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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE THREE MONTHS ENDED JULY 31, 2002 COMMISSION FILE NUMBER 1-3385
H.J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 456-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No __
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of September 6, 2002 was 351,080,144 shares.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H.J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
First Quarter Ended
--------------------------------
July 31, 2002 August 1, 2001*
FY 2003 FY 2002
------------- ---------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
Sales....................................................... $2,203,645 $2,077,295
Cost of products sold....................................... 1,416,732 1,315,016
---------- ----------
Gross profit................................................ 786,913 762,279
Selling, general and administrative expenses................ 441,781 378,125
---------- ----------
Operating income............................................ 345,132 384,154
Interest income............................................. 6,405 5,358
Interest expense............................................ 69,090 75,547
Other expense, net.......................................... 11,701 1,758
---------- ----------
Income before income taxes.................................. 270,746 312,207
Provision for income taxes.................................. 92,951 111,733
---------- ----------
Net income.................................................. $ 177,795 $ 200,474
========== ==========
Net income per share--diluted............................... $ 0.50 $ 0.57
========== ==========
Average common shares outstanding--diluted.................. 353,529 352,380
========== ==========
Net income per share--basic................................. $ 0.51 $ 0.57
========== ==========
Average common shares outstanding--basic.................... 351,026 349,202
========== ==========
Cash dividends per share.................................... $ 0.4050 $ 0.3925
========== ==========
*Reclassified, see Note 5
See Notes to Condensed Consolidated Financial Statements.
------------------
2
H.J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 2002 May 1, 2002*
FY 2003 FY 2002
------------- ------------
(Unaudited)
(Thousands of Dollars)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 197,919 $ 206,921
Short-term investments, at cost which approximates market... 2,461 --
Receivables, net............................................ 1,132,782 1,449,147
Inventories................................................. 1,633,440 1,527,554
Prepaid expenses and other current assets................... 339,582 189,944
----------- -----------
Total current assets................................... 3,306,184 3,373,566
----------- -----------
Property, plant and equipment............................... 3,979,124 3,872,647
Less accumulated depreciation............................... 1,703,834 1,622,573
----------- -----------
Total property, plant and equipment, net............... 2,275,290 2,250,074
----------- -----------
Goodwill, net............................................... 2,557,924 2,528,942
Trademarks, net............................................. 852,732 808,884
Other intangibles, net...................................... 152,170 152,249
Other non-current assets.................................... 1,287,316 1,164,639
----------- -----------
Total other non-current assets......................... 4,850,142 4,654,714
----------- -----------
Total assets........................................... $10,431,616 $10,278,354
=========== ===========
*Summarized from audited fiscal year 2002 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
3
H.J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 2002 May 1, 2002*
FY 2003 FY 2002
------------- ------------
(Unaudited)
(Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $ 265,243 $ 178,358
Portion of long-term debt due within one year............... 457,885 524,287
Accounts payable............................................ 872,069 938,483
Salaries and wages.......................................... 45,810 39,376
Accrued marketing........................................... 177,659 164,650
Other accrued liabilities................................... 437,293 471,910
Income taxes................................................ 216,403 192,105
----------- -----------
Total current liabilities.............................. 2,472,362 2,509,169
----------- -----------
Long-term debt.............................................. 4,695,433 4,642,968
Deferred income taxes....................................... 385,696 394,935
Non-pension postretirement benefits......................... 209,636 208,509
Other liabilities and minority interest..................... 797,374 804,157
----------- -----------
Total long-term debt, other liabilities and minority
interest............................................. 6,088,139 6,050,569
Shareholders' Equity:
Capital stock............................................... 107,883 107,884
Additional capital.......................................... 348,627 348,605
Retained earnings........................................... 5,004,196 4,968,535
----------- -----------
5,460,706 5,425,024
Less:
Treasury stock at cost (80,031,268 shares at July 31, 2002
and 80,192,280 shares at May 1, 2002).................. 2,889,275 2,893,198
Unearned compensation relating to the ESOP................ -- 230
Accumulated other comprehensive loss...................... 700,316 812,980
----------- -----------
Total shareholders' equity............................. 1,871,115 1,718,616
----------- -----------
Total liabilities and shareholders' equity............. $10,431,616 $10,278,354
=========== ===========
*Summarized from audited fiscal year 2002 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
4
H.J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Quarter Ended
-------------------------------
July 31, 2002 August 1, 2001
FY 2003 FY 2002
------------- --------------
(Unaudited)
(Thousands of Dollars)
Cash Flows from Operating Activities
Net Income................................................ $ 177,795 $ 200,474
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................... 57,400 58,038
Amortization........................................... 6,255 16,757
Deferred tax provision................................. 7,500 15,521
Other items, net....................................... 867 21,953
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables.......................................... 300,182 123,592
Inventories.......................................... (61,683) (79,072)
Prepaid expenses and other current assets............ (134,177) (69,249)
Accounts payable..................................... (108,435) (181,602)
Accrued liabilities.................................. (65,675) (122,638)
Income taxes......................................... 47,141 76,127
--------- ---------
Cash provided by operating activities............. 227,170 59,901
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures................................... (32,538) (60,101)
Acquisitions, net of cash acquired..................... (17,278) (310,807)
Purchases of short-term investments.................... (2,411) (1,093)
Other items, net....................................... 8,466 10,836
--------- ---------
Cash used for investing activities................ (43,761) (361,165)
--------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt............................. (4,246) (26,571)
Payments on commercial paper and
short-term borrowings, net........................... (89,525) (656,841)
Proceeds from long-term debt........................... -- 764,622
Proceeds from preferred stock of subsidiary............ -- 325,000
Dividends.............................................. (142,134) (137,099)
Exercise of stock options.............................. 3,981 13,301
Other items, net....................................... 12,443 17,135
--------- ---------
Cash (used for) provided by financing
activities...................................... (219,481) 299,547
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 27,070 4,682
--------- ---------
Net (decrease) increase in cash and cash equivalents........ (9,002) 2,965
Cash and cash equivalents at beginning of year.............. 206,921 138,849
--------- ---------
Cash and cash equivalents at end of period.................. $ 197,919 $ 141,814
========= =========
See Notes to Condensed Consolidated Financial Statements.
