SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 28, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
For the Three Months Ended July 28, 1999 Commission File Number 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Grant Street, Pittsburgh, 15219
Pennsylvania (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code: 412-456-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days. Yes X No
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of August 25, 1999, was 358,377,601 shares.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Three Months
Ended Ended
July 28, 1999 July 29, 1998
------------- -------------
FY 2000 FY 1999
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales............................................... $2,181,007 $2,228,230
Cost of products sold............................... 1,324,257 1,359,777
---------- ----------
Gross profit........................................ 856,750 868,453
Selling, general and administrative expenses........ 475,777 460,354
---------- ----------
Operating income.................................... 380,973 408,099
Interest income..................................... 5,285 7,585
Interest expense.................................... 62,592 64,043
Other (income)/expense, net......................... (4,373) 17,619
---------- ----------
Income before income taxes.......................... 328,039 334,022
Provision for income taxes.......................... 121,371 120,235
---------- ----------
Net income.......................................... $ 206,668 $ 213,787
========== ==========
Net income per share--diluted....................... $ 0.57 $ 0.58
========== ==========
Average common shares outstanding--diluted.......... 364,176 369,398
========== ==========
Net income per share--basic......................... $ 0.58 $ 0.59
========== ==========
Average common shares outstanding--basic............ 358,685 362,400
========== ==========
Cash dividends per share............................ $ 0.3425 $ 0.315
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------
2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 28, 1999 April 28, 1999*
------------- ---------------
FY 2000 FY 1999
(Unaudited)
(Thousands of Dollars)
Assets
Current Assets:
Cash and cash equivalents........................ $ 147,047 $ 115,982
Short-term investments, at cost which
approximates market............................. 4,442 7,139
Receivables, net................................. 1,057,490 1,163,915
Inventories...................................... 1,455,116 1,409,651
Prepaid expenses and other current assets........ 220,829 190,091
---------- ----------
Total current assets........................... 2,884,924 2,886,778
---------- ----------
Property, plant and equipment.................... 4,008,461 4,073,975
Less accumulated depreciation.................... 1,839,826 1,902,951
---------- ----------
Total property, plant and equipment, net....... 2,168,635 2,171,024
---------- ----------
Goodwill, net.................................... 1,747,542 1,781,466
Trademarks, net.................................. 507,196 511,608
Other intangibles, net........................... 167,826 177,290
Other non-current assets......................... 884,211 525,468
---------- ----------
Total other non-current assets................. 3,306,775 2,995,832
---------- ----------
Total assets................................... $8,360,334 $8,053,634
========== ==========
*Summarized from audited fiscal year 1999 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 28, 1999 April 28, 1999*
------------- ---------------
FY 2000 FY 1999
(Unaudited)
(Thousands of Dollars)
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt.................................. $ 274,584 $ 290,841
Portion of long-term debt due within one year.... 571,165 613,366
Accounts payable................................. 811,763 945,488
Salaries and wages............................... 65,625 74,098
Accrued marketing................................ 199,305 182,024
Accrued restructuring costs...................... 127,253 147,786
Other accrued liabilities........................ 237,180 372,623
Income taxes..................................... 168,429 160,096
---------- ----------
Total current liabilities...................... 2,455,304 2,786,322
---------- ----------
Long-term debt................................... 2,740,184 2,472,206
Deferred income taxes............................ 312,395 310,799
Non-pension postretirement benefits.............. 207,199 208,102
Income taxes..................................... 376,778 --
Other liabilities................................ 441,975 473,201
---------- ----------
Total long-term debt and other liabilities..... 4,078,531 3,464,308
---------- ----------
Shareholders' Equity:
Capital stock.................................... 107,947 107,947
Additional capital............................... 280,303 277,652
Retained earnings................................ 4,463,617 4,379,742
---------- ----------
4,851,867 4,765,341
Less:
Treasury stock at cost (72,526,275 shares at
July 28, 1999 and 71,968,652 shares at April
28, 1999)..................................... 2,471,995 2,435,012
Unearned compensation relating to the ESOP...... 10,440 11,728
Accumulated other comprehensive income.......... 542,933 515,597
---------- ----------
Total shareholders' equity..................... 1,826,499 1,803,004
---------- ----------
Total liabilities and shareholders' equity..... $8,360,334 $8,053,634
========== ==========
*Summarized from audited fiscal year 1999 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
July 28, 1999 July 29, 1998
------------- -------------
FY 2000 FY 1999
(Unaudited)
(Thousands of Dollars)
Cash Provided by Operating Activities.............. $ 47,580 $ 75,280
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures............................. (69,475) (65,438)
Acquisitions, net of cash acquired............... (13,580) (160,297)
Purchases of short-term investments.............. (438,969) (175,073)
Sales and maturities of short-term investments... 441,647 175,096
Other items, net................................. 18,307 3,251
--------- ---------
Cash used for investing activities............. (62,070) (222,461)
--------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt....................... (2,437) (40,975)
Proceeds from commercial paper and short-term
borrowings, net................................. 191,039 184,190
Proceeds from long-term debt..................... 1,168 254,808
Dividends........................................ (122,793) (113,997)
Purchases of treasury stock...................... (44,204) (134,011)
Exercise of stock options........................ 7,317 27,178
Other items, net................................. 10,979 16,568
--------- ---------
Cash provided by financing activities.......... 41,069 193,761
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents....................................... 4,486 (5,502)
--------- ---------
Net increase in cash and cash equivalents.......... 31,065 41,078
Cash and cash equivalents at beginning of year..... 115,982 96,300
--------- ---------
Cash and cash equivalents at end of period......... $ 147,047 $ 137,378
========= =========
See Notes to Condensed Consolidated Financial Statements.
