Back to GetFilings.com
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 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 THREE MONTHS ENDED JULY 28, 2004 COMMISSION FILE NUMBER 333-85064
H. J. HEINZ FINANCE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 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
First Quarter Ended
-----------------------------
July 28, 2004 July 30, 2003
FY 2005 FY 2004
------------- -------------
(Unaudited)
(in thousands)
Sales....................................................... $754,034 $715,870
Cost of products sold....................................... 475,508 453,597
-------- --------
Gross profit................................................ 278,526 262,273
Selling, general and administrative expenses................ 129,907 125,404
Royalty expense to related parties.......................... 46,081 35,976
-------- --------
Operating income............................................ 102,538 100,893
Interest income............................................. 3,038 1,400
Interest expense............................................ 33,927 31,595
Dividends from related parties.............................. 30,798 30,798
Currency loss............................................... 6,451 4,852
Other expenses, net......................................... 5,419 4,446
-------- --------
Income before income taxes and minority interest............ 90,577 92,198
Provision for income taxes.................................. 17,001 14,381
-------- --------
Income before minority interest............................. 73,576 77,817
Minority interest........................................... (48,699) (51,669)
-------- --------
Net income.................................................. $ 24,877 $ 26,148
======== ========
See notes to condensed consolidated financial statements.
2
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 28, 2004 April 28, 2004*
FY 2005 FY 2004
------------- ---------------
(Unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 716,404 $ 462,039
Receivables, net.......................................... 297,144 354,282
Due from related parties.................................. 19,941 19,706
Short-term notes receivable from related parties.......... 664,275 386,955
Inventories............................................... 381,472 377,463
Prepaid expenses and other current assets................. 34,011 39,617
---------- ----------
Total current assets................................... 2,113,247 1,640,062
Property, plant and equipment............................... 1,087,146 1,147,808
Less accumulated depreciation............................... (486,904) (521,084)
---------- ----------
Total property, plant and equipment, net............... 600,242 626,724
Other non-current assets:
Long-term notes receivable from related parties........... 35,000 35,000
Investments in related parties............................ 1,895,245 1,895,245
Goodwill.................................................. 1,027,848 1,025,028
Other intangible assets, net.............................. 275,115 279,560
Other non-current assets.................................. 332,455 352,002
---------- ----------
Total other non-current assets......................... 3,565,663 3,586,835
---------- ----------
Total assets........................................... $6,279,152 $5,853,621
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term debt with related parties...................... $ 626,030 $ 282,348
Portion of long-term debt due within one year............. 362,059 355,724
Accounts payable.......................................... 218,709 214,665
Accounts payable to related parties....................... 75,182 72,851
Accrued marketing......................................... 80,077 98,251
Accrued interest.......................................... 97,618 69,075
Other accrued liabilities................................. 59,480 46,096
---------- ----------
Total current liabilities.............................. 1,519,155 1,139,010
Long-term debt and other liabilities:
Long-term debt............................................ 3,765,613 3,795,269
Deferred income taxes..................................... 41,961 46,130
Other liabilities......................................... 20,660 14,668
---------- ----------
Total long-term debt and other liabilities............. 3,828,234 3,856,067
Minority interest........................................... 621,340 572,641
Shareholder's equity:
Common stock.............................................. 11 11
Additional capital........................................ 123,438 123,438
Retained earnings......................................... 185,416 160,539
Accumulated other comprehensive income.................... 1,558 1,915
---------- ----------
Total shareholder's equity............................. 310,423 285,903
---------- ----------
Total liabilities and shareholder's equity............. $6,279,152 $5,853,621
========== ==========
- ---------------
* Summarized from audited Fiscal Year 2004 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 28, 2004 July 30, 2003
FY 2005 FY 2004
------------- -------------
(Unaudited)
(in thousands)
Cash Flows from Operating Activities:
Net income................................................ $ 24,877 $ 26,148
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................... 13,683 14,439
Amortization........................................... 3,502 2,906
Deferred tax (benefit)/provision....................... (3,098) 11,708