------------------
5
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 2003 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 to Shareholders and which are
incorporated by reference into the Company's Annual Report on Form 10-K for
the year ended May 1, 2002.
(2) AGREEMENT BETWEEN H.J. HEINZ COMPANY AND DEL MONTE FOODS COMPANY
On June 13, 2002, Heinz announced that it will transfer to a wholly-owned
subsidiary ("Spinco") assets and liabilities of 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 broth 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 the former Spinco
stockholders and approximately 25.5% by the Del Monte stockholders. As a
result of the transaction, Heinz will receive $1.1 billion in cash that
will be used to retire debt.
Included in the transaction will be the following brands: StarKist(R),
9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R),
Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The
following is a summary of the operating results of the businesses to be
spun off:
First Quarter Ended
------------------------------
July 31, 2002 August 1, 2001
------------- --------------
Revenues........................................ $364,331 $401,754
Operating income/(loss)......................... 49,709 69,948
Operating income excluding special items........ 49,709 77,786
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 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.
6
During the first quarter of Fiscal 2003, the Company recognized transaction
related costs and costs to reduce overhead of the remaining core businesses
totaling $18.4 million pretax ($0.03 per share).
(3) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
July 31, 2002 May 1, 2002
------------- -----------
(Thousands of Dollars)
Finished goods and work-in-process..................... $1,261,308 $1,193,989
Packaging material and ingredients..................... 372,132 333,565
---------- ----------
$1,633,440 $1,527,554
========== ==========
(4) RESTRUCTURING
In the fourth quarter of Fiscal 2001, the Company announced a
restructuring initiative named "Streamline". This initiative includes 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.
The major components of the restructuring charges and implementation costs
and the remaining accrual balances as of July 31, 2002 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--Fiscal 2001................... $ 110.5 $110.3 $ 55.4 $ 22.6 $ 298.8
Amounts utilized--Fiscal 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--Fiscal 2002................... -- 5.7 -- 10.4 16.1
Revision to accruals and asset
write-downs--Fiscal 2002............. 5.8 3.6 (7.7) -- 1.7
Amounts utilized--Fiscal 2002.......... (5.8) (66.6) (32.4) (10.4) (115.2)
------- ------ ------ ------ -------
Accrued restructuring costs-- May 1,
2002................................. -- 13.5 10.6 -- 24.1
Amounts utilized--Fiscal 2003.......... -- (4.0) (1.4) -- (5.4)
------- ------ ------ ------ -------
Accrued restructuring costs-- July 31,
2002................................. $ -- $ 9.5 $ 9.2 $ -- $ 18.7
======= ====== ====== ====== =======
During the first quarter of Fiscal 2003, the Company utilized $5.4 million
of severance and exit cost accruals, principally related to its global
overhead reduction plan, primarily in Europe and North America.
(5) RECENTLY ADOPTED ACCOUNTING STANDARDS
During the fourth quarter of Fiscal 2002, the Company 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 and gross profit were
reduced by approximately $108.2 million in the first quarter of Fiscal
2002. Prior period data has been reclassified to conform to the current
year presentation.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations" which requires that the purchase method of
accounting be applied to all business combinations after June 30, 2001.
SFAS No. 141 also established criteria for recogni-
7
tion of intangible assets and goodwill. 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, but are tested at least annually for impairment.
The Company is currently completing its evaluation of the impact of
adopting SFAS No. 142 on the consolidated financial statements. The
reassessment of intangible assets, including the ongoing impact of
amortization, and the assignment of goodwill to reporting units was
completed during the first quarter of Fiscal 2003. The transitional
goodwill impairment tests will be completed during the second quarter of
Fiscal 2003. If the carrying value of goodwill or an intangible asset
exceeds its fair value, an impairment loss shall be recognized. A
discounted cash flow model is being used to determine the fair value of
the Company's businesses for purposes of testing goodwill for impairment.
