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 28, 1998
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 28, 1998 COMMISSION FILE NUMBER 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 412-456-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days. Yes X No
--- ---
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of February 28, 1998, was 365,679,947 shares.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Nine Months
Ended Ended
January 28, 1998 January 29, 1997
---------------- ----------------
FY 1998 FY 1997
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales........................................ $6,733,386 $6,910,356
Cost of products sold........................ 4,196,835 4,418,924
---------- ----------
Gross profit................................. 2,536,551 2,491,432
Selling, general and administrative expenses. 1,369,517 1,445,107
---------- ----------
Operating income............................. 1,167,034 1,046,325
Interest income.............................. 23,004 28,701
Interest expense............................. 190,956 204,481
Other expense, net........................... 31,829 27,117
---------- ----------
Income before income taxes................... 967,253 843,428
Provision for income taxes................... 346,930 311,991
---------- ----------
Net income................................... $ 620,323 $ 531,437
========== ==========
Net income per share--diluted................ $ 1.66 $ 1.42
========== ==========
Average shares for net income per share--
diluted...................................... 373,509 374,279
========== ==========
Net income per share--basic.................. $ 1.69 $ 1.45
========== ==========
Average shares for net income per share--
basic........................................ 366,403 367,465
========== ==========
Cash dividends per share..................... $ .92 $ .84 1/2
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Three Months
Ended Ended
January 28, 1998 January 29, 1997
---------------- ----------------
FY 1998 FY 1997
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales........................................ $2,236,034 $2,307,538
Cost of products sold........................ 1,379,218 1,459,249
---------- ----------
Gross profit................................. 856,816 848,289
Selling, general and administrative expenses. 512,776 502,998
---------- ----------
Operating income............................. 344,040 345,291
Interest income.............................. 7,462 8,324
Interest expense............................. 64,848 70,496
Other expense, net........................... 18,041 6,436
---------- ----------
Income before income taxes................... 268,613 276,683
Provision for income taxes................... 80,457 102,296
---------- ----------
Net income................................... $ 188,156 $ 174,387
========== ==========
Net income per share--diluted................ $ .50 $ .47
========== ==========
Average shares for net income per share--
diluted...................................... 373,509 374,279
========== ==========
Net income per share--basic.................. $ .51 $ .47
========== ==========
Average shares for net income per share--
basic........................................ 366,403 367,465
========== ==========
Cash dividends per share..................... $ .31 1/2 $ .29
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 28, 1998 April 30, 1997*
---------------- ---------------
FY 1998 FY 1997
(Unaudited)
(Thousands of Dollars)
Assets
Current Assets:
Cash and cash equivalents..................... $ 195,979 $ 156,986
Short-term investments, at cost which
approximates market......................... 12,435 31,451
Receivables, net.............................. 1,037,415 1,118,874
Inventories................................... 1,446,611 1,432,511
Prepaid expenses and other current assets..... 207,606 273,284
---------- ----------
Total current assets........................ 2,900,046 3,013,106
---------- ----------
Property, plant and equipment................. 4,060,852 4,380,598
Less accumulated depreciation................. 1,728,564 1,901,378
---------- ----------
Total property, plant and equipment, net.... 2,332,288 2,479,220
---------- ----------
Goodwill, net................................. 1,764,200 1,803,552
Other intangibles, net........................ 617,068 627,096
Other non-current assets...................... 514,188 514,813
---------- ----------
Total other non-current assets.............. 2,895,456 2,945,461
---------- ----------
Total assets................................ $8,127,790 $8,437,787
========== ==========
*Summarized from audited fiscal year 1997 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
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4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 28, 1998 April 30, 1997*
---------------- ---------------
FY 1998 FY 1997
(Unaudited)
(Thousands of Dollars)
