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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 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
FOR THE THREE MONTHS ENDED JULY 30, 2003 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 __
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
First Quarter Ended
------------------------------
July 30, 2003 July 31, 2002
FY 2004 FY 2003
------------- --------------
(Unaudited)
(in thousands)
Sales....................................................... $715,870 $689,279
Cost of products sold....................................... 453,597 434,213
-------- --------
Gross profit................................................ 262,273 255,066
Selling, general and administrative expenses................ 125,404 129,132
Royalty expense to related parties.......................... 35,976 34,472
-------- --------
Operating income............................................ 100,893 91,462
Interest income............................................. 1,400 6,444
Interest expense............................................ 31,595 33,305
Dividends from related parties.............................. 30,798 30,798
Currency loss............................................... 4,852 22,105
Other expenses, net......................................... 4,446 4,237
-------- --------
Income from continuing operations before income taxes and
minority interest......................................... 92,198 69,057
Provision for income taxes.................................. 14,381 4,086
-------- --------
Income from continuing operations before minority
interest.................................................. 77,817 64,971
Minority interest........................................... (51,669) (58,198)
-------- --------
Income from continuing operations........................... 26,148 6,773
Loss from discontinued operations, net of tax and minority
interest.................................................. -- (2,519)
-------- --------
Net income.................................................. $ 26,148 $ 4,254
======== ========
See notes to condensed consolidated financial statements.
2
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 30, 2003 April 30, 2003*
FY 2004 FY 2003
------------- ---------------
(Unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 327,658 $ 194,266
Receivables, net.......................................... 294,809 400,565
Due from related parties.................................. 7,843 24,603
Short-term notes receivable from related parties.......... 416,123 217,988
Inventories............................................... 406,791 386,889
Prepaid expenses and other current assets................. 65,177 29,901
---------- ----------
Total current assets................................... 1,518,401 1,254,212
Property, plant and equipment............................... 1,133,333 1,120,294
Less accumulated depreciation............................... 497,633 482,981
---------- ----------
Total property, plant and equipment, net............... 635,700 637,313
Investments in related parties.............................. 1,895,245 1,895,245
Goodwill.................................................... 1,058,115 1,008,734
Other intangible assets, net................................ 255,241 257,378
Other non-current assets.................................... 368,088 512,803
---------- ----------
Total other non-current assets......................... 3,576,689 3,674,160
---------- ----------
Total assets........................................... $5,730,790 $5,565,685
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt with related parties...................... $ 93,710 $ 82,716
Portion of long-term debt due within one year............. 1,679 1,738
Accounts payable.......................................... 218,815 212,751
Accounts payable to related parties....................... 95,502 98,947
Accrued interest.......................................... 91,201 66,170
Accrued marketing......................................... 73,282 67,840
Other accrued liabilities................................. 64,196 54,520
---------- ----------
Total current liabilities.............................. 638,385 584,682
Long-term debt.............................................. 3,841,766 3,981,145
Long-term debt with related parties......................... 179,164 --
Deferred income taxes....................................... 12,642 14,511
Other liabilities........................................... 5,273 5,979
---------- ----------
Total long-term debt and other liabilities............. 4,038,845 4,001,635
Minority interest........................................... 509,162 457,493
Mandatorily Redeemable Series A Preferred shares............ 325,000 325,000
Shareholders' equity:
Common stock.............................................. 11 11
Additional capital........................................ 128,050 128,050
Retained earnings......................................... 89,786 68,697
Accumulated other comprehensive gain...................... 1,551 117
---------- ----------
Total shareholders' equity............................. 219,398 196,875
---------- ----------
Total liabilities and shareholders' equity............. $5,730,790 $5,565,685
========== ==========
- ---------------
* Summarized from audited Fiscal Year 2003 balance sheet.
See notes to condensed consolidated financial statements.