Minority interest...................................... 48,699 51,669
Currency loss.......................................... 6,451 4,852
Other items, net....................................... (1,777) (5,205)
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables.......................................... 54,180 110,943
Inventories.......................................... (9,660) (8,669)
Due from/to related parties.......................... 16,373 13,161
Prepaid expenses and other current assets............ 5,599 (35,626)
Accounts payable..................................... 4,374 (4,431)
Accrued liabilities.................................. 8,297 23,957
Income taxes......................................... 19,445 1,959
-------- ---------
Cash provided by operating activities..................... 190,945 207,811
-------- ---------
Cash Flows from Investing Activities:
Capital expenditures...................................... (13,693) (6,254)
Acquisitions, net of cash acquired........................ (6,558) (61,298)
Proceeds from divestitures................................ 18,604 --
Other items, net.......................................... (2,064) (251)
-------- ---------
Cash used for investing activities..................... (3,711) (67,803)
-------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt with related parties......... -- 185,586
Proceeds from/(payments on) short-term borrowings with
related parties, net................................... 67,131 (187,143)
Dividends on preferred shares............................. -- (5,059)
-------- ---------
Cash provided by/(used for) financing activities....... 67,131 (6,616)
-------- ---------
Net increase in cash and cash equivalents................... 254,365 133,392
Cash and cash equivalents, beginning of period.............. 462,039 194,266
-------- ---------
Cash and cash equivalents, end of period.................... $716,404 $ 327,658
======== =========
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 LP.
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 28, 2004 and April 28, 2004 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. 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 28, 2004.
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 July 28, 2004 and
April 28, 2004.
(2) REORGANIZATION COSTS
During the first quarter of Fiscal 2004, Heinz Finance recognized
reorganization costs of $4.0 million pretax, which were primarily due to
employee termination and severance costs following the Fiscal 2003 spin-off
transaction with Del Monte. 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"). Amounts included in
accounts payable to related parties and other accrued liabilities related
to these initiatives totaled $2.9 million and $5.0 million at July 28, 2004
and April 28, 2004, respectively.
5
(3) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
July 28, April 28,
(in thousands) 2004 2004
- -------------- -------- ---------
Finished goods and work-in-process......................... $289,783 $258,142
Packaging material and ingredients......................... 91,689 119,321
-------- --------
$381,472 $377,463
======== ========
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the first quarter ended July
28, 2004, by reportable segment, are as follows:
North
American
Consumer U.S.
(in thousands) Products Foodservice Total
- -------------- -------- ----------- ----------
Balance at April 28, 2004........................ $845,484 $179,544 $1,025,028
Acquisition...................................... -- 6,558 6,558
Purchase accounting reclassifications............ -- (1,190) (1,190)
Disposal......................................... (2,548) -- (2,548)
-------- -------- ----------
Balance at July 28, 2004......................... $842,936 $184,912 $1,027,848
======== ======== ==========
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 charges were recognized during the first quarter
ended July 28, 2004.
Trademarks and other intangible assets at July 28, 2004 and April 28, 2004,
subject to amortization expense, are as follows:
July 28, 2004 April 28, 2004
---------------------------------- ----------------------------------
Accumulated Accumulated
(in thousands) Gross Amortization Net Gross Amortization Net
- -------------- -------- ------------ -------- -------- ------------ --------
Trademarks........... $ 36,403 $ (3,003) $ 33,400 $ 39,103 $ (3,268) $ 35,835
Licenses............. 208,186 (119,976) 88,210 208,186 (118,504) 89,682
Other................ 95,808 (45,439) 50,369 95,708 (44,802) 50,906
-------- --------- -------- -------- --------- --------
$340,397 $(168,418) $171,979 $342,997 $(166,574) $176,423
======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to
amortization was $2.3 million and $2.1 million for the first quarter ended
July 28, 2004 and July 30, 2003, respectively. Based upon the amortizable
intangible assets recorded on the balance sheet at July 28, 2004,
amortization expense for each of the next five years is estimated to be
approximately $9 million.
Intangible assets not subject to amortization at July 28, 2004 and April
28, 2004 were $103.1 million, and consisted solely of trademarks.
(5) TAXES
The provision for income taxes consists of provisions for federal and state
income taxes. The effective tax rate for Heinz Finance is a result of Heinz
Finance's nontaxable minority interest in Heinz LP. The effective tax rate
will fluctuate for Heinz Finance depending on the proportion of this
nontaxable minority interest to total Heinz Finance income before tax.
