In addition to the factors discussed elsewhere in this Report,
the following risks and uncertainties could materially and
adversely affect the Company’s business, financial
condition, and results of operations. Additional risks and
uncertainties that are not presently known to the Company or are
currently deemed by the Company to be immaterial also may impair
the Company’s business operations and financial condition.
Competitive
product and pricing pressures in the food industry and the
financial condition of customers and suppliers could adversely
affect the Company’s ability to gain or maintain market
share and/or profitability.
The Company operates in the highly competitive food industry,
competing with other companies that have varying abilities to
withstand changing market conditions. Any significant change in
the Company’s relationship with a major customer, including
changes in product prices, sales volume, or contractual terms
may impact financial results. Such changes may result because
the Company’s competitors may have substantial financial,
marketing, and other resources that may change the competitive
environment. Private label brands sold by retail customers,
which are typically sold at lower prices, are a source of
competition for certain of our product lines. Such competition
could cause the Company to reduce prices
and/or
increase capital, marketing, and other expenditures, or could
result in the loss of category share. Such changes could have a
material adverse impact on the Company’s net income. As the
retail grocery trade continues to consolidate, the larger retail
customers of the Company could seek to use their positions to
improve their profitability through lower pricing and increased
promotional programs. If the Company is unable to use its scale,
marketing expertise, product innovation, and category leadership
positions to respond to these changes, or is unable to increase
its prices, its profitability and volume growth could be
impacted in a materially adverse way. The success of our
business depends, in part, upon the financial strength and
viability of our suppliers and customers. The financial
condition of those suppliers and customers is affected in large
part by conditions and events that are beyond our control. A
significant deterioration of their financial condition could
adversely affect our financial results.
6
The
Company’s performance may be adversely affected by economic
and political conditions in the U.S. and in various other
nations where it does business.
The Company’s performance has been in the past and may
continue in the future to be impacted by economic and political
conditions in the United States and in other nations. Such
conditions and factors include changes in applicable laws and
regulations, including changes in food and drug laws, accounting
standards and critical accounting estimates, taxation
requirements and environmental laws. Other factors impacting our
operations in the U.S., Venezuela and other international
locations where the Company does business include export and
import restrictions, currency exchange rates, currency
devaluation, recessionary conditions, foreign ownership
restrictions, nationalization, the impact of hyperinflationary
environments, and terrorist acts and political unrest. Such
factors in either domestic or foreign jurisdictions could
materially and adversely affect our financial results.
Our
operating results may be adversely affected by the current
sovereign debt crisis in Europe and related global economic
conditions.
The current Greek debt crisis and related European financial
restructuring efforts may cause the value of the European
currencies, including the Euro, to further deteriorate, thus
reducing the purchasing power of European customers. In
addition, the European crisis is contributing to instability in
global credit markets. The world has recently experienced a
global macroeconomic downturn, and if global economic and market
conditions, or economic conditions in Europe, the
United States or other key markets, remain uncertain,
persist, or deteriorate further, consumer purchasing power and
demand for Company products could decline, and we may experience
material adverse impacts on our business, operating results, and
financial condition.
Increases
in the cost and restrictions on the availability of raw
materials could adversely affect our financial
results.
The Company sources raw materials including agricultural
commodities such as tomatoes, cucumbers, potatoes, onions, other
fruits and vegetables, dairy products, meat, sugar and other
sweeteners, including high fructose corn syrup, spices, and
flour, as well as packaging materials such as glass, plastic,
metal, paper, fiberboard, and other materials in order to
manufacture products. The availability or cost of such
commodities may fluctuate widely due to government policy and
regulation, crop failures or shortages due to plant disease or
insect and other pest infestation, weather conditions, increased
demand for biofuels, or other unforeseen circumstances.
Additionally, the cost of raw materials and finished products
may fluctuate due to movements in cross-currency transaction
rates. To the extent that any of the foregoing or other unknown
factors increase the prices of such commodities or materials and
the Company is unable to increase its prices or adequately hedge
against such changes in a manner that offsets such changes, the
results of its operations could be materially and adversely
affected. Similarly, if supplier arrangements and relationships
result in increased and unforeseen expenses, the Company’s
financial results could be materially and adversely impacted.
Disruption
of our supply chain could adversely affect our
business.
Damage or disruption to our manufacturing or distribution
capabilities due to weather, natural disaster, fire, terrorism,
pandemic, strikes, the financial
and/or
operational instability of key suppliers, distributors,
warehousing and transportation providers, or brokers, or other
reasons could impair our ability to manufacture or sell our
products. To the extent the Company is unable to, or cannot
financially mitigate the likelihood or potential impact of such
events, or to effectively manage such events if they occur,
particularly when a product is sourced from a single location,
there could be a materially adverse affect on our business and
results of operations, and additional resources could be
required to restore our supply chain.
Higher
energy costs and other factors affecting the cost of producing,
transporting, and distributing the Company’s products could
adversely affect our financial results.
Rising fuel and energy costs may have a significant impact on
the cost of operations, including the manufacture,
transportation, and distribution of products. Fuel costs may
fluctuate due to a number of factors outside the control of the
Company, including government policy and regulation and weather
conditions. Additionally, the Company may be unable to maintain
favorable arrangements with respect to the costs of procuring
raw materials, packaging, services, and transporting products,
which could result in increased expenses and negatively affect
operations. If the Company is unable to hedge against such
increases or raise the prices of its products to offset the
changes, its results of operations could be materially and
adversely affected.
The
results of the Company could be adversely impacted as a result
of increased pension, labor, and people-related
expenses.
Inflationary pressures and any shortages in the labor market
could increase labor costs, which could have a material adverse
effect on the Company’s consolidated operating results or
financial condition. The Company’s labor costs include the
cost of providing employee benefits in the U.S. and foreign
jurisdictions, including pension, health and welfare, and
severance benefits. Any declines in market returns could
adversely impact the funding of pension plans, the assets of
which are invested in a diversified portfolio of equity and
fixed income securities and other investments. Additionally, the
annual costs of benefits vary with increased costs of health
care and the outcome of collectively-bargained wage and benefit
agreements.
The
impact of various food safety issues, environmental, legal, tax,
and other regulations and related developments could adversely
affect the Company’s sales and profitability.
The Company is subject to numerous food safety and other laws
and regulations regarding the manufacturing, marketing, and
distribution of food products. These regulations govern matters
such as ingredients, advertising, taxation, relations with
distributors and retailers, health and safety matters, and
environmental concerns. The ineffectiveness of the
Company’s planning and policies with respect to these
matters, and the need to comply with new or revised laws or
regulations with regard to licensing requirements, trade and
pricing practices, environmental permitting, or other food or
safety matters, or new interpretations or enforcement of
existing laws and regulations, as well as any related
litigation, may have a material adverse effect on the
Company’s sales and profitability. Influenza or other
pandemics could disrupt production of the Company’s
products, reduce demand for certain of the Company’s
products, or disrupt the marketplace in the foodservice or
retail environment with consequent material adverse effect on
the Company’s results of operations.
The
need for and effect of product recalls could have an adverse
impact on the Company’s business.
If any of the Company’s products become misbranded or
adulterated, the Company may need to conduct a product recall.
The scope of such a recall could result in significant costs
incurred as a result of the recall, potential destruction of
inventory, and lost sales. Should consumption of any product
cause injury, the Company may be liable for monetary damages as
a result of a judgment against it. A significant product recall
or product liability case could cause a loss of consumer
confidence in the Company’s food products and could have a
material adverse effect on the value of its brands and results
of operations.
The
failure of new product or packaging introductions to gain trade
and consumer acceptance and changes in consumer preferences
could adversely affect our sales.
The success of the Company is dependent upon anticipating and
reacting to changes in consumer preferences, including health
and wellness. There are inherent marketplace risks associated
with new product or packaging introductions, including
uncertainties about trade and consumer acceptance. Moreover,
success is dependent upon the Company’s ability to identify
and respond to consumer trends through innovation. The Company
may be required to increase expenditures for new product
development. The Company may not be successful in developing new
products or improving existing products, or its new products may
not achieve consumer acceptance, each of which could materially
and negatively impact sales.
The
failure to successfully integrate acquisitions and joint
ventures into our existing operations or the failure to gain
applicable regulatory approval for such transactions or
divestitures could adversely affect our financial
results.
The Company’s ability to efficiently integrate acquisitions
and joint ventures into its existing operations also affects the
financial success of such transactions. The Company may seek to
expand its business through acquisitions and joint ventures, and
may divest underperforming or non-core businesses. The
Company’s success depends, in part, upon its ability to
identify such acquisition, joint venture, and divestiture
opportunities and to negotiate favorable contractual terms.
Activities in such areas are regulated by numerous antitrust and
competition laws in the U. S., the European Union, and other
jurisdictions, and the Company may be required to obtain the
approval of acquisition and joint venture transactions by
competition authorities, as well as satisfy other legal
requirements. The failure to obtain such approvals could
materially and adversely affect our results.
The
Company’s operations face significant foreign currency
exchange rate exposure, which could negatively impact its
operating results.
The Company holds assets and incurs liabilities, earns revenue,
and pays expenses in a variety of currencies other than the
U.S. dollar, primarily the British Pound, Euro, Australian
dollar, Canadian dollar, and New Zealand dollar. The
Company’s consolidated financial statements are presented
in U.S. dollars, and therefore the Company must translate
its assets, liabilities, revenue, and expenses into
U.S. dollars for external reporting purposes. Increases or
decreases in the value of the U.S. dollar relative to other
currencies may materially and negatively affect the value of
these items in the Company’s consolidated financial
statements, even if their value has not changed in their
original currency. In addition, the impact of fluctuations in
foreign currency exchange rates on transaction costs ( i.e., the
impact of foreign currency movements on particular transactions
such as raw material sourcing), most notably in the U.K., could
materially and adversely affect our results.
The
Company could incur more debt, which could have an adverse
impact on our business.
The Company may incur additional indebtedness in the future to
fund acquisitions, repurchase shares, or fund other activities
for general business purposes, which could result in a downward
change in credit rating. The Company’s ability to make
payments on and refinance its indebtedness and fund planned
capital expenditures depends upon its ability to generate cash
in the future. The cost of incurring additional debt could
increase in the event of possible downgrades in the
Company’s credit rating.
The
failure to implement our growth plans could adversely affect the
Company’s ability to increase net income and generate
cash.
The success of the Company could be impacted by its inability to
continue to execute on its growth plans regarding product
innovation, implementing cost-cutting measures, improving supply
chain efficiency, enhancing processes and systems, including
information technology systems, on a global basis, and growing
market share and volume. The failure to fully implement the
plans, in a timely manner or within our cost estimates, could
materially and adversely affect the Company’s ability to
increase net income. Additionally, the Company’s ability to
pay cash dividends will depend upon its ability to generate cash
and profits, which, to a certain extent, is subject to economic,
financial, competitive, and other factors beyond the
Company’s control.
CAUTIONARY
STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
Statements about future growth, profitability, costs,
expectations, plans, or objectives included in this report,
including in management’s discussion and analysis, and the
financial statements and footnotes, are forward-looking
statements based on management’s estimates, assumptions,
and projections. These forward-looking statements are subject to
risks, uncertainties, assumptions and other important factors,
many of which may be beyond the Company’s control and could
cause actual results to differ materially from those expressed
or implied in this report and the financial statements and
footnotes. Uncertainties contained in such statements include,
but are not limited to:
The forward-looking statements are and will be based on
management’s then current views and assumptions regarding
future events and speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
the securities laws.
Nothing to report under this item.
See table in Item 1.
PART II
Information relating to the Company’s common stock is set
forth in this report on pages 35 through 36 under the
caption “Stock Market Information” in
Item 7—“Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and on
pages 85 through 86 in Note 16, “Quarterly
Results” in Item 8—“Financial Statements and
Supplementary Data.”
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 fourth quarter of Fiscal 2010. As of April 28, 2010,
the maximum number of shares that may yet be purchased under the
2006 program is 6,716,192.
The following table presents selected consolidated financial
data for the Company and its subsidiaries for each of the five
fiscal years 2006 through 2010. All amounts are in thousands
except per share data.
Sales(1)
Interest expense(1)
Income from continuing operations(1)(4)
Income from continuing operations per share attributable to H.J.
Heinz Company common shareholders—diluted(1)(5)
Income from continuing operations per share attributable to H.J.
Heinz Company common shareholders—basic(1)(5)
Short-term debt and current portion of long-term debt(2)
Long-term debt, exclusive of current portion(2)
Total assets(3)
Cash dividends per common share
Fiscal 2010 results from continuing operations include expenses
of $37.7 million pretax ($27.8 million after tax) for
upfront productivity charges and a gain of $15.0 million
pretax ($11.1 million after tax) on a property disposal in
the Netherlands. The upfront productivity charges include costs
associated with targeted workforce reductions and asset
write-offs, that were part of a corporation-wide initiative to
improve productivity. The asset write-offs related to two
factory closures and the exit of a formula business in the U.K.
See “Discontinued Operations and Other Disposals” in
Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” on
pages 16 through 17 for further explanation of the property
disposal in the Netherlands.
As a result of the Company’s strategic transformation, the
Fiscal 2006 results from continuing operations include expenses
of $124.3 million pretax ($80.1 million after tax) for
targeted workforce reductions consistent with the Company’s
goals to streamline its businesses and expenses of
$22.0 million pretax ($16.3 million after tax) for
strategic review costs related to the potential divestiture of
several businesses. Also, $206.5 million pretax
($153.9 million after tax) was recorded for net losses on
non-core businesses and product lines which were sold in Fiscal
2006, and asset impairment charges on non-core businesses and
product lines which were sold in Fiscal 2007. Also during Fiscal
2006, the Company reversed valuation allowances of
$27.3 million primarily related to The Hain Celestial
Group, Inc. (“Hain”). In addition, results include
$24.4 million of tax expense relating to the impact of the
American Jobs Creation Act.
Executive
Overview- Fiscal 2010
The H.J. Heinz Company has been a pioneer in the food industry
for over 140 years and possesses one of the world’s
best and most recognizable
brands—Heinz®.
The Company has a global portfolio of leading brands focused in
three core categories, Ketchup and Sauces, Meals and Snacks, and
Infant/Nutrition.
In Fiscal 2010, the Company reported diluted earnings per share
from continuing operations of $2.87, compared to $2.91 in the
prior year. During Fiscal 2009, key foreign currencies declined
precipitously versus the U.S. dollar. Given that over 60%
of the Company’s sales and the majority of its net income
are generated outside of the U.S., foreign currency movements
have a significant impact on the Company’s financial
results. However, in Fiscal 2009, forward contracts were put in
place to largely mitigate the unfavorable translation impact on
profit associated with movements in key foreign currencies. In
the first half of Fiscal 2010, foreign currencies remained
unfavorable but began to rebound in the second half of the
fiscal year. Overall, currency movements had a $0.29 unfavorable
impact on the change in EPS from continuing operations in Fiscal
2010 versus 2009, after taking into account the net effect of
current and prior year currency translation contracts, as well
as foreign currency movements on translation and transactions
involving inventory sourcing in the U.K.
EPS from continuing operations for the year reflects 4.8% growth
in sales, a 50 basis point improvement in the gross profit
margin and a 25.7% increase in marketing investments. Full year
sales benefited from combined volume and pricing gains of 2.1%,
led by the emerging markets and our top 15 brands, most notably
the
Heinz®,
Complan®
and
ABC®
brands. Emerging markets generated 30% of the Company’s
reported sales growth and 15% of total Company sales. Also
driving the sales growth was increased consumer marketing
investments and new product development. Acquisitions and
foreign exchange translation rates had a favorable impact on
sales. The gross profit margin increased as a result of
productivity improvements and higher net pricing, partially
offset by higher commodity input costs including the impact of
transaction-related currency cross-rates in the U.K. In Fiscal
2010, the Company incurred $28 million in after-tax charges
for targeted workforce reductions and non-cash asset write-offs
that were part of a corporate-wide initiative to improve
productivity, partially offset by an $11 million after-tax
gain related to a property sale in the Netherlands. The
Company’s Fiscal 2010 EPS from continuing operations
results also reflect reduced net interest expense. Prior year
EPS from continuing operations benefited from $107 million
in currency gains which had an insignificant impact to the
current year. The Company generated record cash flow from
operating activities of $1.26 billion, a $95 million
increase from the prior year.
Management believes these Fiscal 2010 results are indicative of
the effectiveness of the Company’s business plan, which is
focused on the following four strategic pillars:
The recent global recession has dramatically affected consumer
confidence, behavior, spending and ultimately food consumption
patterns. The Company has adapted its strategies to address the
current global economic environment and believes these
strategies have enabled Heinz to drive growth, deliver improved
performance and sustain momentum. The Company has concentrated
on the following:
The Company remains confident in its underlying business
fundamentals and plans to continue to apply these strategies in
Fiscal 2011. Movements in foreign currency exchange rates are
expected to impact Fiscal 2011 reported results.
Discontinued
Operations and Other Disposals
During the third quarter of Fiscal 2010, the Company completed
the sale of its Appetizers And, Inc. frozen hors d’oeuvres
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 d’oeuvres 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 Company’s consolidated statements of income for all
periods presented. The following table presents summarized
operating results for these discontinued operations:
Sales
Net after-tax losses
Tax benefit/(provision) on losses
On March 31, 2010, the Company received cash proceeds of
$95 million from the government of the Netherlands for
property the government acquired through eminent domain
proceedings. The transaction includes the purchase by the
government of the Company’s factory located in Nijmegen,
which produces soups, pasta and cereals. The cash proceeds are
intended to compensate the Company for costs, both capital and
expense, the Company will incur over the next three years to
exit the current factory location and construct certain new
facilities. Note, the Company will likely incur costs to rebuild
an R&D facility in the Netherlands, costs to transfer a
cereal line to another factory location, employee costs for
severance and other costs directly related to the closure and
relocation of the existing facilities. The Company also entered
into a three-year leaseback on the Nijmegen factory. The Company
will continue to operate in the leased factory over the next
three years while commencing to execute its plans for closure
and relocation of the operations. The Company has accounted for
the proceeds on a cost recovery basis. In doing so, the Company
has made its estimates of cost, both of a capital and expense
nature, to be incurred and recovered and to which proceeds from
the transaction will be applied. Of the proceeds received,
$81 million has been deferred based on management’s
total estimated future costs to be recovered and incurred and
has been recorded in other non-current liabilities, other
accrued liabilities and accumulated depreciation in the
Company’s consolidated balance sheet as of April 28,
2010. Proceeds of $15 million represent the excess of
proceeds received over estimated costs to be recovered and
incurred which has been recorded as a
reduction of cost of products sold in the consolidated statement
of income for the year ended April 28, 2010. In the future,
the deferred amounts will be recognized as the related costs are
incurred and if estimated costs differ from amounts actually
incurred there could be adjustments that will be reflected in
earnings.
