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
November 1, 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 filing 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 November 1,
2006 was 329,483,534 shares.
TABLE OF CONTENTS
PART IFINANCIAL INFORMATION
|
|
Item 1.
|
Financial
Statements
|
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
(Unaudited)
|
|
|
|
(In Thousands, Except
|
|
|
|
per Share Amounts)
|
|
|
Sales
|
|
$
|
2,232,225
|
|
|
$
|
2,156,984
|
|
Cost of products sold
|
|
|
1,385,627
|
|
|
|
1,353,212
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
846,598
|
|
|
|
803,772
|
|
Selling, general and
administrative expenses
|
|
|
463,613
|
|
|
|
502,811
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
382,985
|
|
|
|
300,961
|
|
Interest income
|
|
|
7,103
|
|
|
|
5,745
|
|
Interest expense
|
|
|
80,172
|
|
|
|
76,500
|
|
Other expense, net
|
|
|
7,106
|
|
|
|
7,082
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
302,810
|
|
|
|
223,124
|
|
Provision for income taxes
|
|
|
105,379
|
|
|
|
54,793
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
197,431
|
|
|
|
168,331
|
|
(Loss)/income from discontinued
operations, net of tax
|
|
|
(5,856
|
)
|
|
|
35,490
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
191,575
|
|
|
$
|
203,821
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per common share:
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.59
|
|
|
$
|
0.49
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.57
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
Average common shares
outstandingdiluted
|
|
|
334,617
|
|
|
|
342,533
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.60
|
|
|
$
|
0.50
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.58
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
Average common shares
outstandingbasic
|
|
|
330,670
|
|
|
|
339,475
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.35
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
2
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
(Unaudited)
|
|
|
|
(In Thousands, Except
|
|
|
|
per Share Amounts)
|
|
|
Sales
|
|
$
|
4,292,145
|
|
|
$
|
4,057,262
|
|
Cost of products sold
|
|
|
2,673,130
|
|
|
|
2,550,928
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,619,015
|
|
|
|
1,506,334
|
|
Selling, general and
administrative expenses
|
|
|
916,388
|
|
|
|
948,508
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
702,627
|
|
|
|
557,826
|
|
Interest income
|
|
|
14,395
|
|
|
|
13,798
|
|
Interest expense
|
|
|
155,798
|
|
|
|
142,804
|
|
Other expense, net
|
|
|
14,817
|
|
|
|
9,918
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
546,407
|
|
|
|
418,902
|
|
Provision for income taxes
|
|
|
154,875
|
|
|
|
110,398
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
391,532
|
|
|
|
308,504
|
|
(Loss)/income from discontinued
operations, net of tax
|
|
|
(5,856
|
)
|
|
|
52,591
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
385,676
|
|
|
$
|
361,095
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per common share:
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.17
|
|
|
$
|
0.89
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.15
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
Average common shares
outstandingdiluted
|
|
|
334,767
|
|
|
|
345,963
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.18
|
|
|
$
|
0.90
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.16
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
Average common shares
outstandingbasic
|
|
|
331,077
|
|
|
|
342,856
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.70
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
3
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
May 3,
|
|
|
|
2006
|
|
|
2006*
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
379,695
|
|
|
$
|
445,427
|
|
Receivables, net
|
|
|
1,031,352
|
|
|
|
1,002,125
|
|
Inventories
|
|
|
1,277,250
|
|
|
|
1,073,682
|
|
Prepaid expenses
|
|
|
135,011
|
|
|
|
139,714
|
|
Other current assets
|
|
|
33,070
|
|
|
|
42,987
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,856,378
|
|
|
|
2,703,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
3,853,398
|
|
|
|
3,764,476
|
|
Less accumulated depreciation
|
|
|
1,929,080
|
|
|
|
1,863,919
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and
equipment, net
|
|
|
1,924,318
|
|
|
|
1,900,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,789,636
|
|
|
|
2,822,567
|
|
Trademarks, net
|
|
|
847,770
|
|
|
|
776,857
|
|
Other intangibles, net
|
|
|
399,314
|
|
|
|
269,564
|
|
Other non-current assets
|
|
|
1,380,968
|
|
|
|
1,264,287
|
|
|
|
|
|
|
|
|
|
|
Total other non-current assets
|
|
|
5,417,688
|
|
|
|
5,133,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,198,384
|
|
|
$
|
9,737,767
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Summarized from audited fiscal year 2006 balance sheet.
|
See Notes to Condensed Consolidated Financial Statements.
4
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
May 3,
|
|
|
|
2006
|
|
|
2006*
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
121,939
|
|
|
$
|
54,052
|
|
Portion of long-term debt due
within one year
|
|
|
3,058
|
|
|
|
917
|
|
Accounts payable
|
|
|
1,094,241
|
|
|
|
1,035,084
|
|
Salaries and wages
|
|
|
64,554
|
|
|
|
84,815
|
|
Accrued marketing
|
|
|
258,953
|
|
|
|
216,267
|
|
Other accrued liabilities
|
|
|
391,234
|
|
|
|
476,683
|
|
Income taxes
|
|
|
217,100
|
|
|
|
150,413
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,151,079
|
|
|
|
2,018,231
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
4,507,612
|
|
|
|
4,357,013
|
|
Deferred income taxes
|
|
|
552,993
|
|
|
|
518,724
|
|
Non-pension post-retirement
benefits
|
|
|
207,552
|
|
|
|
207,840
|
|
Other liabilities and minority
interest
|
|
|
545,172
|
|
|
|
587,136
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
5,813,329
|
|
|
|
5,670,713
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Capital stock
|
|
|
107,856
|
|
|
|
107,856
|
|
Additional capital
|
|
|
521,789
|
|
|
|
502,235
|
|
Retained earnings
|
|
|
5,607,326
|
|
|
|
5,454,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,236,971
|
|
|
|
6,064,199
|
|
Less:
|
|
|
|
|
|
|
|
|
Treasury stock at cost
(101,612,952 shares at November 1, 2006 and
100,339,405 shares at May 3, 2006)
|
|
|
3,973,088
|
|
|
|
3,852,220
|
|
Unearned compensation
|
|
|
|
|
|
|
32,773
|
|
Accumulated other comprehensive
loss
|
|
|
29,907
|
|
|
|
130,383
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,233,976
|
|
|
|
2,048,823
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
10,198,384
|
|
|
$
|
9,737,767
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Summarized from audited fiscal year 2006 balance sheet.
|
See Notes to Condensed Consolidated Financial Statements.
5
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
November 1, 2006
|
|
|
October 26, 2005
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
(Unaudited)
|
|
|
|
(Thousands of Dollars)
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
385,676
|
|
|
$
|
361,095
|
|
Adjustments to reconcile net income
to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
112,091
|
|
|
|
113,612
|
|
Amortization
|
|
|
13,869
|
|
|
|
15,086
|
|
Deferred tax (benefit)/provision
|
|
|
(36,039
|
)
|
|
|
24,852
|
|
Other items, net
|
|
|
(2,762
|
)
|
|
|
40,230
|
|
Changes in current assets and
liabilities, excluding effects of acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(57,511
|
)
|
|
|
47,520
|
|
Inventories
|
|
|
(196,715
|
)
|
|
|
(155,572
|
)
|
Prepaid expenses and other current
assets
|
|
|
12,654
|
|
|
|
(22,780
|
)
|
Accounts payable
|
|
|
21,094
|
|
|
|
65,198
|
|
Accrued liabilities
|
|
|
(67,469
|
)
|
|
|
52,082
|
|
Income taxes
|
|
|
79,640
|
|
|
|
(147,840
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
|
264,528
|
|
|
|
393,483
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(89,542
|
)
|
|
|
(99,609
|
)
|
Proceeds from disposals of
property, plant and equipment
|
|
|
34,167
|
|
|
|
3,427
|
|
Acquisitions, net of cash acquired
|
|
|
(68,457
|
)
|
|
|
(1,050,466
|
)
|
Proceeds from divestitures
|
|
|
3,904
|
|
|
|
7,703
|
|
Other items, net
|
|
|
(9,042
|
)
|
|
|
(985
|
)
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(128,970
|
)
|
|
|
(1,139,930
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(49,832
|
)
|
|
|
(711
|
)
|
Net proceeds from commercial paper
and short-term debt
|
|
|
130,185
|
|
|
|
999,293
|
|
Dividends
|
|
|
(232,458
|
)
|
|
|
(206,594
|
)
|
Purchases of treasury stock
|
|
|
(204,062
|
)
|
|
|
(525,321
|
)
|
Exercise of stock options
|
|
|
107,236
|
|
|
|
41,691
|
|
Other items, net
|
|
|
13,382
|
|
|
|
11,909
|
|
|
|
|
|
|
|
|
|
|
Cash (used for)/provided by
financing activities
|
|
|
(235,549
|
)
|
|
|
320,267
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities of discontinued operations spun-off to Del Monte
|
|
|
33,511
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
748
|
|
|
|
(57,364
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(65,732
|
)
|
|
|
(483,544
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
445,427
|
|
|
|
1,083,749
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
379,695
|
|
|
$
|
600,205
|
|
|
|
|
|
|
|
|
|
|
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. 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 May 3, 2006.
|
|
(2)
|
Recently
Issued Accounting Standards
|
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. (SFAS) 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plansan amendment
of FASB Statements No. 87, 88, 106 and 132 (R). Among
other things, SFAS 158 requires an employer to recognize
the funded status of each of its defined pension and
postretirement benefit plans as a net asset or liability in its
statement of financial position with an offsetting amount in
accumulated other comprehensive income, and to recognize changes
in that funded status in the year in which changes occur through
comprehensive income. This provision of SFAS 158, along
with disclosure requirements, is effective for the Company
prospectively at the end of Fiscal 2007. Based on the
funded status of the Companys pension and postretirement
benefit plans disclosed in the Fiscal 2006 Annual Report on
Form 10-K,
the adoption of SFAS 158 would have resulted in the
following impacts: a reduction in the prepaid pension assets of
approximately $528 million, a pension and postretirement
liability increase of approximately $47 million, a decrease
in the deferred tax liability of approximately $185 million
and a shareholders equity reduction of approximately
$390 million. There is no impact to the Companys
statements of income or cash flows. The ultimate impact at the
time of adoption is contingent on plan asset returns and the
assumptions that will be used to measure the funded status of
each of the Companys pension and postretirement benefit
plans at the end of Fiscal 2007. Additionally, SFAS 158
requires an employer to measure the funded status of each of its
plans as of the date of its year-end statement of financial
position. This provision becomes effective for the Company in
Fiscal 2008. The Company does not expect the impact of the
change in measurement date to have a material impact on the
financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting for uncertainty in income taxes
recognized in financial statements. This Interpretation includes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, and disclosures. The provisions of FIN 48 are
effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the impact of adopting
FIN 48 in Fiscal 2008.