6
(6) 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 elected to defer
recognizing the effects of the Act on the accounting for its retirement
health care plans in Fiscal 2004. In May of 2004, the FASB issued Staff
Position 106-2, providing final guidance on the accounting for benefits
provided by the Act. The Staff Position 106-2 will be implemented by Heinz
in the second quarter of Fiscal 2005. Heinz Finance is currently evaluating
the impact of Heinz's adoption of this guidance on Heinz Finance's
financial position, results of operations and cash flows.
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 Heinz Finance
for the second quarter of Fiscal 2004. The adoption of SFAS No. 150
required the prospective classification of Heinz Finance Company's $325
million of mandatorily redeemable preferred shares to long-term debt and
the $5.1 million quarterly preferred dividend from retained earnings to
interest expense beginning in the second quarter ended October 29, 2003.
(7) 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 were $71.4 million and $63.5
million for the first quarter ended July 28, 2004 and July 30, 2003,
respectively. These costs are recorded as cost of products sold or SG&A 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 were $15.5 million and $18.1 million for the
first quarter ended July 28, 2004 and July 30, 2003, respectively, and are
recorded in SG&A 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 $38.2 million and $104.6 million of net
short-term notes receivable with related parties recorded on the condensed
consolidated balance sheets as of July 28, 2004 and April 28, 2004,
respectively. An average interest rate of 1.53% and 1.47% was charged on
the combined domestic and foreign notes resulting in $0.2 million and $0.8
million of net interest income for the first quarter ended July 28, 2004
and July 30, 2003, respectively.
7
At July 28, 2004 and April 28, 2004, long-term notes receivable from
related parties includes $35.0 million related to a receivable from Heinz.
This note is classified as long-term given its maturity of May 2, 2007.
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 $19.9
million and $19.7 million balances due from related parties as of July 28,
2004 and April 28, 2004, respectively, and the $75.2 million and $72.9
million balances for accounts payable to related parties as of July 28,
2004 and April 28, 2004, respectively. Product sales to related parties
were $10.7 million and $10.5 million for the first quarter ended July 28,
2004 and July 30, 2003, respectively, and purchases from related parties
were $10.2 million and $6.3 million for the first quarter ended July 28,
2004 and July 30, 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
for the first quarter ended July 28, 2004 and July 30, 2003. This preferred
stock investment is recorded in the Investments in related parties balance
on the condensed consolidated balance sheets as of July 28, 2004 and April
28, 2004.
Heinz Finance paid royalties of $46.1 million and $36.0 million for the
first quarter ended July 28, 2004 and July 30, 2003, respectively, to
Promark Brands, Inc., a direct subsidiary of Heinz, for the use of certain
trademarks.
(8) SEGMENTS
The composition of segments and measure of segment profitability is
consistent with that used by Heinz Finance's management.
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, and frozen potatoes,
entrees, snacks and appetizers to the grocery channels in the United
States of America.
- U.S. Foodservice -- This segment manufactures, markets and sells branded
and customized products to commercial and non-commercial food outlets and
distributors in the United States of America including ketchup,
condiments, sauces and frozen soups and desserts.
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 income
are not presented by segment, since they are excluded from the measure of
segment profitability reviewed by Heinz Finance's management.
8
The following table presents information about Heinz Finance's reportable
segments:
Net External Sales
-----------------------------
First Quarter Ended
-----------------------------
July 28, 2004 July 30, 2003
(in thousands) FY 2005 FY 2004
- -------------- ------------- -------------
North American Consumer Products...................... $405,924 $381,115
U.S. Foodservice...................................... 348,110 334,755
-------- --------
Consolidated totals................................. $754,034 $715,870
======== ========
Intersegment Revenues
-----------------------------
First Quarter Ended
-----------------------------
July 28, 2004 July 30, 2003
(in thousands) FY 2005 FY 2004
- -------------- ------------- -------------
North American Consumer Products...................... $ 10,615 $ 10,660
U.S. Foodservice...................................... -- --
Non-Operating(a)...................................... (10,615) (10,660)
-------- --------
Consolidated totals................................. $ -- $ --
======== ========
Operating Income (Loss) (b)
-----------------------------
First Quarter Ended
-----------------------------
July 28, 2004 July 30, 2003
(in thousands) FY 2005 FY 2004
- -------------- ------------- -------------
North American Consumer Products...................... $ 64,291 $ 65,658
U.S. Foodservice...................................... 38,823 35,807
Non-Operating(a)...................................... (576) (572)
-------- --------
Consolidated totals................................. $102,538 $100,893
======== ========
--------------------
(a) Includes charges not directly attributable to operating segments and
intercompany eliminations.
