1
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 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE NINE MONTHS ENDED JANUARY 31, 2001 COMMISSION FILE NUMBER 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 456-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No
--- ---
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of March 9, 2001 was 348,675,811 shares.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Third Quarter Ended
------------------------------------
January 31, 2001 January 26, 2000
FY 2001 FY 2000
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $2,269,642 $2,294,637
Cost of products sold...................................... 1,385,506 1,391,887
---------- ----------
Gross profit............................................... 884,136 902,750
Selling, general and administrative expenses............... 543,976 566,176
---------- ----------
Operating income........................................... 340,160 336,574
Interest income............................................ 6,916 8,598
Interest expense........................................... 86,395 61,594
Other (income)/expenses, net............................... (15,758) 15,665
---------- ----------
Income before income taxes................................. 276,439 267,913
Provision for income taxes................................. 5,919 96,801
---------- ----------
Net income................................................. $ 270,520 $ 171,112
========== ==========
Net income per share--diluted.............................. $ 0.77 $ 0.47
========== ==========
Average common shares outstanding--diluted................. 350,761 361,741
========== ==========
Net income per share--basic................................ $ 0.78 $ 0.48
========== ==========
Average common shares outstanding--basic................... 347,444 356,690
========== ==========
Cash dividends per share................................... $ 0.3925 $ 0.3675
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
------------------------------------
January 31, 2001 January 26, 2000
FY 2001 FY 2000
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $6,719,612 $6,819,728
Cost of products sold...................................... 4,029,970 4,147,788
---------- ----------
Gross profit............................................... 2,689,642 2,671,940
Selling, general and administrative expenses............... 1,584,437 1,627,803
Gain on sale of Weight Watchers............................ -- 464,617
---------- ----------
Operating income........................................... 1,105,205 1,508,754
Interest income............................................ 18,215 16,767
Interest expense........................................... 249,515 188,377
Other (income)/expenses, net............................... (1,045) 22,366
---------- ----------
Income before income taxes................................. 874,950 1,314,778
Provision for income taxes................................. 213,770 521,500
---------- ----------
Net income................................................. $ 661,180 $ 793,278
========== ==========
Net income per share--diluted.............................. $ 1.88 $ 2.19
========== ==========
Average common shares outstanding--diluted................. 350,761 361,741
========== ==========
Net income per share--basic................................ $ 1.90 $ 2.22
========== ==========
Average common shares outstanding--basic................... 347,444 356,690
========== ==========
Cash dividends per share................................... $ 1.1525 $ 1.0775
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------------
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H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 2001 May 3, 2000*
FY 2001 FY 2000
---------------- ------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 192,884 $ 137,617
Short-term investments, at cost which approximates market... 15,076 16,512
Receivables, net............................................ 1,212,405 1,237,804
Inventories................................................. 1,704,574 1,599,906
Prepaid expenses and other current assets................... 256,129 178,110
---------- ----------
Total current assets................................... 3,381,068 3,169,949
---------- ----------
Property, plant and equipment............................... 4,005,262 4,347,747
Less accumulated depreciation............................... 1,701,391 1,988,994
---------- ----------
Total property, plant and equipment, net............... 2,303,871 2,358,753
---------- ----------
Goodwill, net............................................... 1,716,662 1,609,672
Trademarks, net............................................. 652,179 674,279
Other intangibles, net...................................... 120,633 127,779
Other non-current assets.................................... 987,159 910,225
---------- ----------
Total other non-current assets......................... 3,476,633 3,321,955
---------- ----------
Total assets........................................... $9,161,572 $8,850,657
========== ==========
*Summarized from audited fiscal year 2000 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
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H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 2000 May 3, 2000*
FY 2001 FY 2000
---------------- ------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $2,067,031 $ 151,168
Portion of long-term debt due within one year............... 1,029,348 25,407
Accounts payable............................................ 901,090 1,026,960
Salaries and wages.......................................... 36,403 48,646
Accrued marketing........................................... 111,035 200,775
Accrued restructuring costs................................. 48,226 125,704
Other accrued liabilities................................... 285,789 358,738
Income taxes................................................ 189,406 188,672
---------- ----------
Total current liabilities.............................. 4,668,328 2,126,070
---------- ----------
Long-term debt.............................................. 1,894,561 3,935,826
Deferred income taxes....................................... 255,077 271,831
Non-pension postretirement benefits......................... 207,368 208,958
Other liabilities........................................... 405,926 712,116
---------- ----------
Total long-term debt and other liabilities............. 2,762,932 5,128,731
---------- ----------
Shareholders' Equity:
Capital stock............................................... 107,900 107,913
Additional capital.......................................... 324,480 304,318
Retained earnings........................................... 5,017,323 4,756,513
---------- ----------
5,449,703 5,168,744
Less:
Treasury stock at cost (82,788,720 shares at January 31,
2001 and 83,653,233 shares at May 3, 2000)............. 2,938,966 2,920,471
Unearned compensation relating to the ESOP................ 4,370 7,652
Accumulated other comprehensive loss...................... 776,055 644,765
---------- ----------
Total shareholders' equity............................. 1,730,312 1,595,856
---------- ----------
Total liabilities and shareholders' equity............. $9,161,572 $8,850,657
========== ==========
*Summarized from audited fiscal year 2000 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
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H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
------------------------------------
January 31, 2001 January 26, 2000
FY 2001 FY 2000
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
Cash (used for) provided by Operating Activities........... $ (1,353) $ 200,217
----------- ---------
Cash Flows from Investing Activities:
Capital expenditures.................................. (255,832) (282,711)
Acquisitions, net of cash acquired.................... (182,872) (372,217)
Proceeds from divestitures............................ 93,340 726,493
Purchases of short-term investments................... (1,084,033) (900,313)
Sales and maturities of short-term investments........ 1,085,911 890,168
Investment in The Hain Celestial Group, Inc........... (79,743) (99,764)
Other items, net...................................... 8,477 12,489
----------- ---------
Cash used for investing activities............... (414,752) (25,855)
----------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt............................ (22,034) (375,389)
(Payments on) proceeds from commercial paper and
short-term borrowings, net.......................... (174,318) 510,148
Proceeds from long-term debt.......................... 1,078,701 364,030
Dividends............................................. (400,370) (384,306)
Purchases of treasury stock........................... (90,420) (297,486)
Exercise of stock options............................. 78,540 26,099
Other items, net...................................... 12,118 6,032
----------- ---------
Cash provided by (used for) financing
activities..................................... 482,217 (150,872)
----------- ---------
Effect of exchange rate changes on cash and cash
equivalents.............................................. (10,845) 555
----------- ---------
Net increase in cash and cash equivalents.................. 55,267 24,045
Cash and cash equivalents at beginning of year............. 137,617 115,982
----------- ---------
Cash and cash equivalents at end of period................. $ 192,884 $ 140,027
=========== =========
See Notes to Condensed Consolidated Financial Statements.
------------------
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H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations and the financial position of the
company. Those comments should be read in conjunction with these notes.
The company's Annual Report to Shareholders for the fiscal year ended May
3, 2000 includes additional information about the company, its operations,
and its financial position, and should be read in conjunction with this
quarterly report on Form 10-Q.
(2) The results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the company's business. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 2001 presentation.
(3) In the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair statement of the results of
operations of these interim periods have been included.