------------
5
H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations and the financial position of the
company. Those comments should be read in conjunction with these notes.
The company's annual report on Form 10-K for the fiscal year ended April
28, 1999 includes additional information about the company, its
operations, and its financial position, and should be read in conjunction
with this quarterly report on Form 10-Q.
(2) The results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the company's business. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 2000 presentation.
(3) In the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair statement of the results of
operations of these interim periods have been included.
(4) The composition of inventories at the balance sheet dates was as follows:
July 28, 1999 April 28, 1999
------------- --------------
(Thousands of Dollars)
Finished goods and work-in-process.............. $1,113,927 $1,064,015
Packaging material and ingredients.............. 341,189 345,636
---------- ----------
$1,455,116 $1,409,651
========== ==========
(5) The provision for income taxes consists of provisions for federal, state,
U.S. possessions and foreign income taxes. The company operates in an
international environment with significant operations in various locations
outside the United States. Accordingly, the consolidated income tax rate
is a composite rate reflecting the earnings in the various locations and
the applicable tax rates.
During the first quarter of Fiscal 2000, the company reorganized certain
of its foreign operations and as a result incurred a foreign income tax
liability of $376.8 million, payable over five years. Because the company
increased the tax basis in amortizable assets, cash flow is expected to be
neutral over the next five years, with positive cash flow expected in each
of the following four years.
(6) Restructuring Charges
Operation Excel
In Fiscal 1999, the company announced a growth and restructuring
initiative named "Operation Excel." 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. For more information regarding the background of
Operation Excel, please refer to the company's Annual Report to
Shareholders for the fiscal year ended April 28, 1999.
In the first quarter, as part of Operation Excel, the company recognized
additional restructuring and related costs of $34.6 million pretax ($0.07
per share). These costs were primarily related to
6
implementation costs ($24.7 million) for consulting fees, employee training
and relocation costs, and equipment relocation costs associated with the
implementation of the Operation Excel Phase I projects approved in Fiscal
1999. Other costs recognized in the first quarter consisted of severance
costs ($7.1 million), asset writedowns ($2.6 million), and exit costs ($0.2
million). These costs related primarily to the closure of a chicken
processing facility in New Zealand and additional severance accruals
relating to the closure of the company's Ore-Ida head office in Boise,
Idaho.
During the first quarter, the company utilized $24.1 million of severance
and exit accruals, principally related to consolidating the company's U.S.
frozen food headquarters, consolidating certain European administrative
support functions and downsizing the Puerto Rico tuna processing facility.
Severance costs paid in the first quarter are primarily related to
involuntary termination payments made to affected employees as a direct
result of the restructuring program. Exit costs paid in the first quarter
consist primarily of costs incurred to shutdown factories and terminate
contracts.
