SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

 

Commission File Number 1-3385

 

H. J. HEINZ COMPANY

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (412) 456-5700

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X  No   

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes X  No   

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

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

 

The number of shares of the Registrant’s Common Stock, par value $0.25 per share, outstanding as of July 29, 2009 was 315,188,053 shares.

 

 

PART I—FINANCIAL INFORMATION

 

 

H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

 

 

See Notes to Condensed Consolidated Financial Statements.

 

H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See Notes to Condensed Consolidated Financial Statements.

 

H. J. HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

 

The interim condensed consolidated financial statements of H. J. Heinz Company, together with its subsidiaries (collectively referred to as the “Company”), are unaudited. In the opinion of management, all adjustments, which are of a normal and recurring nature, except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair statement of the results of operations of these interim periods, have been included. The results for interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the Company’s business. Certain prior year amounts have been reclassified to conform with the Fiscal 2010 presentation. These statements should be read in conjunction with the Company’s consolidated financial statements and related notes, and management’s discussion and analysis of financial condition and results of operations which appear in the Company’s Annual Report on Form 10-K for the year ended April 29, 2009. Subsequent events occurring after July 29, 2009 were evaluated through August 20, 2009, the date these financial statements were issued.

 

 

On April 30, 2009, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” for its non-financial assets and liabilities that are recognized at fair value on a non-recurring basis, including long-lived assets, goodwill, other intangible assets, exit liabilities and purchase price allocations. SFAS No. 157 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. The adoption of this standard did not have a material impact on the Company’s financial statements. See Note No. 12 for additional information.

 

On April 30, 2009, the Company adopted SFAS No. 141(R), “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51.” SFAS No. 141(R) and its related standards impact the accounting for any business combinations completed after April 29, 2009. The nature and extent of the impact will depend upon the terms and conditions of any such transaction. SFAS No. 160 changes the accounting and reporting for minority interests, which have been recharacterized as noncontrolling interests and classified as a component of equity. Prior period financial statements and disclosures for existing minority interests have been restated in accordance with SFAS No. 160. All other requirements of SFAS No. 160 will be applied prospectively. The adoption of SFAS No. 160 did not have a material impact on the Company’s financial statements.

 

On April 30, 2009, the Company adopted FASB Staff 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. As a result of adopting FSP EITF 03-6-1, the Company has retrospectively adjusted its earnings per share data for prior periods. The adoption of FSP EITF 03-6-1 had no impact on net income and less than a $0.01 impact on basic and diluted earnings per share for the first quarters of Fiscal 2010 and 2009. See Note No. 8 for additional information.

 

In December 2008, the Financial Accounting Standards Board (“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.

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS No. 165 describes the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and provides guidance on the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted SFAS No. 165 during the first quarter of Fiscal 2010, and its application had no impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 166 removes the concept of a qualifying special-purpose entity and the exception from applying FASB Intrepretation No. (“FIN”) 46(R) to variable interest entities that are qualifying special-purpose entities. SFAS No. 166 requires that a transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The standard also requires additional disclosures about any transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS No. 166 on April 29, 2010, the first day of Fiscal 2011.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the purpose and design of the other entity and the reporting entity’s ability to direct the activities of the other entity that most significantly impact its economic performance. SFAS No. 167 also requires additional disclosures about a reporting entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS No. 167 on April 29, 2010, the first day of Fiscal 2011.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative generally accepted accounting principles in the United States of America. The Codification changes the referencing of financial standards but is not intended to change or alter existing U.S. GAAP. The Codification is effective for interim or annual financial periods ending after September 15, 2009 and will be effective for the Company in the second quarter of Fiscal 2010.

 

 

 

Changes in the carrying amount of goodwill for the first quarter ended July 29, 2009, by reportable segment, are as follows:

 

		North
		American
		Consumer												U.S.				Rest of
		Products				Europe				Asia/Pacific				Foodservice				World				Total
		(Thousands of Dollars)
Balance at April 29, 2009		$	1,074,841			$	1,090,998			$	248,222			$	260,523			$	13,204			$	2,687,788
Purchase accounting adjustments			—				—				652				—				—				652
Translation adjustments			11,624				91,100				25,380				—				729				128,833
Balance at July 29, 2009		$	1,086,465			$	1,182,098			$	274,254			$	260,523			$	13,933			$	2,817,273

 

Trademarks and other intangible assets at July 29, 2009 and April 29, 2009, subject to amortization expense, are as follows:

 

		July 29, 2009												April 29, 2009
						Accum												Accum
		Gross				Amort				Net				Gross				Amort				Net
		(Thousands of Dollars)
Trademarks		$	283,040			$	(74,624	)		$	208,416			$	272,710			$	(71,138	)		$	201,572
Licenses			208,186				(148,219	)			59,967				208,186				(146,789	)			61,397
Recipes/processes			75,975				(23,562	)			52,413				72,988				(22,231	)			50,757
Customer related assets			191,386				(43,364	)			148,022				179,657				(38,702	)			140,955
Other			68,803				(55,894	)			12,909				68,128				(55,091	)			13,037
		$	827,390			$	(345,663	)		$	481,727			$	801,669			$	(333,951	)		$	467,718

 

Amortization expense for trademarks and other intangible assets was $7.2 million and $8.0 million for the quarters ended July 29, 2009 and July 30, 2008, respectively. Based upon the amortizable intangible assets recorded on the balance sheet as of July 29, 2009, annual amortization expense for each of the next five fiscal years is estimated to be approximately $29 million.

 

Intangible assets not subject to amortization at July 29, 2009 totaled $877.5 million and consisted of $726.1 million of trademarks, $120.6 million of recipes/processes, and $30.9 million of licenses. Intangible assets not subject to amortization at April 29, 2009, totaled $827.4 million and consisted of $688.2 million of trademarks, $111.6 million of recipes/processes, and $27.6 million of licenses.