(4) The composition of inventories at the balance sheet dates was as follows:
January 31, 2001 May 3, 2000
---------------- -----------
(Thousands of Dollars)
Finished goods and work-in-process.................. $1,364,424 $1,270,329
Packaging material and ingredients.................. 340,150 329,577
---------- ----------
$1,704,574 $1,599,906
========== ==========
(5) The provision for income taxes consists of provisions for federal, state,
U.S. possessions and foreign income taxes. The company operates in an
international environment with significant operations in various locations
outside the U.S. Accordingly, the consolidated income tax rate is a
composite rate reflecting the earnings in the various locations and the
applicable tax rates.
During the third quarter of Fiscal 2001, the company recognized an income
tax benefit of $93.2 million ($0.27 per share) related to new tax
legislation enacted in Italy in the third quarter.
Also during the third quarter of Fiscal 2001, the company paid
approximately $221 million in foreign income taxes related to a Fiscal
2000 reorganization of its foreign operations. Because the company
realized an increase in tax basis of amortizable assets at the same time,
the company expects the reorganization will result in aggregate net
positive cash flow.
(6) In Fiscal 1999, the company announced a growth and restructuring
initiative named "Operation Excel." This initiative is a multi-year,
multi-faceted program creating manufacturing centers of excellence,
focusing the product portfolio, realigning the company's management teams
and investing in growth initiatives. For more information regarding
Operation Excel, please refer to the company's Annual Report to
Shareholders for the fiscal year ended May 3, 2000.
During the nine months ended January 31, 2001, the company recognized
costs related to the implementation of Operation Excel of $207.2 million
pretax ($0.40 per share). [Note: All earnings per share amounts included
in the Notes to Condensed Consolidated Financial
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Statements are presented on an after-tax diluted basis, unless otherwise
noted.] These costs were primarily consulting fees, employee training and
relocation costs, unaccruable severance costs associated with terminated
employees, equipment relocation costs and commissioning costs.
During the nine months ended January 31, 2001, the company recognized
restructuring charges of $33.5 million pretax, or $0.06 per share,
associated with exiting the company's domestic can-making operations and
exiting a tuna processing facility in Ecuador. This charge was recorded in
cost of products sold and consisted of asset write-downs ($32.2 million
pretax), severance ($0.5 million pretax) and exit costs ($0.8 million
pretax). This charge was offset by the reversals of unutilized Operation
Excel accruals (severance costs of $1.9 million pretax and exit costs of
$9.1 million pretax) and asset write-downs ($22.8 million pretax) of $33.8
million pretax, or $0.07 per share. These reversals were recorded in cost
of products sold ($21.4 million) and selling, general and administrative
expenses ($12.4 million) and were primarily the result of lower than
expected lease termination costs related to exiting the company's fitness
business and revisions in estimates of fair values of assets which have
been disposed of as part of Operation Excel.
During the nine months ended January 31, 2001, the company utilized $67.3
million of severance and exit cost accruals, principally for the closure of
the Harlesden factory in London, England; the relocation of the company's
domestic seafood and pet food headquarters from Newport, Kentucky to
Pittsburgh, Pennsylvania; and consolidating manufacturing capacity in the
Asia/Pacific region.
The major components of the restructuring charges and implementation costs
and the remaining accrual balances as of January 31, 2001 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 1999................... $ 294.9 $159.4 $ 45.3 $ 53.2 $ 552.8
Amounts utilized--Fiscal 1999.......... (294.9) (67.3) (9.8) (53.2) (425.2)
------- ------ ------ ------- -------
Accrued restructuring costs--April 28,
1999................................. -- 92.1 35.5 -- 127.6
Net restructuring and implementation
costs--Fiscal 2000................... 61.6 84.5 30.1 216.5 392.7
Amounts utilized--Fiscal 2000.......... (61.6) (86.3) (30.7) (216.5) (395.1)
------- ------ ------ ------- -------
Accrued restructuring costs--May 3,
2000................................. -- 90.3 34.9 -- 125.2
Net restructuring and implementation
costs--Fiscal 2001................... 9.4 (1.4) (8.3) 207.2 206.9
Amounts utilized--Fiscal 2001.......... (9.4) (53.8) (13.5) (207.2) (283.9)
------- ------ ------ ------- -------
Accrued restructuring costs--January
31, 2001............................. $ -- $ 35.1 $ 13.1 $ -- $ 48.2
======= ====== ====== ======= =======
As of January 31, 2001, the company has closed or exited all of the 23
factories or businesses that were scheduled for closure or divestiture.
Management estimates that Operation Excel will impact approximately 8,500
employees with a net reduction in the workforce of approximately 6,900,
after expansion of certain facilities. During Fiscal 1999 and Fiscal 2000,
the company's workforce was reduced by approximately 3,200 employees.
During the first nine months of Fiscal 2001, the company's workforce was
reduced by approximately 3,200 employees.
(7) During Fiscal 2001, the company completed the acquisition of IDF Holdings,
Inc., the parent of International DiverseFoods Inc., a leading
manufacturer of customized dressings, sauces, mixes and condiments for
restaurant chains and foodservice distributors. Also during Fis-
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cal 2001, the company acquired Alden Merrell Corporation, a manufacturer
of high-quality, premium priced frozen desserts for casual dining
restaurants and foodservice distributors. The company also made several
smaller acquisitions.
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.
(8) On June 19, 2000, the company exercised its preemptive right to purchase
an additional 2,582,774 shares of Hain for $79.7 million, or $30.88 per
share. This transaction restored the company's ownership interest in Hain
to 19.5%. The company's ownership had been diluted as a result of Hain's
stock-for-stock merger with Celestial Seasonings on May 30, 2000.
(9) 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 company's management. Descriptions of the company's
reportable segments are as follows:
North American Grocery & Foodservice--This segment consists of Heinz
U.S.A., Heinz Pet Products, Star-Kist Seafood and Heinz Canada. This
segment's operations include products in all of the company's core
categories.
North American Frozen--This segment consists of Heinz Frozen Food
Company, which markets frozen potatoes, entrees and appetizers.
Europe--This segment includes the company's operations in Europe and
sells products in all of the company's core categories.
Asia/Pacific--This segment includes the company's operations in New
Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and
India. This segment's operations include products in all of the
company's core categories.
Other Operating Entities--This segment includes the company's Weight
Watchers classroom business through September 29, 1999, the date of
divestiture, as well as the company's operations in Africa, Venezuela
and other areas. This segment's operations include products in all of
the company's core categories.
The company's management evaluates performance based on several factors;
however, the primary measurement focus is operating income excluding
unusual costs and gains. Intersegment sales are accounted for at current
market values. Items below the operating income line of the Consolidated
Statements of Income are not presented by segment, since they are not
the primary measure of segment profitability reviewed by the company's
management.
