EX-13 4 ex13.txt PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS H.J. Heinz Company and Subsidiaries OPERATION EXCEL Background In Fiscal 1999, the company announced a transformative growth and restructuring initiative that is expected to generate approximately $240 million in annual pretax savings upon full implementation and growth in earnings per share of 10 to 12 percent per year, on average. The initiative, named "Operation Excel," is a multi-year, multi-faceted program that will result in restructuring charges and implementation costs of approximately $1.1 billion. The company anticipates that substantially all restructuring charges and implementation costs will be recognized by the end of Fiscal 2001. The major components of Operation Excel include: creating manufacturing centers of excellence, focusing the product portfolio, realigning the company's management teams and investing in growth initiatives. Creating manufacturing centers of excellence is resulting in significant changes to the company's manufacturing footprint including the following initiatives: _ Closing the Harlesden factory in London, England and focusing the Kitt Green factory in Wigan, England on canned beans, soups and pasta production and focusing the Elst factory in the Netherlands on tomato ketchup and sauces _ Downsizing the Puerto Rico tuna processing facility and focusing this facility on lower volume/higher margin products (completed in Fiscal 2000) _ Focusing the Pittsburgh, Pennsylvania factory on soup and baby food production and shifting other production to existing facilities _ Consolidating manufacturing capacity in the Asia/Pacific region _ Closing the Zabreh, Czech Republic factory and disposing of the Czech dairy business and transferring the infant formula business to the Kendal, England factory (completed in Fiscal 2000) _ Downsizing the Pocatello, Idaho factory by shifting Bagel Bites production to the Ft. Myers, Florida factory, and shifting certain Smart Ones entree production to the Massillon, Ohio factory (completed in Fiscal 2000) _ Closing the Redditch, England factory and shifting production to the Telford, England factory and the Turnhout factory in Belgium (completed in Fiscal 2000) _ Closing the El Paso, Texas pet treat facility and consolidating production in the Topeka, Kansas factory _ Disposing of the Bloomsburg, Pennsylvania frozen pasta factory (completed in Fiscal 2000). The company is focusing the portfolio of product lines on six core food categories: ketchup, condiments and sauces; frozen foods; tuna; soups, beans and pasta meals; infant foods; and pet products. A consequence of this focus on the core categories was the sale of the Weight Watchers classroom business in Fiscal 2000. Additionally, seven other smaller businesses, which have combined annual revenues of approximately $80 million, are being disposed. 30 2 Realigning the company's management teams will provide processing and product expertise across the regions of North America, Europe and Asia/Pacific. Specifically, Operation Excel includes: _ Creating a single U.S. frozen food headquarters, resulting in the closure of the company's Ore-Ida head office in Boise, Idaho (completed in Fiscal 2000) _ Consolidating many European administrative support functions _ Creating a single North American Grocery & Foodservice headquarters in Pittsburgh, Pennsylvania, resulting in the relocation of the company's domestic seafood and pet food headquarters from Newport, Kentucky _ Creating two Asia/Pacific management teams with headquarters in Melbourne (for the Australian, New Zealand and Japanese businesses) and Singapore (for all other Asian businesses). Growth initiatives include relaunching many of our core brands and additional investments in marketing and pricing programs for our core businesses, particularly in ketchup, condiments and sauces, frozen foods, infant foods and tuna. The initiatives will result in the closure or exit of 21 factories or businesses. Management estimates that these actions will impact approximately 6,000 employees with a net reduction in the workforce of approximately 4,600, after expansion of certain facilities. The pretax savings generated from all Operation Excel initiatives was $70.0 million in Fiscal 2000 and is projected to grow to $145 million in Fiscal 2001 and $215 million in Fiscal 2002, with non-cash savings of $15 million or less in any year. Successful execution of Operation Excel will help the company achieve the following targets over the next three years: _ $240 million in annual ongoing pretax savings upon full implementation _ Earnings per share growth of 10 to 12 percent per year on average _ Sales growth of 4 to 5 percent per year on average _ Gross margins of 42% _ Return on invested capital of 40% _ $2.5 billion of free cash flow. Operation Excel Status Update During Fiscal 2000, the company recognized net restructuring charges and implementation costs totaling $392.7 million pretax ($0.74 per share). [Note: All earnings per share amounts included in Management's Discussion and Analysis are presented on an after-tax diluted basis.] Pretax charges of $170.4 million were classified as cost of products sold and $222.3 million as selling, general and administrative expenses ("SG&A"). During Fiscal 1999, the company recognized restructuring charges and implementation costs totaling $552.8 million pretax ($1.11 per share). Pretax charges of $396.4 million were classified as cost of products sold and $156.4 million as SG&A. Included in the $392.7 million of net restructuring and implementation costs recognized in Fiscal 2000 is a reversal of $18.2 million pretax of Fiscal 1999 restructuring accruals (exit costs, $0.4 million and severance costs, $1.3 million) and asset write-downs ($16.5 million), primarily for the closure of the West Chester, Pennsylvania facility, which will now remain in operation as a result of the sale of the Bloomsburg facility in April of Fiscal 2000. In Fiscal 2000, 11 factories and four businesses were sold or closed including those located in England, Hungary, the Czech Republic, New Zealand and the U.S., resulting in a net reduction of the company's workforce of approximately 3,000 employees. During Fiscal 1999, 31 3 the company's workforce was reduced by approximately 200 employees, principally through the closure of Ore-Ida's Boise head office and through the divestiture of the Clarksville, Arkansas sweet potato business. Pretax savings totaled approximately $70 million ($10 million non-cash) in Fiscal 2000 resulting principally from the plant closures, administrative reductions and factory downsizings. Capital expenditures related to the restructuring totaled $173.6 million in Fiscal 2000 and $5.8 million in Fiscal 1999 and related principally to new equipment resulting from creating manufacturing centers of excellence. The company expects to incur approximately $150 million of additional implementation costs in Fiscal 2001. Implementation costs consist of incremental costs directly related to the implementation of Operation Excel, including consulting fees, employee relocation costs, unaccruable severance costs associated with terminated employees, training costs, equipment relocation costs and commissioning costs. PROJECT During the fourth quarter of Fiscal 1997, the company MILLENNIA announced a reorganization and restructuring program named "Project Millennia," which resulted in a total cost of approximately $750 million over three years. The reorganization plan was designed to strengthen the company's core businesses and improve profitability and global growth. Key initiatives were focused on process changes and product line rationalizations. The company has completed Project Millennia. During Fiscal 2000, the company utilized $19.6 million of severance and exit accruals. The utilization of the accruals related principally to the closure of a tuna processing facility in Australia, the closure of a tomato processing facility in Spain and costs associated with contractual lease commitments of the U.S. Weight Watchers classroom business, which were transferred to the buyer of the classroom business. As of May 3, 2000, the company has closed or divested all of the 25 plants that were scheduled for closure or divestiture. Project Millennia has resulted in a net workforce reduction of 2,250 employees. The financial goals of the project have been achieved as follows: _ Pretax savings in excess of $200 million, of which $10 million were non-cash savings, were realized in Fiscal 2000 _ Gross profit margins, excluding restructuring related items, increased to 40.3% in Fiscal 1999 _ Operating working capital was reduced by approximately $350 million in the first year of the program _ More than $1.3 billion of free cash flow was generated in the first year of the program. As of May 3, 2000, there are $0.5 million of remaining Project Millennia accruals. These accruals relate to contractual lease commitments in the U.S. RESULTS OF 2000 versus 1999: Sales for Fiscal 2000 increased $108.3 OPERATIONS million, or 1.2%, to $9.41 billion from $9.30 billion in Fiscal 1999. Volume increased sales by $349.7 million, or 3.8%, and acquisitions increased sales by $438.2 million, or 4.7%. Divestitures reduced sales by $407.4 million, or 4.4%, lower pricing reduced sales by $161.2 million, or 1.7%, and the unfavorable impact of foreign exchange translation rates reduced sales by $111.0 million, or 1.2%. Domestic operations contributed approximately 52% of consolidated sales in Fiscal 2000 and 53% in Fiscal 1999. 32 4 Sales of the North American Grocery & Foodservice segment increased $61.4 million, or 1.5%. Sales volume increased 3.1%, due to increases in ketchup, condiments and sauces, foodservice, tuna and canned soup, partially offset by a decrease in canned pet food. Acquisitions, net of divestitures, increased sales 0.4%, and a stronger Canadian dollar increased sales 0.3%. Lower pricing reduced sales by 2.3%, due mainly to decreases in tuna and retail ketchup. The North American Frozen segment's sales increased $9.5 million, or 0.9%. Sales volume increased 5.9%, driven by Smart Ones frozen entrees, Boston Market frozen meals and Bagel Bites snacks, partially offset by a decrease in The Budget Gourmet line of frozen entrees. The divestiture of several non-core product lines, net of acquisitions, reduced sales 3.4%. Lower pricing reduced sales 1.6%, primarily due to frozen potatoes. Sales in Europe increased $123.0 million, or 5.0%. Acquisitions, net of divestitures, increased sales 8.6%, due primarily to the acquisitions of United Biscuit's European Frozen and Chilled Division, Remedia Limited (infant feeding), Sonnen Bassermann (convenience meals) and Serv-A- Portion (foodservice). Sales volume increased 3.4%, due to increases in tuna, infant foods and ketchup, condiments and sauces. The unfavorable impact of foreign exchange translation rates reduced sales 5.8% and lower pricing, primarily in tuna, reduced sales 1.2%. Sales in Asia/Pacific increased $184.3 million, or 18.2%. Acquisitions, primarily ABC Sauces in Indonesia, increased sales 11.8%. Sales volume increased 4.5%, due to increases in infant foods, poultry and convenience meals. The favorable impact of foreign exchange translation rates increased sales 2.4%, primarily due to sales in Japan. Lower pricing reduced sales 0.5%. Sales of Other Operating Entities decreased $269.9 million, or 36.0%. Divestitures reduced sales 38.0%, primarily due to the second quarter divestiture of the Weight Watchers classroom business and the Fiscal 1999 divestiture of the bakery products unit. Lower pricing reduced sales 1.9% and foreign exchange translation rates reduced sales 0.6%. Sales volume increased 4.5%. The current year was favorably impacted by a number of special items which net to $40.1 million pretax ($0.10 per share), and are summarized in the tables below. During the second quarter of Fiscal 2000, the company completed the sale of the Weight Watchers classroom business for a pretax gain of $464.6 million ($0.72 per share). The company used part of this gain to fund a pretax contribution of $30.0 million ($0.05 per share) to the H.J. Heinz Company Foundation. Fiscal 2000 results also include Operation Excel implementation costs of $216.5 million pretax ($0.41 per share), additional Operation Excel restructuring charges of $194.5 million pretax ($0.37 per share) and a reversal of $18.2 million pretax ($0.04 per share) of Fiscal 1999 restructuring accruals and asset write-downs. In April of 1999, the company became aware of operational and accounting irregularities in its Ecuador tuna processing facility and expensed $10.0 million as an estimate of the losses. In the first quarter of Fiscal 2000, the company recognized an additional $20.0 million pretax ($0.05 per share) of expenses related to this facility. In addition, the company recognized, in Other Income, a pretax gain of $18.2 million ($0.03 per share) for the sale of an office building in the U.K. Last year's results included the reversal of unutilized Project Millennia accruals of $25.7 million pretax ($0.04 per share), Project Millennia implementation costs of $22.3 million pretax ($0.04 per share), Operation Excel restructuring and implementation costs of $552.8 million pretax ($1.11 per share) and a pretax gain of $5.7 million from the sale of the bakery products unit. 33 5 The following tables provide a comparison of the company's reported results and the results excluding special items for Fiscal 2000 and Fiscal 1999. Fiscal Year (53 Weeks) Ended May 3, 2000 --------------------------------------------- (Dollars in millions, except Gross Operating Net Per per share amounts) Profit Income Income Share ------------------------------------------------------------------------------ Reported results $ 3,619.4 $ 1,733.1 $ 890.6 $ 2.47 Operation Excel restructuring 107.7 194.5 134.4 0.37 Operation Excel implementation costs 79.2 216.5 145.9 0.41 Operation Excel reversal (16.4) (18.2) (12.9) (0.04) Ecuador expenses 20.0 20.0 20.0 0.05 Gain on U.K. building sale - - (11.8) (0.03) Foundation contribution - 30.0 18.9 0.05 Gain on sale of Weight Watchers classroom business - (464.6) (259.7) (0.72) ------------------------------------------------------------------------------ Results excluding special items $ 3,809.9 $ 1,711.2 $ 925.3 $ 2.57 ------------------------------------------------------------------------------ Fiscal Year (52 Weeks) Ended April 28, 1999 --------------------------------------------- (Dollars in millions, except Gross Operating Net Per per share amounts) Profit Income Income Share ------------------------------------------------------------------------------ Reported results $ 3,354.7 $ 1,109.3 $ 474.3 $ 1.29 Operation Excel restructuring and implementation costs 396.4 552.8 409.7 1.11 Project Millennia implementation costs 14.7 22.3 14.3 0.04 Project Millennia reversal (20.7) (25.7) (16.4) (0.04) (Gain)/loss on sale of bakery products unit - (5.7) 0.6 - ------------------------------------------------------------------------------ Results excluding special items $ 3,745.1 $ 1,653.0 $ 882.4 $ 2.40 ------------------------------------------------------------------------------ (Note: Totals may not add due to rounding.) Gross profit increased $264.7 million to $3.62 billion from $3.35 billion in Fiscal 1999. The gross profit margin increased to 38.5% from 36.1%. Excluding the special items identified above, gross profit increased $64.7 million, or 1.7%, to $3.81 billion from $3.75 billion and the gross profit margin increased to 40.5% from 40.3%. Gross profit for the North American Grocery & Foodservice segment increased $52.5 million, or 3.4%, due to increases at Heinz U.S.A. and Heinz Canada, partially offset by a significant decrease in the selling price of tuna at Star-Kist. North American Frozen's gross profit decreased slightly $2.0 million, or 0.4%, as increased sales volume was offset by lower pricing and the elimination of several non-core product lines. Europe's gross profit increased $62.0 million, or 6.1%, due primarily to a favorable profit mix, and the acquisitions of United Biscuit's European Frozen