-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Byu/U9L2dUmUbrehoD+V7ip7C12lNA81M/zFzpNKJSt96NiE5Up4MSJCQMbllTLb szXhTITUH9cE3vV9YKrTkg== 0000950128-01-500734.txt : 20020413 0000950128-01-500734.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950128-01-500734 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEINZ H J CO CENTRAL INDEX KEY: 0000046640 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 250542520 STATE OF INCORPORATION: PA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03385 FILM NUMBER: 1812876 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219 BUSINESS PHONE: 4124565700 MAIL ADDRESS: STREET 1: P O BOX 57 STREET 2: P O BOX 57 CITY: PITTSBURGH STATE: PA ZIP: 15230 10-Q 1 j9099401e10-q.txt H. J. HEINZ 10-Q 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 OCTOBER 31, 2001 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 SIX MONTHS ENDED OCTOBER 31, 2001 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 December 7, 2001 was 350,045,875 shares. PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Second Quarter Ended ------------------------------------ October 31, 2001 November 1, 2000 FY 2002 FY 2001 ---------------- ---------------- (Unaudited) (In Thousands, Except per Share Amounts) Sales...................................................... $2,565,161 $2,296,478 Cost of products sold...................................... 1,551,603 1,383,126 ---------- ---------- Gross profit............................................... 1,013,558 913,352 Selling, general and administrative expenses............... 612,389 530,965 ---------- ---------- Operating income........................................... 401,169 382,387 Interest income............................................ 4,269 5,658 Interest expense........................................... 75,083 82,061 Other expenses, net........................................ 9,985 16,878 ---------- ---------- Income before income taxes................................. 320,370 289,106 Provision for income taxes................................. 112,129 99,073 ---------- ---------- Net income................................................. $ 208,241 $ 190,033 ========== ========== Net income per share--diluted.............................. $ 0.59 $ 0.54 ========== ========== Average common shares outstanding--diluted................. 352,652 350,575 ========== ========== Net income per share--basic................................ $ 0.60 $ 0.55 ========== ========== Average common shares outstanding--basic................... 349,516 347,218 ========== ========== Cash dividends per share................................... $ 0.4050 $ 0.3925 ========== ==========
See Notes to Condensed Consolidated Financial Statements. ------------------ 2 H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended ------------------------------------ October 31, 2001 November 1, 2000 FY 2002 FY 2001* ---------------- ---------------- (Unaudited) (In Thousands, Except per Share Amounts) Sales...................................................... $4,750,640 $4,467,989 Cost of products sold...................................... 2,866,619 2,655,702 ---------- ---------- Gross profit............................................... 1,884,021 1,812,287 Selling, general and administrative expenses............... 1,098,698 1,041,359 ---------- ---------- Operating income........................................... 785,323 770,928 Interest income............................................ 9,627 11,299 Interest expense........................................... 150,630 163,120 Other expenses, net........................................ 11,743 14,713 ---------- ---------- Income before income taxes and cumulative effect of accounting change........................................ 632,577 604,394 Provision for income taxes................................. 223,862 209,910 ---------- ---------- Income before cumulative effect of accounting change....... 408,715 394,484 Cumulative effect of accounting change..................... -- (16,471) ---------- ---------- Net income................................................. $ 408,715 $ 378,013 ========== ========== Net income per share--diluted.............................. $ 1.16 $ 1.08 ========== ========== Average common shares outstanding--diluted................. 352,652 350,575 ========== ========== Net income per share--basic................................ $ 1.17 1.09 ========== ========== Average common shares outstanding--basic................... 349,516 347,218 ========== ========== Cash dividends per share................................... $ 0.7975 $ 0.76 ========== ==========
* Restated, see Note 7. See Notes to Condensed Consolidated Financial Statements. ------------------ 3 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, 2001 May 2, 2001* FY 2002 FY 2001 ---------------- ------------ (Unaudited) (Thousands of Dollars) ASSETS Current Assets: Cash and cash equivalents................................... $ 178,347 $ 138,849 Short-term investments, at cost which approximates market... 1,893 5,371 Receivables, net............................................ 1,452,044 1,383,550 Inventories................................................. 1,718,438 1,407,961 Prepaid expenses and other current assets................... 296,431 181,083 ----------- ---------- Total current assets................................... 3,647,153 3,116,814 ----------- ---------- Property, plant and equipment............................... 3,920,610 3,880,780 Less accumulated depreciation............................... 1,705,642 1,712,400 ----------- ---------- Total property, plant and equipment, net............... 2,214,968 2,168,380 ----------- ---------- Goodwill, net............................................... 2,655,638 2,077,451 Trademarks, net............................................. 733,937 567,692 Other intangibles, net...................................... 122,173 120,749 Other non-current assets.................................... 1,081,281 984,064 ----------- ---------- Total other non-current assets......................... 4,593,029 3,749,956 ----------- ---------- Total assets........................................... $10,455,150 $9,035,150 =========== ==========
*Summarized from audited fiscal year 2001 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 4 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, 2001 May 2, 2001* FY 2002 FY 2001 ---------------- ------------ (Unaudited) (Thousands of Dollars) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt............................................. $ 213,312 $1,555,869 Portion of long-term debt due within one year............... 312,925 314,965 Accounts payable............................................ 1,019,407 962,497 Salaries and wages.......................................... 53,531 54,036 Accrued marketing........................................... 143,380 146,138 Accrued restructuring costs................................. 87,838 134,550 Other accrued liabilities................................... 507,899 388,582 Income taxes................................................ 143,405 98,460 ----------- ---------- Total current liabilities.............................. 2,481,697 3,655,097 ----------- ---------- Long-term debt.............................................. 5,115,456 3,014,853 Deferred income taxes....................................... 272,789 253,690 Non-pension postretirement benefits......................... 208,016 207,104 Other liabilities and minority interest..................... 853,641 530,679 ----------- ---------- Total long-term debt, other liabilities and minority interest.................................................. 6,449,902 4,006,326 Shareholders' Equity: Capital stock............................................... 107,890 107,900 Additional capital.......................................... 342,830 331,633 Retained earnings........................................... 4,827,146 4,697,213 ----------- ---------- 5,277,866 5,136,746 Less: Treasury stock at cost (81,071,016 shares at October 31, 2001 and 82,147,565 shares at May 2, 2001)............. 2,915,591 2,922,630 Unearned compensation relating to the ESOP................ 1,724 3,101 Accumulated other comprehensive loss...................... 837,000 837,288 ----------- ---------- Total shareholders' equity............................. 1,523,551 1,373,727 ----------- ---------- Total liabilities and shareholders' equity............. $10,455,150 $9,035,150 =========== ==========
*Summarized from audited fiscal year 2001 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 5 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended ----------------------------------- October 31, 2001 November 1, 2000 FY 2002 FY 2001 ---------------- ---------------- (Unaudited) (Thousands of Dollars) Cash provided by (used for) Operating Activities............ $ 197,923 $ (1,798) --------- --------- Cash Flows from Investing Activities: Capital expenditures................................... (86,605) (170,852) Acquisitions, net of cash acquired..................... (805,538) (126,502) Proceeds from divestitures............................. 31,889 85,508 Purchases of short-term investments.................... (1,731) (876,567) Sales and maturities of short-term investments......... 11 858,458 Investment in The Hain Celestial Group, Inc............ -- (79,743) Other items, net....................................... (8,534) (10,606) --------- --------- Cash used for investing activities................ (870,508) (320,304) --------- --------- Cash Flows from Financing Activities: Payments on long-term debt............................. (32,182) (19,087) (Payments on) proceeds from commercial paper and short- term borrowings, net................................. (88,032) 688,909 Proceeds from long-term debt........................... 768,307 915 Proceeds from preferred stock of subsidiary............ 325,000 -- Dividends.............................................. (278,782) (263,779) Purchases of treasury stock............................ (45,365) (90,110) Exercise of stock options.............................. 46,441 31,535 Other items, net....................................... 10,284 9,204 --------- --------- Cash provided by financing activities............. 705,671 357,587 --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................... 6,412 (8,835) --------- --------- Net increase in cash and cash equivalents................... 39,498 26,650 Cash and cash equivalents at beginning of year.............. 138,849 137,617 --------- --------- Cash and cash equivalents at end of period.................. $ 178,347 $ 164,267 ========= =========
See Notes to Condensed Consolidated Financial Statements. ------------------ 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 2, 2001 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 2002 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) INVENTORIES The composition of inventories at the balance sheet dates was as follows:
October 31, 2001 May 2, 2001 ---------------- ----------- (Thousands of Dollars) Finished goods and work-in-process.................. $1,304,539 $1,095,954 Packaging material and ingredients.................. 413,899 312,007 ---------- ---------- $1,718,438 $1,407,961 ========== ==========
(5) RESTRUCTURING In the fourth quarter of Fiscal 2001, the company announced a restructuring initiative named "Streamline". This initiative includes a worldwide organizational restructuring aimed at reducing overhead costs, the closure of the company's tuna operations in Puerto Rico, the consolidation of the company's North American canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at the company's Terminal Island, California facility), and the divestiture of the company's U.S. fleet of fishing boats and related equipment. For more information regarding Streamline, refer to the company's Annual Report to Shareholders for the fiscal year ended May 2, 2001. The major components of the restructuring charges and implementation costs and the remaining accrual balances as of October 31, 2001 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 2001................... $ 110.5 $110.3 $ 55.4 $ 22.6 $ 298.8 Amounts utilized--Fiscal 2001.......... (110.5) (39.5) (4.7) (22.6) (177.3) ------- ------ ------ ------ ------- Accrued restructuring costs-- May 2, 2001................................. -- 70.8 50.7 -- 121.5 Restructuring and implementation costs--Fiscal 2002................... -- 5.7 -- 10.4 16.1 Amounts utilized--Fiscal 2002.......... -- (39.9) (8.6) (10.4) (58.9) ------- ------ ------ ------ ------- Accrued restructuring costs--October 31, 2001............................. $ -- $ 36.6 $ 42.1 $ -- $ 78.7 ======= ====== ====== ====== =======
