Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
H.J. Heinz Company and Subsidiaries
AGREEMENT On June 13, 2002, Heinz announced that it will transfer to
BETWEEN H.J. a wholly owned subsidiary ("Spinco") certain assets and
HEINZ COMPANY liabilities of its U.S. and Canadian pet food and pet snacks,
AND DEL MONTE U.S. tuna, U.S. retail private label soup and gravy, College
FOODS COMPANY Inn broths and U.S. infant feeding businesses and distribute
all of the shares of Spinco common stock on a pro rata basis to
its shareholders. Immediately thereafter, Spinco will merge
with a wholly owned subsidiary of Del Monte Foods Company ("Del
Monte") resulting in Spinco becoming a wholly owned subsidiary
of Del Monte (the "Merger"). In connection with the Merger,
each share of Spinco common stock will be automatically
converted into shares of Del Monte common stock that will
result in the fully diluted Del Monte common stock at the
effective time of the Merger being held approximately 74.5% by
Heinz shareholders and approximately 25.5% by the Del Monte
shareholders. As a result of the transaction, Heinz will
receive approximately $1.1 billion in cash that will be used to
retire debt.
The Spinco businesses, which together generate approximately
$1.8 billion in annual sales (or approximately 20% of annual
Heinz revenues), include the following brands: StarKist,
9-Lives, Kibbles 'n Bits, Pup-Peroni, Snausages, Nawsomes,
Heinz Nature's Goodness baby food and College Inn broths.
The strategic rationale behind this transformative initiative
is to make Heinz a more focused and faster-growing business
leveraging two strategic platforms of Meal Enhancers (ketchup,
condiments and sauces) and Meals & Snacks (frozen and ambient).
Heinz expects to increase marketing by more than $100 million
in Fiscal 2003 to support product innovation and to drive
growth.
Pending completion of the transaction, Heinz expects it will
also adjust its common stock dividend beginning April 2003. The
expected indicated dividend will be $1.08 per share, a 33%
reduction from the present rate of $1.62 per share, which is
consistent with its peer group and above the S&P 500 average.
Upon completion of the transaction, Heinz will be a more
global company, with approximately 56% of its sales coming from
outside of the U.S. Heinz intends to accelerate its focus on
cash flow with improvements in working capital and a limit on
capital expenditures. In addition to the approximate $1.1
billion reduction in debt as a result of the transaction, Heinz
is targeting an additional $1.0 billion of debt reduction by
the end of Fiscal 2005.
Fiscal 2003 will be a transition year, as the transaction is
not expected to close until late in calendar year 2002 or early
in calendar year 2003. Heinz anticipates restructuring and
deal-related costs of approximately $160 million after tax to
be incurred in Fiscal 2003. Heinz anticipates that its growth
will be based on annualized earnings estimate of $2.00 to $2.05
per share for its realigned, more focused portfolio. The
outlook beyond Fiscal 2003 is to target the following
improvements:
- 3-4% annualized top-line growth;
- Consistent annualized 8-10% EPS growth;
- A substantial increase in marketing spending as a
percentage of sales--up to 5% of net sales by Fiscal 2005;
_ A simplified management structure, with greater
accountability and commensurate cost-efficiencies going
forward; and
_ Improved working capital intensity and a better cash
conversion cycle.
The Merger, which has been approved by the Boards of Directors
of Heinz and Del Monte, is subject to the approval by the
shareholders of Del Monte and receipt of a ruling from the
Internal Revenue Service that the contribution of the assets
and liabilities to Spinco and
(31)
the distribution of the shares of common stock of Spinco to
Heinz shareholders will be tax-free to Heinz, Spinco and the
shareholders of Heinz. The Merger is also subject to receipt
of applicable governmental approvals and the satisfaction of
other customary closing conditions.
STREAMLINE In the fourth quarter of Fiscal 2001, the company announced
a restructuring initiative named "Streamline." This
initiative included a worldwide organizational restructuring
aimed at reducing overhead costs, the closure of the
company's tuna operations in Puerto Rico, the consolidation
of the company's North American canned pet food production to
Bloomsburg, Pennsylvania (which resulted in ceasing canned
pet food production at the company's Terminal Island,
California facility), and the divestiture of the company's
U.S. fleet of fishing boats and related equipment.
Pretax savings generated from Streamline were approximately
$25 million in Fiscal 2002 and are projected to grow to an
estimated $40 million a year beginning in Fiscal 2003. Non-
cash savings are expected to be less than $6 million per year.
The total cost of this initiative will be approximately $315
million. Management estimates that these actions will impact
approximately 2,800 employees.
Streamline Status Update
During the first quarter of Fiscal 2002, the company recognized
restructuring and implementation charges of $16.1 million
pretax ($0.04 per share). [Note: All earnings per share amounts
included in Management's Discussion and Analysis are presented
on an after-tax diluted basis.] In the fourth quarter of Fiscal
2002, the company recorded a net charge of $1.7 million pretax
to reflect revisions in original cost estimates. This charge
was primarily the result of higher than expected asset
write-downs (primarily related to the Puerto Rican business)
and severance costs (primarily in Europe and the U.S.), offset
by lower than expected contract exit costs associated with the
company's Terminal Island, California facility and the Puerto
Rican facility. Total Fiscal 2002 pretax charges of $8.7
million were classified as cost of products sold and $9.1
million as selling, general and administrative expenses
("SG&A").
During Fiscal 2001, the company recognized restructuring
charges and implementation costs totaling $298.8 million pretax
($0.66 per share). Pretax charges of $192.5 million were
classified as cost of products sold and $106.2 million as SG&A.
Implementation costs were recognized as incurred in Fiscal 2002
($10.4 million pretax) and Fiscal 2001 ($22.6 million pretax)
and consist of incremental costs directly related to the
implementation of the Streamline initiative. These costs
include idle facility costs, consulting fees, cost premiums
related to production transfers and relocation costs.
In Fiscal 2001, the company completed the closure of its tuna
operations in Puerto Rico, ceased production of canned pet food
in the company's Terminal Island, California facility and sold
its U.S. fleet of fishing boats and related equipment. In
Fiscal 2002, the company continued and substantially completed
its implementation of its global overhead reduction plan. To
date, these actions have resulted in a net reduction of the
company's workforce of approximately 2,600 employees.
OPERATION EXCEL Background
In Fiscal 1999, the company announced a growth and
restructuring initiative named "Operation Excel." This
initiative was a multi-year, multi-faceted program which
established manufacturing centers of excellence, focused the
product portfolio, realigned the company's management teams and
invested in growth initiatives. The total cost of Operation
Excel was $1.2 billion, an increase from the original estimate
of $1.1 billion. This increase was attributable to additional
projects and implementation costs which included exiting the
company's domestic can making operations, exiting a tuna
processing facility in Ecuador and additional
(32)
initiatives throughout the globe. These additional projects
delivered business simplifications and improvements in the
company's capital structure.
As part of Operation Excel, the company established
manufacturing centers of excellence around the world that
resulted in significant changes to its manufacturing footprint.
In addition, the company focused its portfolio of product lines
on 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 was the sale of
the Weight Watchers classroom business in Fiscal 2000. Seven
other smaller businesses, which had combined annual revenues of
approximately $80 million, also have been disposed.
A major element of Operation Excel was the realignment of the
company's management teams to provide processing and product
expertise across the regions of North America, Europe and
Asia/Pacific. Growth initiatives included relaunching many of
our core brands and additional investments in marketing and
pricing programs for our core businesses, particularly in
ketchup, condiments and sauces, frozen foods, infant foods and
tuna.
The pretax savings generated from Operation Excel initiatives
were approximately $70 million in Fiscal 2000, $135 million in
Fiscal 2001 and $185 million in Fiscal 2002 and are projected
to grow to approximately $200 million in Fiscal 2003 and
thereafter. The unfavorable trend in foreign exchange rates has
caused these savings to be lower than originally planned by
approximately $5 million in Fiscal 2001, $10 million in Fiscal
2002 and $15 million in Fiscal 2003 and thereafter. In
addition, savings projected for the consolidation of factories
in the Asia/Pacific region are not expected to meet original
estimates. Also, the cancellation of some projects, primarily
the decision not to transfer certain European baby food
production, will result in lower savings than originally
projected.
Operation Excel Status Update
The company has substantially completed Operation Excel. During
Fiscal 2002, the company utilized approximately $9 million of
severance and exit accruals. The utilization of the accruals
related principally to lease obligations and employee
terminations.
During Fiscal 2001, the company recognized restructuring
charges of $55.7 million pretax, or $0.10 per share. These
charges were primarily associated with exiting the company's
domestic can making operations, exiting a tuna processing
facility in Ecuador, and higher than originally expected
severance costs associated with creating the single North
American Grocery & Foodservice headquarters in Pittsburgh,
Pennsylvania. This charge was recorded in cost of products sold
($44.8 million) and SG&A ($10.8 million). This charge was
offset by the reversals of unutilized Operation Excel accruals
and asset write-downs of $78.8 million pretax, or $0.17 per
share. These reversals were recorded in cost of products sold
($46.3 million) and SG&A ($32.5 million) and were primarily the
result of lower than expected lease termination costs related
to exiting the company's fitness business, revisions in
estimates of fair values of assets which were disposed of as
part of Operation Excel, the company's decision not to exit
certain U.S. warehouses due to higher than expected volume
growth, and the company's decision not to transfer certain
European baby food production. Implementation costs of $311.6
million pretax ($0.59 per share) were also recognized in Fiscal
2001. These costs were classified as cost of products sold
($146.4 million) and SG&A ($165.1 million).
During Fiscal 2000, the company recognized restructuring
charges of $194.5 million pretax, or $0.37 per share. Pretax
charges of $107.7 million were classified as cost of products
sold and $86.8 million as SG&A. Also during Fiscal 2000, the
company recorded a reversal of $18.2 million pretax ($0.04 per
share) of Fiscal 1999 restructuring accruals and asset
write-downs, primarily for the closure of the West Chester,
Pennsylvania facility, which remains in operation as a result
of the sale of the Bloomsburg frozen pasta facility in Fiscal
2000. Implementation costs of $216.5 million pretax ($0.41 per
share) were classified as cost of products sold ($79.2 million)
and SG&A ($137.3 million).
During Fiscal 1999, the company recognized restructuring
charges and implementation costs totaling $552.8 million pretax
($1.11 per share). Pretax charges of $396.4 million were
classified as cost of products sold and $156.4 million as SG&A.
(33)
Implementation costs were recognized as incurred and
consisted of incremental costs directly related to the
implementation of Operation Excel, including consulting fees,
employee training and relocation costs, unaccruable severance
costs associated with terminated employees, equipment
relocation costs and commissioning costs.
The company has closed or exited all of the 21 factories or
businesses that were scheduled for closure or divestiture. In
addition, the company also exited its domestic can making
operations and a tuna processing facility in Ecuador. Operation
Excel impacted approximately 8,500 employees with a net
reduction in the workforce of approximately 7,100 after
expansion of certain facilities. The exit of the company's
domestic can making operations and its tuna processing facility
in Ecuador resulted in a reduction of the company's workforce
of approximately 2,500 employees. During Fiscal 2002, Fiscal
2001, Fiscal 2000 and Fiscal 1999, the company's workforce had
a net reduction of approximately 200 employees, 3,700
employees, 3,000 employees and 200 employees, respectively.
RESULTS OF During the fourth quarter of Fiscal 2002, the company
OPERATIONS adopted Emerging Issues Task Force ("EITF") statements
relating to the classification of vendor consideration and
certain sales incentives. The adoption of these EITF statements
has no impact on operating income, net earnings, or basic or
diluted earnings per share; however, revenues were reduced by
approximately $693 million in Fiscal 2002, $610 million in
Fiscal 2001, and $469 million in Fiscal 2000. Prior period data
has been reclassified to conform to the current year
presentation.
2002 versus 2001: Sales for Fiscal 2002 increased $610.1
million, or 6.9%, to $9.43 billion from $8.82 billion in Fiscal
2001. Acquisitions increased sales by $862.9 million, or 9.8%,
and higher pricing increased sales by $98.6 million, or 1.1%.
Offsetting these improvements were decreases from divestitures
of $165.6 million, or 1.9%, foreign exchange translation rates
of $147.7 million, or 1.7%, and volume of $38.1 million, or
0.4%. Domestic operations contributed approximately 51.0% of
consolidated sales in Fiscal 2002 compared to 51.3% in Fiscal
2001.
The favorable impact of acquisitions is primarily related to
Classico and Aunt Millie's pasta sauces, Mrs. Grass Recipe
soups and Wyler's bouillons and soups in the North American
segment; Delimex frozen Mexican foods, Anchor's Poppers retail
frozen appetizers and licensing rights to the T.G.I. Friday's
brand of frozen snacks and appetizers in the U.S. Frozen
segment; and the Honig brands of soups, sauces and pasta meals,
HAK brand of vegetables packed in glass and KDR brand of sport
drinks, juices, spreads and sprinkles in the Europe segment.
Sales of the Heinz North America segment increased $135.9
million, or 5.5%. Acquisitions, net of divestitures, increased
sales 10.8%. Lower pricing decreased sales 2.3%, primarily
related to increased marketing spend across all major brands
and to foodservice ketchup. Sales volume decreased 2.4%,
primarily in the foodservice business, steak sauces and infant
feeding, partially offset by volume increases in soups and
grilling sauces. The weaker Canadian dollar decreased sales
0.5%.
Sales of the U.S. Pet Products and Seafood segment decreased
$22.0 million, or 1.5%. Unfavorable pricing decreased sales
0.3%, primarily in pet food and pet snacks, partially offset by
higher pricing of tuna. Sales volume decreased 0.2%, primarily
in pet food, partially offset by volume increases in pet snacks
and tuna. Divestitures decreased sales 1.1%.
U.S. Frozen's sales increased $214.9 million, or 22.5%.
Acquisitions increased sales 26.8%. Sales volume increased 4.7%
due primarily to Smart Ones frozen entrees, Boston Market
HomeStyle Meals and Bagel Bites snacks, partially offset by
volume decreases in frozen potatoes. Lower pricing decreased
sales 1.0%, primarily due to increased marketing spend across
all major brands and lower pricing in Boston Market HomeStyle
Meals, partially offset by higher pricing of Smart Ones frozen
entrees and frozen potatoes. Divestures reduced sales by 8.0%
due to the sale of The Budget Gourmet.
Heinz Europe's sales increased $251.6 million, or 9.7%.
Acquisitions, net of divestitures, increased sales 11.0%.
Higher pricing increased sales 1.5%, primarily due to higher
pricing in seafood, infant feeding, beans and soup. Volume
decreased by 0.4%, driven primarily
(34)
by infant feeding, partially offset by increases in grocery
ketchup, salad cream and weight control entrees. Unfavorable
foreign exchange translation rates decreased sales by 2.4%.
Sales in Asia/Pacific decreased $60.5 million, or 5.8%.
Unfavorable exchange rates reduced sales by 6.5%. Higher
pricing increased sales 1.8%, primarily due to sauces and
juices. Sales volume decreased 0.6% due primarily to sauces and
corned beef, partially offset by volume increases in poultry
and juices. Divestitures, net of acquisitions, reduced sales by
0.5%.
Sales of Other Operating Entities increased $90.1 million, or
28.1%. Favorable pricing increased sales 34.4%, primarily in
certain highly inflationary countries. Sales volume decreased
1.7%, primarily in tuna offset by infant feeding and grocery
ketchup. Other items, net, reduced sales by 4.6% mainly due to
the divestitures of the South African frozen and pet food
businesses.
The current year's results were negatively impacted by net
Streamline restructuring charges and implementation costs
totaling $17.9 million pretax ($0.03 per share). Pretax charges
of $8.7 million were classified as cost of products sold and
$9.1 million as SG&A. Last year's results were negatively
impacted by special items which net to $418.4 million after-tax
($1.19 per share).
The following tables provide a comparison of the company's
reported results and the results excluding special items for
Fiscal 2002 and Fiscal 2001.
Fiscal Year (52 Weeks) Ended May 1, 2002
-------------------------------------------------------------------------------------------
(Dollars in millions, Gross Operating
except per share amounts) Net Sales Profit Income Net Income Per Share
- ----------------------------------------------------------------------------------------------------------------------------
Reported results $ 9,431.0 $ 3,337.2 $ 1,590.5 $ 833.9 $ 2.36
Revisions to accruals and asset
write-downs--Fourth Quarter
2002 -- -- 1.7 (4.1) (0.01)
Streamline restructuring costs -- -- 5.7 3.6 0.01
Streamline implementation costs -- 8.7 10.5 9.4 0.03
- ----------------------------------------------------------------------------------------------------------------------------
Results excluding special items $ 9,431.0 $ 3,345.9 $ 1,608.4 $ 842.8 $ 2.39
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal Year (52 Weeks) Ended May 2, 2001
-------------------------------------------------------------------------------------------
(Dollars in millions, Gross Operating
except per share amounts) Net Sales Profit Income Net Income Per Share
- ----------------------------------------------------------------------------------------------------------------------------
Reported results $ 8,820.9 $ 2,937.3 $ 982.4 $ 494.9* $ 1.41*
Operation Excel restructuring -- 44.8 55.7 35.0 0.10
Operation Excel implementation
costs -- 146.4 311.6 208.7 0.59
Operation Excel reversal -- (46.3) (78.8) (60.9) (0.17)
Streamline restructuring -- 176.6 276.2 211.6 0.60
Streamline implementation costs -- 16.0 22.6 18.8 0.06
Loss on sale of The All
American Gourmet -- -- 94.6 66.2 0.19
Equity loss on investment in
The Hain Celestial Group -- -- -- 3.5 0.01
Acquisition costs -- -- 18.5 11.7 0.03
Italian tax benefit -- -- -- (93.2) (0.27)
- ----------------------------------------------------------------------------------------------------------------------------
Results excluding special items $ 8,820.9 $ 3,274.8 $ 1,682.7 $ 896.4 $ 2.55
- ----------------------------------------------------------------------------------------------------------------------------
*Before cumulative effect of accounting changes (Note: Totals may not add due to
rounding.)