Prior to May 4, 2006, the Company accounted for its
stock-based compensation plans under the measurement and
recognition provisions of Accounting Principles Board Opinion
No. (APB) 25,
7
Accounting for Stock Issued to Employees, and related
Interpretations, as permitted by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS 123). Under the
intrinsic-value method prescribed by APB 25, compensation
cost for stock options was measured at the grant date as the
excess, if any, of the quoted market price of the Companys
stock over the exercise price of the options. Generally employee
stock options were granted at or above the grant date market
price, therefore, no compensation cost was recognized for stock
option grants in prior periods; however, stock-based
compensation was included as a pro-forma disclosure in the Notes
to Consolidated Financial Statements. Compensation cost for
restricted stock units was determined as the fair value of the
Companys stock at the grant date and was amortized over
the vesting period and recognized as a component of general and
administrative expenses.
Effective May 4, 2006, the Company adopted FAS 123R,
Share-Based Payment (FAS 123R), which
requires all stock-based payments to employees, including grants
of employee stock options, to be recognized in the Consolidated
Statements of Income based on their fair values. Determining the
fair value of share-based awards at the grant date requires
judgment in estimating the expected term that the stock options
will be outstanding prior to exercise as well as the volatility
and dividends over the expected term. Judgment is also required
in estimating the amount of stock-based awards expected to be
forfeited prior to vesting. If actual forfeitures differ
significantly from these estimates, stock-based compensation
expense could be materially impacted.
|
|
(3)
|
Discontinued
Operations
|
In the fourth quarter of Fiscal 2006, the Company completed its
sale of the European seafood and
Tegel®
poultry businesses, in line with the Companys plan to exit
non-strategic businesses. 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 the second quarter and six
months ended October 26, 2005. The Company recorded a loss
of $3.3 million ($5.9 million after-tax) from these
businesses for the second quarter and six months ended
November 1, 2006, primarily resulting from purchase price
adjustments pursuant to the transaction agreements. The
discontinued operations generated sales of $181.9 million
and $391.7 million and net income of $3.5 million (net
of $4.2 million in tax) and $20.6 million (net of
$9.7 million in tax) for the second quarter and six months
ended October 26, 2005, respectively.
Net income from discontinued operations related to the
businesses spun-off to Del Monte in Fiscal 2003 was
$32.0 million for the second quarter and six months ended
October 26, 2005, and reflects the favorable settlement of
tax liabilities.
In Fiscal 2006, the Company recognized reorganization charges
primarily for severance and employee benefit costs consistent
with the Companys goals to streamline its businesses, and
strategic reviews related to the Companys portfolio
realignment. The amount of such charges recorded in continuing
operations of the Company totaled $33.8 million
($23.5 million after-tax) and $66.2 million
($47.0 million after-tax) for the second quarter and six
months ended October 26, 2005, respectively. In addition,
the Company recognized a net $12.7 million
($13.6 million after-tax) charge in the second quarter and
six months ended October 26, 2005 primarily related to the
sale of a seafood business in Israel. The total impact of these
initiatives on continuing operations was $46.5 million for
the second quarter ended October 26, 2005, of which
$2.1 million was recorded as costs of products sold and
$44.4 million in selling, general and administrative
expense (SG&A). The total impact of these
initiatives on continuing operations was $78.8 million for
the six months ended October 26, 2005, of which
$4.2 million was recorded as costs of products sold and
$74.7 million in SG&A. Finally, reorganization charges
of $3.1 million and
8
$4.1 million were recorded in income of discontinued
operations, net of tax for the second quarter and six months
ended October 26, 2005, respectively. There were no
material reorganization costs in Fiscal 2007.
The composition of inventories at the balance sheet dates was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
May 3,
|
|
|
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
|
|
Finished goods and
work-in-process
|
|
$
|
1,015,753
|
|
|
$
|
817,037
|
|
|
|
Packaging material and ingredients
|
|
|
261,497
|
|
|
|
256,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,277,250
|
|
|
$
|
1,073,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
Goodwill
and Other Intangible Assets
|
Changes in the carrying amount of goodwill for the six months
ended November 1, 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
May 3, 2006
|
|
$
|
1,067,727
|
|
|
$
|
278,039
|
|
|
$
|
1,265,469
|
|
|
$
|
195,206
|
|
|
$
|
16,126
|
|
|
$
|
2,822,567
|
|
|
|
Acquisitions
|
|
|
58,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,607
|
|
|
|
Purchase accounting adjustments
|
|
|
(21,233
|
)
|
|
|
(15,125
|
)
|
|
|
(92,001
|
)
|
|
|
|
|
|
|
|
|
|
|
(128,359
|
)
|
|
|
Translation adjustments
|
|
|
(1,771
|
)
|
|
|
|
|
|
|
32,998
|
|
|
|
6,929
|
|
|
|
(1,335
|
)
|
|
|
36,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 1, 2006
|
|
$
|
1,103,330
|
|
|
$
|
262,914
|
|
|
$
|
1,206,466
|
|
|
$
|
202,135
|
|
|
$
|
14,791
|
|
|
$
|
2,789,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During October 2006, the Company acquired Renées
Gourmet Foods, a Canadian manufacturer of premium salad
dressings, sauces, dips, marinades and mayonnaise for
approximately $67 million. The Company expects to finalize
the purchase price allocation related to this acquisition upon
completion of third party valuation procedures. Operating
results of the acquired business have been included in the
consolidated statement of income from the acquisition date
forward. Pro-forma results of the Company, assuming the
acquisition had occurred at the beginning of each period
presented, would not be materially different from the results
reported.
During the first six months of Fiscal 2007, the Company
finalized the purchase price allocations for the acquisitions of
HP Foods and Nancys Specialty Foods, resulting in
reclassifications primarily between goodwill, trademarks, other
intangible assets, and deferred income taxes. The Company also
adjusted the purchase price allocation for the Kabobs, Inc.
acquisition based upon preliminary results of third party
valuation procedures. This adjustment primarily resulted in a
reclassification between goodwill, trademarks, and other
intangible assets.
9
Trademarks and other intangible assets at November 1, 2006
and May 3, 2006, subject to amortization expense, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2006
|
|
|
May 3, 2006
|
|
|
|
|
|
|
|
|
Accum
|
|
|
|
|
|
|
|
|
Accum
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
|
|
Trademarks
|
|
$
|
194,065
|
|
|
$
|
(59,680
|
)
|
|
$
|
134,385
|
|
|
$
|
197,957
|
|
|
$
|
(61,279
|
)
|
|
$
|
136,678
|
|
|
|
Licenses
|
|
|
208,186
|
|
|
|
(132,490
|
)
|
|
|
75,696
|
|
|
|
208,186
|
|
|
|
(129,630
|
)
|
|
|
78,556
|
|
|
|
Recipes/processes
|
|
|
56,450
|
|
|
|
(14,195
|
)
|
|
|
42,255
|
|
|
|
95,456
|
|
|
|
(14,079
|
)
|
|
|
81,377
|
|
|
|
Customer related assets
|
|
|
141,710
|
|
|
|
(13,764
|
)
|
|
|
127,946
|
|
|
|
105,510
|
|
|
|
(11,507
|
)
|
|
|
94,003
|
|
|
|
Other
|
|
|
68,971
|
|
|
|
(54,203
|
)
|
|
|
14,768
|
|
|
|
70,832
|
|
|
|
(55,204
|
)
|
|
|
15,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
669,382
|
|
|
$
|
(274,332
|
)
|
|
$
|
395,050
|
|
|
$
|
677,941
|
|
|
$
|
(271,699
|
)
|
|
$
|
406,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for trademarks and other intangible assets
subject to amortization was $1.9 million and
$7.0 million for the second quarter ended November 1,
2006 and October 26, 2005, respectively, and
$10.2 million and $12.2 million for the six months
ended November 1, 2006 and October 26, 2005,
respectively. The finalization of the purchase price allocation
for the HP Foods acquisition resulted in a $5.3 million
adjustment to amortization expense during the second quarter
ended November 1, 2006. Based upon the amortizable
intangible assets recorded on the balance sheet as of
November 1, 2006, annual amortization expense for each of
the next five fiscal years is estimated to be approximately
$28 million.
Intangible assets not subject to amortization at
November 1, 2006 totaled $852.0 million and consisted
of $713.4 million of trademarks, $122.4 million of
recipes/processes, and $16.2 million of licenses.
Intangible assets not subject to amortization at May 3,
2006 totaled $640.2 million, 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 28.3% compared to 26.4% for the prior
year. During the first quarter of Fiscal 2007, a foreign
subsidiary of the Company revalued certain of its assets, under
local law, increasing the local tax basis by
$243.8 million. This revaluation is expected to reduce
Fiscal 2007 tax expense by approximately $35 million, of
which $27 million was recorded in the first six months of
Fiscal 2007. The remainder of the tax benefit will be recognized
through the effective tax rate in the third and fourth quarter.
The Fiscal
2006 year-to-date
tax expense benefited from the reversal of a tax provision of
$23.4 million related to a foreign affiliate along with an
additional benefit of $16.3 million resulting from tax
planning initiatives related to foreign tax credits, all of
which was partially offset by the non-deductibility of certain
asset write-offs.
The resolution of tax uncertainties and changes in valuation
allowances could be material to the Companys results of
operations for any period, but is not expected to be material to
the Companys financial position.
Subsequent to the end of the second quarter, final conditions
necessary to reverse a foreign tax reserve related to a prior
year transaction were achieved. As a result, the Company will
realize a non-cash tax benefit of $64.1 million in the
third quarter. For further discussion regarding the
Companys current considerations for possible tax planning
strategies and the impact on the current year anticipated
effective tax rate, refer to the information under the caption
10
Subsequent Event in Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations on page 28.
|
|
(8)
|
Stock-Based
Compensation Plans
|
As of November 1, 2006, the Company had outstanding stock
option awards, restricted stock units and restricted stock
awards issued pursuant to various shareholder-approved plans and
a shareholder authorized employee stock purchase plan. The
compensation cost related to these plans recognized in general
and administrative expenses, and the related tax benefit was
$18.2 million and $6.5 million for the six months
ended November 1, 2006 and $12.1 million and
$4.3 million for the second quarter ended November 1,
2006, respectively. The first six months of fiscal 2007 include
an incremental $11.0 million of compensation costs
($7.0 million after-tax or $0.02 impact on both basic and
diluted earnings per share) related to FAS 123R.
