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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 26, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE NINE MONTHS ENDED JANUARY 26, 2005 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
Third Quarter Ended
-----------------------------------
January 26, 2005 January 28, 2004
FY 2005 FY 2004
---------------- ----------------
(Unaudited)
(In Thousands)
Sales...................................................... $876,771 $812,969
Cost of products sold...................................... 545,034 516,016
-------- --------
Gross profit............................................... 331,737 296,953
Selling, general and administrative expenses............... 150,113 128,925
Royalty expense to related parties......................... 46,825 42,106
-------- --------
Operating income........................................... 134,799 125,922
Interest income............................................ 7,337 2,319
Interest expense........................................... 43,033 35,214
Dividends from related parties............................. 30,798 30,798
Currency loss.............................................. 24,269 25,621
Asset impairment charge for an equity investment........... 64,542 --
Other expenses net......................................... 5,251 2,574
-------- --------
Income from continuing operations before income taxes and
minority interest........................................ 35,839 95,630
Provision for income taxes................................. 8,378 8,346
-------- --------
Income from continuing operations before minority
interest................................................. 27,461 87,284
Minority interest.......................................... (19,454) (76,302)
-------- --------
Income from continuing operations.......................... 8,007 10,982
Income from discontinued operations, net of tax and
minority interest........................................ 4,685 --
-------- --------
Net income................................................. $ 12,692 $ 10,982
======== ========
See Notes to Condensed Consolidated Financial Statements.
------------------
2
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
-----------------------------------
January 26, 2005 January 28, 2004
FY 2005 FY 2004
---------------- ----------------
(Unaudited)
(In Thousands)
Sales...................................................... $2,496,080 $2,354,559
Cost of products sold...................................... 1,556,413 1,492,153
---------- ----------
Gross profit............................................... 939,667 862,406
Selling, general and administrative expenses............... 432,842 388,930
Royalty expense to related parties......................... 139,126 119,636
---------- ----------
Operating income........................................... 367,699 353,840
Interest income............................................ 16,001 6,090
Interest expense........................................... 115,603 102,515
Dividends from related parties............................. 92,394 92,394
Currency loss.............................................. 51,186 40,337
Asset impairment charge for an equity investment........... 64,542 --
Other expenses, net........................................ 9,789 6,501
---------- ----------
Income from continuing operations before income taxes and
minority interest........................................ 234,974 302,971
Provision for income taxes................................. 38,689 36,086
---------- ----------
Income from continuing operations before minority
interest................................................. 196,285 266,885
Minority interest.......................................... (149,563) (209,872)
---------- ----------
Income from continuing operations.......................... 46,722 57,013
Income from discontinued operations, net of tax and
minority interest........................................ 4,685 --
---------- ----------
Net income................................................. $ 51,407 $ 57,013
========== ==========
See Notes to Condensed Consolidated Financial Statements.
------------------
3
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 26, 2005 April 28, 2004*
FY 2005 FY 2004
---------------- ---------------
(Unaudited)
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 108,620 $ 462,039
Receivables, net.......................................... 365,764 354,282
Due from related parties.................................. 21,358 19,706
Short-term notes receivable from related parties.......... 791,237 386,955
Inventories............................................... 488,688 377,463
Prepaid expenses and other current assets................. 26,589 39,617
---------- ----------
Total current assets................................... 1,802,256 1,640,062
Property, plant and equipment............................... 1,089,461 1,147,808
Less accumulated depreciation............................... (497,898) (521,084)
---------- ----------
Total property, plant and equipment, net............... 591,563 626,724
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.................................................. 1,027,853 1,025,028
Other intangible assets, net.............................. 270,287 279,560
Other non-current assets.................................. 361,244 352,002
---------- ----------
Total other non-current assets......................... 3,589,629 3,586,835
---------- ----------
Total assets........................................... $5,983,448 $5,853,621
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term debt with related parties...................... $ 547,111 $ 282,348
Portion of long-term debt due within one year............. 324 355,724
Accounts payable.......................................... 231,889 214,665
Accounts payable to related parties....................... 64,240 72,851
Accrued marketing......................................... 71,633 109,038
Accrued interest.......................................... 53,996 69,075
Other accrued liabilities................................. 28,231 35,309
---------- ----------
Total current liabilities.............................. 997,424 1,139,010
Long-term debt and other liabilities:
Long-term debt............................................ 3,878,853 3,795,269
Deferred income taxes..................................... 76,023 46,130
Other liabilities......................................... 8,463 14,668
---------- ----------
Total long-term debt and other liabilities............. 3,963,339 3,856,067
Minority interest........................................... 700,656 572,641
Shareholder's equity:
Common stock.............................................. 11 11
Additional capital........................................ 109,441 123,438
Retained earnings......................................... 211,946 160,539
Accumulated other comprehensive income.................... 631 1,915
---------- ----------
Total shareholder's equity............................. 322,029 285,903
---------- ----------
Total liabilities and shareholder's equity............. $5,983,448 $5,853,621
========== ==========
- ---------------
* Summarized from audited Fiscal Year 2004 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
4
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
-----------------------------------
January 26, 2005 January 28, 2004
FY 2005 FY 2004
---------------- ----------------
(Unaudited)
(In Thousands)
Cash Flows from Operating Activities:
Net income................................................ $ 51,407 $ 57,013
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................... 43,272 43,025
Amortization........................................... 8,917 9,319
Deferred tax provision (benefit)....................... 63,409 (9,104)
Minority interest...................................... 149,563 209,872
Currency loss.......................................... 51,186 40,337
Asset impairment charge for an equity investment....... 64,542 --
Other items, net....................................... 4,427 (9,117)
Changes in current assets and liabilities, excluding
effects of acquisitions and divestitures:
Receivables.......................................... 28,879 63,641
Inventories.......................................... (116,302) (66,285)
Due from/to related parties.......................... (5,625) (26,763)
Prepaid expenses and other current assets............ 12,310 (7,012)
Accounts payable..................................... 30,154 (14,442)
Accrued liabilities.................................. (59,949) (8,208)
Income taxes......................................... (60,693) 22,931
--------- ---------
Cash provided by operating activities..................... 265,497 305,207
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures...................................... (33,310) (30,147)
Acquisitions, net of cash acquired........................ (6,558) (61,298)
Proceeds from divestitures................................ 18,604 --
Other items, net.......................................... 5,340 7,283
--------- ---------
Cash used for investing activities..................... (15,924) (84,162)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt with related parties......... -- 185,639
Payments on long-term debt................................ (404,924) (8,168)
Payments on short-term debt with related parties, net..... (176,520) (353,256)
Distributions to minority partners........................ (21,548) --
Dividends on preferred shares............................. -- (5,059)
--------- ---------
Cash used for financing activities..................... (602,992) (180,844)
--------- ---------
Net (decrease)/increase in cash and cash equivalents........ (353,419) 40,201
Cash and cash equivalents, beginning of period.............. 462,039 194,266
--------- ---------
Cash and cash equivalents, end of period.................... $ 108,620 $ 234,467
========= =========
See Notes to Condensed Consolidated Financial Statements.