Gross profit increased $399.9 million, or 13.6%, to $3.34
billion from $2.94 billion, and the gross profit margin
increased to 35.4% from 33.3%. Excluding the special items
noted above, gross profit increased $71.2 million, or 2.2%, to
$3.35 billion from $3.27 billion, and the gross profit margin
decreased to 35.5% from 37.1%. Gross profit for the Heinz North
America segment decreased $0.2 million as the favorable impact
of acquisitions was offset by lower pricing and a decrease in
the foodservice business. The U.S. Pet Products and Seafood
segment's gross profit decreased $35.8 million, or 7.6%,
primarily due to price decreases in pet food and pet snacks,
increased ingredient and manufacturing costs and a shift to
less profitable, larger-size products. Pet food ingredient
costs also increased as a result of
(35)
reformulating recipes to improve palatability. U.S. Frozen's
gross profit increased $89.8 million, or 25.5%, due primarily
to acquisitions. Europe's gross profit increased $74.4
million, or 7.5%, due primarily to acquisitions and increased
pricing. The Asia/Pacific segment's gross profit decreased
$71.6 million, or 19.7%, due primarily to poor factory
operations in connection with the movement of manufacturing to
New Zealand from Australia and Japan, and unfavorable foreign
exchange rates, partially offset by increased pricing. During
Fiscal 2002, New Zealand's factories experienced
inefficiencies as a result of significant changes in the
supply chain matrix. Gross profit in the Other Operating
Entities segment increased $18.7 million, or 18.8%, due
primarily to favorable pricing.
SG&A decreased $208.2 million, or 10.7%, to $1.75 billion
from $1.95 billion and decreased as a percentage of sales to
18.5% from 22.2%. Excluding the special items noted above, SG&A
increased $145.5 million, or 9.1%, to $1.74 billion from $1.59
billion and increased as a percentage of sales to 18.4% from
18.0%. This increase is primarily attributable to acquisitions
and increased selling and distribution costs in North America
and increased general and administrative costs in Europe.
Total marketing support (including trade and consumer
promotions and media) increased $256.8 million, or 11.6%, to
$2.48 billion from $2.22 billion on a sales increase of 6.9%.
(See Note 17 to the Consolidated Financial Statements.)
Operating income increased $608.1 million, or 61.9%, to $1.59
billion from $982.4 million and increased as a percentage of
sales to 16.9% from 11.1%. Excluding the special items noted
above, operating income decreased $74.4 million, or 4.4%, to
$1.61 billion from $1.68 billion and decreased as a percentage
of sales to 17.1% from 19.1%. Excluding the special items in
both years, domestic operations provided approximately 59% and
50% of operating income in Fiscal 2002 and 2001, respectively.
The Heinz North America segment's operating income increased
$36.6 million, or 6.8%, to $578.2 million from $541.6 million.
Excluding the special items noted above, operating income
decreased $63.6 million, or 9.8%, to $584.3 million from $648.0
million, due primarily to the decrease in gross profit driven
by the foodservice business and higher selling and distribution
costs, partially offset by the favorable impact of
acquisitions.
The U.S. Pet Products and Seafood segment's operating income
increased $246.2 million to $191.6 million from a loss of $54.5
million. Excluding the special items noted above, operating
income decreased $31.1 million, or 13.6%, to $197.1 million
from $228.2 million, due primarily to the decrease in gross
profit.
The U.S. Frozen segment's operating income increased $160.8
million to $244.7 million from $84.0 million. Excluding the
special items noted above, operating income increased $42.7
million, or 21.1%, to $244.7 million from $202.0 million as the
favorable impact of acquisitions was partially offset by lower
pricing and increased selling and distribution costs and the
divestiture of The Budget Gourmet.
Europe's operating income increased $153.2 million to $541.8
million from $388.6 million. Excluding the special items noted
above, operating income increased $27.4 million, or 5.3%, to
$545.4 million from $518.0 million. This increase is primarily
attributable to acquisitions, favorable pricing and the tuna
business, partially offset by increased marketing to support
key brands across Europe and infrastructure costs.
Asia/Pacific's operating income decreased $14.1 million to
$82.1 million from $96.1 million. Excluding the special items
noted above, operating income decreased $65.7 million, or
44.5%, to $81.9 million from $147.6 million. This decrease is
primarily attributable to the unfavorable operating performance
brought about by the movement of manufacturing to New Zealand
from Australia and Japan and the significant realignment of
manufacturing facilities. Operations are expected to improve
during the latter half of Fiscal 2003.
Excluding special items, Other Operating Entities' operating
income increased $17.2 million, or 45.2%, primarily due to
higher pricing.
Net interest expense decreased $43.4 million to $266.8
million from $310.3 million last year, driven by lower interest
rates, partially offset by increased borrowings. Other expense
increased $46.1 million to $45.1 million from other income of
$1.0 million last year. Excluding special items, other expense
increased $51.6 million to $45.1 million from other income of
$6.6 million, primarily due to an increase in minority interest
expense and gains from foreign currency hedge contracts
recorded in the prior year.
(36)
The effective tax rate for Fiscal 2002 was 34.8% compared to
26.5% last year. The Fiscal 2001 rate includes a benefit of
$93.2 million, or $0.27 per share, from tax planning and new
tax legislation in Italy, partially offset by restructuring
expenses in lower rate jurisdictions. Excluding the special
items identified above, the effective tax rate was 35.0% in
both years.
Net income increased $355.9 million to $833.9 million from
$478.0 million last year, and earnings per share increased to
$2.36 from $1.36. In Fiscal 2001, the company changed its
method of accounting for revenue recognition in accordance with
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements" (see Note 1 to the Consolidated
Financial Statements). The cumulative effect of adopting SAB
No. 101 was $16.5 million ($0.05 per share) in Fiscal 2001.
Excluding the special items noted above and the prescribed
accounting change, net income decreased 6.0% to $842.8 million
from $896.4 million, and earnings per share decreased 6.3% to
$2.39 from $2.55 last year.
The impact of fluctuating exchange rates for Fiscal 2002
remained relatively consistent on a line-by-line basis
throughout the Consolidated Statement of Income.
2001 versus 2000: Sales for Fiscal 2001 decreased $118.5
million, or 1.4%, to $8.82 billion from $8.94 billion in Fiscal
2000. Volume increased sales by $215.1 million, or 2.4%, and
acquisitions increased sales by $519.4 million, or 5.8%.
Divestitures reduced sales by $284.5 million, or 3.2%, lower
pricing reduced sales by $166.2 million, or 1.9%, and the
unfavorable impact of foreign exchange translation rates
reduced sales by $402.3 million, or 4.5%. Domestic operations
contributed approximately 51% of consolidated sales in both
fiscal years.
Sales of the Heinz North America segment increased $156.5
million, or 6.8%. Sales volume increased 4.3%, due to increases
in ketchup, condiments and sauces, foodservice, gravy and
canned soups. Acquisitions, net of divestitures, increased
sales 3.2%. Slightly lower pricing decreased sales 0.3% and
weaker Canadian dollar decreased sales 0.4%.
Sales of the U.S. Pet Products and Seafood segment decreased
$187.3 million, or 11.5%. Lower pricing decreased sales 7.5%,
primarily in light meat tuna, dry dog food and cat treats.
Sales volume decreased 3.4%, primarily in tuna and canned pet
food. Divestitures decreased sales 0.6%.
The U.S. Frozen segment's sales increased $87.0 million, or
10.0%. Sales volume increased 10.3%, driven by Smart Ones
frozen entrees, Boston Market frozen meals, Bagel Bites snacks
and frozen potatoes, partially offset by a decrease in The
Budget Gourmet line of frozen entrees and frozen pasta. Higher
pricing increased sales by 1.8% driven by Smart Ones frozen
entrees and frozen potatoes, partially offset by increased
promotions. Divestitures reduced sales 2.1% mainly due to the
sale of The All American Gourmet business and its Budget
Gourmet and Budget Gourmet Value Classics brands of frozen
entrees.
Sales in Europe increased $108.1 million, or 4.4%.
Acquisitions, net of divestitures, increased sales 14.1%, due
primarily to the acquisition of CSM Food Division of CSM
Nederland NV ("CSM") and the full-year impact of the United
Biscuit's European Frozen and Chilled Division ("UB"). Sales
volume increased 1.7%, due to increases in tuna, other
seafoods, and beans, partially offset by a decrease in infant
foods and frozen pizza. Lower pricing decreased sales 1.4%,
driven primarily by increased promotions to support brands
across Europe. The unfavorable impact of foreign exchange
translation rates reduced sales by $247.6 million, or 10.0%.
Sales in Asia/Pacific decreased $126.3 million, or 10.8%. The
unfavorable impact of foreign exchange translation rates
reduced sales by $135.1 million, or 11.6%. Volume increased
sales by 2.1% due to increases in poultry, tuna, and infant
foods partially offset by decreases in nutritional drinks and
pet foods. Other items, net, decreased sales by 1.3%.
Sales of Other Operating Entities decreased $156.5 million,
or 32.7%. Divestitures, net of acquisitions, reduced sales
36.1%, primarily due to the divestiture of the Weight Watchers
classroom business in Fiscal 2000. Sales volume increased 3.5%
and higher pricing increased sales 1.7%. Unfavorable foreign
exchange translation rates reduced sales 1.8%.
(37)
Fiscal 2001 was impacted by a number of special items which
are summarized in the tables below. The Fiscal 2001 results
include Operation Excel implementation costs of $311.6 million
pretax ($0.59 per share), additional Operation Excel
restructuring charges of $55.7 million pretax ($0.10 per share)
and reversals of $78.8 million pretax ($0.17 per share) of
restructuring accruals and assets write-downs. Fiscal 2001
results also include Streamline restructuring charges of $276.2
million pretax ($0.60 per share) and related implementation
costs of $22.6 million pretax ($0.05 per share). During the
fourth quarter of Fiscal 2001, the company completed the sale
of The All American Gourmet business that resulted in a pretax
loss of $94.6 million ($0.19 per share). The Fiscal 2001
results also include pretax costs of $18.5 million ($0.03 per
share) related to attempted acquisitions, a tax benefit of
$93.2 million ($0.27 per share) from tax planning and new tax
legislation in Italy and a loss of $5.6 million pretax ($0.01
per share) which represents the company's equity loss
associated with The Hain Celestial Group's fourth quarter
results which include charges for its merger with Celestial
Seasonings.
Fiscal 2000 results include Operation Excel restructuring
charges of $194.5 million pretax ($0.37 per share), Operation
Excel implementation costs of $216.5 million pretax ($0.41 per
share), reversals of $18.2 million pretax ($0.04 per share) of
Fiscal 1999 restructuring accruals and asset write- downs,
costs related to the company's Ecuador tuna processing facility
of $20.0 million pretax ($0.05 per share), a gain of $18.2
million pretax ($0.03 per share) on the sale of an office
building in the U.K., a pretax contribution of $30.0 million
($0.05 per share) to the H.J. Heinz Company Foundation, a gain
of $464.6 million pretax ($0.72 per share) on the sale of the
Weight Watchers classroom business and the impact of the Weight
Watchers classroom business of $32.8 million pretax ($0.05 per
share).
The following tables provide a comparison of the company's
reported results and the results excluding special items for
Fiscal 2001 and Fiscal 2000.
Fiscal Year (52 Weeks) Ended May 2, 2001
-------------------------------------------------------------------------------------------
(Dollars in millions, Gross Operating
except per share amounts) Net Sales Profit Income Net Income Per Share
- ----------------------------------------------------------------------------------------------------------------------------
Reported results $ 8,820.9 $ 2,937.3 $ 982.4 $ 494.9* $ 1.41*
Operation Excel restructuring -- 44.8 55.7 35.0 0.10
Operation Excel implementation
costs -- 146.4 311.6 208.7 0.59
Operation Excel reversal -- (46.3) (78.8) (60.9) (0.17)
Streamline restructuring -- 176.6 276.2 211.6 0.60
Streamline implementation costs -- 16.0 22.6 18.8 0.06
Loss on sale of The All
American Gourmet -- -- 94.6 66.2 0.19
Equity loss on investment in
The Hain Celestial Group -- -- -- 3.5 0.01
Acquisition costs -- -- 18.5 11.7 0.03
Italian tax benefit -- -- -- (93.2) (0.27)
- ----------------------------------------------------------------------------------------------------------------------------
Results excluding special items $ 8,820.9 $ 3,274.8 $ 1,682.7 $ 896.4 $ 2.55
- ----------------------------------------------------------------------------------------------------------------------------
*Before cumulative effect of accounting changes
Fiscal Year (53 Weeks) Ended May 3, 2000
-------------------------------------------------------------------------------------------
(Dollars in millions, Gross Operating
except per share amounts) Net Sales Profit Income Net Income Per Share
- ----------------------------------------------------------------------------------------------------------------------------
Reported results $ 8,939.4 $ 3,150.9 $ 1,733.1 $ 890.6 $ 2.47
Operation Excel restructuring -- 107.7 194.5 134.4 0.37
Operation Excel implementation
costs -- 79.2 216.5 145.9 0.41
Operation Excel reversal -- (16.4) (18.2) (12.9) (0.04)
Ecuador expenses -- 20.0 20.0 20.0 0.05
Gain on U.K. building sale -- -- -- (11.8) (0.03)
Foundation contribution -- -- 30.0 18.9 0.05
Impact of Weight Watchers
classroom business (175.3) (93.0) (44.7) (19.6) (0.05)
Gain on sale of Weight Watchers
classroom business -- -- (464.6) (259.7) (0.72)
- ----------------------------------------------------------------------------------------------------------------------------
Results excluding special items $ 8,764.1 $ 3,248.4 $ 1,666.5 $ 905.7 $ 2.52
- ----------------------------------------------------------------------------------------------------------------------------
(Note: Totals may not add due to rounding.)
Gross profit decreased $213.7 million to $2.94 billion from
$3.15 billion in Fiscal 2000. The gross profit margin decreased
to 33.3% from 35.2%. Excluding the special items identified
above, gross profit increased $26.4 million, or 0.8%, to $3.27
billion from $3.25 billion, and the gross profit margin
remained constant at 37.1%. Gross profit, across all major
segments, was favorably impacted by savings from Operation
Excel. Gross profit for the Heinz North America segment
increased $64.0 million, or 6.9% due primarily to acquisitions
and increased sales volume of ketchup partially offset by
higher energy costs and the weakened Canadian dollar. The U.S.
Pet Products and Seafood segment's gross profit decreased $49.6
million, or 9.6%, primarily due to increased promotions and
lower volume of tuna and canned pet food. U.S. Frozen's gross
profit increased $26.9 million, or 8.3%, due to increased sales
volume mainly attributable to Boston Market HomeStyle Meals and
higher selling prices, partially offset by higher energy costs
and increased promotions. Europe's gross profit increased $22.9
million, or 2.4%, due primarily to a favorable profit mix and
the acquisitions of CSM, UB and Remedia Limited, partially
offset by increased promotions to support brands across Europe.
The unfavorable impact of foreign exchange translation rates
reduced Europe's gross profit by approximately $99 million. The
Asia/Pacific segment's gross profit decreased $51.8 million, or
12.5%, driven by the unfavorable impact of foreign exchange
translation rates of approximately $48 million, partially
offset by higher selling prices in Indonesia. Other Operating
Entities' gross profit increased $5.8 million, or 6.1%, due
primarily to higher pricing.
SG&A increased $72.5 million to $1.95 billion from $1.88
billion and increased as a percentage of sales to 22.2% from
21.1%. Excluding the special items identified above, SG&A
increased $10.1 million to $1.59 billion from $1.58 billion and
remained constant as a percentage of sales at 18.0%. Selling
and distribution expenses increased $27.4 million to $768.2
million from $740.8 million, or 3.7%, primarily due to
acquisitions and increased fuel costs in North America.
Marketing decreased $7.4 million, or 2.2%. Total marketing
support (including trade and consumer promotions and media)
decreased 5.0% to $2.22 billion from $2.34 billion on a sales
increase of 0.6%.
Operating income decreased $750.7 million, or 43.3%, to $0.98
billion from $1.73 billion in Fiscal 2000. Excluding the
special items identified above, operating income increased
$16.3 million, or 1.0%, to $1.68 billion from $1.67 billion in
Fiscal 2000. Operating income, across all major segments, was
favorably impacted by savings from Operation Excel. Domestic
operations provided approximately 37% and 59% of operating
income in Fiscal 2001 and Fiscal 2000, respectively. Excluding
the special items in both years, domestic operations provided
approximately 50% and 54% of operating income in Fiscal 2001
and Fiscal 2000, respectively.
