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| HNZ > SEC Filings for HNZ > Form 10-Q on 21-Aug-2008 | All Recent SEC Filings |
21-Aug-2008
Quarterly Report
Results of Operations
Sales for the three months ended July 30, 2008 increased $335 million, or 14.9%, to $2.58 billion. Volume increased 5.0%, due to solid growth in the North American Consumer Products segment and the emerging markets (Russia, Poland, the Czech Republic, Indonesia, China, India, South Africa, the Middle East and Latin America) combined with strong performance of Heinz® branded products in the U.K. and Continental Europe. Notably, the emerging markets produced a 14% volume increase and accounted for approximately one-third of Heinz's total sales growth in the first quarter of Fiscal 2009. In addition, sales of the infant/nutrition category grew 29.5%, driven by increased volume of 12.8%. These increases were partially offset by volume declines in the U.S. Foodservice segment. Net pricing increased sales by 5.2%, as price increases were taken across the Company's portfolio to help offset continuing increases in commodity costs. Acquisitions, net of divestitures, increased sales by 0.7%. Foreign exchange translation rates increased sales by 4.0%.
Sales of the Company's top 15 brands grew 16.6% from the year-ago quarter, driven by increases in Heinz® branded products around the globe. New product introductions under the Smart Ones® and Ore-Ida® brands also helped drive this growth, along with a significant improvement in the ABC® brand in Indonesia.
Gross profit increased $96 million, or 11.4%, to $934 million, benefiting from favorable volume, pricing and foreign exchange translation rates. The gross profit margin decreased to 36.2% from 37.3%, as pricing and productivity improvements were more than offset by increased commodity costs, reflecting higher costs for packaging and all of our key ingredients.
Selling, general and administrative expenses ("SG&A") increased $70 million, or 14.9%, to $542 million, and were flat as a percentage of sales at 21.0%. The 14.9% increase in SG&A is due to an increase in marketing expense, higher selling and distribution costs ("S&D") resulting from increased volume, higher fuel costs and movements in foreign exchange translation rates. SG&A was also impacted by increased spending on global task force initiatives including system capability improvements.
Operating income increased $26 million, or 7.0%, to $392 million, reflecting the strong sales growth and solid operating performance, partially offset by increased commodity costs.
Net interest expense decreased $15 million, to $63 million, largely as a result of lower average interest rates in Fiscal 2009. Other expenses, net, decreased $0.6 million, to $8 million, as decreased currency losses were partially offset by increased minority interest expense.
The effective tax rate for the current quarter was 28.7%, up 210 basis points compared to 26.6% last year. The current and prior year first quarter effective tax rates both reflect a discrete benefit resulting from the tax effects of law changes in the U.K. of approximately $11 million and $12 million, respectively.
Net income was $229 million compared to $205 million in the prior year, an increase of 11.5%, due to the increase in operating income and reduced net interest expense, partially offset by a higher effective tax rate. Diluted earnings per share was $0.72 in the current year compared to $0.63 in the prior year, up 14.3%, which also benefited from a 2.7% reduction in fully diluted shares outstanding.
North American Consumer Products
Sales of the North American Consumer Products segment increased $77 million, or 11.5%, to $741 million. Volume increased 4.7%, driven largely by Smart Ones® frozen entrees and Ore-Ida® frozen potatoes. The Smart Ones® increase was due to new product introductions such as Fruit Inspirationstm, Anytime Selectionstm and Morning Expresstm. The Ore-Ida® growth was driven by new products such as Steam n' Mashtm, combined with the carry-over impact of price increases taken during the fourth quarter of Fiscal 2007. Volume also benefited from the introduction of Heinz® Nurture® infant formula in Canada and a strong performance in Heinz® gravy. These increases were partially offset by declines in frozen snacks due to supply constraints. Net prices grew 5.6% reflecting price increases taken across the majority of the product portfolio over the last year to help offset higher commodity costs. Favorable Canadian exchange translation rates increased sales 1.3%.
Gross profit increased $24 million, or 8.8%, to $301 million, due primarily to the sales increase. The gross profit margin decreased to 40.6% from 41.6%, as increased pricing and productivity improvements only partially offset increased commodity costs. Operating income increased $16 million, or 10.3%, to $168 million, due to the strong increase in sales, partially offset by higher commodity costs and increased S&D due to higher volume and fuel costs.
