<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 26, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
FOR THE NINE MONTHS ENDED JANUARY 26, 2000 COMMISSION FILE NUMBER 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
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 29, 2000 was 352,229,397 shares.
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
January 26, 2000 January 27, 1999
FY 2000 FY 1999
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales....................................................... $2,294,637 $2,282,062
Cost of products sold....................................... 1,391,887 1,429,482
---------- ----------
Gross profit................................................ 902,750 852,580
Selling, general and administrative expenses................ 566,176 586,191
---------- ----------
Operating income............................................ 336,574 266,389
Interest income............................................. 8,598 5,993
Interest expense............................................ 61,594 63,522
Other expenses, net......................................... 15,665 7,634
---------- ----------
Income before income taxes.................................. 267,913 201,226
Provision for income taxes.................................. 96,801 80,672
---------- ----------
Net income.................................................. $ 171,112 $ 120,554
========== ==========
Net income per share--diluted............................... $ 0.47 $ 0.33
========== ==========
Average common shares outstanding--diluted.................. 361,741 368,476
========== ==========
Net income per share--basic................................. $ 0.48 $ 0.33
========== ==========
Average common shares outstanding--basic.................... 356,690 361,750
========== ==========
Cash dividends per share.................................... $ 0.3675 $ 0.3425
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------------
2
<PAGE> 3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
January 26, 2000 January 27, 1999
FY 2000 FY 1999
---------------- ----------------
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales...................................................... $6,819,728 $6,832,694
Cost of products sold...................................... 4,147,788 4,175,262
---------- ----------
Gross profit............................................... 2,671,940 2,657,432
Selling, general and administrative expenses............... 1,627,803 1,545,594
Gain on sale of Weight Watchers............................ 464,617 --
---------- ----------
Operating income........................................... 1,508,754 1,111,838
Interest income............................................ 16,767 20,145
Interest expense........................................... 188,377 195,081
Other expenses, net........................................ 22,366 33,545
---------- ----------
Income before income taxes................................. 1,314,778 903,357
Provision for income taxes................................. 521,500 337,684
---------- ----------
Net income................................................. $ 793,278 $ 565,673
========== ==========
Net income per share--diluted.............................. $ 2.19 $ 1.54
========== ==========
Average common shares outstanding--diluted................. 361,741 368,476
========== ==========
Net income per share--basic................................ $ 2.22 $ 1.56
========== ==========
Average common shares outstanding--basic................... 356,690 361,750
========== ==========
Cash dividends per share................................... $ 1.0775 $ 1.00
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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3
<PAGE> 4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 26, 2000 April 28, 1999*
FY 2000 FY 1999
---------------- ---------------
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 140,027 $ 115,982
Short-term investments, at cost which approximates market... 4,189 7,139
Receivables, net............................................ 1,181,602 1,163,915
Inventories................................................. 1,678,410 1,409,651
Prepaid expenses and other current assets................... 192,124 190,091
---------- ----------
Total current assets................................... 3,196,352 2,886,778
---------- ----------
Property, plant and equipment............................... 4,315,944 4,073,975
Less accumulated depreciation............................... 1,914,754 1,902,951
---------- ----------
Total property, plant and equipment, net............... 2,401,190 2,171,024
---------- ----------
Goodwill, net............................................... 1,595,692 1,781,466
Trademarks, net............................................. 618,489 511,608
Other intangibles, net...................................... 156,181 177,290
Other non-current assets.................................... 990,697 525,468
---------- ----------
Total other non-current assets......................... 3,361,059 2,995,832
---------- ----------
Total assets........................................... $8,958,601 $8,053,634
========== ==========
</TABLE>
*Summarized from audited fiscal year 1999 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
4
<PAGE> 5
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 26, 2000 April 28, 1999*
FY 2000 FY 1999
---------------- ---------------
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................................. $ 332,169 $ 290,841
Portion of long-term debt due within one year............... 271,087 613,366
Accounts payable............................................ 931,655 945,488
Salaries and wages.......................................... 48,771 74,098
Accrued marketing........................................... 205,344 182,024
Accrued restructuring costs................................. 111,286 147,786
Other accrued liabilities................................... 406,433 372,623
Income taxes................................................ 191,212 160,096
---------- ----------
Total current liabilities.............................. 2,497,957 2,786,322
---------- ----------
Long-term debt.............................................. 3,285,495 2,472,206
Deferred income taxes....................................... 301,770 310,799
Non-pension postretirement benefits......................... 200,188 208,102
Other liabilities........................................... 752,253 473,201
---------- ----------
Total long-term debt and other liabilities............. 4,539,706 3,464,308
---------- ----------
Shareholders' Equity:
Capital stock............................................... 107,923 107,947
Additional capital.......................................... 307,818 277,652
Retained earnings........................................... 4,788,714 4,379,742
---------- ----------
5,204,455 4,765,341
Less:
Treasury stock at cost (78,060,241 shares at January 26,
2000 and 71,968,652 shares at April 28, 1999).......... 2,717,131 2,435,012
Unearned compensation relating to the ESOP................ 8,840 11,728
Accumulated other comprehensive income.................... 557,546 515,597
---------- ----------
Total shareholders' equity............................. 1,920,938 1,803,004
---------- ----------
Total liabilities and shareholders' equity............. $8,958,601 $8,053,634
========== ==========
</TABLE>
*Summarized from audited fiscal year 1999 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------------
5
<PAGE> 6
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------
January 26, 2000 January 27, 1999
FY 2000 FY 1999
---------------- ----------------
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Cash Provided by Operating Activities....................... $196,229 $475,372
-------- --------
Cash Flows from Investing Activities:
Capital expenditures................................... (282,711) (211,785)
Acquisitions, net of cash acquired..................... (372,217) (196,390)
Proceeds from divestitures............................. 726,493 179,000
Purchases of short-term investments.................... (900,313) (718,279)
Sales and maturities of short-term investments......... 890,168 706,721
Investment in The Hain Food Group, Inc................. (99,764) --
Other items, net....................................... 12,489 31,456
-------- --------
Cash used for investing activities................ (25,855) (209,277)
-------- --------
Cash Flows from Financing Activities:
Payments on long-term debt............................. (375,389) (54,395)
Proceeds from commercial paper and short-term
borrowings, net...................................... 510,148 214,484
Proceeds from long-term debt........................... 364,030 255,928
Dividends.............................................. (384,306) (361,726)
Purchases of treasury stock............................ (297,486) (373,597)
Exercise of stock options.............................. 26,099 70,765
Other items, net....................................... 10,020 32,030
-------- --------
Cash used for financing activities................ (146,884) (216,511)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 555 2,429
-------- --------
Net increase in cash and cash equivalents................... 24,045 52,013
Cash and cash equivalents at beginning of year.............. 115,982 96,300
-------- --------
Cash and cash equivalents at end of period.................. $140,027 $148,313
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------------
6
<PAGE> 7
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:
<TABLE>
<CAPTION>
January 26, 2000 April 28, 1999
---------------- --------------
(Thousands of Dollars)
<S> <C> <C>
Finished goods and work-in-process..................... $1,328,961 $1,064,015
Packaging material and ingredients..................... 349,449 345,636
---------- ----------
$1,678,410 $1,409,651
========== ==========
</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 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 Operation Excel, please refer to
the company's Annual Report to Shareholders for the fiscal year ended April
28, 1999.
