Annual Reports

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  • 10-K (Aug 26, 2013)
  • 10-K (Jul 9, 2013)
  • 10-K (Jun 15, 2012)
  • 10-K (Jun 16, 2011)
  • 10-K (Jun 17, 2010)

 
Quarterly Reports

 
8-K

 
Other

HEINZ H J CO 10-K 2010
e10vk
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
    For the fiscal year ended April 28, 2010
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
    For the transition period from                 to                
 
Commission File Number 1-3385
 
(Exact name of registrant as specified in its charter)
 
     
PENNSYLVANIA   25-0542520
(State of Incorporation)
  (I.R.S. Employer Identification No.)
One PPG Place
  15222
Pittsburgh, Pennsylvania
  (Zip Code)
(Address of principal executive offices)
   
 
412-456-5700
(Registrant’s telephone number)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
     
Title of each class   Name of each exchange on which registered
 
Common Stock, par value $.25 per share
  The New York Stock Exchange
     
Third Cumulative Preferred Stock,
   
$1.70 First Series, par value $10 per share
  The New York Stock Exchange
 
 
None.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o     No þ
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of October 28, 2009 the aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant was approximately $12.4 billion.
 
The number of shares of the Registrant’s Common Stock, par value $.25 per share, outstanding as of May 31, 2010, was 318,060,499 shares.
 
 
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on August 31, 2010, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year ended April 28, 2010, are incorporated into Part III, Items 10, 11, 12, 13, and 14.
 


 

 
 
Item 1.   Business.
 
H. J. Heinz Company was incorporated in Pennsylvania on July 27, 1900. In 1905, it succeeded to the business of a partnership operating under the same name which had developed from a food business founded in 1869 in Sharpsburg, Pennsylvania by Henry J. Heinz. H. J. Heinz Company and its subsidiaries (collectively, the “Company”) manufacture and market an extensive line of food products throughout the world. The Company’s principal products include ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition and other food products.
 
The Company’s products are manufactured and packaged to provide safe, wholesome foods for consumers, as well as foodservice and institutional customers. Many products are prepared from recipes developed in the Company’s research laboratories and experimental kitchens. Ingredients are carefully selected, inspected and passed on to modern factory kitchens where they are processed, after which the intermediate product is filled automatically into containers of glass, metal, plastic, paper or fiberboard, which are then sealed. Products are prepared by sterilization, blending, fermentation, pasteurization, homogenization, chilling, freezing, pickling, drying, freeze drying, baking or extruding, then labeled and cased for market. Quality assurance procedures are designed for each product and process and applied for quality and compliance with applicable laws.
 
The Company manufactures (and contracts for the manufacture of) its products from a wide variety of raw foods. Pre-season contracts are made with farmers for certain raw materials such as a portion of the Company’s requirements of tomatoes, cucumbers, potatoes, onions and some other fruits and vegetables. Ingredients, such as dairy products, meat, sugar and other sweeteners, including high fructose corn syrup, spices, flour and fruits and vegetables, are purchased from approved suppliers.
 
The following table lists the number of the Company’s principal food processing factories and major trademarks by region:
 
                     
    Factories    
    Owned   Leased   Major Owned and Licensed Trademarks
 
North America
    20       4     Heinz, Classico, Quality Chef Foods, Jack Daniel’s*, Catelli*, Wyler’s, Heinz Bell ’Orto, Bella Rossa, Chef Francisco, Dianne’s, Ore-Ida, Tater Tots, Bagel Bites, Weight Watchers* Smart Ones, Boston Market*, Poppers, T.G.I. Friday’s*, Delimex, Truesoups, Alden Merrell, Escalon, PPI, Todd’s, Nancy’s, Lea & Perrins, Renee’s Gourmet, HP, Diana, Bravo, Arthur’s Fresh
Europe
    21           Heinz, Orlando, Karvan Cevitam, Brinta, Roosvicee, Venz, Weight Watchers*, Farley’s, Farex, Sonnen Bassermann, Plasmon, Nipiol, Dieterba, Bi-Aglut, Aproten, Pudliszki, Ross, Honig, De Ruijter, Aunt Bessie*, Mum’s Own, Moya Semya, Picador, Derevenskoye, Mechta Hoziajki, Lea & Perrins, HP, Amoy*, Daddies, Squeezme!, Wyko, Benedicta
Asia/Pacific
    20       2     Heinz, Tom Piper, Wattie’s, ABC, Chef, Craig’s, Bruno, Winna, Hellaby, Hamper, Farley’s, Greenseas, Gourmet, Nurture, LongFong, Ore-Ida, SinSin, Lea & Perrins, HP, Star-Kist, Classico, Weight Watchers*, Cottee’s*, Rose’s*, Complan, Glucon D, Nycil, Golden Circle, La Bonne Cuisine, Original Juice Co., The Good Taste Company
Rest of World
    6       2     Heinz, Wellington’s, Today, Mama’s, John West, Farley’s, Complan, HP, Lea & Perrins, Classico, Banquete, Wattie’s
                     
      67       8     * Used under license
                     


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The Company also owns or leases office space, warehouses, distribution centers and research and other facilities throughout the world. The Company’s food processing factories and principal properties are in good condition and are satisfactory for the purposes for which they are being utilized.
 
The Company has developed or participated in the development of certain of its equipment, manufacturing processes and packaging, and maintains patents and has applied for patents for some of those developments. The Company regards these patents and patent applications as important but does not consider any one or group of them to be materially important to its business as a whole.
 
Although crops constituting some of the Company’s raw food ingredients are harvested on a seasonal basis, most of the Company’s products are produced throughout the year. Seasonal factors inherent in the business have always influenced the quarterly sales, operating income and cash flows of the Company. Consequently, comparisons between quarters have always been more meaningful when made between the same quarters of prior years.
 
The products of the Company are sold under highly competitive conditions, with many large and small competitors. The Company regards its principal competition to be other manufacturers of prepared foods, including branded retail products, foodservice products and private label products, that compete with the Company for consumer preference, distribution, shelf space and merchandising support. Product quality and consumer value are important areas of competition.
 
The Company’s products are sold through its own sales organizations and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, bakeries, pharmacies, mass merchants, club stores, foodservice distributors and institutions, including hotels, restaurants, hospitals, health-care facilities, and certain government agencies. For Fiscal 2010, one customer, Wal-Mart Stores Inc., represented approximately 11% of the Company’s sales. We closely monitor the credit risk associated with our customers and to date have not experienced material losses.
 
Compliance with the provisions of national, state and local environmental laws and regulations has not had a material effect upon the capital expenditures, earnings or competitive position of the Company. The Company’s estimated capital expenditures for environmental control facilities for the remainder of Fiscal 2011 and the succeeding fiscal year are not material and are not expected to materially affect the earnings, cash flows or competitive position of the Company.
 
The Company’s factories are subject to inspections by various governmental agencies in the U.S. and other countries where the Company does business, including the United States Department of Agriculture, and the Occupational Health and Safety Administration, and its products must comply with the applicable laws, including food and drug laws, such as the Federal Food and Cosmetic Act of 1938, as amended, and the Federal Fair Packaging or Labeling Act of 1966, as amended, of the jurisdictions in which they are manufactured and marketed.
 
The Company employed, on a full-time basis as of April 28, 2010, approximately 29,600 people around the world.
 
Segment information is set forth in this report on pages 81 through 84 in Note 15, “Segment Information” in Item 8—“Financial Statements and Supplementary Data.”
 
Income from international operations is subject to fluctuation in currency values, export and import restrictions, foreign ownership restrictions, economic controls and other factors. From time to time, exchange restrictions imposed by various countries have restricted the transfer of funds between countries and between the Company and its subsidiaries. To date, such exchange restrictions have not had a material adverse effect on the Company’s operations.
 
The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge on the Company’s website at www.heinz.com, as soon as


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reasonably practicable after filed or furnished to the Securities and Exchange Commission (“SEC”). Our reports filed with the SEC are also made available on its website at www.sec.gov.
 
 
The following is a list of the names and ages of all of the executive officers of H. J. Heinz Company indicating all positions and offices held by each such person and each such person’s principal occupations or employment during the past five years. All the executive officers have been elected to serve until the next annual election of officers, until their successors are elected, or until their earlier resignation or removal. The next annual election of officers is scheduled to occur on August 31, 2010.
 
             
          Positions and Offices Held with the Company and
    Age (as of
    Principal Occupations or
Name   August 31, 2010)     Employment During Past Five Years
 
William R. Johnson
    61     Chairman, President, and Chief Executive Officer since September 2000.
Karen Alber
    46     Senior Vice President, Chief Information Officer and Global Program Management Officer since May 2010; Vice President and Chief Information Officer from October 2005 to May 2010.
Theodore N. Bobby
    59     Executive Vice President and General Counsel since January 2007; Senior Vice President and General Counsel from April 2005 to January 2007; Acting General Counsel from January 2005 to April 2005; Vice President—Legal Affairs from September 1999 to January 2005.
Steve Clark
    42     Vice President—Chief People Officer since October 2005; Director of Human Resources and Administration for Asia from January 2005 to October 2005; Director of Human Resources from August 2004 to January 2005; Senior Manager Global Leadership and Development from January 2004 to August 2004.
Edward J. McMenamin
    53     Senior Vice President—Finance and Corporate Controller since August 2004; Vice President Finance from June 2001 to August 2004.


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          Positions and Offices Held with the Company and
    Age (as of
    Principal Occupations or
Name   August 31, 2010)     Employment During Past Five Years
 
Michael D. Milone
    54     Executive Vice President—Heinz Rest of World, and Global Enterprise Risk Management and Global Infant/Nutrition since May 2010; Senior Vice President—Heinz Rest of World, Enterprise Risk Management and Global Infant/Nutrition from June 2008 to April 2010; Senior Vice President—Heinz Pacific, Rest of World and Enterprise Risk Management from May 2006 to June 2008; Senior Vice President—President Rest of World and Asia from May 2005 to May 2006; Senior Vice President—President Rest of World from December 2003 to May 2005.
David C. Moran
    52     Executive Vice President and President and Chief Executive Officer of Heinz Europe since July 2009; Executive Vice President & Chief Executive Officer and President of Heinz North America from May 2007 to July 2009; Executive Vice President & Chief Executive Officer and President of Heinz North America Consumer Products from November 2005 to May 2007; Senior Vice President—President Heinz North America Consumer Products from May 2005 to November 2005; President North America Consumer Products from January 2003 to May 2005.
Michael Mullen
    41     Vice President—Corporate and Government Affairs since February 2009; Director Global Corporate Affairs from May 2006 to February 2009; European Corporate Affairs Director from November 2004 to May 2006; General Manager European Corporate Affairs from May 2002 to November 2004.
C. Scott O’Hara
    49     Executive Vice President and President and Chief Executive Officer of Heinz North America since July 2009; Executive Vice President—President and Chief Executive Officer Heinz Europe from May 2006 to July 2009; Executive Vice President—Asia Pacific/Rest of World from January 2006 to May 2006; Senior Vice President Europe—The Gillette Company from October 2004 to January 2006; General Manager U.K. and NL—The Gillette Company from June 2001 to October 2004.

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          Positions and Offices Held with the Company and
    Age (as of
    Principal Occupations or
Name   August 31, 2010)     Employment During Past Five Years
 
Bob Ostryniec
    49     Senior Vice President and Chief Supply Chain Officer since February 2010; Chief Supply Chain Officer from January 2009 to February 2010; Global Supply Chain Officer from April 2008 to January 2009; Chief Supply Chain Officer from June 2005 to April 2008; Group Vice President Consumer Products—Product Supply from July 2003 to June 2006.
Christopher J. Warmoth
    51     Executive Vice President—Heinz Asia Pacific since June 2008; Senior Vice President—Heinz Asia from May 2006 to June 2008; Deputy President Heinz Europe from December 2003 to April 2006.
Arthur B. Winkleblack
    53     Executive Vice President and Chief Financial Officer since January 2002.
 
Item 1A.   Risk Factors
 
In addition to the factors discussed elsewhere in this Report, the following risks and uncertainties could materially and adversely affect the Company’s business, financial condition, and results of operations. Additional risks and uncertainties that are not presently known to the Company or are currently deemed by the Company to be immaterial also may impair the Company’s business operations and financial condition.
 
 
The Company operates in the highly competitive food industry, competing with other companies that have varying abilities to withstand changing market conditions. Any significant change in the Company’s relationship with a major customer, including changes in product prices, sales volume, or contractual terms may impact financial results. Such changes may result because the Company’s competitors may have substantial financial, marketing, and other resources that may change the competitive environment. Private label brands sold by retail customers, which are typically sold at lower prices, are a source of competition for certain of our product lines. Such competition could cause the Company to reduce prices and/or increase capital, marketing, and other expenditures, or could result in the loss of category share. Such changes could have a material adverse impact on the Company’s net income. As the retail grocery trade continues to consolidate, the larger retail customers of the Company could seek to use their positions to improve their profitability through lower pricing and increased promotional programs. If the Company is unable to use its scale, marketing expertise, product innovation, and category leadership positions to respond to these changes, or is unable to increase its prices, its profitability and volume growth could be impacted in a materially adverse way. The success of our business depends, in part, upon the financial strength and viability of our suppliers and customers. The financial condition of those suppliers and customers is affected in large part by conditions and events that are beyond our control. A significant deterioration of their financial condition could adversely affect our financial results.

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The Company’s performance has been in the past and may continue in the future to be impacted by economic and political conditions in the United States and in other nations. Such conditions and factors include changes in applicable laws and regulations, including changes in food and drug laws, accounting standards and critical accounting estimates, taxation requirements and environmental laws. Other factors impacting our operations in the U.S., Venezuela and other international locations where the Company does business include export and import restrictions, currency exchange rates, currency devaluation, recessionary conditions, foreign ownership restrictions, nationalization, the impact of hyperinflationary environments, and terrorist acts and political unrest. Such factors in either domestic or foreign jurisdictions could materially and adversely affect our financial results.
 
Our operating results may be adversely affected by the current sovereign debt crisis in Europe and related global economic conditions.
 
The current Greek debt crisis and related European financial restructuring efforts may cause the value of the European currencies, including the Euro, to further deteriorate, thus reducing the purchasing power of European customers. In addition, the European crisis is contributing to instability in global credit markets. The world has recently experienced a global macroeconomic downturn, and if global economic and market conditions, or economic conditions in Europe, the United States or other key markets, remain uncertain, persist, or deteriorate further, consumer purchasing power and demand for Company products could decline, and we may experience material adverse impacts on our business, operating results, and financial condition.
 
 
The Company sources raw materials including agricultural commodities such as tomatoes, cucumbers, potatoes, onions, other fruits and vegetables, dairy products, meat, sugar and other sweeteners, including high fructose corn syrup, spices, and flour, as well as packaging materials such as glass, plastic, metal, paper, fiberboard, and other materials in order to manufacture products. The availability or cost of such commodities may fluctuate widely due to government policy and regulation, crop failures or shortages due to plant disease or insect and other pest infestation, weather conditions, increased demand for biofuels, or other unforeseen circumstances. Additionally, the cost of raw materials and finished products may fluctuate due to movements in cross-currency transaction rates. To the extent that any of the foregoing or other unknown factors increase the prices of such commodities or materials and the Company is unable to increase its prices or adequately hedge against such changes in a manner that offsets such changes, the results of its operations could be materially and adversely affected. Similarly, if supplier arrangements and relationships result in increased and unforeseen expenses, the Company’s financial results could be materially and adversely impacted.
 
 
Damage or disruption to our manufacturing or distribution capabilities due to weather, natural disaster, fire, terrorism, pandemic, strikes, the financial and/or operational instability of key suppliers, distributors, warehousing and transportation providers, or brokers, or other reasons could impair our ability to manufacture or sell our products. To the extent the Company is unable to, or cannot financially mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single location, there could be a materially adverse affect on our business and results of operations, and additional resources could be required to restore our supply chain.


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Rising fuel and energy costs may have a significant impact on the cost of operations, including the manufacture, transportation, and distribution of products. Fuel costs may fluctuate due to a number of factors outside the control of the Company, including government policy and regulation and weather conditions. Additionally, the Company may be unable to maintain favorable arrangements with respect to the costs of procuring raw materials, packaging, services, and transporting products, which could result in increased expenses and negatively affect operations. If the Company is unable to hedge against such increases or raise the prices of its products to offset the changes, its results of operations could be materially and adversely affected.
 
 
Inflationary pressures and any shortages in the labor market could increase labor costs, which could have a material adverse effect on the Company’s consolidated operating results or financial condition. The Company’s labor costs include the cost of providing employee benefits in the U.S. and foreign jurisdictions, including pension, health and welfare, and severance benefits. Any declines in market returns could adversely impact the funding of pension plans, the assets of which are invested in a diversified portfolio of equity and fixed income securities and other investments. Additionally, the annual costs of benefits vary with increased costs of health care and the outcome of collectively-bargained wage and benefit agreements.
 
 
The Company is subject to numerous food safety and other laws and regulations regarding the manufacturing, marketing, and distribution of food products. These regulations govern matters such as ingredients, advertising, taxation, relations with distributors and retailers, health and safety matters, and environmental concerns. The ineffectiveness of the Company’s planning and policies with respect to these matters, and the need to comply with new or revised laws or regulations with regard to licensing requirements, trade and pricing practices, environmental permitting, or other food or safety matters, or new interpretations or enforcement of existing laws and regulations, as well as any related litigation, may have a material adverse effect on the Company’s sales and profitability. Influenza or other pandemics could disrupt production of the Company’s products, reduce demand for certain of the Company’s products, or disrupt the marketplace in the foodservice or retail environment with consequent material adverse effect on the Company’s results of operations.
 
 
If any of the Company’s products become misbranded or adulterated, the Company may need to conduct a product recall. The scope of such a recall could result in significant costs incurred as a result of the recall, potential destruction of inventory, and lost sales. Should consumption of any product cause injury, the Company may be liable for monetary damages as a result of a judgment against it. A significant product recall or product liability case could cause a loss of consumer confidence in the Company’s food products and could have a material adverse effect on the value of its brands and results of operations.