The discount rate being used is based on a risk-adjusted weighted average
cost of capital for the business.
The effects of adopting the new standards on net income and diluted
earnings per share for the three-month periods ended July 31, 2002 and
August 1, 2001 are as follows:
Net Income Diluted EPS
------------------- -------------
2002 2001 2002 2001
-------- -------- ----- -----
Net income............................ $177,795 $200,474 $0.50 $0.57
Add: Goodwill amortization............ -- 12,771 -- 0.03
Trademark amortization.............. -- 2,131 -- 0.01
-------- -------- ----- -----
Net income excluding goodwill and
trademark amortization.............. $177,795 $215,376 $0.50 $0.61
======== ======== ===== =====
Net income for the quarter ended August 1, 2001 would have been $215,376 or
$0.04 per share higher and net income for Fiscal 2002 would have been
$896,184 or $0.18 per share higher had the provisions of the new standards
been applied as of May 3, 2001.
Changes in the carrying amount of goodwill for the three months ended July
31, 2002, by operating segment, are as follows:
Heinz U.S. Pet Other
North Products and U.S. Asia/ Operating
America Seafood Frozen Europe Pacific Entities Total
-------- ------------ -------- -------- -------- --------- ----------
Balance at May 1,
2002............... $719,364 $564,335 $471,351 $639,465 $109,613 $24,814 $2,528,942
Acquisition.......... -- -- -- -- 7,000 -- 7,000
Purchase accounting
adjustments........ 1,737 -- 14 (21,875) -- -- (20,124)
Translation
adjustments........ (1,724) -- -- 42,797 4,097 448 45,618
Other adjustments.... (983) 16 -- (2,697) 152 -- (3,512)
-------- -------- -------- -------- -------- ------- ----------
Balance at July 31,
2002............... $718,394 $564,351 $471,365 $657,690 $120,862 $25,262 $2,557,924
======== ======== ======== ======== ======== ======= ==========
Trademarks and other intangible assets at July 31, 2002 and May 1, 2002,
subject to amortization expense, are as follows:
July 31, 2002 May 1, 2002
------------------------------- -------------------------------
Accum Accum
Gross Amort Net Gross Amort Net
-------- --------- -------- -------- --------- --------
Trademarks............... $259,268 $ (47,027) $212,241 $252,977 $ (45,153) $207,824
Licenses................. 209,187 (108,515) 100,672 209,204 (107,044) 102,160
Other.................... 107,955 (56,457) 51,498 103,275 (53,186) 50,089
-------- --------- -------- -------- --------- --------
$576,410 $(211,999) $364,411 $565,456 $(205,383) $360,073
======== ========= ======== ======== ========= ========
8
Amortization expense for trademarks and other intangible assets subject to
amortization was $6.3 million for the three months ended July 31, 2002.
Based upon the amortizable intangible assets recorded on the balance sheet
at July 31, 2002, amortization expense for each of the next five years is
estimated to be approximately $25.0 million.
Intangible assets not subject to amortization at July 31, 2002 and May 1,
2002, were $640.5 million and $601.1 million respectively, and consisted
solely of trademarks.
Effective May 2, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." This statement provides
updated guidance concerning the recognition and measurement of an
impairment loss for certain types of long-lived assets, expands the scope
of a discontinued operation to include a component of an entity and
eliminates the current exemption to consolidation when control over a
subsidiary is likely to be temporary. The adoption of this new standard did
not have a material impact on the Company's financial position, results of
operations or cash flows for the three months ended July 31, 2002.
(6) 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 the Company in Fiscal 2004. The
Company does not expect that the adoption of this standard will have a
significant impact on the consolidated financial statements.
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. This Statement also establishes that fair value is
the objective for initial measurement of the liability. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. Management is currently assessing the
details of this Standard.
(7) SEGMENTS
The Company's segments are primarily organized by geographical area. The
composition of segments and measure of segment profitability is consistent
with that used by the Company's management. Descriptions of the Company's
reportable segment are as follows:
Heinz North America--This segment manufactures, markets and sells
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 manufactures, markets and
sells dry and canned pet food, pet snacks, tuna and other seafood.
U.S. Frozen--This segment manufactures, markets and sells 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 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 operat-
9
ing 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 not the primary measure of segment profitability
reviewed by the Company's management.