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The following table presents information about the company's reportable
segments:
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 31, 2001 January 26, 2000 January 31, 2001 January 26, 2000
FY 2001 FY 2000 FY 2001 FY 2000
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net external sales:
North American Grocery &
Foodservice............... $1,011,299 $1,032,721 $2,983,207 $3,027,501
North American Frozen....... 256,505 227,086 772,291 694,595
Europe...................... 652,412 650,234 1,914,550 1,807,664
Asia/Pacific................ 272,567 305,022 806,864 885,875
Other Operating Entities.... 76,859 79,574 242,700 404,093
---------- ---------- ---------- ----------
Consolidated Totals......... $2,269,642 $2,294,637 $6,719,612 $6,819,728
========== ========== ========== ==========
Intersegment sales:
North American Grocery &
Foodservice............... $ 8,992 $ 8,749 $ 28,404 $ 24,878
North American Frozen....... 3,315 2,791 9,583 9,926
Europe...................... 979 326 3,157 2,244
Asia/Pacific................ 1,023 938 2,004 2,597
Other Operating Entities.... 1,439 1,635 3,468 4,161
Non-Operating (a)........... (15,748) (14,439) (46,616) (43,806)
---------- ---------- ---------- ----------
Consolidated Totals......... $ -- $ -- $ -- $ --
========== ========== ========== ==========
Operating income (loss):
North American Grocery &
Foodservice............... $ 195,460 $ 184,832 $ 590,311 $ 552,777
North American Frozen....... 36,353 37,305 133,341 113,319
Europe...................... 107,742 90,388 332,891 302,755
Asia/Pacific................ 22,336 39,997 81,386 104,929
Other Operating Entities.... 6,878 6,742 36,862 531,149
Non-Operating (a)........... (28,609) (22,690) (69,586) (96,175)
---------- ---------- ---------- ----------
Consolidated Totals......... $ 340,160 $ 336,574 $1,105,205 $1,508,754
========== ========== ========== ==========
Core operating income (loss) (b):
North American Grocery &
Foodservice............... $ 225,722 $ 223,047 $ 691,061 $ 661,818
North American Frozen....... 44,778 42,745 150,505 134,545
Europe...................... 127,541 120,751 390,660 362,160
Asia/Pacific................ 35,578 46,543 117,966 127,546
Other Operating Entities.... 7,239 7,150 26,160 22,191
Non-Operating (a)........... (27,218) (22,101) (64,199) (65,586)
---------- ---------- ---------- ----------
Consolidated Totals......... $ 413,640 $ 418,135 $1,312,153 $1,242,674
========== ========== ========== ==========
- ---------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) Third Quarter ended January 31, 2001 - Excludes implementation costs of
Operation Excel as follows: North American Grocery & Foodservice $30.3
million, North American Frozen $8.4 million, Europe $19.8 million,
Asia/Pacific $13.2 million, Other Operating entities $0.4 million and
Non-Operating entities $1.4 million.
Third Quarter ended January 26, 2000 - Excludes restructuring and
implementation costs of Operation Excel as follows: North American Grocery &
Foodservice $38.2 million, North American Frozen $5.4 million, Europe $30.4
million, Asia/Pacific $6.5 million, Other Operating entities $0.4 million,
and Non-Operating $0.6 million.
Nine months ended January 31 , 2001 - Excludes net restructuring and
implementation costs of Operation Excel as follows: North American Grocery &
Foodservice $100.8 million, North American Frozen $17.2 million, Europe
$57.8 million, Asia/Pacific $36.6 million, Other Operating entities ($10.7)
million and Non-Operating entities $5.4 million.
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Nine months ended January 26, 2000 - Excludes restructuring and
implementation costs of Operation Excel as follows: North American Grocery &
Foodservice $89.0 million, North American Frozen $21.2 million, Europe $59.4
million, Asia/Pacific $22.6 million, Other Operating entities $0.4 million
and Non-Operating $0.6 million; excludes costs related to Ecuador in North
American Grocery & Foodservice of $20.0 million; excludes the impact of the
Weight Watchers classroom business $44.7 million and the $464.6 million gain
on the sale of this business in Other Operating entities; excludes the
Foundation Contribution in Non-Operating of $30.0 million.
The company's revenues are generated via the sale of products in the
following categories:
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 31, 2001 January 26, 2000 January 31, 2001 January 26, 2000
FY 2001 FY 2000 FY 2001 FY 2000
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Ketchup, Condiments and
Sauces...................... $ 596,762 $ 577,838 $1,822,350 $1,770,007
Frozen Foods.................. 474,738 383,482 1,385,481 1,042,536
Tuna.......................... 228,079 237,459 720,701 771,600
Soups, Beans and Pasta Meals.. 313,784 331,106 873,316 877,536
Infant/Nutritional Foods...... 230,434 244,046 662,912 716,826
Pet Products.................. 287,630 326,801 851,780 930,674
Other......................... 138,215 193,905 403,072 710,549
---------- ---------- ---------- ----------
Total..................... $2,269,642 $2,294,637 $6,719,612 $6,819,728
========== ========== ========== ==========
(10) The company's $2.3 billion credit facility which supports the company's
commercial paper program is scheduled to expire in September 2001. As a
result, commercial paper that has previously been classified as long-term
debt is classified as short-term debt as of January 31, 2001.
On November 6, 2000, the company issued $1.0 billion of remarketable
securities due November 2020. The proceeds were used to repay domestic
commercial paper. The securities have a coupon rate of 6.82% until November
15, 2001. The securities are subject to mandatory tender by all holders to
the remarketing dealer on November 15, 2001 and each November 15
thereafter, and the interest rate will be reset on such dates. The company
received a premium from the remarketing dealer for the right to require the
mandatory tender of the securities. The amortization of the premium results
in an effective interest rate of 5.82%. If the remarketing dealer does not
elect to exercise its right to a mandatory tender of the securities or
otherwise does not purchase all of the securities on a remarketing date,
then the company is required to repurchase all of the securities on the
remarketing date at 100% of the principal amount plus accrued interest. Due
to the remarketing feature of these securities, they are classified as
portion of long-term debt due within one year.
(11) On September 12, 2000, the company's Board of Directors raised the
quarterly dividend on the company's common stock to $0.3925 per share from
$0.3675 per share, for an indicated annual rate of $1.57 per share.
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(12) The following table sets forth the computation of basic and diluted
earnings per share in accordance with the provisions of SFAS No. 128.
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 31, 2001 January 26, 2000 January 31, 2001 January 26, 2000
FY 2001 FY 2000 FY 2001 FY 2000
---------------- ---------------- ---------------- ----------------
(In Thousands, Except per Share Amounts)
Net income per share--basic:
Net income.................. $270,520 $171,112 $661,180 $793,278
Preferred dividends......... 5 7 17 21
-------- -------- -------- --------
Net income applicable to
common stock.............. $270,515 $171,105 $661,163 $793,257
======== ======== ======== ========
Average common shares
outstanding--basic........ 347,444 356,690 347,444 356,690
======== ======== ======== ========
Net income per
share--basic.............. $ 0.78 $ 0.48 $ 1.90 $ 2.22
======== ======== ======== ========
Net income per share--diluted:
Net income.................. $270,520 $171,112 $661,180 $793,278
======== ======== ======== ========
Average common shares
outstanding............... 347,444 356,690 347,444 356,690
Effect of dilutive
securities:
Convertible preferred
stock................... 178 227 178 227
Stock options............. 3,139 4,824 3,139 4,824
-------- -------- -------- --------
Average common shares
outstanding--diluted...... 350,761 361,741 350,761 361,741
======== ======== ======== ========
Net income per share--
diluted................... $ 0.77 $ 0.47 $ 1.88 $ 2.19
======== ======== ======== ========
Stock options outstanding of 12.0 million and 11.5 million as of January
31, 2001 and January 26, 2000, respectively, were not included in the above
net income per diluted share calculations because to do so would have been
antidilutive for the periods presented.
