EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
H.J. Heinz Company and Subsidiaries
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OPERATION EXCEL In Fiscal 1999, the company announced a transformative
growth and restructuring initiative that is expected to
generate in excess of $200 million in annual pretax savings
and growth in earnings per share of 10 to 12 percent. The
initiative, named "Operation Excel," is a multi-year, multi-
faceted program that will result in restructuring charges and
implementation costs approaching $1.1 billion over four
years.
The company's Board of Directors approved Phase I of this
multi-year program in Fiscal 1999, which resulted in the
recognition of restructuring charges and implementation costs
totaling $552.8 million pretax ($1.11 per share). [Note: All
earnings per share amounts included in Management's
Discussion and Analysis are presented on an after-tax diluted
basis.] Pretax charges of $396.4 million are classified as
cost of products sold and $156.4 million as selling, general
and administrative expenses ("SG&A").
The major components of Operation Excel include: creating
manufacturing centers of excellence; focusing the product
portfolio; realigning the company's management teams; and
investing in growth initiatives.
Creating manufacturing centers of excellence will result in
significant changes to the company's manufacturing footprint
including the following Phase I initiatives:
[ ] Closing the Harlesden factory in London, England and
focusing the Kitt Green factory in Wigan, England on canned
beans, soups and pasta production and focusing the Elst
factory in the Netherlands on tomato ketchup and sauces
[ ] Downsizing the Puerto Rico tuna processing facility and
focusing this facility on lower volume/higher margin
products
[ ] Focusing the Pittsburgh, Pennsylvania factory on soup and
baby food production and shifting other production to
existing facilities
[ ] Closing the West Chester, Pennsylvania factory and shifting
pasta production to the Bloomsburg, Pennsylvania factory
[ ] Consolidating manufacturing capacity in the Asia/Pacific
region
[ ] Closing the Zabreh, Czech Republic factory and disposing of
the dairy business and transferring the infant formula
business to the Kendal, England factory
[ ] Downsizing the Pocatello, Idaho factory by shifting Bagel
Bites production to the Ft. Myers, Florida factory, and
shifting certain Smart Ones entree production to the
Massillon, Ohio factory
[ ] Closing the Redditch, England factory and shifting
production to the Telford, England factory and the Turnhout
factory in Belgium.
The company will focus the portfolio of product lines on
the following six core food categories: ketchup, condiments
and sauces; frozen foods; tuna; soup, beans and pasta meals;
infant foods; and pet products. A consequence of this focus
on the core categories is the potential sale of the Weight
Watchers classroom business. Additionally, seven other
smaller businesses, which had combined annual revenues of
approximately $80 million, will be disposed.
Realigning the company's management teams will provide
processing and product expertise across the regions of North
America, Europe and Asia/Pacific. Specifically, Phase I of
Operation Excel will:
[ ] Create a single U.S. frozen food headquarters, resulting in
the closure of the company's Ore-Ida head office in Boise,
Idaho
[ ] Consolidate many European administrative support functions.
Management's Discussion and Analysis 23
Growth initiatives include additional investments in
marketing and pricing programs for our core businesses,
particularly in retail and foodservice ketchup, frozen foods
and tuna.
Phase I restructuring charges and implementation costs
recognized in Fiscal 1999 totaled $552.8 million, of which
$141.7 million was recognized in the third quarter of Fiscal
1999, and $411.1 million was recognized in the fourth quarter
of Fiscal 1999. In addition to the restructuring charges
recognized, the company expects to spend approximately $150
million in Fiscal 2000 for Phase I implementation costs.
These implementation costs will include consulting fees,
factory start-up expenses, employee relocation expenses and
equipment relocation expenses, and will be expensed as they
are incurred. Capital expenditures related to these Phase I
initiatives will total approximately $165 million, which will
be spent in Fiscal 2000 and Fiscal 2001.
Phase I initiatives will result in the closure or exit of
16 factories or businesses. Management estimates that these
actions will impact approximately 5,500 employees with a net
reduction in the workforce of 4,000, after expansion of
certain facilities. During Fiscal 1999, the company's
workforce was reduced by approximately 200 employees
principally through the closure of Ore-Ida's Boise head
office and through the divestiture of the Clarksville,
Arkansas sweet potato business.
The expected pretax savings to be generated from Phase I of
Operation Excel will be $50 million in Fiscal 2000 and will
grow to $100 million in Fiscal 2001 and $150 million per
year, thereafter, with non-cash savings of less than $15
million in any year.
Future phases of Operation Excel will also be aimed at
generating manufacturing efficiencies, focusing the product
portfolio and realigning management teams, and will result in
the recognition of additional restructuring charges and
implementation costs. Specific initiatives are in the
development stages and have not yet been approved by the
company's Board of Directors. These future initiatives
currently envision the closure of at least four additional
factories, an additional net workforce reduction of 1,000
employees and could result in restructuring charges and
implementation costs of up to $400 million, a portion of
which will be recognized in Fiscal 2000.
Successful execution of all phases of Operation Excel will
help the company achieve the following targets over the next
four years:
[ ] $200 million in annual ongoing pretax savings upon full
implementation
[ ] Volume growth of 3 to 4 percent per year
[ ] Earnings per share growth of 10 to 12 percent per year
[ ] Gross margins of 42%
[ ] Return on invested capital of 40%
[ ] $2.5 billion of free cash flow.
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PROJECT Background
MILLENNIA During the fourth quarter of Fiscal 1997, the company
announced a reorganization and restructuring program named
"Project Millennia." The reorganization plan was designed to
strengthen the company's core businesses and improve
profitability and global growth. Key initiatives were focused
on process changes and product line rationalizations.
Process change initiatives included:
[ ] Changing our go-to-market strategies, including the
elimination of inefficient end-of-quarter trade promotion
practices
[ ] Outsourcing certain manufacturing operations and
eliminating excess manufacturing capacity, while adding
capacity for certain products to support product transfers
from closed facilities
[ ] Focusing the company's U.S. Weight Watchers classroom
business and introducing a new weight loss program (1*2*3
Success(TM)) in the U.S.
[ ] Developing a Pan-European category-based strategy in
Europe.
24 H.J. Heinz Annual Report 1999
Product line rationalization initiatives included:
[ ] Divestiture of the Ore-Ida frozen foodservice business
[ ] Divestiture of the New Zealand ice cream business
[ ] Divestiture of the Weight Watchers dry and refrigerated
businesses
[ ] Divestiture of the U.S. frozen pizza and pizza topping
business
[ ] Exiting the Weight Watchers Personal Cuisine business
[ ] Exiting the "dinner" product line from The Budget Gourmet
business
[ ] Converting all Weight Watchers entrees to the Smart Ones
brand and reformulating the product and changing the
packaging.
Total restructuring charges and implementation costs
recognized in Fiscal 1997 were $647.2 million pretax. The
restructuring program was expected to result in a reduction
of the global workforce of approximately 2,500 employees and
the closure or sale of 25 plants throughout the world. Plant
closures or sales included: five Ore-Ida factories, three New
Zealand ice cream factories, four North American bakery
factories, three U.S. frozen pizza and pizza topping
facilities, two New Zealand food processing factories, the
Tracy, California tomato processing factory, the Kankakee,
Illinois pet food factory and six smaller factories.
The anticipated benefits of the plan were:
[ ] Delivering approximately $120 million of ongoing pretax
savings in Fiscal 1998 growing to $200 million of annual
ongoing pretax savings
[ ] Improving gross margins from 36% to 40% by Fiscal 2001
[ ] Generating over $300 million of working capital reductions
in the first year of the program
[ ] Generating over $1 billion of free cash flow in the first
year of the program.
Project Millennia Status Update
The company has substantially completed the implementation of
Project Millennia. As of April 28, 1999, the company has
utilized $601.4 million of the original $647.2 million
charge. Since 1997, the company has also spent an additional
$106.4 million of implementation costs, consisting primarily
of relocation, consulting, training and start-up costs, which
were expensed as incurred.
During Fiscal 1998, the company utilized $116.4 million of
severance and exit accruals to facilitate the process change
and product line rationalization initiatives, described
above. Seventeen factories were sold or closed and the net
workforce was reduced by 1,800 employees. The company spent
an additional $84.1 million of implementation costs,
consisting primarily of relocation, consulting, training and
start-up costs, which were expensed as incurred. Ongoing
pretax savings realized in Fiscal 1998 were approximately
$125 million.
During Fiscal 1999, the company utilized $48.6 million of
the severance and exit accruals, principally on the
realignment of the pet food manufacturing and distribution
operations, streamlining of European operations,
consolidation of the Heinz-Wattie businesses in Australia and
New Zealand, contractual lease commitments associated with
the restructuring of the U.S. Weight Watchers meeting system,
and costs related to the exit of certain of the company's
frozen entree brands.
During the year, the company also incurred $22.3 million
pretax of additional costs related to the continued
implementation of Project Millennia. These costs consisted
principally of start-up, consulting and training costs.
During the second quarter of Fiscal 1999, the company
reversed $25.7 million of unutilized Project Millennia accruals
for severance and exit costs. In Europe, severance accruals
were reduced $9.1 million, principally as a result of lower
severance payments in Italy versus the original estimates and
fewer
Management's Discussion and Analysis 25
selling, general and administrative terminations in the U.K. In
the U.S., $16.6 million of the accrual for exit costs was
reversed principally as a result of avoided contractual
liabilities related to product returns due to the sale of the
Weight Watchers dry and refrigerated business. The Weight
Watchers frozen entree business also experienced lower costs in
exiting certain of the company's frozen entree product
offerings.
As of April 28, 1999, the company has closed or divested 23
of the 25 plants (five in Fiscal 1997, 17 in Fiscal 1998, and
one in Fiscal 1999) scheduled for closure or divestiture. The
remaining two facilities (one tuna processing facility in
Australia and one tomato processing facility in Spain) have
been publicly announced and will be closed by the end of
October 1999.
As of April 28, 1999, Project Millennia has resulted in a
net workforce reduction of 2,100 employees. The two remaining
plant closures described above will result in an additional
workforce reduction of 150 employees. The total workforce
reduction is now estimated to be 2,250 compared to the 2,500
originally estimated. The lower net headcount reductions as
well as the lower actual severance payments compared to the
original estimates have resulted in the reversal of original
severance accruals of $9.1 million as described above.
The financial goals of the project have been achieved as
follows:
[ ] Pretax savings of approximately $190 million, of which $10
million are non-cash savings, were realized in Fiscal 1999
[ ] Gross profit margins, excluding restructuring related
items, increased to 38.4% in Fiscal 1998 and to 40.3% in
Fiscal 1999
[ ] Operating working capital was reduced by approximately $350
million in the first year of the program
[ ] More than $1.3 billion of free cash flow was generated in
the first year of the program.
As of April 28, 1999, there are $20.1 million of remaining
Project Millennia accruals. These accruals relate to the
finalization of plant closures, remaining costs related to
the exit of certain of the company's frozen entree brands,
and contractual lease commitments associated with the
restructuring of the U.S. Weight Watchers meeting system.
With the exception of the contractual lease commitment costs,
all other spending will be completed by the end of the second
quarter of Fiscal 2000.
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RESULTS OF In Fiscal 1999, the company adopted Statement of Financial
OPERATIONS Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which
establishes new standards for reporting and disclosure
relating to segments and geographic data. The company's
segments are primarily organized by geographical area. The
composition of segments and measure of segment profitability
is consistent with that used by the company's management.
Descriptions of the company's reportable segments are as
follows:
[ ] North American Dry -- This segment includes the company's
North American dry grocery and foodservice operations. This
segment consists of Heinz U.S.A., Heinz Pet Products, Star-
Kist Seafood and Heinz Canada. This segment's operations
include products in all of the company's core categories.
[ ] North American Frozen -- This segment consists of Heinz
Frozen Food Company, which markets frozen potatoes, entrees
and appetizers.
[ ] Europe -- This segment includes the company's operations in
Europe and sells products in all of the company's core
categories.
[ ] Asia/Pacific -- This segment includes the company's
operations in New Zealand, Australia, Japan, China, South
Korea, Indonesia, Thailand and India. This segment's
operations include products in all of the company's core
categories.
[ ] Other Operating Entities -- This segment includes the
company's Weight Watchers classroom business as well as the
company's operations in Africa, Venezuela and other areas
which sell products in all of the company's core
categories.
26 H.J. Heinz Annual Report 1999
1999 versus 1998: Sales for Fiscal 1999 increased $90.3
million, or 1.0%, to $9.30 billion from $9.21 billion in
Fiscal 1998. Volume increased sales by $290.2 million, or
3.2%, acquisitions increased sales by $188.2 million, or
2.0%, and favorable pricing contributed $34.8 million, or
0.4%. The unfavorable impact of foreign exchange translation
rates reduced sales by $210.3 million, or 2.3%, and
divestitures decreased sales by $212.6 million, or 2.3%.
Domestic operations contributed approximately 53% of
consolidated sales in both Fiscal 1999 and Fiscal 1998.
Sales of the North American Dry segment increased $127.4
million, or 3.2%, primarily due to sales volume increases of
$156.6 million, or 4.0%. Volume increases in Heinz ketchup,
seafood and condiments were partially offset by a volume
decrease in canned dog food. Acquisitions, net of
divestitures, contributed $36.9 million, or 0.9%, to the
sales increase, primarily due to the acquisition of the
College Inn brand of canned broths. These increases were
partially offset by unfavorable pricing of $36.1 million, or
0.9%. Price decreases were noted in seafood and pet food. The
unfavorable fluctuation of the Canadian dollar caused a $30.0
million, or 0.8%, decrease in net sales.