In the nine months ended January 26, 2000, as part of Operation Excel, the
company recognized additional restructuring and related costs of $193.3
million pretax ($0.38 per share). [Note: All earnings per share amounts
included in the Notes to Condensed Consolidated Financial Statements are
presented on an after-tax diluted basis.] These costs were primarily
consulting fees, employee training and relocation costs, equipment
relocation costs and equip-
7
<PAGE> 8
ment commissioning costs associated with the implementation of Operation
Excel initiatives ($131.2 million). Other costs recognized in the nine
months ended January 26, 2000 consisted of employee termination and
severance costs ($27.7 million), asset writedowns ($12.7 million) and exit
costs ($21.7 million). These costs were primarily severance and exit costs
for the relocation of the company's domestic seafood and pet food
headquarters to Pittsburgh, Pennsylvania; additional severance accruals
relating to the closure of the company's Ore-Ida head office in Boise,
Idaho; and the closure of a chicken processing facility in New Zealand.
During the nine months ended January 26, 2000, the company utilized $66.3
million of severance and exit cost accruals, principally for 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 January 26, 2000 were as follows:
<TABLE>
<CAPTION>
Employee
Termination
Non-Cash and Accrued
Asset Severance Exit Implementation
(Millions of Dollars) Write-Downs Costs Costs Costs Total
--------------------- ----------- ----------- ------- -------------- -------
<S> <C> <C> <C> <C> <C>
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.......................... 12.7 27.7 21.7 131.2 193.3
Amounts utilized--Fiscal 2000................. (12.7) (41.4) (24.9) (131.2) (210.2)
------- ------ ------ ------- -------
Accrued restructuring costs--
January 26, 2000............................ $ -- $ 78.4 $ 32.3 $ -- $ 110.7
======= ====== ====== ======= =======
</TABLE>
In total, the company has approved the closure or exit of 18 factories or
businesses. To date, ten of these factories or businesses have been sold or
closed. These actions will impact approximately 5,900 employees with a net
reduction in the workforce of 4,100 after expansion of certain facilities.
During Fiscal 1999, the company's workforce was reduced by approximately
200 employees. In the nine months ended January 26, 2000, the workforce was
reduced by an additional 2,200 employees. 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 Project Millennia, please refer to the company's
Annual Report to Shareholders for the fiscal year ended April 28, 1999.
In the nine months ended January 26, 2000, the company utilized $19.5
million of severance and exit cost accruals. 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
classroom business.
8
<PAGE> 9
The major components of the restructuring charges and implementation costs
and the accrual balances as of January 26, 2000 were as follows:
<TABLE>
<CAPTION>
Employee
Termination
Non-Cash and Accrued
Asset Severance Exit Implementation
(Millions of Dollars) Write-Downs Costs Costs Costs Total
--------------------- ----------- ----------- ------- -------------- ------
<S> <C> <C> <C> <C> <C>
Accrued restructuring costs--April 28, 1999.... $ -- $ 2.7 $17.4 $ -- $ 20.1
Amounts utilized--Fiscal 2000.................. -- (2.7) (16.8) -- (19.5)
---- ----- ----- ---- ------
Accrued restructuring costs--January 26,
2000......................................... $ -- $ -- $ 0.6 $ -- $ 0.6
==== ===== ===== ==== ======
</TABLE>
The remaining accruals of $0.6 million relate to contractual lease
commitments in the U.S.
