<PAGE>
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 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 Nine Months Ended January 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 February 26, 1999 was 359,477,782 shares.
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
January 27, 1999 January 28, 1998
---------------- ----------------
FY 1999 FY 1998
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales................... $2,282,062 $2,236,034
Cost of products sold... 1,429,482 1,379,218
---------- ----------
Gross profit............ 852,580 856,816
Selling, general and
administrative expenses. 586,191 512,776
---------- ----------
Operating income........ 266,389 344,040
Interest income......... 5,993 7,462
Interest expense........ 63,522 64,848
Other expense, net...... 7,634 18,041
---------- ----------
Income before income
taxes................... 201,226 268,613
Provision for income
taxes................... 80,672 80,457
---------- ----------
Net income.............. $ 120,554 $ 188,156
========== ==========
Net income per share--
diluted................. $ 0.33 $ 0.50
========== ==========
Average common shares
outstanding--diluted.... 368,476 373,509
========== ==========
Net income per share--
basic................... $ 0.33 $ 0.51
========== ==========
Average common shares
outstanding--basic...... 361,750 366,403
========== ==========
Cash dividends per
share................... $ 0.34 1/4 $ 0.31 1/2
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
2
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
January 27, 1999 January 28, 1998
---------------- ----------------
FY 1999 FY 1998
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales................... $6,832,694 $6,733,386
Cost of products sold... 4,175,262 4,196,835
---------- ----------
Gross profit............ 2,657,432 2,536,551
Selling, general and
administrative expenses. 1,545,594 1,369,517
---------- ----------
Operating income........ 1,111,838 1,167,034
Interest income......... 20,145 23,004
Interest expense........ 195,081 190,956
Other expense, net...... 33,545 31,829
---------- ----------
Income before income
taxes................... 903,357 967,253
Provision for income
taxes................... 337,684 346,930
---------- ----------
Net income.............. $ 565,673 $ 620,323
========== ==========
Net income per share--
diluted................. $ 1.54 $ 1.66
========== ==========
Average common shares
outstanding--diluted.... 368,476 373,509
========== ==========
Net income per share--
basic................... $ 1.56 $ 1.69
========== ==========
Average common shares
outstanding--basic...... 361,750 366,403
========== ==========
Cash dividends per
share................... $ 1.00 $ 0.92
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
3
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 27, 1999 April 29, 1998*
---------------- ---------------
FY 1999 FY 1998
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents..................... $ 148,313 $ 96,300
Short-term investments, at cost which
approximates market........................... 8,325 3,098
Receivables, net.............................. 1,089,812 1,071,837
Inventories................................... 1,482,737 1,328,843
Prepaid expenses and other current assets..... 191,028 186,441
---------- ----------
Total current assets........................ 2,920,215 2,686,519
---------- ----------
Property, plant and equipment................. 4,081,057 4,068,123
Less accumulated depreciation................. 1,781,384 1,673,461
---------- ----------
Total property, plant and equipment, net.... 2,299,673 2,394,662
---------- ----------
Goodwill, net................................. 1,695,902 1,764,574
Trademarks, net............................... 529,746 416,918
Other intangibles, net........................ 186,821 194,560
Other non-current assets...................... 546,196 566,188
---------- ----------
Total other non-current assets.............. 2,958,665 2,942,240
---------- ----------
Total assets................................ $8,178,553 $8,023,421
========== ==========
</TABLE>
*Summarized from audited fiscal year 1998 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
4
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 27, 1999 April 29, 1998*
---------------- ---------------
FY 1999 FY 1998
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt............................... $ 293,373 $ 301,028
Portion of long-term debt due within one year. 16,420 38,598
Accounts payable.............................. 820,150 978,365
Salaries and wages............................ 53,567 66,473
Accrued marketing............................. 199,505 163,405
Accrued restructuring costs................... 30,314 94,400
Other accrued liabilities..................... 322,153 360,608
Income taxes.................................. 255,243 161,396
---------- ----------
Total current liabilities................... 1,990,725 2,164,273
---------- ----------
Long-term debt................................ 3,204,907 2,768,277
Deferred income taxes......................... 262,968 291,161
Non-pension postretirement benefits........... 207,580 209,642
Other liabilities............................. 405,401 373,552
---------- ----------
Total long-term debt and other liabilities.. 4,080,856 3,642,632
---------- ----------
Shareholders' Equity:
Capital stock................................. 107,948 107,973
Additional capital............................ 274,037 252,773
Retained earnings............................. 4,594,195 4,390,248
---------- ----------
4,976,180 4,750,994
Less:
Treasury stock at cost (71,529,986 shares at
January 27, 1999 and 67,678,632 shares at
April 29, 1998)............................ 2,405,401 2,103,979
Unearned compensation relating to the ESOP... 12,649 14,822
Accumulated other comprehensive income....... 451,158 415,677
---------- ----------
Total shareholders' equity.................. 2,106,972 2,216,516
---------- ----------
