H.J. Heinz Company 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
|
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 25, 2006
OR
|
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
|
|
|
PENNSYLVANIA |
|
25-0542520 |
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
600 Grant Street, Pittsburgh, Pennsylvania
(Address of Principal Executive Offices) |
|
15219
(Zip Code) |
Registrants telephone number, including area code:
(412) 456-5700
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such requirements for the past
90 days. Yes X No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer X Accelerated
filer Non-accelerated
filer
Indicate by check mark whether the registrant is a shell Company
(as defined in
Rule 12b-2 of the
Exchange Act).
Yes No X
The number of shares of the Registrants Common Stock, par
value $0.25 per share, outstanding as of January 31,
2006 was 335,012,168 shares.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial
Statements
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended | |
|
|
| |
|
|
January 25, 2006 | |
|
January 26, 2005 | |
|
|
FY 2006 | |
|
FY 2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In Thousands, Except | |
|
|
per Share Amounts) | |
Sales
|
|
$ |
2,186,524 |
|
|
$ |
2,069,159 |
|
Cost of products sold
|
|
|
1,405,807 |
|
|
|
1,284,425 |
|
|
|
|
|
|
|
|
Gross profit
|
|
|
780,717 |
|
|
|
784,734 |
|
Selling, general and administrative expenses
|
|
|
473,081 |
|
|
|
465,365 |
|
|
|
|
|
|
|
|
Operating income
|
|
|
307,636 |
|
|
|
319,369 |
|
Interest income
|
|
|
7,693 |
|
|
|
7,370 |
|
Interest expense
|
|
|
86,336 |
|
|
|
60,434 |
|
Asset impairment charges for cost and equity investments
|
|
|
|
|
|
|
73,842 |
|
Other expense, net
|
|
|
9,918 |
|
|
|
2,173 |
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
219,075 |
|
|
|
190,290 |
|
Provision for income taxes
|
|
|
85,897 |
|
|
|
58,778 |
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
133,178 |
|
|
|
131,512 |
|
(Loss)/income from discontinued operations, net of tax
|
|
|
(16,578 |
) |
|
|
20,899 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
116,600 |
|
|
$ |
152,411 |
|
|
|
|
|
|
|
|
Income/(loss) per common share
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.39 |
|
|
$ |
0.37 |
|
|
|
Discontinued operations
|
|
|
(0.05 |
) |
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.35 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
Average common shares outstanding diluted
|
|
|
337,822 |
|
|
|
352,591 |
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.40 |
|
|
$ |
0.38 |
|
|
|
Discontinued operations
|
|
|
(0.05 |
) |
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.35 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
Average common shares outstanding basic
|
|
|
334,879 |
|
|
|
349,729 |
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$ |
0.30 |
|
|
$ |
0.285 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
2
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
| |
|
|
January 25, 2006 | |
|
January 26, 2005 | |
|
|
FY 2006 | |
|
FY 2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In Thousands, Except | |
|
|
per Share Amounts) | |
Sales
|
|
$ |
6,243,786 |
|
|
$ |
5,872,950 |
|
Cost of products sold
|
|
|
3,956,735 |
|
|
|
3,637,655 |
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,287,051 |
|
|
|
2,235,295 |
|
Selling, general and administrative expenses
|
|
|
1,421,589 |
|
|
|
1,273,274 |
|
|
|
|
|
|
|
|
Operating income
|
|
|
865,462 |
|
|
|
962,021 |
|
Interest income
|
|
|
21,491 |
|
|
|
19,629 |
|
Interest expense
|
|
|
229,140 |
|
|
|
169,871 |
|
Asset impairment charges for cost and equity investments
|
|
|
|
|
|
|
73,842 |
|
Other expense, net
|
|
|
19,836 |
|
|
|
10,238 |
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
637,977 |
|
|
|
727,699 |
|
Provision for income taxes
|
|
|
196,295 |
|
|
|
231,179 |
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
441,682 |
|
|
|
496,520 |
|
Income from discontinued operations, net of tax
|
|
|
36,013 |
|
|
|
49,692 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
477,695 |
|
|
$ |
546,212 |
|
|
|
|
|
|
|
|
Income per common share
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
1.29 |
|
|
$ |
1.40 |
|
|
|
Discontinued operations
|
|
|
0.10 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.39 |
|
|
$ |
1.54 |
|
|
|
|
|
|
|
|
|
Average common shares outstanding diluted
|
|
|
343,532 |
|
|
|
353,842 |
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
1.30 |
|
|
$ |
1.42 |
|
|
|
Discontinued operations
|
|
|
0.11 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.40 |
|
|
$ |
1.56 |
|
|
|
|
|
|
|
|
|
Average common shares outstanding basic
|
|
|
340,484 |
|
|
|
350,357 |
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$ |
0.90 |
|
|
$ |
0.855 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
3
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
January 25, 2006 | |
|
April 27, 2005* | |
|
|
FY 2006 | |
|
FY 2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
(Thousands of Dollars) | |
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
944,281 |
|
|
$ |
1,083,749 |
|
Receivables, net
|
|
|
1,056,326 |
|
|
|
1,092,394 |
|
Inventories
|
|
|
1,213,728 |
|
|
|
1,256,776 |
|
Prepaid expenses
|
|
|
182,761 |
|
|
|
174,818 |
|
Other current assets
|
|
|
28,207 |
|
|
|
37,839 |
|
Current assets of discontinued operations
|
|
|
325,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,751,170 |
|
|
|
3,645,576 |
|
|
|
|
Property, plant and equipment
|
|
|
3,731,227 |
|
|
|
4,022,719 |
|
Less accumulated depreciation
|
|
|
1,814,412 |
|
|
|
1,858,781 |
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
|
1,916,815 |
|
|
|
2,163,938 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,776,025 |
|
|
|
2,138,499 |
|
Trademarks, net
|
|
|
775,496 |
|
|
|
651,552 |
|
Other intangibles, net
|
|
|
257,418 |
|
|
|
171,675 |
|
Other non-current assets
|
|
|
1,510,709 |
|
|
|
1,806,478 |
|
Non-current assets of discontinued operations
|
|
|
337,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other non-current assets
|
|
|
5,657,024 |
|
|
|
4,768,204 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
11,325,009 |
|
|
$ |
10,577,718 |
|
|
|
|
|
|
|
|
|
|
* |
Summarized from audited fiscal year 2005 balance sheet. |
See Notes to Condensed Consolidated Financial Statements.
4
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
January 25, 2006 | |
|
April 27, 2005* | |
|
|
FY 2006 | |
|
FY 2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
(Thousands of Dollars) | |
Liabilities and
Shareholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$ |
54,235 |
|
|
$ |
28,471 |
|
Portion of long-term debt due within one year
|
|
|
514,922 |
|
|
|
544,798 |
|
Accounts payable
|
|
|
915,288 |
|
|
|
1,181,652 |
|
Salaries and wages
|
|
|
76,204 |
|
|
|
76,020 |
|
Accrued marketing
|
|
|
254,043 |
|
|
|
260,550 |
|
Other accrued liabilities
|
|
|
393,592 |
|
|
|
365,022 |
|
Income taxes
|
|
|
100,931 |
|
|
|
130,555 |
|
Current liabilities of discontinued operations
|
|
|
167,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,476,898 |
|
|
|
2,587,068 |
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
5,312,015 |
|
|
|
4,121,984 |
|
Deferred income taxes
|
|
|
524,336 |
|
|
|
508,639 |
|
Non-pension post-retirement benefits
|
|
|
203,952 |
|
|
|
196,686 |
|
Other liabilities and minority interest
|
|
|
623,562 |
|
|
|
560,768 |
|
Non-current liabilities of discontinued operations
|
|
|
22,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
6,686,241 |
|
|
|
5,388,077 |
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Capital stock
|
|
|
107,857 |
|
|
|
107,857 |
|
Additional capital
|
|
|
463,333 |
|
|
|
430,073 |
|
Retained earnings
|
|
|
5,381,357 |
|
|
|
5,210,748 |
|
|
|
|
|
|
|
|
|
|
|
5,952,547 |
|
|
|
5,748,678 |
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Treasury stock at cost (96,090,912 shares at
January 25, 2006 and 83,419,356 shares at
April 27, 2005)
|
|
|
3,627,780 |
|
|
|
3,140,586 |
|
|
Unearned compensation
|
|
|
32,074 |
|
|
|
31,141 |
|
|
Accumulated other comprehensive loss/(income)
|
|
|
130,823 |
|
|
|
(25,622 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,161,870 |
|
|
|
2,602,573 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
11,325,009 |
|
|
$ |
10,577,718 |
|
|
|
|
|
|
|
|
|
|
* |
Summarized from audited fiscal year 2005 balance sheet. |
See Notes to Condensed Consolidated Financial Statements.