(b) First Quarter ended July 30, 2003 -- Includes costs to reduce overhead
of the remaining businesses following the Fiscal 2003 spin-off
transaction with Del Monte. Total costs recorded by Heinz Finance, as
well as charged back to Heinz Finance by Heinz Management Company, were
as follows: North American Consumer Products $1.5 million and U.S.
Foodservice $2.5 million.
(9) COMPREHENSIVE INCOME
First Quarter Ended
-----------------------------
July 28, 2004 July 30, 2003
(in thousands) FY 2005 FY 2004
- -------------- ------------- -------------
Net income............................................ $24,877 $26,148
Other comprehensive income:
Net deferred gains/(losses) on derivatives from
periodic revaluations............................ 1,299 (5,195)
Net deferred (gains)/losses on derivatives
reclassified to earnings......................... (1,656) 6,629
------- -------
Comprehensive income.................................. $24,520 $27,582
======= =======
(10) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Heinz Finance utilizes certain derivative financial instruments to manage
its foreign currency, commodity price and interest rate exposures. There
have been no material changes in Heinz Finance's market risk during the
three months ended July 28, 2004. For additional information, refer to
pages 16-18 of Heinz Finance's Annual Report on Form 10-K for the fiscal
year ended April 28, 2004.
9
As of July 28, 2004, 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. 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 28, 2004 and July 30, 2003.
(11) SUBSEQUENT EVENT
In August 2004, Heinz and Heinz Finance amended their $600 million 364-Day
Credit Agreement and their $1.5 billion Five-Year Credit Agreement by
combining the agreements into a $2.0 billion Five-Year Credit Agreement,
expiring August 2009. The Credit Agreement supports Heinz and Heinz
Finance's commercial paper borrowings and the remarketable securities.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REORGANIZATION COSTS
During the first quarter of Fiscal 2004, Heinz Finance recognized
reorganization costs of $4.0 million pretax, which were primarily due to
employee termination and severance costs following the Fiscal 2003 spin-off
transaction with Del Monte. 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").
THREE MONTHS ENDED JULY 28, 2004 AND JULY 30, 2003
RESULTS OF OPERATIONS
Sales for the three months ended July 28, 2004 increased $38.2 million, or
5.3%, to $754.0 million. Sales volume increased 3.9% due primarily to strong
increases in the North American Consumer Products segment, aided by new product
introductions. Pricing increased 1.0% and acquisitions, net of divestitures,
increased sales 0.4%.
Gross profit increased $16.3 million, or 6.2%, to $278.5 million, and the
gross profit margin increased slightly to 36.9% from 36.6%. The gross profit
margin increase was primarily a result of favorable pricing in the U.S.
Foodservice segment, partially offset by increases in commodity costs.
SG&A increased $4.5 million, or 3.6%, to $129.9 million, while SG&A as a
percentage of sales decreased to 17.2% from 17.5%. Last year's SG&A was
unfavorably impacted by reorganization costs totaling $4.0 million. Operating
income increased $1.6 million, or 1.6%, to $102.5 million, while operating
income decreased as a percentage of sales to 13.6% from 14.1%, as a result of
the changes noted above and increased royalty expense to related parties.
Net interest expense increased $0.7 million, to $30.9 million. Net interest
expense was unfavorably impacted by the adoption of SFAS No. 150 (see below for
further discussion) beginning in the second quarter of Fiscal 2004. The
unfavorable impact on net interest expense related to the adoption of SFAS No.