 

 

The total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $83.5 million and $86.6 million, on July 29, 2009 and April 29, 2009, respectively. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $53.0 million and $51.9 million, on July 29, 2009 and April 29, 2009, respectively. It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $31.1 million in the next 12 months primarily due to the progression of federal, state, and foreign audits in process.

 

The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The total amount of interest and penalties accrued as of July 29, 2009

 

was $21.8 million and $1.9 million, respectively. The corresponding amounts of accrued interest and penalties at April 29, 2009 were $22.5 million and $2.2 million, respectively.

 

The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates in an international environment with significant operations in various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, Italy, the United Kingdom and the United States. The Company has substantially concluded all income tax matters in the United Kingdom for years through Fiscal 2006, all Italian and U.S. federal income tax matters for years through Fiscal 2005, and all Australian and Canadian income tax matters for years through Fiscal 2004.

 

The effective tax rate for the current quarter was 28.5% compared to 28.2% last year. The current quarter effective tax rate benefits from tax planning implemented during the third quarter of Fiscal 2009. The prior year first quarter effective tax rate reflected a discrete benefit resulting from the tax effects of law changes in the U.K. of approximately $11 million.

 

 

As of July 29, 2009, the Company had outstanding stock option awards, restricted stock units and restricted stock awards issued pursuant to various shareholder-approved plans and a shareholder-authorized employee stock purchase plan, as described on pages 55 to 60 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2009. The compensation cost related to these plans recognized in general and administrative expenses (“G&A”), and the related tax benefit was $6.3 million and $1.9 million for the first quarter ended July 29, 2009, and $6.8 million and $2.4 million for the first quarter ended July 30, 2008, respectively.

 

In Fiscal 2010, the Company granted performance awards as permitted in the Fiscal Year 2003 Stock Incentive Plan, subject to the achievement of certain performance goals. These performance awards are tied to the Company’s relative Total Shareholder Return (“Relative TSR”) Ranking within the defined Long-term Performance Program (“LTPP”) peer group and the 2-year average after-tax Return on Invested Capital (“ROIC”) metrics. The Relative TSR metric is based on the two-year cumulative return to shareholders from the change in stock price and dividends paid between the starting and ending dates. The starting value was based on the average of each LTPP peer group company stock price for the 60 trading days prior to and including April 30, 2009. The ending value will be based on the average stock price for the 60 trading days prior to and including the close of the Fiscal 2011 year end, plus dividends paid over the 2 year performance period. The compensation cost related to current and prior period LTPP awards recognized in G&A was $2.6 million, and the related tax benefit was $0.8 million for the first quarter ended July 29, 2009. The compensation cost related to LTPP awards recognized in G&A was $6.1 million, and the related tax benefit was $2.0 million for the first quarter ended July 30, 2008.

 

 

 

The components of net periodic benefit cost are as follows:

 

		First Quarter Ended
		July 29, 2009				July 30, 2008				July 29, 2009				July 30, 2008
		Pension Benefits								Post Retirement Benefits
		(Thousands of Dollars)
Service cost		$	7,789			$	9,900			$	1,471			$	1,694
Interest cost			37,078				41,183				3,727				3,928
Expected return on plan assets			(52,320	)			(59,458	)			—				—
Amortization of prior service cost			538				887				(952	)			(946	)
Amortization of unrecognized loss			13,320				9,051				135				923
Net periodic benefit cost		$	6,405			$	1,563			$	4,381			$	5,599

 

During the first quarter of Fiscal 2010, the Company contributed $144 million to these defined benefit plans, of which $132 million was discretionary. The Company expects to make combined cash contributions of approximately $260 million in Fiscal 2010, of which $200 million would be discretionary, however actual contributions may be affected by pension asset and liability valuations during the year.

 

 

The Company’s segments are primarily organized by geographical area. The composition of segments and measure of segment profitability are consistent with that used by the Company’s management.

 

Descriptions of the Company’s reportable segments are as follows:

 

North American Consumer Products—This segment primarily manufactures, markets and sells ketchup, condiments, sauces, pasta meals, and frozen potatoes, entrees, snacks, and appetizers to the grocery channels in the United States of America and includes our Canadian business.

 

Europe—This segment includes the Company’s operations in Europe, including Eastern Europe and Russia, and sells products in all of the Company’s categories.

 

Asia/Pacific—This segment includes the Company’s operations in New Zealand, Australia, India, Japan, China, South Korea, Indonesia, and Singapore. This segment’s operations include products in all of the Company’s categories.

 

U.S. Foodservice—This segment primarily manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States of America including ketchup, condiments, sauces, and frozen soups, desserts and appetizers.

 

Rest of World—This segment includes the Company’s operations in Africa, Latin America, and the Middle East that sell products in all of the Company’s categories.

 

The Company’s management evaluates performance based on several factors including net sales, operating income, and the use of capital resources. Intersegment revenues and items below the operating income line of the consolidated statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s management.

 

The following table presents information about the Company’s reportable segments:

 

		First Quarter Ended
		July 29, 2009				July 30, 2008
		FY 2010				FY 2009
		(Thousands of Dollars)
Net external sales:
North American Consumer Products		$	727,242			$	741,182
Europe			788,840				918,191
Asia/Pacific			469,234				457,813
U.S. Foodservice			346,501				353,413
Rest of World			136,106				112,609
Consolidated Totals		$	2,467,923			$	2,583,208
Operating income (loss):
North American Consumer Products		$	184,205			$	168,108
Europe			125,641				156,740
Asia/Pacific			53,264				66,519
U.S. Foodservice			31,170				24,940
Rest of World			18,103				12,650
Other:
Non-Operating(a)			(30,665	)			(36,693	)
Upfront productivity charges (b)			(15,749	)			—
Consolidated Totals		$	365,969			$	392,264

 

 

 

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

 

