SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE SIX MONTHS ENDED OCTOBER 28, 1998 COMMISSION FILE NUMBER 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GRANT STREET, 15219
PITTSBURGH, PENNSYLVANIA (Zip Code)
(Address of Principal Executive
Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 412-456-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days. Yes X No
--- ---
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of November 30, 1998 was 361,801,542 shares.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Six Months Six Months
Ended Ended
October 28, 1998 October 29, 1997
---------------- ----------------
FY 1999 FY 1998
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales................... $4,550,632 $4,497,352
Cost of products sold... 2,745,780 2,817,617
---------- ----------
Gross profit............ 1,804,852 1,679,735
Selling, general and
administrative expenses. 959,403 856,741
---------- ----------
Operating income........ 845,449 822,994
Interest income......... 14,152 15,542
Interest expense........ 131,559 126,108
Other expense, net...... 25,911 13,788
---------- ----------
Income before income
taxes................... 702,131 698,640
Provision for income
taxes................... 257,012 266,473
---------- ----------
Net income.............. $ 445,119 $ 432,167
========== ==========
Net income per share--
diluted................. $ 1.21 $ 1.16
========== ==========
Average common shares
outstanding--diluted.... 369,082 374,042
========== ==========
Net income per share--
basic................... $ 1.23 $ 1.18
========== ==========
Average common shares
outstanding--basic...... 362,234 366,775
========== ==========
Cash dividends per
share................... $ 0.65 3/4 $ 0.60 1/2
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------
2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Three Months
Ended Ended
October 28, 1998 October 29, 1997
---------------- ----------------
FY 1999 FY 1998
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales................... $2,322,402 $2,264,082
Cost of products sold... 1,386,003 1,409,414
---------- ----------
Gross profit............ 936,399 854,668
Selling, general and
administrative expenses. 499,049 498,891
---------- ----------
Operating income........ 437,350 355,777
Interest income......... 6,567 7,636
Interest expense........ 67,516 62,797
Other expense, net...... 8,292 7,290
---------- ----------
Income before income
taxes................... 368,109 293,326
Provision for income
taxes................... 136,777 104,460
---------- ----------
Net income.............. $ 231,332 $ 188,866
========== ==========
Net income per share--
diluted................. $ 0.63 $ 0.51
========== ==========
Average common shares
outstanding--diluted.... 369,082 374,042
========== ==========
Net income per share--
basic................... $ 0.64 $ 0.52
========== ==========
Average common shares
outstanding--basic...... 362,234 366,775
========== ==========
Cash dividends per
share................... $ 0.34 1/4 $ 0.31 1/2
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------
3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 28, 1998 April 29, 1998*
---------------- ---------------
FY 1999 FY 1998
(Unaudited)
(Thousands of Dollars)
Assets
Current Assets:
Cash and cash equivalents..................... $ 171,093 $ 96,300
Short-term investments, at cost which
approximates market........................... 10,428 3,098
Receivables, net.............................. 1,081,156 1,071,837
Inventories................................... 1,507,845 1,328,843
Prepaid expenses and other current assets..... 228,169 186,441
---------- ----------
Total current assets........................ 2,998,691 2,686,519
---------- ----------
Property, plant and equipment................. 4,033,659 4,068,123
Less accumulated depreciation................. 1,707,588 1,673,461
---------- ----------
Total property, plant and equipment, net.... 2,326,071 2,394,662
---------- ----------
Goodwill, net................................. 1,726,662 1,764,574
Trademarks, net............................... 538,676 416,918
Other intangibles, net........................ 189,578 194,560
Other non-current assets...................... 562,607 566,188
---------- ----------
Total other non-current assets.............. 3,017,523 2,942,240
---------- ----------
Total assets................................ $8,342,285 $8,023,421
========== ==========
*Summarized from audited fiscal year 1998 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 28, 1998 April 29, 1998*
---------------- ---------------
FY 1999 FY 1998
(Unaudited)
(Thousands of Dollars)
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt............................... $ 300,115 $ 301,028
Portion of long-term debt due within one year. 19,652 38,598
Accounts payable.............................. 928,390 978,365
Salaries and wages............................ 65,063 66,473
Accrued marketing............................. 188,489 163,405
Accrued restructuring costs................... 36,690 94,400
Other accrued liabilities..................... 319,204 360,608
Income taxes.................................. 220,895 161,396
---------- ----------
Total current liabilities................... 2,078,498 2,164,273
---------- ----------
Long-term debt................................ 3,138,793 2,768,277
Deferred income taxes......................... 293,112 291,161