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt............................... $ 402,361 $ 589,893
Portion of long-term debt due within one year. 13,382 573,549
Accounts payable.............................. 791,274 865,154
Salaries and wages............................ 74,007 64,836
Accrued marketing............................. 185,721 164,354
Accrued restructuring costs................... 127,259 210,804
Other accrued liabilities..................... 302,566 315,662
Income taxes.................................. 153,861 96,163
---------- ----------
Total current liabilities................... 2,050,431 2,880,415
---------- ----------
Long-term debt................................ 2,925,537 2,283,993
Deferred income taxes......................... 247,462 265,409
Non-pension postretirement benefits........... 208,005 211,500
Other......................................... 364,342 356,049
---------- ----------
Total long-term debt and other liabilities.. 3,745,346 3,116,951
---------- ----------
Shareholders' Equity:
Capital stock................................. 107,988 108,015
Additional capital............................ 245,917 175,811
Retained earnings............................. 4,323,938 4,041,285
Cumulative translation adjustments............ (364,110) (210,864)
---------- ----------
4,313,733 4,114,247
Less:
Treasury shares at cost (65,612,637 shares at
January 28, 1998 and 63,912,463 shares
at April 30, 1997).......................... 1,940,798 1,629,501
Unfunded pension obligation.................. 25,376 26,962
Unearned compensation relating to the ESOP... 15,546 17,363
---------- ----------
Total shareholders' equity.................. 2,332,013 2,440,421
---------- ----------
Total liabilities and shareholders' equity.. $8,127,790 $8,437,787
========== ==========
*Summarized from audited fiscal year 1997 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
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5
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Nine Months
Ended Ended
January 28, 1998 January 29, 1997
---------------- ----------------
FY 1998 FY 1997
(Unaudited)
(Thousands of Dollars)
Cash Provided by Operating Activities........ $ 554,715 $ 434,858
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures....................... (258,421) (277,681)
Acquisitions, net of cash acquired......... (136,351) (179,627)
Proceeds from sale of Ore-Ida frozen
foodservice foods business................ 490,739 --
Purchases of short-term investments........ (857,067) (951,912)
Sales and maturities of short-term
investments............................... 880,710 962,226
Other items, net........................... 28,864 25,741
--------- ---------
Cash provided by (used for) investing
activities.............................. 148,474 (421,253)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt............... 3,934 45,185
Payments on long-term debt................. (563,065) (100,049)
Proceeds from commercial paper and short-
term borrowings, net...................... 481,438 468,693
Dividends.................................. (337,670) (310,239)
Purchases of treasury stock................ (480,306) (208,281)
Exercise of stock options.................. 170,598 105,589
Other items, net........................... 77,549 27,384
--------- ---------
Cash (used for) provided by financing
activities.............................. (647,522) 28,282
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................ (16,674) (7,068)
--------- ---------
Net increase in cash and cash equivalents.... 38,993 34,819
Cash and cash equivalents at beginning of
year........................................ 156,986 90,064
--------- ---------
Cash and cash equivalents at end of period... $ 195,979 $ 124,883
========= =========
See Notes to Condensed Consolidated Financial Statements.
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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 on Form 10-K for the fiscal year ended April
30, 1997 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 1998 presentation.
(3) In the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair statement of the results of
operations of these interim periods have been included.
(4) The composition of inventories at the balance sheet dates was as follows:
January 28, 1998 April 30, 1997
---------------- --------------
(Thousands of Dollars)
Finished goods and work-in-process........ $1,090,218 $1,040,104
Packaging material and ingredients........ 356,393 392,407
---------- ----------
$1,446,611 $1,432,511
========== ==========
(5) The provision for income taxes consists of provisions for federal, state,
U.S. possessions and foreign income taxes. The company operates in an
international environment with significant operations in various locations
outside the United States. Accordingly, the consolidated income tax rate
is a composite rate reflecting the earnings in the various locations and
the applicable tax rates.