Europe
Heinz Europe sales increased $152 million, or 19.9%, to $918 million. Volume increased 6.4%, principally due to new product introductions and increased promotional activity in the U.K. and Continental Europe. Volume increases were achieved on Heinz® ketchup across Europe, Heinz® beans and salad cream in the U.K., Pudliszki® branded products in Poland and Italian infant nutrition. Net pricing increased 4.3%, driven by Heinz® ketchup, beans and soup, broad-based increases in our Russian market, convenience meals in the Netherlands and Italian infant nutrition products, partially offset by increased promotional spending in the U.K. Acquisitions, net of divestitures, increased sales 1.2%, primarily due to the acquisition of the Wyko® sauce business in the Netherlands at the end of Fiscal 2008. Favorable foreign exchange translation rates increased sales by 8.0%.
Gross profit increased $50 million, or 16.2%, to $356 million, driven by increased sales. Although foreign exchange translation has favorably impacted sales, cross currency purchases between the Euro and British Pound offset most of that benefit at gross profit. The gross profit margin decreased to 38.8% from 40.1%, as increased commodity costs and higher manufacturing costs in the U.K. were only partially offset by the improved pricing. Operating income increased $18 million, or 13.3%, to $157 million, due to the increase in sales, partially offset by higher commodity costs, volume and fuel-related increases in S&D, a new distribution process in Russia and higher general and administrative expenses ("G&A") reflecting task force spending and expenses related to system implementations.
Asia/Pacific
Heinz Asia/Pacific sales increased $86 million, or 23.3%, to $458 million. Volume increased 10.2%, reflecting significant improvements in ABC® syrup in Indonesia, resulting from the timing of the Ramadan holiday and increased consumer demand. In addition, volume increases were achieved in Cottee's® branded condiments in Australia, beverage sales in India and Heinz® branded infant nutrition in China. Pricing increased 5.6%, due to increases on ABC® sauces and syrup in Indonesia, convenience meals in Australia and nutritional beverages in India. This pricing helped offset continuing increases in commodity and fuel costs. Acquisitions increased sales 1.8%, and favorable exchange translation rates increased sales by 5.8%.
Gross profit increased $32 million, or 25.9%, to $157 million, and the gross profit margin expanded to 34.3% from 33.6%. The improvement in gross profit was due to increased volume, pricing and foreign exchange translation rates, which more than offset increased commodity costs. Operating income increased by $15 million, or 29.8%, to $67 million, primarily reflecting the increase in sales and gross margin, partially offset by increased marketing spending and increased S&D related to higher volume.
U.S. Foodservice
Sales of the U.S. Foodservice segment decreased $10 million, or 2.8%, to $353 million. Pricing increased sales 1.5%, largely due to increases on Heinz® ketchup, portion control condiments and tomato products, partially offset by increased promotional spending. Volume decreased by 4.3%, as higher volume on frozen desserts was more than offset by declines in ketchup, portion control products, soup and appetizers. The volume reflects reduced restaurant foot traffic, the elimination of lower margin products and customers, as well as increased competition on our non-branded products.
Gross profit decreased $21 million, or 20.9%, to $79 million, and the gross profit margin decreased to 22.5% from 27.6%, due to higher commodity costs and lower volumes. Operating income decreased $19 million, or 42.7%, to $25 million, which is primarily due to the decline in gross profit. The Company continues to simplify its U.S. Foodservice business, recently closing a manufacturing plant in Dallas and reducing administrative workforce levels. In the quarter, the costs to streamline the business were offset by the gain on the sale of a small, non-core portion control business.
Rest of World
Sales for Rest of World increased $30 million, or 36.4%, to $113 million. Volume increased 12.6% driven by increases in Latin America and the Middle East. Higher pricing increased sales by 24.6%, largely due to price increases and reduced promotions in Latin America as well as commodity-related price increases in South Africa and Middle East. Foreign exchange translation rates decreased sales 0.9%.
Gross profit increased $9 million, or 32.6%, to $38 million, due mainly to increased pricing and higher volume, partially offset by increased commodity costs. Operating income increased $2 million, or 24.6% to $13 million.
