x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
PENNSYLVANIA | 25-0542520 | |
(State or other jurisdiction of
|
(I.R.S. Employer | |
incorporation or organization)
|
Identification No.) |
|
600 Grant Street, Pittsburgh, Pennsylvania | 15219 | |
(Address of Principal Executive Offices) | (Zip Code) |
Second Quarter Ended | |||||||||||
October 26, 2005 | October 27, 2004 | ||||||||||
FY 2006 | FY 2005 | ||||||||||
(Unaudited) | |||||||||||
(In Thousands, Except | |||||||||||
per Share Amounts) | |||||||||||
Sales
|
$ | 2,338,848 | $ | 2,199,560 | |||||||
Cost of products sold
|
1,496,477 | 1,399,546 | |||||||||
Gross profit
|
842,371 | 800,014 | |||||||||
Selling, general and administrative expenses
|
531,835 | 456,566 | |||||||||
Operating income
|
310,536 | 343,448 | |||||||||
Interest income
|
5,896 | 5,983 | |||||||||
Interest expense
|
76,571 | 56,600 | |||||||||
Other expense, net
|
9,088 | 2,777 | |||||||||
Income from continuing operations before income taxes
|
230,773 | 290,054 | |||||||||
Provision for income taxes
|
58,991 | 92,775 | |||||||||
Income from continuing operations
|
171,782 | 197,279 | |||||||||
Income from discontinued operations, net of tax
|
32,039 | 1,686 | |||||||||
Net income
|
$ | 203,821 | $ | 198,965 | |||||||
Income per common share
|
|||||||||||
Diluted
|
|||||||||||
Continuing operations
|
$ | 0.50 | $ | 0.56 | |||||||
Discontinued operations
|
0.09 | | |||||||||
Net income
|
$ | 0.60 | $ | 0.56 | |||||||
Average common shares outstandingdiluted
|
342,533 | 353,275 | |||||||||
Basic
|
|||||||||||
Continuing operations
|
$ | 0.51 | $ | 0.56 | |||||||
Discontinued operations
|
0.09 | | |||||||||
Net income
|
$ | 0.60 | $ | 0.57 | |||||||
Average common shares outstandingbasic
|
339,475 | 349,655 | |||||||||
Cash dividends per share
|
$ | 0.30 | $ | 0.285 | |||||||
2
Six Months Ended | |||||||||||
October 26, 2005 | October 27, 2004 | ||||||||||
FY 2006 | FY 2005 | ||||||||||
(Unaudited) | |||||||||||
(In Thousands, Except | |||||||||||
per Share Amounts) | |||||||||||
Sales
|
$ | 4,449,001 | $ | 4,202,586 | |||||||
Cost of products sold
|
2,852,879 | 2,663,819 | |||||||||
Gross profit
|
1,596,122 | 1,538,767 | |||||||||
Selling, general and administrative expenses
|
1,004,384 | 855,665 | |||||||||
Operating income
|
591,738 | 683,102 | |||||||||
Interest income
|
14,085 | 12,644 | |||||||||
Interest expense
|
143,043 | 109,946 | |||||||||
Other expense, net
|
13,628 | 9,160 | |||||||||
Income from continuing operations before income taxes
|
449,152 | 576,640 | |||||||||
Provision for income taxes
|
120,096 | 184,525 | |||||||||
Income from continuing operations
|
329,056 | 392,115 | |||||||||
Income from discontinued operations, net of tax
|
32,039 | 1,686 | |||||||||
Net income
|
$ | 361,095 | $ | 393,801 | |||||||
Income per common share
|
|||||||||||
Diluted
|
|||||||||||
Continuing operations
|
$ | 0.95 | $ | 1.11 | |||||||
Discontinued operations
|
0.09 | | |||||||||
Net income
|
$ | 1.04 | $ | 1.11 | |||||||
Average common shares outstandingdiluted
|
345,963 | 354,145 | |||||||||
Basic
|
|||||||||||
Continuing operations
|
$ | 0.96 | $ | 1.12 | |||||||
Discontinued operations
|
0.09 | | |||||||||
Net income
|
$ | 1.05 | $ | 1.12 | |||||||
Average common shares outstandingbasic
|
342,856 | 350,569 | |||||||||
Cash dividends per share
|
$ | 0.60 | $ | 0.57 | |||||||
3
October 26, 2005 | April 27, 2005* | ||||||||
FY 2006 | FY 2005 | ||||||||
(Unaudited) | |||||||||
(Thousands of Dollars) | |||||||||
Assets
|
|||||||||
Current Assets:
|
|||||||||
Cash and cash equivalents
|
$ | 600,205 | $ | 1,083,749 | |||||
Receivables, net
|
1,162,080 | 1,092,394 | |||||||
Inventories
|
1,417,789 | 1,256,776 | |||||||
Prepaid expenses
|
198,924 | 174,818 | |||||||
Other current assets
|
31,796 | 37,839 | |||||||
Total current assets
|
3,410,794 | 3,645,576 | |||||||
Property, plant and equipment
|
4,105,537 | 4,022,719 | |||||||
Less accumulated depreciation
|
1,933,091 | 1,858,781 | |||||||
Total property, plant and equipment, net
|
2,172,446 | 2,163,938 | |||||||
Goodwill
|
2,819,787 | 2,138,499 | |||||||
Trademarks, net
|
816,633 | 651,552 | |||||||
Other intangibles, net
|
265,027 | 171,675 | |||||||
Other non-current assets
|
1,658,025 | 1,806,478 | |||||||
Total other non-current assets
|
5,559,472 | 4,768,204 | |||||||
Total assets
|
$ | 11,142,712 | $ | 10,577,718 | |||||
* | Summarized from audited fiscal year 2005 balance sheet. |
4
October 26, 2005 | April 27, 2005* | |||||||||
FY 2006 | FY 2005 | |||||||||
(Unaudited) | ||||||||||
(Thousands of Dollars) | ||||||||||
Liabilities and
Shareholders Equity
|
||||||||||
Current Liabilities:
|
||||||||||
Short-term debt
|
$ | 54,539 | $ | 28,471 | ||||||
Portion of long-term debt due within one year
|
508,861 | 544,798 | ||||||||
Accounts payable
|
1,135,524 | 1,181,652 | ||||||||
Salaries and wages
|
75,782 | 76,020 | ||||||||
Accrued marketing
|
261,521 | 260,550 | ||||||||
Other accrued liabilities
|
416,324 | 365,022 | ||||||||
Income taxes
|
80,549 | 130,555 | ||||||||
Total current liabilities
|
2,533,100 | 2,587,068 | ||||||||
Long-term debt
|
5,110,566 | 4,121,984 | ||||||||
Deferred income taxes
|
564,675 | 508,639 | ||||||||
Non-pension post-retirement benefits
