H.J. Heinz Company 10-Q
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended January 30, 2008
|
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
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|
25-0542520
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
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|
|
|
600 Grant Street, Pittsburgh,
Pennsylvania
(Address of Principal
Executive Offices)
|
|
15219
(Zip Code)
|
Registrants telephone number, including area code:
(412) 456-5700
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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|
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Large accelerated
filer þ
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Accelerated
filer o
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|
Non-accelerated
filer o
(Do not check if a smaller reporting company)
|
|
Smaller reporting
company o
|
Indicate by check mark whether the registrant is a shell Company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of shares of the Registrants Common Stock, par
value $0.25 per share, outstanding as of January 30, 2008
was 315,149,351 shares.
PART IFINANCIAL
INFORMATION
|
|
Item 1.
|
Financial
Statements
|
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
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Third Quarter Ended
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January 30,
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January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
FY 2008
|
|
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FY 2007
|
|
|
|
(Unaudited)
|
|
|
|
(In Thousands, Except
|
|
|
|
per Share Amounts)
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|
|
Sales
|
|
$
|
2,610,863
|
|
|
$
|
2,295,192
|
|
Cost of products sold
|
|
|
1,675,447
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|
|
|
1,443,076
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|
|
|
|
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Gross profit
|
|
|
935,416
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|
|
|
852,116
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Selling, general and administrative expenses
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|
529,360
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475,788
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|
|
|
|
|
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Operating income
|
|
|
406,056
|
|
|
|
376,328
|
|
Interest income
|
|
|
9,296
|
|
|
|
14,752
|
|
Interest expense
|
|
|
93,462
|
|
|
|
86,054
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|
Other expense, net
|
|
|
2,532
|
|
|
|
9,203
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|
|
|
|
|
|
|
|
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|
Income before income taxes
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319,358
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|
|
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295,823
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Provision for income taxes
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|
100,826
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|
|
|
76,785
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|
|
|
|
|
|
|
|
|
Net income
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|
$
|
218,532
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|
|
$
|
219,038
|
|
|
|
|
|
|
|
|
|
|
Net income per sharediluted
|
|
$
|
0.68
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|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
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Average common shares outstandingdiluted
|
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|
321,381
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|
|
|
332,509
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|
|
|
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|
|
|
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Net income per sharebasic
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|
$
|
0.69
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|
|
$
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0.67
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|
|
|
|
|
|
|
|
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Average common shares outstandingbasic
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|
|
316,610
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|
|
|
328,466
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|
|
|
|
|
|
|
|
|
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Cash dividends per share
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|
$
|
0.38
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|
|
$
|
0.35
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|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
2
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
|
(Unaudited)
|
|
|
|
(In Thousands, Except
|
|
|
|
per Share Amounts)
|
|
|
Sales
|
|
$
|
7,382,527
|
|
|
$
|
6,587,337
|
|
Cost of products sold
|
|
|
4,676,909
|
|
|
|
4,116,206
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,705,618
|
|
|
|
2,471,131
|
|
Selling, general and administrative expenses
|
|
|
1,511,912
|
|
|
|
1,392,176
|
|
|
|
|
|
|
|
|
|
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Operating income
|
|
|
1,193,706
|
|
|
|
1,078,955
|
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Interest income
|
|
|
32,659
|
|
|
|
29,147
|
|
Interest expense
|
|
|
282,174
|
|
|
|
241,852
|
|
Other expense, net
|
|
|
21,900
|
|
|
|
24,020
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|
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|
|
|
|
|
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Income from continuing operations before income taxes
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|
|
922,291
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|
|
|
842,230
|
|
Provision for income taxes
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|
271,428
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|
|
|
231,660
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|
|
|
|
|
|
|
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Income from continuing operations
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|
650,863
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|
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|
610,570
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
(5,856
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
650,863
|
|
|
$
|
604,714
|
|
|
|
|
|
|
|
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|
Income/(loss) per common share
|
|
|
|
|
|
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Diluted
|
|
|
|
|
|
|
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Continuing operations
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$
|
2.01
|
|
|
$
|
1.83
|
|
Discontinued operations
|
|
|
|
|
|
|
(.02
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.01
|
|
|
$
|
1.81
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstandingdiluted
|
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|
323,032
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|
|
|
333,985
|
|
|
|
|
|
|
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Basic
|
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|
|
|
|
|
|
|
Continuing operations
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|
$
|
2.04
|
|
|
$
|
1.85
|
|
Discontinued operations
|
|
|
|
|
|
|
(.02
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.04
|
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstandingbasic
|
|
|
318,301
|
|
|
|
330,192
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
1.14
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|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
3
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2007*
|
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
644,765
|
|
|
$
|
652,896
|
|
Receivables, net
|
|
|
1,321,871
|
|
|
|
996,852
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished goods and
work-in-process
|
|
|
1,121,142
|
|
|
|
943,449
|
|
Packaging material and ingredients
|
|
|
323,420
|
|
|
|
254,508
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
1,444,562
|
|
|
|
1,197,957
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
147,279
|
|
|
|
132,561
|
|
Other current assets
|
|
|
52,349
|
|
|
|
38,736
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,610,826
|
|
|
|
3,019,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
4,292,357
|
|
|
|
4,054,863
|
|
Less accumulated depreciation
|
|
|
2,232,013
|
|
|
|
2,056,710
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
|
2,060,344
|
|
|
|
1,998,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,948,004
|
|
|
|
2,834,639
|
|
Trademarks, net
|
|
|
923,991
|
|
|
|
892,749
|
|
Other intangibles, net
|
|
|
429,961
|
|
|
|
412,484
|
|
Other non-current assets
|
|
|
855,534
|
|
|
|
875,999
|
|
|
|
|
|
|
|
|
|
|
Total other non-current assets
|
|
|
5,157,490
|
|
|
|
5,015,871
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,828,660
|
|
|
$
|
10,033,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The year-end condensed consolidated balance sheet data was
derived from audited financial statements, but does not include
all disclosures required by accounting principles generally
accepted in the United States of America. |
See Notes to Condensed Consolidated Financial Statements.
4
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
May 2,
|
|
|
|
2008
|
|
|
2007*
|
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Liabilities and
Shareholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
86,982
|
|
|
$
|
165,054
|
|
Portion of long-term debt due within one year
|
|
|
629,276
|
|
|
|
303,189
|
|
Accounts payable
|
|
|
1,190,877
|
|
|
|
1,181,078
|
|
Salaries and wages
|
|
|
82,277
|
|
|
|
85,818
|
|
Accrued marketing
|
|
|
309,627
|
|
|
|
262,217
|
|
Other accrued liabilities
|
|
|
403,373
|
|
|
|
414,130
|
|
Income taxes
|
|
|
66,953
|
|
|
|
93,620
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,769,365
|
|
|
|
2,505,106
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
4,765,452
|
|
|
|
4,413,641
|
|
Deferred income taxes
|
|
|
458,673
|
|
|
|
463,666
|
|
Non-pension post-retirement benefits
|
|
|
261,786
|
|
|
|
253,117
|
|
Other liabilities and minority interest
|
|
|
573,402
|
|
|
|
555,813
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
6,059,313
|
|
|
|
5,686,237
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Capital stock
|
|
|
107,847
|
|
|
|
107,851
|
|
Additional capital
|
|
|
602,354
|
|
|
|
580,606
|
|
Retained earnings
|
|
|
6,054,398
|
|
|
|
5,778,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,764,599
|
|
|
|
6,467,074
|
|
Less:
|
|
|
|
|
|
|
|
|
Treasury stock at cost (115,947,135 shares at
January 30, 2008 and 109,317,154 shares at May 2,
2007)
|
|
|
4,724,857
|
|
|
|
4,406,126
|
|
Accumulated other comprehensive loss
|
|
|
39,760
|
|
|
|
219,265
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,999,982
|
|
|
|
1,841,683
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
10,828,660
|
|
|
$
|
10,033,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The year-end condensed consolidated balance sheet data was
derived from audited financial statements, but does not include
all disclosures required by accounting principles generally
accepted in the United States of America. |
See Notes to Condensed Consolidated Financial Statements.
