SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE NINE MONTHS ENDED JANUARY 29, 2003 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 March 7, 2003 was 351,405,149 shares.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
H.J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Third Quarter Ended
------------------------------------
January 29, 2003 January 30, 2002
FY 2003 FY 2002
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $2,105,003 $1,928,746
Cost of products sold...................................... 1,342,958 1,259,481
---------- ----------
Gross profit............................................... 762,045 669,265
Selling, general and administrative expenses............... 440,405 350,635
---------- ----------
Operating income........................................... 321,640 318,630
Interest income............................................ 9,149 4,620
Interest expense........................................... 58,870 54,468
Other expense, net......................................... 66,470 18,044
---------- ----------
Income from continuing operations before income taxes...... 205,449 250,738
Provision for income taxes................................. 75,600 89,503
---------- ----------
Income from continuing operations.......................... 129,849 161,235
Income from discontinued operations, net of tax............ 21,770 40,425
---------- ----------
Net income................................................. $ 151,619 $ 201,660
========== ==========
Income per common share
Diluted
Continuing operations................................. $ 0.37 $ 0.46
Discontinued operations............................... 0.06 0.11
---------- ----------
Net income.......................................... $ 0.43 $ 0.57
========== ==========
Average common shares outstanding--diluted............... 353,973 352,745
========== ==========
Basic
Continuing operations................................. $ 0.37 $ 0.46
Discontinued operations............................... 0.06 0.12
---------- ----------
Net income.......................................... $ 0.43 $ 0.58
========== ==========
Average common shares outstanding--basic................. 351,198 349,704
========== ==========
Cash dividends per share................................... $ 0.4050 $ 0.4050
========== ==========
</Table>
See Notes to Condensed Consolidated Financial Statements.
------------------
2
H.J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Nine Months Ended
------------------------------------
January 29, 2003 January 30, 2002
FY 2003 FY 2002
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales...................................................... $6,043,487 $5,543,869
Cost of products sold...................................... 3,857,784 3,528,550
---------- ----------
Gross profit............................................... 2,185,703 2,015,319
Selling, general and administrative expenses............... 1,237,142 1,052,841
---------- ----------
Operating income........................................... 948,561 962,478
Interest income............................................ 21,764 13,333
Interest expense........................................... 165,325 174,260
Other expenses, net........................................ 101,452 30,271
---------- ----------
Income from continuing operations before income taxes and
effect of change in accounting principle................. 703,548 771,280
Provision for income taxes................................. 250,790 275,970
---------- ----------
Income from continuing operations before effect of change
in accounting principle.................................. 452,758 495,310
Income from discontinued operations, net of tax............ 88,738 115,065
---------- ----------
Income before effect of change in accounting principle..... 541,496 610,375
Effect of change in accounting principle................... (77,812) --
---------- ----------
Net income................................................. $ 463,684 $ 610,375
========== ==========
Income per common share
Diluted
Continuing operations................................. $ 1.28 $ 1.40
Discontinued operations............................... 0.25 0.33
Effect of change in accounting principle.............. (0.22) --
---------- ----------
Net income.......................................... $ 1.31 $ 1.73
========== ==========
Average common shares outstanding--diluted............... 353,973 352,745
========== ==========
Basic
Continuing operations................................. $ 1.29 $ 1.42
Discontinued operations............................... 0.25 0.33
Effect of change in accounting principle.............. (0.22) --
---------- ----------
Net income.......................................... $ 1.32 $ 1.75
========== ==========
Average common shares outstanding--basic................. 351,198 349,704
========== ==========
Cash dividends per share................................... $ 1.2150 $ 1.2025
========== ==========
</Table>
See Notes to Condensed Consolidated Financial Statements.
------------------
3
H.J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
January 29, 2003 May 1, 2002*
FY 2003 FY 2002
---------------- ------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 824,117 $ 202,403
Receivables, net............................................ 1,106,499 1,232,388
Inventories................................................. 1,287,209 1,196,922
Prepaid expenses and other current assets................... 245,513 156,061
Current assets of discontinued operations................... -- 585,792
---------- -----------
Total current assets................................... 3,463,338 3,373,566
---------- -----------
Property, plant and equipment............................... 3,453,554 3,201,520
Less accumulated depreciation............................... 1,476,356 1,292,408
---------- -----------
Total property, plant and equipment, net............... 1,977,198 1,909,112
---------- -----------
Goodwill, net............................................... 1,848,922 1,826,504
Trademarks, net............................................. 612,325 549,635
Other intangibles, net...................................... 136,869 142,076
Other non-current assets.................................... 1,580,394 1,116,338
Non-current assets of discontinued operations............... -- 1,361,123
---------- -----------
Total other non-current assets......................... 4,178,510 4,995,676
---------- -----------
Total assets........................................... $9,619,046 $10,278,354
========== ===========
</Table>
*Summarized from audited fiscal year 2002 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
4
H.J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
January 29, 2003 May 1, 2002*
FY 2003 FY 2002
---------------- ------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $ 142,840 $ 178,358
Portion of long-term debt due within one year............... 257,569 524,287
Accounts payable............................................ 847,743 882,826
Salaries and wages.......................................... 47,084 34,355
Accrued marketing........................................... 189,268 155,094
Other accrued liabilities................................... 398,485 431,000
Income taxes................................................ 242,996 191,091
Current liabilities of discontinued operations.............. -- 112,158
---------- -----------
Total current liabilities.............................. 2,125,985 2,509,169
---------- -----------
Long-term debt.............................................. 4,690,557 4,642,968
Deferred income taxes....................................... 301,213 268,307
Non-pension postretirement benefits......................... 188,830 187,275
Other liabilities and minority interest..................... 741,422 777,283
Non-current liabilities of discontinued operations.......... -- 174,736
---------- -----------
Total long-term debt, other liabilities and minority
interest............................................. 5,922,022 6,050,569
Shareholders' Equity:
Capital stock............................................... 107,882 107,884
Additional capital.......................................... 376,879 348,605
Retained earnings........................................... 4,424,855 4,968,535
---------- -----------
4,909,616 5,425,024
Less:
Treasury stock at cost (79,698,311 shares at January 29,
2003 and 80,192,280 shares at May 1, 2002)............. 2,880,791 2,893,198
Unearned compensation..................................... 23,364 230
Accumulated other comprehensive loss...................... 434,422 812,980
---------- -----------
Total shareholders' equity............................. 1,571,039 1,718,616
---------- -----------
Total liabilities and shareholders' equity............. $9,619,046 $10,278,354
========== ===========
</Table>
*Summarized from audited fiscal year 2002 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
5
H.J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Nine Months Ended
