-----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, EwcJ5z90gcrjAwPgk+V62x3Kn/G4UAIi4nB3+Cgu7HTpa4TAILy5QKVcbMh+MB26 dx7DQv0+N6CZZ/EFGOSJTw== 0000950128-04-000179.txt : 20040225 0000950128-04-000179.hdr.sgml : 20040225 20040225164733 ACCESSION NUMBER: 0000950128-04-000179 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040128 FILED AS OF DATE: 20040225 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: 04628076 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 j0533801e10vq.txt H. J. HEINZ COMPANY SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 28, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ FOR THE NINE MONTHS ENDED JANUARY 28, 2004 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 __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No __ The number of shares of the Registrant's Common Stock, par value $.25 per share, outstanding as of February 20, 2004 was 352,096,898 shares. PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Third Quarter Ended ------------------------------------ January 28, 2004 January 29, 2003 FY 2004 FY 2003 ---------------- ---------------- (Unaudited) (In Thousands, Except per Share Amounts) Sales...................................................... $2,097,181 $2,105,003 Cost of products sold...................................... 1,317,934 1,342,958 ---------- ---------- Gross profit............................................... 779,247 762,045 Selling, general and administrative expenses............... 423,880 440,405 ---------- ---------- Operating income........................................... 355,367 321,640 Interest income............................................ 5,588 9,149 Interest expense........................................... 53,725 58,870 Other expense, net......................................... 5,095 66,470 ---------- ---------- Income from continuing operations before income taxes...... 302,135 205,449 Provision for income taxes................................. 99,898 75,600 ---------- ---------- Income from continuing operations.......................... 202,237 129,849 Income from discontinued operations, net of tax............ -- 21,770 ---------- ---------- Net income................................................. $ 202,237 $ 151,619 ========== ========== Income per common share Diluted Continuing operations................................. $ 0.57 $ 0.37 Discontinued operations............................... -- 0.06 ---------- ---------- Net income.......................................... $ 0.57 $ 0.43 ========== ========== Average common shares outstanding--diluted............... 354,254 353,973 ========== ========== Basic Continuing operations................................. $ 0.58 $ 0.37 Discontinued operations............................... -- 0.06 ---------- ---------- Net income.......................................... $ 0.58 $ 0.43 ========== ========== Average common shares outstanding--basic................. 351,725 351,198 ========== ========== Cash dividends per share................................... $ 0.27 $ 0.4050 ========== ==========
See Notes to Condensed Consolidated Financial Statements. ------------------ 2 H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended ------------------------------------ January 28, 2004 January 29, 2003 FY 2004 FY 2003 ---------------- ---------------- (Unaudited) (In Thousands, Except per Share Amounts) Sales...................................................... $6,083,166 $6,043,487 Cost of products sold...................................... 3,815,625 3,857,784 ---------- ---------- Gross profit............................................... 2,267,541 2,185,703 Selling, general and administrative expenses............... 1,214,063 1,237,142 ---------- ---------- Operating income........................................... 1,053,478 948,561 Interest income............................................ 15,901 21,764 Interest expense........................................... 160,254 165,325 Other expense, net......................................... 35,019 101,452 ---------- ---------- Income from continuing operations before income taxes and cumulative effect of change in accounting principle...... 874,106 703,548 Provision for income taxes................................. 293,557 250,790 ---------- ---------- Income from continuing operations before cumulative effect of change in accounting principle........................ 580,549 452,758 Income from discontinued operations, net of tax............ 27,200 88,738 ---------- ---------- Income before cumulative effect of change in accounting principle................................................ 607,749 541,496 Cumulative effect of change in accounting principle........ -- (77,812) ---------- ---------- Net income................................................. $ 607,749 $ 463,684 ========== ========== Income per common share Diluted Continuing operations................................. $ 1.64 $ 1.28 Discontinued operations............................... 0.08 0.25 Cumulative effect of change in accounting principle... -- (0.22) ---------- ---------- Net income.......................................... $ 1.72 $ 1.31 ========== ========== Average common shares outstanding--diluted............... 354,254 353,973 ========== ========== Basic Continuing operations................................. $ 1.65 $ 1.29 Discontinued operations............................... 0.08 0.25 Cumulative effect of change in accounting principle... -- (0.22) ---------- ---------- Net income.......................................... $ 1.73 $ 1.32 ========== ========== Average common shares outstanding--basic................. 351,725 351,198 ========== ========== Cash dividends per share................................... $ 0.81 $ 1.2150 ========== ==========
See Notes to Condensed Consolidated Financial Statements. ------------------ 3 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
January 28, 2004 April 30, 2003* FY 2004 FY 2003 ---------------- ---------------- (Unaudited) (Thousands of Dollars) ASSETS Current Assets: Cash and cash equivalents.................................. $1,016,166 $ 801,732 Receivables, net........................................... 1,029,442 1,165,460 Inventories................................................ 1,309,837 1,152,953 Prepaid expenses and other current assets.................. 253,583 164,175 ---------- ---------- Total current assets.................................. 3,609,028 3,284,320 ---------- ---------- Property, plant and equipment.............................. 3,752,154 3,412,853 Less accumulated depreciation.............................. 1,692,021 1,454,987 ---------- ---------- Total property, plant and equipment, net.............. 2,060,133 1,957,866 ---------- ---------- Goodwill................................................... 2,015,311 1,849,389 Trademarks, net............................................ 656,373 610,063 Other intangibles, net..................................... 130,018 134,897 Other non-current assets................................... 1,439,114 1,388,216 ---------- ---------- Total other non-current assets........................ 4,240,816 3,982,565 ---------- ---------- Total assets.......................................... $9,909,977 $9,224,751 ========== ==========
*Summarized from audited fiscal year 2003 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 4 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
January 28, 2004 April 30, 2003* FY 2004 FY 2003 ---------------- ---------------- (Unaudited) (Thousands of Dollars) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt............................................ $ 11,358 $ 146,838 Portion of long-term debt due within one year.............. 379,086 7,948 Accounts payable........................................... 920,077 938,168 Salaries and wages......................................... 46,270 43,439 Accrued marketing.......................................... 207,461 201,945 Other accrued liabilities.................................. 354,655 387,130 Income taxes............................................... 421,827 200,666 ---------- ---------- Total current liabilities............................. 2,340,734 1,926,134 ---------- ---------- Long-term debt............................................. 4,717,385 4,776,143 Deferred income taxes...................................... 170,901 183,998 Non-pension postretirement benefits........................ 193,054 192,663 Other liabilities and minority interest.................... 690,225 946,656 ---------- ---------- Total long-term liabilities........................... 5,771,565 6,099,460 Shareholders' Equity: Capital stock.............................................. 107,868 107,880 Additional capital......................................... 390,709 376,542 Retained earnings.......................................... 4,755,412 4,432,571 ---------- ---------- 5,253,989 4,916,993 Less: Treasury stock at cost (79,644,446 shares at January 28, 2004 and 79,647,881 shares at April 30, 2003)......... 2,919,419 2,879,506 Unearned compensation.................................... 37,396 21,195 Accumulated other comprehensive loss..................... 499,496 817,135 ---------- ---------- Total shareholders' equity............................ 1,797,678 1,199,157 ---------- ---------- Total liabilities and shareholders' equity............ $9,909,977 $9,224,751 ========== ==========
*Summarized from audited fiscal year 2003 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 5 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended ------------------------------------ January 28, 2004 January 29, 2003 FY 2004 FY 2003 ---------------- ---------------- (Unaudited) (Thousands of Dollars) Cash Flows from Operating Activities: Net income................................................ $ 607,749 $ 463,684 Income from discontinued operations....................... (27,200) (88,738) ---------- ----------- Income from continuing operations......................... 580,549 374,946 Adjustments to reconcile net income to cash provided by operating activities: Depreciation............................................ 153,944 147,828 Amortization............................................ 15,836 9,972 Deferred tax provision.................................. 48,427 37,758 Gain on divestiture..................................... (26,338) -- Cumulative effect of change in accounting principle..... -- 77,812 Provision for transaction costs and restructuring....... -- 61,050 Other items, net........................................ 25,106 (51,784) Changes in current assets and liabilities, excluding effects of acquisitions and divestitures: Receivables........................................... 168,842 158,922 Inventories........................................... (45,758) (75,500) Prepaid expenses and other current assets............. (50,175) (89,403) Accounts payable...................................... (125,864) (74,289) Accrued liabilities................................... (68,863) (95,943) Income taxes.......................................... 141,347 79,816 ---------- ----------- Cash provided by operating activities.............. 817,053 561,185 ---------- ----------- Cash Flows from Investing Activities: Capital expenditures.................................... (119,817) (92,249) Acquisitions, net of cash acquired...................... (75,368) (13,554) Proceeds from spin-off.................................. -- 1,063,557 Proceeds from divestitures.............................. 60,467 54,981 Other items, net........................................ 14,775 (15,863) ---------- ----------- Cash used for investing activities................. (119,943) 996,872 ---------- ----------- Cash Flows from Financing Activities: Payments on long-term debt.............................. (73,988) (487,980) Payments on commercial paper and short-term debt, net... (143,288) (177,333) Dividends............................................... (284,908) (430,991) Purchases of treasury stock............................. (122,730) -- Exercise of stock options............................... 66,762 6,523 Other items, net........................................ 12,467 14,215 ---------- ----------- Cash used for financing activities................. (545,685) (1,075,566) ---------- ----------- Effect of exchange rate changes on cash and cash equivalents............................................... 63,009 36,995 Effect of discontinued operations........................... -- 102,228 ---------- ----------- Net increase in cash and cash equivalents................... 214,434 621,714 Cash and cash equivalents at beginning of year.............. 801,732 202,403 ---------- ----------- Cash and cash equivalents at end of period.................. $1,016,166 $ 824,117 ========== =========== Supplemental cash flow information: Noncash activities: Net assets spun-off..................................... $ -- $ 1,644,195 ========== ===========
