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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 JANUARY 28, 2004
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 NINE MONTHS ENDED JANUARY 28, 2004 COMMISSION FILE NUMBER 333-85064
H. J. HEINZ FINANCE COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 82-0382406
(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 __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes __ No X
All of the outstanding shares of the registrant's common stock are owned by
H. J. Heinz Company.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Third Quarter Ended
-----------------------------------
January 28, 2004 January 29, 2003
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(in thousands)
Sales....................................................... $812,969 $798,229
Cost of products sold....................................... 516,016 506,186
-------- --------
Gross profit................................................ 296,953 292,043
Selling, general and administrative expenses................ 128,925 136,973
Royalty expense to related parties.......................... 42,106 37,429
-------- --------
Operating income............................................ 125,922 117,641
Interest income............................................. 2,319 6,112
Interest expense............................................ 35,214 39,888
Dividends from related parties.............................. 30,798 31,482
Currency loss............................................... 25,621 30,787
Other expenses, net......................................... 2,574 44,311
-------- --------
Income from continuing operations before income taxes and
minority interest......................................... 95,630 40,249
Provision/(benefit) for income taxes........................ 8,346 (2,080)
-------- --------
Income from continuing operations before minority
interest.................................................. 87,284 42,329
Minority interest........................................... (76,302) (45,201)
-------- --------
Income/(loss) from continuing operations.................... 10,982 (2,872)
Loss from discontinued operations, net of tax and minority
interest.................................................. -- (9,909)
-------- --------
Net income/(loss)........................................... $ 10,982 $(12,781)
======== ========
See notes to condensed consolidated financial statements.
2
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
-----------------------------------
January 28, 2004 January 29, 2003
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(in thousands)
Sales....................................................... $2,354,559 $2,309,321
Cost of products sold....................................... 1,492,153 1,457,861
---------- ----------
Gross profit................................................ 862,406 851,460
Selling, general and administrative expenses................ 388,930 409,137
Royalty expense to related parties.......................... 119,636 112,010
---------- ----------
Operating income............................................ 353,840 330,313
Interest income............................................. 6,090 19,925
Interest expense............................................ 102,515 108,731
Dividends from related parties.............................. 92,394 93,078
Currency loss............................................... 40,337 54,404
Other expenses, net......................................... 6,501 54,809
---------- ----------
Income from continuing operations before income taxes and
minority interest......................................... 302,971 225,372
Provision for income taxes.................................. 36,086 18,988
---------- ----------
Income from continuing operations before minority
interest.................................................. 266,885 206,384
Minority interest........................................... (209,872) (172,402)
---------- ----------
Income from continuing operations........................... 57,013 33,982
Loss from discontinued operations, net of tax and minority
interest.................................................. -- (23,313)
---------- ----------
Net income.................................................. $ 57,013 $ 10,669
========== ==========
See notes to condensed consolidated financial statements.
3
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 28, 2004 April 30, 2003*
FY 2004 FY 2003
---------------- ---------------
(Unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 234,467 $ 194,266
Receivables, net.......................................... 350,589 400,565
Due from related parties.................................. 21,334 24,603
Short-term notes receivable from related parties.......... 698,119 217,988
Inventories............................................... 468,421 386,889
Prepaid expenses and other current assets................. 37,052 29,901
---------- ----------
Total current assets................................... 1,809,982 1,254,212
Property, plant and equipment............................... 1,130,451 1,120,294
Less accumulated depreciation............................... 511,053 482,981
---------- ----------
Total property, plant and equipment, net............... 619,398 637,313
Investments in related parties.............................. 1,895,245 1,895,245
Goodwill.................................................... 1,059,652 1,008,734
Other intangible assets, net................................ 250,886 257,378
Other non-current assets.................................... 424,269 512,803
---------- ----------
Total other non-current assets......................... 3,630,052 3,674,160
---------- ----------
Total assets........................................... $6,059,432 $5,565,685
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term debt with related parties...................... $ 209,595 $ 82,716
Portion of long-term debt due within one year............. 374,636 1,738
Accounts payable.......................................... 206,491 212,751
Accounts payable to related parties....................... 69,129 98,947
Accrued interest.......................................... 57,568 66,170
Accrued marketing......................................... 94,427 77,353
Other accrued liabilities................................. 50,885 45,007
---------- ----------
Total current liabilities.............................. 1,062,731 584,682
Long-term debt.............................................. 3,876,318 3,981,145
Long-term debt with related parties......................... 189,104 --
Deferred income taxes....................................... 10,237 14,511
Other liabilities........................................... 4,061 5,979
---------- ----------
Total long-term debt and other liabilities............. 4,079,720 4,001,635
Minority interest........................................... 667,365 457,493
Mandatorily Redeemable Series A Preferred shares............ -- 325,000
Shareholder's equity:
Common stock.............................................. 11 11
Additional capital........................................ 128,050 128,050
Retained earnings......................................... 120,651 68,697
Accumulated other comprehensive gain...................... 904 117
---------- ----------
Total shareholder's equity............................. 249,616 196,875
---------- ----------
Total liabilities and shareholder's equity............. $6,059,432 $5,565,685
========== ==========
- ---------------
* Summarized from audited Fiscal Year 2003 balance sheet.
See notes to condensed consolidated financial statements.