The Company has two plans from which it can issue stock option
awards, the Fiscal Year 2003 Stock Incentive Plan
(the 2003 Plan), which was approved by shareholders
on September 12, 2002, and the 2000 Stock Option Plan (the
2000 Plan), which was approved by shareholders on
September 12, 2000. The Companys primary means for
issuing equity-based awards is the 2003 Plan. Pursuant to the
2003 Plan, the Management Development & Compensation
Committee is authorized to grant a maximum of 9.4 million
shares for issuance as restricted stock units or restricted
stock. Any available shares may be issued as stock options. The
maximum number of shares that may be granted under this plan is
18.9 million shares.
Stock
Options
On May 4, 2006, the Company adopted FAS 123R and began
recognizing the cost of all employee stock options on a
straight-line basis over their respective requisite service
periods (generally equal to an awards vesting period), net
of estimated forfeitures, using the modified-prospective
transition method. Under this transition method, Fiscal 2007
results include stock-based compensation expense related to
stock options granted on or prior to, but not vested as of,
May 3, 2006, based on the grant date fair value originally
estimated and disclosed in a pro-forma manner in prior period
financial statements in accordance with the original provisions
of FAS 123. All stock-based awards granted subsequent to
May 3, 2006, will be expensed based on the grant date fair
value estimated in accordance with the provisions of
FAS 123R. All stock-based compensation expense is
recognized as a component of general and administrative
expenses. Results for prior periods have not been restated.
FAS 123R also requires the attribution of compensation
expense based on the concept of requisite service
period. For awards with vesting provisions tied to
retirement status (i.e., non-substantive vesting provisions,)
compensation cost should be recognized from the date of grant to
the earlier of the vesting date or the date of
retirement-eligibility. The use of the non-substantive vesting
approach will not affect the overall amount of compensation
expense recognized, but could accelerate the recognition of
expense. The Company will continue to follow its previous
vesting approach for the remaining portion of those outstanding
awards that were unvested and granted prior to May 4, 2006,
and accordingly, will recognize expense from the grant date to
the earlier of the actual date of retirement or the vesting
date. Had the Company previously applied the accelerated method
of expense recognition, the impact would have been immaterial to
the second quarter and six months ended October 26, 2005.
Stock options generally require a service period from one to
four years after the date of grant. Awards granted prior to
Fiscal 2004 generally had a requisite service period of three
years. Beginning in Fiscal 2006, awards have a maximum term of
seven years. Prior to Fiscal 2006, awards generally had a
maximum term of ten years.
In accordance with their respective plans, stock options are
forfeited if a holder voluntarily terminates employment prior to
the vesting date. The Company estimates forfeitures based on
11
an analysis of historical trends updated as discrete new
information becomes available and will be re-evaluated on an
annual basis. Compensation cost in any period is at least equal
to the grant-date fair value of the vested portion of an award
on that date.
The Company previously presented all benefits of tax deductions
resulting from the exercise of stock-based compensation as
operating cash flows in the condensed consolidated statements of
cash flows. Upon adoption of FAS 123R, the benefit of tax
deductions in excess of the compensation cost recognized for
those options (excess tax benefits) are classified as financing
cash flows. For the six months ended, November 1, 2006,
$5.4 million of cash tax benefits was reported as an
operating cash inflow and $1.6 million of excess tax
benefits as a financing cash inflow.
As of November 1, 2006, 3,041 shares remained
available for issuance under the 2000 Plan. During the second
quarter and six months ended November 1, 2006,
respectively, 7,755 and 18,995 shares were forfeited and
returned to the plan. During the second quarter and six months
ended November 1, 2006, 221,597 shares were issued
from the 2000 Plan.
A summary of the Companys 2003 Plan at November 1,
2006 is as follows:
|
|
|
|
|
|
|
2003 Plan
|
|
|
|
(Amounts
|
|
|
|
in Thousands)
|
|
|
Number of shares authorized
|
|
|
18,869
|
|
Number of stock option shares
issued
|
|
|
(2,027
|
)
|
Number of stock option shares
forfeited and returned to the plan
|
|
|
114
|
|
Number of restricted stock units
and restricted stock issued
|
|
|
(2,799
|
)
|
|
|
|
|
|
Shares available for grant as
stock options
|
|
|
14,157
|
|
|
|
|
|
|
During the second quarter, the Company granted 894,930 option
awards to employees sourced from the 2000 and 2003 Plans. The
weighted average fair value per share of the options granted
during the six months ended November 1, 2006 and
October 26, 2005 as computed using the Black-Scholes
pricing model was $6.69 and $6.76, respectively. The weighted
average assumptions used to estimate these fair values are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
Dividend yield
|
|
|
3.3
|
%
|
|
|
3.2
|
%
|
Expected volatility
|
|
|
17.9
|
%
|
|
|
22.3
|
%
|
Weighted-average expected life (in
years)
|
|
|
5.0
|
|
|
|
5.1
|
|
Risk-free interest rate
|
|
|
4.7
|
%
|
|
|
4.0
|
%
|
The dividend yield assumption is based on the current fiscal
year dividend payouts. The Company estimates expected volatility
and expected option life assumption consistent with
SFAS 123R and Securities and Exchange Commission Staff
Accounting Bulletin No. 107. The expected volatility
of the Companys common stock at the date of grant is
estimated based on a historic daily volatility rate over a
period equal to the average life of an option. The
weighted-average expected life of options is based on
consideration of historical exercise patterns adjusted for
changes in the contractual term and exercise periods of current
awards. The risk-free interest rate is based on the
U.S. Treasury (constant maturity) rate in effect at the
date of grant for periods corresponding with the expected term
of the options.
12
A summary of the Companys stock option activity for the
six months ended November 1, 2006, and related information
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term (yrs.)
|
|
|
Intrinsic Value
|
|
|
|
(Amounts in Thousands, Except per Share and Term Data)
|
|
|
Options outstanding at May 3,
2006
|
|
|
31,515
|
|
|
$
|
39.33
|
|
|
|
4.40
|
|
|
$
|
1,239,426
|
|
Options granted
|
|
|
895
|
|
|
|
41.92
|
|
|
|
6.84
|
|
|
|
37,515
|
|
Options exercised
|
|
|
(3,159
|
)
|
|
|
42.23
|
|
|
|
|
|
|
|
(107,236
|
)
|
Options forfeited and returned to
the plan
|
|
|
(264
|
)
|
|
|
47.34
|
|
|
|
|
|
|
|
(12,510
|
)
|
Options outstanding at
November 1, 2006
|
|
|
28,987
|
|
|
|
39.92
|
|
|
|
4.03
|
|
|
|
1,157,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable at
November 1, 2006
|
|
|
25,407
|
|
|
$
|
40.28
|
|
|
|
3.68
|
|
|
|
1,023,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company received proceeds of $107.2 million and
$41.7 million from the exercise of stock options during the
six months ended November 1, 2006 and October 26,
2005, respectively. The tax benefit recognized as a result of
stock option exercises was $1.0 million and
$0.4 million for the second quarters of Fiscal 2007 and
2006, respectively. The tax benefit recognized as a result of
stock option exercises was $5.6 million and
$2.6 million for the six months ended November 1, 2006
and October 26, 2005, respectively.
A summary of the status of the Companys unvested stock
options for the six months ended November 1, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
Date
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Options
|
|
|
(per share)
|
|
|
|
(Amounts in Thousands, Except per Share Data)
|
|
|
Unvested options at May 3,
2006
|
|
|
5,970
|
|
|
$
|
7.72
|
|
Options granted
|
|
|
895
|
|
|
|
6.69
|
|
Options vested
|
|
|
(3,274
|
)
|
|
|
8.26
|
|
Options forfeited and returned to
the plan
|
|
|
(11
|
)
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
|
Unvested options at
November 1, 2006
|
|
|
3,580
|
|
|
$
|
6.96
|
|
|
|
|
|
|
|
|
|
|
As of November 1, 2006, there was $13.1 million of
unrecognized compensation cost related to unvested option awards
under the 2003 Plan. This cost is expected to be recognized over
a weighted average period of 2.1 years.
13
Fiscal
Year 2006 Stock-Based Compensation Pro Forma
Summary
Had compensation cost for the Companys stock option plan
been determined in the prior year based on the fair-value-based
method for all awards, the pro forma income and earnings per
share from continuing operations amounts would have been as
follows:
|
|
|
|
|
|
|
|
|
|
|
October 26, 2005
|
|
|
|
Second Quarter Ended
|
|
|
Six Months Ended
|
|
|
|
(In thousands,
|
|
|
|
Except per Share Amounts)
|
|
|
Income from continuing operations:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
168,331
|
|
|
$
|
308,504
|
|
Fair value-based expense, net of
tax
|
|
|
2,960
|
|
|
|
7,002
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
165,371
|
|
|
$
|
301,502
|
|
|
|
|
|
|
|
|
|
|
Income per common share from
continuing operations:
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.49
|
|
|
$
|
0.89
|
|
Pro forma
|
|
$
|
0.48
|
|
|
$
|
0.87
|
|
Basic
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.50
|
|
|
$
|
0.90
|
|
Pro forma
|
|
$
|
0.48
|
|
|
$
|
0.88
|
|
Restricted
Stock Units and Restricted Shares
The 2003 Plan authorizes up to 9.4 million shares for
issuance as restricted stock units (RSUs) or
restricted stock with vesting periods from the first to the
fifth anniversary of the grant date as set forth in the award
agreements. Upon vesting, the RSUs are converted into shares of
the Companys stock on a
one-for-one
basis and issued to employees, subject to any deferral elections
made by a recipient. Restricted stock is reserved in the
recipients name at the grant date and issued upon vesting.
The Company is entitled to an income tax deduction in an amount
equal to the taxable income reported by the holder upon vesting
of the award.
Total compensation expense relating to RSUs and restricted stock
was $6.2 million and $4.4 million for the second
quarters ended November 1, 2006 and October 26, 2005,
respectively. Total compensation expense relating to RSUs and
restricted stock was $9.9 million and $10.6 million
for the six months ended November 1, 2006 and
October 26, 2005, respectively. Unrecognized compensation
cost in connection with these grants totaled $36.7 million
and $34.9 million at November 1, 2006 and
October 26, 2005, respectively. The cost is expected to be
recognized over a weighted-average period of 2.9 years. The
unearned compensation balance of $32.8 million as of
May 4, 2006 related to RSUs and restricted stock awards was
reclassified into additional
paid-in-capital
upon adoption of SFAS 123R.