5
H. J.
HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
January 30, 2008
|
|
|
January 31, 2007
|
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
|
(Unaudited)
|
|
|
|
(Thousands of Dollars)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
650,863
|
|
|
$
|
604,714
|
|
Adjustments to reconcile net income to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
185,783
|
|
|
|
172,986
|
|
Amortization
|
|
|
28,544
|
|
|
|
21,686
|
|
Deferred tax benefit
|
|
|
(11,806
|
)
|
|
|
(24,651
|
)
|
Other items, net
|
|
|
(11,840
|
)
|
|
|
5,849
|
|
Changes in current assets and liabilities, excluding effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(156,564
|
)
|
|
|
(69,250
|
)
|
Inventories
|
|
|
(218,628
|
)
|
|
|
(181,390
|
)
|
Prepaid expenses and other current assets
|
|
|
(6,944
|
)
|
|
|
14,045
|
|
Accounts payable
|
|
|
(46,369
|
)
|
|
|
(128,660
|
)
|
Accrued liabilities
|
|
|
(23,386
|
)
|
|
|
(28,677
|
)
|
Income taxes
|
|
|
81,015
|
|
|
|
3,013
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
470,668
|
|
|
|
389,665
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(201,479
|
)
|
|
|
(150,516
|
)
|
Proceeds from disposals of property, plant and equipment
|
|
|
1,518
|
|
|
|
41,850
|
|
Acquisitions, net of cash acquired
|
|
|
(85,863
|
)
|
|
|
(85,928
|
)
|
Net proceeds/(payments) related to divestitures
|
|
|
60,748
|
|
|
|
(4,811
|
)
|
Other items, net
|
|
|
(77,820
|
)
|
|
|
(27,486
|
)
|
|
|
|
|
|
|
|
|
|
Cash used for investing activities
|
|
|
(302,896
|
)
|
|
|
(226,891
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(4,258
|
)
|
|
|
(51,054
|
)
|
Net proceeds from commercial paper and short-term debt
|
|
|
403,470
|
|
|
|
456,197
|
|
Dividends
|
|
|
(365,794
|
)
|
|
|
(347,797
|
)
|
Purchases of treasury stock
|
|
|
(368,756
|
)
|
|
|
(498,667
|
)
|
Exercise of stock options
|
|
|
46,974
|
|
|
|
194,167
|
|
Other items, net
|
|
|
56,458
|
|
|
|
10,747
|
|
|
|
|
|
|
|
|
|
|
Cash used for financing activities
|
|
|
(231,906
|
)
|
|
|
(236,407
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
|
56,003
|
|
|
|
13,705
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(8,131
|
)
|
|
|
(26,417
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
652,896
|
|
|
|
445,427
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
644,765
|
|
|
$
|
419,010
|
|
|
|
|
|
|
|
|
|
|
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 2, 2007.
|
|
(2)
|
Recently
Issued Accounting Standards
|
In July 2006, the Financial Accounting Standards Board
(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. See Note 5
for additional information.
In December 2007, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 141(R),
Business Combinations and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
StatementsAn Amendment of ARB No. 51. These new
standards will significantly change the accounting for and
reporting of business combination transactions and
noncontrolling (minority) interests in consolidated financial
statements. SFAS Nos. 141(R) and 160 are required to be
adopted simultaneously and are effective for fiscal years
beginning after December 15, 2008, with early adoption
prohibited. Thus, the Company will be required to adopt these
Standards on April 30, 2009, the first day of its 2010
fiscal year. The Company is currently evaluating the impact of
adopting SFAS Nos. 141(R) and 160 on its consolidated
financial statements.
|
|
(3)
|
Discontinued
Operations
|
Net loss from discontinued operations was $5.9 million (net
of $2.6 million of tax benefits) for the nine months ended
January 31, 2007, primarily reflecting purchase price
adjustments related to the Fiscal 2006 European seafood and
Tegel®
poultry sale transactions.
7
|
|
(4)
|
Goodwill
and Other Intangible Assets
|
Changes in the carrying amount of goodwill for the nine months
ended January 30, 2008, by reportable segment, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Rest of
|
|
|
|
|
|
|
Products
|
|
|
Europe
|
|
|
Asia/Pacific
|
|
|
Foodservice
|
|
|
World
|
|
|
Total
|
|
|
|
(Thousands of Dollars)
|
|
|
Balance at May 2, 2007
|
|
$
|
1,081,673
|
|
|
$
|
1,259,514
|
|
|
$
|
214,964
|
|
|
$
|
262,823
|
|
|
$
|
15,665
|
|
|
$
|
2,834,639
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
43,691
|
|
|
|
|
|
|
|
|
|
|
|
43,691
|
|
Purchase accounting adjustments
|
|
|
2,820
|
|
|
|
(2,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377
|
|
Disposals
|
|
|
|
|
|
|
(1,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,239
|
)
|
Translation adjustments
|
|
|
13,598
|
|
|
|
42,536
|
|
|
|
14,673
|
|
|
|
|
|
|
|
(271
|
)
|
|
|
70,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 30, 2008
|
|
$
|
1,098,091
|
|
|
$
|
1,298,368
|
|
|
$
|
273,328
|
|
|
$
|
262,823
|
|
|
$
|
15,394
|
|
|
$
|
2,948,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of Fiscal 2008, the Company acquired
the license to the Cottees
®
and Roses
®
premium branded jams, jellies and toppings business in Australia
and New Zealand for approximately $58 million. The Company
recorded a preliminary purchase price allocation related to this
acquisition and expects to finalize this allocation upon
completion of valuation procedures. During the second quarter of
Fiscal 2008, the Company acquired the remaining interest in its
Shanghai LongFong Foods business. The purchase price for this
transaction consisted of approximately $18 million in cash
and $15 million of deferred consideration. Operating
results of the acquired businesses have been included in the
consolidated statement of income from the respective acquisition
dates forward. Pro-forma results of the Company, assuming the
acquisitions had occurred at the beginning of each period
presented, would not be materially different from the results
reported.
Trademarks and other intangible assets at January 30, 2008
and May 2, 2007, subject to amortization expense, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2008
|
|
|
May 2, 2007
|
|
|
|
|
|
|
Accum
|
|
|
|
|
|
|
|
|
Accum
|
|
|
|
|
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
|
Gross
|
|
|
Amort
|
|
|
Net
|
|
|
|
(Thousands of Dollars)
|
|
|
Trademarks
|
|
$
|
200,114
|
|
|
$
|
(67,554
|
)
|
|
$
|
132,560
|
|
|
$
|
196,703
|
|
|
$
|
(63,110
|
)
|
|
$
|
133,593
|
|
Licenses
|
|
|
208,186
|
|
|
|
(139,640
|
)
|
|
|
68,546
|
|
|
|
208,186
|
|
|
|
(135,349
|
)
|
|
|
72,837
|
|
Recipes/processes
|
|
|
71,331
|
|
|
|
(18,363
|
)
|
|
|
52,968
|
|
|
|
64,315
|
|
|
|
(15,779
|
)
|
|
|
48,536
|
|
Customer related assets
|
|
|
163,566
|
|
|
|
(28,417
|
)
|
|
|
135,149
|
|
|
|
152,668
|
|
|
|
(19,183
|
)
|
|
|
133,485
|
|
Other
|
|
|
69,539
|
|
|
|
(58,046
|
)
|
|
|
11,493
|
|
|
|
70,386
|
|
|
|
(56,344
|
)
|
|
|
14,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
712,736
|
|
|
$
|
(312,020
|
)
|
|
$
|
400,716
|
|
|
$
|
692,258
|
|
|
$
|
(289,765
|
)
|
|
$
|
402,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for trademarks and other intangible assets
subject to amortization was $7.1 million and
$6.6 million for the third quarters ended January 30,
2008 and January 31, 2007, respectively, and
$20.5 million and $16.7 million for the nine months
ended January 30, 2008 and January 31, 2007,
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 of
Fiscal 2007. Based upon the amortizable intangible assets
recorded on the balance sheet as of January 30, 2008,
annual amortization expense for each of the next five fiscal
years is estimated to be approximately $27 million.
8
Intangible assets not subject to amortization at
January 30, 2008 totaled $953.2 million and consisted
of $791.4 million of trademarks, $126.5 million of
recipes/processes, and $35.3 million of licenses.
Intangible assets not subject to amortization at May 2,
2007 totaled $902.7 million and consisted of
$759.2 million of trademarks, $126.6 million of
recipes/processes, and $16.9 million of licenses.
The Company adopted FIN 48 on May 3, 2007. As a result
of adoption, the Company recognized a $9.3 million decrease
to retained earnings and a $1.7 million decrease to
additional capital from the cumulative effect of adoption.
The total amount of gross unrecognized tax benefits for
uncertain tax positions, including positions impacting only the
timing of tax benefits, was $183.7 million and
$182.4 million, on May 3, 2007 and January 30,
2008, respectively. The amount of unrecognized tax benefits
that, if recognized, would impact the effective tax rate was
$71.2 million and $71.8 million, on May 3, 2007
and January 30, 2008, respectively.