Non-pension postretirement benefits........... 204,403 209,642
Other liabilities............................. 376,620 373,552
---------- ----------
Total long-term debt and other liabilities.. 4,012,928 3,642,632
---------- ----------
Shareholders' Equity:
Capital stock................................. 107,952 107,973
Additional capital............................ 273,164 252,773
Retained earnings............................. 4,597,303 4,390,248
---------- ----------
4,978,419 4,750,994
Less:
Treasury stock at cost (69,346,576 shares at
October 28, 1998 and
67,678,632 shares at April 29, 1998)......... 2,275,229 2,103,979
Unearned compensation relating to the ESOP... 13,710 14,822
Accumulated other comprehensive income....... 438,621 415,677
---------- ----------
Total shareholders' equity.................. 2,250,859 2,216,516
---------- ----------
Total liabilities and shareholders' equity.. $8,342,285 $8,023,421
========== ==========
*Summarized from audited fiscal year 1998 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
5
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Six Months
Ended Ended
October 28, 1998 October 29, 1997
---------------- ----------------
FY 1999 FY 1998
(Unaudited)
(Thousands of Dollars)
Cash Provided by Operating Activities........ $ 234,314 $ 397,160
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures....................... (155,559) (171,830)
Acquisitions, net of cash acquired......... (178,957) (117,939)
Proceeds from divestitures................. 178,000 490,739
Purchases of short-term investments........ (449,941) (448,509)
Sales and maturities of short-term
investments............................... 450,115 453,926
Other items, net........................... 14,866 23,559
--------- ---------
Cash (used for) provided by investing
activities.............................. (141,476) 229,946
--------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt................. (49,213) (252,876)
Proceeds from commercial paper and short-
term borrowings, net...................... 155,146 35,430
Proceeds from long-term debt............... 255,877 --
Dividends.................................. (238,064) (222,192)
Purchases of treasury stock................ (238,222) (316,721)
Exercise of stock options.................. 65,739 114,366
Other items, net........................... 31,692 40,894
--------- ---------
Cash (used for) financing activities..... (17,045) (601,099)
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................ (1,000) (4,013)
--------- ---------
Net increase in cash and cash equivalents.... 74,793 21,994
Cash and cash equivalents at beginning of
year........................................ 96,300 156,986
--------- ---------
Cash and cash equivalents at end of period... $ 171,093 $ 178,980
========= =========
See Notes to Condensed Consolidated Financial Statements.
------------
6
H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations and the financial position of the
company. Those comments should be read in conjunction with these notes.
The company's annual report on Form 10-K for the fiscal year ended April
29, 1998 includes additional information about the company, its
operations, and its financial position, and should be read in conjunction
with this quarterly report on Form 10-Q.
(2) The results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the company's business. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 1999 presentation.
(3) In the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair statement of the results of
operations of these interim periods have been included.
(4) The composition of inventories at the balance sheet dates was as follows:
October 28, 1998 April 29, 1998
---------------- --------------
(Thousands of Dollars)
Finished goods and work-in-process.......... $1,145,591 $ 988,322
Packaging material and ingredients.......... 362,254 340,521
---------- ----------
$1,507,845 $1,328,843
========== ==========
(5) The provision for income taxes consists of provisions for federal, state,
U.S. possessions and foreign income taxes. The company operates in an
international environment with significant operations in various locations
outside the United States. Accordingly, the consolidated income tax rate
is a composite rate reflecting the earnings in the various locations and
the applicable tax rates.
(6) In the second quarter of Fiscal 1999, the company reversed $25.7 million
of unutilized Project Millennia (the company's reorganization and
restructuring program announced in March, 1997) accruals for severance and
exit costs. This reversal reflected efficiencies on a number of
initiatives where the original estimates were higher than the actual costs
to complete the projects. This reversal reduced accrued restructuring
costs on the balance sheet and was recorded in cost of products sold
($20.7 million) and selling, general and administrative expenses ($5.0
million) in the statement of income.
(7) On October 2, 1998, the company completed the sale of its bakery products
unit to The Pillsbury Company for $178.0 million. The transaction resulted
in a pretax gain of $5.7 million, which was recorded in selling, general
and administrative expenses. The bakery products unit contributed
approximately $200 million in sales for Fiscal 1998. Pro forma results of
the company, assuming this transaction had been made at the beginning of
each period presented, would not be materially different from the results
reported.