(6) On June 30, 1997, the company completed the sale of its Ore-Ida frozen
foodservice foods business to McCain Foods Limited of New Brunswick,
Canada. The transaction resulted in a pretax gain of approximately $96.6
million ($0.14 per diluted share), and was recorded as an offset to
selling, general and administrative expenses. The transaction included the
sale of the company's Ore-Ida appetizer, pasta and potato foodservice
business and five of the Ore-Ida plants that manufacture the products. The
Ore-Ida frozen foodservice foods business contributed approximately $525
million in net sales for fiscal 1997. This sale was an essential part of
Project Millennia as it will allow the company to focus its efforts on the
Ore-Ida retail frozen potato and pasta business, and on the frozen retail
snacks business. The sale is not expected to have an adverse impact on the
company's results of operations.
(7) On June 30, 1997, the company acquired John West Foods Limited from
Unilever. John West Foods Limited, with annual sales of more than $250
million, is the leading brand of canned tuna and fish in the United
Kingdom. Based in Liverpool, John West Foods Limited sells its canned fish
products throughout Continental Europe and in a number of other
international markets. (John West operations in Australia, New Zealand and
South Africa were not included in the transaction.)
On July 21, 1997, the company announced that it had acquired a majority
interest in a joint venture with Tiger Oats Limited of Johannesburg, South
Africa. The new company is known as Pet Products (Pty) Limited with its
headquarters in Cape Town. Pet Products manufactures and markets pet food
brands formerly owned exclusively by Tiger Oats. These brands include
Dogmor, Husky, Pamper and Catmor.
7
On August 28, 1997, the company acquired a majority interest in one of
Poland's leading food processors, Pudliszki S.A. Pudliszki is the largest
ketchup producer in Poland and also markets tomato concentrate, canned
vegetables and cooking sauces.
On November 7, 1997, the company acquired the single-serve foodservice
business of CPC (United Kingdom) Ltd. and its Frank Cooper's brand. Along
with its flagship brand, Frank Cooper's, this business offers single-
serve sauces, dressings, and jams and jellies under the names Oxford,
Vintage, Adpac and Berry Hill.
During the current year the company also made other acquisitions,
primarily in the Asia/Pacific region.
All of the above acquisitions have been accounted for as purchases and,
accordingly, the respective purchase prices have been allocated on a
preliminary basis to the respective assets and liabilities based on their
estimated fair values as of the dates of the acquisitions. Operating
results of these acquisitions have been included in the Consolidated
Statement of Income from the dates of the acquisitions.
Pro forma results of the company, assuming all of the above transactions
had been made at the beginning of each period presented, would not be
materially different from the results reported.
(8) The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At January 28,
1998, the company had $2.01 billion of domestic commercial paper
outstanding, all of which has been classified as long-term debt due to
the long-term nature of the credit agreement. As of April 30, 1997, the
company had $1.35 billion of domestic commercial paper outstanding and
classified as long-term debt.
On January 14, 1998, the company issued $250 million of 5.75% five-year
notes in the international capital markets. The transaction closed on
February 3, 1998 and the proceeds were used to repay domestic commercial
paper.
(9) On September 10, 1997, the company's board of directors raised the
quarterly dividend on the company's common stock to $0.31 1/2 per share
from $0.29 per share, for an indicated annual rate of $1.26 per share.
(10) On September 10, 1997, the company's board of directors authorized the
repurchase of additional shares of its common stock, par value $0.25 per
share. As of January 28, 1998, there is authorization to repurchase up to
11.6 million shares.
(11) In the third quarter, the company adopted SFAS No. 128, "Earnings per
Share" which requires the disclosure of both diluted and basic earnings
per share. Basic earnings per share is calculated by dividing earnings
attributable to common shares by average common shares outstanding, while
diluted earnings per share include all dilutive securities or other
contracts that may entitle its holder to obtain common stock, in the
divisor.
8
The following table sets forth the computation of basic and diluted
earnings per share in accordance with the provisions of Statement 128.
Previously reported earnings per share amounts have been restated, as
necessary, to conform to Statement 128 requirements.
