Attached files
file | filename |
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EX-12 - EX-12 - HEINZ H J CO | l37749exv12.htm |
EX-31.(B) - EX-31.(B) - HEINZ H J CO | l37749exv31wxby.htm |
EX-31.(A) - EX-31.(A) - HEINZ H J CO | l37749exv31wxay.htm |
EX-32.(B) - EX-32.(B) - HEINZ H J CO | l37749exv32wxby.htm |
EX-32.(A) - EX-32.(A) - HEINZ H J CO | l37749exv32wxay.htm |
EX-10.(A)(I) - EX-10.(A)(I) - HEINZ H J CO | l37749exv10wxayxiy.htm |
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended
October 28, 2009
|
||
OR
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from
to
|
Commission File Number 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as
specified in its charter)
PENNSYLVANIA
|
25-0542520 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
One PPG Place, Pittsburgh, Pennsylvania | 15222 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants 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 filing requirements for the past
90 days. Yes X No
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the Registrant was required to submit and post such
files). Yes X No
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer X | Accelerated filer | Non-accelerated filer | Smaller reporting company |
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes No X
The number of shares of the Registrants Common Stock, par
value $0.25 per share, outstanding as of October 28, 2009
was 315,643,909 shares.
PART IFINANCIAL
INFORMATION
Item 1. | Financial Statements |
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
Second Quarter Ended | ||||||||
October 28, 2009 |
October 29, 2008 |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(In Thousands, Except |
||||||||
per Share Amounts) | ||||||||
Sales
|
$ | 2,672,152 | $ | 2,606,944 | ||||
Cost of products sold
|
1,714,762 | 1,688,357 | ||||||
Gross profit
|
957,390 | 918,587 | ||||||
Selling, general and administrative expenses
|
549,119 | 533,341 | ||||||
Operating income
|
408,271 | 385,246 | ||||||
Interest income
|
7,517 | 10,843 | ||||||
Interest expense
|
71,625 | 83,978 | ||||||
Other (expense)/income, net
|
(9,626 | ) | 82,332 | |||||
Income from continuing operations before income taxes
|
334,537 | 394,443 | ||||||
Provision for income taxes
|
85,668 | 112,661 | ||||||
Income from continuing operations
|
248,869 | 281,782 | ||||||
(Loss)/income from discontinued operations, net of tax
|
(11,542 | ) | 677 | |||||
Net income
|
237,327 | 282,459 | ||||||
Less: Net income attributable to the noncontrolling interest
|
5,892 | 5,749 | ||||||
Net income attributable to H. J. Heinz Company
|
$ | 231,435 | $ | 276,710 | ||||
Income/(loss) per common share:
|
||||||||
Diluted
|
||||||||
Continuing operations attributable to H. J. Heinz Company common
shareholders
|
$ | 0.76 | $ | 0.86 | ||||
Discontinued operations attributable to H. J. Heinz Company
common shareholders
|
(0.04 | ) | | |||||
Net income attributable to H. J. Heinz Company common
shareholders
|
$ | 0.73 | $ | 0.87 | ||||
Average common shares outstandingdiluted
|
317,405 | 318,437 | ||||||
Basic
|
||||||||
Continuing operations attributable to H. J. Heinz Company common
shareholders
|
$ | 0.77 | $ | 0.88 | ||||
Discontinued operations attributable to H. J. Heinz Company
common shareholders
|
(0.04 | ) | | |||||
Net income attributable to H. J. Heinz Company common
shareholders
|
$ | 0.73 | $ | 0.88 | ||||
Average common shares outstandingbasic
|
315,477 | 313,670 | ||||||
Cash dividends per share
|
$ | 0.42 | $ | 0.415 | ||||
Amounts attributable to H. J. Heinz Company common shareholders:
|
||||||||
Income from continuing operations, net of tax
|
$ | 242,977 | $ | 276,033 | ||||
(Loss)/income from discontinued operations, net of tax
|
(11,542 | ) | 677 | |||||
Net income
|
$ | 231,435 | $ | 276,710 | ||||
(Per share amounts may not add due to rounding)
|
See Notes to Condensed Consolidated Financial Statements.
2
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended | ||||||||
October 28, 2009 |
October 29, 2008 |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(In Thousands, Except |
||||||||
per Share Amounts) | ||||||||
Sales
|
$ | 5,137,277 | $ | 5,185,748 | ||||
Cost of products sold
|
3,305,765 | 3,332,742 | ||||||
Gross profit
|
1,831,512 | 1,853,006 | ||||||
Selling, general and administrative expenses
|
1,056,608 | 1,074,254 | ||||||
Operating income
|
774,904 | 778,752 | ||||||
Interest income
|
36,175 | 22,271 | ||||||
Interest expense
|
154,614 | 158,583 | ||||||
Other (expense)/income, net
|
(15,040 | ) | 79,628 | |||||
Income from continuing operations before income taxes
|
641,425 | 722,068 | ||||||
Provision for income taxes
|
173,016 | 205,242 | ||||||
Income from continuing operations
|
468,409 | 516,826 | ||||||
Loss from discontinued operations, net of tax
|
(11,990 | ) | (83 | ) | ||||
Net income
|
456,419 | 516,743 | ||||||
Less: Net income attributable to the noncontrolling interest
|
12,420 | 11,069 | ||||||
Net income attributable to H. J. Heinz Company
|
$ | 443,999 | $ | 505,674 | ||||
Income/(loss) per common share:
|
||||||||
Diluted
|
||||||||
Continuing operations attributable to H. J. Heinz Company common
shareholders
|
$ | 1.43 | $ | 1.58 | ||||
Discontinued operations attributable to H. J. Heinz Company
common shareholders
|
(0.04 | ) | | |||||
Net income attributable to H. J. Heinz Company common
shareholders
|
$ | 1.40 | $ | 1.58 | ||||
Average common shares outstandingdiluted
|
317,395 | 317,710 | ||||||
Basic
|
||||||||
Continuing operations attributable to H. J. Heinz Company common
shareholders
|
$ | 1.44 | $ | 1.61 | ||||
Discontinued operations attributable to H. J. Heinz Company
common shareholders
|
(0.04 | ) | | |||||
Net income attributable to H. J. Heinz Company common
shareholders
|
$ | 1.40 | $ | 1.61 | ||||
Average common shares outstandingbasic
|
315,288 | 312,923 | ||||||
Cash dividends per share
|
$ | 0.84 | $ | 0.83 | ||||
Amounts attributable to H. J. Heinz Company common shareholders:
|
||||||||
Income from continuing operations, net of tax
|
$ | 455,989 | $ | 505,757 | ||||
Loss from discontinued operations, net of tax
|
(11,990 | ) | (83 | ) | ||||
Net income
|
$ | 443,999 | $ | 505,674 | ||||
(Per share amounts may not add due to rounding)
|
See Notes to Condensed Consolidated Financial Statements.
3
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
October 28, 2009 |
April 29, 2009* |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(In Thousands) | ||||||||
Assets
|
||||||||
Current Assets:
|
||||||||
Cash and cash equivalents
|
$ | 460,584 | $ | 373,145 | ||||
Trade receivables, net
|
806,057 | 881,164 | ||||||
Other receivables, net
|
334,008 | 290,633 | ||||||
Inventories:
|
||||||||
Finished goods and
work-in-process
|
1,161,773 | 973,983 | ||||||
Packaging material and ingredients
|
341,150 | 263,630 | ||||||
Total inventories
|
1,502,923 | 1,237,613 | ||||||
Prepaid expenses
|
141,582 | 125,765 | ||||||
Other current assets
|
43,543 | 36,701 | ||||||
Total current assets
|
3,288,697 | 2,945,021 | ||||||
Property, plant and equipment
|
4,508,356 | 4,109,562 | ||||||
Less accumulated depreciation
|
2,391,069 | 2,131,260 | ||||||
Total property, plant and equipment, net
|
2,117,287 | 1,978,302 | ||||||
Goodwill
|
2,865,702 | 2,687,788 | ||||||
Trademarks, net
|
947,847 | 889,815 | ||||||
Other intangibles, net
|
422,461 | 405,351 | ||||||
Long-term restricted cash
|
| 192,736 | ||||||
Other non-current assets
|
631,007 | 565,171 | ||||||
Total other non-current assets
|
4,867,017 | 4,740,861 | ||||||
Total assets
|
$ | 10,273,001 | $ | 9,664,184 | ||||
* | The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. |
See Notes to Condensed Consolidated Financial Statements.
4
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
October 28, 2009 |
April 29, 2009* |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(In Thousands) | ||||||||
Liabilities and Equity
|
||||||||
Current Liabilities:
|
||||||||
Short-term debt
|
$ | 45,775 | $ | 61,297 | ||||
Portion of long-term debt due within one year
|
4,356 | 4,341 | ||||||
Trade payables
|
1,050,589 | 955,430 | ||||||
Other payables
|
140,079 | 157,877 | ||||||
Salaries and wages
|
88,103 | 91,283 | ||||||
Accrued marketing
|
276,402 | 233,316 | ||||||
Other accrued liabilities
|
438,882 | 485,406 | ||||||
Income taxes
|
87,140 | 73,896 | ||||||
Total current liabilities
|
2,131,326 | 2,062,846 | ||||||
Long-term debt
|
4,848,910 | 5,076,186 | ||||||
Deferred income taxes
|
489,676 | 345,749 | ||||||
Non-pension post-retirement benefits
|
220,441 | 214,786 | ||||||
Other liabilities
|
577,141 | 685,512 | ||||||
Total long-term liabilities
|
6,136,168 | 6,322,233 | ||||||
Equity:
|
||||||||
Capital stock
|
107,844 | 107,844 | ||||||
Additional capital
|
719,784 | 737,917 | ||||||
Retained earnings
|
6,703,160 | 6,525,719 | ||||||
7,530,788 | 7,371,480 | |||||||
Less:
|
||||||||
Treasury stock at cost (115,453 shares at October 28,
2009 and 116,237 shares at April 29, 2009)
|
4,845,364 | 4,881,842 | ||||||
Accumulated other comprehensive loss
|
755,568 | 1,269,700 | ||||||
Total H. J. Heinz Company shareholders equity
|
1,929,856 | 1,219,938 | ||||||
Noncontrolling interest
|
75,651 | 59,167 | ||||||
Total equity
|
2,005,507 | 1,279,105 | ||||||
Total liabilities and equity
|
$ | 10,273,001 | $ | 9,664,184 | ||||
* | The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Noncontrolling (minority) interest has been reclassified and presented as a component of equity as a result of the adoption of new accounting guidance (see Note 2). |
See Notes to Condensed Consolidated Financial Statements.
5
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended | ||||||||
October 28, 2009 |
October 29, 2008 |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(Thousands of Dollars) | ||||||||
Cash Flows from Operating Activities:
|
||||||||
Net income
|
$ | 456,419 | $ | 516,743 | ||||
Adjustments to reconcile net income to cash provided by
operating activities:
|
||||||||
Depreciation
|
124,107 | 126,300 | ||||||
Amortization
|
23,994 | 19,430 | ||||||
Deferred tax provision
|
113,365 | 37,140 | ||||||
Pension contributions
|
(227,904 | ) | (40,518 | ) | ||||
Other items, net
|
107,274 | (6,474 | ) | |||||
Changes in current assets and liabilities, excluding effects of
acquisitions and divestitures:
|
||||||||
Receivables securitization facility
|
126,300 | | ||||||
Receivables
|
29,282 | (92,087 | ) | |||||
Inventories
|
(168,549 | ) | (309,307 | ) | ||||
Prepaid expenses and other current assets
|
4,013 | (8,899 | ) | |||||
Accounts payable
|
(10,297 | ) | 29,238 | |||||
Accrued liabilities
|
(52,774 | ) | (90,731 | ) | ||||
Income taxes
|
(16,354 | ) | 32,732 | |||||
Cash provided by operating activities
|
508,876 | 213,567 | ||||||
Cash Flows from Investing Activities:
|
||||||||
Capital expenditures
|
(96,170 | ) | (124,218 | ) | ||||
Proceeds from disposals of property, plant and equipment
|
964 | 1,136 | ||||||
Acquisitions, net of cash acquired
|
(308 | ) | (116,250 | ) | ||||
Proceeds from divestitures
|
9,329 | 12,920 | ||||||
Change in restricted cash
|
192,736 | | ||||||
Other items, net
|
(3,505 | ) | (5,977 | ) | ||||
Cash provided by/(used for) investing activities
|
103,046 | (232,389 | ) | |||||
Cash Flows from Financing Activities:
|
||||||||
Payments on long-term debt
|
(359,340 | ) | (337,600 | ) | ||||
Proceeds from long-term debt
|
433,356 | 849,835 | ||||||
Net (payments on)/proceeds from commercial paper and short-term
debt
|
(427,399 | ) | 118,240 | |||||
Dividends
|
(266,240 | ) | (262,816 | ) | ||||
Purchases of treasury stock
|
| (181,431 | ) | |||||
Exercise of stock options
|
5,129 | 261,415 | ||||||
Other items, net
|
13,201 | 1,718 | ||||||
Cash (used for)/provided by financing activities
|
(601,293 | ) | 449,361 | |||||
Effect of exchange rate changes on cash and cash equivalents
|
76,810 | (120,570 | ) | |||||
Net increase in cash and cash equivalents
|
87,439 | 309,969 | ||||||
Cash and cash equivalents at beginning of year
|
373,145 | 617,687 | ||||||
Cash and cash equivalents at end of period
|
$ | 460,584 | $ | 927,656 | ||||
See Notes to Condensed Consolidated Financial Statements.