The Company classifies interest and penalties on tax
uncertainties as a component of the provision for income taxes.
The total amount of interest and penalties accrued as of the
date of adoption was $55.9 million and $2.2 million,
respectively. The corresponding amounts of accrued interest and
penalties at January 30, 2008 were $54.8 million and
$2.6 million, respectively.
It is reasonably possible that the amount of unrecognized tax
benefits will decrease by as much as $62 million in the
next 12 months primarily due to the progression of federal,
state, and foreign audits in process.
The provision for income taxes consists of provisions for
federal, state and foreign income taxes. The Company operates in
an international environment with significant operations in
various locations outside the U.S. Accordingly, the
consolidated income tax rate is a composite rate reflecting the
earnings in various locations and the applicable tax rates. In
the normal course of business the Company is subject to
examination by taxing authorities throughout the world,
including such major jurisdictions as Canada, Italy, the United
Kingdom and the United States. The Company has substantially
concluded all U.S. federal income tax matters for years
through Fiscal 2003, with the exception of Research &
Experimentation tax credit claims for fiscal years 2000 through
2003, and the Companys appeal, filed October 15,
2007, of a U.S. Court of Federal Claims decision regarding
a refund claim resulting from a Fiscal 1995 transaction. In the
Companys major
non-U.S. jurisdictions,
the Company has substantially concluded all income tax matters
for years through Fiscal 2002.
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 approximately
$245 million. As a result of this revaluation, the Company
incurred a foreign income tax liability of approximately
$30 million related to this revaluation which was paid
during the third quarter of Fiscal 2007. This revaluation is
expected to benefit cash flow from operations by approximately
$90 million over the five to twenty year tax amortization
period.
|
|
(6)
|
Employees
Stock Incentive Plans and Management Incentive Plans
|
As of January 30, 2008, the Company had outstanding stock
option awards, restricted stock units and restricted stock
awards. These awards were issued pursuant to various
shareholder-approved plans and a shareholder authorized employee
stock purchase plan, as described on pages 54 to 59 of the
Companys Annual Report on
Form 10-K
for the fiscal year ended May 2, 2007. The compensation
cost related to these plans is recognized primarily in general
and administrative expenses (G&A). The
compensation cost and related tax benefit, was $7.1 million
and $2.7 million for the third quarter ended
January 30, 2008 and $24.5 million and
9
$8.7 million for the nine months ended January 30,
2008, respectively. The compensation cost related to these plans
recognized in G&A, and the related tax benefit was
$7.2 million and $2.4 million for the third quarter
ended January 31, 2007 and $25.4 million and
$8.9 million for the nine months ended January 31,
2007, respectively.
The Company granted 6,982 option awards to employees during the
third quarter of Fiscal 2008. The Company granted 1,345,173 and
894,930 option awards to employees during the second quarters of
Fiscal 2008 and Fiscal 2007, respectively. The weighted average
fair value per share of the options granted during the nine
months ended January 30, 2008 and January 31, 2007 as
computed using the Black-Scholes pricing model, was $6.25 and
$6.69, respectively. These awards were sourced from the
shareholder approved 2000 Stock Option Plan and Fiscal Year 2003
Stock Incentive Plan. The weighted average assumptions used to
estimate the fair values are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Dividend yield
|
|
|
3.3
|
%
|
|
|
3.3
|
%
|
Expected volatility
|
|
|
15.7
|
%
|
|
|
17.9
|
%
|
Weighted-average expected life (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
4.3
|
%
|
|
|
4.7
|
%
|
The Company granted 671,218 and 357,595 restricted stock units
to employees during the nine months ended January 30, 2008
and January 31, 2007 at weighted average grant prices of
$46.03 and $41.78, respectively.
In Fiscal 2008, the Company granted performance awards as
permitted in the Fiscal Year 2003 Stock Incentive Plan, subject
to the achievement of certain performance goals. These
performance awards are tied to the Companys relative Total
Shareholder Return (TSR) Ranking within the defined
Long-term Performance Program (LTPP) peer group and
the 2-year
average after-tax Return on Invested Capital (ROIC)
metrics. The Relative TSR metric is based on the two-year
cumulative return to shareholders from the change in stock price
and dividends paid between the starting and ending dates. The
starting value was based on the average of each LTPP peer group
Company stock price for the 60 trading days prior to and
including May 2, 2007. The ending value will be based on
the average stock price for the 60 trading days prior to and
including the close of the Fiscal 2009 year end, plus
dividends paid over the 2 year performance period. The
Fiscal
2008-2009
LTPP will be fully funded if
2-year
cumulative EPS equals or exceeds the predetermined level. The
Company also granted performance awards in Fiscal 2007 under the
2007-2008
LTPP. The compensation cost related to LTPP awards recognized in
G&A, and the related tax benefit, was $9.4 million and
$3.2 million for the third quarter ended January 30,
2008 and $17.0 million and $6.2 million for the nine
months ended January 30, 2008, respectively. The
compensation cost related to these plans recognized in G&A,
and the related tax benefit was $4.9 million and
$1.9 million for the third quarter ended January 31,
2007 and $9.8 million and $3.8 million for the nine
months ended January 31, 2007, respectively.
10
|
|
(7)
|
Pensions
and Other Post-Retirement Benefits
|
The components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Pension Benefits
|
|
|
Post-Retirement Benefits
|
|
|
|
(Thousands of Dollars)
|
|
|
Service cost
|
|
$
|
10,049
|
|
|
$
|
10,890
|
|
|
$
|
1,628
|
|
|
$
|
1,601
|
|
Interest cost
|
|
|
38,346
|
|
|
|
34,302
|
|
|
|
3,926
|
|
|
|
3,815
|
|
Expected return on plan assets
|
|
|
(57,299
|
)
|
|
|
(50,096
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(375
|
)
|
|
|
(870
|
)
|
|
|
(1,193
|
)
|
|
|
(1,524
|
)
|
Amortization of unrecognized loss
|
|
|
11,152
|
|
|
|
13,118
|
|
|
|
1,147
|
|
|
|
1,479
|
|
Gain due to curtailment, settlement and special termination
benefits
|
|
|
|
|
|
|
(846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,873
|
|
|
$
|
6,498
|
|
|
$
|
5,508
|
|
|
$
|
5,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Pension Benefits
|
|
|
Post-Retirement Benefits
|
|
|
|
(Thousands of Dollars)
|
|
|
Service cost
|
|
$
|
29,829
|
|
|
$
|
32,079
|
|
|
$
|
4,831
|
|
|
$
|
4,837
|
|
Interest cost
|
|
|
114,046
|
|
|
|
101,504
|
|
|
|
11,708
|
|
|
|
11,488
|
|
Expected return on plan assets
|
|
|
(170,596
|
)
|
|
|
(148,078
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(938
|
)
|
|
|
(2,553
|
)
|
|
|
(3,577
|
)
|
|
|
(4,573
|
)
|
Amortization of unrecognized loss
|
|
|
33,133
|
|
|
|
38,926
|
|
|
|
3,433
|
|
|
|
4,438
|
|
Gain due to curtailment, settlement and special termination
benefits
|
|
|
|
|
|
|
(846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
5,474
|
|
|
$
|
21,032
|
|
|
$
|
16,395
|
|
|
$
|
16,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 30, 2008, the Company has contributed
$40.2 million to fund its obligations under these plans.
The Company expects to make combined cash contributions of
approximately $50 million in Fiscal 2008.
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. During the first quarter of Fiscal
2008, the Company changed its segment reporting to reclassify
its business in India from the Rest of World segment to the
Asia/Pacific segment, reflecting organizational changes. Prior
periods have been conformed to the current presentation. Net
external sales for this business were $24.3 million,
$20.7 million, $27.6 million and $44.8 million
and operating income for this business was $3.1 million,
$1.4 million, $1.8 million and $8.0 million for
the first, second, third and fourth quarters of Fiscal 2007,
respectively.
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
11
appetizers to the grocery channels in the United States of
America and includes our Canadian business.
EuropeThis segment includes the Companys operations
in Europe, including Eastern Europe and Russia, and sells
products in all of the Companys categories.
Asia/PacificThis segment includes the Companys
operations in New Zealand, Australia, India, Japan, China, South
Korea, Indonesia, and Singapore. This segments operations
include products in all of the Companys categories.
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.
