The FINANCIAL — H.J. Heinz Company reported solid third-quarter results, with growth in sales, operating income, net income and earnings per share from continuing operations, excluding special items.
In the third quarter ended January 27, 2013, reported sales increased 2.0% to $2.93 billion. Organic sales grew 2.3% with net pricing up by 2% and volume up 0.3%. Divestitures reduced total sales by 0.3%. Foreign currency reduced sales by 0.1%.
As Heinz reported, the primary growth driver was once again Emerging Markets, which delivered organic sales growth of 17.6% (18.8% reported) led by Latin America, Indonesia and China. Emerging Markets represented 23% of total Company sales in the third quarter.
Global Ketchup delivered organic sales growth of 4.2% (4.7% reported), driven by strong performance in Russia, Latin America and Canada.
The Top 15 Brands achieved organic sales growth of 2.6% (2.2% reported) and generated more than 70% of the Company's total sales, driven by the Heinz, ABC, Quero, Classico and Master brands. The growth was negatively impacted by the Company's prior-year decision to exit T.G.I. Friday's frozen meals.
Gross profit of $1.11 billion grew 7.1% and gross margin increased 170 basis points to 37.7%. Excluding charges for productivity initiatives in Fiscal 2012, gross profit increased 4.8% and gross margin increased 100 basis points, despite higher commodity costs, largely due to higher pricing and productivity improvements.
Operating income of $468 million grew 9.7%. Excluding special items, operating income increased 4.3% to $480 million.
The effective tax rate in this year's third quarter was 19.9% compared to 18.8% a year ago on a reported basis. Excluding special items, the effective tax rate decreased to 19.3% from 20.0% a year ago.
Net income from continuing operations grew 6.9% to $308 million on a reported basis. Excluding special items, net income from continuing operations increased to $320 million, growth of 3.0%.
Diluted earnings per share from continuing operations increased 6.7% to $0.95 on a reported basis. Excluding special items, diluted EPS grew 3.1% to $0.99.
Foreign exchange had a negligible impact on this year's third-quarter results.
As Heinz first announced on January 23, 2013, the Company recorded a special charge of $12 million, or $0.04 per share, in this year's third quarter related to its earn-out payment of $60 million in cash to the previous owners of Foodstar. This early earn-out payment is intended to give Heinz additional flexibility in the future for growing its businesses in China, one of the Company's largest and most important Emerging Markets.
Discontinued Operations — During the third quarter of Fiscal 2013, the Heinz Board of Directors approved management's plan to divest Shanghai LongFong Foods, a frozen food business in China. The Company is committed to divesting LongFong and anticipates securing an agreement with a suitable buyer in the next 12 months.
As a result, LongFong has been reclassified as a discontinued operation; previously it was reported in the Company's Asia/Pacific segment. LongFong's net assets have been classified as held for sale and the Company has recorded a $36.0 million pre-tax and after-tax non-cash goodwill impairment charge in the third quarter of Fiscal 2013, which has been recorded in discontinued operations. LongFong had reported sales of $27 million and $51 million in the nine months ended January 27, 2013 and January 25, 2012, respectively.
In the first quarter of Fiscal 2013, Heinz completed the previously announced sale of its U.S. Foodservice frozen desserts business. This transaction resulted in a $32.7 million pre-tax ($21.1 million after-tax) loss, which has been recorded in discontinued operations.
Including discontinued operations, Heinz reported total Company net income of $270 million and EPS of $0.83 in the latest quarter.
Year-to-Date — Continuing Operations — For the nine months ended January 27, 2013, sales of $8.54 billion increased 0.5% on a reported basis and 3.7% on an organic basis. Operating income was $1.28 billion, an increase of 9.4%. Excluding special items, operating income was $1.29 billion, up 0.9%. Net income from continuing operations was $889 million, up 15.8%. Excluding special items, net income from continuing operations was $901 million, an increase of 6.8%.
The year-to-date tax rate was 15.9% versus 19.7% last year. Heinz reported diluted earnings per share from continuing operations of $2.75, an increase of 16.0%. Excluding special items, diluted earnings per share from continuing operations was $2.79, an increase of 7.3%.
EPS in the first nine months of this year was reduced by $0.06 from unfavorable foreign currency translation.
Including discontinued operations, Heinz reported total Company net income of $817 million and EPS of $2.53 in the first nine months of this year.
H.J. Heinz Company Enters Into Agreement to Be Acquired by Berkshire Hathaway and 3G Capital
As previously announced on Thursday, February 14, 2013, the H.J. Heinz Company entered into a definitive merger agreement to be acquired by an investment consortium comprised of Berkshire Hathaway and 3G Capital.
Under the terms of the agreement, which was unanimously approved by Heinz's Board of Directors, Heinz shareholders will receive $72.50 in cash for each share of common stock they own, in a transaction valued at $28 billion, including the assumption of Heinz's outstanding debt. The per share price represents a 20% premium to Heinz's closing share price of $60.48 on February 13, 2013, a 19% premium to Heinz's all-time high share price, a 23% premium to the 90-day average Heinz share price and a 30% premium to the one-year average share price.
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