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EXCEL - IDEA: XBRL DOCUMENT - HEINZ H J CO | Financial_Report.xls |
EX-12 - EX-12 - HEINZ H J CO | l38251exv12.htm |
EX-31.A - EX-31.A - HEINZ H J CO | l38251exv31wa.htm |
EX-31.B - EX-31.B - HEINZ H J CO | l38251exv31wb.htm |
EX-32.A - EX-32.A - HEINZ H J CO | l38251exv32wa.htm |
EX-32.B - EX-32.B - HEINZ H J CO | l38251exv32wb.htm |
Table of Contents
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended
January 27, 2010
|
||
OR
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from
to
|
Commission File Number 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as
specified in its charter)
PENNSYLVANIA
|
25-0542520 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
One PPG Place, Pittsburgh, Pennsylvania (Address of Principal Executive Offices) |
15222 (Zip Code) |
Registrants telephone number, including area code:
(412) 456-5700
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes X No
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the Registrant was required to submit and post such
files). 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 Registrants Common Stock, par
value $0.25 per share, outstanding as of January 27, 2010
was 316,236,278 shares.
TABLE OF CONTENTS
Table of Contents
PART IFINANCIAL
INFORMATION
Item 1. | Financial Statements |
Third Quarter Ended | ||||||||
January 27, 2010 |
January 28, 2009 |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(In thousands, Except |
||||||||
per Share Amounts) | ||||||||
Sales
|
$ | 2,681,702 | $ | 2,379,711 | ||||
Cost of products sold
|
1,676,436 | 1,528,997 | ||||||
Gross profit
|
1,005,266 | 850,714 | ||||||
Selling, general and administrative expenses
|
568,756 | 467,272 | ||||||
Operating income
|
436,510 | 383,442 | ||||||
Interest income
|
4,166 | 25,713 | ||||||
Interest expense
|
71,978 | 95,931 | ||||||
Other (expense)/income, net
|
(2,438 | ) | 17,498 | |||||
Income from continuing operations before income taxes
|
366,260 | 330,722 | ||||||
Provision for income taxes
|
99,523 | 85,659 | ||||||
Income from continuing operations
|
266,737 | 245,063 | ||||||
Loss from discontinued operations, net of tax
|
(35,588 | ) | (1,287 | ) | ||||
Net income
|
231,149 | 243,776 | ||||||
Less: Net income attributable to the noncontrolling interest
|
2,622 | 1,513 | ||||||
Net income attributable to H. J. Heinz Company
|
$ | 228,527 | $ | 242,263 | ||||
Income/(loss) per common share:
|
||||||||
Diluted
|
||||||||
Continuing operations attributable to H. J. Heinz Company common
shareholders
|
$ | 0.83 | $ | 0.76 | ||||
Discontinued operations attributable to H. J. Heinz Company
common shareholders
|
(0.11 | ) | | |||||
Net income attributable to H. J. Heinz Company common
shareholders
|
$ | 0.72 | $ | 0.76 | ||||
Average common shares outstandingdiluted
|
318,036 | 318,733 | ||||||
Basic
|
||||||||
Continuing operations attributable to H. J. Heinz Company common
shareholders
|
$ | 0.83 | $ | 0.77 | ||||
Discontinued operations attributable to H. J. Heinz Company
common shareholders
|
(0.11 | ) | | |||||
Net income attributable to H. J. Heinz Company common
shareholders
|
$ | 0.72 | $ | 0.77 | ||||
Average common shares outstandingbasic
|
315,955 | 314,538 | ||||||
Cash dividends per share
|
$ | 0.42 | $ | 0.415 | ||||
Amounts attributable to H. J. Heinz Company common shareholders:
|
||||||||
Income from continuing operations, net of tax
|
$ | 264,115 | $ | 243,550 | ||||
Loss from discontinued operations, net of tax
|
(35,588 | ) | (1,287 | ) | ||||
Net income
|
$ | 228,527 | $ | 242,263 | ||||
(Per share amounts may not add due to rounding)
|
See Notes to Condensed Consolidated Financial Statements.
2
Table of Contents
Nine Months Ended | ||||||||
January 27, 2010 |
January 28, 2009 |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(In thousands, Except |
||||||||
per Share Amounts) | ||||||||
Sales
|
$ | 7,770,173 | $ | 7,495,563 | ||||
Cost of products sold
|
4,939,349 | 4,802,027 | ||||||
Gross profit
|
2,830,824 | 2,693,536 | ||||||
Selling, general and administrative expenses
|
1,616,837 | 1,530,058 | ||||||
Operating income
|
1,213,987 | 1,163,478 | ||||||
Interest income
|
40,341 | 47,984 | ||||||
Interest expense
|
226,592 | 254,514 | ||||||
Other (expense)/income, net
|
(17,478 | ) | 97,125 | |||||
Income from continuing operations before income taxes
|
1,010,258 | 1,054,073 | ||||||
Provision for income taxes
|
273,301 | 290,883 | ||||||
Income from continuing operations
|
736,957 | 763,190 | ||||||
Loss from discontinued operations, net of tax
|
(49,389 | ) | (2,671 | ) | ||||
Net income
|
687,568 | 760,519 | ||||||
Less: Net income attributable to the noncontrolling interest
|
15,042 | 12,582 | ||||||
Net income attributable to H. J. Heinz Company
|
$ | 672,526 | $ | 747,937 | ||||
Income/(loss) per common share:
|
||||||||
Diluted
|
||||||||
Continuing operations attributable to H. J. Heinz Company common
shareholders
|
$ | 2.27 | $ | 2.35 | ||||
Discontinued operations attributable to H. J. Heinz Company
common shareholders
|
(0.16 | ) | (0.01 | ) | ||||
Net income attributable to H. J. Heinz Company common
shareholders
|
$ | 2.11 | $ | 2.34 | ||||
Average common shares outstandingdiluted
|
317,627 | 317,995 | ||||||
Basic
|
||||||||
Continuing operations attributable to H. J. Heinz Company common
shareholders
|
$ | 2.28 | $ | 2.38 | ||||
Discontinued operations attributable to H. J. Heinz Company
common shareholders
|
(0.16 | ) | (0.01 | ) | ||||
Net income attributable to H. J. Heinz Company common
shareholders
|
$ | 2.13 | $ | 2.38 | ||||
Average common shares outstandingbasic
|
315,519 | 313,417 | ||||||
Cash dividends per share
|
$ | 1.26 | $ | 1.245 | ||||
Amounts attributable to H. J. Heinz Company common shareholders:
|
||||||||
Income from continuing operations, net of tax
|
$ | 721,915 | $ | 750,608 | ||||
Loss from discontinued operations, net of tax
|
(49,389 | ) | (2,671 | ) | ||||
Net income
|
$ | 672,526 | $ | 747,937 | ||||
(Per share amounts may not add due to rounding)
|
See Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
January 27, 2010 |
April 29, 2009* |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(In Thousands) | ||||||||
Assets
|
||||||||
Current Assets:
|
||||||||
Cash and cash equivalents
|
$ | 562,307 | $ | 373,145 | ||||
Trade receivables, net
|
784,865 | 881,164 | ||||||
Other receivables, net
|
293,768 | 290,633 | ||||||
Inventories:
|
||||||||
Finished goods and
work-in-process
|
1,015,976 | 973,983 | ||||||
Packaging material and ingredients
|
360,194 | 263,630 | ||||||
Total inventories
|
1,376,170 | 1,237,613 | ||||||
Prepaid expenses
|
131,796 | 125,765 | ||||||
Other current assets
|
107,668 | 36,701 | ||||||
Total current assets
|
3,256,574 | 2,945,021 | ||||||
Property, plant and equipment
|
4,420,277 | 4,109,562 | ||||||
Less accumulated depreciation
|
2,361,691 | 2,131,260 | ||||||
Total property, plant and equipment, net
|
2,058,586 | 1,978,302 | ||||||
Goodwill
|
2,826,752 | 2,687,788 | ||||||
Trademarks, net
|
918,187 | 889,815 | ||||||
Other intangibles, net
|
415,441 | 405,351 | ||||||
Long-term restricted cash
|
| 192,736 | ||||||
Other non-current assets
|
595,645 | 565,171 | ||||||
Total other non-current assets
|
4,756,025 | 4,740,861 | ||||||
Total assets
|
$ | 10,071,185 | $ | 9,664,184 | ||||
* | 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
Table of Contents
January 27, 2010 |
April 29, 2009* |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(In Thousands) | ||||||||
Liabilities and Equity
|
||||||||
Current Liabilities:
|
||||||||
Short-term debt
|
$ | 43,632 | $ | 61,297 | ||||
Portion of long-term debt due within one year
|
4,897 | 4,341 | ||||||
Trade payables
|
917,804 | 955,430 | ||||||
Other payables
|
134,997 | 157,877 | ||||||
Salaries and wages
|
89,410 | 91,283 | ||||||
Accrued marketing
|
318,058 | 233,316 | ||||||
Other accrued liabilities
|
491,007 | 485,406 | ||||||
Income taxes
|
88,710 | 73,896 | ||||||
Total current liabilities
|
2,088,515 | 2,062,846 | ||||||
Long-term debt
|
4,764,221 | 5,076,186 | ||||||
Deferred income taxes
|
533,690 | 345,749 | ||||||
Non-pension post-retirement benefits
|
222,919 | 214,786 | ||||||
Other liabilities
|
571,695 | 685,512 | ||||||
Total long-term liabilities
|
6,092,525 | 6,322,233 | ||||||
Equity:
|
||||||||
Capital stock
|
107,844 | 107,844 | ||||||
Additional capital
|
665,744 | 737,917 | ||||||
Retained earnings
|
6,797,957 | 6,525,719 | ||||||
7,571,545 | 7,371,480 | |||||||
Less:
|
||||||||
Treasury stock at cost (114,860 shares at January 27,
2010 and 116,237 shares at April 29, 2009)
|
4,818,295 | 4,881,842 | ||||||
Accumulated other comprehensive loss
|
929,597 | 1,269,700 | ||||||
Total H. J. Heinz Company shareholders equity
|
1,823,653 | 1,219,938 | ||||||
Noncontrolling interest
|
66,492 | 59,167 | ||||||
Total equity
|
1,890,145 | 1,279,105 | ||||||
Total liabilities and equity
|
$ | 10,071,185 | $ | 9,664,184 | ||||
* | 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. Noncontrolling (minority) interest has been reclassified and presented as a component of equity as a result of the adoption of new accounting guidance (see Note 3). |
See Notes to Condensed Consolidated Financial Statements.
5
Table of Contents
Nine Months Ended | ||||||||
January 27, 2010 |
January 28, 2009 |
|||||||
FY 2010 | FY 2009 | |||||||
(Unaudited) | ||||||||
(Thousands of Dollars) | ||||||||
Cash Flows from Operating Activities:
|
||||||||
Net income
|
$ | 687,568 | $ | 760,519 | ||||
Adjustments to reconcile net income to cash provided by
operating activities:
|
||||||||
Depreciation
|
183,912 | 182,466 | ||||||
Amortization
|
35,524 | 29,337 | ||||||
Deferred tax provision
|
204,246 | 68,215 | ||||||
Pension contributions
|
(242,404 | ) | (54,778 | ) | ||||
Other items, net
|
146,728 | (14,356 | ) | |||||
Changes in current assets and liabilities, excluding effects of
acquisitions and divestitures:
|
||||||||
Receivables securitization facility
|
146,800 | | ||||||
Receivables
|
11,102 | (86,889 | ) | |||||
Inventories
|
(81,201 | ) | (154,143 | ) | ||||
Prepaid expenses and other current assets
|
6,240 | (5,638 | ) | |||||
Accounts payable
|
(112,512 | ) | (192,327 | ) | ||||
Accrued liabilities
|
61,210 | (50,028 | ) | |||||
Income taxes
|
(45,091 | ) | 23,539 | |||||
Cash provided by operating activities
|
1,002,122 | 505,917 | ||||||
Cash Flows from Investing Activities:
|
||||||||
Capital expenditures
|
(150,419 | ) | (183,447 | ) | ||||
Proceeds from disposals of property, plant and equipment
|
1,334 | 1,366 | ||||||
Acquisitions, net of cash acquired
|
(73,376 | ) | (287,059 | ) | ||||
Proceeds from divestitures
|
18,417 | 12,895 | ||||||
Change in restricted cash
|
192,736 | (192,736 | ) | |||||
Other items, net
|
(5,262 | ) | (1,916 | ) | ||||
Cash used for investing activities
|
(16,570 | ) | (650,897 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Payments on long-term debt
|
(622,704 | ) | (361,193 | ) | ||||
Proceeds from long-term debt
|
440,117 | 849,844 | ||||||
Net (payments on)/proceeds from commercial paper and short-term
debt
|
(253,168 | ) | 179,200 | |||||
Dividends
|
(399,615 | ) | (394,317 | ) | ||||
Purchases of treasury stock
|
| (181,431 | ) | |||||
Exercise of stock options
|
22,465 | 263,235 | ||||||
Other items, net
|
9,300 | 6,149 | ||||||
Cash (used for)/provided by financing activities
|
(803,605 | ) | 361,487 | |||||
Effect of exchange rate changes on cash and cash equivalents
|
7,215 | (143,253 | ) | |||||
Net increase in cash and cash equivalents
|
189,162 | 73,254 | ||||||
Cash and cash equivalents at beginning of year
|
373,145 | 617,687 | ||||||
Cash and cash equivalents at end of period
|
$ | 562,307 | $ | 690,941 | ||||
See Notes to Condensed Consolidated Financial Statements.