4
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
-----------------------------------
January 28, 2004 January 29, 2003
FY 2004 FY 2003
---------------- ----------------
(Unaudited)
(in thousands)
Cash Flows from Operating Activities:
Net income................................................ $ 57,013 $ 10,669
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................... 43,025 56,160
Amortization........................................... 9,319 9,198
Deferred tax (benefit)/provision....................... (9,104) 16,120
Minority interest...................................... 209,872 270,420
Currency loss.......................................... 40,337 54,404
Other items, net....................................... (9,117) 9,402
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables.......................................... 63,641 203,106
Inventories.......................................... (66,285) (33,085)
Due from/to related parties.......................... (26,763) 62,648
Prepaid expenses and other current assets............ (7,012) (88,023)
Accounts payable..................................... (14,442) 30,227
Accrued liabilities.................................. (8,208) 7,096
Income taxes......................................... 22,931 (16,311)
---------- ----------
Cash provided by operating activities..................... 305,207 592,031
---------- ----------
Cash Flows from Investing Activities:
Capital expenditures...................................... (30,147) (46,561)
Acquisitions, net of cash acquired........................ (61,298) --
Other items, net.......................................... 7,283 5,046
---------- ----------
Cash used for investing activities..................... (84,162) (41,515)
---------- ----------
Cash Flows from Financing Activities:
Proceeds from long-term debt with related parties......... 185,639 --
Payments on long-term debt................................ (8,168) (401,214)
Proceeds received from Heinz related to the spin-off,
net.................................................... -- 1,062,143
Payments on commercial paper, net......................... -- (89,142)
Payments on short-term debt with related parties, net..... (353,256) (667,512)
Distributions to minority partners........................ -- (56,412)
Dividends on preferred shares............................. (5,059) (15,175)
Other items, net.......................................... -- 2,619
---------- ----------
Cash used for financing activities..................... (180,844) (164,693)
---------- ----------
Net increase in cash and cash equivalents................... 40,201 385,823
Cash and cash equivalents, beginning of period.............. 194,266 6,924
---------- ----------
Cash and cash equivalents, end of period.................... $ 234,467 $ 392,747
========== ==========
Supplemental cash plan information:
Non cash activities:
Net assets spun-off.................................... $ -- $1,134,873
========== ==========
See notes to condensed consolidated financial statements.
5
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The U.S. treasury and domestic business operations of H. J. Heinz Company
("Heinz") are conducted by H. J. Heinz Finance Company and its wholly-owned
subsidiaries, and H. J. Heinz Company, L.P. ("Heinz LP") collectively
referred to as "Heinz Finance" in the accompanying notes. H. J. Heinz
Finance Company has limited partnership interests in Heinz LP equal to
approximately 40% of the capital of Heinz L.P.
Heinz LP owns or leases the operating assets involved in manufacturing
throughout the United States and manages the business. Heinz LP has two
classes of limited partnership interests, Class A and Class B, that are
allocated varying income and cash distributions in accordance with the
Heinz LP agreement. H. J. Heinz Finance Company, directly and through
wholly-owned subsidiaries, owns the Class B interests. Heinz directly owns
the Class A interests. Heinz Management Company, a wholly-owned subsidiary
of Heinz, is the managing General Partner of Heinz LP and employs the
salaried personnel of Heinz's domestic operations. Under the partnership
agreement, Heinz Finance has the power to control the general partner
through majority membership on Heinz LP's management board. The minority
interest amounts on the January 28, 2004 and April 30, 2003 balance sheets
represent the Class A and General Partner limited partnership interest in
Heinz LP, and have been adjusted for the minority partners' share of income
and cash distributions.
The interim condensed consolidated financial statements of Heinz Finance
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
the interim periods are not necessarily indicative of the results to be
expected for the full fiscal year due to the seasonal nature of the
business of Heinz Finance. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 2004 presentation. These
statements should be read in conjunction with Heinz Finance's consolidated
and combined financial statements and related notes, and management's
discussion and analysis of financial condition and results of operations
which appear in Heinz Finance's Annual Report on Form 10-K for the year
ended April 30, 2003.
For all Heinz financial reporting and disclosure purposes, H. J. Heinz
Finance Company and its subsidiaries (including Heinz LP) are treated as
fully consolidated subsidiaries. All of the assets, liabilities, results of
operations and cash flows of these entities are included in the Heinz
consolidated financial statements. All of the intercompany transactions and
accounts are eliminated within the Heinz consolidated financial statements.
The preferred shares issued by Heinz Finance are reported in the Heinz
consolidated financial statements as long-term debt at January 28, 2004 and
minority interest at April 30, 2003.
(2) DISCONTINUED OPERATIONS AND SPIN-OFF
On December 20, 2002, Heinz transferred to a wholly-owned subsidiary ("SKF
Foods") certain assets and liabilities, including its U.S. 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.
6
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 Heinz
Finance's consolidated statements of income. The discontinued operations
generated sales of $248.7 million and $1,052.6 million and a net loss of
$9.9 million (net of $6.1 million of a tax benefit) and $23.3 million (net
of $13.8 million of a tax benefit) for the third quarter and nine months
ended January 29, 2003, respectively.
(3) SPECIAL ITEMS
REORGANIZATION COSTS
Heinz Finance recognized reorganization costs of $4.0 million pretax for
the nine months ended January 28, 2004, all of which were recorded in the
first quarter of Fiscal 2004. These costs were primarily due to employee
termination and severance costs following last year's spin-off transaction
with Del Monte, and of this amount, $3.9 million was charged to Heinz
Finance by Heinz Management Company through a management fee for all
salaried employee costs. These costs were recognized as a component of
selling, general and administrative expenses ("SG&A"). For the third
quarter of Fiscal 2003, Heinz Finance recognized reorganization costs
totaling $45.6 million pretax, of which $4.3 million was charged to Heinz
Finance by Heinz Management Company, and $1.6 million was recorded in cost
of products sold, $4.3 million in SG&A and $39.6 million in other expenses,
net. For the first nine months of Fiscal 2003, Heinz Finance recognized
reorganization costs totaling $57.2 million pretax, of which $14.1 million
was charged to Heinz Finance by Heinz Management Company, and $3.5 million
was recorded in cost of products sold, $14.1 million in SG&A and $39.6
million in other expenses, net. These Fiscal 2003 reorganization costs
include employee termination and severance costs and costs related to the
early retirement of debt.