|
201,738 | 196,686 | ||||||||
Other liabilities and minority interest
|
641,034 | 560,768 | ||||||||
Total long-term liabilities
|
6,518,013 | 5,388,077 | ||||||||
Shareholders Equity:
|
||||||||||
Capital stock
|
107,857 | 107,857 | ||||||||
Additional capital
|
459,089 | 430,073 | ||||||||
Retained earnings
|
5,365,249 | 5,210,748 | ||||||||
5,932,195 | 5,748,678 | |||||||||
Less:
|
||||||||||
Treasury stock at cost (96,427,424 shares at October 26,
2005 and 83,419,356 shares at April 27, 2005)
|
3,635,271 | 3,140,586 | ||||||||
Unearned compensation
|
34,858 | 31,141 | ||||||||
Accumulated other comprehensive loss/(income)
|
170,467 | (25,622 | ) | |||||||
Total shareholders equity
|
2,091,599 | 2,602,573 | ||||||||
Total liabilities and shareholders equity
|
$ | 11,142,712 | $ | 10,577,718 | ||||||
* | Summarized from audited fiscal year 2005 balance sheet. |
5
Six Months Ended | ||||||||||||
October 26, 2005 | October 27, 2004 | |||||||||||
FY 2006 | FY 2005 | |||||||||||
(Unaudited) | ||||||||||||
(Thousands of Dollars) | ||||||||||||
Cash Flows from Operating Activities:
|
||||||||||||
Net income
|
$ | 361,095 | $ | 393,801 | ||||||||
Income from discontinued operations spun-off to Del Monte, net
of tax
|
(32,039 | ) | (1,686 | ) | ||||||||
Income from continuing operations
|
329,056 | 392,115 | ||||||||||
Adjustments to reconcile net income to cash provided by
operating activities:
|
||||||||||||
Depreciation
|
113,612 | 109,609 | ||||||||||
Amortization
|
15,086 | 9,703 | ||||||||||
Deferred tax provision
|
24,852 | 20,269 | ||||||||||
Other items, net
|
40,230 | 446 | ||||||||||
Changes in current assets and liabilities, excluding effects of
acquisitions and divestitures:
|
||||||||||||
Receivables
|
47,520 | 74,676 | ||||||||||
Inventories
|
(155,572 | ) | (217,029 | ) | ||||||||
Prepaid expenses and other current assets
|
(22,780 | ) | (32,057 | ) | ||||||||
Accounts payable
|
65,198 | 5,062 | ||||||||||
Accrued liabilities
|
52,082 | (39,997 | ) | |||||||||
Income taxes
|
(115,801 | ) | 56,765 | |||||||||
Cash provided by operating activities
|
393,483 | 379,562 | ||||||||||
Cash Flows from Investing Activities:
|
||||||||||||
Capital expenditures
|
(99,609 | ) | (82,620 | ) | ||||||||
Acquisitions, net of cash acquired
|
(1,050,466 | ) | (13,381 | ) | ||||||||
Proceeds from divestitures
|
7,703 | 39,407 | ||||||||||
Purchases of short-term investments
|
| (266,200 | ) | |||||||||
Sales of short-term investments
|
| 306,200 | ||||||||||
Other items, net
|
2,442 | 4,063 | ||||||||||
Cash used for investing activities
|
(1,139,930 | ) | (12,531 | ) | ||||||||
Cash Flows from Financing Activities:
|
||||||||||||
Payments on long-term debt
|
(711 | ) | (11,022 | ) | ||||||||
Proceeds from commercial paper and short-term debt, net
|
999,293 | 8,457 | ||||||||||
Dividends
|
(206,594 | ) | (199,522 | ) | ||||||||
Purchases of treasury stock
|
(525,321 | ) | (169,016 | ) | ||||||||
Exercise of stock options
|
41,691 | 38,434 | ||||||||||
Other items, net
|
11,909 | 11,323 | ||||||||||
Cash provided by/(used for) financing activities
|
320,267 | (321,346 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents
|
(57,364 | ) | 53,774 | |||||||||
Effect of discontinued operations spun-off to Del Monte
|
| 28,196 | ||||||||||
Net (decrease)/increase in cash and cash equivalents
|
(483,544 | ) | 127,655 | |||||||||
Cash and cash equivalents at beginning of year
|
1,083,749 | 1,140,039 | ||||||||||
Cash and cash equivalents at end of period
|
$ | 600,205 | $ | 1,267,694 | ||||||||
6
(1) | Basis of Presentation |
The interim condensed consolidated financial statements of H. J. Heinz Company, together with its subsidiaries (collectively referred to as the Company), are unaudited. In the opinion of management, all adjustments, which are of a normal and recurring nature, except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair statement of the results of operations of these interim periods have been included. The results for interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the Companys business. Certain prior year amounts have been reclassified in order to conform with the Fiscal 2006 presentation. | |
The $40.0 million of auction rate securities that the Company held as of April 28, 2004, were reclassified from cash and cash equivalents to short-term investments. As such, a corresponding adjustment was made to the consolidated statement of cash flows for the six months ended October 27, 2004 to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. The Company no longer owns auction rate securities as of April 27, 2005. | |
These statements should be read in conjunction with the Companys consolidated financial statements and related notes, and managements discussion and analysis of financial condition and results of operations which appear in the Companys Annual Report on Form 10-K for the year ended April 27, 2005. |
(2) | Special Items |
