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 AUGUST 1, 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 THREE MONTHS ENDED AUGUST 1, 2001 COMMISSION FILE NUMBER 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
<Table>
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)
</Table>
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 September 7, 2001 was 350,142,722 shares.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
First Quarter Ended
---------------------------------
August 1, 2001 August 2, 2000*
FY 2002 FY 2001
-------------- ---------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales....................................................... $2,185,479 $2,171,511
Cost of products sold....................................... 1,315,016 1,272,576
---------- ----------
Gross profit................................................ 870,463 898,935
Selling, general and administrative expenses................ 486,309 510,394
---------- ----------
Operating income............................................ 384,154 388,541
Interest income............................................. 5,358 5,641
Interest expense............................................ 75,547 81,059
Other (expense) income, net................................. (1,758) 2,165
---------- ----------
Income before income taxes and cumulative effect of
accounting change......................................... 312,207 315,288
Provision for income taxes.................................. 111,733 110,837
---------- ----------
Income before cumulative effect of accounting change........ 200,474 204,451
Cumulative effect of accounting change...................... -- (16,471)
---------- ----------
Net income.................................................. $ 200,474 $ 187,980
========== ==========
Net income per share--diluted............................... $ 0.57 $ 0.54
========== ==========
Average common shares outstanding--diluted.................. 352,380 351,128
========== ==========
Net income per share--basic................................. $ 0.57 $ 0.54
========== ==========
Average common shares outstanding--basic.................... 349,202 347,732
========== ==========
Cash dividends per share.................................... $ 0.3925 $ 0.3675
========== ==========
</Table>
*Restated, see Note 7
See Notes to Condensed Consolidated Financial Statements.
------------------
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H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
August 1, 2001 May 2, 2001*
FY 2002 FY 2001
-------------- ------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 141,814 $ 138,849
Short-term investments, at cost which approximates market... 6,564 5,371
Receivables, net............................................ 1,216,090 1,383,550
Inventories................................................. 1,492,938 1,407,961
Prepaid expenses and other current assets................... 251,234 181,083
---------- ----------
Total current assets................................... 3,108,640 3,116,814
---------- ----------
Property, plant and equipment............................... 3,905,896 3,880,780
Less accumulated depreciation............................... 1,714,084 1,712,400
---------- ----------
Total property, plant and equipment, net............... 2,191,812 2,168,380
---------- ----------
Goodwill, net............................................... 2,156,542 2,077,451
Trademarks, net............................................. 760,966 567,692
Other intangibles, net...................................... 124,347 120,749
Other non-current assets.................................... 992,930 984,064
---------- ----------
Total other non-current assets......................... 4,034,785 3,749,956
---------- ----------
Total assets........................................... $9,335,237 $9,035,150
========== ==========
</Table>
*Summarized from audited fiscal year 2001 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
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H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
August 1, 2001 May 2, 2001*
FY 2002 FY 2001
-------------- ------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $ 224,693 $1,555,869
Portion of long-term debt due within one year............... 314,785 314,965
Accounts payable............................................ 777,765 962,497
Salaries and wages.......................................... 48,301 54,036
Accrued marketing........................................... 129,665 146,138
Accrued restructuring costs................................. 99,518 134,550
Other accrued liabilities................................... 401,416 388,582
Income taxes................................................ 133,320 98,460
---------- ----------
Total current liabilities.............................. 2,129,463 3,655,097
---------- ----------
Long-term debt.............................................. 4,429,002 3,014,853
Deferred income taxes....................................... 275,448 253,690
Non-pension postretirement benefits......................... 211,031 207,104
Other liabilities and minority interest..................... 845,552 530,679
---------- ----------
Total long-term debt, other liabilities and minority
interest.................................................. 5,761,033 4,006,326
Shareholders' Equity:
Capital stock............................................... 107,892 107,900
Additional capital.......................................... 332,891 331,633
Retained earnings........................................... 4,760,588 4,697,213
---------- ----------
5,201,371 5,136,746
Less:
Treasury stock at cost (81,618,916 shares at August 1,
2001 and 82,147,565 shares at May 2, 2001)............. 2,909,289 2,922,630
Unearned compensation relating to the ESOP................ 1,724 3,101
Accumulated other comprehensive loss...................... 845,617 837,288
---------- ----------
Total shareholders' equity............................. 1,444,741 1,373,727
---------- ----------
Total liabilities and shareholders' equity............. $9,335,237 $9,035,150
========== ==========
</Table>
*Summarized from audited fiscal year 2001 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
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5
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
First Quarter Ended
--------------------------------
August 1, 2001 August 2, 2000
FY 2002 FY 2001
-------------- --------------
(Unaudited)
(Thousands of Dollars)
Cash provided by (used for) Operating Activities............ $ 59,901 $ (13,228)
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures................................... (60,101) (79,414)
Acquisitions, net of cash acquired..................... (310,807) (130,463)
Purchases of short-term investments.................... (1,093) (515,392)
Sales and maturities of short-term investments......... -- 522,482
Investment in The Hain Celestial Group, Inc............ -- (79,743)
Other items, net....................................... 10,836 (21,460)
--------- ---------
Cash used for investing activities................ (361,165) (303,990)
--------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt............................. (26,571) (11,397)
(Payments on) proceeds from commercial paper and short-
term borrowings, net................................. (656,841) 413,782
Proceeds from long-term debt........................... 764,622 --
Proceeds from preferred stock of subsidiary............ 325,000 --
Dividends.............................................. (137,099) (127,775)
Purchases of treasury stock............................ -- (2,828)
Exercise of stock options.............................. 13,301 21,235
Other items, net....................................... 17,135 9,595
--------- ---------
Cash provided by financing activities............. 299,547 302,612
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 4,682 5,119
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 2,965 (9,487)
Cash and cash equivalents at beginning of year.............. 138,849 137,617
--------- ---------
Cash and cash equivalents at end of period.................. $ 141,814 $ 128,130
========= =========
</Table>
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
2, 2001 includes additional information about the company, its operations,
and its financial position, and should be read in conjunction with this
quarterly report on Form 10-Q.
(2) The results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the company's business. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 2002 presentation.
(3) In the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair statement of the results of
operations of these interim periods have been included.
(4) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
<Table>
<Caption>
August 1, 2001 May 2, 2001
-------------- -----------
(Thousands of Dollars)
Finished goods and work-in-process................. $1,158,135 $1,095,954
Packaging material and ingredients................. 334,803 312,007
---------- ----------
$1,492,938 $1,407,961
========== ==========
</Table>
(5) RESTRUCTURING
In the fourth quarter of Fiscal 2001, the company announced a
restructuring initiative named "Streamline". This initiative includes a
worldwide organizational restructuring aimed at reducing overhead costs,
the closure of the company's tuna operations in Puerto Rico, the
consolidation of the company's North American canned pet food production
to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food
production at the company's Terminal Island, California facility), and the
divestiture of the company's U.S. fleet of fishing boats and related
equipment. For more information regarding Streamline, refer to the
company's Annual Report to Shareholders for the fiscal year ended May 2,
2001.
The major components of the restructuring charges and implementation costs
and the remaining accrual balances as of August 1, 2001 were as follows:
<Table>
<Caption>
Non-Cash Employee
Asset Termination and Accrued Implementation
(Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total
--------------------- ----------- --------------- ---------- -------------- -------
Restructuring and implementation
costs--Fiscal 2001................... $ 110.5 $110.3 $ 55.4 $ 22.6 $ 298.8
Amounts utilized--Fiscal 2001.......... (110.5) (39.5) (4.7) (22.6) (177.3)
------- ------ ------ ------ -------
Accrued restructuring costs-- May 2,
2001................................. -- 70.8 50.7 -- 121.5
Restructuring and implementation
costs--Fiscal 2002................... -- 5.7 -- 10.4 16.1
Amounts utilized--Fiscal 2002.......... -- (30.6) (6.8) (10.4) (47.8)
------- ------ ------ ------ -------
Accrued restructuring costs--August 1,
2001................................. $ -- $ 45.9 $ 43.9 $ -- $ 89.8
======= ====== ====== ====== =======
</Table>
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During the first quarter of Fiscal 2002, the company recognized
restructuring charges and implementation costs totaling $16.1 million
pretax ($0.04 per share). [Note: All earnings per share amounts included in
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 quarter of Fiscal 2002, the company utilized $37.4 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 and its global
overhead reduction plan, primarily in Europe and North America.
(6) ACQUISITIONS
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 company also made a smaller
acquisition.
The above acquisitions have been accounted for as purchases and,
accordingly, the respective purchase prices have been allocated to the
respective assets and liabilities based upon their estimated fair values as
of the acquisition dates. Final allocations of the purchase prices are not
expected to differ significantly from the preliminary allocations.
Operating results of the businesses acquired have been included in the
Consolidated Statements of Income from the respective acquisition dates
forward.