The major components of the restructuring charges and implementation costs
and the accrual balances as of July 28, 1999 were as follows:
Employee
Termination
Non-Cash and Accrued
Asset Severance Exit Implementation
(Dollars in millions) Write-Downs Costs Costs Costs Total
--------------------- ----------- ----------- ------- -------------- -------
Initial charge--Fiscal
1999................... $ 294.9 $159.4 $45.3 $ 53.2 $ 552.8
Amounts utilized--Fiscal
1999................... (294.9) (67.3) (9.8) (53.2) (425.2)
------- ------ ----- ------ -------
Accrued restructuring
costs--April 28, 1999.. -- 92.1 35.5 -- 127.6
Restructuring charges
and implementation
costs--Fiscal 2000..... 2.6 7.1 0.2 24.7 34.6
Amounts utilized--Fiscal
2000................... (2.6) (20.1) (4.0) (24.7) (51.4)
------- ------ ----- ------ -------
Accrued restructuring
costs--July 28, 1999... $ -- $ 79.1 $31.7 $ -- $ 110.8
======= ====== ===== ====== =======
In total, the company has approved the closure or exit of 17 factories or
businesses. To date four of these factories have been sold or closed. 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.
In the first quarter, the workforce was reduced by an additional 1,600
employees. All of the remaining factory closures and employee terminations
are expected to take place within 12 months.
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. For more
information regarding the background of Project Millennia, please refer to
the company's Annual Report to Shareholders for the fiscal year ended April
28, 1999.
In the first quarter, the company utilized $3.7 million of severance and
exit cost accruals to facilitate the implementation of Project Millennia.
The utilization of the accruals related principally to the first quarter
closure of a tuna processing facility in Australia, severance payments in
Spain, and contractual lease commitments associated with the restructuring
of the U.S. Weight Watchers meeting system. During the first quarter the
company's workforce was reduced by 100 employees.
7
The major components of the restructuring charges and implementation costs
and the accrual balances as of July 28, 1999 were as follows:
Employee
Termination
Non-Cash and Accrued
Asset Severance Exit Implementation
(Dollars in millions) Write-Downs Costs Costs Costs Total
--------------------- ----------- ----------- ------- -------------- -----
Accrued restructuring
costs--April 28, 1999.. $-- $ 2.7 $17.4 $-- $20.1
Amounts utilized--Fiscal
2000................... -- (2.3) (1.4) -- (3.7)
--- ----- ----- --- -----
Accrued restructuring
costs--July 28, 1999... $-- $ 0.4 $16.0 $-- $16.4
=== ===== ===== === =====
As a result of the expected sale of the Weight Watchers weight control
business, the contractual lease commitments associated with the
restructuring of the U.S. Weight Watchers meeting system will be assumed
by the new owners, and all other spending will be completed by the end of
the second quarter.
(7) In the first quarter, the company completed the acquisition of Thermo-Pac
Inc. in the U.S., a leader in single-serve condiments.
(8) Segment Information
During Fiscal 1999, the company adopted SFAS No. 131, "Disclosures about
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. Intersegment sales are accounted for at current
market values. Items below the operating income line of the Consolidated
Statements of Income are not presented by segment, since they are excluded
from the measure of segment profitability reviewed by the company's
management.
8
The following table presents information about the company's reportable
segments.
North North Other
American American Asia/ Operating Non- Consolidated
(Dollars in Thousands) Dry Frozen Europe Pacific Entities Operating(1) Totals
---------------------- -------- -------- -------- -------- --------- ------------ ------------
Three Months Ended
July 28, 1999
Intersegment Sales...... $ 6,914 $ 2,964 $ 1,363 $ 455 $ 1,454 $(13,150) $ --
Net External Sales...... 966,123 212,412 551,509 285,829 165,134 -- 2,181,007
Operating Income........ 186,890 33,385 107,341 35,931 36,939 (19,513) 380,973
Operating Income,
Excluding Restructuring
Related and Non-
recurring Items (2).... 216,792 42,684 119,094 39,624 36,939 (19,513) 435,620
Three Months Ended
July 29, 1998
Intersegment Sales...... $ 6,423 $ 3,214 $ 1,058 $ -- $ 1,438 $(12,133) $ --
Net External Sales...... 980,985 219,246 582,308 237,710 207,981 -- 2,228,230
Operating Income........ 215,775 37,071 115,042 33,093 24,203 (17,085) 408,099
Operating Income,
Excluding Restructuring
Related
Items (3).............. 220,275 38,771 119,342 34,493 26,103 (15,985) 422,999
--------
(1) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(2) Excludes restructuring and implementation costs of Operation Excel as
follows: North American Dry $9.9 million, North American Frozen $9.3
million, Europe $11.7 million, and Asia/Pacific $3.7 million. Also
excludes costs related to Ecuador in North American Dry $20.0 million.