(13) Comprehensive income for all periods presented consisted of net income,
foreign currency translation adjustments and the adjustment to the minimum
pension liability. The components of comprehensive income, net of related
tax, for the periods presented are as follows:
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 31, 2001 January 26, 2000 January 31, 2001 January 26, 2000
FY 2001 FY 2000 FY 2001 FY 2000
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net income.................... $270,520 $171,112 $ 661,180 $793,278
Other comprehensive income
(loss):
Foreign currency
translation
adjustment.............. 65,259 (7,584) (129,516) (40,367)
Minimum pension liability
adjustment.............. (241) (2,772) (1,774) (1,582)
-------- -------- --------- --------
Comprehensive income.......... $335,538 $160,756 $ 529,890 $751,329
======== ======== ========= ========
(14) On March 1, 2001, the company announced that it had acquired two privately
held U.S. foodservice companies: Cornucopia, Inc. of Irvine, California,
and Central Commissary, Inc. of Phoenix, Arizona. Both companies make and
market refrigerated and frozen reciped food products.
On February 28, 2001, the company announced it had completed the previously
announced acquisition of the CSM Food Division of CSM Nederland NV for
EUR425 million (approxi-
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mately US$391 million.) CSM Food Division is one of the leading food
companies in Benelux (Belgium, the Netherlands, Luxembourg) region. It
holds number-one and number-two brands in each of the regions and comprises
five units; Honig Merkartikelen bv, HAK bv, Koninklijke de Ruijter bv and
Foodmark, all in the Netherlands; and Anco in Belgium. CSM Food Division's
brands include the Honig brand of soups, sauces and pasta meals; HAK brand
vegetables packed in glass; KDR (Koninklijke de Ruijter) brand sport drinks
and fortified juices; and KDR brand spreads and sprinkles, which are
traditional toppings for breakfast breads and toasts. Annual sales for CSM
Food Division are EUR350 million (approximately US$322 million.) In
connection with this acquisition, the company issued EUR415 million
(approximately US$382 million) of 4.85% Euro commercial paper.
On February 9, 2001, the company announced it had sold The All American
Gourmet Company and its Budget Gourmet and Budget Gourmet Value Classics
brands of frozen entrees to Luigino's Inc.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATION EXCEL
In Fiscal 1999, the company announced a growth and restructuring initiative
named "Operation Excel." This initiative is a multi-year, multi-faceted program
creating manufacturing centers of excellence, focusing the product portfolio,
realigning the company's management teams and investing in growth initiatives.
The company estimates that the total costs related to Operation Excel will
amount to approximately $1.2 billion, an increase from the original estimate of
$1.1 billion. This increase is attributable to additional projects and
implementation costs including exiting the company's domestic can-making
operations, exiting a tuna processing facility in Ecuador, and additional
initiatives throughout the globe. These new projects are expected to deliver
business simplifications and improvements in the company's capital structure.
For more information regarding Operation Excel, please refer to the company's
Annual Report to Shareholders for the fiscal year ended May 3, 2000.
During the nine months ended January 31, 2001, the company recognized costs
related to the implementation of Operation Excel of $207.2 million pretax ($0.40
per share). [Note: All earnings per share amounts included in Management's
Discussion and Analysis are presented on an after-tax diluted basis.] These
costs were primarily consulting fees, employee training and relocation costs,
unaccruable severance costs associated with terminated employees, equipment
relocation costs and commissioning costs. See footnote 9 for a breakdown of
Operation Excel net restructuring and implementation costs by segment.
During the nine months ended January 31, 2001, the company recognized
restructuring charges of $33.5 million pretax, or $0.06 per share, associated
with exiting the company's domestic can-making operations and exiting a tuna
processing facility in Ecuador. This charge was recorded in cost of products
sold and consisted of asset write-downs ($32.2 million pretax), severance ($0.5
million pretax) and exit costs ($0.8 million pretax). This charge was offset by
the reversals of unutilized Operation Excel accruals (severance costs of $1.9
million pretax and exit costs of $9.1 million pretax) and asset write-downs
($22.8 million pretax) of $33.8 million pretax, or $0.07 per share. These
reversals were recorded in cost of products sold ($21.4 million) and selling,
general and administrative expenses ("SG&A")($12.4 million) and were primarily
the result of lower than expected lease termination costs related to exiting the
company's fitness business and revisions in estimates of fair values of assets
which have been disposed of as part of Operation Excel.
During the nine months ended January 31, 2001, the company utilized $67.3
million of severance and exit cost accruals, principally for the closure of the
Harlesden factory in London, England; the relocation of the company's domestic
seafood and pet food headquarters from Newport, Kentucky to Pittsburgh,
Pennsylvania; and consolidating manufacturing capacity in the Asia/ Pacific
region. See footnote 6 for further information.
As of January 31, 2001, the company has closed or exited all of the 23
factories or businesses that were scheduled for closure or divestiture.
Management estimates that Operation Excel will impact approximately 8,500
employees with a net reduction in the workforce of approximately 6,900, after
expansion of certain facilities. During Fiscal 1999 and Fiscal 2000, the
company's workforce was reduced by approximately 3,200 employees. During the
first nine months of Fiscal 2001, the company's workforce was reduced by
approximately 3,200 employees. The remaining employee terminations are expected
to take place within 6 months.
The pretax savings generated from all Operation Excel initiatives was
approximately $70 million in Fiscal 2000. Savings are projected to grow to $145
million in Fiscal 2001 and $215 million in Fiscal 2002, with non-cash savings of
$15 million or less in any year (based on original project
14
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exchange rates utilized during the company's initial project evaluation). At
recent exchange rates, savings are projected to be approximately $200 million in
Fiscal 2002
Successful execution of Operation Excel will help the company achieve the
following targets over the next three years:
- $240 million in annual ongoing pretax savings upon full implementation
(at original project exchange rates); at recent exchange rates, annual
ongoing pretax savings upon full implementation is expected to be
approximately $225 million
- Gross margins of 42%
- Return on invested capital of 40%
- $2.5 billion of free cash flow.
THREE MONTHS ENDED JANUARY 31, 2001 AND JANUARY 26, 2000
RESULTS OF OPERATIONS
For the three months ended January 31, 2001, sales decreased $25.0 million,
or 1.1%, to $2,269.6 million from $2,294.6 million last year. Sales were
unfavorably impacted by foreign exchange translation rates (4.8%), divestitures
(1.0%) and lower pricing (0.2%). Sales were favorably impacted by acquisitions
(4.7%), primarily United Biscuit's European Frozen and Chilled Division and
higher volumes (0.2%). On a constant currency basis, sales increased 3.7%.
The North American Grocery & Foodservice segment's sales decreased $21.4
million, or 2.1%. Excluding the seafood business, which continues to be
unfavorably impacted by raw fish prices that reached 30-year lows, and pet food,
sales increased by 4.7%. Acquisitions, primarily in the foodservice business,
net of divestitures, increased sales 1.5%. Lower pricing reduced sales 1.9%, due
mainly to lower pricing in tuna. Sales volume decreased 1.6%, with decreases in
canned pet food being partially offset by increases in ketchup, gravy and
foodservice. The impact of foreign exchange rates in Canada was negligible.