During the first nine months of Fiscal 2004, Heinz Finance utilized $17.2
million of severance and exit cost accruals related to reorganization
costs. Amounts included in accounts payable to related parties and other
accrued liabilities related to these initiatives totaled $0.9 million and
$14.1 million at January 28, 2004 and April 30, 2003, respectively.
(4) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
January 28, April 30,
(in thousands) 2004 2003
- -------------- ----------- ---------
Finished goods and work-in-process........................ $298,556 $275,295
Packaging material and ingredients........................ 169,865 111,594
-------- --------
$468,421 $386,889
======== ========
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Effective May 2, 2002, Heinz Finance adopted Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." Under this standard, goodwill and intangibles with indefinite
useful lives are no longer amortized. The annual impairment tests are
performed in the fourth quarter of each fiscal year unless events suggest
an impairment may have occurred in the interim. No impairment issues were
identified as a result of adopting SFAS No. 142.
7
Changes in the carrying amount of goodwill for the nine months ended
January 28, 2004 by reportable segment, are as follows (see Note 9 for
information on changes to reportable segments):
North
American
Consumer U.S.
(in thousands) Products Foodservice Total
- -------------- -------- ----------- ----------
Balance at April 30, 2003....................... $844,192 $164,542 $1,008,734
Acquisition..................................... -- 46,051 46,051
Purchase accounting reclassifications........... 4,327 540 4,867
-------- -------- ----------
Balance at January 28, 2004..................... $848,519 $211,133 $1,059,652
======== ======== ==========
Trademarks and other intangible assets at January 28, 2004 and April 30,
2003, subject to amortization expense, are as follows:
January 28, 2004 April 30, 2003
---------------------------------- ----------------------------------
Accumulated Accumulated
(in thousands) Gross Amortization Net Gross Amortization Net
- -------------- -------- ------------ -------- -------- ------------ --------
Trademarks........... $ 39,103 $ (2,965) $ 36,138 $ 39,103 $ (2,051) $ 37,052
Licenses............. 208,186 (117,032) 91,154 208,186 (112,617) 95,569
Other................ 75,907 (43,453) 32,454 75,907 (42,269) 33,638
-------- --------- -------- -------- --------- --------
$323,196 $(163,450) $159,746 $323,196 $(156,937) $166,259
======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to
amortization was $6.5 million and $7.5 million for the nine months ended
January 28, 2004 and January 29, 2003, respectively. Based upon the
amortizable intangible assets recorded on the balance sheet at January 28,
2004, amortization expense for each of the next five years is estimated to
be approximately $9.0 million.
Intangible assets not subject to amortization at January 29, 2003 and April
30, 2003, were $91.1 million and consisted solely of trademarks.
(6) TAXES
The provision for income taxes consists of provisions for federal and state
income taxes. The low effective tax rate for Heinz Finance is a result of
the income of Heinz LP that is allocated to minority interest not being
subject to tax at the Heinz LP level or at Heinz Finance, partially offset
by the nondeductible interest expense associated with Heinz Finance's
mandatorily redeemable preferred shares. The effective tax rate will
fluctuate depending on the proportion of minority interest to total Heinz
Finance income before tax.
(7) RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. The Act
introduced a prescription drug benefit under Medicare (Medicare Part D) and
a federal subsidy to sponsors of retirement health care plans that provide
a benefit that is at least actuarially equivalent to Medicare Part D. In
accordance with FASB Staff Position 106-1, Heinz Finance has elected to
defer recognizing the effects of the Act on the accounting for its
retirement health care plans because specific authoritative guidance on the
accounting for the Act's provisions is pending. Once issued, this guidance
could require Heinz Finance to change previously reported financial
information.
In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46-R,
"Consolidation of Variable Interest Entities," FIN No. 46-R, which modifies
certain provisions and effective dates of FIN No. 46, sets forth criteria
to be used in determining whether an investment in a variable interest
entity should be consolidated, and is based on the general premise that
companies that
8
control another entity through interests other than voting interests should
consolidate the controlled entity. The provisions of FIN No. 46 become
effective for Heinz Finance in its fourth quarter ended April 28, 2004.
Heinz Finance is currently evaluating the impact the revised accounting
standard will have on the consolidated results of operations and financial
position.
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 Heinz Finance for the
second quarter of Fiscal 2004. The adoption of SFAS No. 150 required the
prospective classification of Heinz Finance's $325 million of mandatorily
redeemable preferred shares as long-term debt and the preferred dividend
from retained earnings to interest expense beginning in the second quarter
ended October 29, 2003.
(8) RELATED PARTY TRANSACTIONS
Employee Costs
Certain of Heinz's general and administrative expenses are allocated to
Heinz Finance. These costs primarily include a management charge of all
salaried employee costs from the Heinz Management Company. Total costs
charged to Heinz Finance for these services, including discontinued
operations, were $62.2 million and $82.5 million for the third quarter
ended January 28, 2004 and January 29, 2003, respectively, and $187.7
million and $250.7 million for the nine months ended January 28, 2004 and
January 29, 2003, respectively. These costs are recorded as cost of
products sold or SG&A expense in the accompanying consolidated statements
of income depending on the nature of the cost.
Heinz charges Heinz Finance for its share of group health insurance costs
for eligible company employees based upon location-specific costs, overall
insurance costs and loss experience incurred during a calendar year. In
addition, various other insurance coverages are also provided to Heinz
Finance through Heinz's corporate programs. Workers compensation, auto,
property, product liability and other insurance coverages are charged
directly based on Heinz Finance's loss experience. Amounts charged to Heinz
Finance for insurance costs, including discontinued operations, were $16.0
million and $17.6 million for the third quarter ended January 28, 2004 and
January 29, 2003, respectively, and $49.4 million and $53.9 million for the
nine months ended January 28, 2004 and January 29, 2003, respectively, and
are recorded in SG&A expense in the accompanying consolidated statements of
income.
