SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE SIX MONTHS ENDED OCTOBER 29, 2003 COMMISSION FILE NUMBER 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
<Table>
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219
(Address of Principal Executive Offices) (Zip Code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 456-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of November 21, 2003 was 351,868,119 shares.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Second Quarter Ended
------------------------------------
October 29, 2003 October 30, 2002
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales....................................................... $2,090,461 $2,099,170
Cost of products sold....................................... 1,309,243 1,348,191
---------- ----------
Gross profit................................................ 781,218 750,979
Selling, general and administrative expenses................ 432,183 419,955
---------- ----------
Operating income............................................ 349,035 331,024
Interest income............................................. 4,548 6,392
Interest expense............................................ 54,292 54,602
Other expense, net.......................................... 12,945 21,797
---------- ----------
Income from continuing operations before income taxes....... 286,346 261,017
Provision for income taxes.................................. 94,859 92,480
---------- ----------
Income from continuing operations........................... 191,487 168,537
Income from discontinued operations, net of tax............. -- 43,545
---------- ----------
Net income.................................................. $ 191,487 $ 212,082
========== ==========
Income per common share
Diluted
Continuing operations.................................. $ 0.54 $ 0.48
Discontinued operations................................ -- 0.12
---------- ----------
Net income........................................... $ 0.54 $ 0.60
========== ==========
Average common shares outstanding--diluted................ 354,258 353,438
========== ==========
Basic
Continuing operations.................................. $ 0.54 $ 0.48
Discontinued operations................................ -- 0.12
---------- ----------
Net income........................................... $ 0.54 $ 0.60
========== ==========
Average common shares outstanding--basic.................. 351,805 351,121
========== ==========
Cash dividends per share.................................... $ 0.27 $ 0.4050
========== ==========
</Table>
See Notes to Condensed Consolidated Financial Statements.
------------------
2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Six Months Ended
------------------------------------
October 29, 2003 October 30, 2002
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales....................................................... $3,985,985 $3,938,484
Cost of products sold....................................... 2,497,691 2,514,826
---------- ----------
Gross profit................................................ 1,488,294 1,423,658
Selling, general and administrative expenses................ 790,183 796,737
---------- ----------
Operating income............................................ 698,111 626,921
Interest income............................................. 10,313 12,615
Interest expense............................................ 106,529 106,455
Other expense, net.......................................... 29,924 34,982
---------- ----------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle....... 571,971 498,099
Provision for income taxes.................................. 193,659 175,190
---------- ----------
Income from continuing operations before cumulative effect
of change in accounting principle......................... 378,312 322,909
Income from discontinued operations, net of tax............. 27,200 66,968
---------- ----------
Income before cumulative effect of change in accounting
principle................................................. 405,512 389,877
Cumulative effect of change in accounting principle......... -- (77,812)
---------- ----------
Net income.................................................. $ 405,512 $ 312,065
========== ==========
Income per common share
Diluted
Continuing operations.................................. $ 1.07 $ 0.91
Discontinued operations................................ 0.08 0.19
Cumulative effect of change in accounting principle.... -- (0.22)
---------- ----------
Net income........................................... $ 1.14 $ 0.88
========== ==========
Average common shares outstanding--diluted................ 354,258 353,438
========== ==========
Basic
Continuing operations.................................. $ 1.08 $ 0.92
Discontinued operations................................ 0.08 0.19
Cumulative effect of change in accounting principle.... -- (0.22)
---------- ----------
Net income........................................... $ 1.15 $ 0.89
========== ==========
Average common shares outstanding--basic.................. 351,805 351,121
========== ==========
Cash dividends per share.................................... $ 0.54 $ 0.8100
========== ==========
</Table>
See Notes to Condensed Consolidated Financial Statements.
------------------
3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
April 30,
October 29, 2003 2003*
FY 2004 FY 2003
---------------- --------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 848,696 $ 801,732
Receivables, net............................................ 1,034,130 1,165,460
Inventories................................................. 1,325,770 1,152,953
Prepaid expenses and other current assets................... 248,023 164,175
---------- ----------
Total current assets................................... 3,456,619 3,284,320
---------- ----------
Property, plant and equipment............................... 3,574,704 3,412,853
Less accumulated depreciation............................... 1,590,022 1,454,987
---------- ----------
Total property, plant and equipment, net............... 1,984,682 1,957,866
---------- ----------
Goodwill.................................................... 1,951,175 1,849,389
Trademarks, net............................................. 624,430 610,063
Other intangibles, net...................................... 131,967 134,897
Other non-current assets.................................... 1,261,327 1,388,216
---------- ----------
Total other non-current assets......................... 3,968,899 3,982,565
---------- ----------
Total assets........................................... $9,410,200 $9,224,751
========== ==========
</Table>
*Summarized from audited fiscal year 2003 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
October 29, 2003 April 30, 2003*
FY 2004 FY 2003
---------------- ---------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $ 20,609 $ 146,838
Portion of long-term debt due within one year............... 3,314 7,948
Accounts payable............................................ 967,868 938,168
Salaries and wages.......................................... 47,955 43,439
Accrued marketing........................................... 191,632 201,945
Other accrued liabilities................................... 376,323 387,130
Income taxes................................................ 263,749 200,666
---------- ----------
Total current liabilities.............................. 1,871,450 1,926,134
---------- ----------
Long-term debt.............................................. 4,971,816 4,776,143
Deferred income taxes....................................... 164,847 183,998
Non-pension postretirement benefits......................... 192,821 192,663
Other liabilities and minority interest..................... 667,358 946,656
---------- ----------
Total long-term liabilities............................ 5,996,842 6,099,460
Shareholders' Equity:
Capital stock............................................... 107,870 107,880
Additional capital.......................................... 387,610 376,542
Retained earnings........................................... 4,648,044 4,432,571
---------- ----------
5,143,524 4,916,993
Less:
Treasury stock at cost (78,997,014 shares at October 29,
2003 and 79,647,881 shares at April 30, 2003).......... 2,887,501 2,879,506
Unearned compensation..................................... 43,071 21,195
Accumulated other comprehensive loss...................... 671,044 817,135
---------- ----------
Total shareholders' equity............................. 1,541,908 1,199,157
---------- ----------
Total liabilities and shareholders' equity............. $9,410,200 $9,224,751
========== ==========
</Table>
*Summarized from audited fiscal year 2003 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
5
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Six Months Ended
------------------------------------
October 29, 2003 October 30, 2002
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income................................................ $ 405,512 $ 312,065
Income from discontinued operations....................... (27,200) (66,968)
--------- ---------
Income from continuing operations......................... 378,312 245,097
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation............................................ 101,660 96,595
Amortization............................................ 10,401 9,353
Deferred tax provision.................................. 39,283 5,597
Gain on divestiture..................................... (26,338) --
Cumulative effect of change in accounting principle..... -- 77,812
Provision for transaction costs and restructuring....... -- 28,548
Other items, net........................................ 25,923 16,218
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables........................................... 126,554 102,997
Inventories........................................... (128,632) (149,550)
Prepaid expenses and other current assets............. (66,326) (103,751)
Accounts payable...................................... (27,581) 47,250
Accrued liabilities................................... (36,808) (55,127)
Income taxes.......................................... 96,811 95,897
--------- ---------
Cash provided by operating activities.............. 493,259 416,936
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures.................................... (74,837) (63,543)
Acquisitions, net of cash acquired...................... (69,483) (13,536)
Proceeds from divestitures.............................. 60,467 --
Other items, net........................................ (6,177) 13,995
--------- ---------
Cash used for investing activities................. (90,030) (63,084)
--------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt.............................. (70,249) (9,859)
Payments on commercial paper and short-term debt, net... (130,084) (145,753)
Dividends............................................... (190,039) (284,417)
Purchases of treasury stock............................. (76,010) --
Exercise of stock options............................... 52,308 5,496
Other items, net........................................ 11,372 12,879
--------- ---------
Cash used for financing activities................. (402,702) (421,654)
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 46,437 31,180
Effect of discontinued operations........................... -- 126,082
--------- ---------
Net increase in cash and cash equivalents................... 46,964 89,460
Cash and cash equivalents at beginning of year.............. 801,732 202,403
--------- ---------
Cash and cash equivalents at end of period.................. $ 848,696 $ 291,863
========= =========
</Table>
See Notes to Condensed Consolidated Financial Statements.
