| The Company currently presents proformaThe Company currently presents pro forma stock-based compensation cost for employees eligible to retire ratably over the vesting period of the applicable grants. Upon adoption of SFAS 123(R) in Fiscal 2007, the Company will recognize a compensation charge to such retirement-eligible employees over an accelerated period no greater than the first date of retirement eligibility as defined under the Company’s benefit plans. The financial impact of applying the accelerated method of expense recognition is immaterial to the comparative financial statements presented herein.Restricted Stock Units During the first nine months of Fiscal 2006, the Company granted 465,572 Restricted Stock Units (“RSUs”) to employees and non-employee directors. The number of RSUs awarded to employees is determined by the fair market value of the Company’s stock on the grant date. The fair value of the awards granted has been recorded as unearned compensation and is shown as a separate component of shareholders’ equity. Unearned compensation is amortized over the vesting period for the particular grant, and is recognized as a component of general and administrative expenses. The RSU liability is classified as a component of additional capital in the consolidated balance sheets. The Company recognized amortization related to the unearned compensation of $3.1 million and $1.7 million for the third quarter ended January 25, 2006 and January 26, 2005, respectively, and $13.4 million and $11.4 million for the nine months ended January 25, 2006 and January 26, 2005, respectively. | | | The Company currently records compensation expense for employees eligible to retire ratably over the vesting period of the applicable RSU grants. Upon adoption of SFAS 123(R) in Fiscal 2007, the Company will recognize a compensation charge to such retirement-eligible employees over an accelerated period no greater than the first date of retirement eligibility as defined under the Company’s benefit plans. The financial impact of applying the accelerated method of expense recognition is immaterial to the comparative financial statements presented herein. |
Restricted Stock Units
| | | During the first six months of Fiscal 2006, the Company granted 447,631 Restricted Stock Units (“RSUs”) to employees and non-employee directors. The number of RSUs awarded to employees is determined by the fair market value of the Company’s stock on the grant date. The fair value of the awards granted has been recorded as unearned compensation and is shown as a separate component of shareholders’ equity. Unearned compensation is amortized over the vesting period for the particular grant, and is recognized as a component of general and administrative expenses. The RSU liability is classified as a component of additional paid in capital in the consolidated balance sheets. The Company recognized amortization related to the unearned compensation of $4.3 million and $4.7 million for the second quarter ended October 26, 2005 and October 27, 2004, respectively, and $10.4 million and $9.8 million for the six months ended October 26, 2005 and October 27, 2004, respectively. | | | The Company currently records compensation expense for employees eligible to retire ratably over the vesting period of the applicable RSU grants. Upon adoption of SFAS 123(R) in Fiscal 2007 (see note 9), the Company will recognize a compensation charge to such retirement-eligible employees over an accelerated period no greater than the first date of retirement eligibility as defined under the Company’s benefit plans. The financial impact of applying the accelerated method of expense recognition is immaterial to the comparative financial statements presented herein. |
1113
| | (8)(9) | Pensions and Other Post-Retirement Benefits |
| | | The components of net periodic benefit cost are as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Second Quarter Ended | | | Third Quarter Ended | | | | | | | | | | | October 26, 2005 | | | October 27, 2004 | | | October 26, 2005 | | | October 27, 2004 | | | January 25, 2006 | | | January 26, 2005 | | | January 25, 2006 | | | January 26, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | | Post-Retirement Benefits | | | Pension Benefits | | | Post-Retirement Benefits | | | | | | | | | | | | | | | | | (Thousands of Dollars) | | | (Thousands of Dollars) | | Service cost | | $ | 10,483 | | $ | 11,247 | | $ | 1,555 | | $ | 1,363 | | | $ | 9,956 | | $ | 12,351 | | $ | 1,563 | | $ | 1,376 | | Interest cost | | | 30,420 | | | 30,189 | | | 3,818 | | | 4,094 | | | | 29,820 | | | 31,352 | | | 3,827 | | | 3,971 | | Expected return on plan assets | | | (41,871 | ) | | | (41,345 | ) | | | — | | | — | | | | (41,229 | ) | | | (42,903 | ) | | | — | | | — | | Amortization of net initial asset | | | (6 | ) | | | (211 | ) | | | — | | | — | | | | (4 | ) | | | (220 | ) | | | — | | | — | | Amortization of prior service cost | | | 1,026 | | | 2,273 | | | (708 | ) | | | (756 | ) | | | 530 | | | 2,343 | | | (707 | ) | | | (757 | ) | Amortization of unrecognized loss | | | 14,775 | | | 13,831 | | | 1,826 | | | 1,201 | | | | 14,706 | | | 14,372 | | | 1,826 | | | 1,306 | | Loss due to settlement and special termination benefits | | | 1,972 | | | — | | | 694 | | | — | | | Gain due to curtailment, settlement and special termination benefits | | | | (6,733 | ) | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | | | | Net periodic benefit cost | | $ | 16,799 | | $ | 15,984 | | $ | 7,185 | | $ | 5,902 | | | $ | 7,046 | | $ | 17,295 | | $ | 6,509 | | $ | 5,896 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended | | | Nine Months Ended | | | | | | | | | | | October 26, 2005 | | | October 27, 2004 | | | October 26, 2005 | | | October 27, 2004 | | | January 25, 2006 | | | January 26, 2005 | | | January 25, 2006 | | | January 26, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | | Post-Retirement Benefits | | | Pension Benefits | | | Post-Retirement Benefits | | | | | | | | | | | | | | | | | (Thousands of Dollars) | | | (Thousands of Dollars) | | Service cost | | $ | 21,022 | | $ | 22,445 | | $ | 3,091 | | $ | 2,735 | | | $ | 30,978 | | $ | 34,796 | | $ | 4,654 | | $ | 4,111 | | Interest cost | | | 60,888 | | | 60,193 | | | 7,610 | | | 8,148 | | | | 90,708 | | | 91,545 | | | 11,437 | | | 12,119 | | Expected return on plan assets | | | (83,861 | ) | | | (82,495 | ) | | | — | | | — | | | | (125,090 | ) | | | (125,398 | ) | | | — | | | — | | Amortization of net initial asset | | | (11 | ) | | | (422 | ) | | | — | | | — | | | | (15 | ) | | | (642 | ) | | | — | | | — | | Amortization of prior service cost | | | 2,056 | | | 4,560 | | | (1,415 | ) | | | (1,512 | ) | | | 2,586 | | | 6,903 | | | (2,122 | ) | | | (2,269 | ) | Amortization of unrecognized loss | | | 29,540 | | | 27,581 | | | 3,651 | | | 3,067 | | | | 44,246 | | | 41,953 | | | 5,477 | | | 4,373 | | Loss due to settlement and special termination benefits | | | 6,193 | | | — | | | 1,250 | | | — | | | (Gain)/loss due to curtailment, settlement and special termination benefits | | | | (540 | ) | | | — | | | 1,250 | | | — | | | | | | | | | | | | | | | | | | | | | Net periodic benefit cost | | $ | 35,827 | | $ | 31,862 | | $ | 14,187 | | $ | 12,438 | | | $ | 42,873 | | $ | 49,157 | | $ | 20,696 | | $ | 18,334 | | | | | | | | | | | | | | | | | | | | |
| | | As of October 26, 2005,January 25, 2006, the Company has contributed $21.5$29 million to fund its obligations under these plans. As previously disclosed, theThe Company expects to make combined cash contributions of approximately $45$40 million in Fiscal 2006. | | | Prepaid benefit cost of $717.4$716.9 million and $758.8 million is included as a component of other non-current assets in the condensed consolidated balance sheets at October 26, 2005January 25, 2006 and April 27, 2005, respectively. |
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| | (9)(10) | Recently Issued Accounting Standards |
| | | In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This Statement focuses primarily on accounting for transactions in which an entity compensates employees for services through share-based payments.awards. This Statement requires an entity to measure the cost of employee services received in exchange for an award of equity or equity based instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward.award. On April 18, 2005, the Securities and Exchange Commission adopted a new rule that amended the compliance dates of SFAS No. 123(R) to require the implementation no later than the beginning of the first fiscal year beginning after June 15, 2005. The impact of adoption in Fiscal 2007 is anticipated to be approximately $15$18 million before the impact of income taxes. | | | In December 2004, the FASB issued FASB Staff Position (“FSP”) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“AJCA.”) The FSP provides guidance on the accounting and disclosures for the temporary repatriation provision of the AJCA. The Company has adoptedRefer to note 3 regarding the disclosure provisionsimpact of the FSP which apply to entities that have not yet completed their evaluation ofAJCA for the repatriation provision,quarter and will expand its disclosures in accordance with the FSP upon completion of the final evaluation.nine months ended January 25, 2006. |
| | | 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. The Company’s management evaluates performance based on several factors including net sales, operating income, operating income excluding special items, and the use of capital resources. Intersegment revenues are accounted for at current market values. Items below the operating income line on the consolidated statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s management. | | | 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. | | | U.S. Foodservice—This segment primarily manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States of America including ketchup, condiments, sauces, and frozen soups, desserts and appetizers. | | | Europe—This segment includes the Company’s operations in Europe and sells products in all of the Company’s categories. | | | Asia/ Pacific—This segment includes the Company’s operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Singapore, and Thailand. This segment’s operations include products in all of the Company’s categories. | | | Other Operating Entities—This segment includes the Company’s operations in Africa, India, Latin America, the Middle East, and other areas that sell products in all of the Company’s categories. |
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The following table presents information about the Company’s reportable segments:
| | | The following table presents information about the Company’s reportable segments: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Second Quarter Ended | | | Six Months Ended | | | | Third Quarter Ended | | | Nine Months Ended | | | | | | | | | | | | | | | | | | | | October 26, 2005 | | | October 27, 2004 | | | October 26, 2005 | | | October 27, 2004 | | | | January 25, 2006 | | | January 26, 2005 | | | January 25, 2006 | | | January 26, 2005 | | | | | FY 2006 | | | FY 2005 | | | FY 2006 | | | FY 2005 | | | | FY 2006 | | | FY 2005 | | | FY 2006 | | | FY 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Thousands of Dollars) | | | | | | (Thousands of Dollars) | | Net external sales: | Net external sales: | | | | | | | | | | | | | | Net external sales: | | | | | | | | | | | | | | | North American Consumer Products | | $ | 625,039 | | $ | 565,927 | | $ | 1,169,999 | | $ | 1,054,759 | | North American Consumer Products | | $ | 658,771 | | $ | 579,039 | | $ | 1,828,770 | | $ | 1,633,798 | | | U.S. Foodservice | | | 385,345 | | | 379,832 | | | 738,556 | | | 723,700 | | U.S. Foodservice | | | 401,098 | | | 374,835 | | | 1,139,654 | | | 1,098,535 | | | Europe | | | 858,692 | | | 814,771 | | | 1,646,856 | | | 1,603,496 | | Europe | | | 772,212 | | | 762,602 | | | 2,159,654 | | | 2,101,586 | | | Asia/ Pacific | | | 369,110 | | | 344,787 | | | 692,640 | | | 639,059 | | Asia/ Pacific | | | 258,985 | | | 253,974 | | | 819,300 | | | 758,750 | | | Other Operating Entities | | | 100,662 | | | 94,243 | | | 200,950 | | | 181,572 | | Other Operating Entities | | | 95,458 | | | 98,709 | | | 296,408 | | | 280,281 | | | | | | | | | | | | | | | | | | | | | | | | Consolidated Totals | | $ | 2,338,848 | | $ | 2,199,560 | | $ | 4,449,001 | | $ | 4,202,586 | | Consolidated Totals | | $ | 2,186,524 | | $ | 2,069,159 | | $ | 6,243,786 | | $ | 5,872,950 | | | | | | | | | | | | | | | | | | | | | | | Intersegment revenues: | Intersegment revenues: | | | | | | | | | | | | | | Intersegment revenues: | | | | | | | | | | | | | | | North American Consumer Products | | $ | 13,128 | | $ | 12,965 | | $ | 25,431 | | $ | 25,691 | | North American Consumer Products | | $ | 13,202 | | $ | 12,773 | | $ | 38,633 | | $ | 38,464 | | | U.S. Foodservice | | | 5,307 | | | 5,339 | | | 10,205 | | | 9,581 | | U.S. Foodservice | | | 6,726 | | | 7,130 | | | 16,931 | | | 16,711 | | | Europe | | | 3,239 | | | 4,494 | | | 6,474 | | | 9,166 | | Europe | | | 2,732 | | | 4,455 | | | 9,206 | | | 13,621 | | | Asia/ Pacific | | | 449 | | | 1,013 | | | 1,223 | | | 1,610 | | Asia/ Pacific | | | 479 | | | 825 | | | 1,702 | | | 2,435 | | | Other Operating Entities | | | 301 | | | 368 | | | 564 | | | 758 | | Other Operating Entities | | | 378 | | | 434 | | | 942 | | | 1,192 | | | Non-Operating(a) | | | (22,424 | ) | | | (24,179 | ) | | | (43,897 | ) | | | (46,806 | ) | Non-Operating(a) | | | (23,517 | ) | | | (25,617 | ) | | | (67,414 | ) | | | (72,423 | ) | | | | | | | | | | | | | | | | | | | | | | | Consolidated Totals | | $ | — | | $ | — | | $ | — | | $ | — | | Consolidated Totals | | $ | — | | $ | — | | $ | — | | $ | — | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss): | Operating income (loss): | | | | | | | | | | | | | | Operating income (loss): | | | | | | | | | | | | | | | North American Consumer Products | | $ | 147,018 | | $ | 134,977 | | $ | 270,949 | | $ | 246,069 | | North American Consumer Products | | $ | 154,440 | | $ | 148,352 | | $ | 425,389 | | $ | 394,421 | | | U.S. Foodservice | | | 47,202 | | | 57,964 | | | 97,664 | | | 112,304 | | U.S. Foodservice | | | 56,902 | | | 54,378 | | | 154,566 | | | 166,682 | | | Europe | | | 112,727 | | | 125,480 | | | 229,017 | | | 279,571 | | Europe | | | 124,147 | | | 123,933 | | | 324,757 | | | 374,912 | | | Asia/ Pacific | | | 39,633 | | | 42,858 | | | 59,986 | | | 75,121 | | Asia/ Pacific | | | (957 | ) | | | 27,073 | | | 53,744 | | | 90,471 | | | Other Operating Entities | | | (5,002 | ) | | | 8,162 | | | 1,365 | | | 22,488 | | Other Operating Entities | | | 4,927 | | | 2,587 | | | 6,292 | | | 25,075 | | | Non-Operating(a) | | | (31,042 | ) | | | (25,993 | ) | | | (67,243 | ) | | | (52,451 | ) | Non-Operating(a) | | | (31,823 | ) | | | (36,954 | ) | | | (99,286 | ) | | | (89,540 | ) | | | | | | | | | | | | | | | | | | | | | | | Consolidated Totals | | $ | 310,536 | | $ | 343,448 | | $ | 591,738 | | $ | 683,102 | | Consolidated Totals | | $ | 307,636 | | $ | 319,369 | | $ | 865,462 | | $ | 962,021 | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) excluding special items(b): | Operating income (loss) excluding special items(b): | | | | | | | | | | | | | | Operating income (loss) excluding special items(b): | | | | | | | | | | | | | | | North American Consumer Products | | $ | 147,571 | | $ | 134,977 | | $ | 273,338 | | $ | 246,069 | | North American Consumer Products | | $ | 154,479 | | $ | 148,352 | | $ | 427,817 | | $ | 394,421 | | | U.S. Foodservice | | | 52,535 | | | 57,964 | | | 104,345 | | | 112,304 | | U.S. Foodservice | | | 57,273 | | | 54,378 | | | 161,617 | | | 166,682 | | | Europe | | | 136,288 | | | 125,480 | | | 266,019 | | | 279,571 | | Europe | | | 138,509 | | | 123,933 | | | 372,459 | | | 374,912 | | | Asia/ Pacific | | | 42,750 | | | 42,858 | | | 70,021 | | | 75,121 | | Asia/ Pacific | | | 18,185 | | | 27,073 | | | 80,675 | | | 90,471 | | | Other Operating Entities | | | 10,419 | | | 8,162 | | | 18,751 | | | 22,488 | | Other Operating Entities | | | 8,293 | | | 2,587 | | | 27,044 | | | 25,075 | | | Non-Operating(a) | | | (28,111 | ) | | | (25,993 | ) | | | (55,986 | ) | | | (52,451 | ) | Non-Operating(a) | | | (31,511 | ) | | | (36,954 | ) | | | (87,717 | ) | | | (89,540 | ) | | | | | | | | | | | | | | | | | | | | | | | Consolidated Totals | | $ | 361,452 | | $ | 343,448 | | $ | 676,488 | | $ | 683,102 | | Consolidated Totals | | $ | 345,228 | | $ | 319,369 | | $ | 981,895 | | $ | 962,021 | | | | | | | | | | | | | | | | | | | | | | |
| | | | (a) | Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. |
| | | | (b) | SecondThird Quarter ended October 26, 2005—January 25, 2006— Excludes costs associated with targeted workforce reductions, costs incurred in connection with strategic reviews of several non-core businesses and lossesnet losses/impairment charge on disposalsdivestitures as follows: North American Consumer Products, $0.6 million; U.S. Foodservice, $5.3$0.4 million; Europe, $23.6$14.4 million; Asia/ Pacific, $3.1$19.1 million; Other Operating, $15.4$3.4 million; and Non-Operating $2.9$0.3 million. |
| | | SixNine Months ended October 26, 2005—January 25, 2006— Excludes costs associated with targeted workforce reductions, costs incurred in connection with strategic reviews of several non-core businesses and lossesnet losses/impairment charge on disposalsdivestitures as follows: North American Consumer Products, $2.4 mil-million; U.S. Foodservice, $7.1 million; Europe, $47.7 million; |
1416
| | | lion; U.S. Foodservice, $6.7 million; Europe, $37.0 million; Asia/ Pacific, $10.0$26.9 million; Other Operating, $17.4$20.7 million; and Non-Operating $11.3$11.6 million. |
| | | The results for the second quarter and the sixnine months of last fiscal year, ended October 27, 2004January 26, 2005 were impacted by a $21.1 million charge for trade promotion spending for the Italian infant nutrition business. The charge relates to an under-accrual in fiscal years 2001, 2002 and 2003. The amount of the charge that corresponds to each of the fiscal years 2001, 2002 and 2003 is less than 2% of net income for each of those years. |
| | | The Company’s revenues are generated via the sale of products in the following categories: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Second Quarter Ended | | | Six Months Ended | | | | Third Quarter Ended | | | Nine Months Ended | | | | | | | | | | | | | | | | | | | | October 26, 2005 | | | October 27, 2004 | | | October 26, 2005 | | | October 27, 2004 | | | | January 25, 2006 | | | January 26, 2005 | | | January 25, 2006 | | | January 26, 2005 | | | | | FY 2006 | | | FY 2005 | | | FY 2006 | | | FY 2005 | | | | FY 2006 | | | FY 2005 | | | FY 2006 | | | FY 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Thousands of Dollars) | | | | (Thousands of Dollars) | | Ketchup, Condiments and Sauces | Ketchup, Condiments and Sauces | | $ | 870,080 | | $ | 800,435 | | $ | 1,673,009 | | $ | 1,563,035 | | Ketchup, Condiments and Sauces | | $ | 872,114 | | $ | 793,614 | | $ | 2,545,123 | | $ | 2,356,649 | | Frozen Foods | Frozen Foods | | | 602,455 | | | 543,050 | | | 1,106,337 | | | 1,004,590 | | Frozen Foods | | | 668,428 | | | 594,690 | | | 1,774,765 | | | 1,599,280 | | Convenience Meals | Convenience Meals | | | 477,358 | | | 480,431 | | | 931,634 | | | 931,300 | | Convenience Meals | | | 371,382 | | | 394,576 | | | 1,046,473 | | | 1,063,532 | | Infant Foods | Infant Foods | | | 207,318 | | | 202,437 | | | 401,696 | | | 381,388 | | Infant Foods | | | 196,934 | | | 220,431 | | | 598,630 | | | 601,819 | | Other | Other | | | 181,637 | | | 173,207 | | | 336,325 | | | 322,273 | | Other | | | 77,666 | | | 65,848 | | | 278,795 | | | 251,670 | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 2,338,848 | | $ | 2,199,560 | | $ | 4,449,001 | | $ | 4,202,586 | | Total | | $ | 2,186,524 | | $ | 2,069,159 | | $ | 6,243,786 | | $ | 5,872,950 | | | | | | | | | | | | | | | | | | | | | | |
| | | As a result of general economic uncertainty, coupled with government restrictions on the repatriation of earnings, as of the end of November 2002, the Company deconsolidated its Zimbabwean operations and classified its remaining net investment of approximately $110 million as a cost investment included in other non-current assets on the consolidated balance sheets. As previously noted, economic conditions have not improved and the currency continues to devalue. Should the current situation continue, the Company could experience disruptions and delays in its Zimbabwean operations. The ability to source raw materials, which at certain times of the year requires access to foreign currency, is critical to the sustainability of local operations. While the Company’s business continues to operate profitably and is able to source raw materials, the country’s economic situation remains uncertain. The Company’s ability to recover its investment could become impaired if the economic and political uncertainties continue to deteriorate. |
1517
| | (11)(12) | Net Income Per Common Share |
| | | The following are reconciliations of income to income applicable to common stock and the number of common shares outstanding used to calculate basic EPS to those shares used to calculate diluted EPS: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Second Quarter Ended | | | Six Months Ended | | | | Third Quarter Ended | | | Nine Months Ended | | | | | | | | | | | | | | | | | | | | October 26, 2005 | | | October 27, 2004 | | | October 26, 2005 | | | October 27, 2004 | | | | January 25, 2006 | | | January 26, 2005 | | | January 25, 2006 | | | January 26, 2005 | | | | | FY 2006 | | | FY 2005 | | | FY 2006 | | | FY 2005 | | | | FY 2006 | | | FY 2005 | | | FY 2006 | | | FY 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (In Thousands) | | | | (In Thousands) | | Income from continuing operations | Income from continuing operations | | $ | 171,782 | | $ | 197,279 | | $ | 329,056 | | $ | 392,115 | | Income from continuing operations | | $ | 133,178 | | $ | 131,512 | | $ | 441,682 | | $ | 496,520 | | Preferred dividends | Preferred dividends | | | 3 | | | 4 | | | 7 | | | 8 | | Preferred dividends | | | 4 | | | 4 | | | 11 | | | 12 | | | | | | | | | | | | | | | | | | | | | | | Income from continuing operations applicable to common stock | Income from continuing operations applicable to common stock | | $ | 171,779 | | $ | 197,275 | | $ | 329,049 | | $ | 392,107 | | Income from continuing operations applicable to common stock | | $ | 133,174 | | $ | 131,508 | | $ | 441,671 | | $ | 496,508 | | | | | | | | | | | | | | | | | | | | | | | | Average common shares outstanding—basic | | | 339,475 | | | 349,655 | | | 342,856 | | | 350,569 | | Average common shares outstanding— basic | | | 334,879 | | | 349,729 | | | 340,484 | | | 350,357 | | | Effect of dilutive securities: | | | | | | | | | | | | | | Effect of dilutive securities: | | | | | | | | | | | | | | | | Convertible preferred stock | | | 125 | | | 140 | | | 125 | | | 140 | | | Convertible preferred stock | | | 124 | | | 139 | | | 124 | | | 139 | | | | Stock options and restricted stock | | | 2,933 | | | 3,480 | | | 2,982 | | | 3,436 | | | Stock options and restricted stock | | | 2,819 | | | 2,723 | | | 2,924 | | | 3,346 | | | | | | | | | | | | | | | | | | | | | | | | Average common shares outstanding—diluted | | | 342,533 | | | 353,275 | | | 345,963 | | | 354,145 | | Average common shares outstanding— diluted | | | 337,822 | | | 352,591 | | | 343,532 | | | 353,842 | | | | | | | | | | | | | | | | | | | | | | |