6
H. J.
HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) | Basis of Presentation |
The interim condensed consolidated financial statements of H. J.
Heinz Company, together with its subsidiaries (collectively
referred to as the Company), are unaudited. In the
opinion of management, all adjustments, which are of a normal
and recurring nature, except those which have been disclosed
elsewhere in this Quarterly Report on
Form 10-Q,
necessary for a fair statement of the results of operations of
these interim periods, have been included. The results for
interim periods are not necessarily indicative of the results to
be expected for the full fiscal year due to the seasonal nature
of the Companys business. Certain prior year amounts have
been reclassified to conform with the Fiscal 2010 presentation.
These statements should be read in conjunction with the
Companys consolidated financial statements and related
notes, and managements discussion and analysis of
financial condition and results of operations which appear in
the Companys Annual Report on
Form 10-K
for the year ended April 29, 2009. Subsequent events
occurring after October 28, 2009 were evaluated through
November 24, 2009, the date these financial statements were
issued.
(2) | Recently Issued Accounting Standards |
On September 15, 2009, the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (the
Codification) became the single source of
authoritative generally accepted accounting principles in the
United States of America. The Codification changed the
referencing of financial standards but did not change or alter
existing U.S. GAAP. The Codification became effective for
the Company in the second quarter of Fiscal 2010.
Business
Combinations and Consolidation
On April 30, 2009, the Company adopted new accounting
guidance on business combinations and noncontrolling interests
in consolidated financial statements. The guidance on business
combinations impacts the accounting for any business
combinations completed after April 29, 2009. The nature and
extent of the impact will depend upon the terms and conditions
of any such transaction. The guidance on noncontrolling
interests changes the accounting and reporting for minority
interests, which have been recharacterized as noncontrolling
interests and classified as a component of equity. Prior period
financial statements and disclosures for existing minority
interests have been restated in accordance with this guidance.
All other requirements of this guidance will be applied
prospectively. The adoption of the guidance on noncontrolling
interests did not have a material impact on the Companys
financial statements.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for transfers of financial assets. This
amendment removes the concept of a qualifying special-purpose
entity and requires that a transferor recognize and initially
measure at fair value all assets obtained and liabilities
incurred as a result of a transfer of financial assets accounted
for as a sale. This amendment also requires additional
disclosures about any transfers of financial assets and a
transferors continuing involvement with transferred
financial assets. This amendment is effective for fiscal years
beginning after November 15, 2009, and interim periods
within those fiscal years. As of October 28, 2009, the
Company has approximately $284 million of trade receivables
associated with factoring and securitization programs that are
not recognized on the balance sheet. The Company is currently
evaluating these arrangements as well as any other potential
impact of adopting this amendment on April 29, 2010, the
first day of Fiscal 2011.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for variable interest entities. This
amendment changes how a reporting entity determines when an
7
entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to
consolidate another entity is based on, among other things, the
purpose and design of the other entity and the reporting
entitys ability to direct the activities of the other
entity that most significantly impact its economic performance.
The amendment also requires additional disclosures about a
reporting entitys involvement with variable interest
entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity
affects the reporting entitys financial statements. This
amendment is effective for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal
years. The Company is currently evaluating the impact of
adopting this amendment on April 29, 2010, the first day of
Fiscal 2011.
Fair
Value
On April 30, 2009, the Company adopted new accounting
guidance on fair value measurements for its non-financial assets
and liabilities that are recognized at fair value on a
non-recurring basis, including long-lived assets, goodwill,
other intangible assets, exit liabilities and purchase price
allocations. This guidance defines fair value, establishes a
framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value
measurements. This guidance applies whenever other accounting
guidance requires or permits assets or liabilities to be
measured at fair value, but does not expand the use of fair
value to new accounting transactions. The adoption of this
guidance did not have a material impact on the Companys
financial statements. See Note 13 for additional
information.
Postretirement
Benefit Plans and Equity Compensation
On April 30, 2009, the Company adopted accounting guidance
for determining whether instruments granted in share-based
payment transactions are participating securities. This guidance
states 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. As a result of adopting this guidance, the
Company has retrospectively adjusted its earnings per share data
for prior periods. The adoption of this guidance had no impact
on net income and less than a $0.01 impact on basic and diluted
earnings per share from continuing operations for the second
quarters of Fiscal 2010 and 2009. The adoption had less than a
$0.01 impact on basic and diluted earnings per share from
continuing operations for the first six months of Fiscal 2010
and a $0.01 impact on basic and diluted earnings per share from
continuing operations for the first six months of Fiscal 2009.
See Note 9 for additional information.
In December 2008, the FASB issued new accounting guidance on
employers disclosures about postretirement benefit plan
assets. This new guidance requires enhanced disclosures about
plan assets in an employers defined benefit pension or
other postretirement plan. Companies will be required to
disclose information about how investment allocation decisions
are made, the fair value of each major category of plan assets,
the basis used to determine the overall expected long-term rate
of return on assets assumption, a description of the inputs and
valuation techniques used to develop fair value measurements of
plan assets, and significant concentrations of credit risk. This
guidance is effective for fiscal years ending after
December 15, 2009. The Company is currently evaluating the
impact of adopting this guidance in the fourth quarter of Fiscal
2010.
Other
Areas
In May 2009, the FASB issued new accounting guidance on
subsequent events, which establishes general standards of
accounting for and disclosure of events or transactions that
occur after the balance sheet date but before the financial
statements are issued or are available to be
8
issued. This guidance describes the circumstances under which an
entity should recognize events or transactions occurring after
the balance sheet date in its financial statements and provides
guidance on the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. The Company adopted this guidance during the first quarter
of Fiscal 2010, and its application had no impact on the
Companys consolidated financial statements.
(3) | Discontinued Operations |
During the second quarter of Fiscal 2010, the Company completed
the sale of its non-core Kabobs frozen hors doeuvres
business which was previously reported within the
U.S. Foodservice segment, resulting in a $15.0 million
pre-tax ($10.9 million after-tax) loss which has been
recorded in discontinued operations.
In accordance with accounting principles generally accepted in
the United States of America, the operating results related to
this business have been included in discontinued operations in
the Companys consolidated statements of income for all
periods presented. These discontinued operations generated sales
of $1.2 million and $5.6 million and a net loss of
$0.6 million (net of $0.3 million of a tax benefit)
and net income of $0.7 million (net of $0.4 million in
tax expense) for the second quarters ended October 28, 2009
and October 29, 2008, respectively. These discontinued
operations generated sales of $4.0 million and
$10.0 million and a net loss of $1.1 million (net of
$0.6 million of a tax benefit) and $0.1 million (net
of $0.1 million of a tax benefit) for the six months ended
October 28, 2009 and October 29, 2008, respectively.
(4) | Goodwill and Other Intangible Assets |
Changes in the carrying amount of goodwill for the six months
ended October 28, 2009, by reportable segment, are as
follows:
North |
||||||||||||||||||||||||
American |
||||||||||||||||||||||||
Consumer |
U.S. |
Rest of |
||||||||||||||||||||||
Products | Europe | Asia/Pacific | Foodservice | World | Total | |||||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||||||
Balance at April 29, 2009
|
$ | 1,074,841 | $ | 1,090,998 | $ | 248,222 | $ | 260,523 | $ | 13,204 | $ | 2,687,788 | ||||||||||||
Purchase accounting adjustments
|
| (557 | ) | 4,582 | | | 4,025 | |||||||||||||||||
Disposals
|
| | | (2,059 | ) | | (2,059 | ) | ||||||||||||||||
Translation adjustments
|
12,573 | 117,914 | 44,676 | | 785 | 175,948 | ||||||||||||||||||
Balance at October 28, 2009
|
$ | 1,087,414 | $ | 1,208,355 | $ | 297,480 | $ | 258,464 | $ | 13,989 | $ | 2,865,702 | ||||||||||||
The Company completed the sale of its Kabobs frozen hors
doeuvres business within the U.S. Foodservice segment
during the second quarter of Fiscal 2010 resulting in disposals
of goodwill, trademarks and other intangible assets. The
purchase accounting adjustments reflected in the above table
relate to acquisitions completed prior to April 30, 2009, the
first day of Fiscal 2010.
9
Trademarks and other intangible assets at October 28, 2009
and April 29, 2009, subject to amortization expense, are as
follows:
October 28, 2009 | April 29, 2009 | |||||||||||||||||||||||
Accum |
Accum |
|||||||||||||||||||||||
Gross | Amort | Net | Gross | Amort | Net | |||||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||||||
Trademarks
|
$ | 289,553 | $ | (77,073 | ) | $ | 212,480 | $ | 272,710 | $ | (71,138 | ) | $ | 201,572 | ||||||||||
Licenses
|
208,186 | (149,649 | ) | 58,537 | 208,186 | (146,789 | ) | 61,397 | ||||||||||||||||
Recipes/processes
|
77,023 | (24,753 | ) | 52,270 | 72,988 | (22,231 | ) | 50,757 | ||||||||||||||||
Customer-related assets
|
190,640 | (45,478 | ) | 145,162 | 179,657 | (38,702 | ) | 140,955 | ||||||||||||||||
Other
|
68,711 | (55,843 | ) | 12,868 | 68,128 | (55,091 | ) | 13,037 | ||||||||||||||||
$ | 834,113 | $ | (352,796 | ) | $ | 481,317 | $ | 801,669 | $ | (333,951 | ) | $ | 467,718 | |||||||||||
Amortization expense for trademarks and other intangible assets
was $7.7 million and $7.5 million for the second
quarters ended October 28, 2009 and October 29, 2008,
respectively, and $14.7 million and $15.3 million for
the six months ended October 28, 2009 and October 29,
2008, respectively. Based upon the amortizable intangible assets
recorded on the balance sheet at October 28, 2009, annual
amortization expense for each of the next five fiscal years is
estimated to be approximately $30 million.
Intangible assets not subject to amortization at
October 28, 2009 totaled $889.0 million and consisted
of $735.4 million of trademarks, $121.1 million of
recipes/processes, and $32.5 million of licenses.
Intangible assets not subject to amortization at April 29,
2009 totaled $827.4 million and consisted of
$688.2 million of trademarks, $111.6 million of
recipes/processes, and $27.6 million of licenses.
(5) | Income Taxes |
The total amount of gross unrecognized tax benefits for
uncertain tax positions, including positions impacting only the
timing of tax benefits, was $68.1 million and
$86.6 million, at October 28, 2009 and April 29,
2009, respectively. The amount of unrecognized tax benefits
that, if recognized, would impact the effective tax rate was
$48.1 million and $51.9 million, at October 28,
2009 and April 29, 2009, respectively. It is reasonably
possible that the amount of unrecognized tax benefits will
decrease by as much as $12.4 million in the next
12 months due to the expiration of statutes in various
foreign jurisdictions along with the progression of federal,
state, and foreign audits in process.
The Company classifies interest and penalties on tax
uncertainties as a component of the provision for income taxes.
The total amount of interest and penalties accrued at
October 28, 2009 was $18.7 million and
$2.0 million, respectively. The corresponding amounts of
accrued interest and penalties at April 29, 2009 were
$22.5 million and $2.2 million, respectively.
The provision for income taxes consists of provisions for
federal, state 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 various locations and the applicable tax rates. In
the normal course of business, the Company is subject to
examination by taxing authorities throughout the world,
including such major jurisdictions as Australia, Canada, Italy,
the United Kingdom and the United States. The Company has
substantially concluded all U.S. federal income tax matters
for years through Fiscal 2007, all income tax matters in the
United Kingdom for years through Fiscal 2006, all Italian income
tax matters for years through Fiscal 2005, and all Australian
and Canadian income tax matters for years through Fiscal 2004.
10
The effective tax rate for the six months ended October 28,
2009 was 27.0% compared to 28.4% last year. The decrease in the
effective tax rate resulted from tax planning implemented during
the third quarter of Fiscal 2009, along with increased benefits
resulting from second quarter resolutions and settlements of
federal, state, and foreign uncertain tax positions, partially
offset by a prior year discrete benefit resulting from the tax
effects of law changes in the U.K. of approximately
$10 million.
(6) | Employees Stock Incentive Plans and Management Incentive Plans |
At October 28, 2009, the Company had outstanding stock
option awards, restricted stock units and restricted stock
awards issued pursuant to various shareholder-approved plans and
a shareholder-authorized employee stock purchase plan, as
described on pages 55 to 60 of the Companys Annual Report
on
Form 10-K
for the fiscal year ended April 29, 2009. The compensation
cost related to these plans recognized in general and
administrative expenses (G&A), and the related
tax benefit was $11.0 million and $3.5 million for the
second quarter ended October 28, 2009 and
$17.3 million and $5.4 million for the six months
ended October 28, 2009, respectively. The compensation cost
related to these plans recognized in G&A, and the related
tax benefit was $16.3 million and $5.5 million for the
second quarter ended October 29, 2008 and
$23.1 million and $7.9 million for the six months
ended October 29, 2008, respectively.
