SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

Commission File Number 1-3385

 

H. J. HEINZ COMPANY

(Exact name of registrant as specified in its charter)

 

 

412-456-5700

(Registrant’s telephone number)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

 

None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 þ     No o

 

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 o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of October 29, 2008 the aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant was approximately $13.0 billion.

 

The number of shares of the Registrant’s Common Stock, par value $.25 per share, outstanding as of May 31, 2009, was 315,036,582 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on August 12, 2009, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year ended April 29, 2009, are incorporated into Part III, Items 10, 11, 12, 13, and 14.

 

 

[This Page Intentionally Left Blank]

 

 

PART I

 

 

H. J. Heinz Company was incorporated in Pennsylvania on July 27, 1900. In 1905, it succeeded to the business of a partnership operating under the same name which had developed from a food business founded in 1869 in Sharpsburg, Pennsylvania by Henry J. Heinz. H. J. Heinz Company and its subsidiaries (collectively, the “Company”) manufacture and market an extensive line of food products throughout the world. The Company’s principal products include ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition and other processed food products.

 

The Company’s products are manufactured and packaged to provide safe, wholesome foods for consumers, as well as foodservice and institutional customers. Many products are prepared from recipes developed in the Company’s research laboratories and experimental kitchens. Ingredients are carefully selected, inspected and passed on to modern factory kitchens where they are processed, after which the intermediate product is filled automatically into containers of glass, metal, plastic, paper or fiberboard, which are then sealed. Products are processed by sterilization, blending, fermentation, pasteurization, homogenization, chilling, freezing, pickling, drying, freeze drying, baking or extruding, then labeled and cased for market. Quality assurance procedures are designed for each product and process and applied to ensure quality and compliance with applicable laws.

 

The Company manufactures and contracts for the manufacture of its products from a wide variety of raw foods. Pre-season contracts are made with farmers for a portion of raw materials such as tomatoes, cucumbers, potatoes, onions and some other fruits and vegetables. Ingredients, such as dairy products, meat, sugar and other sweeteners, including high fructose corn syrup, spices, flour and certain other fruits and vegetables, are purchased from approved suppliers.

 

The following table lists the number of the Company’s principal food processing factories and major trademarks by region:

 

The Company also owns or leases office space, warehouses, distribution centers and research and other facilities throughout the world. The Company’s food processing factories and principal properties are in good condition and are satisfactory for the purposes for which they are being utilized.

 

The Company has developed or participated in the development of certain of its equipment, manufacturing processes and packaging, and maintains patents and has applied for patents for some of those developments. The Company regards these patents and patent applications as important but does not consider any one or group of them to be materially important to its business as a whole.

 

Although crops constituting some of the Company’s raw food ingredients are harvested on a seasonal basis, most of the Company’s products are produced throughout the year. Seasonal factors inherent in the business have always influenced the quarterly sales, operating income and cash flows of the Company. Consequently, comparisons between quarters have always been more meaningful when made between the same quarters of prior years.

 

The products of the Company are sold under highly competitive conditions, with many large and small competitors. The Company regards its principal competition to be other manufacturers of processed foods, including branded retail products, foodservice products and private label products, that compete with the Company for consumer preference, distribution, shelf space and merchandising support. Product quality and consumer value are important areas of competition.

 

The Company’s products are sold through its own sales organizations and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, bakeries, pharmacies, mass merchants, club stores, foodservice distributors and institutions, including hotels, restaurants, hospitals, health-care facilities, and certain government agencies. For Fiscal 2009, one customer, Wal-Mart Stores Inc., represented 10.8% of the Company’s sales. We closely monitor the credit risk associated with our customers and to date have not experienced material losses.

 

Compliance with the provisions of national, state and local environmental laws and regulations has not had a material effect upon the capital expenditures, earnings or competitive position of the Company. The Company’s estimated capital expenditures for environmental control facilities for the remainder of Fiscal 2010 and the succeeding fiscal year are not material and are not expected to materially affect the earnings, cash flows or competitive position of the Company.

 

The Company’s factories are subject to inspections by various governmental agencies in the U.S. and other countries where the Company does business, including the United States Department of Agriculture, and the Occupational Health and Safety Administration, and its products must comply with the applicable laws, including food and drug laws, such as the Federal Food and Cosmetic Act of 1938, as amended, and the Federal Fair Packaging or Labeling Act of 1966, as amended, of the jurisdictions in which they are manufactured and marketed.

 

The Company employed, on a full-time basis as of April 29, 2009, approximately 32,400 people around the world.

 

Segment information is set forth in this report on pages 71 through 73 in Note 15, “Segment Information” in Item 8—“Financial Statements and Supplementary Data.”

 

Income from international operations is subject to fluctuation in currency values, export and import restrictions, foreign ownership restrictions, economic controls and other factors. From time to time, exchange restrictions imposed by various countries have restricted the transfer of funds between countries and between the Company and its subsidiaries. To date, such exchange restrictions have not had a material adverse effect on the Company’s operations.

 

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge on the Company’s website at www.heinz.com, as soon as reasonably practicable after filed or furnished to the Securities and Exchange Commission (“SEC”).

Our reports filed with the SEC are also made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its website at www.sec.gov.

 

Executive Officers of the Registrant

 

The following is a list of the names and ages of all of the executive officers of H. J. Heinz Company indicating all positions and offices held by each such person and each such person’s principal occupations or employment during the past five years. All the executive officers have been elected to serve until the next annual election of officers, until their successors are elected, or until their earlier resignation or removal. The next annual election of officers is scheduled to occur on August 12, 2009.

 

 

 

 

In addition to the factors discussed elsewhere in this Report, the following risks and uncertainties could materially and adversely affect the Company’s business, financial condition, and results of operations. Additional risks and uncertainties that are not presently known to the Company or are currently deemed by the Company to be immaterial also may impair the Company’s business operations and financial condition.

 

Competitive product and pricing pressures in the food industry and the financial condition of customers and suppliers could adversely affect the Company’s ability to gain or maintain market share and/or profitability.

 

The Company operates in the highly competitive food industry, competing with other companies that have varying abilities to withstand changing market conditions. Any significant change in the Company’s relationship with a major customer, including changes in product prices, sales volume, or contractual terms may impact financial results. Such changes may result because the Company’s competitors may have substantial financial, marketing, and other resources that may change the competitive environment. Private label brands sold by retail customers, which are typically sold at lower prices, are a source of competition for certain of our product lines. Such competition could cause the Company to reduce prices and/or increase capital, marketing, and other expenditures, or could result in the loss of category share. Such changes could have a material adverse impact on the Company’s net income. As the retail grocery trade continues to consolidate, the larger retail customers of the Company could seek to use their positions to improve their profitability through lower pricing and increased promotional programs. If the Company is unable to use its scale, marketing expertise, product innovation, and category leadership positions to respond to these changes, or is unable to increase its prices, its profitability and volume growth could be impacted in a materially adverse way. The success of our business depends, in part, upon the financial strength and viability of our suppliers and customers. The financial condition of those suppliers and customers are affected in large part by conditions and events that are beyond our control. A significant deterioration of their financial condition could adversely affect our financial results.

The Company’s performance may be adversely affected by economic and political conditions in the U.S. and in various other nations where it does business.

 

The Company’s 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 include export and import restrictions, currency exchange rates, recessionary conditions, foreign ownership restrictions, nationalization, conducting business in hyperinflationary environments, and terrorist acts and political unrest in the U.S., Venezuela and other international locations where the Company does business. Such factors in either domestic or foreign jurisdictions could materially and adversely affect our financial results.

 

Increases in the cost and restrictions on the availability of raw materials could adversely affect our financial results.

 

The Company sources raw materials including agricultural commodities such as tomatoes, cucumbers, potatoes, onions, other fruits and vegetables, dairy products, meat, sugar and other sweeteners, including high fructose corn syrup, spices, and flour, as well as packaging materials such as glass, plastic, metal, paper, fiberboard, and other materials in order to manufacture products. The availability or cost of such commodities may fluctuate widely due to government policy and regulation, crop failures or shortages due to plant disease or insect and other pest infestation, weather conditions, increased demand for biofuels, or other unforeseen circumstances. Additionally, the cost of raw materials and finished products may fluctuate due to movements in cross-currency transaction rates. To the extent that any of the foregoing or other unknown factors increase the prices of such commodities or materials and the Company is unable to increase its prices or adequately hedge against such changes in a manner that offsets such changes, the results of its operations could be materially and adversely affected. Similarly, if supplier arrangements and relationships result in increased and unforeseen expenses, the Company’s financial results could be materially and adversely impacted.

