Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
H.J. Heinz Company and Subsidiaries
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In Fiscal 1998, the H.J. Heinz Company made significant
progress on the implementation of Project Millennia, the
company's largest-ever reorganization plan announced in
the fourth quarter of Fiscal 1997. Project Millennia was
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 share), and was
recorded as an offset to selling, general and
administrative ("SG&A") expenses. (All earnings per share
amounts included in Management's Discussion and Analysis
are presented on a diluted basis.) Including this
divestiture, the company has announced the closure or sale
of 25 plants worldwide.
The results for Fiscal 1998 included non-recurring costs
related to the implementation of Project Millennia of
$84.1 million pretax ($0.14 per share). These non-
recurring costs consist primarily of relocation, training,
consulting and start-up costs.
In comparison, the financial results for Fiscal 1997
were also significantly impacted by Project Millennia.
Restructuring charges and related costs recorded in Fiscal
1997 for Project Millennia totaled $647.2 million pretax
($1.09 per share). Also during Fiscal 1997, the company
recognized gains on the sale of the New Zealand ice cream
business, $72.1 million pretax ($0.12 per share) and real
estate in the United Kingdom, $13.2 million pretax ($0.02
per share). As an integral part of Project Millennia, the
company implemented a program to eliminate inefficient
end-of-quarter trade promotion practices, which reduced
Fiscal 1997 earnings by an estimated $102.7 million pretax
($0.17 per share).
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RESULTS OF 1998 versus 1997: Sales for 1998 decreased $147.7
OPERATIONS million, or 1.6%, to $9.21 billion from $9.36 billion in
1997. The sales decrease was primarily due to divestitures
which reduced sales by 6.6% for the year and the
unfavorable effect of foreign exchange translation rates
which reduced sales by 3.1%. Sales volume increased 3.1%.
In addition, acquisitions increased sales by 3.5% and
favorable pricing increased sales by 1.5%. Domestic
operations contributed approximately 53% of consolidated
sales in 1998, compared to approximately 55% in 1997.
Divestitures accounted for $617.0 million, or 6.6%, of
the sales decrease. This decrease is primarily
attributable to the divestitures of the Ore-Ida frozen
foodservice business in the first quarter of Fiscal 1998
and the New Zealand ice cream business in the fourth
quarter of Fiscal 1997. The unfavorable sales impact of
divestitures was partially offset by acquisitions, which
increased sales by $332.0 million, or 3.5%. During Fiscal
1998, the company acquired John West Foods Limited in
Europe and made other smaller acquisitions. Fiscal 1997
acquisitions impacting the year-to-year 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 smaller acquisitions, primarily in the Asia/Pacific
region.
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Volume increased $286.8 million, or 3.1%, in 1998.
Domestically, strong volume increases were noted in Ore-
Ida retail frozen potatoes, soups and Heinz ketchup,
offset partially by a volume decrease in dog food. Foreign
volume increases were noted in seafood, infant food,
weight loss classroom activities, weight loss entrees and
bakery products.
Favorable pricing increased sales $136.4 million, or
1.5%, in 1998. Domestically, price increases were noted in
seafood, Heinz ketchup and infant food, offset partially
by a price decrease in frozen entrees.
Foreign currencies declined against the U.S. dollar,
decreasing sales $285.9 million, or 3.1%. This decrease
came primarily from sales in Italy and the Asia/Pacific
region, offset partially by sales in the United Kingdom.
In Fiscal 1998, the company implemented "price-based
costing" for The Budget Gourmet brand of frozen entrees.
This strategy has turned around the negative volume trends
noted in Fiscal 1997 with a volume increase in Fiscal
1998. In addition, the company has also refocused on the
"Smart Ones from Weight Watchers" line of frozen entrees,
resulting in a volume increase as well. Strong volume
increases were also experienced in the Weight Watchers
meeting business, which benefited from the implementation
of the Weight Watchers 1*2*3 Success(TM) Plan in the U.S.
Gross profit increased $526.2 million to $3.50 billion
from $2.97 billion, and the gross profit margin increased
to 38.0% from 31.8%. Excluding non-recurring items related
to Project Millennia in both years, gross profit increased
$169.3 million, or 5.0%, to $3.53 billion, or 38.4% of
sales, from $3.36 billion, or 36.0% of sales, last year.
The current year was unfavorably impacted by non-recurring
costs related to the implementation of Project Millennia
of $35.7 million. The prior year was unfavorably impacted
by Project Millennia restructuring and related costs of
$477.8 million, partially offset by gains on the sales of
the New Zealand ice cream business and real estate in the
United Kingdom of $85.3 million. The current year's gross
profit and gross profit margin 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, a favorable product mix and the sale of
the lower margin Ore-Ida frozen foodservice business.
SG&A expenses decreased $237.9 million to $1.98 billion
from $2.22 billion and decreased as a percentage of sales
to 21.5% from 23.7%. Excluding non-recurring items related
to Project Millennia in both years, SG&A expenses
decreased $20.3 million to $2.03 billion from $2.05
billion and increased slightly as a percentage of sales to
22.0% from 21.9%. Fiscal 1998 was favorably impacted by
the gain on the sale of the Ore-Ida frozen foodservice
business of $96.6 million, offset partially by non-
recurring costs related to the implementation of Project
Millennia of $48.4 million. The prior year was unfavorably
impacted by $169.4 million of restructuring and related
costs. Excluding non-recurring items related to Project
Millennia in both years, increased marketing and general
and administrative expenses were offset by lower selling
and distribution expenses attributable to cost savings
resulting from Project Millennia.
Total marketing support (including trade and consumer
promotions and media) remained relatively constant on a
sales decrease of 1.6%. However, advertising costs to
support our key brands increased 13.8%. (See Note 16 to
the Consolidated Financial Statements.)
Operating income increased to $1.52 billion from $756.3
million reported last year. Excluding the non-recurring
items related to Project Millennia in both years,
operating income increased 14.4% to $1.51 billion from
$1.32 billion last year. This increase was primarily due
to the increase in gross
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profit, as SG&A expenses were relatively flat year-on-year.
Operating income in the current year was negatively impacted
by foreign exchange translation rates, primarily in Italy
and the Asia/Pacific region, which reduced operating income
by $45.5 million or 3.5%. In addition to the restructuring
and related costs, last year's operating income was
negatively impacted by the company's decision to eliminate
inefficient end-of-quarter trade promotion practices.
Domestic operations provided approximately 59% of operating
income in 1998 compared to approximately 23% of operating
income in 1997. Excluding the non-recurring items related to
Project Millennia in both years, domestic operations
provided 57% of operating income this year versus
approximately 53% of operating income last year.
Non-operating expenses totaled $265.3 million in 1998
compared to $277.2 million in 1997. Net interest expense
decreased $9.4 million, or 4.0%, to $226.0 million from
$235.4 million due mainly to lower average borrowings.
The effective tax rate was 36.1% in 1998 compared to
37.0% in 1997. The 1998 effective tax rate reflects the
benefits of recent tax legislation in Italy and the United
Kingdom. (See Note 5 to the Consolidated Financial
Statements.)
Net income increased $499.7 million to $801.6 million
from $301.9 million last year and earnings per share
increased to $2.15 from $0.81. Excluding the non-recurring
items related to Project Millennia in both years, net
income increased $143.5 million, or 21.8%, to $801.4
million in Fiscal 1998 from $657.9 million in Fiscal 1997
and earnings per share increased to $2.15 per share from
$1.76 per share.
The impact of fluctuating exchange rates for 1998
remained relatively consistent on a line-by-line basis
throughout the Consolidated Statement of Income.
1997 versus 1996: Sales for 1997 increased $244.7 million,
or 2.7%, to $9.36 billion from $9.11 billion in 1996. The
sales increase was primarily due to acquisitions (net of
divestitures) and increased prices in a number of product
lines. Sales volume was reduced by the company's program
to eliminate inefficient end-of-quarter trade promotion
practices, primarily in North America. Domestic operations
contributed approximately 55% of consolidated sales in
1997, compared to approximately 57% in 1996.
Acquisitions (net of divestitures) contributed $225.5
million, or 2.5%, to the sales increase. Fiscal 1997
acquisitions impacting the year-to-year sales dollar
comparison included: Southern Country Foods Limited in
Australia, a producer of canned corned beef and meals;
substantially all of the pet food businesses of Martin
Feed Mills Limited in Canada, which produces and markets
cat and dog food throughout Canada; the canned beans and
pasta business of Nestle Canada Inc.; and other smaller
acquisitions.
Also contributing to the sales dollar increase were the
following 1996 acquisitions: Nature's Recipe Pet Food in
the U.S., which markets a brand of premium specialty pet
foods; Alimentos Pilar S.A. of Argentina, a producer of
pet and animal feed; Fattoria Scaldasole S.p.A. in Italy,
a processor of organic foods; Earth's Best, Inc. in the
U.S., which produces premium organic baby foods; Britwest
Ltd. in the United Kingdom, which markets single-serve
condiments, beverages and sauces in Britain and France;
the Craig's brand of jams and dressings in New Zealand;
Indian Ocean Tuna Ltd. in the Seychelles; and the Mareblu
brand of canned tuna in Italy. Sales were reduced by the
divestitures of the following non-strategic businesses: an
overseas mushroom business; Weight Watchers Magazine; two
regional dry
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pet food product lines; the New Zealand ice cream business;
and other smaller divestitures.
Worldwide prices increased $152.7 million, or 1.7%, in
1997. Domestic price increases occurred in Ore-Ida retail
frozen potatoes, single-serve condiments and pet food.
Overseas, prices increased in infant foods and soups.
Worldwide volume decreased $104.5 million, or 1.2%, in
1997. Sales volume was reduced by the company's program to
eliminate inefficient end-of-quarter trade promotion
practices as discussed above, primarily in North America.
Domestic sales volume decreased 3.4%, as volume declined
in Ore-Ida retail frozen potatoes, ketchup and infant
foods. Sales volume also declined in frozen entrees
(including weight control) due primarily to a very
competitive marketplace. Domestic sales volume increased
in foodservice frozen potatoes, bakery products,
condiments and pet food. Foreign sales volume increased
1.9%, driven by increased attendance overseas at the
Weight Watchers meeting business.
Overall, attendance was up in the Weight Watchers
meeting business due to a strong increase in attendance
overseas, offset partially by lower attendance in the U.S.
Foreign currencies declined against the U.S. dollar,
decreasing sales $29.0 million, or less than 1%. This
decrease came primarily from sales in Japan, Central
Europe and Zimbabwe, offset partially by sales in the
United Kingdom.