The Company granted 1,737,557 and 1,516,457 option awards to
employees during the second quarters ended October 28, 2009
and October 29, 2008, respectively. The weighted average
fair value per share of the options granted during the six
months ended October 28, 2009 and October 29, 2008, as
computed using the Black-Scholes pricing model, was $4.70 and
$5.80, respectively. These awards were sourced from the 2000
Stock Option Plan and Fiscal Year 2003 Stock Incentive Plan. The
weighted average assumptions used to estimate the fair values
are as follows:
Six Months Ended | ||||||||
October 28, |
October 29, |
|||||||
2009 | 2008 | |||||||
Dividend yield
|
4.3 | % | 3.2 | % | ||||
Expected volatility
|
20.2 | % | 14.8 | % | ||||
Weighted-average expected life (in years)
|
5.5 | 5.5 | ||||||
Risk-free interest rate
|
2.7 | % | 3.1 | % |
The Company granted 485,986 and 394,058 restricted stock units
to employees during the six months ended October 28, 2009
and October 29, 2008 at weighted average grant prices of
$39.00 and $51.07, respectively.
In June of Fiscal 2010, the Company granted performance awards
as permitted in the Fiscal Year 2003 Stock Incentive Plan,
subject to the achievement of certain performance goals. These
performance awards are tied to the Companys relative Total
Shareholder Return (Relative TSR) Ranking within the
defined Long-term Performance Program (LTPP) peer
group and the
2-year
average after-tax Return on Invested Capital (ROIC)
metrics. The Relative TSR metric is based on the two-year
cumulative return to shareholders from the change in stock price
and dividends paid between the starting and ending dates. The
starting value was based on the average of each LTPP peer group
company stock price for the 60 trading days prior to and
including April 30, 2009. The ending value will be based on
the average stock price for the 60 trading days prior to and
including the close of the Fiscal 2011 year end, plus
dividends paid over the 2 year performance period. The
compensation cost related to current and prior period LTPP
awards recognized in G&A, and the related tax benefit was
$5.4 million and $1.9 million for the second quarter
ended October 28, 2009 and $8.0 million and
$2.7 million for the six months ended October 28,
2009, respectively. The compensation cost related to LTPP awards
recognized in G&A, and the related tax benefit was
$6.6 million and $2.3 million for the second quarter
11
ended October 29, 2008 and $12.7 million and
$4.3 million for the six months ended October 29,
2008, respectively.
(7) | Pensions and Other Post-Retirement Benefits |
The components of net periodic benefit cost are as follows:
Second Quarter Ended | ||||||||||||||||
October 28, 2009 | October 29, 2008 | October 28, 2009 | October 29, 2008 | |||||||||||||
Pension Benefits | Post-Retirement Benefits | |||||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Service cost
|
$ | 7,997 | $ | 8,865 | $ | 1,498 | $ | 1,645 | ||||||||
Interest cost
|
37,922 | 37,901 | 3,770 | 3,866 | ||||||||||||
Expected return on plan assets
|
(53,455 | ) | (54,819 | ) | | | ||||||||||
Amortization of prior service cost
|
539 | 840 | (949 | ) | (951 | ) | ||||||||||
Amortization of unrecognized loss
|
13,615 | 8,519 | 135 | 922 | ||||||||||||
Settlement charge
|
2,089 | | | | ||||||||||||
Net periodic benefit cost
|
$ | 8,707 | $ | 1,306 | $ | 4,454 | $ | 5,482 | ||||||||
Six Months Ended | ||||||||||||||||
October 28, 2009 | October 29, 2008 | October 28, 2009 | October 29, 2008 | |||||||||||||
Pension Benefits | Post-Retirement Benefits | |||||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Service cost
|
$ | 15,786 | $ | 18,765 | $ | 2,969 | $ | 3,339 | ||||||||
Interest cost
|
75,000 | 79,084 | 7,497 | 7,794 | ||||||||||||
Expected return on plan assets
|
(105,775 | ) | (114,277 | ) | | | ||||||||||
Amortization of prior service cost
|
1,077 | 1,727 | (1,901 | ) | (1,897 | ) | ||||||||||
Amortization of unrecognized loss
|
26,935 | 17,570 | 270 | 1,845 | ||||||||||||
Settlement charge
|
2,089 | | | | ||||||||||||
Net periodic benefit cost
|
$ | 15,112 | $ | 2,869 | $ | 8,835 | $ | 11,081 | ||||||||
During the first six months of Fiscal 2010, the Company
contributed $228 million to these defined benefit plans, of
which $200 million was discretionary. The Company expects
to make combined cash contributions of approximately
$260 million in Fiscal 2010, of which $200 million
would be discretionary, however actual contributions may be
affected by pension asset and liability valuations during the
year.
(8) | Segments |
The Companys segments are primarily organized by
geographical area. The composition of segments and measure of
segment profitability are consistent with that used by the
Companys management.
Descriptions of the Companys reportable segments are as
follows:
North American Consumer ProductsThis segment primarily
manufactures, markets and sells ketchup, condiments, sauces,
pasta meals, and frozen potatoes, entrees, snacks, and
12
appetizers to the grocery channels in the United States of
America and includes our Canadian business.
EuropeThis segment includes the Companys operations
in Europe, including Eastern Europe and Russia, and sells
products in all of the Companys categories.
Asia/PacificThis segment includes the Companys
operations in Australia, New Zealand, India, Japan, China, South
Korea, Indonesia, and Singapore. This segments operations
include products in all of the Companys categories.
U.S. FoodserviceThis segment primarily manufactures,
markets and sells branded and customized products to commercial
and non-commercial food outlets and distributors in the United
States of America including ketchup, condiments, sauces, and
frozen soups, desserts and appetizers.
Rest of WorldThis segment includes the Companys
operations in Africa, Latin America, and the Middle East that
sell products in all of the Companys categories.
The Companys management evaluates performance based on
several factors including net sales, operating income, and the
use of capital resources. Inter-segment revenues, items below
the operating income line of the consolidated statements of
income, and certain costs associated with corporation-wide
productivity initiatives are not presented by segment, since
they are excluded from the measure of segment profitability
reviewed by the Companys management.
The following table presents information about the
Companys reportable segments:
Second Quarter Ended | Six Months Ended | |||||||||||||||
October 28, 2009 |
October 29, 2008 |
October 28, 2009 |
October 29, 2008 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Net external sales:
|
||||||||||||||||
North American Consumer Products
|
$ | 791,511 | $ | 827,278 | $ | 1,518,753 | $ | 1,568,460 | ||||||||
Europe
|
858,529 | 887,946 | 1,647,369 | 1,806,137 | ||||||||||||
Asia/Pacific
|
491,957 | 386,158 | 961,191 | 843,971 | ||||||||||||
U.S. Foodservice
|
381,983 | 385,427 | 725,686 | 734,436 | ||||||||||||
Rest of World
|
148,172 | 120,135 | 284,278 | 232,744 | ||||||||||||
Consolidated Totals
|
$ | 2,672,152 | $ | 2,606,944 | $ | 5,137,277 | $ | 5,185,748 | ||||||||
Operating income (loss):
|
||||||||||||||||
North American Consumer Products
|
$ | 200,868 | $ | 191,503 | $ | 385,073 | $ | 359,611 | ||||||||
Europe
|
134,431 | 134,768 | 260,072 | 291,508 | ||||||||||||
Asia/Pacific
|
53,044 | 50,707 | 106,308 | 117,226 | ||||||||||||
U.S. Foodservice
|
43,411 | 37,709 | 75,279 | 63,961 | ||||||||||||
Rest of World
|
20,866 | 14,889 | 38,969 | 27,539 | ||||||||||||
Other:
|
||||||||||||||||
Non-Operating(a)
|
(44,349 | ) | (44,330 | ) | (75,048 | ) | (81,093 | ) | ||||||||
Upfront productivity charges(b)
|
| | (15,749 | ) | | |||||||||||
Consolidated Totals
|
$ | 408,271 | $ | 385,246 | $ | 774,904 | $ | 778,752 | ||||||||
(a) | Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. |
13
(b) | Includes costs associated with targeted workforce reductions and asset write-offs related to a factory closure that were part of a corporation-wide initiative to improve productivity. |
The Companys revenues are generated via the sale of
products in the following categories:
Second Quarter Ended | Six Months Ended | |||||||||||||||
October 28, 2009 |
October 29, 2008 |
October 28, 2009 |
October 29, 2008 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Ketchup and Sauces
|
$ | 1,110,133 | $ | 1,077,067 | $ | 2,178,946 | $ | 2,175,652 | ||||||||
Meals and Snacks
|
1,130,568 | 1,168,681 | 2,078,203 | 2,222,440 | ||||||||||||
Infant/Nutrition
|
291,574 | 267,972 | 583,528 | 577,438 | ||||||||||||
Other
|
139,877 | 93,224 | 296,600 | 210,218 | ||||||||||||
Total
|
$ | 2,672,152 | $ | 2,606,944 | $ | 5,137,277 | $ | 5,185,748 | ||||||||
(9) | Net Income Per Common Share |
The following are reconciliations of income from continuing
operations to income from continuing operations applicable to
common stock and the number of common shares outstanding used to
calculate basic EPS to those shares used to calculate diluted
EPS:
Second Quarter Ended | Six Months Ended | |||||||||||||||
October 28, 2009 |
October 29, 2008 |
October 28, 2009 |
October 29, 2008 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Income from continuing operations attributable to H. J. Heinz
Company
|
$ | 242,977 | $ | 276,033 | $ | 455,989 | $ | 505,757 | ||||||||
Allocation to participating securities (See Note 2)
|
756 | 1,136 | 1,278 | 2,448 | ||||||||||||
Preferred dividends
|
3 | 3 | 6 | 6 | ||||||||||||
Income from continuing operations applicable to common stock
|
$ | 242,218 | $ | 274,894 | $ | 454,705 | $ | 503,303 | ||||||||
Average common shares outstandingbasic
|
315,477 | 313,670 | 315,288 | 312,923 | ||||||||||||
Effect of dilutive securities:
|
||||||||||||||||
Convertible preferred stock
|
105 | 108 | 105 | 106 | ||||||||||||
Stock options, restricted stock and the global stock purchase
plan
|
1,823 | 4,659 | 2,002 | 4,681 | ||||||||||||
Average common shares outstandingdiluted
|
317,405 | 318,437 | 317,395 | 317,710 | ||||||||||||
Diluted earnings per share is based upon the average shares of
common stock and dilutive common stock equivalents outstanding
during the periods presented. Common stock equivalents arising
from dilutive stock options, restricted common stock units, and
the global stock purchase plan are computed using the treasury
stock method.
Options to purchase an aggregate of 6.9 million shares of
common stock for the second quarter and six months ended
October 28, 2009 and 2.5 million shares of common
stock for the second quarter and six months ended
October 29, 2008 were not included in the computation of
diluted
14
earnings per share because inclusion of these options would be
anti-dilutive. These options expire at various points in time
through 2016.