A summary of the Companys RSU and restricted stock awards
at November 1, 2006 is as follows:
|
|
|
|
|
|
|
2003 Plan
|
|
|
|
(Amounts
|
|
|
|
in Thousands)
|
|
|
Number of shares authorized
|
|
|
9,440
|
|
Number of shares reserved for
issuance
|
|
|
(3,231
|
)
|
Number of shares forfeited and
returned to the plan
|
|
|
432
|
|
|
|
|
|
|
Shares available for grant
|
|
|
6,641
|
|
|
|
|
|
|
14
A summary of the activity of unvested RSU and restricted stock
awards for the six months ended November 1, 2006, and
related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Units
|
|
|
(per share)
|
|
|
|
(Amounts in Thousands, Except per Share Data)
|
|
|
Unvested units and stock at
May 3, 2006
|
|
|
1,813
|
|
|
$
|
35.48
|
|
Units and stock granted
|
|
|
348
|
|
|
|
41.71
|
|
Units and stock vested
|
|
|
(131
|
)
|
|
|
36.12
|
|
Units and stock forfeited and
returned to the plan
|
|
|
(11
|
)
|
|
|
36.00
|
|
|
|
|
|
|
|
|
|
|
Unvested units and stock at
November 1, 2006
|
|
|
2,019
|
|
|
$
|
36.51
|
|
|
|
|
|
|
|
|
|
|
Upon share option exercise or vesting of restricted stock and
RSUs, the Company uses available treasury shares and maintains a
repurchase program that anticipates exercises and vesting of
awards so that shares are available for issuance. The Company
records forfeitures of restricted stock as treasury share
repurchases. The Company expects to repurchase approximately
15.0 million shares during Fiscal 2007.
Global
Stock Purchase Plan
The Company has a shareholder approved employee stock purchase
plan (the GSPP) that permits substantially all
employees to purchase shares of the Companys common stock
at a discounted price through payroll deductions at the end of
two six-month offering periods. Currently, the offering periods
are February 16 to August 15 and August 16 to February 15.
Commencing with the February 2006 offering period, the purchase
price of the option is equal to 85% of the fair market value of
the Companys common stock on the last day of the offering
period. The number of shares available for issuance under the
GSPP is a total of three million shares. During the two offering
periods from February 16, 2005 to February 15, 2006,
employees purchased 352,395 shares under the plan. During
the offering period from February 16, 2006 to
August 15, 2006, employees purchased 157,111 shares
under the plan. The Company expects approximately 125,000
additional shares to be purchased under the plan in the
August 16, 2006 to February 15, 2007 offering period.
Shares issued under the GSPP will be sourced from available
treasury shares.
15
|
|
(9)
|
Pensions
and Other Post-Retirement Benefits
|
The components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
Pension Benefits
|
|
|
Post-Retirement Benefits
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
|
|
|
Service cost
|
|
$
|
10,659
|
|
|
$
|
10,483
|
|
|
$
|
1,617
|
|
|
$
|
1,555
|
|
Interest cost
|
|
|
33,764
|
|
|
|
30,420
|
|
|
|
3,836
|
|
|
|
3,818
|
|
Expected return on plan assets
|
|
|
(49,240
|
)
|
|
|
(41,871
|
)
|
|
|
|
|
|
|
|
|
Amortization of net initial asset
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(838
|
)
|
|
|
1,026
|
|
|
|
(1,524
|
)
|
|
|
(708
|
)
|
Amortization of unrecognized loss
|
|
|
12,964
|
|
|
|
14,775
|
|
|
|
1,479
|
|
|
|
1,826
|
|
Loss due to settlement and special
termination benefits
|
|
|
|
|
|
|
1,972
|
|
|
|
|
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
7,309
|
|
|
|
16,799
|
|
|
|
5,408
|
|
|
|
7,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less periodic benefit cost
associated with discontinued operations
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic benefit cost associated
with continuing operations
|
|
$
|
7,309
|
|
|
$
|
16,705
|
|
|
$
|
5,408
|
|
|
$
|
7,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
Pension Benefits
|
|
|
Post-Retirement Benefits
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
|
|
|
Service cost
|
|
$
|
21,189
|
|
|
$
|
21,022
|
|
|
$
|
3,236
|
|
|
$
|
3,091
|
|
Interest cost
|
|
|
67,202
|
|
|
|
60,888
|
|
|
|
7,673
|
|
|
|
7,610
|
|
Expected return on plan assets
|
|
|
(97,982
|
)
|
|
|
(83,861
|
)
|
|
|
|
|
|
|
|
|
Amortization of net initial asset
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(1,683
|
)
|
|
|
2,056
|
|
|
|
(3,049
|
)
|
|
|
(1,415
|
)
|
Amortization of unrecognized loss
|
|
|
25,808
|
|
|
|
29,540
|
|
|
|
2,959
|
|
|
|
3,651
|
|
Loss due to settlement and special
termination benefits
|
|
|
|
|
|
|
6,193
|
|
|
|
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
14,534
|
|
|
|
35,827
|
|
|
|
10,819
|
|
|
|
14,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less periodic benefit cost
associated with discontinued operations
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic benefit cost associated
with continuing operations
|
|
$
|
14,534
|
|
|
$
|
35,639
|
|
|
$
|
10,819
|
|
|
$
|
14,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 1, 2006, the Company has contributed
$37 million to fund its obligations under these plans. As
previously disclosed, the Company expects to make combined cash
contributions of approximately $60 million in Fiscal 2007.
Prepaid benefit costs of $766.7 million and
$733.5 million are included as components of other
non-current assets in the condensed consolidated balance sheets
at November 1, 2006 and May 3, 2006, respectively.
16
The Companys segments are primarily organized by
geographical area. The composition of segments and measure of
segment profitability are consistent with that used by the
Companys management.
Descriptions of the Companys reportable segments are as
follows:
North American Consumer ProductsThis segment primarily
manufactures, markets and sells ketchup, condiments, sauces,
pasta meals, and frozen potatoes, entrees, snacks, and
appetizers to the grocery channels in the United States of
America and includes our Canadian business.
U.S. FoodserviceThis segment primarily manufactures,
markets and sells branded and customized products to commercial
and non-commercial food outlets and distributors in the United
States of America including ketchup, condiments, sauces, and
frozen soups, desserts and appetizers.
EuropeThis segment includes the Companys operations
in Europe and sells products in all of the Companys
categories.
Asia/PacificThis segment includes the Companys
operations in New Zealand, Australia, Japan, China, South Korea,
Indonesia, Singapore, and Thailand. This segments
operations include products in all of the Companys
categories.
Rest of WorldThis 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.
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 of 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.
The following table presents information about the
Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
Six Months Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
(Thousands of Dollars)
|
|
|
Net external sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American
Consumer Products
|
|
$
|
671,644
|
|
|
$
|
625,039
|
|
|
$
|
1,287,221
|
|
|
$
|
1,169,999
|
|
U.S. Foodservice
|
|
|
406,222
|
|
|
|
385,345
|
|
|
|
772,835
|
|
|
|
738,556
|
|
Europe
|
|
|
739,428
|
|
|
|
745,543
|
|
|
|
1,425,290
|
|
|
|
1,387,442
|
|
Asia/Pacific
|
|
|
318,323
|
|
|
|
300,395
|
|
|
|
609,856
|
|
|
|
560,315
|
|
Rest of World
|
|
|
96,608
|
|
|
|
100,662
|
|
|
|
196,943
|
|
|
|
200,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$
|
2,232,225
|
|
|
$
|
2,156,984
|
|
|
$
|
4,292,145
|
|
|
$
|
4,057,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
Six Months Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
(Thousands of Dollars)
|
|
|
Intersegment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American
Consumer Products
|
|
$
|
12,982
|
|
|
$
|
13,128
|
|
|
$
|
25,811
|
|
|
$
|
25,431
|
|
U.S. Foodservice
|
|
|
5,324
|
|
|
|
5,307
|
|
|
|
11,378
|
|
|
|
10,205
|
|
Europe
|
|
|
3,812
|
|
|
|
3,239
|
|
|
|
8,726
|
|
|
|
6,474
|
|
Asia/Pacific
|
|
|
1,501
|
|
|
|
449
|
|
|
|
2,436
|
|
|
|
1,223
|
|
Rest of World
|
|
|
567
|
|
|
|
301
|
|
|
|
786
|
|
|
|
564
|
|
Non-Operating(a)
|
|
|
(24,186
|
)
|
|
|
(22,424
|
)
|
|
|
(49,137
|
)
|
|
|
(43,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American
Consumer Products
|
|
$
|
165,965
|
|
|
$
|
147,018
|
|
|
$
|
309,179
|
|
|
$
|
270,949
|
|
U.S. Foodservice
|
|
|
59,537
|
|
|
|
47,202
|
|
|
|
114,593
|
|
|
|
97,664
|
|
Europe
|
|
|
139,386
|
|
|
|
106,887
|
|
|
|
258,735
|
|
|
|
200,610
|
|
Asia/Pacific
|
|
|
44,317
|
|
|
|
36,012
|
|
|
|
75,364
|
|
|
|
54,701
|
|
Rest of World
|
|
|
11,828
|
|
|
|
(5,002
|
)
|
|
|
23,667
|
|
|
|
1,365
|
|
Non-Operating(a)
|
|
|
(38,048
|
)
|
|
|
(31,156
|
)
|
|
|
(78,911
|
)
|
|
|
(67,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$
|
382,985
|
|
|
$
|
300,961
|
|
|
$
|
702,627
|
|
|
$
|
557,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) excluding
special items(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American
Consumer Products
|
|
$
|
165,965
|
|
|
$
|
147,571
|
|
|
$
|
309,179
|
|
|
$
|
273,338
|
|
U.S. Foodservice
|
|
|
59,537
|
|
|
|
52,535
|
|
|
|
114,593
|
|
|
|
104,345
|
|
Europe
|
|
|
139,386
|
|
|
|
127,059
|
|
|
|
258,735
|
|
|
|
233,950
|
|
Asia/Pacific
|
|
|
44,317
|
|
|
|
38,075
|
|
|
|
75,364
|
|
|
|
62,490
|
|
Rest of World
|
|
|
11,828
|
|
|
|
10,419
|
|
|
|
23,667
|
|
|
|
18,751
|
|
Non-Operating(a)
|
|
|
(38,048
|
)
|
|
|
(28,227
|
)
|
|
|
(78,911
|
)
|
|
|
(56,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$
|
382,985
|
|
|
$
|
347,432
|
|
|
$
|
702,627
|
|
|
$
|
636,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes corporate overhead, intercompany eliminations and
charges not directly attributable to operating segments.
|
|
|
(b)
|
Second Quarter ended October 26, 2005Excludes costs
totaling $46.5 million associated with targeted workforce
reductions, costs incurred in connection with strategic reviews
of several non-core businesses, and losses on disposals as
follows: North American Consumer Products, $0.6 million;
U.S. Foodservice, $5.3 million; Europe,
$20.2 million; Asia/Pacific, $2.1 million; Rest of
World, $15.4 million; and Non-Operating $2.9 million.
|
Six Months ended October 26, 2005Excludes costs
totaling $78.8 million associated with targeted workforce
reductions, costs incurred in connection with strategic reviews
of several non-core businesses, and losses on disposals as
follows: North American Consumer Products, $2.4 million;
U.S. Foodservice, $6.7 million; Europe,
$33.3 million; Asia/Pacific, $7.8 million; Rest of
World, $17.4 million; and Non-Operating $11.3 million.