Pension costs and postretirement costs are also charged to Heinz Finance
based upon eligible employees participating in the plans.
Cash Management
Heinz Finance represents the treasury center for cash management and debt
financing for all of Heinz's domestic operations. In addition, Heinz
Finance enters into a number of short-term notes payable with foreign
wholly-owned subsidiaries of Heinz. As a result of these cash management
activities, Heinz Finance had $453.5 million and $100.3 million of net
short-term notes receivable with related parties recorded on the
consolidated balance sheets as of January 28, 2004 and April 30, 2003,
respectively. An average interest rate of 1.14% and 1.74% was charged on
these combined domestic and foreign notes resulting in $1.6 million and
$2.1 million of net interest income for the third quarter ended January 28,
2004 and January 29, 2003, respectively, and $3.8 million and $10.8 million
of net interest income for the nine months ended January 28, 2004 and
January 29, 2003, respectively.
In the first quarter of Fiscal 2004, Heinz Finance entered into a long-term
note payable with a wholly-owned subsidiary of Heinz. The balance was
$189.1 million as of January 28, 2004, and is reported as long-term debt
with related parties on the condensed consolidated balance sheet. Interest
expense on this note totaled $1.4 million and $3.6 million for the third
quarter and nine
9
months ended January 28, 2004, respectively, and was based on a fixed
interest rate of 4.0%. This note is scheduled to mature in April 2005.
At January 28, 2004 and April 30, 2003, short-term notes receivable from
related parties includes $35.0 million related to a receivable from Heinz.
This note is classified as short-term given its maturity of April 29, 2004.
Product Sales and Purchases
Heinz Finance sells and purchases products and services to and from other
Heinz affiliates. The results of related party transactions are the $21.3
million and $24.6 million balances due from related parties as of January
28, 2004 and April 30, 2003, respectively, and the $69.1 million and $98.9
million balances for accounts payable to related parties as of January 28,
2004 and April 30, 2003, respectively. Product sales to related parties
were $12.2 million and $14.8 million for the third quarter ended January
28, 2004 and January 29, 2003, respectively, and $35.1 million and $34.8
million for the nine months ended January 28, 2004 and January 29, 2003,
respectively. Purchases from related parties were $8.3 million and $5.6
million for the third quarter ended January 28, 2004 and January 29, 2003,
respectively, and $23.0 million and $20.3 million for the nine months ended
January 28, 2004 and January 29, 2003, respectively.
Other Related Party Items
Heinz Finance held $1.9 billion of non-voting, 6.5% cumulative
non-participating preferred stock of PM Holding, Inc. ("PM Holding"), a
subsidiary of Heinz. Heinz Finance's preferred stock investment in PM
Holding was converted to a preferred stock investment in Heinz as a result
of the merger of PM Holding with and into Heinz during the third quarter of
Fiscal 2003. The dividends on the preferred stock amounted to $30.8 million
and $31.5 million for the third quarters ended January 28, 2004 and January
29, 2003, respectively, and $92.4 million and $93.1 million for the nine
months ended January 28, 2004 and January 29, 2003, respectively. This
preferred stock investment is recorded in the Investments in related
parties balance on the condensed consolidated balance sheets as of January
28, 2004 and April 30, 2003.
Heinz Finance paid royalties of $42.1 million and $37.4 million for the
third quarter ended January 28, 2004 and January 29, 2003, respectively,
and $119.6 million and $112.0 million for the nine months ended January 28,
2004 and January 29, 2003, respectively, to Promark International, Inc. and
Promark Brands, Inc., direct subsidiaries of Heinz, for the use of certain
trademarks.
(9) SEGMENTS
In the first quarter of Fiscal 2004, Heinz Finance changed its segment
reporting to reflect changes in organizational structure and management of
its businesses. Heinz Finance is now managing and reporting its operating
businesses under two segments, designated North American Consumer Products
and U.S. Foodservice. Prior periods have been restated to conform with the
current presentation.
Descriptions of Heinz Finance's reportable segments are as follows:
- North American Consumer Products -- This segment manufactures, markets
and sells ketchup, condiments, sauces, pasta meals, frozen potatoes,
entrees, snacks and appetizers to the grocery channels in the U.S.
- U.S. Foodservice -- This segment manufactures, markets and sells branded
and customized products to commercial and non-commercial food outlets and
distributors in the U.S. including ketchup, condiments, sauces and frozen
soups and desserts.
Heinz Finance's management evaluates performance based on several factors
including net sales, operating income 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
10
income are not presented by segment, since they are excluded from the
measure of segment profitability reviewed by Heinz Finance's management.
The following table presents information about Heinz Finance's reportable
segments:
Net External Sales Net External Sales
----------------------------------- -----------------------------------
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003
(in thousands) FY 2004 FY 2003 FY 2004 FY 2003
- -------------- ---------------- ---------------- ---------------- ----------------
North American Consumer
Products................ $455,335 $471,840 $1,287,177 $1,325,809
U.S. Foodservice.......... 357,634 326,389 1,067,382 983,512
-------- -------- ---------- ----------
Consolidated totals..... $812,969 $798,229 $2,354,559 $2,309,321
======== ======== ========== ==========
Intersegment Revenues Intersegment Revenues
----------------------------------- -----------------------------------
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003
(in thousands) FY 2004 FY 2003 FY 2004 FY 2003
- -------------- ---------------- ---------------- ---------------- ----------------
North American Consumer
Products................ $10,660 $10,025 $31,980 $30,535
U.S. Foodservice.......... -- -- -- --
Non-Operating(a).......... (10,660) (10,025) (31,980) (30,535)
------- ------- ------- -------
Consolidated totals..... $ -- $ -- $ -- $ --
======= ======= ======= =======
Operating Income (Loss) (b) Operating Income (Loss) (b)
----------------------------------- -----------------------------------
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003
(in thousands) FY 2004 FY 2003 FY 2004 FY 2003
- -------------- ---------------- ---------------- ---------------- ----------------
North American Consumer
Products................ $ 85,908 $ 79,234 $235,713 $220,536
U.S. Foodservice.......... 40,479 38,703 119,725 111,317
Non-Operating(a).......... (465) (296) (1,598) (1,540)
-------- -------- -------- --------
Consolidated totals..... $125,922 $117,641 $353,840 $330,313
======== ======== ======== ========
--------------------
(a) Includes charges not directly attributable to operating segments and
intercompany eliminations.