Three Months Ended Nine Months Ended
----------------------- -----------------------
January 28, January 29, January 28, January 29,
1998 1997 1998 1997
----------- ----------- ----------- -----------
FY 1998 FY 1997 FY 1998 FY 1997
(In Thousands, Except per Share Amounts)
Net income per share--basic:
Net income................ $188,156 $174,387 $620,323 $531,437
Preferred dividends....... 9 10 28 32
-------- -------- -------- --------
Net income applicable to
common stock............. $188,147 $174,377 $620,295 $531,405
======== ======== ======== ========
Average common shares
outstanding--basic....... 366,403 367,465 366,403 367,465
======== ======== ======== ========
Net income per share--
basic.................... $ 0.51 $ 0.47 $ 1.69 $ 1.45
======== ======== ======== ========
Net income per share--
diluted:
Net income................ $188,156 $174,387 $620,323 $531,437
======== ======== ======== ========
Average common shares
outstanding.............. 366,403 367,465 366,403 367,465
Effect of dilutive
securities:
Convertible preferred
stock.................. 304 345 304 345
Stock options........... 6,802 6,469 6,802 6,469
-------- -------- -------- --------
Average common shares
outstanding--diluted..... 373,509 374,279 373,509 374,279
======== ======== ======== ========
Net income per share--
diluted................ $ 0.50 $ 0.47 $ 1.66 $ 1.42
======== ======== ======== ========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NINE MONTHS ENDED JANUARY 28, 1998 AND JANUARY 29, 1997
H. J. Heinz Company announced its largest-ever reorganization plan in the
fourth quarter of Fiscal 1997. This reorganization and restructuring program
("Project Millennia") is designed to strengthen the company's core businesses
and improve the company's profitability and global growth.
On June 30, 1997, the company completed the sale of its Ore-Ida frozen
foodservice business to McCain Foods Limited. The transaction resulted in a
pretax gain of approximately $96.6 million ($0.14 per diluted share), and was
recorded as an offset to selling, general and administrative expenses. This
sale was an essential part of Project Millennia as it will allow the company
to focus its efforts on the Ore-Ida retail frozen potato and pasta business,
and on the frozen retail snacks business. In addition, the company has
announced the closure or sale of 23 plants worldwide, with another 2 to be
announced.
During the first nine months of Fiscal 1998, the company incurred non-
recurring costs related to the ongoing implementation of Project Millennia of
$60.4 million pretax ($0.10 per diluted share). These non-recurring costs
consist primarily of relocation, training, consulting and start-up costs. In
the fourth quarter of the fiscal year, the company expects additional non-
recurring costs associated with the implementation of Project Millennia of
between $0.04 and $0.05 per share.
RESULTS OF OPERATIONS
For the nine months ended January 28, 1998, sales decreased $177.0 million,
or 2.6%, to $6,733.4 million from $6,910.4 million recorded in the same period
a year ago. The sales decrease resulted from divestitures of 6.3% and the
unfavorable effect of foreign exchange translation rates of 3.0%; partially
offset by acquisitions of 3.4%, volume gains of 1.7% and favorable price of
1.6%. Domestic operations provided 53.2% of the current period's sales
compared to 55.4% in the same period last year.
During the first nine months of Fiscal 1998, the company acquired John West
Foods Limited in Europe, a majority interest in Pudliszki S.A., one of
Poland's top food processors, and other small acquisitions. Fiscal 1997
acquisitions impacting the period-to-period sales dollar comparison include
substantially all of the pet food businesses of Martin Feed Mills Limited in
Canada, the canned beans and pasta business of Nestle Canada, Inc. and other
small acquisitions, primarily in the Asia/Pacific region. The sales impact of
these acquisitions was more than offset by divestitures, primarily the Ore-Ida
frozen foodservice business and the New Zealand ice cream business.
Volume increases recorded in seafood, sauces and pastes, weight loss
classroom activities, bakery products and retail frozen potatoes were
partially offset by a volume decline in pet food.
Price increases recorded in retail ketchup, infant food, pet food and
seafood were partially offset by a price decrease in frozen entrees.
Foreign currencies declined against the U.S. dollar, decreasing sales by
3.0%. This decrease came primarily from sales in Italy and the Asia/Pacific
region.