and Chilled Division, Remedia Limited, Sonnen Bassermann and Serv-A-Portion. The unfavorable impact of foreign exchange translation rates reduced Europe's gross profit by approximately $65 million. The Asia/Pacific segment's gross profit increased $84.4 million, or 23.4%, driven by the acquisition of ABC Sauces in Indonesia, improved performances throughout the segment, and the favorable impact of foreign exchange translation rates in Japan. Other Operating Entities' gross profit decreased $130.4 million, or 40.6%, due primarily to the second quarter divestiture of the Weight Watchers classroom business and the Fiscal 1999 divestiture of the bakery products unit. SG&A increased $105.5 million to $2.35 billion from $2.25 billion and increased as a percentage of sales to 25.0% from 24.1%. Excluding the special items identified above, SG&A increased $6.5 million to $2.10 billion from $2.09 billion and decreased as a percentage of sales to 22.3% from 22.5%. Increased selling and distribution expenses, primarily in Asia/Pacific and Europe, resulting from acquisitions, were offset by decreases in marketing and general and 34 6 administrative expenses. Marketing decreased $11.2 million, or 1.3%, primarily due to the second quarter divestiture of the Weight Watchers classroom business. Excluding the Weight Watchers classroom business, marketing expense increased 6.5%. Marketing increases were noted in all major segments. Total marketing support (including trade and consumer promotions and media) increased 6.6% to $2.37 billion from $2.22 billion on a sales increase of 1.2%. Excluding the Weight Watchers classroom business, total marketing support increased 9.6%. Advertising costs in Fiscal 2000 were $374.0 million compared to $373.9 million in Fiscal 1999. Excluding the Weight Watchers classroom business in both periods, advertising costs increased 9.3%. Operating income increased $623.8 million, or 56.2%, to $1.73 billion from $1.11 billion last year. Excluding the special items identified above, operating income increased $58.2 million, or 3.5%, to $1.71 billion from $1.65 billion last year. Removing the impact of the Weight Watchers classroom business in both periods, operating income increased 6.6%. Domestic operations provided approximately 59% and 57% of operating income in Fiscal 2000 and Fiscal 1999, respectively. Excluding the special items in both years, domestic operations provided approximately 54% and 55% of operating income in Fiscal 2000 and Fiscal 1999, respectively. The North American Grocery & Foodservice segment's operating income decreased $22.5 million, or 3.1%, to $694.4 million from $717.0 million last year. Excluding the special items noted above (see Note 14 to the Consolidated Financial Statements), operating income increased $40.6 million, or 4.9%, to $875.3 million from $834.6 million last year. The strong performance of Heinz U.S.A., improvements in Heinz Canada and the pet food business and savings from Operation Excel were partially offset by a significant decrease in the selling price of tuna at Star-Kist. The North American Frozen segment's operating income increased $71.8 million to $152.0 million from $80.2 million last year. Excluding the special items noted above (see Note 14 to the Consolidated Financial Statements), operating income decreased $1.9 million, or 1.0%, to $181.5 million from $183.4 million last year. This decrease is attributable to higher marketing expenses as a result of the national campaign in support of Boston Market and lower pricing on Ore-Ida frozen potatoes, offset by a reduction in SG&A resulting from the domestic consolidation of the frozen business as part of Operation Excel. Europe's operating income increased $118.0 million, or 47.9%, to $364.2 million from $246.2 million. Excluding the special items noted above (see Note 14 to the Consolidated Financial Statements), operating income increased $35.1 million, or 7.5%, to $502.3 million from $467.2 million last year, due primarily to a favorable profit mix, savings from Operation Excel and the acquisitions of United Biscuit's European Frozen and Chilled Division, Remedia Limited and Serv-A-Portion. The unfavorable impact of foreign exchange translation rates reduced Europe's operating income by approximately $26 million. Asia/Pacific's operating income increased $34.3 million, or 38.2%, to $124.1 million from $89.8 million last year. Excluding the special items noted above (see Note 14 to the Consolidated Financial Statements), operating income increased $31.8 million, or 21.8%, to $177.5 million from $145.7 million last year. This increase is attributable to the acquisition of ABC Sauces in Indonesia and solid performances from Japan, India and the poultry business. Other Operating Entities reported an increase in operating income of $444.4 million to $540.2 million from $95.7 million last year. Excluding the special items noted above (see Note 14 to the Consolidated Financial Statements), operating income decreased $44.9 million, or 36.9% to $77.0 million from $122.0 million last year. This decrease is primarily attributable to the second quarter divestiture of the Weight Watchers classroom business. 35 7 Other expenses, net totaled $269.4 million compared to $274.2 million last year. The decrease is primarily due to a gain on the sale of an office building in the U.K. of $18.2 million pretax ($0.03 per share) partially offset by an increase in interest expense resulting from higher average borrowings and interest rates. The effective tax rate for Fiscal 2000 was 39.2% compared to 43.2% last year. The Fiscal 2000 effective tax rate was unfavorably impacted by the excess of basis in assets for financial reporting over the tax basis of assets included in the Weight Watchers sale and by gains in higher taxed states related to the sale. The Fiscal 2000 and 1999 effective tax rates were unfavorably impacted by restructuring and implementation costs expected to be realized in lower tax rate jurisdictions and by nondeductible expenses related to the restructuring. Excluding the special items identified in the tables above, the effective tax rate for Fiscal 2000 was 35.0% compared to 36.0% last year. Net income increased $416.2 million to $890.6 million from $474.3 million last year and earnings per share increased to $2.47 from $1.29. Excluding the special items noted above, net income increased 4.9% to $925.3 million from $882.4 million, and earnings per share increased 7.1% to $2.57 from $2.40 last year. Removing the impact of the Weight Watchers classroom business in both years, earnings per share increased 9.6% and net income increased 7.1%. The impact of fluctuating exchange rates for Fiscal 2000 remained relatively consistent on a line-by-line basis throughout the Consolidated Statement of Income. 1999 versus 1998: Sales for Fiscal 1999 increased $90.3 million, or 1.0%, to $9.30 billion from $9.21 billion in Fiscal 1998. Volume increased sales by $290.2 million, or 3.2%, acquisitions increased sales by $188.2 million, or 2.0%, and favorable pricing contributed $34.8 million, or 0.4%. The unfavorable impact of foreign exchange translation rates reduced sales by $210.3 million, or 2.3%, and divestitures decreased sales by $212.6 million, or 2.3%. Domestic operations contributed approximately 53% of consolidated sales in both Fiscal 1999 and Fiscal 1998. Sales of the North American Grocery & Foodservice segment increased $127.4 million, or 3.2%, primarily due to sales volume increases of $156.6 million, or 4.0%. Volume increases in Heinz ketchup, seafood and condiments were partially offset by a volume decrease in canned dog food. Acquisitions, net of divestitures, contributed $36.9 million, or 0.9%, to the sales increase, primarily due to the acquisition of the College Inn brand of canned broths. These increases were partially offset by unfavorable pricing of $36.1 million, or 0.9%. Price decreases were noted in seafood and pet food. The unfavorable fluctuation of the Canadian dollar caused a $30.0 million, or 0.8%, decrease in net sales. The North American Frozen segment's sales decreased $61.7 million, or 5.7%. Divestitures, net of acquisitions, accounted for $71.2 million, or 6.6%, of the decrease, primarily due to the divestiture of the Ore-Ida frozen foodservice business in the first quarter of Fiscal 1998. Price decreases, primarily in frozen potatoes, contributed $13.5 million, or 1.2%, to the sales decrease. Volume increases of $23.0 million, or 2.1%, were largely due to Smart Ones frozen entrees, partially offset by decreased volume in appetizers. Sales in Europe increased $128.1 million, or 5.5%, primarily due to acquisitions, which contributed $94.2 million, or 4.0%. Acquisitions impacting the year-to-year sales dollar comparison include the Fiscal 1998 acquisition of John West Foods Limited in the U.K. and the Fiscal 1999 acquisition of the convenience meals business of Sonnen Bassermann in 36 8 Germany and other smaller acquisitions. Exchange rates had a favorable impact of $21.0 million, or 0.9%, primarily in Italy. Favorable pricing increased sales by $13.5 million, or 0.6%, while sales volume was flat. Sales in Asia/Pacific decreased $61.1 million, or 5.7%. The unfavorable impact of foreign exchange translation rates reduced sales by $128.1 million, or 11.9%, primarily due to sales in New Zealand, Australia, South Korea and India. This decrease was partially offset by favorable volume of $33.8 million, or 3.1%, and favorable price of $21.2 million, or 2.0%. Acquisitions also contributed $12.0 million, or 1.1%. Sales of Other Operating Entities decreased $42.4 million, or 5.3%. Divestitures, primarily the bakery products unit, decreased sales by $122.5 million, or 15.5%. The unfavorable impact of foreign exchange translation rates decreased sales by $73.1 million, or 9.2%, principally in Africa. These decreases were partially offset by volume increases of $77.4 million, or 9.8%, largely due to the Weight Watchers classroom business. In addition, price increases contributed $49.6 million, or 6.3%, and acquisitions, primarily in South Africa, contributed $26.2 million, or 3.3%, to sales. The following tables provide a comparison of the company's reported results and the results excluding special items for Fiscal 1999 and Fiscal 1998. Fiscal Year (52 Weeks) Ended April 28, 1999 --------------------------------------------- (Dollars in millions, except Gross Operating Net Per per share amounts) Profit Income Income Share ------------------------------------------------------------------------------ Reported results $ 3,354.7 $ 1,109.3 $ 474.3 $ 1.29 Operation Excel restructuring and implementation costs 396.4 552.8 409.7 1.11 Project Millennia implementation costs 14.7 22.3 14.3 0.04 Project Millennia reversal (20.7) (25.7) (16.4) (0.04) (Gain)/loss on sale of bakery products unit - (5.7) 0.6 - ------------------------------------------------------------------------------ Results excluding special items $ 3,745.1 $ 1,653.0 $ 882.4 $ 2.40 ------------------------------------------------------------------------------ Fiscal Year (52 Weeks) Ended April 29, 1998 --------------------------------------------- (Dollars in millions, except Gross Operating Net Per per share amounts) Profit Income Income Share ------------------------------------------------------------------------------ Reported results $ 3,498.1 $ 1,520.3 $ 801.6 $ 2.15 Gain on sale of Ore-Ida frozen foodservice business - (96.6) (53.1) (0.14) Project Millennia implementation costs 35.7 84.1 53.0 0.14 ------------------------------------------------------------------------------ Results excluding special items $ 3,533.8 $ 1,507.9 $ 801.4 $ 2.15 ------------------------------------------------------------------------------ (Note: Totals may not add due to rounding.) Gross profit decreased $143.3 million to $3.35 billion from $3.50 billion in Fiscal 1998. The gross profit margin decreased to 36.1% from 38.0%. Excluding the special items identified above, gross profit would have increased $211.4 million, or 6.0%, to $3.75 billion from $3.53 billion and the gross profit margin would have increased to 40.3% from 38.4%. Europe accounted for $156.5 million of this increase due to improvements in the baby food business in Italy, the favorable impact of foreign exchange translation rates and acquisitions. North American Grocery & Foodservice segment's gross profit increased $56.7 million due to cost savings from Project Millennia, stronger sales volume and acquisitions, partially offset by the disappointing performance of the domestic pet food business. Other Operating Entities' gross profit increased $41.5 million due to improvements in the Weight Watchers classroom business, attributable to the Weight Watchers 1*2*3 Success(TM) Plan. North American Frozen's gross profit decrease of $24.0 million was due to the divestiture of the Ore-Ida frozen foodservice business 37 9 in Fiscal 1998 and increased competitive activities for frozen potatoes, partially offset by the strong performance of Smart Ones frozen entrees. The Asia/Pacific segment's gross profit decreased $20.6 million, or 5.4%; however, excluding the unfavorable impact of foreign exchange translation rates ($47.6 million), primarily in New Zealand and Australia, gross profit increased $27.0 million, or 7.1%. SG&A increased $267.7 million to $2.25 billion from $1.98 billion and increased as a percentage of sales to 24.1% from 21.5%. Excluding special items identified above, SG&A increased $66.2 million to $2.09 billion from $2.03 billion and increased as a percentage of sales to 22.5% from 22.0%. Marketing increases were noted in the North American Grocery & Foodservice segment primarily due to a focus on Heinz ketchup and in Europe where the company aggressively promoted ketchup and beans. These increases were partially offset by decreased marketing expense in the North American Frozen segment as a result of establishing low everyday list prices for The Budget Gourmet line of frozen entrees. Excluding marketing, SG&A was stable as a percentage of sales year-on- year. Total marketing support (including trade and consumer promotions and media) increased 8.4% to $2.22 billion from $2.05 billion on a sales increase of 1.0%. Advertising costs to support the company's key brands increased 3.0% to $373.9 million in Fiscal 1999 from $363.1 million in Fiscal 1998. Operating income decreased $411.0 million, or 27.0%, to $1.11 billion from $1.52 billion reported in Fiscal 1998. Excluding the special items in both years, operating income increased $145.2 million, or 9.6%, to $1.65 billion from $1.51 billion in Fiscal 1998. This increase was primarily due to the increase in gross profit, partially offset by increased marketing and selling and distribution costs. Domestic operations provided approximately 57% and 59% of operating income in Fiscal 1999 and Fiscal 1998, respectively. Excluding the special items in both years, domestic operations provided approximately 55% and 57% of operating income in Fiscal 1999 and Fiscal 1998, respectively. The North American Grocery & Foodservice segment's operating income decreased $80.2 million, or 10.1%, to $717.0 million from $797.2 million in Fiscal 1998. Excluding the special items in both years (see Note 14 to the Consolidated Financial Statements), this segment's operating income increased $8.6 million, or 1.0%, to $834.6 million from $826.0 million. Excluding the results of the domestic pet food business, the North American Grocery & Foodservice segment experienced double-digit operating income growth due to strong sales volume and acquisitions, primarily the College Inn brand of canned broths, as well as cost savings from Project Millennia. The domestic pet food business was negatively impacted by higher costs associated with the introduction of the 9-Lives four pack, an unfavorable mix shift, significant volume declines in canned dog food and ineffective trade spending, all of which the company has aggressively worked to correct. The North American Frozen segment reported $80.2 million of operating income in Fiscal 1999 versus $258.2 million in Fiscal 1998. Excluding special items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $12.7 million, or 7.4%, to $183.4 million from $170.7 million. The increase is primarily due to favorable operating results of the Smart Ones frozen entree line; partially offset by the retail frozen potato business, where prices have been reduced in order to recapture market share. Europe's operating income decreased $140.7 million, or 36.4%, to $246.2 million from $386.9 million. Excluding special items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $61.7 million, or 15.2%, to $467.2 million from $405.4 million. This increase was primarily due to favorable operating results in the U.K. and Italy due to increased sales prices and acquisitions, partially offset by increased marketing spending described above. 