(8) On June 1, 1998, the company acquired the Vidalia O's frozen onion rings
brand from Vidalia Frozen Foods, Inc. to complement the company's Ore-Ida
frozen vegetable lines.
7
On June 26, 1998, the company acquired the Eta brand of dressings
(mayonnaise, salad dressings) and peanut butter from Griffins Foods Limited
of Auckland, New Zealand.
On July 6, 1998, the company acquired the College Inn brand of canned
broths from Nabisco Inc.
During Fiscal 1999, the company also made other acquisitions.
All of the above acquisitions have been accounted for as purchases and,
accordingly, the respective purchase prices have been allocated on a
preliminary basis to the respective assets and liabilities based on their
estimated fair values as of the dates of the acquisitions. Operating
results of these acquisitions have been included in the Consolidated
Statement of Income from the dates of the acquisitions.
Pro forma results of the company, assuming all of the acquisitions had been
made at the beginning of each period presented, would not be materially
different from the results reported.
(9) The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At October 28, 1998,
the company had $1.49 billion of domestic commercial paper outstanding,
all of which has been classified as long-term debt due to the long-term
nature of the credit agreement. As of April 29, 1998, the company had
$1.34 billion of domestic commercial paper outstanding and classified as
long-term debt.
On July 15, 1998, the company, under its current shelf registration
statement, issued $250 million of 6.375% debentures due 2028. The proceeds
were used to repay domestic commercial paper.
(10) On September 8, 1998, the company's board of directors raised the
quarterly dividend on the company's common stock to $0.34 1/4 per share
from $0.31 1/2 per share, for an indicated annual rate of $1.37 per
share.
8
(11) In the third quarter of Fiscal 1998, the company adopted Statement of
Financial Accounting Standards ("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 SFAS No. 128.
Previously reported earnings per share amounts have been restated, as
necessary, to conform to SFAS No. 128 requirements.
Three Months Three Months Six Months
Ended Ended Ended Six Months Ended
October 28, 1998 October 29, 1997 October 28, 1998 October 29, 1997
---------------- ---------------- ---------------- ----------------
FY 1999 FY 1998 FY 1999 FY 1998
(In Thousands, Except per Share Amounts)
Net income per share--
basic:
Net income............ $231,332 $188,866 $445,119 $432,167
Preferred dividends... 8 9 16 19
-------- -------- -------- --------
Net income applicable
to common stock...... $231,324 $188,857 $445,103 $432,148
======== ======== ======== ========
Average common shares
outstanding--basic... 362,234 366,775 362,234 366,775
======== ======== ======== ========
Net income per share--
basic................ $ 0.64 $ 0.52 $ 1.23 $ 1.18
======== ======== ======== ========
Net income per share--
diluted:
Net income............ $231,332 $188,866 $445,119 $432,167
======== ======== ======== ========
Average common shares
outstanding.......... 362,234 366,775 362,234 366,775
Effect of dilutive
securities:
Convertible
preferred stock.... 248 310 248 310
Stock options....... 6,600 6,957 6,600 6,957
-------- -------- -------- --------
Average common shares
outstanding--diluted. 369,082 374,042 369,082 374,042
======== ======== ======== ========
Net income per share--
diluted.............. $ 0.63 $ 0.51 $ 1.21 $ 1.16
======== ======== ======== ========
9
(12) As of April 30, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." The adoption of this statement had no impact on
the company's net income or shareholders' equity. SFAS No. 130
establishes standards for reporting comprehensive income in financial
statements. Comprehensive income includes all changes in equity during a
period except those resulting from investments by or distributions to
shareholders. For the company, comprehensive income for all periods
presented consisted of net income, foreign currency translation
adjustments and the adjustment to the minimum pension liability. Amounts
in prior year financial statements have been reclassified to conform to
SFAS No. 130 requirements.