7 During the first six months of Fiscal 2002, the company recognized restructuring charges and implementation costs totaling $16.1 million pretax ($0.04 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.] Pretax charges of $8.7 million were classified as cost of products sold and $7.4 million as selling, general and administrative expenses ("SG&A"). Implementation costs ($10.4 million pretax) were primarily cost premiums related to production transfers, consulting costs and relocation costs. During the first six months of Fiscal 2002, the company utilized $48.5 million of severance and exit cost accruals, principally for the closure of the company's tuna operations in Puerto Rico, ceasing canned pet food production in its Terminal Island, California facility and its global overhead reduction plan, primarily in Europe and North America. (6) ACQUISITIONS During the second quarter of Fiscal 2002, the company acquired Anchor Food Products branded retail business which includes the retail licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers and the Poppers brand of retail appetizer lines. Also during the second quarter of Fiscal 2002, the Company completed the acquisition of Delimex Holdings, Inc., a leading maker of frozen Mexican food products. Delimex is a leading U.S. producer of frozen taquitos, tightly rolled fried corn and flour tortillas with fillings such as beef, chicken or cheese. Delimex also makes quesadillas, tamales and rice bowls. During the first quarter of Fiscal 2002, the company completed the acquisition of Borden Food Corporation's pasta sauce, dry bouillon and soup business. Under this transaction, the company acquired such brands as Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups. 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. (7) RECENTLY ADOPTED ACCOUNTING STANDARDS In Fiscal 2001, the company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". Under the new accounting method, adopted retroactive to May 4, 2000, the company recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The cumulative effect adjustment of $16.5 million in net income as of May 4, 2000 was recognized during the first quarter of Fiscal 2001. The Fiscal 2001 first six month amounts have been restated for the effect of the change in accounting for revenue recognition. Amounts originally reported were as follows: Sales, $4.45 billion; Gross profit, $1.81 billion; Net income, $390.7 million; Net income per share - diluted, $1.11; Net income per share - basic, $1.13. (8) RECENTLY ISSUED ACCOUNTING STANDARDS In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued new guidelines entitled "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products". In addition, during May 2000, the EITF issued new guidelines entitled "Accounting for Certain Sales Incentives". Both of these issues provide guidance primarily on income statement classification of consideration from a vendor to a purchaser of the vendor's products, including both customers and consumers. Generally, 8 cash consideration is to be classified as a reduction of revenue, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. In the fourth quarter of Fiscal 2002, the company will reclassify promotional payments to its customers and the cost of consumer coupons and other cash redemption offers from SG&A to net sales. SG&A would be correspondingly reduced such that net earnings would not be affected. The company is currently assessing the impact both issues will have on net sales. In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually, and they provide guidelines for new disclosure requirements. These standards outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. The provisions of SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other intangible assets are required to be implemented in the first quarter of Fiscal 2003. The company is currently evaluating the impact of these standards on the consolidated financial statements. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS No. 144 clarifies and revises existing guidance on accounting for impairment of plant, property, and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other accounting literature. This standard will be effective for the company beginning in Fiscal 2003. The company does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. (9) SEGMENTS Descriptions of the company's reportable segments are as follows: Heinz North America--This segment markets ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels and includes the Canadian business. U.S. Pet Products and Seafood--This segment markets dry and canned pet food, pet snacks, tuna and other seafood. U.S. Frozen--This segment markets frozen potatoes, entrees, snacks 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 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 including net sales and the use of capital resources; 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, because they are not the primary measure of segment profitability reviewed by the company's management. Prior year quarterly segment information has been revised to conform with current quarter presentation. 9 The following table presents information about the company's reportable segments:
Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 31, 2001 November 1, 2000 October 31, 2001 November 1, 2000 FY 2002 FY 2001 FY 2002 FY 2001* ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) Net external sales: Heinz North America............... $ 704,656 $ 659,576 $1,279,558 $1,221,623 U.S. Pet Products and Seafood..... 394,227 379,755 739,693 754,304 U.S. Frozen....................... 342,507 288,596 581,008 517,760 ---------- ---------- ---------- ---------- North America Totals.............. 1,441,390 1,327,927 2,600,259 2,493,687 Europe............................ 750,622 623,211 1,437,479 1,262,638 Asia/Pacific...................... 262,219 261,724 507,038 545,823 Other Operating Entities.......... 110,930 83,616 205,864 165,841 ---------- ---------- ---------- ---------- Consolidated Totals............... $2,565,161 $2,296,478 $4,750,640 $4,467,989 ========== ========== ========== ========== Intersegment sales: Heinz North America............... $ 14,529 $ 9,787 $ 21,860 $ 20,509 U.S. Pet Products and Seafood..... 2,761 6,400 7,574 12,587 U.S. Frozen....................... 2,951 3,418 5,152 6,268 Europe............................ 1,042 1,422 2,416 2,178 Asia/Pacific...................... 937 568 1,229 981 Other Operating Entities.......... 17 1,021 17 2,029 Non-Operating (a)................. (22,237) (22,616) (38,248) (44,552) ---------- ---------- ---------- ---------- Consolidated Totals............... $ -- $ -- $ -- $ -- ========== ========== ========== ========== Operating income (loss): Heinz North America............... $ 165,313 $ 156,330 $ 283,784 $ 298,251 U.S. Pet Products and Seafood..... 46,458 35,245 103,999 96,203 U.S. Frozen....................... 61,092 59,640 105,328 97,269 ---------- ---------- ---------- ---------- North America Totals.............. 272,863 251,215 493,111 491,723 Europe............................ 119,431 107,244 270,002 225,949 Asia/Pacific...................... 24,815 22,713 50,951 64,249 Other Operating Entities.......... 14,977 18,920 26,910 29,984 Non-Operating (a)................. (30,917) (17,705) (55,651) (40,977) ---------- ---------- ---------- ---------- Consolidated Totals............... $ 401,169 $ 382,387 $ 785,323 $ 770,928 ========== ========== ========== ========== Operating income (loss) excluding special items (b): Heinz North America............... $ 165,313 $ 169,193 $ 288,658 $ 324,038 U.S. Pet Products and Seafood..... 46,458 69,871 111,794 140,904 U.S. Frozen....................... 61,092 62,905 105,328 106,008 ---------- ---------- ---------- ---------- North America Totals.............. 272,863 301,969 505,780 570,950 Europe............................ 119,431 124,368 271,717 263,919 Asia/Pacific...................... 24,815 39,987 51,549 87,587 Other Operating Entities.......... 14,977 7,857 26,910 18,921 Non-Operating (a)................. (30,917) (14,684) (54,458) (36,981) ---------- ---------- ---------- ---------- Consolidated Totals............... $ 401,169 $ 459,497 $ 801,498 $ 904,396 ========== ========== ========== ==========
*Restated, see Note 7. - --------------- (a) Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. (b) Second Quarter ended November 1, 2000 - Excludes implementation costs of Operation Excel as follows: Heinz North America $12.9 million, U.S. Pet Products and Seafood $34.6 million, U.S. Frozen $3.3 million, Europe $17.1 million, Asia/Pacific $17.3 million, Other Operating Entities ($11.1) million and Non-Operating $3.0 million. Six Months ended October 31, 2001 - Excludes implementation and restructuring costs of Streamline as follows: Heinz North America $4.9 million, U.S. Pet Products and Seafood $7.8 million, Europe $1.7 million, Asia/Pacific $0.6 million and Non-Operating $1.2 million. 10 Six Months ended November 1, 2000 - Excludes implementation costs of Operation Excel as follows: Heinz North America $25.8 million, U.S. Pet Products and Seafood $44.7 million, U.S. Frozen $8.7 million, Europe $38.0 million, Asia/Pacific $23.3 million, Other Operating Entities ($11.1) million and Non-Operating $4.0 million. (10) On May 3, 2001, the company reorganized its U.S. corporate structure by consolidating its U.S. business into two major entities: H. J. Heinz Finance Company (HFC) manages treasury functions and H. J. Heinz Company, L.P. (Heinz LP) owns or leases the operating assets and manages the business. HFC assumed primary liability for payment of the company's outstanding senior unsecured debt and accrued interest by becoming a co-obligor with the company. HFC's financial statements for the six months ended October 31, 2001 are attached as Exhibit 99. On July 6, 2001, HFC raised $325 million via the issuance of Voting Cumulative Preferred Stock, Series A with a liquidation preference of $100,000 per share. The Series A Preferred shares are entitled to receive quarterly dividends at a rate of 6.226% per annum and are required to be redeemed for cash on July 15, 2008. In addition, HFC issued $750 million of 6.625% Guaranteed Notes due July 15, 2011 which are guaranteed by the company. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings, financing acquisitions and ongoing operations. On September 6, 2001, the company, HFC and a group of domestic and international banks entered into a $1.50 billion credit agreement which expires in September 2006 and an $800 million credit agreement which expires in September 2002. These credit agreements, which support the company's commercial paper programs, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of October 31, 2001, $1.25 billion of domestic commercial paper was outstanding and classified as long-term debt due to the long-term nature of the supporting credit agreement. As of May 2, 2001, the company had $1.34 billion of domestic commercial paper outstanding and classified as short-term debt. (11) DIVIDENDS On September 17, 2001, the company's Board of Directors raised the quarterly dividend on the company's common stock to $0.4050 per share from $0.3925 per share, for an indicated annual rate of $1.62 per share. 11 (12) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share in accordance with the provisions of SFAS No. 128.
Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 31, 2001 November 1, 2000 October 31, 2001 November 1, 2000 FY 2002 FY 2001 FY 2002 FY 2001 ---------------- ---------------- ---------------- ---------------- (In Thousands, Except per Share Amounts) Income before cumulative effect of accounting change............... $208,241 $190,033 $408,715 $394,484 Preferred dividends............... 5 6 10 12 -------- -------- -------- -------- Income applicable to common stock before effect of accounting change.......................... 208,236 190,027 408,705 394,472 Cumulative effect of accounting change.......................... -- -- -- (16,471) -------- -------- -------- -------- Net income applicable to common stock........................... $208,236 $190,027 $408,705 $378,001 ======== ======== ======== ======== Average common shares outstanding--basic............ 349,516 347,218 349,516 347,218 Effect of dilutive securities: Convertible preferred stock... 166 181 166 181 Stock options................. 2,970 3,176 2,970 3,176 -------- -------- -------- -------- Average common shares outstanding--diluted.......... 352,652 350,575 352,652 350,575 Income per share before cumulative effect of accounting change-- basic........................... $ 0.60 $ 0.55 $ 1.17 $ 1.14 ======== ======== ======== ======== Net income per share--basic....... $ 0.60 $ 0.55 $ 1.17 $ 1.09 ======== ======== ======== ======== Income per share before cumulative effect of accounting change-- diluted......................... $ 0.59 $ 0.54 $ 1.16 $ 1.13 ======== ======== ======== ======== Net income per share--diluted... $ 0.59 $ 0.54 $ 1.16 $ 1.08 ======== ======== ======== ========
(13) COMPREHENSIVE INCOME
Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 31, 2001 November 1, 2000 October 31, 2001 November 1, 2000 FY 2002 FY 2001 FY 2002 FY 2001 ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) Net income........................ $208,241 $190,033 $408,715 $378,013 Other comprehensive income (loss): Foreign currency translation adjustment.................. 8,657 (131,367) (374) (194,775) Minimum pension liability adjustment.................. 1,018 1,503 1,158 (1,533) Deferred gains/(losses) on derivatives: Net change from periodic revaluations............ (1,056) -- (737) -- Net amount reclassified to earnings................ (2) -- 241 -- -------- -------- -------- -------- Comprehensive income.............. $216,858 $ 60,169 $409,003 $181,705 ======== ======== ======== ========
(14) FINANCIAL INSTRUMENTS The company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain financial instruments to manage its foreign currency, commodity price and interest rate exposures. FOREIGN CURRENCY HEDGING: The company uses forward contracts and currency swaps to mitigate its foreign currency exchange rate exposure due to anticipated purchases of raw materials and sales of finished goods, and future settlement of foreign currency denominated assets and liabilities. Hedges of anticipated transactions are designated as cash flow hedges, 12 and consequently, the effective portion of unrealized gains and losses is deferred as a component of accumulated other comprehensive loss and is recognized in earnings at the time the hedged item affects earnings. The company uses certain foreign currency debt instruments as net investment hedges of foreign operations. During the six months ended October 31, 2001, losses of $1.3 million, net of income taxes of $0.8 million, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive loss within unrealized translation adjustment. COMMODITY PRICE HEDGING: The company uses commodity futures and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow hedges. When using a commodity option as a hedging instrument, the company excludes the time value of the option from the assessment of hedge effectiveness. INTEREST RATE HEDGING: The company uses interest rate swaps to manage interest rate exposure. These derivatives are designated as cash flow hedges or fair value hedges depending on the nature of the particular risk being hedged. During Fiscal 2002, the company entered into interest rate swap agreements to convert the interest rate exposure on certain of the company's existing long-term debt from fixed to floating. The weighted average fixed rate of the associated debt is 6.433%. The aggregate notional amount of these swaps is $1.3 billion and their average duration is 12 years. HEDGE INEFFECTIVENESS: During the six months ended October 31, 2001, hedge ineffectiveness related to cash flow hedges was a net loss of $0.2 million, which is reported in the consolidated statements of income as other expenses. DEFERRED HEDGING GAINS AND LOSSES: As of October 31, 2001, the company is hedging forecasted transactions for periods not exceeding 18 months. During the next 12 months, the company expects $0.6 million of net deferred loss reported in accumulated other comprehensive loss to be reclassified to earnings. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STREAMLINE In the fourth quarter of Fiscal 2001, the company announced a restructuring initiative named "Streamline". This initiative includes a worldwide organizational restructuring aimed at reducing overhead costs, the closure of the company's tuna operations in Puerto Rico, the consolidation of the company's North American canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at the company's Terminal Island, California facility), and the divestiture of the company's U.S. fleet of fishing boats and related equipment. For more information regarding Streamline, please refer to the company's Annual Report to Shareholders for the fiscal year ended May 2, 2001. During the first quarter of Fiscal 2002, the company recognized restructuring charges and implementation costs totaling $16.1 million pretax ($0.04 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 $8.7 million were classified as cost of products sold and $7.4 million as selling, general and administrative expenses ("SG&A"). Implementation costs ($10.4 million pretax) were recognized as incurred and consisted of incremental costs directly related to the 13 implementation of the Streamline initiative. These include cost premiums related to production transfers, consulting costs and relocation costs. In Fiscal 2001, the company completed the closure of its tuna operations in Puerto Rico, ceased production of canned pet food in the company's Terminal Island, California facility and sold its U.S. fleet of fishing boats and related equipment. In addition, the company is continuing its implementation of its global overhead reduction plan. To date, these actions have resulted in a net reduction of the company's workforce of approximately 2,100 employees. THREE MONTHS ENDED OCTOBER 31, 2001 AND NOVEMBER 1, 2000 RESULTS OF OPERATIONS For the three months ended October 31, 2001, sales increased $268.7 million, or 11.7%, to $2,565.2 million from $2,296.5 million last year. Sales were favorably impacted by acquisitions (10.4%), higher pricing (3.0%) and higher volumes (0.9%) and unfavorably impacted by foreign exchange translation rates (0.5%) and divestitures (2.1%). The favorable impact of acquisitions is primarily related to Classico and Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups in the North America segment; Delimex frozen Mexican foods, Anchor's Poppers retail frozen appetizers and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers in the U.S. Frozen Segment; and the Honig brands of soups, sauces and pasta meals, HAK brand of vegetables packed in glass and KDR brand of sport drinks, juices, spreads and sprinkles in the Europe segment. Sales of the Heinz North America segment increased $45.1 million, or 6.8%. Acquisitions, net of divestitures, increased sales 11.2%. Lower pricing decreased sales 2.0%, due mainly to foodservice partially offset by a price increase in soup. Sales volume decreased 1.7%, mainly due to decreases in foodservice ketchup and broth partially offset by volume increases in soup and infant feeding. The weaker Canadian dollar decreased sales 0.6%. Sales of the U.S. Pet Products and Seafood segment increased $14.5 million, or 3.8%. Sales volume increased 4.6% primarily in pet snacks and tuna partially offset by volume decreases in dry and canned dog food. Lower pricing decreased sales 0.1%, primarily in pet snacks, partially offset by higher pricing in tuna. Divestitures decreased sales 0.8%. U.S. Frozen's sales increased $53.9 million, or 18.7%. Acquisitions increased sales 20.6%. Sales volume increased 3.8% due primarily to Boston Market HomeStyle Meals, SmartOnes frozen entrees and Bagel Bites snacks partially offset by volume decreases in frozen potatoes. Higher pricing increased sales 3.0%, primarily in SmartOnes frozen entrees, and Bagel Bites snacks. Divestures reduced sales by 8.7% due to the sale of Budget Gourmet. Heinz Europe's sales increased $127.4 million, or 20.4%. Acquisitions increased sales 14.5%. Higher pricing increased sales 5.3%, primarily due to higher pricing in seafood, infant feeding, frozen entrees, beans and ketchup. Volume decreased slightly by 0.2%, driven primarily by frozen entrees and tuna partially offset by volume increases in ketchup, frozen pizza, beans and salmon. Favorable foreign exchange translation rates increased sales by 0.8%. Sales in Asia/Pacific increased $0.5 million, or 0.2%. Higher pricing increased sales 3.4%, primarily due to higher pricing in sauces, infant feeding and juices. Sales volume increased 1.7% due primarily to frozen vegetables, infant feeding and poultry partially offset by volume decreases in frozen potatoes, soups and foodservice business. Unfavorable exchange rates reduced sales by 4.9%. Sales for Other Operating Entities increased $27.3 million, or 32.7%. Favorable pricing increased sales 37.9%, primarily in highly inflationary countries. Sales volume increased 0.6%, 14 primarily in infant feeding and cooking oils. Other items net reduced sales by 5.8% mainly due to the divestitures of the South African frozen and pet food businesses. Last year's second quarter was negatively impacted by a number of special items which net to $82.7 million pretax ($0.15 per share). The following table provides a comparison of the company's reported results and the results excluding special items for the second quarter of Fiscal 2001.
Second Quarter Ended November 1, 2000 ----------------------------------------------- Net Gross Operating Net Per Sales Profit Income Income Share -------- ------ --------- ------ ------ (Dollars in Millions, Except per Share Amounts) Reported results.................... $2,296.5 $913.4 $382.4 $190.0 $ 0.54 Operation Excel restructuring..... -- 33.5 33.5 20.8 0.06 Operation Excel implementation costs.......................... -- 35.5 77.3 53.3 0.15 Operation Excel reversals......... -- (21.4) (33.8) (25.9) (0.07) Equity Loss on Investment in the Hain Celestial Group........... -- -- -- 3.5 0.01 -------- ------ ------ ------ ------ Results excluding special items..... $2,296.5 $961.0 $459.5 $241.7 $ 0.69 ======== ====== ====== ====== ======
(Note: Totals may not add due to rounding.) Gross profit increased $100.2 million, or 11.0%, to $1,013.6 million from $913.4 million and the gross profit margin decreased to 39.5% from 39.8%. Excluding the Fiscal 2001 special items noted above, gross profit increased $52.5 million, or 5.5%, to $1,013.6 million from $961.0 million and the gross profit margin decreased to 39.5% from 41.8%. Gross profit for the Heinz North America segment increased $16.1 million, or 5.7% due primarily to acquisitions offset by lower pricing and the decline in the foodservice business. The U.S. Pet Products and Seafood segment's gross profit decreased $24.0 million, or 15.9%, primarily due to price decreases in pet food and pet snacks, increased fish, meat and manufacturing costs, increased ingredient costs as a result of reformulating recipes to improve palatability and a shift to less profitable larger size products. U.S. Frozen's gross profit increased $18.2 million or 13.2%, due primarily to acquisitions and increased pricing. Europe's gross profit increased $50.0 million, or 19.2%, due primarily to increased pricing and acquisitions. The Asia/Pacific segment's gross profit decreased $12.7 million, or 12.4%, due primarily to unfavorable foreign exchange rates and poor factory operations in connection with the movement of manufacturing to New Zealand from Australia and Japan partially offset by increased pricing. New Zealand's factories are experiencing inefficiencies as a result of over 60% of the products being produced in a different factory or line compared to the prior year. Gross profit in the Other Operating Entities segment increased $3.9 million, or 15.9%, due primarily to favorable pricing. Selling, general and administrative expenses ("SG&A") increased $81.4 million, or 15.3%, to $612.4 million from $531.0 million, and increased as a percentage of sales to 23.9% from 23.1%. Excluding the Fiscal 2001 special items noted above, SG&A increased $110.9 million, or 22.1%, to $612.4 million from $501.5 million and increased as a percentage of sales to 23.9% from 21.8%. This increase is primarily attributable to acquisitions, increased promotional spending in North America and Europe and increased selling and distribution cost. Operating income increased $18.8 million, or 4.9%, to $401.2 million from $382.4 million, and decreased as a percentage of sales to 15.6% from 16.7%. Excluding the Fiscal 2001 special items noted above, operating income decreased $58.3 million, or 12.7%, to $401.2 million from $459.5 million and decreased as a percentage of sales to 15.6% from 20.0%. Heinz North America's operating income increased $9.0 million, or 5.8%, to $165.3 million from $156.3 million. Excluding the Fiscal 2001 special items noted above, operating income de- 15 creased $3.9 million, or 2.3%, to $165.3 million from $169.2 million, due primarily to a significant decrease in the foodservice business, partially offset by acquisitions and the soup business. The U.S. Pet Products and Seafood segment's operating income increased $11.2 million, or 31.8%, to $46.5 million from $35.2 million. Excluding the Fiscal 2001 special items noted above, operating income decreased $23.4 million, or 33.5%, to $46.5 million from $69.9 million, due primarily to the decrease in gross profit. The U.S. Frozen segment's operating income increased $1.5 million, or 2.4%, to $61.1 million from $59.6 million. Excluding the Fiscal 2001 special items noted above, operating income decreased $1.8 million, or 2.9%, to $61.1 million from $62.9 million as the favorable impact of acquisitions was offset by increased selling and distribution costs, increased marketing costs related to Boston Market HomeStyle Meals, SmartOnes frozen entrees and Bagel Bites and the divestiture of Budget Gourmet. Europe's operating income increased $12.2 million, or 11.4%, to $119.4 million from $107.2 million. Excluding the Fiscal 2001 special items noted above, operating income decreased $4.9 million, or 4.0%, to $119.4 million from $124.4 million. Europe's decrease is primarily attributable to increased marketing to support key brands across Europe and integration costs associated with recent acquisitions. Asia/Pacific's operating income increased $2.1 million, or 9.3%, to $24.8 million from $22.7 million. Excluding the Fiscal 2001 special items noted above, operating income decreased $15.2 million, or 37.9%, to $24.8 million from $40.0 million. This decrease is primarily attributable to the unfavorable operating performance brought about by the movement of manufacturing to New Zealand from Australia and Japan. New Zealand's factories are experiencing inefficiencies as a result of over 60% of the products being produced in a different factory or line compared to the prior year. Operations are expected to improve during Fiscal 2003. Excluding special items, Other Operating Entities' operating income increased $7.1 million or 90.6% primarily due to higher pricing. Net interest expense decreased $5.6 million to $70.8 million from $76.4 million last year, driven by lower interest rates partially offset by increased borrowings. Other expense decreased $6.9 million to $10.0 million from $16.9 million last year. Excluding special items, other expense decreased $1.3 million to $10.0 million from $11.3 million. The effective tax rate for the current quarter was 35.0% compared to 34.3% last year. Excluding the Fiscal 2001 special items noted above, the effective rate was 35.0% for both periods. Net income in the current quarter was $208.2 million compared to $190.0 million last year and diluted earnings per share was $0.59 in the current quarter versus $0.54 in the same period last year. Excluding the Fiscal 2001 special items noted above, net income decreased $33.5 million to $208.2 million from $241.7 million last year, and diluted earnings per share decreased 14.4%, to $0.59 from $0.69 last year. SIX MONTHS ENDED OCTOBER 31, 2001 AND NOVEMBER 1, 2000 RESULTS OF OPERATIONS For the six months ended October 31, 2001, sales increased $282.7 million, or 6.3%, to $4,750.6 million from $4,468.0 million last year. Sales were favorably impacted by acquisitions (8.3%), higher volumes (0.6%) and higher pricing (1.6%). Sales were unfavorably impacted by foreign exchange translation rates (2.2%) and divestitures (2.0%). Sales of the Heinz North America segment increased $57.9 million, or 4.7%. Acquisitions, net of divestitures, increased sales 9.1%. Lower pricing decreased sales 2.3%, primarily related to the 16 foodservice business and grocery ketchup. Sales volume decreased 1.5%, primarily in the foodservice business and steak sauces partially offset by volume increases in grocery ketchup, soups and grilling sauces. The weaker Canadian dollar decreased sales 0.5%. Sales of the U.S. Pet Products and Seafood segment decreased $14.6 million, or 1.9%. Slightly higher pricing increased sales 0.5%, primarily in tuna, partially offset by lower pricing in pet treats and dry dog food. Sales volume decreased 0.6% primarily in dry and canned dog food partially offset by volume increases in pet treats. Divestitures decreased sales 1.8%. U.S. Frozen's sales increased $63.2 million, or 12.2%. Acquisitions increased sales 11.8%. Sales volume increased 7.1% due primarily to Boston Market HomeStyle Meals, SmartOnes frozen entrees and Bagel Bites snacks partially offset by volume decreases in frozen potatoes. Higher pricing increased sales 2.1%, primarily in SmartOnes frozen entrees and frozen potatoes. Divestures reduced sales by 8.8% due to the sale of Budget Gourmet. Heinz Europe's sales increased $174.8 million, or 13.8%. Acquisitions increased sales 13.6%. Higher pricing increased sales 2.9%, primarily due to higher pricing in seafood, infant feeding, beans and soup. Volume increased slightly by 0.1%, driven primarily by grocery ketchup, salad cream and weight control entrees partially offset by volume decreases in infant feeding, soups and tuna. Unfavorable foreign exchange translation rates decreased sales by 2.8%. Sales in Asia/Pacific decreased $38.8 million, or 7.1%. Unfavorable exchange rates reduced sales by 9.7%. Higher pricing increased sales 1.6%, primarily due to higher pricing in sauces and juices. Sales volume increased 1.3% due primarily to frozen vegetables, poultry and juices partially offset by volume decreases in sauces and corned beef. Divestitures, net of acquisitions, reduced sales by 0.3%. Sales for Other Operating Entities increased $40.0 million, or 24.1%. Favorable pricing increased sales 23.7%, primarily in certain highly inflationary countries. Sales volume increased 3.8%, primarily in infant feeding and cooking oils. Other items net reduced sales by 3.4% mainly due to the divestitures of the South African frozen and pet food businesses. The current year's results were negatively impacted by additional Streamline restructuring charges and implementation costs totaling $16.1 million pretax ($0.04 per share). Pretax charges of $8.7 million were classified as cost of products sold and $7.4 million as SG&A. Last year's results include net Operation Excel costs of $133.5 million pretax or $0.24 per share. Also included in the prior year results is a pretax loss of $5.6 million ($0.01 per share), which represented the company's equity loss associated with Hain Celestial Seasonings. The following tables provide a comparison of the company's reported results and the results excluding special items for the six months ended October 31, 2001 and November 1, 2000.