------------------
6
H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The interim condensed consolidated financial statements of H. J. Heinz
Company, together with its subsidiaries (collectively referred to as the
"Company"), are unaudited. In the opinion of management, all adjustments,
which are of a normal and recurring nature, necessary for a fair statement
of the results of operations of these interim periods have been included.
The results for interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the Company's business. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 2004 presentation.
These statements should be read in conjunction with the Company's
consolidated financial statements and related notes, and management's
discussion and analysis of financial condition and results of operations
which appear in the Company's Annual Report on Form 10-K for the year ended
April 30, 2003.
(2) DISCONTINUED OPERATIONS AND SPIN-OFF
On December 20, 2002, the Company transferred to a wholly-owned subsidiary
("SKF Foods") certain assets and liabilities, including its U.S. and
Canadian pet food and pet snacks, U.S. tuna, U.S. retail private label soup
and private label gravy, College Inn broths and its U.S. infant feeding
businesses and distributed all of the shares of SKF Foods common stock on a
pro rata basis to its shareholders. Immediately thereafter, SKF Foods
merged with a wholly-owned subsidiary of Del Monte Foods Company ("Del
Monte") resulting in SKF Foods becoming a wholly-owned subsidiary of Del
Monte ("the Merger").
In accordance with accounting principles generally accepted in the United
States of America, the operating results related to these businesses spun
off to Del Monte have been treated as discontinued operations in the
Company's consolidated statements of income. Net income from discontinued
operations for the six months ended October 29, 2003 reflects the favorable
settlement of prior year tax liabilities related to the spun off
businesses. The discontinued operations generated sales of $469.6 million
and $833.9 million and net income of $43.5 million (net of $19.7 million in
tax) and $67.0 million (net of $29.9 million in tax) for the second quarter
and six months ended October 30, 2002, respectively.
(3) SPECIAL ITEMS
DIVESTITURES
During the first quarter of Fiscal 2004, the Company sold its bakery
business in Northern Europe for $57.9 million. The transaction resulted in
a pretax gain of $26.3 million ($13.3 million after tax) of which a portion
will be used to offset reorganization costs during Fiscal 2004. Pro forma
results of the Company, assuming the divestiture had been made at the
beginning of each period presented, would not be materially different from
the results reported.
REORGANIZATION COSTS
The Company recognized $5.5 million pretax ($3.4 million after tax) for the
six months ended October 29, 2003, all of which was recorded in the first
quarter of Fiscal 2004. These costs were recorded as a component of
selling, general and administrative expenses ("SG&A"), primarily due to
employee termination and severance costs related to ongoing efforts to
reduce overhead costs at its North American operations following last
year's spin-off transaction with Del Monte. Additionally, during the first
quarter of Fiscal 2004, the Company wrote down pizza crust assets to be
disposed of in the United Kingdom totaling $4.0 million pretax ($2.8
million after tax) which has been included as a component of cost of
products sold. For
7
the second quarter of Fiscal 2003, the Company recognized reorganization
costs totaling $10.1 million pretax ($6.9 million after tax), of which $1.9
million was recorded in cost of products sold and $8.3 million in SG&A. For
the first six months of Fiscal 2003, the Company recognized $28.5 million
pretax ($18.5 million after tax), of which $1.9 million was recorded in
cost of products sold and $26.7 million in SG&A.
During the first six months of Fiscal 2004, the Company utilized $42.2
million of severance and exit cost accruals related to reorganization
costs. Amounts included in accrued expenses related to these initiatives
totaled $9.5 million and $46.2 million at October 29, 2003 and April 30,
2003, respectively.
(4) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
<Table>
<Caption>
October 29, 2003 April 30, 2003
---------------- --------------
(Thousands of Dollars)
Finished goods and work-in-process.................. $ 987,012 $ 902,186
Packaging material and ingredients.................. 338,758 250,767
---------- ----------
$1,325,770 $1,152,953
========== ==========
</Table>
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Effective May 2, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible
Assets." Under this standard, goodwill and intangibles with indefinite
useful lives are no longer amortized. As a result of adopting SFAS No. 142,
the Company recorded a transitional impairment charge which was calculated
as of May 2, 2002, and recorded as an effect of a change in accounting
principle in the six-month period ended October 30, 2002, of $77.8 million.
There was no tax effect associated with this charge. The charge, which
relates to certain of the Company's reporting units, has been reflected in
its segments as follows: Europe $54.6 million, Asia/Pacific $2.7 million,
and Other Operating Entities $20.5 million. The annual impairment tests are
preformed in the fourth quarter of each fiscal year unless events suggest
an impairment may have occurred in the interim. No impairment charges were
recognized for the six months ended October 29, 2003.
Changes in the carrying amount of goodwill for the six months ended October
29, 2003, by reportable segment, are as follows (see footnote 8 for
information on changes to reportable segments):
<Table>
<Caption>
North
American Other
Consumer U.S. Asia/ Operating
(Thousands of Dollars) Products Foodservice Europe Pacific Entities Total
---------------------- -------- ----------- -------- -------- --------- ----------
Balance at April 30, 2003........... $891,608 $164,542 $637,371 $143,201 $12,667 $1,849,389
Acquisition......................... -- 49,381 2,867 5,000 141 57,389
Purchase accounting
reclassifications................. 4,327 540 213 -- -- 5,080
Disposal............................ -- -- (11,469) -- -- (11,469)
Translation adjustments............. 4,546 -- 31,017 12,549 111 48,223
Other............................... 2,563 -- -- -- -- 2,563
-------- -------- -------- -------- ------- ----------
Balance at October 29, 2003......... $903,044 $214,463 $659,999 $160,750 $12,919 $1,951,175
======== ======== ======== ======== ======= ==========
</Table>
8
Trademarks and other intangible assets at October 29, 2003 and April 30,
2003, subject to amortization expense, are as follows:
<Table>
<Caption>
October 29, 2003 April 30, 2003
------------------------------- -------------------------------
Accum Accum
(Thousands of Dollars) Gross Amort Net Gross Amort Net
- ---------------------- -------- --------- -------- -------- --------- --------
Trademarks...................... $182,404 $ (47,477) 134,927 $191,832 $ (55,691) $136,141
Licenses........................ 208,186 (109,674) 98,512 208,186 (112,617) 95,569
Other........................... 98,435 (64,981) 33,454 96,938 (57,610) 39,328
-------- --------- -------- -------- --------- --------
$489,025 $(222,132) $266,893 $496,956 $(225,918) $271,038
======== ========= ======== ======== ========= ========
</Table>
Amortization expense for trademarks and other intangible assets subject to
amortization was $7.6 million and $9.4 million for the six months ended
October 29, 2003 and October 30, 2002, respectively. Based upon the
amortizable intangible assets recorded on the balance sheet at October 29,
2003, amortization expense for each of the next five years is estimated to
be approximately $16.0 million.
