-----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, OlW3wpiO8HJvS/nfV4WONg1zgVf6+9VUxi6pXOuUndrr9N15iuRBQObE0yIBr4+3 NWIgvRQerv9Cl1Z9zVPVLA== 0000950132-99-001029.txt : 19991214 0000950132-99-001029.hdr.sgml : 19991214 ACCESSION NUMBER: 0000950132-99-001029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991027 FILED AS OF DATE: 19991213 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: SEC FILE NUMBER: 001-03385 FILM NUMBER: 99773192 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219 BUSINESS PHONE: 4124565700 MAIL ADDRESS: STREET 2: P O BOX 57 CITY: PITTSBURGH STATE: PA ZIP: 15230 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 27, 1999 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to For the Six Months Ended October 27, 1999 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, 15219 Pennsylvania (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: 412-456-5700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes X No The number of shares of the Registrant's Common Stock, par value $.25 per share, outstanding as of December 3, 1999, was 354,664,014 shares. PART I--FINANCIAL INFORMATION Item 1. Financial Statements. H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Three Months Ended Ended October 27, 1999 October 28, 1998 ---------------- ---------------- FY 2000 FY 1999 (Unaudited) (In Thousands, Except per Share Amounts) Sales................... $2,344,084 $2,322,402 Cost of products sold... 1,431,644 1,386,003 ---------- ---------- Gross profit............ 912,440 936,399 Selling, general and administrative expenses. 585,850 499,049 Gain on sale of Weight Watchers................ 464,617 -- ---------- ---------- Operating income........ 791,207 437,350 Interest income......... 2,884 6,567 Interest expense........ 64,191 67,516 Other expenses, net..... 11,074 8,292 ---------- ---------- Income before income taxes................... 718,826 368,109 Provision for income taxes................... 303,328 136,777 ---------- ---------- Net income.............. $ 415,498 $ 231,332 ========== ========== Net income per share-- diluted................. $ 1.14 $ 0.63 ========== ========== Average common shares outstanding--diluted.... 363,113 369,082 ========== ========== Net income per share-- basic................... $ 1.16 $ 0.64 ========== ========== Average common shares outstanding--basic...... 357,866 362,234 ========== ========== Cash dividends per share................... $ 0.3675 $ 0.3425 ========== ==========
See Notes to Condensed Consolidated Financial Statements. ------------ 2 H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Six Months Six Months Ended Ended October 27, 1999 October 28, 1998 ---------------- ---------------- FY 2000 FY 1999 (Unaudited) (In Thousands, Except per Share Amounts) Sales................... $4,525,091 $4,550,632 Cost of products sold... 2,755,901 2,745,780 ---------- ---------- Gross profit............ 1,769,190 1,804,852 Selling, general and administrative expenses. 1,061,627 959,403 Gain on sale of Weight Watchers................ 464,617 -- ---------- ---------- Operating income........ 1,172,180 845,449 Interest income......... 8,169 14,152 Interest expense........ 126,783 131,559 Other expenses, net..... 6,701 25,911 ---------- ---------- Income before income taxes................... 1,046,865 702,131 Provision for income taxes................... 424,699 257,012 ---------- ---------- Net income.............. $ 622,166 $ 445,119 ========== ========== Net income per share-- diluted................. $ 1.71 $ 1.21 ========== ========== Average common shares outstanding--diluted.... 363,113 369,082 ========== ========== Net income per share-- basic................... $ 1.74 $ 1.23 ========== ========== Average common shares outstanding--basic...... 357,866 362,234 ========== ========== Cash dividends per share................... $ 0.71 $ 0.6575 ========== ==========
See Notes to Condensed Consolidated Financial Statements. ------------ 3 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
October 27, 1999 April 28, 1999* ---------------- --------------- FY 2000 FY 1999 (Unaudited) (Thousands of Dollars) Assets Current Assets: Cash and cash equivalents..................... $ 168,004 $ 115,982 Short-term investments, at cost which approximates market.......................... 1,066 7,139 Receivables, net.............................. 1,152,521 1,163,915 Inventories................................... 1,601,073 1,409,651 Prepaid expenses and other current assets..... 184,868 190,091 ---------- ---------- Total current assets........................ 3,107,532 2,886,778 ---------- ---------- Property, plant and equipment................. 4,099,366 4,073,975 Less accumulated depreciation................. 1,848,706 1,902,951 ---------- ---------- Total property, plant and equipment, net.... 2,250,660 2,171,024 ---------- ---------- Goodwill, net................................. 1,568,598 1,781,466 Trademarks, net............................... 497,147 511,608 Other intangibles, net........................ 158,342 177,290 Other non-current assets...................... 1,035,640 525,468 ---------- ---------- Total other non-current assets.............. 3,259,727 2,995,832 ---------- ---------- Total assets................................ $8,617,919 $8,053,634 ========== ==========
*Summarized from audited fiscal year 1999 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------ 4 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
October 27, 1999 April 28, 1999* ---------------- --------------- FY 2000 FY 1999 (Unaudited) (Thousands of Dollars) Liabilities and Shareholders' Equity Current Liabilities: Short-term debt............................... $ 205,754 $ 290,841 Portion of long-term debt due within one year. 272,252 613,366 Accounts payable.............................. 961,007 945,488 Salaries and wages............................ 55,808 74,098 Accrued marketing............................. 208,838 182,024 Accrued restructuring costs................... 107,065 147,786 Other accrued liabilities..................... 364,424 372,623 Income taxes.................................. 321,132 160,096 ---------- ---------- Total current liabilities................... 2,496,280 2,786,322 ---------- ---------- Long-term debt................................ 2,824,662 2,472,206 Deferred income taxes......................... 327,504 310,799 Non-pension postretirement benefits........... 200,394 208,102 Other liabilities............................. 779,731 473,201 ---------- ---------- Total long-term debt and other liabilities.. 4,132,291 3,464,308 ---------- ---------- Shareholders' Equity: Capital stock................................. 107,945 107,947 Additional capital............................ 307,946 277,652 Retained earnings............................. 4,747,806 4,379,742 ---------- ---------- 5,163,697 4,765,341 Less: Treasury stock at cost (75,706,431 shares at October 27, 1999 and 71,968,652 shares at April 28, 1999)............................ 2,617,001 2,435,012 Unearned compensation relating to the ESOP... 10,158 11,728 Accumulated other comprehensive income....... 547,190 515,597 ---------- ---------- Total shareholders' equity.................. 1,989,348 1,803,004 ---------- ---------- Total liabilities and shareholders' equity.. $8,617,919 $8,053,634 ========== ==========
*Summarized from audited fiscal year 1999 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------ 5 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Six Months Ended Ended October 27, 1999 October 28, 1998 ---------------- ---------------- FY 2000 FY 1999 (Unaudited) (Thousands of Dollars) Cash Provided by Operating Activities........ $ 188,717 $ 234,314 --------- --------- Cash Flows from Investing Activities: Capital expenditures....................... (181,919) (155,559) Acquisitions, net of cash acquired......... (60,241) (178,957) Proceeds from divestitures................. 723,344 178,000 Purchases of short-term investments........ (665,457) (449,941) Sales and maturities of short-term investments............................... 671,493 450,115 Investment in The Hain Food Group, Inc..... (99,764) -- Other items, net........................... 165 14,866 --------- --------- Cash provided by (used for) investing activities.............................. 387,621 (141,476) --------- --------- Cash Flows from Financing Activities: Payments on long-term debt................. (370,028) (49,213) Proceeds from commercial paper and short- term borrowings, net...................... 251,462 155,146 Proceeds from long-term debt............... 18,500 255,877 Dividends.................................. (254,102) (238,064) Purchases of treasury stock................ (192,654) (238,222) Exercise of stock options.................. 10,749 65,739 Other items, net........................... 9,097 31,692 --------- --------- Cash used for financing activities....... (526,976) (17,045) --------- --------- Effect of exchange rate changes on cash and cash equivalents............................ 2,660 (1,000) --------- --------- Net increase in cash and cash equivalents.... 52,022 74,793 Cash and cash equivalents at beginning of year........................................ 115,982 96,300 --------- --------- Cash and cash equivalents at end of period... $ 168,004 $ 171,093 ========= =========
See Notes to Condensed Consolidated Financial Statements. ------------ 6 H. J. HEINZ COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on the results of operations and the financial position of the company. Those comments should be read in conjunction with these notes. The company's Annual Report to Shareholders for the fiscal year ended April 28, 1999 includes additional information about the company, its operations, and its financial position, and should be read in conjunction with this quarterly report on Form 10-Q. (2) The results for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the company's business. Certain prior year amounts have been reclassified in order to conform with the Fiscal 2000 presentation. (3) In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the results of operations of these interim periods have been included. (4) The composition of inventories at the balance sheet dates was as follows:
October 27, 1999 April 28, 1999 ---------------- -------------- (Thousands of Dollars) Finished goods and work-in-process........... $1,258,854 $1,064,015 Packaging material and ingredients........... 342,219 345,636 ---------- ---------- $1,601,073 $1,409,651 ========== ==========