The Company recorded pretax reorganization charges for targeted workforce reductions consistent with the Companys goals to streamline its businesses totaling $31.5 million ($22.2 million after tax) and $56.5 million ($39.1 million after tax) during the second quarter and six months ended October 26, 2005, respectively. Additionally, pretax costs of $6.8 million ($4.4 million after tax) and $15.6 million ($12.0 million after tax) were incurred in the second quarter and six months ended October 26, 2005, respectively, primarily as a result of the previously announced strategic review related to the potential divestiture of several non-core businesses. The strategic review costs are primarily associated with portfolio reviews of the Companys non-core European seafood and frozen foods businesses and the Tegel® poultry business in New Zealand. Finally, in the second quarter ended October 26, 2005, the Company recognized a net $12.7 million ($13.6 million after tax) charge primarily related to the sale of a seafood business in Israel, which closed early in the third quarter of Fiscal 2006. For the second quarter, the total impact of these initiatives was $50.9 million pre-tax ($40.2 million after-tax), of which $2.1 million was recorded as costs of products sold and $48.8 million in selling, general and administrative expenses (SG&A). For the six months ended October 26, 2005, the total impact of these initiatives was $84.8 million pre-tax ($64.6 million after-tax), of which $4.2 million was recorded as costs of products sold and $80.6 million in SG&A. The amount included in accrued expenses related to these initiatives totaled $32.0 million at October 26, 2005, most of which is expected to be paid in the third quarter of Fiscal 2006. |
7
Net income from discontinued operations for the second quarter and six months ended October 26, 2005 was $32.0 million, and for the second quarter and six months ended October 27, 2004 was $1.7 million, and reflects the favorable settlement of tax liabilities related to the businesses spun-off to Del Monte in Fiscal 2003. |
(3) | Inventories |
The composition of inventories at the balance sheet dates was as follows: |
October 26, 2005 | April 27, 2005 | |||||||
(Thousands of Dollars) | ||||||||
Finished goods and work-in-process
|
$ | 1,135,823 | $ | 974,974 | ||||
Packaging material and ingredients
|
281,966 | 281,802 | ||||||
$ | 1,417,789 | $ | 1,256,776 | |||||
(4) | Acquisitions |
The Company acquired the following businesses during the first six months of Fiscal 2006 for a total purchase price of $1.04 billion (before post-closing adjustments): | |
In August 2005, the Company completed its acquisition of HP Foods Limited, HP Foods Holdings Limited, and HP Foods International Limited, collectively referred to as HPF, for a purchase price of approximately $874 million. HPF is a manufacturer and marketer of sauces which are primarily sold in the United Kingdom, the United States, and Canada. The Company acquired HPFs brands including HP® and Lea & Perrins® and a perpetual license to market Amoy® brand Asian sauces and products in Europe. This acquisition is currently under review by the British Competition Commission (BCC), which will determine whether the acquisition is expected to result in a substantial lessening of competition in the market for the supply of certain products in the United Kingdom. As a result, Heinz must delay integration of HPF into its United Kingdom operations until the BCC issues its report, which is expected by April 2006. As a result of this review, the Company may be required to divest certain HPF product lines in the U.K. | |
In July 2005, the Company acquired Nancys Specialty Foods, Inc., a producer of premium appetizers, quiche entrees and desserts in the United States and Canada. | |
On April 28, 2005, the Company acquired a controlling interest in Petrosoyuz, a leading Russian maker of ketchup, condiments and sauces. Petrosoyuzs business includes brands such as Pikador®, Derevenskoye®, Mechta Hoziaiyki® and Moya Semya®. | |
All of these acquisitions have been accounted for as purchases and, accordingly, the respective purchase prices have been allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. The preliminary allocations of the purchase price resulted in goodwill of $723.3 million, which was assigned to the North American Consumer Products segment ($144.9 million) and the Europe segment ($578.4 million). In addition, $297.7 million of intangible assets were acquired, of which $155.1 million is not subject to amortization. | |
Operating results of the businesses acquired have been included in the consolidated statements of income from the respective acquisition dates forward. Pro forma results of the Company, assuming all of the acquisitions had occurred at the beginning of each period presented, would not be materially different from the results reported. There are no significant contingent payments, options or commitments associated with any of the acquisitions. |
8
(5) | Goodwill and Other Intangible Assets |
Changes in the carrying amount of goodwill for the six months ended October 26, 2005, by reportable segment, are as follows: |
North | ||||||||||||||||||||||||
American | Other | |||||||||||||||||||||||
Consumer | U.S. | Operating | ||||||||||||||||||||||
Products | Foodservice | Europe | Asia/Pacific | Entities | Total | |||||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||||||
Balance at April 27, 2005
|
$ | 917,706 | $ | 230,367 | $ | 763,758 | $ | 207,925 | $ | 18,743 | $ | 2,138,499 | ||||||||||||