Gross profit decreased $365.0 million to $2.97 billion
in 1997 from $3.34 billion in 1996. The gross profit
margin decreased to 31.8% from 36.6%. Excluding the
effects of the 1997 restructuring charges and related
costs of $477.8 million, and the gains on the sale of the
New Zealand ice cream business and real estate in the
United Kingdom of $85.3 million, gross profit would have
increased $27.5 million to $3.36 billion, however, the
gross profit margin would have decreased to 36.0%. Fiscal
1997's adjusted gross profit margin of 36.0% was impacted
by the company's change in trade promotion practices and
higher commodity prices, offset partially by favorable
pricing.
SG&A expenses increased $166.3 million to $2.22 billion
from $2.05 billion and increased as a percentage of sales
to 23.7% from 22.5%. Excluding the effects of the 1997
restructuring charges and related costs of $169.4 million,
SG&A expenses would have remained flat at $2.05 billion
and would have decreased as a percentage of sales to
21.9%.
Total marketing support (including trade and consumer
promotions and media) increased 3.8% to $2.05 billion on a
sales increase of 2.7%.
Operating income decreased $531.3 million to $756.3
million from $1.29 billion. Excluding the effects of the
1997 restructuring charges and related costs, and gains
recognized on the sale of certain non-strategic assets,
operating income would have increased $30.6 million to
$1.32 billion. The increase in operating income, excluding
the impact of these non-recurring items, was primarily due
to the increase in gross profit as SG&A expenses were
relatively flat year-on-year. Domestic operations provided
approximately 23% of operating income in 1997 compared to
approximately 57% in 1996. Excluding the effects of the
1997 restructuring charges and related costs, and gains
recognized on the sale of certain non-strategic assets,
domestic operations would have provided approximately 53%
of operating income.
Non-operating expenses totaled $277.2 million in 1997
compared to $263.9 million in 1996. Net interest expense
increased 1.2% to $235.4 million from $232.6 million.
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The effective tax rate was 37.0% in 1997 and 35.6% in
1996. The lower effective tax rate in 1996 reflects the
recognition of operating losses overseas. (See Note 5 to
the Consolidated Financial Statements.)
Net income decreased $357.4 million to $301.9 million
from $659.3 million in Fiscal 1996 and earnings per share
decreased to $0.81 from $1.75. After-tax restructuring
charges and related costs, net of gains recognized on the
sale of certain non-strategic assets, totaled $356.0
million, or $0.95 per share. Excluding the impact of these
non-recurring items, net income would have decreased
slightly to $657.9 million and earnings per share would
have increased to $1.76. Earnings per share benefited
slightly from a reduction in the average number of shares
used for the calculation of earnings per share, which was
due primarily to the company's share repurchase program.
The impact of fluctuating exchange rates for 1997
remained relatively consistent on a line-by-line basis
throughout the Consolidated Statement of Income.
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LIQUIDITY AND Return on average shareholders' equity (ROE) was 34.4%
FINANCIAL POSITION in 1998, 11.7% in 1997 and 25.5% in 1996. Excluding non-
recurring items related to Project Millennia, ROE was
34.4% and 23.9% in 1998 and 1997, respectively. Pretax
return on average invested capital (ROIC) was 27.0% in
1998, 12.6% in 1997 and 21.8% in 1996. Excluding non-
recurring items related to Project Millennia, ROIC was
26.8% and 21.4% in 1998 and 1997, respectively.
Cash provided by operating activities increased to $1.07
billion in 1998, compared to $875.0 million in 1997 and
$737.1 million in 1996. Fiscal 1998 benefited from
increased earnings, while both Fiscal 1998 and 1997
benefited from the company's decision in the fourth
quarter of 1997 to eliminate inefficient end-of-quarter
trade promotion practices, which has resulted in improved
inventory turns and reduced working capital. In both
periods the increases were offset partially by
expenditures related to Project Millennia.
Cash provided by investing activities totaled $27.2
million in 1998, compared to requiring $386.3 million in
1997. Proceeds from divestitures totaled $494.7 million in
1998, primarily due to the sale of the Ore-Ida frozen
foodservice business, versus $165.6 million in 1997. (See
Note 3 to the Consolidated Financial Statements.) In 1998,
the company spent $142.1 million on acquisitions compared
to $208.4 million in 1997. (See Note 2 to the Consolidated
Financial Statements.)
Capital expenditures totaled $373.8 million in 1998 and
$377.5 million in 1997. Both years reflect expenditures
for productivity improvements and plant expansions,
principally at the company's Heinz Pet Products, Heinz
U.S.A., Wattie's, European Seafood, United Kingdom, Ore-
Ida, StarKist Seafood and Heinz Bakery Products
operations.
Purchases and sales/maturities of short-term investments
decreased in 1998. The company periodically sells a
portion of its short-term investment portfolio in order to
reduce its borrowings. In 1996, investments in tax
benefits provided $62.1 million, due mainly to the
company's sale of certain domestic investments.
Financing activities used $1.15 billion in 1998 compared
to $429.8 million in 1997. The company made net repayments
on indebtedness totaling $306.2 million in 1998 versus
borrowing funds totaling $82.0 million in 1997. Cash used
for dividends paid to shareholders increased by $35.6
million. Treasury stock purchases totaled $677.2 million
(13.6 million shares) in 1998 versus $277.0 million (7.9
million shares) in 1997. Stock options exercised provided
an additional $65.9 million in 1998 compared to 1997.
The average amount of short-term debt outstanding
(excluding the long-term portion of domestic commercial
paper) during 1998, 1997 and 1996 was $556.3 million,
$520.5 million and $1.52 billion, respectively. Total
short-term
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debt had a weighted-average interest rate during 1998 of
6.5% and at year-end of 6.4%. The weighted-average interest
rate on short-term debt during 1997 was 7.6% and at year-end
was 6.1%.
Aggregate domestic commercial paper had a weighted-
average interest rate during 1998 and at year-end of 5.6%.
In 1997, the weighted-average rate was 5.4% and the rate
at year-end was 5.6%. Based upon the amount of commercial
paper recorded at April 29, 1998, a variance of 1/8% in
the related interest rate would cause annual interest
expense to change by approximately $1.8 million. In
February 1998, the company issued $250 million of 5.75%
five-year notes in the international capital markets. On
March 16, 1998, the company filed a shelf registration
statement with the Securities and Exchange Commission
pursuant to which the company may from time to time issue
debt securities of up to $750 million in the aggregate.
The first transaction under the shelf registration
statement was the issuance of $300 million of 6% ten-year
notes in March 1998. The proceeds from both the five-year
notes and the ten-year notes were used to repay domestic
commercial paper. (See Note 6 to the Consolidated
Financial Statements.)
The company's $2.30 billion credit agreement, which
expires in September 2001, supports its domestic
commercial paper program. As of April 29, 1998, $1.34
billion of domestic commercial paper is classified as
long-term debt due to the long-term nature of the
supporting credit agreement. At April 30, 1997, $1.35
billion of domestic commercial paper was outstanding and
classified as long-term 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.
The company paid $452.6 million in dividends to both
common and preferred shareholders, an increase of $35.6
million, or 8.5%, over 1997. The dividend rate in effect
at the end of each year resulted in a payout ratio of
58.6% in 1998, 143.2% in 1997 and 60.6% in 1996. Excluding
the impact of the non-recurring items related to Project
Millennia in 1998 and 1997, the payout ratio was 58.6% and
65.9%, respectively.
In 1998, the company repurchased 13.6 million shares of
treasury stock, or 3.7% of the amount outstanding at the
beginning of Fiscal 1998, at a cost of $677.2 million. As
of April 29, 1998, the company had repurchased 1.8 million
shares as part of the current 10.0 million share
repurchase program, which was authorized by the Board of
Directors on September 10, 1997. The previous 15.0 million
share repurchase program, which was authorized by the
Board of Directors on July 10, 1996, was completed in
March 1998. During 1997, 7.9 million shares were
repurchased at a cost of $277.0 million. The company may
reissue repurchased shares upon the exercise of stock
options, conversion of preferred stock and for general
corporate purposes.
In Fiscal 1998, the cash requirements for Project
Millennia totaled approximately $340 million consisting of
spending for severance and exit costs, capital
expenditures and non-recurring costs related to the
implementation of Project Millennia. In Fiscal 1999, the
company expects the cash requirements related to Project
Millennia to be approximately $150 million. The company is
financing the cash requirements of Project Millennia
through operations, proceeds from the sale of non-
strategic assets and with short- and long-term borrowings.
The remaining cash requirements of Project Millennia will
not have a significant impact on the company's liquidity
or financial position.
During 1995, the company participated in the formation
of a business (the "entity") which purchases a portion of
the trade receivables generated by the company. The
company sells receivables to Jameson, Inc., a wholly
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owned subsidiary, which then sells undivided interests in
the receivables to the entity. Outside investors contributed
$95.4 million in capital to the entity. The company
consolidates the entity, and the capital contributed by
outside investors is classified as minority interest ("other
long-term liabilities") on the Consolidated Balance Sheets.
In June 1997, the Financial Accounting Standards Board
(the "FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 130
establishes standards for reporting comprehensive income
in financial statements and SFAS No. 131 expands certain
reporting and disclosure requirements for segments from
current standards. In February 1998, the FASB issued SFAS
No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits." SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit
plans. The company will adopt these statements in Fiscal
1999. The adoption of these statements will not have a
financial impact on the company.
In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. The statement requires that an entity
recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those
instruments at fair value. The company is not required to
adopt the statement until Fiscal 2001. The company is
currently evaluating the effect that implementation of the
new standard will have on its results of operations and
financial position.
The impact of inflation on both the company's financial
position and results of operations has been minimal and is
not expected to adversely affect 1999 results.
The company's financial position continues to remain
strong, enabling it to meet cash requirements for
operations, capital expansion programs and dividends to
shareholders.
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MARKET RISK The following discussion about the company's risk-
FACTORS management activities includes "forward-looking"
statements that involve risk and uncertainties. Actual
results could differ materially from those projected in
the forward-looking statements.
The company is exposed to market risks from adverse
changes in foreign exchange rates, interest rates and
commodity prices. As a policy, the company does not engage
in speculative or leveraged transactions, nor does the
company hold or issue financial instruments for trading
purposes.
Foreign Exchange Rate Sensitivity: The company's cash flow
and earnings are subject to fluctuations due to exchange
rate variation. Foreign currency risk exists by nature of
the company's global operations. The company manufactures
and sells its products in a number of locations around the
world, and hence foreign currency risk is well
diversified.