3
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Quarter Ended
------------------------------
July 30, 2003 July 31, 2002
FY 2004 FY 2003
------------- -------------
(Unaudited)
(in thousands)
Cash Flows from Operating Activities:
Net income................................................ $ 26,148 $ 4,254
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................... 14,439 18,187
Amortization........................................... 2,906 2,860
Deferred tax provision................................. 11,708 4,828
Minority interest...................................... 51,669 70,213
Currency loss.......................................... 4,852 22,105
Other items, net....................................... (5,205) (2,934)
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables.......................................... 110,943 264,470
Inventories.......................................... (8,669) (40,797)
Due from/to related parties.......................... 13,161 72,344
Prepaid expenses and other current assets............ (35,626) (79,758)
Accounts payable..................................... (4,431) (12,723)
Accrued liabilities.................................. 23,957 20,963
Income taxes......................................... 1,959 (3,236)
---------- ---------
Cash provided by operating activities..................... 207,811 340,776
---------- ---------
Cash Flows from Investing Activities:
Capital expenditures...................................... (6,254) (16,559)
Acquisitions, net of cash acquired........................ (61,298) --
Other items, net.......................................... (251) 10,136
---------- ---------
Cash used for investing activities..................... (67,803) (6,423)
---------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt with related parties......... 185,586 --
Payments on commercial paper, net......................... -- (64,309)
Payments on short-term debt with related parties, net..... (187,143) (196,624)
Distributions to minority partners........................ -- (64,844)
Dividends on preferred shares............................. (5,059) (5,058)
Other items, net.......................................... -- 905
---------- ---------
Cash used for financing activities..................... (6,616) (329,930)
---------- ---------
Net increase in cash and cash equivalents................... 133,392 4,423
Cash and cash equivalents, beginning of period.............. 194,266 6,924
---------- ---------
Cash and cash equivalents, end of period.................... $ 327,658 $ 11,347
========== =========
See notes to condensed consolidated financial statements.
4
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 July 30, 2003 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 shown as minority interest
in the Heinz consolidated financial statements.
(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 ("the Merger").
5
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 $349.1 million and a net loss of $2.5 million (net of
$1.7 million of a tax benefit) for the first quarter ended July 31, 2002.
(3) SPECIAL ITEMS
REORGANIZATION COSTS
During the first quarter of Fiscal 2004, Heinz Finance recognized
reorganization costs of $4.0 million pretax, primarily due to employee
termination and severance costs following last year's spin-off transaction
with Del Monte and of which $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"). During the first quarter of Fiscal 2003,
Heinz Finance recognized reorganization costs totaling $6.3 million pretax,
all of which were charged to Heinz Finance by Heinz Management Company and
were included as a component of SG&A.
During the first quarter of Fiscal 2004, Heinz Finance utilized $10.8
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 $7.3 million and
$14.1 million at July 30, 2003 and April 30, 2003, respectively.
(4) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
July 30, April 30,
(in thousands) 2003 2003
- -------------- -------- ---------
Finished goods and work-in-process......................... $291,990 $275,295
Packaging material and ingredients......................... 114,801 111,594
-------- --------
$406,791 $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. No impairment issues were identified
as a result of adopting SFAS No. 142.
Changes in the carrying amount of goodwill for the first quarter ended July
30, 2003 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..................................... -- 49,381 49,381
-------- -------- ----------
Balance at July 30, 2003........................ $844,192 $213,923 $1,058,115
======== ======== ==========
6
Trademarks and other intangible assets at July 30, 2003 and April 30, 2003,
subject to amortization expense, are as follows:
July 30, 2003 April 30, 2003
---------------------------------- ----------------------------------
Accumulated Accumulated
(in thousands) Gross Amortization Net Gross Amortization Net
- -------------- -------- ------------ -------- -------- ------------ --------
Trademarks........... $ 39,103 $ (2,356) $ 36,747 $ 39,103 $ (2,051) $ 37,052
Licenses............. 208,186 (114,089) 94,097 208,186 (112,617) 95,569
Other................ 75,907 (42,628) 33,279 75,907 (42,269) 33,638
-------- --------- -------- -------- --------- --------
$323,196 $(159,073) $164,123 $323,196 $(156,937) $166,259
======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to
amortization was $2.1 million and $2.2 million for the first quarter ended
July 30, 2003 and July 31, 2002, respectively. Based upon the amortizable
intangible assets recorded on the balance sheet at July 30, 2003,
amortization expense for each of the next five years is estimated to be
approximately $8.0 million.
Intangible assets not subject to amortization at July 30, 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 occurs because
the income of Heinz LP that is allocated to minority interest is not
subject to tax at the Heinz LP level or at Heinz Finance. 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 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 freestanding financial instruments, including
mandatorily redeemable shares. SFAS No. 150 was effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective for Heinz Finance for the second quarter of Fiscal 2004. The
adoption of SFAS No. 150 will require the reclassification of Heinz
Finance's $325 million of mandatorily redeemable preferred shares to the
liabilities section of the condensed consolidated balance sheet and the
$20.2 million annual preferred dividend from retained earnings on the
condensed consolidated balance sheet to interest expense on the
consolidated statement of income.