(5) The provision for income taxes consists of provisions for federal, state, U.S. possessions and foreign income taxes. The company operates in an international environment with significant operations in various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable tax rates. During the first quarter of Fiscal 2000, the company reorganized certain of its foreign operations and as a result incurred a foreign income tax liability of $376.8 million, payable over five years. Because the company increased the tax basis in amortizable assets, cash flow is expected to be neutral over the next five years, with positive cash flow expected in each of the following four years. (6) Restructuring Charges Operation Excel In Fiscal 1999, the company announced a growth and restructuring initiative named "Operation Excel." The major components of Operation Excel include creating manufacturing centers of excellence, focusing the product portfolio, realigning the company's management teams and investing in growth initiatives. For more information regarding the background of Operation Excel, please refer to the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. 7 In the six months ended October 27, 1999, as part of Operation Excel, the company recognized additional restructuring and related costs of $111.7 million pretax ($0.23 per share). [Note: All earnings per share amounts included in the Notes to the Condensed Consolidated Financial Statements are presented on an after-tax diluted basis, unless otherwise noted.] These costs were primarily related to implementation costs ($68.4 million) for consulting fees, employee training and relocation costs, equipment relocation costs and equipment commissioning costs associated with the implementation of Operation Excel initiatives. Other costs recognized in the six months ended October 27, 1999 consisted of employee termination and severance costs ($13.9 million), asset writedowns ($11.2 million), and exit costs ($18.2 million). These costs were primarily related to: additional severance accruals relating to the closure of the company's Ore-Ida head office in Boise, Idaho, severance and exit costs associated with the relocation of our U.S. seafood and petfood headquarters to Pittsburgh, Pennsylvania and the closure of a chicken processing facility in New Zealand. During the six months ended October 27, 1999, the company utilized $53.8 million of severance and exit cost accruals, principally related to consolidating the company's U.S. frozen food headquarters, consolidating certain European administrative support functions and downsizing the Puerto Rico tuna processing facility. The major components of the restructuring charges and implementation costs and the accrual balances as of October 27, 1999 were as follows:
Employee Termination Non-Cash and Accrued Asset Severance Exit Implementation (Dollars in millions) Write-Downs Costs Costs Costs Total --------------------- ----------- ----------- ------- -------------- ------- Initial charge--Fiscal 1999................... $ 294.9 $159.4 $ 45.3 $ 53.2 $ 552.8 Amounts utilized--Fiscal 1999................... (294.9) (67.3) (9.8) (53.2) (425.2) ------- ------ ------ ------ ------- Accrued restructuring costs--April 28, 1999.. -- 92.1 35.5 -- 127.6 Restructuring charges and implementation costs--Fiscal 2000..... 11.2 13.9 18.2 68.4 111.7 Amounts utilized--Fiscal 2000................... (11.2) (31.1) (22.7) (68.4) (133.4) ------- ------ ------ ------ ------- Accrued restructuring costs--October 27, 1999................... $ -- $ 74.9 $ 31.0 $ -- $ 105.9 ======= ====== ====== ====== =======
In total, the company has approved the closure or exit of 17 factories or businesses. To date six of these factories or businesses have been sold or closed. These actions will impact approximately 5,500 employees with a net reduction in the workforce of 4,000 after expansion of certain facilities. During Fiscal 1999, the company's workforce was reduced by approximately 200 employees. In the six months ended October 27, 1999, the workforce was reduced by an additional 1,800 employees. All of the remaining factory closures and employee terminations are expected to take place within 12 months. Project Millennia During the fourth quarter of Fiscal 1997, the company announced a reorganization and restructuring program named "Project Millennia." The reorganization plan was designed to strengthen the company's core businesses and improve profitability and global growth. Key initiatives were focused on process changes and product line rationalizations. For more information regarding the background of Project Millennia, please refer to the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. In the six months ended October 27, 1999, the company utilized $18.9 million of severance and exit cost accruals to facilitate the implementation of Project Millennia. The utilization of the accruals related principally to the closure of a tuna processing facility in Australia, the closure of a tomato 8 processing facility in Spain and contractual lease commitments associated with the restructuring of the U.S. Weight Watchers meeting system, which were transferred to the buyer of the weight control business. The major components of the restructuring charges and implementation costs and the accrual balances as of October 27, 1999 were as follows:
Employee Termination Non-Cash and Accrued Asset Severance Exit Implementation (Dollars in millions) Write-Downs Costs Costs Costs Total --------------------- ----------- ----------- ------- -------------- ------ Accrued restructuring costs--April 28, 1999.. $-- $ 2.7 $ 17.4 $-- $ 20.1 Amounts utilized--Fiscal 2000................... -- (2.3) (16.6) -- (18.9) --- ----- ------ --- ------ Accrued restructuring costs--October 27, 1999................... $-- $ 0.4 $ 0.8 $-- $ 1.2 === ===== ====== === ======
The remaining accruals of $1.2 million relate to the finalization of severance payments in Spain and certain contractual lease commitments in the U.S. (7) On September 29, 1999, the company completed the sale of the Weight Watchers weight control business for $735 million, which included $25 million of preferred stock, to Artal Luxembourg, S.A., a European private investment firm. The transaction resulted in a pretax gain of $464.6 million ($0.72 per share). The company used a portion of the proceeds to retain a 6% equity interest in Weight Watchers International. The sale does not include Weight Watchers Smart Ones frozen meals, desserts and breakfast items, Weight Watchers from Heinz in the U.K. and a broad range of other Weight Watchers branded foods in Heinz's global core product categories. Pro forma results of the company, assuming this transaction had been made at the beginning of each period presented, would not be materially different from the results reported. During Fiscal 2000, the company also made other smaller divestitures. (8) During Fiscal 2000, the company completed the acquisitions of Thermo-Pac Inc., a U.S. leader in single-serve condiments, Quality Chef Foods, Inc., a leading manufacturer of frozen heat-and-serve soups, entrees and sauces, and obtained a 51% share of Remedia Limited, Israel's leading company in infant nutrition. All of the above acquisitions have been accounted for as purchases and, accordingly, the respective purchase prices have been allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition dates. Final allocations of the purchase prices are not expected to differ significantly from the preliminary allocations. Operating results of the businesses acquired have been included in the Consolidated Statements of Income from the respective acquisition dates forward. Pro forma results of the company, assuming all of the acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. (9) On September 27, 1999 the company and The Hain Food Group announced an agreement to form a strategic alliance for the global production and marketing of natural and organic foods and soy-based beverages. The company's investment of $99.8 million gave it a 19.5% stake in Hain. Heinz will provide procurement, manufacturing and logistic expertise while Hain will provide marketing, sales and distribution services. Additionally, Hain acquired from the company the trademark and name for Earth's Best organic baby foods. (10) Segment Information During Fiscal 1999, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 9 supersedes previously issued segment reporting disclosure rules and requires the presentation of descriptive information about reportable segments that is consistent with the way in which management operates the company. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. Previously reported segment and geographic information has been restated to conform with SFAS No. 131 requirements. The company's segments are primarily organized by geographical area. The composition of segments and measure of segment profitability is consistent with that used by the company's management. Descriptions of the company's reportable segments are as follows: North American Dry--This segment includes the company's North American dry grocery and foodservice operations. This segment consists of Heinz U.S.A., Heinz Pet Products, Star-Kist Seafood and Heinz Canada. This segment's operations include products in all of the company's core categories. North American Frozen--This segment consists of Heinz Frozen Food Company, which markets frozen potatoes, entrees, and appetizers. Europe--This segment includes the company's operations in Europe and sells products in all of the company's core categories. Asia/Pacific--This segment includes the company's operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and India. This segment's operations include products in all of the company's core categories. Other Operating Entities--This segment includes the company's Weight Watchers classroom business through September 29, 1999, the date of divestiture, as well as the company's operations in Africa, Venezuela and other areas which sell products in all of the company's core categories. The company's management evaluates performance based on several factors; however, the primary measurement focus is operating income excluding unusual costs and gains. Intersegment sales are accounted for at current market values. Items below the operating income line of the Consolidated Statements of Income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by the company's management. 10 The following table presents information about the company's reportable segments.
