SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
|
| |
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended April 29, 201228, 2013 |
| or |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from _________ to _________ |
Commission File Number 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
|
| | |
| PENNSYLVANIA | | 25-0542520 |
| (State of Incorporation) | | (I.R.S. Employer Identification No.) |
| | |
| One PPG Place | | 15222 |
| Pittsburgh, Pennsylvania | | (Zip Code) |
| (Address of principal executive offices) | | |
412-456-5700
(Registrant’s telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
|
| | |
Title of each class | | Name of each exchange on which registered |
Common Stock, par value $.25 per share | | The New York Stock Exchange |
| | |
Third Cumulative Preferred Stock, | | |
$1.70 First Series, par value $10 per share | | The New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes þ No o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | |
Large accelerated filer oþ | | Accelerated filer o | | Non-accelerated filer þo (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 26, 2011,28, 2012, the aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant was approximately $16.9 billion.$18.3 billion.
The number of shares of the Registrant’s Common Stock, par value $.25 per share, outstanding as of May 31, 2012,June 20, 2013, was 320,337,764100 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement
INTRODUCTORY NOTE
On July 9, 2013, H. J. Heinz Company (the “Company,” “we,” “us,” and “our”) filed its annual report on Form 10-K for the Annual Meeting of Shareholdersyear ended April 28, 2013 (the “Original Filing”). This Amendment No. 1 to be heldForm 10-K (this “Amendment”) on August 28, 2012, which willForm 10-K/A completes the items identified below that were originally omitted from the Original Filing in the expectation that an amendment to the Original Filing would be filed with the Securities and Exchange Commission (the “SEC”) within 120 days after the end of the Registrant’sour 2013 fiscal year ended April 29, 2012, are incorporated intoyear.
As a result, this Amendment amends only Part III, ItemsItem 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and 14.
PART IRelated Transactions, and Director Independence) and Item 14 (Principal Accounting Fees and Services). All other items in the Original Filing are unchanged and this Amendment does not amend, update or change any other information in the Original Filing.
H. J.On June 7, 2013, we were acquired by H.J. Heinz Company was incorporated in Pennsylvania on July 27, 1900. In 1905, it succeededHolding Corporation (formerly known as Hawk Acquisition Holding Corporation) (“Holdings”), a Delaware corporation controlled by Berkshire Hathaway Inc. (“Berkshire Hathaway”) and 3G Special Situations Fund III, L.P. (“3G SS Fund III,” and together with Berkshire Hathaway, the “Sponsors”), pursuant to the businessAgreement and Plan of Merger, dated February 13, 2013 (the “Merger Agreement”), as amended by the Amendment to Agreement and Plan of Merger, dated March 4, 2013 (the “Amendment”), by and among the Company, Holdings and Hawk Acquisition Sub, Inc., a partnership operatingPennsylvania corporation and an indirect wholly owned subsidiary of Holdings (“Merger Subsidiary”), in a transaction hereinafter referred to as the “Merger.”
As a result of the Merger and related transactions, our common stock was deregistered under the same name which had developed fromSecurities Exchange Act of 1934, as amended (the “Exchange Act”) and is no longer publicly traded. We do not intend to file a food business foundedproxy or information statement with respect to our 2013 annual meeting of shareholders or any action by written consent in 1869 in Sharpsburg, Pennsylvania by Henry J. Heinz. H. J. Heinz Company and its subsidiaries (collectively,lieu of such a meeting. However, we will continue reporting as a voluntary filer with the “Company”) manufacture and market an extensive lineSEC.
Pursuant to Rule 12b-15 under the Exchange Act, this Amendment also contains new certifications pursuant to Section 302 of food products throughout the world. The Company’s principal products include ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition and other food products.
The Company’s products are manufactured and packaged to provide safe, wholesome foods for consumers, as well as foodservice and institutional customers. Many products are prepared from recipes developed in the Company’s innovation and research centers. Ingredients are carefully selected, inspected and passed on to factory kitchens where they are processed, after which the intermediate product is filled automatically into containersSarbanes-Oxley Act of glass, metal, plastic, paper or fiberboard,2002, which are then sealed. Products are prepared by sterilization, blending, fermentation, pasteurization, homogenization, chilling, freezing, pickling, drying, freeze drying, bakingattached hereto. Because no financial statements have been included in this Amendment and this Amendment does not contain or extruding, then labeledamend any disclosure with respect to Items 307 and cased for market. Quality assurance procedures are designed for each product308 of Regulation S-K, paragraphs 3, 4, and process and applied for quality and compliance with applicable laws.
The Company manufactures (and contracts for the manufacture of) its products from a wide variety of raw food materials. Pre-season contracts are made with farmers for certain raw materials such as a portion5 of the Company’s requirements of tomatoes, cucumbers, potatoes, onions and some other fruits and vegetables. Ingredients, such as dairy products, meat, sugar and other sweeteners, including high fructose corn syrup, spices, flour and fruits and vegetables, are purchased from approved suppliers.
During Fiscal 2012, the Company invested in productivity initiatives designedcertifications have been omitted. Pursuant to increase manufacturing effectiveness and efficiency as well as accelerate overall productivity on a global scale. The initiatives included the closure of a number of factories worldwide and a reductionRule 13a-14 of the global workforce. See Note 3, "Productivity Initiatives" in Item 8- "Financial Statements and Supplementary Data" and the "Liquidity and Financial Position" section below for additional information on these productivity initiatives.
The following table lists the numberExchange Act, this Amendment also contains new certifications pursuant to Section 906 of the Company’s principal food processing factories and major trademarks by region asSarbanes-Oxley Act of May 31, 2012:2002, which are attached hereto.
|
| | | | | | | |
| | Factories | | |
| | Owned | | Leased | | Major Owned and Licensed Trademarks |
| North America | 15 |
| | 4 |
| | Heinz, Classico, Quality Chef Foods, Jack Daniel’s*, Catelli*, Wyler’s, Heinz Bell ’Orto, Bella Rossa, Chef Francisco, Ore-Ida, Tater Tots, Bagel Bites, Weight Watchers* Smart Ones, Poppers, T.G.I. Friday’s*, Delimex, Truesoups, Escalon, PPI, Todd’s, Nancy’s, Lea & Perrins, Renee’s Gourmet, HP, Diana, Bravo, Arthur’s Fresh |
| Europe | 17 |
| | 1 |
| | Heinz, Orlando, Karvan Cevitam, Brinta, Roosvicee, Venz, Weight Watchers*, Farley’s, Plasmon, Nipiol, Dieterba, Bi-Aglut, Aproten, Pudliszki, Ross, Honig, De Ruijter, Aunt Bessie*, Mum’s Own, Moya Semya, Picador, Derevenskoye, Mechta Hoziajki, Lea & Perrins, HP, Amoy*, Daddies, Squeezme!, Wyko, Benedicta |
| Asia/Pacific | 24 |
| | — |
| | Heinz, Tom Piper, Wattie’s, ABC, Chef, Craig’s, Winna, Hellaby, Hamper, Farley’s, Greenseas, Gourmet, Nurture, LongFong, Ore-Ida, SinSin, Lea & Perrins, HP, Classico, Weight Watchers*, Cottee’s, Rose’s*, Complan, Glucon D, Nycil, Golden Circle, La Bonne Cuisine, Original Juice Co., The Good Taste Company, Master, Guanghe |
| Rest of World | 7 |
| | 2 |
| | Heinz, Wellington’s, Today, Mama’s, John West, Farley’s, Complan, HP, Lea & Perrins, Classico, Banquete, Wattie’s, Quero |
| | 63 |
|
| 7 |
| | * Used under license |
2
PART III
The Company also owns| Item 10. | Directors, Executive Officers and Corporate Governance. |
BOARD OF DIRECTORS
Our current Board of Directors consists of six members, who have been elected pursuant to a shareholders’ agreement among the Sponsors and Holdings. All of the directors are employees of the Sponsors or leases office space, warehouses, distribution centers and research and other facilities throughout the world. The Company’s food processing factories and principal properties are in good conditiontheir respective subsidiaries and are satisfactory for the purposes for which they are being utilized.
The Company has developed or participated in the development of certain of its equipment, manufacturing processes and packaging, and maintains patents and has applied for patents for some of those developments. The Company regards these patents and patent applications as important but does not consider any one or group of themtherefore deemed to be materially important to its business as a whole.
Although crops constituting some of the Company’s raw food ingredients are harvested on a seasonal basis, most of the Company’s products are produced throughout the year. Seasonal factors inherent in the business have always influenced the
quarterly sales, operating income and cash flows of the Company. Consequently, comparisons between quarters have always been more meaningful when made between the same quarters of prior years.
The products of the Company are sold under highly competitive conditions, with many large and small competitors. The Company regards its principal competition to be other manufacturers of prepared foods, including branded retail products, foodservice products and private label products, that compete with the Company for consumer preference, distribution, shelf space and merchandising support. Product quality and consumer value are important areas of competition.
The Company’s products are sold through its own sales organizations and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, bakeries, pharmacies, mass merchants, club stores, foodservice distributors and institutions, including hotels, restaurants, hospitals, health-care facilities, and certain government agencies. For Fiscal 2012, one customer, Wal-Mart Stores Inc., represented approximately 10% of the Company’s sales. We closely monitor the credit risk associated with our customers and to date have not experienced material losses.
Compliance with the provisions of national, state and local environmental laws and regulations has not had a material effect upon the capital expenditures, earnings or competitive positionaffiliates of the Company. The Company’s estimated capital expenditures for environmental control facilities fornames of our current directors, along with their present positions and qualifications, their principal occupations and directorships held with public corporations during the remainder of Fiscal 2013past five years, their ages and the succeeding fiscal year first elected as a director are not materialset forth below.
| Name | | Age | | Year First Elected a Director |
| Gregory Abel | | 51 | | 2013 |
| Alexandre Behring | | 46 | | 2013 |
| Tracy Britt | | 28 | | 2013 |
| Warren E. Buffett | | 82 | | 2013 |
| Jorge Paulo Lemann | | 74 | | 2013 |
| Marcel Herrmann Telles | | 63 | | 2013 |
Gregory Abel
Age: 51
Chairman, Director, Chief Executive Officer and are not expected to materially affectPresident, MidAmerican Energy Holdings Company (“MidAmerican”), an electric and natural gas service provider with more than 7.1 million customers worldwide; Chairman and Chief Executive Officer, PacifiCorp, an affiliate of MidAmerican; Chairman, Nothern Powergrid Holdings Company, an affiliate of MidAmerican; Director, Kern River Gas Transmission Company and Northern Natural Gas Company, both affiliates of MidAmerican; Director, HomeServices of America, Inc., the earnings, cash flows or competitive positionsecond-largest residential real estate brokerage firm in the United States.
Mr. Abel serves on the board and executive committee of the Company.Edison Electric Institute and the Greater Des Moines Partnership. He also serves on the Nuclear Electric Insurance Limited board of directors; the Kum & Go, L.C. board of directors; the executive board of the Mid-Iowa Council Boy Scouts of America; the American Football Coaches Foundation board of the directors and is a past member of the Drake University board of trustees.
Mr. Abel has experience as chief executive officer and director of multiple energy companies and is a Chartered Accountant and Certified Public Accountant. Due to his service as a director in a highly-regulated industry and his management and accounting experience, he provides the Board of Directors with strong financial and accounting skills.
Alexandre Behring
Age: 46
Managing Partner 3G Capital (2004 – present); Director and Chairman, Burger King Worldwide Holdings, Inc. (October 2010-present).
Mr. Behring has served on our Board of Directors since June 2013. Mr. Behring is a co-founder of 3G Capital and has been its managing partner since 2004. Previously, Mr. Behring spent 10 years at GP Investments, Latin America’s largest private-equity firm, including eight years as a partner and member of the firm’s Investment Committee. He served for seven years, from 1998 through 2004, as CEO of America Latina Logistica (“ALL”), Latin America’s largest railroad and logistics company. He served as a director of ALL until December 2011. Mr. Behring also serves as an alternate director of Lojas Americanas S.A., a retail chain operator based in Brazil. From July 2008 to May 2011, Mr. Behring served as a director of CSX Corporation, a U.S. rail-based transportation company. Mr. Behring is also currently a director of Burger King Worldwide, Inc., an affiliate of 3G Capital.
Mr. Behring was selected to be a member of the Board of Directors because of his extensive leadership experience in developing and operating both public and private companies. Mr. Behring’s particular qualifications and operational, financial and strategic skills strengthen the Board of Directors’ collective knowledge and capabilities.
Tracy Britt
Age: 28
Chairman, Benjamin Moore, a leading manufacturer and retailer of paints and architectural coatings (June 2012-present); Chairman, Larson-Juhl, a manufacturer and distributor of wood and metal framing products (January 2012-present); Chairman, Oriental Trading, a direct merchant of party supplies, arts and crafts, toys and novelties (November 2012-present); Johns Manville, a manufacturer of commercial and industrial roofing systems, fire-protection systems, thermal and acoustical insulation, glass textile wall coverings and flooring (November 2012-present).
Ms. Britt received her B.A. from Harvard University in 2007 and her M.B.A. from Harvard Business School in 2009. Ms. Britt was hired by Berkshire Hathaway in December 2009 as Financial Assistant to the Berkshire Hathaway Chairman. Tracy is also a co-founder of Smart Woman Securities, a nonprofit organization with the goal of educating women about managing their finances.
Ms. Britt’s experience as chairman of several Berkshire Hathaway subsidiaries, as well as insight into financial, investment and other complex subjects as a result of her experience as Financial Assistant to the Chairman of Berkshire Hathaway.
Warren Buffett
Age: 82
Chairman and Chief Executive Officer, Berkshire Hathaway Inc. (1970-present); Director, The Washington Post Company (May 1996-May 2011)
Mr. Buffett brings over 43 years of experience as Chairman and Chief Executive Officer of publicly traded and private companies, providing the Board of Directors with a strong background in finance, investing and other complex subjects. His extensive experience in investing and building companies provides the Board of Directors with strong leadership and an investor’s perspective. Mr. Buffett has pledged all of his Berkshire shares, representing 99% of his net worth, to philanthropic endeavors.
Mr. Buffett has significant investment experience, including the evaluation of strategic opportunities and challenges of the Company’s factories are subject to inspections by various governmental agenciesbusiness and its competitive and financial position, as well as experience in public and private company financial reporting practices.
Jorge Paulo Lemann
Age: 74
Founding Partner, 3G Capital (2004 – present); Director, Anheuser-Busch InBev (2004-present)
Mr. Lemann founded and was senior partner of Banco de Investimentos Garantia S.A. in Brazil from 1971 through June 1998. Until early 2005, Mr. Lemann was Director of The Gillette Company, Swiss Re and of Lojas Americanas. He was also Chairman of the Latin American Advisory Committee of the New York Stock Exchange. Mr. Lemann is co-founder and Board of Directors member of Fundação Estudar, a non-profit organization that provides scholarships for Brazilians and Endeavor, an international non-profit organization that supports entrepreneurs in emerging markets.
Mr. Lemann has experience as a director of a consumer products company and has a strong international experience in the U.S.beverage industry. He also has broad knowledge of strategy, investing and other countries wherebusiness development.
Marcel Herrmann Telles
Age 63
Founding Partner, 3G Capital (2004-present); Director, Anheuser-Busch InBev (2004-present); Director, AmBev (2000-present)
Marcel Herrmann Telles has served on our Board of Directors since June 2013. Mr. Telles served as a member of the Company doesboard of directors of Lojas Americanas S.A., and as Chief Executive Officer of Companhia Cervejaria Brahma (which became AmBev in 2002) from 1989 to 1999. He also served as a member of the board of directors of Burger King Worldwide Holdings, Inc. from 2010 to 2013. From 2009 to 2013, he served as a member of the Advisory Board of ITAU-UNIBANCO, a banking conglomerate based in Brazil. He serves on the board of directors of Fundação Estudar, a not-for-profit foundation in Brazil, and on the board of directors of ISMART, a not-for-profit foundation.
Mr. Telles has experience as the chief executive officer of a large brewing company and major consumer brand and as a director of multiple public and private companies in various industries. He has knowledge of strategy and business includingdevelopment, finance, supply chain management and distribution and leadership development.
See “Item 13. Certain Relationships and Related Transactions, and Director Independence – Related Person Transactions” below for a discussion of certain arrangements and understandings regarding the United States Departmentnomination and selection of Agriculture, and the Occupational Health and Safety Administration, and its products must complycertain of our directors.
As previously disclosed, on June 7, 2013, in accordance with the applicable laws, including food and drug laws, such asMerger Agreement, at the Federal Food and Cosmetic Act of 1938, as amended, and the Federal Fair Packaging or Labeling Act of 1966, as amended,effective time of the jurisdictions in which they are manufacturedMerger, each of William R. Johnson, Charles E. Bunch, Leonard S. Coleman Jr., John G. Drosdick, Edith E. Holiday, Candace Kendle, Franck J. Moison, Dean R. O’Hare, Nelson Peltz, Dennis H. Reilley, Lynn C. Swann, Thomas J. Usher and marketed.
The Company employed, on a full-time basisMichael F. Weinstein (the “Former Directors”) ceased serving as of May 31, 2012, approximately 32,200 people around the world.
Segment information is set forth in this report on pages 70 through 72 in Note 16, “Segment Information” in Item 8—“Financial Statements and Supplementary Data.”
Income from international operations is subject to fluctuation in currency values, export and import restrictions, foreign ownership restrictions, economic controls and other factors. From time to time, exchange restrictions imposed by various countries have restricted the transfer of funds between countries and between the Company and its subsidiaries. To date, such exchange restrictions have not had a material adverse effect on the Company’s operations.
The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d)members of the Exchange Act are available freeBoard of charge on the Company’s web site at www.heinz.com, as soon as reasonably practicable after being filed or furnished to the Securities and Exchange Commission (“SEC”). Our reports filed with the SEC are also made available on its website at www.sec.gov.
Executive OfficersDirectors of the RegistrantCompany.
EXECUTIVE OFFICERS
The following is a list of the names and ages of all of theour current executive officers, of H. J. Heinz Company indicating allalong with their positions and offices held by each such person and each such person’s principal occupations or employment during the past five years. All the executive officers have been elected to serve until the next annual election of officers, until their successorsqualifications, are elected, or until their earlier resignation or removal. The next annual election of officers is scheduled to occur on August 28, 2012.set forth below.
|
| | | | | |
| | Age (as of | | Positions and Offices Held with the Company and
Principal Occupations or
|
| Name | | August 28, 2012)Age | | Employment During Past Five YearsPosition |
William R. JohnsonBernardo Hees | | 63 |
43 | | Chairman, President, and Chief Executive Officer since September 2000. |
Theodore N. BobbyPaulo Basilio | | 61 |
38 | | Executive Vice President, General Counsel and Corporate Secretary since May 2012. Executive Vice President and General Counsel from January 2007 to May 2012.Chief Financial Officer |
Stephen S.Kristen Clark | | 44 |
| | Vice President—Chief People Officer since October 2005. |
Edward J. McMenamin | | 55 |
45 | | Senior Vice President—Finance since May 2010; Senior Vice President—Finance and Corporate Controller from August 2004 to May 2010. |
Michael D. Milone(1)
| | 56 |
| | Executive Vice President from May 2012; Executive Vice President—Heinz Rest of World, and Global Enterprise Risk Management and Global Infant/Nutrition from May 2010 to May 2012; Senior Vice President—Heinz Rest of World, Enterprise Risk Management and Global Infant/Nutrition from June 2008 to April 2010; Senior Vice President—Heinz Pacific, Rest of World and Enterprise Risk Management from May 2006 to June 2008. |
David C. Moran | | 54 |
| | Executive Vice President, President and Chief ExecutivePeople Officer of Heinz Europe and Global Infant/Nutrition since May 2012. Executive Vice President and President and Chief Executive Officer of Heinz Europe from July 2009 to May 2012; Executive Vice President & Chief Executive Officer and |
| Brendan Foley | | 47 | | Zone President of Heinz North America from May 2007 to July 2009. |
| Matt Hill | | 42 | | Zone President of Heinz Europe |
| Andy Keatings | | 56 | | Chief Quality Officer |
| Emin Mammadov | | 36 | | Zone President of Heinz Russia, Turkey, and Middle East & Africa |
| John Mastalerz | | 46 | | Principal Accounting Officer |
| Michael Mullen | | 43 |
| | Vice President—Corporate and Government Affairs since February 2009; Director Global Corporate Affairs from May 2006 to February 2009. |
Margaret R. Nollen | | 49 |
44 | | Senior Vice President—Investor Relations and Global Program Management Officer since January 2011; Senior Vice President—Investor Relations from May 2010 to January 2011; Vice President—Investor Relations from February 2007 to May 2010.President of Corporate & Government Affairs |
C. Scott O’HaraEduardo Pelleissone | | 51 |
39 | | Executive Vice President of Operations |
| Fernando Pocaterra | | 59 | | Zone President of Heinz Latin America |
| Garry Price | | 52 | | Senior Vice President Global Strategy and Audit |
| Marcos Romaneiro | | 30 | | Senior Vice President Global Finance |
| Hein Schumacher | | 42 | | Zone President of Heinz Asia Pacific |
| Dan Shaw | | 62 | | General Counsel |
| Melissa Werneck | | 40 | | Senior Vice President of Performance and Information Technology |
Bernardo Hees is the Chief Executive Officer of the Company. Previously, Mr. Hees served as Chief Executive Officer Burger King Worldwide Holdings, Inc. from 2010 to June 2013 and Burger King Worldwide, Inc. from June 2012 to June 2013 and as Chief Executive Officer of ALL from January 2005 to September 2010. Mr. Hees has also been a Partner at 3G Capital since July 2010. Mr. Hees has experience as Chief Executive Officer of Burger King and for a large railroad and logistics company based in Brazil. He has knowledge of strategy and business development, finance, marketing and consumer insight, risk assessment, leadership development and succession planning. Mr. Hees earned a degree in Economics from the Pontifícia Universidade Católica (Brazil) and a Masters in Business Administration (“MBA”) from the University of Warwick (United Kingdom). Mr. Hees joined Heinz in June 2013.
Paulo Basilio is the Chief Financial Officer of the Company. Mr. Basilio joined Heinz in June 2013. Mr. Basilio is a partner at an affiliate of 3G Capital and previously served as Chief Executive Officer of ALL from 2010 to 2012, after having served as ALL’s Chief Operating Officer, Chief Financial Officer and Analyst. Mr. Basilio holds a M.Sc. in Economics from Fundacao Getulio Vargas in Brazil.
Kristen Clark is the Senior Vice President and Chief People Officer of the Company. Ms. Clark served as President of Heinz Canada until her appointment as Senior Vice President and Chief People Officer in June 2013. Previously, Ms. Clark was Chief Strategy Officer for the Company. Formerly, Ms. Clark served as the Group Vice President of Meals and Snacks for Heinz North America. Prior to joining Heinz, Ms. Clark worked at Procter & Gamble and Johnson & Johnson in marketing and sales. Ms. Clark joined Heinz in 2000. Ms. Clark graduated with an MBA from the Fuqua School of Business at Duke University and a BS in Business Administration from the University of Delaware.
Brendan Foley is the Zone President of Heinz North America. Mr. Foley was most recently President of U.S. Consumer Products. In this role, Mr. Foley was focused on reestablishing the U.S. Consumer Products business as a growth engine. Mr. Foley’s prior positions with the Company included President of U.S. Foodservice and Group Vice President of Marketing for Frozen Meals and Snacks for U.S. Consumer Products. Mr. Foley joined the Company in 1998 and held various marketing and general management positions including Marketing Director of Classico/Gravy/Wylers, Marketing Director of Global Ketchup & Sauces and Senior Brand Manager of Ketchup. Mr. Foley also led the acquisition and integration of Borden Foods into Heinz, which included the Classico and Wyler’s brands. Prior to joining the Company, Mr. Foley was with General Mills where he was Marketing Manager for new cereal products and also worked on the Cheerios, Trix Cereal and Yoplait Yogurt brands. Brendan graduated from Miami University of Ohio with a degree in Business Administration and Marketing.
Matt Hill is the Zone President of Heinz Europe. Prior to his appointment, Mr. Hill was President of Heinz UK & Ireland, the second largest business for the Company globally. Mr. Hill joined Heinz in 2010 as Chief Marketing Officer for the UK & Ireland and was promoted after four months to Chief Commercial Officer managing Sales and Marketing, and responsible for delivery of the Annual Plan. He was promoted to President UK & Ireland in April 2012. Prior to joining the Company, Mr. Hill spent 17 years at Unilever in a variety of UK, European and Global marketing roles including 7 years at a Vice President level. Mr. Hill has 20 years’ experience in the consumer packaged goods food industry. He brings experience of chilled, ambient and frozen product categories, of retail and foodservice channels, and of developed and emerging markets. Matt is an Economics graduate from the University of Warwick (United Kingdom). He is based in the United Kingdom and travels extensively throughout Europe.
Andy Keatings is the Chief Quality Officer of the Company. As the Chief Quality Officer, Mr. Keatings is responsible for quality risk assessment in all of Heinz’s products globally. Mr. Keatings is also responsible for global risk assessment and management, ensuring consistent product performance globally and driving continuous improvement. Mr. Keatings joined Heinz in 1994. He holds a degree in chemical engineering from Leeds University, U.K. Prior to joining the Company, Mr. Keatings worked in supply chain in the chemicals, pharmaceuticals and consumer goods industries.
Emin Mammadov is the Zone President of Heinz Russia, Turkey, and Middle East & Africa. Mr. Mammadov most recently served as President, Heinz Africa & Middle East, where he focused on accelerating Heinz’s growth in the Emerging Markets. Mr. Mammadov joined Heinz as Marketing Director for Heinz Russia and has since held the roles of Commercial Director, Heinz Russia, followed by an assignment in China as Managing Director, Heinz Foodstar & Heinz Sauces. Prior to joining the Company, Mr. Mammadov spent more than eight years at Procter & Gamble mostly in several emerging markets, including Turkey. Mr. Mammadov joined the Company in 2006.
John Mastalerz is the Principal Accounting Officer of H.J. Heinz Company. Mr. Mastalerz is responsible for overseeing all aspects of global accounting. In his most recent role as Vice President & Corporate Controller at the Company, Mr. Mastalerz was responsible for global business unit adherence to all of the corporate accounting policies and directing the SEC and SOX reporting requirements of the Company. Previously, Mr. Mastalerz was the Finance Process Optimization Leader on Project Keystone where he led the Keystone Plan Report team, working with the Company’s global finance teams to align and optimize its finance processes globally. Prior to joining the Company in 2001, Mr. Mastalerz spent more than 11 years at PricewaterhouseCoopers.
Michael Mullen continues in his role as the Senior Vice President of Corporate & Government Affairs. Mr. Mullen is responsible for all global internal and external communications, government affairs and corporate reputation management. Mr. Mullen has held this role at H.J. Heinz Company since November 2012 and previously held the positions of Vice President of Corporate & Government Affairs and Director of Corporate Affairs. Mr. Mullen also has responsibility for the H.J. Heinz Company Foundation. Mr. Mullen joined Heinz in 1998.
Eduardo Pelleissone is the Executive Vice President of Operations. Prior to joining the Company, Mr. Pelleissone was Chief Executive Officer of ALL. Previously, Mr. Pelleissone held the roles of Chief Operating Officer, Managing Director and General Manager of Agricultural Products at ALL. Before joining ALL, Mr. Pelleissone held several positions at Glencore Importadora e Exportadora SA. Mr. Pelleissone also serves as a Chairman of Brado Logistics S/A, Vetria Mining S/A, and Ritmo Logistics S/A, all subsidiaries of ALL. In addition, Mr. Pelleissone is a director of the Federation of Industries of the State of Sao Paulo, Brazil, the largest professional association of Brazilian industry, and is a director of the National Association of Rail Transport, a Brazilian civil nonprofit entity that promotes the development and improvement of rail transport in Brazil. In his role as Vice President of Operations, Mr. Pelleissone has responsibility for supply chain, procurement and operations. Mr. Pelleissone has an MBA in Logistics, Operations and Services from COPPEAD in Brazil.
Fernando Pocaterra is the Zone President of Heinz Latin America. Since 2005, Mr. Pocaterra had been serving as Area Director of Heinz Latin America. Previously, Mr. Pocaterra was President of Heinz Venezuela and Chief Operating Officer of Heinz Italy. Prior to joining Heinz, Mr. Pocaterra worked in marketing at Procter & Gamble in Venezuela. Mr. Pocaterra joined the Company in 1981. He holds an engineering degree from Iowa State University.
Garry Price is the Senior Vice President, Global Strategy and Audit. Mr. Price is responsible for Global Audit, European Business Strategy support, and special projects. Since joining the Company in 1985, Mr. Price has held the role of Chief Financial Officer in Canada, Continental Europe, Western Europe, and UK & Ireland. Most recently, Mr. Price served as the Vice President, Finance and Chief Financial Officer for Europe. Mr. Price holds a degree in business administration from Wilfred Laurier University (Canada) and a CMA designation from the Canadian Society of Management Accountants.
Marcos Romaneiro is the Senior Vice President, Global Finance and is responsible for Planning, Treasury and Tax. Previously, Mr. Romaneiro worked at 3G Capital and was responsible for evaluating and executing on private equity opportunities. Prior to joining 3G Capital, Mr. Romaneiro spent six years in private equity at Cerberus Capital Management and Vestar Capital Partners. Mr. Romaneiro is a graduate of Brown University in Business Economics and is a former professional soccer player.
Hein Schumacher is the Zone President of Heinz Asia Pacific. Prior to being appointed Zone President of Heinz Asia Pacific, Mr. Schumacher had been President of Heinz Greater China since 2011and previously held the positions of Vice President Finance Heinz Europe, Vice President and Chief Strategy Officer for the Company and Vice President and Chief Financial Officer of Heinz Continental Europe. Mr. Schumacher worked with Royal Ahold NV and Unilever NV prior to the Company in various roles. He holds a Masters degree in finance as well as politics and international affairs from the University of Amsterdam, The Netherlands. Mr. Schumacher joined Heinz in 2003.
Daniel F. Shaw is the Company’s General Counsel. Prior to his appointment as General Counsel, Mr. Shaw had been Vice President and Deputy General Counsel since 2009. Previously, Mr. Shaw worked at the U.S. Department of Justice and the Washington, D.C. law firm of Chayet and Sonnenreich. Mr. Shaw is responsible for all legal affairs globally including but not limited to mergers and acquisitions, securities law, finance transactions, litigation, and general commercial and regulatory matters. Mr. Shaw graduated from Williams College and received his Juris Doctor degree from the Dickinson School of Law.
Melissa Werneck is the Senior Vice President of Performance and Information Technology. Ms. Werneck is responsible for setting and cascading performance goals across the Company. She is also responsible for global information technology. Most recently, Ms. Werneck served as Performance Senior Vice President and Chief People Officer at ALL, and previously held various other senior roles in human resources at ALL. Prior to joining ALL in 1999, Ms. Werneck held various positions at Brahma, which later became Ambev. Melissa received a degree in Chemical Engineering from Universidade Federal de Minas Gerais in Brazil and an MBA from COPPEAD/Universidade Federal do Rio de Janeiro.
On June 7, 2013, the Company’s former Chief Executive Officer, William R. Johnson, and former Chief Financial Officer, Arthur Winkleblack resigned from their positions as executive officers of the Company. Since June 7, 2013, the Company has also announced the departures of the following executive officers: Ted Bobby, Executive Vice President, General Counsel and Corporate Secretary; Dave Ciesinski, Vice President of Transition; Steve Clark, Senior Vice President, Chief People Officer; Ed McMenamin, Senior Vice President, Finance; David Moran, Executive Vice President, President & CEO of Heinz North America & Global Infant Nutrition; Meg Nollen, Senior Vice President of Strategy & Investor Relations; Bob Ostryniec, Senior Vice President, Chief Supply Chain Officer & Global ERM; Chris Warmoth, Executive Vice President, Heinz Asia Pacific; Dave Woodward, Executive Vice President, President & CEO of Heinz Europe; Roel van Neerbos, President, Heinz Continental Europe; and Diane Owen, Senior Vice President, Corporate Audit.
CORPORATE GOVERNANCE
Election of Members to the Board of Directors
The Sponsors are party to a shareholders’ agreement with H.J. Heinz Holding Corporation (“Holdings”), the indirect parent corporation of the Company, pursuant to which the members of the Board of Directors of the Company are nominated and elected. For so long as each Sponsor owns at least 66% of the common stock of Holdings originally acquired by such Sponsor, such Sponsor is entitled to nominate and elect three representatives to the board of directors of Holdings and each of its subsidiaries (including the Company). Following the closing of the Merger, all of the current members of the Board of Directors of the Company were so elected, in accordance with the provisions of the Company’s Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State, and the Company’s Amended and Restated Bylaws.
Board Committees
Since the closing of the Merger, when there ceased to be any pubic listing or trading market for our common stock, our Board of Directors has not established any committees of the Board. Until such time as any committees of the Board of Directors are created, the entire Board of Directors has and shall act on all matters that have or might otherwise have been delegated to a committee of the Board.
Code of Ethics
The Company has adopted a Global Code of Conduct applicable to all directors, officers and employees of the Company, including our chief executive officer, chief financial officer and principal accounting officer. The Global Code of Conduct is posted on our website at www.heinz.com. We intend to disclose on our website any amendments to or waivers of this Global Code of Conduct.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers to file reports with the SEC. To the Company's knowledge, during the fiscal year ended April 28, 2013, all required filings were made on a timely basis, based on our review of the reports and written representations provided to the Company.
| Item 11. | Executive Compensation. |
COMPENSATION DISCUSSION AND ANALYSIS
Overview
INTRODUCTION
On February 13, 2013, the Company entered into the Merger Agreement with affiliates of the Sponsors, pursuant to which Merger Subsidiary agreed to be merged with and into the Company, subject to the terms, provisions and conditions of the Merger Agreement. The Merger was consummated on June 7, 2013, after the completion of the Company’s 2013 fiscal year (“Fiscal Year 2013”), which ended on April 28, 2013.
This Compensation Discussion and Analysis (“CD&A”), provides the disclosure required by Item 402(t) of Regulation S-K for the Fiscal Year 2013 and outlines compensation earned during the Fiscal Year 2013 by our then-current chief executive officer (the “CEO”), chief financial officer, and the three other most highly compensated executive officers for such fiscal year, whom we refer to collectively as our named executive officers (the “NEOs”). This CD&A does not reflect the payments that were and will be made to our then NEOs in connection with the Merger, which are described in detail in the definitive proxy statement for the acquisition filed with the SEC on March 27, 2013.
For purposes of this CD&A the “Committee” refers to the Management Development & Compensation Committee of the Board of Directors of the Company before the Merger and the decisions made by such Committee. Following the Merger, the Board of Directors of the Company did not designate a compensation committee and until it does so, the full Board of Directors of the Company will be responsible for all compensation committee functions including the approval of this CD&A.
PRIOR SAY-ON-PAY VOTE
The Committee carefully considered the results of the Fiscal Year 2012 advisory vote on executive compensation, in which over 78% of votes cast were “For” the compensation of the NEOs as described in the Fiscal Year 2012 Proxy Statement. The Committee considered shareholder feedback on executive compensation received from a wide-ranging dialogue between management and numerous shareholders, including the Company's largest shareholders, many of whom have held Heinz stock for over a decade. This dialogue took place both before and after the advisory vote on Fiscal Year 2012 compensation and provided an excellent opportunity to discuss the linkage between pay and performance for our NEOs.
Key Elements of our NEO Compensation Program - Fiscal Year 2013
COMPENSATION OBJECTIVES AND PRINCIPLES - FISCAL YEAR 2013
The Fiscal Year 2013 NEO compensation programs were designed to reward superior financial performance and achieve the following objectives, which were previously established by the Committee:
Link the pay opportunity for each NEO to the performance of the Company, including the building of shareholder value through the achievement of the financial and strategic objectives established by the Board of Directors;
Align the interests of our NEOs with those of our shareholders by paying a significant portion of compensation (salary plus annual bonus plus performance-based restricted stock units (“RSUs”), stock option and Long-Term Performance Program (“LTPP”) awards) under long-term incentive plans (approximately 65% at target for our CEO and 56% at target for the other NEOs) and requiring our NEOs to maintain meaningful equity ownership in the Company;
Provide competitive compensation to attract and retain superior executive talent for the long term; and
Provide a balance between risk and potential reward for NEOs by:
| o | Achieving a balance of short-term and long-term goals; |
| o | Discouraging unnecessary or excessive assumption of risks that would threaten the reputation or sustainability of the Company; and |
| o | Encouraging appropriate assumption of risk for competitive advantage. |
The key principles that have guided the decision-making process of the Committee on executive compensation matters include:
Applying a broader and more flexible orientation, generally a range around the median of comparator company compensation, which provides the ability to:
| o | Establish pay levels commensurate with each NEO's years of experience in their current role and recent performance compared to peers in comparator companies; |
| o | Manage salaries and total compensation opportunity based on changing business conditions; and |
| o | Differentiate compensation based on a number of factors, including experience and performance. |
Giving consideration to the differences in size, scope, and complexity between the Company and the comparator companies (this is one of several judgmental factors the Committee has considered and is not based on a formula).
Using an independent executive compensation consultant to provide expertise and experience.
FISCAL YEAR 2013 EXECUTIVE PAY GUIDELINES
The Committee confirmed the Company’s Executive Pay Guidelines, which, in the aggregate, approximated the median total compensation of the Compensation Peer Group (adjusted for size and other factors as described below), based on its judgment and that of its executive compensation consultant on the use of the compensation data from our Compensation Peer Group. The Fiscal Year 2013 Executive Pay Guidelines, which are expressed as a percentage of base salary and reflect target award amounts, are shown below and were unchanged for NEOs from Fiscal Year 2012.
| | Annual Incentive | RSUs | Stock Options | LTPP Awards |
| Chairman, President & CEO | 220% | 120% | 200% | 275% |
| Executive Vice Presidents | 100% | 80% | 85% | 85% |
The Committee could have exercised its discretion in setting target awards for performance-based RSUs, stock options, and LTPP awards at +25% to -100% of the amounts set forth above. For Fiscal Year 2013, the Committee exercised no discretion in making awards to the NEOs.
CASH COMPENSATION - FISCAL YEAR 2013
Base Salaries
Base salaries are the foundation for all of the NEO compensation programs as the amounts of incentive payments, equity awards, and benefits are, in most cases, linked to salary, as set forth in the Executive Pay Guidelines. As salary changes, all of the other elements have typically changed proportionately. Salaries of the NEOs have been reviewed on an annual basis, as well as at the time of a promotion or other change in responsibilities. Salary changes have typically taken effect in May of each year. In addition to the quantitative metrics identified in the table under “Management Development and Compensation Committee Decisions - Performance Measurements - Financial Metrics,” salary increases, if any, were based on an evaluation of the individual's most recent performance rating, level of pay compared to data from the Compensation Peer Group, and difficulty of replacement. For Fiscal Year 2013, the Committee approved no salary increases for NEOs.
Annual Cash Incentive Awards
NEOs have been eligible to earn annual cash awards under the Senior Executive Incentive Compensation Plan (the “SEICP”) from a pool of funds created from 1.5% of our net income and with reference to the same financial metrics for bonuses paid under our Annual Incentive Plan (the “AIP”) (see the chart under “Management Development and Compensation Committee Decisions - Performance Measurements - Financial Metrics”). The SEICP is intended to reward NEOs for achieving targeted levels of performance. The upside and downside variation around the target award opportunity facilitates the objective of varying annual cash compensation to reflect our operating performance and the contribution of each NEO. The Fiscal Year 2013 target awards and payments are described below in the narrative following the Summary Compensation Table under the heading “Senior Executive Incentive Compensation Plan-Material Factors.”
LONG-TERM INCENTIVE COMPENSATION - FISCAL YEAR 2013
Overview
Our Long-Term Incentive (“LTI”) Compensation Program provided performance-based RSUs, stock option, and LTPP awards. This program was primarily designed to reward outstanding long-term financial performance and the creation of shareholder value while also helping us to attract and retain key executives. In addition, the use of RSUs and stock options promoted stock ownership for NEOs. The Committee has annually reviewed the competitiveness of our LTI awards both in target value and mix between the various elements of LTI, based on data from the Compensation Peer Group and advice from its executive compensation consultant. The Committee has also annually examined the individual performance assessment, tally sheets, and the compensation earned by each NEO under prior LTI awards to better determine the size of new grants necessary to achieve the stated compensation objectives. The NEOs have not influenced the size or timing of their individual annual LTI awards, which have generally been awarded at the same time each year as part of a formal annual grant process administered by the Committee. However, the CEO could have recommended to the Committee an adjustment to the size of the LTI award that would have been determined under the Executive Pay Guidelines for an individual NEO (other than the CEO), based on considerations such as Company or Business Unit financial performance, individual performance, retention, long-term potential, and the NEO's Performance Management Development (“PMD”) rating. These adjustments can range from an increase of 25% to a decrease of 100% in the target award for each NEO. The Committee approved all LTI awards granted to NEOs and had the discretion to make adjustments to the established target award opportunities for each LTI program, which may be above or below the target guideline based on the factors discussed above. As described under “Fiscal Year 2013 Executive Pay Guidelines,” the Committee made no discretionary adjustments to the annual LTI awards for the NEOs for Fiscal Year 2013.
Performance-based Restricted Stock Units
In Fiscal Year 2013, the Committee approved annual grants of performance-based RSUs to each NEO. Target RSU awards for NEOs are based on the established Executive Pay Guidelines. In making this annual grant, the Committee determined the value of the RSUs to be granted to participants and the vesting and forfeiture provisions. To further align the Company’s equity programs with the Company's financial performance, vesting of the annual grant of RSUs awarded in August 2012 was contingent upon achieving the operating income (“OI”) financial performance threshold for Fiscal Year 2013 established by the Committee. This metric was expressed in constant currency and could be adjusted to exclude special items and accounting changes. It was selected because it complements the portfolio of metrics used by the Company in its incentive programs and reflects operational performance before the effects of interest, taxes, and other transactions. The OI financial performance threshold established by the Committee for the Fiscal Year 2013 grant was $1,481 million. Because the financial performance threshold for the Fiscal Year 2013 grant was achieved, the RSUs were scheduled to vest 25% per year on each of the first four anniversaries of the grant date. The Committee occasionally varied the vesting schedule to address circumstances where the awards were intended to facilitate greater retention of key employees, to recognize exceptional performance, to address cash flow issues for non-U.S. based individuals due to the timing of tax payments, or to align with the regulatory requirements of various countries. These awards have contained provisions including either accelerated vesting in the case of special performance awards, such as vesting one-third after the first two years and then one-third in years three and four with forfeiture of all unvested units upon termination; or, in the case of the special retention awards, full vesting on the third or fifth anniversary of the grant without the possibility of earlier vesting. For NEOs who are approaching retirement or are retirement eligible, the Committee has, from time-to-time, established vesting provisions that result in full forfeiture of any unvested portion of an award if the NEO retires prior to the vesting date.