38 10 Asia/Pacific's operating income decreased $46.7 million, or 34.2%, to $89.8 million from $136.5 million. Excluding special items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $3.3 million to $145.7 million from $142.3 million in Fiscal 1998. Strong performances in all of the company's Asia/Pacific businesses more than offset the unfavorable impact of foreign exchange translation rates, which reduced operating income by approximately $19.5 million. Other Operating Entities reported an increase in operating income of $42.0 million to $95.7 million from $53.7 million. Excluding special items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $58.4 million, or 91.8%, to $122.0 million from $63.6 million. The increase is primarily due to the exceptional performance of the Weight Watchers 1*2*3 Success (TM) Plan. The unfavorable fluctuation of foreign exchange translation rates, primarily in Africa, caused a $12.5 million decrease in operating income. Other income and expenses totaled $274.2 million in Fiscal 1999 compared to $265.3 million in Fiscal 1998. Interest expense was relatively flat year-on-year as the increase in average borrowings was offset by lower interest rates. Interest income decreased $7.6 million, or 23.2%, to $25.1 million from $32.7 million due to decreased invested funds and significantly lower interest rates on investments, primarily in Italy. The effective tax rate for Fiscal 1999 was 43.2% compared to 36.1% in Fiscal 1998. The Fiscal 1999 higher rate includes the impact of restructuring expenses in lower tax rate jurisdictions and nondeductible expenses related to the restructuring. Excluding the special items noted above, the effective rate for Fiscal 1999 was 36.0% compared to 35.5% in Fiscal 1998. The Fiscal 1998 effective tax rate reflects the benefits of tax legislation in Italy and the U.K. (See Note 5 to the Consolidated Financial Statements.) Net income decreased $327.2 million to $474.3 million from $801.6 million in Fiscal 1998 and earnings per share decreased to $1.29 from $2.15. Excluding the special items discussed above, net income increased $81.0 million, or 10.1%, to $882.4 million in Fiscal 1999 from $801.4 million in Fiscal 1998, and earnings per share increased to $2.40 from $2.15. The impact of fluctuating exchange rates for Fiscal 1999 remained relatively consistent on a line-by-line basis throughout the Consolidated Statement of Income. LIQUIDITY AND Return on average shareholders' equity ("ROE") was 52.4% in FINANCIAL Fiscal 2000, 23.6% in Fiscal 1999 and 34.4% in Fiscal 1998. POSITION Excluding the special items identified above, ROE was 54.4% in Fiscal 2000, 43.9% in Fiscal 1999 and 34.4% in Fiscal 1998. Pretax return on average invested capital ("ROIC") was 31.4% in Fiscal 2000, 20.4% in Fiscal 1999 and 26.4% in Fiscal 1998. Excluding the special items identified above, ROIC was 30.6% in Fiscal 2000, 30.7% in Fiscal 1999 and 26.2% in Fiscal 1998. Cash provided by operating activities decreased to $543.1 million in Fiscal 2000, compared to $910.1 million in Fiscal 1999 and $1.07 billion in Fiscal 1998. The decrease in Fiscal 2000 versus Fiscal 1999 is primarily due to expenditures on Operation Excel and increased inventory levels. In order to facilitate the anticipated plant shutdowns and reconfigurations for Operation Excel, the company has increased inventory levels at certain locations. Cash used for investing activities was $268.7 million in Fiscal 2000 compared to $390.5 million in Fiscal 1999. Acquisitions in the current year required $394.4 million versus $269.0 million last year. Current year acquisitions included United Biscuit's European Frozen and Chilled Division, Quality Chef Foods, Yoshida, Thermo Pac, Inc. and Remedia Limited in Israel. Fiscal 1999 acquisitions included the College Inn brand of canned broths, ABC Sauces in Indonesia, and other smaller acquisitions. (See Note 2 to the Consolidated Financial 39 11 Statements.) During Fiscal 2000, the company invested $99.8 million in The Hain Celestial Group, Inc., formerly The Hain Food Group, Inc. Divestitures in the current year provided $726.5 million, primarily from the sale of the Weight Watchers classroom business, compared to $180.4 million in Fiscal 1999, primarily from the sale of the company's bakery products unit. (See Note 3 to the Consolidated Financial Statements.) Capital expenditures totaled $452.4 million compared to $316.7 million last year. The increase is attributable to Operation Excel related capital expenditures across all major segments. Last year's capital expenditures were concentrated in the North American Grocery & Foodservice and European segments. Purchases and sales/maturities of short-term investments increased in Fiscal 2000. The company periodically sells a portion of its short-term investment portfolio in order to reduce its borrowings. Financing activities required $259.2 million compared to $515.5 million last year. Cash used for dividends to shareholders increased $28.9 million to $513.8 million from $484.8 million last year. Purchases of treasury stock totaled $511.5 million (12.8 million shares) in Fiscal 2000, compared to $410.1 million (7.5 million shares) in Fiscal 1999. Net funds borrowed were $739.1 million in Fiscal 2000 compared to $268.3 million in Fiscal 1999. Cash provided from stock options exercised totaled $20.0 million in Fiscal 2000 versus $77.2 million in Fiscal 1999. The average amount of short-term debt outstanding during Fiscal 2000, Fiscal 1999 and Fiscal 1998 was $315.5 million, $453.9 million and $556.3 million, respectively. Total short- term debt had a weighted-average interest rate during Fiscal 2000 of 6.2% and at year-end of 6.5%. The weighted-average interest rate on short-term debt during Fiscal 1999 was 6.3% and at year-end was 5.3%. Aggregate domestic commercial paper had a weighted-average interest rate during Fiscal 2000 of 5.5% and at year-end of 6.2%. In Fiscal 1999, the weighted-average interest rate was 5.3% and the rate at year-end was 4.9%. Based upon the amount of commercial paper outstanding at May 3, 2000, a variance of 1/8% in the related interest rate would cause annual interest expense to change by approximately $2.6 million. On January 5, 2000, the company issued Euro300 million of 5% Notes due 2005. The proceeds were used to repay domestic commercial paper. On February 15, 2000, the company issued $300 million of 7.0% Notes due 2002. The proceeds were used to repay domestic commercial paper. On February 18, 2000, the company issued Pds125 million of 6.25% Notes due 2030. The proceeds were used for general corporate purposes, including repaying commercial paper borrowings that were incurred in connection with the acquisition of United Biscuit's European Frozen and Chilled Division in December 1999. The company entered into an interest rate swap agreement with a notional amount of Pds50 million and a settlement date of April 2001. The swap converts the 6.25% fixed rate to a floating rate. (See Note 6 to the Consolidated Financial Statements.) The company's $2.30 billion credit agreement, which expires in September 2001, supports its commercial paper program. As of May 3, 2000, $2.08 billion of domestic commercial paper is classified as long-term debt due to the long-term nature of the supporting credit agreement. As of April 28, 1999, the company had $1.41 billion of domestic commercial paper outstanding and classified as long-term debt. On September 8, 1999, the company's Board of Directors raised the quarterly dividend on the company's common stock to $0.36 3/4 per share from $0.34 1/4 per share, for an indicated annual rate of $1.47 per share. The company paid $513.8 million in dividends to both common and preferred shareholders, an increase of $28.9 million, or 6.0% over Fiscal 1999. The dividend rate in effect at the end of each year resulted in a payout ratio of 59.5% in Fiscal 2000, 106.2% in Fiscal 1999 and 58.6% in Fiscal 1998. Excluding the impact of special items in all years, the payout ratio was 57.2% in Fiscal 2000, 57.1% in Fiscal 1999 and 58.6% in Fiscal 1998. 40 12 In Fiscal 2000, the company repurchased 12.8 million shares of common stock, or 3.6% of the amount outstanding at the beginning of Fiscal 2000, at a cost of $511.5 million compared to the repurchase of 7.5 million shares, or 2.1% of the amount outstanding at the beginning of Fiscal 1999, at a cost of $410.1 million in Fiscal 1999. On June 1, 1999, the company completed the 10.0 million share repurchase program which was authorized by the Board of Directors on September 10, 1997. On June 9, 1999, the Board of Directors authorized the repurchase of up to 20.0 million shares. As of May 3, 2000, the company had repurchased 12.0 million shares of the 20.0 million share program. The company may reissue repurchased shares upon the exercise of stock options, conversions of preferred stock and for general corporate purposes. In Fiscal 2000, the cash requirements of Operation Excel were $479.4 million, consisting of spending for severance and exit costs ($89.3 million), capital expenditures ($173.6 million) and implementation costs ($216.5 million). The Fiscal 2000 cash requirements for Project Millennia were $29.1 million, consisting of spending for severance and exit costs ($19.6 million) and capital expenditures ($9.5 million). In Fiscal 1999, the cash requirements of Operation Excel were $75.6 million, consisting of spending for severance and exit costs ($16.6 million), capital expenditures ($5.8 million) and implementation costs ($53.2 million). The Fiscal 1999 cash requirements for Project Millennia were $117.4 million, consisting of spending for severance and exit costs ($48.6 million), capital expenditures ($46.5 million) and implementation costs ($22.3 million). In Fiscal 2001, the company expects the cash requirements of Operation Excel to be approximately $413 million, consisting of severance and exit costs ($104 million of the $125.2 million accrued at May 3, 2000), capital expenditures ($159 million) and implementation costs ($150 million). The company is financing the cash requirements of these programs through operations, proceeds from the sale of non-strategic assets and with short-term and long-term borrowings. The cash requirements of Operation Excel will not have a significant impact on the company's liquidity or financial position. During 1995, the company participated in the formation of a business ("the entity") which purchases a portion of the trade receivables generated by the company. The company sells receivables to Jameson, Inc., a wholly owned subsidiary, which then sells undivided interests in the receivables to the entity. Outside investors contributed $95.4 million in capital to the entity. The company consolidates the entity, and the capital contributed by outside investors is classified as minority interest (other long-term liabilities) on the Consolidated Balance Sheets. In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS Statement 133," which postponed the adoption date of SFAS No. 133. As such, the company is not required to adopt the statement until Fiscal 2002. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133." This statement amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. The company is currently evaluating the effect that implementation of the new standard will have on its results of operations and financial position. 41 13 In May 2000, the FASB Emerging Issues Task Force (the "EITF") issued new guidelines entitled "Accounting for Certain Sales Incentives" which address the recognition, measurement and income statement classification for certain sales incentives (e.g., coupons). These guidelines will be effective for the company beginning in the second quarter of Fiscal 2001. The implementation of these guidelines will require the company to make reclassifications between SG&A and sales. In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. Management believes that the impact of SAB No. 101, which will be effective in the fourth quarter of Fiscal 2001, will not have a material effect on its financial position or results of operations. On June 19, 2000, the company exercised its preemptive right to purchase an additional 2,582,774 shares of Hain for approximately $80 million, or $30.88 per share. This transaction restored the company's ownership interest in Hain to 19.5%. The company's ownership had been diluted as a result of Hain's stock-for-stock merger with Celestial Seasonings on May 30, 2000. The impact of inflation on both the company's financial position and results of operations is not expected to adversely affect Fiscal 2001 results. The company's financial position continues to remain strong, enabling it to meet cash requirements for operations, capital expansion programs and dividends to shareholders. The company's goal remains the achievement of 10% EPS growth for Fiscal 2001 with stronger performance expected in the second half of the year resulting from the contribution of new brands and Operation Excel savings. MARKET RISK The following discussion about the company's risk- FACTORS management activities includes "forward-looking" statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The company is exposed to market risks from adverse changes in foreign exchange rates, interest rates and commodity prices. As a policy, the company does not engage in speculative or leveraged transactions, nor does the company hold or issue financial instruments for trading purposes. Foreign Exchange Rate Sensitivity: The company's cash flow and earnings are subject to fluctuations due to exchange rate variation. Foreign currency risk exists by nature of the company's global operations. The company manufactures and sells its products in a number of locations around the world, and hence foreign currency risk is well diversified. When appropriate, the company may attempt to limit its exposure to changing foreign exchange rates through both operational and financial market actions. These actions may include entering into forward, option and swap contracts to hedge existing exposures, firm commitments and anticipated transactions. The instruments are used to reduce risk 42 14 by essentially creating offsetting currency exposures. As of May 3, 2000, the company held contracts for the purpose of hedging certain intercompany cash flows with an aggregate notional amount of approximately $320 million. In addition, the company held separate contracts in order to hedge purchases of certain raw materials and finished goods and for payments arising from certain foreign currency denominated obligations totaling approximately $260 million. The company also held contracts to hedge sales denominated in foreign currencies of $105 million. The company's contracts mature within two years of the fiscal year-end. The contracts that effectively meet the risk reduction and correlation criteria, as measured on a currency-by-currency basis, are accounted for as hedges. Accordingly, gains and losses are deferred in the cost basis of the underlying transaction. In those circumstances when it is not appropriate to account for the contracts as hedges, any gains and losses from mark-to-market and settlement are recorded in miscellaneous income and expense. At May 3, 2000, unrealized gains and losses on outstanding foreign currency contracts are not material. As of May 3, 2000, the potential gain or loss in the fair value of the company's