6
Table of Contents
H. J.
HEINZ COMPANY AND SUBSIDIARIES
(Unaudited)
(1) | Basis of Presentation |
The interim condensed consolidated financial statements of H. J.
Heinz Company, together with its subsidiaries (collectively
referred to as the Company), are unaudited. In the
opinion of management, all adjustments, which are of a normal
and recurring nature, except those which have been disclosed
elsewhere in this Quarterly Report on
Form 10-Q,
necessary for a fair statement of the results of operations of
these interim periods, have been included. The results for
interim periods are not necessarily indicative of the results to
be expected for the full fiscal year due to the seasonal nature
of the Companys business. Certain prior year amounts have
been reclassified to conform with the Fiscal 2010 presentation.
These statements should be read in conjunction with the
Companys consolidated financial statements and related
notes, and managements discussion and analysis of
financial condition and results of operations which appear in
the Companys Annual Report on
Form 10-K
for the year ended April 29, 2009. Subsequent events
occurring after January 27, 2010 were evaluated through
February 25, 2010, the date these financial statements were
issued.
(2) | Venezuela |
Foreign
Currency
The local currency in Venezuela is the bolivar fuerte
(VEF). A currency control board exists in Venezuela
that is responsible for foreign exchange procedures, including
approval of requests for exchanges of VEF for U.S. dollars
at the official (government established) exchange rate. Our
business in Venezuela has historically been successful in
obtaining U.S. dollars at the official exchange rate for
imports of ingredients, packaging, manufacturing equipment, and
other necessary inputs, and for dividend remittances, albeit on
a delay. While an unregulated parallel market exists for
exchanging VEF for U.S dollars through securities transactions,
our Venezuelan subsidiary has no recent history of entering into
such exchange transactions.
The Company uses the official exchange rate to translate the
financial statements of its Venezuelan subsidiary, since we
expect to obtain U.S. dollars at the official rate for
future dividend remittances. The official exchange rate in
Venezuela had been fixed at 2.15 VEF to 1 U.S. dollar for
several years, despite significant inflation. On January 8,
2010, the Venezuelan government announced the devaluation of its
currency relative to the U.S. dollar. The official exchange
rate for imported goods classified as essential, such as food
and medicine, changed from 2.15 to 2.60, while payments for
other non-essential goods moved to an exchange rate of 4.30. The
majority, if not all, of our imported products in Venezuela are
expected to fall into the essential classification and qualify
for the 2.60 rate. However, our Venezuelan subsidiarys
financial statements are translated using the 4.30 rate, as this
is the rate expected to be applicable to dividend repatriations.
During the third quarter of Fiscal 2010, the Company recorded a
$59 million currency translation loss as a result of the
currency devaluation, which has been reflected as a component of
accumulated other comprehensive loss within unrealized
translation adjustment. The net asset position of our Venezuelan
subsidiary has also been reduced as a result of the devaluation
to approximately $66 million at January 27, 2010.
Highly
Inflationary Economy
An economy is considered highly inflationary under
U.S. GAAP if the cumulative inflation rate for a three year
period meets or exceeds 100 percent. Based on the blended
National Consumer
7
Table of Contents
Price Index, the Venezuelan economy exceeded the three year
cumulative inflation rate of 100 percent during the third
quarter of Fiscal 2010. As a result, the financial statements of
our Venezuelan subsidiary will be consolidated and reported
under highly inflationary accounting rules beginning on
January 28, 2010, the first day of our fiscal fourth
quarter. Under highly inflationary accounting, the financial
statements of our Venezuelan subsidiary will be remeasured into
the Companys reporting currency (U.S. dollars) and
future exchange gains and losses from the remeasurement of
monetary assets and liabilities will be reflected in current
earnings, rather than accumulated other comprehensive loss on
the balance sheet, until such time as the economy is no longer
considered highly inflationary.
The impact of applying highly inflationary accounting for
Venezuela on our consolidated financial statements is dependent
upon movements in the applicable exchange rates (at this time,
the official rate) between the local currency and the
U.S. dollar and the amount of monetary assets and
liabilities included in our subsidiarys balance sheet. At
January 27, 2010, the U.S. dollar value of monetary
assets, net of monetary liabilities, which would be subject to
an earnings impact from exchange rate movements for our
Venezuelan subsidiary under highly inflationary accounting was
$36.9 million.
(3) | Recently Issued Accounting Standards |
On September 15, 2009, the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (the
Codification) became the single source of
authoritative generally accepted accounting principles in the
United States of America. The Codification changed the
referencing of financial standards but did not change or alter
existing U.S. GAAP. The Codification became effective for
the Company in the second quarter of Fiscal 2010.
Business
Combinations and Consolidation
On April 30, 2009, the Company adopted new accounting
guidance on business combinations and noncontrolling interests
in consolidated financial statements. The guidance on business
combinations impacts the accounting for any business
combinations completed after April 29, 2009. The nature and
extent of the impact will depend upon the terms and conditions
of any such transaction. The guidance on noncontrolling
interests changes the accounting and reporting for minority
interests, which have been recharacterized as noncontrolling
interests and classified as a component of equity. Prior period
financial statements and disclosures for existing minority
interests have been restated in accordance with this guidance.
All other requirements of this guidance will be applied
prospectively. The adoption of the guidance on noncontrolling
interests did not have a material impact on the Companys
financial statements.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for transfers of financial assets. This
amendment removes the concept of a qualifying special-purpose
entity and requires that a transferor recognize and initially
measure at fair value all assets obtained and liabilities
incurred as a result of a transfer of financial assets accounted
for as a sale. This amendment also requires additional
disclosures about any transfers of financial assets and a
transferors continuing involvement with transferred
financial assets. This amendment is effective for fiscal years
beginning after November 15, 2009, and interim periods
within those fiscal years. As of January 27, 2010, the
Company has approximately $323 million of trade receivables
associated with factoring and securitization programs that are
not recognized on the balance sheet. The Company is currently
evaluating these arrangements as well as any other potential
impact of adopting this amendment on April 29, 2010, the
first day of Fiscal 2011.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for variable interest entities. This
amendment changes how a reporting entity determines when an
entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to
8
Table of Contents
consolidate another entity is based on, among other things, the
purpose and design of the other entity and the reporting
entitys ability to direct the activities of the other
entity that most significantly impact its economic performance.
The amendment also requires additional disclosures about a
reporting entitys involvement with variable interest
entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity
affects the reporting entitys financial statements. This
amendment is effective for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal
years. The Company is currently evaluating the impact of
adopting this amendment on April 29, 2010, the first day of
Fiscal 2011.
Fair
Value
On April 30, 2009, the Company adopted new accounting
guidance on fair value measurements for its non-financial assets
and liabilities that are recognized at fair value on a
non-recurring basis, including long-lived assets, goodwill,
other intangible assets and exit liabilities. This guidance
defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and
expands disclosures about fair value measurements. This guidance
applies whenever other accounting guidance requires or permits
assets or liabilities to be measured at fair value, but does not
expand the use of fair value to new accounting transactions. The
adoption of this guidance did not have a material impact on the
Companys financial statements. See Note 14 for
additional information.
Postretirement
Benefit Plans and Equity Compensation
On April 30, 2009, the Company adopted accounting guidance
for determining whether instruments granted in share-based
payment transactions are participating securities. This guidance
states 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. As a result of adopting this guidance, the
Company has retrospectively adjusted its earnings per share data
for prior periods. The adoption of this guidance had no impact
on net income and less than a $0.01 impact on basic and diluted
earnings per share from continuing operations for the third
quarters of Fiscal 2010 and 2009. The adoption had no impact on
net income and a $0.01 impact on basic and diluted earnings per
share from continuing operations for the first nine months of
Fiscal 2010 and 2009. See Note 10 for additional
information.
In December 2008, the FASB issued new accounting guidance on
employers disclosures about postretirement benefit plan
assets. This new guidance requires enhanced disclosures about
plan assets in an employers defined benefit pension or
other postretirement plan. Companies will be required to
disclose information about how investment allocation decisions
are made, the fair value of each major category of plan assets,
the basis used to determine the overall expected long-term rate
of return on assets assumption, a description of the inputs and
valuation techniques used to develop fair value measurements of
plan assets, and significant concentrations of credit risk. This
guidance is effective for fiscal years ending after
December 15, 2009. As this guidance only requires enhanced
disclosures, its adoption during the fourth quarter of Fiscal
2010 will have no impact on the Companys financial
position, results of operations, or cash flows.
Other
Areas
In May 2009, the FASB issued new accounting guidance on
subsequent events, which establishes general standards of
accounting for and disclosure of events or transactions that
occur after the balance sheet date but before the financial
statements are issued or are available to be issued. This
guidance describes the circumstances under which an entity
should recognize events or transactions occurring after the
balance sheet date in its financial statements and
9
Table of Contents
provides guidance on the disclosures that an entity should make
about events or transactions that occurred after the balance
sheet date. The Company adopted this guidance during the first
quarter of Fiscal 2010, and its application had no impact on the
Companys consolidated financial statements.
(4) | Discontinued Operations |
During the third quarter of Fiscal 2010, the Company completed
the sale of its Appetizers And, Inc. frozen hors doeuvres
business which was previously reported within the
U.S. Foodservice segment, resulting in a $14.5 million
pre-tax ($10.4 million after-tax) loss. Also during the
third quarter, the Company completed the sale of its private
label frozen desserts business in the U.K., resulting in a
$31.4 million pre-tax ($23.6 million after-tax) loss.
During the second quarter of Fiscal 2010, the Company completed
the sale of its Kabobs frozen hors doeuvres business which
was previously reported within the U.S. Foodservice
segment, resulting in a $15.0 million pre-tax
($10.9 million after-tax) loss. The losses on each of these
transactions have been recorded in discontinued operations.
In accordance with accounting principles generally accepted in
the United States of America, the operating results related to
these businesses have been included in discontinued operations
in the Companys consolidated statements of income for all
periods presented. The following table presents summarized
operating results for these discontinued operations:
Third Quarter Ended | Nine Months Ended | |||||||||||||||
January 27, 2010 |
January 28, 2009 |
January 27, 2010 |
January 28, 2009 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(Millions of Dollars) | ||||||||||||||||
Sales
|
$ | 10.9 | $ | 34.9 | $ | 63.7 | $ | 114.8 | ||||||||
Net after-tax losses
|
$ | (1.6 | ) | $ | (1.3 | ) | $ | (4.5 | ) | $ | (2.7 | ) | ||||
Tax benefit on losses
|
$ | 0.5 | $ | 0.3 | $ | 1.8 | $ | 0.4 |
(5) | Goodwill and Other Intangible Assets |
Changes in the carrying amount of goodwill for the nine months
ended January 27, 2010, 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 April 29, 2009
|
$ | 1,074,841 | $ | 1,090,998 | $ | 248,222 | $ | 260,523 | $ | 13,204 | $ | 2,687,788 | ||||||||||||
Acquisitions
|
6,378 | | | | | 6,378 | ||||||||||||||||||
Purchase accounting adjustments
|
| (557 | ) | (1,433 | ) | | | (1,990 | ) | |||||||||||||||
Disposals
|
| (483 | ) | | (2,849 | ) | | (3,332 | ) | |||||||||||||||
Translation adjustments
|
14,501 | 83,229 | 39,706 | | 472 | 137,908 | ||||||||||||||||||
Balance at January 27, 2010
|
$ | 1,095,720 | $ | 1,173,187 | $ | 286,495 | $ | 257,674 | $ | 13,676 | $ | 2,826,752 | ||||||||||||
During the third quarter of Fiscal 2010, the Company acquired
Arthurs Fresh Company, a small chilled smoothies business
in Canada. The Company recorded a preliminary purchase price
allocation related to this acquisition, which is expected to be
finalized upon completion of valuation procedures. Operating
results of the acquired business have been included in the
consolidated statement of income from the acquisition date
forward. Pro-forma results of the Company, assuming the
acquisition had occurred at the beginning of each period
presented,
10
Table of Contents
would not be materially different from the results reported.
Also during the third quarter, the Company finalized the
purchase price allocation for the Golden Circle acquisition
resulting primarily in adjustments between goodwill, other
intangibles and income taxes. All of the purchase accounting
adjustments reflected in the above table relate to acquisitions
completed prior to April 30, 2009, the first day of Fiscal
2010.
During Fiscal 2010, the Company divested its Kabobs and
Appetizers And, Inc. frozen hors doeuvres businesses
within the U.S. Foodservice segment, and completed the sale
of its private label frozen desserts business in the U.K. These
sale transactions resulted in disposals of goodwill, trademarks
and other intangible assets. See Note 4 for additional
information.
Trademarks and other intangible assets at January 27, 2010
and April 29, 2009, subject to amortization expense, are as
follows:
January 27, 2010 | April 29, 2009 | |||||||||||||||||||||||
Accum |
Accum |
|||||||||||||||||||||||
Gross | Amort | Net | Gross | Amort | Net | |||||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||||||
Trademarks
|
$ | 277,054 | $ | (76,076 | ) | $ | 200,978 | $ | 272,710 | $ | (71,138 | ) | $ | 201,572 | ||||||||||
Licenses
|
208,186 | (151,078 | ) | 57,108 | 208,186 | (146,789 | ) | 61,397 | ||||||||||||||||
Recipes/processes
|
77,924 | (25,617 | ) | 52,307 | 72,988 | (22,231 | ) | 50,757 | ||||||||||||||||
Customer-related assets
|
182,195 | (40,762 | ) | 141,433 | 179,657 | (38,702 | ) | 140,955 | ||||||||||||||||
Other
|
67,883 | (55,055 | ) | 12,828 | 68,128 | (55,091 | ) | 13,037 | ||||||||||||||||
$ | 813,242 | $ | (348,588 | ) | $ | 464,654 | $ | 801,669 | $ | (333,951 | ) | $ | 467,718 | |||||||||||
Amortization expense for trademarks and other intangible assets
was $6.7 million for both of the third quarters ended
January 27, 2010 and January 28, 2009, and
$20.6 million and $21.1 million for the nine months
ended January 27, 2010 and January 28, 2009,
respectively. Based upon the amortizable intangible assets
recorded on the balance sheet at January 27, 2010, annual
amortization expense for each of the next five fiscal years is
estimated to be approximately $27 million.