Total liabilities and shareholders' equity.. $8,178,553 $8,023,421
========== ==========
</TABLE>
*Summarized from audited fiscal year 1998 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
5
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
January 27, 1999 January 28, 1998
---------------- ----------------
FY 1999 FY 1998
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Cash Provided by Operating Activities........ $ 475,372 $ 554,715
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures....................... (211,785) (258,421)
Acquisitions, net of cash acquired......... (196,390) (136,351)
Proceeds from divestitures................. 179,000 490,739
Purchases of short-term investments........ (718,279) (857,067)
Sales and maturities of short-term
investments............................... 706,721 880,710
Other items, net........................... 31,456 28,864
--------- ---------
Cash (used for) provided by investing
activities.............................. (209,277) 148,474
--------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt............... 255,928 3,934
Proceeds from commercial paper and short-
term borrowings, net...................... 214,484 481,438
Payments on long-term debt................. (54,395) (563,065)
Dividends.................................. (361,726) (337,670)
Purchases of treasury stock................ (373,597) (480,306)
Exercise of stock options.................. 70,765 170,598
Other items, net........................... 32,030 77,549
--------- ---------
Cash used for financing activities....... (216,511) (647,522)
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................ 2,429 (16,674)
--------- ---------
Net increase in cash and cash equivalents.... 52,013 38,993
Cash and cash equivalents at beginning of
year........................................ 96,300 156,986
--------- ---------
Cash and cash equivalents at end of period... $ 148,313 $ 195,979
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
6
<PAGE>
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 on Form 10-K for the fiscal year ended April
29, 1998 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 1999 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:
<TABLE>
<CAPTION>
January 27, 1999 April 29, 1998
---------------- --------------
(Thousands of Dollars)
<S> <C> <C>
Finished goods and work-in-process.......... $1,127,462 $ 988,322
Packaging material and ingredients.......... 355,275 340,521
---------- ----------
$1,482,737 $1,328,843
========== ==========
</TABLE>
(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 United States. Accordingly, the consolidated income tax rate
is a composite rate reflecting the earnings in the various locations and
the applicable tax rates.
(6) In the third quarter, as part of the initial phase of Operation Excel (the
transformative four-year growth and restructuring initiative, announced on
February 17, 1999) the company recognized restructuring and related costs
of $141.7 million pretax ($0.27 per diluted share), primarily due to
combining the company's Ore-Ida Foods and Weight Watchers Gourmet Food
Company units into the newly formed Heinz Frozen Food Company. These costs
are classified as costs of products sold ($87.6 million) and as selling,
general and administrative expenses ($54.1 million) in the Consolidated
Statement of Income. In its entirety, Operation Excel will require a pre-
tax restructuring charge of $900 million, which includes the charge taken
in this third quarter. This $900 million charge will be spread over four
years, with most of the cost accrued this year. Implementation costs will
be approximately $200 million over the four years.
As part of this plan to streamline and focus the North American frozen
food operations, Heinz Frozen Food Company headquarters will be located in
Pittsburgh. The company's current frozen food manufacturing operations
will also be realigned to create "Centers of Manufacturing Excellence."
This manufacturing realignment includes the closure of the West Chester,
Pennsylvania factory and downsizing of the Pocatello, Idaho facility. In
addition, the company will discontinue the pocket sandwich business and
exit certain non-strategic frozen food businesses in order to focus on the
key frozen brands.
7
<PAGE>
The major components of this charge and the remaining accrual balance as
of January 27, 1999 were as follows:
<TABLE>
<CAPTION>
Accrued
Amounts Restructuring
Charge Utilized Costs
------ -------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Employee termination and severance costs.... $ 19,696 $ 13,980 $5,716
Exit costs.................................. 7,674 4,397 3,277
Non-cash asset write-downs.................. 89,295 89,295 --
Implementation costs........................ 25,060 25,060 --
-------- -------- ------
$141,725 $132,732 $8,993
======== ======== ======
</TABLE>
Employee termination and severance costs do not represent all of the
amounts to be recorded in connection with the separation of the affected
employees, as additional costs will be recognized over the next year as
eligibility requirements are met. The restructuring initiatives will
result in a net workforce reduction of approximately 400 employees due to
the termination of approximately 800 employees at closed or downsized
locations, which will be partially offset by increased employment at other
locations.
Asset write-downs consist primarily of fixed asset and other long-term
asset impairments that were recorded as a direct result of the company's
decision to exit businesses or facilities ($86 million). Of this amount,
$61.4 million represents write-downs of property, plant and equipment and
other depreciable assets and $24.6 million represents the write-down of
goodwill on businesses to be discontinued. Write-downs were also
recognized for estimated losses from disposals of inventories, packaging
materials and other assets as a direct result of the company's decision to
exit businesses or facilities ($3.3 million).