(7) On September 29, 1999, the company completed the sale of the Weight
Watchers classroom business for $735 million, which included $25 million of
preferred stock. 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, Inc. 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) On December 7, 1999, the company completed the acquisition of United
Biscuit's European Frozen and Chilled Division, one of the leading frozen
food businesses in the UK and Ireland, which produces frozen desserts and
vegetarian/meat free products, frozen pizzas, frozen value-added potato
products, and fresh sandwiches. Also 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, Inc. 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 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 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
9
<PAGE> 10
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
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
January 26, 2000 January 27, 1999 January 26, 2000 January 27, 1999
FY 2000 FY 1999 FY 2000 FY 1999
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Net external sales:
North American Dry................... $1,032,721 $1,026,484 $3,027,501 $3,033,975
North American Frozen................ 227,086 243,515 694,595 722,140
Europe............................... 650,234 615,131 1,807,664 1,795,143
Asia/Pacific......................... 305,022 247,081 885,875 732,301
Other Operating Entities............. 79,574 149,851 404,093 549,135
---------- ---------- ---------- ----------
Consolidated Totals.................. $2,294,637 $2,282,062 $6,819,728 $6,832,694
========== ========== ========== ==========
Intersegment sales:
North American Dry................... $ 8,749 $ 9,837 $ 24,878 $ 24,106
North American Frozen................ 2,791 6,760 9,926 14,940
Europe............................... 326 1,223 2,244 3,825
Asia/Pacific......................... 938 -- 2,597 --
Other Operating Entities............. 1,635 1,834 4,161 4,717
Non-Operating (a).................... (14,439) (19,654) (43,806) (47,588)
---------- ---------- ---------- ----------
Consolidated Totals.................. $ -- $ -- $ -- $ --
========== ========== ========== ==========
Operating income (loss):
North American Dry................... $ 184,832 $ 196,747 $ 552,777 $ 636,044
North American Frozen................ 37,305 (58,726) 113,319 41,240
Europe............................... 90,388 103,679 302,755 339,683
Asia/Pacific......................... 39,997 27,395 104,929 90,739
Other Operating Entities............. 6,742 29,164 531,149 83,126
Non-Operating (a).................... (22,690) (31,870) (96,175) (78,994)
---------- ---------- ---------- ----------
Consolidated Totals.................. $ 336,574 $ 266,389 $1,508,754 $1,111,838
========== ========== ========== ==========
Operating income (loss) excluding
special items (b):
North American Dry................... $ 223,047 $ 203,128 $ 661,818 $ 649,635
North American Frozen................ 42,745 46,693 134,545 132,982
Europe............................... 120,751 113,014 362,160 344,864
Asia/Pacific......................... 46,543 34,484 127,546 100,778
Other Operating Entities............. 7,150 33,231 66,940 84,255
Non-Operating (a).................... (22,101) (22,436) (65,586) (68,061)
---------- ---------- ---------- ----------
Consolidated Totals.................. $ 418,135 $ 408,114 $1,287,423 $1,244,453
========== ========== ========== ==========
</TABLE>
- ---------------
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) Three months ended January 26, 2000 - Excludes restructuring and
implementation costs of Operation Excel as follows: North American Dry $38.2
million, North American Frozen $5.4 million, Europe $30.4 million, and Asia/
Pacific $6.5 million, Other Operating entities $0.4 million, and
Non-Operating $0.6 million.
Three months ended January 27, 1999 - Excludes restructuring costs for
Operation Excel as follows: North American Dry $6.4 million, North American
Frozen $105.4 million, Europe $9.3 million, Asia/Pacific $7.1 million, Other
Operating entities $4.1 million and Non-Operating $9.4 million.
Nine months ended January 26, 2000 - Excludes restructuring and
implementation costs of Operation Excel as follows: North American Dry $89.0
million, North American Frozen $21.2 million, Europe $59.4 million,
Asia/Pacific $22.6 million, Other Operating entities $0.4 million and
Non-Operating $0.6 million; excludes costs related to Ecuador in North
American Dry of $20.0 million; excludes the gain on the sale of the Weight
Watchers weight control business in Other Operating entities of $464.6
million and excludes the Foundation Contribution in Non-Operating of $30.0
million.
Nine months ended January 27, 1999 - 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
11
<PAGE> 12
$9.1 million, respectively; excludes the gain on the sale of the bakery
division in Other Operating entities of $5.7 million and excludes
restructuring costs for Operation Excel as follows: North American Dry $6.4
million, North American Frozen $105.4 million, Europe $9.3 million,
Asia/Pacific $7.1 million, Other Operating entities $4.1 million and
Non-Operating $9.4 million.
The company's revenues are generated via the sale of products in the
following categories:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
January 26, 2000 January 27, 1999 January 26, 2000 January 27, 1999
FY 2000 FY 1999 FY 2000 FY 1999
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Ketchup, Condiments and
Sauces....................... $ 577,838 $ 534,423 $1,770,007 $1,635,139
Frozen Foods................... 383,482 343,418 1,042,536 1,004,261
Tuna........................... 237,459 237,704 771,600 800,612
Soups, Beans and Pasta Meals... 331,106 313,044 877,536 831,650
Infant Foods................... 244,046 254,943 716,826 730,929
Pet Products................... 326,801 345,552 930,674 985,429
Other.......................... 193,905 252,978 710,549 844,674
---------- ---------- ---------- ----------
Total...................... $2,294,637 $2,282,062 $6,819,728 $6,832,694
========== ========== ========== ==========
</TABLE>
(11) The company's $2.30 billion credit agreement, which expires in September
2001, supports its commercial paper program. At January 26, 2000, the
company had $1.90 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 January 5, 2000, the company issued E300 million of 5% Notes due 2005.
The proceeds were used to repay domestic commercial paper.
(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
<PAGE> 13
(13) 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 Ended Nine Months Ended
----------------------------------- -----------------------------------
January 26, 2000 January 27, 1999 January 26, 2000 January 27, 1999
FY 2000 FY 1999 FY 2000 FY 1999
---------------- ---------------- ---------------- ----------------
(In Thousands, Except per Share Amounts)
<S> <C> <C> <C> <C>
Net income per share--basic:
Net income.................... $171,112 $120,554 $793,278 $565,673
Preferred dividends........... 7 7 21 23
-------- -------- -------- --------
Net income applicable to
common stock................ $171,105 $120,547 $793,257 $565,650
======== ======== ======== ========
Average common shares
outstanding--basic.......... 356,690 361,750 356,690 361,750
======== ======== ======== ========
Net income per share--basic... $ 0.48 $ 0.33 $ 2.22 $ 1.56
======== ======== ======== ========
Net income per share--diluted:
Net income.................... $171,112 $120,554 $793,278 $565,673
======== ======== ======== ========
Average common shares
outstanding................. 356,690 361,750 356,690 361,750
Effect of dilutive securities:
Convertible preferred
stock..................... 227 245 227 245
Stock options............... 4,824 6,481 4,824 6,481
-------- -------- -------- --------
Average common shares
outstanding--diluted........ 361,741 368,476 361,741 368,476
======== ======== ======== ========
Net income per
share--diluted.............. $ 0.47 $ 0.33 $ 2.19 $ 1.54
======== ======== ======== ========
</TABLE>
(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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
January 26, 2000 January 27, 1999 January 26, 2000 January 27, 1999
FY 2000 FY 1999 FY 2000 FY 1999
---------------- ---------------- ---------------- ----------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Net income................. $171,112 $120,554 $793,278 $565,673
Other comprehensive income
(loss):
Foreign currency
translation
adjustment........... (7,584) (15,218) (40,367) (39,955)
Minimum pension
liability
adjustment........... (2,772) 2,681 (1,582) 4,474
-------- -------- -------- --------
Comprehensive income....... $160,756 $108,017 $751,329 $530,192
======== ======== ======== ========
</TABLE>
13
<PAGE> 14
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 Operation Excel, please refer to the company's
Annual Report to Shareholders for the fiscal year ended April 28, 1999.