Intangible assets not subject to amortization at
January 27, 2010 totaled $869.0 million and consisted
of $717.2 million of trademarks, $119.5 million of
recipes/processes, and $32.3 million of licenses.
Intangible assets not subject to amortization at April 29,
2009 totaled $827.4 million and consisted of
$688.2 million of trademarks, $111.6 million of
recipes/processes, and $27.6 million of licenses.
(6) | Income Taxes |
The total amount of gross unrecognized tax benefits for
uncertain tax positions, including positions impacting only the
timing of tax benefits, was $61.4 million and
$86.6 million, at January 27, 2010 and April 29,
2009, respectively. The amount of unrecognized tax benefits
that, if recognized, would impact the effective tax rate was
$43.3 million and $51.9 million, at January 27,
2010 and April 29, 2009, respectively. It is reasonably
possible that the amount of unrecognized tax benefits will
decrease by as much as $10.5 million in the next
12 months due to the expiration of statutes in various
foreign jurisdictions along with the progression of federal,
state, and foreign audits in process.
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
January 27, 2010 was $18.2 million and
$1.3 million, respectively. The corresponding amounts of
accrued interest and penalties at April 29, 2009 were
$22.5 million and $2.2 million, respectively.
11
Table of Contents
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 Australia, Canada, Italy,
the United Kingdom and the United States. The Company has
substantially concluded all national income tax matters for
years through Fiscal 2007 for the U.S. and the United
Kingdom, through Fiscal 2005 for Canada and Italy, and through
Fiscal 2004 for Australia.
The effective tax rate for the nine months ended
January 27, 2010 was 27.1% compared to 27.6% last year. The
decrease in the effective tax rate resulted primarily from
increased benefits related to on-going tax planning, along with
increased benefits resulting from resolutions and settlements of
federal, state, and foreign uncertain tax positions, partially
offset by a prior year discrete benefit resulting from the tax
effects of law changes in the U.K. of approximately
$10 million.
(7) | Employees Stock Incentive Plans and Management Incentive Plans |
At January 27, 2010, 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 55 to 60 of the Companys Annual Report
on
Form 10-K
for the fiscal year ended April 29, 2009. The compensation
cost related to these plans recognized in general and
administrative expenses (G&A), and the related
tax benefit was $8.1 million and $2.5 million for the
third quarter ended January 27, 2010 and $25.4 million
and $7.9 million for the nine months ended January 27,
2010, respectively. The compensation cost related to these plans
recognized in G&A, and the related tax benefit was
$8.0 million and $2.9 million for the third quarter
ended January 28, 2009 and $31.2 million and
$10.8 million for the nine months ended January 28,
2009, respectively.
The Company granted 1,755,714 and 1,539,703 option awards to
employees during the nine months ended January 27, 2010 and
January 28, 2009, respectively. The weighted average fair
value per share of the options granted during the nine months
ended January 27, 2010 and January 28, 2009 as
computed using the Black-Scholes pricing model, was $4.70 and
$5.77, respectively. These awards were sourced from the 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 27, |
January 28, |
|||||||
2010 | 2009 | |||||||
Dividend yield
|
4.3 | % | 3.3 | % | ||||
Expected volatility
|
20.2 | % | 14.9 | % | ||||
Weighted-average expected life (in years)
|
5.5 | 5.5 | ||||||
Risk-free interest rate
|
2.7 | % | 3.1 | % |
The Company granted 511,432 and 476,682 restricted stock units
to employees during the nine months ended January 27, 2010
and January 28, 2009 at weighted average grant prices of
$39.09 and $50.26, respectively.
In June of Fiscal 2010, 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 (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
12
Table of Contents
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 April 30,
2009. 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 2011 year end, plus dividends paid over the
2 year performance period. The compensation cost related to
current and prior period LTPP awards recognized in G&A, and
the related tax benefit was $7.2 million and
$2.4 million for the third quarter ended January 27,
2010 and $15.2 million and $5.1 million for the nine
months ended January 27, 2010, respectively. The
compensation (benefit)/cost related to LTPP awards recognized in
G&A, and the related tax (expense)/benefit was
$(0.6) million and $(0.2) million for the third
quarter ended January 28, 2009 and $12.1 million and
$4.2 million for the nine months ended January 28,
2009, respectively.
(8) | Pensions and Other Post-Retirement Benefits |
The components of net periodic benefit cost are as follows:
Third Quarter Ended | ||||||||||||||||
January 27, 2010 | January 28, 2009 | January 27, 2010 | January 28, 2009 | |||||||||||||
Pension Benefits | Post-Retirement Benefits | |||||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Service cost
|
$ | 8,528 | $ | 7,600 | $ | 1,507 | $ | 1,586 | ||||||||
Interest cost
|
37,803 | 33,111 | 3,785 | 3,787 | ||||||||||||
Expected return on plan assets
|
(53,560 | ) | (47,816 | ) | | | ||||||||||
Amortization of prior service cost
|
521 | 733 | (948 | ) | (957 | ) | ||||||||||
Amortization of unrecognized loss
|
13,523 | 7,711 | 135 | 918 | ||||||||||||
Settlement charge
|
498 | | | | ||||||||||||
Curtailment gain
|
(297 | ) | | | | |||||||||||
Net periodic benefit cost
|
7,016 | 1,339 | 4,479 | 5,334 | ||||||||||||
Less periodic benefit cost associated with discontinued
operations
|
132 | 301 | | | ||||||||||||
Periodic benefit cost associated with continuing operations
|
$ | 6,884 | $ | 1,038 | $ | 4,479 | $ | 5,334 | ||||||||
13
Table of Contents
Nine Months Ended | ||||||||||||||||
January 27, 2010 | January 28, 2009 | January 27, 2010 | January 28, 2009 | |||||||||||||
Pension Benefits | Post-Retirement Benefits | |||||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Service cost
|
$ | 24,314 | $ | 26,365 | $ | 4,476 | $ | 4,925 | ||||||||
Interest cost
|
112,803 | 112,195 | 11,282 | 11,581 | ||||||||||||
Expected return on plan assets
|
(159,335 | ) | (162,093 | ) | | | ||||||||||
Amortization of prior service cost
|
1,598 | 2,460 | (2,849 | ) | (2,854 | ) | ||||||||||
Amortization of unrecognized loss
|
40,458 | 25,281 | 405 | 2,763 | ||||||||||||
Settlement charge
|
2,587 | | | | ||||||||||||
Curtailment gain
|
(297 | ) | | | | |||||||||||
Net periodic benefit cost
|
22,128 | 4,208 | 13,314 | 16,415 | ||||||||||||
Less periodic benefit cost associated with discontinued
operations
|
924 | 1,080 | | | ||||||||||||
Periodic benefit cost associated with continuing operations
|
$ | 21,204 | $ | 3,128 | $ | 13,314 | $ | 16,415 | ||||||||
During the first nine months of Fiscal 2010, the Company
contributed $242 million to these defined benefit plans, of
which $200 million was discretionary. The Company will
likely make additional discretionary contributions to the
defined benefit plans during the fourth quarter of Fiscal 2010,
which could be well above normal contribution levels.
Determination of such amounts will be based on external market
conditions, plan status, and cash flow performance.
(9) | Segments |
The Companys segments are primarily organized by
geographical area. The composition of segments and measure of
segment profitability are consistent with that used by the
Companys management.
Descriptions of the Companys reportable segments are as
follows:
North American Consumer ProductsThis segment primarily
manufactures, markets and sells ketchup, condiments, sauces,
pasta meals, and frozen potatoes, entrees, snacks, and
appetizers to the grocery channels in the United States of
America and includes our Canadian business.
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 Australia, New Zealand, 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, frozen
soups and desserts.
14
Table of Contents
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. Inter-segment revenues, items below
the operating income line of the consolidated statements of
income, and certain costs associated with corporation-wide
productivity initiatives 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 27, 2010 |
January 28, 2009 |
January 27, 2010 |
January 28, 2009 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Net external sales:
|
||||||||||||||||
North American Consumer Products
|
$ | 815,042 | $ | 761,605 | $ | 2,333,795 | $ | 2,330,065 | ||||||||
Europe
|
878,263 | 783,675 | 2,493,054 | 2,543,673 | ||||||||||||
Asia/Pacific
|
500,060 | 354,430 | 1,461,251 | 1,198,401 | ||||||||||||
U.S. Foodservice
|
355,091 | 366,198 | 1,064,549 | 1,076,877 | ||||||||||||
Rest of World
|
133,246 | 113,803 | 417,524 | 346,547 | ||||||||||||
Consolidated Totals
|
$ | 2,681,702 | $ | 2,379,711 | $ | 7,770,173 | $ | 7,495,563 | ||||||||
Operating income (loss):
|
||||||||||||||||
North American Consumer Products
|
$ | 207,048 | $ | 191,437 | $ | 592,121 | $ | 551,048 | ||||||||
Europe
|
156,094 | 136,005 | 420,089 | 432,311 | ||||||||||||
Asia/Pacific
|
47,574 | 31,489 | 153,882 | 148,715 | ||||||||||||
U.S. Foodservice
|
42,383 | 35,521 | 116,699 | 96,432 | ||||||||||||
Rest of World
|
16,771 | 11,786 | 55,740 | 39,325 | ||||||||||||
Other:
|
||||||||||||||||
Non-Operating(a)
|
(33,360 | ) | (22,796 | ) | (108,795 | ) | (104,353 | ) | ||||||||
Upfront productivity charges(b)
|
| | (15,749 | ) | | |||||||||||
Consolidated Totals
|
$ | 436,510 | $ | 383,442 | $ | 1,213,987 | $ | 1,163,478 | ||||||||
(a) | Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. | |
(b) | Includes costs associated with targeted workforce reductions and asset write-offs related to a factory closure that were part of a corporation-wide initiative to improve productivity. |
15
Table of Contents
The Companys revenues are generated via the sale of
products in the following categories:
Third Quarter Ended | Nine Months Ended | |||||||||||||||
January 27, 2010 |
January 28, 2009 |
January 27, 2010 |
January 28, 2009 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Ketchup and Sauces
|
$ | 1,087,155 | $ | 1,000,414 | $ | 3,266,101 | $ | 3,176,066 | ||||||||
Meals and Snacks
|
1,176,485 | 1,036,324 | 3,205,882 | 3,188,868 | ||||||||||||
Infant/Nutrition
|
280,454 | 252,797 | 863,982 | 830,235 | ||||||||||||
Other
|
137,608 | 90,176 | 434,208 | 300,394 | ||||||||||||
Total
|
$ | 2,681,702 | $ | 2,379,711 | $ | 7,770,173 | $ | 7,495,563 | ||||||||
(10) | Net Income Per Common Share |
The following are reconciliations of income from continuing
operations to income from continuing operations 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 27, 2010 |
January 28, 2009 |
January 27, 2010 |
January 28, 2009 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(In Thousands) | ||||||||||||||||
Income from continuing operations attributable to H. J. Heinz
Company
|
$ | 264,115 | $ | 243,550 | $ | 721,915 | $ | 750,608 | ||||||||
Allocation to participating securities (See Note 3)
|
580 | 930 | 1,863 | 3,385 | ||||||||||||
Preferred dividends
|
3 | 3 | 9 | 9 | ||||||||||||
Income from continuing operations applicable to common stock
|
$ | 263,532 | $ | 242,617 | $ | 720,043 | $ | 747,214 | ||||||||
Average common shares outstandingbasic
|
315,955 | 314,538 | 315,519 | 313,417 | ||||||||||||
Effect of dilutive securities:
|
||||||||||||||||
Convertible preferred stock
|
105 | 108 | 105 | 106 | ||||||||||||
Stock options, restricted stock and the global stock purchase
plan
|
1,976 | 4,087 | 2,003 | 4,472 | ||||||||||||
Average common shares outstandingdiluted
|
318,036 | 318,733 | 317,627 | 317,995 | ||||||||||||
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 4.3 million shares of
common stock for the third quarter and nine months ended
January 27, 2010 and 2.8 million shares of common
stock for the third quarter and nine months ended
January 28, 2009 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 2016.