The Heinz North America segment's operating income increased
$45.3 million to $541.6 million from $496.3 million in Fiscal
2000. Excluding the special items noted above, operating income
increased $45.3 million, or 7.5% to $647.9 million from $602.6
million in Fiscal 2000 due to the strong performance of
ketchup, condiments and sauces, and the acquisitions of Quality
Chef, Yoshida and IDF Holdings, Inc. ("IDF"), partially offset
by higher energy costs.
The U.S. Pet Products and Seafood segment's operating income
decreased $252.7 million to a loss of $54.5 million from income
of $198.1 million in Fiscal 2000. Excluding the special items
noted above, operating income decreased $44.4 million, or 16.3%
to $228.2 million from $272.6 million due to lower tuna and
canned pet food sales volumes, a significant decrease in the
selling price of tuna and higher energy costs, partially offset
by the strong performance of pet snacks.
The U.S. Frozen segment's operating income decreased $68.1
million to $84.0 million from $152.0 million in Fiscal 2000.
Excluding the special items noted above, operating income
increased $20.5 million, or 11.3%, to $202.0 million from
$181.5 million in Fiscal 2000. This increase is mainly
attributable to increased sales of Smart Ones frozen entrees,
Boston Market frozen meals and Bagel Bites snacks, partially
offset by marketing spending behind the national rollouts of
Boston Market products, the stand-up resealable pouch and
higher energy costs.
(38)
Europe's operating income increased $24.4 million, or 6.7%,
to $388.6 million from $364.2 million. Excluding the special
items noted above, operating income increased $15.7 million, or
3.1%, to $518.0 million from $502.3 million in Fiscal 2000, due
primarily to increased sales of seafood and beans and the UB
acquisition, partially offset by competitive pricing and trade
destocking in the company's European infant foods business. The
unfavorable impact of foreign exchange translation rates
reduced Europe's operating income by approximately $45 million.
Asia/Pacific's operating income decreased $28.0 million, or
22.6%, to $96.1 million from $124.1 million in Fiscal 2000.
Excluding the special items noted above, operating income
decreased $29.9 million, or 16.8%, to $147.6 million from
$177.5 million in Fiscal 2000. Solid performances from
Indonesia, Greater China and the poultry business were offset
by reduced sales in New Zealand, Japan and India. The
unfavorable impact of foreign exchange translation rates
reduced Asia/Pacific's operating income by approximately $17
million.
Other Operating Entities reported a decrease in operating
income of $490.9 million to $49.3 million from $540.2 million
in Fiscal 2000. Excluding the special items noted above,
operating income increased $5.7 million, or 17.7%, to $38.0
million from $32.3 million in Fiscal 2000.
Other expense, net totaled $309.3 million compared to $269.4
million in Fiscal 2000. The increase is primarily due to an
increase in interest expense resulting from higher average
borrowings and higher interest rates partially offset by gains
from foreign currency contracts.
The effective tax rate for Fiscal 2001 was 26.5% compared to
39.2% in Fiscal 2000. The Fiscal 2001 rate includes a benefit
of $93.2 million, or $0.27 per share, from tax planning and new
tax legislation in Italy, partially offset by restructuring
expenses in lower rate jurisdictions. The Fiscal 2000 rate was
negatively impacted by a higher rate on the sale of the Weight
Watchers classroom business, resulting from an excess of basis
in assets for financial reporting over the tax basis in assets,
and by higher state taxes related to the sale and more
restructuring expenses in lower rate jurisdictions. Excluding
the special items identified in the tables above, the effective
tax rate was 35.0% in both years.
Net income decreased $412.5 million to $478.0 million from
$890.6 million in Fiscal 2000, and earnings per share decreased
to $1.36 from $2.47. In Fiscal 2001, the company changed its
method of accounting for revenue recognition in accordance with
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements" (see Note 1 to the Consolidated
Financial Statements). The cumulative effect of adopting SAB
No. 101 was $16.5 million ($0.05 per share). Excluding the
special items noted above and the prescribed accounting change,
net income decreased 1.0% to $896.4 million from $905.7
million, and earnings per share increased 1.2% to $2.55 from
$2.52 in Fiscal 2000.
The impact of fluctuating exchange rates for Fiscal 2001
remained relatively consistent on a line-by-line basis
throughout the Consolidated Statement of Income.
(39)
LIQUIDITY AND Return on average shareholders' equity ("ROE") was 53.9% in
FINANCIAL Fiscal 2002, 32.2% in Fiscal 2001 and 52.4% in Fiscal 2000.
POSITION Excluding the special items identified above, ROE was 54.5%
in Fiscal 2002, 60.4% in Fiscal 2001 and 54.4% in Fiscal 2000.
Pretax return on average invested capital ("ROIC") was 23.2% in
Fiscal 2002, 16.4% in Fiscal 2001 and 31.4% in Fiscal 2000.
Excluding the special items identified above, ROIC was 23.5% in
Fiscal 2002, 28.2% in Fiscal 2001 and 30.6% in Fiscal 2000.
Cash provided by operating activities increased to $891.4
million in Fiscal 2002 compared to $506.3 million in Fiscal
2001 and $543.1 million in Fiscal 2000. The improvement in
Fiscal 2002 versus Fiscal 2001 is primarily due to expenditures
in the prior year related to Operation Excel and income taxes
related to the reorganization of certain foreign operations.
These improvements were partially offset by an increase in
working capital as a result of increased accounts receivable
and inventory levels.
Cash used for investing activities was $994.3 million in
Fiscal 2002 compared to $774.2 million in Fiscal 2001.
Acquisitions in the current year required $834.8 million, due
primarily to the purchase of Borden Food Corporation's pasta
and dry bouillon and soup
(40)
business, Delimex Holdings, Inc. and Anchor Food Products
branded retail business and licensing rights to the T.G.I.
Friday's brand of frozen snacks and appetizers. Acquisitions in
the prior year required $673.0 million, due primarily to the
purchase of the Honig brands of soups, sauces and pasta meals;
HAK brand of vegetables packed in glass; KDR brand of sport
drinks, juices, spreads and sprinkles; IDF and Alden Merrell.
(See Note 2 to the Consolidated Financial Statements.) Also
during the prior year, the company exercised its preemptive
right to purchase additional equity in The Hain Celestial
Group, Inc. to restore Heinz's investment level to
approximately 19.5% of the outstanding stock of Hain, for $79.7
million. Divestitures provided $32.9 million in Fiscal 2002
compared to $151.1 million in Fiscal 2001. The prior year
divestitures primarily relate to the sale of The All American
Gourmet business and can making assets.
Capital expenditures totaled $213.4 million compared to
$411.3 million last year. The decrease is attributable to a
reduction in Operation Excel-related capital expenditures. In
Fiscal 2003, the company expects capital expenditures to be
consistent with Fiscal 2002. Proceeds from disposals of
property, plant and equipment were $19.0 million in Fiscal 2002
compared to $257.0 million in Fiscal 2001. The prior year was
primarily due to the sale of equipment that was then utilized
under operating lease arrangements.
Purchases and sales/maturities of short-term investments
decreased in Fiscal 2002. The company periodically sells a
portion of its short-term investment portfolio in order to
reduce its borrowings.
In Fiscal 2002, financing activities provided $181.3 million
compared to $283.1 million in the prior year. Financing
activities required $259.2 million in Fiscal 2000. Cash used
for dividends to shareholders increased $25.3 million to $562.6
million from $537.3 million last year. Purchases of treasury
stock totaled $45.4 million (1.0 million shares) in Fiscal 2002
compared to $90.1 million (2.3 million shares) in Fiscal 2001.
Net funds borrowed were $408.9 million in Fiscal 2002 compared
to $807.6 million in Fiscal 2001. Cash provided from stock
options exercised totaled $63.7 million in Fiscal 2002 versus
$93.9 million in Fiscal 2001.
On May 3, 2001, the company reorganized its U.S. corporate
structure by consolidating its U.S. business into two major
entities: H.J. Heinz Finance Company ("Heinz Finance")
manages treasury functions and H.J. Heinz Company, L.P.
("Heinz LP") owns or leases the operating assets and manages
the U.S. business. Heinz Finance assumed primary liability
for payment of the company's outstanding senior unsecured
debt and accrued interest by becoming a co-obligor with the
company. All of the assets, liabilities, results of
operations and cash flows of Heinz Finance and Heinz LP are
included in the company's consolidated financial statements.
On July 6, 2001, Heinz Finance raised $325.0 million via the
issuance of Voting Cumulative Preferred Stock, Series A with
liquidation preference of $100,000 per share. The Series A
Preferred shares are entitled to receive quarterly dividends at
a rate of 6.226% per annum and are required to be redeemed for
cash on July 15, 2008. In addition, Heinz Finance issued $750
million of 6.625% Guaranteed Notes due July 15, 2011. The
proceeds were used for general corporate purposes, including
retiring commercial paper borrowings and financing acquisitions
and ongoing operations.
On September 6, 2001, the company, Heinz Finance and a group
of domestic and international banks entered into a $1.50
billion credit agreement which expires in September 2006 and a
$800 million credit agreement which expires in September 2002.
These credit agreements, which support the company's commercial
paper programs, replaced the $2.30 billion credit agreement
which expired on September 6, 2001. As of May 1, 2002, $119.1
million of domestic commercial paper is classified as long-term
debt due to the long-term nature of the supporting credit
agreement. As of May 2, 2001, the company had $1.34 billion of
domestic commercial paper outstanding and classified as
short-term debt.
On March 7, 2002, Heinz Finance issued $700 million of 6.00%
Guaranteed Notes due March 15, 2012 and $550 million of 6.75%
Guaranteed Notes due March 15, 2032, which
(41)
are guaranteed by the company. The proceeds were used to retire
commercial paper borrowings, as the company made the strategic
decision to increase long-term debt and decrease short-term
debt to enhance its liquidity profile.
On November 6, 2000, the company issued $1.0 billion of
remarketable securities due November 2020. The proceeds were
used to repay domestic commercial paper. The securities have a
coupon rate of 6.82%. The securities are subject to mandatory
tender by all holders to the remarketing dealer on each
November 15, and the interest rate will be reset on such dates.
If the remarketing dealer does not elect to exercise its right
to a mandatory tender of the securities or otherwise does not
purchase all of the securities on the remarketing date, then
the company is required to repurchase all of the securities on
the remarketing date at 100% of the principal amount plus
accrued interest. The company received a premium from the
remarketing dealer for the right to require the mandatory
tender of the securities. The amortization of the premium
resulted in an effective interest rate of 5.82% through
November 15, 2001. On November 15, 2001, the remarketing dealer
exercised its right to a mandatory tender of the securities and
purchased all of the securities and remarketed the securities
at an effective interest rate to the company of 6.49% through
November 15, 2002. Because the remarketable securities may be
refinanced by the $1.5 billion credit agreement discussed
above, they are classified as long-term debt.
On April 10, 2001, the company issued Euro 450 million of
5.125% Guaranteed Notes due 2006. The proceeds were used for
general corporate purposes, including repaying borrowings that
were incurred in connection with the acquisition of CSM.
Aggregate domestic commercial paper had a weighted-average
interest rate during Fiscal 2002 of 2.9% and at year-end of
2.0%. In Fiscal 2001, the weighted-average interest rate was
6.3%, and the rate at year-end was 4.9%. Based upon the amount
of commercial paper outstanding at May 1, 2002, a variance of
1/8% in the related interest rate would cause annual interest
expense to change by approximately $0.1 million.
The average amount of short-term debt outstanding (excluding
domestic commercial paper) during Fiscal 2002 and Fiscal 2001
was $215.7 million and $202.6 million, respectively. Total
short-term debt had a weighted-average interest rate during
Fiscal 2002 of 8.6% and at year-end of 4.7%. The
weighted-average interest rate on short-term debt during Fiscal
2001 was 8.03% and at year-end was 7.00%.
In January 2002, Moody's Investors Service changed the credit
ratings on the company's debt to A-3 for long-term debt and P-2
for short-term debt. The previous ratings were A-2 and P-1,
respectively. The company's long-term and short- term ratings
by Standard & Poor's remained at A and A-1, respectively.
On September 17, 2001, the company's Board of Directors
raised the quarterly dividend on the company's common stock to
$0.4050 per share from $0.3925 per share, for an indicated
annual rate of $1.62 per share. The dividend rate in effect at
the end of each year resulted in a payout ratio of 68.6% in
Fiscal 2002, 115.4% in Fiscal 2001 and 59.5% in Fiscal 2000.
Excluding the impact of special items in all years, the payout
ratio was 67.8% in Fiscal 2002, 61.6% in Fiscal 2001 and 57.2%
in Fiscal 2000.
In Fiscal 2002, the company repurchased 1.0 million shares of
common stock, or 0.3% of the amount outstanding at the
beginning of Fiscal 2002, at a cost of $45.4 million, compared
to the repurchase of 2.3 million shares at a cost of $90.1
million in Fiscal 2001. On June 9, 1999, the Board of Directors
authorized the repurchase of up to 20.0 million shares. As of
May 1, 2002, the company had repurchased 15.4 million shares of
this current 20.0 million share program. The company may
reissue repurchased shares upon the exercise of stock options,
conversions of preferred stock and for general corporate
purposes.
In Fiscal 2002, the cash requirements of Streamline were
$111.5 million, consisting of spending for severance and exit
costs ($97.1 million), capital expenditures ($4.0 million) and
implementation costs ($10.4 million). In Fiscal 2001, the cash
requirements of Streamline were $31.7 million, consisting of
spending for severance and exit costs ($8.9 million), capital
(42)
expenditures ($0.3 million) and implementation costs ($22.6
million). In Fiscal 2001, the cash requirements of Operation
Excel were $537.4 million, consisting of spending for severance
and exit costs ($76.8 million), capital expenditures ($149.0
million) and implementation costs ($311.6 million). In Fiscal
2000, the cash requirements of Operation Excel were $479.4
million, consisting of spending for severance and exit costs
($89.3 million), capital expenditures ($173.6 million) and
implementation costs ($216.5 million).
In Fiscal 2003, the company expects the cash requirements of
Streamline to be approximately $23.7 million, consisting of
severance and exit costs ($23.7 million of the $24.1 million
accrued as of May 1, 2002). The company financed the cash
requirements of these programs through operations, proceeds
from the sale of non-strategic assets and with short-term and
long-term borrowings. The cash requirements of these programs
have not had and are not expected to have a material adverse
impact on the company's liquidity or financial position.
COMMITMENTS AND The company is obligated to make future payments under
CONTINGENCIES various contracts such as debt agreements, lease agreements
and unconditional purchase obligations. The following table
represents the significant contractual cash obligations of the
company as of May 1, 2002.
Contractual Cash
Obligations Due
(In millions) Total Due in 2003 Due in 2004 Due in 2005 Due in 2006 Due in 2007 Thereafter
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt
(including capital
leases of $48.8
million) $ 5,167 $ 524 $ 16 $ 323 $ 415 $ 126 $ 3,763
Operating leases 444 50 44 37 31 216* 66
- ------------------------------------------------------------------------------------------------------------------------------
Total contractual cash
obligations $ 5,611 $ 574 $ 60 $ 360 $ 446 $ 342 $ 3,829
- ------------------------------------------------------------------------------------------------------------------------------
*Includes the purchase option related to certain warehouses and equipment
currently utilized under existing synthetic leases.
The company has purchase commitments for materials, supplies,
services and property, plant and equipment as part of the
ordinary conduct of business. A few of these commitments are
long-term and are based on minimum purchase requirements. In
the aggregate, such commitments are not at prices in excess of
current markets. Due to the proprietary nature of some of the
company's materials and processes, certain supply contracts
contain penalty provisions for early terminations. The company
does not believe a material amount of penalties is reasonably
likely to be incurred under these contracts based upon
historical experience and current expectations.
The company does not have material financial guarantees or
other contractual commitments that are reasonably likely to
adversely affect liquidity. In addition, the company does not
have any related-party transactions that materially affect the
results of operations, cash flow or financial condition.
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, commodity prices and
production costs (including energy). 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 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 anticipated
transactions. The instruments are used to reduce risk by
essentially creating offsetting currency exposures. As of May
1, 2002, the company held
(43)
contracts for the purpose of hedging certain intercompany cash
flows with an aggregate notional amount of approximately $380
million. In addition, the company held separate contracts,
totaling $335 million, in order to hedge certain purchases of
raw materials and finished goods and foreign currency
denominated obligations. The company also held contracts,
totaling $130 million, to hedge certain anticipated sales and
assets denominated in foreign currencies. The company's
contracts to hedge anticipated transactions mature within one
year of the fiscal year-end. Contracts that meet certain
qualifying criteria are accounted for as foreign currency cash
flow hedges. Accordingly, the effective portion of gains and
losses is deferred as a component of other comprehensive loss
and is recognized in earnings at the time the hedged item
affects earnings. Any gains and losses due to hedge
ineffectiveness or related to contracts which do not qualify
for hedge accounting are recorded in other income and expense.
At May 1, 2002, unrealized gains and losses on outstanding
foreign currency contracts are not material. As of May 1, 2002,
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 $60 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. 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
utilizes interest rate swap agreements to manage interest rate
exposure.