		First Quarter Ended
		July 29, 2009				July 30, 2008
		FY 2010				FY 2009
		(Thousands of Dollars)
Ketchup and Sauces		$	1,068,813			$	1,098,585
Meals and Snacks			950,433				1,058,163
Infant/Nutrition			291,954				309,466
Other			156,723				116,994
Total		$	2,467,923			$	2,583,208

 

 

 

The following are reconciliations of income to income applicable to common stock and the number of common shares outstanding used to calculate basic EPS to those shares used to calculate diluted EPS:

 

		First Quarter Ended
		July 29, 2009				July 30, 2008
		FY 2010				FY 2009
		(In thousands)
Net income attributable to H. J. Heinz Company		$	212,564			$	228,964
Allocation to participating securities (See Note No. 2)			522				1,308
Preferred dividends			3				3
Income applicable to common stock		$	212,039			$	227,653
Average common shares outstanding—basic			315,074				312,022
Effect of dilutive securities:
Convertible preferred stock			105				107
Stock options, restricted stock and the global stock purchase plan			2,050				4,672
Average common shares outstanding—diluted			317,229				316,801

 

Diluted earnings per share is based upon the average shares of common stock and dilutive common stock equivalents outstanding during the periods presented. Common stock equivalents arising from dilutive stock options, restricted common stock units, and the global stock purchase plan are computed using the treasury stock method.

 

Options to purchase an aggregate of 8.5 million and 0.9 million shares of common stock for the first quarters ended July 29, 2009 and July 30, 2008, respectively, were not included in the computation of diluted earnings per share because inclusion of these options would be anti-dilutive. These options expire at various points in time through 2016.

 

 

The following table provides a summary of comprehensive income attributable to H. J. Heinz Company:

 

		First Quarter Ended
		July 29, 2009				July 30, 2008
		FY 2010				FY 2009
		(Thousands of Dollars)
Net income		$	219,092			$	234,284
Other comprehensive income:
Foreign currency translation adjustments			342,525				(7,945	)
Reclassification of net pension and post-retirement benefit losses to net income			8,542				8,369
Adoption of measurement date provisions of SFAS No. 158			—				1,506
Net deferred losses on derivatives from periodic revaluations			(11,524	)			(9,841	)
Net deferred (gains)/losses on derivatives reclassified to earnings			(5,184	)			4,319
Total comprehensive income			553,451				230,692
Comprehensive income attributable to the noncontrolling interest			(9,959	)			(6,546	)
Comprehensive income attributable to H. J. Heinz Company		$	543,492			$	224,146

 

The following table summarizes the allocation of total comprehensive income between H. J. Heinz Company and the noncontrolling interest for the first quarter ended July 29, 2009:

 

		H. J. Heinz				Noncontrolling
		Company				Interest				Total
		(Thousands of Dollars)
Net income		$	212,564			$	6,528			$	219,092
Other comprehensive income:
Foreign currency translation adjustments			338,957				3,568				342,525
Reclassification of net pension and post-retirement benefit losses/(gains) to net income			8,582				(40	)			8,542
Net deferred losses on derivatives from periodic revaluations			(11,305	)			(219	)			(11,524	)
Net deferred (gains)/losses on derivatives reclassified to earnings			(5,306	)			122				(5,184	)
Total comprehensive income		$	543,492			$	9,959			$	553,451

 

 

The following table provides a summary of the changes in the carrying amounts of total equity, H. J. Heinz Company shareholders’ equity and equity attributable to the noncontrolling interest:

 

 

 

 

 

On June 12, 2009, the Company entered into a three-year $175 million accounts receivable securitization program. Under the terms of the agreement, the Company sells, on a revolving basis, its receivables to a wholly-owned, bankruptcy-remote-subsidiary. This subsidiary then sells all of the rights, title and interest in a pool of these receivables to an unaffiliated entity. After the sale, the Company, as servicer of the assets, collects the receivables on behalf of the unaffiliated entity. The amount of receivables sold through this program as of July 29, 2009 was $131.8 million. The proceeds from this securitization program are recognized on the statements of cash flows as a component of operating activities.

 

On July 29, 2009, H. J. Heinz Finance Company (“HFC”), a subsidiary of Heinz, issued $250 million of 7.125% notes due 2039 through a private placement. The notes are fully, unconditionally and irrevocably guaranteed by the Company. The proceeds from the notes were used for payment of the cash component of the exchange transaction discussed below as well as various expenses relating to the exchange, and for general corporate purposes.

 

On August 6, 2009, subsequent to the end of the first quarter, HFC exchanged $681 million of 7.125% notes due 2039 (of the same series as the notes issued in the private placement), and $217.5 million of cash, for $681 million of their outstanding 15.590% dealer remarketable securities due December 1, 2020. In addition, HFC terminated a portion of the remarketing option by paying the remarketing agent a cash payment of $89.0 million. The exchange transaction will be accounted for as a modification of debt.

 

The Company was in compliance with all of its debt covenants as of July 29, 2009.

 

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below:

 

Level 1:  Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.

 

Level 2:  Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3:  Unobservable inputs for the asset or liability.

 

As of July 29, 2009, the fair values of the Company’s assets and liabilities measured on a recurring basis are categorized as follows:

 

		Level 1				Level 2				Level 3				Total
		(Thousands of Dollars)
Assets:
Derivatives(a)		$	—			$	220,136			$	—			$	220,136
Total assets at fair value		$	—			$	220,136			$	—			$	220,136
Liabilities:
Derivatives(a)		$	—			$	20,387			$	—			$	20,387
Total liabilities at fair value		$	—			$	20,387			$	—			$	20,387

 

 

 

 

The fair values of the Company’s liabilities measured on a non-recurring basis during the first quarter ended July 29, 2009 are categorized as follows:

 

		Level 1				Level 2				Level 3				Total
		(Thousands of Dollars)
Liabilities:
Targeted workforce reduction reserves(a)		$	—			$	—			$	8,417			$	8,417
Total liabilities at fair value		$	—			$	—			$	8,417			$	8,417

 

 

 

The Company also recognized $1.4 million of non-cash asset write-offs during the first quarter of Fiscal 2010 related to a factory closure. The charge reduced the Company’s carrying value in the assets to net realizable value. The fair value of the assets was determined based on unobservable inputs.