Rest of WorldThis segment includes the Companys
operations in Africa, Latin America and the Middle East that
sell products in all of the Companys categories.
The Companys management evaluates performance based on
several factors including net sales, operating income, and the
use of capital resources. Intersegment revenues and items below
the operating income line of the consolidated statements of
income are not presented by segment, since they are excluded
from the measure of segment profitability reviewed by the
Companys management.
The following table presents information about the
Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
|
(Thousands of Dollars)
|
|
|
Net external sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American
Consumer Products
|
|
$
|
807,634
|
|
|
$
|
714,536
|
|
|
$
|
2,228,539
|
|
|
$
|
2,001,757
|
|
Europe
|
|
|
923,087
|
|
|
|
812,996
|
|
|
|
2,561,550
|
|
|
|
2,238,286
|
|
Asia/Pacific
|
|
|
386,573
|
|
|
|
303,325
|
|
|
|
1,153,764
|
|
|
|
958,171
|
|
U.S. Foodservice
|
|
|
400,606
|
|
|
|
386,013
|
|
|
|
1,170,715
|
|
|
|
1,158,848
|
|
Rest of World
|
|
|
92,963
|
|
|
|
78,322
|
|
|
|
267,959
|
|
|
|
230,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$
|
2,610,863
|
|
|
$
|
2,295,192
|
|
|
$
|
7,382,527
|
|
|
$
|
6,587,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American
Consumer Products
|
|
$
|
183,427
|
|
|
$
|
161,862
|
|
|
$
|
513,308
|
|
|
$
|
471,041
|
|
Europe
|
|
|
164,288
|
|
|
|
151,904
|
|
|
|
462,670
|
|
|
|
410,639
|
|
Asia/Pacific
|
|
|
40,739
|
|
|
|
29,483
|
|
|
|
147,745
|
|
|
|
109,412
|
|
U.S. Foodservice
|
|
|
46,767
|
|
|
|
54,343
|
|
|
|
141,810
|
|
|
|
168,936
|
|
Rest of World
|
|
|
11,186
|
|
|
|
10,075
|
|
|
|
34,146
|
|
|
|
29,177
|
|
Non-Operating(a)
|
|
|
(40,351
|
)
|
|
|
(31,339
|
)
|
|
|
(105,973
|
)
|
|
|
(110,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Totals
|
|
$
|
406,056
|
|
|
$
|
376,328
|
|
|
$
|
1,193,706
|
|
|
$
|
1,078,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes corporate overhead, intercompany eliminations and
charges not directly attributable to operating segments.
|
12
The Companys revenues are generated via the sale of
products in the following categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
|
(Thousands of Dollars)
|
|
|
Ketchup and Sauces
|
|
$
|
1,010,904
|
|
|
$
|
890,018
|
|
|
$
|
2,982,167
|
|
|
$
|
2,706,142
|
|
Meals and Snacks
|
|
|
1,235,032
|
|
|
|
1,085,428
|
|
|
|
3,327,797
|
|
|
|
2,948,715
|
|
Infant/Nutrition
|
|
|
276,263
|
|
|
|
236,019
|
|
|
|
784,088
|
|
|
|
662,918
|
|
Other
|
|
|
88,664
|
|
|
|
83,727
|
|
|
|
288,475
|
|
|
|
269,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,610,863
|
|
|
$
|
2,295,192
|
|
|
$
|
7,382,527
|
|
|
$
|
6,587,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9)
|
Net
Income Per Common Share
|
The following are reconciliations of income to income applicable
to common stock and the number of common shares outstanding used
to calculate basic EPS to those shares used to calculate diluted
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
|
(In Thousands)
|
|
|
Income from continuing operations
|
|
$
|
218,532
|
|
|
$
|
219,038
|
|
|
$
|
650,863
|
|
|
$
|
610,570
|
|
Preferred dividends
|
|
|
3
|
|
|
|
3
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common stock
|
|
$
|
218,529
|
|
|
$
|
219,035
|
|
|
$
|
650,854
|
|
|
$
|
610,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstandingbasic
|
|
|
316,610
|
|
|
|
328,466
|
|
|
|
318,301
|
|
|
|
330,192
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
116
|
|
|
|
123
|
|
|
|
110
|
|
|
|
123
|
|
Stock options, restricted stock and the global stock purchase
plan
|
|
|
4,655
|
|
|
|
3,920
|
|
|
|
4,621
|
|
|
|
3,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstandingdiluted
|
|
|
321,381
|
|
|
|
332,509
|
|
|
|
323,032
|
|
|
|
333,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share is based upon the average shares of
common stock and dilutive common stock equivalents outstanding
during the periods presented. Common stock equivalents arising
from dilutive stock options, restricted common stock units, and
the global stock purchase plan are computed using the treasury
stock method.
Options to purchase an aggregate of 7.7 million shares of
common stock for the third quarter and nine months ended
January 30, 2008 and 9.2 million shares of common
stock for the third quarter and nine months ended
January 31, 2007, were not included in the computation of
diluted earnings per share because inclusion of these options
would be anti-dilutive. These options expire at various points
in time through 2014. The Company elected to apply the long-form
method for determining the pool of windfall tax benefits in
connection with the adoption of Statement of Financial
Accounting Standards No. 123R, Share-Based Payment.
13
|
|
(10)
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
FY 2008
|
|
|
FY 2007
|
|
|
|
(Thousands of Dollars)
|
|
|
Net income
|
|
$
|
218,532
|
|
|
$
|
219,038
|
|
|
$
|
650,863
|
|
|
$
|
604,714
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(70,478
|
)
|
|
|
57,067
|
|
|
|
158,277
|
|
|
|
149,455
|
|
Minimum pension liability adjustment
|
|
|
24,459
|
|
|
|
4,394
|
|
|
|
19,571
|
|
|
|
8,863
|
|
Net deferred gains/(losses) on derivatives from periodic
revaluations
|
|
|
23,370
|
|
|
|
5,384
|
|
|
|
15,750
|
|
|
|
(6,023
|
)
|
Net deferred (gains)/losses on derivatives reclassified to
earnings
|
|
|
(9,636
|
)
|
|
|
(1,405
|
)
|
|
|
(14,093
|
)
|
|
|
13,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
186,247
|
|
|
$
|
284,478
|
|
|
$
|
830,368
|
|
|
$
|
770,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11)
|
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, commodity price, and interest rate exposures.
There have been no material changes in the Companys market
risk during the nine months ended January 30, 2008. For
additional information, refer to pages
25-26 of the
Companys Annual Report on
Form 10-K
for the fiscal year ended May 2, 2007.
As of January 30, 2008, the Company is hedging forecasted
transactions for periods not exceeding two years. During the
next 12 months, the Company expects $5.1 million of
net deferred gains 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 third quarter and nine months ended
January 30, 2008 and January 31, 2007. Amounts
reclassified to earnings because the hedged transaction was no
longer expected to occur were not significant for the third
quarter and nine months ended January 30, 2008 and
January 31, 2007.
The Company had outstanding cross currency swaps with a total
notional amount of $1.6 billion and $1.9 billion as of
January 30, 2008 and January 31, 2007, respectively,
which were designated as net investment hedges of foreign
operations. The Company assesses hedge effectiveness for these
contracts based on changes in fair value attributable to changes
in spot prices. Net losses of $29.7 million
($28.4 million after-tax) and $96.8 million
($72.5 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 third quarter and nine months
ended January 30, 2008, respectively. Net losses of
$21.3 million ($12.2 million after-tax) and
$30.7 million ($14.6 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 third quarter and nine
months ended January 31, 2007, respectively. Changes in the
fair value of swaps excluded from the assessment of hedge
effectiveness were not significant for the third quarter ended
January 30, 2008 and resulted in a gain of
$4.2 million for the nine months ended January 30,
2008. These amounts were included in current period earnings as
a component of interest expense for the nine months ended
January 30, 2008. Gains of $3.2 million and
$13.1 million, which represented the changes in fair
14
value excluded from the assessment of hedge effectiveness, were
included in current period earnings as a component of interest
expense for the third quarter and nine months ended
January 31, 2007, respectively.