5
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
| |
|
|
January 25, 2006 | |
|
January 26, 2005 | |
|
|
FY 2006 | |
|
FY 2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(Thousands of Dollars) | |
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
477,695 |
|
|
$ |
546,212 |
|
|
Adjustments to reconcile net income to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
170,407 |
|
|
|
168,807 |
|
|
|
Amortization
|
|
|
23,890 |
|
|
|
15,893 |
|
|
|
Deferred tax provision
|
|
|
102,306 |
|
|
|
65,970 |
|
|
|
Impairment charges and losses on disposals
|
|
|
21,861 |
|
|
|
74,449 |
|
|
|
Tax pre-payment in Europe
|
|
|
|
|
|
|
(124,886 |
) |
|
|
Other items, net
|
|
|
30,017 |
|
|
|
31,243 |
|
|
|
Changes in current assets and liabilities, excluding effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
46,694 |
|
|
|
130,463 |
|
|
|
|
Inventories
|
|
|
(178,920 |
) |
|
|
(165,749 |
) |
|
|
|
Prepaid expenses and other current assets
|
|
|
(23,893 |
) |
|
|
(35,633 |
) |
|
|
|
Accounts payable
|
|
|
(58,270 |
) |
|
|
(140,777 |
) |
|
|
|
Accrued liabilities
|
|
|
67,387 |
|
|
|
(67,835 |
) |
|
|
|
Income taxes
|
|
|
(176,254 |
) |
|
|
7,989 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
502,920 |
|
|
|
506,146 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(151,017 |
) |
|
|
(131,024 |
) |
|
|
Acquisitions, net of cash acquired
|
|
|
(1,053,616 |
) |
|
|
(38,121 |
) |
|
|
Proceeds from divestitures
|
|
|
171,649 |
|
|
|
39,878 |
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(293,475 |
) |
|
|
Sales of short-term investments
|
|
|
|
|
|
|
333,475 |
|
|
|
Other items, net
|
|
|
(251 |
) |
|
|
4,135 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(1,033,235 |
) |
|
|
(85,132 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from/(payments on) long-term debt
|
|
|
216,414 |
|
|
|
(418,466 |
) |
|
|
Proceeds from/(payments on) commercial paper and short-term
debt, net
|
|
|
961,430 |
|
|
|
(24,128 |
) |
|
|
Dividends
|
|
|
(307,086 |
) |
|
|
(299,252 |
) |
|
|
Purchases of treasury stock
|
|
|
(525,321 |
) |
|
|
(169,016 |
) |
|
|
Exercise of stock options
|
|
|
51,536 |
|
|
|
59,337 |
|
|
|
Other items, net
|
|
|
11,908 |
|
|
|
11,323 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by/(used for) financing activities
|
|
|
408,881 |
|
|
|
(840,202 |
) |
|
|
|
|
|
|
|
Cash provided by operating activities of discontinued operations
spun-off to Del Monte
|
|
|
13,312 |
|
|
|
28,196 |
|
Cash presented in discontinued operations as of January 25,
2006
|
|
|
(15,984 |
) |
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(15,362 |
) |
|
|
85,758 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(139,468 |
) |
|
|
(305,234 |
) |
Cash and cash equivalents at beginning of year
|
|
|
1,083,749 |
|
|
|
1,140,039 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
944,281 |
|
|
$ |
834,805 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
6
H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
(1) |
Basis of Presentation |
|
|
|
The interim condensed consolidated financial statements of H. J.
Heinz Company, together with its subsidiaries (collectively
referred to as the Company), are unaudited. In the
opinion of management, all adjustments, which are of a normal
and recurring nature, except those which have been disclosed
elsewhere in this Quarterly Report on
Form 10-Q,
necessary for a fair statement of the results of operations of
these interim periods have been included. The results for
interim periods are not necessarily indicative of the results to
be expected for the full fiscal year due to the seasonal nature
of the Companys business. Certain prior year amounts have
been reclassified 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 nine months ended January 26, 2005 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) |
Discontinued Operations |
|
|
|
In the third quarter of Fiscal 2006, the Companys Board of
Directors approved the divestitures of the European seafood
business and the
Tegel®
poultry business in New Zealand. The Company has entered into a
definitive agreement to sell the European seafood business. Some
of the brands included in this business are: John
West®,
Petit
Navire®,
Marie
Elisabeth®
and
Mareblu®.
The closing of the transaction is subject to customary European
Union competition authority review and approval. A definitive
agreement was signed on December 22, 2005 to sell the
Tegel®
poultry business, which is subject to competition authority
approval. The Company expects to complete the sale of the
European seafood and
Tegel®
poultry businesses in the fourth quarter of Fiscal 2006, with
proceeds expected to approximate
425 million
and NZ$250 million, respectively. |
|
|
In accordance with accounting principles generally accepted in
the United States of America, the operating results related to
these businesses have been included in discontinued operations
in the Companys consolidated statements of income for all
periods presented, and the net assets related to these
businesses have been presented as discontinued operations in the
condensed consolidated balance sheet as of January 25, 2006. |
|
|
These discontinued operations generated sales of
$184.5 million and $192.1 million and net
income/(loss) of $(18.2) million (net of $27.3 million
in tax expense) and $7.0 million (net of $3.4 million
in tax expense) for the three months ended January 25, 2006
and January 26, 2005, respectively. These discontinued
operations generated sales of $576.2 million and
$590.9 million and net income of $2.3 million (net of
$37.0 million in tax expense) and $34.1 million (net
of $15.5 million in tax expense) for the nine months ended
January 25, 2006 and January 26, 2005, respectively. |
7
|
|
|
Net assets related to discontinued operations of
$473.2 million are reported on the January 25, 2006
condensed consolidated balance sheet. These assets consist of
the following: |
|
|
|
|
|
|
|
|
January 25, 2006 | |
|
|
| |
|
|
(Thousands of | |
|
|
Dollars) | |
Cash and cash equivalents
|
|
$ |
15,984 |
|
Receivables, net
|
|
|
102,433 |
|
Inventories
|
|
|
190,802 |
|
Prepaid expenses and other current assets
|
|
|
16,647 |
|
Property, plant and equipment, net
|
|
|
215,749 |
|
Goodwill
|
|
|
58,599 |
|
Trademarks and other intangibles, net
|
|
|
15,462 |
|
Other non-current assets
|
|
|
47,567 |
|
|
|
|
|
|
Total assets
|
|
|
663,243 |
|
|
|
|
|
Accounts payable
|
|
|
93,236 |
|
Accrued marketing
|
|
|
34,020 |
|
Other accrued liabilities
|
|
|
25,236 |
|
Income taxes
|
|
|
27,737 |
|
Other liabilities
|
|
|
9,830 |
|
|
|
|
|
|
Total liabilities
|
|
|
190,059 |
|
|
|
|
|
|
Net assets
|
|
$ |
473,184 |
|
|
|
|
|
|
|
|
In addition, net income from discontinued operations includes
amounts related to the favorable settlement of tax liabilities
associated with the businesses spun-off to Del Monte in Fiscal
2003. Such amounts totaled $1.7 million and
$13.9 million for the quarters ended January 25, 2006
and January 26, 2005, respectively, and $33.7 million
and $15.6 million for the nine months ended
January 25, 2006 and January 26, 2005, respectively. |
Reorganization
Costs
|
|
|
The Company recorded pre-tax reorganization charges for targeted
workforce reductions consistent with the Companys goals to
streamline its businesses totaling $14.0 million
($10.0 million after tax) and $70.4 million
($49.1 million after tax) during the third quarter and nine
months ended January 25, 2006, respectively. Additionally,
pre-tax costs of $13.9 million ($14.8 million after
tax) and $29.6 million ($26.8 million after tax) were
incurred in the third quarter and nine months ended
January 25, 2006, respectively, primarily as a result of
the previously announced strategic reviews related to the
potential divestiture of several businesses which include the
European seafood and frozen businesses and
Tegel®
poultry business in New Zealand. |
|
|
For the third quarter, the total impact of these initiatives on
continuing operations was $22.0 million pre-tax
($18.3 million after-tax), of which $1.8 million was
recorded as costs of products sold and $20.2 million in
selling, general and administrative expenses
(SG&A). In addition, $6.6 million was
recorded in income of discontinued operations, net of tax. For
the nine months ended January 25, 2006, the total impact of
these initiatives on continuing operations was
$88.2 million pre-tax ($65.3 million after-tax), of
which $9.3 million was recorded as costs of products sold
and $78.9 million in SG&A. In addition,
$10.7 million was recorded in income of discontinued
operations, net of tax. The amount included in accrued |
8
expenses related to these initiatives totaled $15.2 million
at January 25, 2006, most of which is expected to be paid
in the fourth quarter of Fiscal 2006.
Divestitures/ Impairment Charges
During the third quarter, the Company completed the sale of the
HAK®
vegetable product line in Northern Europe and received proceeds
from this divestiture of $51.1 million, which was in excess
of the cost basis by $3.2 million ($3.5 million after
tax). This excess was recorded in cost of products sold. In the
fourth quarter of Fiscal 2005, the Company recognized a non-cash
asset impairment charge of $27.0 million pre-tax
($18.0 million after-tax) related to the anticipated
disposition of this product line.
Also during the third quarter of Fiscal 2006, the Company sold
its equity investment in The Hain Celestial Group, Inc.
(Hain) and recognized a $6.9 million
($4.5 million after-tax) loss which was recorded within
other expense, net. Net proceeds from the sale of this
investment were $116.1 million. During the third quarter of
Fiscal 2005, the Company recognized a $64.5 million
other-than-temporary impairment charge on its equity investment
in Hain. The charge reduced Heinzs carrying value in Hain
to fair market value as of January 26, 2005, with no
resulting impact on cash flows. The Company also recorded a
$9.3 million non-cash charge in the third quarter of Fiscal
2005 to recognize the impairment of a cost-basis investment in a
grocery industry sponsored
e-commerce business
venture. There was no tax benefit associated with these
impairment charges in Fiscal 2005.
Also, in the third quarter of Fiscal 2006, the Company
recognized a non-cash asset impairment charge of
$15.8 million pre-tax ($8.5 million after-tax) on a
small noodle business in Indonesia. The charge, which was
primarily recorded as a component of cost of products sold,
relates to the anticipated disposition of this business in the
fourth quarter of 2006. The net assets related to this business
total approximately $5.7 million.
During the second quarter of Fiscal 2006, the Company recognized
a net $12.7 million ($13.6 million after tax) charge
primarily related to the sale of a small seafood business in
Israel which closed in the third quarter of Fiscal 2006.
Income Taxes
The American Jobs Creation Act (AJCA) provides a
deduction of 85% of qualified foreign dividends in excess of a
Base Period dividend amount. During the third
quarter of Fiscal 2006, the Company finalized plans to
repatriate an additional $253 million to satisfy the Base
Period dividend requirement and an additional $562 million
that will qualify under the AJCA (the Qualified
Dividends). In addition, the Company expects that
$154 million of $166 million of previously planned
dividends will also qualify under the AJCA. The Company expects
to incur a tax charge of $24.8 million on total Base Period
dividends of $265 million, $10.3 million of which is
incremental to the tax already accrued on the $154 million
of qualifying previously planned dividends. The Fiscal
2006 net tax cost related to the $716 million of
Qualified Dividends is $14.0 million. The
$10.2 million of incremental tax related to the Base Period
dividends and the $14.0 million of tax related to the
Qualified Dividends were recorded during the third quarter as
part of tax expense related to special items. The total impact
of the AJCA on tax expense for the third quarter and nine months
ended January 25, 2006 was $24.3 million, of which
$27.7 million of expense was recorded in continuing
operations and $3.4 million was a benefit in discontinued
operations.