Implementation costs consist primarily of consulting fees and employee
relocation costs related to Operation Excel and are recognized as
incurred.
(7) In the second quarter of Fiscal 1999, the company reversed $25.7 million
of unutilized Project Millennia (the company's reorganization and
restructuring program announced in March, 1997) accruals for severance and
exit costs. This reversal reflected efficiencies on a number of
initiatives where the original estimates were higher than the actual costs
to complete the projects. This reversal reduced accrued restructuring
costs on the balance sheet and was recorded in cost of products sold
($20.7 million) and selling, general and administrative expenses ($5.0
million) in the Consolidated Statement of Income. The remaining Project
Millennia accrual balance of $21.3 million is included in accrued
restructuring costs on the Condensed Consolidated Balance Sheet.
(8) On October 2, 1998, the company completed the sale of its bakery products
unit to The Pillsbury Company for $178 million. The transaction resulted
in a pretax gain of $5.7 million, which was recorded in selling, general
and administrative expenses. The bakery products unit contributed
approximately $200 million in sales for Fiscal 1998. 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.
(9) On June 1, 1998, the company acquired the Vidalia O's frozen onion rings
brand from Vidalia Frozen Foods, Inc. to complement the company's Ore-Ida
frozen vegetable lines.
On June 26, 1998, the company acquired the Eta brand of dressings
(mayonnaise, salad dressings) and peanut butter from Griffins Foods
Limited of Auckland, New Zealand.
On July 6, 1998, the company acquired the College Inn brand of canned
broths from Nabisco Inc.
8
<PAGE>
On January 4, 1999, the company acquired Sonnen Bassermann, Germany's
leading marketer of ready-to-serve soups and meals, from Danone Group.
During Fiscal 1999, the company also made other acquisitions.
All of the above acquisitions have been accounted for as purchases and,
accordingly, the respective purchase prices have been allocated on a
preliminary basis to the respective assets and liabilities based on their
estimated fair values as of the dates of the acquisitions. Operating
results of these acquisitions have been included in the Consolidated
Statement of Income from the dates of the acquisitions.
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.
(10) The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At January 27, 1999,
the company had $1.55 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 29, 1998, the company had
$1.34 billion of domestic commercial paper outstanding and classified as
long-term debt.
On July 15, 1998, the company, under its current shelf registration
statement, issued $250 million of 6.375% debentures due 2028. The proceeds
were used to repay domestic commercial paper.
(11) On September 8, 1998, the company's board of directors raised the
quarterly dividend on the company's common stock to $0.34 1/4 per share
from $0.31 1/2 per share, for an indicated annual rate of $1.37 per share.
9
<PAGE>
(12) The following table sets forth the computation of basic and diluted
earnings per share in accordance with the provisions of SFAS No. 128.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
January 27, 1999 January 28, 1998 January 27, 1999 January 28, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
FY 1999 FY 1998 FY 1999 FY 1998
(In Thousands, Except per Share Amounts)
Net income per share--basic:
Net income.................... $120,554 $188,156 $565,673 $620,323
Preferred dividends........... 7 9 23 28
-------- -------- -------- --------
Net income applicable to
common stock................. $120,547 $188,147 $565,650 $620,295
======== ======== ======== ========
Average common shares
outstanding--basic........... 361,750 366,403 361,750 366,403
======== ======== ======== ========
Net income per share--basic... $ 0.33 $ 0.51 $ 1.56 $ 1.69
======== ======== ======== ========
Net income per share--diluted:
Net income.................... $120,554 $188,156 $565,673 $620,323
======== ======== ======== ========
Average common shares
outstanding.................. 361,750 366,403 361,750 366,403
Effect of dilutive securities:
Convertible preferred stock. 245 304 245 304
Stock options............... 6,481 6,802 6,481 6,802
-------- -------- -------- --------
Average common shares
outstanding--diluted......... 368,476 373,509 368,476 373,509
======== ======== ======== ========
Net income per share--diluted. $ 0.33 $ 0.50 $ 1.54 $ 1.66
======== ======== ======== ========
</TABLE>
10
<PAGE>
(13) As of April 30, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." The adoption of this statement had no impact on
the company's net income or shareholders' equity. SFAS No. 130
establishes standards for reporting comprehensive income in financial
statements. Comprehensive income includes all changes in equity during a
period except those resulting from investments by or distributions to
shareholders. For the company, comprehensive income for all periods
presented consisted of net income, foreign currency translation
adjustments and the adjustment to the minimum pension liability. Amounts
in prior year financial statements have been reclassified to conform to
SFAS No. 130 requirements.