Stock Options
In Fiscal Year 2013, the Committee determined the target grant date fair market value of non-qualified stock options to be granted to each NEO and the vesting and forfeiture provisions of those options. Target stock option awards for NEOs are based on the established Executive Pay Guidelines. All options were granted at an exercise price equal to the closing price of the Company’s Common Stock on the New York Stock Exchange (“NYSE”) on the date of grant. Accordingly, the stock options would have value only if the market price of the Company’s Common Stock increases after the grant date. The approach to vesting and expiration was influenced by considerations such as competitiveness, retention impact, and cost. The Committee generally, and in Fiscal Year 2013 granted, stock options that vest 25% per year on each of the first four anniversaries of the grant date. The Committee has occasionally granted awards that vest on a different schedule where the awards are intended to recognize new hires or promotions; to facilitate greater retention of key employees; or to recognize the exceptional performance of certain individuals. For NEOs who are approaching retirement or are retirement eligible, the Committee has, from time-to-time, established vesting provisions that result in full forfeiture of any unvested portion of an award if the NEO retires prior to the vesting date.
Long-Term Performance Program
In Fiscal Year 2013, following its review of the Company’s prior year performance and business plans for future years, the Committee approved annual LTPP awards providing for cash payments based on financial measures over a two-year period. Target LTPP awards for NEOs were based on the established Executive Pay Guidelines. The Company’s two LTPPs are described below under “Long Term Performance Programs-Material Factors.”
BENEFITS AND PERQUISITES - FISCAL YEAR 2013
The Company provided retirement benefits, including supplemental retirement, and other benefits at levels that approximate the median of our Compensation Peer Group (see “Management Development and Compensation Committee Decisions - Analytical Tools - Peer Groups” for a list of the Compensation Peer Group members) and supported succession planning, based on the following principles:
Supplemental retirement benefits must support one or more of the following objectives:
Link a portion of the benefit to Company and/or individual performance by basing the benefit primarily on salary and bonus earned;
Aid in the recruitment of new hires, particularly mid-career executives; and/or
Compensate for benefit limitations imposed by the Internal Revenue Code of 1986, as amended (the “Code”).
Each benefit and perquisite must support one or more of the following objectives:
Provide greater security/safety to the NEO;
Increase time available for business purposes;
Enhance personal financial management; and/or
Represent a competitive practice that helps to support recruitment and retention goals.
Management Development and Compensation Committee Decisions - Fiscal Year 2013
ANALYTICAL TOOLS
Tally Sheets
A tally sheet is a matrix used by the Committee that shows the individual elements of compensation and benefits, including retirement, for each NEO. The total of all compensation and benefit plan elements is included to reflect the full employment costs for each NEO.
Tally sheets were used for the following principal purposes:
| o | To understand how decisions on each individual element of compensation affect total compensation for each NEO; |
| o | To gauge total compensation for each NEO against publicly available data for similar positions at comparator companies; and, |
| o | To confirm that performance-based compensation represents a substantial portion of each NEO's total compensation. |
Peer Groups
One of the primary objectives of our NEO compensation programs was to provide compensation that is within a range around the median of comparator company compensation. The Committee believed this practice was appropriate because it is based on an objective analysis of the Compensation Peer Group pay data provided by the Committee's executive compensation consultant, and because the Company directly competes with these companies to recruit and retain executive talent.
The compensation components used for comparison purposes included many of those disclosed in the Summary Compensation Table and the Grants of Plan Based Awards table. The Committee compared both the value of such compensation as well as the prevalence of individual components based upon available data. The Committee analyzed the following components:
Annual incentive (both target and actual);
Performance-based RSU and stock option awards (actual); and
LTPP awards (both target and actual).
The Committee utilized two peer groups: one for comparison purposes in establishing the Executive Pay Guidelines and one for measuring financial performance, based on total shareholder return (“TSR”) under the LTPP (the “TSR Peer Group”). The composition of each peer group was reviewed by the Committee at least once a year.
The Compensation Peer Group and the TSR Peer was comprised of the following companies:
| Compensation Peer Group | FY12-FY13 TSR Peer Group | FY13-FY14 TSR Peer Group |
| Campbell Soup Company | X | X | X |
| Colgate-Palmolive Company | X | | |
| ConAgra Foods, Inc. | X | X | X |
| Dean Foods Company | X | X | X |
| General Mills, Inc. | X | X | X |
| Hormel Foods Company | | X | X |
| Kellogg Company | X | X | X |
| Kimberly-Clark Corporation | X | | |
| McCormick & Company, Incorporated | | X | X |
| PepsiCo, Inc. | X | | |
| The Clorox Company | X | | |
| The Coca-Cola Company | X | | |
| The Hershey Company | X | X | X |
| The J.M. Smucker Company | | X | X |
INDEPENDENT EXECUTIVE COMPENSATION ADVISOR - FISCAL YEAR 2013
In determining total compensation and allocating the elements of total compensation for the NEOs individually and as a group, the Committee was assisted by: (i) the CEO and the Chief People Officer, who made recommendations regarding potential changes to NEO pay (the CEO does not participate in discussions regarding his pay) based on performance, regulatory, competitiveness, experience, and retention considerations; (ii) an independent executive compensation consultant from Mercer retained exclusively by the Committee to advise the Committee on all matters related to CEO and other NEO compensation; and (iii) the Total Rewards staff within the Company’s Human Resources Department, which acted as a liaison between the Committee and its executive compensation consultant and collects information and prepares materials for the Committee's use in making compensation decisions. Since the selection of the individual Mercer consultant by the Committee in Fiscal Year 2007, the Mercer consultant has not provided and does not provide any services to management or other Company employees. At the request of the Committee, the consultant has participated in each meeting of the Committee, providing guidance on market, regulatory, legislative, and governance concerns as well as conducting the annual review of NEO compensation. The Committee formally evaluated its executive compensation consultant annually, without the input of management. The Committee's consultant participated in all of the Committee meetings in Fiscal Year 2013.
In Fiscal Year 2013, Mercer received approximately $237,897 in fees from the Company in connection with the services related to executive and director compensation. Mercer and its affiliates also received an additional $71,285 in fees from the Company in Fiscal Year 2013 in connection with its provision of other services, which consisted primarily of services related to compensation tools and surveys, as well as our subsidiaries' generally available pension plans as requested by the pension plan trustees. The Mercer teams that provide these services are independently managed and are separate from the compensation consultant who provided executive and director compensation services. The decision to engage Mercer on all other compensation-related services was made by management and the pension plan trustees and reported to the Committee.
PERFORMANCE MEASUREMENTS - FISCAL YEAR 2013
Performance was Measured and Rewarded Based on Both:
| 1. | Total Company and/or business unit financial metrics; and |
| 2. | Individual performance. |
Financial Metrics
The financial metrics, as described further under “Senior Executive Incentive Compensation Plan-Material Factors,” used for all NEO compensation programs are similar to those that the investment community uses to project the future return from a company's stock:
| 2. | Profitability (both pre- and post-tax); |
| 3. | Cash flow generation; and |
| 4. | Return on Invested Capital (“ROIC”). |
In addition, the creation of shareholder wealth as measured by relative TSR is also a key financial metric used to determine NEO compensation.
Our NEO compensation programs incorporated these metrics as illustrated in the chart below:
Metric | Salary Increase | Annual Bonus | LTPPs(1) | RSUs | Stock Options |
| Net Sales | X | X | | | |
| Operating Income | X | X | | X | |
| Net Income | X | X | | | |
| Earnings per Share | X | X | | | |
| Operating Free Cash Flow | X | X | | | |
| Return on Invested Capital | X | | X | | |
| Total Shareholder Return | X | | X | | |
| Stock Price | X | | X | X | X |
| Cash Dividends or Dividend Equivalents | | | | X | |
| Individual Goals | X | X | | | |
_____________________
(1) Includes Fiscal Year 2012-2013 and Fiscal Year 2013-2014 LTPP awards
The specifics regarding how these metrics determined equity awards and incentive plan payouts are described below under “Senior Executive Incentive Compensation Plan - Material Factors.”
Individual Performance
Our PMD process was used by the Committee to establish individual performance goals for each of the NEOs on an annual basis and then to measure actual results against those goals. At the beginning of the Fiscal Year 2013, the CEO reviewed and approved proposed goals for the other NEOs and recommended individual performance goals for himself to the Committee. The Committee then reviewed, refined, and ultimately established the CEO's goals as well as the goals for the other NEOs. At the end of the fiscal year, the CEO reviewed his performance and the performance of the other NEOs against their respective individual personal goals with the Committee. Without any NEOs present, the Committee assigned a performance rating to each NEO and considers these performance ratings in determining:
The annual base salary for the next fiscal year;
Up to 20% of the target payout under the AIP objectives described below that are considered under the Senior Executive Incentive Compensation Plan SEICP; and
Between +25% and -100% of the size of the target annual performance-based RSU, stock option, and LTPP awards for the next fiscal year.
The specifics regarding how performance ratings influenced base salary, award grants, and payouts in Fiscal Year 2013 are described in detail under each program's description below.
Additional Information - Fiscal Year 2013
RISK ANALYSIS OF NEO COMPENSATION POLICIES AND PRACTICES
The Committee's independent executive compensation consultant annually reviewed with the Committee the design of the Company’s annual and long-term incentive programs for NEOs to assist the Committee in achieving the Company’s objective of an appropriate balance between risk and potential reward for executives. Using the “Compensation Committee Checklist for Assessing Incentives and Risk” developed by the Center on Executive Compensation, which was established at the direction of the Board of Directors of the HR Policy Association, coupled with a review of key documents governing these incentive programs, the Committee and its consultant concluded that the Fiscal Year 2013 executive compensation plans were designed in a manner to:
Achieve balance of short and long-term results aligned with key stakeholder interests;
Discourage executives from taking unnecessary or excessive risks that would threaten the reputation and/or sustainability of the Company; and
Encourage appropriate assumption of risk to the extent necessary for competitive advantage purposes.
TAX DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Code imposes a limit of $1,000,000 on the amount of non-performance-based compensation that a publicly-traded Company may deduct in any one year with respect to its CEO and each of its other three most highly-paid executive officers, excluding the Chief Financial Officer. All annual incentives and long-term incentive amounts were designed to be deductible when they are paid to the NEOs because they met the definition of qualified performance-based compensation under Section 162(m). However, to maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the Committee did not adopt a policy requiring all compensation to be deductible. The Committee considered the impact of Section 162(m) of the Code on the Company when making pay decisions, and its normal practice was to take such action as is necessary to preserve the Company’s tax deduction to the extent consistent with the applicable compensation objectives. However, the Committee reserved the right to forego any or all of the tax deduction if it believed it to be in the best interests of the Company's shareholders.
Pursuant to the Merger Agreement, the Committee approved a Fiscal Year 2012 - Fiscal Year 2013 LTPP payout at target and a target payout for total Company performance under the Fiscal Year 2013 AIP. These payouts will not be tax deductible.
MANAGEMENT CHANGES IN FISCAL YEAR 2013
Michael D. Milone, the Company's former Executive Vice President, Rest of World, Global ERM & Global Infant/Nutrition, retired from the Company on June 22, 2012. C. Scott O'Hara, the Company's former Executive Vice President & President and Chief Executive Officer of Heinz North America, ceased to be an executive officer of the Company on June 26, 2012.
David C. Woodward was promoted to Executive Vice President - Heinz Rest of World in May 2012 in anticipation of Mr. Milone's retirement. Mr. Woodward was subsequently promoted, effective July 1, 2012, to Executive Vice President & President and Chief Executive Officer of Heinz North America. Effective April 1, 2013, Mr. Woodward was assigned to the position of Executive Vice President & President and Chief Executive Officer of Heinz Europe, which was formerly held by David C. Moran, and Mr. Moran was assigned to the position of Executive Vice President & President and Chief Executive Officer of Heinz North America & Global Infant/Nutrition.
In addition to the Company’s five NEOs for Fiscal Year 2013 (W.R. Johnson, A.B. Winkleblack, D.C. Moran, C.J. Warmoth, and D.C. Woodward), we have provided disclosure for Mr. Milone in this Item 11, as required by Item 402(a)(3)(iv) of Regulation S-K, as Mr. Milone would have been one of the Company's NEOs had he still been serving as an executive officer at the end of Fiscal Year 2013.
Summary Compensation Table (Fiscal Year 2013)
| | | | Bonus(1) (d) | | Non-Equity Incentive Plan Compensation (g) | | | |
Name and Principal Position (a) | Year (b) | Salary ($) (c) | Annual Incentive Plan Awards ($) | Long Term Performance Program Awards ($) | Stock Awards (2) ($) (e) | Option Awards (3) ($) (f) | Annual Incentive Plan Award(4) ($) | Long Term Performance Program Awards (1) ($) | Change in Pension Value & Nonqualified Deferred Compensation Earnings (5) ($) (h) | All Other Compensation (6) (7) (8) (9) ($) (i) | Total ($) (j) |
| W.R. Johnson | 2013 | 1,295,019 | 2,860,000 | 3,500,000 | 1,559,993 | 2,600,000 | 0 | 0 | 81,662 | 1,202,415 | 13,099,089 |
| Chairman, President & Chief Executive Officer | 2012 | 1,299,618 | 0 | 0 | 1,560,011 | 2,499,997 | 3,400,000 | 4,338,125 | 1,794,928 | 1,264,140 | 16,156,819 |
| 2011 | 1,245,211 | 0 | 0 | 1,500,016 | 2,500,000 | 4,250,000 | 4,675,000 | 2,879,445 | 1,425,361 | 18,475,033 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| A.B. Winkleblack | 2013 | 672,414 | 675,000 | 573,750 | 539,983 | 573,748 | 0 | 0 | 169,241 | 290,402 | 3,494,538 |
| Executive Vice President & Chief Financial Officer | 2012 | 674,809 | 0 | 0 | 540,010 | 573,748 | 801,300 | 697,255 | 172,628 | 308,772 | 3,768,522 |
| 2011 | 647,318 | 0 | 0 | 519,997 | 552,498 | 970,000 | 722,500 | 74,326 | 351,122 | 3,837,761 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| D.C. Moran | 2013 | 682,375 | 411,000 | 582,250 | 548,006 | 582,248 | 264,638 | 0 | 24,036 | 2,472,672 | 5,567,225 |
| Executive Vice President & President and Chief Executive Officer of Heinz North America & Global Infant/Nutrition | 2012 | 684,847 | 0 | 0 | 547,995 | 582,250 | 783,994 | 713,346 | 162,241 | 1,748,264 | 5,222,937 |
| 2011 | 662,345 | 0 | 0 | 532,020 | 565,250 | 912,000 | 752,556 | 280,623 | 1,213,474 | 4,918,268 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| C.J. Warmoth | 2013 | 617,625 | 372,000 | 527,000 | 496,019 | 527,000 | 340,134 | 0 | 836,211 | 166,446 | 3,882,435 |
| Executive Vice President, Heinz Asia Pacific | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
D.C. Woodward (10) | 2013 | 609,291 | 339,000 | 294,378 | 435,006 | 480,003 | 282,033 | 0 | 0 | 320,163 | 2,759,874 |
| Executive Vice President & President and Chief Executive Officer of Heinz Europe | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
M.D. Milone(11) | 2013 | 95,785 | 0 | 531,250 | 0 | 0 | 0 | 0 | 43,680 | 5,789,580 | 6,460,295 |
| Retired Executive Vice President, Rest of World, Global ERM & Global Infant/Nutrition | 2012 | 624,809 | 0 | 0 | 499,980 | 531,251 | 924,203 | 643,620 | 448,928 | 288,128 | 3,960,919 |
| 2011 | 597,586 | 0 | 0 | 479,983 | 509,999 | 800,000 | 477,360 | 739,550 | 316,214 | 3,920,692 |
| (1) | Pursuant to the Merger Agreement, the portion of the FY13 SEICP awards attributable to total Company performance were paid at 100% of target, with the portion attributable to the achievement of business unit financial metrics to be paid based on actual results against target, and the LTPP for FY12-FY13 was paid at 100% of the applicable target award. The payments that are fixed at 100% of target pursuant to the Merger Agreement are reported in this column (d). The portions of the awards that will be paid based on actual results against target are reported in column (g). |
| (2) | The value of the stock awards equals their grant date fair value as computed in accordance with FASB ASC Topic 718. For a discussion of the assumptions made in the valuation of the RSU awards in this column (e), see Note 10, "Employees' Stock Incentive Plans and Management Incentive Plans" in Item 8-"Financial Statement and Supplementary Data." |
| (3) | The value of the stock option awards is equal to their grant date fair value as computed in accordance with FASB ASC Topic 718. For a discussion of the assumptions made in the valuation of the stock option awards in this column (f), see Note 10, "Employees' Stock Incentive Plans and Management Incentive Plans" in Item 8-"Financial Statement and Supplementary Data." |
| (4) | Amounts reported in this column (g) reflect the portions of the FY13 SEICP awards that are attributable to actual business unit results against target, as described in Footnote (1) above. |
| (5) | Includes for FY13 for Messrs. Johnson, Winkleblack, Moran, Warmoth, Woodward, and Milone, respectively, the following amounts: (i) the annual change in net present value of pension benefits for each executive, which is the difference between the accrued lump sum values for pension accruals as of May 1, 2012 and May 1, 2013: $0, $169,241, $24,036, $836,211, $0, and $0, respectively; and (ii) the portion of interest accrued (but not currently paid or payable) on deferred compensation at a rate above 120% of the long-term Applicable Federal Rate (“AFR”): $81,662, $0, $0, $0, $0, and $43,680, respectively. |
| (6) | In accordance with SEC rules, disclosure of perquisites and other personal benefits is omitted if the aggregate amount of such compensation for an executive is less than $10,000 for the year. If the total amount is $10,000 or more, each perquisite must be identified by type, and if the amount of any perquisite exceeds the greater of $25,000 or 10% of total perquisites, the dollar value must be disclosed. Perquisites and other personal benefits provided to NEOs include financial counseling, tax preparation services, allowance for an automobile, executive group umbrella liability insurance, and private security. Mr. Moran's automobile benefit in the U.K., which is consistent with the benefit provided to other U.K. executives, includes the aggregate incremental cost of a leased vehicle, gas, value added taxes (“VAT”), administrative fees, and road use taxes. The amount reflected in this column (i) for Mr. Woodward includes (a) $48,677 for financial counseling and planning services, $23,157 of which is attributable to services provided by a consulting firm in FY13 and $25,520 of which is attributable to services provided in FY12 but not billed until FY13 due to an administrative oversight by the firm, and (b) a four-month extension of the temporary housing benefit associated with Mr. Woodward's relocation to the U.S. (as discussed in more detail in Footnote (9) below.) The Company permitted limited use of its corporate aircraft by the NEOs and their families, and the aggregate incremental cost of such personal use, if any, is included in this column (i). Aggregate incremental cost includes the following trip specific costs: fuel, travel expenses of the crew, hangar costs, flight-specific insurance, landing fees, airport taxes and fees, customs fees, in-flight food, passenger ground transportation, flight planning, weather contract services, and any “deadhead” segments of flights. Mr. Johnson's aggregate incremental cost totaled $40,534. The Company provided drivers for occasional business and personal use by the NEOs, and the aggregate incremental cost related to such personal use, if any, is included in this column (i). The aggregate incremental cost consists of driver overtime and meals and mileage for the car at the Internal Revenue Service's published rates. |
| (7) | In addition to the perquisites described in Footnote (6) above, this column includes for FY13 for Messrs. Johnson, Winkleblack, Moran, Warmoth, Woodward, and Milone, the following: (i) amounts contributed by the Company under its Employee Retirement and Savings Plan and the Excess Plan: $771,520, $224,923, $206,731, $110,342, $38,100, and $133,817, respectively; and (ii) amounts paid by the Company to NEOs for payment of premiums allocable to executive life insurance provided through the Company in the amounts of $321,986, $33,914, $35,798, $31,074, $13,179, and $0, respectively. Mr. Woodward received employer contributions into the Heinz U.K. Pension Plan in the amount of $67,943 and received cash payments in lieu of pension contributions in the amount of $45,672. Due to Mr. Milone's retirement, he received a lump sum payment from the Company's Supplemental Executive Retirement Plan (SERP) in the amount of $5,574,929, payment for his accrued unused vacation days in the amount of $60,096, and monthly distributions from the Plan A benefit in the amount of $16,834. The amounts in column (i) do not include any value attributable to the Executive Estate Life Insurance Program (see the description in “Executive Estate Life Insurance Program” below). |
| (8) | Mr. Moran participated in the Company's Global Assignment Program (the “Program”) through April 2013. (As discussed in the CD&A, Mr. Moran was appointed to the position of Executive Vice President & President and Chief Executive Officer of Heinz North America since July 2009;& Global Infant/Nutrition effective April 1, 2013. He returned to the U.S. on May 1, 2013.) The Program is designed to relocate and support employees who are sent on assignment outside their home country and to place the employees in the same economic condition in the host country as they would have been in their home country. Among other benefits, the Program provides a housing allowance comprised of a housing budget ($190,064) (offset by an employee contribution ($30,634) based upon actual housing costs in the employee's home location) and a utilities allowance ($9,078); a cost of living allowance to help offset the difference in the cost of goods and services in the home location, compared to the cost of the same or similar goods and services in the host location ($32,874); and a home leave allowance ($29,161). Additionally, the Program provides certain other benefits to assist employees, including shipment and storage of personal effects ($14,584). These benefits are paid on a tax free basis. The Company also provided tax preparation services and audit support services, if needed ($24,473) and tax equalization designed to ensure that the employee pays tax at the same state and federal rates as if the employee remained in the employee's home country, including a gross-up for additional U.S. taxes paid as a result of the global assignment ($427,291), and the Company will assume responsibility for foreign taxes while on assignment ($1,497,670). This arrangement is designed to ensure that there is no undue hardship or windfall due to taxes while on assignment. Mr. Moran also received a relocation allowance ($7,500) in connection with his return to the U.S. on May 1, 2013. |
| Benefits under the Program that were paid to or on behalf of Mr. Moran in British pound sterling (“GBP”) have been converted from GBP to United States Dollars (“USD”) using the average daily exchange rate for FY13, which was 1.576018 USD per GBP. |
| (9) | During his transition to North America in connection with his appointment to the position of Executive Vice President—President & President and Chief Executive Officer of Heinz Europe from May 2006North America effective July 1, 2012, Mr. Woodward received relocation assistance comprised of a temporary housing benefit ($30,578) (which includes the four-month extension discussed in Footnote (6) above), a tax gross-up on the housing benefit ($21,241), and immigration assistance ($21,936). Except as discussed in Footnote (6) above, Mr. Woodward's relocation benefits were consistent with the benefits provided to July 2009. |
Robert P. Ostryniec | | 51 |
| | Seniorother Company executives. (As discussed in the CD&A, Mr. Woodward was appointed to the position of Executive Vice President Chief Supply Chain Officer and Global Enterprise Risk Management, Environmental Health, Safety and Sustainability and Quality since May 2012; Senior Vice& President and Chief Supply ChainExecutive Officer of Heinz Europe effective April 1, 2013, and he returned to the United Kingdom in May 2013.) |
| (10) | Mr. Woodward's FY12-13 LTPP award was granted in GBP and will be paid in USD. This amount has been converted from February 2010GBP to May 2012; Chief Supply Chain OfficerUSD using the exchange rate included in the Company's annual operating plan for the fiscal year in which the grant was made (1.620 USD per GBP). The amount in column (h) has also been converted using the same exchange rate. Other amounts in columns (c), (d) and (i) paid to Mr. Woodward prior to July 1, 2012, which was the first day of his U.S. assignment, have been converted from January 2009GBP to February 2010; Global Supply Chain OfficerUSD using the average daily exchange rate from April 2008 to January 2009; Chief Supply Chain Officer from30, 2012 through June 2005 to April 2008.30, 2012, which was 1.5753 USD per GBP. |
Christopher J. Warmoth(11) | Mr. Milone retired on June 22, 2012. |
The following narrative provides additional information about the various Fiscal Year 2013 compensation plans, programs, and policies reflected in the Summary Compensation Table, although the Executive Estate Life Insurance Program did not result in any compensation reported in the Table for Fiscal Year 2013.
Executive Estate Life Insurance Program
In December 2001, we adopted an Executive Estate Life Insurance Program (“EELIP”) for certain eligible executives. Under the EELIP, in 2001 and 2002, eligible executives relinquished compensation in exchange for a loan from the Company equal to 150% of the amount relinquished (“EELIP Loans”). The proceeds of each EELIP Loan were used to fund a life insurance policy purchased by the executive's family trust. Each of the EELIP Loans was subject to vesting, and the Company will automatically be repaid the amount of the then outstanding principal and interest of the applicable EELIP Loan from the proceeds of the policy after the death of the participant and/or the death of the participant's spouse, as applicable. Mr. Johnson had an outstanding EELIP Loan to the Company that fully vested on or before September 2003. This EELIP Loan accrues interest at the annual rate of 4.99%. As of April 28, 2013, the total amount due to the Company plus the accrued interest under the EELIP Loan was $8,513,533. The EELIP Loan to Mr. Johnson is permitted to remain outstanding under the Sarbanes-Oxley Act of 2002, so long as the terms are not materially modified. Mr. Milone paid $275,007 to the Company in March 2013 in full satisfaction of his EELIP loan.
Senior Executive Incentive Compensation Plan - Material Factors
In Fiscal Year 2013, the SEICP provided an annual cash incentive pool of 1.5% of the Company’s net income (the “Incentive Pool”) for possible award to the NEOs. The maximum award for any one participant could not exceed 40% of the Incentive Pool, with the total allocation to all NEOs limited to no greater than 100% of the Incentive Pool.
In Fiscal Year 2013, NEOs were eligible to earn annual cash awards under the Company’s SEICP with reference to the metrics established for the AIP in the following manner:
The maximum award amount for each NEO was determined as described above;
The award that would have been payable to each NEO under the AIP was determined with reference to the achievement of established metrics and other goals under the AIP, as may be determined by the Committee (the “AIP Bonus”); and
The Committee could make discretionary adjustments downward from the SEICP maximum award to the AIP Bonus or below while maintaining the deductibility of these adjustments under Section 162(m) of the Code, provided the payment does not exceed the allowable Incentive Pool maximum.
AIP metrics are comprised of Company-wide financial metrics, business unit financial metrics, and personal goals. The Company-wide metrics for financial performance for the Fiscal Year 2013 AIP were:
| 1. | Earnings per Share (“EPS”) |
| | 53EPS = net income / average fully-diluted shares outstanding |
| 2. |
Operating Free Cash Flow (“OFCF”) |
| | Executive Vice President—Heinz Asia Pacific since June 2008; Senior Vice President—Heinz AsiaOFCF = cash flow from May 2006 to June 2008.operating activities - capital expenditures + proceeds from dispositions of property, plant, and equipment |
| | 55NSV = gross sales - deals and allowances, excluding the impact of foreign currency |
|
| | The Business Unit (“BU”) specific metrics for financial performance were: |
| 1. | Business Unit Operating Income (“BU OI”) |
| BU OI = NSV - operating costs |
| 2. | Business Unit Operating Free Cash Flow (“BU OFCF”) |
| BU OFCF = cash flow from operating activities - (intercompany royalties, as applicable, and dividend income/expense) - capital expenditures + proceeds from dispositions of property, plant, and equipment |
| 3. | Business Unit Net Sales Value (“BU NSV”) |
| BU NSV = external gross sales - deals and allowances |
The individual personal goals for Fiscal Year 2013 for Mr. Johnson included achieving specific milestones against the Company’s leadership succession planning, execution of Project Keystone, global product quality, and diversity. The individual personal goals for Fiscal Year 2013 for the other NEOs included financial metrics that were specific to their businesses, goals related to global productivity initiatives, product quality, and personnel development such as talent development and increasing diversity in executive positions.
For Fiscal Year 2013, the specific targets and weightings for the NEOs were:
| Name | Weighting | Metrics | | Target | Threshold to Maximum Range |
| W.R. Johnson | 80% | EPS(1) | $ | 3.60 | 80%(2) | 110% |
| | | OFCF | | $1,130 million | 80%(2) | 115% |
| | | NSV | | $11,710 million | 95%(2) | 105% |
| | 20% | Personal Goals | | Personal Goals | 0% | 200% |
| A.B. Winkleblack | 80% | EPS(1) | $ | 3.60 | 80%(2) | 110% |
| | | OFCF | | $1,130 million | 80%(2) | 115% |
| | | NSV | | $11,710 million | 95%(2) | 105% |
| | 20% | Personal Goals | | Personal Goals | 0% | 200% |
| D.C. Moran | 40% | EPS(1) | $ | 3.60 | 80%(2) | 110% |
| C.J. Warmoth & | | OFCF | | $1,130 million | 80%(2) | 115% |
| D.C. Woodward | | NSV | | $11,170 million | 95%(2) | 105% |
| | 40% | BU OI | | Varies by BU | 80%(2) | 110% |
| | | BU OFCF | | Varies by BU | 80%(2) | 115% |
| | | BU NSV | | Varies by BU | 95%(2) | 105% |
| | 20% | Personal Goals | | Personal Goals | 0% | 200% |
| (1) | Excludes charges for productivity initiatives related to severance, asset write-offs, and other implementation costs. |
| (2) | Minimum performance required to earn a payment under the AIP's financial metrics. |
NOTE - Pursuant to the Merger Agreement, the portions of the Fiscal Year 2013 SEICP awards attributable to total Company performance and achievement of personal goals were paid at 100% of target, which the parties determined was appropriate in light of the Company's performance prior to its entry into the Merger Agreement and the anticipated impact of the acquisition on the performance criteria applicable to these awards. Also pursuant to the Merger Agreement, the portion of the Fiscal Year 2013 SEICP awards attributable to the achievement of business unit financial metrics will be paid based on actual results against target. The business units for Messrs. Moran, Warmoth, and Woodward achieved between 91.5% and 108.6% of their respective OI targets, between 67.6% and 253.9% of their respective OFCF targets, and between 96.3% and 102.2% of their NSV targets. The Committee utilized less than 40% of the available Incentive Pool. The bonuses were paid in cash to each NEO after the end of Fiscal Year 2013.
LTPP (Fiscal Year 2012-Fiscal Year 2013)
Pursuant to the Merger Agreement, all outstanding awards under the LTPP for Fiscal Years 2012-2013 have been amended to provide that each award will be paid at 100% of the applicable target. It is estimated that, in the absence of the impending acquisition, Company performance under this plan would have met the established targets.
Grants of Plan-Based Awards (Fiscal Year 2013)
| Name | Award | Action Date | Grant Date | Estimated Future Payouts Under Non-Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($ / Sh) | Grant Date Fair Value of Stock and Option Awards |
| Minimum ($) | Target ($) | Maximum ($) |
W.R. Johnson | SEICP (1) | | June 12, 2012 | $2,860,000 | $2,860,000 | $2,860,000 | | | | |
| | FY13-14 LTPP (2) | June 12, 2012 | June 12, 2012 | $3,575,000 | $3,575,000 | $3,575,000 | | | | |
| | Options (3) | August 27, 2012 | August 31, 2012 | | | | | $449,050 | $55.72 | $2,600,000 |
| | RSUs (3) | August 27, 2012 | August 31, 2012 | | | | $27,997 | | | $1,559,993 |
| | | | | | | | | | | |
A.B. Winkleblack | SEICP (1) | | June 12, 2012 | $675,000 | $675,000 | $675,000 | | | | |
| | FY13-14 LTPP (2) | June 12, 2012 | June 12, 2012 | $573,750 | $573,750 | $573,750 | | | | |
| | Options (3) | August 27, 2012 | August 31, 2012 | | | | | $99,093 | $55.72 | $573,748 |
| | RSUs (3) | August 27, 2012 | August 31, 2012 | | | | $9,691 | | | $539,983 |
| | | | | | | | | | | |
D.C. Moran | SEICP (4) | | June 12, 2012 | $411,000 | $685,000 | $2,630,547 | | | | |
| | FY13-14 LTPP (2) | June 12, 2012 | June 12, 2012 | $582,250 | $582,250 | $582,250 | | | | |
| | Options (3) | August 27, 2012 | August 31, 2012 | | | | | $100,561 | $55.72 | $582,248 |
| | RSUs (3) | August 27, 2012 | August 31, 2012 | | | | $9,835 | | | $548,006 |
| | | | | | | | | | | |
C. J. Warmoth | SEICP (4) | | June 12, 2012 | $372,000 | $620,000 | $2,630,547 | | | | |
| | FY13-14 LTPP (2) | June 12, 2012 | June 12, 2012 | $527,000 | $527,000 | $527,000 | | | | |
| | Options (3) | August 27, 2012 | August 31, 2012 | | | | | $91,019 | $55.72 | $527,000 |
| | RSUs (3) | August 27, 2012 | August 31, 2012 | | | | $8,902 | | | $496,019 |
| | | | | | | | | | | |
D. C. Woodward | SEICP (4) | | June 12, 2012 | $339,000 | $565,000 | $2,630,547 | | | | |
| | FY13-14 LTPP (5) | June 12, 2012 | June 12, 2012 | $364,210 | $364,210 | $364,210 | | | | |
| | FY13-14 LTPP (5) | July 27, 2012 | July 27, 2012 | $103,290 | $103,290 | $103,290 | | | | |
| | Options (3) | August 27, 2012 | August 31, 2012 | | | | | $82,902 | $55.72 | $480,003 |
| | RSUs (3) | August 27, 2012 | August 31, 2012 | | | | $7,807 | | | $435,006 |
| | | | | | | | | | | |
M.D. Milone(6) | SEICP | | | $0 | $0 | $0 | | | | |
| | FY13-14 LTPP | | | $0 | $0 | $0 | | | | |
| | Options | | | | | | | $0 | $0 | $0 |
| | RSUs | | | | | | $0 | | | $0 |
| (1) | Messrs. Johnson and Winkleblack's payouts are based on Heinz total Company AIP financial metrics and personal goals. The target amounts reflect the target awards under our Executive Pay Guidelines. Pursuant to the Merger Agreement, Heinz total Company performance and personal performance will be paid at 100% of target, which is reflected in the minimum and maximum amounts set forth in the above table. |
| (2) | The target amounts reflect the target awards under our Executive Pay Guidelines. Pursuant to the Merger Agreement, all outstanding awards under the FY13-14 LTPP have been amended to provide that each award will be paid at 100% of the applicable target and prorated (55.49%) to reflect the number of full and partial months of the award period completed prior to the closing of the acquisition. The minimum and maximum amounts included in the above table have been set at target to reflect the terms of the Merger Agreement. Upon completion of the merger on June 7, 2013, the target award payouts were prorated 55.49% to reflect 404 days completed out of a possible 728 days in the two-year performance period. |
| (3) | The Committee met on August 27, 2012 and approved the FY13 stock option and RSU awards that were granted on August 31, 2012, at the Company's closing stock price as of the grant date ($55.72). |
| (4) | The payouts for Messrs. Moran, Warmoth, and Woodward are based 40% on Heinz total Company performance, 40% on actual business unit performance against target, and 20% on personal performance. Pursuant to the Merger Agreement, Heinz total Company performance and personal performance will be paid at 100% of target, and those amounts comprise the minimum amounts reflected in this column. The target amounts reflect the target awards under our Executive Pay Guidelines. The maximum amounts reflect the maximum payment that can be made to each of these NEOs under the SEICP, 15% of the Incentive Pool, regardless of whether the financial results could have produced a higher AIP Bonus. |
| (5) | Mr. Woodward received two LTPP awards for FY13-14 due to his promotion, effective June 26, 2012, to the position of Executive Vice President and President & Chief FinancialExecutive Officer since January 2002. |
David C.of Heinz North America. Mr. Woodward's June 12, 2012 award was granted in GBP and converted to USD using a fixed FX rate of 1.561794. On July 27, 2012, Mr. Woodward | | 47 |
| | Executive Vice President—Heinz Rest received an incremental award in connection with his promotion to a new salary band, which was granted in USD. Pursuant to the Merger Agreement, all outstanding awards under the FY13-14 LTPP have been amended to provide that each award will be paid at 100% of World since May 2012; President—Heinz United Kingdom, Ireland, Africathe applicable target and Middle East from January 2011 prorated (55.49%)to May 2012; President—Heinz United Kingdomreflect the number of full and Ireland from July 2006partial months of the award period completed prior to May 2012.the closing of the acquisition. The minimum and maximum amounts have been set at target to reflect the terms of the Merger Agreement. Upon completion of the merger on June 7, 2013, the target award payouts were prorated 55.49% to reflect 404 days completed out of a possible 728 days in the two-year performance period. |
| (6) | Mr. Milone retired on June 22, 2012. |
The following tables and narrative provide additional information about the various Fiscal Year 2013 compensation plans, programs, and policies reflected in the Grants of Plan-Based Awards table.
RSUs-Material Factors
Annual Awards. The Committee granted annual RSU awards to the NEOs at target award values determined in accordance with the Executive Pay Guidelines described in this CD&A. The actual number of RSUs granted was determined by dividing the target award value by the closing price of our stock on the NYSE on the date of the grant, rounded using the traditional rounding convention. RSUs vest 25% per year after achievement of the performance metric described under “Performance-based Restricted Stock Units” above.
The NEOs received cash dividend equivalents on RSUs during the restricted period at the same rate that shareholders received dividends on the Company’s Common Stock. Beginning with the Fiscal Year 2009 awards, cash dividend equivalents accrued each quarter but were not paid until the next annual vesting date, provided that the performance metric had been achieved, and, at that time, were paid only with respect to the portion of the awards that vested. The annual award is included as compensation for the year of the grant for purposes of calculating benefits for participants in the H. J. Heinz Company Supplemental Executive Retirement Plan (“SERP”) and the H. J. Heinz Company Employees Retirement and Savings Plan.
Each NEO agreed to non-competition, non-solicitation, and confidentiality covenants pursuant to their RSU award agreements. The NEOs agreed, during the term of employment and for eighteen months after termination of employment, not to compete against the Company and not to solicit any other employee of the Company for employment outside of the Company. Each NEO also agreed, during the term of employment and any time thereafter, not to use or disclose the Company's confidential information for purposes other than the furtherance of our business purposes. The NEOs consented to the issuance of an injunction with respect to any conduct that leads to a breach of any of these covenants. A breach of these covenants could also result in the forfeiture of the NEO's unvested RSUs.
In March 2012, Michael D. Milone announced his intentionthe event of an NEO's retirement, and assuming that any applicable performance threshold had been met, the RSUs will continue to retire fromvest according to their original schedule. In the event of the death or disability of an NEO, and assuming that any applicable performance threshold had been met, the RSUs will continue to vest according to their original schedule, but in no event later than the last business day of the month of the one-year anniversary of the date of termination of employment. Commencing with Fiscal Year 2011 awards, if an NEO's employment is terminated without cause, any unvested RSUs will be forfeited unless the executive executes a release of claims against the Company, in June 2012.which case the RSUs will continue to vest in the same manner as in the case of death or disability. For all other terminations, except as described below under “RSU Change in Control Provisions,” all unvested RSUs would have been forfeited.
NOTE - Pursuant to the Merger Agreement, each vested and unvested RSU - other than retention RSUs - was canceled upon the closing of the acquisition, and the holder was entitled to receive $72.50 in cash for each RSU plus any accrued and unpaid dividend equivalents. Payment in respect of deferred RSUs was made in accordance with the terms of such award and the applicable deferral election. Retention RSUs (i.e., RSUs granted pursuant to retention awards) were canceled and converted to cash awards of $72.50 per share upon the closing of the acquisition. Such cash amounts will remain subject to the vesting provisions applicable to the original awards. In addition, if a recipient of a retention award is terminated involuntarily without cause, such award would vest upon any such termination.
Stock Options-Material Factors
In Fiscal Year 2013, the Committee granted annual stock option awards to the NEOs at target award values determined in accordance with the Executive Pay Guidelines. The actual number of options granted was determined by dividing the target award value by the value of a Company stock option computed using the Black-Scholes pricing model for the date of grant, rounded using the traditional rounding convention. Such stock options were scheduled to vest 25% per year on the first four anniversaries of the date of the grant and expire ten years after the grant date.
Each NEO agreed, pursuant to the stock option award agreement, to the same non-competition, non-solicitation, and confidentiality covenants set forth in their RSU award agreements. In the event of any breach by the NEO of these covenants, the NEO must immediately return to us the pre-tax income resulting from any exercise of the options or any portion thereof, unless such exercise occurred more than twelve months prior to the date of the termination of the NEO's employment with the Company. A breach of these covenants could also result in the forfeiture of any unexercised portion of the options.
In the event of retirement, the stock options granted to the NEOs would have continued to vest according to their original schedule and expire on the earlier of five years after retirement or the original expiration date. If an NEO died while an employee or within five years after retirement, all of the stock options would have vested upon death and then expired on the earlier of one year after death or the original expiration date. In the event of disability while employed, the stock options would have vested upon such disability and then expired on the earlier of one year after the disability or the original expiration date. Commencing with the Fiscal Year 2011 awards, if an NEO's employment was terminated without cause, the stock options would have continued to vest according to their original schedule and expired 90 days after separation unless a release of claims against the Company is executed by the NEO, in which case the stock options will expire on the earlier of five years after the date of termination or the original expiration date. For all other terminations, except as described below under “Stock Option Change in Control Provisions,” unvested stock options will be forfeited.
NOTE - Pursuant to the Merger Agreement, all vested and unvested stock options were cancelled upon the closing of the acquisition, and the holder was entitled to receive a cash payment for each option equal to $72.50 per share minus the exercise price applicable to the option.
Long Term Performance Program-Material Factors
The LTPP (Fiscal Years 2013-2014) had two independently measured and equally weighted financial metrics:
After-Tax Return on Invested Capital-Fifty percent (50%) of the target award opportunity to be determined by the Company’s performance against a two-year ROIC metric established by the Committee.
ROIC for Fiscal Years 2013-2014 to be calculated as follows:
| • | ROIC = Annual After-Tax Operating Profit /Annual Average Invested Capital |
| • | Annual After-Tax Operating Profit = (operating income - other expenses, net) x (1- effective tax rate) |
| • | Annual Average Invested Capital = five quarter average net debt + total shareholder's equity |
| • | ROIC for FY13-14 = (FY13 ROIC + FY14 ROIC) / 2 |
The percentage of the target LTPP award that could be earned for the Fiscal Years 2013-2014 performance period based on ROIC is summarized in the following chart:
| Performance | 2-Year Average ROIC | % of Target Achieved | Percent of Target Award Opportunity Earned(1) |
| Maximum | 24.1% | 120% | 100% |
| Target | 20.1% | 100% | 50% |
| Threshold | 16.1% | 80% | 12.5% |
| Below Threshold | <16.10% | <80% | 0% |
| (1) | |
Item 1A. | Risk Factors.Represents one-half of the target award opportunity. |
If the Board approved an acquisition or divestiture during a performance period, it may consider an adjustment to the ROIC targets based on the impact the transaction will have on ROIC. In addition, Annual After-Tax Operating Profit and Annual Average Invested Capital may be adjusted to eliminate the after-tax effects of any charges that may be excluded when determining performance against the financial measures under the LTPP. For treatment of the LTPP Awards in the Merger please see below.
Relative Total Shareholder Return-Fifty percent (50%) of the target award opportunity to be determined by our two-year TSR growth rate (the “TSR Value”) compared to the factors discussed elsewheretwo-year TSR growth rates of the other companies in this report,the TSR Peer Group, as described in the CD&A.