When appropriate, the company may attempt to limit its
exposure to changing foreign exchange rates through both
operational and financial market actions. These actions
may include entering into forward, option and swap
contracts to hedge existing exposures, firm commitments
and, potentially, anticipated transactions. The
instruments are used to reduce risk
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by essentially creating offsetting currency exposures. As of
April 29, 1998, the company held contracts for the purpose
of hedging certain intercompany cash flows with an aggregate
notional amount of approximately $630 million. In addition,
the company also held separate contracts in order to hedge
purchases of certain raw materials and finished goods and
for payments arising from certain foreign currency
denominated obligations totaling approximately $280 million.
Most of the company's contracts mature within one year of
the fiscal year-end. The contracts that effectively meet the
risk reduction and correlation criteria, as measured on a
currency-by-currency basis are accounted for as hedges.
Accordingly, gains and losses are deferred in the cost basis
of the underlying transaction. In those circumstances when
it is not appropriate to account for the contracts as
hedges, any gains and losses from mark-to-market and
settlement are recorded in miscellaneous income and expense.
At April 29, 1998, unrealized gains and losses on
outstanding foreign currency contracts are not material. As
of April 29, 1998, the potential gain or loss in the fair
value of the company's outstanding foreign currency
contracts, assuming a hypothetical 10% fluctuation in the
currencies of such contracts, would be approximately $90
million. However, it should be noted that any change in the
value of the contracts, real or hypothetical, would be
significantly offset by an inverse change in the value of
the underlying hedged items. In addition, this hypothetical
calculation assumes that each exchange rate would change in
the same direction relative to the U.S. dollar.
Substantially all of the company's foreign affiliates'
financial instruments are denominated in their respective
functional currencies. Accordingly, exposure to exchange
risk on foreign currency financial instruments is not
material. (See Note 12 to the Consolidated Financial
Statements.)
Interest Rate Sensitivity: The company is exposed to
changes in interest rates primarily as a result of its
borrowing and investing activities used to maintain
liquidity and fund business operations. The company
continues to utilize commercial paper to fund working
capital requirements in the U.S. and Canada. The company
also borrows in different currencies from other sources to
meet the borrowing needs of its foreign affiliates. The
nature and amount of the company's long-term and short-
term debt can be expected to vary as a result of future
business requirements, market conditions and other
factors. The company may utilize interest rate swap
agreements to lower funding costs, to diversify sources of
funding or to alter interest rate exposure. There are no
interest rate swap agreements outstanding at April 29,
1998.
The following table summarizes the company's debt
obligations at April 29, 1998. The interest rates
represent weighted-average rates, with the period end rate
used for the variable rate debt obligations. The fair
value of the debt obligations approximated the recorded
value as of April 29, 1998. (See Notes 6 and 12 to the
Consolidated Financial Statements.)
Expected Fiscal Year of Maturity
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(Dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total
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Fixed rate $ 34,519 $ 582,538 $ 18,513 $ 14,464 $ 457,190 $ 346,889 $ 1,454,113
Average interest rate 7.21% 7.01% 7.75% 9.53% 6.28% 6.42%
Variable rate $ 305,107 $ 3,687 - $ 1,340,824 - $ 7,432 $ 1,657,050
Average interest rate 6.40% 5.75% - 5.64% - 5.30%
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Commodity Price Sensitivity: The company is the
purchaser of certain commodities such as corn, wheat and
soybean meal and oil. The company generally purchases
these commodities based upon market prices that are
established with the vendor as part of the purchase
process. In general, the company does not use significant
levels of commodity financial instruments to hedge
commodity prices due to a high correlation between the
commodity cost and the ultimate selling price of the
product. On occasion, the company may enter into commodity
future or option contracts, as deemed appropriate, to
reduce the effect of price fluctuations on some future
manufacturing requirements. Such contracts are accounted
for as hedges, with gains and losses recognized as part of
cost of products sold, and generally have a term of less
than one year. As of April 29, 1998, unrealized gains and
losses related to commodity contracts held by the company
were not material nor would they have been given a
hypothetical 10% fluctuation in market prices. It should
be noted that any change in the value of the contracts,
real or hypothetical, would be significantly offset by an
inverse change in the value of the underlying hedged
items. (See Note 12 to the Consolidated Financial
Statements.)
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YEAR 2000 ISSUE The Year 2000 issue is the result of date-sensitive
computer programs using two digits rather than four to
define the applicable year. If not corrected, this could
result in system failures or miscalculations leading to
significant disruptions in a company's operations.
Beginning in 1996, the company initiated a worldwide
information technology review to identify areas impacted
by Year 2000 issues. Employees of the company, outside
experts and consultants have developed a plan to manage
and correct potential problems. As part of the plan, the
company has or will replace, upgrade, modify and test
existing computer hardware, software and process systems.
Additionally, a review of the company's suppliers and
customers is being made to ascertain that they will be
Year 2000 compliant. The company is proceeding against
time lines established in the plan which are designed to
bring its systems to the point that they will be
operationally effective prior to the Year 2000. While
there can be no assurance that the company and its
suppliers and customers will fully resolve all Year 2000
issues, neither the estimated cost to become Year 2000
operationally effective nor the outcome of the Year 2000
problem is expected to have a material impact on the
company's operations, liquidity or financial position.
- ------------------------------------------------------------------------------
STOCK MARKET H.J. Heinz Company common stock is traded principally on
INFORMATION the New York Stock Exchange and the Pacific Stock
Exchange, under the symbol HNZ. The number of shareholders
of record of the company's common stock as of June 26,
1998 approximated 64,497. The closing price of the common
stock on the New York Stock Exchange composite listing on
April 29, 1998 was $53 5/16.
Stock price information for common stock by quarter
follows:
Stock Price Range
-------------------------------------------
High Low
- ------------------------------------------------------------------------------
1998
First $47 1/2 $41 1/4
Second 49 7/16 41 1/8
Third 56 11/16 45 1/2
Fourth 59 15/16 51 7/16
- ------------------------------------------------------------------------------
1997
First $34 $29 3/4
Second 36 1/8 31 1/4
Third 41 1/2 35 1/4
Fourth 44 7/8 38 1/8
- ------------------------------------------------------------------------------
33
- ------------------------------------------------------------------------------
SEGMENT AND The company is engaged principally in one line of
GEOGRAPHIC DATA business--processed food products--which represents more
than 90% of consolidated sales. The following table
presents information about the company by geographic area.
There were no material amounts of sales or transfers among
geographic areas and no material amounts of United States
export sales.
(Dollars in thousands) Domestic Foreign Worldwide North America Europe Asia/Pacific Other
- ------------------------------------------------------------------- -----------------------------------------------------------
1998
Sales $4,873,710 $4,335,574 $9,209,284 $5,331,408 $2,453,180 $1,015,885 $408,811
Operating income 892,625 627,705 1,520,330 938,289 395,179 132,934 53,928
Operating income
excluding
restructuring
related items* 860,521 647,332 1,507,853 906,114 409,030 138,781 53,928
Identifiable assets 4,075,040 3,948,381 8,023,421 4,522,535 2,332,609 825,029 343,248
Capital expenditures+ 187,927 185,827 373,754 212,713 62,211 49,097 49,733
Depreciation and
amortization expense 168,076 145,546 313,622 186,602 81,906 30,475 14,639
- ------------------------------------------------------------------- -----------------------------------------------------------
1997
Sales $5,169,779 $4,187,228 $9,357,007 $5,586,730 $2,281,364 $1,129,788 $359,125
Operating income 174,280 581,991 756,271 208,585 320,347 166,552 60,787
Operating income
excluding
restructuring
related items++ 704,880 613,309 1,318,189 751,685 374,202 130,515 61,787
Identifiable assets 4,474,740 3,963,047 8,437,787 4,941,301 2,241,006 995,762 259,718
Capital expenditures+ 192,682 184,775 377,457 213,574 102,677 31,442 29,764
Depreciation and
amortization expense 203,587 136,903 340,490 221,249 81,932 29,944 7,365
1996
Sales $5,235,847 $3,876,418 $9,112,265 $5,598,286 $2,133,690 $1,085,747 $294,542
Operating income 739,807 547,765 1,287,572 801,090 336,481 114,239 35,762
Identifiable assets 4,801,790 3,821,901 8,623,691 5,099,632 2,289,919 978,292 255,848
Capital expenditures+ 185,874 148,913 334,787 195,517 65,485 40,294 33,491
Depreciation and
amortization expense 206,912 136,897 343,809 224,824 72,530 30,674 15,781
- ------------------------------------------------------------------- -----------------------------------------------------------
*Excludes domestic and foreign charges for non-recurring costs related to the
implementation of Project Millennia of $64.5 million and $19.6 million,
respectively. Also excludes a domestic gain on the sale of the Ore-Ida
foodservice foods business of $96.6 million.
+Excludes property, plant and equipment acquired through acquisitions.
++Excludes domestic and foreign charges for restructuring and related costs of
$530.6 million and $116.6 million, respectively. Also excludes gains on the
sale of an ice cream business in New Zealand and real estate in the U.K. of
$72.1 million and $13.2 million, respectively.