------------------
5
H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The domestic treasury and 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"), which are
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, H. J. Heinz Finance Company has the power to control the General
Partner through majority membership on Heinz LP's management board. The
minority interest amounts on the January 26, 2005 and April 28, 2004
balance sheets represent the Class A and General Partner's 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, except those which have been disclosed
elsewhere in this Quarterly Report on Form 10-Q, 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 2005
presentation. These statements should be read in conjunction with Heinz
Finance's consolidated 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 H.J. Heinz Finance Company are reported in
the Heinz consolidated financial statements as long-term debt at January
26, 2005 and April 28, 2004.
(2) SPECIAL ITEMS
ASSET IMPAIRMENTS
Heinz Finance holds an equity investment in The Hain Celestial Group, Inc.
("Hain"), a rapid growth natural, specialty and snack food company. Hain
shares have been trading at less than 80% of Heinz Finance's carrying value
since late January 2004. Due to the length of time and the amount that Hain
stock has traded below Heinz Finance's basis, Heinz Finance has determined
that the decline is other-than-temporary as defined by Accounting
Principles Board Opinion No. 18 and as a result, has recognized a $64.5
million non-cash impairment
6
charge during the third quarter of Fiscal 2005. The charge reduced Heinz
Finance's carrying value in Hain to fair market value as of January 26,
2005, with no resulting impact on cash flow. Heinz Finance currently owns
approximately six million shares of Hain stock at a new basis of $19.86 per
share as of January 26, 2005. In the future, should the market value of
Hain common stock decline and remain below current market value for a
substantial time, Heinz Finance may need to record additional writedowns of
its investment in Hain. There was no tax benefit associated with this
impairment charge.
DISCONTINUED OPERATIONS
Net income from discontinued operations for the three and nine months ended
January 26, 2005 was $4.7 million and reflects the favorable settlement of
tax liabilities related to the businesses spun-off to Del Monte on December
20, 2002.
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 $1.0 million and $4.0 million at January 26,
2005 and April 28, 2004, respectively.
(3) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
January 26, April 28,
(in thousands) 2005 2004
-------------- ----------- ---------
Finished goods and work-in-process.......................... $321,275 $265,107
Packaging material and ingredients.......................... 167,413 112,356
-------- --------
$488,688 $377,463
======== ========
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the nine months ended
January 26, 2005, 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.............. -- (1,185) (1,185)
Disposal........................................... (2,548) -- (2,548)
-------- -------- ----------
Balance at January 26, 2005........................ $842,936 $184,917 $1,027,853
======== ======== ==========
The annual impairment tests are performed in the fourth quarter of each
fiscal year unless events suggest impairment may have occurred in the
interim. No impairment charges were recognized during the nine months ended
January 26, 2005.
7
Trademarks and other intangible assets at January 26, 2005 and April 28,
2004, subject to amortization expense, are as follows:
January 26, 2005 April 28, 2004
---------------------------------- ----------------------------------
Accumulated Accumulated
(in thousands) Gross Amortization Net Gross Amortization Net
-------------- -------- ------------ -------- -------- ------------ --------
Trademarks........... $ 36,403 $ (3,488) $ 32,915 $ 39,103 $ (3,268) $ 35,835
Licenses............. 208,186 (122,919) 85,267 208,186 (118,504) 89,682
Other................ 95,808 (46,804) 49,004 95,708 (44,802) 50,906
-------- --------- -------- -------- --------- --------
$340,397 $(173,211) $167,186 $342,997 $(166,574) $176,423
======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to
amortization was $7.2 million and $6.5 million for the nine months ended
January 26, 2005 and January 28, 2004, respectively. Based upon the
amortizable intangible assets recorded on the balance sheet at January 26,
2005, annual amortization expense for each of the next five years is
estimated to be approximately $10 million.
Intangible assets not subject to amortization at January 26, 2005 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. The
increase in Heinz Finance's nine month effective tax rate is a result of a
reduction in minority interest as a percentage of income before tax, an
increase in nondeductible expense and the impairment charge for Hain for
which no tax benefit can currently be recorded.