The following table summarizes the company's debt obligations
at May 1, 2002. The interest rates represent weighted-average
rates, with the period end rate used for the floating rate debt
obligations. The fair value of the debt obligations
approximated the recorded value as of May 1, 2002.
Expected Fiscal Year of Maturity
----------------------------------------------------------------------------------------------------
(Dollars in thousands) 2003 2004 2005 2006 2007 Thereafter Total
- --------------------------------------------------------------------------------------------------------------------------------
Fixed rate $ 452,373 $ 6,837 $ 317,091 $ 408,676 $ 30,851 $ 3,757,288 $ 4,973,116
Average interest rate 6.41% 2.43% 5.31% 5.13% 5.79% 6.45%
Floating rate $ 71,914 $ 8,763 $ 5,498 $ 5,929 $ 95,537 $ 6,498 $ 194,139
Average interest rate 6.13% 7.61% 8.78% 8.78% 3.33% 3.39%
- --------------------------------------------------------------------------------------------------------------------------------
In Fiscal 2002, the company entered into interest rate swaps in
order to convert certain fixed-rate debt to floating. These
swaps have an aggregate notional value of $2.05 billion and an
average maturity of 16.4 years. The weighted-average fixed rate
of the associated debt is 6.45%; however, the effective rate
after taking into account the swaps is 3.14%. As of May 1,
2002, the potential gain or loss in the fair value of the
company's interest rate swaps, assuming a hypothetical 10%
fluctuation in the swap rates, would be approximately $120
million. However, it should be noted that any change in the
fair value of the swaps, real or hypothetical, would be offset
by an inverse change in the fair value of the related debt.
Based on the amount of fixed- rate debt converted to floating
as of May 1, 2002, a variance of 1/8% in the related interest
rate would cause annual interest expense related to this debt
to change by approximately $2.6 million.
(44)
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. The company enters into commodity
future or option contracts, as deemed appropriate, to reduce
the effect of price fluctuations on anticipated purchases. Such
contracts are accounted for as hedges, if they meet certain
qualifying criteria, with the effective portion of gains and
losses recognized as part of cost of products sold, and
generally have a term of less than one year. As of May 1, 2002,
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.)
NEW ACCOUNTING In June 2001, the FASB issued SFAS No. 141 "Business
STANDARDS Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." These standards require that all business combinations
be accounted for using the purchase method and that goodwill
and intangible assets with indefinite useful lives should not
be amortized but should be tested for impairment at least
annually, and they provide guidelines for new disclosure
requirements. These standards outline the criteria for initial
recognition and measurement of intangibles, assignment of
assets and liabilities including goodwill to reporting units
and goodwill impairment testing. The company has adopted the
provisions of SFAS Nos. 141 and 142 for all business
combinations after June 30, 2001.
Effective May 2, 2002, the company will adopt SFAS No. 142
for existing goodwill and other intangible assets. The company
is currently evaluating the impact of adopting SFAS No. 142 on
the consolidated financial statements. The reassessment of
intangible assets, including the ongoing impact of
amortization, must be completed during the first quarter of
Fiscal 2003. The assignment of goodwill to reporting units,
along with completion of the first step of the transitional
goodwill impairment tests, must be completed during the first
six months of Fiscal 2003. Total amortization of goodwill and
other intangible assets was $61.1 million and $35.8 million in
Fiscal 2002, $51.6 million and $35.0 million in Fiscal 2001 and
$50.8 million and $32.8 million in Fiscal 2000, respectively.
The company estimates that the adoption of SFAS No. 142 will
benefit earnings per share by approximately $0.17 in Fiscal
2003.
In Fiscal 2001, the company changed its method of accounting
for revenue recognition in accordance with Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements." Under the new accounting method, adopted
retroactive to May 4, 2000, the company recognizes revenue upon
the passage of title, ownership and risk of loss to the
customer. The cumulative effect adjustment of $66.2 million in
revenue ($16.5 million in net income) as of May 4, 2000, was
recognized during the first quarter of Fiscal 2001.
In June 2001, the FASB approved SFAS 143, "Accounting for
Asset Retirement Obligations." SFAS 143 addresses accounting
for legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction,
development and the normal operation of a long-lived asset,
except for certain obligations of lessees. This standard is
effective for fiscal years beginning after June 15, 2002. The
company does not expect that the adoption of this standard will
have a significant impact on the consolidated financial
statements.
In October 2001, the FASB issued SFAS No. 144 "Accounting for
Impairment or Disposal of Long-lived Assets." SFAS No. 144
clarifies and revises existing guidance on accounting for
impairment of plant, property, and equipment, amortized
intangibles, and other long-lived assets not specifically
addressed in other accounting literature. This standard will be
effective for the company beginning in Fiscal 2003. The company
does not expect the adoption of this standard to have a
significant impact on the consolidated financial statements.
(45)
DISCUSSION OF In the ordinary course of business, the company has made a
SIGNIFICANT number of estimates and assumptions relating to the reporting
ACCOUNTING of results of operations and financial condition in the
ESTIMATES preparation of its financial statements in conformity with
accounting principles generally accepted in the United States
of America. Actual results could differ significantly from
those estimates under different assumptions and conditions. The
company believes that the following discussion addresses the
company's most critical accounting policies, which are those
that are most important to the portrayal of the company's
financial condition and results and require management's most
difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that
are inherently uncertain.
Marketing Costs: In order to support the company's products,
the company offers various marketing programs to its customers
and/or consumers which reimburse them for a portion or all of
their promotional activities related to the company's products.
The company regularly reviews and revises, when deemed
necessary, estimates of costs to the company for these
marketing programs based on estimates of what has been earned
by our customers and/or consumers. Actual costs incurred by the
company may differ significantly if factors such as the level
and success of the programs or other conditions differ from
expectations.
Inventories: Inventories are stated at the lower of cost or
market value. Cost is principally determined by the average
cost method. The company records adjustments to the carrying
value of inventory based upon its forecasted plans to sell its
inventories. The physical condition (e.g., age and quality) of
the inventories is also considered in establishing its
valuation. These adjustments are estimates, which could vary
significantly, either favorably or unfavorably, from actual
requirements if future economic conditions, customer inventory
levels or competitive conditions differ from our expectations.
Property, Plant and Equipment: Land, buildings and equipment
are recorded at cost and are depreciated on a straight-line
method over the estimated useful lives of such assets. Changes
in circumstances such as technological advances, changes to the
company's business model or changes in the company's capital
strategy could result in the actual useful lives differing from
the company's estimates. In those cases where the company
determines that the useful life of buildings and equipment
should be shortened, the company would depreciate the net book
value in excess of the salvage value over its revised remaining
useful life, thereby increasing depreciation expense. Factors
such as changes in the planned use of fixtures or software or
closing of facilities could result in shortened useful lives.
Long-Lived Assets: Long-lived assets, including fixed assets
and intangibles, are evaluated periodically by the company for
impairment whenever events or changes in circumstances indicate
that the carrying amount of any such assets may not be
recoverable. If the sum of the undiscounted cash flows is less
than the carrying value, the company recognizes an impairment
loss, measured as the amount by which the carrying value
exceeds the fair value of the asset. The estimate of cash flow
is based upon, among other things, certain assumptions about
expected future operating performance. The company's estimates
of undiscounted cash flow may differ from actual cash flow due
to, among other things, technological changes, economic
conditions, changes to its business model or changes in its
operating performance.
Pension Benefits: The company sponsors pension and other
retirement plans in various forms covering substantially all
employees who meet eligibility requirements. Several
statistical and other factors which attempt to anticipate
future events are used in calculating the expense and liability
related to the plans. These factors include assumptions about
the discount rate, expected return on plan assets and rate of
future compensation increases as determined by the company,
within certain guidelines. In addition, the company's actuarial
consultants
(46)
also use subjective factors such as withdrawal and mortality
rates to estimate these factors. The actuarial assumptions used
by the company may differ materially from actual results due to
changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant
impact to the amount of pension expense recorded by the
company.
INFLATION In general, costs are affected by inflation and the effects
of inflation may be experienced by the company in future
periods. Management believes, however, that such effects have
not been material to the company during the past three years
in the United States or foreign non-hyperinflationary
countries. The company operates in certain countries around
the world, such as Argentina, Mexico, Venezuela and Zimbabwe,
that have experienced hyperinflation. In hyperinflationary
foreign countries, the company attempts to mitigate the
effects of inflation by increasing prices in line with
inflation, where possible, and efficiently managing its
working capital levels.
STOCK MARKET H.J. Heinz Company common stock is traded principally on
INFORMATION The New York Stock Exchange and the Pacific Exchange, under
the symbol HNZ. The number of shareholders of record of the
company's common stock as of June 30, 2002 approximated 54,100.
The closing price of the common stock on the New York Stock
Exchange composite listing on May 1, 2002 was $42.80.
Stock price information for common stock by quarter follows:
Stock Price Range
--------------------------------------
High Low
- ----------------------------------------------------------------------------
2002
First $ 43.37 $ 39.01
Second 46.96 39.74
Third 43.30 38.12
Fourth 42.99 40.00
- ----------------------------------------------------------------------------
2001
First $ 45.50 $ 36.94
Second 43.13 35.44
Third 47.63 41.75
Fourth 45.09 37.72
- ----------------------------------------------------------------------------
CAUTIONARY The Private Securities Litigation Reform Act of 1995 (the
STATEMENT "Act") provides a safe harbor for forward-looking statements
RELEVANT TO made by or on behalf of the company. The company and its
FORWARD-LOOKING representatives may from time to time make written or oral
STATEMENTS forward-looking statements, including statements contained in
the company's filings with the Securities and Exchange
Commission and in its reports to shareholders. These forward-
looking statements are based on management's views and
assumptions of future events and financial performance. The
words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "should," "estimate," "project,"
"target," "goal" or similar expressions identify
"forward-looking statements" within the meaning of the Act.
In order to comply with the terms of the safe harbor, the
company notes that a variety of factors could cause the
company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in
the company's forward-looking statements. These forward-
looking statements are uncertain. The risks and uncertainties
that may affect operations, financial performance and other
activities, some of which may be beyond the control of the
company, include the following:
- Changes in laws and regulations, including changes in food
and drug laws, accounting standards, taxation requirements
(including tax rate changes, new tax laws and revised tax law
interpretations) and environmental laws in domestic or
foreign jurisdictions;
- Competitive product and pricing pressures and the company's
ability to gain or maintain share of sales in the global
market as a result of actions by competitors and others;
(47)
- Fluctuations in the cost and availability of raw materials
and the ability to maintain favorable supplier arrangements
and relationships;
- The impact of higher energy costs and other factors on the
cost of producing, transporting and distributing the
company's products;
- The company's ability to generate sufficient cash flows to
support capital expenditures, share repurchase programs, debt
repayment and general operating activities;
- The inherent risks in the marketplace associated with new
product or packaging introductions, including uncertainties
about trade and consumer acceptance;
- The company's ability to achieve sales and earnings
forecasts, which are based on assumptions about sales volume,
product mix and other items;
- The company's ability to integrate acquisitions and joint
ventures into its existing operations, the availability of
new acquisition and joint venture opportunities and the
success of divestitures and other business combinations;
- The company's ability to achieve its cost savings objectives,
including any restructuring programs and its working capital
initiative;
- The impact of unforeseen economic and political changes in
international markets where the company competes, such as
currency exchange rates (notably with respect to the euro and
the pound sterling), inflation rates, recession, foreign
ownership restrictions and other external factors over which
the company has no control;
- Interest rate fluctuations and other capital market
conditions;
- The effectiveness of the company's advertising, marketing
and promotional programs;
- Weather conditions, which could impact demand for company
products and the supply and cost of raw materials;
- The impact of e-commerce and e-procurement, supply chain
efficiency and cash flow initiatives;
- The company's ability to maintain its profit margin in the
face of a consolidating retail environment;
- The impact of global industry conditions, including the
effect of the economic downturn in the food industry and the
foodservice business in particular;
- The company's ability to offset the reduction in volume and
revenue resulting from participation in categories
experiencing declining consumption rates;
- With respect to the proposed spin-off and merger between the
company's U.S. and Canadian pet food and pet snacks, U.S.
tuna, U.S. retail private label soup and gravy, College Inn
broths and U.S. infant feeding businesses, and a wholly owned
subsidiary of Del Monte Foods Company ("Del Monte"), the
ability to obtain required third-party consents, regulatory
and Del Monte shareholders' approval, including a private
letter ruling from the Internal Revenue Service, and the
success of business integration in a timely and
cost-effective manner; and
- With respect to future dividends on company stock, meeting
certain legal requirements at the time of declaration.
The foregoing list of important factors is not exclusive. The
forward-looking statements are and will be based on
management's then current views and assumptions regarding
future events and operating performance and speak only as of
their dates. The company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
(48)
CONSOLIDATED STATEMENTS OF INCOME
H.J. Heinz Company and Subsidiaries
- ------------------------------------------------------------------------------
Fiscal year ended May 1, 2002 May 2, 2001 May 3, 2000
- ------------------------------------------------------------------------------
(Dollars in thousands, except
per share amounts) (52 Weeks) (52 Weeks) (53 Weeks)
- ------------------------------------------------------------------------------
Sales $ 9,431,000 $ 8,820,884 $ 8,939,416
Cost of products sold 6,093,827 5,883,618 5,788,525
- ------------------------------------------------------------------------------
Gross profit 3,337,173 2,937,266 3,150,891
Selling, general and
administrative expenses 1,746,702 1,954,912 1,882,409
Gain on sale of Weight Watchers -- -- 464,617
- ------------------------------------------------------------------------------
Operating income 1,590,471 982,354 1,733,099
Interest income 27,445 22,692 25,330
Interest expense 294,269 332,957 269,748
Other (income)/expense, net 45,057 (969) 25,005
- ------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of
accounting changes 1,278,590 673,058 1,463,676
Provision for income taxes 444,701 178,140 573,123
- ------------------------------------------------------------------------------
Income before cumulative effect
of accounting changes 833,889 494,918 890,553
Cumulative effect of accounting
changes -- (16,906) --
- ------------------------------------------------------------------------------
Net income $ 833,889 $ 478,012 $ 890,553
- ------------------------------------------------------------------------------
PER COMMON SHARE AMOUNTS:
Income before cumulative effect
of accounting changes--diluted $ 2.36 $ 1.41 $ 2.47
Income before cumulative effect
of accounting changes--basic $ 2.38 $ 1.42 $ 2.51
Net income--diluted $ 2.36 $ 1.36 $ 2.47
Net income--basic $ 2.38 $ 1.37 $ 2.51
Cash dividends $ 1.6075 $ 1.545 $ 1.445
- ------------------------------------------------------------------------------
Average common shares
outstanding--diluted 352,871,918 351,041,321 360,095,455
Average common shares
outstanding--basic 349,920,983 347,758,281 355,272,696
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
(49)
CONSOLIDATED BALANCE SHEETS
H.J. Heinz Company and Subsidiaries
- ------------------------------------------------------------------------------
Assets (Dollars in thousands) May 1, 2002 May 2, 2001
- ------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 206,921 $ 138,849
Short-term investments, at cost which
approximates market -- 5,371
Receivables (net of allowances: 2002-
$19,349 and 2001-$15,075) 1,449,147 1,383,550
Inventories:
Finished goods and work-in-process 1,193,989 1,095,954
Packaging material and ingredients 333,565 312,007
- ------------------------------------------------------------------------------
1,527,554 1,407,961
- ------------------------------------------------------------------------------
Prepaid expenses 172,460 157,801
Other current assets 17,484 23,282
- ------------------------------------------------------------------------------
Total current assets 3,373,566 3,116,814
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 63,075 54,774
Buildings and leasehold improvements 880,490 878,028
Equipment, furniture and other 2,929,082 2,947,978
- ------------------------------------------------------------------------------
3,872,647 3,880,780
Less accumulated depreciation 1,622,573 1,712,400
- ------------------------------------------------------------------------------
Total property, plant and equipment,
net 2,250,074 2,168,380
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OTHER NON-CURRENT ASSETS:
Goodwill (net of amortization: 2002-
$393,972 and 2001-$334,907) 2,528,942 2,077,451
Trademarks (net of amortization: 2002-
$144,884 and 2001-$118,254) 808,884 567,692
Other intangibles (net of amortization:
2002-$160,230 and 2001-$157,678) 152,249 120,749
Other non-current assets 1,164,639 984,064
- ------------------------------------------------------------------------------
Total other non-current assets 4,654,714 3,749,956
- ------------------------------------------------------------------------------
Total assets $ 10,278,354 $ 9,035,150
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
(50)
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
(Dollars in thousands) May 1, 2002 May 2, 2001
- ------------------------------------------------------------------------------
CURRENT LIABILITIES:
Short-term debt $ 178,358 $ 1,555,869
Portion of long-term debt due within
one year 524,287 314,965
Accounts payable 938,483 962,497
Salaries and wages 39,376 54,036
Accrued marketing 164,650 146,138
Accrued restructuring costs 28,589 134,550
Other accrued liabilities 443,321 388,582
Income taxes 192,105 98,460
- ------------------------------------------------------------------------------
Total current liabilities 2,509,169 3,655,097
- ------------------------------------------------------------------------------
LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt 4,642,968 3,014,853
Deferred income taxes 394,935 253,690
Non-pension postretirement benefits 208,509 207,104
Minority interest 440,648 183,922
Other 363,509 346,757
- ------------------------------------------------------------------------------
Total long-term debt and other
liabilities 6,050,569 4,006,326
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Capital stock:
Third cumulative preferred, $1.70
first series, $10 par value 110 126
Common stock, 431,096,485 shares
issued, $0.25 par value 107,774 107,774
- ------------------------------------------------------------------------------
107,884 107,900
Additional capital 348,605 331,633
Retained earnings 4,968,535 4,697,213
- ------------------------------------------------------------------------------
5,425,024 5,136,746
Less:
Treasury shares, at cost (80,192,280
shares at May 1, 2002 and
82,147,565 shares at May 2, 2001) 2,893,198 2,922,630
Unearned compensation relating to the
ESOP 230 3,101
Accumulated other comprehensive loss 812,980 837,288
- ------------------------------------------------------------------------------
Total shareholders' equity 1,718,616 1,373,727
Total liabilities and shareholders'
equity $ 10,278,354 $ 9,035,150
- ------------------------------------------------------------------------------
(51)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
H.J. Heinz Company and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
Comprehensive -------------------- ---------------------
(Amounts in thousands, except per share amounts) Income Shares Dollars Shares Dollars
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at April 28, 1999 17 $ 173 431,096 $107,774
Comprehensive income--2000:
Net income--2000 $ 890,553
Other comprehensive income (loss), net of tax:
Minimum pension liability, net of $10,894 tax expense 18,548
Unrealized translation adjustments (154,962)
Realized translation reclassification adjustment 7,246
----------------
Comprehensive income $ 761,385
----------------
Cash dividends:
Preferred @ $1.70 per share
Common @ $1.445 per share
Shares reacquired
Conversion of preferred into common stock (3) (34)
Stock options exercised, net of shares tendered for payment
Unearned compensation relating to the ESOP
Other, net*
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 3, 2000 14 139 431,096 107,774
Comprehensive income--2001:
Net income--2001 $ 478,012
Other comprehensive income (loss), net of tax:
Minimum pension liability, net of $6,995 tax benefit (11,909)
Unrealized translation adjustments (179,476)
Cumulative effect of change in accounting for derivatives (64)
Net change in fair value of cash flow hedges (1,669)
Net hedging losses reclassified into earnings 595
----------------
Comprehensive income $ 285,489
----------------
Cash dividends:
Preferred @ $1.70 per share
Common @ $1.545 per share
Shares reacquired
Conversion of preferred into common stock (1) (13)
Stock options exercised, net of shares tendered for payment
Unearned compensation relating to the ESOP
Other, net*
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 2, 2001 13 126 431,096 107,774
Comprehensive income--2002:
Net income--2002 $ 833,889
Other comprehensive income (loss), net of tax:
Minimum pension liability, net of $3,782 tax benefit (6,440)
Unrealized translation adjustments 30,824
Net change in fair value of cash flow hedges (3,270)
Net hedging losses reclassified into earnings 3,194
----------------
Comprehensive income $ 858,197
----------------
Cash dividends:
Preferred @ $1.70 per share
Common @ $1.6075 per share
Shares reacquired
Conversion of preferred into common stock (2) (16)
Stock options exercised, net of shares tendered for payment
Unearned compensation relating to the ESOP
Other, net*
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at May 1, 2002 11 $ 110 431,096 $ 107,774
- -----------------------------------------------------------------------------------------------------------------------------------
Authorized Shares--May 1, 2002 11 600,000
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
* Includes activity of the Global Stock Purchase Plan.