Acquisitions
|
144,947 | 4,049 | 578,428 | 7,345 | | 734,769 | ||||||||||||||||||
Purchase accounting adjustments
|
| 2,875 | | 4,316 | 702 | 7,893 | ||||||||||||||||||
Disposals
|
| | | | (2,638 | ) | (2,638 | ) | ||||||||||||||||
Translation adjustments
|
4,746 | | (59,163 | ) | (3,484 | ) | (835 | ) | (58,736 | ) | ||||||||||||||
Balance at October 26, 2005
|
$ | 1,067,399 | $ | 237,291 | $ | 1,283,023 | $ | 216,102 | $ | 15,972 | $ | 2,819,787 | ||||||||||||
During the first six months of Fiscal 2006, the Company acquired HPF, Nancys Specialty Foods, Inc., and a controlling interest in Petrosoyuz. Preliminary purchase price allocations have been recorded for each of these acquisitions. The Company also adjusted the purchase price allocations related to the Fiscal 2005 acquisitions of Appetizers And, Inc. and Shanghai LongFong Foods. The Company expects to finalize the purchase price allocations related to each of these acquisitions upon completion of third party valuation procedures. During the first six months of Fiscal 2006, the Company finalized the purchase price allocation for the acquisition of certain assets from ABAL, S.A. de C.V., within the Other Operating Entities segment. | |
Trademarks and other intangible assets at October 26, 2005 and April 27, 2005, subject to amortization expense, are as follows: |
October 26, 2005 | April 27, 2005 | |||||||||||||||||||||||
Accum | Accum | |||||||||||||||||||||||
Gross | Amort | Net | Gross | Amort | Net | |||||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||||||
Trademarks
|
$ | 245,594 | $ | (64,200 | ) | $ | 181,394 | $ | 221,019 | $ | (61,616 | ) | $ | 159,403 | ||||||||||
Licenses
|
208,186 | (126,770 | ) | 81,416 | 208,186 | (123,911 | ) | 84,275 | ||||||||||||||||
Other
|
257,509 | (73,898 | ) | 183,611 | 155,481 | (68,081 | ) | 87,400 | ||||||||||||||||
$ | 711,289 | $ | (264,868 | ) | $ | 446,421 | $ | 584,686 | $ | (253,608 | ) | $ | 331,078 | |||||||||||
Amortization expense for trademarks and other intangible assets subject to amortization was $7.1 million and $4.1 million for the second quarter ended October 26, 2005 and October 27, 2004, respectively, and $12.4 million and $7.4 million for the six months ended October 26, 2005 and October 27, 2004, respectively. Based upon the amortizable intangible assets recorded on the balance sheet as of October 26, 2005, annual amortization expense for each of the next five fiscal years is estimated to be approximately $25 million. | |
Intangible assets with indefinite lives at October 26, 2005 and April 27, 2005 were $635.2 million and $492.2 million, respectively, and consisted solely of trademarks. |
9
(6) | Income Taxes |
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 the various locations and the applicable tax rates. The current year-to-date effective tax rate was 26.7% compared to 32.0% last year. The decrease in the effective tax rate is attributable to discrete benefits from foreign tax credit carryforwards of approximately $16.3 million related to tax planning initiatives and the reversal of $23.4 million of tax provision related to a foreign affiliate following a favorable court decision involving an unrelated party. These benefits were partially offset by the elimination of certain tax benefits as well as no tax benefit on some of the special items discussed above. | |
The American Jobs Creation Act (the AJCA) provides a deduction of 85% on certain foreign earnings repatriation. The Company may elect to apply this provision in Fiscal 2006. The Company is currently evaluating the costs and benefits of repatriating amounts under this provision in conjunction with its future business needs and expects to complete its evaluation within the third quarter of Fiscal 2006. The range of amounts that the Company is currently considering for repatriation under this provision is between zero and $700 million. The related potential range of income tax expense is estimated to be between zero and $14 million. |
(7) | Stock-Based Compensation Plans |
Stock-based compensation is accounted for by using the intrinsic value-based method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. |
The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the Companys stock option plans. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, income and income per common share from continuing operations would have been as follows: |
Second Quarter Ended | Six Months Ended | |||||||||||||||||
October 26, | October 27, | October 26, | October 27, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
(In Thousands, Except per Share Amounts) | ||||||||||||||||||
Income from continuing operations:
|
||||||||||||||||||
As reported
|
$ | 171,782 | $ | 197,279 | $ | 329,056 | $ | 392,115 | ||||||||||
Fair value-based expense, net of tax
|
2,960 | 4,691 | 7,002 | 10,831 | ||||||||||||||
Pro forma
|
$ | 168,822 | $ | 192,588 | $ | 322,054 | $ | 381,284 | ||||||||||
Income per common share from continuing operations:
|
||||||||||||||||||
Diluted
|
||||||||||||||||||
As reported
|
$ | 0.50 | $ | 0.56 | $ | 0.95 | $ | 1.11 | ||||||||||
Pro forma
|
$ | 0.49 | $ | 0.54 | $ | 0.93 | $ | 1.08 | ||||||||||
Basic
|
||||||||||||||||||
As reported