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The success of the Company is dependent upon anticipating and reacting to changes in consumer preferences, including health and wellness. There are inherent marketplace risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance. Moreover, success is dependent upon the Company’s ability to identify and respond to consumer trends through innovation. The Company may be required to increase expenditures for new product development. The Company may not be successful in developing new products or improving existing products, or its new products may not achieve consumer acceptance, each of which could materially and negatively impact sales.
 
 
The Company’s ability to efficiently integrate acquisitions and joint ventures into its existing operations also affects the financial success of such transactions. The Company may seek to expand its business through acquisitions and joint ventures, and may divest underperforming or non-core businesses. The Company’s success depends, in part, upon its ability to identify such acquisition, joint venture, and divestiture opportunities and to negotiate favorable contractual terms. Activities in such areas are regulated by numerous antitrust and competition laws in the U. S., the European Union, and other jurisdictions, and the Company may be required to obtain the approval of acquisition and joint venture transactions by competition authorities, as well as satisfy other legal requirements. The failure to obtain such approvals could materially and adversely affect our results.
 
 
The Company holds assets and incurs liabilities, earns revenue, and pays expenses in a variety of currencies other than the U.S. dollar, primarily the British Pound, Euro, Australian dollar, Canadian dollar, and New Zealand dollar. The Company’s consolidated financial statements are presented in U.S. dollars, and therefore the Company must translate its assets, liabilities, revenue, and expenses into U.S. dollars for external reporting purposes. Increases or decreases in the value of the U.S. dollar relative to other currencies may materially and negatively affect the value of these items in the Company’s consolidated financial statements, even if their value has not changed in their original currency. In addition, the impact of fluctuations in foreign currency exchange rates on transaction costs ( i.e., the impact of foreign currency movements on particular transactions such as raw material sourcing), most notably in the U.K., could materially and adversely affect our results.
 
 
The Company may incur additional indebtedness in the future to fund acquisitions, repurchase shares, or fund other activities for general business purposes, which could result in a downward change in credit rating. The Company’s ability to make payments on and refinance its indebtedness and fund planned capital expenditures depends upon its ability to generate cash in the future. The cost of incurring additional debt could increase in the event of possible downgrades in the Company’s credit rating.
 
 
The success of the Company could be impacted by its inability to continue to execute on its growth plans regarding product innovation, implementing cost-cutting measures, improving supply


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chain efficiency, enhancing processes and systems, including information technology systems, on a global basis, and growing market share and volume. The failure to fully implement the plans, in a timely manner or within our cost estimates, could materially and adversely affect the Company’s ability to increase net income. Additionally, the Company’s ability to pay cash dividends will depend upon its ability to generate cash and profits, which, to a certain extent, is subject to economic, financial, competitive, and other factors beyond the Company’s control.
 
 
Statements about future growth, profitability, costs, expectations, plans, or objectives included in this report, including in management’s discussion and analysis, and the financial statements and footnotes, are forward-looking statements based on management’s estimates, assumptions, and projections. These forward-looking statements are subject to risks, uncertainties, assumptions and other important factors, many of which may be beyond the Company’s control and could cause actual results to differ materially from those expressed or implied in this report and the financial statements and footnotes. Uncertainties contained in such statements include, but are not limited to:
 
  •  sales, earnings, and volume growth,
 
  •  general economic, political, and industry conditions, including those that could impact consumer spending,
 
  •  competitive conditions, which affect, among other things, customer preferences and the pricing of products, production, and energy costs,
 
  •  competition from lower-priced private label brands,
 
  •  increases in the cost and restrictions on the availability of raw materials including agricultural commodities and packaging materials, the ability to increase product prices in response, and the impact on profitability,
 
  •  the ability to identify and anticipate and respond through innovation to consumer trends,
 
  •  the need for product recalls,
 
  •  the ability to maintain favorable supplier and customer relationships, and the financial viability of those suppliers and customers,
 
  •  currency valuations and devaluations and interest rate fluctuations,
 
  •  changes in credit ratings, leverage, and economic conditions, and the impact of these factors on our cost of borrowing and access to capital markets,
 
  •  our ability to effectuate our strategy, which includes our continued evaluation of potential acquisition opportunities, including strategic acquisitions, joint ventures, divestitures and other initiatives, including our ability to identify, finance and complete these initiatives, and our ability to realize anticipated benefits from them,
 
  •  the ability to successfully complete cost reduction programs and increase productivity,
 
  •  the ability to effectively integrate acquired businesses,
 
  •  new products, packaging innovations, and product mix,
 
  •  the effectiveness of advertising, marketing, and promotional programs,
 
  •  supply chain efficiency,
 
  •  cash flow initiatives,
 
  •  risks inherent in litigation, including tax litigation,


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  •  the ability to further penetrate and grow and the risk of doing business in international markets, including our emerging markets, economic or political instability in those markets and the performance of business in hyperinflationary environments, such as Venezuela, and the uncertain global macroeconomic environment and sovereign debt issues, particularly in Europe,
 
  •  changes in estimates in critical accounting judgments and changes in laws and regulations, including tax laws,
 
  •  the success of tax planning strategies,
 
  •  the possibility of increased pension expense and contributions and other people-related costs,
 
  •  the potential adverse impact of natural disasters, such as flooding and crop failures,
 
  •  the ability to implement new information systems and potential disruptions due to failures in information technology systems,
 
  •  with regard to dividends, dividends must be declared by the Board of Directors and will be subject to certain legal requirements being met at the time of declaration, as well as our Board’s view of our anticipated cash needs, and
 
  •  other factors as described in “Risk Factors” above.
 
The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the securities laws.
 
Item 1B.   Unresolved Staff Comments.
 
Nothing to report under this item.
 
Item 2.   Properties.
 
See table in Item 1.
 
Item 3.   Legal Proceedings.
 
Nothing to report under this item.
 
Item 4.   (Removed and Reserved).


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Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Information relating to the Company’s common stock is set forth in this report on pages 35 through 36 under the caption “Stock Market Information” in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and on pages 85 through 86 in Note 16, “Quarterly Results” in Item 8—“Financial Statements and Supplementary Data.”
 
The Board of Directors authorized a share repurchase program on May 31, 2006 for a maximum of 25 million shares. The Company did not repurchase any shares of its common stock during the fourth quarter of Fiscal 2010. As of April 28, 2010, the maximum number of shares that may yet be purchased under the 2006 program is 6,716,192.


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Item 6.   Selected Financial Data.
 
The following table presents selected consolidated financial data for the Company and its subsidiaries for each of the five fiscal years 2006 through 2010. All amounts are in thousands except per share data.
 
                                         
    Fiscal Year Ended
    April 28,
  April 29,
  April 30,
  May 2,
  May 3,
    2010
  2009
  2008
  2007
  2006
    (52 Weeks)   (52 Weeks)   (52 Weeks)   (52 Weeks)   (53 Weeks)
 
Sales(1)
  $ 10,494,983     $ 10,011,331     $ 9,885,556     $ 8,800,071     $ 8,469,968  
Interest expense(1)
    295,711       339,635       364,808       333,037       316,274  
Income from continuing operations(1)(4)
    931,940       944,400       858,176       794,398       435,192  
Income from continuing operations per share attributable to H.J. Heinz Company common shareholders—diluted(1)(5)
    2.87       2.91       2.62       2.34       1.25  
Income from continuing operations per share attributable to H.J. Heinz Company common shareholders—basic(1)(5)
    2.89       2.95       2.65       2.37       1.26  
Short-term debt and current portion of long-term debt(2)
    59,020       65,638       452,708       468,243       54,969  
Long-term debt, exclusive of current portion(2)
    4,559,152       5,076,186       4,730,946       4,413,641       4,357,013  
Total assets(3)
    10,075,711       9,664,184       10,565,043       10,033,026       9,737,767  
Cash dividends per common share
    1.68       1.66       1.52       1.40       1.20  
 
 
(1) Amounts exclude the operating results related to the Company’s private label frozen desserts business in the U.K. as well as the Kabobs and Appetizers And, Inc. businesses in the U.S., which were divested in Fiscal 2010 and have been presented as discontinued operations. Amounts also exclude the operating results related to the Company’s European seafood and Tegel® poultry businesses which were divested in Fiscal 2006 and have been presented as discontinued operations.
 
(2) Long-term debt, exclusive of current portion, includes $207.1 million, $251.5 million, $198.3 million, $71.0 million, and ($1.4) million of hedge accounting adjustments associated with interest rate swaps at April 28, 2010, April 29, 2009, April 30, 2008, May 2, 2007, and May 3, 2006, respectively. H.J. Heinz Finance Company’s (“HFC”) mandatorily redeemable preferred shares of $350 million in Fiscals 2010 and 2009 and $325 million in Fiscals 2008-2006 are classified as long-term debt.
 
(3) Fiscals 2010-2007 reflect the adoption of new accounting guidance for defined benefit pension and other postretirement plans.
 
(4) Amounts have been restated to reflect the adoption in Fiscal 2010 of new accounting guidance on noncontrolling interests. Such guidance changed the accounting and reporting for minority interests. As such, income from continuing operations includes $17.5 million, $14.9 million, $11.6 million, $14.3 million, and $5.7 million of income attributable to noncontrolling interests for the fiscal years ended April 28, 2010, April 29, 2009, April 30, 2008, May 2, 2007, and May 3, 2006, respectively.
 
(5) Amounts have been restated to reflect the adoption in Fiscal 2010 of new accounting guidance for determining whether instruments granted in share-based payment awards that contain non-


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forfeitable rights to dividends or dividend equivalents (either paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. As a result of adopting this guidance, both basic and diluted earnings per share from continuing operations was reduced by $0.01 in Fiscals 2010, 2009 and 2007, by $0.02 in Fiscal 2008 and had a less than $0.01 impact in Fiscal 2006.
 
Fiscal 2010 results from continuing operations include expenses of $37.7 million pretax ($27.8 million after tax) for upfront productivity charges and a gain of $15.0 million pretax ($11.1 million after tax) on a property disposal in the Netherlands. The upfront productivity charges include costs associated with targeted workforce reductions and asset write-offs, that were part of a corporation-wide initiative to improve productivity. The asset write-offs related to two factory closures and the exit of a formula business in the U.K. See “Discontinued Operations and Other Disposals” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 16 through 17 for further explanation of the property disposal in the Netherlands.
 
As a result of the Company’s strategic transformation, the Fiscal 2006 results from continuing operations include expenses of $124.3 million pretax ($80.1 million after tax) for targeted workforce reductions consistent with the Company’s goals to streamline its businesses and expenses of $22.0 million pretax ($16.3 million after tax) for strategic review costs related to the potential divestiture of several businesses. Also, $206.5 million pretax ($153.9 million after tax) was recorded for net losses on non-core businesses and product lines which were sold in Fiscal 2006, and asset impairment charges on non-core businesses and product lines which were sold in Fiscal 2007. Also during Fiscal 2006, the Company reversed valuation allowances of $27.3 million primarily related to The Hain Celestial Group, Inc. (“Hain”). In addition, results include $24.4 million of tax expense relating to the impact of the American Jobs Creation Act.


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Executive Overview- Fiscal 2010
 
The H.J. Heinz Company has been a pioneer in the food industry for over 140 years and possesses one of the world’s best and most recognizable brands—Heinz®. The Company has a global portfolio of leading brands focused in three core categories, Ketchup and Sauces, Meals and Snacks, and Infant/Nutrition.
 
In Fiscal 2010, the Company reported diluted earnings per share from continuing operations of $2.87, compared to $2.91 in the prior year. During Fiscal 2009, key foreign currencies declined precipitously versus the U.S. dollar. Given that over 60% of the Company’s sales and the majority of its net income are generated outside of the U.S., foreign currency movements have a significant impact on the Company’s financial results. However, in Fiscal 2009, forward contracts were put in place to largely mitigate the unfavorable translation impact on profit associated with movements in key foreign currencies. In the first half of Fiscal 2010, foreign currencies remained unfavorable but began to rebound in the second half of the fiscal year. Overall, currency movements had a $0.29 unfavorable impact on the change in EPS from continuing operations in Fiscal 2010 versus 2009, after taking into account the net effect of current and prior year currency translation contracts, as well as foreign currency movements on translation and transactions involving inventory sourcing in the U.K.
 
EPS from continuing operations for the year reflects 4.8% growth in sales, a 50 basis point improvement in the gross profit margin and a 25.7% increase in marketing investments. Full year sales benefited from combined volume and pricing gains of 2.1%, led by the emerging markets and our top 15 brands, most notably the Heinz®, Complan® and ABC® brands. Emerging markets generated 30% of the Company’s reported sales growth and 15% of total Company sales. Also driving the sales growth was increased consumer marketing investments and new product development. Acquisitions and foreign exchange translation rates had a favorable impact on sales. The gross profit margin increased as a result of productivity improvements and higher net pricing, partially offset by higher commodity input costs including the impact of transaction-related currency cross-rates in the U.K. In Fiscal 2010, the Company incurred $28 million in after-tax charges for targeted workforce reductions and non-cash asset write-offs that were part of a corporate-wide initiative to improve productivity, partially offset by an $11 million after-tax gain related to a property sale in the Netherlands. The Company’s Fiscal 2010 EPS from continuing operations results also reflect reduced net interest expense. Prior year EPS from continuing operations benefited from $107 million in currency gains which had an insignificant impact to the current year. The Company generated record cash flow from operating activities of $1.26 billion, a $95 million increase from the prior year.
 
Management believes these Fiscal 2010 results are indicative of the effectiveness of the Company’s business plan, which is focused on the following four strategic pillars:
 
  •  Grow the Core Portfolio
 
  •  Accelerate Growth in Emerging Markets
 
  •  Strengthen and Leverage Global Scale
 
  •  Make Talent an Advantage
 
The recent global recession has dramatically affected consumer confidence, behavior, spending and ultimately food consumption patterns. The Company has adapted its strategies to address the current global economic environment and believes these strategies have enabled Heinz to drive growth, deliver improved performance and sustain momentum. The Company has concentrated on the following:
 
  •  Investing behind core brands, proven ideas and growth through innovation;
 
  •  Focusing investments in marketing and research and development toward delivering value to consumers;


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  •  Continuing its focus on emerging markets where economic growth remains well above the global average;
 
  •  Increasing margins through productivity initiatives, reductions in discretionary spending and tight management of fixed costs; and
 
  •  Increasing cash flow through reductions in average inventory levels and management of capital spending.
 
The Company remains confident in its underlying business fundamentals and plans to continue to apply these strategies in Fiscal 2011. Movements in foreign currency exchange rates are expected to impact Fiscal 2011 reported results.
 
Discontinued Operations and Other Disposals
 
During the third quarter of Fiscal 2010, the Company completed the sale of its Appetizers And, Inc. frozen hors d’oeuvres business which was previously reported within the U.S. Foodservice segment, resulting in a $14.5 million pre-tax ($10.4 million after-tax) loss. Also during the third quarter, the Company completed the sale of its private label frozen desserts business in the U.K., resulting in a $31.4 million pre-tax ($23.6 million after-tax) loss. During the second quarter of Fiscal 2010, the Company completed the sale of its Kabobs frozen hors d’oeuvres business which was previously reported within the U.S. Foodservice segment, resulting in a $15.0 million pre-tax ($10.9 million after-tax) loss. The losses on each of these transactions have been recorded in discontinued operations.
 
In accordance with accounting principles generally accepted in the United States of America, the operating results related to these businesses have been included in discontinued operations in the Company’s consolidated statements of income for all periods presented. The following table presents summarized operating results for these discontinued operations:
 
                         
    Fiscal Year Ended
    April 28,
  April 29,
  April 30,
    2010 FY
  2009 FY
  2008 FY
    2010   2009   2008
    (Millions of Dollars)
 
Sales
  $ 63.0     $ 136.8     $ 185.2  
Net after-tax losses
  $ (4.7 )   $ (6.4 )   $ (1.7 )
Tax benefit/(provision) on losses
  $ 2.0     $ 2.4     $ (0.3 )
 
On March 31, 2010, the Company received cash proceeds of $95 million from the government of the Netherlands for property the government acquired through eminent domain proceedings. The transaction includes the purchase by the government of the Company’s factory located in Nijmegen, which produces soups, pasta and cereals. The cash proceeds are intended to compensate the Company for costs, both capital and expense, the Company will incur over the next three years to exit the current factory location and construct certain new facilities. Note, the Company will likely incur costs to rebuild an R&D facility in the Netherlands, costs to transfer a cereal line to another factory location, employee costs for severance and other costs directly related to the closure and relocation of the existing facilities. The Company also entered into a three-year leaseback on the Nijmegen factory. The Company will continue to operate in the leased factory over the next three years while commencing to execute its plans for closure and relocation of the operations. The Company has accounted for the proceeds on a cost recovery basis. In doing so, the Company has made its estimates of cost, both of a capital and expense nature, to be incurred and recovered and to which proceeds from the transaction will be applied. Of the proceeds received, $81 million has been deferred based on management’s total estimated future costs to be recovered and incurred and has been recorded in other non-current liabilities, other accrued liabilities and accumulated depreciation in the Company’s consolidated balance sheet as of April 28, 2010. Proceeds of $15 million represent the excess of proceeds received over estimated costs to be recovered and incurred which has been recorded as a


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reduction of cost of products sold in the consolidated statement of income for the year ended April 28, 2010. In the future, the deferred amounts will be recognized as the related costs are incurred and if estimated costs differ from amounts actually incurred there could be adjustments that will be reflected in earnings.
 