(10) | Comprehensive Income |
The following table provides a summary of comprehensive income
attributable to H. J. Heinz Company:
Second Quarter Ended | Six Months Ended | |||||||||||||||
October 28, 2009 |
October 29, 2008 |
October 28, 2009 |
October 29, 2008 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Net income
|
$ | 237,327 | $ | 282,459 | $ | 456,419 | $ | 516,743 | ||||||||
Other comprehensive income/(loss):
|
||||||||||||||||
Foreign currency translation adjustments
|
164,830 | (830,244 | ) | 507,355 | (838,189 | ) | ||||||||||
Reclassification of net pension and post-retirement benefit
losses to net income
|
10,929 | 2,766 | 19,471 | 11,135 | ||||||||||||
New measurement date provisions
|
| | | 1,506 | ||||||||||||
Net deferred gains/(losses) on derivatives from periodic
revaluations
|
3,170 | 27,687 | (8,354 | ) | 17,846 | |||||||||||
Net deferred losses/(gains) on derivatives reclassified to
earnings
|
5,335 | (1,371 | ) | 151 | 2,948 | |||||||||||
Total comprehensive income/(loss)
|
421,591 | (518,703 | ) | 975,042 | (288,011 | ) | ||||||||||
Comprehensive (income)/loss attributable to the noncontrolling
interest
|
(6,952 | ) | 6,543 | (16,911 | ) | (3 | ) | |||||||||
Comprehensive income/(loss) attributable to H. J. Heinz Company
|
$ | 414,639 | $ | (512,160 | ) | $ | 958,131 | $ | (288,014 | ) | ||||||
15
The following table summarizes the allocation of total
comprehensive income between H. J. Heinz Company and the
noncontrolling interest for the second quarter and six months
ended October 28, 2009:
Second Quarter Ended | Six Months Ended | |||||||||||||||||||||||
H. J. Heinz |
Noncontrolling |
H. J. Heinz |
Noncontrolling |
|||||||||||||||||||||
Company | Interest | Total | Company | Interest | Total | |||||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||||||
Net income
|
$ | 231,435 | $ | 5,892 | $ | 237,327 | $ | 443,999 | $ | 12,420 | $ | 456,419 | ||||||||||||
Other comprehensive income:
|
||||||||||||||||||||||||
Foreign currency translation adjustments
|
163,744 | 1,086 | 164,830 | 502,701 | 4,654 | 507,355 | ||||||||||||||||||
Reclassification of net pension and post-retirement benefit
losses/(gains) to net income
|
10,945 | (16 | ) | 10,929 | 19,527 | (56 | ) | 19,471 | ||||||||||||||||
Net deferred gains/(losses) on derivatives from periodic
revaluations
|
3,193 | (23 | ) | 3,170 | (8,112 | ) | (242 | ) | (8,354 | ) | ||||||||||||||
Net deferred losses/(gains) on derivatives reclassified to
earnings
|
5,322 | 13 | 5,335 | 16 | 135 | 151 | ||||||||||||||||||
Total comprehensive income
|
$ | 414,639 | $ | 6,952 | $ | 421,591 | $ | 958,131 | $ | 16,911 | $ | 975,042 | ||||||||||||
(11) | Changes in Equity |
The following table provides a summary of the changes in the
carrying amounts of total equity, H. J. Heinz Company
shareholders equity and equity attributable to the
noncontrolling interest:
H. J. Heinz Company | ||||||||||||||||||||||||||||
Capital |
Additional |
Retained |
Treasury |
Accum |
Noncontrolling |
|||||||||||||||||||||||
Total | Stock | Capital | Earnings | Stock | OCI | Interest | ||||||||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||||||||||
Balance as of April 29, 2009
|
$ | 1,279,105 | $ | 107,844 | $ | 737,917 | $ | 6,525,719 | $ | (4,881,842 | ) | $ | (1,269,700 | ) | $ | 59,167 | ||||||||||||
Comprehensive
income(1)
|
975,042 | | | 443,999 | | 514,132 | 16,911 | |||||||||||||||||||||
Dividends paid to shareholders of H. J. Heinz Company
|
(266,240 | ) | | | (266,240 | ) | | | | |||||||||||||||||||
Dividends paid to noncontrolling interest
|
(427 | ) | | | | | | (427 | ) | |||||||||||||||||||
Stock options exercised, net of shares tendered for payment
|
5,368 | | (1,722 | ) | | 7,090 | | | ||||||||||||||||||||
Stock option expense
|
5,405 | | 5,405 | | | | | |||||||||||||||||||||
Restricted stock unit activity
|
(386 | ) | | (19,637 | ) | | 19,251 | | | |||||||||||||||||||
Other
|
7,640 | | (2,179 | ) | (318 | ) | 10,137 | | | |||||||||||||||||||
Balance as of October 28, 2009
|
$ | 2,005,507 | $ | 107,844 | $ | 719,784 | $ | 6,703,160 | $ | (4,845,364 | ) | $ | (755,568 | ) | $ | 75,651 | ||||||||||||
(1) | The allocation of the individual components of comprehensive income attributable to H. J. Heinz Company and the noncontrolling interest is disclosed in Note 10. |
16
(12) | Debt and Financing Arrangements |
On June 12, 2009, the Company entered into a three-year
$175 million accounts receivable securitization program.
Under the terms of the agreement, the Company sells, on a
revolving basis, its receivables to a wholly-owned,
bankruptcy-remote-subsidiary. This subsidiary then sells all of
the rights, title and interest in a pool of these receivables to
an unaffiliated entity. After the sale, the Company, as servicer
of the assets, collects the receivables on behalf of the
unaffiliated entity. The amount of receivables sold through this
program as of October 28, 2009 was $126.3 million. The
proceeds from this securitization program are recognized on the
statements of cash flows as a component of operating activities.
On July 29, 2009, H. J. Heinz Finance Company
(HFC), a subsidiary of Heinz, issued
$250 million of 7.125% notes due 2039. The notes are
fully, unconditionally and irrevocably guaranteed by the
Company. The proceeds from the notes were used for payment of
the cash component of the exchange transaction discussed below
as well as various expenses relating to the exchange, and for
general corporate purposes.
On August 6, 2009, HFC issued $681 million of
7.125% notes due 2039 (of the same series as the notes
issued in July 2009), and $217.5 million of cash, in
exchange for $681 million of its outstanding 15.590% dealer
remarketable securities due December 1, 2020. In addition,
HFC terminated a portion of the remarketing option by paying the
remarketing agent a cash payment of $89.0 million. The
exchange transaction was accounted for as a modification of
debt. Accordingly, cash payments used in the exchange, including
the payment to the remarketing agent, have been accounted for as
a reduction in the book value of the debt, and will be amortized
to interest expense under the effective yield method.
Additionally, the Company terminated its $175 million
notional total rate of return swap in August 2009 in connection
with the dealer remarketable securities exchange transaction.
See Note 14 for additional information.
During the second quarter of Fiscal 2010, the Company entered
into a three-year 15 billion Japanese yen denominated
credit agreement (approximately $167 million). This credit
agreement is yen LIBOR based and has been effectively converted
to a U.S. dollar fixed rate facility using cross-currency
interest rate swaps. See Note 14 for additional information.
The Company was in compliance with all of its debt covenants as
of October 28, 2009.
(13) | Fair Value Measurements |
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The fair value hierarchy consists of three levels to prioritize
the inputs used in valuations, as defined below:
Level 1: Observable inputs that reflect
unadjusted quoted prices for identical assets or liabilities in
active markets.
Level 2: Inputs other than quoted prices
included within Level 1 that are observable for the asset
or liability, either directly or indirectly.
Level 3: Unobservable inputs for the asset or
liability.
17
As of October 28, 2009, the fair values of the
Companys assets and liabilities measured on a recurring
basis are categorized as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Assets:
|
||||||||||||||||
Derivatives(a)
|
$ | | $ | 166,093 | $ | | $ | 166,093 | ||||||||
Total assets at fair value
|
$ | | $ | 166,093 | $ | | $ | 166,093 | ||||||||
Liabilities:
|
||||||||||||||||
Derivatives(a)
|
$ | | $ | 35,128 | $ | | $ | 35,128 | ||||||||
Total liabilities at fair value
|
$ | | $ | 35,128 | $ | | $ | 35,128 | ||||||||
As of April 29, 2009, the fair values of the Companys
assets and liabilities measured on a recurring basis are
categorized as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Assets:
|
||||||||||||||||
Derivatives(a)
|
$ | | $ | 219,845 | $ | | $ | 219,845 | ||||||||
Total assets at fair value
|
$ | | $ | 219,845 | $ | | $ | 219,845 | ||||||||
Liabilities:
|
||||||||||||||||
Derivatives(a)
|
$ | | $ | 12,847 | $ | | $ | 12,847 | ||||||||
Total liabilities at fair value
|
$ | | $ | 12,847 | $ | | $ | 12,847 | ||||||||
(a) | Foreign currency derivative contracts are valued based on observable market spot and forward rates, and are classified within Level 2 of the fair value hierarchy. Interest rate swaps are valued based on observable market swap rates, and are classified within Level 2 of the fair value hierarchy. Cross-currency interest rate swaps are valued based on observable market spot and swap rates, and are classified within Level 2 of the fair value hierarchy. The Companys total rate of return swap was terminated in the second quarter of Fiscal 2010. As of April 29, 2009, the total rate of return swap was valued based on observable market swap rates and the Companys credit spread, and was classified within Level 2 of the fair value hierarchy. |
As of October 28, 2009, the fair values of the
Companys liabilities measured on a non-recurring basis are
categorized as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Liabilities:
|
||||||||||||||||
Targeted workforce reduction reserves(a)
|
$ | | $ | | $ | 3,827 | $ | 3,827 | ||||||||
Total liabilities at fair value
|
$ | | $ | | $ | 3,827 | $ | 3,827 | ||||||||
(a) | Targeted workforce reduction reserves are recorded based on employees date of hire, years of service, position level, and current salary, and are classified within Level 3 of the fair value hierarchy. |
The Company also recognized $1.4 million of non-cash asset
write-offs during the first six months of Fiscal 2010 related to
a factory closure. The charge reduced the Companys
carrying value in the assets to net realizable value. The fair
value of the assets was determined based on unobservable inputs.
18
As of October 28, 2009 and April 29, 2009, the
aggregate fair value of the Companys debt obligations,
based on market quotes, approximated the recorded value.
(14) | Derivative Financial Instruments and Hedging Activities |
The Company operates internationally, with manufacturing and
sales facilities in various locations around the world, and
utilizes certain derivative financial instruments to manage its
foreign currency, debt and interest rate exposures. At
October 28, 2009, the Company had outstanding currency
exchange, interest rate, and cross-currency interest rate
derivative contracts with notional amounts of
$1.59 billion, $1.52 billion and $165 million,
respectively. At April 29, 2009, the Company had
outstanding currency exchange, interest rate, and total rate of
return derivative contracts with notional amounts of
$1.25 billion, $1.52 billion and $175 million,
respectively.
The following table presents the fair values and corresponding
balance sheet captions of the Companys derivative
instruments as of October 28, 2009 and April 29, 2009:
October 28, 2009 | April 29, 2009 | |||||||||||||||||||||||
Cross- |
Cross- |
|||||||||||||||||||||||
Currency |
Currency |
|||||||||||||||||||||||
Foreign |
Interest |
Interest Rate |
Foreign |
Interest |
Interest Rate |
|||||||||||||||||||
Exchange |
Rate |
Swap |
Exchange |
Rate |
Swap |
|||||||||||||||||||
Contracts | Contracts | Contracts | Contracts | Contracts | Contracts | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Derivatives designated as hedging instruments:
|
||||||||||||||||||||||||
Other receivables, net
|
$ | 11,906 | $ | 71,432 | $ | | $ | 28,406 | $ | 64,502 | $ | | ||||||||||||
Other non-current assets
|
18,371 | 60,312 | | 8,659 | 86,434 | | ||||||||||||||||||
30,277 | 131,744 | | 37,065 | 150,936 | | |||||||||||||||||||
Derivatives not designated as hedging instruments:
|
||||||||||||||||||||||||
Other receivables, net
|
4,072 | | | 11,644 | | | ||||||||||||||||||
Other non-current assets
|
| | | | 20,200 | | ||||||||||||||||||
4,072 | | | 11,644 | 20,200 | | |||||||||||||||||||
Total assets
|
$ | 34,349 | $ | 131,744 | $ | | $ | 48,709 | $ | 171,136 | $ | | ||||||||||||
Liabilities:
|
||||||||||||||||||||||||
Derivatives designated as hedging instruments:
|
||||||||||||||||||||||||
Other payables
|
$ | 23,070 | $ | | $ | 3,201 | $ | 12,198 | $ | | $ | | ||||||||||||
Other liabilities
|
| | 1,377 | 598 | | | ||||||||||||||||||
23,070 | | 4,578 | 12,796 | | | |||||||||||||||||||
Derivatives not designated as hedging instruments:
|
||||||||||||||||||||||||
Other payables
|
7,480 | | | 51 | | | ||||||||||||||||||
Other liabilities
|
| | | | | | ||||||||||||||||||
7,480 | | | 51 | | | |||||||||||||||||||
Total liabilities
|
$ | 30,550 | $ | | $ | 4,578 | $ | 12,847 | $ | | $ | | ||||||||||||
19
Refer to
Note 13Fair
Value Measurements for further information on how fair value is
determined for the Companys derivatives.