In the second quarter of Fiscal 2005, a $14 million prior period adjustment
was made to additional paid-in-capital and deferred tax accounts related to
an adjustment to the original net assets contributed to Heinz LP on May 3,
2001.
The American Jobs Creation Act provides a deduction calculated as a
percentage of qualified income from manufacturing in the United States. The
percentage increases from 3% to 9% over a 6 year period beginning with
Heinz Finance's 2006 fiscal year. In December 2004, the Financial
Accounting Standards Board ("FASB") issued a new staff position providing
for this deduction to be treated as a special deduction, as opposed to a
tax rate reduction, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109. The benefit of this deduction is not expected
to have a material impact on Heinz Finance's effective tax rate in Fiscal
2006.
(6) RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4". This Statement is meant to eliminate
any narrow differences existing between the FASB standards and the
standards issued by the International Accounting Standards Board by
clarifying that any abnormal idle facility expense, freight, handling costs
and spoilage be recognized as current-period charges. This Statement is
required to be adopted by Heinz Finance in the first quarter of Fiscal
2007; however, early application is permitted. Heinz Finance does not
expect the adoption of this Statement to have a material impact on results
of operations, financial position or 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,
8
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'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 $72.8 million and $62.2
million for the third quarter ended January 26, 2005 and January 28, 2004,
respectively, and $221.4 million and $187.7 million for the nine months
ended January 26, 2005 and January 28, 2004, 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. For the third
quarter and nine months ended January 26, 2005, $13.0 million and $41.8
million, respectively, were recorded as cost of products sold and $59.8
million and $179.6 million, respectively, as SG&A. For the third quarter
and nine months ended January 28, 2004, $11.5 million and $33.0 million,
respectively, were recorded as cost of products sold and $50.7 million and
$154.8 million, respectively, as SG&A.
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 $15.2 million and $16.0 million for the
third quarter ended January 26, 2005 and January 28, 2004, respectively,
and $45.9 million and $49.4 million for the nine months ended January 26,
2005 and January 28, 2004, 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 and are included
either in the management charge from Heinz Management Company discussed
above or are recorded directly on Heinz LP.
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 with foreign wholly-owned
subsidiaries of Heinz. As a result of these cash management activities,
Heinz Finance had $244.1 million and $104.6 million of net short-term notes
receivable with related parties recorded on the condensed consolidated
balance sheets as of January 26, 2005 and April 28, 2004, respectively. In
addition, at January 26, 2005 and April 28, 2004, long-term notes
receivable from related parties includes $35.0 million related to a
receivable from Heinz, which is classified as long-term given its maturity
of May 2, 2007.
An average interest rate of 2.0% and 1.1% was earned on total notes
receivable from related parties resulting in $4.9 million and $1.7 million
of interest income for the third quarter ended January 26, 2005 and January
28, 2004, respectively, and $10.6 million and $3.9 million of interest
income for the nine months ended January 26, 2005 and January 28, 2004,
respectively. In addition, an average interest rate of 2.0% and 1.8% was
charged on total notes payable to related parties resulting in $3.6 million
and $1.6 million of interest expense for the third quarter ended January
26, 2005 and January 28, 2004, respectively, and $7.9 million
9
and $3.8 million of interest expense for the nine months ended January 26,
2005 and January 28, 2004, respectively.
Product Sales and Purchases
Heinz Finance sells and purchases products and services to and from other
Heinz affiliates. The results of related party transactions are the $21.4
million and $19.7 million balances due from related parties as of January
26, 2005 and April 28, 2004, respectively, and the $64.2 million and $72.9
million balances for accounts payable to related parties as of January 26,
2005 and April 28, 2004, respectively. Product sales to related parties
were $16.4 million and $12.2 million for the third quarter ended January
26, 2005 and January 28, 2004, respectively, and $39.5 and $35.1 million
for the nine months ended January 26, 2005 and January 28, 2004,
respectively. Purchases from related parties were $11.4 million and $8.3
million for the third quarter ended January 26, 2005 and January 28, 2004,
respectively, and $33.4 and $23.0 million for the nine months ended January
26, 2005 and January 28, 2004, respectively.
Other Related Party Items
Heinz Finance held $1.9 billion of non-voting, 6.5% cumulative
non-participating preferred stock of PM Holding, Inc. ("PM Holding"), a
subsidiary of Heinz. Heinz Finance's preferred stock investment in PM
Holding was converted to a preferred stock investment in Heinz as a result
of the merger of PM Holding with and into Heinz during the third quarter of
Fiscal 2003. The dividends on the preferred stock amounted to $30.8 million
and $92.4 million for the third quarter and nine months ended January 26,
2005 and January 28, 2004, respectively. This preferred stock investment is
recorded in the Investments in related parties balance on the condensed
consolidated balance sheets as of January 26, 2005 and April 28, 2004.
Heinz Finance paid royalties of $46.8 million and $42.1 million for the
third quarter ended January 26, 2005 and January 28, 2004, respectively,
and $139.1 million and $119.6 million for the nine months ended January 26,
2005 and January 28, 2004, 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.