 

Disruption of our supply chain could adversely affect our business.

 

Damage or disruption to our manufacturing or distribution capabilities due to weather, natural disaster, fire, terrorism, pandemic, strikes, the financial and/or operational instability of key suppliers, distributors, warehousing and transportation providers, or brokers, or other reasons could impair our ability to manufacture or sell our products. To the extent the Company is unable to, or cannot financially mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single location, there could be a materially adverse affect on our business and results of operations, and additional resources could be required to restore our supply chain.

 

Higher energy costs and other factors affecting the cost of producing, transporting, and distributing the Company’s products could adversely affect our financial results.

 

Rising fuel and energy costs may have a significant impact on the cost of operations, including the manufacture, transportation, and distribution of products. Fuel costs may fluctuate due to a number of factors outside the control of the Company, including government policy and regulation and weather conditions. Additionally, the Company may be unable to maintain favorable arrangements with respect to the costs of procuring raw materials, packaging, services, and transporting products, which could result in increased expenses and negatively affect operations. If the Company is unable to hedge against such increases or raise the prices of its products to offset the changes, its results of operations could be materially and adversely affected.

The results of the Company could be adversely impacted as a result of increased pension, labor, and people-related expenses.

 

Inflationary pressures and any shortages in the labor market could increase labor costs, which could have a material adverse effect on the Company’s consolidated operating results or financial condition. The Company’s labor costs include the cost of providing employee benefits in the U.S. and foreign jurisdictions, including pension, health and welfare, and severance benefits. Any declines in market returns could adversely impact the funding of pension plans, the assets of which are invested in a diversified portfolio of equity and fixed income securities and other investments. Additionally, the annual costs of benefits vary with increased costs of health care and the outcome of collectively-bargained wage and benefit agreements.

 

The impact of various food safety issues, environmental, legal, tax, and other regulations and related developments could adversely affect the Company’s sales and profitability.

 

The Company is subject to numerous food safety and other laws and regulations regarding the manufacturing, marketing, and distribution of food products. These regulations govern matters such as ingredients, advertising, taxation, relations with distributors and retailers, health and safety matters, and environmental concerns. The ineffectiveness of the Company’s planning and policies with respect to these matters, and the need to comply with new or revised laws or regulations with regard to licensing requirements, trade and pricing practices, environmental permitting, or other food or safety matters, or new interpretations or enforcement of existing laws and regulations, may have a material adverse effect on the Company’s sales and profitability. Influenza or other pandemics could disrupt production of the Company’s products, reduce demand for certain of the Company’s products, or disrupt the marketplace in the foodservice or retail environment with consequent material adverse effect on the Company’s results of operations.

 

The need for and effect of product recalls could have an adverse impact on the Company’s business.

 

If any of the Company’s products become misbranded or adulterated, the Company may need to conduct a product recall. The scope of such a recall could result in significant costs incurred as a result of the recall, potential destruction of inventory, and lost sales. Should consumption of any product cause injury, the Company may be liable for monetary damages as a result of a judgment against it. A significant product recall or product liability case could cause a loss of consumer confidence in the Company’s food products and could have a material adverse effect on the value of its brands and results of operations.

 

The failure of new product or packaging introductions to gain trade and consumer acceptance and changes in consumer preferences could adversely affect our sales.

 

The success of the Company is dependent upon anticipating and reacting to changes in consumer preferences, including health and wellness. There are inherent marketplace risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance. Moreover, success is dependent upon the Company’s ability to identify and respond to consumer trends through innovation. The Company may be required to increase expenditures for new product development. The Company may not be successful in developing new products or improving existing products, or its new products may not achieve consumer acceptance, each of which could materially and negatively impact sales.

The failure to successfully integrate acquisitions and joint ventures into our existing operations or the failure to gain applicable regulatory approval for such transactions or divestitures could adversely affect our financial results.

 

The Company’s ability to efficiently integrate acquisitions and joint ventures into its existing operations also affects the financial success of such transactions. The Company may seek to expand its business through acquisitions and joint ventures, and may divest underperforming or non-core businesses. The Company’s success depends, in part, upon its ability to identify such acquisition, joint venture, and divestiture opportunities and to negotiate favorable contractual terms. Activities in such areas are regulated by numerous antitrust and competition laws in the U. S., the European Union, and other jurisdictions, and the Company may be required to obtain the approval of acquisition and joint venture transactions by competition authorities, as well as satisfy other legal requirements. The failure to obtain such approvals could materially and adversely affect our results.

 

The Company’s operations face significant foreign currency exchange rate exposure, which could negatively impact its operating results.

 

The Company holds assets and incurs liabilities, earns revenue, and pays expenses in a variety of currencies other than the U.S. dollar, primarily the British Pound, Euro, Australian dollar, Canadian dollar, and New Zealand dollar. The Company’s consolidated financial statements are presented in U.S. dollars, and therefore the Company must translate its assets, liabilities, revenue, and expenses into U.S. dollars for external reporting purposes. Increases or decreases in the value of the U.S. dollar may materially and negatively affect the value of these items in the Company’s consolidated financial statements, even if their value has not changed in their original currency.

 

The Company could incur more debt, which could have an adverse impact on our business.

 

The Company may incur additional indebtedness in the future to fund acquisitions, repurchase shares, or fund other activities for general business purposes, which could result in a downward change in credit rating. The Company’s ability to make payments on and refinance its indebtedness and fund planned capital expenditures depends upon its ability to generate cash in the future. The cost of incurring additional debt could increase in the event of possible downgrades in the Company’s credit rating.

 

The failure to implement our growth plans could adversely affect the Company’s ability to increase net income and generate cash.

 

The success of the Company could be impacted by its inability to continue to execute on its growth plans regarding product innovation, implementing cost-cutting measures, improving supply chain efficiency, enhancing processes and systems, including information technology systems, on a global basis, and growing market share and volume. The failure to fully implement the plans, in a timely manner or within our cost estimates, could materially and adversely affect the Company’s ability to increase net income. Additionally, the Company’s ability to pay cash dividends will depend upon its ability to generate cash and profits, which, to a certain extent, is subject to economic, financial, competitive, and other factors beyond the Company’s control.

 

CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION

 

Statements about future growth, profitability, costs, expectations, plans, or objectives included in this report, including in management’s discussion and analysis, and the financial statements and footnotes, are forward-looking statements based on management’s estimates, assumptions, and projections. These forward-looking statements are subject to risks, uncertainties, assumptions and other important factors, many of which may be beyond the Company’s control and could cause

actual results to differ materially from those expressed or implied in this report and the financial statements and footnotes. Uncertainties contained in such statements include, but are not limited to:

 

 

 

The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the securities laws.

 

 

Nothing to report under this item.

 

 

See table in Item 1.

 

 

Nothing to report under this item.

 

 

Nothing to report under this item.

 

PART II

 

 

Information relating to the Company’s common stock is set forth in this report on page 33 under the caption “Stock Market Information” in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and on pages 73 through 74 in Note 16, “Quarterly Results” in Item 8—“Financial Statements and Supplementary Data.”

 

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 fourth quarter of Fiscal 2009. As of April 29, 2009, the maximum number of shares that may yet be purchased under the 2006 program is 6,716,192.

 

 

The following table presents selected consolidated financial data for the Company and its subsidiaries for each of the five fiscal years 2005 through 2009. All amounts are in thousands except per share data.

 

 

 

As a result of the Company’s strategic transformation, the Fiscal 2006 results from continuing operations include expenses of $124.7 million pretax ($80.3 million after tax) for targeted workforce reductions consistent with the Company’s goals to streamline its businesses and expenses of $22.0 million pretax ($16.3 million after tax) for strategic review costs related to the potential divestiture of several businesses. Also, $206.5 million pretax ($153.9 million after tax) was recorded for net losses on non-core businesses and product lines which were sold in Fiscal 2006, and asset impairment charges on non-core businesses and product lines which were sold in Fiscal 2007. Also during Fiscal 2006, the Company reversed valuation allowances of $27.3 million primarily related to The Hain Celestial Group, Inc. (“Hain”). In addition, results include $24.4 million of tax expense relating to the impact of the American Jobs Creation Act.