The North American Frozen segment's sales decreased $61.7
million, or 5.7%. Divestitures, net of acquisitions,
accounted for $71.2 million, or 6.6%, of the decrease,
primarily due to the divestiture of the Ore-Ida frozen
foodservice business in the first quarter of Fiscal 1998.
Price decreases, primarily in frozen potatoes, contributed
$13.5 million, or 1.2%, to the sales decrease. Volume
increases of $23.0 million, or 2.1%, were largely due to
Smart Ones frozen entrees, partially offset by decreased
volume in appetizers.
Sales in Europe increased $128.1 million, or 5.5%,
primarily due to acquisitions, which contributed $94.2
million, or 4.0%. Acquisitions impacting the year-to-year
sales dollar comparison include the Fiscal 1998 acquisition
of John West Foods Limited in the United Kingdom and the
Fiscal 1999 acquisition of the convenience meals business of
Sonnen Bassermann in Germany and other smaller acquisitions.
Exchange rates had a favorable impact of $21.0 million, or
0.9%, primarily in Italy. Favorable pricing increased sales
by $13.5 million, or 0.6%, while sales volume was flat.
Sales in Asia/Pacific decreased $61.1 million, or 5.7%. The
unfavorable impact of foreign exchange translation rates
reduced sales by $128.1 million, or 11.9%, primarily due to
sales in New Zealand, Australia, Korea and India. This
decrease was partially offset by favorable volume of $33.8
million, or 3.1%, and favorable price of $21.2 million, or
2.0%. Acquisitions also contributed $12.0 million, or 1.1%.
Sales of Other Operating entities decreased $42.4 million,
or 5.3%. Divestitures, primarily the bakery products unit,
decreased sales by $122.5 million, or 15.5%. The unfavorable
impact of foreign exchange translation rates decreased sales
by $73.1 million, or 9.2%, principally in Africa. These
decreases were partially offset by volume increases of $77.4
million, or 9.8%, largely due to the Weight Watchers
classroom business. In addition, price increases contributed
$49.6 million, or 6.3%, and acquisitions, primarily in South
Africa, contributed $26.2 million, or 3.3%, to sales.
Management's Discussion and Analysis 27
The following tables provide a comparison of the company's
reported results and the results excluding restructuring
related items for Fiscal 1999 and Fiscal 1998.
FISCAL YEAR ENDED APRIL 28, 1999
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(DOLLARS IN MILLIONS, EXCEPT GROSS OPERATING NET PER
PER SHARE AMOUNTS) PROFIT INCOME INCOME SHARE
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Reported results $ 3,354.7 $ 1,109.3 $ 474.3 $ 1.29
Operation Excel restructuring
and implementation costs 396.4 552.8 409.7 1.11
Project Millennia
implementation costs 14.7 22.3 14.3 0.04
Reversal of unutilized Project
Millennia accruals (20.7) (25.7) (16.4) (0.04)
Gain on sale of bakery
products unit - (5.7) 0.6 -
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Results excluding restructuring
related items $ 3,745.1 $ 1,653.0 $ 882.4 $ 2.40
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FISCAL YEAR ENDED APRIL 29, 1998
----------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT GROSS OPERATING NET PER
PER SHARE AMOUNTS) PROFIT INCOME INCOME SHARE
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Reported results $ 3,498.1 $ 1,520.3 $ 801.6 $ 2.15
Gain on sale of Ore-Ida frozen
foodservice business - (96.6) (53.1) (0.14)
Project Millennia
implementation costs 35.7 84.1 53.0 0.14
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Results excluding restructuring
related items $ 3,533.8 $ 1,507.9 $ 801.4 $ 2.15
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(Note: Totals may not add due to rounding.)
Gross profit decreased $143.3 million to $3.35 billion from
$3.50 billion in Fiscal 1998. The gross profit margin
decreased to 36.1% from 38.0%. Excluding the restructuring
related items identified above, gross profit would have
increased $211.4 million, or 6.0%, to $3.75 billion from
$3.53 billion and the gross profit margin would have
increased to 40.3% from 38.4%. Europe accounted for $156.5
million of this increase due to improvements in the baby food
business in Italy, the favorable impact of foreign exchange
translation rates and acquisitions. North American Dry's
gross profit increased $56.7 million due to cost savings from
Project Millennia, stronger sales volume and acquisitions;
partially offset by the disappointing performance of the
domestic pet food business. Other Operating entities' gross
profit increased $41.5 million due to improvements in the
Weight Watchers classroom business, attributable to the
Weight Watchers 1*2*3 Success(TM) Plan. North American
Frozen's gross profit decrease of $24.0 million was due to
the divestiture of the Ore-Ida frozen foodservice business in
Fiscal 1998 and increased competitive activities for frozen
potatoes, partially offset by the strong performance of Smart
Ones frozen entrees. The Asia/Pacific segment's gross profit
decreased $20.6 million, or 5.4%; however, excluding the
unfavorable impact of foreign exchange translation rates
($47.6 million), primarily in New Zealand and Australia,
gross profit increased $27.0 million, or 7.1%.
SG&A increased $267.7 million to $2.25 billion from $1.98
billion and increased as a percentage of sales to 24.1% from
21.5%. Excluding restructuring related items identified
above, SG&A increased $66.2 million to $2.09 billion from
$2.03 billion and increased as a percentage of sales to 22.5%
from 22.0%. Marketing increases were noted in the North
American Dry segment primarily due to a focus on Heinz
ketchup and in Europe where the company has been aggressively
promoting ketchup and beans. These increases were partially
offset by decreased marketing expense in the North American
Frozen segment as a result of establishing low everyday list
prices for The Budget Gourmet line of frozen entrees.
Excluding marketing, SG&A was stable as a percentage of sales
year-on-year.
Total marketing support (including trade and consumer
promotions and media) increased 8.4% to $2.22 billion from
$2.05 billion on a sales increase of 1.0%. Advertising costs
to support the company's key brands increased 3.0% to $373.9
million in Fiscal 1999 from $363.1 million in Fiscal 1998.
28 H.J. Heinz Annual Report 1999
Operating income decreased $411.0 million, or 27.0%, to
$1.11 billion from $1.52 billion reported last year.
Excluding the restructuring related items in both years,
operating income increased $145.2 million, or 9.6%, to $1.65
billion from $1.51 billion last year. This increase was
primarily due to the increase in gross profit, partially
offset by increased marketing and selling and distribution
costs. Domestic operations provided approximately 57% and 59%
of operating income in Fiscal 1999 and Fiscal 1998,
respectively. Excluding the restructuring related items in
both years, domestic operations provided approximately 55%
and 57% of operating income in Fiscal 1999 and Fiscal 1998,
respectively.
The North American Dry segment's operating income decreased
$80.2 million, or 10.1%, to $717.0 million from $797.2
million last year. Excluding the restructuring related items
in both years (see Note 14 to the Consolidated Financial
Statements), this segment's operating income increased $8.6
million, or 1.0%, to $834.6 million from $826.0 million.
Excluding the results of the domestic pet food business, the
North American Dry segment experienced double-digit operating
income growth due to strong sales volume and acquisitions,
primarily the College Inn brand of canned broths, as well as
cost savings from Project Millennia. The domestic pet food
business was negatively impacted by higher costs associated
with the introduction of the 9-Lives four pack, an
unfavorable mix shift, significant volume declines in canned
dog food and ineffective trade spending, all of which the
company is aggressively working to correct.
The North American Frozen segment reported $80.2 million of
operating income in Fiscal 1999 versus $258.2 million in
Fiscal 1998. Excluding restructuring related items in both
years (see Note 14 to the Consolidated Financial Statements),
operating income increased $12.7 million, or 7.4%, to $183.4
million from $170.7 million. The increase is primarily due to
favorable operating results of the Smart One's frozen entree
line; partially offset by the retail frozen potato business,
where prices have been reduced in order to recapture market
share.
Europe's operating income decreased $140.7 million, or
36.4%, to $246.2 million from $386.9 million. Excluding
restructuring related items in both years (see Note 14 to the
Consolidated Financial Statements), operating income
increased $61.7 million, or 15.2%, to $467.2 million from
$405.4 million. This increase was primarily due to favorable
operating results in the U.K. and Italy due to increased
sales prices and acquisitions, partially offset by increased
marketing spending described above.
Asia/Pacific's operating income decreased $46.7 million, or
34.2%, to $89.8 million from $136.5 million. Excluding
restructuring related items in both years (see Note 14 to the
Consolidated Financial Statements), operating income
increased $3.3 million to $145.7 million from $142.3 million
last year. Strong performances in all of the company's Asia/
Pacific businesses more than offset the unfavorable impact of
foreign exchange translation rates, which reduced operating
income by approximately $19.5 million.
Other Operating entities reported an increase in operating
income of $42.0 million to $95.7 million from $53.7 million.
Excluding restructuring related items in both years (see Note
14 to the Consolidated Financial Statements), operating
income increased $58.4 million, or 91.8%, to $122.0 million
from $63.6 million. The increase is primarily due to the
exceptional performance of the Weight Watchers 1*2*3
Success(TM) Plan. The unfavorable fluctuation of foreign
exchange translation rates, primarily in Africa, caused a
$12.5 million decrease in operating income.
Other income and expenses totaled $274.2 million in Fiscal
1999 compared to $265.3 million in Fiscal 1998. Interest
expense was relatively flat year-on-year as the increase in
average borrowings was offset by lower interest rates.
Interest income decreased $7.6 million, or 23.2%, to $25.1
million from $32.7 million due to decreased invested funds
and significantly lower interest rates on investments,
primarily in Italy.
Management's Discussion and Analysis 29
The effective tax rate for Fiscal 1999 was 43.2% compared
to 36.1% last year. This year's higher rate includes the
impact of restructuring expenses in lower tax rate
jurisdictions and nondeductible expenses related to the
restructuring. Excluding the restructuring related items
noted above, the effective rate for Fiscal 1999 was 36.0%
compared to 35.5% last year. The Fiscal 1998 effective tax
rate reflects the benefits of tax legislation in Italy and
the United Kingdom. (See Note 5 to the Consolidated Financial
Statements.)
Net income decreased $327.2 million to $474.3 million from
$801.6 million last year and earnings per share decreased to
$1.29 from $2.15. Excluding the restructuring related items
discussed above, net income increased $81.0 million, or
10.1%, to $882.4 million in Fiscal 1999 from $801.4 million
in Fiscal 1998, and earnings per share increased to $2.40
from $2.15.
The impact of fluctuating exchange rates for Fiscal 1999
remained relatively consistent on a line-by-line basis
throughout the Consolidated Statement of Income.
1998 versus 1997: Sales for Fiscal 1998 decreased $147.7
million, or 1.6%, to $9.21 billion from $9.36 billion in
Fiscal 1997. The sales decrease was primarily due to
divestitures, which reduced sales by $617.0 million, or 6.6%,
and the unfavorable effect of foreign exchange translation
rates, which reduced sales by $285.9 million, or 3.1%. Sales
volume increased $286.8 million, or 3.1%. In addition,
acquisitions increased sales by $332.0 million, or 3.5%, and
favorable pricing increased sales by $136.4 million, or 1.5%.
Domestic operations contributed approximately 53% of
consolidated sales in Fiscal 1998, compared to approximately
55% in Fiscal 1997.
Sales of the North American Dry segment increased $236.5
million, or 6.4%, primarily due to sales volume increases of
$109.2 million, or 3.0%, and favorable pricing of $95.2
million, or 2.6%. Volume increases were noted in Heinz
ketchup and soups, partially offset by a volume decrease in
canned dog food. Price increases were noted in Heinz ketchup,
seafood and infant foods. The Fiscal 1997 Canadian
acquisitions of Martin Feed Mills Limited and the canned
beans and pasta business of Nestle Canada Inc. contributed
$42.5 million, or 1.1%, to the increase in net sales. The
unfavorable fluctuation of the Canadian dollar exchange
translation rate caused a $10.4 million, or 0.3%, decrease in
net sales.
The North American Frozen segment's sales decreased $475.6
million, or 30.7%. Divestitures accounted for $478.0 million,
or 30.8%, of the decrease, primarily due to the divestiture
of the Ore-Ida frozen foodservice business in the first
quarter of Fiscal 1998. Volume increases of $41.3 million, or
2.6%, primarily in Ore-Ida retail frozen potatoes, were
offset by price declines of $38.9 million, or 2.5%. In Fiscal
1998, the company implemented "price-based costing" for The
Budget Gourmet brand of frozen entrees. "Price-based costing"
refers to a strategy whereby the selling price which should
drive consumer demand is determined, followed by designing
product specifications that will provide adequate margins at
the selling price. This strategy turned around the negative
volume trends noted in Fiscal 1997 with a volume increase in
Fiscal 1998. In addition, the company also focused on the
Smart Ones brand of frozen entrees from Weight Watchers,
resulting in a volume increase as well.
Sales in Europe increased $177.9 million, or 8.3%,
primarily due to acquisitions, net of divestitures, which
contributed $207.0 million, or 9.6%, (primarily John West
Foods Limited in the United Kingdom), volume increases of
$46.3 million, or 2.2%, and price increases of $27.1 million,
or 1.3%. Volume increases were experienced in seafood, infant
foods and weight loss entrees. These increases were partially
offset by the unfavorable effect of foreign exchange
translation rates, which reduced European sales by $102.5
million, or 4.8%, primarily in Italy.
Sales of Asia/Pacific declined $148.0 million, or 12.1%.