------------------------------------
January 29, 2003 January 30, 2002
FY 2003 FY 2002
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
Cash Flows from Operating Activities
Net income................................................ $ 463,684 $ 610,375
Net income from discontinued operations................... (88,738) (115,065)
----------- ---------
Net income from continuing operations..................... 374,946 495,310
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation............................................ 147,828 119,731
Amortization............................................ 9,972 43,256
Deferred tax provision.................................. 37,758 38,799
Effect of change in accounting principle................ 77,812 --
Provision for transaction costs and restructuring....... 61,050 8,280
Other items, net........................................ (51,784) (54,942)
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables........................................... 158,922 17,993
Inventories........................................... (75,500) (221,439)
Prepaid expenses and other current assets............. (89,403) (125,823)
Accounts payable...................................... (74,289) (64,710)
Accrued liabilities................................... (95,943) (91,893)
Income taxes.......................................... 79,816 77,711
----------- ---------
Cash provided by operating activities.............. 561,185 242,273
----------- ---------
Cash Flows from Investing Activities:
Capital expenditures.................................... (92,249) (108,172)
Acquisitions, net of cash acquired...................... (13,554) (802,668)
Proceeds from divestitures.............................. 54,981 31,889
Proceeds from spin-off.................................. 1,063,557 --
Purchases of short-term investments..................... (8,235) (2,049)
Sales and maturities of short-term investments.......... -- 7,378
Other items, net........................................ (7,628) (29,419)
----------- ---------
Cash provided by/(used for) investing activities... 996,872 (903,041)
----------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt............................ -- 770,772
Payments on long-term debt.............................. (487,980) (37,526)
(Payments on) proceeds from commercial paper and
short-term borrowings, net............................ (177,333) 2,219
Proceeds from preferred stock of subsidiary............. -- 325,000
Dividends............................................... (430,991) (420,568)
Exercise of stock options............................... 6,523 53,186
Purchase of treasury stock.............................. -- (45,363)
Other items, net........................................ 14,215 11,637
----------- ---------
Cash (used for)/provided by financing activities... (1,075,566) 659,357
----------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 36,995 (5,871)
Effect of discontinued operations........................... 102,228 70,749
----------- ---------
Net increase in cash and cash equivalents................... 621,714 63,467
Cash and cash equivalents at beginning of year.............. 202,403 138,849
----------- ---------
Cash and cash equivalents at end of period.................. $ 824,117 $ 202,316
=========== =========
Supplemental cash flow information:
Noncash activities:
Net assets spun-off..................................... $ 1,644,195 $ --
=========== =========
</Table>
See Notes to Condensed Consolidated Financial Statements.
------------------
6
H.J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The interim condensed consolidated financial statements of H.J. Heinz
Company, together with its subsidiaries (collectively referred to as the
"Company") are unaudited. In the opinion of management, all adjustments,
which are of a normal and recurring nature, necessary for a fair statement
of the results of operations of these interim periods have been included.
The results for interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the Company's business. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 2003 presentation.
These statements should be read in conjunction with the Company's
consolidated financial statements and related notes, and management's
discussion and analysis of financial condition and results of operations
which appear in the Company's Annual Report to Shareholders and which are
incorporated by reference into the Company's Annual Report on Form 10-K for
the year ended May 1, 2002.
(2) DISCONTINUED OPERATIONS AND SPIN-OFF
On December 20, 2002, Heinz transferred to a wholly-owned subsidiary ("SKF
Foods") certain assets and liabilities, including its U.S. and Canadian
pet food and pet snacks, U.S. tuna, U.S. retail private label soup and
private label gravy, College Inn broths and its U.S. infant feeding
businesses and distributed all of the shares of SKF Foods common stock on
a pro rata basis to its shareholders. Immediately thereafter, SKF Foods
merged with a wholly-owned subsidiary of Del Monte Foods Company ("Del
Monte") resulting in SKF Foods becoming a wholly-owned subsidiary of Del
Monte ("the Merger").
In accordance with generally accepted accounting principles, the operating
results and net assets related to these businesses spun off to Del Monte
have been treated as discontinued operations in the Company's consolidated
statements of income and condensed consolidated balance sheets.
Discontinued operations for the three and nine months ended January 29,
2003, include operating results for two and eight months, respectively. The
net assets distributed to Heinz shareholders have been treated as a
dividend and charged to retained earnings.
The discontinued operations generated sales of $257.4 million and $436.4
million and net income of $21.8 million (net of $5.5 million in tax) and
$40.4 million (net of $19.1 million in tax) for the three months ended
January 29, 2003 and January 30, 2002, respectively. The discontinued
operations generated sales of $1,091.3 million and $1,312.8 million and net
income of $88.7 million (net of $35.4 million in tax) and $115.1 million
(net of $56.5 million) for the nine months ended January 29, 2003 and
January 30, 2002, respectively.
7
Net assets related to discontinued operations of $1,660.0 million are
reported on the May 1, 2002 condensed consolidated balance sheet. These
assets consist of the following:
<Table>
<Caption>
(Thousands of Dollars) May 1, 2002
- ---------------------- ------------
Receivables................................................. $ 216,759
Inventories................................................. 330,632
Property, plant and equipment, net.......................... 340,962
Intangibles................................................. 971,860
Other assets................................................ 86,702
----------
Total assets........................................... 1,946,915
----------
Accounts payable............................................ 55,657
Other accrued liabilities................................... 56,501
Other long-term liabilities................................. 174,736
----------
Total liabilities...................................... 286,894
----------
Net assets............................................. $1,660,021
==========
</Table>
During the three and nine months ended January 29, 2003, the Company
recognized transaction related costs and costs to reduce overhead of the
remaining businesses totaling $72.1 million pretax and $100.7 million
pretax, respectively.
(3) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
<Table>
<Caption>
January 29, 2003 May 1, 2002
---------------- -----------
(Thousands of Dollars)
Finished goods and work-in-process.................. $ 986,073 $ 922,823
Packaging material and ingredients.................. 301,136 274,099
---------- ----------
$1,287,209 $1,196,922
========== ==========
</Table>
(4) 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.
The major components of the restructuring charges and implementation costs
and the remaining accrual balances as of January 29, 2003 were as follows:
<Table>
<Caption>
Employee
Termination and Accrued
(Dollars in Millions) Severance Costs Exit Costs Total
--------------------- --------------- ---------- -------
Accrued restructuring costs-- May 1, 2002................... $ 13.5 $ 10.6 $ 24.1
Amounts utilized/spun off in Fiscal 2003.................... (10.6) (10.5) (21.1)
------ ------ -------
Accrued restructuring costs-- January 29, 2003.............. $ 2.9 $ 0.1 $ 3.0
====== ====== =======
</Table>
During the first nine months of Fiscal 2003, the Company utilized $17.7
million of severance and exit cost accruals, principally related to its
global overhead reduction plan, primarily in Europe and North America. In
addition, as a result of the Merger, a $3.4 million restructuring liability
related to ceasing canned pet food production at the Company's Terminal
Island, California facility was transferred to Del Monte in the third
quarter of Fiscal 2003.