16
Table of Contents
(11) | Comprehensive Income |
The following table provides a summary of comprehensive income
attributable to H. J. Heinz Company:
Third Quarter Ended | Nine Months Ended | |||||||||||||||
January 27, 2010 |
January 28, 2009 |
January 27, 2010 |
January 28, 2009 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Net income
|
$ | 231,149 | $ | 243,776 | $ | 687,568 | $ | 760,519 | ||||||||
Other comprehensive income/(loss):
|
||||||||||||||||
Foreign currency translation adjustments
|
(171,327 | ) | (224,542 | ) | 336,028 | (1,062,731 | ) | |||||||||
Reclassification of net pension and post-retirement benefit
losses to net income
|
7,987 | 5,471 | 27,458 | 16,606 | ||||||||||||
New measurement date provisions
|
| | | 1,506 | ||||||||||||
Net deferred gains/(losses) on derivatives from periodic
revaluations
|
(8,613 | ) | (2,855 | ) | (16,967 | ) | 14,991 | |||||||||
Net deferred losses/(gains) on derivatives reclassified to
earnings
|
819 | (2,150 | ) | 970 | 798 | |||||||||||
Total comprehensive income/(loss)
|
60,015 | 19,700 | 1,035,057 | (268,311 | ) | |||||||||||
Comprehensive income attributable to the noncontrolling interest
|
(3,319 | ) | (163 | ) | (20,230 | ) | (166 | ) | ||||||||
Comprehensive income/(loss) attributable to H. J. Heinz Company
|
$ | 56,696 | $ | 19,537 | $ | 1,014,827 | $ | (268,477 | ) | |||||||
17
Table of Contents
The following table summarizes the allocation of total
comprehensive income between H. J. Heinz Company and the
noncontrolling interest for the third quarter and nine months
ended January 27, 2010:
Third Quarter Ended | Nine Months Ended | |||||||||||||||||||||||
H. J. Heinz |
Noncontrolling |
H. J. Heinz |
Noncontrolling |
|||||||||||||||||||||
Company | Interest | Total | Company | Interest | Total | |||||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||||||
Net income
|
$ | 228,527 | $ | 2,622 | $ | 231,149 | $ | 672,526 | $ | 15,042 | $ | 687,568 | ||||||||||||
Other comprehensive income:
|
||||||||||||||||||||||||
Foreign currency translation adjustments
|
(173,044 | ) | 1,717 | (171,327 | ) | 329,657 | 6,371 | 336,028 | ||||||||||||||||
Reclassification of net pension and post-retirement benefit
losses/(gains) to net income
|
8,841 | (854 | ) | 7,987 | 28,368 | (910 | ) | 27,458 | ||||||||||||||||
Net deferred losses on derivatives from periodic revaluations
|
(8,407 | ) | (206 | ) | (8,613 | ) | (16,519 | ) | (448 | ) | (16,967 | ) | ||||||||||||
Net deferred losses on derivatives reclassified to earnings
|
779 | 40 | 819 | 795 | 175 | 970 | ||||||||||||||||||
Total comprehensive income
|
$ | 56,696 | $ | 3,319 | $ | 60,015 | $ | 1,014,827 | $ | 20,230 | $ | 1,035,057 | ||||||||||||
(12) | Changes in Equity |
The following table provides a summary of the changes in the
carrying amounts of total equity, H. J. Heinz Company
shareholders equity and equity attributable to the
noncontrolling interest:
H. J. Heinz Company | ||||||||||||||||||||||||||||
Capital |
Additional |
Retained |
Treasury |
Accum |
Noncontrolling |
|||||||||||||||||||||||
Total | Stock | Capital | Earnings | Stock | OCI | Interest | ||||||||||||||||||||||
(Thousands of Dollars) | ||||||||||||||||||||||||||||
Balance as of April 29, 2009
|
$ | 1,279,105 | $ | 107,844 | $ | 737,917 | $ | 6,525,719 | $ | (4,881,842 | ) | $ | (1,269,700 | ) | $ | 59,167 | ||||||||||||
Comprehensive income(1)
|
1,035,057 | | | 672,526 | | 342,301 | 20,230 | |||||||||||||||||||||
Dividends paid to shareholders of H. J. Heinz Company
|
(399,615 | ) | | | (399,615 | ) | | | | |||||||||||||||||||
Dividends paid to noncontrolling interest
|
(7,438 | ) | | | | | | (7,438 | ) | |||||||||||||||||||
Stock options exercised, net of shares tendered for payment
|
24,342 | | (8,949 | ) | | 33,291 | | | ||||||||||||||||||||
Stock option expense
|
6,754 | | 6,754 | | | | | |||||||||||||||||||||
Restricted stock unit activity
|
6,518 | | (13,555 | ) | | 20,073 | | | ||||||||||||||||||||
Change in ownership interest in subsidiary(2)
|
(61,874 | ) | | (54,209 | ) | | | (2,198 | ) | (5,467 | ) | |||||||||||||||||
Other
|
7,296 | | (2,214 | ) | (673 | ) | 10,183 | | | |||||||||||||||||||
Balance as of January 27, 2010
|
$ | 1,890,145 | $ | 107,844 | $ | 665,744 | $ | 6,797,957 | $ | (4,818,295 | ) | $ | (929,597 | ) | $ | 66,492 | ||||||||||||
18
Table of Contents
(1) | The allocation of the individual components of comprehensive income attributable to H. J. Heinz Company and the noncontrolling interest is disclosed in Note 11. | |
(2) | During the third quarter of Fiscal 2010, the Company acquired the remaining 49% interest in Cairo Food Industries, S.A.E., an Egyptian subsidiary of the Company that manufactures ketchup, condiments and sauces, for $61.9 million. Prior to the transaction, the Company was the owner of 51% of the business. |
(13) | Debt and Financing Arrangements |
On June 12, 2009, the Company entered into a three-year
$175 million accounts receivable securitization program.
Under the terms of the agreement, the Company sells, on a
revolving basis, its receivables to a wholly-owned,
bankruptcy-remote-subsidiary. This subsidiary then sells all of
the rights, title and interest in a pool of these receivables to
an unaffiliated entity. After the sale, the Company, as servicer
of the assets, collects the receivables on behalf of the
unaffiliated entity. The amount of receivables sold through this
program as of January 27, 2010 was $146.8 million. The
proceeds from this securitization program are recognized on the
statements of cash flows as a component of operating activities.
On July 29, 2009, H. J. Heinz Finance Company
(HFC), a subsidiary of Heinz, issued
$250 million of 7.125% notes due 2039. The notes are
fully, unconditionally and irrevocably guaranteed by the
Company. The proceeds from the notes were used for payment of
the cash component of the exchange transaction discussed below
as well as various expenses relating to the exchange, and for
general corporate purposes.
On August 6, 2009, HFC issued $681 million of
7.125% notes due 2039 (of the same series as the notes
issued in July 2009), and $217.5 million of cash, in
exchange for $681 million of its outstanding 15.590% dealer
remarketable securities due December 1, 2020. In addition,
HFC terminated a portion of the remarketing option by paying the
remarketing agent a cash payment of $89.0 million. The
exchange transaction was accounted for as a modification of
debt. Accordingly, cash payments used in the exchange, including
the payment to the remarketing agent, have been accounted for as
a reduction in the book value of the debt, and will be amortized
to interest expense under the effective yield method.
Additionally, the Company terminated its $175 million
notional total rate of return swap in August 2009 in connection
with the dealer remarketable securities exchange transaction.
See Note 15 for additional information.
During the second quarter of Fiscal 2010, the Company entered
into a three-year 15 billion Japanese yen denominated
credit agreement (approximately $167 million). This credit
agreement is yen London Interbank Offered Rates (LIBOR) based
and has been effectively converted to a U.S. dollar fixed
rate facility using cross-currency interest rate swaps. See
Note 15 for additional information.
During the third quarter of Fiscal 2010, the Company paid off
its A$281 million Australian denominated borrowings
($257 million), which matured on December 16, 2009.
Also during the third quarter of Fiscal 2010, the Company
entered into a C$25 million Canadian dollar uncommitted
receivables sales facility. Under the terms of the agreement,
the Company sells its receivables from time to time to an
unaffiliated entity. After the sale, the Company, as servicer of
the assets, collects the receivables on behalf of the
unaffiliated entity. The amount of receivables sold through this
agreement as of January 27, 2010 was $18.8 million.
The Company was in compliance with all of its debt covenants as
of January 27, 2010.
(14) | Fair Value Measurements |
Fair value is defined 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.
The
19
Table of Contents
fair value hierarchy consists of three levels 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 January 27, 2010, the fair values of the
Companys assets and liabilities measured on a recurring
basis are categorized as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Assets:
|
||||||||||||||||
Derivatives(a)
|
$ | | $ | 144,069 | $ | | $ | 144,069 | ||||||||
Total assets at fair value
|
$ | | $ | 144,069 | $ | | $ | 144,069 | ||||||||
Liabilities:
|
||||||||||||||||
Derivatives(a)
|
$ | | $ | 24,894 | $ | | $ | 24,894 | ||||||||
Total liabilities at fair value
|
$ | | $ | 24,894 | $ | | $ | 24,894 | ||||||||
As of April 29, 2009, the fair values of the Companys
assets and liabilities measured on a recurring basis are
categorized as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Assets:
|
||||||||||||||||
Derivatives(a)
|
$ | | $ | 219,845 | $ | | $ | 219,845 | ||||||||
Total assets at fair value
|
$ | | $ | 219,845 | $ | | $ | 219,845 | ||||||||
Liabilities:
|
||||||||||||||||
Derivatives(a)
|
$ | | $ | 12,847 | $ | | $ | 12,847 | ||||||||
Total liabilities at fair value
|
$ | | $ | 12,847 | $ | | $ | 12,847 | ||||||||
(a) | Foreign currency derivative contracts are valued based on observable market spot and forward rates, and are classified within Level 2 of the fair value hierarchy. Interest rate swaps are valued based on observable market swap rates, and are classified within Level 2 of the fair value hierarchy. Cross-currency interest rate swaps are valued based on observable market spot and swap rates, and are classified within Level 2 of the fair value hierarchy. The Companys total rate of return swap was terminated in the second quarter of Fiscal 2010. As of April 29, 2009, the total rate of return swap was valued based on observable market swap rates and the Companys credit spread, and was classified within Level 2 of the fair value hierarchy. |
20
Table of Contents
As of January 27, 2010, the fair values of the
Companys liabilities measured on a non-recurring basis are
categorized as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Thousands of Dollars) | ||||||||||||||||
Liabilities:
|
||||||||||||||||
Targeted workforce reduction reserves(a)
|
$ | | $ | | $ | 1,288 | $ | 1,288 | ||||||||
Total liabilities at fair value
|
$ | | $ | | $ | 1,288 | $ | 1,288 | ||||||||
(a) | Targeted workforce reduction reserves are recorded based on employees date of hire, years of service, position level, and current salary, and are classified within Level 3 of the fair value hierarchy. |
The Company also recognized $1.4 million of non-cash asset
write-offs during the first nine months of Fiscal 2010 related
to a factory closure. The charge reduced the Companys
carrying value in the assets to net realizable value. The fair
value of the assets was determined based on unobservable inputs.
As of January 27, 2010, the aggregate fair value of the
Companys debt obligations, based on market quotes,
approximated the recorded value, with the exception of the
7.125% notes issued as part of the dealer remarketable
securities exchange transaction. The book value of these notes
has been reduced as a result of the cash payments made in
connection with the exchange. See Note 13. As of
April 29, 2009, the aggregate fair value of the
Companys debt obligations, based on market quotes,
approximated the recorded value.
(15) | 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, debt and interest rate exposures. At
January 27, 2010, the Company had outstanding currency
exchange, interest rate, and cross-currency interest rate
derivative contracts with notional amounts of
$1.77 billion, $1.52 billion and $167 million,
respectively. At April 29, 2009, the Company had
outstanding currency exchange, interest rate, and total rate of
return derivative contracts with notional amounts of
$1.25 billion, $1.52 billion and $175 million,
respectively.
21
Table of Contents
The following table presents the fair values and corresponding
balance sheet captions of the Companys derivative
instruments as of January 27, 2010 and April 29, 2009:
January 27, 2010 | April 29, 2009 | |||||||||||||||||||||||
Cross- |
Cross- |
|||||||||||||||||||||||
Currency |
Currency |
|||||||||||||||||||||||
Foreign |
Interest |
Interest Rate |
Foreign |
Interest |
Interest Rate |
|||||||||||||||||||
Exchange |
Rate |
Swap |
Exchange |
Rate |
Swap |
|||||||||||||||||||
Contracts | Contracts | Contracts | Contracts | Contracts | Contracts | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Derivatives designated as hedging instruments:
|
||||||||||||||||||||||||
Other receivables, net
|
$ | 6,183 | $ | 73,288 | $ | | $ | 28,406 | $ | 64,502 | $ | | ||||||||||||
Other non-current assets
|
14,928 | 48,696 | | 8,659 | 86,434 | | ||||||||||||||||||
21,111 | 121,984 | | 37,065 | 150,936 | | |||||||||||||||||||
Derivatives not designated as hedging instruments:
|
||||||||||||||||||||||||
Other receivables, net
|
974 | | | 11,644 | | | ||||||||||||||||||
Other non-current assets
|
| | | | 20,200 | | ||||||||||||||||||
974 | | | 11,644 | 20,200 | | |||||||||||||||||||
Total assets
|
$ | 22,085 | $ | 121,984 | $ | | $ | 48,709 | $ | 171,136 | $ | | ||||||||||||
Liabilities:
|
||||||||||||||||||||||||
Derivatives designated as hedging instruments:
|
||||||||||||||||||||||||
Other payables
|
$ | 14,926 | $ | | $ | 3,342 | $ | 12,198 | $ | | $ | | ||||||||||||
Other liabilities
|
537 | | 720 | 598 | | | ||||||||||||||||||
15,463 | | 4,062 | 12,796 | | | |||||||||||||||||||
Derivatives not designated as hedging instruments:
|
||||||||||||||||||||||||
Other payables
|
5,369 | | | 51 | | | ||||||||||||||||||
Other liabilities
|
| | | | | | ||||||||||||||||||
5,369 | | | 51 | | | |||||||||||||||||||
Total liabilities
|
$ | 20,832 | $ | | $ | 4,062 | $ | 12,847 | $ | | $ | | ||||||||||||
Refer to Note 14Fair Value Measurements for further
information on how fair value is determined for the
Companys derivatives.