In February 2008, the Company terminated all of the cross
currency swaps that were referred to above. The notional amount
of these contracts totaled $1.6 billion and upon
settlement, the Company paid $93.2 million of cash to the
counterparties which will be presented in the consolidated
statements of cash flows within investing activities in the
appropriate period as a component of other items, net. During
Fiscal 2008, the Company terminated interest rate swaps that
were previously designated as fair value hedges of fixed rate
debt obligations. The notional amount of these contracts totaled
$612.0 million. The Company received $40.2 million of
cash in the third quarter of Fiscal 2008 and $70.3 million
of cash in the fourth quarter of Fiscal 2008. These amounts are,
or will be, presented in the condensed consolidated statements
of cash flows within financing activities in the appropriate
period as a component of other items, net. The
$110.5 million gain is being amortized to reduce interest
expense over the remaining term of the corresponding debt
obligations (average of 22 years). The unwinding of the net
investment hedges and interest rate swaps described above were
completed in conjunction with the reorganization of our foreign
operations and our interest rate swap portfolio.
The Company enters into certain derivative contracts in
accordance with its risk management strategy that do not meet
the criteria for hedge accounting. The Company maintained
foreign currency forward contracts with a total notional amount
of $234.3 million and $111.2 million as of
January 30, 2008 and January 31, 2007, respectively,
that do not qualify as hedges, but which have the impact of
largely mitigating volatility associated with earnings from
foreign subsidiaries. These forward contracts are accounted for
on a full
mark-to-market
basis through current earnings, with gains and losses recorded
as a component of other expense, net. Net unrealized gains
related to these contracts totaled $2.4 million and
$0.6 million at January 30, 2008 and January 31,
2007, respectively. These contracts are scheduled to mature
during the fourth quarter of Fiscal 2008. As of January 30,
2008, the Company maintained commodity derivative contracts with
a total notional amount of $7.8 million that do not qualify
as hedges, but which have the economic impact of largely
mitigating commodity price exposures. These contracts are
accounted for on a full
mark-to-market
basis through current earnings, with gains and losses recorded
as a component of cost of products sold. Net unrealized gains
related to these contracts totaled $2.6 million at
January 30, 2008. These contracts are scheduled to mature
within four months.
|
|
(12)
|
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 nine months ended January 31, 2007.
15
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
THREE
MONTHS ENDED JANUARY 30, 2008 AND JANUARY 31, 2007
Results
of Operations
Sales for the three months ended January 30, 2008 increased
$316 million, or 13.8%, to $2.61 billion, with growth
in all five business segments. Volume increased 5.2%, driven by
a 9.8% volume increase in Asia/Pacific, combined with solid
growth in Europe, North American Consumer Products and
U.S. Foodservice segments. Notably, the Companys
emerging markets (Russia, Indonesia, China, India, Poland, Latin
America, Czech Republic, Egypt, South Africa and Middle East)
achieved an 8% volume increase and accounted for over 20% of
Heinzs total sales growth in the third quarter of Fiscal
2008. Net pricing increased sales by 3.4%, mainly in the North
American Consumer Products and European segments, as well as our
businesses in Latin America and Indonesia. Foreign exchange
translation rates increased sales by 5.3%.
Sales of the Companys top 15 brands grew 16.8% from the
year-ago quarter, as sales of ketchup rose 7.8% and sales of
beans and soups increased 15.8%. The growth in the top brands
was led by
Heinz®,
Ore-Ida®,
Smart
Ones®,
Classico®,
Weight
Watchers®,
and
ABC®.
Gross profit increased $83 million, or 9.8%, to
$935 million, benefiting from favorable volume, pricing and
foreign exchange translation rates. The gross profit margin
decreased to 35.8% from 37.1%, as pricing and productivity
improvements were more than offset by increased commodity costs,
reflecting higher costs for dairy, oils, grains and other key
ingredients.
Selling, general and administrative expenses
(SG&A) decreased as a percentage of sales to
20.3% from 20.7%, but increased $54 million, or 11.3%, to
$529 million. The 11.3% increase in SG&A is primarily
due to a 16.2% increase in marketing expense and 18.5% increase
in research and development costs to support brands across the
Company, and higher selling and distribution costs resulting
from foreign exchange translation rates and increased volume.
Total marketing support (recorded as a reduction of revenue or
as a component of SG&A) increased $54 million, or
9.5%, to $618 million on a gross sales increase of 12.8%.
Marketing support recorded as a reduction of revenue, typically
deals and allowances, increased $41 million, or 8.4%, to
$525 million, and decreased as a percentage of gross sales
to 16.7% from 17.4%, in line with the Companys strategy to
reduce spending on less efficient promotions and realignment of
some list prices. Marketing support recorded as a component of
SG&A increased $13 million, or 16.2%, to
$93 million, which was primarily in our U.S. retail
frozen business as we continued supporting our top brands.
Operating income increased $30 million, or 7.9%, to
$406 million, reflecting the strong sales growth,
productivity improvements, solid operating performance and
favorable foreign exchange which more than offset significant
commodity cost increases.
Net interest expense increased $13 million, to
$84 million, largely due to higher debt in Fiscal 2008,
related primarily to share repurchase activity. Other expenses,
net, decreased $7 million to $3 million, chiefly due
to gains on foreign currency contracts designed to mitigate
volatility of earnings from foreign subsidiaries.
The effective tax rate for the current quarter was 31.6%
compared to 26.0% last year. The current quarters tax rate
is higher than the prior years primarily due to the
negative effects of a tax law change in a foreign jurisdiction
that occurred during the current quarter and a benefit in the
prior year from the reversal of a foreign tax reserve. These
items were partially offset by reduced repatriation costs in the
current period. The current year annual effective tax rate is
expected to be approximately 31%.
16
Net income was consistent with the prior year quarter at
$219 million, reflecting the 560 basis point increase
in the tax rate. Diluted earnings per share was $0.68 in the
current year compared to $0.66 in the prior year, up 3.0%,
reflecting the higher tax rate and a 3.3% reduction in fully
diluted shares outstanding.
OPERATING
RESULTS BY BUSINESS SEGMENT
During the first quarter of Fiscal 2008, the Company changed its
segment reporting to reclassify its business in India from the
Rest of World segment to the Asia/Pacific segment, reflecting
organizational changes. Prior periods have been conformed to the
current presentation. (See Note 8 to the condensed
consolidated financial statements for further discussion of the
Companys reportable segments).
North
American Consumer Products
North American Consumer Products continued to deliver
consistently strong results, with sales and operating income up
13.0% and 13.3%, respectively. Overall, sales increased
$93 million, to $808 million. Volume increased 5.4%,
due primarily to Smart
Ones®
frozen entrees, largely due to new products such as Fruit
Inspirations®
and Anytime
Selections®,
as well as
Classico®
pasta sauces, due to new products and a shift in timing of sales
resulting from a recent price increase.
Ore-Ida®
frozen potatoes and Boston
Market®
frozen entrees also contributed to the volume improvement. Net
pricing increased 4.5% largely due to Fiscal 2008 price
increases instituted on
Ore-Ida®
frozen potatoes,
Heinz®
ketchup and Smart
Ones®
frozen entrees. Favorable Canadian exchange translation rates
increased sales 3.0%.
Gross profit increased $38 million, or 13.3%, to
$325 million, due primarily to the volume and pricing
increases. The gross profit margin increased slightly to 40.2%
from 40.1%, as increased commodity costs were offset by
productivity improvements, pricing and favorable mix. Last
years results were impacted by increased manufacturing
costs resulting from inefficiencies during the
start-up
phase of a plant consolidation. Operating income increased
$22 million, or 13.3%, to $183 million, driven by
strong sales growth, which was partially offset by increased
marketing, research and development and general and
administrative (G&A) costs.
Europe
Heinz Europe grew sales and operating income by 13.5% and 8.2%,
respectively. Overall, sales increased $110 million, to
$923 million. Volume increased 3.9%, principally due to the
strong performance of
Heinz®
ketchup and soup in the U.K.,
Pudliszki®
branded products in Poland, and new product introductions across
continental Europe, such as Weight
Watchers®
Big Soups in Germany, Austria and Switzerland and new
Honig®
convenience meal varieties in the Netherlands. Net pricing
increased sales 2.7%, resulting chiefly from prior year
commodity-related price increases taken on convenience meal
products in the U.K. and various products in Russia.
Divestitures reduced sales 1.2% and favorable exchange
translation rates increased sales by 8.1%.
Gross profit increased $22 million, or 6.8%, to
$346 million, driven largely by increased volume and price
and favorable foreign exchange rates. The gross profit margin
decreased to 37.4% from 39.8% due primarily to increased
commodity costs and higher manufacturing costs in our U.K. and
European frozen businesses, which was mitigated somewhat by the
pricing increases. Operating income increased $12 million,
or 8.2%, to $164 million, due to the increase in sales and
favorable foreign exchange rates, partially offset by increased
commodity and selling and distribution expenses.