Fiscal 2005 results from continuing operations include a $64.5 million non-cash impairment charge for the Company’s equity investment in Hain and a $9.3 million non-cash charge to recognize the impairment of a cost-basis investment in a grocery industry sponsored e-commerce business venture. There was no tax benefit recorded with these impairment charges in Fiscal 2005. Fiscal 2005 also includes a $27.0 million pre-tax ($18.0 million after-tax) non-cash asset impairment charge related to the anticipated disposition of the HAK vegetable product line in Northern Europe which occurred in Fiscal 2006.

 

 

Executive Overview- Fiscal 2009

 

The H.J. Heinz Company has been a pioneer in the food industry for 140 years and possesses one of the world’s best and most recognizable brands—Heinz^®. The Company has a global portfolio of leading brands focused in three core categories, Ketchup and Sauces, Meals and Snacks, and Infant/Nutrition.

 

In Fiscal 2009, Heinz delivered record sales of over $10.1 billion and record high net income of $923 million. Diluted EPS increased by more than 10% to $2.90 and the Company generated $880 million of operating free cash flow (cash flow from operations of $1.167 billion, less capital expenditures of $292 million plus proceeds from disposals of PP&E of $5 million). Management believes these results are indicative of the effectiveness of the Company’s business plan, which is focused on the following four strategic pillars:

 

 

Management believes this strategy has enabled Heinz to drive growth, deliver consistent performance and sustain momentum, despite the weakened global economic environment.

 

The recent global recession has dramatically affected consumer confidence, behavior, spending and ultimately food consumption patterns. The Company has adapted its strategies to address this difficult environment, with a concentration on the following:

 

 

During Fiscal 2009, key foreign currencies declined precipitously versus the U.S. dollar. Given that approximately 60% of the Company’s sales and the majority of its net income are generated outside of the U.S., foreign currency movements can have a significant impact on the Company’s financial results. Inflationary increases in commodity input costs also continued in Fiscal 2009, and some key input costs remain above historic levels. While we expect Fiscal 2010 results to be impacted by unfavorable foreign currency rates and commodity input costs, the Company remains confident in its business fundamentals and plans to continue executing its strategy.

Results of Continuing Operations

 

The Company’s revenues are generated via the sale of products in the following categories:

 

 

Fiscal Year Ended April 29, 2009 compared to Fiscal Year Ended April 30, 2008

 

Sales for Fiscal 2009 increased $77 million, or 0.8%, to $10.15 billion. Net pricing increased sales by 7.0%, as price increases were taken across the Company’s portfolio to help compensate for increases in commodity costs. Volume decreased 1.5%, as a net volume improvement in emerging markets was more than offset by declines in the U.S., Australian and New Zealand businesses, which have been impacted by the recessionary economic environment. Volume also declined on frozen products in the U.K. Acquisitions, net of divestitures, increased sales by 1.9%. Foreign exchange translation rates reduced sales by 6.6%, reflecting the impact of a strengthening U.S. dollar on sales generated in international markets.

 

Sales of the Company’s top 15 brands grew 2.1% from prior year, as combined volume and pricing gains exceeded the 6.3% unfavorable impact of foreign exchange translation rates on sales. Excluding the impact of foreign exchange, the top 15 brands grew by 8.4%, led by strong growth in Heinz^®, Ore-Ida^®, Classico^®, Pudliszki^® and ABC^® branded products. In addition, global ketchup sales increased 3.2% despite a 5.9% unfavorable impact from foreign exchange, resulting in a 9.1% increase excluding the impact of currency translation. Emerging markets continued to be an important growth driver, with sales up 8.8%. Excluding a 7% impact from unfavorable foreign exchange, emerging markets’ sales grew 15.8%.

 

Gross profit decreased $97 million, or 2.6%, to $3.58 billion, as higher net pricing and the favorable impact of acquisitions was more than offset by a $238 million unfavorable impact from foreign exchange translation rates as well as higher commodity costs, including transaction currency costs in the U.K., and lower volume. The gross profit margin decreased to 35.3% from 36.5%, as pricing and productivity improvements were more than offset by increased commodity costs, which includes the impact of cross currency sourcing of ingredients, most notably in the U.K.

 

Selling, general and administrative expenses (“SG&A”) decreased $22 million, or 1.0%, to $2.09 billion, and improved as a percentage of sales to 20.6% from 21.0%. The $22 million decrease in SG&A is due to a $117 million impact from foreign exchange translation rates, decreased marketing expense, a life insurance settlement benefit received in the current year and a gain on the sale of a small portion control business in the U.S. These decreases were partially offset by increased spending on global task force initiatives, including system capability improvements, the SG&A from recent acquisitions and inflation in Latin America.

 

Operating income decreased $75 million, or 4.8%, to $1.49 billion, reflecting the items above, particularly a $121 million (7.7%) unfavorable impact from foreign exchange translation rates, and higher commodity costs.

 

Net interest expense decreased $48 million, to $275 million, reflecting a $25 million decrease in interest expense and a $23 million increase in interest income. Interest expense benefited from lower average interest rates in Fiscal 2009, which more than offset a higher coupon on the dealer securities

which were remarketed on December 1, 2008 (see Note 7 in Item 8, “Financial Statements and Supplementary Data” for additional information). The improvement in interest income is due to a $20 million mark-to-market gain in the current year on a total rate of return swap which was entered into in conjunction with the Company’s remarketable securities on December 1, 2008. Future mark-to-market adjustments on the total rate of return swap will be primarily derived from changes in the fair value of the dealer remarketable securities which will reflect fluctuations in the credit market.

 

Other income/(expense), net, improved by $106 million, to $78 million of income compared to $28 million of expense in the prior year, as a $113 million increase in currency gains was partially offset by an insignificant gain recognized on the sale of our business in Zimbabwe in the prior year. The currency gains resulted primarily from forward contracts that were put in place to help mitigate the unfavorable translation impact on profit associated with movements in key foreign currencies for all of Fiscal 2009.

 

The effective tax rate for Fiscal 2009 was 28.8% compared to 30.6% for the prior year. The current year tax rate was lower than the prior year primarily due to reduced repatriation costs partially offset by decreased benefits from the revaluation of tax basis of foreign assets.

 

Net income was $923 million compared to $845 million in the prior year, an increase of 9.2%, due to increased currency gains, reduced net interest expense and a lower effective tax rate, partially offset by lower operating income reflecting unfavorable foreign currency movements. Diluted earnings per share was $2.90 in the current year, an increase of 10.3%, compared to $2.63 in the prior year. Earnings per share also benefited from a 1.1% reduction in fully diluted shares outstanding.

 

The translation impact of fluctuating exchange rates in Fiscal 2009 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 ingredients, most notably in the U.K., reduced gross profit and operating income but did not affect sales.

 

FISCAL YEAR 2009 OPERATING RESULTS BY BUSINESS SEGMENT

 

North American Consumer Products

 

Sales of the North American Consumer Products segment increased $124 million, or 4.1%, to $3.14 billion. Net prices grew 6.8% reflecting price increases taken across the majority of the product portfolio over the last year to help offset higher commodity costs. Volume decreased 0.4%, as increases in Ore-Ida^® frozen potatoes, Heinz^® ketchup and new TGI Friday’s^® Skillet Meals were more than offset by declines in Delimex^® frozen products and Smart Ones^® frozen meals and desserts. The Ore-Ida^® growth was driven by new products such as Steam n’ Mash^tm in addition to the timing of price increases. The Heinz^® ketchup improvement was largely due to increased consumption. The Smart Ones volume decline resulted from softness in the category, aggressive competitive promotions and the timing of price increases taken in the fourth quarter of Fiscal 2008, partially offset by new breakfast product offerings in the current year. Lower sales of Delimex^® frozen meals and snacks was due to a supply interruption in the first half of Fiscal 2009. Unfavorable Canadian exchange translation rates decreased sales 2.3%.

 

Gross profit increased $38 million, or 3.1%, to $1.26 billion, due primarily to increased pricing partially offset by unfavorable foreign exchange translation rates. The gross profit margin decreased to 40.1% from 40.5%, as increased pricing and productivity improvements only partially offset increased commodity costs. Operating income increased $46 million, or 6.8%, to $725 million, largely reflecting the increase in gross profit and decreased marketing expense.