During the third quarter of Fiscal 2006, the Company reversed
valuation allowances of $20.6 million in continuing
operations related to the non-cash asset impairment charges
recorded in Fiscal 2005 on the cost and equity investments
discussed above. The reversal of the valuation allowances is
based upon tax planning strategies that are expected to generate
sufficient capital gains that will occur during the capital loss
carryforward period.
9
|
|
|
The Company has not previously recorded deferred taxes on the
difference between the book and tax bases of the European
Seafood business because this basis difference was not expected
to be realized in the foreseeable future. As a result of the
European Seafood business being classified as discontinued
operations, the Company now expects that this basis difference
will be realized as a result of the anticipated sale and has
recorded a deferred tax liability of $19.6 million in
connection with this basis difference. The recording of the
deferred tax liability resulted in a $24.6 million tax
charge in discontinued operations and a tax benefit of
$5.0 million recorded as part of other comprehensive income
during the third quarter. |
|
|
|
The Company acquired the following businesses during the first
nine months of Fiscal 2006 for a total purchase price of
$1.04 billion: |
|
|
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
$877 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). The BCC has provisionally cleared the
acquisition, concluding that the acquisition may not be expected
to result in a substantial lessening of competition within the
markets for tomato ketchup, brown sauce, barbecue sauce, canned
baked beans and canned pasta in the United Kingdom. A final
decision is expected in April, 2006. Pending the final decision,
Heinz must delay integration of HPF into its U.K. operations. If
the provisional findings become final in their current form, the
Company would not be required to divest any of the acquired
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 $722.5 million, which was assigned to the North
American Consumer Products segment ($146.7 million) and the
Europe segment ($575.8 million). In addition,
$297.3 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. |
10
|
|
|
The composition of inventories at the balance sheet dates was as
follows: |
|
|
|
|
|
|
|
|
|
|
|
January 25, 2006 | |
|
April 27, 2005 | |
|
|
| |
|
| |
|
|
(Thousands of Dollars) | |
Finished goods and work-in-process
|
|
$ |
908,591 |
|
|
$ |
974,974 |
|
Packaging material and ingredients
|
|
|
305,137 |
|
|
|
281,802 |
|
|
|
|
|
|
|
|
|
|
$ |
1,213,728 |
|
|
$ |
1,256,776 |
|
|
|
|
|
|
|
|
|
|
(6) |
Goodwill and Other Intangible Assets |
|
|
|
Changes in the carrying amount of goodwill for the nine months
ended January 25, 2006, 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
|
|
|
146,707 |
|
|
|
4,079 |
|
|
|
583,503 |
|
|
|
7,400 |
|
|
|
|
|
|
|
741,689 |
|
Purchase accounting adjustments
|
|
|
|
|
|
|
2,922 |
|
|
|
|
|
|
|
2,506 |
|
|
|
702 |
|
|
|
6,130 |
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,638 |
) |
|
|
(2,638 |
) |
Translation adjustments
|
|
|
6,255 |
|
|
|
|
|
|
|
(48,693 |
) |
|
|
(6,850 |
) |
|
|
232 |
|
|
|
(49,056 |
) |
Goodwill allocated to discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(50,660 |
) |
|
|
(7,939 |
) |
|
|
|
|
|
|
(58,599 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 25, 2006
|
|
$ |
1,070,668 |
|
|
$ |
237,368 |
|
|
$ |
1,247,908 |
|
|
$ |
203,042 |
|
|
$ |
17,039 |
|
|
$ |
2,776,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first nine 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 expects to finalize the purchase price allocations
related to each of these acquisitions upon completion of third
party valuation procedures. During the first nine months of
Fiscal 2006, the Company finalized the purchase price
allocations for the acquisitions of Appetizers And, Inc.,
Shanghai LongFong Foods and for certain assets from ABAL, S.A.
de C.V.. |
|
|
Trademarks and other intangible assets at January 25, 2006
and April 27, 2005, subject to amortization expense, are as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 25, 2006 | |
|
April 27, 2005 | |
|
|
| |
|
| |
|
|
|
|
Accum | |
|
|
|
|
|
Accum | |
|
|
|
|
Gross | |
|
Amort | |
|
Net | |
|
Gross | |
|
Amort | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of Dollars) | |
Trademarks
|
|
$ |
221,838 |
|
|
$ |
(63,218 |
) |
|
$ |
158,620 |
|
|
$ |
221,019 |
|
|
$ |
(61,616 |
) |
|
$ |
159,403 |
|
|
Licenses
|
|
|
208,186 |
|
|
|
(128,199 |
) |
|
|
79,987 |
|
|
|
208,186 |
|
|
|
(123,911 |
) |
|
|
84,275 |
|
|
Other
|
|
|
252,905 |
|
|
|
(75,474 |
) |
|
|
177,431 |
|
|
|
155,481 |
|
|
|
(68,081 |
) |
|
|
87,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
682,929 |
|
|
$ |
(266,891 |
) |
|
$ |
416,038 |
|
|
$ |
584,686 |
|
|
$ |
(253,608 |
) |
|
$ |
331,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for trademarks and other intangible assets
subject to amortization was $7.7 million and
$3.8 million for the third quarter ended January 25,
2006 and January 26, |
11
|
|
|
2005, respectively, and $19.9 million and
$11.0 million for the nine months ended January 25,
2006 and January 26, 2005, respectively. Based upon the
amortizable intangible assets recorded on the balance sheet as
of January 25, 2006, annual amortization expense for each
of the next five fiscal years is estimated to be approximately
$31 million. |
|
|
Intangible assets with indefinite lives at January 25, 2006
and April 27, 2005 were $616.9 million and
$492.2 million, respectively, and consisted solely of
trademarks. |
|
|
|
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 30.8% compared to 31.8% for the prior 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, the
reversal of $23.4 million of tax provision related to a
foreign affiliate following a favorable court decision involving
an unrelated party, and the reversal of $20.6 million of
valuation allowance as part of tax expense related to special
items discussed above. The majority of these benefits were
offset by the elimination of certain tax benefits, the recording
of tax charges for the American Jobs Creation Act discussed
above, as well as no tax benefit on some of the special items. |
|
|
(8) |
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. |
Stock Options
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
January 25, | |
|
January 26, | |
|
January 25, | |
|
January 26, | |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In Thousands, Except per Share Amounts) | |
Income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
133,178 |
|
|
$ |
131,512 |
|
|
$ |
441,682 |
|
|
$ |
496,520 |
|
|
Fair value-based expense, net of tax
|
|
|
1,907 |
|
|
|
4,360 |
|
|
|
8,909 |
|
|
|
15,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
131,271 |
|
|
$ |
127,152 |
|
|
$ |
432,773 |
|
|
$ |
481,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.39 |
|
|
$ |
0.37 |
|
|
$ |
1.29 |
|
|
$ |
1.40 |
|
|
|
Pro forma
|
|
$ |
0.39 |
|
|
$ |
0.36 |
|
|
$ |
1.26 |
|
|
$ |
1.36 |
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.40 |
|
|
$ |
0.38 |
|
|
$ |
1.30 |
|
|
$ |
1.42 |
|
|
|
Pro forma
|
|
$ |
0.39 |
|
|
$ |
0.36 |
|
|
$ |
1.27 |
|
|
$ |
1.37 |
|
12
|
|
|
The weighted-average fair value of options granted was $6.68 and
$9.33 per share in the nine months ended January 25,
2006 and January 26, 2005, 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: |
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
| |
|
|
January 25, | |
|
January 26, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Dividend yield
|
|
|
3.2 |
% |
|
|
3.0 |
% |
Volatility
|
|
|
22.0 |
% |
|
|
25.4 |
% |
Risk-free interest rate
|
|
|
4.0 |
% |
|
|
4.4 |
% |
Expected term (years)
|
|
|
5.1 |
|
|
|
7.9 |
|
The Company currently presents pro forma 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.