17
Asia/Pacific
Heinz Asia/Pacific sales and operating income increased 27.4%
and 38.2%, respectively. Overall, sales increased
$83 million, or 27.4%, to $387 million. Volume
increased 9.8%, reflecting strong improvements across all
businesses within this segment, resulting primarily from new
product introductions and increased marketing. Leading these
improvements were Australia, Indonesia and China. Pricing
increased 4.2% reflecting increases on
ABC®
soy sauce and beverages in Indonesia,
LongFong®
frozen products in China and nutritional products in India.
Acquisitions, net of divestitures, increased sales 2.8%,
primarily due to the first quarter acquisition of the license
for the
Cottees®
and
Roses®
premium branded jams, jellies and toppings business in Australia
and New Zealand. Favorable exchange translation rates increased
sales by 10.7%.
Gross profit increased $26 million, or 27.0%, to
$120 million, and the gross profit margin remained
consistent at 31.2%. The increase was due to increased volume
and pricing, favorable sales mix and favorable foreign exchange
translation rates, partially offset by increased commodity
costs. Operating income increased by $11 million, or 38.2%,
to $41 million, primarily due to the increase in sales,
partially offset by an increased marketing investment.
U.S.
Foodservice
U.S. Foodservice sales increased $15 million, or 3.8%,
to $401 million. Volume increased 4.3%, largely due to
promotional timing and new products, partially offset by reduced
industry traffic reported by many of our customers.
Specifically, the volume growth benefited from new frozen
dessert product sales to the Companys casual dining
customers as well as increases in frozen soup. Pricing decreased
sales by 0.5% as price increases in frozen soup were more than
offset by declines in frozen desserts.
Gross profit decreased $7 million, or 6.0%, to
$109 million, and the gross profit margin decreased to
27.3% from 30.1%, reflecting higher commodity and energy costs.
This segment continues to be disproportionately hit by
double-digit increases in commodity costs, approximately
one-third of which were offset by gains on commodity derivative
contracts which did not qualify for hedge accounting. Operating
income decreased $8 million, or 13.9%, to $47 million,
due primarily to the increase in commodity costs.
Rest of
World
Sales for Rest of World increased $15 million, or 18.7%, to
$93 million. Volume increased 2.5% due primarily to
increased infant nutrition and tomato paste sales in Latin
America. Higher pricing increased sales by 15.0%, largely due to
commodity-related price increases in Latin America and South
Africa. This growth was enhanced by 1.2% due to favorable
foreign exchange translation rates.
Gross profit increased $5 million, or 18.4%, to
$33 million, due mainly to increased pricing, higher volume
and improved business mix. Operating income increased 11.0% to
$11 million.
NINE
MONTHS ENDED JANUARY 30, 2008 AND JANUARY 31, 2007
Results
of Continuing Operations
Sales for the nine months ended January 30, 2008 increased
$795 million, or 12.1%, to $7.38 billion, reflecting
growth in all five business segments. Volume increased 4.4%, as
continued solid growth in the North American Consumer Products
segment, Australia, New Zealand and the emerging markets were
combined with strong performance of
Heinz®
ketchup, beans and soup in Europe and Italian infant nutrition.
The emerging markets produced a 9.5% volume increase and
accounted for over 20% of Heinzs total sales growth for
the nine months ended January 30, 2008. Net pricing
increased sales by 2.9%, mainly in the North American Consumer
Products, European and
18
U.S. Foodservice segments and our businesses in Latin
America and Indonesia. Divestitures, net of acquisitions,
decreased sales by 0.2%. Foreign exchange translation rates
increased sales by 4.9%.
Sales of the Companys top 15 brands grew 13.8% from prior
year, led by strong increases in
Heinz®,
Smart
Ones®,
Classico®,
Boston
Market®,
Plasmon®,
Weight
Watchers®
and
ABC®.
These increases are a result of the Companys strategy of
focused innovation and marketing support behind these top brands.
Gross profit increased $234 million, or 9.5%, to
$2.71 billion, benefiting from favorable volume, pricing
and foreign exchange translation rates. The gross profit margin
decreased to 36.6% from 37.5%, as pricing and productivity
improvements were more than offset by increased commodity costs.
The most significant commodity cost increases were for dairy,
oils, tomato products and other key ingredients.
SG&A increased $120 million, or 8.6%, to
$1.51 billion. As a percentage of sales, SG&A
decreased to 20.5% from 21.1%. The increase in SG&A is due
to a 21.4% increase in marketing expense, a 16.3% increase in
research and development costs and higher selling and
distribution costs resulting from increased volume as well as
foreign exchange translation rates. These increases were
partially offset by the benefits of effective cost control and
headcount reductions that took place last year and prior year
costs related to the proxy contest.
Total marketing support (recorded as a reduction of revenue or
as a component of SG&A) increased $126 million, or
7.9%, to $1.71 billion on a gross sales increase of 11.0%.
Marketing support recorded as a reduction of revenue, typically
deals and allowances, increased $78 million, or 5.7%, to
$1.44 billion, but decreased as a percentage of gross sales
to 16.3% from 17.1%, in line with the Companys strategy to
reduce spending on less efficient promotions and realignment of
some list prices. Marketing support recorded as a component of
SG&A increased $49 million, or 21.4%, to
$277 million, as we increased consumer marketing across the
Companys businesses supporting innovation and our top
brands.
Operating income increased $115 million, or 10.6%, to
$1.19 billion, reflecting the strong sales growth,
productivity improvements and favorable foreign exchange,
partially offset by increased commodity costs.
Net interest expense increased $37 million, to
$250 million, largely as a result of higher debt in Fiscal
2008 related to share repurchase activity, and to rate
increases. Other expenses, net, decreased $2 million to
$22 million, as losses on foreign currency contracts
designed to mitigate volatility of earnings from foreign
subsidiaries were more than offset by a gain recognized on the
sale of our business in Zimbabwe.
The current year-to-date effective tax rate was 29.4% compared
to 27.5% for the prior year. The current year effective tax rate
benefits from a greater percentage of income occurring in lower
taxed foreign jurisdictions and lower repatriation costs.
However, these benefits were more than offset by prior year
nonrecurring items. 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
approximately $245 million. This revaluation reduced Fiscal
2007 tax expense by approximately $35 million. Of this
$35 million tax benefit, approximately $31 million was
recorded in the first nine months of Fiscal 2007. During the
third quarter of Fiscal 2007, final conditions necessary to
reverse a foreign tax reserve were achieved, and as a result,
the Company realized a non-cash tax benefit of
$64.1 million. Also, during the third quarter of Fiscal
2007, the Company modified its plans for repatriation of foreign
earnings, and as such, recorded incremental tax charges of
$62.9 million in the prior year quarter.
Income from continuing operations was $651 million compared
to $611 million in the prior year, an increase of 6.6%, due
to the increase in operating income, which was partially offset
by a higher net interest expense and a higher effective tax
rate. Diluted earnings per share from continuing
19
operations were $2.01 in the current year compared to $1.83 in
the prior year, up 9.8%, which also benefited from a 3.3%
reduction in fully diluted shares outstanding.
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. The Company recorded a loss of
$3.3 million ($5.9 million after-tax) from these
businesses for the nine months ended January 31, 2007,
primarily resulting from purchase price adjustments pursuant to
the transaction agreements. In accordance with accounting
principles generally accepted in the United States of America,
these adjustments have been included in discontinued operations
in the Companys consolidated statements of income.
OPERATING
RESULTS BY BUSINESS SEGMENT
North
American Consumer Products
Sales of the North American Consumer Products segment increased
$227 million, or 11.3%, to $2.23 billion. Volume
increased 5.2%, due primarily to Smart
Ones®
frozen entrees and desserts, Boston
Market®
frozen entrees and
Classico®
pasta sauces. The Smart
Ones®
volume improvement is largely a result of increased consumption
and new products. These volume improvements were partially
offset by a decline in
Ore-Ida®
frozen potatoes reflecting the effects of a price increase at
the beginning of this fiscal year. The
Ore-Ida®
frozen potatoes price increase, along with more efficient
promotions on
Classico®
pasta sauces and price increases on Smart
Ones®
frozen entrees, resulted in overall price gains of 3.2%. The
prior year acquisition of Renees Gourmet Foods in Canada
increased sales 0.9% and favorable Canadian exchange translation
rates increased sales 2.0%.
Gross profit increased $79 million, or 9.4%, to
$911 million, due primarily to the volume and pricing
increases. The gross profit margin decreased to 40.9% from
41.6%, as increased pricing, favorable mix and productivity
improvements only partially offset increased commodity costs.