Liquidity and Financial Position
Cash (used for)/provided by operating activities was $(14) million in the current year and $9 million in the prior year. The decrease in the first quarter of Fiscal 2009 versus Fiscal 2008 was primarily due to additional contributions made this year to fund the Company's pension plans and the current year payment of the incentive compensation accruals from Fiscal 2008, partially offset by an increase from the timing of tax payments. The Company's cash conversion cycle increased 8 days, to 52 days in the first quarter of Fiscal 2009, which was largely due to accounts payable which increased only modestly while cost of goods sold grew significantly as a result of volume and higher commodity costs.
Cash used for investing activities totaled $35 million compared to $101 million last year. Proceeds from divestitures provided cash of $5 million in the first quarter of Fiscal 2009, resulting from the sale of a small portion control foodservice business in the U.S. In the first quarter of Fiscal 2008, cash paid for acquisitions, net of divestitures, required $24 million, primarily related to the acquisition of the license to the Cottee's® and Rose's® premium branded jams, jellies and toppings business in Australia and New Zealand, partially offset by the divestiture of a tomato paste business in Portugal. Capital expenditures totaled $42 million (1.6% of sales) compared to $58 million (2.6% of sales) in the prior year. This reduction is timing-related, as capital spending is expected to increase significantly in line with our full year estimate of 3.0% to 3.5% of sales. Proceeds from disposals of property, plant and equipment were $0.7 million compared to $0.2 million in the prior year.
Cash used for financing activities totaled $13 million compared to $224 million last year. Proceeds from long-term debt were $850 million in the current year. The current year proceeds represent the sale of $500 million 5.35% Notes due 2013 as well as the sale of $350 million or 3,500 shares of H.J. Heinz Finance Company's (a subsidiary of Heinz) Series B Preferred Stock. The proceeds from both transactions were used for general corporate purposes, including the repayment of commercial paper and other indebtedness incurred to redeem H.J. Heinz Finance Company's Series A Preferred Stock. As a result, payments on commercial paper and short-term debt were $398 million and payments on long-term debt were $337 million this year compared to proceeds from commercial paper and short-term debt of $16 million and payments on long-term debt of $1 million in the prior year. Cash proceeds from option exercises, net of treasury stock purchases, provided $1 million of cash in the current year. Cash used for the purchases of treasury stock, net of proceeds from option exercises, was $127 million in the prior year. Dividend payments totaled $131 million, compared to $123 million for the same period last year, reflecting a 9.2% increase in the dividend on common stock.
At July 30, 2008, the Company had total debt of $5.26 billion (including $169 million relating to the SFAS No. 133 hedge accounting adjustments) and cash and cash equivalents of $554 million. Total debt balances since prior year end increased slightly primarily to fund our capital spending and inventory levels in support of future growth.
The Company and H.J. Heinz Finance Company maintain a $2 billion credit agreement that expires in August 2009. The credit agreement supports the Company's commercial paper borrowings. As a result, these borrowings are classified as long-term debt based upon the Company's intent and ability to refinance these borrowings on a long-term basis. The Company maintains in excess of $1 billion of other credit facilities used primarily by the Company's foreign subsidiaries. These resources, the Company's existing cash balance, strong annual operating cash flow, and access to the capital markets, if required, should enable the Company to meet its cash requirements for operations, including capital expansion programs, debt maturities, share repurchases and dividends to shareholders.
As of July 30, 2008, the Company's long-term debt ratings at Moody's, Standard & Poor's and Fitch Rating were Baa2, BBB and BBB, respectively.
The Company has continued to experience inflationary increases in commodity input costs in the first quarter and expects this trend to continue for the remainder of Fiscal 2009. The most significant commodity cost increases in Fiscal 2009 have been for packaging, edible oils and tomato products. Strong sales growth, price increases, continued productivity improvements and the Company's geographic diversity are helping to offset these cost increases.
Contractual Obligations
The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements and unconditional purchase obligations. In addition, the Company has purchase obligations for materials, supplies, services, and property, plant and equipment as part of the ordinary conduct of business. A few of these obligations are long-term and are based on minimum purchase requirements. In the aggregate, such commitments are not at prices in excess of current markets. Due to the proprietary nature of some of the Company's materials and processes, certain supply contracts contain penalty provisions for early terminations. The Company does not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. There have been no material changes to contractual obligations during the three months ended July 30, 2008. For additional information, refer to page 26 of the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2008.
