SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 30,JULY 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE NINETHREE MONTHS ENDED JANUARY 30,JULY 31, 2002 COMMISSION FILE NUMBER 1-3385
H. J.H.J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 456-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No __
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of March 8,September 6, 2002 was 350,353,230351,080,144 shares.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J.H.J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
ThirdFirst Quarter Ended
------------------------------------
January 30,--------------------------------
July 31, 2002 January 31, 2001August 1, 2001*
FY 2003 FY 2002
FY 2001
---------------- ----------------------------- ---------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $2,551,292 $2,269,642Sales....................................................... $2,203,645 $2,077,295
Cost of products sold...................................... 1,550,254 1,385,506sold....................................... 1,416,732 1,315,016
---------- ----------
Gross profit............................................... 1,001,038 884,136profit................................................ 786,913 762,279
Selling, general and administrative expenses............... 605,622 543,976expenses................ 441,781 378,125
---------- ----------
Operating income........................................... 395,416 340,160income............................................ 345,132 384,154
Interest income............................................ 4,752 6,916income............................................. 6,405 5,358
Interest expense........................................... 70,194 86,395expense............................................ 69,090 75,547
Other expenses (income), net............................... 19,697 (15,758)expense, net.......................................... 11,701 1,758
---------- ----------
Income before income taxes................................. 310,277 276,439taxes.................................. 270,746 312,207
Provision for income taxes................................. 108,617 5,919taxes.................................. 92,951 111,733
---------- ----------
Net income.................................................income.................................................. $ 201,660177,795 $ 270,520200,474
========== ==========
Net income per share--diluted..............................share--diluted............................... $ 0.570.50 $ 0.770.57
========== ==========
Average common shares outstanding--diluted................. 352,745 350,761outstanding--diluted.................. 353,529 352,380
========== ==========
Net income per share--basic................................share--basic................................. $ 0.580.51 $ 0.780.57
========== ==========
Average common shares outstanding--basic................... 349,704 347,444outstanding--basic.................... 351,026 349,202
========== ==========
Cash dividends per share...................................share.................................... $ 0.4050 $ 0.3925
========== ==========
*Reclassified, see Note 5
See Notes to Condensed Consolidated Financial Statements.
------------------
2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
------------------------------------
January 30, 2002 January 31, 2001
FY 2002 FY 2001*
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $7,301,932 $6,737,631
Cost of products sold...................................... 4,416,873 4,041,208
---------- ----------
Gross profit............................................... 2,885,059 2,696,423
Selling, general and administrative expenses............... 1,704,320 1,585,335
---------- ----------
Operating income........................................... 1,180,739 1,111,088
Interest income............................................ 14,379 18,215
Interest expense........................................... 220,824 249,515
Other expenses (income), net............................... 31,440 (1,045)
---------- ----------
Income before income taxes and cumulative effect of
accounting change........................................ 942,854 880,833
Provision for income taxes................................. 332,479 215,829
---------- ----------
Income before cumulative effect of accounting change....... 610,375 665,004
Cumulative effect of accounting change..................... -- (16,471)
---------- ----------
Net income................................................. $ 610,375 $ 648,533
========== ==========
Net income per share--diluted.............................. $ 1.73 $ 1.85
========== ==========
Average common shares outstanding--diluted................. 352,745 350,761
========== ==========
Net income per share--basic................................ $ 1.75 $ 1.87
========== ==========
Average common shares outstanding--basic................... 349,704 347,444
========== ==========
Cash dividends per share................................... $ 1.2025 $ 1.1525
========== ==========
* Restated, see Note 7.
See Notes to Condensed Consolidated Financial Statements.
------------------
3
H. J.H.J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 30,July 31, 2002 May 2, 2001*1, 2002*
FY 2003 FY 2002
FY 2001
----------------------------- ------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 202,316197,919 $ 138,849206,921
Short-term investments, at cost which approximates market... 5 5,3712,461 --
Receivables, net............................................ 1,363,373 1,383,5501,132,782 1,449,147
Inventories................................................. 1,633,174 1,407,9611,633,440 1,527,554
Prepaid expenses and other current assets................... 289,795 181,083339,582 189,944
----------- ---------------------
Total current assets................................... 3,488,663 3,116,8143,306,184 3,373,566
----------- ---------------------
Property, plant and equipment............................... 3,766,169 3,880,7803,979,124 3,872,647
Less accumulated depreciation............................... 1,596,492 1,712,4001,703,834 1,622,573
----------- ---------------------
Total property, plant and equipment, net............... 2,169,677 2,168,3802,275,290 2,250,074
----------- ---------------------
Goodwill, net............................................... 2,531,586 2,077,4512,557,924 2,528,942
Trademarks, net............................................. 682,677 567,692852,732 808,884
Other intangibles, net...................................... 205,595 120,749152,170 152,249
Other non-current assets.................................... 1,014,089 984,0641,287,316 1,164,639
----------- ---------------------
Total other non-current assets......................... 4,433,947 3,749,9564,850,142 4,654,714
----------- ---------------------
Total assets........................................... $10,092,287 $9,035,150$10,431,616 $10,278,354
=========== =====================
*Summarized from audited fiscal year 20012002 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
43
H. J.H.J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 30,July 31, 2002 May 2, 2001*1, 2002*
FY 2003 FY 2002
FY 2001
----------------------------- ------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $ 172,700 $1,555,869265,243 $ 178,358
Portion of long-term debt due within one year............... 572,141 314,965457,885 524,287
Accounts payable............................................ 845,685 962,497872,069 938,483
Salaries and wages.......................................... 48,721 54,03645,810 39,376
Accrued marketing........................................... 151,804 146,138
Accrued restructuring costs................................. 53,017 134,550177,659 164,650
Other accrued liabilities................................... 365,900 388,582437,293 471,910
Income taxes................................................ 149,919 98,460216,403 192,105
----------- ---------------------
Total current liabilities.............................. 2,359,887 3,655,0972,472,362 2,509,169
----------- ---------------------
Long-term debt.............................................. 4,864,133 3,014,8534,695,433 4,642,968
Deferred income taxes....................................... 312,226 253,690385,696 394,935
Non-pension postretirement benefits......................... 208,091 207,104209,636 208,509
Other liabilities and minority interest..................... 805,106 530,679797,374 804,157
----------- ---------------------
Total long-term debt, other liabilities and minority
interest............................................. 6,189,556 4,006,3266,088,139 6,050,569
Shareholders' Equity:
Capital stock............................................... 107,885 107,900107,883 107,884
Additional capital.......................................... 343,805 331,633348,627 348,605
Retained earnings........................................... 4,887,020 4,697,2135,004,196 4,968,535
----------- ----------
5,338,710 5,136,746-----------
5,460,706 5,425,024
Less:
Treasury stock at cost (80,782,624(80,031,268 shares at January 30,July 31, 2002
and 82,147,56580,192,280 shares at May 2, 2001)............. 2,908,241 2,922,6301, 2002).................. 2,889,275 2,893,198
Unearned compensation relating to the ESOP................ -- 230 3,101
Accumulated other comprehensive loss...................... 887,395 837,288700,316 812,980
----------- ---------------------
Total shareholders' equity............................. 1,542,844 1,373,7271,871,115 1,718,616
----------- ---------------------
Total liabilities and shareholders' equity............. $10,092,287 $9,035,150$10,431,616 $10,278,354
=========== =====================
*Summarized from audited fiscal year 20012002 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
54
H. J.H.J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine MonthsFirst Quarter Ended
-----------------------------------
January 30,-------------------------------
July 31, 2002 January 31,August 1, 2001
FY 2003 FY 2002
FY 2001
---------------- ----------------------------- --------------
(Unaudited)
(Thousands of Dollars)
Cash Flows from Operating Activities
Net Income................................................ $ 177,795 $ 200,474
Adjustments to reconcile net income to cash provided by
(used for) Operating Activities........... $ 334,341 $ (1,353)operating activities:
Depreciation........................................... 57,400 58,038
Amortization........................................... 6,255 16,757
Deferred tax provision................................. 7,500 15,521
Other items, net....................................... 867 21,953
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables.......................................... 300,182 123,592
Inventories.......................................... (61,683) (79,072)
Prepaid expenses and other current assets............ (134,177) (69,249)
Accounts payable..................................... (108,435) (181,602)
Accrued liabilities.................................. (65,675) (122,638)
Income taxes......................................... 47,141 76,127
--------- --------------------
Cash provided by operating activities............. 227,170 59,901
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures.................................. (130,183) (255,832)expenditures................................... (32,538) (60,101)
Acquisitions, net of cash acquired.................... (802,668) (182,872)
Proceeds from divestitures............................ 31,889 93,340acquired..................... (17,278) (310,807)
Purchases of short-term investments................... (2,049) (1,084,033)
Sales and maturities of short-term investments........ 7,378 1,085,911
Investment in The Hain Celestial Group, Inc........... -- (79,743)investments.................... (2,411) (1,093)
Other items, net...................................... (29,199) 8,477net....................................... 8,466 10,836
--------- --------------------
Cash used for investing activities............... (924,832) (414,752)activities................ (43,761) (361,165)
--------- --------------------
Cash Flows from Financing Activities:
Payments on long-term debt............................ (37,526) (22,034)
Proceeds from (payments on)debt............................. (4,246) (26,571)
Payments on commercial paper and
short-term borrowings, net.......................... 2,219 (174,318)net........................... (89,525) (656,841)
Proceeds from long-term debt.......................... 770,772 1,078,701debt........................... -- 764,622
Proceeds from preferred stock of subsidiary...........subsidiary............ -- 325,000
--
Dividends............................................. (420,568) (400,370)
Purchases of treasury stock........................... (45,363) (90,420)Dividends.............................................. (142,134) (137,099)
Exercise of stock options............................. 53,186 78,540options.............................. 3,981 13,301
Other items, net...................................... 11,637 12,118net....................................... 12,443 17,135
--------- --------------------
Cash (used for) provided by financing
activities............ 659,357 482,217activities...................................... (219,481) 299,547
--------- --------------------
Effect of exchange rate changes on cash and cash
equivalents.............................................. (5,399) (10,845)equivalents............................................... 27,070 4,682
--------- --------------------
Net (decrease) increase in cash and cash equivalents.................. 63,467 55,267equivalents........ (9,002) 2,965
Cash and cash equivalents at beginning of year.............year.............. 206,921 138,849
137,617
--------- --------------------
Cash and cash equivalents at end of period.................period.................. $ 202,316197,919 $ 192,884141,814
========= ====================
See Notes to Condensed Consolidated Financial Statements.
------------------
65
H. J.H.J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The Management's Discussion and Analysisinterim condensed consolidated financial statements of Financial Condition and
Results of Operations which follows these notes contains additional
information onH.J. Heinz
Company, together with its subsidiaries (collectively referred to as the
results of operations and the financial position of the
company. Those comments should be read in conjunction with these notes.
The company's Annual Report to Shareholders for the fiscal year ended May
2, 2001 includes additional information about the company, its operations,
and its financial position, and should be read in conjunction with this
quarterly report on Form 10-Q.
(2) The results for the interim periods"Company") are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the company's business. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 2002 presentation.
(3)unaudited. In the opinion of management, all adjustments,
which are of a normal and recurring nature, necessary for a fair statement
of the results of operations of these interim periods have been included.
(4)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 2003 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 to Shareholders and which are
incorporated by reference into the Company's Annual Report on Form 10-K for
the year ended May 1, 2002.
(2) AGREEMENT BETWEEN H.J. HEINZ COMPANY AND DEL MONTE FOODS COMPANY
On June 13, 2002, Heinz announced that it will transfer to a wholly-owned
subsidiary ("Spinco") assets and liabilities of 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 broth and U.S. infant feeding businesses and
distribute all of the shares of Spinco common stock on a pro rata basis to
its shareholders. Immediately thereafter, Spinco will merge with a
wholly-owned subsidiary of Del Monte Foods Company ("Del Monte") resulting
in Spinco becoming a wholly-owned subsidiary of Del Monte (the "Merger").
In connection with the Merger, each share of Spinco common stock will be
automatically converted into shares of Del Monte common stock that will
result in the fully diluted Del Monte common stock at the effective time
of the Merger being held approximately 74.5% by the former Spinco
stockholders and approximately 25.5% by the Del Monte stockholders. As a
result of the transaction, Heinz will receive $1.1 billion in cash that
will be used to retire debt.