The components of comprehensive income, net of related tax, for the
periods presented are as follows:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
January 27, 1999 January 28, 1998 January 27, 1999 January 28, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
FY 1999 FY 1998 FY 1999 FY 1998
(Thousands of Dollars)
Net income........... $120,554 $188,156 $565,673 $620,323
Other comprehensive
income (loss):
Foreign currency
translation
adjustment........ (15,218) (106,883) (39,955) (153,246)
Minimum pension
liability
adjustment........ 2,681 1,089 4,474 1,586
-------- -------- -------- --------
Comprehensive income. $108,017 $ 82,362 $530,192 $468,663
======== ======== ======== ========
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
THREE MONTHS ENDED JANUARY 27, 1999 AND JANUARY 28, 1998
On November 10, 1998, the company announced the formation of Heinz Frozen
Food Company, combining the operations of its Ore-Ida Foods and Weight
Watchers Gourmet Food Company units. This program is the initial phase of
Operation Excel and includes consolidating Ore-Ida's headquarters staff in
Boise with the Weight Watchers Gourmet Food Company in Pittsburgh. The
company's frozen food manufacturing operations will also be realigned to
create "Centers of Manufacturing Excellence." This manufacturing realignment
includes the closure of the West Chester, Pennsylvania factory and downsizing
the Pocatello, Idaho facility. In addition, the company will discontinue the
pocket sandwich business and exit certain non-strategic frozen food businesses
in order to focus on the key frozen brands. In connection with this initial
phase of Operation Excel the company expects to make capital expenditures
totaling approximately $17 million, with a significant portion to be spent in
Fiscal 2000. This phase of the restructuring initiatives will result in a net
workforce reduction of approximately 400 employees due to the termination of
approximately 800 employees at closed or downsized locations, which will be
partially offset by increased employment at other locations.
In the third quarter, the company recorded restructuring and related costs
of $141.7 million pretax ($0.27 per diluted share) primarily for this initial
phase of Operation Excel. This charge is classified as cost of products sold
($87.6 million) and as selling, general and administrative expenses ($54.1
million) in the Consolidated Statement of Income. Components of the third
quarter Operation Excel costs requiring the utilization of cash total
approximately $42 million, of which approximately $33 million was spent in the
third quarter.
Results of Operations
For the three months ended January 27, 1999, sales increased $46.0 million,
or 2.1%, to $2,282.1 million from $2,236.0 million last year. The increase is
due to improved volume of 2.6%, acquisitions of 2.3% and pricing of 0.5%,
partially offset by the unfavorable effect of foreign exchange translation
rates of 1.0% and divestitures of 2.3%. Domestic operations provided 53.1% of
sales in both the current and prior year periods.
Volume increases were recorded in seafood, single serve condiments, Smart
Ones frozen entrees, sauces, soups, Heinz ketchup, weight loss classroom
activities and infant foods. These increases were partially offset by volume
decreases in dog food, coated products, Budget Gourmet frozen entrees, and
frozen potatoes. Price increases in infant foods were offset by price
decreases in seafood and Heinz ketchup.
Foreign currencies declined against the U.S. dollar, decreasing sales by
$21.5 million or 1.0%. This decrease came primarily from sales in the
Asia/Pacific region, Canada and Africa.
Acquisitions impacting the quarter-to-quarter sales dollar comparison
include the College Inn brand of canned broths and other smaller acquisitions,
primarily in South Africa. The sales impact of these acquisitions was offset
by divestitures, primarily the bakery products unit in Fiscal 1999.
Gross profit decreased $4.2 million to $852.6 million from $856.8 million
and the gross profit margin decreased to 37.4% from 38.3%. Excluding the
Operation Excel costs in the current quarter and Project Millennia
implementation costs ($14.8 million) in the prior year's same quarter, gross
profit increased $68.5 million to $940.2 million from $871.7 million, and the
gross profit margin increased to 41.2% from 39.0%. Cost savings from Project
Millennia, stronger sales volume, a favorable product mix due to acquisitions
and divestitures, and gross profit margin improvements in the Weight Watchers
classroom business (attributable to the Weight Watchers 1-2-3 Success(TM)
Plan) increased gross profit and gross profit margin.
12
<PAGE>
Operating income decreased $77.7 million to $266.4 million from $344.0
million. Excluding the Operation Excel costs in the current quarter and
Project Millennia implementation costs ($29.4 million) in last year's third
quarter, operating income increased $34.7 million, or 9.3% to $408.1 million
from $373.4 million and the operating margin increased to 17.9% from 16.7%.
The increase in operating income, excluding these non-recurring items, is
primarily attributable to the increase in gross profit; partially offset by
increased selling, general and administrative expenses, due primarily to
increased marketing expense. Poor results in the pet food business, primarily
due to the disappointing performance of the 9-Lives four pack, an unfavorable
mix shift and inefficient trade spending, were largely offset by the favorable
results of the Weight Watchers classroom business. Excluding the results of
the pet food and the Weight Watchers classroom businesses, operating income
increased more than 12%.
Net interest expense was flat as higher borrowings were offset by lower
average interest rates. Other expenses decreased $10.4 million to $7.6 million
from $18.0 million, primarily due to currency losses in the Asia/Pacific
region last year.