| | | Stock options outstanding in the amounts of 18.5 million and 16.2 million were not included in the computation of diluted earnings per share for the third quarters ended January 25, 2006 and January 26, 2005, respectively, and 18.6 million and 16.1 million were not included in the computation of diluted earnings per share for the second quarters ended October 26, 2005 and October 27, 2004, respectively, and 18.6 million and 16.3 million were not included in the computation of diluted earnings per share for the sixnine months ended OctoberJanuary 25, 2006 and January 26, 2005, and October 27, 2004, respectively, because inclusion of these options would be antidilutive. |
| | (12)(13) | Comprehensive Income |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Second Quarter Ended | | | Six Months Ended | | | | Third Quarter Ended | | | Nine Months Ended | | | | | | | | | | | | | | | | | | | | October 26, 2005 | | | October 27, 2004 | | | October 26, 2005 | | | October 27, 2004 | | | | January 25, 2006 | | | January 26, 2005 | | | January 25, 2006 | | | January 26, 2005 | | | | | FY 2006 | | | FY 2005 | | | FY 2006 | | | FY 2005 | | | | FY 2006 | | | FY 2005 | | | FY 2006 | | | FY 2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Thousands of Dollars) | | | | (Thousands of Dollars) | | Net income | Net income | | $ | 203,821 | | $ | 198,965 | | $ | 361,095 | | $ | 393,801 | | Net income | | $ | 116,600 | | $ | 152,411 | | $ | 477,695 | | $ | 546,212 | | Other comprehensive income: | Other comprehensive income: | | | | | | | | | | | | | | Other comprehensive income: | | | | | | | | | | | | | | | Foreign currency translation adjustments | | | 46,722 | | | 150,381 | | | (195,398 | ) | | | 193,699 | | Foreign currency translation adjustments | | | 37,510 | | | 88,534 | | | (157,888 | ) | | | 282,233 | | | Minimum pension liability adjustment | | | (2,548 | ) | | | (354 | ) | | | (2,163 | ) | | | (6,061 | ) | Minimum pension liability adjustment | | | (59 | ) | | | (3,800 | ) | | | (2,222 | ) | | | (9,861 | ) | | Net deferred gains/(losses) on derivatives from periodic revaluations | | | (13,644 | ) | | | 27,935 | | | (7,568 | ) | | | 25,734 | | Net deferred gains on derivatives from periodic revaluations | | | 7,587 | | | 1,493 | | | 19 | | | 27,227 | | | Net deferred (gains)/losses on derivatives reclassified to earnings | | | 9,186 | | | (18,652 | ) | | | 9,040 | | | (17,007 | ) | Net deferred (gains)/losses on derivatives reclassified to earnings | | | (5,394 | ) | | | (6,647 | ) | | | 3,646 | | | (23,654 | ) | | | | | | | | | | | | | | | | | | | | | | Comprehensive income | Comprehensive income | | $ | 243,537 | | $ | 358,275 | | $ | 165,006 | | $ | 590,166 | | Comprehensive income | | $ | 156,244 | | $ | 231,991 | | $ | 321,250 | | $ | 822,157 | | | | | | | | | | | | | | | | | | | | | | |
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| | (13)(14) | 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 and interest rate exposures. There have been no material changes in the Company’s market risk during the sixnine months ended October 26, 2005.January 25, 2006. For additional information, refer to pages 22-23 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 27, 2005. | | | As of October 26, 2005,January 25, 2006, the Company is hedging forecasted transactions for periods not exceeding two years. During the next 12 months, the Company expects $3.3$1.4 million of net deferred losses reported in accumulated other comprehensive loss/(income) to be reclassified to earnings, assuming market rates remain constant through contract maturities. Hedge ineffectiveness related to cash flow hedges, which is reported in current period earnings as other income and expense, was not significant for the sixthree and nine months ended OctoberJanuary 25, 2006 and January 26, 2005 and October 27, 2004.2005. Amounts reclassified to earnings because the hedged transaction was no longer expected to occur were not significant for the sixthree and nine months ended OctoberJanuary 25, 2006 and January 26, 20052005. | | | During the third quarter of Fiscal 2006, the Company entered into forward contracts and October 27, 2004.cross currency swaps with a combined notional amount of $2.0 billion, which were designated as net investment hedges of foreign operations. These contracts mature within two years. The Company assesses hedge effectiveness for these contracts based on changes in fair value attributable to changes in spot prices. Losses of $10.6 million (net of income taxes of $6.6 million) which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive loss/(income) within foreign currency translation adjustment for the three and nine months ended January 25, 2006. Gains of $0.2 million, which represented the changes in fair value excluded from the assessment of hedge effectiveness, were included in current period earnings as a component of interest expense for the quarter and nine months ended January 25, 2006. |
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| | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Strategic OverviewDiscontinued Operations
In the third quarter of Fiscal 2006, the Company’s Board of Directors approved the divestitures of the European seafood business and theTegel® poultry business in New Zealand. The Company has entered into a definitive agreement to sell the European seafood business. Some of the brands included in this business are:John West®,Petit Navire®,Marie Elisabeth® andMareblu®. The closing of the transaction is subject to customary European Union competition authority review and approval. A definitive agreement was signed on December 22, 2005 to sell theTegel® poultry business, which is subject to competition authority approval. The Company expects to complete the sale of the European seafood andTegel® poultry businesses in the fourth quarter of Fiscal 2006, with proceeds expected to approximate€425 million and NZ$250 million, respectively. In accordance with accounting principles generally accepted in the United States of America, the operating results related to these businesses have been included in discontinued operations in the Company’s consolidated statements of income for all periods presented, and the net assets related to these businesses have been presented as discontinued operations in the condensed consolidated balance sheet as of January 25, 2006. These discontinued operations generated sales of $184.5 million and $192.1 million and net income/(loss) of $(18.2) million (net of $27.3 million in tax expense) and $7.0 million (net of $3.4 million in tax expense) for the three months ended January 25, 2006 and January 26, 2005, respectively. These discontinued operations generated sales of $576.2 million and $590.9 million and net income of $2.3 million (net of $37.0 million in tax expense) and $34.1 million (net of $15.5 million in tax expense) for the nine months ended January 25, 2006 and January 26, 2005, respectively. In addition, net income from discontinued operations includes amounts related to the favorable settlement of tax liabilities associated with the businesses spun-off to Del Monte in Fiscal 2003. Such amounts totaled $1.7 million and $13.9 million for the quarters ended January 25, 2006 and January 26, 2005, respectively, and $33.7 million and $15.6 million for the nine months ended January 25, 2006 and January 26, 2005, respectively. Portfolio Reviews In the first half of Fiscal 2006, the Company initiated a strategic review of its European frozen business in addition to the above businesses which were classified as discontinued operations. Some of the brands involved in this strategic review include: Weight Watchers® fromHeinz®,Linda McCartney®, andAunt Bessie’s® in the United Kingdom. Management is currently in the process of finalizing this review and expects the Company’s assessment regarding the future of this business to be completed in the fourth quarter of Fiscal 2006. The Company is also evaluating the divestiture of several other small foreign businesses. Special Items | | | HP/ LP AcquisitionReorganization Costs |
The Company recorded pre-tax reorganization charges for targeted workforce reductions consistent with the Company’s goals to streamline its businesses totaling $14.0 million ($10.0 million after tax) and $70.4 million ($49.1 million after tax) during the third quarter and nine months ended January 25, 2006, respectively. Approximately 600 positions are being eliminated as a result of this program, primarily in the General & Administrative (“G&A”) area. Additionally, pre-tax costs of $13.9 million ($14.8 million after tax) and $29.6 million ($26.8 million after tax) were incurred in the third quarter and nine months ended January 25, 2006, respectively, primarily as a result of the previously announced strategic reviews related to the potential divestiture of several 20
businesses which include the European seafood and frozen businesses andTegel® poultry business in New Zealand. For the third quarter, the total impact of these initiatives on continuing operations was $22.0 million pre-tax ($18.3 million after-tax), of which $1.8 million was recorded as costs of products sold and $20.2 million in selling, general and administrative expenses (“SG&A”). In addition, $6.6 million was recorded in income of discontinued operations, net of tax. For the nine months ended January 25, 2006, the total impact of these initiatives on continuing operations was $88.2 million pre-tax ($65.3 million after-tax), of which $9.3 million was recorded as costs of products sold and $78.9 million in SG&A. In addition, $10.7 million was recorded in income of discontinued operations, net of tax. | | | Divestitures/ Impairment Charges |