Pro forma results of the company, assuming all of the acquisitions had been
made at the beginning of each period presented, would not be materially
different from the results reported.
(7) RECENTLY ADOPTED ACCOUNTING STANDARDS
In Fiscal 2001, the company changed its method of accounting for revenue
recognition in accordance with Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition in Financial Statements". Under the new accounting
method, adopted retroactive to May 4, 2000, the company recognizes revenue
upon the passage of title, ownership and risk of loss to the customer. The
cumulative effect adjustment of $16.5 million in net income as of May 4,
2000, was recognized during the first quarter of Fiscal 2001. The Fiscal
2001 first quarter amounts have been restated for the effect of the change
in accounting for revenue recognition. Amounts originally reported were as
follows: Sales, $2.15 billion; Gross profit, $892.2 million; Net income,
$200.6 million; Net income per share -- diluted, $0.57; Net income per
share -- basic, $0.58.
(8) RECENTLY ISSUED ACCOUNTING STANDARDS
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 provides guidelines for new disclosure requirements. These
standards outline the criteria for initial recognition and measurement of
intangibles, assignment of assets and liabilities including goodwill to
reporting units and goodwill impairment testing. The provisions of SFAS
Nos. 141 and 142 apply to all business combinations after June 30, 2001.
The provisions of SFAS No. 142 for existing goodwill and other intangible
assets are required to be implemented in the first quarter of Fiscal 2003.
The company is currently evaluating the impact of these standards on the
consolidated financial statements.
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
7
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the Purchase or Promotion of the Vendor's Products," which address the
income statement classification of consideration from a vendor to a
retailer. These guidelines will be effective for the company beginning in
the fourth quarter of Fiscal 2002. The implementation of these guidelines
will require the company to make reclassifications between SG&A and sales,
the amounts of which have not yet been determined.
In May 2000, the EITF issued new guidelines entitled "Accounting for
Certain Sales Incentives" which addresses 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 fourth quarter of Fiscal 2002. The implementation of these guidelines
will require the company to make reclassifications between SG&A and sales,
the amounts of which have not yet been determined.
(9) SEGMENTS
The company has reconsidered its segment reporting for its North American
business in light of recent performance trends and management changes.
Accordingly, the U.S. Pet Products and Seafood business, previously
aggregated with Heinz North America, is reported separately. Prior year
quarterly segment information has been revised to conform with current
quarter presentation. In order to provide historical information on the
current reporting segments, the prior three year segment data and related
MD&A are included in Item 5, Other Information.
Heinz North America--This segment markets ketchup, condiments, sauces,
soups, pasta meals and infant foods to the grocery and foodservice
channels and includes the Canadian business.
U.S. Pet Products & Seafood--This segment markets dry and canned pet
food, pet snacks, tuna and other seafood.
U.S. Frozen--This segment markets frozen potatoes, entrees, snacks and
appetizers.
Europe--This segment includes the company's operations in Europe and
sells products in all of the company's core categories.
Asia/Pacific--This segment includes the company's operations in New
Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and
India. This segment's operations include products in all of the
company's core categories.
Other Operating Entities--This segment includes the company's operations
in Africa, Venezuela and other areas which sell products in all of the
company's core categories.
The company's management evaluates performance based on several factors
including net sales and the use of capital resources; however, the
primary measurement focus is operating income excluding unusual costs
and gains. Intersegment sales are accounted for at current market
values. Items below the operating income line of the Consolidated
Statements of Income are not presented by segment, 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:
<Table>
<Caption>
First Quarter Ended
--------------------------------
August 1, 2001 August 2, 2000
FY 2002 FY 2001*
-------------- --------------
(Thousands of Dollars)
Net external sales:
Heinz North America....................................... $ 574,902 $ 562,047
U.S. Pet Products and Seafood............................. 345,466 374,549
U.S. Frozen............................................... 238,501 229,164
---------- ----------
North America Totals...................................... 1,158,869 1,165,760
Europe.................................................... 686,857 639,427
Asia/Pacific.............................................. 244,819 284,099
Other Operating Entities.................................. 94,934 82,225
---------- ----------
Consolidated Totals....................................... $2,185,479 $2,171,511
========== ==========
Intersegment sales:
Heinz North America....................................... $ 7,331 $ 10,722
U.S. Pet Products and Seafood............................. 4,813 6,187
U.S. Frozen............................................... 2,201 2,850
Europe.................................................... 1,374 756
Asia/Pacific.............................................. 292 413
Other Operating Entities.................................. -- 1,008
Non-Operating (a)......................................... (16,011) (21,936)
---------- ----------
Consolidated Totals....................................... $ -- $ --
========== ==========
Operating income (loss):
Heinz North America....................................... $ 118,471 $ 141,921
U.S. Pet Products and Seafood............................. 57,541 60,958
U.S. Frozen............................................... 44,236 37,629
---------- ----------
North America Totals...................................... 220,248 240,508
Europe.................................................... 150,571 118,705
Asia/Pacific.............................................. 26,136 41,536
Other Operating Entities.................................. 11,933 11,064
Non-Operating (a)......................................... (24,734) (23,272)
---------- ----------
Consolidated Totals....................................... $ 384,154 $ 388,541
========== ==========
Operating income (loss) excluding special items (b):
Heinz North America....................................... $ 123,345 $ 154,845
U.S. Pet Products and Seafood............................. 65,336 71,033
U.S. Frozen............................................... 44,236 43,103
---------- ----------
North America Totals...................................... 232,917 268,981
Europe.................................................... 152,286 139,551
Asia/Pacific.............................................. 26,734 47,600
Other Operating Entities.................................. 11,933 11,064
Non-Operating (a)......................................... (23,541) (22,297)
---------- ----------
Consolidated Totals....................................... $ 400,329 $ 444,899
========== ==========
</Table>
*Restated, see Note 7
---------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
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(b) First Quarter ended August 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.
First Quarter ended August 2, 2000 - Excludes implementation costs of
Operation Excel as follows: Heinz North America $12.9 million, U.S. Pet
Products and Seafood $10.1 million, U.S. Frozen $5.5 million, Europe $20.8
million, Asia/Pacific $6.1 million and Non-Operating $1.0 million.
The company's revenues are generated via the sale of products in the
following categories:
<Table>
<Caption>
First Quarter Ended
--------------------------------
August 1, 2001 August 2, 2000
FY 2002 FY 2001
-------------- --------------
(Thousands of Dollars)
Ketchup, Condiments and Sauces.............................. $ 619,859 $ 594,956
Frozen Foods................................................ 415,230 423,084
Tuna........................................................ 258,638 257,823
Soups, Beans and Pasta Meals................................ 281,397 244,841
Infant Foods................................................ 206,339 229,753
Pet Products................................................ 250,805 279,404
Other....................................................... 153,211 141,650
---------- ----------
Total................................................... $2,185,479 $2,171,511
========== ==========
</Table>
(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 (HFC) manages treasury functions and H. J. Heinz Company,
L.P. (Heinz LP) owns or leases the operating assets and manages the
business. HFC assumed primary liability for payment of the company's
outstanding senior unsecured debt and accrued interest by becoming a
co-obligor with the company. HFC's financial statements for the quarter
ended August 1, 2001 are attached as Exhibit 99.
On July 6, 2001, HFC 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, HFC 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, HFC 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 August 1, 2001, $673
million of domestic 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 domestic
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 $.4050 per share from
$0.3925 per share, for an indicated annual rate of $1.62 per share. The
dividend will be paid on October 10, 2001, to shareholders of record at the
close of business on September 27, 2000.
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(12) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with the provisions of SFAS No. 128.
<Table>
<Caption>
First Quarter Ended
-------------------------------
August 1, 2001 August 2, 2000
FY 2002 FY 2001
-------------- --------------
(In Thousands, Except per
Share Amounts)
Income before cumulative effect of accounting change........ $200,474 $204,451
Preferred dividends......................................... 5 6
-------- --------
Income applicable to common stock before effect of
accounting change......................................... 200,469 204,445
Cumulative effect of accounting change...................... -- (16,471)
-------- --------
Net income applicable to common stock....................... $200,469 $187,974
======== ========
Average common shares outstanding--basic.................. 349,202 347,732
Effect of dilutive securities:
Convertible preferred stock............................. 169 184
Stock options........................................... 3,009 3,212
-------- --------
Average common shares outstanding--diluted................ 352,380 351,128
Income per share before cumulative effect of accounting
change--basic............................................. $ 0.57 $ 0.59
======== ========
Net income per share--basic:................................ $ 0.57 $ 0.54
======== ========
Income per share before cumulative effect of accounting
change--dilutive.......................................... $ 0.57 $ 0.58
======== ========
Net income per share--diluted............................. $ 0.57 $ 0.54
======== ========
</Table>
(13) COMPREHENSIVE INCOME
<Table>
<Caption>
First Quarter Ended
--------------------------------
August 1, 2001 August 2, 2000
FY 2002 FY 2001
-------------- --------------
(Thousands of Dollars)
Net income.................................................. $200,474 $187,980
Other comprehensive income (loss):
Foreign currency translation adjustment................. (9,031) (63,408)
Minimum pension liability adjustment.................... 140 (3,036)
Deferred gains/(losses) on derivatives:
Net change from periodic revaluations.............. 319 --
Net amount reclassified to earnings................ 243 --
-------- --------
Comprehensive income........................................ $192,145 $121,536
======== ========
</Table>
(14) FINANCIAL INSTRUMENTS
The company operates internationally, with manufacturing and sales
facilities in various locations around the world, and utilizes certain
financial instruments to manage its foreign currency, commodity price and
interest rate exposures.