Divestitures accounted for $92.6 million, or 7.6%, of the
decrease, primarily due to the divestiture of the New Zealand
ice cream business in the fourth quarter of Fiscal 1997. The
unfavorable impact of foreign exchange translation rates,
primarily in New Zealand, Australia, Korea and Japan, reduced
sales by $130.0 million, or 10.6%. These decreases were
partially offset by acquisitions, which increased sales by
$32.3 million, or 2.6%. In addition, pricing increased $25.2
million, or 2.1%, and volume increased $17.1 million, or
1.4%.
30 H.J. Heinz Annual Report 1999
Sales of Other Operating entities increased $61.5 million,
or 8.4%, due to volume increases of $73.0 million, or 10.0%,
and price increases of $27.7 million, or 3.8%. Strong volume
increases were experienced in the Weight Watchers classroom
business, which benefited from the introduction of the Weight
Watchers 1*2*3 Success(TM) Plan in the U.S. Acquisitions, net
of divestitures contributed $3.8 million, or 0.5%. The
unfavorable impact of foreign exchange translation rates
reduced sales by $43.0 million, or 5.9%, primarily due to
fluctuations in Africa.
The following tables provide a comparison of the company's
reported results and the results excluding restructuring
related items for Fiscal 1998 and Fiscal 1997.
FISCAL YEAR ENDED APRIL 29, 1998
----------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT GROSS OPERATING NET PER
PER SHARE AMOUNTS) PROFIT INCOME INCOME SHARE
- ------------------------------------------------------------------------------
Reported results $ 3,498.1 $ 1,520.3 $ 801.6 $ 2.15
Gain on sale of Ore-Ida frozen
foodservice business - (96.6) (53.1) (0.14)
Project Millennia
implementation costs 35.7 84.1 53.0 0.14
- ------------------------------------------------------------------------------
Results excluding restructuring
related items $ 3,533.8 $ 1,507.9 $ 801.4 $ 2.15
- ------------------------------------------------------------------------------
FISCAL YEAR ENDED APRIL 30, 1997
----------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT GROSS OPERATING NET PER
PER SHARE AMOUNTS) PROFIT INCOME INCOME SHARE
- ------------------------------------------------------------------------------
Reported results $ 2,971.9 $ 756.3 $ 301.9 $ 0.81
Project Millennia
restructuring charge 477.8 647.2 409.4 1.09
Gain on sale of New Zealand
ice cream business (72.1) (72.1) (44.9) (0.12)
Gain on sale of real estate in
the United Kingdom (13.2) (13.2) (8.5) (0.02)
- ------------------------------------------------------------------------------
Results excluding restructuring
related items $ 3,364.4 $ 1,318.2 $ 657.9 $ 1.76
- ------------------------------------------------------------------------------
(Note: Totals may not add due to rounding.)
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 restructuring related items identified
above, 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. This increase was primarily noted in the
North American Dry segment, which benefited from price
increases and reduced trade allowances resulting from the
discontinuance of inefficient end-of-quarter trade
promotions, cost savings resulting from Project Millennia and
a favorable product mix. The sale of the lower margin Ore-Ida
frozen foodservice business contributed to an improved gross
profit margin in the North American Frozen segment. Gross
profit in Europe increased due to favorable sales pricing,
volume and acquisitions, primarily John West Foods Limited in
the U.K.; partially offset by the unfavorable impact of
foreign exchange translation rates ($45.4 million), primarily
in Italy.
SG&A 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 restructuring related items in both years,
SG&A decreased $20.3 million, or 1.0%, to $2.03 billion from
$2.05 billion and increased slightly as a percentage of sales
to 22.0% from 21.9%. Excluding restructuring related items 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 the
company's key brands increased 13.8% to $363.1 million in
Fiscal 1998 from $319.0 million in Fiscal 1997.
Management's Discussion and Analysis 31
Operating income increased to $1.52 billion from $756.3
million reported in Fiscal 1997. Excluding the restructuring
related items in both years, operating income increased $189.7
million, or 14.4%, to $1.51 billion from $1.32 billion. This
increase was primarily due to the increase in gross profit, as
SG&A expenses were relatively flat year-on-year. Domestic
operations provided approximately 59% of operating income in
Fiscal 1998 compared to approximately 23% of operating income
in Fiscal 1997. Excluding restructuring related items in both
years, domestic operations provided 57% of operating income in
Fiscal 1998 versus approximately 53% of operating income in
Fiscal 1997.
The North American Dry segment's operating income increased
$354.7 million to $797.2 million from $442.5 million reported
in Fiscal 1997. Excluding the restructuring related items in
both years (see Note 14 to the Consolidated Financial
Statements), operating income of the North American Dry
segment increased $118.1 million, or 16.7%, to $826.0 million
from $707.9 million. The North American Frozen segment
reported operating income of $258.2 million in Fiscal 1998
versus an operating loss of $4.7 million in Fiscal 1997.
Excluding the restructuring related items in both years (see
Note 14 to the Consolidated Financial Statements), operating
income increased $40.3 million, or 30.9%, to $170.7 million
from $130.4 million. For both of these segments, Fiscal 1997
operating income was negatively impacted by the company's
decision to eliminate inefficient end-of-quarter trade
promotion practices, which significantly reduced sales.
Europe's operating income increased $70.3 million, or
22.2%, to $386.9 million from $316.6 million. Excluding
restructuring related items in both years (see Note 14 to the
Consolidated Financial Statements), operating income
increased $30.2 million, or 8.1%, to $405.4 million from
$375.2 million. This increase was primarily due to price
increases, stronger sales volume and favorable product mix as
well as acquisitions, primarily John West Foods Limited in
the U.K., partially offset by unfavorable foreign exchange
translation rates, primarily in Italy.
Asia/Pacific's operating income decreased $35.1 million, or
20.4%, to $136.5 million from $171.6 million. Excluding
restructuring related items in both years (see Note 14 to the
Consolidated Financial Statements), operating income
increased $6.1 million, or 4.5%, to $142.3 million from
$136.2 million in Fiscal 1997. In local currency, operating
income experienced strong double-digit growth due to
favorable pricing in Australia and New Zealand; offset by
unfavorable foreign exchange translation rates.
Other Operating entities reported an increase in operating
income of $118.0 million to $53.7 million from an operating
loss of $64.3 million. Excluding restructuring related items
in both years (see Note 14 to the Consolidated Financial
Statements), operating income increased $13.4 million, or
26.6%, to $63.6 million from $50.2 million. The increase is
primarily due to the Weight Watchers classroom business,
which benefited from the introduction of the Weight Watchers
1*2*3 Success(TM) Plan in the United States and streamlining
efforts of Project Millennia, partially offset by an
unfavorable fluctuation of foreign exchange translation
rates, primarily in Africa.
Other income and expenses totaled $265.3 million in Fiscal
1998 compared to $277.2 million in Fiscal 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 Fiscal 1998 compared to
37.0% in Fiscal 1997. The Fiscal 1998 effective tax rate
reflects the benefits of 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 and earnings per share increased to $2.15 from
$0.81. Excluding restructuring related items 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 Fiscal 1998
remained relatively consistent on a line-by-line basis
throughout the Consolidated Statement of Income.
32 H.J. Heinz Annual Report 1999
- ------------------------------------------------------------------------------
LIQUIDITY AND Return on average shareholders' equity ("ROE") was 23.6% in
FINANCIAL Fiscal 1999, 34.4% in Fiscal 1998 and 11.7% in Fiscal 1997.
POSITION Excluding the restructuring related items described above,
ROE was 39.9% in Fiscal 1999, 34.4% in Fiscal 1998 and 23.9%
in Fiscal 1997. Pretax return on average invested capital
("ROIC") was 20.8% in Fiscal 1999, 27.0% in Fiscal 1998 and
12.6% in Fiscal 1997. Excluding the restructuring related
items described above, ROIC was 30.0%, 26.8% and 21.4% in
Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
Cash provided by operating activities decreased to $910.1
million in Fiscal 1999, compared to $1.07 billion in Fiscal
1998 and $875.0 million in Fiscal 1997. The decrease in
Fiscal 1999 versus Fiscal 1998 was primarily the result of
higher working capital requirements. In order to facilitate
the anticipated plant shutdowns and reconfigurations for
Operation Excel, the company has increased inventory levels
at certain locations.
Cash used for investing activities totaled $390.5 million
in Fiscal 1999, compared to providing $27.2 million in Fiscal
1998. Acquisitions in the current year required $269.0
million, compared to $142.1 million in the prior year. Fiscal
1999 acquisitions included the College Inn brand of canned
broths, a joint venture with ABC Indonesia, a leading
provider of ketchup, sauces and condiments, and other smaller
acquisitions. (See Note 2 to the Consolidated Financial
Statements.) Divestitures provided $180.4 million in Fiscal
1999, primarily the sale of the company's bakery products
unit, compared to $494.7 million in Fiscal 1998, primarily
the sale of the Ore-Ida frozen foodservice business. (See
Note 3 to the Consolidated Financial Statements.)
Capital expenditures totaled $316.7 million in Fiscal 1999
and $373.8 million in Fiscal 1998. Both years reflect
expenditures for productivity improvements and plant
expansions, principally at the company's North American Dry
and European segments.
Purchases and sales/maturities of short-term investments
decreased in Fiscal 1999. The company periodically sells a
portion of its short-term investment portfolio in order to
reduce its borrowings.
Financing activities used $515.5 million in Fiscal 1999
compared to $1.15 billion in Fiscal 1998. Net funds borrowed
were $268.3 million in Fiscal 1999 versus net repayments of
$306.2 million in Fiscal 1998. Cash used for dividends paid
to shareholders increased by $32.2 million, to $484.8 million
from $452.6 million in Fiscal 1998. Treasury stock purchased
totaled $410.1 million (7.5 million shares) in Fiscal 1999
versus $677.2 million (13.6 million shares) in Fiscal 1998.
In Fiscal 1999, proceeds from the exercise of stock options
provided $77.2 million versus $201.0 million in Fiscal 1998.
The average amount of short-term debt outstanding
(excluding domestic commercial paper, all of which is long-
term) during Fiscal 1999, Fiscal 1998 and Fiscal 1997 was
$453.9 million, $556.3 million and $520.5 million,
respectively. Total short-term debt had a weighted-average
interest rate during Fiscal 1999 of 6.3% and at year-end of
5.3%. The weighted-average interest rate on short-term debt
during Fiscal 1998 was 6.5% and at year-end was 6.4%.
Aggregate domestic commercial paper had a weighted-average
interest rate during Fiscal 1999 of 5.3% and at year-end of
4.9%. In Fiscal 1998, the weighted-average interest rate and
the rate at year-end was 5.6%. Based upon the amount of
commercial paper outstanding at April 28, 1999, a variance of
1/8% in the related interest rate would cause annual
interest expense to change by approximately $1.8 million. On
July 15, 1998, the company, under its current shelf
registration statement, issued $250 million of 6.375%
debentures due July 2028. The proceeds 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 28, 1999, $1.41 billion of domestic
commercial paper is classified as long-term debt due to the
long-term nature of the supporting credit agreement. At April
29, 1998, $1.34 billion of domestic commercial paper was
outstanding and classified as long-term debt.
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. The company paid $484.8 million in
dividends to both common and preferred shareholders, an
increase of $32.2 million, or 7.1%, over Fiscal 1998. The
dividend rate in effect at the
Management's Discussion and Analysis 33
end of each year resulted in a payout ratio of 106.2% in Fiscal
1999, 58.6% in Fiscal 1998 and 143.2% in Fiscal 1997. Excluding
the impact of the restructuring related items in all years, the
payout ratio was 57.1%, 58.6% and 65.9% in Fiscal 1999, Fiscal
1998 and Fiscal 1997, respectively.
In Fiscal 1999, the company repurchased 7.5 million shares
of common stock, or 2.1% of the amount outstanding at the
beginning of Fiscal 1999, at a cost of $410.1 million. As of
April 28, 1999, the company had repurchased 9.3 million
shares as part of the 10.0 million share repurchase program,
which was authorized by the Board of Directors on September
10, 1997. This plan was completed on June 1, 1999. On June 9,
1999, the Board of Directors authorized the repurchase of up
to 20.0 million shares. During Fiscal 1998, 13.6 million
shares were repurchased at a cost of $677.2 million. The
company may reissue repurchased shares upon the exercise of
stock options, conversions of preferred stock and for general
corporate purposes.
In Fiscal 1999, the cash requirements for Phase I of
Operation Excel were $75.6 million, consisting of spending
for severance and exit costs ($16.6 million), capital
expenditures ($5.8 million) and implementation costs ($53.2
million). The Fiscal 1999 cash requirements for Project
Millennia were $117.4 million, consisting of spending for
severance and exit costs ($48.6 million), capital
expenditures ($46.5 million) and implementation costs ($22.3
million). In Fiscal 2000, the company expects the cash
requirements related to Phase I of Operation Excel to be
approximately $340 million, consisting of spending for
severance and exit costs ($110 million of the $127.6 million
accrued at April 28, 1999), capital expenditures ($100
million) and implementation costs ($130 million). Project
Millennia is expected to require cash of approximately $20
million in Fiscal 2000, consisting of spending for severance
and exit costs ($15 million of the $20.1 million accrued at
April 28, 1999) and capital expenditures ($5 million). Future
phases of Operation Excel are expected to require
approximately $400 million for severance, exit and
implementation costs over the next four years. The company is
financing the cash requirements of these programs through
operations, proceeds from the sale of non-strategic assets
and with short- and long-term borrowings. The cash
requirements of Operation Excel and 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 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 1998, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments. 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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FAS Statement 133," which
postponed the adoption date of SFAS No. 133. As such, the
company is not required to adopt the statement until Fiscal
2002. The company is currently evaluating the effect that
implementation of the new standard will have on its results
of operations and financial position.