Operating income increased $42 million, or 9.0%, to
$513 million, due to the strong increase in sales,
partially offset by higher commodity costs and increased
marketing and research and development costs.
Europe
Heinz Europe sales increased $323 million, or 14.4%, to
$2.56 billion. Volume increased 5.1%, principally due to
strong performance on
Heinz®
ketchup, soup and beans, Italian infant nutrition,
Pudliszki®
branded products in Poland, and
Heinz®
sauces and infant feeding products in Russia. Volume also
benefited from new product introductions across continental
Europe, such as Weight
Watchers®
Big Soups in Germany, Austria and Switzerland. These increases
were partially offset by volume declines on U.K. frozen products
due to the elimination of some low profit items. Net pricing
increased sales 2.5%, resulting chiefly from commodity-related
price increases taken on
Heinz®
ketchup, beans and soup, and Weight
Watchers®
and Aunt
Bessies®
frozen products. Divestitures reduced sales 1.6% and favorable
exchange translation rates increased sales by 8.4%.
Gross profit increased $101 million, or 11.3%, to
$992 million, and the gross profit margin decreased to
38.7% from 39.8%. The 11.3% increase reflects improved pricing
and volume and the favorable impact of exchange translation
rates, while the decline in gross profit margin is largely due
to increased commodity costs and higher manufacturing costs in
our U.K., European frozen and Netherlands businesses. Operating
income increased $52 million, or 12.7%, to
$463 million, due to higher sales, partially offset by
higher commodity costs and increased marketing spending of
$22 million in support of our strong brands across Europe.
20
Asia/Pacific
Heinz Asia/Pacific sales increased $196 million, or 20.4%,
to $1.15 billion. Volume increased 6.3%, reflecting strong
improvements across all businesses within this segment,
particularly Australia and India, related primarily to new
product introductions and increased marketing, up
$14 million, or 30.4%. Pricing increased 2.6% as increases
on soy sauce and beverages in Indonesia,
LongFong®
frozen products in China and nutritional products in India, were
partially offset by price declines in convenience meals in
Australia. Acquisitions, net of divestitures, increased sales
1.5%, and favorable exchange translation rates increased sales
by 10.0%.
Gross profit increased $71 million, or 23.0%, to
$377 million, and the gross profit margin increased to
32.7% from 32.0%. These increases were due to increased volume,
pricing, favorable sales mix and foreign exchange translation
rates, which more than offset increased commodity costs.
Operating income increased by $38 million, or 35.0%, to
$148 million, primarily reflecting the increase in sales
and gross margin, partially offset by increased marketing
expense from investment in our brands along with increased
selling and distribution and G&A expenses, due primarily to
foreign exchange translation rates.
U.S.
Foodservice
Sales of the U.S. Foodservice segment increased
$12 million, or 1.0%, to $1.17 billion. Pricing
increased sales 1.6%, largely due to commodity-related price
increases and reduced promotional spending on
Heinz®
ketchup and frozen soup, partially offset by declines in frozen
desserts. The core ketchup and sauces business performed well,
with ketchup sales up 3.9%. Overall volume was flat, reflecting
higher ketchup and frozen dessert volume offset by lower
industry traffic which resulted in declines in the non-branded
portion control business, tomato products and frozen appetizers.
Divestitures reduced sales 0.5%.
Gross profit decreased $28 million, or 8.1%, to
$323 million, and the gross profit margin decreased to
27.6% from 30.3% as increased commodity and manufacturing costs
were only partially offset by increased pricing and
productivity. Operating income decreased $27 million, or
16.1%, to $142 million, due primarily to the significant
increase in commodity costs.
Rest of
World
Sales for Rest of World increased $38 million, or 16.4%, to
$268 million. Volume increased 5.2% due primarily to infant
nutrition sales in Latin America as well as strong performance
across our Middle East business. Higher pricing increased sales
by 12.8%, largely due to price increases and reduced promotions
in Latin America as well as commodity-related price increases in
South Africa. Divestitures reduced growth 2.3% and favorable
foreign exchange increased sales 0.8%.
Gross profit increased $14 million, or 17.5%, to
$96 million, due mainly to increased pricing, higher volume
and improved business mix. Operating income increased
$5 million, or 17.0% to $34 million.
Liquidity
and Financial Position
For the first nine months of Fiscal 2008, cash provided by
operating activities was $471 million, an increase of
$81 million from the prior year and in line with the
Companys operating plan. The increase in Fiscal 2008
versus Fiscal 2007 is primarily due to favorable movement in
accounts payable, income taxes and cash paid in the prior year
for reorganization costs related to workforce reductions in
Fiscal 2006, partially offset by higher inventories and
receivables. The higher inventory levels were required to
support customer service demands created by the Companys
strong growth. The Company continued to make progress in
reducing its cash conversion cycle, with a reduction of
2 days, to 50 days in Fiscal 2008 compared to Fiscal
2007, primarily reflecting improvements in accounts payable.
21
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 approximately
$245 million. As a result of this revaluation, the Company
incurred a foreign income tax liability of approximately
$30 million related to this revaluation which was paid
during the third quarter of Fiscal 2007. Additionally, cash flow
from operations is expected to be improved by approximately
$90 million over the five to twenty year tax amortization
period.
Cash used for investing activities totaled $303 million
compared to $227 million last year. Capital expenditures
totaled $201 million (2.7% of sales) compared to
$151 million (2.3% of sales) last year, which reflect
capacity-related spending in support of future growth and an
ongoing investment in improved systems. Proceeds from disposals
of property, plant and equipment were $2 million compared
to $42 million in the prior year, representing the disposal
of 12 plants during the prior year. In Fiscal 2008, cash paid
for acquisitions, net of divestitures, required
$25 million, primarily related to the acquisition of the
license to the
Cottees®
and
Roses®
premium branded jams, jellies and toppings business in Australia
and New Zealand and the buy-out of the minority ownership on the
Companys Long Fong business in China, partially offset by
the divestiture of a tomato paste business in Portugal. In the
first nine months of Fiscal 2007, acquisitions, net of
divestitures, used $91 million primarily related to the
Companys purchase of Renées Gourmet Foods and
the purchase of the minority ownership in our Heinz Petrosoyuz
business in Russia. Divestitures in the prior year included the
sale 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 addition, transaction costs related to the
European seafood and
Tegel®
poultry divestitures were also paid during the prior year.
Cash used by financing activities totaled $232 million
compared to $236 million last year. Proceeds from
short-term debt and commercial paper were $403 million this
year compared to $456 million in the prior year. Payments
on long-term debt were $4 million in the current year
compared to $51 million in the prior year. Cash used for
the purchases of treasury stock, net of proceeds from option
exercises, was $322 million this year compared to
$305 million in the prior year, in line with the
Companys plans for repurchasing $500 million in net
shares in Fiscal 2008. Dividend payments totaled
$366 million, compared to $348 million for the same
period last year, reflecting an 8.6% increase in the annual
dividend on common stock. During the third quarter of Fiscal
2008, the Company terminated interest rate swaps that were
previously designated as fair value hedges of fixed rate debt
obligations. The notional amount of these contracts totaled
$235 million. The Company received $40 million of
cash, which has been presented in the condensed consolidated
statements of cash flows within financing activities as a
component of other items, net.
In February 2008, the Company terminated additional interest
rate swaps with a total notional amount of $377 million.
The Company received $70 million of cash, which will be
presented in financing activities in the consolidated statements
of cash flows. This $70 million gain, along with the
$40 million received in the current quarter, will be
amortized to reduce interest expense over the remaining term of
the corresponding debt obligations (average of 22 years).
Also, in February 2008, the Company terminated the cross
currency swaps that were previously designated as net investment
hedges of foreign operations. The notional amount of these
contracts totaled $1.6 billion, and the Company paid
$93 million of cash to the counterparties, which will be
presented in investing activities in the consolidated statements
of cash flows. The unwinding of the net investment hedges and
interest rate swaps described above were completed in
conjunction with the reorganization of our foreign operations
and our interest rate swap portfolio.
At January 30, 2008, the Company had total debt of
$5.48 billion (including $221 million relating to the
SFAS No. 133 hedge accounting adjustments) and cash
and cash equivalents of $645 million. Total debt balances
since prior year end increased primarily due to share
repurchases. Total debt is expected to be reduced by year-end
fiscal 2008 as the Company anticipates strong cash flow in the
fourth quarter of 2008.