The components of comprehensive income, net of related tax, for the periods
presented are as follows:
Three Months Three Months
Ended Ended Six Months Ended Six Months Ended
October 28, 1998 October 29, 1997 October 28, 1998 October 29, 1997
---------------- ---------------- ---------------- ----------------
FY 1999 FY 1998 FY 1999 FY 1998
Net income........... $231,332 $188,866 $445,119 $432,167
Other comprehensive
income (loss):
Foreign currency
translation
adjustment........ 36,572 13,821 (24,737) (46,363)
Minimum pension
liability
adjustment........ 690 476 1,793 497
-------- -------- -------- --------
Comprehensive income. $268,594 $203,163 $422,175 $386,301
======== ======== ======== ========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SIX MONTHS ENDED OCTOBER 28, 1998 AND OCTOBER 29, 1997
RESULTS OF OPERATIONS
For the six months ended October 28, 1998, sales increased $53.3 million, or
1.2%, to $4,550.6 million from $4,497.4 million recorded in the same period a
year ago. The sales increase resulted from volume gains of 3.4%, acquisitions
of 2.4% and favorable pricing of 1.3%; partially offset by the unfavorable
effect of foreign exchange translation rates of 3.8% and divestitures of 2.1%.
Domestic operations provided 53.3% of the current period's sales compared to
53.2% in the same period last year.
Volume increases were recorded in weight loss classroom activities, Heinz
ketchup, weight loss frozen entrees and single serve condiments. Price
increases experienced in light meat tuna were offset by price decreases
experienced in pet food. Overall, domestic pricing was flat and price
increases experienced overseas were offset by unfavorable currency movements
in certain markets.
Foreign currencies declined against the U.S. dollar, decreasing sales by
$171.1 million or 3.8%. This decrease came primarily from sales in the
Asia/Pacific region and Africa.
During the first six months of Fiscal 1999, the company acquired the College
Inn brand of canned broths and other smaller acquisitions. Fiscal 1998
acquisitions impacting the period-to-period sales dollar comparison include
John West Foods Limited in Europe and other acquisitions, primarily in South
Africa and Europe. The sales impact of these acquisitions was partially offset
by divestitures, primarily the Ore-Ida frozen foodservice business in Fiscal
1998 and the bakery products unit in Fiscal 1999.
During the first six months of Fiscal 1999, the company reversed $25.7
million of unutilized Project Millennia accruals for severance and exit costs.
This reversal reflected efficiencies on a number of initiatives where the
original estimates were higher than the actual costs to complete the projects.
This reversal was recorded in cost of products sold ($20.7 million) and
selling, general and administrative expenses ($5.0 million). Also during the
first half of Fiscal 1999, the company incurred additional costs of $22.3
million related to the continued implementation of Project Millennia. These
costs consisted primarily of start-up, consulting, and training costs. On
October 2, 1998, the company completed the sale of its bakery products unit,
resulting in a pretax gain of $5.7 million, which was recorded in selling,
general and administrative expenses. The net impact of these items on diluted
earnings per share for the current six-month period was an increase of $0.01
per share.
During the first six months of Fiscal 1998, the company recognized a pretax
gain of $96.6 million from the sale of its Ore-Ida frozen foodservice
business, which was recorded in selling, general and administrative expenses,
and also incurred additional costs of $31.0 million related to the
implementation of Project Millennia. The net impact of these items on diluted
earnings per share for last year's six-month period was an increase of $0.09
per share.
Gross profit increased $125.1 million to $1,804.9 million from $1,679.7
million, and the gross profit margin increased to 39.7% from 37.3%. Excluding
the reversal of unutilized Project Millennia accruals in the current period
and Project Millennia implementation costs in both periods, gross profit
increased $108.4 million to $1,798.9 million from $1,690.5 million, and the
gross profit margin increased to 39.5% from 37.6%. Cost savings resulting from
Project Millennia, stronger sales volume and a favorable product mix increased
gross profit and gross profit margin. The Weight Watchers classrooms business
has shown continued improvement as a result of the streamlining efforts of
Project Millennia and a strong increase in attendance due to the introduction
of the Weight Watchers 1-2-3 Success(TM) Plan in the United States.
Operating income increased $22.5 million to $845.4 million from $823.0
million. The current period includes the reversal of unutilized Project
Millennia accruals, the gain on the sale of the bakery products unit, and
Project Millennia implementation costs. Last year's first six months included
the gain on the
11
sale of the Ore-Ida frozen foodservice business and Project Millennia
implementation costs. Excluding these items in both periods, operating income
increased $78.9 million, or 10.4%, to $836.3 million from $757.4 million and
the operating margin increased to 18.4% from 16.8%. The increase in operating
income, excluding these items, is primarily due to the increase in gross
profit, offset partially by an increase in selling, general and administrative
expenses. During the current period, the negative impact of foreign exchange
translation rates, primarily in the Asia/Pacific region and Africa, reduced
operating income by $20.9 million or 2.8%.