Europe

 

Heinz Europe sales decreased $122 million, or 3.4%, to $3.41 billion. Net pricing increased 7.1%, driven by Heinz^® ketchup, beans and soup, broad-based increases in our Russian market, frozen products in the U.K. and Italian infant nutrition products. Volume decreased 1.0%, primarily due to declines on frozen products as a result of price increases, competitor promotions and the exit of lower margin products and customers. Volume was also unfavorably impacted by decreases in Heinz^® soup and pasta meals in the U.K, and reduced volume in Russia. These declines were partially offset by new product introductions in the U.K. and Continental Europe. Acquisitions, net of divestitures, increased sales 2.5%, primarily due to the acquisition of the Bénédicta^® sauce business in France during the second quarter of this year and the Wyko^® sauce business in the Netherlands at the end of Fiscal 2008. Unfavorable foreign exchange translation rates decreased sales by 12.0%.

 

Gross profit decreased $114 million, or 8.3%, to $1.26 billion, and the gross profit margin decreased to 36.9% from 38.8% as unfavorable foreign exchange translation rates, cross currency rate movements in the British Pound versus the Euro and U.S. dollar, increased commodity costs and higher manufacturing costs in the frozen food plants were only partially offset by improved pricing and the favorable impact from acquisitions. Operating income decreased $76 million, or 11.9%, to $561 million, as pricing gains were more than offset by unfavorable translation, increased commodity costs, a portion of which is due to the transaction foreign currency impacts discussed above, increased selling and distribution expenses (“S&D”), a portion of which was from acquisitions, and higher general and administrative expenses (“G&A”) reflecting investments in task forces and systems.

 

Asia/Pacific

 

Heinz Asia/Pacific sales increased $28 million, or 1.7%, to $1.63 billion. Pricing increased 6.1%, due to increases on sardines, sauces and syrup in Indonesia, nutritional beverages in India and pricing gains across the product portfolios in Australia and New Zealand. This pricing partially offset increased commodity costs. Volume decreased 1.4%, as significant improvements on nutritional beverage sales in India, frozen foods in Japan and ABC^® products in Indonesia were more than offset by declines in convenience meals in Australia and New Zealand and Long Fong^® frozen products in China. Acquisitions increased sales 6.8% due to the third quarter 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 foreign exchange translation rates decreased sales by 9.8%.

 

Gross profit increased $3 million, or 0.6%, to $530 million, while the gross profit margin declined to 32.5% from 32.9%. The $3 million improvement in gross profit was due to increased pricing and acquisitions, which offset increased commodity costs, unfavorable foreign exchange translation rates and reduced volume, particularly in our Long Fong business as we revised our distribution system and streamlined our product offerings. Operating income decreased by $12 million, or 6.4%, to $182 million, as the increase in gross profit and decreased marketing expense was more than offset by increased S&D and G&A, a portion of which is due to acquisitions.

 

U.S. Foodservice

 

Sales of the U.S. Foodservice segment decreased $53 million, or 3.4%, to $1.51 billion. Pricing increased sales 3.5%, largely due to increases on Heinz^® ketchup, portion control condiments, frozen soups and tomato products. Volume decreased by 6.0%, reflecting reduced restaurant foot traffic, the exit of numerous lower margin products (stock-keeping units) and customers, as well as increased competition on our non-branded products. Divestitures reduced sales 0.9%.

 

Gross profit decreased $54 million, or 12.8%, to $365 million, and the gross profit margin decreased to 24.2% from 26.8%, due to lower volume, higher commodity and manufacturing costs and prior year gains on commodity derivative contracts, partially offset by higher pricing. Operating income decreased $40 million, or 23.8%, to $129 million, which was primarily due to the decline in

gross profit, partially offset by reduced G&A reflecting a gain in the current year on the sale of a small, non-core portion control business.

 

Rest of World

 

Sales for Rest of World increased $100 million, or 27.3%, to $468 million. Volume increased 4.6% driven by increases in Latin America and the Middle East. Higher pricing increased sales by 27.6%, largely due to inflation in Latin America and commodity-related price increases in South Africa and the Middle East. Acquisitions increased sales 0.2% due to the fourth quarter acquisition of Papillon, a small chilled products business in South Africa. Foreign exchange translation rates decreased sales 5.2%.

 

Gross profit increased $28 million, or 21.4%, to $161 million, due mainly to increased pricing and higher volume, partially offset by increased commodity costs and unfavorable foreign currency movements. Operating income increased $7 million, or 15.2% to $52 million due to the increase in gross profit partially offset by wage inflation in Latin America.

 

Fiscal Year Ended April 30, 2008 compared to Fiscal Year Ended May 2, 2007

 

Sales for Fiscal 2008 increased $1.07 billion, or 11.9%, to $10.07 billion, reflecting growth in all five business segments. Volume increased 3.6%, as solid growth in the North American Consumer Products segment, Australia, New Zealand and the emerging markets were combined with strong performance of beans, soup and pasta meals in the U.K. and Heinz^® ketchup across Europe. The emerging markets produced a 9.1% volume increase and accounted for over 24% of the Company’s total sales growth for the year. These volume increases were partially offset by declines in U.S. Foodservice. Net pricing increased sales by 3.3%, mainly in the North American Consumer Products, European and U.S. Foodservice segments and our businesses in Latin America and Indonesia. Divestitures, net of acquisitions, decreased sales by 0.2%. Foreign exchange translation rates increased sales by 5.1%.

 

Sales of the Company’s top 15 brands grew 13.4% from Fiscal 2007, led by strong increases in Heinz^®, Smart Ones^®, Classico^®, Boston Market^®, Pudliszki^®, Weight Watchers^® and ABC^®. These increases are a result of the Company’s strategy of focused innovation and marketing support behind these top brands.

 

Gross profit increased $288 million, or 8.5%, to $3.68 billion, benefiting from favorable volume, pricing and foreign exchange translation rates. The gross profit margin decreased to 36.5% from 37.7%, as pricing and productivity improvements were more than offset by increased commodity costs. The most significant commodity cost increases were for dairy, oils and grains.

 

SG&A increased $166 million, or 8.5%, to $2.11 billion. As a percentage of sales, SG&A decreased to 21.0% from 21.6%. The increase in SG&A is due to a 14.9% increase in marketing expense, a 16.9% increase in research and development (“R&D”) and higher S&D resulting from increased volume, higher fuel costs and foreign exchange translation rates. Additional investments were also made in Fiscal 2008 for global task force initiatives, streamlining and system capability improvements. These increases were partially offset by the benefits of effective cost control and Fiscal 2007 workforce reductions and costs related to the proxy contest.

 

Operating income increased $122 million, or 8.5%, to $1.57 billion, reflecting the strong sales growth, productivity improvements and favorable impacts from foreign exchange, partially offset by increased commodity costs.

 

Net interest expense increased $32 million, to $323 million, largely as a result of higher debt in Fiscal 2008 related to share repurchase activity. Other expenses, net, decreased $3 million to $28 million, primarily due to an insignificant gain recognized on the sale of our business in Zimbabwe.

The Fiscal 2008 effective tax rate was 30.6% compared to 29.6% in Fiscal 2007. The Fiscal 2008 tax rate was higher than the Fiscal 2007 rate primarily due to benefits recognized in Fiscal 2007 for reversal of a foreign tax reserve, tax planning completed in a foreign jurisdiction, and R&D tax credits. Those Fiscal 2007 benefits were partially offset by lower repatriation costs and increased benefits from tax audit settlements occurring during Fiscal 2008, along with changes in valuation allowances for foreign losses.

 

Income from continuing operations was $845 million compared to $792 million in Fiscal 2007, an increase of 6.7%, due to the increase in operating income, which was partially offset by higher net interest expense and a higher effective tax rate. Diluted earnings per share from continuing operations were $2.63 in Fiscal 2008 compared to $2.38 in Fiscal 2007, up 10.5%, which also benefited from a 3.2% reduction in fully diluted shares outstanding.

 

FISCAL YEAR 2008 OPERATING RESULTS BY BUSINESS SEGMENT

 

North American Consumer Products

 

Sales of the North American Consumer Products segment increased $272 million, or 9.9%, to $3.01 billion. Volume increased 3.5%, due primarily to Smart Ones^® frozen entrees and desserts, Boston Market^® frozen entrees and Classico^® pasta sauces. The Smart Ones volume improvement was driven by successful new product introductions like Anytime Selections^tm, Fruit Inspirations^tm and various dessert items, as well as the impact of the launch of Smart Ones^® products into Canada. The Boston Market improvements were mainly driven by new products and increased consumption, and the success of Classico was primarily due to new products as well as increased promotions in Canada. These volume improvements were partially offset by a decline in Ore-Ida^® frozen potatoes reflecting the timing of price increases taken during both the fourth quarter of Fiscal 2007 and the third quarter of Fiscal 2008. The Ore-Ida^® frozen potatoes price increases, along with other commodity cost related price increases, resulted in overall price gains of 3.5%. The Fiscal 2007 acquisition of Renee’s Gourmet Foods in Canada increased sales 0.7% and favorable Canadian exchange translation rates increased sales 2.2%.