During the third quarter, the Company completed the sale of theHAK® vegetable product line in Northern Europe and received proceeds from this divestiture of $51.1 million, which was in excess of the cost basis by $3.2 million ($3.5 million after tax). This excess was recorded in cost of products sold. In the fourth quarter of Fiscal 2005, the Company recognized a non-cash asset impairment charge of $27.0 million pre-tax ($18.0 million after-tax) related to the anticipated disposition of this product line. Also during the third quarter of Fiscal 2006, the Company sold its equity investment in The Hain Celestial Group, Inc. (“Hain”) and recognized a $6.9 million ($4.5 million after-tax) loss which was recorded within other expense, net. Net proceeds from the sale of this investment were $116.1 million. During the third quarter of Fiscal 2005, the Company recognized a $64.5 million other-than-temporary impairment charge on its equity investment in Hain. The charge reduced Heinz’s carrying value in Hain to fair market value as of January 26, 2005, with no resulting impact on cash flows. The Company also recorded a $9.3 million non-cash charge in the third quarter of Fiscal 2005 to recognize the impairment of a cost-basis investment in a grocery industry sponsorede-commerce business venture. There was no tax benefit associated with these impairment charges in Fiscal 2005. Also, in the third quarter of Fiscal 2006, the Company recognized a non-cash asset impairment charge of $15.8 million pre-tax ($8.5 million after-tax) on a small noodle business in Indonesia. The charge, which was primarily recorded as a component of cost of products sold, relates to the anticipated disposition of this business in the fourth quarter of 2006. The net assets related to this business total approximately $5.7 million. During the second quarter of Fiscal 2006, the Company recognized a net $12.7 million ($13.6 million after tax) charge primarily related to the sale of a small seafood business in Israel which closed in the third quarter of Fiscal 2006. The American Jobs Creation Act (“AJCA”) provides a deduction of 85% of qualified foreign dividends in excess of a “Base Period” dividend amount. During the third quarter of Fiscal 2006, the Company finalized plans to repatriate an additional $253 million to satisfy the Base Period dividend requirement and an additional $562 million that will qualify under the AJCA (the “Qualified Dividends”). In addition, the Company expects that $154 million of $166 million of previously planned dividends will also qualify under the AJCA. The Company expects to incur a tax charge of $24.8 million on total Base Period dividends of $265 million, $10.3 million of which is incremental to the tax already accrued on the $154 million of qualifying previously planned dividends. The Fiscal 2006 net tax cost related to the $716 million of Qualified Dividends is $14.0 million. The $10.2 million of incremental tax related to the Base Period dividends and the $14.0 million of tax related to the Qualified Dividends were recorded during the third quarter as part of tax expense related to special items. The total impact of the AJCA on tax expense for the 21
third quarter and nine months ended January 25, 2006 was $24.3 million, of which $27.7 million of expense was recorded in continuing operations and $3.4 million was a benefit in discontinued operations. During the third quarter of Fiscal 2006, the Company reversed valuation allowances of $20.6 million in continuing operations related to the non-cash asset impairment charges recorded in Fiscal 2005 on the cost and equity investments discussed above. The reversal of the valuation allowances is based upon tax planning strategies that are expected to generate sufficient capital gains that will occur during the capital loss carryforward period. The Company has not previously recorded deferred taxes on the difference between the book and tax bases of the European Seafood business because this basis difference was not expected to be realized in the foreseeable future. As a result of the European Seafood business being classified as discontinued operations, the Company now expects that this basis difference will be realized as a result of the anticipated sale and has recorded a deferred tax liability of $19.6 million in connection with this basis difference. The recording of the deferred tax liability resulted in a $24.6 million tax charge in discontinued operations and a tax benefit of $5.0 million recorded as part of other comprehensive income during the third quarter. HP/ LP Acquisition In August 2005, the Company completed its acquisition of HP Foods Limited, HP Foods Holdings Limited, and HP Foods International Limited collectively(collectively referred to as “HPF,”“HPF”) for a purchase price of $874 million, from Groupe Danone.approximately $877 million. HPF is a manufacturer and marketer of sauces which are primarily sold in the United Kingdom, the United States, and Canada. The Company acquired HPF’s brands includingHP®® andLea & Perrins®Perrins® and a perpetual license to marketAmoy®Amoy® brand Asian sauces and products in Europe. This transaction was in line with the Company’s strategy to focus on quality brands in three core businesses: Ketchup, Condiments and Sauces, Meals & Snacks, and Infant Nutrition. This acquisition complements Heinz’s leadership in its core condiments and sauces businesses, especially in Europe and North America. The acquired brands are very popular with consumers and represent a great fit with the Company’s product portfolio. Heinz aims to expand sales of theHP®,Lea & Perrins® andAmoy® brands by leveraging the company’s worldwide retail and foodservice distribution and marketing capabilities.
This acquisition is currently under review by the British Competition Commission (“BCC”), who will determine whether. The BCC has provisionally cleared the acquisition, isconcluding that the acquisition may not be expected to result in a substantial lessening of competition inwithin the marketmarkets for the supply of certain productstomato ketchup, brown sauce, barbecue sauce, canned baked beans and canned pasta in the United Kingdom. As a result,A final decision is expected in April, 2006. Pending the final decision, Heinz must delay integration of HPF into its United Kingdom operations untilU.K. operations. If the BCC issues its report, which is expected by April 2006. As a result of this review,provisional findings become final in their current form, the Company maywould not be required to divest certain HPFany of the acquired product lines in the U.K. The Company has initiated a strategic review of its international portfolio including the seafood and frozen businesses in Europe, theHAK® vegetable product line in Northern Europe and theTegel® poultry business in New Zealand. This is in line with the Company’s focus on its core product categories: Ketchup, Condiments and Sauces; Infant Nutrition; and Convenience Meals and Snacks. Some of the brands involved in the strategic review include:John West®,Weight Watchers® fromHeinz®, Linda McCartney®,Aunt Bessie’s® in the United Kingdom,Petit Navire® canned fish in France;Tegel® poultry products in New Zealand;HAK® vegetables in Northern Europe;Marie Elisabeth® seafood in Portugal andMareblu® seafood in Italy. Management is in the process of finalizing such reviews and obtaining acceptable purchase offers, and expects to seek approval of the divestitures from the Company’s Board of Directors beginning in the third quarter of Fiscal 2006. In Fiscal 2005, these businesses had annual sales approximating $1.4 billion and operating income approximating $150 million.
Special Items
The Company recorded pretax reorganization charges for targeted workforce reductions consistent with the Company’s goals to streamline its businesses totaling $31.5 million ($22.2 million after tax) and $56.5 million ($39.1 million after tax) during the second quarter and six months ended October 26, 2005, respectively. Approximately 300 positions are being eliminated as a result of this program, primarily in the General & Administrative (“G&A”) area. Additionally, pretax costs of $6.8 million ($4.4 million after tax) and $15.6 million ($12.0 million after tax) were incurred in the second quarter and six months ended October 26, 2005, respectively, primarily as a result of the strategic review discussed above. Finally, in the second quarter ended October 26, 2005, the Company recognized a net $12.7 million ($13.6 million after tax) charge during the
18
quarter primarily related to the sale of a seafood business in Israel, which closed early in the third quarter of Fiscal 2006. For the second quarter, the total impact of these initiatives was $50.9 million pre-tax ($40.2 million after-tax), of which $2.1 million was recorded as costs of products sold and $48.8 million in selling, general and administrative expenses (“SG&A”). For the six months ended October 26, 2005, the total impact of these initiatives was $84.8 million pre-tax ($64.6 million after-tax), of which $4.2 million was recorded as costs of products sold and $80.6 million in SG&A.
Net income from discontinued operations for the second quarter and six months ended October 26, 2005 was $32.0 million, and for the second quarter and six months ended October 27, 2004 was $1.7 million, and reflects the favorable settlement of tax liabilities related to the businesses spun-off to Del Monte in Fiscal 2003.THREE MONTHS ENDED OCTOBERJANUARY 25, 2006 AND JANUARY 26, 2005 AND OCTOBER 27, 2004 Results of Continuing Operations Sales for the three months ended October 26, 2005January 25, 2006 increased $139.3$117.4 million, or 6.3%5.7%, to $2.34$2.19 billion. Sales were favorably impacted by a volume increase of 0.6%2.9% driven primarily by the North American Consumer Products segment, as well as the Australian and IndonesianU.K. businesses. These volume increases were partially offset by declines in the European frozen food and convenience meals product lines, the U.S. Foodservice segment and theTegel® poultry business in New Zealand. Pricing increased sales by 0.2% as improvements in the Italian infant nutrition businessbusinesses. Net pricing was virtually flat as more efficient trade spending in the North American Consumer Products segment and price increases taken in Latin America were offset by increased promotional spending onHeinz® soup in the U.K. Acquisitions, net of divestitures, increased sales by 5.4%6.6%, and foreign exchange translation rates increaseddecreased sales by 0.2%3.7%. Gross profit increased $42.4decreased $4.0 million, or 5.3%0.5%, to $842.4$780.7 million, and the gross profit margin declined to 35.7% from 37.9%. These decreases are primarily a result of the $18.8 million asset impairment charge on an Indonesian noodle business discussed above, unfavorable exchange rates and increased commodity costs, particularly in the U.S. and Indonesian businesses. These declines were partially offset by the favorable sales impact of acquisitions and higher sales volume. The gross profit margin declined slightly 22
SG&A increased $7.7 million, or 1.7%, to 36.0% from 36.4% mainly$473.1 million, primarily due to acquisitions and increased commodity costs, higher manufacturing costs in Northern Europe and Italy, and lower margins on the new business in Russia,volume, partially offset by moderate pricing increases and productivity initiatives. SG&A increased $75.3 million, or 16.5%, to $531.8 million and increased asthe impact of exchange rates. As a percentage of sales, SG&A decreased to 22.7%21.6% from 20.8%. The increase as a percentage of sales is22.5% primarily due to decreased G&A, which resulted from the $48.8Company’s streamlining efforts, particularly in Europe, and reduced litigation costs. These declines were offset by $20.2 million of special items previously discussed above and the impact of higher fuel and transportation costs.