22
Table of Contents
The following table presents the effect of derivative
instruments on the statement of income for the third quarter
ended January 27, 2010:
Third Quarter Ended | ||||||||||||
January 27, 2010 | ||||||||||||
Cross-Currency |
||||||||||||
Foreign Exchange |
Interest Rate |
Interest Rate |
||||||||||
Contracts | Contracts | Swap Contracts | ||||||||||
(Dollars in Thousands) | ||||||||||||
Cash flow hedges:
|
||||||||||||
Net losses recognized in other comprehensive loss (effective
portion)
|
$ | (11,960 | ) | $ | | $ | (348 | ) | ||||
Net gains/(losses) reclassified from other comprehensive loss
into earnings (effective portion):
|
||||||||||||
Sales
|
$ | (110 | ) | $ | | $ | | |||||
Cost of products sold
|
(384 | ) | | | ||||||||
Selling, general and administrative expenses
|
(50 | ) | | | ||||||||
Other expense, net
|
(1,265 | ) | | 1,372 | ||||||||
Interest expense
|
12 | | (852 | ) | ||||||||
(1,797 | ) | | 520 | |||||||||
Fair value hedges:
|
||||||||||||
Net losses recognized in other expense, net
|
| (9,760 | ) | | ||||||||
Derivatives not designated as hedging instruments:
|
||||||||||||
Net losses recognized in other expense, net
|
(1,538 | ) | | | ||||||||
(1,538 | ) | (9,760 | ) | | ||||||||
Total amount recognized in statement of income
|
$ | (3,335 | ) | $ | (9,760 | ) | $ | | ||||
23
Table of Contents
The following table presents the effect of derivative
instruments on the statement of income for the nine months ended
January 27, 2010:
Nine Months Ended | ||||||||||||
January 27, 2010 | ||||||||||||
Cross-Currency |
||||||||||||
Foreign Exchange |
Interest Rate |
Interest Rate |
||||||||||
Contracts | Contracts | Swap Contracts | ||||||||||
(Dollars in Thousands) | ||||||||||||
Cash flow hedges:
|
||||||||||||
Net losses recognized in other comprehensive loss (effective
portion)
|
$ | (19,490 | ) | $ | | $ | (4,926 | ) | ||||
Net gains/(losses) reclassified from other comprehensive loss
into earnings (effective portion):
|
||||||||||||
Sales
|
$ | 1,255 | $ | | $ | | ||||||
Cost of products sold
|
1,781 | | | |||||||||
Selling, general and administrative expenses
|
87 | | | |||||||||
Other expense, net
|
(3,901 | ) | | (656 | ) | |||||||
Interest expense
|
14 | | (975 | ) | ||||||||
(764 | ) | | (1,631 | ) | ||||||||
Fair value hedges:
|
||||||||||||
Net losses recognized in other expense, net
|
| (28,952 | ) | | ||||||||
Derivatives not designated as hedging instruments:
|
||||||||||||
Net gains recognized in other expense, net
|
11,628 | | | |||||||||
Net gains recognized in interest income
|
| 30,469 | | |||||||||
11,628 | 30,469 | | ||||||||||
Total amount recognized in statement of income
|
$ | 10,864 | $ | 1,517 | $ | | ||||||
Foreign
Currency Hedging:
The Company uses forward contracts and to a lesser extent,
option contracts to mitigate its foreign currency exchange rate
exposure due to forecasted purchases of raw materials and sales
of finished goods, and future settlement of foreign currency
denominated assets and liabilities. The Companys principal
foreign currency exposures include the Australian dollar,
British pound sterling, Canadian dollar, euro, and the New
Zealand dollar. Derivatives used to hedge forecasted
transactions and specific cash flows associated with foreign
currency denominated financial assets and liabilities that meet
the criteria for hedge accounting are designated as cash flow
hedges. Consequently, the effective portion of gains and losses
is deferred as a component of accumulated other comprehensive
loss and is recognized in earnings at the time the hedged item
affects earnings, in the same line item as the underlying hedged
item.
The Company has used certain foreign currency debt instruments
as net investment hedges of foreign operations. Losses of
$32.3 million (net of income taxes of $20.4 million)
and gains of $3.6 million (net of income taxes of
$2.3 million), which represented effective hedges of net
investments, were reported as a component of accumulated other
comprehensive loss within unrealized translation adjustment for
the nine months ended January 27, 2010 and January 28,
2009, respectively.
24
Table of Contents
Interest
Rate Hedging:
The Company uses interest rate swaps to manage debt and interest
rate exposures. The Company is exposed to interest rate
volatility with regard to existing and future issuances of fixed
and floating rate debt. Primary exposures include
U.S. Treasury rates, LIBOR, and commercial paper rates in
the United States. Derivatives used to hedge risk associated
with changes in the fair value of certain fixed-rate debt
obligations are primarily designated as fair value hedges.
Consequently, changes in the fair value of these derivatives,
along with changes in the fair value of the hedged debt
obligations that are attributable to the hedged risk, are
recognized in current period earnings.
The Company had outstanding cross-currency interest rate swaps
with a total notional amount of $166.7 million as of
January 27, 2010, which were designated as cash flow hedges
of the future payments of loan principal and interest associated
with certain foreign denominated variable rate debt obligations.
These contracts are scheduled to mature in Fiscal 2013.
Deferred
Hedging Gains and Losses:
As of January 27, 2010, the Company is hedging forecasted
transactions for periods not exceeding 5 years. During the
next 12 months, the Company expects $4.4 million of
net deferred losses reported in accumulated other comprehensive
loss to be reclassified to earnings, assuming market rates
remain constant through contract maturities. Hedge
ineffectiveness related to cash flow hedges, which is reported
in current period earnings as other expense, net, was not
significant for the third quarter and nine months ended
January 27, 2010 and January 28, 2009. 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 27, 2010 and
January 28, 2009.
Other
Activities:
The Company enters into certain derivative contracts in
accordance with its risk management strategy that do not meet
the criteria for hedge accounting but which have the economic
impact of largely mitigating foreign currency or interest rate
exposures. The Company maintained foreign currency forward
contracts with a total notional amount of $380.1 million
and $349.1 million that did not meet the criteria for hedge
accounting as of January 27, 2010 and April 29, 2009,
respectively. 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
(losses)/gains related to outstanding contracts totaled
$(4.4) million and $11.6 million as of
January 27, 2010 and April 29, 2009, respectively.
These contracts are scheduled to mature within one year.
Forward contracts that were put in place to help mitigate the
unfavorable impact of translation associated with key foreign
currencies resulted in gains of $1.4 million and losses of
$2.9 million for the third quarter and nine months ended
January 27, 2010, respectively, and gains of
$17.3 million and $108.5 million for the third quarter
and nine months ended January 28, 2009, respectively.
During the second quarter of Fiscal 2010, the Company terminated
its $175 million notional total rate of return swap that
was being used as an economic hedge to reduce a portion of the
interest cost related to the Companys remarketable
securities. The unwinding of the total rate of return swap was
completed in conjunction with the exchange of $681 million
of dealer remarketable securities discussed in Note 13.
Upon termination of the swap, the Company received net cash
proceeds of $47.6 million, in addition to the return of the
$192.7 million of restricted cash collateral that the
Company was required to maintain with the counterparty for the
term of the swap. Prior to termination, the swap was being
accounted for on a full
mark-to-market
basis through earnings, as a component of interest income. The
Company
25
Table of Contents
recorded a benefit in interest income of $28.3 million for
the nine months ended January 27, 2010, and
$17.6 million for the nine months ended January 28,
2009, representing changes in the fair value of the swap and
interest earned on the arrangement, net of transaction fees. Net
unrealized gains related to this swap totaled $20.2 million
as of April 29, 2009.
Concentration
of Credit Risk:
Counterparties to currency exchange and interest rate
derivatives consist of major international financial
institutions. The Company continually monitors its positions and
the credit ratings of the counterparties involved and, by
policy, limits the amount of credit exposure to any one party.
While the Company may be exposed to potential losses due to the
credit risk of non-performance by these counterparties, losses
are not anticipated. The Company closely monitors the credit
risk associated with its counterparties and customers and to
date has not experienced material losses.
26
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Executive
Overview
The Company has adapted its strategies to address the current
global economic environment, with an emphasis on:
| Investing behind core brands, proven ideas and growth through innovation; | |
| Focusing investments in marketing and research and development toward delivering value to consumers; | |
| Continuing its focus on emerging markets where economic growth remains well above the global average; | |
| Increasing margins through productivity initiatives, reductions in discretionary spending and tight management of fixed costs; and | |
| Increasing cash flow through reductions in average inventory levels and management of capital spending. |
During the third quarter of Fiscal 2010, the Company reported
diluted earnings per share from continuing operations of $0.83,
compared to $0.76 in the prior year. Several factors that have
negatively impacted the Companys financial results over
the last year began to ease during the third quarter, including
foreign exchange translation rates and commodity input costs.
The impact of currency movements on EPS growth was not material
for the third quarter, after taking into account the net effect
of current and prior year currency translation contracts, as
well as foreign currency movements on translation and particular
transactions, such as inventory sourcing in the U.K. However,
unfavorable currency movements significantly impacted the
Companys
year-to-date
results.
The increase in EPS from continuing operations for the third
quarter reflects 12.7% growth in sales, a 180 basis point
improvement in the gross profit margin, as well as a 40.7%
increase in marketing investments. Third quarter sales benefited
from combined volume and pricing gains of 3.0%, led by the
emerging markets and our U.S. retail and U.K. businesses.
Acquisitions and foreign exchange translation rates also had a
favorable impact on sales. The gross profit margin increased as
a result of productivity improvements and higher net pricing and
volume, partially offset by higher commodity input costs. Our
strong profit growth and focus on increasing cash flow generated
$493 million of cash provided by operating activities
during the third quarter, a $201 million increase from the
prior year. Overall, the Company remains confident in its
underlying business fundamentals and plans to continue executing
its strategy.
Discontinued
Operations
During the third quarter of Fiscal 2010, the Company completed
the sale of its Appetizers And, Inc. frozen hors doeuvres
business which was previously reported within the
U.S. Foodservice segment, resulting in a $14.5 million
pre-tax ($10.4 million after-tax) loss. Also during the
third quarter, the Company completed the sale of its private
label frozen desserts business in the U.K., resulting in a
$31.4 million pre-tax ($23.6 million after-tax) loss.
During the second quarter of Fiscal 2010, the Company completed
the sale of its Kabobs frozen hors doeuvres business which
was previously reported within the U.S. Foodservice
segment, resulting in a $15.0 million pre-tax
($10.9 million after-tax) loss. The losses on each of these
transactions have been recorded in discontinued operations.
In accordance with accounting principles generally accepted in
the United States of America, the operating results related to
these businesses have been included in discontinued operations
in the
27
Table of Contents
Companys consolidated statements of income for all periods
presented. The following table presents summarized operating
results for these discontinued operations:
Third Quarter Ended | Nine Months Ended | |||||||||||||||
January 27, 2010 |
January 28, 2009 |
January 27, 2010 |
January 28, 2009 |
|||||||||||||
FY 2010 | FY 2009 | FY 2010 | FY 2009 | |||||||||||||
(Millions of Dollars) | ||||||||||||||||
Sales
|
$ | 10.9 | $ | 34.9 | $ | 63.7 | $ | 114.8 | ||||||||
Net after-tax losses
|
$ | (1.6 | ) | $ | (1.3 | ) | $ | (4.5 | ) | $ | (2.7 | ) | ||||
Tax benefit on losses
|
$ | 0.5 | $ | 0.3 | $ | 1.8 | $ | 0.4 |
THREE
MONTHS ENDED JANUARY 27, 2010 AND JANUARY 28, 2009
Results
of Continuing Operations
Sales for the three months ended January 27, 2010 increased
$302 million, or 12.7%, to $2.68 billion. Volume
increased 1.2%, as favorable volume in our emerging markets and
U.S. retail and U.K. businesses was partially offset by
declines in U.S. Foodservice and Australia. Volume growth
for the quarter was driven by investments in marketing and
promotions and new products. The year over year comparative was
also favorably impacted by customer buy-ins taken near the end
of the second quarter last year in anticipation of price
increases in the U.S. and U.K. Emerging markets continued
to be an important growth driver, with combined volume and
pricing gains of 15.5%. In addition, the Companys top 15
brands performed well, with combined volume and pricing gains of
5.3%, led by the
Heinz®,
Ore-Ida®,
Smart
Ones®,
Complan®
and
ABC®
brands. Net pricing increased sales by 1.8%, largely due to the
carryover impact of price increases taken in Fiscal 2009 across
the Companys portfolio to help offset increased commodity
costs. Acquisitions, net of divestitures, increased sales by
2.9%. Foreign exchange translation rates increased sales by 6.9%
compared to the third quarter of the prior year.
Gross profit increased $155 million, or 18.2%, to
$1.01 billion, and the gross profit margin increased to
37.5% from 35.7%. The increase in gross margin reflects higher
net pricing, increased volume and productivity improvements,
partially offset by higher commodity costs, including the effect
of transaction currency costs, and the impact of acquisitions
that have gross margins below the Company average. Gross profit
dollars were also favorably impacted by $56 million from
foreign exchange translation rates, as well as acquisitions.
Selling, general and administrative expenses
(SG&A) increased $101 million, or 21.7%,
to $569 million, and increased as a percentage of sales to
21.2% from 19.6%. The increase primarily reflects additional
investments in marketing, a $30 million impact from foreign
exchange translation rates, higher pension costs, the timing of
accrued incentive compensation expenses and a life insurance
settlement benefit received in the third quarter of Fiscal 2009.
In addition, selling and distribution expenses
(S&D) increased reflecting the impact of
acquisitions.
Operating income increased $53 million, or 13.8%, to
$437 million, reflecting the items above, particularly
higher volume and pricing, productivity improvements and a
$26 million favorable impact from foreign exchange
translation rates, partially offset by higher commodity costs,
including a $10 million impact from unfavorable cross
currency rate movements in the British pound versus the euro and
U.S. dollar.