Results
of Continuing Operations
The Company’s revenues are generated via the sale of
products in the following categories:
Ketchup and sauces
Meals and snacks
Infant/Nutrition
Other
Total
Fiscal
Year Ended April 28, 2010 compared to Fiscal Year Ended
April 29, 2009
Sales for Fiscal 2010 increased $484 million, or 4.8%, to
$10.49 billion. Net pricing increased sales by 3.4%,
largely due to the carryover impact of broad-based price
increases taken in Fiscal 2009 to help offset increased
commodity costs. Volume decreased 1.3%, as favorable volume in
emerging markets was more than offset by declines in the
U.S. and Australian businesses. Volume was impacted by
aggressive competitor promotional activity and softness in some
of the Company’s product categories, 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 15.3%. In addition, the
Company’s top 15 brands performed well, with combined
volume and pricing gains of 3.4%, led by the
Heinz®,
Complan®
and
ABC®
brands. Acquisitions, net of divestitures, increased sales by
2.2%. Foreign exchange translation rates increased sales by 0.5%
compared to the prior year.
Gross profit increased $225 million, or 6.3%, to
$3.79 billion, and the gross profit margin increased to
36.2% from 35.7%. The improvement in gross margin reflects
higher net pricing and productivity improvements, partially
offset by higher commodity costs including transaction currency
costs. Acquisitions had a favorable impact on gross profit
dollars but reduced overall gross profit margin. In addition,
gross profit was unfavorably impacted by lower volume and
$24 million of charges for a corporation-wide initiative to
improve productivity, partially offset by a $15 million
gain related to property sold in the Netherlands as discussed
previously.
Selling, general and administrative expenses
(“SG&A”) increased $168 million, or 8.1%, to
$2.24 billion, and increased as a percentage of sales to
21.3% from 20.6%. The increase reflects the impact from
additional marketing investments, acquisitions, inflation in
Latin America, and higher pension and incentive compensation
expenses. In addition, SG&A was impacted by
$14 million related to targeted workforce reductions in the
current year and a gain in the prior year on the sale of a small
portion control business in the U.S. These increases were
partially offset by improvements in selling and distribution
expenses (“S&D”), reflecting productivity
improvements and lower fuel costs.
Operating income increased $57 million, or 3.8%, to
$1.56 billion, reflecting the items above.
Net interest expense decreased $25 million, to
$251 million, reflecting a $44 million decrease in
interest expense and a $19 million decrease in interest
income. The decreases in interest income and interest expense
are primarily due to lower average interest rates.
Other expenses, net, increased $111 million primarily due
to a $105 million decrease in currency gains, and
$9 million of charges recognized in connection with the
August 2009 dealer remarketable
securities (“DRS”) exchange transaction (see below in
“Liquidity and Financial Position” for further
explanation of this transaction). The decrease in currency gains
reflects prior year gains of $107 million related to
forward contracts that were put in place to help mitigate the
unfavorable impact of translation associated with key foreign
currencies for Fiscal 2009.
The effective tax rate for Fiscal 2010 was 27.8% compared to
28.4% for the prior year. The current year effective tax rate
was lower than the prior year primarily due to tax efficient
financing of the Company’s operations, partially offset by
higher taxes on repatriation of earnings.
Income from continuing operations attributable to H. J. Heinz
Company was $914 million compared to $930 million in
the prior year, a decrease of 1.6%. The decrease reflects the
prior year currency gains discussed above, which were
$66 million after-tax ($0.21 per share), and
$28 million in after-tax charges ($0.09 per share) in
Fiscal 2010 for targeted workforce reductions and non-cash asset
write-offs, partially offset by higher operating income, reduced
net interest expense, a lower effective tax rate and an
$11 million after-tax gain related to property sold in the
Netherlands. Diluted earnings per share from continuing
operations was $2.87 in Fiscal 2010 compared to $2.91 in the
prior year, down 1.4%. EPS movements were unfavorably impacted
by $0.29, or $90 million of net income, 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.
The impact of fluctuating translation exchange rates 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.
FISCAL
YEAR 2010 OPERATING RESULTS BY BUSINESS SEGMENT
North
American Consumer Products
Sales of the North American Consumer Products segment increased
$56 million, or 1.8%, to $3.19 billion. Net prices
grew 1.9% reflecting the carryover impact of price increases
taken across the majority of the product portfolio throughout
Fiscal 2009, partially offset by increased promotional spending
in the current year, particularly on Smart
Ones®
frozen entrees and
Heinz®
ketchup. Volume decreased 1.5%, reflecting declines in
frozen meals and desserts due to category softness, competitor
promotional activity and the impact of price increases. Volume
declines were also noted in
Ore-Ida®
frozen potatoes,
Classico®
pasta sauces and frozen snacks. These volume declines were
partially offset by increases in TGI
Friday’s®
Skillet Meals due to new product introductions and increased
trade promotions and marketing as well as growth in
Heinz®
ketchup. The acquisition of Arthur’s Fresh Company, a small
chilled smoothies business in Canada, at the beginning of the
third quarter of this year increased sales 0.2%. Favorable
Canadian exchange translation rates increased sales 1.3%.
Gross profit increased $80 million, or 6.3%, to
$1.34 billion, and the gross profit margin increased to
41.9% from 40.1%. The higher gross margin reflects productivity
improvements and the carryover impact of price increases,
partially offset by increased commodity costs. The favorable
impact of foreign exchange on gross profit was more than offset
by unfavorable volume. Operating income increased
$47 million, or 6.4%, to $771 million, reflecting the
improvement in gross profit and reduced S&D, partially
offset by increased marketing investment, pension costs and
incentive compensation expense. The improvement in S&D was
a result of productivity projects, tight cost control and lower
fuel costs.
Europe
Heinz Europe sales increased $4 million, or 0.1%, to
$3.33 billion. Unfavorable foreign exchange translation
rates decreased sales by 1.9%. Net pricing increased 2.4%,
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 0.9%, principally due to decreases in France from the
rationalization of low-margin sauces, 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. Lower
volume in Italy reflects the overall category decline in that
country. Volume improvements were posted on soups in the U.K.
and Germany as well as
Heinz®
ketchup across Europe, particularly in Russia where both
ketchup, sauces and infant feeding products are growing at
double digit rates. Acquisitions, net of divestitures, increased
sales 0.5%, largely due to the acquisition of the
Bénédicta®
sauce business in France in the second quarter of Fiscal 2009.
Gross profit decreased $9 million, or 0.7%, to
$1.25 billion, and the gross profit margin decreased to
37.4% from 37.7%. 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 and
productivity improvements. Operating income decreased
$17 million, or 2.9%, to $554 million, due to
unfavorable foreign currency translation and transaction
impacts, as well as increased marketing and higher incentive
compensation expense, partially offset by reduced S&D.
Asia/Pacific
Heinz Asia/Pacific sales increased $380 million, or 23.3%,
to $2.01 billion. Acquisitions increased sales 12.6% 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 2.0%, reflecting current and prior year
increases on
ABC®
products in Indonesia as well as the carryover impact of prior
year price increases and reduced promotions in New Zealand.
These increases were partially offset by reduced net pricing on
Long
Fong®
frozen products in China due to increased promotional spending.
Volume increased 1.0%, as significant growth in
Complan®
and Glucon
D®
nutritional beverages in India and
ABC®
products in Indonesia was more than offset by general softness
in both Australia and New Zealand, which have been impacted by
competitive activity and reduced market demand associated with
higher prices. Favorable exchange translation rates increased
sales by 7.8%.
Gross profit increased $83 million, or 15.6%, to
$612 million, and the gross profit margin declined to 30.5%
from 32.5%. The $83 million increase in gross profit was
due to higher volume and 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.
Acquisitions had a favorable impact on gross profit dollars but
reduced overall gross profit margin. Operating income increased
by $13 million, or 7.0%, to $195 million, as the
increase in gross profit was 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
$21 million, or 1.5%, to $1.43 billion. Pricing
increased sales 4.4%, largely due to prior year price increases
taken across the portfolio. Volume decreased by 5.5%, due to
industry-wide declines in U.S. restaurant traffic and
sales, targeted SKU reductions, the unfavorable impact from
price increases and increased competitive activity. Prior year
divestitures reduced sales 0.4%.
Gross profit increased $49 million, or 13.8%, to
$402 million, and the gross profit margin increased to
28.1% from 24.3%, as cumulative price increases helped return
margins for this business
closer 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. Operating income increased $21 million,
or 16.4%, to $151 million, which is primarily due to gross
profit improvements and reduced S&D reflecting productivity
projects, tight cost control and lower fuel costs. These
improvements were partially offset by increased marketing
expense and higher general and administrative expenses
(“G&A”) resulting from increased pension and
incentive compensation costs 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 $65 million, or 14.0%, to
$533 million. Higher pricing increased sales by 23.1%,
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 2.3% reflecting increases in Latin
America and the Middle East. Acquisitions increased sales 0.8%
due to the prior year acquisition of Papillon, a small chilled
products business in South Africa. Foreign exchange translation
rates decreased sales 12.2%, 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 $37 million, or 23.1%, to
$199 million, due mainly to increased pricing, partially
offset by increased commodity costs and the impact of the VEF
devaluation. Operating income increased $17 million, or
32.2% to $69 million, as the increase in gross profit was
partially offset by increased marketing and higher S&D and
G&A expenses reflecting growth-related investments and
inflation in Latin America.
Fiscal
Year Ended April 29, 2009 compared to Fiscal Year Ended
April 30, 2008
Sales for Fiscal 2009 increased $126 million, or 1.3%, to
$10.01 billion. Net pricing increased sales by 7.1%, as
price increases were taken across the Company’s portfolio
to help compensate for increases in commodity costs. Volume
decreased 1.1%, as a net volume improvement in emerging markets
was more than offset by declines in the U.S., Australian and New
Zealand businesses, which were impacted by the recessionary
economic environment. Volume also declined on frozen products in
the U.K. Acquisitions, net of divestitures, increased sales by
1.9%. Foreign exchange translation rates reduced sales by 6.6%,
reflecting the impact of a strengthening U.S. dollar on
sales generated in international markets.
Sales of the Company’s top 15 brands grew 2.1% from Fiscal
2008, as combined volume and pricing gains exceeded the 6.3%
unfavorable impact of foreign exchange translation rates on
sales. Excluding the impact of foreign exchange, the top 15
brands grew by 8.4%, led by strong growth in
Heinz®,
Ore-Ida®,
Classico®,
Pudliszki®
and
ABC®
branded products. In addition, global ketchup sales increased
3.2% despite a 5.9% unfavorable impact from foreign exchange,
resulting in a 9.1% increase excluding the impact of currency
translation. Emerging markets continued to be an important
growth driver, with sales up 8.8%. Excluding a 7% impact from
unfavorable foreign exchange, emerging markets’ sales grew
15.8%.
Gross profit decreased $83 million, or 2.3%, to
$3.57 billion, as higher net pricing and the favorable
impact of acquisitions was more than offset by a
$238 million unfavorable impact from foreign exchange
translation rates as well as higher commodity costs, including
transaction currency costs in the U.K., and lower volume. The
gross profit margin decreased to 35.7% from 36.9%, as pricing
and productivity improvements were more than offset by increased
commodity costs, which includes the impact of cross currency
sourcing of ingredients, most notably in the U.K.
SG&A decreased $15 million, or 0.7%, to
$2.07 billion, and improved as a percentage of sales to
20.6% from 21.1%. The $15 million decrease in SG&A is
due to a $115 million impact from foreign exchange
translation rates, decreased marketing expense, a life insurance
settlement benefit received in the Fiscal 2009 and a gain on the
sale of a small portion control business in the U.S. These
decreases were partially offset by increased spending on global
task force initiatives, including system capability
improvements, the SG&A from acquisitions and inflation in
Latin America.
Operating income decreased $68 million, or 4.3%, to
$1.5 billion, reflecting the items above, particularly a
$123 million (7.8%) unfavorable impact from foreign
exchange translation rates, and higher commodity costs.
Net interest expense decreased $48 million, to
$275 million, reflecting a $25 million decrease in
interest expense and a $23 million increase in interest
income. Interest expense benefited from lower average interest
rates in Fiscal 2009, which more than offset a higher coupon on
the DRS which were remarketed on December 1, 2008. The
improvement in interest income is due to a $20 million
mark-to-market
gain in Fiscal 2009 on a total rate of return swap which was
entered into in conjunction with the Company’s DRS on
December 1, 2008.
Other income/(expense), net, improved by $109 million, to
$93 million of income compared to ($16) million of
expense in Fiscal 2008, as a $113 million increase in
currency gains was partially offset by an insignificant gain
recognized on the sale of our business in Zimbabwe in Fiscal
2008. The currency gains resulted primarily from forward
contracts that were put in place to help mitigate the
unfavorable translation impact on profit associated with
movements in key foreign currencies for Fiscal 2009.
The effective tax rate for Fiscal 2009 was 28.4% compared to
30.3% for Fiscal 2008. The Fiscal 2009 tax rate was lower than
Fiscal 2008 primarily due to reduced repatriation costs
partially offset by decreased benefits from the revaluation of
tax basis of foreign assets.
Income from continuing operations attributable to H. J. Heinz
Company was $930 million compared to $847 million in
Fiscal 2008, an increase of 9.8%, due to increased currency
gains, reduced net interest expense and a lower effective tax
rate, partially offset by lower operating income reflecting
unfavorable foreign currency movements. Diluted earnings per
share was $2.91 in the Fiscal 2009, an increase of 11.1%,
compared to $2.62 in the Fiscal 2008. Earnings per share also
benefited from a 1.1% reduction in fully diluted shares
outstanding.
The translation impact of fluctuating exchange rates in Fiscal
2009 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 ingredients, most notably
in the U.K., reduced gross profit and operating income but did
not affect sales.
FISCAL
YEAR 2009 OPERATING RESULTS BY BUSINESS SEGMENT
Sales of the North American Consumer Products segment increased
$124 million, or 4.1%, to $3.14 billion. Net prices
grew 6.8% reflecting price increases taken across the majority
of the product portfolio during Fiscal 2009 to help offset
higher commodity costs. Volume decreased 0.4%, as increases in
Ore-Ida®
frozen potatoes,
Heinz®
ketchup and new TGI
Friday’s®
Skillet Meals were more than offset by declines in
Delimex®
frozen products and Smart
Ones®
frozen meals and desserts. The
Ore-Ida®
growth was driven by new products such as Steam n’
Mashtm
in addition to the timing of price increases. The
Heinz®
ketchup improvement was largely due to increased consumption.
The Smart Ones volume decline resulted from softness in the
category, aggressive competitive promotions and the timing of
price increases taken in the fourth quarter of Fiscal 2008,
partially offset by new breakfast product offerings in Fiscal
2009. Lower sales of
Delimex®
frozen meals and snacks was due to a supply interruption in the
first half of Fiscal 2009. Unfavorable Canadian exchange
translation rates decreased sales 2.3%.
Gross profit increased $38 million, or 3.1%, to
$1.26 billion, due primarily to increased pricing partially
offset by unfavorable foreign exchange translation rates. The
gross profit margin decreased
to 40.1% from 40.5%, as increased pricing and productivity
improvements only partially offset increased commodity costs.
Operating income increased $46 million, or 6.8%, to
$725 million, largely reflecting the increase in gross
profit and decreased marketing expense.
Heinz Europe sales decreased $89 million, or 2.6%, to
$3.33 billion. Net pricing increased 7.1%, driven by
Heinz®
ketchup, beans and soup, broad-based increases in our Russian
market, frozen products in the U.K. and Italian infant nutrition
products. Volume decreased 0.5%, primarily due to declines on
frozen products as a result of competitor promotions and the
exit of lower margin products and customers. Volume was also
unfavorably impacted by decreases in
Heinz®
soup and pasta meals in the U.K, and reduced volume in Russia.
These declines were partially offset by new product
introductions in the U.K. and Continental Europe. Acquisitions,
net of divestitures, increased sales 2.6%, primarily due to the
acquisition of the
Bénédicta®
sauce business in France during the second quarter of Fiscal
2009 and the
Wyko®
sauce business in the Netherlands at the end of Fiscal 2008.
Unfavorable foreign exchange translation rates decreased sales
by 11.8%.
Gross profit decreased $110 million, or 8.0%, to
$1.26 billion, and the gross profit margin decreased to
37.7% from 40.0% as unfavorable foreign exchange translation
rates, cross currency rate movements in the British Pound versus
the Euro and U.S. dollar, increased commodity costs and
higher manufacturing costs in the frozen food plants were only
partially offset by improved pricing and the favorable impact
from acquisitions. Operating income decreased $75 million,
or 11.6%, to $571 million, as pricing gains were more than
offset by unfavorable translation, increased commodity costs, a
portion of which was due to the transaction foreign currency
impacts discussed above, increased S&D, a portion of which
was from acquisitions, and higher G&A reflecting
investments in task forces and systems.
Heinz Asia/Pacific sales increased $28 million, or 1.7%, to
$1.63 billion. Pricing increased 6.1%, due to increases on
sardines, sauces and syrup in Indonesia, nutritional beverages
in India and pricing gains across the product portfolios in
Australia and New Zealand. This pricing partially offset
increased commodity costs. Volume decreased 1.4%, as significant
improvements on nutritional beverage sales in India, frozen
foods in Japan and
ABC®
products in Indonesia were more than offset by declines in
convenience meals in Australia and New Zealand and Long
Fong®
frozen products in China. Acquisitions increased sales 6.8% due
to the third quarter Fiscal 2009 acquisitions of Golden Circle
Limited and La Bonne Cuisine. Unfavorable foreign exchange
translation rates decreased sales by 9.8%.
Gross profit increased $3 million, or 0.6%, to
$530 million, while the gross profit margin declined to
32.5% from 32.9%. The $3 million improvement in gross
profit was due to increased pricing and acquisitions, which
offset increased commodity costs, unfavorable foreign exchange
translation rates and reduced volume, particularly in our Long
Fong business as we revised our distribution system and
streamlined our product offerings. Operating income decreased by
$12 million, or 6.4%, to $182 million, as the increase
in gross profit and decreased marketing expense was more than
offset by increased S&D and G&A, a portion of which
was due to acquisitions.
Sales of the U.S. Foodservice segment decreased
$37 million, or 2.5%, to $1.45 billion. Pricing
increased sales 3.7%, largely due to increases on
Heinz®
ketchup, portion control condiments, frozen soups and tomato
products. Volume decreased by 5.3%, reflecting reduced
restaurant foot traffic, the exit of numerous lower margin
products and customers, as well as increased competition on our
non-branded products. Divestitures reduced sales 0.9%.
Gross profit decreased $44 million, or 11.1%, to
$353 million, and the gross profit margin decreased to
24.3% from 26.7%, due to lower volume, higher commodity and
manufacturing costs and Fiscal 2008 gains on commodity
derivative contracts, partially offset by higher pricing.
Operating income decreased $34 million, or 20.7%, to
$129 million, which was primarily due to the decline in
gross profit, partially offset by reduced G&A reflecting a
gain in Fiscal 2009 on the sale of a small, non-core portion
control business.