In the nine months ended January 26, 2000, as part of Operation Excel, the
company recognized additional restructuring and related costs of $193.3 million
pretax ($0.38 per share). [Note: All earnings per share amounts included in
Management's Discussion and Analysis are presented on an after-tax diluted
basis.] These costs were primarily consulting fees, employee training and
relocation costs, equipment relocation costs and equipment commissioning costs
associated with the implementation of Operation Excel initiatives ($131.2
million). Other costs recognized in the nine months ended January 26, 2000
consisted of employee termination and severance costs ($27.7 million), asset
writedowns ($12.7 million) and exit costs ($21.7 million). These costs were
primarily severance and exit costs for the relocation of the company's domestic
seafood and pet food headquarters to Pittsburgh, Pennsylvania; additional
severance accruals relating to the closure of the company's Ore-Ida head office
in Boise, Idaho; 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 nine months ended January 26, 2000, the company utilized $66.3
million of severance and exit cost accruals, principally for 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 18 factories or
businesses. To date, ten of these factories or businesses have been sold or
closed. These actions will impact approximately 5,900 employees with a net
reduction in the workforce of 4,100 after expansion of certain facilities.
During Fiscal 1999, the company's workforce was reduced by approximately 200
employees. In the nine months ended January 26, 2000, the workforce was reduced
by an additional 2,200 employees. The remaining factory closures and employee
terminations are expected to take place within 12 months.
Future Operation Excel initiatives will result in the recognition of
additional restructuring charges and implementation costs. At its March meeting,
the company's Board of Directors approved additional Operation Excel initiatives
which will be recognized in the fourth quarter and implemented throughout Fiscal
2001. These initiatives envision additional net workforce reductions of
approximately 1,500 employees and the closure of additional factories, including
a pet food factory in El Paso, Texas and a food processing factory in Japan. The
entire program will result in restructuring charges and implementation costs of
approximately $1.1 billion.
The expected pretax savings to be generated from all Operation Excel
initiatives will be $60 million in Fiscal 2000 and are projected to 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
<PAGE> 15
Successful execution of all Operation Excel initiatives, including the sale
of the Weight Watchers classroom business, will help the company achieve the
following targets over the next four years:
- $240 million in annual ongoing pretax savings upon full implementation
- Earnings per share growth of 10 to 12 percent per year on average
- Sales growth of 4 to 5 percent per year on average
- Gross margins of 42%
- Return on invested capital of 40%
- $2.5 billion of free cash flow
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
Project Millennia, please refer to the company's Annual Report to Shareholders
for the fiscal year ended April 28, 1999.
In the nine months ended January 26, 2000, the company utilized $19.5
million of severance and exit cost accruals. 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 classroom business.
See footnote 6 for further information.
The remaining accruals of $0.6 million relate to contractual lease
commitments in the U.S.
THREE MONTHS ENDED JANUARY 26, 2000 AND JANUARY 27, 1999
RESULTS OF OPERATIONS
For the three months ended January 26, 2000, sales increased $12.6 million
or 0.6%, to $2,294.6 million from $2,282.1 million last year. Acquisitions
increased sales 6.1% and favorable volume increased sales 2.6%. Sales were
unfavorably impacted by divestitures of 5.3%, primarily the Weight Watchers
classroom business, pricing of 1.6% and the impact of foreign exchange
translation rates of 1.2%.
North American Dry's sales increased $6.2 million or 0.6%. Favorable volume
increased sales 3.0%, due to continued strong sales of ketchup and condiments,
foodservice and tuna. The strengthening of the Canadian dollar increased sales
0.6%. Lower pricing, primarily in tuna and pet food, reduced sales 2.8%. In pet
food, lower prices were a result of the company's decision to refocus its
marketing to achieve more competitive price points on the shelf. Divestitures,
net of acquisitions, reduced sales 0.2%.
North American Frozen's sales decreased $16.4 million, or 6.7%. The
divestiture of several non-core product lines reduced sales 4.4%, lower pricing
reduced sales 1.3% and volume decreased 1.0%.
Sales in Europe increased $35.1 million, or 5.7%. Acquisitions, net of
divestitures, increased sales 11.8%, primarily due to the acquisition of the
brands of United Biscuit's European Frozen and Chilled Division. Sales volume
increased 2.3%, largely as a result of an increase in canned seafood
15
<PAGE> 16
sales. The unfavorable impact of foreign exchange translation rates reduced
sales by 6.6% and lower pricing reduced sales 1.8%.
Sales in Asia/Pacific increased $57.9 million, or 23.5%. The acquisition of
ABC Sauces in Indonesia increased sales 14.5% and sales volume increased 6.1%,
primarily in convenience meals. The favorable impact of foreign exchange
translation rates, primarily in Japan and Australia, increased sales 3.2%. Lower
pricing reduced sales 0.3%.
Other Operating entities' sales decreased $70.3 million, or 46.9%.
Divestitures, primarily the second quarter divestiture of the Weight Watchers
classroom business, reduced sales 53.5%. The impact of foreign exchange
translation rates reduced sales 0.4%. Favorable pricing increased sales 5.3% and
sales volume increased 1.7%.
The third quarters of both Fiscal 2000 and Fiscal 1999 were impacted by
Operation Excel costs. This year's third quarter included Operation Excel
implementation costs of $62.7 million pretax ($0.12 per share) and restructuring
charges of $18.8 million pretax ($0.03 per share). Last year's third quarter
included Operation Excel restructuring and implementation costs of $141.7
million pretax ($0.27 per share).