Intangible assets not subject to amortization at October 29, 2003 and April
30, 2003 were $489.5 million and $473.9 million, respectively, and
consisted solely of trademarks.
(6) 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."
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, income
and income per common share from continuing operations before cumulative
effect of change in accounting principle would have been as follows:
<Table>
<Caption>
Second Quarter Ended Six Months Ended
------------------------------------- -------------------------------------
October 29, 2003 October 30, 2002 October 29, 2003 October 30, 2002
----------------- ----------------- ----------------- -----------------
(In Thousands, Except Per Share Amounts)
Income from continuing
operations before cumulative
effect of change in
accounting principle:
As reported................ $191,487 $168,537 $378,312 $322,909
Fair value-based expense,
net of tax............... (8,089) (6,800) (12,996) (13,387)
-------- -------- -------- --------
Pro forma.................. $183,398 $161,737 $365,316 $309,522
======== ======== ======== ========
Income per common share from
continuing operations before
cumulative effect of change
in accounting principle:
Diluted
As reported.............. $ 0.54 $ 0.48 $ 1.07 $ 0.91
Pro forma................ $ 0.52 $ 0.46 $ 1.03 $ 0.88
Basic
As reported.............. $ 0.54 $ 0.48 $ 1.08 $ 0.92
Pro forma................ $ 0.52 $ 0.46 $ 1.04 $ 0.88
</Table>
The weighted-average fair value of options granted was $5.93 and $6.89 per
share in the six months ended October 29, 2003 and October 30, 2002,
respectively.
9
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:
<Table>
<Caption>
Six Months Ended
------------------------------------
October 29, 2003 October 30, 2002
---------------- ----------------
Dividend yield........................................ 3.26% 4.26%
Volatility............................................ 20.30% 25.20%
Risk-free interest rate............................... 3.70% 3.98%
Expected term (years)................................. 6.50 6.50
</Table>
During the first six months of Fiscal 2004, the Company granted 780,550
restricted stock units to employees. The fair value of the awards granted
has been recorded as unearned compensation and is shown as a separate
component of shareholders' equity.
(7) RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This statement affects the classification, measurement and
disclosure requirements of certain financial instruments including
mandatorily redeemable shares. SFAS No. 150 was effective for the Company
for the second quarter of Fiscal 2004. The adoption of SFAS No. 150
required the prospective classification of Heinz Finance Company's $325
million of mandatorily redeemable preferred shares from minority interest
to long-term debt and the $5.1 million quarterly preferred dividend from
other expenses to interest expense for the second quarter ending October
29, 2003, with no resulting effect on the Company's profitability.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of
FASB Statement No. 123". SFAS No. 148 provides alternative methods of
transition for entities that voluntarily change to the fair value method
of accounting for stock-based employee compensation, and it also amends
the disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects of an entity's accounting policy decisions with respect
to stock-based employee compensation in both annual and interim financial
reporting. The disclosure provisions of SFAS No. 148 were effective for
the Company at April 30, 2003.
(8) SEGMENTS
The Company's reportable segments are primarily organized by geographical
area. The composition of segments and measure of segment profitability is
consistent with that used by the Company's management.
In the first quarter of Fiscal 2004, the Company changed its segment
reporting to reflect changes in organizational structure and management of
its businesses. The Company is now managing and reporting its North
American businesses under two segments, designated North American Consumer
Products and U.S. Foodservice. Changes in the remaining segments involve
the reclassification of certain operating and non-operating businesses
between existing segments. Prior periods have been restated to conform
with the current presentation. Descriptions of the Company's reportable
segments are as follows:
North American Consumer Products--This segment manufactures, markets and
sells ketchup, condiments, sauces, pasta meals, and frozen potatoes,
entrees, snacks and appetizers to the grocery channels in the United
States of America and our Canadian business.
U.S. Foodservice--This segment manufactures, markets and sells branded
and customized products to commercial and non-commercial food outlets
and distributors in the United States of America including ketchup,
condiments, sauces and frozen soups and desserts.
10
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 and Thailand.
This segment's operations include products in all of the Company's core
categories.
Other Operating Entities--This segment includes the Company's operations
in Africa, India, Latin America, the Middle East and other areas that
sell products in all of the Company's core categories. During Fiscal
2003, the Company deconsolidated its Zimbabwe operations which had
historically been reported in this segment.
The Company's management evaluates performance based on several factors
including net sales, operating income excluding unusual costs and gains,
and the use of capital resources. Intersegment revenues are accounted for
at current market values. Items below the operating income line of the
consolidated statements of income are not presented by segment, since they
are excluded from the measure of segment profitability reviewed by the
Company's management.
The following table presents information about the Company's reportable
segments:
<Table>
<Caption>
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 29, 2003 October 30, 2002 October 29, 2003 October 30, 2002
FY 2004 FY 2003 FY 2004 FY 2003
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net external sales:
North American Consumer
Products.................... $ 521,882 $ 551,644 $ 972,660 $1,005,789
U.S. Foodservice.............. 371,892 342,588 703,109 650,316
Europe........................ 774,651 714,175 1,509,804 1,387,573
Asia/Pacific.................. 334,769 270,152 624,776 507,392
Other Operating Entities...... 87,267 220,611 175,636 387,414
---------- ---------- ---------- ----------
Consolidated Totals........... $2,090,461 $2,099,170 $3,985,985 $3,938,484
========== ========== ========== ==========
Intersegment revenues:
North American Consumer
Products.................... $ 14,903 $ 14,422 $ 28,980 $ 27,801
U.S. Foodservice.............. 3,099 3,392 6,631 6,946
Europe........................ 3,088 3,870 7,623 7,401
Asia/Pacific.................. 903 813 1,577 1,728
Other Operating Entities...... 619 583 1,118 1,045
Non-Operating (a)............. (22,612) (23,080) (45,929) (44,921)
---------- ---------- ---------- ----------
Consolidated Totals........... $ -- $ -- $ -- $ --
========== ========== ========== ==========
Operating income (loss):
North American Consumer
Products.................... $ 126,469 $ 123,650 $ 232,731 $ 225,278
U.S. Foodservice.............. 57,450 55,741 106,650 96,689
Europe........................ 144,667 134,213 315,983 273,992
Asia/Pacific.................. 43,737 26,868 78,003 45,800
Other Operating Entities...... 8,392 31,255 19,630 52,715
Non-Operating (a)............. (31,680) (40,703) (54,886) (67,553)
---------- ---------- ---------- ----------
Consolidated Totals........... $ 349,035 $ 331,024 $ 698,111 $ 626,921
========== ========== ========== ==========
</Table>
11
<Table>
<Caption>
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 29, 2003 October 30, 2002 October 29, 2003 October 30, 2002
FY 2004 FY 2003 FY 2004 FY 2003
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Operating income (loss)
excluding special items (b):
North American Consumer
Products.................... $ 126,469 $ 127,904 $ 234,227 $ 234,298
U.S. Foodservice.............. 57,450 56,841 109,150 99,917
Europe........................ 144,667 134,213 291,184 273,992
Asia/Pacific.................. 43,737 26,868 78,003 45,800
Other Operating Entities...... 8,392 31,255 19,630 52,715
Non-Operating (a)............. (31,680) (35,914) (53,428) (51,253)
---------- ---------- ---------- ----------
Consolidated Totals........... $ 349,035 $ 341,167 $ 678,766 $ 655,469
========== ========== ========== ==========
</Table>
- ---------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) Second Quarter ended October 30, 2002 - Excludes Del Monte transaction
related costs and cost to reduce overhead of the remaining businesses as
follows: North American Consumer Products $4.3 million, U.S. Foodservice
$1.1 million, and Non-Operating $4.8 million.