18
The Companys revenues are generated via the sale of
products in the following categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
Six Months Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
(Thousands of Dollars)
|
|
|
Ketchup and Sauces
|
|
$
|
915,149
|
|
|
$
|
870,080
|
|
|
$
|
1,816,124
|
|
|
$
|
1,673,009
|
|
Meals and Snacks
|
|
|
1,009,344
|
|
|
|
968,327
|
|
|
|
1,863,287
|
|
|
|
1,781,428
|
|
Infant Foods
|
|
|
213,202
|
|
|
|
207,318
|
|
|
|
426,899
|
|
|
|
401,696
|
|
Other
|
|
|
94,530
|
|
|
|
111,259
|
|
|
|
185,835
|
|
|
|
201,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,232,225
|
|
|
$
|
2,156,984
|
|
|
$
|
4,292,145
|
|
|
$
|
4,057,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11)
|
Net
Income Per Common Share
|
The following are reconciliations of income to income applicable
to common stock and the number of common shares outstanding used
to calculate basic EPS to those shares used to calculate diluted
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
Six Months Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
(In thousands)
|
|
|
Income from continuing operations
|
|
$
|
197,431
|
|
|
$
|
168,331
|
|
|
$
|
391,532
|
|
|
$
|
308,504
|
|
Preferred dividends
|
|
|
4
|
|
|
|
3
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
applicable to common stock
|
|
$
|
197,427
|
|
|
$
|
168,328
|
|
|
$
|
391,525
|
|
|
$
|
308,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common
shares outstandingbasic
|
|
|
330,670
|
|
|
|
339,475
|
|
|
|
331,077
|
|
|
|
342,856
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred
stock
|
|
|
122
|
|
|
|
125
|
|
|
|
120
|
|
|
|
125
|
|
Stock options,
restricted stock and the global stock purchase plan
|
|
|
3,825
|
|
|
|
2,933
|
|
|
|
3,570
|
|
|
|
2,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common
shares outstandingdiluted
|
|
|
334,617
|
|
|
|
342,533
|
|
|
|
334,767
|
|
|
|
345,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share is based upon the weighted-average
shares of common stock and dilutive common stock equivalents
outstanding during the periods presented. Common stock
equivalents arising from dilutive stock options and restricted
common stock units are computed using the treasury stock method.
Options to purchase an aggregate of 10,840,037 shares of
common stock for the second quarter and six months ended
November 1, 2006 and 18,561,090 shares of common stock
for the second quarter and six months ended October 26,
2005, were not included in the computation of diluted earnings
per share because the options exercise prices were greater
than the average market prices of the common stock for each
respective period. These options expire at various points in
time through 2009. The Company elected to apply the long-form
method for determining the pool of windfall tax benefits in
connection with the adoption of FAS 123R.
19
|
|
(12)
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
Six Months Ended
|
|
|
|
November 1,
|
|
|
October 26,
|
|
|
November 1,
|
|
|
October 26,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
FY 2007
|
|
|
FY 2006
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
|
|
|
Net income
|
|
$
|
191,575
|
|
|
$
|
203,821
|
|
|
$
|
385,676
|
|
|
$
|
361,095
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
|
|
62,981
|
|
|
|
46,722
|
|
|
|
92,388
|
|
|
|
(195,398
|
)
|
Minimum pension
liability adjustment
|
|
|
1,764
|
|
|
|
(2,548
|
)
|
|
|
4,469
|
|
|
|
(2,163
|
)
|
Net deferred losses on
derivatives from periodic revaluations
|
|
|
(2,417
|
)
|
|
|
(13,644
|
)
|
|
|
(11,407
|
)
|
|
|
(7,568
|
)
|
Net deferred losses on
derivatives reclassified to earnings
|
|
|
8,913
|
|
|
|
9,186
|
|
|
|
15,026
|
|
|
|
9,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
262,816
|
|
|
$
|
243,537
|
|
|
$
|
486,152
|
|
|
$
|
165,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13)
|
Derivative
Financial Instruments and Hedging Activities
|
The Company operates internationally, with manufacturing and
sales facilities in various locations around the world, and
utilizes certain derivative financial instruments to manage its
foreign currency and interest rate exposures. There have been no
material changes in the Companys market risk during the
six months ended November 1, 2006. For additional
information, refer to
pages 27-29
of the Companys Annual Report on
Form 10-K
for the fiscal year ended May 3, 2006.
As of November 1, 2006, the Company is hedging forecasted
transactions for periods not exceeding two years. During the
next 12 months, the Company expects $2.0 million of
net deferred losses reported in accumulated other comprehensive
loss to be reclassified to earnings, assuming market rates
remain constant through contract maturities. Hedge
ineffectiveness related to cash flow hedges, which is reported
in current period earnings as other income and expense, was not
significant for the second quarter and six months ended
November 1, 2006 and October 26, 2005. Amounts
reclassified to earnings because the hedged transaction was no
longer expected to occur were not significant for the second
quarter and six months ended November 1, 2006 and
October 26, 2005.
As of November 1, 2006, the Company had outstanding cross
currency swaps with a total notional amount of
$1.9 billion, which were designated as net investment
hedges of foreign operations. These contracts are scheduled to
mature within two years. The Company assesses hedge
effectiveness for these contracts based on changes in fair value
attributable to changes in spot prices. A net gain of
$2.0 million ($2.2 million after-tax) and a net loss
of $9.4 million ($2.4 million after-tax) which
represented effective hedges of net investments, were reported
as a component of accumulated other comprehensive loss within
unrealized translation adjustment for the second quarter and six
months ended November 1, 2006, respectively. Gains of
$4.8 million and $9.9 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 second quarter and six
months ended November 1, 2006, respectively.
|
|
(14)
|
Supplemental
Non-Cash Investing and Financing Activities
|
A capital lease obligation of $51.0 million was incurred
when the Company entered into a lease for equipment during the
first quarter of Fiscal 2007. This equipment was previously
under an operating lease. This non-cash transaction has been
excluded from the condensed consolidated statement of cash flows
for the six months ended November 1, 2006.
20
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Discontinued
Operations
In the fourth quarter of Fiscal 2006, the Company completed its
sale of the European seafood and
Tegel®
poultry businesses, in line with the Companys plan to exit
non-strategic businesses. 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 the second quarter and six
months ended October 26, 2005. The Company recorded a loss
of $3.3 million ($5.9 million after-tax) from these
businesses for the second quarter and six months ended
November 1, 2006, primarily resulting from purchase price
adjustments pursuant to the transaction agreements. The
discontinued operations generated sales of $181.9 million
and $391.7 million and net income of $3.5 million (net
of $4.2 million in tax) and $20.6 million (net of
$9.7 million in tax) for the second quarter and six months
ended October 26, 2005, respectively.
Net income from discontinued operations related to the
businesses spun-off to Del Monte in Fiscal 2003 was
$32.0 million for the second quarter and six months ended
October 26, 2005, and reflects the favorable settlement of
tax liabilities.
Reorganization
Costs
In Fiscal 2006, the Company recognized reorganization charges
primarily for severance and employee benefit costs consistent
with the Companys goals to streamline its businesses, and
strategic reviews related to the Companys portfolio
realignment. The amount of such charges recorded in continuing
operations of the Company totaled $33.8 million
($23.5 million after-tax) and $66.2 million
($47.0 million after-tax) for the second quarter and six
months ended October 26, 2005, respectively. In addition,
the Company recognized a net $12.7 million
($13.6 million after-tax) charge in the second quarter and
six months ended October 26, 2005 primarily related to the
sale of a seafood business in Israel. The total impact of these
initiatives on continuing operations was $46.5 million for
the second quarter ended October 26, 2005, of which
$2.1 million was recorded as costs of products sold and
$44.4 million in selling, general and administrative
expense (SG&A). The total impact of these
initiatives on continuing operations was $78.8 million for
the six months ended October 26, 2005, of which
$4.2 million was recorded as costs of products sold and
$74.7 million in SG&A. Finally, reorganization charges
of $3.1 million and $4.1 million were recorded in
income of discontinued operations, net of tax for the second
quarter and six months ended October 26, 2005,
respectively. There were no material reorganization costs in
Fiscal 2007.
THREE
MONTHS ENDED NOVEMBER 1, 2006 AND OCTOBER 26,
2005
Results
of Continuing Operations
Sales for the three months ended November 1, 2006 increased
$75.2 million, or 3.5%, to $2.23 billion. Sales were
favorably impacted by an increase in volume of 2.5% driven
primarily by the North American, Australian and New Zealand
businesses. These increases were partially offset by seasonally
related declines in Indonesia. Net pricing increased sales by
1.7%, mainly due to our businesses in the U.S., U.K., Indonesia
and Latin America. Divestitures, net of acquisitions, decreased
sales by 2.6%. Foreign exchange translation rates increased
sales by 1.8%.
Gross profit increased $42.8 million, or 5.3%, to
$846.6 million, and the gross profit margin increased to
37.9% from 37.3%. These increases reflect higher volume,
increased pricing and favorable foreign exchange, partially
offset by commodity cost increases and the impact of
divestitures.
21
SG&A decreased $39.2 million, or 7.8%, to
$463.6 million and decreased as a percentage of sales to
20.8% from 23.3%. These decreases are primarily due to the
$44.4 million of reorganization costs in the prior year
discussed above. In addition, the targeted workforce reductions
in the prior year have resulted in reduced selling and
distribution expenses (S&D) despite volume
increases, and reduced general and administrative expenses
(G&A). These declines were partially offset by
increased marketing expense, particularly in the North American
Consumer Products segment, and increased compensation costs
related to the adoption of FAS 123(R) in the current fiscal
year.
Total marketing support (recorded as a reduction of revenue or
as a component of SG&A) decreased $8.9 million, or
1.7%, to $520.5 million on a gross sales increase of 2.3%.
