SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE SIX MONTHS ENDED OCTOBER 31, 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 December 7, 2001 was 350,045,875 shares.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Second Quarter Ended
------------------------------------
October 31, 2001 November 1, 2000
FY 2002 FY 2001
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $2,565,161 $2,296,478
Cost of products sold...................................... 1,551,603 1,383,126
---------- ----------
Gross profit............................................... 1,013,558 913,352
Selling, general and administrative expenses............... 612,389 530,965
---------- ----------
Operating income........................................... 401,169 382,387
Interest income............................................ 4,269 5,658
Interest expense........................................... 75,083 82,061
Other expenses, net........................................ 9,985 16,878
---------- ----------
Income before income taxes................................. 320,370 289,106
Provision for income taxes................................. 112,129 99,073
---------- ----------
Net income................................................. $ 208,241 $ 190,033
========== ==========
Net income per share--diluted.............................. $ 0.59 $ 0.54
========== ==========
Average common shares outstanding--diluted................. 352,652 350,575
========== ==========
Net income per share--basic................................ $ 0.60 $ 0.55
========== ==========
Average common shares outstanding--basic................... 349,516 347,218
========== ==========
Cash dividends per share................................... $ 0.4050 $ 0.3925
========== ==========
</Table>
See Notes to Condensed Consolidated Financial Statements.
------------------
2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Six Months Ended
------------------------------------
October 31, 2001 November 1, 2000
FY 2002 FY 2001*
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $4,750,640 $4,467,989
Cost of products sold...................................... 2,866,619 2,655,702
---------- ----------
Gross profit............................................... 1,884,021 1,812,287
Selling, general and administrative expenses............... 1,098,698 1,041,359
---------- ----------
Operating income........................................... 785,323 770,928
Interest income............................................ 9,627 11,299
Interest expense........................................... 150,630 163,120
Other expenses, net........................................ 11,743 14,713
---------- ----------
Income before income taxes and cumulative effect of
accounting change........................................ 632,577 604,394
Provision for income taxes................................. 223,862 209,910
---------- ----------
Income before cumulative effect of accounting change....... 408,715 394,484
Cumulative effect of accounting change..................... -- (16,471)
---------- ----------
Net income................................................. $ 408,715 $ 378,013
========== ==========
Net income per share--diluted.............................. $ 1.16 $ 1.08
========== ==========
Average common shares outstanding--diluted................. 352,652 350,575
========== ==========
Net income per share--basic................................ $ 1.17 1.09
========== ==========
Average common shares outstanding--basic................... 349,516 347,218
========== ==========
Cash dividends per share................................... $ 0.7975 $ 0.76
========== ==========
</Table>
* Restated, see Note 7.
See Notes to Condensed Consolidated Financial Statements.
------------------
3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
October 31, 2001 May 2, 2001*
FY 2002 FY 2001
---------------- ------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 178,347 $ 138,849
Short-term investments, at cost which approximates market... 1,893 5,371
Receivables, net............................................ 1,452,044 1,383,550
Inventories................................................. 1,718,438 1,407,961
Prepaid expenses and other current assets................... 296,431 181,083
----------- ----------
Total current assets................................... 3,647,153 3,116,814
----------- ----------
Property, plant and equipment............................... 3,920,610 3,880,780
Less accumulated depreciation............................... 1,705,642 1,712,400
----------- ----------
Total property, plant and equipment, net............... 2,214,968 2,168,380
----------- ----------
Goodwill, net............................................... 2,655,638 2,077,451
Trademarks, net............................................. 733,937 567,692
Other intangibles, net...................................... 122,173 120,749
Other non-current assets.................................... 1,081,281 984,064
----------- ----------
Total other non-current assets......................... 4,593,029 3,749,956
----------- ----------
Total assets........................................... $10,455,150 $9,035,150
=========== ==========
</Table>
*Summarized from audited fiscal year 2001 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
October 31, 2001 May 2, 2001*
FY 2002 FY 2001
---------------- ------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $ 213,312 $1,555,869
Portion of long-term debt due within one year............... 312,925 314,965
Accounts payable............................................ 1,019,407 962,497
Salaries and wages.......................................... 53,531 54,036
Accrued marketing........................................... 143,380 146,138
Accrued restructuring costs................................. 87,838 134,550
Other accrued liabilities................................... 507,899 388,582
Income taxes................................................ 143,405 98,460
----------- ----------
Total current liabilities.............................. 2,481,697 3,655,097
----------- ----------
Long-term debt.............................................. 5,115,456 3,014,853
Deferred income taxes....................................... 272,789 253,690
Non-pension postretirement benefits......................... 208,016 207,104
Other liabilities and minority interest..................... 853,641 530,679
----------- ----------
Total long-term debt, other liabilities and minority
interest.................................................. 6,449,902 4,006,326
Shareholders' Equity:
Capital stock............................................... 107,890 107,900
Additional capital.......................................... 342,830 331,633
Retained earnings........................................... 4,827,146 4,697,213
