10-Q 1 j8385601e10-q.txt QUARTERLY PERIOD ENDED AUGUST 2, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 2, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ FOR THE THREE MONTHS ENDED AUGUST 2, 2000 COMMISSION FILE NUMBER 1-3385 H. J. HEINZ COMPANY (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0542520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219 (Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 456-5700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes X No __ The number of shares of the Registrant's Common Stock, par value $.25 per share, outstanding as of September 7, 2000 was 346,829,322 shares. 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
First Quarter Ended ------------------------------- August 2, 2000 July 28, 1999 FY 2001 FY 2000 -------------- ------------- (Unaudited) (In Thousands, Except per Share Amounts) Sales....................................................... $2,153,492 $2,181,007 Cost of products sold....................................... 1,261,338 1,324,257 ---------- ---------- Gross profit................................................ 892,154 856,750 Selling, general and administrative expenses................ 509,496 475,777 ---------- ---------- Operating income............................................ 382,658 380,973 Interest income............................................. 5,641 5,285 Interest expense............................................ 81,059 62,592 Other income, net........................................... 2,165 4,373 ---------- ---------- Income before income taxes.................................. 309,405 328,039 Provision for income taxes.................................. 108,778 121,371 ---------- ---------- Net income.................................................. $ 200,627 $ 206,668 ========== ========== Net income per share--diluted............................... $ 0.57 $ 0.57 ========== ========== Average common shares outstanding--diluted.................. 351,128 364,176 ========== ========== Net income per share--basic................................. $ 0.58 $ 0.58 ========== ========== Average common shares outstanding--basic.................... 347,732 358,685 ========== ========== Cash dividends per share.................................... $ 0.3675 $ 0.3425 ========== ==========
See Notes to Condensed Consolidated Financial Statements. ------------------ 2 3 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
August 2, 2000 May 3, 2000* FY 2001 FY 2000 -------------- ------------ (Unaudited) (Thousands of Dollars) ASSETS Current Assets: Cash and cash equivalents................................... $ 128,130 $ 137,617 Short-term investments, at cost which approximates market... 14,652 16,512 Receivables, net............................................ 1,217,886 1,237,804 Inventories................................................. 1,667,990 1,599,906 Prepaid expenses and other current assets................... 214,561 178,110 ---------- ---------- Total current assets................................... 3,243,219 3,169,949 ---------- ---------- Property, plant and equipment............................... 4,347,487 4,347,747 Less accumulated depreciation............................... 1,980,698 1,988,994 ---------- ---------- Total property, plant and equipment, net............... 2,366,789 2,358,753 ---------- ---------- Goodwill, net............................................... 1,677,962 1,609,672 Trademarks, net............................................. 664,584 674,279 Other intangibles, net...................................... 125,018 127,779 Other non-current assets.................................... 1,004,965 910,225 ---------- ---------- Total other non-current assets......................... 3,472,529 3,321,955 ---------- ---------- Total assets........................................... $9,082,537 $8,850,657 ========== ==========
*Summarized from audited fiscal year 2000 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 3 4 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
August 2, 2000 May 3, 2000* FY 2001 FY 2000 -------------- ------------ (Unaudited) (Thousands of Dollars) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt............................................. $ 362,634 $ 151,168 Portion of long-term debt due within one year............... 22,508 25,407 Accounts payable............................................ 904,615 1,026,960 Salaries and wages.......................................... 46,760 48,646 Accrued marketing........................................... 204,804 200,775 Accrued restructuring costs................................. 93,536 125,704 Other accrued liabilities................................... 297,493 358,738 Income taxes................................................ 190,835 188,672 ---------- ---------- Total current liabilities.............................. 