Restricted Stock Units
During the first nine months of Fiscal 2006, the Company granted
465,572 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 capital in the
consolidated balance sheets. The Company recognized amortization
related to the unearned compensation of $3.1 million and
$1.7 million for the third quarter ended January 25,
2006 and January 26, 2005, respectively, and
$13.4 million and $11.4 million for the nine months
ended January 25, 2006 and January 26, 2005,
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, 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. |
13
|
|
(9) |
Pensions and Other Post-Retirement Benefits |
|
|
|
The components of net periodic benefit cost are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended | |
|
|
| |
|
|
January 25, 2006 | |
|
January 26, 2005 | |
|
January 25, 2006 | |
|
January 26, 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
Pension Benefits | |
|
Post-Retirement Benefits | |
|
|
| |
|
| |
|
|
(Thousands of Dollars) | |
Service cost
|
|
$ |
9,956 |
|
|
$ |
12,351 |
|
|
$ |
1,563 |
|
|
$ |
1,376 |
|
Interest cost
|
|
|
29,820 |
|
|
|
31,352 |
|
|
|
3,827 |
|
|
|
3,971 |
|
Expected return on plan assets
|
|
|
(41,229 |
) |
|
|
(42,903 |
) |
|
|
|
|
|
|
|
|
Amortization of net initial asset
|
|
|
(4 |
) |
|
|
(220 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
530 |
|
|
|
2,343 |
|
|
|
(707 |
) |
|
|
(757 |
) |
Amortization of unrecognized loss
|
|
|
14,706 |
|
|
|
14,372 |
|
|
|
1,826 |
|
|
|
1,306 |
|
Gain due to curtailment, settlement and special termination
benefits
|
|
|
(6,733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
7,046 |
|
|
$ |
17,295 |
|
|
$ |
6,509 |
|
|
$ |
5,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
| |
|
|
January 25, 2006 | |
|
January 26, 2005 | |
|
January 25, 2006 | |
|
January 26, 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
Pension Benefits | |
|
Post-Retirement Benefits | |
|
|
| |
|
| |
|
|
(Thousands of Dollars) | |
Service cost
|
|
$ |
30,978 |
|
|
$ |
34,796 |
|
|
$ |
4,654 |
|
|
$ |
4,111 |
|
Interest cost
|
|
|
90,708 |
|
|
|
91,545 |
|
|
|
11,437 |
|
|
|
12,119 |
|
Expected return on plan assets
|
|
|
(125,090 |
) |
|
|
(125,398 |
) |
|
|
|
|
|
|
|
|
Amortization of net initial asset
|
|
|
(15 |
) |
|
|
(642 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
2,586 |
|
|
|
6,903 |
|
|
|
(2,122 |
) |
|
|
(2,269 |
) |
Amortization of unrecognized loss
|
|
|
44,246 |
|
|
|
41,953 |
|
|
|
5,477 |
|
|
|
4,373 |
|
(Gain)/loss due to curtailment, settlement and special
termination benefits
|
|
|
(540 |
) |
|
|
|
|
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
42,873 |
|
|
$ |
49,157 |
|
|
$ |
20,696 |
|
|
$ |
18,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 25, 2006, the Company has contributed
$29 million to fund its obligations under these plans. The
Company expects to make combined cash contributions of
approximately $40 million in Fiscal 2006. |
|
|
Prepaid benefit cost of $716.9 million and
$758.8 million is included as a component of other
non-current assets in the condensed consolidated balance sheets
at January 25, 2006 and April 27, 2005, respectively. |
14
|
|
(10) |
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 awards. This Statement requires an entity to measure
the cost of employee services received in exchange for an award
of equity or equity based 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 award. 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
$18 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. Refer to note 3 regarding the impact of the AJCA for
the quarter and nine months ended January 25, 2006. |
|
|
|
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 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. |
|
|
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. |
|
|
Europe This segment includes the Companys operations
in Europe and sells products in all of the Companys
categories. |
|
|
Asia/ Pacific This 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 Entities This 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. |
15
|
|
|
The following table presents information about the
Companys reportable segments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
January 25, 2006 | |
|
January 26, 2005 | |
|
January 25, 2006 | |
|
January 26, 2005 | |
|
|
FY 2006 | |
|
FY 2005 | |
|
FY 2006 | |
|
FY 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of Dollars) | |
Net external sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Consumer Products
|
|
$ |
658,771 |
|
|
$ |
579,039 |
|
|
$ |
1,828,770 |
|
|
$ |
1,633,798 |
|
|
U.S. Foodservice
|
|
|
401,098 |
|
|
|
374,835 |
|
|
|
1,139,654 |
|
|
|
1,098,535 |
|
|
Europe
|
|
|
772,212 |
|
|
|
762,602 |
|
|
|
2,159,654 |
|
|
|
2,101,586 |
|
|
Asia/ Pacific
|
|
|
258,985 |
|
|
|
253,974 |
|
|
|
819,300 |
|
|
|
758,750 |
|
|
Other Operating Entities
|
|
|
95,458 |
|
|
|
98,709 |
|
|
|
296,408 |
|
|
|
280,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$ |
2,186,524 |
|
|
$ |
2,069,159 |
|
|
$ |
6,243,786 |
|
|
$ |
5,872,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Consumer Products
|
|
$ |
13,202 |
|
|
$ |
12,773 |
|
|
$ |
38,633 |
|
|
$ |
38,464 |
|
|
U.S. Foodservice
|
|
|
6,726 |
|
|
|
7,130 |
|
|
|
16,931 |
|
|
|
16,711 |
|
|
Europe
|
|
|
2,732 |
|
|
|
4,455 |
|
|
|
9,206 |
|
|
|
13,621 |
|
|
Asia/ Pacific
|
|
|
479 |
|
|
|
825 |
|
|
|
1,702 |
|
|
|
2,435 |
|
|
Other Operating Entities
|
|
|
378 |
|
|
|
434 |
|
|
|
942 |
|
|
|
1,192 |
|
|
Non-Operating(a)
|
|
|
(23,517 |
) |
|
|
(25,617 |
) |
|
|
(67,414 |
) |
|
|
(72,423 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Consumer Products
|
|
$ |
154,440 |
|
|
$ |
148,352 |
|
|
$ |
425,389 |
|
|
$ |
394,421 |
|
|
U.S. Foodservice
|
|
|
56,902 |
|
|
|
54,378 |
|
|
|
154,566 |
|
|
|
166,682 |
|
|
Europe
|
|
|
124,147 |
|
|
|
123,933 |
|
|
|
324,757 |
|
|
|
374,912 |
|
|
Asia/ Pacific
|
|
|
(957 |
) |
|
|
27,073 |
|
|
|
53,744 |
|
|
|
90,471 |
|
|
Other Operating Entities
|
|
|
4,927 |
|
|
|
2,587 |
|
|
|
6,292 |
|
|
|
25,075 |
|
|
Non-Operating(a)
|
|
|
(31,823 |
) |
|
|
(36,954 |
) |
|
|
(99,286 |
) |
|
|
(89,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$ |
307,636 |
|
|
$ |
319,369 |
|
|
$ |
865,462 |
|
|
$ |
962,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) excluding special items(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Consumer Products
|
|
$ |
154,479 |
|
|
$ |
148,352 |
|
|
$ |
427,817 |
|
|
$ |
394,421 |
|
|
U.S. Foodservice
|
|
|
57,273 |
|
|
|
54,378 |
|
|
|
161,617 |
|
|
|
166,682 |
|
|
Europe
|
|
|
138,509 |
|
|
|
123,933 |
|
|
|
372,459 |
|
|
|
374,912 |
|
|
Asia/ Pacific
|
|
|
18,185 |
|
|
|
27,073 |
|
|
|
80,675 |
|
|
|
90,471 |
|
|
Other Operating Entities
|
|
|
8,293 |
|
|
|
2,587 |
|
|
|
27,044 |
|
|
|
25,075 |
|
|
Non-Operating(a)
|
|
|
(31,511 |
) |
|
|
(36,954 |
) |
|
|
(87,717 |
) |
|
|
(89,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$ |
345,228 |
|
|
$ |
319,369 |
|
|
$ |
981,895 |
|
|
$ |
962,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Includes corporate overhead, intercompany eliminations and
charges not directly attributable to operating segments. |
|
|
|
|
(b) |
Third Quarter ended January 25, 2006 Excludes costs
associated with targeted workforce reductions, costs incurred in
connection with strategic reviews of several non-core businesses
and net losses/impairment charge on divestitures as follows:
U.S. Foodservice, $0.4 million; Europe,
$14.4 million; Asia/ Pacific, $19.1 million; Other
Operating, $3.4 million; and Non-Operating
$0.3 million. |
|
|
|
Nine Months ended January 25, 2006 Excludes costs
associated with targeted workforce reductions, costs incurred in
connection with strategic reviews of several non-core businesses
and net losses/impairment charge on divestitures as follows:
North American Consumer Products, $2.4 million;
U.S. Foodservice, $7.1 million; Europe,
$47.7 million; |
16
|
|
|
Asia/ Pacific, $26.9 million; Other Operating,
$20.7 million; and Non-Operating $11.6 million. |
|
|
|
The results for the nine months ended January 26, 2005 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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
January 25, 2006 | |
|
January 26, 2005 | |
|
January 25, 2006 | |
|
January 26, 2005 | |
|
|
FY 2006 | |
|
FY 2005 | |
|
FY 2006 | |
|
FY 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of Dollars) | |
Ketchup, Condiments and Sauces
|
|
$ |
872,114 |
|
|
$ |
793,614 |
|
|
$ |
2,545,123 |
|
|
$ |
2,356,649 |
|
Frozen Foods
|
|
|
668,428 |
|
|
|
594,690 |
|
|
|
1,774,765 |
|
|
|
1,599,280 |
|
Convenience Meals
|
|
|
371,382 |
|
|
|
394,576 |
|
|
|
1,046,473 |
|
|
|
1,063,532 |
|
Infant Foods
|
|
|
196,934 |
|
|
|
220,431 |
|
|
|
598,630 |
|
|
|
601,819 |
|
Other
|
|
|
77,666 |
|
|
|
65,848 |
|
|
|
278,795 |
|
|
|
251,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,186,524 |
|
|
$ |
2,069,159 |
|
|
$ |
6,243,786 |
|
|
$ |
5,872,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, which at
certain times of the year requires access to foreign currency,
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. |
17
|
|
(12) |
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
January 25, 2006 | |
|
January 26, 2005 | |
|
January 25, 2006 | |
|
January 26, 2005 | |
|
|
FY 2006 | |
|
FY 2005 | |
|
FY 2006 | |
|
FY 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In Thousands) | |
Income from continuing operations
|
|
$ |
133,178 |
|
|
$ |
131,512 |
|
|
$ |
441,682 |
|
|
$ |
496,520 |
|
Preferred dividends
|
|
|
4 |
|
|
|
4 |
|
|
|
11 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common stock
|
|
$ |
133,174 |
|
|
$ |
131,508 |
|
|
$ |
441,671 |
|
|
$ |
496,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding basic
|
|
|
334,879 |
|
|
|
349,729 |
|
|
|
340,484 |
|
|
|
350,357 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
124 |
|
|
|
139 |
|
|
|
124 |
|
|
|
139 |
|
|
|
Stock options and restricted stock
|
|
|
2,819 |
|
|
|
2,723 |
|
|
|
2,924 |
|
|
|
3,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding diluted
|
|
|
337,822 |
|
|
|
352,591 |
|
|
|
343,532 |
|
|
|
353,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding in the amounts of 18.5 million
and 16.2 million were not included in the computation of
diluted earnings per share for the third quarters ended
January 25, 2006 and January 26, 2005, respectively,
and 18.6 million and 16.1 million were not included in
the computation of diluted earnings per share for the nine
months ended January 25, 2006 and January 26, 2005,
respectively, because inclusion of these options would be
antidilutive. |
|
|
(13) |
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
January 25, 2006 | |
|
January 26, 2005 | |
|
January 25, 2006 | |
|
January 26, 2005 | |
|
|
FY 2006 | |
|
FY 2005 | |
|
FY 2006 | |
|
FY 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of Dollars) | |
Net income
|
|
$ |
116,600 |
|
|
$ |
152,411 |
|
|
$ |
477,695 |
|
|
$ |
546,212 |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
37,510 |
|
|
|
88,534 |
|
|
|
(157,888 |
) |
|
|
282,233 |
|
|
Minimum pension liability adjustment
|
|
|
(59 |
) |
|
|
(3,800 |
) |
|
|
(2,222 |
) |
|
|
(9,861 |
) |
|
Net deferred gains on derivatives from periodic revaluations
|
|
|
7,587 |
|
|
|
1,493 |
|
|
|
19 |
|
|
|
27,227 |
|
|
Net deferred (gains)/losses on derivatives reclassified to
earnings
|
|
|
(5,394 |
) |
|
|
(6,647 |
) |
|
|
3,646 |
|
|
|
(23,654 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
156,244 |
|
|
$ |
231,991 |
|
|
$ |
321,250 |
|
|
$ |
822,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
(14) |
Derivative Financial Instruments and Hedging Activities |
|
|
|
The Company operates internationally, with manufacturing and
sales facilities in various locations around the world, and
utilizes certain derivative financial instruments to manage its
foreign currency and interest rate exposures. There have been no
material changes in the Companys market risk during the
nine months ended January 25, 2006. 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 January 25, 2006, the Company is hedging forecasted
transactions for periods not exceeding two years. During the
next 12 months, the Company expects $1.4 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 three and nine months ended January 25,
2006 and January 26, 2005. Amounts reclassified to earnings
because the hedged transaction was no longer expected to occur
were not significant for the three and nine months ended
January 25, 2006 and January 26, 2005. |
|
|
During the third quarter of Fiscal 2006, the Company entered
into forward contracts and cross currency swaps with a combined
notional amount of $2.0 billion, which were designated as
net investment hedges of foreign operations. These contracts
mature within two years. The Company assesses hedge
effectiveness for these contracts based on changes in fair value
attributable to changes in spot prices. Losses of
$10.6 million (net of income taxes of $6.6 million)
which represented effective hedges of net investments, were
reported as a component of accumulated other comprehensive
loss/(income) within foreign currency translation adjustment for
the three and nine months ended January 25, 2006. Gains of
$0.2 million, which represented the changes in fair value
excluded from the assessment of hedge effectiveness, were
included in current period earnings as a component of interest
expense for the quarter and nine months ended January 25,
2006. |
19
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Discontinued Operations
In the third quarter of Fiscal 2006, the Companys Board of
Directors approved the divestitures of the European seafood
business and the
Tegel®
poultry business in New Zealand. The Company has entered into a
definitive agreement to sell the European seafood business. Some
of the brands included in this business are: John
West®,
Petit
Navire®,
Marie
Elisabeth®
and
Mareblu®.