(3) Excludes implementation costs for Project Millennia as follows: North
American Dry $4.5 million, North American Frozen $1.7 million, Europe
$4.3 million, Asia/Pacific $1.4 million, Other Operating $1.9 million
and Non-Operating $1.1 million.
A reconciliation of total segment operating income to total consolidated
income before income taxes is as follows:
Three Months Three Months
Ended Ended
(Dollars in Thousands) July 28, 1999 July 29, 1998
---------------------- ------------- -------------
Total Operating Income for Reportable Segments... $380,973 $408,099
Interest Income.................................. 5,285 7,585
Interest Expense................................. 62,592 64,043
Other (income)/expense, net...................... (4,373) 17,619
-------- --------
Consolidated Income Before Income Taxes.......... $328,039 $334,022
======== ========
The company's revenues are generated via the sale of products in the
following categories:
Soups,
Beans
Ketchup, and
Condiments Frozen Pasta Infant Pet
(Dollars in Thousands) and Sauces Foods Tuna Meals Foods Products Other Total
---------------------- ---------- -------- -------- -------- -------- -------- -------- ----------
First quarter ended July
28, 1999............... $611,612 $301,080 $271,618 $233,767 $231,401 $294,337 $237,192 $2,181,007
First quarter ended July
29, 1998............... 542,288 309,020 293,349 227,018 251,729 321,824 283,002 2,228,230
-------- -------- -------- -------- -------- -------- -------- ----------
Total Increase
(Decrease)............. $ 69,324 $ (7,940) $(21,731) $ 6,749 $(20,328) $(27,487) $(45,810) $ (47,223)
======== ======== ======== ======== ======== ======== ======== ==========
(9) The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At July 28, 1999, the
company had $1.68 billion of domestic commercial paper outstanding, all of
which has been classified as long-term debt due to the long-term nature of
the credit agreement. As of April 28, 1999, the company had $1.41 billion
of domestic commercial paper outstanding and classified as long-term debt.
9
(10) On September 8, 1999, the company's Board of Directors raised the
quarterly dividend on the company's common stock to $0.36 3/4 per share
from $0.34 1/4 per share, for an indicated annual rate of $1.47 per
share. The dividend will be paid on October 10, 1999 to shareholders of
record at the close of business on September 21, 1999.
(11) The following table sets forth the computation of basic and diluted
earnings per share in accordance with the provisions of SFAS No. 128.
Three Months Three Months
Ended Ended
July 28, 1999 July 29, 1998
------------- -------------
FY 2000 FY 1999
(In Thousands, Except
per Share Amounts)
Net income per share--basic:
Net income....................................... $206,668 $213,787
Preferred dividends.............................. 7 8
-------- --------
Net income applicable to common stock............ $206,661 $213,779
======== ========
Average common shares outstanding--basic......... 358,685 362,400
======== ========
Net income per share--basic...................... $ 0.58 $ 0.59
======== ========
Net income per share--diluted:
Net income....................................... $206,668 $213,787
======== ========
Average common shares outstanding................ 358,685 362,400
Effect of dilutive securities:
Convertible preferred stock.................... 234 253
Stock options.................................. 5,257 6,745
-------- --------
Average common shares outstanding--diluted....... 364,176 369,398
======== ========
Net income per share--diluted.................... $ 0.57 $ 0.58
======== ========
(12) Comprehensive income for all periods presented consisted of net income,
foreign currency translation adjustments and the adjustment to the
minimum pension liability. The components of comprehensive income, net of
related tax, for the periods presented are as follows:
Three Months Three Months
Ended Ended
July 28, 1999 July 29, 1998
------------- -------------
FY 2000 FY 1999
(Thousands of Dollars)
Net income....................................... $206,668 $213,787
Other comprehensive income (loss):
Foreign currency translation adjustment........ (29,320) (61,309)
Minimum pension liability adjustment........... 1,984 1,103
-------- --------
Comprehensive income............................. $179,332 $153,581
======== ========
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
THREE MONTHS ENDED JULY 28, 1999 AND JULY 29, 1998
Operation Excel
In Fiscal 1999, the company announced a growth and restructuring initiative
named "Operation Excel." 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.
For more information regarding the background of Operation Excel, please refer
to the company's annual report on Form 10-K for the fiscal year ended April 28,
1999.