TSR Value for Fiscal Years 2013-2014 were to be calculated as follows:
| • | Performance Period-Commenced the first day of Heinz's Fiscal Year 2013 and ends two years later on the last day of Heinz's Fiscal Year 2014. |
| • | Starting Value-Average of each TSR Peer Group company's stock price for the 60 trading days prior to the first day of the performance period. |
| • | Ending Value-Average of each TSR Peer Group company's stock price for the 60 trading days prior to and including the last day of the performance period plus all dividends paid over the performance period. |
| • | TSR Value-Growth rate between starting value and ending value. |
The percentage of the target LTPP award that could be earned for the Fiscal Years 2013-2014 performance period is based on our ranking within the TSR Peer Group as shown in the following riskschart:
Rank Using TSR Peer Group | Percent of Target Award Opportunity Earned(1) |
| 1 | 100% |
| 2 | 87.5% |
| 3 | 75% |
| 4 | 62.5% |
| 5 | 50% |
| 6 | 37.5% |
| 7 | 25% |
| 8 | 12.5% |
| 9-10 | 0% |
| (1) | Represents one-half of the target award opportunity. |
The LTPP awards were structured so that in the event of a qualifying termination (retirement, death, or disability) during the first year of the performance period, the award would have been pro-rated and uncertainties could materiallypaid at the end of the performance period based on the actual results achieved. If a qualifying termination occurred during the second year of the performance period, the full award would have been paid (without pro-rating) at the end of the performance period based on the actual results achieved. This approach recognized the contributions of the individual to the two-year performance results. Commencing with awards for the Fiscal Years 2012 -2013 performance period, if an NEO's employment was involuntarily terminated without cause, the LTPP award is forfeited upon such separation unless a release of claims against the Company is executed by the NEO, in which case the LTPP award is prorated (if applicable) and adversely affectpaid in the manner described above for a qualifying termination. For all other terminations, all unpaid LTPP awards would have been forfeited.
Each NEO agreed to non-solicitation and confidentiality covenants pursuant to their LTPP award agreements. The NEO agrees, during the term of employment and for eighteen months after termination of employment, not to solicit any other employee of the Company for employment outside of the Company. Each NEO also agreed, during the term of employment and any time thereafter, not to use or disclose the Company's confidential information for purposes other than the furtherance of the Company’s business financial condition,purposes. The NEO consented to the issuance of an injunction with respect to any conduct that leads to a breach of any of these covenants. A breach of these covenants could also result in the forfeiture of any unpaid portion of the award to which the NEO would otherwise be entitled pursuant to the agreement.
NOTE - Pursuant to the Merger Agreement, all outstanding awards under the LTPP for Fiscal Years 2012-2013 and resultsFiscal Years 2013-2014 were amended to provide that each award will be paid at 100% of operations. Additional risksthe applicable target, and uncertaintieswith respect to the LTPP for Fiscal Years 2013-2014, prorated to reflect the number of full and partial months of the award period completed prior to the closing of the acquisition. The parties determined that these amendments were appropriate in light of the Company's performance prior to its entry into the Merger Agreement and the anticipated impact of the acquisition on the performance criteria applicable to these awards.
The following table sets forth each NEO's Outstanding Equity Awards, including awards of stock options and RSUs, as of the end of Fiscal Year 2013:
Outstanding Equity Awards at Fiscal Year-End (Fiscal Year 2013)
| | Option Awards | | Stock Awards |
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested (#) | | Market Value of Shares or Units of Stock That Have Not Vested ($) (5) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
W.R. Johnson | 474,137 | — | | | $51.25 | August 25, 2015 | | 9,608 | (1) | $696,580 | | |
| | — | 132,979 | (1) | | $39.03 | August 24, 2016 | | 16,157 | (2) | $1,171,383 | | |
| | 233,209 | 233,209 | (2) | | $46.42 | September 3, 2017 | | 22,419 | (3) | $1,625,378 | | |
| | 107,758 | 323,276 | (3) | | $52.19 | August 29, 2018 | | 27,997 | (6) | $2,029,783 | | |
| | — | 449,050 | (4) | | $55.72 | August 31, 2022 | | | | | | |
| | | | | | | | | | | | | |
A.B. Winkleblack | 91,594 | — | | | $51.25 | August 25, 2015 | | 3,203 | (1) | $232,218 | | |
| | 29,773 | 28,258 | (1) | | $39.03 | August 24, 2016 | | 5,601 | (2) | $406,073 | | |
| | 51,539 | 51,539 | (2) | | $46.42 | September 3, 2017 | | 7,761 | (3) | $562,673 | | |
| | 24,730 | 74,192 | (3) | | $52.19 | August 29, 2018 | | 9,691 | (6) | $702,598 | | |
| | — | 99,093 | (4) | | $55.72 | August 31, 2022 | | | | | | |
| | | | | | | | | | | | | |
D.C. Moran | 95,405 | — | | | $51.25 | August 25, 2015 | | 3,336 | (1) | $241,860 | | |
| | — | 29,434 | (1) | | $39.03 | August 24, 2016 | | 5,731 | (2) | $415,498 | | |
| | 52,728 | 52,729 | (2) | | $46.42 | September 3, 2017 | | 7,875 | (3) | $570,938 | | |
| | 25,097 | 75,291 | (3) | | $52.19 | August 29, 2018 | | 9,835 | (6) | $713,038 | | |
| | — | 100,561 | (4) | | $55.72 | August 31, 2022 | | | | | | |
| | | | | | | | | | | | | |
C.J. Warmoth | 67,011 | 22,337 | (1) | | $39.03 | August 24, 2016 | | 2,532 | (1) | $183,570 | | |
| | 47,574 | 47,575 | (2) | | $46.42 | September 3, 2017 | | 5,170 | (2) | $374,825 | | |
| | 22,715 | 68,147 | (3) | | $52.19 | August 29, 2018 | | 7,128 | (3) | $516,780 | | |
| | — | 91,019 | (4) | | $55.72 | August 31, 2022 | | 8,902 | (6) | $645,395 | | |
| | | | | | | | | | | | | |
D.C. Woodward | — | 12,290 | (1) | | $39.03 | August 24, 2016 | | 822 | (1) | $59,595 | | |
| | 22,526 | 22,526 | (2) | | $46.42 | September 3, 2017 | | 1,445 | (2) | $104,763 | | |
| | 12,688 | 38,067 | (3) | | $52.19 | August 29, 2018 | | 2,351 | (3) | $170,448 | | |
| | — | 82,902 | (4) | | $55.72 | August 31, 2022 | | 20,000 | (9) | $1,450,000 | | |
| | | | | | | | | 7,807 | (6) | $566,008 | | |
| | | | | | | | | | | | | |
M.D. Milone | 51,194 | — | | | $45.54 | August 27, 2014 | | 1,871 | (1) | $135,648 | | |
| | 60,517 | — | | | $51.25 | August 25, 2015 | | 5,170 | (2) | $374,825 | | |
| | — | 23,298 | (1) | | $39.03 | August 24, 2016 | | 7,185 | (3) | $520,913 | | |
| | 47,574 | 47,575 | (2) | | $46.42 | June 22, 2017 | (7) | | | | | |
| | 22,898 | 68,697 | (3) | | $52.19 | June 22, 2017 | (8) | | | | | |
| (1) | 25% of the award vested on each of August 24, 2010, 2011 and 2012 and the remainder was scheduled to vest on August 24, 2013. |
| (2) | 25% of the award vested on each of September 3, 2011 and 2012 and the remainder was scheduled to vest in 25% increments on September 3, 2013 and 2014. |
| (3) | 25% of the award vested on August 29, 2012, and the remainder was scheduled to vest in 25% increments on August 29, 2013, 2014, and 2015. |
| (4) | The award was scheduled to vest in 25% increments on August 31, 2013, 2014, 2015, and 2016. |
| (5) | Based on the merger consideration of $72.50 per share. |
| (6) | The award was scheduled to vest in 25% increments on August 31, 2013, 2014, 2015, and 2016, assuming the performance threshold was achieved. |
| (7) | Due to Mr. Milone's retirement on June 22, 2012, pursuant to the terms of the stock option award agreement, the expiration date for this award has been accelerated from September 3, 2017 to June 22, 2017, which is the date that is five years after the date of his retirement. |
| (8) | Due to Mr. Milone's retirement on June 22, 2012, pursuant to the terms of the stock option award agreement, the expiration date for this award has been accelerated from August 29, 2018 to June 22, 2017, which is the date that is five years from the date of his retirement. |
| (9) | 100% of the award was scheduled to vest on January 18, 2015. |
NOTE - Pursuant to the Merger Agreement, each vested and unvested RSU - other than Retention RSUs - was canceled upon the closing of the acquisition, and the holder was entitled to receive $72.50 in cash for each RSU plus any accrued and unpaid dividend equivalents. Payment in respect of deferred RSUs will be made in accordance with the terms of such award and the applicable deferral election. Retention RSUs (i.e., RSUs granted pursuant to retention awards) were canceled and converted to cash awards of $72.50 per share upon the closing of the acquisition. Such cash amounts will remain subject to the vesting provisions applicable to the original awards. In addition, if a recipient of a retention award is terminated involuntarily without cause, such award would vest upon any such termination. All vested and unvested stock options were cancelled upon the closing of the acquisition, and the holder was entitled to receive a cash payment for each option equal to $72.50 per share minus the exercise price applicable to the option.
The following table sets forth the stock options exercised by the NEOs and the RSUs that vested for the NEOs in Fiscal Year 2013:
Option Exercises and Stock Vested (Fiscal Year 2013)
Name | | Option Awards | Stock Awards |
Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) (1) |
W.R. Johnson | 766,935 | $11,414,602 | 25,159 | $1,412,072 |
| | | | | |
A.B. Winkleblack | 135,920 | $1,786,203 | 8,589 | $482,047 |
| | | | | |
D.C. Moran | 172,620 | $2,618,373 | 8,826 | $495,357 |
| | | | | |
C. J. Warmoth | 192,352 | $2,300,234 | 7,492 | $420,417 |
| | | | | |
D. C. Woodward | 129,659 | $1,325,012 | 10,468 | $588,909 |
| | | | | |
M.D. Milone | 148,547 | $2,798,097 | 80,630 | $4,690,118 |
_________________
| (1) | Messrs. Johnson, Winkleblack, Moran, Warmoth, Woodward and Milone received the following shares, which were distributed (a) on August 24, 2012 at $56.27 per share: 9,608, 3,202, 3,336, 2,531, 7,822, and 1,870, respectively; (b) on August 25, 2012 at $56.46 per share: 0, 0, 0, 0, 1,140, and 0, respectively; (c) on August 29, 2012 at $56.12 per share: 7,472, 2,586, 2,625, 2,376, 783, and 2,395, respectively; and (d) on September 3, 2012 at $55.96 per share: 8,079, 2,801, 2,865, 2,585, 723, and 2,585. Due to Mr. Milone's retirement on June 22, 2012, he also received distribution of 73,780 deferred RSUs on December 22, 2012 at $58.36 per share. The value of these distributions is reflected in the table above. |
In addition, receipt is deferred on certain RSUs. Historically, the MDCC required the automatic deferral of each NEO's vested RSUs until after termination of employment, because our RSUs were not considered performance-based under Section 162(m) of the Code, which limits the deductibility of certain compensation. The MDCC eliminated this requirement beginning with the FY10 annual grant, because the RSUs are now performance-based awards and, as such, are not presently knownsubject to Section 162(m). However, RSUs granted prior to FY10 are still subject to mandatory deferral. The value of the deferred vested awards, which is not reflected in the above table, is based on the closing price of the Company's stock on the vesting date, August 25, 2012, at $56.46 per share. Messrs. Johnson, Winkleblack, Moran, Warmoth, and Milone realized the following aggregate amounts as a result of such vestings, representing the deferred value of their RSUs: $413,118, $137,706, $143,465, $141,545, and $64,477, respectively.
NOTE - Pursuant to the Merger Agreement, each vested and unvested RSU - excluding retention RSUs - were canceled upon the closing of the acquisition, and the holder was entitled to receive $72.50 in cash for each RSU plus any accrued and unpaid dividend equivalents. Payment in respect of deferred RSUs was made in accordance with the terms of such award and the applicable deferral election. Retention RSUs (i.e., RSUs granted pursuant to retention awards) were canceled and converted to cash awards of $72.50 per share upon the closing of the acquisition. Such cash amounts will remain subject to the vesting provisions applicable to the original awards. In addition, if a recipient of a retention award is terminated involuntarily without cause, such award would vest upon any such termination.
The Pension Benefits Table below sets forth a description of the retirement benefits for the NEOs:
Pension Benefits Table (Fiscal Year 2013)
| Name | Plan Name | | Present Value of Accumulated Benefits | | |
| W.R. Johnson | Plan A(1) of the H. J. Heinz Company Employees’ Retirement System | 11 | $498,498 | $0 | |
| | | | | | |
| | Supplemental Executive Retirement Plan | 31 | $43,145,792 | $147,364 | (2) |
| | | | | | |
| A.B. Winkleblack | Supplemental Executive Retirement Plan | 11 | $1,635,477 | $34,303 | (2) |
| | | | | | |
| D.C. Moran | Supplemental Executive Retirement Plan | 15 | $1,938,741 | $0 | |
| | | | | | |
| C.J. Warmoth | H.J. Heinz Company Limited Employer Financed Retirement Benefit Scheme (EFRBS) | 9 | $1,630,400 | $0 | (3) |
| | | | | | |
| D.C. Woodward | None | N/A | N/A | N/A | |
| | | | | | |
| M.D. Milone | Plan A(1) of the H. J. Heinz Company Employees’ Retirement System | 13 | $4,109,462 | $94,676 | (4) |
| | | | | | |
| | Supplemental Executive Retirement Plan | 32 | $0 | $5,574,929 | |
____________________| (1) | Plan A was frozen on December 31, 1992, and no additional benefit accruals were earned after that date. |
| (2) | As permitted under U.S. Treasury regulations, the Company adopted an “early inclusion” date for recognition of Federal Insurance Contributions Act (“FICA”) taxes on vested SERP benefits. Under early inclusion, SERP benefits are subject to FICA taxes as accrued benefits vest and executives are responsible for paying the employee portion of FICA taxes with such tax payments funded through a reduction in the future benefit payments at retirement. The amount shown represents Messrs. Johnson and Winkleblack's reduction in current benefits to pay the FICA taxes on their vested SERP benefit. |
| (3) | Mr. Warmoth's benefit under the Employer Financed Retirement Benefit Scheme (EFRBS) is converted from GBP to USD using $1 USD = £0.625 GBP. |
| (4) | As provided under Plan A, employees may transfer funds from the H.J. Heinz Company Employee Retirement and Savings Plan (“RSP”) to secure a monthly retirement income benefit. When Mr. Milone retired on June 22, 2012, he elected to transfer $1,415,000 for a 50% Joint and Survivor benefit, with a 4% annual cost of living provision of $8,819.56 per month commencing on July 1, 2012. This benefit combined with his regular Plan A benefit produces a $10,496.28 monthly benefit. Mr. Milone's Present Value of Accumulated Benefits under Plan A was calculated using the FY13 disclosure assumptions including a discount rate of 3.70% and the RP 2000 Combined White Collar Mortality Table, projected 15 years using scale AA. |
Eligible earnings under all of the retirement plans listed above except Plan A of the H. J. Heinz Company Employees' Retirement System (“Plan A”) include base salary, annual bonus payments, and the value of the annual RSU award. The value of any stock options, any special RSU awards, and LTPP awards are not included as eligible earnings.
The Committee reviews annually the eligibility, costs, and competitiveness of these retirement benefits and believes that the retirement benefits afforded the NEOs meet our compensation objectives.
Plan A-Material Factors
Most U.S. full-time salaried employees hired before January 1, 1993 are entitled to retirement benefits under Plan A. These benefits are based on credited service and five-year average eligible compensation through December 31, 1992, the date on which Plan A was frozen. Messrs. Johnson and Milone, the only NEOs who are participants in Plan A, are fully vested in this benefit.
Supplemental Executive Retirement Plan (SERP)-Material Factors
Effective May 1, 2004, the Board of Directors amended the SERP to provide future benefits under a career average cash balance plan for all members. Under the cash balance plan formula, each of the NEOs receives a monthly pay credit of eight percent of eligible compensation. Eligible compensation includes base salary, annual bonus payments, and the value of the annual RSU award. The accumulated credits earn five percent interest, compounded monthly. The SERP was closed to new participants in April, 2010.
For service prior to May 1, 2004, participants receive a payment equal to the product of a service-related multiple, frozen as of May 1, 2004, and the participant's final average eligible compensation during the highest five of the ten years immediately prior to retirement. The service-related multiple ranges from one for less than six years of service with the Company, to a maximum of five after 35 years of service. The service-related multiple for each NEO currently participating in the SERP is as follows: Mr. Johnson, 3.7; Mr. Winkleblack, 1.0; and Mr. Moran, 1.0. Benefits under this service-related multiple formula are reduced by (i) the lump sum value of the Plan A benefit (if any), and (ii) the value of the participant's Age-Related Company Contribution Account under the Employee Retirement Savings Plan and the Excess Plan with earnings at a fixed rate of interest currently equivalent to the Moody's Aa Long Term Corporate Bond Index rate of return as such rate changes from time to time.
On May 6, 2002, the Board of Directors approved an additional benefit under the SERP for Mr. Johnson to align his benefit with competitive industry practices at that time. The benefit, which vested on May 6, 2007, reached its maximum of 26.95% of final average pay in Fiscal Year 2010 after seven years of additional service by Mr. Johnson. This benefit, including all other Company provided retirement benefits, when expressed as a straight life annuity, will be no more than 60% of Mr. Johnson's final average pay. The value of this benefit for Mr. Johnson is included in the SERP amount set forth in the table above under the column “Present Value of Accumulated Benefits.”
NOTE - Pursuant to the Merger Agreement, the Supplemental Executive Retirement Plan was fully vested and will be terminated within 1 year of the closing of the acquisition. At that time each NEO will then be entitled to all of their benefits under the terminated plan.
Nonqualified Deferred Compensation (Fiscal Year 2013)
| A | | B | C | D | E | F |
| Name | Plan | Executive Contributions in Last FY (1) ($) | Registrant Contributions in Last FY (2) ($) | Aggregate Earnings in Last FY (3) ($) | Aggregate Withdrawals / Distributions (4) ($) | Aggregate Balance at Last FYE (5) ($) |
| W.R. Johnson | Deferred RSUs | $413,118 | $0 | $6,795,737 | $0 | $23,117,510 |
| | 1986 Plan | $0 | $0 | $104,249 | $0 | $799,242 |
| | Executive Deferred Comp Plan | $0 | $0 | $0 | $0 | $0 |
| | Excess Plan | $0 | $764,507 | $2,288,099 | $0 | $13,502,988 |
| | Total: | $413,118 | $764,507 | $9,188,085 | $0 | $37,419,740 |
| A.B. Winkleblack | Deferred RSUs | $137,706 | $0 | $2,473,279 | $0 | $8,410,623 |
| | Executive Deferred Comp Plan | $0 | $0 | $0 | $0 | $0 |
| | Excess Plan | $0 | $213,579 | $132,721 | $0 | $1,963,427 |
| | Total: | $137,706 | $213,579 | $2,606,000 | $0 | $10,374,050 |
| D.C. Moran | Deferred RSUs | $143,465 | $0 | $2,280,259 | $0 | $7,758,019 |
| | Executive Deferred Comp Plan | $0 | $0 | $15,802 | $0 | $496,129 |
| | Excess Plan | $0 | $195,708 | $17,286 | $0 | $1,718,803 |
| | Total: | $143,465 | $195,708 | $2,313,348 | $0 | $9,972,952 |
| C.J. Warmoth | Deferred RSUs | $141,545 | $0 | $816,340 | $0 | $2,798,041 |
| | Executive Deferred Comp Plan | $0 | $0 | $0 | $0 | $0 |
| | Excess Plan | $0 | $105,501 | $24,656 | $0 | $253,189 |
| | Total: | $141,545 | $105,501 | $840,996 | $0 | $3,051,230 |
| D.C. Woodward | Deferred RSUs | $0 | $0 | $0 | $0 | $0 |
| | Executive Deferred Comp Plan | $0 | $0 | $0 | $0 | $0 |
| | Excess Plan | $0 | $26,100 | $1,871 | $0 | $27,971 |
| | Total: | $0 | $26,100 | $1,871 | $0 | $27,971 |
| M.D. Milone | Deferred RSUs | $64,477 | $0 | -$3,812,536 | $4,305,829 | $0 |
| | 1986 Plan | $0 | $0 | $55,761 | $0 | $427,501 |
| | Executive Deferred Comp Plan | $0 | $0 | $73,338 | $289,972 | $1,625,007 |
| | Excess Plan | $0 | $126,785 | $21,310 | $1,764,000 | $0 |
| | Total: | $64,477 | $126,785 | -$3,662,127 | $6,359,800 | $2,052,509 |
| (1) | Amounts of deferred RSUs were granted in prior years and were reported in the Summary Compensation Table for the year of such grants. Amounts in this column represent RSUs granted in prior years that vested and were deferred in FY13. No RSUs granted in FY13 were vested in FY 2013. |
| (2) | Reflects employer contributions to the Excess Plan, which are reported in the 2013 rows of the “All Other Compensation” column of the Summary Compensation Table and quantified in Footnote (4) below. |
| (3) | The amounts reported include earnings from the 1986 Deferred Compensation Plan, the Executive Deferred Compensation Plan, and the Excess Plan, including investment gains or losses, cash dividend equivalents paid on deferred RSUs, and interest. Included in these amounts are $81,662 and $43,680 in interest accrued at a rate greater than 120% of the long-term AFR under the 1986 Deferred Compensation Plan for Messrs. Johnson and Milone, respectively, which are reported in the 2013 rows of the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table. |
| (4) | Mr. Milone received the distributions reported in column (e) following his retirement from the Company in June 2012. |
| (5) | Includes the following amounts that were reported in the Summary Compensation Table for the fiscal years in which an executive was an NEO: |
| • | The interest on deferred compensation greater than 120% of the long-term AFR under the 1986 Deferred Compensation Plan is reported in the following rows of the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table in the amounts of: $81,662 (2013), $70,889 (2012), and $51,973 (2011) for Mr. Johnson; and $43,680 (2013), $37,918 (2012), and $27,800 (2011) for Mr. Milone. |
| • | The Company's contributions to the Excess Plan are included in the following rows of the “All Other Compensation” column of the Summary Compensation Table in the amounts of: $764,507 (2013), $895,864 (2012), and $950,519 (2011) for Mr. Johnson; $213,579 (2013), $212,484 (2012), and $220,183 (2011) for Mr. Winkleblack; $195,708 (2013), $209,353 (2012), and $223,609 (2011) for Mr. Moran; $105,501 (2013), $0 (2012), and $0 (2011) for Mr. Warmoth; $26,100 (2013), $0 (2012), and $0 (2011) for Mr. Woodward; $126,785 (2013), $192,535 (2012), and $202,606 (2011) for Mr. Milone. |
1986 Deferred Compensation Plan-Material Factors
The 1986 Deferred Compensation Plan (the “1986 Plan”) permitted executives who were eligible under the Company’s Management Incentive Plan during 1986-87 to defer all or a part of their Fiscal Year 1986 and Fiscal Year 1987 annual bonus and LTI awards, as well as to roll over any previously deferred cash awards plus interest accrued. The 1986 Plan accounts accrue earnings at the greater of 150% of the Moody's Composite Bond Index or 15% per year. The deferred account is distributed upon age 65 in 15 equal annual installments. This program was closed in 1987 and, as such, no additional compensation may be deferred into it. Currently, Mr. Johnson and Mr. Milone participate in the 1986 Plan, and the portion of the interest accrued on this deferred compensation that was greater than 120% of the long-term AFR for Fiscal Year 2012 is included in the Summary Compensation Table and identified in Footnote (5)(ii) to that table.
Executive Deferred Compensation Plan-Material Factors
The Executive Deferred Compensation Plan (the “EDCP”) permits eligible executives to make irrevocable elections in advance of receipt to defer all or part of their annual incentive payment. The Committee determined that the EDCP is appropriate to enable executives to better plan for their retirement and manage their tax obligations.
Participants may elect a deferral period in which payments commence no earlier than one year after the year in which the compensation was earned and no later than the retirement date. Payments of deferred amounts may occur in a lump sum of cash or shares of Heinz stock or in up to 15 equal annual installments, according to the participant's election. In electing to defer an amount under the EDCP, a participant also defers any federal income tax obligations until the time at which the deferred amount is paid out.
A notional account is established for each participant's deferred amounts. Investment gains and losses on amounts deferred prior to Fiscal Year 2010 are credited to the account based on one or more of the following hypothetical investments as selected by the participant: (i) cash account bearing interest at the BNY Mellon Prime Account rate; (ii) H. J. Heinz Company stock account; or (iii) phantom investment alternatives that include several funds available to all employees through the Employees' Retirement and Savings Plan, plus a fixed income option. Participants may change the future allocations of their deferred account among the various investment alternatives, but amounts that have been allocated to the H. J. Heinz Company Stock Account may not be transferred to other investment options. Deferred compensation contributions made to the EDCP after Fiscal Year 2010 earn a fixed rate of interest, and participants no longer have a choice of investment options for these deferrals. The fixed interest rate used by Heinz is based on 120% of the long-term AFR. The fixed interest rate is set annually at the beginning of October and is effective at the beginning of the next calendar year. Participants may not transfer prior deferrals into this fixed rate account or any other investment options.
Participants have no interest in any specific asset of the Company; their rights to receive payments under the EDCP are equivalent to those of an unsecured general creditor. Any and all investments remain the property of the Company. The credited earnings on each NEO's account for Fiscal Year 2013 are included in the Non-Qualified Deferred Compensation table.
Employee Retirement and Savings Excess Plan (“Excess Plan”)-Material Factors
The Excess Plan provides supplementary benefits to the NEOs whose benefits under the Employees' Retirement and Savings Plan are limited because of the restriction on annual additions that may be made to a qualified defined contribution plan and/or the limitation on compensation that may be taken into account in calculating contributions to such a plan. Only the age-related company profit-sharing contributions are credited under the Excess Plan, and deferrals by the NEOs are not permitted. The Excess Plan also provides for contribution credit on the value of annual RSU awards and any RSU award granted on a pro-rata basis to new hires.
NOTE - Pursuant to the Merger Agreement, each of the Plans listed above, except the 1986 Plan, was fully vested and will be terminated within 1 year of the closing of the acquisition. At that time each NEO will then be entitled to all of their benefits under each terminated plan.
Potential Payments Upon Termination
NOTE - The tables and footnotes below provide the disclosure required by Item 402(t) of Regulation S-K and reflect the assumption that a hypothetical termination of employment occurred on the last day of Fiscal Year 2013. The below table and footnotes do not reflect the payments that were and will be made to the NEOs in connection with the Merger, which are described in detail in the definitive proxy statement for the acquisition filed with the SEC on March 27, 2013.
The estimated payments to each NEO triggered in the event of an involuntary termination without cause, retirement, death, or disability, as of April 28, 2013, are set forth in the table below. There are no payments triggered by an involuntary termination with cause or a voluntary termination of employment.
Summary of Potential Payments Upon Termination (As of April 28, 2013)
| Element | | Involuntary Termination Without Cause | | Retirement | | Death | | Disability |
| | | | | | | | | |
Severance (1) | | | | | | | | |
| W.R. Johnson | | $2,600,000 | | $0 | | $0 | | $0 |
| A.B. Winkleblack | | $1,350,000 | | $0 | | $0 | | $0 |
| D.C. Moran | | $1,370,000 | | $0 | | $0 | | $0 |
| C.J. Warmoth | | $1,240,000 | | $0 | | $0 | | $0 |
| D.C. Woodward | | $1,200,000 | | $0 | | $0 | | $0 |
M.D. Milone (2) | | $0 | | $0 | | $0 | | $0 |
Intrinsic Value of Accelerated RSUs (3) | | | | | | | | |
| W.R. Johnson | | $0 | | $0 | | $3,191,613 | | $3,191,613 |
| A.B. Winkleblack | | $0 | | $0 | | $1,105,099 | | $1,105,099 |
| D.C. Moran | | $0 | | $0 | | $1,123,152 | | $1,123,152 |
| C.J. Warmoth | | $1,015,979 | | $0 | | $1,015,979 | | $1,015,979 |
| D.C. Woodward | | $2,040,519 | | $0 | | $590,519 | | $590,519 |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 |
Intrinsic Value of Accelerated Stock Options (4) | | | | | | | | |
| W.R. Johnson | | $0 | | $0 | | $24,633,692 | | $24,633,692 |
| A.B. Winkleblack | | $0 | | $0 | | $5,459,552 | | $5,459,552 |
| D.C. Moran | | $0 | | $0 | | $5,576,902 | | $5,576,902 |
| C.J. Warmoth | | $0 | | $0 | | $4,899,740 | | $4,899,740 |
| D.C. Woodward | | $0 | | $0 | | $3,163,061 | | $3,163,061 |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 |
Long-Term Performance Program (5) | | | | | | | | |
| W.R. Johnson | | $1,787,500 | | $1,787,500 | | $1,787,500 | | $1,787,500 |
| A.B. Winkleblack | | $286,875 | | $286,875 | | $286,875 | | $286,875 |
| D.C. Moran | | $291,125 | | $291,125 | | $291,125 | | $291,125 |
| C.J. Warmoth | | $263,500 | | $263,500 | | $263,500 | | $263,500 |
| D.C. Woodward | | $233,750 | | $233,750 | | $233,750 | | $233,750 |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 |
| Total | | | | | | | | |
| W.R. Johnson | | $4,387,500 | | $1,787,500 | | $29,612,807 | | $29,612,807 |
| A.B. Winkleblack | | $1,636,875 | | $286,875 | | $6,851,527 | | $6,851,527 |
| D.C. Moran | | $1,661,125 | | $291,125 | | $6,991,179 | | $6,991,179 |
| C.J. Warmoth | | $2,519,479 | | $263,500 | | $6,179,219 | | $6,179,219 |
| D.C. Woodward | | $3,474,269 | | $233,750 | | $3,987,330 | | $3,987,330 |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 |
| (1) | Severance pay assumes 24 months of base salary with a signed release. |
| (2) | Mr. Milone retired on June 22, 2012. |
| (3) | Intrinsic value of RSUs for each termination event for which vesting is accelerated, determined based on the merger consideration of $72.50 per share. It is assumed that the performance metric for the FY13 RSUs is met. In the event of the involuntary termination without cause of a retirement-eligible NEO, the executive would be treated, for purposes of RSU vestings, as if he had retired (i.e., vesting is not accelerated and continues according to the original vesting schedule). Mr. Woodward’s 20,000 retention RSUs would have an accelerated vesting only in the event of involuntary termination without cause and would have been forfeited for the other termination reasons. |
| (4) | Intrinsic value of stock options for each termination event for which vesting is accelerated, determined based on the merger consideration of $72.50 per share. |
| (5) | For the FY13-14 LTPP, termination during the first year of the two-year performance period generates a pro-rated award based on actual results. The assumption is that the termination occurs on the last day of the first year of the two-year performance period making the pro-rated award equal to one-half of the target payout. Upon completion of the merger on June 7, 2013, the target award payouts were prorated 55.49% to reflect 404 days completed out of a possible 728 days in the two-year performance period. |
Severance Pay Plan-Material Factors
NEOs are eligible for benefits under the Severance Pay Plan provided that the reason for termination is involuntary on the part of the NEO and occurs for reasons beyond the NEO's control, such as job elimination, location closing, or reduction in the workforce. NEOs must be willing to provide satisfactory transitional assistance in order to be eligible for severance benefits.
Under the Severance Pay Plan, NEOs typically receive a severance payment equal to 24 months of salary following the execution of a release. Severance payments are generally made in a cash lump sum, but may occasionally be made in periodic payments at the Company’s discretion as soon as administratively feasible after the termination of employment and after the former NEO's executed release has become irrevocable.
In the event that an NEO is rehired within one year after such termination of employment, the NEO will be required to refund to the Company or are currently deemed by the Company to be immaterial also may impairportion of any severance pay that exceeded the Company’s business operations and financial condition.
Competitive product and pricing pressures inamount of earnings 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 thatindividual would 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 customersreceived as an employee of the Company could seekbetween the time of termination and rehire.
Potential Payments Upon Change in Control
NOTE - The tables and footnotes below provide the disclosure required by Item 402(t) of Regulation S-K and reflect the assumption that a hypothetical termination change in control occurred on the last day of Fiscal Year 2013. The table and footnotes do not reflect the payments that were and will be made 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 impactedNEOs in a materially adverse way. The success of our business depends,connection with the Merger, which are described 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.
The Company’s performance may be adversely affected by economic and political conditionsdetail in the U.S. and in various other nations where it does business.definitive proxy statement for the acquisition filed with the SEC on March 27, 2013.
The Company’s performance has beenestimated payments to each NEO triggered in the past and may continueevent of a change 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, terrorist acts, and political unrest. Such factors in either domestic or foreign jurisdictions could materially and adversely affect our financial results.
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 and inputs such as water, 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, potential impact of climate change, 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 policyon April 28, 2013 with and regulation and weather conditions. Additionally,without termination of employment are set forth in the table below. There are no payments triggered by an involuntary termination for cause or a voluntary termination of employment (other than a termination for good reason, as described below).
Summary of Potential Payments Upon Change in Control for
Named Executive Officers (Fiscal Year 2013) (As of April 28, 2013)
| | | Change in Control |
| | | | | Double Trigger (2) |
| Element | | Single Trigger (1) | | Involuntary Termination without Cause | | Good Reason | | Retirement | | Death | | Disability |
| | | | | | | | | | | | | |
| Severance Protection Agreement | | | | | | | | | | | | |
Bonus (3) | | | | | | | | | | | | |
| W.R. Johnson | | $0 | | $2,860,000 | | $2,860,000 | | $0 | | $3,503,333 | | $3,503,333 |
| A.B. Winkleblack | | $0 | | $675,000 | | $675,000 | | $0 | | $815,433 | | $815,433 |
| D.C. Moran | | $0 | | $675,638 | | $675,638 | | $0 | | $790,544 | | $790,544 |
| C.J. Warmoth | | $0 | | $712,134 | | $712,134 | | $0 | | $698,738 | | $698,738 |
| D.C. Woodward | | $0 | | $621,033 | | $621,033 | | $0 | | $561,065 | | $561,065 |
M.D. Milone (4) | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| | | | | | | | | | | | | |
Severance (5) | | | | | | | | | | | | |
| W.R. Johnson | | $0 | | $14,410,000 | | $14,410,000 | | $0 | | $0 | | $0 |
| A.B. Winkleblack | | $0 | | $4,471,300 | | $4,471,300 | | $0 | | $0 | | $0 |
| D.C. Moran | | $0 | | $4,426,632 | | $4,426,632 | | $0 | | $0 | | $0 |
| C.J. Warmoth | | $0 | | $2,637,476 | | $2,637,476 | | $0 | | $0 | | $0 |
| D.C. Woodward | | $0 | | $2,322,130 | | $2,322,130 | | $0 | | $0 | | $0 |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| | | | | | | | | | | | | |
| Continuation Coverage (Health & Life) (6) | | | | | | | | | | | | |
| W.R. Johnson | | $0 | | $28,261 | | $28,261 | | $0 | | $0 | | $0 |
| A.B. Winkleblack | | $0 | | $130,003 | | $130,003 | | $0 | | $0 | | $0 |
| D.C. Moran | | $0 | | $135,655 | | $135,655 | | $0 | | $0 | | $0 |
| C.J. Warmoth | | $0 | | $80,988 | | $80,988 | | $0 | | $0 | | $0 |
| D.C. Woodward | | $0 | | $26,359 | | $26,359 | | $0 | | $0 | | $0 |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| | | | | | | | | | | | | |
Additional Retirement Equivalent (7) | | | | | | | | | | | | |
| W.R. Johnson | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| A.B. Winkleblack | | $0 | | $1,472,226 | | $1,472,226 | | $0 | | $0 | | $0 |
| D.C. Moran | | $0 | | $1,144,239 | | $1,144,239 | | $0 | | $0 | | $0 |
| C.J. Warmoth | | $0 | | $1,444,078 | | $1,444,078 | | $0 | | $0 | | $0 |
| D.C. Woodward | | $0 | | $147,752 | | $147,752 | | $0 | | $0 | | $0 |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| | | | | | | | | | | | | |
Excise Tax Gross-Up (8) | | | | | | | | | | | | |
| W.R. Johnson | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| A.B. Winkleblack | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| D.C. Moran | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| C.J. Warmoth | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| D.C. Woodward | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 |
| | | Change in Control | |
| | | | | Double Trigger (2) | |
| Element | | Single Trigger (1) | | Involuntary Termination without Cause | | Good Reason | | Retirement | | Death | | Disability | |
| | | | | | | | | | | | | | |
| Other | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Intrinsic Value of Accelerated Stock Options | | | | | | | | | | | | | |
| W.R. Johnson | | $24,633,692 | (9) | $24,633,692 | (10) | $24,633,692 | (10) | $24,633,692 | | $24,633,692 | (10) | $24,633,692 | (10) |
| A.B. Winkleblack | | $5,459,552 | (9) | $5,459,552 | (10) | $5,459,552 | (10) | $5,459,552 | | $5,459,552 | (10) | $5,459,552 | (10) |
| D.C. Moran | | $5,576,902 | (9) | $5,576,902 | (10) | $5,576,902 | (10) | $5,576,902 | | $5,576,902 | (10) | $5,576,902 | (10) |
| C.J. Warmoth | | $4,899,740 | (9) | $4,899,740 | (10) | $4,899,740 | (10) | $4,899,740 | | $4,899,740 | (10) | $4,899,740 | (10) |
| D.C. Woodward | | $3,163,061 | (9) | $3,163,061 | (10) | $3,163,061 | (10) | $3,163,061 | | $3,163,061 | (10) | $3,163,061 | (10) |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 | |
| | | | | | | | | | | | | | |
| Intrinsic Value of Accelerated RSUs | | | | | | | | | | | | | |
| W.R. Johnson | | $5,523,123 | (11) | $5,523,123 | (12) | $5,523,123 | (12) | $5,523,123 | | $5,523,123 | (12) | $5,523,123 | (12) |
| A.B. Winkleblack | | $1,903,560 | (11) | $1,903,560 | (12) | $1,903,560 | (12) | $1,903,560 | | $1,903,560 | (12) | $1,903,560 | (12) |
| D.C. Moran | | $1,941,333 | (11) | $1,941,333 | (12) | $1,941,333 | (12) | $1,941,333 | | $1,941,333 | (12) | $1,941,333 | (12) |
| C.J. Warmoth | | $1,720,570 | (11) | $1,720,570 | (12) | $1,720,570 | (12) | $1,720,570 | | $1,720,570 | (12) | $1,720,570 | (12) |
| D.C. Woodward | | $900,813 | (11) | $2,350,813 | (12) | $900,813 | (12) | $900,813 | | $900,813 | (12) | $900,813 | (12) |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 | |
| | | | | | | | | | | | | | |
| Long-Term Performance Program (13) | | | | | | | | | | | | | |
| W.R. Johnson | | $1,787,500 | | $1,787,500 | | $1,787,500 | | $1,787,500 | | $1,787,500 | | $1,787,500 | |
| A.B. Winkleblack | | $286,875 | | $286,875 | | $286,875 | | $286,875 | | $286,875 | | $286,875 | |
| D.C. Moran | | $291,125 | | $291,125 | | $291,125 | | $291,125 | | $291,125 | | $291,125 | |
| C.J. Warmoth | | $263,500 | | $263,500 | | $263,500 | | $263,500 | | $263,500 | | $263,500 | |
| D.C. Woodward | | $233,750 | | $233,750 | | $233,750 | | $233,750 | | $233,750 | | $233,750 | |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 | |
| | | | | | | | | | | | | | |
| Total | | | | | | | | | | | | | |
| W.R. Johnson | | $31,944,315 | | $49,242,576 | | $49,242,576 | | $31,944,315 | | $35,447,648 | | $35,447,648 | |
| A.B. Winkleblack | | $7,649,987 | | $14,398,517 | | $14,398,517 | | $7,649,987 | | $8,465,421 | | $8,465,421 | |
| D.C. Moran | | $7,809,360 | | $14,191,524 | | $14,191,524 | | $7,809,360 | | $8,599,904 | | $8,599,904 | |
| C.J. Warmoth | | $6,883,810 | | $11,758,486 | | $11,758,486 | | $6,883,810 | | $7,582,548 | | $7,582,548 | |
| D.C. Woodward | | $4,297,623 | | $8,864,897 | | $7,414,897 | | $4,297,623 | | $4,858,688 | | $4,858,688 | |
| M.D. Milone | | $0 | | $0 | | $0 | | $0 | | $0 | | $0 | |
_______________________| (1) | There is a change in control with a cash buyout of all Heinz equity and the executive continues in his job. |
| (2) | There is a change in control with a cash buyout of all Heinz equity and the executive's employment terminates within 24 months of the change in control for one of the following reasons: involuntary termination by the Company without cause; by the executive for good reason; death; or disability. Each payment is calculated pursuant to the severance protection agreement, a form of which is filed with the SEC, or the applicable equity plans. |
| (3) | In the event of involuntary termination without cause or termination by the NEO for good reason, the bonus is equal to the FY13 annual cash bonus award multiplied by the portion of the fiscal year worked by the NEO, which in this case is assumed to be the entire year. In the event of death or disability, the amount is equal to the average of FY13, FY12, and FY11 annual cash bonus awards multiplied by the portion of the fiscal year worked by the NEO, which in this case is assumed to be the entire year. |
| (4) | Mr. Milone retired on June 22, 2012. |
| (5) | Amount equals three times the sum of FY13 salary + the average of FY13, FY12, and FY11 annual cash bonus awards for Messrs. Johnson, Winkleblack and Moran and two times the sum of FY13 salary + the average of FY13, FY12 and FY11 annual cash bonus awards for Messrs. Warmoth and Woodward. |
| (6) | Amount equals 36 months of health care coverage for Mr. Johnson, 36 months of health care coverage and three years of life insurance premiums for Messrs. Winkleblack and Moran, 24 months of health care coverage, and two years of life insurance premiums for Messrs. Warmoth and Woodward. No discount rate was applied. |
| (7) | Calculated in accordance with Section 3.1(b)(iv) of the severance protection agreement. See “Severance Protection Agreements” Below. |
| (8) | Based on a cash-for-stock transaction and calculated in accordance with Sections 5 and 6 of the severance protection agreement. |
| (9) | The assumption is that all stock options are cancelled and cashed out at $72.50 per share at the time of the CIC; therefore, there is acceleration of the unvested stock option awards. The intrinsic value is reported. |
| (10) | The assumption is that all stock options are cancelled and cashed out at $72.50 per share at the time of the CIC along with a simultaneous termination. |
| (11) | The assumption is that all RSUs (excluding Woodward’s 20,000 retention RSUs) are cancelled and cashed out at $72.50 per share at the time of the CIC; therefore, there is acceleration of the unvested RSU awards. The intrinsic value is reported. |
| (12) | The assumption is that all RSUs are cancelled and cashed out at $72.50 per share at the time of the CIC along with a simultaneous termination. Mr. Woodward’s 20,000 retention RSUs would only accelerate in the event of involuntary termination without cause and would be forfeited for all other scenarios. |
| (13) | For the FY13-14 LTPP, a change in control generates a pro-rated award as of the date of the change in control. The change in control occurred on June 7, 2013 and the pro-rated factor was 55.49% to reflect 404 days completed out of a possible 728 days in the two-year performance period. Pursuant to the Merger Agreement, all outstanding awards under the FY13-14 LTPP were amended to provide that each award will be paid at 100% of the applicable target. |
Severance Protection Agreement
Each NEO has entered into a severance protection agreement with the Company. Each severance protection agreement provides that, in lieu of the benefits under the Severance Pay Plan, the Company may be unable to maintain favorable arrangements with respect towill make 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 increasesfollowing payments 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 includepay the cost of providing employeethe following benefits if an executive's employment is terminated involuntarily other than for “cause” or voluntarily for “good reason,” (as such terms are defined in the U.S. and foreign jurisdictions, including pension, health and welfare, and severance benefits. Any declinesNEO’s Severance Protection Agreement), within two years after a change 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 ineffectivenesscontrol 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 effects on the Company’s results of operations.Company:
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.| • | All accrued compensation and a pro-rated bonus; |
The failure of new product or packaging introductions to gain trade and consumer acceptance and changes in consumer preferences could adversely affect our sales.| • | A lump sum payment equal to three times the sum of the executive's annual salary and his three-year actual bonus average as severance pay for Messrs. Johnson, Winkleblack and Moran and two times the sum of the executive's annual salary and his three-year actual bonus average as severance pay for Messrs. Warmoth and Woodward; |
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.| • | A lump sum payment of a retirement benefit determined by taking into account an additional three years of age, service, and contributions for purposes of calculating such retirement benefits for Messrs. Johnson, Winkleblack and Moran and an additional two years of age, service and contributions for purposes of calculating such retirement benefits for Messrs. Warmoth and Woodward; |
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.| • | Life insurance, (except for that of William R. Johnson, which was fully funded), medical, dental, and hospitalization benefits for the NEO and his dependents for three years, at the same level as immediately prior to the change in control or at the same level as other similarly situated executives who continue in the employ of the Company for Messrs. Johnson, Winkleblack and Moran and two years, at the same level as immediately prior to the change in control or at the same level as other similarly situated executives who continue in the employ of the Company for Messrs. Warmoth and Woodward. These amounts may be reduced to the extent that the executive becomes eligible for any such benefits pursuant to a subsequent employer's benefit plans; and |
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.| • | Reimbursement for the impact of excise taxes associated with payments that are contingent upon a change in control; however, the Company can reduce severance payments by up to 10% to avoid triggering the excise tax. |
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.