In April 1998, the American Institute of CPAs issued a
Statement of Position ("SOP") entitled "Reporting on the
Costs of Start-up Activities." This SOP requires that costs
incurred to open a new facility, introduce a new product,
commence a new operation or other similar activities be
expensed as incurred. The company will adopt this SOP in
Fiscal 2000. The company does not believe this SOP will have
a material impact on its financial statements.
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 Fiscal 2000 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.
34 H.J. Heinz Annual Report 1999
- ------------------------------------------------------------------------------
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 by essentially creating offsetting currency exposures.
As of April 28, 1999, the company held contracts for the
purpose of hedging certain intercompany cash flows with an
aggregate notional amount of approximately $680 million. In
addition, the company 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 $190 million.
The company also held contracts to hedge sales denominated in
foreign currencies of $140 million. The company's contracts
mature within two years 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 28, 1999, unrealized gains and losses
on outstanding foreign currency contracts are not material.
As of April 28, 1999, 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 $30
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 28, 1999.
Management's Discussion and Analysis 35
The following table summarizes the company's debt
obligations at April 28, 1999. 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 28,
1999. (See Notes 6 and 12 to the Consolidated Financial
Statements.)
EXPECTED FISCAL YEAR OF MATURITY
---------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed rate $ 613,366 $ 19,330 $ 11,434 $ 453,201 $ 2,540 $ 568,864 $1,668,735
Average interest rate 6.83% 6.85% 8.35% 6.25% 6.40% 6.31%
Variable rate $ 290,841 $ - $1,409,437 $ - $ - $ 7,400 $1,707,678
Average interest rate 5.32% - 4.89% - - 3.72%
- ------------------------------------------------------------------------------------------------------------------------------------
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 28, 1999, unrealized gains
and losses related to commodity contracts held by the company
were not material nor would they be 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.)
- ------------------------------------------------------------------------------
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 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 company's
progress is monitored by senior management and periodically
reported to the Audit Committee and Board of Directors.
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 technology 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 completed, and the
assessment of its non-IT systems is substantially complete.
36 H.J. Heinz Annual Report 1999
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. As of April 28, 1999, management estimates
that approximately 65% of its core worldwide IT systems are
Year 2000 ready. Several of the company's major affiliates
such as Heinz U.S.A., Heinz Italy and Heinz Australia are
virtually 100% operationally ready with respect to their IT
systems. It is expected that the remaining IT systems will be
operationally ready by the end of September 1999. Time
machine testing of key IT applications has been completed
successfully for the company's major North American
affiliates and the testing of other remediated systems is
progressing on schedule. The remediation of non-IT systems is
progressing on schedule, and it is estimated that these
efforts also will be substantially complete by the end of
September 1999.
The company's corporate audit department has dedicated
efforts to evaluating the company's Year 2000 preparedness.
The corporate audit department, with the assistance of
outside consultants, completed on-site preparedness reviews
at the company's major affiliate locations and its corporate
headquarters. These reviews addressed IT system remediation
efforts as well as contingency planning and non-IT issues.
The corporate audit department continues monitoring progress
with respect to earlier reviews.
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 $75 million, of
which over 80% 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. The above
amount includes costs for implementation of the company's
contingency plans described below.
A critical part of Operation Ready involves the
investigation and assessment of the Year 2000 preparedness of
important suppliers, vendors, customers, utilities and other
third parties. The company's initial round of assessments has
been completed. Generally, these third parties have indicated
that they are progressing on schedule with their Year 2000
issues. The company is continuing on-site interviews and
face-to-face visits with the critical suppliers, vendors and
customers. These efforts will continue throughout the year in
order to minimize the risk that any significant adverse
consequences will result due to the failure of these third
parties to be Year 2000 ready.
While the company has no reason to believe that its
exposure to the risks of the failure of it or third parties
to be Year 2000 ready is any greater than the exposure to
such risks that affect its competitors generally, there can
be no assurance that the consequences of such failures would
not 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
believes that its Operation Ready contingency planning should
significantly reduce the adverse effect any such disruptions
may have.
The company's headquarters and affiliate Year 2000
readiness 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,
sales, etc.) has a contingency planning team working on Year
2000 issues specific to that function. The plans developed by
the functional teams have been shared with the affiliate
teams, so that Year 2000 issues will be addressed from two
separate perspectives. Contingency plans include stockpiling
raw and packaging materials, increasing finished goods
inventory levels, developing emergency backup and recovery
procedures, securing alternate suppliers, replacing
electronic applications with manual processes or other
appropriate measures.
The company has implemented an internal web site to
disseminate Year 2000 related information, including
policies, guidelines, tools, teams, plans and progress
reporting to affiliate Operation Ready
Management's Discussion and Analysis 37
teams throughout the world. Standardized progress reporting has
been implemented for all affiliates to report their contingency
planning and remediation status to the corporate headquarters.
Year 2000 status and issues have been key topics at global
management conferences. The company's Year 2000 readiness plan,
including the further development and refinement of contingency
plans, is an ongoing process and will continue to evolve and
change as new information becomes available.
- ------------------------------------------------------------------------------
EURO CONVERSION A single currency, the Euro, was introduced in Europe on
January 1, 1999. Of the fifteen member countries of the
European Union, eleven adopted the Euro as their legal
currency on that date. Fixed conversion rates between the
national currencies of these eleven countries and the Euro
were established on that date. The national currencies are
scheduled to remain legal tender as denominations of the Euro
during the transition period ending December 31, 2001. During
this transition period, parties may settle transactions using
either the Euro or a participating country's national
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.
- ------------------------------------------------------------------------------
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 30, 1999 approximated
61,306. The closing price of the common stock on the New York
Stock Exchange composite listing on April 28, 1999 was
$48-7/16.
Stock price information for common stock by quarter
follows:
STOCK PRICE RANGE
--------------------------------------
HIGH LOW
----------------------------------------------------------
1999
First $58-1/2 $51-5/8
Second 61-1/8 48-1/2
Third 61-3/4 51-3/16
Fourth 58-13/16 44-9/16
----------------------------------------------------------
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
----------------------------------------------------------
38 H.J. Heinz Annual Report 1999
CONSOLIDATED STATEMENTS OF INCOME
H.J. Heinz Company and Subsidiaries
FISCAL YEAR ENDED APRIL 28, 1999 APRIL 29, 1998 APRIL 30, 1997
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) (52 WEEKS) (52 WEEKS) (52 WEEKS)
- ------------------------------------------------------------------------------
Sales $ 9,299,610 $ 9,209,284 $ 9,357,007
Cost of products sold 5,944,867 5,711,213 6,385,091
- ------------------------------------------------------------------------------
Gross profit 3,354,743 3,498,071 2,971,916
Selling, general and
administrative
expenses 2,245,431 1,977,741 2,215,645
- ------------------------------------------------------------------------------
Operating income 1,109,312 1,520,330 756,271
Interest income 25,082 32,655 39,359
Interest expense 258,813 258,616 274,746
Other expense, net 40,450 39,388 41,820
- ------------------------------------------------------------------------------
Income before income
taxes 835,131 1,254,981 479,064
Provision for income
taxes 360,790 453,415 177,193
- ------------------------------------------------------------------------------
Net income $ 474,341 $ 801,566 $ 301,871
- ------------------------------------------------------------------------------
PER COMMON SHARE
AMOUNTS:
Net income - diluted $ 1.29 $ 2.15 $ 0.81
Net income - basic $ 1.31 $ 2.19 $ 0.82
Cash dividends $ 1.34-1/4 $ 1.23-1/2 $ 1.13-1/2
- ------------------------------------------------------------------------------
Average common shares
outstanding -
diluted 367,830,419 372,952,851 374,043,705
Average common shares
outstanding - basic 361,203,539 365,982,290 367,470,850
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Statements of Income 39
CONSOLIDATED BALANCE SHEETS
H.J. Heinz Company and Subsidiaries
ASSETS (DOLLARS IN THOUSANDS) APRIL 28, 1999 APRIL 29, 1998
- ------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 115,982 $ 96,300
Short-term investments, at
cost which approximates
market 7,139 3,098
Receivables (net of
allowances: 1999 - $21,633
and 1998 - $17,627) 1,163,915 1,071,837
Inventories:
Finished goods and
work-in-process 1,064,015 988,322
Packaging material and
ingredients 345,636 340,521
- ------------------------------------------------------------------------------
1,409,651 1,328,843
- ------------------------------------------------------------------------------
Prepaid expenses 154,619 167,431
Other current assets 35,472 19,010
- ------------------------------------------------------------------------------
Total current assets 2,886,778 2,686,519
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 48,649 51,129
Buildings and leasehold
improvements 798,307 806,299
Equipment, furniture and
other 3,227,019 3,210,695
- ------------------------------------------------------------------------------
4,073,975 4,068,123
Less accumulated depreciation 1,902,951 1,673,461
- ------------------------------------------------------------------------------
Total property, plant and
equipment, net 2,171,024 2,394,662
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OTHER NON-CURRENT ASSETS:
Goodwill (net of
amortization: 1999 -
$352,209 and 1998 -
$297,868) 1,781,466 1,764,574
Trademarks (net of
amortization: 1999 -
$84,672 and 1998 - $67,791) 511,608 416,918
Other intangibles (net of
amortization: 1999 -
$117,038 and 1998 -
$112,768) 177,290 194,560
Other non-current assets 525,468 566,188
- ------------------------------------------------------------------------------
Total other non-current
assets 2,995,832 2,942,240
- ------------------------------------------------------------------------------
Total assets $8,053,634 $8,023,421
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
40 H.J. Heinz Annual Report 1999
LIABILITIES AND SHAREHOLDERS'
EQUITY (DOLLARS IN THOUSANDS) APRIL 28, 1999 APRIL 29, 1998
- ------------------------------------------------------------------------------
CURRENT LIABILITIES:
Short-term debt $ 290,841 $ 301,028
Portion of long-term debt due
within one year 613,366 38,598
Accounts payable 945,488 978,365
Salaries and wages 74,098 66,473
Accrued marketing 182,024 163,405
Accrued restructuring costs 147,786 94,400
Other accrued liabilities 372,623 360,608
Income taxes 160,096 161,396
- ------------------------------------------------------------------------------
Total current liabilities 2,786,322 2,164,273
- ------------------------------------------------------------------------------
LONG-TERM DEBT AND OTHER
LIABILITIES:
Long-term debt 2,472,206 2,768,277
Deferred income taxes 310,799 291,161
Non-pension postretirement
benefits 208,102 209,642
Other 473,201 373,552
- ------------------------------------------------------------------------------
Total long-term debt and
other liabilities 3,464,308 3,642,632
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Capital stock:
Third cumulative preferred,
$1.70 first series, $10
par value 173 199
Common stock, 431,096,485
shares issued, $.25 par
value 107,774 107,774
- ------------------------------------------------------------------------------
107,947 107,973
Additional capital 277,652 252,773
Retained earnings 4,379,742 4,390,248
- ------------------------------------------------------------------------------
4,765,341 4,750,994
Less:
Treasury shares, at cost
(71,968,652 shares at
April 28, 1999 and
67,678,632 shares at
April 29, 1998) 2,435,012 2,103,979
Unearned compensation
relating to the ESOP 11,728 14,822
Accumulated other
comprehensive loss 515,597 415,677
- ------------------------------------------------------------------------------
Total shareholders' equity 1,803,004 2,216,516
Total liabilities and
shareholders' equity $8,053,634 $8,023,421
- ------------------------------------------------------------------------------
Consolidated Balance Sheets 41
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
H.J. Heinz Company and Subsidiaries
PREFERRED STOCK COMMON STOCK
---------------- ------------------
(AMOUNTS IN THOUSANDS, COMPREHENSIVE
EXCEPT PER SHARE DATA) INCOME SHARES DOLLARS SHARES DOLLARS
- -------------------------------------------------------------------------------
Balance at May 1, 1996 27 $271 431,096 $107,774
Comprehensive income - 1997:
Net income - 1997 $301,871
Other comprehensive income
(loss), net of tax:
Minimum pension liability,
net of $3,282 tax
expense 5,588
Unrealized translation
adjustments (41,353)
Realized translation
reclassification
adjustment (13,758)
--------
Comprehensive income $252,348
--------
Cash dividends:
Preferred @ $1.70 per share
Common @ $1.13-1/2 per share
Shares reacquired
Conversion of preferred into
common stock (3) (30)
Stock options exercised, net
of shares tendered for
payment
Unearned compensation relating
to the ESOP
Other, net
- -------------------------------------------------------------------------------
Balance at April 30, 1997 24 241 431,096 107,774
Comprehensive income - 1998:
Net income - 1998 $801,566
Other comprehensive income
(loss), net of tax:
Minimum pension liability,
net of $1,428 tax
expense 2,433
Unrealized translation
adjustments (180,284)
--------
Comprehensive income $623,715
--------
Cash dividends:
Preferred @ $1.70 per share
Common @ $1.23-1/2 per share
Shares reacquired
Conversion of preferred into
common stock (4) (42)
Stock options exercised, net
of shares tendered for
payment
Unearned compensation relating
to the ESOP
Other, net
- -------------------------------------------------------------------------------
Balance at April 29, 1998 20 199 431,096 107,774
Comprehensive income - 1999:
Net income - 1999 $474,341
Other comprehensive income
(loss), net of tax:
Minimum pension liability,
net of $6,975 tax
benefit (11,880)
Unrealized translation
adjustments (88,040)
--------
Comprehensive income $374,421
--------
Cash dividends:
Preferred @ $1.70 per share
Common @ $1.34-1/4 per share
Shares reacquired
Conversion of preferred into
common stock (3) (26)
Stock options exercised, net
of shares tendered for
payment
Unearned compensation relating
to the ESOP
Other, net
- -------------------------------------------------------------------------------
Balance at April 28, 1999 17 $173 431,096 $107,774
- -------------------------------------------------------------------------------
Authorized Shares - April 28,
1999 17 600,000
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
42 H.J. Heinz Annual Report 1999
UNEARNED ACCUMULATED
TREASURY STOCK COMPENSATION OTHER TOTAL
(AMOUNTS IN THOUSANDS, ADDITIONAL RETAINED --------------------- RELATING COMPREHENSIVE SHAREHOLDERS'
EXCEPT PER SHARE DATA) CAPITAL EARNINGS SHARES DOLLARS TO THE ESOP LOSS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Balance at May 1, 1996 $154,602 $4,156,380 (62,498) $(1,500,866) $(23,101) $(188,303) $2,706,757
Comprehensive income - 1997:
Net income - 1997 301,871 301,871
Other comprehensive income
(loss), net of tax:
Minimum pension liability,
net of $3,282 tax
expense
Unrealized translation
adjustments
Realized translation
reclassification
adjustment (49,523) (49,523)
Comprehensive income
Cash dividends:
Preferred @ $1.70 per share (43) (43)
Common @ $1.13-1/2 per share (416,923) (416,923)
Shares reacquired (7,939) (277,046) (277,046)
Conversion of preferred into
common stock (932) 41 963 1
Stock options exercised, net
of shares tendered for
payment 21,946* 6,466 147,071 169,017
Unearned compensation relating
to the ESOP 5,738 5,738
Other, net 195 18 377 572
- ------------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1997 175,811 4,041,285 (63,912) (1,629,501) (17,363) (237,826) 2,440,421
Comprehensive income - 1998:
Net income - 1998 801,566 801,566
Other comprehensive income
(loss), net of tax:
Minimum pension liability,
net of $1,428 tax
expense
Unrealized translation
adjustments (177,851) (177,851)
Comprehensive income
Cash dividends:
Preferred @ $1.70 per share (37) (37)
Common @ $1.23-1/2 per share (452,566) (452,566)
Shares reacquired (13,559) (677,193) (677,193)
Conversion of preferred into
common stock (1,322) 56 1,364 -
Stock options exercised, net
of shares tendered for
payment 77,830* 9,717 200,860 278,690
Unearned compensation relating
to the ESOP 2,541 2,541
Other, net 454 19 491 945
- ------------------------------------------------------------------------------------------------------------------------------
Balance at April 29, 1998 252,773 4,390,248 (67,679) (2,103,979) (14,822) (415,677) 2,216,516
Comprehensive income - 1999:
Net income - 1999 474,341 474,341
Other comprehensive income
(loss), net of tax:
Minimum pension liability,
net of $6,975 tax
benefit
Unrealized translation
adjustments (99,920) (99,920)
Comprehensive income
Cash dividends:
Preferred @ $1.70 per share (30) (30)
Common @ $1.34-1/4 per share (484,817) (484,817)
Shares reacquired (7,464) (410,103) (410,103)
Conversion of preferred into
common stock (846) 34 872 -
Stock options exercised, net
of shares tendered for
payment 25,658* 3,138 78,150 103,808
Unearned compensation relating
to the ESOP 3,094 3,094
Other, net 67 2 48 115
- ------------------------------------------------------------------------------------------------------------------------------
Balance at April 28, 1999 $277,652 $4,379,742 (71,969) $(2,435,012) $(11,728) $(515,597)+ $1,803,004
- ------------------------------------------------------------------------------------------------------------------------------
Authorized Shares - April 28,
1999
- ------------------------------------------------------------------------------------------------------------------------------
* Includes income tax benefit resulting from exercised stock options.