(b) Third Quarter ended January 29, 2003 - Includes Del Monte transaction
related costs and costs to reduce overhead of the remaining businesses
recorded on Heinz Finance as well as charged back to Heinz Finance by
Heinz Management Company as follows: North American Consumer Products
$5.9 million.
Nine Months ended January 28, 2004 - Includes costs to reduce overhead
of the remaining businesses recorded on Heinz Finance as well as
charged back to Heinz Finance by Heinz Management Company as follows:
North American Consumer Products $1.5 million and U.S. Foodservice $2.5
million.
Nine Months ended January 29, 2003 - Includes Del Monte transaction
related costs and costs to reduce overhead of the remaining businesses
recorded on Heinz Finance as well as charged back to Heinz Finance by
Heinz Management Company as follows: North American Consumer Products
$14.4 million and U.S. Foodservice $3.2 million.
11
(10) COMPREHENSIVE INCOME
Third Quarter Ended Nine Months Ended
------------------------------------- -----------------------------------
January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003
(in thousands) FY 2004 FY 2003 FY 2004 FY 2003
- -------------- ----------------- ----------------- ---------------- ----------------
Net income/(loss)....... $ 10,982 $(12,781) $57,013 $ 10,669
Other comprehensive
income:
Net deferred
gains/(losses) on
derivatives from
periodic
revaluations........ (1,567) 12,416 5,475 30,227
Net deferred
(gains)/losses on
derivatives
reclassified to
earnings............ 1,690 (14,409) (4,688) (29,283)
-------- -------- ------- --------
Comprehensive
income/(loss)......... $ 11,105 $(14,774) $57,800 $ 11,613
======== ======== ======= ========
(11) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Heinz Finance utilizes certain derivative financial instruments to manage
its foreign currency, commodity price and interest rate exposures.
FOREIGN CURRENCY HEDGING: Heinz Finance may hedge specific foreign currency
cash flows associated with foreign-currency-denominated financial assets
and liabilities. Derivatives meeting the criteria for hedge accounting are
designated as cash flow hedges. Consequently, the effective portion of
gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged
item affects earnings, in the same line item as the underlying hedged item.
COMMODITY PRICE HEDGING: Heinz Finance 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: Heinz Finance 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. At January 28, 2004, Heinz Finance had interest rate swaps with a
total notional amount of $2.77 billion that satisfied the criteria for
hedge accounting and interest rate swaps with a total notional amount of
$907.6 million that were not eligible for hedge accounting but effectively
mitigate interest rate exposure. The net unrealized gains related to
interest rate swaps that satisfy the criteria for hedge accounting were
$206.6 million and $294.8 million at January 28, 2004 and April 30, 2003,
respectively. The net unrealized gains related to the other interest rate
swaps were $2.3 million and $2.1 million at January 28, 2004 and April 30,
2003, respectively.
HEDGE INEFFECTIVENESS: Hedge ineffectiveness related to cash flow hedges,
which is reported in current period earnings as other expenses, net, was
not significant for the nine months ended January 28, 2004, and was a net
gain of $0.1 million for the nine months ended January 29, 2003.
DEFERRED HEDGING GAINS AND LOSSES: As of January 28, 2004, Heinz Finance is
hedging forecasted transactions for periods not exceeding two years. During
the next 12 months, Heinz
12
Finance expects $0.9 million of net deferred gain reported in accumulated
other comprehensive income to be reclassified to earnings.
OTHER ACTIVITIES: Heinz Finance 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 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE OVERVIEW
Heinz Finance is engaged in the business of acquiring, holding and
financing equity and debt investments in subsidiaries that own and operate
Heinz's U.S. businesses and represents the treasury center for cash management
and debt financing for all of Heinz's domestic operations. Heinz Finance's most
significant asset is its approximately 40% ownership interest in H.J. Heinz
Company, L.P. ("Heinz LP"), a Delaware limited partnership which consists of all
of the U.S. business operations of Heinz. Heinz LP manufactures and markets an
extensive line of processed food products. Heinz LP's principal products include
ketchup, condiments and sauces, frozen food, soups, beans and pasta meals and
other processed food products. Heinz LP's products are sold under highly
competitive conditions, with many large and small competitors. Heinz Finance
regards Heinz LP's principal competition to be other manufacturers of processed
foods, including branded, retail products, foodservice products and private
label products that compete with Heinz LP's products for consumer preference,
distribution, shelf space and merchandising support. Product quality and
consumer value are important areas of competition.
Heinz Finance manages and reports its operating businesses under two
segments, designated North American Consumer Products and U.S. Foodservice. All
of the assets, liabilities, results of operations and cash flows of Heinz
Finance are included in the Heinz consolidated financial statements. All debt of
Heinz Finance is guaranteed by Heinz.
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. 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.
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 Heinz Finance's
consolidated statements of income. The discontinued operations generated sales
of $248.7 million and $1,052.6 million and a net loss of $9.9 million (net of
$6.1 million of a tax benefit) and $23.3 million (net of $13.8 million of a tax
benefit) for the third quarter and nine months ended January 29, 2003,
respectively.