The Company is increasingly dependent on information technology, and potential disruption, cyber attacks, security problems, and expanding social media vehicles present new risks.
The Company is increasingly dependent on information technology systems to manage and support a variety of business processes and activities, and any significant breakdown, invasion, destruction, or interruption of these systems could negatively impact operations. In addition, there is a risk of business interruption and reputational damage from leakage of confidential information.
The inappropriate use of certain media vehicles could cause brand damage or information leakage. Negative posts or comments about the Company on any social networking web site could seriously damage its reputation. In addition, the disclosure of non-public company sensitive information through external media channels could lead to information loss. Identifying new points of entry as social media continues to expand presents new challenges. Any business interruptions or damage to the Company's reputation could negatively impact the Company's financial condition, results of operation, and the market price of the Company's common stock.
The Company's operating results may be adversely affected by the current sovereign debt crisis in Europe and elsewhere and by related global economic conditions.
The current European debt crisis, particularly most recently in Greece, Italy, Ireland, Portugal and Spain, 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. One potential extreme outcome of the European financial situation is the re-introduction of individual currencies in one or more Eurozone countries or the dissolution of the Euro entirely. Should the Euro dissolve entirely, the legal and contractual consequences for holders of Euro-denominated obligations would be determined by laws in effect at such time. The potential dissolution of the Euro, or market perceptions concerning this and related issues, could adversely affect the value of the Company's Euro-denominated assets and obligations. 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 the Company may experience material adverse impacts on its business, operating results, and financial condition.
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:
sales, volume, earnings, or cash flow growth,
general economic, political, and industry conditions, including those that could impact consumer spending,
competitive conditions, which affect, among other things, customer preferences and the pricing of products, production, and energy costs,
competition from lower-priced private label brands,
increases in the cost and restrictions on the availability of raw materials including agricultural commodities and packaging materials, the ability to increase product prices in response, and the impact on profitability,
the ability to identify and anticipate and respond through innovation to consumer trends,
the need for product recalls,
the ability to maintain favorable supplier and customer relationships, and the financial viability of those suppliers and customers,
currency valuations and devaluations and interest rate fluctuations,
changes in credit ratings, leverage, and economic conditions, and the impact of these factors on our cost of borrowing and access to capital markets,
our ability to effectuate our strategy, including our continued evaluation of potential opportunities, such as strategic acquisitions, joint ventures, divestitures, and other initiatives, our ability to identify, finance and complete these transactions and other initiatives, and our ability to realize anticipated benefits from them,
the ability to successfully complete cost reduction programs and increase productivity,
the ability to effectively integrate acquired businesses,
new products, packaging innovations, and product mix,
the effectiveness of advertising, marketing, and promotional programs,
supply chain efficiency,
cash flow initiatives,
risks inherent in litigation, including tax litigation,
the ability to further penetrate and grow and the risk of doing business in international markets, particularly our emerging markets, economic or political instability in those markets, strikes, nationalization, and the performance of business in hyperinflationary environments, in each case such as Venezuela; and the uncertain global macroeconomic environment and sovereign debt issues, particularly in Europe,
changes in estimates in critical accounting judgments and changes in laws and regulations, including tax laws,
the success of tax planning strategies,
the possibility of increased pension expense and contributions and other people-related costs,
the potential adverse impact of natural disasters, such as flooding and crop failures, and the potential impact of climate change,
the ability to implement new information systems, potential disruptions due to failures in information technology systems, and risks associated with social media,
with regard to dividends, dividends must be declared by the Board of Directors and will be subject to certain legal
requirements being met at the time of declaration, as well as our Board’s view of our anticipated cash needs, andReport
other factors as described in “Risk Factors” above.
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.
| |
Item 1B. | Unresolved Staff Comments. |
Nothing to report under this item.
See table in Item 1.
| |
Item 3. | Legal Proceedings. |
Nothing to report under this item.
| |
Item 4. | Mine Safety Disclosures. |
Nothing to report under this item.
PART II
| |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Information relating to the Company’s common stock is set forth in this report on page 29 under the caption “Stock Market Information” in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and on pages 72 and 73 in Note 17, “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 2012. As of April 29, 2012, the maximum number of shares that may yet be purchased under the 2006 program is 1,431,270.
| |
Item 6. | Selected Financial Data. |
The following table presents selected consolidated financial data for the Company has reviewed and its subsidiaries for each of the five fiscal years 2008 through 2012. All amounts are in thousands except per share data.
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29, 2012 | | April 27, 2011 |
| | April 28, 2010 |
| | April 29, 2009 |
| | April 30, 2008 |
|
| | (52 1/2 Weeks) | | (52 Weeks) | | (52 Weeks) | | (52 Weeks) | | (52 Weeks) |
Sales(1) | $ | 11,649,079 |
| | $ | 10,706,588 |
| | $ | 10,494,983 |
| | $ | 10,011,331 |
| | $ | 9,885,556 |
|
Interest expense(1) | 294,104 |
| | 275,398 |
| | 295,711 |
| | 339,635 |
| | 364,808 |
|
Income from continuing operations attributable to H.J. Heinz Company common shareholders(1) | 923,159 |
| | 989,510 |
| | 914,489 |
| | 929,511 |
| | 846,623 |
|
Income from continuing operations per share attributable to H.J. Heinz Company common shareholders—diluted(1) | 2.85 |
| | 3.06 |
| | 2.87 |
| | 2.91 |
| | 2.62 |
|
Income from continuing operations per share attributable to H.J. Heinz Company common shareholders—basic(1) | 2.87 |
| | 3.09 |
| | 2.89 |
| | 2.95 |
| | 2.65 |
|
| Short-term debt and current portion of long-term debt | 246,708 |
| | 1,534,932 |
| | 59,020 |
| | 65,638 |
| | 452,708 |
|
Long-term debt, exclusive of current portion(2) | 4,779,981 |
| | 3,078,128 |
| | 4,559,152 |
| | 5,076,186 |
| | 4,730,946 |
|
| Total assets | 11,983,293 |
| | 12,230,645 |
| | 10,075,711 |
| | 9,664,184 |
| | 10,565,043 |
|
| Cash dividends per common share | 1.92 |
| | 1.80 |
| | 1.68 |
| | 1.66 |
| | 1.52 |
|
| |
(1) | Amounts exclude the operating results related to the Company’s private label frozen desserts business in the U.K. as well as the Kabobs and Appetizers And, Inc. businesses in the U.S., which were divested in Fiscal 2010 and have been presented as discontinued operations. |
| |
(2) | Long-term debt, exclusive of current portion, includes $128.4 million, $150.5 million, $207.1 million, $251.5 million, and $198.3 million of hedge accounting adjustments associated with interest rate swaps at April 29, 2012, April 27, 2011, April 28, 2010, April 29, 2009, and April 30, 2008, respectively. H.J. Heinz Finance Company’s (“HFC”) mandatorily redeemable preferred shares of $350 million in Fiscals 2012-2009 and $325 million in Fiscal 2008 are classified as long-term debt.
|
Fiscal 2012 results include expenses of $224.3 million pre-tax ($162.9 million after-tax or $0.50 per share) for productivity initiatives. See Note 3, "Productivity Initiatives" in Item 8—"Financial Statement and Supplementary Data" for further explanation of these initiatives.
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’sdiscussed this Compensation Discussion and Analysis required by Item 402(b) of Financial Condition and Results of Operations” on pages 12 and 13 for further explanation of the property disposal in the Netherlands.
| |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Executive Overview- Fiscal 2012
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.
The Company's Fiscal 2012 results reflect strong sales growth of 8.8%, led by a trio of growth engines- emerging markets, our top 15 brands and global ketchup. The emerging markets posted organic sales growth(1) of 16.4% for the fiscal year (40.9% reported). Emerging markets represented 21.0% of total Company sales reflecting this strong organic growth and our Fiscal 2011 acquisitions of Quero® in Brazil and Master®in China. The Company's top 15 brands performed wellRegulation S-K with organic sales growth of 5.0%(12.3% reported) driven by the Heinz®, Master®, Complan®and ABC® brands. The Quero® and Master®brands acquired in Fiscal 2011 are now part of the Company's top 15 brands and drove an additional 4.0% increase in total Company sales. Global ketchup grew organically 8.0% (9.7% reported). Favorable foreign exchange increased sales by 1.8% while the Company's strategic decision to exit the Boston Market® license in the U.S. reduced sales by 0.5%. Overall, the Company's Fiscal 2012 organic sales growth of 3.5% reflects a 3.8% increase in net pricing and a 0.3% decline in volume. This quarter marks the 28th consecutive quarter of organic sales growth for the Company.
On May 26, 2011, the Company announced that in order to accelerate growth and drive global productivity, it would invest in productivity initiatives in Fiscal 2012 that are expected to make the Company stronger and even more competitive (see “Productivity Initiatives” section below for further detail). During Fiscal 2012, the Company incurred charges of $224 million pre-tax or $0.50 per share related to these productivity initiatives.
On a reported basis, gross margin for Fiscal 2012 declined 260 basis points to 34.3% compared to prior year. Excluding charges for productivity initiatives(2), gross margin for the year declined 140 basis points to 35.5% reflecting industry-wide commodity cost inflation, unfavorable sales mix and lower gross margin on recent acquisitions, partially offset by higher pricing and productivity improvements. Operating income for the fiscal year decreased 12.0% to $1.45 billion. Excluding charges for productivity initiatives, operating income increased 1.7% versus prior year to $1.68 billion reflecting higher sales, effective cost management and, lower incentive compensation expenses. The Company continued to invest for the future, despite the tough economic environment, increasing marketing spending by 9.4% and spending approximately $80 million on Project Keystone, a multi-year program designed to drive productivity and make Heinz much more competitive by adding capabilities, harmonizing global processes and standardizing our systems through SAP.
Diluted earnings per share were $2.85 for Fiscal 2012, compared to $3.06 in the prior year. Excluding charges for productivity initiatives, earnings per share were $3.35 in the current year, up 9.5%. Earnings per share benefited from the increase in operating income excluding charges for productivity initiatives and a lower effective tax rate. The Company also generated $1.08 billion of operating free cash flow(3) this year or $1.21 billion excluding the $122 million of cash paid in Fiscal 2012 for productivity initiatives. The remaining cash required for these initiatives of approximately $80 million is expected to be paid in the first quarter of Fiscal 2013.
The Company believes these Fiscal 2012 results are indicative of the effectiveness of its business plan, which is focused on the following four strategic pillars:
• Accelerate growth in emerging markets;
• Expand the core portfolio;
• Strengthen and leverage global scale; and
• Make talent an advantage.
The Company remains confident in its underlying business fundamentals and plans to continue to focus on these four strategic pillars in Fiscal 2013.
| |
(1) | Organic sales growth is defined as volume plus price or total sales growth excluding the impact of foreign exchange, acquisitions and divestitures. See “Non-GAAP Measures” section below for the reconciliation of all of these organic sales growth measures to the reported GAAP measure. |
| |
(2) | All results excluding charges for productivity initiatives are non-GAAP measures used for management reporting and incentive compensation purposes. See “Non-GAAP Measures” section below and the following reconciliation of all non-GAAP measures to the reported GAAP measures. |
| |
(3) | Operating Free Cash Flow is defined as cash from operations less capital expenditures net of proceeds from disposals of Property, Plant and Equipment. See “Non-GAAP Measures” section below for the reconciliation of this measure to the reported GAAP measure. |
|
| | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29, 2012 |
| | Sales | Gross Profit | SG&A | Operating Income | Effective Tax Rate | Net Income attributable to H.J. Heinz Company | Diluted EPS |
| | (In thousands except per share amounts) |
| Reported results | $11,649,079 | $3,999,530 | $2,548,362 | $1,451,168 | 20.6 | % | $923,159 | $2.85 |
| Charges for productivity initiatives | — |
| 139,830 |
| 84,487 |
| 224,317 |
| 27.4 | % | 162,874 |
| 0.50 |
|
| Results excluding charges for productivity initiatives | $11,649,079 | $4,139,360 | $2,463,875 | $1,675,485 | 21.7 | % | $1,086,033 | $3.35 |
| (Totals may not add due to rounding) | | | | | | |
Productivity Initiatives
The Company announced on May 26, 2011 that it would invest in productivity initiatives during Fiscal 2012 designed to increase manufacturing effectiveness and efficiency as well as accelerate overall productivity on a global scale. The Company originally anticipated investing at least $130 million of cash and $160 million of pre-tax income ($0.35 per share) on these initiatives during Fiscal 2012. During Fiscal 2012, the Company's Board of Directors gave its approval for the Company to invest an incremental $40 million cash and $75 million of pre-tax income ($0.21 per share) on additional productivity initiatives. The Company was able to execute these projects under budget and is on track to deliver the expected benefits. All of these costs in Fiscal 2012 were reported in the Non-Operating segment. See Note 3, "Productivity Initiatives" in Item 8- "Financial Statements and Supplementary Data" and the "Liquidity and Financial Position" section below for additional information on these productivity initiatives.
Discontinued Operations
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 of Fiscal 2010, 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 Fiscal 2010. The following table presents summarized operating results for these discontinued operations:
|
| |
| Fiscal Year Ended |
| April 28,
2010
FY 2010
|
| (In millions) |
Sales | $63.0 |
Net after-tax losses | $(4.7) |
Tax benefit on losses | $2.0 |
During the first quarter of Fiscal 2013, the Company's Board of Directors approved the sale of its U.S. Foodservice frozen desserts business. This business had annual sales of approximately $75 million in Fiscal 2012. The disposal transaction included the sale of two factories. As a result of this transaction, the Company will recognize a pre-tax loss of approximately $33 million ($21 million after-tax), which will be recorded in discontinued operations in the first quarter of Fiscal 2013. The sale will not significantly affect the Company's profit on a continuing operations basis going forward.
Other Disposals
During the fourth quarter of Fiscal 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 included 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, which are being incurred over a three year period from the date of the transaction, which is the length of time the Company has to exit the current factory location and construct new facilities. Note, the Company has and will incur costs to build 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 while executing 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 initial proceeds received, $81 million was deferred based on management’s total estimated future costs to be recoveredsuch review and these deferred amounts are recognized as the related costs are incurred. If estimated costs differ from what is actually incurred, these adjustments will be reflected in earnings. As of April 29, 2012 and April 27, 2011, the remaining deferred amounts on the consolidated balance sheets were $21 million and $63 million, respectively, and were recorded in other non-current liabilities and other accrued liabilities. No significant adjustments were reflected in earnings in Fiscal 2012 and 2011. The excess of the $95 million of proceeds received over estimated costs to be recovered and incurred was $15 million and was recorded as a reduction of cost of products sold in the consolidated statement of income for the year ended April 28, 2010.
Results of Continuing Operations
On March 14, 2012 the Company's Board of Directors of H. J. Heinz Company authorized a change in the Company's fiscal year end from the Wednesday nearest April 30 to the Sunday nearest April 30. The change in the fiscal year end resulted in Fiscal 2012 changing from a 53 week year to a 52 1/2 week year and was intended to better align the Company's financial reporting period with its business partners and production schedules. This change did not have a material impact on the Company's financial statements.
The Company’s revenues are generated via the sale of products in the following categories:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29, 2012 | | April 27, 2011 | | April 28, 2010 |
| | (52 1/2 Weeks) | | (52 Weeks) | | (52 Weeks) |
| | (In thousands) |
| Ketchup and Sauces | $ | 5,232,607 |
| | $ | 4,607,971 |
| | $ | 4,446,911 |
|
| Meals and Snacks | 4,479,502 |
| | 4,282,318 |
| | 4,289,977 |
|
| Infant/Nutrition | 1,232,248 |
| | 1,175,438 |
| | 1,157,982 |
|
| Other | 704,722 |
| | 640,861 |
| | 600,113 |
|
| Total | $ | 11,649,079 |
| | $ | 10,706,588 |
| | $ | 10,494,983 |
|
Fiscal 2012 Company Results- Fiscal Year Ended April 29, 2012 compared to Fiscal Year Ended April 27, 2011
Sales for Fiscal 2012 increased $942 million, or 8.8%, to $11.65 billion. Net pricing increased sales by 3.8%, driven by price increases across the Company, particularly in the U.S., Latin America, U.K. and China. Volume decreased 0.3%, as favorable volume in emerging markets, Japan and Germany were more than offset by declines in the U.S., Australia and Italy. Emerging markets, global ketchup and the Company's top 15 brands continued to be the most significant growth drivers, with organic sales growth of 16.4%, 8.0%, and 5.0%, respectively (40.9%, 9.7% and 12.3%, respectively, reported). Acquisitions, net of divestitures, increased sales by 3.5%. Foreign exchange translation rates increased sales by 1.8%.
Gross profit increased $47 million, or 1.2%, to $4.0 billion however, the gross profit margin decreased 260 basis points to 34.3%. Excluding charges for productivity initiatives, gross profit increased $187 million, or 4.7%, to $4.14 billion, largely due to higher pricing, acquisitions and a $59 million favorable impact from foreign exchange, partially offset by lower volume and commodity cost inflation. Gross profit margin excluding charges for productivity initiatives reflected industry-wide price and cost pressure and decreased 140 basis points to 35.5%, resulting from higher commodity and other costs, the impact of recent
acquisitions and unfavorable sales mix, partially offset by higher pricing and productivity improvements.
Selling, general and administrative expenses ("SG&A") increased $244 million, or 10.6% to $2.55 billion. Excluding charges for productivity initiatives, SG&A increased $160 million, or 6.9% to $2.46 billion, and decreased as a percentage of sales to 21.2% versus 21.5% last year. This increase in SG&A reflects a $38 million unfavorable impact from foreign exchange translation rates, as well as increases from acquisitions, higher marketing spending and incremental investments in Project Keystone. In addition, selling and distribution expense ("S&D") was unfavorably impacted by higher fuel prices, particularly in the U.S., and general and administrative expenses ("G&A") were higher as a result of strategic investments to drive growth in emerging markets, partially offset by effective cost management in developed markets and lower incentive compensation expense. SG&A, excluding marketing and charges for productivity initiatives, decreased as percentage of sales by 40 basis points, to 17.1%.
Operating income decreased $197 million, or 12.0%, to $1.45 billion. Excluding charges for productivity initiatives, operating income was up $27 million, or 1.7%, to $1.68 billion.
Net interest expense increased $7 million, to $259 million, reflecting a $19 million increase in interest expense, partially offset by a $12 million increase in interest income. The increase in interest income is mainly due to earnings on short-term investments and the increase in interest expense is largely due to interest rate mix in the Company's debt portfolio and acquisitions made last fiscal year. Other expenses, net, decreased $13 million, to $8 million, primarily due to currency gains this year compared to currency losses in the prior year.
The effective tax rate for Fiscal 2012 was 20.6%. Excluding charges for productivity initiatives, the effective tax rate was 21.7% in the current year compared to 26.8% last year. The decrease in the effective tax rate is primarily the result of the increased benefits from the revaluation of the tax basis of foreign assets, the reversal of an uncertain tax position liability due to the expiration of the statute of limitations in a foreign tax jurisdiction, the beneficial resolution of a foreign tax case, and lower tax on the income of foreign subsidiaries primarily resulting from a statutory tax rate reduction in the U.K. These benefits were partially offset by the current year expense for changes in valuation allowances.
Net income attributable to H. J. Heinz Company was $923 million, a decrease of 6.7%. Excluding charges for productivity initiatives, net income attributable to H. J. Heinz Company was $1.09 billion compared to $990 million in the prior year, an increase of 9.8%. This increase was largely due to higher sales and a lower effective tax rate, partially offset by a lower gross margin and investments in marketing, emerging markets capabilities and Project Keystone. Diluted earnings per share were $2.85 in the current year, down 6.9%. Excluding charges for productivity initiatives, diluted earnings per share were $3.35 in the current year compared to $3.06 in the prior year, up 9.5%. EPS movements were favorably impacted by $0.06 from currency translation and translation hedges.
The impact of fluctuating translation exchange rates in Fiscal 2012 has had a relatively consistent impact on all components of operating income on the consolidated statement of income.
FISCAL YEAR 2012 OPERATING RESULTS BY BUSINESS SEGMENT
North American Consumer Products
Sales of the North American Consumer Products segment decreased $24 million, or 0.7%, to $3.24 billion. Higher net price of 2.8% reflects price increases across the leading brands and reduced trade promotions. Despite volume gains from new product launches, overall volume declined 2.3% across most of our key brands reflecting reduced promotional activity and the impact of price increases. Sales were also unfavorably impacted by 1.6% from the Company's strategic decision to exit the Boston Market® license effective July 2011. Favorable Canadian exchange translation rates increased sales 0.3%.
Gross profit decreased $51 million, or 3.7%, to $1.32 billion, and the gross profit margin decreased to 40.9% from 42.1%. Gross profit declined as higher pricing and productivity improvements were more than offset by increased commodity and fuel costs, lower volume and the impact from the exit of the Boston Market®license. The decline in gross margin is due to higher commodity costs and unfavorable sales mix. Operating income decreased $21 million, or 2.5% to $812 million, as the decline in gross profit was partially offset by a decrease in G&A reflecting effective cost management, lower incentive compensation expenses and decreased S&D largely due to lower volume.
Europe
Heinz Europe sales increased $204 million, or 6.3%, to $3.44 billion. Net pricing increased 3.7%, driven by price increases across Europe and reduced promotions in the U.K. Volume increased by 0.6% as growth in ketchup across Europe, soup in the
U.K., sauces in Germany and Heinz® branded sauces in Russia were offset by declines in Italian infant nutrition and frozen products in the U.K. The Italian infant nutrition business was unfavorably impacted by weakness in the Italian economy and corresponding softness in the category. Favorable foreign exchange translation rates increased sales by 1.9%.
Gross profit increased $52 million, or 4.1%, to $1.32 billion, while the gross profit margin decreased to 38.3% from 39.1%. The $52 million increase in gross profit is due to favorable net pricing, increased volume and foreign exchange translation rates. The decrease in the gross margin reflects the benefits from higher pricing and productivity improvements which were more than offset by higher commodity costs, unfavorable sales mix and a prior year gain on the sale of distribution rights on Amoy® products to ethnic channels in the U.K. Operating income increased $28 million, or 4.8%, to $609 million, due to higher pricing, increased volume and favorable foreign currency translation, partially offset by increased marketing investments.
Asia/Pacific
Heinz Asia/Pacific sales increased $248 million, or 10.7%, to $2.57 billion. Favorable exchange translation rates increased sales by 5.4%. The acquisition of Foodstar in China during the third quarter of Fiscal 2011 increased sales 3.1%. Pricing increased 2.5% and volume decreased 0.3%. Total segment volume was negatively impacted by poor operating results in Australia. The Australian business has been impacted by a challenging market environment, higher promotions and reduced market demand. Price increases were realized on ABC® products in Indonesia, Complan®products in India, and Long Fong® frozen products and Heinz® infant feeding products in China. Significant volume growth occurred in Complan® nutritional beverages in India, frozen potatoes and sauces in Japan, ABC® sauces in Indonesia, and Heinz® and Master® branded sauces and Heinz® branded infant feeding products in China. Beyond Australia, volume declines were noted in Glucon D® and Nycil® branded products in India and Long Fong®frozen products in China.
Gross profit increased $50 million, or 6.9%, to $764 million, and the gross profit margin decreased to 29.8% from 30.8%. The $50 million increase in gross profit largely reflects favorable net pricing and foreign exchange translation rates and the Foodstar acquisition, partially offset by weakness in Australia, prior year gains from the favorable renegotiation of a long-term supply contract in Australia and the sale of a factory in India. The decline in gross margin is a result of higher commodity costs and poor operating results in Australia which were only partially offset by higher pricing and productivity improvements. SG&A increased as a result of foreign exchange translation rates, the Foodstar acquisition, increased marketing and investments to improve capabilities in our emerging markets businesses. Operating income decreased by $15 million, or 6.9%, to $206 million, reflecting results in Australia.
U.S. Foodservice
Sales of the U.S. Foodservice segment increased $6 million, or 0.4%, to $1.42 billion. Pricing increased sales 2.6%, largely due to price increases across this segment's product portfolio to offset commodity cost increases. Volume decreased by 2.2%, due largely to ongoing weakness in restaurant foot traffic at some key customers, which is beginning to improve, and the impact of price increases.
Gross profit decreased $25 million, or 5.9%, to $397 million, and the gross profit margin decreased to 28.0% from 29.9%, as pricing and productivity improvements were more than offset by increased commodity and fuel costs and unfavorable volume and product mix. Operating income decreased $10 million, or 5.5%, to $166 million, which is primarily due to higher commodity costs, partially offset by a decrease in G&A expenses which reflects effective cost management, including reduced incentive compensation expense.
Rest of World
Sales for Rest of World increased $509 million, or 108.3%, to $979 million. The Coniexpress acquisition in Brazil ("Quero"), which was completed at the end of Fiscal 2011, increased sales 76.6%. Higher pricing increased sales by 21.5%, largely due to price increases in Latin America taken to mitigate inflation. (See the “Venezuela - Foreign Currency and Inflation” section below for further discussion on inflation in Venezuela.) Volume increased 11.9% mainly due to increases in Heinz® ketchup and baby food in Latin America. Volume in Latin America was unfavorably impacted in the prior year by labor disruptions which occurred in Venezuela. Ketchup and sauces in South Africa and improvements across product categories in the Middle East also drove favorable volume. Foreign exchange translation rates decreased sales 1.7%.
Gross profit increased $158 million, or 93.2%, to $327 million, due mainly to the Quero acquisition in Brazil and higher pricing and volume, partially offset by increased commodity costs. The gross profit margin declined to 33.4% from 36.0% primarily reflecting the impact of the Quero acquisition. Operating income increased $52 million, or 96.9%, to $105 million resulting from higher pricing and volume and the Quero acquisition.
Fiscal 2011 Company Results- Fiscal Year Ended April 27, 2011 compared to Fiscal Year Ended April 28, 2010
Sales for Fiscal 2011 increased $212 million, or 2.0%, to $10.71 billion. Volume increased 0.7%, as favorable volume in emerging markets as well as improvements in North American Consumer Products were partially offset by declines in U.S. Foodservice, Australia and Germany. Emerging markets and our Top 15 brands realized combined volume and pricing gains of 14.4% and 3.8%, respectively. Net pricing increased sales by 1.2%, as price increases in emerging markets, particularly Latin America, U.S. Foodservice and the U.K. were partially offset by increased trade promotions in the North American Consumer Products and Australian businesses. Acquisitions increased sales by 0.6%, while foreign exchange translation rates reduced sales by 0.5%.
Gross profit increased $158 million, or 4.2%, to $3.95 billion, and the gross profit margin increased to 36.9% from 36.2%. Gross profit increased as higher volume, net pricing, productivity improvements and the favorable impact from the Foodstar acquisition were partially offset by a $33 million unfavorable impact from foreign exchange translation rates as well as higher commodity costs. In addition, Fiscal 2010’s gross profit included $24 million in 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.
SG&A increased $69 million, or 3.1% to $2.30 billion, and increased slightly as a percentage of sales to 21.5% from 21.3%. SG&A was unfavorably impacted by S&D, largely resulting from the higher volume and fuel costs, and higher G&A, reflecting investments in global process and system upgrades, increased capabilities in emerging markets and acquisition costs related to the Coniexpress acquisition. These increases were partially offset by reduced marketing expense, a $17 million favorable impact from foreign exchange translation rates and a $14 million impact related to Fiscal 2010 targeted workforce reductions. Operating income increased $89 million, or 5.7%, to $1.65 billion, reflecting the items above.
Net interest expense increased $2 million, to $253 million, reflecting a $23 million decrease in interest income and a $20 million decrease in interest expense. The decrease in interest income is mainly due to a $24 million gain in Fiscal 2010 on a total rate of return swap, which was terminated in August 2009. Interest expense decreased due to lower average interest rates and debt balances. Other expenses, net, increased $3.0 million, to $21 million, primarily due to currency losses partially offset by $9 million of charges in Fiscal 2010 recognized in connection with the dealer remarketable securities exchange transaction (see below in “Liquidity and Financial Position” for further explanation of this transaction).
The effective tax rate for Fiscal 2011 was 26.8% compared to 27.8% for Fiscal 2010. The Fiscal 2011 effective tax rate was lower than Fiscal 2010 primarily due to increased benefits from foreign tax planning and increased tax exempt foreign income, partially offset by higher taxes on repatriation of earnings.
Income from continuing operations attributable to H. J. Heinz Company was $990 million compared to $914 million in Fiscal 2010, an increase of 8.2%. The increase was due to higher operating income, reduced interest expense, a lower tax rate and $28 million in Fiscal 2010 after-tax charges ($0.09 per share) for targeted workforce reductions and non-cash asset write-offs. These were partially offset by an $11 million after-tax gain in Fiscal 2010 related to property sold in the Netherlands and a $15 million after-tax gain in Fiscal 2010 on a total rate of return swap. Diluted earnings per share from continuing operations were $3.06 in Fiscal 2011 compared to $2.87 in Fiscal 2010, up 6.6%. EPS movements were unfavorably impacted by 1.5% higher shares outstanding and by $0.06 from currency fluctuations, after taking into account the net effect of Fiscal 2011 and 2010 currency translation contracts and foreign currency movements on translation.
The impact of fluctuating translation exchange rates in Fiscal 2011 has had a relatively consistent impact on all components of operating income on the consolidated statement of income.
FISCAL YEAR 2011 OPERATING RESULTS BY BUSINESS SEGMENT
North American Consumer Products
Sales of the North American Consumer Products segment increased $74 million, or 2.3%, to $3.27 billion. Volume increased 2.0% as new products and increased trade promotions drove improvements in Heinz® ketchup and gravy, Smart Ones® frozen entrees, Classico® pasta sauces, Ore-Ida® frozen potatoes and TGI Friday’s® frozen meals and appetizers (TGI Friday’s® frozen meals were discontinued at the end of Fiscal 2012). These increases were partially offset by declines in Boston Market® frozen products as we transitioned away from the Boston Market® license which was completed in the first quarter of Fiscal 2012. In addition, volume was up across most product categories in Canada. Net prices decreased 1.1% reflecting trade promotion increases in Canada, the Consumer Value Program launched in the U.S. in the second half of Fiscal 2010 and trade spending in Fiscal 2011 to support the launch of TGI Friday’s® single serve frozen products. The acquisition of Arthur’s Fresh Company, a small chilled smoothies business in Canada, in the third quarter of Fiscal 2010, increased sales 0.2%. Favorable Canadian exchange translation rates increased sales 1.1%.
Gross profit increased $38 million, or 2.8%, to $1.38 billion, and the gross profit margin increased to 42.1% from 41.9%. The increase in gross profit dollars was aided by favorable volume and foreign exchange translation rates. The gross profit margin improved as productivity improvements more than offset the shift in marketing funds to trade promotion investments and increased commodity costs. SG&A decreased as a result of the shift of marketing funds to trade promotions. Operating income increased $61 million, or 7.9%, to $833 million, reflecting higher volume, gross margin improvements and tight control of SG&A.
Europe
Heinz Europe sales decreased $96 million, or 2.9%, to $3.24 billion. The decrease was due to unfavorable foreign exchange translation rates, which decreased sales by 3.5%, or $117 million. Volume decreased 0.4%, as increases in Weight Watchers® and Aunt Bessies® frozen products in the U.K, improvements in ketchup, particularly in Russia and France, and increases in drinks in The Netherlands, were more than offset by declines in soups in the U.K. and Germany, Honig® branded products in The Netherlands, and infant nutrition across Europe. Net pricing increased 1.0%, due to reduced promotions on Heinz® soup in the U.K. and increased net pricing in our Russian and Italian infant nutrition businesses.
Gross profit increased $19 million, or 1.5%, to $1.27 billion, and the gross profit margin increased to 39.1% from 37.4%. These increases resulted from productivity improvements and higher net pricing partially offset by increased commodity costs and unfavorable foreign exchange translation rates. Gross profit also benefited from a gain in Fiscal 2011 on the sale of distribution rights on Amoy® products in certain ethnic channels in the U.K. Operating income increased $27 million, or 4.8%, to $581 million, reflecting the items above as well as reduced SG&A. The decline in SG&A was largely related to foreign exchange translation rates, partially offset by increased marketing and investments in global process and system upgrades.
Asia/Pacific
Heinz Asia/Pacific sales increased $314 million, or 15.6%, to $2.32 billion. Volume increased 4.8%, due to significant growth in Complan® and Glucon D® nutritional beverages in India, ABC® products in Indonesia and infant feeding and frozen products in China and Japan. These increases were partially offset by softness in Australia, which has been impacted by a difficult trade environment and generally weak category trends. Pricing rose 0.2%, reflecting increases on ABC® products in Indonesia and Complan® and Glucon D® products in India offset by higher promotions in Australia. The acquisition of Foodstar during the third quarter of Fiscal 2011 increased sales 2.9%. Favorable exchange translation rates increased sales by 7.7%.
Gross profit increased $103 million, or 16.8%, to $715 million, and the gross profit margin increased to 30.8% from 30.5%. These increases reflect higher volume and pricing, favorable foreign exchange translation rates, the impact of the Foodstar acquisition, a gain in Fiscal 2011 on the sale of a factory in India, and productivity improvements, which include the favorable renegotiation of a long-term supply contract in Australia. These increases were reduced by higher commodity costs, particularly in Indonesia and India, partially offset by transactional currency benefits. Operating income increased $26 million, or 13.5%, to $222 million, primarily reflecting higher volume, improved gross margins and favorable foreign exchange. These improvements were partially offset by increased marketing investments and higher G&A.
U.S. Foodservice
Sales of the U.S. Foodservice segment decreased $16 million, or 1.1%, to $1.41 billion. Pricing increased sales 2.3%, largely due to Heinz® ketchup and other tomato products, reflecting reduced trade promotions and price increases taken to offset commodity cost increases. Volume decreased by 3.5%, due to declines in frozen desserts and soup as well as non-branded sauces. The volume reflects ongoing weakness in restaurant foot traffic, rationalization of less-profitable products, and the timing of new product launches and promotions in Fiscal 2010.
Gross profit increased $20 million, or 5.1%, to $422 million, and the gross profit margin increased to 29.9% from 28.1%, as pricing and productivity improvements more than offset increased commodity costs and lower volume. Operating income increased $25 million, or 16.8%, to $176 million, due to the gross margin improvements and lower SG&A costs relating to reduced incentive compensation expense.
Rest of World
Sales for Rest of World decreased $64 million, or 11.9%, to $470 million. Foreign exchange translation rates decreased sales 24.6%, or $131 million, largely due to the devaluation of the Venezuelan bolivar fuerte (“VEF”) late in the third quarter of Fiscal 2010. Higher pricing increased sales by 17.2%, largely due to price increases in Latin America taken to mitigate inflation. Volume decreased 4.5% as increases in the Middle East resulting from new products, market expansion and increased marketing and promotions were more than offset by declines in Venezuela resulting from labor disruptions which occurred during Fiscal 2011.
Gross profit decreased $29 million, or 14.8%, to $169 million, due mainly to the impact of VEF devaluation, increased commodity costs and lower volume, partially offset by increased pricing. Operating income decreased $16 million, or 22.9%, to
$53 million, reflecting the VEF devaluation. In order to facilitate timely reporting in Fiscal 2011, the operating results of Coniexpress in Brazil, which was acquired on April 1, 2011, was first reported in the Rest of World segment beginning in the first quarter of Fiscal 2012.
Liquidity and Financial Position
For Fiscal 2012, cash provided by operating activities was $1.49 billion compared to $1.58 billion in the prior year. The decline in Fiscal 2012 versus Fiscal 2011 reflects the cash impact of spending on productivity initiatives, as well as unfavorable movements in accounts payable and accrued income taxes, partially offset by favorable movements in receivables and inventories. The Company's cash conversion cycle, which is calculated using a 5 quarter average, was consistent with the prior year at 42 days in Fiscal 2012.
In Fiscal 2012, cash required for productivity initiatives was $122 million. The remaining cash required for these initiatives of approximately $80 million is expected to be paid in the first quarter of Fiscal 2013. Ongoing pre-tax savings relative to these initiatives was approximately $25 million in Fiscal 2012 and is expected to be approximately $95 million in Fiscal 2013, the majority of which will be realized as a reduction in cost of products sold.
In 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, U.S. trade receivables to a wholly-owned, bankruptcy-remote-subsidiary. This subsidiary then sells all of the rights, title and interest in these receivables, all of which are short-term, to an unaffiliated entity in return for cash consideration of up to $175 million and a receivable for the remainder of the purchase price (the "Deferred Purchase Price"). The cash consideration and the carrying amount of receivables removed from the consolidated balance sheets were $162 million and $29 million as of April 29, 2012 and April 27, 2011, respectively, resulting in an increase of $133 million in cash for sales under this program for Fiscal 2012 and a decrease in cash of $55 million for Fiscal 2011. The increase in cash proceeds related to the Deferred Purchase Price was $117 million in Fiscal 2012 and was a decrease in cash of $85 million in Fiscal 2011. See Note 8, “Debt and Financing Arrangements” in Item 8- “Financial Statements and Supplementary Data” for additional information. On June 8, 2012, subsequent to the Fiscal 2012 year end, the Company entered into an amendment of the $175 million accounts receivables securitization program that extended the term until June 7, 2013.
During the second quarter of Fiscal 2012, a foreign subsidiary of the Company exercised a tax option under local law to revalue certain of its intangible assets, increasing the local tax basis by approximately $220 million. This revaluation resulted in a reduction in Fiscal 2012 tax expense, fully recognized in Fiscal 2012, of $35 million reflecting the deferred tax benefit from the higher tax basis partially offset by the current tax liability arising from this revaluation of $35 million. The subsidiary paid $10 million of the $35 million during Fiscal 2012 and will pay approximately $14 million in Fiscal 2013 with the remainder due during Fiscal 2014. The tax benefit from the higher basis amortization will result in a reduction in cash taxes over the five year amortization period totaling approximately $69 million partially offset by the $35 million aforementioned tax payments.
Cash used for investing activities totaled $402 million compared to $950 million of cash last year. Capital expenditures totaled $419 million (3.6% of sales) compared to $336 million (3.1% of sales) in the prior year, which is in-line with planned levels. Higher capital spending reflects increased investments in Project Keystone, capacity projects in emerging markets and productivity initiatives. The Company expects capital spending as a percentage of sales to be approximately 4% in Fiscal 2013. Proceeds from disposals of property, plant and equipment were $10 million in the current year compared to $13 million in the prior year. The current year increase in restricted cash of $39 million primarily represents collateral that the Company is required to maintain in connection with a total rate of return swap entered into during the third quarter of Fiscal 2012. (See Note 13, "Derivative Financial Instruments and Hedging Activities" in Item 8- “Financial Statements and Supplementary Data” for addition information.) The prior year increase in restricted cash of $5 million relates to restricted funds in our Foodstar business in China. Cash received for the sale of short-term investments in Brazil in the current year was $57 million. Cash paid for acquisitions in the current year totaled $3 million compared to $618 million in the prior year primarily related to Coniexpress in Brazil and Foodstar in China.
Coniexpress is a leading Brazilian manufacturer of the Quero® brand of tomato-based sauces, tomato paste, ketchup, condiments and vegetables. The Quero® brand holds number one or number two positions in tomato product categories in Brazil and the leading position in vegetables. This Fiscal 2011 acquisition included a modern factory that is centrally located in Neropolis and a new distribution center. Based near Sao Paulo, the Quero® business has over 1,800 employees. The Company has the right to exercise a call option at any time requiring the minority partner to sell his 20% equity interest, while the minority partner has the right to exercise a put option requiring the Company to purchase his 20% equity interest (see Note 18, “Commitments and Contingencies” in Item 8- “Financial Statements and Supplementary Data” for additional explanation).
Foodstar is a manufacturer of soy sauces and fermented bean curd in China. The acquisition of Foodstar in Fiscal 2011 included a contingent earn-out payment in Fiscal 2014 based upon certain net sales and EBITDA (earnings before interest, taxes, depreciation and amortization) targets during Fiscals 2013 and 2014. In accordance with accounting principles generally accepted
in the United States of America, a liability of $45 million was recognized as an estimate of the acquisition date fair value of the earn-out and is included in the Other non-current liabilities line item of our consolidated balance sheets as of April 29, 2012 and April 27, 2011. Any change in the fair value of the earn-out subsequent to the acquisition date, including an increase resulting from the passage of time, is and will be recognized in earnings in the period of the estimated fair value change. As of April 29, 2012, there was no significant change to the fair value of the earn-out recorded for Foodstar at the acquisition date. A change in fair value of the earn-out could have a material impact on the Company’s earnings in the period of the change in estimate. The fair value of the earn-out was estimated using a discounted cash flow model. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. (See Note 11, “Fair Value Measurements” in Item 8- “Financial Statements and Supplementary Data” for the definition of a Level 3 instrument.) Key assumptions in determining the fair value of the earn-out include the discount rate and revenue and EBITDA projections for Fiscals 2013 and 2014.
Cash used for financing activities totaled $363 million compared to $483 million last year.