150 was largely offset by lower debt balances in the first quarter of Fiscal
2005. Other expense, net, increased $1.0 million, to $5.4 million, due to losses
on certain interest rate contracts that do not meet the criteria for hedge
accounting. There was a non-cash currency loss of $6.5 million in the current
quarter compared to $4.9 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 operations, this marked-to-market adjustment does not qualify
for net investment hedge accounting treatment at Heinz Finance. The effective
tax rate for the current quarter was 18.8% compared to 15.6% 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.
Net income for the first quarter of Fiscal 2005 was $24.9 million compared
to $26.1 million in the year-earlier quarter.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment increased $24.8
million, or 6.5%, to $405.9 million. Sales volume increased 7.7% due to
significant growth in Ore-Ida frozen potatoes and SmartOnes frozen entrees,
aided by the introduction of Ore-Ida Extra Crispy Potatoes, new microwavable
Easy Fries, and several new "Truth About Carbs" frozen entrees. Strong
performance
11
in Boston Market HomeStyle meals, Delimex snacks, and TGI Friday's appetizers
also contributed to the volume increase. Divestitures reduced sales 1.3%
primarily due to the sale of Ethnic Gourmet Foods.
Gross profit increased $7.7 million, or 4.6%, to $173.9 million driven by
the increase in sales volume. The gross profit margin decreased to 42.9% from
43.6% due primarily to sales mix and higher commodity and other manufacturing
costs. Operating income decreased $1.4 million, or 2.1%, to $64.3 million, as
strong volume growth and reduced marketing expenses were offset by higher
commodity and distribution costs, and increased royalty expense to related
parties, resulting from increased sales and a change in the application of the
royalty rate. Operating income for the first quarter ended July 30, 2003 was
impacted by reorganization costs totaling $1.5 million.
U.S. FOODSERVICE
Sales of the U.S. Foodservice segment increased $13.4 million, or 4.0%, to
$348.1 million. Acquisitions increased sales 2.3%, due to the prior year
acquisition of Truesoups LLC, a manufacturer and marketer of premium frozen
soups. Higher pricing increased sales by 2.2% mainly due to Heinz Ketchup,
single serve condiments, Chef Francisco frozen soups, and Dianne's and Alden
Merrell frozen desserts. Sales volume decreased sales 0.5% due to customer
service issues at Portion Pac Inc. resulting from the startup of a new warehouse
management system that temporarily impacted shipments of some portion control
products early in the quarter. The system is now fully operational.
Gross Profit increased $8.5 million, or 8.9%, to $104.8 million, and the
gross profit margin increased to 30.1% from 28.8%. These increases are primarily
due to favorable pricing, sales mix, and the prior year acquisition of Truesoups
LLC, partly offset by increases in commodity costs. Operating income increased
$3.0 million, or 8.4%, to $38.8 million, primarily due to growth in gross
profit, partially offset by increased distribution costs and increased royalty
expense to related parties, resulting from increased sales. Operating income for
the first quarter ended July 30, 2003 was impacted by reorganization costs
totaling $2.5 million.
LIQUIDITY AND FINANCIAL POSITION
The following discussion of liquidity and financial position references
certain business measures utilized by Senior Management and the Board of
Directors to gauge Heinz Finance's business operating performance. Management
believes the adjusted GAAP measures provide additional clarity in understanding
the trends of the business.
Cash provided by operating activities was $190.9 million, a decrease of
$16.9 million from the prior year. The decrease in Fiscal 2005 versus Fiscal
2004 is primarily due to unfavorable working capital movements compared to the
last fiscal year, particularly receivables, partially offset by prepaid expenses
and other current assets.
Cash used for investing activities totaled $3.7 million compared to $67.8
million last year. Acquisitions used $6.6 million in cash in the first three
months of Fiscal 2005 compared to $61.3 million in same period of Fiscal 2004.
Capital expenditures totaled $13.7 million (1.8% of sales) compared to $6.3
million (0.9% of sales) last year. Proceeds from divestitures provided $18.6
million in the first three months of Fiscal 2005.
Cash provided by financing activities totaled $67.1 million, compared to
cash used for financing activities of $6.6 million last year. Proceeds from
short-term borrowings with related parties were $67.1 million this year,
compared to payments in the prior year totaling $187.1 million. Proceeds from
long-term debt with related parties provided $185.6 million in the prior year.