 

Gross profit increased $85 million, or 7.5%, to $1.22 billion, due primarily to the sales increase along with favorable foreign exchange translation rates. The gross profit margin decreased to 40.5% from 41.4%, as increased pricing, favorable mix and productivity improvements only partially offset increased commodity costs. Operating income increased $53 million, or 8.4%, to $678 million, due to the strong increase in sales, partially offset by higher commodity costs and increased S&D due to higher volume and fuel costs.

 

Europe

 

Heinz Europe sales increased $456 million, or 14.8%, to $3.53 billion, driven by new product innovation and more focus on the key brands in the portfolio. Volume increased 4.5%, principally due to strong performance of Heinz^® ketchup across Europe, soup, beans and pasta meals in the U.K., Pudliszki^® branded products in Poland, and Heinz^® sauces and condiments in Russia. Volume also benefited from new product introductions across continental Europe, such as Weight Watchers^® Big Soups in Germany, Austria and Switzerland. Net pricing increased sales 3.3%, resulting chiefly from commodity-related price increases on Heinz^® ketchup and soup, the majority of the products in our Russian market and Italian infant nutrition products. Pricing was also favorable due to promotional timing on Heinz^® beans. Divestitures, net of acquisitions, reduced sales 1.4% and favorable foreign exchange translation rates increased sales by 8.5%.

 

Gross profit increased $135 million, or 10.9%, to $1.37 billion, and the gross profit margin decreased to 38.8% from 40.2%. The 10.9% increase reflects improved pricing and volume and the favorable impact of foreign exchange translation rates, while the decline in gross profit margin is largely due to increased commodity costs and higher manufacturing costs in our U.K., European

frozen and Netherlands businesses. Operating income increased $71 million, or 12.4%, to $637 million, due to higher sales and reductions in G&A, partially offset by higher commodity costs and increased marketing spending in support of our strong brands across Europe.

 

Asia/Pacific

 

Heinz Asia/Pacific sales increased $281 million, or 21.3%, to $1.60 billion. Volume increased 6.5%, reflecting significant improvements across the majority of the businesses within this segment, particularly Australia, India and China, related primarily to new product introductions supported by a 34.7% increase in marketing. Pricing increased 2.8%, due to increases on soy sauce and beverages in Indonesia, LongFong^® frozen products in China and nutritional products in India. Acquisitions, net of divestitures, increased sales 1.6%, and favorable foreign exchange translation rates increased sales by 10.4%.

 

Gross profit increased $101 million, or 23.9%, to $526 million, and the gross profit margin increased to 32.9% from 32.2%. These increases were due to increased volume, pricing, favorable mix and foreign exchange translation rates, which more than offset increased commodity costs. Operating income increased by $45 million, or 29.8%, to $195 million, primarily reflecting the increase in sales and gross margin, partially offset by increased marketing spending and increased S&D due to higher volume.

 

U.S. Foodservice

 

Sales of the U.S. Foodservice segment increased $3 million, or 0.2%, to $1.56 billion. Pricing increased sales 1.7%, largely due to commodity-related price increases and reduced promotional spending on Heinz^® ketchup, frozen soup and tomato products, partially offset by declines in frozen desserts. Volume decreased by 1.1%, as higher volume from frozen desserts sold to casual dining customers was more than offset by declines in the portion control business, tomato products and frozen appetizers. The volume reflected softness in the U.S. restaurant business as well as increased competition on our non-branded products. Divestitures reduced sales 0.4%.

 

Gross profit decreased $47 million, or 10.0%, to $419 million, and the gross profit margin decreased to 26.8% from 29.9%, as commodity costs disproportionately impacted the foodservice business, despite gains on commodity derivative contracts. The declines also reflect costs incurred in Fiscal 2008 in anticipation of a plant closure in the first quarter of Fiscal 2009, partially offset by increased pricing and productivity. Operating income decreased $47 million, or 21.5%, to $170 million, all of which is due to the decline in gross profit.

 

Rest of World

 

Sales for Rest of World increased $58 million, or 18.7%, to $368 million. Volume increased 6.3% due primarily to increased demand for the Company’s products in Latin America as well as strong performance across our Middle East business. Higher pricing increased sales by 13.6%, largely due to price increases and reduced promotions in Latin America as well as commodity-related price increases in South Africa. Divestitures reduced growth 1.7% and favorable foreign exchange translation rates increased sales 0.6%.

 

Gross profit increased $22 million, or 19.9%, to $133 million, due mainly to increased pricing, higher volume and improved business mix, partially offset by increased commodity costs. Operating income increased $6 million, or 15.1%, to $45 million.

 

Discontinued Operations

 

In the fourth quarter of Fiscal 2006, the Company completed its sale of the European seafood and Tegel^® poultry businesses. The Company recorded a $3.3 million ($5.9 million after-tax) loss from

discontinued operations related to these businesses for the year ended May 2, 2007, primarily resulting from purchase price adjustments pursuant to the transaction agreements.

 

Liquidity and Financial Position

 

For Fiscal 2009, cash provided by operating activities was $1.17 billion, a decrease of $21 million from the prior year. This decrease reflects incremental discretionary contributions of approximately $65 million made this year to fund the Company’s pension plans, the current year payment of the long-term incentive compensation accruals from Fiscal 2008 and unfavorable foreign exchange translation rates. These decreases were partially offset by a $106 million cash inflow from foreign currency forward contracts discussed previously as well as reduced tax payments. The Company’s cash conversion cycle increased 7 days, to 56 days in Fiscal 2009, 5 days of which was due to payables and 2 days from receivables. The payables decline was impacted by 3 days for the settlement of hedge contract liabilities that were outstanding in the prior year. Strong inventory reductions in the last four months of the fiscal year resulted in days in inventory remaining flat versus prior year.

 

Recent adverse conditions in the global equity and bond markets caused the actual rate of return on the pension plan assets during Fiscal 2009 to be a loss of approximately 16% versus the Company’s assumed long-term rate of return of +8.2% as of the end of Fiscal 2008. The impact of this lower rate of return on the funded status was partially offset by higher discount rates in Fiscal 2009 (6.54% in Fiscal 2009 versus 6.1% in Fiscal 2008). As a result of these two factors, the Company made incremental discretionary contributions of approximately $65 million to the plans in Fiscal 2009, thus resulting in total Fiscal 2009 contributions of $134 million which exceeded the original projection.

 

Cash used for investing activities totaled $761 million compared to $554 million last year. In Fiscal 2009, cash paid for acquisitions, net of divestitures, required $281 million, primarily related to the acquisitions of Benedicta, a sauce business in France, Golden Circle Limited, a fruit and juice business in Australia, La Bonne Cuisine, a chilled dip business in New Zealand, and Papillon, a small chilled products business in South Africa. This amount was partially offset by proceeds from the sale of a small portion control foodservice business in the U.S. In Fiscal 2008, cash paid for acquisitions, net of divestitures, required $88 million, primarily related to the acquisition of the license to the Cottee’s^® and Rose’s^® premium branded jams, jellies and toppings business in Australia and New Zealand, the Wyko^® sauce business in the Netherlands and the buy-out of the minority ownership on the Company’s Long Fong business in China, partially offset by the divestiture of a tomato paste business in Portugal. Fiscal 2009 capital expenditures totaled $292 million (2.9% of sales) compared to $302 million (3.0% of sales) in the prior year. In response to recent changes in economic conditions across the globe, the Company is reevaluating all non-critical capital projects and will target reduced capital spending as a percentage of sales in Fiscal 2010. Proceeds from disposals of property, plant and equipment were $5 million compared to $9 million in the prior year. During Fiscal 2008, the Company terminated the cross currency swaps that were previously designated as net investment hedges of foreign operations. The Company paid $93 million of cash in the prior year to the counterparties, which is presented in investing activities in the consolidated statements of cash flows. In addition, the Company paid $74 million in the prior year as a result of cross currency swap contract maturities and such payments were presented within other investing items, net. The current year requirement of $193 million for restricted cash represents collateral that the Company is required to maintain in connection with a total rate of return swap entered into during the third quarter of Fiscal 2009. See Note 13 in Item 8, “Financial Statements and Supplementary Data,” for further information.