(52)
- -----------------------------------------------------------------------------------------------------------------------------------
Unearned Accumulated
Treasury Stock Compensation Other Total
Additional Retained ------------------------------ Relating to Comprehensive Shareholders'
Capital Earnings Shares Dollars the ESOP Loss Equity
- -----------------------------------------------------------------------------------------------------------------------------------
$ 277,652 $ 4,379,742 (71,969) $ (2,435,012) $ (11,728) $ (515,597) $ 1,803,004
890,553 890,553
(129,168) (129,168)
(26) (26)
(513,756) (513,756)
(12,766) (511,480) (511,480)
(1,136) 46 1,170 --
26,830* 833 19,681 46,511
4,076 4,076
972 203 5,170 6,142
- -----------------------------------------------------------------------------------------------------------------------------------
304,318 4,756,513 (83,653) (2,920,471) (7,652) (644,765) 1,595,856
478,012 478,012
(192,523) (192,523)
(22) (22)
(537,290) (537,290)
(2,325) (90,134) (90,134)
(446) 18 459 --
25,787* 3,389 76,737 102,524
4,551 4,551
1,974 423 10,779 12,753
- -----------------------------------------------------------------------------------------------------------------------------------
331,633 4,697,213 (82,148) (2,922,630) (3,101) (837,288) 1,373,727
833,889 833,889
24,308 24,308
(20) (20)
(562,547) (562,547)
(1,000) (45,363) (45,363)
(540) 22 556 --
13,660* 2,556 64,620 78,280
2,871 2,871
3,852 378 9,619 13,471
- -----------------------------------------------------------------------------------------------------------------------------------
$ 348,605 $ 4,968,535 (80,192) $ (2,893,198) $ (230) $ (812,980)** $ 1,718,616
- -----------------------------------------------------------------------------------------------------------------------------------
*Includes income tax benefit resulting from exercised stock options.
**Comprised of unrealized translation adjustment of $(775,556), minimum pension
liability of $(36,210) and deferred net losses on derivative financial
instruments $(1,214).
(53)
CONSOLIDATED STATEMENTS OF CASH FLOWS
H.J. Heinz Company and Subsidiaries
- ------------------------------------------------------------------------------------------------------------
Fiscal year ended May 1, 2002 May 2, 2001 May 3, 2000
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands) (52 Weeks) (52 Weeks) (53 Weeks)
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 833,889 $ 478,012 $ 890,553
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 207,131 213,968 219,255
Amortization 94,566 85,198 87,228
Deferred tax provision 120,296 67,468 28,331
Loss on sale of The All American Gourmet
business -- 94,600 --
Gain on sale of Weight Watchers -- -- (464,617)
Cumulative effect of changes in
accounting principle -- 16,906 --
Benefit from tax planning and new tax
legislation in Italy -- (93,150) --
Provision for restructuring 17,886 587,234 392,720
Other items, net (126,977) (79,415) 48,905
Changes in current assets and
liabilities, excluding effects of
acquisitions and divestitures:
Receivables (94,995) (119,433) (123,994)
Inventories (89,918) 209,428 (217,127)
Prepaid expenses and other current
assets (23,158) (11,017) (23,296)
Accounts payable (34,368) (69,754) 111,976
Accrued liabilities (99,703) (553,268) (372,999)
Income taxes 86,773 (320,432) (33,860)
- -----------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 891,422 506,345 543,075
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (213,387) (411,299) (452,444)
Proceeds from disposals of property, plant
and equipment 18,966 257,049 45,472
Acquisitions, net of cash acquired (834,838) (672,958) (394,418)
Proceeds from divestitures 32,859 151,112 726,493
Purchases of short-term investments -- (1,484,201) (1,175,538)
Sales and maturities of short-term
investments 17,314 1,493,091 1,119,809
Investment in The Hain Celestial Group,
Inc. -- (79,743) (99,764)
Other items, net (15,209) (27,210) (38,284)
- -----------------------------------------------------------------------------------------------------------------
Cash used for investing activities (994,295) (774,159) (268,674)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 2,009,111 1,536,744 834,328
Payments on long-term debt (329,178) (48,321) (627,498)
(Payments on) proceeds from commercial
paper and short-term borrowings, net (1,270,984) (680,858) 532,305
Proceeds from issuance of preferred stock
of subsidiary 325,000 -- --
Dividends (562,567) (537,312) (513,782)
Purchase of treasury stock (45,363) (90,134) (511,480)
Exercise of stock options 63,731 93,901 20,027
Other items, net (8,491) 9,077 6,937
- -----------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing
activities 181,259 283,097 (259,163)
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (10,314) (14,051) 6,397
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 68,072 1,232 21,635
Cash and cash equivalents at beginning of
year 138,849 137,617 115,982
Cash and cash equivalents at end of year $ 206,921 $ 138,849 $ 137,617
- -----------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
(54)
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 May 1, 2002, May
2, 2001 and May 3, 2000.
Principles of Consolidation: The consolidated financial
statements include the accounts of the company and its
subsidiaries. All intercompany accounts and transactions were
eliminated. Investments owned less than 50%, where significant
influence exists, are accounted for on an equity basis. Certain
prior-year amounts have been reclassified in order to conform
with the Fiscal 2002 presentation.
On May 3, 2001, the company reorganized its U.S. corporate
structure by consolidating its U.S. business into two major
entities: H.J. Heinz Finance Company ("Heinz Finance")
manages treasury functions and H.J. Heinz Company, L.P.
("Heinz LP") owns or leases the operating assets and manages
the U.S. business. Heinz Finance assumed primary liability
for payment of the company's outstanding senior unsecured
debt and accrued interest by becoming a co-obligor with the
company. All the assets, liabilities, results of operations
and cash flows of Heinz Finance and Heinz LP are included in
the company's consolidated financial statements.
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 carrying value
of intangibles is evaluated periodically in relation to the
operating performance
(55)
and future undiscounted cash flows of the underlying
businesses. Adjustments are made if the sum of expected future
net cash flows is less than book value. See Recently Adopted
Accounting Standards regarding the accounting for goodwill and
intangibles amortization effective May 2, 2002.
Revenue Recognition: The company recognizes revenue when
title, ownership and risk of loss pass to the customer. See
Recently Adopted Accounting Standards for additional
information.
Advertising Expenses: Advertising costs are 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.
The cash flows related to financial instruments are
classified in the Consolidated Statements of Cash Flows in a
manner consistent with those of the transactions being hedged.
Recently Adopted Accounting Standards: In September 2000, the
FASB Emerging Issues Task Force (the "EITF") issued new
guidelines entitled "Accounting for Consideration from a Vendor
to a Retailer in Connection with the Purchase or Promotion of
the Vendor's Products." In addition, during May 2000, the EITF
issued new guidelines entitled "Accounting for Certain Sales
Incentives." Both of these issues provide guidance primarily on
income statement classification of consideration from a vendor
to a purchaser of the vendor's products, including both
customers and consumers. Generally, cash consideration is to be
classified as a reduction of revenue, unless specific criteria
are met regarding goods or services that the vendor may receive
in return for this consideration.
In the fourth quarter of Fiscal 2002, the company adopted
these new EITF guidelines. The adoption of these EITF
guidelines resulted in a reduction of revenues of approximately
$693 million in Fiscal 2002, $610 million in Fiscal 2001 and
$469 million in Fiscal 2000. Selling, general and
administrative expenses ("SG&A") was correspondingly reduced
such that net earnings were not affected. Prior periods
presented have been reclassified to conform with the current
year presentation.
In June 2001, the FASB issued SFAS No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." These standards require that all business combinations
be accounted for using the purchase method and that goodwill
and intangible assets with indefinite useful lives should not
be amortized but should be tested for impairment at least
annually, and they provide guidelines for new disclosure
requirements. These standards outline the criteria for initial
recognition and measurement of intangibles, assignment of
assets and liabilities including goodwill to reporting units
and goodwill impairment testing. The company has adopted the
provisions of SFAS Nos. 141 and 142 for all business
combinations after June 30, 2001.
(56)
Effective May 2, 2002, Heinz will adopt SFAS No. 142 for
existing goodwill and other intangible assets. The company is
currently evaluating the impact of adopting SFAS No. 142 on the
consolidated financial statements. The reassessment of
intangible assets, including the ongoing impact of
amortization, must be completed during the first quarter of
Fiscal 2003. The assignment of goodwill to reporting units,
along with completion of the first step of the transitional
goodwill impairment tests, must be completed during the first
six months of Fiscal 2003. Total amortization of goodwill and
other intangible assets was $61.1 million and $35.8 million in
Fiscal 2002, $51.6 million and $35.0 million in Fiscal 2001 and
$50.8 million and $32.8 million in Fiscal 2000, respectively.
In Fiscal 2001, the company changed its method of accounting
for revenue recognition in accordance with Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." Under the new accounting method, adopted
retroactive to May 4, 2000, Heinz recognizes revenue upon the
passage of title, ownership and risk of loss to the customer.
The cumulative effect of the change on prior years resulted in
a charge to income of $16.5 million (net of income taxes of
$10.2 million), which has been included in net income for the
year ended May 3, 2000. The change did not have a significant
effect on revenues or results of operations for the year ended
May 2, 2001. The pro forma amounts, assuming that the new
revenue recognition method had been applied retroactively to
prior periods, were not materially different from the amounts
shown in the Consolidated Statements of Income for the year
ended May 3, 2000.
Recently Issued Accounting Standards: In June 2001, the FASB
approved SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting for legal
obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and
the normal operation of a long-lived asset, except for certain
obligations of lessees. This standard is effective for fiscal
years beginning after June 15, 2002. The company does not
expect that the adoption of this standard will have a
significant impact on the consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144 "Accounting for
Impairment or Disposal of Long-lived Assets." SFAS No. 144
clarifies and revises existing guidance on accounting for
impairment of plant, property, and equipment, amortized
intangibles, and other long-lived assets not specifically
addressed in other accounting literature. This standard will be
effective for the company beginning in Fiscal 2003. The company
does not expect the adoption of this standard to have a
significant impact on the consolidated 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. There are no significant
contingent payments, options or commitments associated with any
of the acquisitions.
Fiscal 2002: The company acquired the following businesses for
a total of $837.3 million, which was paid primarily in cash,
including obligations to sellers of $2.5 million:
- In July 2001, the company completed the acquisition of Borden
Food Corporation's pasta sauce, dry bouillon and soup
business including such brands as Classico pasta sauces, Aunt
Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's
bouillons and soups.
- In August 2001, the company completed the acquisition of
Delimex Holdings, Inc., a leading maker of frozen Mexican
food products such as taquitos, quesadillas, tamales and rice
bowls.
- In September 2001, the company completed the acquisition of
Anchor Food Products branded retail business, which includes
the retail licensing rights to the T.G.I. Friday's brand of
frozen snacks and appetizers and the Poppers brand of retail
appetizer lines.
- The company also made other smaller acquisitions.
(57)
The preliminary allocations of the purchase price resulted in
goodwill of $581.4 million, which was assigned to the U.S.
Frozen segment ($375.3 million) and the Heinz North America
segment ($206.1 million). Of that amount, $375.3 million is
expected to be deductible for tax purposes. In addition, $192.1
million of intangible assets were acquired, of which $97.2
million was assigned to brands and trademarks that are not
subject to amortization. The remaining $94.9 million of
acquired intangible assets has a weighted-average useful life
of approximately 27 years. The intangible assets that make up
that amount include brands and trademarks of $39.1 million
(38-year weighted-average useful life), licensing agreements of
$45.8 million (20-year weighted-average useful life) and
patents of $10.0 million (18-year weighted-average useful
life).
Fiscal 2001: The company acquired businesses for a total of
$678.4 million, including obligations to sellers of $5.5
million. The allocations of the purchase price resulted in
goodwill of $589.8 million and trademarks and other intangible
assets of $14.1 million, which are being amortized on a
straight-line basis over periods not exceeding 40 years.
On February 28, 2001, the company completed the acquisition
of the CSM Food Division of CSM Nederland NV, one of the
leading food companies in the Benelux (Belgium, the
Netherlands, Luxembourg) region which includes the following
brands: Honig brand of soups, sauces and pasta meals; HAK brand
vegetables packed in glass; KDR (Koninklijke de Ruijter) brand
sport drinks and fortified juices; and KDR brand spreads and
sprinkles, which are traditional toppings for breakfast breads
and toasts.
On March 1, 2001, the company acquired two privately held
U.S. foodservice companies: Cornucopia, Inc. of Irvine,
California, and Central Commissary, Inc. of Phoenix, Arizona.
Both companies make and market refrigerated and frozen
reciped food products. Also during Fiscal 2001, the company
completed the acquisitions of IDF Holdings, Inc., the parent
of International DiverseFoods Inc., a leading manufacturer of
customized dressings, sauces, mixes and condiments for
restaurant chains and foodservice distributors, and Alden
Merrell Corporation, a manufacturer of high-quality, premium-
priced frozen desserts for casual dining restaurants and
foodservice distributors. The company also made other smaller
acquisitions.
Fiscal 2000: The company acquired businesses for a total of
$404.9 million, including obligations to sellers of $10.4
million. The allocations of the purchase price resulted in
goodwill of $255.2 million and trademarks and other intangible
assets of $39.7 million, which are being amortized on a
straight-line basis over periods not exceeding 40 years.
On December 7, 1999, the company completed the acquisition of
United Biscuit's European Frozen and Chilled Division, one of
the leading frozen food businesses in the U.K. and Ireland,
which produces frozen desserts and vegetarian/meat- free
products, frozen pizzas, frozen value-added potato products and
fresh sandwiches. Also during Fiscal 2000, the company
completed the acquisition of Quality Chef Foods, a leading
manufacturer of frozen heat-and-serve soups, entrees and
sauces; Yoshida, a line of Asian sauces marketed in the U.S.;
Thermo Pac, Inc., a U.S. leader in single-serve condiments; and
obtained a 51% share of Remedia Limited, Israel's leading
company in infant nutrition. The company also made other
smaller acquisitions during the year.