Six Months ended October 29, 2003 - Excludes the gain on disposal of the
bakery business in Northern Europe and costs to reduce overhead of the
remaining businesses as follows: North American Consumer Products $1.5
million, U.S. Foodservice $2.5 million, Europe $(24.8) million, and
Non-Operating $1.5 million.
Six Months ended October 30, 2002 - Excludes Del Monte transaction related
costs and cost to reduce overhead of the remaining businesses as follows:
North American Consumer Products $9.0 million, U.S. Foodservice $3.2
million, and Non-Operating $16.3 million.
The Company's revenues are generated via the sale of products in the
following categories:
<Table>
<Caption>
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 29, 2003 October 30, 2002 October 29, 2003 October 30, 2002
FY 2004 FY 2003 FY 2004 FY 2003
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Ketchup, Condiments and Sauces..... $ 751,555 $ 691,346 $1,493,850 $1,331,321
Frozen Foods....................... 483,770 524,685 876,479 962,400
Convenience Meals.................. 457,832 402,615 885,012 782,848
Infant Foods....................... 220,535 201,160 407,117 378,087
Other.............................. 176,769 279,364 323,527 483,828
---------- ---------- ---------- ----------
Total.......................... $2,090,461 $2,099,170 $3,985,985 $3,938,484
========== ========== ========== ==========
</Table>
The above amounts include the impact of acquisitions, divestitures
(primarily affecting the Other and Frozen Foods categories) and foreign
exchange.
12
(9) NET INCOME PER COMMON SHARE
The following are reconciliations of income to income applicable to common
stock and the number of common shares outstanding used to calculate basic
EPS to those shares used to calculate diluted EPS:
<Table>
<Caption>
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 29, 2003 October 30, 2002 October 29, 2003 October 30, 2002
FY 2004 FY 2003 FY 2004 FY 2003
---------------- ---------------- ---------------- ----------------
(In Thousands)
Income from continuing operations
before cumulative effect of
change in accounting principle... $191,487 $168,537 $378,312 $322,909
Preferred dividends................ 4 4 8 9
-------- -------- -------- --------
Income from continuing operations
applicable to common stock before
cumulative effect of change in
accounting principle............. 191,483 168,533 378,304 322,900
Cumulative effect of change in
accounting principle............. -- -- -- (77,812)
-------- -------- -------- --------
Income from continuing operations
applicable to common stock....... $191,483 $168,533 $378,304 $245,088
======== ======== ======== ========
Average common shares
outstanding--basic............. 351,805 351,121 351,805 351,121
Effect of dilutive securities:
Convertible preferred stock.... 148 148 148 148
Stock options and restricted
stock........................ 2,305 2,169 2,305 2,169
-------- -------- -------- --------
Average common shares
outstanding--diluted........... 354,258 353,438 354,258 353,438
======== ======== ======== ========
</Table>
(10) COMPREHENSIVE INCOME
<Table>
<Caption>
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 29, 2003 October 30, 2002 October 29, 2003 October 30, 2002
FY 2004 FY 2003 FY 2004 FY 2003
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
Net income......................... $191,487 $212,082 $405,512 $312,065
Other comprehensive income:
Foreign currency translation
adjustment................... 121,610 29,386 176,410 123,923
Minimum pension liability
adjustment................... (20,209) (550) (25,019) 356
Net deferred gains/(losses) on
derivatives from periodic
revaluations................. 4,662 3,426 2,036 11,591
Net deferred (gains)/losses on
derivatives reclassified to
earnings..................... (12,094) 584 (7,336) (13,211)
-------- -------- -------- --------
Comprehensive income............... $285,456 $244,928 $551,603 $434,724
======== ======== ======== ========
</Table>
(11) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company operates internationally, with manufacturing and sales
facilities in various locations around the world, and utilizes certain
derivative and non-derivative financial instruments to manage its foreign
currency, commodity price, and interest rate exposures.
FOREIGN CURRENCY HEDGING: The Company uses forward contracts and option
contracts designed to mitigate its foreign currency exchange rate exposure
due to forecasted purchases of raw materials and sales of finished goods,
and future settlement of foreign currency denominated assets and
liabilities. Derivatives used to hedge forecasted transactions and specific
cash flows associated with foreign currency denominated financial assets
and liabilities which meet the criteria for hedge accounting are designated
as cash flow hedges.
13
The Company uses certain foreign currency debt instruments as net
investment hedges of foreign operations. Losses of $9.3 million (net of
income taxes of $5.4 million), which represented effective hedges of net
investments, were reported as a component of accumulated other
comprehensive loss within unrealized translation adjustment for the six
months ended October 29, 2003.
COMMODITY PRICE HEDGING: The Company uses commodity futures, swaps and
option contracts in order to reduce price risk associated with forecasted
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. Derivatives used to hedge forecasted commodity purchases
that 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 may be designated as cash flow
hedges or fair value hedges depending on the nature of the risk being
hedged.
HEDGE INEFFECTIVENESS: Hedge ineffectiveness related to cash flow hedges,
which is reported in current period earnings as other income and expense,
was a net loss of $0.1 million and a net gain of $0.4 million for the six
months ended October 29, 2003 and October 30, 2002, respectively.
DEFERRED HEDGING GAINS AND LOSSES: As of October 29, 2003, the Company is
hedging forecasted transactions for periods not exceeding two years. During
the next 12 months, the Company expects $0.1 million of net deferred loss
reported in accumulated other comprehensive loss to be reclassified to
earnings. Amounts reclassified to earnings because the hedged transaction
was no longer expected to occur were a net loss of $0.1 million and a net
gain of $0.3 million for the six months ended October 29, 2003 and October
30, 2002, respectively.
OTHER ACTIVITIES: The Company enters into certain derivative contracts in
accordance with its risk management strategy that do not meet the criteria
for hedge accounting. Although these derivatives do not qualify as hedges,
they have the economic impact of largely mitigating foreign currency,
commodity price or interest rate exposures. These derivative financial
instruments are accounted for on a full mark to market basis through
current earnings even though they were not acquired for trading purposes.
(12) SUBSEQUENT EVENTS
On November 7, 2003, subsidiaries of an Israeli joint venture company 51%
indirectly owned by the Company (collectively, "Remedia") issued a recall
of a soy-based kosher infant formula product sold under the Remedia brand
and produced by Humana Milchunion GmbH ("Humana"), a third-party leading
global German baby food and formula manufacturer. Remedia and the Israeli
health authorities instituted the recall upon learning that the consumption
of the soy-based formula might be related to certain cases of infant
illness, and possibly three infant deaths, in Israel. Subsequently, Israeli
authorities initiated criminal and civil investigations. On November 10,
2003, Humana, the third-party manufacturer, publicly released the results
of its just completed studies which stated that there were low levels of
vitamin B1 in their formula, despite product specifications to the
contrary. Humana also admitted that human error caused this problem, and
has terminated several of its quality personnel. Civil lawsuits have been
filed in Israel against Humana, Remedia, its directors and certain
officers, and the Israeli Ministry of Health, in connection with this
matter. The Remedia formula at issue is not sold or marketed by the joint
venture company anywhere else in the world besides Israel. At this point,
the Company does not believe that this matter will have a material
financial impact; however, the matter is still developing at this time and
facts are still being determined.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL ITEMS
DISCONTINUED OPERATIONS
On December 20, 2002, Heinz transferred to a wholly-owned subsidiary ("SKF
Foods") certain assets and liabilities, including its U.S. and Canadian pet food
and pet snacks, U.S. tuna, U.S. retail private label soup and private label
gravy, College Inn broths and its U.S. infant feeding businesses and distributed
all of the shares of SKF Foods common stock on a pro rata basis to its
shareholders. Immediately thereafter, SKF Foods merged with a wholly-owned
subsidiary of Del Monte Foods Company ("Del Monte") resulting in SKF Foods
becoming a wholly-owned subsidiary of Del Monte ("the Merger").