Sales for Rest of World increased $100 million, or 27.3%,
to $468 million. Volume increased 4.6% driven by increases
in Latin America and the Middle East. Higher pricing increased
sales by 27.6%, largely due to inflation in Latin America and
commodity-related price increases in South Africa and the Middle
East. Acquisitions increased sales 0.2% due to the fourth
quarter Fiscal 2009 acquisition of Papillon, a small chilled
products business in South Africa. Foreign exchange translation
rates decreased sales 5.2%.
Gross profit increased $28 million, or 21.4%, to
$161 million, due mainly to increased pricing and higher
volume, partially offset by increased commodity costs and
unfavorable foreign currency movements. Operating income
increased $7 million, or 15.2% to $52 million due to
the increase in gross profit partially offset by wage inflation
in Latin America.
Liquidity
and Financial Position
For Fiscal 2010, cash provided by operating activities was a
record $1.26 billion compared to $1.17 billion in the
prior year. The improvement in Fiscal 2010 versus Fiscal 2009
was generated despite significant contributions to our pension
plans, and was primarily due to favorable movements in working
capital and reduced tax payments. Additionally, $84 million
of cash was received in the current year in connection with an
accounts receivable securitization program (see additional
explanations below), and the Company also received
$48 million of cash from the termination of a total rate of
return swap. In the prior year, the Company received
$106 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 12, “Derivative Financial
Instruments and Hedging Activities” in
Item 8-“Financial
Statements and Supplementary Data” for additional
information). The Company’s cash conversion cycle improved
8 days, to 47 days in Fiscal 2010. There was a
6 day improvement in inventories as a result of the
Company’s efforts to reduce inventory levels. Receivables
accounted for 5 days of the improvement, 4 days of
which is a result of the accounts receivable securitization
program. Accounts payable partially offset these improvements,
with a 3 day decrease, a portion of which reflects
inventory reductions and the resulting decrease in the amounts
due to suppliers.
During Fiscal 2010, the Company made $540 million of
contributions to the pension plans compared to $134 million
in the prior year. Of this $540 million of payments,
$475 million were discretionary contributions that were
made to help offset the impact of adverse conditions in the
global equity and bond markets in Fiscal 2009. Contributions for
Fiscal 2011 are expected to be less than $50 million;
however, actual contributions may be affected by pension asset
and liability valuations during the year.
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 U.S. receivables
to a wholly-owned, bankruptcy-remote-subsidiary. This subsidiary
then sells all of the rights, title and interest in 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 April 28, 2010 was
$84 million.
Cash provided by investing activities totaled $13 million
compared to using $761 million of cash last year. In the
current year, proceeds from divestitures provided cash of
$19 million which primarily
related to the sale of our Kabobs and Appetizers And, Inc.
frozen hors d’oeuvres 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
$11 million and primarily related to Arthur’s Fresh
Company, a small chilled smoothies business in Canada. In the
prior year, cash paid for acquisitions, net of divestitures,
required $281 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, the
Bénédicta®
sauce business in France and Papillon, a small chilled products
business in South Africa, partially offset by the sale of a
small domestic portion control foodservice business. Capital
expenditures totaled $278 million (2.6% of sales) in Fiscal
2010 compared to $292 million (2.9% of sales) in the prior
year, which is in-line with historic levels. The Company expects
capital spending as a percentage of sales to be approximately 3%
in Fiscal 2011. Proceeds from disposals of property, plant and
equipment were $96 million in Fiscal 2010 compared to
$5 million in the prior year reflecting proceeds received
in the fourth quarter of this year related to property sold in
the Netherlands as discussed previously. The current year
decrease in restricted cash represents collateral that was
released in connection with the termination of a total rate of
return swap in August 2009. The prior year requirement of
$193 million for restricted cash represents the posting of
this collateral.
Cash used for financing activities in the current year totaled
$1.15 billion compared to $516 million last year.
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 paid $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 12,
“Derivative Financial Instruments and Hedging
Activities” in
Item 8-“Financial
Statements and Supplementary Data” for additional
information.
On May 27, 2010, the Company announced that its Board of
Directors approved a 7.1% increase in the quarterly dividend on
common stock from 42.0 cents to 45.0 cents, an annual indicative
rate of $1.80 per share for Fiscal 2011, effective with the July
2010 dividend payment. Fiscal 2011 dividend payments are
expected to be approximately $575 million.
At April 28, 2010, the Company had total debt of
$4.62 billion (including $207 million relating to
hedge accounting adjustments) and cash and cash equivalents of
$483 million. Total debt balances since prior year end
declined $524 million as a result of the items discussed
above. The reported cash as of April 28, 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 in Venezuela.
At April 28, 2010, the Company had $1.7 billion of
credit agreements, $1.2 billion of which expires in April
2012 and $500 million which expires in April 2013. The
credit agreement that expires in 2013 replaced the
$600 million credit agreement that expired in April 2010.
These credit agreements support the Company’s commercial
paper borrowings. As a result, the commercial paper borrowings
are classified as long-term debt based upon the Company’s
intent and ability to refinance these borrowings on a long-term
basis. The credit agreements have identical covenants which
include a leverage ratio covenant in addition to customary
covenants. The Company was in compliance with all of its
covenants as of April 28, 2010 and April 29, 2009. In
addition, the Company has $489 million of foreign lines of
credit available at April 28, 2010.
After-tax return on invested capital (“ROIC”) is
calculated by taking net income attributable to H.J. Heinz
Company, plus net interest expense net of tax, divided by
average invested capital. Average invested capital is a
five-point quarterly average of debt plus total H.J. Heinz
Company shareholders’ equity less cash and cash
equivalents, short-term investments, restricted cash, and the
hedge accounting adjustments. ROIC was 17.8% in Fiscal 2010,
18.4% in Fiscal 2009, and 16.8% in Fiscal 2008. Fiscal 2010 ROIC
was negatively impacted by 0.9% for the losses on discontinued
operations. ROIC in Fiscal 2009 was favorably impacted by 1.1%
due to the $107 million gain on foreign currency forward
contracts discussed earlier. The remaining increase in Fiscal
2010 ROIC compared to Fiscal 2009 is largely due to reduced debt
levels and effective management of the asset base. The increase
in ROIC in Fiscal 2009 versus 2008 was largely due to higher net
income attributable to H.J. Heinz Company and decreased average
H.J. Heinz Company shareholders’ equity reflecting foreign
currency translation adjustments, share repurchases and
effective management of the asset base.
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 Company’s 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 April 28, 2010, the Company’s long-term debt
ratings at Moody’s, Standard & Poor’s and
Fitch Rating have remained consistent at Baa2, BBB and BBB,
respectively.
Contractual
Obligations and Other Commitments
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 Company’s materials and processes, certain supply
contracts contain penalty provisions for early terminations. The
Company does not believe that a material amount of penalties is
reasonably likely to be incurred under these contracts based
upon historical experience and current expectations.
The following table represents the contractual obligations of
the Company as of April 28, 2010.
Long Term Debt(1)
Capital Lease Obligations
Operating Leases
Purchase Obligations
Other Long Term Liabilities Recorded on the Balance Sheet
Other long-term liabilities primarily consist of certain
specific incentive compensation arrangements and pension and
postretirement benefit commitments. The following long-term
liabilities included on the consolidated balance sheet are
excluded from the table above: income taxes and insurance
accruals. The Company is unable to estimate the timing of the
payments for these items.
At April 28, 2010, 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
$73 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.
Off-Balance
Sheet Arrangements and Other Commitments
The Company does not have guarantees or other off-balance sheet
financing arrangements that we believe are reasonably likely to
have a current or future effect on our financial condition,
changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or
capital resources. In addition, the Company does not have any
related party transactions that materially affect the results of
operations, cash flow or financial condition.
As of April 28, 2010, the Company was a party to two
operating leases for buildings and equipment. The Company has
guaranteed supplemental payment obligations of approximately
$130 million at the termination of these leases. The
Company believes, based on current facts and circumstances, that
any payment pursuant to these guarantees is remote.
The Company acted as servicer for $84 million of
U.S. trade receivables sold through an accounts receivable
securitization program that are not recognized on the balance
sheet as of April 28, 2010. In addition, the Company acted
as servicer for approximately $126 million and
$71 million of trade receivables which were sold to
unrelated third parties without recourse as of April 28,
2010 and April 29, 2009, respectively.
No significant credit guarantees existed between the Company and
third parties as of April 28, 2010.
Market
Risk Factors
The Company is exposed to market risks from adverse changes in
foreign exchange rates, interest rates, commodity prices and
production costs. As a policy, the Company does not engage in
speculative or leveraged transactions, nor does the Company hold
or issue financial instruments for trading purposes.
Foreign Exchange Rate Sensitivity: The
Company’s cash flow and earnings are subject to
fluctuations due to exchange rate variation. Foreign currency
risk exists by nature of the Company’s global operations.
The Company manufactures and sells its products on six
continents around the world, and hence foreign currency risk is
diversified.
The Company may attempt to limit its exposure to changing
foreign exchange rates through both operational and financial
market actions. These actions may include entering into forward
contracts, option contracts, or cross currency swaps to hedge
existing exposures, firm commitments and forecasted
transactions. The instruments are used to reduce risk by
essentially creating offsetting currency exposures.
The following table presents information related to foreign
currency contracts held by the Company:
Purpose of Hedge:
Intercompany cash flows
Forecasted purchases of raw materials and finished goods and
foreign currency denominated obligations
Forecasted sales and foreign currency denominated assets
As of April 28, 2010, the Company’s foreign currency
contracts mature within four years. Contracts that meet
qualifying criteria are accounted for as either foreign currency
cash flow hedges, fair value hedges or net investment hedges of
foreign operations. Any gains and losses related to contracts
that do not qualify for hedge accounting are recorded in current
period earnings in other income and expense.
Substantially all of the Company’s foreign business
units’ financial instruments are denominated in their
respective functional currencies. Accordingly, exposure to
exchange risk on foreign currency financial instruments is not
material. (See Note 12, “Derivative Financial
Instruments and Hedging Activities” in
Item 8—“Financial Statements and Supplementary
Data.”)
Interest Rate Sensitivity: The Company
is exposed to changes in interest rates primarily as a result of
its borrowing and investing activities used to maintain
liquidity and fund business operations. The nature and amount of
the Company’s long-term and short-term debt can be expected
to vary as a result of future business requirements, market
conditions and other factors. The Company’s debt
obligations totaled $4.62 billion (including
$207 million relating to hedge accounting adjustments) and
$5.14 billion (including $251 million relating to
hedge accounting adjustments) at April 28, 2010 and
April 29, 2009, respectively. The Company’s debt
obligations are summarized in Note 7, “Debt and
Financing Arrangements” in Item 8—“Financial
Statements and Supplementary Data.”
In order to manage interest rate exposure, the Company utilizes
interest rate swaps to convert fixed-rate debt to floating.
These derivatives are primarily accounted for as fair value
hedges. Accordingly, 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. Based on the amount of
fixed-rate debt converted to floating as of April 28, 2010,
a variance of 1/8% in the related interest rate would cause
annual interest expense related to this debt to change by
approximately $2 million. The following table presents
additional information related to interest rate contracts
designated as fair value hedges by the Company:
Pay floating swaps—notional amount
Net unrealized gains
Weighted average maturity (years)
Weighted average receive rate
Weighted average pay rate
During 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 Company’s DRS. The unwinding of the total rate of
return swap was completed in conjunction with the exchange of
$681 million of DRS discussed in Note 7, “Debt
and Financing Arrangements” in
Item 8-“Financial
Statements and Supplementary Data.” Upon termination of the
swap, the Company received net cash proceeds of
$48 million, in addition to the release of the
$193 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 recorded a benefit in interest income of
$28 million for the year ended April 28, 2010, and
$28 million for the year ended April 29, 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 million
as of April 29, 2009.
The Company had outstanding cross-currency interest rate swaps
with a total notional amount of $160 million as of
April 28, 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.
Net unrealized losses related to these swaps totaled
$12 million as of April 28, 2010. These contracts are
scheduled to mature in Fiscal 2013.
Effect of Hypothetical 10% Fluctuation in Market
Prices: As of April 28, 2010, the
potential gain or loss in the fair value of the Company’s
outstanding foreign currency contracts,
interest rate contracts and cross-currency interest rate swaps
assuming a hypothetical 10% fluctuation in currency and swap
rates would be approximately:
Foreign currency contracts
Interest rate swap contracts
Cross-currency interest rate swaps
However, it should be noted that any change in the fair value of
the contracts, real or hypothetical, would be significantly
offset by an inverse change in the value of the underlying
hedged items. In relation to currency contracts, this
hypothetical calculation assumes that each exchange rate would
change in the same direction relative to the U.S. dollar.
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.
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 subsidiary’s
financial statements are translated using the 4.30 rate, as this
is the rate expected to be applicable to dividend repatriations.
During Fiscal 2010, the Company recorded a $62 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 $81 million at April 28, 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 have been
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 are remeasured
into the Company’s reporting currency (U.S. dollars)
and exchange gains and losses from the remeasurement of
monetary assets and liabilities are 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 subsidiary’s balance sheet. At
April 28, 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
$42 million.
Recently
Issued Accounting Standards
On September 15, 2009, the 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 Company’s
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
transferor’s 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. The Company will adopt this amendment
on April 29, 2010, the first day of Fiscal 2011, and this
adoption is not expected to have a material impact on the
Company’s financial statements.
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
entity’s 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 entity’s 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 entity’s financial statements. This
amendment is effective for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal
years. The
Company will adopt this amendment on April 29, 2010, the
first day of Fiscal 2011, and this adoption is not expected to
have a material impact on the Company’s financial
statements.
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
Company’s financial statements. See Note 10,
“Fair Value Measurements” in
Item 8—“Financial Statements and Supplementary
Data”, 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 had no impact on net income and
a $0.01, $0.01, and $0.02 unfavorable impact on basic and
diluted earnings per share from continuing operations for Fiscal
2010, 2009 and 2008, respectively. See Note 13,
“Income Per Common Share” in
Item 8-“Financial
Statements and Supplementary Data” 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 employer’s defined benefit pension or
other postretirement plan. Companies are 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. The Company adopted this guidance in the
fourth quarter of Fiscal 2010. As this guidance only requires
enhanced disclosures, its adoption did not impact the
Company’s financial position, results of operations, or
cash flows. See Note 11, “Pension and Other
Postretirement Benefit Plans” in
Item 8—“Financial Statements and Supplementary
Data” for additional information.
In May 2010, the FASB issued Accounting Standards Update
No. 2010-19,
“Foreign Currency Issues: Multiple Foreign Currency
Exchange Rates.” The guidance provides clarification of
accounting treatment when reported balances in an entity’s
financial statements differ from their underlying
U.S. dollar denominated values due to different rates being
used for remeasurement and translation. The guidance indicates
that upon adopting highly inflationary accounting for Venezuela,
since the U.S. dollar is now the functional currency of a
Venezuelan subsidiary, there should no longer be any differences
between the amounts reported for financial reporting purposes
and the amount of any underlying U.S. dollar denominated
value held by the subsidiary. Therefore, any differences between
these should either be recognized in the income statement or as
a cumulative translation adjustment, if the difference was
previously recognized as a cumulative translation adjustment. As
discussed above, the Company began applying highly inflationary
accounting for its Venezuelan subsidiary on
the first day of its Fiscal 2010 fourth quarter, however, such
guidance had no impact on the Company’s financial
statements.
Discussion
of Significant Accounting Estimates
In the ordinary course of business, the Company has made a
number of estimates and assumptions relating to the reporting of
results of operations and financial condition in the preparation
of its financial statements in conformity with accounting
principles generally accepted in the United States of
America. Actual results could differ significantly from those
estimates under different assumptions and conditions. The
Company believes that the following discussion addresses its
most critical accounting policies, which are those that are most
important to the portrayal of the Company’s financial
condition and results and require management’s most
difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that
are inherently uncertain.
Marketing Costs—Trade promotions are an important
component of the sales and marketing of the Company’s
products and are critical to the support of the business. Trade
promotion costs include amounts paid to retailers to offer
temporary price reductions for the sale of the Company’s
products to consumers, amounts paid to obtain favorable display
positions in retailers’ stores, and amounts paid to
customers for shelf space in retail stores. Accruals for trade
promotions are initially recorded at the time of sale of product
to the customer based on an estimate of the expected levels of
performance of the trade promotion, which is dependent upon
factors such as historical trends with similar promotions,
expectations regarding customer participation, and sales and
payment trends with similar previously offered programs. Our
original estimated costs of trade promotions may change in the
future as a result of changes in customer participation,
particularly for new programs and for programs related to the
introduction of new products. We perform monthly evaluations of
our outstanding trade promotions, making adjustments where
appropriate to reflect changes in estimates. Settlement of these
liabilities typically occurs in subsequent periods primarily
through an authorization process for deductions taken by a
customer from amounts otherwise due to the Company. As a result,
the ultimate cost of a trade promotion program is dependent on
the relative success of the events and the actions and level of
deductions taken by the Company’s customers for amounts
they consider due to them. Final determination of the
permissible deductions may take extended periods of time and
could have a significant impact on the Company’s results of
operations depending on how actual results of the programs
compare to original estimates.
We offer coupons to consumers in the normal course of our
business. Expenses associated with this activity, which we refer
to as coupon redemption costs, are accrued in the period in
which the coupons are offered. The initial estimates made for
each coupon offering are based upon historical redemption
experience rates for similar products or coupon amounts. We
perform monthly evaluations of outstanding coupon accruals that
compare actual redemption rates to the original estimates. We
review the assumptions used in the valuation of the estimates
and determine an appropriate accrual amount. Adjustments to our
initial accrual may be required if actual redemption rates vary
from estimated redemption rates.
Investments and Long-lived Assets, including Property, Plant
and Equipment—Investments and long-lived assets are
recorded at their respective cost basis on the date of
acquisition. Buildings, equipment and leasehold improvements are
depreciated on a straight-line basis over the estimated useful
life of such assets. The Company reviews investments and
long-lived assets, including intangibles with finite useful
lives, and property, plant and equipment, whenever circumstances
change such that the indicated recorded value of an asset may
not be recoverable or has suffered an
other-than-temporary
impairment. Factors that may affect recoverability include
changes in planned use of equipment or software, the closing of
facilities and changes in the underlying financial strength of
investments. The estimate of current value requires significant
management judgment and requires assumptions that can include:
future volume trends and revenue and expense growth rates
developed in connection with the Company’s internal
projections and annual operating plans,
and in addition, external factors such as changes in
macroeconomic trends. As each is management’s best estimate
on then available information, resulting estimates may differ
from actual cash flows and estimated fair values.
Goodwill and Indefinite-Lived Intangibles—Carrying
values of goodwill and intangible assets with indefinite lives
are reviewed for impairment at least annually, or when
circumstances indicate that a possible impairment may exist.