The closing of the transaction is subject to customary European
Union competition authority review and approval. A definitive
agreement was signed on December 22, 2005 to sell the
Tegel®
poultry business, which is subject to competition authority
approval. The Company expects to complete the sale of the
European seafood and
Tegel®
poultry businesses in the fourth quarter of Fiscal 2006, with
proceeds expected to approximate
425 million
and NZ$250 million, respectively.
In accordance with accounting principles generally accepted in
the United States of America, the operating results related to
these businesses have been included in discontinued operations
in the Companys consolidated statements of income for all
periods presented, and the net assets related to these
businesses have been presented as discontinued operations in the
condensed consolidated balance sheet as of January 25, 2006.
These discontinued operations generated sales of
$184.5 million and $192.1 million and net
income/(loss) of $(18.2) million (net of $27.3 million
in tax expense) and $7.0 million (net of $3.4 million
in tax expense) for the three months ended January 25, 2006
and January 26, 2005, respectively. These discontinued
operations generated sales of $576.2 million and
$590.9 million and net income of $2.3 million (net of
$37.0 million in tax expense) and $34.1 million (net
of $15.5 million in tax expense) for the nine months ended
January 25, 2006 and January 26, 2005, respectively.
In addition, net income from discontinued operations includes
amounts related to the favorable settlement of tax liabilities
associated with the businesses spun-off to Del Monte in Fiscal
2003. Such amounts totaled $1.7 million and
$13.9 million for the quarters ended January 25, 2006
and January 26, 2005, respectively, and $33.7 million
and $15.6 million for the nine months ended
January 25, 2006 and January 26, 2005, respectively.
Portfolio Reviews
In the first half of Fiscal 2006, the Company initiated a
strategic review of its European frozen business in addition to
the above businesses which were classified as discontinued
operations. Some of the brands involved in this strategic review
include: Weight
Watchers®
from
Heinz®,
Linda
McCartney®,
and Aunt
Bessies®
in the United Kingdom. Management is currently in the process of
finalizing this review and expects the Companys assessment
regarding the future of this business to be completed in the
fourth quarter of Fiscal 2006. The Company is also evaluating
the divestiture of several other small foreign businesses.
Special Items
The Company recorded pre-tax reorganization charges for targeted
workforce reductions consistent with the Companys goals to
streamline its businesses totaling $14.0 million
($10.0 million after tax) and $70.4 million
($49.1 million after tax) during the third quarter and nine
months ended January 25, 2006, respectively. Approximately
600 positions are being eliminated as a result of this program,
primarily in the General & Administrative
(G&A) area. Additionally, pre-tax costs of
$13.9 million ($14.8 million after tax) and
$29.6 million ($26.8 million after tax) were incurred
in the third quarter and nine months ended January 25,
2006, respectively, primarily as a result of the previously
announced strategic reviews related to the potential divestiture
of several
20
businesses which include the European seafood and frozen
businesses and
Tegel®
poultry business in New Zealand.
For the third quarter, the total impact of these initiatives on
continuing operations was $22.0 million pre-tax
($18.3 million after-tax), of which $1.8 million was
recorded as costs of products sold and $20.2 million in
selling, general and administrative expenses
(SG&A). In addition, $6.6 million was
recorded in income of discontinued operations, net of tax. For
the nine months ended January 25, 2006, the total impact of
these initiatives on continuing operations was
$88.2 million pre-tax ($65.3 million after-tax), of
which $9.3 million was recorded as costs of products sold
and $78.9 million in SG&A. In addition,
$10.7 million was recorded in income of discontinued
operations, net of tax.
|
|
|
Divestitures/ Impairment Charges |
During the third quarter, the Company completed the sale of the
HAK®
vegetable product line in Northern Europe and received proceeds
from this divestiture of $51.1 million, which was in excess
of the cost basis by $3.2 million ($3.5 million after
tax). This excess was recorded in cost of products sold. In the
fourth quarter of Fiscal 2005, the Company recognized a non-cash
asset impairment charge of $27.0 million pre-tax
($18.0 million after-tax) related to the anticipated
disposition of this product line.
Also during the third quarter of Fiscal 2006, the Company sold
its equity investment in The Hain Celestial Group, Inc.
(Hain) and recognized a $6.9 million
($4.5 million after-tax) loss which was recorded within
other expense, net. Net proceeds from the sale of this
investment were $116.1 million. During the third quarter of
Fiscal 2005, the Company recognized a $64.5 million
other-than-temporary impairment charge on its equity investment
in Hain. The charge reduced Heinzs carrying value in Hain
to fair market value as of January 26, 2005, with no
resulting impact on cash flows. The Company also recorded a
$9.3 million non-cash charge in the third quarter of Fiscal
2005 to recognize the impairment of a cost-basis investment in a
grocery industry sponsored
e-commerce business
venture. There was no tax benefit associated with these
impairment charges in Fiscal 2005.
Also, in the third quarter of Fiscal 2006, the Company
recognized a non-cash asset impairment charge of
$15.8 million pre-tax ($8.5 million after-tax) on a
small noodle business in Indonesia. The charge, which was
primarily recorded as a component of cost of products sold,
relates to the anticipated disposition of this business in the
fourth quarter of 2006. The net assets related to this business
total approximately $5.7 million.
During the second quarter of Fiscal 2006, the Company recognized
a net $12.7 million ($13.6 million after tax) charge
primarily related to the sale of a small seafood business in
Israel which closed in the third quarter of Fiscal 2006.
The American Jobs Creation Act (AJCA) provides a
deduction of 85% of qualified foreign dividends in excess of a
Base Period dividend amount. During the third
quarter of Fiscal 2006, the Company finalized plans to
repatriate an additional $253 million to satisfy the Base
Period dividend requirement and an additional $562 million
that will qualify under the AJCA (the Qualified
Dividends). In addition, the Company expects that
$154 million of $166 million of previously planned
dividends will also qualify under the AJCA. The Company expects
to incur a tax charge of $24.8 million on total Base Period
dividends of $265 million, $10.3 million of which is
incremental to the tax already accrued on the $154 million
of qualifying previously planned dividends. The Fiscal
2006 net tax cost related to the $716 million of
Qualified Dividends is $14.0 million. The
$10.2 million of incremental tax related to the Base Period
dividends and the $14.0 million of tax related to the
Qualified Dividends were recorded during the third quarter as
part of tax expense related to special items. The total impact
of the AJCA on tax expense for the
21
third quarter and nine months ended January 25, 2006 was
$24.3 million, of which $27.7 million of expense was
recorded in continuing operations and $3.4 million was a
benefit in discontinued operations.
During the third quarter of Fiscal 2006, the Company reversed
valuation allowances of $20.6 million in continuing
operations related to the non-cash asset impairment charges
recorded in Fiscal 2005 on the cost and equity investments
discussed above. The reversal of the valuation allowances is
based upon tax planning strategies that are expected to generate
sufficient capital gains that will occur during the capital loss
carryforward period.
The Company has not previously recorded deferred taxes on the
difference between the book and tax bases of the European
Seafood business because this basis difference was not expected
to be realized in the foreseeable future. As a result of the
European Seafood business being classified as discontinued
operations, the Company now expects that this basis difference
will be realized as a result of the anticipated sale and has
recorded a deferred tax liability of $19.6 million in
connection with this basis difference. The recording of the
deferred tax liability resulted in a $24.6 million tax
charge in discontinued operations and a tax benefit of
$5.0 million recorded as part of other comprehensive income
during the third quarter.