FOREIGN CURRENCY HEDGING: The company uses forward contracts and currency
swaps to mitigate its foreign currency exchange rate exposure due to
anticipated purchases of raw materials and sales of finished goods, and
future settlement of foreign currency denominated assets and liabilities.
Hedges of anticipated transactions are designated as cash flow hedges, 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.
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12
The company uses certain foreign currency debt instruments as net
investment hedges of foreign operations. During the quarter ended August 1,
2001, gains of $2.4 million, net of income taxes of $1.4 million, which
represented effective hedges of net investments, were reported as a
component of accumulated other comprehensive loss within unrealized
translation adjustment.
COMMODITY PRICE HEDGING: The company uses commodity futures and options in
order to reduce price risk associated with anticipated purchases of raw
materials such as corn, soybean oil and soybean meal. Commodity price risk
arises due to factors such as weather conditions, government regulations,
economic climate and other unforeseen circumstances. Hedges of anticipated
commodity purchases which meet the criteria for hedge accounting are
designated as cash flow hedges. 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 company uses interest rate swaps to manage
interest rate exposure. These derivatives are designated as cash flow
hedges or fair value hedges depending on the nature of the particular risk
being hedged.
HEDGE INEFFECTIVENESS: During the quarter ended August 1, 2001, hedge
ineffectiveness related to cash flow hedges was a net loss of $0.2 million,
which is reported in the consolidated statements of income as other
expenses.
DEFERRED HEDGING GAINS AND LOSSES: As of August 1, 2001, the company is
hedging forecasted transactions for periods not exceeding 12 months, and
expects $0.3 million of net deferred gain reported in accumulated other
comprehensive loss to be reclassified to earnings within that time frame.
(15) SUBSEQUENT EVENT
On August 2, 2001, the Company announced that it acquired Delimex Holdings,
Inc., a leading maker of frozen Mexican food products, from Fenway
Partners. Delimex is the 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 quesadillos, tamales and rice bowls.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STREAMLINE
In the fourth quarter of Fiscal 2001, the company announced a restructuring
initiative named "Streamline." This initiative includes a worldwide
organizational restructuring aimed at reducing overhead costs, the closure of
the company's tuna operations in Puerto Rico, the consolidation of the company's
North American canned pet food production to Bloomsburg, Pennsylvania (which
resulted in ceasing canned pet food production at the company's Terminal Island,
California facility), and the divestiture of the company's U.S. fleet of fishing
boats and related equipment. For more information regarding Streamline, refer to
the company's Annual Report to Shareholders for the fiscal year ended May 2,
2001.
During the first quarter of Fiscal 2002, the company recognized
restructuring charges and implementation costs totaling $16.1 million pretax
($0.04 per share). [Note: All earnings per share amounts included in
Management's Discussion and Analysis are presented on an after-tax diluted
basis]. Pretax charges of $8.7 million were classified as cost of products sold
and $7.4 million as selling, general and administrative expenses ("SG&A").
Implementation costs ($10.4 million pretax) were recognized as incurred and
consisted of incremental costs directly related to the implementation of the
Streamline initiative. These include cost premiums related to production
transfers, consulting costs and relocation costs.
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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 2,000 employees.
THREE MONTHS ENDED AUGUST 1, 2001 AND AUGUST 2, 2000
RESULTS OF OPERATIONS
For the three months ended August 1, 2001, sales increased $14.0 million,
or 0.6%, to $2,185.5 million from $2,171.5 million last year. Sales were
favorably impacted by acquisitions (6.2%), primarily the prior year acquisitions
of IDF Holdings, Inc., Cornucopia, Inc. and the CSM Food Division of CSM
Nederland NV, higher volumes (0.3%) and slightly higher pricing (0.1%). Sales
were unfavorably impacted by unfavorable foreign exchange translation rates
(3.9%) and divestitures (2.1%).
Sales of the Heinz North America segment increased $12.9 million, or 2.3%.
Acquisitions, net of divestitures, increased sales 6.7%, due primarily to the
prior year acquisitions of IDF Holdings, Inc. and Cornucopia, Inc. Pricing was
adversely effected by increased trade promotions which reduced sales 2.7%, due
mainly to foodservice, soups and broths. Sales volume decreased 1.3%, due
primarily to foodservice and infant feeding. The weaker Canadian dollar
decreased sales 0.4%.
Sales of the U.S. Pet Products and Seafood segment decreased $29.1 million,
or 7.8%. Higher pricing increased sales 1.1%, primarily in light meat tuna and
canned pet food, partially offset by lower pricing of dry dog food. Sales volume
decreased 6.0%, primarily in pet food and light meat tuna, partially offset by
volume increases in white meat tuna and pet snacks. Divestitures decreased sales
3.1%.
U.S. Frozen's sales increased $9.3 million, or 4.1%. Sales volume increased
11.2% driven by SmartOnes frozen entrees and the success of Bagel Bites and Hot
Bites snacks. Higher pricing increased sales 0.9%, primarily in SmartOnes frozen
entrees. Divestures, net of acquisitions, reduced sales by 8.0% due to the sale
of The All American Gourmet business and its Budget Gourmet and Value Classics
brands of frozen entrees.
Heinz Europe's sales increased $47.4 million, or 7.4%. Acquisitions, net of
divestitures, increased sales 12.9%, due primarily to the acquisition of the CSM
Food Division of CSM Nederland NV. Higher pricing increased sales 0.5%,
primarily due to higher pricing in infant feeding and seafood, partially offset
by lower pricing in frozen weight control entrees. Volume increased 0.3%, driven
primarily by ketchup, salad cream and frozen meals, partially offset by volume
decreases in infant feeding and seafood. Unfavorable foreign exchange
translation rates reduced sales by 6.3%.
Sales in Asia/Pacific decreased $39.3 million, or 13.8%, primarily due to
unfavorable exchange rates which reduced sales by 14.2%. Sales volume increased
1.0% and pricing remained constant. Divestitures, net of acquisitions, reduced
sales by 0.6%.
Sales for Other Operating Entities increased $12.7 million, or 15.5%. Sales
volume increased 7.0%, primarily in infant feeding and cooking oils. Favorable
pricing increased sales 9.3% and other items net, reduced sales by 0.8%.
The current year's first quarter was 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 selling, general and administrative
expenses ("SG&A"). Last year's first quarter was negatively impacted by
Operation Excel implementation costs of $56.4 million pretax or $0.11 per share.
(For more information
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regarding Operation Excel, refer to the company's Annual Report to Shareholders
for the fiscal year ended May 2, 2001.)
The following tables provide a comparison of the company's reported results
and the results excluding special items for the first quarters of Fiscal 2002
and Fiscal 2001.
<Table>
<Caption>
First Quarter Ended August 1, 2001
--------------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- ------ --------- ------ -----
(Dollars in millions except per share amounts)
Reported results..................... $2,185.5 $870.5 $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...... $2,185.5 $879.2 $400.3 $213.4 $0.61
======== ====== ====== ====== =====
</Table>
<Table>
<Caption>
First Quarter Ended August 2, 2000
--------------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- ------ --------- ------ -----
Reported results (a)................ $2,171.5 $898.9 $388.5 $204.5(b) $0.58(b)
Operation Excel implementation
costs.......................... -- 17.3 56.4 37.1 0.11
-------- ------ ------ ------ -----
Results excluding special items..... $2,171.5 $916.2 $444.9 $241.6 $0.69
======== ====== ====== ====== =====
</Table>
---------------
(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 decreased $28.5 million, or 3.2%, to $870.5 million from
$898.9 million and the gross profit margin decreased to 39.8% from 41.4%.