2,123,185 2,126,070 ---------- ---------- Long-term debt.............................................. 4,125,885 3,935,826 Deferred income taxes....................................... 286,410 271,831 Non-pension postretirement benefits......................... 209,040 208,958 Other liabilities........................................... 714,309 712,116 ---------- ---------- Total long-term debt and other liabilities............. 5,335,644 5,128,731 ---------- ---------- Shareholders' Equity: Capital stock............................................... 107,905 107,913 Additional capital.......................................... 307,885 304,318 Retained earnings........................................... 4,829,365 4,756,513 ---------- ---------- 5,245,155 5,168,744 Less: Treasury stock at cost (82,913,644 shares at August 2, 2000 and 83,653,233 shares at May 3, 2000)............. 2,904,180 2,920,471 Unearned compensation relating to the ESOP................ 6,058 7,652 Accumulated other comprehensive loss...................... 711,209 644,765 ---------- ---------- Total shareholders' equity............................. 1,623,708 1,595,856 ---------- ---------- Total liabilities and shareholders' equity............. $9,082,537 $8,850,657 ========== ==========
*Summarized from audited fiscal year 2000 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 4 5 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Quarter Ended ------------------------------- August 2, 2000 July 28, 1999 FY 2001 FY 2000 -------------- ------------- (Unaudited) (Thousands of Dollars) Cash (used for) provided by Operating Activities............ $(13,228) $ 48,971 -------- -------- Cash Flows from Investing Activities: Capital expenditures................................... (79,414) (69,475) Acquisitions, net of cash acquired..................... (130,463) (13,580) Purchases of short-term investments.................... (515,392) (438,969) Sales and maturities of short-term investments......... 522,482 441,647 Investment in The Hain Celestial Group, Inc............ (79,743) -- Other items, net....................................... (21,460) 18,307 -------- -------- Cash used for investing activities................ (303,990) (62,070) -------- -------- Cash Flows from Financing Activities: Payments on long-term debt............................. (11,397) (2,437) Proceeds from commercial paper and short-term borrowings, net...................................... 413,782 191,039 Proceeds from long-term debt........................... -- 1,168 Dividends.............................................. (127,775) (122,793) Purchases of treasury stock............................ (2,828) (44,204) Exercise of stock options.............................. 21,235 7,317 Other items, net....................................... 9,595 9,588 -------- -------- Cash provided by financing activities............. 302,612 39,678 -------- -------- Effect of exchange rate changes on cash and cash equivalents............................................... 5,119 4,486 -------- -------- Net (decrease) increase in cash and cash equivalents........ (9,487) 31,065 Cash and cash equivalents at beginning of year.............. 137,617 115,982 -------- -------- Cash and cash equivalents at end of period.................. $128,130 $147,047 ======== ========
See Notes to Condensed Consolidated Financial Statements. ------------------ 5 6 H. J. HEINZ COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on the results of operations and the financial position of the company. Those comments should be read in conjunction with these notes. The company's Annual Report to Shareholders for the fiscal year ended May 3, 2000 includes additional information about the company, its operations, and its financial position, and should be read in conjunction with this quarterly report on Form 10-Q. (2) The results for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the company's business. Certain prior year amounts have been reclassified in order to conform with the Fiscal 2001 presentation. (3) In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the results of operations of these interim periods have been included. (4) The composition of inventories at the balance sheet dates was as follows:
August 2, 2000 May 3, 2000 -------------- ----------- (Thousands of Dollars) Finished goods and work-in-process................. $1,315,743 $1,270,329 Packaging material and ingredients................. 352,247 329,577 ---------- ---------- $1,667,990 $1,599,906 ========== ==========