 

As of July 29, 2009 and April 29, 2009, the aggregate fair value of the Company’s debt obligations, based on market quotes, approximated the recorded value.

 

 

The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain derivative financial instruments to manage its foreign currency, debt and interest rate exposures. At July 29, 2009, the Company had outstanding currency exchange, interest rate, and total rate of return derivative contracts with notional amounts of $1.22 billion, $1.52 billion and $175 million, respectively. At April 29, 2009, the Company had outstanding currency exchange, interest rate, and total rate of return derivative contracts with notional amounts of $1.25 billion, $1.52 billion and $175 million, respectively.

 

The following table presents the fair values and corresponding balance sheet captions of the Company’s derivative instruments as of July 29, 2009 and April 29, 2009:

 

		July 29, 2009								April 29, 2009
		Foreign				Interest				Foreign				Interest
		Exchange				Rate				Exchange				Rate
		Contracts				Contracts				Contracts				Contracts
		(Dollars in Thousands)
Assets:
Derivatives designated as hedging instruments:
Other receivables, net		$	8,802			$	68,513			$	28,406			$	64,502
Other non-current assets			12,844				60,432				8,659				86,434
			21,646				128,945				37,065				150,936
Derivatives not designated as hedging instruments:
Other receivables, net			29,291				40,254				11,644				—
Other non-current assets			—				—				—				20,200
			29,291				40,254				11,644				20,200
Total assets		$	50,937			$	169,199			$	48,709			$	171,136
Liabilities:
Derivatives designated as hedging instruments:
Other payables		$	19,401			$	—			$	12,198			$	—
Other liabilities			261				—				598				—
			19,662				—				12,796				—
Derivatives not designated as hedging instruments:
Other payables			725				—				51				—
Other liabilities			—				—				—				—
			725				—				51				—
Total liabilities		$	20,387			$	—			$	12,847			$	—

 

Refer to Note 12—Fair Value Measurements for further information on how fair value is determined for the Company’s derivatives.

 

The following table presents the effect of derivative instruments on the statement of income for the first quarter ended July 29, 2009:

 

		First Quarter Ended
		July 29, 2009
		Foreign Exchange				Interest Rate
		Contracts				Contracts
		(Dollars in Thousands)
Cash flow hedges:
Net losses recognized in other comprehensive loss (effective portion)		$	(16,943	)		$	—
Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion):
Sales		$	1,337			$	—
Cost of products sold			6,099				—
Selling, general and administrative expenses			(137	)			—
Other expense, net			(915	)			—
Interest expense			5				—
			6,389				—
Fair value hedges:
Net losses recognized in other expense, net			—				(21,991	)
Derivatives not designated as hedging instruments:
Net gains recognized in other expense, net			9,961				—
Net gains recognized in interest income			—				20,054
			9,961				20,054
Total amount recognized in statement of income		$	16,350			$	(1,937	)

 

Foreign Currency Hedging:

 

The Company uses forward contracts and to a lesser extent, option contracts to mitigate its foreign currency exchange rate exposure due to forecasted purchases of raw materials and sales of finished goods, and future settlement of foreign currency denominated assets and liabilities. The Company’s principal foreign currency exposures include the Australian dollar, British pound sterling, Canadian dollar, Euro, and the New Zealand dollar. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities that meet the criteria for hedge accounting are designated as cash flow hedges. Consequently, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive loss and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item.

 

The Company uses certain foreign currency debt instruments as net investment hedges of foreign operations. During the first quarter of Fiscal 2010, losses of $15.6 million, net of income taxes of $9.9 million, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive loss within unrealized translation adjustment.

 

Deferred Hedging Gains and Losses:

 

As of July 29, 2009, the Company is hedging forecasted transactions for periods not exceeding 5 years. During the next 12 months, the Company expects $4.3 million of net deferred losses reported in accumulated other comprehensive loss to be reclassified to earnings, assuming market rates remain constant through contract maturities. Hedge ineffectiveness related to cash flow hedges, which is reported in current period earnings as other expense, net, was not

 

significant for the first quarters ended July 29, 2009 and July 30, 2008. Amounts reclassified to earnings because the hedged transaction was no longer expected to occur were not significant for the first quarters ended July 29, 2009 and July 30, 2008.

 

Interest Rate Hedging:

 

The Company uses interest rate swaps to manage debt and interest rate exposures. The Company is exposed to interest rate volatility with regard to existing and future issuances of fixed and floating rate debt. Primary exposures include U.S. Treasury rates, London Interbank Offered Rates (LIBOR), and commercial paper rates in the United States. Derivatives used to hedge risk associated with changes in the fair value of certain fixed-rate debt obligations are primarily designated as fair value hedges. Consequently, changes in the fair value of these derivatives, along with changes in the fair value of the hedged debt obligations that are attributable to the hedged risk, are recognized in current period earnings.

 

Other Activities:

 

The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the economic impact of largely mitigating foreign currency or interest rate exposures. The Company maintained foreign currency forward contracts with a total notional amount of $363.6 million and $349.1 million that did not meet the criteria for hedge accounting as of July 29, 2009 and April 29, 2009, respectively. These forward contracts are accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of other expense, net. Net unrealized gains related to outstanding contracts totaled $28.6 million and $11.6 million as of July 29, 2009 and April 29, 2009, respectively. These contracts are scheduled to mature during Fiscal 2010.