Net interest expense increased to $117.4 million from $110.6 million due to
higher borrowings, partially offset by lower average interest rates. Other
expenses increased $12.1 million to $25.9 million from $13.8 million,
primarily due to currency losses in the Asia/Pacific region.
The effective tax rate for the Fiscal 1999 six-month period was 36.6%
compared to 38.1% for the Fiscal 1998 six-month period. Excluding the impact
of the bakery sale, the effective tax rate for the current period was 36.0%.
Last year's effective rate reflected the benefit of a reduction in the income
tax rate in the United Kingdom, partially offset by a significantly higher tax
rate associated with the sale of the Ore-Ida frozen foodservice business.
Excluding the impact of the Ore-Ida frozen foodservice sale, the effective tax
rate for last year's six-month period was 37.0%.
Net income for the first six months of Fiscal 1999 was $445.1 million
compared to $432.2 million for the same period last year, and diluted earnings
per share was $1.21 compared to $1.16 a year ago. Excluding the impact of the
non-recurring items noted above, net income would have increased 11.3% to
$443.5 million from $398.6 million, and diluted earnings per share would have
increased 12.1% to $1.20 from $1.07.
THREE MONTHS ENDED OCTOBER 28, 1998 AND OCTOBER 29, 1997
RESULTS OF OPERATIONS
For the three months ended October 28, 1998, sales increased $58.3 million,
or 2.6%, to $2,322.4 million from $2,264.1 million recorded in the same period
a year ago. The sales increase resulted from volume gains of 3.2%,
acquisitions of 2.3% and favorable pricing of 1.2%; partially offset by the
unfavorable effect of foreign exchange translation rates of 3.3% and
divestitures of 0.8%. Domestic operations provided 53.7% of the current
period's sales compared to 52.3% in the same period last year.
Volume increases were experienced in Heinz ketchup, weight loss classroom
activities, light meat tuna, weight loss frozen entrees, single serve
condiments and soups. A volume decrease was recorded in frozen potatoes. Price
increases experienced in light meat tuna were offset by price decreases
experienced in pet food. Overall, domestic pricing was flat and price
increases experienced overseas were offset by unfavorable currency movements
in certain markets.
Foreign currencies declined against the U.S. dollar, decreasing sales by
$75.8 million or 3.3%. This decrease came primarily from sales in the
Asia/Pacific region and Africa.
Acquisitions impacting the quarter-to-quarter sales dollar comparison
included the College Inn brand of canned broths and other acquisitions,
primarily in South Africa and Europe. The sales impact of these acquisitions
was partially offset by divestitures, primarily the bakery products unit in
Fiscal 1999.
Gross profit increased $81.7 million to $936.4 million from $854.7 million,
and the gross profit margin increased to 40.3% from 37.7%. Excluding the
reversal of unutilized Project Millennia accruals in the current period and
Project Millennia implementation costs in both periods, gross profit increased
$55.7 million to $920.2 million from $864.5 million, and the gross profit
margin increased to 39.6% from 38.2%. Cost savings resulting from Project
Millennia, stronger sales volume, acquisitions and a favorable product mix
increased gross profit and gross profit margin. The Weight Watchers classrooms
business has shown continued improvement as a result of the streamlining
efforts of Project Millennia and a strong increase in attendance due to the
introduction of the Weight Watchers 1-2-3 Success(TM) Plan in the United
States. However, during the current period, performance in frozen potatoes and
pet food
12
have been disappointing. The company is currently addressing these issues with
the recent plan to consolidate Ore-Ida and Weight Watchers Gourmet Foods into
Heinz Frozen Food and accelerating the distribution of the 9-Lives four pack.
Operating income increased $81.6 million to $437.4 million from $355.8
million. The current period includes the reversal of unutilized Project
Millennia accruals ($25.7 million), the gain on the sale of the bakery
products unit ($5.7 million pretax), and Project Millennia implementation
costs ($7.4 million). Last year's second quarter included Project Millennia
implementation costs ($19.5 million). Excluding these items in both periods,
operating income increased $38.1 million, or 10.2%, to $413.3 million from
$375.2 million and the operating margin increased to 17.8% from 16.6%. The
increase in operating income, excluding these items, is primarily due to the
increase in gross profit, offset partially by an increase in selling, general
and administrative expenses. During the current quarter, the negative impact
of foreign exchange translation rates, primarily in the Asia/Pacific region
and Africa, reduced operating income by $6.9 million or 1.8%.