+ Comprised of unrealized translation adjustment of $(479,188) and minimum
pension liability of $(36,409).
Consolidated Statements of Shareholders' Equity 43
CONSOLIDATED STATEMENTS OF CASH FLOWS
H.J. Heinz Company and Subsidiaries
FISCAL YEAR ENDED APRIL 28, 1999 APRIL 29, 1998 APRIL 30, 1997
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 474,341 $ 801,566 $ 301,871
Adjustments to
reconcile net income
to cash provided by
operating activities:
Depreciation 207,852 222,492 244,388
Amortization 94,360 91,130 96,102
Deferred tax
provision
(benefit) 23,564 120,875 (33,450)
Gain on sale of
bakery products
unit (5,717) - -
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 527,107 - 647,200
Other items, net (43,147) (126,805) (42,527)
Changes in current
assets and
liabilities,
excluding effects of
acquisitions and
divestitures:
Receivables (88,742) (7,155) 74,445
Inventories (115,743) 47,917 (5,329)
Prepaid expenses
and other
current assets 2,604 4,874 5,094
Accounts payable 3,410 54,345 18,003
Accrued
liabilities (150,533) (131,400) (182,555)
Income taxes (19,220) 84,468 (162,962)
- --------------------------------------------------------------------------------
Cash provided by
operating activities 910,136 1,065,744 874,998
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (316,723) (373,754) (377,457)
Acquisitions, net of
cash acquired (268,951) (142,112) (208,383)
Proceeds from
divestitures 180,400 494,739 165,555
Purchases of short-
term investments (915,596) (1,179,024) (1,223,884)
Sales and maturities
of short-term
investments 883,945 1,216,573 1,233,919
Other items, net 46,396 10,740 23,937
- --------------------------------------------------------------------------------
Cash (used for)
provided by
investing activities (390,529) 27,162 (386,313)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from long-
term debt 259,593 555,017 47,483
Payments on long-term
debt (65,744) (572,905) (99,176)
Proceeds from
(payments on)
commercial paper and
short-term
borrowings, net 74,464 (288,346) 133,732
Dividends (484,847) (452,603) (416,966)
Purchase of treasury
stock (410,103) (677,193) (277,046)
Exercise of stock
options 77,158 200,972 135,082
Other items, net 33,989 88,457 47,131
- --------------------------------------------------------------------------------
Cash (used for)
financing activities (515,490) (1,146,601) (429,760)
- --------------------------------------------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents 15,565 (6,991) 7,997
- --------------------------------------------------------------------------------
Net increase
(decrease) in cash
and cash equivalents 19,682 (60,686) 66,922
Cash and cash
equivalents at
beginning of year 96,300 156,986 90,064
Cash and cash
equivalents at end
of year $ 115,982 $ 96,300 $ 156,986
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
44 H.J. Heinz Annual Report 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H.J. Heinz Company and Subsidiaries
- ------------------------------------------------------------------------------
1. SIGNIFICANT Fiscal Year: H.J. Heinz Company (the "company") operates on
ACCOUNTING a 52- or 53-week fiscal year ending the Wednesday nearest
POLICIES April 30. However, certain foreign subsidiaries have earlier
closing dates to facilitate timely reporting. Fiscal years
for the financial statements included herein ended April 28,
1999, April 29, 1998 and April 30, 1997.
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 1999 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 ranging from three to 40 years. The
company regularly reviews the individual 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.
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.
Notes to Consolidated Financial Statements 45
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, purchased 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 and sales of certain raw
materials and finished goods and for payments 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 SFAS No. 128
requirements. All earnings per share amounts are presented on
an after-tax diluted basis unless otherwise noted.
46 H.J. Heinz Annual Report 1999
Comprehensive Income: The company adopted SFAS No. 130,
"Reporting Comprehensive Income." 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.
Business Segment Information: The company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes new standards for reporting
and disclosure relating to segments and geographic areas.
Previously reported segment and geographic information has
been restated to conform to SFAS No. 131 requirements.
Postretirement Benefits: The company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other
Postretirement Benefits," which revises employers'
disclosures about pension and other postretirement benefit
plans. Amounts in prior year financial statements have been
reclassified to conform to SFAS No. 132 requirements.
Recently Issued Accounting Standards: 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. 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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FAS Statement 133," which
postponed the adoption date of SFAS No. 133. As such, the
company is not required to adopt the statement until Fiscal
2002. The company is currently evaluating the effect that
implementation of the new standard will have on its results
of operations and financial position.
In April 1998, the American Institute of CPAs issued a
Statement of Position ("SOP") entitled "Reporting on the
Costs of Start-up Activities." This SOP requires that costs
incurred to open a new facility, introduce a new product,
commence a new operation or other similar activities be
expensed as incurred. The company will adopt this SOP in
Fiscal 2000. The company does not believe this SOP will have
a material impact on its financial statements.
- ------------------------------------------------------------------------------
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. Pro forma results of
the company, assuming all of the following acquisitions had
been made at the beginning of each period presented, would
not be materially different from the results reported.
Fiscal 1999: The company acquired businesses for a total of
$317.3 million, including obligations to sellers of $48.4
million. The preliminary allocations of the purchase price
resulted in goodwill of $179.4 million and trademarks and
other intangible assets of $128.0 million, which are being
amortized on a straight-line basis over periods not exceeding
40 years. Final allocation of the purchase price is not
expected to differ significantly from the preliminary
allocations and is expected to be completed in the first
quarter of Fiscal 2000.
Acquisitions made during Fiscal 1999 include: the College
Inn brand of canned broths and a joint venture with ABC
Indonesia, a leading provider of ketchup, sauces and
condiments. The company also made other smaller acquisitions
during the year.
Notes to Consolidated Financial Statements 47
Fiscal 1998: The company acquired businesses for a total of
$142.1 million. The allocations of the purchase price
resulted in goodwill of $65.1 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, 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.
- ------------------------------------------------------------------------------
3. DIVESTITURES On October 2, 1998, the company completed the sale of its
bakery products unit for $178.0 million. The transaction
resulted in a pretax gain of $5.7 million, which was recorded
in selling, general and administrative expenses ("SG&A"). The
bakery products unit contributed approximately $200 million
in sales for Fiscal 1998.
On June 30, 1997, the company completed the sale of its
Ore-Ida frozen foodservice business. The transaction resulted
in a pretax gain of approximately $96.6 million ($0.14 per
share), and was recorded in SG&A. 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
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 for approximately $150
million. The pretax gain on the divestiture totaled $72.1
million, or $0.12 per share.
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 Operation Excel
CHARGES During Fiscal 1999, Phase I of a multi-year restructuring
program ("Operation Excel") was approved by the company's
Board of Directors, and resulted in recognition of
restructuring charges and implementation costs totaling
$552.8 million pretax ($1.11 per share), of which $141.7
million was recognized in the third quarter of Fiscal 1999,
and $411.1 million was recognized in the fourth quarter of
Fiscal 1999. Pretax charges of $396.4 million are classified
as cost of products sold and $156.4 million as SG&A.
The major components of Operation Excel include: creating
manufacturing centers of excellence; focusing the product
portfolio; realigning the company's management teams; and
investing in growth initiatives.
48 H.J. Heinz Annual Report 1999
Creating manufacturing centers of excellence is resulting
in significant changes to the company's manufacturing
footprint including the following Phase I initiatives:
closing the Harlesden factory in London, England and focusing
the Kitt Green factory in Wigan, England on canned beans,
soups and pasta production and focusing the Elst factory in
the Netherlands on tomato ketchup and sauces; downsizing the
Puerto Rico tuna processing facility and focusing this
facility on lower volume/higher margin products; focusing the
Pittsburgh, Pennsylvania factory on soup and baby food
production and shifting other production to existing
facilities; closing the West Chester, Pennsylvania factory
and shifting pasta production to the Bloomsburg, Pennsylvania
factory; consolidating manufacturing capacity in the Asia/
Pacific region; closing the Zabreh, Czech Republic factory
and disposing of the dairy business and transferring the
infant formula business to the Kendal, England factory;
downsizing the Pocatello, Idaho factory by shifting Bagel
Bites production to the Ft. Myers, Florida factory and
shifting certain other Smart Ones entree production to the
Massillon, Ohio factory; and closing the Redditch, England
factory and shifting production to the Telford, England
factory and the Turnhout factory in Belgium.
As part of Operation Excel, the company is focusing the
product portfolio on six core food categories. A consequence
of this focus is the potential sale of the Weight Watchers
classroom business. Additionally, seven other smaller
businesses, which had combined annual revenues of
approximately $80 million, will be disposed.
Phase I of Operation Excel will also result in creating a
single U.S. frozen food headquarters, including the closure
of the company's Ore-Ida head office in Boise, Idaho; and
also includes consolidating many European administrative
support functions.
Phase I initiatives will result in the closure or exit of
16 factories or businesses. Management estimates that these
actions will impact 5,500 employees with a net reduction in
the workforce of 4,000 after expansion of certain facilities.
During Fiscal 1999, the company's workforce was reduced by
approximately 200 employees principally through the closure
of Ore-Ida's Boise head office and through the divestiture of
the Clarksville, Arkansas sweet potato business.