The effective tax rate for the third quarter of Fiscal 1999 was 40.1%
compared to 30.0% for the same period last year. This quarter's higher rate
includes the impact of nondeductible expenses related to the restructuring.
Excluding the impact of the Operation Excel restructuring and related costs,
the effective tax rate for this year's third quarter was 36.0%. Last year's
effective tax rate included a benefit from tax legislation in Italy and a
reduction in the full-year projected rate.
Net income for the third quarter of Fiscal 1999 was $120.6 million compared
to $188.2 million for the same period last year, and diluted earnings per
share was $0.33 compared to $0.50 a year ago. Excluding the impact of the non-
recurring items noted above, net income would have increased 6.2% to $219.5
million from $206.7 million, and diluted earnings per share would have
increased 9.1% to $0.60 from $0.55 last year.
NINE MONTHS ENDED JANUARY 27, 1999 AND JANUARY 28, 1998
Results of Operations
For the nine months ended January 27, 1999, sales increased $99.3 million,
or 1.5% to $6,832.7 million from $6,733.4 million. The increase is due to
improved volume of 3.2%, acquisitions of 2.4% and pricing of 1.0%, partially
offset by the unfavorable impact of foreign exchange translation rates of 2.9%
and divestitures of 2.2%. Domestic operations provided 53.2% of sales in both
the current and prior year periods.
Volume increases were recorded in weight loss classroom activities, Heinz
ketchup, Smart Ones frozen entrees, single serve condiments, sauces, seafood
and soups. These increases were partially offset by volume decreases in dog
food, coated products and frozen potatoes. Price increases in infant foods and
sauces were partially offset by price decreases in dog food.
Foreign currencies declined against the U.S. dollar, decreasing sales by
$192.6 million, or 2.9%. This decrease came primarily from sales in the
Asia/Pacific region, Africa and Canada.
During the first nine months of Fiscal 1999, the company acquired the
College Inn brand of canned broths, the Eta brand of dressings and peanut
butter in New Zealand, the convenience meals business of Sonnen Bassermann in
Germany, the Vidalia O's frozen onion rings brand and also made some other
small acquisitions. Fiscal 1998 acquisitions impacting the period-to-period
sales dollar comparison include John West Foods Limited in Europe and other
acquisitions, primarily in South Africa and Europe. The sales impact of these
acquisitions was partially offset by divestitures, primarily the Ore-Ida
frozen foodservice business in Fiscal 1998 and the bakery products unit in the
second quarter of Fiscal 1999.
During the first nine months of Fiscal 1999, the company reversed $25.7
million of unutilized Project Millennia accruals for severance and exit costs.
This reversal reflected efficiencies on a number of initiatives where the
original estimates were higher than the actual costs to complete the projects.
This reversal was recorded in cost of products sold ($20.7 million) and
selling, general and
13
<PAGE>
administrative expenses ($5.0 million) in the Consolidated Statement of
Income. Also during Fiscal 1999, the company incurred additional costs of
$22.3 million related to the implementation of Project Millennia. These costs
consisted primarily of start-up, consulting, and training costs. On October 2,
1998, the company completed the sale of its bakery products unit, resulting in
a pretax gain of $5.7 million, which was recorded in selling, general and
administrative expenses in the Consolidated Statement of Income. The net
impact, on diluted earnings per share, of these items and the Operation Excel
costs described above was a decrease of $0.26.
During the first nine months of Fiscal 1998, the company recognized a pretax
gain of $96.6 million from the sale of its Ore-Ida frozen foodservice
business, which was recorded in selling, general and administrative expenses,
and also incurred additional costs of $60.4 million related to the
implementation of Project Millennia. The net impact of these items on diluted
earnings per share for last year's nine-month period was an increase of $0.04
per share.
Gross profit increased $120.9 million to $2,657.4 million from $2,536.6
million last year, and the gross profit margin increased to 38.9% from 37.7%.
Excluding the Operation Excel costs, the reversal of unutilized Project
Millennia accruals in the current period, and Project Millennia implementation
costs in both periods, gross profit increased $176.9 million to $2,739.1
million from $2,562.2 million, and the gross profit margin increased to 40.1%
from 38.1%. Cost savings from Project Millennia, stronger sales volume, a
favorable product mix due to acquisitions and divestitures, and gross profit
margin improvements in the Weight Watchers classroom business (attributable to
the Weight Watchers 1-2-3 Success(TM) Plan) increased gross profit and gross
profit margin.