The following table presents information about the Company's reportable
segments:
First Quarter Ended
-------------------------------
July 31, 2002 August 1, 2001
FY 2003 FY 2002*
------------- --------------
(Thousands of Dollars)
Net external sales:
Heinz North America...................................... $ 586,114 $ 554,927
U.S. Pet Products and Seafood............................ 294,302 328,216
U.S. Frozen.............................................. 245,789 208,976
---------- ----------
North America Totals..................................... 1,126,205 1,092,119
Europe................................................... 696,341 657,817
Asia/Pacific............................................. 254,424 233,655
Other Operating Entities................................. 126,675 93,704
---------- ----------
Consolidated Totals...................................... $2,203,645 $2,077,295
========== ==========
Intersegment sales:
Heinz North America...................................... $ 9,662 $ 7,331
U.S. Pet Products and Seafood............................ 2,844 4,813
U.S. Frozen.............................................. 1,928 2,201
Europe................................................... 1,564 1,374
Asia/Pacific............................................. 873 292
Other Operating Entities................................. 462 --
Non-Operating (a)........................................ (17,333) (16,011)
---------- ----------
Consolidated Totals...................................... $ -- $ --
========== ==========
Operating income (loss):
Heinz North America...................................... $ 105,878 $ 118,471
U.S. Pet Products and Seafood............................ 34,355 57,541
U.S. Frozen.............................................. 51,703 44,236
---------- ----------
North America Totals..................................... 191,936 220,248
Europe................................................... 142,499 150,571
Asia/Pacific............................................. 21,203 26,136
Other Operating Entities................................. 17,070 11,933
Non-Operating (a)........................................ (27,576) (24,734)
---------- ----------
Consolidated Totals...................................... $ 345,132 $ 384,154
========== ==========
Operating income (loss) excluding special items (b):
Heinz North America...................................... $ 112,772 $ 123,345
U.S. Pet Products and Seafood............................ 34,355 65,336
U.S. Frozen.............................................. 51,703 44,236
---------- ----------
North America Totals..................................... 198,830 232,917
Europe................................................... 142,499 152,286
Asia/Pacific............................................. 21,203 26,734
Other Operating Entities................................. 17,070 11,933
Non-Operating (a)........................................ (16,065) (23,541)
---------- ----------
Consolidated Totals...................................... $ 363,537 $ 400,329
========== ==========
10
--------------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) First Quarter ended July 31, 2002 - Excludes Del Monte transaction
related costs and cost to reduce overhead of the remaining core
businesses as follows: Heinz North America $6.9 million and
Non-Operating $11.5 million.
First Quarter ended August 1, 2001 - Excludes implementation and
restructuring costs of Streamline as follows: Heinz North America $4.9
million, U.S. Pet Products and Seafood $7.8 million, Europe $1.7
million, Asia/Pacific $0.6 million and Non-Operating $1.2 million.
The Company's revenues are generated via the sale of products in the
following categories:
First Quarter Ended
-------------------------------
July 31, 2002 August 1, 2001
FY 2003 FY 2002*
------------- --------------
(Thousands of Dollars)
Ketchup, Condiments and Sauces.............................. $ 640,780 $ 598,341
Frozen Foods................................................ 437,754 377,775
Tuna........................................................ 251,069 247,855
Soups, Beans and Pasta Meals................................ 285,914 268,395
Infant Foods................................................ 195,414 196,916
Pet Products................................................ 197,178 237,583
Other....................................................... 195,536 150,430
---------- ----------
Total................................................... $2,203,645 $2,077,295
========== ==========
*Reclassified, see Note 5
(8) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share in accordance with the provisions of SFAS No. 128:
First Quarter Ended
------------------------------
July 31, 2002 August 1, 2001
FY 2003 FY 2002
------------- --------------
(In Thousands, Except per
Share Amounts)
Net income.................................................. $177,795 $200,474
Preferred dividends......................................... 5 5
-------- --------
Net income applicable to common stock....................... $177,790 $200,469
======== ========
Average common shares outstanding--basic.................. 351,026 349,202
Effect of dilutive securities:
Convertible preferred stock............................. 148 169
Stock options........................................... 2,355 3,009
-------- --------
Average common shares outstanding--diluted................ 353,529 352,380
======== ========
Net income per share--basic................................. $ 0.51 $ 0.57
======== ========
Net income per share--diluted............................... $ 0.50 $ 0.57
======== ========
11
(9) COMPREHENSIVE INCOME
First Quarter Ended
-------------------------------
July 31, 2002 August 1, 2001
FY 2003 FY 2002
------------- --------------
(Thousands of Dollars)
Net income.................................................. $177,795 $200,474
Other comprehensive income:
Foreign currency translation adjustment................. 117,388 (9,031)
Minimum pension liability adjustment.................... 906 140
Deferred gains/(losses) on derivatives:
Net change from periodic revaluations.............. 8,165 319
Net amount reclassified to earnings................ (13,795) 243
-------- --------
Comprehensive income........................................ $290,459 $192,145
======== ========
(10) FINANCIAL INSTRUMENTS
The Company operates internationally, with manufacturing 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 currency
swaps 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 and hedges of specific cash flows
associated with foreign currency denominated financial assets and
liabilities 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. During the quarter ended July 31,
2002, losses of $13.5 million, net of income taxes of $7.9 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. When using a commodity option as a hedging
instrument, the Company excludes the time value of the option from the
assessment of hedge effectiveness.
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 particular risk
being hedged.
HEDGE INEFFECTIVENESS: During the quarter ended July 31, 2002, hedge
ineffectiveness related to cash flow hedges was a net loss of $0.1 million,
which is reported in the consolidated statements of income as other
expenses.