Net interest expense increased to $60.9 million from $55.2 million due to
higher borrowings, partially offset by lower average interest rates.
The effective tax rate for the second quarter was 37.2% compared to 35.6%
for the same period last year. Excluding the impact of the bakery sale, the
effective tax rate for the second quarter was 36.0%. Last year's second
quarter effective rate reflected the benefit of a reduction in the income tax
rate in the United Kingdom.
Net income for the second quarter of Fiscal 1999 was $231.3 million compared
to $188.9 million for the same period last year, and diluted earnings per
share was $0.63 compared to $0.51 a year ago. Excluding the impact of the non-
recurring items noted above, net income would have increased 9.4% to $220.2
million from $201.3 million, and diluted earnings per share would have
increased 11.1% to $0.60 from $0.54.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities totaled $234.3 million for the six-
month period ended October 28, 1998 compared to $397.2 million last year.
Cash used for investing activities totaled $141.5 million compared to
providing $229.9 million last year. Acquisitions in the current period
required $179.0 million due to the purchase of the College Inn brand of canned
broths, the Eta brand of dressings and peanut butter in New Zealand, the
Vidalia O's frozen onion rings brand and other acquisitions. Acquisitions in
last year's comparable period required $117.9 million, due mainly to the
purchases of John West Limited in Europe, a majority interest in Pudliskzi
S.A. of Poland and other acquisitions. Capital expenditures required $155.6
million in the current period compared to $171.8 million a year ago. Cash
provided by divestitures in the current period totaled $178.0 million, due to
the sale of the bakery products unit. In last year's six-month period, cash
provided by divestitures totaled $490.7 million, due to the sale of the Ore-
Ida frozen foodservice business.
In the current period, financing activities required $17.0 million compared
to $601.1 million a year ago. Share repurchases totaled $238.2 million (4.3
million shares) versus $316.7 million (7.0 million shares) last year. Dividend
payments totaled $238.1 million compared to $222.2 million a year ago.
Payments on long-term debt required $49.2 million compared to $252.9 million
last year. Proceeds from long-term debt provided $255.9 million in the current
period. Net proceeds from commercial paper and short-term borrowings provided
$155.1 million compared to $35.4 million last year. Stock options exercised
provided $65.7 million versus $114.4 million a year ago.
The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At October 28, 1998, the
company had $1.49 billion of domestic commercial paper outstanding, all of
which has been classified as long-term debt due to the long-term nature of the
credit agreement. As of April 29, 1998, the company had $1.34 billion of
domestic commercial paper outstanding and classified as long-term debt.
13
On July 15, 1998, the company, under its current shelf registration
statement, issued $250 million of 6.375% debentures due 2028. The proceeds
were used to repay domestic commercial paper.
On September 8, 1998, the company's board of directors raised the quarterly
dividend on the company's common stock to $0.34 1/4 per share from $0.31 1/2
per share, for an indicated annual rate of $1.37 per share. On December 9,
1998, the company's board of directors declared the quarterly dividend on the
company's common stock of $0.34 1/4 per share, payable on January 10, 1999, to
shareholders of record at the close of business on December 21, 1998.
On October 2, 1998, the company completed the sale of its bakery products
unit to The Pillsbury Company for $178.0 million. The transaction resulted in
a pretax gain of $5.7 million. The bakery products unit contributed
approximately $200 million in sales for Fiscal 1998. This divestiture is part
of the company's strategy to divest businesses that do not meet its strategic
objectives.
The company's financial position remains strong, enabling it to meet cash
requirements for operations, capital expansion programs and dividends to
shareholders.
YEAR 2000 ISSUE
The Year 2000 issue arises because many computer hardware and software
systems use only two digits rather than four digits to refer to a year.
Therefore, computers or other equipment with date-sensitive programming may
not properly recognize a year that begins with "20." If not corrected, this
could cause system failures or miscalculations that could significantly
disrupt the company's business.
Beginning in 1996, the company initiated a worldwide plan to address the
Year 2000 issues that could affect its operations. The company's Chief
Information Officer is in charge of the Year 2000 project. Each of the
company's business units and corporate headquarters have established Year 2000
compliance teams. The project is called "Operation Ready," a name that helps
focus the organization on the overall challenge of being operationally ready
to address the expected consequences of the Year 2000 issue, including
compliance by third parties who have material relationships with the company,
such as vendors, customers and suppliers, and the development of contingency
plans.