22
The Company and H.J. Heinz Finance Company maintain a
$2 billion credit agreement that expires in August 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 required, should enable the Company to meet its cash
requirements for operations, including capital expansion
programs, debt maturities, share repurchases and dividends to
shareholders.
As of January 30, 2008, the Companys long-term debt
ratings at Moodys and Standard & Poors
were Baa2 and BBB, respectively.
During the first nine months of Fiscal 2008, the Company has
experienced inflationary increases in commodity costs and
expects this trend to continue for the remainder of Fiscal 2008.
Strong sales growth, price increases, continued productivity
improvements and the Companys geographic diversity are
helping to mitigate these increases.
Contractual
Obligations
The Company is obligated to make future payments under various
contracts such as debt agreements, lease agreements and
unconditional purchase obligations. In addition, the Company has
purchase obligations for materials, supplies, services, and
property, plant and equipment as part of the ordinary conduct of
business. A few of these obligations are long-term and are based
on minimum purchase requirements. In the aggregate, such
commitments are not at prices in excess of current markets. Due
to the proprietary nature of some of the Companys
materials and processes, certain supply contracts contain
penalty provisions for early terminations. The Company does not
believe that a material amount of penalties is reasonably likely
to be incurred under these contracts based upon historical
experience and current expectations. There have been no material
changes to contractual obligations during the nine months ended
January 30, 2008. For additional information, refer to
pages 24 and 25 of the Companys Annual Report on
Form 10-K
for the fiscal year ended May 2, 2007.
The Company adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48) as of the beginning
of fiscal year 2008. As of the end of the third quarter, the
total amount of gross unrecognized tax benefits for uncertain
tax positions, including an accrual of related interest and
penalties along with positions only impacting the timing of tax
benefits, was approximately $240 million. However, the net
obligation to taxing authorities under FIN 48 was
approximately $158 million. The difference relates
primarily to outstanding refund claims. The timing of payments
will depend on the progress of examinations with tax
authorities. The Company does not expect a significant tax
payment related to these net obligations within the next year.
The Company is unable to make a reasonably reliable estimate
when cash settlements with taxing authorities may occur.
Recently
Issued Accounting Standards
In July 2006, the Financial Accounting Standards Board
(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. See Note 5
for additional information.
In December 2007, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 141(R),
Business Combinations and SFAS No. 160,
Noncontrolling Interests in Consolidated
23
Financial StatementsAn Amendment of ARB No. 51.
These new standards will significantly change the accounting for
and reporting of business combination transactions and
noncontrolling (minority) interests in consolidated financial
statements. SFAS Nos. 141(R) and 160 are required to be
adopted simultaneously and are effective for fiscal years
beginning after December 15, 2008, with early adoption
prohibited. Thus, the Company will be required to adopt these
Standards on April 30, 2009, the first day of its 2010
fiscal year. The Company is currently evaluating the impact of
adopting SFAS Nos. 141(R) and 160 on its consolidated
financial statements.
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, and 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,
and energy costs,
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increases in the cost and restrictions on the availability of
raw materials including agricultural commodities and packaging
materials, the ability to increase product prices in response,
and the impact on profitability,
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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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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 and economic conditions, and the
impact of these factors on our cost of borrowing and access to
capital markets,
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our ability to effectuate our strategy, which includes our
continued evaluation of potential acquisition opportunities,
including strategic acquisitions, joint ventures, divestitures
and other initiatives, including our ability to identify,
finance and complete these initiatives, and our ability to
realize anticipated benefits from them,
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the ability to successfully complete cost reduction programs and
increase productivity,
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the ability to effectively integrate acquired businesses, new
product and packaging innovations,
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|
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product mix,
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|
|
|
the effectiveness of advertising, marketing, and promotional
programs,
|
|
|
|
supply chain efficiency,
|
|
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|
cash flow initiatives,
|
|
|
|
risks inherent in litigation, including tax litigation,
|
|
|
|
economic or political instability in international markets,
particularly in Venezuela, and the performance of business in
hyperinflationary environments,
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24
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|
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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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|
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|
the potential adverse impact of natural disasters, such as
flooding and crop failures,
|
|
|
|
the ability to implement new information systems, 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 2, 2007.
|
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.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
There have been no material changes in the Companys market
risk during the nine months ended January 30, 2008. For
additional information, refer to pages
25-26 of the
Companys Annual Report on
Form 10-K
for the fiscal year ended May 2, 2007.
|
|
Item 4.
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Companys
disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures, as of the end
of the period covered by this report, were effective and
provided reasonable assurance that the information required to
be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is (i) recorded, processed,
summarized, and reported within the time periods specified in
the SECs rules and forms, and (ii) accumulated and
communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
No change in the Companys internal control over financial
reporting occurred during the Companys most recent fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over
financial reporting.
25
PART IIOTHER
INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
Nothing to report under this item.
There have been no material changes in our risk factors from
those disclosed in Part I, Item 1A to our Annual
Report on
Form 10-K
for the fiscal year ended May 2, 2007. The risk factors
disclosed in Part I, Item 1A to our Annual Report on
Form 10-K
for the fiscal year ended May 2, 2007, in addition to the
other information set forth in this report, could materially
affect our business, financial condition, or results of
operations. Additional risks and uncertainties not currently
known to the Company or that the Company currently deems to be
immaterial also may materially adversely affect our business,
financial condition, or results of operations.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
In the third quarter of Fiscal 2008, the Company repurchased the
following number of shares of its common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Shares that
|
|
|
|
Total
|
|
|
Average
|
|
|
as Part of
|
|
|
May Yet Be
|
|
|
|
Number
|
|
|
Price
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced
|
|
|
Under the
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Programs
|
|
|
Programs
|
|
|
November 1, 2007November 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 29, 2007December 26, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2007January 30, 2008
|
|
|
2,297,600
|
|
|
$
|
43.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,297,600
|
|
|
$
|
43.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The shares repurchased were acquired under the share repurchase
program authorized by the Board of Directors on May 31,
2006 for a maximum of 25 million shares. All repurchases
were made in open market transactions. As of January 30,
2008, the maximum number of shares that may yet be purchased
under the 2006 program is 15,096,192.
|
|
Item 3.
|
Defaults
upon Senior Securities
|
Nothing to report under this item.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Nothing to report under this item.
|
|
Item 5.
|
Other
Information
|
Nothing to report under this item.
26
Exhibits required to be furnished by Item 601 of
Regulation S-K
are listed below. The Company may have omitted certain exhibits
in accordance with Item 601(b)(4)(iii)(A) of
Regulation S-K
and any exhibits filed pursuant to Item 601(b)(2) of
Regulation S-K
may omit certain schedules. The Company agrees to furnish such
documents to the Commission upon request. Documents not
designated as being incorporated herein by reference are set
forth herewith. The paragraph numbers correspond to the exhibit
numbers designated in Item 601 of
Regulation S-K.
|
|
|
10.
|
|
Retirement and Consulting Agreement and a Non-Competition and
Non-Solicitation Agreement dated January 30, 2008 between
H.J. Heinz Company and Jeffrey P. Berger are hereby incorporated
by reference to Exhibit 10.1 of the Companys current
report on
Form 8-K
dated February 1, 2008.
|
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.
|
27
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
H. J. HEINZ COMPANY
(Registrant)
Date: February 26, 2008
|
|
|
|
By
|
/s/ Arthur
B. Winkleblack
|
Arthur B. Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 26, 2008
|
|
|
|
By
|
/s/ Edward
J. McMenamin
|
Edward J. McMenamin
Senior Vice PresidentFinance
and Corporate Controller
(Principal Accounting Officer)
28
EXHIBIT INDEX
DESCRIPTION OF EXHIBIT
Exhibits required to be furnished by Item 601 of
Regulation S-K
are listed below. Documents not designated as being incorporated
herein by reference are furnished herewith. The Company may have
omitted certain exhibits in accordance with
Item 601(b)(4)(iii)(A) of
Regulation S-K
and any exhibits filed pursuant to Item 601(b)(2) of
Regulation S-K
may omit certain schedules. The Company agrees to furnish such
documents to the Commission upon request. The paragraph numbers
correspond to the exhibit numbers designated in Item 601 of
Regulation S-K.
|
|
|
10.
|
|
Retirement and Consulting Agreement and a Non-Competition and
Non-Solicitation Agreement dated January 30, 2008 between
H.J. Heinz Company and Jeffrey P. Berger are hereby incorporated
by reference to Exhibit 10.1 of the Companys current
report on
Form 8-K
dated February 1, 2008.
|
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.
|
29