10
The following table presents information about Heinz Finance's reportable
segments:
Net External Sales Net External Sales
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 26, 2005 January 28, 2004 January 26, 2005 January 28, 2004
(in thousands) FY 2005 FY 2004 FY 2005 FY 2004
-------------- ---------------- ---------------- ---------------- ----------------
North American Consumer
Products.............. $494,806 $455,335 $1,380,834 $1,287,177
U.S. Foodservice........ 381,965 $357,634 1,115,246 1,067,382
-------- -------- ---------- ----------
Consolidated totals... $876,771 $812,969 $2,496,080 $2,354,559
======== ======== ========== ==========
Intersegment Revenues Intersegment Revenues
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 26, 2005 January 28, 2004 January 26, 2005 January 28, 2004
(in thousands) FY 2005 FY 2004 FY 2005 FY 2004
-------------- ---------------- ---------------- ---------------- ----------------
North American Consumer
Products.............. $10,563 $10,660 $31,689 $31,980
U.S. Foodservice........ -- -- -- --
Non-Operating(a)........ (10,563) (10,660) (31,689) (31,980)
------- ------- ------- -------
Consolidated totals... $ -- $ -- $ -- $ --
======= ======= ======= =======
Operating Income (Loss)(b) Operating Income (Loss)(b)
Third Quarter Ended Nine Months Ended
----------------------------------- -----------------------------------
January 26, 2005 January 28, 2004 January 26, 2005 January 28, 2004
(in thousands) FY 2005 FY 2004 FY 2005 FY 2004
-------------- ---------------- ---------------- ---------------- ----------------
North American Consumer
Products.............. $ 97,068 $ 85,908 $251,024 $235,713
U.S. Foodservice........ 38,383 40,479 118,413 119,725
Non-Operating(a)........ (652) (465) (1,738) (1,598)
-------- -------- -------- --------
Consolidated totals... $134,799 $125,922 $367,699 $353,840
======== ======== ======== ========
--------------------
(a) Includes charges not directly attributable to operating segments and
intercompany eliminations.
(b) Nine Months ended January 28, 2004--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
Third Quarter Ended Nine Months Ended
------------------------- -------------------------
January 26, January 28, January 26, January 28,
2005 2004 2005 2004
(in thousands) FY 2005 FY 2004 FY 2005 FY 2004
-------------- ----------- ----------- ----------- -----------
Net income........................... $12,692 $10,982 $ 51,407 $57,013
Other comprehensive income:
Net deferred gains/(losses) on
derivatives from periodic
revaluations.................... 6,759 (1,567) 29,342 5,475
Net deferred (gains)/losses on
derivatives reclassified to
earnings........................ (6,839) 1,690 (30,626) (4,688)
------- ------- -------- -------
Comprehensive income................. $12,612 $11,105 $ 50,123 $57,800
======= ======= ======== =======
11
(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
nine months ended January 26, 2005. 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.
As of January 26, 2005, Heinz Finance is hedging forecasted transactions
for periods not exceeding two years. During the next 12 months, Heinz
Finance expects $0.6 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 nine
months ended January 26, 2005 and January 28, 2004.
(11) INVESTMENTS AND UNCONSOLIDATED SUBSIDIARIES
The consolidated financial statements include the accounts of Heinz
Finance, and entities in which Heinz Finance maintains a controlling
financial interest. Control is generally determined based on the majority
ownership of an entity's voting interests. In certain situations, control
is based on participation in the majority of an entity's economic risks and
rewards. Investments in certain companies over which Heinz Finance exerts
significant influence, but does not control the financial and operating
decisions, are accounted for as equity method investments. Heinz Finance
has no investments in variable interest entities.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL ITEMS
ASSET IMPAIRMENTS
Heinz Finance holds an equity investment in The Hain Celestial Group, Inc.
("Hain"), a rapid growth natural, specialty and snack food company. Hain shares
have been trading at less than 80% of Heinz Finance's carrying value since late
January 2004. Due to the length of time and the amount that Hain stock has
traded below Heinz Finance's basis, Heinz Finance has determined that the
decline is other-than-temporary as defined by Accounting Principles Board
Opinion No. 18 and as a result, has recognized a $64.5 million non-cash
impairment charge during the third quarter of Fiscal 2005. The charge reduced
Heinz Finance's carrying value in Hain to fair market value as of January 26,
2005, with no resulting impact on cash flow. Heinz Finance currently owns
approximately six million shares of Hain stock at a new basis of $19.86 per
share as of January 26, 2005. In the future, should the market value of Hain
common stock decline and remain below current market value for a substantial
time, Heinz Finance may need to record additional writedowns of its investment
in Hain. There was no tax benefit associated with this impairment charge.
DISCONTINUED OPERATIONS
Net income from discontinued operations for the three and nine months ended
January 26, 2005 was $4.7 million and reflects the favorable settlement of tax
liabilities related to the businesses spun-off to Del Monte on December 20,
2002.
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 JANUARY 26, 2005 AND JANUARY 28, 2004
RESULTS OF CONTINUING OPERATIONS
Sales for the three months ended January 26, 2005 increased $63.8 million,
or 7.8%, to $876.8 million. Sales volume increased 6.3% due primarily to strong
increases in the North American Consumer Products segment, driven by
improvements in frozen potatoes and snacks and strong increases in the U.S.
Foodservice segment due primarily to sales of frozen soup, tomato products,
single serve condiments and Heinz ketchup. Pricing increased 2.4% as a result of
reduced trade promotion spending and product placement fees in the North
American Consumer Products segment and price increases initiated in the U.S.
Foodservice segment to offset fuel and commodity cost pressures. Divestitures
reduced sales 0.9% due to the sale of Ethnic Gourmet Foods and Rosetto pasta to
Hain in the first quarter.