|
$ | 0.51 | $ | 0.56 | $ | 0.96 | $ | 1.12 | ||||||||||
Pro forma
|
$ | 0.50 | $ | 0.55 | $ | 0.94 | $ | 1.09 |
10
The weighted-average fair value of options granted was $6.76 and $9.33 per share in the six months ended October 26, 2005 and October 27, 2004, respectively. | |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: |
Six Months Ended | ||||||||
October 26, | October 27, | |||||||
2005 | 2004 | |||||||
Dividend yield
|
3.2 | % | 3.0 | % | ||||
Volatility
|
22.3 | % | 25.4 | % | ||||
Risk-free interest rate
|
4.0 | % | 4.4 | % | ||||
Expected term (years)
|
5.1 | 7.9 |
The Company currently presents proforma stock-based compensation cost for employees eligible to retire ratably over the vesting period of the applicable grants. Upon adoption of SFAS 123(R) in Fiscal 2007, the Company will recognize a compensation charge to such retirement-eligible employees over an accelerated period no greater than the first date of retirement eligibility as defined under the Companys benefit plans. The financial impact of applying the accelerated method of expense recognition is immaterial to the comparative financial statements presented herein. |
During the first six months of Fiscal 2006, the Company granted 447,631 Restricted Stock Units (RSUs) to employees and non-employee directors. The number of RSUs awarded to employees is determined by the fair market value of the Companys stock on the grant date. The fair value of the awards granted has been recorded as unearned compensation and is shown as a separate component of shareholders equity. Unearned compensation is amortized over the vesting period for the particular grant, and is recognized as a component of general and administrative expenses. The RSU liability is classified as a component of additional paid in capital in the consolidated balance sheets. The Company recognized amortization related to the unearned compensation of $4.3 million and $4.7 million for the second quarter ended October 26, 2005 and October 27, 2004, respectively, and $10.4 million and $9.8 million for the six months ended October 26, 2005 and October 27, 2004, respectively. | |
The Company currently records compensation expense for employees eligible to retire ratably over the vesting period of the applicable RSU grants. Upon adoption of SFAS 123(R) in Fiscal 2007 (see note 9), the Company will recognize a compensation charge to such retirement-eligible employees over an accelerated period no greater than the first date of retirement eligibility as defined under the Companys benefit plans. The financial impact of applying the accelerated method of expense recognition is immaterial to the comparative financial statements presented herein. |
11
(8) | Pensions and Other Post-Retirement Benefits |
The components of net periodic benefit cost are as follows: |
Second Quarter Ended | ||||||||||||||||
October 26, 2005 | October 27, 2004 | October 26, 2005 | October 27, 2004 | |||||||||||||
Pension Benefits | Post-Retirement Benefits | |||||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Service cost
|
$ | 10,483 | $ | 11,247 | $ | 1,555 | $ | 1,363 | ||||||||
Interest cost
|
30,420 | 30,189 | 3,818 | 4,094 | ||||||||||||
Expected return on plan assets
|
(41,871 | ) | (41,345 | ) | | | ||||||||||
Amortization of net initial asset
|
(6 | ) | (211 | ) | | | ||||||||||
Amortization of prior service cost
|
1,026 | 2,273 | (708 | ) | (756 | ) | ||||||||||
Amortization of unrecognized loss
|
14,775 | 13,831 | 1,826 | 1,201 | ||||||||||||
Loss due to settlement and special termination benefits
|
1,972 | | 694 | | ||||||||||||
Net periodic benefit cost
|
$ | 16,799 | $ | 15,984 | $ | 7,185 | $ | 5,902 | ||||||||
Six Months Ended | ||||||||||||||||
October 26, 2005 | October 27, 2004 | October 26, 2005 | October 27, 2004 | |||||||||||||
Pension Benefits | Post-Retirement Benefits | |||||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Service cost
|
$ | 21,022 | $ | 22,445 | $ | 3,091 | $ | 2,735 | ||||||||
Interest cost
|
60,888 | 60,193 | 7,610 | 8,148 | ||||||||||||
Expected return on plan assets
|
(83,861 | ) | (82,495 | ) | | | ||||||||||
Amortization of net initial asset
|
(11 | ) | (422 | ) | | | ||||||||||
Amortization of prior service cost
|
2,056 | 4,560 | (1,415 | ) | (1,512 | ) | ||||||||||
Amortization of unrecognized loss
|
29,540 | 27,581 | 3,651 | 3,067 | ||||||||||||
Loss due to settlement and special termination benefits
|
6,193 | | 1,250 | | ||||||||||||
Net periodic benefit cost
|
$ | 35,827 | $ | 31,862 | $ | 14,187 | $ | 12,438 | ||||||||
As of October 26, 2005, the Company has contributed $21.5 million to fund its obligations under these plans. As previously disclosed, the Company expects to make combined cash contributions of approximately $45 million in Fiscal 2006. | |
Prepaid benefit cost of $717.4 million and $758.8 million is included as a component of other non-current assets in the condensed consolidated balance sheets at October 26, 2005 and April 27, 2005, respectively. |
12
(9) | Recently Issued Accounting Standards |