(5) The provision for income taxes consists of provisions for federal, state, U.S. possessions and foreign income taxes. The company operates in an international environment with significant operations in various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable tax rates. 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) In Fiscal 1999, the company announced a growth and restructuring initiative named "Operation Excel." This initiative 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. For more information regarding Operation Excel, please refer to the company's Annual Report to Shareholders for the fiscal year ended May 3, 2000. In the first quarter of Fiscal 2001, the company recognized costs related to the implementation of Operation Excel of $56.4 million pretax ($0.11 per share). [Note: All earnings per share amounts included in the Notes to Condensed Consolidated Financial Statements are presented on an after-tax diluted basis, unless otherwise noted.] These costs were primarily consulting fees, employee training and relocation costs, unaccruable severance costs associated with terminated employees, equipment relocation costs and commissioning costs. 6 7 During the first quarter of Fiscal 2001, the company utilized $31.7 million of severance and exit cost accruals, principally for the closure of the Harlesden factory in London, England; the relocation of the company's domestic seafood and pet food headquarters from Newport, Kentucky to Pittsburgh, Pennsylvania; and consolidating manufacturing capacity in the Asia/ Pacific region. The major components of the restructuring charges and implementation costs and the remaining accrual balances as of August 2, 2000 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--Fiscal 1999................... $ 294.9 $159.4 $ 45.3 $ 53.2 $ 552.8 Amounts utilized--Fiscal 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--Fiscal 2000................... 61.6 84.5 30.1 216.5 392.7 Amounts utilized--Fiscal 2000.......... (61.6) (86.3) (30.7) (216.5) (395.1) ------- ------ ------ ------- ------- Accrued restructuring costs--May 3, 2000................................. -- 90.3 34.9 -- 125.2 Implementation costs--Fiscal 2001...... -- -- -- 56.4 56.4 Amounts utilized--Fiscal 2001.......... -- (27.0) (4.7) (56.4) (88.1) ------- ------ ------ ------- ------- Accrued restructuring costs--August 2, 2000................................. $ -- $ 63.3 $ 30.2 $ -- $ 93.5 ======= ====== ====== ======= =======
The initiatives will result in the closure or exit of 21 factories or businesses. To date, 15 of these factories or businesses have been sold or closed. 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 1999 and Fiscal 2000, the company's workforce was reduced by approximately 3,200 employees. During the first quarter of Fiscal 2001, the company's workforce was reduced by 300 employees. (7) In the first quarter of Fiscal 2001, the company completed the acquisition of IDF Holdings, Inc., the parent of International DiverseFoods Inc. (IDF), a leading manufacturer of customized dressings, sauces, mixes and condiments for restaurant chains and foodservice distributors. The company also made a smaller acquisition. The above 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 dates. Final allocations of the purchase prices are not expected to differ significantly from the preliminary allocations. Operating results of the 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 acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. (8) On June 19, 2000, the company exercised its preemptive right to purchase an additional 2,582,774 shares of Hain for $79.7 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. 7 8 (9) The company's segments are primarily organized by 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 for the three months ended July 28, 1999, prior to 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. 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 not the primary measure of segment profitability reviewed by the company's management. 8 9 The following table presents information about the company's reportable segments:
First Quarter Ended ------------------------------- August 2, 2000 July 28, 1999 FY 2001 FY 2000 -------------- ------------- (Thousands of Dollars) Net external sales: North American Grocery & Foodservice...................... $ 932,577 $ 966,123 North American Frozen..................................... 227,190 212,412 Europe.................................................... 638,927 551,509 Asia/Pacific.............................................. 272,573 285,829 Other Operating Entities.................................. 82,225 165,134 ---------- ---------- Consolidated Totals....................................... $2,153,492 $2,181,007 ========== ========== Intersegment sales: North American Grocery & Foodservice...................... $ 9,580 $ 6,914 North American Frozen..................................... 2,850 2,964 Europe.................................................... 756 1,363 Asia/Pacific.............................................. 413 455 Other Operating Entities.................................. 