Gross profit increased $34.8 million, or 11.7%, to $331.7 million, and the
gross profit margin increased to 37.8% from 36.5%. The gross profit margin
increase was primarily a result of favorable pricing and margin improvements in
the U.S. Foodservice segment, partially offset by increases in commodity and
fuel costs of approximately 1.1%.
SG&A increased $21.2 million, or 16.4%, to $150.1 million, and increased as
a percentage of sales to 17.1% from 15.9%. This increase is due primarily to
increased fuel and trucking costs of
13
approximately 0.8%. Operating income increased $8.9 million, or 7.0%, to $134.8
million, and decreased as a percentage of sales to 15.4% from 15.5%. The 7.0%
increase was a result of the changes noted above partially offset by increased
royalty expense to related parties.
Total marketing support (recorded as a reduction of revenue or as a
component of SG&A) decreased $14.3 million, or 7.5%, to $177.3 million on a
sales increase of 7.8%. Marketing support recorded as a reduction of revenue,
typically deals and allowances, decreased $14.9 million, or 8.5%, to $160.5
million, which is primarily a result of reduced trade promotion spending,
primarily related to Heinz ketchup, Bagel Bites and TGI Friday's frozen snacks,
and reduced product placement fees on Ore-Ida frozen potatoes in the North
America Consumer Products segment. Marketing support recorded as a component of
SG&A increased $0.6 million, or 3.4%, to $16.8 million.
Net interest expense increased $2.8 million, to $35.7 million. This
increase is a result of increased interest expense resulting from higher average
short-term related party debt balances and higher average interest rates in
Fiscal 2005 partially offset by lower average external debt balances. Also,
interest income increased due to increased average cash balances and short-term
notes receivable from related parties. The quarter was also unfavorably impacted
by a $64.5 million non-cash impairment charge related to Hain, as discussed
previously. There was a non-cash currency loss of $24.3 million in the current
quarter compared to $25.6 million in the year-earlier quarter related to the
marked-to-market adjustment on Euro-denominated long-term debt, which matured on
January 5, 2005. This debt represented 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 23.4% compared to 8.7%
last year. The increase in the third quarter effective tax rate is attributable
to a reduction in minority interest as a percentage of net income before tax and
the impairment charge for Hain for which no tax benefit can currently be
recorded.
Income from continuing operations for the third quarter of Fiscal 2005 was
$8.0 million compared to $11.0 million in the year-earlier quarter.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment increased $39.5
million, or 8.7%, to $494.8 million. Volume increased significantly, up 7.1%, as
a result of strong growth in frozen potatoes, reflecting the success of the
introduction of Ore-Ida Extra Crispy Potatoes and new microwavable Easy Fries,
and new distribution related to a co-packing agreement. Bagel Bites and TGI
Friday's frozen snacks also contributed to the significant volume increase
reflecting the success of new, more effective promotional programs. Pricing
increased 3.2% largely due to reduced trade promotion spending, primarily
related to Heinz ketchup, Bagel Bites and TGI Friday's frozen snacks, and
reduced product placement fees on Ore-Ida frozen potatoes. Divestitures reduced
sales 1.6% due to the sale of Ethnic Gourmet Foods and Rosetto pasta to Hain in
the first quarter.
Gross profit increased $20.0 million, or 10.3%, to $213.8 million, and the
gross profit margin increased to 43.2% from 42.6%, as increases in sales volume
and net pricing were partially offset by higher commodity and fuel costs. Gross
profit also benefited from favorable termination of a long-term co-packing
arrangement with a customer. Operating income increased $11.2 million, or 13.0%,
to $97.1 million, due to the increase in gross profit partially offset by
increased pension and fuel costs and increased royalty expense to related
parties resulting from increased sales and a change in the application of the
royalty rate.
14
U.S. FOODSERVICE
Sales of the U.S. Foodservice segment increased $24.3 million, or 6.8%, to
$382.0 million. Strong volume increased sales 5.4%, largely driven by our
Truesoups frozen soup business, increased sales of our custom recipe tomato
products, improvements in single serve condiments and Heinz ketchup, and
increased sales to related parties. Higher pricing increased sales by 1.4%, as
price increases were initiated, primarily on Heinz ketchup and frozen soup, to
offset fuel and commodity cost pressures.
Gross profit increased $14.9 million, or 14.4%, to $118.2 million, and the
gross profit margin increased to 31.0% from 28.9% primarily due to favorable
pricing and mix, partially offset by increased commodity and fuel costs.
Operating income decreased $2.1 million, or 5.2%, to $38.4 million, as the
increase in gross profit was offset by increased distribution, fuel and fixed
selling costs and increased royalty expense resulting from increased sales and a
change in the application of the royalty rate.
NINE MONTHS ENDED JANUARY 26, 2005 AND JANUARY 28, 2004
RESULTS OF CONTINUING OPERATIONS
Sales for the nine months ended January 26, 2005 increased $141.5 million,
or 6.0%, to $2.50 billion. Sales volume increased 4.4% due primarily to strong
increases in the North American Consumer Products segment, driven by increases
in frozen potatoes, entrees and snacks and increases in the U.S. Foodservice
segment driven by increased sales of frozen soup, tomato products and Heinz
ketchup. Pricing increased 2.2% as a result of more efficient trade spending and
decreased product placement fees in the North American Consumer Products segment
and price increases initiated in the U.S. Foodservice segment to offset fuel and
commodity cost pressures. Divestitures, net of acquisitions, reduced sales 0.6%.
Gross profit increased $77.3 million, or 9.0%, to $939.7 million, and the
gross profit margin increased to 37.6% from 36.6%. The gross profit margin
increase was primarily a result of favorable pricing, partially offset by
increases in commodity costs.