Included in the transaction will be the following brands: StarKist(R),
9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R),
Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The
following is a summary of the operating results of the businesses to be
spun off:
First Quarter Ended
------------------------------
July 31, 2002 August 1, 2001
------------- --------------
Revenues........................................ $364,331 $401,754
Operating income/(loss)......................... 49,709 69,948
Operating income excluding special items........ 49,709 77,786
The Merger, which has been approved by the Boards of Directors of Heinz and
Del Monte, is subject to the approval by the shareholders of Del Monte and
receipt of a ruling from the Internal Revenue Service that the contribution
of the assets and liabilities to Spinco and the distribution of the shares
of common stock of Spinco to Heinz shareholders will be tax-free to Heinz,
Spinco and the shareholders of Heinz. The Merger is also subject to receipt
of applicable governmental approvals and the satisfaction of other
customary closing conditions. The Company expects that the transaction will
close late in calendar year 2002 or early in calendar year 2003.
6
During the first quarter of Fiscal 2003, the Company recognized transaction
related costs and costs to reduce overhead of the remaining core businesses
totaling $18.4 million pretax ($0.03 per share).
(3) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
January 30,July 31, 2002 May 2, 2001
----------------1, 2002
------------- -----------
(Thousands of Dollars)
Finished goods and work-in-process................. $1,267,266 $1,095,954work-in-process..................... $1,261,308 $1,193,989
Packaging material and ingredients................. 365,908 312,007ingredients..................... 372,132 333,565
---------- ----------
$1,633,174 $1,407,961$1,633,440 $1,527,554
========== ==========
(5)(4) RESTRUCTURING
In the fourth quarter of Fiscal 2001, the companyCompany announced a
restructuring initiative named "Streamline". This initiative includes a
worldwide organizational restructuring aimed at reducing overhead costs,
the closure of the company'sCompany's tuna operations in Puerto Rico, the
consolidation of the company'sCompany's North American canned pet food production
to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food
production at the company'sCompany's Terminal Island, California facility), and the
divestiture of the company'sCompany's U.S. fleet of fishing boats and related
equipment. For more information regarding Streamline, refer to the
company's Annual Report to Shareholders for the fiscal year ended May 2,
2001.
The major components of the restructuring charges and implementation costs
and the remaining accrual balances as of January 30,July 31, 2002 were as follows:
Non-Cash Employee
Asset Termination and Accrued Implementation
(Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total
--------------------- ----------- --------------- ---------- -------------- -------
Restructuring and implementation
costs--Fiscal 2001................... $ 110.5 $110.3 $ 55.4 $ 22.6 $ 298.8
Amounts utilized--Fiscal 2001.......... (110.5) (39.5) (4.7) (22.6) (177.3)
------- ------ ------ ------ -------
Accrued restructuring costs-- May 2,
2001................................. -- 70.8 50.7 -- 121.5
Restructuring and implementation
costs--Fiscal 2002................... -- 5.7 -- 10.4 16.1
Revision to accruals and asset
write-downs--Fiscal 2002............. 5.8 3.6 (7.7) -- 1.7
Amounts utilized--Fiscal 2002.......... -- (52.7) (27.9)(5.8) (66.6) (32.4) (10.4) (91.0)(115.2)
------- ------ ------ ------ -------
Accrued restructuring costs--January
30, 2002.............................costs-- May 1,
2002................................. -- 13.5 10.6 -- 24.1
Amounts utilized--Fiscal 2003.......... -- (4.0) (1.4) -- (5.4)
------- ------ ------ ------ -------
Accrued restructuring costs-- July 31,
2002................................. $ -- $ 23.89.5 $ 22.89.2 $ -- $ 46.618.7
======= ====== ====== ====== =======
7
During the first nine monthsquarter of Fiscal 2002,2003, the company recognized
restructuring charges and implementation costs totaling $16.1 million
pretax ($0.04 per share). [Note: All earnings per share amounts included in
the Notes to Condensed Consolidated Financial Statements are presented on
an after-tax diluted basis, unless otherwise noted.] Pretax charges of $8.7
million were classified as cost of products sold and $7.4 million as
selling, general and administrative expenses ("SG&A"). Implementation costs
($10.4 million pretax) were primarily cost premiums related to production
transfers, consulting costs and relocation costs.
During the first nine months of Fiscal 2002, the companyCompany utilized $80.6$5.4 million
of severance and exit cost accruals, principally for the closure of
the company's tuna operations in Puerto Rico, ceasing canned pet food
production in its Terminal Island, California facility andrelated to its global
overhead reduction plan, primarily in Europe and North America.
(6) ACQUISITIONS
During the second quarter of Fiscal 2002, the company acquired Anchor Food
Products branded retail business which includes the retail licensing
rights to the T.G.I. Friday's brand of frozen snacks and appetizers and
the Poppers brand of retail appetizer lines. Also during the second
quarter of Fiscal 2002, the company completed the acquisition of Delimex
Holdings, Inc., a leading maker of frozen Mexican food products. Delimex
is a leading U.S. producer of frozen taquitos, tightly rolled fried corn
and flour tortillas with fillings such as beef, chicken or cheese. Delimex
also makes quesadillas, tamales and rice bowls.
During the first quarter of Fiscal 2002, the company completed the
acquisition of Borden Food Corporation's pasta sauce, dry bouillon and
soup business. Under this transaction, the company acquired such brands as
Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups
and Wyler's bouillons and soups.
The above acquisitions have been accounted for as purchases and,
accordingly, the respective purchase prices have been allocated to the
respective assets and liabilities based upon their estimated fair values as
of the acquisition dates. Final allocations of the purchase prices are not
expected to differ significantly from the preliminary allocations.
Operating results of the businesses acquired have been included in the
Consolidated Statements of Income from the respective acquisition dates
forward.
Pro forma results of the company, assuming all of the acquisitions had been
made at the beginning of each period presented, would not be materially
different from the results reported.
(7)(5) RECENTLY ADOPTED ACCOUNTING STANDARDS
In Fiscal 2001, the company changed its method of accounting for revenue
recognition in accordance with Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition in Financial Statements". Under the new accounting
method, adopted retroactive to May 4, 2000, the company recognizes revenue
upon the passage of title, ownership and risk of loss to the customer. The
cumulative effect adjustment of $16.5 million in net income as of May 4,
2000 was recognized during the first quarter of Fiscal 2001. The Fiscal
2001 first nine month amounts have been restated for the effect of the
change in accounting for revenue recognition. Amounts originally reported
were as follows: Sales, $6.72 billion; Gross profit, $2.69 billion; Net
income, $661.2 million; Net income per share - diluted, $1.88; Net income
per share - basic, $1.90.
(8) RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued
new guidelines entitled "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's
Products". In addition, during May 2000, the EITF issued new guidelines
entitled "Accounting for Certain Sales Incentives". Both of these issues
provide guidance primarily on income statement classification of
consideration from a vendor to a purchaser of the vendor's products,
including both customers and consumers. Generally,
8
cash consideration is to be classified as a reduction of revenue, unless
specific criteria are met regarding goods or services that the vendor may
receive in return for this consideration.
InDuring the fourth quarter of Fiscal 2002, the company will reclassify
promotional paymentsCompany adopted Emerging
Issues Task Force ("EITF") statements relating to its customersthe classification of
vendor consideration and the costcertain sales incentives. The adoption of consumer coupons and
other cash redemption offers from SG&A to net sales. The company is
currently assessing the combinedthese
EITF statements has no impact of both issues, however, we believe
that, based on historical information, sales could be reduced up to 6 to
7%. SG&A will be correspondingly reduced such thatoperating income, net earnings, will not be
affected.
In June 2001,or basic
or diluted earnings per share; however, revenues and gross profit were
reduced by approximately $108.2 million in the FASB issued SFASfirst quarter of Fiscal
2002. Prior period data has been reclassified to conform to the current
year presentation.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets". These standards requirewhich requires that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should
notof
accounting be amortized but should be tested for impairment at least annually, and
they provide guidelines for new disclosure requirements. These standards
outline the criteria for initial recognition and measurement of
intangibles, assignment of assets and liabilities including goodwill to
reporting units and goodwill impairment testing. The provisions of SFAS
Nos. 141 and 142 applyapplied to all business combinations after June 30, 2001.
The company has not fully assessedSFAS No. 141 also established criteria for recogni-
7
tion of intangible assets and goodwill. Effective May 2, 2002, the potential impact of the adoption ofCompany
adopted SFAS No. 142 which"Goodwill and Other Intangible Assets." Under this
standard, goodwill and intangibles with indefinite useful lives are no
longer amortized, but are tested at least annually for impairment.
The Company is effective forcurrently completing its evaluation of the company in Fiscal 2003.impact of
adopting SFAS No. 142 on the consolidated financial statements. The
reassessment of intangible assets, including the ongoing impact of
amortization, must beand the assignment of goodwill to reporting units was
completed during the first quarter of Fiscal 2003. The
assignment of goodwill to reporting units, along with completion of the
first step of the transitional
goodwill impairment tests mustwill be completed during the first six monthssecond quarter of
Fiscal 2003. Total amortizationIf the carrying value of goodwill or an intangible asset
exceeds its fair value, an impairment loss shall be recognized. A
discounted cash flow model is being used to determine the fair value of
the Company's businesses for purposes of testing goodwill for impairment.
The discount rate being used is based on a risk-adjusted weighted average
cost of capital for the business.
The effects of adopting the new standards on net income and diluted
earnings per share for the three-month periods ended July 31, 2002 and
August 1, 2001 are as follows:
Net Income Diluted EPS
------------------- -------------
2002 2001 2002 2001
-------- -------- ----- -----
Net income............................ $177,795 $200,474 $0.50 $0.57
Add: Goodwill amortization............ -- 12,771 -- 0.03
Trademark amortization.............. -- 2,131 -- 0.01
-------- -------- ----- -----
Net income excluding goodwill and
trademark amortization.............. $177,795 $215,376 $0.50 $0.61
======== ======== ===== =====
Net income for the quarter ended August 1, 2001 would have been $215,376 or
$0.04 per share higher and net income for Fiscal 2002 would have been
$896,184 or $0.18 per share higher had the provisions of the new standards
been applied as of May 3, 2001.
Changes in the carrying amount of goodwill for the three months ended July
31, 2002, by operating segment, are as follows:
Heinz U.S. Pet Other
North Products and U.S. Asia/ Operating
America Seafood Frozen Europe Pacific Entities Total
-------- ------------ -------- -------- -------- --------- ----------
Balance at May 1,
2002............... $719,364 $564,335 $471,351 $639,465 $109,613 $24,814 $2,528,942
Acquisition.......... -- -- -- -- 7,000 -- 7,000
Purchase accounting
adjustments........ 1,737 -- 14 (21,875) -- -- (20,124)
Translation
adjustments........ (1,724) -- -- 42,797 4,097 448 45,618
Other adjustments.... (983) 16 -- (2,697) 152 -- (3,512)
-------- -------- -------- -------- -------- ------- ----------
Balance at July 31,
2002............... $718,394 $564,351 $471,365 $657,690 $120,862 $25,262 $2,557,924
======== ======== ======== ======== ======== ======= ==========
Trademarks and other intangible assets at July 31, 2002 and May 1, 2002,
subject to amortization expense, are as follows:
July 31, 2002 May 1, 2002
------------------------------- -------------------------------
Accum Accum
Gross Amort Net Gross Amort Net
-------- --------- -------- -------- --------- --------
Trademarks............... $259,268 $ (47,027) $212,241 $252,977 $ (45,153) $207,824
Licenses................. 209,187 (108,515) 100,672 209,204 (107,044) 102,160
Other.................... 107,955 (56,457) 51,498 103,275 (53,186) 50,089
-------- --------- -------- -------- --------- --------
$576,410 $(211,999) $364,411 $565,456 $(205,383) $360,073
======== ========= ======== ======== ========= ========
8
Amortization expense for trademarks and other intangible assets subject to
amortization was $6.3 million for the yearthree months ended July 31, 2002.
Based upon the amortizable intangible assets recorded on the balance sheet
at July 31, 2002, amortization expense for each of the next five years is
estimated to be approximately $25.0 million.
Intangible assets not subject to amortization at July 31, 2002 and May 1,
2002, were $640.5 million and $601.1 million respectively, and consisted
solely of trademarks.