DEFERRED HEDGING GAINS AND LOSSES: As of July 31, 2002, the Company is
hedging forecasted transactions for periods not exceeding 12 months, and
expects $6.2 million of net deferred loss reported in accumulated other
comprehensive loss to be reclassified to earnings within that time frame.
12
(11) SUBSEQUENT EVENT
On September 5, 2002, the Company, H.J. Heinz Finance Company ("HFC") and a
group of domestic and international banks renewed an $800 million credit
364-day agreement. That credit agreement and the $1.5 billion credit
agreement that expires in September 2006 support the Company's commercial
paper programs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AGREEMENT BETWEEN H.J. HEINZ COMPANY AND DEL MONTE FOODS COMPANY
On June 13, 2002, Heinz announced that it will transfer to a wholly-owned
subsidiary ("Spinco") assets and liabilities of 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 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.
Included in the transaction will be the following brands: StarKist(R),
9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz
Nature's Goodness(R) baby food and College Inn(R) broths. The following is a
summary of the Fiscal 2003 and Fiscal 2002 first quarter operating results of
the businesses to be spun off:
First Quarter Ended
------------------------------
July 31, 2002 August 1, 2001
------------- --------------
Revenues......................................... $ 364,331 $401,754
Operating income................................. 49,709 69,948
Operating income excluding special items......... 49,709 77,786
Pending completion of the transaction, Heinz expects it will 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. [Note:
All earnings per share amounts included in Management's Discussion and Analysis
are presented on an after-tax diluted basis]. Upon completion of the
transaction, 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 debt reduction as a result of the transaction,
Heinz is targeting an additional $1.0 billion of debt reduction by the end of
Fiscal 2005.
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 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 transaction is not expected to close until late in
calendar year 2002 or early in calendar year 2003.
During the first quarter of Fiscal 2003, the Company recognized transaction
related costs and costs to reduce overhead of the remaining core businesses
totaling $18.4 million pretax ($0.03 per share). Heinz anticipates transaction
related and restructuring costs of approximately $160 million
13
after-tax to be incurred in Fiscal 2003. For more information regarding this
transaction, please refer to the Company's Annual Report to Shareholders for the
fiscal year ended May 1, 2002.
STREAMLINE
In the fourth quarter of Fiscal 2001, the Company announced a restructuring
initiative named "Streamline". This initiative includes 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. The accrued restructuring costs at July 31, 2002
were approximately $18.7 million and relate to employee termination and exit
costs. For more information regarding Streamline, please refer to the Company's
Annual Report to Shareholders for the fiscal year ended May 1, 2002.
THREE MONTHS ENDED JULY 31, 2002 AND AUGUST 1, 2001
RECENTLY ADOPTED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations", which requires that the purchase method of
accounting be applied to all business combinations after June 30, 2001. SFAS No.
141 also established criteria for recognition of intangible assets and goodwill.
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. This standard also requires, at
a minimum, an annual assessment of the carrying value of goodwill and
intangibles with indefinite useful lives.
The Company is currently completing its evaluation of the impact of
adopting SFAS No. 142 on the consolidated financial statements. The reassessment
of intangible assets, including the ongoing impact of amortization, was
completed during the first quarter of Fiscal 2003. The assignment of goodwill to
reporting units, along with transitional goodwill impairment tests, must be
completed during the second quarter of Fiscal 2003. Net income for the quarter
ended August 1, 2001 would have been $215.4 or $0.04 per share higher had the
provisions of the new standards been applied as of May 3, 2001.
Effective May 2, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment of Disposal of Long-Lived Assets." This statement provides
updated guidance concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets, expands the scope of a discontinued
operation to include a component of an entity and eliminates the current
exemption to consolidation when control over a subsidiary is likely to be
temporary. The adoption of this new standard did not have a material impact on
the Company's financial position, results of operations or cash flows for the
three months ended July 31, 2002.
During the fourth quarter of Fiscal 2002, the company 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 and gross profit were reduced by
approximately $108.2 million in the first quarter of Fiscal 2002. Prior period
data has been reclassified to conform to the current year presentation.
RESULTS OF OPERATIONS
For the three months ended July 31, 2002, sales increased $126.4 million,
or 6.1%, to $2.20 billion from $2.08 billion last year. Sales were favorably
impacted by acquisitions (4.1%), pricing (4.0%) and foreign exchange translation
rates (3.4%). The favorable impact of acquisitions is primarily related to the
prior year acquisitions in the Heinz North America and U.S. Frozen segments. The
favorable pricing was realized primarily in certain highly inflationary
countries.
14
Sales were negatively impacted by unfavorable volumes of 4.6% driven by the
current year strategic shift from trade promotional spending to consumer focused
promotional and marketing programs. This strategic shift has caused a
realignment of promotional timing, particularly in the United States.
Additionally, the Company is increasing its focus on trade spending efficiency
and effectiveness. Divestitures reduced sales by 0.8%.
The current year's first quarter was negatively impacted by costs related
to the Del Monte transaction and costs to reduce overhead of the remaining core
businesses totaling $18.4 million pretax ($0.03 per share), which are included
in selling, general and administrative expenses ("SG&A".) These include employee
termination and severance costs, legal and other professional service costs.