North North Other American American Asia/ Operating Non- Consolidated (Dollars in Thousands) Dry Frozen Europe Pacific Entities Operating(1) Totals ---------------------- ---------- -------- ---------- -------- --------- ------------ ------------ Three months ended October 27, 1999 Intersegment sales...... $ 9,215 $ 4,171 $ 555 $ 1,204 $ 1,072 $(16,217) $ -- Net external sales...... 1,028,657 255,097 605,921 295,024 159,385 -- 2,344,084 Operating income........ 181,055 42,629 105,026 29,001 487,468 (53,972) 791,207 Operating income, excluding special items (2).................... 221,979 49,116 122,315 41,379 22,851 (23,972) 433,668 Three months ended October 28, 1998 Intersegment sales...... $ 7,846 $ 4,966 $ 1,544 $ -- $ 1,445 $(15,801) $ -- Net external sales...... 1,026,506 259,379 597,704 247,510 191,303 -- 2,322,402 Operating income........ 223,522 62,895 120,962 30,251 29,759 (30,039) 437,350 Operating income, excluding special items (3).................... 226,232 47,518 112,508 31,801 24,921 (29,640) 413,340 Six months ended October 27, 1999 Intersegment sales...... $ 16,129 $ 7,135 $ 1,918 $ 1,659 $ 2,526 $(29,367) $ -- Net external sales...... 1,994,780 467,509 1,157,430 580,853 324,519 -- 4,525,091 Operating income........ 367,945 76,014 212,367 64,932 524,407 (73,485) 1,172,180 Operating income, excluding special items (4).................... 438,771 91,800 241,409 81,003 59,790 (43,485) 869,288 Six months ended October 28, 1998 Intersegment sales...... $ 14,269 $ 8,180 $ 2,602 $ -- $ 2,883 $(27,934) $ -- Net external sales...... 2,007,491 478,625 1,180,012 485,220 399,284 -- 4,550,632 Operating income........ 439,297 99,966 236,004 63,344 53,962 (47,124) 845,449 Operating income, excluding special items (5).................... 446,507 86,289 231,850 66,294 51,024 (45,625) 836,339
-------- (1) Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. (2) Excludes restructuring and implementation costs of Operation Excel as follows: North American Dry $40.9 million, North American Frozen $6.5 million, Europe $17.3 million, and Asia/Pacific $12.4 million; excludes the gain on the sale of Weight Watchers weight control business in Other Operating entities of $464.6 million; excludes the Foundation Contribution in Non-Operating of $30.0 million. (3) Excludes implementation costs for Project Millennia as follows: North American Dry $2.7 million, North American Frozen $1.2 million, Europe $0.6 million, Asia/Pacific $1.6 million, Other Operating entities $0.9 million and Non-Operating $0.4 million; excludes the reversal of unutilized Project Millennia accruals for severance and exit costs in North American Frozen and Europe of $16.6 million and $9.1 million, respectively, and excludes the gain on the sale of the bakery division in Other Operating entities of $5.7 million. (4) Excludes restructuring and implementation costs of Operation Excel as follows: North American Dry $50.8 million, North American Frozen $15.8 million, Europe $29.0 million, and Asia/Pacific $16.1 million; excludes costs related to Ecuador in North American Dry $20.0 million; excludes the gain on the sale of Weight Watchers weight control business in Other Operating entities of $464.6 million; excludes the Foundation Contribution in Non-Operating of $30.0 million. (5) Excludes implementation costs for Project Millennia as follows: North American Dry $7.2 million, North American Frozen $2.9 million, Europe $4.9 million, Asia/Pacific $3.0 million, Other Operating entities $2.8 million and Non-Operating $1.5 million; excludes the reversal of unutilized Project Millennia accruals for severance and exit costs in North American Frozen and Europe of $16.6 million and $9.1 million, respectively, and excludes the gain on the sale of the bakery division in Other Operating entities of $5.7 million. 11 A reconciliation of total segment operating income to consolidated income before income taxes is as follows:
Three Months Three Months Six Months Six Months Ended Ended Ended Ended (Dollars in thousands) October 27, 1999 October 28, 1998 October 27, 1999 October 28, 1998 ---------------------- ---------------- ---------------- ---------------- ---------------- Total operating income for reportable segments............... $791,207 $437,350 $1,172,180 $845,449 Interest income......... 2,884 6,567 8,169 14,152 Interest expense........ 64,191 67,516 126,783 131,559 Other expenses, net..... 11,074 8,292 6,701 25,911 -------- -------- ---------- -------- Consolidated income before income taxes.... $718,826 $368,109 $1,046,865 $702,131 ======== ======== ========== ========
The company's revenues are generated via the sale of products in the following categories:
Soups, Beans Ketchup, and Condiments Frozen Pasta Infant Pet (Dollars in thousands) and Sauces Foods Tuna Meals Foods Products Other Total ---------------------- ---------- -------- -------- -------- -------- -------- -------- ---------- Three months ended October 27, 1999....... $ 580,557 $357,974 $262,523 $312,663 $241,379 $309,536 $279,452 $2,344,084 Three months ended October 28, 1998....... 558,428 351,823 269,559 291,588 224,257 318,053 308,694 2,322,402 ---------- -------- -------- -------- -------- -------- -------- ---------- Total increase (decrease)............. $ 22,129 $ 6,151 $ (7,036) $ 21,075 $ 17,122 $ (8,517) $(29,242) $ 21,682 ========== ======== ======== ======== ======== ======== ======== ========== Six months ended October 27, 1999....... $1,192,169 $659,054 $534,141 $546,430 $472,780 $603,873 $516,644 $4,525,091 Six months ended October 28, 1998....... 1,100,716 660,843 562,908 518,606 475,986 639,877 591,696 4,550,632 ---------- -------- -------- -------- -------- -------- -------- ---------- Total increase (decrease)............. $ 91,453 $ (1,789) $(28,767) $ 27,824 $ (3,206) $(36,004) $(75,052) $ (25,541) ========== ======== ======== ======== ======== ======== ======== ==========
(11) The company's $2.30 billion credit agreement, which expires in September 2001, supports its domestic commercial paper program. At October 27, 1999, the company had $1.77 billion of domestic commercial paper outstanding, all of which has been classified as long-term debt due to the long-term nature of the credit agreement. As of April 28, 1999, the company had $1.41 billion of domestic commercial paper outstanding and classified as long-term debt. (12) On September 8, 1999, the company's Board of Directors raised the quarterly dividend on the company's common stock to $0.36 3/4 per share from $0.34 1/4 per share, for an indicated annual rate of $1.47 per share. 12 (13) The following table sets forth the computation of basic and diluted earnings per share in accordance with the provisions of SFAS No. 128.