Operating income decreased $55.2 million to $1,111.8 million from $1,167.0
million last year. The current period includes the Operation Excel costs; the
reversal of unutilized Project Millennia accruals; the gain on the sale of the
bakery products unit; and Project Millennia implementation costs. Last year's
first nine months included the gain on the sale of the Ore-Ida frozen
foodservice business and Project Millennia implementation costs. Excluding
these items in both periods, operating income increased $113.6 million, or
10.0%, to $1,244.5 million from $1,130.8 million and the operating margin
increased to 18.2% from 16.8%. The increase in operating income, excluding
these items, is primarily attributable to the increase in gross profit;
partially offset by increased selling, general and administrative expenses,
driven by increased marketing expense. Poor results in the pet food business,
primarily due to the disappointing performance of the 9-Lives four pack, an
unfavorable mix shift and inefficient trade spending, were largely offset by
the favorable results of the Weight Watchers classroom business. The company
expects that continued exceptional performance by several core businesses,
along with tight cost controls, will keep it on track to meet expectations for
the year despite an anticipated reduction in the fourth quarter operating
income for the pet food business.
Net interest expense increased to $174.9 million from $168.0 million last
year due to higher borrowings offset by lower average interest rates.
The effective tax rate for the current nine-month period was 37.4% compared
to 35.9% last year. Excluding the impact of the Operation Excel costs and the
bakery sale, the effective tax rate for the current nine-month period was
36.0%. Last year's effective tax rate reflected the benefits of tax
legislation in Italy and the United Kingdom, partially offset by a
significantly higher tax rate associated with the sale of Ore-Ida's frozen
foodservice business. Excluding these items, last year's effective tax rate
was 37.0% for the nine-month period.
Net income for the first nine months of Fiscal 1999 was $565.7 million
compared to $620.3 million last year, and diluted earnings per share was $1.54
compared to $1.66 a year ago. Excluding the impact of the non-recurring items
noted above, net income would have increased 9.5% to $663.0 million from
$605.2 million last year, and diluted earnings per share would have increased
11.1% to $1.80 from $1.62 last year.
14
<PAGE>
Liquidity and Financial Position
Cash provided by operating activities totaled $475.4 million for the nine-
month period ended January 27, 1999 compared to $554.7 million last year.
Cash used for investing activities totaled $209.3 million this year compared
to providing $148.5 million last year. Acquisitions in the current period
required $196.4 million, due mainly to the purchases of the College Inn brand
of canned broths, the Eta brand of dressings and peanut butter in New Zealand,
the convenience meals business of Sonnen Bassermann in Germany, and the
Vidalia O's frozen onion rings brand. Acquisitions in last year's comparable
period required $136.4 million, due mainly to the purchases of John West Foods
Limited in Europe, the single-serve foodservice business of CPC (United
Kingdom) and its Frank Cooper's brand, a majority interest in Pudliszki S. A.
of Poland, and other acquisitions primarily in South Africa and the
Asia/Pacific region. Capital expenditures required $211.8 million in the
current period compared to $258.4 million last year. Cash provided by
divestitures totaled $179.0 million in the current period, due primarily to
the sale of the bakery products unit. Last year, cash provided by divestitures
totaled $490.7 million due to the sale of the Ore-Ida frozen foodservice
business.
In the current period, financing activities required $216.5 million compared
to $647.5 million last year. Share repurchases totaled $373.6 million (6.7
million shares) versus $480.3 million (10.2 million shares) last year.
Dividend payments totaled $361.7 million compared to $337.7 million last year.
Payments on long-term debt required $54.4 million compared to $563.1 million a
year ago. Proceeds from long-term debt provided $255.9 million versus $3.9
million last year. Net proceeds from commercial paper and short-term
borrowings provided $214.5 million compared to $481.4 million last year. Stock
options exercised provided $70.8 million in the current period versus $170.6
million last year.
The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At January 27, 1999, the
company had $1.55 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 29, 1998, the company had $1.34 billion of
domestic commercial paper outstanding and classified as long-term debt.
On July 15, 1998, the company, under its current shelf registration
statement, issued $250 million of 6.375% debentures due 2028. The proceeds
were used to repay domestic commercial paper.
On September 8, 1998, the company's board of directors raised the quarterly
dividend on the company's common stock to $0.34 1/4 per share from $0.31 1/2
per share, for an indicated annual rate of $1.37 per share. On March 10, 1999,
the company's board of directors declared the quarterly dividend on the
company's common stock of $0.34 1/4 per share, payable on April 10, 1999, to
shareholders of record at the close of business on March 22, 1999.
On October 2, 1998, the company completed the sale of its bakery products
unit to the Pillsbury Company for $178.0 million. The transaction resulted in
a pretax gain of $5.7 million. The bakery products unit contributed
approximately $200 million in sales for Fiscal 1998.
The company's financial position remains strong, enabling it to meet cash
requirements for operations, capital expansion programs and dividends to
shareholders.
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.
15
<PAGE>
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 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
organization 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 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 has been
completed, and the assessment of its non-IT systems is continuing on schedule
and is expected to be complete by June 1999.