REORGANIZATION COSTS
Heinz Finance recognized reorganization costs of $4.0 million pretax for
the nine months ended January 28, 2004, all of which were recorded in the first
quarter of Fiscal 2004. These costs were primarily due to employee termination
and severance costs following last year's spin-off transaction
13
with Del Monte, and of this amount, $3.9 million was charged to Heinz Finance by
Heinz Management Company through a management fee for all salaried employee
costs. These costs were recognized as a component of selling, general and
administrative expenses ("SG&A"). For the third quarter of Fiscal 2003, Heinz
Finance recognized reorganization costs totaling $45.6 million pretax, of which
$4.3 million was charged to Heinz Finance by Heinz Management Company, and $1.6
million was recorded in cost of products sold, $4.3 million in SG&A and $39.6
million in other expenses, net. For the first nine months of Fiscal 2003, Heinz
Finance recognized reorganization costs totaling $57.2 million pretax, of which
$14.1 million was charged to Heinz Finance by Heinz Management Company, and $3.5
million was recorded in costs of products sold, $14.1 million in SG&A and $39.6
million in other expenses, net. These Fiscal 2003 reorganization costs include
employee termination and severance costs and costs related to the early
retirement of debt.
During the first nine months of Fiscal 2004, Heinz Finance utilized $17.2
million in severance and exit cost accruals related to reorganization costs.
THREE MONTHS ENDED JANUARY 28, 2004 AND JANUARY 29, 2003
In the first quarter of Fiscal 2004, Heinz Finance changed its segment
reporting to reflect changes in organizational structure and the management of
its business. Heinz Finance is now managing and reporting its operating
businesses under two segments, designated North American Consumer Products and
U.S. Foodservice. Prior periods have been restated to conform with the current
presentation. (See Note 9 to the condensed consolidated financial statements for
further discussion of Heinz Finance's reportable segments.)
RESULTS OF CONTINUING OPERATIONS
Sales for the three months ended January 28, 2004 increased $14.7 million,
or 1.8%, to $813.0 million. Sales volume increased 1.2% due primarily to strong
increases in ketchup and the U.S. Foodservice segment. Pricing decreased 1.0%
and acquisitions, net of divestitures, increased sales 1.6% due primarily to the
acquisition of Truesoups LLC, a manufacturer and marketer of premium frozen
soups.
Gross profit increased $4.9 million, or 1.7%, to $297.0 million; however,
the gross profit margin decreased slightly to 36.5% from 36.6%. The gross profit
margin decrease was primarily due to unfavorable raw material costs in the U.S.
Foodservice segment partially offset by increases in the North American Consumer
Products segment. Last year's gross profit was unfavorably impacted by
reorganization costs of $1.6 million.
SG&A decreased $8.0 million, or 5.9%, to $128.9 million, and decreased as a
percentage of sales to 15.9% from 17.2%. These decreases were principally due to
the unfavorable impact of reorganization costs in the prior year of $4.3 million
and reductions in consumer marketing expenses in the North American Consumer
Products segment. Operating income increased $8.3 million, or 7.0%, to $125.9
million, and operating income increased as a percentage of sales to 15.5% from
14.7%, largely due to the lapping of prior year reorganization costs.
Net interest expense decreased $0.9 million, to $32.9 million, due to
declining interest rates partially offset by the prospective classification of
Heinz Finance Company's dividend on its mandatorily redeemable preferred shares
to interest expense from retained earnings. This treatment is in accordance with
the adoption of SFAS No. 150 (see below for further discussion). Other expense,
net, decreased $41.7 million, to $2.6 million, chiefly attributable to a $39.6
million pretax charge related to the early retirement of debt in Fiscal 2003 and
increased equity income. There was a non-cash currency loss of $25.6 million in
the current quarter compared to $30.8 million in the year-earlier quarter
related to the marked-to-market adjustment on Euro-denominated long-term debt.
This debt represents a net investment hedge at the Heinz level. Because Heinz
Finance does not have foreign assets, this marked-to-market adjustment does not
qualify for hedge accounting treatment at Heinz
14
Finance. The effective tax rate for current quarter was 8.7% compared to (5.2%)
last year. Heinz Finance's effective tax rate fluctuates depending on the
proportion of its nontaxable minority interest in Heinz LP to total Heinz
Finance income before tax and was also unfavorably impacted by the nondeductible
interest expense associated with Heinz Finance's mandatorily redeemable
preferred shares.
Income from continuing operations for the third quarter of Fiscal 2004 was
$11.0 million compared to a loss of $2.9 million in the year-earlier quarter.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment decreased $16.5
million, or 3.5%. Sales volume remained stable as significant growth in Heinz
ketchup and Ore-Ida frozen potatoes was offset by declines resulting from the
California grocery strike. The volume growth in Heinz ketchup is compared to a
weak prior year quarter and the volume growth in Ore-Ida frozen potatoes was
aided by the launch of Ore-Ida Extra Crispy Potatoes. Early results of this new
product launch are ahead of management expectations. In addition, volume of
SmartOnes frozen entrees remained stable as increases resulting from the recent
launch of the "Truth About Carbs" frozen entrees were offset by double-digit
declines in the overall nutritional frozen entree category in the U.S. due to
the impact of the low-carb dieting phenomenon. Lower pricing decreased sales
2.8% due to the promotional timing on Bagel Bites and price declines on Delimex
snacks, Tater Tots and introductory pricing on the new Ore-Ida Extra Crispy
Potatoes. Divestitures reduced sales 0.7%.
Gross profit decreased $1.3 million, or 0.7%, to $193.8 million; however,
the gross profit margin increased to 42.6% from 41.4%, as manufacturing cost
savings were partially offset by unfavorable pricing. In addition,
reorganization costs unfavorably impacted last year's gross profit by $1.6
million. Operating income increased $6.7 million, or 8.4%, to $85.9 million.
Last year's operating income was unfavorably impacted by $5.9 million of
reorganization costs. Additionally, reductions in consumer marketing expenses
were offset by increased General & Administrative expenses ("G&A") due to
increased personnel costs.