----------- ----------
5,277,866 5,136,746
Less:
Treasury stock at cost (81,071,016 shares at October 31,
2001 and 82,147,565 shares at May 2, 2001)............. 2,915,591 2,922,630
Unearned compensation relating to the ESOP................ 1,724 3,101
Accumulated other comprehensive loss...................... 837,000 837,288
----------- ----------
Total shareholders' equity............................. 1,523,551 1,373,727
----------- ----------
Total liabilities and shareholders' equity............. $10,455,150 $9,035,150
=========== ==========
</Table>
*Summarized from audited fiscal year 2001 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
5
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Six Months Ended
-----------------------------------
October 31, 2001 November 1, 2000
FY 2002 FY 2001
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
Cash provided by (used for) Operating Activities............ $ 197,923 $ (1,798)
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures................................... (86,605) (170,852)
Acquisitions, net of cash acquired..................... (805,538) (126,502)
Proceeds from divestitures............................. 31,889 85,508
Purchases of short-term investments.................... (1,731) (876,567)
Sales and maturities of short-term investments......... 11 858,458
Investment in The Hain Celestial Group, Inc............ -- (79,743)
Other items, net....................................... (8,534) (10,606)
--------- ---------
Cash used for investing activities................ (870,508) (320,304)
--------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt............................. (32,182) (19,087)
(Payments on) proceeds from commercial paper and short-
term borrowings, net................................. (88,032) 688,909
Proceeds from long-term debt........................... 768,307 915
Proceeds from preferred stock of subsidiary............ 325,000 --
Dividends.............................................. (278,782) (263,779)
Purchases of treasury stock............................ (45,365) (90,110)
Exercise of stock options.............................. 46,441 31,535
Other items, net....................................... 10,284 9,204
--------- ---------
Cash provided by financing activities............. 705,671 357,587
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 6,412 (8,835)
--------- ---------
Net increase in cash and cash equivalents................... 39,498 26,650
Cash and cash equivalents at beginning of year.............. 138,849 137,617
--------- ---------
Cash and cash equivalents at end of period.................. $ 178,347 $ 164,267
========= =========
</Table>
See Notes to Condensed Consolidated Financial Statements.
------------------
6
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>
October 31, 2001 May 2, 2001
---------------- -----------
(Thousands of Dollars)
Finished goods and work-in-process.................. $1,304,539 $1,095,954
Packaging material and ingredients.................. 413,899 312,007
---------- ----------
$1,718,438 $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 October 31, 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.......... -- (39.9) (8.6) (10.4) (58.9)
------- ------ ------ ------ -------
Accrued restructuring costs--October
31, 2001............................. $ -- $ 36.6 $ 42.1 $ -- $ 78.7
======= ====== ====== ====== =======
</Table>
7
During the first six months 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 six months of Fiscal 2002, the company utilized $48.5
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 second quarter of Fiscal 2002, the company acquired Anchor Food
Products branded retail business which includes the retail licensing
rights to the T.G.I. Friday's brand of frozen snacks and appetizers and
the Poppers brand of retail appetizer lines. Also during the second
quarter of Fiscal 2002, the Company completed the acquisition of Delimex
Holdings, Inc., a leading maker of frozen Mexican food products. Delimex
is a leading U.S. producer of frozen taquitos, tightly rolled fried corn
and flour tortillas with fillings such as beef, chicken or cheese. Delimex
also makes quesadillas, tamales and rice bowls.
During the first quarter of Fiscal 2002, the company completed the
acquisition of Borden Food Corporation's pasta sauce, dry bouillon and
soup business. Under this transaction, the company acquired such brands as
Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups
and Wyler's bouillons and soups. The 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 six month amounts have been restated for the effect of the
change in accounting for revenue recognition. Amounts originally reported
were as follows: Sales, $4.45 billion; Gross profit, $1.81 billion; Net
income, $390.7 million; Net income per share - diluted, $1.11; Net income
per share - basic, $1.13.
(8) RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued
new guidelines entitled "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's
Products". In addition, during May 2000, the EITF issued new guidelines
entitled "Accounting for Certain Sales Incentives". Both of these issues
provide guidance primarily on income statement classification of
consideration from a vendor to a purchaser of the vendor's products,
including both customers and consumers. Generally,
8
cash consideration is to be classified as a reduction of revenue, unless
specific criteria are met regarding goods or services that the vendor may
receive in return for this consideration.
In the fourth quarter of Fiscal 2002, the company will reclassify
promotional payments to its customers and the cost of consumer coupons and
other cash redemption offers from SG&A to net sales. SG&A would be
correspondingly reduced such that net earnings would not be affected. The
company is currently assessing the impact both issues will have on net
sales.
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 October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144 clarifies and
revises existing guidance on accounting for impairment of plant, property,
and equipment, amortized intangibles, and other long-lived assets not
specifically addressed in other accounting literature. This standard will
be effective for the company beginning in Fiscal 2003. The company does not
expect that the adoption of this standard will have a significant impact on
the consolidated financial statements.
(9) SEGMENTS
Descriptions of the company's reportable segments are as follows:
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 and 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, because they are not
the primary measure of segment profitability reviewed by the company's
management.
Prior year quarterly segment information has been revised to conform
with current quarter presentation.