The major components of the restructuring charges and
implementation costs and the remaining accrual balance as of
April 28, 1999 were as follows:
EMPLOYEE
TERMINATION
NON-CASH AND IMPLEMEN-
(DOLLARS IN ASSET SEVERANCE ACCRUED TATION
MILLIONS) WRITE-DOWNS COSTS EXIT COSTS COSTS TOTAL
- ------------------------------------------------------------------------------
Initial charge - 1999 $ 294.9 $ 159.4 $ 45.3 $ 53.2 $ 552.8
Amounts utilized -
1999 (294.9) (67.3) (9.8) (53.2) (425.2)
- ------------------------------------------------------------------------------
Accrued restructuring
costs - April 28,
1999 $ - $ 92.1 $ 35.5 $ - $ 127.6
- ------------------------------------------------------------------------------
Non-cash asset write-downs consisted primarily of long-term
asset impairments that were recorded as a direct result of
the company's decision to exit businesses or facilities
($260.5 million), including property, plant and equipment
($210.9 million) and goodwill and other intangibles ($49.6
million). The write-downs were based on third party
appraisals, contracted sales prices or management's estimate
of salvage value. The carrying value of these long-term
assets is approximately $50 million and these assets will be
sold or removed from service within 15 months. Once the
assets are removed from service, the company will actively
market these assets for sale. The results of operations,
including the effect of reduced depreciation, related to
these assets, were not material. Current assets ($34.5
million) affected by the restructuring program were also
written-down to net realizable values. These write-downs
included inventory and packaging material, prepaids, and
other current assets and were determined based on
management's estimate of net realizable value.
Severance charges are primarily related to involuntary
terminations and represent cash termination payments to be
paid to affected employees as a direct result of the
restructuring program. Non-cash pension and postretirement
benefit charges ($60.5 million) for curtailments and
settlements related to the approved projects are also
included as a component of total severance cost. Employee
termination
Notes to Consolidated Financial Statements 49
and severance costs do not represent all of the amounts to be
recorded in connection with the separation of the affected
employees, as additional costs will be recognized over the next
year as eligibility requirements are met.
Accrued exit costs ($45.3 million) are primarily related to
contract and lease termination costs ($35.0 million).
Implementation costs were recognized as incurred in Fiscal
1999 ($53.2 million) and consist primarily of consulting fees
and employee relocation expenses.
Project Millennia
During the fourth quarter of Fiscal 1997, the company
announced a reorganization and restructuring program named
"Project Millennia." The reorganization plan was designed to
strengthen the company's core businesses and improve
profitability and global growth. Key initiatives were focused
on process changes and product line rationalizations.
Significant process change initiatives were: changing our
go-to-market strategies, including the elimination of
inefficient end-of-quarter trade promotion practices;
outsourcing certain manufacturing operations and eliminating
excess manufacturing capacity throughout the company;
refocusing the company's U.S. Weight Watchers classroom
business and introducing a new weight loss program (1*2*3
Success(TM)) in the U.S.; and developing a Pan-European
category-based strategy in Europe. Product line
rationalization initiatives included: divestiture of four
businesses (the Ore-Ida frozen foodservice business, the New
Zealand ice cream business, the Weight Watchers dry and
refrigerated businesses and the U.S. frozen pizza and pizza
topping business); exiting the Weight Watchers Personal
Cuisine business; exiting the "dinner" product line from The
Budget Gourmet business; and converting all Weight Watchers
entrees to the Smart Ones brand and reformulating the product
and changing the packaging.
Total restructuring charges and implementation costs
recognized in Fiscal 1997 were $647.2 million, of which
$477.8 million were classified as cost of products sold and
$169.4 million were classified as selling, general and
administrative expenses. Components of the restructuring
program included an estimated net reduction of the global
workforce of approximately 2,500 employees and the closure or
sale of 25 plants throughout the world. Plant closures or
sales include: five Ore-Ida factories, three New Zealand ice
cream factories, four North American bakery factories, three
U.S. frozen pizza and pizza topping facilities, two New
Zealand food processing factories, the Tracy, California
tomato processing factory, the Kankakee, Illinois pet food
factory and six smaller factories.
The major components of the restructuring charges and
implementation costs and the accrual balances as of April 28,
1999, April 29, 1998 and April 30, 1997 were as follows:
EMPLOYEE EXIT COSTS
TERMINATION ---------------------
NON-CASH AND IMPLEMEN-
(DOLLARS IN ASSET SEVERANCE ACCRUED TATION
MILLIONS) WRITE-DOWNS COSTS EXIT COSTS COSTS TOTAL
- ------------------------------------------------------------------------------
Initial charge - 1997 $ 324.3 $164.5 $ 94.3 $ 64.1 $ 647.2
Amounts utilized -
1997 (324.3) (32.1)* (15.9) (64.1) (436.4)
- ------------------------------------------------------------------------------
Accrued restructuring
costs - April 30,
1997 - 132.4 78.4 - 210.8
Implementation costs -
1998 - - - 84.1 84.1
Amounts utilized -
1998 - (91.9) (24.5) (84.1) (200.5)
- ------------------------------------------------------------------------------
Accrued restructuring
costs - April 29,
1998 - 40.5 53.9 - 94.4
Implementation costs -
1999 - - - 22.3 22.3
Amounts utilized -
1999 - (28.7) (19.9) (22.3) (70.9)
Accrual reversal -
1999 - (9.1) (16.6) - (25.7)
- ------------------------------------------------------------------------------
Accrued restructuring
costs - April 28,
1999 $ - $ 2.7 $ 17.4 $ - $ 20.1
- ------------------------------------------------------------------------------
*Includes $18.9 million in non-cash charges resulting from termination benefit
programs.
50 H.J. Heinz Annual Report 1999
Non-cash asset write-downs consisted primarily of long-term
asset impairments that were recorded as a direct result of
the company's decision to exit businesses or facilities
($206.8 million), including property, plant and equipment
($193.9 million) and goodwill and other intangibles ($12.9
million). The write-downs were based on third party
appraisals, contracted sales price or management's estimate
of salvage value. After the write-down, the carrying value of
these assets was $36.5 million and the results of operations,
including the effect of suspending depreciation, related to
assets to be disposed of were not material. Write-downs were
also recognized for current assets that were written-down to
net realizable values as a result of the process changes and
product line rationalizations described above ($117.5
million). These write-downs included inventory and packaging
material, prepaids, spare-parts and supplies, and cylinders
and dies.
Severance costs include charges related to both voluntary
terminations and involuntary terminations. As part of the
voluntary termination agreements, enhanced retirement
benefits were offered to the affected employees. These
amounts were included in the severance cost component of the
restructuring charge.
Exit costs included $64.1 million of implementation costs
for the project, which were recognized as incurred in Fiscal
1997, and accrued costs comprised of contract and lease
termination costs of $55.9 million, product return costs of
$20.7 million and other costs of $17.7 million.
Project Millennia Status Update
During Fiscal 1998, the company utilized $116.4 million of
severance and exit accruals to facilitate the process change
and product line rationalization initiatives, described
above. The company spent an additional $84.1 million for
implementation costs, consisting primarily of relocation,
consulting, training and start-up costs, which were expensed
as incurred. There were 17 factories sold or closed during
the year and the net workforce was reduced by 1,800
employees.
During Fiscal 1999, the company utilized $48.6 million of
severance and exit accruals, principally on the realignment
of the pet food manufacturing and distribution operations,
streamlining of European operations, consolidation of the
Heinz-Wattie businesses in Australia and New Zealand,
contractual lease commitments associated with the
restructuring of the U.S. Weight Watchers meeting system, and
costs related to the exit of certain of the company's frozen
entree brands. The company also incurred $22.3 million of
additional costs related to the continued implementation of
Project Millennia. These costs consisted principally of
start-up, consulting and training costs.
In the second quarter of Fiscal 1999, the company reversed
$25.7 million of unutilized Project Millennia accruals for
severance and exit costs. In Europe, severance accruals were
reduced $9.1 million, principally as a result of lower
severance payments in Italy versus the original estimates and
fewer selling, general and administrative terminations in the
U.K. In the U.S., $16.6 million of the accrual for exit costs
was reversed principally as a result of avoided contractual
liabilities related to product returns due to the sale of the
Weight Watchers dry and refrigerated business. The Weight
Watchers frozen entree business also experienced lower costs
in exiting certain of the company's frozen entree product
offerings.
As of April 28, 1999, the company has closed or divested 23
of the 25 plants (five in Fiscal 1997, 17 in Fiscal 1998 and
one in Fiscal 1999) that were scheduled for closure or
divestiture. The remaining two facilities (one tuna
processing facility in Australia and one tomato processing
facility in Spain) have been publicly announced and will be
closed by the end of October 1999.
As of April 28, 1999, Project Millennia has resulted in a
net workforce reduction of 2,100 employees. The two remaining
plant closures described above will result in an additional
workforce reduction of 150 employees. The total workforce
reduction is now estimated to be 2,250 compared to the 2,500
originally estimated. The lower net headcount reductions as
well as the lower actual severance payments compared to the
original estimates have resulted in the reversal of original
severance accruals of $9.1 million as described above.
Notes to Consolidated Financial Statements 51
As of April 28, 1999, there are $20.1 million of remaining
Project Millennia accruals. These accruals relate to the
finalization of plant closures, remaining costs related to
the exit of certain of the company's frozen entree brands,
and contractual lease commitments associated with the
restructuring of the U.S. Weight Watchers meeting system.
With the exception of the lease costs, all other spending
will be completed by the end of the second quarter of Fiscal
2000.
- ------------------------------------------------------------------------------
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) 1999 1998 1997
- ------------------------------------------------------------------------------
Current:
U.S. federal and U.S.
possessions $ 110,490 $ 214,866 $ 67,274
State 15,389 17,667 6,458
Foreign 211,347 100,007 136,911
- ------------------------------------------------------------------------------
337,226 332,540 210,643
- ------------------------------------------------------------------------------
Deferred:
U.S. federal and U.S.
possessions 66,944 103,630 (38,988)
State 2,441 1,536 (10,763)
Foreign (45,821) 15,709 16,301
- ------------------------------------------------------------------------------
23,564 120,875 (33,450)
- ------------------------------------------------------------------------------
Total tax provision $ 360,790 $ 453,415 $ 177,193
- ------------------------------------------------------------------------------
The Fiscal 1999 effective tax rate was unfavorably impacted
by restructuring and related costs expected to be realized in
lower tax rate jurisdictions and by non-deductible expenses
related to the restructuring. The tax benefit related to the
$552.8 million of restructuring and related costs for Phase I
of Operation Excel was $143.1 million. 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. Tax expense resulting from allocating
certain tax benefits directly to additional capital totaled
$26.6 million in 1999, $77.7 million in 1998 and $33.8
million in 1997.
The components of income before income taxes consist of the
following:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------
Domestic $ 427,089 $ 742,665 $ (47,219)
Foreign 408,042 512,316 526,283
- ------------------------------------------------------------------------------
$ 835,131 $ 1,254,981 $ 479,064
- ------------------------------------------------------------------------------
52 H.J. Heinz Annual Report 1999
The differences between the U.S. federal statutory tax rate
and the company's consolidated effective tax rate are as
follows:
1999 1998 1997
- ------------------------------------------------------------------------------
U.S. federal statutory tax
rate 35.0% 35.0% 35.0%
Tax on income of foreign
subsidiaries 1.5 (0.7) 5.6
State income taxes (net of
federal benefit) 1.5 1.1 (0.2)
Tax credits (0.3) 0.2 (2.1)
Earnings repatriation (0.3) (0.2) 5.5
Effect of foreign losses 3.8 - (0.7)
Tax on income of U.S.
possessions subsidiaries 0.6 (1.3) (2.8)
Other 1.4 2.0 (3.3)
- ------------------------------------------------------------------------------
Effective tax rate 43.2% 36.1% 37.0%
- ------------------------------------------------------------------------------
The deferred tax (assets) and deferred tax liabilities
recorded on the balance sheets as of April 28, 1999 and April
29, 1998 are as follows:
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------
Depreciation/amortization $ 429,101 $ 443,448
Benefit plans 70,006 71,508
Other 57,925 100,676
- ------------------------------------------------------------------------------
557,032 615,632
- ------------------------------------------------------------------------------
Provision for estimated
expenses (148,519) (106,325)
Operating loss carryforwards (37,104) (50,317)
Benefit plans (106,015) (111,039)
Promotions and advertising (23,162) (31,829)
Other (102,077) (119,771)
- ------------------------------------------------------------------------------
(416,877) (419,281)
- ------------------------------------------------------------------------------
Valuation allowance 40,811 20,992
- ------------------------------------------------------------------------------
Net deferred tax liabilities $ 180,966 $ 217,343
- ------------------------------------------------------------------------------
At the end of 1999, net operating loss carryforwards
totaled $89.0 million. Of that amount, $41.1 million expire
through 2010; the other $47.9 million do not expire. Foreign
tax credit carryforwards total $10.6 million and expire
through 2004.
The company's consolidated U.S. income tax returns have
been audited by the Internal Revenue Service for all years
through 1994.
Undistributed earnings of foreign subsidiaries considered
to be reinvested permanently amounted to $1.92 billion at
April 28, 1999.
The 1999 net change in the valuation allowance for deferred
tax assets was an increase of $19.8 million, primarily due to
write-offs and accruals related to Operation Excel.
Notes to Consolidated Financial Statements 53
- ------------------------------------------------------------------------------
6. DEBT
SHORT-TERM (DOLLARS IN
THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------
Commercial paper (foreign) $ - $ 79,841
Bank and other borrowings 290,841 221,187
- ------------------------------------------------------------------------------
$290,841 $301,028
- ------------------------------------------------------------------------------
Total short-term debt had a weighted-average interest rate
during 1999 of 6.3% and at year-end of 5.3%. The weighted-
average interest rate on short-term debt during 1998 was 6.5%
and at year-end was 6.4%.
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 $916.5 million of foreign lines of credit available at
year-end, principally for overdraft protection.