In accordance with accounting principles generally accepted in the United
States of America, the operating results related to these businesses spun off to
Del Monte have been treated as discontinued operations in the Company's
consolidated statements of income. Net income from discontinued operations for
the six months ended October 29, 2003 relates to a favorable settlement of prior
year tax liabilities related to the spun off businesses. The discontinued
operations generated sales of $469.6 million and $833.9 million and net income
of $43.5 million (net of $19.7 million in tax) and $67.0 million (net of $29.9
million in tax) for the second quarter and six months ended October 30, 2002,
respectively.
DIVESTITURES
During the first quarter of Fiscal 2004, the Company sold its bakery
business in Northern Europe for $57.9 million. The transaction resulted in a
pretax gain of $26.3 million ($13.3 million after-tax) of which a portion will
be used to offset reorganization costs during Fiscal 2004.
REORGANIZATION COSTS
The Company recognized $5.5 million pretax ($3.4 million after-tax) for the
six months ended October 29, 2003, all of which was recorded in the first
quarter of Fiscal 2004. These costs were recorded as a component of Selling,
General and Administrative expenses ("SG&A") and were primarily due to employee
termination and severance costs related to ongoing efforts to reduce overhead
costs at its North American operations following last year's spin-off
transaction with Del Monte. Additionally, during the first quarter of Fiscal
2004, the Company wrote down pizza crust assets to be disposed of in the United
Kingdom totaling $4.0 million pretax ($2.8 million after-tax) which has been
included as a component of cost of products sold. For the second quarter of
Fiscal 2003, the Company recognized reorganization costs totaling $10.1 million
pretax ($6.9 million after-tax), of which $1.9 million is recorded in cost of
products sold and $8.3 million in SG&A. For the first six months of Fiscal 2003,
the Company recognized $28.5 million pretax ($18.5 million after-tax), of which
$1.9 million is recorded in cost of products sold and $26.7 million in SG&A.
During the first six months of Fiscal 2004, the Company utilized $42.2
million in severance and exit cost accruals related to reorganization costs.
THREE MONTHS ENDED OCTOBER 29, 2003 AND OCTOBER 30, 2002
In the first quarter of Fiscal 2004, the Company changed its segment
reporting to reflect changes in organizational structure and the management of
its business. The Company is now managing and reporting its North American
businesses under two segments, designated North American Consumer Products and
U.S. Foodservice. Certain changes were also made to the composition of the
remaining segments. These changes involve the reclassification of certain
operating and non-operating businesses between existing segments. Prior periods
have been restated to
15
conform with the current presentation. (See Note 8 to the condensed consolidated
financial statements for further discussion of the Company's reportable
segments).
RESULTS OF CONTINUING OPERATIONS
Sales for the three months ended October 29, 2003 decreased $8.7 million,
or 0.4%, to $2.09 billion. Sales were favorably impacted by volume growth of
1.6% and exchange translation rates of 6.0%. The favorable volume impact is
primarily due to strong increases in the Europe and the Asia/ Pacific segments
and good performance in U.S. Foodservice. Divestitures, net of acquisitions,
reduced sales 8.1% due primarily to the deconsolidation of the Zimbabwe
operations in Fiscal 2003 (see below for further discussion of this
deconsolidation).
Gross profit increased $30.2 million, or 4.0%, to $781.2 million, and the
gross profit margin increased to 37.4% from 35.8%. The gross profit margin
increase was primarily driven by the Asia/ Pacific segment, the deconsolidation
of Zimbabwe, and the Company's progress in reducing less-profitable Stock
Keeping Units and improving sales mix and productivity, especially in developing
markets. The aggregate increase in gross profit also benefited from favorable
exchange translation rates, partially offset by the impact of divestitures. Last
year's gross profit was unfavorably impacted by reorganization costs of $1.9
million.
SG&A increased $12.2 million, or 2.9%, to $432.2 million, and increased as
a percentage of sales to 20.7% from 20.0%. These increases are primarily due to
the impact of higher sales volume, higher exchange translation rates and
increased pension costs. These increases were partially offset by decreased
marketing expense. For the second quarter of Fiscal 2003, SG&A was unfavorably
impacted by reorganization costs of $8.3 million. Operating income increased
$18.0 million, or 5.4%, to $349.0 million, and operating income increased as a
percentage of sales to 16.7% from 15.8%.
Net interest expense increased $1.5 million, to $49.7 million, primarily
due to the prospective classification of Heinz Finance Company's dividend on its
mandatorily redeemable preferred shares to interest expense from other expense
in accordance with the adoption of Statement of Financial Accounting Standard
("SFAS") No. 150 (see below for further discussion). Other expense, net,
decreased $8.9 million, to $12.9 million, primarily attributable to decreased
minority interest expense as a result of the Zimbabwe deconsolidation and the
SFAS No. 150 reclassification previously discussed, partially offset by currency
losses in the current year. The effective tax rate for the current quarter was
33.1% compared to 35.4% last year.
Income from continuing operations for the second quarter of Fiscal 2004 was
$191.5 million compared to $168.5 million in the year-earlier quarter. Diluted
earnings per share was $0.54 in the current year compared to $0.48 in the prior
year.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment decreased $29.8
million, or 5.4%. Sales volume decreased 0.2% as significant growth in Heinz
ketchup, EZ Marinader and Classico pasta sauces was offset by declines in
SmartOnes frozen entrees related to the increased popularity of low-carb dieting
and the continuing effects of the rationalization of Boston Market side dishes
and Hot Bites snacks. Lower pricing decreased sales 2.9% consistent with our
strategy to obtain a more competitive consumer price point on Boston Market
HomeStyle meals and due to the launch of the Every Day Low Price strategy on
Heinz gravy and Classico pasta sauces. Unfavorable sales mix on SmartOnes frozen
entrees also affected price. Divestitures reduced sales 4.4% and favorable
exchange translation rates increased sales 2.0%.
16
Gross profit decreased $12.1 million, or 5.2%, to $222.1 million; however,
the gross profit margin increased slightly to 42.6% from 42.5%, as manufacturing
cost savings offset unfavorable pricing. Operating income increased $2.8
million, or 2.3%, to $126.5 million, primarily due to decreased consumer
marketing expenses related to Boston Market frozen entrees and the prior year
launch of Easy Squeeze! In addition, reorganization costs unfavorably impacted
last year's operating income by $4.3 million.
U.S. FOODSERVICE
U.S. Foodservice's sales increased $29.3 million, or 8.6%. Sales volume
increased sales 1.1% primarily due to increases in Heinz ketchup, Escalon
processed tomato products and Dianne's frozen desserts. Higher pricing increased
sales by 3.0% primarily due to Heinz ketchup and single serve condiments.