1,008 1,454 Non-Operating (a)......................................... (14,607) (13,150) ---------- ---------- Consolidated Totals....................................... $ -- $ -- ========== ========== Operating income (loss): North American Grocery & Foodservice...................... $ 203,276 $ 186,890 North American Frozen..................................... 37,348 33,385 Europe.................................................... 117,905 107,341 Asia/Pacific.............................................. 36,337 35,931 Other Operating Entities.................................. 11,064 36,939 Non-Operating (a)......................................... (23,272) (19,513) ---------- ---------- Consolidated Totals....................................... $ 382,658 $ 380,973 ========== ========== Operating income (loss) excluding special items (b): North American Grocery & Foodservice...................... $ 226,275 $ 216,792 North American Frozen..................................... 42,822 42,684 Europe.................................................... 138,751 119,094 Asia/Pacific.............................................. 42,401 39,624 Other Operating Entities.................................. 11,064 36,939 Non-Operating (a)......................................... (22,297) (19,513) ---------- ---------- Consolidated Totals....................................... $ 439,016 $ 435,620 ========== ==========
--------------- (a) Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. (b) First Quarter ended August 2, 2000 - Excludes implementation costs of Operation Excel as follows: North American Grocery & Foodservice $23.0 million, North American Frozen $5.5 million, Europe $20.8 million, Asia/Pacific $6.1 million and Non-Operating $1.0 million. First Quarter ended July 28, 1999 - Excludes restructuring and implementation costs of Operation Excel as follows: North American Grocery & Foodservice $9.9 million, North American Frozen $9.3 million, Europe $11.7 million and Asia/Pacific $3.7 million. Excludes costs related to Ecuador in North American Grocery & Foodservice $20.0 million. 9 10 The company's revenues are generated via the sale of products in the following categories:
First Quarter Ended ------------------------------- August 2, 2000 July 28, 1999 FY 2001 FY 2000 -------------- ------------- (Thousands of Dollars) Ketchup, Condiments and Sauces.............................. $ 592,915 $ 611,612 Frozen Foods................................................ 419,745 301,080 Tuna........................................................ 257,809 271,618 Soups, Beans and Pasta Meals................................ 243,460 233,767 Infant Foods................................................ 223,084 231,401 Pet Products................................................ 276,616 294,337 Other....................................................... 139,863 237,192 ---------- ---------- Total................................................... $2,153,492 $2,181,007 ========== ==========
(10) The company's $2.30 billion credit agreement, which expires September 6, 2001, supports its commercial paper program. As of August 2, 2000, $2.29 billion of domestic commercial paper is classified as long-term debt due to the long-term nature of the supporting credit agreement. As of May 3, 2000, the company had $2.08 billion of domestic commercial paper outstanding and classified as long-term debt. (11) On September 12, 2000, the company's Board of Directors raised the quarterly dividend on the company's common stock to $0.39 1/4 per share from $0.36 3/4 per share, for an indicated annual rate of $1.57 per share. The dividend will be paid on October 10, 2000, to shareholders of record at the close of business on September 22, 2000. (12) The following table sets forth the computation of basic and diluted earnings per share in accordance with the provisions of SFAS No. 128.
First Quarter Ended ------------------------------ August 2, 2000 July 28, 1999 FY 2001 FY 2000 -------------- ------------- (In Thousands, Except per Share Amounts) Net income per share--basic: Net income................................................ $200,627 $206,668 Preferred dividends....................................... 6 7 -------- -------- Net income applicable to common stock..................... $200,621 $206,661 ======== ======== Average common shares outstanding--basic.................. 347,732 358,685 ======== ======== Net income per share--basic............................... $ 0.58 $ 0.58 ======== ======== Net income per share--diluted: Net income................................................ $200,627 $206,668 ======== ======== Average common shares outstanding......................... 347,732 358,685 Effect of dilutive securities: Convertible preferred stock............................. 184 234 Stock options........................................... 3,212 5,257 -------- -------- Average common shares outstanding--diluted................ 351,128 364,176 ======== ======== Net income per share--diluted............................. $ 0.57 $ 0.57 ======== ========