Three Months Three Months Six Months Ended Ended Ended Six Months Ended October 27, 1999 October 28, 1998 October 27, 1999 October 28, 1998 ---------------- ---------------- ---------------- ---------------- FY 2000 FY 1999 FY 2000 FY 1999 (In Thousands, Except per Share Amounts) Net income per share--basic: Net income.................... $415,498 $231,332 $622,166 $445,119 Preferred dividends........... 7 8 14 16 -------- -------- -------- -------- Net income applicable to common stock................. $415,491 $231,324 $622,152 $445,103 ======== ======== ======== ======== Average common shares outstanding--basic........... 357,866 362,234 357,866 362,234 ======== ======== ======== ======== Net income per share--basic... $ 1.16 $ 0.64 $ 1.74 $ 1.23 ======== ======== ======== ======== Net income per share--diluted: Net income.................... $415,498 $231,332 $622,166 $445,119 ======== ======== ======== ======== Average common shares outstanding.................. 357,866 362,234 357,866 362,234 Effect of dilutive securities: Convertible preferred stock. 233 248 233 248 Stock options............... 5,014 6,600 5,014 6,600 -------- -------- -------- -------- Average common shares outstanding--diluted......... 363,113 369,082 363,113 369,082 ======== ======== ======== ======== Net income per share--diluted. $ 1.14 $ 0.63 $ 1.71 $ 1.21 ======== ======== ======== ========
(14) Comprehensive income for all periods presented consisted of net income, foreign currency translation adjustments and the adjustment to the minimum pension liability. The components of comprehensive income, net of related tax, for the periods presented are as follows:
Three Months Three Months Six Months Six Months Ended Ended Ended Ended October 27, 1999 October 28, 1998 October 27, 1999 October 28, 1998 ---------------- ---------------- ---------------- ---------------- FY 2000 FY 1999 FY 2000 FY 1999 (Thousands of Dollars) Net income.............. $415,498 $231,332 $622,166 $445,119 Other comprehensive in- come (loss): Foreign currency translation adjustment........... (3,463) 36,572 (32,783) (24,737) Minimum pension liability adjustment. (794) 690 1,190 1,793 -------- -------- -------- -------- Comprehensive income.... $411,241 $268,594 $590,573 $422,175 ======== ======== ======== ========
13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Operation Excel In Fiscal 1999, the company announced a growth and restructuring initiative named "Operation Excel." The major components of Operation Excel include creating manufacturing centers of excellence, focusing the product portfolio, realigning the company's management teams and investing in growth initiatives. For more information regarding the background of Operation Excel, please refer to the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. In the six months ended October 27, 1999, as part of Operation Excel, the company recognized additional restructuring and related costs of $111.7 million pretax ($0.23 per share). [Note: All earnings per share amounts included in Management's Discussion and Analysis are presented on an after-tax diluted basis.] These costs were primarily related to implementation costs ($68.4 million) for consulting fees, employee training and relocation costs, equipment relocation costs and equipment commissioning costs associated with the implementation of Operation Excel initiatives. Other costs recognized in the six months ended October 27, 1999 consisted of employee termination and severance costs ($13.9 million), asset writedowns ($11.2 million), and exit costs ($18.2 million). These costs were primarily related to additional severance accruals relating to the closure of the company's Ore-Ida head office in Boise, Idaho, severance and exit costs associated with the relocation of our U.S. seafood and petfood headquarters to Pittsburgh, Pennsylvania and the closure of a chicken processing facility in New Zealand. See footnote 10 for a breakdown of Operation Excel restructuring and implementation costs by segment. During the six months ended October 27, 1999, the company utilized $53.8 million of severance and exit cost accruals, principally related to consolidating the company's U.S. frozen food headquarters, consolidating certain European administrative support functions and downsizing the Puerto Rico tuna processing facility. See footnote 6 for further information. In total, the company has approved the closure or exit of 17 factories or businesses. To date six of these factories or businesses have been sold or closed. These actions will impact approximately 5,500 employees with a net reduction in the workforce of 4,000 after expansion of certain facilities. During Fiscal 1999, the company's workforce was reduced by approximately 200 employees. In the six months ended October 27, 1999, the workforce was reduced by an additional 1,800 employees. All of the remaining factory closures and employee terminations are expected to take place within 12 months. Future Operation Excel initiatives will also be aimed at generating manufacturing efficiencies and realigning management teams and will result in the recognition of additional restructuring charges and implementation costs. Specific initiatives are in the development stages and have not yet been approved by the company's Board of Directors. These future initiatives currently envision the closure of at least three additional factories and additional net workforce reductions of 1,000 employees. The entire program will result in restructuring charges and implementation costs of approximately $1.1 billion, a portion of which will be recognized in future quarters of Fiscal 2000. The expected pretax savings to be generated from all Operation Excel initiatives will be $60 million in Fiscal 2000 and will grow to $145 million in Fiscal 2001 and $215 million in Fiscal 2002, with non-cash savings of less than $15 million in any year. The company is accelerating Operation Excel and anticipates that all restructuring charges will be recognized by the end of Fiscal 2001, a year earlier than previously planned. 14 Successful execution of all Operation Excel initiatives will help the company achieve the following targets over the next four years: . Over $200 million in annual ongoing pretax savings upon full implementation . Earnings per share growth of 10 to 12 percent per year on average . Sales growth of 4 to 5 percent per year on average . Gross margins of 42% . Return on invested capital of 40% . $2.5 billion of free cash flow Project Millennia During the fourth quarter of Fiscal 1997, the company announced a reorganization and restructuring program named "Project Millennia." The reorganization plan was designed to strengthen the company's core businesses and improve profitability and global growth. Key initiatives were focused on process changes and product line rationalizations. For more information regarding the background of Project Millennia, please refer to the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. In the six months ended October 27, 1999, the company utilized $18.9 million of severance and exit cost accruals to facilitate the implementation of Project Millennia. The utilization of the accruals related principally to the closure of a tuna processing facility in Australia, the closure of a tomato processing facility in Spain and contractual lease commitments associated with the restructuring of the U.S. Weight Watchers meeting system, which were transferred to the buyer of the weight control business. See footnote 6 for further information. The remaining accruals of $1.2 million relate to the finalization of severance payments in Spain and certain contractual lease commitments in the U.S. THREE MONTHS ENDED OCTOBER 27, 1999 AND OCTOBER 28, 1998 Results of Operations For the three months ended October 27, 1999, sales increased $21.7 million, or 0.9%, to $2,344.1 million from $2,322.4 million last year. Favorable volume increased sales by 3.5% and acquisitions increased sales by 3.3%. Sales were unfavorably impacted by divestitures of 3.5%, lower pricing of 1.9% and the unfavorable impact of foreign exchange translation rates of 0.5%. The North American Dry segment's sales increased $2.2 million, or 0.2%. Favorable volume increased sales by 2.5%, due primarily to ketchup and condiments and tuna, partially offset by a decrease in pet food. The favorable impact of foreign exchange translation rates in Canada increased sales by 0.3%. Sales were unfavorably impacted by lower pricing of 2.1%, due primarily to tuna and ketchup. Divestitures, net of acquisitions, negatively impacted sales by 0.5%. The North American Frozen segment's sales decreased $4.3 million, or 1.7%. Lower pricing reduced sales by 4.7%, due primarily to major promotions for Ore-Ida frozen potatoes. Divestitures decreased sales by 3.7%, primarily due to the exit of several non-core product lines as part of Operation Excel. Favorable volume increased sales by 6.7%, led by Smart Ones and Ore-Ida frozen potatoes. Sales in Europe increased $8.2 million, or 1.4%. Favorable volume increased sales by 4.2%, due primarily to increases in infant foods, tuna and frozen foods. Acquisitions, net of divestitures, increased sales 3.3%, due primarily to the acquisitions of Sonnen Bassermann in Germany, Remedia Limited in Israel and Serv-A-Portion in Belgium. The unfavorable impact of foreign exchange translation rates, primarily in Italy and the U.K., reduced sales by 5.2%. Lower pricing reduced sales by 0.9%. 15 Sales in Asia/Pacific increased $47.5 million, or 19.2%. Acquisitions, net of divestitures, increased sales 10.7%, primarily due to the Fiscal 1999 acquisition of ABC Indonesia. The favorable impact of foreign exchange translation rates, primarily in Japan and Australia, increased sales by 6.6%. Favorable volume increased sales by 2.4%, while lower pricing reduced sales by 0.5%. Other Operating entities' sales decreased $31.9 million, or 16.7%. Divestitures, net of acquisitions, decreased sales 17.7%, due primarily to the Fiscal 1999 divestiture of the bakery products unit and the Fiscal 2000 divestiture of the Weight Watchers weight control business. Lower prices of 2.1% were partially offset by favorable volume of 3.1%. The impact of foreign exchange translation rates was negligible. The second quarter was favorably impacted by a number of special items which net to $357.5 million pretax or $0.49 per share, and are summarized in the table below. During the second quarter, the company completed the sale of the Weight Watchers weight control business for $735 million. This transaction resulted in a pretax gain of $464.6 million ($0.72 per share). The company used part of this gain to fund a pretax contribution of $30.0 million ($0.05 per share) to the H. J. Heinz Company Foundation. The second quarter results also include implementation costs of $43.7 million pretax ($0.08 per share) related to Operation Excel and additional restructuring charges for Operation Excel of $33.3 million pretax ($0.09 per share). Last year's second quarter results included the reversal of unutilized Project Millennia accruals of $25.7 million pretax ($0.04 per share), implementation costs of $7.4 million pretax ($0.01 per share) related to Project Millennia; and a pretax gain of $5.7 million from the sale of the bakery products unit. The following tables provide a comparison of the company's reported results and the results excluding special items for the second quarter ended October 27, 1999 and October 28, 1998.