Effective May 2, 2001, was $51.6 million2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." This statement provides
updated guidance concerning the recognition and $33.6 million, respectively.measurement of an
impairment loss for certain types of long-lived assets, expands the scope
of a discontinued operation to include a component of an entity and
eliminates the current exemption to consolidation when control over a
subsidiary is likely to be temporary. The adoption of this new standard did
not have a material impact on the Company's financial position, results of
operations or cash flows for the three months ended July 31, 2002.
(6) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, addresses accounting for legal
obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and the normal
operation of a long-lived asset, except for certain obligations of
lessees. This standard is effective for fiscal years beginning after June 15, 2002.the Company in Fiscal 2004. The
companyCompany does not expect that the adoption of this standard will have a
significant impact on the consolidated financial statements.
In October 2001,June 2002, the FASB issuedapproved SFAS No. 144146, "Accounting for the
ImpairmentCosts
Associated with Exit or Disposal of Long-lived Assets.Activities." SFAS No. 144 clarifies146 addresses
financial accounting and revises existing guidance on accountingreporting for impairmentcosts associated with exit or
disposal activities. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. This Statement also establishes that fair value is
the objective for initial measurement of plant, property,
and equipment, amortized intangibles, and other long-lived assets not
specifically addressed in other accounting literature. This standard will
bethe liability. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. Management is currently assessing the
company beginning in Fiscal 2003. The company does not
expect that the adoptiondetails of this standard will have a significant impact onStandard.
(7) SEGMENTS
The Company's segments are primarily organized by geographical area. The
composition of segments and measure of segment profitability is consistent
with that used by the consolidated financial statements.
(9) SEGMENTSCompany's management. Descriptions of the company'sCompany's
reportable segmentssegment are as follows:
Heinz North America--This segment manufactures, markets and sells
ketchup, condiments, sauces, soups, pasta meals and infant foods to the
grocery and foodservice channels and includes the Canadian business.
U.S. Pet Products and& Seafood--This segment manufactures, markets and
sells dry and canned pet food, pet snacks, tuna and other seafood.
U.S. Frozen--This segment manufactures, markets and sells frozen
potatoes, entrees, snacks and appetizers.
Europe--This segment includes the company'sCompany's operations in Europe and
sells products in all of the company'sCompany's core categories.
9
Asia/Pacific--This segment includes the company'sCompany's operations in New
Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and
India. This segment's operations include products in all of the
company'sCompany's core categories.
Other Operating Entities--This segment includes the company'sCompany's operations
in Africa, Venezuela and other areas which sell products in all of the
company'sCompany's core categories.
The company's management evaluates performance based on several factors
including net sales and the use of capital resources; however, the
primary measurement focus is operatingoperat-
9
ing income excluding unusual costs and gains. Intersegment sales are
accounted for at current market values. Items below the operating income
line of the Consolidated Statements of Income are not presented by
segment, becausesince they are not the primary measure of segment profitability
reviewed by the company'sCompany's management.
Prior year quarterly segment information has been revised to conform
with current quarter presentation.
10
The following table presents information about the company'sCompany's reportable
segments:
ThirdFirst Quarter Ended
Nine Months Ended
----------------------------------- -----------------------------------
January 30,-------------------------------
July 31, 2002 January 31, 2001 January 30, 2002 January 31,August 1, 2001
FY 20022003 FY 2001 FY 2002 FY 2001*
---------------- ---------------- ---------------- ----------------2002*
------------- --------------
(Thousands of Dollars)
Net external sales:
Heinz North America..............America...................................... $ 702,715586,114 $ 632,375 $1,982,273 $1,853,998554,927
U.S. Pet Products and Seafood.... 362,319 378,924 1,102,012 1,133,228Seafood............................ 294,302 328,216
U.S. Frozen...................... 360,375 256,505 941,383 774,265
---------- ----------Frozen.............................................. 245,789 208,976
---------- ----------
North America Totals............. 1,425,409 1,267,804 4,025,668 3,761,491
Europe........................... 756,598 652,412 2,194,077 1,915,050Totals..................................... 1,126,205 1,092,119
Europe................................................... 696,341 657,817
Asia/Pacific..................... 263,197 272,567 770,235 818,390Pacific............................................. 254,424 233,655
Other Operating Entities......... 106,088 76,859 311,952 242,700
---------- ----------Entities................................. 126,675 93,704
---------- ----------
Consolidated Totals.............. $2,551,292 $2,269,642 $7,301,932 $6,737,631
========== ==========Totals...................................... $2,203,645 $2,077,295
========== ==========
Intersegment sales:
Heinz North America..............America...................................... $ 9,6179,662 $ 10,022 $ 31,477 $ 30,5317,331
U.S. Pet Products and Seafood.... 4,288 5,824 11,862 18,411Seafood............................ 2,844 4,813
U.S. Frozen...................... 2,423 3,315 7,575 9,583
Europe........................... 1,944 979 4,360 3,157Frozen.............................................. 1,928 2,201
Europe................................................... 1,564 1,374
Asia/Pacific..................... 713 1,023 1,942 2,004Pacific............................................. 873 292
Other Operating Entities......... 632 1,439 649 3,468Entities................................. 462 --
Non-Operating (a)................ (19,617) (22,602) (57,865) (67,154)
---------- ----------........................................ (17,333) (16,011)
---------- ----------
Consolidated Totals..............Totals...................................... $ -- $ -- $ -- $ --
========== ==========
========== ==========
Operating income (loss):
Heinz North America..............America...................................... $ 141,338105,878 $ 156,808 $ 425,122 $ 455,059118,471
U.S. Pet Products and Seafood.... 46,372 38,652 150,371 134,855Seafood............................ 34,355 57,541
U.S. Frozen...................... 60,265 36,353 165,593 133,622
---------- ----------Frozen.............................................. 51,703 44,236
---------- ----------
North America Totals............. 247,975 231,813 741,086 723,536
Europe........................... 136,785 107,742 406,787 333,691Totals..................................... 191,936 220,248
Europe................................................... 142,499 150,571
Asia/Pacific..................... 20,411 22,336 71,362 86,585Pacific............................................. 21,203 26,136
Other Operating Entities......... 12,580 6,878 39,490 36,862Entities................................. 17,070 11,933
Non-Operating (a)................ (22,335) (28,609) (77,986) (69,586)
---------- ----------........................................ (27,576) (24,734)
---------- ----------
Consolidated Totals..............Totals...................................... $ 395,416345,132 $ 340,160 $1,180,739 $1,111,088
========== ==========384,154
========== ==========
Operating income (loss) excluding special items (b):
Heinz North America..............America...................................... $ 141,338112,772 $ 171,544 $ 429,996 $ 495,582123,345
U.S. Pet Products and Seafood.... 46,372 54,178 158,166 195,082Seafood............................ 34,355 65,336
U.S. Frozen...................... 60,265 44,778 165,593 150,786
---------- ----------Frozen.............................................. 51,703 44,236
---------- ----------
North America Totals............. 247,975 270,500 753,755 841,450
Europe........................... 136,785 127,541 408,502 391,460Totals..................................... 198,830 232,917
Europe................................................... 142,499 152,286
Asia/Pacific..................... 20,411 35,578 71,960 123,165Pacific............................................. 21,203 26,734
Other Operating Entities......... 12,580 7,239 39,490 26,160Entities................................. 17,070 11,933
Non-Operating (a)................ (22,335) (27,218) (76,793) (64,199)
---------- ----------........................................ (16,065) (23,541)
---------- ----------
Consolidated Totals..............Totals...................................... $ 395,416363,537 $ 413,640 $1,196,914 $1,318,036
========== ==========400,329
========== ==========
*Restated, see Note 7.
- ---------------10
--------------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) ThirdFirst Quarter ended JanuaryJuly 31, 20012002 - Excludes implementationDel Monte transaction
related costs and cost to reduce overhead of Operation Excelthe remaining core
businesses as follows: Heinz North America $14.7 million, U.S. Pet
Products and Seafood $15.5 million, U.S. Frozen $8.4 million, Europe $19.8
million, Asia/Pacific $13.2 million, Other Operating Entities $0.4$6.9 million and
Non-Operating $1.4$11.5 million.
Nine MonthsFirst Quarter ended January 30, 2002August 1, 2001 - Excludes implementation and
restructuring costs of Streamline as follows: Heinz North America $4.9
million, U.S. Pet Products and Seafood $7.8 million, Europe $1.7
million, Asia/Pacific $0.6 million and Non-Operating $1.2 million.
11
Nine Months ended January 31, 2001 - Excludes implementation costs of
Operation Excel as follows: Heinz North America $40.5 million, U.S. Pet
Products and Seafood $60.2 million, U.S. Frozen $17.2 million, Europe $57.8
million, Asia/Pacific $36.6 million, Other Operating Entities ($10.7) million
and Non-Operating $5.4 million.
The company'sCompany's revenues are generated via the sale of products in the
following categories:
ThirdFirst Quarter Ended
Nine Months Ended
----------------------------------- -----------------------------------
January 30,-------------------------------
July 31, 2002 January 31, 2001 January 30, 2002 January 31,August 1, 2001
FY 20022003 FY 2001 FY 2002 FY 2001
---------------- ---------------- ---------------- ----------------2002*
------------- --------------
(Thousands of Dollars)
Ketchup, Condiments and Sauces.....Sauces.............................. $ 668,192640,780 $ 596,762 $1,957,502 $1,824,391598,341
Frozen Foods....................... 583,535 474,738 1,549,754 1,388,820
Seafood............................ 237,950 228,079 761,486 720,715
Convenience Meals.................. 397,498 313,785 1,090,633 874,698Foods................................................ 437,754 377,775
Tuna........................................................ 251,069 247,855
Soups, Beans and Pasta Meals................................ 285,914 268,395
Infant and Nutritional Foods....... 228,796 230,434 659,883 669,581Foods................................................ 195,414 196,916
Pet Products....................... 259,419 287,630 781,095 854,568
Other.............................. 175,902 138,214 501,579 404,858Products................................................ 197,178 237,583
Other....................................................... 195,536 150,430
---------- ----------
---------- ----------
Total.............................. $2,551,292 $2,269,642 $7,301,932 $6,737,631
========== ==========Total................................................... $2,203,645 $2,077,295
========== ==========
(10) On May 3, 2001, the company reorganized its U.S. corporate structure by
consolidating its U.S. business into two major entities: H. J. Heinz
Finance Company (Heinz Finance) manages treasury functions and H. J. Heinz
Company, L.P. (Heinz LP) owns or leases the operating assets and manages
the U.S. business. Heinz Finance assumed primary liability for payment of
the company's outstanding senior unsecured debt and accrued interest by
becoming a co-obligor with the company. Heinz Finance's financial
statements for the nine months ended January 30, 2002 are attached as
Exhibit 99.
On July 6, 2001, Heinz Finance raised $325 million via the issuance of
Voting Cumulative Preferred Stock, Series A with a liquidation preference
of $100,000 per share. The Series A Preferred shares are entitled to
receive quarterly dividends at a rate of 6.226% per annum and are required
to be redeemed for cash on July 15, 2008. In addition, Heinz Finance issued
$750 million of 6.625% Guaranteed Notes due July 15, 2011 which are
guaranteed by the company. The proceeds were used for general corporate
purposes, including retiring commercial paper borrowings, financing
acquisitions and ongoing operations.
On September 6, 2001, the company, Heinz Finance and a group of domestic
and international banks entered into a $1.50 billion credit agreement which
expires in September 2006 and an $800 million credit agreement which
expires in September 2002. These credit agreements, which support the
company's commercial paper programs, replaced the $2.30 billion credit
agreement which expired on September 6, 2001. As of January 30, 2002, $1.38
billion of commercial paper was outstanding and classified as long-term
debt due to the long-term nature of the supporting credit agreement. As of
May 2, 2001, the company had $1.34 billion of commercial paper outstanding
and classified as short-term debt.
(11) DIVIDENDS
On September 17, 2001, the company's Board of Directors raised the
quarterly dividend on the company's common stock to $0.4050 per share from
$0.3925 per share, for an indicated annual rate of $1.62 per share.