34
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
H.J. Heinz Company and Subsidiaries
Fiscal Year Ended APRIL 29, 1998 April 30, 1997 May 1, 1996
- ------------------------------------------------------------------------------
(Dollars in thousands,
except per share data) (52 WEEKS) (52 weeks) (52 weeks)
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS
OF INCOME:
Sales $ 9,209,284 $ 9,357,007 $ 9,112,265
Cost of products sold 5,711,213 6,385,091 5,775,357
- ------------------------------------------------------------------------------
Gross profit 3,498,071 2,971,916 3,336,908
Selling, general and
administrative
expenses 1,977,741 2,215,645 2,049,336
- ------------------------------------------------------------------------------
Operating income 1,520,330 756,271 1,287,572
Interest income 32,655 39,359 44,824
Interest expense 258,616 274,746 277,411
Other expense, net 39,388 41,820 31,324
- ------------------------------------------------------------------------------
Income before income
taxes 1,254,981 479,064 1,023,661
Provision for income
taxes 453,415 177,193 364,342
Net income $ 801,566 $ 301,871 $ 659,319
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS
OF RETAINED EARNINGS:
Amount at beginning of
year $ 4,041,285 $ 4,156,380 $ 3,878,988
Net income 801,566 301,871 659,319
Cash dividends:
Common stock 452,566 416,923 381,871
Preferred stock 37 43 56
Amount at end of year $ 4,390,248 $ 4,041,285 $ 4,156,380
- ------------------------------------------------------------------------------
PER COMMON SHARE
AMOUNTS:
Net income - diluted $ 2.15 $ 0.81 $ 1.75
Net income - basic $ 2.19 $ 0.82 $ 1.79
Cash dividends $ 1.23 1/2 $ 1.13 1/2 $ 1.03 1/2
- ------------------------------------------------------------------------------
Average common shares
outstanding - diluted 372,952,851 374,043,705 377,606,606
Average common shares
outstanding - basic 365,982,290 367,470,850 368,799,645
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
35
CONSOLIDATED BALANCE SHEETS
H.J. Heinz Company and Subsidiaries
Assets (Dollars in thousands) APRIL 29, 1998 April 30, 1997
- ------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 96,300 $ 156,986
Short-term investments, at cost
which approximates market 3,098 31,451
Receivables (net of allowances:
1998 - $17,627 and 1997 -
$18,934) 1,071,837 1,118,874
Inventories:
Finished goods and work-in-
process 988,322 1,040,104
Packaging material and
ingredients 340,521 392,407
- ------------------------------------------------------------------------------
1,328,843 1,432,511
- ------------------------------------------------------------------------------
Prepaid expenses 167,431 208,246
Other current assets 19,010 65,038
- ------------------------------------------------------------------------------
Total current assets 2,686,519 3,013,106
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 51,129 55,992
Buildings and leasehold
improvements 806,299 871,417
Equipment, furniture and other 3,210,695 3,453,189
- ------------------------------------------------------------------------------
4,068,123 4,380,598
Less accumulated depreciation 1,673,461 1,901,378
- ------------------------------------------------------------------------------
Total property, plant and
equipment, net 2,394,662 2,479,220
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OTHER NON-CURRENT ASSETS:
Goodwill (net of amortization:
1998 - $297,868 and 1997 -
$259,019) 1,764,574 1,803,552
Trademarks (net of
amortization: 1998 - $67,791
and 1997 - $57,186) 416,918 416,990
Other intangibles (net of
amortization: 1998 - $112,768
and 1997 - $106,046) 194,560 210,106
Other non-current assets 566,188 514,813
- ------------------------------------------------------------------------------
Total other non-current assets 2,942,240 2,945,461
- ------------------------------------------------------------------------------
Total assets $ 8,023,421 $ 8,437,787
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
36
Liabilities and Shareholders'
Equity (Dollars in thousands) APRIL 29, 1998 April 30, 1997
- ------------------------------------------------------------------------------
CURRENT LIABILITIES:
Short-term debt $ 301,028 $ 589,893
Portion of long-term debt due
within one year 38,598 573,549
Accounts payable 978,365 865,154
Salaries and wages 66,473 64,836
Accrued marketing 163,405 164,354
Accrued restructuring costs 94,400 210,804
Other accrued liabilities 360,608 315,662
Income taxes 161,396 96,163
- ------------------------------------------------------------------------------
Total current liabilities 2,164,273 2,880,415
- ------------------------------------------------------------------------------
LONG-TERM DEBT AND OTHER
LIABILITIES:
Long-term debt 2,768,277 2,283,993
Deferred income taxes 291,161 265,409
Non-pension postretirement
benefits 209,642 211,500
Other 373,552 356,049
- ------------------------------------------------------------------------------
Total long-term debt and other
liabilities 3,642,632 3,116,951
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Capital stock:
Third cumulative preferred,
$1.70 first series, $10 par
value 199 241
Common stock, 431,096,485
shares issued, $.25 par
value 107,774 107,774
- ------------------------------------------------------------------------------
107,973 108,015
Additional capital 252,773 175,811
Retained earnings 4,390,248 4,041,285
Cumulative translation
adjustments (391,148) (210,864)
- ------------------------------------------------------------------------------
4,359,846 4,114,247
Less:
Treasury shares, at cost
(67,678,632 shares at April
29, 1998 and 63,912,463
shares at April 30, 1997) 2,103,979 1,629,501
Unfunded pension obligation 24,529 26,962
Unearned compensation
relating to the ESOP 14,822 17,363
- ------------------------------------------------------------------------------
Total shareholders' equity 2,216,516 2,440,421
Total liabilities and
shareholders' equity $ 8,023,421 $ 8,437,787
- ------------------------------------------------------------------------------
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
H.J. Heinz Company and Subsidiaries
Fiscal Year Ended APRIL 29, 1998 April 30, 1997 May 1, 1996
- ------------------------------------------------------------------------------
(Dollars in thousands) (52 WEEKS) (52 weeks) (52 weeks)
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 801,566 $ 301,871 $ 659,319
Adjustments to reconcile
net income to cash provided
by operating activities:
Depreciation 222,492 244,388 254,640
Amortization 91,130 96,102 89,169
Deferred tax provision
(benefit) 120,875 (33,450) 135,235
Gain on sale of Ore-Ida
frozen foodservice
business (96,563) - -
Gain on sale of New
Zealand ice cream
business and U.K. real
estate - (85,282) -
Provision for
restructuring - 647,200 -
Other items, net (126,805) (42,527) (82,198)
Changes in current assets
and liabilities,
excluding effects of
acquisitions and
divestitures:
Receivables (7,155) 74,445 (222,894)
Inventories 47,917 (5,329) (102,269)
Prepaid expenses and
other current assets 4,874 5,094 (14,361)
Accounts payable 54,345 18,003 126,596
Accrued liabilities (131,400) (182,555) (114,015)
Income taxes 84,468 (162,962) 7,866
- ------------------------------------------------------------------------------
Cash provided by operating
activities 1,065,744 874,998 737,088
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (373,754) (377,457) (334,787)
Acquisitions, net of cash
acquired (142,112) (208,383) (156,006)
Proceeds from divestitures 494,739 165,555 82,061
Purchases of short-term
investments (1,179,024) (1,223,884) (982,824)
Sales and maturities of
short-term investments 1,216,573 1,233,919 1,050,971
Investment in tax benefits - 139 62,081
Other items, net 10,740 23,798 (11,637)
- ------------------------------------------------------------------------------
Cash provided by (used for)
investing activities 27,162 (386,313) (290,141)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from long-term
debt 555,017 47,483 4,860
Payments on long-term debt (572,905) (99,176) (46,791)
(Payments on) proceeds from
commercial paper and
short-term borrowings (288,346) 133,732 (39,745)
Dividends (452,603) (416,966) (381,927)
Purchase of treasury stock (677,193) (277,046) (155,200)
Exercise of stock options 200,972 135,082 95,853
Other items, net 88,457 47,131 52,149
- ------------------------------------------------------------------------------
Cash (used for) financing
activities (1,146,601) (429,760) (470,801)
- ------------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents (6,991) 7,997 (10,420)
- ------------------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents (60,686) 66,922 (34,274)
Cash and cash equivalents
at beginning of year 156,986 90,064 124,338
Cash and cash equivalents
at end of year $ 96,300 $ 156,986 $ 90,064
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H.J. Heinz Company and Subsidiaries
- ------------------------------------------------------------------------------
1. SIGNIFICANT
ACCOUNTING Fiscal Year: H.J. Heinz Company (the "company") operates
POLICIES on a 52- or 53-week fiscal year ending the Wednesday
nearest April 30. However, certain foreign subsidiaries
have earlier closing dates to facilitate timely reporting.
Fiscal years for the financial statements included herein
ended April 29, 1998, April 30, 1997 and May 1, 1996.
Principles of Consolidation: The consolidated financial
statements include the accounts of the company and its
subsidiaries. All intercompany accounts and transactions
were eliminated. Certain prior-year amounts have been
reclassified in order to conform with the 1998
presentation.
Use of Estimates: The preparation of financial statements,
in conformity with generally accepted accounting
principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these
estimates.
Translation of Foreign Currencies: For all significant
foreign operations, the functional currency is the local
currency. Assets and liabilities of these operations are
translated at the exchange rate in effect at each year-
end. Income statement accounts are translated at the
average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing
exchange rates from period to period are included as a
component of shareholders' equity. Gains and losses from
foreign currency transactions are included in net income
for the period.
Cash Equivalents: Cash equivalents are defined as highly
liquid investments with original maturities of 90 days or
less.
Inventories: Inventories are stated at the lower of cost
or market. Cost is determined principally under the
average cost method.
Property, Plant and Equipment: Land, buildings and
equipment are recorded at cost. For financial reporting
purposes, depreciation is provided on the straight-line
method over the estimated useful lives of the assets.
Accelerated depreciation methods are generally used for
income tax purposes. Expenditures for new facilities and
improvements that substantially extend the capacity or
useful life of an asset are capitalized. Ordinary repairs
and maintenance are expensed as incurred. When property is
retired or otherwise disposed, the cost and related
depreciation are removed from the accounts and any related
gains or losses are included in income.
Intangibles: Goodwill, trademarks and other intangibles
arising from acquisitions are being amortized on a
straight-line basis over periods not exceeding 40 years.
The company regularly reviews the individual
39
- ------------------------------------------------------------------------------
components of the balances by evaluating the future cash
flows of the businesses to determine the recoverability of
the assets and recognizes, on a current basis, any
diminution in value.
Long-Lived Assets: On May 2, 1996, the company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The
implementation of this standard did not have a material
effect on results of operations or financial position.
Revenue Recognition: The company generally recognizes
revenue upon shipment of goods to customers or upon
performance of services. However, in certain overseas
countries, revenue is recognized upon receipt of the
product by the customer.
Advertising Expenses: Advertising costs are generally
expensed in the year in which the advertising first takes
place.
Income Taxes: Deferred income taxes result primarily from
temporary differences between financial and tax reporting.
If it is more likely than not that some portion or all of
a deferred tax asset will not be realized, a valuation
allowance is recognized.
The company has not provided for possible U.S. taxes on
the undistributed earnings of foreign subsidiaries that
are considered to be reinvested indefinitely. Calculation
of the unrecognized deferred tax liability for temporary
differences related to these earnings is not practicable.
Where it is contemplated that earnings will be remitted,
credit for foreign taxes already paid generally will
offset applicable U.S. income taxes. In cases where they
will not offset U.S. income taxes, appropriate provisions
are included in the Consolidated Statements of Income.
Stock-Based Employee Compensation Plans: Stock-based
compensation is accounted for by using the intrinsic
value-based method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees."
Financial Instruments: The company uses derivative
financial instruments for the purpose of hedging currency,
price and interest rate exposures which exist as part of
ongoing business operations. As a policy, the company does
not engage in speculative or leveraged transactions, nor
does the company hold or issue financial instruments for
trading purposes.