See Notes to Condensed Consolidated Financial Statements. ------------------ 6 H. J. HEINZ COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The interim condensed consolidated financial statements of H. J. Heinz Company, together with its subsidiaries (collectively referred to as the "Company"), are unaudited. In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the results of operations of these interim periods have been included. The results for 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 2004 presentation. These statements should be read in conjunction with the Company's consolidated financial statements and related notes, and management's discussion and analysis of financial condition and results of operations which appear in the Company's Annual Report on Form 10-K for the year ended April 30, 2003. (2) DISCONTINUED OPERATIONS AND SPIN-OFF On December 20, 2002, the Company transferred to a wholly-owned subsidiary ("SKF Foods") certain assets and liabilities, including its U.S. and Canadian pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broths and its U.S. infant feeding businesses and distributed all of the shares of SKF Foods common stock on a pro rata basis to its shareholders. Immediately thereafter, SKF Foods merged with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte") resulting in SKF Foods becoming a wholly-owned subsidiary of Del Monte. In accordance with accounting principles generally accepted in the United States of America, the operating results related to these businesses spun off to Del Monte have been treated as discontinued operations in the Company's consolidated statements of income. Net income from discontinued operations for the nine months ended January 28, 2004 reflects the favorable settlement of prior year tax liabilities related to the spun off businesses. The discontinued operations generated sales of $257.4 million and $1,091.3 million and net income of $21.8 million (net of $5.5 million in tax) and $88.7 million (net of $35.4 million in tax) for the third quarter and nine months ended January 29, 2003, respectively. (3) SPECIAL ITEMS DIVESTITURES During the first quarter of Fiscal 2004, the Company sold its bakery business in Northern Europe for $57.9 million. The transaction resulted in a pretax gain of $26.3 million ($13.3 million after tax), which will be used to offset reorganization and other costs during Fiscal 2004. Pro forma results of the Company, assuming the divestiture had been made at the beginning of each period presented, would not be materially different from the results reported. In the third quarter of Fiscal 2003, the Company was impacted by a loss on the disposal of a North American fish and vegetable business of $9.4 million pretax ($10.1 million after tax), which was recorded in Selling, General and Administrative expenses ("SG&A"). REORGANIZATION COSTS The Company recognized $5.5 million pretax ($3.4 million after tax) for the nine months ended January 28, 2004, all of which was recorded in the first quarter of Fiscal 2004. These costs were recorded as a component of SG&A, and were primarily due to employee termination and severance costs related to ongoing efforts to reduce overhead costs at its North 7 American operations following last year's spin-off transaction with Del Monte. Additionally, during the first quarter of Fiscal 2004, the Company wrote down pizza crust assets to be disposed of in the United Kingdom totaling $4.0 million pretax ($2.8 million after tax) which has been included as a component of cost of products sold. For the third quarter of Fiscal 2003, the Company recognized reorganization costs totaling $72.1 million pretax ($51.5 million after tax), of which $1.6 million was recorded in cost of products sold, $30.9 million in SG&A and $39.6 million in other expenses, net. For the first nine months of Fiscal 2003, the Company recognized $100.7 million pretax ($70.1 million after tax), of which $3.5 million was recorded in cost of products sold, $57.6 million in SG&A and $39.6 million in other expenses, net. These Fiscal 2003 reorganization costs include employee termination and severance costs, legal and other professional service costs and costs related to the early retirement of debt. During the first nine months of Fiscal 2004, the Company utilized $46.1 million of severance and exit cost accruals related to reorganization costs. Amounts included in accrued expenses related to these initiatives totaled $5.6 million and $46.2 million at January 28, 2004 and April 30, 2003, respectively. (4) INVENTORIES The composition of inventories at the balance sheet dates was as follows:
January 28, 2004 April 30, 2003 ---------------- -------------- (Thousands of Dollars) Finished goods and work-in-process................. $ 975,423 $ 902,186 Packaging material and ingredients................. 334,414 250,767 ---------- ---------- $1,309,837 $1,152,953 ========== ==========
(5) GOODWILL AND OTHER INTANGIBLE ASSETS Effective May 2, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. As a result of adopting SFAS No. 142, the Company recorded a transitional impairment charge which was calculated as of May 2, 2002, and recorded as an effect of a change in accounting principle in the nine-month period ended January 29, 2003, of $77.8 million. There was no tax effect associated with this charge. The charge, which relates to certain of the Company's reporting units, has been reflected in its segments as follows: Europe $54.6 million, Asia/Pacific $2.7 million, and Other Operating Entities $20.5 million. The annual impairment tests are performed in the fourth quarter of each fiscal year unless events suggest an impairment may have occurred in the interim. No impairment charges were recognized for the nine months ended January 28, 2004. 8 Changes in the carrying amount of goodwill for the nine months ended January 28, 2004, by reportable segment, are as follows (see footnote 9 for information on changes to reportable segments):
North American Other Consumer U.S. Asia/ Operating (Thousands of Dollars) Products Foodservice Europe Pacific Entities Total ---------------------- -------- ----------- -------- -------- --------- ---------- Balance at April 30, 2003........... $891,608 $164,542 $637,371 $143,201 $12,667 $1,849,389 Acquisition......................... -- 46,051 2,930 5,000 4,728 58,709 Purchase accounting reclassifications................. 4,327 540 (3,585) -- -- 1,282 Disposal............................ -- -- (11,469) -- -- (11,469) Translation adjustments............. 4,068 -- 82,583 27,494 692 114,837 Other............................... 2,563 -- -- -- -- 2,563 -------- -------- -------- -------- ------- ---------- Balance at January 28, 2004......... $902,566 $211,133 $707,830 $175,695 $18,087 $2,015,311 ======== ======== ======== ======== ======= ==========
Trademarks and other intangible assets at January 28, 2004 and April 30, 2003, subject to amortization expense, are as follows:
January 28, 2004 April 30, 2003 ------------------------------- ------------------------------- Accum Accum (Thousands of Dollars) Gross Amort Net Gross Amort Net - ---------------------- -------- --------- -------- -------- --------- -------- Trademarks...................... $190,844 $ (49,560) $141,284 $191,832 $ (55,691) $136,141 Licenses........................ 208,186 (117,032) 91,154 208,186 (112,617) 95,569 Other........................... 100,619 (61,755) 38,864 96,938 (57,610) 39,328 -------- --------- -------- -------- --------- -------- $499,649 $(228,347) $271,302 $496,956 $(225,918) $271,038 ======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to amortization was $11.6 million and $10.0 million for the nine months ended January 28, 2004 and January 29, 2003, respectively. Based upon the amortizable intangible assets recorded on the balance sheet at January 28, 2004, amortization expense for each of the next five years is estimated to be approximately $16.0 million. Intangible assets not subject to amortization at January 28, 2004 and April 30, 2003 were $515.1 million and $473.9 million, respectively, and consisted solely of trademarks. (6) INCOME TAXES The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates in an international environment with significant operations in various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable tax rates. During the third quarter of Fiscal 2004, the Company reorganized certain of its foreign operations and as a result incurred a foreign income tax liability of $117.8 million, payable in Fiscal 2005. Because the Company increased the tax basis in amortizable assets, cash flow is expected to be positive in each of the nine years following Fiscal 2005. (7) STOCK-BASED EMPLOYEE COMPENSATION PLANS Stock-based compensation is accounted for by using the intrinsic value-based method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the Company's stock option plans. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, 9 income and income per common share from continuing operations before cumulative effect of change in accounting principle would have been as follows:
Third Quarter Ended Nine Months Ended ------------------------------------- ------------------------------------- January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003 ----------------- ----------------- ----------------- ----------------- (Thousands of Dollars, Except Per Share Amounts) Income from continuing operations before cumulative effect of change in accounting principle: As reported............... $202,237 $129,849 $580,549 $452,758 Fair value-based expense, net of tax.............. 7,834 6,496 20,830 19,874 -------- -------- -------- -------- Pro forma................. $194,403 $123,353 $559,719 $432,884 ======== ======== ======== ======== Income per common share from continuing operations before cumulative effect of change in accounting principle: Diluted As reported............. $ 0.57 $ 0.37 $ 1.64 $ 1.28 Pro forma............... $ 0.55 $ 0.35 $ 1.58 $ 1.22 Basic As reported............. $ 0.58 $ 0.37 $ 1.65 $ 1.29 Pro forma............... $ 0.55 $ 0.35 $ 1.59 $ 1.23
The weighted-average fair value of options granted was $5.91 and $6.89 per share in the nine months ended January 28, 2004 and January 29, 2003, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Nine Months Ended ------------------------------------ January 28, 2004 January 29, 2003 ---------------- ---------------- Dividend yield........................................ 3.26% 4.26% Volatility............................................ 20.20% 25.20% Risk-free interest rate............................... 3.71% 3.98% Expected term (years)................................. 6.50 6.50