In the first quarter, as part of Operation Excel, the company recognized
additional restructuring and related costs of $34.6 million pretax ($0.07 per
share). [Note: All earnings per share amounts included in Management's
Discussion and Analysis are presented on an after-tax diluted basis.] These
costs were primarily related to implementation costs ($24.7 million) for
consulting fees, employee training and relocation costs, and equipment
relocation costs associated with the implementation of the Operation Excel
Phase I projects approved in Fiscal 1999. Other costs recognized in the first
quarter consisted of severance costs ($7.1 million), asset writedowns ($2.6
million), and exit costs ($0.2 million). These costs related primarily to the
closure of a chicken processing facility in New Zealand and additional
severance accruals relating to the closure of the company's Ore-Ida head office
in Boise, Idaho. See footnote 8 for a breakdown of Operation Excel
restructuring and implementation costs by segment.
During the first quarter, the company utilized $24.1 million of severance and
exit accruals, principally related to consolidating the company's U.S. frozen
food headquarters, consolidating certain European administrative support
functions and downsizing the Puerto Rico tuna processing facility. See footnote
6 for further information.
In total, the company has approved the closure or exit of 17 factories or
businesses. To date four of these factories have been sold or closed. 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. In the first quarter, the
workforce was reduced by an additional 1,600 employees. All of the remaining
factory closures and employee terminations are expected to take place within 12
months.
The expected pretax savings to be generated from Operation Excel initiatives
approved to-date 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. These savings will be generated
from raw material procurement savings, inbound freight savings, direct labor
savings, material yield savings, production efficiency savings, depreciation
savings and indirect overhead savings.
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 three
additional factories, an additional net workforce reduction of 1,000 employees
and could result in restructuring charges and implementation costs of up to
$350 million, a portion of which will be recognized in future quarters of
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
11
. 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
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. For more information
regarding the background of Project Millennia, please refer to the company's
annual report on Form 10-K for the fiscal year ended April 28, 1999.
In the first quarter, the company utilized $3.7 million of severance and
exit cost accruals to facilitate the implementation of Project Millennia. The
utilization of the accruals related principally to the first quarter closure
of a tuna processing facility in Australia, severance payments in Spain and
contractual lease commitments associated with the restructuring of the U.S.
Weight Watchers meeting system. During the first quarter the company's
workforce was reduced by 100 employees. See footnote 6 for further
information.
As a result of the expected sale of the Weight Watchers weight control
business, the contractual lease commitments associated with the restructuring
of the U.S. Weight Watchers meeting system will be assumed by the new owners,
and all other spending will be completed by the end of the second quarter.
Results of Operations
For the three months ended July 28, 1999, sales decreased $47.2 million, or
2.1%, to $2.18 billion from $2.23 billion last year. Divestitures reduced
sales by $59.3 million, or 2.7%, unfavorable pricing reduced sales by $36.1
million, or 1.6%, the unfavorable impact of foreign exchange translation rates
reduced sales by $7.8 million, or 0.3%, and volume was down $6.3 million, or
0.3%. Acquisitions increased sales by $62.2 million, or 2.8%.
Sales in Europe decreased $30.8 million, or 5.3%. Unfavorable sales volume,
primarily in convenience meals and infant foods, contributed $30.0 million, or
5.1%, to the sales decrease. The unfavorable impact of foreign exchange
translation rates reduced sales by $19.3 million, or 3.3%, primarily due to
sales in the United Kingdom and Italy. In addition, pricing was unfavorable
$1.7 million, or 0.3%. These decreases were partially offset by acquisitions,
which increased sales by $20.1 million, or 3.4%, primarily due to the
acquisitions of the convenience meals business of Sonnen Bassermann in Germany
and Serv-A-Portion in Belgium.
The North American Dry segment's sales decreased $14.9 million, or 1.5%,
primarily due to unfavorable pricing of $20.9 million, or 2.1%. Price
decreases were noted in tuna and pet products. The unfavorable pricing in tuna
was in response to market pressures caused by a substantial decline in fish
costs. The company expects that the oversupply of tuna should correct itself
and tuna pricing will recover in the coming months. Volume was unfavorable
$1.4 million, or 0.1% as volume increases in ketchup, condiments and sauces
were offset by a volume decrease in pet products. Acquisitions, net of
divestitures, increased sales by $7.4 million, or 0.7%.
The North American Frozen segment's sales declined $6.8 million, or 3.1%.