outstanding foreign currency contracts, assuming a hypothetical 10% fluctuation in the currencies of such contracts, would be approximately $20 million. However, it should be noted that any change in the value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. In addition, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. Substantially all of the company's foreign affiliates' financial instruments are denominated in their respective functional currencies. Accordingly, exposure to exchange risk on foreign currency financial instruments is not material. (See Note 12 to the Consolidated Financial Statements.) Interest Rate Sensitivity: The company is exposed to changes in interest rates primarily as a result of its borrowing and investing activities used to maintain liquidity and fund business operations. The company continues to utilize commercial paper to fund working capital requirements in the U.S. and Canada. The company also borrows in different currencies from other sources to meet the borrowing needs of its foreign affiliates. The nature and amount of the company's long-term and short-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The company may utilize interest rate swap agreements to lower funding costs or to alter interest rate exposure. As of May 3, 2000, the company was party to an interest rate swap with a notional amount of Pds50 million and a settlement date of April 2001. The swap converts a 6.25% fixed rate exposure, on long-term debt maturing in 2030, to a floating rate exposure. The following table summarizes the company's debt obligations at May 3, 2000. The interest rates represent weighted-average rates, with the period-end rate used for the variable rate debt obligations. The fair value of the debt obligations approximated the recorded value as of May 3, 2000. (See Notes 6 and 12 to the Consolidated Financial Statements.) Expected Fiscal Year of Maturity ------------------------------------------------------------------------------------------ (Dollars in thousands) 2001 2002 2003 2004 2005 Thereafter Total -------------------------------------------------------------------------------------------------------------------- Fixed rate $ 20,055 $ 311,880 $ 461,141 $ 1,672 $ 273,022 $ 674,972 $1,742,742 Average interest rate 7.19% 7.04% 6.20% 7.85% 5.04% 6.83% Variable rate $ 156,520 $2,092,933 $ 5,855 $ 6,069 $ 6,639 $ 101,643 $2,369,659 Average interest rate 6.54% 6.21% 8.80% 8.78% 8.77% 5.94% --------------------------------------------------------------------------------------------------------------------
43 15 Commodity Price Sensitivity: The company is the purchaser of certain commodities such as corn, wheat and soybean meal and oil. The company generally purchases these commodities based upon market prices that are established with the vendor as part of the purchase process. In general, the company does not use significant levels of commodity financial instruments to hedge commodity prices due to a high correlation between the commodity cost and the ultimate selling price of the product. On occasion, the company may enter into commodity future or option contracts, as deemed appropriate, to reduce the effect of price fluctuations on some future manufacturing requirements. Such contracts are accounted for as hedges, with gains and losses recognized as part of cost of products sold, and generally have a term of less than one year. As of May 3, 2000, unrealized gains and losses related to commodity contracts held by the company were not material nor would they be given a hypothetical 10% fluctuation in market prices. It should be noted that any change in the value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. (See Note 12 to the Consolidated Financial Statements.) EURO A single currency, the Euro, was introduced in Europe on CONVERSION January 1, 1999. Of the fifteen member countries of the European Union, eleven adopted the Euro as their legal currency on that date. Fixed conversion rates between the national currencies of these eleven countries and the Euro were established on that date. The national currencies are scheduled to remain legal tender as denominations of the Euro during the transition period ending December 31, 2001. During this transition period, parties may settle transactions using either the Euro or a participating country's national currency. At the current time, the company does not believe that the conversion to the Euro will have a material impact on its business or its financial condition. STOCK MARKET H.J. Heinz Company common stock is traded principally on INFORMATION the New York Stock Exchange and the Pacific Stock Exchange, under the symbol HNZ. The number of shareholders of record of the company's common stock as of June 30, 2000 approximated 58,500. The closing price of the common stock on the New York Stock Exchange composite listing on May 3, 2000 was $37 5/8. Stock price information for common stock by quarter follows: Stock Price Range ------------------------------------ High Low --------------------------------------------------- 2000 First $ 54 $ 45 3/4 Second 48 5/16 41 7/8 Third 48 1/4 36 5/8 Fourth 39 15/16 30 13/16 --------------------------------------------------- 1999 First $ 58 1/2 $ 51 5/8 Second 61 1/8 48 1/2 Third 61 3/4 51 3/16 Fourth 58 13/16 44 9/16 ---------------------------------------------------- 44 16 CONSOLIDATED STATEMENTS OF INCOME H.J. Heinz Company and Subsidiaries May 3, April 28, April 29, Fiscal year ended 2000 1999 1998 ------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) (53 Weeks) (52 Weeks) (52 Weeks) ------------------------------------------------------------------------------ Sales $ 9,407,949 $ 9,299,610 $ 9,209,284 Cost of products sold 5,788,525 5,944,867 5,711,213 ------------------------------------------------------------------------------ Gross profit 3,619,424 3,354,743 3,498,071 Selling, general and administrative expenses 2,350,942 2,245,431 1,977,741 Gain on sale of Weight Watchers 464,617 - - ------------------------------------------------------------------------------ Operating income 1,733,099 1,109,312 1,520,330 Interest income 25,330 25,082 32,655 Interest expense 269,748 258,813 258,616 Other expenses, net 25,005 40,450 39,388 ------------------------------------------------------------------------------ Income before income taxes 1,463,676 835,131 1,254,981 Provision for income taxes 573,123 360,790 453,415 ------------------------------------------------------------------------------ Net income $ 890,553 $ 474,341 $ 801,566 ------------------------------------------------------------------------------ PER COMMON SHARE AMOUNTS: Net income - diluted $ 2.47 $ 1.29 $ 2.15 Net income - basic $ 2.51 $ 1.31 $ 2.19 Cash dividends $ 1.44 1/2 $ 1.34 1/4 $ 1.23 1/2 ------------------------------------------------------------------------------ Average common shares outstanding - diluted 360,095,455 367,830,419 372,952,851 Average common shares outstanding - basic 355,272,696 361,203,539 365,982,290 ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. 45 17 CONSOLIDATED BALANCE SHEETS H.J. Heinz Company and Subsidiaries Assets (Dollars in thousands) May 3, 2000 April 28, 1999 ------------------------------------------------------------------------------ CURRENT ASSETS: Cash and cash equivalents $ 137,617 $ 115,982 Short-term investments, at cost which approximates market 16,512 7,139 Receivables (net of allowances: 2000 - $18,697 and 1999 - $21,633) 1,237,804 1,163,915 Inventories: Finished goods and work-in-process 1,270,329 1,064,015 Packaging material and ingredients 329,577 345,636 ------------------------------------------------------------------------------ 1,599,906 1,409,651 ------------------------------------------------------------------------------ Prepaid expenses 171,599 154,619 Other current assets 6,511 35,472 ------------------------------------------------------------------------------ Total current assets 3,169,949 2,886,778 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT: Land 45,959 48,649 Buildings and leasehold improvements 860,873 798,307 Equipment, furniture and other 3,440,915 3,227,019 ------------------------------------------------------------------------------ 4,347,747 4,073,975 Less accumulated depreciation 1,988,994 1,902,951 ------------------------------------------------------------------------------ Total property, plant and equipment, net 2,358,753 2,171,024 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ OTHER NON-CURRENT ASSETS: Goodwill (net of amortization: 2000 - $312,433 and 1999 - $352,209) 1,609,672 1,781,466 Trademarks (net of amortization: 2000 - $104,125 and 1999 - $84,672) 674,279 511,608 Other intangibles (net of amortization: 2000 - $147,343 and 1999 - $117,038) 127,779 177,290 Other non-current assets 910,225 525,468 ------------------------------------------------------------------------------ Total other non-current assets 3,321,955 2,995,832 ------------------------------------------------------------------------------ Total assets $ 8,850,657 $ 8,053,634 ------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. 46 18 Liabilities and Shareholders' Equity (Dollars in thousands) May 3, 2000 April 28, 1999 ------------------------------------------------------------------------------ CURRENT LIABILITIES: Short-term debt $ 151,168 $ 290,841 Portion of long-term debt due within one year 25,407 613,366 Accounts payable 1,026,960 945,488 Salaries and wages 48,646 74,098 Accrued marketing 200,775 182,024 Accrued restructuring costs 125,704 147,786 Other accrued liabilities 358,738 372,623 Income taxes 188,672 160,096 ------------------------------------------------------------------------------ Total current liabilities 2,126,070 2,786,322 ------------------------------------------------------------------------------ LONG-TERM DEBT AND OTHER LIABILITIES: Long-term debt 3,935,826 2,472,206 Deferred income taxes 271,831 310,799 Non-pension postretirement benefits 208,958 208,102 Other 712,116 473,201 ------------------------------------------------------------------------------ Total long-term debt and other liabilities 5,128,731 3,464,308 ------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY: Capital stock: Third cumulative preferred, $1.70 first series, $10 par value 139 173 Common stock, 431,096,485 shares issued, $0.25 par value 107,774 107,774 ------------------------------------------------------------------------------ 107,913 107,947 Additional capital 304,318 277,652 Retained earnings 4,756,513 4,379,742 ------------------------------------------------------------------------------ 5,168,744 4,765,341 Less: Treasury shares, at cost (83,653,233 shares at May 3, 2000 and 71,968,652 shares at April 28, 1999) 2,920,471 2,435,012 Unearned compensation relating to the ESOP 7,652 11,728 Accumulated other comprehensive loss 644,765 515,597 ------------------------------------------------------------------------------ Total shareholders' equity 1,595,856 1,803,004 Total liabilities and shareholders' equity $ 8,850,657 $ 8,053,634 ------------------------------------------------------------------------------ 47 19 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY H.J. Heinz Company and Subsidiaries
Preferred Stock Common Stock (Amounts in thousands, except per Comprehensive ----------------------------- -------------------------- share amounts) Income Shares Dollars Shares Dollars --------------------------------------------------------------------------------- -------------------------- Balance at April 30, 1997 24 $ 241 431,096 $ 107,774 Comprehensive income - 1998: Net income - 1998 $ 801,566 Other comprehensive income (loss), net of tax: Minimum pension liability, net of $1,428 tax expense 2,433 Unrealized translation adjustments (180,284) ----------- Comprehensive income $ 623,715 ----------- Cash dividends: Preferred @ $1.70 per share Common @ $1.23 1/2 per share Shares reacquired Conversion of preferred into common stock (4) (42) Stock options exercised, net of shares tendered for payment Unearned compensation relating to the ESOP Other, net --------------------------------------------------------------------------------------------------------------- Balance at April 29, 1998 20 199 431,096 107,774 Comprehensive income - 1999: Net income - 1999 $ 474,341 Other comprehensive income (loss), net of tax: Minimum pension liability, net of $6,975 tax benefit (11,880) Unrealized translation adjustments (88,040) ----------- Comprehensive income $ 374,421 ----------- Cash dividends: Preferred @ $1.70 per share Common @ $1.34 1/4 per share Shares reacquired Conversion of preferred into common stock (3) (26) Stock options exercised, net of shares tendered for payment Unearned compensation relating to the ESOP Other, net --------------------------------------------------------------------------------------------------------------- Balance at April 28, 1999 17 173 431,096 107,774 Comprehensive income - 2000: Net income - 2000 $ 890,553 Other comprehensive income (loss), net of tax: Minimum pension liability, net of $10,894 tax expense 18,548 Unrealized translation adjustments (154,962) Realized translation reclassification adjustment 7,246 ----------- Comprehensive income $ 761,385 ----------- Cash dividends: Preferred @ $1.70 per share Common @ $1.44 1/2 per share Shares reacquired Conversion of preferred into common stock (3) (34) Stock options exercised, net of shares tendered for payment Unearned compensation relating to the ESOP Other, net* --------------------------------------------------------------------------------------------------------------- Balance at May 3, 2000 14 $ 139 431,096 $ 107,774 --------------------------------------------------------------------------------------------------------------- Authorized Shares - May 3, 2000 14 600,000 ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. * Includes activity of the Global Stock Purchase Plan. 48 20
Unearned Accumulated Treasury Stock Compensation Other Total Additional Retained --------------------------- Relating to Comprehensive Shareholders' Capital Earnings Shares Dollars the ESOP Loss Equity ----------------------------------------------------------------------------------------------------------------------------------- $ 175,811 $ 4,041,285 (63,912) $ (1,629,501) $ (17,363) $ (237,826) $ 2,440,421 801,566 801,566 (177,851) (177,851) (37) (37) (452,566) (452,566) (13,559) (677,193) (677,193) (1,322) 56 1,364 - 77,830* 9,717 200,860 278,690 2,541 2,541 454 19 491 945 ----------------------------------------------------------------------------------------------------------------------------------- 252,773 4,390,248 (67,679) (2,103,979) (14,822) (415,677) 2,216,516 474,341 474,341 (99,920) (99,920) (30) (30) (484,817) (484,817) (7,464) (410,103) (410,103) (846) 34 872 - 25,658* 3,138 78,150 103,808 3,094 3,094 67 2 48 115 ----------------------------------------------------------------------------------------------------------------------------------- 277,652 4,379,742 (71,969) (2,435,012) (11,728) (515,597) 1,803,004 890,553 890,553 (129,168) (129,168) (26) (26) (513,756) (513,756) (12,766) (511,480) (511,480) (1,136) 46 1,170 - 26,830* 833 19,681 46,511 4,076 4,076 972 203 5,170 6,142 ----------------------------------------------------------------------------------------------------------------------------------- $ 304,318 $ 4,756,513 (83,653) $ (2,920,471) $ (7,652) $ (644,765)** $ 1,595,856 ----------------------------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------------------------
*Includes income tax benefit resulting from exercised stock options. **Comprised of unrealized translation adjustment of $(626,904) and minimum pension liability of $(17,861). 49 21 CONSOLIDATED STATEMENTS OF CASH FLOWS H.J. Heinz Company and Subsidiaries