costs, particularly in the U.S. businesses. Operating income decreased $32.9$11.7 million, or 9.6%3.7%, to $310.5 million, as the favorable impact of acquisitions and volume were more than offset by the $50.9 million of special items discussed above, the lower gross profit margin and increased fuel and transportation costs.$307.6 million. Total marketing support (recorded as a reduction of revenue or as a component of SG&A) increased $23.0$13.1 million, or 3.8%2.4%, to $633.3$550.4 million, on a sales increase of 6.3%5.7%. Marketing support recorded as a reduction of revenue, typically deals and allowances, increased $21.2$15.6 million, or 3.9%3.3%, to $559.1$483.8 million. This increase is largely a result of acquisitions and increased trade promotion spending in the U.K., partially offset by decreases in the Italian infant nutrition business.business and North American Consumer Products segment. Marketing support recorded as a component of SG&A increased $1.8decreased $2.5 million, or 2.5%3.6%, to $74.2 million.$66.5 million, primarily from reductions in the U.K. Net interest expense increased $20.1$25.6 million, to $70.7$78.6 million, due to higher average interest rates and higher average debt in Fiscal 2006. Other expenses, net, increased $6.3$7.7 million, to $9.1$9.9 million, primarily due to reducedthe $6.9 million loss on the sale of the Company’s equity investment in Hain. The prior year includes the non-cash impairment charges totaling $73.8 million related to the cost and investment income.equity investments previously discussed. The effective tax rate for the quarter was 25.6%39.2% versus 32.0%30.9% in the prior year. This declineincrease was primarily a result of a reversal of arecording current period tax provision of $23.4 million related to a foreign affiliate 19
following a favorable court decision involving an unrelated party.charges associated with the American Jobs Creation Act. The impact of this benefitthese charges was partially offset by additional special items accrued ina $20.6 million reversal of valuation allowances associated with the quarter for which no tax benefit can be recorded.prior year non-cash asset impairment charges. The Company has revisedreaffirms its projected effective tax rate for the year, excluding special items, from a range of 31% to 33% to 30% to 31%.
Income from continuing operations was $171.8increased to $133.2 million compared to $197.3from $131.5 million in the year earlier quarter, a decrease of 12.9%. This decrease is primarily due to the $40.2 million of after tax special items discussed above and increased net interest expense, partially offset by the favorable impact of acquisitions and a lower effective tax rate.quarter. Diluted earnings per share from continuing operations was $0.50$0.39 in the current year compared to $0.56$0.37 in the prior year, down 10.7%up 5.4%. OPERATING RESULTS BY BUSINESS SEGMENT North American Consumer Products Sales of the North American Consumer Products segment increased $59.1$79.7 million, or 10.4%13.8%, to $625.0$658.8 million. Volume increased 4.2%4.9%, as a result of strong growth inSmart Ones® frozen entrees and desserts,TGI Friday’s®® andDelimex®® brands of frozen snacks,Classico® pasta sauces andClassicoHeinz®® pasta sauces. Frozen potatoes volume benefited favorably from new distribution related to a co-packing agreement. These improvements were partially offset by declines inHeinz® ketchup primarily due to the timing of price increases in Canada in the prior year. ketchup. Overall, pricing increased 0.7%1.5% largely due to reducedmore efficient trade promotion expense, primarily in thespending onSmartOnes® frozen food category.entrees andOre-Ida® frozen potatoes. The acquisitions of HPF and Nancy’s Specialty Foods, Inc. increased sales 4.1%6.6%. Favorable Canadian exchange translation rates increased sales 1.4%0.7%. Gross profit increased $21.0$25.4 million, or 8.7%10.3%, to $261.7$273.1 million, driven primarily by the favorable impact of acquisitions, volume growth and acquisitions.increased net pricing. The gross profit margin declined to 41.9%41.5% from 42.5%42.8%, primarily due to increased commodity costs.costs and a benefit in the prior year from the favorable termination of a long-term co-packing arrangement. Operating income increased $12.0��$6.1 million, or 8.9%4.1%, to $147.0$154.4 million, due to the increase in gross profit partially offset by increased Selling and Distribution expenses (“S&D”), resulting from acquisitions, increased volume and higher fuel and trucking costs, and increased G&A, largely from acquisitions and increased personnel costs. 23
U.S. Foodservice Sales of the U.S. Foodservice segment increased $5.5$26.3 million, or 1.5%7.0%, to $385.3$401.1 million. The acquisition of Appetizers And, Inc. (“AAI”) in the fourth quarter of Fiscal 2005 increased sales 4.6%. Lower pricing, primarily onHeinz® ketchup, decreased sales by 0.7%5.2%. Volume decreased sales 2.5%increased 1.3%, as increases in Truesoups frozen soup and single serve condiments were partially offset by reductions in ketchup due primarily to the timing of ketchup trade promotionsincreased competition and reduced traffic at some key customers. Higher pricing increased sales by 0.6% as increases in custom recipe tomato products and single serve condiments were largely offset by declines inHeinz® ketchup. Gross profit decreased $3.2increased $4.0 million, or 2.8%3.4%, to $111.7$120.4 million, and the gross profit margin decreased to 29.0% from 30.3% primarilylargely due to the volume decline, higher commodity costs and $2.4 million of reorganization costs related to targeted workforce reductions, partially offset by the favorable impact of the AAI acquisition.acquisition, partially offset by a decline in the gross profit margin to 30.0% from 31.1% resulting from higher commodity and fuel costs. Operating income decreased $10.8increased $2.5 million, or 4.6%, to $47.2$56.9 million, largely due to $5.3 million of reorganization costs related to targeted workforce reductions, the decreaseincrease in gross profit, andpartially offset by increased S&D,G&A, largely due to higher fuel and distribution costs.the AAI acquisition. Europe Heinz Europe’s sales increased $43.9$9.6 million, or 5.4%1.3%, to $858.7$772.2 million. The acquisitions of HPF and Petrosoyuz increased sales 9.7%12.0%. Volume decreased 2.0%increased 2.1%, as increases fromHeinz® soup and top-down ketchup and beans were more thanpartially offset by declines in the non-core frozen foods business in the U.K.,HAK® vegetables in Northern Europe and convenience meals in the U.K. The frozen food decline is resulting mainly a result offrom category softness, and the loss of a contract related to chilled sandwiches, and the decrease in convenience mealsdeclines in the U.K. is primarily in soup and pasta meals. 20
Italian infant nutrition business. Lower pricing decreased sales 0.5%2.8%, driven primarily by increased promotional spending onHeinz® soup in the U.K., and other condiments in Northern Europe, partially offset by the Italian infant nutrition business and price increases initiated onHeinz® beans. The improvement in the Italian infant nutrition business was largely due to the $21.1 million charge for trade spending in the prior year which was partially offset by list price declines and promotional timing. Divestitures reduced sales 1.0%1.5%, and unfavorable exchange translation rates decreased sales by 0.8%8.5%. Gross profit increased $15.1decreased $5.2 million, or 5.0%1.7%, to $314.9$295.8 million, and the gross profit margin declined to 38.3% from 39.5%. These decreases were driven mainly by unfavorable pricing and exchange translation rates, partially offset by the favorable impact of acquisitions partiallyand higher volume. Operating income increased slightly by $0.2 million, or 0.2%, to $124.1 million, as reduced marketing expense and G&A, due primarily to the Company’s streamlining efforts and reduced litigation costs, were offset by lower volume. The gross profit margin was virtually flat primarily due to higher manufacturing costs in Northern Europe and Italy, offset by improved net pricing in European seafood, higher margin acquisitions and the settlement$14.4 million of a supplier claim in the U.K. related to the Sudan 1 recall. Operating income decreased $12.8 million, or 10.2%, to $112.7 million, due to $23.6 millionspecial items discussed above. These special items consist mainly of reorganization costs related to targeted workforce reductions and strategic review costs for the non-core seafood and frozen businessesbusiness in Europe, partially offset by a gain on the increasesale of theHAK® vegetable product line in gross profit and reduced European headquarter costs.Northern Europe. Asia/ Pacific Sales in Asia/ Pacific increased $24.3$5.0 million, or 7.1%2.0%, to $369.1$259.0 million. Volume increased sales 3.9%3.7%, reflecting strong volume in Australia, and Indonesia, largely due to new product introductions, and increased promotions. These increases were partially offset by a declinedeclines in theTegel® poultry business in New Zealand. Favorable exchange translation ratesIndonesian sauces and noodles resulting from price increases and increased sales by 1.6%.competition. Pricing increased sales slightly, up 0.4%.0.5%, resulting largely from price increases on various products in Indonesia. Acquisitions, net of divestitures, increased sales 1.2%1.8%, largely due to the acquisition of Shanghai LongFong Foods (“LongFong”), a maker of popular frozen Chinese snacks and desserts. Unfavorable exchange translation rates decreased sales by 4.0%. Gross profit increased $4.7decreased $29.2 million, or 4.2%33.4%, to $116.1$58.1 million, benefiting from volume improvements and the LongFong acquisition. The gross profit margin decreased to 31.4%22.4% from 32.3%34.4%. These declines were primarily a result of an $18.8 million asset impairment charge on an Indonesian noodle business previously discussed, as well as increased commodity and manufacturing cost increasescosts primarily in Indonesia and China, and lower sales in theTegel® poultry business.Indonesia. Operating income decreased $3.2$28.0 million, or 7.5%, to $39.6$1.0 million, primarily due to $3.1 million of reorganization costs related to targeted workforce reductions and strategic review costs for the non-coreTegel® poultry business.decline in gross profit. Other Operating Entities Sales for Other Operating Entities increased $6.4decreased $3.3 million, or 6.8%3.3%, to $100.7$95.5 million. Volume increased 2.6%1.4% due primarily to strong sales in Latin America and India. Higher pricing increased 24