12
(12)*Reclassified, see Note 5
(8) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share in accordance with the provisions of SFAS No. 128.128:
ThirdFirst Quarter Ended
Nine Months Ended
----------------------------------- -----------------------------------
January 30,------------------------------
July 31, 2002 January 31, 2001 January 30, 2002 January 31,August 1, 2001
FY 2002 FY 20012003 FY 2002
FY 2001
---------------- ---------------- ---------------- ----------------------------- --------------
(In Thousands, Except per
Share Amounts)
Income before cumulative effect of
accounting change............... $201,660 $270,520 $610,375 $665,004Net income.................................................. $177,795 $200,474
Preferred dividends...............dividends......................................... 5 5 15 17
-------- -------- -------- --------
Income applicable to common stock
before effect of accounting
change.......................... 201,655 270,515 610,360 664,987
Cumulative effect of accounting
change.......................... -- -- -- (16,471)
-------- --------
-------- --------
Net income applicable to common stock........................... $201,655 $270,515 $610,360 $648,516
======== ========stock....................... $177,790 $200,469
======== ========
Average common shares outstanding--basic............ 349,704 347,444 349,704 347,444outstanding--basic.................. 351,026 349,202
Effect of dilutive securities:
Convertible preferred stock... 164 178 164 178stock............................. 148 169
Stock options................. 2,877 3,139 2,877 3,139
-------- --------options........................................... 2,355 3,009
-------- --------
Average common shares outstanding--diluted.......... 352,745 350,761 352,745 350,761
Income per share before cumulative
effect of accounting change--
basic........................... $ 0.58 $ 0.78 $ 1.75 $ 1.91
======== ========outstanding--diluted................ 353,529 352,380
======== ========
Net income per share--basic.......share--basic................................. $ 0.580.51 $ 0.78 $ 1.75 $ 1.87
======== ======== ======== ========
Income per share before cumulative
effect of accounting change--
diluted......................... $ 0.57 $ 0.77 $ 1.73 $ 1.90
======== ========
======== ========
Net income per share--diluted...share--diluted............................... $ 0.570.50 $ 0.77 $ 1.73 $ 1.85
======== ========0.57
======== ========
(13)11
(9) COMPREHENSIVE INCOME
ThirdFirst Quarter Ended
Nine Months Ended
----------------------------------- -----------------------------------
January 30,-------------------------------
July 31, 2002 January 31, 2001 January 30, 2002 January 31,August 1, 2001
FY 2002 FY 20012003 FY 2002
FY 2001
---------------- ---------------- ---------------- ----------------------------- --------------
(Thousands of Dollars)
Net income........................ $201,660 $270,520 $610,375 $ 648,533income.................................................. $177,795 $200,474
Other comprehensive income (loss):income:
Foreign currency translation adjustment.................. (51,197) 65,259 (51,571) (129,434)adjustment................. 117,388 (9,031)
Minimum pension liability adjustment.................. (51) (241) 1,107 (1,774)adjustment.................... 906 140
Deferred gains gains/(losses) on derivatives:
Net change from periodic revaluations............ (900) -- (1,637) --revaluations.............. 8,165 319
Net amount reclassified to earnings................ 1,753 -- 1,994 --(13,795) 243
-------- --------
-------- ---------
Comprehensive income.............. $151,265 $335,538 $560,268 $ 517,325
======== ========income........................................ $290,459 $192,145
======== =================
(14)(10) FINANCIAL INSTRUMENTS
The companyCompany operates internationally, with manufacturing and sales
facilities in various locations around the world, and utilizes certain
financial instruments to manage its foreign currency, commodity price and
interest rate exposures.
FOREIGN CURRENCY HEDGING: The companyCompany uses forward contracts and currency
swaps to mitigate its foreign currency exchange rate exposure due to
anticipated purchases of raw materials and sales of finished goods, and
future settlement of foreign currency denominated assets and liabilities.
Hedges of anticipated transactions and hedges of specific cash flows
associated with foreign currency denominated financial assets and
liabilities are designated as cash flow hedges,
13
and consequently, the
effective portion of unrealized gains and losses is deferred as a component
of accumulated other comprehensive loss and is recognized in earnings at
the time the hedged item affects earnings.
The companyCompany uses certain foreign currency debt instruments as net
investment hedges of foreign operations. During the nine monthsquarter ended January 30,July 31,
2002, gainslosses of $6.2$13.5 million, net of income taxes of $3.6$7.9 million, which
represented effective hedges of net investments, were reported as a
component of accumulated other comprehensive loss within unrealized
translation adjustment.
COMMODITY PRICE HEDGING: The companyCompany uses commodity futures and options in
order to reduce price risk associated with anticipated purchases of raw
materials such as corn, soybean oil and soybean meal. Commodity price risk
arises due to factors such as weather conditions, government regulations,
economic climate and other unforeseen circumstances. Hedges of anticipated
commodity purchases which meet the criteria for hedge accounting are
designated as cash flow hedges. When using a commodity option as a hedging
instrument, the Company excludes the time value of the option from the
assessment of hedge effectiveness.
INTEREST RATE HEDGING: The companyCompany uses interest rate swaps to manage
interest rate exposure. These derivatives are designated as cash flow
hedges or fair value hedges depending on the nature of the particular risk
being hedged.
During Fiscal 2002, the company entered into interest rate swap agreements
to convert the interest rate exposure on certain of the company's existing
long-term debt from fixed to floating. The weighted average fixed rate of
the associated debt is 6.433%. The aggregate notional amount of these swaps
is $1.3 billion and their average duration is 12 years.
HEDGE INEFFECTIVENESS: During the nine monthsquarter ended January 30,July 31, 2002, hedge
ineffectiveness related to cash flow hedges was a net loss of $0.3$0.1 million,
which is reported in the consolidated statements of income as other
expenses.
DEFERRED HEDGING GAINS AND LOSSES: As of January 30,July 31, 2002, the companyCompany is
hedging forecasted transactions for periods not exceeding 15 months. During
the next 12 months, the companyand
expects $0.3$6.2 million of net deferred gainloss reported in accumulated other
comprehensive loss to be reclassified to earnings.
(15)earnings within that time frame.
12
(11) SUBSEQUENT EVENT
On March 7,September 5, 2002, the Company, H.J. Heinz Finance issued $700Company ("HFC") and a
group of domestic and international banks renewed an $800 million of 6.00% Guaranteed
Notes due March 15, 2012credit
364-day agreement. That credit agreement and $550 million of 6.75% Guaranteed Notes due
March 15, 2032, which are guaranteed by the company. The proceeds will be
used to retire$1.5 billion credit
agreement that expires in September 2006 support the Company's commercial
paper borrowings. Heinz Finance converted $750
million of the new debt from fixed to floating through interest rate swap
agreements.programs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCUSSION OF CRITICAL ACCOUNTING POLICIESAGREEMENT BETWEEN H.J. HEINZ COMPANY AND DEL MONTE FOODS COMPANY
On June 13, 2002, Heinz announced that it will transfer to a wholly-owned
subsidiary ("Spinco") assets and liabilities of 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 U.S. infant feeding businesses and distribute all
of the shares of Spinco common stock on a pro rata basis to its shareholders.
Immediately thereafter, Spinco will merge with a wholly-owned subsidiary of Del
Monte Foods Company ("Del Monte") resulting in Spinco becoming a wholly-owned
subsidiary of Del Monte (the "Merger"). In connection with the ordinary courseMerger, each
share of business,Spinco common stock will be automatically converted into shares of Del
Monte common stock that will result in the company has madefully diluted Del Monte common stock
at the effective time of the Merger being held approximately 74.5% by Heinz
shareholders and approximately 25.5% by the Del Monte shareholders. As a numberresult
of estimatesthe transaction, Heinz will receive approximately $1.1 billion in cash that
will be used to retire debt.
Included in the transaction will be the following brands: StarKist(R),
9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz
Nature's Goodness(R) baby food and assumptions relatingCollege Inn(R) broths. The following is a
summary of the Fiscal 2003 and Fiscal 2002 first quarter operating results of
the businesses to be spun off:
First Quarter Ended
------------------------------
July 31, 2002 August 1, 2001
------------- --------------
Revenues......................................... $ 364,331 $401,754
Operating income................................. 49,709 69,948
Operating income excluding special items......... 49,709 77,786
Pending completion of the transaction, Heinz expects it will adjust its
common stock dividend beginning April 2003. The expected indicated dividend will
be $1.08 per share, a 33% reduction from the present rate of $1.62 per share
which is consistent with its peer group and above the S&P 500 average. [Note:
All earnings per share amounts included in Management's Discussion and Analysis
are presented on an after-tax diluted basis]. Upon completion of the
transaction, Heinz intends to accelerate its focus on cash flow with
improvements in working capital and a limit on capital expenditures. In addition
to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The company believes that the following discussion
addresses the company's most critical accounting policies, which are those that
are most important to the portrayal of the company's financial condition and
results and require management's most subjective and complex judgments, oftenapproximate $1.1 billion debt reduction as a result of the need to make estimates abouttransaction,
Heinz is targeting an additional $1.0 billion of debt reduction by the effectend of
matters that are
inherently uncertain.
14
MARKETING COSTS -- In order to supportFiscal 2005.
The Merger, which has been approved by the company's products,Boards of Directors of Heinz offers
various marketing programs to its customers which reimburse them for a portion
or all of their promotional activities relatedand
Del Monte, is subject to the company's products.approval by the shareholders of Del Monte and
receipt of a ruling from the Internal Revenue Service that the contribution of
the assets and liabilities to Spinco and the distribution of the shares of
common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco
and the shareholders of Heinz. The company regularly reviewsMerger is also subject to receipt of
applicable governmental approvals and revises, when deemed necessary, estimatesthe satisfaction of other customary
closing conditions. The transaction is not expected to close until late in
calendar year 2002 or early in calendar year 2003.
During the first quarter of Fiscal 2003, the Company recognized transaction
related costs and costs to the company for these marketing programs based on estimates of what has been
incurred by our customers. Actual costs incurred by the company may differ
significantly if factors such as the level and successreduce overhead of the customers'
programs or other conditions differ from our expectations.
INVENTORIES -- Inventories are stated at the lowerremaining core businesses
totaling $18.4 million pretax ($0.03 per share). Heinz anticipates transaction
related and restructuring costs of cost or market value.
Cost is principally determined by the first-in, first-out method. The company
records adjustmentsapproximately $160 million
13
after-tax to be incurred in Fiscal 2003. For more information regarding this
transaction, please refer to the value of inventory based upon its forecasted plansCompany's Annual Report to sell its inventories. The physical condition (e.g., age and quality) ofShareholders for the
inventories is also considered in establishing its valuation. These adjustments
are estimates, which could vary significantly, either favorably or unfavorably,
from actual requirements if future economic conditions, customer inventory
levels or competitive conditions differ from our expectations.
PROPERTY, PLANT AND EQUIPMENT AND OTHER ASSETS -- Property, plant and
equipment is recorded at cost and is depreciated on a straight-line basis over
the estimated useful lives of such assets. Changes in circumstances such as
technological advances, changes to the company's business model or changes in
the company's capital strategy can result in the actual useful lives differing
from the company's estimates. In those cases where the company determines that
the useful life of property, plant and equipment should be shortened, the
company would depreciate the net book value in excess of the salvage value, over
its revised remaining useful life thereby increasing depreciation expense.
Long-lived assets, including fixed assets and intangibles other than
goodwill, are reviewed by the company for impairment whenever events or changes
in circumstances indicate that the carrying amount of any such asset may not be
recoverable. The estimate of cash flow is based upon, among other things,
certain assumptions about expected future operating performance. The company's
estimates of undiscounted cash flow may differ from actual cash flow due to,
among other things, technological changes, economic conditions, changes to its
business model or changes in its operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying value,
the company recognizes an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset.
GOODWILL -- The company regularly reviews the individual components of
goodwill by evaluating the future cash flows of the businesses to determine the
recoverability of goodwill and recognizes, on a current basis, any diminution in
value. If future cash flows are less favorable than those anticipated, goodwill
may be impaired.
PENSION BENEFITS -- The company sponsors pension and other retirement plans
in various forms covering substantially all employees who meet eligibility
requirements. Several statistical and other factors which attempt to anticipate
future events are used in calculating the expense and liability related to the
plans. These factors include assumptions about the discount rate, expected
return on plan assets and rate of future compensation increases as determined by
the company, within certain guidelines. In addition, the company's actuarial
consultants also use subjective factors such as withdrawal and mortality rates
to estimate these factors. The actuarial assumptions used by the company may
differ materially from actual results due to changing market and economic
conditions, higher or lower withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant impact to the amount
of pension expense recorded by the company.fiscal year ended May 1, 2002.