Acquisitions, net of divestitures, increased sales 4.5%, primarily due to the
acquisition of Truesoups LLC, a manufacturer and marketer of premium frozen
soups.
Gross profit increased $11.4 million, or 11.7%, to $109.1 million, and the
gross profit margin increased to 29.3% from 28.5%. This increase in gross profit
margin is primarily due to favorable pricing and sales mix. In addition,
reorganization costs unfavorably impacted gross profit by $1.1 million for the
quarter ending October 30, 2002. Selling & Distribution expense ("S&D")
increased $4.5 million, and increased 0.6% as a percentage of sales. Operating
income increased $1.7 million, or 3.1%, to $57.5 million, primarily due to the
increase in gross profit, partially offset by increased SG&A expense
attributable to investment in people and infrastructure.
EUROPE
Heinz Europe's sales increased $60.5 million, or 8.5%. Higher volumes
increased sales 1.5% primarily due to increases in John West and Petite Navire
seafood, Heinz salad cream and convenience meals, partially offset by decreases
in infant feeding and frozen food products and the impact of our previously
announced program to reduce low-margin Stock Keeping Units. Favorable exchange
translation rates increased sales by 9.7%. Lower pricing decreased sales 0.3%,
primarily due to increased trade promotion spending related to seafood,
partially offset by price increases on convenience meals and infant feeding
products. Divestitures reduced sales 2.3%, primarily related to the sale of the
UK frozen pizza business and the Northern European bakery business.
Gross profit increased $28.0 million, or 10.0%, to $307.4 million, and the
gross profit margin increased to 39.7% from 39.1%. These increases are primarily
due to the rationalization of low-margin products and favorable exchange
translation rates. Operating income increased $10.5 million, or 7.8%, to $144.7
million, primarily attributable to the favorable change in gross profit,
partially offset by increased General & Administrative expense ("G&A") primarily
related to increased pension expense.
ASIA/PACIFIC
Sales in Asia/Pacific increased $64.6 million, or 23.9%. Volume increased
sales 6.2% primarily due to strong sales of Tegel poultry in New Zealand, ABC
sauces and holiday promotions on juice concentrates in Indonesia and Heinz
sauces, convenience meals and tuna in Australia. Favorable exchange translation
rates increased sales by 16.4%. Higher pricing increased sales 2.0% related to
ABC sauces and juice concentrates, offset by declines in Tegel poultry.
Divestitures decreased sales by 0.7%.
Gross profit increased $27.6 million, or 32.9%, to $111.3 million, and the
gross profit margin increased to 33.3% from 31.0%. These increases are primarily
due to strong volume growth, increased net pricing and manufacturing cost
improvements in Australia and New Zealand, as well as favorable exchange
translation rates. Operating income increased $16.9 million, or 62.8%, to $43.7
million, primarily due to the growth in gross profit, offset partially by
increased SG&A.
17
OTHER OPERATING ENTITIES
Sales for Other Operating Entities decreased $133.3 million, or 60.4%,
primarily due to the deconsolidation of the Company's Zimbabwe operations in
Fiscal 2003. The deconsolidation also impacted gross profit and operating
income. Gross profit decreased $28.0 million, or 49.2%, to $29.0 million, and
operating income decreased $22.9 million, or 73.1%, to $8.4 million. Excluding
the Zimbabwe operations in the prior year, sales increased 10.8%, primarily due
to strong volume increases of 5.6%, and operating income increased 16.9%.
Zimbabwe remains in a period of economic uncertainty. Should the current
situation continue, the Company could experience disruptions and delays
associated with its Zimbabwe operations. Therefore, as of the end of November
2002, the Company deconsolidated its Zimbabwean operations and classified its
remaining net investment of approximately $110 million as a cost investment
included in other non-current assets on the condensed consolidated balance sheet
as of October 29, 2003. If this situation continues to deteriorate, the
Company's ability to recover its investment could be impaired.
SIX MONTHS ENDED OCTOBER 29, 2003 AND OCTOBER 30, 2002
RESULTS OF CONTINUING OPERATIONS
Sales for the six months ended October 29, 2003 increased $47.5 million, or
1.2%, to $3.99 billion. Sales were favorably impacted by volume of 1.9% and
exchange translation rates of 6.7%. The favorable volume impact is primarily due
to strong increases in the North American Consumer Products, U.S. Foodservice,
Asia/Pacific and Other Operating segments. Lower pricing decreased sales by
0.2%. Divestitures, net of acquisitions, reduced sales 7.2% due primarily to the
deconsolidation of Zimbabwe.
Gross profit increased $64.6 million, or 4.5%, to $1.49 billion, and the
gross profit margin increased to 37.3% from 36.1%. The gross profit margin
increase was primarily driven by the U.S. Foodservice and Asia/Pacific segments.
The aggregate increase in gross profit also benefited from favorable exchange
translation rates, partially offset by the impact of divestitures and the write
down of UK pizza crust assets held for sale. For the first six months of Fiscal
2003, gross profit was also impacted by reorganization costs of $1.9 million.
SG&A decreased $6.6 million, or 0.8%, to $790.2 million, and as a
percentage of sales was reduced to 19.8% from 20.2%. The decrease is primarily
due to the gain recorded on the sale of the Northern European bakery business
and decreased marketing expense as well as the impact of reorganization costs of
$5.5 million and $26.7 million for the six months ended October 29, 2003 and
October 30, 2002, respectively. These favorable items were offset by the impact
of higher sales volume, higher exchange translation rates and increases in
pension costs. Operating income increased $71.2 million, or 11.4%, to $698.1
million, and increased as a percentage of sales to 17.5% from 15.9%.
Net interest expense increased $2.4 million, to $96.2 million, primarily
due to the prospective classification of the Heinz Finance Company's second
quarter of Fiscal 2004 dividend on its mandatorily redeemable preferred shares
to interest expense from other expense in accordance with the adoption of SFAS
No. 150 (see below for further discussion). Other expense, net, decreased $5.1
million, to $29.9 million, primarily attributable to decreased minority interest
expense as a result of the Zimbabwe deconsolidation and the SFAS No. 150
reclassification previously discussed, partially offset by currency losses in
the current year. The effective tax rate for current year was 33.9% compared to
35.2% last year. The current year effective tax rate was unfavorably impacted by
0.8 percentage points due to the sale of the Northern European bakery business.
Income from continuing operations (before the cumulative effect of change
in accounting principle related to the adoption of SFAS No. 142) for the first
six months of Fiscal 2004 was
18
$378.3 million compared to $322.9 million in the year-earlier period. Diluted
earnings per share (before the cumulative effect of change in accounting
principle related to the adoption of SFAS No. 142) was $1.07 in the current year
compared to $0.91 in the prior year.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment decreased $33.1
million, or 3.3%. Sales volume increased 1.8% primarily due to Heinz ketchup,
Classico pasta sauces and EZ Marinader partially offset by declines in SmartOnes
frozen entrees related to the increased popularity of low-carb dieting, Ore-Ida
frozen potatoes due to growth in private label, and the effects of the
continuing rationalization of Boston Market side dishes and Hot Bites snacks.
Lower pricing decreased sales 2.5% consistent with our strategy to obtain a more
competitive consumer price point on Boston Market HomeStyle meals and due to the
launch of the Every Day Low Price strategy on Heinz gravy and Classico pasta
sauces. Price was also affected by unfavorable sales mix on SmartOnes frozen
entrees and promotional timing related to TGI Fridays, Poppers and Bagel Bites
partially offset by increases in Heinz ketchup due to trade promotion
efficiencies in the current year. Divestitures reduced sales 4.6% and favorable
exchange translation rates increased sales 1.9%.