During the first nine months of Fiscal 2004, the Company granted 907,531 restricted stock units to employees. The fair value of the awards granted has been recorded as unearned compensation and is shown as a separate component of shareholders' equity. (8) RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This revised statement requires additional annual disclosures regarding types of pension plan assets, investment strategy, future plan contributions, expected benefit payments and other items. The statement also requires quarterly disclosure of the components of net periodic benefit cost and plan contributions. The annual disclosures will be required for the Company's Form 10-K for its fiscal year ended April 28, 2004, and the quarterly disclosures will be required beginning in the quarter ended July 28, 2004. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") was signed into law. The Act introduced a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-1, the Company has elected to defer recognizing the effects of the Act on the accounting for its retirement health care plans because specific authoritative 10 guidance on the accounting for the Act's provisions is pending. Once issued, this guidance could require the Company to change previously reported financial information. In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46-R, "Consolidation of Variable Interest Entities." FIN No. 46-R, which modifies certain provisions and effective dates of FIN No. 46, sets forth criteria to be used in determining whether an investment in a variable interest entity should be consolidated, and is based on the general premise that companies that control another entity through interests other than voting interests should consolidate the controlled entity. The provisions of FIN No. 46 become effective for the Company in its fourth quarter ended April 28, 2004. The Company is currently evaluating the impact the revised accounting standard will have on the consolidated results of operations and financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement affects the classification, measurement and disclosure requirements of certain financial instruments including mandatorily redeemable shares. SFAS No. 150 was effective for the Company for the second quarter of Fiscal 2004. The adoption of SFAS No. 150 required the prospective classification of Heinz Finance Company's $325 million of mandatorily redeemable preferred shares from minority interest to long-term debt and the $5.1 million quarterly preferred dividend from other expenses to interest expense beginning in the second quarter ending October 29, 2003, with no resulting effect on the Company's profitability. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for entities that voluntarily change to the fair value method of accounting for stock-based employee compensation, and it also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects of an entity's accounting policy decisions with respect to stock-based employee compensation in both annual and interim financial reporting. The disclosure provisions of SFAS No. 148 were effective for the Company at April 30, 2003. (9) SEGMENTS The Company's reportable segments are primarily organized by geographical area. The composition of segments and measure of segment profitability is consistent with that used by the Company's management. In the first quarter of Fiscal 2004, the Company changed its segment reporting to reflect changes in organizational structure and management of its businesses. The Company is now managing and reporting its North American businesses under two segments, designated North American Consumer Products and U.S. Foodservice. Changes in the remaining segments involve the reclassification of certain operating and non-operating businesses between existing segments. Prior periods have been restated to conform with the current presentation. Descriptions of the Company's reportable segments are as follows: North American Consumer Products--This segment manufactures, markets and sells ketchup, condiments, sauces, pasta meals, and frozen potatoes, entrees, snacks and appetizers to the grocery channels in the United States of America and our Canadian business. U.S. Foodservice--This segment manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States of America including ketchup, condiments, sauces and frozen soups and desserts. Europe--This segment includes the Company's operations in Europe and sells products in all of the Company's core categories. 11 Asia/Pacific--This segment includes the Company's operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Singapore and Thailand. 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, India, Latin America, the Middle East and other areas that sell products in all of the Company's core categories. During Fiscal 2003, the Company deconsolidated its Zimbabwe operations which had historically been reported in this segment. The Company's management evaluates performance based on several factors including net sales, operating income excluding unusual costs and gains, and the use of capital resources. Intersegment revenues are accounted for at current market values. Items below the operating income line of the consolidated statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by the Company's management. The following table presents information about the Company's reportable segments:
Third Quarter Ended Nine Months Ended ----------------------------------- ----------------------------------- January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003 FY 2004 FY 2003 FY 2004 FY 2003 ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) Net external sales: North American Consumer Products................. $ 521,753 $ 535,792 $1,494,413 $1,541,581 U.S. Foodservice........... 353,884 321,091 1,056,993 971,407 Europe..................... 827,451 769,114 2,337,255 2,156,687 Asia/Pacific............... 301,885 274,288 926,661 781,680 Other Operating Entities... 92,208 204,718 267,844 592,132 ---------- ---------- ---------- ---------- Consolidated Totals........ $2,097,181 $2,105,003 $6,083,166 $6,043,487 ========== ========== ========== ========== Intersegment revenues: North American Consumer Products................. $ 13,449 $ 14,548 $ 42,429 $ 42,349 U.S. Foodservice........... 3,747 5,153 10,378 12,099 Europe..................... 2,729 4,554 10,352 11,955 Asia/Pacific............... 581 780 2,158 2,508 Other Operating Entities... 609 657 1,727 1,702 Non-Operating (a).......... (21,115) (25,692) (67,044) (70,613) ---------- ---------- ---------- ---------- Consolidated Totals........ $ -- $ -- $ -- $ -- ========== ========== ========== ========== Operating income (loss): North American Consumer Products................. $ 126,534 $ 103,807 $ 359,265 $ 329,085 U.S. Foodservice........... 54,658 51,536 161,308 148,225 Europe..................... 163,147 141,297 479,130 415,289 Asia/Pacific............... 34,026 29,313 112,029 75,113 Other Operating Entities... 2,554 40,785 22,184 93,500 Non-Operating (a).......... (25,552) (45,098) (80,438) (112,651) ---------- ---------- ---------- ---------- Consolidated Totals........ $ 355,367 $ 321,640 $1,053,478 $ 948,561 ========== ========== ========== ========== Operating income (loss) excluding special items (b): North American Consumer Products................. $ 126,534 $ 123,320 $ 360,761 $ 357,618 U.S. Foodservice........... 54,658 51,536 163,808 151,453 Europe..................... 163,147 141,297 454,331 415,289 Asia/Pacific............... 34,026 29,313 112,029 75,113 Other Operating Entities... 2,554 40,785 22,184 93,500 Non-Operating (a).......... (25,552) (22,698) (78,980) (73,950) ---------- ---------- ---------- ---------- Consolidated Totals........ $ 355,367 $ 363,553 $1,034,133 $1,019,023 ========== ========== ========== ==========
- --------------- (a) Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. 12 (b) Third Quarter ended January 29, 2003 - Excludes Del Monte transaction related costs and cost to reduce overhead of the remaining businesses as follows: North American Consumer Products $19.5 million and Non-Operating $22.4 million. Nine Months ended January 28, 2004 - Excludes the gain on disposal of the bakery business in Northern Europe and costs to reduce overhead of the remaining businesses as follows: North American Consumer Products $1.5 million, U.S. Foodservice $2.5 million, Europe $(24.8) million, and Non-Operating $1.5 million. Nine Months ended January 29, 2003 - Excludes Del Monte transaction related costs and cost to reduce overhead of the remaining businesses as follows: North American Consumer Products $28.5 million, U.S. Foodservice $3.2 million, and Non-Operating $38.7 million. The Company's revenues are generated via the sale of products in the following categories:
Third Quarter Ended Nine Months Ended ----------------------------------- ----------------------------------- January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003 FY 2004 FY 2003 FY 2004 FY 2003 ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) Ketchup, Condiments and Sauces..... $ 735,347 $ 667,635 $2,229,197 $1,998,956 Frozen Foods....................... 526,150 506,938 1,402,629 1,469,338 Convenience Meals.................. 464,000 452,371 1,349,012 1,235,219 Infant Foods....................... 222,652 199,759 629,769 577,846 Other.............................. 149,032 278,300 472,559 762,128 ---------- ---------- ---------- ---------- Total.......................... $2,097,181 $2,105,003 $6,083,166 $6,043,487 ========== ========== ========== ==========
The above amounts include the impact of acquisitions, divestitures (primarily affecting the Other and Frozen Foods categories) and foreign exchange. (10) NET INCOME PER COMMON SHARE The following are reconciliations of income to income applicable to common stock and the number of common shares outstanding used to calculate basic EPS to those shares used to calculate diluted EPS:
Third Quarter Ended Nine Months Ended ----------------------------------- ----------------------------------- January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003 FY 2004 FY 2003 FY 2004 FY 2003 ---------------- ---------------- ---------------- ---------------- (In Thousands) Income from continuing operations before cumulative effect of change in accounting principle........... $202,237 $129,849 $580,549 $452,758 Preferred dividends................. 4 5 12 14 -------- -------- -------- -------- Income from continuing operations applicable to common stock before cumulative effect of change in accounting principle.............. 202,233 129,844 580,537 452,744 Cumulative effect of change in accounting principle.............. -- -- -- (77,812) -------- -------- -------- -------- Income from continuing operations applicable to common stock........ $202,233 $129,844 $580,537 $374,932 ======== ======== ======== ======== Average common shares outstanding--basic.............. 351,725 351,198 351,725 351,198 Effect of dilutive securities: Convertible preferred stock..... 146 147 146 147 Stock options and restricted stock......................... 2,383 2,628 2,383 2,628 -------- -------- -------- -------- Average common shares outstanding--diluted............ 354,254 353,973 354,254 353,973 ======== ======== ======== ========
13 (11) COMPREHENSIVE INCOME
Third Quarter Ended Nine Months Ended ----------------------------------- ----------------------------------- January 28, 2004 January 29, 2003 January 28, 2004 January 29, 2003 FY 2004 FY 2003 FY 2004 FY 2003 ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) Net income.......................... $202,237 $151,619 $607,749 $463,684 Other comprehensive income: Foreign currency translation adjustment.................... 207,546 252,135 383,956 376,057 Minimum pension liability adjustment.................... (28,613) (799) (53,632) (443) Net deferred gains/(losses) on derivatives from periodic revaluations.................. (8,321) 15,341 (6,285) 26,932 Net deferred (gains)/losses on derivatives reclassified to earnings...................... 936 (10,777) (6,400) (23,988) -------- -------- -------- -------- Comprehensive income................ $373,785 $407,519 $925,388 $842,242 ======== ======== ======== ========