SG&A increased $43.9 million, or 11.3%, to $432.8 million, and increased as
a percentage of sales to 17.3% from 16.5%. This increase is primarily a result
of increased selling and distribution costs, reflecting the sales volume
increase and higher fuel and trucking costs. Last year's SG&A was unfavorably
impacted by reorganization costs totaling $4.0 million. Operating income
increased $13.9 million, or 3.9%, to $367.7 million, while operating income
decreased as a percentage of sales to 14.7% from 15.0%. The 3.9% increase was a
result of the changes noted above partially offset by increased royalty expense
to related parties.
Total marketing support (recorded as a reduction of revenue or as a
component of SG&A) decreased $37.2 million, or 6.9%, to $499.6 million on a
sales increase of 6.0%. Marketing support recorded as a reduction of revenue,
typically deals and allowances, decreased $36.5 million, or 7.6%, to $445.8
million primarily due to more efficient trade spending and decreased product
placement fees on SmartOnes frozen entrees and Ore-Ida potatoes as well as
declines related to Classico pasta sauces and Heinz ketchup. Marketing support
recorded as a component of SG&A decreased $0.7 million, or 1.3%, to $53.8
million.
Net interest expense increased $3.2 million, to $99.6 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, higher interest rates during Fiscal 2005 and higher average short-term
related party debt balances largely offset by lower average external debt
balances and higher interest income resulting from increased average cash
balances and short-term notes receivable from related parties. The year was also
unfavorably impacted by a $64.5 million non-cash impair-
15
ment charge related to Hain, as previously discussed. There was a non-cash
currency loss of $51.2 million in the current period compared to $40.3 million
in the year-earlier period related to the marked-to-market adjustment on
Euro-denominated long-term debt, which matured on January 5, 2005. 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 period was 16.5% compared to 11.9%
last year. The increase in the nine month effective tax rate is attributable to
a reduction in minority interest as a percentage of net income before tax, an
increase in nondeductible expense and the impairment charge for Hain for which
no tax benefit can currently be recorded.
Income from continuing operations for the first nine months of Fiscal 2005
was $46.7 million compared to $57.0 million in the year-earlier period.
OPERATING RESULTS BY BUSINESS SEGMENT
NORTH AMERICAN CONSUMER PRODUCTS
Sales of the North American Consumer Products segment increased $93.7
million, or 7.3%, to $1.38 billion. Sales volume increased 6.4% 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 in Boston Market HomeStyle meals and in the frozen snack brands of
Delimex, Bagel Bites and TGI Friday's, as well as new distribution related to a
co-packing agreement also contributed to the volume increase. Pricing increased
sales 2.5% largely due to more efficient trade spending and decreased product
placement fees on SmartOnes frozen entrees and Ore-Ida potatoes as well as
increases related to Classico pasta sauces and Heinz ketchup. Divestitures
reduced sales 1.6% due to the sale of Ethnic Gourmet Foods and Rosetto pasta to
Hain in the first quarter.
Gross profit increased $46.8 million, or 8.5%, to $599.7 million driven by
the increase in sales volume. The gross profit margin increased to 43.4% from
43.0% due primarily to higher net pricing and a benefit from favorable
termination of a long-term co-packing arrangement with a customer, partially
offset by higher commodity costs. Operating income increased $15.3 million, or
6.5%, to $251.0 million, due to the increase in volume and gross profit,
partially offset by higher selling and distribution costs, reflecting the volume
increase and higher fuel costs, and by increased royalty expense to related
parties resulting from increased sales and a change in the application of the
royalty rate. Operating income for the nine months ended January 28, 2004 was
impacted by reorganization costs totaling $1.5 million.
U.S. FOODSERVICE
Sales of the U.S. Foodservice segment increased $47.9 million, or 4.5%, to
$1.12 billion. Higher pricing increased sales by 1.8%, as price increases were
initiated on Heinz ketchup and frozen soup to offset fuel and commodity cost
pressures. Volume increased sales 2.0% due to stronger performance on Truesoups
frozen soup, growth in custom recipe tomato products and Heinz ketchup and
increased sales to related parties. These increases were partially offset by
declines at Portion Pac Inc. resulting from the startup of a new warehouse
management system that temporarily impacted shipments of some portion control
products in the first quarter of Fiscal 2005. Acquisitions increased sales 0.7%,
due to the prior year acquisition of Truesoups LLC.
Gross profit increased $30.5 million, or 9.8%, to $340.7 million, and the
gross profit margin increased to 30.5% from 29.1%. The gross profit margin
increase was primarily due to favorable pricing, partly offset by increases in
commodity costs. Operating income decreased $1.3 million, or 1.1%, to $118.4
million, primarily due to increased selling and distribution costs some of which
16
relates to the Portion Pac Inc. issues disclosed above, increased fuel and
trucking costs and increased royalty expense to related parties resulting from
increased sales and a change in the application of the royalty rate, partially
offset by the growth in gross profit. Operating income for the nine months ended
January 28, 2004, was impacted by reorganization costs totaling $2.5 million.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities was $265.5 million, a decrease of
$39.7 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 accounts receivable and inventories, partially
offset by accounts payable.
Cash used for investing activities totaled $15.9 million compared to $84.2
million last year. Acquisitions used $6.6 million in cash in the first nine
months of Fiscal 2005 compared to $61.3 million in same period of Fiscal 2004.
Capital expenditures totaled $33.3 million compared to $30.1 million last year.