Indicators such as unexpected adverse economic factors,
unanticipated technological change or competitive activities,
decline in expected cash flows, slower growth rates, loss of key
personnel, and acts by governments and courts, may signal that
an asset has become impaired.
All goodwill is assigned to reporting units, which are primarily
one level below our operating segments. Goodwill is assigned to
the reporting unit that benefits from the cash flows arising
from each business combination. We perform our impairment tests
of goodwill at the reporting unit level. The Company has 17
reporting units globally that have assigned goodwill and are
thus required to be tested for impairment.
The Company’s measure of impairment for both goodwill and
intangible assets with indefinite lives is based on a discounted
cash flow model as management believes forecasted cash flows are
the best indicator of fair value. A number of significant
assumptions and estimates are involved in the application of the
discounted cash flow model, including future volume trends,
revenue and expense growth rates, terminal growth rates,
weighted-average cost of capital, tax rates, capital spending
and working capital changes. The assumptions used in the models
were determined utilizing historical data, current and
anticipated market conditions, product category growth rates,
management plans, and market comparables. Most of these
assumptions vary significantly among the reporting units, but
generally, higher assumed growth rates were utilized in emerging
markets when compared to developed markets. For each reporting
unit and indefinite-lived intangible asset, we used a
market-participant, risk-adjusted-weighted-average cost of
capital to discount the projected cash flows of those operations
or assets. Such discount rates ranged from 6-17% in Fiscal 2010.
Management believes the assumptions used for the impairment
evaluation are consistent with those that would be utilized by
market participants performing similar valuations of our
reporting units. We validated our fair values for reasonableness
by comparing the sum of the fair values for all of our reporting
units, including those with no assigned goodwill, to our market
capitalization and a reasonable control premium.
During the fourth quarter of Fiscal 2010, the Company completed
its annual review of goodwill and indefinite-lived intangible
assets. No impairments were identified during the Company’s
annual assessment of goodwill and indefinite-lived intangible
assets. The fair values of each reporting unit significantly
exceeded their carrying values, with the exception of two
reporting units, in which there was only a minor excess. The
goodwill associated with these two reporting units is not
material as of April 28, 2010.
Retirement Benefits—The Company sponsors pension and
other retirement plans in various forms covering substantially
all employees who meet eligibility requirements. Several
actuarial and other factors that attempt to anticipate future
events are used in calculating the expense and obligations
related to the plans. These factors include assumptions about
the discount rate, expected return on plan assets, turnover
rates and rate of future compensation increases as determined by
the Company, within certain guidelines. In addition, the Company
uses best estimate assumptions, provided by actuarial
consultants, for withdrawal and mortality rates to estimate
benefit expense. The financial and actuarial assumptions used by
the Company may differ materially from actual results due to
changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant
impact to the amount of pension expense recorded by the Company.
The Company recognized pension expense related to defined
benefit programs of $25 million, $6 million, and
$7 million for fiscal years 2010, 2009, and 2008,
respectively, which reflected expected
return on plan assets of $211 million, $208 million,
and $227 million, respectively. The Company contributed
$540 million to its pension plans in Fiscal 2010 compared
to $134 million in Fiscal 2009 and $58 million in
Fiscal 2008. The Company expects to contribute less than
$50 million to its pension plans in Fiscal 2011.
One of the significant assumptions for pension plan accounting
is the expected rate of return on pension plan assets. Over
time, the expected rate of return on assets should approximate
actual long-term returns. In developing the expected rate of
return, the Company considers average real historic returns on
asset classes, the investment mix of plan assets, investment
manager performance and projected future returns of asset
classes developed by respected advisors. When calculating the
expected return on plan assets, the Company primarily uses a
market-related-value of assets that spreads asset gains and
losses (difference between actual return and expected return)
uniformly over 3 years. The weighted average expected rate
of return on plan assets used to calculate annual expense was
8.1% for the year end April 28, 2010 and 8.2% for the years
ended April 29, 2009 and April 30, 2008. For purposes
of calculating Fiscal 2011 expense, the weighted average rate of
return will be approximately 8.2%.
Another significant assumption used to value benefit plans is
the discount rate. The discount rate assumptions used to value
pension and postretirement benefit obligations reflect the rates
available on high quality fixed income investments available (in
each country where the Company operates a benefit plan) as of
the measurement date. The Company uses bond yields of
appropriate duration for each country by matching it with the
duration of plan liabilities. The weighted average discount rate
used to measure the projected benefit obligation for the year
ending April 28, 2010 decreased to 5.6% from 6.5% as of
April 29, 2009.
Deferred gains and losses result from actual experience
different from expected financial and actuarial assumptions. The
pension plans currently have a deferred loss amount of
$1.09 billion at April 28, 2010. Deferred gains and
losses are amortized through the actuarial calculation into
annual expense over the estimated average remaining service
period of plan participants, which is currently 10 years.
However, if all or almost all of a plan’s participants are
inactive, deferred gains and losses are amortized through the
actuarial calculation into annual expense over the estimated
average remaining life expectancy of the inactive participants.
The Company also provides certain postretirement health care
benefits. The postretirement health care benefit expense and
obligation are determined using the Company’s assumptions
regarding health care cost trend rates. The health care trend
rates are developed based on historical cost data, the near-term
outlook on health care trends and the likely long-term trends.
The postretirement health care benefit obligation at April 28,
2010 as determined using an average initial health care trend
rate of 7.1% which gradually decreases to an average ultimate
rate of 4.8% in 6 years. A one percentage point increase in
the assumed health care cost trend rate would increase the
service and interest cost components of annual expense by
$2 million and increase the benefit obligation by
$16 million. A one percentage point decrease in the assumed
health care cost trend rates would decrease the service and
interest cost by $2 million and decrease the benefit
obligation by $15 million.
The Patient Protection and Affordable Care Act (PPACA) was
signed into law on March 23, 2010, and on March 30,
2010, the Health Care and Education Reconciliation Act of 2010
(HCERA) was signed into law, which amends certain aspects of the
PPACA. Among other things, the PPACA reduces the tax benefits
available to an employer that receives the Medicare Part D
subsidy. As a result of the PPACA, the Company was required to
recognize in Fiscal 2010 tax expense of $4 million
(approximately $0.01 per share) related to reduced deductibility
in future periods of the postretirement prescription drug
coverage. The PPACA and HCERA (collectively referred to as the
Act) will have both immediate and long-term ramifications for
many employers that provide retiree health benefits.
Sensitivity
of Assumptions
If we assumed a 100 basis point change in the following
rates, the Company’s Fiscal 2010 projected benefit
obligation and expense would increase (decrease) by the
following amounts (in millions):
Pension benefits
Discount rate used in determining projected benefit obligation
Discount rate used in determining net pension expense
Long-term rate of return on assets used in determining net
pension expense
Other benefits
Discount rate used in determining net benefit expense
Income Taxes—The Company computes its annual tax
rate based on the statutory tax rates and tax planning
opportunities available to it in the various jurisdictions in
which it earns income. Significant judgment is required in
determining the Company’s annual tax rate and in evaluating
uncertainty in its tax positions. The Company recognizes a
benefit for tax positions that it believes will more likely than
not be sustained upon examination. The amount of benefit
recognized is the largest amount of benefit that the Company
believes has more than a 50% probability of being realized upon
settlement. The Company regularly monitors its tax positions and
adjusts the amount of recognized tax benefit based on its
evaluation of information that has become available since the
end of its last financial reporting period. The annual tax rate
includes the impact of these changes in recognized tax benefits.
When adjusting the amount of recognized tax benefits the Company
does not consider information that has become available after
the balance sheet date, but does disclose the effects of new
information whenever those effects would be material to the
Company’s financial statements. The difference between the
amount of benefit taken or expected to be taken in a tax return
and the amount of benefit recognized for financial reporting
represents unrecognized tax benefits. These unrecognized tax
benefits are presented in the balance sheet principally within
accrued income taxes.
The Company records valuation allowances to reduce deferred tax
assets to the amount that is more likely than not to be
realized. When assessing the need for valuation allowances, the
Company considers future taxable income and ongoing prudent and
feasible tax planning strategies. Should a change in
circumstances lead to a change in judgment about the
realizability of deferred tax assets in future years, the
Company would adjust related valuation allowances in the period
that the change in circumstances occurs, along with a
corresponding increase or charge to income.
Input
Costs
In general, the effects of cost inflation may be experienced by
the Company in future periods. During Fiscals 2009 and 2010, the
Company experienced wide-spread inflationary increases in
commodity input costs. Price increases and continued
productivity improvements have helped to offset these cost
increases. While recently there has been a general decline in
commodity inflation, some key input costs remain above historic
levels. Productivity improvements are expected to help mitigate
such costs.
Stock
Market Information
H. J. Heinz Company common stock is traded principally on
The New York Stock Exchange under the symbol HNZ. The number of
shareholders of record of the Company’s common stock as of
May 31, 2010 approximated 35,400. The closing price of the
common stock on The New York Stock Exchange composite listing on
April 28, 2010 was $45.76.
Stock price information for common stock by quarter follows:
2010
First
Second
Third
Fourth
2009
This information is set forth in this report in
Item 7—“Management’s Discussion and Analysis
of Financial Condition and Results of Operations” on pages
27 through 29.
Item 8. Financial
Statements and Supplementary Data.
TABLE OF
CONTENTS
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company. Internal control over financial reporting refers to the
process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, and effected by
our Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles in the United States of America, and
includes those policies and procedures that:
(1) Pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles;
(3) Provide reasonable assurance that receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the
Company; and
(4) Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management has used the framework set forth in the report
entitled “Internal
Control—Integrated
Framework” published by the Committee of Sponsoring
Organizations of the Treadway Commission to evaluate the
effectiveness of the Company’s internal control over
financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Management has concluded that the
Company’s internal control over financial reporting was
effective as of the end of the most recent fiscal year.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, audited the effectiveness of the Company’s
internal control over financial reporting as of April 28,
2010, as stated in their report which appears herein.
/s/ William
R. Johnson
/s/ Arthur
B. Winkleblack
June 17, 2010
To the Board of Directors and Shareholders of
H. J. Heinz Company:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of H. J. Heinz
Company and its subsidiaries at April 28, 2010 and
April 29, 2009, and the results of their operations and
their cash flows for each of the three years in the period ended
April 28, 2010 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of April 28, 2010, based on criteria
established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is
responsible for these financial statements and financial
statement schedule, for maintaining effective internal control
over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the Report of Management on Internal Control over
Financial Reporting appearing under Item 8. Our
responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the
Company’s internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 2 to the accompanying consolidated
financial statements, effective April 30, 2009, the Company
changed its accounting and reporting for noncontrolling
interests, business combinations, and earnings per share.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Pittsburgh, Pennsylvania
June 17, 2010
H. J.
Heinz Company and Subsidiaries
Cost of products sold
Gross profit
Selling, general and administrative expenses
Operating income
Interest income
Interest expense
Other (expense)/income, net
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Less: Net income attributable to the noncontrolling interest
Net income attributable to H. J. Heinz Company
Income/(loss) per common share:
Diluted
Continuing operations attributable to H. J. Heinz Company common
shareholders
Discontinued operations attributable to H. J. Heinz Company
common shareholders
Net income attributable to H. J. Heinz Company common
shareholders
Average common shares outstanding—diluted
Basic
Average common shares outstanding—basic
Cash dividends per share
Amounts attributable to H. J. Heinz Company common shareholders:
Income from continuing operations, net of tax
Loss from discontinued operations, net of tax
Net income
(Per share amounts may not add due to rounding)
See Notes to Consolidated Financial Statements
Assets
Current assets:
Cash and cash equivalents
Trade receivables (net of allowances: 2010—$10,196 and
2009—$10,233)
Other receivables (net of allowances: 2010—$268 and
2009—$1,162)
Inventories:
Finished goods and
work-in-process
Packaging material and ingredients
Total inventories
Prepaid expenses
Other current assets
Total current assets
Property, plant and equipment:
Land
Buildings and leasehold improvements
Equipment, furniture and other
Less accumulated depreciation
Total property, plant and equipment, net
Other non-current assets:
Goodwill
Trademarks, net
Other intangibles, net
Long-term restricted cash
Other non-current assets
Total other non-current assets
Total assets
Consolidated
Balance Sheets
Liabilities and Equity
Current liabilities:
Short-term debt
Portion of long-term debt due within one year
Trade payables
Other payables
Salaries and wages
Accrued marketing
Other accrued liabilities
Income taxes
Total current liabilities
Long-term debt and other non-current liabilities:
Long-term debt
Deferred income taxes
Non-pension post-retirement benefits
Other non-current liabilities
Total long-term debt and other non-current liabilities
Equity:
Capital stock:
Third cumulative preferred, $1.70 first series, $10 par
value(1)
Common stock, 431,096 shares issued, $0.25 par value
Additional capital
Retained earnings
Less:
Treasury shares, at cost (113,404 shares at April 28,
2010 and 116,237 shares at April 29, 2009)
Accumulated other comprehensive loss
Total H.J. Heinz Company shareholders’ equity
Noncontrolling interest(2)
Total equity
Total liabilities and equity
See Notes to Consolidated Financial
Statements
PREFERRED STOCK
Balance at beginning of year
Conversion of preferred into common stock
Balance at end of year
Authorized shares- April 28, 2010
COMMON STOCK
ADDITIONAL CAPITAL
Stock options exercised, net of shares tendered for payment
Stock option expense
Restricted stock unit activity
Initial adoption of accounting guidance for uncertainty in
income taxes
Tax settlement(1)
Purchase of subsidiary shares from noncontrolling interests(2)
Other, net(3)
RETAINED EARNINGS
Net income attributable to H.J. Heinz Company
Cash dividends:
Preferred (per share $1.70 per share in 2010, 2009 and 2008)
Common (per share $1.68, $1.66, and $1.52 in 2010, 2009 and
2008, respectively)
Other(5)
TREASURY STOCK
Shares reacquired
Consolidated
Statements of Equity
OTHER COMPREHENSIVE (LOSS)/INCOME
Balance at beginning of year
Net pension and post-retirement benefit gains/(losses)
Reclassification of net pension and post-retirement benefit
losses to net income
Unrealized translation adjustments
Net change in fair value of cash flow hedges
Net hedging losses/(gains) reclassified into earnings
Purchase of subsidiary shares from noncontrolling interests(2)
Balance at end of year
TOTAL H.J. HEINZ COMPANY SHAREHOLDERS’ EQUITY
NONCONTROLLING INTEREST
Net income attributable to the noncontrolling interest
Other comprehensive income, net of tax:
Net pension and post-retirement benefit losses
Unrealized translation adjustments
Net change in fair value of cash flow hedges
Net hedging losses/(gains) reclassified into earnings
Dispositions of minority-owned entities
Purchase of subsidiary shares from noncontrolling interests(2)
Dividends paid to noncontrolling interest
TOTAL EQUITY
COMPREHENSIVE INCOME
Net income
Net pension and post-retirement benefit gains/(losses)
Reclassification of net pension and post-retirement benefit
losses to net income
Total comprehensive income/(loss)
Comprehensive income attributable to the noncontrolling interest
Comprehensive income/(loss) attributable to H.J. Heinz Company
Note: See Footnote explanations on Page 43
Operating activities:
Net income
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation
Amortization
Deferred tax provision
Net losses/(gains) on disposals
Pension contributions
Other items, net
Changes in current assets and liabilities, excluding effects of
acquisitions and divestitures:
Receivable securitization facility
Receivables
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued liabilities
Income taxes
Cash provided by operating activities
Investing activities:
Capital expenditures
Proceeds from disposals of property, plant and equipment
Acquisitions, net of cash acquired
Proceeds from divestitures
Change in restricted cash
Termination of net investment hedges
Other items, net
Cash provided by/( used for) investing activities
Financing activities:
Payments on long-term debt
Proceeds from long-term debt
Net (payments on)/proceeds from commercial paper and short-term
debt
Dividends
Purchases of treasury stock
Exercise of stock options
Acquisition of subsidiary shares from noncontrolling interests
Termination of interest rate swaps
Cash used for financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Fiscal
Year:
H. J. Heinz Company (the “Company”) operates on a
52-week or 53-week fiscal year ending the Wednesday nearest
April 30. However, certain foreign subsidiaries have
earlier closing dates to facilitate timely reporting. Fiscal
years, for the financial statements included herein, ended
April 28, 2010, April 29, 2009, and April 30,
2008.
Principles
of Consolidation:
The consolidated financial statements include the accounts of
the Company and entities in which the Company maintains a
controlling financial interest. Control is generally determined
based on the majority ownership of an entity’s voting
interests. In certain situations, control is based on
participation in the majority of an entity’s economic risks
and rewards. Investments in certain companies over which the
Company exerts significant influence, but does not control the
financial and operating decisions, are accounted for as equity
method investments. All intercompany accounts and transactions
are eliminated. Certain prior year amounts have been
reclassified to conform with the Fiscal 2010 presentation.
Use of
Estimates:
The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from these estimates.
Translation
of Foreign Currencies:
For all significant foreign operations, the functional currency
is the local currency. Assets and liabilities of these
operations are translated at the exchange rate in effect at each
year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation
adjustments arising from the use of differing exchange rates
from period to period are included as a component of other
comprehensive income/(loss) within shareholders’ equity.
Gains and losses from foreign currency transactions are included
in net income for the period.
Highly
Inflationary Accounting:
The Company applies highly inflationary accounting if the
cumulative inflation rate in an economy for a three-year period
meets or exceeds 100 percent. Under highly inflationary
accounting, the financial statements of a subsidiary are
remeasured into the Company’s reporting currency
(U.S. dollars) and exchange gains and losses from the
remeasurement of monetary assets and liabilities are 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. See Note 19 for
additional information.
Cash
Equivalents:
Cash equivalents are defined as highly liquid investments with
original maturities of 90 days or less.
Notes to
Consolidated Financial
Statements — (Continued)
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined principally under the average cost method.
Property,
Plant and Equipment:
Land, buildings and equipment are recorded at cost. For
financial reporting purposes, depreciation is provided on the
straight-line method over the estimated useful lives of the
assets, which generally have the following ranges:
buildings—40 years or less, machinery and
equipment—15 years or less, computer software—3
to 7 years, and leasehold improvements—over the life
of the lease, not to exceed 15 years. Accelerated
depreciation methods are generally used for income tax purposes.
Expenditures for new facilities and improvements that
substantially extend the capacity or useful life of an asset are
capitalized. Ordinary repairs and maintenance are expensed as
incurred. When property is retired or otherwise disposed, the
cost and related accumulated depreciation are removed from the
accounts and any related gains or losses are included in income.
The Company reviews property, plant and equipment, whenever
circumstances change such that the indicated recorded value of
an asset may not be recoverable. Factors that may affect
recoverability include changes in planned use of equipment or
software, and the closing of facilities. The Company’s
impairment review is based on an undiscounted cash flow analysis
at the lowest level for which identifiable cash flows exist and
are largely independent. When the carrying value of the asset
exceeds the future undiscounted cash flows, an impairment is
indicated and the asset is written down to its fair value.