The following tables provide a comparison of the company's reported results
and the results excluding special items for the third quarters of Fiscal 2000
and Fiscal 1999.
<TABLE>
<CAPTION>
Third Quarter Ended January 26, 2000
--------------------------------------------------------
(Dollars in millions except per share amounts) Gross Profit Operating Income Net Income Per Share
- ---------------------------------------------- ------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C>
Reported results....................................... $902.8 $336.6 $171.1 $0.47
Operation Excel restructuring........................ 3.2 18.8 12.0 0.03
Operation Excel implementation costs................. 17.5 62.7 44.1 0.12
------ ------ ------ -----
Results excluding special items........................ $923.5 $418.1 $227.2 $0.63
====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Third Quarter Ended January 27, 1999
--------------------------------------------------------
Gross Profit Operating Income Net Income Per Share
------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C>
Reported results....................................... $852.6 $266.4 $120.6 $0.33
Operation Excel restructuring and implementation
costs.............................................. 87.6 141.7 98.9 0.27
------ ------ ------ -----
Results excluding special items $940.2 $408.1 $219.5 $0.60
====== ====== ====== =====
</TABLE>
(Note: Totals may not add due to rounding.)
Gross profit increased $50.2 million, or 5.9%, to $902.8 million from
$852.6 million, and the gross profit margin increased to 39.3% from 37.4%.
Excluding the special items noted above, gross profit decreased $16.7 million,
or 1.8%, to $923.5 million from $940.2 million, and the gross profit margin
decreased to 40.2% from 41.2%. Additionally, removing the impact of the Weight
Watchers classroom business in the prior year, gross profit increased 3.8%.
Excluding special items, gross profit in the North American Dry segment
increased $2.0 million, or 0.5%, due primarily to increases at Heinz U.S.A. and
Canada, partially offset by lower pricing in tuna and pet food. The North
American Frozen segment's gross profit decreased $10.4 million, or 8.9%, due
primarily to the elimination of several non-core product lines as part of
Operation Excel, lower pricing and a decrease in sales volume. Europe's gross
profit increased $8.0 million, or 3.1%, due to increased sales volume and
acquisitions, primarily United Biscuit's European Frozen and Chilled Division.
The unfavorable impact of foreign exchange translation rates in Europe reduced
gross profit by approximately $21 million. Asia/Pacific's gross profit increased
$27.9 million, or 32.0%, due primarily to the acquisition of ABC Sauces in
Indonesia, increased sales and favorable exchange. Other Operating entities'
gross profit decreased $44.2 million, or 63.5%, due primarily to the divestiture
of the Weight Watchers classroom business.
Selling, general and administrative expenses ("SG&A") decreased $20.0
million, or 3.4%, to $566.2 million from $586.2 million last year, and decreased
as a percentage of sales to 24.7% from
16
<PAGE> 17
25.7%. Excluding the special items noted above, SG&A decreased $26.7 million, or
5.0%, to $505.4 million from $532.1 million, and decreased as a percentage of
sales to 22.0% from 23.3% last year. A decrease in marketing, due primarily to
the divestiture of the Weight Watchers classroom business and the company's
refocus of its pet food marketing to achieve more competitive price points on
the shelf, was partially offset by an increase in selling and distribution
expenses.
Operating income increased $70.2 million, or 26.3%, to $336.6 million from
$266.4 million. Excluding the special items noted above, operating income
increased $10.0 million, or 2.5%, to $418.1 million from $408.1 million.
Additionally, removing the impact of the Weight Watchers classroom business in
the prior year, operating income increased 9.7%.
North American Dry's operating income decreased $11.9 million, or 6.1%, to
$184.8 million from $196.7 million. Excluding special items in both periods,
operating income increased $19.9 million, or 9.8%, to $223.0 million from $203.1
million, as favorable results at Heinz U.S.A. and Canada were partially offset
by lower pricing in tuna.
North American Frozen's operating income increased $96.0 million. Excluding
special items in both periods, operating income decreased $3.9 million, or 8.5%,
to $42.7 million from $46.7 million. This decrease was a result of the continued
roll-out of Boston Market meals in grocery, the elimination of several non-core
product lines and poor performance on Budget Gourmet, partially offset by a
reduction in selling and distribution, and general and administrative expenses
as a result of the domestic consolidation of the frozen business.
Europe's operating income decreased $13.3 million, or 12.8%, to $90.4
million from $103.7 million. Excluding special items in both periods, operating
income increased $7.7 million, or 6.8%, to $120.8 million from $113.0 million,
and increased 14.1% on a constant currency basis. This increase is largely due
to increased sales and acquisitions, primarily United Biscuit's European Frozen
and Chilled Division.
Asia/Pacific's operating income increased $12.6 million, or 46.0%, to $40.0
million from $27.4 million. Excluding special items in both periods, operating
income increased $12.1 million, or 35.0%, to $46.5 million from $34.5 million.
This increase is primarily due to the Fiscal 1999 acquisition of ABC Sauces in
Indonesia and improved performances throughout the segment.
Other Operating entities' operating income decreased $22.4 million, or
76.9%, to $6.7 million from $29.2 million. Excluding special items in both
periods, operating income decreased $26.1 million, or 78.5%, to $7.2 million
from $33.2 million. This decrease is primarily attributable to the second
quarter divestiture of the Weight Watchers classroom business.
Other income and expenses increased $3.5 million to $68.7 million from
$65.2 million last year. Net interest expense decreased $4.5 million, due
primarily to the proceeds from the second quarter divestiture of the Weight
Watchers classroom business. Other expenses, net, increased $8.0 million,
largely due to currency losses in Europe.
The effective tax rate for the third quarter of Fiscal 2000 was 36.1%
compared to 40.1% last year. Excluding special items, the effective tax rate for
the third quarter was 35.0% compared to 36.0% last year.
Net income for the current quarter was $171.1 million compared to $120.6
million last year and diluted earnings per share was $0.47 compared to $0.33.