U.S. FOODSERVICE
U.S. Foodservice's sales increased $31.2 million, or 9.6%. Sales volume
increased sales 3.1% primarily due to increases in Heinz ketchup, single-serve
condiments, Escalon processed tomato products and Dianne's frozen desserts. This
reflects stronger trends in the U.S. restaurant industry and successful product
innovation. Higher pricing increased sales by 1.6% primarily due to price
increases on Heinz ketchup and improved sales mix on Chef Francisco frozen
soups. Acquisitions, net of divestitures, increased sales 4.8%, due to the
acquisition of Truesoups LLC.
Gross profit increased $6.4 million, or 6.6%, to $103.3 million; however,
the gross profit margin decreased to 28.9% from 29.7%. This decrease in gross
profit margin is primarily due to unfavorable raw material costs. Operating
income increased $1.8 million, or 4.6%, to $40.5 million, primarily due to the
increase in gross profit, partially offset by increased G&A expense attributable
to increased personnel costs.
NINE MONTHS ENDED JANUARY 28, 2004 AND JANUARY 29, 2003
RESULTS OF CONTINUING OPERATIONS
Sales for the nine months ended January 28, 2004 increased $45.2 million,
or 2.0%, to $2.35 billion. Sales were favorably impacted by volume of 2.0% due
to strong increases in the U.S.
15
Foodservice segment. Lower pricing decreased sales by 0.7%. Acquisitions, net of
divestitures, increased sales 0.7% due primarily to the acquisition of Truesoups
LLC.
Gross profit increased $10.9 million, or 1.3%, to $862.4 million; however,
the gross profit margin decreased slightly to 36.6% from 36.9%. For the first
nine months of Fiscal 2003, gross profit was impacted by reorganization costs of
$3.5 million.
SG&A decreased $20.2 million, or 4.9%, to $388.9 million, and as a
percentage of sales was reduced to 16.5% from 17.7%. The decrease is primarily
due to decreased marketing expense as a result of a shift to increased trade
promotion spending primarily in the North American Consumer Products segment and
the impact of reorganization costs of $4.0 million and $14.1 million for the
nine months ended January 28, 2004 and January 29, 2003, respectively. These
favorable items were offset by the impact of higher expenses resulting from
higher sales volume. Operating income increased $23.5 million, or 7.1%, to
$353.8 million, and increased as a percentage of sales to 15.0% from 14.3%.
Net interest expense increased $7.6 million, to $96.4 million, due to the
prospective classification of the Heinz Finance Company's dividend on its
mandatorily redeemable preferred shares to interest expense from retained
earnings. This treatment is in accordance with the adoption of SFAS No. 150 (see
below for further discussion) beginning in the second quarter of Fiscal 2004.
Other expense, net, decreased $48.3 million, to $6.5 million, attributable to a
$39.6 million pretax charge related to early retirement of debt in Fiscal 2003
and increased equity income. There was a non-cash currency loss of $40.3 million
in the current year compared to $54.4 million in the year-earlier period related
to the marked-to-market adjustment on Euro-denominated long-term debt. This debt
represents a net investment hedge at the Heinz level. Because Heinz Finance does
not have foreign assets, this marked-to-market adjustment does not qualify for
hedge accounting treatment at Heinz Finance. The effective tax rate for current
quarter was 11.9% compared to 8.4% last year. Heinz Finance's effective tax rate
fluctuates depending on the proportion of its nontaxable minority interest in
Heinz LP to total Heinz Finance income before tax and was also unfavorably
impacted by the nondeductible interest expense associated with Heinz Finance's
mandatorily redeemable preferred shares.
Income from continuing operations for the first nine months of Fiscal 2004
was $57.0 million compared to $34.0 million in the year-earlier period.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment decreased $38.6
million, or 2.9%. Sales volume increased 1.4% primarily due to Heinz ketchup and
Classico pasta sauces which benefited from Every Day Low Pricing. These
increases were partially offset by declines in SmartOnes frozen entrees, related
to the increased popularity of low-carb dieting and declines in the overall
nutritional frozen entree category in the U.S., and the 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 more competitive
consumer price points on Boston Market HomeStyle meals, Heinz gravy and Classico
pasta sauces, as well as price declines on Delimex frozen snacks. Price was also
unfavorably affected by additional promotional spending on SmartOnes frozen
entrees. Divestitures in the prior year reduced sales 1.3%.
Gross profit decreased $15.1 million, or 2.7%, to $552.9 million; however,
the gross profit margin increased to 43.0% from 42.8%, as manufacturing cost
savings offset unfavorable pricing. In addition, reorganization costs
unfavorably impacted gross profit by $2.4 million for the nine months ending
January 29, 2003. Operating income increased $15.2 million, or 6.9%, to $235.7
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
16
$1.5 million and $14.4 million for the nine months ending January 28, 2004 and
January 29, 2003, respectively.
U.S. FOODSERVICE
U.S. Foodservice's sales increased $83.9 million, or 8.5%. 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
as a result of a strengthening trend in the U.S. restaurant industry and
successful product innovation. Higher pricing increased sales by 2.3% chiefly
due to Heinz ketchup and single serve condiments. Acquisitions, net of
divestitures, increased sales 3.4%, primarily due to the acquisition of
Truesoups LLC.
Gross profit increased $25.9 million, or 9.1%, to $310.2 million, and the
gross profit margin increased slightly to 29.1% from 28.9%. These increases are
primarily due to favorable pricing and sales mix, partially offset by
unfavorable raw material costs. In addition, reorganization costs unfavorably
impacted gross profit by $1.1 million for the nine months ending January 29,
2003. Operating income increased $8.4 million, or 7.6%, to $119.7 million,
primarily due to the growth in gross profit, partially offset by the impact of
higher sales volume on selling and distribution costs and increased G&A expenses
attributable to increased personnel costs. In addition, reorganization costs
unfavorably impacted operating income by $2.5 million and $3.2 million for the
nine months ending January 28, 2004 and January 29, 2003, respectively.