Goodwill
and Intangibles:
Intangible assets with finite useful lives are amortized on a
straight-line basis over the estimated periods benefited, and
are reviewed when appropriate for possible impairment, similar
to property, plant and equipment. Goodwill and intangible assets
with indefinite useful lives are not amortized. The carrying
values of goodwill and other intangible assets with indefinite
useful lives are tested at least annually for impairment, or
when circumstances indicate that a possible impairment may
exist. The annual impairment tests are performed as of the last
day of the third quarter of each fiscal year. All goodwill is
assigned to reporting units, which are primarily one level below
our operating segments. We perform our impairment tests of
goodwill at the reporting unit level. The Company’s measure
of impairment for both goodwill and intangible assets with
indefinite lives is based on a discounted cash flow model, using
a market participant approach, that requires significant
judgment and requires assumptions about future volume trends,
revenue and expense growth rates, terminal growth rates,
discount rates, tax rates, working capital changes and
macroeconomic factors.
Revenue
Recognition:
The Company recognizes revenue when title, ownership and risk of
loss pass to the customer. This primarily occurs upon delivery
of the product to the customer. For the most part, customers do
not have the right to return products unless damaged or
defective. Revenue is recorded, net of sales incentives, and
includes shipping and handling charges billed to customers.
Shipping and handling costs are primarily classified as part of
selling, general and administrative expenses.
Marketing
Costs:
The Company promotes its products with advertising, consumer
incentives and trade promotions. Such programs include, but are
not limited to, discounts, coupons, rebates, in-store display
incentives and volume-based incentives. Advertising costs are
expensed as incurred. Consumer
incentive and trade promotion activities are primarily recorded
as a reduction of revenue or as a component of cost of products
sold based on amounts estimated as being due to customers and
consumers at the end of a period, based principally on
historical utilization and redemption rates. Accruals for trade
promotions are initially recorded at the time of sale of product
to the customer based on an estimate of the expected levels of
performance of the trade promotion, which is dependent upon
factors such as historical trends with similar promotions,
expectations regarding customer participation, and sales and
payment trends with similar previously offered programs. We
perform monthly evaluations of our outstanding trade promotions,
making adjustments where appropriate to reflect changes in
estimates. Settlement of these liabilities typically occurs in
subsequent periods primarily through an authorization process
for deductions taken by a customer from amounts otherwise due to
the Company. Expenses associated with coupons, which we refer to
as coupon redemption costs, are accrued in the period in which
the coupons are offered. The initial estimates made for each
coupon offering are based upon historical redemption experience
rates for similar products or coupon amounts. We perform monthly
evaluations of outstanding coupon accruals that compare actual
redemption rates to the original estimates. For interim
reporting purposes, advertising, consumer incentive and product
placement expenses are charged to operations as a percentage of
volume, based on estimated volume and related expense for the
full year.
Income
Taxes:
Deferred income taxes result primarily from temporary
differences between financial and tax reporting. If it is more
likely than not that some portion or all of a deferred tax asset
will not be realized, a valuation allowance is recognized. When
assessing the need for valuation allowances, the Company
considers future taxable income and ongoing prudent and feasible
tax planning strategies. Should a change in circumstances lead
to a change in judgment about the realizability of deferred tax
assets in future years, the Company would adjust related
valuation allowances in the period that the change in
circumstances occurs, along with a corresponding increase or
charge to income.
The Company has not provided for possible U.S. taxes on the
undistributed earnings of foreign subsidiaries that are
considered to be reinvested indefinitely. Calculation of the
unrecognized deferred tax liability for temporary differences
related to these earnings is not practicable.
Stock-Based
Employee Compensation Plans:
The Company recognizes the cost of all stock-based awards to
employees, including grants of employee stock options, on a
straight-line basis over their respective requisite service
periods (generally equal to an award’s vesting period). A
stock-based award is considered vested for expense attribution
purposes when the employee’s retention of the award is no
longer contingent on providing subsequent service. Accordingly,
the Company recognizes compensation cost immediately for awards
granted to retirement-eligible individuals or over the period
from the grant date to the date retirement eligibility is
achieved, if less than the stated vesting period. The vesting
approach used does not affect the overall amount of compensation
expense recognized, but could accelerate the recognition of
expense. The Company follows its previous vesting approach for
the remaining portion of those outstanding awards that were
unvested and granted prior to May 4, 2006, and accordingly,
will recognize expense from the grant date to the earlier of the
actual date of retirement or the vesting date. Judgment is
required in estimating the amount of stock-based awards expected
to be forfeited prior to vesting. If actual forfeitures differ
significantly from these estimates, stock-based compensation
expense could be materially impacted.
Compensation cost related to all stock-based awards is
determined using the grant date fair value. Determining the fair
value of employee stock options at the grant date requires
judgment in
estimating the expected term that the stock options will be
outstanding prior to exercise as well as the volatility and
dividends over the expected term. Compensation cost for
restricted stock units is determined based on the fair value of
the Company’s stock at the grant date. The Company applies
the modified-prospective transition method for stock options
granted on or prior to, but not vested as of, May 3, 2006.
Compensation cost related to these stock options is determined
using the grant date fair value originally estimated and
disclosed in a pro-forma manner in prior period financial
statements in accordance with the original provisions of the
Financial Accounting Standards Board’s
(“FASB’s”) guidance for stock compensation.
All stock-based compensation expense is recognized as a
component of general and administrative expenses in the
Consolidated Statements of Income.
Financial
Instruments:
The Company’s financial instruments consist primarily of
cash and cash equivalents, receivables, accounts payable,
short-term and long-term debt, swaps, forward contracts, and
option contracts. The carrying values for the Company’s
financial instruments approximate fair value. As a policy, the
Company does not engage in speculative or leveraged
transactions, nor does the Company hold or issue financial
instruments for trading purposes.
The Company uses derivative financial instruments for the
purpose of hedging currency, debt and interest rate exposures,
which exist as part of ongoing business operations. The Company
carries derivative instruments on the balance sheet at fair
value, determined using observable market data. Derivatives with
scheduled maturities of less than one year are included in other
receivables or other payables, based on the instrument’s
fair value. Derivatives with scheduled maturities beyond one
year are classified between current and long-term based on the
timing of anticipated future cash flows. The current portion of
these instruments is included in other receivables or other
payables and the long-term portion is presented as a component
of other non-current assets or other non-current liabilities,
based on the instrument’s fair value.
The accounting for changes in the fair value of a derivative
instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, the
reason for holding it. Gains and losses on fair value hedges are
recognized in current period earnings in the same line item as
the underlying hedged item. The effective portion of gains and
losses on cash flow hedges are deferred as a component of
accumulated other comprehensive loss and are recognized in
earnings at the time the hedged item affects earnings, in the
same line item as the underlying hedged item. Hedge
ineffectiveness related to cash flow hedges is reported in
current period earnings within other income and expense. The
income statement classification of gains and losses related to
derivative contracts that do not qualify for hedge accounting is
determined based on the underlying intent of the contracts. Cash
flows related to the settlement of derivative instruments
designated as net investment hedges of foreign operations are
classified in the consolidated statements of cash flows within
investing activities. Cash flows related to the termination of
derivative instruments designated as fair value hedges of fixed
rate debt obligations are classified in the consolidated
statements of cash flows within financing activities. All other
cash flows related to derivative instruments are generally
classified in the consolidated statements of cash flows within
operating activities.
On September 15, 2009, the 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.
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
entity’s 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 entity’s 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 entity’s financial statements. This
amendment is effective for fiscal years beginning after
November 15, 2009, and interim periods within those fiscal
years. The Company will adopt this amendment on April 29,
2010, the first day of Fiscal 2011, and this adoption is not
expected to have a material impact on the Company’s
financial statements.
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
Company’s financial statements. See Note 10 for
additional information.
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 had no impact on net income and
a $0.01, $0.01, and $0.02 unfavorable impact on basic and
diluted earnings per share from continuing operations for Fiscal
2010, 2009 and 2008, respectively. See Note 13 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 employer’s defined benefit pension or
other postretirement plan. Companies are 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. The Company adopted this guidance in the
fourth quarter of Fiscal 2010. As this guidance only requires
enhanced disclosures, its adoption did not impact the
Company’s financial position, results of operations, or
cash flows. See Note 11 for additional information.
In May 2010, the FASB issued Accounting Standards Update
No. 2010-19,
“Foreign Currency Issues: Multiple Foreign Currency
Exchange Rates.” The guidance provides clarification of
accounting treatment when reported balances in an entity’s
financial statements differ from their underlying
U.S. dollar denominated values due to different rates being
used for remeasurement and translation. The guidance indicates
that upon adopting highly inflationary accounting for Venezuela,
since the U.S. dollar is now the functional currency of a
Venezuelan subsidiary, there should no longer be any differences
between the amounts reported for financial reporting purposes
and the amount of any underlying U.S. dollar denominated
value held by the subsidiary. Therefore, any differences between
these should either be recognized in the income statement or as
a cumulative translation adjustment, if the difference was
previously recognized as a cumulative translation adjustment. As
discussed in Note 19, the Company began applying highly
inflationary accounting for its Venezuelan subsidiary on the
first day of its Fiscal 2010 fourth quarter, however, such
guidance had no impact on the Company’s financial
statements.
Tax benefit on losses
On March 31, 2010, the Company received cash proceeds of
$94.6 million from the government of the Netherlands for
property the government acquired through eminent domain
proceedings. The transaction includes the purchase by the
government of the Company’s factory located in Nijmegen,
which produces soups, pasta and cereals. The cash proceeds are
intended to compensate the Company for costs, both capital and
expense, the Company will incur over the next three years to
exit the current factory location and construct certain new
facilities. Note, the Company will likely incur costs to rebuild
an R&D facility in the Netherlands, costs to transfer a
cereal line to another factory location, employee costs for
severance and other costs directly related to the closure and
relocation of the existing facilities. The Company also entered
into a three-year leaseback on the Nijmegen factory. The Company
will continue to operate in the leased factory over the next
three years while commencing to execute its plans for closure
and relocation of the operations. The Company has accounted for
the proceeds on a cost recovery basis. In doing so, the Company
has made its estimates of cost, both of a capital and expense
nature, to be incurred and recovered and to which proceeds from
the transaction will be applied. Of the proceeds received,
$81.2 million has been deferred based on management’s
total estimated future costs to be recovered and incurred and
recorded in other non-current liabilities, other accrued
liabilities and accumulated depreciation in the Company’s
consolidated balance sheet as of April 28, 2010. Proceeds
of $15.0 million represent the excess of proceeds received
over estimated costs to be recovered and incurred which has been
recorded as a reduction of cost of products sold in the
consolidated statement of income for the year ended
April 28, 2010. In the future, the deferred amounts will be
recognized as the related costs are incurred and if estimated
costs differ from what are actually incurred there could be
adjustments that will be reflected in earnings.
During the third quarter of Fiscal 2010, the Company acquired
Arthur’s Fresh Company, a chilled smoothies business in
Canada for approximately $11 million in cash as well as an
insignificant amount of contingent consideration which is
scheduled to be paid in Fiscal 2013. The Company also made
payments during Fiscal 2010 related to acquisitions completed in
prior fiscal years, none of which were significant.
During the second quarter of Fiscal 2009, the Company acquired
Bénédicta, a sauce business in France for
approximately $116 million. During the third quarter of
Fiscal 2009, the Company acquired Golden Circle Limited, a fruit
and juice business in Australia for approximately
$211 million, including the assumption of $68 million
of debt that was immediately refinanced by the Company.
Additionally, the Company acquired La Bonne Cuisine, a
chilled dip business in New Zealand for approximately
$28 million in the third quarter of Fiscal 2009. During the
fourth quarter of Fiscal 2009, the Company acquired Papillon, a
South African producer of chilled products
for approximately $6 million. The Company also made
payments during Fiscal 2009 related to acquisitions completed in
prior fiscal years, none of which were significant.
During the first quarter of Fiscal 2008, the Company acquired
the license to the
Cottee’s®
and
Rose’s®
premium branded jams, jellies and toppings business in Australia
and New Zealand for approximately $58 million. During the
second quarter of Fiscal 2008, the Company acquired the
remaining interest in its Shanghai LongFong Foods business for
approximately $18 million in cash as well as deferred
consideration. The amount and timing of the deferred payment has
not yet been determined, but is not expected to be significant.
During the fourth quarter of Fiscal 2008, the Company acquired
the
Wyko®
sauce business in the Netherlands for approximately
$66 million. The Company also made payments during Fiscal
2008 related to acquisitions completed in prior fiscal years,
none of which were significant.
All of the above-mentioned acquisitions have been accounted for
as business combinations and, accordingly, the respective
purchase prices have been allocated to the respective assets and
liabilities based upon their estimated fair values as of the
acquisition date. Operating results of the businesses acquired
have been included in the consolidated statements of income from
the respective acquisition dates forward. Pro forma results of
the Company, assuming all of the acquisitions had occurred at
the beginning of each period presented, would not be materially
different from the results reported. There are no significant
contingent payments, options or commitments associated with any
of the acquisitions.
During 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 $62.1 million. The purchase has been accounted for
primarily as a reduction in additional capital and
noncontrolling interest on the consolidated statements of
equity. Prior to the transaction, the Company was the owner of
51% of the business.
Changes in the carrying amount of goodwill for the fiscal year
ended April 28, 2010, by reportable segment, are as follows:
Balance at April 30, 2008
Goodwill
Accumulated impairment losses
Acquisitions
Purchase accounting adjustments
Disposals
Translation adjustments
Balance at April 29, 2009
Balance at April 28, 2010
During the fourth quarter of Fiscal 2010, the Company completed
its annual review of goodwill and indefinite-lived intangible
assets. No impairments were identified during the Company’s
annual assessment of goodwill and indefinite-lived intangible
assets.
During the third quarter of Fiscal 2010, the Company recorded a
preliminary purchase price allocation related to the
Arthur’s Fresh acquisition, which is expected to be
finalized upon completion of valuation procedures. Also during
the third quarter of Fiscal 2010, 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 d’oeuvres 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 3 for additional
information.
Trademarks and other intangible assets at April 28, 2010
and April 29, 2009, subject to amortization expense, are as
follows:
Trademarks
Licenses
Recipes/processes
Customer-related assets
Amortization expense for trademarks and other intangible assets
was $28.2 million, $28.2 million and
$25.3 million for the fiscal years ended April 28,
2010, April 29, 2009 and April 30, 2008, respectively.
Based upon the amortizable intangible assets recorded on the
balance sheet as of April 28, 2010, amortization expense
for each of the next five fiscal years is estimated to be
approximately $28 million.
Intangible assets not subject to amortization at April 28,
2010 totaled $847.1 million and consisted of
$701.2 million of trademarks, $113.8 million of
recipes/processes, and $32.1 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.
The following table summarizes the (benefit)/provision for
U.S. federal, state and foreign taxes on income from
continuing operations.
Current:
U.S. federal
State
Foreign
Deferred:
Provision for income taxes
Tax benefits related to stock options and other equity
instruments recorded directly to additional capital totaled
$9.3 million in Fiscal 2010, $17.6 million in Fiscal
2009 and $6.2 million in Fiscal 2008.
The components of income from continuing operations before
income taxes consist of the following:
Domestic
Foreign
From continuing operations
The differences between the U.S. federal statutory tax rate
and the Company’s consolidated effective tax rate on
continuing operations are as follows:
U.S. federal statutory tax rate
Tax on income of foreign subsidiaries
State income taxes (net of federal benefit)
Earnings repatriation
Tax free interest
Effects of revaluation of tax basis of foreign assets
Effective tax rate
The decrease in the effective tax rate in Fiscal 2010 is
primarily the result of tax efficient financing of the
Company’s operations, partially offset by higher taxes on
repatriation of earnings. The decrease in the effective tax rate
in Fiscal 2009 was primarily the result of reduced repatriation
costs partially offset by decreased benefits from the
revaluation of tax basis of foreign assets. The effective tax
rate in Fiscal 2008 was impacted by higher earnings repatriation
costs which were partially offset by increased benefits from the
revaluation of the tax basis of foreign assets.
The following table and note summarize deferred tax (assets) and
deferred tax liabilities as of April 28, 2010 and
April 29, 2009.
Depreciation/amortization
Benefit plans
Deferred income
Financing costs
Deferred tax liabilities
Operating loss carryforwards and carrybacks
Tax credit carryforwards
Deferred tax assets
Valuation allowance
Net deferred tax liabilities
The Company also has foreign deferred tax assets and valuation
allowances of $119.2 million, each related to statutory
increases in the capital tax bases of certain internally
generated intangible assets for which the probability of
realization is remote.
The resolution of tax reserves and changes in valuation
allowances could be material to the Company’s results of
operations for any period, but is not expected to be material to
the Company’s financial position.
At the end of Fiscal 2010, foreign operating loss carryforwards
totaled $312.7 million. Of that amount, $193.2 million
expire between 2011 and 2020; the other $119.5 million do
not expire. Deferred tax assets of $47.4 million have been
recorded for foreign tax credit carryforwards. These credit
carryforwards expire between 2015 and 2020. Deferred tax assets
of $13.1 million have been recorded for state operating
loss carryforwards. These losses expire between 2011 and 2030.
The net change in the Fiscal 2010 valuation allowance shown
above is an increase of $3.4 million. The increase was
primarily due to the recording of additional valuation allowance
for foreign loss carryforwards that are not expected to be
utilized prior to their expiration date, partially offset by a
reduction in unrealizable net state deferred tax assets. The net
change in the Fiscal 2009 valuation allowance was an increase of
$7.1 million. The increase was primarily due to the
recording of additional valuation allowance for foreign loss
carryforwards and state deferred tax assets that were not
expected to be utilized prior to their expiration date. The net
change in the Fiscal 2008 valuation allowance was an increase of
$7.0 million. The increase was primarily due to the
recording of additional valuation allowance for state deferred
tax assets that were not expected to be utilized prior to their
expiration date.
A reconciliation of the beginning and ending amount of gross
unrecognized tax benefits is as follows:
Balance at the beginning of the fiscal year
Increases for tax positions of prior years
Decreases for tax positions of prior years
Increases based on tax positions related to the current year
Decreases due to settlements with taxing authorities
Decreases due to lapse of statute of limitations
Balance at the end of the fiscal year
The amount of unrecognized tax benefits that, if recognized,
would impact the effective tax rate was $38.2 million and
$51.9 million, on April 28, 2010 and April 29,
2009, respectively.
The Company classifies interest and penalties on tax
uncertainties as a component of the provision for income taxes.
For Fiscal 2010, the total amount of gross interest and penalty
expense included in the provision for income taxes was
$2.0 million and $0.3 million, respectively. For
Fiscal 2009, the total amount of gross interest and penalty
expense included in the provision for income taxes was
$2.8 million and $0.4 million, respectively. For
Fiscal 2008, the total amount of gross
interest and penalty expense included in the provision for
income taxes was $10.7 million and $0.6 million,
respectively. The total amount of interest and penalties accrued
as of April 28, 2010 was $17.3 million and
$1.2 million, respectively. The corresponding amounts of
accrued interest and penalties at April 29, 2009 were
$22.5 million and $2.2 million, respectively.