Proceeds from long-term debt were $1.91 billion in the current year and $230 million in the prior year. During the fourth quarter of Fiscal 2012, the Company issued $300 million1.50% Notes due 2017 and $300 million2.85% Notes due 2022. During the second quarter of Fiscal 2012, the Company issued $300 million2.00% Notes due 2016 and $400 million3.125% Notes due 2021. During the first quarter of Fiscal 2012, the Company issued $500 million of private placement notes at an average interest rate of 3.48% with maturities of three, five, seven and ten years. Additionally, during the first quarter of Fiscal 2012, the Company issued $100 million of private placement notes at an average interest rate of 3.38% with maturities of five and seven years. The prior year proceeds relate to a variable rate, three-year 16 billion Japanese yen denominated credit agreement entered into in the third quarter of Fiscal 2011which was swapped to $193 million and the interest rate was fixed at 2.66%.
The current year proceeds discussed above were used for the repayment of commercial paper and to pay off the Company's $750 million of notes which matured on July 15, 2011 and $600 million notes which matured on March 15, 2012. Overall, payments on long-term debt were $1.44 billion in the current year compared to $46 million in the prior year. The prior year proceeds discussed above were used in the funding of the Foodstar acquisition and for general corporate purposes.
Net payments on commercial paper and short-term debt were $43 million this year compared to $193 million in the prior year.
Cash payments for treasury stock purchases, net of cash from option exercises, used $119 million of cash in the current year as the Company purchased 3.9 million shares of stock at a total cost of $202 million, in-line with its strategy to hold fully diluted shares outstanding flat. Cash proceeds from option exercises, net of treasury stock purchases, provided $85 million of cash in the prior year. During Fiscal 2011, the Company purchased 1.4 million shares of stock at a total cost of $70 million.
Dividend payments totaled $619 million this year, compared to $580 million for the same period last year, reflecting an increase in the annualized dividend per common share to $1.92.
During the second quarter of Fiscal 2012, the Company acquired an additional 10% interest in P.T. Heinz ABC Indonesia for $55 million. P.T. Heinz ABC Indonesia is an Indonesian subsidiary of the Company that manufacturers Asian sauces and condiments as well as juices and syrups. Prior to the transaction, the Company owned 65% of this business. During Fiscal 2011, $6 million of cash was paid for the purchase of the remaining 21% interest in Heinz UFE Ltd., a Chinese subsidiary of the Company that manufactures infant feeding products.
During the first quarter of Fiscal 2012, the Company modified its $1.2 billion credit agreement to increase the available borrowings under the facility to $1.5 billion as well as to extend its maturity date from April 2012 to June 2016. The $1.5 billion credit agreement supports the Company's commercial paper borrowings. As a result, the commercial paper borrowings, if any, are classified as long-term debt based upon the Company's intent and ability to refinance these borrowings on a long-term basis. The Company has historically maintained a commercial paper program that is used to fund operations in the U.S., principally within fiscal quarters. There were no commercial paper borrowings outstanding at April 29, 2012. The Company's average commercial paper borrowings during the fourth quarter of Fiscal 2012 was approximately $700 million and the maximum amount of commercial paper borrowings outstanding during the fourth quarter of Fiscal 2012 was $880 million. The Company's commercial paper maturities are funded principally through new issuances and are repaid by quarter-end using cash from operations and overseas cash which is available for use in the U.S. on a short-term basis without being subject to U.S. tax. In addition, the Company has $500 million of foreign lines of credit available at April 29, 2012. Certain of the Company's debt agreements contain customary covenants, including a leverage ratio covenant. The Company was in compliance with all of its debt covenants as of April 29, 2012. In anticipation of these Fiscal 2012 modifications above, the Company terminated a $500 million credit agreement during April 2011.
On August 6, 2009, H.J. Heinz Finance Company ("HFC") issued $681 million of 7.125% notes due 2039, and paid $218 million of cash, in exchange for $681 million of its outstanding dealer remarketable securities ("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, were accounted for as a reduction in the book value of the debt, and are being 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 13, “Derivative Financial Instruments and Hedging Activities” in Item 8-“Financial Statements and Supplementary Data” for additional information.)
On December 1, 2011, the Company remarketed the remaining $119 million remarketable securities. The next remarketing is scheduled for December 1, 2014. If these 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 these 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. Also on December 1, 2011, the Company entered into a three year total rate of return swap with a notional amount of $119 million. The swap has not been designated as a hedge, but will have the economic impact of reducing a portion of the interest cost related to the remarketable securities. (See Note 13, “Derivative Financial Instruments and Hedging Activities” in Item 8- “Financial Statements and Supplementary Data” for additional information.)
At April 29, 2012, the Company had total debt of $5.03 billion (including $128 million relating to the hedge accounting adjustments) and cash and cash equivalents of $1.33 billion. Total debt balances have increased since prior year end due to the items discussed above.
At April 29, 2012, approximately $1.2 billion of cash and short-term investments was held by international subsidiaries whose undistributed earnings are considered permanently reinvested. Our intent is to reinvest these funds in our international operations and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. If we decide at a later date to repatriate these funds to the U.S., the Company would be required to provide taxes on these amounts based on the applicable U.S. tax rates net of credits for foreign taxes already paid.
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 16.8% in Fiscal 2012, 19.3% in Fiscal 2011, and 17.8% in Fiscal 2010. Fiscal 2012 ROIC was unfavorably impacted by 240 basis points from charges for productivity initiatives and Fiscal 2012 and 2011 ROIC was unfavorably impacted by 120 and 60 basis points, respectively, as a result of the Quero and Foodstar acquisitions. Therefore, excluding these impacts, ROIC would have improved 50 basis points in Fiscal 2012 compared to 2011 which is largely due to higher earnings excluding charges for productivity initiatives in Fiscal 2012 compared to 2011. The increase in ROIC in Fiscal 2011 compared to Fiscal 2010 is largely due to higher earnings and reduced debt levels partially offset by higher equity reflecting the impact of cumulative translation adjustments. Fiscal 2010 ROIC was negatively impacted by 90 basis points for the losses on discontinued operations.
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, dividends to shareholders, debt maturities, acquisitions and share repurchases. 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.
On May 24, 2012, the Company announced that its Board of Directors approved a 7.3% increase in the quarterly dividend on common stock from 48 cents to 51.5 cents, an annual indicative rate of $2.06 per share for Fiscal 2013, effective with the July 2012 dividend payment. Fiscal 2013 dividend payments are expected to be approximately $664 million.
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 29, 2012.
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | |
| | 2013 | | 2014-2015 | | 2016-2017 | | 2018
Forward | | Total |
| | (In thousands) |
Long Term Debt(1) | $ | 436,210 |
| | $ | 1,490,363 |
| | $ | 1,081,656 |
| | $ | 5,529,263 |
| | $ | 8,537,492 |
|
| Capital Lease Obligations | 9,208 |
| | 19,463 |
| | 19,522 |
| | 17,707 |
| | 65,900 |
|
| Operating Leases | 96,385 |
| | 137,253 |
| | 86,009 |
| | 172,877 |
| | 492,524 |
|
| Purchase Obligations | 985,678 |
| | 676,159 |
| | 92,989 |
| | 28,013 |
| | 1,782,839 |
|
| Other Long Term Liabilities Recorded on the Balance Sheet | 150,650 |
| | 398,228 |
| | 304,661 |
| | 316,651 |
| | 1,170,190 |
|
| Total | $ | 1,678,131 |
| | $ | 2,721,466 |
| | $ | 1,584,837 |
| | $ | 6,064,511 |
| | $ | 12,048,945 |
|
| |
(1) | Amounts include expected cash payments for interest on fixed rate long-term debt. Due to the uncertainty of forecasting expected variable rate interest payments, those amounts are not included in the table. |
Other long-term liabilities primarily consist of certain specific incentive compensation arrangements and pension and postretirement benefit commitments. Long-term liabilities related to income taxes and insurance accruals included on the consolidated balance sheet are excluded from the table above as the Company is unable to estimate the timing of the payments for these items.
At April 29, 2012, 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 $81 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 any significant 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 29, 2012, the Company was a party to two operating leases for buildings and equipment under which the Company has guaranteed supplemental payment obligations of approximately $134 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 $162 million and $29 million of U.S. trade receivables sold through an accounts receivable securitization program that are not recognized on the balance sheet as of April 29, 2012 and April 27, 2011, respectively. In addition, the Company acted as servicer for approximately $206 million and $146 million of trade receivables which were sold to unrelated third parties without recourse as of April 29, 2012 and April 27, 2011, respectively.
No significant credit guarantees existed between the Company and third parties as of April 29, 2012.
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:
|
| | | | | | | | | | | | | |
| | Aggregate Notional Amount | | Net Unrealized Gains/(Losses) |
| | April 29, 2012 |
| April 27, 2011 | | April 29, 2012 | | April 27, 2011 |
| | (In millions) |
| Purpose of Hedge: | |
| | |
| | |
| | |
|
| Intercompany cash flows | $ | 1,090 |
| | 1,031 |
| | $ | 13 |
| | 29 |
|
| Forecasted purchases of raw materials and finished goods and foreign currency denominated obligations | 578 |
| | 726 |
| | (5 | ) | | (32 | ) |
| Forecasted sales and foreign currency denominated assets | 245 |
| | 104 |
| | 9 |
| | 12 |
|
| | $ | 1,913 |
| | 1,861 |
| | $ | 17 |
| | 9 |
|
As of April 29, 2012, the Company’s foreign currency contracts mature within three 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 13, “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 $5.03 billion (including $128 million relating to hedge accounting adjustments) and $4.61 billion (including $151 million relating to hedge accounting adjustments) at April 29, 2012 and April 27, 2011, respectively. The Company’s debt obligations are summarized in Note 8, “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 29, 2012, a variance of 1/8% in the related interest rate would cause annual interest expense related to this debt to change by approximately $0.2 million. The following table presents additional information related to interest rate contracts designated as fair value hedges by the Company:
|
| | | | | | | |
| | April 29, 2012 | | April 27, 2011 |
| | (Dollars in millions) |
| Pay floating swaps—notional amount | $ | 160 |
| | $ | 1,510 |
|
| Net unrealized gains | $ | 36 |
| | $ | 55 |
|
| Weighted average maturity (years) | 8.2 |
| | 1.4 |
|
| Weighted average receive rate | 6.09 | % | | 6.30 | % |
| Weighted average pay rate | 1.57 | % | | 1.32 | % |
The Company entered into a three-year total rate of return swap with an unaffiliated international financial institution during the third quarter of Fiscal 2012 with a notional amount of $119 million. This instrument is being used as an economic hedge to reduce the interest cost related to the Company's $119 million remarketable securities. The swap is being accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of interest income. During the fiscal year ended April 29, 2012, the Company recorded a $0.1 million reduction in interest income, representing changes in the fair value of the swap and interest earned on the arrangement. Net unrealized gains totaled $0.2 million as of April 29, 2012. In connection with this swap, the Company is required to maintain a restricted cash collateral balance of $34 million with the counterparty for the term of the swap. See Note 13, “Derivative Financial Instruments and Hedging Activities” in Item 8-“Financial Statements and Supplementary Data” for additional information.
The Company had outstanding cross-currency interest rate swaps with a total notional amount of $386 million and $377 million as of April 29, 2012 and April 27, 2011, respectively, 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 gains related to these swaps totaled $20 million and $9 million as of April 29, 2012 and April 27, 2011, respectively. These contracts are scheduled to mature in Fiscal 2013 and 2014.
Effect of Hypothetical 10% Fluctuation in Market Prices: As of April 29, 2012, 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:
|
| | | |
| | Fair Value Effect |
| | (In millions) |
| Foreign currency contracts | $ | 145 |
|
| Interest rate swap contracts | $ | 3 |
|
| Cross-currency interest rate swaps | $ | 40 |
|
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
The Company applies highly inflationary accounting to its business in Venezuela. 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 official exchange rate between the Venezuelan bolivar fuerte and the U.S. dollar and the amount of net monetary assets and liabilities included in our subsidiary's balance sheet, which was $100 million at April 29, 2012.
The Venezuelan government recently announced that it will be instituting price controls on a number of food and personal care products sold in the country. Such controls could impact the products that the Company currently sells within this country. In Fiscal 2012, sales in Venezuela represented less than 3% of the Company's total sales.
Recently Issued Accounting Standards
See Note 2 to the Consolidated Financial Statements in Item 8-“Financial Statements and Supplementary Data” of this Form 10-K.
Non-GAAP Measures
Included in this report are measures of financial performance that are not defined by generally accepted accounting principles in the United States (“GAAP”). Each of the measures is used in reporting to the Company's executive management and as a component of the Board of Directors' measurement of the Company's performance for incentive compensation purposes. Management anddiscussions, the Board of Directors believe that these measures provide useful information to investors, and include these measureshas included such CD&A in other communications to investors.
For each of these non-GAAP financial measures, a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure has been provided. In addition, an explanation of why management believes the non-GAAP measure provides useful information to investors and any additional purposes for which management uses the non-GAAP measure are provided below. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure.
Results Excluding Charges for Productivity Initiatives
Management believes that this measure provides useful information to investors because it is the profitability measure used to evaluate earnings performance on a comparable year-over-year basis. The adjustments are charges for non-recurring productivity initiatives that, in management's judgment, significantly affect the year-over-year assessment of operating results. See the above “Productivity Initiatives” section for further explanation of these charges and the “Executive Overview” section above for the reconciliation of the Company's results excluding charges for productivity initiatives to the relevant GAAP measure.
Organic Sales Growth
Organic sales growth is a non-GAAP measure that is defined as either volume plus price or total sales growth excluding the impact of foreign exchange and acquisitions and divestitures. This measure is utilized by senior management to provide investors with a more complete understanding of underlying sales trends by providing sales growth on a consistent basis. The limitation of this measure is its exclusion of the impact of foreign exchange and acquisitions and divestitures. |
| | | | | | | | | | | | |
| | | Organic Sales Growth | + | Foreign Exchange | + | Acquisitions/ Divestitures | = | Total Net Sales Change |
| FY12 Total Company | | 3.5 | % | | 1.8 | % | | 3.5 | % | | 8.8 | % |
| FY12 global ketchup | | 8.0 | % | | 0.5 | % | | 1.2 | % | | 9.7 | % |
| FY12 Emerging Markets | | 16.4 | % | | (0.4 | )% | | 24.9 | % | | 40.9 | % |
| FY12 Top 15 brands | | 5.0 | % | | 1.7 | % | | 5.6 | % | | 12.3 | % |
Operating Free Cash Flow
Operating free cash flow is defined by the Company as cash flow from operations less capital expenditures net of proceeds from disposal of property, plant and equipment. This measure is utilized by senior management and the Board of Directors to gauge the Company's business operating performance, including the progress of management to profitably monetize low return assets. The limitation of operating free cash flow is that it adjusts for cash used for capital expenditures and cash received from disposals of property, plant and equipment, the net of which is no longer available to the Company for other purposes. Management compensates for this limitation by using the GAAP operating cash flow number as well. Operating free cash flow does not represent residual cash flow available for discretionary expenditures and does not provide insight to the entire scope of the historical cash inflows or outflows of the Company's operations that are captured in the other cash flow measures reported in the statement of cash flows.
|
| | | |
Total Company (in millions) | 2012 |
| Cash provided by operating activities | $ | 1,493.1 |
|
| Capital expenditures | (418.7 | ) |
| Proceeds from disposals of property, plant and equipment | 9.8 |
|
| Operating Free Cash Flow | $ | 1,084.2 |
|
| Cash paid for productivity initiatives | 121.9 |
|
| Operating Free Cash Flow excluding cash paid for productivity initiatives | $ | 1,206.1 |
|
(Totals may not add due to rounding)
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 GAAP. 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.
Long-lived Assets, including Property, Plant and Equipment—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 long-lived assets, including intangibles with finite useful lives, and property, plant and equipment, whenever circumstances change such that the recorded value of an asset, or asset group, may not be recoverable. Factors that may affect recoverability include changes to the planned use of the asset and the closing of facilities. The estimates implicit in a recoverability test require significant judgment on the part of management, and require 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. When the carrying value of an asset, or asset group, exceeds the future undiscounted cash flows, an impairment is indicated and the asset is written down to its fair value.
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, lower growth rates, loss of key personnel, and changes in regulation, 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. The Company performs its impairment tests of goodwill at the reporting unit level. The Company has 19 reporting units globally that have assigned goodwill and are thus required to be evaluated for impairment. The Company tests goodwill for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass this qualitative assessment for some or all of its reporting units and perform a two-step quantitative test.
The Company's estimates of fair value when testing for impairment of 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 discounted cash flow 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 among the reporting units, but generally, higher assumed growth rates and discount rates were utilized for tests of reporting units for which the principal market is an emerging market compared to those for which the principal market is a developed market. For each of the reporting units tested quantitatively, and for indefinite-lived intangible assets, 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 7% to 15% in Fiscal 2012. 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 2012, 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. We performed a qualitative assessment over 11 of the Company's 19 reporting units. Factors considered as part of the qualitative assessment process include reporting unit specific operating results as well as industry, market and general economic conditions. In addition, the results of the Fiscal 2011 quantitative test performed for these 11 reporting units were considered, and these tests each indicated that the fair values of these reporting units significantly exceeded their carrying amounts. We concluded that there were no significant events in Fiscal 2012 which had a material impact on the fair values of these reporting units.
For the 8 reporting units which were tested quantitatively, the fair values of each reporting unit significantly exceeded their carrying values, with the exception of one reporting unit, where the fair value exceeded the carrying value of its net assets by 9%. The goodwill associated with this reporting unit was $40 million as of April 29, 2012.
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, $27 million, and $25 million for fiscal years 2012, 2011, and 2010, respectively, which reflected expected return on plan assets of $235 million, $229 million, and $211 million, respectively. The Company contributed $23 million to its pension plans in Fiscal 2012 compared to $22 million in Fiscal 2011 and $540 million in Fiscal 2010. The Company expects to contribute approximately $80 million to its pension plans in Fiscal 2013.
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 8.2% for the years ended April 29, 2012 and April 27, 2011, and 8.1% for the year ended April 28, 2010. For purposes of calculating Fiscal 2013 expense, the weighted average rate of return will be 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 29, 2012 decreased to 4.8% from 5.5% as of April 27, 2011.
Deferred gains and losses result from actual experience differing from expected financial and actuarial assumptions. The pension plans currently have a deferred loss amount of $1.17 billion at April 29, 2012. 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’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 actual and target asset allocation at April 29, 2012 and April 27, 2011 were as follows:Form 10-K Amendment.
|
| | | | | | | | | | | | |
| | | Plan Assets at | | Target Allocation at |
| Asset Category | | 2012 | | 2011 | | 2012 | | 2011 |
| Equity securities | | 61 | % | | 62 | % | | 59 | % | | 58 | % |
| Debt securities | | 31 | % | | 32 | % | | 32 | % | | 32 | % |
| Real estate | | 7 | % | | 3 | % | | 8 | % | | 9 | % |
| Other | | 1 | % | | 3 | % | | 1 | % | | 1 | % |
| | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
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 29, 2012 was determined using an average initial health care trend rate of 7.1% which gradually decreases to an average ultimate rate of 4.8% in 5 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 $18 million. A one percentage point decrease in the assumed health care cost trend rates would decrease the service and interest cost by $1 million and decrease the benefit obligation by $16 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 will have both immediate and long-term ramifications for many employers, including the Company, that provide retiree health benefits.
Sensitivity of Assumptions
If we assumed a 100 basis point change in the following rates, the Company’s Fiscal 2012 projected benefit obligation and expense would increase (decrease) by the following amounts (in millions):
|
| | | |
| | 100 Basis Point |
| | Increase | | Decrease |
| Pension benefits | | | |
| Discount rate used in determining projected benefit obligation | $(339) | | $406 |
| Discount rate used in determining net pension expense | $(33) | | $36 |
| Long-term rate of return on assets used in determining net pension expense | $(29) | | $29 |
| Other benefits | | | |
| Discount rate used in determining projected benefit obligation | $(21) | | $24 |
| Discount rate used in determining net benefit expense | $(2) | | $1 |
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 other non-current liabilities.
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.
The Company has a significant amount of undistributed earnings of foreign subsidiaries that are considered to be indefinitely reinvested. Our intent is to continue to reinvest these earnings to support our priorities for growth in international markets and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. If we decided at a later date to repatriate these funds to the U.S., the Company would be required to provide taxes on these amounts based on the applicable U.S. tax rates net of credits for foreign taxes already paid. The Company has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable. The Company believes it is not practicable to calculate the deferred tax liability associated with these undistributed earnings as there is a significant amount of uncertainty with respect to the tax impact resulting from the significant judgment required to analyze the amount of foreign tax credits attributable to the earnings, the potential timing of any distributions, as well as the local withholding tax and other indirect tax consequences that may arise due to the potential distribution of these earnings.
Input Costs
In general, the effects of cost inflation may be experienced by the Company in future periods. During Fiscals 2012, 2011, and 2010, the Company experienced wide-spread inflationary increases in commodity input costs, which is expected to continue in Fiscal 2013. Price increases and continued productivity improvements are expected to more than offset these cost increases.
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, 2012 approximated 33,400. The closing price of the common stock on The New York Stock Exchange composite listing on April 29, 2012 was $53.16.
Stock price information for common stock by quarter follows:
|
| | | | | | | |
| | Stock Price Range |
| | High | | Low |
| 2012 | |
| | |
|
| First | $ | 55.00 |
| | $ | 50.95 |
|
| Second | 53.46 |
| | 48.17 |
|
| Third | 54.82 |
| | 49.75 |
|
| Fourth | 54.83 |
| | 51.51 |
|
| 2011 | |
| | |
|
| First | $ | 47.48 |
| | $ | 40.00 |
|
| Second | 49.95 |
| | 44.35 |
|
| Third | 50.77 |
| | 47.51 |
|
| Fourth | 51.38 |
| | 46.99 |
|
| |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
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 22 through 23.
| |
Item 8. | Financial Statements and Supplementary Data. |
TABLE OF CONTENTS
Report of Management on Internal Control over Financial Reporting
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. Based on this evaluation, 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 29, 2012, as stated in their report which appears herein.
|
|
/s/ William R. Johnson |
Chairman, President and
Chief Executive Officer |
|
|
/s/ Arthur B. Winkleblack |
Executive Vice President and
Chief Financial Officer
|
June 15, 2012
Report of Independent Registered Public Accounting Firm
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 29, 2012 and April 27, 2011, and the results of their operations and their cash flows for each of the three years in the period ended April 29, 2012 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 29, 2012, 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.
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 15, 2012
H. J. Heinz Company and Subsidiaries
Consolidated Statements of Income
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29, 2012 | | April 27, 2011 | | April 28, 2010 |
| | (52 1/2 Weeks) | | (52 Weeks) | | (52 Weeks) |
| | (In thousands, except per share amounts) |
| Sales | $ | 11,649,079 |
| | $ | 10,706,588 |
| | $ | 10,494,983 |
|
| Cost of products sold | 7,649,549 |
| | 6,754,048 |
| | 6,700,677 |
|
| Gross profit | 3,999,530 |
| | 3,952,540 |
| | 3,794,306 |
|
| Selling, general and administrative expenses | 2,548,362 |
| | 2,304,350 |
| | 2,235,078 |
|
| Operating income | 1,451,168 |
| | 1,648,190 |
| | 1,559,228 |
|
| Interest income | 34,615 |
| | 22,565 |
| | 45,137 |
|
| Interest expense | 294,104 |
| | 275,398 |
| | 295,711 |
|
| Other expense, net | (8,236 | ) | | (21,188 | ) | | (18,200 | ) |
| Income from continuing operations before income taxes | 1,183,443 |
| | 1,374,169 |
| | 1,290,454 |
|
| Provision for income taxes | 243,535 |
| | 368,221 |
| | 358,514 |
|
| Income from continuing operations | 939,908 |
| | 1,005,948 |
| | 931,940 |
|
| Loss from discontinued operations, net of tax | — |
| | — |
| | (49,597 | ) |
| Net income | 939,908 |
| | 1,005,948 |
| | 882,343 |
|
| Less: Net income attributable to the noncontrolling interest | 16,749 |
| | 16,438 |
| | 17,451 |
|
| Net income attributable to H. J. Heinz Company | $ | 923,159 |
| | $ | 989,510 |
| | $ | 864,892 |
|
| Income/(loss) per common share: | |
| | |
| | |
|
| Diluted | |
| | |
| | |
|
| Continuing operations attributable to H. J. Heinz Company common shareholders | $ | 2.85 |
| | $ | 3.06 |
| | $ | 2.87 |
|
| Discontinued operations attributable to H. J. Heinz Company common shareholders | — |
| | — |
| | (0.16 | ) |
| Net income attributable to H. J. Heinz Company common shareholders | $ | 2.85 |
| | $ | 3.06 |
| | $ | 2.71 |
|
| Average common shares outstanding—diluted | 323,321 |
| | 323,042 |
| | 318,113 |
|
| Basic | |
| | |
| | |
|
| Continuing operations attributable to H. J. Heinz Company common shareholders | $ | 2.87 |
| | $ | 3.09 |
| | $ | 2.89 |
|
| Discontinued operations attributable to H. J. Heinz Company common shareholders | — |
| | — |
| | (0.16 | ) |
| Net income attributable to H. J. Heinz Company common shareholders | $ | 2.87 |
| | $ | 3.09 |
| | $ | 2.73 |
|
| Average common shares outstanding—basic | 320,686 |
| | 320,118 |
| | 315,948 |
|
| Cash dividends per share | $ | 1.92 |
| | $ | 1.80 |
| | $ | 1.68 |
|
| Amounts attributable to H. J. Heinz Company common shareholders: | |
| | |
| | |
|
| Income from continuing operations, net of tax | $ | 923,159 |
| | $ | 989,510 |
| | $ | 914,489 |
|
| Loss from discontinued operations, net of tax | — |
| | — |
| | (49,597 | ) |
| Net income | $ | 923,159 |
| | $ | 989,510 |
| | $ | 864,892 |
|
See Notes to Consolidated Financial Statements
H. J. Heinz Company and Subsidiaries
Consolidated Balance Sheets
|
| | | | | | | |
| | April 29,
2012 | | April 27,
2011 |
| | (In thousands) |
| Assets | |
| | |
|
| Current assets: | |
| | |
|
| Cash and cash equivalents | $ | 1,330,441 |
| | $ | 724,311 |
|
| Trade receivables (net of allowances: 2012—$10,680 and 2011—$10,909) | 815,600 |
| | 1,039,064 |
|
| Other receivables (net of allowances: 2012—$607 and 2011—$503) | 177,910 |
| | 225,968 |
|
| Inventories: | |
| | |
|
| Finished goods and work-in-process | 1,082,317 |
| | 1,165,069 |
|
| Packaging material and ingredients | 247,034 |
| | 286,477 |
|
| Total inventories | 1,329,351 |
| | 1,451,546 |
|
| Prepaid expenses | 174,795 |
| | 159,521 |
|
| Other current assets | 54,139 |
| | 153,132 |
|
| Total current assets | 3,882,236 |
| | 3,753,542 |
|
| Property, plant and equipment: | |
| | |
|
| Land | 81,185 |
| | 85,457 |
|
| Buildings and leasehold improvements | 1,009,379 |
| | 1,019,311 |
|
| Equipment, furniture and other | 4,175,997 |
| | 4,119,947 |
|
| | 5,266,561 |
| | 5,224,715 |
|
| Less accumulated depreciation | 2,782,423 |
| | 2,719,632 |
|
| Total property, plant and equipment, net | 2,484,138 |
| | 2,505,083 |
|
| Other non-current assets: | |
| | |
|
| Goodwill | 3,185,527 |
| | 3,298,441 |
|
| Trademarks, net | 1,090,892 |
| | 1,156,221 |
|
| Other intangibles, net | 407,802 |
| | 442,563 |
|
| Other non-current assets | 932,698 |
| | 1,074,795 |
|
| Total other non-current assets | 5,616,919 |
| | 5,972,020 |
|
| Total assets | $ | 11,983,293 |
| | $ | 12,230,645 |
|
See Notes to Consolidated Financial Statements
H. J. Heinz Company and Subsidiaries
Consolidated Balance Sheets
|
| | | | | | | |
| | April 29,
2012 | | April 27,
2011 |
| | (In thousands) |
| Liabilities and Equity | |
| | |
|
| Current liabilities: | |
| | |
|
| Short-term debt | $ | 46,460 |
| | $ | 87,800 |
|
| Portion of long-term debt due within one year | 200,248 |
| | 1,447,132 |
|
| Trade payables | 1,202,398 |
| | 1,337,620 |
|
| Other payables | 146,414 |
| | 162,047 |
|
| Accrued marketing | 303,132 |
| | 313,389 |
|
| Other accrued liabilities | 647,769 |
| | 715,147 |
|
| Income taxes | 101,540 |
| | 98,325 |
|
| Total current liabilities | 2,647,961 |
| | 4,161,460 |
|
| Long-term debt and other non-current liabilities: | |
| | |
|
| Long-term debt | 4,779,981 |
| | 3,078,128 |
|
| Deferred income taxes | 817,928 |
| | 897,179 |
|
| Non-pension post-retirement benefits | 231,452 |
| | 216,172 |
|
| Other non-current liabilities | 581,390 |
| | 570,571 |
|
| Total long-term debt and other non-current liabilities | 6,410,751 |
| | 4,762,050 |
|
| Redeemable noncontrolling interest | 113,759 |
| | 124,669 |
|
| Equity: | |
| | |
|
| Capital stock: | |
| | |
|
Third cumulative preferred, $1.70 first series, $10 par value(1) | 61 |
| | 69 |
|
| Common stock, 431,096 shares issued, $0.25 par value | 107,774 |
| | 107,774 |
|
| | 107,835 |
| | 107,843 |
|
| Additional capital | 594,608 |
| | 629,367 |
|
| Retained earnings | 7,567,278 |
| | 7,264,678 |
|
| | 8,269,721 |
| | 8,001,888 |
|
| Less: | |
| | |
|
| Treasury shares, at cost (110,870 shares at April 29, 2012 and 109,818 shares at April 27, 2011) | 4,666,404 |
| | 4,593,362 |
|
| Accumulated other comprehensive loss | 844,728 |
| | 299,564 |
|
| Total H.J. Heinz Company shareholders’ equity | 2,758,589 |
| | 3,108,962 |
|
| Noncontrolling interest | 52,233 |
| | 73,504 |
|
| Total equity | 2,810,822 |
| | 3,182,466 |
|
| Total liabilities and equity | $ | 11,983,293 |
| | $ | 12,230,645 |
|
| |
(1) | The preferred stock outstanding is convertible at a rate of one share of preferred stock into 15 shares of common stock. The Company can redeem the stock at $28.50 per share. As of April 29, 2012, there were authorized, but unissued, 2,200 shares of third cumulative preferred stock for which the series had not been designated. |
See Notes to Consolidated Financial Statements
H. J. Heinz Company and Subsidiaries
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | |
| | April 29, 2012 | | April 27, 2011 | | April 28, 2010 | |
| | Shares | | Dollars | | Shares | | Dollars | | Shares | | Dollars | |
| | (In thousands, expect per share amounts) |
| PREFERRED STOCK | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at beginning of year | 7 |
| | $ | 69 |
| | 7 |
| | $ | 70 |
| | 7 |
| | $ | 70 |
| |
| Conversion of preferred into common stock | (1 | ) | | (8 | ) | | — |
| | (1 | ) | | — |
| | — |
| |
| Balance at end of year | 6 |
| | 61 |
| | 7 |
| | 69 |
| | 7 |
| | 70 |
| |
| Authorized shares- April 29, 2012 | 6 |
| | |
| | |
| | |
| | |
| | |
| |
| COMMON STOCK | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at beginning of year | 431,096 |
| | 107,774 |
| | 431,096 |
| | 107,774 |
| | 431,096 |
| | 107,774 |
| |
| Balance at end of year | 431,096 |
| | 107,774 |
| | 431,096 |
| | 107,774 |
| | 431,096 |
| | 107,774 |
| |
| Authorized shares- April 29, 2012 | 600,000 |
| | |
| | |
| | |
| | |
| | |
| |
| ADDITIONAL CAPITAL | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at beginning of year | |
| | 629,367 |
| | |
| | 657,596 |
| | |
| | 737,917 |
| |
| Conversion of preferred into common stock | |
| | (539 | ) | | |
| | (39 | ) | | |
| | (29 | ) | |
| Stock options exercised, net of shares tendered for payment | |
| | (15,220 | ) | (3) | |
| | (26,482 | ) | (3) | |
| | (21,717 | ) | (3) |
| Stock option expense | |
| | 10,864 |
| | |
| | 9,447 |
| | |
| | 7,897 |
| |
| Restricted stock unit activity | |
| | 4,305 |
| | |
| | (8,119 | ) | | |
| | (9,698 | ) | |
Purchase of subsidiary shares from noncontrolling interests(1) | |
| | (34,483 | ) | | |
| | (2,411 | ) | | |
| | (54,209 | ) | |
Other, net(2) | |
| | 314 |
| | |
| | (625 | ) | | |
| | (2,565 | ) | |
| Balance at end of year | |
| | 594,608 |
| | |
| | 629,367 |
| | |
| | 657,596 |
| |
| RETAINED EARNINGS | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at beginning of year | |
| | 7,264,678 |
| | |
| | 6,856,033 |
| | |
| | 6,525,719 |
| |
| Net income attributable to H.J. Heinz Company | |
| | 923,159 |
| | |
| | 989,510 |
| | |
| | 864,892 |
| |
| Cash dividends: | |
| | |
| | |
| | |
| | |
| | |
| |
| Preferred (per share $1.70 per share in 2012, 2011 and 2010) | |
| | (9 | ) | | |
| | (12 | ) | | |
| | (9 | ) | |
| Common (per share $1.92, $1.80, and $1.68 in 2012, 2011 and 2010, respectively) | |
| | (619,095 | ) | | |
| | (579,606 | ) | | |
| | (533,543 | ) | |
Other(4) | |
| | (1,455 | ) | | |
| | (1,247 | ) | | |
| | (1,026 | ) | |
| Balance at end of year | |
| | 7,567,278 |
| | |
| | 7,264,678 |
| | |
| | 6,856,033 |
| |
| TREASURY STOCK | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at beginning of year | (109,819 | ) | | (4,593,362 | ) | | (113,404 | ) | | (4,750,547 | ) | | (116,237 | ) | | (4,881,842 | ) | |
| Shares reacquired | (3,860 | ) | | (201,904 | ) | | (1,425 | ) | | (70,003 | ) | | — |
| | — |
| |
| Conversion of preferred into common stock | 12 |
| | 547 |
| | 1 |
| | 40 |
| | 1 |
| | 29 |
| |
| Stock options exercised, net of shares tendered for payment | 2,298 |
| | 105,144 |
| | 4,495 |
| | 203,196 |
| | 2,038 |
| | 94,315 |
| |
| Restricted stock unit activity | 303 |
| | 14,087 |
| | 296 |
| | 13,756 |
| | 470 |
| | 21,864 |
| |
Other, net(2) | 195 |
| | 9,084 |
| | 218 |
| | 10,196 |
| | 324 |
| | 15,087 |
| |
| Balance at end of year | (110,871 | ) | | $ | (4,666,404 | ) | | (109,819 | ) | | $ | (4,593,362 | ) | | (113,404 | ) | | $ | (4,750,547 | ) | |
| |
(1) | See Note No. 5 for further details. |
| |
(2) | Includes activity of the Global Stock Purchase Plan. |
| |
(3) | Includes income tax benefit resulting from exercised stock options. |
| |
(4) | Includes unpaid dividend equivalents on restricted stock units. |
| |
(5) | Comprised of unrealized translation adjustment of $(23,152), pension and post-retirement benefits net prior service cost of $(12,134) and net losses of $(816,060), and deferred net losses on derivative financial instruments of $6,618. |
See Notes to Consolidated Financial Statements
H. J. Heinz Company and Subsidiaries
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | |
| | April 29, 2012 | | April 27, 2011 | | April 28, 2010 | |
| | Shares | | Dollars | | Shares | | Dollars | | Shares | | Dollars | |
| | (In thousands, expect per share amounts) | |
| OTHER COMPREHENSIVE (LOSS)/INCOME | | | |
| | | | |
| | | | |
| |
| Balance at beginning of year | | | $ | (299,564 | ) | | | | $ | (979,581 | ) | | | | $ | (1,269,700 | ) | |
| Net pension and post-retirement benefit (losses)/gains | | | (258,067 | ) | | | | 77,355 |
| | | | 78,871 |
| |
| Reclassification of net pension and post-retirement benefit losses to net income | | | 56,813 |
| | | | 53,353 |
| | | | 38,903 |
| |
| Unrealized translation adjustments | | | (359,771 | ) | | | | 563,060 |
| | | | 193,600 |
| |
| Net change in fair value of cash flow hedges | | | 30,405 |
| | | | 9,790 |
| | | | (32,488 | ) | |
| Net hedging (gains)/losses reclassified into earnings | | | (14,088 | ) | | | | (21,365 | ) | | | | 13,431 |
| |
Purchase of subsidiary shares from noncontrolling interests(1) | | | (456 | ) | | | | (2,176 | ) | | | | (2,198 | ) | |
| Balance at end of year | | | (844,728 | ) | (5) | | | (299,564 | ) | | | | (979,581 | ) | |
| TOTAL H.J. HEINZ COMPANY SHAREHOLDERS’ EQUITY | | | 2,758,589 |
| | | | 3,108,962 |
| | | | 1,891,345 |
| |
| NONCONTROLLING INTEREST | | | |
| | | | |
| | | | |
| |
| Balance at beginning of year | | | 73,504 |
| | | | 57,151 |
| | | | 59,167 |
| |
| Net income attributable to the noncontrolling interest | | | 15,884 |
| | | | 16,438 |
| | | | 17,451 |
| |
| Other comprehensive income, net of tax: | | | |
| | | | |
| | | | |
| |
| Net pension and post-retirement benefit losses | | | (12 | ) | | | | (57 | ) | | | | (1,266 | ) | |
| Unrealized translation adjustments | | | (5,945 | ) | | | | 4,816 |
| | | | 8,411 |
| |
| Net change in fair value of cash flow hedges | | | (28 | ) | | | | (395 | ) | | | | (788 | ) | |
| Net hedging losses reclassified into earnings | | | 277 |
| | | | 571 |
| | | | 254 |
| |
Purchase of subsidiary shares from noncontrolling interests(1) | | | (19,885 | ) | | | | (1,750 | ) | | | | (5,467 | ) | |
| Dividends paid to noncontrolling interest | | | (11,562 | ) | | | | (3,270 | ) | | | | (20,611 | ) | |
| Balance at end of year | | | 52,233 |
| | | | 73,504 |
| | | | 57,151 |
| |
| TOTAL EQUITY | | | $ | 2,810,822 |
| | | | $ | 3,182,466 |
| | | | $ | 1,948,496 |
| |
| COMPREHENSIVE INCOME | | | |
| | | | |
| | | | |
| |
| Net income | | | $ | 939,908 |
| | | | $ | 1,005,948 |
| | | | $ | 882,343 |
| |
| Other comprehensive income/loss, net of tax: | | | |
| | | | |
| | | | |
| |
| Net pension and post-retirement benefit (losses)/gains | | | (258,079 | ) | | | | 77,298 |
| | | | 77,605 |
| |
| Reclassification of net pension and post-retirement benefit losses to net income | | | 56,813 |
| | | | 53,353 |
| | | | 38,903 |
| |
| Unrealized translation adjustments | | | (377,491 | ) | | | | 567,876 |
| | | | 202,011 |
| |
| Net change in fair value of cash flow hedges | | | 30,377 |
| | | | 9,395 |
| | | | (33,276 | ) | |
| Net hedging (gains)/losses reclassified into earnings | | | (13,811 | ) | | | | (20,794 | ) | | | | 13,685 |
| |
| Total comprehensive income | | | 377,717 |
| | | | 1,693,076 |
| | | | 1,181,271 |
| |
| Comprehensive loss/(income) attributable to the noncontrolling interest | | | 734 |
| | | | (21,373 | ) | | | | (24,062 | ) | |
| Comprehensive income attributable to H.J. Heinz Company | | | $ | 378,451 |
| | | | $ | 1,671,703 |
| | | | $ | 1,157,209 |
| |
| Note: See Footnote explanations on Page 36. | | | |
| | | | |
| | | | |
| |
See Notes to Consolidated Financial Statements
H. J. Heinz Company and Subsidiaries
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29,
2012 | | April 27,
2011 | | April 28,
2010 |
| | (52 1/2 Weeks) | | (52 Weeks) | | (52 Weeks) |
| | (In thousands) |
| Operating activities: | |
| | |
| | |
|
| Net income | $ | 939,908 |
| | $ | 1,005,948 |
| | $ | 882,343 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | |
| | |
| | |
|
| Depreciation | 295,718 |
| | 255,227 |
| | 254,528 |
|
| Amortization | 47,075 |
| | 43,433 |
| | 48,308 |
|
| Deferred tax (benefit)/provision | (94,816 | ) | | 153,725 |
| | 220,528 |
|
| Net losses on divestitures | — |
| | — |
| | 44,860 |
|
| Pension contributions | (23,469 | ) | | (22,411 | ) | | (539,939 | ) |
| Asset write-downs from Fiscal 2012 productivity initiatives | 58,736 |
| | — |
| | — |
|
| Other items, net | 75,375 |
| | 98,172 |
| | 90,938 |
|
| Changes in current assets and liabilities, excluding effects of acquisitions and divestitures: | |
| | |
| | |
|
| Receivables (includes proceeds from securitization) | 171,832 |
| | (91,057 | ) | | 121,387 |
|
| Inventories | 60,919 |
| | (80,841 | ) | | 48,537 |
|
| Prepaid expenses and other current assets | (11,584 | ) | | (1,682 | ) | | 2,113 |
|
| Accounts payable | (72,352 | ) | | 233,339 |
| | (2,805 | ) |
| Accrued liabilities | (20,008 | ) | | (60,862 | ) | | 96,533 |
|
| Income taxes | 65,783 |
| | 50,652 |
| | (5,134 | ) |
| Cash provided by operating activities | 1,493,117 |
| | 1,583,643 |
| | 1,262,197 |
|
| Investing activities: | |
| | |
| | |
|
| Capital expenditures | (418,734 | ) | | (335,646 | ) | | (277,642 | ) |
| Proceeds from disposals of property, plant and equipment | 9,817 |
| | 13,158 |
| | 96,493 |
|
| Acquisitions, net of cash acquired | (3,250 | ) | | (618,302 | ) | | (11,428 | ) |
| Proceeds from divestitures | 3,828 |
| | 1,939 |
| | 18,637 |
|
| Sale of short-term investments | 56,780 |
| | — |
| | — |
|
| Change in restricted cash | (39,052 | ) | | (5,000 | ) | | 192,736 |
|
| Other items, net | (11,394 | ) | | (5,781 | ) | | (5,353 | ) |
| Cash (used for)/provided by investing activities | (402,005 | ) | | (949,632 | ) | | 13,443 |
|
| Financing activities: | |
| | |
| | |
|
| Payments on long-term debt | (1,440,962 | ) | | (45,766 | ) | | (630,394 | ) |
| Proceeds from long-term debt | 1,912,467 |
| | 229,851 |
| | 447,056 |
|
| Net payments on commercial paper and short-term debt | (42,543 | ) | | (193,200 | ) | | (427,232 | ) |
| Dividends | (619,104 | ) | | (579,618 | ) | | (533,552 | ) |
| Purchases of treasury stock | (201,904 | ) | | (70,003 | ) | | — |
|
| Exercise of stock options | 82,714 |
| | 154,774 |
| | 67,369 |
|
| Acquisition of subsidiary shares from noncontrolling interests | (54,824 | ) | | (6,338 | ) | | (62,064 | ) |
| Other items, net | 1,321 |
| | 27,791 |
| | (9,099 | ) |
| Cash used for financing activities | (362,835 | ) | | (482,509 | ) | | (1,147,916 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (122,147 | ) | | 89,556 |
| | (17,616 | ) |
| Net increase in cash and cash equivalents | 606,130 |
| | 241,058 |
| | 110,108 |
|
| Cash and cash equivalents at beginning of year | 724,311 |
| | 483,253 |
| | 373,145 |
|
| Cash and cash equivalents at end of year | $ | 1,330,441 |
| | $ | 724,311 |
| | $ | 483,253 |
|
See Notes to Consolidated Financial Statements
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements
| |
1. | Significant Accounting Policies |
Director Compensation for Fiscal Year:Year 2013
H. J. Heinz Company (the “Company”) operates on a 52-week or 53-week fiscal year end. On March 14, 2012,
Upon the Merger, the membership of the Board of Directors of the Company authorized a changewas revised as otherwise set forth in this Form 10K Amendment. The following table and narrative sets forth the compensation paid to the non-employee directors of the Company in Fiscal Year 2013, but does not reflect the payments that were and will be made to the non-employee directors in connection with the Merger (if any), which is described in detail in the Company's fiscal year end fromdefinitive proxy statement for the Wednesday nearest April 30 toacquisition filed with the Sunday nearest April 30. The changeSEC on March 27, 2013.
