SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

 

Commission File Number 1-3385

 

H. J. HEINZ COMPANY

(Exact name of registrant as specified in its charter)

 

 

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

 

 

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

 

Indicate by check mark whether the registrant 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):

 

Large accelerated filer X  Accelerated filer     Non-accelerated filer     Smaller reporting company   

(Do not check if a smaller reporting company)

 

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

 

The number of shares of the Registrant’s Common Stock, par value $0.25 per share, outstanding as of July 30, 2008 was 312,309,606 shares.

 

 

PART I—FINANCIAL INFORMATION

 

 

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

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

H. J. HEINZ COMPANY AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The interim condensed consolidated financial statements of H. J. Heinz Company, together with its subsidiaries (collectively referred to as the “Company”), are unaudited. In the opinion of management, all adjustments, which are of a normal and recurring nature, except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair statement of the results of operations of these interim periods have been included. The results for interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the Company’s business. These statements should be read in conjunction with the Company’s consolidated financial statements and related notes, and management’s discussion and analysis of financial condition and results of operations which appear in the Company’s Annual Report on Form 10-K for the year ended April 30, 2008.

 

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value, but does not expand the use of fair value to new accounting transactions. SFAS No. 157 is effective for financial assets and liabilities in fiscal years beginning after November 15, 2007, and for non-financial assets and liabilities in fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 for its financial assets and liabilities on May 1, 2008. See Note No. 11 for additional information. The Company is currently evaluating the impact of SFAS No. 157 for its non-financial assets and liabilities that are recognized at fair value on a non-recurring basis, including goodwill, other intangible assets, exit liabilities and purchase price allocations.

 

On May 1, 2008, the Company adopted the measurement date provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” The measurement date provisions require plan assets and obligations to be measured as of the date of the year-end financial statements. The Company previously measured its foreign pension and other postretirement benefit obligations as of March 31 each year. The adoption of the measurement date provisions of SFAS No. 158 did not have a material effect on the Company’s consolidated statement of income or condensed consolidated balance sheet for the quarter ended July 30, 2008.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An 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 Fiscal 2010. The Company is currently evaluating the impact of adopting SFAS Nos. 141(R) and 160 on its consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” This new standard requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative

instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of adopting SFAS No. 161 in the fourth quarter of Fiscal 2009.

 

In June 2008, the FASB issued Financial Statement of Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is currently evaluating the impact of FSP EITF 03-6-1 on its consolidated financial statements.

 

 

Changes in the carrying amount of goodwill for the first quarter ended July 30, 2008, by reportable segment, are as follows:

 

 

Trademarks and other intangible assets at July 30, 2008 and April 30, 2008, subject to amortization expense, are as follows:

 

 

Amortization expense for trademarks and other intangible assets subject to amortization was $8.0 million and $7.2 million for the quarters ended July 30, 2008 and August 1, 2007, respectively. Based upon the amortizable intangible assets recorded on the balance sheet as

of July 30, 2008, annual amortization expense for each of the next five fiscal years is estimated to be approximately $32 million.

 

Intangible assets not subject to amortization at July 30, 2008 totaled $889.4 million and consisted of $718.0 million of trademarks, $135.1 million of recipes/processes, and $36.3 million of licenses. Intangible assets not subject to amortization at April 30, 2008, totaled $996.9 million and consisted of $825.2 million of trademarks, $135.3 million of recipes/processes, and $36.4 million of licenses.

 

 

The total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $127.3 million and $129.1 million, on July 30, 2008 and April 30, 2008, respectively. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $51.6 million and $55.7 million, on July 30, 2008 and April 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 at July 30, 2008 was $58.1 million and $3.4 million, respectively. The corresponding amounts of accrued interest and penalties at April 30, 2008 were $57.2 million and $2.8 million, respectively.

 

It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $27 million in the next 12 months primarily due to the progression of federal, state, and foreign audits in process. In addition, it is also reasonably possible that during the next 12 months a conclusion may be reached regarding the Company’s appeal, filed October 15, 2007, of a U.S. Court of Federal Claims decision regarding a refund claim resulting from a Fiscal 1995 transaction. Upon conclusion of the appeal, the amount of unrecognized tax benefits will decrease by approximately $43 million, the benefit of which, if any, would be reflected through additional capital.