[_] Interest Rate Swap Agreements: The company may utilize
interest rate swap agreements to lower funding costs, to
diversify sources of funding or to alter interest rate
exposure. Amounts paid or received on interest rate swap
agreements are deferred and recognized as adjustments to
interest expense. Gains and losses realized upon the
settlement of such contracts are deferred and amortized to
interest expense over the remaining term of the debt
instrument or are recognized immediately if the underlying
instrument is settled.
[_] Foreign Currency Contracts: The company enters into
forward, option and swap contracts to hedge transactions
denominated in foreign currencies in order to reduce the
currency risk associated with fluctuating exchange rates.
Such contracts are used primarily to hedge certain
intercompany cash flows, purchases of certain raw
materials and finished goods and for payments
40
- ------------------------------------------------------------------------------
arising from certain foreign currency denominated
obligations. Realized and unrealized gains and losses from
instruments qualifying as hedges are deferred as part of the
cost basis of the underlying transaction. Realized and
unrealized gains and losses from foreign currency contracts
used as economic hedges but not qualifying for hedge
accounting are recognized currently in miscellaneous income
and expense.
[_] Commodity Contracts: In connection with purchasing
certain commodities for future manufacturing requirements,
the company enters into commodities futures and option
contracts, as deemed appropriate, to reduce the effect of
price fluctuations. Such contracts are accounted for as
hedges, with gains and losses recognized as part of cost
of products sold, and generally have a term of less than
one year.
The cash flows related to the above financial instruments
are classified in the Statements of Cash Flows in a manner
consistent with those of the transactions being hedged.
Earnings Per Share: In the third quarter of Fiscal 1998,
the company adopted SFAS No. 128, "Earnings Per Share,"
which requires the disclosure of both diluted and basic
earnings per share. Previously reported earnings per share
amounts have been restated, as necessary, to conform to
Statement No. 128 requirements. All earnings per share
amounts are presented on a diluted basis unless otherwise
noted.
Business Segment Information: Information concerning
business segment and geographic data is in Management's
Discussion and Analysis.
Recently Issued Accounting Standards: In June 1997, the
FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 130
establishes standards for reporting comprehensive income
in financial statements and SFAS No. 131 expands certain
reporting and disclosure requirements for segments from
current standards. In February 1998, the FASB issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit
plans. The company will adopt these statements in Fiscal
1999. The adoption of these statements will not have a
financial impact on the company.
In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. The statement requires that an entity
recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those
instruments at fair value. The company is not required to
adopt the statement until Fiscal 2001. The company is
currently evaluating the effect that implementation of the
new standard will have on its results of operations and
financial position.
41
- ------------------------------------------------------------------------------
2. ACQUISITIONS All of the following acquisitions have been accounted
for as purchases and, accordingly, the respective purchase
prices have been allocated to the respective assets and
liabilities based upon their estimated fair values as of
the acquisition date. Operating results of businesses
acquired have been included in the Consolidated Statements
of Income from the respective acquisition dates forward.
Fiscal 1998: The company acquired businesses for a total
of $142.1 million. The preliminary allocations of the
purchase price resulted in goodwill of $71.4 million and
trademarks and other intangible assets of $27.2 million,
which are being amortized on a straight-line basis over
periods not exceeding 40 years.
On June 30, 1997, the company acquired John West Foods
Limited from Unilever. John West Foods Limited 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.) During Fiscal 1998, the
company also made other acquisitions, primarily in the
Asia/Pacific region, Europe and South Africa.
Fiscal 1997: The company acquired businesses for a total
of $222.6 million, including notes to sellers of $14.2
million. The allocations of purchase price resulted in
goodwill of $144.9 million and trademarks and other
intangible assets of $26.9 million, which are being
amortized on a straight-line basis over periods not
exceeding 40 years.
On November 4, 1996, the company acquired the assets of
the canned beans and pasta business of Nestle Canada Inc.,
together with a two-year license to use the Libby's brand.
Under the agreement, the company also acquired the
trademarks Deep-Browned Beans, Alpha-Getti and Zoodles,
among others.
On September 23, 1996, the company acquired
substantially all of the pet food businesses of Martin
Feed Mills Limited of Elmira, Ontario. Martin produces and
markets cat and dog food throughout Canada and also
exports to Japan and Europe. Martin sells pet food under
the Techni-Cal brand and markets products under the Medi-
Cal label through veterinary offices and clinics.
On July 10, 1996, the company acquired Southern Country
Foods Limited in Australia, a producer of canned corned
beef and meals. During Fiscal 1997, the company also made
other smaller acquisitions.
Fiscal 1996: The company acquired businesses for a total
of $193.4 million, including notes to sellers of $37.4
million. The allocations of purchase price resulted in
goodwill of $128.1 million and trademarks and other
intangibles of $6.6 million, which are being amortized on
a straight-line basis over periods not exceeding 40 years.
On March 28, 1996, the company acquired the Nature's
Recipe business, which markets a brand of premium
specialty pet foods.
42
- ------------------------------------------------------------------------------
On March 6, 1996, the company acquired Earth's Best,
Inc., which produces premium, organic baby foods and
complements the company's range of infant cereals, juices
and strained and junior foods.
The company acquired a majority interest in PMV/Zabreh,
a producer of infant formulas and dairy products located
in Zabreh, Moravia, Czech Republic.
The company increased its investment to 97% of
Kecskemeti Konzervgyar RT, which produces jarred baby
foods and canned vegetable products in Kecskemet, Hungary.
Other small acquisitions were also made during Fiscal
1996, including Fattoria Scaldasole S.p.A., which is a
processor of organic foods in Italy; Alimentos Pilar S.A.
of Argentina, a producer of pet and animal feed; the
Craig's brand of jams and dressings in New Zealand; the
Mareblu brand of canned tuna, which is sold exclusively in
Italy; a majority interest in Indian Ocean Tuna Ltd.,
located in the Seychelles; and Britwest Ltd., which
markets single-serve condiments, beverages and sauces in
Britain and France.
Pro forma results of the company, assuming all of the
above acquisitions had been made at the beginning of each
period presented, would not be materially different from
the results reported.
- ------------------------------------------------------------------------------
3. DIVESTITURES 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
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.
In the fourth quarter of Fiscal 1997, the company sold
its New Zealand ice cream business to Peters & Brownes
Limited of Perth, Australia for approximately $150
million. The pretax gain on the divestiture totaled $72.1
million, or $0.12 per share.
Fiscal 1996 divestitures included: an overseas sweetener
business, the Weight Watchers Magazine and two regional
dry pet food product lines.
Pro forma results of the company, assuming all of the
above divestitures had been made at the beginning of each
period presented, would not be materially different from
the results reported.
- ------------------------------------------------------------------------------
4. RESTRUCTURING Charges related to the company's reorganization and
CHARGES restructuring program, Project Millennia, were recorded in
Fiscal 1997 and were recognized to reflect the closure or
divestiture of 25 facilities throughout the world, the net
reduction of the global workforce by approximately 2,500
(excluding the businesses or facilities to be sold), and
other initiatives involving the exit of certain
underperforming businesses and product lines.
Restructuring and related costs recorded in Fiscal 1997
totaled $647.2 million pretax or $1.09 per share. Pretax
charges of $477.8 million were classified as cost of
products sold and $169.4 million as selling, general and
administrative expenses.
The results for Fiscal 1998 included non-recurring costs
related to the implementation of Project Millennia of
$84.1 million pretax ($0.14 per share). Pretax charges of
$35.7 million were classified as cost of products sold and
$48.4 million as selling, general and administrative
expenses. These non-recurring costs consist primarily of
relocation, training, consulting and start-up costs.
43
- ------------------------------------------------------------------------------
The major components of the Fiscal 1997 charges and the
remaining accrual balances as of April 29, 1998 and April
30, 1997 were as follows:
Employee Non-Cash
Termination and Asset
(Dollars in millions) Severance Costs Exit Costs Write-downs Total
- --------------------------------------------------------------------------------------------------------------------------------
Initial charge - 1997 $ 164.5 $ 158.4 $ 324.3 $ 647.2
Amounts utilized - 1997 (32.1)* (80.0) (324.3) (436.4)
- --------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs -
April 30, 1997 132.4 78.4 - 210.8
Amounts utilized - 1998 (91.9) (24.5) - (116.4)
- --------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs -
April 29, 1998 $ 40.5 $ 53.9 - $ 94.4
- --------------------------------------------------------------------------------------------------------------------------------
*Includes $18.9 million in non-cash charges resulting from termination benefit
programs.
Asset write-downs consisted primarily of fixed asset and
other long-term asset impairments that were recorded as a
direct result of the company's decision to exit businesses
or facilities ($206.8 million). Such assets were written
down based on management's estimate of fair value. Write-
downs were also recognized for estimated losses from
disposals of inventories, packaging materials and other
assets related to product line rationalizations and
process changes as a direct result of the company's
decision to exit businesses or facilities ($117.5
million).
- ------------------------------------------------------------------------------
5. INCOME TAXES The following table summarizes the provision/(benefit)
for U.S. federal and U.S. possessions, state and foreign
taxes on income.
(Dollars in
thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Current:
U.S. federal and
U.S. possessions $ 214,866 $ 67,274 $ 106,848
State 17,667 6,458 11,475
Foreign 100,007 136,911 110,784
- ------------------------------------------------------------------------------
332,540 210,643 229,107
- ------------------------------------------------------------------------------
Deferred:
U.S. federal and
U.S. possessions 103,630 (38,988) 87,239
State 1,536 (10,763) 10,408
Foreign 15,709 16,301 37,588
- ------------------------------------------------------------------------------
120,875 (33,450) 135,235
- ------------------------------------------------------------------------------
Total tax
provision $ 453,415 $ 177,193 $ 364,342
- ------------------------------------------------------------------------------
In 1998, reduced tax rates enacted in the United Kingdom
and Italy decreased the tax provision by $21.6 million,
representing the impact of the reduced tax rates on net
deferred taxes payable as of the dates of enactment. In
1996, the tax provision was reduced by $24.9 million due
to the recognition of foreign tax losses. In addition, tax
benefits resulting from adjustments to the beginning-of-
the-year valuation allowance, due to a change in
circumstances, to recognize the realizability of deferred
tax assets in future years totaled $12.5 million in 1996.
Tax expense resulting from allocating certain tax benefits
directly to additional capital totaled $77.7 million in
1998, $33.8 million in 1997 and $41.7 million in 1996.