Excluding the special items noted above, gross profit decreased $37.0 million,
or 4.0%, to $879.2 million from $916.2 million and the gross profit margin
decreased to 40.2% from 42.2%. Gross profit for the Heinz North America segment
decreased $19.3 million, or 8.0%, due primarily to trade promotions and
unfavorable sales mix. In addition, recent foodservice acquisitions are dilutive
to gross margin percentages since they are not yet reflective of expected
synergies. The U.S. Pet Products and Seafood segment's gross profit decreased
$17.0 million, or 11.3%, primarily due to canned pet food, partially offset by
tuna. U.S. Frozen's gross profit increased $4.2 million or 3.9%, due to
increased sales and pricing. Europe's gross profit increased $17.3 million, or
6.2%, due primarily to the acquisition of the CSM Food Division of CSM Nederland
NV, offset partially by unfavorable foreign exchange rates. The Asia/Pacific
segment's gross profit decreased $24.8 million, or 22.2%, due primarily to
unfavorable foreign exchange rates and temporary supply chain inefficiencies due
to recent significant changes in the manufacturing footprint in the region.
Gross profit in the Other Operating Entities segment increased $2.6 million, or
9.9%, due primarily to favorable pricing.
Selling, general and administrative expenses ("SG&A") decreased $24.1
million, or 4.7%, to $486.3 million from $510.4 million, and decreased as a
percentage of sales to 22.3% from 23.5%. Excluding the special items noted
above, SG&A increased $7.5 million, or 1.6%, to $478.9 million from $471.3
million and increased slightly as a percentage of sales to 21.9% from 21.7%.
Increases in selling and distribution, driven by higher fuel costs, have been
partially offset by a reduction in consumer promotion spending.
Operating income decreased $4.4 million, or 1.1%, to $384.2 million from
$388.5 million and decreased as a percentage of sales to 17.6% from 17.9%.
Excluding the special items noted above, operating income decreased $44.6
million, or 10.0%, to $400.3 million from $444.9 million and decreased as a
percentage of sales to 18.3% from 20.5%.
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15
Heinz North America's operating income decreased $23.5 million, or 16.5%,
to $118.5 million from $141.9 million. Excluding the special items noted above,
operating income decreased $31.5 million, or 20.3%, to $123.3 million from
$154.8 million, due primarily to changes in gross profit and higher selling and
distribution costs.
The U.S. Pet Products and Seafood Segment's operating income decreased $3.4
million, or 5.6%, to $57.5 million from $61.0 million. Excluding the special
items noted above, operating income decreased $5.7 million, or 8.0%, to $65.3
million from $71.0 million, due primarily to the continued decline in pet food
business.
The U.S. Frozen segment's operating income increased $6.6 million, or
17.6%, to $44.2 million from $37.6 million. Excluding the special items noted
above, operating income increased $1.1 million, or 2.6%, to $44.2 million from
$43.1 million reflecting decreased marketing spending primarily due to the
divestiture of The All American Gourmet business.
Europe's operating income increased $31.9 million, or 26.8%, to $150.6
million from $118.7 million. Excluding the special items noted above, operating
income increased $12.7 million, or 9.1%, to $152.3 million from $139.6 million,
and increased 16.2% on a constant currency basis. Europe's increase is primarily
attributable to the acquisition of the CSM Food Division of CSM Nederland NV
offset partially by unfavorable foreign exchange rates.
Asia/Pacific's operating income decreased $15.4 million, or 37.1%, to $26.1
million from $41.5 million. Excluding the special items noted above, operating
income decreased $20.9 million, or 43.8%, to $26.7 million from $47.6 million.
This decrease is primarily attributable to temporary supply chain inefficiencies
due to recent significant changes in the manufacturing footprint in the region.
Operations are expected to improve by the end of Fiscal 2002. In addition,
unfavorable foreign exchange rates reduced operating income by 9.5%.
Other Operating Entities' operating income remained constant with the prior
year quarter.
Net interest expense decreased $5.2 million to $70.2 million from $75.4
million last year, driven primarily by lower interest rates over the past year.
Other expense increased $3.9 million to $1.8 million from other income of
$2.2 million last year. The increase is primarily attributable to favorable
currency gains realized in the prior year quarter.
The effective tax rate for the current quarter was 35.8% compared to 35.2%
last year. Excluding the special items noted above, the effective rate was 35.0%
for both periods.
Net income in the current quarter was $200.5 million compared to $188.0
million last year and diluted earnings per share was $0.57 in the current
quarter versus $0.54 in the same period last year. Excluding the special items
noted above and the cumulative effect of the accounting change for revenue
recognition in the prior year quarter, net income decreased $28.1 million to
$213.4 million from $241.6 million last year, and diluted earnings per share
decreased 11.6%, to $0.61 from $0.69 last year.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities was $59.9 million compared to cash
used for operating activities of $13.2 million last year. The increase in Fiscal
2002 versus Fiscal 2001 is primarily due to improved working capital
performance.
Cash used for investing activities totaled $361.2 million compared to
$304.0 million last year. Acquisitions in the current period required $310.8
million, due primarily to the purchase of Borden Food Corporation's pasta sauce,
bouillon and soup businesses. Acquisitions in the prior period required $130.5
million, due primarily to the purchase of IDF Holdings, Inc. During the prior
year
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period, the company also invested $79.7 million in The Hain Celestial Group,
Inc. Capital expenditures in the current quarter required $60.1 million compared
to $79.4 million last year.
Cash provided by financing activities decreased to $299.5 million from
$302.6 million last year. Proceeds from long-term debt were $764.6 million
compared to $0 last year. Payments on long-term debt required $26.6 million this
quarter compared to $11.4 million last year. Proceeds from commercial paper and
short-term borrowings required $656.8 million compared to providing $413.8
million last year. In addition, $325.0 million was provided during the current
quarter via the issuance of Preferred Stock (see below). Cash provided from
stock options exercised totaled $13.3 million versus $21.2 million last year.
Dividend payments totaled $137.1 million compared to $127.8 million for the same
period last year. There were no share repurchases this year versus $2.8 million
(0.1 million shares) in last year's first quarter.
In the first quarter of Fiscal 2002, the cash requirements of Streamline
were $45.6 million, consisting of spending for severance and exit costs ($35.2
million) and implementation costs ($10.4 million).
On July 6, 2001, H.J. Heinz Finance Company (HFC) raised $325.0 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, HFC issued $750 million of
6.625% Guaranteed Notes due July 15, 2011. The proceeds were used for general
corporate purposes, including retiring commercial paper borrowings and financing
acquisitions and ongoing operations.
On September 6, 2001, the company, HFC 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 August 1, 2001, $673 million of domestic 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 domestic commercial paper outstanding and classified as
short-term debt.
The impact of inflation on both the company's financial position and
results of operations is not expected to affect Fiscal 2002 results adversely.
The company's financial position continues to remain strong, enabling it to meet
cash requirements for operations, capital expansion programs and dividends to
shareholders. The company's goal remains the achievement of previously
communicated earnings per share for the full year assuming stable currencies.
The company anticipates significant improvement in performance in the second
half of the year due to the positive impact of acquisitions, pricing, new
product introductions and margin-enhancement initiatives.
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 quarter amounts
have been restated for the effect of the change in accounting for revenue
recognition. Amounts originally reported were as follows: Sales, $2.15 billion;
Gross profit, $892.2 million; Net income, $200.6 million; Net income per
share--diluted, $0.57; Net income per share--basic, $0.58.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets". These standards require that all
business combinations be accounted for using the purchase method and that
goodwill and intangible assets with indefinite useful lives should not be
amortized but should be tested for impairment at least annually, and they
provide guidelines for new disclosure requirements. These standards outline the
criteria for initial recognition and measurement of intangibles, assignment of
assets and liabilities including goodwill to reporting units and goodwill
impairment testing. The provisions of SFAS Nos. 141 and 142 apply to all
business combinations after June 30, 2001. The provisions of SFAS No. 142 for
existing goodwill and other intangible assets are required to be implemented in
the first quarter of Fiscal 2003. The company is currently evaluating the impact
of these standards on the consolidated financial statements.
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,"
which addresses the income statement classification of consideration from a
vendor to a retailer. These guidelines will be effective for the company
beginning in the fourth quarter of Fiscal 2002. The implementation of these
guidelines will require the company to make reclassifications between SG&A and
sales, the amounts of which have not yet been determined.
In May 2000, the EITF issued new guidelines entitled "Accounting for
Certain Sales Incentives" which addresses 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 fourth
quarter of Fiscal 2002. The implementation of these guidelines will require the
company to make reclassifications between SG&A and sales, the amounts of which
have not yet been determined.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the company's market risk during the
three months ended August 1, 2001. For additional information, refer to pages
41-42 of the company's Annual Report to Shareholders for the fiscal year ended
May 2, 2001.
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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.
The company has reconsidered its segment reporting for its North American
business in light of recent performance trends and management changes.
Accordingly, the U.S. Pet Products and Seafood business, previously aggregated
with Heinz North America is reported separately. In order to provide historical
information on the current reporting segments, the prior three year segment data
and related MD&A are presented below.