(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 $63.5 million and $86.9 million for the first quarter
ended July 30, 2003 and July 31, 2002, respectively. These costs are
recorded as cost of products sold or selling, general and administrative
("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
7
loss experience. Amounts charged to Heinz Finance for insurance costs,
including discontinued operations, were $18.1 million and $18.3 million for
the first quarter ended July 30, 2003 and July 31, 2002, 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 $287.4 million and $100.3 million of net
short-term notes receivable with related parties recorded on the
consolidated balance sheets as of July 30, 2003 and April 30, 2003,
respectively. An average interest rate of 1.47% and 1.95% was charged on
these combined domestic and foreign notes resulting in $0.8 million and
$6.2 million of net interest income for the first quarter ended July 30,
2003 and July 31, 2002, 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
$179.2 million as of July 30, 2003, and is reported as long-term debt with
related parties on the condensed consolidated balance sheet. Interest
expense on this note totaled $0.5 million for the first quarter ended July
30, 2003, and was based on a fixed interest rate of 4.0%. This note is
scheduled to mature in April 2005.
At July 30, 2003 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 result of related party transactions is the $7.8
million and $24.6 million balances due from related parties as of July 30,
2003 and April 30, 2003, respectively, and the $95.5 million and $98.9
million balances for accounts payable to related parties as of July 30,
2003 and April 30, 2003, respectively. Product sales to related parties
were $10.5 million and $9.8 million for the first quarter ended July 30,
2003 and July 31, 2002, respectively, and purchases from related parties
were $6.3 million and $8.1 million for the first quarter ended July 30,
2003 and July 31, 2002, 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
for the first quarter ended July 30, 2003 and July 31, 2002. This preferred
stock investment is recorded in the Investments in related parties balance
on the condensed consolidated balance sheets as of July 30, 2003 and April
30, 2003.
Heinz Finance paid royalties of $36.0 million and $34.5 million for the
first quarter ended July 30, 2003 and July 31, 2002, 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
8
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 segments 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 and the use of capital resources; however, the primary
measurement focus is operating income. Intersegment revenues are accounted
for at current market values. Items below the operating income line of the
consolidated statements of income are not presented by segment, since they
are excluded from the measure of segment profitability reviewed by Heinz
Finance's management.
The following table presents information about Heinz Finance's reportable
segments:
Net External Sales
-----------------------------
First Quarter Ended
-----------------------------
July 30, 2003 July 31, 2002
(in thousands) FY 2004 FY 2003
- -------------- ------------- -------------
North American Consumer Products............................ $ 381,115 $ 377,996
U.S. Foodservice............................................ 334,755 311,283
---------- ----------
Consolidated totals....................................... $ 715,870 $ 689,279
========== ==========
Intersegment Revenues
-----------------------------
First Quarter Ended
-----------------------------
July 30, 2003 July 31, 2002
(in thousands) FY 2004 FY 2003
- -------------- ------------- -------------
North American Consumer Products............................ $10,660 $9,755
U.S. Foodservice............................................ -- --
------- ------
Consolidated totals....................................... $10,660 $9,755
======= ======
Operating Income (Loss) (b)
-----------------------------
First Quarter Ended
-----------------------------
July 30, 2003 July 31, 2002
(in thousands) FY 2004 FY 2003
- -------------- ------------- -------------
North American Consumer Products............................ $ 65,658 $ 61,716
U.S. Foodservice............................................ 35,807 30,213
Non-Operating(a)............................................ (572) (467)
---------- ----------
Consolidated totals....................................... $ 100,893 $ 91,462
========== ==========
--------------------
(a) Includes charges not directly attributable to operating segments.
(b) First Quarter ended July 30, 2003 - 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.
First Quarter ended July 31, 2002 - Includes Del Monte transaction
related costs and costs to reduce overhead of the remaining businesses
which were charged back to Heinz Finance by Heinz Management Company as
follows: North American Consumer Products: $4.2 million and U.S.
Foodservice $2.1 million.
9
(10) COMPREHENSIVE INCOME
First Quarter Ended
-------------------------------
July 30, 2003 July 31, 2002
(in thousands) FY 2004 FY 2003
- -------------- -------------- --------------
Net income.................................................. $ 26,148 $ 4,254
Other comprehensive income:
Net deferred gains/(losses) on derivatives from periodic
revaluations............................................ (5,195) 15,773
Net deferred (gains)/losses on derivatives reclassified to
earnings................................................ 6,629 (13,206)
-------- -------
Comprehensive income........................................ $ 27,582 $ 6,821
======== =======
(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.
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 first quarter ended July 30, 2003, and was a net
loss of $0.3 million for the first quarter ended July 31, 2002.