As of April 28, 1999 and April 29, 1998, the company had
$1.41 billion and $1.34 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 28, 1999 and April 29, 1998. Aggregate domestic
commercial paper had a weighted-average interest rate during
1999 of 5.3% and at year-end of 4.9%. In 1998, the weighted-
average rate and the rate at year-end was 5.6%.
LONG-TERM (DOLLARS IN RANGE OF MATURITY
THOUSANDS) INTEREST (FISCAL YEAR) 1999 1998
- ------------------------------------------------------------------------------
United States Dollars:
Commercial paper Variable 2002 $1,406,131 $1,337,574
Senior unsecured notes 6.00-6.88% 2000-2029 1,040,013 797,791
Eurodollar bonds 5.75-7.50 2000-2003 499,089 498,944
Revenue bonds 3.40-7.70 2000-2027 15,092 18,342
Promissory notes 3.00-10.00 2000-2005 67,397 47,157
Other 6.35-15.00 2000-2006 5,860 6,337
- ------------------------------------------------------------------------------
3,033,582 2,706,145
- ------------------------------------------------------------------------------
Foreign Currencies
(U.S. Dollar Equivalents):
Promissory notes:
Pounds sterling 5.94-8.85% 2000-2006 10,230 27,272
Italian lire 3.50-8.83 2000-2008 7,377 23,751
Australian dollar 5.21 2000-2002 13,421 19,066
Other 5.75-24.00 2000-2022 20,962 30,641
- ------------------------------------------------------------------------------
51,990 100,730
- ------------------------------------------------------------------------------
Total long-term debt 3,085,572 2,806,875
Less portion due within one
year 613,366 38,598
- ------------------------------------------------------------------------------
$2,472,206 $2,768,277
- ------------------------------------------------------------------------------
54 H.J. Heinz Annual Report 1999
The amount of long-term debt that matures in each of the
four years succeeding 2000 is: $19.3 million in 2001,
$1,420.9 million in 2002, $453.2 million in 2003 and $2.5
million in 2004.
In February 1998, the company issued $250 million of 5.75%
five-year notes in the Eurodollar 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.
On July 15, 1998, the company, under its current shelf
registration statement, issued $250 million of 6.375%
debentures due July 2028. The proceeds 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.
As of April 28, 1999, 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 interest-bearing note, fixed at 5.6% for 1999, 1998
and 1997, 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 1999,
1998 and 1997 was $0.6 million, $0.2 million and $3.0
million, respectively. Interest expense was $0.8 million,
$0.9 million and $1.1 million for 1999, 1998 and 1997,
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 in each of the fiscal years ended 1999, 1998 and
1997.
The ESOP shares outstanding at April 28, 1999 and April 29,
1998, respectively, were as follows: unallocated 458,069 and
593,095; committed-to-be-released 38,921 and 32,329; and
allocated 1,152,996 and 1,124,475. Shares held by the ESOP
are considered outstanding for purposes of calculating the
company's net income per share.
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 $88.0 million in 1999, $180.3 million in 1998 and
$55.1 million in 1997. 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.)
Notes to Consolidated Financial Statements 55
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.)
- ------------------------------------------------------------------------------
8. SUPPLEMENTAL
CASH FLOWS
INFORMATION
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------
Cash Paid During The
Year For:
Interest $266,395 $300,173 $310,146
Income taxes 287,544 188,567 295,008
- ------------------------------------------------------------------------------
Details of
Acquisitions:
Fair value of assets $350,575 $200,406 $264,560
Liabilities* 80,055 47,912 56,168
- ------------------------------------------------------------------------------
Cash paid 270,520 152,494 208,392
Less cash acquired 1,569 10,382 9
- ------------------------------------------------------------------------------
Net cash paid for
acquisitions $268,951 $142,112 $208,383
- ------------------------------------------------------------------------------
*Includes obligations to sellers of $48.4 million and $14.2 million in 1999
and 1997, respectively.
- ------------------------------------------------------------------------------
9. EMPLOYEES' Under the company's stock option plans, officers and other
STOCK OPTION key employees may be granted options to purchase shares of
PLANS AND the company's common stock. The option price on all
MANAGEMENT outstanding options is equal to the fair market value of the
INCENTIVE stock at the date of grant. Generally, options are
PLANS 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) 1999 1998 1997
- ------------------------------------------------------------------------------
Pro forma net income $440,080 $790,325 $295,605
Pro forma diluted net
income per common
share $ 1.20 $ 2.12 $ 0.79
Pro forma basic net
income per common
share $ 1.22 $ 2.16 $ 0.80
- ------------------------------------------------------------------------------
The pro forma effect on net income for 1999, 1998 and 1997
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
$11.34 per share in 1999, $12.45 per share in 1998 and $6.94
per share in 1997.
56 H.J. Heinz Annual Report 1999
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
1999 1998 1997
- ------------------------------------------------------------------------------
Dividend yield 2.5% 2.5% 3.3%
Volatility 22.0% 20.0% 17.5%
Risk-free interest rate 5.3% 5.8% 6.3%
Expected term (years) 4.9 5.5 5.5
- ------------------------------------------------------------------------------
Data regarding the company's stock option plans follows:
WEIGHTED-
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
- ------------------------------------------------------------------------------
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 granted 8,979,200 53.07
Options exercised (3,138,445) 24.59
Options surrendered (924,300) 40.11
- ------------------------------------------------------------------------------
Shares under option
April 28, 1999 30,517,230 $37.94
- ------------------------------------------------------------------------------
Options exercisable at:
April 30, 1997 18,473,073 $22.53
April 29, 1998 14,397,175 24.70
April 28, 1999 13,507,295 27.60
- ------------------------------------------------------------------------------
The following summarizes information about shares under
option in the respective exercise price ranges at April 28,
1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE PRICE NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
PER SHARE OUTSTANDING (YEARS) PER SHARE EXERCISABLE PER SHARE
- ----------------------------------------------------------------------------------------------------------------------------
$18.75-32.13 16,020,830 5.26 $26.73 11,954,208 $24.97
33.00-46.00 3,279,500 7.58 39.34 762,667 36.98
46.31-59.94 11,216,900 9.38 53.53 790,420 58.31
- ----------------------------------------------------------------------------------------------------------------------------
30,517,230 13,507,295
- ----------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 57
The shares authorized but not granted under the company's
stock option plans were 452,335 at April 28, 1999 and
8,507,235 at April 29, 1998. Common stock reserved for
options totaled 30,969,565 at April 28, 1999 and 34,108,010
at April 29, 1998.
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 $47 million
in 1999, $46 million in 1998 and $37 million in 1997.
- ------------------------------------------------------------------------------
10. RETIREMENT The company maintains retirement plans for the majority of
PLANS its employees. Current defined benefit plans are provided
primarily for domestic union and foreign employees. Defined
contribution plans are provided for the majority of its
domestic non-union hourly and salaried employees.
Total pension cost consisted of the following:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------
Components of defined
benefit net periodic
benefit cost:
Service cost $ 23,617 $ 21,038 $ 15,583
Interest cost 82,958 83,005 81,620
Expected return on assets (109,490) (103,421) (94,720)
Amortization of:
Net initial asset (3,632) (4,333) (6,116)
Prior service cost 8,026 8,466 7,492
Net actuarial (gain)/loss (3,752) (10,307) 8,330
Loss due to curtailment,
settlement and special
termination benefits 60,485 6,482 -
- ------------------------------------------------------------------------------
Net periodic benefit cost 58,212 930 12,189
Defined contribution plans
(excluding the ESOP) 23,980 23,571 23,658
- ------------------------------------------------------------------------------
Total pension cost $ 82,192 $ 24,501 $ 35,847
- ------------------------------------------------------------------------------
58 H.J. Heinz Annual Report 1999
The following table sets forth the funded status of the
company's principal defined benefit plans at April 28, 1999
and April 29, 1998.
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at the
beginning of the year $1,270,521 $1,076,978
Service cost 23,617 21,038
Interest cost 82,958 83,005
Participants' contributions 7,044 7,344
Amendments 18,625 5,066
Actuarial loss 102,361 207,391
Curtailment (gain)/loss (867) 453
Settlement (36,751) (34,474)
Special termination benefits 31,581 1,098
Benefits paid (86,615) (93,009)
Exchange (25,431) (4,369)
- ------------------------------------------------------------------------------
Benefit obligation at the end
of the year 1,387,043 1,270,521
- ------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at
the beginning of the year 1,444,080 1,229,016
Actual return on plan assets 105,296 314,392
Settlement (36,751) (34,474)
Employer contribution 34,701 26,459
Participants' contributions 7,044 7,344
Benefits paid (86,615) (93,009)
Exchange (27,398) (5,648)
- ------------------------------------------------------------------------------
Fair value of plan assets at
the end of the year 1,440,357 1,444,080
- ------------------------------------------------------------------------------
Funded status 53,314 173,559
Unamortized prior service cost 75,770 83,622
Unamortized net actuarial
loss/(gain) 95,994 (1,488)
Unamortized net initial asset (11,501) (15,124)
- ------------------------------------------------------------------------------
Net amount recognized 213,577 240,569
- ------------------------------------------------------------------------------
Amount recognized in the
consolidated balance sheet
consists of:
Prepaid benefit cost 221,823 251,306
Accrued benefit liability (69,226) (53,785)
Intangible asset 3,189 4,112
Accumulated other
comprehensive loss 57,791 38,936
- ------------------------------------------------------------------------------
Net amount recognized $ 213,577 $ 240,569
- ------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit
obligation and fair value of plan assets for plans with
accumulated benefit obligations in excess of plan assets were
$278.8 million, $237.5 million and $168.3 million,
respectively, as of April 28, 1999 and $274.3 million, $236.9
million and $183.1 million, respectively, as of April 29,
1998.
Notes to Consolidated Financial Statements 59
The weighted-average rates used for the years ended April
28, 1999, April 29, 1998 and April 30, 1997 in determining
the net pension costs and projected benefit obligations for
defined benefit plans were as follows:
1999 1998 1997
- ------------------------------------------------------------------------------
Expected rate of
return 9.5% 9.6% 9.6%
Discount rate 6.3% 6.9% 8.2%
Compensation increase
rate 4.7% 4.9% 5.2%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
11. POST- The company and certain of its subsidiaries provide health
RETIREMENT care and life insurance benefits for retired employees and
BENEFITS their eligible dependents. Certain of the company's U.S. and
OTHER Canadian employees may become eligible for such benefits. The
THAN company currently does not fund these benefit arrangements
PENSIONS and may modify plan provisions or terminate plans at its
AND OTHER discretion.
POST- Net postretirement costs consisted of the following:
EMPLOYMENT
BENEFITS
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------
Components of defined
benefit net periodic
benefit cost:
Service cost $ 3,603 $ 3,339 $ 3,864
Interest cost 10,483 11,280 11,694
Amortization of:
Prior service cost (649) (5,633) (4,442)
Net actuarial gain (3,430) (3,664) (2,572)
Loss due to
curtailment and
special termination
benefits 3,732 1,085 -
- ------------------------------------------------------------------------------
Net periodic benefit
cost $ 13,739 $ 6,407 $ 8,544
- ------------------------------------------------------------------------------
The following table sets forth the combined status of the
company's postretirement benefit plans at April 28, 1999 and
April 29, 1998.
(DOLLARS IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at the
beginning of the year $ 157,975 $ 143,877
Service cost 3,603 3,339
Interest cost 10,483 11,280
Participant's contributions 858 620
Actuarial (gain)/loss (3,688) 5,088
Curtailment - (834)
Special termination benefits 2,779 5,204
Benefits paid (12,709) (9,846)
Exchange (813) (753)
- ------------------------------------------------------------------------------
Benefit obligation at the end
of the year 158,488 157,975
- ------------------------------------------------------------------------------
Funded status (158,488) (157,975)
Unamortized prior service cost (6,711) (6,418)
Unamortized net actuarial gain (52,826) (53,849)
- ------------------------------------------------------------------------------
Net accrued benefit liability $(218,025) $(218,242)
- ------------------------------------------------------------------------------
60 H.J. Heinz Annual Report 1999
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 1999 and 1998 and
8.0% in 1997. The assumed annual composite rate of increase
in the per capita cost of company-provided health care
benefits begins at 7.1% for 1999, gradually decreases to 4.2%
by 2007, and remains at that level thereafter. Assumed health
care cost trend rates have a significant effect on the
amounts reported for postretirement medical benefits. A one-
percentage-point change in assumed health care cost trend
rates would have the following effects:
1% INCREASE 1% DECREASE
- ------------------------------------------------------------------------------
Effect on total service and
interest cost components $ 1,536 $ (1,314)
Effect on postretirement benefit
obligation 13,935 (12,090)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
12. FINANCIAL Foreign Currency Contracts: As of April 28, 1999 and April
INSTRUMENTS 29, 1998, the company held currency swap contracts with an
aggregate notional amount of approximately $110 million and
$350 million, respectively. As of April 28, 1999, these
contracts mature in 2002. The company had separate contracts
to purchase certain foreign currencies as of April 28, 1999
and April 29, 1998 totaling approximately $510 million and
$560 million, respectively, most of which mature within one
year of the respective fiscal year-end. The company also had
separate contracts to sell certain foreign currencies as of
April 28, 1999 and April 29, 1998 of approximately $390
million and $60 million, respectively. As of April 28, 1999,
these contracts mature in 2000 and 2001. Net unrealized gains
and losses associated with the company's foreign currency
contracts as of April 28, 1999 and April 29, 1998 were not
material.