sales by 5.4%6.4%, largely due to price increases taken in Latin America.America and India. Sales were also favorably impacted by 4.1%4.9% from the acquisition of a sauce and condiments business in Mexico in the fourth quarter Fiscal 2005. Divestitures reduced sales by 3.2%11.0% and foreign exchange translation rates reduced sales by 2.1%5.0%. Gross profit increased $4.0$2.2 million, or 13.5%7.7%, to $34.0$30.3 million, due mainly to increased pricing.pricing, partially offset by the impact of divestitures. Operating income decreased $13.2increased $2.3 million, to a loss of $5.0$4.9 million, due primarily to an asset impairment charge for the seafood businessincrease in Israel related to its salegross profit and decreased SG&A partially offset by strategic review costs in the third quarter of Fiscal 2006.Israel. As a result of general economic uncertainty, coupled with government restrictions on the repatriation of earnings, as of the end of November 2002, the Company deconsolidated its Zimbabwean operations and classified its remaining net investment of approximately $110 million as a cost investment included in other non-current assets on the consolidated balance sheets. As previously noted, economic conditions have not improved and the currency continues to devalue. Should the current situation continue, the Company could experience disruptions and delays in its Zimbabwean operations. The ability to source raw materials, which at certain times of the year requires access to foreign currency, is critical to the sustainability of local operations. While the Company’s business continues to operate profitably and is able to source raw materials, the country’s economic situation remains uncertain. The Company’s ability to recover its 21
investment could become impaired if the economic and political uncertainties continue to deteriorate. SIXNINE MONTHS ENDED OCTOBERJANUARY 25, 2006 AND JANUARY 26, 2005 AND OCTOBER 27, 2004
Results of Continuing Operations Sales for the sixnine months ended October 26, 2005January 25, 2006 increased $246.4$370.8 million, or 5.9%6.3%, to $4.45$6.24 billion. Sales were favorably impacted by a volume increase of 1.4%2.3% driven primarily by the North American Consumer Products segment, as well as the Australian, Indonesian and Italian infant nutrition businesses. These volume increases were partially offset by declines in the European frozen food convenience mealsbusiness and seafood product lines, the U.S. Foodservice segment and theTegel® poultry business in New Zealand.segment. Pricing increased sales slightly, by 0.2%0.1%, as improvements in the Italian infant nutrition businessLatin America and in Latin AmericaIndonesia were offset by declines in Australia, U.K. and Northern Europe. Acquisitions, net of divestitures, increased sales by 3.4%4.8%. Foreign exchange translation rates increaseddecreased sales by 0.8%0.9%. Gross profit increased $57.4$51.8 million, or 3.7%2.3%, to $1.60$2.29 billion, primarily a result ofdue to the favorable sales impact of acquisitions and higher sales volume, and favorablepartially offset by unfavorable exchange translation rates. The gross profit margin decreased to 35.9%36.6% from 36.6%38.1% mainly due to the $18.8 million asset impairment charge on an Indonesian noodle business previously discussed, declines in the Europe segment, particularly in Italy and Northern and Eastern Europe, as well asand increased commodity costs, acrossparticularly in the Company.U.S. and Indonesian businesses. SG&A increased $148.7$148.3 million, or 17.4%11.6%, to $1.00$1.42 billion, and increased as a percentage of sales to 22.6%22.8% from 20.4%21.7%. The increase as a percentage of sales is primarily due to the $80.6$94.8 million of special items discussed above, the impact of acquisitions, and higher fuel and transportation costs,costs. These increases were partially offset by decreased G&A in Europe, due mainly to the Company’s streamlining efforts and increased G&A. reduced litigation costs. Operating income decreased $91.4$96.6 million, or 13.4%10.0%, to $591.7 million, which was primarily impacted by the $84.8 million of special items discussed above, higher fuel and transportation costs and increased G&A expense.$865.5 million. Total marketing support (recorded as a reduction of revenue or as a component of SG&A) increased $69.8$62.3 million, or 6.0%4.2%, to $1.23$1.55 billion on a sales increase of 5.9%6.3%. Marketing support recorded as a reduction of revenue, typically deals and allowances, increased $66.2$61.0 million, or 6.4%4.7%, to $1.10$1.35 billion. This increase is largely a result of increased trade promotion spending acrossin the European businesses,Heinz® ketchupU.K. andClassico® pasta sauces in U.S. businesses, acquisitions Australia and foreign exchange translation rates.the impact of acquisitions. These increases were partially offset by decreases in the Italian infant nutrition business.business and foreign exchange translation rates. Marketing support 25
recorded as a component of SG&A increased $3.6$1.4 million, or 2.7%0.7%, to $136.9 million.$195.9 million, as increases from acquisitions were largely offset by reductions in the U.K. Net interest expense increased $31.7$57.4 million, to $129.0$207.6 million due to higher average interest rates and higher average debt in Fiscal 2006. Other expenses, net, increased $4.5$9.6 million to $13.6$19.8 million primarily due to reducedthe $6.9 million loss on the sale of the Company’s equity investment in Hain. The prior year includes the non-cash impairment charges totaling $73.8 million related to the cost and investment income, partially offset by reduced currency losses.equity investments previously discussed. The current year-to-dateyear-to-date effective tax rate was 26.7%30.8% compared to 32.0% last31.8% for the prior year. The decrease in the effective tax rate is attributable to discrete benefits from foreign tax credit carryforwards of approximately $16.3 million related to tax planning initiatives, and the reversal of $23.4 million of tax provision related to a foreign affiliate as a result offollowing a favorable court decision involving an unrelated party. Theseparty, and the reversal of $20.6 million of valuation allowances as previously discussed. The majority of these benefits were partially offset by the elimination of certain tax benefits, the recording of tax charges for the American Jobs Creation Act, as well as no tax benefit on some of the special items discussed above. Income from continuing operations for the first sixnine months of Fiscal 2006 was $329.1$441.7 million compared to $392.1$496.5 million in the year earlier period, a decrease of 16.1%, due to the $64.6 million of special items discussed above and increased net interest expense, partially offset by a lower 22
effective tax rate.11.0%. Diluted earnings per share from continuing operations was $0.95$1.29 in the current year compared to $1.11$1.40 in the prior year, down 14.4%7.9%.
OPERATING RESULTS BY BUSINESS SEGMENT North American Consumer Products Sales of the North American Consumer Products segment increased $115.2$195.0 million, or 10.9%11.9%, to $1.17$1.83 billion. Volume increased significantly, up 7.5%6.6%, as a result of strong growth inHeinz® ketchup, andTGI Friday’s® andDelimex® brands of frozen snacks. In addition,Classico® pasta sauces,Smart Ones® frozen entrees and the launch of the new larger size Picnic Pak aided the volume increase. Frozen potatoes continued to perform well, as a result of last calendar year’s successful launch ofOre-Ida® Extra Crispy Fries and microwavableEasy Fries® as well as new distribution related to a co-packing agreement. Pricing was virtually flat,up 0.5%, as reduced trade spending onOre-Ida® frozen potatoes was largely due tooffset by increased trade promotion expense primarily related toonHeinz® ketchup andClassico® pasta sauces, and decreased price on the new larger size Picnic Pak. These price decreases were partially offset by reduced trade spending onOre-Ida® frozen potatoes. The HPF and Nancy’s acquisitions increased sales 2.2%3.8%. Divestitures reduced sales 0.2%0.1% and exchange translation rates increased sales 1.5%1.2%. Gross profit increased $42.7$68.1 million, or 9.6%9.8%, to $486.1$759.2 million, driven primarily by volume growth and acquisitions. The gross profit margin declined to 41.6%41.5% from 42.0%42.3%, primarily due to increased commodity costs.costs and a benefit in the prior year from the favorable termination of a long-term co-packing arrangement with a customer. Operating income increased $24.9$31.0 million, or 10.1%7.9%, to $270.9$425.4 million, due to the increase in revenue,gross profit, partially offset by increased S&D, GSG&A, primarily due to acquisitions and volume and increased R&D costs.associated with the new innovation center. U.S. Foodservice Sales of the U.S. Foodservice segment increased $14.9$41.1 million, or 2.1%3.7%, to $738.6 million.$1.14 billion. The acquisition of AAI increased sales 4.1%4.5%. Net pricing was virtually flat to prior year. Volume decreased sales 1.9%0.8%, due primarily to the timing of ketchup, trade promotionsresulting from increased competition and reduced traffic at some key customers, partially offset by strong frozen soup sales. Pricing increased sales 0.1% as increases in custom recipe tomato products and frozen desserts were offset by declines in ketchup. 26
Gross profit increased $2.8$6.8 million, or 1.3%2.0%, to $219.4$339.8 million, primarily due to the AAI acquisition, partially offset by $3.0 million of reorganization costs discussed above, increased commodity and fuel costs and the unfavorable volume impact. The gross profit margin decreased slightly to 29.7%29.8% from 29.9%30.3%. Operating income decreased $14.6$12.1 million, or 13.0%7.3%, to $97.7$154.6 million, chiefly due to $6.7$7.1 million of reorganization costs and increased S&D, largely due to higher fuel and distribution costs. Europe Heinz Europe’s sales increased $43.4$58.1 million, or 2.7%2.8%, to $1.65$2.16 billion. The HPF and Petrosoyuz acquisitions increased sales 6.2%9.1%. Volume decreased 2.5%0.9%, principally due to the non-core frozen foods business and convenience mealsinfant feeding in the U.K. and the European seafood business. The frozen food decline is mainly a result of category softness, reduced promotional spending and the loss of a chilled sandwich contract. The decrease in U.K. convenience mealsinfant feeding is primarily from soupincreased competition in canned and pasta meals.jarred baby food. These volume declines were partially offset by increases in the Italian infant nutrition business, andas well asHeinz® top-down ketchup. Higherketchup and soup. Lower pricing increaseddecreased sales 0.2%0.9%, driven primarily by increased promotional spending onHeinz® soup in the U.K., partially offset by improvements in the Italian infant nutrition business and price increases initiated onHeinz® beans, partially offset by increased promotional spending onHeinz® soup in the U.K. beans. The improvement in the Italian infant nutrition business is largely due to the $21.1 million charge for trade spending in the prior year which was partially offset by list price declines and promotional timing. Divestitures reduced sales 1.0%1.3%, and unfavorable exchange translation rates decreased sales by 0.1%3.1%. Gross profit increased $0.6decreased $8.5 million, or 1.0%, to $603.5$839.4 million, whileand the gross profit margin decreased to 36.6%38.9% from 37.6%40.3%. The decrease in gross profit margin isThese decreases are primarily due to unfavorable exchange translation rates, decreased volume and pricing and higher manufacturing 23