 
The Company’s revenues are generated via the sale of products in the following categories:
 
                         
    Fiscal Year Ended  
    April 28,
    April 29,
    April 30,
 
    2010
    2009
    2008
 
    (52 Weeks)     (52 Weeks)     (52 Weeks)  
    (Dollars in thousands)  
 
Ketchup and sauces
  $ 4,446,911     $ 4,251,583     $ 4,081,864  
Meals and snacks
    4,289,977       4,225,127       4,336,475  
Infant/Nutrition
    1,157,982       1,105,313       1,089,544  
Other
    600,113       429,308       377,673  
                         
Total
  $ 10,494,983     $ 10,011,331     $ 9,885,556  
                         
 
Fiscal Year Ended April 28, 2010 compared to Fiscal Year Ended April 29, 2009
 
Sales for Fiscal 2010 increased $484 million, or 4.8%, to $10.49 billion. Net pricing increased sales by 3.4%, largely due to the carryover impact of broad-based price increases taken in Fiscal 2009 to help offset increased commodity costs. Volume decreased 1.3%, as favorable volume in emerging markets was more than offset by declines in the U.S. and Australian businesses. Volume was impacted by aggressive competitor promotional activity and softness in some of the Company’s product categories, as well as reduced foot traffic in U.S. restaurants this year. Emerging markets continued to be an important growth driver, with combined volume and pricing gains of 15.3%. In addition, the Company’s top 15 brands performed well, with combined volume and pricing gains of 3.4%, led by the Heinz®, Complan® and ABC® brands. Acquisitions, net of divestitures, increased sales by 2.2%. Foreign exchange translation rates increased sales by 0.5% compared to the prior year.
 
Gross profit increased $225 million, or 6.3%, to $3.79 billion, and the gross profit margin increased to 36.2% from 35.7%. The improvement in gross margin reflects higher net pricing and productivity improvements, partially offset by higher commodity costs including transaction currency costs. Acquisitions had a favorable impact on gross profit dollars but reduced overall gross profit margin. In addition, gross profit was unfavorably impacted by lower volume and $24 million of charges for a corporation-wide initiative to improve productivity, partially offset by a $15 million gain related to property sold in the Netherlands as discussed previously.
 
Selling, general and administrative expenses (“SG&A”) increased $168 million, or 8.1%, to $2.24 billion, and increased as a percentage of sales to 21.3% from 20.6%. The increase reflects the impact from additional marketing investments, acquisitions, inflation in Latin America, and higher pension and incentive compensation expenses. In addition, SG&A was impacted by $14 million related to targeted workforce reductions in the current year and a gain in the prior year on the sale of a small portion control business in the U.S. These increases were partially offset by improvements in selling and distribution expenses (“S&D”), reflecting productivity improvements and lower fuel costs.
 
Operating income increased $57 million, or 3.8%, to $1.56 billion, reflecting the items above.
 
Net interest expense decreased $25 million, to $251 million, reflecting a $44 million decrease in interest expense and a $19 million decrease in interest income. The decreases in interest income and interest expense are primarily due to lower average interest rates.
 
Other expenses, net, increased $111 million primarily due to a $105 million decrease in currency gains, and $9 million of charges recognized in connection with the August 2009 dealer remarketable


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securities (“DRS”) exchange transaction (see below in “Liquidity and Financial Position” for further explanation of this transaction). The decrease in currency gains reflects prior year gains of $107 million related to forward contracts that were put in place to help mitigate the unfavorable impact of translation associated with key foreign currencies for Fiscal 2009.
 
The effective tax rate for Fiscal 2010 was 27.8% compared to 28.4% for the prior year. The current year effective tax rate was lower than the prior year primarily due to tax efficient financing of the Company’s operations, partially offset by higher taxes on repatriation of earnings.
 
Income from continuing operations attributable to H. J. Heinz Company was $914 million compared to $930 million in the prior year, a decrease of 1.6%. The decrease reflects the prior year currency gains discussed above, which were $66 million after-tax ($0.21 per share), and $28 million in after-tax charges ($0.09 per share) in Fiscal 2010 for targeted workforce reductions and non-cash asset write-offs, partially offset by higher operating income, reduced net interest expense, a lower effective tax rate and an $11 million after-tax gain related to property sold in the Netherlands. Diluted earnings per share from continuing operations was $2.87 in Fiscal 2010 compared to $2.91 in the prior year, down 1.4%. EPS movements were unfavorably impacted by $0.29, or $90 million of net income, from currency fluctuations, after taking into account the net effect of current and prior year currency translation contracts, as well as foreign currency movements on translation and U.K. transaction costs.
 
The impact of fluctuating translation exchange rates in Fiscal 2010 has had a relatively consistent impact on all components of operating income on the consolidated statement of income. The impact of cross currency sourcing of inventory reduced gross profit and operating income but did not affect sales.
 
FISCAL YEAR 2010 OPERATING RESULTS BY BUSINESS SEGMENT
 
 
Sales of the North American Consumer Products segment increased $56 million, or 1.8%, to $3.19 billion. Net prices grew 1.9% reflecting the carryover impact of price increases taken across the majority of the product portfolio throughout Fiscal 2009, partially offset by increased promotional spending in the current year, particularly on Smart Ones® frozen entrees and Heinz® ketchup. Volume decreased 1.5%, reflecting declines in frozen meals and desserts due to category softness, competitor promotional activity and the impact of price increases. Volume declines were also noted in Ore-Ida® frozen potatoes, Classico® pasta sauces and frozen snacks. These volume declines were partially offset by increases in TGI Friday’s® Skillet Meals due to new product introductions and increased trade promotions and marketing as well as growth in Heinz® ketchup. The acquisition of Arthur’s Fresh Company, a small chilled smoothies business in Canada, at the beginning of the third quarter of this year increased sales 0.2%. Favorable Canadian exchange translation rates increased sales 1.3%.
 
Gross profit increased $80 million, or 6.3%, to $1.34 billion, and the gross profit margin increased to 41.9% from 40.1%. The higher gross margin reflects productivity improvements and the carryover impact of price increases, partially offset by increased commodity costs. The favorable impact of foreign exchange on gross profit was more than offset by unfavorable volume. Operating income increased $47 million, or 6.4%, to $771 million, reflecting the improvement in gross profit and reduced S&D, partially offset by increased marketing investment, pension costs and incentive compensation expense. The improvement in S&D was a result of productivity projects, tight cost control and lower fuel costs.


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Heinz Europe sales increased $4 million, or 0.1%, to $3.33 billion. Unfavorable foreign exchange translation rates decreased sales by 1.9%. Net pricing increased 2.4%, driven by the carryover impact of price increases taken in Fiscal 2009, partially offset by increased promotions, particularly in the U.K. and Continental Europe. Volume decreased 0.9%, principally due to decreases in France from the rationalization of low-margin sauces, and increased competitor promotional activity on frozen products in the U.K. Volume for infant nutrition products in the U.K. and Italy also declined, along with decreases in Heinz® pasta meals as a result of reduced promotional activities. Lower volume in Italy reflects the overall category decline in that country. Volume improvements were posted on soups in the U.K. and Germany as well as Heinz® ketchup across Europe, particularly in Russia where both ketchup, sauces and infant feeding products are growing at double digit rates. Acquisitions, net of divestitures, increased sales 0.5%, largely due to the acquisition of the Bénédicta® sauce business in France in the second quarter of Fiscal 2009.
 
Gross profit decreased $9 million, or 0.7%, to $1.25 billion, and the gross profit margin decreased to 37.4% from 37.7%. The decline in gross profit is largely due to unfavorable foreign exchange translation rates and increased commodity costs, including the cross currency rate movements in the British pound versus the euro and U.S. dollar. These declines were partially mitigated by higher pricing and productivity improvements. Operating income decreased $17 million, or 2.9%, to $554 million, due to unfavorable foreign currency translation and transaction impacts, as well as increased marketing and higher incentive compensation expense, partially offset by reduced S&D.
 
 
Heinz Asia/Pacific sales increased $380 million, or 23.3%, to $2.01 billion. Acquisitions increased sales 12.6% due to the prior year acquisitions of Golden Circle Limited, a health-oriented fruit and juice business in Australia, and La Bonne Cuisine, a chilled dip business in New Zealand. Pricing increased 2.0%, reflecting current and prior year increases on ABC® products in Indonesia as well as the carryover impact of prior year price increases and reduced promotions in New Zealand. These increases were partially offset by reduced net pricing on Long Fong® frozen products in China due to increased promotional spending. Volume increased 1.0%, as significant growth in Complan® and Glucon D® nutritional beverages in India and ABC® products in Indonesia was more than offset by general softness in both Australia and New Zealand, which have been impacted by competitive activity and reduced market demand associated with higher prices. Favorable exchange translation rates increased sales by 7.8%.
 
Gross profit increased $83 million, or 15.6%, to $612 million, and the gross profit margin declined to 30.5% from 32.5%. The $83 million increase in gross profit was due to higher volume and pricing, productivity improvements and favorable foreign exchange translation rates. These increases were partially offset by increased commodity costs, which include the impact of cross-currency rates on inventory costs. Acquisitions had a favorable impact on gross profit dollars but reduced overall gross profit margin. Operating income increased by $13 million, or 7.0%, to $195 million, as the increase in gross profit was partially offset by increased SG&A related to acquisitions, the impact of foreign exchange translation rates and increased marketing investments.
 
 
Sales of the U.S. Foodservice segment decreased $21 million, or 1.5%, to $1.43 billion. Pricing increased sales 4.4%, largely due to prior year price increases taken across the portfolio. Volume decreased by 5.5%, due to industry-wide declines in U.S. restaurant traffic and sales, targeted SKU reductions, the unfavorable impact from price increases and increased competitive activity. Prior year divestitures reduced sales 0.4%.
 
Gross profit increased $49 million, or 13.8%, to $402 million, and the gross profit margin increased to 28.1% from 24.3%, as cumulative price increases helped return margins for this business


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closer to their historical levels. In the current year, gross profit benefited from pricing and productivity improvements as well as commodity cost favorability which more than offset unfavorable volume. Operating income increased $21 million, or 16.4%, to $151 million, which is primarily due to gross profit improvements and reduced S&D reflecting productivity projects, tight cost control and lower fuel costs. These improvements were partially offset by increased marketing expense and higher general and administrative expenses (“G&A”) resulting from increased pension and incentive compensation costs and a prior year gain on the sale of a small, non-core portion control business.
 
 
Sales for Rest of World increased $65 million, or 14.0%, to $533 million. Higher pricing increased sales by 23.1%, largely due to current and prior year price increases in Latin America taken to mitigate the impact of raw material and labor inflation. Volume increased 2.3% reflecting increases in Latin America and the Middle East. Acquisitions increased sales 0.8% due to the prior year acquisition of Papillon, a small chilled products business in South Africa. Foreign exchange translation rates decreased sales 12.2%, largely due to the devaluation of the Venezuelan bolivar fuerte (“VEF”) late in the third quarter of this fiscal year (See the “Venezuela- Foreign Currency and Inflation” section below for further explanation).
 
Gross profit increased $37 million, or 23.1%, to $199 million, due mainly to increased pricing, partially offset by increased commodity costs and the impact of the VEF devaluation. Operating income increased $17 million, or 32.2% to $69 million, as the increase in gross profit was partially offset by increased marketing and higher S&D and G&A expenses reflecting growth-related investments and inflation in Latin America.
 
 
Sales for Fiscal 2009 increased $126 million, or 1.3%, to $10.01 billion. Net pricing increased sales by 7.1%, as price increases were taken across the Company’s portfolio to help compensate for increases in commodity costs. Volume decreased 1.1%, as a net volume improvement in emerging markets was more than offset by declines in the U.S., Australian and New Zealand businesses, which were impacted by the recessionary economic environment. Volume also declined on frozen products in the U.K. Acquisitions, net of divestitures, increased sales by 1.9%. Foreign exchange translation rates reduced sales by 6.6%, reflecting the impact of a strengthening U.S. dollar on sales generated in international markets.
 
Sales of the Company’s top 15 brands grew 2.1% from Fiscal 2008, as combined volume and pricing gains exceeded the 6.3% unfavorable impact of foreign exchange translation rates on sales. Excluding the impact of foreign exchange, the top 15 brands grew by 8.4%, led by strong growth in Heinz®, Ore-Ida®, Classico®, Pudliszki® and ABC® branded products. In addition, global ketchup sales increased 3.2% despite a 5.9% unfavorable impact from foreign exchange, resulting in a 9.1% increase excluding the impact of currency translation. Emerging markets continued to be an important growth driver, with sales up 8.8%. Excluding a 7% impact from unfavorable foreign exchange, emerging markets’ sales grew 15.8%.
 
Gross profit decreased $83 million, or 2.3%, to $3.57 billion, as higher net pricing and the favorable impact of acquisitions was more than offset by a $238 million unfavorable impact from foreign exchange translation rates as well as higher commodity costs, including transaction currency costs in the U.K., and lower volume. The gross profit margin decreased to 35.7% from 36.9%, as pricing and productivity improvements were more than offset by increased commodity costs, which includes the impact of cross currency sourcing of ingredients, most notably in the U.K.
 
SG&A decreased $15 million, or 0.7%, to $2.07 billion, and improved as a percentage of sales to 20.6% from 21.1%. The $15 million decrease in SG&A is due to a $115 million impact from foreign exchange translation rates, decreased marketing expense, a life insurance settlement benefit received in the Fiscal 2009 and a gain on the sale of a small portion control business in the U.S. These


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decreases were partially offset by increased spending on global task force initiatives, including system capability improvements, the SG&A from acquisitions and inflation in Latin America.
 
Operating income decreased $68 million, or 4.3%, to $1.5 billion, reflecting the items above, particularly a $123 million (7.8%) unfavorable impact from foreign exchange translation rates, and higher commodity costs.
 
Net interest expense decreased $48 million, to $275 million, reflecting a $25 million decrease in interest expense and a $23 million increase in interest income. Interest expense benefited from lower average interest rates in Fiscal 2009, which more than offset a higher coupon on the DRS which were remarketed on December 1, 2008. The improvement in interest income is due to a $20 million mark-to-market gain in Fiscal 2009 on a total rate of return swap which was entered into in conjunction with the Company’s DRS on December 1, 2008.
 
Other income/(expense), net, improved by $109 million, to $93 million of income compared to ($16) million of expense in Fiscal 2008, as a $113 million increase in currency gains was partially offset by an insignificant gain recognized on the sale of our business in Zimbabwe in Fiscal 2008. The currency gains resulted primarily from forward contracts that were put in place to help mitigate the unfavorable translation impact on profit associated with movements in key foreign currencies for Fiscal 2009.
 
The effective tax rate for Fiscal 2009 was 28.4% compared to 30.3% for Fiscal 2008. The Fiscal 2009 tax rate was lower than Fiscal 2008 primarily due to reduced repatriation costs partially offset by decreased benefits from the revaluation of tax basis of foreign assets.
 
Income from continuing operations attributable to H. J. Heinz Company was $930 million compared to $847 million in Fiscal 2008, an increase of 9.8%, due to increased currency gains, reduced net interest expense and a lower effective tax rate, partially offset by lower operating income reflecting unfavorable foreign currency movements. Diluted earnings per share was $2.91 in the Fiscal 2009, an increase of 11.1%, compared to $2.62 in the Fiscal 2008. Earnings per share also benefited from a 1.1% reduction in fully diluted shares outstanding.
 
The translation impact of fluctuating exchange rates in Fiscal 2009 has had a relatively consistent impact on all components of operating income on the consolidated statement of income. The impact of cross currency sourcing of ingredients, most notably in the U.K., reduced gross profit and operating income but did not affect sales.
 
FISCAL YEAR 2009 OPERATING RESULTS BY BUSINESS SEGMENT
 
 
Sales of the North American Consumer Products segment increased $124 million, or 4.1%, to $3.14 billion. Net prices grew 6.8% reflecting price increases taken across the majority of the product portfolio during Fiscal 2009 to help offset higher commodity costs. Volume decreased 0.4%, as increases in Ore-Ida® frozen potatoes, Heinz® ketchup and new TGI Friday’s® Skillet Meals were more than offset by declines in Delimex® frozen products and Smart Ones® frozen meals and desserts. The Ore-Ida® growth was driven by new products such as Steam n’ Mashtm in addition to the timing of price increases. The Heinz® ketchup improvement was largely due to increased consumption. The Smart Ones volume decline resulted from softness in the category, aggressive competitive promotions and the timing of price increases taken in the fourth quarter of Fiscal 2008, partially offset by new breakfast product offerings in Fiscal 2009. Lower sales of Delimex® frozen meals and snacks was due to a supply interruption in the first half of Fiscal 2009. Unfavorable Canadian exchange translation rates decreased sales 2.3%.
 
Gross profit increased $38 million, or 3.1%, to $1.26 billion, due primarily to increased pricing partially offset by unfavorable foreign exchange translation rates. The gross profit margin decreased


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to 40.1% from 40.5%, as increased pricing and productivity improvements only partially offset increased commodity costs. Operating income increased $46 million, or 6.8%, to $725 million, largely reflecting the increase in gross profit and decreased marketing expense.
 
 
Heinz Europe sales decreased $89 million, or 2.6%, to $3.33 billion. Net pricing increased 7.1%, driven by Heinz® ketchup, beans and soup, broad-based increases in our Russian market, frozen products in the U.K. and Italian infant nutrition products. Volume decreased 0.5%, primarily due to declines on frozen products as a result of competitor promotions and the exit of lower margin products and customers. Volume was also unfavorably impacted by decreases in Heinz® soup and pasta meals in the U.K, and reduced volume in Russia. These declines were partially offset by new product introductions in the U.K. and Continental Europe. Acquisitions, net of divestitures, increased sales 2.6%, primarily due to the acquisition of the Bénédicta® sauce business in France during the second quarter of Fiscal 2009 and the Wyko® sauce business in the Netherlands at the end of Fiscal 2008. Unfavorable foreign exchange translation rates decreased sales by 11.8%.
 
Gross profit decreased $110 million, or 8.0%, to $1.26 billion, and the gross profit margin decreased to 37.7% from 40.0% as unfavorable foreign exchange translation rates, cross currency rate movements in the British Pound versus the Euro and U.S. dollar, increased commodity costs and higher manufacturing costs in the frozen food plants were only partially offset by improved pricing and the favorable impact from acquisitions. Operating income decreased $75 million, or 11.6%, to $571 million, as pricing gains were more than offset by unfavorable translation, increased commodity costs, a portion of which was due to the transaction foreign currency impacts discussed above, increased S&D, a portion of which was from acquisitions, and higher G&A reflecting investments in task forces and systems.
 