Gross profit decreased $13.9 million, or 3.2%, to $418.9 million; however,
the gross profit margin increased slightly to 43.1% from 43.0%, as manufacturing
cost savings offset unfavorable pricing. Operating income increased $7.5
million, or 3.3%, to $232.7 million, primarily due to decreased consumer
marketing expenses related to Boston Market frozen entrees and the prior year
launch of Easy Squeeze! In addition, reorganization costs unfavorably impacted
operating income by $1.5 million and $9.0 million for the six months ending
October 29, 2003 and October 30, 2002, respectively.
U.S. FOODSERVICE
U.S. Foodservice's sales increased $52.8 million, or 8.1%. Sales volume
increased sales 2.9% primarily due to increases in Heinz ketchup, Escalon
processed tomato products, Dianne's frozen desserts and single serve condiments.
Higher pricing increased sales by 2.6% primarily due to Heinz ketchup and single
serve condiments. Acquisitions, net of divestitures, increased sales 2.5%,
primarily due to the acquisition of Truesoups LLC, a manufacturer and marketer
of premium frozen soups.
Gross profit increased $20.6 million, or 11.3%, to $203.7 million, and the
gross profit margin increased to 29.0% from 28.2%. This increase in gross profit
margin is primarily due to favorable pricing and sales mix. In addition,
reorganization costs unfavorably impacted gross profit by $1.1 million for the
six months ending October 30, 2002. S&D increased $6.5 million, and increased
0.3% as a percentage of sales. Operating income increased $10.0 million, or
10.3%, to $106.7 million, primarily due to the growth in gross profit partially
offset by increased SG&A expenses. In addition, reorganization costs unfavorably
impacted operating income by $2.5 million and $3.2 million for the six months
ending October 29, 2003 and October 30, 2002, respectively.
EUROPE
Heinz Europe's sales increased $122.2 million, or 8.8%. Favorable exchange
translation rates increased sales by 11.4%. Volumes remained constant as
increases in John West and Petite Navire seafood and Heinz salad cream were
offset by decreases in infant feeding and frozen food products and the impact of
our previously announced program to reduce low-margin Stock Keeping Units. Lower
pricing decreased sales 0.6%, primarily due to increased trade promotion
spending related to seafood, partially offset by recent price increases on
convenience meals and infant feeding
19
products. This pricing pressure is likely to continue going forward as the
Netherland's largest retailer rolled back prices in excess of 8% in the second
quarter. Divestitures reduced sales 1.9%, primarily related to the sale of the
UK frozen pizza business and the Northern European bakery business.
Gross profit increased $44.7 million, or 8.1%, to $595.4 million; however,
the gross profit margin decreased to 39.4% from 39.7%. The increase in gross
profit is primarily due to improvements in the seafood business and favorable
exchange translation rates, partially offset by the impact of divestitures and
the write down of the UK pizza assets. The gross profit margin decline is
primarily due to unfavorable manufacturing costs in Northern Europe and
unfavorable sales mix. Operating income increased $42.0 million, or 15.3%, to
$316.0 million, primarily attributable to the favorable change in gross profit
and the gain on the sale of the Northern Europe bakery business partially offset
by increased G&A expense primarily related to increased pension expense.
ASIA/PACIFIC
Sales in Asia/Pacific increased $117.4 million, or 23.1%. Volume increased
sales 5.8% primarily due to strong sales of Tegel poultry in New Zealand, ABC
sauces and holiday promotions on juice concentrates in Indonesia and tuna in
Australia. Favorable exchange translation rates increased sales by 16.0%. Higher
pricing increased sales 1.4% related to recent price increases on ABC sauces and
juice concentrates, partially offset by declines in Tegel poultry.
Gross profit increased $51.5 million, or 33.3%, to $205.9 million, and the
gross profit margin increased to 32.9% from 30.4%. These increases are primarily
due to favorable exchange translation rates, strong net pricing and
manufacturing cost improvements in Australia and New Zealand. Operating income
increased $32.2 million, or 70.3%, to $78.0 million, primarily due to the growth
in gross profit, partially offset by increased SG&A.
OTHER OPERATING ENTITIES
Sales for Other Operating Entities decreased $211.8 million, or 54.7%,
primarily due to the deconsolidation of the Company's Zimbabwe operations in
Fiscal 2003. The deconsolidation also impacted gross profit and operating
income. Gross profit decreased $42.3 million, or 41.4%, to $59.9 million, and
operating income decreased $33.1 million, or 62.8%, to $19.6 million. Excluding
the Zimbabwe operations in the prior year, sales increased 12.2%, primarily due
to strong volume increases of 6.3%, and operating income increased 29.6%.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by continuing operating activities increased by more than 18%
to $493.3 million compared to $416.9 million last year. The increase in Fiscal
2004 versus Fiscal 2003 is primarily due to improved working capital performance
as a result of the 11 days improvement in the Company's cash conversion cycle
versus the year ago period.
Cash used for investing activities totaled $90.0 million compared to $63.1
million last year. Acquisitions, net of divestitures, used $9.0 million in net
cash in the first six months of Fiscal 2004 compared to $13.5 million in the
prior year, in line with the Company's strategy of improving its business mix
through acquisitions and divestitures. Capital expenditures totaled $74.8
million compared to $63.5 million last year.
Cash used for financing activities totaled $402.7 million compared to
$421.7 million last year. The Company paid down $70.2 million in long-term debt
during the current period, compared to $9.9 million last year. Payments on
commercial paper and short-term borrowings were $130.1 million this year,
compared to $145.8 million last year. Cash used for purchases of treasury stock,
net of proceeds from option exercises, was $23.7 million this year. There were
no treasury stock purchases in the prior year, and proceeds from option
exercises provided $5.5 million in the prior
20
year. Dividend payments totaled $190.0 million, compared to $284.4 million for
the same period last year, reflecting a reduction in the dividend rate in the
fourth quarter of Fiscal 2003 as a result of the spin off of SKF Foods.
The Company continued its debt reduction efforts in the first six months of
Fiscal 2004 by retiring approximately $200 million of debt, offset partially by
a $60 million increase in debt as a result of changes in foreign exchange rates.
At October 29, 2003, the Company's net debt (total debt net of the value of
interest rate swaps of $176.3 million, less cash and cash equivalents) was $3.97
billion. Excluding the reclassification of Heinz Finance Company's preferred
stock (see below for further discussion), net debt would have been $3.65
billion, down approximately $1.33 billion compared to the year earlier quarter.
Additional net debt reductions are anticipated in Fiscal 2004.
In September 2003, the Company, Heinz Finance Company and a group of
domestic and international banks renewed a 364-day credit agreement at $600
million. That credit agreement and the $1.5 billion credit agreement that
expires in September 2006 support the Company's commercial paper programs. As of
October 29, 2003, there was no commercial paper outstanding.
In the first six months of Fiscal 2004, the cash used for reorganization
costs were approximately $42.5 million.
The impact of inflation on both the Company's financial position and
results of operations is not expected to adversely affect Fiscal 2004 results.
The Company's financial position continues to remain very strong, enabling it to
meet cash requirements for operations, including anticipated additional pension
plan contributions, capital expansion programs and dividends to shareholders.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
statement affects the classification, measurement and disclosure requirements of
certain financial instruments, including mandatorily redeemable shares. SFAS No.