North American Frozen's sales increased $29.4 million, or 13.0%. Sales
volume increased 11.5% due primarily to Boston Market HomeStyle Frozen Meals,
Bagel Bite Snacks and Smart-Ones frozen entrees. Higher pricing increased sales
1.5%, primarily in frozen potatoes.
Europe's sales increased $2.2 million, or 0.3%. On a constant currency
basis, sales increased 10.8%. Acquisitions, net of divestitures, increased sales
9.5%, due primarily to the acquisition of United Biscuit's European Frozen and
Chilled Division. Higher pricing, primarily in soups and beans, increased sales
by 2.3%. Unfavorable foreign exchange translation rates decreased sales 10.5%.
Sales volume decreased 1.0% reflecting competitive pricing and trade destocking
in Heinz's European infant foods business.
Sales in Asia/Pacific declined $32.5 million, or 10.6%, primarily due to
unfavorable exchange rates, which decreased sales by 12.5% and reduced sales in
Australia and New Zealand (including Japan which is sourced out of New Zealand).
Acquisitions increased sales by 2.2% and sales volume increased 0.9%, with solid
increases in China and Indonesia. Lower pricing reduced sales by 1.2%.
Sales for Other Operating Entities decreased $2.7 million, or 3.4%.
Acquisitions, net of divestitures, increased sales by 1.2%. Sales volume
decreased 2.1% and favorable pricing increased sales 0.7%. Unfavorable foreign
exchange rates decreased sales 3.2%.
The current year's third quarter results include Operation Excel
implementation costs of $73.5 million pretax or $0.14 per share and a benefit of
$93.2 million or $0.27 per share from tax planning and new tax legislation in
Italy enacted in the third quarter. Last year's third quarter
15
16
results include restructuring charges and implementation costs of $81.6 million
or $0.15 per share, and are summarized in the table below.
The following tables provide a comparison of the company's reported results
and the core results for the third quarters of Fiscal 2001 and Fiscal 2000.
(Note: Core results exclude special items.)
THIRD QUARTER ENDED JANUARY 31, 2001
---------------------------------------------------
GROSS OPERATING NET
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NET SALES PROFIT INCOME INCOME PER SHARE
- ---------------------------------------------- --------- ------ --------- ------ ---------
Reported results............................ $2,269.6 $884.1 $340.2 $270.5 $0.77
Operation Excel Costs.................. -- 43.2 73.5 50.1 0.14
Italian tax benefit.................... -- -- -- (93.2) (0.27)
-------- ------ ------ ------ -----
Core results.............................. $2,269.6 $927.4 $413.6 $227.4 $0.65
======== ====== ====== ====== =====
THIRD QUARTER ENDED JANUARY 26, 2000
---------------------------------------------------
GROSS OPERATING NET
NET SALES PROFIT INCOME INCOME PER SHARE
--------- ------ --------- ------ ---------
Reported results........................... $2,294.6 $902.8 $336.6 $171.1 $0.47
Operation Excel Costs................. -- 20.7 81.6 56.0 0.15
-------- ------ ------ ------ -----
Core results............................. $2,294.6 $923.5 $418.1 $227.2 $0.63
======== ====== ====== ====== =====
- ---------------
(Note: Totals may not add due to rounding.)
Gross profit decreased $18.6 million, or 2.1%, to $884.1 million from
$902.8 million and the gross profit margin decreased to 39.0% from 39.3%. Core
gross profit increased $3.9 million, or 0.4%, to $927.4 million from $923.5
million and the core gross profit margin increased to 40.9% from 40.2%. Core
gross profit in the North American Grocery & Foodservice segment increased $1.2
million or 0.3% due primarily to acquisitions and savings from Operation Excel,
partially offset by lower pricing and higher energy costs. Excluding the seafood
and pet food businesses, core gross profit increased 6.1%. North American
Frozen's core gross profit increased $10.2 million or 9.5%, due to increased
sales and savings from Operation Excel, partially offset by higher energy costs.
Europe's core gross profit increased $9.6 million, or 3.7%, due primarily to the
acquisition of United Biscuit's European Frozen and Chilled Division, higher
pricing and savings from Operation Excel, offset partially by unfavorable
foreign exchange rates. The Asia/Pacific segment's core gross profit decreased
$15.5 million, or 13.5%, primarily due to unfavorable foreign exchange rates,
offset partially by savings from Operation Excel. Core gross profit in the Other
Operating Entities segment decreased $0.2 million, or 0.9%.
SG&A decreased $22.2 million, or 3.9%, to $544.0 million from $566.2
million, and decreased as a percentage of sales to 24.0% from 24.7%. Core SG&A
increased $8.4 million, or 1.7%, to $513.7 million from $505.4 million and
increased as a percentage of sales to 22.6% from 22.0%.
Operating income increased $3.6 million, or 1.1%, to $340.2 million from
$336.6 million, and increased as a percentage of sales to 15.0% from 14.7%. Core
operating income decreased $4.5 million, or 1.1%, to $413.6 million from $418.1
million and remained unchanged as a percentage of sales (18.2%). On a constant
currency basis, core operating income increased 3.3%.
The North American Grocery & Foodservice segment's operating income
increased $10.6 million, or 5.8%, to $195.5 million from $184.8 million. Core
operating income increased $2.7 million, or 1.2%, to $225.7 million from $223.0
million, due primarily to Operation Excel savings and acquisitions, partially
offset by lower pricing and higher energy costs. Excluding the seafood and pet
food businesses, core operating income increased 7.6%.
The North American Frozen segment's operating income decreased $1.0
million, or 2.6%, to $36.4 million from $37.3 million. Core operating income
increased $2.0 million, or 4.8%, to
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$44.8 million from $42.7 million as increased sales and Operation Excel savings
were partially offset by a 17% increase in marketing spending and higher energy
costs.
Europe's operating income increased $17.4 million, or 19.2%, to $107.7
million from $90.4 million. Core operating income increased $6.8 million, or
5.6%, to $127.5 million from $120.8 million. Europe's increase is primarily
attributable to the acquisition of United Biscuit's European Frozen and Chilled
Division and savings from Operation Excel, offset partially by unfavorable
foreign exchange rates and competitive pricing and trade destocking in Heinz's
European infant foods business. Core operating income increased 16.0% on a
constant currency basis.
Asia/Pacific's operating income decreased $17.7 million, or 44.2%, to $22.3
million from $40.0 million. Core operating income decreased $11.0 million, or
23.6%, to $35.6 million from $46.5 million. Core operating income decreased
11.6% on a constant currency basis reflecting reduced sales in Australia and New
Zealand (including Japan, which is sourced out of New Zealand).
Other Operating Entities' operating income increased $0.1 million, to $6.9
million from $6.7 million. Core operating income was $7.2 million in both
periods.
Net interest expense increased $26.5 million to $79.5 million from $53.0
million last year, driven primarily by higher interest rates and increased
borrowings resulting from share repurchases, acquisitions and increased working
capital over the past year.
Other (income)/expense decreased $31.5 million to ($15.8) million from
$15.7 million last year, due to gains from foreign currency hedge contracts,
which largely offset the adverse impact of foreign currency translation on
operating income.