 
Heinz Asia/Pacific sales increased $28 million, or 1.7%, to $1.63 billion. Pricing increased 6.1%, due to increases on sardines, sauces and syrup in Indonesia, nutritional beverages in India and pricing gains across the product portfolios in Australia and New Zealand. This pricing partially offset increased commodity costs. Volume decreased 1.4%, as significant improvements on nutritional beverage sales in India, frozen foods in Japan and ABC® products in Indonesia were more than offset by declines in convenience meals in Australia and New Zealand and Long Fong® frozen products in China. Acquisitions increased sales 6.8% due to the third quarter Fiscal 2009 acquisitions of Golden Circle Limited and La Bonne Cuisine. Unfavorable foreign exchange translation rates decreased sales by 9.8%.
 
Gross profit increased $3 million, or 0.6%, to $530 million, while the gross profit margin declined to 32.5% from 32.9%. The $3 million improvement in gross profit was due to increased pricing and acquisitions, which offset increased commodity costs, unfavorable foreign exchange translation rates and reduced volume, particularly in our Long Fong business as we revised our distribution system and streamlined our product offerings. Operating income decreased by $12 million, or 6.4%, to $182 million, as the increase in gross profit and decreased marketing expense was more than offset by increased S&D and G&A, a portion of which was due to acquisitions.
 
 
Sales of the U.S. Foodservice segment decreased $37 million, or 2.5%, to $1.45 billion. Pricing increased sales 3.7%, largely due to increases on Heinz® ketchup, portion control condiments, frozen soups and tomato products. Volume decreased by 5.3%, reflecting reduced restaurant foot traffic, the exit of numerous lower margin products and customers, as well as increased competition on our non-branded products. Divestitures reduced sales 0.9%.


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Gross profit decreased $44 million, or 11.1%, to $353 million, and the gross profit margin decreased to 24.3% from 26.7%, due to lower volume, higher commodity and manufacturing costs and Fiscal 2008 gains on commodity derivative contracts, partially offset by higher pricing. Operating income decreased $34 million, or 20.7%, to $129 million, which was primarily due to the decline in gross profit, partially offset by reduced G&A reflecting a gain in Fiscal 2009 on the sale of a small, non-core portion control business.
 
 
Sales for Rest of World increased $100 million, or 27.3%, to $468 million. Volume increased 4.6% driven by increases in Latin America and the Middle East. Higher pricing increased sales by 27.6%, largely due to inflation in Latin America and commodity-related price increases in South Africa and the Middle East. Acquisitions increased sales 0.2% due to the fourth quarter Fiscal 2009 acquisition of Papillon, a small chilled products business in South Africa. Foreign exchange translation rates decreased sales 5.2%.
 
Gross profit increased $28 million, or 21.4%, to $161 million, due mainly to increased pricing and higher volume, partially offset by increased commodity costs and unfavorable foreign currency movements. Operating income increased $7 million, or 15.2% to $52 million due to the increase in gross profit partially offset by wage inflation in Latin America.
 
 
For Fiscal 2010, cash provided by operating activities was a record $1.26 billion compared to $1.17 billion in the prior year. The improvement in Fiscal 2010 versus Fiscal 2009 was generated despite significant contributions to our pension plans, and was primarily due to favorable movements in working capital and reduced tax payments. Additionally, $84 million of cash was received in the current year in connection with an accounts receivable securitization program (see additional explanations below), and the Company also received $48 million of cash from the termination of a total rate of return swap. In the prior year, the Company received $106 million of cash from the settlement and maturity of foreign currency contracts that were put in place to help mitigate the impact of translation associated with key foreign currencies (see Note 12, “Derivative Financial Instruments and Hedging Activities” in Item 8-“Financial Statements and Supplementary Data” for additional information). The Company’s cash conversion cycle improved 8 days, to 47 days in Fiscal 2010. There was a 6 day improvement in inventories as a result of the Company’s efforts to reduce inventory levels. Receivables accounted for 5 days of the improvement, 4 days of which is a result of the accounts receivable securitization program. Accounts payable partially offset these improvements, with a 3 day decrease, a portion of which reflects inventory reductions and the resulting decrease in the amounts due to suppliers.
 
During Fiscal 2010, the Company made $540 million of contributions to the pension plans compared to $134 million in the prior year. Of this $540 million of payments, $475 million were discretionary contributions that were made to help offset the impact of adverse conditions in the global equity and bond markets in Fiscal 2009. Contributions for Fiscal 2011 are expected to be less than $50 million; however, actual contributions may be affected by pension asset and liability valuations during the year.
 
During the first quarter of Fiscal 2010, the Company entered into a three-year $175 million accounts receivable securitization program. Under the terms of the agreement, the Company sells, on a revolving basis, its U.S. receivables to a wholly-owned, bankruptcy-remote-subsidiary. This subsidiary then sells all of the rights, title and interest in these receivables to an unaffiliated entity. After the sale, the Company, as servicer of the assets, collects the receivables on behalf of the unaffiliated entity. The amount of receivables sold through this program as of April 28, 2010 was $84 million.
 
Cash provided by investing activities totaled $13 million compared to using $761 million of cash last year. In the current year, proceeds from divestitures provided cash of $19 million which primarily


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related to the sale of our Kabobs and Appetizers And, Inc. frozen hors d’oeuvres foodservice businesses in the U.S. and our private label frozen desserts business in the U.K. Cash paid for acquisitions in the current year totaled $11 million and primarily related to Arthur’s Fresh Company, a small chilled smoothies business in Canada. In the prior year, cash paid for acquisitions, net of divestitures, required $281 million which primarily related to the acquisitions of the Golden Circle Limited fruit and juice business in Australia, the La Bonne Cuisine chilled dip business in New Zealand, the Bénédicta® sauce business in France and Papillon, a small chilled products business in South Africa, partially offset by the sale of a small domestic portion control foodservice business. Capital expenditures totaled $278 million (2.6% of sales) in Fiscal 2010 compared to $292 million (2.9% of sales) in the prior year, which is in-line with historic levels. The Company expects capital spending as a percentage of sales to be approximately 3% in Fiscal 2011. Proceeds from disposals of property, plant and equipment were $96 million in Fiscal 2010 compared to $5 million in the prior year reflecting proceeds received in the fourth quarter of this year related to property sold in the Netherlands as discussed previously. The current year decrease in restricted cash represents collateral that was released in connection with the termination of a total rate of return swap in August 2009. The prior year requirement of $193 million for restricted cash represents the posting of this collateral.
 
Cash used for financing activities in the current year totaled $1.15 billion compared to $516 million last year.
 
  •  Proceeds from long-term debt were $447 million in the current year largely reflecting the July 2009 issuance of $250 million of 7.125% notes due 2039 by H. J. Heinz Finance Company (“HFC”), a subsidiary of Heinz. These notes are fully, unconditionally and irrevocably guaranteed by the Company. The proceeds from the notes were used for payment of the cash component of the exchange transaction discussed below as well as various expenses relating to the exchange, and for general corporate purposes. In addition, the Company received cash proceeds of $167 million related to a 15 billion Japanese yen denominated credit agreement that was entered into during the second quarter of Fiscal 2010.
 
  •  Payments on long-term debt were $630 million in the current year primarily reflecting cash payments on the DRS exchange transaction discussed below and the payoff of our A$281 million Australian denominated borrowings which matured on December 16, 2009.
 
  •  Proceeds from long-term debt were $853 million in the prior year. The prior year proceeds represent the sale of $500 million 5.35% Notes due 2013 as well as the sale of $350 million or 3,500 shares of HFC Series B Preferred Stock. The proceeds from both of these prior year transactions were used for general corporate purposes, including the repayment of commercial paper and other indebtedness incurred to redeem HFC’s Series A Preferred Stock. As a result, payments on long-term debt were $427 million in the prior year.
 
  •  Net payments on commercial paper and short-term debt were $427 million this year compared to $484 million in the prior year.
 
  •  Cash proceeds from option exercises provided $67 million of cash in the current year, and the Company had no treasury stock purchases in the current year. Cash proceeds from option exercises, net of treasury stock purchases, were $83 million in the prior year.
 
  •  Dividend payments totaled $534 million this year, compared to $525 million for the same period last year, reflecting a 1.2% increase in the annualized dividend per common share to $1.68.
 
  •  Acquisition of subsidiary shares from noncontrolling interests of $62 million relates to the purchase of the remaining 49% interest in Cairo Food Industries, S.A.E., an Egyptian subsidiary of the Company that manufactures ketchup, condiments and sauces.
 
On August 6, 2009, HFC issued $681 million of 7.125% notes due 2039 (of the same series as the notes issued in July 2009), and paid $218 million of cash, in exchange for $681 million of its


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outstanding 15.590% DRS due December 1, 2020. In addition, HFC terminated a portion of the remarketing option by paying the remarketing agent a cash payment of $89 million. The exchange transaction was accounted for as a modification of debt. Accordingly, cash payments used in the exchange, including the payment to the remarketing agent, have been accounted for as a reduction in the book value of the debt, and will be amortized to interest expense under the effective yield method. Additionally, the Company terminated its $175 million notional total rate of return swap in August 2009 in connection with the DRS exchange transaction. See Note 12, “Derivative Financial Instruments and Hedging Activities” in Item 8-“Financial Statements and Supplementary Data” for additional information.
 
On May 27, 2010, the Company announced that its Board of Directors approved a 7.1% increase in the quarterly dividend on common stock from 42.0 cents to 45.0 cents, an annual indicative rate of $1.80 per share for Fiscal 2011, effective with the July 2010 dividend payment. Fiscal 2011 dividend payments are expected to be approximately $575 million.
 
At April 28, 2010, the Company had total debt of $4.62 billion (including $207 million relating to hedge accounting adjustments) and cash and cash equivalents of $483 million. Total debt balances since prior year end declined $524 million as a result of the items discussed above. The reported cash as of April 28, 2010 was negatively impacted by approximately $56 million due to the currency devaluation in Venezuela (see “Venezuela- Foreign Currency and Inflation” section below for additional discussion). Access to U.S. dollars in Venezuela at the official (government established) exchange rate is limited and subject to approval by a currency control board in Venezuela.
 
At April 28, 2010, the Company had $1.7 billion of credit agreements, $1.2 billion of which expires in April 2012 and $500 million which expires in April 2013. The credit agreement that expires in 2013 replaced the $600 million credit agreement that expired in April 2010. These credit agreements support the Company’s commercial paper borrowings. As a result, the commercial paper borrowings are classified as long-term debt based upon the Company’s intent and ability to refinance these borrowings on a long-term basis. The credit agreements have identical covenants which include a leverage ratio covenant in addition to customary covenants. The Company was in compliance with all of its covenants as of April 28, 2010 and April 29, 2009. In addition, the Company has $489 million of foreign lines of credit available at April 28, 2010.
 
After-tax return on invested capital (“ROIC”) is calculated by taking net income attributable to H.J. Heinz Company, plus net interest expense net of tax, divided by average invested capital. Average invested capital is a five-point quarterly average of debt plus total H.J. Heinz Company shareholders’ equity less cash and cash equivalents, short-term investments, restricted cash, and the hedge accounting adjustments. ROIC was 17.8% in Fiscal 2010, 18.4% in Fiscal 2009, and 16.8% in Fiscal 2008. Fiscal 2010 ROIC was negatively impacted by 0.9% for the losses on discontinued operations. ROIC in Fiscal 2009 was favorably impacted by 1.1% due to the $107 million gain on foreign currency forward contracts discussed earlier. The remaining increase in Fiscal 2010 ROIC compared to Fiscal 2009 is largely due to reduced debt levels and effective management of the asset base. The increase in ROIC in Fiscal 2009 versus 2008 was largely due to higher net income attributable to H.J. Heinz Company and decreased average H.J. Heinz Company shareholders’ equity reflecting foreign currency translation adjustments, share repurchases and effective management of the asset base.
 
The Company will continue to monitor the credit markets to determine the appropriate mix of long-term debt and short-term debt going forward. The Company believes that its strong operating cash flow, existing cash balances, together with the credit facilities and other available capital market financing, will be adequate to meet the Company’s cash requirements for operations, including capital spending, debt maturities, acquisitions, share repurchases and dividends to shareholders. While the Company is confident that its needs can be financed, there can be no assurance that increased volatility and disruption in the global capital and credit markets will not impair its ability to access these markets on commercially acceptable terms.


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As of April 28, 2010, the Company’s long-term debt ratings at Moody’s, Standard & Poor’s and Fitch Rating have remained consistent at Baa2, BBB and BBB, respectively.
 
Contractual Obligations and Other Commitments
 
 
The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements and unconditional purchase obligations. In addition, the Company has purchase obligations for materials, supplies, services and property, plant and equipment as part of the ordinary conduct of business. A few of these obligations are long-term and are based on minimum purchase requirements. Certain purchase obligations contain variable pricing components, and, as a result, actual cash payments are expected to fluctuate based on changes in these variable components. Due to the proprietary nature of some of the Company’s materials and processes, certain supply contracts contain penalty provisions for early terminations. The Company does not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations.
 
The following table represents the contractual obligations of the Company as of April 28, 2010.
 
                                         
    Fiscal Year        
                      2016
       
    2011     2012-2013     2014-2015     Forward     Total  
    (Amounts in thousands)  
 
Long Term Debt(1)
  $ 334,511     $ 2,147,033     $ 1,078,602     $ 3,278,618     $ 6,838,764  
Capital Lease Obligations
    24,068       74,884       12,801       23,841       135,594  
Operating Leases
    78,745       131,765       90,113       151,919       452,542  
Purchase Obligations
    1,355,379       1,359,806       545,546       66,277       3,327,008  
Other Long Term Liabilities Recorded on the Balance Sheet
    46,377       133,026       105,795       150,191       435,389  
                                         
Total
  $ 1,839,080     $ 3,846,514     $ 1,832,857     $ 3,670,846     $ 11,189,297  
                                         
 
 
(1) Amounts include expected cash payments for interest on fixed rate long-term debt. Due to the uncertainty of forecasting expected variable rate interest payments, those amounts are not included in the table.
 
Other long-term liabilities primarily consist of certain specific incentive compensation arrangements and pension and postretirement benefit commitments. The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: income taxes and insurance accruals. The Company is unable to estimate the timing of the payments for these items.
 
At April 28, 2010, the total amount of gross unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was approximately $73 million. The timing of payments will depend on the progress of examinations with tax authorities. The Company does not expect a significant tax payment related to these obligations within the next year. The Company is unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities may occur.
 
 
The Company does not have guarantees or other off-balance sheet financing arrangements that we believe are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or


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capital resources. In addition, the Company does not have any related party transactions that materially affect the results of operations, cash flow or financial condition.
 
As of April 28, 2010, the Company was a party to two operating leases for buildings and equipment. The Company has guaranteed supplemental payment obligations of approximately $130 million at the termination of these leases. The Company believes, based on current facts and circumstances, that any payment pursuant to these guarantees is remote.
 
The Company acted as servicer for $84 million of U.S. trade receivables sold through an accounts receivable securitization program that are not recognized on the balance sheet as of April 28, 2010. In addition, the Company acted as servicer for approximately $126 million and $71 million of trade receivables which were sold to unrelated third parties without recourse as of April 28, 2010 and April 29, 2009, respectively.
 
No significant credit guarantees existed between the Company and third parties as of April 28, 2010.
 
Market Risk Factors
 
The Company is exposed to market risks from adverse changes in foreign exchange rates, interest rates, commodity prices and production costs. As a policy, the Company does not engage in speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes.
 
Foreign Exchange Rate Sensitivity:  The Company’s cash flow and earnings are subject to fluctuations due to exchange rate variation. Foreign currency risk exists by nature of the Company’s global operations. The Company manufactures and sells its products on six continents around the world, and hence foreign currency risk is diversified.
 
The Company may attempt to limit its exposure to changing foreign exchange rates through both operational and financial market actions. These actions may include entering into forward contracts, option contracts, or cross currency swaps to hedge existing exposures, firm commitments and forecasted transactions. The instruments are used to reduce risk by essentially creating offsetting currency exposures.
 
The following table presents information related to foreign currency contracts held by the Company:
 
                                 
    Aggregate Notional Amount     Net Unrealized Gains/(Losses)  
    April 28, 2010     April 29, 2009     April 28, 2010     April 29, 2009  
    (Dollars in millions)  
 
Purpose of Hedge:
                               
Intercompany cash flows
  $ 726     $ 683     $ (5 )   $ 16  
Forecasted purchases of raw materials and finished goods and foreign currency denominated obligations
    814       468       (17 )     20  
Forecasted sales and foreign currency denominated assets
    98       96       22        
                                 
    $ 1,638     $ 1,247     $     $ 36  
                                 
 
As of April 28, 2010, the Company’s foreign currency contracts mature within four years. Contracts that meet qualifying criteria are accounted for as either foreign currency cash flow hedges, fair value hedges or net investment hedges of foreign operations. Any gains and losses related to contracts that do not qualify for hedge accounting are recorded in current period earnings in other income and expense.


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Substantially all of the Company’s foreign business units’ financial instruments are denominated in their respective functional currencies. Accordingly, exposure to exchange risk on foreign currency financial instruments is not material. (See Note 12, “Derivative Financial Instruments and Hedging Activities” in Item 8—“Financial Statements and Supplementary Data.”)
 
Interest Rate Sensitivity:  The Company is exposed to changes in interest rates primarily as a result of its borrowing and investing activities used to maintain liquidity and fund business operations. The nature and amount of the Company’s long-term and short-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The Company’s debt obligations totaled $4.62 billion (including $207 million relating to hedge accounting adjustments) and $5.14 billion (including $251 million relating to hedge accounting adjustments) at April 28, 2010 and April 29, 2009, respectively. The Company’s debt obligations are summarized in Note 7, “Debt and Financing Arrangements” in Item 8—“Financial Statements and Supplementary Data.”
 