LIQUIDITY AND FINANCIAL POSITION
The following discussion of cash flows includes cash flows from
discontinued operations.
Cash provided by operating activities decreased to $305.2 million compared
to $592.0 million last year. The decrease in Fiscal 2004 versus Fiscal 2003 is
primarily due to increased working capital primarily due to receivables and due
from/to related parties.
Cash used for investing activities totaled $84.2 million compared to $41.5
million last year. Acquisitions used $61.3 million in cash in the first nine
months of Fiscal 2004. Capital expenditures totaled $30.1 million compared to
$46.6 million last year.
Cash used for financing activities totaled $180.8 million compared to
$164.7 million last year. Payments on short-term borrowings with related parties
were $353.3 million this year, compared to $667.5 million last year. Proceeds
from long-term debt with related parties provided $185.6 million in the current
year. Heinz Finance paid down $8.2 million in long-term debt during the current
period, compared to $401.2 million last year. Dividend payments to preferred
shareholders recorded in retained earnings on the balance sheet totaled $5.1
million in the current year compared to $15.2 million in the prior year as a
result of the adoption of SFAS No. 150 as previously discussed. In the prior
year Heinz Finance received $1,062.1 million of net proceeds from Heinz related
to the Del Monte transaction. Payments on commercial paper were $89.1 million
and distributions to minority partners were $56.4 million in the prior year.
At January 28, 2004, Heinz Finance's external net debt (total external debt
net of the value of interest rate swaps of $206.6 million, less cash and cash
equivalents) was $3,809.9 million. Excluding the reclassification of Heinz
Finance Company's preferred stock (see below for further discussion), external
net debt would have been $3,484.9 million, down approximately $50 million
compared to the year earlier period. Additional net debt reductions are
anticipated in Fiscal 2004.
In the first nine months of Fiscal 2004, the cash used for reorganization
costs was approximately $16.6 million.
Heinz Finance maintains committed credit facilities of $2.1 billion. These
resources together with Heinz Finance's anticipated strong operating cash flow
and access to the capital markets, if required,
17
should enable Heinz Finance to meet its cash requirements for operations,
including capital expansion programs and dividends to shareholders.
The impact of inflation on both Heinz Finance's financial position and
results of operations is not expected to adversely affect Fiscal 2004 results.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. The Act introduced a
prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy
to sponsors of retirement health care plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. In accordance with FASB Staff
Position 106-1, Heinz Finance has elected to defer recognizing the effects of
the Act on the accounting for its retirement health care plans because specific
authoritative guidance on the accounting for the Act's provisions is pending.
Once issued, this guidance could require Heinz Finance to change previously
reported financial information.
In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46-R,
"Consolidation of Variable Interest Entities." FIN No. 46-R, which modifies
certain provisions and effective dates of FIN No. 46, sets forth criteria to be
used in determining whether an investment in a variable interest entity should
be consolidated, and is based on the general premise that companies that control
another entity through interests other than voting interests should consolidate
the controlled entity. The provisions of FIN No. 46 become effective for Heinz
Finance in its fourth quarter ended April 28, 2004. Heinz Finance is currently
evaluating the impact the revised accounting standard will have on the
consolidated results of operations and financial position.
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 Heinz Finance 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 preferred dividend from retained
earnings to interest expense beginning in the second quarter of Fiscal 2004.
Effective May 2, 2002, Heinz Finance adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." Under this standard, goodwill and intangibles with
indefinite useful lives are no longer amortized. No impairment issues were
identified as a result of adopting SFAS No. 142.
18
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, changes in estimates
in critical accounting judgments, the possibility of increased pension expense,
and other factors described in "Cautionary Statement Relevant to Forward-Looking
Information" in Heinz Finance's Form 10-K for the fiscal year ended April 30,
2003, and Heinz Finance'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. Heinz Finance 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 Heinz Finance's market risk during
the nine months ended January 28, 2004. For additional information, refer to
pages 18-19 of Heinz Finance'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
Heinz Finance's management, with participation of Heinz Finance's President
and Chief Financial Officer, evaluated the effectiveness of Heinz Finance's
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the President and Chief Financial Officer
concluded that Heinz Finance's disclosure controls and procedures, as of the end
of the period covered by this report, were designed and functioning effectively
to provide reasonable assurance that the information required to be disclosed by
Heinz Finance 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. Heinz Finance 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 Heinz Finance's internal control over financial reporting
occurred during Heinz Finance's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, Heinz Finance's internal
control over financial reporting.
19
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
Nothing to report under this Item.
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. Heinz Finance has omitted certain exhibits in accordance with
Item 601(b)(4)(iii)(A) of Regulation S-K. Heinz Finance 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.
10(a). First Amendment to Third Amended and Restated Limited
Partnership Agreement.
10(b). Second Amendment to Third Amended and Restated Limited
Partnership Agreement.
12. Computation of Ratios of Earnings to Fixed Charges.
31(a). Rule 13a-14(a)/15d-14(a) Certification by the President.
31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief
Financial Officer.
32(a). Certification by the President 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) No reports on Form 8-K have been filed.
* 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 the
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.
20
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 FINANCE COMPANY
(Registrant)
Date: March 8, 2004
By: /s/ LEONARD A. CULLO, JR.
..........................................
Leonard A. Cullo, Jr.
Director and President
By: /s/ ARTHUR B. WINKLEBLACK
..........................................
Arthur B. Winkleblack
Director, Vice President, and
Chief Financial Officer
(Principal Financial Officer)
21
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.
10(a). First Amendment to Third Amended and Restated Limited Partnership
Agreement.
10(b). Second Amendment to Third Amended and Restated Limited
Partnership Agreement.
12. Computation of Ratios of Earnings to Fixed Charges.
31(a). Rule 13a-14(a)/15d-14(a) Certification of the President.
31(b). Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer.
32(a). Certification by the President 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.