- ------------------------------------------------------------------------------
3. DIVESTITURES On February 9, 2001, the company announced it had sold The All
American Gourmet business and its Budget Gourmet and Budget
Gourmet Value Classics brands of frozen entrees for $55.0
million. The transaction resulted in a pretax loss of $94.6
million ($0.19 per share). The All American Gourmet business
contributed approximately $141.4 million in sales for Fiscal
2000. During Fiscal 2001, the company also made other smaller
divestitures.
On September 29, 1999, the company completed the sale of the
Weight Watchers classroom business for $735 million, which
included $25 million of preferred stock. The transaction
resulted in a pretax gain of $464.6 million ($0.72 per share).
The company used a portion of the proceeds to retain a 6%
equity interest in Weight Watchers International, Inc.
(58)
The sale did not include Weight Watchers Smart Ones frozen
meals, desserts and breakfast items, Weight Watchers from Heinz
in the U.K. and a broad range of other Weight Watchers branded
foods in Heinz's global core product categories. During Fiscal
2000, the company also made other smaller divestitures.
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 Streamline
CHARGES In the fourth quarter of Fiscal 2001, the company announced a
restructuring initiative named "Streamline" which included:
- A worldwide organizational restructuring aimed at reducing
overhead costs;
- The closure of the company's tuna operations in Puerto
Rico;
- The consolidation of the company's North American canned pet
food production to Bloomsburg, Pennsylvania (which results in
ceasing canned pet food production at the company's Terminal
Island, California facility); and
- The divestiture of the company's U.S. fleet of fishing
boats and related equipment.
Management estimates that these actions will impact
approximately 2,800 employees.
During the first quarter of Fiscal 2002, the company recognized
restructuring charges and implementation costs totaling $16.1
million pretax ($0.04 per share). In the fourth quarter of
Fiscal 2002, the company recorded a net charge of $1.7 million
pretax to reflect revisions in original cost estimates. This
charge was primarily the result of higher than expected asset
write-downs (primarily related to the Puerto Rican business)
and severance costs (primarily in Europe and the U.S.), offset
by lower than expected contract exit costs associated with the
company's Terminal Island, California facility and the Puerto
Rican facility. Total Fiscal 2002 pretax charges of $8.7
million were classified as cost of products sold and $9.1
million as SG&A.
During Fiscal 2001, the company recognized restructuring
charges and implementation costs totaling $298.8 million pretax
($0.66 per share). Pretax charges of $192.5 million were
classified as cost of products sold and $106.2 million as SG&A.
The major components of the restructuring charge and
implementation costs and the remaining accrual balance as of
May 1, 2002 and May 2, 2001 were as follows:
Non-Cash Employee
Asset Termination and Accrued Implementation
(Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total
- -----------------------------------------------------------------------------------------------------------------------------------
Restructuring and implementation costs
--2001 $ 110.5 $ 110.3 $ 55.4 $ 22.6 $ 298.8
Amounts utilized--2001 (110.5) (39.5) (4.7) (22.6) (177.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs--May 2,
2001 -- 70.8 50.7 -- 121.5
Restructuring and implementation costs
--First Quarter 2002 -- 5.7 -- 10.4 16.1
Revisions to accruals and asset write-
downs--Fourth Quarter 2002 5.8 3.6 (7.7) -- 1.7
Amounts utilized--2002 (5.8) (66.6) (32.4) (10.4) (115.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs--May 1,
2002 $ -- $ 13.5 $ 10.6 $ -- $ 24.1
- -----------------------------------------------------------------------------------------------------------------------------------
During Fiscal 2002, the company utilized $99.0 million of
severance and exit cost accruals, principally for the closure
of the company's tuna operations in Puerto Rico, ceasing canned
pet food production in its Terminal Island, California facility
and its global overhead reduction plan, primarily in Europe and
North America.
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 its tuna facility in Puerto Rico,
consolidate its canned pet food operations and divest its U.S.
fleet of fishing boats. Non-cash asset write-downs totaled
$116.3 million and related to property, plant and equipment
($98.3 million) and current assets ($18.0 million). Long-term
asset write-downs were based
(59)
on third-party appraisals, contracted sales prices or
management's estimate of salvage value. Current asset
write-downs included inventory and packaging material, prepaids
and other current assets and were determined based on
management's estimate of net realizable value.
Employee termination and severance costs 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 related to the approved
projects are also included as a component of total severance
costs ($37.3 million).
Exit costs are primarily contractual obligations incurred as
a result of the company's decision to exit these facilities.
Implementation costs were recognized as incurred in Fiscal
2002 ($10.4 million pretax) and Fiscal 2001 ($22.6 million
pretax) and consist of incremental costs directly related to
the implementation of the Streamline initiative. These include
cost premiums related to production transfers, idle facility
costs, consulting costs and relocation costs.
In Fiscal 2001, the company completed the closure of its tuna
operations in Puerto Rico, ceased production of canned pet food
in the company's Terminal Island, California facility and sold
its U.S. fleet of fishing boats and related equipment. In
Fiscal 2002, the company continued, and substantially
completed, its global overhead reduction plan. To date, these
actions resulted in a net reduction of the company's workforce
of approximately 2,600 employees.
Operation Excel
In Fiscal 1999, the company announced a growth and
restructuring initiative named "Operation Excel." This
initiative was a multi-year, multi-faceted program which
established manufacturing centers of excellence, focused the
product portfolio, realigned the company's management teams and
invested in growth initiatives.
The company established manufacturing centers of excellence
which resulted in significant changes to its manufacturing
footprint. The company completed the following initiatives:
closed the Harlesden factory in London, England and focused the
Kitt Green factory in Wigan, England on canned beans, soups and
pasta production and focused the Elst factory in the
Netherlands on tomato ketchup and sauces; downsized the Puerto
Rico tuna processing facility and focused this facility on
lower volume/higher margin products; focused the Pittsburgh,
Pennsylvania factory on soup and baby food production and
shifted other production to existing facilities; consolidated
manufacturing capacity in the Asia/ Pacific region; closed the
Zabreh, Czech Republic factory and disposed of the Czech dairy
business and transferred the infant formula business to the
Kendal, England factory; downsized the Pocatello, Idaho factory
by shifting Bagel Bites production to the Ft. Myers, Florida
factory, and shifted certain Smart Ones entree production to
the Massillon, Ohio factory; closed the Redditch, England
factory and shifted production to the Telford, England factory
and the Turnhout factory in Belgium; closed the El Paso, Texas
pet treat facility and transferred production to the Topeka,
Kansas factory and to co-packers; and disposed of the
Bloomsburg, Pennsylvania frozen pasta factory.
As part of Operation Excel, the company focused its portfolio
of product lines on 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 was the sale of the Weight Watchers classroom
business in Fiscal 2000. Seven other smaller businesses, which
had combined annual revenues of approximately $80 million, also
have been disposed.
Realigning the company's management teams provided processing
and product expertise across the regions of North America,
Europe and Asia/Pacific. Specifically, Operation Excel:
established a single U.S. frozen food headquarters, resulting
in the closure of the company's Ore-Ida head office in Boise,
Idaho; consolidated many European administrative support
functions; established a single North American Grocery &
Foodservice headquarters in Pittsburgh, Pennsylvania, resulting
in the relocation of the company's domestic seafood and pet
food headquarters from Newport, Kentucky; and established two
Asia/Pacific management teams with headquarters in Melbourne
and Singapore.
(60)
The company has substantially completed Operation Excel.
During Fiscal 2002, the company utilized approximately $9
million of severance and exit accruals. The utilization of the
accruals related principally to lease obligations and employee
terminations.
During Fiscal 2001, the company recognized restructuring
charges of $55.7 million pretax, or $0.10 per share. These
charges were primarily associated with exiting the company's
domestic can making operations, exiting a tuna processing
facility in Ecuador, and higher than originally expected
severance costs associated with creating the single North
American Grocery & Foodservice headquarters in Pittsburgh,
Pennsylvania. This charge was recorded in cost of products sold
($44.8 million) and SG&A ($10.8 million). This charge was
offset by the reversals of unutilized Operation Excel accruals
and asset write-downs of $78.8 million pretax, or $0.17 per
share. These reversals were recorded in cost of products sold
($46.3 million) and SG&A ($32.5 million) and were primarily the
result of lower than expected lease termination costs related
to exiting the company's fitness business, revisions in
estimates of fair values of assets which were disposed of as
part of Operation Excel, the company's decision not to exit
certain U.S. warehouses due to higher than expected volume
growth, and the company's decision not to transfer certain
European baby food production. Implementation costs of $311.6
million pretax, or $0.59 per share, were also recognized in
Fiscal 2001. These costs were classified as costs of products
sold ($146.4 million) and SG&A ($165.1 million).
During Fiscal 2000, the company recognized restructuring
charges of $194.5 million pretax, or $0.37 per share. Pretax
charges of $107.7 million were classified as cost of products
sold and $86.8 million as SG&A. Also during Fiscal 2000, the
company recorded a reversal of $18.2 million pretax ($0.04 per
share) of Fiscal 1999 restructuring accruals and asset
write-downs, primarily for the closure of the West Chester,
Pennsylvania facility, which remains in operation as a result
of the sale of the Bloomsburg frozen pasta facility in Fiscal
2000. Implementation costs of $216.5 million pretax ($0.41 per
share) were classified as costs of products sold ($79.2
million) and SG&A ($137.3 million).
During Fiscal 1999, the company recognized restructuring
charges and implementation costs totaling $552.8 million pretax
($1.11 per share). Pretax charges of $396.4 million were
classified as cost of products sold and $156.4 million as SG&A.
Implementation costs were recognized as incurred and
consisted of incremental costs directly related to the
implementation of Operation Excel, including consulting fees,
employee training and relocation costs, unaccruable severance
costs associated with terminated employees, equipment
relocation costs and commissioning costs.
The major components of the restructuring charges and
implementation costs and the remaining accrual balances as of
May 1, 2002, May 2, 2001 and May 3, 2000 were as follows:
Non-Cash Employee
Asset Termination and Accrued Implementation
(Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs--April 28,
1999 $ -- $ 92.1 $ 35.5 $ -- $ 127.6
Restructuring and implementation costs
--2000 78.1 85.8 30.5 216.5 410.9
Accrual reversal--2000 (16.5) (1.3) (0.4) -- (18.2)
Amounts utilized--2000 (61.6) (86.3) (30.7) (216.5) (395.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs--May 3,
2000 -- 90.3 34.9 -- 125.2
Restructuring and implementation costs
--2001 44.4 3.0 8.3 311.6 367.3
Accrual reversal--2001 (32.2) (28.3) (18.3) -- (78.8)
Amounts utilized--2001 (12.2) (60.1) (16.7) (311.6) (400.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs--May 2,
2001 -- 4.9 8.2 -- 13.1
Amounts utilized--2002 -- (4.9) (3.7) -- (8.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs--May 1,
2002 $ -- $ -- $ 4.5 $ -- $ 4.5
- -----------------------------------------------------------------------------------------------------------------------------------
(61)
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. Net
non-cash asset write-downs totaled $12.2 million in Fiscal 2001
and related to property, plant and equipment ($5.6 million net
reversal of previous asset write-downs), goodwill and other
intangibles ($11.6 million net restructuring charge) and other
current assets ($6.3 million net restructuring charge). In
Fiscal 2000, net non-cash asset write-downs totaled $61.6
million and related to property, plant and equipment ($48.7
million) and current assets ($12.9 million). In Fiscal 1999,
non-cash asset write-downs totaled $294.9 million and consisted
of property, plant and equipment ($210.9 million), goodwill and
other intangibles ($49.6 million) and current assets ($34.5
million). Long-term asset 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 was
approximately $5 million at May 2, 2001, $30 million at May 3,
2000 and $50 million at April 28, 1999. These assets were sold
or removed from service by the end of Fiscal 2001. The results
of operations, related to these assets, including the effect of
reduced depreciation were not material. Current asset 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
related to the projects are also included as a component of
total severance costs ($27.8 million and $60.5 million in
Fiscal 2000 and Fiscal 1999, respectively).
Exit costs are primarily related to contract and lease
termination costs ($42.7 million of the total $65.5 million net
exit costs).
The company has closed or exited all of the 21 factories or
businesses that were scheduled for closure or divestiture. In
addition, the company also exited its domestic can making
operations and a tuna processing facility in Ecuador. Operation
Excel impacted approximately 8,500 employees with a net
reduction in the workforce of approximately 7,100 after
expansion of certain facilities. The exit of the company's
domestic can making operations and its tuna processing facility
in Ecuador resulted in a reduction of the company's workforce
of approximately 2,500 employees. During Fiscal 2002, Fiscal
2001, Fiscal 2000 and Fiscal 1999, the company's workforce had
a net reduction of approximately 200 employees, 3,700
employees, 3,000 employees and 200 employees, respectively.
- ------------------------------------------------------------------------------
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) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Current:
U.S. federal and U.S. possessions $ 153,513 $ 79,430 $ 318,873
State 8,532 (15,699) 45,935
Foreign 162,360 46,941 179,984
- -------------------------------------------------------------------------------------------------------------
324,405 110,672 544,792
- -------------------------------------------------------------------------------------------------------------
Deferred:
U.S. federal and U.S. possessions 67,738 28,591 71,602
State 2,839 3,279 (1,871)
Foreign 49,719 35,598 (41,400)
- -------------------------------------------------------------------------------------------------------------
120,296 67,468 28,331
- -------------------------------------------------------------------------------------------------------------
Total tax provision $ 444,701 $ 178,140 $ 573,123
- -------------------------------------------------------------------------------------------------------------
The Fiscal 2001 effective tax rate was favorably impacted by
the recognition of a tax benefit of $93.2 million related to
new tax legislation enacted in Italy. The Fiscal 2000 effective
tax rate was unfavorably impacted by the excess of basis in
assets for financial reporting
(62)
over tax basis of assets included in the Weight Watchers sale
and by gains in higher tax rate states related to the sale. Tax
expense related to the pretax gain of $464.6 million was $204.9
million. The Fiscal 2001 and 2000 effective tax rates were
unfavorably impacted by restructuring and related costs
expected to be realized in lower tax rate jurisdictions and by
non-deductible expenses related to the restructurings. Tax
benefit related to the $17.9 million of Streamline
restructuring and related costs for Fiscal 2002 was $9.0
million. Tax benefit related to the $587.2 million of
Streamline and Operation Excel restructuring and related costs
for Fiscal 2001 was $174.0 million, and tax benefit related to
the $392.7 million of Operation Excel restructuring and related
costs for Fiscal 2000 was $125.3 million. Tax expense resulting
from allocating certain tax benefits directly to additional
capital was $15.1 million in Fiscal 2002, $12.5 million in
Fiscal 2001 and immaterial in Fiscal 2000.
The components of income before income taxes consist of the
following:
(Dollars in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Domestic $ 599,912 $ 116,126 $ 805,464
Foreign 678,678 556,932 658,212
- -------------------------------------------------------------------------------------------------------------
$ 1,278,590 $ 673,058 $ 1,463,676
- -------------------------------------------------------------------------------------------------------------
The differences between the U.S. federal statutory tax rate
and the company's consolidated effective tax rate are as
follows:
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Tax on income of foreign subsidiaries (1.7) (4.0) (1.0)
State income taxes (net of federal
benefit) 0.6 (1.0) 1.9
Earnings repatriation 1.1 6.4 1.7
Foreign losses 0.2 2.0 1.4
Tax on income of U.S. possessions
subsidiaries (0.4) 1.9 (1.4)
Tax law changes -- (13.7) (0.1)
Other -- (0.1) 1.7
- -------------------------------------------------------------------------------------------------------------
Effective tax rate 34.8% 26.5% 39.2%
- -------------------------------------------------------------------------------------------------------------
The deferred tax (assets) and deferred tax liabilities recorded
on the Consolidated Balance Sheets as of May 1, 2002 and May 2,
2001 are as follows:
(Dollars in thousands) 2002 2001
- ----------------------------------------------------------------------------
Depreciation/amortization $ 428,438 $ 411,681
Benefit plans 62,061 52,002
Other 73,900 54,232
- ----------------------------------------------------------------------------
564,399 517,915
- ----------------------------------------------------------------------------
Provision for estimated expenses (15,932) (69,873)
Operating loss carryforwards (38,829) (39,547)
Benefit plans (127,282) (129,722)
Tax credit carryforwards (70,657) (33,889)
Other (118,198) (139,467)
- ----------------------------------------------------------------------------
(370,898) (412,498)
- ----------------------------------------------------------------------------
Valuation allowance 100,358 60,298
- ----------------------------------------------------------------------------
Net deferred tax liabilities $ 293,859 $ 165,715
- ----------------------------------------------------------------------------
At the end of Fiscal 2002, net operating loss carryforwards
totaled $97.3 million. Of that amount, $55.9 million expire
through 2021; the other $41.4 million do not expire. Foreign
tax credit carryforwards total $70.7 million and expire through
2007.
The company's consolidated United States income tax returns
have been audited by the Internal Revenue Service for all years
through 1994.
(63)
Undistributed earnings of foreign subsidiaries considered to
be reinvested permanently amounted to $2.41 billion at May 1,
2002.