Fiscal year ended May 3, 2000 April 28, 1999 April 29, 1998 ------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) (53 Weeks) (52 Weeks) (52 Weeks) ------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income $ 890,553 $ 474,341 $ 801,566 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 219,255 207,852 222,492 Amortization 87,228 94,360 91,130 Deferred tax provision 28,331 23,564 120,875 Gain on sale of Weight Watchers (464,617) - - Gain on sale of bakery products unit - (5,717) - Gain on sale of Ore-Ida frozen foodservice business - - (96,563) Provision for restructuring 392,720 527,107 - Other items, net 48,905 (43,147) (126,805) Changes in current assets and liabilities, excluding effects of acquisitions and divestitures: Receivables (123,994) (88,742) (7,155) Inventories (217,127) (115,743) 47,917 Prepaid expenses and other current assets (23,296) 2,604 4,874 Accounts payable 111,976 3,410 54,345 Accrued liabilities (372,999) (150,533) (131,400) Income taxes (33,860) (19,220) 84,468 ------------------------------------------------------------------------------------------------------------------ Cash provided by operating activities 543,075 910,136 1,065,744 ------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Capital expenditures (452,444) (316,723) (373,754) Acquisitions, net of cash acquired (394,418) (268,951) (142,112) Proceeds from divestitures 726,493 180,400 494,739 Purchases of short-term investments (1,175,538) (915,596) (1,179,024) Sales and maturities of short-term investments 1,119,809 883,945 1,216,573 Investment in The Hain Celestial Group, Inc. (99,764) - - Other items, net 7,188 46,396 10,740 ------------------------------------------------------------------------------------------------------------------ Cash (used for) provided by investing activities (268,674) (390,529) 27,162 ------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Proceeds from long-term debt 834,328 259,593 555,017 Payments on long-term debt (627,498) (65,744) (572,905) Proceeds from (payments on) commercial paper and short-term borrowings, net 532,305 74,464 (288,346) Dividends (513,782) (484,847) (452,603) Purchase of treasury stock (511,480) (410,103) (677,193) Exercise of stock options 20,027 77,158 200,972 Other items, net 6,937 33,989 88,457 ------------------------------------------------------------------------------------------------------------------ Cash used for financing activities (259,163) (515,490) (1,146,601) ------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents 6,397 15,565 (6,991) ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 21,635 19,682 (60,686) Cash and cash equivalents at beginning of year 115,982 96,300 156,986 Cash and cash equivalents at end of year $ 137,617 $ 115,982 $ 96,300 ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 50 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS H.J. Heinz Company and Subsidiaries 1. SIGNIFICANT Fiscal Year: H.J. Heinz Company (the "company") operates on ACCOUNTING a 52- or 53-week fiscal year ending the Wednesday nearest POLICIES April 30. However, certain foreign subsidiaries have earlier closing dates to facilitate timely reporting. Fiscal years for the financial statements included herein ended May 3, 2000, April 28, 1999 and April 29, 1998. Principles of Consolidation: The consolidated financial statements include the accounts of the company and its subsidiaries. All intercompany accounts and transactions were eliminated. Investments owned less than 50%, where significant influence exists, are accounted for on an equity basis. Certain prior-year amounts have been reclassified in order to conform with the Fiscal 2000 presentation. Use of Estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Translation of Foreign Currencies: For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of shareholders' equity. Gains and losses from foreign currency transactions are included in net income for the period. Cash Equivalents: Cash equivalents are defined as highly liquid investments with original maturities of 90 days or less. Inventories: Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. Property, Plant and Equipment: Land, buildings and equipment are recorded at cost. For financial reporting purposes, depreciation is provided on the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are generally used for income tax purposes. Expenditures for new facilities and improvements that substantially extend the capacity or useful life of an asset are capitalized. Ordinary repairs and maintenance are expensed as incurred. When property is retired or otherwise disposed, the cost and related depreciation are removed from the accounts and any related gains or losses are included in income. Intangibles: Goodwill, trademarks and other intangibles arising from acquisitions are being amortized on a straight- line basis over periods ranging from three to 40 years. The company regularly reviews the individual components of the balances by evaluating the future cash flows of the businesses to determine the recoverability of the assets and recognizes, on a current basis, any diminution in value. 51 23 Revenue Recognition: The company generally recognizes revenue upon shipment of goods to customers or upon performance of services. However, in certain overseas countries, revenue is recognized upon receipt of the product by the customer. Advertising Expenses: Advertising costs are generally expensed in the year in which the advertising first takes place. Income Taxes: Deferred income taxes result primarily from temporary differences between financial and tax reporting. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The company has not provided for possible U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. Calculation of the unrecognized deferred tax liability for temporary differences related to these earnings is not practicable. Where it is contemplated that earnings will be remitted, credit for foreign taxes already paid generally will offset applicable U.S. income taxes. In cases where they will not offset U.S. income taxes, appropriate provisions are included in the Consolidated Statements of Income. Stock-Based Employee Compensation Plans: Stock-based compensation is accounted for by using the intrinsic value- based method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Financial Instruments: The company uses derivative financial instruments for the purpose of hedging currency, price and interest rate exposures which exist as part of ongoing business operations. As a policy, the company does not engage in speculative or leveraged transactions, nor does the company hold or issue financial instruments for trading purposes. - Interest Rate Swap Agreements: The company may utilize interest rate swap agreements to lower funding costs or to alter interest rate exposure. Amounts paid or received on interest rate swap agreements are deferred and recognized as adjustments to interest expense. Gains and losses realized upon the settlement of such contracts are deferred and amortized to interest expense over the remaining term of the debt instrument or are recognized immediately if the underlying instrument is settled. - Foreign Currency Contracts: The company enters into forward, purchased option and swap contracts to hedge transactions denominated in foreign currencies in order to reduce the currency risk associated with fluctuating exchange rates. Such contracts are used primarily to hedge certain intercompany cash flows, purchases and sales of certain raw materials and finished goods and for payments arising from certain foreign currency denominated obligations. Realized and unrealized gains and losses from instruments qualifying as hedges are deferred as part of the cost basis of the underlying transaction. Realized and unrealized gains and losses from foreign currency contracts used as economic hedges but not qualifying for hedge accounting are recognized currently in miscellaneous income and expense. - Commodity Contracts: In connection with purchasing certain commodities for future manufacturing requirements, the company enters into commodities futures and option contracts, as deemed appropriate, to reduce the effect of price fluctuations. Such contracts are accounted for as hedges, with gains and losses recognized as part of cost of products sold, and generally have a term of less than one year. 52 24 The cash flows related to the above financial instruments are classified in the Statements of Cash Flows in a manner consistent with those of the transactions being hedged. Recently Issued Accounting Standards: In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS Statement 133," which postponed the adoption date of SFAS No. 133. As such, the company is not required to adopt the statement until Fiscal 2002. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133." This statement amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. The company is currently evaluating the effect that implementation of the new standard will have on its results of operations and financial position. In May 2000, the FASB Emerging Issues Task Force (the "EITF") issued new guidelines entitled "Accounting for Certain Sales Incentives" which address the recognition, measurement and income statement classification for certain sales incentives (e.g., coupons). These guidelines will be effective for the company beginning in the second quarter of Fiscal 2001. The implementation of these guidelines will require the company to make reclassifications between selling, general and administrative expenses ("SG&A") and sales. In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. Management believes that the impact of SAB No. 101, which will be effective in the fourth quarter of Fiscal 2001, will not have a material effect on its financial position or results of operations. 2. ACQUISITIONS All of the following acquisitions have been accounted for as purchases and, accordingly, the respective purchase prices have been allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. Operating results of businesses acquired have been included in the Consolidated Statements of Income from the respective acquisition dates forward. Pro forma results of the company, assuming all of the following acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. Fiscal 2000: The company acquired businesses for a total of $404.9 million, including obligations to sellers of $10.4 million. The preliminary allocations of the purchase price resulted in goodwill of $153.4 million and trademarks and other intangible assets of $134.8 million, which are being amortized on a straight-line basis over periods not exceeding 40 years. Final allocation of the purchase price is not expected to differ significantly from the preliminary allocations and is expected to be completed in Fiscal 2001. On December 7, 1999, the company completed the acquisition of United Biscuit's European Frozen and Chilled Division, one of the leading frozen food businesses in the U.K. and Ireland, which produces frozen desserts and vegetarian/meat- free products, frozen pizzas, frozen value-added potato products and fresh sandwiches. Also during Fiscal 2000, the 53 25 company completed the acquisition of Quality Chef Foods, a leading manufacturer of frozen heat-and-serve soups, entrees and sauces; Yoshida, a line of Asian sauces marketed in the U.S.; Thermo Pac, Inc., a U.S. leader in single-serve condiments; and obtained a 51% share of Remedia Limited, Israel's leading company in infant nutrition. The company also made other smaller acquisitions during the year. Fiscal 1999: The company acquired businesses for a total of $317.3 million, including obligations to sellers of $48.4 million. The allocations of the purchase price resulted in goodwill of $99.7 million and trademarks and other intangible assets of $215.0 million, which are being amortized on a straight-line basis over periods not exceeding 40 years. Acquisitions made during Fiscal 1999 include: the College Inn brand of canned broths and ABC Sauces in Indonesia, a leading provider of ketchup, sauces and condiments. The company also made other smaller acquisitions during the year. Fiscal 1998: The company acquired businesses for a total of $142.1 million. The allocations of the purchase price resulted in goodwill of $65.1 million and trademarks and other intangible assets of $27.2 million, which are being amortized on a straight-line basis over periods not exceeding 40 years. On June 30, 1997, the company acquired John West Foods Limited, the leading brand of canned tuna and fish in the U.K. Based in Liverpool, John West Foods Limited sells its canned fish products throughout Continental Europe and in a number of other international markets. (John West operations in Australia, New Zealand and South Africa were not included in the transaction.) During Fiscal 1998, the company also made other acquisitions, primarily in the Asia/Pacific region, Europe and South Africa. 3. DIVESTITURES On September 29, 1999, the company completed the sale of the Weight Watchers classroom business for $735 million, which included $25 million of preferred stock. The transaction resulted in a pretax gain of $464.6 million ($0.72 per share). The company used a portion of the proceeds to retain a 6% equity interest in Weight Watchers International, Inc. The sale did not include Weight Watchers Smart Ones frozen meals, desserts and breakfast items, Weight Watchers from Heinz in the U.K. and a broad range of other Weight Watchers branded foods in Heinz's global core product categories. The Weight Watchers classroom business contributed approximately $400 million in sales for Fiscal 1999. During Fiscal 2000, the company also made other smaller divestitures. On October 2, 1998, the company completed the sale of its bakery products unit for $178.0 million. The transaction resulted in a pretax gain of $5.7 million, which was recorded in SG&A. The bakery products unit contributed approximately $200 million in sales for Fiscal 1998. On June 30, 1997, the company completed the sale of its Ore-Ida frozen foodservice business. The transaction resulted in a pretax gain of approximately $96.6 million ($0.14 per share), and was recorded in SG&A. The transaction included the sale of the company's Ore-Ida appetizer, pasta and potato foodservice business and five of the Ore-Ida plants that manufacture the products. The Ore-Ida frozen foodservice business contributed approximately $525 million in net sales for Fiscal 1997. Pro forma results of the company, assuming all of the above divestitures had been made at the beginning of each period presented, would not be materially different from the results reported. 