costs in Northern Europe and Italy.Europe. These decreases were partially offset by improvements in European seafood, resulting from higher pricing and reduced manufacturing costs, and higher margin acquisitions. Operating income decreased $50.6$50.2 million, or 18.1%13.4%, to $229.0$324.8 million, due largely to lower volume, the decreased gross profit margin,decrease, unfavorable exchange translation rates and the $37.0$47.7 million of special items discussed above, partially offset by the favorable impact of acquisitions, reduced G&A and decreased marketing expense in the U.K. The special items consist mainly of reorganization costs related to targeted workforce reductions and strategic review costs for the non-core seafood and frozen businessesbusiness in Europe. These were partially offset by the favorable impact of acquisitions. Asia/ Pacific Sales in Asia/ Pacific increased $53.6$60.5 million, or 8.4%8.0%, to $692.6$819.3 million. Volume increased sales 4.3%6.2%, reflecting strong volume in Australia and Indonesia, largely due to new product introductions and increased promotional spending. These increases were partially offset by a decline in theTegel® poultry business in New Zealand. Favorable exchange translation rates increased sales by 3.8%0.6%. Lower pricing reduced sales 0.7%0.2%, primarily due to continuing market price pressures on theTegel® poultry business in New Zealand as well as declines in the Australian business.business offset by increases in Indonesia. Acquisitions, net of divestitures, increased sales 1.0%1.5%, largely due to the acquisition of LongFong. Gross profit increased $7.7decreased $19.2 million, or 3.7%7.3%, to $214.5$242.9 million, benefitingand the gross profit margin declined to 29.7% from volume improvements, acquisitions34.5%. These declines were primarily a result of an $18.8 million asset impairment charge on an Indonesian noodle business and increased commodity and manufacturing costs in Indonesia and China, partially offset by the favorable impact of exchange translation rates in Australiaacquisitions and New Zealand. The gross profit margin decreased to 31.0% from 32.4% primarily a result of lower pricing, higher commodity costs and lower sales in theTegel® poultry business.volume. Operating income decreased $15.1$36.7 million, or 20.1%40.6%, to $60.0$53.7 million, primarily due to the decline in gross profit margin, increased S&D and G&A and $10.0$8.1 million of reorganization costs related to targeted workforce reductions and strategic review costs for the non-coreTegel® poultry business.discussed above. Other Operating Entities Sales for Other Operating Entities increased $19.4$16.1 million, or 10.7%5.8%, to $201.0$296.4 million. Volume increased 4.2%3.2% reflecting strong infant feeding sales in Latin America and beverage sales in India. Higher pricing increased sales by 5.9%6.1%, largely due to price increases taken in Latin America and reduced trade spendingpromotions in India. 27
Latin America. Sales were also favorably impacted by 4.1%4.4% from the acquisition of a sauce and condiments business in Mexico in the fourth quarter Fiscal 2005. Divestitures reduced sales by 1.9%5.1%, and foreign exchange translation rates reduced sales by 1.8%2.9%. Gross profit increased $7.5$9.6 million, or 12.7%11.1%, to $66.2$96.6 million, due mainly to increased pricing. Operating income decreased $21.1$18.8 million, to $1.4$6.3 million, due primarily toas the increase in gross profit was more than offset by an asset impairment charge for the seafood business in Israel related to its saleand strategic review costs in the third quarter of Fiscal 2006.Israel. In addition, last year’s results include the proceeds of an agreement related to the recall in Israel. Liquidity and Financial Position For the first sixnine months, year-to-date, cash provided by continuing operating activities was $393.5$502.9 million, an increasea decrease of $13.9$3.2 million from the prior year. The increasedecrease in Fiscal 2006 versus Fiscal 2005 is primarily due to favorable movement in accounts payable and accrued expenses, and inventories, partially offset by a decline in income from continuing operationsaccounts receivable and the timing of income tax payments. The Company continues to make progress in reducing its cash conversion cycle, with a reduction of two days in Fiscal 2006 compared to Fiscal 2005. During the third quarter of Fiscal 2004, the Company reorganized certain of its foreign operations, resulting in astep-up in the tax basis of certain assets. As a consequence, the Company incurred a foreign income tax liability of $125 million, which was offset by an equal amount of prepaid tax asset. The tax liability was paid in the third quarter of Fiscal 2005. The prepaid tax asset is being amortized to tax expense to match the amortization of the stepped up tax basis in the assets. As a result of thestep-up, the Company expects to realize a tax benefit in excess of the tax liability paid. Accordingly, cash flow and tax expense are expected to be improved by $120 million over the amortization period. Cash used for investing activities totaled $1.14 billion$1,033.2 million compared to $12.5$85.1 million last year. Capital expenditures totaled $99.6were $151.0 million (2.2% of sales) compared to $82.6$131.0 million (2.0% of sales) last year. Acquisitions net of divestitures, used $1.04 billionrequired $1,053.6 million in the first sixnine months of Fiscal 2006 primarily related to the Company’s purchase of HPF, Nancy’s Specialty Foods, Inc., and Petrosoyuz.Petrosoyuz, compared to $38.1 million in the prior year, which related largely to the purchase of a controlling interest in Shanghai LongFong Foods. Proceeds from divestitures provided $171.6 million in the current year, related primarily to the third quarter sales of the equity investment in Hain and theHAK® vegetable product line in Northern Europe. In the first six months of Fiscal 2005, proceeds from divestitures net of acquisitions, provided $26.0 million. Included in the Fiscal 2005 net proceeds from divestitures, is a $20.2$39.9 million deposit related primarily to the sale of an oil and fats product line in South Korea. 24
Cash provided by financing activities totaled $320.3$408.9 million compared to using $321.3$840.2 million last year. Proceeds from short-term debt and commercial paper were $999.3$961.4 million this year compared to $8.5payments on short-term debt of $24.1 million in the prior year. Proceeds from long-term debt were $216.4 million compared to payments on long-term debt of $418.5 million in the prior year, which relates primarily to the payoff of€300 million of bonds which matured in the third quarter of the prior year. Cash used for the purchases of treasury stock, net of proceeds from option exercises, was $483.6$473.8 million this year compared to $130.6$109.7 million in the prior year, in line with the Company’s plans of reducing shares outstanding. Dividend payments totaled $206.6$307.1 million, compared to $199.5$299.3 million for the same period last year, reflecting a 5.3%the increase in the annual dividend on common stock. At October 26, 2005,January 25, 2006, the Company, on a continuing basis, had total debt of $5.67$5.88 billion (including $100.3$112.4 million relating to the fair value of interest rate swaps) and cash and cash equivalents of $600.2$944.3 million. The $979 million$1.19 billion increase in total debt and the $484$139.5 million decrease in cash from year-end Fiscal 2005 is primarily the result of acquisitions and stock repurchases during Fiscal 2006. The Company expects to use cash on hand and a portion of the proceeds from the pending divestitures to reduce commercial paper borrowings and to repay long-term debt that matures in the fourth quarter of Fiscal 2006. 28
The Company and H.J. Heinz Finance Company maintain a $2 billion credit agreement that expires in 2009. The credit agreement supports the Company’s commercial paper borrowings and the remarketable securities.borrowings. As a result, thesethe commercial paper borrowings are classified as long-term debt based upon the Company’s intent and ability to refinance these borrowings on a long-term basis. The Company maintains in excess of $1 billion of other credit facilities used primarily by the Company’s foreign subsidiaries. These resources, the Company’s existing cash balance of more than $600$900 million, strong operating cash flow, the impact of the repatriation provisions of the AJCA, and access to the capital markets, if required, should enable the Company to meet its cash requirements for operations, including capital expansion programs, debt maturities and dividends to shareholders. On December 1, 2005, the Company remarketed the $800 million remarketable securities and amended the terms of the securities so that the securities will be remarketed every third year rather than annually. The next remarketing is scheduled for December 1, 2008. In Fiscal 2006, cash required for reorganization costs, related to both workforce reductions and strategic review costs, was approximately $32.8$78.0 million. The Company expects the aggregate amount of net expense to be incurred in Fiscal 2006 relative to worldwide targeted headcount reductions, costs relative to portfolio reviews of several non-core businesses and integration costs for the above acquisitions to be approximately $100$120 million, which will be primarily cash expenditures. On-going savings relative to these initiatives are anticipated to be approximately $25 million and $50$30 million in fiscal years 2006 and 2007, respectively. In the third quarter of Fiscal 2006, Moody’s changed the Company’s long-term debt rating from A3 to Baa1. The Company’s long-term debt ratings wererating was A- at Standard & Poors and Fitch and A-3 at Moody’s. Moody’s has put Heinz’s long-term rating under review for possible downgrade.Poors. The impact of inflation on both the Company’s financial position and the results of operations is not expected to adversely affect Fiscal 2006 results. Contractual Obligations The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements and unconditional purchase obligations. In addition, the Company has purchase obligations for materials, supplies, services and property, plant and equipment as part of the ordinary conduct of business. A few of these obligations are long-term and are based on minimum purchase requirements. In the aggregate, such commitments are not at prices in excess of current markets. Due to the proprietary nature of some of the Company’s materials and processes, certain supply contracts contain penalty provisions for early terminations. The Company does not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. 25
The following table represents the contractual obligations of the Company as of October 26, 2005.January 25, 2006. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less than | | | | | | | More than | | | | | Less than | | | | | | | More than | | | | | | 1 Year | | | 1-3 Years | | | 3-5 Years | | | 5 Years | | | Total | | | 1 Year | | | 1-3 Years | | | 3-5 Years | | | 5 Years | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Thousands of Dollars) | | | (Thousands of Dollars) | | Long-term Debt | | $ | 508,276 | | $ | 302,668 | | $ | 1,422,699 | | $ | 3,281,043 | | $ | 5,514,686 | | | $ | 514,286 | | $ | 625,303 | | $ | 1,050,619 | | $ | 3,509,828 | | $ | 5,700,036 | | Capital Lease Obligations | | | 565 | | | 1,124 | | | 1,418 | | | 18,520 | | | 21,627 | | | | 2,762 | | | 5,749 | | | 5,788 | | | 33,043 | | | 47,342 | | Operating Leases | | | 57,872 | | | 251,977 | | | 77,162 | | | 209,286 | | | 596,297 | | | | 40,359 | | | 244,146 | | | 73,755 | | | 203,419 | | | 561,679 | | Purchase Obligations | | | 463,122 | | | 877,923 | | | 386,640 | | | 91,695 | | | 1,819,380 | | | | 367,575 | | | 1,018,360 | | | 478,737 | | | 108,161 | | | 1,972,833 | | Other Long Term Liabilities Recorded on the Balance Sheet | | | 78,876 | | | 167,171 | | | 154,067 | | | 153,103 | | | 553,217 | | | | 91,902 | | | 139,629 | | | 150,348 | | | 167,555 | | | 549,434 | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 1,108,711 | | $ | 1,600,863 | | $ | 2,041,986 | | $ | 3,753,647 | | $ | 8,505,207 | | | $ | 1,016,884 | | $ | 2,033,187 | | $ | 1,759,247 | | $ | 4,022,006 | | $ | 8,831,324 | | | | | | | | | | | | | | | | | | | | | | | | |