Net interest expense decreased $2 million, to
$68 million, reflecting a $24 million decrease in
interest expense and a $22 million decrease in interest
income. Interest expense in the current year benefited from
lower average interest rates, while prior year interest expense
was unfavorably impacted by a higher coupon on the dealer
remarketable securities (DRS). The majority of the
DRS were exchanged for new notes in August 2009 (see below in
Liquidity and Financial Position for further
explanation of this transaction). The decline in interest income
was largely due to an $18 million gain in the prior year on
a total rate of return swap, which was terminated in August
28
Table of Contents
2009 in connection with the DRS exchange transaction (see
Note 15, Derivative Financial Instruments and Hedging
Activities for additional information). Other expenses,
net, increased $20 million primarily due to prior year
currency gains related to forward contracts that were put in
place to help mitigate the unfavorable impact of translation
associated with key foreign currencies for all of Fiscal 2009.
The effective tax rate for the current quarter was 27.2%, an
increase of 130 basis points compared to 25.9% last year.
The increase in the effective tax rate is primarily due to
increased income in higher tax rate jurisdictions.
Income from continuing operations attributable to H. J. Heinz
Company was $264 million compared to $244 million in
the prior year, an increase of 8.4%. The increase is due to
higher operating income, partially offset by the prior year
currency gains discussed above and a higher effective tax rate
in the current year. Diluted earnings per share from continuing
operations was $0.83 in the current year compared to $0.76 in
the prior year, up 9.2%. EPS growth was favorably impacted by
$0.01 from currency movements, after taking into account the net
effect of current and prior year currency translation contracts,
as well as foreign currency movements on translation and U.K.
transaction costs.
Foreign currency movements on translation in Fiscal 2010 has had
a relatively consistent impact on all components of operating
income on the consolidated statement of income. The impact of
cross currency sourcing of inventory reduced gross profit and
operating income but did not affect sales.
OPERATING
RESULTS BY BUSINESS SEGMENT
North
American Consumer Products
Sales of the North American Consumer Products segment increased
$53 million, or 7.0%, to $815 million. Volume
increased 2.8%, as improvements in our U.S. business were
partially offset by declines in Canada. Volume improvements
resulted from new product introductions, particularly new TGI
Fridays®
Skillet Meals items, and investments in marketing and promotions
to help offset aggressive competitor promotional activity.
Volume was also favorably impacted by a shift in the timing of
sales resulting from a buy-in by customers in the prior year
second quarter in anticipation of price increases. The buy-in
resulted in a shift in volume from the third quarter to the
second quarter of last year and impacted Smart
Ones®
frozen entrees and
Ore-Ida®
frozen potatoes. Strong volume was also reported on
Heinz®
ketchup and gravy. These improvements were partially offset by
declines in frozen snacks. Net prices grew 1.0% reflecting the
carryover impact of price increases taken in the fourth quarter
of Fiscal 2009, partially offset by increased promotional
spending, particularly on Smart
Ones®
frozen entrees. The acquisition of Arthurs Fresh Company,
a small chilled smoothies business in Canada, at the beginning
of the third quarter of this year increased sales 0.3%.
Favorable Canadian exchange translation rates increased sales
3.0%.
Gross profit increased $46 million, or 14.7%, to
$359 million, and the gross profit margin increased to
44.1% from 41.2%. The gross margin improvement was driven by
volume and productivity improvements, increased pricing and
favorable product mix. Gross profit dollars were also favorably
impacted by Canadian exchange translation rates. Operating
income increased $16 million, or 8.2%, to
$207 million, reflecting the improvement in gross profit,
partially offset by increased marketing investment, pension
costs and accrued incentive compensation expense.
Europe
Heinz Europe sales increased $95 million, or 12.1%, to
$878 million. Favorable foreign exchange translation rates
increased sales by 9.7% reflecting improvements in the euro and
British pound. Volume increased 3.0%, largely due to increased
marketing and promotional activities on
Heinz®
products in the U.K. and increased ketchup sales in Russia.
Volume was also favorably impacted by a
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buy-in by customers in the U.K. in the second quarter of the
prior year in anticipation of price increases. The buy-in
resulted in lower volumes in the prior year third quarter,
primarily impacting
Heinz®
ketchup and salad cream. These improvements were partially
offset by declines in frozen products in the U.K., reflecting
promotional timing, and the rationalization of low-margin
private label sauces in France. Net pricing decreased 0.5%, as
increased promotional activity in the U.K. was partially offset
by the carryover impact of price increases taken in the fourth
quarter of Fiscal 2009.
Gross profit increased $47 million, or 16.1%, to
$339 million, and the gross profit margin increased to
38.6% from 37.2%. The increase in gross margin was largely due
to volume and productivity improvements as well as favorable
product mix, partially offset by increased commodity costs,
including the unfavorable cross currency rate movements in the
British pound versus the euro and U.S. dollar. Foreign
exchange translation rates had a favorable impact on gross
profit dollars. Operating income increased $20 million, or
14.8%, to $156 million, due to the increase in gross
profit, partially offset by higher SG&A expense, which
reflects the impact of foreign currency translation rates,
marketing investments and higher accrued incentive compensation
expense.
Asia/Pacific
Heinz Asia/Pacific sales increased $146 million, or 41.1%,
to $500 million. Favorable exchange translation rates
increased sales by 19.9%, largely due to the improvements in the
Australian and New Zealand dollars. Acquisitions increased sales
18.5% due to the prior year acquisitions of Golden Circle
Limited, a health-oriented fruit and juice business in
Australia, and La Bonne Cuisine, a chilled dip business in
New Zealand. Volume increased 2.5%, as marketing investments,
new products and higher consumer demand drove significant growth
in
ABC®
sauces and beverages in Indonesia,
Complan®
and Glucon
D®
nutritional beverages in India and ketchup and sauces in China.
These improvements were offset by declines in Australia
resulting from increased competitor promotional activities and
reduced demand. Pricing increased 0.3%, reflecting current and
prior year increases on
ABC®
sauces in Indonesia as well as the carryover impact of prior
year price increases in New Zealand and India.
Gross profit increased $38 million, or 34.1%, to
$149 million, and the gross profit margin declined to 29.8%
from 31.3%. The increase in gross profit was due to higher
volume, productivity improvements and favorable foreign exchange
translation rates. These improvements were partially offset by
increased commodity costs. Acquisitions had a favorable impact
on gross profit dollars but reduced overall gross profit margin.
Operating income increased by $16 million, or 51.1%, to
$48 million, primarily reflecting the increase in gross
profit, partially offset by increased SG&A related to
acquisitions, the impact of foreign exchange translation rates
and increased marketing investments.
U.S.
Foodservice
Sales of the U.S. Foodservice segment decreased
$11 million, or 3.0%, to $355 million. Pricing
increased sales 4.3%, largely due to prior year price increases
taken across the portfolio. Volume decreased by 7.3%, reflecting
softness in U.S. restaurant traffic, promotional timing,
and on-going SKU eliminations.
Gross profit increased $14 million, or 16.0%, to
$104 million, and the gross profit margin increased to
29.3% from 24.5%, as cumulative price increases helped return
margins for this business to their historical levels. In the
current quarter, gross profit benefited from pricing and
productivity improvements as well as commodity cost favorability
which more than offset unfavorable volume. Operating income
increased $7 million, or 19.3%, to $42 million, which
is primarily due to gross profit improvements partially offset
by higher general and administrative expenses
(G&A) reflecting increased incentive
compensation accruals.
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Rest of
World
Sales for Rest of World increased $19 million, or 17.1%, to
$133 million. Higher pricing increased sales by 19.0%,
largely due to current and prior year price increases in Latin
America taken to mitigate the impact of raw material and labor
inflation. Volume increased 1.6% as increases in the Middle East
and South Africa more than offset declines in Latin America.
Acquisitions increased sales 1.0% due to the prior year
acquisition of Papillon, a chilled products business in South
Africa. Foreign exchange translation rates decreased sales 4.6%,
largely due to the devaluation of the Venezuelan bolivar fuerte
(VEF) late in the third quarter of this fiscal year
(See the Venezuela- Foreign Currency and Inflation
section below for further explanation).
Gross profit increased $11 million, or 29.2%, to
$50 million, due mainly to increased pricing, partially
offset by increased commodity costs. Operating income increased
$5 million, or 42.3% to $17 million.
NINE
MONTHS ENDED JANUARY 27, 2010 AND JANUARY 28, 2009
Results
of Continuing Operations
Sales for the nine months ended January 27, 2010 increased
$275 million, or 3.7%, to $7.77 billion. Net pricing
increased sales by 4.2%, largely due to the carryover impact of
broad based price increases taken in Fiscal 2009 to help offset
increased commodity costs. Volume decreased 2.3%, as favorable
volume in emerging markets was more than offset by declines in
the U.S. and Australian businesses. Volume for the first
nine months was impacted by aggressive competitor promotional
activity as well as reduced foot traffic in
U.S. restaurants this year. Emerging markets continued to
be an important growth driver, with combined volume and pricing
gains of 13.5%. In addition, the Companys top 15 brands
performed well, with combined volume and pricing gains of 3.3%,
led by the
Heinz®,
Complan®
and
ABC®
brands. Acquisitions, net of divestitures, increased sales by
2.9%. Foreign exchange translation rates reduced sales by 1.2%
compared to the prior year.
Gross profit increased $137 million, or 5.1%, to
$2.83 billion, and the gross profit margin increased to
36.4% from 35.9%, as higher net pricing, productivity
improvements and the favorable impact from acquisitions were
partially offset by a $31 million unfavorable impact from
foreign exchange translation rates, higher commodity costs,
including transaction currency costs, and lower volume.
Acquisitions had a favorable impact on gross profit dollars but
reduced overall gross profit margin. In addition, gross profit
was unfavorably impacted by $7 million from targeted
workforce reductions and non-cash asset write-offs related to a
factory closure.
SG&A increased $87 million, or 5.7%, to
$1.62 billion, and increased as a percentage of sales to
20.8% from 20.4%. The increase reflects the impact from
acquisitions, additional marketing investments, inflation in
Latin America, and higher pension and accrued incentive
compensation expenses. In addition, SG&A was impacted by
$9 million related to targeted workforce reductions in the
current year. These increases were partially offset by an
$18 million impact from foreign exchange translation rates
and improvements in S&D reflecting lower fuel costs.
Operating income increased $51 million, or 4.3%, to
$1.21 billion, reflecting the items above, including higher
pricing and productivity improvements partially offset by higher
commodity costs, including transaction currency costs, a
$13 million unfavorable impact from foreign exchange
translation rates and $16 million of charges for targeted
workforce reductions and non-cash asset write-offs related to a
factory closure.
Net interest expense decreased $20 million, to
$186 million, reflecting a $28 million decrease in
interest expense and an $8 million decrease in interest
income. Interest expense decreased due to lower average interest
rates, partially offset by the higher coupon on the DRS for the
period preceding the exchange transaction that took place in
August 2009 (see below in Liquidity and Financial
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Position for further explanation of this transaction). The
decrease in interest income is due to lower average interest
rates, partially offset by increased benefits in the current
year on a total rate of return swap, which was terminated in
August 2009 in connection with the DRS exchange transaction (see
Note 15, Derivative Financial Instruments and Hedging
Activities for additional information).
Other expenses, net, increased $115 million primarily due
to a $108 million decrease in currency gains, and
$9 million of charges recognized in connection with the
August 2009 DRS exchange transaction. The decrease in currency
gains reflects prior year gains of $108 million related to
forward contracts that were put in place to help mitigate the
unfavorable impact of translation associated with key foreign
currencies for all of Fiscal 2009.
The effective tax rate for the nine months ended
January 27, 2010 was 27.1% compared to 27.6% last year. The
decrease in the effective tax rate resulted primarily from
increased benefits related to on-going tax planning, along with
increased benefits resulting from resolutions and settlements of
federal, state, and foreign uncertain tax positions, partially
offset by a prior year discrete benefit resulting from the tax
effects of law changes in the U.K. of approximately
$10 million.
Income from continuing operations attributable to H. J. Heinz
Company was $722 million compared to $751 million in
the prior year, a decrease of 3.8%. The decrease reflects the
prior year currency gains discussed above, unfavorable foreign
exchange rates and $12 million in after-tax charges ($0.04
per share) for targeted workforce reductions and non-cash asset
write-offs, partially offset by higher operating income and
reduced net interest expense. Diluted earnings per share from
continuing operations was $2.27 in the current year compared to
$2.35 in the prior year, down 3.4%. EPS movements were
unfavorably impacted by $0.33 from currency fluctuations, after
taking into account the net effect of current and prior year
currency translation contracts, as well as foreign currency
movements on translation and U.K. transaction costs.
Foreign currency movements on translation in Fiscal 2010 has had
a relatively consistent impact on all components of operating
income on the consolidated statement of income. The impact of
cross currency sourcing of inventory reduced gross profit and
operating income but did not affect sales.
OPERATING
RESULTS BY BUSINESS SEGMENT
North
American Consumer Products
Sales of the North American Consumer Products segment increased
$4 million, or 0.2%, to $2.33 billion. Net prices grew
3.2% reflecting the carryover impact of price increases taken
across the majority of the product portfolio in Fiscal 2009,
partially offset by increased promotional spending in the
current year, particularly on Smart
Ones®
frozen entrees. Volume decreased 3.5%, reflecting declines
in frozen meals due to category softness and aggressive
competitor promotional activity, partially offset by increases
in TGI
Fridays®
Skillet Meals due to new product introductions and increased
trade promotions. Volume declines were also noted in
Ore-Ida®
frozen potatoes,
Classico®
pasta sauces and frozen snacks. The acquisition of Arthurs
Fresh Company, a small chilled smoothies business in Canada, at
the beginning of the third quarter of this year increased sales
0.1%. Favorable Canadian exchange translation rates increased
sales 0.4%.