Price decreases, primarily in frozen potatoes, contributed $7.1 million, or
3.2%, to the sales decrease. Divestitures, net of acquisitions, accounted for
$6.9 million, or 3.2%, of the decrease, primarily due to the exit of certain
12
product lines, including the pocket sandwich business, as part of Operation
Excel. Volume contributed $7.2 million, or 3.3% to sales, led by Smart Ones,
which were up 27%, and Ore-Ida frozen potatoes, which were up 4.5%.
Sales in Asia/Pacific increased $48.1 million, or 20.2%, due to acquisitions
of $30.9 million, or 13.0%, primarily the Fiscal 1999 acquisition of ABC
Indonesia. In addition, sales of the Asia/Pacific segment benefited from the
favorable impact of foreign exchange translation rates of $14.8 million, or
6.2%, primarily in Japan and Australia. Favorable pricing of $1.2 million, or
0.5% and favorable volume of $1.2 million, or 0.5% also increased sales.
Sales of Other Operating entities decreased $42.8 million or 20.6%,
primarily due to the divestiture of the bakery products unit, $48.5 million,
or 23.3%. Unfavorable pricing of $7.7 million or 3.7%, primarily due to the
Weight Watchers classroom business, and the unfavorable impact of foreign
exchange translation rates of $3.3 million, or 1.6%, also negatively impacted
sales. Favorable volume of $16.7 million, or 8.0%, largely due to the Weight
Watchers classroom business partially offset these decreases.
The first quarter was negatively impacted by a number of special items which
net to $36.4 million pre-tax and $0.08 per share, which are summarized in the
table below. These items include implementation costs of $24.7 million pretax
($0.05 per share) related to Operation Excel. The company recorded an
additional restructuring charge for Operation Excel of $9.9 million pretax
($0.02 per share). In April of 1999, the company became aware of operational
and accounting irregularities in its Ecuador tuna processing facility and
expensed $10.0 million as an estimate of the losses. In the first quarter, the
company recognized an additional $20.0 million pretax ($0.05 per share) of
expenses related to this facility and does not anticipate significant further
losses. In addition, the company recognized, in Other income, a pretax gain of
$18.2 million ($0.03 per share) for the sale of an office building in the
United Kingdom. During last year's first quarter the company incurred costs of
$14.9 million pretax ($0.02 per share) related to the implementation of
Project Millennia, consisting of start-up costs, consulting fees, relocation
costs of employees and relocation of equipment.
The following tables provide a comparison of the company's reported results
and the results excluding special items for the periods ended July 28, 1999
and July 29, 1998.
Three Months Ended July 28, 1999
--------------------------------------
(Dollars in Millions, except per share Gross Operating Net Per
amounts) Profit Income Income Share
- -------------------------------------- -------- ---------- -------- --------
Reported results........................ $ 856.8 $ 381.0 $ 206.7 $ 0.57
Operation Excel restructuring......... 3.4 9.9 5.6 0.02
Operation Excel implementation costs.. 6.9 24.7 16.5 0.05
Ecuador expenses...................... 20.0 20.0 20.0 0.05
Gain on U.K. building sale............ -- -- (11.8) (0.03)
-------- -------- -------- --------
Results excluding special items......... $ 887.1 $ 435.6 $ 236.9 $ 0.65
======== ======== ======== ========
Three Months Ended July 29, 1998
--------------------------------------
(Dollars in Millions, except per share Gross Operating Net Per
amounts) Profit Income Income Share
- -------------------------------------- -------- ---------- -------- --------
Reported results........................ $ 868.5 $ 408.1 $ 213.8 $ 0.58
Project Millennia costs............... 10.2 14.9 9.5 0.02
-------- -------- -------- --------
Results excluding special items......... $ 878.7 $ 423.0 $ 223.3 $ 0.60
======== ======== ======== ========
(Note: Totals may not add due to rounding)
Gross profit decreased $11.7 million, or 1.3%, to $856.8 million from $868.5
million, and the gross profit margin increased to 39.3% from 39.0%. Excluding
the special items noted above, gross profit increased $8.5 million, or 1.0%,
to $887.1 million from $878.7 million, and the gross profit margin
13
increased to 40.7% from 39.4%. The Asia/Pacific segment's gross profit
increased $20.1 million, or 23.7% due to increased sales, favorable exchange
and the acquisition of ABC Indonesia. Europe's gross profit increased $3.8
million or 1.6%, due primarily to a changing sales mix favoring higher margin
products. The North American Frozen segment's gross profit decreased $8.1
million, or 7.6%, due primarily to a decrease in sales driven by the
discontinuation of certain products as part of Operation Excel and price
reductions in frozen potatoes. Gross profit in the North American Dry segment
decreased $4.3 million, or 1.1%, due primarily to a decrease in the domestic
pet food business and price reductions in seafood, partially offset by solid
increases at Heinz U.S.A. and Canada. Other Operating entities' gross profit
decreased $2.7 million, or 3.5%, due primarily to the divestiture of the
bakery products business, partially offset by an increase at the Weight
Watchers classroom business.