The second phase of the company's Year 2000 readiness plan is remediation
which involves replacement, upgrading, modification and testing of affected
hardware, software and process systems. Management estimates that nearly 60%
of its core worldwide IT systems are Year 2000 ready. It is expected that the
remaining IT systems will be operationally ready by July 1999. The remediation
of non-IT systems is progressing on schedule, and it is estimated that these
efforts will be substantially complete by August 1999. The testing of
remediated systems has been ongoing and is progressing on schedule.
The Company's Corporate Audit Department has dedicated efforts to evaluating
the company's Year 2000 preparedness. During the first quarter of calendar
year 1999, Corporate Audit with the assistance of outside consultants
performed on-site preparedness reviews at the company's 11 largest affiliate
locations and its Corporate Headquarters. These reviews addressed IT systems
remediation efforts as well as contingency planning and non-IT issues. Over
the course of the remainder of the year, Corporate Audit will be performing
similar reviews of other affiliates in addition to monitoring progress with
respect to earlier reviews.
It is currently estimated that the cost to make the company's IT systems and
non-IT systems Year 2000 operationally ready will be approximately $65
million, of which over 70% has been incurred to date. All of the costs are
being funded through operating cash flow. These estimated costs have not had
nor are expected to have a material adverse effect on the company's
consolidated financial position, results of operations or liquidity. This
amount does not include any costs for implementation of the company's
contingency plans described below.
A critical part of Operation Ready involves the investigation and assessment
of the Year 2000 preparedness of important suppliers, vendors, customers,
utilities and other third parties. The company's initial round of assessments
has been completed. Generally, these third parties have indicated that they
are progressing on schedule with their Year 2000 issues. The company has begun
on-site interviews and face-to-face visits with the critical suppliers,
vendors and customers. These efforts will continue throughout the year in
order 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
16
<PAGE>
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 have been shared with
the affiliate teams, so that Year 2000 issues will be addressed from two
separate perspectives. Contingency plans include stockpiling raw and packaging
materials, increasing finished goods inventory levels, developing emergency
back-up and recovery procedures, securing alternate suppliers, replacing
electronic applications with manual processes or other appropriate measures.
In early March, the key managers from corporate headquarters and each major
affiliate participated in a three-day conference to share best practices, with
particular emphasis on contingency planning. The company anticipates that this
conference will help to accelerate its overall plan and readiness efforts.
The company's Year 2000 readiness plan, including the further development
and refinement of contingency plans, is an ongoing process and will continue
to evolve and change as new information becomes available.
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.
The foregoing discussion of the company's Year 2000 issue and Euro
conversion contains forward- looking statements regarding anticipated costs,
projections or risks, descriptions of expected outcomes and results and other
matters that are not historical facts. These statements are subject to risks,
uncertainties and unanticipated events, including among others with respect to
the Year 2000 issue, those that could arise from Year 2000 actions and plans
of entities that do business with the company, the ability to identify,
assess, remediate and test all affected equipment and systems, including those
using embedded technology and the continued availability of qualified
personnel. As a consequence, actual results and costs may differ materially
from those expressed above. In addition, actual results may differ as a result
of other factors not enumerated above as well as changes in current
circumstances that are impossible to predict at this time.
Other Matters
On February 11, 1999, the company announced that it has completed a joint
venture transaction involving Indonesia's leading ketchup and sauce producer,
ABC Central Food Industry of Jakarta. The new joint venture, named PT Heinz
ABC Indonesia, will continue ABC Central Food's business. The company holds a
majority interest in the joint venture. The ABC brand is Indonesia's market
leader in "kecap" (a sweet soy sauce consumed with virtually every meal as
either a tabletop condiment or ingredient). ABC produces Indonesia's top
brands of "sambal" (a hot chili sauce) and "kecap asin" (a salty soy sauce).
Additionally, the joint venture will produce ABC tomato ketchup and fruit
drink concentrates. ABC products are sold to both the grocery and foodservice
trade.
17
<PAGE>
On February 17, 1999, the company announced a transformative four-year
growth and restructuring initiative, named Operation Excel, that is expected
to generate $200 million in annual savings upon completion and growth in
earnings per share of 10 to 12% annually over the next four years.
Financially, Operation Excel is expected to deliver over four years:
. More than $200 million in annual savings to reinvest against Heinz's
brands;
. $2.5 billion in free cash flow;
. Volume growth of 3 to 4% annually;
. Return on invested capital to almost 40%;
. Increased gross profit margins to 42%;
. A sustained tax rate of between 35 to 36%; and
. An additional $100 million investment in the coming year to support
marketing and pricing initiatives against key brands (including ketchup,
tuna and frozen potatoes).