The following table presents the effect of derivative
instruments on the statement of income for the second quarter
ended October 28, 2009:
Second Quarter Ended | ||||||||||||
October 28, 2009 | ||||||||||||
Cross-Currency |
||||||||||||
Foreign Exchange |
Interest Rate |
Interest Rate |
||||||||||
Contracts | Contracts | Swap Contracts | ||||||||||
(Dollars in Thousands) | ||||||||||||
Cash flow hedges:
|
||||||||||||
Net gains/(losses) recognized in other comprehensive loss
(effective portion)
|
$ | 9,413 | $ | | $ | (4,578 | ) | |||||
Net gains/(losses) reclassified from other comprehensive loss
into earnings (effective portion):
|
||||||||||||
Sales
|
$ | 28 | $ | | $ | | ||||||
Cost of products sold
|
(3,934 | ) | | | ||||||||
Selling, general and administrative expenses
|
274 | | | |||||||||
Other expense, net
|
(1,721 | ) | | (2,028 | ) | |||||||
Interest expense
|
(3 | ) | | (123 | ) | |||||||
(5,356 | ) | | (2,151 | ) | ||||||||
Fair value hedges:
|
||||||||||||
Net gains recognized in other expense, net
|
| 2,799 | | |||||||||
Derivatives not designated as hedging instruments:
|
||||||||||||
Net gains recognized in other expense, net
|
3,205 | | | |||||||||
Net gains recognized in interest income
|
| 10,415 | | |||||||||
3,205 | 10,415 | | ||||||||||
Total amount recognized in statement of income
|
$ | (2,151 | ) | $ | 13,214 | $ | | |||||
20
The following table presents the effect of derivative
instruments on the statement of income for the six months ended
October 28, 2009:
Six Months Ended | ||||||||||||
October 28, 2009 | ||||||||||||
Cross-Currency |
||||||||||||
Foreign Exchange |
Interest Rate |
Interest Rate |
||||||||||
Contracts | Contracts | Swap Contracts | ||||||||||
(Dollars in Thousands) | ||||||||||||
Cash flow hedges:
|
||||||||||||
Net losses recognized in other comprehensive loss (effective
portion)
|
$ | (7,530 | ) | $ | | $ | (4,578 | ) | ||||
Net gains/(losses) reclassified from other comprehensive loss
into earnings
(effective portion): |
||||||||||||
Sales
|
$ | 1,365 | $ | | $ | | ||||||
Cost of products sold
|
2,165 | | | |||||||||
Selling, general and administrative expenses
|
137 | | | |||||||||
Other expense, net
|
(2,636 | ) | | (2,028 | ) | |||||||
Interest expense
|
2 | | (123 | ) | ||||||||
1,033 | | (2,151 | ) | |||||||||
Fair value hedges:
|
||||||||||||
Net losses recognized in other expense, net
|
| (19,192 | ) | | ||||||||
Derivatives not designated as hedging instruments:
|
||||||||||||
Net gains recognized in other expense, net
|
13,166 | | | |||||||||
Net gains recognized in interest income
|
| 30,469 | | |||||||||
13,166 | 30,469 | | ||||||||||
Total amount recognized in statement of income
|
$ | 14,199 | $ | 11,277 | $ | | ||||||
Foreign
Currency Hedging:
The Company uses forward contracts and to a lesser extent,
option contracts to mitigate its foreign currency exchange rate
exposure due to forecasted purchases of raw materials and sales
of finished goods, and future settlement of foreign currency
denominated assets and liabilities. The Companys principal
foreign currency exposures include the Australian dollar,
British pound sterling, Canadian dollar, euro, and the New
Zealand dollar. Derivatives used to hedge forecasted
transactions and specific cash flows associated with foreign
currency denominated financial assets and liabilities that meet
the criteria for hedge accounting are designated as cash flow
hedges. Consequently, the effective portion of gains and losses
is deferred as a component of accumulated other comprehensive
loss and is recognized in earnings at the time the hedged item
affects earnings, in the same line item as the underlying hedged
item.
The Company uses certain foreign currency debt instruments as
net investment hedges of foreign operations. For the six months
ended October 28, 2009, losses of $29.3 million, net
of income taxes of $18.5 million, which represented
effective hedges of net investments, were reported as a
component of accumulated other comprehensive loss within
unrealized translation adjustment.
21
Interest
Rate Hedging:
The Company uses interest rate swaps to manage debt and interest
rate exposures. The Company is exposed to interest rate
volatility with regard to existing and future issuances of fixed
and floating rate debt. Primary exposures include
U.S. Treasury rates, London Interbank Offered Rates
(LIBOR), and commercial paper rates in the United States.
Derivatives used to hedge risk associated with changes in the
fair value of certain fixed-rate debt obligations are primarily
designated as fair value hedges. Consequently, changes in the
fair value of these derivatives, along with changes in the fair
value of the hedged debt obligations that are attributable to
the hedged risk, are recognized in current period earnings.
The Company had outstanding cross-currency interest rate swaps
with a total notional amount of $165.3 million as of
October 28, 2009, which were designated as cash flow hedges
of the future payments of loan principal and interest associated
with certain foreign denominated variable rate debt obligations.
These contracts are scheduled to mature in Fiscal 2013.
Deferred
Hedging Gains and Losses:
As of October 28, 2009, the Company is hedging forecasted
transactions for periods not exceeding 5 years. During the
next 12 months, the Company expects $1.5 million of
net deferred gains reported in accumulated other comprehensive
loss to be reclassified to earnings, assuming market rates
remain constant through contract maturities. Hedge
ineffectiveness related to cash flow hedges, which is reported
in current period earnings as other expense, net, was not
significant for the second quarter and six months ended
October 28, 2009 and October 29, 2008. Amounts
reclassified to earnings because the hedged transaction was no
longer expected to occur were not significant for the second
quarter and six months ended October 28, 2009 and
October 29, 2008.
Other
Activities:
The Company enters into certain derivative contracts in
accordance with its risk management strategy that do not meet
the criteria for hedge accounting but which have the economic
impact of largely mitigating foreign currency or interest rate
exposures. The Company maintained foreign currency forward
contracts with a total notional amount of $509.2 million
and $349.1 million that did not meet the criteria for hedge
accounting as of October 28, 2009 and April 29, 2009,
respectively. These forward contracts are accounted for on a
full
mark-to-market
basis through current earnings, with gains and losses recorded
as a component of other expense, net. Net unrealized
(losses)/gains related to outstanding contracts totaled
$(3.4) million and $11.6 million as of
October 28, 2009 and April 29, 2009, respectively.
These contracts are scheduled to mature within one year.
Forward contracts that were put in place to help mitigate the
unfavorable impact of translation associated with key foreign
currencies resulted in gains of $0.3 million and losses of
$4.3 million for the second quarter and six months ended
October 28, 2009, respectively, and gains of
$92.4 million and $91.2 million for the second quarter
and six months ended October 29, 2008, respectively.
During the second quarter of Fiscal 2010, the Company terminated
its $175 million notional total rate of return swap that
was being used as an economic hedge to reduce a portion of the
interest cost related to the Companys remarketable
securities. The unwinding of the total rate of return swap was
completed in conjunction with the exchange of $681 million
of dealer remarketable securities discussed in Note 12.
Upon termination of the swap, the Company received net cash
proceeds of $47.6 million, in addition to the return of the
$192.7 million of restricted cash collateral that the
Company was required to maintain with the counterparty for the
term of the swap. Prior to termination, the swap was being
accounted for on a full
mark-to-market
basis through earnings, as a component of interest income. The
Company
22
recorded a benefit in interest income of $3.6 million in
the second quarter ended October 28, 2009, and
$28.3 million in the six months ended October 28,
2009, representing changes in the fair value of the swap and
interest earned on the arrangement, net of transaction fees. Net
unrealized gains related to this swap totaled $20.2 million
as of April 29, 2009.
Concentration
of Credit Risk:
Counterparties to currency exchange and interest rate
derivatives consist of major international financial
institutions. The Company continually monitors its positions and
the credit ratings of the counterparties involved and, by
policy, limits the amount of credit exposure to any one party.
While the Company may be exposed to potential losses due to the
credit risk of non-performance by these counterparties, losses
are not anticipated. The Company closely monitors the credit
risk associated with its counterparties and customers and to
date has not experienced material losses.
(15) | Subsequent Events |
On November 23, 2009, the Company completed the sale of its
private label frozen desserts business in the U.K. This business
had annual sales of approximately $82 million in Fiscal 2009.
The disposal transaction included two factories in Okehampton
and Leamington Spa, England. As a result of this transaction,
the Company will recognize a pretax loss of approximately $33
million ($25 million after-tax), which will be recorded in
discontinued operations in the third quarter of Fiscal 2010. The
sale is not expected to significantly affect the Companys
profit on a continuing operations basis going forward.
Also, on November 23, 2009, the Company acquired
Arthurs Fresh Company, a small chilled smoothies business
in Canada.
23
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Executive
Overview
The Company has adapted its strategies to address the current
global economic environment, with an emphasis on:
| Investing behind core brands and proven ideas and driving growth through innovation; | |
| Shifting investments in marketing and research and development toward delivering value to consumers; | |
| Continuing its focus on emerging markets where economic growth remains well above the global average; | |
| Increasing margins through productivity initiatives, reductions in discretionary spending and tight management of fixed costs; and | |
| Increasing cash flow through reductions in inventory and tight management of capital spending. |
During the second quarter of Fiscal 2010, the Company reported
diluted earnings per share from continuing operations of $0.76,
compared to $0.86 in the prior year. At the beginning of the
second quarter of Fiscal 2009, Heinz entered into foreign
currency contracts to help mitigate the translation impact of
potentially unfavorable movements in key foreign currencies for
the full year. Subsequently during that quarter, there was a
precipitous decline in foreign currency translation rates versus
the U.S. dollar. As a result, the Fiscal 2009 second
quarter earnings included a $92 million gain or $0.18 per
share benefit from these currency contracts. During the first
half of Fiscal 2010, foreign currency rates have strengthened
versus the U.S. dollar but continue to unfavorably impact
the Companys financial results. Despite these currency
headwinds, Heinz reported increased sales and operating income
in the quarter versus prior year. Excluding the impact of
currency translation contracts, as well as foreign currency
movements on translation and particular transactions, such as
inventory sourcing, EPS would have also experienced growth
versus prior year. Overall, the Company remains confident in its
underlying business fundamentals and plans to continue executing
its strategy.
Discontinued
Operations
During the second quarter of Fiscal 2010, the Company completed
the sale of its non-core Kabobs frozen hors doeuvres
business which was previously reported within the
U.S. Foodservice segment, resulting in a $15.0 million
pre-tax ($10.9 million after-tax) loss which has been
recorded in discontinued operations.
In accordance with accounting principles generally accepted in
the United States of America, the operating results related to
this business have been included in discontinued operations in
the Companys consolidated statements of income for all
periods presented. These discontinued operations generated sales
of $1.2 million and $5.6 million and a net loss of
$0.6 million (net of $0.3 million of a tax benefit)
and net income of $0.7 million (net of $0.4 million in
tax expense) for the second quarters ended October 28, 2009
and October 29, 2008, respectively. These discontinued
operations generated sales of $4.0 million and
$10.0 million and a net loss of $1.1 million (net of
$0.6 million of a tax benefit) and $0.1 million (net
of $0.1 million of a tax benefit) for the six months ended
October 28, 2009 and October 29, 2008, respectively.
24
THREE
MONTHS ENDED OCTOBER 28, 2009 AND OCTOBER 29, 2008
Results
of Continuing Operations
Sales for the three months ended October 28, 2009 increased
$65 million, or 2.5%, to $2.67 billion. Net pricing
increased sales by 4.6%, largely due to the carryover impact of
price increases taken in Fiscal 2009 across the Companys
portfolio to help offset increased commodity costs. Volume
decreased 4.1%, as favorable volume in emerging markets was more
than offset by declines in the U.S. and U.K. businesses.
Volume for the quarter was impacted by customer buy-ins
preceeding price increases in the U.S. and U.K. taken near the
end of the second quarter last year, as well as reduced foot
traffic in U.S. restaurants this year. Emerging markets
continued to be an important growth driver, with combined volume
and pricing gains of 11.7%. Acquisitions, net of divestitures,
increased sales by 3.1%. Foreign exchange translation rates
reduced sales by 1.0% compared to the second quarter of the
prior year, reflecting the impact of a stronger U.S. dollar.
Gross profit increased $39 million, or 4.2%, to
$957 million, and the gross profit margin increased to
35.8% from 35.2%, as higher net pricing, productivity
improvements and the favorable impact from acquisitions were
partially offset by higher commodity costs, including the impact
of transaction currency costs, lower volume and the unfavorable
impact from foreign exchange translation rates. Acquisitions had
a favorable impact on gross profit dollars but reduced overall
gross profit margin.
Selling, general and administrative expenses
(SG&A) increased $16 million, or 3.0%, to
$549 million, but remained flat as a percentage of sales at
20.5%. The $16 million increase primarily reflects
increased investments in marketing as well as higher pension
expense, partially offset by lower selling and distribution
expenses (S&D). The S&D improvement is due
to reduced volume and fuel costs, partially offset by increases
from acquisitions.
Operating income increased $23 million, or 6.0%, to
$408 million, reflecting the items above, particularly
higher pricing and productivity improvements, partially offset
by higher commodity costs.
Net interest expense decreased $9 million, to
$64 million, reflecting a $12 million decrease in
interest expense and a $3 million decrease in interest
income. Interest expense and interest income were both impacted
by lower average interest rates. Other expenses, net, increased
$92 million primarily due to an $85 million decrease
in currency gains, and $8 million of charges recognized in
connection with the August 2009 dealer remarketable securities
exchange transaction (see below in Liquidity and Financial
Position for further explanation of this transaction). The
decrease in currency gains reflects prior year gains of
$92 million related to forward contracts that were put in
place to help mitigate the unfavorable impact of translation
associated with key foreign currencies for all of Fiscal 2009.
The effective tax rate for the current quarter was 25.6%, an
improvement of 300 basis points compared to 28.6% last
year. The decrease in the effective tax rate was due to tax
planning implemented during the third quarter of Fiscal 2009,
along with increased benefits resulting from second quarter
resolutions and settlements of federal, state, and foreign
uncertain tax positions, partially offset by higher repatriation
costs.
Income from continuing operations attributable to H. J. Heinz
Company was $243 million compared to $276 million in
the prior year, a decrease of 12.0%. The decrease is due to the
prior year currency gains discussed above, partially offset by
higher operating income, reduced net interest expense and a
lower effective tax rate. Diluted earnings per share from
continuing operations was $0.76 in the current year compared to
$0.86 (which included the $0.18 benefit from currency contracts)
in the prior year, down 11.6%.