Last year's first quarter was negatively impacted by Streamline restructuring
charges and implementation costs totaling $16.1 million pretax ($0.04 per
share.)
The following tables provide a comparison of the Company's reported results
and the results excluding special items for the first quarter of Fiscal 2003 and
Fiscal 2002:
First Quarter Ended July 31, 2002
----------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
(Dollars in millions except per share amounts) -------- ------ --------- ------ -----
Reported results............................. $2,203.6 $786.9 $345.1 $177.8 $0.50
Special items.............................. -- -- 18.4 11.6 0.03
-------- ------ ------ ------ -----
Results excluding special items.............. $2,203.6 $786.9 $363.5 $189.4 $0.54
======== ====== ====== ====== =====
First Quarter Ended August 1, 2001
----------------------------------------------
Net Gross Operating Net Per
Sales Profit Income Income Share
-------- ------ --------- ------ -----
Reported results............................. $2,077.3 $762.3 $384.2 $200.5 $0.57
Streamline implementation costs............ -- 8.7 10.4 9.4 0.03
Streamline restructuring costs............. -- -- 5.7 3.6 0.01
-------- ------ ------ ------ -----
Results excluding special items.............. $2,077.3 $771.0 $400.3 $213.4 $0.61
======== ====== ====== ====== =====
- ---------------
(Note: Totals may not add due to rounding.)
Gross profit increased $24.6 million, or 3.2%, to $786.9 million from
$762.3 million. Excluding the special items noted above, gross profit increased
$15.9 million, or 2.1%, to $786.9 million from $771.0 million and the gross
profit margin decreased to 35.7% from 37.1%, primarily related to the U.S. Pet
Products and Seafood segment, partially offset by the current year benefit of
approximately $16.6 million related to the non-amortization of intangible assets
with indefinite lives.
SG&A increased $63.7 million, or 16.8%, to $441.8 million from $378.1
million. Excluding the special items noted above, SG&A increased $52.7 million,
or 14.2%, to $423.4 million from $370.7 million and increased as a percentage of
sales to 19.2% from 17.8%. The increase is primarily driven by increased
marketing spend across all segments and increased general and administrative
expenses ("G&A") in the Heinz North America and Europe segments.
Operating income decreased $39.0 million, or 10.2%, to $345.1 million from
$384.2 million. Excluding the special items noted above, operating income
decreased $36.8 million, or 9.2%, to $363.5 million from $400.3 million and
decreased as a percentage of sales to 16.5% from 19.3% primarily related to the
change in gross profit and SG&A discussed above.
Net interest expense decreased $7.5 million to $62.7 million from $70.2
million last year, driven primarily by lower interest rates over the past year.
Other expense increased $9.9 million to $11.7 million from $1.8 million last
year. The increase is primarily attributable to increases in minority interest
expense. The effective tax rate for the current quarter was 34.3% compared to
35.8% last year. Excluding the special items noted above, the effective rate was
34.5% in the current quarter compared to 35.0% last year.
15
Net income in the current quarter was $177.8 million compared to $200.5
million last year and diluted earnings per share was $0.50 in the current
quarter versus $0.57 in the same period last year. Excluding the special items
in the table noted above, net income decreased $24.1 million to $189.4 million
from $213.4 million last year, and diluted earnings per share decreased 12.2%,
to $0.54 from $0.61 last year.
OPERATING RESULTS BY BUSINESS SEGMENT
First Quarter Ended
------------------------------
July 31, 2002 August 1, 2001
------------- --------------
SALES:
Heinz North America......................................... $ 586,114 $ 554,927
U.S. Pet Products and Seafood............................... 294,302 328,216
U.S. Frozen................................................. 245,789 208,976
---------- ----------
Total North America......................................... 1,126,205 1,092,119
Europe...................................................... 696,341 657,817
Asia/Pacific................................................ 254,424 233,655
Other Operating Entities.................................... 126,675 93,704
---------- ----------
Consolidated Totals......................................... $2,203,645 $2,077,295
========== ==========
OPERATING INCOME:
Heinz North America......................................... $ 105,878 $ 118,471
U.S. Pet Products and Seafood............................... 34,355 57,541
U.S. Frozen................................................. 51,703 44,236
---------- ----------
Total North America......................................... 191,936 220,248
Europe...................................................... 142,499 150,571
Asia/Pacific................................................ 21,203 26,136
Other Operating Entities.................................... 17,070 11,933
Non-operating............................................... (27,576) (24,734)
---------- ----------
Consolidated Totals......................................... $ 345,132 $ 384,154
========== ==========
OPERATING INCOME EXCLUDING SPECIAL ITEMS:
Heinz North America......................................... $ 112,772 $ 123,345
U.S. Pet Products and Seafood............................... 34,355 65,336
U.S. Frozen................................................. 51,703 44,236
---------- ----------
Total North America......................................... 198,830 232,917
Europe...................................................... 142,499 152,286
Asia/Pacific................................................ 21,203 26,734
Other Operating Entities.................................... 17,070 11,933
Non-Operating............................................... (16,065) (23,541)
---------- ----------
Consolidated Totals......................................... $ 363,537 $ 400,329
========== ==========
The following discussion of segment operating results excludes the special
items discussed above.