 

The early termination of the net investment hedges described above and interest rate swaps described below were completed in conjunction with the reorganizations of the Company’s foreign operations and interest rate swap portfolio in Fiscal 2008.

Cash used for financing activities totaled $516 million compared to $758 million last year. Proceeds from long-term debt were $853 million in the current year. The current year proceeds reflect the sale of $500 million 5.35% Notes due 2013 as well as the sale of $350 million or 3,500 shares of HFC (a subsidiary of Heinz) Series B Preferred Stock. The proceeds from both transactions were used for general corporate purposes, including the repayment of commercial paper and other indebtedness incurred to redeem HFC’s Series A Preferred Stock. As a result, payments on long-term debt were $427 million this year compared to $368 million in the prior year. Fiscal 2008 payments reflect the maturity and payment of the $300 million 6% U.S. Dollar Notes as well as the repurchase of a portion of the 6% U.S. Dollar Notes due March 15, 2012. Net payments on commercial paper and short-term debt were $484 million this year compared to net proceeds of $484 million in the prior year. Cash proceeds from option exercises, net of treasury stock purchases, provided $83 million of cash in the current year. Cash used for the purchases of treasury stock, net of proceeds from option exercises, was $502 million in the prior year. Dividend payments totaled $525 million, compared to $485 million in the prior year, reflecting a 9.2% increase in the dividend per share of common stock for Fiscal 2009. During Fiscal 2008, the Company terminated certain interest rate swaps that were previously designated as fair value hedges of fixed rate debt obligations. The notional amount of these contracts totaled $612 million. The Company received $104 million of cash from the termination of these contracts which is presented in the consolidated statements of cash flows within financing activities. The $104 million gain is being amortized to reduce interest expense over the remaining term of the corresponding debt obligations (average remaining life of 21 years).

 

On December 1, 2008, the Company was contractually required to remarket $800 million in dealer securities. At the time of the contractually required remarketing and for the majority of the fourth calendar quarter of 2008, the global capital markets were characterized by extreme volatility and illiquidity. These market conditions resulted in the Company having to reset the coupon on the remarketable securities at higher than anticipated levels. The total coupon of 15.59% represented an 11.5% yield to investors and 4.09% for the cost of the three-year remarketing option. The next remarketing is scheduled for December 1, 2011. If the securities are not remarketed, then the Company is required to repurchase all of the securities at 100% of the principal amount plus accrued interest. If the Company purchases or otherwise acquires the securities from the holders, the Company is required to pay to the holder of the remarketing option the option settlement amount. As of December 1, 2008, the date of the most recent remarketing, the fair value of the dealer’s option to remarket the securities every three years through 2020 was estimated to be approximately $150 million. This value fluctuates based on market conditions. Also on December 1, 2008, the Company entered into a three year total rate of return swap with a notional amount of $175 million. The swap has not been designated as a hedge, but will have the economic impact of reducing a portion of the interest cost related to the remarketable securities. See Note No. 13 in Item 8, “Financial Statements and Supplementary Data” for additional information.

 

On May 28, 2009, the Company announced that its Board of Directors approved an increase in the quarterly dividend on common stock from 41.5 cents to 42.0 cents, an annual indicative rate of $1.68 per share for Fiscal 2010, effective with the July 2009 dividend payment. Fiscal 2010 dividend payments are expected to be approximately $535 million.

 

At April 29, 2009, the Company had total debt of $5.14 billion (including $251 million relating to the Statement of Financial Accounting Standards (“SFAS”) No. 133 hedge accounting adjustments), cash and cash equivalents of $373 million and $193 million of restricted cash. Total debt balances have decreased slightly since prior year, primarily reflecting lower share repurchase activity.

 

Return on average shareholders’ equity (“ROE”) is calculated by taking net income divided by average shareholders’ equity. Average shareholders’ equity is a five-point quarterly average. ROE was 58.2% in Fiscal 2009, 44.0% in Fiscal 2008 and 37.4% in Fiscal 2007. The increase in ROE over the three years is largely due to higher net income and decreased average equity reflecting foreign currency translation adjustments, the adoption of SFAS No. 158 and share repurchases. ROE in

Fiscal 2009 was favorably impacted by 3.7% due to the $107 million gain on foreign currency forward contracts discussed earlier.

 

After-tax return on invested capital (“ROIC”) is calculated by taking net income, plus net interest expense net of tax, divided by average invested capital. Average invested capital is a five-point quarterly average of debt plus total equity less cash and cash equivalents, short-term investments, restricted cash, and the SFAS No. 133 hedge accounting adjustments. ROIC was 18.4% in Fiscal 2009, 16.8% in Fiscal 2008 and 15.8% in Fiscal 2007. The increase in ROIC over the three years is largely due to higher net income and decreased average equity reflecting foreign currency translation adjustments, the adoption of SFAS No. 158, share repurchases and effective management of the asset base. ROIC in Fiscal 2009 was favorably impacted by 1.1% due to the $107 million gain on foreign currency forward contracts discussed earlier.

 

In April 2009, the Company and HFC replaced their existing $2.0 billion credit agreement with $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 Company’s commercial paper borrowings and $204.3 million of Australian denominated borrowings. As a result, the commercial paper and Australian denominated borrowings are classified as long-term debt based upon the Company’s intent and ability to refinance these borrowings on a long-term basis. In connection with the credit agreements, the Company is required to pay commitment fees of approximately $8 million in Fiscal 2010 which will be reported as interest expense in the consolidated statements of income. The new credit agreements include a leverage ratio covenant in addition to customary covenants that are substantially similar to those in the former credit agreement. The Company was in compliance with all of its covenants as of April 29, 2009. In addition, the Company has $542.5 million of foreign lines of credit available at April 29, 2009.

 

Subsequent to fiscal year end, the Company entered into a three-year $175 million accounts receivable securitization program.

 

Global capital and credit markets, including the domestic commercial paper markets, experienced increased volatility late in calendar year 2008. Despite this situation, the Company has continued to have access to the commercial paper market. 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 Company’s 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 continued or 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 April 29, 2009, the Company’s long-term debt ratings at Moody’s, Standard & Poor’s and Fitch Rating have remained consistent at Baa2, BBB and BBB, respectively.

 

Contractual Obligations and Other Commitments

 

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 Company’s materials and processes, certain supply contracts contain penalty provisions for early terminations. The Company does not believe

that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations.

 

The following table represents the contractual obligations of the Company as of April 29, 2009.

 

 

 

Other long-term liabilities primarily consist of certain specific incentive compensation arrangements and pension and postretirement benefit commitments. The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: income taxes, minority interest and insurance accruals. The Company is unable to estimate the timing of the payments for these items.

 

At April 29, 2009, 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 $106 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 of when cash settlements with taxing authorities may occur.

 

Off-Balance Sheet Arrangements and Other Commitments

 

The Company does not have guarantees or other off-balance sheet financing arrangements that we believe are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. In addition, the Company does not have any related party transactions that materially affect the results of operations, cash flow or financial condition.

 

As of April 29, 2009, the Company was party to an operating lease for buildings and equipment in which the Company has guaranteed a supplemental payment obligation of approximately $52 million at the termination of the lease. The Company believes, based on current facts and circumstances, that any payment pursuant to this guarantee is remote. In May 2008, the construction of a new frozen food factory in South Carolina commenced. It is expected that this project will be completed in approximately 3 to 6 months at which time the Company plans to enter into an operating lease.

 

Market Risk Factors

 

The Company is exposed to market risks from adverse changes in foreign exchange rates, interest rates, commodity prices and production costs. As a policy, the Company does not engage in

speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes.

 

Foreign Exchange Rate Sensitivity:  The Company’s cash flow and earnings are subject to fluctuations due to exchange rate variation. Foreign currency risk exists by nature of the Company’s global operations. The Company manufactures and sells its products on six continents around the world, and hence foreign currency risk is diversified.

 

The Company may attempt to limit its exposure to changing foreign exchange rates through both operational and financial market actions. These actions may include entering into forward contracts, option contracts, or cross currency swaps to hedge existing exposures, firm commitments and forecasted transactions. The instruments are used to reduce risk by essentially creating offsetting currency exposures.