8
(5) RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective May 2, 2002, the Company adopted SFAS No. 142 "Goodwill and
Other Intangible Assets." Under this standard, goodwill and intangibles
with indefinite useful lives are no longer amortized. This standard also
requires, at a minimum, an annual impairment assessment of the carrying
value of goodwill and intangibles with indefinite useful lives. The
reassessment of intangible assets, including the ongoing impact of
amortization, and the assignment of goodwill to reporting units was
completed during the first quarter of Fiscal 2003.
The Company completed its transitional goodwill impairment tests during
the second quarter of Fiscal 2003 and, as a result, recorded a
transitional impairment charge which is calculated as of May 2, 2002, and
recorded as an effect of a change in accounting principle in the nine-
month period ended January 29, 2003, of $77.8 million ($0.22 per share).
There was no tax effect associated with this charge. The charge, which
relates to certain of the Company's reporting units, has been reflected in
its segments as follows: Europe $54.6 million, Asia/ Pacific $2.7 million,
and Other Operating Entities $20.5 million.
The transitional impairment charge resulted from application of the new
impairment methodology introduced by SFAS No. 142. Previous accounting
rules incorporated a comparison of carrying value to undiscounted cash
flows, whereas new rules require a comparison of carrying value to
discounted cash flows, which are lower. Under previous requirements, no
goodwill impairment would have been recorded on May 2, 2002. Based upon
current and forecasted operating results, the Company does not anticipate
any further goodwill impairment charges in the near term.
The effects of adopting the new standards on net income and diluted
earnings per share are as follows:
<Table>
<Caption>
Third Quarter Ended Nine Months Ended
----------------------------------- ------------------------------------
Net Income Diluted EPS Net Income Diluted EPS
------------------- ------------- ------------------- --------------
(Thousands of Dollars) 2003 2002 2003 2002 2003 2002 2003 2002
- ---------------------- -------- -------- ----- ----- -------- -------- ------ -----
Net income before effect
of change in accounting
principle............... $151,619 $201,660 $0.43 $0.57 $541,496 $610,375 $ 1.53 $1.73
Add: Goodwill
amortization............ -- 14,262 -- 0.04 -- 40,850 -- 0.11
Trademark amortization.. -- 2,132 -- 0.01 -- 6,392 -- 0.02
-------- -------- ----- ----- -------- -------- ------ -----
Adjusted net income before
effect of change in
accounting principle.... 151,619 218,054 0.43 0.62 541,496 657,617 1.53 1.86
Effect of change in
accounting principle.... -- -- -- -- (77,812) -- (0.22) --
-------- -------- ----- ----- -------- -------- ------ -----
Adjusted net income....... $151,619 $218,054 $0.43 $0.62 $463,684 $657,617 $ 1.31 $1.86
======== ======== ===== ===== ======== ======== ====== =====
</Table>
Income from continuing operations for the three and nine month periods
ended January 30, 2002 would have been $169.2 million and $528.8 million or
$0.02 and $0.09 per share higher, respectively, and net income for Fiscal
2002 would have been $699.1 million or $0.13 per share higher had the
provisions of the new standards been applied as of May 3, 2001.
9
Changes in the carrying amount of goodwill for the nine months ended
January 29, 2003, by reportable segment, are as follows:
<Table>
<Caption>
Heinz Other
North U.S. Asia/ Operating
(Thousands of Dollars) America Frozen Europe Pacific Entities Total
---------------------- -------- -------- -------- -------- --------- ----------
Balance at May 1, 2002............. $581,261 $471,351 $639,465 $109,613 $ 24,814 $1,826,504
Acquisition/(disposal)............. (5,564) -- -- 10,232 (3,453) 1,215
Effect of change in accounting
principle........................ -- -- (54,533) (2,737) (20,542) (77,812)
Purchase accounting
reclassifications................ 1,737 5,287 (21,875) -- -- (14,851)
Translation adjustments............ 1,140 -- 91,080 21,262 701 114,183
Other.............................. (141) (1,291) (1,244) 2,427 (68) (317)
-------- -------- -------- -------- -------- ----------
Balance at January 29, 2003........ $578,433 $475,347 $652,893 $140,797 $ 1,452 $1,848,922
======== ======== ======== ======== ======== ==========
</Table>
Trademarks and other intangible assets at January 29, 2003 and May 1, 2002,
subject to amortization expense, are as follows:
<Table>
<Caption>
January 29, 2003 May 1, 2002
------------------------------- -------------------------------
Accum Accum
(Thousands of Dollars) Gross Amort Net Gross Amort Net
- ---------------------- -------- --------- -------- -------- --------- --------
Trademarks............... $192,138 $ (45,050) $147,088 $179,496 $ (28,238) $151,258
Licenses................. 208,186 (111,145) 97,041 208,186 (106,730) 101,456
Other.................... 94,636 (54,808) 39,828 87,941 (47,321) 40,620
-------- --------- -------- -------- --------- --------
$494,960 $(211,003) $283,957 $475,623 $(182,289) $293,334
======== ========= ======== ======== ========= ========
</Table>
Amortization expense for trademarks and other intangible assets subject to
amortization was $10.0 million for the nine months ended January 29, 2003.
Based upon the amortizable intangible assets recorded on the balance sheet
at January 29, 2003, amortization expense for each of the next five years
is estimated to be approximately $13.3 million.
Intangible assets not subject to amortization at January 29, 2003 and May
1, 2002, were $465.2 million and $398.4 million, respectively, and
consisted solely of trademarks.
Effective May 2, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." This Statement provides
updated guidance concerning the recognition and measurement of an
impairment loss for certain types of long-lived assets, expands the scope
of a discontinued operation to include a component of an entity and
eliminates the current exemption to consolidation when control over a
subsidiary is likely to be temporary. The adoption of this new standard did
not have a material impact on the Company's financial position, results of
operations or cash flows for the nine months ended January 29, 2003.
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. This Statement also establishes that fair value is
the objective for initial measurement of the liability. The Company will
apply the provisions of SFAS No. 146 to all exit or disposal activities
that are initiated after December 31, 2002.
(6) RECENTLY ISSUED ACCOUNTING STANDARDS
During the third quarter of fiscal 2003, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates
on the disclosures to be made by a guarantor about its obligations under
certain guarantees that it has issued, and it requires the recognition of a
liability at fair value by a
10
guarantor at the inception of a guarantee. The disclosure requirements of
FIN 45 are effective as of January 29, 2003. The initial recognition and
measurement provisions of FIN 45 are effective on a prospective basis for
all guarantees issued or modified after December 31, 2002. The Company has
not issued or modified any material guarantees since December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement
No. 123". SFAS No. 148 provides alternative methods of transition for
entities that voluntarily change to the fair value method of accounting for
stock-based employee compensation, and it also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the
effects of an entity's accounting policy decisions with respect to
stock-based employee compensation in both annual and interim financial
reporting. The provisions of SFAS No. 148 are effective for the Company
beginning in Fiscal Year 2004.