DEFERRED HEDGING GAINS AND LOSSES: As of July 30, 2003, Heinz Finance is
hedging forecasted transactions for periods not exceeding two years. During
the next 12 months, Heinz Finance expects $1.6 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
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
10
soup and private label gravy, College Inn broths and its U.S. infant feeding
businesses, and distributed all of the shares of SKF Foods common stock on a pro
rata basis to its shareholders. Immediately thereafter, SKF Foods merged with a
wholly-owned subsidiary of Del Monte Foods Company ("Del Monte") resulting in
SKF Foods becoming a wholly-owned subsidiary of Del Monte ("the Merger").
In accordance with accounting principles generally accepted in the United
States of America, the operating results related to these businesses spun off to
Del Monte have been treated as discontinued operations in Heinz Finance's
consolidated statements of income. The discontinued operations generated sales
of $349.1 million and a net loss of $2.5 million (net of $1.7 million of a tax
benefit) for the first quarter ended July 31, 2002.
REORGANIZATION COSTS
During the first quarter of Fiscal 2004, Heinz Finance recognized
reorganization costs of $4.0 million pretax, primarily due to employee
termination and severance costs related to ongoing efforts to reduce overhead
costs following last year's spin-off transaction with Del Monte and of which
$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"). During the
first quarter of Fiscal 2003, Heinz Finance recognized reorganization costs
totaling $6.3 million pretax, all of which were charged to Heinz Finance by
Heinz Management Company and were included as a component of SG&A.
During the first quarter of Fiscal 2004, Heinz Finance utilized $10.8
million in severance and exit cost accruals related to reorganization costs.
THREE MONTHS ENDED JULY 30, 2003 AND JULY 31, 2002
In the first quarter of Fiscal 2004, Heinz Finance changed its segment
reporting to reflect changes in organizational structure and 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 July 30, 2003 increased $26.6 million, or
3.9%, to $715.9 million. Sales were favorably impacted by volume increases of
4.7% primarily due to strong increases in the North American Consumer Products
and U.S. Foodservice segments. Lower pricing decreased sales by 0.3%.
Divestitures, net of acquisitions, reduced sales 0.6%.
Gross profit increased $7.2 million, or 2.8%, to $262.3 million; however,
the gross profit margin decreased to 36.6% from 37.0%. The decline in the gross
profit margin is primarily attributable to the North American Consumer Products
segment partially offset by improvement in the margin in the U.S. Foodservice
segment.
SG&A decreased $3.7 million, or 2.9%, to $125.4 million. As a percentage of
sales, SG&A was reduced to 17.5% from 18.7%. SG&A was impacted by reorganization
costs of $4.0 million and $6.3 million for the first quarters ended July 30,
2003 and July 31, 2002, respectively.
Operating income increased $9.4 million, or 10.3%, to $100.9 million, and
increased as a percentage of sales to 14.1% from 13.3%. This increase was
primarily driven by the increase in gross profit.
Net interest expense increased $3.3 million, to $30.2 million, and other
expense, net, increased $0.2 million, to $4.4 million. There was a non-cash
currency loss of $4.9 million in the current quarter compared to $22.1 million
in the year-earlier quarter related to the marked-to-market adjustment on
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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 the current quarter was 15.6% compared
to 5.9% 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. Income from continuing operations for the first
quarter of Fiscal 2004 was $26.1 million compared to $6.8 million in the
year-earlier quarter.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment increased $3.1
million, or 0.8%. Sales volume increased 4.5% primarily due to Heinz ketchup and
Classico pasta sauces, partially offset by declines in frozen food products.
Lower pricing decreased sales 2.3% consistent with our strategy to obtain a more
competitive consumer price point on Boston Market HomeStyle meals, Classico
pasta sauces and Bagel Bites snacks. This decrease was partially offset by price
increases in Heinz ketchup. Divestitures reduced sales 1.4%.
Gross profit decreased $3.4 million, or 2.0%, to $166.2 million, and the
gross profit margin decreased to 43.6% from 44.9%, as manufacturing cost savings
were offset by unfavorable pricing. Operating income increased $3.9 million, or
6.4%, to $65.7 million, primarily due to decreased costs to support the prior
year launch of Easy Squeeze! and Kick'rs ketchup. Reorganization costs
unfavorably impacted operating income by $1.5 million and $4.2 million for the
quarters ending July 30, 2003 and July 31, 2002, respectively.
U.S. FOODSERVICE
U.S. Foodservice's sales increased $23.5 million, or 7.5%. Sales volume
increased sales 5.0% primarily due to increases in Heinz ketchup, Escalon
specialty sauces and Dianne's frozen desserts. Higher pricing increased sales by
2.1%. Acquisitions, net of divestitures, increased sales 0.4%, primarily due to
the current year acquisition of Truesoups LLC, a manufacturer and marketer of
premium frozen soups.