REVISED FISCAL 1999-2001 SEGMENT REPORTING AND RESULTS OF OPERATIONS
Heinz North America--This segment markets ketchup, condiments, sauces,
soups, pasta meals and infant foods to the grocery and foodservice
channels and includes the Canadian business.
U.S. Pet Products & Seafood--This segment markets dry and canned pet
food, pet snacks, tuna and other seafood.
U.S. Frozen--This segment markets frozen potatoes, entrees, snacks and
appetizers.
Europe--This segment includes the company's operations in Europe and
sells products in all of the company's core categories.
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 the
divestiture, as well as the company's operations in Africa, Venezuela
and other areas which sell products in all of the company's core
categories.
The company's management evaluates performance based on several factors
including net sales and the use of capital resources; however, the
primary measurement focus is operating income excluding unusual costs
and gains. Inter-segment sales are accounted for at current market
values. Items below the operating income line of the Consolidate
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.
<Table>
<Caption>
May 2, May 3, April 28, May 2, May 3, April 28,
2001 2000 1999 2001 2000 1999
Fiscal Year Ended (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
(Dollars in Thousands) ---------- ---------- ---------- ---------- ---------- ----------
Net External Sales Intersegment Sales
------------------------------------ ------------------------------------
Heinz North America......... $2,583,662 $2,414,833 $2,245,505 $ 37,597 $ 37,125 $ 23,900
U.S. Pet Products and
Seafood................... 1,562,876 1,709,227 1,817,178 24,884 32,437 32,713
U.S. Frozen................. 1,125,396 1,023,915 1,014,370 12,660 12,782 21,131
---------- ---------- ----------
Total North America......... 5,271,934 5,147,975 5,077,053
Europe...................... 2,746,870 2,583,684 2,460,698 3,657 2,687 6,661
Asia/Pacific................ 1,087,330 1,196,049 1,011,764 3,376 2,853 13
Other Operating Entities.... 324,288 480,241 750,095 -- 2,526 6,971
Non-Operating (a)........... -- -- -- (82,174) (90,410) (91,389)
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Totals......... $9,430,422 $9,407,949 $9,299,610 $ -- $ -- $ --
========== ========== ========== ========== ========== ==========
Operating Income (Loss)
Operating Income (Loss) Excluding Special Items(b)
------------------------------------ ------------------------------------
Heinz North America......... $ 541,559 $ 496,338 $ 522,413 $ 647,962 $ 602,649 $ 555,008
U.S. Pet Products and
Seafood................... (54,546) 198,111 194,566 228,243 272,619 279,621
U.S. Frozen................. 83,964 152,018 80,231 202,012 181,511 183,409
---------- ---------- ---------- ---------- ---------- ----------
Total North America..... 570,977 846,467 797,210 1,078,217 1,056,779 1,018,038
Europe...................... 388,647 364,207 246,187 518,009 502,302 467,159
Asia/Pacific................ 96,123 124,125 89,830 147,599 177,454 145,654
Other Operating Entities.... 49,284 540,155 95,715 37,958 32,255 121,950
Non-Operating (a)........... (122,677) (141,855) (119,630) (99,060) (102,337) (99,792)
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Totals......... $ 982,354 $1,733,099 $1,109,312 $1,682,723 $1,666,453 $1,653,009
========== ========== ========== ========== ========== ==========
Depreciation and Amortization
Expense Capital Expenditures(c)
------------------------------------ ------------------------------------
Total North America......... $ 170,279 $ 174,703 $ 165,893 $ 211,022 $ 250,870 $ 173,374
Europe...................... 90,106 81,802 85,408 140,780 127,595 100,569
Asia/Pacific................ 26,288 28,871 20,549 46,166 60,795 25,209
Other Operating Entities.... 8,117 13,066 23,278 4,716 8,495 12,757
Non-Operating (a)........... 4,376 8,041 7,084 8,615 4,689 4,814
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Totals......... $ 299,166 $ 306,483 $ 302,212 $ 411,299 $ 452,444 $ 316,723
========== ========== ========== ========== ========== ==========
Identifiable Assets
------------------------------------
Total North America......... $4,572,995 $4,593,916 $4,250,322
Europe...................... 3,130,680 2,781,238 2,208,208
Asia/Pacific................ 912,515 1,085,491 998,685
Other Operating Entities.... 208,267 187,684 374,852
Non-Operating (d)........... 210,693 202,328 221,567
---------- ---------- ----------
Consolidated Totals......... $9,035,150 $8,850,657 $8,053,634
========== ========== ==========
</Table>
---------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) FISCAL YEAR ENDED MAY 2, 2001: Excludes net restructuring and implementation
costs of Operation Excel as follows: Heinz North America $71.6 million, U.S.
Pet Products and Seafood $85.4 million, U.S. Frozen $23.4 million, Europe
$63.7 million, Asia/Pacific $46.3 million, Other Operating Entities $(11.3)
million and Non-Operating $9.4 million. Excludes restructuring and
implementation costs of the Streamline initiative as follows: Heinz North
America $16.3 million, U.S. Pet Products and Seafood $197.4 million, Europe
$65.7 million, Asia/Pacific $5.2 million and Non-Operating $14.2 million.
Excludes the loss on the sale of The All American Gourmet in U.S. Frozen of
$94.6 million. Excludes acquisition costs in Heinz North America $18.5
million.
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FISCAL YEAR ENDED MAY 3, 2000: Excludes net restructuring and implementation
costs of Operation Excel as follows: Heinz North America $106.2 million,
U.S. Pet Products and Seafood $54.6 million, U.S. Frozen $29.5 million,
Europe $138.1 million, Asia/Pacific $53.3 million, Other Operating Entities
$1.5 million and Non-Operating $9.5 million. Excludes costs related to
Ecuador in U.S. Pet Products and Seafood $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 $30.0 million.
FISCAL YEAR ENDED APRIL 28, 1999: Excludes restructuring and implementation
costs of Operation Excel as follows: Heinz North America $31.1 million, U.S.
Pet Products and Seafood $79.3 million, U.S. Frozen $116.9 million, Europe
$225.1 million, Asia/Pacific $52.9 million, Other Operating Entities $29.2
million and Non-Operating $18.3 million. Excludes costs related to the
implementation of Project Millennia as follows: Heinz North America $1.5
million, U.S. Pet Products and Seafood $5.7 million, U.S. Frozen $2.9
million, Europe $4.9 million, Asia/ Pacific $3.0 million, Other Operating
Entities $2.8 million and Non-Operating $1.5 million. Excludes the gain on
the sale of the bakery division in Other Operating Entities of $5.7 million.
Excludes the reversal of unutilized Project Millennia accruals for severance
and exit costs in U.S. Frozen and Europe of $16.6 million and $9.1 million,
respectively.
(c) Excludes property, plant and equipment obtained through acquisitions.
(d) Includes identifiable assets not directly attributable to operating
segments.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
H.J. HEINZ COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS
2001 VERSUS 2000: Sales for Fiscal 2001 increased $22.5 million, or 0.2%,
to $9.43 billion from $9.41 billion in Fiscal 2000. Volume increased sales by
$215.1 million, or 2.3%, and acquisitions increased sales by $519.4 million, or
5.5%. Divestitures reduced sales by $284.5 million, or 3.0%, lower pricing
reduced sales by $25.2 million, or 0.3%, and the unfavorable impact of foreign
exchange translation rates reduced sales by $402.3 million, or 4.3%. Domestic
operations contributed approximately 52% of consolidated sales in both fiscal
years.
Sales of the Heinz North America segment increased $168.8 million, or 7.0%.
Sales volume increased 4.1%, due to increases in ketchup, condiments and sauces,
foodservice, gravy and canned soups. Acquisitions, net of divestitures,
increased sales 3.2%. Slightly higher pricing increased sales 0.2% and weaker
Canadian dollar decreased sales 0.4%.
Sales of the U.S. Pet Products and Seafood segment decreased $146.3
million, or 8.6%. Lower pricing decreased sales 4.8%, primarily in light meat
tuna, dry dog food and cat treats. Sales volume decreased 3.2%, primarily in
tuna and canned pet food. Divestitures decreased sales 0.5%.
The U.S. Frozen segment's sales increased $101.5 million, or 9.9%. Sales
volume increased 8.8%, driven by Smart Ones frozen entrees, Boston Market frozen
meals, Bagel Bites snacks and frozen potatoes, partially offset by a decrease in
The Budget Gourmet line of frozen entrees and frozen pasta. Higher pricing
increased sales by 2.9% driven by Smart Ones frozen entrees and frozen potatoes.
Divestitures reduced sales 1.8% mainly due to the sale of The All American
Gourmet business and its Budget Gourmet and Budget Gourmet Value Classics brands
of frozen entrees.
Sales in Europe increased $163.2 million, or 6.3%. Acquisitions, net of
divestitures, increased sales 13.5%, due primarily to the current year
acquisition of CSM Food Division of CSM Nederland NV ("CSM") and the full-year
impact of the United Biscuit's European Frozen and Chilled Division ("UB").