Name (a) | Fees Earned Or Paid in Cash ($)(b)(1) | Stock Awards ($)(2)(c) | Option Awards ($)(d) | Non-Equity Incentive Plan Compensation ($)(e) | Change in Pension Value and Nonqualified Deferred Compensation Earnings (3)(f) | All Other Compensation ($)(4)(5)(g) | Total ($)(h) |
| Charles E. Bunch | 100,000 | 181,090 | — | — | — | — | 281,090 |
| Leonard S. Coleman | 95,000 | 181,090 | — | — | — | — | 276,090 |
| John G. Drosdick | 85,000 | 181,090 | — | — | — | — | 266,090 |
| Edith E. Holiday | 94,000 | 181,090 | — | — | — | — | 275,090 |
| Candace Kendle | 85,000 | 181,090 | — | — | — | — | 266,090 |
Franck J. Moison(6) | 28,333 | — | — | — | — | — | 28,333 |
| Dean R. O'Hare | 100,000 | 181,090 | — | — | — | — | 281,090 |
| Nelson Peltz | 94,000 | 181,090 | — | — | — | — | 275,090 |
| Dennis H. Reilley | 94,000 | 181,090 | — | — | — | — | 275,090 |
| Lynn C. Swann | 85,000 | 181,090 | — | — | — | — | 266,090 |
| Thomas J. Usher, Presiding Director | 104,000 | 181,090 | — | — | — | — | 285,090 |
| Michael F. Weinstein | 85,000 | 181,090 | — | — | — | — | 266,090 |
_______________________
| (1) | Amounts reported in column (1) for each of Ms. Holiday, Mr. Peltz, Mr. Reilley, and Mr. Usher include $9,000 in fees paid for their service on the Transaction Committee appointed by the Board of Directors in connection with the acquisition. |
| (2) | Represents the grant date fair value of 3,250 restricted stock units granted to each director on August 31, 2012, at a value of $55.72 per unit. As of April 28, 2013, the aggregate number of stock awards granted to each director who elected to defer the receipt of the award were as follows: Mr. Coleman, 9,750; Mr. Drosdick, 21,750; Ms. Holiday, 28,250; Mr. Reilley, 21,750; Mr. Usher, 28,250; and Mr. Weinstein, 18,750. |
| (3) | See narrative below for description of non-employee director pension. Ms. Holiday is the only currently serving director who is eligible to receive this benefit upon retirement from the Board. |
| (4) | See narrative below for description of the director charitable award program. Ms. Holiday is the only currently serving director who is eligible to participate in this program. The Company made no payments related to this program to or on behalf of Ms. Holiday in FY13. |
| (5) | See narrative below for travel policy and use of corporate aircraft, including personal use, if any. |
| (6) | Mr. Moison was elected to the Board effective January 1, 2013 and received prorated fees for his service from January 1 through April 30, 2013. |
Non-employee directors receive the fiscal year end resulted in Fiscal 2012 changing from a 53 week year to a 52 1/2 week year and was intended to better alignfollowing annual compensation:
| • | $85,000 in cash and 3,250 restricted stock units payable in Common Stock; |
| • | $15,000 retainer for the chairs of the Audit and Management Development and Compensation Committees; and |
| • | $10,000 retainer for the chairs of the Corporate Social Responsibility and Corporate Governance Committees. |
Annual restricted stock unit grants are restricted for six months, during which time directors receive cash dividend equivalents at the Company's financial reporting period with its business partners and production schedules. This change did not have a material impactsame rate as paid on the Company's financial statements. Certain foreign subsidiariesCommon Stock. Non-employee directors may defer some or all of their cash into either a Heinz common stock fund or a cash account and may defer equity compensation into a Company common stock fund. Amounts deferred into Company stock units are credited with additional stock units equal to the dollar amount of dividends paid from time to time. Sums deferred into cash accounts accrue interest calculated periodically at the prime rate. All amounts deferred are paid in stock or in cash, as specified by the director, on a date elected by the director at the time of the deferral. As of Fiscal Year 2013, six directors have closing dates earlier thanelected to defer some or all of their compensation.
Directors are reimbursed for travel to Board of Directors' meetings for their actual out-of-pocket travel cost, up to the Sunday nearest April 30cost of a first-class, commercial airline ticket. The Company may, at its discretion, provide transportation via Company-operated aircraft or third-party charter aircraft. Directors are reimbursed for reasonable expenses incurred while traveling to facilitate timely reporting. Fiscal yearsor from Board of Directors' meetings or while conducting business on behalf of the Company. To the extent a director or a director's spouse uses the Company aircraft for personal travel, the financial statementsdirector will receive imputed income for such use at the Standard Industry Fare Level established by the Internal Revenue Service, and the aggregate incremental cost of such use, if any, will be included herein ended April 29, 2012, April 27, 2011, and April 28, 2010.in the “All Other Compensation” column in the table above.
Principles of Consolidation:
The consolidated financial statements includeCompany has maintained a charitable award program funded by insurance policies on the accountslives of non-employee directors who were members of the Company, all wholly-owned and majority-owned subsidiaries, and any variable interest entities for which we are the primary beneficiary. All intercompany accounts and transactions are eliminated. CertainBoard of Directors prior year amounts have been reclassified to conform with the Fiscal 2012 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 20 for additional information.
Cash Equivalents:
Cash equivalents are defined as highly liquid investments with original maturities of 90 days or less.
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
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
equipment, whenever circumstances change such that the recorded value of an asset may not be recoverable. Factors that may affect recoverability include changes in planned use of the asset 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 during the fourth quarter of each fiscal year. All goodwill is assigned to reporting units, which are primarily one level below our operating segments. The Company performs its impairment tests of goodwill at the reporting unit level. The Company tests goodwill for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. Factors considered1995 as part of the qualitative assessment include entity-specific industry, market and general economic conditions. The Company may electCompany's overall program to bypass this qualitative assessment for some or all of its reporting units and perform a two-step quantitative test. This quantitative test involves estimating a reporting units fair value. The Company's estimates of fair value when testing for impairment of both goodwill and intangible assets with indefinite lives is based on a discounted cash flow model, using a market participant approach,promote charitable giving at 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 totime. Under the customer. This primarily occurs upon delivery ofprogram, following 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 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 enddeath of a period, based principally on historical utilization and redemption rates. Advertising costs are recognized as an expense within selling, general and administrative expenses ifcovered non-employee director, the Company determines that it will receive an identifiable, separable benefit in return fordonate $1,000,000 to qualifying charitable organizations recommended by the consideration paidnon-employee director and it can reasonably estimate the fair value of the benefit identified. 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. The Company performs monthly evaluations of its 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 takenapproved by a customer from amounts otherwise due to the Company. 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. The Company performs 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.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
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.
Stock-based compensation expense is primarily recognized as a component of selling, 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, except as disclosed in Note 11. 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 foreign 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.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
2. | Recently Issued Accounting Standards |
In December 2011, the FASB issued an amendment on disclosures about offsetting assets and liabilities. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. The Company is required to adopt this amendment onreimbursed from the first day of Fiscal 2014 and will provide the disclosures required by this amendment retrospectively for all comparative periods presented. This adoption will only impact the notes to the financial statements and not the financial results.
In September 2011, the FASB issued an amendment to the disclosure requirements for multiemployer pension plans. This amendment requires an employer who participates in multiemployer pension plans to provide additional quantitative and qualitative disclosures to help financial statement users better understand the plans in which an employer participates, the levelproceeds of the employer's participation in the plans, and thelife insurance policies. Participants derive no financial health of significant plans. The disclosures also will enable users of financial information to obtain additional information outside of the financial statements. The amendment does not change the current recognition and measurement guidance for an employer's participation in a multiemployer plan. The Company adopted this amendment in the fourth quarter of Fiscal 2012 and applied the provisions of this amendment retrospectively. The adoption of this amendment did not impact the notes to the consolidated financial statements or the financial results.
In September 2011, the FASB issued an amendment to the goodwill impairment standard. This amendment is intended to reduce the cost and complexity of the annual impairment test by providing entities with the option of performing a qualitative assessment to determine whether further impairment testing is necessary. An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then perform a qualitative assessment in any subsequent period. The Company early adopted this amendment for the Fiscal 2012 annual impairment tests which were performed during the fourth quarter of Fiscal 2012. This amendment does not impact our results of operations or financial position.
In June 2011, the FASB issued an amendment on the presentation of comprehensive income. This amendment is intended to improve comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This amendment eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this amendment, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The statement(s) would need to be presented with equal prominence as the other primary financial statements. While the options for presenting other comprehensive income change under this amendment, many items will not change. Those items remaining the same include the items that constitute net income and other comprehensive income; when an item of other comprehensive income must be reclassified to net income; and the earnings-per-share computation. The Company is required to adopt this amendment retrospectively on the first day of Fiscal 2013. This adoption will only impact the presentation of the Company's financial statements, not the financial results.
In May 2011, the FASB issued an amendment to revise the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the current requirements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements, such as specifying that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements such as specifying that, in the absence of a Level 1 input (refer to Note 11 for additional information), a reporting entity should apply premiums or discounts when market participants would do so when pricing the asset or liability. The Company adopted this amendment on the first day of the fourth quarter of Fiscal 2012 and this adoption did not have an impact on the Company's financial statements.
In December 2010, the FASB issued an amendment to the disclosure requirements for Business Combinations. This amendment clarifies that if a public entity is required to disclose pro forma information for business combinations, the entity should disclose such pro forma information as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This amendment also expands the supplemental pro forma disclosures for business combinations to include a description of the nature and amount of material nonrecurring pro forma adjustments directly attributable to the business combination included in reported pro forma revenue and earnings. The Company adopted this amendment on the first day of Fiscal 2012 and will apply such amendment for any business combinations that are material on an individual or aggregate basis if and when they occur.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
In December 2010, the FASB issued an amendment to the accounting requirements for Goodwill and Other Intangibles. This amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The Company adopted this amendment on the first day of Fiscal 2012. This adoption did not have an 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. The Company adopted this amendment on the first day of Fiscal 2011. This adoption did not have a material impact on the Company’s financial statements. Refer to Note 8 for additional information.
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 is required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The Company adopted this amendment on the first day of Fiscal 2011. This adoption did not have a material impact on the Company’s financial statements.
3. Productivity Initiatives
The Company announced on May 26, 2011 that it would invest in productivity initiatives during Fiscal 2012 designed to increase manufacturing effectiveness and efficiency as well as accelerate overall productivity on a global scale. The Company originally anticipated investing at least $130 million of cash and $160 million of pre-tax income ($0.35 per share) on these initiatives during Fiscal 2012. These initiatives included:
The establishment of a European supply chain hub in the Netherlands in order to consolidate and centralize procurement, manufacturing, logistics and inventory control decisions,
The exit of at least five factories, including two in Europe, two in the U.S., and one in Asia/Pacific in order to enhance manufacturing effectiveness and efficiency, and
A reduction of the global workforce by approximately 800 to 1,000 positions.
The Company continued to look for opportunities to drive shareholder value in this difficult economic environment, and in Fiscal 2012, the Company's Board of Directors gave its approval for the Company to invest an incremental $40 million cash and $75 million of pre-tax income ($0.21 per share) on additional productivity initiatives. These projects included the closure of another three factories worldwide and further reduction of the global workforce by more than 1,000 employees.
The Company recorded costs related to these productivity initiatives of $224.3 million pre-tax ($162.9 million after-tax or $0.50 per share) during Fiscal 2012, all of which were reported in the Non-Operating segment as disclosed in Note 16. These pre-tax costs were comprised of the following:
$58.7 million relating to asset write-downs and accelerated depreciation for the closure of eight factories, including two in Europe, three in the U.S. and three in Asia/Pacific,
$89.8 million for severance and employee benefit costs relating to the reduction of the global workforce by approximately 2,900 positions, and
$75.8 million associated with other implementation costs, primarily for professional fees, contract termination and relocation costs for the establishment of the European supply chain hub and to improve global manufacturing efficiencies.
Of the $224.3 million total pre-tax charges in Fiscal 2012, $139.8 million was recorded in cost of products sold and $84.5 million in selling, general and administrative expenses (“SG&A”).
The Company does not include productivity charges in the results of its reportable segments. The pre-tax impact of allocating such charges to segment results would have been as follows:
|
| | | | |
| | | Fiscal 2012 |
| | | (In millions) |
| North American Consumer Products | | $ | 25.6 |
|
| Europe | | 56.4 |
|
| Asia/Pacific | | 84.5 |
|
| U.S. Foodservice | | 52.8 |
|
| Rest of World | | 4.4 |
|
| Non-Operating | | 0.7 |
|
| Total productivity charges | | $ | 224.3 |
|
(Totals may not add due to rounding)
Activity in other accrued liability balances for productivity charges were as follows:
|
| | | | |
| | | (In millions) |
| | | |
| Fiscal 2012 productivity charges | | $ | 165.6 |
|
| Cash payments | | (111.0 | ) |
| Reserve balance at April 29, 2012 | | $ | 54.6 |
|
(Totals may not add due to rounding)
The majority of the amount included in other accrued liabilities at April 29, 2012 related to these initiatives is expected to be paid in the first quarter of Fiscal 2013.
| |
4. | 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 of Fiscal 2010, 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 Fiscal 2010. The following table presents summarized operating results for these discontinued operations:
|
| | | | |
| | Fiscal Year Ended | |
| | April 28, 2010 | |
| | FY 2010 | |
| | (In millions) | |
| Sales | $ | 63.0 |
| |
| Net after-tax losses | $ | (4.7 | ) | |
| Tax benefit on losses | $ | 2.0 |
| |
During the first quarter of Fiscal 2013, the Company's Board of Directors approved the sale of its U.S. Foodservice frozen desserts business. This business had annual sales of approximately $75 million in Fiscal 2012. The disposal transaction included the sale of two factories. As a result of this transaction, the Company will recognize a pre-tax loss of approximately $33 million ($21 million after-tax), which will be recorded in discontinued operations in the first quarter of Fiscal 2013. The sale will not significantly affect the Company's profit on a continuing operations basis going forward.
During the fourth quarter of Fiscal 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
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
are intended to compensate the Company for costs, both capital and expense, which are being incurred over a three year period from the date of the transaction, which is the length of time the Company has to exit the current factory location and construct certain new facilities. Note, the Company has and will incur costs to build 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 while executing 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 initial proceeds received, $81.2 million was deferred based on management’s total estimated future costs to be recovered and incurred and these deferred amounts are recognized as the related costs are incurred. If estimated costs differ from what is actually incurred, these adjustments will be reflected in earnings. As of April 29, 2012 and April 27, 2011, the remaining deferred amounts on the consolidated balance sheets were $20.7 million and $63.2 million, respectively, and were recorded in other non-current liabilities and other accrued liabilities. No significant adjustments were reflected in earnings in Fiscal 2012 and 2011. The excess of the $94.6 million of proceeds received over estimated costs to be recovered and incurred was $15.0 million and was recorded as a reduction of cost of products sold in the consolidated statement of income for the year ended April 28, 2010.
On April 1, 2011, the Company acquired an 80% stake in Coniexpress S.A. Industrias Alimenticias (“Coniexpress”), a leading Brazilian manufacturer of the Quero® brand of tomato-based sauces, tomato paste, ketchup, condiments and vegetables for $493.5 million in cash, which included $10.6 million of acquired cash and $60.1 million of short-term investments. The Company also incurred $11.3 million of pre-tax costs related to the acquisition, consisting primarily of professional fees, which were recorded in selling, general and administrative expenses in the Fiscal 2011 consolidated statement of income. The Company has the right to exercise a call option at any time requiring the minority partner to sell his 20% equity interest, while the minority partner has the right to exercise a put option requiring the Company to purchase his 20% equity interest (see Note 18 for additional explanation). The Coniexpress acquisition was accounted for as a business combination and, accordingly, the purchase price was allocated to the assets and liabilities based upon their estimated fair values as of the acquisition date. The allocations of the purchase price resulted in goodwill of $301.6 million, which was assigned to the Rest of World segment and is not deductible for tax purposes. In addition, $161.9 million of intangible assets were acquired, $142.0 million of which relate to trademarks which are not subject to amortization. The remaining $19.9 million represents customer-related assets which are being amortized over 15 years.
On November 2, 2010, the Company acquired Foodstar Holding Pte (“Foodstar”), a manufacturer of soy sauces and fermented bean curd in China for $165.4 million in cash, which included $30.0 million of acquired cash, as well as a potential earn-out payment in Fiscal 2014 contingent upon certain net sales and EBITDA (earnings before interest, taxes, depreciation and amortization) targets during Fiscals 2013 and 2014. In accordance with accounting principles generally accepted in the United States of America, a liability of $44.5 million was recognized for an estimate of the acquisition date fair value of the earn-out and is included in Other non-current liabilities in our consolidated balance sheet as of April 29, 2012 and April 27, 2011. Any change in the fair value of the earn-out subsequent to the acquisition date, including an increase resulting from the passage of time, is and will be recognized in earnings in the period of the estimated fair value change (see Note 11 for further explanation). A change in fair value of the earn-out could have a material impact on the Company’s earnings in the period of the change in estimate.
The Foodstar acquisition has been accounted for as a business combination and, accordingly, the purchase price has been allocated to the assets and liabilities based upon their estimated fair values as of the acquisition date. The allocations of the purchase price resulted in goodwill of $77.3 million, which was assigned to the Asia/Pacific segment and is not deductible for tax purposes. In addition, $70.7 million of intangible assets were acquired, $42.4 million of which relate to trademarks and are not subject to amortization. The remaining $28.3 million are being amortized over a weighted average life of 31 years.
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. This acquisition has been accounted for as a business combination and accordingly, the purchase price has been allocated to assets and liabilities based upon their estimated fair values as of the acquisition date. The Company also made payments during Fiscal 2010 related to acquisitions completed in prior fiscal years, none of which were significant.
Operating results of the above-mentioned 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, except as disclosed above.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
During Fiscal 2012, the Company acquired an additional 10% interest in P.T. Heinz ABC Indonesia for $54.8 million. P.T. Heinz ABC Indonesia is an Indonesian subsidiary of the Company that manufacturers Asian sauces and condiments as well as juices and syrups. Prior to the transaction, the Company owned 65% of this business. During Fiscal 2011, the Company acquired the remaining 21% interest in Heinz UFE Ltd., a Chinese subsidiary of the Company that manufactures infant feeding products, for $6.3 million. Prior to the transaction, the Company was the owner of 79% of the business. 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. Prior to the transaction, the Company was the owner of 51% of the business. These purchases were accounted for primarily as a reduction in additional capital and noncontrolling interest on the consolidated statements of equity.
| |
6. | Goodwill and Other Intangible Assets |
Changes in the carrying amount of goodwill for the fiscal year ended April 29, 2012, by reportable segment, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | North American Consumer Products | | Europe | | Asia/ Pacific | | U.S. Foodservice | | Rest of World | | Total |
| | | | | | (In thousands) | | | | |
| Balance at April 28, 2010 | $ | 1,102,891 |
| | $ | 1,106,744 |
| | $ | 289,425 |
| | $ | 257,674 |
| | $ | 14,184 |
| | $ | 2,770,918 |
|
| Acquisitions | — |
| | — |
| | 77,345 |
| | — |
| | 300,227 |
| | 377,572 |
|
| Purchase accounting adjustments | — |
| | (278 | ) | | (10,688 | ) | | — |
| | — |
| | (10,966 | ) |
| Translation adjustments | 8,846 |
| | 114,774 |
| | 35,998 |
| | — |
| | 1,299 |
| | 160,917 |
|
| Balance at April 27, 2011 | 1,111,737 |
| | 1,221,240 |
| | 392,080 |
| | 257,674 |
| | 315,710 |
| | 3,298,441 |
|
| Purchase accounting adjustments | — |
| | (600 | ) | | — |
| | — |
| | 1,380 |
| | 780 |
|
| Disposals | — |
| | (1,532 | ) | | — |
| | — |
| | — |
| | (1,532 | ) |
| Translation adjustments | (4,662 | ) | | (73,820 | ) | | 3,119 |
| | — |
| | (36,799 | ) | | (112,162 | ) |
| Balance at April 29, 2012 | $ | 1,107,075 |
| | $ | 1,145,288 |
| | $ | 395,199 |
| | $ | 257,674 |
| | $ | 280,291 |
| | $ | 3,185,527 |
|
During the fourth quarter of Fiscal 2012, 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 second quarter of Fiscal 2012, the Company finalized the purchase price allocation for the Coniexpress acquisition in Brazil resulting primarily in immaterial adjustments between goodwill, income taxes and non-pension postretirement benefits.
During the fourth quarter of Fiscal 2011, the Company finalized the purchase price allocation for the Foodstar acquisition resulting primarily in immaterial adjustments between goodwill, accrued liabilities and income taxes. All of the Fiscal 2011 purchase accounting adjustments reflected in the above table relate to acquisitions completed prior to April 30, 2009, the first day of Fiscal 2010. Total goodwill accumulated impairment losses for the Company since Fiscal 2003 were $84.7 million consisting of $54.5 million for Europe, $2.7 million for Asia/Pacific and $27.4 million for Rest of World as of April 28, 2010, April 27, 2011 and April 29, 2012.
Trademarks and other intangible assets at April 29, 2012 and April 27, 2011, subject to amortization expense, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | April 29, 2012 | | April 27, 2011 |
| | Gross | | Accum Amort | | Net | | Gross | | Accum Amort | | Net |
| | | | | | (In thousands) | | | | |
| Trademarks | $ | 282,937 |
| | $ | (87,925 | ) | | $ | 195,012 |
| | $ | 297,020 |
| | $ | (83,343 | ) | | $ | 213,677 |
|
| Licenses | 208,186 |
| | (163,945 | ) | | 44,241 |
| | 208,186 |
| | (158,228 | ) | | 49,958 |
|
| Recipes/processes | 89,207 |
| | (35,811 | ) | | 53,396 |
| | 90,553 |
| | (31,988 | ) | | 58,565 |
|
| Customer-related assets | 216,755 |
| | (69,244 | ) | | 147,511 |
| | 224,173 |
| | (57,555 | ) | | 166,618 |
|
| Other | 48,643 |
| | (25,442 | ) | | 23,201 |
| | 79,045 |
| | (54,833 | ) | | 24,212 |
|
| | $ | 845,728 |
| | $ | (382,367 | ) | | $ | 463,361 |
| | $ | 898,977 |
| | $ | (385,947 | ) | | $ | 513,030 |
|
Amortization expense for trademarks and other intangible assets was $31.8 million, $29.0 million and $28.2 million for the fiscal years ended April 29, 2012, April 27, 2011 and April 28, 2010, respectively. The remaining reduction in net trademarks and other intangible assets, subject to amortization expense, since April 27, 2011 is primarily due to translation adjustments. Based upon the amortizable intangible assets recorded on the balance sheet as of April 29, 2012, amortization expense for each of the
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
next five fiscal years is estimated to be approximately $30 million.
Intangible assets not subject to amortization at April 29, 2012 totaled $1,035.3 million and consisted of $895.9 million of trademarks, $119.3 million of recipes/processes, and $20.1 million of licenses. Intangible assets not subject to amortization at April 27, 2011 totaled $1,085.7 million and consisted of $942.5 million of trademarks, $122.5 million of recipes/processes, and $20.7 million of licenses. The reduction in intangible assets, not subject to amortization expense, since April 27, 2011 is primarily due to translation adjustments.
The following table summarizes the provision/(benefit) for U.S. federal, state and foreign taxes on income from continuing operations.
|
| | | | | | | | | | | |
| | 2012 | | 2011 | | 2010 |
| | (In thousands) |
| Current: | |
| | |
| | |
|
| U.S. federal | $ | 110,354 |
| | $ | 38,686 |
| | $ | (24,446 | ) |
| State | 12,048 |
| | 14,507 |
| | (809 | ) |
| Foreign | 215,949 |
| | 161,303 |
| | 163,241 |
|
| | 338,351 |
| | 214,496 |
| | 137,986 |
|
| Deferred: | |
| | |
| | |
|
| U.S. federal | (16,262 | ) | | 123,601 |
| | 165,141 |
|
| State | 4,186 |
| | (4,318 | ) | | 8,141 |
|
| Foreign | (82,740 | ) | | 34,442 |
| | 47,246 |
|
| | (94,816 | ) | | 153,725 |
| | 220,528 |
|
| Provision for income taxes | $ | 243,535 |
| | $ | 368,221 |
| | $ | 358,514 |
|
Tax benefits related to stock options and other equity instruments recorded directly to additional capital totaled $16.8 million in Fiscal 2012, $21.4 million in Fiscal 2011 and $9.3 million in Fiscal 2010.
The components of income from continuing operations before income taxes consist of the following:
|
| | | | | | | | | | | |
| | 2012 | | 2011 | | 2010 |
| | (In thousands) |
| Domestic | $ | 312,197 |
| | $ | 463,142 |
| | $ | 499,059 |
|
| Foreign | 871,246 |
| | 911,027 |
| | 791,395 |
|
| From continuing operations | $ | 1,183,443 |
| | $ | 1,374,169 |
| | $ | 1,290,454 |
|
The differences between the U.S. federal statutory tax rate and the Company’s consolidated effective tax rate on continuing operations are as follows:
|
| | | | | | | | |
| | 2012 | | 2011 | | 2010 |
| U.S. federal statutory tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Tax on income of foreign subsidiaries | (8.7 | ) | | (5.6 | ) | | (4.3 | ) |
| Changes in valuation allowances | 2.6 |
| | (0.2 | ) | | 0.2 |
|
| Earnings repatriation | 2.1 |
| | 3.0 |
| | 1.2 |
|
| Tax free interest | (5.6 | ) | | (4.2 | ) | | (4.6 | ) |
| Effects of revaluation of tax basis of foreign assets | (3.3 | ) | | (1.6 | ) | | (0.5 | ) |
| Audit settlements and changes in uncertain tax positions | (2.1 | ) | | — |
| | (1.3 | ) |
| Other | 0.6 |
| | 0.4 |
| | 2.1 |
|
| Effective tax rate | 20.6 | % | | 26.8 | % | | 27.8 | % |
The decrease in the effective tax rate is primarily the result of the increased benefits from the revaluation of the tax basis of foreign assets, the reversal of an uncertain tax position liability due to the expiration of the statute of limitations in a foreign tax jurisdiction, the beneficial resolution of a foreign tax case, and lower tax on the income of foreign subsidiaries primarily resulting
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
from a statutory tax rate reduction in the U.K. These benefits were partially offset by the current year expense for changes in valuation allowances. The decrease in the effective tax rate in Fiscal 2011 was primarily the result of increased benefits from foreign tax planning and increased tax exempt foreign income, partially offset by higher taxes on repatriation of earnings. The effective tax rate in Fiscal 2010 was impacted by higher taxes on the income of foreign subsidiaries partially offset by lower earnings repatriation costs.
During the second quarter of Fiscal 2012, a foreign subsidiary of the Company exercised a tax option under local law to revalue certain of its intangible assets, increasing the local tax basis by approximately $220.2 million. This revaluation resulted in a reduction in Fiscal 2012 tax expense, fully recognized in Fiscal 2012, of $34.9 million reflecting the deferred tax benefit from the higher tax basis partially offset by the current tax liability arising from this revaluationthese programs.
As of$34.8 million. The subsidiary paid $10.4 million of the $34.8 million during Fiscal 2012 and will pay approximately $13.9 million in Fiscal 2013 with the remainder due during Fiscal 2014. The tax benefit from the higher basis amortization will result in a reduction in cash taxes over the five year amortization period totaling approximately $69.1 million partially offset by the $34.8 million aforementioned tax payments.
The following table and note summarize deferred tax (assets) and deferred tax liabilities as of April 29, 2012 and April 27, 2011.
|
| | | | | | | |
| | 2012 | | 2011 |
| | (In thousands) |
| Depreciation/amortization | $ | 910,987 |
| | $ | 916,716 |
|
| Benefit plans | 59,647 |
| | 93,916 |
|
| Deferred income | 96,472 |
| | 126,917 |
|
| Financing costs | 117,670 |
| | 118,118 |
|
| Other | 48,371 |
| | 48,839 |
|
| Deferred tax liabilities | 1,233,147 |
| | 1,304,506 |
|
| Operating loss carryforwards | (141,358 | ) | | (120,261 | ) |
| Benefit plans | (195,697 | ) | | (168,001 | ) |
| Depreciation/amortization | (147,745 | ) | | (86,044 | ) |
| Tax credit carryforwards | (81,703 | ) | | (46,452 | ) |
| Deferred income | (20,286 | ) | | (24,235 | ) |
| Other | (96,502 | ) | | (105,327 | ) |
| Deferred tax assets | (683,291 | ) | | (550,320 | ) |
| Valuation allowance | 90,553 |
| | 64,386 |
|
| Net deferred tax liabilities | $ | 640,409 |
| | $ | 818,572 |
|
The Company also has foreign deferred tax assets and valuation allowances of $127.7 million as of April 29, 2012, 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 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.
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 2012, foreign operating loss carryforwards totaled $493.4 million. Of that amount, $252.7 million expire betweenYear 2013, and 2028;non-employee directors who were on the other $240.7 million do not expire. Deferred tax assets of $49.1 million have been recorded for foreign tax credit carryforwards. These credit carryforwards expire between 2020 and 2022. Deferred tax assets of $11.9 million have been recorded for state operating loss carryforwards. These losses expire between 2013 and 2032. Additionally, the Company has incurred losses in a foreign jurisdiction where realization of the future economic benefit is so remote that the benefit is not reflected as a deferred tax asset.
The net change in the Fiscal 2012 valuation allowance shown above is an increase of $26.2 million. The increase was primarily due to the recording of additional valuation allowance for foreign loss carryforwards that are not expected to be utilized.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The net change in the Fiscal 2011 valuation allowance was an increase of $1.9 million. The increase was primarily due to the recording of additional valuation allowance for foreign loss carryforwards that are not expected to be utilized, partially offset by the release of valuation allowance related to state tax loss and credit carryforwards that are now expected to be utilized. The net change in the Fiscal 2010 valuation allowance was 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 utilizedBoard prior to their expiration date, partially offset byJanuary 31, 1994 will receive, upon retirement on or after age 70, a reductionpension benefit for life equivalent to $30,000 annually.
Mr. Johnson, the only employee director in unrealizable net state deferred tax assets.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| | 2012 | | 2011 | | 2010 |
| | (In millions) |
| Balance at the beginning of the fiscal year | $ | 70.7 |
| | $ | 57.1 |
| | $ | 86.6 |
|
| Increases for tax positions of prior years | 5.2 |
| | 13.5 |
| | 3.7 |
|
| Decreases for tax positions of prior years | (18.0 | ) | | (26.0 | ) | | (35.4 | ) |
| Increases based on tax positions related to the current year | 3.7 |
| | 10.8 |
| | 10.4 |
|
| Increases due to business combinations | — |
| | 26.9 |
| | — |
|
| Decreases due to settlements with taxing authorities | (2.2 | ) | | (5.4 | ) | | (0.8 | ) |
| Decreases due to lapse of statute of limitations | (6.7 | ) | | (6.2 | ) | | (7.4 | ) |
| Balance at the end of the fiscal year | $ | 52.7 |
| | $ | 70.7 |
| | $ | 57.1 |
|
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $38.9 million and $56.5 million, on April 29, 2012 and April 27, 2011, respectively.
The Company classifies interest and penalties on tax uncertainties as a component of the provisionFiscal Year 2013, received no additional compensation for income taxes. For Fiscal 2012, the total amount of net interest and penalty expense included in the provision for income taxes was a benefit of $9.5 million and $4.7 million, respectively. For Fiscal 2011, the total amount of net interest and penalty expense included in the provision for income taxes was a benefit of $1.3 million and $0.1 million, respectively. For Fiscal 2010, the total amount of net interest and penalty expense included in the provision for income taxes was a benefit of $5.2 million and $1.0 million, respectively. The total amount of interest and penalties accrued as of April 29, 2012 was $16.0 million and $13.8 million, respectively. The corresponding amounts of accrued interest and penalties at April 27, 2011 were $27.3 million and $21.1 million, respectively.
It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $26.2 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.
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 2009 for the U.S. and United Kingdom, and through Fiscal 2007 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 $5.1 billion at April 29, 2012. The Company has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
8. | Debt and Financing Arrangements |
Short-term debt consisted of bank debt and other borrowings of $46.5 million and $87.8 million as of April 29, 2012 and April 27, 2011, respectively. The weighted average interest rate was 5.1% and 3.4% for Fiscal 2012 and Fiscal 2011, respectively.
Long-term debt was comprised of the following as of April 29, 2012 and April 27, 2011:
|
| | | | | | | |
| | 2012 | | 2011 |
| | (In thousands) |
| Commercial Paper (variable rate) | $ | — |
| | $ | — |
|
| 6.625% U.S. Dollar Notes due July 2011 | — |
| | 749,982 |
|
| 6.00% U.S. Dollar Notes due March 2012 | — |
| | 599,631 |
|
| Other U.S. Dollar Debt due May 2012 — November 2034 (1.08%—7.89%) | 43,164 |
| | 112,829 |
|
| Other Non-U.S. Dollar Debt due May 2012 — May 2023 (3.50%—11.25%) | 64,060 |
| | 67,964 |
|
| Japanese Yen Credit Agreement due October 2012 (variable rate) | 186,869 |
| | 182,571 |
|
| 5.35% U.S. Dollar Notes due July 2013 | 499,958 |
| | 499,923 |
|
| 8.0% Heinz Finance Preferred Stock due July 2013 | 350,000 |
| | 350,000 |
|
| Japanese Yen Credit Agreement due December 2013 (variable rate) | 199,327 |
| | 194,742 |
|
| U.S. Dollar Private Placement Notes due May 2014 — May 2021 (2.11% - 4.23%) | 500,000 |
| | — |
|
| U.S. Dollar Private Placement Notes due July 2016 — July 2018 (2.86% - 3.55%) | 100,000 |
| | — |
|
| 2.00% U.S. Dollar Notes due September 2016 | 299,913 |
| | — |
|
| 1.50% U.S. Dollar Notes due March 2017 | 299,556 |
| | — |
|
| U.S. Dollar Remarketable Securities due December 2020 | 119,000 |
| | 119,000 |
|
| 3.125% U.S. Dollar Notes due September 2021 | 395,268 |
| | — |
|
| 2.85% U.S. Dollar Notes due March 2022 | 299,516 |
| | — |
|
| 6.375% U.S. Dollar Debentures due July 2028 | 231,137 |
| | 230,878 |
|
| 6.25% British Pound Notes due February 2030 | 202,158 |
| | 206,590 |
|
| 6.75% U.S. Dollar Notes due March 2032 | 435,112 |
| | 435,038 |
|
| 7.125% U.S. Dollar Notes due August 2039 | 626,747 |
| | 625,569 |
|
| | 4,851,785 |
| | 4,374,717 |
|
| Hedge Accounting Adjustments (See Note 13) | 128,444 |
| | 150,543 |
|
| Less portion due within one year | (200,248 | ) | | (1,447,132 | ) |
| Total long-term debt | $ | 4,779,981 |
| | $ | 3,078,128 |
|
| Weighted-average interest rate on long-term debt, including the impact of applicable interest rate swaps | 4.28 | % | | 4.23 | % |
During the first quarter of Fiscal 2012, the Company modified its $1.2 billion credit agreement to increase the available borrowings under the facility to $1.5 billion as well as to extend its maturity date from April 2012 to June 2016. The $1.5 billion credit agreement supports the Company's commercial paper borrowings. As a result, the commercial paper borrowings, if any, are classified as long-term debt based upon the Company's intent and ability to refinance these borrowings on a long-term basis. There were no commercial paper borrowings outstanding at April 29, 2012. In addition, the Company has $500 million of foreign lines of credit available at April 29, 2012. In anticipation of these Fiscal 2012 modifications above, the Company terminated a $500 million credit agreement during April 2011.
During the fourth quarter of Fiscal 2012, the Company issued $300 million1.50% Notes due 2017 and $300 million2.85% Notes due 2022. During the second quarter of Fiscal 2012, the Company issued $300 million2.00% Notes due 2016 and $400 million3.125% Notes due 2021. During the first quarter of Fiscal 2012, the Company issued $500 million of private placement notes at an average interest rate of 3.48% with maturities of three, five, seven and ten years. Additionally, during the first quarter of Fiscal 2012, the Company issued $100 million of private placement notes at an average interest rate of 3.38% with maturities of five and seven years. The current year proceeds were used for the repayment of commercial paper and to pay off the Company's $750 million of notes which matured on July 15, 2011 and $600 million notes which matured on March 15, 2012.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
During the third quarter of Fiscal 2011, the Company entered into a variable rate, three-year 16 billion Japanese yen denominated credit agreement. The proceeds were used in the funding of the Foodstar acquisition and for general corporate purposes and were swapped to $193.2 million and the interest rate was fixed at 2.66%. See Note 13 for additional information.
Certain of the Company's debt agreements contain customary covenants, including a leverage ratio covenant. The Company was in compliance with all of its covenants as of April 29, 2012 and April 27, 2011.
During the second quarter Fiscal 2010, H.J. Heinz Finance Company ("HFC"), a subsidiary of Heinz, issued $681 million of 7.125% notes due 2039 and paid $217.5 million of cash, in exchange for $681 million of its outstanding 15.59% 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, were accounted for as a reduction in the book value of the debt, and are being amortized to interest expense under the effective yield method. Additionally, the Company terminated its $175 million notional total rate of return swap in the second quarter of Fiscal 2010 in connection with the dealer remarketable securities exchange transaction. See Note 13 for additional information.
During the third quarter of Fiscal 2012, the Company remarketed the remaining $119 million remarketable securities at a rate of 6.049%. The next remarketing is scheduled for December 1, 2014. On the same date, the Company entered into a total rate of return swap with a notional amount of $119 million as an economic hedge to reduce the interest cost related to these remarketable securities. See Note 13 for further details. If these 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 these 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.
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 $200.2 million in 2013, $1,093.9 million in 2014, $60.3 million in 2015, $5.3 million in 2016 and $734.1 million in 2017.
In 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, U.S. trade receivables to a wholly-owned, bankruptcy-remote-subsidiary. This subsidiary then sells all of the rights, title and interest in these receivables, all of which are short-term, to an unaffiliated entity. On April 29, 2010, the Company adopted new accounting guidance related to the transfer of financial assets. The securitization agreement continues to qualify for sale accounting treatment under the new guidance. After the sale, the Company, as servicer of the assets, collects the receivables on behalf of the unaffiliated entity. On the statements of cash flows, all cash flows related to this securitization program are included as a component of operating activities because the cash received from the unaffiliated entity and the cash collected from servicing the transferred assets are not subject to significantly different risks due to the short-term nature of the Company's trade receivables.
For the sale of receivables under the program, the Company receives cash consideration of up to $175 million and a receivable for the remainder of the purchase price (the "Deferred Purchase Price"). The cash consideration and the carrying amount of receivables removed from the consolidated balance sheets were $161.8 million and $29.0 million as of April 29, 2012 and April 27, 2011, respectively, resulting in an increase of $132.8 million in cash for sales under this program for Fiscal 2012 and a decrease in cash of $55.2 million for Fiscal 2011. The fair value of the Deferred Purchase Price was $56.8 million and $173.9 million as of April 29, 2012 and April 27, 2011, respectively. The increase in cash proceeds related to the Deferred Purchase Price was $117.1 million for fiscal year ended April 29, 2012 and was a decrease in cash of $84.7 million for the fiscal year ended April 27, 2011. This Deferred Purchase Price is included as a trade receivableserving on the consolidated balance sheets and has a carrying value which approximates fair value as of April 29, 2012 and April 27, 2011, due to the nature of the short-term underlying financial assets. On June 8, 2012, subsequent to the Fiscal 2012 year end, the Company entered into an amendment of the $175 million accounts receivables securitization program that extended the term until June 7, 2013.Board or any committee.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
9. | Supplemental Cash Flows Information |
|
| | | | | | | | | | | |
| | 2012 | | 2011 | | 2010 |
| | (In thousands) |
| Cash Paid During the Year For: | |
| | |
| | |
|
| Interest | $ | 277,954 |
| | $ | 268,131 |
| | $ | 305,332 |
|
| Income taxes | $ | 265,547 |
| | $ | 154,527 |
| | $ | 138,953 |
|
| Details of Acquisitions: | |
| | |
| | |
|
| Fair value of assets | $ | — |
| | $ | 1,057,870 |
| | $ | 16,072 |
|
Liabilities(1) | (3,250 | ) | | 274,294 |
| | 4,644 |
|
Redeemable noncontrolling interest(2) | — |
| | 124,669 |
| | — |
|
| Cash paid | 3,250 |
| | 658,907 |
| | 11,428 |
|
| Less cash acquired | — |
| | 40,605 |
| | — |
|
| Net cash paid for acquisitions | $ | 3,250 |
| | $ | 618,302 |
| | $ | 11,428 |
|
| |
(1) | Includes contingent obligations to sellers of $44.5 million in 2011.
|
| |
(2) | See Note 18 for additional information. |
During 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 8 for additional information.40
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.
In addition, the Company acted as servicer for approximately $205.6 million and $145.7 million of trade receivables which were sold to unrelated third parties without recourse as of April 29, 2012 and April 27, 2011, respectively. These trade receivables are short-term in nature. The proceeds from these sales are also recognized on the statements of cash flows as a component of operating activities.