10 11 (13) Comprehensive income for all periods presented consisted of net income, foreign currency translation adjustments and the adjustment to the minimum pension liability. The components of comprehensive income, net of related tax, for the periods presented are as follows:
First Quarter Ended ------------------------------- August 2, 2000 July 28, 1999 FY 2001 FY 2000 -------------- ------------- (Thousands of Dollars) Net income.................................................. $200,627 $206,668 Other comprehensive income (loss): Foreign currency translation adjustment................. (63,408) (29,320) Minimum pension liability adjustment.................... (3,036) 1,984 -------- -------- Comprehensive income........................................ $134,183 $179,332 ======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATION EXCEL In Fiscal 1999, the company announced a growth and restructuring initiative named "Operation Excel." This initiative is a multi-year, multi-faceted program that will result in restructuring charges and implementation costs of approximately $1.1 billion. 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. The company anticipates that substantially all restructuring charges and implementation costs will be recognized by the end of Fiscal 2001. For more information regarding Operation Excel, please refer to the company's Annual Report to Shareholders for the fiscal year ended May 3, 2000. In the first quarter of Fiscal 2001, the company recognized costs related to the implementation of Operation Excel of $56.4 million pretax ($0.11 per share). [Note: All earnings per share amounts included in Management's Discussion and Analysis are presented on an after-tax diluted basis.] These costs were primarily consulting fees, employee training and relocation costs, unaccruable severance costs associated with terminated employees, equipment relocation costs and commissioning costs. See footnote 9 for a breakdown of Operation Excel restructuring and implementation costs by segment. During the first quarter of Fiscal 2001, the company utilized $31.7 million of severance and exit cost accruals, principally for the closure of the Harlesden factory in London, England; the relocation of the company's domestic seafood and pet food headquarters from Newport, Kentucky to Pittsburgh, Pennsylvania; and consolidating manufacturing capacity in the Asia/Pacific region. See footnote 6 for further information. The initiatives will result in the closure or exit of 21 factories or businesses. To date, 15 of these factories or businesses have been sold or closed. 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 1999 and Fiscal 2000, the company's workforce was reduced by approximately 3,200 employees. During the first quarter of Fiscal 2001, the company's workforce was reduced by 300 employees. The remaining factory closures and employee terminations are expected to be substantially completed within 12 months. The pretax savings generated from all Operation Excel initiatives was $70 million in Fiscal 2000 and are projected to grow to $145 million in Fiscal 2001, $215 million in Fiscal 2002, with non-cash savings of $15 million or less in any year. Fiscal 2001 savings are expected to be realized predominantly in the latter half of the year as the remaining factories or businesses are sold or closed. 11 12 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. THREE MONTHS ENDED AUGUST 2, 2000 AND JULY 28, 1999 RESULTS OF OPERATIONS For the three months ended August 2, 2000, sales decreased $27.5 million, or 1.3%, to $2,153.5 million from $2,181.0 million last year. Sales were unfavorably impacted by divestitures (5.5%), primarily the Weight Watchers classroom business, unfavorable foreign exchange translation rates (3.0%) and lower pricing (1.2%). Sales were favorably impacted by acquisitions (6.4%), primarily United Biscuit's European Frozen and Chilled Division, and increased volume (2.0%). Heinz's U.S. soups, ketchup and foodservice businesses had an excellent first quarter, but overall sales for the North American Grocery & Foodservice segment decreased $33.5 million, or 3.5%, due primarily to lower sales for StarKist tuna (reflecting tuna fish prices at a 34-year low) and canned pet food. Lower pricing reduced sales 1.9%, due mainly to StarKist tuna, and sales volume decreased 0.9%, reflecting reduced consumption of StarKist tuna in the quarter. Divestitures, net of acquisitions, reduced sales 0.5% and the impact of foreign exchange was negligible. North American Frozen's sales increased $14.8 million, or 7.0%. Sales volume increased 4.9% driven by Boston Market HomeStyle Frozen Meals and the continued momentum of Bagel Bites snacks. This increase was partially offset by a volume decline in frozen potatoes, related to the transition to the new Stand Up Resealable Packaging ("SURP"), which will be rolled out nationally in September 2000. Higher pricing increased