Gross profit increased $45.1 million to $2,536.6 million from $2,491.4
million a year ago. The ratio of gross profit to sales increased to 37.7% from
36.1%. In the current period, gross profit was unfavorably impacted by non-
recurring costs related to the ongoing implementation of Project Millennia.
Gross profit in the prior period was favorably impacted by a gain on the sale
of real estate, partially offset by restructuring and related costs. Excluding
these non-recurring items in both periods, gross profit would have increased
$79.5 million and the gross profit ratio would have increased to 38.1% from
35.9%. The current year's gross profit and gross profit ratio were favorably
impacted by price increases and reduced trade allowances which resulted from
the discontinuance of inefficient end-of-quarter trade promotions, cost
savings resulting from Project Millennia and a favorable product mix.
10
Operating income increased $120.7 million, or 11.5%, to $1,167.0 million
from $1,046.3 million for the same period last year. In the current period,
operating income was favorably impacted by the gain on the sale of the Ore-Ida
frozen foodservice business, partially offset by non-recurring costs related
to the ongoing implementation of Project Millennia. Operating income in the
prior period was unfavorably impacted by restructuring and related costs,
partially offset by a gain on the sale of real estate. Excluding these non-
recurring items in both periods, operating income would have increased $76.0
million, or 7.2%, to $1,130.8 million from $1,054.8 million. The increase in
operating income, excluding the effects of these non-recurring items in both
periods, is primarily due to the increase in gross profit as SG&A expenses
were relatively flat period-to-period. Unfavorable foreign exchange
translation rates reduced operating income by $32.0 million or 3.1%.
Interest expense decreased $13.5 million to $191.0 million from $204.5
million in the comparable period a year ago primarily due to lower average
borrowings.
Other expenses increased $4.7 million to $31.8 million from $27.1 million in
the prior period, primarily due to currency losses in the Asia/Pacific region.
The effective tax rate for the current nine-month period was 35.9% compared
to 37.0% for the same period last year. The current period's effective rate
reflected the benefits of recent tax legislation in Italy and the United
Kingdom, partially offset by a significantly higher tax rate associated with
the sale of Ore-Ida's frozen foodservice business. Excluding these items, the
effective tax rate for the nine-month period would be 37.0%, the same as the
prior year's comparable period. The current rate reflects a reduction in the
effective rate for the year as a result of foreign tax planning.
Net income for the first nine months was $620.3 million compared to $531.4
million for the same period last year. Diluted earnings per share was $1.66
compared to $1.42 a year ago and basic earnings per share was $1.69 compared
to $1.45 a year ago. Excluding the non-recurring items noted above, net income
would have increased 12.8% to $605.2 million from $536.5 million a year ago;
diluted earnings per share would have increased 13.3% to $1.62 from $1.43 a
year ago; and basic earnings per share would have increased 13.0% to $1.65
from $1.46 a year ago.
THREE MONTHS ENDED JANUARY 28, 1998 AND JANUARY 29, 1997
RESULTS OF OPERATIONS
For the three months ended January 28, 1998, sales decreased $71.5 million,
or 3.1%, to $2,236.0 million from $2,307.5 million recorded in the same period
a year ago. The sales decrease resulted from the impact of divestitures of
7.2% and the unfavorable effect of foreign exchange translation rates of 4.8%;
partially offset by volume gains of 4.3%, acquisitions of 3.3% and favorable
price of 1.3%. Domestic operations provided 53.1% of the current period's
sales compared to 53.6% in the same period last year.
Volume increases occurred in seafood, retail ketchup, retail frozen
potatoes, sauces and pastes, infant food, frozen entrees and weight loss
classroom activities; partially offset by decreases in pet food and soups.
Acquisitions impacting the quarter-to-quarter sales dollar comparison
included John West Foods Limited in Europe, a majority interest in Pudliszki
S.A., one of Poland's top food processors and other small acquisitions. The
sales impact of these acquisitions was more than offset by divestitures,
primarily the Ore-Ida frozen foodservice business and the New Zealand ice
cream business.