HP/ LP Acquisition
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
$877 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). The BCC has provisionally cleared the
acquisition, concluding that the acquisition may not be expected
to result in a substantial lessening of competition within the
markets for tomato ketchup, brown sauce, barbecue sauce, canned
baked beans and canned pasta in the United Kingdom. A final
decision is expected in April, 2006. Pending the final decision,
Heinz must delay integration of HPF into its U.K. operations. If
the provisional findings become final in their current form, the
Company would not be required to divest any of the acquired
product lines in the U.K.
THREE MONTHS ENDED JANUARY 25, 2006 AND JANUARY 26,
2005
Results of Continuing Operations
Sales for the three months ended January 25, 2006 increased
$117.4 million, or 5.7%, to $2.19 billion. Sales were
favorably impacted by a volume increase of 2.9% driven primarily
by the North American Consumer Products segment, as well as the
Australian and U.K. businesses. These volume increases were
partially offset by declines in the European frozen food and the
Italian infant nutrition businesses. Net pricing was virtually
flat as more efficient trade spending in the North American
Consumer Products segment and price increases taken in Latin
America were offset by increased promotional spending on
Heinz®
soup in the U.K. Acquisitions, net of divestitures, increased
sales by 6.6%, and foreign exchange translation rates decreased
sales by 3.7%.
Gross profit decreased $4.0 million, or 0.5%, to
$780.7 million, and the gross profit margin declined to
35.7% from 37.9%. These decreases are primarily a result of the
$18.8 million asset impairment charge on an Indonesian
noodle business discussed above, unfavorable exchange rates and
increased commodity costs, particularly in the U.S. and
Indonesian businesses. These declines were partially offset by
the favorable impact of acquisitions and higher sales volume.
22
SG&A increased $7.7 million, or 1.7%, to
$473.1 million, primarily due to acquisitions and increased
volume, partially offset by the impact of exchange rates. As a
percentage of sales, SG&A decreased to 21.6% from 22.5%
primarily due to decreased G&A, which resulted from the
Companys streamlining efforts, particularly in Europe, and
reduced litigation costs. These declines were offset by
$20.2 million of special items previously discussed and the
impact of higher fuel and transportation costs, particularly in
the U.S. businesses. Operating income decreased
$11.7 million, or 3.7%, to $307.6 million.
Total marketing support (recorded as a reduction of revenue or
as a component of SG&A) increased $13.1 million, or
2.4%, to $550.4 million, on a sales increase of 5.7%.
Marketing support recorded as a reduction of revenue, typically
deals and allowances, increased $15.6 million, or 3.3%, to
$483.8 million. This increase is largely a result of
acquisitions and increased trade promotion spending in the U.K.,
partially offset by decreases in the Italian infant nutrition
business and North American Consumer Products segment. Marketing
support recorded as a component of SG&A decreased
$2.5 million, or 3.6%, to $66.5 million, primarily
from reductions in the U.K.
Net interest expense increased $25.6 million, to
$78.6 million, due to higher average interest rates and
higher average debt in Fiscal 2006.
Other expenses, net, increased $7.7 million, to
$9.9 million, primarily due to the $6.9 million loss
on the sale of the Companys equity investment in Hain. The
prior year includes the non-cash impairment charges totaling
$73.8 million related to the cost and equity investments
previously discussed.
The effective tax rate for the quarter was 39.2% versus 30.9% in
the prior year. This increase was primarily a result of
recording current period tax charges associated with the
American Jobs Creation Act. The impact of these charges was
partially offset by a $20.6 million reversal of valuation
allowances associated with the prior year non-cash asset
impairment charges. The Company reaffirms its projected
effective tax rate for the year, excluding special items, of 30%
to 31%.
Income from continuing operations increased to
$133.2 million from $131.5 million in the year earlier
quarter. Diluted earnings per share from continuing operations
was $0.39 in the current year compared to $0.37 in the prior
year, up 5.4%.
OPERATING RESULTS BY BUSINESS SEGMENT
North American Consumer Products
Sales of the North American Consumer Products segment increased
$79.7 million, or 13.8%, to $658.8 million. Volume
increased 4.9%, as a result of strong growth in Smart
Ones®
frozen entrees and desserts, TGI
Fridays®
and
Delimex®
brands of frozen snacks,
Classico®
pasta sauces and
Heinz®
ketchup. Overall, pricing increased 1.5% largely due to more
efficient trade spending on
SmartOnes®
frozen entrees and
Ore-Ida®
frozen potatoes. The acquisitions of HPF and Nancys
Specialty Foods, Inc. increased sales 6.6%. Favorable Canadian
exchange translation rates increased sales 0.7%.
Gross profit increased $25.4 million, or 10.3%, to
$273.1 million, driven primarily by the favorable impact of
acquisitions, volume growth and increased net pricing. The gross
profit margin declined to 41.5% from 42.8%, primarily due to
increased commodity costs and a benefit in the prior year from
the favorable termination of a long-term co-packing arrangement.
Operating income increased $6.1 million, or 4.1%, to
$154.4 million, due to the increase in gross profit
partially offset by increased Selling and Distribution expenses
(S&D), resulting from acquisitions, increased
volume and higher fuel and trucking costs, and increased
G&A, largely from acquisitions and increased personnel costs.
23
U.S. Foodservice
Sales of the U.S. Foodservice segment increased
$26.3 million, or 7.0%, to $401.1 million. The
acquisition of Appetizers And, Inc. (AAI) in the
fourth quarter of Fiscal 2005 increased sales 5.2%. Volume
increased 1.3%, as increases in Truesoups frozen soup and single
serve condiments were partially offset by reductions in ketchup
due to increased competition and reduced traffic at some key
customers. Higher pricing increased sales by 0.6% as increases
in custom recipe tomato products and single serve condiments
were largely offset by declines in
Heinz®
ketchup.
Gross profit increased $4.0 million, or 3.4%, to
$120.4 million, largely due to the favorable impact of the
AAI acquisition, partially offset by a decline in the gross
profit margin to 30.0% from 31.1% resulting from higher
commodity and fuel costs. Operating income increased
$2.5 million, or 4.6%, to $56.9 million, largely due
to the increase in gross profit, partially offset by increased
G&A, largely due to the AAI acquisition.
Europe
Heinz Europes sales increased $9.6 million, or 1.3%,
to $772.2 million. The acquisitions of HPF and Petrosoyuz
increased sales 12.0%. Volume increased 2.1%, as increases from
Heinz®
soup and top-down ketchup were partially offset by declines in
the frozen foods business in the U.K., resulting mainly from
category softness, and declines in the Italian infant nutrition
business. Lower pricing decreased sales 2.8%, driven primarily
by increased promotional spending on
Heinz®
soup in the U.K. and other condiments in Northern Europe,
partially offset by price increases initiated on
Heinz®
beans. Divestitures reduced sales 1.5%, and unfavorable exchange
translation rates decreased sales by 8.5%.
Gross profit decreased $5.2 million, or 1.7%, to
$295.8 million, and the gross profit margin declined to
38.3% from 39.5%. These decreases were driven mainly by
unfavorable pricing and exchange translation rates, partially
offset by the favorable impact of acquisitions and higher
volume. Operating income increased slightly by
$0.2 million, or 0.2%, to $124.1 million, as reduced
marketing expense and G&A, due primarily to the
Companys streamlining efforts and reduced litigation
costs, were offset by $14.4 million of special items
discussed above. These special items consist mainly of
reorganization costs related to targeted workforce reductions
and strategic review costs for the non-core frozen business in
Europe, partially offset by a gain on the sale of the
HAK®
vegetable product line in Northern Europe.
Asia/ Pacific
Sales in Asia/ Pacific increased $5.0 million, or 2.0%, to
$259.0 million. Volume increased sales 3.7%, reflecting
strong volume in Australia, largely due to new product
introductions, partially offset by declines in Indonesian sauces
and noodles resulting from price increases and increased
competition. Pricing increased sales slightly, up 0.5%,
resulting largely from price increases on various products in
Indonesia. Acquisitions, net of divestitures, increased sales
1.8%, largely due to the acquisition of Shanghai LongFong Foods
(LongFong), a maker of popular frozen Chinese snacks
and desserts. Unfavorable exchange translation rates decreased
sales by 4.0%.
Gross profit decreased $29.2 million, or 33.4%, to
$58.1 million, and the gross profit margin decreased to
22.4% from 34.4%. These declines were primarily a result of an
$18.8 million asset impairment charge on an Indonesian
noodle business previously discussed, as well as increased
commodity and manufacturing costs primarily in Indonesia.
Operating income decreased $28.0 million, to
$1.0 million, primarily due to the decline in gross profit.
Other Operating Entities
Sales for Other Operating Entities decreased $3.3 million,
or 3.3%, to $95.5 million. Volume increased 1.4% due
primarily to strong sales in Latin America and India. Higher
pricing increased
24
sales by 6.4%, largely due to price increases taken in Latin
America and India. Sales were also favorably impacted by 4.9%
from the acquisition of a sauce and condiments business in
Mexico in the fourth quarter Fiscal 2005. Divestitures reduced
sales by 11.0% and foreign exchange translation rates reduced
sales by 5.0%.
Gross profit increased $2.2 million, or 7.7%, to
$30.3 million, due mainly to increased pricing, partially
offset by the impact of divestitures. Operating income increased
$2.3 million, to $4.9 million, due primarily to the
increase in gross profit and decreased SG&A partially offset
by strategic review costs in Israel.
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, which at
certain times of the year requires access to foreign currency,
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.
NINE MONTHS ENDED JANUARY 25, 2006 AND JANUARY 26,
2005
Results of Continuing Operations
Sales for the nine months ended January 25, 2006 increased
$370.8 million, or 6.3%, to $6.24 billion. Sales were
favorably impacted by a volume increase of 2.3% driven primarily
by the North American Consumer Products segment, as well as the
Australian, Indonesian and Italian infant nutrition businesses.
These volume increases were partially offset by declines in the
European frozen food business and the U.S. Foodservice
segment. Pricing increased sales slightly, by 0.1%, as
improvements in Latin America and Indonesia were offset by
declines in Australia, U.K. and Northern Europe. Acquisitions,
net of divestitures, increased sales by 4.8%. Foreign exchange
translation rates decreased sales by 0.9%.