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This Statement focuses primarily on accounting for transactions in which an entity compensates employees for services through share-based payments. This Statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward. On April 18, 2005, the Securities and Exchange Commission adopted a new rule that amended the compliance dates of SFAS No. 123(R) to require the implementation no later than the beginning of the first fiscal year beginning after June 15, 2005. The impact of adoption in Fiscal 2007 is anticipated to be approximately $15 million before the impact of income taxes. | |
In December 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (AJCA.) The FSP provides guidance on the accounting and disclosures for the temporary repatriation provision of the AJCA. The Company has adopted the disclosure provisions of the FSP which apply to entities that have not yet completed their evaluation of the repatriation provision, and will expand its disclosures in accordance with the FSP upon completion of the final evaluation. |
(10) | Segments |
The Companys segments are primarily organized by geographical area. The composition of segments and measure of segment profitability are consistent with that used by the Companys management. The Companys management evaluates performance based on several factors including net sales, operating income, operating income excluding special items, and the use of capital resources. Intersegment revenues are accounted for at current market values. Items below the operating income line on the consolidated statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by the Companys management. | |
Descriptions of the Companys reportable segments are as follows: |
North American Consumer ProductsThis segment primarily manufactures, markets and sells ketchup, condiments, sauces, pasta meals, and frozen potatoes, entrees, snacks, and appetizers to the grocery channels in the United States of America and includes our Canadian business. | |
U.S. FoodserviceThis segment primarily manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States of America including ketchup, condiments, sauces, and frozen soups, desserts and appetizers. | |
EuropeThis segment includes the Companys operations in Europe and sells products in all of the Companys categories. | |
Asia/ PacificThis segment includes the Companys operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Singapore, and Thailand. This segments operations include products in all of the Companys categories. | |
Other Operating EntitiesThis segment includes the Companys operations in Africa, India, Latin America, the Middle East, and other areas that sell products in all of the Companys categories. |
13
Second Quarter Ended | Six Months Ended | ||||||||||||||||
October 26, 2005 | October 27, 2004 | October 26, 2005 | October 27, 2004 | ||||||||||||||
FY 2006 | FY 2005 | FY 2006 | FY 2005 | ||||||||||||||
(Thousands of Dollars) | |||||||||||||||||
Net external sales:
|
|||||||||||||||||
North American Consumer Products
|
$ | 625,039 | $ | 565,927 | $ | 1,169,999 | $ | 1,054,759 | |||||||||
U.S. Foodservice
|
385,345 | 379,832 | 738,556 | 723,700 | |||||||||||||
Europe
|
858,692 | 814,771 | 1,646,856 | 1,603,496 | |||||||||||||
Asia/ Pacific
|
369,110 | 344,787 | 692,640 | 639,059 | |||||||||||||
Other Operating Entities
|
100,662 | 94,243 | 200,950 | 181,572 | |||||||||||||
Consolidated Totals
|
$ | 2,338,848 | $ | 2,199,560 | $ | 4,449,001 | $ | 4,202,586 | |||||||||
Intersegment revenues:
|
|||||||||||||||||
North American Consumer Products
|
$ | 13,128 | $ | 12,965 | $ | 25,431 | $ | 25,691 | |||||||||
U.S. Foodservice
|
5,307 | 5,339 | 10,205 | 9,581 | |||||||||||||
Europe
|
3,239 | 4,494 | 6,474 | 9,166 | |||||||||||||
Asia/ Pacific
|
449 | 1,013 | 1,223 | 1,610 | |||||||||||||
Other Operating Entities
|
301 | 368 | 564 | 758 | |||||||||||||
Non-Operating(a)
|
(22,424 | ) | (24,179 | ) | (43,897 | ) | (46,806 | ) | |||||||||
Consolidated Totals
|
$ | | $ | | $ | | $ | | |||||||||
Operating income (loss):
|
|||||||||||||||||
North American Consumer Products
|
$ | 147,018 | $ | 134,977 | $ | 270,949 | $ | 246,069 | |||||||||
U.S. Foodservice
|
47,202 | 57,964 | 97,664 | 112,304 | |||||||||||||
Europe
|
112,727 | 125,480 | 229,017 | 279,571 | |||||||||||||
Asia/ Pacific
|
39,633 | 42,858 | 59,986 | 75,121 | |||||||||||||
Other Operating Entities
|
(5,002 | ) | 8,162 | 1,365 | 22,488 | ||||||||||||
Non-Operating(a)
|
(31,042 | ) | (25,993 | ) | (67,243 | ) | (52,451 | ) | |||||||||
Consolidated Totals
|
$ | 310,536 | $ | 343,448 | $ | 591,738 | $ | 683,102 | |||||||||
Operating income (loss) excluding special items(b):
|
|||||||||||||||||
North American Consumer Products
|
$ | 147,571 | $ | 134,977 | $ | 273,338 | $ | 246,069 | |||||||||
U.S. Foodservice
|
52,535 | 57,964 | 104,345 | 112,304 | |||||||||||||
Europe
|
136,288 | 125,480 | 266,019 | 279,571 | |||||||||||||
Asia/ Pacific
|
42,750 | 42,858 | 70,021 | 75,121 | |||||||||||||
Other Operating Entities
|
10,419 | 8,162 | 18,751 | 22,488 | |||||||||||||
Non-Operating(a)
|
(28,111 | ) | (25,993 | ) | (55,986 | ) | (52,451 | ) | |||||||||
Consolidated Totals
|
$ | 361,452 | $ | 343,448 | $ | 676,488 | $ | 683,102 | |||||||||
|
(a) | Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. |