The effective tax rate for the current quarter was 2.1% compared to 36.1%
last year. The current quarter rate includes a benefit of $93.2 million or $0.27
per share from tax planning and new tax legislation in Italy enacted in the
third quarter. The effective rate on core earnings was 35.0% in both periods.
Net income in the current quarter was $270.5 million compared to $171.1
million last year and diluted earnings per share was $0.77 in the current
quarter versus $0.47 in the same period last year. Core net income increased
$0.3 million, or 0.1%, to $227.4 million from $227.2 million, and core diluted
earnings per share increased 3.2%, to $0.65 from $0.63 last year.
NINE MONTHS ENDED JANUARY 31, 2001 AND JANUARY 26, 2000
RESULTS OF OPERATIONS
For the nine months ended January 31, 2001, sales decreased $100.1 million,
or 1.5%, to $6,719.6 million from $6,819.7 million last year. Sales were
unfavorably impacted by divestitures (3.6%), primarily the Weight Watchers
classroom business, foreign exchange translation rates (4.3%), and lower pricing
(0.6%). Sales were favorably impacted by acquisitions (5.9%), primarily United
Biscuit's European Frozen and Chilled Division, and increased volume (1.1%).
Excluding the impact of the Weight Watchers classroom business, sales increased
5.4% on a constant currency basis and 1.1% after the impact of foreign currency.
The North American Grocery and Foodservice segment's sales decreased $44.3
million, or 1.5%. Excluding the seafood business and pet food, sales increased
by 5.9%. Lower pricing reduced sales 2.0%, primarily in tuna and pet food. Lower
volume reduced sales 0.9% as decreases in tuna and canned pet food were largely
offset by increases in retail ketchup, condiments and sauces, and foodservice.
Acquisitions, primarily in the foodservice business, net of divestitures,
increased sales 1.5%. The impact of foreign exchange rates in Canada was
negligible.
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North American Frozen's sales increased $77.7 million, or 11.2%. Sales
volume increased 8.6% due to strong sales of Boston Market HomeStyle Frozen
Meals, Smart-Ones frozen entrees and Bagel Bites snacks. Higher pricing
increased sales 2.6%, primarily in frozen potatoes.
Europe's sales increased $106.9 million, or 5.9%. On a constant currency
basis, sales increased 16.7%. Acquisitions, primarily United Biscuit's European
Frozen and Chilled Division, net of divestitures, increased sales 15.2%. This
increase was partially offset by competitive pricing and trade destocking in
Heinz's European infant foods business. Sales volume increased 1.2% and higher
pricing increased sales by 0.3%. Unfavorable foreign exchange translation rates
decreased sales 10.8%.
Sales in Asia/Pacific declined $79.0 million, or 8.9%, primarily due to
unfavorable exchange rates, which decreased sales by 9.9% and reflecting reduced
sales in Australia and New Zealand (including Japan, which is sourced out of New
Zealand). Acquisitions increased sales by 1.1% and sales volume increased 0.6%.
Lower pricing reduced sales by 0.7%.
Sales for Other Operating Entities decreased $161.4 million, or 39.9%.
Divestitures, net of acquisitions, primarily the Fiscal 2000 disposal of the
Weight Watchers classroom business, reduced sales 43.5%. Sales volume increased
3.6% and favorable pricing increased sales 1.4%. Unfavorable foreign exchange
rates decreased sales 1.4%.
The current year results include net Operation Excel costs of $206.9
million pretax or $0.39 per share. These net Operation Excel costs include
implementation costs and restructuring charges associated with exiting the
company's domestic can-making operations and exiting a tuna processing facility
in Ecuador, partially offset by the reversals of unutilized Operation Excel
accruals and asset write-downs. Also included in the current year results is a
benefit of $93.2 million ($0.27 per share) from tax planning and new tax
legislation in Italy enacted in the third quarter and a pretax loss of $5.6
million ($0.01 per share) which represents the company's equity loss associated
with The Hain Celestial Group's fourth quarter results which included charges
for its merger with Celestial Seasonings. The prior year's results were
favorably affected by a number of special items and the impact of the Weight
Watchers classroom business, which net to $272.3 million pre-tax and $0.31 per
share, and are summarized in the table below.
The following tables provide a comparison of the company's reported results
and the core results for the nine months ended January 31, 2001 and January 26,
2000. (Note: Core results for
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the nine months ended January 31, 2001 and January 26, 2000 exclude special
items and the divested Weight Watchers classroom business.)
NINE MONTHS ENDED JANUARY 31, 2001
-----------------------------------------------------
GROSS OPERATING NET
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NET SALES PROFIT INCOME INCOME PER SHARE
- ---------------------------------------------- --------- -------- --------- ------ ---------
Reported results........................... $6,719.6 $2,689.6 $1,105.2 $661.2 $1.88
Operation Excel Costs................. -- 108.2 206.9 135.3 0.39
Italian tax benefit................... -- -- -- (93.2) (0.27)
Equity Loss on Investment in The Hain
Celestial Group..................... -- -- -- 3.5 0.01
-------- -------- -------- ------ -----
Core results............................. $6,719.6 $2,797.9 $1,312.2 $706.9 $2.02
======== ======== ======== ====== =====
NINE MONTHS ENDED JANUARY 26, 2000
-----------------------------------------------------
GROSS OPERATING NET
NET SALES PROFIT INCOME INCOME PER SHARE
--------- -------- --------- ------ ---------
Reported results......................... $6,819.7 $2,671.9 $1,508.8 $793.3 $2.19
Operation Excel Costs............... -- 62.0 193.3 138.3 0.38
Ecuador expenses.................... -- 20.0 20.0 20.0 0.05
Gain on U.K. building sale.......... -- -- -- (11.8) (0.03)
Foundation contribution............. -- -- 30.0 18.9 0.05
Impact of Weight Watchers classroom
business.......................... (175.3) (93.0) (44.7) (19.6) (0.05)
Gain on sale of Weight Watchers
classroom business................ -- -- (464.6) (259.7) (0.72)
-------- -------- -------- ------ -----
Core results........................... $6,644.4 $2,660.9 $1,242.7 $679.3 $1.88
======== ======== ======== ====== =====
- ---------------
(Note: Totals may not add due to rounding.)
Gross profit increased $17.7 million, or 0.7%, to $2,689.6 million from
$2,671.9 million and the gross profit margin increased to 40.0% from 39.2%. Core
gross profit increased $136.9 million, or 5.1%, to $2,797.9 million from
$2,660.9 million and the gross profit margin increased to 41.6% from 40.0%. Core
gross profit in the North American Grocery & Foodservice segment increased $58.6
million or 5.0% due primarily to acquisitions and savings from Operation Excel,
partially offset by lower pricing and higher energy costs. Excluding the seafood
business and pet food, core gross profit increased 6.5%. North American Frozen's
core gross profit increased $33.6 million or 10.3%, due to increased sales and
savings from Operation Excel, partially offset by higher energy costs. Europe's
core gross profit increased $62.5 million, or 8.3%, due primarily to the
acquisition of United Biscuit's European Frozen and Chilled Division and savings
from Operation Excel, offset partially by unfavorable foreign exchange rates.
The Asia/Pacific segment's core gross profit decreased $21.0 million, or 6.4%,
primarily due to unfavorable foreign exchange rates, offset partially by savings
from Operation Excel. Core gross profit in the Other Operating Entities segment
increased $5.2 million, or 7.4%.