 

The following table presents information related to foreign currency contracts held by the Company:

 

 

As of April 29, 2009, the Company’s foreign currency contracts mature within 5 years. Contracts that meet qualifying criteria are accounted for as either foreign currency cash flow hedges, fair value hedges or net investment hedges of foreign operations. Any gains and losses related to contracts that do not qualify for hedge accounting are recorded in current period earnings in other income and expense.

 

Substantially all of the Company’s foreign business units’ financial instruments are denominated in their respective functional currencies. Accordingly, exposure to exchange risk on foreign currency financial instruments is not material. (See Note 13, “Derivative Financial Instruments and Hedging Activities” in Item 8—“Financial Statements and Supplementary Data.”)

 

Interest Rate Sensitivity:  The Company is exposed to changes in interest rates primarily as a result of its borrowing and investing activities used to maintain liquidity and fund business operations. The nature and amount of the Company’s long-term and short-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company’s debt obligations totaled $5.14 billion (including $251 million relating to the SFAS No. 133 hedge accounting adjustments) and $5.18 billion (including $199 million relating to the SFAS No. 133 hedge accounting adjustments) at April 29, 2009 and April 30, 2008, respectively. The Company’s debt obligations are summarized in Note 7, “Debt” in Item 8—“Financial Statements and Supplementary Data.”

 

In order to manage interest rate exposure, the Company utilizes interest rate swaps to convert fixed-rate debt to floating. These derivatives are primarily accounted for as fair value hedges. Accordingly, 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. Based on the amount of fixed-rate debt converted to floating as of April 29, 2009, a variance of 1/8% in the related interest rate would cause annual interest expense related to this debt to change by approximately $2 million. The following table presents additional information related to interest rate contracts designated as fair value hedges by the Company:

 

 

The Company had interest rate contracts with a total notional amount of $177 million at April 30, 2008, that did not meet the criteria for hedge accounting but effectively mitigated interest rate exposures. These derivatives were accounted for on a full mark-to-market basis through earnings. Net unrealized gains related to these interest rate contracts were insignificant as of April 30, 2008. These contracts are no longer outstanding.

 

The Company entered into a total rate of return swap with an unaffiliated international financial institution during the third quarter of Fiscal 2009 with a notional amount of $175 million. This instrument is being used as an economic hedge to reduce a portion of the interest cost related to the Company’s $800 million remarketable securities. The swap is being accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of interest income. Net unrealized gains related to the swap totaled $20.2 million as of April 29, 2009. Future mark-to-market adjustments on the total rate of return swap will be primarily derived from changes in the fair value of the dealer remarketable securities which will reflect fluctuations in the credit market. This swap is scheduled to mature in three years, corresponding with the next scheduled remarketing of the Company’s $800 million remarketable securities. In connection with this swap, the Company is required to maintain a restricted cash collateral balance of $192.7 million with the counterparty for the term of the swap. Pursuant to the terms of the swap, the counterparty has the option for early termination of the agreement upon the occurrence of specified events as defined in the agreement. In the event of early termination there would be a net settlement between the Company and the counterparty primarily based on the change in fair value of the remarketable securities subsequent to the most recent remarketing date which coincides with the date of the swap.

 

Effect of Hypothetical 10% Fluctuation in Market Prices:  As of April 29, 2009, the potential gain or loss in the fair value of the Company’s outstanding foreign currency contracts and interest rate contracts assuming a hypothetical 10% fluctuation in currency and swap rates would be approximately:

 

 

However, it should be noted that any change in the fair value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. In relation to currency contracts, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.

 

Recently Issued Accounting Standards

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair

value under generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value, but does not expand the use of fair value to new accounting transactions. SFAS No. 157 is effective for financial assets and liabilities in fiscal years beginning after November 15, 2007, and for non-financial assets and liabilities in fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 for its financial assets and liabilities on May 1, 2008. See Note No. 12 in Item 8—“Financial Statements and Supplementary Data” for additional information. The Company will adopt SFAS No. 157 for its non-financial assets and liabilities that are recognized at fair value on a non-recurring basis, including goodwill, other intangible assets, exit liabilities and purchase price allocations on April 30, 2009 (the first day of Fiscal 2010) and this adoption is not expected to have a material impact on the Company’s financial statements.

 

On May 1, 2008, the Company adopted the measurement date provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” The measurement date provisions require plan assets and obligations to be measured as of the date of the year-end financial statements. The Company previously measured its foreign pension and other postretirement benefit obligations as of March 31 each year. The adoption of the measurement date provisions of SFAS No. 158 did not have a material effect on the Company’s consolidated statement of income or consolidated balance sheet for the fiscal year ended April 29, 2009.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51.” These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. SFAS No. 141(R) and its related standards will impact the accounting for any future 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. SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity. SFAS No. 160 requires retrospective adoption of the presentation and disclosures for existing minority interests. All other requirements of SFAS No. 160 will be applied prospectively. SFAS No. 160 is not expected to have a material impact on the Company’s financial statements upon adoption. These standards will be adopted on April 30, 2009, the first day of Fiscal 2010.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” This new standard requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. As SFAS No. 161 only requires enhanced disclosures, it will have no impact on the Company’s financial position, results of operations, or cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted SFAS No. 161 in the fourth quarter of Fiscal 2009. See Note No. 13 in Item 8—“Financial Statements and Supplementary Data” for additional information.

 

In June 2008, the FASB issued Financial Statement of Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim

periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company has completed its evaluation of the impact of adopting FSP EITF 03-6-1 in Fiscal 2010. The adoption will have no impact on net income, but is expected to have a $0.01 unfavorable impact on both basic and diluted earnings per share in Fiscal 2010 and no material impact for Fiscal 2011 forward. The adoption is also expected to result in a $0.02 and $0.01 reduction in both basic and diluted earnings per share in Fiscal 2008 and 2009, respectively.

 

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This new standard requires enhanced disclosures about plan assets in an employer’s 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 statement is effective for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact of adopting FSP FAS 132(R)-1 in the fourth quarter of Fiscal 2010.

 

Discussion of Significant Accounting Estimates

 

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

Marketing Costs—Trade promotions are an important component of the sales and marketing of the Company’s products and are critical to the support of the business. Trade promotion costs include amounts paid to retailers to offer temporary price reductions for the sale of the Company’s products to consumers, amounts paid to obtain favorable display positions in retailers’ stores, and amounts paid to customers for shelf space in retail stores. Accruals for trade promotions are initially recorded at the time of sale of product to the customer based on an estimate of the expected levels of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer participation, and sales and payment trends with similar previously offered programs. Our original estimated costs of trade promotions may change in the future as a result of changes in customer participation, particularly for new programs and for programs related to the introduction of new products. We perform monthly and quarterly evaluations of our outstanding trade promotions, making adjustments where appropriate to reflect changes in estimates. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorization process for deductions taken by a customer from amounts otherwise due to the Company. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by the Company’s customers for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time and could have a significant impact on the Company’s results of operations depending on how actual results of the programs compare to original estimates.

 

We offer coupons to consumers in the normal course of our business. Expenses associated with this activity, which we refer to as coupon redemption costs, are accrued in the period in which the coupons are offered. The initial estimates made for each coupon offering are based upon historical redemption experience rates for similar products or coupon amounts. We perform monthly and

quarterly evaluations of outstanding coupon accruals that compare actual redemption rates to the original estimates. We review the assumptions used in the valuation of the estimates and determine an appropriate accrual amount. Adjustments to our initial accrual may be required if actual redemption rates vary from estimated redemption rates.

 

Investments and Long-lived Assets, including Property, Plant and Equipment—Investments and long-lived assets are recorded at their respective cost basis on the date of acquisition. Buildings, equipment and leasehold improvements are depreciated on a straight-line basis over the estimated useful life of such assets. The Company reviews investments and long-lived assets, including intangibles with finite useful lives, and property, plant and equipment, whenever circumstances change such that the indicated recorded value of an asset may not be recoverable or has suffered an other-than-temporary impairment. Factors that may affect recoverability include changes in planned use of equipment or software, the closing of facilities and changes in the underlying financial strength of investments. The estimate of current value requires significant management judgment and requires assumptions that can include: future volume trends and revenue and expense growth rates developed in connection with the Company’s internal projections and annual operating plans, and in addition, external factors such as changes in macroeconomic trends which are developed in connection with the Company’s long-term strategic planning. As each is management’s best estimate on then available information, resulting estimates may differ from actual cash flows.