54 26 4. RESTRUCTURING Operation Excel CHARGES In Fiscal 1999, the company announced a transformative growth and restructuring initiative. The initiative, named "Operation Excel," is a multi-year, multi-faceted program creating manufacturing centers of excellence, focusing the product portfolio, realigning the company's management teams and investing in growth initiatives. Creating manufacturing centers of excellence is resulting in significant changes to the company's manufacturing footprint including the following initiatives: closing the Harlesden factory in London, England and focusing the Kitt Green factory in Wigan, England on canned beans, soups and pasta production and focusing the Elst factory in the Netherlands on tomato ketchup and sauces; downsizing the Puerto Rico tuna processing facility and focusing this facility on lower volume/higher margin products (completed in Fiscal 2000); focusing the Pittsburgh, Pennsylvania factory on soup and baby food production and shifting other production to existing facilities; consolidating manufacturing capacity in the Asia/Pacific region; closing the Zabreh, Czech Republic factory and disposing of the Czech dairy business and transferring the infant formula business to the Kendal, England factory (completed in Fiscal 2000); downsizing the Pocatello, Idaho factory by shifting Bagel Bites production to the Ft. Myers, Florida factory, and shifting certain Smart Ones entree production to the Massillon, Ohio factory (completed in Fiscal 2000); closing the Redditch, England factory and shifting production to the Telford, England factory and the Turnhout factory in Belgium (completed in Fiscal 2000); closing the El Paso, Texas pet treat facility and consolidating production in the Topeka, Kansas factory; and disposing of the Bloomsburg, Pennsylvania frozen pasta factory (completed in Fiscal 2000). As part of Operation Excel, the company is focusing the portfolio of product lines on six core food categories: ketchup, condiments and sauces; frozen foods; tuna; soup, beans and pasta meals; infant foods; and pet products. A consequence of this focus on the core categories was the sale of the Weight Watchers classroom business in Fiscal 2000. Additionally, seven other smaller businesses, which have combined annual revenues of approximately $80 million, are being disposed. Realigning the company's management teams will provide processing and product expertise across the regions of North America, Europe and Asia/Pacific. Specifically, Operation Excel includes creating a single U.S. frozen food headquarters, resulting in the closure of the company's Ore- Ida head office in Boise, Idaho (completed in Fiscal 2000); consolidating many European administrative support functions; creating a single North American Grocery & Foodservice headquarters in Pittsburgh, Pennsylvania, resulting in the relocation of the company's domestic seafood and pet food headquarters from Newport, Kentucky; and creating two Asia/ Pacific management teams with headquarters in Melbourne (for the Australian, New Zealand and Japanese businesses) and Singapore (for all other Asian businesses). The initiatives will result in the closure or exit of 21 factories or businesses. Management estimates that these actions will impact approximately 6,000 employees with a net reduction in the workforce of approximately 4,600, after expansion of certain facilities. During Fiscal 2000, the company recognized net restructuring charges and implementation costs totaling $392.7 million pretax ($0.74 per share). Pretax charges of $170.4 million were classified as cost of products sold and $222.3 million as SG&A. During Fiscal 1999, the company recognized restructuring charges and implementation costs totaling $552.8 million pretax ($1.11 per share). Pretax charges of $396.4 million were classified as cost of products sold and $156.4 million as SG&A. 55 27 Included in the $392.7 million of net restructuring and implementation costs recognized in Fiscal 2000 is a reversal of $18.2 million pretax of Fiscal 1999 restructuring accruals (exit costs, $0.4 million and severance costs, $1.3 million) and asset write-downs ($16.5 million), primarily for the closure of the West Chester, Pennsylvania facility, which will now remain in operation as a result of the sale of the Bloomsburg facility in April of Fiscal 2000. The major components of the restructuring charges and implementation costs and the remaining accrual balances as of May 3, 2000 and April 28, 1999 were as follows:
Non-Cash Employee Asset Termination and Accrued Implementation (Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total ----------------------------------------------------------------------------------------------------------------------------------- Restructuring and implementation costs - 1999 $ 294.9 $ 159.4 $ 45.3 $ 53.2 $ 552.8 Amounts utilized - 1999 (294.9) (67.3) (9.8) (53.2) (425.2) ----------------------------------------------------------------------------------------------------------------------------------- Accrued restructuring costs - April 28, 1999 - 92.1 35.5 - 127.6 Net restructuring and implementation costs - 2000 61.6 84.5 30.1 216.5 392.7 Amounts utilized - 2000 (61.6) (86.3) (30.7) (216.5) (395.1) ----------------------------------------------------------------------------------------------------------------------------------- Accrued restructuring costs - May 3, 2000 $ - $ 90.3 $ 34.9 $ - $ 125.2 -----------------------------------------------------------------------------------------------------------------------------------
Non-cash asset write-downs consisted primarily of long-term asset impairments that were recorded as a direct result of the company's decision to exit businesses or facilities. Non- cash asset write-downs totaled $61.6 million in Fiscal 2000 and related to property, plant and equipment ($48.7 million) and current assets ($12.9 million). In Fiscal 1999, non-cash asset write-downs consisted of property, plant and equipment ($210.9 million), goodwill and other intangibles ($49.6 million) and current assets ($34.5 million). Long-term asset write-downs were based on third-party appraisals, contracted sales prices or management's estimate of salvage value. The carrying value of these long-term assets was approximately $30 million at May 3, 2000 and $50 million at April 28, 1999. These assets will be sold or removed from service within 12 months. Once the assets are removed from service, the company will actively market these assets for sale. The results of operations, related to these assets, including the effect of reduced depreciation were not material. Current asset write- downs included inventory and packaging material, prepaids and other current assets and were determined based on management's estimate of net realizable value. Severance charges are primarily related to involuntary terminations and represent cash termination payments to be paid to affected employees as a direct result of the restructuring program. Non-cash pension and postretirement benefit charges related to the approved projects are also included as a component of total severance costs ($27.8 million and $60.5 million in Fiscal 2000 and Fiscal 1999, respectively). Exit costs are primarily related to contract and lease termination costs ($12.0 million in Fiscal 2000 and $35.0 million in Fiscal 1999). Implementation costs were recognized as incurred in Fiscal 2000 ($216.5 million) and Fiscal 1999 ($53.2 million) and consist of incremental costs directly related to the implementation of Operation Excel, including consulting fees, employee relocation costs, unaccruable severance costs associated with terminated employees, training costs, equipment relocation costs and commissioning costs. In Fiscal 2000, 11 factories and four businesses were sold or closed including those located in England, Hungary, the Czech Republic, New Zealand and the U.S., resulting in a net reduction of the company's workforce of approximately 3,000 employees. During Fiscal 1999, the company's workforce was reduced by approximately 200 employees, principally through the closure of Ore-Ida's Boise head office and through the divestiture of the Clarksville, Arkansas sweet potato business. 56 28 Project Millennia During the fourth quarter of Fiscal 1997, the company announced a reorganization and restructuring program named "Project Millennia," which resulted in a total cost of approximately $750 million over three years. The reorganization plan was designed to strengthen the company's core businesses and improve profitability and global growth. Key initiatives were focused on process changes and product line rationalizations. The major components of the restructuring charges and implementation costs and the accrual balances as of May 3, 2000, April 28, 1999, April 29, 1998 and April 30, 1997 were as follows:
Exit Costs Non-Cash Employee ------------------------------------ Asset Termination and Accrued Implementation (Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total ----------------------------------------------------------------------------------------------------------------------------------- Restructuring and implementation costs - 1997 $ 324.3 $ 164.5 $ 94.3 $ 64.1 $ 647.2 Amounts utilized - 1997 (324.3) (32.1) (15.9) (64.1) (436.4) ----------------------------------------------------------------------------------------------------------------------------------- Accrued restructuring costs - April 30, 1997 - 132.4 78.4 - 210.8 Implementation costs - 1998 - - - 84.1 84.1 Amounts utilized - 1998 - (91.9) (24.5) (84.1) (200.5) ----------------------------------------------------------------------------------------------------------------------------------- Accrued restructuring costs - April 29, 1998 - 40.5 53.9 - 94.4 Implementation costs - 1999 - - - 22.3 22.3 Amounts utilized - 1999 - (28.7) (19.9) (22.3) (70.9) Accrual reversal - 1999 - (9.1) (16.6) - (25.7) ----------------------------------------------------------------------------------------------------------------------------------- Accrued restructuring costs - April 28, 1999 - 2.7 17.4 - 20.1 Amounts utilized - 2000 - (2.7) (16.9) - (19.6) ----------------------------------------------------------------------------------------------------------------------------------- Accrued restructuring costs - May 3, 2000 $ - $ - $ 0.5 $ - $ 0.5 -----------------------------------------------------------------------------------------------------------------------------------
The company has completed the implementation of Project Millennia. During Fiscal 2000, the company utilized $19.6 million of severance and exit accruals. The utilization of the accruals related principally to the closure of a tuna processing facility in Australia, the closure of a tomato processing facility in Spain and costs associated with contractual lease commitments of the U.S. Weight Watchers classroom business, which were transferred to the buyer of the classroom business. As of May 3, 2000, the company has closed or divested all of the 25 plants that were scheduled for closure or divestiture. Project Millennia has resulted in a net workforce reduction of 2,250 employees. As of May 3, 2000, there are $0.5 million of remaining Project Millennia accruals. These accruals relate to contractual lease commitments in the U.S. 57 29 5. INCOME TAXES The following table summarizes the provision/(benefit) for U.S. federal and U.S. possessions, state and foreign taxes on income. (Dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------ Current: U.S. federal and U.S. possessions $ 318,873 $ 110,490 $ 214,866 State 45,935 15,389 17,667 Foreign 179,984 211,347 100,007 ------------------------------------------------------------------------------ 544,792 337,226 332,540 ------------------------------------------------------------------------------ Deferred: U.S. federal and U.S. possessions 71,602 66,944 103,630 State (1,871) 2,441 1,536 Foreign (41,400) (45,821) 15,709 ---------------------------------------------------------------------------- 28,331 23,564 120,875 ---------------------------------------------------------------------------- Total tax provision $ 573,123 $ 360,790 $ 453,415 ---------------------------------------------------------------------------- The Fiscal 2000 effective tax rate was unfavorably impacted by the excess of basis in assets for financial reporting over the tax basis of assets included in the Weight Watchers sale and by gains in higher taxed states related to the sale. Tax expense related to the pretax gain of $464.6 million was $204.9 million. The Fiscal 2000 and Fiscal 1999 effective tax rates were unfavorably impacted by restructuring and implementation costs expected to be realized in lower tax rate jurisdictions and by nondeductible expenses related to the restructuring. Tax benefit related to the $392.7 million of Operation Excel net restructuring and implementation costs for Fiscal 2000 was $125.3 million. Tax benefit related to the $552.8 million of Operation Excel restructuring and implementation costs for 1999 was $143.1 million. In Fiscal 1998, reduced tax rates enacted in the U.K. and Italy decreased the tax provision by $21.6 million, representing the impact of the reduced tax rates on net deferred taxes payable as of the dates of enactment. Tax expense resulting from allocating certain tax benefits directly to additional capital was immaterial in Fiscal 2000. In Fiscal 1999 it was $26.6 million, and in Fiscal 1998 it was $77.7 million. The components of income before income taxes consist of the following: (Dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------ Domestic $ 805,464 $ 427,089 $ 742,665 Foreign 658,212 408,042 512,316 ------------------------------------------------------------------------------ Total income before income taxes $ 1,463,676 $ 835,131 $ 1,254,981 ------------------------------------------------------------------------------ The differences between the U.S. federal statutory tax rate and the company's consolidated effective tax rate are as follows: 2000 1999 1998 ------------------------------------------------------------------------------ U.S. federal statutory tax rate 35.0% 35.0% 35.0% Tax on income of foreign subsidiaries (1.1) 1.3 (0.9) State income taxes (net of federal benefit) 1.9 1.5 1.1 Earnings repatriation 1.7 (0.3) (0.2) Effect of foreign losses 1.4 3.8 - Tax on income of U.S. possessions subsidiaries (1.4) 0.6 (1.3) Other 1.7 1.3 2.4 ------------------------------------------------------------------------------ Effective tax rate 39.2% 43.2% 36.1% ------------------------------------------------------------------------------ 58 30 The deferred tax (assets) and deferred tax liabilities recorded on the balance sheets as of May 3, 2000 and April 28, 1999 are as follows: (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------------ Depreciation/amortization $ 416,453 $ 429,101 Benefit plans 48,180 70,006 Other 63,626 57,925 ------------------------------------------------------------------------------ 528,259 557,032 ------------------------------------------------------------------------------ Provision for estimated expenses (105,375) (148,519) Operating loss carryforwards (37,813) (37,104) Benefit plans (115,007) (122,007) Tax credit carryforwards (44,911) (10,573) Other (131,086) (98,674) ------------------------------------------------------------------------------ (434,192) (416,877) ------------------------------------------------------------------------------ Valuation allowance 75,109 40,811 ------------------------------------------------------------------------------ Net deferred tax liabilities $ 169,176 $ 180,966 ------------------------------------------------------------------------------ At the end of Fiscal 2000, net operating loss carryforwards totaled $81.1 million. Of that amount, $20.5 million expire through 2010; the other $60.6 million do not expire. Foreign tax credit carryforwards total $44.9 million and expire through 2005. The company's consolidated U.S. income tax returns have been audited by the Internal Revenue Service for all years through 1994. Undistributed earnings of foreign subsidiaries considered to be reinvested permanently amounted to $2.25 billion at May 3, 2000. The Fiscal 2000 net change in the valuation allowance for deferred tax assets was an increase of $34.3 million, due principally to additional deferred tax asset related to foreign tax credit carryforward. During the first quarter of Fiscal 2000, the company reorganized certain of its foreign operations, and, as a result, expects to pay approximately $320 million in foreign income taxes through Fiscal 2005. Because the company increased tax basis in amortizable assets at the same time, cash flow related to the reorganization is expected to be neutral over the payment period. 6. DEBT Short-term debt consisted of bank and other borrowings of $151.2 million and $290.8 million as of May 3, 2000 and April 28, 1999, respectively. Total short-term debt had a weighted- average interest rate during Fiscal 2000 of 6.2% and at year- end of 6.5%. The weighted-average interest rate on short-term debt during Fiscal 1999 was 6.3% and at year-end was 5.3%. The company maintains a $2.30 billion credit agreement that supports its domestic commercial paper program. The credit agreement expires in September 2001. In addition, the company had $760.3 million of foreign lines of credit available at year-end. As of May 3, 2000 and April 28, 1999, the company had $2.08 billion and $1.41 billion, respectively, of domestic commercial paper outstanding. Due to the long-term nature of the credit agreement, all of the outstanding domestic commercial paper has been classified as long-term debt as of May 3, 2000 and April 28, 1999. Aggregate domestic commercial paper 59 31 had a weighted-average interest rate during Fiscal 2000 of 5.5% and at year-end of 6.2%. In Fiscal 1999, the weighted-average rate was 5.3% and at year-end was 4.9%.