sales 2.1%. Heinz Europe's sales increased $87.4 million, or 15.9%. Acquisitions, net of divestitures, increased sales 20.6%, due primarily to the acquisition of United Biscuit's European Frozen and Chilled Division. Sales volume increased 5.4%, driven primarily by the strength of seafood and convenience meals (soups, beans and pasta meals). Unfavorable foreign exchange translation rates reduced sales by 8.2% and lower pricing reduced sales by 1.9%. Sales in Asia/Pacific decreased $13.3 million, or 4.6%, primarily due to unfavorable exchange rates and, to a lesser extent, a weak quarter in the New Zealand Wattie's business. Acquisitions increased sales by 0.9% and sales volume increased 0.6%. Sales were reduced by 5.3% due to foreign exchange rates and by 0.8% due to lower pricing. Sales for Other Operating Entities decreased $82.9 million, or 50.2%. Divestitures, primarily the Fiscal 2000 disposal of the Weight Watchers classroom business, reduced sales 55.1%. Unfavorable foreign exchange reduced sales 2.9%. Sales volume increased 6.8% and favorable pricing increased sales 1.0%. The current year's first quarter was negatively impacted by additional Operation Excel implementation costs of $56.4 million pretax or $0.11 per share. Last year's first quarter was negatively impacted by a number of special items which net to $36.4 million pretax and $0.08 per share, and are summarized in the table below. These items include implementation costs of $24.7 million pretax ($0.05 per share) related to Operation Excel and an additional restructuring charge for Operation Excel of $9.9 million pretax ($0.02 per share). In April of 1999, the company became 12 13 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 and does not anticipate significant further losses. 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 United Kingdom. The following tables provide a comparison of the company's reported results and the results excluding special items for the first quarters of Fiscal 2001 and Fiscal 2000.
First Quarter Ended August 2, 2000 (Dollars in millions except per share amounts) ------------------------------------------ Gross Operating Net Profit Income Income Per Share ------ --------- ------ --------- Reported results............................ $892.2 $382.7 $200.6 $0.57 Operation Excel implementation costs...... 17.3 56.4 37.1 0.11 ------ ------ ------ ----- Results excluding special items............. $909.5 $439.0 $237.7 $0.68 ====== ====== ====== =====
First Quarter Ended July 28, 1999 ------------------------------------------ Gross Operating Net Profit Income Income Per Share ------ --------- ------ --------- Reported results.......................... $856.8 $381.0 $206.7 $ 0.57 Operation Excel restructuring costs..... 3.4 9.9 5.6 0.02 Operation Excel implementation costs.... 6.9 24.7 16.5 0.05 Ecuador expenses........................ 20.0 20.0 20.0 0.05 Gain on U.K. building sale.............. -- -- (11.8) (0.03) ------ ------ ------ ------ Results excluding special items........... $887.1 $435.6 $236.9 $ 0.65 ====== ====== ====== ======
(Note: Totals may not add due to rounding.) Gross profit increased $35.4 million, or 4.1%, to $892.2 million from $856.8 million and the gross profit margin increased to 41.4% from 39.3%. Excluding the special items noted above and the impact of the Weight Watchers classroom business, gross profit increased $75.2 million, or 9.0%, to $909.5 million from $834.3 million and the gross profit margin increased to 42.2% from 40.0%. Excluding only the special items noted above, gross profit increased $22.3 million, or 2.5%, to $909.5 million from $887.1 million and the gross profit margin increased to 42.2% from 40.7%. Gross profit in the North American Grocery & Foodservice segment increased $18.8 million or 5.0% due primarily to sales mix and savings from Operation Excel. North American Frozen's gross profit increased $6.5 million or 6.6%, due to increased sales and savings from Operation Excel. Europe's gross profit increased $44.2 million, or 18.8%, due primarily to increased sales volume and the acquisition of United Biscuit's European Frozen and Chilled Division, offset partially by unfavorable foreign exchange rates and lower pricing. The Asia/Pacific segment's gross profit increased $1.5 million, or 1.4%. Gross profit in the Other Operating Entities segment decreased $48.2 million, or 65.0%, due primarily to the divestiture of the Weight Watchers classroom business. Selling, general and administrative expenses ("SG&A") increased $33.7 million, or 7.1%, to $509.5 million from $475.8 million, and increased as a percentage of sales to 23.7% from 21.8%. Excluding the special items noted above and the impact of the Weight Watchers classroom business, SG&A increased $42.6 million, or 10.0%, to $470.4 million from $427.8 million and increased as a percentage of sales to 21.8% from 20.5%. Excluding only the special items noted above, SG&A