44
- ------------------------------------------------------------------------------
The components of income before income taxes consist of
the following:
(Dollars in
thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Domestic $ 742,665 $ (47,219) $ 500,034
Foreign 512,316 526,283 523,627
- ------------------------------------------------------------------------------
$ 1,254,981 $ 479,064 $ 1,023,661
- ------------------------------------------------------------------------------
The differences between the U.S. federal statutory tax
rate and the company's consolidated effective tax rate are
as follows:
1998 1997 1996
- ------------------------------------------------------------------------------
U.S. federal
statutory tax
rate 35.0% 35.0% 35.0%
Tax on income of
foreign
subsidiaries (0.7) 5.6 2.2
State income
taxes (net of
federal
benefit) 1.1 (0.2) 1.8
Tax credits 0.2 (2.1) (0.2)
Earnings
repatriation (0.2) 5.5 1.3
Recognition of
foreign tax
losses - (0.7) (2.4)
Tax on income of
U.S.
possessions
subsidiaries (1.3) (2.8) (1.7)
Other 2.0 (3.3) (0.4)
- ------------------------------------------------------------------------------
Effective tax
rate 36.1% 37.0% 35.6%
- ------------------------------------------------------------------------------
The deferred tax (assets) and deferred tax liabilities
recorded on the balance sheets as of April 29, 1998 and
April 30, 1997 are as follows:
(Dollars in
thousands) 1998 1997
- ------------------------------------------------------------------------------
Depreciation/
amortization $ 443,448 $ 448,327
Benefit plans 71,508 73,081
Other 100,676 87,223
- ------------------------------------------------------------------------------
615,632 608,631
- ------------------------------------------------------------------------------
Provision for
estimated expenses (106,325) (188,220)
Operating loss
carryforwards (50,317) (51,685)
Benefit plans (111,039) (100,327)
Promotions and
advertising (31,829) (12,877)
Other (119,771) (103,575)
- ------------------------------------------------------------------------------
(419,281) (456,684)
- ------------------------------------------------------------------------------
Valuation allowance 20,992 5,459
- ------------------------------------------------------------------------------
Net deferred tax
liabilities $ 217,343 $ 157,406
- ------------------------------------------------------------------------------
At the end of 1998, net operating loss carryforwards
totaled $116.9 million. Of that amount, $69.7 million
expire through 2010; the other $47.2 million do not
expire. Foreign tax credit carryforwards total $13.4
million and expire through 2003.
The company's consolidated United States income tax
returns have been audited by the Internal Revenue Service
for all years through 1991.
Undistributed earnings of foreign subsidiaries
considered to be reinvested permanently amounted to $1.78
billion at April 29, 1998.
The 1998 net change in the valuation allowance for
deferred tax assets was an increase of $15.5 million.
45
- ------------------------------------------------------------------------------
6. DEBT
Short-Term (Dollars
in thousands) 1998 1997
- ------------------------------------------------------------------------------
Commercial paper
(foreign) $ 79,841 $ 97,008
Bank and other
borrowings 221,187 492,885
- ------------------------------------------------------------------------------
$ 301,028 $ 589,893
- ------------------------------------------------------------------------------
Total short-term debt had a weighted-average interest
rate during 1998 of 6.5% and at year-end of 6.4%. The
weighted-average interest rate on short-term debt during
1997 was 7.6% and at year-end was 6.1%.
The company maintains a $2.30 billion credit agreement
that supports its domestic commercial paper program. The
credit agreement expires in September 2001. In addition,
the company had $832.8 million of other foreign lines of
credit available at year-end, principally for overdraft
protection.
As of April 29, 1998 and April 30, 1997, the company had
$1.34 billion and $1.35 billion, respectively, of domestic
commercial paper outstanding. Due to the long-term nature
of the amended credit agreement, all of the outstanding
domestic commercial paper has been classified as long-term
debt as of April 29, 1998 and April 30, 1997. Aggregate
domestic commercial paper had a weighted-average interest
rate during 1998 and at year-end of 5.6%. In 1997, the
weighted-average rate was 5.4% and the rate at year-end
was 5.6%.
Long-Term (Dollars in Range of Maturity
thousands) Interest (Fiscal Year) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
United States Dollars:
Commercial paper Variable 2002 $ 1,337,574 $ 1,346,779
Senior unsecured notes 6.00-6.88% 2000-2008 797,791 749,681
Eurodollar bonds 5.75-7.50 2000-2003 498,944 551,423
Revenue bonds 4.00-7.70 1999-2027 18,342 16,121
Promissory notes 4.00-10.00 1999-2005 47,157 49,220
Other 6.35 1999-2006 6,337 7,072
- -----------------------------------------------------------------------------------------------------------------------------------
2,706,145 2,720,296
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Currencies
(U.S. Dollar Equivalents):
Promissory notes:
Pounds sterling 8.85% 1999-2006 27,272 41,260
Italian lire 3.90-12.55 1999-2008 23,751 28,209
Australian dollar 5.21 1999-2002 19,066 28,323
Other 5.19-24.00 1999-2022 30,641 39,454
- -----------------------------------------------------------------------------------------------------------------------------------
100,730 137,246
- ----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt 2,806,875 2,857,542
Less portion due within one
year 38,598 573,549
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2,768,277 $ 2,283,993
- -----------------------------------------------------------------------------------------------------------------------------------
The amount of long-term debt that matures in each of the
four years succeeding 1999 is: $586.2 million in 2000,
$18.5 million in 2001, $1,355.3 million in 2002 and $457.2
million in 2003.
46
- ------------------------------------------------------------------------------
In February 1998, the company issued $250 million of
5.75% five-year notes in the international capital
markets. On March 16, 1998, the company filed a shelf
registration statement with the Securities and Exchange
Commission pursuant to which the company may from time to
time issue debt securities of up to $750 million in the
aggregate. The first transaction under the shelf
registration statement was the issuance of $300 million of
6% ten-year notes in March 1998. The proceeds from both
the five-year notes and the ten-year notes were used to
repay domestic commercial paper.
- ------------------------------------------------------------------------------
7. SHAREHOLDERS' Capital Stock: The preferred stock outstanding is
EQUITY convertible at a rate of one share of preferred stock into
13.5 shares of common stock. The company can redeem the
stock at $28.50 per share.
On April 29, 1998, there were authorized, but unissued,
2,200,000 shares of third cumulative preferred stock for
which the series had not been designated.
Employee Stock Ownership Plan (ESOP): The company
established an ESOP in 1990 to replace in full or in part
the company's cash-matching contributions to the H.J.
Heinz Company Employees Retirement and Savings Plan, a 401
(k) plan for salaried employees. Matching contributions to
the 401(k) plan are based on a percentage of the
participants' contributions, subject to certain
limitations.
To finance the plan, the ESOP borrowed $50.0 million
directly from the company in 1990. The loan is in the form
of a 15-year variable-rate interest-bearing note (an
average of 5.6%, 5.6% and 5.5% for 1998, 1997 and 1996,
respectively) and is included in the company's
Consolidated Balance Sheets as unearned compensation. The
proceeds of the note were used to purchase 2,366,862
shares of treasury stock from the company at approximately
$21.13 per share.
The stock held by the ESOP is released for allocation to
the participants' accounts over the term of the loan as
company contributions to the ESOP are made. The company
contributions are reported as compensation and interest
expense. Compensation expense related to the ESOP for
1998, 1997 and 1996 was $0.2 million, $3.0 million and
$2.3 million, respectively. Interest expense was $0.9
million, $1.1 million and $1.5 million for 1998, 1997 and
1996, respectively. The company's contributions to the
ESOP and the dividends on the company stock held by the
ESOP are used to repay loan interest and principal.
The dividends on the company stock held by the ESOP were
$2.3 million, $2.3 million and $2.1 million in 1998, 1997
and 1996, respectively.
The ESOP shares outstanding at April 29, 1998 and April
30, 1997, respectively, were as follows: unallocated
593,095 and 711,725; committed-to-be-released 32,329 and
61,724; and allocated 1,124,475 and 1,156,236. Shares held
by the ESOP are considered outstanding for purposes of
calculating the company's net income per share.
47
- ------------------------------------------------------------------------------
Cumulative Translation Adjustments: Changes in the
cumulative translation component of shareholders' equity
result principally from translation of financial
statements of foreign subsidiaries into U.S. dollars. The
reduction in shareholders' equity related to the
translation component increased $180.3 million in 1998,
increased $55.1 million in 1997 and decreased $1.4 million
in 1996. During 1997, a gain of $13.8 million was
transferred from the cumulative translation component of
shareholders' equity and included in the determination of
net income as a component of the $72.1 million gain
recognized as a result of the liquidation of the company's
investment in its New Zealand ice cream business. (See
Note 3 to the Consolidated Financial Statements.)
Unfunded Pension Obligation: An adjustment for unfunded
foreign pension obligations in excess of unamortized prior
service costs was recorded, net of tax, as a reduction in
shareholders' equity. (See Note 10 to the Consolidated
Financial Statements.)
Cumulative
Preferred Stock Common Stock
--------------- ------------------------------------------------------------------
Third, $1.70
First Series Additional
$10 Par Issued In Treasury Capital
- -----------------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands) Amount Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Balance May 3, 1995 $358 $107,774 431,096 $1,450,724 65,587 $121,291
Reacquired - - - 155,200 4,806 -
Conversion of preferred
into common stock (87) - - (2,674) (117) (2,587)
Stock options exercised,
net of shares tendered
for payment - - - (101,751) (7,747) 35,797*
Other, net - - - (633) (31) 101
- -----------------------------------------------------------------------------------------------------------------------------------
Balance May 1, 1996 $271 $107,774 431,096 $1,500,866 62,498 $154,602
Reacquired - - - 277,046 7,939 -
Conversion of preferred
into common stock (30) - - (963) (41) (932)
Stock options exercised,
net of shares tendered
for payment - - - (147,071) (6,466) 21,946*
Other, net - - - (377) (18) 195
- -----------------------------------------------------------------------------------------------------------------------------------
Balance April 30, 1997 $241 $107,774 431,096 $1,629,501 63,912 $175,811
Reacquired - - - 677,193 13,559 -
Conversion of preferred
into common stock (42) - - (1,364) (56) (1,322)
Stock options exercised,
net of shares tendered
for payment - - - (200,860) (9,717) 77,830*
Other, net - - - (491) (19) 454
- -----------------------------------------------------------------------------------------------------------------------------------
Balance April 29, 1998 $199 $107,774 431,096 $2,103,979 67,679 $252,773
- -----------------------------------------------------------------------------------------------------------------------------------
Authorized Shares--April
29, 1998 20 600,000
- -----------------------------------------------------------------------------------------------------------------------------------
*Includes income tax benefit resulting from exercised stock options.