 

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 2005, with the exception of the Company’s appeal of a U.S. Court of Federal claims decision regarding a refund claim. In the Company’s major non-U.S. jurisdictions, the Company has substantially concluded all income tax matters for years through Fiscal 2002.

 

The effective tax rate for the current quarter was 28.7% compared to 26.6% last year. The current and prior year first quarter effective tax rates both reflect a discrete benefit resulting from the tax effects of law changes in the U.K. of approximately $11 million and $12 million, respectively.

 

 

As of July 30, 2008, the Company had outstanding stock option awards, restricted stock units and restricted stock awards issued pursuant to various shareholder-approved plans and a shareholder-authorized employee stock purchase plan, as described on pages 56 to 61 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2008. The compensation cost related to these plans recognized in general and administrative expenses (“G&A”), and the related tax benefit was $6.8 million and $2.4 million for the first quarter ended July 30, 2008, and $7.2 million and $2.3 million for the first quarter ended August 1, 2007, respectively.

In Fiscal 2009, the Company granted performance awards as permitted in the Fiscal Year 2003 Stock Incentive Plan, subject to the achievement of certain performance goals. These performance awards are tied to the Company’s relative Total Shareholder Return (“Relative TSR”) Ranking within the defined Long-term Performance Program (“LTPP”) peer group and the 2-year average after-tax Return on Invested Capital (“ROIC”) metrics. The Relative TSR metric is based on the two-year cumulative return to shareholders from the change in stock price and dividends paid between the starting and ending dates. The starting value was based on the average of each LTPP peer group Company stock price for the 60 trading days prior to and including May 1, 2008. 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 2010 year end, plus dividends paid over the 2 year performance period. The Fiscal 2009-2010 LTPP will be fully funded if 2-year cumulative EPS equals or exceeds the predetermined level. The compensation cost recognized in G&A for current and prior year LTPP awards totaled $6.1 million and $6.5 million for the first quarters ended July 30, 2008 and August 1, 2007, respectively. Tax benefits related to these awards totaled $2.0 million and $2.4 million for the first quarters ended July 30, 2008 and August 1, 2007, respectively.

 

 

The components of net periodic benefit cost are as follows:

 

 

As of July 30, 2008, the Company has contributed $28 million to fund its obligations under these plans. The Company expects to make combined cash contributions of approximately $80 million in Fiscal 2009, however actual contributions may be affected by pension asset and liability valuations during the year.

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

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

 

 

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:

 

 

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 0.9 million and 6.5 million shares of common stock for the first quarters ended July 30, 2008 and August 1, 2007, respectively, were not included in the computation of diluted earnings per share because inclusion of these options would be anti-dilutive. These options expire at various points in time through 2014.

 

 

 

 

On July 15, 2008, the Company completed the sale of $500 million 5.35% Notes due 2013. Also on the same day the Company’s H. J. Heinz Finance Company (“HFC”) subsidiary completed the sale of $350 million or 3,500 shares of its Series B Preferred Stock. The proceeds from both

transactions were used for general corporate purposes, including the repayment of commercial paper and other indebtedness incurred to redeem HFC’s Series A Preferred Stock.

 

HFC’s 3,500 mandatorily redeemable preferred shares are classified as long-term debt. Each share of preferred stock is entitled to annual cash dividends at a rate of 8% or $8,000 per share. On July 15, 2013, each share will be redeemed for $100,000 in cash for a total redemption price of $350 million.

 

 

The Company adopted SFAS No. 157, “Fair Value Measurements” for its financial assets and liabilities on May 1, 2008. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a three level fair value hierarchy to prioritize the inputs used in valuations, as defined below:

 

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

 

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

 

Level 3:  Unobservable inputs for the asset or liability.

 

As of July 30, 2008, the fair values of the Company’s assets and liabilities measured on a recurring basis are categorized as follows:

 

 

 

 

 

The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain derivative financial instruments to manage its foreign currency, debt and interest rate exposures. There have been no material changes in the Company’s market risk during the first quarter ended July 30, 2008. For additional information, refer to pages 27-28 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2008.

 

As of July 30, 2008, the Company is hedging forecasted transactions for periods not exceeding two years. During the next 12 months, the Company expects $3.1 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 first quarters ended July 30, 2008 and August 1, 2007. Amounts

reclassified to earnings because the hedged transaction was no longer expected to occur were not significant for the first quarters ended July 30, 2008 and August 1, 2007.