 

The Company had an outstanding total rate of return swap with a notional amount of $175 million as of July 29, 2009. This instrument was being used as an economic hedge to reduce a portion of the interest cost related to the Company’s remarketable securities. The swap was being accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of interest income. During the first quarter ended July 29, 2009, the Company recorded a $24.7 million benefit in interest income, representing changes in the fair value of the swap and interest earned on the arrangement. Net unrealized gains totaled $40.3 million and $20.2 million as of July 29, 2009 and April 29, 2009, respectively. In connection with this swap, the Company was required to maintain a restricted cash collateral balance of $192.7 million with the counterparty for the term of the swap. On August 6, 2009, subsequent to the end of the first quarter, the Company terminated the total rate of return swap and received net cash proceeds of $47.6 million, in addition to the return of the collateral. The unwinding of the total rate of return swap was completed in conjunction with the exchange of $681 million of dealer remarketable securities discussed in Note 11.

 

Concentration of Credit Risk:

 

Counterparties to currency exchange and interest rate derivatives consist of major international financial institutions. The Company continually monitors its positions and the credit ratings of the counterparties involved and, by policy, limits the amount of credit exposure to any one party. While the Company may be exposed to potential losses due to the credit risk of non-performance by these counterparties, losses are not anticipated. The Company closely monitors the credit risk associated with its counterparties and customers and to date has not experienced material losses.

 

Executive Overview

 

The 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 the first quarter of Fiscal 2010, the Company reported diluted earnings per share of $0.67, compared to $0.72 in the prior year. The decrease in EPS resulted from the precipitous decline in foreign currency translation rates versus the U.S. dollar that occurred during Fiscal 2009. 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. Excluding the impact of foreign currency movements on translation and particular transactions such as inventory sourcing, our key financial performance measures of sales, operating income and EPS all experienced growth versus prior year. 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.

 

THREE MONTHS ENDED JULY 29, 2009 AND JULY 30, 2008

 

Results of Operations

 

Sales for the three months ended July 29, 2009 decreased $115 million, or 4.5%, to $2.47 billion. Foreign exchange translation rates reduced sales by 9.0%, reflecting the impact of a stronger U.S. dollar on sales generated in international markets compared to the first quarter of the prior year. Net pricing increased sales by 6.0%, largely due to the carryover impact of price increases taken in Fiscal 2009 across the Company’s portfolio to help offset increased commodity costs. Volume decreased 4.3%, as favorable volume in emerging markets was more than offset by declines in the U.S. and U.K. businesses, which have been impacted by the recessionary economic environment. Emerging markets and our Top 15 brands continued to be important growth drivers, with combined volume and pricing gains of 13.6% and 2.2%, respectively. Acquisitions, net of divestitures, increased sales by 2.9%.

 

Gross profit decreased $60 million, or 6.4%, to $874 million, as higher net pricing and the favorable impact from acquisitions was more than offset by a $79 million unfavorable impact from foreign exchange translation rates as well as higher commodity costs, including transaction currency costs most notably in the U.K., and lower volume. The gross profit margin decreased to 35.4% from 36.2%, as pricing and productivity improvements were more than offset by lower margins on recent acquisitions and increased commodity costs, which includes the impact of cross currency sourcing of inventory, most notably in the U.K. In addition, gross profit was unfavorably impacted by $7 million from targeted workforce reductions and non-cash asset write-offs related to a factory closure.

 

Selling, general and administrative expenses (“SG&A”) decreased $34 million, or 6.2%, to $508 million, and improved as a percentage of sales to 20.6% from 21.0%. The $34 million decline reflects a $45 million impact from foreign exchange translation rates and the Company’s focus on tight cost control, partially offset by $9 million related to targeted workforce reductions in the current year, increases from acquisitions, inflation in Latin America, and a prior year gain on a small portion control business in the U.S.

 

Operating income decreased $26 million, or 6.7%, to $366 million, reflecting the items above, particularly a $35 million (8.9%) unfavorable impact from foreign exchange translation rates, higher commodity costs and $16 million of charges for targeted workforce reductions and non-cash asset write-offs related to a factory closure.

 

Net interest expense decreased $9 million, to $54 million, reflecting an $8 million increase in interest expense and a $17 million increase in interest income. Interest expense increased largely due to the higher coupon on the dealer remarketable securities which were remarketed on December 1, 2008, partially offset by lower average interest rates on the remaining debt portfolio. The improvement in interest income is due to a $20 million mark-to-market gain in the current period on a total rate of return swap, which was entered into in conjunction with the Company’s remarketable securities on December 1, 2008. This swap contract was terminated in August 2009 subsequent to the end of the first quarter (see Note 13, “Derivative Financial Instruments and Hedging Activities” for additional information). Other expenses, net, increased $3 million primarily due to increased currency losses.

 

The effective tax rate for the current quarter was 28.5% compared to 28.2% last year. The current quarter effective tax rate benefits from tax planning implemented during the third quarter of Fiscal 2009. The prior year first quarter effective tax rate reflected a discrete benefit resulting from the tax effects of law changes in the U.K. of approximately $11 million.

 

Net income attributable to H. J. Heinz Company was $213 million compared to $229 million in the prior year, a decrease of 7.2%. The decrease is due to unfavorable foreign exchange rates and $12 million in after-tax charges ($0.04 per share) for targeted workforce reductions and non-cash asset write-offs, partially offset by reduced net interest expense. Diluted earnings per share was $0.67 in the current year compared to $0.72 in the prior year, down 6.9%.

 

The translation impact of fluctuating exchange rates in Fiscal 2010 has had a relatively consistent impact on all components of operating income on the consolidated statement of income. The impact of cross currency sourcing of inventory, most notably in the U.K., reduced gross profit and operating income but did not affect sales.

 

OPERATING RESULTS BY BUSINESS SEGMENT

 

North American Consumer Products

 

Sales of the North American Consumer Products segment decreased $14 million, or 1.9%, to $727 million. Net prices grew 5.4% reflecting the carryover impact of price increases taken across the majority of the product portfolio in Fiscal 2009 to help offset higher commodity costs. Volume decreased 4.9% as increases from the new TGI Friday’s^® Skillet Meals and snacks were more than offset by declines in Heinz^® ketchup and Smart Ones^® and Boston Market^® frozen products. The decline in Heinz^® ketchup is a result of reduced promotions and increased competitor promotional activity. The Smart Ones^® decrease was due to softness in the category and the timing of price increases, and Boston Market^® products were affected by aggressive competitor promotions. Unfavorable Canadian exchange translation rates decreased sales 2.4%.