Gross profit increased $51.8 million, or 2.3%, to
$2.29 billion, primarily due to the favorable impact of
acquisitions and higher sales volume, partially offset by
unfavorable exchange translation rates. The gross profit margin
decreased to 36.6% from 38.1% mainly due to the
$18.8 million asset impairment charge on an Indonesian
noodle business previously discussed, declines in the Europe
segment, particularly in Northern and Eastern Europe, and
increased commodity costs, particularly in the U.S. and
Indonesian businesses.
SG&A increased $148.3 million, or 11.6%, to
$1.42 billion, and increased as a percentage of sales to
22.8% from 21.7%. The increase as a percentage of sales is
primarily due to the $94.8 million of special items
discussed above, the impact of acquisitions, and higher fuel and
transportation costs. These increases were partially offset by
decreased G&A in Europe, due mainly to the Companys
streamlining efforts and reduced litigation costs. Operating
income decreased $96.6 million, or 10.0%, to
$865.5 million.
Total marketing support (recorded as a reduction of revenue or
as a component of SG&A) increased $62.3 million, or
4.2%, to $1.55 billion on a sales increase of 6.3%.
Marketing support recorded as a reduction of revenue, typically
deals and allowances, increased $61.0 million, or 4.7%, to
$1.35 billion. This increase is largely a result of
increased trade promotion spending in the U.K. and Australia and
the impact of acquisitions. These increases were partially
offset by decreases in the Italian infant nutrition business and
foreign exchange translation rates. Marketing support
25
recorded as a component of SG&A increased $1.4 million,
or 0.7%, to $195.9 million, as increases from acquisitions
were largely offset by reductions in the U.K.
Net interest expense increased $57.4 million, to
$207.6 million due to higher average interest rates and
higher average debt in Fiscal 2006.
Other expenses, net, increased $9.6 million to
$19.8 million primarily due to the $6.9 million loss
on the sale of the Companys equity investment in Hain. The
prior year includes the non-cash impairment charges totaling
$73.8 million related to the cost and equity investments
previously discussed.
The current
year-to-date effective
tax rate was 30.8% compared to 31.8% for the prior 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, the
reversal of $23.4 million of tax provision related to a
foreign affiliate following a favorable court decision involving
an unrelated party, and the reversal of $20.6 million of
valuation allowances as previously discussed. The majority of
these benefits were offset by the elimination of certain tax
benefits, the recording of tax charges for the American Jobs
Creation Act, as well as no tax benefit on some of the special
items discussed above.
Income from continuing operations for the first nine months of
Fiscal 2006 was $441.7 million compared to
$496.5 million in the year earlier period, a decrease of
11.0%. Diluted earnings per share from continuing operations was
$1.29 in the current year compared to $1.40 in the prior year,
down 7.9%.
OPERATING RESULTS BY BUSINESS SEGMENT
North American Consumer Products
Sales of the North American Consumer Products segment increased
$195.0 million, or 11.9%, to $1.83 billion. Volume
increased significantly, up 6.6%, as a result of strong growth
in
Heinz®
ketchup, and TGI
Fridays®
and
Delimex®
brands of frozen snacks. In addition,
Classico®
pasta sauces, Smart
Ones®
frozen entrees and the launch of the new larger size Picnic Pak
aided the volume increase. Frozen potatoes continued to perform
well, as a result of last calendar years successful launch
of
Ore-Ida®
Extra Crispy Fries and microwavable Easy
Fries®
as well as new distribution related to a co-packing agreement.
Pricing was up 0.5%, as reduced trade spending on
Ore-Ida®
frozen potatoes was largely offset by increased trade promotion
expense on
Heinz®
ketchup and
Classico®
pasta sauces, and decreased price on the new larger size Picnic
Pak. The HPF and Nancys acquisitions increased sales 3.8%.
Divestitures reduced sales 0.1% and exchange translation rates
increased sales 1.2%.
Gross profit increased $68.1 million, or 9.8%, to
$759.2 million, driven primarily by volume growth and
acquisitions. The gross profit margin declined to 41.5% from
42.3%, primarily due to increased commodity costs and a benefit
in the prior year from the favorable termination of a long-term
co-packing arrangement with a customer. Operating income
increased $31.0 million, or 7.9%, to $425.4 million,
due to the increase in gross profit, partially offset by
increased SG&A, primarily due to acquisitions and volume and
increased R&D associated with the new innovation center.
U.S. Foodservice
Sales of the U.S. Foodservice segment increased
$41.1 million, or 3.7%, to $1.14 billion. The
acquisition of AAI increased sales 4.5%. Volume decreased sales
0.8%, due primarily to ketchup, resulting from increased
competition and reduced traffic at some key customers, partially
offset by strong frozen soup sales. Pricing increased sales 0.1%
as increases in custom recipe tomato products and frozen
desserts were offset by declines in ketchup.
26
Gross profit increased $6.8 million, or 2.0%, to
$339.8 million, primarily due to the AAI acquisition,
partially offset by $3.0 million of reorganization costs
discussed above, increased commodity and fuel costs and the
unfavorable volume impact. The gross profit margin decreased to
29.8% from 30.3%. Operating income decreased $12.1 million,
or 7.3%, to $154.6 million, chiefly due to
$7.1 million of reorganization costs and increased S&D,
largely due to higher fuel and distribution costs.
Europe
Heinz Europes sales increased $58.1 million, or 2.8%,
to $2.16 billion. The HPF and Petrosoyuz acquisitions
increased sales 9.1%. Volume decreased 0.9%, principally due to
the frozen foods business and infant feeding in the U.K. The
frozen food decline is mainly a result of category softness,
reduced promotional spending and the loss of a chilled sandwich
contract. The decrease in U.K. infant feeding is primarily from
increased competition in canned and jarred baby food. These
volume declines were partially offset by increases in the
Italian infant nutrition business, as well as
Heinz®
top-down ketchup and soup. Lower pricing decreased sales 0.9%,
driven primarily by increased promotional spending on
Heinz®
soup in the U.K., partially offset by improvements in the
Italian infant nutrition business and price increases initiated
on
Heinz®
beans. The improvement in the Italian infant nutrition business
is largely due to the $21.1 million charge for trade
spending in the prior year which was partially offset by list
price declines and promotional timing. Divestitures reduced
sales 1.3%, and unfavorable exchange translation rates decreased
sales by 3.1%.
Gross profit decreased $8.5 million, or 1.0%, to
$839.4 million, and the gross profit margin decreased to
38.9% from 40.3%. These decreases are primarily due to
unfavorable exchange translation rates, decreased volume and
pricing and higher manufacturing costs in Northern Europe. These
decreases were partially offset by higher margin acquisitions.
Operating income decreased $50.2 million, or 13.4%, to
$324.8 million, due largely to the gross profit decrease,
unfavorable exchange translation rates and the
$47.7 million of special items discussed above, partially
offset by the favorable impact of acquisitions, reduced G&A
and decreased marketing expense in the U.K. The special items
consist mainly of reorganization costs related to targeted
workforce reductions and strategic review costs for the frozen
business in Europe.
Asia/ Pacific
Sales in Asia/ Pacific increased $60.5 million, or 8.0%, to
$819.3 million. Volume increased sales 6.2%, reflecting
strong volume in Australia and Indonesia, largely due to new
product introductions and increased promotional spending.
Favorable exchange translation rates increased sales by 0.6%.
Lower pricing reduced sales 0.2%, primarily due to declines in
the Australian business offset by increases in Indonesia.
Acquisitions, net of divestitures, increased sales 1.5%, largely
due to the acquisition of LongFong.
Gross profit decreased $19.2 million, or 7.3%, to
$242.9 million, and the gross profit margin declined to
29.7% from 34.5%. These declines were primarily a result of an
$18.8 million asset impairment charge on an Indonesian
noodle business and increased commodity and manufacturing costs
in Indonesia and China, partially offset by the favorable impact
of acquisitions and sales volume. Operating income decreased
$36.7 million, or 40.6%, to $53.7 million, primarily
due to the decline in gross profit margin, increased S&D and
G&A and $8.1 million of reorganization costs related to
targeted workforce reductions discussed above.
Other Operating Entities
Sales for Other Operating Entities increased $16.1 million,
or 5.8%, to $296.4 million. Volume increased 3.2%
reflecting strong infant feeding sales in Latin America and
beverage sales in India. Higher pricing increased sales by 6.1%,
largely due to price increases and reduced promotions in
27
Latin America. Sales were also favorably impacted by 4.4% from
the acquisition of a sauce and condiments business in Mexico in
the fourth quarter Fiscal 2005. Divestitures reduced sales by
5.1%, and foreign exchange translation rates reduced sales by
2.9%.
Gross profit increased $9.6 million, or 11.1%, to
$96.6 million, due mainly to increased pricing. Operating
income decreased $18.8 million, to $6.3 million, as
the increase in gross profit was more than offset by an asset
impairment charge for the seafood business in Israel and
strategic review costs in Israel. In addition, last years
results include the proceeds of an agreement related to the
recall in Israel.
Liquidity and Financial Position
For the first nine months, cash provided by operating activities
was $502.9 million, a decrease of $3.2 million from
the prior year. The decrease in Fiscal 2006 versus Fiscal 2005
is primarily due to favorable movement in accounts payable and
accrued expenses, offset by a decline in accounts receivable and
the timing of income tax payments. The Company continues to make
progress in reducing its cash conversion cycle, with a reduction
of two days in Fiscal 2006 compared to Fiscal 2005.
During the third quarter of Fiscal 2004, the Company reorganized
certain of its foreign operations, resulting in a
step-up in the tax
basis of certain assets. As a consequence, the Company incurred
a foreign income tax liability of $125 million, which was
offset by an equal amount of prepaid tax asset. The tax
liability was paid in the third quarter of Fiscal 2005. The
prepaid tax asset is being amortized to tax expense to match the
amortization of the stepped up tax basis in the assets. As a
result of the step-up,
the Company expects to realize a tax benefit in excess of the
tax liability paid. Accordingly, cash flow and tax expense are
expected to be improved by $120 million over the
amortization period.