SG&A decreased $43.4 million, or 2.7%, to $1,584.4 million from $1,627.8
million, and decreased as a percentage of sales to 23.6% from 23.9%. Core SG&A
increased $67.5 million, or 4.8%, to $1,485.7 million from $1,418.3 million and
increased as a percentage of sales to 22.1% from 21.3%.
Operating income decreased $403.5 million, or 26.7%, to $1,105.2 million
from $1,508.8 million, and decreased as a percentage of sales to 16.4% from
22.1%. Core operating income increased $69.5 million, or 5.6%, to $1,312.2
million from $1,242.7 million and increased as a percentage of sales to 19.5%
from 18.7%. On a constant currency basis, core operating income increased 10.5%.
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20
The North American Grocery & Foodservice segment's operating income
increased $37.5 million, or 6.8%, to $590.3 million from $552.8 million. Core
operating income increased $29.2 million, or 4.4%, to $691.1 million from $661.8
million, due primarily to Operation Excel savings and acquisitions, partially
offset by lower pricing and higher energy costs. Excluding the seafood business
and pet food, core operating income increased 7.3%.
The North American Frozen segment's operating income increased $20.0
million, or 17.7%, to $133.3 million from $113.3 million. Core operating income
increased $16.0 million, or 11.9%, to $150.5 million from $134.5 million, due
primarily to increased sales and Operation Excel savings, partially offset by
marketing spending behind Boston Market products and the national rollout of the
Stand Up Resealable Packaging ("SURP") for Ore-Ida frozen potatoes and higher
energy costs.
Europe's operating income increased $30.1 million, or 10.0%, to $332.9
million from $302.8 million. Core operating income increased $28.5 million, or
7.9%, to $390.7 million from $362.2 million. Europe's increase is primarily
attributable to the acquisition of United Biscuit's European Frozen and Chilled
Division and Operation Excel savings, offset partially by unfavorable foreign
exchange rates and competitive pricing and trade destocking in Heinz's European
infant foods business. Core operating income increased 19.9% on a constant
currency basis.
Asia/Pacific's operating income decreased $23.5 million, or 22.4%, to $81.4
million from $104.9 million. Core operating income decreased $9.6 million, or
7.5%, to $118.0 million from $127.5 million, and increased 6.1% on a constant
currency basis. Savings from Operation Excel have been offset by reduced sales
in Australia and New Zealand (including Japan, which is sourced out of New
Zealand).
Other Operating Entities' operating income decreased $494.3 million, to
$36.9 million from $531.1 million. Included in last year's operating income was
the gain of $464.6 million on the divestiture of the Weight Watchers classroom
business. Core operating income increased 17.9% to $26.2 million from $22.2
million.
Net interest expense increased $59.7 million to $231.3 million from $171.6
million last year. Core net interest expense increased $70.0 million to $231.3
million from $161.3 million last year, driven primarily by higher interest rates
and increased borrowings resulting from share repurchases, acquisitions and
increased working capital over the past year.
Other (income)/expense decreased $23.4 million to ($1.0) million from $22.4
million last year, due to gains from foreign currency hedge contracts. On a core
basis, other (income)/expense decreased $45.6 million to ($6.7) million from
$38.9 million.
The effective tax rate for the current year was 24.4% compared to 39.7%
last year. The effective rate on core earnings was 35.0% for the current year
compared to 34.8% for the prior year.
Net income for the current nine months was $661.2 million compared to
$793.3 million last year and diluted earnings per share was $1.88 compared to
$2.19. Core net income increased $27.6 million, or 4.1%, to $706.9 million from
$679.3 million, and core diluted earnings per share increased 7.4%, to $2.02
from $1.88 last year.
LIQUIDITY AND FINANCIAL POSITION
Cash used for operating activities was $1.4 million compared to cash
provided by operating activities of $200.2 million last year. The decrease in
Fiscal 2001 versus Fiscal 2000 is primarily due to expenditures for Operation
Excel, an increase in working capital and the payment of income taxes related to
the Fiscal 2000 reorganization of the foreign operations.
Cash used for investing activities totaled $414.8 million compared to $25.9
million last year. Capital expenditures in the current period required $255.8
million versus $282.7 million last year. Acquisitions in the current period
required $182.9 million, due primarily to the purchase of IDF Holdings, Inc.,
the parent of International DiverseFoods Inc., and Alden Merrell. Acquisitions
in
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the prior year required $372.2 million, due to purchases of United Biscuit's
European Frozen and Chilled Division, Quality Chef, Thermo-Pac, Inc. and Remedia
Limited in Israel. During the current period, the company invested $79.7 million
in The Hain Celestial Group, Inc. Last year the company invested $99.8 million
in The Hain Celestial Group, Inc. In the current period, proceeds from
divestitures provided $93.3 million, primarily from the disposal of the
company's domestic can-making facilities. Last year, proceeds from divestitures
totaled $726.5 million primarily due to the sale of the Weight Watchers
classroom business.
Cash provided by financing activities totaled $482.2 million compared to
using $150.9 million last year. Payments on commercial paper and short-term
borrowings used $174.3 million versus providing $510.1 million in last year's
comparable period. Cash provided from stock options exercised totaled $78.5
million compared to $26.1 million last year. Dividend payments totaled $400.4
million versus $384.3 million last year. Share repurchases totaled $90.4 million
(2.3 million shares) versus $297.5 million (6.8 million shares) a year ago.
Proceeds from long-term debt provided $1,078.7 million compared to $364.0
million last year. Payments on long-term debt required $22.0 million compared to
$375.4 million last year.
In the nine months ended January 31, 2001, the cash requirements of
Operation Excel were $376.8 million, consisting of spending for severance and
exit costs ($67.3 million), capital expenditures ($102.3 million) and
implementation costs ($207.2 million).
The company's $2.3 billion credit facility which supports its commercial
paper program is scheduled to expire in September 2001. As a result, commercial
paper that has previously been classified as long-term debt is classified as
short-term debt as of January 31, 2001. It is anticipated that the company will
enter into a new credit agreement early next fiscal year.
On November 6, 2000, the company issued $1.0 billion of remarketable
securities due November 2020. The proceeds were used to repay domestic
commercial paper. The securities have a coupon rate of 6.82% until November 15,
2001. The securities are subject to mandatory tender by all holders to the
remarketing dealer on November 15, 2001 and on each November 15 thereafter, and
the interest rate will be reset on such dates. The company received a premium
from the remarketing dealer for the right to require the mandatory tender of the
securities. The amortization of the premium results in an effective interest
rate of 5.82%. If the remarketing dealer does not elect to exercise its right to
a mandatory tender of the securities or otherwise does not purchase all of the
securities on a remarketing date, then the company is required to repurchase all
of the securities on the remarketing date at 100% of the principal amount plus
accrued interest. Due to the remarketing feature of these securities, they are
classified as portion of long-term debt due within one year.
On September 12, 2000, the company's Board of Directors raised the
quarterly dividend on the company's common stock to $0.3925 per share from
$0.3675 per share, for an indicated annual rate of $1.57 per share. On March 14,
2001, the company's Board of Directors declared a quarterly dividend on the
company's common stock of $0.3925 per share, payable on April 10, 2001, to
shareholders of record at the close of business on March 26, 2001.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments. The statement
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FAS Statement 133," which postponed the adoption date of SFAS No. 133. As
such, the company is not required to adopt the statement until Fiscal 2002. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment to FASB Statement No.