The translation impact of fluctuating exchange rates in Fiscal
2010 has had a relatively consistent impact on all components of
operating income on the consolidated statement of income.
25
The impact of cross currency sourcing of inventory reduced gross
profit and operating income but did not affect sales.
OPERATING
RESULTS BY BUSINESS SEGMENT
North
American Consumer Products
Sales of the North American Consumer Products segment decreased
$36 million, or 4.3%, to $792 million. Net prices grew
3.3% reflecting the carryover impact of price increases taken
across the majority of the product portfolio in Fiscal 2009 to
help offset higher commodity costs. Volume decreased 8.0%,
primarily due to a buy-in by customers in the prior year in
anticipation of price increases. In addition, our frozen food
volume declined as a result of category softness and aggressive
competitor promotional activity. We expect better volume
comparisons across the balance of Fiscal 2010, aided by planned
investments in marketing and promotions. Volume improvements
were noted on
Delimex®
products, due to new distribution and lapping a prior year
supply interruption.
Heinz®
ketchup volume also improved versus prior year. Favorable
Canadian exchange translation rates increased sales 0.4%.
Gross profit increased $7 million, or 2.1%, to
$337 million, and the gross profit margin increased to
42.6% from 39.9%, as increased pricing and productivity
improvements more than offset increased commodity costs and the
impact of unfavorable volume. Operating income increased
$9 million, or 4.9%, to $201 million, reflecting the
improvement in gross profit and reduced S&D, partially
offset by increased marketing investment. The improvement in
S&D was a result of productivity projects, tight cost
control and reduced fuel costs.
Europe
Heinz Europe sales decreased $29 million, or 3.3%, to
$859 million, due to unfavorable foreign exchange
translation rates, which decreased sales by 5.1%. Net pricing
increased 3.8%, driven by the carryover impact of price
increases taken in Fiscal 2009, partially offset by increased
promotional activity on
Heinz®
ketchup and soup in the U.K. Volume decreased 2.1%, mainly due
to declines in
Heinz®
beans and pasta meals, frozen products in the U.K., and the
rationalization of low-margin private label sauces in France.
Volume was also impacted by a buy-in by customers in the U.K. in
the prior year in anticipation of price increases. Volume
improvements were posted on soups in the U.K. and Germany as
well as ketchup and infant feeding products in Russia.
Gross profit decreased $10 million, or 3.1%, to
$306 million, and the gross profit margin increased
slightly to 35.7% from 35.6%. The decline in gross profit is
largely due to unfavorable foreign exchange translation rates,
the cross currency rate movements in the British Pound versus
the euro and U.S. dollar and increased commodity costs.
These declines were partially mitigated by higher pricing and
productivity improvements. Operating income was flat versus
prior year at $134 million, reflecting unfavorable foreign
currency translation and transaction impacts.
Asia/Pacific
Heinz Asia/Pacific sales increased $106 million, or 27.4%,
to $492 million. Acquisitions increased sales 20.3% due to
the prior year acquisitions of Golden Circle Limited, a
health-oriented fruit and juice business in Australia, and
La Bonne Cuisine, a chilled dip business in New Zealand.
Pricing increased 3.4%, reflecting current and prior year
increases on
ABC®
sauces, syrup and drinks in Indonesia as well as both reduced
promotions and the carryover impact of prior year price
increases in New Zealand. These increases were partially offset
by reduced pricing on Long
Fong®
frozen products in China due to increased promotions. Volume
decreased 0.3%, as significant growth in
Complan®
and Glucon
D®
nutritional beverages in India was offset by seasonality-related
(i.e., Ramadan holiday) declines in
ABC®
syrup and sardines in Indonesia. Favorable exchange translation
rates increased sales by 4.0%.
26
Gross profit increased $23 million, or 17.9%, to
$152 million, and the gross profit margin declined to 30.8%
from 33.3%. The increase in gross profit was due to higher
pricing, productivity improvements and favorable foreign
exchange translation rates. These improvements were partially
offset by increased commodity costs, including the impact of
cross-currency rates on inventory costs, and declines in our
Long
Fong®
business where we are revising our distribution system and
streamlining product offerings. Acquisitions had a favorable
impact on gross profit dollars but reduced overall gross profit
margin. Operating income increased by $2 million, or 4.6%,
to $53 million, primarily reflecting the increase in gross
profit, partially offset by increased SG&A related to
acquisitions.
U.S.
Foodservice
Sales of the U.S. Foodservice segment decreased
$3 million, or 0.9%, to $382 million. Pricing
increased sales 4.7%, largely due to the carryover impact of
prior year price increases on
Heinz®
ketchup, portion control condiments, tomato products and frozen
soup as well as decreased promotional spending on portion
control condiments. Volume decreased by 5.6%, as increases in
frozen desserts driven by casual dining customer promotions were
more than offset by volume declines in the balance of the
portfolio. The volume reflects softness in U.S. restaurant
traffic, promotional timing, increased competition, and planned
SKU eliminations.
Gross profit increased $8 million, or 7.8%, to
$107 million, and the gross profit margin increased to
28.1% from 25.8%, as pricing and productivity improvements more
than offset unfavorable volume. Operating income increased
$6 million, or 15.1%, to $43 million, which is
primarily due to gross profit improvements and reduced S&D
reflecting productivity projects, tight cost control and reduced
fuel costs. These improvements were partially offset by higher
G&A resulting from increased incentive compensation
accruals.
Rest of
World
Sales for Rest of World increased $28 million, or 23.3%, to
$148 million. Higher pricing increased sales by 22.6%,
largely due to current and prior year price increases in Latin
America taken to mitigate the impact of raw material and labor
inflation. Volume increased 0.7% as increases in baby food in
Latin America were partially offset by declines in the Middle
East and South Africa. Acquisitions increased sales 1.0% due to
the prior year acquisition of Papillon, a chilled products
business in South Africa. Foreign exchange translation rates
decreased sales 1.0%.
Gross profit increased $13 million, or 30.4%, to
$55 million, due mainly to increased pricing, partially
offset by increased commodity costs. Operating income increased
$6 million, or 40.1% to $21 million.
SIX
MONTHS ENDED OCTOBER 28, 2009 AND OCTOBER 29, 2008
Results
of Continuing Operations
Sales for the six months ended October 28, 2009 decreased
$48 million, or 0.9%, to $5.14 billion. Foreign
exchange translation rates reduced sales by 5.0% compared to the
prior year, reflecting the impact of a stronger
U.S. dollar. Net pricing increased sales by 5.3%, largely
due to the carryover impact of broad based price increases taken
in Fiscal 2009 to help offset increased commodity costs. Volume
decreased 4.2%, as favorable volume in emerging markets was more
than offset by declines in the U.S. and U.K. businesses.
Volume for the first six months was impacted by customer buy-ins
preceeding price increases in the U.S. and U.K. taken near the
end of the second quarter last year, as well as reduced foot
traffic in U.S. restaurants this year. Emerging markets
continued to be an important growth driver, with combined volume
and pricing gains of 12.7%. Acquisitions, net of divestitures,
increased sales by 3.0%.
27
Gross profit decreased $21 million, or 1.2%, to
$1.83 billion, and the gross profit margin was steady at
35.7%, as higher net pricing, productivity improvements and the
favorable impact from acquisitions were more than offset by an
$87 million unfavorable impact from foreign exchange
translation rates as well as higher commodity costs, including
transaction currency costs, and lower volume. Acquisitions had a
favorable impact on gross profit dollars but reduced overall
gross profit margin. In addition, gross profit was unfavorably
impacted by $7 million from targeted workforce reductions
and non-cash asset write-offs related to a factory closure.
SG&A decreased $18 million, or 1.6%, to
$1.06 billion, and improved slightly as a percentage of
sales to 20.6% from 20.7%. The $18 million decline reflects
a $49 million impact from foreign exchange translation
rates, the Companys focus on tight cost control and lower
fuel costs. These declines were partially offset by increases
from acquisitions, additional marketing investments, inflation
in Latin America, $9 million related to targeted workforce
reductions in the current year and higher pension expense.
Operating income decreased $4 million, or 0.5%, to
$775 million, reflecting the items above, including a
$39 million (5.0%) unfavorable impact from foreign exchange
translation rates and $16 million of charges for targeted
workforce reductions and non-cash asset write-offs related to a
factory closure.
Net interest expense decreased $18 million, to
$118 million, reflecting a $4 million decrease in
interest expense and a $14 million increase in interest
income. Interest expense decreased due to lower average interest
rates, partially offset by the higher coupon on the dealer
remarketable securities for the current year period preceding
the exchange transaction that took place in August 2009 (see
below in Liquidity and Financial Position for
further explanation of this transaction). The increase in
interest income is due to a $24 million gain on a total
rate of return swap, which was terminated in August 2009 in
connection with the dealer remarketable securities exchange
transaction (see Note 14, Derivative Financial
Instruments and Hedging Activities for additional
information). This gain was partially offset by decreases in
interest income from the impact of lower average interest rates.
Other expenses, net, increased $95 million primarily due to
an $88 million decrease in currency gains, and
$8 million of charges recognized in connection with the
August 2009 dealer remarketable securities exchange transaction.
The decrease in currency gains reflects prior year gains of
$91 million related to forward contracts that were put in
place to help mitigate the unfavorable impact of translation
associated with key foreign currencies for all of Fiscal 2009.
The effective tax rate for the six months ended October 28,
2009 was 27.0% compared to 28.4% last year. The decrease in the
effective tax rate resulted from tax planning implemented during
the third quarter of Fiscal 2009, along with increased benefits
resulting from second quarter resolutions and settlements of
federal, state, and foreign uncertain tax positions, partially
offset by a prior year discrete benefit resulting from the tax
effects of law changes in the U.K. of approximately
$10 million.
Income from continuing operations attributable to H. J. Heinz
Company was $456 million compared to $506 million in
the prior year, a decrease of 9.8%. The decrease is due to the
prior year currency gains discussed above, unfavorable foreign
exchange rates and $12 million in after-tax charges ($0.04
per share) for targeted workforce reductions and non-cash asset
write-offs, partially offset by reduced net interest expense and
a lower effective tax rate. Diluted earnings per share from
continuing operations was $1.43 in the current year compared to
$1.58 in the prior year, down 9.5%.
The translation impact of fluctuating exchange rates in Fiscal
2010 has had a relatively consistent impact on all components of
operating income on the consolidated statement of income. The
impact of cross currency sourcing of inventory reduced gross
profit and operating income but did not affect sales.
28
OPERATING
RESULTS BY BUSINESS SEGMENT
North
American Consumer Products
Sales of the North American Consumer Products segment decreased
$50 million, or 3.2%, to $1.52 billion. Net prices
grew 4.3% reflecting the carryover impact of price increases
taken across the majority of the product portfolio in Fiscal
2009 to help offset higher commodity costs. Volume decreased
6.6%, almost half of which related to customer buy-ins last year
in advance of price increases. In addition, our frozen food
volume declined due to category softness and aggressive
competitor promotional activity. Volume declines were also noted
in
Heinz®
ketchup and gravy and
Classico®
pasta sauces. We expect better volume comparisons across the
balance of Fiscal 2010, aided by planned investments in
marketing and promotions. Unfavorable Canadian exchange
translation rates decreased sales 0.9%.
Gross profit increased $16 million, or 2.6%, to
$647 million, and the gross profit margin increased to
42.6% from 40.2%, as increased pricing and productivity
improvements more than offset the impact from unfavorable
volume, increased commodity costs and unfavorable foreign
exchange translation rates. Operating income increased
$25 million, or 7.1%, to $385 million, reflecting the
improvement in gross profit and reduced S&D, partially
offset by increased marketing investment. The improvement in
S&D was a result of productivity projects, tight cost
control and reduced fuel costs.
Europe
Heinz Europe sales decreased $159 million, or 8.8%, to
$1.65 billion. Unfavorable foreign exchange translation
rates decreased sales by 11.2%. Net pricing increased 4.5%,
driven by the carryover impact of price increases taken in
Fiscal 2009, partially offset by increased promotions on
Heinz®
ketchup and soup in the U.K. Volume decreased 3.2%, principally
due to reduced promotions on
Heinz®
beans and pasta meals and declines on frozen products in the
U.K., reflecting reduced promotions, unfavorable mix and
increased competitor promotional activity. Volume for infant
nutrition products in the U.K. and Italy also declined, along
with decreases in France from the rationalization of low-margin
private label sauces. Volume was also impacted by a buy-in by
customers in the U.K. in the prior year in anticipation of price
increases. Volume improvements were posted on soups in the U.K.
and Germany as well as ketchup and infant feeding products in
Russia. Acquisitions increased sales 1.2%, due to the
acquisition of the
Bénédicta®
sauce business in France in the second quarter of Fiscal 2009.
Gross profit decreased $83 million, or 12.3%, to
$590 million, and the gross profit margin decreased to
35.8% from 37.2%. The decline in gross profit is largely due to
unfavorable foreign exchange translation rates, the cross
currency rate movements in the British Pound versus the euro and
U.S. dollar, increased commodity costs and lower volume.