48
- ------------------------------------------------------------------------------
8. SUPPLEMENTAL CASH FLOWS INFORMATION
(Dollars in
thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Cash Paid During
The Year For:
Interest $ 300,173 $ 310,146 $ 308,564
Income taxes 188,567 295,008 143,646
- ------------------------------------------------------------------------------
Details of
Acquisitions:
Fair value of
assets $ 200,406 $ 264,560 $ 269,907
Liabilities* 47,912 56,168 113,697
- ------------------------------------------------------------------------------
Cash paid 152,494 208,392 156,210
Less cash
acquired 10,382 9 204
- ------------------------------------------------------------------------------
Net cash paid for
acquisitions $ 142,112 $ 208,383 $ 156,006
- ------------------------------------------------------------------------------
*Includes notes to sellers of $14.2 million and $37.4
million in 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
9. EMPLOYEES' Under the company's stock option plans, officers and
STOCK OPTION PLANS other key employees may be granted options to purchase
AND MANAGEMENT shares of the company's common stock. The option price on
INCENTIVE PLANS all outstanding options is equal to the fair market value
of the stock at the date of grant. Generally, options are
exercisable beginning from one to three years after date
of grant and have a maximum term of 10 years. Beginning in
Fiscal 1998, in order to place greater emphasis on
creation of shareholder value, performance-accelerated
stock options were granted to certain key executives.
These options vest eight years after the grant date,
subject to acceleration if predetermined share price goals
are achieved.
The company has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been
recognized for the company's stock option plans. If the
company had elected to recognize compensation cost based
on the fair value of the options granted at grant date as
prescribed by SFAS No. 123, net income and earnings per
share would have been reduced to the pro forma amounts
indicated below:
(Dollars in
thousands, except
per share data) 1998 1997 1996
- ------------------------------------------------------------------------------
Pro forma net
income $ 790,325 $ 295,605 $ 658,798
Pro forma diluted
net income per
common share $ 2.12 $ 0.79 $ 1.74
Pro forma basic
net income per
common share $ 2.16 $ 0.80 $ 1.79
- ------------------------------------------------------------------------------
The pro forma effect on net income for 1998, 1997 and
1996 is not representative of the pro forma effect on net
income in future years because it does not take into
consideration pro forma compensation expense related to
grants made prior to 1996.
The weighted-average fair value of options granted was
$12.45 per share in 1998, $6.94 per share in 1997 and
$6.27 per share in 1996.
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following assumptions:
1998 1997 1996
- ------------------------------------------------------------------------------
Dividend yield 2.5% 3.3% 3.3%
Volatility 20.0% 17.5% 17.8%
Risk-free
interest rate 5.8% 6.3% 6.0%
Expected term
(years) 5.5 5.5 5.5
- ------------------------------------------------------------------------------
49
- ------------------------------------------------------------------------------
Data regarding the company's stock option plans follows:
Weighted-
Average
Exercise Price
Shares Per Share
- ----------------------------------------------------------------------------
Shares under option
May 3, 1995 42,170,931 $21.52
Options granted 2,154,100 32.11
Options exercised (11,713,653) 18.40
Options surrendered (115,500) 25.26
- ----------------------------------------------------------------------------
Shares under option
May 1, 1996 32,495,878 $ 23.33
Options granted 7,508,500 34.68
Options exercised (6,466,030) 20.92
Options surrendered (463,500) 25.87
- ----------------------------------------------------------------------------
Shares under option
April 30, 1997 33,074,848 $ 26.34
Options granted 2,990,000 53.76
Options exercised (10,283,073) 22.40
Options surrendered (181,000) 34.22
- ----------------------------------------------------------------------------
Shares under option
April 29, 1998 25,600,775 $ 31.07
- ----------------------------------------------------------------------------
Options exercisable
at:
May 1, 1996 12,252,228 $ 21.53
April 30, 1997 18,473,073 22.53
April 29, 1998 14,397,175 24.70
- ----------------------------------------------------------------------------
The following summarizes information about shares under
option in the respective exercise price ranges at April
29, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------------------
Range of Weighted- Weighted- Weighted-
Exercise Average Average Average
Price Number Remaining Life Exercise Price Number Exercise Price
Per Share Outstanding (Years) Per Share Exercisable Per Share
- -------------------------------------------------------------------------------------------------------------------
$13.67-28.83 13,331,675 5.22 $ 23.86 13,301,675 $ 23.85
29.08-43.50 9,345,100 7.94 34.18 1,033,500 34.36
44.38-58.56 2,924,000 9.71 54.01 62,000 45.29
- -------------------------------------------------------------------------------------------------------------------
25,600,775 14,397,175
- -------------------------------------------------------------------------------------------------------------------
The shares authorized but not granted under the
company's stock option plans were 8,507,235 at April 29,
1998 and 11,316,235 at April 30, 1997. Common stock
reserved for options totaled 34,108,010 at April 29, 1998
and 44,391,083 at April 30, 1997.
Effective June 12, 1996, the Board of Directors adopted
and the shareholders approved a new stock option plan
providing for the grant of up to 15.0 million shares of
common stock at any time over the next 10 years. In
general, the terms of the 1996 plan are similar to the
company's other stock option plans.
The company's management incentive plan covers officers
and other key employees. Participants may elect to be paid
on a current or deferred basis. The aggregate amount of
all awards may not exceed certain limits in any year.
Compensation under the management incentive plans was
approximately $46 million in 1998, $37 million in 1997 and
$37 million in 1996.
50
- ------------------------------------------------------------------------------
10. RETIREMENT The company maintains retirement plans for the majority
PLANS of its employees. Current defined benefit plans are
provided primarily for domestic union and foreign
employees. Benefits are based on years of service and
compensation or stated amounts for each year of service.
Plan assets are primarily invested in equities and fixed-
income securities. The company's funding policy for
domestic defined benefit plans is to contribute annually
not less than the ERISA minimum funding standards nor more
than the maximum amount which can be deducted for federal
income tax purposes. Generally, foreign defined benefit
plans are funded in amounts sufficient to comply with
local regulations and ensure adequate funds to pay
benefits to retirees as they become due.
Effective in 1993, the company discontinued future
benefit accruals under the defined benefit plans for
domestic non-union hourly and salaried employees and
expanded its defined contribution plans for these same
employees.
The company maintains defined contribution plans for the
majority of its domestic non-union hourly and salaried
employees. Defined contribution benefits are provided
through company contributions that are a percentage of the
participant's pay based on age, with the contribution rate
increasing with age, and matching contributions based on a
percentage of the participant's contributions to the 401
(k) portion of the plan. (The company's matching
contributions for salaried employees are provided under
the ESOP. See Note 7 to the Consolidated Financial
Statements.) In addition, certain non-union hourly
employees receive supplemental contributions, which are
paid at the discretion of the company.
Total pension cost consisted of the following:
(Dollars in
thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Defined Benefit
Plans:
Benefits earned
during the
year $ 21,038 $ 15,583 $ 13,675
Interest cost
on projected
benefit
obligation 83,005 81,620 74,623
Actual return
on plan
assets (314,392) (149,513) (200,592)
Net
amortization
and deferral 211,279 64,499 117,461
- ------------------------------------------------------------------------------
930 12,189 5,167
Defined
contribution
plans
(excluding the
ESOP) 23,571 23,658 25,946
- ------------------------------------------------------------------------------
Total pension
cost $ 24,501 $ 35,847 $ 31,113
- ------------------------------------------------------------------------------
51
- --------------------------------------------------------------------------------
The following table sets forth the combined funded
status of the company's principal defined benefit plans at
April 29, 1998 and April 30, 1997.
Plans for Which Plans for Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of:
Accumulated benefit obligation,
primarily vested $ 949,908 $ 814,721 $ 236,852 $ 193,114
Additional obligation for
projected compensation
increases 46,323 32,850 37,438 36,293
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 996,231 847,571 274,290 229,407
Plan assets, at fair value 1,261,015 1,079,148 183,065 149,868
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation less
than (in excess of) assets 264,784 231,577 (91,225) (79,539)
Unamortized prior service cost 81,442 81,879 2,180 5,067
Unamortized actuarial (gains)
losses, net (80,119) (70,324) 78,631 66,001
Unamortized net (assets) at date
of adoption (14,798) (18,479) (326) (828)
Additional minimum liability - - (43,048) (44,870)
- -----------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension costs $ 251,309 $ 224,653 $ (53,788) $ (54,169)
- -----------------------------------------------------------------------------------------------------------------------------------
The adjustment for unfunded foreign pension obligations
in excess of the unamortized prior service costs was
recorded, net of tax, as a reduction in shareholders'
equity of $24.5 million and $27.0 million in 1998 and
1997, respectively. In 1998, the remaining portion of the
unfunded obligation was recorded as other long-term
assets and deferred taxes in the amounts of $4.1 million
and $14.4 million, respectively. In 1997, the remaining
portion of the unfunded obligation was recorded as other
long-term assets and deferred taxes in the amounts of $2.1
million and $15.8 million, respectively.
The weighted-average rates used for the years ended
April 29, 1998, April 30, 1997 and May 1, 1996 in
determining the net pension costs and projected benefit
obligations for defined benefit plans were as follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Expected rate of
return on plan
assets 9.6% 9.6% 9.4%
Discount rate 6.9% 8.2% 8.4%
Compensation
increase rate 4.9% 5.2% 5.3%
- ------------------------------------------------------------------------------
Assumptions for foreign defined benefit plans are
developed on a basis consistent with those for U.S. plans,
adjusted for prevailing economic conditions.
- ------------------------------------------------------------------------------
11. POSTRETIREMENT The company and certain of its subsidiaries provide
BENEFITS OTHER health care and life insurance benefits for retired
THAN PENSIONS employees and their eligible dependents. Certain of the
AND OTHER company's U.S. and Canadian employees may become eligible
POSTEMPLOYMENT for such benefits. In general, postretirement medical
BENEFITS coverage is provided for eligible non-union hourly and
salaried employees with at least 10 years of service
rendered after the age of 45 and certain eligible union
employees who retire with an immediate pension benefit.
Effective May 1, 1996, retired employees share in the cost
of the plan at a rate of 50%. The company currently does
not fund these benefit arrangements and may modify plan
provisions or terminate plans at its discretion.
52
- ------------------------------------------------------------------------------
Net postretirement costs consisted of the following:
(Dollars in
thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Postretirement
benefits earned
during the year $ 3,339 $ 3,864 $ 2,736
Interest cost on
accumulated
postretirement
benefit
obligation 11,280 11,694 13,350
Net amortization
and deferral (8,212) (7,014) (6,583)
- ------------------------------------------------------------------------------
Net
postretirement
benefit costs $ 6,407 $ 8,544 $ 9,503
- ------------------------------------------------------------------------------
The following table sets forth the combined status of
the company's postretirement benefit plans at April 29,
1998 and April 30, 1997.