133." This statement amends the accounting and reporting standards of SFAS No.
133 for certain derivative
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instruments and certain hedging activities. The company adopted these standards
on February 1, 2001. The adoption of these new standards did not have a material
effect on the company's financial position or results of operations.
In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued
new guidelines entitled "Accounting for Points and Certain Other Time-Based or
Volume-Based Sales Incentives Offers, and Offers for Free Products or Services
to Be Delivered in the Future" which address the recognition, measurement and
income statement classification for certain sales incentives (e.g., volume
purchase rebates and free or discounted goods). These guidelines will be
effective for the company beginning in the fourth quarter of Fiscal 2001. The
implementation of these guidelines is not expected to have a material effect on
the company's financial position or results of operations.
In May 2000, the FASB Emerging Issues Task Force (the "EITF") issued new
guidelines entitled "Accounting for Certain Sales Incentives" which address the
recognition, measurement and income statement classification for certain sales
incentives (e.g., coupons). These guidelines will be effective for the company
beginning in the first quarter of Fiscal 2002. The implementation of these
guidelines will require the company to make reclassifications between SG&A and
sales.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements filed with the SEC. SAB No.
101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosure related to revenue recognition policies.
Management believes that SAB No. 101, which will be effective in the fourth
quarter of Fiscal 2001, will impact Fiscal 2001 earnings by $0.03 per share and
will primarily affect its businesses in Canada, Australia, Italy and Japan.
The company's financial position remains strong, enabling it to meet cash
requirements for operations, capital expansion programs and dividends to
shareholders.
On March 5, 2001, the company revised its earnings outlook for the second
half of Fiscal 2001. For additional information, refer to exhibit 99 on Form 8-K
which was filed on March 8, 2001.
OTHER MATTERS
On March 15, 2001, the company announced major initiatives to streamline
its tuna and pet food supply chain and to reduce global overhead. This includes
an aggressive effort to centralize Heinz's supply chain in Europe. These
initiatives will save an estimated $25 million in Fiscal 2002 and an estimated
$60 million a year beginning in Fiscal 2004. The initiatives include the closure
of tuna operations in Puerto Rico, the consolidation of North American canned
pet food production to Bloomsburg, Pennsylvania and asset sales. The company
announced that it will take an estimated $300 million pre-tax charge in the
fourth quarter of Fiscal 2001 for these initiatives. (These are preliminary
estimates; numbers will be updated following the end of the fourth quarter.)
Specifically, these initiatives include the following:
- To increase asset utilization, tuna operations will be closed in Puerto
Rico at the end of April and production will be absorbed into facilities
already supplying Heinz. In addition, a fleet of eight fishing boats and
related equipment will be divested;
- At the end of April, Heinz will consolidate all North American canned pet
food operations into its manufacturing Center of Excellence in
Bloomsburg, Pennsylvania. The company's Terminal Island, California
facility will cease canned pet food operations and assume a redefined
role, retaining approximately 200 jobs for processing fish, labeling
certain Star-Kist products, and providing distribution and R&D functions;
and
- Heinz will streamline its organization worldwide to reduce its overhead
costs.
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The net employment impact of these initiatives will be a reduction of
approximately 1,900 jobs, primarily in Puerto Rico and Terminal Island. Affected
employees will receive severance and benefits packages and outplacement
services.
On March 1, 2001, the company announced that it had acquired two privately
held U.S. foodservice companies: Cornucopia, Inc. of Irvine, California, and
Central Commissary, Inc. of Phoenix, Arizona. Both companies make and market
refrigerated and frozen reciped food products.
On February 28, 2001, the company announced it had completed the previously
announced acquisition of the CSM Food Division of CSM Nederland NV for EUR425
million (approximately US$391 million.) CSM Food Division is one of the leading
food companies in Benelux (Belgium, the Netherlands, Luxembourg) region. It
holds number-one and number-two brands in each of the regions and comprises five
units; Honig Merkartikelen bv, HAK bv, Koninklijke de Ruijter bv and Foodmark,
all in the Netherlands; and Anco in Belgium. CSM Food Division's brands include
the Honig brand of soups, sauces and pasta meals; HAK brand vegetables packed in
glass; KDR (Koninklijke de Ruijter) brand sport drinks and fortified juices; and
KDR brand spreads and sprinkles, which are traditional toppings for breakfast
breads and toasts. Annual sales for CSM Food Division are EUR350 million
(approximately US$322 million.) In connection with this acquisition, the company
issued EUR415 million (approximately US$382 million) of 4.85% Euro commercial
paper. The company intends to refinance the commercial paper with long-term
financing.
On February 9, 2001, the company announced it had sold The All American
Gourmet Company and its Budget Gourmet and Budget Gourmet Value Classics brands
of frozen entrees to Luigino's Inc. The sale of Budget Gourmet is in line with
the company's strategy to maximize growth in faster-growing Frozen Meal and
Snack Solutions. The company expects the transaction to be mildly dilutive to
earnings in Fiscal 2001 ($0.02 per share) and Fiscal 2002 ($0.04 per share), as
a result of lost sales and the brands' seasonal nature. The company expects to
take a one-time pre-tax charge of approximately $95 million pretax or $65
million after tax ($0.19 per share) in the fourth quarter of Fiscal 2001
reflecting a loss on the disposal of the business. Cash proceeds will be used
for debt retirement, acquisitions and share repurchases.
On January 29, 2001, Heinz and Vlasic Foods International announced that
they signed an agreement for Heinz to acquire two leading brands from Vlasic
Foods International. The brands are Vlasic pickles, the best selling brand of
pickles in the United States, and in retail channels, Open Pit barbecue sauce.
This transaction is subject to bankruptcy court and U.S. regulatory approvals.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the company's market risk during the
nine months ended January 31, 2001. For additional information, refer to pages
42-44 of the company's Annual Report to Shareholders for the fiscal year ended
May 3, 2000.
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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 7 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.
This report contains forward-looking statements regarding the company's
future performance. These forward-looking statements are based on management's
views and assumptions, and involve risks, uncertainties and other important
factors that could cause actual results to differ materially from those
expressed or implied in the forward-looking statements. These include, but are
not limited to, sales, earnings and volume growth, competitive conditions,
production costs, currency valuations, global economic and industry conditions,
tuna prices, achieving cost savings and working capital and debt reduction
programs, success of acquisitions, divestitures, innovations and supply chain
and overhead initiatives and other factors described in "Cautionary Statement
Relevant to Forward-Looking Information" in the company's Form 10-K for the
fiscal year ended May 3, 2000, as updated from time to time by the company in
its subsequent filings with the Securities and Exchange Commission.
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 registrant has omitted
certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation
S-K. The registrant 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.
4. Indenture between the Company and Bank One, National Association
dated November 6, 2000.
12. Computation of Ratios of Earnings to Fixed Charges.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 31,
2001.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H. J. HEINZ COMPANY
(Registrant)
Date: March 19, 2001
By: /s/ PAUL F. RENNE
..........................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 19, 2001
By: /s/ WILLIAM J. SHOWALTER
..........................................
William J. Showalter
Vice President and Corporate
Controller
(Principal Accounting Officer)
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