 

The Company had outstanding cross currency swaps with a total notional amount of $2.0 billion as of August 1, 2007, which were designated as net investment hedges of foreign operations. All of these contracts either matured or were terminated during Fiscal 2008. The Company assessed hedge effectiveness for these contracts based on changes in fair value attributable to changes in spot prices. Net losses of $5.5 million ($1.0 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 first quarter ended August 1, 2007. Gains of $2.4 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 first quarter ended August 1, 2007.

 

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 $527.0 million and $181.2 million as of July 30, 2008 and August 1, 2007, respectively, that do not qualify as hedges, but which have the impact of largely mitigating foreign currency exposures. 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/(losses) related to these contracts totaled $3.4 million and $(4.6) million at July 30, 2008 and August 1, 2007, respectively. These contracts are scheduled to mature within Fiscal 2009.

 

 

In August 2008, the Company completed the purchase of Bénédicta, a table top sauce, mayonnaise and salad dressing business in France for approximately $117 million.

 

 

THREE MONTHS ENDED JULY 30, 2008 AND AUGUST 1, 2007

 

Results of Operations

 

Sales for the three months ended July 30, 2008 increased $335 million, or 14.9%, to $2.58 billion. Volume increased 5.0%, due to solid growth in the North American Consumer Products segment and the emerging markets (Russia, Poland, the Czech Republic, Indonesia, China, India, South Africa, the Middle East and Latin America) combined with strong performance of Heinz^® branded products in the U.K. and Continental Europe. Notably, the emerging markets produced a 14% volume increase and accounted for approximately one-third of Heinz’s total sales growth in the first quarter of Fiscal 2009. In addition, sales of the infant/nutrition category grew 29.5%, driven by increased volume of 12.8%. These increases were partially offset by volume declines in the U.S. Foodservice segment. Net pricing increased sales by 5.2%, as price increases were taken across the Company’s portfolio to help offset continuing increases in commodity costs. Acquisitions, net of divestitures, increased sales by 0.7%. Foreign exchange translation rates increased sales by 4.0%.

 

Sales of the Company’s top 15 brands grew 16.6% from the year-ago quarter, driven by increases in Heinz^® branded products around the globe. New product introductions under the Smart Ones^® and Ore-Ida^® brands also helped drive this growth, along with a significant improvement in the ABC^® brand in Indonesia.

 

Gross profit increased $96 million, or 11.4%, to $934 million, benefiting from favorable volume, pricing and foreign exchange translation rates. The gross profit margin decreased to 36.2% from 37.3%, as pricing and productivity improvements were more than offset by increased commodity costs, reflecting higher costs for packaging and all of our key ingredients.

 

Selling, general and administrative expenses (“SG&A”) increased $70 million, or 14.9%, to $542 million, and were flat as a percentage of sales at 21.0%. The 14.9% increase in SG&A is due to an increase in marketing expense, higher selling and distribution costs (“S&D”) resulting from increased volume, higher fuel costs and movements in foreign exchange translation rates. SG&A was also impacted by increased spending on global task force initiatives including system capability improvements.

 

Operating income increased $26 million, or 7.0%, to $392 million, reflecting the strong sales growth and solid operating performance, partially offset by increased commodity costs.

 

Net interest expense decreased $15 million, to $63 million, largely as a result of lower average interest rates in Fiscal 2009. Other expenses, net, decreased $0.6 million, to $8 million, as decreased currency losses were partially offset by increased minority interest expense.

 

The effective tax rate for the current quarter was 28.7%, up 210 basis points compared to 26.6% last year. The current and prior year first quarter effective tax rates both reflect a discrete benefit resulting from the tax effects of law changes in the U.K. of approximately $11 million and $12 million, respectively.

 

Net income was $229 million compared to $205 million in the prior year, an increase of 11.5%, due to the increase in operating income and reduced net interest expense, partially offset by a higher effective tax rate. Diluted earnings per share was $0.72 in the current year compared to $0.63 in the prior year, up 14.3%, which also benefited from a 2.7% reduction in fully diluted shares outstanding.