Selling, general and administrative expenses ("SG&A") increased $15.4
million to $475.8 million from $460.4 million and increased as a percentage of
sales to 21.8% from 20.7%. Excluding the special items noted above, SG&A
decreased $4.2 million to $451.5 million from $455.7 million and increased as
a percentage of sales to 20.7% from 20.4%. Increased marketing expenses were
offset by lower general and administrative, and selling and distribution
expenses.
Operating income decreased $27.1 million, or 6.6%, to $381.0 million from
$408.1 million reported last year. Excluding the special items noted above,
operating income increased $12.6 million, or 3.0%, to $435.6 million from
$423.0 million. This increase was primarily due to the increase in gross
profit and a decrease in SG&A.
Asia/Pacific's operating income increased $2.8 million, or 8.6%, to $35.9
million from $33.1 million. Excluding restructuring related items in both
periods, operating income increased $5.1 million, or 14.9%, to $39.6 million
from $34.5 million. The increase is primarily attributable to the acquisition
of ABC Indonesia.
North American Frozen's operating income decreased $3.7 million, or 9.9%, to
$33.4 million from $37.1 million. Excluding restructuring related items in
both periods, operating income increased $3.9 million, or 10.1%, to $42.7
million from $38.8 million. This increase is primarily due to decreases in
general and administrative expenses and marketing expense.
The North American Dry's operating income decreased $28.9 million, or 13.4%,
to $186.9 million from $215.8 million. Excluding restructuring related items
in both periods and the Ecuador expenses in the current quarter, operating
income decreased $3.5 million, or 1.6%, to $216.8 million from $220.3 million.
The decrease is primarily due to the domestic pet food business, which is down
compared to last year's first quarter, but continues to show steady
improvement from last year's second half.
Europe's operating income decreased $7.7 million, or 6.7%, to $107.3 million
from $115.0 million. Excluding restructuring related items in both periods,
operating income decreased $0.2 million, or 0.2%, to $119.1 million from
$119.3 million.
Other Operating entities' operating income increased $12.7 million, or
52.6%, to $36.9 million from $24.2 million. Excluding restructuring related
items in last year's first quarter, operating income increased $10.8 million,
or 41.5%, to $36.9 million from $26.1 million. This increase is primarily due
to the continued strong performance of the Weight Watchers classroom business.
Other income and expenses totaled $52.9 million in the current quarter
compared to $74.1 million last year. The decrease is primarily attributable to
a gain on the sale of an office building in the United Kingdom, $18.2 million
pretax ($0.03 per share). Net interest expense remained relatively flat.
The effective tax rate for the first quarter of the current year was 37.0%
compared to 36.0% last year. Excluding the special items noted above, the
effective rate was 35.0%.
14
Net income for the current quarter was $206.7 million compared to $213.8
million for the same quarter last year, and diluted earnings per share was
$0.57 compared to $0.58. Excluding the special items noted above, net income
increased $13.6 million, or 6.1%, to $236.9 million from $223.3 million, and
earnings per share increased to $0.65 from $0.60 last year.
Liquidity and Financial Position
Cash provided by operating activities totaled $47.6 million for the three
month period ended July 28, 1999 compared to $75.3 million in last year's
first quarter.
Cash used for investing activities totaled $62.1 million compared to $222.5
million used last year. Capital expenditures required $69.5 million in the
current quarter versus $65.4 million in last year's first quarter.
Acquisitions in the current period required $13.6 million, due primarily to
the purchase of Thermo-Pac, Inc. Acquisitions in the prior year's comparable
period required $160.3 million due to the purchases of the College Inn brand
of canned broths, the Eta brand of dressings and peanut butter in New Zealand
and the Vidalia O's frozen onion rings brand.