(7) SEGMENTS
The Company's reportable segments are primarily organized by geographical
area. The composition of segments and measure of segment profitability is
consistent with that used by the Company's management. The Heinz North
America segment now includes only those businesses that were retained by
Heinz following the Del Monte transaction. Prior periods have been
reclassified to conform with the current presentation. Descriptions of the
Company's reportable segments are as follows:
Heinz North America--This segment manufactures, markets and sells
ketchup, condiments, sauces and pasta meals to the grocery and
foodservice channels in North America.
U.S. Frozen--This segment manufactures, markets and sells 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 that sell products in all of the
Company's core categories. During the third quarter, the Company
deconsolidated its Zimbabwe operations which have historically been
consolidated in this segment.
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.
11
The following table presents information about the Company's reportable
segments:
<Table>
<Caption>
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 29, 2003 January 30, 2002 January 29, 2003 January 30, 2002
FY 2003 FY 2002 FY 2003 FY 2002
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net external sales:
Heinz North America.............. $ 563,739 $ 563,043 $1,657,607 $1,613,455
U.S. Frozen...................... 293,146 311,667 855,379 820,053
Europe........................... 797,843 695,882 2,236,745 2,064,681
Asia/Pacific..................... 289,907 252,975 827,977 737,025
Other Operating Entities......... 160,368 105,179 465,779 308,655
---------- ---------- ---------- ----------
Consolidated Totals.............. $2,105,003 $1,928,746 $6,043,487 $5,543,869
========== ========== ========== ==========
Intersegment sales:
Heinz North America.............. $ 11,930 $ 10,028 $ 28,262 $ 21,573
U.S. Frozen...................... 2,967 2,423 6,785 7,575
Europe........................... 1,415 1,944 4,474 4,360
Asia/Pacific..................... 742 713 2,435 1,942
Other Operating Entities......... 617 632 1,625 649
Non-Operating (a)................ (17,671) (15,740) (43,581) (36,099)
---------- ---------- ---------- ----------
Consolidated Totals.............. $ -- $ -- $ -- $ --
========== ========== ========== ==========
Operating income (loss):
Heinz North America.............. $ 104,072 $ 110,435 $ 308,686 $ 355,765
U.S. Frozen...................... 51,101 60,265 167,745 165,593
Europe........................... 144,565 136,785 424,746 406,787
Asia/Pacific..................... 36,023 20,411 85,027 71,362
Other Operating Entities......... 36,824 12,580 81,437 39,490
Non-Operating (a)................ (50,945) (21,846) (119,080) (76,519)
---------- ---------- ---------- ----------
Consolidated Totals.............. $ 321,640 $ 318,630 $ 948,561 $ 962,478
========== ========== ========== ==========
Operating income (loss) excluding
special items (b):
Heinz North America.............. $ 123,584 $ 110,435 $ 340,447 $ 360,539
U.S. Frozen...................... 51,101 60,265 167,745 165,593
Europe........................... 144,565 136,785 424,746 408,502
Asia/Pacific..................... 36,023 20,411 85,027 71,960
Other Operating Entities......... 36,824 12,580 81,437 39,490
Non-Operating (a)................ (28,544) (21,846) (80,379) (75,326)
---------- ---------- ---------- ----------
Consolidated Totals.............. $ 363,553 $ 318,630 $1,019,023 $ 970,758
========== ========== ========== ==========
</Table>
- ---------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) Third Quarter ended January 29, 2003 - Excludes Del Monte transaction
related costs and cost to reduce overhead of the remaining core businesses
as follows: Heinz North America $19.5 million and Non-Operating $22.4
million.
Nine Months ended January 29, 2003 - Excludes Del Monte transaction related
costs and cost to reduce overhead of the remaining core businesses as
follows: Heinz North America $31.8 million and Non-Operating $38.7 million.
Nine Months ended January 30, 2002 - Excludes implementation and
restructuring costs of Streamline as follows: Heinz North America $4.8
million, Europe $1.7 million, Asia/Pacific $0.6 million and Non-Operating
$1.2 million.
12
The Company's revenues are generated via the sale of products in the
following categories:
<Table>
<Caption>
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 29, 2003 January 30, 2002 January 29, 2003 January 30, 2002
FY 2003 FY 2002 FY 2003 FY 2002
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Ketchup, Condiments and Sauces....... $ 667,635 $ 717,061 $1,998,956 $1,946,069
Frozen Foods......................... 506,938 551,310 1,469,338 1,427,052
Tuna................................. 123,361 101,905 367,859 331,731
Soups, Beans and Pasta Meals......... 329,010 187,700 867,360 749,973
Infant Foods......................... 199,759 189,176 577,846 552,630
Other................................ 278,300 181,594 762,128 536,414
---------- ---------- ---------- ----------
Total............................ $2,105,003 $1,928,746 $6,043,487 $5,543,869
========== ========== ========== ==========
</Table>
(8) EARNINGS PER SHARE
The following are reconciliations of income to income applicable to common
stock and the number of common shares outstanding used to calculate basic
EPS to those shares used to calculate diluted EPS:
<Table>
<Caption>
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 29, 2003 January 30, 2002 January 29, 2003 January 30, 2002
FY 2003 FY 2002 FY 2003 FY 2002
---------------- ---------------- ---------------- ----------------
(In Thousands, Except per Share Amounts)
Income from continuing operations
before effect of change in
accounting principle............... $129,849 $161,235 $452,758 $495,310
Preferred dividends.................. 5 5 14 15
-------- -------- -------- --------
Income from continuing operations
applicable to common stock before
effect of change in accounting
principle.......................... 129,854 161,240 452,772 495,325
Effect of change in accounting
principle.......................... -- -- (77,812) --
-------- -------- -------- --------
Income from continuing operations
applicable to common stock......... $129,854 $161,240 $374,960 $495,325
======== ======== ======== ========
Average common shares
outstanding--basic............... 351,198 349,704 351,198 349,704
Effect of dilutive securities:
Convertible preferred stock...... 147 164 147 164
Stock options.................... 2,628 2,877 2,628 2,877
-------- -------- -------- --------
Average common shares
outstanding--diluted............. 353,973 352,745 353,973 352,745
======== ======== ======== ========
</Table>
(9) COMPREHENSIVE INCOME
<Table>
<Caption>
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 29, 2003 January 30, 2002 January 29, 2003 January 30, 2002
FY 2003 FY 2002 FY 2003 FY 2002
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net income........................... $151,619 $201,660 $463,684 $610,375
Other comprehensive income:
Foreign currency translation
adjustment..................... 252,135 (51,197) 376,057 (51,571)
Minimum pension liability
adjustment..................... (799) (51) (443) 1,107
Net deferred gains/(losses) on
derivatives from periodic
revaluations................... 15,341 (900) 26,932 (1,637)
Net deferred (gains)/losses on
derivatives reclassified to
earnings/spun off.............. (10,777) 2,084 (23,988) 2,325
-------- -------- -------- --------
Comprehensive income................. $407,519 $151,596 $842,242 $560,599
======== ======== ======== ========
</Table>
13
(10) 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 and hedges of specific cash flows
associated with foreign currency denominated financial assets and
liabilities 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.