Range of Maturity Long-Term (Dollars in thousands) Interest (Fiscal Year) 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- United States Dollars: Commercial paper Variable 2002 $ 2,084,175 $ 1,406,131 Senior unsecured notes and debentures 6.00-6.88% 2001-2029 740,537 1,040,013 Eurodollar notes 5.75-7.00 2002-2003 548,463 499,089 Revenue bonds 3.40-7.70 2001-2027 14,892 15,092 Promissory notes 3.00-10.00 2001-2005 20,967 67,397 Other 6.50 2001-2020 12,287 5,860 ----------------------------------------------------------------------------------------------------------------------------------- 3,421,321 3,033,582 ----------------------------------------------------------------------------------------------------------------------------------- Foreign Currencies (U.S. Dollar Equivalents): Promissory notes: Pound sterling 5.67-8.86% 2001-2030 235,388 10,230 Euro 5.00 2005 268,674 - Italian lire 3.90-6.53 2001-2008 1,422 7,377 Australian dollar 6.10 2001-2002 6,152 13,421 Other 5.00-24.00 2001-2022 28,276 20,962 ----------------------------------------------------------------------------------------------------------------------------------- 539,912 51,990 ----------------------------------------------------------------------------------------------------------------------------------- Total long-term debt 3,961,233 3,085,572 Less portion due within one year 25,407 613,366 ----------------------------------------------------------------------------------------------------------------------------------- $ 3,935,826 $ 2,472,206 -----------------------------------------------------------------------------------------------------------------------------------
The amount of long-term debt that matures in each of the four years succeeding 2001 is: $2,404.8 million in 2002, $467.0 million in 2003, $7.7 million in 2004 and $279.7 million in 2005. On January 5, 2000, the company issued Euro300 million of 5% Notes due 2005. The proceeds were used to repay domestic commercial paper. On February 15, 2000, the company issued $300 million of 7.0% Notes due 2002. The proceeds were used to repay domestic commercial paper. On February 18, 2000, the company issued Pds125 million of 6.25% Notes due 2030. The proceeds were used for general corporate purposes, including repaying commercial paper borrowings that were incurred in connection with the acquisition of United Biscuit's European Frozen and Chilled Division in December 1999. The company entered into an interest rate swap agreement with a notional amount of Pds50 million and a settlement date of April 2001. This swap converts the 6.25% fixed rate to a floating rate. On July 15, 1998, the company issued $250 million of 6.375% Debentures due July 2028. The proceeds were used to repay domestic commercial paper. 7. SHAREHOLDERS' Capital Stock: The preferred stock outstanding is EQUITY convertible at a rate of one share of preferred stock into 13.5 shares of common stock. The company can redeem the stock at $28.50 per share. As of May 3, 2000, there were authorized, but unissued, 2,200,000 shares of third cumulative preferred stock for which the series had not been designated. Employee Stock Ownership Plan ("ESOP"): The company established an ESOP in 1990 to replace in full or in part the company's cash-matching contributions to the H.J. Heinz Company Employees Retirement and Savings Plan, a 401(k) plan for salaried employees. Matching contributions to the 401(k) plan are based on a percentage of the participants' contributions, subject to certain limitations. 60 32 Global Stock Purchase Plan ("GSPP"): On September 8, 1999, the stockholders authorized a GSPP, which qualifies under Internal Revenue Code Section 423, and provides for the purchase by employees of up to 3,000,000 shares of the company's stock through payroll deductions. Employees who choose to participate in the plan will receive an option to acquire common stock at a discount. The purchase price per share will be the lower of 85% of the fair market value of the company's stock on the first or last day of a purchase period. During Fiscal 2000, employees purchased 173,326 shares under this plan. Cumulative Translation Adjustments: Changes in the cumulative translation component of shareholders' equity result principally from translation of financial statements of foreign subsidiaries into U.S. dollars. The reduction in shareholders' equity related to the translation component increased $147.7 million in 2000, $88.0 million in 1999 and $180.3 million in 1998. During Fiscal 2000, a loss of $7.2 million was transferred from the cumulative translation component of shareholders' equity and included in the determination of net income. Unfunded Pension Obligation: An adjustment for unfunded foreign pension obligations in excess of unamortized prior service costs was recorded, net of tax, as a reduction in shareholders' equity. 8. SUPPLEMENTAL CASH FLOWS INFORMATION (Dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------ Cash Paid During the Year For: Interest $ 273,506 $ 266,395 $ 300,173 Income taxes 485,267 287,544 188,567 ------------------------------------------------------------------------------ Details of Acquisitions: Fair value of assets $ 563,376 $ 350,575 $ 200,406 Liabilities* 166,699 80,055 47,912 ------------------------------------------------------------------------------ Cash paid 396,677 270,520 152,494 Less cash acquired 2,259 1,569 10,382 ------------------------------------------------------------------------------ Net cash paid for acquisitions $ 394,418 $ 268,951 $ 142,112 ------------------------------------------------------------------------------ *Includes obligations to sellers of $10.4 million and $48.4 million in 2000 and 1999, respectively. 9. EMPLOYEES' Under the company's stock option plans, officers and other STOCK OPTION key employees may be granted options to purchase shares of PLANS AND the company's common stock. Generally, the option price on MANAGEMENT outstanding options is equal to the fair market value of the INCENTIVE PLANS stock at the date of grant. Options are generally exercisable beginning from one to three years after date of grant and have a maximum term of 10 years. Beginning in Fiscal 1998, in order to place greater emphasis on creation of shareholder value, performance-accelerated stock options were granted to certain key executives. These options vest eight years after the grant date, subject to acceleration if predetermined share price goals are achieved. The company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the company's stock option plans. If the company had elected to recognize compensation cost 61 33 based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below: Fiscal year ended May 3, 2000 April 28, 1999 April 29, 1998 ------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) (53 Weeks) (52 Weeks) (52 Weeks) ------------------------------------------------------------------------------ Pro forma net income $ 862,698 $ 440,080 $ 790,325 Pro forma diluted net income per common share $ 2.40 $ 1.20 $ 2.12 Pro forma basic net income per common share $ 2.43 $ 1.22 $ 2.16 ------------------------------------------------------------------------------ The pro forma effect on net income for Fiscal 2000, Fiscal 1999 and Fiscal 1998 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996. The weighted-average fair value of options granted was $8.98 per share in Fiscal 2000, $11.34 per share in Fiscal 1999 and $12.45 per share in Fiscal 1998. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2000 1999 1998 ------------------------------------------------------------------------------ Dividend yield 3.5% 2.5% 2.5% Volatility 24.0% 22.0% 20.0% Risk-free interest rate 6.1% 5.3% 5.8% Expected term (years) 5.0 4.9 5.5 ------------------------------------------------------------------------------ Data regarding the company's stock option plans follows: Weighted-Average Exercise Price Shares Per Share ------------------------------------------------------------------------------ Shares under option April 30, 1997 33,074,848 $ 26.34 Options granted 2,990,000 53.76 Options exercised (10,283,073) 22.40 Options surrendered (181,000) 34.22 ------------------------------------------------------------------------------ Shares under option April 29, 1998 25,600,775 $ 31.07 Options granted 8,979,200 53.07 Options exercised (3,138,445) 24.59 Options surrendered (924,300) 40.11 ------------------------------------------------------------------------------ Shares under option April 28, 1999 30,517,230 $ 37.94 Options granted 347,000 41.40 Options exercised (858,283) 24.81 Options surrendered (287,665) 44.70 ------------------------------------------------------------------------------ Shares under option May 3, 2000 29,718,282 $ 38.29 ------------------------------------------------------------------------------ Options exercisable at: April 29, 1998 14,397,175 $ 24.70 April 28, 1999 13,507,295 27.60 May 3, 2000 16,430,099 31.43 ------------------------------------------------------------------------------ 62 34 The following summarizes information about shares under option in the respective exercise price ranges at May 3, 2000:
Options Outstanding Options Exercisable --------------------------------------- -------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Range of Exercise Number Remaining Life Price Per Number Price Per Price Per Share Outstanding (Years) Share Exercisable Share --------------------------------------------------------------------------------------- $21.75-33.88 15,536,049 4.42 $ 27.00 12,902,472 $ 25.99 36.75-48.38 3,591,333 7.01 41.13 1,079,967 39.54 49.31-59.94 10,590,900 8.41 53.88 2,447,660 56.49 --------------------------------------------------------------------------------------- 29,718,282 16,430,099 ---------------------------------------------------------------------------------------
The shares authorized but not granted under the company's stock option plans were 393,000 at May 3, 2000 and 452,335 at April 28, 1999. Common stock reserved for options totaled 30,111,282 at May 3, 2000 and 30,969,565 at April 28, 1999. The company's management incentive plan covers officers and other key employees. Participants may elect to be paid on a current or deferred basis. The aggregate amount of all awards may not exceed certain limits in any year. Compensation under the management incentive plans was approximately $44 million in Fiscal 2000, $47 million in Fiscal 1999 and $46 million in Fiscal 1998. 10. RETIREMENT The company maintains retirement plans for the majority of PLANS its employees. Current defined benefit plans are provided primarily for domestic union and foreign employees. Defined contribution plans are provided for the majority of its domestic non-union hourly and salaried employees. Total pension cost consisted of the following:
(Dollars in thousands) 2000 1999 1998 --------------------------------------------------------------------------------------- Components of defined benefit net periodic benefit cost: Service cost $ 27,352 $ 23,617 $ 21,038 Interest cost 84,096 82,958 83,005 Expected return on assets (121,735) (109,490) (103,421) Amortization of: Net initial asset (3,629) (3,632) (4,333) Prior service cost 8,067 8,026 8,466 Net actuarial loss/(gain) 1,931 (3,752) (10,307) Loss due to curtailment, settlement and special termination benefits 27,908 60,485 6,482 --------------------------------------------------------------------------------------- Net periodic benefit cost 23,990 58,212 930 Defined contribution plans (excluding the ESOP) 20,558 23,980 23,571 --------------------------------------------------------------------------------------- Total pension cost $ 44,548 $ 82,192 $ 24,501 ---------------------------------------------------------------------------------------
63 35 The following table sets forth the funded status of the company's principal defined benefit plans at May 3, 2000 and April 28, 1999. (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------------ Change in Benefit Obligation: Benefit obligation at the beginning of the year $ 1,387,043 $ 1,270,521 Service cost 27,352 23,617 Interest cost 84,096 82,958 Participants' contributions 6,895 7,044 Amendments 20,505 18,625 Actuarial (gain)/loss (34,023) 102,361 Curtailment gain (939) (867) Settlement (15,976) (36,751) Special termination benefits 19,234 31,581 Benefits paid (86,013) (86,615) Acquisition 78,729 - Exchange (29,493) (25,431) ------------------------------------------------------------------------------ Benefit obligation at the end of the year 1,457,410 1,387,043 ------------------------------------------------------------------------------ Change in Plan Assets: Fair value of plan assets at the beginning of the year 1,440,357 1,444,080 Actual return on plan assets 207,616 105,296 Settlement (15,976) (36,751) Employer contribution 38,632 34,701 Participants' contributions 6,895 7,044 Benefits paid (86,013) (86,615) Acquisition 102,396 - Exchange (36,483) (27,398) ------------------------------------------------------------------------------ Fair value of plan assets at the end of the year 1,657,424 1,440,357 ------------------------------------------------------------------------------ Funded status 200,014 53,314 Unamortized prior service cost 85,795 75,770 Unamortized net actuarial (gain)/loss (35,529) 95,994 Unamortized net initial asset (7,434) (11,501) ------------------------------------------------------------------------------ Net amount recognized 242,846 213,577 ------------------------------------------------------------------------------ Amount recognized in the consolidated balance sheet consists of: Prepaid benefit cost 257,633 221,823 Accrued benefit liability (46,537) (69,226) Intangible asset 3,402 3,189 Accumulated other comprehensive loss 28,348 57,791 ------------------------------------------------------------------------------ Net amount recognized $ 242,846 $ 213,577 ------------------------------------------------------------------------------ The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets were $263.4 million, $231.3 million and $184.8 million, respectively, as of May 3, 2000 and $278.8 million, $237.5 million and $168.3 million, respectively, as of April 28, 1999. 64 36 The weighted-average rates used for the years ended May 3, 2000, April 28, 1999 and April 29, 1998 in determining the net pension costs and projected benefit obligations for defined benefit plans were as follows: 2000 1999 1998 ------------------------------------------------------------------------------ Expected rate of return 9.5% 9.5% 9.6% Discount rate 6.8% 6.3% 6.9% Compensation increase rate 4.6% 4.7% 4.9% ------------------------------------------------------------------------------ 11. POSTRETIRE- The company and certain of its subsidiaries provide health MENT BENEFITS care and life insurance benefits for retired employees and OTHER THAN their eligible dependents. Certain of the company's U.S. and PENSIONS AND Canadian employees may become eligible for such benefits. The OTHER company currently does not fund these benefit arrangements POSTEMPLOYMENT and may modify plan provisions or terminate plans at its BENEFITS discretion. Net postretirement costs consisted of the following: (Dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------ Components of defined benefit net periodic benefit cost: Service cost $ 3,903 $ 3,603 $ 3,339 Interest cost 10,475 10,483 11,280 Amortization of: Prior service cost (655) (649) (5,633) Net actuarial gain (3,144) (3,430) (3,664) Loss due to curtailment and special termination benefits 1,536 3,732 1,085 ------------------------------------------------------------------------------ Net periodic benefit cost $ 12,115 $ 13,739 $ 6,407 ------------------------------------------------------------------------------ The following table sets forth the combined status of the company's postretirement benefit plans at May 3, 2000 and April 28, 1999. (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------------ Change in benefit obligation: Benefit obligation at the beginning of the year $ 158,488 $ 157,975 Service cost 3,903 3,603 Interest cost 10,475 10,483 Participants' contributions 889 858 Actuarial loss/(gain) 6,644 (3,688) Curtailment (154) - Special termination benefits 1,389 2,779 Benefits paid (11,864) (12,709) Exchange (220) (813) ------------------------------------------------------------------------------ Benefit obligation at the end of the year 169,550 158,488 ------------------------------------------------------------------------------ Funded status (169,550) (158,488) Unamortized prior service cost (6,583) (6,711) Unamortized net actuarial gain (42,825) (52,826) ------------------------------------------------------------------------------ Net accrued benefit liability $ (218,958) $ (218,025) ------------------------------------------------------------------------------ 65 37 The weighted-average discount rate used in the calculation of the accumulated postretirement benefit obligation and the net postretirement benefit cost was 7.7% in 2000, 6.9% in 1999 and 1998. The assumed annual composite rate of increase in the per capita cost of company-provided health care benefits begins at 7.2% for 2000, gradually decreases to 5.3% by 2007, and remains at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for postretirement medical benefits. A one- percentage-point change in assumed health care cost trend rates would have the following effects: 1% Increase 1% Decrease ------------------------------------------------------------------------------ Effect on total service and interest cost components $ 1,537 $ (1,349) Effect on postretirement benefit obligation 15,860 (13,988) ------------------------------------------------------------------------------ 12. FINANCIAL Interest Rate Swap Agreements: As of May 3, 2000, the INSTRUMENTS company was party to an interest rate swap with a notional amount of Pds50 million and a settlement date of April 2001. The swap converts a 6.25% fixed rate exposure, on long-term debt maturing in 2030, to a floating rate exposure. As of April 28, 1999, no such agreements were outstanding. Foreign Currency Contracts: As of May 3, 2000 and April 28, 1999, the company held currency swap contracts with an aggregate notional amount of approximately $90 million and $110 million, respectively. As of May 3, 2000, these contracts mature in 2002. The company held separate contracts to purchase certain foreign currencies as of May 3, 2000 and April 28, 1999 totaling approximately $490 million and $510 million, respectively, which mature within one year of the respective fiscal year-end. The company also held separate contracts to sell certain foreign currencies as of May 3, 2000 and April 28, 1999 of approximately $105 million and $390 million, respectively. As of May 3, 2000, these contracts mature in 2001 and 2002. Net unrealized gains and losses associated with the company's foreign currency contracts as of May 3, 2000 and April 28, 1999 were not material. Commodity Contracts: As of May 3, 2000 and April 28, 1999, the notional values and unrealized gains or losses related to commodity contracts held by the company were not material. Fair Value of Financial Instruments: The company's significant financial instruments include cash and cash equivalents, short- and long-term investments, short- and long-term debt, currency exchange agreements, interest rate swaps and guarantees. In evaluating the fair value of significant financial instruments, the company generally uses quoted market prices of the same or similar instruments or calculates an estimated fair value on a discounted cash flow basis using the rates available for instruments with the same remaining maturities. As of May 3, 2000 and April 28, 1999, the fair value of financial instruments held by the company approximated the recorded value. Concentrations of Credit Risk: Counterparties to currency exchange and interest rate derivatives consist of large major international financial institutions. The company continually monitors its positions and the credit ratings of the counterparties involved and, by policy, limits the amount of credit exposure to any one party. While the company may be exposed to potential losses due to the credit risk of non- performance by these counterparties, losses are not anticipated. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers, generally short payment terms, and their dispersion across geographic areas. 66 38 13. NET INCOME The following table sets forth the computation of basic and PER COMMON diluted earnings per share in accordance with the provisions SHARE of SFAS No. 128. May 3, April 28, April 29, Fiscal year ended 2000 1999 1998 ------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) (53 Weeks) (52 Weeks) (52 Weeks) ------------------------------------------------------------------------------ Net income per share - basic: Net income $ 890,553 $ 474,341 $ 801,566 Preferred dividends 26 30 37 ------------------------------------------------------------------------------ Net income applicable to common stock $ 890,527 $ 474,311 $ 801,529 Average common shares outstanding - basic 355,273 361,204 365,982 Net income per share - basic $ 2.51 $ 1.31 $ 2.19 Net income per share - diluted: Net income $ 890,553 $ 474,341 $ 801,566 Average common shares outstanding 355,273 361,204 365,982 Effect of dilutive securities: Convertible preferred stock 218 243 297 Stock options 4,604 6,383 6,674 ------------------------------------------------------------------------------ Average common shares outstanding - diluted 360,095 367,830 372,953 Net income per share - diluted $ 2.47 $ 1.29 $ 2.15 ------------------------------------------------------------------------------ Stock options outstanding of 11.7 million, 6.0 million and 2.0 million as of May 3, 2000, April 28, 1999 and April 29, 1998, respectively, were not included in the above net income per diluted share calculations because to do so would have been antidilutive for the periods presented. 14. SEGMENT The company's segments are primarily organized by INFORMATION geographical area. The composition of segments and measure of segment profitability is consistent with that used by the company's management. Descriptions of the company's reportable segments are as follows: _ North American Grocery & Foodservice - This segment consists of Heinz U.S.A., Heinz Pet Products, Star-Kist Seafood and Heinz Canada. This segment's operations include products in all of the company's core categories. _ North American Frozen - This segment consists of Heinz Frozen Food Company, which markets frozen potatoes, entrees and appetizers. _ Europe - This segment includes the company's operations in Europe and sells products in all of the company's core categories. _ Asia/Pacific - This segment includes the company's operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and India. This segment's operations include products in all of the company's core categories. _ Other Operating Entities - This segment includes the company's Weight Watchers classroom business through September 29, 1999, the date of divestiture, as well as the company's operations in Africa, Venezuela and other areas which sell products in all of the company's core categories. The company's management evaluates performance based on several factors; however, the primary measurement focus is operating income excluding unusual costs and gains. The accounting policies used are the same as those described in Note 1, "Significant Accounting Policies." Intersegment sales are accounted for at current market values. Items below the operating income line of the Consolidated Statements of Income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by the company's management. 67 39 The following table presents information about the company's reportable segments.