 

OPERATING RESULTS BY BUSINESS SEGMENT

 

North American Consumer Products

 

Sales of the North American Consumer Products segment increased $77 million, or 11.5%, to $741 million. Volume increased 4.7%, driven largely by Smart Ones^® frozen entrees and Ore-Ida^® frozen potatoes. The Smart Ones^® increase was due to new product introductions such as Fruit Inspirations^tm, Anytime Selections^tm and Morning Express^tm. The Ore-Ida^® growth was driven by new products such as Steam n’ Mash^tm, combined with the carry-over impact of price increases taken during the fourth quarter of Fiscal 2007. Volume also benefited from the introduction of Heinz^® Nurture^® infant formula in Canada and a strong performance in Heinz^® gravy. These increases were partially offset by declines in frozen snacks due to supply constraints. Net prices grew 5.6% reflecting price increases taken across the majority of the product portfolio over the last year to help offset higher commodity costs. Favorable Canadian exchange translation rates increased sales 1.3%.

 

Gross profit increased $24 million, or 8.8%, to $301 million, due primarily to the sales increase. The gross profit margin decreased to 40.6% from 41.6%, as increased pricing and productivity improvements only partially offset increased commodity costs. Operating income increased $16 million, or 10.3%, to $168 million, due to the strong increase in sales, partially offset by higher commodity costs and increased S&D due to higher volume and fuel costs.

 

Europe

 

Heinz Europe sales increased $152 million, or 19.9%, to $918 million. Volume increased 6.4%, principally due to new product introductions and increased promotional activity in the U.K. and Continental Europe. Volume increases were achieved on Heinz^® ketchup across Europe, Heinz^® beans and salad cream in the U.K., Pudliszki^® branded products in Poland and Italian infant nutrition. Net pricing increased 4.3%, driven by Heinz^® ketchup, beans and soup, broad-based increases in our Russian market, convenience meals in the Netherlands and Italian infant nutrition products, partially offset by increased promotional spending in the U.K. Acquisitions, net of divestitures, increased sales 1.2%, primarily due to the acquisition of the Wyko^® sauce business in the Netherlands at the end of Fiscal 2008. Favorable foreign exchange translation rates increased sales by 8.0%.

 

Gross profit increased $50 million, or 16.2%, to $356 million, driven by increased sales. Although foreign exchange translation has favorably impacted sales, cross currency purchases between the Euro and British Pound offset most of that benefit at gross profit. The gross profit margin decreased to 38.8% from 40.1%, as increased commodity costs and higher manufacturing costs in the U.K. were only partially offset by the improved pricing. Operating income increased $18 million, or 13.3%, to $157 million, due to the increase in sales, partially offset by higher commodity costs, volume and fuel-related increases in S&D, a new distribution process in Russia and higher general and administrative expenses (“G&A”) reflecting task force spending and expenses related to system implementations.

 

Asia/Pacific

 

Heinz Asia/Pacific sales increased $86 million, or 23.3%, to $458 million. Volume increased 10.2%, reflecting significant improvements in ABC^® syrup in Indonesia, resulting from the timing of the Ramadan holiday and increased consumer demand. In addition, volume increases were achieved in Cottee’s^® branded condiments in Australia, beverage sales in India and Heinz^® branded infant nutrition in China. Pricing increased 5.6%, due to increases on ABC^® sauces and syrup in Indonesia, convenience meals in Australia and nutritional beverages in India. This pricing helped offset continuing increases in commodity and fuel costs. Acquisitions increased sales 1.8%, and favorable exchange translation rates increased sales by 5.8%.

Gross profit increased $32 million, or 25.9%, to $157 million, and the gross profit margin expanded to 34.3% from 33.6%. The improvement in gross profit was due to increased volume, pricing and foreign exchange translation rates, which more than offset increased commodity costs. Operating income increased by $15 million, or 29.8%, to $67 million, primarily reflecting the increase in sales and gross margin, partially offset by increased marketing spending and increased S&D related to higher volume.

 

U.S. Foodservice

 

Sales of the U.S. Foodservice segment decreased $10 million, or 2.8%, to $353 million. Pricing increased sales 1.5%, largely due to increases on Heinz^® ketchup, portion control condiments and tomato products, partially offset by increased promotional spending. Volume decreased by 4.3%, as higher volume on frozen desserts was more than offset by declines in ketchup, portion control products, soup and appetizers. The volume reflects reduced restaurant foot traffic, the elimination of lower margin products and customers, as well as increased competition on our non-branded products.