Marketing support recorded as a reduction of revenue, typically
deals and allowances, decreased $14.5 million, or 3.2%, to
$443.5 million, in line with the Companys strategy.
This decrease is due to reduced spending on less efficient
promotions and realignment of some list prices. Marketing
support recorded as a component of SG&A increased
$5.6 million, or 7.9%, to $77.0 million. Spending
increased across virtually the entire Company, particularly in
the U.S. Consumer Products business, while the U.K.
business reduced spending.
Operating income increased $82.0 million, or 27.3%, to
$383.0 million, which was favorably impacted by increased
volume, the higher gross profit margin, reduced SG&A and the
$46.5 million of prior year special items discussed above.
Net interest expense increased $2.3 million, to
$73.1 million, due to higher average interest rates in
Fiscal 2007. Other expenses, net, remained consistent at
$7.1 million.
The effective tax rate for the current quarter is 34.8% compared
to 24.6% in the prior year. The prior years second quarter
tax expense benefited from the reversal of a tax provision of
$23.4 million related to a foreign affiliate, partially
offset by the non-deductibility of certain asset write-offs
taken that quarter. The Company continues to expect a reported
tax rate on continuing operations for the year of approximately
30%.
Income from continuing operations was $197.4 million
compared to $168.3 million in the year earlier quarter, an
increase of 17.3%, primarily due to the increase in operating
income, partially offset by a higher effective tax rate. Diluted
earnings per share from continuing operations was $0.59 in the
current year compared to $0.49 in the prior year, up 20.4%.
OPERATING
RESULTS BY BUSINESS SEGMENT
North
American Consumer Products
Sales of the North American Consumer Products segment increased
$46.6 million, or 7.5%, to $671.6 million. Volume
increased 4.7%, due largely to strong growth in Smart
Ones®
and Boston Marketfrozen entrees, sides and desserts. The
increase in Smart
Ones®
reflects improved distribution, and the increase in Boston
Market®
frozen entrees relates primarily to increased promotions and new
packaging design. Volume increases were also generated from
increased consumption of TGI
Fridays®
and Bagel
Bites®
frozen snacks and
Heinz®
gravy. These volume increases were partially offset by declines
in
Ore-Ida®
frozen potatoes, resulting from a reduced supply of raw
potatoes and reduced promotional activity. Pricing increased
1.0% largely due to
Heinz®
ketchup, resulting from reduced promotions as part of the
strategy to increase consumption through sales of larger sizes,
and
Ore-Ida®
frozen potatoes, resulting from reduced promotions.
Acquisitions increased sales 0.8%, primarily from the current
quarter acquisition of Renées Gourmet Foods, a
Canadian manufacturer of premium salad dressings, sauces, dips,
marinades and mayonnaise. Favorable Canadian exchange
translation rates increased sales 1.0%.
Gross profit increased $24.3 million, or 9.3%, to
$286.1 million, and the gross profit margin increased to
42.6% from 41.9%. These increases are due primarily to increased
volume, higher pricing and manufacturing efficiencies in the
Canadian business. Operating income increased
22
$18.9 million, or 12.9%, to $166.0 million, due to the
increase in gross profit and lower S&D, despite higher
volume, due to reduced transportation costs from distribution
efficiencies. These increases were partially offset by increased
marketing expenses, primarily for Smart
Ones®,
Ore-Ida®
and frozen snacks, and increased incentive compensation accruals.
U.S. Foodservice
Sales of the U.S. Foodservice segment increased
$20.9 million, or 5.4%, to $406.2 million. Volume
increased 5.1%, due to higher volume in
Heinz®
ketchup and frozen soup, appetizers and desserts. Pricing
increased 2.3%, reflecting lower deal spending on
Heinz®
ketchup and price increases taken on
Heinz®
tomato products and frozen desserts. Divestitures, net of
acquisitions, reduced sales 2.1%.
Gross profit increased $11.8 million, or 10.6%, to
$123.6 million, and the gross profit margin increased to
30.4% from 29.0% primarily due to increased volume, higher
pricing and prior year reorganization costs related to targeted
workforce reductions of $2.4 million, partially offset by
higher commodity costs. Operating income increased
$12.3 million, or 26.1%, to $59.5 million, largely due
to the increase in gross profit and $5.3 million of
reorganization costs incurred in the prior year related to
targeted workforce reductions, partially offset by increased
incentive compensation accruals. In addition, operating income
benefited from reduced S&D costs, despite the strong volume
improvement, reflecting strong productivity initiatives to
reduce transportation costs.
Europe
Heinz Europes sales decreased $6.1 million, or 0.8%,
to $739.4 million. Volume decreased 1.7%, due to reduced
promotions on
HP®
and Lea &
Perrins®
sauces, timing of promotions in the Italian infant nutrition
business and market softness in our Russian business. These
declines were partially offset by increases on
Heinz®
ketchup across Europe,
Heinz®
beans in the U.K. and
Pudlizski®
sauces in Poland. The increase in
Heinz®
ketchup is a result of increased marketing and promotional
support as well as new customers, including McDonalds.
Higher pricing increased sales 1.4%, driven primarily by
Heinz®
soup and pasta meals in the U.K. The acquisition of HP Foods in
Fiscal 2006 increased sales 1.5%. Divestitures reduced sales
6.7%, and favorable exchange translation rates increased sales
by 4.7%.
Gross profit increased $3.1 million, or 1.1%, to
$295.3 million, and the gross profit margin increased to
39.9% from 39.2%. These increases are due to higher pricing and
favorable exchange translation rates, partially offset by the
impact of divestitures and increased raw potato costs in our
frozen food business. Operating income increased
$32.5 million, or 30.4%, to $139.4 million, due
primarily to reduced G&A and lower marketing expense. The
decrease in G&A reflects prior year targeted workforce
reductions, including the elimination of European headquarters,
as well as $20.2 million of reorganization costs incurred
in the prior year related to these workforce reductions and
strategic review costs. The slight reduction in marketing
expense is primarily related to the timing of promotions,
particularly on the
HP®
sauce business. Marketing expense is expected to increase in the
second half of the year with the planned launch of
HP®
Top Down, which will be supported with significant off shelf
promotional support, and the Dreamz Meanz Heinz
initiative, an integrated consumer and trade promotion that runs
across the
Heinz®
brand portfolio in the U.K.
Asia/Pacific
Sales in Asia/Pacific increased $17.9 million, or 6.0%, to
$318.3 million. Volume increased sales 3.7%, reflecting
continued strong performance in Australia and New Zealand,
largely due to new product introductions in Weight
Watchers®
steamfresh vegetables and meals. These increases were offset by
declines in Indonesian drinks, reflecting the shift in Ramadan
related promotions from the second quarter of Fiscal 2006 to the
first quarter of Fiscal 2007. Higher pricing increased sales
2.1%, mainly due to price increases taken on Indonesian sauces
and drinks, partially offset by increased promotional spending
in Australia.
23
Gross profit increased $5.1 million, or 5.1%, to
$105.4 million, benefiting from volume improvements. The
gross profit margin decreased to 33.1% from 33.4% primarily due
to commodity cost increases in Indonesia, partially offset by
higher pricing. Operating income increased $8.3 million, or
23.1%, to $44.3 million, primarily due to the increase in
gross profit and reduced G&A, partially offset by increased
marketing. The reduction in G&A is a result of targeted
workforce reductions, including the elimination of Asia
headquarters, in the prior year, and $2.1 million of
reorganization costs in the prior year related to these
workforce reductions.
Rest of
World
Sales for Rest of World decreased $4.1 million, or 4.0%, to
$96.6 million, as divestitures reduced sales 13.6% and
foreign exchange translation rates reduced sales 3.1%. Volume
increased 6.8% due primarily to market and share growth in
nutritional drinks in India and increased promotions on baby
food in Latin America. Higher pricing increased sales by 5.9%,
largely due to reduced promotions and price increases taken in
Latin America.
Gross profit decreased slightly by $0.2 million, or 0.7%,
to $33.7 million, as increased pricing was offset by the
impact of divestitures. Operating income increased
$16.8 million, to $11.8 million, due primarily to an
asset impairment charge for the seafood business in Israel
related to its sale in the prior year.
SIX
MONTHS ENDED NOVEMBER 1, 2006 AND OCTOBER 26,
2005
Results
of Continuing Operations
Sales for the six months ended November 1, 2006 increased
$234.9 million, or 5.8%, to $4.29 billion. Sales were
favorably impacted by a volume increase of 3.7%, with increases
across all of the Companys segments, led by the North
American Consumer Products and U.S. Foodservice segments.
Strong volume increases were also noted in our businesses in
Australia and New Zealand, as well as in the emerging markets of
India, China and Poland, in line with the Companys
strategy to focus on such key emerging markets. These increases
were partially offset by declines in Indonesia, Russia and the
U.K. Net pricing increased sales by 1.4%, mainly due to our
businesses in North America, the U.K, Indonesia and Latin
America. Divestitures, net of acquisitions, decreased sales by
0.7%. Foreign exchange translation rates increased sales by 1.5%.
Gross profit increased $112.7 million, or 7.5%, to
$1.62 billion, and the gross profit margin increased to
37.7% from 37.1%. These increases were due to higher volume,
increased pricing, higher margin acquisitions, productivity
improvements and favorable foreign exchange, partially offset by
commodity cost increases.
SG&A decreased $32.1 million, or 3.4%, to
$916.4 million and decreased as a percentage of sales to
21.4% from 23.4%. These decreases are primarily due to the
favorable impact of the prior year targeted workforce
reductions, particularly in Europe and Asia, and the
$74.7 million of reorganization costs in the prior year
discussed above. These declines were partially offset by
increased marketing expense, costs of approximately
$12 million related to the proxy contest affecting the
Companys 2006 election of directors and higher accrued
incentive compensation costs, including the expensing of stock
options. S&D costs were higher as a result of the volume
increase; however as a percentage of sales, S&D declined.
Total marketing support (recorded as a reduction of revenue or
as a component of SG&A) increased $27.4 million, or
2.7%, to $1.02 billion on a gross sales increase of 5.0%.
Marketing support recorded as a reduction of revenue, typically
deals and allowances, increased $9.0 million, or 1.0%, to
$875.8 million. This increase is due to foreign exchange
translation rates, partially offset by decreases relating to
spending reductions on less efficient promotions and a
realignment of list
24
prices. Marketing support recorded as a component of SG&A
increased $18.3 million, or 14.2%, to $147.6 million,
as the Company continues to invest behind its top brands.
Operating income increased $144.8 million, or 26.0%, to
$702.6 million, which was favorably impacted by increased
volume, the higher gross profit margin and the
$78.8 million of prior year special items discussed above.