Six Months Ended October 31, 2001 ------------------------------------------------ Net Gross Operating Net Per Sales Profit Income Income Share -------- -------- --------- ------ ----- (Dollars in Millions, Except per Share Amounts) Reported results................... $4,750.6 $1,884.0 $785.3 $408.7 $1.16 Streamline implementation costs.. -- 8.7 10.4 9.4 0.03 Streamline restructuring costs... -- -- 5.7 3.6 0.01 -------- -------- ------ ------ ----- Results excluding special items.... $4,750.6 $1,892.8 $801.5 $421.7 $1.20 ======== ======== ====== ====== =====
17
Six Months Ended November 1, 2000 ------------------------------------------------- Net Gross Operating Net Per Sales Profit Income Income Share -------- -------- --------- ------ ------ (Dollars in Millions, Except per Share Amounts) Reported results (a).............. $4,468.0 $1,812.3 $770.9 $394.5 $ 1.13(b) Operation Excel restructuring... -- 33.5 33.5 20.8 0.06 Operation Excel implementation costs........................ -- 52.8 133.7 90.5 0.26 Operation Excel reversals....... -- (21.4) (33.8) (25.9) (0.07) Equity Loss on Investment in the Hain Celestial Group......... -- -- -- 3.5 0.01 -------- -------- ------ ------ ------ Results excluding special items... $4,468.0 $1,877.3 $904.4 $483.3 $ 1.38 ======== ======== ====== ====== ======
- --------------- (a) Amounts have been restated for the effect of the change in accounting for revenue recognition (b) Before cumulative effect of accounting change (Note: Totals may not add due to rounding.) Gross profit increased $71.7 million, or 4.0%, to $1,884.0 million from $1,812.3 million and the gross profit margin decreased to 39.7% from 40.6%. Excluding the special items noted above, gross profit increased $15.5 million, or 0.8%, to $1,892.8 million from $1,877.3 million and the gross profit margin decreased to 39.8% from 42.0%. Gross profit for the Heinz North America segment decreased $3.1 million, or 0.6% due primarily to lower pricing and the decline in the foodservice business partially offset by acquisitions. The U.S. Pet Products and Seafood segment's gross profit decreased $41.0 million, or 13.6%, primarily due to price decreases in pet food and pet snacks, increased fish, meat and manufacturing costs, increased ingredient costs as a result of reformulating recipes to improve palatability and a shift to less profitable larger size products. U.S. Frozen's gross profit increased $22.3 million or 9.2%, due primarily to increased pricing and acquisitions. Europe's gross profit increased $67.3 million, or 12.4%, due primarily to increased pricing and acquisitions. The Asia/Pacific segment's gross profit decreased $37.5 million, or 17.5%, due primarily to unfavorable foreign exchange rates and poor factory operations in connection with the movement of manufacturing to New Zealand from Australia and Japan partially offset by increased pricing. New Zealand's factories are experiencing inefficiencies as a result of over 60% of the products being produced in a different factory or line compared to the prior year. Gross profit in the Other Operating Entities segment increased $6.5 million, or 12.8%, due primarily to favorable pricing. SG&A increased $57.3 million, or 5.5%, to $1,098.7 million from $1,041.4 million, and decreased as a percentage of sales to 23.1% from 23.3%. Excluding the special items noted above, SG&A increased $118.4 million, or 12.2%, to $1,091.3 million from $972.9 million and increased as a percentage of sales to 23.0% from 21.8%. This increase is primarily attributable to acquisitions, increased promotional spending in North America and Europe and increased selling and distribution costs. Operating income increased $14.4 million, or 1.9%, to $785.3 million from $770.9 million, and decreased as a percentage of sales to 16.5% from 17.3%. Excluding the special items noted above, operating income decreased $102.9 million, or 11.4%, to $801.5 million from $904.4 million and decreased as a percentage of sales to 16.9% from 20.2%. Heinz North America's operating income decreased $14.5 million, or 4.9%, to $283.8 million from $298.3 million. Excluding the special items noted above, operating income decreased $35.4 million, or 10.9%, to $288.7 million from $324.0 million, due primarily to the decrease in gross profit and higher selling and distribution costs. 18 The U.S. Pet Products and Seafood segment's operating income increased $7.8 million, or 8.1%, to $104.0 million from $96.2 million. Excluding the special items noted above, operating income decreased $29.1 million, or 20.7%, to $111.8 million from $140.9 million, due primarily to the decrease in gross profit. The U.S. Frozen segment's operating income increased $8.1 million, or 8.3%, to $105.3 million from $97.3 million. Excluding the special items noted above, operating income decreased $0.7 million, or 0.6%, to $105.3 million from $106.0 million as the favorable impact of acquisitions was offset by increased selling and distribution costs and the divestiture of Budget Gourmet. Europe's operating income increased $44.1 million, or 19.5%, to $270.0 million from $225.9 million. Excluding the special items noted above, operating income increased $7.8 million, or 3.0%, to $271.7 million from $263.9 million. This increase is primarily attributable to the tuna business in Europe and acquisitions partially offset by increased marketing to support key brands across Europe and acquisition integration costs. Asia/Pacific's operating income decreased $13.3 million, or 20.7%, to $51.0 million from $64.2 million. Excluding the special items noted above, operating income decreased $36.0 million, or 41.1%, to $51.5 million from $87.6 million. This decrease is primarily attributable to the unfavorable operating performance brought about by the movement of manufacturing to New Zealand from Australia and Japan and the significant realignment of manufacturing facilities. Operations are expected to improve during Fiscal 2003. Excluding special items, Other Operating Entities' operating income increased $8.0 million or 42.2% primarily due to higher pricing. Net interest expense decreased $10.8 million to $141.0 million from $151.8 million last year, driven by lower interest rates partially offset by increased borrowings. Other expense decreased $3.0 million to $11.7 million from $14.7 million last year. Excluding special items, other expense increased $2.7 million to $11.7 million from $9.1 million. The effective tax rate for the current year was 35.4% compared to 34.7% last year. Excluding the special items, the effective rate was 35.0% in both years. Net income for the current six months was $408.7 million compared to $378.0 million last year and diluted earnings per share was $1.16 compared to $1.08 last year. Excluding the special items noted above and the cumulative effect of the accounting change for revenue recognition in the prior year, net income decreased $61.6 million to $421.7 million from $483.3 million last year, and diluted earnings per share decreased 13.0%, to $1.20 from $1.38 last year. LIQUIDITY AND FINANCIAL POSITION Cash provided by operating activities was $197.9 million compared to cash used for operating activities of $1.8 million last year. The increase in Fiscal 2002 versus Fiscal 2001 is primarily due to improved working capital performance. Cash used for investing activities totaled $870.5 million compared to $320.3 million last year. Acquisitions in the current period required $805.5 million, due primarily to the purchase of Borden Food Corporation's pasta and dry bouillon and soup business, Delimex Holdings, Inc. and Anchor Food Products branded retail business which includes the retail licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers. Acquisitions in the prior period required $126.5 million, due primarily to the purchase of International DiverseFoods Inc. During the prior year period, the company also invested $79.7 million in The Hain Celestial Group, Inc. Capital expenditures in the current period required $86.6 million compared to $170.9 million last year. Cash provided by financing activities increased to $705.7 million from $357.6 million last year. Proceeds from long-term debt were $768.3 million compared to $0.9 million last year. Payments on long-term debt required $32.2 million this period compared to $19.1 million last year. Payments on 19 commercial paper and short-term borrowings required $88.0 million compared to providing $688.9 million last year. In addition, $325.0 million was provided during the current period via the issuance of Preferred Stock (see below). Cash provided from stock options exercised totaled $46.4 million versus $31.5 million last year. Dividend payments totaled $278.8 million compared to $263.8 million for the same period last year. Share repurchases totaled $45.4 million (1.0 million shares) versus $90.1 million (2.3 million shares) a year ago. In the first six months of Fiscal 2002, the cash requirements of Streamline were $56.7 million, consisting of spending for severance and exit costs ($46.3 million) and implementation costs ($10.4 million). On July 6, 2001, H.J. Heinz Finance Company (HFC) raised $325.0 million via the issuance of Voting Cumulative Preferred Stock, Series A with liquidation preference of $100,000 per share. The Series A Preferred shares are entitled to receive quarterly dividends at a rate of 6.226% per annum and are required to be redeemed for cash on July 15, 2008. In addition, HFC issued $750 million of 6.625% Guaranteed Notes due July 15, 2001. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings and financing acquisitions and ongoing operations. On September 6, 2001, the company, HFC and a group of domestic and international banks entered into a $1.50 billion credit agreement which expires in September 2006 and a $800 million credit agreement which expires in September 2002. These credit agreements, which support the company's commercial paper programs, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of October 31, 2001, $1.25 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 2, 2001, the company had $1.34 billion of domestic commercial paper outstanding and classified as short-term debt. The company expects the second half the year to deliver earnings per share consistent with the first half with the third quarter profits slightly lower then the second quarter and an improved fourth quarter as a result of recent acquisitions, new products and cost reduction efforts. The company's financial position continues to remain strong, enabling it to meet cash requirements for operations, capital expansion programs and dividends to shareholders. RECENTLY ADOPTED ACCOUNTING STANDARDS In Fiscal 2001, the company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". Under the new accounting method, adopted retroactive to May 4, 2000, Heinz recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The cumulative effect adjustment of $66.2 million in revenue ($16.5 million in net income) as of May 4, 2000, was recognized during the first quarter of Fiscal 2001. The Fiscal 2001 six month amounts have been restated for the effect of the change in accounting for revenue recognition. Amounts originally reported were as follows: Sales, $4.45 billion; Gross profit, $1.81 billion; Net income, $390.7 million; Net income per share - diluted, $1.11; Net income per share - basic, $1.13. RECENTLY ISSUED ACCOUNTING STANDARDS In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued new guidelines entitled "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products". In addition, during May 2000, the EITF issued new guidelines entitled "Accounting for Certain Sales Incentives". Both of these issues provide guidance primarily on income statement classification of consideration from a vendor to a purchaser of the vendor's products, including both customers and consumers. Generally, cash consideration is to be classified as a reduction of revenue, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. 20 In the fourth quarter of Fiscal 2002, the company will reclassify promotional payments to its customers and the cost of consumer coupons and other cash redemption offers from SG&A to net sales. SG&A would be correspondingly reduced such that net earnings would not be affected. The company is currently assessing the impact both issues will have on net sales. In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually, and they provide guidelines for new disclosure requirements. These standards outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. The provisions of SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other intangible assets are required to be implemented in the first quarter of Fiscal 2003. The company is currently evaluating the impact of these standards on the consolidated financial statements. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS No. 144 clarifies and revises existing guidance on accounting for impairment of plant, property, and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other accounting literature. This standard will be effective for the company beginning in Fiscal 2003. The company does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the company's market risk during the six months ended October 31, 2001. For additional information, refer to pages 41-42 of the company's Annual Report to Shareholders for the fiscal year ended May 2, 2001. 21 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. 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 company has omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The company 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. 