Excluding the special items noted above, net income increased $7.7 million, or
3.5%, to $227.2 million from $219.5 million and diluted earnings per share
increased 5.0% to $0.63 from $0.60 last year. Additionally, removing the impact
of the Weight Watchers classroom business, net income increased 9.5% and diluted
earnings per share increased 12.5%.
17
<PAGE> 18
NINE MONTHS ENDED JANUARY 26, 2000 AND JANUARY 27, 1999
RESULTS OF OPERATIONS
For the nine months ended January 26, 2000, sales decreased $13.0 million,
or 0.2%, to $6,819.7 million from $6,832.7 million last year. Sales were
unfavorably impacted by divestitures of 3.8%, pricing of 1.7% and the impact of
foreign exchange translation rates of 0.7%. Acquisitions increased sales by 4.0%
and sales volume increased 2.0%.
North American Dry's sales decreased slightly $6.5 million, or 0.2%. Lower
pricing, mainly in tuna, reduced sales 2.4%. Sales volume was favorable by 1.8%
as increases in ketchup, condiments, tuna and soup were partially offset by a
decrease in pet food. The strengthening of the Canadian dollar increased sales
by 0.3%, and acquisitions, net of divestitures, increased sales by 0.1%.
North American Frozen's sales decreased $27.5 million, or 3.8%.
Divestitures, net of acquisitions, decreased sales 3.8%, due primarily to the
exit of several non-core product lines as part of Operation Excel. Lower
pricing, primarily on Ore-Ida frozen potatoes, reduced sales 3.1%. Sales volume
increased by 3.1%, largely due to Smart Ones and Ore-Ida frozen potatoes.
Sales in Europe increased $12.5 million, or 0.7%. Acquisitions, net of
divestitures, increased sales 6.3%, due primarily to the acquisitions of United
Biscuit's European Frozen and Chilled Division, Sonnen Bassermann,
Serv-A-Portion and Remedia Limited. Sales volume increased by 0.5% as increases
in seafood, ketchup and condiments were partially offset by decreases in
convenience meals. The unfavorable impact of foreign exchange translation rates
reduced sales by 5.1% and lower pricing, primarily in seafood, reduced sales by
1.0%.
Sales in Asia/Pacific increased $153.6 million, or 21.0%. Acquisitions,
primarily ABC Sauces in Indonesia, increased sales 12.7%. The favorable impact
of foreign exchange translation rates increased sales 5.4% and sales volume
increased 3.0%. Lower pricing reduced sales 0.1%.
Other Operating entities' sales decreased $145.0 million, or 26.4%.
Divestitures reduced sales 29.6%, primarily due to the second quarter
divestiture of the Weight Watchers classroom business and the Fiscal 1999
divestiture of the bakery products unit. The impact of foreign exchange
translation rates reduced sales 0.7% and lower pricing reduced sales 0.7%. Sales
volume increased 4.6%.
The current year was favorably impacted by a number of special items which
net to $239.5 million pretax ($0.26 per share), and are summarized in the tables
below. During the second quarter of Fiscal 2000, the company completed the sale
of the Weight Watchers classroom 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 Operation Excel implementation
costs of $131.2 million pretax ($0.25 per share) and additional Operation Excel
restructuring charges of $62.1 million pretax ($0.13 per share). In April of
1999, the 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 nine month
results included the reversal of unutilized Project Millennia accruals of $25.7
million pretax ($0.04 per share), Project Millennia implementation costs of
$22.3 million pretax ($0.04 per share), Operation Excel restructuring and
implementation costs of $141.7 million pretax ($0.27 per share) 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 nine months ended January 26,
2000 and January 27, 1999.
18
<PAGE> 19
All of the following special items have been previously disclosed, except
for additional Operation Excel costs, which occurred in the third quarter of
Fiscal 2000.
<TABLE>
<CAPTION>
Nine Months Ended January 26, 2000
--------------------------------------------------------
(Dollars in millions except per share amounts) Gross Profit Operating Income Net Income Per Share
- ---------------------------------------------- ------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C>
Reported results....................................... $2,671.9 $1,508.8 $793.3 $2.19
Operation Excel restructuring........................ 15.3 62.1 48.6 0.13
Operation Excel implementation costs................. 46.6 131.2 89.7 0.25
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 classroom business... -- (464.6) (259.7) (0.72)
-------- -------- ------ -----
Results excluding special items........................ $2,753.9 $1,287.4 $698.9 $1.93
======== ======== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended January 27, 1999
--------------------------------------------------------
Gross Operating Net Per
Profit Income Income Share
------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C>
Reported results....................................... $2,657.4 $1,111.8 $565.7 $1.54
Operation Excel restructuring and implementation
costs.............................................. 87.6 141.7 98.9 0.27
Project Millennia implementation costs............... 14.7 22.3 14.3 0.04
(Gain)/loss 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........................ $2,739.1 $1,244.5 $663.0 $1.80
======== ======== ====== =====
</TABLE>
(Note: Totals may not add due to rounding.)
Gross profit increased $14.5 million, or 0.5%, to $2,671.9 million from
$2,657.4 million last year and the gross profit margin increased to 39.2% from
38.9%. Excluding the special items noted above, gross profit increased $14.9
million, or 0.5%, to $2,753.9 million from $2,739.1 million, and the gross
profit margin increased to 40.4% from 40.1%. Additionally, removing the impact
of the Weight Watchers classroom business, gross profit increased 2.5%.
Excluding special items, gross profit in the North American Dry segment
increased $1.8 million, or 0.2%, due primarily to increases at Heinz U.S.A. and
Canada, offset by decreases in pet food and tuna, largely due to lower pricing.