 

Gross profit increased $9 million, or 3.1%, to $310 million, and the gross profit margin increased to 42.6% from 40.6%, as increased pricing and productivity improvements more than offset increased commodity costs, the impact from unfavorable volume and unfavorable foreign exchange translation rates. Our disciplined approach to promotional programs on our key brands has underpinned our improved margin and absolute dollar gross profit and operating income growth. Operating income

increased $16 million, or 9.6%, to $184 million, reflecting the improvement in gross profit, reduced selling and distribution expenses (“S&D”) and decreased general and administrative expenses (“G&A”), partially offset by increased marketing investment. The improvements in S&D and G&A were a result of tight cost control and reduced fuel costs.

 

Europe

 

Heinz Europe sales decreased $129 million, or 14.1%, to $789 million. Unfavorable foreign exchange translation rates decreased sales by 17.1%. Net pricing increased 5.1%, driven by the carryover impact of price increases taken in Fiscal 2009 as well as reduced promotional activity on Heinz^® ketchup, beans and soup and frozen products in the U.K. Volume decreased 4.3%, principally due to Heinz^® beans, soup and pasta meals as well as frozen products in the U.K., all of which reflect reduced promotions along with increased competitor promotional activity. Volume improvements were posted on Pudliszki^® branded products in Poland, soups in Germany, and ketchup and infant feeding products in Russia. Acquisitions increased sales 2.2%, due to the acquisition of the Bénédicta^® sauce business in France in the second quarter of Fiscal 2009.

 

Gross profit decreased $73 million, or 20.4%, to $284 million, and the gross profit margin decreased to 36.0% from 38.8%. The decline in gross profit is largely due to unfavorable foreign exchange translation rates, the cross currency rate movements in the British Pound versus the Euro and U.S. dollar, increased commodity costs, lower volume and decreased capacity utilization to reduce inventory levels in the U.K. and Netherlands. These declines were partially mitigated by higher pricing, productivity improvements and the favorable impact from acquisitions. Operating income decreased $31 million, or 19.8%, to $126 million, reflecting unfavorable foreign currency translation and transaction impacts.

 

Asia/Pacific

 

Heinz Asia/Pacific sales increased $11 million, or 2.5%, to $469 million. Unfavorable exchange translation rates decreased sales by 12.0%. Pricing increased 4.1%, reflecting current and prior year increases on ABC^® syrup and sardines in Indonesia as well as reduced promotions and the carryover impact of prior year price increases in New Zealand. Volume decreased 2.2%, as significant growth in Complan^® and Glucon D^® nutritional beverages in India and ABC^® syrup in Indonesia were more than offset by declines on Long Fong^® frozen products in China and general softness in both Australia and New Zealand, which are being impacted by competitive activity. Acquisitions increased sales 12.7% due to the prior year acquisitions of Golden Circle Limited, a health-oriented fruit and juice business in Australia, and La Bonne Cuisine, a chilled dip business in New Zealand.

 

Gross profit decreased $10 million, or 6.3%, to $147 million, and the gross profit margin declined to 31.4% from 34.3%. The decline in gross profit is due to unfavorable foreign exchange translation rates, increased commodity costs, which include the impact of cross-currency rates on inventory costs, and unfavorable volume, particularly in our Long Fong^® business where we revised our distribution system and streamlined our product offerings. These declines were partially offset by higher pricing. Acquisitions had a favorable impact on gross profit dollars but negatively impacted gross profit margin. Operating income decreased by $13 million, or 19.9%, to $53 million, primarily reflecting the decrease in gross profit and increased S&D, largely related to acquisitions.

 

U.S. Foodservice

 

Sales of the U.S. Foodservice segment decreased $7 million, or 2.0%, to $347 million. Pricing increased sales 5.6%, largely due to the carryover impact of prior year price increases on Heinz^® ketchup, portion control condiments, tomato products and frozen soup as well as decreased promotional spending on portion control condiments. Volume decreased by 6.0%, due to declines in ketchup and frozen soup, desserts and appetizers. The volume reflects softness in the U.S. restaurant business, promotional timing and increased competition on our non-branded products. Divestitures reduced sales 1.6%.

Gross profit increased $9 million, or 11.0%, to $88 million, and the gross profit margin increased to 25.4% from 22.5%, as pricing and productivity improvements more than offset unfavorable volume and decreased capacity utilization to reduce inventory levels. Operating income increased $6 million, or 25.0%, to $31 million, which is primarily due to gross profit improvements and reduced S&D reflecting distribution network upgrades last year. In addition, Fiscal 2009 operating income was affected by a gain on the sale of a small, non-core portion control business which was partially offset by costs to streamline the business.

 

Rest of World

 

Sales for Rest of World increased $23 million, or 20.9%, to $136 million. Foreign exchange translation rates decreased sales 3.1%. Higher pricing increased sales by 26.2%, largely due to current and prior year price increases in Latin America taken to mitigate raw material and labor inflation. Volume decreased 3.3% as declines in meat and seafood products in the Middle East and frozen products in South Africa were partially offset by increases in ketchup and baby food in Latin America. Acquisitions increased sales 1.0% due to the prior year acquisition of Papillon, a small chilled products business in South Africa.

 

Gross profit increased $12 million, or 31.2%, to $50 million, due mainly to increased pricing, partially offset by increased commodity costs. Operating income increased $5 million, or 43.1%, to $18 million.