Second Quarter Ended October 27, 1999 ----------------------------------------- (Dollars in millions except per share Gross Operating Net Per amounts) Profit Income Income Share - ------------------------------------- -------- ----------- --------- -------- Reported results..................... $ 912.4 $ 791.2 $ 415.5 $ 1.14 Special items: Operation Excel restructuring...... 8.7 33.3 31.0 0.09 Operation Excel implementation costs............................. 22.2 43.7 29.1 0.08 Foundation contribution............ -- 30.0 18.9 0.05 Gain on sale of Weight Watchers weight control business........... -- (464.6) (259.7) (0.72) -------- --------- --------- -------- Results excluding special items...... $ 943.3 $ 433.7 $ 234.8 $ 0.65 ======== ========= ========= ======== Second Quarter Ended October 28, 1998 ----------------------------------------- Gross Operating Net Per Profit Income Income Share -------- ----------- --------- -------- Reported results..................... $ 936.4 $ 437.4 $ 231.3 $ 0.63 Special items: Project Millennia implementation costs............................. 4.5 7.4 4.7 0.01 Gain on sale of bakery products unit.............................. -- (5.7) 0.6 -- Reversal of unutilized Project Millennia accruals................ (20.7) (25.7) (16.4) (0.04) -------- --------- --------- -------- Results excluding special items...... $ 920.2 $ 413.3 $ 220.2 $ 0.60 ======== ========= ========= ========
(Note: Totals may not add due to rounding.) Gross profit decreased $24.0 million, or 2.6%, to $912.4 million from $936.4 million, and the gross profit margin decreased to 38.9% from 40.3%. Excluding the special items noted above, gross profit increased $23.1 million, or 2.5%, to $943.3 million from $920.2 million, and the gross profit margin increased to 40.2% from 39.6%. Gross profit in the North American Dry segment increased $4.0 million, or 1.0%, due primarily to an increase at Heinz U.S.A., partially offset by lower pricing in tuna. The North 16 American Frozen segment's gross profit decreased $4.0 million, or 3.2%, due primarily to a decrease in sales driven by the exit of several non-core product lines as part of Operation Excel and lower pricing in Ore-Ida frozen potatoes. Europe's gross profit increased $9.7 million, or 4.0%, due primarily to a changing sales mix favoring higher margin products and the acquisitions of Remedia Limited, Sonnen Bassermann and Serv-A-Portion. The unfavorable impact of foreign exchange translation rates, primarily in Italy and the U.K., reduced gross profit in Europe by approximately $13 million. The Asia/Pacific segment's gross profit increased $23.7 million, or 27.5% due to the acquisition of ABC Indonesia, increased sales and favorable exchange. Other Operating entities' gross profit decreased $11.8 million, or 15.6%, due primarily to the divestitures of the bakery products business and the Weight Watchers weight control business. Selling, general and administrative expenses ("SG&A") increased $86.8 million, or 17.4%, to $585.9 million from $499.0 million and increased as a percentage of sales to 25.0% from 21.5%. Excluding the special items noted above, SG&A increased $2.7 million, or 0.5%, to $509.6 million from $506.9 million and decreased slightly as a percentage of sales to 21.7% from 21.8%. A 7% increase in marketing expenses were partially offset by lower general and administrative and selling and distribution expenses. Operating income increased $353.9 million, or 80.9%, to $791.2 million from $437.4 million last year. Excluding the special items noted above, operating income increased $20.3 million, or 4.9%, to $433.7 million from $413.3 million. This increase was primarily due to the increase in gross profit, slightly offset by the increase in SG&A. North American Dry's operating income decreased $42.5 million, or 19.0%, to $181.1 million from $223.5 million. Excluding restructuring related items in both periods, operating income decreased $4.3 million, or 1.9%, to $222.0 million from $226.2 million as the favorable results at Heinz U.S.A. were offset by the retail effect of record low prices for raw tuna and under- performance by pet food. North American Frozen's operating income decreased $20.3 million, or 32.2%, to $42.6 million from $62.9 million. Excluding restructuring related items in both periods, operating income increased $1.6 million, or 3.4%, to $49.1 million from $47.5 million. This increase is primarily due to a reduction in general and administrative expenses related to the consolidation of the company's U.S. frozen food headquarters in Fiscal 1999. Europe's operating income decreased $15.9 million, or 13.2%, to $105.0 million from $121.0 million. Excluding restructuring related items in both periods, operating income increased $9.8 million, or 8.7%, to $122.3 million from $112.5 million. On a constant currency basis, operating income increased 14.3%, excluding restructuring related items in both periods. This increase is due to improved performances throughout most of the segment. Asia/Pacific's operating income decreased $1.3 million, or 4.1%, to $29.0 million from $30.3 million. Excluding restructuring related items in both periods, operating income increased $9.6 million, or 30.1%, to $41.4 million from $31.8 million. This increase is primarily attributable to the Fiscal 1999 acquisition of ABC Indonesia and improved performances throughout the segment. Other Operating entities' operating income increased $457.7 million to $487.5 million from $29.8 million. Excluding the gain on the sale of the Weight Watchers weight control business this year, and restructuring related items and the gain on the sale of the bakery products unit last year, operating income decreased $2.1 million, or 8.3%, to $22.9 million from $24.9 million. Other income and expenses increased $3.1 million to $72.4 million in the current quarter compared to $69.2 million last year. Net interest expense remained relatively flat between periods. 17 The effective tax rate for the second quarter of the current year was 42.2% compared to 37.2% last year. Excluding restructuring and implementation costs, and non-recurring items, the effective rate for the second quarter was 35.0% compared to 36.0% last year. Net income for the current quarter was $415.5 million compared to $231.3 million for the same quarter last year and diluted earnings per share was $1.14 compared to $0.63. Excluding the special items noted above, net income increased $14.6 million, or 6.6%, to $234.8 million from $220.2 million and earnings per share increased 8.3% to $0.65 from $0.60 last year. SIX MONTHS ENDED OCTOBER 27, 1999 AND OCTOBER 28, 1998 Results of Operations For the six months ended October 27, 1999, sales decreased $25.5 million, or 0.6%, to $4,525.1 million from $4,550.6 million last year. Sales were unfavorably impacted by divestitures of 3.1%, lower pricing of 1.8% and the unfavorable impact of foreign exchange translation rates of 0.4%. Acquisitions increased sales by 3.1% and sales volume increased 1.6%. The North American Dry segment's sales decreased $12.7 million, or 0.6%, largely due to lower pricing, primarily in seafood, of 2.1%. Sales volume was favorable by 1.2%, as increases in ketchup and condiments and tuna were partially offset by declines in pet food. In addition, acquisitions, net of divestitures, contributed 0.2%, and the favorable impact of foreign exchange translation rates in Canada contributed 0.1%. The North American Frozen segment's sales decreased $11.1 million, or 2.3%. Lower pricing reduced sales 4.0%, primarily due to major promotions for Ore- Ida frozen potatoes. Divestitures, net of acquisitions, decreased sales 3.4%, primarily due to the exit of several non-core product lines as part of Operation Excel. Sales volume increased 5.1%, led by Smart Ones and Ore-Ida frozen potatoes. Sales in Europe decreased $22.6 million, or 1.9%. The unfavorable impact of foreign exchange translation rates, primarily in Italy and the U.K., reduced sales by 4.3%. In addition, lower pricing of 0.6% and unfavorable sales volume of 0.4% contributed to the sales decrease. Acquisitions, net of divestitures, increased sales by 3.4%, due primarily to the acquisitions of Sonnen Bassermann, Serv-A-Portion and Remedia Limited. Sales in Asia/Pacific increased $95.6 million, or 19.7%. Acquisitions, net of divestitures, increased 11.8%, primarily due to the Fiscal 1999 acquisition of ABC Indonesia. The favorable impact of foreign exchange translation rates, primarily in Japan and Australia, increased sales by 6.5%. Sales volume increased 1.4%. Sales prices were flat year-on-year. Other Operating entities' sales decreased $74.8 million, or 18.7%. Divestitures, net of acquisitions, decreased