 

Gross profit decreased $21 million, or 20.9%, to $79 million, and the gross profit margin decreased to 22.5% from 27.6%, due to higher commodity costs and lower volumes. Operating income decreased $19 million, or 42.7%, to $25 million, which is primarily due to the decline in gross profit. The Company continues to simplify its U.S. Foodservice business, recently closing a manufacturing plant in Dallas and reducing administrative workforce levels. In the quarter, the costs to streamline the business were offset by the gain on the sale of a small, non-core portion control business.

 

Rest of World

 

Sales for Rest of World increased $30 million, or 36.4%, to $113 million. Volume increased 12.6% driven by increases in Latin America and the Middle East. Higher pricing increased sales by 24.6%, largely due to price increases and reduced promotions in Latin America as well as commodity-related price increases in South Africa and Middle East. Foreign exchange translation rates decreased sales 0.9%.

 

Gross profit increased $9 million, or 32.6%, to $38 million, due mainly to increased pricing and higher volume, partially offset by increased commodity costs. Operating income increased $2 million, or 24.6% to $13 million.

 

Liquidity and Financial Position

 

Cash (used for)/provided by operating activities was $(14) million in the current year and $9 million in the prior year. The decrease in the first quarter of Fiscal 2009 versus Fiscal 2008 was primarily due to additional contributions made this year to fund the Company’s pension plans and the current year payment of the incentive compensation accruals from Fiscal 2008, partially offset by an increase from the timing of tax payments. The Company’s cash conversion cycle increased 8 days, to 52 days in the first quarter of Fiscal 2009, which was largely due to accounts payable which increased only modestly while cost of goods sold grew significantly as a result of volume and higher commodity costs.

 

Cash used for investing activities totaled $35 million compared to $101 million last year. Proceeds from divestitures provided cash of $5 million in the first quarter of Fiscal 2009, resulting from the sale of a small portion control foodservice business in the U.S. In the first quarter of Fiscal 2008, cash paid for acquisitions, net of divestitures, required $24 million, primarily related to the acquisition of the license to the Cottee’s^® and Rose’s^® premium branded jams, jellies and toppings business in Australia and New Zealand, partially offset by the divestiture of a tomato paste business in Portugal. Capital expenditures totaled $42 million (1.6% of sales) compared to $58 million (2.6% of sales) in the prior year. This reduction is timing-related, as capital spending is expected to increase significantly in line with our full year estimate of 3.0% to 3.5% of sales. Proceeds from disposals of property, plant and equipment were $0.7 million compared to $0.2 million in the prior year.

Cash used for financing activities totaled $13 million compared to $224 million last year. Proceeds from long-term debt were $850 million in the current year. The current year proceeds represent the sale of $500 million 5.35% Notes due 2013 as well as the sale of $350 million or 3,500 shares of H.J. Heinz Finance Company’s (a subsidiary of Heinz) Series B Preferred Stock. The proceeds from both transactions were used for general corporate purposes, including the repayment of commercial paper and other indebtedness incurred to redeem H.J. Heinz Finance Company’s Series A Preferred Stock. As a result, payments on commercial paper and short-term debt were $398 million and payments on long-term debt were $337 million this year compared to proceeds from commercial paper and short-term debt of $16 million and payments on long-term debt of $1 million in the prior year. Cash proceeds from option exercises, net of treasury stock purchases, provided $1 million of cash in the current year. Cash used for the purchases of treasury stock, net of proceeds from option exercises, was $127 million in the prior year. Dividend payments totaled $131 million, compared to $123 million for the same period last year, reflecting a 9.2% increase in the dividend on common stock.

 

At July 30, 2008, the Company had total debt of $5.26 billion (including $169 million relating to the SFAS No. 133 hedge accounting adjustments) and cash and cash equivalents of $554 million. Total debt balances since prior year end increased slightly primarily to fund our capital spending and inventory levels in support of future growth.

 

The Company and H.J. Heinz Finance Company maintain a $2 billion credit agreement that expires in August 2009. The credit agreement supports the Company’s commercial paper borrowings. As a result, these borrowings are classified as long-term debt based upon the Company’s 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 Company’s foreign subsidiaries. These resources, the Company’s existing cash balance, strong annual 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 July 30, 2008, the Company’s long-term debt ratings at Moody’s, Standard & Poor’s and Fitch Rating were Baa2, BBB and BBB, respectively.