Proceeds from divestitures provided $18.6 million in the first nine months of
Fiscal 2005.
Cash used by financing activities totaled $603.0 million, compared to
$180.8 million last year. Payments on short-term debt with related parties were
$176.5 million this year, compared to $353.3 million last year. Proceeds from
long-term debt with related parties provided $185.6 million in the prior year.
Payments on long-term debt totaled $404.9, compared to $8.2 million in the prior
year, reflecting the payoff of E300 million of bonds ($404.7 million) which
matured on January 5, 2005. 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).
Distributions to minority partners totaled $21.5 million this year.
Heinz and Heinz Finance completed the remarketing of their $800 million
remarketable securities due 2020 on December 1, 2004. Heinz and Heinz Finance's
$2.0 billion Five-Year 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, Heinz
Finance's existing cash balance of $109 million, 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.
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.
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
17
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 nine months ended January 26,
2005. 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 November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs,
an amendment of ARB No. 43, Chapter 4". This Statement is meant to eliminate any
narrow differences existing between the FASB standards and the standards issued
by the International Accounting Standards Board by clarifying that any abnormal
idle facility expense, freight, handling costs and spoilage be recognized as
current-period charges. This Statement is required to be adopted by Heinz
Finance in the first quarter of Fiscal 2007; however, early application is
permitted. Heinz Finance does not expect the adoption of this Statement to have
a material impact on results of operations, financial position or 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'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.
DISCUSSION OF SIGNIFICANT ACCOUNTING ESTIMATES
In the ordinary course of business, Heinz Finance has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. Heinz Finance believes that the following discussion
addresses Heinz Finance's most critical accounting policies, which are those
that are most important to the portrayal of Heinz Finance's financial condition
and results and require management's most difficult, subjective and complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Marketing Costs--Trade promotions are an important component of the sales
and marketing of Heinz Finance's products and are critical to the support of the
business. Trade promotion costs include amounts paid to encourage retailers to
offer temporary price reductions for the sale of Heinz Finance's products to
consumers, amounts paid to obtain favorable display positions in retailers'
stores, and amounts paid to customers for shelf space in retail stores. Accruals
for trade promotions are recorded primarily at the time of sale of product to
the customer based on an estimate of the expected levels of performance of the
trade promotion, which is dependent upon factors such as historical trends with
similar promotions, expectations regarding customer participation, and sales and
payment trends with similar previously offered programs. Our original estimated
costs of trade promotions are reasonably likely to change in the future as a
result of changes in trends with regard to customer participation, particularly
for new programs and for programs related to the introduction of new products.
We perform monthly and quarterly evaluations of our outstanding trade
promotions; making adjustments, where appropriate, to reflect changes in our
estimates. Settlement of these liabilities typically occurs in subsequent
periods
18
primarily through an authorized process for deductions taken by a customer from
amounts otherwise due to Heinz Finance. As a result, the ultimate cost of a
trade promotion program is dependent on the relative success of the events and
the actions and level of deductions taken by Heinz Finance's customers for
amounts they consider due to them. Final determination of the permissible
deductions may take extended periods of time and could have a significant impact
on Heinz Finance's results of operations depending on how actual results of the
programs compare to original estimates.
We offer coupons to consumers in the normal course of our business. Costs
associated with this activity, which we refer to as coupon redemption costs, are
accrued in the period in which the coupons are offered. The initial estimates
made for each coupon offering are based upon historical redemption experience
rates for similar products or coupon amounts. We perform subsequent estimates
that compare our actual redemption rates to the original estimates. We review
the assumptions used in the valuation of the estimates and determine an
appropriate accrual amount. Adjustments to our initial accrual may be required
if our actual redemption rates vary from our estimated redemption rates.
Inventories--Inventories are stated at the lower of cost or market value.
Cost is principally determined by the average cost method. Heinz Finance records
adjustments to the carrying value of inventory based upon its forecasted plans
to sell its inventories. The physical condition (e.g., age and quality) of the
inventories is also considered in establishing its valuation. These adjustments
are estimates, which could vary, either favorably or unfavorably, from actual
requirements if future economic conditions, customer inventory levels or
competitive conditions differ from our expectations.
Investments and Long-lived Assets and Property, Plant and
Equipment--Investments and long-lived assets are recorded at their respective
cost basis on the date of acquisition. Buildings, equipment and leasehold
improvements are depreciated on a straight-line basis over the estimated useful
life of such assets. Heinz Finance reviews investments and long-lived assets,
including intangibles with finite useful lives, and property, plant and
equipment, whenever circumstances change such that the indicated recorded value
of an asset may not be recoverable or has suffered an other than temporary
impairment. Factors that may affect recoverability include changes in planned
use of equipment or software, the closing of facilities and changes in the
underlying financial strength of investments. The estimate of current value
requires significant management judgment and requires assumptions that can
include: future volume trends and revenue and expense growth rates developed in
connection with Heinz Finance's internal projections and annual operating plans,
and in addition, external factors such as market value devaluation and inflation
which are developed in connection with Heinz Finance's longer- term strategic
planning. As each is management's best estimate on then available information,
resulting estimates may differ from actual cash flows.
Goodwill and Indefinite Lived Intangibles--Carrying values of goodwill and
intangible assets with indefinite lives are reviewed for impairment at least
annually, or when circumstances indicate that a possible impairment may exist,
in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
Indicators such as unexpected adverse economic factors, unanticipated
technological change or competitive activities, loss of key personnel, and acts
by governments and courts, may signal that an asset has become impaired. Heinz
Finance's measure of impairment is based on a discounted cash flow model that
requires significant judgment and requires assumptions about future volume
trends and revenue and expense growth rates developed in connection with Heinz
Finance's internal projections and annual operating plans, and in addition,
external factors such as changes in macroeconomic trends and cost of capital
developed in connection with Heinz Finance's longer-term strategic planning.