As of the end of the first quarter, the total amount of gross unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions
only impacting the timing of tax benefits, was $189 million. However, the net obligation to taxing authorities was $105 million. The difference relates primarily to outstanding refund claims. The timing of payments will depend on the progress of examinations with tax authorities. The Company does not expect a significant tax payment related to these obligations within the next year. The Company is unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities may occur.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value, but does not expand the use of fair value to new accounting transactions. SFAS No. 157 is effective for financial assets and liabilities in fiscal years beginning after November 15, 2007, and for non-financial assets and liabilities in fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 for its financial assets and liabilities on May 1, 2008. See Note No. 11, "Fair Value Measurements," in Item 1- "Financial Statements" for additional information. The Company is currently evaluating the impact of SFAS No. 157 for its non-financial assets and liabilities that are recognized at fair value on a non-recurring basis, including goodwill, other intangible assets, exit liabilities and purchase price allocations.
On May 1, 2008, the Company adopted the measurement date provisions of
SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)." The measurement date provisions require plan assets and obligations to
be measured as of the date of the year-end financial statements. The Company
previously measured its foreign pension and other postretirement benefit
obligations as of March 31 each year. The adoption of the measurement date
provisions of SFAS No. 158 did not have a material effect on the Company's
consolidated statement of income or condensed consolidated balance sheet for the
quarter ended July 30, 2008.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" and SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51." These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. Thus, the Company will be required to adopt these standards on April 30, 2009, the first day of Fiscal 2010. The Company is currently evaluating the impact of adopting SFAS Nos. 141(R) and 160 on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133." This new standard requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of adopting SFAS No. 161 in the fourth quarter of Fiscal 2009. In June 2008, the FASB issued Financial Statement of Position ("FSP") Emerging Issues Task Force ("EITF") 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to
the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is currently evaluating the impact of FSP EITF 03-6-1 on its consolidated financial statements.
Statements about future growth, profitability, costs, expectations, plans, or objectives included in this report, including in management's discussion and analysis, and the financial statements and footnotes, are forward-looking statements based on management's estimates, assumptions, and projections. These forward-looking statements are subject to risks, uncertainties, assumptions and other important factors, many of which may be beyond the Company's control and could cause actual results to differ materially from those expressed or implied in this report and the financial statements and footnotes. Uncertainties contained in such statements include, but are not limited to,
• sales, earnings, and volume growth,
• general economic, political, and industry conditions, including those that could impact consumer spending,
• competitive conditions, which affect, among other things, customer preferences and the pricing of products, production, and energy costs,
• increases in the cost and restrictions on the availability of raw materials including agricultural commodities and packaging materials, the ability to increase product prices in response, and the impact on profitability,
• the ability to identify and anticipate and respond through innovation to consumer trends,
• the need for product recalls,
• the ability to maintain favorable supplier relationships,
• currency valuations and interest rate fluctuations,
• changes in credit ratings, leverage, and economic conditions, and the impact of these factors on our cost of borrowing and access to capital markets,
• the ability to execute our strategy, which includes our continued evaluation of potential acquisition opportunities, including strategic acquisitions, joint ventures, divestitures and other initiatives, including our ability to identify, finance and complete these initiatives, and our ability to realize anticipated benefits from them,
• the ability to successfully complete cost reduction programs and increase productivity,
• the ability to effectively integrate acquired businesses,
• new products, packaging innovations, and product mix,
• the effectiveness of advertising, marketing, and promotional programs,
• supply chain efficiency,
• cash flow initiatives,
• risks inherent in litigation, including tax litigation,
• the ability to further penetrate and grow in international markets, economic or political instability in those markets, particularly in Venezuela, and the performance of business in hyperinflationary environments,
• changes in estimates in critical accounting judgments and changes in laws and regulations, including tax laws,
• the success of tax planning strategies,
• the possibility of increased pension expense and contributions and other people-related costs,
• the potential adverse impact of natural disasters, such as flooding and crop failures,
• the ability to implement new information systems and potential disruptions due to failures in technology systems,
• with regard to dividends, dividends must be declared by the Board of Directors and will be subject to certain legal requirements being met at the time of declaration, as well as anticipated cash needs, and
• other factors described in "Risk Factors" and "Cautionary Statement Relevant to Forward-Looking Information" in the Company's Form 10-K for the fiscal year ended April 30, 2008.
The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by the securities laws.
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