Price increases recorded in retail ketchup and infant food were partially
offset by a decrease in frozen entrees.
Foreign currencies declined against the U.S. dollar, decreasing sales by
4.8%. This decrease came primarily from sales in Italy and the Asia/Pacific
region.
11
Gross profit increased $8.5 million to $856.8 million from $848.3 million a
year ago. The ratio of gross profit to sales increased to 38.3% from 36.8%. In
the current period, gross profit was unfavorably impacted by non-recurring
costs related to the ongoing implementation of Project Millennia. Gross profit
in the prior period was favorably impacted by a gain on the sale of real
estate, partially offset by restructuring and related costs. Excluding the
non-recurring items in both periods, gross profit would have increased $32.3
million and the gross profit ratio would have increased to 39.0% from 36.4%.
The current quarter's gross profit and gross profit ratio were favorably
impacted by price increases and reduced trade allowances which resulted from
the discontinuance of inefficient end-of-quarter trade promotions, cost
savings resulting from Project Millennia and a favorable product mix.
Operating income decreased $1.3 million to $344.0 million from $345.3
million for the same quarter last year. In the current quarter, operating
income was unfavorably impacted by non-recurring costs related to the ongoing
implementation of Project Millennia of $29.4 million pretax ($0.05 per diluted
share). Operating income in the same quarter last year was unfavorably
impacted by a pretax charge of $18.1 million ($0.03 per diluted share) for
restructuring and related costs, partially offset by a pretax gain of $13.2
million ($0.02 per diluted share) on the sale of real estate. Excluding the
non-recurring items in both periods, operating income increased $23.2 million,
or 6.6%, to $373.4 million from $350.2 million. The increase in operating
income, excluding the effects of these non-recurring items in both periods, is
primarily due to the increase in gross profit as SG&A expenses were relatively
flat quarter-to-quarter. Unfavorable foreign exchange translation rates
reduced operating income by $16.0 million or 4.6%.
Interest expense decreased $5.6 million to $64.8 million from $70.5 million
in the third quarter a year ago primarily due to lower average borrowings.
Other expenses increased $11.6 million to $18.0 million from $6.4 million in
the same quarter last year, primarily due to currency losses in the
Asia/Pacific region.
The effective tax rate for the third quarter was 30.0%, which included a
benefit from recent tax legislation in Italy and a reduction in the full-year
projected tax rate as noted in the nine-month discussion above.
Net income for the current quarter was $188.2 million compared to $174.4
million for the same quarter last year. Diluted earnings per share was $0.50
compared to $0.47 a year ago and basic earnings per share was $0.51 compared
to $0.47 a year ago. Excluding the non-recurring items noted above, net income
would have increased 16.6% to $206.7 million from $177.2 million a year ago;
diluted earnings per share would have increased 14.6% to $0.55 from $0.48 a
year ago; and basic earnings per share would have increased 16.7% to $0.56
from $0.48 a year ago.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities totaled $554.7 million for the nine
month period ended January 28, 1998 compared to $434.9 million last year.
Cash provided by investing activities totaled $148.5 million compared to
requiring $421.3 million last year. Cash provided by divestitures in the
current period totaled $490.7 million, due to the sale of the Ore-Ida frozen
foodservice business. Acquisitions in the current period required $136.4
million, due mainly to the purchases of John West Foods Limited in Europe, the
single-serve foodservice business of CPC (United Kingdom) and its Frank
Cooper's brand, a majority interest in Pudliszki S.A. of Poland, a majority
interest in a pet food joint venture with Tiger Oats Limited of Johannesburg,
South Africa and other acquisitions, primarily in the Asia/Pacific region.
Acquisitions in the prior year's comparable period totaled $179.6 million, due
mainly to the purchases of substantially all of the pet food businesses of
Martin Feed Mills Limited in Canada, the assets of the canned beans and pasta
business of Nestle Canada Inc., Shortland Cannery Limited in New Zealand, and
Southern Country Foods Ltd. in Australia. Purchases of property, plant and
equipment totaled $258.4 million in the current period compared to $277.7
million a year ago.