In order to manage interest rate exposure, the Company utilizes interest rate swaps to convert fixed-rate debt to floating. These derivatives are primarily accounted for as fair value hedges. Accordingly, changes in the fair value of these derivatives, along with changes in the fair value of the hedged debt obligations that are attributable to the hedged risk, are recognized in current period earnings. Based on the amount of fixed-rate debt converted to floating as of April 28, 2010, a variance of 1/8% in the related interest rate would cause annual interest expense related to this debt to change by approximately $2 million. The following table presents additional information related to interest rate contracts designated as fair value hedges by the Company:
 
                 
    April 28, 2010   April 29, 2009
    (Dollars in millions)
 
Pay floating swaps—notional amount
  $ 1,516     $ 1,516  
Net unrealized gains
  $ 109     $ 151  
Weighted average maturity (years)
    3       4  
Weighted average receive rate
    6.30 %     6.31 %
Weighted average pay rate
    1.47 %     3.67 %
 
During Fiscal 2010, the Company terminated its $175 million notional total rate of return swap that was being used as an economic hedge to reduce a portion of the interest cost related to the Company’s DRS. The unwinding of the total rate of return swap was completed in conjunction with the exchange of $681 million of DRS discussed in Note 7, “Debt and Financing Arrangements” in Item 8-“Financial Statements and Supplementary Data.” Upon termination of the swap, the Company received net cash proceeds of $48 million, in addition to the release of the $193 million of restricted cash collateral that the Company was required to maintain with the counterparty for the term of the swap. Prior to termination, the swap was being accounted for on a full mark-to-market basis through earnings, as a component of interest income. The Company recorded a benefit in interest income of $28 million for the year ended April 28, 2010, and $28 million for the year ended April 29, 2009, representing changes in the fair value of the swap and interest earned on the arrangement, net of transaction fees. Net unrealized gains related to this swap totaled $20 million as of April 29, 2009.
 
The Company had outstanding cross-currency interest rate swaps with a total notional amount of $160 million as of April 28, 2010, which were designated as cash flow hedges of the future payments of loan principal and interest associated with certain foreign denominated variable rate debt obligations. Net unrealized losses related to these swaps totaled $12 million as of April 28, 2010. These contracts are scheduled to mature in Fiscal 2013.
 
Effect of Hypothetical 10% Fluctuation in Market Prices:  As of April 28, 2010, the potential gain or loss in the fair value of the Company’s outstanding foreign currency contracts,


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interest rate contracts and cross-currency interest rate swaps assuming a hypothetical 10% fluctuation in currency and swap rates would be approximately:
 
         
    Fair Value Effect
    (Dollars in millions)
 
Foreign currency contracts
  $ 116  
Interest rate swap contracts
  $ 7  
Cross-currency interest rate swaps
  $ 17  
 
However, it should be noted that any change in the fair value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. In relation to currency contracts, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.
 
Venezuela- Foreign Currency and Inflation
 
Foreign Currency
 
The local currency in Venezuela is the VEF. A currency control board exists in Venezuela that is responsible for foreign exchange procedures, including approval of requests for exchanges of VEF for U.S. dollars at the official (government established) exchange rate. Our business in Venezuela has historically been successful in obtaining U.S. dollars at the official exchange rate for imports of ingredients, packaging, manufacturing equipment, and other necessary inputs, and for dividend remittances, albeit on a delay. While an unregulated parallel market exists for exchanging VEF for U.S dollars through securities transactions, our Venezuelan subsidiary has no recent history of entering into such exchange transactions.
 
The Company uses the official exchange rate to translate the financial statements of its Venezuelan subsidiary, since we expect to obtain U.S. dollars at the official rate for future dividend remittances. The official exchange rate in Venezuela had been fixed at 2.15 VEF to 1 U.S. dollar for several years, despite significant inflation. On January 8, 2010, the Venezuelan government announced the devaluation of its currency relative to the U.S. dollar. The official exchange rate for imported goods classified as essential, such as food and medicine, changed from 2.15 to 2.60, while payments for other non-essential goods moved to an exchange rate of 4.30. The majority, if not all, of our imported products in Venezuela are expected to fall into the essential classification and qualify for the 2.60 rate. However, our Venezuelan subsidiary’s financial statements are translated using the 4.30 rate, as this is the rate expected to be applicable to dividend repatriations.
 
During Fiscal 2010, the Company recorded a $62 million currency translation loss as a result of the currency devaluation, which has been reflected as a component of accumulated other comprehensive loss within unrealized translation adjustment. The net asset position of our Venezuelan subsidiary has also been reduced as a result of the devaluation to approximately $81 million at April 28, 2010. While our future operating results in Venezuela will be negatively impacted by the currency devaluation, we plan to take actions to help mitigate these effects. Accordingly, we do not expect the devaluation to have a material impact on our operating results going forward.
 
Highly Inflationary Economy
 
An economy is considered highly inflationary under U.S. GAAP if the cumulative inflation rate for a three-year period meets or exceeds 100 percent. Based on the blended National Consumer Price Index, the Venezuelan economy exceeded the three-year cumulative inflation rate of 100 percent during the third quarter of Fiscal 2010. As a result, the financial statements of our Venezuelan subsidiary have been consolidated and reported under highly inflationary accounting rules beginning on January 28, 2010, the first day of our fiscal fourth quarter. Under highly inflationary accounting, the financial statements of our Venezuelan subsidiary are remeasured into the Company’s reporting currency (U.S. dollars) and exchange gains and losses from the remeasurement of


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monetary assets and liabilities are reflected in current earnings, rather than accumulated other comprehensive loss on the balance sheet, until such time as the economy is no longer considered highly inflationary.
 
The impact of applying highly inflationary accounting for Venezuela on our consolidated financial statements is dependent upon movements in the applicable exchange rates (at this time, the official rate) between the local currency and the U.S. dollar and the amount of monetary assets and liabilities included in our subsidiary’s balance sheet. At April 28, 2010, the U.S. dollar value of monetary assets, net of monetary liabilities, which would be subject to an earnings impact from exchange rate movements for our Venezuelan subsidiary under highly inflationary accounting was $42 million.
 
 
On September 15, 2009, the FASB Accounting Standards Codification (the “Codification”) became the single source of authoritative generally accepted accounting principles in the United States of America. The Codification changed the referencing of financial standards but did not change or alter existing U.S. GAAP. The Codification became effective for the Company in the second quarter of Fiscal 2010.
 
Business Combinations and Consolidation
 
On April 30, 2009, the Company adopted new accounting guidance on business combinations and noncontrolling interests in consolidated financial statements. The guidance on business combinations impacts the accounting for any business combinations completed after April 29, 2009. The nature and extent of the impact will depend upon the terms and conditions of any such transaction. The guidance on noncontrolling interests changes the accounting and reporting for minority interests, which have been recharacterized as noncontrolling interests and classified as a component of equity. Prior period financial statements and disclosures for existing minority interests have been restated in accordance with this guidance. All other requirements of this guidance will be applied prospectively. The adoption of the guidance on noncontrolling interests did not have a material impact on the Company’s financial statements.
 
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment removes the concept of a qualifying special-purpose entity and requires that a transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. This amendment also requires additional disclosures about any transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This amendment is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. The Company will adopt this amendment on April 29, 2010, the first day of Fiscal 2011, and this adoption is not expected to have a material impact on the Company’s financial statements.
 
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for variable interest entities. This amendment changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the purpose and design of the other entity and the reporting entity’s ability to direct the activities of the other entity that most significantly impact its economic performance. The amendment also requires additional disclosures about a reporting entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. This amendment is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. The


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Company will adopt this amendment on April 29, 2010, the first day of Fiscal 2011, and this adoption is not expected to have a material impact on the Company’s financial statements.
 
Fair Value
 
On April 30, 2009, the Company adopted new accounting guidance on fair value measurements for its non-financial assets and liabilities that are recognized at fair value on a non-recurring basis, including long-lived assets, goodwill, other intangible assets and exit liabilities. This guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value, but does not expand the use of fair value to new accounting transactions. The adoption of this guidance did not have a material impact on the Company’s financial statements. See Note 10, “Fair Value Measurements” in Item 8—“Financial Statements and Supplementary Data”, for additional information.
 
Postretirement Benefit Plans and Equity Compensation
 
On April 30, 2009, the Company adopted accounting guidance for determining whether instruments granted in share-based payment transactions are participating securities. This guidance states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. As a result of adopting this guidance, the Company has retrospectively adjusted its earnings per share data for prior periods. The adoption had no impact on net income and a $0.01, $0.01, and $0.02 unfavorable impact on basic and diluted earnings per share from continuing operations for Fiscal 2010, 2009 and 2008, respectively. See Note 13, “Income Per Common Share” in Item 8-“Financial Statements and Supplementary Data” for additional information.
 
In December 2008, the FASB issued new accounting guidance on employers’ disclosures about postretirement benefit plan assets. This new guidance requires enhanced disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan. Companies are required to disclose information about how investment allocation decisions are made, the fair value of each major category of plan assets, the basis used to determine the overall expected long-term rate of return on assets assumption, a description of the inputs and valuation techniques used to develop fair value measurements of plan assets, and significant concentrations of credit risk. This guidance is effective for fiscal years ending after December 15, 2009. The Company adopted this guidance in the fourth quarter of Fiscal 2010. As this guidance only requires enhanced disclosures, its adoption did not impact the Company’s financial position, results of operations, or cash flows. See Note 11, “Pension and Other Postretirement Benefit Plans” in Item 8—“Financial Statements and Supplementary Data” for additional information.
 
Foreign Currency
 
In May 2010, the FASB issued Accounting Standards Update No. 2010-19, “Foreign Currency Issues: Multiple Foreign Currency Exchange Rates.” The guidance provides clarification of accounting treatment when reported balances in an entity’s financial statements differ from their underlying U.S. dollar denominated values due to different rates being used for remeasurement and translation. The guidance indicates that upon adopting highly inflationary accounting for Venezuela, since the U.S. dollar is now the functional currency of a Venezuelan subsidiary, there should no longer be any differences between the amounts reported for financial reporting purposes and the amount of any underlying U.S. dollar denominated value held by the subsidiary. Therefore, any differences between these should either be recognized in the income statement or as a cumulative translation adjustment, if the difference was previously recognized as a cumulative translation adjustment. As discussed above, the Company began applying highly inflationary accounting for its Venezuelan subsidiary on


31


 

the first day of its Fiscal 2010 fourth quarter, however, such guidance had no impact on the Company’s financial statements.
 
Discussion of Significant Accounting Estimates
 
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
 
Marketing Costs—Trade promotions are an important component of the sales and marketing of the Company’s products and are critical to the support of the business. Trade promotion costs include amounts paid to retailers to offer temporary price reductions for the sale of the Company’s products to consumers, amounts paid to obtain favorable display positions in retailers’ stores, and amounts paid to customers for shelf space in retail stores. Accruals for trade promotions are initially recorded at the time of sale of product to the customer based on an estimate of the expected levels of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer participation, and sales and payment trends with similar previously offered programs. Our original estimated costs of trade promotions may change in the future as a result of changes in customer participation, particularly for new programs and for programs related to the introduction of new products. We perform monthly evaluations of our outstanding trade promotions, making adjustments where appropriate to reflect changes in estimates. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorization process for deductions taken by a customer from amounts otherwise due to the Company. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by the Company’s customers for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time and could have a significant impact on the Company’s results of operations depending on how actual results of the programs compare to original estimates.
 
We offer coupons to consumers in the normal course of our business. Expenses associated with this activity, which we refer to as coupon redemption costs, are accrued in the period in which the coupons are offered. The initial estimates made for each coupon offering are based upon historical redemption experience rates for similar products or coupon amounts. We perform monthly evaluations of outstanding coupon accruals that compare actual redemption rates to the original estimates. We review the assumptions used in the valuation of the estimates and determine an appropriate accrual amount. Adjustments to our initial accrual may be required if actual redemption rates vary from estimated redemption rates.
 
Investments and Long-lived Assets, including Property, Plant and Equipment—Investments and long-lived assets are recorded at their respective cost basis on the date of acquisition. Buildings, equipment and leasehold improvements are depreciated on a straight-line basis over the estimated useful life of such assets. The Company reviews investments and long-lived assets, including intangibles with finite useful lives, and property, plant and equipment, whenever circumstances change such that the indicated recorded value of an asset may not be recoverable or has suffered an other-than-temporary impairment. Factors that may affect recoverability include changes in planned use of equipment or software, the closing of facilities and changes in the underlying financial strength of investments. The estimate of current value requires significant management judgment and requires assumptions that can include: future volume trends and revenue and expense growth rates developed in connection with the Company’s internal projections and annual operating plans,


32


 

and in addition, external factors such as changes in macroeconomic trends. As each is management’s best estimate on then available information, resulting estimates may differ from actual cash flows and estimated fair values.
 
Goodwill and Indefinite-Lived Intangibles—Carrying values of goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually, or when circumstances indicate that a possible impairment may exist. Indicators such as unexpected adverse economic factors, unanticipated technological change or competitive activities, decline in expected cash flows, slower growth rates, loss of key personnel, and acts by governments and courts, may signal that an asset has become impaired.
 
All goodwill is assigned to reporting units, which are primarily one level below our operating segments. Goodwill is assigned to the reporting unit that benefits from the cash flows arising from each business combination. We perform our impairment tests of goodwill at the reporting unit level. The Company has 17 reporting units globally that have assigned goodwill and are thus required to be tested for impairment.
 
The Company’s measure of impairment for both goodwill and intangible assets with indefinite lives is based on a discounted cash flow model as management believes forecasted cash flows are the best indicator of fair value. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model, including future volume trends, revenue and expense growth rates, terminal growth rates, weighted-average cost of capital, tax rates, capital spending and working capital changes. The assumptions used in the models were determined utilizing historical data, current and anticipated market conditions, product category growth rates, management plans, and market comparables. Most of these assumptions vary significantly among the reporting units, but generally, higher assumed growth rates were utilized in emerging markets when compared to developed markets. For each reporting unit and indefinite-lived intangible asset, we used a market-participant, risk-adjusted-weighted-average cost of capital to discount the projected cash flows of those operations or assets. Such discount rates ranged from 6-17% in Fiscal 2010. Management believes the assumptions used for the impairment evaluation are consistent with those that would be utilized by market participants performing similar valuations of our reporting units. We validated our fair values for reasonableness by comparing the sum of the fair values for all of our reporting units, including those with no assigned goodwill, to our market capitalization and a reasonable control premium.
 
During the fourth quarter of Fiscal 2010, the Company completed its annual review of goodwill and indefinite-lived intangible assets. No impairments were identified during the Company’s annual assessment of goodwill and indefinite-lived intangible assets. The fair values of each reporting unit significantly exceeded their carrying values, with the exception of two reporting units, in which there was only a minor excess. The goodwill associated with these two reporting units is not material as of April 28, 2010.
 
Retirement Benefits—The Company sponsors pension and other retirement plans in various forms covering substantially all employees who meet eligibility requirements. Several actuarial and other factors that attempt to anticipate future events are used in calculating the expense and obligations related to the plans. These factors include assumptions about the discount rate, expected return on plan assets, turnover rates and rate of future compensation increases as determined by the Company, within certain guidelines. In addition, the Company uses best estimate assumptions, provided by actuarial consultants, for withdrawal and mortality rates to estimate benefit expense. The financial and actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of pension expense recorded by the Company.
 
The Company recognized pension expense related to defined benefit programs of $25 million, $6 million, and $7 million for fiscal years 2010, 2009, and 2008, respectively, which reflected expected


33


 

return on plan assets of $211 million, $208 million, and $227 million, respectively. The Company contributed $540 million to its pension plans in Fiscal 2010 compared to $134 million in Fiscal 2009 and $58 million in Fiscal 2008. The Company expects to contribute less than $50 million to its pension plans in Fiscal 2011.
 
One of the significant assumptions for pension plan accounting is the expected rate of return on pension plan assets. Over time, the expected rate of return on assets should approximate actual long-term returns. In developing the expected rate of return, the Company considers average real historic returns on asset classes, the investment mix of plan assets, investment manager performance and projected future returns of asset classes developed by respected advisors. When calculating the expected return on plan assets, the Company primarily uses a market-related-value of assets that spreads asset gains and losses (difference between actual return and expected return) uniformly over 3 years. The weighted average expected rate of return on plan assets used to calculate annual expense was 8.1% for the year end April 28, 2010 and 8.2% for the years ended April 29, 2009 and April 30, 2008. For purposes of calculating Fiscal 2011 expense, the weighted average rate of return will be approximately 8.2%.
 
Another significant assumption used to value benefit plans is the discount rate. The discount rate assumptions used to value pension and postretirement benefit obligations reflect the rates available on high quality fixed income investments available (in each country where the Company operates a benefit plan) as of the measurement date. The Company uses bond yields of appropriate duration for each country by matching it with the duration of plan liabilities. The weighted average discount rate used to measure the projected benefit obligation for the year ending April 28, 2010 decreased to 5.6% from 6.5% as of April 29, 2009.
 
Deferred gains and losses result from actual experience different from expected financial and actuarial assumptions. The pension plans currently have a deferred loss amount of $1.09 billion at April 28, 2010. Deferred gains and losses are amortized through the actuarial calculation into annual expense over the estimated average remaining service period of plan participants, which is currently 10 years. However, if all or almost all of a plan’s participants are inactive, deferred gains and losses are amortized through the actuarial calculation into annual expense over the estimated average remaining life expectancy of the inactive participants.
 
The Company also provides certain postretirement health care benefits. The postretirement health care benefit expense and obligation are determined using the Company’s assumptions regarding health care cost trend rates. The health care trend rates are developed based on historical cost data, the near-term outlook on health care trends and the likely long-term trends. The postretirement health care benefit obligation at April 28, 2010 as determined using an average initial health care trend rate of 7.1% which gradually decreases to an average ultimate rate of 4.8% in 6 years. A one percentage point increase in the assumed health care cost trend rate would increase the service and interest cost components of annual expense by $2 million and increase the benefit obligation by $16 million. A one percentage point decrease in the assumed health care cost trend rates would decrease the service and interest cost by $2 million and decrease the benefit obligation by $15 million.
 