The Fiscal 2002 net change in valuation allowance for
deferred tax assets was an increase of $40.1 million, due
principally to additional deferred tax assets related to
foreign tax credit carryforwards.
- ------------------------------------------------------------------------------
6. DEBT Short-term debt, excluding domestic commercial paper,
consisted of bank and other borrowings of $178.4 million and
$211.0 million as of May 1, 2002 and May 2, 2001,
respectively. Total short-term debt, excluding domestic
commercial paper, had a weighted-average interest rate during
Fiscal 2002 of 8.6% and at year-end of 4.7%. The weighted-
average interest rate on short-term debt during Fiscal 2001
was 8.0% and at year-end was 7.0%.
On September 6, 2001, the company, Heinz Finance and a group
of domestic and international banks entered into a $1.50
billion credit agreement which expires in September 2006 and a
$800 million credit agreement which expires in September 2002.
These credit agreements, which support the company's commercial
paper programs and the remarketable securities discussed below,
replaced the $2.30 billion credit agreement that expired on
September 6, 2001. In addition, the company had $676.0 million
of foreign lines of credit available at year-end.
As of May 1, 2002, $119.1 million of domestic commercial
paper is classified as long-term debt due to the long-term
nature of the supporting credit agreement. As of May 2, 2001,
the company had $1.34 billion of domestic commercial paper
outstanding and classified as short-term debt. Aggregate
domestic commercial paper had a weighted-average interest rate
during Fiscal 2002 of 2.9% and at year-end of 2.0%. In Fiscal
2001, the weighted-average rate was 6.3% and at year- end of
4.9%.
Range of Maturity
Long-Term (Dollars in thousands) Interest (Fiscal Year) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
United States Dollars:
Commercial paper Floating 2007 $ 119,117 $ --
Senior unsecured notes and debentures 6.00-7.00% 2003-2032 2,756,305 741,061
Eurodollar notes 5.05-5.95 2003-2005 521,845 549,185
Revenue bonds 3.39-7.70 2003-2027 8,942 12,392
Promissory notes 3.25-7.00 2003-2017 5,339 7,005
Remarketable securities 6.49 2021 1,000,000 1,005,970
Other 6.50-7.925 2003-2034 10,337 9,890
- ----------------------------------------------------------------------------------------------------------------------------
4,421,885 2,325,503
- ----------------------------------------------------------------------------------------------------------------------------
Foreign Currencies
(U.S. Dollar Equivalents):
Promissory notes:
Pound sterling 6.25% 2030 181,164 211,087
Euro 3.90-6.53 2003-2008 408,678 668,814
New Zealand dollar 5.95-6.85 2003-2005 107,472 101,640
Other 4.00-17.15 2003-2022 48,056 22,774
- ----------------------------------------------------------------------------------------------------------------------------
745,370 1,004,315
- ----------------------------------------------------------------------------------------------------------------------------
Total long-term debt 5,167,255 3,329,818
Less portion due within one year 524,287 314,965
- ----------------------------------------------------------------------------------------------------------------------------
$ 4,642,968 $ 3,014,853
- ----------------------------------------------------------------------------------------------------------------------------
The amount of long-term debt that matures in each of the four
years following 2003 is: $15.6 million in 2004, $322.6 million
in 2005, $414.6 million in 2006 and $126.4 million in 2007. The
fair value of the debt obligations approximated the recorded
value as of May 1, 2002.
On July 6, 2001, Heinz Finance issued $750 million of 6.625%
Guaranteed Notes due July 15, 2011. The proceeds were used for
general corporate purposes, including retiring commercial paper
borrowings and financing acquisitions and ongoing operations.
In addition, Heinz Finance raised $325.0 million via the
issuance of Voting Cumulative Preferred Stock,
(64)
Series A with liquidation preference of $100,000 per share. The
Series A Preferred shares are entitled to receive quarterly
dividends at a rate of 6.226% per annum and are required to be
redeemed for cash on July 15, 2008. The Series A Preferred
shares are included in minority interest on the accompanying
Consolidated Balance Sheets.
On March 7, 2002, Heinz Finance issued $700 million of 6.00%
Guaranteed Notes due March 15, 2012 and $550 million of 6.75%
Guaranteed Notes due March 15, 2032. The proceeds were used to
retire commercial paper borrowings.
On April 10, 2001, the company issued Euro 450 million of
5.125% Guaranteed Notes due 2006. The proceeds were used for
general corporate purposes, including repaying borrowings that
were incurred in connection with the acquisition of the CSM
Food Division of CSM Nederland NV in February.
On November 6, 2000, the company issued $1.0 billion of
remarketable securities due November 2020. The proceeds were
used to repay domestic commercial paper. The securities have a
coupon rate of 6.82%. The securities are subject to mandatory
tender by all holders to the remarketing dealer on each
November 15, and the interest rate will be reset on such dates.
If the remarketing dealer does not elect to exercise its right
to a mandatory tender of the securities or otherwise does not
purchase all of the securities on a remarketing date, then the
company is required to repurchase all of the securities on the
remarketing date at 100% of the principal amount plus accrued
interest. The company received a premium from the remarketing
dealer for the right to require the mandatory tender of the
securities. The amortization of the premium resulted in an
effective interest rate of 5.82% through November 15, 2001. On
November 15, 2001, the remarketing dealer exercised its right
to a mandatory tender of the securities and purchased all of
the securities and remarketed the securities at an effective
yield to the company of 6.49% through November 15, 2002.
Because the remarketable securities may be refinanced by the
$1.5 billion credit agreement discussed above, they are
classified as long-term debt.
In Fiscal 2002, the company entered into interest rate swaps
in order to convert certain fixed-rate debt to floating. These
swaps have an aggregate notional value of $2.05 billion and an
average maturity of 16.4 years. The weighted-average fixed rate
of the associated debt is 6.45%; however, the effective rate
after taking into account the swaps is 3.14%.
- ------------------------------------------------------------------------------
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 May 1, 2002, 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.
Global Stock Purchase Plan ("GSPP"): On September 8, 1999, the
shareholders authorized the GSPP which provides for the
purchase by employees of up to 3,000,000 shares of the
company's stock through payroll deductions. Employees who
choose to participate in the plan receive an option to acquire
common stock at a discount. The purchase price per share is the
lower of 85% of the fair market value of the company's stock on
the first or last day of a purchase period. During Fiscal 2002,
employees purchased 340,049 shares under this plan.
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.
(65)
- ------------------------------------------------------------------------------
8. SUPPLEMENTAL CASH FLOWS INFORMATION
(Dollars in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------
Cash Paid During the Year For:
Interest $ 290,513 $ 298,761 $ 273,506
Income taxes 180,757 456,279 485,267
- ------------------------------------------------------------------------------
Details of Acquisitions:
Fair value of assets $ 889,440 $ 819,163 $ 563,376
Liabilities* 52,615 136,358 166,699
- ------------------------------------------------------------------------------
Cash paid 836,825 682,805 396,677
Less cash acquired 1,987 9,847 2,259
- ------------------------------------------------------------------------------
Net cash paid for acquisitions $ 834,838 $ 672,958 $ 394,418
- ------------------------------------------------------------------------------
*Includes obligations to sellers of $2.5 million, $5.5 million and $10.4 million
in 2002, 2001 and 2000, 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. Generally, the option price on
MANAGEMENT outstanding options is equal to the fair market value of the
INCENTIVE PLANS stock at the date of grant. Options are generally 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:
Fiscal year ended May 1, 2002 May 2, 2001 May 3, 2000
- ------------------------------------------------------------------------------
(Dollars in thousands, except per
share amounts) (52 Weeks) (52 Weeks) (53 Weeks)
- ------------------------------------------------------------------------------
Pro forma net income $ 790,535 $ 440,600 $ 862,698
Pro forma diluted net income per
common share $ 2.24 $ 1.26 $ 2.40
Pro forma basic net income per
common share $ 2.26 $ 1.27 $ 2.43
- ------------------------------------------------------------------------------
The pro forma effect on net income for Fiscal 2002, Fiscal 2001
and Fiscal 2000 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 $8.54
per share in Fiscal 2002, $8.46 per share in Fiscal 2001 and
$8.98 per share in Fiscal 2000.
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:
2002 2001 2000
- ------------------------------------------------------------------------------
Dividend yield 3.9% 3.8% 3.5%
Volatility 23.3% 23.5% 24.0%
Risk-free interest rate 4.6% 6.0% 6.1%
Expected term (years) 6.5 6.5 5.0
- ------------------------------------------------------------------------------
(66)
Data regarding the company's stock option plans follows:
Weighted-Average
Exercise Price
Shares Per Share
- ------------------------------------------------------------------------------
Shares under option April 28, 1999 30,517,230 $ 37.94
Options granted 347,000 41.40
Options exercised (858,283) 24.81
Options surrendered (287,665) 44.70
- ------------------------------------------------------------------------------
Shares under option May 3, 2000 29,718,282 $ 38.29
Options granted 4,806,600 37.19
Options exercised (3,395,874) 26.69
Options surrendered (887,663) 51.27
- ------------------------------------------------------------------------------
Shares under option May 2, 2001 30,241,345 $ 39.04
Options granted 4,712,000 43.16
Options exercised (2,555,999) 24.93
Options surrendered (1,088,250) 51.01
- ------------------------------------------------------------------------------
Shares under option May 1, 2002 31,309,096 $ 40.39
- ------------------------------------------------------------------------------
Options exercisable at:
May 3, 2000 16,430,099 $ 31.43
May 2, 2001 15,350,907 33.00
May 1, 2002 19,087,840 38.40
- ------------------------------------------------------------------------------
The following summarizes information about shares under option
in the respective exercise price ranges at May 1, 2002:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Exercise Number Remaining Life Exercise Price Number Exercise Price
Price Per Share Outstanding (Years) Per Share Exercisable Per Share
- ------------------------------------------------------------------------------------------------------------------------------
$22.08-31.88 8,306,600 2.9 $ 27.08 8,306,600 $ 27.08
32.13-43.28 12,956,516 7.7 39.18 3,420,918 36.51
43.50-59.94 10,045,980 6.3 52.96 7,360,322 52.05
- ------------------------------------------------------------------------------------------------------------------------------
31,309,096 6.0 $ 40.39 19,087,840 $ 38.40
- ------------------------------------------------------------------------------------------------------------------------------
The shares authorized but not granted under the company's stock
option plans were 7,840,147 at May 1, 2002 and 11,469,563 at
May 2, 2001. Common stock reserved for options totaled
39,149,243 at May 1, 2002 and 41,710,908 at May 2, 2001.
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 $21 million in
Fiscal 2002, $20 million in Fiscal 2001 and $44 million in
Fiscal 2000.
(67)
- ------------------------------------------------------------------------------
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) 2002 2001 2000
- ------------------------------------------------------------------------------
Components of defined benefit net periodic benefit cost:
Service cost $ 30,391 $ 25,769 $ 27,352
Interest cost 96,444 89,889 84,096
Expected return on assets (141,545) (135,990) (121,735)
Amortization of:
Net initial asset (1,818) (2,637) (3,629)
Prior service cost 8,473 9,616 8,067
Net actuarial loss/(gain) 4,386 (729) 1,931
Loss due to curtailment,
settlement and special
termination benefits 1,694 29,146 27,908
- ------------------------------------------------------------------------------
Net periodic benefit (income)
cost (1,975) 15,064 23,990
Defined contribution plans
(excluding the ESOP) 19,314 21,846 20,558
- ------------------------------------------------------------------------------
Total pension cost $ 17,339 $ 36,910 $ 44,548
- ------------------------------------------------------------------------------
The following table sets forth the funded status of the
company's principal defined benefit plans at May 1, 2002 and
May 2, 2001.
(Dollars in thousands) 2002 2001
- ----------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at the
beginning of the year $ 1,549,413 $ 1,457,410
Service cost 30,391 25,769
Interest cost 96,444 89,889
Participants' contributions 8,152 8,010
Amendments 9,596 5,877
Actuarial loss/(gain) 36,762 (6,303)
Curtailment gain -- (793)
Settlement -- (7,548)
Special termination benefits 1,254 21,651
Benefits paid (110,846) (96,090)
Acquisition (3,543) 120,090
Exchange 14,166 (68,549)
- ------------------------------------------------------------------------------
Benefit obligation at the end of the
year 1,631,789 1,549,413
- ------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at the
beginning of the year 1,496,171 1,657,424
Actual return on plan assets (9,743) (88,655)
Settlement -- (7,548)
Employer contribution 110,632 33,448
Participants' contributions 8,152 8,010
Benefits paid (110,846) (96,090)
Acquisition 1,919 67,127
Exchange 14,526 (77,545)
- ------------------------------------------------------------------------------
Fair value of plan assets at the end
of the year 1,510,811 1,496,171
- ------------------------------------------------------------------------------
Funded status (120,978) (53,242)
Unamortized prior service cost 70,972 68,935
Unamortized net actuarial loss/
(gain) 364,890 177,813
Unamortized net initial asset (2,626) (4,396)
- ------------------------------------------------------------------------------
Net amount recognized $ 312,258 $ 189,110
- ------------------------------------------------------------------------------
Amount recognized in the consolidated balance sheet consists of:
Prepaid benefit cost 373,125 257,019
Accrued benefit liability (118,341) (115,161)
Accumulated other comprehensive
loss 57,474 47,252
- ------------------------------------------------------------------------------
Net amount recognized $ 312,258 $ 189,110
- ------------------------------------------------------------------------------
(68)
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
$347.8 million, $298.7 million and $207.0 million,
respectively, as of May 1, 2002 and $358.6 million, $305.3
million and $214.8 million, respectively, as of May 2, 2001.
The weighted-average rates used for the years ended May 1,
2002, May 2, 2001 and May 3, 2000 in determining the net
pension costs and projected benefit obligations for defined
benefit plans were as follows:
2002 2001 2000
- ------------------------------------------------------------------------------
Expected rate of return 9.2% 9.3% 9.5%
Discount rate 6.6% 6.7% 6.8%
Compensation increase rate 4.2% 4.3% 4.6%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
11. POSTRETIRE- The company and certain of its subsidiaries provide health
MENT BENEFITS care and life insurance benefits for retired employees and
OTHER THAN their eligible dependents. Certain of the company's U.S. and
PENSIONS AND Canadian employees may become eligible for such benefits. The
OTHER POST- company currently does not fund these benefit arrangements
EMPLOYMENT and may modify plan provisions or terminate plans at its
BENEFITS discretion.
Net postretirement costs consisted of the following:
(Dollars in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------
Components of defined benefit net periodic benefit cost:
Service cost $ 4,668 $ 4,350 $ 3,903
Interest cost 13,395 12,519 10,475
Amortization of:
Prior service cost (728) (728) (655)
Net actuarial gain (2,170) (3,560) (3,144)
Loss due to curtailment and
special termination benefits 551 951 1,536
- ------------------------------------------------------------------------------
Net periodic benefit cost $ 15,716 $ 13,532 $ 12,115
- ------------------------------------------------------------------------------
The following table sets forth the combined status of the
company's postretirement benefit plans at May 1, 2002 and May
2, 2001.
(Dollars in thousands) 2002 2001
- ----------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at the
beginning of the year $ 186,256 $ 169,550
Service cost 4,668 4,350
Interest cost 13,395 12,519
Participants' contributions 1,169 1,390
Actuarial loss 36,184 13,127
Acquisition 1,800 --
Special termination benefits 551 951
Benefits paid (17,301) (15,077)
Exchange (354) (554)
- ------------------------------------------------------------------------------
Benefit obligation at the end of the
year 226,368 186,256
- ------------------------------------------------------------------------------
Funded status (226,368) (186,256)
Unamortized prior service cost (5,127) (5,855)
Unamortized net actuarial loss/
(gain) 11,986 (25,989)
- ------------------------------------------------------------------------------
Net accrued benefit liability $ (219,509) $ (218,100)
- ------------------------------------------------------------------------------
The weighted-average discount rate used in the calculation of
the accumulated post-retirement benefit obligation and the net
postretirement benefit cost was 7.2% in 2002, 7.5% in 2001 and
7.7% in 2000. The assumed annual composite rate of increase in
the per capita cost of company-provided health care benefits
begins at 9.6% for 2003, gradually decreases to 5.0% by 2007,
and remains at that level thereafter. Assumed health care cost
(69)
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:
(Dollars in thousands) 1% Increase 1% Decrease
- ----------------------------------------------------------------------------
Effect on total service and interest
cost components $ 2,091 $ (1,187)
Effect on postretirement benefit
obligation 21,748 (13,670)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
12. FINANCIAL The company operates internationally, with manufacturing
INSTRUMENTS and sales facilities in various locations around the world,
and utilizes certain financial instruments to manage its
foreign currency, commodity price and interest rate exposures.
Foreign Currency Hedging: The company uses forward contracts
and options to mitigate its foreign currency exchange rate
exposure due to anticipated purchases of raw materials and
sales of finished goods, and future settlement of foreign
currency denominated assets and liabilities. Hedges of
anticipated transactions are designated as cash flow hedges,
and consequently, the effective portion of unrealized gains and
losses is deferred as a component of accumulated other
comprehensive loss and is recognized in earnings at the time
the hedged item affects earnings.