150 was effective for the Company in the second quarter of Fiscal 2004. The
adoption of SFAS No. 150 required the prospective classification of Heinz
Finance Company's $325 million of mandatorily redeemable preferred shares from
minority interest to long-term debt and the $5.1 million quarterly preferred
dividend from other expenses to interest expense for the second quarter ending
October 29, 2003, with no resulting effect on the Company's profitability.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123". SFAS No. 148 provides
alternative methods of transition for entities that voluntarily change to the
fair value method of accounting for stock-based employee compensation, and it
also amends the disclosure provisions of SFAS No. 123 to require prominent
disclosure about the effects of an entity's accounting policy decisions with
respect to stock-based employee compensation in both annual and interim
financial reporting. The disclosure provisions of SFAS No. 148 were effective
for the Company at April 30, 2003. The Company is currently evaluating its
policy for recognizing expense related to stock options.
Effective May 2, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Under this standard, goodwill and intangibles with
indefinite useful lives are no longer amortized. As a result of adopting SFAS
No. 142, the Company recorded a transitional impairment charge which was
calculated as of May 2, 2002, and recorded as an effect of a change in
accounting principle in the six month period ended October 30, 2002, of $77.8
million. There was no tax effect associated with this charge. The charge, which
relates to certain of the Company's reporting units, has been reflected in its
segments as follows: Europe $54.6 million, Asia/Pacific $2.7 million and Other
Operating Entities $20.5 million.
21
SUBSEQUENT EVENTS
On November 7, 2003, subsidiaries of an Israeli joint venture company 51%
indirectly owned by the Company (collectively, "Remedia") issued a recall of a
soy-based kosher infant formula product sold under the Remedia brand and
produced by Humana Milchunion GmbH ("Humana"), a third-party leading global
German baby food and formula manufacturer. Remedia and the Israeli health
authorities instituted the recall upon learning that the consumption of the
soy-based formula might be related to certain cases of infant illness, and
possibly three infant deaths, in Israel. Subsequently, Israeli authorities
initiated criminal and civil investigations. On November 10, 2003, Humana, the
third-party manufacturer, publicly released the results of its just completed
studies which stated that there were low levels of vitamin B1 in their formula,
despite product specifications to the contrary. Humana also admitted that human
error caused this problem, and has terminated several of its quality personnel.
Civil lawsuits have been filed in Israel against Humana, Remedia, its directors
and certain officers, and the Israeli Ministry of Health, in connection with
this matter. The Remedia formula at issue is not sold or marketed by the joint
venture company anywhere else in the world besides Israel. At this point, the
Company does not believe that this matter will have a material financial impact;
however, the matter is still developing at this time and facts are still being
determined.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
Statements about future growth, profitability, costs, expectations, plans,
or objectives included in this report, including the management's discussion and
analysis, the financial statements and footnotes, are forward-looking statements
based on management's estimates, assumptions, and projections. These
forward-looking statements are subject to risks, uncertainties, and other
important factors that could cause actual results to differ materially from
those expressed or implied in this report and the financial statements and
footnotes. These include, but are not limited to, sales, earnings, and volume
growth, general economic, political, and industry conditions, competitive
conditions, production, energy and raw material costs, the ability to maintain
favorable supplier relationships, achieving cost savings programs and gross
margins, currency valuations and interest rate fluctuations, success of
acquisitions, joint ventures, and divestitures, new product and packaging
innovations, the effectiveness of advertising, marketing, and promotional
programs, supply chain efficiency and cash flow initiatives, the impact of
e-commerce and e-procurement, risks inherent in litigation, including the
Remedia related claims in Israel and rights against its third party supplier,
international operations, particularly the performance of business in
hyperinflationary environments, changes in estimates in critical accounting
judgments, the possibility of increased pension expense and contributions, and
other factors described in "Cautionary Statement Relevant to Forward-Looking
Information" in the Company's Form 10-K for the fiscal year ended April 30,
2003, and the Company's subsequent filings with the Securities and Exchange
Commission. The forward-looking statements are and will be based on management's
then current views and assumptions regarding future events 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, except as required by the securities laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
six months ended October 29, 2003. For additional information, refer to pages
21-23 of the Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief
22
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures, as of the end of the period covered by this
report, were designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. The Company believes that a controls system, no matter how well designed
and operated, cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected.
(b) Changes in Internal Controls
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
23
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of H. J. Heinz Company was held in
Pittsburgh, Pennsylvania, on September 12, 2003. The following individuals were
elected as directors for a one-year term expiring on September 8, 2004:
<Table>
<Caption>
Director Shares For Shares Withheld
-------- ----------- ---------------
W.R. Johnson.............................................. 280,879,632 16,448,107
C.E. Bunch................................................ 282,688,483 14,639,256
M.C. Choksi............................................... 279,700,041 17,627,698
L.S. Coleman, Jr.......................................... 279,206,581 18,121,158
P.H. Coors................................................ 282,698,737 14,629,002
E.E. Holiday.............................................. 279,313,483 18,014,256
C. Kendle................................................. 282,710,556 14,617,183
D.R. O'Hare............................................... 279,704,097 17,623,642
L.C. Swann................................................ 279,530,305 17,797,434
T.J. Usher................................................ 282,715,617 14,612,122
J.M. Zimmerman............................................ 282,774,236 14,553,503
</Table>
Shareholders also acted upon the following proposal at the Annual Meeting:
Elected PricewaterhouseCoopers, LLP the Company's independent accountants
for the fiscal year ending April 28, 2004. Votes totaled 283,918,859 for;
10,597,659 against, and 2,811,220 abstentions.
ITEM 5. OTHER INFORMATION
Nothing to report under this item.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below. The Company may have omitted certain exhibits in accordance
with Item 601(b)(4)(iii)(A) of Regulation S-K. The Company agrees to
furnish such documents to the Commission upon request. Documents not
designated as being incorporated herein by reference are set forth
herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
12. Computation of Ratios of Earnings to Fixed Charges.
31(a). Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer.
31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer.
32(a). Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements.*
32(b). Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements.*
(b) Reports on Form 8-K
During the last fiscal quarter of the period covered by this Report,
the Company filed a Current Report on Form 8-K dated September 3, 2003,
relating to its press release regarding its first quarter net income.
The Item 12 and the Exhibit attached to that Form 8-K shall not be
deemed "filed" for purposes of Section 18 of the Exchange Act or
otherwise subject to liability under that Section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act
of 1933, as amended, or the Exchange Act, except as expressly set forth
by specific reference to such filing.
* The Exhibit attached to this Form 10-Q shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise subject to liability under that section, nor
shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933, as amended, or the Exchange Act, except as expressly
set forth by specific reference in such filing.
25
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H. J. HEINZ COMPANY
(Registrant)
Date: November 25, 2003
By: /s/ ARTHUR B. WINKLEBLACK
..........................................
Arthur B. Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 25, 2003
By: /s/ EDWARD J. MCMENAMIN
..........................................
Edward J. McMenamin
Vice President -- Finance
(Principal Accounting Officer)
26
EXHIBIT INDEX
DESCRIPTION OF EXHIBIT
Exhibits required to be furnished by Item 601 of Regulation S-K are listed
below. Documents not designated as being incorporated herein by reference are
furnished herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
12. Computation of Ratios of Earnings to Fixed Charges.
31(a). Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer.
31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer.
32(a). Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements.*
32(b). Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements.*
* The Exhibit attached to this Form 10-Q shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of
1933, as amended, or the Exchange Act, except as expressly set forth by
specific reference in such filing.