 

The Company has continued to experience inflationary increases in commodity input costs in the first quarter and expects this trend to continue for the remainder of Fiscal 2009. The most significant commodity cost increases in Fiscal 2009 have been for packaging, edible oils and tomato products. Strong sales growth, price increases, continued productivity improvements and the Company’s geographic diversity are helping to offset these cost 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 Company’s materials and processes, certain supply contracts contain penalty provisions for early terminations. The Company does not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. There have been no material changes to contractual obligations during the three months ended July 30, 2008. For additional information, refer to page 26 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2008.

 

As of the end of the first quarter, the total amount of gross unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions

only impacting the timing of tax benefits, was $189 million. However, the net obligation to taxing authorities was $105 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 obligations within the next year. The Company is unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities may occur.

 

Recently Issued Accounting Standards

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value, but does not expand the use of fair value to new accounting transactions. SFAS No. 157 is effective for financial assets and liabilities in fiscal years beginning after November 15, 2007, and for non-financial assets and liabilities in fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 for its financial assets and liabilities on May 1, 2008. See Note No. 11, “Fair Value Measurements,” in Item 1- “Financial Statements” for additional information. The Company is currently evaluating the impact of SFAS No. 157 for its non-financial assets and liabilities that are recognized at fair value on a non-recurring basis, including goodwill, other intangible assets, exit liabilities and purchase price allocations.

 

On May 1, 2008, the Company adopted the measurement date provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” The measurement date provisions require plan assets and obligations to be measured as of the date of the year-end financial statements. The Company previously measured its foreign pension and other postretirement benefit obligations as of March 31 each year. The adoption of the measurement date provisions of SFAS No. 158 did not have a material effect on the Company’s consolidated statement of income or condensed consolidated balance sheet for the quarter ended July 30, 2008.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An 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 Fiscal 2010. The Company is currently evaluating the impact of adopting SFAS Nos. 141(R) and 160 on its consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” This new standard requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of adopting SFAS No. 161 in the fourth quarter of Fiscal 2009. In June 2008, the FASB issued Financial Statement of Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to

the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is currently evaluating the impact of FSP EITF 03-6-1 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 in management’s discussion and analysis, and the financial statements and footnotes, are forward-looking statements based on management’s estimates, assumptions, and projections. These forward-looking statements are subject to risks, uncertainties, assumptions and other important factors, many of which may be beyond the Company’s control and could cause actual results to differ materially from those expressed or implied in this report and the financial statements and footnotes. Uncertainties contained in such statements include, but are not limited to,

 

 

 

The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by the securities laws.

 

 

There have been no material changes in the Company’s market risk during the first quarter ended July 30, 2008. For additional information, refer to pages 27-28 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2008.

 

 

(a) Evaluation of Disclosure Controls and Procedures

 

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

 

(b) Changes in Internal Control over Financial Reporting

 

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

 

PART II—OTHER INFORMATION

 

 

Nothing to report under this item.

 

 

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended April 30, 2008. The risk factors disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended April 30, 2008, 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.

 

 

In the first quarter of Fiscal 2009, the Company repurchased the following number of shares of its common stock:

 

 

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 July 30, 2008, the maximum number of shares that may yet be purchased under the 2006 program is 6,716,192.

 

 

Nothing to report under this item.

 

 

Nothing to report under this item.

 

 

Nothing to report under this item.

 

 

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

designated as being incorporated herein by reference are set forth herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K.

 

   3(i). The Company’s Third Amended and Restated Articles of Incorporation.

 

   3(ii). The Company’s By-Laws, as amended and effective August 13, 2008.

 

   10(a). Management contracts and compensatory plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

   (xiv). Third Amended and Restated Global Stock Purchase Plan.

 

 

 

 

   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.

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

 

H. J. HEINZ COMPANY

  (Registrant)

 

Date: August 21, 2008

Arthur B. Winkleblack

Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)

 

Date: August 21, 2008

 

Edward J. McMenamin

Senior Vice President—Finance

and Corporate Controller

(Principal Accounting Officer)

 

EXHIBIT INDEX

 

DESCRIPTION OF EXHIBIT

 

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

 

3(i).  The Company’s Third Amended and Restated Articles of Incorporation.

 

3(ii).  The Company’s By-Laws, as amended and effective August 13, 2008.

 

10(a).  Management contracts and compensatory plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.