16
HEINZ NORTH AMERICA
Sales of the Heinz North America segment increased $31.2 million, or 5.6%.
Acquisitions, net of divestitures, increased sales 4.6%, due primarily to the
prior year acquisitions of Classico and Aunt Millie's pasta sauce, Mrs. Grass
Recipe soups and Wyler's bouillons and soups. Higher pricing increased sales
2.5% due mainly to foodservice, private label soup and reduced trade promotions
on retail ketchup and baby food. Sales volume decreased 1.3%, due to decreases
in retail ketchup and infant feeding, partially offset by specialty sauces and
private label soup. Shipments of retail ketchup are down due to the ongoing
trade initiatives to reduce inventory levels. The weaker Canadian dollar
decreased sales 0.2%.
Gross profit increased $12.7 million, or 6.3% due primarily to
acquisitions, pricing and the benefit of reduced amortization expense of
intangible assets, partially offset by unfavorable sales mix. Operating income
decreased $10.5 million, or 8.6%, to $112.8 million from $123.3 million, due
primarily to increased marketing and higher G&A partially offset by acquisitions
and the change in gross profit.
U.S. PET PRODUCTS AND SEAFOOD
Sales of the U.S. Pet Products and Seafood segment decreased $33.9 million,
or 10.3%. Sales volume decreased 7.7% primarily in pet snacks, canned cat food
and dry dog food, partially offset by volume increases in tuna. Lower pricing
decreased sales 2.6%, primarily in tuna partially offset by lower trade
promotions and higher pricing of pet food. Pet food volume and pricing were
impacted by the current year strategic shift from trade promotional spending to
consumer focused promotional and marketing programs and the timing of these
promotional programs.
Gross profit decreased $32.0 million, or 27.4%, primarily due to lower
pricing and higher tuna costs and lower volume of pet snacks, partially offset
by reduced trade promotion spending in tuna and the benefit of reduced
amortization expense of intangible assets. Operating income decreased $31.0
million, or 47.4%, to $34.4 million from $65.3 million, due primarily to the
change in gross profit.
U.S. FROZEN
U.S. Frozen's sales increased $36.8 million, or 17.6%. Acquisitions, net of
divestitures, increased sales 24.9%, due primarily to the prior year
acquisitions of 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. Higher pricing increased sales 5.1%, primarily due to SmartOnes
frozen entrees and a reduction in trade promotions related to the launch of Hot
Bites in the prior year. Sales volume decreased 12.4% driven by Bagel Bites/Hot
Bites, Boston Market HomeStyle Meals and frozen potatoes. The volume decrease is
partially attributed to the rationalization of the Hot Bites product lines with
renewed focus on the base Bagel Bites business and the timing of promotional and
marketing programs across the segment.
Gross profit increased $17.4 million or 21.4%, primarily due to
acquisitions, partially offset by volume decreases. Operating income increased
$7.5 million, or 16.9%, to $51.7 million from $44.2 million reflecting increased
marketing and S&D expenses.
EUROPE
Heinz Europe's sales increased $38.5 million, or 5.9%. Higher pricing
increased sales 0.7%, primarily due to seafood, infant feeding and beans,
partially offset by lower pricing in frozen foods. Lower volume decreased sales
2.0%, driven primarily by seafood, infant feeding and frozen pizza, partially
offset by beans and frozen entrees. Favorable foreign exchange translation rates
increased sales by 7.5%. Divestitures reduced sales by 0.3%.
17
Gross profit increased $11.0 million, or 4.1%, due primarily to increased
pricing, favorable foreign exchange rates and the benefit of reduced
amortization expense of intangible assets. Operating income decreased $9.8
million, or 6.4%, to $142.5 million from $152.3 million primarily attributable
to increased marketing and G&A expense offset partially by the favorable change
in gross profit.
ASIA/PACIFIC
Sales in Asia/Pacific increased $20.8 million, or 8.9%. Higher pricing
increased sales 3.8%, primarily due to poultry, frozen foods and sauces. Volume
decreased sales 4.2%, driven primarily by juices/drinks and cooking oils.
Favorable foreign exchange translation rates increased sales by 9.7%.
Divestitures reduced sales by 0.4%.
Gross profit increased $0.9 million, or 1.2%, due primarily to increased
pricing, favorable foreign exchange rates and the current year benefit of
approximately $2.0 million related to the non-amortization of intangible assets
with indefinite lives, partially offset by the ongoing poor factory operations
in connection with the movement of manufacturing offshore for Australia and
Japan. Operating income decreased $5.5 million, or 20.7%, to $21.2 million from
$26.7 million primarily due to increased marketing and G&A expenses.
OTHER OPERATING ENTITIES
Sales for Other Operating Entities increased $33.0 million, or 35.2%
primarily due to favorable pricing in certain highly inflationary countries.