 

Liquidity and Financial Position

 

Cash provided by/(used for) operating activities was $169 million in the current year and $(14) million in the prior year. The improvement in the first quarter of Fiscal 2010 versus Fiscal 2009 was primarily due to favorable movements in receivables and inventories which were partially offset by reduced payables and the impact of foreign exchange. Additionally, $132 million of cash was received in the current quarter in connection with an accounts receivable securitization program (see additional explanation below), which offset discretionary contributions made in Fiscal 2010 to fund the Company’s pension plans. The Company’s cash conversion cycle improved 2 days, to 49 days in the first quarter of Fiscal 2010. Receivables accounted for 3 days of the improvement, all of which is a result of the accounts receivable securitization program. There was a 6 day improvement in inventories as a result of the Company’s efforts to reduce inventory levels. Accounts payable partially offset these improvements, with a 7 day decrease, a portion of which reflects inventory reductions and the resulting decrease in the amounts due to suppliers.

 

During the first quarter of Fiscal 2010, the Company made $144 million of contributions to the pension plans compared to $28 million in the prior year. Of this $144 million of payments, $132 million were discretionary contributions that were made as a result of adverse conditions in the global equity and bond markets. The Company expects to make approximately $260 million of pension contributions in Fiscal 2010, of which $200 million would be discretionary, however actual contributions may be affected by pension asset and liability valuations during the year.

 

On June 12, 2009, the Company entered into a three-year $175 million accounts receivable securitization program. Under the terms of the agreement, the Company sells, on a revolving basis, its receivables to a wholly-owned, bankruptcy-remote-subsidiary. This subsidiary then sells all of the rights, title and interest in a pool of these receivables to an unaffiliated entity. After the sale, the Company, as servicer of the assets, collects the receivables on behalf of the unaffiliated entity. The amount of receivables sold through this program as of July 29, 2009 was $132 million.

 

Cash used for investing activities totaled $47 million compared to $35 million last year. Net proceeds from divestitures provided cash of $2 million in the first quarter of Fiscal 2010, compared to $5 million in the prior year from the sale of a small domestic portion control foodservice business. Capital expenditures totaled $49 million (2.0% of sales) compared to $42 million (1.6% of sales) in the prior year, which is in line with our full year estimate of approximately 2.5% of sales. Proceeds from disposals of property, plant and equipment were $1 million in both the current and prior year.

Cash provided by/(used for) financing activities totaled $33 million compared to ($13) million last year. Proceeds from long-term debt were $250 million in the current year due to the issuance of $250 million of 7.125% notes due 2039 by H. J. Heinz Finance Company (“HFC”), a subsidiary of Heinz, through a private placement in July 2009. These notes are fully, unconditionally and irrevocably guaranteed by the Company. The proceeds from the notes were used for payment of the cash component of the exchange transaction discussed below as well as various expenses relating to the exchange, and for general corporate purposes. Proceeds from long-term debt were $850 million in the prior year. The prior year proceeds represent the sale of $500 million 5.35% Notes due 2013 as well as the sale of $350 million or 3,500 shares of HFC Series B Preferred Stock. The proceeds from both of these prior year transactions were used for general corporate purposes, including the repayment of commercial paper and other indebtedness incurred to redeem HFC’s Series A Preferred Stock. Payments on long-term debt were $27 million in the current year compared to $337 million in the prior year. Net payments on commercial paper and short-term debt were $67 million this year compared to $398 million in the prior year. Cash proceeds from option exercises provided $2 million of cash in the current year, and the Company had no treasury stock purchases in the current quarter. Cash proceeds from option exercises, net of treasury stock purchases, were $1 million in the prior year. Dividend payments totaled $133 million this year, compared to $131 million for the same period last year, reflecting an increase in the annualized dividend per common share to $1.68.

 

On August 6, 2009, subsequent to the end of the first quarter, HFC exchanged $681 million of 7.125% notes due 2039 (of the same series as the notes issued in the July 2009 private placement), and $218 million of cash, for $681 million of their outstanding 15.590% dealer remarketable securities due December 1, 2020. In conjunction with this exchange transaction the Company also terminated its $175 million notional total rate of return swap and received net cash proceeds of $48 million as well as the return of the collateral from the counterparty. In addition, HFC terminated a portion of the remarketing option by paying the remarketing agent a cash payment of $89 million. See Note 13, “Derivative Financial Instruments and Hedging Activities” for additional information. The exchange transaction will be accounted for as a modification of debt.

 

At July 29, 2009, the Company had total debt of $5.33 billion (including $229 million relating to the SFAS No. 133 hedge accounting adjustments), cash and cash equivalents of $551 million and $193 million of restricted cash. Total debt balances since prior year end increased due to the July 2009 note issuance discussed above.

 

The Company and HFC maintain $1.8 billion of credit agreements, consisting of a $1.2 billion Three-Year Credit Agreement which expires in April 2012 and a $600 million 364-Day Credit Agreement. These agreements support the Company’s commercial paper borrowings and $230 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. These credit agreements include a leverage ratio covenant in addition to customary covenants, and the Company was in compliance with all of its covenants as of July 29, 2009. In addition, the Company maintains in excess of $500 million of other credit facilities used primarily by the Company’s foreign subsidiaries.

 

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 July 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

 

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. There have been no material changes to contractual obligations during the three months ended July 29, 2009. For additional information, refer to pages 24-25 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2009.

 

As of the end of the first quarter, the total amount of gross unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was approximately $103 million. The timing of payments will depend on the progress of examinations with tax authorities. The Company does not expect a significant tax payment related to these obligations within the next year. The Company is unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities may occur.

 

Recently Issued Accounting Standards

 

On April 30, 2009, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” for its non-financial assets and liabilities that are recognized at fair value on a non-recurring basis, including long-lived assets, goodwill, other intangible assets, exit liabilities and purchase price allocations. SFAS No. 157 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. The adoption of this standard did not have a material impact on the Company’s financial statements. See Note No. 12 for additional information.