The Patient Protection and Affordable Care Act (PPACA) was signed into law on March 23, 2010, and on March 30, 2010, the Health Care and Education Reconciliation Act of 2010 (HCERA) was signed into law, which amends certain aspects of the PPACA. Among other things, the PPACA reduces the tax benefits available to an employer that receives the Medicare Part D subsidy. As a result of the PPACA, the Company was required to recognize in Fiscal 2010 tax expense of $4 million (approximately $0.01 per share) related to reduced deductibility in future periods of the postretirement prescription drug coverage. The PPACA and HCERA (collectively referred to as the Act) will have both immediate and long-term ramifications for many employers that provide retiree health benefits.


34


 

 
If we assumed a 100 basis point change in the following rates, the Company’s Fiscal 2010 projected benefit obligation and expense would increase (decrease) by the following amounts (in millions):
 
                 
    100 Basis Point
    Increase   Decrease
 
Pension benefits
               
Discount rate used in determining projected benefit obligation
  $ (295 )   $ 352  
Discount rate used in determining net pension expense
  $ (29 )   $ 27  
Long-term rate of return on assets used in determining net pension expense
  $ (26 )   $ 26  
Other benefits
               
Discount rate used in determining projected benefit obligation
  $ (13 )   $ 16  
Discount rate used in determining net benefit expense
  $ (1 )   $ 1  
 
Income Taxes—The Company computes its annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income. Significant judgment is required in determining the Company’s annual tax rate and in evaluating uncertainty in its tax positions. The Company recognizes a benefit for tax positions that it believes will more likely than not be sustained upon examination. The amount of benefit recognized is the largest amount of benefit that the Company believes has more than a 50% probability of being realized upon settlement. The Company regularly monitors its tax positions and adjusts the amount of recognized tax benefit based on its evaluation of information that has become available since the end of its last financial reporting period. The annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the amount of recognized tax benefits the Company does not consider information that has become available after the balance sheet date, but does disclose the effects of new information whenever those effects would be material to the Company’s financial statements. The difference between the amount of benefit taken or expected to be taken in a tax return and the amount of benefit recognized for financial reporting represents unrecognized tax benefits. These unrecognized tax benefits are presented in the balance sheet principally within accrued income taxes.
 
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
 
Input Costs
 
In general, the effects of cost inflation may be experienced by the Company in future periods. During Fiscals 2009 and 2010, the Company experienced wide-spread inflationary increases in commodity input costs. Price increases and continued productivity improvements have helped to offset these cost increases. While recently there has been a general decline in commodity inflation, some key input costs remain above historic levels. Productivity improvements are expected to help mitigate such costs.
 
 
H. J. Heinz Company common stock is traded principally on The New York Stock Exchange under the symbol HNZ. The number of shareholders of record of the Company’s common stock as of


35


 

May 31, 2010 approximated 35,400. The closing price of the common stock on The New York Stock Exchange composite listing on April 28, 2010 was $45.76.
 
Stock price information for common stock by quarter follows:
 
                 
    Stock Price Range
    High   Low
 
2010
               
First
  $ 38.85     $ 34.03  
Second
    41.60       37.30  
Third
    43.75       39.69  
Fourth
    47.84       42.67  
2009
               
First
  $ 51.44     $ 46.35  
Second
    53.00       38.43  
Third
    45.83       34.52  
Fourth
    38.34       30.51  
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.
 
This information is set forth in this report in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 27 through 29.


36


 


 

 
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America, and includes those policies and procedures that:
 
(1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles;
 
(3) Provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
(4) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Management has concluded that the Company’s internal control over financial reporting was effective as of the end of the most recent fiscal year. PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the Company’s internal control over financial reporting as of April 28, 2010, as stated in their report which appears herein.
 
/s/  William R. Johnson

Chairman, President and
Chief Executive Officer
 
/s/  Arthur B. Winkleblack

Executive Vice President and
Chief Financial Officer
 
June 17, 2010


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To the Board of Directors and Shareholders of
H. J. Heinz Company:
 
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of H. J. Heinz Company and its subsidiaries at April 28, 2010 and April 29, 2009, and the results of their operations and their cash flows for each of the three years in the period ended April 28, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 28, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
As discussed in Note 2 to the accompanying consolidated financial statements, effective April 30, 2009, the Company changed its accounting and reporting for noncontrolling interests, business combinations, and earnings per share.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 
/s/  PricewaterhouseCoopers LLP
 
Pittsburgh, Pennsylvania
June 17, 2010


39


 

H. J. Heinz Company and Subsidiaries
 
 
                         
    Fiscal Year Ended  
    April 28, 2010
    April 29, 2009
    April 30, 2008
 
    (52 Weeks)     (52 Weeks)     (52 Weeks)  
    (In thousands, except per share amounts)  
 
Sales
  $ 10,494,983     $ 10,011,331     $ 9,885,556  
Cost of products sold
    6,700,677       6,442,075       6,233,420  
                         
Gross profit
    3,794,306       3,569,256       3,652,136  
Selling, general and administrative expenses
    2,235,078       2,066,810       2,081,801  
                         
Operating income
    1,559,228       1,502,446       1,570,335  
Interest income
    45,137       64,150       41,519  
Interest expense
    295,711       339,635       364,808  
Other (expense)/income, net
    (18,200 )     92,922       (16,283 )
                         
Income from continuing operations before income taxes
    1,290,454       1,319,883       1,230,763  
Provision for income taxes
    358,514       375,483       372,587  
                         
Income from continuing operations
    931,940       944,400       858,176  
Loss from discontinued operations, net of tax
    (49,597 )     (6,439 )     (1,698 )
                         
Net income
    882,343       937,961       856,478  
Less: Net income attributable to the noncontrolling interest
    17,451       14,889       11,553  
                         
Net income attributable to H. J. Heinz Company
  $ 864,892     $ 923,072     $ 844,925  
                         
Income/(loss) per common share:
                       
Diluted
                       
Continuing operations attributable to H. J. Heinz Company common shareholders
  $ 2.87     $ 2.91     $ 2.62  
Discontinued operations attributable to H. J. Heinz Company common shareholders
    (0.16 )     (0.02 )     (0.01 )
                         
Net income attributable to H. J. Heinz Company common shareholders
  $ 2.71     $ 2.89     $ 2.61  
                         
Average common shares outstanding—diluted
    318,113       318,063       321,717  
                         
Basic
                       
Continuing operations attributable to H. J. Heinz Company common shareholders
  $ 2.89     $ 2.95     $ 2.65  
Discontinued operations attributable to H. J. Heinz Company common shareholders
    (0.16 )     (0.02 )     (0.01 )
                         
Net income attributable to H. J. Heinz Company common shareholders
  $ 2.73     $ 2.93     $ 2.65  
                         
Average common shares outstanding—basic
    315,948       313,747       317,019  
                         
Cash dividends per share
  $ 1.68     $ 1.66     $ 1.52  
                         
Amounts attributable to H. J. Heinz Company common shareholders:
                       
Income from continuing operations, net of tax
  $ 914,489     $ 929,511     $ 846,623  
Loss from discontinued operations, net of tax
    (49,597 )     (6,439 )     (1,698 )
                         
Net income
  $ 864,892     $ 923,072     $ 844,925  
                         
(Per share amounts may not add due to rounding)
                       
 
See Notes to Consolidated Financial Statements


40


 

H. J. Heinz Company and Subsidiaries
 
 
                 
    April 28,
    April 29,
 
    2010     2009  
    (In thousands)  
 
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 483,253     $ 373,145  
Trade receivables (net of allowances: 2010—$10,196 and 2009—$10,233)
    794,845       881,164  
Other receivables (net of allowances: 2010—$268 and 2009—$1,162)
    250,493       290,633  
Inventories:
               
Finished goods and work-in-process
    979,543       973,983  
Packaging material and ingredients
    269,584       263,630  
                 
Total inventories
    1,249,127       1,237,613  
Prepaid expenses
    130,819       125,765  
Other current assets
    142,588       36,701  
                 
Total current assets
    3,051,125       2,945,021  
                 
Property, plant and equipment:
               
Land
    77,248       76,193  
Buildings and leasehold improvements
    842,346       775,217  
Equipment, furniture and other
    3,546,046       3,258,152  
                 
      4,465,640       4,109,562  
Less accumulated depreciation
    2,373,844       2,131,260  
                 
Total property, plant and equipment, net
    2,091,796       1,978,302  
                 
Other non-current assets:
               
Goodwill
    2,770,918       2,687,788  
Trademarks, net
    895,138       889,815  
Other intangibles, net
    402,576       405,351  
Long-term restricted cash
          192,736  
Other non-current assets
    864,158       565,171  
                 
Total other non-current assets
    4,932,790       4,740,861  
                 
Total assets
  $ 10,075,711     $ 9,664,184  
                 
 
See Notes to Consolidated Financial Statements


41


 

H. J. Heinz Company and Subsidiaries
 
Consolidated Balance Sheets
 
                 
    April 28,
    April 29,
 
    2010     2009(2)  
    (In thousands)  
 
Liabilities and Equity
               
Current liabilities:
               
Short-term debt
  $ 43,853     $ 61,297  
Portion of long-term debt due within one year
    15,167       4,341  
Trade payables
    1,007,517       955,430  
Other payables
    121,997       157,877  
Salaries and wages
    118,161       91,283  
Accrued marketing
    288,579       233,316  
Other accrued liabilities
    549,492       485,406  
Income taxes
    30,593       73,896  
                 
Total current liabilities
    2,175,359       2,062,846  
                 
Long-term debt and other non-current liabilities:
               
Long-term debt
    4,559,152       5,076,186  
Deferred income taxes
    665,089       345,749  
Non-pension post-retirement benefits
    216,423       214,786  
Other non-current liabilities
    511,192       685,512  
                 
Total long-term debt and other non-current liabilities
    5,951,856       6,322,233  
                 
Equity:
               
Capital stock:
               
Third cumulative preferred, $1.70 first series, $10 par value(1)
    70       70  
Common stock, 431,096 shares issued, $0.25 par value
    107,774       107,774  
                 
      107,844       107,844  
Additional capital
    657,596       737,917  
Retained earnings
    6,856,033       6,525,719  
                 
      7,621,473       7,371,480  
Less:
               
Treasury shares, at cost (113,404 shares at April 28, 2010 and 116,237 shares at April 29, 2009)
    4,750,547       4,881,842  
Accumulated other comprehensive loss
    979,581       1,269,700  
                 
Total H.J. Heinz Company shareholders’ equity
    1,891,345       1,219,938  
Noncontrolling interest(2)
    57,151       59,167  
                 
Total equity
    1,948,496       1,279,105  
                 
Total liabilities and equity
  $ 10,075,711     $ 9,664,184  
                 
 
(1) The preferred stock outstanding is convertible at a rate of one share of preferred stock into 15 shares of common stock. The Company can redeem the stock at $28.50 per share. As of April 28, 2010, there were authorized, but unissued, 2,200 shares of third cumulative preferred stock for which the series had not been designated.
 
(2) Noncontrolling (minority) interest has been reclassified and presented as a component of equity as a result of the adoption of new accounting guidance (see Note 2).
 
See Notes to Consolidated Financial Statements


42


 

H. J. Heinz Company and Subsidiaries
 
 
                                                 
    April 28, 2010     April 29, 2009     April 30, 2008  
    Shares     Dollars     Shares     Dollars     Shares     Dollars  
    (Amounts in thousands, expect per share amounts)  
 
PREFERRED STOCK
                                               
Balance at beginning of year
    7     $ 70       7     $ 72       8     $ 77  
Conversion of preferred into common stock
                      (2 )     (1 )     (5 )
                                                 
Balance at end of year
    7       70       7       70       7       72  
                                                 
Authorized shares- April 28, 2010
    7                                          
                                                 
COMMON STOCK
                                               
Balance at beginning of year
    431,096       107,774       431,096       107,774       431,096       107,774  
                                                 
Balance at end of year
    431,096       107,774       431,096       107,774       431,096       107,774  
                                                 
Authorized shares- April 28, 2010
    600,000                                          
                                                 
ADDITIONAL CAPITAL
                                               
Balance at beginning of year
            737,917               617,811               580,606  
Conversion of preferred into common stock
            (29 )             (95 )             (219 )
Stock options exercised, net of shares tendered for payment
            (21,717 )(4)             98,736 (4)             20,920 (4)
Stock option expense
            7,897               9,405               8,919  
Restricted stock unit activity
            (9,698 )             (538 )             4,961  
Initial adoption of accounting guidance for uncertainty in income taxes
                                        (1,719 )
Tax settlement(1)
                          8,537                
Purchase of subsidiary shares from noncontrolling interests(2)
            (54,209 )                            
Other, net(3)
            (2,565 )             4,061               4,343  
                                                 
Balance at end of year
            657,596               737,917               617,811  
                                                 
RETAINED EARNINGS
                                               
Balance at beginning of year
            6,525,719               6,129,008               5,778,617  
Net income attributable to H.J. Heinz Company
            864,892               923,072               844,925  
Cash dividends:
                                               
Preferred (per share $1.70 per share in 2010, 2009 and 2008)
            (9 )             (12 )             (12 )
Common (per share $1.68, $1.66, and $1.52 in 2010, 2009 and 2008, respectively)
            (533,543 )             (525,281 )             (485,234 )
Initial adoption of accounting guidance for uncertainty in income taxes
                                        (9,288 )
Other(5)
            (1,026 )             (1,068 )              
                                                 
Balance at end of year
            6,856,033               6,525,719               6,129,008  
                                                 
TREASURY STOCK
                                               
Balance at beginning of year
    (116,237 )     (4,881,842 )     (119,628 )     (4,905,755 )     (109,317 )     (4,406,126 )
Shares reacquired
                (3,650 )     (181,431 )     (13,054 )     (580,707 )
Conversion of preferred into common stock
    1       29       3       97       8       224  
Stock options exercised, net of shares tendered for payment
    2,038       94,315       6,179       178,559       2,116       62,486  
Restricted stock unit activity
    470       21,864       485       15,026       289       8,591  
Other, net(3)
    324       15,087       374       11,662       330       9,777  
                                                 
Balance at end of year
    (113,404 )   $ (4,750,547 )     (116,237 )   $ (4,881,842 )     (119,628 )   $ (4,905,755 )
                                                 
(1) See Note No. 6 for further details.
 
(2) See Note No. 4 for further details.
 
(3) Includes activity of the Global Stock Purchase Plan.
 
(4) Includes income tax benefit resulting from exercised stock options.
 
(5) Includes adoption of the measurement date provisions of accounting guidance for defined benefit pension and other postretirement plans and unpaid dividend equivalents on restricted stock units.
 
(6) Comprised of unrealized translation adjustment of $(221,611), pension and post-retirement benefits net prior service cost of $(7,833) and net losses of $(749,815), and deferred net losses on derivative financial instruments of $1,876 .
 
See Notes to Consolidated Financial Statements


43


 

H. J. Heinz Company and Subsidiaries
 
Consolidated Statements of Equity
 
                                                 
    April 28, 2010     April 29, 2009     April 30, 2008  
    Shares     Dollars     Shares     Dollars     Shares     Dollars  
    (Amounts in thousands, expect per share amounts)  
 
OTHER COMPREHENSIVE (LOSS)/INCOME
                                               
Balance at beginning of year
          $ (1,269,700 )           $ (61,090 )           $ (219,265 )
Net pension and post-retirement benefit gains/(losses)
            78,871               (301,347 )             (155,989 )
Reclassification of net pension and post-retirement benefit losses to net income
            38,903               24,744               27,787  
Unrealized translation adjustments
            193,600               (944,439 )             281,090  
Net change in fair value of cash flow hedges
            (32,488 )             33,204               16,273  
Net hedging losses/(gains) reclassified into earnings
            13,431               (20,772 )             (10,986 )
Purchase of subsidiary shares from noncontrolling interests(2)
            (2,198 )                            
                                                 
Balance at end of year
            (979,581 )(6)             (1,269,700 )             (61,090 )
                                                 
TOTAL H.J. HEINZ COMPANY SHAREHOLDERS’ EQUITY
            1,891,345               1,219,938               1,887,820  
                                                 
NONCONTROLLING INTEREST
                                               
Balance at beginning of year
            59,167               65,727               98,309  
Net income attributable to the noncontrolling interest
            17,451               14,889               11,553  
Other comprehensive income, net of tax:
                                               
Net pension and post-retirement benefit losses
            (1,266 )             (464 )              
Unrealized translation adjustments
            8,411               (8,110 )             (1,727 )
Net change in fair value of cash flow hedges
            (788 )             131                
Net hedging losses/(gains) reclassified into earnings
            254               (56 )              
Dispositions of minority-owned entities
                                        (20,062 )
Purchase of subsidiary shares from noncontrolling interests(2)
            (5,467 )                           (10,284 )
Dividends paid to noncontrolling interest
            (20,611 )             (12,950 )             (12,062 )
                                                 
Balance at end of year
            57,151               59,167               65,727  
                                                 
TOTAL EQUITY
          $ 1,948,496             $ 1,279,105             $ 1,953,547  
                                                 
COMPREHENSIVE INCOME
                                               
Net income
          $ 882,343             $ 937,961             $ 856,478  
Other comprehensive income, net of tax:
                                               
Net pension and post-retirement benefit gains/(losses)
            77,605               (301,811 )             (155,989 )
Reclassification of net pension and post-retirement benefit losses to net income
            38,903               24,744               27,787  
Unrealized translation adjustments
            202,011               (952,549 )             279,363  
Net change in fair value of cash flow hedges
            (33,276 )             33,335               16,273  
Net hedging losses/(gains) reclassified into earnings
            13,685               (20,828 )             (10,986 )
                                                 
Total comprehensive income/(loss)
            1,181,271               (279,148 )             1,012,926  
Comprehensive income attributable to the noncontrolling interest
            (24,062 )             (6,390 )             (9,826 )
                                                 
Comprehensive income/(loss) attributable to H.J. Heinz Company
          $ 1,157,209             $ (285,538 )           $ 1,003,100  
                                                 
Note: See Footnote explanations on Page 43
                                               
 
See Notes to Consolidated Financial Statements


44


 

H. J. Heinz Company and Subsidiaries
 
 
 
                         
    Fiscal Year Ended  
    April 28,
    April 29,
    April 30,
 
    2010
    2009
    2008
 
    (52 Weeks)     (52 Weeks)     (52 Weeks)  
    (Dollars in thousands)  
 