In the current quarter, financing activities provided $41.1 million compared
to providing $193.8 million in the same quarter last year. Proceeds from
commercial paper and short-term borrowings provided $191.0 million compared to
$184.2 million in the same period last year. Cash provided from stock options
exercised totaled $7.3 million compared to $27.2 million last year. Proceeds
from long-term debt totaled $1.2 million compared to $254.8 million in the
prior year's first quarter. Dividend payments totaled $122.8 million compared
to $114.0 million a year ago. Share repurchases totaled $44.2 million (0.9
million shares) versus $134.0 million (2.5 million shares) in the prior year's
first quarter.
In the first quarter, the cash requirements for Operation Excel were $84.9
million, consisting of capital expenditures ($36.1 million), severance and
exit costs ($24.1 million) and implementation costs ($24.7 million). The cash
requirements of Project Millennia in the current quarter were $8.2 million
consisting of capital expenditures ($4.5 million) and severance and exit costs
($3.7 million).
The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At July 28, 1999, the
company had $1.68 billion of domestic commercial paper outstanding, all of
which has been classified as long-term debt due to the long-term nature of the
credit agreement. As of April 28, 1999, the company had $1.41 billion of
domestic commercial paper outstanding and classified as long-term debt.
On September 8, 1999, the company's Board of Directors raised the quarterly
dividend on the company's common stock to $0.36 3/4 per share from $0.34 1/4
per share for an indicated annual rate of $1.47 per share. The dividend will
be paid on October 10, 1999 to shareholders of record at the close of business
on September 21, 1999.
The company's financial position remains strong, enabling it to meet cash
requirements for operations, capital expansion programs and dividends to
shareholders. The company expects to see strong second half performance with
solid double-digit earnings growth from its core businesses, fueled by savings
from Operation Excel and improvements in ketchup, potatoes, pet food and tuna.
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.
15
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 and non-IT
systems is complete.
The second phase of the company's Year 2000 readiness plan is remediation
which involves replacement, upgrading, modification and testing of affected
hardware, software and process systems. Management estimates that
approximately 80% of its core worldwide IT systems are Year 2000 ready. Of the
company's top ten affiliates, comprising 90% of the company's sales, eight
have completed the remediation of their critical IT systems, with the others
progressing on schedule to complete in October. Overall, half of the company's
affiliates are 100% complete. 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. 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
16
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's second Operation Ready conference is scheduled for later in
September. This conference will focus on operational contingency planning and
millennium transition strategies and will provide Operation Ready affiliate
and functional/strike force executives an opportunity to review Year 2000
related issues in a common forum and to prepare an overall transition plan for
the company. The agenda includes issues such as demand planning, staffing,
production scheduling, communications, and highlights the critical 100 days
leading up to and spanning January 1, 2000.
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 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.
Other Matters
On July 22, 1999, the company announced plans to sell its Weight Watchers
weight control business to a unit of Artal Luxembourg, S.A., a European
private investment firm. The company expects to close on the sale at the end
of September. The agreed sales price of $735 million is expected to result in
a pretax gain of approximately $500 million, which will be used to retire debt
and to fund $29 million in costs related to the unbudgeted national launch of
the new Boston Market Home Style Meals line in this fiscal year. The sale does
not include Weight Watchers core food businesses such as Weight Watchers Smart
Ones frozen meals, desserts and breakfast items, Weight Watchers from Heinz in
the United Kingdom and a broad range of other Weight Watchers branded foods in
Heinz's global core product categories.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the company's market risk during the
three months ended July 28, 1999. For additional information, refer to pages
35-36 of the company's Annual Report to Shareholders for the fiscal year ended
April 28, 1999.
17
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
See Notes 6 and 7 to the Condensed Consolidated Financial Statements in Part
I--Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part
I--Item 2 of this Quarterly Report on Form 10-Q.
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and
financial performance. Reference should be made to the section "Forward-
Looking Statements" in Item 1 of the registrant's Annual Report on Form 10-K
for the fiscal year ended April 28, 1999 for a description of the important
factors that could cause actual results to differ materially from those
discussed herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The Registrant has omitted
certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-
K. The Registrant agrees to furnish such documents to the Commission upon
request. Documents not designated as being incorporated herein by reference
are filed herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
3. The Company's By-Laws, as amended effective September 8, 1999.
12. Computation of Ratios of Earnings to Fixed Charges.
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended July 28,
1999.
18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H. J. HEINZ COMPANY
(Registrant)
Date: September 10, 1999 /s/ Paul F. Renne
By...................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: September 10, 1999 /s/ Edward J. McMenamin
By...................................
Edward J. McMenamin
Vice President and Corporate
Controller
(Principal Accounting Officer)
19