increased $19.0 million, or 4.2%, to $470.4 million from $451.5 million and increased as a percentage of sales to 21.8% from 20.7%, primarily due to increased marketing and selling and distribution expenses. Operating income increased $1.7 million, or 0.4%, to $382.7 million from $381.0 million, and increased as a percentage of sales to 17.8% from 17.5%. Excluding the special items noted above 13 14 and the impact of the Weight Watchers classroom business, operating income increased $32.5 million, or 8.0%, to $439.0 million from $406.5 million and increased as a percentage of sales to 20.4% from 19.5%. Excluding only the special items noted above, operating income increased $3.4 million, or 0.8%, to $439.0 million from $435.6 million and increased as a percentage of sales to 20.4% from 20.0%. The North American Grocery & Foodservice segment's operating income increased $16.4 million, or 8.8%, to $203.3 million from $186.9 million. Excluding the special items noted above, operating income increased $9.5 million, or 4.4%, to $226.3 million from $216.8 million, due primarily to sales mix and Operation Excel savings. Additionally, excluding Star-Kist Seafood, operating income increased by 8.8%. The North American Frozen segment's operating income increased $4.0 million, or 11.9%, to $37.3 million from $33.4 million. Excluding the special items noted above, operating income increased $0.1 million, or 0.3%, to $42.8 million from $42.7 million, reflecting increased marketing spending behind Boston Market products and the national rollout of the SURP for Ore-Ida frozen potatoes. Europe's operating income increased $10.6 million, or 9.8%, to $117.9 million from $107.3 million. Excluding the special items noted above, operating income increased $19.7 million, or 16.5%, to $138.8 million from $119.1 million, and increased 25.1% on a constant currency basis. Europe's increase is primarily attributable to the acquisition of United Biscuit's European Frozen and Chilled Division, increased sales volume and savings from Operation Excel, offset partially by unfavorable foreign exchange rates, increased marketing expenses and lower pricing. Asia/Pacific's operating income increased $0.4 million, or 1.1%, to $36.3 million from $35.9 million. Excluding the special items noted above, operating income increased $2.8 million, or 7.0%, to $42.4 million from $39.6 million, and increased 15.3% on a constant currency basis. Heinz affiliates in Australia, China and Indonesia performed well, as sales volumes and operating income were strong, offset by unfavorable foreign exchange rates and a weak quarter in the New Zealand Wattie's business. Other Operating Entities' operating income decreased $25.9 million, or 70.0%, due primarily to the divestiture of the Weight Watchers classroom business in the second quarter of last year. Net interest expense increased $18.1 million to $75.4 million from $57.3 million last year, driven primarily by increased borrowings resulting from share repurchases and acquisitions over the past year. Other income decreased $2.2 million to $2.2 million from $4.4 million last year. Last year's first quarter included a gain of $18.2 million on the sale of an office building in the U.K., partially offset by favorable currency gains in the current year. The effective tax rate for the current quarter was 35.2% compared to 37.0% last year. Excluding the special items noted above, the effective rate was 35.0% for both periods. Net income in the current quarter was $200.6 million compared to $206.7 million last year and diluted earnings per share was $0.57 in both periods. Excluding the special items noted above and the impact of the Weight Watchers classroom business, net income increased $14.0 million, or 6.2%, to $237.7 million from $223.8 million, and diluted earnings per share increased 11.5%, to $0.68 from $0.61 last year. Excluding only the special items noted above, net income increased to $237.7 million from $236.9 million last year, and diluted earnings per share increased 4.6%, to $0.68 from $0.65 last year. LIQUIDITY AND FINANCIAL POSITION Cash used for operating activities was $13.2 million compared to cash provided by operating activities of $49.0 million last year. The decrease in Fiscal 2001 versus Fiscal 2000 is primarily due 14 15 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 totaled $304.0 million compared to $62.1 million last year. Acquisitions in the current period required $130.5 million, due primarily to the purchase of International DiverseFoods Inc. Acquisitions in the prior period required $13.6 million, due primarily to the purchase of Thermo Pac, Inc. During the current period, the company invested $79.7 million in The Hain Celestial Group, Inc. Capital expenditures in the current quarter required $79.4 million compared to $69.5 million last year. Cash provided by financing activities increased to $302.6 million from $39.7 million last