Operating activities:
                       
Net income
  $ 882,343     $ 937,961     $ 856,478  
Adjustments to reconcile net income to cash provided by operating activities:
                       
Depreciation
    254,528       241,294       250,826  
Amortization
    48,308       40,081       38,071  
Deferred tax provision
    220,528       108,950       18,543  
Net losses/(gains) on disposals
    44,860       (6,445 )     (15,706 )
Pension contributions
    (539,939 )     (133,714 )     (58,061 )
Other items, net
    90,938       (85,029 )     68,851  
Changes in current assets and liabilities, excluding effects of acquisitions and divestitures:
                       
Receivable securitization facility
    84,200              
Receivables
    37,187       (10,866 )     (55,832 )
Inventories
    48,537       50,731       (133,600 )
Prepaid expenses and other current assets
    2,113       996       5,748  
Accounts payable
    (2,805 )     (62,934 )     89,160  
Accrued liabilities
    96,533       24,641       28,259  
Income taxes
    (5,134 )     61,216       95,566  
                         
Cash provided by operating activities
    1,262,197       1,166,882       1,188,303  
                         
Investing activities:
                       
Capital expenditures
    (277,642 )     (292,121 )     (301,588 )
Proceeds from disposals of property, plant and equipment
    96,493       5,407       8,531  
Acquisitions, net of cash acquired
    (11,428 )     (293,898 )     (151,604 )
Proceeds from divestitures
    18,637       13,351       63,481  
Change in restricted cash
    192,736       (192,736 )      
Termination of net investment hedges
                (93,153 )
Other items, net
    (5,353 )     (1,197 )     (79,894 )
                         
Cash provided by/( used for) investing activities
    13,443       (761,194 )     (554,227 )
                         
Financing activities:
                       
Payments on long-term debt
    (630,394 )     (427,417 )     (368,214 )
Proceeds from long-term debt
    447,056       853,051        
Net (payments on)/proceeds from commercial paper and short-term debt
    (427,232 )     (483,666 )     483,730  
Dividends
    (533,552 )     (525,293 )     (485,246 )
Purchases of treasury stock
          (181,431 )     (580,707 )
Exercise of stock options
    67,369       264,898       78,596  
Acquisition of subsidiary shares from noncontrolling interests
    (62,064 )            
Termination of interest rate swaps
                103,522  
Other items, net
    (9,099 )     (16,478 )     10,224  
                         
Cash used for financing activities
    (1,147,916 )     (516,336 )     (758,095 )
                         
Effect of exchange rate changes on cash and cash equivalents
    (17,616 )     (133,894 )     88,810  
                         
Net increase/(decrease) in cash and cash equivalents
    110,108       (244,542 )     (35,209 )
Cash and cash equivalents at beginning of year
    373,145       617,687       652,896  
                         
Cash and cash equivalents at end of year
  $ 483,253     $ 373,145     $ 617,687  
                         
 
See Notes to Consolidated Financial Statements


45


 

H. J. Heinz Company and Subsidiaries
 
 
1.   Significant Accounting Policies
 
Fiscal Year:
 
H. J. Heinz Company (the “Company”) operates on a 52-week or 53-week fiscal year ending the Wednesday nearest April 30. However, certain foreign subsidiaries have earlier closing dates to facilitate timely reporting. Fiscal years, for the financial statements included herein, ended April 28, 2010, April 29, 2009, and April 30, 2008.
 
 
The consolidated financial statements include the accounts of the Company and entities in which the Company maintains a controlling financial interest. Control is generally determined based on the majority ownership of an entity’s voting interests. In certain situations, control is based on participation in the majority of an entity’s economic risks and rewards. Investments in certain companies over which the Company exerts significant influence, but does not control the financial and operating decisions, are accounted for as equity method investments. All intercompany accounts and transactions are eliminated. Certain prior year amounts have been reclassified to conform with the Fiscal 2010 presentation.
 
 
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
 
 
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of other comprehensive income/(loss) within shareholders’ equity. Gains and losses from foreign currency transactions are included in net income for the period.
 
Highly Inflationary Accounting:
 
The Company applies highly inflationary accounting if the cumulative inflation rate in an economy for a three-year period meets or exceeds 100 percent. Under highly inflationary accounting, the financial statements of a subsidiary are remeasured into the Company’s reporting currency (U.S. dollars) and exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings, rather than accumulated other comprehensive loss on the balance sheet, until such time as the economy is no longer considered highly inflationary. See Note 19 for additional information.
 
 
Cash equivalents are defined as highly liquid investments with original maturities of 90 days or less.


46


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
 
Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method.
 
 
Land, buildings and equipment are recorded at cost. For financial reporting purposes, depreciation is provided on the straight-line method over the estimated useful lives of the assets, which generally have the following ranges: buildings—40 years or less, machinery and equipment—15 years or less, computer software—3 to 7 years, and leasehold improvements—over the life of the lease, not to exceed 15 years. Accelerated depreciation methods are generally used for income tax purposes. Expenditures for new facilities and improvements that substantially extend the capacity or useful life of an asset are capitalized. Ordinary repairs and maintenance are expensed as incurred. When property is retired or otherwise disposed, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in income. The Company reviews property, plant and equipment, whenever circumstances change such that the indicated recorded value of an asset may not be recoverable. Factors that may affect recoverability include changes in planned use of equipment or software, and the closing of facilities. The Company’s impairment review is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist and are largely independent. When the carrying value of the asset exceeds the future undiscounted cash flows, an impairment is indicated and the asset is written down to its fair value.
 
 
Intangible assets with finite useful lives are amortized on a straight-line basis over the estimated periods benefited, and are reviewed when appropriate for possible impairment, similar to property, plant and equipment. Goodwill and intangible assets with indefinite useful lives are not amortized. The carrying values of goodwill and other intangible assets with indefinite useful lives are tested at least annually for impairment, or when circumstances indicate that a possible impairment may exist. The annual impairment tests are performed as of the last day of the third quarter of each fiscal year. All goodwill is assigned to reporting units, which are primarily one level below our operating segments. We perform our impairment tests of goodwill at the reporting unit level. The Company’s measure of impairment for both goodwill and intangible assets with indefinite lives is based on a discounted cash flow model, using a market participant approach, that requires significant judgment and requires assumptions about future volume trends, revenue and expense growth rates, terminal growth rates, discount rates, tax rates, working capital changes and macroeconomic factors.
 
 
The Company recognizes revenue when title, ownership and risk of loss pass to the customer. This primarily occurs upon delivery of the product to the customer. For the most part, customers do not have the right to return products unless damaged or defective. Revenue is recorded, net of sales incentives, and includes shipping and handling charges billed to customers. Shipping and handling costs are primarily classified as part of selling, general and administrative expenses.
 
 
The Company promotes its products with advertising, consumer incentives and trade promotions. Such programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. Advertising costs are expensed as incurred. Consumer


47


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
incentive and trade promotion activities are primarily recorded as a reduction of revenue or as a component of cost of products sold based on amounts estimated as being due to customers and consumers at the end of a period, based principally on historical utilization and redemption rates. Accruals for trade promotions are initially recorded at the time of sale of product to the customer based on an estimate of the expected levels of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer participation, and sales and payment trends with similar previously offered programs. We perform monthly evaluations of our outstanding trade promotions, making adjustments where appropriate to reflect changes in estimates. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorization process for deductions taken by a customer from amounts otherwise due to the Company. Expenses associated with coupons, which we refer to as coupon redemption costs, are accrued in the period in which the coupons are offered. The initial estimates made for each coupon offering are based upon historical redemption experience rates for similar products or coupon amounts. We perform monthly evaluations of outstanding coupon accruals that compare actual redemption rates to the original estimates. For interim reporting purposes, advertising, consumer incentive and product placement expenses are charged to operations as a percentage of volume, based on estimated volume and related expense for the full year.
 
 
Deferred income taxes result primarily from temporary differences between financial and tax reporting. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
 
The Company has not provided for possible U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. Calculation of the unrecognized deferred tax liability for temporary differences related to these earnings is not practicable.
 
 
The Company recognizes the cost of all stock-based awards to employees, including grants of employee stock options, on a straight-line basis over their respective requisite service periods (generally equal to an award’s vesting period). A stock-based award is considered vested for expense attribution purposes when the employee’s retention of the award is no longer contingent on providing subsequent service. Accordingly, the Company recognizes compensation cost immediately for awards granted to retirement-eligible individuals or over the period from the grant date to the date retirement eligibility is achieved, if less than the stated vesting period. The vesting approach used does not affect the overall amount of compensation expense recognized, but could accelerate the recognition of expense. The Company follows its previous vesting approach for the remaining portion of those outstanding awards that were unvested and granted prior to May 4, 2006, and accordingly, will recognize expense from the grant date to the earlier of the actual date of retirement or the vesting date. Judgment is required in estimating the amount of stock-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, stock-based compensation expense could be materially impacted.
 
Compensation cost related to all stock-based awards is determined using the grant date fair value. Determining the fair value of employee stock options at the grant date requires judgment in


48


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
estimating the expected term that the stock options will be outstanding prior to exercise as well as the volatility and dividends over the expected term. Compensation cost for restricted stock units is determined based on the fair value of the Company’s stock at the grant date. The Company applies the modified-prospective transition method for stock options granted on or prior to, but not vested as of, May 3, 2006. Compensation cost related to these stock options is determined using the grant date fair value originally estimated and disclosed in a pro-forma manner in prior period financial statements in accordance with the original provisions of the Financial Accounting Standards Board’s (“FASB’s”) guidance for stock compensation.
 
All stock-based compensation expense is recognized as a component of general and administrative expenses in the Consolidated Statements of Income.
 
 
The Company’s financial instruments consist primarily of cash and cash equivalents, receivables, accounts payable, short-term and long-term debt, swaps, forward contracts, and option contracts. The carrying values for the Company’s financial instruments approximate fair value. As a policy, the Company does not engage in speculative or leveraged transactions, nor does the Company hold or issue financial instruments for trading purposes.
 
The Company uses derivative financial instruments for the purpose of hedging currency, debt and interest rate exposures, which exist as part of ongoing business operations. The Company carries derivative instruments on the balance sheet at fair value, determined using observable market data. Derivatives with scheduled maturities of less than one year are included in other receivables or other payables, based on the instrument’s fair value. Derivatives with scheduled maturities beyond one year are classified between current and long-term based on the timing of anticipated future cash flows. The current portion of these instruments is included in other receivables or other payables and the long-term portion is presented as a component of other non-current assets or other non-current liabilities, based on the instrument’s fair value.
 
The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. Gains and losses on fair value hedges are recognized in current period earnings in the same line item as the underlying hedged item. The effective portion of gains and losses on cash flow hedges are deferred as a component of accumulated other comprehensive loss and are recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item. Hedge ineffectiveness related to cash flow hedges is reported in current period earnings within other income and expense. The income statement classification of gains and losses related to derivative contracts that do not qualify for hedge accounting is determined based on the underlying intent of the contracts. Cash flows related to the settlement of derivative instruments designated as net investment hedges of foreign operations are classified in the consolidated statements of cash flows within investing activities. Cash flows related to the termination of derivative instruments designated as fair value hedges of fixed rate debt obligations are classified in the consolidated statements of cash flows within financing activities. All other cash flows related to derivative instruments are generally classified in the consolidated statements of cash flows within operating activities.
 
2.   Recently Issued Accounting Standards
 
On September 15, 2009, the FASB Accounting Standards Codification (the “Codification”) became the single source of authoritative generally accepted accounting principles in the United States of America. The Codification changed the referencing of financial standards but did not


49


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
change or alter existing U.S. GAAP. The Codification became effective for the Company in the second quarter of Fiscal 2010.
 
Business Combinations and Consolidation
 
On April 30, 2009, the Company adopted new accounting guidance on business combinations and noncontrolling interests in consolidated financial statements. The guidance on business combinations impacts the accounting for any business combinations completed after April 29, 2009. The nature and extent of the impact will depend upon the terms and conditions of any such transaction. The guidance on noncontrolling interests changes the accounting and reporting for minority interests, which have been recharacterized as noncontrolling interests and classified as a component of equity. Prior period financial statements and disclosures for existing minority interests have been restated in accordance with this guidance. All other requirements of this guidance will be applied prospectively. The adoption of the guidance on noncontrolling interests did not have a material impact on the Company’s financial statements.
 
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment removes the concept of a qualifying special-purpose entity and requires that a transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. This amendment also requires additional disclosures about any transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This amendment is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. The Company will adopt this amendment on April 29, 2010, the first day of Fiscal 2011, and this adoption is not expected to have a material impact on the Company’s financial statements.
 
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for variable interest entities. This amendment changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the purpose and design of the other entity and the reporting entity’s ability to direct the activities of the other entity that most significantly impact its economic performance. The amendment also requires additional disclosures about a reporting entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. This amendment is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. The Company will adopt this amendment on April 29, 2010, the first day of Fiscal 2011, and this adoption is not expected to have a material impact on the Company’s financial statements.
 
Fair Value
 
On April 30, 2009, the Company adopted new accounting guidance on fair value measurements for its non-financial assets and liabilities that are recognized at fair value on a non-recurring basis, including long-lived assets, goodwill, other intangible assets and exit liabilities. This guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value, but does not expand the use of fair value to new accounting transactions. The adoption of this guidance did not have a material impact on the Company’s financial statements. See Note 10 for additional information.


50


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Postretirement Benefit Plans and Equity Compensation
 
On April 30, 2009, the Company adopted accounting guidance for determining whether instruments granted in share-based payment transactions are participating securities. This guidance states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. As a result of adopting this guidance, the Company has retrospectively adjusted its earnings per share data for prior periods. The adoption had no impact on net income and a $0.01, $0.01, and $0.02 unfavorable impact on basic and diluted earnings per share from continuing operations for Fiscal 2010, 2009 and 2008, respectively. See Note 13 for additional information.
 
In December 2008, the FASB issued new accounting guidance on employers’ disclosures about postretirement benefit plan assets. This new guidance requires enhanced disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan. Companies are required to disclose information about how investment allocation decisions are made, the fair value of each major category of plan assets, the basis used to determine the overall expected long-term rate of return on assets assumption, a description of the inputs and valuation techniques used to develop fair value measurements of plan assets, and significant concentrations of credit risk. This guidance is effective for fiscal years ending after December 15, 2009. The Company adopted this guidance in the fourth quarter of Fiscal 2010. As this guidance only requires enhanced disclosures, its adoption did not impact the Company’s financial position, results of operations, or cash flows. See Note 11 for additional information.
 
Foreign Currency
 
In May 2010, the FASB issued Accounting Standards Update No. 2010-19, “Foreign Currency Issues: Multiple Foreign Currency Exchange Rates.” The guidance provides clarification of accounting treatment when reported balances in an entity’s financial statements differ from their underlying U.S. dollar denominated values due to different rates being used for remeasurement and translation. The guidance indicates that upon adopting highly inflationary accounting for Venezuela, since the U.S. dollar is now the functional currency of a Venezuelan subsidiary, there should no longer be any differences between the amounts reported for financial reporting purposes and the amount of any underlying U.S. dollar denominated value held by the subsidiary. Therefore, any differences between these should either be recognized in the income statement or as a cumulative translation adjustment, if the difference was previously recognized as a cumulative translation adjustment. As discussed in Note 19, the Company began applying highly inflationary accounting for its Venezuelan subsidiary on the first day of its Fiscal 2010 fourth quarter, however, such guidance had no impact on the Company’s financial statements.
 
3.   Discontinued Operations and Other Disposals
 
During the third quarter of Fiscal 2010, the Company completed the sale of its Appetizers And, Inc. frozen hors d’oeuvres business which was previously reported within the U.S. Foodservice segment, resulting in a $14.5 million pre-tax ($10.4 million after-tax) loss. Also during the third quarter, the Company completed the sale of its private label frozen desserts business in the U.K., resulting in a $31.4 million pre-tax ($23.6 million after-tax) loss. During the second quarter of Fiscal 2010, the Company completed the sale of its Kabobs frozen hors d’oeuvres business which was previously reported within the U.S. Foodservice segment, resulting in a $15.0 million pre-tax ($10.9 million after-tax) loss. The losses on each of these transactions have been recorded in discontinued operations.


51


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
In accordance with accounting principles generally accepted in the United States of America, the operating results related to these businesses have been included in discontinued operations in the Company’s consolidated statements of income for all periods presented. The following table presents summarized operating results for these discontinued operations:
 
                         
    Fiscal Year Ended
    April 28, 2010
  April 29, 2009
  April 30, 2008
    FY 2010   FY 2009   FY 2008
    (Millions of Dollars)
 
Sales
  $ 63.0     $ 136.8     $ 185.2  
Net after-tax losses
  $ (4.7 )   $ (6.4 )   $ (1.7 )
Tax benefit on losses
  $ 2.0     $ 2.4     $ 0.3  
 
On March 31, 2010, the Company received cash proceeds of $94.6 million from the government of the Netherlands for property the government acquired through eminent domain proceedings. The transaction includes the purchase by the government of the Company’s factory located in Nijmegen, which produces soups, pasta and cereals. The cash proceeds are intended to compensate the Company for costs, both capital and expense, the Company will incur over the next three years to exit the current factory location and construct certain new facilities. Note, the Company will likely incur costs to rebuild an R&D facility in the Netherlands, costs to transfer a cereal line to another factory location, employee costs for severance and other costs directly related to the closure and relocation of the existing facilities. The Company also entered into a three-year leaseback on the Nijmegen factory. The Company will continue to operate in the leased factory over the next three years while commencing to execute its plans for closure and relocation of the operations. The Company has accounted for the proceeds on a cost recovery basis. In doing so, the Company has made its estimates of cost, both of a capital and expense nature, to be incurred and recovered and to which proceeds from the transaction will be applied. Of the proceeds received, $81.2 million has been deferred based on management’s total estimated future costs to be recovered and incurred and recorded in other non-current liabilities, other accrued liabilities and accumulated depreciation in the Company’s consolidated balance sheet as of April 28, 2010. Proceeds of $15.0 million represent the excess of proceeds received over estimated costs to be recovered and incurred which has been recorded as a reduction of cost of products sold in the consolidated statement of income for the year ended April 28, 2010. In the future, the deferred amounts will be recognized as the related costs are incurred and if estimated costs differ from what are actually incurred there could be adjustments that will be reflected in earnings.
 