The Company has not recorded any servicing assets or liabilities as of April 29, 2012 or April 27, 2011 for the arrangements discussed above because the fair value of these servicing agreements as well as the fees earned were not material to the financial statements.
| |
10. | Employees' Stock Incentive Plans and Management Incentive Plans |
As of April 29, 2012, 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 primarily recognized in SG&A and the related tax benefit are as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29, 2012 | | April 27, 2011 | | April 28, 2010 |
| | (In millions) |
| Pre-tax compensation cost | $ | 36.5 |
| | $ | 32.7 |
| | $ | 33.4 |
|
| Tax benefit | 12.0 |
| | 10.4 |
| | 10.3 |
|
| After-tax compensation cost | $ | 24.5 |
| | $ | 22.3 |
| | $ | 23.1 |
|
During Fiscal 2012, the Company's plan from which it issued equity-based awards was the Fiscal Year 2003 Stock Incentive Plan (the “2003 Plan”), which was approved by shareholders on September 12, 2002 for a ten-year period. During Fiscals 2011 and 2010, the Company issued equity-based awards from the 2003 Plan and the 2000 Stock Option Plan (the “2000 Plan”). The 2000 Plan was approved by Shareholders on September 12, 2000 and expired on September 12, 2010. 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
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
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 four years after the date of grant. Awards granted prior to 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 29, 2012, $7.5 million of cash tax benefits was reported as an operating cash inflow and $7.6 million of excess tax benefits as a financing cash inflow. For the fiscal year ended April 27, 2011, $12.4 million of cash tax benefits was reported as an operating cash inflow and $8.6 million of excess tax benefits as a financing cash inflow. 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.
A summary of the Company’s 2003 Plan at April 29, 2012 is as follows:
|
| | |
| 2003 Plan |
| (In thousands) |
Number of shares authorized | 18,869 |
|
Number of stock option shares granted | (9,992 | ) |
Number of stock option shares cancelled/forfeited and returned to the plan | 313 |
|
Number of restricted stock units and restricted stock issued | (4,895 | ) |
Shares available for grant as stock options | 4,295 |
|
During Fiscal 2012, the Company granted 1,649,119 option awards to employees sourced from the 2003 Plan. The weighted average fair value per share of the options granted during the fiscal years ended April 29, 2012, April 27, 2011, and April 28, 2010 as computed using the Black-Scholes pricing model was $5.80, $5.36, and $4.71, respectively. The weighted average assumptions used to estimate these fair values are as follows:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | April 29,
2012 | | April 27,
2011 | | April 28,
2010 |
| Dividend yield | 3.7 | % | | 3.9 | % | | 4.3 | % |
| Expected volatility | 20.9 | % | | 20.5 | % | | 20.2 | % |
| Expected term (years) | 5.0 |
| | 5.5 |
| | 5.5 |
|
| Risk-free interest rate | 1.0 | % | | 1.7 | % | | 2.7 | % |
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.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
A summary of the Company’s stock option activity and related information is as follows:
|
| | | | | | | | | | |
| | Number of Options | | Weighted Average Exercise Price (per share) | | Aggregate Intrinsic Value |
| | (In thousands, except per share data) |
| Options outstanding at April 29, 2009 | 14,100 |
| | $ | 38.59 |
| | $ | 544,071 |
|
| Options granted | 1,768 |
| | 39.12 |
| | 69,166 |
|
| Options exercised | (2,921 | ) | | 35.46 |
| | (103,558 | ) |
| Options cancelled/forfeited and returned to the plan | (26 | ) | | 40.44 |
| | (1,068 | ) |
| Options outstanding at April 28, 2010 | 12,921 |
| | 39.36 |
| | 508,611 |
|
| Options granted | 1,733 |
| | 46.42 |
| | 80,460 |
|
| Options exercised | (4,813 | ) | | 35.73 |
| | (171,980 | ) |
| Options cancelled/forfeited and returned to the plan | (73 | ) | | 42.81 |
| | (3,147 | ) |
| Options outstanding at April 27, 2011 | 9,768 |
| | 42.38 |
| | 413,944 |
|
| Options granted | 1,649 |
| | 52.19 |
| | 86,068 |
|
| Options exercised | (2,798 | ) | | 37.99 |
| | (106,287 | ) |
| Options cancelled/forfeited and returned to the plan | (11 | ) | | 38.38 |
| | (435 | ) |
| Options outstanding at April 29, 2012 | 8,608 |
| | $ | 45.69 |
| | $ | 393,290 |
|
| Options vested and exercisable at April 28, 2010 | 9,300 |
| | $ | 37.59 |
| | $ | 349,600 |
|
| Options vested and exercisable at April 27, 2011 | 5,744 |
| | $ | 40.65 |
| | $ | 233,507 |
|
| Options vested and exercisable at April 29, 2012 | 4,418 |
| | $ | 43.90 |
| | $ | 193,942 |
|
The following summarizes information about shares under option in the respective exercise price ranges at April 29, 2012:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| | | | | Weighted- Average Remaining | | Weighted- Average Remaining | | | | Weighted- Average Remaining | | Weighted- Average |
| Range of Exercise | | Number | | Life | | Exercise Price | | Number | | Life | | Exercise Price |
| Price Per Share | | Outstanding | | (Years) | | Per Share | | Exercisable | | (Years) | | Per Share |
| | | (Options in thousands) |
| $29.70-$34.00 | | 495 |
| | 1.1 |
| | $ | 33.44 |
| | 492 |
| | 1.1 |
| | $ | 33.45 |
|
| $34.01-$42.42 | | 2,087 |
| | 3.8 |
| | 38.92 |
| | 1,211 |
| | 3.5 |
| | 38.82 |
|
| $42.43-$52.19 | | 6,026 |
| | 4.5 |
| | 49.04 |
| | 2,715 |
| | 3.2 |
| | 48.05 |
|
| | | 8,608 |
| | 4.2 |
| | $ | 45.69 |
| | 4,418 |
| | 3.1 |
| | $ | 43.90 |
|
The Company received proceeds of $82.7 million, $154.8 million, and $67.4 million from the exercise of stock options during the fiscal years ended April 29, 2012, April 27, 2011 and April 28, 2010, respectively. The tax benefit recognized as a result of stock option exercises was $15.1 million, $21.0 million and $9.3 million for the fiscal years ended April 29, 2012, April 27, 2011, and April 28, 2010, respectively.
A summary of the status of the Company’s unvested stock options is as follows:
|
| | | | | | |
| | Number of Options | | Weighted Average Grant Date Fair Value (per share) |
| | (In thousands, except per share data) |
| Unvested options at April 27, 2011 | 4,024 |
| | $ | 5.27 |
|
| Options granted | 1,649 |
| | 5.80 |
|
| Options vested | (1,483 | ) | | 5.41 |
|
| Unvested options at April 29, 2012 | 4,190 |
| | $ | 5.43 |
|
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Unrecognized compensation cost related to unvested option awards under the 2000 and 2003 Plans totaled $6.4 million and $7.7 million as of April 29, 2012 and April 27, 2011, respectively. This cost is expected to be recognized over a weighted average period of 1.5 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 $25.7 million, $23.2 million and $24.8 million for the fiscal years ended April 29, 2012, April 27, 2011, and April 28, 2010, respectively. Unrecognized compensation cost in connection with RSU and restricted stock grants totaled $27.6 million, $29.4 million, and $29.8 million at April 29, 2012, April 27, 2011, and April 28, 2010, respectively. The cost is expected to be recognized over a weighted-average period of 1.7 years.
A summary of the Company’s RSU and restricted stock awards at April 29, 2012 is as follows:
|
| | |
| 2003 Plan |
| (In thousands) |
Number of shares authorized | 9,440 |
|
Number of shares reserved for issuance | (6,377 | ) |
Number of shares returned to the plan | 1,482 |
|
Shares available for grant | 4,545 |
|
A summary of the activity of unvested RSU and restricted stock awards and related information is as follows:
|
| | | | | | |
| | Number of Units | | Weighted Average Grant Date Fair Value (Per Share) |
| | (In thousands, except per share data) |
| Unvested units and stock at April 29, 2009 | 1,722 |
| | $ | 44.08 |
|
| Units and stock granted | 628 |
| | 39.55 |
|
| Units and stock vested | (834 | ) | | 40.59 |
|
| Units and stock cancelled/forfeited and returned to the plan | (20 | ) | | 44.12 |
|
| Unvested units and stock at April 28, 2010 | 1,496 |
| | 44.13 |
|
| Units and stock granted | 574 |
| | 46.74 |
|
| Units and stock vested | (725 | ) | | 44.96 |
|
| Units and stock cancelled/forfeited and returned to the plan | (49 | ) | | 43.47 |
|
| Unvested units and stock at April 27, 2011 | 1,296 |
| | 44.84 |
|
| Units and stock granted | 526 |
| | 52.31 |
|
| Units and stock vested | (520 | ) | | 45.27 |
|
| Units and stock cancelled/forfeited and returned to the plan | (32 | ) | | 45.90 |
|
| Unvested units and stock at April 29, 2012 | 1,270 |
| | $ | 47.75 |
|
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.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
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. 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, 2011 to February 15, 2012, employees purchased 165,635 shares under the plan. During the two offering periods from February 16, 2010 to February 15, 2011, employees purchased 185,716 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 $34 million, $45 million, and $49 million in fiscal years 2012, 2011 and 2010, respectively.
Long-Term Performance Program:
In Fiscal 2012, the Company granted performance awards as permitted in the 2003 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 27, 2011. 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 2013 year end, plus dividends paid over the 2 year performance period. The Company also granted performance awards in Fiscal 2011 under the 2011-2012 LTPP and in Fiscal 2010 under the 2010-2011 LTPP. The compensation cost related to LTPP awards primarily recognized in SG&A and the related tax benefit are as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29, 2012 | | April 27, 2011 | | April 28, 2010 |
| | (In millions) |
| Pre-tax compensation cost | $ | 18.4 |
| | $ | 21.5 |
| | $ | 20.7 |
|
| Tax benefit | 6.5 |
| | 7.4 |
| | 7.0 |
|
| After-tax compensation cost | $ | 11.9 |
| | $ | 14.1 |
| | $ | 13.7 |
|
| |
11. | Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The 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.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
As of April 29, 2012 and April 27, 2011, the fair values of the Company’s assets and liabilities measured on a recurring basis are categorized as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 29, 2012 | | April 27, 2011 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In thousands) |
| Assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Derivatives(a) | $ | — |
| | $ | 90,221 |
| | $ | — |
| | $ | 90,221 |
| | $ | — |
| | $ | 115,705 |
| | $ | — |
| | $ | 115,705 |
|
| Short-term investments(b) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 60,125 |
| | $ | — |
| | $ | — |
| | $ | 60,125 |
|
| Total assets at fair value | $ | — |
| | $ | 90,221 |
| | $ | — |
| | $ | 90,221 |
| | $ | 60,125 |
| | $ | 115,705 |
| | $ | — |
| | $ | 175,830 |
|
| Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Derivatives(a) | $ | — |
| | $ | 15,379 |
| | $ | — |
| | $ | 15,379 |
| | $ | — |
| | $ | 43,007 |
| | $ | — |
| | $ | 43,007 |
|
| Earn-out(c) | $ | — |
| | $ | — |
| | $ | 46,881 |
| | $ | 46,881 |
| | $ | — |
| | $ | — |
| | $ | 45,325 |
| | $ | 45,325 |
|
| Total liabilities at fair value | $ | — |
| | $ | 15,379 |
| | $ | 46,881 |
| | $ | 62,260 |
| | $ | — |
| | $ | 43,007 |
| | $ | 45,325 |
| | $ | 88,332 |
|
| |
(a) | Foreign currency derivative contracts are valued based on observable market spot and forward rates, and are classified within Level 2 of the fair value hierarchy. Interest rate swaps are valued based on observable market swap rates, and are classified within Level 2 of the fair value hierarchy. Cross-currency interest rate swaps are valued based on observable market spot and swap rates, and are classified within Level 2 of the fair value hierarchy. The total rate of return swap is valued based on observable market swap rates and the Company's credit spread, and is classified within Level 2 of the fair value hierarchy.
|
| |
(b) | The Company acquired Coniexpress in Brazil in Fiscal 2011. The acquisition included short-term investments that are valued based on observable market rates and classified within Level 1 of the fair value hierarchy. |
| |
(c) | The Company acquired Foodstar in China in Fiscal 2011. Consideration for this acquisition included a potential earn-out payment in Fiscal 2014 contingent upon certain net sales and EBITDA (earnings before interest, taxes, depreciation and amortization) targets during Fiscals 2013 and 2014. The fair value of the earn-out was estimated using a discounted cash flow model and is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Key assumptions in determining the fair value of the earn-out include the discount rate, and revenue and EBITDA projections for Fiscals 2013 and 2014. As of April 29, 2012 there were no significant changes to the fair value of the earn-out recorded for Foodstar at the acquisition date. A change in fair value of the earn-out could have a material impact on the Company's earnings.
|
There have been no transfers between Levels 1, 2 and 3 in Fiscals 2012 and 2011.
The Company recognized $58.7 million of non-cash asset write-downs during Fiscal 2012 related to eight factory closures. These factory closures are directly linked to the Company's Fiscal 2012 productivity initiatives (see Note 3). These charges reduced the Company's carrying value in the assets to the estimated fair value, the remainder of which is not material.
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 estimated fair value. The fair value of the assets was determined based on observable inputs.
The aggregate fair value of the Company's long-term debt, including the current portion, was $5.70 billion as compared with the carrying value of $4.98 billion at April 29, 2012, and $5.00 billion as compared with the carrying value of $4.53 billion at April 27, 2011. The Company's debt obligations are valued based on market quotes and are classified within Level 2 of the fair value hierarchy.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
12. | Pension and Other Postretirement Benefit Plans |
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 provides 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:
The Company 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 29, 2012 and April 27, 2011.
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Retiree Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| | (In thousands) |
| Change in Benefit Obligation: | |
| | |
| | |
| | |
|
| Benefit obligation at the beginning of the year | $ | 2,765,316 |
| | $ | 2,585,984 |
| | $ | 234,431 |
| | $ | 235,297 |
|
| Service cost | 33,719 |
| | 32,329 |
| | 5,967 |
| | 6,311 |
|
| Interest cost | 139,525 |
| | 142,133 |
| | 11,457 |
| | 12,712 |
|
| Participants’ contributions | 2,281 |
| | 2,444 |
| | 712 |
| | 822 |
|
| Amendments | 3,396 |
| | 377 |
| | 735 |
| | (3,710 | ) |
| Actuarial loss/(gain) | 196,606 |
| | (8,457 | ) | | 17,278 |
| | (3,786 | ) |
| Settlement | (1,854 | ) | | (3,275 | ) | | — |
| | — |
|
| Benefits paid | (152,342 | ) | | (159,307 | ) | | (19,574 | ) | | (16,986 | ) |
| Exchange/other | (56,300 | ) | | 173,088 |
| | (1,989 | ) | | 3,771 |
|
| Benefit obligation at the end of the year | $ | 2,930,347 |
| | $ | 2,765,316 |
| | $ | 249,017 |
| | $ | 234,431 |
|
| Change in Plan Assets: | |
| | |
| | |
| | |
|
| Fair value of plan assets at the beginning of the year | $ | 3,261,881 |
| | $ | 2,869,971 |
| | $ | — |
| | $ | — |
|
| Actual return on plan assets | 84,004 |
| | 318,494 |
| | — |
| | — |
|
| Settlement | (1,854 | ) | | (3,275 | ) | | — |
| | — |
|
| Employer contribution | 23,469 |
| | 22,411 |
| | 18,862 |
| | 16,164 |
|
| Participants’ contributions | 2,281 |
| | 2,444 |
| | 712 |
| | 822 |
|
| Benefits paid | (152,342 | ) | | (159,307 | ) | | (19,574 | ) | | (16,986 | ) |
| Exchange/other | (76,605 | ) | | 211,143 |
| | — |
| | — |
|
| Fair value of plan assets at the end of the year | 3,140,834 |
| | 3,261,881 |
| | — |
| | — |
|
| Funded status | $ | 210,487 |
| | $ | 496,565 |
| | $ | (249,017 | ) | | $ | (234,431 | ) |
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Amounts recognized in the consolidated balance sheets consist of the following:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Retiree Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| | (In thousands) |
| Other non-current assets | $ | 399,868 |
| | $ | 644,598 |
| | $ | — |
| | $ | — |
|
| Other accrued liabilities | (15,943 | ) | | (31,589 | ) | | (17,565 | ) | | (18,259 | ) |
| Other non-current liabilities | (173,438 | ) | | (116,444 | ) | | (231,452 | ) | | (216,172 | ) |
| Net asset/(liabilities) recognized | $ | 210,487 |
| | $ | 496,565 |
| | $ | (249,017 | ) | | $ | (234,431 | ) |
The accumulated benefit obligation for all defined benefit pension plans was $2,791.8 million at April 29, 2012 and $2,602.0 million at April 27, 2011.
Certain of the Company’s pension plans have accumulated benefit and projected 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 29, 2012 were $630.3 million, $642.3 million, and $452.9 million, respectively. For pension plans having accumulated benefit and projected benefit obligations in excess of the fair value of plan assets at April 27, 2011, the accumulated benefit obligations, projected benefit obligations and the fair value of plan assets were $154.3 million, $175.0 million and $27.0 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:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Retiree Benefits |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 |
| | (In thousands) |
| Components of defined benefit net periodic benefit cost: | |
| | |
| | |
| | |
| | |
| | |
|
| Service cost | $ | 33,719 |
| | $ | 32,329 |
| | $ | 30,486 |
| | $ | 5,967 |
| | $ | 6,311 |
| | $ | 5,999 |
|
| Interest cost | 139,525 |
| | 142,133 |
| | 149,640 |
| | 11,457 |
| | 12,712 |
| | 15,093 |
|
| Expected return on assets | (234,717 | ) | | (229,258 | ) | | (211,408 | ) | | — |
| | — |
| | — |
|
| Amortization of: | |
| | |
| | |
| | |
| | |
| | |
|
| Prior service cost/(credit) | 1,995 |
| | 2,455 |
| | 2,173 |
| | (6,127 | ) | | (5,155 | ) | | (3,796 | ) |
| Net actuarial loss | 83,800 |
| | 77,687 |
| | 53,882 |
| | 1,095 |
| | 1,604 |
| | 540 |
|
| Loss due to curtailment, settlement and special termination benefits | 1,120 |
| | 2,039 |
| | 612 |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost | 25,442 |
| | 27,385 |
| | 25,385 |
| | 12,392 |
| | 15,472 |
| | 17,836 |
|
| Defined contribution plans | 46,572 |
| | 49,089 |
| | 47,356 |
| | — |
| | — |
| | — |
|
| Total cost | 72,014 |
| | 76,474 |
| | 72,741 |
| | 12,392 |
| | 15,472 |
| | 17,836 |
|
| Less periodic benefit cost associated with discontinued operations | — |
| | — |
| | 618 |
| | — |
| | — |
| | — |
|
| Periodic benefit cost associated with continuing operations | $ | 72,014 |
| | $ | 76,474 |
| | $ | 72,123 |
| | $ | 12,392 |
| | $ | 15,472 |
| | $ | 17,836 |
|
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
Accumulated Other Comprehensive Income:
Amounts recognized in accumulated other comprehensive loss, before tax, consist of the following:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Retiree Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| | (In thousands) |
| Net actuarial loss | $ | 1,174,199 |
| | $ | 909,796 |
| | $ | 28,000 |
| | $ | 11,816 |
|
| Prior service cost/(credit) | 30,051 |
| | 28,649 |
| | (13,474 | ) | | (20,335 | ) |
| Net amount recognized | $ | 1,204,250 |
| | $ | 938,445 |
| | $ | 14,526 |
| | $ | (8,519 | ) |
The change in other comprehensive loss related to pension benefit (losses)/gains arising during the period was $(353.1) million and $95.5 million at April 29, 2012 and April 27, 2011, respectively. The change in other comprehensive loss related to the reclassification of pension benefit losses to net income was $87.3 million and $82.2 million at April 29, 2012 and April 27, 2011, respectively.
The change in other comprehensive loss related to postretirement benefit (losses)/gains arising during the period is $(18.0) million and $7.5 million at April 29, 2012 and at April 27, 2011, respectively. The change in other comprehensive loss related to the reclassification of postretirement benefit gains to net income is $5.0 million and $3.6 million at April 29, 2012 and at April 27, 2011, respectively.
Amounts in accumulated other comprehensive loss (income) expected to be recognized as components of net periodic benefit cost/(credit) in the following fiscal year are as follows:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Retiree Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| | (In thousands) |
| Net actuarial loss | $ | 77,238 |
| | $ | 85,932 |
| | $ | 1,803 |
| | $ | 1,095 |
|
| Prior service cost/(credit) | 2,569 |
| | 2,020 |
| | (6,174 | ) | | (6,116 | ) |
| Net amount recognized | $ | 79,807 |
| | $ | 87,952 |
| | $ | (4,371 | ) | | $ | (5,021 | ) |
Assumptions:
The weighted-average rates used for the fiscal years ended April 29, 2012 and April 27, 2011 in determining the projected benefit obligations for defined benefit pension plans and the accumulated postretirement benefit obligation for other postretirement plans were as follows:
|
| | | | | | | | | | | |
| | Pension Benefits | | Other Retiree Benefits |
| | 2012 | | 2011 | | 2012 | | 2011 |
| Discount rate | 4.8 | % | | 5.5 | % | | 4.1 | % | | 5.0 | % |
| Compensation increase rate | 3.4 | % | | 3.8 | % | | — | % | | — | % |
The weighted-average rates used for the fiscal years ended April 29, 2012, April 27, 2011, and April 28, 2010 in determining the defined benefit plans’ net pension costs and net postretirement benefit costs were as follows:
|
| | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Retiree Benefits |
| | 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 |
| Expected rate of return | 8.2 | % | | 8.2 | % | | 8.1 | % | | — | % | | — | % | | — | % |
| Discount rate | 4.8 | % | | 5.6 | % | | 6.5 | % | | 4.1 | % | | 5.5 | % | | 6.4 | % |
| Compensation increase rate | 3.4 | % | | 4.0 | % | | 4.3 | % | | — | % | | — | % | | — | % |
The Company’s expected rate of return is determined based on a methodology that considers investment 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.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
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 2013, gradually decreases to 4.8% by 2018 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:
|
| | | | | | | |
| | 1% Increase | | 1% Decrease |
| | (In thousands) |
| Effect on total service and interest cost components | $ | 1,592 |
| | $ | 1,426 |
|
| Effect on postretirement benefit obligations | $ | 17,501 |
| | $ | 15,882 |
|
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 29, 2012 and April 27, 2011. The Company’s investment policy specifies the type of investment vehicles appropriate for the applicable 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 the applicable plan fiduciaries to fulfill their responsibilities.
The Company’s defined benefit pension plans’ weighted average actual and target asset allocation at April 29, 2012 and April 27, 2011 were as follows:
|
| | | | | | | | | | | | |
| | | | | | | Target |
| | | Plan Assets at | | Allocation at |
| Asset Category | | 2012 | | 2011 | | 2012 | | 2011 |
| Equity securities | | 61 | % | | 62 | % | | 59 | % | | 58 | % |
| Debt securities | | 31 | % | | 32 | % | | 32 | % | | 32 | % |
| Real estate | | 7 | % | | 3 | % | | 8 | % | | 9 | % |
| Other | | 1 | % | | 3 | % | | 1 | % | | 1 | % |
| | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
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 applicable 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.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
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.
|
| | | | | | | | | | | | | | | | |
| | | April 29, 2012 |
| Asset Category | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | (In thousands) |
| Equity Securities | | $ | 822,184 |
| | $ | — |
| | $ | — |
| | $ | 822,184 |
|
| Equity Securities (mutual and pooled funds) | | 147,865 |
| | 943,745 |
| | — |
| | 1,091,610 |
|
| Fixed Income Securities | | 76,032 |
| | 894,978 |
| | 10,486 |
| | 981,496 |
|
| Other Investments | | — |
| | — |
| | 216,234 |
| | 216,234 |
|
| Cash and Cash Equivalents | | 10,335 |
| | 18,975 |
| | — |
| | 29,310 |
|
| Total | | $ | 1,056,416 |
| | $ | 1,857,698 |
| | $ | 226,720 |
| | $ | 3,140,834 |
|
|
| | | | | | | | | | | | | | | | |
| | | April 27, 2011 |
| Asset Category | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | (In thousands) |
| Equity Securities | | $ | 863,404 |
| | $ | — |
| | $ | — |
| | $ | 863,404 |
|
| Equity Securities (mutual and pooled funds) | | 157,296 |
| | 1,005,678 |
| | — |
| | 1,162,974 |
|
| Fixed Income Securities | | 53,381 |
| | 966,157 |
| | 9,649 |
| | 1,029,187 |
|
| Other Investments | | — |
| | — |
| | 131,095 |
| | 131,095 |
|
| Cash and Cash Equivalents | | 16,270 |
| | 58,951 |
| | — |
| | 75,221 |
|
| Total | | $ | 1,090,351 |
| | $ | 2,030,786 |
| | $ | 140,744 |
| | $ | 3,261,881 |
|
Level 3 Gains and Losses:
Changes in the fair value of the Plan’s Level 3 assets are summarized as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value
April 27,
2011 | | Acquisitions | | Transfers In | | Dispositions | | Realized Gain/(Loss) | | Unrealized Gain/(Loss) | | Fair Value
April 29,
2012 |
| | (In thousands) |
| Fixed Income Securities | $ | 9,649 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 837 |
| | $ | 10,486 |
|
| Other Investments | 131,095 |
| | 96,938 |
| | 10,138 |
| | (21,262 | ) | | 753 |
| | (1,428 | ) | | 216,234 |
|
| Total | $ | 140,744 |
| | $ | 96,938 |
| | $ | 10,138 |
| | $ | (21,262 | ) | | $ | 753 |
| | $ | (591 | ) | | $ | 226,720 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value
April 28,
2010 | | Acquisitions | | Dispositions | | Realized Gain/(Loss) | | Unrealized Gain/(Loss) | | Fair Value
April 27,
2011 |
| | (In thousands) |
| Fixed Income Securities | $ | 8,646 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,003 |
| | $ | 9,649 |
|
| Other Investments | 35,569 |
| | 95,518 |
| | (619 | ) | | 2,727 |
| | (2,100 | ) | | 131,095 |
|
| Total | $ | 44,215 |
| | $ | 95,518 |
| | $ | (619 | ) | | $ | 2,727 |
| | $ | (1,097 | ) | | $ | 140,744 |
|
Cash Flows:
The Company contributed $23.5 million to the defined benefit plans in Fiscal 2012, none of which 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 approximately $80 million; however, actual contributions may be affected by pension asset and liability valuation changes during the year.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The Company paid $18.9 million for benefits in the postretirement medical plans in Fiscal 2012. The Company makes payments on claims as they occur during the fiscal year. Payments for the next fiscal year are expected to be approximately $17.6 million. The medical subsidy received in Fiscal 2012 was $1.1 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 $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 will have both immediate and long-term ramifications for many employers, including the Company, that provide retiree health benefits.
Benefit payments expected in future years are as follows:
|
| | | | | | | |
| | Pension Benefits | | Other Retiree Benefits |
| | (In thousands) |
| 2013 | $ | 171,479 |
| | $ | 17,565 |
|
| 2014 | $ | 186,555 |
| | $ | 18,265 |
|
| 2015 | $ | 171,446 |
| | $ | 18,706 |
|
| 2016 | $ | 174,053 |
| | $ | 19,240 |
|
| 2017 | $ | 174,488 |
| | $ | 19,831 |
|
| Years 2018-2022 | $ | 891,680 |
| | $ | 99,799 |
|
| |
13. | Derivative Financial Instruments and Hedging Activities |
The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain derivative financial instruments to manage its foreign currency, debt and interest rate exposures. At April 29, 2012, the Company had outstanding currency exchange, interest rate, and cross-currency interest rate derivative contracts with notional amounts of $1.91 billion, $160 million and $386 million, respectively. At April 27, 2011, the Company had outstanding currency exchange, interest rate, and cross-currency interest rate derivative contracts with notional amounts of $1.86 billion, $1.51 billion and $377 million, respectively. The fair value of derivative financial instruments was a net asset of $74.8 million and $72.7 million at April 29, 2012 and April 27, 2011, respectively.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table presents the fair values and corresponding balance sheet captions of the Company’s derivative instruments as of April 29, 2012 and April 27, 2011:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | April 29, 2012 | | April 27, 2011 |
| | Foreign Exchange Contracts | | Interest Rate Contracts | | Cross- Currency Interest Rate Swap Contracts | | Foreign Exchange Contracts | | Interest Rate Contracts | | Cross- Currency Interest Rate Swap Contracts |
| | (In thousands) |
| Assets: | |
| | |
| | |
| | |
| | |
| | |
|
| Derivatives designated as hedging instruments: | |
| | |
| | |
| | |
| | |
| | |
|
| Other receivables, net | $ | 17,318 |
| | $ | 6,851 |
| | $ | 18,222 |
| | $ | 28,139 |
| | $ | 38,703 |
| | $ | — |
|
| Other non-current assets | 8,188 |
| | 29,393 |
| | 4,974 |
| | 7,913 |
| | 16,723 |
| | 14,898 |
|
| | 25,506 |
| | 36,244 |
| | 23,196 |
| | 36,052 |
| | 55,426 |
| | 14,898 |
|
| Derivatives not designated as hedging instruments: | |
| | |
| | |
| | |
| | |
| | |
|
| Other receivables, net | 5,041 |
| | — |
| | — |
| | 9,329 |
| | — |
| | — |
|
| Other non-current assets | — |
| | 234 |
| | — |
| | — |
| | — |
| | — |
|
| | 5,041 |
| | 234 |
| | — |
| | 9,329 |
| | — |
| | — |
|
| Total assets | $ | 30,547 |
| | $ | 36,478 |
| | $ | 23,196 |
| | $ | 45,381 |
| | $ | 55,426 |
| | $ | 14,898 |
|
| Liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
| Derivatives designated as hedging instruments: | |
| | |
| | |
| | |
| | |
| | |
|
| Other payables | $ | 10,653 |
| | $ | — |
| | $ | 2,760 |
| | $ | 27,804 |
| | $ | — |
| | $ | 6,125 |
|
| Other non-current liabilities | 14 |
| | — |
| | — |
| | 8,054 |
| | — |
| | — |
|
| | 10,667 |
| | — |
| | 2,760 |
| | 35,858 |
| | — |
| | 6,125 |
|
| Derivatives not designated as hedging instruments: | |
| | |
| | |
| | |
| | |
| | |
|
| Other payables | 1,952 |
| | — |
| | — |
| | 1,024 |
| | — |
| | — |
|
| Total liabilities | $ | 12,619 |
| | $ | — |
| | $ | 2,760 |
| | $ | 36,882 |
| | $ | — |
| | $ | 6,125 |
|
Refer to Note 11 for further information on how fair value is determined for the Company’s derivatives.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table presents the pre-tax effect of derivative instruments on the statement of income for the fiscal year ended April 29, 2012:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29, 2012 |
| | Foreign Exchange Contracts | | Interest Rate Contracts | | Cross-Currency Interest Rate Swap Contracts |
| | (In thousands) |
| Cash flow hedges: | |
| | |
| | |
|
| Net gains/(losses) recognized in other comprehensive loss (effective portion) | $ | 45,658 |
| | $ | (2,341 | ) | | $ | 5,725 |
|
| Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion): | |
| | |
| | |
|
| Sales | $ | 8,033 |
| | $ | — |
| | $ | — |
|
| Cost of products sold | (19,880 | ) | | — |
| | — |
|
| Selling, general and administrative expenses | (62 | ) | | — |
| | — |
|
| Other income, net | 33,401 |
| | — |
| | 8,901 |
|
| Interest income/(expense) | 199 |
| | (146 | ) | | (5,966 | ) |
| | 21,691 |
| | (146 | ) | | 2,935 |
|
| Fair value hedges: | |
| | |
| | |
|
| Net losses recognized in other expense, net | — |
| | (19,181 | ) | | — |
|
| | | | | | |
| Derivatives not designated as hedging instruments: | |
| | |
| | |
|
| Net losses recognized in other expense, net | (2,183 | ) | | — |
| | — |
|
| Net gains recognized in interest income | — |
| | 234 |
| | — |
|
| | (2,183 | ) | | 234 |
| | — |
|
| Total amount recognized in statement of income | $ | 19,508 |
| | $ | (19,093 | ) | | $ | 2,935 |
|
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table presents the pre-tax effect of derivative instruments on the statement of income for the fiscal year ended April 27, 2011:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 27, 2011 |
| | Foreign Exchange Contracts | | Interest Rate Contracts | | Cross-Currency Interest Rate Swap Contracts |
| | (In thousands) |
| Cash flow hedges: | |
| | |
| | |
|
| Net gains recognized in other comprehensive loss (effective portion) | $ | 3,626 |
| | $ | — |
| | $ | 16,649 |
|
| Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion): | |
| | |
| | |
|
| Sales | $ | 3,375 |
| | $ | — |
| | $ | — |
|
| Cost of products sold | (23,372 | ) | | — |
| | — |
|
| Selling, general and administrative expenses | (141 | ) | | — |
| | — |
|
| Other income, net | 35,744 |
| | — |
| | 24,644 |
|
| Interest income/(expense) | 226 |
| | — |
| | (4,484 | ) |
| | 15,832 |
| | — |
| | 20,160 |
|
| Fair value hedges: | |
| | |
| | |
|
| Net losses recognized in other expense, net | — |
| | (51,125 | ) | | — |
|
| Net losses recognized in interest expense, net | — |
| | (351 | ) | | — |
|
| | — |
| | (51,476 | ) | | — |
|
| | | | | | |
| Derivatives not designated as hedging instruments: | |
| | |
| | |
|
| Net gains recognized in other expense, net | 3,351 |
| | — |
| | — |
|
| Total amount recognized in statement of income | $ | 19,183 |
| | $ | (51,476 | ) | | $ | 20,160 |
|
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The following table presents the pre-tax effect of derivative instruments on the statement of income for the fiscal year ended April 28, 2010:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 28, 2010 |
| | Foreign Exchange Contracts | | Interest Rate Contracts | | Cross-Currency Interest Rate Swap Contracts |
| | (In thousands) |
| Cash flow hedges: | |
| | |
| | |
|
| Net losses recognized in other comprehensive loss (effective portion) | $ | (38,422 | ) | | $ | — |
| | $ | (13,692 | ) |
| Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion): | |
| | |
| | |
|
| Sales | $ | 1,141 |
| | $ | — |
| | $ | — |
|
| Cost of products sold | (5,104 | ) | | — |
| | — |
|
| Selling, general and administrative expenses | 108 |
| | — |
| | — |
|
| Other expense, net | (11,574 | ) | | — |
| | (7,819 | ) |
| Interest income/(expense) | 20 |
| | — |
| | (1,867 | ) |
| | (15,409 | ) | | — |
| | (9,686 | ) |
| Fair value hedges: | |
| | |
| | |
|
| Net losses recognized in other expense, net | — |
| | (41,730 | ) | | — |
|
| | | | | | |
| Derivatives not designated as hedging instruments: | |
| | |
| | |
|
| Net losses recognized in other expense, net | (59 | ) | | — |
| | — |
|
| Net gains recognized in interest income | — |
| | 30,469 |
| | — |
|
| | (59 | ) | | 30,469 |
| | — |
|
| Total amount recognized in statement of income | $ | (15,468 | ) | | $ | (11,261 | ) | | $ | (9,686 | ) |
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 that are hedged 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, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive loss within unrealized translation adjustment for the fiscal year ended April 28, 2010.
During the first quarter of Fiscal 2011, the Company early terminated certain foreign currency forward contracts, receiving cash proceeds of $11.6 million, and will release the gain in accumulated other comprehensive loss to earnings when the underlying transactions occur. The underlying transactions are scheduled to occur at various points in time through 2014.
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, London Interbank Offered 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.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The Company had outstanding cross-currency interest rate swaps with a total notional amount of $386.2 million and $377.3 million as of April 29, 2012 and April 27, 2011, respectively, 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 Fiscals 2013 and 2014.
Hedge accounting adjustments related to debt obligations totaled $128.4 million and $150.5 million as of April 29, 2012 and April 27, 2011, respectively. See Note 8 for further information.
Deferred Hedging Gains and Losses:
As of April 29, 2012, the Company is hedging forecasted transactions for periods not exceeding 3 years. During the next 12 months, the Company expects $1.7 million of net deferred gains reported in accumulated other comprehensive loss to be reclassified to earnings, assuming market rates remain constant through contract maturities. Hedge ineffectiveness related to cash flow hedges, which is reported in current period earnings as other expense, net, was not significant for the years ended April 29, 2012, April 27, 2011 and April 28, 2010. Amounts reclassified to earnings because the hedged transaction was no longer expected to occur were not significant for the years ended April 29, 2012, April 27, 2011 and April 28, 2010.
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 $445.5 million and $309.9 million that did not meet the criteria for hedge accounting as of April 29, 2012 and April 27, 2011, respectively. These forward contracts are accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of other expense, net. Net unrealized gains related to outstanding contracts totaled $3.1 million and $8.3 million as of April 29, 2012 and April 27, 2011, respectively. These contracts are scheduled to mature within one year.
Forward contracts that were put in place to help mitigate the unfavorable impact of translation associated with key foreign currencies resulted in gains/(losses) of $8.8 million, $(16.9) million and $(2.5) million for the years ended April 29, 2012, April 27, 2011 and April 28, 2010, respectively.
The Company entered into a three-year total rate of return swap with an unaffiliated international financial institution during the third quarter of Fiscal 2012 with a notional amount of $119 million. This instrument is being used as an economic hedge to reduce the interest cost related to the Company's $119 million remarketable securities. The swap is being accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of interest income. During the fiscal year ended April 29, 2012, the Company recorded a $0.1 million reduction in interest income, representing changes in the fair value of the swap and interest earned on the arrangement. Net unrealized gains totaled $0.2 million as of April 29, 2012. In connection with this swap, the Company is required to maintain a restricted cash collateral balance of $34.1 million with the counterparty for the term of the swap.
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 8. 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, representing changes in the fair value of the swap and interest earned on the arrangement, net of transaction fees.
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 2012, one customer represented approximately 10% 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.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
14. | Income Per Common Share |
The following are reconciliations of income from continuing operations to income from continuing operations applicable to common stock and the number of common shares outstanding used to calculate basic EPS to those shares used to calculate diluted EPS:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29,
2012 | | April 27,
2011 | | April 28,
2010 |
| | (52 1/2 Weeks) | | (52 Weeks) | | (52 Weeks) |
| | (In thousands) |
| Income from continuing operations attributable to H.J. Heinz Company | $ | 923,159 |
| | $ | 989,510 |
| | $ | 914,489 |
|
| Allocation to participating securities | 1,939 |
| | 1,746 |
| | 2,153 |
|
| Preferred dividends | 9 |
| | 12 |
| | 9 |
|
| Income from continuing operations applicable to common stock | $ | 921,211 |
| | $ | 987,752 |
| | $ | 912,327 |
|
| Average common shares outstanding-basic | 320,686 |
| | 320,118 |
| | 315,948 |
|
| Effect of dilutive securities: | |
| | |
| | |
|
| Convertible preferred stock | 104 |
| | 105 |
| | 105 |
|
| Stock options, restricted stock and the global stock purchase plan | 2,531 |
| | 2,819 |
| | 2,060 |
|
| Average common shares outstanding-diluted | 323,321 |
| | 323,042 |
| | 318,113 |
|
In Fiscal 2010, 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.
Diluted EPS is based upon the average shares of common stock and dilutive common stock equivalents outstanding during the periods presented. Common stock equivalents arising from dilutive stock options, restricted common stock units, and the Global Stock Purchase Plan are computed using the treasury stock method.
Options to purchase an aggregate of 0.8 million, 2.4 million and 4.4 million shares of common stock as of April 29, 2012, April 27, 2011 and April 28, 2010 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 2018.
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
| |
15. | Other Comprehensive Income |
The tax (expense)/benefit associated with each component of other comprehensive income are as follows:
|
| | | | | | | | | | | |
| | H. J. Heinz Company | | Noncontrolling Interest | | Total |
| | (In thousands) |
| April 29, 2012 | |
| | |
| | |
|
| Net pension and post-retirement benefit losses | $ | 112,665 |
| | $ | 9 |
| | $ | 112,674 |
|
| Reclassification of net pension and post-retirement benefit losses to net income | $ | 25,070 |
| | $ | — |
| | $ | 25,070 |
|
| Unrealized translation adjustments | $ | 180 |
| | $ | — |
| | $ | 180 |
|
| Net change in fair value of cash flow hedges | $ | (17,770 | ) | | $ | 9 |
| | $ | (17,761 | ) |
| Net hedging gains/losses reclassified into earnings | $ | (10,756 | ) | | $ | 92 |
| | $ | (10,664 | ) |
| April 27, 2011 | |
| | |
| | |
|
| Net pension and post-retirement benefit gains/losses | $ | (25,670 | ) | | $ | 14 |
| | $ | (25,656 | ) |
| Reclassification of net pension and post-retirement benefit losses to net income | $ | 25,276 |
| | $ | — |
| | $ | 25,276 |
|
| Unrealized translation adjustments | $ | (1,158 | ) | | $ | — |
| | $ | (1,158 | ) |
| Net change in fair value of cash flow hedges | $ | (10,348 | ) | | $ | 132 |
| | $ | (10,216 | ) |
| Net hedging gains/losses reclassified into earnings | $ | (15,149 | ) | | $ | 191 |
| | $ | (14,958 | ) |
| April 28, 2010 | |
| | |
| | |
|
| Net pension and post-retirement benefit gains/losses | $ | (39,186 | ) | | $ | 351 |
| | $ | (38,835 | ) |
| Reclassification of net pension and post-retirement benefit losses to net income | $ | 18,468 |
| | $ | — |
| | $ | 18,468 |
|
| Unrealized translation adjustments | $ | 20,491 |
| | $ | — |
| | $ | 20,491 |
|
| Net change in fair value of cash flow hedges | $ | 13,713 |
| | $ | 260 |
| | $ | 13,973 |
|
| Net hedging losses reclassified into earnings | $ | 7,885 |
| | $ | 83 |
| | $ | 7,968 |
|
The Company’s segments are primarily organized by geographical area. The composition of segments and measure of segment profitability are consistent with that used by the Company’s management.
Descriptions of the Company’s reportable segments are as follows:
North American Consumer Products—This segment primarily manufactures, markets and sells ketchup, condiments, sauces, pasta meals, and frozen potatoes, entrees, snacks, and appetizers to the grocery channels in the United States of America and includes our Canadian business.
Europe—This segment includes the Company’s operations in Europe and products in all of the Company’s categories.
Asia/Pacific—This segment includes the Company’s operations in Australia, New Zealand, India, Japan, China, Papua New Guinea, South Korea, Indonesia, Vietnam and Singapore. This segment’s operations include products in all of the Company’s categories.
U.S. Foodservice—This segment primarily manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States of America including ketchup, condiments, sauces, frozen soups and desserts.
Rest of World—This segment includes the Company’s operations in Africa, Latin America, and the Middle East that sell products in all of the Company’s categories.