- ------------------------------------------------------------------------------
(Dollars in
thousands) 1998 1997
- ------------------------------------------------------------------------------
Accumulated
postretirement
benefit obligation:
Retirees and
spouses $ 121,897 $ 104,300
Employees currently
eligible to
retire 14,853 14,790
Employees not yet
eligible to
retire 21,225 24,787
- ------------------------------------------------------------------------------
Total accumulated
postretirement
benefit obligation 157,975 143,877
Unamortized prior
service cost 6,418 15,346
Unrecognized net gain 53,849 62,277
- ------------------------------------------------------------------------------
Accrued
postretirement
benefit obligation 218,242 221,500
Current portion,
included in other
accrued liabilities 8,600 10,000
- ------------------------------------------------------------------------------
Non-pension
postretirement
benefits $ 209,642 $ 211,500
- ------------------------------------------------------------------------------
The weighted-average discount rate used in the
calculation of the accumulated postretirement benefit
obligation and the net postretirement benefit cost was
6.9% in 1998, 8.0% in 1997 and 8.1% in 1996. The assumed
annual composite rate of increase in the per capita cost
of company-provided health care benefits begins at 8.3%
for 1998, gradually decreases to 4.4% by 2007, and remains
at that level thereafter. A 1% increase in these health
care cost trend rates would cause the accumulated
postretirement obligation to increase by $14.0 million,
and the aggregate of the service and interest components
of 1998 net postretirement benefit costs to increase by
$1.6 million.
53
- ------------------------------------------------------------------------------
12. FINANCIAL Foreign Currency Contracts: As of April 29, 1998 and
INSTRUMENTS April 30, 1997, the company held currency swap contracts
with an aggregate notional amount of approximately $350
million and $400 million, respectively. As of April 29,
1998, these contracts have maturity dates extending from
1999 through 2002. The company also had separate contracts
to purchase certain foreign currencies as of April 29,
1998 and April 30, 1997 totaling approximately $560
million and $600 million, respectively, most of which
mature within one year of the respective fiscal year-end.
Net unrealized gains and losses associated with the
company's foreign currency contracts as of April 29, 1998
and April 30, 1997 were not material.
Commodity Contracts: As of April 29, 1998 and April 30,
1997, the notional values and unrealized gains or losses
related to commodity contracts held by the company were
not material.
Fair Value of Financial Instruments: The company's
significant financial instruments include cash and cash
equivalents, short- and long-term investments, short- and
long-term debt, currency exchange agreements and
guarantees.
In evaluating the fair value of significant financial
instruments, the company generally uses quoted market
prices of the same or similar instruments or calculates an
estimated fair value on a discounted cash flow basis using
the rates available for instruments with the same
remaining maturities. As of April 29, 1998 and April 30,
1997, the fair value of financial instruments held by the
company approximated the recorded value.
Concentrations of Credit Risk: Counterparties to currency
exchange and interest rate derivatives consist of large
major international financial institutions. The company
continually monitors its positions and the credit ratings
of the counterparties involved and, by policy, limits the
amount of credit exposure to any one party. While the
company may be exposed to potential losses due to the
credit risk of non-performance by these counterparties,
losses are not anticipated. Concentrations of credit risk
with respect to accounts receivable are limited due to the
large number of customers, generally short payment terms,
and their dispersion across geographic areas.
54
- ------------------------------------------------------------------------------
13. NET INCOME In the third quarter of Fiscal 1998, the company adopted
PER COMMON SHARE SFAS No. 128, "Earnings Per Share," which requires the
disclosure of both diluted and basic earnings per share.
The following table sets forth the computation of basic
and diluted earnings per share in accordance with the
provisions of Statement No. 128. Previously reported
earnings per share amounts have been restated, as
necessary, to conform to Statement No. 128 requirements.
Fiscal Year Ended
- ------------------------------------------------------------------------------
(In thousands,
except per share
data) 1998 1997 1996
- ------------------------------------------------------------------------------
Net income per
share - basic:
Net income $ 801,566 $ 301,871 $ 659,319
Preferred
dividends 37 43 56
- ------------------------------------------------------------------------------
Net income
applicable to
common stock $ 801,529 $ 301,828 $ 659,263
Average common
shares
outstanding -
basic 365,982 367,471 368,800
Net income per
share - basic $ 2.19 $ 0.82 $ 1.79
Net income per
share -
diluted:
Net income $ 801,566 $ 301,871 $ 659,319
Average common
shares
outstanding 365,982 367,471 368,800
Effect of
dilutive
securities:
Convertible
preferred
stock 297 340 451
Stock options 6,674 6,233 8,356
- ------------------------------------------------------------------------------
Average common
shares
outstanding -
diluted 372,953 374,044 377,607
Net income per
share - diluted $ 2.15 $ 0.81 $ 1.75
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
14. QUARTERLY RESULTS (UNAUDITED)
1998
-------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share data) First Second Third Fourth Total
- -----------------------------------------------------------------------------------------------------------------------------------
Sales $2,233,270 $2,264,082 $2,236,034 $2,475,898 $9,209,284
Gross profit 825,067 854,668 856,816 961,520 3,498,071
Net income 243,301 188,866 188,156 181,243 801,566
Per Share Amounts:
Net income - diluted $ 0.65 $ 0.51 $ 0.50 $ 0.49 $ 2.15
Net income - basic 0.66 0.52 0.51 0.50 2.19
Dividends 0.29 0.31 1/2 0.31 1/2 0.31 1/2 1.23 1/2
- -----------------------------------------------------------------------------------------------------------------------------------
1997
-------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share data) First Second Third Fourth Total
- -----------------------------------------------------------------------------------------------------------------------------------
Sales $2,208,760 $2,394,058 $2,307,538 $2,446,651 $9,357,007
Gross profit 795,639 847,504 848,289 480,484 2,971,916
Net income (loss) 179,530 177,520 174,387 (229,566) 301,871
Per Share Amounts:
Net income (loss) -
diluted $ 0.48 $ 0.47 $ 0.47 $ (0.62) $ 0.81
Net income (loss) - basic 0.49 0.48 0.47 (0.62) 0.82
Dividends 0.26 1/2 0.29 0.29 0.29 1.13 1/2
- -----------------------------------------------------------------------------------------------------------------------------------
55
- --------------------------------------------------------------------------------
First-quarter 1998 results include a gain on the sale of
the company's Ore-Ida frozen foodservice foods business to
McCain Foods Limited ($0.14 per share). (See Note 3 to the
Consolidated Financial Statements.)
The implementation of Project Millennia resulted in non-
recurring costs of $0.02 per share in the first quarter,
$0.03 per share in the second quarter, $0.05 per share in
the third quarter and $0.04 per share in the fourth
quarter of Fiscal 1998.
Third-quarter 1997 results include restructuring and
related costs ($0.03 per share), partially offset by a
gain on the sale of real estate in the U.K. ($0.02 per
share).
Fourth-quarter 1997 results include restructuring and
related costs ($1.06 per share). (See Note 4 to the
Consolidated Financial Statements.) These charges were
partially offset by a gain on the sale of the New Zealand
ice cream business ($0.12 per share). (See Note 3 to the
Consolidated Financial Statements.)
- ------------------------------------------------------------------------------
15. COMMITMENTS Legal Matters: On December 31, 1992, a food wholesale
AND CONTINGENCIES distributor filed suit against the company and its
principal competitors in the U.S. baby food industry.
Subsequent to that date, several similar lawsuits were
filed in the same court and have been consolidated into a
class action suit. The complaints, each of which seeks an
injunction and unspecified treble money damages, allege a
conspiracy to fix, maintain and stabilize the prices of
baby food. Related suits have also been filed in Alabama
and California state courts, seeking to represent a class
of indirect purchasers of baby food in the respective
states. The court has granted summary judgment to the
defendants and entered an order dismissing the complaint
with prejudice. The plaintiffs have appealed. The company
believes all of the suits are without merit and will
defend itself vigorously against them. Certain other
claims have been filed against the company or its
subsidiaries and have not been finally adjudicated. The
above-mentioned suits and claims, when finally concluded
and determined, in the opinion of management, based upon
the information that it presently possesses, will not have
a material adverse effect on the company's consolidated
financial position, results of operations or liquidity.
Lease Commitments: Operating lease rentals for warehouse,
production and office facilities and equipment amounted to
approximately $98.3 million in 1998, $93.2 million in 1997
and $87.1 million in 1996. Future lease payments for non-
cancellable operating leases as of April 29, 1998 totaled
$253.6 million (1999-$51.4 million, 2000-$43.7 million,
2001-$39.1 million, 2002-$32.1 million, 2003-$23.3 million
and thereafter-$64.0 million).
- ------------------------------------------------------------------------------
16. ADVERTISING Advertising costs for fiscal years 1998, 1997 and 1996
COSTS were $363.1 million, $319.0 million and $334.0 million,
respectively.
56
RESPONSIBILITY STATEMENTS
- ------------------------------------------------------------------------------
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management of H.J. Heinz Company is responsible for the preparation of the
financial statements and other information included in this annual report. The
financial statements have been prepared in conformity with generally accepted
accounting principles, incorporating management's best estimates and
judgments, where applicable.
Management believes that the company's internal control systems provide
reasonable assurance that assets are safeguarded, transactions are recorded
and reported appropriately, and policies are followed. The concept of
reasonable assurance recognizes that the cost of a control procedure should
not exceed the expected benefits. Management believes that its systems provide
this appropriate balance. An important element of the company's control
systems is the ongoing program to promote control consciousness throughout the
organization. Management's commitment to this program is emphasized through
written policies and procedures (including a code of conduct), an effective
internal audit function and a qualified financial staff.
The company engages independent public accountants who are responsible for
performing an independent audit of the financial statements. Their report,
which appears herein, is based on obtaining an understanding of the company's
accounting systems and procedures and testing them as they deem necessary.
The company's Audit Committee is composed entirely of outside directors. The
Audit Committee meets regularly, and when appropriate separately, with the
independent public accountants, the internal auditors and financial management
to review the work of each and to satisfy itself that each is discharging its
responsibilities properly. Both the independent public accountants and the
internal auditors have unrestricted access to the Audit Committee.
- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of H.J. Heinz Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of H.J. Heinz
Company and Subsidiaries at April 29, 1998 and April 30, 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended April 29, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, PA
June 15, 1998
57