9
The following table presents information about the company's reportable
segments:
<Table>
<Caption>
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 31, 2001 November 1, 2000 October 31, 2001 November 1, 2000
FY 2002 FY 2001 FY 2002 FY 2001*
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net external sales:
Heinz North America............... $ 704,656 $ 659,576 $1,279,558 $1,221,623
U.S. Pet Products and Seafood..... 394,227 379,755 739,693 754,304
U.S. Frozen....................... 342,507 288,596 581,008 517,760
---------- ---------- ---------- ----------
North America Totals.............. 1,441,390 1,327,927 2,600,259 2,493,687
Europe............................ 750,622 623,211 1,437,479 1,262,638
Asia/Pacific...................... 262,219 261,724 507,038 545,823
Other Operating Entities.......... 110,930 83,616 205,864 165,841
---------- ---------- ---------- ----------
Consolidated Totals............... $2,565,161 $2,296,478 $4,750,640 $4,467,989
========== ========== ========== ==========
Intersegment sales:
Heinz North America............... $ 14,529 $ 9,787 $ 21,860 $ 20,509
U.S. Pet Products and Seafood..... 2,761 6,400 7,574 12,587
U.S. Frozen....................... 2,951 3,418 5,152 6,268
Europe............................ 1,042 1,422 2,416 2,178
Asia/Pacific...................... 937 568 1,229 981
Other Operating Entities.......... 17 1,021 17 2,029
Non-Operating (a)................. (22,237) (22,616) (38,248) (44,552)
---------- ---------- ---------- ----------
Consolidated Totals............... $ -- $ -- $ -- $ --
========== ========== ========== ==========
Operating income (loss):
Heinz North America............... $ 165,313 $ 156,330 $ 283,784 $ 298,251
U.S. Pet Products and Seafood..... 46,458 35,245 103,999 96,203
U.S. Frozen....................... 61,092 59,640 105,328 97,269
---------- ---------- ---------- ----------
North America Totals.............. 272,863 251,215 493,111 491,723
Europe............................ 119,431 107,244 270,002 225,949
Asia/Pacific...................... 24,815 22,713 50,951 64,249
Other Operating Entities.......... 14,977 18,920 26,910 29,984
Non-Operating (a)................. (30,917) (17,705) (55,651) (40,977)
---------- ---------- ---------- ----------
Consolidated Totals............... $ 401,169 $ 382,387 $ 785,323 $ 770,928
========== ========== ========== ==========
Operating income (loss) excluding
special items (b):
Heinz North America............... $ 165,313 $ 169,193 $ 288,658 $ 324,038
U.S. Pet Products and Seafood..... 46,458 69,871 111,794 140,904
U.S. Frozen....................... 61,092 62,905 105,328 106,008
---------- ---------- ---------- ----------
North America Totals.............. 272,863 301,969 505,780 570,950
Europe............................ 119,431 124,368 271,717 263,919
Asia/Pacific...................... 24,815 39,987 51,549 87,587
Other Operating Entities.......... 14,977 7,857 26,910 18,921
Non-Operating (a)................. (30,917) (14,684) (54,458) (36,981)
---------- ---------- ---------- ----------
Consolidated Totals............... $ 401,169 $ 459,497 $ 801,498 $ 904,396
========== ========== ========== ==========
</Table>
*Restated, see Note 7.
- ---------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) Second Quarter ended November 1, 2000 - Excludes implementation costs of
Operation Excel as follows: Heinz North America $12.9 million, U.S. Pet
Products and Seafood $34.6 million, U.S. Frozen $3.3 million, Europe $17.1
million, Asia/Pacific $17.3 million, Other Operating Entities ($11.1)
million and Non-Operating $3.0 million.
Six Months ended October 31, 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.
10
Six Months ended November 1, 2000 - Excludes implementation costs of
Operation Excel as follows: Heinz North America $25.8 million, U.S. Pet
Products and Seafood $44.7 million, U.S. Frozen $8.7 million, Europe $38.0
million, Asia/Pacific $23.3 million, Other Operating Entities ($11.1) million
and Non-Operating $4.0 million.
(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 six months
ended October 31, 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 October 31, 2001, $1.25
billion 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 $0.4050 per share from
$0.3925 per share, for an indicated annual rate of $1.62 per share.
11
(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>
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 31, 2001 November 1, 2000 October 31, 2001 November 1, 2000
FY 2002 FY 2001 FY 2002 FY 2001
---------------- ---------------- ---------------- ----------------
(In Thousands, Except per Share Amounts)
Income before cumulative effect of
accounting change............... $208,241 $190,033 $408,715 $394,484
Preferred dividends............... 5 6 10 12
-------- -------- -------- --------
Income applicable to common stock
before effect of accounting
change.......................... 208,236 190,027 408,705 394,472
Cumulative effect of accounting
change.......................... -- -- -- (16,471)
-------- -------- -------- --------
Net income applicable to common
stock........................... $208,236 $190,027 $408,705 $378,001
======== ======== ======== ========
Average common shares
outstanding--basic............ 349,516 347,218 349,516 347,218
Effect of dilutive securities:
Convertible preferred stock... 166 181 166 181
Stock options................. 2,970 3,176 2,970 3,176
-------- -------- -------- --------
Average common shares
outstanding--diluted.......... 352,652 350,575 352,652 350,575
Income per share before cumulative
effect of accounting change--
basic........................... $ 0.60 $ 0.55 $ 1.17 $ 1.14
======== ======== ======== ========
Net income per share--basic....... $ 0.60 $ 0.55 $ 1.17 $ 1.09
======== ======== ======== ========
Income per share before cumulative
effect of accounting change--
diluted......................... $ 0.59 $ 0.54 $ 1.16 $ 1.13
======== ======== ======== ========
Net income per share--diluted... $ 0.59 $ 0.54 $ 1.16 $ 1.08
======== ======== ======== ========
</Table>
(13) COMPREHENSIVE INCOME
<Table>
<Caption>
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 31, 2001 November 1, 2000 October 31, 2001 November 1, 2000
FY 2002 FY 2001 FY 2002 FY 2001
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net income........................ $208,241 $190,033 $408,715 $378,013
Other comprehensive income (loss):
Foreign currency translation
adjustment.................. 8,657 (131,367) (374) (194,775)
Minimum pension liability
adjustment.................. 1,018 1,503 1,158 (1,533)
Deferred gains/(losses) on
derivatives:
Net change from periodic
revaluations............ (1,056) -- (737) --
Net amount reclassified to
earnings................ (2) -- 241 --
-------- -------- -------- --------
Comprehensive income.............. $216,858 $ 60,169 $409,003 $181,705
======== ======== ======== ========
</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,
12
and consequently, the effective portion of unrealized gains and losses is
deferred as a component of accumulated other comprehensive loss and is
recognized in earnings at the time the hedged item affects earnings.