(12) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain derivative and non-derivative financial instruments to manage its foreign currency, commodity price, and interest rate exposures. FOREIGN CURRENCY HEDGING: The Company uses forward contracts and option contracts designed to mitigate its foreign currency exchange rate exposure due to forecasted purchases of raw materials and sales of finished goods and future settlement of foreign currency denominated assets and liabilities. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities which meet the criteria for hedge accounting are designated as cash flow hedges. The Company uses certain foreign currency debt instruments as net investment hedges of foreign operations. Losses of $25.4 million (net of income taxes of $14.9 million), which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive loss within unrealized translation adjustment for the nine months ended January 28, 2004. COMMODITY PRICE HEDGING: The Company uses commodity futures, swaps and option contracts in order to reduce price risk associated with forecasted 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. Derivatives used to hedge forecasted commodity purchases that meet the criteria for hedge accounting are designated as cash flow hedges. INTEREST RATE HEDGING: The Company uses interest rate swaps to manage interest rate exposure. These derivatives may be designated as cash flow hedges or fair value hedges depending on the nature of the risk being hedged. At January 28, 2004, the Company had interest rate swaps with a total notional amount of $2.77 billion that satisfied the criteria for hedge accounting and interest rate swaps with a total notional amount of $907.6 million that were not eligible for hedge accounting but effectively mitigate interest rate exposure. The net unrealized gains related to interest rate swaps that satisfy the criteria for hedge accounting were $206.6 million and $294.8 million at January 28, 2004 and April 30, 2003, respectively. The net unrealized gains related to the other interest rate swaps were $2.3 million and $2.1 million at January 28, 2004 and April 30, 2003, respectively. HEDGE INEFFECTIVENESS: Hedge ineffectiveness related to cash flow hedges, which is reported in current period earnings as other income and expense, was not significant for the nine months ended January 28, 2004 and was a net loss of $0.5 million for the nine months ended January 29, 2003. 14 DEFERRED HEDGING GAINS AND LOSSES: As of January 28, 2004, the Company is hedging forecasted transactions for periods not exceeding two years. During the next 12 months, the Company expects $6.9 million of net deferred loss reported in accumulated other comprehensive loss to be reclassified to earnings. Amounts reclassified to earnings because the hedged transaction was no longer expected to occur were not significant for the nine months ended January 28, 2004 and resulted in a net loss of $0.6 million for the nine months ended January 29, 2003. OTHER ACTIVITIES: The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting. Although these derivatives do not qualify as hedges, they have the economic impact of largely mitigating foreign currency, commodity price or interest rate exposures. These derivative financial instruments are accounted for on a full mark to market basis through current earnings even though they were not acquired for trading purposes. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE OVERVIEW We manufacture and market an extensive line of processed food products throughout the world. Our principal products include ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, tuna and other seafood products, infant food and other processed food products. Our products are sold under highly competitive conditions, with many large and small competitors. We regard our principle competition to be other manufacturers of processed foods, including branded, retail products, foodservice products and private label products that compete with us for consumer preference, distribution, shelf space and merchandising support. Product quality and consumer value are important areas of competition. The following is a summary of the business measures for the third quarter and nine months ended January 28, 2004 utilized by Senior Management and the Board of Directors to gauge our business operating performance: KEY PERFORMANCE MEASURES (IN MILLIONS)
Q3 Change 9 months Change --------------- Better/ --------------- Better/ Continuing Operations FY04 FY03 (Worse) FY04 FY03 (Worse) - --------------------- ------ ------ ------- ------ ------ ------- Net Sales...................................... $2,097 $2,105 (0.4)% $6,083 $6,043 0.7% Gross Profit Margin............................ 37.2% 36.2% 1.0pp 37.3% 36.2% 1.1pp Organic Gross Profit Margin (1)................ 37.2% 36.3% 0.9pp 37.3% 36.2% 1.1pp Marketing (% of Net Sales)..................... 3.4% 3.2% 0.2pp 3.5% 3.6% (0.1)pp Operating Income............................... $ 355 $ 322 $ 33 $1,053 $ 949 $105 Organic Operating Income (2)................... $ 355 $ 364 (2.3)% $1,034 $1,019 1.5% Capital Expenditures (% of Net Sales).......... 2.1% 1.4% (0.8)pp 2.0% 1.5% (0.4)pp Cash Conversion Cycle.......................... 71 77 7days 70 79 10days Cash provided by operations less capital expenditures (3)............................. $ 279 $ 116 $ 163 $ 697 $ 469 $228 Total Company - ----------------------------------------------- Net Debt -- Excl. Preferred Stock (4).......... $3,560 $4,040 $479 -- Incl. Preferred Stock (4)......... $3,885 $4,040 $154 Organic Pre-Tax ROIC (5)....................... 23.8% 22.2% 1.7% (Totals may not add due to rounding)
- --------------- (1) Organic gross profit for the nine months ended January 28, 2004 excludes costs to reduce overhead of the remaining businesses of $4.0 million. Organic gross profit for the third quarter and nine months ended January 29, 2003 excludes Del Monte transaction related costs and costs to reduce overhead of the remaining businesses of $1.6 million and $3.5 million, respectively. See "Special Items" section below for further discussion regarding the Del Monte transaction and these reorganization costs. (2) Organic operating income for the nine months ended January 28, 2004 excludes the gain on the disposal of the bakery business in Northern Europe of $28.8 million and costs to reduce overhead of the remaining businesses of $9.5 million. Organic operating income for the third quarter and nine months ended January 29, 2003 excludes Del Monte transaction related costs and costs to reduce overhead of the remaining businesses of $32.5 million and $61.1 million, respectively, and loss on the exit of non-strategic businesses of $9.4 million. (3) Also referred to as "Operating Free Cash Flow". (4) Net debt is defined as total debt, less cash and cash equivalents and the value of interest rate swaps of $206.6 and $227.3 million for the periods ended January 28, 2004 and January 29, 2003, respectively. Also, in order to provide more meaningful comparisons in prior periods, the current period calculation of net debt is shown excluding the effects of the prospective classification of Heinz Finance Company's $325 million of mandatorily redeemable preferred shares from minority interest to long-term debt beginning in the second quarter of Fiscal 2004 as a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 150. (5) The Organic ROIC calculation is based on 4-point average balance sheet information that uses average net debt defined above as opposed to average gross debt and uses organic net profit before tax. 16 The third quarter results were in-line with our expectations as: - Overall, net sales were stable at $2.1 billion, as favorable foreign exchange offset the impact of divestitures and the deconsolidation of Zimbabwe. This result also reflects our strategic decision to improve the consumer price-value relationship on a number of key products through increased trade spending and point-of-purchase merchandising to achieve more competitive consumer price points. - Excluding divestitures and the Zimbabwe deconsolidation, net of acquisitions, net sales increased 6.8%. - Organic gross profit margin increased by 90 basis points, to 37.2%, led by our European segment, reflecting solid supply chain performance and the reduction of low-margin Stock Keeping Units. - Consumer marketing was up slightly for the quarter. Additionally, we have redirected our marketing spending against improving consumer price points, value and point-of-purchase merchandising. - Organic operating income decreased by a little more than 2%, but net profit before tax increased by 5.3%. This reflects savings on minority interest costs related to the deconsolidated Zimbabwe joint venture and reduced interest costs. - Capital Expenditures remained in the forecast range of 2 - 2.5% of net sales and the Cash Conversion Cycle continued to show strong improvement, dropping by 7 days to 71 days. - Operating Free Cash Flow was very strong for the quarter, more than double that of the prior year at $279 million. This was largely driven by a successful focus on working capital reductions across the Company. - Net Debt on a comparable basis was $479 million better than last year, or $154 million better when you include preferred stock as SFAS 150 now requires. Highlights from our performance for the first nine months of the year include: - Net Sales are up 0.7%, driven by an increase in volume/mix of 1.0%. Net price is down slightly, and foreign exchange gains of 7.1% have offset virtually all of the decrease related to net divestitures and deconsolidation. - Organic gross profit margin of 37.3% is up 110 basis points, driven by improvements in Asia/ Pacific, Europe and the Other Operating segment. This increase was achieved despite solid growth in the U.S. Foodservice business which has a lower gross margin than the Company average. - Consumer marketing is down slightly, again due to the refocusing of resources to sharpen retail price points. - Organic operating income is up 1.5% versus last year primarily due to gross margin improvements. - Capital spending is within our forecasted range and we have driven 10 days out of the cash conversion cycle. As a result, operating free cash flow is up 49%. - Our year-to-date organic pre-tax ROIC is up 170 basis points at 23.8%. SPECIAL ITEMS DISCONTINUED OPERATIONS On December 20, 2002, Heinz transferred to a wholly-owned subsidiary ("SKF Foods") certain assets and liabilities, including its U.S. and Canadian pet food and pet snacks, U.S. tuna, U.S. 17 retail private label soup and private label gravy, College Inn broths and its U.S. infant feeding businesses and distributed all of the shares of SKF Foods common stock on a pro rata basis to its shareholders. Immediately thereafter, SKF Foods merged with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte") resulting in SKF Foods becoming a wholly-owned subsidiary of Del Monte. In accordance with accounting principles generally accepted in the United States of America, the operating results related to these businesses spun off to Del Monte have been treated as discontinued operations in the Company's consolidated statements of income. Net income from discontinued operations for the nine months ended January 28, 2004 relates to a favorable settlement of prior year tax liabilities related to the spun off businesses. The discontinued operations generated sales of $257.4 million and $1,091.3 million and net income of $21.8 million (net of $5.5 million in tax) and $88.7 million (net of $35.4 million in tax) for the third quarter and nine months ended January 29, 2003, respectively. DIVESTITURES During the first quarter of Fiscal 2004, the Company sold its bakery business in Northern Europe for $57.9 million. The transaction resulted in a pretax gain of $26.3 million ($13.3 million after-tax), which will be used to offset reorganization and other costs during Fiscal 2004. In the third quarter of Fiscal 2003, the Company was impacted by a loss on the disposal of a North American fish and vegetable business of $9.4 million pretax ($10.1 million after-tax), which was recorded in Selling, General and Administrative expenses ("SG&A"). REORGANIZATION COSTS The Company recognized $5.5 million pretax ($3.4 million after-tax) for the nine months ended January 28, 2004, all of which was recorded in the first quarter of Fiscal 2004. These costs were recorded as a component of SG&A and were primarily due to employee termination and severance costs related to ongoing efforts to reduce overhead costs at its North American operations following last year's spin-off transaction with Del Monte. Additionally, during the first quarter of Fiscal 2004, the Company wrote down pizza crust assets to be disposed of in the United Kingdom totaling $4.0 million pretax ($2.8 million after-tax) which has been included as a component of cost of products sold. For the third quarter of Fiscal 2003, the Company recognized reorganization costs totaling $72.1 million pretax ($51.5 million after-tax), of which $1.6 million is recorded in cost of products sold, $30.9 million in SG&A and $39.6 million in other expenses, net. For the first nine months of Fiscal 2003, the Company recognized $100.7 million pretax ($70.1 million after-tax), of which $3.5 million is recorded in cost of products sold, $57.6 million in SG&A and $39.6 million in other expenses, net. These Fiscal 2003 reorganization costs include employee termination and severance costs, legal and other professional service costs and cost related to the early retirement of debt. During the first nine months of Fiscal 2004, the Company utilized $46.1 million in severance and exit cost accruals related to reorganization costs. THREE MONTHS ENDED JANUARY 28, 2004 AND JANUARY 29, 2003 In the first quarter of Fiscal 2004, the Company changed its segment reporting to reflect changes in organizational structure and the management of its business. The Company is now managing and reporting its North American businesses under two segments, designated North American Consumer Products and U.S. Foodservice. Certain