(b) | Second Quarter ended October 26, 2005Excludes costs associated with targeted workforce reductions, costs incurred in connection with strategic reviews of several non-core businesses, and losses on disposals as follows: North American Consumer Products, $0.6 million; U.S. Foodservice, $5.3 million; Europe, $23.6 million; Asia/ Pacific, $3.1 million; Other Operating, $15.4 million; and Non-Operating $2.9 million. |
Six Months ended October 26, 2005Excludes costs associated with targeted workforce reductions, costs incurred in connection with strategic reviews of several non-core businesses, and losses on disposals as follows: North American Consumer Products, $2.4 mil- |
14
lion; U.S. Foodservice, $6.7 million; Europe, $37.0 million; Asia/ Pacific, $10.0 million; Other Operating, $17.4 million; and Non-Operating $11.3 million. | |
The results for the second quarter and the six months of last fiscal year, ended October 27, 2004 were impacted by a $21.1 million charge for trade promotion spending for the Italian infant nutrition business. The charge relates to an under-accrual in fiscal years 2001, 2002 and 2003. The amount of the charge that corresponds to each of the fiscal years 2001, 2002 and 2003 is less than 2% of net income for each of those years. |
The Companys revenues are generated via the sale of products in the following categories: |
Second Quarter Ended | Six Months Ended | ||||||||||||||||
October 26, 2005 | October 27, 2004 | October 26, 2005 | October 27, 2004 | ||||||||||||||
FY 2006 | FY 2005 | FY 2006 | FY 2005 | ||||||||||||||
(Thousands of Dollars) | |||||||||||||||||
Ketchup, Condiments and Sauces
|
$ | 870,080 | $ | 800,435 | $ | 1,673,009 | $ | 1,563,035 | |||||||||
Frozen Foods
|
602,455 | 543,050 | 1,106,337 | 1,004,590 | |||||||||||||
Convenience Meals
|
477,358 | 480,431 | 931,634 | 931,300 | |||||||||||||
Infant Foods
|
207,318 | 202,437 | 401,696 | 381,388 | |||||||||||||
Other
|
181,637 | 173,207 | 336,325 | 322,273 | |||||||||||||
Total
|
$ | 2,338,848 | $ | 2,199,560 | $ | 4,449,001 | $ | 4,202,586 | |||||||||
As a result of general economic uncertainty, coupled with government restrictions on the repatriation of earnings, as of the end of November 2002, the Company deconsolidated its Zimbabwean operations and classified its remaining net investment of approximately $110 million as a cost investment included in other non-current assets on the consolidated balance sheets. As previously noted, economic conditions have not improved and the currency continues to devalue. Should the current situation continue, the Company could experience disruptions and delays in its Zimbabwean operations. The ability to source raw materials is critical to the sustainability of local operations. While the Companys business continues to operate profitably and is able to source raw materials, the countrys economic situation remains uncertain. The Companys ability to recover its investment could become impaired if the economic and political uncertainties continue to deteriorate. |
15
(11) | Net Income Per Common Share |
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: |
Second Quarter Ended | Six Months Ended | ||||||||||||||||||
October 26, 2005 | October 27, 2004 | October 26, 2005 | October 27, 2004 | ||||||||||||||||
FY 2006 | FY 2005 | FY 2006 | FY 2005 | ||||||||||||||||
(In Thousands) | |||||||||||||||||||
Income from continuing operations
|
$ | 171,782 | $ | 197,279 | $ | 329,056 | $ | 392,115 | |||||||||||
Preferred dividends
|
3 | 4 | 7 | 8 | |||||||||||||||
Income from continuing operations applicable to common stock
|
$ | 171,779 | $ | 197,275 | $ | 329,049 | $ | 392,107 | |||||||||||
Average common shares outstandingbasic
|
339,475 | 349,655 | 342,856 | 350,569 | |||||||||||||||
Effect of dilutive securities:
|
|||||||||||||||||||
Convertible preferred stock
|
125 | 140 | 125 | 140 | |||||||||||||||
Stock options and restricted stock
|
2,933 | 3,480 | 2,982 | 3,436 | |||||||||||||||
Average common shares outstandingdiluted
|
342,533 | 353,275 | 345,963 | 354,145 | |||||||||||||||
Stock options outstanding in the amounts of 18.6 million and 16.1 million were not included in the computation of diluted earnings per share for the second quarters ended October 26, 2005 and October 27, 2004, respectively, and 18.6 million and 16.3 million were not included in the computation of diluted earnings per share for the six months ended October 26, 2005 and October 27, 2004, respectively, because inclusion of these options would be antidilutive. |
(12) | Comprehensive Income |
Second Quarter Ended | Six Months Ended | ||||||||||||||||
October 26, 2005 | October 27, 2004 | October 26, 2005 | October 27, 2004 | ||||||||||||||
FY 2006 | FY 2005 | FY 2006 | FY 2005 | ||||||||||||||
(Thousands of Dollars) | |||||||||||||||||
Net income
|
$ | 203,821 | $ | 198,965 | $ | 361,095 | $ | 393,801 | |||||||||
Other comprehensive income:
|
|||||||||||||||||
Foreign currency translation adjustments
|
46,722 | 150,381 | (195,398 | ) | 193,699 | ||||||||||||
Minimum pension liability adjustment
|
(2,548 | ) | (354 | ) | (2,163 | ) | (6,061 | ) | |||||||||
Net deferred gains/(losses) on derivatives from periodic
revaluations
|
(13,644 | ) | 27,935 | (7,568 | ) | 25,734 | |||||||||||
Net deferred (gains)/losses on derivatives reclassified to