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Other long-term liabilities primarily consist of certain specific incentive compensation arrangements and pension and postretirement benefit commitments. The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: interest payments, income taxes, minority interest and insurance accruals. The Company is unable to estimate the timing of the payments for these items. Recently Issued Accounting Standards In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This Statement focuses primarily on accounting for transactions in which an entity compensates employeeemployees for services through share-based payments.awards. This Statement requires an entity to measure the cost of employees foremployee services received in exchange for an award of equity or equity based instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward.award. On April 18, 2005, the Securities and Exchange Commission adopted a new rule that amended the compliance dates of SFAS No. 123(R) to require the implementation no later than the beginning of the first fiscal year beginning after June 15, 2005. The impact of adoption in Fiscal 2007 is anticipated to be approximately $15$18 million before the impact of income taxes. In December 2004, the FASB issued FASB Staff Position (“FSP”) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“AJCA.”) The FSP provides guidance on the accounting and disclosures for the temporary repatriation provision of the AJCA. The Company has adoptedRefer to note 3 regarding the disclosure provisionsimpact of the FSP which apply to entities that have not yet completed their evaluation ofAJCA for the repatriation provision,quarter and will expand its disclosures in accordance with the FSP upon completion of the final evaluation.nine months ended January 25, 2006. 26
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION Statements about future growth, profitability, costs, expectations, plans, or objectives included in this report, including the management’s discussion and analysis, 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 Heinz’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, earnings, and volume growth, general economic, political, and industry conditions, competitive conditions, which affect, among other things, customer preferences and the pricing of products, production, energy and raw material costs, the ability to identify and anticipate and respond through innovation to consumer trends, the need for product recalls, the ability to maintain favorable supplier relationships, achieving cost savings and gross margins objectives, currency valuations and interest rate fluctuations, change in credit ratings, the ability to identify and complete and the timing, pricing and success of acquisitions, joint ventures, divestitures, and other strategic initiatives, the approval of acquisitions and divestitures by competition authorities including potential divestituresand satisfaction of certain HPF product lines in the U.K.,other legal requirements, the success of Heinz’s growth and innovation strategy and the ability to limit disruptions to the business resulting from the emphasis on three core categories and potential divestitures, the ability to effectively integrate acquired businesses, new product and packaging innovations, product mix, the effectiveness of advertising, marketing, and promotional programs, supply chain efficiency and cash flow initiatives, risks inherent in litigation, including tax litigation, and international operations, particularly the performance of business in hyperinflationary environments, changes in estimates in critical accounting judgments and other 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 possibility of an impairment in Heinz’s investments, and other factors described in “Cautionary Statement Relevant to 30
Forward-Looking Information” in the Company’s Form 10-K for the fiscal year ended April 27, 2005, and factors described under “Safe Harbor Provisions for Forward-Looking Statements” in the Company’s subsequent filings with the Securities and Exchange Commission. 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 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes in the Company’s market risk during the sixnine months ended October 26, 2005.January 25, 2006. For additional information, refer to pages 22-23 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 27, 2005. | | Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure 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 designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Control over Financial Reporting | | | (b) Changes in Internal Control over Financial Reporting |
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No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 2831
PART II—OTHER INFORMATION | | Item 1. | Legal Proceedings |
| | | Nothing to report under this item. |
| | Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In the second quarter of Fiscal 2006, the Company repurchased the following number of shares of its common stock:
| | | | | | | | | | | | | | | | | | | | | | | Total Number of | | | Maximum | | | | Total | | | | | Shares Purchased as | | | Number of Shares | | | | Number of | | | Average | | | Part of Publicly | | | that May Yet Be | | | | Shares | | | Price Paid | | | Announced | | | Purchased Under | | Period | | Purchased | | | per Share | | | Programs | | | the Programs | | | | | | | | | | | | | | | July 28, 2005 - August 24, 2005 | | | 573,984 | | | $ | 36.95 | | | | — | | | | — | | August 25, 2005 - September 21, 2005 | | | — | | | | — | | | | — | | | | — | | September 22, 2005 - October 26, 2005 | | | 6,845,200 | | | $ | 36.52 | | | | — | | | | — | | | | | | | | | | | | | | | Total | | | 7,419,184 | | | $ | 36.55 | | | | — | | | | — | | | | | | | | | | | | | | |
| | | Nothing to report under this item. |
The shares repurchased were acquired under the share repurchase program authorized by the Board of Directors on June 8, 2005 for a maximum of 30 million shares. All repurchases were made in open market transactions. As of October 26, 2005, the maximum number of shares that may yet be purchased under the 2005 program is 22,426,192. | | Item 3. | Defaults upon Senior Securities |
| | | Nothing to report under this item. |
| | Item 4. | Submission of Matters to a Vote of Security Holders |
The Annual Meeting of Shareholders of H.J. Heinz Company was held in Pittsburgh, Pennsylvania, on August 23, 2005. The following individuals were elected as directors for a term expiring at the next annual meeting of the shareholders.
| | | | | | | | | | | | | | | | | | | | | Shares | | | | | | | | | | Against or | | | | | | Director | | Shares For | | | Withheld | | | Abstain | | | Broker Non-vote | | | | | | | | | | | | | | | W. R. Johnson | | | 290,530,055 | | | | 7,423,742 | | | | — | | | | — | | C. E. Bunch | | | 292,360,535 | | | | 5,593,262 | | | | — | | | | — | | M. C. Choksi | | | 292,469,727 | | | | 5,484,070 | | | | — | | | | — | | L. S. Coleman, Jr | | | 290,577,629 | | | | 7,376,168 | | | | — | | | | — | | P. H. Coors | | | 292,200,915 | | | | 5,752,882 | | | | — | | | | — | | E. E. Holiday | | | 289,270,905 | | | | 8,682,892 | | | | — | | | | — | | C. Kendle | | | 292,351,457 | | | | 5,602,340 | | | | — | | | | — | | D. R. O’Hare | | | 292,397,982 | | | | 5,555,815 | | | | — | | | | — | | L. C. Swann | | | 292,250,296 | | | | 5,703,501 | | | | — | | | | — | | T. J. Usher | | | 291,502,702 | | | | 6,451,095 | | | | — | | | | — | |
Shareholders also acted upon the following proposals at the Annual Meeting:
| | | Ratified the Audit Committee’s selection of PricewaterhouseCoopers, LLP as the Company’s independent accountants for the fiscal year ending May 3, 2006. Votes totaled 289,886,454 for, 5,304,859 against or withheld, and 2,762,484 abstentions. |
29
| | | A proposal recommended hiring an investment bankNothing to explore the sale of the Company. Votes totaled 13,141,092 for, 227,056,332 against or withheld, 5,095,593 abstentions, and 52,660,780 broker non-votes. | | | A proposal recommended that the Board of Directors take each step necessary in the most expeditious manner for a simple majority vote to apply on each issue subject to shareholder vote, except directors. Votes totaled 156,632,834 for, 84,324,299 against or withheld, 4,335,883 abstentions, and 52,660,780 broker non-votes.report under this item. |
| | Item 5. | Other Information |
| | | Nothing to report under this item. |
Exhibits required to be furnished by Item 601 of Regulation S-K are listed below. The Company may have omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The Company agrees to furnish such documents to the Commission upon request. Documents not designated as being incorporated herein by reference are set forth herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. | | | | 4. | Amended and Restated Five-Year Credit Agreement dated as of September 6, 2001 and amended and restated as of August 4, 2004 among H.J. Heinz Company, H.J. Heinz Finance Company, the Banks listed on the signature pages thereto and JP Morgan Chase Bank, as Administrative Agent. |
| | | | 10. | Annual Non-Employee Director Compensation. | | | 12. | Computation of Ratios of Earnings to Fixed Charges. |
| | | | 31(a). | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. | | | 31(b). | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. | | | 32(a). | 18 U.S.C. Section 1350 Certification by the Chief Executive Officer. | | | 32(b). | 18 U.S.C. Section 1350 Certification by the Chief Financial Officer. |
3032
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | H. J. HEINZ COMPANY | | (Registrant) |
Date: November 22, 2005February 28, 2006 | | | | By | /s/Arthur B. Winkleblack |
| | | ............................................ ............................................ ................................... |
| | | Arthur B. Winkleblack | | Executive Vice President and | | Chief Financial Officer | | (Principal Financial Officer) |
Date: November 22, 2005February 28, 2006 | | | | By | /s/Edward J. McMenaminMcmenamin |
| | | ............................................ ............................................ ................................... |
| | | Edward J. McMenamin | | Senior Vice President—Finance | | and Corporate Controller | | (Principal Accounting Officer) |
3133
EXHIBIT INDEX DESCRIPTION OF EXHIBIT Exhibits required to be furnished by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are furnished herewith. The Company may have omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The Company agrees to furnish such documents to the Commission upon request. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. | | | | 4. | Amended and Restated Five-Year Credit Agreement dated as of September 6, 2001 and amended and restated as of August 4, 2004 among H.J. Heinz Company, H.J. Heinz Finance Company, the Banks listed on the signature pages thereto and JP Morgan Chase Bank, as Administrative Agent. |
10. Annual Non-Employee Director Compensation. 12. Computation of Ratios of Earnings to Fixed Charges. 31(a). Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. 31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. 32(a). 18 U.S.C. Section 1350 Certification by the Chief Executive Officer. 32(b). 18 U.S.C. Section 1350 Certification by the Chief Financial Officer. |