Cash used for investing activities totaled $1,033.2 million
compared to $85.1 million last year. Capital expenditures
were $151.0 million (2.2% of sales) compared to
$131.0 million (2.0% of sales) last year. Acquisitions
required $1,053.6 million in the first nine months of
Fiscal 2006 primarily related to the Companys purchase of
HPF, Nancys Specialty Foods, Inc., and Petrosoyuz,
compared to $38.1 million in the prior year, which related
largely to the purchase of a controlling interest in Shanghai
LongFong Foods. Proceeds from divestitures provided
$171.6 million in the current year, related primarily to
the third quarter sales of the equity investment in Hain and the
HAK®
vegetable product line in Northern Europe. In Fiscal 2005,
proceeds from divestitures provided $39.9 million related
primarily to the sale of an oil and fats product line in Korea.
Cash provided by financing activities totaled
$408.9 million compared to using $840.2 million last
year. Proceeds from short-term debt and commercial paper were
$961.4 million this year compared to payments on short-term
debt of $24.1 million in the prior year. Proceeds from
long-term debt were $216.4 million compared to payments on
long-term debt of $418.5 million in the prior year, which
relates primarily to the payoff of
300 million
of bonds which matured in the third quarter of the prior year.
Cash used for the purchases of treasury stock, net of proceeds
from option exercises, was $473.8 million this year
compared to $109.7 million in the prior year, in line with
the Companys plans of reducing shares outstanding.
Dividend payments totaled $307.1 million, compared to
$299.3 million for the same period last year, reflecting
the increase in the annual dividend on common stock.
At January 25, 2006, the Company, on a continuing basis,
had total debt of $5.88 billion (including
$112.4 million relating to the fair value of interest rate
swaps) and cash and cash equivalents of $944.3 million. The
$1.19 billion increase in total debt and the
$139.5 million decrease in cash from year-end Fiscal 2005
is primarily the result of acquisitions and stock repurchases
during Fiscal 2006. The Company expects to use cash on hand and
a portion of the proceeds from the pending divestitures to
reduce commercial paper borrowings and to repay long-term debt
that matures in the fourth quarter of Fiscal 2006.
28
The Company and H.J. Heinz Finance Company maintain a
$2 billion credit agreement that expires in 2009. The
credit agreement supports the Companys commercial paper
borrowings. As a result, the commercial paper borrowings are
classified as long-term debt based upon the Companys
intent and ability to refinance these borrowings on a long-term
basis. The Company maintains in excess of $1 billion of
other credit facilities used primarily by the Companys
foreign subsidiaries. These resources, the Companys
existing cash balance of more than $900 million, strong
operating cash flow, the impact of the repatriation provisions
of the AJCA, and access to the capital markets, if required,
should enable the Company to meet its cash requirements for
operations, including capital expansion programs, debt
maturities and dividends to shareholders.
On December 1, 2005, the Company remarketed the
$800 million remarketable securities and amended the terms
of the securities so that the securities will be remarketed
every third year rather than annually. The next remarketing is
scheduled for December 1, 2008.
In Fiscal 2006, cash required for reorganization costs, related
to both workforce reductions and strategic review costs, was
approximately $78.0 million. The Company expects the
aggregate amount of net expense to be incurred in Fiscal 2006
relative to worldwide targeted headcount reductions, costs
relative to portfolio reviews of several non-core businesses and
integration costs for the above acquisitions to be approximately
$120 million, which will be primarily cash expenditures.
On-going savings relative to these initiatives are anticipated
to be approximately $25 million and $30 million in
fiscal years 2006 and 2007, respectively.
In the third quarter of Fiscal 2006, Moodys changed the
Companys long-term debt rating from A3 to Baa1. The
Companys long-term debt rating was A- at
Standard & Poors.
The impact of inflation on both the Companys financial
position and the results of operations is not expected to
adversely affect Fiscal 2006 results.
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. In the aggregate, such
commitments are not at prices in excess of current markets. Due
to the proprietary nature of some of the Companys
materials and processes, certain supply contracts contain
penalty provisions for early terminations. The Company does not
believe that a material amount of penalties is reasonably likely
to be incurred under these contracts based upon historical
experience and current expectations.
The following table represents the contractual obligations of
the Company as of January 25, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than | |
|
|
|
|
|
More than | |
|
|
|
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of Dollars) | |
Long-term Debt
|
|
$ |
514,286 |
|
|
$ |
625,303 |
|
|
$ |
1,050,619 |
|
|
$ |
3,509,828 |
|
|
$ |
5,700,036 |
|
Capital Lease Obligations
|
|
|
2,762 |
|
|
|
5,749 |
|
|
|
5,788 |
|
|
|
33,043 |
|
|
|
47,342 |
|
Operating Leases
|
|
|
40,359 |
|
|
|
244,146 |
|
|
|
73,755 |
|
|
|
203,419 |
|
|
|
561,679 |
|
Purchase Obligations
|
|
|
367,575 |
|
|
|
1,018,360 |
|
|
|
478,737 |
|
|
|
108,161 |
|
|
|
1,972,833 |
|
Other Long Term Liabilities Recorded on the Balance Sheet
|
|
|
91,902 |
|
|
|
139,629 |
|
|
|
150,348 |
|
|
|
167,555 |
|
|
|
549,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,016,884 |
|
|
$ |
2,033,187 |
|
|
$ |
1,759,247 |
|
|
$ |
4,022,006 |
|
|
$ |
8,831,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Other long-term liabilities primarily consist of certain
specific incentive compensation arrangements and pension and
postretirement benefit commitments. The following liabilities
included on the consolidated balance sheet are excluded from the
table above: interest payments, income taxes, minority interest
and insurance accruals. The Company is unable to estimate the
timing of the payments for these items.
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 awards. This Statement requires an entity to measure
the cost of employee services received in exchange for an award
of equity or equity based 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 award. 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
$18 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. Refer to note 3 regarding the impact of the AJCA for
the quarter and nine months ended January 25, 2006.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING
INFORMATION
Statements about future growth, profitability, costs,
expectations, plans, or objectives included in this report,
including the managements discussion and analysis, the
financial statements and footnotes, are forward-looking
statements based on managements estimates, assumptions,
and projections. These forward-looking statements are subject to
risks, uncertainties, assumptions and other important factors,
many of which may be beyond Heinzs control and could cause
actual results to differ materially from those expressed or
implied in this report and the financial statements and
footnotes. Uncertainties contained in such statements include,
but are not limited to, sales, earnings, and volume growth,
general economic, political, and industry conditions,
competitive conditions, which affect, among other things,
customer preferences and the pricing of products, production,
energy and raw material costs, the ability to identify and
anticipate and respond through innovation to consumer trends,
the need for product recalls, the ability to maintain favorable
supplier relationships, achieving cost savings and gross margins
objectives, currency valuations and interest rate fluctuations,
change in credit ratings, the ability to identify and complete
and the timing, pricing and success of acquisitions, joint
ventures, divestitures, and other strategic initiatives, the
approval of acquisitions and divestitures by competition
authorities and satisfaction of other legal requirements, the
success of Heinzs growth and innovation strategy and the
ability to limit disruptions to the business resulting from the
emphasis on three core categories and potential divestitures,
the ability to effectively integrate acquired businesses, new
product and packaging innovations, product mix, the
effectiveness of advertising, marketing, and promotional
programs, supply chain efficiency and cash flow initiatives,
risks inherent in litigation, including tax litigation, and
international operations, particularly the performance of
business in hyperinflationary environments, changes in estimates
in critical accounting judgments and other laws and regulations,
including tax laws, the success of tax planning strategies, the
possibility of increased pension expense and contributions and
other people-related costs, the possibility of an impairment in
Heinzs investments, and other factors described in
Cautionary Statement Relevant to
30
Forward-Looking Information in the Companys
Form 10-K for the
fiscal year ended April 27, 2005, and factors described
under Safe Harbor Provisions for Forward-Looking
Statements in the Companys subsequent filings with
the Securities and Exchange Commission. The forward-looking
statements are and will be based on managements then
current views and assumptions regarding future events and speak
only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise, except as required by the securities laws.
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes in the Companys market
risk during the nine months ended January 25, 2006. 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.
|
|
Item 4. |
Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Companys
disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures, as of the end
of the period covered by this report, were designed and are
functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports
filed under the Securities Exchange Act of 1934 is
(i) recorded, processed, summarized, and reported within
the time periods specified in the SECs rules and forms,
and (ii) accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure.
(b) Changes in Internal Control over Financial Reporting
No change in the Companys internal control over financial
reporting occurred during the Companys most recent fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over
financial reporting.
31
PART II OTHER INFORMATION
|
|
Item 1. |
Legal Proceedings |
|
|
|
Nothing to report under this item. |
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
|
|
|
Nothing to report under this item. |
|
|
Item 3. |
Defaults upon Senior Securities |
|
|
|
Nothing to report under this item. |
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
|
|
|
Nothing to report under this item. |
|
|
Item 5. |
Other Information |
|
|
|
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.
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.
|
|
|
|
4. |
Amended and Restated Five-Year Credit Agreement dated as of
September 6, 2001 and amended and restated as of
August 4, 2004 among H.J. Heinz Company, H.J. Heinz Finance
Company, the Banks listed on the signature pages thereto and JP
Morgan Chase Bank, as Administrative Agent. |
|
|
|
|
10. |
Annual Non-Employee Director Compensation. |
|
|
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. |
32
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: February 28, 2006
|
|
|
|
By |
/s/ Arthur B. Winkleblack
|
|
|
|
............................................
............................................
................................... |
|
|
|
Arthur B. Winkleblack |
|
Executive Vice President and |
|
Chief Financial Officer |
|
(Principal Financial Officer) |
Date: February 28, 2006
|
|
|
|
By |
/s/ Edward J. Mcmenamin
|
|
|
|
............................................
............................................
................................... |
|
Edward J. McMenamin |
|
Senior Vice PresidentFinance |
|
and Corporate Controller |
|
(Principal Accounting Officer) |
33
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.
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.
|
|
|
|
4. |
Amended and Restated Five-Year Credit Agreement dated as of
September 6, 2001 and amended and restated as of
August 4, 2004 among H.J. Heinz Company, H.J. Heinz Finance
Company, the Banks listed on the signature pages thereto and JP
Morgan Chase Bank, as Administrative Agent. |
10. Annual Non-Employee Director Compensation.
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.