The Company uses certain foreign currency debt instruments as net
investment hedges of foreign operations. During the nine months ended
January 29, 2003, losses of $33.5 million, net of income taxes of $19.7
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, swaps 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.
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 nine months ended January 29, 2003, hedge
ineffectiveness related to cash flow hedges was a net loss of $0.5 million,
which is reported in the consolidated statements of income as other
expenses, net.
DEFERRED HEDGING GAINS AND LOSSES: As of January 29, 2003, the Company is
hedging forecasted transactions for periods not exceeding 15 months. During
the next 12 months, the Company expects $1.7 million of net deferred gain
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
DISCONTINUED OPERATIONS
On December 20, 2002, Heinz transferred to a wholly-owned subsidiary ("SKF
Foods") certain assets and liabilities, including its U.S. and Canadian pet food
and pet snacks, U.S. tuna, U.S. retail private label soup and private label
gravy, College Inn broths and its U.S. infant feeding businesses and distributed
all of the shares of SKF Foods common stock on a pro rata basis to its
shareholders. Immediately thereafter, SKF Foods merged with a wholly-owned
subsidiary of Del Monte Foods Company ("Del Monte") resulting in SKF Foods
becoming a wholly-owned subsidiary of Del Monte ("the Merger").
In connection with the Del Monte transaction, the Company received $1.06
billion in cash. The cash was used to fund:
- The retirement of maturing long-term debt ($200 million);
- The early retirement of long-term debt ($240 million, which includes the
cost of early retirement);
14
- The retirement of long-term debt maturing shortly after the end of the
Company's fiscal third quarter ($250 million);
- The termination of operating lease obligations on assets transferred to
Del Monte ($104 million); and
- The retirement of short-term debt incurred in connection with the Del
Monte transaction ($53 million).
The balance of the cash was invested pending further debt reduction
activities and the payment of additional transaction related expenses.
In accordance with generally accepted accounting principles, the operating
results and net assets related to these businesses spun off to Del Monte have
been included in discontinued operations in the Company's consolidated
statements of income and condensed consolidated balance sheets. Discontinued
operations for the three and nine months ended January 29, 2003, represent
operating results for two and eight months, respectively. The net assets
distributed to Heinz shareholders have been treated as a dividend and charged to
retained earnings.
The discontinued operations generated sales of $257.4 million and $436.4
million and net income of $21.8 million (net of $5.5 million in tax) and $40.4
million (net of $19.1 million in tax) for the three months ended January 29,
2003 and January 30, 2002, respectively. The discontinued operations generated
sales of $1,091.3 million and $1,312.8 million and net income of $88.7 million
(net of $35.4 million in tax) and $115.1 million (net of $56.5 million) for the
nine months ended January 29, 2003 and January 30, 2002, respectively.
STREAMLINE
In the fourth quarter of Fiscal 2001, the Company announced a restructuring
initiative named "Streamline." This initiative included 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 1, 2002.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective May 2, 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets." Under this standard, goodwill and intangibles with
indefinite useful lives are no longer amortized. This standard also requires, at
a minimum, an annual assessment of the carrying value of goodwill and
intangibles with indefinite useful lives. The reassessment of intangible assets,
including the ongoing impact of amortization, was completed during the first
quarter of Fiscal 2003. Net income from continuing operations for the quarter
and nine months ended January 30, 2002 would have been $169.2 million or $0.02
per share higher and $528.8 million or $0.09 per share higher, respectively, had
the provisions of the new standards been applied as of May 3, 2001.
During the first half of Fiscal 2003, the Company completed its
transitional impairment review and recognized a transition adjustment of $77.8
million ($0.22 per share) to write down goodwill associated with its businesses
in Eastern Europe, Argentina, Spain, South Korea and South Africa. This
adjustment is recorded as an effect of change in accounting principle as of May
2, 2002.
Effective May 2, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment of Disposal of Long-Lived Assets." This statement provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets, expands the
15
scope of a discontinued operation to include a component of an entity and
eliminates the current exemption to consolidation when control over a subsidiary
is likely to be temporary. The adoption of this new standard did not have a
material impact on the Company's financial position, results of operations or
cash flows.
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities.
This Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The Company will apply the provisions of SFAS No. 146 to all disposal
activities that are initiated after December 31, 2002.
THREE MONTHS ENDED JANUARY 29, 2003 AND JANUARY 30, 2002
RESULTS OF CONTINUING OPERATIONS
For the three months ended January 29, 2003, sales increased $176.3
million, or 9.1%, to $2.11 billion. Sales were favorably impacted by pricing
(5.4%), foreign exchange translation rates (6.1%) and acquisitions (0.9%.) The
favorable impact of acquisitions is primarily related to prior year acquisitions
in the Heinz North America segment. The favorable pricing was realized primarily
in certain highly inflationary countries, Europe and Asia/Pacific. Sales were
negatively impacted by unfavorable volumes (1.9%), primarily in the Heinz North
America segment and certain highly inflationary countries and by divestitures
(1.4%.)
The current year's third quarter was negatively impacted by costs related
to the Del Monte transaction and costs to reduce overhead of the remaining core
businesses totaling $72.1 million pretax ($0.15 per share) which are classified
primarily as selling, general and administrative ("SG&A") expenses. The costs
related to the Del Monte transaction include employee termination and severance
costs, legal and other professional service costs and cost related to the early
retirement of debt. In addition, the third quarter was negatively impacted by a
loss on the disposal of a North American fish and vegetable business of $9.4
million pretax ($0.03 per share).
Gross profit increased $92.8 million, or 13.9%, to $762.0 million.
Excluding the special items noted above, gross profit increased $94.4 million,
or 14.1%, to $763.6 million and the gross profit margin increased to 36.3% from
34.7%. The increase in gross profit margin occurred across all segments except
U.S. Frozen. This increase is primarily related to favorable pricing and foreign
exchange as well as the benefit of reduced amortization of intangible assets of
approximately $13.0 million.
As reported, SG&A expenses increased $89.8 million, or 25.6%, to $440.4
million. Excluding the special items noted above, SG&A increased $49.4 million,
or 14.1%, to $400.1 million and it increased as a percentage of sales to 19.0%
from 18.2%. The increase is primarily driven by increases in Selling and
Distribution (S&D) expenses in the European and Asia/Pacific segments and
increased General and Administrative (G&A) expenses in the European and
Non-operating segments. Marketing spend increased 25.5% reflecting increased
spending in the Europe and Asia/ Pacific segment, offset by reductions in the
North America segment.
Operating income increased $3.0 million, or 0.9%, to $321.6 million.
Excluding the special items noted above, operating income increased $44.9
million, or 14.1%, to $363.6 million and increased as a percentage of sales to
17.3% from 16.5%.