These declines were partially mitigated by higher pricing,
productivity improvements and the favorable impact from the
Bénédicta®
acquisition. Operating income decreased $31 million, or
10.8%, to $260 million, reflecting unfavorable foreign
currency translation and transaction impacts.
Asia/Pacific
Heinz Asia/Pacific sales increased $117 million, or 13.9%,
to $961 million. Acquisitions increased sales 16.1% due to
the prior year acquisitions of Golden Circle Limited, a
health-oriented fruit and juice business in Australia, and
La Bonne Cuisine, a chilled dip business in New Zealand.
Unfavorable exchange translation rates decreased sales by 4.7%.
Pricing increased 3.7%, reflecting current and prior year
increases on
ABC®
sauces, syrup and drinks in Indonesia as well as both reduced
promotions and the carryover impact of prior year price
increases in New Zealand. This was partially offset by reduced
pricing on Long
Fong®
frozen products in China due to increased promotions. Volume
decreased 1.3%, as significant growth in
Complan®
and Glucon
D®
nutritional
29
beverages in India were more than offset by declines on Long
Fong
®
frozen products in China,
ABC®
sardines in Indonesia and general softness in both Australia and
New Zealand, which are being impacted by competitive activity.
Gross profit increased $13 million, or 4.6%, to
$299 million, and the gross profit margin declined to 31.1%
from 33.9%. The increase in gross profit was due to higher
pricing and productivity improvements. These increases were
partially offset by increased commodity costs, which include the
impact of cross-currency rates on inventory costs, unfavorable
foreign exchange translation rates and declines in our Long
Fong®
business where we are revising our distribution system and
streamlining product offerings. Acquisitions had a favorable
impact on gross profit dollars but reduced overall gross profit
margin. Operating income decreased by $11 million, or 9.3%,
to $106 million, as increased SG&A, largely due to
acquisitions and increased marketing investments, more than
offset the increase in gross profit.
U.S.
Foodservice
Sales of the U.S. Foodservice segment decreased
$9 million, or 1.2%, to $726 million. Pricing
increased sales 5.2%, largely due to the carryover impact of
prior year price increases on
Heinz®
ketchup, portion control condiments, tomato products and frozen
soup as well as decreased promotional spending on portion
control condiments. Volume decreased by 5.6%, due to softness in
U.S. restaurant traffic and sales, promotional timing,
targeted SKU reductions, and increased competition. Divestitures
reduced sales 0.8%.
Gross profit increased $16 million, or 9.0%, to
$195 million, and the gross profit margin increased to
26.9% from 24.4%, as pricing and productivity improvements more
than offset unfavorable volume and the impact of reduced
inventory levels. Operating income increased $11 million,
or 17.7%, to $75 million, which is primarily due to gross
profit improvements and reduced S&D reflecting productivity
projects, tight cost control and reduced fuel costs. These
improvements were partially offset by higher G&A resulting
from increased incentive compensation accruals and a prior year
gain on the sale of a small, non-core portion control business.
Rest of
World
Sales for Rest of World increased $52 million, or 22.1%, to
$284 million. Foreign exchange translation rates decreased
sales 2.0%. Higher pricing increased sales by 24.3%, largely due
to current and prior year price increases in Latin America taken
to mitigate the impact of raw material and labor inflation.
Volume decreased 1.2% as declines in the Middle East and South
Africa were partially offset by increases in ketchup and baby
food in Latin America. Acquisitions increased sales 1.0% due to
the prior year acquisition of Papillon, a chilled products
business in South Africa.
Gross profit increased $25 million, or 30.8%, to
$105 million, due mainly to increased pricing, partially
offset by increased commodity costs. Operating income increased
$11 million, or 41.5% to $39 million, as the increase
in gross profit was partially offset by higher S&D and
G&A reflecting inflation in Latin America.
Liquidity
and Financial Position
For the first six months of Fiscal 2010, cash provided by
operating activities was $509 million compared to
$214 million in the prior year. The significant improvement
in the first six months of Fiscal 2010 versus Fiscal 2009 was
primarily due to favorable movements in receivables and
inventories and reduced tax payments. Additionally,
$126 million of cash was received in the current year in
connection with an accounts receivable securitization program
(see additional explanation below), which partially offset
discretionary contributions made in Fiscal 2010 to fund the
Companys pension plans. In Fiscal 2010, the Company also
received $48 million of cash from the termination of a
total rate of return swap and $32 million of cash from the
maturity of foreign currency contracts that were used as an
economic hedge of certain intercompany transactions. In the
prior year, the Company
30
received $82 million of cash from the settlement and
maturity of foreign currency contracts that were put in place to
help mitigate the impact of translation associated with key
foreign currencies (see Note 14, Derivative Financial
Instruments and Hedging Activities for additional
information). The Companys cash conversion cycle improved
four days, to 49 days in the first six months of Fiscal
2010. Receivables accounted for four days of the improvement,
three days of which is a result of the accounts receivable
securitization program. There was a five day improvement in
inventories as a result of the Companys efforts to reduce
inventory levels. Accounts payable partially offset these
improvements, with a five day decrease, a portion of which
reflects inventory reductions and the resulting decrease in the
amounts due to suppliers.
During the first six months of Fiscal 2010, the Company made
$228 million of contributions to the pension plans compared
to $41 million in the prior year. Of this $228 million
of payments, $200 million were discretionary contributions
that were made as a result of adverse conditions in the global
equity and bond markets. The Company expects to make
approximately $260 million of pension contributions in
Fiscal 2010, of which $200 million would be discretionary,
however actual contributions may be affected by pension asset
and liability valuations during the year.
During the first quarter of Fiscal 2010, the Company entered
into a three-year $175 million accounts receivable
securitization program. Under the terms of the agreement, the
Company sells, on a revolving basis, its receivables to a
wholly-owned, bankruptcy-remote-subsidiary. This subsidiary then
sells all of the rights, title and interest in a pool of these
receivables to an unaffiliated entity. After the sale, the
Company, as servicer of the assets, collects the receivables on
behalf of the unaffiliated entity. The amount of receivables
sold through this program as of October 28, 2009 was
$126 million.
Cash provided by investing activities totaled $103 million
compared to cash used of $232 million last year. In the
current year, proceeds from divestitures, net of acquisitions,
provided cash of $9 million which primarily related to the
sale of our non-core Kabobs frozen hors doeuvres
foodservice business in the U.S. Cash paid for
acquisitions, net of divestitures, required $103 million in
the prior year, primarily related to the acquisition of the
Bénédicta®
sauce business in France, partially offset by the sale of a
small domestic portion control foodservice business. Capital
expenditures totaled $96 million (1.9% of sales) compared
to $124 million (2.4% of sales) in the prior year,
reflecting the elimination of non-critical capital spending in
the current year and the timing of project spending. Proceeds
from disposals of property, plant and equipment were
$1 million in both the current and prior years. The current
year decrease in restricted cash represents collateral that was
returned to the Company in connection with the termination of a
total rate of return swap in August 2009.
Cash used for financing activities in the current year totaled
$601 million compared to $449 million of cash provided
last year. Proceeds from long-term debt were $433 million
in the current year reflecting the July 2009 issuance of
$250 million of 7.125% notes due 2039 by H. J. Heinz
Finance Company (HFC), a subsidiary of Heinz. These
notes are fully, unconditionally and irrevocably guaranteed by
the Company. The proceeds from the notes were used for payment
of the cash component of the exchange transaction discussed
below as well as various expenses relating to the exchange, and
for general corporate purposes. In addition, the Company
received cash proceeds of $167 million related to a
15 billion Japanese yen denominated credit agreement that
was entered into during the second quarter of Fiscal 2010.
Payments on long-term debt were $359 million in the current
year primarily reflecting cash payments on the dealer
remarketable securities exchange transaction discussed below.
Proceeds from long-term debt were $850 million in the prior
year. The prior 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 HFC Series B
Preferred Stock. The proceeds from both of these prior year
transactions were used for general corporate purposes, including
the repayment of commercial paper and other indebtedness
incurred to redeem HFCs Series A Preferred Stock. As
a result, payments on long-term debt were $338 million in
the prior year. Net payments on commercial paper and short-term
debt were $427 million this year compared to proceeds from
commercial paper and
31
short-term debt of $118 million in the prior year. Cash
proceeds from option exercises provided $5 million of cash
in the current year, and the Company had no treasury stock
purchases in the current year. Cash proceeds from option
exercises, net of treasury stock purchases, were
$80 million in the prior year. Dividend payments totaled
$266 million this year, compared to $263 million for
the same period last year, reflecting an increase in the
annualized dividend per common share to $1.68.
On August 6, 2009, HFC issued $681 million of
7.125% notes due 2039 (of the same series as the notes
issued in July 2009), and $218 million of cash, in exchange
for $681 million of its outstanding 15.590% dealer
remarketable securities due December 1, 2020. In addition,
HFC terminated a portion of the remarketing option by paying the
remarketing agent a cash payment of $89 million. The
exchange transaction was accounted for as a modification of
debt. Accordingly, cash payments used in the exchange, including
the payment to the remarketing agent, have been accounted for as
a reduction in the book value of the debt, and will be amortized
to interest expense under the effective yield method.
Additionally, the Company terminated its $175 million
notional total rate of return swap in August 2009 in connection
with the dealer remarketable securities exchange transaction.
See Note 14, Derivative Financial Instruments and
Hedging Activities for additional information.
At October 28, 2009, the Company had total debt of
$4.90 billion (including $231 million relating to
hedge accounting adjustments) and cash and cash equivalents of
$461 million. Total debt balances since prior year end
declined $243 million as a result of the items discussed
above.
The Company and HFC maintain $1.8 billion of credit
agreements, consisting of a $1.2 billion Three-Year Credit
Agreement which expires in April 2012 and a $600 million
364-Day
Credit Agreement. These agreements support the Companys
commercial paper borrowings, $252 million of Australian
denominated borrowings and certain domestic borrowings. As a
result, the commercial paper, Australian denominated borrowings
and domestic borrowings are classified as long-term debt based
upon the Companys intent and ability to refinance these
borrowings on a long-term basis. Commercial paper outstanding
was $231 million at October 28, 2009 compared to
$640 million at April 29, 2009. These credit
agreements include a leverage ratio covenant in addition to
customary covenants, and the Company was in compliance with all
of its covenants as of October 28, 2009. In addition, the
Company maintains in excess of $500 million of other credit
facilities used primarily by the Companys foreign
subsidiaries.
The Company will continue to monitor the credit markets to
determine the appropriate mix of long-term debt and short-term
debt going forward. The Company believes that its strong
operating cash flow, existing cash balances, together with the
credit facilities and other available capital market financing,
will be adequate to meet the Companys cash requirements
for operations, including capital spending, debt maturities,
acquisitions, share repurchases and dividends to shareholders.
While the Company is confident that its needs can be financed,
there can be no assurance that increased volatility and
disruption in the global capital and credit markets will not
impair its ability to access these markets on commercially
acceptable terms.
As of October 28, 2009, the Companys long-term debt
ratings at Moodys, Standard & Poors and
Fitch Rating have remained consistent at Baa2, BBB and BBB,
respectively.
The Company continues to assess opportunities to divest small
non-core
businesses that could help us further simplify our global
portfolio. On November 23, 2009, the Company completed the
sale of its private label frozen desserts business in the U.K.
This business had annual sales of approximately $82 million
in Fiscal 2009. The disposal transaction included two factories
in Okehampton and Leamington Spa, England. As a result of this
transaction, the Company will recognize a pretax loss of
approximately $33 million ($25 million after-tax),
which will be recorded in discontinued operations in the third
quarter of Fiscal 2010. This sale, and other potential current
year divestitures, are not expected to significantly affect the
Companys profit on a continuing operations basis going
forward.
Also, on November 23, 2009, the Company acquired
Arthurs Fresh Company, a small chilled smoothies business
in Canada.
32
Inflation
The Company operates in certain countries around the world, such
as Venezuela, that have previously experienced hyperinflation.
In hyperinflationary foreign countries, the Company attempts to
mitigate the effects of inflation by increasing prices in line
with inflation, whenever possible. The Companys business
in Venezuela generates approximately 3% of the Companys
consolidated net sales. The Company uses the official exchange
rate to translate the financial statements of its Venezuelan
subsidiary, which is consistent with guidance from the Center
for Audit Quality SEC Regulations Committees International
Practices Task Force. The official exchange rate has been fixed
at 2.15 Venezuelan bolivar fuertes to the U.S. dollar,
despite significant inflation in recent periods. As a result of
this escalating inflation in Venezuela during the past few
years, it is possible that Venezuela may be considered a highly
inflationary economy in the near future. If that occurs and if
the Company were to use the parallel market rate to translate
the financial statements, or if there is a devaluation of the
official exchange rate in the future, the Companys
financial results and financial position would be negatively
impacted.
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. Certain purchase obligations
contain variable pricing components, and, as a result, actual
cash payments are expected to fluctuate based on changes in
these variable components. Due to the proprietary nature of some
of the Companys 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
six months ended October 28, 2009. For additional
information, refer to pages
24-25 of the
Companys Annual Report on
Form 10-K
for the fiscal year ended April 29, 2009.