It is reasonably possible that the amount of unrecognized tax
benefits will decrease by as much as $16.2 million in the
next 12 months primarily due to the expiration of statutes
in various foreign jurisdictions along with the progression of
state and foreign audits in process.
During Fiscal 2009, the Company effectively settled its appeal
filed October 15, 2007 of a U.S. Court of Federal Claims
decision regarding a refund claim resulting from a Fiscal 1995
transaction. The effective settlement resulted in a
$42.7 million decrease in the amount of unrecognized tax
benefits, $8.5 million of which was recorded as a credit to
additional capital and was received as a refund of tax during
Fiscal 2009.
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, and through Fiscal 2005 for Australia, Canada and Italy.
Undistributed earnings of foreign subsidiaries considered to be
indefinitely reinvested or which may be remitted tax free in
certain situations, amounted to $3.7 billion at
April 28, 2010.
Short-term debt consisted of bank debt and other borrowings of
$43.9 million and $61.3 million as of April 28,
2010 and April 29, 2009, respectively. The weighted average
interest rate was 4.7% and 6.7% for Fiscal 2010 and Fiscal 2009,
respectively.
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 U.S. receivables to a wholly-owned,
bankruptcy-remote-subsidiary. This subsidiary then sells all of
the rights, title and interest in 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 April 28, 2010 was $84.2 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.
As of April 29, 2009, the Company had $800 million of
remarketable securities due December 2020. 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 paid
$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 12 for additional information. The next
remarketing on the remaining remarketable securities
($119 million) is scheduled for December 1, 2011. If
the remaining securities are not remarketed, then the Company is
required to repurchase all of the remaining securities at 100%
of the principal amount plus accrued interest. If the Company
purchases or otherwise acquires the remaining securities from
the holders, the Company is required to pay to the holder of the
remaining remarketing option the option settlement amount. This
value fluctuates based on market conditions.
During the second quarter of Fiscal 2010, the Company entered
into a three-year 15 billion Japanese yen denominated
credit agreement. The proceeds were swapped to U.S. dollar
167.3 million and the interest rate was fixed at 4.084%.
See Note 12 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.
At April 28, 2010, the Company had $1.7 billion of
credit agreements, $1.2 billion of which expires in April
2012 and $500 million which expires in April 2013. The
credit agreement that expires in 2013 replaced the
$600 million credit agreement that expired in April 2010.
These credit agreements support the Company’s commercial
paper borrowings. As a result, the commercial paper borrowings
are classified as long-term debt based upon the Company’s
intent and ability to refinance these borrowings on a long-term
basis. The credit agreements have identical covenants which
include a leverage ratio covenant in addition to customary
covenants. The Company was in compliance with all of its
covenants as of April 28, 2010 and April 29, 2009. In
addition, the Company has $488.6 million of foreign lines
of credit available at April 28, 2010.
Long-term debt was comprised of the following as of
April 28, 2010 and April 29, 2009:
Commercial Paper (variable rate)
7.125% U.S. Dollar Notes due August 2039
8.0% Heinz Finance Preferred Stock due July 2013
5.35% U.S. Dollar Notes due July 2013
6.625% U.S. Dollar Notes due July 2011
6.00% U.S. Dollar Notes due March 2012
U.S. Dollar Remarketable Securities due December 2020
6.375% U.S. Dollar Debentures due July 2028
6.25% British Pound Notes due February 2030
6.75% U.S. Dollar Notes due March 2032
Japanese Yen Credit Agreement due October 2012 (variable rate)
Australian Dollar Credit Agreement (variable rate)
Canadian Dollar Credit Agreement (variable rate)
Other U.S. Dollar due May 2010—November 2034
(1.04—7.90)%
Other
Non-U.S.
Dollar due May 2010—March 2022 (7.00—11.00)%
Hedge Accounting Adjustments (See Note 12)
Less portion due within one year
Total long-term debt
Weighted-average interest rate on long-term debt, including the
impact of applicable interest rate swaps
During Fiscal 2009, the Company completed the sale of
$500 million 5.35% Notes due 2013. Also, during Fiscal
2009, the Company’s HFC subsidiary completed the sale of
$350 million or 3,500 shares of its Series B
Preferred Stock. The proceeds from both transactions were used
for general corporate purposes, including the repayment of
commercial paper and other indebtedness incurred to redeem
HFC’s Series A Preferred Stock.
HFC’s 3,500 mandatorily redeemable preferred shares are
classified as long-term debt. Each share of preferred stock is
entitled to annual cash dividends at a rate of 8% or $8,000 per
share. On July 15, 2013, each share will be redeemed for
$100,000 in cash for a total redemption price of
$350 million.
Annual maturities of long-term debt during the next five fiscal
years are $15.2 million in 2011, $1,401.8 million in
2012, $446.6 million in 2013 (includes the commercial paper
in the table above), $872.8 million in 2014 and
$1.9 million in 2015.
Cash Paid During the Year For:
Interest
Income taxes
Details of Acquisitions:
Fair value of assets
Liabilities(1)
Cash paid
Less cash acquired
Net cash paid for acquisitions
During the second quarter of Fiscal 2010, HFC issued
$681 million of 30 year notes and paid
$217.5 million of cash in exchange for $681 million of
its outstanding dealer remarketable securities. The
$681 million of notes exchanged was a non-cash transaction
and has been excluded from the consolidated statement of cash
flows for the year ended April 28, 2010. See Note 7
for additional information.
The Company recognized $41.8 million of property, plant and
equipment and debt in Fiscal 2010 related to contractual
arrangements that contain a lease. These non-cash transactions
have been excluded from the consolidated statement of cash flows
for the year ended April 28, 2010.
As of April 28, 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. The
compensation cost related to these plans recognized in general
and administrative expenses, and the related tax benefit was
$33.4 million and $10.3 million for the fiscal year
ended April 28, 2010, $37.9 million and
$12.8 million for the fiscal year ended April 29,
2009, and $31.7 million and $11.1 million for the
fiscal year ended April 30, 2008, respectively.
The Company has two plans from which it can issue equity based
awards, the Fiscal Year 2003 Stock Incentive Plan (the
“2003 Plan”), which was approved by shareholders on
September 12, 2002, and the 2000 Stock Option Plan (the
“2000 Plan”), which was approved by shareholders on
September 12, 2000. The Company’s primary means for
issuing equity-based awards is the 2003 Plan. Pursuant to the
2003 Plan, the Management Development & Compensation
Committee is authorized to grant a maximum of 9.4 million
shares for issuance as restricted stock units or restricted
stock. Any available shares may be issued as stock options. The
maximum number of shares that may be granted under this plan is
18.9 million shares. Shares issued under these plans are
sourced from available treasury shares.
Stock
Options:
Stock options generally vest over a period of one to four years
after the date of grant. Awards granted between Fiscal 2004 and
Fiscal 2006 generally had a maximum term of ten years. Beginning
in Fiscal 2006, awards have a maximum term of seven years.
In accordance with their respective plans, stock option awards
are forfeited if a holder voluntarily terminates employment
prior to the vesting date. The Company estimates forfeitures
based on an analysis of historical trends updated as discrete
new information becomes available and will be re-evaluated on an
annual basis. Compensation cost in any period is at least equal
to the grant-date fair value of the vested portion of an award
on that date.
The Company presents all benefits of tax deductions resulting
from the exercise of stock-based compensation as operating cash
flows in the consolidated statements of cash flows, except the
benefit of tax deductions in excess of the compensation cost
recognized for those options (“excess tax benefits”)
which are classified as financing cash flows. For the fiscal
year ended April 28, 2010, $6.9 million of cash tax
benefits was reported as an operating cash inflow and
$2.4 million of excess tax benefits as a financing cash
inflow. For the fiscal year ended April 29, 2009,
$9.5 million of cash tax benefits was reported as an
operating cash inflow and $4.8 million of excess tax
benefits as a financing cash inflow. For the fiscal year ended
April 30, 2008, $2.7 million of cash tax benefits was
reported as an operating cash inflow and $1.7 million of
excess tax benefits as a financing cash inflow.
As of April 28, 2010, 2,653 shares remained available
for issuance under the 2000 Plan. During the fiscal year ended
April 28, 2010, 8,715 shares were forfeited and
returned to the plan. During the fiscal year ended
April 28, 2010, 34,143 shares were issued from the
2000 Plan.
A summary of the Company’s 2003 Plan at April 28, 2010
is as follows:
Number of shares authorized
Number of stock option shares granted
Number of stock option shares cancelled/forfeited and returned
to the plan
Number of restricted stock units and restricted stock issued
Shares available for grant as stock options
During Fiscal 2010, the Company granted 1,768,226 option awards
to employees sourced from the 2000 and 2003 Plans. The weighted
average fair value per share of the options granted during the
fiscal years ended April 28, 2010, April 29, 2009 and
April 30, 2008 as computed using the
Black-Scholes
pricing model was $4.71, $5.75, and $6.25, respectively. The
weighted average assumptions used to estimate these fair values
are as follows:
Dividend yield
Expected volatility
Expected term (years)
Risk-free interest rate
The dividend yield assumption is based on the current fiscal
year dividend payouts. The expected volatility of the
Company’s common stock at the date of grant is estimated
based on a historic daily
volatility rate over a period equal to the average life of an
option. The weighted average expected life of options is based
on consideration of historical exercise patterns adjusted for
changes in the contractual term and exercise periods of current
awards. The risk-free interest rate is based on the
U.S. Treasury (constant maturity) rate in effect at the
date of grant for periods corresponding with the expected term
of the options.
A summary of the Company’s stock option activity and
related information is as follows:
Options outstanding at May 2, 2007
Options granted
Options exercised
Options cancelled/forfeited and returned to the plan
Options outstanding at April 30, 2008
Options outstanding at April 29, 2009
Options outstanding at April 28, 2010
Options vested and exercisable at April 30, 2008
Options vested and exercisable at April 29, 2009
Options vested and exercisable at April 28, 2010
The following summarizes information about shares under option
in the respective exercise price ranges at April 28, 2010:
$29.18-$35.38
$35.39-$42.42
$42.43-$51.25
The Company received proceeds of $67.4 million,
$264.9 million, and $78.6 million from the exercise of
stock options during the fiscal years ended April 28, 2010,
April 29, 2009 and April 30, 2008, respectively. The
tax benefit recognized as a result of stock option exercises was
$9.3 million, $14.3 million and $4.4 million for
the fiscal years ended April 28, 2010, April 29, 2009
and April 30, 2008, respectively.
A summary of the status of the Company’s unvested stock
options is as follows:
Unvested options at April 29, 2009
Options vested
Unvested options at April 28, 2010
Unrecognized compensation cost related to unvested option awards
under the 2000 and 2003 Plans totaled $8.1 million and
$7.6 million as of April 28, 2010 and April 29,
2009, respectively. This cost is expected to be recognized over
a weighted average period of 1.6 years.
Restricted
Stock Units and Restricted Shares:
The 2003 Plan authorizes up to 9.4 million shares for
issuance as restricted stock units (“RSUs”) or
restricted stock with vesting periods from the first to the
fifth anniversary of the grant date as set forth in the award
agreements. Upon vesting, the RSUs are converted into shares of
the Company’s stock on a
one-for-one
basis and issued to employees, subject to any deferral elections
made by a recipient or required by the plan. Restricted stock is
reserved in the recipients’ name at the grant date and
issued upon vesting. The Company is entitled to an income tax
deduction in an amount equal to the taxable income reported by
the holder upon vesting of the award. RSUs generally vest over a
period of one to four years after the date of grant.
Total compensation expense relating to RSUs and restricted stock
was $24.8 million, $26.6 million and
$21.1 million for the fiscal years ended April 28,
2010, April 29, 2009 and April 30, 2008, respectively.
Unrecognized compensation cost in connection with RSU and
restricted stock grants totaled $29.8 million,
$31.8 million and $35.7 million at April 28,
2010, April 29, 2009 and April 30, 2008, respectively.
The cost is expected to be recognized over a weighted-average
period of 1.8 years.
A summary of the Company’s RSU and restricted stock awards
at April 28, 2010 is as follows:
Number of shares reserved for issuance
Number of shares forfeited and returned to the plan
Shares available for grant
A summary of the activity of unvested RSU and restricted stock
awards and related information is as follows:
Unvested units and stock at May 2, 2007
Units and stock granted
Units and stock vested
Units and stock cancelled/forfeited and returned to the plan
Unvested units and stock at April 30, 2008
Unvested units and stock at April 29, 2009
Unvested units and stock at April 28, 2010
Upon share option exercise or vesting of restricted stock and
RSUs, the Company uses available treasury shares and maintains a
repurchase program that anticipates exercises and vesting of
awards so that shares are available for issuance. The Company
records forfeitures of restricted stock as treasury share
repurchases. The Company did not repurchase any shares during
Fiscal 2010.
Global
Stock Purchase Plan:
The Company has a shareholder-approved employee global stock
purchase plan (the “GSPP”) that permits substantially
all employees to purchase shares of the Company’s common
stock at a discounted price through payroll deductions at the
end of two six-month offering periods. Currently, the offering
periods are February 16 to August 15 and August 16 to
February 15. From the February 2006 to February 2009
offering periods, the purchase price of the option was equal to
85% of the fair market value of the Company’s common stock
on the last day of the offering period. Commencing with the
August 2009 offering period, the purchase price of the option is
equal to 95% of the fair market value of the Company’s
common stock on the last day of the offering period. The number
of shares available for issuance under the GSPP is a total of
five million shares. During the two offering periods from
February 16, 2009 to February 15, 2010, employees
purchased 280,006 shares under the plan. During the two
offering periods from February 16, 2008 to
February 15, 2009, employees purchased 315,597 shares
under the plan.
Annual
Incentive Bonus:
The Company’s management incentive plans cover officers and
other key employees. Participants may elect to be paid on a
current or deferred basis. The aggregate amount of all awards
may not exceed certain limits in any year. Compensation under
the management incentive plans was
approximately $49 million, $38 million and
$45 million in fiscal years 2010, 2009 and 2008,
respectively.
Long-Term
Performance Program:
In 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 Company’s relative Total
Shareholder Return (“Relative TSR”) Ranking within the
defined Long-term Performance Program (“LTPP”) peer
group and the
2-year
average after-tax Return on Invested Capital (“ROIC”)
metrics. The Relative TSR metric is based on the two-year
cumulative return to shareholders from the change in stock price
and dividends paid between the starting and ending dates. The
starting value was based on the average of each LTPP peer group
company stock price for the 60 trading days prior to and
including 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
Company also granted performance awards in Fiscal 2009 under the
2009-2010
LTPP and in Fiscal 2008 under the
2008-2009
LTPP. The compensation cost related to LTPP awards recognized in
general and administrative expenses (“G&A”) was
$20.7 million, and the related tax benefit was
$7.0 million for the fiscal year ended April 28, 2010.
The compensation cost related to these plans, recognized in
G&A was $17.4 million, and the related tax benefit was
$5.9 million for the fiscal year ended April 29, 2009.
The compensation cost related to these plans, recognized in
G&A was $23.8 million, and the related tax benefit was
$8.1 million for the fiscal year ended April 30, 2008.
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 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 April 28, 2010, the fair values of the Company’s
assets and liabilities measured on a recurring basis are
categorized as follows:
Assets:
Derivatives(a)
Total assets at fair value
Liabilities:
Total liabilities at fair value
As of April 29, 2009, the fair values of the Company’s
assets and liabilities measured on a recurring basis were
categorized as follows:
The Company recognized $12.6 million of non-cash asset
write-offs during Fiscal 2010 related to two factory closures
and the exit of a formula business in the U.K. These charges
reduced the Company’s carrying value in the assets to net
realizable value. The fair value of the assets was determined
based on unobservable inputs.
As of April 28, 2010, the aggregate fair value of the
Company’s 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 7. As of
April 29, 2009, the aggregate fair value of the
Company’s debt obligations, based on market quotes,
approximated the recorded value.
Pension
Plans:
The Company maintains retirement plans for the majority of its
employees. Current defined benefit plans are provided primarily
for domestic union and foreign employees. Defined contribution
plans are provided for the majority of its domestic non-union
hourly and salaried employees as well as certain employees in
foreign locations.
Other
Postretirement Benefit Plans:
The Company and certain of its subsidiaries provide health care
and life insurance benefits for retired employees and their
eligible dependents. Certain of the Company’s U.S. and
Canadian employees may become eligible for such benefits. The
Company currently does not fund these benefit arrangements until
claims occur and may modify plan provisions or terminate plans
at its discretion.
Measurement
Date:
On May 1, 2008, the Company adopted the measurement date
provisions of the FASB’s accounting guidance on
Compensation-Retirement Benefits which requires plan assets and
obligations to be measured as of the date of the year-end
financial statements. Prior to adoption, the Company used an
April 30 measurement date for its domestic plans, and a March 31
measurement date for its foreign plans. The Company now uses the
last day of its fiscal year as the measurement date for all of
its defined benefit plans and other postretirement benefit plans.
Obligations
and Funded Status:
The following table sets forth the changes in benefit
obligation, plan assets and funded status of the Company’s
principal defined benefit plans and other postretirement benefit
plans at April 28, 2010 and April 29, 2009.
Change in Benefit Obligation:
Benefit obligation at the beginning of the year
Service cost
Interest cost
Participants’ contributions
Amendments
Actuarial loss/(gain)
Divestitures
Settlement
Curtailment
Benefits paid
Effect of eliminating early measurement date
Exchange/other
Benefit obligation at the end of the year
Change in Plan Assets:
Fair value of plan assets at the beginning of the year
Actual return/(loss) on plan assets
Employer contribution
Exchange
Fair value of plan assets at the end of the year
Funded status
Amounts recognized in the consolidated balance sheets consist of
the following:
Other non-current assets
Other accrued liabilities
Other non-current liabilities
Net amount recognized
Certain of the Company’s pension plans have projected
benefit obligations in excess of the fair value of plan assets.
For these plans, the projected benefit obligations and the fair
value of plan assets at April 28, 2010 were
$160.9 million and $20.3 million, respectively. For
pension plans having projected benefit obligations in excess of
the fair value of plan assets at April 29, 2009, the
projected benefit obligations and the fair value of plan assets
were $1,862.7 million and $1,469.9 million,
respectively.
The accumulated benefit obligation for all defined benefit
pension plans was $2,414.3 million at April 28, 2010
and $2,092.1 million at April 29, 2009.
Certain of the Company’s pension plans have accumulated
benefit obligations in excess of the fair value of plan assets.