 

Goodwill and Indefinite-Lived Intangibles—Carrying values of goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually, or when circumstances indicate that a possible impairment may exist. Indicators such as unexpected adverse economic factors, unanticipated technological change or competitive activities, loss of key personnel, and acts by governments and courts, may signal that an asset has become impaired. All goodwill is assigned to reporting units, which are primarily one level below our operating segments. Goodwill is assigned to the reporting unit that benefits from the cash flows arising from each business combination. We perform our impairment tests of goodwill at the reporting unit level. The Company’s measure of impairment for both goodwill and intangible assets with indefinite lives is based on a discounted cash flow model that requires significant judgment and requires assumptions about future volume trends and revenue and expense growth rates developed in connection with the Company’s internal projections and annual operating plans, and in addition, external factors such as changes in macroeconomic trends and cost of capital developed in connection with the Company’s long-term strategic planning. Inherent in estimating future performance, in particular assumptions regarding external factors such as capital markets, are uncertainties beyond the Company’s control.

 

During the fourth quarter of Fiscal 2009, the Company completed its annual review of goodwill and indefinite-lived intangible assets. The key assumptions used to determine the fair value of each reporting unit were: (a) expected net cash flow of the reporting units; (b) terminal growth rates; and (c) discount rates. The discount rates were based on the Company’s estimate of the after-tax weighted average cost of capital, adjusted for country-specific risks. No impairments were identified during the Company’s annual assessment of goodwill and indefinite-lived intangible assets.

 

Retirement Benefits—The Company sponsors pension and other retirement plans in various forms covering substantially all employees who meet eligibility requirements. Several actuarial and other factors that attempt to anticipate future events are used in calculating the expense and obligations related to the plans. These factors include assumptions about the discount rate, expected return on plan assets, turnover rates and rate of future compensation increases as determined by the Company, within certain guidelines. In addition, the Company uses best estimate assumptions, provided by actuarial consultants, for withdrawal and mortality rates to estimate benefit expense. The financial and actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension expense recorded by the Company.

The Company recognized pension expense related to defined benefit programs of $6 million, $7 million, and $32 million for fiscal years 2009, 2008, and 2007, respectively, which reflected expected return on plan assets of $208 million, $227 million, and $199 million, respectively. The Company contributed $134 million to its pension plans in Fiscal 2009 compared to $58 million in Fiscal 2008 and $63 million in Fiscal 2007. Due to poor returns across global equity markets, the Company expects to increase contributions to its pension plans to approximately $250 million in Fiscal 2010.

 

One of the significant assumptions for pension plan accounting is the expected rate of return on pension plan assets. Over time, the expected rate of return on assets should approximate actual long-term returns. In developing the expected rate of return, the Company considers average real historic returns on asset classes, the investment mix of plan assets, investment manager performance and projected future returns of asset classes developed by respected advisors. When calculating the expected return on plan assets, the Company primarily uses a market-related-value of assets that spreads asset gains and losses (difference between actual return and expected return) uniformly over 3 years. The weighted average expected rate of return on plan assets used to calculate annual expense was 8.2% for the years ended April 29, 2009, April 30, 2008 and May 2, 2007. For purposes of calculating Fiscal 2010 expense, the weighted average rate of return will be approximately 8.1%.

 

Another significant assumption used to value benefit plans is the discount rate. The discount rate assumptions used to value pension and postretirement benefit obligations reflect the rates available on high quality fixed income investments available (in each country where the Company operates a benefit plan) as of the measurement date. The Company uses bond yields of appropriate duration for each country by matching it with the duration of plan liabilities. The weighted average discount rate used to measure the projected benefit obligation for the year ending April 29, 2009 increased to 6.5% from 6.1% as of April 30, 2008.

 

Deferred gains and losses result from actual experience different from expected financial and actuarial assumptions. The pension plans currently have a deferred loss amount of $1.10 billion at April 29, 2009. During 2009, the deferred loss amount was negatively impacted by actual asset returns being less than expected. Deferred gains and losses are amortized through the actuarial calculation into annual expense over the estimated average remaining service period of plan participants, which is currently 10 years.

 

The Company also provides certain postretirement health care benefits. The postretirement health care benefit expense and obligation are determined using the Company’s assumptions regarding health care cost trend rates. The health care trend rates are developed based on historical cost data, the near-term outlook on health care trends and the likely long-term trends. The domestic postretirement health care benefit obligation at April 29, 2009 was determined using an average initial health care trend rate of 8.0% which gradually decreases to an average ultimate rate of 5.0% in 6 years. The foreign postretirement health care benefit obligation at April 29, 2009 was determined using an average initial health care trend rate of 6.3% which gradually decreases to an average ultimate rate of 4.3% in 6 years. A one percentage point increase in the assumed health care cost trend rate would increase the service and interest cost components of annual expense by $2 million and increase the benefit obligation by $16 million. A one percentage point decrease in the assumed health care cost trend rates would decrease the service and interest cost by $2 million and decrease the benefit obligation by $15 million.

Sensitivity of Assumptions

 

If we assumed a 100 basis point change in the following rates, the Company’s Fiscal 2009 projected benefit obligation and expense would increase (decrease) by the following amounts (in millions):

 

 

Income Taxes—The Company computes its annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income. Significant judgment is required in determining the Company’s annual tax rate and in evaluating uncertainty in its tax positions. The Company recognizes a benefit for tax positions that it believes will more likely than not be sustained upon examination. The amount of benefit recognized is the largest amount of benefit that the Company believes has more than a 50% probability of being realized upon settlement. The Company regularly monitors its tax positions and adjusts the amount of recognized tax benefit based on its evaluation of information that has become available since the end of its last financial reporting period. The annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the amount of recognized tax benefits the Company does not consider information that has become available after the balance sheet date, but does disclose the effects of new information whenever those effects would be material to the Company’s financial statements. The difference between the amount of benefit taken or expected to be taken in a tax return and the amount of benefit recognized for financial reporting represents unrecognized tax benefits. These unrecognized tax benefits are presented in the balance sheet principally within accrued income taxes.

 

The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.

 

Changes in recognized tax benefits and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

 

Inflation and Input Costs

 

In general, the effects of cost inflation may be experienced by the Company in future periods. During Fiscal 2009, the Company experienced wide-spread inflationary increases in commodity input costs. While recently there has been a general decline in commodity inflation, some key input costs remain above historic levels. Price increases and continued productivity improvements are helping to offset these cost increases.

 

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, where possible, and efficiently managing its working capital levels.

 

Stock Market Information

 

H. J. Heinz Company common stock is traded principally on The New York Stock Exchange under the symbol HNZ. The number of shareholders of record of the Company’s common stock as of May 31, 2009 approximated 37,000. The closing price of the common stock on The New York Stock Exchange composite listing on April 29, 2009 was $33.99.

 

Stock price information for common stock by quarter follows:

 

 

 

This information is set forth in this report in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 25 through 27.

Item 8.  Financial Statements and Supplementary Data.

 

TABLE OF CONTENTS

 

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America, and includes those policies and procedures that:

 

(1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles;

 

(3) Provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

(4) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Management has concluded that the Company’s internal control over financial reporting was effective as of the end of the most recent fiscal year. PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the Company’s internal control over financial reporting as of April 29, 2009, as stated in their report which appears herein.

 

Chairman, President and
Chief Executive Officer

 

Executive Vice President and
Chief Financial Officer

 

June 17, 2009

 

To the Board of Directors and Shareholders of

H. J. Heinz Company:

 

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of H. J. Heinz Company and its subsidiaries at April 29, 2009 and April 30, 2008, and the results of their operations and their cash flows for each of the three years in the period ended April 29, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 29, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation effective May 4, 2006 and as discussed in Note 10 to the consolidated financial statements, the Company changed the manner in which it accounts for defined benefit pension and other postretirement plans effective May 2, 2007.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

 

Pittsburgh, Pennsylvania

June 17, 2009

H. J. Heinz Company and Subsidiaries

 

Consolidated Statements of Income

 

 

See Notes to Consolidated Financial Statements

H. J. Heinz Company and Subsidiaries

 

Consolidated Balance Sheets

 

 

See Notes to Consolidated Financial Statements

H. J. Heinz Company and Subsidiaries

 

Consolidated Balance Sheets

 

 

 

See Notes to Consolidated Financial Statements

H. J. Heinz Company and Subsidiaries

 

Consolidated Statements of Shareholders’ Equity

 

 

See Notes to Consolidated Financial Statements

H. J. Heinz Company and Subsidiaries

 

Consolidated Statements of Cash Flows