As of the end of the second 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
approximately $85 million. 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
On September 15, 2009, the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (the
Codification) became the single source of
authoritative generally accepted accounting principles in the
United States of America. The Codification changed the
referencing of financial standards but did not change or alter
existing U.S. GAAP. The Codification became effective for
the Company in the second quarter of Fiscal 2010.
Business
Combinations and Consolidation
On April 30, 2009, the Company adopted new accounting
guidance on business combinations and noncontrolling interests
in consolidated financial statements. The guidance on business
combinations impacts the accounting for any business
combinations completed after April 29, 2009. The nature and
extent of the impact will depend upon the terms and conditions
of any such transaction. The guidance on noncontrolling
interests changes the accounting and reporting for minority
33
interests, which have been recharacterized as noncontrolling
interests and classified as a component of equity. Prior period
financial statements and disclosures for existing minority
interests have been restated in accordance with this guidance.
All other requirements of this guidance will be applied
prospectively. The adoption of the guidance on noncontrolling
interests did not have a material impact on the Companys
financial statements.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for transfers of financial assets. This
amendment removes the concept of a qualifying special-purpose
entity and requires that a transferor recognize and initially
measure at fair value all assets obtained and liabilities
incurred as a result of a transfer of financial assets accounted
for as a sale. This amendment also requires additional
disclosures about any transfers of financial assets and a
transferors continuing involvement with transferred
financial assets. This amendment is effective for fiscal years
beginning after November 15, 2009, and interim periods
within those fiscal years. As of October 28, 2009, the
Company has approximately $284 million of trade receivables
associated with factoring and securitization programs that are
not recognized on the balance sheet. The Company is currently
evaluating these arrangements as well as any other potential
impact of adopting this amendment on April 29, 2010, the
first day of Fiscal 2011.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for variable interest entities. This
amendment changes how a reporting entity determines when an
entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to
consolidate another entity is based on, among other things, the
purpose and design of the other entity and the reporting
entitys ability to direct the activities of the other
entity that most significantly impact its economic performance.
The amendment also requires additional disclosures about a
reporting entitys involvement with variable interest
entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity
affects the reporting entitys financial statements. This
amendment is effective for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal
years. The Company is currently evaluating the impact of
adopting this amendment on April 29, 2010, the first day of
Fiscal 2011.
Fair
Value
On April 30, 2009, the Company adopted new accounting
guidance on fair value measurements for its non-financial assets
and liabilities that are recognized at fair value on a
non-recurring basis, including long-lived assets, goodwill,
other intangible assets, exit liabilities and purchase price
allocations. This guidance defines fair value, establishes a
framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value
measurements. This guidance applies whenever other accounting
guidance requires or permits assets or liabilities to be
measured at fair value, but does not expand the use of fair
value to new accounting transactions. The adoption of this
guidance did not have a material impact on the Companys
financial statements. See Note 13, Fair Value
Measurements, for additional information.
Postretirement
Benefit Plans and Equity Compensation
On April 30, 2009, the Company adopted accounting guidance
for determining whether instruments granted in share-based
payment transactions are participating securities. This guidance
states 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. As a result of adopting this guidance, the
Company has retrospectively adjusted its earnings per share data
for prior periods. The adoption of this guidance had no impact
on net income and less than a $0.01 impact on basic and diluted
earnings per share from continuing operations for the second
quarters of Fiscal 2010 and 2009. The adoption had less than a
$0.01 impact on basic and diluted earnings per share from
34
continuing operations for the first six months of Fiscal 2010
and a $0.01 impact on basic and diluted earnings per share from
continuing operations for the first six months of Fiscal 2009.
See Note 9, Net Income per Common Share, for
additional information.
In December 2008, the FASB issued new accounting guidance on
employers disclosures about postretirement benefit plan
assets. This new guidance requires enhanced disclosures about
plan assets in an employers defined benefit pension or
other postretirement plan. Companies will be required to
disclose information about how investment allocation decisions
are made, the fair value of each major category of plan assets,
the basis used to determine the overall expected long-term rate
of return on assets assumption, a description of the inputs and
valuation techniques used to develop fair value measurements of
plan assets, and significant concentrations of credit risk. This
guidance is effective for fiscal years ending after
December 15, 2009. The Company is currently evaluating the
impact of adopting this guidance in the fourth quarter of Fiscal
2010.
Other
Areas
In May 2009, the FASB issued new accounting guidance on
subsequent events, which establishes general standards of
accounting for and disclosure of events or transactions that
occur after the balance sheet date but before the financial
statements are issued or are available to be issued. This
guidance describes the circumstances under which an entity
should recognize events or transactions occurring after the
balance sheet date in its financial statements and provides
guidance on the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. The Company adopted this guidance during the first quarter
of Fiscal 2010, and its application had no impact on the
Companys consolidated financial statements.
35
CAUTIONARY
STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
Statements about future growth, profitability, costs,
expectations, plans, or objectives included in this report,
including in managements discussion and analysis, and the
financial statements and footnotes, are forward-looking
statements based on managements 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 Companys 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, | |
| competition from lower-priced private label brands, | |
| 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 and customer relationships, and the financial viability of those suppliers and customers, | |
| 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, | |
| our ability to effectuate 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 and the risk of doing business 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, |
36
| 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 information 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 our Boards view of our anticipated cash needs, and | |
| other factors described in Risk Factors and Cautionary Statement Relevant to Forward-Looking Information in the Companys Form 10-K for the fiscal year ended April 29, 2009. |
The forward-looking statements are and will be based on
managements 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.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes in the Companys market
risk during the six months ended October 28, 2009. For
additional information, refer to pages
25-27 of the
Companys Annual Report on
Form 10-K
for the fiscal year ended April 29, 2009.
Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Companys
disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures, as of the end
of the period covered by this report, were effective and
provided reasonable assurance that the information required to
be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is (i) recorded, processed,
summarized, and reported within the time periods specified in
the SECs rules and forms, and (ii) accumulated and
communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
No change in the Companys internal control over financial
reporting occurred during the Companys most recent fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over
financial reporting.
37
PART IIOTHER
INFORMATION
Item 1. | Legal Proceedings |
Nothing to report under this item.
Item 1A. | Risk Factors |
There have been no material changes in our risk factors from
those disclosed in Part I, Item 1A to our Annual
Report on
Form 10-K
for the fiscal year ended April 29, 2009, except as
disclosed below. The risk factors disclosed in Part I,
Item 1A to our Annual Report on
Form 10-K
for the fiscal year ended April 29, 2009, in addition to
the other information set forth in this report, could materially
affect our business, financial condition, or results of
operations. Additional risks and uncertainties not currently
known to the Company or that the Company currently deems to be
immaterial also may materially adversely affect our business,
financial condition, or results of operations.
The
Companys performance may be adversely affected by economic
and political conditions in the U.S. and in various other
nations where it does business.
The Companys performance has been in the past and may
continue in the future to be impacted by economic and political
conditions in the United States and in other nations. Such
conditions and factors include changes in applicable laws and
regulations, including changes in food and drug laws, accounting
standards, taxation requirements and environmental laws. Other
factors impacting our operations in the U.S., Venezuela, and
other international locations where the Company does business
include export and import restrictions, currency exchange rates,
currency devaluation, recessionary conditions, foreign ownership
restrictions, nationalization, conducting business in
hyperinflationary environments, and terrorist acts and political
unrest. Such factors in either domestic or foreign jurisdictions
could materially and adversely affect our financial results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The Board of Directors authorized a share repurchase program on
May 31, 2006 for a maximum of 25 million shares. The
Company did not repurchase any shares of its common stock during
the second quarter of Fiscal 2010. As of October 28, 2009,
the maximum number of shares that may yet be purchased under the
2006 program is 6,716,192.
Item 3. | Defaults upon Senior Securities |
Nothing to report under this item.
38
Item 4. | Submission of Matters to a Vote of Security Holders |
The Annual Meeting of Shareholders of H. J. Heinz Company was
held in Pittsburgh, Pennsylvania, on August 12, 2009. The
following individuals were elected as directors for terms
expiring at the next annual meeting of the shareholders.
Shares |
||||||||||||
Director
|
Shares For | Against | Abstentions | |||||||||
W. R. Johnson
|
246,516,101 | 10,328,965 | 1,102,815 | |||||||||
C. E. Bunch
|
242,553,840 | 14,390,511 | 1,003,530 | |||||||||
L. S. Coleman, Jr.
|
247,730,044 | 9,139,072 | 1,078,765 | |||||||||
J. G. Drosdick
|
252,721,547 | 4,171,061 | 1,055,273 | |||||||||
E. E. Holiday
|
240,078,820 | 16,757,502 | 1,111,559 | |||||||||
C. Kendle
|
250,396,880 | 6,458,788 | 1,092,213 | |||||||||
D. R. OHare
|
249,824,742 | 7,042,671 | 1,080,468 | |||||||||
N. Peltz
|
251,464,590 | 5,356,471 | 1,126,820 | |||||||||
D. H. Reilley
|
249,976,945 | 6,915,398 | 1,055,538 | |||||||||
L. C. Swann
|
252,713,942 | 4,132,830 | 1,101,109 | |||||||||
T. J. Usher
|
249,770,992 | 7,162,546 | 1,014,343 | |||||||||
M. F. Weinstein
|
249,665,881 | 7,185,081 | 1,096,919 |
Shareholders also acted upon the following proposals at the
Annual Meeting:
Ratified the Audit Committees recommendation to appoint
PricewaterhouseCoopers, LLP as the Companys Independent
Registered Public Accounting Firm for the fiscal year ending
April 28, 2010. Votes totaled 250,572,633 for, 6,406,285
against or withheld, and 968,963 abstentions.
Approved the amendment of the By-Laws to add a right permitting
holders of 25% of the voting power of the outstanding shares to
call a special meeting of shareholders. Votes totaled
252,590,546 for, 3,764,948 against or withheld, and 1,592,387
abstentions.
Item 5. | Other Information |
Nothing to report under this item.
Item 6. | Exhibits |
Exhibits required to be furnished by Item 601 of
Regulation S-K
are listed below. The Company may have omitted certain exhibits
in accordance with Item 601(b)(4)(iii)(A) of
Regulation S-K
and any exhibits filed pursuant to Item 601(b)(2) of
Regulation S-K
may omit certain schedules. The Company agrees to furnish such
documents to the Commission upon request. Documents not
designated as being incorporated herein by reference are set
forth herewith. The paragraph numbers correspond to the exhibit
numbers designated in Item 601 of
Regulation S-K.
10(a). Management contracts and
compensatory plans:
(i). Form of Fiscal Year 2010 Restricted
Stock Unit Award and Agreement (U.S. EmployeesTime
Based Vesting).
12. Computation of Ratios of Earnings to
Fixed Charges.
31(a). Rule 13a-14(a)/15d-14(a)
Certification by the Chief Executive Officer.
31(b). Rule 13a-14(a)/15d-14(a)
Certification by the Chief Financial Officer.
32(a). 18 U.S.C. Section 1350
Certification by the Chief Executive Officer.
32(b). 18 U.S.C. Section 1350
Certification by the Chief Financial Officer.
39
101.INS XBRL Instance Document*
101.SCH XBRL Schema Document*
101.CAL XBRL Calculation Linkbase Document*
101.LAB XBRL Labels Linkbase Document*
101.PRE XBRL Presentation Linkbase Document*
101.DEF XBRL Definition Linkbase Document*
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed. |
40
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: November 24, 2009
By: |
/s/ Arthur
B. Winkleblack
|
Arthur B. Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 24, 2009
By: |
/s/ Edward
J. McMenamin
|
Edward J. McMenamin
Senior Vice PresidentFinance
and Corporate Controller
(Principal Accounting Officer)
41
EXHIBIT INDEX
DESCRIPTION OF EXHIBIT
Exhibits required to be furnished by Item 601 of
Regulation S-K
are listed below. Documents not designated as being incorporated
herein by reference are furnished herewith. The Company may have
omitted certain exhibits in accordance with
Item 601(b)(4)(iii)(A) of
Regulation S-K
and any exhibits filed pursuant to Item 601(b)(2) of
Regulation S-K
may omit certain schedules. The Company agrees to furnish such
documents to the Commission upon request. The paragraph numbers
correspond to the exhibit numbers designated in Item 601 of
Regulation S-K.
10(a). Management contracts and
compensatory plans:
(i) Form of Fiscal Year 2010 Restricted
Stock Unit Award and Agreement (U.S. EmployeesTime
Based Vesting).
12. Computation of Ratios of Earnings to
Fixed Charges.
31(a). Rule 13a-14(a)/15d-14(a)
Certification by the Chief Executive Officer.
31(b). Rule 13a-14(a)/15d-14(a)
Certification by the Chief Financial Officer.
32(a). 18 U.S.C. Section 1350
Certification by the Chief Executive Officer.
32(b). 18 U.S.C. Section 1350
Certification by the Chief Financial Officer.
101.INS XBRL Instance Document*
101.SCH XBRL Schema Document*
101.CAL XBRL Calculation Linkbase Document*
101.LAB XBRL Labels Linkbase Document*
101.PRE XBRL Presentation Linkbase Document*
101.DEF XBRL Definition Linkbase Document*
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed. |