Commodity Contracts: As of April 28, 1999 and April 29, 1998,
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 28, 1999 and April 29, 1998, 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.
Notes to Consolidated Financial Statements 61
- ------------------------------------------------------------------------------
13. NET INCOME The following table sets forth the computation of basic and
PER COMMON diluted earnings per share in accordance with the provisions
SHARE of SFAS No. 128.
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA) 1999 1998 1997
- ------------------------------------------------------------------------------
Net income per share -
basic:
Net income $474,341 $801,566 $301,871
Preferred dividends 30 37 43
- ------------------------------------------------------------------------------
Net income applicable to
common stock $474,311 $801,529 $301,828
Average common shares
outstanding - basic 361,204 365,982 367,471
Net income per share -
basic $ 1.31 $ 2.19 $ 0.82
Net income per share -
diluted:
Net income $474,341 $801,566 $301,871
Average common shares
outstanding 361,204 365,982 367,471
Effect of dilutive
securities:
Convertible preferred
stock 243 297 340
Stock options 6,383 6,674 6,233
- ------------------------------------------------------------------------------
Average common shares
outstanding - diluted 367,830 372,953 374,044
Net income per share -
diluted $ 1.29 $ 2.15 $ 0.81
- ------------------------------------------------------------------------------
Stock options outstanding of 6.0 million, 2.0 million and
2.6 million as of April 28, 1999, April 29, 1998 and April
30, 1997, respectively, were not included in the above net
income per diluted share calculations because to do so would
have been antidilutive for the periods presented.
- ------------------------------------------------------------------------------
14. SEGMENT The company adopted SFAS No. 131, "Disclosures about
INFORMATION Segments of an Enterprise and Related Information." SFAS No.
131 supersedes previously issued segment reporting disclosure
rules and requires the presentation of descriptive
information about reportable segments that is consistent with
the way in which management operates the company. SFAS No.
131 also requires disclosures about products and services,
geographic areas and major customers. Previously reported
segment and geographic information has been restated to
conform with SFAS No. 131 requirements.
The company's segments are primarily organized by
geographical area. The composition of segments and measure of
segment profitability is consistent with that used by the
company's management. Descriptions of the company's
reportable segments are as follows:
[ ] North American Dry - This segment includes the company's
North American dry grocery and foodservice operations. This
segment consists of Heinz U.S.A., Heinz Pet Products, Star-
Kist Seafood and Heinz Canada. This segment's operations
include products in all of the company's core categories.
[ ] North American Frozen - This segment consists of Heinz
Frozen Food Company, which markets frozen potatoes, entrees
and appetizers.
[ ] Europe - This segment includes the company's operations in
Europe and sells products in all of the company's core
categories.
[ ] Asia/Pacific - This segment includes the company's
operations in New Zealand, Australia, Japan, China, South
Korea, Indonesia, Thailand and India. This segment's
operations include products in all of the company's core
categories.
[ ] Other Operating Entities - This segment includes the
company's Weight Watchers classroom business as well as the
company's operations in Africa, Venezuela and other areas
which sell products in all of the company's core
categories.
The company's management evaluates performance based on
several factors; however, the primary measurement focus is
operating income excluding unusual costs and gains. The
accounting policies used are the same as those described in
Note 1, "Significant Accounting Policies." Intersegment sales
62 H.J. Heinz Annual Report 1999
are accounted for at current market values. Items below the
operating income line of the Consolidated Statements of
Income are not presented by segment, since they are excluded
from the measure of segment profitability reviewed by the
company's management.
The following table presents information about the
company's reportable segments.
NORTH NORTH OTHER NON-
AMERICAN AMERICAN ASIA/ OPERATING OPERATING CONSOLIDATED
(DOLLARS IN THOUSANDS) DRY FROZEN EUROPE PACIFIC ENTITIES (1) TOTALS
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended April 28, 1999
Intersegment sales $ 32,144 $ 21,131 $ 6,661 $ 13 $ 6,971 $ (66,920) $ -
Net external sales 4,062,683 1,014,370 2,460,698 1,011,764 750,095 - 9,299,610
Operating income (loss) 716,979 80,231 246,187 89,830 95,715 (119,630) 1,109,312
Operating income (loss), excluding
restructuring related items (2) 834,629 183,409 467,159 145,654 121,950 (99,792) 1,653,009
Depreciation and amortization
expense 121,363 39,773 85,408 20,549 23,278 11,841 302,212
Capital expenditures (3) 138,081 35,293 100,569 25,209 12,757 4,814 316,723
Identifiable assets 3,418,096 832,226 2,208,208 998,685 374,852 221,567 8,053,634
Fiscal year ended April 29, 1998
Intersegment sales $ 28,492 $ 14,467 $ 3,756 $ - $ 6,298 $ (53,013) $ -
Net external sales 3,935,269 1,076,080 2,332,594 1,072,856 792,485 - 9,209,284
Operating income (loss) 797,191 258,199 386,874 136,501 53,677 (112,112) 1,520,330
Operating income (loss), excluding
restructuring related items (4) 825,981 170,732 405,425 142,348 63,586 (100,219) 1,507,853
Depreciation and amortization
expense 117,739 41,855 84,583 30,406 28,291 10,748 313,622
Capital expenditures (3) 121,783 34,244 90,829 53,856 40,076 32,966 373,754
Identifiable assets 3,248,068 918,807 2,230,857 839,176 564,391 222,122 8,023,421
Fiscal year ended April 30, 1997
Intersegment sales $ 34,475 $ 27,067 $ 3,430 $ - $ 6,524 $ (71,496) $ -
Net external sales 3,698,797 1,551,690 2,154,686 1,220,885 730,949 - 9,357,007
Operating income (loss) 442,461 (4,698) 316,563 171,577 (64,291) (105,341) 756,271
Operating income (loss), excluding
restructuring related items (5) 707,861 130,402 375,218 136,241 50,209 (81,742) 1,318,189
Depreciation and amortization
expense 128,930 58,030 81,850 30,684 30,517 10,479 340,490
Capital expenditures (3) 118,377 63,682 107,166 38,415 48,565 1,252 377,457
Identifiable assets 3,309,675 1,324,293 2,015,296 1,017,875 571,711 198,937 8,437,787
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to segments.
(2) Excludes restructuring and implementation costs of Operation Excel as
follows: North American Dry $110.4 million, North American Frozen $116.9
million, Europe $225.1 million, Asia/Pacific $52.9 million, Other Operating
entities $29.2 million and Non-Operating $18.3 million. Also excludes costs
related to the implementation of Project Millennia as follows: North
American Dry $7.2 million, North American Frozen $2.9 million, Europe $4.9
million, Asia/Pacific $3.0 million, Other Operating entities $2.8 million
and Non-Operating $1.5 million. Also excludes the gain on the sale of the
bakery division in Other Operating entities of $5.7 million. Also excludes
the reversal of unutilized Project Millennia accruals for severance and exit
costs in North American Frozen and Europe of $16.6 million and $9.1 million,
respectively.
(3) Excludes property, plant and equipment acquired through acquisitions.
(4) Excludes costs related to the implementation of Project Millennia as
follows: North American Dry $28.8 million, North American Frozen $9.1
million, Europe $18.6 million, Asia/Pacific $5.8 million, Other Operating
entities $9.9 million and Non-Operating $11.9 million. Also excludes the
North American Frozen gain on the sale of the Ore-Ida frozen foodservice
business of $96.6 million.
(5) Excludes restructuring and implementation costs for Project Millennia as
follows: North American Dry $265.4 million, North American Frozen $135.1
million, Europe $71.8 million, Asia/Pacific $36.8 million, Other Operating
entities $114.5 million and Non-Operating $23.6 million. Also excludes gains
on the sale of an ice cream business in Asia/Pacific and real estate in
Europe of $72.1 million and $13.2 million, respectively.
Notes to Consolidated Financial Statements 63
A reconciliation of total segment operating income to total
consolidated income before income taxes is as follows:
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------------
Total operating income for
reported segments $1,109,312 $1,520,330 $756,271
Interest income 25,082 32,655 39,359
Interest expense 258,813 258,616 274,746
Other expense, net 40,450 39,388 41,820
- ------------------------------------------------------------------------------
Consolidated income before
income taxes $ 835,131 $1,254,981 $479,064
- ------------------------------------------------------------------------------
The company's revenues are generated via the sale of
products in the following categories:
KETCHUP, SOUPS,
(DOLLARS IN CONDIMENTS AND FROZEN BEANS AND INFANT PET
THOUSANDS) SAUCES FOODS TUNA PASTA MEALS FOODS PRODUCTS OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended
April 28, 1999 $2,230,403 $1,399,111 $1,084,847 $1,117,328 $1,039,781 $1,287,356 $1,140,784 $9,299,610
Fiscal year ended
April 29, 1998 2,046,578 1,473,228 1,080,576 1,085,438 986,203 1,315,774 1,221,487 9,209,284
Fiscal year ended
April 30, 1997 1,958,362 2,023,058 873,610 1,021,615 1,013,826 1,238,109 1,228,427 9,357,007
- -----------------------------------------------------------------------------------------------------------------------------------
The company has significant sales and long-lived assets in
the following geographic areas. Sales are based on the
location in which the sale originated. Long-lived assets
include property, plant and equipment, goodwill, trademarks
and other intangibles, net of related depreciation and
amortization.
NET EXTERNAL SALES
------------------------------------------------- LONG-LIVED ASSETS
FISCAL YEAR ENDED -----------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997 APRIL 28, 1999 APRIL 29, 1998 APRIL 30, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
United States $4,917,967 $4,873,710 $5,169,779 $2,856,315 $2,885,359 $3,075,793
United Kingdom 1,182,690 1,170,935 967,644 399,669 491,850 436,709
Other 3,198,953 3,164,639 3,219,584 1,385,404 1,393,505 1,397,366
- -----------------------------------------------------------------------------------------------------------------------------------
Total $9,299,610 $9,209,284 $9,357,007 $4,641,388 $4,770,714 $4,909,868
- -----------------------------------------------------------------------------------------------------------------------------------
64 H.J. Heinz Annual Report 1999
- ------------------------------------------------------------------------------
15. QUARTERLY RESULTS
(UNAUDITED)
1999
-----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Sales $2,228,230 $2,322,402 $2,282,062 $2,466,916 $9,299,610
Gross profit 868,453 936,399 852,580 697,311 3,354,743
Net income (loss) 213,787 231,332 120,554 (91,332) 474,341
Per Share Amounts:
Net income (loss) -
diluted $ 0.58 $ 0.63 $ 0.33 $ (0.25) $ 1.29
Net income (loss) -
basic 0.59 0.64 0.33 (0.25) 1.31
Cash dividends 0.31-1/2 0.34-1/4 0.34-1/4 0.34-1/4 1.34-1/4
- -----------------------------------------------------------------------------------------------------------------------------------
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
Cash dividends 0.29 0.31-1/2 0.31-1/2 0.31-1/2 1.23-1/2
- -----------------------------------------------------------------------------------------------------------------------------------
The first and second quarters of Fiscal 1999 include
implementation costs related to Project Millennia of $0.02
per share and $0.01 per share, respectively. Second-quarter
1999 results also include the reversal of unutilized Project
Millennia accruals for severance and exit costs ($0.04 per
share) (see Note 4 to the Consolidated Financial Statements)
and the gain on the sale of the bakery products unit (see
Note 3 to the Consolidated Financial Statements).
Operation Excel resulted in restructuring and
implementation costs of $0.27 per share in the third quarter
and $0.84 per share in the fourth quarter of Fiscal 1999.
(See Note 4 to the Consolidated Financial Statements.)
First-quarter Fiscal 1998 results include a gain on the
sale of the company's Ore-Ida frozen foodservice business
($0.14 per share). (See Note 3 to the Consolidated Financial
Statements.)
The implementation of Project Millennia resulted in 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. (See
Note 4 to the Consolidated Financial Statements.)
Notes to Consolidated Financial Statements 65
- ------------------------------------------------------------------------------
16. COMMITMENTS Legal Matters: On December 31, 1992, a food wholesale
AND CONTIN- distributor filed suit against the company and its principal
GENCIES competitors in the U.S. baby food industry. Subsequent to
that date, several similar lawsuits were filed in the same
court and were consolidated into a class action suit. The
complaints, each of which sought an injunction and
unspecified treble money damages, alleged a conspiracy to
fix, maintain and stabilize the prices of baby food. The
court granted summary judgment to the defendants and entered
an order dismissing the complaint with prejudice. The
plaintiffs appealed and the Third Circuit Court of Appeals
upheld the granting of summary judgment and dismissal of the
complaint. Related suits which were filed in Alabama and
California state courts, seeking to represent a class of
indirect purchasers of baby food in their respective states
continue. 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 $99.5 million in 1999, $98.3 million in 1998
and $93.2 million in 1997. Future lease payments for non-
cancellable operating leases as of April 28, 1999 totaled
$239.4 million (2000-$49.1 million, 2001-$42.2 million, 2002-
$33.5 million, 2003-$23.3 million, 2004-$19.7 million and
thereafter-$71.6 million).
- ------------------------------------------------------------------------------
17. ADVERTISING Advertising costs for fiscal years 1999, 1998 and 1997 were
COSTS $373.9 million, $363.1 million and $319.0 million,
respectively.
66 H.J. Heinz Annual Report 1999
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, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of H.J. Heinz Company
and Subsidiaries (the "company") at April 28, 1999 and April 29, 1998, and the
results of its operations and its cash flows for each of the three years in
the period ended April 28, 1999, 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
June 14, 1999
Responsibility Statements 67