For these plans, the accumulated benefit obligations, projected
benefit obligations and the fair value of plan assets at
April 28, 2010 were $137.0 million,
$160.9 million and $20.3 million, respectively. For
pension plans having accumulated benefit obligations in excess
of the fair value of plan assets at April 29, 2009, the
accumulated benefit obligations, projected benefit obligations
and the fair value of plan assets were $1,066.9 million,
$1,112.9 million and $784.0 million, respectively.
Components
of Net Periodic Benefit Cost and Defined Contribution Plan
Expense:
Total pension cost of the Company’s principal pension plans
and postretirement plans consisted of the following:
Components of defined benefit net periodic benefit cost:
Service cost
Interest cost
Expected return on assets
Amortization of:
Prior service cost/(credit)
Net actuarial loss
Loss due to curtailment, settlement and special termination
benefits
Net periodic benefit cost
Defined contribution plans
Total cost
Less periodic benefit cost associated with discontinued
operations
Periodic benefit cost associated with continuing operations
Accumulated
Other Comprehensive Income:
Amounts recognized in accumulated other comprehensive loss,
before tax, consist of the following:
Net actuarial loss
Prior service cost/(credit)
The change in other comprehensive loss related to pension
benefit gains/(losses) arising during the period was
$106.6 million and ($484.4 million) at April 28,
2010 and April 29, 2009, respectively. The change in other
comprehensive loss related to the reclassification of pension
benefit losses to net income was $60.6 million and
$37.0 million at April 28, 2010 and April 29,
2009, respectively.
The change in other comprehensive loss related to postretirement
benefit gains arising during the period is $11.4 million
and $37.9 million at April 28, 2010 and at
April 29, 2009, respectively. The change in other
comprehensive loss related to the reclassification of
postretirement benefit gains to net income is $3.2 million
and $0.1 million at April 28, 2010 and at
April 29, 2009, respectively.
Amounts in accumulated other comprehensive loss (income)
expected to be recognized as components of net periodic benefit
costs/(credits) in the following fiscal year are as follows:
Assumptions:
The weighted-average rates used for the fiscal years ended
April 28, 2010 and April 29, 2009 in determining the
projected benefit obligations for defined benefit pension plans
and the accumulated postretirement benefit obligation for other
postretirement plans were as follows:
Discount rate
Compensation increase rate
The weighted-average rates used for the fiscal years ended
April 28, 2010, April 29, 2009 and April 30, 2008
in determining the defined benefit plans’ net pension costs
and net postretirement benefit costs were as follows:
Expected rate of return
The Company’s expected rate of return is determined based
on a methodology that considers investment real returns for
certain asset classes over historic periods of various
durations, in conjunction with the long-term outlook for
inflation (i.e. “building block” approach). This
methodology is applied to the actual asset allocation, which is
in line with the investment policy guidelines for each plan. The
Company also considers long-term rates of return for each asset
class based on projections from consultants and investment
advisors regarding the expectations of future investment
performance of capital markets.
The weighted-average assumed annual composite rate of increase
in the per capita cost of company-provided health care benefits
begins at 7.1% for 2011, gradually decreases to 4.8% by 2016 and
remains at that level thereafter. Assumed health care cost trend
rates have a significant effect on the amounts reported for
postretirement medical benefits. A one-percentage-point change
in assumed health care cost trend rates would have the following
effects:
Effect on total service and interest cost components
Effect on postretirement benefit obligations
Pension
Plan Assets:
The underlying basis of the investment strategy of the
Company’s defined benefit plans is to ensure that pension
funds are available to meet the plans’ benefit obligations
when they are due. The Company’s investment objectives
include: investing plan assets in a high-quality, diversified
manner in order to maintain the security of the funds; achieving
an optimal return on plan assets within specified risk
tolerances; and investing according to local regulations and
requirements specific to each country in which a defined benefit
plan operates. The investment strategy expects equity
investments to yield a higher return over the long term than
fixed income securities, while fixed income securities are
expected to provide certain matching characteristics to the
plans’ benefit payment cash flow requirements. Company
common stock held as part of the equity securities amounted to
less than one percent of plan assets at April 28, 2010 and
April 29, 2009. The Company’s investment policy
specifies the type of investment vehicles appropriate for the
Plan, asset allocation guidelines, criteria for the selection of
investment managers, procedures to monitor overall investment
performance as well as investment manager performance. It also
provides guidelines enabling Plan fiduciaries to fulfill their
responsibilities.
The Company’s defined benefit pension plans’ weighted
average asset allocation at April 28, 2010 and
April 29, 2009 and weighted average target allocation were
as follows:
Equity securities
Debt securities
Real estate
Other(1)
For the year ended April 28, 2010, the Company adopted a
new accounting standard requiring additional disclosures for
Plan assets of defined benefit pension and other post-retirement
plans. See Note 2 for additional information. As required
by the standard, the Company categorized Plan assets within a
three level fair value hierarchy. The following section
describes the valuation methodologies used to measure the fair
value of pension plan assets, including an indication of the
level in the fair value hierarchy in which each type of asset is
generally classified.
Equity Securities. These securities consist of
direct investments in the stock of publicly traded companies.
Such investments are valued based on the closing price reported
in an active market on which the individual securities are
traded. As such, the direct investments are classified as
Level 1.
Equity Securities (mutual and pooled
funds). Mutual funds are valued at the net asset
value of shares held by the Plan at year end. As such, these
mutual fund investments are classified as Level 1. Pooled
funds are similar in nature to retail mutual funds, but are more
efficient for institutional investors than retail mutual funds.
As pooled funds are only accessible by institutional investors,
the net asset value is not readily observable by
non-institutional investors; therefore, pooled funds are
classified as Level 2.
Fixed Income Securities. These securities
consist of publicly traded U.S. and
non-U.S. fixed
interest obligations (principally corporate bonds and
debentures). Such investments are valued through consultation
and evaluation with brokers in the institutional market using
quoted prices
and other observable market data. As such, a portion of these
securities are included in Levels 1, 2 and 3.
Other Investments. Primarily consist of real
estate, private equity holdings and interest rate swaps. Direct
investments of real estate and private equity are valued by
investment managers based on the most recent financial
information available, which typically represents significant
observable data. As such, these investments are generally
classified as Level 3. The fair value of interest rate
swaps is determined through use of observable market swap rates
and are classified as Level 2.
Cash and Cash Equivalents. This consists of
direct cash holdings and institutional short-term investment
vehicles. Direct cash holdings are valued based on cost, which
approximates fair value and are classified as Level 1.
Institutional short-term investment vehicles are valued daily
and are classified as Level 2.
Equity Securities
Equity Securities (mutual and pooled funds)
Fixed Income Securities
Other Investments
Cash and Cash Equivalents
Level 3
Gains and Losses:
Changes in the fair value of the Plan’s Level 3 assets
are summarized as follows:
Cash
Flows:
The Company contributed $540 million to the defined benefit
plans in Fiscal 2010, of which $475 million was
discretionary. The Company funds its U.S. defined benefit
plans in accordance with IRS regulations, while foreign defined
benefit plans are funded in accordance with local laws and
regulations in each respective country. Discretionary
contributions to the pension funds may also be made by the
Company from time to time. Defined benefit plan contributions
for the next fiscal year are expected to be less than
$50 million; however, actual contributions may be affected
by pension asset and liability valuations during the year.
The Company paid $17.5 million for benefits in the
postretirement medical plans in Fiscal 2010. The Company makes
payments on claims as they occur during the fiscal year.
Payments for the next fiscal year are expected to be
approximately $19 million. The medical subsidy received in
Fiscal 2010 was $1.2 million. Estimated future medical
subsidy receipts are approximately $1.0 million for 2011,
$0.4 million for 2012, $0.5 million annually from 2013
through 2015 and $3.2 million for the period
from 2016 through 2020. The Patient Protection and Affordable
Care Act (PPACA) was signed into law on March 23, 2010, and
on March 30, 2010, the Health Care and Education
Reconciliation Act of 2010 (HCERA) was signed into law, which
amends certain aspects of the PPACA. Among other things, the
PPACA reduces the tax benefits available to an employer that
receives the Medicare Part D subsidy. As a result of the
PPACA, the Company was required to recognize in Fiscal 2010 tax
expense of $3.9 million (approximately $0.01 per share)
related to the reduced deductibility in future periods of the
postretirement prescription drug coverage. The PPACA and HCERA
(collectively referred to as the Act) will have both immediate
and long-term ramifications for many employers that provide
retiree health benefits.
Benefit payments expected in future years are as follows:
2011
2012
2013
2014
2015
Years
2016-2020
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
April 28, 2010, the Company had outstanding currency
exchange, interest rate, and cross-currency interest rate
derivative contracts with notional amounts of
$1.64 billion, $1.52 billion and $160 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. The fair value of derivative financial instruments
was a net asset of $97.7 million and $207.0 million at
April 28, 2010 and April 29, 2009, respectively.
The following table presents the fair values and corresponding
balance sheet captions of the Company’s derivative
instruments as of April 28, 2010 and April 29, 2009:
Derivatives designated as hedging instruments:
Other receivables, net
Other non-current assets
Derivatives not designated as hedging instruments:
Total assets
Other payables
Other non-current liabilities
Total liabilities
Refer to Note 10 for further information on how fair value
is determined for the Company’s derivatives.
The following table presents the pre-tax effect of derivative
instruments on the statement of income for the fiscal year ended
April 28, 2010:
Cash flow hedges:
Net losses recognized in other comprehensive loss (effective
portion)
Net gains/(losses) reclassified from other comprehensive loss
into earnings (effective portion):
Sales
Cost of products sold
Selling, general and administrative expenses
Other expense, net
Interest expense
Fair value hedges:
Net losses recognized in other expense, net
Derivatives not designated as hedging instruments:
Net gains recognized in interest income
Total amount recognized in statement of income
The following table presents the pre-tax effect of derivative
instruments on the statement of income for the fiscal year ended
April 29, 2009:
Net gains recognized in other comprehensive loss (effective
portion)
Net gains recognized in other income, net
Net gains/(losses) recognized in other income/(expense), net
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 Company’s 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 $6.9 million (net of income taxes of
$4.4 million), which represented effective hedges of net
investments, were reported
as a component of accumulated other comprehensive loss within
unrealized translation adjustment for the fiscal years ended
April 28, 2010 and April 29, 2009, respectively.
Prior to Fiscal 2008, the Company had outstanding cross currency
swaps which were designated as net investment hedges of foreign
operations. During Fiscal 2008, the Company made cash payments
to the counterparties totaling $74.5 million as a result of
contract maturities and $93.2 million as a result of early
termination of contracts. The Company assessed hedge
effectiveness for these contracts based on changes in fair value
attributable to changes in spot prices. A net loss of
$95.8 million ($72.0 million after-tax) which
represented effective hedges of net investments, was reported as
a component of accumulated other comprehensive loss within
unrealized translation adjustment for Fiscal 2008. A gain of
$3.6 million, which represented the changes in fair value
excluded from the assessment of hedge effectiveness, was
included in current period earnings as a component of interest
expense for Fiscal 2008. The early termination of the net
investment hedges described above and the interest rate swaps
described below were completed in conjunction with the
reorganizations of the Company’s foreign operations and
interest swap portfolio.
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. During Fiscal 2008, the
Company terminated certain interest rate swaps that were
previously designated as fair value hedges of fixed debt
obligations. The notional amount of these interest rate
contracts totaled $612.0 million and the Company received a
total of $103.5 million of cash from the termination of
these contracts. The $103.5 million gain is being amortized
to reduce interest expense over the remaining term of the
corresponding debt obligations (average of 20 years
remaining).
The Company had outstanding cross-currency interest rate swaps
with a total notional amount of $159.5 million as of
April 28, 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.
Hedge accounting adjustments related to debt obligations totaled
$207.1 million and $251.5 million as of April 28,
2010 and April 29, 2009, respectively. See Note 7 for
further information.
Deferred
Hedging Gains and Losses:
As of April 28, 2010, the Company is hedging forecasted
transactions for periods not exceeding 4 years. During the
next 12 months, the Company expects $6.0 million of
net deferred losses reported in accumulated other comprehensive
loss to be reclassified to earnings, assuming market rates
remain constant through contract maturities. Hedge
ineffectiveness related to cash flow hedges, which is reported
in current period earnings as other income/(expense), net, was
not significant for the years ended April 28, 2010,
April 29, 2009 and April 30, 2008. The Company
excludes the time value component of option contracts from the
assessment of hedge effectiveness. Amounts reclassified to
earnings because the hedged transaction was no longer expected
to occur were not significant for the years ended April 28,
2010, April 29, 2009 and April 30, 2008.
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 $284.5 million
and $349.1 million that did not meet the criteria for hedge
accounting as of April 28, 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 income/(expense), net. Net unrealized
(losses)/gains related to outstanding contracts totaled
$(2.6) million and $11.6 million as of April 28,
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 (losses)/gains of $(2.5) million and
$107.3 million for the years ended April 28, 2010 and
April 29, 2009, respectively. During Fiscal 2010 and 2009,
the Company also (paid)/received $(1.7) million and
$106.3 million of cash related to these forward contracts,
respectively.
During 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 Company’s 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 7. Upon termination of the
swap, the Company received net cash proceeds of
$47.6 million, in addition to the release 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 recorded a benefit in interest income of
$28.3 million for the year ended April 28, 2010, and
$28.1 million for the year ended April 29, 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. During Fiscal 2010, one customer
represented approximately 11% of the Company’s sales. The
Company closely monitors the credit risk associated with its
counterparties and customers and to date has not experienced
material losses.
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:
Income from continuing operations attributable to H.J. Heinz
Company
Allocation to participating securities (See Note 2)
Preferred dividends
Income from continuing operations applicable to common stock
Average common shares outstanding-basic
Effect of dilutive securities:
Convertible preferred stock
Stock options, restricted stock and the global stock purchase
plan
Average common shares outstanding-diluted
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 4.4 million,
3.7 million and 6.1 million shares of common stock as
of April 28, 2010, April 29, 2009 and April 30,
2008, respectively, were not included in the computation of
diluted earnings per share because inclusion of these options
would be anti-dilutive. These options expire at various points
in time through 2017.
The tax (expense)/benefit associated with each component of
other comprehensive income are as follows:
April 28, 2010
Net pension and post-retirement benefit losses
Reclassification of net pension and post-retirement benefit
losses to net income
Unrealized translation adjustments
Net change in fair value of cash flow hedges
Net hedging gains/losses reclassified into earnings
April 29, 2009
April 30, 2008
The Company’s segments are primarily organized by
geographical area. The composition of segments and measure of
segment profitability are consistent with that used by the
Company’s management.
Descriptions of the Company’s reportable segments are as
follows:
The Company’s 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 the corporation-wide
productivity initiatives are not presented by segment, since
they are not reflected in the measure of segment profitability
reviewed by the Company’s management.
The following table presents information about the
Company’s reportable segments:
North American Consumer Products
Europe
Asia/Pacific
U.S. Foodservice
Rest of World
Non-Operating(a)
Upfront productivity charges(d)
Gain on property disposal in the Netherlands(e)
Consolidated Totals
Total North America
Non-Operating(c)
Ketchup and Sauces
Meals and Snacks
The Company has significant sales and long-lived assets in the
following geographic areas. Sales are based on the location in
which the sale originated. Long-lived assets include property,
plant and equipment, goodwill, trademarks and other intangibles,
net of related depreciation and amortization.
United States
United Kingdom
Sales(1)
Gross profit(1)
Income from continuing operations attributable to H.J. Heinz
Company common shareholders, net of tax(1)
Net income attributable to H.J. Heinz Company
Per Share Amounts:
Net income from continuing operations—diluted(1)
Net income from continuing operations—basic(1)
Cash dividends
Cash provided by operating activities
Cash (used for)/provided by investing activities
Cash provided by/(used for) financing activities
Gross profit(1)
Income from continuing operations attributable to H.J. Heinz
Company common shareholders, net of tax(1)
Net income attributable to H.J. Heinz Company
Per Share Amounts:
Net income from continuing operations—diluted(1)(2)
Net income from continuing operations—basic(1)(2)
Cash dividends
Cash (used for)/provided by operating activities
Cash used for investing activities
Cash (used for)/provided by financing activities
Continuing operations for the first quarter of Fiscal 2010
includes charges of $15.7 million pre-tax
($11.6 million after-tax) associated with targeted
workforce reductions and asset write-offs related to a factory
closure. Continuing operations for the fourth quarter of Fiscal
2010 includes charges of $21.9 million pre-tax
($16.2 million after-tax) associated with targeted
workforce reductions and asset write-offs related to two factory
closures and the exit of a formula business in the U.K. These
Fiscal 2010 charges were part of a corporation-wide initiative
to improve productivity. In addition, continuing operations for
the fourth quarter of Fiscal 2010 includes a gain of
$15.0 million pre-tax ($11.1 million after-tax) on a
property disposal in the Netherlands.
Legal
Matters:
Certain suits and claims have been filed against the Company and
have not been finally adjudicated. In the opinion of management,
based upon the information that it presently possesses, the
final conclusion and determination of these suits and claims
would not be expected to have a material adverse effect on the
Company’s consolidated financial position, results of
operations or liquidity.
Lease
Commitments:
Operating lease rentals for warehouse, production and office
facilities and equipment amounted to approximately
$119.1 million in 2010, $113.4 million in 2009 and
$106.4 million in 2008. Future lease payments for
non-cancellable operating leases as of April 28, 2010
totaled $452.5 million (2011-$78.7 million,
2012-$70.6 million, 2013-$61.2 million,
2014-$50.8 million, 2015-$39.3 million and
thereafter-$151.9 million).
As of April 28, 2010, the Company was a party to two
operating leases for buildings and equipment, one of which also
includes land. The Company has guaranteed supplemental payment
obligations of approximately $130 million at the
termination of these leases. The Company believes, based on
current facts and circumstances, that any payment pursuant to
these guarantees is remote. No significant credit guarantees
existed between the Company and third parties as of
April 28, 2010.
Advertising expenses (including production and communication
costs) for fiscal years 2010, 2009 and 2008 were
$375.8 million, $303.1 million and
$338.7 million, respectively. For fiscal years 2010, 2009
and 2008, $108.9 million, $105.3 million and
$118.9 million, respectively, were recorded as a
reduction of revenue and $266.9 million,
$197.8 million and $219.8 million, respectively, were
recorded as a component of selling, general and administrative
expenses.
During Fiscal 2010, the Company recorded a $61.7 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 $81 million at April 28, 2010.
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 have been
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 are remeasured
into the Company’s reporting currency (U.S. dollars)
and exchange gains and losses from the remeasurement of monetary
assets and liabilities are 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 subsidiary’s balance sheet. At
April 28, 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
$42.2 million.
There is nothing to be reported under this item.
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures, as of the end
of the period covered by this report, were effective and
provided reasonable assurance that the information required to
be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is (i) recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms, and (ii) accumulated and
communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. See also
“Report of Management on Internal Control over Financial
Reporting.”
(b) Management’s Report on Internal Control Over
Financial Reporting.