The company uses certain foreign currency debt instruments as net
investment hedges of foreign operations. During the six months ended
October 31, 2001, losses of $1.3 million, net of income taxes of $0.8
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.
During Fiscal 2002, the company entered into interest rate swap agreements
to convert the interest rate exposure on certain of the company's existing
long-term debt from fixed to floating. The weighted average fixed rate of
the associated debt is 6.433%. The aggregate notional amount of these swaps
is $1.3 billion and their average duration is 12 years.
HEDGE INEFFECTIVENESS: During the six months ended October 31, 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 October 31, 2001, the company is
hedging forecasted transactions for periods not exceeding 18 months. During
the next 12 months, the company expects $0.6 million of net deferred loss
reported in accumulated other comprehensive loss to be reclassified to
earnings.
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, please
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
13
implementation of the Streamline initiative. These include cost premiums related
to production transfers, consulting costs and relocation costs.
In Fiscal 2001, the company completed the closure of its tuna operations in
Puerto Rico, ceased production of canned pet food in the company's Terminal
Island, California facility and sold its U.S. fleet of fishing boats and related
equipment. In addition, the company is continuing its implementation of its
global overhead reduction plan. To date, these actions have resulted in a net
reduction of the company's workforce of approximately 2,100 employees.
THREE MONTHS ENDED OCTOBER 31, 2001 AND NOVEMBER 1, 2000
RESULTS OF OPERATIONS
For the three months ended October 31, 2001, sales increased $268.7
million, or 11.7%, to $2,565.2 million from $2,296.5 million last year. Sales
were favorably impacted by acquisitions (10.4%), higher pricing (3.0%) and
higher volumes (0.9%) and unfavorably impacted by foreign exchange translation
rates (0.5%) and divestitures (2.1%).
The favorable impact of acquisitions is primarily related to Classico and
Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and
soups in the North America segment; Delimex frozen Mexican foods, Anchor's
Poppers retail frozen appetizers and licensing rights to the T.G.I. Friday's
brand of frozen snacks and appetizers in the U.S. Frozen Segment; and the Honig
brands of soups, sauces and pasta meals, HAK brand of vegetables packed in glass
and KDR brand of sport drinks, juices, spreads and sprinkles in the Europe
segment.
Sales of the Heinz North America segment increased $45.1 million, or 6.8%.
Acquisitions, net of divestitures, increased sales 11.2%. Lower pricing
decreased sales 2.0%, due mainly to foodservice partially offset by a price
increase in soup. Sales volume decreased 1.7%, mainly due to decreases in
foodservice ketchup and broth partially offset by volume increases in soup and
infant feeding. The weaker Canadian dollar decreased sales 0.6%.
Sales of the U.S. Pet Products and Seafood segment increased $14.5 million,
or 3.8%. Sales volume increased 4.6% primarily in pet snacks and tuna partially
offset by volume decreases in dry and canned dog food. Lower pricing decreased
sales 0.1%, primarily in pet snacks, partially offset by higher pricing in tuna.
Divestitures decreased sales 0.8%.
U.S. Frozen's sales increased $53.9 million, or 18.7%. Acquisitions
increased sales 20.6%. Sales volume increased 3.8% due primarily to Boston
Market HomeStyle Meals, SmartOnes frozen entrees and Bagel Bites snacks
partially offset by volume decreases in frozen potatoes. Higher pricing
increased sales 3.0%, primarily in SmartOnes frozen entrees, and Bagel Bites
snacks. Divestures reduced sales by 8.7% due to the sale of Budget Gourmet.
Heinz Europe's sales increased $127.4 million, or 20.4%. Acquisitions
increased sales 14.5%. Higher pricing increased sales 5.3%, primarily due to
higher pricing in seafood, infant feeding, frozen entrees, beans and ketchup.
Volume decreased slightly by 0.2%, driven primarily by frozen entrees and tuna
partially offset by volume increases in ketchup, frozen pizza, beans and salmon.
Favorable foreign exchange translation rates increased sales by 0.8%.
Sales in Asia/Pacific increased $0.5 million, or 0.2%. Higher pricing
increased sales 3.4%, primarily due to higher pricing in sauces, infant feeding
and juices. Sales volume increased 1.7% due primarily to frozen vegetables,
infant feeding and poultry partially offset by volume decreases in frozen
potatoes, soups and foodservice business. Unfavorable exchange rates reduced
sales by 4.9%.