year. Proceeds from commercial paper and short-term borrowings provided $413.8 million compared to $191.0 million last year. Cash provided from stock options exercised totaled $21.2 million versus $7.3 million last year. Dividend payments totaled $127.8 million compared to $122.8 million for the same period last year. Share repurchases required $2.8 million (0.1 million shares) versus $44.2 million (0.9 million shares) in last year's first quarter. Payments on long-term debt required $11.4 million this quarter compared to $2.4 million last year. In the first quarter of Fiscal 2001, the cash requirements of Operation Excel were $127.8 million, consisting of spending for severance and exit costs ($31.7 million), capital expenditures ($39.7 million) and implementation costs ($56.4 million). The company's $2.30 billion credit agreement, which expires September 6, 2001, supports its commercial paper program. As of August 2, 2000, $2.29 billion of domestic commercial paper is classified as long-term debt due to the long-term nature of the supporting credit agreement. As of May 3, 2000, the company had $2.08 billion of domestic commercial paper outstanding and classified as long-term debt. On September 12, 2000, the company's Board of Directors raised the quarterly dividend on the company's common stock to $0.39 1/4 per share from $0.36 3/4 per share, for an indicated annual rate of $1.57 per share. The dividend will be paid on October 10, 2000, to shareholders of record at the close of business on September 22, 2000. 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 fourth 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 pro- 15 16 vides 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. The company's financial position remains 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. OTHER MATTERS On September 12, 2000 the company's Board of Directors elected William R. Johnson as Chairman, effective immediately. Mr. Johnson succeeds Anthony J.F. O'Reilly, who retired on September 12, 2000, following the annual shareholders meeting held in Pittsburgh, PA. In addition to his new responsibilities as Chairman, Mr. Johnson will continue to serve as President and Chief Executive Officer of the H.J. Heinz Company. He was named President and Chief Operating Officer in June 1996 and CEO on April 30, 1998. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the company's market risk during the three months ended August 2, 2000. For additional information, refer to pages 42-44 of the company's Annual Report to Shareholders for the fiscal year ended May 3, 2000. 16 17 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Nothing to report under this item. ITEM 2. CHANGES IN SECURITIES Nothing to report under this item. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Nothing to report under this item. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Nothing to report under this item. ITEM 5. OTHER INFORMATION See Note 7 to the Condensed Consolidated Financial Statements in Part I--Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part I--Item 2 of this Quarterly Report on Form 10-Q. This report contains forward-looking statements regarding the company's future performance. These forward-looking statements are based on management's views and assumptions, and involve risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These include, but are not limited to, sales, earnings and volume growth, competitive conditions, production costs, currency valuations (notably the euro and the pound sterling), global economic and industry conditions, achieving cost savings programs, success of acquisitions and new product and packaging innovations and other factors described in "Cautionary Statement Relevant to Forward-Looking Information" in the company's Form 10-K for the fiscal year ended May 3, 2000, as updated from time to time by the company in its subsequent filings with the Securities and Exchange Commission. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be furnished by Item 601 of Regulation S-K are listed below and are filed as part hereof. The registrant has omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant agrees to furnish such documents to the Commission upon request. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 10(a)(vii) H.J. Heinz Company Executive Deferred Compensation Plan. 12. Computation of Ratios of Earnings to Fixed Charges. 27. Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended August 2, 2000. 17 18 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. H. J. HEINZ COMPANY (Registrant) Date: September 14, 2000 By: /s/ PAUL F. RENNE .......................................... Paul F. Renne Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: September 14, 2000 By: /s/ WILLIAM J. SHOWALTER .......................................... William J. Showalter Vice President and Corporate Controller (Principal Accounting Officer) 18