changes were also made to the composition of the remaining segments. These changes involve the reclassification of certain operating and non-operating businesses between existing segments. Prior periods have been restated to 18 conform with the current presentation. (See Note 9 to the condensed consolidated financial statements for further discussion of the Company's reportable segments.) RESULTS OF CONTINUING OPERATIONS Sales for the three months ended January 28, 2004 decreased $7.8 million, or 0.4%, to $2.10 billion. Sales were favorably impacted by exchange translation rates by 7.8%. Sales volume decreased 0.8% as strong increases in global ketchup and the U.S. Foodservice and Other Operating Entities segments were offset by lapping of buy-one, get-one free promotions in European seafood last year, and competitive pressure on Plasmon baby food in Italy and the timing of soup promotions in the UK. Additionally, volume in Indonesia was down due to the timing of seasonal holiday sales which fell in the second quarter of Fiscal 2004 and in the third quarter of Fiscal 2003. Pricing decreased 0.2% and divestitures, net of acquisitions, reduced sales 7.2% due primarily to the deconsolidation of the Zimbabwe operations in Fiscal 2003. Gross profit increased $17.2 million, or 2.3%, to $779.2 million, and the gross profit margin increased to 37.2% from 36.2%. The gross profit margin increase was primarily driven by the North American Consumer Products and Europe segments largely due to the Company's progress in reducing less profitable Stock Keeping Units, higher pricing in certain European markets and improved sales mix and productivity, especially in developing markets. The aggregate increase in gross profit also benefited from favorable exchange translation rates, partially offset by the impact of divestitures. Last year's gross profit was unfavorably impacted by reorganization costs of $1.6 million. SG&A decreased $16.5 million, or 3.8%, to $423.9 million, and decreased as a percentage of sales to 20.2% from 20.9%. These decreases were principally due to the unfavorable impact of reorganization costs in the prior year of $30.9 million and a loss in the prior year on the disposal of a North American fish and vegetable business of $9.4 million. This was partially offset by increases due to exchange translation rates and higher pension costs. Operating income increased $33.7 million, or 10.5%, to $355.4 million, and operating income increased as a percentage of sales to 16.9% from 15.3%, largely due to the lapping of prior year reorganization costs. Net interest expense decreased $1.6 million, to $48.1 million, due to decreased debt balances and declining interest rates partially offset by the prospective classification of Heinz Finance Company's dividend on its mandatorily redeemable preferred shares to interest expense from other expense. This was completed in accordance with the adoption of SFAS No. 150 (see below for further discussion). Other expense, net, decreased $61.4 million, to $5.1 million, chiefly attributable to a $39.6 million pretax charge related to the early retirement of debt in Fiscal 2003, decreased minority interest expense as a result of the Zimbabwe deconsolidation and the SFAS No. 150 reclassification previously discussed as well as increased equity income. The effective tax rate for the current quarter was 33.1% compared to 36.8% last year. The prior year effective tax rate was unfavorably impacted by 3.5 percentage points due primarily to the loss on the disposal of a North American fish and vegetable business. Income from continuing operations for the third quarter of Fiscal 2004 was $202.2 million compared to $129.8 million in the year-earlier quarter, an increase of 56%. Diluted earnings per share was $0.57 in the current year compared to $0.37 in the prior year, up 54%. OPERATING RESULTS BY BUSINESS SEGMENT NORTH AMERICAN CONSUMER PRODUCTS Sales of the North American Consumer Products segment decreased $14.0 million, or 2.6%, due primarily to the divestiture of a North American fish and vegetable business. Sales volume increased 0.1% as significant growth in Heinz ketchup and Ore-Ida frozen potatoes was offset by 19 declines resulting from the California grocery strike and in Canadian juices and drinks due primarily to the timing of price increases. The volume growth in Heinz ketchup is compared to a weak prior year quarter and the volume growth in Ore-Ida frozen potatoes was aided by the launch of Ore-Ida Extra Crispy Potatoes. Early results of this new product launch are ahead of management expectations. In addition, volume of SmartOnes frozen entrees remained stable as increases resulting from the recent launch of the "Truth About Carbs" frozen entrees were offset by double-digit declines in the nutritional frozen entree category in the U.S. due to the impact of the low-carb dieting phenomenon. Lower pricing decreased sales 2.4% due to the promotional timing on Bagel Bites and price declines on Delimex snacks, Tater Tots and introductory pricing on the new Ore-Ida Extra Crispy Potatoes. Favorable exchange translation rates increased sales 2.3%. Gross profit increased $1.2 million, or 0.5%, to $223.0 million, and the gross profit margin increased to 42.7% from 41.4%, as manufacturing cost savings were partially offset by unfavorable pricing. In addition, reorganization costs unfavorably impacted last year's gross profit by $1.6 million. Operating income increased $22.7 million, or 21.9%, to $126.5 million. Last year's operating income was unfavorably impacted by $8.2 million of reorganization costs and $11.3 million for the loss on the disposal of a North American fish and vegetable business. Additionally, reductions in consumer marketing expenses were offset by increased General & Administrative expenses ("G&A") due to increased personnel costs. U.S. FOODSERVICE U.S. Foodservice's sales increased $32.8 million, or 10.2%. Sales volume increased sales 3.6% primarily due to increases in Heinz ketchup, single-serve condiments, Escalon processed tomato products and Dianne's frozen desserts. This reflects stronger trends in the U.S. restaurant industry and successful product innovation. Higher pricing increased sales by 1.7% primarily due to price increases on Heinz ketchup and improved sales mix on Chef Francisco frozen soups. Acquisitions, net of divestitures, increased sales 4.9%, due to the acquisition of Truesoups LLC, a manufacturer and marketer of premium frozen soups. Gross profit increased $7.1 million, or 7.5%, to $102.1 million; however, the gross profit margin decreased to 28.9% from 29.6%. This decrease in gross profit margin is primarily due to unfavorable raw material costs. Operating income increased $3.1 million, or 6.1%, to $54.7 million, primarily due to the increase in gross profit, partially offset by increased G&A expense attributable to increased personnel costs. EUROPE Heinz Europe's sales increased $58.3 million, or 7.6%. Favorable exchange translation rates increased sales by 12.9%. Higher pricing increased sales 1.4% primarily due to price increases on Heinz beans, ready-to-serve soups and infant feeding products partially offset by reduced pricing on John West seafood. Lower volumes decreased sales 4.2% due to declines in Europeon seafood and Italian infant feeding as a result of competitive and trade pressures. Reduced seafood volume reflects the overlap of strong promotional activity in the third quarter of Fiscal 2003, as the business was rebounding from an earlier product recall. Volume was also affected by our previously announced program to reduce low-margin Stock Keeping Units. These decreases were partially offset by increases in Heinz ketchup, specifically due to the introduction of the top-down bottle, and in our UK frozen food business behind new product introductions. Divestitures reduced sales 2.5%, primarily related to the sale of the UK frozen pizza business and the Northern European bakery business. Gross profit increased $38.2 million, or 13.3%, to $326.5 million, and the gross profit margin increased to 39.5% from 37.5%. These increases are primarily due to the rationalization of low-margin products, lower procurement costs, increased pricing and favorable exchange translation rates, which were partially offset by increased pension expense. Operating income increased 20 $21.9 million, or 15.5%, to $163.1 million, primarily attributable to the favorable change in gross profit, partially offset by increased consumer marketing and the unfavorable impact of exchange translation rates on SG&A. ASIA/PACIFIC Sales in Asia/Pacific increased $27.6 million, or 10.1%. Favorable exchange translation rates increased sales by 18.0%. After a strong first-half performance during which volume increased 5.8%, third quarter volume decreased sales 3.4% primarily due to holiday timing of juice concentrate sales in Indonesia and the continuing reduction of low-margin stock keeping units. Lower pricing decreased sales 3.8% due primarily to declines in Tegel poultry driven by declining short-term market prices for New Zealand poultry. Divestitures decreased sales by 0.8%. Gross profit increased $7.7 million, or 8.4%, to $99.1 million; however, the gross profit margin decreased to 32.8% from 33.3%. The gross profit margin decline is due primarily to decreased pricing, partially offset by savings due to manufacturing cost improvements in Australia and Watties. Gross profit also benefited from favorable exchange translation rates. Operating income increased $4.7 million, or 16.1%, to $34.0 million, primarily due to the growth in gross profit, offset partially by increased Selling & Distribution ("S&D") expenses due to exchange translation rates. OTHER OPERATING ENTITIES Sales for Other Operating Entities decreased $112.5 million, or 55.0%, primarily due to the deconsolidation of the Company's Zimbabwe operations in Fiscal 2003. The deconsolidation also impacted gross profit and operating income. Gross profit decreased $38.8 million, or 60.0%, to $25.9 million, and operating income decreased $38.2 million, or 93.7%, to $2.6 million. Excluding the Zimbabwe operations in the prior year, sales increased 29.1%, primarily due to strong volume increases of 17.7%, and operating income increased 1.9%. This favorable performance was negatively impacted by the recall in the second quarter of Fiscal 2004 of a soy-based infant formula product sold under the Remedia brand. Zimbabwe remains in a period of economic uncertainty. Should the current situation continue, the Company could experience disruptions and delays associated with its Zimbabwe operations. Therefore, as of the end of November 2002, the Company deconsolidated its Zimbabwean operations and classified its remaining net investment of approximately $110 million as a cost investment included in other non-current assets on the condensed consolidated balance sheet as of January 28, 2004. Although our business continues to operate and we are able to source raw materials, the country's economic situation continues to deteriorate and the Company's ability to recover its investment could become impaired. NINE MONTHS ENDED JANUARY 28, 2004 AND JANUARY 29, 2003 RESULTS OF CONTINUING OPERATIONS Sales for the nine months ended January 28, 2004 increased $39.7 million, or 0.7%, to $6.08 billion. Sales were favorably impacted by volume of 1.0% and exchange translation rates of 7.1%. The favorable volume impact was primarily due to strong increases in the U.S. Foodservice, Asia/Pacific and Other Operating Entities segments. Lower pricing decreased sales by 0.2%. Divestitures, net of acquisitions, reduced sales 7.2% due primarily to the deconsolidation of Zimbabwe. Gross profit increased $81.8 million, or 3.7%, to $2.27 billion, and the gross profit margin increased to 37.3% from 36.2%. The gross profit margin increase was primarily driven by the Europe and Asia/Pacific segments. The aggregate increase in gross profit also benefited from favorable exchange translation rates, partially offset by the impact of higher pension costs, divesti- 21 tures and the write down of UK pizza crust assets held for sale. For the first nine months of Fiscal 2003, gross profit was also impacted by reorganization costs of $3.5 million. SG&A decreased $23.1 million, or 1.9%, to $1.21 billion, and as a percentage of sales was reduced to 20.0% from 20.5%. The decrease is primarily due to the gain recorded on the sale of the Northern European Bakery business in the current year, and decreased marketing expense as a result of