12. Computation of Ratios of Earnings to Fixed Charges. 99 (i) Condensed consolidated and combined financial statements of H.J. Heinz Finance Company and Subsidiaries for the six months ended October 31, 2001 (ii) Restated condensed consolidated and combined financial statements of H.J. Heinz Finance Company and Subsidiaries for the quarterly period ended August 1, 2001 both of which are filed in accordance with Rule 3-10 of Regulation S-X. H.J. Heinz Company is a guarantor of all of H.J. Heinz Finance Company's outstanding debt. (b) Reports on Form 8-K A report on Form 8-K was filed with the Securities and Exchange Commission on November 9, 2001 reporting a revised earnings outlook for the second quarter ended October 31, 2001 and the full fiscal year ending May 1, 2002. 22 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: December 13, 2001 By: /s/ PAUL F. RENNE .......................................... Paul F. Renne Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: December 13, 2001 By: /s/ BRUNA GAMBINO .......................................... Bruna Gambino Corporate Controller (Principal Accounting Officer) 23 EX-12 3 j9099401ex12.txt RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 H. J. HEINZ COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Six Months Ended Fiscal Years Ended ------------- -------------------------------------------------------------- May 2, May 3, April 28, April 29, April 30, October 31, 2001 2000 1999 1998 1997 2001 (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) ------------- ---------- ---------- ---------- ---------- ---------- Fixed Charges: Interest expense*.......................... $153,579 $ 335,531 $ 271,597 $ 260,743 $ 260,401 $ 277,818 Capitalized interest....................... 959 8,396 -- -- 1,542 2,688 Interest component of rental expense....... 11,889 28,096 32,274 29,926 30,828 27,382 -------- ---------- ---------- ---------- ---------- ---------- Total fixed charges...................... $166,427 $ 372,023 $ 303,871 $ 290,669 $ 292,771 $ 307,888 -------- ---------- ---------- ---------- ---------- ---------- Earnings: Income before income taxes................. $632,577 $ 673,058 $1,463,676 $ 835,131 $1,254,981 $ 479,064 Add: Interest expense*..................... 153,579 335,531 271,597 260,743 260,401 277,818 Add: Interest component of rental expense.................................. 11,889 28,096 32,274 29,926 30,828 27,382 Add: Amortization of capitalized interest................................. 1,110 2,129 2,799 3,050 3,525 3,454 -------- ---------- ---------- ---------- ---------- ---------- Earnings as adjusted..................... $799,155 $1,038,814 $1,770,346 $1,128,850 $1,549,735 $ 787,718 -------- ---------- ---------- ---------- ---------- ---------- Ratio of earnings to fixed charges......... 4.80 2.79 5.83 3.88 5.29 2.56 ======== ========== ========== ========== ========== ==========
- --------------- * Interest expense includes amortization of debt expense and any discount or premium relating to indebtedness. EX-99 4 j9099401ex99.txt FINANCIAL STATEMENTS EXHIBIT 99(I) H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED OCTOBER 31, 2001 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
Second Quarter Ended ----------------------------------- October 31, 2001 November 1, 2000 FY 2002 FY 2001 ---------------- ---------------- (Unaudited) (in thousands) Sales..................................................... $1,221,044 $1,248,110 Cost of products sold..................................... 728,363 771,974 ---------- ---------- Gross profit.............................................. 492,681 476,136 Selling, general and administrative expenses.............. 266,375 270,239 Royalty expense to related parties........................ 48,240 26,613 ---------- ---------- Operating income.......................................... 178,066 179,284 Interest income........................................... 10,397 35,915 Interest expense.......................................... 54,082 4,561 Dividends from related parties............................ 30,605 -- Other expenses, net....................................... 9,434 6,261 ---------- ---------- Income before income taxes and minority interest.......... 155,552 204,377 Provision for income taxes................................ 9,373 75,592 ---------- ---------- Income before minority interest........................... 146,179 128,785 Minority interest......................................... (130,219) -- ---------- ---------- Net income................................................ $ 15,960 $ 128,785 ========== ==========
See notes to condensed consolidated and combined financial statements. 1 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
Six Months Ended ----------------------------------- October 31, 2001 November 1, 2000 FY 2002 FY 2001 ---------------- ---------------- (Unaudited) (in thousands) Sales..................................................... $1,777,783 $2,344,574 Cost of products sold..................................... 1,048,683 1,425,873 ---------- ---------- Gross profit.............................................. 729,100 918,701 Selling, general and administrative expenses.............. 400,453 508,354 Royalty expense to related parties........................ 71,338 50,705 ---------- ---------- Operating income.......................................... 257,309 359,642 Interest income........................................... 22,160 63,890 Interest expense.......................................... 106,255 6,222 Dividends from related parties............................ 69,124 -- Other expenses, net....................................... 9,232 9,868 ---------- ---------- Income before income taxes, minority interest and cumulative effect of accounting change.................. 233,106 407,442 Provision for income taxes................................ 18,715 150,726 ---------- ---------- Income before minority interest and cumulative effect of accounting change....................................... 214,391 256,716 Minority interest......................................... (182,524) -- ---------- ---------- Income before cumulative effect of accounting change...... 31,867 256,716 Cumulative effect of accounting change.................... -- (4,849) ---------- ---------- Net income................................................ $ 31,867 $ 251,867 ========== ==========
See notes to condensed consolidated and combined financial statements. 2 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
October 31, 2001 May 2, 2001* FY 2002 FY 2001 ---------------- ------------ (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents................................. $ 12,636 $ 393 Receivables, net.......................................... 565,998 506,447 Due from related parties.................................. 98,973 75,429 Short-term notes receivable from related parties.......... 1,094,948 -- Inventories............................................... 816,288 655,170 Deferred income taxes..................................... 4,395 50,042 Prepaid expenses and other current assets................. 145,819 49,428 ---------- ---------- Total current assets................................... 2,739,057 1,336,909 Property, plant and equipment............................... 1,483,894 1,608,514 Less accumulated depreciation............................... 651,157 738,731 ---------- ---------- Total property, plant and equipment, net............... 832,737 869,783 Long-term notes receivable from related parties............. 35,000 35,000 Investments in related parties.............................. 1,895,245 1,895,245 Other investments........................................... 196,564 201,438 Intangible assets, net...................................... 1,950,389 1,208,294 Other noncurrent assets..................................... 159,994 54,822 ---------- ---------- Total other noncurrent assets.......................... 4,237,192 3,394,799 ---------- ---------- Total assets........................................... $7,808,986 $5,601,491 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Portion of long-term debt due within one year............. $ 301,475 $ 29,833 Accounts payable.......................................... 359,381 321,222 Due to related parties.................................... 327,252 96,221 Other accrued liabilities................................. 310,140 224,384 ---------- ---------- Total current liabilities.............................. 1,298,248 671,660 Long-term debt.............................................. 4,384,136 23,932 Deferred income taxes....................................... 6,594 205,134 Deferred income............................................. 31,955 29,684 Other liabilities........................................... 5,517 12,684 Minority interest........................................... 1,595,088 -- Mandatorily Redeemable Series A Preferred shares............ 325,000 -- Shareholders' equity: Common stock.............................................. 11 -- Additional capital........................................ 135,385 -- Retained earnings......................................... 26,303 -- Accumulated other comprehensive income.................... 749 -- Parent company's investment............................... -- 4,658,397 ---------- ---------- Total shareholders' equity............................. 162,448 4,658,397 ---------- ---------- Total liabilities and shareholders' equity............. $7,808,986 $5,601,491 ========== ==========
- --------------- * Summarized from audited Fiscal Year 2001 balance sheet See notes to condensed consolidated and combined financial statements. 3 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
Six Months Ended ------------------------------------ October 31, 2001 November 1, 2000 FY 2002 FY 2001 ---------------- ---------------- (Unaudited) (in thousands) Cash used for Operating Activities....................... $(133,128) $(340,544) --------- --------- Cash Flows from Investing Activities: Capital expenditures................................... (36,956) (79,617) Acquisitions, net of cash acquired..................... (781,300) (121,453) Proceeds from divestitures............................. -- 40,595 Investment in The Hain Celestial Group, Inc............ -- (79,743) Other items, net....................................... (12,090) (3,933) --------- --------- Cash used for investing activities.................. (830,346) (244,151) --------- --------- Cash Flows from Financing Activities: Payments on long-term debt............................. (9,179) (8,566) Proceeds from long-term debt........................... 751,059 -- Payments on commercial paper and short-term borrowings, net................................................. (95,833) -- Dividends.............................................. (5,564) (202,518) Net parent advances.................................... -- 795,181 Proceeds from mandatorily redeemable Series A preferred shares.............................................. 325,000 -- Other items, net....................................... 500 -- --------- --------- Cash provided by financing activities............... 965,983 584,097 --------- --------- Net increase (decrease) in cash and cash equivalents..... 2,509 (598) Cash and cash equivalents, beginning of period........... 10,127 2,322 --------- --------- Cash and cash equivalents, end of period................. $ 12,636 $ 1,724 ========= =========
See notes to condensed consolidated and combined financial statements. 4 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED) (1) On May 3, 2001, H.J. Heinz Company ("Heinz") reorganized its U.S. corporate structure and established two primary companies for the management of U.S. trademarks and for U.S. treasury functions. As a result, all of the business operations of Heinz's domestic operations ("the U.S. Group") are now being conducted by H.J. Heinz Finance Company and its wholly-owned subsidiaries, and H.J. Heinz Company, L.P. ("Heinz LP") collectively referred to as "HFC" in the accompanying notes. H.J. Heinz Finance Company has limited partnership interests in Heinz LP. H.J. Heinz Finance Company assumed primary liability for approximately $2.9 billion of Heinz's outstanding senior unsecured debt and accrued interest by becoming co-obligor with Heinz. Heinz LP owns or leases the operating assets involved in manufacturing throughout the United States which were contributed by Heinz and its subsidiaries, together with other assets and liabilities, to Heinz LP and manages the business. Heinz LP has two classes of limited partnership interests, Class A and Class B. H.J. Heinz Finance Company, directly and through wholly-owned subsidiaries, owns the Class B interests. Heinz, directly and through wholly-owned subsidiaries, owns the Class A interests. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the managing General Partner of Heinz LP and employs the salaried personnel of the U.S. Group. The minority interest amounts on the October 31, 2001 statement of income and balance sheet represents the Class A and General Partner limited partnership interest in Heinz LP. The preparation of the November 1, 2000 and May 2, 2001 financial statements include the use of "carve out" and "push down" accounting procedures wherein certain assets, liabilities and expenses historically recorded or incurred at the parent company level or an affiliate of Heinz, which related to or were incurred on behalf of the U.S. Group, have been identified and allocated or pushed down as appropriate to reflect results of the U.S. Group for the periods presented. See Note (9), for a further discussion regarding Heinz parent company costs. As a result of finalizing the reorganization, certain assets and liabilities which are included in the May 2, 2001 "carve out" balance sheet, were not contributed to HFC. Substantially all finished goods inventories of the U.S. Group remained assets of Heinz and were not contributed to Heinz LP. These retained inventories result in reduced sales and operating results in Fiscal 2002 when compared to Fiscal 2001. (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 business of HFC. 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. (3) INVENTORIES The composition of inventories at the balance sheet dates was as follows:
October 31, May 2, 2001 2001 (in thousands) ----------- -------- Finished goods and work-in-process........................ $613,293 $515,315 Packaging material and ingredients........................ 202,995 139,855 -------- -------- $816,288 $655,170 ======== ========
5 (4) TAXES The provision for income taxes consists of provisions for federal and state income taxes. The tax provision in the October 31, 2001 financial statements declined significantly given the non-taxable status of Heinz LP. (5) RESTRUCTURING In the fourth quarter of Fiscal 2001, Heinz announced a restructuring initiative named "Streamline" which includes an organizational restructuring aimed at reducing overhead costs and the consolidation of HFC's canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at HFC's Terminal Island, California facility). The major components of the restructuring charge and implementation costs and the remaining accrual balances as of October 31, 2001 were as follows:
Employee Termination Non-Cash and Accrued Asset Severance Exit Implementation (in millions) Write-Downs Costs Costs Costs Total ------------- ----------- ----------- ------- -------------- ----- Restructuring and Implementation costs--Fiscal 2001....................... $34.7 $15.4 $22.8 $11.8 $84.7 Amounts utilized--Fiscal 2001.............. (34.7) (5.8) (1.7) (11.8) (54.0) ----- ----- ----- ----- ----- Accrued restructuring costs--May 2, 2001... -- 9.6 21.1 -- 30.7 Implementation costs--Fiscal 2002.......... -- -- -- 1.2 1.2 Amounts utilized--Fiscal 2002.............. -- (1.7) (0.7) (1.2) (3.6) Liability assumed by related party--Fiscal 2002..................................... -- (3.8) (0.6) -- (4.4) ----- ----- ----- ----- ----- Accrued restructuring costs--October 31, 2001..................................... $ -- $ 4.1 $19.8 $ -- $23.9 ===== ===== ===== ===== =====
During the first six months of Fiscal 2002, HFC incurred implementation costs totaling $1.2 million pretax, which consisted of incremental costs directly related to the implementation of the Streamline initiative. Pretax charges of $1.1 million were classified as cost of products sold and $0.1 million as selling, general and administrative expenses ("SG&A"). In addition, Heinz Management Company, a wholly-owned subsidiary of Heinz, assumed a portion of the HFC's restructuring liability as a result of the realignment that occurred on May 3, 2001. During the first six months of Fiscal 2002, HFC utilized $2.4 million of severance and exit cost accruals, principally for ceasing canned pet food production in its Terminal Island, California facility and its overhead reduction plan. (6) ACQUISITIONS During the second quarter of Fiscal 2002, HFC acquired Anchor Food Products branded retail business which includes the retail licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers and the Poppers brand of retail appetizer lines. Also during the second quarter of Fiscal 2002, HFC completed the acquisition of Delimex Holdings, Inc., a leading maker of frozen Mexican food products. Delimex is a leading U.S. producer of frozen taquitos, tightly rolled fried corn and flour tortillas with fillings such as beef, chicken or cheese. Delimex also makes quesadillas, tamales and rice bowls. During the first quarter of Fiscal 2002, HFC completed the acquisition of Borden Food Corporation's pasta sauce, dry bouillon and soup business. Under this transaction, HFC 6 acquired such brands as Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups. HFC 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 and combined statements of income from the respective acquisition dates forward. Pro forma results of HFC, assuming all of the acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. (7) RECENTLY ADOPTED ACCOUNTING STANDARDS In Fiscal 2001, HFC changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." Under the new accounting method, adopted retroactive to May 4, 2000, HFC recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The cumulative effect adjustment of $4.8 million in net income as of May 4, 2000 was recognized during the first quarter of Fiscal 2001. The Fiscal 2001 six months amounts include the effect of the change in accounting for revenue recognition. (8) RECENTLY ISSUED ACCOUNTING STANDARDS In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued new guidelines entitled "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products". In addition, during May 2000, the EITF issued new guidelines entitled "Accounting for Certain Sales Incentives". Both of these issues provide guidance primarily on income statement classification of consideration from a vendor to a purchaser of the vendor's products, including both customers and consumers. Generally, cash consideration is to be classified as a reduction of revenue, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. In the fourth quarter of Fiscal 2002, HFC will reclassify promotional payments to its customers and the cost of consumer coupons and other cash redemption offers from SG&A to net sales. SG&A would be correspondingly reduced such that net earnings would not be affected. HFC is currently assessing the impact both issues will have on net sales. In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually, and they provide guidelines for new disclosure requirements. These standards outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. The provisions of SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other intangible assets are required to be implemented in the first quarter of Fiscal 2003. HFC is currently evaluating the impact of these standards on the consolidated financial statements. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS No. 144 clarifies and revises existing guidance on accounting for impairment of plant, property, and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other accounting literature. This standard will be effective for HFC beginning in Fiscal 2003. HFC does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. 7 (9) RELATED PARTY TRANSACTIONS Employee Costs Certain of Heinz's general and administrative expenses are allocated to HFC. In Fiscal 2001, total costs allocated include charges for salaries of corporate officers and staff and other Heinz corporate overhead. In Fiscal 2002, these costs primarily include a management charge of all salaried employee costs from the Heinz Management Company. Total costs charged to HFC for these services were $82.9 million and $5.7 million for the quarter ended October 31, 2001 and November 1, 2000, respectively, and $164.8 million and $12.6 million for the six months ended October 31, 2001 and November 1, 2000, respectively. These costs are recorded as cost of products sold and SG&A expense in the accompanying consolidated and combined statements of income. Heinz charges HFC for its share of group health insurance costs for eligible company employees based upon location-specific costs, overall insurance costs and loss experience incurred during a calendar year. In addition, various other insurance coverages are also provided to HFC through Heinz's consolidated programs. Workers compensation, auto, property, product liability and other insurance coverages are charged directly based on HFC's loss experience. Amounts charged to HFC for insurance costs were $17.3 million and $19.7 million for the quarter ended October 31, 2001 and November 1, 2000, respectively, and $32.7 million and $40.1 million for the six months ended October 31, 2001 and November 1, 2000, respectively, and are recorded in SG&A expense in the accompanying consolidated and combined statement of income. Pension costs and postretirement costs are also charged to HFC based upon eligible employees participating in the Plans. Cash Management In Fiscal 2001, the U.S. Group maintained a cash management arrangement with Heinz. On a daily basis, all available cash was deposited and disbursements were withdrawn. Heinz charged (credited) the U.S. Group's interest on the average daily balance maintained in the resulting intercompany account. Net interest expense related to this arrangement, included in the combined statement of income was $1.3 million for the quarter ended November 1, 2000 and $0.7 million for the six months ended November 1, 2000. The interest rate charged to or received by the U.S. Group was 6.32% for the six months ended November 1, 2000. Beginning in Fiscal 2002, HFC became the treasury center for cash management and debt financing for all of Heinz's domestic operations resulting in the $1.1 billion of short term notes receivable with related parties on the October 31, 2001 condensed consolidated balance sheet. An average interest rate of 3.72% was charged on these notes resulting in $9.6 million of interest income for the quarter ended October 31, 2001 and $20.6 million of interest income for the six months ended October 31, 2001. Product sales and purchases HFC sells and purchases products and services to and from other Heinz affiliates. The results of such transactions are the $99.0 million and $75.4 million balances due from related parties as of October 31, 2001 and May 2, 2001, respectively, and the $327.3 million and $96.2 million balances due to related parties as of October 31, 2001 and May 2, 2001, respectively. Sales to related parties were $11.9 million and $14.5 million for the quarter ended October 31, 2001 and November 1, 2000, respectively, and $24.2 million and $34.2 million in the six months ended October 31, 2001 and November 1, 2000, respectively, and purchases from related parties were $94.3 million and $126.2 million for the quarter ended October 31, 2001 and November 1, 2000, respectively, and $165.1 million and $240.6 million in the six months ended October 31, 2001 and November 1, 2000, respectively. 8 Other related party items HFC sells undivided interests in certain accounts receivable to a Heinz affiliate, Receivables Servicing Company ("RSC"). HFC sold $619.2 million and $1,291.0 million of receivables net of discount expense of $2.8 million and $9.4 million for the six months ended October 31, 2001 and the year ended May 2, 2001, respectively, to RSC. As of October 31, 2001 and May 2, 2001, respectively, HFC had $80.0 million and $126.9 million of receivables sold to RSC. These sales were reflected as reductions of trade accounts receivable. HFC ceased the factoring of its receivables to RSC in October 2001. HFC's contract with RSC will terminate in December 2001. Until the fourth quarter of Fiscal 2001, HFC had outstanding notes receivable from Heinz affiliates which were used for working capital purposes and to fund acquisitions. The short-term notes had interest rates ranging from 6.50% to 7.00%. The long-term notes had interest rates ranging from 6.75% to 7.50% with a maturity of May 2003. Interest income earned by HFC related to these receivables was $30.6 million for the quarter ended November 1, 2000 and $57.7 million for the six months ended November 1, 2000. In the fourth quarter of Fiscal 2001, these notes receivable from related parties were exchanged by HFC with a subsidiary of Heinz, PM Holding, Inc. ("PM Holding"), for $1.9 billion of non-voting, 6.5% cumulative non-participating preferred stock of PM Holding. This dividend amounted to $30.6 million for the quarter ended October 31, 2001 and $69.1 million for the first six months of Fiscal 2002. This preferred stock investment is recorded in the Investments in related parties balance on the condensed consolidated and combined balance sheets as of October 31, 2001 and May 2, 2001. HFC paid royalties of $46.5 million and $26.6 million for the quarter ended October 31, 2001 and November 1, 2000 and $69.6 million and $50.7 million for the six months ended October 31, 2001 and November 1, 2000, respectively, to Promark International, Inc., an indirect subsidiary of Heinz, for the use of trademarks. The $35.0 million long-term note receivable from related parties recorded on the accompanying condensed consolidated and combined balance sheets relates to a receivable from Heinz that was contributed to HFC in exchange for common stock of HFC. HFC received an administrative fee from Heinz for acting as the agent in the sale of the retained inventory discussed in Note (1). This fee was $0.8 million for the quarter ended October 31, 2001 and $10.4 million for the six months ended October 31, 2001, which is recorded as income in SG&A expense in the accompanying consolidated statement of income. (10) On September 6, 2001, HFC, Heinz and a group of domestic and international banks entered into a $1.50 billion credit agreement which expires in September 2006 and an $800 million credit agreement which expires in September 2002. These credit agreements, which support HFC's commercial paper program, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of October 31, 2001, $1.3 billion of commercial paper was outstanding and classified as long-term debt due to the long-term nature of the supporting credit agreement. On July 6, 2001, HFC raised $325 million via the issuance of Voting Cumulative Preferred Stock, Series A with a liquidation preference of $100,000 per share. The Series A Preferred shares are entitled to receive quarterly dividends at a rate of 6.226% per annum and are required to be redeemed for cash on July 15, 2008. In addition, HFC issued $750 million of 6.625% Guaranteed Notes due July 15, 2011 which are guaranteed by Heinz. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings, financing acquisitions and ongoing operations. 9 (11) COMPREHENSIVE INCOME