STREAMLINE
In the fourth quarter of Fiscal 2001, the companyCompany announced a restructuring
initiative named "Streamline". This initiative includes a worldwide
organizational restructuring aimed at reducing 15
overhead costs, the closure of
the company'sCompany's tuna operations in Puerto Rico, the consolidation of the company'sCompany's
North American canned pet food production to Bloomsburg, Pennsylvania (which
resulted in ceasing canned pet food production at the company'sCompany's Terminal Island,
California facility), and the divestiture of the company'sCompany's U.S. fleet of fishing
boats and related equipment. The accrued restructuring costs at July 31, 2002
were approximately $18.7 million and relate to employee termination and exit
costs. For more information regarding Streamline, please refer to the company'sCompany's
Annual Report to Shareholders for the fiscal year ended May 1, 2002.
THREE MONTHS ENDED JULY 31, 2002 AND AUGUST 1, 2001
RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations", which requires that the purchase method of
accounting be applied to all business combinations after June 30, 2001. SFAS No.
141 also established criteria for recognition of intangible assets and goodwill.
Effective May 2, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under this standard, goodwill and intangibles with
indefinite useful lives are no longer amortized. This standard also requires, at
a minimum, an annual assessment of the carrying value of goodwill and
intangibles with indefinite useful lives.
The Company is currently completing its evaluation of the impact of
adopting SFAS No. 142 on the consolidated financial statements. The reassessment
of intangible assets, including the ongoing impact of amortization, was
completed during the first quarter of Fiscal 2003. The assignment of goodwill to
reporting units, along with transitional goodwill impairment tests, must be
completed during the second quarter of Fiscal 2003. Net income for the quarter
ended August 1, 2001 would have been $215.4 or $0.04 per share higher had the
provisions of the new standards been applied as of May 3, 2001.
Effective May 2, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment of Disposal of Long-Lived Assets." This statement provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets, expands the scope of a discontinued
operation to include a component of an entity and eliminates the current
exemption to consolidation when control over a subsidiary is likely to be
temporary. The adoption of this new standard did not have a material impact on
the Company's financial position, results of operations or cash flows for the
three months ended July 31, 2002.
During the firstfourth quarter of Fiscal 2002, the company recognizedadopted Emerging
Issues Task Force ("EITF") statements relating to the classification of vendor
consideration and certain sales incentives. The adoption of these EITF
statements has no impact on operating income, net earnings, or basic or diluted
earnings per share; however, revenues and gross profit were reduced by
approximately $108.2 million in the first quarter of Fiscal 2002. Prior period
data has been reclassified to conform to the current year presentation.
RESULTS OF OPERATIONS
For the three months ended July 31, 2002, sales increased $126.4 million,
or 6.1%, to $2.20 billion from $2.08 billion last year. Sales were favorably
impacted by acquisitions (4.1%), pricing (4.0%) and foreign exchange translation
rates (3.4%). The favorable impact of acquisitions is primarily related to the
prior year acquisitions in the Heinz North America and U.S. Frozen segments. The
favorable pricing was realized primarily in certain highly inflationary
countries.
14
Sales were negatively impacted by unfavorable volumes of 4.6% driven by the
current year strategic shift from trade promotional spending to consumer focused
promotional and marketing programs. This strategic shift has caused a
realignment of promotional timing, particularly in the United States.
Additionally, the Company is increasing its focus on trade spending efficiency
and effectiveness. Divestitures reduced sales by 0.8%.
The current year's first quarter was negatively impacted by costs related
to the Del Monte transaction and costs to reduce overhead of the remaining core
businesses totaling $18.4 million pretax ($0.03 per share), which are included
in selling, general and administrative expenses ("SG&A".) These include employee
termination and severance costs, legal and other professional service costs.
Last year's first quarter was negatively impacted by Streamline restructuring
charges and implementation costs totaling $16.1 million pretax ($0.04 per
share)share.)
The following tables provide a comparison of the Company's reported results
and the results excluding special items for the first quarter of Fiscal 2003 and
Fiscal 2002:
First Quarter Ended July 31, 2002
----------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
(Dollars in millions except per share amounts) -------- ------ --------- ------ -----
Reported results............................. $2,203.6 $786.9 $345.1 $177.8 $0.50
Special items.............................. -- -- 18.4 11.6 0.03
-------- ------ ------ ------ -----
Results excluding special items.............. $2,203.6 $786.9 $363.5 $189.4 $0.54
======== ====== ====== ====== =====
First Quarter Ended August 1, 2001
----------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- ------ --------- ------ -----
Reported results............................. $2,077.3 $762.3 $384.2 $200.5 $0.57
Streamline implementation costs............ -- 8.7 10.4 9.4 0.03
Streamline restructuring costs............. -- -- 5.7 3.6 0.01
-------- ------ ------ ------ -----
Results excluding special items.............. $2,077.3 $771.0 $400.3 $213.4 $0.61
======== ====== ====== ====== =====
- ---------------
(Note: Totals may not add due to rounding.)
Gross profit increased $24.6 million, or 3.2%, to $786.9 million from
$762.3 million. Excluding the special items noted above, gross profit increased
$15.9 million, or 2.1%, to $786.9 million from $771.0 million and the gross
profit margin decreased to 35.7% from 37.1%, primarily related to the U.S. Pet
Products and Seafood segment, partially offset by the current year benefit of
approximately $16.6 million related to the non-amortization of intangible assets
with indefinite lives.
SG&A increased $63.7 million, or 16.8%, to $441.8 million from $378.1
million. Excluding the special items noted above, SG&A increased $52.7 million,
or 14.2%, to $423.4 million from $370.7 million and increased as a percentage of
sales to 19.2% from 17.8%. [Note: All earnings per share amounts included in
Management's DiscussionThe increase is primarily driven by increased
marketing spend across all segments and Analysis are presented on an after-tax diluted
basis]. Pretax charges of $8.7 million were classified as cost of products sold
and $7.4 million as selling,increased general and administrative
expenses ("SGG&A").
Implementation costs ($10.4 in the Heinz North America and Europe segments.
Operating income decreased $39.0 million, pretax) were recognizedor 10.2%, to $345.1 million from
$384.2 million. Excluding the special items noted above, operating income
decreased $36.8 million, or 9.2%, to $363.5 million from $400.3 million and
decreased as incurred and
consisteda percentage of incremental costs directlysales to 16.5% from 19.3% primarily related to the
implementation of the
Streamline initiative. These include cost premiums relatedchange in gross profit and SG&A discussed above.
Net interest expense decreased $7.5 million to production
transfers, consulting costs and relocation costs.
In Fiscal 2001, the company completed the closure of its tuna operations in
Puerto Rico, ceased production of canned pet food in the company's Terminal
Island, California facility and sold its U.S. fleet of fishing boats and related
equipment. In addition, the company is continuing its implementation of its
global overhead reduction plan. To date, these actions have resulted in a net
reduction of the company's workforce of approximately 2,400 employees.
THREE MONTHS ENDED JANUARY 30, 2002 AND JANUARY 31, 2001
RESULTS OF OPERATIONS
For the three months ended January 30, 2002, sales increased $281.7
million, or 12.4%, to $2,551.3$62.7 million from $2,269.6$70.2
million last year, driven primarily by lower interest rates over the past year.
Other expense increased $9.9 million to $11.7 million from $1.8 million last
year. Sales
were favorably impacted by acquisitions (12.7%), higher pricing (2.9%) and
higher volumes (0.4%) and unfavorably impacted by foreign exchange translation
rates (1.7%) and divestitures (1.9%).
The favorable impact of acquisitionsincrease is primarily relatedattributable to increases in minority interest
expense. The effective tax rate for the current quarter was 34.3% compared to
35.8% last year. Excluding the special items noted above, the effective rate was
34.5% in the current quarter compared to 35.0% last year.
15
Net income in the current quarter was $177.8 million compared to $200.5
million last year and diluted earnings per share was $0.50 in the current
quarter versus $0.57 in the same period last year. Excluding the special items
in the table noted above, net income decreased $24.1 million to $189.4 million
from $213.4 million last year, and diluted earnings per share decreased 12.2%,
to $0.54 from $0.61 last year.
OPERATING RESULTS BY BUSINESS SEGMENT
First Quarter Ended
------------------------------
July 31, 2002 August 1, 2001
------------- --------------
SALES:
Heinz North America......................................... $ 586,114 $ 554,927
U.S. Pet Products and Seafood............................... 294,302 328,216
U.S. Frozen................................................. 245,789 208,976
---------- ----------
Total North America......................................... 1,126,205 1,092,119
Europe...................................................... 696,341 657,817
Asia/Pacific................................................ 254,424 233,655
Other Operating Entities.................................... 126,675 93,704
---------- ----------
Consolidated Totals......................................... $2,203,645 $2,077,295
========== ==========
OPERATING INCOME:
Heinz North America......................................... $ 105,878 $ 118,471
U.S. Pet Products and Seafood............................... 34,355 57,541
U.S. Frozen................................................. 51,703 44,236
---------- ----------
Total North America......................................... 191,936 220,248
Europe...................................................... 142,499 150,571
Asia/Pacific................................................ 21,203 26,136
Other Operating Entities.................................... 17,070 11,933
Non-operating............................................... (27,576) (24,734)
---------- ----------
Consolidated Totals......................................... $ 345,132 $ 384,154
========== ==========
OPERATING INCOME EXCLUDING SPECIAL ITEMS:
Heinz North America......................................... $ 112,772 $ 123,345
U.S. Pet Products and Seafood............................... 34,355 65,336
U.S. Frozen................................................. 51,703 44,236
---------- ----------
Total North America......................................... 198,830 232,917
Europe...................................................... 142,499 152,286
Asia/Pacific................................................ 21,203 26,734
Other Operating Entities.................................... 17,070 11,933
Non-Operating............................................... (16,065) (23,541)
---------- ----------
Consolidated Totals......................................... $ 363,537 $ 400,329
========== ==========
The following discussion of segment operating results excludes the special
items discussed above.
16
HEINZ NORTH AMERICA
Sales of the Heinz North America segment increased $31.2 million, or 5.6%.
Acquisitions, net of divestitures, increased sales 4.6%, due primarily to the
prior year acquisitions of Classico and Aunt Millie's pasta sauce, Mrs. Grass
Recipe soups and Wyler's bouillons and soupssoups. Higher pricing increased sales
2.5% due mainly to foodservice, private label soup and reduced trade promotions
on retail ketchup and baby food. Sales volume decreased 1.3%, due to decreases
in retail ketchup and infant feeding, partially offset by specialty sauces and
private label soup. Shipments of retail ketchup are down due to the North American segment;ongoing
trade initiatives to reduce inventory levels. The weaker Canadian dollar
decreased sales 0.2%.
Gross profit increased $12.7 million, or 6.3% due primarily to
acquisitions, pricing and the benefit of reduced amortization expense of
intangible assets, partially offset by unfavorable sales mix. Operating income
decreased $10.5 million, or 8.6%, to $112.8 million from $123.3 million, due
primarily to increased marketing and higher G&A partially offset by acquisitions
and the change in gross profit.
U.S. PET PRODUCTS AND SEAFOOD
Sales of the U.S. Pet Products and Seafood segment decreased $33.9 million,
or 10.3%. Sales volume decreased 7.7% primarily in pet snacks, canned cat food
and dry dog food, partially offset by volume increases in tuna. Lower pricing
decreased sales 2.6%, primarily in tuna partially offset by lower trade
promotions and higher pricing of pet food. Pet food volume and pricing were
impacted by the current year strategic shift from trade promotional spending to
consumer focused promotional and marketing programs and the timing of these
promotional programs.
Gross profit decreased $32.0 million, or 27.4%, primarily due to lower
pricing and higher tuna costs and lower volume of pet snacks, partially offset
by reduced trade promotion spending in tuna and the benefit of reduced
amortization expense of intangible assets. Operating income decreased $31.0
million, or 47.4%, to $34.4 million from $65.3 million, due primarily to the
change in gross profit.
U.S. FROZEN
U.S. Frozen's sales increased $36.8 million, or 17.6%. Acquisitions, net of
divestitures, increased sales 24.9%, due primarily to the prior year
acquisitions of Delimex frozen Mexican foods, Anchor's Poppers retail frozen
appetizers and licensing rights to the T.G.I. Friday's brand of frozen snacks
and appetizers in the U.S. Frozen Segment; and the Honig
brands of soups, sauces and pasta meals, HAK brand of vegetables packed in
glass, KDR brand of sport drinks, juices, spreads and sprinkles in the Europe
segment.
Sales of the Heinz North America segment increased $70.3 million, or 11.1%.