earnings
|
9,186 | (18,652 | ) | 9,040 | (17,007 | ) | |||||||||||
Comprehensive income
|
$ | 243,537 | $ | 358,275 | $ | 165,006 | $ | 590,166 | |||||||||
16
(13) | Derivative Financial Instruments and Hedging Activities |
The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain derivative financial instruments to manage its foreign currency and interest rate exposures. There have been no material changes in the Companys market risk during the six months ended October 26, 2005. For additional information, refer to pages 22-23 of the Companys Annual Report on Form 10-K for the fiscal year ended April 27, 2005. | |
As of October 26, 2005, the Company is hedging forecasted transactions for periods not exceeding two years. During the next 12 months, the Company expects $3.3 million of net deferred losses reported in accumulated other comprehensive loss/(income) 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 income and expense, was not significant for the six months ended October 26, 2005 and October 27, 2004. Amounts reclassified to earnings because the hedged transaction was no longer expected to occur were not significant for the six months ended October 26, 2005 and October 27, 2004. |
17
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
HP/ LP Acquisition |
Portfolio Reviews |
Reorganization costs |
18
Discontinued operations |
19
20
21
22
23
24
25
Less than | More than | |||||||||||||||||||
1 Year | 1-3 Years | 3-5 Years | 5 Years | Total | ||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||
Long-term Debt
|
$ | 508,276 | $ | 302,668 | $ | 1,422,699 | $ | 3,281,043 | $ | 5,514,686 | ||||||||||
Capital Lease Obligations
|
565 | 1,124 | 1,418 | 18,520 | 21,627 | |||||||||||||||
Operating Leases
|
57,872 | 251,977 | 77,162 | 209,286 | 596,297 | |||||||||||||||
Purchase Obligations
|
463,122 | 877,923 | 386,640 | 91,695 | 1,819,380 | |||||||||||||||
Other Long Term Liabilities Recorded on the Balance Sheet
|
78,876 | 167,171 | 154,067 | 153,103 | 553,217 | |||||||||||||||
Total
|
$ | 1,108,711 | $ | 1,600,863 | $ | 2,041,986 | $ | 3,753,647 | $ | 8,505,207 | ||||||||||
26
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures |
(b) Changes in Internal Control over Financial Reporting |
27
28
Item 1. | Legal Proceedings |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Total Number of | Maximum | |||||||||||||||
Total | Shares Purchased as | Number of Shares | ||||||||||||||
Number of | Average | Part of Publicly | that May Yet Be | |||||||||||||
Shares | Price Paid | Announced | Purchased Under | |||||||||||||
Period | Purchased | per Share | Programs | the Programs | ||||||||||||
July 28, 2005 - August 24, 2005
|
573,984 | $ | 36.95 | | | |||||||||||
August 25, 2005 - September 21, 2005
|
| | | | ||||||||||||
September 22, 2005 - October 26, 2005
|
6,845,200 | $ | 36.52 | | | |||||||||||
Total
|
7,419,184 | $ | 36.55 | | | |||||||||||
Item 3. | Defaults upon Senior Securities |
Item 4. | Submission of Matters to a Vote of Security Holders |
Shares | ||||||||||||||||
Against or | ||||||||||||||||
Director | Shares For | Withheld | Abstain | Broker Non-vote | ||||||||||||
W. R. Johnson
|
290,530,055 | 7,423,742 | | | ||||||||||||
C. E. Bunch
|
292,360,535 | 5,593,262 | | | ||||||||||||
M. C. Choksi
|
292,469,727 | 5,484,070 | | | ||||||||||||
L. S. Coleman, Jr
|
290,577,629 | 7,376,168 | | | ||||||||||||
P. H. Coors
|
292,200,915 | 5,752,882 | | | ||||||||||||
E. E. Holiday
|
289,270,905 | 8,682,892 | | | ||||||||||||
C. Kendle
|
292,351,457 | 5,602,340 | | | ||||||||||||
D. R. OHare
|
292,397,982 | 5,555,815 | | | ||||||||||||
L. C. Swann
|
292,250,296 | 5,703,501 | | | ||||||||||||
T. J. Usher
|
291,502,702 | 6,451,095 | | |
Ratified the Audit Committees selection of PricewaterhouseCoopers, LLP as the Companys independent accountants for the fiscal year ending May 3, 2006. Votes totaled 289,886,454 for, 5,304,859 against or withheld, and 2,762,484 abstentions. |
29
A proposal recommended hiring an investment bank to explore the sale of the Company. Votes totaled 13,141,092 for, 227,056,332 against or withheld, 5,095,593 abstentions, and 52,660,780 broker non-votes. | |
A proposal recommended that the Board of Directors take each step necessary in the most expeditious manner for a simple majority vote to apply on each issue subject to shareholder vote, except directors. Votes totaled 156,632,834 for, 84,324,299 against or withheld, 4,335,883 abstentions, and 52,660,780 broker non-votes. |
Item 5. | Other Information |
Nothing to report under this item. |
Item 6. | Exhibits |
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. |
30
H. J. HEINZ COMPANY | |
(Registrant) |
By | /s/ Arthur B. Winkleblack |
............................................ ............................................ ................................... |
Arthur B. Winkleblack | |
Executive Vice President and | |
Chief Financial Officer | |
(Principal Financial Officer) |
By | /s/ Edward J. McMenamin |
............................................ ............................................ ................................... |
Edward J. McMenamin | |
Senior Vice PresidentFinance | |
and Corporate Controller | |
(Principal Accounting Officer) |
31