Second Quarter Six Months Ended Ended -------------- ----------- October 31, October 31, 2001 2001 (in thousands) FY 2002 FY 2002 - -------------- -------------- ----------- Net income.............................................. $15,960 $31,867 Deferred gains/(losses) on derivatives: Net change from periodic revaluations................. (657) 986 Net amount reclassified to earnings................... (114) 24 ------- ------- Comprehensive income.................................... $15,189 $32,877 ======= =======
(12) FINANCIAL INSTRUMENTS HFC utilizes certain financial instruments to manage its commodity price and interest rate exposures. COMMODITY PRICE HEDGING: HFC uses commodity futures and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow hedges. When using a commodity option as a hedging instrument, HFC excludes the time value of the option from the assessment of hedge effectiveness. INTEREST RATE HEDGING: HFC uses interest rate swaps to manage interest rate exposure. These derivatives are designated as cash flow hedges or fair value hedges depending on the nature of the particular risk being hedged. During Fiscal 2002, HFC entered into interest rate swap agreements to convert the interest rate exposure on certain of HFC's existing long-term debt from fixed to floating. The weighted average fixed rate of the associated debt is 6.433%. The aggregate notional amount of these swaps is $1.3 billion and their average duration is 12 years. HEDGE INEFFECTIVENESS: During the six months ended October 31, 2001, hedge ineffectiveness related to cash flow hedges was immaterial. DEFERRED HEDGING GAINS AND LOSSES: As of October 31, 2001, HFC is hedging forecasted transactions for periods not exceeding 12 months, and expects $0.7 million of net deferred gain reported in accumulated other comprehensive income to be reclassified to earnings within that time frame. 10 EXHIBIT 99(II) H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES RESTATED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED AUGUST 1, 2001 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES RESTATED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
First Quarter Ended ------------------------------- August 1, 2001 August 2, 2000 FY 2002 FY 2001 -------------- -------------- (Unaudited) (in thousands) Sales....................................................... $556,739 $1,096,464 Cost of products sold....................................... 320,320 653,899 -------- ---------- Gross profit................................................ 236,419 442,565 Selling, general and administrative expenses................ 134,078 238,115 Royalty expense to related parties.......................... 23,098 24,092 -------- ---------- Operating income............................................ 79,243 180,358 Interest income............................................. 11,763 27,975 Interest expense............................................ 52,173 1,661 Dividends from related parties.............................. 38,519 -- Other income/(expense)...................................... 202 (3,607) -------- ---------- Income before income taxes, minority interest and cumulative effect of accounting change............................... 77,554 203,065 Provision for income taxes.................................. 9,342 75,134 -------- ---------- Income before minority interest and cumulative effect of accounting change......................................... 68,212 127,931 Minority interest........................................... (52,305) -- -------- ---------- Income before cumulative effect of accounting change........ 15,907 127,931 Cumulative effect of accounting change...................... -- (4,849) -------- ---------- Net income.................................................. $ 15,907 $ 123,082 ======== ==========
See notes to restated condensed consolidated and combined financial statements. 1 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES RESTATED CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
August 1, 2001 May 2, 2001* FY 2002 FY 2001 -------------- ------------ (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents................................. $ 17,682 $ 393 Receivables, net.......................................... 372,675 506,447 Due from related parties.................................. 131,174 75,429 Short-term notes receivable from related parties.......... 1,032,999 -- Inventories............................................... 631,923 655,170 Deferred income taxes..................................... 575 50,042 Prepaid expenses and other current assets................. 100,723 49,428 ---------- ---------- Total current assets................................... 2,287,751 1,336,909 Property, plant and equipment............................... 1,482,055 1,608,514 Less accumulated depreciation............................... 679,038 738,731 ---------- ---------- Total property, plant and equipment, net............... 803,017 869,783 Long-term notes receivable from related parties............. 35,000 35,000 Investments in related parties.............................. 1,907,245 1,895,245 Other investments........................................... 195,104 201,438 Intangible assets, net...................................... 1,479,971 1,208,294 Other noncurrent assets..................................... 65,826 54,822 ---------- ---------- Total other noncurrent assets.......................... 3,683,146 3,394,799 ---------- ---------- Total assets........................................... $6,773,914 $5,601,491 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Portion of long-term debt due within one year............. $ 303,201 $ 29,833 Accounts payable.......................................... 232,008 321,222 Due to related parties.................................... 226,348 96,221 Other accrued liabilities................................. 248,857 224,384 ---------- ---------- Total current liabilities.............................. 1,010,414 671,660 Long-term debt.............................................. 3,705,999 23,932 Deferred income taxes....................................... 4,413 205,134 Deferred income............................................. 28,160 29,684 Other liabilities........................................... 5,677 12,684 Minority interest........................................... 1,542,869 -- Mandatorily Redeemable Series A Preferred shares............ 325,000 -- Shareholders' equity: Common stock.............................................. 11 -- Additional capital........................................ 135,385 -- Retained earnings......................................... 14,466 -- Accumulated other comprehensive income.................... 1,520 -- Parent company's investment............................... -- 4,658,397 ---------- ---------- Total shareholders' equity............................. 151,382 4,658,397 ---------- ---------- Total liabilities and shareholders' equity............. $6,773,914 $5,601,491 ========== ==========
- --------------- * Summarized from audited Fiscal Year 2001 balance sheet See notes to restated condensed consolidated and combined financial statements. 2 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES RESTATED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
First Quarter Ended -------------------------------- August 1, 2001 August 2, 2000 FY 2002 FY 2001 -------------- -------------- (Unaudited) (in thousands) Cash used for Operating Activities.......................... $(128,005) $(12,250) --------- -------- Cash Flows from Investing Activities: Capital expenditures...................................... (2,556) (35,528) Acquisitions, net of cash acquired........................ (290,200) (128,813) Investment in The Hain Celestial Group, Inc............... -- (79,743) Other items, net.......................................... (20,978) (9,457) --------- -------- Cash used for investing activities..................... (313,734) (253,541) --------- -------- Cash Flows from Financing Activities: Payments on long-term debt................................ (7,167) (5,884) Proceeds from long-term debt.............................. 748,959 -- Payments on commercial paper and short-term borrowings, net.................................................... (617,998) -- Dividends................................................. -- (103,019) Net parent advances....................................... -- 381,596 Proceeds from mandatorily redeemable Series A preferred shares................................................. 325,000 -- Other items, net.......................................... 500 -- --------- -------- Cash provided by financing activities.................. 449,294 272,693 --------- -------- Net increase in cash and cash equivalents................... 7,555 6,902 Cash and cash equivalents, beginning of period.............. 10,127 2,322 --------- -------- Cash and cash equivalents, end of period.................... $ 17,682 $ 9,224 ========= ========
See notes to restated condensed consolidated and combined financial statements. 3 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES NOTES TO RESTATED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED) (1) Subsequent to the issuance of the financial statements as of and for the three months ended August 1, 2001, management determined that certain adjustments relating to the sale of inventories retained by H.J. Heinz Company ("Heinz") were required. As a result of the aforementioned adjustments, the effect on the financial statements was as follows:
As Previously Reported As Restated ---------------------- ----------- Sales............................................ $ 530,120 $ 556,739 Gross profit..................................... 270,967 236,419 Selling general and administrative expense....... 126,455 134,078 Royalty expense to related parties............... 45,280 23,098 Operating income................................. 99,232 79,243 Minority interest................................ 71,295 52,305 Net income....................................... 16,536 15,907 Due from related parties......................... 110,750 131,174 Inventories...................................... 672,336 631,923 Total assets..................................... 6,793,903 6,773,914 Minority interest................................ 1,561,859 1,542,869 Shareholders' equity............................. 152,011 151,382 Cash used for operating activities............... (118,569) (128,005) Capital expenditures............................. (11,992) (2,556) Cash used for investing activities............... (323,170) (313,734)
(2) On May 3, 2001, Heinz reorganized its U.S. corporate structure and established two primary companies for the management of U.S. trademarks and for U.S. treasury functions. As a result, all of the business operations of Heinz's domestic operations ("the U.S. Group") are now being conducted by H.J. Heinz Finance Company and its wholly-owned subsidiaries, and H.J. Heinz Company, L.P. ("Heinz LP"), collectively referred to as "HFC" in the accompanying notes. H.J. Heinz Finance Company has limited partnership interests in Heinz LP. H.J. Heinz Finance Company assumed primary liability for approximately $2.9 billion of Heinz's outstanding senior unsecured debt and accrued interest by becoming co-obligor with Heinz. Heinz LP owns or leases the operating assets involved in manufacturing throughout the United States which were contributed by Heinz and its subsidiaries, together with other assets and liabilities, to Heinz LP and manages the business. Heinz LP has two classes of limited partnership interests, Class A and Class B. H.J. Heinz Finance Company, directly and through wholly-owned subsidiaries, owns the Class B interests. Heinz, directly and through wholly-owned subsidiaries, owns the Class A interests. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the managing General Partner of Heinz LP and employs the salaried personnel of the U.S. Group. The minority interest amounts on the August 1, 2001 statement of income and balance sheet represents the Class A and General Partner limited partnership interest in Heinz LP. The preparation of the August 2, 2000 and May 2, 2001 financial statements include the use of "carve out" and "push down" accounting procedures wherein certain assets, liabilities and expenses historically recorded or incurred at the parent company level or an affiliate of Heinz, which related to or were incurred on behalf of the U.S. Group, have been identified and 4 allocated or pushed down as appropriate to reflect results of the U.S. Group for the periods presented. See Note (10), for a further discussion regarding Heinz parent company costs. As a result of finalizing the reorganization, certain assets and liabilities which are included in the May 2, 2001 "carve out" balance sheet, were not contributed to HFC. Substantially all finished goods inventories of the U.S. Group remained assets of Heinz and were not contributed to Heinz LP. These retained inventories result in reduced sales and operating results in Fiscal 2002 when compared to Fiscal 2001. (3) The results for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the business of HFC. 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) INVENTORIES The composition of inventories at the balance sheet dates was as follows:
August 1, May 2, 2001 2001 (in thousands) --------- -------- Finished goods and work-in-process......................... $506,832 $515,315 Packaging material and ingredients......................... 125,091 139,855 -------- -------- $631,923 $655,170 ======== ========
(5) TAXES The provision for income taxes consists of provisions for federal and state income taxes. The tax provision in the August 1, 2001 financial statements declined significantly given the non-taxable status of Heinz LP. (6) RESTRUCTURING In the fourth quarter of Fiscal 2001, Heinz announced a restructuring initiative named "Streamline" which includes an organizational restructuring aimed at reducing overhead costs and the consolidation of HFC's canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at HFC's Terminal Island, California facility). The major components of the restructuring charge and implementation costs and the remaining accrual balances as of August 1, 2001 were as follows:
Employee Termination Non-Cash and Accrued Asset Severance Exit Implementation (in millions) Write-Downs Costs Costs Costs Total ------------- ----------- ----------- ------- -------------- ----- Restructuring and Implementation costs--Fiscal 2001.................. $34.7 $15.4 $22.8 $11.8 $84.7 Amounts utilized--Fiscal 2001......... (34.7) (5.8) (1.7) (11.8) (54.0) ----- ----- ----- ----- ----- Accrued restructuring costs--May 2, 2001................................ -- 9.6 21.1 -- 30.7 Implementation costs--Fiscal 2002..... -- -- -- 1.2 1.2 Amounts utilized--Fiscal 2002......... -- (1.7) (0.5) (1.2) (3.4) Liability assumed by related party--Fiscal 2002.................. -- (3.8) (0.6) -- (4.4) ----- ----- ----- ----- ----- Accrued restructuring costs--August 1, 2001................................ $ -- $ 4.1 $20.0 $ -- $24.1 ===== ===== ===== ===== =====
5 During the first quarter of Fiscal 2002, HFC incurred implementation costs totaling $1.2 million pretax, which consisted of incremental costs directly related to the implementation of the Streamline initiative. Pretax charges of $1.1 million were classified as cost of products sold and $0.1 million as selling, general and administrative expenses ("SG&A"). In addition, Heinz Management Company, a wholly-owned subsidiary of Heinz, assumed a portion of the HFC's restructuring liability as a result of the realignment that occurred on May 3, 2001. During the first quarter of Fiscal 2002, HFC utilized $2.2 million of severance and exit cost accruals, principally for ceasing canned pet food production in its Terminal Island, California facility and its overhead reduction plan. (7) ACQUISITIONS During the first quarter of Fiscal 2002, HFC completed the acquisition of Borden Food Corporation's pasta sauce and dry bouillon and soup business. Under this transaction, HFC acquired such brands as Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups, Wyler's bouillons and soups. HFC also made another 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 and combined statements of income from the respective acquisition dates forward. Pro forma results of HFC, 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) RECENTLY ADOPTED ACCOUNTING STANDARDS In Fiscal 2001, HFC changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." Under the new accounting method, adopted retroactive to May 4, 2000, HFC recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The cumulative effect adjustment of $4.8 million in net income as of May 4, 2000 was recognized during the first quarter of Fiscal 2001. The Fiscal 2001 first quarter amounts include the effect of the change in accounting for revenue recognition. (9) RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually, and they provide guidelines for new disclosure requirements. These standards outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. The provisions of SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other intangible assets are required to be implemented in the first quarter of Fiscal 2003. HFC is currently evaluating the impact of these standards on the consolidated financial statements. In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued new guidelines entitled "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products," which address the income statement classification of consideration from a vendor to a retailer. These guidelines will be effective for HFC beginning in the fourth quarter of Fiscal 2002. The implementation of these guidelines 6 will require HFC to make reclassifications between SG&A and sales, the amounts of which have not yet been determined. In May 2000, the EITF issued new guidelines entitled "Accounting for Certain Sales Incentives" which addresses the recognition, measurement and income statement classification for certain sales incentives (e.g., coupons). These guidelines will be effective for HFC beginning in the fourth quarter of Fiscal 2002. The implementation of these guidelines will require HFC to make reclassifications between SG&A and sales, the amounts of which have not yet been determined. (10) RELATED PARTY TRANSACTIONS Employee Costs Certain of Heinz's general and administrative expenses are allocated to HFC. In Fiscal 2001, total costs allocated include charges for salaries of corporate officers and staff and other Heinz corporate overhead. In Fiscal 2002, these costs primarily include a management charge of all salaried employee costs from the Heinz Management Company. Total costs charged to HFC for these services were $82.0 million and $6.9 million for the three months ended August 1, 2001 and August 2, 2000, respectively. These costs are recorded as cost of products sold and SG&A expense in the accompanying consolidated and combined statements of income. Heinz charges HFC for its share of group health insurance costs for eligible company employees based upon location-specific costs, overall insurance costs and loss experience incurred during a calendar year. In addition, various other insurance coverages are also provided to HFC through Heinz's consolidated programs. Workers compensation, auto, property, product liability and other insurance coverages are charged directly based on HFC's loss experience. Amounts charged to HFC for insurance costs were $15.4 million and $20.4 million for the three months ended August 1, 2001 and August 2, 2000, respectively, and are recorded in SG&A expense in the accompanying consolidated and combined statement of income. Pension costs and postretirement costs are also charged to HFC based upon eligible employees participating in the Plans. Cash Management In Fiscal 2001, the U.S. Group maintained a cash management arrangement with Heinz. On a daily basis, all available cash was deposited and disbursements were withdrawn. Heinz charged (credited) the U.S. Group's interest on the average daily balance maintained in the resulting intercompany account. Net interest income related to this arrangement, included in the combined statement of income for August 2, 2000 was $0.6 million. The interest rate charged to or received by the U.S. Group was 5.4% for the three months ended August 2, 2000. Beginning in Fiscal 2002, HFC became the treasury center for cash management and debt financing for all of Heinz's domestic operations resulting in the $1.0 billion of short term notes receivable with related parties on the August 1, 2001 condensed consolidated balance sheet. An average interest rate of 3.93% was charged on these notes resulting in $11.0 million of interest income recorded on the August 1, 2001 consolidated statement of income. Product sales and purchases HFC sells and purchases products and services to and from other Heinz affiliates. The results of such transactions are the $131.2 million and $75.4 million balances due from related parties as of August 1, 2001 and May 2, 2001, respectively, and the $226.3 million and $96.2 million balances due to related parties as of August 1, 2001 and May 2, 2001, respectively. Sales to related parties were $12.3 million and $19.7 million in the three months ended August 1, 2001 and August 2, 2000, respectively, and purchases from related parties were 7 $70.8 million and $114.3 million in the three months ended August 1, 2001 and August 2, 2000, respectively. Other related party items HFC sells undivided interests in certain accounts receivable to a Heinz affiliate, Receivables Servicing Company (RSC). HFC sold $318.6 million and $1,291.0 million of receivables net of discount expense of $1.6 million and $9.4 million for the quarter ended August 1, 2001 and the year ended May 2, 2001, respectively, to RSC. As of August 1, 2001 and May 2, 2001, respectively, HFC had $130.1 million and $126.9 million of receivables sold to RSC. These sales were reflected as reductions of trade accounts receivable. HFC's contract with RSC will terminate in December 2001. Until the fourth quarter of Fiscal 2001, HFC had outstanding notes receivable from Heinz affiliates which were used for working capital purposes and to fund acquisitions. The short-term notes had interest rates ranging from 6.50% to 7.00%. The long-term notes had interest rates ranging from 6.75% to 7.50% with a maturity of May 2003. Interest income earned by HFC related to these receivables was $27.2 million for the three months ended August 2, 2000. In the fourth quarter of Fiscal 2001, these notes receivable from related parties were exchanged by HFC with a subsidiary of Heinz, PM Holding, Inc. ("PM Holding"), for $1.9 billion of non-voting, 6.5% cumulative non-participating preferred stock of PM Holding. This dividend amounted to $38.5 million for the first three months of Fiscal 2002. This preferred stock investment is recorded in the Investments in related parties balance on the condensed consolidated and combined balance sheets as of August 1, 2001 and May 2, 2001. HFC paid royalties of $23.1 million and $24.1 million for the quarter ended August 1, 2001 and August 2, 2000, respectively, to Promark International, Inc., an indirect subsidiary of Heinz, for the use of trademarks. The $35.0 million long-term note receivable from related parties recorded on the accompanying condensed consolidated and combined balance sheets relates to a receivable from Heinz that was contributed to HFC in exchange for common stock of HFC. (11) On September 6, 2001, HFC, Heinz and a group of domestic and international banks entered into a $1.50 billion credit agreement which expires in September 2006 and an $800 million credit agreement which expires in September 2002. These credit agreements, which support HFC's commercial paper program, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of August 1, 2001, $673 million of commercial paper was outstanding and classified as long-term debt due to the long-term nature of the supporting credit agreement. On July 6, 2001, HFC raised $325 million via the issuance of Voting Cumulative Preferred Stock, Series A with a liquidation preference of $100,000 per share. The Series A Preferred shares are entitled to receive quarterly dividends at a rate of 6.226% per annum and are required to be redeemed for cash on July 15, 2008. In addition, HFC issued $750 million of 6.625% Guaranteed Notes due July 15, 2011 which are guaranteed by Heinz. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings, financing acquisitions and ongoing operations. 8 (12) COMPREHENSIVE INCOME
First Quarter Ended ------------------- August 1, 2001 (in thousands) FY 2002 - -------------- ------------------- Net income.................................................. $15,907 Deferred gains on derivatives: Net change from periodic revaluations..................... 1,643 Net amount reclassified to earnings....................... 138 ------- Comprehensive income........................................ $17,688 =======
(13) FINANCIAL INSTRUMENTS HFC utilizes certain financial instruments to manage its commodity price and interest rate exposures. COMMODITY PRICE HEDGING: HFC uses commodity futures and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow hedges. When using a commodity option as a hedging instrument, HFC excludes the time value of the option from the assessment of hedge effectiveness. INTEREST RATE HEDGING: HFC uses interest rate swaps to manage interest rate exposure. These derivatives are designated as cash flow hedges or fair value hedges depending on the nature of the particular risk being hedged. HEDGE INEFFECTIVENESS: During the quarter ended August 1, 2001, hedge ineffectiveness related to cash flow hedges was a net loss of $0.1 million, which is reported in the consolidated statements of income as other expenses. DEFERRED HEDGING GAINS AND LOSSES: As of August 1, 2001, HFC is hedging forecasted transactions for periods not exceeding 12 months, and expects $1.5 million of net deferred gain reported in accumulated other comprehensive income to be reclassified to earnings within that time frame. (14) SUBSEQUENT EVENTS On August 2, 2001, HFC announced that it acquired Delimex Holdings, Inc. ("Delimex"), a leading maker of frozen Mexican food products, from Fenway Partners. Delimex is a leading U.S. producer of frozen taquitos, tightly rolled fried corn and flour tortillas with fillings such as beef, chicken or cheese. Delimex also makes quesadillas, tamales and rice bowls. 9 -----END PRIVACY-ENHANCED MESSAGE-----