Our management’s report on Internal Control Over Financial
Reporting is set forth in Item 8 and incorporated herein by
reference.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, audited the effectiveness of the Company’s
internal control over financial reporting as of April 28,
2010, as stated in their report as set forth in Item 8.
(c) Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial
reporting occurred during the Company’s most recent fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
PART III
Information relating to the Directors of the Company is set
forth under the captions “Election of Directors” and
“Additional Information—Section 16 Beneficial
Ownership Reporting Compliance” in the Company’s
definitive Proxy Statement in connection with its Annual Meeting
of Shareholders to be held August 31, 2010. Information
regarding the Audit Committee members and the audit committee
financial expert is set forth under the captions “Report of
the Audit Committee” and “Relationship with
Independent Registered Public Accounting Firm” in the
Company’s definitive Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on August 31,
2010. Information relating to the executive officers of the
Company is set forth under the caption “Executive Officers
of the Registrant” in Part I of this report, and such
information is incorporated herein by reference. The
Company’s Global Code of Conduct, which is applicable to
all employees, including the principal executive officer, the
principal financial officer, and the principal accounting
officer, as well as the charters for the Company’s Audit,
Management Development & Compensation, Corporate
Governance, and Corporate Social Responsibility Committees, as
well as periodic and current reports filed with the SEC are
available on the Company’s website, www.heinz.com, and are
available in print to any shareholder upon request. Such
specified information is incorporated herein by reference.
Information relating to executive and director compensation is
set forth under the captions “Compensation Discussion and
Analysis,” “Director Compensation Table,” and
“Compensation Committee Report” in the Company’s
definitive Proxy Statement in connection with its Annual Meeting
of Shareholders to be held on August 31, 2010. Such
information is incorporated herein by reference.
Information relating to the ownership of equity securities of
the Company by certain beneficial owners and management is set
forth under the captions “Security Ownership of Certain
Principal Shareholders” and “Security Ownership of
Management” in the Company’s definitive Proxy
Statement in connection with its Annual Meeting of Shareholders
to be held August 31, 2010. Such information is
incorporated herein by reference.
The number of shares to be issued upon exercise and the number
of shares remaining available for future issuance under the
Company’s equity compensation plans at April 28, 2010
were as follows:
Equity
Compensation Plan Information
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders(1)
Information relating to the Company’s policy on related
person transactions and certain relationships with a beneficial
shareholder is set forth under the caption “Related Person
Transactions” in the Company’s definitive Proxy
Statement in connection with its Annual Meeting of Shareholders
to be held on August 31, 2010. Such information is
incorporated herein by reference.
Information relating to director independence is set forth under
the caption “Director Independence Standards” in the
Company’s definitive Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on August 31,
2010. Such information is incorporated herein by reference.
Information relating to the principal auditor’s fees and
services is set forth under the caption “Relationship With
Independent Registered Public Accounting Firm” in the
Company’s definitive Proxy Statement in connection with its
Annual Meeting of Shareholders to be held on August 31,
2010. Such information is incorporated herein by reference.
PART IV
(a)(1)
(2)
(3)
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(c)
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Indenture among H. J. Heinz Company and Union Bank of
California, N.A. dated as of July 15, 2008 relating to the
Company’s $500,000,000 5.35% Notes due 2013 is
incorporated herein by reference to Exhibit 4(d) of the
Company’s Annual Report on
Form 10-K
for the period ended April 29, 2009.
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10(a)
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Management contracts and compensatory plans:
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(i)
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1986 Deferred Compensation Program for H. J. Heinz Company and
affiliated companies, as amended and restated in its entirety
effective January 1, 2005, is incorporated herein by
reference to Exhibit 10(a)(xi) to the Company’s Annual
Report on
Form 10-Q
for the period ended July 30, 2008.
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(ii)
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H. J. Heinz Company 1994 Stock Option Plan, as amended and
restated effective August 13, 2008, is incorporated herein
by reference to Exhibit 10(a)(vi) to the Company’s
Quarterly Report on
Form 10-Q
for the period ended July 30, 2008.
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(iii)
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H. J. Heinz Company Supplemental Executive Retirement Plan, as
amended and restated effective November 12, 2008, is
incorporated herein by reference to Exhibit 10(a)(ii) to
the Company’s Quarterly Report on
Form 10-Q
for the period ended October 29, 2008.
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(iv)
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H. J. Heinz Company Executive Deferred Compensation Plan, as
amended and restated effective January 1, 2005, is
incorporated herein by reference to Exhibit 10(a)(xii) of
the Company’s Quarterly Report on
Form 10-Q
for the period ended July 30, 2008.
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(v)
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H. J. Heinz Company Stock Compensation Plan for Non-Employee
Directors is incorporated herein by reference to Appendix A
to the Company’s Proxy Statement dated August 3, 1995.
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(vi)
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H. J. Heinz Company 1996 Stock Option Plan, as amended and
restated effective August 13, 2008, is incorporated herein
by reference to Exhibit 10(a)(vii) to the Company’s
Quarterly Report on
Form 10-Q
for the period ended July 30, 2008.
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(vii)
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H. J. Heinz Company Deferred Compensation Plan for Directors is
incorporated herein by reference to Exhibit 10(a)(xiii) to
the Company’s Annual Report on
Form 10-K
for the fiscal year ended April 29, 1998.
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(viii)
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H. J. Heinz Company 2000 Stock Option Plan, as amended and
restated effective August 13, 2008, is incorporated herein
by reference to Exhibit 10(a)(viii) to the Company’s
Quarterly Report on
Form 10-Q
for the period ended July 30, 2008.
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(ix)
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H. J. Heinz Company Executive Estate Life Insurance Program is
incorporated herein by reference to Exhibit 10(a)(xv) to
the Company’s Annual Report on
Form 10-K
for the fiscal year ended May 1, 2002.
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(x)
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H. J. Heinz Company Senior Executive Incentive Compensation
Plan, as amended and restated effective January 1, 2008, is
incorporated herein by reference to Exhibit 10(a)(xiii) to
the Company’s Quarterly Report on
Form 10-Q
for the period ending July 30, 2008.
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(xi)
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Deferred Compensation Plan for Non-Employee Directors of
H. J. Heinz Company, as amended and restated effective
January 1, 2005, is incorporated herein by reference to
Exhibit 10(a)(x) to the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xii)
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Form of Stock Option Award and Agreement for U.S. Employees is
incorporated herein by reference to Exhibit 10(a) to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended January 26, 2005.
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(xiii)
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Form of Stock Option Award and Agreement for U.S. Employees
Based in the U.K. on International Assignment is incorporated
herein by reference to Exhibit 10(a) to the Company’s
Quarterly Report on
Form 10-Q
for the quarterly period ended January 26, 2005.
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(xiv)
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Named Executive Officer and Director Compensation
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(xv)
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Form of Fiscal Year 2006 Restricted Stock Unit Award and
Agreement for U.S. Employees is incorporated herein by reference
to the Company’s Annual Report on
Form 10-K
for the fiscal year ended April 27, 2005.
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(xvi)
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Form of Fiscal Year 2006 Restricted Stock Unit Award and
Agreement for
non-U.S.
Based Employees is incorporated herein by reference to the
Company’s Annual Report on
Form 10-K
for the fiscal year ended April 27, 2005.
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(xvii)
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Form of Revised Severance Protection Agreement is incorporated
herein by reference to Exhibit 10(a)(i) to the
Company’s Quarterly Report on
Form 10-Q
for the period ended October 29, 2008.
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(xviii)
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Form of Fiscal Year 2007 Restricted Stock Unit Award and
Agreement is incorporated herein by reference to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended November 1, 2006.
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(xix)
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Form of Fiscal Year 2008 Stock Option Award and Agreement (U.S.
Employees) is incorporated herein by reference to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
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(xx)
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Form of Stock Option Award and Agreement is incorporated herein
by reference to the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
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(xxi)
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Form of Restricted Stock Unit Award and Agreement is
incorporated herein by reference to the Company’s Quarterly
Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
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(xxii)
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Form of Revised Fiscal Year 2008 Restricted Stock Unit Award and
Agreement is incorporated herein by reference to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
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(xxiii)
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Form of Restricted Stock Award and Agreement (U.S. Employees
Retention) is incorporated herein by reference to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
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(xxiv)
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Third Amended and Restated Fiscal Year 2003 Stock Incentive Plan
is incorporated herein by reference to Exhibit 10(a)(ix) to
the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxv)
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Third Amended and Restated Global Stock Purchase Plan is
incorporated herein by reference to Exhibit 10(a)(xiv) to
the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxvi)
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Time Sharing Agreement dated as of September 14, 2007,
between H. J. Heinz Company and William R. Johnson is
incorporated herein by reference to Exhibit 10.1 of the
Company’s
Form 8-K
dated September 14, 2007.
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(xxvii)
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H. J. Heinz Company Annual Incentive Plan, as amended and
restated effective January 1, 2008, is incorporated herein
by reference to Exhibit 10(a)(xv) to the Company’s
Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxviii)
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Form of Stock Option Award and Agreement for U.K. Employees on
International Assignment is incorporated herein by reference to
Exhibit 10(a)(xvii) to the Company’s Quarterly Report
on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxix)
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Form of Fiscal Year 2008 Restricted Stock Unit Award and
Agreement (U.S. Employees—Retention) is incorporated herein
by reference to Exhibit 10(a)(xxx) to the Company’s
Annual Report on
Form 10-K
for the period ended April 29, 2009.
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(xxx)
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Form of Fiscal Year 2009 Restricted Stock Unit Award and
Agreement (U.S. Employees) is incorporated herein by reference
to Exhibit 10(a)(i) to the Company’s Quarterly Report
on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxxi)
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Form of Fiscal Year 2009 Long-Term Performance Program Award
Agreement (U.S. Employees) is incorporated herein by reference
to Exhibit 10(a)(iii) to the Company’s Quarterly
Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxxii)
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Form of Fiscal Year 2009 Long-Term Performance Program Award
Agreement
(Non-U.S.
Employees) is incorporated herein by reference to
Exhibit 10(a)(iv) to the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxxiii)
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Form of Fiscal Year
2010-11
Long-Term Performance Program Award Agreement (U.S. Employees)
is incorporated herein by reference to Exhibit 10(a)(xxxiv)
to the Company’s Annual Report on
Form 10-K
for the period ended April 29, 2009.
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(xxxiv)
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Form of Fiscal Year 2010 Restricted Stock Unit Award and
Agreement (U.S. Employees) is incorporated herein by reference
to Exhibit 10(a)(i) to the Company’s Quarterly Report
on
Form 10-Q
for the quarterly period ended July 29, 2009.
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(xxxv)
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Form of Fiscal Year 2010 Restricted Stock Unit Award and
Agreement
(Non-U.S.
Employees) is incorporated herein by reference to
Exhibit 10(a)(ii) to the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 29, 2009.
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(xxxvi)
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Form of Fiscal Year 2010 Restricted Stock Unit Award and
Agreement (U.S. Employees—Time Based Vesting) is
incorporated herein by reference to Exhibit 10(a)(i) to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended October 28, 2009.
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(xxxvii)
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Form of Fiscal Year
2010-11
Long-Term Performance Program Award Agreement
(Non-U.S.
Employees) is incorporated herein by reference to the
Exhibit 10(a)(xxxv) to the Company’s Annual Report on
Form 10-K
for the period ended April 29, 2009.
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12.
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Computation of Ratios of Earnings to Fixed Charges.
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21.
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Subsidiaries of the Registrant.
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23.
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Consent of PricewaterhouseCoopers LLP.
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94
Copies of the exhibits listed above will be furnished upon
request to holders or beneficial holders of any class of the
Company’s stock, subject to payment in advance of the cost
of reproducing the exhibits requested.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on June 17, 2010.
H. J. HEINZ COMPANY
(Registrant)
/s/ Arthur
B. Winkleblack
Arthur B. Winkleblack
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated, on
June 17, 2010.
/s/ William
R. Johnson
/s/ Edward
J. McMenamin
Schedule Of Valuation And Qualifying Accounts Disclosure
Schedule II
H. J.
Heinz Company and Subsidiaries
VALUATION
AND QUALIFYING ACCOUNTS AND RESERVES
Fiscal Years Ended April 28, 2010, April 29, 2009 and
April 30, 2008
(Thousands of Dollars)
Fiscal year ended April 28, 2010:
Reserves deducted in the balance sheet from the assets to which
they apply:
Trade receivables
Other receivables
Fiscal year ended April 29, 2009:
Fiscal year ended April 30, 2008:
EXHIBIT INDEX
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Description of Exhibit
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(vi)
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H. J. Heinz Company 1996 Stock Option Plan, as amended and
restated effective August 13, 2008, is incorporated herein
by reference to Exhibit 10(a)(vii) to the Company’s
Quarterly Report on
Form 10-Q
for the period ended July 30, 2008.
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(vii)
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H. J. Heinz Company Deferred Compensation Plan for Directors is
incorporated herein by reference to Exhibit 10(a)(xiii) to
the Company’s Annual Report on
Form 10-K
for the fiscal year ended April 29, 1998.
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(viii)
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H. J. Heinz Company 2000 Stock Option Plan, as amended and
restated effective August 13, 2008, is incorporated herein
by reference to Exhibit 10(a)(viii) to the Company’s
Quarterly Report on
Form 10-Q
for the period ended July 30, 2008.
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(ix)
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H. J. Heinz Company Executive Estate Life Insurance Program is
incorporated herein by reference to Exhibit 10(a)(xv) to
the Company’s Annual Report on
Form 10-K
for the fiscal year ended May 1, 2002.
|
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(x)
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H. J. Heinz Company Senior Executive Incentive Compensation
Plan, as amended and restated effective January 1, 2008, is
incorporated herein by reference to Exhibit 10(a)(xiii) to
the Company’s Quarterly Report on
Form 10-Q
for the period ending July 30, 2008.
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(xi)
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Deferred Compensation Plan for Non-Employee Directors of H. J.
Heinz Company, as amended and restated effective January 1,
2005, is incorporated herein by reference to
Exhibit 10(a)(x) to the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xii)
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Form of Stock Option Award and Agreement for U.S. Employees is
incorporated herein by reference to Exhibit 10(a) to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended January 26, 2005.
|
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(xiii)
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Form of Stock Option Award and Agreement for U.S. Employees
Based in the U.K. on International Assignment is incorporated
herein by reference to Exhibit 10(a) to the Company’s
Quarterly Report on
Form 10-Q
for the quarterly period ended January 26, 2005.
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(xiv)
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Named Executive Officer and Director Compensation
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(xv)
|
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Form of Fiscal Year 2006 Restricted Stock Unit Award and
Agreement for U.S. Employees is incorporated herein by reference
to the Company’s Annual Report on
Form 10-K
for the fiscal year ended April 27, 2005.
|
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(xvi)
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Form of Fiscal Year 2006 Restricted Stock Unit Award and
Agreement for
non-U.S.
Based Employees is incorporated herein by reference to the
Company’s Annual Report on
Form 10-K
for the fiscal year ended April 27, 2005.
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(xvii)
|
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Form of Revised Severance Protection Agreement is incorporated
herein by reference to Exhibit 10(a)(i) to the
Company’s Quarterly Report on
Form 10-Q
for the period ended October 29, 2008.
|
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(xviii)
|
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Form of Fiscal Year 2007 Restricted Stock Unit Award and
Agreement is incorporated herein by reference to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended November 1, 2006.
|
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(xix)
|
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Form of Fiscal Year 2008 Stock Option Award and Agreement (U.S.
Employees) is incorporated herein by reference to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
|
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(xx)
|
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Form of Stock Option Award and Agreement is incorporated herein
by reference to the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
|
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(xxi)
|
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Form of Restricted Stock Unit Award and Agreement is
incorporated herein by reference to the Company’s Quarterly
Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
|
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Description of Exhibit
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(xxii)
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Form of Revised Fiscal Year 2008 Restricted Stock Unit Award and
Agreement is incorporated herein by reference to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
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(xxiii)
|
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Form of Restricted Stock Award and Agreement (U.S. Employees
Retention) is incorporated herein by reference to the
Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended August 1, 2007.
|
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(xxiv)
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Third Amended and Restated Fiscal Year 2003 Stock Incentive Plan
is incorporated herein by reference to Exhibit 10(a)(ix) to
the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
|
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(xxv)
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Third Amended and Restated Global Stock Purchase Plan is
incorporated herein by reference to Exhibit 10(a)(xiv) to
the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
|
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(xxvi)
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Time Sharing Agreement dated as of September 14, 2007,
between H. J. Heinz Company and William R. Johnson is
incorporated herein by reference to Exhibit 10.1 of the
Company’s
Form 8-K
dated September 14, 2007.
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(xxvii)
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H. J. Heinz Company Annual Incentive Plan, as amended and
restated effective January 1, 2008, is incorporated herein
by reference to Exhibit 10(a)(xv) to the Company’s
Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxviii)
|
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Form of Stock Option Award and Agreement for U.K. Employees on
International Assignment is incorporated herein by reference to
Exhibit 10(a)(xvii) to the Company’s Quarterly Report
on
Form 10-Q
for the quarterly period ended July 30, 2008.
|
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(xxix)
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Form of Fiscal Year 2008 Restricted Stock Unit Award and
Agreement (U.S. Employees—Retention) is incorporated herein
by reference to Exhibit 10(a)(xxx) to the Company’s
Annual Report on
Form 10-K
for the period ended April 29, 2009.
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(xxx)
|
|
Form of Fiscal Year 2009 Restricted Stock Unit Award and
Agreement (U.S. Employees) is incorporated herein by reference
to Exhibit 10(a)(i) to the Company’s Quarterly Report
on
Form 10-Q
for the quarterly period ended July 30, 2008.
|
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(xxxi)
|
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Form of Fiscal Year 2009 Long-Term Performance Program Award
Agreement (U.S. Employees) is incorporated herein by reference
to Exhibit 10(a)(iii) to the Company’s Quarterly
Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxxii)
|
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Form of Fiscal Year 2009 Long-Term Performance Program Award
Agreement
(Non-U.S.
Employees) is incorporated herein by reference to
Exhibit 10(a)(iv) to the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 30, 2008.
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(xxxiii)
|
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Form of Fiscal Year
2010-11
Long-Term Performance Program Award Agreement (U.S. Employees)
is incorporated herein by reference to Exhibit 10(a)(xxxiv)
to the Company’s Annual Report on
Form 10-K
for the period ended April 29, 2009.
|
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(xxxiv)
|
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Form of Fiscal Year 2010 Restricted Stock Unit Award and
Agreement (U.S. Employees) is incorporated herein by reference
to Exhibit 10(a)(i) to the Company’s Quarterly Report
on
Form 10-Q
for the quarterly period ended July 29, 2009.
|
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(xxxv)
|
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Form of Fiscal Year 2010 Restricted Stock Unit Award and
Agreement
(Non-U.S.
Employees) is incorporated herein by reference to
Exhibit 10(a)(ii) to the Company’s Quarterly Report on
Form 10-Q
for the quarterly period ended July 29, 2009.
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