The North American Frozen segment's gross profit decreased $22.5 million, or
6.5%, due primarily to the elimination of several non-core product lines as part
of Operation Excel and lower pricing on Ore-Ida frozen potatoes. Europe's gross
profit increased $21.5 million, or 3.0%, due largely to a favorable profit mix
and acquisitions of United Biscuit's European Frozen and Chilled Division,
Sonnen Bassermann, Remedia Limited and Serv-A-Portion. The unfavorable impact of
foreign exchange translation rates in Europe reduced gross profit by
approximately $41 million. Asia/Pacific's gross profit increased $71.7 million,
or 27.8%, due to the acquisition of ABC Sauces in Indonesia, increased sales and
favorable exchange. Other Operating entities' gross profit decreased $58.6
million, or 26.4%, due primarily to the divestitures of the Weight Watchers
classroom business and the bakery products unit.
Selling, general and administrative expenses increased $82.2 million, or
5.3%, to $1,627.8 million from $1,545.6 million last year, and increased as a
percentage of sales to 23.9% from 22.6%. Excluding the special items noted
above, SG&A decreased $28.1 million or 1.9%, to $1,466.5 million from $1,494.6
million, and decreased as a percentage of sales to 21.5% from 21.9% last year. A
decrease in marketing, due primarily to the divestiture of the Weight Watchers
classroom business and the company's refocus of its pet food marketing to
achieve more competitive price points on the shelf, along with lower general and
administrative expenses were partially offset by higher selling and distribution
expenses.
Operating income increased $396.9 million, or 35.7%, to $1,508.8 million
from $1,111.8 million last year. Excluding the special items noted above,
operating income increased $43.0 million, or
19
<PAGE> 20
3.5%, to $1,287.4 million from $1,244.5 million. Additionally, removing the
impact of the Weight Watchers classroom business, operating income increased
4.9%.
North American Dry's operating income decreased $83.3 million, or 13.1%, to
$552.8 million from $636.0 million. Excluding special items in both periods,
operating income increased $12.2 million or 1.9%, to $661.8 million from $649.6
million, as favorable results at Heinz U.S.A. and Canada were partially offset
by lower pricing in tuna and pet food.
North American Frozen's operating income increased $72.1 million to $113.3
million from $41.2 million. Excluding special items in both periods, operating
income increased $1.6 million, or 1.2%, to $134.5 million from $133.0 million.
The increase is attributable to a reduction in SG&A expenses resulting from the
domestic consolidation of the frozen business, offset by the elimination of
several non-core product lines as part of Operation Excel and lower pricing on
Ore-Ida frozen potatoes.
Europe's operating income decreased $36.9 million, or 10.9%, to $302.8
million from $339.7 million. Excluding special items in both periods, operating
income increased $17.3 million, or 5.0%, to $362.2 million from $344.9 million,
and increased approximately 10% on a constant currency basis. This increase is
attributable to a favorable profit mix, and acquisitions of United Biscuit's
European Frozen and Chilled Division, Sonnen Bassermann, Remedia Limited and
Serv-A-Portion. The unfavorable impact of foreign exchange translation rates in
Europe reduced operating income by approximately $17 million.
Asia/Pacific's operating income increased $14.2 million, or 15.6%, to
$104.9 million from $90.7 million. Excluding special items in both periods,
operating income increased $26.8 million, or 26.6%, to $127.5 million from
$100.8 million. This increase is primarily due to the acquisition of ABC Sauces
in Indonesia and improved performances throughout the segment.
Other Operating entities' operating income increased $448.0 million to
$531.1 million from $83.1 million. Excluding special items in both periods,
operating income decreased $17.3 million, or 20.6%, to $66.9 million from $84.3
million due primarily to the divestitures of the Weight Watchers classroom
business and the bakery products unit.
Other income and expenses totaled $194.0 million compared to $208.5 million
last year. The decrease is primarily due 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 decreased $3.3 million, due primarily to the proceeds from the second
quarter divestiture of the Weight Watchers classroom business. These decreases
were partially offset by currency losses in Europe.
The effective tax rate for the current year was 39.7% compared to 37.4%
last year. Excluding special items, the effective tax rate for the current year
was 35.0% compared to 36.0% last year.
Net income for the current year was $793.3 million compared to $565.7
million last year and diluted earnings per share was $2.19 compared to $1.54
last year. Excluding the special items noted above, net income increased $35.9
million, or 5.4%, to $698.9 million from $663.0 million and diluted earnings per
share increased 7.2% to $1.93 from $1.80 last year. Additionally, removing the
impact of the Weight Watchers classroom business in both years, net income
increased 6.2% and diluted earnings per share increased 8.0%.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities totaled $196.2 million for the nine
month period ended January 26, 2000, compared to $475.4 million last year.
Cash required by investing activities totaled $25.9 million compared to
$209.3 million last year. Cash provided by divestitures in the current period
totaled $726.5 million, primarily resulting from the sale of the Weight Watchers
classroom business. Cash provided by divestitures in the prior period totaled
$179.0 million, primarily from the sale of the bakery products unit. Acquisi-
20
<PAGE> 21
tions in the current period required $372.2 million, due to the purchases of
United Biscuit's European Frozen and Chilled Division, Quality Chef, Thermo-Pac,
Inc. and Remedia Limited in Israel. Acquisitions in the prior 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. Capital expenditures required $282.7 million in the
current period compared to $211.8 million last year. During the current year,
the company invested $99.8 million in The Hain Food Group, Inc.
Financing activities required $146.9 million in the current period compared
to $216.5 million last year. Dividend payments totaled $384.3 million compared
to $361.7 million last year. Payments on long-term debt required $375.4 million
compared to $54.4 million last year. Share repurchases totaled $297.5 million
(6.8 million shares) versus $373.6 million (6.7 million shares) last year.
Proceeds from commercial paper and short-term borrowings provided $510.1 million
compared to $214.5 million last year. Proceeds from long-term debt provided
$364.0 million versus $255.9 million in last year's comparable period. Cash
provided from stock options exercised totaled $26.1 million compared to $70.8
million last year.
In the nine months ended January 26, 2000, the cash requirements for
Operation Excel were $333.9 million, consisting of capital expenditures ($136.4
million), severance and exit costs ($66.3 million) and implementation costs
($131.2 million). The cash requirements of Project Millennia in the nine months
ended January 26, 2000 were $29.6 million, consisting of capital expenditures
($10.1 million) and severance and exit costs ($19.5 million).