Gross profit increased $3.9 million, or 14.2%, due primarily to favorable
pricing. Operating income increased $5.1 million or 43.0% due primarily to the
increase in gross profit.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities was $227.2 million compared to $59.9
million last year. The increase in Fiscal 2003 versus Fiscal 2002 is primarily
due to improved working capital performance and a reduction in payments related
to restructuring activities.
Cash used for investing activities totaled $43.8 million compared to $361.2
million last year. Acquisitions in the current period required $17.3 million
compared to $310.8 million last year. Acquisitions in the prior period related
primarily to the purchase of Borden Food Corporation's pasta and dry bouillon
and soup business. Capital expenditures in the current quarter required $32.6
million compared to $60.1 million last year. The current year reduction is
primarily related to restructuring initiatives in the prior year.
Cash used by financing activities was $219.5 million compared to cash
provided by financing activities of $299.5 million last year. There were no
proceeds from long-term debt in the current year compared to $764.6 last year.
Payments on long-term debt required $4.2 million this quarter compared to $26.6
million last year. Commercial paper and short-term borrowings required $89.5
million compared to $656.8 million last year. In addition, $325.0 million was
provided during the prior year quarter through the issuance of Preferred Stock
by H.J. Heinz Finance Company ("HFC"). Cash provided from stock options
exercised totaled $4.0 million versus $13.3 million last year. Dividend payments
totaled $142.1 million compared to $137.1 million for the same period last year.
In the first quarter of Fiscal 2003, the cash requirements of Streamline
were $5.4 million, relating to severance costs.
On August 16, 2002, Fitch Ratings initiated coverage of the Company
assigning an 'A' rating to the Company's senior unsecured debt and a 'F1' rating
to the Company's commercial paper. Fitch indicated that the ratings outlook was
stable. In connection with the announcement of the Del
18
Monte transaction, Moody's Investors Service changed the Company's 'A3' senior
unsecured debt ratings outlook from negative to stable.
On September 5, 2002, the Company, HFC and a group of domestic and
international banks renewed an $800 million credit 364-day agreement. That
credit agreement and the $1.5 billion credit agreement that expires in September
2006 support the Company's commercial paper programs. As of July 31, 2002 $22.3
million of commercial paper was outstanding and classified as long-term debt due
to the long-term nature of the supporting credit agreement. As of May 1, 2002,
the Company had $119.1 million of commercial paper outstanding and classified as
long-term debt.
The impact of inflation on both the Company's financial position and
results of operations is not expected to adversely affect Fiscal 2003 results.
The Company's financial position continues to remain strong, enabling it to meet
cash requirements for operations, capital expansion programs and dividends to
shareholders. The Company's goal remains the achievement of previously
communicated earnings per share for the full year.
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 the Company in Fiscal 2004. The Company does not expect that the
adoption of this standard will have a significant impact on the consolidated
financial statements.
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities.
This Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. Management is currently
assessing the details of this Standard and is preparing a plan of
implementation.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or oral
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 and 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;
19
- 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;
- Fluctuations in the cost and availability of raw materials, including
tuna, 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 and 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 private label gravy, College Inn broth 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
20
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
three months ended July 31, 2002. For additional information, refer to pages
43-45 of the Company's Annual Report to Shareholders for the fiscal year ended
May 1, 2002.
21
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
See Note 7 to the Condensed Consolidated Financial Statements in Part
I--Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part
I--Item 2 of this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The Company has 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
filed herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
3. The Company's By-Laws, as amended.
12. Computation of Ratios of Earnings to Fixed Charges.
99(a). Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements.
99(b). Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements.
99(c). Condensed consolidated financial statements of HFC filed in
accordance with rule 3-10 of Regulation S-X. H.J. Heinz Company
is a guarantor of all of HFC's outstanding debt.
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Securities and Exchange
Commission on June 18, 2002 in connection with the Agreement and Plan
of Merger by and among H.J. Heinz Company, SKF Foods Inc., Del Monte
Foods Company and Del Monte Corporation and certain related agreements.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H.J. HEINZ COMPANY
(Registrant)
Date: September 11, 2002
By: /s/ ARTHUR WINKLEBLACK
..........................................
Arthur Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: September 11, 2002
By: /s/ BRUNA GAMBINO
..........................................
Bruna Gambino
Corporate Controller
(Principal Accounting Officer)
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I, William R. Johnson, Chairman, President and Chief Executive Officer of
H.J. Heinz Company certify that:
1. I have reviewed this quarterly report on Form 10-Q of H.J. Heinz
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 11, 2002
By: /s/ WILLIAM R. JOHNSON
------------------------------------
Name: William R. Johnson
Title: Chairman, President and
Chief Executive Officer
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I, Arthur Winkleblack, Executive Vice President and Chief Financial Officer
of H.J. Heinz Company certify that:
1. I have reviewed this quarterly report on Form 10-Q of H. J. Heinz
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: September 11, 2002
By: /s/ ARTHUR WINKLEBLACK
------------------------------------
Name: Arthur Winkleblack
Title: Executive Vice President
and Chief
Financial Officer
25