Sales for Other Operating Entities increased $27.3 million, or 32.7%.
Favorable pricing increased sales 37.9%, primarily in highly inflationary
countries. Sales volume increased 0.6%,
14
primarily in infant feeding and cooking oils. Other items net reduced sales by
5.8% mainly due to the divestitures of the South African frozen and pet food
businesses.
Last year's second quarter was negatively impacted by a number of special
items which net to $82.7 million pretax ($0.15 per share). The following table
provides a comparison of the company's reported results and the results
excluding special items for the second quarter of Fiscal 2001.
<Table>
<Caption>
Second Quarter Ended November 1, 2000
-----------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- ------ --------- ------ ------
(Dollars in Millions, Except per Share Amounts)
Reported results.................... $2,296.5 $913.4 $382.4 $190.0 $ 0.54
Operation Excel restructuring..... -- 33.5 33.5 20.8 0.06
Operation Excel implementation
costs.......................... -- 35.5 77.3 53.3 0.15
Operation Excel reversals......... -- (21.4) (33.8) (25.9) (0.07)
Equity Loss on Investment in the
Hain Celestial Group........... -- -- -- 3.5 0.01
-------- ------ ------ ------ ------
Results excluding special items..... $2,296.5 $961.0 $459.5 $241.7 $ 0.69
======== ====== ====== ====== ======
</Table>
(Note: Totals may not add due to rounding.)
Gross profit increased $100.2 million, or 11.0%, to $1,013.6 million from
$913.4 million and the gross profit margin decreased to 39.5% from 39.8%.
Excluding the Fiscal 2001 special items noted above, gross profit increased
$52.5 million, or 5.5%, to $1,013.6 million from $961.0 million and the gross
profit margin decreased to 39.5% from 41.8%. Gross profit for the Heinz North
America segment increased $16.1 million, or 5.7% due primarily to acquisitions
offset by lower pricing and the decline in the foodservice business. The U.S.
Pet Products and Seafood segment's gross profit decreased $24.0 million, or
15.9%, primarily due to price decreases in pet food and pet snacks, increased
fish, meat and manufacturing costs, increased ingredient costs as a result of
reformulating recipes to improve palatability and a shift to less profitable
larger size products. U.S. Frozen's gross profit increased $18.2 million or
13.2%, due primarily to acquisitions and increased pricing. Europe's gross
profit increased $50.0 million, or 19.2%, due primarily to increased pricing and
acquisitions. The Asia/Pacific segment's gross profit decreased $12.7 million,
or 12.4%, due primarily to unfavorable foreign exchange rates and poor factory
operations in connection with the movement of manufacturing to New Zealand from
Australia and Japan partially offset by increased pricing. New Zealand's
factories are experiencing inefficiencies as a result of over 60% of the
products being produced in a different factory or line compared to the prior
year. Gross profit in the Other Operating Entities segment increased $3.9
million, or 15.9%, due primarily to favorable pricing.
Selling, general and administrative expenses ("SG&A") increased $81.4
million, or 15.3%, to $612.4 million from $531.0 million, and increased as a
percentage of sales to 23.9% from 23.1%. Excluding the Fiscal 2001 special items
noted above, SG&A increased $110.9 million, or 22.1%, to $612.4 million from
$501.5 million and increased as a percentage of sales to 23.9% from 21.8%. This
increase is primarily attributable to acquisitions, increased promotional
spending in North America and Europe and increased selling and distribution
cost.
Operating income increased $18.8 million, or 4.9%, to $401.2 million from
$382.4 million, and decreased as a percentage of sales to 15.6% from 16.7%.
Excluding the Fiscal 2001 special items noted above, operating income decreased
$58.3 million, or 12.7%, to $401.2 million from $459.5 million and decreased as
a percentage of sales to 15.6% from 20.0%.
Heinz North America's operating income increased $9.0 million, or 5.8%, to
$165.3 million from $156.3 million. Excluding the Fiscal 2001 special items
noted above, operating income de-
15
creased $3.9 million, or 2.3%, to $165.3 million from $169.2 million, due
primarily to a significant decrease in the foodservice business, partially
offset by acquisitions and the soup business.
The U.S. Pet Products and Seafood segment's operating income increased
$11.2 million, or 31.8%, to $46.5 million from $35.2 million. Excluding the
Fiscal 2001 special items noted above, operating income decreased $23.4 million,
or 33.5%, to $46.5 million from $69.9 million, due primarily to the decrease in
gross profit.
The U.S. Frozen segment's operating income increased $1.5 million, or 2.4%,
to $61.1 million from $59.6 million. Excluding the Fiscal 2001 special items
noted above, operating income decreased $1.8 million, or 2.9%, to $61.1 million
from $62.9 million as the favorable impact of acquisitions was offset by
increased selling and distribution costs, increased marketing costs related to
Boston Market HomeStyle Meals, SmartOnes frozen entrees and Bagel Bites and the
divestiture of Budget Gourmet.
Europe's operating income increased $12.2 million, or 11.4%, to $119.4
million from $107.2 million. Excluding the Fiscal 2001 special items noted
above, operating income decreased $4.9 million, or 4.0%, to $119.4 million from
$124.4 million. Europe's decrease is primarily attributable to increased
marketing to support key brands across Europe and integration costs associated
with recent acquisitions.