Inherent in estimating future performance, in particular assumptions regarding
external factors such as capital markets, are uncertainties beyond Heinz
Finance's control. Management believes that because fair values of goodwill and
intangible assets with
19
indefinite lives significantly exceed carrying value, it is unlikely that a
material impairment charge would be recognized.
Income Taxes--Heinz Finance accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes". Judgment is required in determining
Heinz Finance's provision for income taxes. In the ordinary course of Heinz
Finance's business, there are some transactions for which the ultimate tax
outcome is uncertain. Heinz Finance adjusts its income tax provision in the
period it is probable that actual results will differ from its estimates. Tax
law and rate changes are reflected in the income tax provision in the period in
which such changes are enacted.
The American Jobs Creation Act provides a deduction calculated as a
percentage of qualified income from manufacturing in the United States. The
percentage increases from 3% to 9% over a 6 year period beginning with Heinz
Finance's 2006 fiscal year. In December 2004, the Financial Accounting Standards
Board ("FASB") issued a new staff position providing for this deduction to be
treated as a special deduction, as opposed to a tax rate reduction, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
The benefit of this deduction is not expected to have a material impact on Heinz
Finance's effective tax rate in Fiscal 2006.
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, product mix, 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 and other laws and regulations,
including tax laws, the success of tax planning strategies, the possibility of
increased pension expense and other people-related costs, the possibility of
investment impairment, 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 and subsequent filings with the Securities and
Exchange Commission. The forward-looking statements are and will be based on
management's then current views and assumptions regarding future events and
speak only as of their dates. Heinz Finance undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by the securities
laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in Heinz Finance's market risk during
the nine months ended January 26, 2005. 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.
20
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 are 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 (i) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (ii) accumulated and communicated to
our management, including the President and Chief Financial Officer, as
appropriate to allow timely decision regarding disclosure. Heinz Finance
believes that no controls system can 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.
21
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
(a) 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.
4. Except as set forth below, there are no instruments with respect to
long-term debt of Heinz Finance that involve indebtedness or securities
authorized thereunder exceeding 10 percent of the total assets of Heinz
Finance on a consolidated basis. Heinz Finance agrees to file a copy of
any instrument or agreement defining the rights of holders of long-term
debt of Heinz Finance upon request of the Securities and Exchange
Commission.
(a) The Indenture between Heinz and Bank One, National Association dated
November 6, 2000, is incorporated herein by reference to Exhibit 4
to Heinz's Quarterly Report on Form 10-Q for the nine months ended
January 31, 2001.
(i) The Supplement dated May 3, 2001 among Heinz, Heinz Finance and
Bank One, National Association to the Indenture is incorporated
herein by reference to Exhibit 4(b)(i) of Heinz's Form 10-K for
the fiscal year ended May 2, 2001.
(ii) The second Supplement dated November 15, 2002 among Heinz,
Heinz Finance and Bank One, National Association to the
Indenture is incorporated herein by reference to Exhibit 4 of
Heinz Finance's Quarterly Report on Form 10-Q for the nine
months ended January 29, 2003.
(iii) The third Supplement dated November 10, 2004 among Heinz, Heinz
Finance and Bank One, National Association to the Indenture.
(iv) The fourth Supplement dated November 24, 2004 among Heinz, Heinz
Finance and Bank One, National Association to the Indenture.
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.
22
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.
23
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H. J. HEINZ FINANCE COMPANY
(Registrant)
Date: March 7, 2005
By: /s/ LEONARD A. CULLO, JR.
..........................................
Leonard A. Cullo, Jr.
Director and President
Date: March 7, 2005
By: /s/ ARTHUR B. WINKLEBLACK
..........................................
Arthur B. Winkleblack
Director, Vice President, and
Chief Financial Officer
(Principal Financial Officer)
24
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.
(a) 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.
4. Except as set forth below, there are no instruments with respect to
long-term debt of Heinz Finance that involve indebtedness or securities
authorized thereunder exceeding 10 percent of the total assets of Heinz
Finance on a consolidated basis. Heinz Finance agrees to file a copy of
any instrument or agreement defining the rights of holders of long-term
debt of Heinz Finance upon request of the Securities and Exchange
Commission.
(a) The Indenture between Heinz and Bank One, National Association dated
November 6, 2000, is incorporated herein by reference to Exhibit 4
to Heinz's Quarterly Report on Form 10-Q for the nine months ended
January 31, 2001.
(i) The Supplement dated May 3, 2001 among Heinz, Heinz Finance and
Bank One, National Association to the Indenture is incorporated
herein by reference to Exhibit 4(b)(i) of Heinz's Form 10-K for
the fiscal year ended May 2, 2001.
(ii) The second Supplement dated November 15, 2002 among Heinz,
Heinz Finance and Bank One, National Association to the
Indenture is incorporated herein by reference to Exhibit 4 of
Heinz Finance's Quarterly Report on Form 10-Q for the nine
months ended January 29, 2003.
(iii) The third Supplement dated November 10, 2004 among Heinz, Heinz
Finance and Bank One, National Association to the Indenture.
(iv) The fourth Supplement dated November 24, 2004 among Heinz, Heinz
Finance and Bank One, National Association to the Indenture.
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.