Net interest expense was consistent with the prior year. Other expense
increased $48.4 million to $66.5 million from $18.0 million last year. The
increase is primarily attributable to the $39.6 million pretax charge related to
early retirement of debt and increases in minority interest expense, largely
related to increased profitability in joint ventures in certain highly
inflationary
16
countries. The effective tax rate for the current quarter was 36.8% compared to
35.7% last year. Excluding the special items noted above, the effective rate was
33.3% in the current quarter compared to 35.7% last year.
Net income from continuing operations in the current quarter was $129.8
million compared to $161.2 million last year and diluted earnings per share was
$0.37 in the current quarter versus $0.46 in the same period last year.
Excluding special items, net income from continuing operations increased $30.3
million to $191.5 million, and diluted earnings per share from continuing
operations increased 17.4%, to $0.54 from $0.46 last year.
OPERATING RESULTS BY BUSINESS SEGMENT
HEINZ NORTH AMERICA
Sales of the Heinz North America segment increased $0.7 million, or 0.1%.
Acquisitions, net of divestitures, increased sales by 1.9%, due primarily to the
prior year acquisition of Royal American Foods frozen desserts. Lower pricing
decreased sales 0.7% primarily related to portion control. Sales volume
decreased 1.4% mainly related to decreases in foodservice ketchup, partially
offset by a 3.3% increase in U.S. retail ketchup. The stronger Canadian dollar
increased sales 0.3%.
Gross profit increased $5.7 million, or 2.7%, to $213.4 million. Excluding
special items, gross profit increased $7.3 million, or 3.5%, due primarily to
decreased manufacturing costs and reduced amortization expense on intangible
assets. Operating income decreased $6.4 million, or 5.8%, to $104.1 million.
Excluding special items, operating income increased $13.1 million, or 11.9%, to
$123.6 million, due primarily to the change in gross profit and reduced
marketing expense.
U.S. FROZEN
U.S. Frozen's sales decreased $18.5 million, or 5.9%. Sales volume
decreased 0.7% as the significant increase in SmartOnes frozen entrees was
offset by a reduction in appetizers and Boston Market HomeStyle side dishes and
meals. Lower pricing decreased sales 3.4%, primarily due to increased trade
promotions related to appetizers and Boston Market HomeStyle meals. Divestitures
reduced sales by 1.8%.
Gross profit decreased $10.5 million, or 9.3%, and the gross profit margin
decreased to 35.2% from 36.5%, primarily due to price decreases. Operating
income decreased $9.2 million, or 15.2%, to $51.1 million primarily due to the
change in gross profit and increased marketing expenses, partially offset by a
significant reduction in G&A expenses due to realized synergies related to prior
year acquisitions.
EUROPE
Heinz Europe's sales increased $102.0 million, or 14.7%. Favorable foreign
exchange translation rates increased sales by 12.0%. Higher pricing increased
sales 2.3%, primarily due to beans, soup and infant feeding. Higher volume
increased sales 0.7%, driven primarily by seafood and ketchup, partially offset
by planned SKU rationalizations and volume decreases in frozen entrees.
Divestitures reduced sales 0.3%.
Gross profit increased $48.9 million, or 19.7%, due primarily to favorable
foreign exchange rates, pricing and reduced amortization expense related to
intangible assets. Operating income increased $7.8 million, or 5.7%, to $144.6
million primarily attributable to the increase in gross profit and the favorable
impact of foreign exchange, offset partially by increased marketing and G&A
expenses.
17
ASIA/PACIFIC
Sales in Asia/Pacific increased $36.9 million, or 14.6%. Favorable foreign
exchange translation rates increased sales by 12.8%. Higher pricing increased
sales 2.5%, primarily due to poultry and juices/drinks, partially offset by
decreases in frozen vegetables. Volume decreased 2.5%, driven primarily by
juices/drinks and cooking oils, partially offset by frozen vegetables.
Acquisitions, net of divestitures, increased sales by 1.8%.
Gross profit increased $24.0 million, or 33.3%, due primarily to favorable
foreign exchange rates, increased pricing and reduced manufacturing costs.
Operating income increased $15.6 million, or 76.5%, to $36.0 million from $20.4
million primarily due to the change in gross profit, partially offset by
increased S&D and marketing expenses.
OTHER OPERATING ENTITIES
Sales for Other Operating Entities increased $55.2 million, or 52.5%
primarily due to favorable pricing in certain highly inflationary countries.
Gross profit increased $22.5 million, or 78.7%, due primarily to favorable
pricing. Operating income increased $24.2 million, or 192.7%, due primarily to
the increase in gross profit.
NINE MONTHS ENDED JANUARY 29, 2003 AND JANUARY 30, 2002
RESULTS OF CONTINUING OPERATIONS
For the nine months ended January 29, 2003, sales increased $499.6 million,
or 9.0%, to $6.04 billion from $5.54 billion last year. Sales were favorably
impacted by pricing (5.2%), foreign exchange translation rates (4.5%) and
acquisitions (2.7%). The favorable impact of acquisitions is primarily related
to the prior year acquisitions in the Heinz North America and U.S. Frozen
segments. The favorable pricing was realized primarily in certain highly
inflationary countries, Europe and Asia/Pacific. Sales were negatively impacted
by unfavorable volumes of 2.5%. Divestitures reduced sales by 0.9%.
The current year's results were negatively impacted by costs related to the
Del Monte transaction and costs to reduce overhead of the remaining core
businesses totaling $110.1 million pretax ($0.23 per share) which are classified
primarily as selling, general and administrative ("SG&A") and other expenses.
These include employee termination and severance costs, legal and other
professional service costs and cost related to the early extinguishment of debt.
Last year's results were negatively impacted by Streamline restructuring charges
and implementation costs totaling $8.3 million pretax ($0.02 per share.)
Gross profit increased $170.4 million, or 8.5%, to $2,185.7 million.
Excluding the special items, gross profit increased $172.5 million, or 8.6%, to
$2,189.2 million however the gross profit margin decreased slightly to 36.2%
from 36.4%. This decrease was partially offset by the favorable pricing
discussed above and the benefit of reduced amortization of intangible assets of
approximately $36.5 million.
SG&A increased $184.3 million, or 17.5%, to $1,237.1 million. Excluding the
special items noted above, SG&A increased $124.2 million, or 11.9%, to $1,170.2
million and increased as a percentage of sales to 19.4% from 18.9%. The increase
is primarily driven by increased S&D and marketing spend across all segments and
increased G&A expenses in the Europe, Heinz North America and Asia/Pacific
segments.
Operating income decreased $13.9 million, or 1.4%, to $948.6 million.
Excluding the special items noted above, operating income increased $48.3
million, or 5.0%, to $1,019.0 million and decreased as a percentage of sales to
16.9% from 17.5%.
18
Net interest expense decreased $17.4 million to $143.6 million, driven
primarily by lower interest rates over the past year and interest earned on cash
received from the Del Monte transaction. Other expense increased $71.2 million
to $101.5 million. The increase is primarily attributable to the $39.6 million
pretax charge related to early retirement of debt as a result of the Merger
discussed above and increases in minority interest expense, largely related to
increased profitability in joint ventures in certain highly inflationary
countries. The effective tax rate for the nine months ended January 29, 2003 was
35.6% compared to 35.8% last year. Excluding the special items noted above, the
effective rate was 34.5% in the current period compared to 35.7% last year.