Gross profit increased $62 million, or 6.6%, to
$1.01 billion, and the gross profit margin increased to
43.1% from 40.5%, as productivity improvements and the carryover
impact of price increases more than offset unfavorable volume
and increased commodity costs. Operating income increased
$41 million, or 7.5%, to $592 million, reflecting the
improvement in gross profit and reduced S&D, partially
offset by increased marketing investment, pension costs and
accrued incentive compensation expense. The improvement in
S&D was a result of productivity projects and tight cost
control.
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Europe
Heinz Europe sales decreased $51 million, or 2.0%, to
$2.49 billion. Unfavorable foreign exchange translation
rates decreased sales by 4.8%. Net pricing increased 2.9%,
driven by the carryover impact of price increases taken in
Fiscal 2009, partially offset by increased promotions,
particularly in the U.K. and Continental Europe. Volume
decreased 1.0%, principally due to decreases in France from the
rationalization of low-margin private label sauces, and reduced
promotions and increased competitor promotional activity on
frozen products in the U.K. Volume for infant nutrition products
in the U.K. and Italy also declined, along with decreases in
Heinz®
pasta meals as a result of reduced promotional activities.
Volume improvements were posted on soups in the U.K. and Germany
as well as ketchup and infant feeding products in Russia.
Acquisitions, net of divestitures, increased sales 0.7%, largely
due to the acquisition of the
Bénédicta®
sauce business in France in the second quarter of Fiscal 2009.
Gross profit decreased $34 million, or 3.6%, to
$928 million, and the gross profit margin decreased to
37.2% from 37.8%. The decline in gross profit is largely due to
unfavorable foreign exchange translation rates and increased
commodity costs, including the cross currency rate movements in
the British pound versus the euro and U.S. dollar. These
declines were partially mitigated by higher pricing,
productivity improvements and the favorable impact from the
Bénédicta®
acquisition. Operating income decreased $12 million, or
2.8%, to $420 million, reflecting unfavorable foreign
currency translation and transaction impacts.
Asia/Pacific
Heinz Asia/Pacific sales increased $263 million, or 21.9%,
to $1.46 billion. Acquisitions increased sales 16.8% due to
the prior year acquisitions of Golden Circle Limited, a
health-oriented fruit and juice business in Australia, and
La Bonne Cuisine, a chilled dip business in New Zealand.
Pricing increased 2.7%, reflecting current and prior year
increases on
ABC®
products in Indonesia as well as the carryover impact of prior
year price increases in New Zealand. These increases were
partially offset by reduced net pricing on Long
Fong®
frozen products in China due to increased promotions. Volume
decreased 0.2%, as significant growth in
Complan®
and Glucon
D®
nutritional beverages in India was more than offset by declines
on Long
Fong®
frozen products in China and general softness in both Australia
and New Zealand, which have been impacted by competitive
activity and reduced demand. Favorable exchange translation
rates increased sales by 2.6%.
Gross profit increased $51 million, or 12.9%, to
$448 million, and the gross profit margin declined to 30.6%
from 33.1%. The increase in gross profit was due to higher
pricing, productivity improvements and favorable foreign
exchange translation rates. These increases were partially
offset by increased commodity costs, which include the impact of
cross-currency rates on inventory costs, and declines in our
Long
Fong®
business where we revised our distribution system and
streamlined product offerings. Acquisitions had a favorable
impact on gross profit dollars but reduced overall gross profit
margin. Operating income increased by $5 million, or 3.5%,
to $154 million, as the increase in gross profit was
partially offset by increased SG&A, largely due to
acquisitions, the impact of foreign exchange translation rates
and increased marketing investments.
U.S.
Foodservice
Sales of the U.S. Foodservice segment decreased
$12 million, or 1.1%, to $1.06 billion. Pricing
increased sales 5.1%, largely due to prior year price increases
taken across the portfolio. Volume decreased by 5.7%, due to
softness in U.S. restaurant traffic and sales and targeted
SKU reductions. Prior year divestitures reduced sales 0.5%.
Gross profit increased $34 million, or 12.9%, to
$295 million, and the gross profit margin increased to
27.7% from 24.2%, as cumulative price increases helped return
margins for this business to their historical levels. In the
current year, gross profit benefited from pricing and
productivity improvements as well as commodity cost favorability
which more than offset unfavorable volume and
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the impact of reduced inventory levels. Operating income
increased $20 million, or 21.0%, to $117 million,
which is primarily due to gross profit improvements and reduced
S&D reflecting productivity projects and tight cost
control. These improvements were partially offset by higher
G&A resulting from increased incentive compensation
accruals and a prior year gain on the sale of a small, non-core
portion control business.
Rest of
World
Sales for Rest of World increased $71 million, or 20.5%, to
$418 million. Higher pricing increased sales by 22.6%,
largely due to current and prior year price increases in Latin
America taken to mitigate the impact of raw material and labor
inflation. Volume decreased 0.3% as declines in the Middle East
were partially offset by increases in ketchup and baby food in
Latin America. Acquisitions increased sales 1.0% due to the
prior year acquisition of Papillon, a chilled products business
in South Africa. Foreign exchange translation rates decreased
sales 2.8%, largely due to the recent devaluation of the
Venezuelan VEF (See the Venezuela- Foreign Currency and
Inflation section below for further explanation).
Gross profit increased $36 million, or 30.3%, to
$155 million, due mainly to increased pricing, partially
offset by increased commodity costs. Operating income increased
$16 million, or 41.7% to $56 million, as the increase
in gross profit was partially offset by higher S&D and
G&A expenses reflecting inflation in Latin America.
Liquidity
and Financial Position
For the first nine months of Fiscal 2010, cash provided by
operating activities was $1.0 billion compared to
$506 million in the prior year. The significant improvement
in the first nine months of Fiscal 2010 versus Fiscal 2009 was
primarily due to favorable movements in working capital and
reduced tax payments. Additionally, $147 million of cash
was received in the current year in connection with an accounts
receivable securitization program and $19 million was
received in connection with a Canadian receivables sales
facility (see additional explanations below), which partially
offset discretionary contributions made in Fiscal 2010 to fund
the Companys pension plans. In Fiscal 2010, the Company
also received $48 million of cash from the termination of a
total rate of return swap and $27 million of cash from the
maturity of foreign currency contracts that were used as an
economic hedge of certain intercompany transactions. In the
prior year, the Company received $98 million of cash from
the settlement and maturity of foreign currency contracts that
were put in place to help mitigate the impact of translation
associated with key foreign currencies (see Note 15,
Derivative Financial Instruments and Hedging
Activities for additional information). The Companys
cash conversion cycle improved 6 days, to 50 days in
the first nine months of Fiscal 2010. Receivables accounted for
5 days of the improvement, 3 days of which is a result
of the accounts receivable securitization program. There was a
7 day improvement in inventories as a result of the
Companys efforts to reduce inventory levels. Accounts
payable partially offset these improvements, with a 5 day
decrease, a portion of which reflects inventory reductions and
the resulting decrease in the amounts due to suppliers.
During the first nine months of Fiscal 2010, the Company made
$242 million of contributions to the pension plans compared
to $55 million in the prior year. Of this $242 million
of payments, $200 million were discretionary contributions
that were made as a result of adverse conditions in the global
equity and bond markets. The Company will likely make additional
discretionary contributions to the pension plans during the
fourth quarter of Fiscal 2010, which could be well above normal
contribution levels. Determination of such amounts will be based
on external market conditions, plan status, and cash flow
performance.
During the first quarter of Fiscal 2010, the Company entered
into a three-year $175 million accounts receivable
securitization program. Under the terms of the agreement, the
Company sells, on a revolving basis, its receivables to a
wholly-owned, bankruptcy-remote-subsidiary. This subsidiary
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then sells all of the rights, title and interest in a pool of
these receivables to an unaffiliated entity. After the sale, the
Company, as servicer of the assets, collects the receivables on
behalf of the unaffiliated entity. The amount of receivables
sold through this program as of January 27, 2010 was
$147 million.
During the third quarter of Fiscal 2010, the Company entered
into a C$25 million Canadian dollar uncommitted receivables
sales facility. Under the terms of the agreement, the Company
sells its receivables from time to time to an unaffiliated
entity. After the sale, the Company, as servicer of the assets,
collects the receivables on behalf of the unaffiliated entity.
The amount of receivables sold through this agreement as of
January 27, 2010 was $19 million.
Cash used for investing activities totaled $17 million
compared to $651 million last year. In the current year,
proceeds from divestitures provided cash of $18 million
which primarily related to the sale of our Kabobs and Appetizers
And, Inc. frozen hors doeuvres foodservice businesses in
the U.S. and our private label frozen desserts business in
the U.K. Cash paid for acquisitions in the current year totaled
$73 million and primarily related to the purchase of the
remaining 49% interest in Cairo Food Industries, S.A.E., an
Egyptian subsidiary of the Company that manufactures ketchup,
condiments and sauces, and Arthurs Fresh Company, a small
chilled smoothies business in Canada. In the prior year, cash
paid for acquisitions, net of divestitures, required
$274 million which primarily related to the acquisitions of
the Golden Circle Limited fruit and juice business in Australia,
the La Bonne Cuisine chilled dip business in New Zealand,
and the
Bénédicta®
sauce business in France, partially offset by the sale of a
small domestic portion control foodservice business. Capital
expenditures totaled $150 million (1.9% of sales) in Fiscal
2010 compared to $183 million (2.4% of sales) in the prior
year, reflecting the elimination of non-critical capital
spending in the first half of the fiscal year and the timing of
project spending. The Company expects capital expenditures to be
approximately 2.5%-3.0% of sales for the full fiscal year, in
line with our original projections. Proceeds from disposals of
property, plant and equipment were $1 million in both the
current and prior years. The current year decrease in restricted
cash represents collateral that was returned to the Company in
connection with the termination of a total rate of return swap
in August 2009.
Cash used for financing activities in the current year totaled
$804 million compared to $361 million of cash provided
last year. Proceeds from long-term debt were $440 million
in the current year reflecting the July 2009 issuance of
$250 million of 7.125% notes due 2039 by H. J. Heinz
Finance Company (HFC), a subsidiary of Heinz. These
notes are fully, unconditionally and irrevocably guaranteed by
the Company. The proceeds from the notes were used for payment
of the cash component of the exchange transaction discussed
below as well as various expenses relating to the exchange, and
for general corporate purposes. In addition, the Company
received cash proceeds of $167 million related to a
15 billion Japanese yen denominated credit agreement that
was entered into during the second quarter of Fiscal 2010.
Payments on long-term debt were $623 million in the current
year primarily reflecting cash payments on the DRS exchange
transaction discussed below and the payoff of our
A$281 million Australian denominated borrowings which
matured on December 16, 2009. Proceeds from long-term debt
were $850 million in the prior year. The prior 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 HFC Series B
Preferred Stock. The proceeds from both of these prior year
transactions were used for general corporate purposes, including
the repayment of commercial paper and other indebtedness
incurred to redeem HFCs Series A Preferred Stock. As
a result, payments on long-term debt were $361 million in
the prior year. Net payments on commercial paper and short-term
debt were $253 million this year compared to proceeds of
$179 million in the prior year. Cash proceeds from option
exercises provided $22 million of cash in the current year,
and the Company had no treasury stock purchases in the current
year. Cash proceeds from option exercises, net of treasury stock
purchases, were $82 million in the prior year. Dividend
payments totaled $400 million this year, compared to
$394 million for the same period last year, reflecting an
increase in the annualized dividend per common share to $1.68.
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On August 6, 2009, HFC issued $681 million of
7.125% notes due 2039 (of the same series as the notes
issued in July 2009), and $218 million of cash, in exchange
for $681 million of its outstanding 15.590% DRS due
December 1, 2020. In addition, HFC terminated a portion of
the remarketing option by paying the remarketing agent a cash
payment of $89 million. The exchange transaction was
accounted for as a modification of debt. Accordingly, cash
payments used in the exchange, including the payment to the
remarketing agent, have been accounted for as a reduction in the
book value of the debt, and will be amortized to interest
expense under the effective yield method. Additionally, the
Company terminated its $175 million notional total rate of
return swap in August 2009 in connection with the DRS exchange
transaction. See Note 15, Derivative Financial
Instruments and Hedging Activities for additional
information.
At January 27, 2010, the Company had total debt of
$4.81 billion (including $221 million relating to
hedge accounting adjustments) and cash and cash equivalents of
$562 million. Total debt balances since prior year end
declined $329 million as a result of the items discussed
above. The reported cash as of January 27, 2010 was
negatively impacted by approximately $56 million due to the
currency devaluation in Venezuela (see Venezuela- Foreign
Currency and Inflation section below for additional
discussion). Access to U.S. dollars in Venezuela at the
official (government established) exchange rate is limited and
subject to approval by a currency control board.
The Company and HFC maintain $1.8 billion of credit
agreements, consisting of a $1.2 billion Three-Year Credit
Agreement which expires in April 2012 and a $600 million
364-Day
Credit Agreement. These agreements support the Companys
commercial paper borrowings and certain domestic borrowings. As
a result, the commercial paper and domestic borrowings are
classified as long-term debt based upon the Companys
intent and ability to refinance these borrowings on a long-term
basis. Commercial paper outstanding was $409 million at
January 27, 2010 compared to $640 million at
April 29, 2009. These credit agreements include a leverage
ratio covenant in addition to customary covenants, and the
Company was in compliance with all of its covenants as of
January 27, 2010. In addition, the Company maintains in
excess of $500 million of other credit facilities used
primarily by the Companys foreign subsidiaries.