Acquisitions, net of divestitures, increased sales 12.1%.appetizers. Higher pricing increased sales 0.3%, due mainly to grocery ketchup and infant feeding. Sales
volume decreased 0.4%, mainly due to decreases in grocery ketchup, lapping last
year's introduction of EZ Squirt, and gravy partially offset by increased volume
of foodservice sauces. The weaker Canadian dollar decreased sales 0.9%.
Sales of the U.S. Pet Products and Seafood segment decreased $16.6 million,
or 4.4%. Sales volume decreased 5.6% primarily in pet food partially offset by
volume increases in pet snacks. Higher pricing increased sales 1.2%5.1%, primarily in tuna and pet snacks.
U.S. Frozen's sales increased $103.9 million, or 40.5%. Acquisitions
increased sales 43.3%. Sales volume increased 3.0% due primarily to SmartOnes
frozen entrees and a reduction in trade promotions related to the launch of Hot
Bites in the prior year. Sales volume decreased 12.4% driven by Bagel Bites/Hot
Bites, Boston Market HomeStyle Meals and frozen potatoes. The volume decrease is
partially attributed to the rationalization of the Hot Bites product lines with
renewed focus on the base Bagel Bites business and the timing of promotional and
marketing programs across the segment.
Gross profit increased $17.4 million or 21.4%, primarily due to
acquisitions, partially offset by volume decreases in frozen snacks. Divestitures reduced sales by 5.8% duedecreases. Operating income increased
$7.5 million, or 16.9%, to the sale
of Budget Gourmet.$51.7 million from $44.2 million reflecting increased
marketing and S&D expenses.
EUROPE
Heinz Europe's sales increased $104.2$38.5 million, or 16.0%. Acquisitions, net
of divestitures, increased sales 13.0%. Volume increased by 3.5%, driven
primarily by ketchup, frozen foods, beans and salmon partially offset by volume
decreases in tuna. Higher pricing increased sales 1.4%,
16
primarily due to higher pricing in tuna, soups and beans. Unfavorable foreign
exchange translation rates decreased sales by 1.9%.
Sales in Asia/Pacific decreased $9.4 million, or 3.4%. Unfavorable exchange
rates reduced sales by 7.2%. Higher pricing increased sales 3.7%, primarily due
to sauces, infant feeding and juices. Sales volume increased 0.9% due primarily
to frozen foods, poultry, cooking oils and infant feeding partially offset by
volume decreases in canned meats and pet food. Divestitures, net of
acquisitions, reduced sales by 0.8%.
Sales for Other Operating Entities increased $29.2 million, or 38.0%.
Favorable pricing increased sales 50.7%, primarily in highly inflationary
countries. Other items net reduced sales by 12.7% mainly due to the divestitures
of the South African frozen and pet food businesses.
Last year's third quarter was positively impacted by special items which
net to $43.1 million after-tax ($0.13 per share). The following table provides a
comparison of the company's reported results and the results excluding special
items for the third quarter of Fiscal 2001.
Third Quarter Ended January 31, 2001
(Dollars in millions except per share amounts) -----------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- ------- --------- ------ -----
Reported results............................. $2,269.6 $884.1 $340.2 $270.5 $0.77
Operation Excel implementation costs....... -- 43.2 73.5 50.1 0.14
Italian tax benefit........................ -- -- -- (93.2) (0.27)
-------- ------ ------ ------ -----
Results excluding special items............ $2,269.6 $927.4 $413.6 $227.4 $0.65
======== ====== ====== ====== =====
(Note: Totals may not add due to rounding.)
Gross profit increased $116.9 million, or 13.2%, to $1,001.0 million from
$884.1 million and the gross profit margin increased to 39.2% from 39.0%.
Excluding the Fiscal 2001 special items noted above, gross profit increased
$73.7 million, or 7.9%, to $1,001.0 million from $927.4 million and the gross
profit margin decreased to 39.2% from 40.9%. Gross profit for the Heinz North
America segment increased $13.1 million, or 4.8% due primarily to acquisitions
offset by the decline in the foodservice business. The U.S. Pet Products and
Seafood segment's gross profit decreased $7.9 million, or 5.6%, primarily due to
volume decreases in pet food and a shift to less profitable larger size
products. U.S. Frozen's gross profit increased $45.4 million or 38.7%, due
primarily to acquisitions. Europe's gross profit increased $37.6 million, or
13.8%, due primarily to acquisitions and increased pricing. The Asia/Pacific
segment's gross profit decreased $17.2 million, or 17.3%, due primarily to
supply chain issues in New Zealand and Australia and declining sales in Japan.
Unfavorable foreign exchange rates were only partially offset by increased
pricing. A significant number of products produced in this region are sourced
from a different factory or line compared with prior year. Gross profit in the
Other Operating Entities segment increased $4.4 million, or 17.5%, due primarily
to favorable pricing.
Selling, general and administrative expenses ("SG&A") increased $61.6
million, or 11.3%, to $605.6 million from $544.0 million, and decreased as a
percentage of sales to 23.7% from 24.0%. Excluding the Fiscal 2001 special items
noted above, SG&A increased $91.9 million, or 17.9%, to $605.6 million from
$513.7 million and increased as a percentage of sales to 23.7% from 22.6%. This
increase is primarily attributable to acquisitions, increased promotional
spending in North America and Europe and increased selling and distribution
cost.
Operating income increased $55.3 million, or 16.2%, to $395.4 million from
$340.2 million, and increased as a percentage of sales to 15.5% from 15.0%.
Excluding the Fiscal 2001 special items noted above, operating income decreased
$18.2 million, or 4.4%, to $395.4 million from $413.6 million and decreased as a
percentage of sales to 15.5% from 18.2%.
Heinz North America's operating income decreased $15.5 million, or 9.9%, to
$141.3 million from $156.8 million. Excluding the Fiscal 2001 special items
noted above, operating income de-
17
creased $30.2 million, or 17.6%, to $141.3 million from $171.5 million, due
primarily to increased selling and distribution costs, increased promotional
spending and a decrease in the foodservice business partially offset by
acquisitions.
The U.S. Pet Products and Seafood segment's operating income increased $7.7
million, or 20.0%, to $46.4 million from $38.7 million. Excluding the Fiscal
2001 special items noted above, operating income decreased $7.8 million, or
14.4%, to $46.4 million from $54.2 million, due primarily to the decrease in
gross profit.
The U.S. Frozen segment's operating income increased $23.9 million, or
65.8%, to $60.3 million from $36.4 million. Excluding the Fiscal 2001 special
items noted above, operating income increased $15.5 million, or 34.6%, to $60.3
million from $44.8 million primarily due to the favorable impact of acquisitions
partially offset by the divestiture of Budget Gourmet.
Europe's operating income increased $29.0 million, or 27.0%, to $136.8
million from $107.7 million. Excluding the Fiscal 2001 special items noted
above, operating income increased $9.2 million, or 7.2%, to $136.8 million from
$127.5 million. Europe's increase is primarily attributable to the increase in
gross profit partially offset by increased marketing to support key brands
across Europe and integration costs associated with recent acquisitions.
Asia/Pacific's operating income decreased $1.9 million, or 8.6%, to $20.4
million from $22.3 million. Excluding the Fiscal 2001 special items noted above,
operating income decreased $15.2 million, or 42.6%, to $20.4 million from $35.6
million. This decrease is due primarily to supply chain issues in New Zealand
and Australia and declining sales in Japan. A significant number of products
produced in this region are sourced from a different factory or line compared
with prior year. Operations are expected to improve during the latter half of
Fiscal 2003.
Excluding special items, Other Operating Entities' operating income
increased $5.3 million or 73.8% primarily due to higher pricing.
Net interest expense decreased $14.0 million to $65.4 million from $79.5
million last year, driven by lower interest rates partially offset by increased
borrowings. Other expense increased $35.5 million to $19.7 million from other
income of $15.8 million last year primarily due to gains from foreign currency
hedge contracts recorded in the prior year quarter and an increase in minority
interest expense.
The effective tax rate for the current quarter was 35.0% compared to 2.1%
last year. The prior year quarter included the benefit from tax planning and new
tax legislation outlined above. Excluding the Fiscal 2001 special items noted
above, the effective rate was 35.0% for both periods.
Net income in the current quarter was $201.7 million compared to $270.5
million last year and diluted earnings per share was $0.57 in the current
quarter versus $0.77 in the same period last year. Excluding the Fiscal 2001
special items noted above, net income decreased $25.8 million to $201.7 million
from $227.4 million last year, and diluted earnings per share decreased 12.0%,
to $0.57 from $0.65 last year.
NINE MONTHS ENDED JANUARY 30, 2002 AND JANUARY 31, 2001
RESULTS OF OPERATIONS
For the nine months ended January 30, 2002, sales increased $564.3 million,
or 8.4%, to $7,301.9 million from $6,737.6 million last year. Sales were
favorably impacted by acquisitions (9.8%), higher pricing (2.0%) and higher
volumes (0.6%). Sales were unfavorably impacted by foreign exchange translation
rates (2.0%) and divestitures (2.0%).
Sales of the Heinz North America segment increased $128.3 million, or 6.9%.
Acquisitions, net of divestitures, increased sales 10.1%. Lower pricing
decreased sales 1.4%, primarily related to
18
foodservice ketchup. Sales volume decreased 1.1%, primarily in the foodservice
business, various sauces and infant feeding partially offset by volume increases
in soups and grilling sauces. The weaker Canadian dollar decreased sales 0.7%.
Sales of the U.S. Pet Products and Seafood segment decreased $31.2 million,
or 2.8%5.9%. Higher pricing
increased sales 0.7%, primarily in tuna,due to seafood, infant feeding and beans,
partially offset by lower pricing in dry dog food, pet snacks and cat food. Salesfrozen foods. Lower volume decreased 2.2% primarily in pet food partially offset by volume increases in pet
treats and tuna. Divestitures decreased sales
1.3%.
U.S. Frozen's sales increased $167.1 million, or 21.6%. Acquisitions
increased sales 22.3%. Sales volume increased 5.7% due primarily to SmartOnes
frozen entrees, Boston Market HomeStyle Meals and Bagel Bites snacks partially
offset by volume decreases in frozen potatoes. Higher pricing increased sales
1.4%, primarily in SmartOnes frozen entrees and frozen potatoes partially offset
by lower pricing of Boston Market HomeStyle Meals. Divestures reduced sales by
7.8% due to the sale of Budget Gourmet.
Heinz Europe's sales increased $279.0 million, or 14.6%. Acquisitions, net
of divestitures, increased sales 13.4%. Higher pricing increased sales 2.4%,
primarily due to higher pricing in seafood, infant feeding, beans and soup.
Volume increased by 1.3%2.0%, driven primarily by grocery ketchup, salad cream,
beans, salmonseafood, infant feeding and weight control entreesfrozen pizza, partially
offset by volume decreases in
infant feedingbeans and tuna. Unfavorablefrozen entrees. Favorable foreign exchange translation rates
decreasedincreased sales by 2.5%7.5%. Divestitures reduced sales by 0.3%.
17
Gross profit increased $11.0 million, or 4.1%, due primarily to increased
pricing, favorable foreign exchange rates and the benefit of reduced
amortization expense of intangible assets. Operating income decreased $9.8
million, or 6.4%, to $142.5 million from $152.3 million primarily attributable
to increased marketing and G&A expense offset partially by the favorable change
in gross profit.
ASIA/PACIFIC
Sales in Asia/Pacific decreased $48.2increased $20.8 million, or 5.9%. Unfavorable
exchange rates reduced sales by 8.9%. Higher pricing
increased sales 2.3%3.8%, primarily due to higher pricing in saucespoultry, frozen foods and juices partially offsetsauces. Volume
decreased sales 4.2%, driven primarily by lower
pricing injuices/drinks and cooking oils.
Sales volumeFavorable foreign exchange translation rates increased 1.2% due primarily to poultry,
frozen vegetables and juices partially offsetsales by volume decreases in sauces,
corned beef and frozen potatoes.9.7%.
Divestitures net of acquisitions, reduced sales by 0.5%0.4%.
Sales for Other Operating Entities increased $69.3 million, or 28.5%.
Favorable pricing increased sales 32.3%, primarily in certain highly
inflationary countries. Sales volume increased 2.7%, primarily in infant feeding
and grocery ketchup offset by decreases in tuna. Other items net reduced sales
by 6.5% mainly due to the divestitures of the South African frozen and pet food
businesses.