Gross profit increased $10.6 million, or 12.3%, to $96.3 million, and the
gross profit margin increased to 28.8% from 27.5%. This increase in gross profit
margin is primarily due to favorable pricing and sales mix. Operating income
increased $5.6 million, or 18.5%, to $35.8 million, primarily due to growth in
gross profit partially offset by increased royalty expense to related parties
resulting from increased sales.
LIQUIDITY AND FINANCIAL POSITION
The following discussion of cash flows includes cash flows from
discontinued operations.
Cash provided by operating activities decreased to $207.8 million compared
to $340.8 million last year. The decrease in Fiscal 2004 versus Fiscal 2003 is
primarily due to decreased working capital primarily due to receivables and due
to/from related parties.
Cash used for investing activities totaled $67.8 million compared to $6.4
million last year. Acquisitions used $61.3 million in cash in the first quarter
of Fiscal 2004 in line with Heinz Finance's strategy of improving its business
mix through acquisitions. Capital expenditures totaled $6.3 million compared to
$16.6 million last year.
Cash used for financing activities totaled $6.6 million compared to $329.9
million last year. Proceeds from long-term debt with related parties totaled
$185.6 million in the current period related to a new long-term note payable
entered into with a wholly-owned subsidiary of Heinz. Payments on
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commercial paper were $64.3 million last year. Payments on short-term borrowings
with related parties were $187.1 million this year compared to $196.6 million
last year. Dividend payments to preferred shareholders totaled $5.1 million for
both the current and prior periods. Distributions to minority partners totaled
$64.8 million in the prior quarter.
At July 30, 2003, Heinz Finance's external net debt (total external debt
net of the value of interest rate swaps ($150.4 million), less cash and cash
equivalents) was $3.37 billion, down approximately $942.2 million as compared to
the year earlier quarter. Additional net debt reductions are anticipated in
Fiscal 2004.
In first quarter of Fiscal 2004, the cash used for reorganization costs was
approximately $10.4 million.
The impact of inflation on both Heinz Finance's financial position and
results of operations is not expected to adversely affect Fiscal 2004 results.
Heinz Finance's financial position continues to remain very strong, enabling it
to meet cash requirements for operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
statement affects the classification, measurement and disclosure requirements of
certain freestanding financial instruments, including mandatorily redeemable
shares. SFAS No. 150 was effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for Heinz Finance for
the second quarter of Fiscal 2004. The adoption of SFAS No. 150 will require the
reclassification of Heinz Finance's $325 million of mandatorily redeemable
preferred shares to the liabilities section of the condensed consolidated
balance sheet and the $20.2 million annual preferred dividend from retained
earnings on the condensed consolidated balance sheet to interest expense on the
consolidated statement of income.
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.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
Except for historical information, matters discussed in this report,
including the management's discussion and analysis, the financial statements and
footnotes, and the statements about future growth, profitability, costs,
expectations, plans, or objectives, 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, 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, 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 review
any forward-looking statements, whether as a result of new information, future
events or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in Heinz Finance's market risk during
the first quarter ended July 30, 2003. 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 and Accounting 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 and
Accounting 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 Heinz Finance's most recent Internal Controls over Financial
Reporting
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 reasonable likely to materially affect, Heinz Finance's internal
control over financial reporting.
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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 9 to the Condensed Consolidated Financial Statements in Part
I -- Item 1 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. 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.
12. Computation of Ratios of Earnings to Fixed Charges.
31. Rule 13a-14(a)/15d-14(a) Certifications.
32(a). Certification by the President Relating to a Periodic
Report Containing Financial Statements.*
32(b). Certification by the Chief Financial and Accounting 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.
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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 FINANCE COMPANY
(Registrant)
Date: September 12, 2003
By: /s/ LEONARD A. CULLO, JR.
..........................................
Leonard A. Cullo, Jr.
Director and President
By: /s/ ARTHUR B. WINKLEBLACK
..........................................
Arthur B. Winkleblack
Director, Vice President,
Chief Financial and Accounting
Officer
(Principal Financial Officer)
16
EXHIBIT INDEX
DESCRIPTION OF EXHIBIT
Exhibits required to be filed by Item 601 of Regulation S-K are listed
below. 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.
12. Computation of Ratios of Earnings to Fixed Charges.
31. Rule 13a-14(a)/15d-14(a) Certifications.
32(a). Certification by the President Relating to a Periodic Report
Containing Financial Statements.*
32(b). Certification by the Chief Financial and Accounting 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.