Dividend payments to preferred shareholders recorded in retained earnings on the
balance sheet totaled $5.1 million in the prior year. These payments are
included as a component of cash flows from operating activities beginning in the
second quarter ended October 29, 2003, as a result of the adoption of SFAS No.
150 (see below for further discussion).
12
At July 28, 2004, Heinz Finance's external net debt (total external debt
net of the value of interest rate swaps ($95.4 million), less cash and cash
equivalents) was $3.32 billion. Excluding the reclassification of Heinz Finance
Company's preferred stock (see below for further discussion), external net debt
would have been $2.99 billion, down approximately $375 million as compared to
the year earlier quarter. Heinz Finance expects that over $350 million of
long-term debt maturing in Fiscal 2005 will be retired.
In August 2004, Heinz and Heinz Finance amended their $600 million 364-Day
Credit Agreement and their $1.5 billion Five-Year Credit Agreement by combining
the agreements into a $2.0 billion Five-Year Credit Agreement, expiring August
2009. The Credit Agreement supports Heinz and Heinz Finance's commercial paper
borrowings and the remarketable securities. As a result, these borrowings are
classified as long-term debt based upon Heinz Finance's ability to refinance
these borrowings on a long-term basis. These resources together with Heinz
Finance's existing cash balance of over $700 million, its anticipated strong
operating cash flow and access to the capital market, if required, should enable
Heinz Finance to meet its cash requirements for operations, including capital
expansion programs, debt maturities, 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 2005 results.
CONTRACTUAL OBLIGATIONS
Heinz Finance is obligated to make future payments under various contracts
such as debt agreements, lease agreements and unconditional purchase
obligations. In addition, Heinz Finance has purchase obligations for materials,
supplies, services and property, plant and equipment as part of the ordinary
conduct of business. A few of these obligations are long-term and are based on
minimum purchase requirements. In the aggregate, such commitments are not at
prices in excess of current markets. Due to the proprietary nature of some of
Heinz Finance's materials and processes, certain supply contracts contain
penalty provisions for early terminations. Heinz Finance does not believe that a
material amount of penalties are reasonably likely to be incurred under these
contracts based upon historical experience and current expectations. There have
been no material changes to contractual obligations during the three months
ended July 28, 2004. For additional information, refer to pages 15-16 of Heinz
Finance's Annual Report on Form 10-K for the fiscal year ended April 28, 2004.
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 elected to defer recognizing the effects of the Act on the
accounting for its retirement health care plans in Fiscal 2004. In May 2004, the
FASB issued Staff Position 106-2, providing final guidance on the accounting for
benefits provided by the Act. The Staff Position 106-2 will be implemented by
Heinz in the second quarter of Fiscal 2005. Heinz Finance is currently
evaluating the impact of Heinz's adoption of this guidance on Heinz Finance's
financial position, results of operations and cash flows.
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 Heinz Finance for the second quarter of
Fiscal 2004. The adoption of SFAS No. 150 required the prospective
classification of Heinz Finance Company's $325 million of mandatorily redeemable
preferred shares to long-term debt and the $5.1 million quarterly preferred
dividend from retained earnings to interest expense beginning in the second
quarter ended October 29, 2003.
13
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, competitors'
actions, which affect, among other things, customer preferences and the pricing
of products, production, energy and raw material costs, product recalls, 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 28, 2004. 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 three months ended July 28, 2004. For additional information, refer to pages
16-18 of Heinz Finance's Annual Report on Form 10-K for the fiscal year ended
April 28, 2004.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Heinz Finance's management, with the 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 Control 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 reasonably likely to materially affect, Heinz Finance's internal
control over financial reporting.
14
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
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
Exhibits required to be furnished by Item 601 of Regulation S-K are listed
below. Heinz Finance may have 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(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.*
* 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.
15
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 7, 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)
16
EXHIBIT INDEX
DESCRIPTION OF EXHIBIT
Exhibits required to be furnished by Item 601 of Regulation S-K are listed
below. Documents not designated as being incorporated herein by reference are
furnished herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
12. Computation of Ratios of Earnings to Fixed Charges.
31(a). Rule 13a-14(a)/15d-14(a) Certification by the 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.*
* 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.