Net interest expense increased $12.4 million, to
$141.4 million, due to higher average interest rates in
Fiscal 2007. Other expenses, net, increased $4.9 million,
to $14.8 million, largely due to increased minority
interest expense and currency losses and reduced equity income.
The
year-to-date
effective tax rate was 28.3% compared to 26.4% in the prior
year. During the first quarter of Fiscal 2007, a foreign
subsidiary of the Company revalued certain of its assets, under
local law, increasing the local tax basis by
$243.8 million. This revaluation is expected to reduce
Fiscal 2007 tax expense by approximately $35 million, of
which $27 million was recorded in the first six months of
Fiscal 2007. The remainder of the tax benefit will be recognized
through the effective tax rate in the third and fourth quarter.
The Fiscal
2006 year-to-date
tax expense benefited from the reversal of a tax provision of
$23.4 million related to a foreign affiliate as well as a
benefit of $16.3 million that resulted from tax planning
initiatives related to foreign tax credits, all of which was
partially offset by the non-deductibility of certain asset
write-offs.
Income from continuing operations was $391.5 million
compared to $308.5 million in the year earlier quarter, an
increase of 26.9%, primarily due to the increase in operating
income, partially offset by a higher effective tax rate and
higher net interest expense. Diluted earnings per share from
continuing operations was $1.17 in the current year compared to
$0.89 in the prior year, an increase of 31.5%.
OPERATING
RESULTS BY BUSINESS SEGMENT
North
American Consumer Products
Sales of the North American Consumer Products segment increased
$117.2 million, or 10.0%, to $1.29 billion. Volume
increased 4.5%, largely resulting from strong consumption growth
in Smart
Ones®
and Boston
Market®
frozen entrees, sides and desserts,
Heinz®
gravy and
Delimex®,
TGI Fridays®
and Bagel
Bites®
frozen snacks. In addition,
Classico®
pasta sauces generated volume growth, aided by increased
promotions and new product introductions. These increases were
partially offset by the expected first quarter volume decline in
Heinz®
ketchup, reflecting fewer promotions as part of the strategy to
increase consumption through sales of larger sizes.
Ore-Ida®
frozen potatoes also had slightly lower sales reflecting a
shortage of raw potato supply and reduced promotional activity.
Pricing increased 1.5% largely due to
Heinz®
ketchup and
Ore-Ida®
frozen potatoes, resulting from reduced promotions.
Acquisitions increased sales 2.5%, primarily from the prior year
acquisitions of Nancys Specialty Foods and HP Foods as
well as the second quarter acquisition of Renées
Gourmet Foods. Favorable Canadian exchange translation rates
increased sales 1.4%.
Gross profit increased $59.7 million, or 12.3%, to
$545.9 million, and the gross profit margin increased to
42.4% from 41.6%. These increases are due primarily to increased
volume, higher pricing, the favorable impact of acquisitions and
reduced manufacturing costs in the Canadian business, partially
offset by increased commodity costs. Operating income increased
$38.2 million, or 14.1%, to $309.2 million, mainly due
to the increase in gross profit. This increase was partially
offset by increased marketing expenses, primarily for Smart
Ones®,
Ore-Ida®
and frozen snacks, and increased research and development costs
and incentive compensation costs.
25
U.S. Foodservice
Sales of the U.S. Foodservice segment increased
$34.3 million, or 4.6%, to $772.8 million. Volume
increased 5.1%, due to higher volume in
Heinz®
ketchup, single serve condiments and frozen soup, appetizers
and desserts. Pricing increased 1.0%, largely due to
Heinz®
ketchup and tomato products, single serve condiments and frozen
desserts, partially offset by price reductions on frozen soup.
Divestitures, net of acquisitions, reduced sales 1.4%.
Gross profit increased $15.5 million, or 7.1%, to
$235.0 million, and the gross profit margin increased to
30.4% from 29.7% reflecting the increased volume, higher
pricing, the Kabobs, Inc. acquisition and prior year
reorganization costs related to targeted workforce reductions of
$3.0 million, partially offset by higher commodity costs.
Operating income increased $16.9 million, or 17.3%, to
$114.6 million, largely due to the increase in gross profit
and $6.7 million of reorganization costs incurred in the
prior year related to targeted workforce reductions, partially
offset by incentive compensation costs. In addition, operating
income benefited from reduced S&D as a percentage of sales,
despite the strong volume improvement, due to reduced
transportation costs resulting from productivity initiatives.
Europe
Heinz Europes sales increased $37.8 million, or 2.7%,
to $1.43 billion. Volume increased slightly as improvements
in
Heinz®
ketchup,
Heinz®
beans, Italian infant feeding and
Pudlizki®
sauces in Poland were offset by reduced promotions in
HP®
and Lea &
Perrins®
sauces, market softness in our Russian business and promotional
timing in U.K.
ready-to-serve
soups and pasta convenience meals. Pricing increased slightly,
up 0.5%, driven primarily by promotional timing of
Heinz®
soup and pasta meals in the U.K. The acquisition of HP Foods and
Petrosoyuz in Fiscal 2006 increased sales 4.0%. Divestitures
reduced sales 5.8%, and favorable exchange translation rates
increased sales by 3.9%.
Gross profit increased $23.6 million, or 4.3%, to
$567.2 million, and the gross profit margin increased to
39.8% from 39.2%. These increases are due to higher pricing, the
favorable impact of acquisitions and favorable exchange
translation rates, partially offset by increased raw potato
costs in our frozen food business. Operating income increased
$58.1 million, or 29.0%, to $258.7 million, due to the
increase in gross profit, reduced G&A and reduced marketing
expense, particularly in the
HP®
sauce business. The decrease in G&A is chiefly a result of
prior year targeted workforce reductions, including the
elimination of European headquarters, as well as
$33.3 million of reorganization costs incurred in the prior
year related to these workforce reductions and strategic review
costs.
Asia/Pacific
Sales in Asia/Pacific increased $49.5 million, or 8.8%, to
$609.9 million. Volume increased sales 8.2%, reflecting
strong volume in Australia, New Zealand and China, largely due
to increased marketing and new product introductions, such as
Heinz®
ready-to-serve
soup products and Weight
Watchers®
steamfresh vegetables and meals. These increases were offset by
declines in Indonesian drinks, as the choice of beverages
available has expanded rapidly. Higher pricing increased sales
1.7%, mainly due to price increases taken on Indonesian sauces
and drinks, partially offset by increased promotional spending
in Australia. Foreign exchange translation rates decreased sales
by 1.1%.
Gross profit increased $12.8 million, or 6.9%, to
$197.6 million, benefiting from volume improvements. The
gross profit margin decreased to 32.4% from 33.0% primarily due
to commodity cost increases in Indonesia, partially offset by
higher pricing. Operating income increased $20.7 million,
or 37.8%, to $75.4 million, primarily due to the increase
in gross profit and reduced G&A, partially offset by
increased marketing. The reduction in G&A is a result of
targeted workforce reductions, including the elimination of Asia
headquarters, in the prior year, and $7.8 million of
reorganization costs in the prior year related to these
workforce reductions.
26
Rest of
World
Sales for Rest of World decreased $4.0 million, or 2.0%, to
$196.9 million. Volume increased 6.3% due primarily to
market and share growth in nutritional drinks in India and
increased promotions on baby food in Latin America. Higher
pricing increased sales by 6.5%, largely due to reduced
promotions on ketchup and price increases taken on baby food in
Latin America. However, divestitures reduced sales 12.1% and
foreign exchange translation rates reduced sales 2.7%.
Gross profit increased $1.7 million, or 2.6%, to
$68.0 million, as increased pricing was partially offset by
the impact of divestitures. Operating income increased
$22.3 million, to $23.7 million, due primarily to an
asset impairment charge for the seafood business in Israel
related to its sale in the prior year.
Liquidity
and Financial Position
For the first six months of Fiscal 2007, cash provided by
operating activities was $264.5 million, a decrease of
$129.0 million from the prior year. The decrease in Fiscal
2007 versus Fiscal 2006 is primarily due to unfavorable movement
in accrued liabilities and accounts receivable, partially offset
by favorable movement in income taxes. The Company continues to
make progress in reducing its cash conversion cycle, with a
reduction of 9 days in Fiscal 2007 compared to Fiscal 2006.
During the first quarter of Fiscal 2007, a foreign subsidiary of
the Company revalued certain of its assets, under local law,
increasing the local tax basis by $243.8 million. As a
result of this revaluation, the Company incurred a foreign
income tax liability of $29.3 million related to this
revaluation which will be paid during the third quarter of
Fiscal 2007. Additionally, cash flow from operations is expected
to be improved by approximately $100 million over the five
to twenty year tax amortization period.
Cash used for investing activities totaled $129.0 million
compared to $1.14 billion last year. Capital expenditures
totaled $89.5 million (2.1% of sales) compared to
$99.6 million (2.2% of sales) last year. Proceeds from
disposals of property, plant and equipment were
$34.2 million compared to $3.4 million in the prior
year. Acquisitions, net of divestitures, used $64.6 million
in the first six months of Fiscal 2007 primarily related to the
Companys purchase of Renées Gourmet Foods in
the second quarter. These payments were partially offset by the
sale in the first quarter of a non-core U.S. Foodservice
product line, a frozen and chilled product line in the U.K., and
a pet food business in Argentina. In the first six months of
2006, acquisitions, net of divestitures, used $1.04 billion
primarily related to the Companys purchases of HP Foods,
Nancys Specialty Foods, and Petrosoyuz.
Cash used for financing activities totaled $235.5 million
compared to providing $320.3 million last year. Net
proceeds from short-term debt and commercial paper were
$130.2 million this year compared to $999.3 million in
the prior year. Payments on long-term debt were
$49.8 million in the current year. Cash used for the
purchases of treasury stock, net of proceeds from option
exercises, was $96.8 million this year compared to
$483.6 million in the prior year. Dividend payments totaled
$232.5 million, compared to $206.6 million for the
same period last year, reflecting a 16.7% increase in the annual
dividend on common stock.
At November 1, 2006, the Company had total debt of
$4.63 billion (including $91.3 million relating to the
fair value of interest rate swaps) and cash and cash equivalents
of $379.7 million. The $221 million increase in total
debt since prior year end is primarily the result of share
repurchases and a new capital lease obligation incurred in the
first quarter of Fiscal 2007.
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, these 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, strong operating cash flow and access to the capital
markets, if
27
required should enable the Company to meet its cash requirements
for operations, including capital expansion programs, debt
maturities, share repurchases and dividends to shareholders.