Sales volume increased 1.6%, due to increases in tuna, other seafoods, and
beans, partially offset by a decrease in infant foods and frozen pizza. Higher
pricing increased sales 0.8%, driven by increases in beans, frozen foods and
salad cream/salad dressing, partially offset by decreases in tuna and other
seafood. The unfavorable impact of foreign exchange translation rates reduced
sales by $247.6 million, or 9.6%.
Sales in Asia/Pacific decreased $108.7 million, or 9.1%. The unfavorable
impact of foreign exchange translation rates reduced sales by $135.1 million, or
11.3%. Volume increased sales by 2.1% due to increases in poultry, tuna, and
infant foods partially offset by decreases in nutritional drinks and pet foods.
Other items, net, increased sales by 0.1%.
Sales of Other Operating entities decreased $156.0 million, or 32.5%.
Divestitures, net of acquisitions, reduced sales 36.0%, primarily due to the
divestiture of the Weight Watchers classroom business in Fiscal 2000. Sales
volume increased 3.5% and higher pricing increased sales 1.8%. Unfavorable
foreign exchange translation rates reduced sales 1.8%.
The current year was impacted by a number a special items which are
summarized in the tables below. Fiscal 2001 results include Operation Excel
implementation costs of $311.6 million pretax ($0.59 per share), additional
Operation Excel restructuring charges of $55.7 million pretax ($0.10 per share)
and reversals of $78.8 million pretax ($0.17 per share) of restructuring
accruals and assets write-downs. Fiscal 2001 results also include Streamline
restructuring charges of $276.2 million pretax ($0.60 per share) and related
implementation costs of $22.6 million pretax ($0.05 per share). During the
fourth quarter of Fiscal 2001, the company completed the sale of The All
American Gourmet business that resulted in a pretax loss of $94.6 million ($0.19
per share). The Fiscal 2001 results also include pretax costs of $18.5 million
($0.03 per share) related to
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attempted acquisitions, a tax benefit of $93.2 million ($0.27 per share) from
tax planning and new tax legislation in Italy and a loss of $5.6 million pretax
($0.01 per share) which represents the company's equity loss associated with The
Hain Celestial Group's fourth quarter results which include charges for its
merger with Celestial Seasonings.
Last year's results include Operation Excel restructuring charges of $194.5
million pretax ($0.37 per share), Operation Excel implementation costs of $216.5
million pretax ($0.41 per share), reversals of $18.2 million pretax ($0.04 per
share) of Fiscal 1999 restructuring accruals and assets write-downs, costs
related to the company's Ecuador tuna processing facility of $20.0 million
pretax ($0.05 per share), a gain of $18.2 million pretax ($0.03 per share) on
the sale of an office building in the U.K., a pretax contribution of $30.0
million ($0.05 per share) to the H.J. Heinz Company Foundation, a gain of $464.6
million pretax ($0.72 per share) on the sale of the Weight Watchers classroom
business and the impact of the Weight Watchers classroom business of $32.8
million pretax ($0.05 per share).
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The following tables provide a comparison of the company's reported results
and the results excluding special items for Fiscal 2001 and Fiscal 2000.
<Table>
<Caption>
Fiscal Year (52 Weeks) Ended May 2, 2001
---------------------------------------------------
Gross Operating Net Per
Net sales Profit Income Income Share
--------- ------ --------- ------ -----
(Dollars in millions, except per share amounts)
Reported results............................ $9,430.4 $3,546.8 $ 982.4 $ 494.9* $ 1.41*
Operation Excel restructuring............. -- 44.8 55.7 35.0 0.10
Operation Excel implementation costs...... -- 146.4 311.6 208.7 0.59
Operation Excel reversal.................. -- (46.3) (78.8) (60.9) (0.17)
Streamline restructuring.................. -- 176.6 276.2 211.6 0.60
Streamline implementation costs........... -- 16.0 22.6 18.8 0.06
Loss on sale of The All American Gourmet.. -- -- 94.6 66.2 0.19
Equity loss on investment in The Hain
Celestial Group........................ -- -- -- 3.5 0.01
Acquisition costs......................... -- -- 18.5 11.7 0.03
Italian tax benefit....................... -- -- -- (93.2) (0.27)
-------- -------- -------- ------- ------
Results excluding special items............. $9,430.4 $3,884.3 $1,682.7 $ 896.4 $ 2.55
======== ======== ======== ======= ======
</Table>
---------------
* Before cumulative effect of accounting change
<Table>
<Caption>
Fiscal Year (52 Weeks) Ended May 3, 2000
--------------------------------------------------
Gross Operating Net Per
Net sales Profit Income Income Share
--------- ------ --------- ------ -----
(Dollars in millions, except per share amounts)
Reported results............................. $9,407.9 $3,619.4 $1,733.1 $ 890.6 $2.47
Operation Excel restructuring.............. -- 107.7 194.5 134.4 0.37
Operation Excel implementation costs....... -- 79.2 216.5 145.9 0.41
Operation Excel reversal................... -- (16.4) (18.2) (12.9) (0.04)
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)
-------- -------- -------- ------- -----
Results excluding special items.............. $9,232.7 $3,716.9 $1,666.5 $ 905.7 $2.52
======== ======== ======== ======= =====
</Table>
---------------
(Note: Totals may not add due to rounding.)
Gross profit decreased $72.6 million to $3.55 billion from $3.62 billion in
Fiscal 2000. The gross profit margin decreased to 37.6% from 38.5% Excluding the
special items identified above, gross profit increased $167.4 million, or 4.5%,
to $3.88 billion from $3.72 billion, and the gross profit margin increased to
41.2% from 40.3%. Gross profit, across all major segments, was favorably
impacted by savings from Operation Excel. Gross profit for the Heinz North
America segment increased $76.3 million, or 7.4% due primarily to acquisitions
and increased sales volume of ketchup partially offset by higher energy costs
and the weakened Canadian dollar. The U.S. Pet Products and Seafood segment's
gross profit decreased $8.6 million, or 1.5%, primarily due to lower volume and
pricing of tuna and canned pet food. U.S. Frozen's gross profit increased $41.4
million, or 8.6%, due to increased sales volume mainly attributable to Boston
Market HomeStyle Meals and higher selling prices, partially offset by higher
energy costs. Europe's gross profit increased $78.0 million, or 7.2%, due
primarily to a favorable profit mix and the acquisitions of CSM, UB and
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Remedia Limited. The unfavorable impact of foreign exchange translation rates
reduced Europe's gross profit by approximately $99 million The Asia/Pacific
segment's gross profit decreased $34.3 million, or 7.7%, driven by the
unfavorable impact of foreign exchange translation rates of approximately $48
million, partially offset by higher selling prices in Indonesia. Other Operating
Entities' gross profit increased $6.3 million, or 6.5%, due primarily to higher
pricing.
SG&A increased $213.5 million to $2.56 billion from $2.35 billion and
increased as a percentage of sales to 27.2% from 25.0%. Excluding the special
items identified above, SG&A increased $151.1 million to $2.20 billion from
$2.05 billion and increased as a percentage of sales to 23.3% from 22.2% Selling
and distribution expenses increased $27.4 million to $768.2 million from $740.8
million, or 3.7%, primarily due to acquisitions and increased fuel costs in
North America. Marketing increased $133.6 million, or 16.7%, primarily due to
the UB acquisition and the national rollouts of StarKist Tuna in a pouch, Boston
Market products, and the Stand Up Resealable Packaging for Ore-Ida frozen
potatoes ("SURP").
Total marketing support (including trade and consumer promotions and media)
decreased 5.0% to $2.22 billion from $2.34 billion on a sales increase of 2.1%.
However, advertising costs to support our key brands increased 8.1%. (See Note
17 to the Consolidated Financial Statements.)
Operating income decreased $750.7 million, or 43.3%, to $0.98 billion from
$1.73 billion last year. Excluding the special items identified above, operating
income increased $16.3 million, or 1.0%, to $1.68 billion from $1.67 billion
last year. Operating income, across all major segments, was favorably impacted
by savings from Operation Excel. Domestic operations provided approximately 37%
and 59% of operating income in Fiscal 2001 and Fiscal 2000, respectively.
Excluding the special items in both years, domestic operations provided
approximately 50% and 54% of operating income in Fiscal 2001 and Fiscal 2000,
respectively.
The Heinz North America segment's operating income increased $45.3 million
to $541.6 million from $496.3 million last year. Excluding the special items
noted above, operating income increased $45.3 million, or 7.5% to $647.9 million
from $602.6 million last year due to the strong performance of ketchup,
condiments and sauces, and the acquisitions of Quality Chef, Yoshida and IDF
Holdings, Inc. ("IDF"), partially offset by higher energy costs.