The company's $2.30 billion credit agreement, which expires in September
2001, supports its commercial paper program. At January 26, 2000, the company
had $1.90 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 January 5, 2000, the company issued E300 million of 5% Notes due 2005.
The proceeds were used to repay domestic commercial paper.
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 March 8, 2000, 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 April 10, 2000, to shareholders
of record at the close of business on March 20, 2000.
On September 29, 1999, the company completed the sale of its Weight
Watchers classroom business 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 company completed "Operation Ready," its multi-year project to address
the expected consequences of the Year 2000 computer-related issue. As of the
date of this report, the company has not experienced any significant disruptions
to its business nor is it aware of any significant Year 2000-related disruptions
impacting its customers or suppliers. The company will continue to monitor its
critical systems, but does not anticipate any significant impacts due to Year
2000 problems from its internal systems or from the activities of its suppliers
and customers.
21
<PAGE> 22
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 February 15, 2000, the company issued $300 million of 7.0% Notes due
2002. The proceeds were used to repay domestic commercial paper. On February 18,
2000, the company issued L125 million of 6.25% Notes due 2030. The proceeds were
used for general corporate purposes, including to repay commercial paper
borrowings which were incurred in connection with the acquisition of United
Biscuit's European Frozen and Chilled Division in December 1999.
On February 28, 2000, Heinz and Milnot Holding Corporation signed an
agreement for Heinz to acquire Milnot, a leading producer of branded and
private-label food products based in St. Louis. Milnot's largest subsidiary is
Beech-Nut Nutrition Corporation, maker of the popular Beech-Nut brand of
prepared baby foods. In addition to Milnot's Beech-Nut baby food business, Heinz
will acquire the company's other branded and private-label businesses, including
Milnot brand evaporated and sweetened condensed canned milk and Chilli Man brand
canned chili. The transaction is subject to U.S. regulatory review.
On March 1, 2000, Heinz announced that it signed an agreement for a joint
venture with the Philippines' leading ketchup producer, Nutri Asia of Manila,
Philippines. The transaction is subject to customary regulatory approvals in the
Philippines and is expected to be completed in early May. The new joint venture
will be named Heinz UFC Philippines.
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 26, 2000. For additional information, refer to pages
35-36 of the company's Annual Report to Shareholders for the fiscal year ended
April 28, 1999.
22
<PAGE> 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
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
See Note 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 forward-looking statements regarding the company's
future performance. These forward-looking statements are based on management's
views and assumptions, and involve unknown risks, uncertainties and other
important factors that could cause actual results to differ materially from
those expressed or implied in the forward-looking statements. These include, but
are not limited to, sales, earnings and volume growth, competitive conditions,
production costs, currency valuations (most notably the euro and the pound
sterling), global economic and industry conditions, achieving cost savings
programs, successful completion of Operation Excel and the other factors
described in "Forward-Looking Statements" in the company's Form 10-K for the
fiscal year ended April 28, 1999, as updated from time to time by the company in
its subsequent filings with the SEC.
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 26,
2000.
23
<PAGE> 24
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 10, 2000
By: /s/ PAUL F. RENNE
..........................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 10, 2000
By: /s/ EDWARD J. MCMENAMIN
..........................................
Edward J. McMenamin
Vice President and Corporate Controller
(Principal Accounting Officer)
24
<PAGE> 1
EXHIBIT 12
H. J. HEINZ COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months
Ended Fiscal Years Ended
----------- --------------------------------------------------------------
January 26, April 28, April 29, April 30, May 1, May 3,
2000 1999 1998 1997 1996 1995
----------- --------- --------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense*........................... $ 189,705 $ 260,743 $ 260,401 $ 277,818 $ 279,368 $ 212,123
Capitalized interest........................ -- -- 1,542 2,688 1,007 414
Interest component of rental expense........ 19,775 29,926 30,828 27,382 26,728 24,200
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges....................... $ 209,480 $ 290,669 $ 292,771 $ 307,888 $ 307,103 $ 236,737
---------- ---------- ---------- ---------- ---------- ----------
Earnings:
Income before income taxes.................. $1,314,778 $ 835,131 $1,254,981 $ 479,064 $1,023,661 $ 938,007
Add: Interest expense*...................... 189,705 260,743 260,401 277,818 279,368 212,123
Add: Interest component of rental expense... 19,775 29,926 30,828 27,382 26,728 24,200
Add: Amortization of capitalized interest... 577 3,050 3,525 3,454 3,399 3,465
---------- ---------- ---------- ---------- ---------- ----------
Earnings as adjusted...................... $1,524,835 $1,128,850 $1,549,735 $ 787,718 $1,333,156 $1,177,795
---------- ---------- ---------- ---------- ---------- ----------
Ratio of earnings to fixed charges.......... 7.28 3.88 5.29 2.56 4.34 4.98
========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
* Interest expense includes amortization of debt expense and any discount or
premium relating to indebtedness.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JANUARY 26, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-03-2000
<PERIOD-START> APR-29-1999
<PERIOD-END> JAN-26-2000
<CASH> 140,027
<SECURITIES> 4,189
<RECEIVABLES> 1,181,602
<ALLOWANCES> 0
<INVENTORY> 1,678,410
<CURRENT-ASSETS> 3,196,352
<PP&E> 4,315,944
<DEPRECIATION> 1,914,754
<TOTAL-ASSETS> 8,958,601
<CURRENT-LIABILITIES> 2,497,957
<BONDS> 3,285,495
0
149
<COMMON> 107,774
<OTHER-SE> 1,813,015
<TOTAL-LIABILITY-AND-EQUITY> 8,958,601
<SALES> 6,819,728
<TOTAL-REVENUES> 6,819,728
<CGS> 4,147,788
<TOTAL-COSTS> 4,147,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 188,377
<INCOME-PRETAX> 1,314,778
<INCOME-TAX> 521,500
<INCOME-CONTINUING> 793,278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 793,278
<EPS-BASIC> 2.22
<EPS-DILUTED> 2.19
</TABLE>