The company uses certain foreign currency debt instruments as
net investment hedges of foreign operations. As of May 1, 2002,
losses of $2.4 million, net of income taxes of $1.4 million,
which represented effective hedges of net investments, were
reported as a component of accumulated other comprehensive loss
within unrealized translation adjustment.
Commodity Price Hedging: The company uses commodity futures and
options in order to reduce price risk associated with
anticipated purchases of raw materials such as corn, soybean
oil and soybean meal. Commodity price risk arises due to
factors such as weather conditions, government regulations,
economic climate and other unforeseen circumstances. Hedges of
anticipated commodity purchases which meet the criteria for
hedge accounting are designated as cash flow hedges.
Interest Rate Hedging: The company uses interest rate swaps to
manage interest rate exposure. These derivatives are designated
as cash flow hedges or fair value hedges depending on the
nature of the risk being hedged. During Fiscal 2002, the
company entered into interest rate swaps with a notional amount
of $2.05 billion to swap fixed-rate debt to floating (see Note
6). The swaps were designated as fair value hedges.
Hedge Ineffectiveness: During Fiscal 2002, hedge
ineffectiveness related to cash flow hedges, which is reported
in the consolidated statements of income as other expense, was
not significant.
Deferred Hedging Gains and Losses: As of May 1, 2002, the
company is hedging forecasted transactions for periods not
exceeding 12 months, and expects $0.5 million of net deferred
loss reported in accumulated other comprehensive loss to be
reclassified to earnings within that time frame. During Fiscal
2002, the net deferred losses reclassified to earnings because
the hedged transaction was no longer expected to occur were not
significant.
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. During Fiscal 2002, one customer represented over
10% of the company's sales. The company closely monitors the
credit risk associated with this customer and has never
experienced significant losses.
(70)
- ------------------------------------------------------------------------------
13. NET INCOME The following table sets forth the computation of basic and
PER COMMON SHARE diluted earnings per share in accordance with the provisions
of SFAS No. 128.
Fiscal year ended May 1, 2002 May 2, 2001 May 3, 2000
- ------------------------------------------------------------------------------
(Dollars in thousands, except per
share amounts) (52 Weeks) (52 Weeks) (53 Weeks)
- ------------------------------------------------------------------------------
Income before cumulative effect
of accounting changes $ 833,889 $ 494,918 $ 890,553
Preferred dividends 20 22 26
- ------------------------------------------------------------------------------
Income applicable to common
stock before effect of
accounting changes 833,869 494,896 890,527
Cumulative effect of accounting
changes -- (16,906) --
- ------------------------------------------------------------------------------
Net income applicable to common
stock $ 833,869 $ 477,990 $ 890,527
Average common shares
outstanding--basic 349,921 347,758 355,273
Effect of dilutive securities:
Convertible preferred stock 162 176 218
Stock options 2,789 3,107 4,604
- ------------------------------------------------------------------------------
Average common shares
outstanding--diluted 352,872 351,041 360,095
Income per share before
cumulative effect of
accounting changes--basic $ 2.38 $ 1.42 $ 2.51
Net income per share--basic 2.38 1.37 2.51
Income per share before
cumulative effect of
accounting changes--diluted 2.36 1.41 2.47
Net income per share--diluted 2.36 1.36 2.47
- ------------------------------------------------------------------------------
Stock options outstanding of 14.9 million, 11.5 million and
11.7 million as of May 1, 2002, May 2, 2001 and May 3, 2000,
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's segments are primarily organized by
INFORMATION 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:
- Heinz North America--This segment markets ketchup,
condiments, sauces, soups, pasta meals and infant foods to
the grocery and foodservice channels and includes the
Canadian business.
- U.S. Pet Products & Seafood--This segment markets dry and
canned pet food, pet snacks, tuna and other seafood.
- U.S. Frozen--This segment markets frozen potatoes, entrees,
snacks 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 through September 29,
1999, the date of divestiture, 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 including net sales and the use of capital resources;
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.
(71)
The following table presents information about the company's
reportable segments.
Fiscal year ended May 1, 2002 May 2, 2001 May 3, 2000 May 1, 2002 May 2, 2001 May 3, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (53 Weeks)
- -----------------------------------------------------------------------------------------------------------------------------------
Net External Sales (a) Intersegment Sales
- -----------------------------------------------------------------------------------------------------------------------------------
Heinz North America $ 2,604,266 $ 2,468,227 $ 2,311,749 $ 25,790 $ 37,597 $ 37,125
U.S. Pet Products and Seafood 1,429,643 1,451,724 1,639,074 15,187 24,884 32,437
U.S. Frozen 1,171,487 956,564 869,550 10,222 12,660 12,782
- ----------------------------------------------------------------------------
Total North America 5,205,396 4,876,515 4,820,373
Europe 2,834,396 2,582,769 2,474,657 6,737 3,657 2,687
Asia/Pacific 980,848 1,041,328 1,167,621 2,901 3,376 2,853
Other Operating Entities 410,360 320,272 476,765 1,379 -- 2,526
Non-Operating (b) -- -- -- (62,216) (82,174) (90,410)
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $ 9,431,000 $ 8,820,884 $ 8,939,416 $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) Excluding Special Items
Operating Income (Loss) (c)
- -----------------------------------------------------------------------------------------------------------------------------------
Heinz North America $ 578,197 $ 541,559 $ 496,338 $ 584,346 $ 647,962 $ 602,649
U.S. Pet Products and Seafood 191,613 (54,546) 198,111 197,134 228,243 272,619
U.S. Frozen 244,731 83,964 152,018 244,731 202,012 181,511
- -----------------------------------------------------------------------------------------------------------------------------------
Total North America 1,014,541 570,977 846,467 1,026,211 1,078,217 1,056,779
Europe 541,830 388,647 364,207 545,442 518,009 502,302
Asia/Pacific 82,060 96,123 124,125 81,919 147,599 177,454
Other Operating Entities 55,132 49,284 540,155 55,132 37,958 32,255
Non-Operating (b) (103,092) (122,677) (141,855) (100,347) (99,060) (102,337)
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $ 1,590,471 $ 982,354 $ 1,733,099 $ 1,608,357 $ 1,682,723 $ 1,666,453
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense Capital Expenditures (d)
- -----------------------------------------------------------------------------------------------------------------------------------
Total North America $155,811 $170,279 $ 174,703 $103,937 $211,022 $ 250,870
Europe 107,222 90,106 81,802 71,688 140,780 127,595
Asia/Pacific 27,783 26,288 28,871 26,646 46,166 60,795
Other Operating Entities 6,974 8,117 13,066 6,169 4,716 8,495
Non-Operating (b) 3,907 4,376 8,041 4,947 8,615 4,689
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $301,697 $299,166 $ 306,483 $213,387 $411,299 $ 452,444
- -----------------------------------------------------------------------------------------------------------------------------------
Identifiable Assets
-------------------------------------------------------
Total North America $ 5,469,722 $ 4,572,995 $ 4,593,916
Europe 3,253,266 3,130,680 2,781,238
Asia/Pacific 969,185 912,515 1,085,491
Other Operating Entities 226,177 208,267 187,684
Non-Operating (e) 360,004 210,693 202,328
- ----------------------------------------------------------------------------------
Consolidated Totals $ 10,278,354 $ 9,035,150 $ 8,850,657
- ----------------------------------------------------------------------------------
(a) Sales for 2002, 2001 and 2000 reflect the adoption of the new EITF
guidelines relating to the classification of consideration from a vendor to a
purchaser of a vendor's products, including both customers and consumers. Total
net external sales previously reported for the fiscal years ended May 2, 2001
and May 3, 2000 were $9,430,422 and $9,407,949, respectively.
(b) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(c) Fiscal year ended May 1, 2002: Excludes restructuring and implementation
costs of the Streamline initiative as follows: Heinz North America $6.1 million,
U.S. Pet Products and Seafood $5.5 million, Europe $3.6 million, Asia/Pacific
$(0.1) million and Non-Operating $2.7 million.
Fiscal year ended May 2, 2001: Excludes net restructuring and implementation
costs of Operation Excel as follows: Heinz North America $71.6 million, U.S. Pet
Products and Seafood $85.4 million, U.S. Frozen $23.4 million, Europe $63.7
million, Asia/Pacific $46.3 million, Other Operating Entities $(11.3) million
and Non-Operating $9.4 million. Excludes restructuring and implementation costs
of the Streamline initiative as follows: Heinz North America $16.3 million, U.S.
Pet Products and Seafood $197.4 million, Europe $65.7 million, Asia/Pacific $5.2
million and Non-Operating $14.2 million. Excludes the loss on the sale of The
All American Gourmet in U.S. Frozen of $94.6 million. Excludes acquisition costs
in Heinz North America $18.5 million.
Fiscal year ended May 3, 2000: Excludes net restructuring and implementation
costs of Operation Excel as follows: Heinz North America $106.2 million, U.S.
Pet Products and Seafood $54.6 million, U.S. Frozen $29.5 million, Europe $138.1
million, Asia/Pacific $53.3 million, Other Operating Entities $1.5 million and
Non-Operating $9.5 million. Excludes costs related to Ecuador in U.S. Pet
Products and Seafood $20.0 million. Excludes the impact of the Weight Watchers
classroom business $44.7 million and the $464.6 million gain on the sale of this
business in Other Operating Entities. Excludes the Foundation contribution in
Non-Operating $30.0 million.
(d) Excludes property, plant and equipment obtained through acquisitions.
(e) Includes identifiable assets not directly attributable to operating
segments.
(72)
The company's revenues are generated via the sale of products
in the following categories:
(Unaudited)
Fiscal year ended May 1, 2002 May 2, 2001 May 3, 2000
- ------------------------------------------------------------------------------
(Dollars in thousands) (52 Weeks) (52 Weeks) (53 Weeks)
- ------------------------------------------------------------------------------
Ketchup, condiments and sauces $ 2,669,971 $ 2,444,349 $ 2,332,868
Frozen foods 1,999,500 1,739,283 1,387,154
Seafood 1,035,896 982,499 1,044,994
Soups, beans and pasta meals 1,192,268 1,129,254 1,143,338
Infant/nutritional foods 891,387 915,803 996,970
Pet products 983,157 1,063,340 1,165,119
Other 658,821 546,356 868,973
- ------------------------------------------------------------------------------
Total $ 9,431,000 $ 8,820,884 $ 8,939,416
- ------------------------------------------------------------------------------
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 May 1, 2002 May 2, 2001 May 3, 2000 May 1, 2002 May 2, 2001 May 3, 2000
- --------------------------------------------------------------------------------
(Dollars in thousands) (52 Weeks) (52 Weeks) (53 Weeks)
- -----------------------------------------------------------------------------------------------------------------------------------
United States $ 4,772,724 $ 4,523,883 $ 4,528,261 $ 2,776,227 $ 2,508,105 $ 2,705,735
United Kingdom 1,408,642 1,353,970 1,247,558 434,405 524,390 549,213
Other 3,249,634 2,943,031 3,163,597 2,529,517 1,901,777 1,515,535
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 9,431,000 $ 8,820,884 $ 8,939,416 $ 5,740,149 $ 4,934,272 $ 4,770,483
- -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
15. QUARTERLY RESULTS (UNAUDITED)
2002
-------------------------------------------------------------------------------------------
(Dollars in thousands, except per First Second Third Fourth Total
share amounts) (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (52 Weeks)
- -----------------------------------------------------------------------------------------------------------------------------------
Sales* $ 2,077,295 $ 2,414,219 $ 2,365,105 $ 2,574,381 $ 9,431,000
Gross profit 762,279 862,616 814,851 897,427 3,337,173
Net income 200,474 208,241 201,660 223,514 833,889
Per Share Amounts:
Net income--diluted $ 0.57 $ 0.59 $ 0.57 $ 0.63 $ 2.36
Net income--basic 0.57 0.60 0.58 0.64 2.38
Cash dividends 0.3925 0.4050 0.4050 0.4050 1.6075
2001
-------------------------------------------------------------------------------------------
(Dollars in thousands, except per First Second Third Fourth Total
share amounts) (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (52 Weeks)
- -----------------------------------------------------------------------------------------------------------------------------------
Sales* $ 2,053,777 $ 2,182,470 $ 2,128,188 $ 2,456,449 $ 8,820,884
Gross profit 781,201 799,344 742,682 614,039 2,937,266
Net income 187,980 190,033 270,520 (170,521) 478,012
Per Share Amounts:
Net income/(loss)--diluted $ 0.54 $ 0.54 $ 0.77 $ (0.49) $ 1.36
Net income/(loss)--basic 0.54 0.55 0.78 (0.49) 1.37
Cash dividends 0.3675 0.3925 0.3925 0.3925 1.545
- -----------------------------------------------------------------------------------------------------------------------------------
*The sales amounts reflect the adoption of the new EITF guidelines relating to
the classification of consideration from a vendor to a purchaser of the
vendor's products, including both customers and consumers. See Recently Adopted
Accounting Standards for further details.
(73)
The first quarter of Fiscal 2002 includes restructuring and
implementation costs related to the Streamline initiative of
$0.04 per share. The first quarter of Fiscal 2001 includes
restructuring and implementation costs related to Operation
Excel of $0.11 per share.
The second quarter of Fiscal 2001 includes net restructuring
and implementation costs related to Operation Excel of $0.14
per share and the loss of $0.01 per share which represents the
company's equity loss associated with The Hain Celestial
Group's fourth quarter results which included charges for its
merger with Celestial Seasonings.
The third quarter of Fiscal 2001 includes restructuring and
implementation costs related to Operation Excel of $0.14 per
share and a benefit from tax planning and new tax legislation
in Italy of $0.27 per share.
The fourth quarter of Fiscal 2002 includes a net benefit of
$0.01 per share related to the Streamline initiative. The
fourth quarter of Fiscal 2001 includes net restructuring and
implementation costs related to Operation Excel of $0.14 per
share, restructuring and implementation costs related to the
Streamline initiative of $0.66 per share, acquisition costs of
$0.03 per share and the loss on the sale of The All American
Gourmet business of $0.19 per share.
- ------------------------------------------------------------------------------
16. COMMITMENTS Legal Matters: Certain suits and claims have been filed
AND against the company and have not been finally adjudicated.
CONTINGENCIES These 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 $103.6 million in 2002, $91.1 million in 2001 and
$111.1 million in 2000. Future lease payments for non-
cancellable operating leases as of May 1, 2002 totaled $444.0
million (2003-$50.1 million, 2004-$43.8 million, 2005-$37.2
million, 2006-$31.4 million, 2007-$215.9 million and
thereafter-$65.6 million).
No significant credit guarantees existed between the company
and third parties as of May 1, 2002.
- ------------------------------------------------------------------------------
17. ADVERTISING Advertising costs for fiscal years 2002, 2001 and 2000 were
COSTS $413.9 million, $404.4 million and $374.0 million,
respectively, and are recorded either as a reduction of
revenue or as a component of SG&A.
- ------------------------------------------------------------------------------
18. SUBSEQUENT On June 13, 2002, Heinz announced that it will transfer to
EVENTS a wholly owned subsidiary ("Spinco") certain assets and
liabilities of its U.S. and Canadian pet food and pet snacks,
U.S. tuna, U.S. retail private label soup and gravy, College
Inn broths and U.S. infant feeding businesses and distribute
all of the shares of Spinco common stock on a pro rata basis to
its shareholders. Immediately thereafter, Spinco will merge
with a wholly owned subsidiary of Del Monte Foods Company ("Del
Monte") resulting in Spinco becoming a wholly owned subsidiary
of Del Monte (the "Merger"). In connection with the Merger,
each share of Spinco common stock will be automatically
converted into shares of Del Monte common stock that will
result in the fully diluted Del Monte common stock at the
effective time of the Merger being held approximately 74.5% by
Heinz shareholders and approximately 25.5% by the Del Monte
shareholders. As a result of the transaction, Heinz will
receive approximately $1.1 billion in cash that will be used to
retire debt.
(74)
Included in the transaction will be the following brands:
StarKist, 9-Lives, Kibbles 'n Bits, Pup-Peroni, Snausages,
Nawsomes, Heinz Nature's Goodness baby food and College Inn
broths. The following is a summary of the operating results
over the past three years of the businesses to be spun off:
(Dollars in thousands) Fiscal 2002 Fiscal 2001 Fiscal 2000
- ------------------------------------------------------------------------------
Revenues $ 1,809,593 $ 1,817,163 $ 2,028,131
Operating income/(loss) 275,292 (8,788) 241,164
Operating income excluding
special items 280,814 330,537 369,899
- ------------------------------------------------------------------------------
The Merger, which has been approved by the Board of Directors
of Heinz and Del Monte, is subject to the approval of the
shareholders of Del Monte and receipt of a ruling from the
Internal Revenue Service that the contribution of the assets
and liabilities to Spinco and the distribution of the shares of
common stock of Spinco to Heinz shareholders will be tax-free
to Heinz, Spinco and the shareholders of Heinz. The Merger is
also subject to receipt of applicable governmental approvals
and the satisfaction of other customary closing conditions. The
company expects that the transaction will close late in
calendar year 2002 or early in calendar year 2003.
(75)
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 safe-guarded, 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 its subsidiaries (the "Company") at May 1, 2002 and May 2, 2001, and the
results of its operations and its cash flows for each of the three years in the
period ended May 1, 2002, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards generally
accepted in the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
June 13, 2002
(76)