Asia/Pacific's operating income increased $2.1 million, or 9.3%, to $24.8
million from $22.7 million. Excluding the Fiscal 2001 special items noted above,
operating income decreased $15.2 million, or 37.9%, to $24.8 million from $40.0
million. This decrease is primarily attributable to the unfavorable operating
performance brought about by the movement of manufacturing to New Zealand from
Australia and Japan. New Zealand's factories are experiencing inefficiencies as
a result of over 60% of the products being produced in a different factory or
line compared to the prior year. Operations are expected to improve during
Fiscal 2003.
Excluding special items, Other Operating Entities' operating income
increased $7.1 million or 90.6% primarily due to higher pricing.
Net interest expense decreased $5.6 million to $70.8 million from $76.4
million last year, driven by lower interest rates partially offset by increased
borrowings. Other expense decreased $6.9 million to $10.0 million from $16.9
million last year. Excluding special items, other expense decreased $1.3 million
to $10.0 million from $11.3 million.
The effective tax rate for the current quarter was 35.0% compared to 34.3%
last year. Excluding the Fiscal 2001 special items noted above, the effective
rate was 35.0% for both periods.
Net income in the current quarter was $208.2 million compared to $190.0
million last year and diluted earnings per share was $0.59 in the current
quarter versus $0.54 in the same period last year. Excluding the Fiscal 2001
special items noted above, net income decreased $33.5 million to $208.2 million
from $241.7 million last year, and diluted earnings per share decreased 14.4%,
to $0.59 from $0.69 last year.
SIX MONTHS ENDED OCTOBER 31, 2001 AND NOVEMBER 1, 2000
RESULTS OF OPERATIONS
For the six months ended October 31, 2001, sales increased $282.7 million,
or 6.3%, to $4,750.6 million from $4,468.0 million last year. Sales were
favorably impacted by acquisitions (8.3%), higher volumes (0.6%) and higher
pricing (1.6%). Sales were unfavorably impacted by foreign exchange translation
rates (2.2%) and divestitures (2.0%).
Sales of the Heinz North America segment increased $57.9 million, or 4.7%.
Acquisitions, net of divestitures, increased sales 9.1%. Lower pricing decreased
sales 2.3%, primarily related to the
16
foodservice business and grocery ketchup. Sales volume decreased 1.5%, primarily
in the foodservice business and steak sauces partially offset by volume
increases in grocery ketchup, soups and grilling sauces. The weaker Canadian
dollar decreased sales 0.5%.
Sales of the U.S. Pet Products and Seafood segment decreased $14.6 million,
or 1.9%. Slightly higher pricing increased sales 0.5%, primarily in tuna,
partially offset by lower pricing in pet treats and dry dog food. Sales volume
decreased 0.6% primarily in dry and canned dog food partially offset by volume
increases in pet treats. Divestitures decreased sales 1.8%.
U.S. Frozen's sales increased $63.2 million, or 12.2%. Acquisitions
increased sales 11.8%. Sales volume increased 7.1% due primarily to Boston
Market HomeStyle Meals, SmartOnes frozen entrees and Bagel Bites snacks
partially offset by volume decreases in frozen potatoes. Higher pricing
increased sales 2.1%, primarily in SmartOnes frozen entrees and frozen potatoes.
Divestures reduced sales by 8.8% due to the sale of Budget Gourmet.
Heinz Europe's sales increased $174.8 million, or 13.8%. Acquisitions
increased sales 13.6%. Higher pricing increased sales 2.9%, primarily due to
higher pricing in seafood, infant feeding, beans and soup. Volume increased
slightly by 0.1%, driven primarily by grocery ketchup, salad cream and weight
control entrees partially offset by volume decreases in infant feeding, soups
and tuna. Unfavorable foreign exchange translation rates decreased sales by
2.8%.
Sales in Asia/Pacific decreased $38.8 million, or 7.1%. Unfavorable
exchange rates reduced sales by 9.7%. Higher pricing increased sales 1.6%,
primarily due to higher pricing in sauces and juices. Sales volume increased
1.3% due primarily to frozen vegetables, poultry and juices partially offset by
volume decreases in sauces and corned beef. Divestitures, net of acquisitions,
reduced sales by 0.3%.
Sales for Other Operating Entities increased $40.0 million, or 24.1%.
Favorable pricing increased sales 23.7%, primarily in certain highly
inflationary countries. Sales volume increased 3.8%, primarily in infant feeding
and cooking oils. Other items net reduced sales by 3.4% mainly due to the
divestitures of the South African frozen and pet food businesses.
The current year's results were negatively impacted by additional
Streamline restructuring charges and implementation costs totaling $16.1 million
pretax ($0.04 per share). Pretax charges of $8.7 million were classified as cost
of products sold and $7.4 million as SG&A. Last year's results include net
Operation Excel costs of $133.5 million pretax or $0.24 per share. Also included
in the prior year results is a pretax loss of $5.6 million ($0.01 per share),
which represented the company's equity loss associated with Hain Celestial
Seasonings.
The following tables provide a comparison of the company's reported results
and the results excluding special items for the six months ended October 31,
2001 and November 1, 2000.