sales 20.6%, due primarily to the Fiscal 1999 divestiture of the bakery products unit and the Fiscal 2000 divestiture of the Weight Watchers weight control business. In addition, lower pricing reduced sales by 2.9%, and the unfavorable impact of foreign exchange translation rates reduced sales by 0.9%. These decreases were partially offset by favorable volume of 5.7%, largely due to the Weight Watchers weight control business. The current year was favorably impacted by a number of special items which net to $321.1 million pretax and $0.41 per share, and are summarized in the table below. During the second quarter of Fiscal 2000, the company completed the sale of the Weight Watchers weight control business for a pretax gain of $464.6 million ($0.72 per share). The company used part of this gain to fund a pretax contribution of $30.0 million ($0.05 per share) to the H. J. Heinz Company Foundation. Fiscal 2000 results also include implementation costs of $68.4 million pretax ($0.13 per share) related to Operation Excel and additional restructuring charges for Operation Excel of $43.3 million pretax ($0.10 per share). In April of 1999, the 18 company became aware of operational and accounting irregularities in its Ecuador tuna processing facility and expensed $10.0 million as an estimate of the losses. In the first quarter of Fiscal 2000, the company recognized an additional $20.0 million pretax ($0.05 per share) of expenses related to this facility and does not anticipate significant further losses. In addition, the company recognized, in Other Income, a pretax gain of $18.2 million ($0.03 per share) for the sale of an office building in the U.K. Last year's six months results included the reversal of unutilized Project Millennia accruals of $25.7 million pretax ($0.04 per share), implementation costs of $22.3 million pretax ($0.04 per share) related to Project Millennia and a pretax gain of $5.7 million from the sale of the bakery products unit. The following tables provide a comparison of the company's reported results and the results excluding special items for the six months ended October 27, 1999 and October 28, 1998.
Six Months Ended October 27, 1999 ------------------------------------ (Dollars in millions except per share Gross Operating Net Per amounts) Profit Income Income Share - ------------------------------------- -------- --------- ------- ------ Reported results........................... $1,769.2 $1,172.2 $ 622.2 $ 1.71 Special items: Operation Excel restructuring............ 12.1 43.3 36.6 0.10 Operation Excel implementation costs..... 29.1 68.4 45.6 0.13 Ecuador expenses......................... 20.0 20.0 20.0 0.05 Gain on U.K. building sale............... -- -- (11.8) (0.03) Foundation contribution.................. -- 30.0 18.9 0.05 Gain on sale of Weight Watchers weight control business........................ -- (464.6) (259.7) (0.72) -------- -------- ------- ------ Results excluding special items............ $1,830.4 $ 869.3 $ 471.7 $ 1.30 ======== ======== ======= ====== Six Months Ended October 28, 1998 ------------------------------------ Gross Operating Net Per Profit Income Income Share -------- --------- ------- ------ Reported results........................... $1,804.9 $ 845.4 $ 445.1 $ 1.21 Special items: Project Millennia implementation costs... 14.7 22.3 14.3 0.04 Gain on sale of bakery products unit..... -- (5.7) 0.6 -- Reversal of unutilized Project Millennia accruals................................ (20.7) (25.7) (16.4) (0.04) -------- -------- ------- ------ Results excluding special items............ $1,798.9 $ 836.3 $ 443.5 $ 1.20 ======== ======== ======= ======
(Note: Totals may not add due to rounding.) Gross profit decreased $35.7 million, or 2.0%, to $1,769.2 million from $1,804.9 million, and the gross profit margin decreased to 39.1% from 39.7%. Excluding the special items noted above, gross profit increased $31.5 million, or 1.8%, to $1,830.4 million from $1,798.9 million, and the gross profit margin increased to 40.5% from 39.5%. Gross profit in the North American Dry segment decreased $0.2 million, due primarily to a decrease in the domestic pet food business and lower pricing in tuna, offset by increases at Heinz U.S.A. and Canada. The North American Frozen segment's gross profit decreased $12.1 million, or 5.2%, due primarily to a decrease in sales driven by lower pricing in frozen potatoes and the discontinuation of several non-core product lines as part of Operation Excel. Europe's gross profit increased $13.5 million, or 2.9%, due to the continued emphasis on higher margin products and acquisitions of Sonnen Bassermann, Remedia Limited and Serv-A-Portion. The unfavorable impact of foreign exchange translation rates, primarily in Italy and the U.K., reduced gross profit in Europe by approximately $23 million. The Asia/Pacific segment's gross profit increased $43.8 million, or 25.6% due to the acquisition of ABC Indonesia, increased sales and favorable exchange. Other Operating entities' gross profit decreased $14.5 million, or 9.5%, due primarily to the divestiture of the bakery products business. 19 SG&A increased $102.2 million, or 10.7%, to $1,061.6 million from $959.4 million and increased as a percentage of sales to 23.5% from 21.1%. Excluding the special items noted above, SG&A decreased $1.4 million, or 0.1%, to $961.1 million from $962.5 million and remained flat as a percentage of sales at 21.2%. Lower general and administrative and selling and distribution expenses were largely offset by increased marketing expenses. Operating income increased $326.7 million, or 38.6%, to $1,172.2 million from $845.4 million last year. Excluding the special items noted above, operating income increased $32.9 million, or 3.9%, to $869.3 million from $836.3 million. This increase was primarily due to the increase in gross profit. North American Dry's operating income decreased $71.4 million, or 16.2%, to $367.9 million from $439.3 million. Excluding restructuring related items in both years and the Ecuador expenses in the current year, operating income decreased $7.7 million, or 1.7%, to $438.8 million from $446.5 million. Favorable results at Heinz U.S.A. were offset by the retail effect of record low prices for raw tuna and under-performance by pet food. North American Frozen's operating income decreased $24.0 million, or 24.0%, to $76.0 million from $100.0 million. Excluding restructuring related items in both years, operating income increased $5.5 million, or 6.4%, to $91.8 million from $86.3 million. This increase is primarily due to a reduction in general and administrative expenses due to the consolidation of the company's U.S. frozen food headquarters in Fiscal 1999. Europe's operating income decreased $23.6 million, or 10.0%, to $212.4 million from $236.0 million. Excluding restructuring related items in both periods, operating income increased $9.6 million, or 4.1%, to $241.4 million from $231.9 million. This increase is due to improved performances throughout most of the segment, despite the unfavorable impact of foreign exchange translation rates, which decreased operating income by approximately $11 million. Asia/Pacific's operating income increased $1.6 million, or 2.5%, to $64.9 million from $63.3 million. Excluding restructuring related items in both periods, operating income increased $14.7 million, or 22.2%, to $81.0 million from $66.3 million. This increase is primarily attributable to the Fiscal 1999 acquisition of ABC Indonesia. Other Operating entities' operating income increased $470.4 million to $524.4 million from $54.0 million. Excluding the gain on the sale of the Weight Watchers weight control business this year, and restructuring related items and the gain on the sale of the bakery products unit last year, operating income increased $8.8 million, or 17.2%, to $59.8 million from $51.0 million. This increase is primarily due to the favorable results of the Weight Watchers classroom business. Other income and expenses totaled $125.3 million in the current year compared to $143.3 million last year. The decrease is primarily attributable to a gain on the sale of an office building in the U.K. of $18.2 million pretax ($0.03 per share). Net interest expense remained relatively flat between periods. The effective tax rate for the current year was 40.6% compared to 36.6% last year. Excluding the special items noted above, the effective rate for the current year was 35.0% compared to 36.0% last year. Net income for the current six months was $622.2 million compared to $445.1 million for the same period last year and diluted earnings per share was $1.71 compared to $1.21. Excluding the special items noted above, net income increased $28.2 million, or 6.4%, to $471.7 million from $443.5 million and earnings per share increased 8.3% to $1.30 from $1.20 last year. Liquidity and Financial Position Cash provided by operating activities totaled $188.7 million for the six month period ended October 27, 1999 compared to $234.3 million last year. 20 Cash provided by investing activities totaled $387.6 million compared to requiring $141.5 million last year. Cash provided by divestitures in the current period totaled $723.3 million primarily due to the sale of the Weight Watchers weight control business. Cash provided by divestitures in the prior period totaled $178.0 million, due to the sale of the bakery products unit. Acquisitions in the current period required $60.2 million, due to the purchases of Quality Chef, Thermo-Pac, Inc. and Remedia Limited in Israel. Acquisitions in the prior year's comparable period required $179.0 million due to the purchases of the College Inn brand of canned broths, the Eta brand of dressings and peanut butter in New Zealand, the Vidalia O's frozen onion rings brand and other acquisitions. Capital expenditures required $181.9 million in the current year versus $155.6 million last year. The company also invested $99.8 million in The Hain Food Group, Inc. in the current year. Financing activities required $527.0 million in the current period compared to $17.0 million last year. Payments on long-term debt used $370.0 million compared to $49.2 million last year. Proceeds from commercial paper and short- term borrowings provided $251.5 million compared to $155.1 million in the same period last year. Proceeds from long-term debt totaled $18.5 million compared to $255.9 million in the prior year. Dividend payments totaled $254.1 million compared to $238.1 million a year ago. Share repurchases totaled $192.7 million (4.2 million shares) versus $238.2 million (4.3 million shares) in the prior year. Cash provided from stock options exercised totaled $10.7 million compared to $65.7 million last year. In the six months ended October 27, 1999, the cash requirements for Operation Excel were $191.3 million, consisting of capital expenditures ($69.1 million), severance and exit costs ($53.8 million) and implementation costs ($68.4 million). The cash requirements of Project Millennia in the six months ended October 27, 1999 were $27.3 million consisting of capital expenditures ($8.4 million) and severance and exit costs ($18.9 million). The company's $2.30 billion credit agreement, which expires in September 2001, supports its domestic commercial paper program. At October 27, 1999, the company had $1.77 billion of domestic commercial paper outstanding, all of which has been classified as long-term debt due to the long-term nature of the credit agreement. As of April 28, 1999, the company had $1.41 billion of domestic commercial paper outstanding and classified as long-term debt. On September 8, 1999, the company's Board of Directors raised the quarterly dividend on the company's common stock to $0.36 3/4 per share from $0.34 1/4 per share, for an indicated annual rate of $1.47 per share. On December 8, 1999, the company's Board of Directors declared the quarterly dividend on the company's common stock of $0.36 3/4 per share, payable on January 10, 2000, to shareholders of record at the close of business on December 20, 1999. On September 29, 1999, the company completed the sale of its Weight Watchers weight control business to Artal Luxembourg, S.A. for $735 million. This transaction resulted in a pretax gain of $464.6 million ($0.72 per share). This divestiture is part of the company's strategy to divest non-core businesses. Through the date of sale, this business contributed approximately $175 million to Fiscal 2000 sales. The company's financial position remains strong, enabling it to meet cash requirements for operations, capital expansion programs and dividends to shareholders. The company is on track to deliver its year-end target of 6 to 7% EPS growth, excluding special items. Year 2000 Issue The Year 2000 issue arises because many computer hardware and software systems use only two digits rather than four digits to refer to a year. Therefore, computers or other equipment with date sensitive programming may not properly recognize a year that begins with "20." If not corrected, this could cause system failures or miscalculations that could significantly disrupt the company's business. Beginning in 1996, the company initiated a worldwide plan to address the Year 2000 issues that could affect its operations. The company's Chief Information Officer is in charge of the Year 2000 21 project. Each of the company's business units and corporate headquarters have established Year 2000 teams. The project is called "Operation Ready," a name that helps focus the company on the overall challenge of being operationally ready to address the expected consequences of the Year 2000 issue, including compliance by third parties who have material relationships with the company, such as vendors, customers and suppliers, and the development of contingency plans. The company's progress is monitored by senior management and periodically reported to the Audit Committee and Board of Directors. The first phase of Operation Ready was to conduct a worldwide review to identify and evaluate areas impacted by the Year 2000 issue. The review and evaluation focused on both traditional computer information technology systems ("IT systems") and non-information systems such as manufacturing, process and logistical systems which rely on embedded chips or similar devices ("non-IT systems"). The assessment of the company's internal IT systems and non-IT systems is complete. The second phase of the company's Year 2000 readiness plan was remediation, which involved the replacement, upgrading, modification and testing of affected hardware, software and process systems. The remediation of IT and non-IT systems to be Year 2000 ready has been completed. The company's corporate audit department has dedicated efforts to evaluating the company's Year 2000 preparedness. The corporate audit department, with the assistance of outside consultants, completed on-site preparedness reviews at the company's major affiliate locations and its corporate headquarters. These reviews addressed IT system remediation efforts as well as contingency planning and non-IT issues. Off-site reviews focusing on similar issues have been completed at all remaining affiliates. The corporate audit department continues to monitor progress with respect to earlier reviews and will be integrally involved in monitoring activities over the millennium transition period. To date, the cost to make the company's IT systems and non-IT systems Year 2000 operationally ready has been approximately $40 million. These costs have been funded through operating cash flow and have not had a material adverse effect on the company's consolidated financial position, results of operations or liquidity. Based on the company's state of readiness, no additional material costs are foreseen. A critical part of Operation Ready was the investigation and assessment of the Year 2000 preparedness of important suppliers, vendors, customers, utilities and other third parties. These assessments have been completed, although the company continues to monitor them to minimize the risk that any significant adverse consequences will result due to the failure of these third parties to be Year 2000 ready. While the company has no reason to believe that its exposure to the risks of the failure of it or third parties to be Year 2000 ready is any greater than the exposure to such risks that affect its competitors generally, there can be no assurance that the consequences of such failures would not have a material adverse impact on the company's operations. Although the company does not anticipate any major noncompliance issues, the company believes the most likely worst case scenario would be the temporary disruption of its business in certain locations in the event of noncompliance by the company or such third parties, which could include temporary plant closings, delays in the delivery and receipt of products and supplies, invoice and collection errors and inventory obsolescence. The company believes that its Operation Ready contingency planning should significantly reduce the adverse effect any such disruptions may have. The company's headquarters and affiliate Year 2000 readiness teams are working to allow the company to continue critical operations in the event either the company or major key suppliers or customers fail to resolve their respective Year 2000 issues in a timely manner. In addition, each major function involving the company (purchasing, manufacturing, sales, etc.) has a contingency planning team working on Year 2000 issues specific to that function. The plans developed by the functional teams 22 have been shared with the affiliate teams, so that Year 2000 issues are addressed from two separate perspectives. Contingency plans include stockpiling raw and packaging materials, increasing finished goods inventory levels, developing emergency backup and recovery procedures, securing alternate suppliers, replacing electronic applications with manual processes or other appropriate measures. The company's second Operation Ready conference was held in September and focused on the critical 100 days leading up to and spanning January 1, 2000. The agenda included the development of an overall millennium transition plan for the company and addressed affiliate transition planning issues such as demand planning, facility operating plans, communications and personnel scheduling. These plans have been completed and were instituted in mid- November to enable management to monitor the company's progress at key transition dates. Euro Conversion A single currency, the Euro, was introduced in Europe on January 1, 1999. Of the fifteen member countries of the European Union, eleven adopted the Euro as their legal currency on that date. Fixed conversion rates between the national currencies of these eleven countries and the Euro were established on that date. The national currencies are scheduled to remain legal tender as denominations of the Euro during the transition period ending December 31, 2001. During this transition period, parties may settle transactions using either the Euro or a participating country's national currency. At the current time, the company does not believe that the conversion to the Euro will have a material impact on its business or its financial condition. Other Matters On December 7, 1999, the company completed its acquisition of UB Frozen and Chilled Foods from United Biscuits (Holding) plc in the U.K. for $317 million. UB Frozen and Chilled Foods is one of the leading companies in the U.K. and Ireland producing frozen desserts and vegetarian/meat-free products, frozen pizzas and frozen value-added potato products, as well as fresh sandwiches. Its well-known brands include San Marco pizzas, Go Ahead! Brand, McVitie's American Dream and Jane Asher desserts, Linda McCartney vegetarian/meat-free products, and value-added frozen potato products under the Ross, Hula Hoops and Harry Ramsden's trade names. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the company's market risk during the six months ended October 27, 1999. For additional information, refer to pages 35-36 of the company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. 23 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 The Annual Meeting of Shareholders of H. J. Heinz Company was held in Pittsburgh, Pennsylvania on September 8, 1999. The following individuals were elected as directors for a one-year term expiring in September 2000:
Shares Director Shares For Withheld - -------- ----------- ---------- A. J. F. O'Reilly........................................ 292,905,736 5,757,420 W. R. Johnson............................................ 293,836,815 4,826,341 W. P. Snyder III......................................... 293,086,415 5,576,741 H. J. Schmidt............................................ 293,160,295 5,502,861 E. B. Sheldon............................................ 293,200,941 5,462,215 S. C. Johnson............................................ 293,709,926 4,953,230 D. R. Keough............................................. 293,631,316 5,031,840 S. D. Wiley.............................................. 293,680,375 4,982,781 D. R. Williams........................................... 293,939,482 4,723,674 N. F. Brady.............................................. 293,698,425 4,964,731 E. E. Holiday............................................ 293,806,175 4,856,981 P. F. Renne.............................................. 293,942,817 4,720,339 C. Kendle................................................ 286,412,738 12,250,418 M. C. Choksi............................................. 293,841,870 4,821,286 J. M. Zimmerman.......................................... 293,622,358 5,040,798 L. S. Coleman, Jr........................................ 293,560,733 5,102,423 A. G. M. Ritchie......................................... 293,990,458 4,672,698
Shareholders also acted upon the following proposals at the Annual Meeting: Elected PricewaterhouseCoopers, LLP the company's independent accountants for the fiscal year ending May 3, 2000. Votes totaled 296,282,217 for; 1,045,066 against; and 1,335,866 abstentions. Approved the performance goals under the H. J. Heinz Incentive Compensation Plan. Votes totaled 285,492,962 for; 10,432,783 against; and 2,735,897 abstentions. Approved the H. J. Heinz Global Stock Purchase Plan. Votes totaled 289,688,132 for; 6,624,160 against; and 2,341,500 abstentions. ITEM 5. OTHER INFORMATION See Notes 7 and 8 to the Condensed Consolidated Financial Statements in Part I--Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part I--Item 2 of this Quarterly Report on Form 10-Q. This report contains certain forward-looking statements which are based on management's current views and assumptions regarding future events and financial performance. Reference should be made to the section "Forward- Looking Statements" in Item 1 of the registrant's Annual Report on Form 10-K 24 for the fiscal year ended April 28, 1999 for a description of the important factors that could cause actual results to differ materially from those discussed herein. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be furnished by Item 601 of Regulation S-K are listed below and are filed as part hereof. The Registrant has omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S- K. The Registrant agrees to furnish such documents to the Commission upon request. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 12. Computation of Ratios of Earnings to Fixed Charges. 27. Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended October 27, 1999. 25 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. H. J. HEINZ COMPANY (Registrant) Date: December 13, 1999 /s/ Paul F. Renne By................................... Paul F. Renne Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: December 13, 1999 /s/ Edward J. McMenamin By................................... Edward J. McMenamin Vice President and Corporate Controller (Principal Accounting Officer) 26 EX-12 2 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Exhibit 12 H. J. HEINZ COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Six Months Fiscal Years Ended Ended ----------------------------------------------------- October 27, April 28, April 29, April 30, May 1, May 3, 1999 1999 1998 1997 1996 1995 ----------- ---------- ---------- --------- ---------- ---------- Fixed Charges: Interest expense*...... $ 127,769 $ 260,743 $ 260,401 $277,818 $ 279,368 $ 212,123 Capitalized interest... -- -- 1,542 2,688 1,007 414 Interest component of rental expense........ 14,607 29,926 30,828 27,382 26,728 24,200 ---------- ---------- ---------- -------- ---------- ---------- Total fixed charges.. $ 142,376 $ 290,669 $ 292,771 $307,888 $ 307,103 $ 236,737 ---------- ---------- ---------- -------- ---------- ---------- Earnings: Income before income taxes................. $1,046,865 $ 835,131 $1,254,981 $479,064 $1,023,661 $ 938,007 Add: Interest expense*.............. 127,769 260,743 260,401 277,818 279,368 212,123 Add: Interest component of rental expense............... 14,607 29,926 30,828 27,382 26,728 24,200 Add: Amortization of capitalized interest.. 427 3,050 3,525 3,454 3,399 3,465 ---------- ---------- ---------- -------- ---------- ---------- Earnings as adjusted. $1,189,668 $1,128,850 $1,549,735 $787,718 $1,333,156 $1,177,795 ---------- ---------- ---------- -------- ---------- ---------- Ratio of earnings to fixed charges......... 8.36 3.88 5.29 2.56 4.34 4.98 ========== ========== ========== ======== ========== ==========
- -------- * Interest expense includes amortization of debt expense and any discount or premium relating to indebtedness. EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Form 10-Q for the period ended October 27, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS MAY-03-2000 APR-29-1999 OCT-27-1999 168,004 1,066 1,152,521 0 1,601,073 3,107,532 4,099,366 1,848,706 8,617,919 2,496,280 2,824,662 0 171 107,774 1,881,403 8,617,919 4,525,091 4,525,091 2,755,901 2,755,901 0 0 126,783 1,046,865 424,699 622,166 0 0 0 622,166 1.74 1.71
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