The first phase of Operation Ready was to conduct a worldwide review to
identify and evaluate areas impacted by the Year 2000 issue. The review and
evaluation focused on both traditional computer information systems ("IT
systems") and non-information systems such as manufacturing, process and
logistical systems which rely on embedded chips or similar devices ("non-IT
systems"). The assessment of the company's internal IT systems has been
substantially completed, and the assessment of its non-IT systems is
continuing on schedule.
The second phase of the company's Year 2000 readiness plan is remediation
which involves replacement, upgrading, modification and testing of affected
hardware, software and process systems. Management estimates that
approximately 56% of its core worldwide IT systems are Year 2000 compliant. It
is expected that the remaining IT systems will be operationally ready by July
1999. The remediation of non-IT systems is progressing, and it is estimated
that these efforts will be substantially complete by August 1999.
Teams from the Corporate Audit Department with the assistance of outside
consultants are visiting the company's major affiliates to independently
review the progress of Operation Ready. The target date for the completion of
the reviews is the end of February 1999.
It is currently estimated that the cost to make the company's IT systems and
non-IT systems Year 2000 operationally ready will be approximately $65
million, of which approximately two-thirds has been incurred to date. All of
the costs are being funded through operating cash flow. These estimated costs
have not had nor are expected to have a material adverse effect on the
company's consolidated financial position, results of operations or liquidity.
This amount does not include any costs for implementation of the company's
contingency plans described below.
14
The investigation and assessment of the Year 2000 preparedness of important
suppliers, vendors, customers and other third parties is ongoing. Progress
reports from the company's Year 2000 compliance teams on the Year 2000
readiness of these third parties are to be completed January 1999.
The consequences of noncompliance by the company, its major suppliers,
vendors, service providers or customers could have a material adverse impact
on the company's operations. Although the company does not anticipate any
major noncompliance issues, the company believes the most likely worst case
scenario would be the temporary disruption of its business in certain
locations in the event of noncompliance by the company or such third parties,
which could include temporary plant closings, delays in the delivery and
receipt of products and supplies, invoice and collection errors and inventory
obsolescence.
The company's headquarters and affiliate Year 2000 compliance teams are
working to allow the company to continue critical operations in the event
either the company or major key suppliers or customers fail to resolve their
respective Year 2000 issues in a timely manner. In addition, each major
function involving the company (purchasing, manufacturing, etc.) has a
contingency planning team working on Year 2000 issues specific to that
function. The plans developed by the functional teams will be shared with the
affiliate teams, so that Year 2000 issues will be addressed from two separate
perspectives. Contingency plans may include stockpiling raw and packaging
materials, increasing finished goods inventory levels, developing emergency
back-up procedures, securing alternate suppliers, replacing electronic
applications with manual processes or other appropriate measures.
The company's Year 2000 readiness plan, including the consideration of
contingency plans, is an ongoing process and will continue to evolve and
change as new information becomes available, including without limitation
estimates of costs and completion dates for various components of the plan as
described above.
EURO CONVERSION
A single currency, the Euro, will be introduced in Europe on January 1,
1999. Of the fifteen member countries of the European Union, eleven have
agreed to adopt the Euro as their legal currency on that date. Fixed
conversion rates between the existing currencies of these eleven countries and
the Euro will be established as of that date. The existing currencies are
scheduled to remain legal tender as denominations of the Euro until at least
January 1, 2002. During this transition period, parties may settle
transactions using either the Euro or a participating country's legal
currency. At the current time, the company does not believe that the
conversion to the Euro will have a material impact on its business or its
financial condition.
The foregoing discussion of the company's Year 2000 issue and Euro
conversion contains forward looking statements regarding anticipated costs,
projections or risks, descriptions of expected outcomes and results and other
matters that are not historical facts. These statements are subject to risks,
uncertainties and unanticipated events, including among others with respect to
the Year 2000 issue, those that could arise from Year 2000 actions and plans
of entities that do business with the company, the ability to identify,
assess, remediate and test all affected equipment and systems, including those
using embedded technology and the continued availability of qualified
personnel. As a consequence, actual results and costs may differ materially
from those expressed above. In addition, actual results may differ as a result
of other factors not enumerated above as well as changes in current
circumstances that are impossible to predict at this time.