The Company will continue to monitor the credit markets to
determine the appropriate mix of long-term debt and short-term
debt going forward. The Company believes that its strong
operating cash flow, existing cash balances, together with the
credit facilities and other available capital market financing,
will be adequate to meet the Companys cash requirements
for operations, including capital spending, debt maturities,
acquisitions, share repurchases and dividends to shareholders.
While the Company is confident that its needs can be financed,
there can be no assurance that increased volatility and
disruption in the global capital and credit markets will not
impair its ability to access these markets on commercially
acceptable terms.
As of January 27, 2010, the Companys long-term debt
ratings at Moodys, Standard & Poors and
Fitch Rating have remained consistent at Baa2, BBB and BBB,
respectively.
Venezuela-
Foreign Currency and Inflation
Foreign
Currency
The local currency in Venezuela is the VEF. A currency control
board exists in Venezuela that is responsible for foreign
exchange procedures, including approval of requests for
exchanges of VEF for U.S. dollars at the official
(government established) exchange rate. Our business in
Venezuela has historically been successful in obtaining
U.S. dollars at the official exchange rate for imports of
ingredients, packaging, manufacturing equipment, and other
necessary inputs, and for dividend remittances, albeit on a
delay. While an unregulated parallel market exists for
exchanging VEF for U.S dollars through securities transactions,
our Venezuelan subsidiary has no recent history of entering into
such exchange transactions.
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The Company uses the official exchange rate to translate the
financial statements of its Venezuelan subsidiary, since we
expect to obtain U.S. dollars at the official rate for
future dividend remittances. The official exchange rate in
Venezuela had been fixed at 2.15 VEF to 1 U.S. dollar for
several years, despite significant inflation. On January 8,
2010, the Venezuelan government announced the devaluation of its
currency relative to the U.S. dollar. The official exchange
rate for imported goods classified as essential, such as food
and medicine, changed from 2.15 to 2.60, while payments for
other non-essential goods moved to an exchange rate of 4.30. The
majority, if not all, of our imported products in Venezuela are
expected to fall into the essential classification and qualify
for the 2.60 rate. However, our Venezuelan subsidiarys
financial statements are translated using the 4.30 rate, as this
is the rate expected to be applicable to dividend repatriations.
During the third quarter of Fiscal 2010, the Company recorded a
$59 million currency translation loss as a result of the
currency devaluation, which has been reflected as a component of
accumulated other comprehensive loss within unrealized
translation adjustment. The net asset position of our Venezuelan
subsidiary has also been reduced as a result of the devaluation
to approximately $66 million at January 27, 2010.
While our future operating results in Venezuela will be
negatively impacted by the currency devaluation, we plan to take
actions to help mitigate these effects. Accordingly, we do not
expect the devaluation to have a material impact on our
operating results going forward.
Highly
Inflationary Economy
An economy is considered highly inflationary under
U.S. GAAP if the cumulative inflation rate for a three year
period meets or exceeds 100 percent. Based on the blended
National Consumer Price Index, the Venezuelan economy exceeded
the three year cumulative inflation rate of 100 percent
during the third quarter of Fiscal 2010. As a result, the
financial statements of our Venezuelan subsidiary will be
consolidated and reported under highly inflationary accounting
rules beginning on January 28, 2010, the first day of our
fiscal fourth quarter. Under highly inflationary accounting, the
financial statements of our Venezuelan subsidiary will be
remeasured into the Companys reporting currency
(U.S. dollars) and future exchange gains and losses from
the remeasurement of monetary assets and liabilities will be
reflected in current earnings, rather than accumulated other
comprehensive loss on the balance sheet, until such time as the
economy is no longer considered highly inflationary.
The impact of applying highly inflationary accounting for
Venezuela on our consolidated financial statements is dependent
upon movements in the applicable exchange rates (at this time,
the official rate) between the local currency and the
U.S. dollar and the amount of monetary assets and
liabilities included in our subsidiarys balance sheet. At
January 27, 2010, the U.S. dollar value of monetary
assets, net of monetary liabilities, which would be subject to
an earnings impact from exchange rate movements for our
Venezuelan subsidiary under highly inflationary accounting was
$37 million.
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. Certain purchase obligations
contain variable pricing components, and, as a result, actual
cash payments are expected to fluctuate based on changes in
these variable components. 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 27, 2010. For additional
information,
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refer to pages
24-25 of the
Companys Annual Report on
Form 10-K
for the fiscal year ended April 29, 2009.
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 $78 million. 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
On September 15, 2009, the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (the
Codification) became the single source of
authoritative generally accepted accounting principles in the
United States of America. The Codification changed the
referencing of financial standards but did not change or alter
existing U.S. GAAP. The Codification became effective for
the Company in the second quarter of Fiscal 2010.
Business
Combinations and Consolidation
On April 30, 2009, the Company adopted new accounting
guidance on business combinations and noncontrolling interests
in consolidated financial statements. The guidance on business
combinations impacts the accounting for any business
combinations completed after April 29, 2009. The nature and
extent of the impact will depend upon the terms and conditions
of any such transaction. The guidance on noncontrolling
interests changes the accounting and reporting for minority
interests, which have been recharacterized as noncontrolling
interests and classified as a component of equity. Prior period
financial statements and disclosures for existing minority
interests have been restated in accordance with this guidance.
All other requirements of this guidance will be applied
prospectively. The adoption of the guidance on noncontrolling
interests did not have a material impact on the Companys
financial statements.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for transfers of financial assets. This
amendment removes the concept of a qualifying special-purpose
entity and requires that a transferor recognize and initially
measure at fair value all assets obtained and liabilities
incurred as a result of a transfer of financial assets accounted
for as a sale. This amendment also requires additional
disclosures about any transfers of financial assets and a
transferors continuing involvement with transferred
financial assets. This amendment is effective for fiscal years
beginning after November 15, 2009, and interim periods
within those fiscal years. As of January 27, 2010, the
Company has approximately $323 million of trade receivables
associated with factoring and securitization programs that are
not recognized on the balance sheet. The Company is currently
evaluating these arrangements as well as any other potential
impact of adopting this amendment on April 29, 2010, the
first day of Fiscal 2011.
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for variable interest entities. This
amendment changes how a reporting entity determines when an
entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to
consolidate another entity is based on, among other things, the
purpose and design of the other entity and the reporting
entitys ability to direct the activities of the other
entity that most significantly impact its economic performance.
The amendment also requires additional disclosures about a
reporting entitys involvement with variable interest
entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity
affects the reporting entitys financial statements. This
amendment is effective for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal
years. The
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Company is currently evaluating the impact of adopting this
amendment on April 29, 2010, the first day of Fiscal 2011.
Fair
Value
On April 30, 2009, the Company adopted new accounting
guidance on fair value measurements for its non-financial assets
and liabilities that are recognized at fair value on a
non-recurring basis, including long-lived assets, goodwill,
other intangible assets and exit liabilities. This guidance
defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and
expands disclosures about fair value measurements. This guidance
applies whenever other accounting guidance requires or permits
assets or liabilities to be measured at fair value, but does not
expand the use of fair value to new accounting transactions. The
adoption of this guidance did not have a material impact on the
Companys financial statements. See Note 14,
Fair Value Measurements, for additional information.
Postretirement
Benefit Plans and Equity Compensation
On April 30, 2009, the Company adopted accounting guidance
for determining whether instruments granted in share-based
payment transactions are participating securities. This guidance
states 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. As a result of adopting this guidance, the
Company has retrospectively adjusted its earnings per share data
for prior periods. The adoption of this guidance had no impact
on net income and less than a $0.01 impact on basic and diluted
earnings per share from continuing operations for the third
quarters of Fiscal 2010 and 2009. The adoption had no impact on
net income and a $0.01 impact on basic and diluted earnings per
share from continuing operations for the first nine months of
Fiscal 2010 and 2009. See Note 10, Net Income per
Common Share, for additional information.
In December 2008, the FASB issued new accounting guidance on
employers disclosures about postretirement benefit plan
assets. This new guidance requires enhanced disclosures about
plan assets in an employers defined benefit pension or
other postretirement plan. Companies will be required to
disclose information about how investment allocation decisions
are made, the fair value of each major category of plan assets,
the basis used to determine the overall expected long-term rate
of return on assets assumption, a description of the inputs and
valuation techniques used to develop fair value measurements of
plan assets, and significant concentrations of credit risk. This
guidance is effective for fiscal years ending after
December 15, 2009. As this guidance only requires enhanced
disclosures, its adoption during the fourth quarter of Fiscal
2010 will have no impact on the Companys financial
position, results of operations or cash flows.
Other
Areas
In May 2009, the FASB issued new accounting guidance on
subsequent events, which establishes general standards of
accounting for and disclosure of events or transactions that
occur after the balance sheet date but before the financial
statements are issued or are available to be issued. This
guidance describes the circumstances under which an entity
should recognize events or transactions occurring after the
balance sheet date in its financial statements and provides
guidance on the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date. The Company adopted this guidance during the first quarter
of Fiscal 2010, and its application had no impact on the
Companys consolidated financial statements.
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Table of Contents
CAUTIONARY
STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
Statements about future growth, profitability, costs,
expectations, plans, or objectives included in this report,
including in 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 the Companys control and could
cause actual results to differ materially from those expressed
or implied in this report and the financial statements and
footnotes. Uncertainties contained in such statements include,
but are not limited to,
| sales, earnings, and volume growth, | |
| general economic, political, and industry conditions, including those that could impact consumer spending, | |
| competitive conditions, which affect, among other things, customer preferences and the pricing of products, production, and energy costs, | |
| competition from lower-priced private label brands, | |
| 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, | |
| the ability to identify and anticipate and respond through innovation to consumer trends, | |
| the need for product recalls, | |
| the ability to maintain favorable supplier and customer relationships, and the financial viability of those suppliers and customers, | |
| currency valuations and devaluations and interest rate fluctuations, | |
| changes in credit ratings, leverage, and economic conditions, and the impact of these factors on our cost of borrowing and access to capital markets, | |
| 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, | |
| the ability to successfully complete cost reduction programs and increase productivity, | |
| the ability to effectively integrate acquired businesses, | |
| new products, packaging innovations, and product mix, | |
| the effectiveness of advertising, marketing, and promotional programs, | |
| supply chain efficiency, | |
| cash flow initiatives, | |
| risks inherent in litigation, including tax litigation, | |
| the ability to further penetrate and grow and the risk of doing business in international markets, economic or political instability in those markets and the performance of business in hyperinflationary environments, such as Venezuela, | |
| changes in estimates in critical accounting judgments and changes in laws and regulations, including tax laws, | |
| the success of tax planning strategies, |
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Table of Contents
| the possibility of increased pension expense and contributions and other people-related costs, | |
| the potential adverse impact of natural disasters, such as flooding and crop failures, | |
| the ability to implement new information systems and potential disruptions due to failures in information technology systems, | |
| with regard to dividends, dividends must be declared by the Board of Directors and will be subject to certain legal requirements being met at the time of declaration, as well as our Boards view of our anticipated cash needs, and | |
| 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 April 29, 2009. |
The forward-looking statements are and will be based on
managements then current views and assumptions regarding
future events and speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
the securities laws.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes in the Companys market
risk during the nine months ended January 27, 2010. For
additional information, refer to pages
25-27 of the
Companys Annual Report on
Form 10-K
for the fiscal year ended April 29, 2009.
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.
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Table of Contents
PART IIOTHER
INFORMATION
Item 1. | Legal Proceedings |
Nothing to report under this item.
Item 1A. | Risk Factors |
There have been no material changes in our risk factors from
those disclosed in Part I, Item 1A to our Annual
Report on
Form 10-K
for the fiscal year ended April 29, 2009, except as
disclosed in Part II, Item 1A of our Quarterly Report
on
Form 10-Q
for the quarterly period ended October 28, 2009. The risk
factors disclosed in Part I, Item 1A to our Annual
Report on
Form 10-K
for the fiscal year ended April 29, 2009 and in
Part II, Item 1A of our Quarterly Report on
Form 10-Q
for the quarterly period ended October 28, 2009, 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 |
The Board of Directors authorized a share repurchase program on
May 31, 2006 for a maximum of 25 million shares. The
Company did not repurchase any shares of its common stock during
the third quarter of Fiscal 2010. As of January 27, 2010,
the maximum number of shares that may yet be purchased under the
2006 program is 6,716,192.
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.
Item 6. | Exhibits |
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.
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.
101.INS XBRL Instance Document*
101.SCH XBRL Schema Document*
42
Table of Contents
101.CAL XBRL Calculation Linkbase Document*
101.LAB XBRL Labels Linkbase Document*
101.PRE XBRL Presentation Linkbase Document*
101.DEF XBRL Definition Linkbase Document*
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed. |
43
Table of Contents
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 25, 2010
By: |
/s/ Arthur
B. Winkleblack
|
Arthur B. Winkleblack
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 25, 2010
By: |
/s/ Edward
J. McMenamin
|
Edward J. McMenamin
Senior Vice PresidentFinance
and Corporate Controller
(Principal Accounting Officer)
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Table of Contents
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.
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.
101.INS XBRL Instance Document*
101.SCH XBRL Schema Document*
101.CAL XBRL Calculation Linkbase Document*
101.LAB XBRL Labels Linkbase Document*
101.PRE XBRL Presentation Linkbase Document*
101.DEF XBRL Definition Linkbase Document*
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be furnished and not filed. |