Fiscal year ended May 3, 2000 April 28, 1999 April 29, 1998 May 3, 2000 April 28, 1999 April 29, 1998 ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) (53 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) ----------------------------------------------------------------------------------------------------------------------------------- Net External Sales Intersegment Sales --------------------------------------------------- ---------------------------------------------- North American Grocery & Foodservice $ 4,124,060 $ 4,062,683 $ 3,935,269 $ 37,987 $ 32,144 $ 28,492 North American Frozen 1,023,915 1,014,370 1,076,080 12,782 21,131 14,467 Europe 2,583,684 2,460,698 2,332,594 2,687 6,661 3,756 Asia/Pacific 1,196,049 1,011,764 1,072,856 2,853 13 - Other Operating Entities 480,241 750,095 792,485 2,526 6,971 6,298 Non-Operating (a) - - - (58,835) (66,920) (53,013) ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Totals $ 9,407,949 $ 9,299,610 $ 9,209,284 $ - $ - $ - ----------------------------------------------------------------------------------------------------------------------------------- Operating Income (Loss) Operating Income (Loss) Excluding Special Items (b) ---------------------------------------------- ---------------------------------------------- North American Grocery & Foodservice $ 694,449 $ 716,979 $ 797,191 $ 875,268 $ 834,629 $ 825,981 North American Frozen 152,018 80,231 258,199 181,511 183,409 170,732 Europe 364,207 246,187 386,874 502,302 467,159 405,425 Asia/Pacific 124,125 89,830 136,501 177,454 145,654 142,348 Other Operating Entities 540,155 95,715 53,677 77,004 121,950 63,586 Non-Operating (a) (141,855) (119,630) (112,112) (102,337) (99,792) (100,219) ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Totals $ 1,733,099 $ 1,109,312 $ 1,520,330 $ 1,711,202 $ 1,653,009 $ 1,507,853 ----------------------------------------------------------------------------------------------------------------------------------- Depreciation and Amortization Expense Capital Expenditures (c) ---------------------------------------------- ---------------------------------------------- North American Grocery & Foodservice $ 133,471 $ 121,363 $ 117,739 $ 171,295 $ 138,081 $ 121,783 North American Frozen 36,480 39,773 41,855 79,575 35,293 34,244 Europe 81,802 85,408 84,583 127,595 100,569 90,829 Asia/Pacific 28,871 20,549 30,406 60,795 25,209 53,856 Other Operating Entities 13,066 23,278 28,291 8,495 12,757 40,076 Non-Operating (a) 12,793 11,841 10,748 4,689 4,814 32,966 ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Totals $ 306,483 $ 302,212 $ 313,622 $ 452,444 $ 316,723 $ 373,754 ----------------------------------------------------------------------------------------------------------------------------------- Identifiable Assets ---------------------------------------------- North American Grocery & Foodservice $ 3,711,691 $ 3,418,096 $3,248,068 North American Frozen 882,225 832,226 918,807 Europe 2,781,238 2,208,208 2,230,857 Asia/Pacific 1,085,491 998,685 839,176 Other Operating Entities 187,684 374,852 564,391 Non-Operating (d) 202,328 221,567 222,122 ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Totals $ 8,850,657 $ 8,053,634 $ 8,023,421 -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. (b) Fiscal year ended May 3, 2000: Excludes net restructuring and implementation costs of Operation Excel as follows: North American Grocery & Foodservice $160.8 million, North American Frozen $29.5 million, Europe $138.1 million, Asia/Pacific $53.3 million, Other Operating Entities $1.5 million and Non-Operating $9.5 million. Excludes costs related to Ecuador in North American Grocery & Foodservice $20.0 million. Excludes the gain on the sale of the Weight Watchers classroom business in Other Operating Entities $464.6 million. Excludes the Foundation contribution in Non-Operating $30.0 million. Fiscal year ended April 28, 1999: Excludes restructuring and implementation costs of Operation Excel as follows: North American Grocery & Foodservice $110.4 million, North American Frozen $116.9 million, Europe $225.1 million, Asia/Pacific $52.9 million, Other Operating Entities $29.2 million and Non- Operating $18.3 million. Excludes costs related to the implementation of Project Millennia as follows: North American Grocery & Foodservice $7.2 million, North American Frozen $2.9 million, Europe $4.9 million, Asia/Pacific $3.0 million, Other Operating Entities $2.8 million and Non-Operating $1.5 million. Excludes the gain on the sale of the bakery division in Other Operating Entities of $5.7 million. Excludes the reversal of unutilized Project Millennia accruals for severance and exit costs in North American Frozen and Europe of $16.6 million and $9.1 million, respectively. Fiscal year ended April 29, 1998: Excludes costs related to the implementation of Project Millennia as follows: North American Grocery & Foodservice $28.8 million, North American Frozen $9.1 million, Europe $18.6 million, Asia/ Pacific $5.8 million, Other Operating Entities $9.9 million and Non-Operating $11.9 million. Excludes the North American Frozen gain on the sale of the Ore- Ida frozen foodservice business of $96.6 million. (c) Excludes property, plant and equipment obtained through acquisitions. (d) Includes identifiable assets not directly attributable to operating segments. 68 40 The company's revenues are generated via the sale of products in the following categories: (Unaudited) May 3, April 28, April 29, Fiscal year ended 2000 1999 1998 ------------------------------------------------------------------------------ (Dollars in thousands) (53 Weeks) (52 Weeks) (52 Weeks) ------------------------------------------------------------------------------ Ketchup, condiments and sauces $ 2,439,109 $ 2,230,403 $ 2,046,578 Frozen foods 1,561,488 1,399,111 1,473,228 Tuna 1,059,317 1,084,847 1,080,576 Soups, beans and pasta meals 1,197,466 1,117,328 1,085,438 Infant foods 1,041,401 1,039,781 986,203 Pet products 1,237,671 1,287,356 1,315,774 Other 871,497 1,140,784 1,221,487 ------------------------------------------------------------------------------ Total $ 9,407,949 $ 9,299,610 $ 9,209,284 ------------------------------------------------------------------------------ The company has significant sales and long-lived assets in the following geographic areas. Sales are based on the location in which the sale originated. Long-lived assets include property, plant and equipment, goodwill, trademarks and other intangibles, net of related depreciation and amortization.
Net External Sales Long-Lived Assets ------------------------------------------- ----------------------------------------------- Fiscal year ended May 3, 2000 April 28, 1999 April 29, 1998 May 3, 2000 April 28, 1999 April 29, 1998 --------------------------------------------------------------------------- (Dollars in thousands) (53 Weeks) (52 Weeks) (52 Weeks) ---------------------------------------------------------------------------------------------------------------------------- United States $ 4,848,125 $ 4,917,967 $ 4,873,710 $ 2,705,735 $ 2,856,315 $ 2,885,359 United Kingdom 1,314,550 1,182,690 1,170,935 549,213 399,669 491,850 Other 3,245,274 3,198,953 3,164,639 1,515,535 1,385,404 1,393,505 ---------------------------------------------------------------------------------------------------------------------------- Total $ 9,407,949 $ 9,299,610 $ 9,209,284 $ 4,770,483 $ 4,641,388 $ 4,770,714 ----------------------------------------------------------------------------------------------------------------------------
15. QUARTERLY RESULTS (UNAUDITED)
2000 ------------------------------------------------------------------------------------- (Dollars in thousands, except First Second Third Fourth Total per share amounts) (13 Weeks) (13 Weeks) (13 Weeks) (14 Weeks) (53 Weeks) -------------------------------------------------------------------------------------------------------------------- Sales $ 2,181,007 $ 2,344,084 $ 2,294,637 $ 2,588,221 $ 9,407,949 Gross profit 856,750 912,440 902,750 947,484 3,619,424 Net income 206,668 415,498 171,112 97,275 890,553 Per Share Amounts: Net income - diluted $ 0.57 $ 1.14 $ 0.47 $ 0.27 $ 2.47 Net income - basic 0.58 1.16 0.48 0.27 2.51 Cash dividends 0.34 1/4 0.36 3/4 0.36 3/4 0.36 3/4 1.44 1/2 --------------------------------------------------------------------------------------------------------------------
1999 ------------------------------------------------------------------------------------- (Dollars in thousands, except First Second Third Fourth Total per share amounts) (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (52 Weeks) -------------------------------------------------------------------------------------------------------------------- Sales $ 2,228,230 $ 2,322,402 $ 2,282,062 $ 2,466,916 $ 9,299,610 Gross profit 868,453 936,399 852,580 697,311 3,354,743 Net income (loss) 213,787 231,332 120,554 (91,332) 474,341 Per Share Amounts: Net income (loss) - diluted $ 0.58 $ 0.63 $ 0.33 $ (0.25) $ 1.29 Net income (loss) - basic 0.59 0.64 0.33 (0.25) 1.31 Cash dividends 0.31 1/2 0.34 1/4 0.34 1/4 0.34 1/4 1.34 1/4 --------------------------------------------------------------------------------------------------------------------
69 41 The first quarter of Fiscal 2000 includes restructuring and implementation costs related to Operation Excel of $0.07 per share, costs related to Ecuador of $0.05 per share and the gain on the sale of an office building in the U.K. of $0.03 per share. The first quarter of Fiscal 1999 includes implementation costs related to Project Millennia of $0.02 per share. The second quarter of Fiscal 2000 includes restructuring and implementation costs related to Operation Excel of $0.17 per share, the gain on the sale of the Weight Watchers classroom business of $0.72 per share (see Note 3 to the Consolidated Financial Statements) and a pretax contribution to the H.J. Heinz Company Foundation of $0.05 per share. The second quarter of Fiscal 1999 includes implementation costs related to Project Millennia of $0.01 per share, reversal of unutilized Project Millennia accruals for severance and exit costs of $0.04 per share (see Note 4 to the Consolidated Financial Statements) and the gain on the sale of the bakery products unit (see Note 3 to the Consolidated Financial Statements). The third quarter includes restructuring and implementation costs related to Operation Excel of $0.15 per share in Fiscal 2000 and $0.27 in Fiscal 1999. The fourth quarter of Fiscal 2000 includes restructuring and implementation costs related to Operation Excel of $0.40 per share and a reversal of Fiscal 1999 Operation Excel accruals and asset write-downs of $0.04 per share, for net restructuring and implementation costs of $0.36 per share. The fourth quarter of Fiscal 1999 includes restructuring and implementation costs related to Operation Excel of $0.84 per share. 16. COMMITMENTS Legal Matters: Certain suits and claims have been filed AND against the company and have not been finally adjudicated. CONTINGENCIES These suits and claims when finally concluded and determined, in the opinion of management, based upon the information that it presently possesses, will not have a material adverse effect on the company's consolidated financial position, results of operations or liquidity. Lease Commitments: Operating lease rentals for warehouse, production and office facilities and equipment amounted to approximately $111.1 million in 2000, $99.5 million in 1999 and $98.3 million in 1998. Future lease payments for non- cancellable operating leases as of May 3, 2000 totaled $182.4 million (2001-$38.5 million, 2002-$29.5 million, 2003-$22.0 million, 2004-$19.7 million, 2005-$15.4 million and thereafter-$57.3 million). 17. ADVERTISING Advertising costs for fiscal years 2000, 1999 and 1998 were COSTS $374.0 million, $373.9 million and $363.1 million, respectively. 70 42 RESPONSIBILITY STATEMENTS RESPONSIBILITY FOR FINANCIAL STATEMENTS Management of H.J. Heinz Company is responsible for the preparation of the financial statements and other information included in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles, incorporating management's best estimates and judgments, where applicable. Management believes that the company's internal control systems provide reasonable assurance that assets are safe-guarded, transactions are recorded and reported appropriately, and policies are followed. The concept of reasonable assurance recognizes that the cost of a control procedure should not exceed the expected benefits. Management believes that its systems provide this appropriate balance. An important element of the company's control systems is the ongoing program to promote control consciousness throughout the organization. Management's commitment to this program is emphasized through written policies and procedures (including a code of conduct), an effective internal audit function and a qualified financial staff. The company engages independent public accountants who are responsible for performing an independent audit of the financial statements. Their report, which appears herein, is based on obtaining an understanding of the company's accounting systems and procedures and testing them as they deem necessary. The company's Audit Committee is composed entirely of outside directors. The Audit Committee meets regularly, and when appropriate separately, with the independent public accountants, the internal auditors and financial management to review the work of each and to satisfy itself that each is discharging its responsibilities properly. Both the independent public accountants and the internal auditors have unrestricted access to the Audit Committee. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of H.J. Heinz Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of H.J. Heinz Company and its subsidiaries (the "Company") at May 3, 2000 and April 28, 1999, and the results of its operations and its cash flows for each of the three years in the period ended May 3, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania June 14, 2000 ***** 71