a shift to increased trade promotion spending primarily in the North American Consumer Products segment. Additionally, SG&A was impacted by the Fiscal 2003 loss of $9.4 million that was recorded on the disposal of a North American fish and vegetable business and the impact of reorganization costs of $5.5 million and $57.6 million for the nine months ended January 28, 2004 and January 29, 2003, respectively. These favorable items were offset by the impact of higher expenses resulting from higher sales volume, higher exchange translation rates and increases in pension costs. Operating income increased $104.9 million, or 11.1%, to $1.05 billion, and increased as a percentage of sales to 17.3% from 15.7%. Net interest expense increased $0.8 million, to $144.4 million, due to the prospective classification of the Heinz Finance Company's dividend on its mandatorily redeemable preferred shares to interest expense from other expense. This treatment is in accordance with the adoption of SFAS No. 150 (see below for further discussion) beginning in the second quarter of Fiscal 2004. This increase was partially offset by declines from lower debt balances and lower interest rates. Other expense, net, decreased $66.4 million, to $35.0 million, attributable to a $39.6 million pretax charge related to early retirement of debt in Fiscal 2003, decreased minority interest expense as a result of the Zimbabwe deconsolidation, the SFAS No. 150 reclassification previously discussed and increased equity income, partially offset by currency losses in the current year. The effective tax rate for the current year was 33.6% compared to 35.6% last year. The current year effective tax rate was unfavorably impacted by 0.5 percentage points due to the sale of the Northern European bakery business and the prior year effective tax rate was unfavorably impacted by 1.1 percentage points due primarily to the loss on the disposal of a North American fish and vegetable business. Income from continuing operations (before the cumulative effect of change in accounting principle related to the adoption of SFAS No. 142) for the first nine months of Fiscal 2004 was $580.5 million compared to $452.8 million in the year-earlier period. Diluted earnings per share (before the cumulative effect of change in accounting principle related to the adoption of SFAS No. 142) was $1.64 in the current year compared to $1.28 in the prior year. OPERATING RESULTS BY BUSINESS SEGMENT NORTH AMERICAN CONSUMER PRODUCTS Sales of the North American Consumer Products segment decreased $47.2 million, or 3.1%. Sales volume increased 1.2% primarily due to Heinz ketchup and Classico pasta sauces which benefited from Every Day Low Pricing. These increases were partially offset by declines in SmartOnes frozen entrees, related to the increased popularity of low-carb dieting and declines in the nutritional frozen entree category in the U.S., and the effects of the rationalization of Boston Market side dishes and Hot Bites snacks. Lower pricing decreased sales 2.4% consistent with our strategy to obtain more competitive consumer price points on Boston Market HomeStyle meals, Heinz gravy and Classico pasta sauces, as well as price declines on Delimex frozen snacks. Price was also unfavorably affected by additional promotional spending on SmartOnes frozen entrees. Divestitures in the prior year reduced sales 3.9% and favorable exchange translation rates increased sales 2.1%. Gross profit decreased $12.7 million, or 1.9%, to $642.0 million; however, the gross profit margin increased to 43.0% from 42.5%, as manufacturing cost savings offset unfavorable pricing. In addition, reorganization costs unfavorably impacted gross profit by $2.4 million for the nine months ending January 29, 2003. Operating income increased $30.2 million, or 9.2%, to $359.3 mil- 22 lion, primarily due to decreased consumer marketing expenses related to Boston Market frozen entrees and the prior year launch of Easy Squeeze!. In addition, reorganization costs unfavorably impacted operating income by $1.5 million and $17.2 million for the nine months ending January 28, 2004 and January 29, 2003, respectively, and last year's operating income was unfavorably impacted by $11.3 million from a loss on the disposal of a North American fish and vegetable business. U.S. FOODSERVICE U.S. Foodservice's sales increased $85.6 million, or 8.8%. Sales volume increased sales 3.2% primarily due to increases in Heinz ketchup, Escalon processed tomato products, Dianne's frozen desserts and single serve condiments as a result of a strengthening trend in the U.S. restaurant industry and successful product innovation. Higher pricing increased sales by 2.3% chiefly due to Heinz ketchup and single serve condiments. Acquisitions, net of divestitures, increased sales 3.3%, primarily due to the acquisition of Truesoups LLC, a manufacturer and marketer of premium frozen soups. Gross profit increased $27.7 million, or 10.0%, to $305.8 million, and the gross profit margin increased slightly to 28.9% from 28.6%. These increases are primarily due to favorable pricing and sales mix, partially offset by unfavorable raw material costs. In addition, reorganization costs unfavorably impacted gross profit by $1.1 million for the nine months ending January 29, 2003. Operating income increased $13.1 million, or 8.8%, to $161.3 million, primarily due to the growth in gross profit, partially offset by the impact of higher sales volume on S&D and increased G&A expenses attributable to increased personnel costs. In addition, reorganization costs unfavorably impacted operating income by $2.5 million and $3.2 million for the nine months ending January 28, 2004 and January 29, 2003, respectively. EUROPE Heinz Europe's sales increased $180.6 million, or 8.4%. Favorable exchange translation rates increased sales by 11.9%. Volumes decreased 1.5% as increases in Petite Navire seafood, Heinz salad cream and Heinz ketchup from the introduction of the top-down bottle were more than offset by decreases in convenience meals, due to promotional timing, weather conditions and the impact of our previously announced program to reduce low-margin Stock Keeping Units, Italian infant feeding, due to competitive and trade pressures, and frozen food products. Pricing increased 0.1% as increased trade promotion spending related to seafood was offset by recent price increases on Heinz beans, ready-to-serve soups, John West seafood and infant feeding products. Also, pricing pressures were experienced in Northern Europe resulting from the Netherland's largest retailer rolling back prices in excess of 8% beginning in the second quarter. Divestitures reduced sales 2.1%, primarily related to the sale of the UK frozen pizza business and the Northern European bakery business. Gross profit increased $82.9 million, or 9.9%, to $921.9 million, and the gross profit margin increased to 39.4% from 38.9%. The increase in gross profit is primarily due to improvements in the seafood business and favorable exchange translation rates, partially offset by the impact of divestitures, the write down of the UK pizza assets, and the impact of soft volume in our Italian baby food and Northern European businesses. Operating income increased $63.8 million, or 15.4%, to $479.1 million, primarily attributable to the favorable change in gross profit and the gain on the sale of the Northern European bakery business, partially offset by increased G&A expense primarily related to increased pension expense. ASIA/PACIFIC Sales in Asia/Pacific increased $145.0 million, or 18.5%. Volume increased sales 2.5% primarily due to strong sales of Heinz ketchup, Tegel poultry in New Zealand, ABC sauces in Indonesia and 23 tuna in Australia. Favorable exchange translation rates increased sales by 16.7%. Lower pricing decreased sales 0.4% related to Tegel poultry, partially offset by recent price increases on ABC sauces and juice concentrates. Divestitures, net of acquisitions, reduced sales 0.2%. Gross profit increased $59.1 million, or 24.0%, to $305.0 million, and the gross profit margin increased to 32.9% from 31.5%. These increases are primarily due to favorable exchange translation rates and supply chain improvements in Australia and at Watties, partially offset by Tegel poultry's lower pricing and higher commodity costs. Operating income increased $36.9 million, or 49.1%, to $112.0 million, primarily due to the growth in gross profit and declining G&A expense due to improved cost control particularly in our Australian business, partially offset by the impact of exchange translation rates on SG&A expenses. OTHER OPERATING ENTITIES Sales for Other Operating Entities decreased $324.3 million, or 54.8%, primarily due to the deconsolidation of the Company's Zimbabwe operations in Fiscal 2003. The deconsolidation also impacted gross profit and operating income. Gross profit decreased $81.1 million, or 48.6%, to $85.8 million, and operating income decreased $71.3 million, or 76.3%, to $22.2 million. Excluding the Zimbabwe operations in the prior year, sales increased 17.5%, primarily due to strong volume increases of 9.8%, and operating income increased 25.7%. LIQUIDITY AND FINANCIAL POSITION Cash provided by continuing operating activities increased by more than 45% to $817.1 million compared to $561.2 million last year. The increase in Fiscal 2004 versus Fiscal 2003 is primarily due to a successful focus on working capital reductions across the Company which resulted in the ten day improvement in the Company's cash conversion cycle versus the year ago period. Cash used for investing activities totaled $119.9 million compared to cash provided by investing activities of $996.9 million last year. Cash provided by the spin-off of assets to Del Monte was $1,063.6 million in the prior year. Acquisitions, net of divestitures, used $14.9 million in net cash in the first nine months of Fiscal 2004 compared to providing $41.4 million in the prior year. Capital expenditures totaled $119.8 million compared to $92.2 million last year. Cash used for financing activities totaled $545.7 million compared to $1,075.6 million last year. The Company paid down $74.0 million in long-term debt during the current period, compared to $488.0 million last year. Payments on short-term borrowings were $143.3 million this year, compared to $177.3 million last year. Cash used for purchases of treasury stock, net of proceeds from option exercises, was $56.0 million this year. There were no treasury stock purchases in the prior year, and proceeds from option exercises provided $6.5 million in the prior year. Dividend payments totaled $284.9 million, compared to $431.0 million for the same period last year, reflecting a reduction in the dividend rate in the fourth quarter of Fiscal 2003 following the spin-off of SKF Foods. The Company's primary measure of cash flow performance is operating free cash flow. For the first nine months of Fiscal 2004, the Company has had strong operating free cash flow totaling $697.2 million as compared to $468.9 million for the same period a year ago, or a increase of 48.7%. The increase in operating free cash flow is the result of higher net income, improved working capital performance, partially offset by a small increase in capital expenditures. The Company anticipates that operating free cash flow for Fiscal 2004 should be substantially in excess of that of Fiscal 2003. The Company continued its debt reduction efforts in the first nine months of Fiscal 2004 by retiring approximately $217 million of debt, offset partially by a $152 million increase in debt as a result of changes in foreign exchange rates. At January 28, 2004, the Company's net debt was $3.89 billion. Excluding the reclassification of Heinz Finance Company's preferred stock (see below 24 for further discussion), net debt would have been $3.56 billion, down approximately $479.4 million compared to the year earlier quarter. Additional net debt reductions are anticipated in Fiscal 2004 and the Company expects that over $400 million of long-term debt maturing in Fiscal 2005 will be retired resulting in further debt reductions by the end of Fiscal 2005. In the first nine months of Fiscal 2004, the cash used for reorganization costs was approximately $44.7 million. The Company has enhanced its liquidity during the first nine months of Fiscal 2004 by reducing short-term debt to $11.4 million at January 28, 2004 from $146.8 million at April 30, 2003. Over the same time period, cash and cash equivalents have increased by 26.7% to $1.02 billion from $801.7 million. The Company maintains committed credit facilities of $2.1 billion as well as in excess of $500 million of other credit facilities used primarily by the Company's foreign subsidiaries. These resources together with the Company's anticipated strong operating cash flow and access to the capital market, if required, should enable the Company to meet its cash requirements for operations, including anticipated additional pension plan contributions, capital expansion programs and dividends to shareholders. The impact of inflation on both the Company's financial position and results of operations is not expected to adversely affect Fiscal 2004 results. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This revised statement requires additional annual disclosures regarding types of pension plan assets, investment strategy, future plan contributions, expected benefit payments and other items. The statement also requires quarterly disclosure of the components of net periodic benefit cost and plan contributions. The annual disclosures will be required for the Company's Form 10-K for its fiscal year ended April 28, 2004, and the quarterly disclosures will be required beginning in the quarter ended July 28, 2004. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") was signed into law. The Act introduced a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-1, the Company has elected to defer recognizing the effects of the Act on the accounting for its retirement health care plans because specific authoritative guidance on the accounting for the Act's provisions is pending. Once issued, this guidance could require the Company to change previously reported financial information. In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46-R, "Consolidation of Variable Interest Entities." FIN No. 46-R, which modifies certain provisions and effective dates of FIN No. 46, sets forth criteria to be used in determining whether an investment in a variable interest entity should be consolidated, and is based on the general premise that companies that control another entity through interests other than voting interests should consolidate the controlled entity. The provisions of FIN No. 46 become effective for the Company in its fourth quarter ended April 28, 2004. The Company is currently evaluating the impact the revised accounting standard will have on the consolidated results of operations and financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This statement affects the classification, measurement and disclosure requirements of certain financial instruments, including mandatorily redeemable shares. SFAS No. 150 was effective for the Company in the second quarter of Fiscal 2004. The adoption of SFAS No. 150 required the prospective classification of Heinz Finance Company's $325 million of mandatorily redeemable preferred shares from minority interest to 25 long-term debt and the $5.1 million quarterly preferred dividend from other expenses to interest expense beginning in the second quarter of Fiscal 2004, with no resulting effect on the Company's profitability. In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for entities that voluntarily change to the fair value method of accounting for stock-based employee compensation, and it also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects of an entity's accounting policy decisions with respect to stock-based employee compensation in both annual and interim financial reporting. The disclosure provisions of SFAS No. 148 were effective for the Company at April 30, 2003. The Company is currently evaluating its policy for recognizing expense related to stock options. Effective May 2, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. As a result of adopting SFAS No. 142, the Company recorded a transitional impairment charge which was calculated as of May 2, 2002, and recorded as an effect of a change in accounting principle in the nine month period ended January 29, 2003, of $77.8 million. There was no tax effect associated with this charge. The charge, which relates to certain of the Company's reporting units, has been reflected in its segments as follows: Europe $54.6 million, Asia/Pacific $2.7 million and Other Operating Entities $20.5 million. 26 CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION Statements about future growth, profitability, costs, expectations, plans, or objectives included in this report, including the management's discussion and analysis, the financial statements and footnotes, are forward-looking statements based on management's estimates, assumptions, and projections. These forward-looking statements are subject to risks, uncertainties, and other important factors that could cause actual results to differ materially from those expressed or implied in this report and the financial statements and footnotes. These include, but are not limited to, sales, earnings, and volume growth, general economic, political, and industry conditions, competitive conditions, production, energy and raw material costs, the ability to maintain favorable supplier relationships, achieving cost savings programs and gross margins, currency valuations and interest rate fluctuations, success of acquisitions, joint ventures, and divestitures, new product and packaging innovations, the effectiveness of advertising, marketing, and promotional programs, supply chain efficiency and cash flow initiatives, the impact of e-commerce and e-procurement, risks inherent in litigation, including the Remedia related claims in Israel and rights against its third party supplier, international operations, particularly the performance of business in hyperinflationary environments, changes in estimates in critical accounting judgments, the possibility of increased pension expense and contributions, and other factors described in "Cautionary Statement Relevant to Forward-Looking Information" in the Company's Form 10-K for the fiscal year ended April 30, 2003, and the Company's subsequent filings with the Securities and Exchange Commission. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the securities laws. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk during the nine months ended January 28, 2004. For additional information, refer to pages 21-23 of the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2003. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures, as of the end of the period covered by this report, were designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. (b) Changes in Internal Controls No change in the Company's internal control over financial reporting occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. 27 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 Nothing to report under this item. 28 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. The Company may have 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 set forth herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 10. Deferred Compensation Plan for Non-Employee Directors of H.J. Heinz Company (as amended and restated effective January 1, 2004). 12. Computation of Ratios of Earnings to Fixed Charges. 31(a). Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. 31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. 32(a). Certification by the Chief Executive Officer Relating to a Periodic Report Containing Financial Statements.* 32(b). Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.* (b) Reports on Form 8-K During the last fiscal quarter of the period covered by this Report, the Company furnished a Current Report on Form 8-K dated November 25, 2003, relating to its press release announcing its results for the second quarter and six months ended October 29, 2003. The Form 8-K, including its Item 12 and the Exhibit attached thereto shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to liability under that Section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference to such filing. * The Exhibit attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing. 29 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: February 25, 2004 By: /s/ ARTHUR B. WINKLEBLACK .......................................... Arthur B. Winkleblack Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: February 25, 2004 By: /s/ EDWARD J. MCMENAMIN .......................................... Edward J. McMenamin Vice President -- Finance (Principal Accounting Officer) 30 EXHIBIT INDEX DESCRIPTION OF EXHIBIT Exhibits required to be furnished by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are furnished herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 10. Deferred Compensation Plan for Non-Employee Directors of H.J. Heinz Company (as amended and restated effective January 1, 2004). 12. Computation of Ratios of Earnings to Fixed Charges. 31(a). Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. 31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. 32(a). Certification by the Chief Executive Officer Relating to a Periodic Report Containing Financial Statements.* 32(b). Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.* * The Exhibit attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing. EX-10 3 j0533801exv10.txt DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECT Exhibit 10 DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS ----------------------------------------------------- OF H. J. HEINZ COMPANY ---------------------- (as amended and restated effective January 1, 2004) SECTION 1. EFFECTIVE DATE. The original effective date of the Plan is July 1, 1982. The Plan was amended and restated effective July 1, 2000. Effective January 1, 2004, the Plan is again amended and restated as described herein. SECTION 2. ELIGIBILITY. Any Director of H. J. Heinz Company (the "Company") who is not an officer or employee of the Company or a subsidiary of the Company is eligible to participate in the Plan. SECTION 3. DEFERRED COMPENSATION ACCOUNT. There shall be established for each participant who so elects a deferred compensation account ("Account"), which as of any point in time shall consist of the total of the balance to the credit of the participant in his or her Prime Rate Account (see Section 6) and/or the Deferred Units credited to the participant under his or her H. J. Heinz Deferred Stock Account (see Section 7). SECTION 4. AMOUNT OF DEFERRAL. A participant may elect to defer receipt of all or a specified part of the cash or stock compensation ("Directors Fees") otherwise payable to the participant for serving on the Board of Directors or committees of the Board of Directors of the Company. Elective deferrals may be invested in a Prime Rate Account or in an H. J. Heinz Deferred Stock Account, at the election of the participant; provided, however, that restricted stock or restricted stock unit grants or other stock based compensation may only be deferred in an H. J. Heinz Deferred Stock Account. Deferred compensation will be credited to the participant's Account on the date the Directors Fees would otherwise be paid (in the case of cash compensation) or granted (in the case of stock based compensation). SECTION 5. TIME OF ELECTION OF DEFERRAL. (a) ANNUAL DEFERRAL ELECTION. Subject to the provisions of Section 8, an election to defer Directors Fees shall be effective when made, as to any Directors Fees not then earned. Deferral elections shall be made for each calendar year on a prospective basis, shall be irrevocable for the relevant calendar year, and shall be made on an Election Form provided by the Company as described in Section 8. (b) ONE-TIME H. J. HEINZ DEFERRED STOCK ACCOUNT ELECTION. In addition to the election with respect to compensation not yet earned, an eligible Director of the Company as of December 15, 2003 shall be eligible to make a one-time irrevocable election on or before December 31, 2003 to move all or any portion of the amounts in his or her Prime Rate Account into his or her H. J. Heinz Deferred Stock Account effective January 1, 2004. SECTION 6. PRIME RATE ACCOUNT. The Company shall be obligated to pay interest on the amount of a participant's deferrals into the Prime Rate Account. Interest shall accrue on additions to a Prime Rate Account as of the first day of the month following the month in which such additions are made. Interest earned for a year shall be credited to the Prime Rate Account on the last day of the Company's fiscal year and shall thereafter be part of the Prime Rate Account for all purposes of this Plan. The rate of interest in effect for a fiscal