Operationally, the initiative will:
. Focus on six core food categories (ketchup, condiments and sauces;
frozen foods; tuna; soups, beans and pasta meals; infant foods; and pet
products) and six key countries (the U. S.; the U. K.; Italy; Canada;
Australia; and New Zealand) to provide a platform for growth in our
other new markets worldwide;
. Realign global manufacturing and distribution and create "Centers of
Manufacturing Excellence" through expansion of 13 to 15 factories,
closure or sale of 15 to 20 factories and the downsizing of at least 10
more;
. Result in a net reduction of the worldwide workforce by approximately
3,000 to 4,000 over four years; and
. Sell the Weight Watchers classroom business (while keeping Weight
Watchers brand frozen foods), resulting in a reduction in future EPS
projections by approximately 7 cents per share.
Restructuring initiatives from Operation Excel are expected to generate
savings of at least $50 million in Fiscal 2000, $145 million in Fiscal 2001,
surpassing $200 million in Fiscal 2002 and beyond. Delivering these savings
will require a pre-tax restructuring charge of approximately $900 million,
which includes the charge taken in this third quarter. This $900 million
charge will be spread over four years, with most of the cost accrued this
year. Implementation costs that cannot be accrued under the accounting rules
will be approximately $200 million over the four years.
With the exception of the projects reflected in the third quarter
restructuring charge, the remainder of Operation Excel, including the sale of
the Weight Watchers classroom business, is subject to the approval of the
company's Board of Directors. Action by the Board of Directors on Operation
Excel is expected to take place prior to the end of the fiscal year. For
additional information regarding Operation Excel, please refer to the
company's Current Report on Form 8-K dated February 22, 1999.
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 27, 1999. For additional information, refer to pages
31 through 33 of the company's Annual Report to Shareholders for the fiscal
year ended April 29, 1998.
18
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
See Notes 6 and 9 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
for the fiscal year ended April 29, 1998 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 January 27,
1999.
19
<PAGE>
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: March 15, 1999 /s/ Paul F. Renne
By...................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 15, 1999 /s/ Edward J. McMenamin
By...................................
Edward J. McMenamin
Vice President and Corporate
Controller
(Principal Accounting Officer)
20
<PAGE>
Exhibit 12
H. J. HEINZ COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Fiscal Years Ended
Nine Months -----------------------------------------------------
Ended April 29, April 30, May 1, May 3, April 27,
January 27, 1999 1998 1997 1996 1995 1994
---------------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense*...... $ 196,524 $ 260,401 $277,818 $ 279,368 $ 212,123 $ 150,598
Capitalized interest... 896 1,542 2,688 1,007 414 770
Interest component of
rental expense........ 22,338 30,828 27,382 26,728 24,200 26,638
---------- ---------- -------- ---------- ---------- ----------
Total fixed charges.. $ 219,758 $ 292,771 $307,888 $ 307,103 $ 236,737 $ 178,006
---------- ---------- -------- ---------- ---------- ----------
Earnings:
Income before income
taxes................. $ 903,357 $1,254,981 $479,064 $1,023,661 $ 938,007 $ 922,386
Add: Interest expense*. 196,524 260,401 277,818 279,368 212,123 150,598
Add: Interest component
of rental expense..... 22,338 30,828 27,382 26,728 24,200 26,638
Add: Amortization of
capitalized interest.. 2,427 3,525 3,454 3,399 3,465 3,327
---------- ---------- -------- ---------- ---------- ----------
Earnings as adjusted. $1,124,646 $1,549,735 $787,718 $1,333,156 $1,177,795 $1,102,949
---------- ---------- -------- ---------- ---------- ----------
Ratio of earnings to
fixed charges....... 5.12 5.29 2.56 4.34 4.98 6.20
========== ========== ======== ========== ========== ==========
</TABLE>
*Interest expense includes amortization of debt expense and any discount or
premium relating to indebtedness.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JANUARY 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-28-1999
<PERIOD-START> APR-30-1998
<PERIOD-END> JAN-27-1999
<EXCHANGE-RATE> 1
<CASH> 148,313
<SECURITIES> 8,325
<RECEIVABLES> 1,089,812
<ALLOWANCES> 0
<INVENTORY> 1,482,737
<CURRENT-ASSETS> 2,920,215
<PP&E> 4,081,057
<DEPRECIATION> 1,781,384
<TOTAL-ASSETS> 8,178,553
<CURRENT-LIABILITIES> 1,990,725
<BONDS> 3,204,907
0
174
<COMMON> 107,774
<OTHER-SE> 1,999,024
<TOTAL-LIABILITY-AND-EQUITY> 8,178,553
<SALES> 6,832,694
<TOTAL-REVENUES> 6,832,694
<CGS> 4,175,262
<TOTAL-COSTS> 4,175,262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,081
<INCOME-PRETAX> 903,357
<INCOME-TAX> 337,684
<INCOME-CONTINUING> 565,673
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 565,673
<EPS-PRIMARY> 1.56<F1>
<EPS-DILUTED> 1.54
<FN>
<F1>Represents basic earnings per share in accordance with SFAS No. 128.
</FN>
</TABLE>