The Company’s management evaluates performance based on several factors including net sales, operating income and the use of capital resources. Inter-segment revenues, items below the operating income line of the consolidated statements of income, and certain costs associated with the Fiscals 2012 and 2010 corporation-wide productivity initiatives are not presented by segment,
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
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:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29,
2012 | | April 27,
2011 | | April 28,
2010 | | April 29,
2012 | | April 27,
2011 | | April 28,
2010 |
| | (52 1/2 Weeks) | | (52 Weeks) | | (52 Weeks) | | (52 1/2 Weeks) | | (52 Weeks) | | (52 Weeks) |
| | (In thousands) |
| | Net External Sales | | Operating Income (Loss) |
| North American Consumer Products | $ | 3,241,533 |
| | $ | 3,265,857 |
| | $ | 3,192,219 |
| | $ | 812,056 |
| | $ | 832,719 |
| | $ | 771,497 |
|
| Europe | 3,441,282 |
| | 3,236,800 |
| | 3,332,619 |
| | 608,829 |
| | 581,148 |
| | 554,300 |
|
| Asia/Pacific | 2,568,716 |
| | 2,320,789 |
| | 2,007,252 |
| | 206,306 |
| | 221,580 |
| | 195,261 |
|
| U.S. Foodservice | 1,418,970 |
| | 1,413,456 |
| | 1,429,511 |
| | 166,298 |
| | 175,977 |
| | 150,628 |
|
| Rest of World | 978,578 |
| | 469,686 |
| | 533,382 |
| | 105,080 |
| | 53,371 |
| | 69,219 |
|
| Non-Operating(a) | — |
| | — |
| | — |
| | (223,084 | ) | | (216,605 | ) | | (158,989 | ) |
| Productivity initiatives(d) | — |
| | — |
| | — |
| | (224,317 | ) | | — |
| | (37,665 | ) |
| Gain on property disposal in the Netherlands(e) | — |
| | — |
| | — |
| | — |
| | — |
| | 14,977 |
|
| Consolidated Totals | $ | 11,649,079 |
| | $ | 10,706,588 |
| | $ | 10,494,983 |
| | $ | 1,451,168 |
| | $ | 1,648,190 |
| | $ | 1,559,228 |
|
| | Depreciation and Amortization Expenses | | Capital Expenditures(b) |
| Total North America | $ | 133,589 |
| | $ | 123,817 |
| | $ | 122,774 |
| | $ | 103,958 |
| | $ | 101,001 |
| | $ | 88,841 |
|
| Europe | 98,384 |
| | 91,222 |
| | 105,684 |
| | 113,420 |
| | 97,964 |
| | 74,095 |
|
| Asia/Pacific | 63,102 |
| | 53,326 |
| | 46,976 |
| | 99,912 |
| | 71,419 |
| | 46,105 |
|
| Rest of World | 19,290 |
| | 6,324 |
| | 6,638 |
| | 38,539 |
| | 12,829 |
| | 11,785 |
|
| Non-Operating(a) | 28,428 |
| | 23,971 |
| | 16,978 |
| | 62,905 |
| | 52,433 |
| | 56,816 |
|
| Consolidated Totals | $ | 342,793 |
| | $ | 298,660 |
| | $ | 299,050 |
| | $ | 418,734 |
| | $ | 335,646 |
| | $ | 277,642 |
|
| | Identifiable Assets | | | | | | |
| Total North America | $ | 3,394,387 |
| | $ | 3,633,276 |
| | $ | 3,532,477 |
| | |
| | |
| | |
|
| Europe | 4,158,349 |
| | 4,398,944 |
| | 3,815,179 |
| | |
| | |
| | |
|
| Asia/Pacific | 2,544,332 |
| | 2,424,739 |
| | 1,869,591 |
| | |
| | |
| | |
|
| Rest of World | 1,145,696 |
| | 1,149,802 |
| | 276,902 |
| | |
| | |
| | |
|
| Non-Operating(c) | 740,529 |
| | 623,884 |
| | 581,562 |
| | |
| | |
| | |
|
| Consolidated Totals | $ | 11,983,293 |
| | $ | 12,230,645 |
| | $ | 10,075,711 |
| | |
| | |
| | |
|
| |
(a) | Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. |
| |
(b) | Excludes property, plant and equipment obtained through acquisitions. |
| |
(c) | Includes identifiable assets not directly attributable to operating segments. |
| |
(d) | See Note 3 for further details on Fiscal 2012 productivity initiatives. Fiscal 2010 includes 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. |
| |
(e) | Includes payments received from the government in the Netherlands net of estimated costs to exit the facility. See Note 4for additional explanation.
|
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
The Company’s revenues are generated via the sale of products in the following categories:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 29,
2012 | | April 27,
2011 | | April 28,
2010 |
| | (52 1/2 Weeks) | | (52 Weeks) | | (52 Weeks) |
| | (In thousands) |
| Ketchup and Sauces | $ | 5,232,607 |
| | $ | 4,607,971 |
| | $ | 4,446,911 |
|
| Meals and Snacks | 4,479,502 |
| | 4,282,318 |
| | 4,289,977 |
|
| Infant/Nutrition | 1,232,248 |
| | 1,175,438 |
| | 1,157,982 |
|
| Other | 704,722 |
| | 640,861 |
| | 600,113 |
|
| Total | $ | 11,649,079 |
| | $ | 10,706,588 |
| | $ | 10,494,983 |
|
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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | Net External Sales | | Long-Lived Assets |
| | April 29,
2012 | | April 27,
2011 | | April 28,
2010 | | | | | | |
| | (52 1/2 Weeks) | | (52 Weeks) | | (52 Weeks) | | April 29,
2012 | | April 27,
2011 | | April 28,
2010 |
| | (In thousands) |
| United States | $ | 3,958,259 |
| | $ | 3,991,344 |
| | $ | 3,993,692 |
| | $ | 2,419,518 |
| | $ | 2,425,446 |
| | $ | 2,403,078 |
|
| United Kingdom | 1,611,177 |
| | 1,506,607 |
| | 1,519,278 |
| | 1,207,918 |
| | 1,245,047 |
| | 1,151,660 |
|
| Other | 6,079,643 |
| | 5,208,637 |
| | 4,982,013 |
| | 3,540,923 |
| | 3,731,815 |
| | 2,605,690 |
|
| Total | $ | 11,649,079 |
| | $ | 10,706,588 |
| | $ | 10,494,983 |
| | $ | 7,168,359 |
| | $ | 7,402,308 |
| | $ | 6,160,428 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | 2012 |
| | First (13 Weeks) | | Second (13 Weeks) | | Third (13 Weeks) | | Fourth (13 1/2 Weeks) | | Total (52 1/2 Weeks) |
| | (Unaudited) (In thousands, except per share amounts) |
| Sales | $ | 2,849,581 |
| | $ | 2,831,832 |
| | $ | 2,918,077 |
| | $ | 3,049,589 |
| | $ | 11,649,079 |
|
| Gross profit | 985,493 |
| | 970,038 |
| | 1,040,722 |
| | 1,003,277 |
| | 3,999,530 |
|
| Net income attributable to H.J. Heinz Company | 226,114 |
| | 237,009 |
| | 284,694 |
| | 175,342 |
| | 923,159 |
|
| Per Share Amounts: | |
| | |
| | |
| | |
| | |
|
| Net income—diluted | $ | 0.70 |
| | $ | 0.73 |
| | $ | 0.88 |
| | $ | 0.54 |
| | $ | 2.85 |
|
| Net income—basic | 0.70 |
| | 0.74 |
| | 0.89 |
| | 0.55 |
| | 2.87 |
|
| Cash dividends | 0.48 |
| | 0.48 |
| | 0.48 |
| | 0.48 |
| | 1.92 |
|
H. J. Heinz Company and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | 2011 |
| | First (13 Weeks) | | Second (13 Weeks) | | Third (13 Weeks) | | Fourth (13 Weeks) | | Total (52 Weeks) |
| | (Unaudited) (In thousands, except per share amounts) |
| Sales | $ | 2,480,825 |
| | $ | 2,614,623 |
| | $ | 2,722,350 |
| | $ | 2,888,790 |
| | $ | 10,706,588 |
|
| Gross profit | 907,977 |
| | 966,627 |
| | 1,028,293 |
| | 1,049,643 |
| | 3,952,540 |
|
| Net income attributable to H.J. Heinz Company | 240,427 |
| | 251,435 |
| | 273,785 |
| | 223,863 |
| | 989,510 |
|
| Per Share Amounts: | |
| | |
| | |
| | |
| | |
|
| Net income—diluted | $ | 0.75 |
| | $ | 0.78 |
| | $ | 0.84 |
| | $ | 0.69 |
| | $ | 3.06 |
|
| Net income—basic | 0.76 |
| | 0.78 |
| | 0.85 |
| | 0.70 |
| | 3.09 |
|
| Cash dividends | 0.45 |
| | 0.45 |
| | 0.45 |
| | 0.45 |
| | 1.80 |
|
During Fiscal 2012 the Company invested in productivity initiatives designed to increase manufacturing effectiveness and efficiency as well as accelerate overall productivity on a global scale (see Note 3). The pre-tax and after-tax charges as well as the EPS impact of these productivity initiatives on the Company's Fiscal 2012 quarterly results are as follows:
|
| | | | | | | | | | | |
| | 2012 |
| | Pre-tax charges | | After-tax charges | | EPS impact |
| | (Unaudited) (In millions, except per share amounts) |
| First Quarter | $ | 40.5 |
| | $ | 28.4 |
| | $ | 0.09 |
|
| Second Quarter | 37.3 |
| | 25.5 |
| | 0.08 |
|
| Third Quarter | 33.8 |
| | 22.8 |
| | 0.07 |
|
| Fourth Quarter | 112.7 |
| | 86.2 |
| | 0.27 |
|
| Total | $ | 224.3 |
| | $ | 162.9 |
| | $ | 0.50 |
|
| (Totals may not add due to rounding) | | | | | |
| |
18. | Commitments and Contingencies |
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 $158.4 million in 2012, $115.1 million in 2011 and $119.1 million in 2010. Future lease payments for non-cancellable operating leases as of April 29, 2012 totaled $492.5 million (2013-$96.4 million, 2014-$75.1 million, 2015-$62.2 million, 2016-$44.5 million, 2017-$41.5 million and thereafter-$172.9 million).
As of April 29, 2012, the Company was a party to two operating leases for buildings and equipment, one of which also includes land, under which the Company has guaranteed supplemental payment obligations of approximately $134 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 29, 2012.
Redeemable Noncontrolling Interest:
The minority partner in Coniexpress has the right, at any time, to exercise a put option to require the Company to purchase his 20% equity interest at a redemption value determinable from a specified formula based on a multiple of EBITDA (subject to a fixed minimum linked to the original acquisition date value). The Company also has a call right on this noncontrolling interest exercisable at any time and subject to the same redemption price. The put and call options cannot be separated from the noncontrolling interest and the combination of a noncontrolling interest and the redemption feature require classification of the minority partner’s interest as a redeemable noncontrolling interest in the consolidated balance sheet. The carrying amount of the redeemable noncontrolling interest approximates its maximum redemption value. Any subsequent change in maximum redemption
value would be adjusted through retained earnings. The reduction in carrying value from April 27, 2011 to April 29, 2012 was primarily due to the impact the weakening of the Brazilian Real had on translation into U.S. dollars. We do not currently believe the exercise of the put option would materially impact our results of operations or financial condition.
Advertising expenses (including production and communication costs) for fiscal years 2012, 2011 and 2010 were $442.0 million, $369.6 million and $375.8 million, respectively. For fiscal years 2012, 2011 and 2010, $151.5 million, $119.0 million and $108.9 million, respectively, were recorded as a reduction of revenue and $290.5 million, $250.6 million and $266.9 million, respectively, were recorded as a component of SG&A.
| |
20. | Venezuela- Foreign Currency and Inflation |
The Company applies highly inflationary accounting to its business in Venezuela. 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 official exchange rate between the Venezuelan bolivar fuerte and the U.S. dollar and the amount of net monetary assets and liabilities included in our subsidiary's balance sheet, which was $99.8 million at April 29, 2012.
| |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
There is nothing to be reported under this item.
| |
Item 9A. | Controls and Procedures. |
(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 29, 2012, 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 materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
| |
Item 9B. | Other Information. |
There is nothing to be reported under this item.
PART III
| |
Item 10. | Directors, Executive Officers and Corporate Governance. |
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 28, 2012. 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 28, 2012. 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.
| |
Item 11. | Executive Compensation. |
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 28, 2012. Such information is incorporated herein by reference.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information relating to the ownership of equity securities of the Company by certain beneficial owners and management is set forth under the captions “Security
Security Ownership of Certain Principal Shareholders” and “Security OwnershipShareholders
There are currently 1,000 shares of Management” in the Company’s definitive Proxy Statement in connection with its Annual Meetingcommon stock, no par value, issued and outstanding. Following the Merger, all of Shareholdersthe issued and outstanding common stock of the Company is held by Parent. Hawk Acquisition Intermediate Corporation I (“Intermediate Holdings”) holds all the issued and outstanding common stock of Parent. Holdings holds all of the issued and outstanding common stock of Intermediate Holdings.
The following table describes the beneficial ownership of Holdings common stock as of August 15, 2013 by each person known to be held on August 28, 2012. Such information is incorporated herein by reference.
the Company to beneficially own more than five percent of Holdings’ common stock. The number of shares of common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying the warrant beneficially owned by that person that are exercisable within 60 days following August 15, 2013 but not for any other person. The beneficial ownership percentages reflected in the table below are based on 950,000,000 shares of Holdings’ common stock outstanding as of August 15, 2013.
Notwithstanding the beneficial ownership of common stock presented below, a shareholders agreement governs the Sponsors’ exercise of their voting rights with respect to the election of directors and certain other material events. The parties to this shareholders’ agreement (e.g., the Sponsors and Holdings) have agreed that all shares of the Sponsors shall be issued upon exercisevoted in accordance with the provisions thereof, including with respect to the election the board of directors of Holdings and its subsidiaries (including H.J. Heinz Company). See the number“Corporate Governance — Election of Members to the Board of Directors” in Item 10, “Directors, Executive Officers and Corporate Governance” and Item 13, “Certain Relationships and Related Party Transactions, and Director Independence.”
Except as described in the agreements mentioned above or as otherwise indicated in a footnote, each of the beneficial owners listed has, to our knowledge, sole voting, dispositive and investment power with respect to the indicated shares remaining available for future issuance under the Company’s equity compensation plans at April 29, 2012 were as follows:of common stock beneficially owned by them.
| Name and Address | | Number of Shares Beneficially Owned | | Percent of Common Stock |
3G Special Situations Fund III, L.P. (2) | | 475,000,000 (1) | | 50.00% (1) |
Berkshire Hathaway Inc. (3) | | 521,195,654 (1) | | 52.32% (1) |
| Gregory Abel | | - | | - |
| Alexandre Behring | | - | | - |
| Tracy Britt | | - | | - |
| Warren E. Buffett | | 521,195,654 (3) | | 52.32% (3) |
| Jorge Paulo Lemann | | - | | - |
| Marcel Herrmann Telles | | - | | - |
| All directors and executive officers as a group | | - | | - |
_______________________
| (1) | Includes shares of which the listed beneficial owner is deemed to have the right to acquire beneficial ownership under Rule 13d-3(d) under the Securities Exchange Act, including, among other things, shares which the listed beneficial owner has the right to acquire within 60 days. Each of 3G Special Situations Fund III, L.P. and Berkshire Hathaway Inc. beneficially own 475,000,000 shares of common stock of Holdings. In addition, in connection with the Merger and the transactions contemplated thereby, Berkshire Hathaway Inc. was granted a warrant to purchase 46,195,654 shares of common stock of Holdings at an exercise price of $0.01 per share. |
| (2) | 3G Special Situations Fund III Partners, L.P. (the “GP”) serves as the general partner of 3G Special Situations Fund III, L.P. (the “Fund”). 3G Capital Partners, L.P. (the “UGP”) is the general partner of the GP. 3G Capital Partners Ltd. (the “UUGP” and, together with the GP, the Fund and the UGP, the “3G Entities”) is the general partner of the UGP. Each of the 3G Entities may be deemed to beneficially own, and to have shared voting and dispositive power with respect to, these shares of Common Stock. The address of each of the 3G Entities is 3G Capital, Inc., 600 Third Avenue, 37th Floor, New York, New York 10016. Mr. Behring is the managing partner of 3G Capital Partners, Ltd. and Messrs. Behring, Lemann, Hees, Basilio and Telles are directors of 3G Capital Partners, Ltd. A five member investment committee of 3G Capital Partners, L.P. is empowered to make decisions with respect to 3G Special Situations Fund III, L.P.’s investments, including H.J. Heinz Company, and, therefore, no individual member of the committee is deemed to be the beneficial owner of the shares of H.J. Heinz Company beneficially owned indirectly by 3G Special Situation Fund III, L.P. This investment committee has the power to vote, dispose of or sell all of the shares of H.J. Heinz Company. Messrs. Behring, Lemann and Telles are members of the investment committee and disclaim beneficial ownership of any shares of H.J. Heinz Company beneficially owned by 3G Special Situations Fund III, L.P., except to the extent of their pecuniary interest, if any, therein. |
| (3) | Berkshire Hathaway Inc., a diversified holding company whose address is 3555 Farnam Street, Omaha, NE 68131, owns an aggregate of 475,000,000 shares of common stock of Holdings, and has the right to acquire an additional 46, 195,654 shares of common stock under the Warrant. Warren E. Buffett, the Chairman and CEO of Berkshire Hathaway Inc., may be deemed to control Berkshire Hathaway Inc., and therefore may be deemed to beneficially own the shares of common stock of Holdings beneficially owned by Berkshire Hathaway Inc. |
Equity Compensation Plan Information
|
| | | | | | | | | |
| | (a) | | (b) | | (c) |
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation Plans (excluding securities reflected in column (a)) |
| Equity compensation plans approved by stockholders | 10,864,554 |
| | $ | 45.47 |
| | 4,295,249 |
|
Equity compensation plans not approved by stockholders(1) | 64,413 |
| | N/A |
| (2) | N/A |
|
| Total | 10,928,967 |
| | $ | 45.47 |
| | 4,295,249 |
|
| |
(1) | The Executive Deferred Compensation Plan, as amended and restated effective January 1, 2005 and the Deferred Compensation Plan for Non-Employee Directors as amended and restated effective January 1, 2005, permit full-time salaried personnel based in the U.S. who have been identified as key employees and non-employee directors, to defer all or part of his or her cash compensation into either a cash account that accrues interest or a Heinz stock account. The election to defer is irrevocable. The Management Development & Compensation Committee of the Board of Directors administers the Plan. All amounts are payable at the times and in the amounts elected by the executives at the time of the deferral. The deferral period shall be at least one year and shall be no greater than the date of retirement or other termination, whichever is earlier. Amounts deferred into cash accounts are payable in cash, and amounts deferred into the Heinz stock account are payable in Heinz Common Stock. Compensation deferred into the Heinz stock account appreciates or depreciates according to the fair market value of Heinz Common Stock. |
| |
(2) | The grants made under the Executive Deferred Compensation Plan and the Deferred Compensation Plan for Non-Employee Directors are restricted or reserved shares of Common Stock, and therefore there is no exercise price. |
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Related Person Transactions
Information relatingThe Related Person Transaction Policy of the Board ensures that the Company's transactions with certain persons are not inconsistent with the best interests of the Company. A “Related Person Transaction” is a transaction with the Company in an amount exceeding $120,000 in which a Related Person has a direct or indirect material interest. A “Related Person” includes the executive officers, directors, nominees to the Company’s policy on relatedBoard of Directors, and more than five percent shareholders of the Company, and any immediate family member of such a person. Under the Company's written Related Person Transaction Policy, Company management screens for any potential Related Person Transactions, primarily through the annual circulation of a Directors and Officers Questionnaire (“D&O Questionnaire”) to each member of the Board of Directors and each officer of the Company that is a reporting person under Section 16 of the Securities Exchange Act of 1934. The D&O Questionnaire contains questions intended to identify Related Persons and transactions between the Company and certain relationships withRelated Persons. If a beneficial shareholderRelated Person Transaction is set forth underidentified, such transaction is brought to the caption “Related Person Transactions”attention of the Corporate Governance Committee for its approval, ratification, revision, or rejection in consideration of all of the Company’s definitive Proxy Statement inrelevant facts and circumstances.
Shareholders Agreement
In connection with the Merger, on June 7, 2013, Holdings entered into a shareholders agreement with the Sponsors, which governs, among other things, the Sponsors’ respective rights, duties and obligations with respect to the ownership of Holdings’ securities, including the nomination and election of the members of the board of directors of each of Holdings, Intermediate I, Parent and the Company. For so long as each Sponsor owns at least 66% of the common stock of Holdings originally acquired by such Sponsor, such Sponsor is entitled to nominate and elect three representatives to the board of directors of Holdings and each of its Annual Meetingsubsidiaries (including the Company).If either Sponsor’s ownership of Shareholderscommon stock of Holdings falls below such threshold, such Sponsor shall retain the right to nominate and elect a lesser number of representatives to the boards of directors, which number of representatives would be held on August 28, 2012. Such information is incorporated herein by reference.linked to such Sponsor’s percentage ownership of the originally acquired common stock of Holdings.
Information relating to director independence is set forth under the caption “Director
Director Independence Standards” in the Company’s definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held on August 28, 2012. Such information is incorporated herein by reference.Standards
We are a privately held corporation. As the Company is no longer listed on any exchange, we are no longer subject to any listing standards for director independence.
| |
| Item 14. | Principal Accountant Fees and Services. |
Information relating to the principal auditor’s fees and services is set forth under the caption “Relationship With
Relationship with Independent Registered Public Accounting Firm” inFirm
PricewaterhouseCoopers LLP has been the Company’s definitive Proxy Statementindependent registered public accounting firm and has audited the consolidated financial statements of the Company since 1979. In addition to performing the audit of the Company's consolidated financial statements, PricewaterhouseCoopers LLP provided various audit-related and tax services during Fiscal Year 2013. The following table shows fees for professional services rendered by PricewaterhouseCoopers LLP for the past two fiscal years (in thousands):
| | | Fiscal Year 2012 | | | Fiscal Year 2013 | |
| Audit Fees(1) | | $ | 8,165 | | | $ | 9,053 | |
| Audit-Related Fees(2) | | | 1,159 | | | | 1,446 | |
| Tax Fees | | | | | | | | |
| Tax Compliance(3) | | | 620 | | | | 644 | |
| Other Tax Services(4) | | | 842 | | | | 2,164 | |
| All Other Fees | | | — | | | | — | |
| Total Fees | | $ | 10,786 | | | | 13,307 | |
(1) Audit fees relate to professional services rendered for the integrated audit of the consolidated financial statements of the Company and of the Company's internal control over financial reporting, audits of the financial statements of certain subsidiaries and certain statutory audits, reviews of the Company's quarterly consolidated financial statements, and procedures in connection with comfort letters, consents and other services related to Securities and Exchange Commission filings.
(2) Audit-related fees relate primarily to financial due diligence for potential acquisition transactions, audits of employee benefit plans and audit related procedures in connection with the Company's continued implementation of SAP software.
(3) Tax compliance services consist of assistance with federal, state and international tax compliance, tax return preparation and tax audits.
(4) Other tax services consist of fees related to tax planning regarding domestic and international taxes including tax planning related to potential acquisition transactions.
The Audit Committee prohibits the Company or any of its Annual Meetingaffiliates from receiving services from the Company's independent registered public accounting firm that could be considered to have an impact on independence and services prohibited by the Sarbanes-Oxley Act of Shareholders2002 and SEC regulations.
In accordance with Audit Committee policy and legal requirements, all services to be held on August 28, 2012. Such information is incorporated hereinprovided by reference.the independent registered public accounting firm in a category are pre-approved by the Audit Committee prior to engagement. The pre-approved services are budgeted, and the Audit Committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. If necessary, the Chair of the Audit Committee has been delegated authority to pre-approve additional services and then notify the entire Audit Committee of the additional services and estimated fees at the next Audit Committee meeting.
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules. |
|
| | | | | |
(a)(1) | | The following financial statements and reports are filed as part of this report under Item 8—“Financial Statements and Supplementary Data”: |
| | | Consolidated Balance Sheets as of April 29, 2012 and April 27, 2011 |
| | | Consolidated Statements of Income for the fiscal years ended April 29, 2012, April 27, 2011 and April 28, 2010 |
| | | Consolidated Statements of Equity for the fiscal years ended April 29, 2012, April 27, 2011 and April 28, 2010 |
| | | Consolidated Statements of Cash Flows for the fiscal years ended April 29, 2012, April 27, 2011 and April 28, 2010 |
| | | Notes to Consolidated Financial Statements |
| | | Report of Independent Registered Public Accounting Firm of PricewaterhouseCoopers LLP dated June 15, 2012, on the Company’s consolidated financial statements and financial statement schedule filed as a part hereof for the fiscal years ended April 29, 2012, April 27, 2011 and April 28, 2010 |
(2) | | The following report and schedule is filed herewith as a part hereof: |
| | | Schedule II (Valuation and Qualifying Accounts and Reserves) for the three fiscal years ended April 29, 2012, April 27, 2011 and April 28, 2010 |
| | | All other schedules are omitted because they are not applicable or the required information is included herein or is shown in the consolidated financial statements or notes thereto filed as part of this report incorporated herein by reference. |
(3) | | Exhibits required to be filed by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. |
| | 3(i) | Third Amended and Restated Articles of Incorporation of H. J. Heinz Company dated August 21, 2008, are incorporated herein by reference to Exhibit 3(i) of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2008. |
| | 3(ii) | The Company’s By-Laws, as amended effective April 29, 2012, are incorporated herein by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K dated March 16, 2012. |
| | 4 | Except as set forth below, there are no instruments with respect to long-term unregistered debt of the Company that involve indebtedness or securities authorized thereunder in amounts that exceed 10 percent of the total assets of the Company on a consolidated basis. The Company agrees to furnish a copy of any instrument or agreement defining the rights of holders of long-term debt of the Company upon request of the Securities and Exchange Commission. |
| | | (a) | Indenture among the Company, H. J. Heinz Finance Company, and Bank One, National Association dated as of July 6, 2001 relating to H. J. Heinz Finance Company’s $550,000,000 6.75% Guaranteed Notes due 2032 and $250,000,000 7.125% Guaranteed Notes due 2039 is incorporated herein by reference to Exhibit 4 of the Company’s Annual Report on Form 10-K for the fiscal year ended May 1, 2002. |
| | | (b) | 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, $300,000,000 2.000% Notes due 2016, $400,000,000 3.125% Notes due 2021, $300,000,000 1.50% Notes due 2017, $300,000,000 2.85% Notes due 2022 is incorporated herein by reference to Exhibit 4(d) of the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2009. |
| | | (c) | Five-Year Credit Agreement dated June 30, 2011 among H.J. Heinz Company, H.J. Heinz Finance Company, the banks listed on the signature pages thereto and J.P. Morgan Chase Bank, N.A. as Administrative Agent is incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated July 7, 2011. |
| | 10(a) | Management contracts and compensatory plans: |
| | | | (i) | 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 Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2008. |
|
| | | | | |
| | | | (ii) | 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 quarterly period ended October 29, 2008. |
| | | | (iii) | 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 quarterly period ended July 30, 2008. |
| | | | (iv) | 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. |
| | | | (v) | 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 quarterly period ended July 30, 2008. |
| | | | (vi) | 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. |
| | | | (vii) | 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 quarterly period ended July 30, 2008. |
| | | | (viii) | 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. |
| | | | (ix) | 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 quarterly period ending July 30, 2008. |
| | | | (x) | 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. |
| | | | (xi) | 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. |
| | | | (xii) | Named Executive Officer and Director Compensation |
| | | | (xiii) | 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 quarterly period ended October 29, 2008. |
| | | | (xiv) | 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. |
| | | | (xv) | 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. |
| | | | (xvi) | 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. |
| | | | (xvii) | 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. |
| | | | (xviii) | 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. |
| | | | (xix) | 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. |
|
| | | | | |
| | | | (xx) | 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. |
| | | | (xxi) | 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. |
| | | | (xxii) | 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. |
| | | | (xxiii) | H. J. Heinz Company Annual Incentive Plan (as amended and restated effective January 1, 2008, as amended June 12, 2012). |
| | | | (xxiv) | 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. |
| | | | (xxv) | 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 fiscal year ended April 29, 2009. |
| | | | (xxvi) | 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. |
| | | | (xxvii) | 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 fiscal year ended April 29, 2009. |
| | | | (xxviii) | 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. |
| | | | (xxix) | 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. |
| | | | (xxx) | 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. |
| | | | (xxxi) | 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 fiscal year ended April 29, 2009. |
| | | | (xxxii) | Form of Fiscal Year 2011 Restricted Stock Unit Award and Agreement (U.S. Employees) is incorporated herein by reference to the Exhibit 10(a)(i) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2010. |
| | | | (xxxiii) | Form of Fiscal Year 2011 Restricted Stock Unit Award and Agreement (Non-U.S. Employees) is incorporated herein by reference to the Exhibit 10(a)(ii) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2010. |
| | | | (xxxiv) | Form of Fiscal Year 2011 Stock Option Award Agreement for U.S. Employees is incorporated herein by reference to the Exhibit 10(a)(iii) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2010. |
| | | | (xxxv) | Form of Fiscal Year 2011 Stock Option Award and Agreement for U.K. Expatriates on International Assignment is incorporated herein by reference to the Exhibit 10(a)(iv) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2010. |
|
| | | | | |
| | | | (xxxvi) | Form of Fiscal Year 2012 Restricted Stock Unit Award and Agreement (U.S. Employees) is incorporated herein by reference to Exhibit 10(a)(xxxvii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | | | (xxxvii) | Form of Fiscal Year 2012 Restricted Stock Unit Award and Agreement (Non-U.S. Employees) is incorporated herein by reference to Exhibit 10(a)(xxxviii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | | | (xxxviii) | Form of Fiscal Year 2012 Restricted Stock Unit Award and Agreement (U.S. Employees — Time Based Vesting) is incorporated herein by reference to Exhibit 10(a)(xxxix) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | | | (xxxix) | Form of Fiscal Year 2012 Restricted Stock Unit Award and Agreement (U.S. Employees — Retention) is incorporated herein by reference to Exhibit 10(a)(xl) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | | | (xl) | Form of Fiscal Year 2012 Stock Option Award and Agreement for U.S. Employees is incorporated herein by reference to Exhibit 10(a)(xli) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | | | (xli) | Form of Fiscal Year 2012 Stock Option Award and Agreement for U.K. Expatriates on International Assignment is incorporated herein by reference to Exhibit 10(a)(xlii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | | | (xlii) | Form of Fiscal Year 2012-13 Long-Term Performance Program Award Agreement (U.S. Employees) is incorporated herein by reference to Exhibit 10(a)(xliii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | | | (xliii) | Form of Fiscal Year 2012-13 Long-Term Performance Program Award Agreement (Non-U.S. Employees) is incorporated herein by reference to Exhibit 10(a)(xliv) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | | | (xliv) | First Amendment to Third Amended and Restated Global Stock Purchase Plan—H.J. Heinz Company U.K. Sub-Plan is incorporated herein by reference to Exhibit 10(a)(xlv) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | | | (xlv) | Form of Fiscal Year 2013-14 Long-Term Performance Program Award Agreement (U.S. Employees). |
| | | | (xlvi) | Form of Fiscal Year 2013-14 Long-Term Performance Program Award Agreement (Non-U.S. Employees). |
| | 12 | Computation of Ratios of Earnings to Fixed Charges. |
| | 21 | Subsidiaries of the Registrant. |
| | 23 | Consent of PricewaterhouseCoopers LLP. |
| | 24 | Powers-of-attorney of the Company’s directors. |
| | 31(a) | Rule 13a-14(a)/15d-14(a) Certification by William R. Johnson.Bernardo Hees. |
| | 31(b) | Rule 13a-14(a)/15d-14(a) Certification by Arthur B. Winkleblack.Paulo Basilio. |
| | 32(a) | Certification by the Chief Executive Officer Relating to the Annual Report Containing Financial Statements. |
| | 32(b) | Certification by the Chief Financial Officer Relating to the Annual Report Containing Financial Statements. |
| | 101.INS | XBRL Instance Document |
| | 101.SCH | XBRL Schema Document |
| | 101.CAL | XBRL Calculation Linkbase Document |
| | 101.LAB | XBRL Labels Linkbase Document |
| | 101.PRE | XBRL Presentation Linkbase Document |
| | 101.DEF | XBRL Definition Linkbase Document |
| | | | | |
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. |
81
Copies of the exhibits listed above will be furnished upon request, 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 15, 2012.August 26, 2013.
|
| | |
| | | H. J. HEINZ COMPANY |
| | | (Registrant) |
| | By: | /s/ Arthur B. WinkleblackPaulo Basilio |
| | | Arthur B. WinkleblackPaulo Basilio |
| | | 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 15, 2012.August 26, 2013.
|
| | |
| Signature | | Capacity | Date |
| | | |
| | | |
/s/ William R. JohnsonBernardo Hees | | Chairman, President andChief Executive Officer | August 26, 2013 |
William R. JohnsonBernardo Hees | | Chief Executive Officer
(Principal Executive Officer) | |
| | | |
/s/ Arthur B. WinkleblackPaulo Basilio | | Executive Vice President andChief Financial Officer | August 26, 2013 |
Arthur B. WinkleblackPaulo Basilio | | Chief Financial Officer
(Principal Financial Officer) | |
| | | |
/s/ Edward J. McMenaminJohn Mastalerz Jr. | | Senior Vice President-FinanceCorporate Controller | August 26, 2013 |
Edward J. McMenaminJohn Mastalerz Jr. | | (Principal Accounting Officer) |
|
| | |
William R. Johnson | Director } | |
Charles E. Bunch | Director } | |
Leonard S. Coleman, Jr. | Director } | |
John G. Drosdick | Director } | |
Edith E. Holiday | Director } | By: /s/ Arthur B. Winkleblack
|
Candace Kendle | Director } | Arthur B. Winkleblack |
Dean R. O’Hare | Director } | Attorney-in-Fact |
Nelson Peltz | Director } | |
Dennis H. Reilley | Director } | |
Lynn C. Swann | Director } | |
Thomas J. Usher | Director } | |
Michael F. Weinstein | Director } | |
Schedule II
H. J. Heinz Company and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Fiscal Years Ended April 29, 2012, April 27, 2011 and April 28, 2010
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| Description | | Balance at beginning of period | | Charged to costs and expenses | | Deductions | | Exchange | | Balance at end of period |
| Fiscal year ended April 29, 2012: | | |
| | |
| | |
| | |
| | |
|
| Reserves deducted in the balance sheet from the assets to which they apply: | | |
| | |
| | |
| | |
| | |
|
| Trade receivables | | $ | 10,909 |
| | $ | 4,220 |
| | $ | 3,807 |
| | $ | (642 | ) | | $ | 10,680 |
|
| Other receivables | | $ | 503 |
| | $ | 108 |
| | $ | 8 |
| | $ | 4 |
| | $ | 607 |
|
| Fiscal year ended April 27, 2011: | | |
| | |
| | |
| | |
| | |
|
| Reserves deducted in the balance sheet from the assets to which they apply: | | |
| | |
| | |
| | |
| | |
|
| Trade receivables | | $ | 10,196 |
| | $ | 1,997 |
| | $ | 2,053 |
| | $ | 769 |
| | $ | 10,909 |
|
| Other receivables | | $ | 268 |
| | $ | 203 |
| | $ | — |
| | $ | 32 |
| | $ | 503 |
|
| Fiscal year ended April 28, 2010: | | |
| | |
| | |
| | |
| | |
|
| Reserves deducted in the balance sheet from the assets to which they apply: | | |
| | |
| | |
| | |
| | |
|
| Trade receivables | | $ | 10,233 |
| | $ | 2,158 |
| | $ | 2,575 |
| | $ | 380 |
| | $ | 10,196 |
|
| Other receivables | | $ | 1,162 |
| | $ | (367 | ) | | $ | 602 |
| | $ | 75 |
|
| $ | 268 |
|
EXHIBIT INDEX
|
| | | | | |
Description of Exhibit |
Exhibits required to be filed by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. |
3(i) | | Third Amended and Restated Articles of Incorporation of H. J. Heinz Company dated August 21, 2008, are incorporated herein by reference to Exhibit 3(i) of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2008. |
3(ii) | | The Company’s By-Laws, as amended effective April 29, 2012, are incorporated herein by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K dated March 16, 2012. |
4 | | Except as set forth below, there are no instruments with respect to long-term unregistered debt of the Company that involve indebtedness or securities authorized thereunder in amounts that exceed 10 percent of the total assets of the Company on a consolidated basis. The Company agrees to furnish a copy of any instrument or agreement defining the rights of holders of long-term debt of the Company upon request of the Securities and Exchange Commission. |
| | | (a) | Indenture among the Company, H. J. Heinz Finance Company, and Bank One, National Association dated as of July 6, 2001 relating to H. J. Heinz Finance Company’s $550,000,000 6.75% Guaranteed Notes due 2032 and $250,000,000 7.125% Guaranteed Notes due 2039 is incorporated herein by reference to Exhibit 4 of the Company’s Annual Report on Form 10-K for the fiscal year ended May 1, 2002. |
| * | | Director | August 26, 2013 |
| Gregory Abel | | | |
| | | (b) | 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 |
| * | | Director | August 26, 2013 $300,000,000 2.000% Notes due 2016, $400,000,000 3.125% Notes due 2021, $300,000,000 1.50% Notes due 2017, $300,000,000 2.85% Notes due 2022 is incorporated herein by reference to Exhibit 4(d) of the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2009. |
| Alexandre Behring | | | |
| | | (c) | Five-Year Credit Agreement dated June 30, 2011 among H.J. Heinz Company, H.J. Heinz Finance Company, the banks listed on the signature pages thereto and J.P. Morgan Chase Bank, N.A. as Administrative Agent is incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated July 7, 2011. |
10(a)* | | Management contracts and compensatory plans:Director | August 26, 2013 |
| Tracy Britt | | | |
| | | (i) | 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 the Exhibit 10(a)(xi) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2008. |
| * | | Director | August 26, 2013 |
| Warren Buffett | | | |
| | | (ii) | 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 quarterly period ended October 29, 2008. |
| * | | Director | August 26, 2013 |
| Jorge Paulo Lemann | | | |
| | | (iii) | 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 quarterly period ended July 30, 2008. |
| * | | Director | August 26, 2013 |
| Marcel Hermann Telles | | | |
| | | (iv) | 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. |
* /s/ Paulo Basilio | | | (v) | 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 quarterly period ended July 30, 2008.26, 2013 |
| Paulo Basilio Attorney-in-Fact | | | (vi) | 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. |
| | (vii) | 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 quarterly period ended July 30, 2008. |
| | (viii) | 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. |
| | (ix) | 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 quarterly period ending July 30, 2008. |
| | (x) | 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. |
EXHIBIT INDEX
|
| | | | | |
| | (xi) | FormDescription 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. |
| | (xii) | Named Executive Officer and Director Compensation. |
| | (xiii) | 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 quarterly period ended October 29, 2008. |
| | (xiv) | 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. |
| | (xv) | 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. |
| | (xvi) | 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. |
| | (xvii) | 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. |
| | (xviii) | 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. |
| | (xix) | 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. |
| | (xx) | 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. |
| | (xxi) | 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. |
| | (xxii) | 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. |
| | (xxiii) | H. J. Heinz Company Annual Incentive Plan (as amended and restated effective January 1, 2008, as amended June 12, 2012). |
| | (xxiv) | 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. |
| | (xxv) | 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 fiscal year ended April 29, 2009. |
| | (xxvi) | 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. |
| | (xxvii) | 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 fiscal year ended April 29, 2009. |
| | (xxviii) | 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. |
| | (xxix) | 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. |
| | (xxx) | 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. |
| | (xxxi) | 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 fiscal year ended April 29, 2009. |
Exhibits required to be filed by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K.
|
| | | | | |
| | (xxxii) | Form of Fiscal Year 2011 Restricted Stock Unit Award and Agreement (U.S. Employees) is incorporated herein by reference to the Exhibit 10(a)(i) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2010. |
| | (xxxiii) | Form of Fiscal Year 2011 Restricted Stock Unit Award and Agreement (Non-U.S. Employees) is incorporated herein by reference to the Exhibit 10(a)(ii) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2010. |
| | (xxxiv) | Form of Fiscal Year 2011 Stock Option Award Agreement for U.S. Employees is incorporated herein by reference to the Exhibit 10(a)(iii) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2010. |
| | (xxxv) | Form of Fiscal Year 2011 Stock Option Award and Agreement for U.K. Expatriates on International Assignment is incorporated herein by reference to the Exhibit 10(a)(iv) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2010. |
| | (xxxvi) | Form of Fiscal Year 2012 Restricted Stock Unit Award and Agreement (U.S. Employees) is incorporated herein by reference to Exhibit 10(a)(xxxvii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | (xxxvii) | Form of Fiscal Year 2012 Restricted Stock Unit Award and Agreement (Non-U.S. Employees) is incorporated herein by reference to Exhibit 10(a)(xxxviii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | (xxxviii) | Form of Fiscal Year 2012 Restricted Stock Unit Award and Agreement (U.S. Employees — Time Based Vesting) is incorporated herein by reference to Exhibit 10(a)(xxxix) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | (xxxix) | Form of Fiscal Year 2012 Restricted Stock Unit Award and Agreement (U.S. Employees — Retention) is incorporated herein by reference to Exhibit 10(a)(xl) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | (xl) | Form of Fiscal Year 2012 Stock Option Award and Agreement for U.S. Employees is incorporated herein by reference to Exhibit 10(a)(xli) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | (xli) | Form of Fiscal Year 2012 Stock Option Award and Agreement for U.K. Expatriates on International Assignment is incorporated herein by reference to Exhibit 10(a)(xlii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | (xlii) | Form of Fiscal Year 2012-13 Long-Term Performance Program Award Agreement (U.S. Employees) is incorporated herein by reference to Exhibit 10(a)(xliii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | (xliii) | Form of Fiscal Year 2012-13 Long-Term Performance Program Award Agreement (Non-U.S. Employees) is incorporated herein by reference to Exhibit 10(a)(xliv) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | (xliv) | First Amendment to Third Amended and Restated Global Stock Purchase Plan—H.J. Heinz Company U.K. Sub-Plan is incorporated herein by reference to Exhibit 10(a)(xlv) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2011. |
| | (xlv) | Form of Fiscal Year 2013-14 Long-Term Performance Program Award Agreement (U.S. Employees). |
| | (xlvi) | Form of Fiscal Year 2013-14 Long-Term Performance Program Award Agreement (Non-U.S. Employees). |
12 | | Computation of Ratios of Earnings to Fixed Charges. |
21 | | Subsidiaries of the Registrant. |
23 | | Consent of PricewaterhouseCoopers LLP. |
24 | | Powers of attorney of the Company’s directors. |
| 31(a) | | Rule 13a-14(a)/15d-14(a) Certification by William R. Johnson.Bernardo Hees. |
| 31(b) | | Rule 13a-14(a)/15d-14(a) Certification by Arthur B. Winkleblack.Paulo Basilio. |
| 32(a) | | Certification by the Chief Executive Officer Relating to the Annual Report Containing Financial Statements. |
| 32(b) | | Certification by the Chief Financial Officer Relating to the Annual Report Containing Financial Statements. |
101.INS | | XBRL | Instance Document |
101.SCH | | XBRL | Schema Document |
101.CAL | | XBRL | Calculation Linkbase Document |
101.LAB | | XBRL | Labels Linkbase Document |
101.PRE | | XBRL | Presentation Linkbase Document |
101.DEF | | XBRL | Definition Linkbase Document |