The current year's results were negatively impacted by additional
Streamline restructuring charges and implementation costs totaling $16.1 million
pretax ($0.04 per share). Pretax charges of $8.7 million were classified as cost
of products sold and $7.4 million as SG&A. Last year's results were negatively
impacted by special items which net to $45.7 million after-tax ($0.13 per
share).
The following tables provide a comparison of the company's reported results
and the results excluding special items for the nine months ended January 30,
2002 and January 31, 2001.
Nine Months Ended January 30, 2002
(Dollars in millions except per share amounts) ------------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- -------- --------- ------ -----
Reported results........................... $7,301.9 $2,885.1 $1,180.7 $610.4 $1.73
Streamline implementation costs.......... -- 8.7 10.4 9.4 0.03
Streamline restructuring costs........... -- -- 5.7 3.6 0.01
-------- -------- -------- ------ -----
Results excluding special items............ $7,301.9 $2,893.8 $1,196.9 $623.3 $1.77
======== ======== ======== ====== =====
19
Nine Months Ended January 31, 2001
(Dollars in millions except per share amounts) ------------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- -------- --------- ------ -----
Reported results (a)....................... $6,737.6 $2,696.4 $1,111.1 $665.0 $1.90(b)
Operation Excel restructuring............ -- 33.5 33.5 20.8 0.06
Operation Excel implementation costs..... -- 96.1 207.2 140.5 0.40
Operation Excel reversals................ -- (21.4) (33.8) (25.9) (0.07)
Italian tax benefit...................... -- -- -- (93.2) (0.27)
Equity Loss on Investment in the Hain
Celestial Group....................... -- -- -- 3.5 0.01
-------- -------- -------- ------ -----
Results excluding special items............ $6,737.6 $2,804.6 $1,318.0 $710.7 $2.03
======== ======== ======== ====== =====
- ---------------
(a) Amounts have been restated for the effect of the change in accounting for
revenue recognition
(b) Before cumulative effect of accounting change
(Note: Totals may not add due to rounding.)
Gross profit increased $188.6$0.9 million, or 7.0%, to $2,885.1 million from
$2,696.4 million and the gross profit margin decreased to 39.5% from 40.0%.
Excluding the special items noted above, gross profit increased $89.2 million,
or 3.2%, to $2,893.8 million from $2,804.6 million and the gross profit margin
decreased to 39.6% from 41.6%. Gross profit for the Heinz North America segment
increased $10.0 million, or 1.2% due primarily to acquisitions partially offset
by lower pricing and the decline in the foodservice business. The U.S. Pet
Products and Seafood segment's gross profit decreased $48.8 million, or 11.1%,
primarily due to price decreases in pet food and pet snacks, increased
ingredient and manufacturing costs and a shift to less profitable larger size
products. Pet food ingredient costs also increased as a result of reformulating
recipes to improve palatability. U.S. Frozen's gross profit increased $67.7
million or 18.8%, due primarily to acquisitions and increased
pricing. Europe's
gross profit increased $104.8 million, or 12.9%, due primarily to acquisitions
and increased pricing. The Asia/Pacific segment's gross profit decreased $54.7
million, or 17.4%, due primarily to unfavorablepricing, favorable foreign exchange rates and the current year benefit of
approximately $2.0 million related to the non-amortization of intangible assets
with indefinite lives, partially offset by the ongoing poor factory operations
in connection with the movement of manufacturing to New
Zealand fromoffshore for Australia and
Japan partially offset byJapan. Operating income decreased $5.5 million, or 20.7%, to $21.2 million from
$26.7 million primarily due to increased pricing. New
Zealand's factories are experiencing inefficiencies as a result of significant
changes in the supply chain matrix. Gross profit in themarketing and G&A expenses.
OTHER OPERATING ENTITIES
Sales for Other Operating Entities segment increased $10.9$33.0 million, or 14.4%35.2%
primarily due to favorable pricing in certain highly inflationary countries.
Gross profit increased $3.9 million, or 14.2%, due primarily to favorable
pricing. SG&A increased $119.0 million, or 7.5%, to $1,704.3 million from $1,585.3
million, and decreased as a percentage of sales to 23.3% from 23.5%. Excluding
the special items noted above, SG&A increased $210.3 million, or 14.1%, to
$1,696.9 million from $1,486.6 million and increased as a percentage of sales to
23.2% from 22.1%. This increase is primarily attributable to acquisitions,
increased promotional spending in North America and Europe and increased selling
and distribution costs in North America.
Operating income increased $69.7$5.1 million or 6.3%, to $1,180.7 million from
$1,111.1 million, and decreased as a percentage of sales to 16.2% from 16.5%.
Excluding the special items noted above, operating income decreased $121.1
million, or 9.2%, to $1,196.9 million from $1,318.0 million and decreased as a
percentage of sales to 16.4% from 19.6%.
Heinz North America's operating income decreased $29.9 million, or 6.6%, to
$425.1 million from $455.1 million. Excluding the special items noted above,
operating income decreased $65.6 million, or 13.2%, to $430.0 million from
$495.6 million,43.0% due primarily to the
decreaseincrease in gross profit and higher selling
and distribution costs partially offset by the favorable impact of acquisitions.
The U.S. Pet Products and Seafood segment's operating income decreased
$15.5 million, or 11.5%, to $150.4 million from $134.9 million. Excluding the
special items noted above, operating
20
income decreased $36.9 million, or 18.9%, to $158.2 million from $195.1 million,
due primarily to the decrease in gross profit.
The U.S. Frozen segment's operating income increased $32.0 million, or
23.9%, to $165.6 million from $133.6 million. Excluding the special items noted
above, operating income increased $14.8 million, or 9.8%, to $165.6 million from
$150.8 million as the favorable impact of acquisitions and pricing was partially
offset by increased selling and distribution costs and the divestiture of Budget
Gourmet.
Europe's operating income increased $73.1 million, or 21.9%, to $406.8
million from $333.7 million. Excluding the special items noted above, operating
income increased $17.0 million, or 4.4%, to $408.5 million from $391.5 million.
This increase is primarily attributable to acquisitions and the tuna business
partially offset by increased marketing to support key brands across Europe and
integration costs.
Asia/Pacific's operating income decreased $15.2 million, or 17.6%, to $71.4
million from $86.6 million. Excluding the special items noted above, operating
income decreased $51.2 million, or 41.6%, to $72.0 million from $123.2 million.
This decrease is primarily attributable to the unfavorable operating performance
brought about by the movement of manufacturing to New Zealand for Australia and
Japan and the significant realignment of manufacturing facilities. Operations
are expected to improve during the latter half of Fiscal 2003.
Excluding special items, Other Operating Entities' operating income
increased $13.3 million or 51.0% primarily due to higher pricing.
Net interest expense decreased $24.9 million to $206.4 million from $231.3
million last year, driven by lower interest rates partially offset by increased
borrowings. Other expense increased $32.5 million to $31.4 million from other
income of $1.0 million last year. Excluding special items, other expense
increased $38.1 million to $31.4 million from other income of $6.7 million
primarily due to gains from foreign currency hedge contracts recorded in the
prior year and an increase in minority interest expense.
The effective tax rate for the current year was 35.3% compared to 24.5%
last year. Excluding the special items, the effective rate was 35.0% in both
years.
Net income for the current nine months was $610.4 million compared to
$648.5 million last year and diluted earnings per share was $1.73 compared to
$1.85 last year. Excluding the special items noted above and the cumulative
effect of the accounting change for revenue recognition in the prior year, net
income decreased $87.4 million to $623.3 million from $710.7 million last year,
and diluted earnings per share decreased 12.8%, to $1.77 from $2.03 last year.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities was $334.3$227.2 million compared to cash
used for operating activities of $1.4$59.9
million last year. The increase in Fiscal 20022003 versus Fiscal 20012002 is primarily
due to expendituresimproved working capital performance and a reduction in the prior yearpayments related
to Operation Excel and income taxes related to the reorganization of
certain foreign operations.restructuring activities.
Cash used for investing activities totaled $924.8$43.8 million compared to $414.8$361.2
million last year. Acquisitions in the current period required $802.7$17.3 million
duecompared to $310.8 million last year. Acquisitions in the prior period related
primarily to the purchase of Borden Food Corporation's pasta and dry bouillon
and soup business, Delimex Holdings, Inc. and Anchor Food Products
branded retail business and licensing rights to the T.G.I. Friday's brand of
frozen snacks and appetizers. Acquisitions in the prior period required $182.9
million, due primarily to the purchase of International DiverseFoods Inc. and
Alden Merrell. During the prior year period, the company also invested $79.7
million in The Hain Celestial Group, Inc. In the current period, proceeds from
divestitures provided $31.9 million compared to $93.3 million prior year.
Proceeds from divestures in the prior year primarily relate to the sale of the
company's domestic can making
21
facilities.business. Capital expenditures in the current periodquarter required $103.2$32.6
million compared to $255.8$60.1 million last year. The current year reduction is
primarily related to restructuring initiatives in the prior year.
Cash used by financing activities was $219.5 million compared to cash
provided by financing activities increased to $659.4 million from
$482.2of $299.5 million last year. ProceedsThere were no
proceeds from long-term debt were $770.8 millionin the current year compared to $1,078.7 million$764.6 last year.
Payments on long-term debt required $37.5$4.2 million this periodquarter compared to $22.0$26.6
million last year. Proceeds from
commercialCommercial paper and short-term borrowings provided $2.2required $89.5
million compared to requiring $174.3$656.8 million last year. In addition, $325.0 million was
provided during the current periodprior year quarter through the issuance of Preferred Stock
by H.J. Heinz Finance Company ("Heinz Finance"HFC"), (see below). Cash provided from stock options
exercised totaled $53.2$4.0 million versus $78.5$13.3 million last year. Dividend payments
totaled $420.6$142.1 million compared to $400.4$137.1 million for the same period last year.
Share repurchases totaled $45.4 million (1.0 million shares) versus
$90.4 million (2.3 million shares) a year ago.
In the first nine monthsquarter of Fiscal 2002,2003, the cash requirements of Streamline
were $88.8$5.4 million, consistingrelating to severance costs.
On August 16, 2002, Fitch Ratings initiated coverage of spending for severancethe Company
assigning an 'A' rating to the Company's senior unsecured debt and exit
costs ($78.4 million) and implementation costs ($10.4 million).
On July 6, 2001, Heinz Finance raised $325.0 million viaa 'F1' rating
to the issuanceCompany's commercial paper. Fitch indicated that the ratings outlook was
stable. In connection with the announcement of Voting Cumulative Preferred Stock, Series A with liquidation preference of
$100,000 per share. The Series A Preferred shares are entitledthe Del
18
Monte transaction, Moody's Investors Service changed the Company's 'A3' senior
unsecured debt ratings outlook from negative to receive
quarterly dividends at a rate of 6.226% per annum and are required to be
redeemed for cash on July 15, 2008. In addition, Heinz Finance issued $750
million of 6.625% Guaranteed Notes due July 15, 2001. The proceeds were used for
general corporate purposes, including retiring commercial paper borrowings and
financing acquisitions and ongoing operations.stable.
On September 6, 2001,5, 2002, the company, Heinz FinanceCompany, HFC and a group of domestic and
international banks entered into a $1.50renewed an $800 million credit 364-day agreement. That
credit agreement and the $1.5 billion credit agreement whichthat expires in September
2006 and a $800 million credit agreement which expires in
September 2002. These credit agreements, which support the company'sCompany's commercial paper programs, replaced the $2.30 billion credit agreement which expired on
September 6, 2001.programs. As of January 30,July 31, 2002 $1.38 billion$22.3
million of commercial paper iswas outstanding and classified as long-term debt due
to the long-term nature of the supporting credit agreement. As of May 2, 2001,1, 2002,
the companyCompany had $1.34 billion$119.1 million of commercial paper outstanding and classified as
short-term debt.
In January 2002, Moody's Investors Service changed the credit ratings on
the company's debt to A-3 for long-term debt and P-1 for short-term debt.
The previous ratings were A-2impact of inflation on both the Company's financial position and
P-1, respectively. The company's long-term and
short-term debt ratings by Standard & Poor's remained at A and A-1,
respectively.
On March 7, 2002, Heinz Finance issued $700 millionresults of 6.00% Guaranteed
Notes due March 15, 2012 and $550 million of 6.75% Guaranteed Notes due March
15, 2032, which are guaranteed by the company. The proceeds will be used to
retire commercial paper borrowings. Heinz Finance converted $750 million of the
new debt from fixed to floating through interest rate swap agreements. Long-term
debt accounts for over 60% of the company's total debt.