In Fiscal 2007, cash required for reorganization costs related
to workforce reductions was approximately $45 million. The
Company is on track to achieve the full year estimated savings
of $45 million in Fiscal 2007 as a result of the
reorganization.
As of November 1, 2006, the Companys long-term debt
ratings at Moodys and Standard & Poors were
Baa2 and BBB, respectively.
The impact of inflation on both the Companys financial
position and the results of operations is not expected to
adversely affect Fiscal 2007 results.
Subsequent
Event
Subsequent to the end of the second quarter, final conditions
necessary to reverse a foreign tax reserve related to a prior
year transaction were achieved. As a result, the Company will
realize a non-cash tax benefit of $64.1 million in the
third quarter. This benefit will have a favorable impact of
approximately 6 percentage points on the effective tax rate on
continuing operations for Fiscal 2007. However, the Company is
currently evaluating various tax planning opportunities, such as
changes to its plan for the repatriation of foreign earnings,
that if implemented, would result in a charge to the tax
provision and increase the effective tax rate. Consequently, the
Company continues to anticipate that the reported tax rate on
continuing operations for the year will be approximately 30%.
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 termination. The Company does not
believe that a material amount of penalties is reasonably likely
to be incurred under these contracts based upon historical
experience and current expectations. There have been no material
changes to contractual obligations during the six months ended
November 1, 2006. For additional information, refer to
pages 26 and 27 of the Companys Annual Report on
Form 10-K
for the fiscal year ended May 3, 2006.
Recently
Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No.
(SFAS) 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plansan amendment of FASB
Statements No. 87, 88, 106 and 132
(R). Among other things, SFAS 158 requires
an employer to recognize the funded status of each of its
defined pension and postretirement benefit plans as a net asset
or liability in its statement of financial position with an
offsetting amount in accumulated other comprehensive income, and
to recognize changes in that funded status in the year in which
changes occur through comprehensive income. This provision of
SFAS 158, along with disclosure requirements, is effective
for the Company prospectively at the end of Fiscal 2007. Based
on the funded status of the Companys pension and
postretirement benefit plans disclosed in the Fiscal 2006 Annual
Report on
Form 10-K,
the adoption of SFAS 158 would have resulted in the
following impacts: a reduction in the prepaid pension assets of
approximately $528 million, a pension and postretirement
liability increase of approximately $47 million, a decrease
in the deferred tax liability of approximately $185 million
and a shareholders equity reduction of approximately
$390 million. There is no impact to the Companys
statements of income or cash flows. The ultimate impact at the
time of adoption is contingent on plan asset returns and the
assumptions that will be used to measure the funded status of
each of the Companys pension
28
and postretirement benefit plans at the end of Fiscal 2007.
Additionally, SFAS 158 requires an employer to measure the
funded status of each of its plans as of the date of its
year-end statement of financial position. This provision becomes
effective for the Company in Fiscal 2008. The Company does not
expect the impact of the change in measurement date to have a
material impact on the financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting for uncertainty in income taxes
recognized in financial statements. This Interpretation includes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, and disclosures. The provisions of FIN 48 are
effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the impact of adopting
FIN 48 in Fiscal 2008.
Prior to May 4, 2006, the Company accounted for its
stock-based compensation plans under the measurement and
recognition provisions of Accounting Principles Board Opinion
No. (APB) 25, Accounting for Stock Issued to
Employees, and related Interpretations, as permitted by
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(FAS 123). Under the intrinsic-value method
prescribed by APB 25, compensation cost for stock options
was measured at the grant date as the excess, if any, of the
quoted market price of the Companys stock over the
exercise price of the options. Generally employee stock options
were granted at or above the grant date market price, therefore,
no compensation cost was recognized for stock option grants in
prior periods; however, stock-based compensation was included as
a pro-forma disclosure in the Notes to Consolidated Financial
Statements. Compensation cost for restricted stock units was
determined as the fair value of the Companys stock at the
grant date and was amortized over the vesting period and
recognized as a component of general and administrative expenses.
Effective May 4, 2006, the Company adopted FAS 123R,
Share-Based Payment (FAS 123R), which
requires all stock-based payments to employees, including grants
of employee stock options, to be recognized in the Consolidated
Statements of Income based on their fair values. Determining the
fair value of share-based awards at the grant date requires
judgment in estimating the expected term that the stock options
will be outstanding prior to exercise as well as the volatility
and dividends over the expected term. Judgment is also required
in estimating the amount of stock-based awards expected to be
forfeited prior to vesting. If actual forfeitures differ
significantly from these estimates, stock-based compensation
expense could be materially impacted.
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:
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sales, earnings, and volume growth,
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general economic, political, and industry conditions,
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competitive conditions, which affect, among other things,
customer preferences and the pricing of products, production,
energy and raw material costs,
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the ability to identify and anticipate and respond through
innovation to consumer trends,
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the need for product recalls,
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29
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the ability to maintain favorable supplier relationships,
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currency valuations and interest rate fluctuations,
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changes in credit ratings,
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the ability to identify and complete and the timing, pricing and
success of acquisitions, joint ventures, divestitures and other
strategic initiatives,
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approval of acquisitions and divestitures by competition
authorities, and satisfaction of other legal requirements,
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the ability to successfully complete cost reduction programs,
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the voting results on shareholder proposals, including the
proposed amendments to require majority voting,
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the ability to limit disruptions to the business resulting from
the emphasis on three core categories and potential divestitures,
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the ability to effectively integrate acquired businesses, new
product and packaging innovations,
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product mix,
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the effectiveness of advertising, marketing, and promotional
programs,
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the ability to maintain sales growth while reducing any spending
on advertising, marketing and promotional programs,
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supply chain efficiency,
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cash flow initiatives,
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risks inherent in litigation, including tax litigation, and
international operations, particularly the performance of
business in hyperinflationary environments,
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changes in estimates in critical accounting judgments and
changes in laws and regulations, including tax laws,
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the success of tax planning strategies,
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the possibility of increased pension expense and contributions
and other people-related costs,
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the possibility of an impairment in Heinzs
investments, and
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other factors described in Risk Factors and
Cautionary Statement Relevant to Forward-Looking
Information in the Companys
Form 10-K
for the fiscal year ended May 3, 2006.
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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.
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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There have been no material changes in the Companys market
risk during the six months ended November 1, 2006. For
additional information, refer to
pages 27-29
of the Companys Annual Report on
Form 10-K
for the fiscal year ended May 3, 2006.
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Item 4.
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Controls
and Procedures
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(a)
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Evaluation of Disclosure Controls and Procedures
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30
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.
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(b)
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Changes in Internal Control over Financial Reporting
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During the first quarter of Fiscal 2007, the Company implemented
SAP software in its U.K. operations. As appropriate, the Company
is modifying the design and documentation of internal control
process and procedures relating to the new system to supplement
and complement existing internal controls over financial
reporting.
31
PART IIOTHER
INFORMATION
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Item 1.
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Legal
Proceedings
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Nothing to report under this item.
Item 1A. Risk
Factors
There have been no material changes in our risk factors from
those disclosed in Part I, Item 1A to our Annual
Report on
Form 10-K
for the fiscal year ended May 3, 2006. The risk factors
disclosed in Part I, Item 1A to our Annual Report on
Form 10-K
for the fiscal year ended May 3, 2006, in addition to the
other information set forth in this report, could materially
affect our business, financial condition or results of
operations. Additional risks and uncertainties not currently
known to the Company or that the Company deems to be immaterial
also may materially adversely affect our business, financial
condition or results of operations.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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In the second quarter of Fiscal 2007, the Company repurchased
the following number of shares of its common stock:
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Maximum
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Total Number of
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Number of
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Shares Purchased
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Shares that
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Total
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Average
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as Part of
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May Yet Be
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Number
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Price
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Publicly
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Purchased
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of Shares
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Paid per
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Announced
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Under the
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Period
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Purchased
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Share
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Programs
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Programs
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August 3,
2006August 30, 2006
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$
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August 31,
2006September 27, 2006
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1,000,000
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41.50
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September 28,
2006November 1, 2006
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1,795,000
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42.15
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Total
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2,795,000
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$
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41.92
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The shares repurchased were acquired under the share repurchase
program authorized by the Board of Directors on June 8,
2005 for a maximum of 30 million shares. All repurchases
were made in open market transactions. As of November 1,
2006, the maximum number of shares that may yet be purchased
under the 2005 program is 10,400,292. In addition, on
May 31, 2006, the Board of Directors authorized a share
repurchase program of up to 25 million shares, all of which
may yet be purchased under the program.
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Item 3.
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Defaults
upon Senior Securities
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Nothing to report under this item.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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The Annual Meeting of Shareholders of H.J. Heinz Company was
held in Pittsburgh, Pennsylvania, on August 16, 2006, and
adjourned until September 15, 2006, when it concluded. The
following individuals were elected as directors for a term
expiring at the next annual meeting of the shareholders.
32
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Shares
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Director
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Shares For
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Withheld
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W. R. Johnson
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200,287,963
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24,978,486
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C. E. Bunch
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127,985,868
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1,604,074
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L. S. Coleman, Jr
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208,935,833
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24,373,976
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J. G. Drosdick
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127,924,140
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1,608,865
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E. E. Holiday
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226,861,225
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23,794,325
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C. Kendle
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217,760,592
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22,583,725
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D. R. OHare
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233,619,286
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14,554,709
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N. Peltz
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135,792,181
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11,535,753
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D. H. Reilley
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127,896,239
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1,636,537
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L. C. Swann
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224,091,717
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14,649,407
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T. J. Usher
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231,018,634
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19,636,687
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M. F. Weinstein
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138,863,238
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5,002,408
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Shareholders also acted upon the following proposal at the
Annual Meeting:
Ratified the Audit Committees selection of
PricewaterhouseCoopers, LLP as the Companys Independent
Registered Public Accounting Firm for the fiscal year ending
May 2, 2007. Votes totaled 247,172,636 for, 2,139,629
against or withheld, and 2,477,095 abstentions.
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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
and has omitted certain schedules to Exhibit 4 in
accordance with Item 601(b)(2) 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.
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10.
|
|
Form of Fiscal Year 2007
Restricted Stock Unit Award and Agreement
|
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).
|
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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.
|
33
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
H. J. HEINZ COMPANY
(Registrant)
Date: November 30, 2006
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By
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/s/ Arthur
B. Winkleblack
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Arthur B. Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 30, 2006
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|
|
By
|
/s/
Edward J. McMenamin
|
Edward J. McMenamin
Senior Vice PresidentFinance
and Corporate Controller
(Principal Accounting Officer)
34
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.
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|
10.
|
|
Form of Fiscal Year 2007
Restricted Stock Unit Award and Agreement
|
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.
|
35