OTHER MATTERS
On November 10, 1998, the company announced the formation of Heinz Frozen
Food Company, combining the operations of its Ore-Ida Foods and Weight
Watchers Gourmet Food Company units. As a result, the company expects to incur
a restructuring charge of approximately $150 million pretax in the third
quarter ending January 27, 1999.
15
This plan to streamline and focus the North American frozen food operations
includes the following four major initiatives:
1. Heinz Frozen Food Company headquarters will be located in Pittsburgh.
The company expects significant go-to-market benefits by combining all
frozen brands under a single management focus;
2. The company's current frozen food manufacturing operations will be
realigned to create manufacturing "centers of excellence." This
manufacturing realignment includes the closure of the West Chester,
Pennsylvania factory and downsizing of the Pocatello, Idaho facility;
3. Reconfiguration of the frozen food distribution matrix including the
consolidation and realignment of the company's warehousing and
distribution structure;
4. The discontinuance of the pocket sandwich business and exit of certain
non-strategic frozen food businesses in order to focus on the key frozen
brands.
Additionally, there will be approximately $15 million of future costs
incurred for implementation of the initiatives through the remainder of Fiscal
1999 and Fiscal 2000. These initiatives are expected to generate approximately
$32 million in future ongoing annual savings, which will be fully realized by
Fiscal 2001. The restructuring initiatives will result in a net workforce
reduction of approximately 400 employees.
The company will continue to review additional initiatives in the months
ahead which would further sharpen our business focus, while standardizing and
freeing resources for our future growth plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the company's market risk during the
six months ended October 28, 1998. For additional information, refer to pages
31 through 33 of the company's Annual Report to Shareholders for the fiscal
year ended April 29, 1998.
16
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of H. J. Heinz Company was held in
Pittsburgh, Pennsylvania on September 8, 1998. The following individuals were
elected as directors for a one-year term expiring in September 1999:
Shares
Director Shares for Withheld
------------------ ----------- ---------
A. J. F. O'Reilly 311,368,571 7,971,656
W. R. Johnson 314,237,454 5,102,773
W. P. Snyder III 313,583,829 5,756,398
H. J. Schmidt 313,569,565 5,770,662
E. B. Sheldon 313,615,229 5,724,998
S. C. Johnson 313,948,761 5,391,466
D. R. Keough 313,884,448 5,455,779
S. D. Wiley 314,014,586 5,325,641
L. J. McCabe 314,270,294 5,069,933
D. R. Williams 314,274,062 5,066,165
N. F. Brady 312,022,717 7,317,510
W. C. Springer 314,239,561 5,100,666
E. E. Holiday 314,131,576 5,208,651
P. F. Renne 314,227,857 5,112,370
C. K. Bryan 313,889,575 5,450,652
M. C. Choksi 313,864,060 5,476,167
J. M. Zimmerman 314,144,904 5,195,323
L. S. Coleman, Jr. 313,689,260 5,650,967
D. J. O'Neill 314,031,962 5,308,265
M. Ritchie 314,120,756 5,219,471
Shareholders also acted upon the following proposal at the Annual Meeting:
Elected Price WaterhouseCoopers, LLP the company's independent accountants
for the fiscal year ending April 28, 1999. Votes totaled 317,460,967 for;
749,018 against; and 1,130,242 abstentions.
ITEM 5. OTHER INFORMATION
See Note 7 to the Condensed Consolidated Financial Statements in Part I--
Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part I--
Item 2 of this Quarterly Report on Form 10-Q.
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and
financial performance. Reference should be made to the section "Forward-
Looking Statements" in Item 1 of the registrant's Annual Report on Form 10-K
for the fiscal year ended April 29, 1998 for a description of the important
factors that could cause actual results to differ materially from those
discussed herein.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The Registrant has omitted
certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-
K. The Registrant agrees to furnish such documents to the Commission upon
request. Documents not designated as being incorporated herein by reference
are filed herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
12.Computation of Ratios of Earnings to Fixed Charges.
27.Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended October 28,
1998.
18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H. J. HEINZ COMPANY
(Registrant)
Date: December 11, 1998 /s/ Paul F. Renne
By...................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: December 11, 1998 /s/ Edward J. McMenamin
By...................................
Edward J. McMenamin
Vice President and Corporate
Controller
(Principal Accounting Officer)
19