 

On April 30, 2009, the Company adopted SFAS No. 141(R), “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51.” SFAS No. 141(R) and its related standards impact the accounting for any business combinations completed after April 29, 2009. The nature and extent of the impact will depend upon the terms and conditions of any such transaction. SFAS No. 160 changes the accounting and reporting for minority interests, which have been recharacterized as noncontrolling interests and classified as a component of equity. Prior period financial statements and disclosures for existing minority interests have been restated in accordance with SFAS No. 160. All other requirements of SFAS No. 160 will be applied prospectively. The adoption of SFAS No. 160 did not have a material impact on the Company’s financial statements.

 

On April 30, 2009, the Company adopted FASB Staff 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. As a result of adopting FSP EITF 03-6-1, the Company has retrospectively adjusted its earnings per share data for prior periods. The adoption of FSP EITF 03-6-1 had no impact on net income and less than a $0.01 impact on basic and diluted earnings per share for the first quarters of Fiscal 2010 and 2009.

The adoption had a $0.01 unfavorable impact on both basic and diluted earnings per share for full year Fiscal 2009, and is expected to have a $0.01 unfavorable impact on both basic and diluted earnings per share for full year Fiscal 2010. No material impact is expected for Fiscal 2011 forward. See Note No. 8 for additional information.

 

In December 2008, the Financial Accounting Standards Board (“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.

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS No. 165 describes the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and provides guidance on the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted SFAS No. 165 during the first quarter of Fiscal 2010, and its application had no impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 166 removes the concept of a qualifying special-purpose entity and the exception from applying FASB Intrepretation No. (“FIN”) 46(R) to variable interest entities that are qualifying special-purpose entities. SFAS No. 166 requires that a transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The standard also requires additional disclosures about any transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS No. 166 on April 29, 2010, the first day of Fiscal 2011.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the purpose and design of the other entity and the reporting entity’s ability to direct the activities of the other entity that most significantly impact its economic performance. SFAS No. 167 also requires additional disclosures about a reporting entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS No. 167 on April 29, 2010, the first day of Fiscal 2011.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative generally accepted accounting principles in the United States of America. The Codification changes the referencing of financial standards but is not intended to change or alter existing U.S. GAAP. The Codification is effective for interim or annual financial periods ending after September 15, 2009 and will be effective for the Company in the second quarter of Fiscal 2010.

 

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.

 

 

There have been no material changes in the Company’s market risk during the first quarter ended July 29, 2009. For additional information, refer to pages 25-27 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2009.

 

 

(a) Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were effective and provided reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting

 

No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

 

Nothing to report under this item.

 

 

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended April 29, 2009. The risk factors disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended April 29, 2009, in addition to the other information set forth in this report, could materially affect our business, financial condition, or results of operations. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect our business, financial condition, or results of operations.

 

 

The 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 first quarter of Fiscal 2010. As of July 29, 2009, the maximum number of shares that may yet be purchased under the 2006 program is 6,716,192.

 

 

Nothing to report under this item.

 

 

Nothing to report under this item.

 

 

Nothing to report under this item.

 

 

Exhibits required to be furnished by Item 601 of Regulation S-K are listed below. The Company may have omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K and any exhibits filed pursuant to Item 601(b)(2) of Regulation S-K may omit certain schedules. The Company agrees to furnish such documents to the Commission upon request. Documents not designated as being incorporated herein by reference are set forth herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K.

 

   3(ii). The Company’s By-Laws, as amended and effective August 12, 2009.

 

   10(a). Management contracts and compensatory plans:

 

   (i). Form of Fiscal Year 2010 Restricted Stock Unit Award and Agreement (U.S. Employees).

 

   (ii). Form of Fiscal Year 2010 Restricted Stock Unit Award and Agreement (Non-U.S. Employees).

 

   12. Computation of Ratios of Earnings to Fixed Charges.

 

   31(a). Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer.

 

   31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer.

 

   32(a). 18 U.S.C. Section 1350 Certification by the Chief Executive Officer.

   32(b). 18 U.S.C. Section 1350 Certification by the Chief Financial Officer.

 

   101.INS XBRL Instance Document*

 

   101.SCH XBRL Schema Document*

 

   101.CAL XBRL Calculation Linkbase Document*

 

   101.LAB XBRL Labels Linkbase Document*

 

   101.PRE XBRL Presentation Linkbase Document*

 

   101.DEF XBRL Definition Linkbase Document*

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

H. J. HEINZ COMPANY

  (Registrant)

 

Date: August 20, 2009

Arthur B. Winkleblack

Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)

 

Date: August 20, 2009

 

Edward J. McMenamin

Senior Vice President—Finance

and Corporate Controller

(Principal Accounting Officer)

 

EXHIBIT INDEX

 

DESCRIPTION OF EXHIBIT

 

Exhibits required to be furnished by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are furnished herewith. The Company may have omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K and any exhibits filed pursuant to Item 601(b)(2) of Regulation S-K may omit certain schedules. The Company agrees to furnish such documents to the Commission upon request. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K.

 

   3(ii). The Company’s By-Laws, as amended and effective August 12, 2009.

 

   10(a). Management contracts and compensatory plans:

 

   (i). Form of Fiscal Year 2010 Restricted Stock Unit Award and Agreement (U.S. Employees).

 

   (ii). Form of Fiscal Year 2010 Restricted Stock Unit Award and Agreement (Non-U.S. Employees).

 

   12. Computation of Ratios of Earnings to Fixed Charges.

 

   31(a). Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer.

 

   31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer.

 

   32(a). 18 U.S.C. Section 1350 Certification by the Chief Executive Officer.

 

   32(b). 18 U.S.C. Section 1350 Certification by the Chief Financial Officer.

 

   101.INS XBRL Instance Document*

 

   101.SCH XBRL Schema Document*

 

   101.CAL XBRL Calculation Linkbase Document*

 

   101.LAB XBRL Labels Linkbase Document*

 

   101.PRE XBRL Presentation Linkbase Document*

 

   101.DEF XBRL Definition Linkbase Document*