year shall be specified by the Executive Committee of the Company's Board of Directors. If the Executive Committee has not specified a rate for all or part of any fiscal year, the applicable rate shall be the prime rate at Mellon Bank, N.A., Pittsburgh, Pennsylvania, or its successor, on the last day of the preceding fiscal year. SECTION 7. H. J. HEINZ DEFERRED STOCK ACCOUNT. (a) GENERAL. Amounts that a participant elects to be deferred into his or her H. J. Heinz Deferred Stock Account shall be posted to the account of the participant in the form of "Deferred Units," each of which is equivalent in value to one share of H. J. Heinz Company Common Stock ("Company Stock") on the date the Directors Fees would otherwise be granted or paid based on the closing price of such stock on the New York Stock Exchange on such grant or payment date. The value of the Deferred Units posted to the H. J. Heinz Deferred Stock Account of a participant as of any date will be equal to the number of Deferred Units in the participant's account times the closing price of the Company Stock on the date of such valuation. (b) INITIAL CREDITS FOR DEFERRED AND/OR TRANSFERRED AMOUNTS. The number of Deferred Units initially credited to a participant's H. J. Heinz Deferred Stock Account shall be determined by dividing the dollar amount to be credited by the closing trading price of the Company Stock on the date the Directors Fees would have been paid (in the case of cash compensation), or in the case of the one-time election referred to in Section 5(b), by dividing the dollar amount to be converted into Deferred Units under the H. J. Heinz Deferred Stock Account by the closing price of the Company Stock on December 31, 2003. In the case of stock based compensation, on the date such stock based compensation would have been granted, a number of Deferred Units shall be credited to a participant's H. J. Heinz Deferred Stock Account equal to the number of shares or other units of the stock based compensation that would have been granted to such participant. (c) ADDITIONAL CREDITS FOR DIVIDENDS DECLARED. A participant will be credited with additional Deferred Units equal in value to the quotient of (i) divided by (ii), where (i) is the dollar amount of any dividends paid from time to time during the deferral period on a share of Company Stock times the number of "Deferred Units" then credited to the participant's account, and (ii) is the closing trading price of the Company Stock on the day the dividend is paid. (d) NO BROKERAGE FEES. Brokerage fees will not be charged against the value of initial deferrals of Directors Compensation as Deferred Units in the H. J. Heinz Deferred Stock Account, or against the value of Deferred Units credited on account of dividends on Company Stock, either when such Deferred Units are credited to a participant's Account or upon distribution of such Deferred Units from a participant's Account. (e) ADJUSTMENTS TO DEFERRED UNITS IN AN H. J. HEINZ DEFERRED STOCK ACCOUNT. In the event of any change in the outstanding shares of the Company's common stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares or other similar corporate change, then an equitable equivalent adjustment shall be made in the "Deferred Units" credited to a participant's H. J. Heinz Deferred Stock Account. (f) IRREVOCABILITY OF INVESTMENTS IN H. J. HEINZ DEFERRED STOCK ACCOUNT. Once amounts have been allocated as Deferred Units in a participant's H. J. Heinz Deferred Stock Account, they may not be reallocated to a participant's Prime Rate Account or to any other investment alternative. (g) PAYMENT/DISTRIBUTION OF DEFERRED UNITS. Payment of amounts allocated as Deferred Units in a participant's H. J. Heinz Deferred Stock Account shall be made by transferring to the participant a number of shares of Company Stock equal to the number of whole Deferred Units then distributable, with cash in lieu of any fractional units, and net of any withholding obligations of the Company with respect to such distributions. Shares of Company Stock distributed to a participant or other beneficiary as a result of Deferred Units in a participant's H. J. Heinz Deferred Stock Account must be held by the recipient for at least six (6) months following distribution of the shares from this Plan, and shall also be subject to any applicable holding and other requirements of the H. J. Heinz Company Fiscal Year 2003 Stock Incentive Plan under which the Deferred Units were granted, or any comparable successor plan under which future Deferred Units may be granted. SECTION 8. MANNER OF ELECTING DEFERRAL. A participant may elect to defer compensation by written notice given to the Company prior to the time such compensation is earned. The notice, which shall be on a form provided by the Company, shall include (1) the amount to be deferred; (2) an election of either a lump sum payment or a number of annual installments (not to exceed 20) for the payment of the Account balance; and (3) selection of a date for the lump sum payment or the first installment payment. Any election to defer shall be effective when received by the Corporate Secretary's Office. Elections under this Section 8 shall be irrevocable. However, notwithstanding a participant's irrevocable election, the Executive Committee of the Company's Board of Directors may, in its sole discretion, accelerate the date of the lump sum or first installment selected by a participant, may reduce the number of installments specified by a participant, and/or may prescribe a lump sum payment in lieu of installments. SECTION 9. PAYMENT OF ACCOUNT BALANCE. Payment of a participant's Account shall be made (or shall begin, in the case of an installment payout) as soon as administratively practicable, but not later than 30 days after the date specified in the participant's deferral election. If an installment payout is in effect, each installment payment except the last one shall consist of (A) plus (B), where (A) is the amount determined by dividing the participant's Prime Rate Account balance (not including accrued but not credited interest) on the date installment payments begin by the number of installments elected, and (B) is the number of Deferred Units equal to the total Deferred Units credited to the participant's H. J. Heinz Deferred Stock Account (not including accrued but un-credited units attributable to dividends on Company Stock) on the date installment payments begin divided by the number of installments elected. The last payment shall be the amount necessary to reduce the participant's Prime Rate Account balance (including accrued but not credited interest) to zero and to reduce the Deferred Units credited to the participant's H. J. Heinz Deferred Stock Account (including accrued but un-credited units attributable to dividends on Company Stock) to zero. If a Prime Rate Account balance exists on a participant's death or total disability the amount plus interest to the date of death shall be paid to the participant's designated beneficiary, or in the absence of a designated beneficiary to the participant's estate, as soon as administratively practicable, but not later than 30 days after the date of death or determination of the existence of total disability. If Deferred Units are credited to a participant's H. J. Heinz Deferred Stock Account on a participant's death or total disability, such Deferred Units shall be distributed in the form of Company Stock, in the manner provided in Section 7(g), to a participant's designated beneficiary, or in the absence of a designated beneficiary to the participant's estate, as soon as administratively practicable, but not later than 30 days after the date of death or determination of the existence of total disability. SECTION 10. PARTICIPANT'S RIGHTS UNSECURED AND UNFUNDED. The right of any participant to receive future payments under the provisions of this Plan shall be an unsecured claim against the general assets of the Company. The amounts credited to a participant under the Plan shall not be funded in any manner prior to payment of such amounts becoming due. SECTION 11. STATEMENT OF ACCOUNT. Statements will be sent to each participant during May of each year as to the value of his or her Prime Rate Account and/or the Deferred Units to his or her credit in the H. J. Heinz Deferred Stock Account as of the end of the preceding fiscal year. SECTION 12. ASSIGNABILITY. The right to receive payments hereunder shall not be transferable or assignable by a participant nor subject to the claims of the participant's creditors. SECTION 13. AMENDMENT. This Plan may at any time or from time to time be amended, modified or terminated by the Board of Directors of the Company. No amendment, modification or termination shall, without the consent of a participant, adversely affect the rights of such participant under this Plan with respect to the then current balance of his or her Prime Rate Account and/or the Deferred Units then credited to his or her H. J. Heinz Deferred Stock Account. EX-12 4 j0533801exv12.txt EXHIBIT 12 . . . EXHIBIT 12 H. J. HEINZ COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Nine Months Ended January 28, 2004 (Thousands of Dollars) ----------- Fixed Charges: Interest expense*......................................... $ 164,796 Capitalized interest...................................... -- Interest component of rental expense...................... 24,891 ---------- Total fixed charges.................................... $ 189,687 ---------- Earnings: Income from continuing operations before income taxes and cumulative effect of change in accounting principle.... $ 874,106 Add: Interest expense*.................................... 164,796 Add: Interest component of rental expense................. 24,891 Add: Amortization of capitalized interest................. 1,409 ---------- Earnings as adjusted................................... $1,065,202 ---------- Ratio of earnings to fixed charges........................ 5.62 ==========
- --------------- * Interest expense includes amortization of debt expense and any discount or premium relating to indebtedness. EX-31.A 5 j0533801exv31wa.txt SECTION 302 CERTIFICATION OF CEO EXHIBIT 31(a) I, William R. Johnson, Chairman, President and Chief Executive Officer of H. J. Heinz Company certify that: 1. I have reviewed this quarterly report on Form 10-Q of H. J. Heinz Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; d) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 25, 2004 By: /s/ WILLIAM R. JOHNSON ------------------------------------ Name: William R. Johnson Title: Chairman, President and Chief Executive Officer EX-31.B 6 j0533801exv31wb.txt SECTION 302 CERTIFICATION OF CFO EXHIBIT 31(b) I, Arthur B. Winkleblack, Executive Vice President and Chief Financial Officer of H. J. Heinz Company certify that: 1. I have reviewed this quarterly report on Form 10-Q of H. J. Heinz Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; d) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 25, 2004 By: /s/ ARTHUR B. WINKLEBLACK ------------------------------------ Name: Arthur B. Winkleblack Title: Executive Vice President and Chief Financial Officer EX-32.A 7 j0533801exv32wa.txt SECTION 906 CERTIFICATION OF CEO EXHIBIT 32(a) CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER RELATING TO A PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS I, William R. Johnson, Chairman, President and Chief Executive Officer, of H. J. Heinz Company, a Pennsylvania corporation (the "Company"), hereby certify that, to my knowledge: 1. The Company's periodic report on Form 10-Q for the period ended January 28, 2004 (the "Form 10-Q") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 25, 2004 /s/ William R. Johnson -------------------------------------- Name: William R. Johnson Title: Chairman, President and Chief Executive Officer EX-32.B 8 j0533801exv32wb.txt SECTION 906 CERTIFICATION OF CFO EXHIBIT 32(b) CERTIFICATION BY THE CHIEF FINANCIAL OFFICER RELATING TO A PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS I, Arthur B. Winkleblack, Executive Vice President and Chief Financial Officer of H. J. Heinz Company, a Pennsylvania corporation (the "Company"), hereby certify that, to my knowledge: 1. The Company's periodic report on Form 10-Q for the period ended January 28, 2004 (the "Form 10-Q") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 25, 2004 /s/ Arthur B. Winkleblack -------------------------------------- Name: Arthur B. Winkleblack Title: Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----