The U.S. Pet Products and Seafood Segment's operating income decreased
$252.7 million to a loss of $54.5 million from income of $198.1 million last
year. Excluding the special items noted above, operating income decreased $44.4
million, or 16.3% to $228.2 million from $272.6 million due to lower tuna and
canned pet food sales volumes, a significant decrease in the selling price of
tuna and higher energy costs, partially offset by the strong performance of pet
treats.
The U.S. Frozen segment's operating income decreased $68.1 million to $84.0
million from $152.0 million last year. Excluding the special items noted above ,
operating income increased $20.5 million, or 11.3%, to $202.0 million from
$181.5 million last year. This increase is mainly attributable to increased
sales of Smart Ones frozen entrees, Boston Market frozen meals and Bagel Bites
snacks, partially offset by marketing spending behind the national rollouts of
Boston Market products, the SURP and higher energy costs.
Europe's operating income increased $24.4 million, or 6.7%, to $388.6
million from $364.2 million. Excluding the special items noted above , operating
income increased $15.7 million, or 3.1%, to $518.0 million from $502.3 million
last year, due primarily to increased sales of seafood and beans and the UB
acquisition, partially offset by competitive pricing and trade destocking in the
company's European infant foods business. The unfavorable impact of foreign
exchange translation rates reduced Europe's operating income by approximately
$45 million.
Asia/Pacific's operating income decreased $28.0 million, or 22.6%, to $96.1
million from $124.1 million last year. Excluding the special items noted above,
operating income decreased $29.9 million, or 16.8%, to $147.6 million from
$177.5 million last year. Solid performances from Indonesia, Greater China and
the poultry business were offset by reduced sales in New Zealand,
24
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Japan and India. The unfavorable impact of foreign exchange translation rates
reduced Asia/ Pacific's operating income by approximately $17 million.
Other Operating Entities reported a decrease in operating income of $490.9
million to $49.3 million from $540.2 million last year. Excluding the special
items noted above, operating income increased $5.7 million, or 17.7%, to $38.0
million from $32.3 million last year.
Other expense, net totaled $309.3 million compared to $269.4 million last
year. The increase is primarily due to an increase in interest expense resulting
from higher average borrowings and higher interest rates partially offset by
gains from foreign currency contracts.
The effective tax rate for Fiscal 2001 was 26.5% compared to 39.2% last
year. The current year's rate includes a benefit of $93.2 million, or $0.27 per
share, from tax planning and new tax legislation in Italy, partially offset by
restructuring expenses in lower rate jurisdictions. The Fiscal 2000 rate was
negatively impacted by a higher rate on the sale of the Weight Watchers
classroom business, resulting from an excess of basis in assets for financial
reporting over the tax basis in assets, and by higher state taxes related to the
sale and more restructuring expenses in lower rate jurisdictions. Excluding the
special items identified in the tables above, the effective tax rate was 35.0%
in both years.
Net income decreased $412.5 million to $478.0 million from $890.6 million
last year, and earnings per share decreased to $1.36 from $2.47. In Fiscal 2001,
the company changed its method of accounting for revenue recognition in
accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements" (see Note 1 to the Consolidated Financial Statements). The
cumulative effect of adopting SAB No. 101 was $16.5 million ($0.05 per share).
Excluding the special items noted above and the prescribed accounting change,
net income decreased 1.0% to $896.4 million from $905.7 million, and earnings
per share increased 1.2% to $2.55 from $2.52 last year.
The impact of fluctuating exchange rates for Fiscal 2001 remained
relatively consistent on a line-by-line basis throughout the Consolidated
Statement of Income.
2000 VERSUS 1999: Sales for Fiscal 2000 increased $108.3 million, or 1.2%,
to $9.41 billion from $9.30 billion in Fiscal 1999. Volume increased sales by
$349.7 million, or 3.8%, and acquisitions increased sales by $438.2 million, or
4.7%. Divestitures reduced sales by $407.4 million, or 4.4%, lower pricing
reduced sales by $161.2 million, or 1.7%, and the unfavorable impact of foreign
exchange translation rates reduced sales by $111.0 million, or 1.2%. Domestic
operations contributed approximately 52% of consolidated sales in Fiscal 2000
and 53% in Fiscal 1999.
Sales of the Heinz North America segment increased $169.3 million, or 7.5%.
Sales volume increased 5.2%, due to increases in ketchup, condiments and sauces,
foodservice and canned soup. Acquisitions, net of divestitures, increased sales
1.9%, and a stronger Canadian dollar increased sales 0.5%. Lower pricing reduced
sales by 0.1%, due mainly to decreases in retail ketchup.
Sales of the U.S. Pet Products and Seafood segment decreased $108.0
million, or 5.9%. Sales volume increased 0.5%, due to increases in tuna,
partially offset by a decrease in canned pet food. Divestitures decreased sales
1.3% and lower pricing reduced sales by 5.1%, due mainly to decreases in tuna.
The U.S. Frozen segment's sales increased $9.5 million, or 0.9%. Sales
volume increased 5.9%, driven by Smart Ones frozen entrees, Boston Market frozen
meals and Bagel Bites snacks, partially offset by a decrease in The Budget
Gourmet line of frozen entrees. The divestiture of several non-core product
lines, net of acquisitions, reduced sales 3.4%. Lower pricing reduced sales
1.6%, primarily due to frozen potatoes.
Sales in Europe increased $123.0 million, or 5.0%. Acquisitions, net of
divestitures, increased sales 8.6%, due primarily to the acquisitions of United
Biscuit's European Frozen and Chilled Division, Remedia Limited (infant
feeding), Sonnen Bassermann (convenience meals) and Serv-A-
25
26
Portion (foodservice). Sales volume increased 3.4%, due to increases in tuna,
infant foods and ketchup, condiments and sauces. The unfavorable impact of
foreign exchange translation rates reduced sales 5.8% and lower pricing,
primarily in tuna, reduced sales 1.2%.
Sales in Asia/Pacific increased $184.3 million, or 18.2%. Acquisitions,
primarily ABC Sauces in Indonesia, increased sales 11.8%. Sales volume increased
4.5%, due to increases in infant foods, poultry and convenience meals. The
favorable impact of foreign exchange translation rates increased sales 2.4%,
primarily due to sales in Japan. Lower pricing reduced sales 0.5%.
Sales of Other Operating Entities decreased $269.9 million, or 36.0%.
Divestitures reduced sales 38.0%, primarily due to the second quarter
divestiture of the Weight Watchers classroom business and the Fiscal 1999
divestiture of the bakery products unit. Lower pricing reduced sales 1.9%, and
foreign exchange translation rates reduced sales 0.6%. Sales volume increased
4.5%.
The following tables provide a comparison of the company's reported results
and the results excluding special items for Fiscal 2000 and Fiscal 1999 as
reported in the company's annual report for the year ended May 3, 2000. The
Fiscal 2000 results have not been adjusted for the impact of the Weight Watchers
classroom business for comparative purposes.
<Table>
<Caption>
Fiscal Year (53 Weeks) Ended May 3, 2000
---------------------------------------------------
Gross Operating Net Per
Net Sales Profit Income Income Share
--------- -------- --------- ------ -----
(Dollars in millions, except per share amounts)
Reported results............................ $9,407.9 $3,619.4 $1,733.1 $ 890.6 $ 2.47
Operation Excel restructuring............. -- 107.7 194.5 134.4 0.37
Operation Excel implementation costs...... -- 79.2 216.5 145.9 0.41
Operation Excel reversal.................. -- (16.4) (18.2) (12.9) (0.04)
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
Gain on sale of Weight Watchers classroom
business............................... -- -- (464.6) (259.7) (0.72)
-------- -------- -------- ------- ------
Results excluding special items............. $9,407.9 $3,809.9 $1,711.2 $ 925.3 $ 2.57
======== ======== ======== ======= ======
</Table>
<Table>
<Caption>
Fiscal Year (52 Weeks) Ended April 28, 1999
---------------------------------------------------
Gross Operating Net Per
Net Sales Profit Income Income Share
--------- ------ --------- ------ -----
(Dollars in millions, except per share amounts)
Reported results............................ $9,299.6 $3,354.7 $1,109.3 $ 474.3 $ 1.29
Operation Excel restructuring and
implementation costs................... -- 396.4 552.8 409.7 1.11
Project Millennia implementation costs.... -- 14.7 22.3 14.3 0.04
Project Millennia reversal................ -- (20.7) (25.7) (16.4) (0.04)
(Gain)/loss on sale of bakery products
unit................................... -- -- (5.7) 0.6 --
-------- -------- -------- ------- ------
Results excluding special items............. $9,299.6 $3,745.1 $1,653.0 $ 882.4 $ 2.40
======== ======== ======== ======= ======
</Table>
(Note: Totals may not add due to rounding.)