COMMITMENTS AND CONTINGENCIES
The Securities and Exchange Commission recently issued an interpretive
release on disclosures related to liquidity and capital resources, including
off-balance sheet arrangements. The companyoperations is not aware of factors that are
reasonably likelyexpected to adversely affect liquidity trends or increase the company's
risk beyond the risk factors presented in other company filings.Fiscal 2003 results.
The following
additional information is provided to assist financial statement users.
Purchase Commitments -- The company has purchase commitments for materials,
supplies, services, and property, plant and equipment as part of the ordinary
conduct of business. A few of these commitments are long-term and are based on
minimum purchase requirements. In the aggregate, such commitments are not at
prices in excess of current market. Due to the proprietary
22
nature of some of the company's materials and processes, certain supply
contracts contain penalty provisions for early termination. The company does not
believe a material amount of penalties is reasonably likely to be incurred under
these contracts based upon historical experience and current expectations.
Leases -- The company has entered into operating and synthetic leases for
certain of its warehouses, equipment and office buildings where the economic
profile is favorable. Contractual obligations under existing synthetic leases,
which are due at the end of the lease period (fiscal years 2007 and 2008), total
approximately $220 million as of January 30, 2002. The liquidity impact of
outstanding leases is not material to the company - by reference to both annual
cash flow and total outstanding debt nor do they adversely affect the company's
on-going business.
Other Contractual Obligations -- The company does not have material
financial guarantees or other contractual commitments that are reasonably likely
to adversely affect liquidity.
Related Party Transactions -- The company does not have any related party
transactions that materially affect the results of operations, cash flow or
financial condition.
The company'sCompany's financial position continues to remain strong, enabling it to meet
cash requirements for operations, capital expansion programs and dividends to
shareholders. RECENTLY ADOPTED ACCOUNTING STANDARDS
In Fiscal 2001,The Company's goal remains the company changed its methodachievement of accounting for revenue
recognition in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition in Financial Statements". Under the new accounting method, adopted
retroactive to May 4, 2000, Heinz recognizes revenue upon the passage of title,
ownership and risk of loss to the customer. The cumulative effect adjustment of
$66.2 million in revenue ($16.5 million in net income) as of May 4, 2000, was
recognized during the first quarter of Fiscal 2001. The Fiscal 2001 nine month
amounts have been restatedpreviously
communicated earnings per share for the effect of the change in accounting for
revenue recognition. Amounts originally reported were as follows: Sales, $6.72
billion; Gross profit, $2.69 billion; Net income, $661.2 million; Net income per
share -- diluted, $1.88; Net income per share -- basic, $1.90.full year.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued
new guidelines entitled "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products".
In addition, during May 2000, the EITF issued new guidelines entitled
"Accounting for Certain Sales Incentives". Both of these issues provide guidance
primarily on income statement classification of consideration from a vendor to a
purchaser of the vendor's products, including both customers and consumers.
Generally, cash consideration is to be classified as a reduction of revenue,
unless specific criteria are met regarding goods or services that the vendor may
receive in return for this consideration.
In the fourth quarter of Fiscal 2002, the company will reclassify
promotional payments to our customers and the cost of consumer coupons and other
cash redemption offers from SG&A to net sales. The company is currently
assessing the combined impact of both Issues, however, we believe that, based on
historical information. Sales could be reduced up to 6 to 7%. SG&A will be
correspondingly reduced such that net earnings will not be affected.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets." These standards require that all
business combinations be accounted for using the purchase method and that
goodwill and intangible assets with indefinite useful lives should not be
amortized but should be tested for impairment at least annually, and they
provide guidelines for new disclosure requirements. These standards outline the
criteria for initial recognition and measurement of intangibles, assignment of
assets and liabilities including
23
goodwill to reporting units and goodwill impairment testing. The provisions of
SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001.
The company has not fully assessed the potential impact of the adoption of
SFAS No. 142 which is effective for the company in Fiscal 2003. The reassessment
of intangible assets, including the ongoing impact of amortization, must be
completed during the first quarter of Fiscal 2003. The assignment of goodwill to
reporting units, along with completion of the first step of the transitional
goodwill impairment tests, must be completed during the first six months of
Fiscal 2003. Total amortization of goodwill and intangible assets for the year
ended May 2, 2001, was $51.6 million and $33.6 million, respectively.
In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, addresses accounting for legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and the normal operation of a
long-lived asset, except for certain obligations of lessees. This standard is
effective for fiscal years beginning after June 15, 2002.the Company in Fiscal 2004. The companyCompany does not expect that the
adoption of this standard will have a significant impact on the consolidated
financial statements.
In October 2001,June 2002, the FASB issuedapproved SFAS No. 144146, "Accounting for ImpairmentCosts
Associated with Exit or Disposal of Long-lived Assets.Activities." SFAS No. 144 clarifies146 addresses financial
accounting and revises existing
guidance on accountingreporting for impairmentcosts associated with exit or disposal activities.
This Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. This Statement
also establishes that fair value is the objective for initial measurement of plant, property and equipment,
amortized intangibles, and other long-lived assets not specifically addressed in
other accounting literature. This standard will bethe
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. Management is currently
assessing the company
beginning in Fiscal 2003. The company does not expect the adoptiondetails of this standard to haveStandard and is preparing a significant impact on the consolidated financial statements.
INFLATION
In general, costs are affected by inflation and the effectsplan of
inflation
may be experienced by the company in future periods. Management believes,
however, that such effects have not been material to the company during the past
three years in the United States or foreign non-hyperinflationary countries. The
company operates in certain countries around the world, such as Argentina,
Venezuela, Mexico and Zimbabwe that have experienced hyperinflation. In
hyperinflationary foreign countries, the company attempts to mitigate the
effects of inflation by increasing prices in line with inflation, where
possible, and efficiently managing its working capital levels.implementation.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING STATEMENTSINFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by or on behalf of the company.Company.
The companyCompany and its representatives may from time to time make written or oral
forward-looking statements, including certain statements includedcontained in or
incorporated by reference in this Form 10-Q, the company's otherCompany's
filings with the Securities and Exchange Commission and in its reports to
shareholders. These forward-looking statements are based on management's views
and assumptions of future events and involvefinancial performance. The words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"should," "estimate," "project," "target," "goal" or similar expressions
identify "forward-looking statements" within the meaning of the Act.
In order to comply with the terms of the safe harbor, the Company notes
that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. These
forward-looking statements are uncertain. The risks and uncertainties that may
affect operations and financial performance and other important factors,activities, some of which
may be beyond the control of the company, that could cause actual resultsCompany, include the following:
- Changes in laws and regulations, including changes in food and drug laws,
accounting standards, taxation requirements (including tax rate changes,
new tax laws and revised tax law interpretations) and environmental laws
in domestic or foreign jurisdictions;
19
- Competitive product and pricing pressures and the Company's ability to
differ
materially from those expressedgain or impliedmaintain share of sales in the forward-looking statements.
These include, butglobal market as a result of
actions by competitors and others;
- Fluctuations in the cost and availability of raw materials, including
tuna, and the ability to maintain favorable supplier arrangements and
relationships;
- The impact of higher energy costs and other factors on the cost of
producing, transporting and distributing the Company's products;
- The Company's ability to generate sufficient cash flows to support
capital expenditures, share repurchase programs, debt repayment and
general operating activities;
- The inherent risks in the marketplace associated with new product or
packaging introductions, including uncertainties about trade and consumer
acceptance;
- The Company's ability to achieve sales and earnings forecasts, which are
not limitedbased on assumptions about sales volume, product mix and other items;
- The Company's ability to sales, earningsintegrate acquisitions and volume growth,
competitive conditions, production costs,joint ventures into
its existing operations and the availability of new acquisition and joint
venture opportunities and the success of divestitures and other business
combinations;
- The Company's ability to achieve its cost savings objectives, including
any restructuring programs and its working capital initiative;
- The impact of unforeseen economic and political changes in international
markets where the Company competes, such as currency valuations and fluctuations
in thoseexchange rates,
(notably with respect to the euro and the pound sterling), inflation
rates, recession, foreign ownership restrictions and other external
factors over which the Company has no control;
- Interest rate fluctuations and other capital market conditions;
- The effectiveness of the Company's advertising, marketing and promotional
programs;
- Weather conditions, which could impact demand for Company products and
the supply and cost of raw materials;
- The impact of e-commerce and e-procurement, supply chain efficiency and
cash flow initiatives;
- The Company's ability to maintain its profit margin in the face of a
consolidating retail environment;
- The impact of global economic and industry conditions, including the impacteffect of the
economic downturn in the food industry and the foodservice business in
particular, achieving cost savings
programs,particular;
- The Company's ability to offset the reduction in volume and revenue
resulting from participation in categories experiencing declining
consumption rates;
- With respect to the proposed spin-off and merger between the Company's
U.S. and Canadian pet food and pet snacks, U.S. tuna, U.S. retail private
label soup and private label gravy, College Inn broth and U.S. infant
feeding businesses, and a wholly-owned subsidiary of Del Monte Foods
Company ("Del Monte,") the ability to obtain required third party
consents, regulatory and Del Monte shareholders' approval, including a
private letter ruling from the Internal Revenue Service, and the success
of acquisitions (including integration), divestituresbusiness integration in a timely and other business combinationscost effective manner; and
new product and packaging innovations,- With respect to future dividends on Company stock, meeting certain legal
requirements at the impacttime of e-commerce and e-procurement, supply chain efficiency and cash flow
initiatives, and otherdeclaration.
The foregoing list of important factors described in "Cautionary Statement Relevant to
Forward-Looking Information" in the company's Form 10-K for the fiscal year
ended May 2, 2001, as updated from time to time by the company in its subsequent
filings with the Securities and Exchange Commission.is not exclusive. The
forward-looking statements are and will
24
be based on management's then current
views and assumptions regarding future events
20
and operating performance and speak only as of their dates. The companyCompany
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the company'sCompany's market risk during the
ninethree months ended January 30,July 31, 2002. For additional information, refer to pages
41-4243-45 of the company'sCompany's Annual Report to Shareholders for the fiscal year ended
May 2, 2001.
251, 2002.
21
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
See Note 67 to the Condensed Consolidated Financial Statements in Part
I--Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part
I--Item 2 of this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The companyCompany has omitted certain
exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The
companyCompany agrees to furnish such documents to the Commission upon request.
Documents not designated as being incorporated herein by reference are
filed herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
3. The Company's By-Laws, as amended.
12. Computation of Ratios of Earnings to Fixed Charges.
9999(a). Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements.
99(b). Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements.
99(c). Condensed consolidated and combined financial statements of HFC filed in
accordance with rule 3-10 of Regulation S-X. H.J. Heinz Finance Company
and Subsidiaries for the nine months ended
January 30, 2002.is a guarantor of all of HFC's outstanding debt.
(b) Reports on Form 8-K.8-K
A report on Form 8-K was filed with the Securities and Exchange
Commission on November 13, 2001 relating to its revised earnings outlook forJune 18, 2002 in connection with the second quarter ended October 31, 2001Agreement and the full fiscal year ending May
1, 2002.
26Plan
of Merger by and among H.J. Heinz Company, SKF Foods Inc., Del Monte
Foods Company and Del Monte Corporation and certain related agreements.
22
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.H.J. HEINZ COMPANY
(Registrant)
Date: March 13,September 11, 2002
By: /s/ Arthur Winkleblack
..................................ARTHUR WINKLEBLACK
..........................................
Arthur Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 13,September 11, 2002
By: /s/ Bruna Gambino
..................................BRUNA GAMBINO
..........................................
Bruna Gambino
Corporate Controller
(Principal Accounting Officer)
2723
I, William R. Johnson, Chairman, President and Chief Executive Officer of
H.J. Heinz Company certify that:
1. I have reviewed this quarterly report on Form 10-Q of H.J. Heinz
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 11, 2002
By: /s/ WILLIAM R. JOHNSON
------------------------------------
Name: William R. Johnson
Title: Chairman, President and
Chief Executive Officer
24
I, Arthur Winkleblack, Executive Vice President and Chief Financial Officer
of H.J. Heinz Company certify that:
1. I have reviewed this quarterly report on Form 10-Q of H. J. Heinz
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 11, 2002
By: /s/ ARTHUR WINKLEBLACK
------------------------------------
Name: Arthur Winkleblack
Title: Executive Vice President
and Chief
Financial Officer
25