<Table>
<Caption>
Six Months Ended October 31, 2001
------------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- -------- --------- ------ -----
(Dollars in Millions, Except per Share Amounts)
Reported results................... $4,750.6 $1,884.0 $785.3 $408.7 $1.16
Streamline implementation costs.. -- 8.7 10.4 9.4 0.03
Streamline restructuring costs... -- -- 5.7 3.6 0.01
-------- -------- ------ ------ -----
Results excluding special items.... $4,750.6 $1,892.8 $801.5 $421.7 $1.20
======== ======== ====== ====== =====
</Table>
17
<Table>
<Caption>
Six Months Ended November 1, 2000
-------------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- -------- --------- ------ ------
(Dollars in Millions, Except per Share Amounts)
Reported results (a).............. $4,468.0 $1,812.3 $770.9 $394.5 $ 1.13(b)
Operation Excel restructuring... -- 33.5 33.5 20.8 0.06
Operation Excel implementation
costs........................ -- 52.8 133.7 90.5 0.26
Operation Excel reversals....... -- (21.4) (33.8) (25.9) (0.07)
Equity Loss on Investment in the
Hain Celestial Group......... -- -- -- 3.5 0.01
-------- -------- ------ ------ ------
Results excluding special items... $4,468.0 $1,877.3 $904.4 $483.3 $ 1.38
======== ======== ====== ====== ======
</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 increased $71.7 million, or 4.0%, to $1,884.0 million from
$1,812.3 million and the gross profit margin decreased to 39.7% from 40.6%.
Excluding the special items noted above, gross profit increased $15.5 million,
or 0.8%, to $1,892.8 million from $1,877.3 million and the gross profit margin
decreased to 39.8% from 42.0%. Gross profit for the Heinz North America segment
decreased $3.1 million, or 0.6% due primarily to lower pricing and the decline
in the foodservice business partially offset by acquisitions. The U.S. Pet
Products and Seafood segment's gross profit decreased $41.0 million, or 13.6%,
primarily due to price decreases in pet food and pet snacks, increased fish,
meat and manufacturing costs, increased ingredient costs as a result of
reformulating recipes to improve palatability and a shift to less profitable
larger size products. U.S. Frozen's gross profit increased $22.3 million or
9.2%, due primarily to increased pricing and acquisitions. Europe's gross profit
increased $67.3 million, or 12.4%, due primarily to increased pricing and
acquisitions. The Asia/Pacific segment's gross profit decreased $37.5 million,
or 17.5%, due primarily to unfavorable foreign exchange rates and poor factory
operations in connection with the movement of manufacturing to New Zealand from
Australia and Japan partially offset by increased pricing. New Zealand's
factories are experiencing inefficiencies as a result of over 60% of the
products being produced in a different factory or line compared to the prior
year. Gross profit in the Other Operating Entities segment increased $6.5
million, or 12.8%, due primarily to favorable pricing.
SG&A increased $57.3 million, or 5.5%, to $1,098.7 million from $1,041.4
million, and decreased as a percentage of sales to 23.1% from 23.3%. Excluding
the special items noted above, SG&A increased $118.4 million, or 12.2%, to
$1,091.3 million from $972.9 million and increased as a percentage of sales to
23.0% from 21.8%. This increase is primarily attributable to acquisitions,
increased promotional spending in North America and Europe and increased selling
and distribution costs.
Operating income increased $14.4 million, or 1.9%, to $785.3 million from
$770.9 million, and decreased as a percentage of sales to 16.5% from 17.3%.
Excluding the special items noted above, operating income decreased $102.9
million, or 11.4%, to $801.5 million from $904.4 million and decreased as a
percentage of sales to 16.9% from 20.2%.
Heinz North America's operating income decreased $14.5 million, or 4.9%, to
$283.8 million from $298.3 million. Excluding the special items noted above,
operating income decreased $35.4 million, or 10.9%, to $288.7 million from
$324.0 million, due primarily to the decrease in gross profit and higher selling
and distribution costs.
18
The U.S. Pet Products and Seafood segment's operating income increased $7.8
million, or 8.1%, to $104.0 million from $96.2 million. Excluding the special
items noted above, operating income decreased $29.1 million, or 20.7%, to $111.8
million from $140.9 million, due primarily to the decrease in gross profit.
The U.S. Frozen segment's operating income increased $8.1 million, or 8.3%,
to $105.3 million from $97.3 million. Excluding the special items noted above,
operating income decreased $0.7 million, or 0.6%, to $105.3 million from $106.0
million as the favorable impact of acquisitions was offset by increased selling
and distribution costs and the divestiture of Budget Gourmet.
Europe's operating income increased $44.1 million, or 19.5%, to $270.0
million from $225.9 million. Excluding the special items noted above, operating
income increased $7.8 million, or 3.0%, to $271.7 million from $263.9 million.
This increase is primarily attributable to the tuna business in Europe and
acquisitions partially offset by increased marketing to support key brands
across Europe and acquisition integration costs.
Asia/Pacific's operating income decreased $13.3 million, or 20.7%, to $51.0
million from $64.2 million. Excluding the special items noted above, operating
income decreased $36.0 million, or 41.1%, to $51.5 million from $87.6 million.
This decrease is primarily attributable to the unfavorable operating performance
brought about by the movement of manufacturing to New Zealand from Australia and
Japan and the significant realignment of manufacturing facilities. Operations
are expected to improve during Fiscal 2003.
Excluding special items, Other Operating Entities' operating income
increased $8.0 million or 42.2% primarily due to higher pricing.