Net income for the current nine months (before effect of change in
accounting principle related to the adoption of SFAS No. 142) was $452.8 million
compared to $495.3 million last year and diluted earnings per share (before
cumulative effect of change in accounting related to the adoption of SFAS No.
142) was $1.28 in the current nine months versus $1.40 in the same period last
year. Excluding the special items noted above, net income increased $31.6
million to $532.9 million from $501.4 million last year, and diluted earnings
per share increased 6.3%, to $1.51.
HEINZ NORTH AMERICA
Sales of the Heinz North America segment increased $44.2 million, or 2.7%.
Acquisitions, net of divestitures, increased sales 2.9%, due primarily to the
prior year acquisitions of Classico and Aunt Millie's pasta sauce, Mrs. Grass
Recipe soups, Wyler's bouillons and soups and Royal American Foods frozen
desserts. Higher pricing increased sales 0.3% due mainly to ketchup, portion
control and frozen soup. Sales volume decreased 0.5% as increases in foodservice
ketchup and specialty sauces were offset by decreases primarily in frozen soup.
Gross profit decreased $4.2 million, or 0.7%, to $608.6 million. Excluding
special items, gross profit was consistent with prior year and the gross profit
margin decreased to 36.9% from 38.0% due primarily to unfavorable sales mix and
increased manufacturing costs, partially offset by reduced amortization expense
on intangible assets with indefinite lives and acquisitions. Operating income
decreased $47.1 million, or 13.2%, to $308.7 million. Excluding special items,
operating income decreased $20.1 million, or 5.6%, to $340.4 million from $360.5
million, due primarily to increased marketing and higher S&D and G&A expenses.
U.S. FROZEN
U.S. Frozen's sales increased $35.3 million, or 4.3%. Acquisitions, net of
divestures, increased sales 8.4%, due primarily to the prior year acquisitions
of Delimex frozen Mexican foods, Anchor's Poppers retail frozen appetizers and
licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers.
Lower pricing decreased sales 1.2%, primarily due to Boston Market HomeStyle
meals and appetizers, partially offset by a reduction in trade promotions
primarily related to the launch of Hot Bites in the prior year. Sales volume
decreased 2.9% driven by declines in frozen potatoes, Boston Market HomeStyle
side dishes and the rationalization of Hot Bites partially offset by SmartOnes
frozen entrees.
Gross profit increased $16.4 million, or 5.3%, and the gross profit margin
increased to 37.8% from 37.4%. The increase in gross profit is primarily due to
acquisitions and reduced manufacturing costs, partially offset by lower pricing.
Operating income increased $2.2 million, or 1.3%, to $167.7 million due
primarily to the change in gross profit and reduced G&A expenses, partially
offset by increased marketing and S&D.
EUROPE
Heinz Europe's sales increased $172.1 million, or 8.3%. Favorable foreign
exchange translation rates increased sales by 8.7%. Higher pricing increased
sales 1.7%, primarily due to seafood, beans, ketchup and soups. Lower volume
decreased sales 1.3%, driven primarily by planned SKU ratio-
19
nalizations and frozen pizza, partially offset by volume increases in frozen
entrees and ketchup. Divestitures reduced sales by 0.8%.
Gross profit increased $78.9 million, or 10.0%, to $864.8 million.
Excluding special items, gross profit increased $77.5 million, or 9.8%, due
primarily to favorable foreign exchange rates, pricing and reduced amortization
expense related to intangible assets. Operating income increased $18.0 million,
or 4.4%, to $424.7 million. Excluding special items, operating income increased
$16.2 million, or 4.0%, to $424.7 million primarily attributable to the
favorable change in gross profit, offset partially by increased S&D, G&A and
marketing expenses.
ASIA/PACIFIC
Sales in Asia/Pacific increased $91.0 million, or 12.3%. Favorable foreign
exchange translation rates increased sales by 10.0%. Higher pricing increased
sales 3.1%, primarily due to poultry, juices/drinks and sauces. Volume decreased
sales 2.0%, driven primarily by cooking oils and pet food, partially offset by
increases in sauces. Acquisitions, net of divestitures, increased sales by 1.2%.
Gross profit increased $34.5 million, or 15.3%, due primarily to favorable
foreign exchange rates, increased pricing and favorable manufacturing costs.
Operating income increased $13.7 million, or 19.1%, to $85.0 million. Excluding
special items, operating income increased $13.1 million, or 18.2%, to $85.0
million primarily due to the change in gross profit, offset partially by
increased marketing and G&A expenses.
OTHER OPERATING ENTITIES
Sales for Other Operating Entities increased $157.1 million, or 50.9%,
primarily due to favorable pricing in certain highly inflationary countries.
Gross profit increased $42.8 million, or 51.4%, due primarily to favorable
pricing. Operating income increased $41.9 million due primarily to the increase
in gross profit; however, this increase is significantly offset by increased
minority interest expense recorded below operating income.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by continuing operating activities was $561.2 million
compared to $242.3 million last year. The increase in Fiscal 2003 versus Fiscal
2002 is primarily due to improved working capital performance.
Cash provided by investing activities totaled $996.9 million compared to
cash used by investing activities of $903.0 million last year. Cash provided by
the spin off was $1,063.6 million in the current year. Acquisitions in the
current period required $13.6 million. Acquisitions in the prior period required
$802.7 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. Capital expenditures
in the current nine months required $92.2 million compared to $108.2 million
last year.
Cash used for financing activities totaled $1,075.6 million compared to
cash provided by financing activities of $659.4 million last year. There were no
proceeds from long-term debt in the current period compared to $770.8 million
last year. Payments on long-term debt required $488.0 million in the current
nine months compared to $37.5 million last year. Payments on commercial paper
and short-term borrowings required $177.3 million compared to providing $2.2
million last year. In addition, $325.0 million was provided during the prior
year via the issuance of Preferred Stock. Cash provided from stock options
exercised totaled $6.5 million versus $53.2 million last year. Dividend payments
totaled $431.0 million compared to $420.6 million for the same
20
period last year. There were no share repurchases in the current nine months and
share repurchases required $45.4 million in the prior year.
The Company's net debt obligations on January 29, 2003 (total debt less
cash ($824.1 million) and the fair value of interest rate swaps ($227.0
million)) was $4,039.9 million as compared to $5,119.6 million (total debt less
cash ($202.4 million) and the fair value of interest rate swaps ($23.6 million))
at May 1, 2002.
In the first nine months of Fiscal 2003, the cash requirements of
Streamline were $17.7 million, relating to severance and exit costs.