Gross profit increased $264.7 million to $3.62 billion from $3.35 billion
in Fiscal 1999. The gross profit margin increased to 38.5% from 36.1%. Excluding
the special items identified above, gross profit increased $64.7 million, or
1.7%, to $3.81 billion from $3.75 billion and the gross profit margin increased
to 40.5% from 40.3%. Gross profit for the Heinz North America segment increased
$76.6 million, or 8.1%, due primarily to acquisitions and increased sales volume
of ketchup. Gross profit for the U.S. Pet Products and Seafood segment decreased
$24.1 million, or 3.9%, due primarily to a significant decrease in the selling
price of tuna. U.S. Frozen's gross profit decreased
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27
slightly by $2.0 million, or 0.4%, as increased sales volume was offset by lower
pricing and the elimination of several non-core product lines. Europe's gross
profit increased $62.0 million, or 6.1%, due primarily to a favorable profit
mix, and the acquisitions of United Biscuit's European Frozen and Chilled
Division, Remedia Limited, Sonnen Bassermann and Serv-A-Portion. The unfavorable
impact of foreign exchange translation rates reduced Europe's gross profit by
approximately $65 million. The Asia/Pacific segment's gross profit increased
$84.4 million, or 23.4%, driven by the acquisition of ABC Sauces in Indonesia,
improved performances throughout the segment, and the favorable impact of
foreign exchange translation rates in Japan. Other Operating Entities' gross
profit decreased $130.4 million, or 40.6%, due primarily to the second quarter
divestiture of the Weight Watchers classroom business and the Fiscal 1999
divestiture of the bakery products unit.
SG&A increased $105.5 million to $2.35 billion from $2.25 billion and
increased as a percentage of sales to 25.0% from 24.1%. Excluding the special
items identified above, SG&A increased $6.5 million to $2.10 billion from $2.09
billion and decreased as a percentage of sales to 22.3% from 22.5%. Increased
selling and distribution expenses, primarily in Asia/Pacific and Europe,
resulting from acquisitions, were offset by decreases in marketing and general
and administrative expenses. Marketing decreased $11.2 million, or 1.3%,
primarily due to the second quarter divestiture of the Weight Watchers classroom
business. Excluding the Weight Watchers classroom business, marketing expense
increased 6.5%. Marketing increases were noted in all major segments.
Total marketing support (including trade and consumer promotions and media)
increased 6.6% to $2.37 billion from $2.22 billion on a sales increase of 1.2%.
Excluding the Weight Watchers classroom business, total marketing support
increased 9.6%. Advertising costs in Fiscal 2000 were $374.0 million compared to
$373.9 million in Fiscal 1999. Excluding the Weight Watchers classroom business
in both periods, advertising costs increased 9.3%.
Operating income increased $623.8 million, or 56.2%, to $1.73 billion from
$1.11 billion in Fiscal 1999. Excluding the special items identified above,
operating income increased $58.2 million, or 3.5%, to $1.71 billion from $1.65
billion in Fiscal 1999. Removing the impact of the Weight Watchers classroom
business in both periods, operating income increased 6.6%. Domestic operations
provided approximately 59% and 57% of operating income in Fiscal 2000 and Fiscal
1999, respectively. Excluding the special items in both years, domestic
operations provided approximately 54% and 55% of operating income in Fiscal 2000
and Fiscal 1999, respectively.
The Heinz North America segment's operating income decreased $26.1 million,
or 5.0%, to $496.3 million from $522.4 million in Fiscal 1999. Excluding the
special items noted above, operating income increased $47.6 million, or 8.6%, to
$602.6 million from $555.0 million in Fiscal 1999. The increase is due to the
strong performance of Heinz U.S.A., improvements in Heinz Canada and savings
from Operation Excel.
The U.S. Pet Products and Seafood segment's operating income increased $3.5
million, or 1.8%, to $198.1 million from $194.6 million in Fiscal 1999.
Excluding the special items noted above, operating income decreased $7.0
million, or 2.5%, to $272.6 million from $279.6 million in Fiscal 1999. The
strong performance of the pet food business and savings from Operation Excel
were partially offset by a significant decrease in the selling price of tuna.
The U.S. Frozen segment's operating income increased $71.8 million to
$152.0 million from $80.2 million in Fiscal 1999. Excluding the special items
noted above, operating income decreased $1.9 million, or 1.0%, to $181.5 million
from $183.4 million in Fiscal 1999. This decrease is attributable to higher
marketing expenses as a result of the national campaign in support of Boston
Market and lower pricing on Ore-Ida frozen potatoes, offset by a reduction in
SG&A resulting from the domestic consolidation of the frozen business as part of
Operation Excel.
Europe's operating income increased $118.0 million, or 47.9%, to $364.2
million from $246.2 million. Excluding the special items noted above, operating
income increased $35.1 million, or 7.5%, to $502.3 million from $467.2 million
in Fiscal 1999, due primarily to a favorable profit
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28
mix, savings from Operation Excel and the acquisitions of United Biscuit's
European Frozen and Chilled Division, Remedia Limited and Serv-A-Portion. The
unfavorable impact of foreign exchange translation rates reduced Europe's
operating income by approximately $26 million.
Asia/Pacific's operating income increased $34.3 million, or 38.2%, to
$124.1 million from $89.8 million in Fiscal 1999. Excluding the special items
noted above, operating income increased $31.8 million, or 21.8%, to $177.5
million from $145.7 million in Fiscal 1999. This increase is attributable to the
acquisition of ABC Sauces in Indonesia and solid performances from Japan, India
and the poultry business.
Other Operating Entities reported an increase in operating income of $444.4
million to $540.2 million from $95.7 million in Fiscal 1999. Excluding the
special items noted above, operating income decreased $44.9 million, or 36.9%,
to $77.0 million from $122.0 million in Fiscal 1999. This decrease is primarily
attributable to the second quarter divestiture of the Weight Watchers classroom
business.
Other expenses, net totaled $269.4 million compared to $274.2 million in
Fiscal 1999. The decrease is primarily due to a gain on the sale of an office
building in the U.K. of $18.2 million pretax ($0.03 per share) partially offset
by an increase in interest expense resulting from higher average borrowings and
interest rates.
The effective tax rate for Fiscal 2000 was 39.2% compared to 43.2% in
Fiscal 1999. The Fiscal 2000 effective tax rate was unfavorably impacted by the
excess of basis in assets for financial reporting over the tax basis of assets
included in the Weight Watchers sale and by gains in higher taxed states related
to the sale. The Fiscal 2000 and 1999 effective tax rates were unfavorably
impacted by restructuring and implementation costs expected to be realized in
lower tax rate jurisdictions and by nondeductible expenses related to the
restructuring. Excluding the special items identified in the tables above, the
effective tax rate for Fiscal 2000 was 35.0% compared to 36.0% in Fiscal 1999.
Net income increased $416.2 million to $890.6 million from $474.3 million
in Fiscal 1999, and earnings per share increased to $2.47 from $1.29. Excluding
the special items noted above, net income increased 4.9% to $925.3 million from
$882.4 million, and earnings per share increased 7.1% to $2.57 from $2.40 in
Fiscal 1999. Removing the impact of the Weight Watchers classroom business in
both years, earnings per share increased 9.6% and net income increased 7.1%.
The impact of fluctuating exchange rates for Fiscal 2000 remained
relatively consistent on a line-by-line basis throughout the Consolidated
Statement of Income.
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 (notably the euro and the pound sterling),
global economic and industry conditions, achieving cost savings programs,
success of acquisitions and new product and packaging innovations and other
factors described in "Cautionary Statement Relevant to Forward-Looking
Information" in the company's Form 10-K for the fiscal year ended May 2, 2001,
as updated from time to time by the company in its subsequent filings with the
Securities and Exchange Commission. The company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The company has omitted certain
exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The
company agrees to furnish such documents to the
28
29
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. Certificate of Designations, Preferences and Rights of Voting
Cumulative Preferred Stock, Series A of H.J. Heinz Finance Company.
12. Computation of Ratios of Earnings to Fixed Charges.
99. Condensed financial statements of HFC filed in accordance with rule
3-10 of Regulation S-X. H. J. Heinz Company is a guarantor of all of
HFC's outstanding debt.
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Securities and Exchange
Commission on June 26, 2001 reporting the execution of an agreement by
the company to acquire the pasta sauce and dry bouillon and soup
business of Borden Foods Corporation, and the release of the company's
financial results for the fourth quarter and the fiscal year ended May
2, 2001.
A report on Form 8-K was filed with the Securities and Exchange
Commission on September 17, 2001, regarding the date of the annual
shareholders' meeting of the company.
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30
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: September 17, 2001
By: /s/ PAUL F. RENNE
..........................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: September 17, 2001
By: /s/ BRUNA GAMBINO
..........................................
Bruna Gambino
Corporate Controller
(Principal Accounting Officer)
30