Net interest expense decreased $10.8 million to $141.0 million from $151.8
million last year, driven by lower interest rates partially offset by increased
borrowings. Other expense decreased $3.0 million to $11.7 million from $14.7
million last year. Excluding special items, other expense increased $2.7 million
to $11.7 million from $9.1 million.
The effective tax rate for the current year was 35.4% compared to 34.7%
last year. Excluding the special items, the effective rate was 35.0% in both
years.
Net income for the current six months was $408.7 million compared to $378.0
million last year and diluted earnings per share was $1.16 compared to $1.08
last year. Excluding the special items noted above and the cumulative effect of
the accounting change for revenue recognition in the prior year, net income
decreased $61.6 million to $421.7 million from $483.3 million last year, and
diluted earnings per share decreased 13.0%, to $1.20 from $1.38 last year.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities was $197.9 million compared to cash
used for operating activities of $1.8 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 $870.5 million compared to
$320.3 million last year. Acquisitions in the current period required $805.5
million, due primarily to the purchase of Borden Food Corporation's pasta and
dry bouillon and soup business, Delimex Holdings, Inc. and Anchor Food Products
branded retail business which includes the retail licensing rights to the T.G.I.
Friday's brand of frozen snacks and appetizers. Acquisitions in the prior period
required $126.5 million, due primarily to the purchase of International
DiverseFoods Inc. During the prior year period, the company also invested $79.7
million in The Hain Celestial Group, Inc. Capital expenditures in the current
period required $86.6 million compared to $170.9 million last year.
Cash provided by financing activities increased to $705.7 million from
$357.6 million last year. Proceeds from long-term debt were $768.3 million
compared to $0.9 million last year. Payments on long-term debt required $32.2
million this period compared to $19.1 million last year. Payments on
19
commercial paper and short-term borrowings required $88.0 million compared to
providing $688.9 million last year. In addition, $325.0 million was provided
during the current period via the issuance of Preferred Stock (see below). Cash
provided from stock options exercised totaled $46.4 million versus $31.5 million
last year. Dividend payments totaled $278.8 million compared to $263.8 million
for the same period last year. Share repurchases totaled $45.4 million (1.0
million shares) versus $90.1 million (2.3 million shares) a year ago.
In the first six months of Fiscal 2002, the cash requirements of Streamline
were $56.7 million, consisting of spending for severance and exit costs ($46.3
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 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, 2001. 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 a $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 October 31, 2001, $1.25 billion of domestic commercial paper is
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 company expects the second half the year to deliver earnings per share
consistent with the first half with the third quarter profits slightly lower
then the second quarter and an improved fourth quarter as a result of recent
acquisitions, new products and cost reduction efforts. The company's financial
position continues to remain strong, enabling it to meet cash requirements for
operations, capital expansion programs and dividends to shareholders.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In Fiscal 2001, the company 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, Heinz recognizes revenue upon the passage of title,
ownership and risk of loss to the customer. The cumulative effect adjustment of
$66.2 million in revenue ($16.5 million in net income) as of May 4, 2000, was
recognized during the first quarter of Fiscal 2001. The Fiscal 2001 six month
amounts have been restated for the effect of the change in accounting for
revenue recognition. Amounts originally reported were as follows: Sales, $4.45
billion; Gross profit, $1.81 billion; Net income, $390.7 million; Net income per
share - diluted, $1.11; Net income per share - basic, $1.13.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued
new guidelines entitled "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products".
In addition, during May 2000, the EITF issued new guidelines entitled
"Accounting for Certain Sales Incentives". Both of these issues provide guidance
primarily on income statement classification of consideration from a vendor to a
purchaser of the vendor's products, including both customers and consumers.
Generally, cash consideration is to be classified as a reduction of revenue,
unless specific criteria are met regarding goods or services that the vendor may
receive in return for this consideration.
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In the fourth quarter of Fiscal 2002, the company will reclassify
promotional payments to its customers and the cost of consumer coupons and other
cash redemption offers from SG&A to net sales. SG&A would be correspondingly
reduced such that net earnings would not be affected. The company is currently
assessing the impact both issues will have on net sales.
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 October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144 clarifies and revises
existing guidance on accounting for impairment of plant, property, and
equipment, amortized intangibles, and other long-lived assets not specifically
addressed in other accounting literature. This standard will be effective for
the company beginning in Fiscal 2003. The company does not expect that the
adoption of this standard will have a significant impact on the consolidated
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the company's market risk during the
six months ended October 31, 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.
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 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.
12. Computation of Ratios of Earnings to Fixed Charges.
99 (i) Condensed consolidated and combined financial statements of H.J.
Heinz Finance Company and Subsidiaries for the six months ended
October 31, 2001 (ii) Restated condensed consolidated and combined
financial statements of H.J. Heinz Finance Company and Subsidiaries
for the quarterly period ended August 1, 2001 both of which are filed
in accordance with Rule 3-10 of Regulation S-X. H.J. Heinz Company is
a guarantor of all of H.J. Heinz Finance Company's outstanding debt.
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Securities and Exchange
Commission on November 9, 2001 reporting a revised earnings outlook for
the second quarter ended October 31, 2001 and the full fiscal year
ending May 1, 2002.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H. J. HEINZ COMPANY
(Registrant)
Date: December 13, 2001
By: /s/ PAUL F. RENNE
..........................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: December 13, 2001
By: /s/ BRUNA GAMBINO
..........................................
Bruna Gambino
Corporate Controller
(Principal Accounting Officer)
23