On September 5, 2002, the Company, Heinz Finance Company and a group of
domestic and international banks renewed an $800 million 364-day credit
agreement. That credit agreement and the $1.5 billion credit agreement that
expires in September 2006 support the Company's commercial paper programs. As of
January 29, 2003 there was no commercial paper outstanding. As of May 1, 2002,
the Company had $119.1 million of commercial paper outstanding and classified as
long-term debt.
Zimbabwe remains in a period of economic uncertainty. Should the current
situation continue, the Company could experience disruptions and delays
associated with its Zimbabwe operations. Therefore, as of the end of November
2002, the Company deconsolidated its Zimbabwean operations and classified its
remaining net investment of approximately $110 million as a cost investment
included in other non-current assets on the condensed consolidated balance sheet
as at January 29, 2003. If this situation continues to deteriorate, the
Company's ability to recover its investment could be impaired.
The impact of inflation on both the Company's financial position and
results of operations is not expected to adversely affect Fiscal 2003 results.
The Company's financial position continues to remain strong, enabling it to meet
cash requirements for operations, including anticipated additional pension plan
contributions in an amount at least equal to that of last fiscal year, capital
expansion programs and dividends to shareholders. The Company's goal remains the
achievement of previously communicated earnings per share for the full year.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 29, 2003, the Company adopted Financial Accounting
Standards Board (FASB) Interpretation No. 45 (FIN 45), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by a
guarantor about its obligations under certain guarantees that it has issued, and
it requires the recognition of a liability at fair value by a guarantor at the
inception of a guarantee. The disclosure requirements of FIN 45 are effective as
of January 29, 2003. The initial recognition and measurement provisions of FIN
45 are effective on a prospective basis for all guarantees issued or modified
after December 31, 2002. The Company has not issued or modified any material
guarantees since December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for entities that
voluntarily change to the fair value method of accounting for stock-based
employee compensation, and it also amends the disclosure provisions of SFAS No.
123 to require prominent disclosure about the effects of an entity's accounting
policy decisions with respect to stock-based employee compensation in both
annual and interim financial reporting. The provisions of SFAS No. 148 are
effective for the Company beginning in fiscal year 2004.
21
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
Except for historical information, matters discussed in this report,
including the management's discussion and analysis, the financial statements and
footnotes, and the statements about future growth, profitability, costs,
expectations, plans, or objectives, are forward-looking statements based on
management's estimates, assumptions, and projections. These forward-looking
statements are subject to risks, uncertainties, and other important factors that
could cause actual results to differ materially from those expressed or implied
in this report and the financial statements and footnotes. These include, but
are not limited to, sales, earnings, and volume growth, general economic,
political, and industry conditions, competitive conditions, production costs,
energy costs, achieving cost savings programs, currency valuations (notably the
euro and the pound sterling) and interest rate fluctuations, success of
acquisitions, joint ventures, and divestitures, new product and packaging
innovations, the effectiveness of advertising, marketing, and promotional
programs, supply chain efficiency and cash flow initiatives, risks inherent in
international operations, particularly the performance of business in
hyperinflationary environments and litigation, the Company's ability to achieve
its goal for a simpler, more focused business following the spin-off of certain
businesses to Del Monte Foods Company, 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 1, 2002, and the Company's subsequent
filings with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update or review any forward-looking statements, whether
as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
nine months ended January 29, 2003. For additional information, refer to pages
43-45 of the Company's Annual Report to Shareholders for the fiscal year ended
May 1, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within 90 days before filing this report, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was carried out by the Company under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the date of their
evaluation, the Company's disclosure controls and procedures have been designed
and are functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company
believes that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
(b) Changes in Internal Controls
Subsequent to the date of the most recent evaluation of the Company's
internal controls, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
22
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.
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.
4. The Second Supplement dated as of November 15, 2002, to the
Indenture between the Company and Bank One, National Association
dated as of November 6, 2000.
12. Computation of Ratios of Earnings to Fixed Charges.
99(a). Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements.
99(b). Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements.
(b) Reports on Form 8-K
Reports on Form 8-K were filed with the Securities and Exchange Commission
on (i) December 6, 2002, in connection with the announcement by the Company of
second quarter results for the businesses being spun off to Del Monte Foods
Company; (ii) January 6, 2003, in connection with the spinoff of certain
businesses to Del Monte Foods Company, providing unaudited pro forma
consolidated financial statements of income for the six months ended October 30,
2002 and October 31, 2001, unaudited pro forma consolidated statements of income
for the fiscal years ended May 1, 2002, May 2, 2001, and May 3, 2000, and an
unaudited pro forma consolidated balance sheet as of October 30, 2002; and (iii)
January 17, 2003, furnishing details as to the impact on the Company's prior
results of the disposition of certain assets to Del Monte Foods Company and
providing unaudited pro forma consolidated statements of income for the three
months ended July 31, 2002, October 30, 2002, August 1, 2001, October 31, 2001,
January 30, 2002, and May 1, 2002.
23
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H.J. HEINZ COMPANY
(Registrant)
Date: March 13, 2003
By: /s/ ARTHUR WINKLEBLACK
..........................................
Arthur Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 13, 2003
By: /s/ EDWARD MCMENAMIN
..........................................
Edward McMenamin
Vice President -- Finance
(Principal Accounting Officer)
24
I, William R. Johnson, Chairman, President and Chief Executive Officer of
H.J. Heinz Company certify that:
1. I have reviewed this quarterly report on Form 10-Q of H.J. Heinz
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant and its consolidated
subsidiaries is made known to such officers by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
By: /s/ WILLIAM R. JOHNSON
------------------------------------
Name: William R. Johnson
Title: Chairman, President and
Chief Executive Officer
25
I, Arthur Winkleblack, Executive Vice President and Chief Financial Officer
of H.J. Heinz Company certify that:
1. I have reviewed this quarterly report on Form 10-Q of H.J. Heinz
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant and its consolidated
subsidiaries is made known to such officers by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
By: /s/ ARTHUR WINKLEBLACK
------------------------------------
Name: Arthur Winkleblack
Title: Executive Vice President and
Chief Financial Officer
26
EXHIBIT 99(A)
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER RELATING TO A
PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS
I, William R. Johnson, Chairman, President and Chief Executive Officer, of
H.J. Heinz Company, a Pennsylvania corporation (the "Company"), hereby certify
that;
1. The Company's periodic report on Form 10-Q for the period ended January
29, 2003 (the "Form 10-Q") fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date March 13, 2003
/s/ William R. Johnson
--------------------------------------
Name: William R. Johnson
Title: Chairman, President and Chief
Executive Officer
EXHIBIT 99(B)
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER RELATING TO A
PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS
I, Arthur Winkleblack, Executive Vice President and Chief Financial Officer
of H.J. Heinz Company, a Pennsylvania corporation (the "Company"), hereby
certify that:
1. The Company's periodic report on Form 10-Q for the period ended January
29, 2003 (the "Form 10-Q") fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: March 13, 2003
/s/ ARTHUR WINKLEBLACK
--------------------------------------
Name: Arthur Winkleblack
Title: Executive Vice President and
Chief
Financial Officer