12
In the current period, $647.5 million was applied to financing activities
while financing activities provided $28.3 million a year ago. Treasury stock
purchases totaled $480.3 million (10.2 million shares) versus $208.3 million
(6.2 million shares) in the prior year's first nine months. Payments on long-
term debt totaled $563.1 million for the current period compared to $100.0
million last year. Dividend payments totaled $337.7 million compared to $310.2
million a year ago. Proceeds from long-term debt provided $3.9 million
compared to $45.2 million in the prior period. Stock options exercised
provided $170.6 million in the current period versus $105.6 million in the
prior year's comparable period. Net proceeds from commercial paper and short-
term borrowings provided $481.4 million compared to $468.7 million in the
prior period.
The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. As of January 28, 1998,
the company had $2.01 billion of domestic commercial paper outstanding, all of
which has been classified as long-term debt due to the long-term nature of the
credit agreement. As of April 30, 1997, the company had $1.35 billion of
domestic commercial paper outstanding and classified as long-term debt. The
company continues to evaluate long-term financing vehicles in order to reduce
short-term variable interest rate debt.
On September 10, 1997, the company's board of directors raised the quarterly
dividend on the company's common stock to $0.31 1/2 per share from $0.29 per
share, for an indicated annual rate of $1.26 per share. On March 11, 1998, the
company's board of directors declared the quarterly dividend on the company's
common stock of $0.31 1/2 per share payable on April 10, 1998 to shareholders
of record at the close of business on March 23, 1998.
On September 10, 1997, the company's board of directors authorized the
repurchase of additional shares of its common stock, par value $0.25 per
share. As of January 28, 1998 there is authorization to repurchase 11.6
million shares.
On January 14, 1998, the company issued $250 million of 5.75% five-year
notes in the international capital markets. The transaction closed on February
3, 1998 and the proceeds were used to repay domestic commercial paper.
In the third quarter, the company adopted SFAS No. 128, "Earnings per Share"
which requires the disclosure of both diluted and basic earnings per share.
Basic earnings per share is calculated by dividing earnings attributable to
common shares by average common shares outstanding, while diluted earnings per
share include all dilutive securities or other contracts that may entitle its
holder to obtain common stock, in the divisor.
The company's financial position continues to remain strong, enabling it to
meet cash requirements for operations, capital expansion programs and
dividends to shareholders.
OTHER MATTERS
On December 2, 1997, following the recommendation of the Chairman and Chief
Executive Officer Anthony J. F. O'Reilly, to the Management Development and
Compensation Committee of outside directors, the board of directors of the
company announced the appointment of William R. Johnson as president and chief
executive officer, effective April 30, 1998, the beginning of the company's
financial year. Dr. O'Reilly has agreed to remain as non-executive chairman of
the company through the annual meeting of shareholders in September 2000.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the description of legal proceedings set forth under this caption in the
company's Quarterly Report on Form 10-Q for the three months ended July 30,
1997.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
See Note 7 to the Condensed Consolidated Financial Statements in Part I--
Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part I--
Item 2 of this Quarterly Report on Form 10-Q.
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and
financial performance. Reference should be made to the section "Forward-
Looking Statements" in Item 1 of the registrant's Annual Report on Form 10-K
for the fiscal year ended April 30, 1997 for a description of the important
factors that could cause actual results to differ materially from those
discussed herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The Registrant has omitted
certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation
S-K. The Registrant agrees to furnish such documents to the Commission upon
request. Documents not designated as being incorporated herein by reference
are filed herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
10. Service Agreement between H. J. Heinz Company and
Anthony J. F. O'Reilly.
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 28, 1998.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H. J. HEINZ COMPANY
(Registrant)
Date: March 13, 1998 /s/ Paul F. Renne
By...................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 13, 1998 /s/ Edward J. McMenamin
By...................................
Edward J. McMenamin
Vice President and Corporate
Controller
(Principal Accounting Officer)
15