4.   Acquisitions
 
During the third quarter of Fiscal 2010, the Company acquired Arthur’s Fresh Company, a chilled smoothies business in Canada for approximately $11 million in cash as well as an insignificant amount of contingent consideration which is scheduled to be paid in Fiscal 2013. The Company also made payments during Fiscal 2010 related to acquisitions completed in prior fiscal years, none of which were significant.
 
During the second quarter of Fiscal 2009, the Company acquired Bénédicta, a sauce business in France for approximately $116 million. During the third quarter of Fiscal 2009, the Company acquired Golden Circle Limited, a fruit and juice business in Australia for approximately $211 million, including the assumption of $68 million of debt that was immediately refinanced by the Company. Additionally, the Company acquired La Bonne Cuisine, a chilled dip business in New Zealand for approximately $28 million in the third quarter of Fiscal 2009. During the fourth quarter of Fiscal 2009, the Company acquired Papillon, a South African producer of chilled products


52


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
for approximately $6 million. The Company also made payments during Fiscal 2009 related to acquisitions completed in prior fiscal years, none of which were significant.
 
During the first quarter of Fiscal 2008, the Company acquired the license to the Cottee’s® and Rose’s® premium branded jams, jellies and toppings business in Australia and New Zealand for approximately $58 million. During the second quarter of Fiscal 2008, the Company acquired the remaining interest in its Shanghai LongFong Foods business for approximately $18 million in cash as well as deferred consideration. The amount and timing of the deferred payment has not yet been determined, but is not expected to be significant. During the fourth quarter of Fiscal 2008, the Company acquired the Wyko® sauce business in the Netherlands for approximately $66 million. The Company also made payments during Fiscal 2008 related to acquisitions completed in prior fiscal years, none of which were significant.
 
All of the above-mentioned acquisitions have been accounted for as business combinations and, accordingly, the respective purchase prices have been allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. Operating results of the businesses acquired have been included in the consolidated statements of income from the respective acquisition dates forward. Pro forma results of the Company, assuming all of the acquisitions had occurred at the beginning of each period presented, would not be materially different from the results reported. There are no significant contingent payments, options or commitments associated with any of the acquisitions.
 
During Fiscal 2010, the Company acquired the remaining 49% interest in Cairo Food Industries, S.A.E, an Egyptian subsidiary of the Company that manufactures ketchup, condiments and sauces, for $62.1 million. The purchase has been accounted for primarily as a reduction in additional capital and noncontrolling interest on the consolidated statements of equity. Prior to the transaction, the Company was the owner of 51% of the business.


53


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
5.   Goodwill and Other Intangible Assets
 
Changes in the carrying amount of goodwill for the fiscal year ended April 28, 2010, by reportable segment, are as follows:
 
                                                 
    North
                               
    American
                      Rest
       
    Consumer
          Asia/
    U.S.
    of
       
    Products     Europe     Pacific     Foodservice     World     Total  
    (Thousands of dollars)  
 
Balance at April 30, 2008
                                               
Goodwill
  $ 1,096,288     $ 1,395,461     $ 285,156     $ 262,823     $ 42,394     $ 3,082,122  
Accumulated impairment losses
          (54,533 )     (2,737 )           (27,390 )     (84,660 )
                                                 
      1,096,288       1,340,928       282,419       262,823       15,004       2,997,462  
Acquisitions
          36,983       18,238             394       55,615  
Purchase accounting adjustments
          (868 )     (1,574 )                 (2,442 )
Disposals
                      (2,300 )           (2,300 )
Translation adjustments
    (21,447 )     (286,045 )     (50,861 )           (2,194 )     (360,547 )
                                                 
Balance at April 29, 2009
                                               
Goodwill
    1,074,841       1,145,531       250,959       260,523       40,594       2,772,448  
Accumulated impairment losses
          (54,533 )     (2,737 )           (27,390 )     (84,660 )
                                                 
      1,074,841       1,090,998       248,222       260,523       13,204       2,687,788  
Acquisitions
    6,378                               6,378  
Purchase accounting adjustments
          (895 )     (3,030 )                 (3,925 )
Disposals
          (483 )           (2,849 )           (3,332 )
Translation adjustments
    21,672       17,124       44,233             980       84,009  
                                                 
Balance at April 28, 2010
                                               
Goodwill
    1,102,891       1,161,277       292,162       257,674       41,574       2,855,578  
Accumulated impairment losses
          (54,533 )     (2,737 )           (27,390 )     (84,660 )
                                                 
    $ 1,102,891     $ 1,106,744     $ 289,425     $ 257,674     $ 14,184     $ 2,770,918  
                                                 
 
During the fourth quarter of Fiscal 2010, the Company completed its annual review of goodwill and indefinite-lived intangible assets. No impairments were identified during the Company’s annual assessment of goodwill and indefinite-lived intangible assets.
 
During the third quarter of Fiscal 2010, the Company recorded a preliminary purchase price allocation related to the Arthur’s Fresh acquisition, which is expected to be finalized upon completion of valuation procedures. Also during the third quarter of Fiscal 2010, the Company finalized the purchase price allocation for the Golden Circle acquisition resulting primarily in adjustments between goodwill, other intangibles and income taxes. All of the purchase accounting adjustments reflected in the above table relate to acquisitions completed prior to April 30, 2009, the first day of Fiscal 2010.


54


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
During Fiscal 2010, the Company divested its Kabobs and Appetizers And, Inc. frozen hors d’oeuvres businesses within the U.S. Foodservice segment, and completed the sale of its private label frozen desserts business in the U.K. These sale transactions resulted in disposals of goodwill, trademarks and other intangible assets. See Note 3 for additional information.
 
Trademarks and other intangible assets at April 28, 2010 and April 29, 2009, subject to amortization expense, are as follows:
 
                                                 
    April 28, 2010     April 29, 2009  
    Gross     Accum Amort     Net     Gross     Accum Amort     Net  
    (Thousands of dollars)  
 
Trademarks
  $ 267,435     $ (73,500 )   $ 193,935     $ 272,710     $ (71,138 )   $ 201,572  
Licenses
    208,186       (152,509 )     55,677       208,186       (146,789 )     61,397  
Recipes/processes
    78,080       (26,714 )     51,366       72,988       (22,231 )     50,757  
Customer-related assets
    180,302       (43,316 )     136,986       179,657       (38,702 )     140,955  
Other
    66,807       (54,157 )     12,650       68,128       (55,091 )     13,037  
                                                 
    $ 800,810     $ (350,196 )   $ 450,614     $ 801,669     $ (333,951 )   $ 467,718  
                                                 
 
Amortization expense for trademarks and other intangible assets was $28.2 million, $28.2 million and $25.3 million for the fiscal years ended April 28, 2010, April 29, 2009 and April 30, 2008, respectively. Based upon the amortizable intangible assets recorded on the balance sheet as of April 28, 2010, amortization expense for each of the next five fiscal years is estimated to be approximately $28 million.
 
Intangible assets not subject to amortization at April 28, 2010 totaled $847.1 million and consisted of $701.2 million of trademarks, $113.8 million of recipes/processes, and $32.1 million of licenses. Intangible assets not subject to amortization at April 29, 2009 totaled $827.4 million and consisted of $688.2 million of trademarks, $111.6 million of recipes/processes, and $27.6 million of licenses.
 
6.   Income Taxes
 
The following table summarizes the (benefit)/provision for U.S. federal, state and foreign taxes on income from continuing operations.
 
                         
    2010     2009     2008  
    (Dollars in thousands)  
 
Current:
                       
U.S. federal
  $ (24,446 )   $ 73,490     $ 79,310  
State
    (809 )     1,855       15,218  
Foreign
    163,241       192,765       260,977  
                         
      137,986       268,110       355,505  
                         
Deferred:
                       
U.S. federal
    165,141       73,130       14,072  
State
    8,141       8,230       1,823  
Foreign
    47,246       26,013       1,187  
                         
      220,528       107,373       17,082  
                         
Provision for income taxes
  $ 358,514     $ 375,483     $ 372,587  
                         
 
Tax benefits related to stock options and other equity instruments recorded directly to additional capital totaled $9.3 million in Fiscal 2010, $17.6 million in Fiscal 2009 and $6.2 million in Fiscal 2008.


55


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
The components of income from continuing operations before income taxes consist of the following:
 
                         
    2010     2009     2008  
    (Dollars in thousands)  
 
Domestic
  $ 499,059     $ 534,217     $ 257,330  
Foreign
    791,395       785,666       973,433  
                         
From continuing operations
  $ 1,290,454     $ 1,319,883     $ 1,230,763  
                         
 
The differences between the U.S. federal statutory tax rate and the Company’s consolidated effective tax rate on continuing operations are as follows:
 
                         
    2010     2009     2008  
 
U.S. federal statutory tax rate
    35.0 %     35.0 %     35.0 %
Tax on income of foreign subsidiaries
    (3.5 )     (4.1 )     (4.9 )
State income taxes (net of federal benefit)
    0.3       0.6       0.6  
Earnings repatriation
    1.2       0.4       3.2  
Tax free interest
    (4.6 )     (2.5 )     (1.2 )
Effects of revaluation of tax basis of foreign assets
    (0.5 )     (0.7 )     (2.4 )
Other
    (0.1 )     (0.3 )      
                         
Effective tax rate
    27.8 %     28.4 %     30.3 %
                         
 
The decrease in the effective tax rate in Fiscal 2010 is primarily the result of tax efficient financing of the Company’s operations, partially offset by higher taxes on repatriation of earnings. The decrease in the effective tax rate in Fiscal 2009 was primarily the result of reduced repatriation costs partially offset by decreased benefits from the revaluation of tax basis of foreign assets. The effective tax rate in Fiscal 2008 was impacted by higher earnings repatriation costs which were partially offset by increased benefits from the revaluation of the tax basis of foreign assets.
 
The following table and note summarize deferred tax (assets) and deferred tax liabilities as of April 28, 2010 and April 29, 2009.
 
                 
    2010     2009  
    (Dollars in thousands)  
 
Depreciation/amortization
  $ 754,353     $ 643,538  
Benefit plans
    38,718       1,854  
Deferred income
    66,920       84,939  
Financing costs
    118,512        
Other
    102,663       90,640  
                 
Deferred tax liabilities
    1,081,166       820,971  
                 
Operating loss carryforwards and carrybacks
    (159,519 )     (87,923 )
Benefit plans
    (178,363 )     (295,254 )
Depreciation/amortization
    (74,925 )     (53,461 )
Tax credit carryforwards
    (62,284 )     (34,721 )
Deferred income
    (36,373 )     (44,308 )
Other
    (123,681 )     (91,851 )
                 
Deferred tax assets
    (635,145 )     (607,518 )
                 
Valuation allowance
    62,519       59,072  
                 
Net deferred tax liabilities
  $ 508,540     $ 272,525  
                 


56


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
The Company also has foreign deferred tax assets and valuation allowances of $119.2 million, each related to statutory increases in the capital tax bases of certain internally generated intangible assets for which the probability of realization is remote.
 
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
 
The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.
 
At the end of Fiscal 2010, foreign operating loss carryforwards totaled $312.7 million. Of that amount, $193.2 million expire between 2011 and 2020; the other $119.5 million do not expire. Deferred tax assets of $47.4 million have been recorded for foreign tax credit carryforwards. These credit carryforwards expire between 2015 and 2020. Deferred tax assets of $13.1 million have been recorded for state operating loss carryforwards. These losses expire between 2011 and 2030.
 
The net change in the Fiscal 2010 valuation allowance shown above is an increase of $3.4 million. The increase was primarily due to the recording of additional valuation allowance for foreign loss carryforwards that are not expected to be utilized prior to their expiration date, partially offset by a reduction in unrealizable net state deferred tax assets. The net change in the Fiscal 2009 valuation allowance was an increase of $7.1 million. The increase was primarily due to the recording of additional valuation allowance for foreign loss carryforwards and state deferred tax assets that were not expected to be utilized prior to their expiration date. The net change in the Fiscal 2008 valuation allowance was an increase of $7.0 million. The increase was primarily due to the recording of additional valuation allowance for state deferred tax assets that were not expected to be utilized prior to their expiration date.
 
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
 
                         
    2010     2009     2008  
    (Dollars in millions)  
 
Balance at the beginning of the fiscal year
  $ 86.6     $ 129.1     $ 183.7  
Increases for tax positions of prior years
    3.7       11.3       10.6  
Decreases for tax positions of prior years
    (35.4 )     (59.5 )     (31.0 )
Increases based on tax positions related to the current year
    10.4       15.0       9.9  
Decreases due to settlements with taxing authorities
    (0.8 )     (0.8 )     (41.0 )
Decreases due to lapse of statute of limitations
    (7.4 )     (8.5 )     (3.1 )
                         
Balance at the end of the fiscal year
  $ 57.1     $ 86.6     $ 129.1  
                         
 
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $38.2 million and $51.9 million, on April 28, 2010 and April 29, 2009, respectively.
 
The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. For Fiscal 2010, the total amount of gross interest and penalty expense included in the provision for income taxes was $2.0 million and $0.3 million, respectively. For Fiscal 2009, the total amount of gross interest and penalty expense included in the provision for income taxes was $2.8 million and $0.4 million, respectively. For Fiscal 2008, the total amount of gross


57


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
interest and penalty expense included in the provision for income taxes was $10.7 million and $0.6 million, respectively. The total amount of interest and penalties accrued as of April 28, 2010 was $17.3 million and $1.2 million, respectively. The corresponding amounts of accrued interest and penalties at April 29, 2009 were $22.5 million and $2.2 million, respectively.
 
It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $16.2 million in the next 12 months primarily due to the expiration of statutes in various foreign jurisdictions along with the progression of state and foreign audits in process.
 
During Fiscal 2009, the Company effectively settled its appeal filed October 15, 2007 of a U.S. Court of Federal Claims decision regarding a refund claim resulting from a Fiscal 1995 transaction. The effective settlement resulted in a $42.7 million decrease in the amount of unrecognized tax benefits, $8.5 million of which was recorded as a credit to additional capital and was received as a refund of tax during Fiscal 2009.
 
The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates in an international environment with significant operations in various locations outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, Italy, the United Kingdom and the United States. The Company has substantially concluded all national income tax matters for years through Fiscal 2007 for the U.S. and the United Kingdom, and through Fiscal 2005 for Australia, Canada and Italy.
 
Undistributed earnings of foreign subsidiaries considered to be indefinitely reinvested or which may be remitted tax free in certain situations, amounted to $3.7 billion at April 28, 2010.
 
7.   Debt and Financing Arrangements
 
Short-term debt consisted of bank debt and other borrowings of $43.9 million and $61.3 million as of April 28, 2010 and April 29, 2009, respectively. The weighted average interest rate was 4.7% and 6.7% for Fiscal 2010 and Fiscal 2009, respectively.
 
On June 12, 2009, the Company entered into a three-year $175 million accounts receivable securitization program. Under the terms of the agreement, the Company sells, on a revolving basis, its U.S. receivables to a wholly-owned, bankruptcy-remote-subsidiary. This subsidiary then sells all of the rights, title and interest in these receivables to an unaffiliated entity. After the sale, the Company, as servicer of the assets, collects the receivables on behalf of the unaffiliated entity. The amount of receivables sold through this program as of April 28, 2010 was $84.2 million. The proceeds from this securitization program are recognized on the statements of cash flows as a component of operating activities.
 
On July 29, 2009, H. J. Heinz Finance Company (“HFC”), a subsidiary of Heinz, issued $250 million of 7.125% notes due 2039. The notes are fully, unconditionally and irrevocably guaranteed by the Company. The proceeds from the notes were used for payment of the cash component of the exchange transaction discussed below as well as various expenses relating to the exchange, and for general corporate purposes.
 
As of April 29, 2009, the Company had $800 million of remarketable securities due December 2020. On August 6, 2009, HFC issued $681 million of 7.125% notes due 2039 (of the same series as the notes issued in July 2009), and paid $217.5 million of cash, in exchange for $681 million of its outstanding 15.590% dealer remarketable securities due December 1, 2020. In addition, HFC terminated a portion of the remarketing option by paying the remarketing agent a cash payment of $89.0 million. The


58


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
exchange transaction was accounted for as a modification of debt. Accordingly, cash payments used in the exchange, including the payment to the remarketing agent, have been accounted for as a reduction in the book value of the debt, and will be amortized to interest expense under the effective yield method. Additionally, the Company terminated its $175 million notional total rate of return swap in August 2009 in connection with the dealer remarketable securities exchange transaction. See Note 12 for additional information. The next remarketing on the remaining remarketable securities ($119 million) is scheduled for December 1, 2011. If the remaining securities are not remarketed, then the Company is required to repurchase all of the remaining securities at 100% of the principal amount plus accrued interest. If the Company purchases or otherwise acquires the remaining securities from the holders, the Company is required to pay to the holder of the remaining remarketing option the option settlement amount. This value fluctuates based on market conditions.
 
During the second quarter of Fiscal 2010, the Company entered into a three-year 15 billion Japanese yen denominated credit agreement. The proceeds were swapped to U.S. dollar 167.3 million and the interest rate was fixed at 4.084%. See Note 12 for additional information.
 
During the third quarter of Fiscal 2010, the Company paid off its A$281 million Australian denominated borrowings ($257 million), which matured on December 16, 2009.
 
At April 28, 2010, the Company had $1.7 billion of credit agreements, $1.2 billion of which expires in April 2012 and $500 million which expires in April 2013. The credit agreement that expires in 2013 replaced the $600 million credit agreement that expired in April 2010. These credit agreements support the Company’s commercial paper borrowings. As a result, the commercial paper borrowings are classified as long-term debt based upon the Company’s intent and ability to refinance these borrowings on a long-term basis. The credit agreements have identical covenants which include a leverage ratio covenant in addition to customary covenants. The Company was in compliance with all of its covenants as of April 28, 2010 and April 29, 2009. In addition, the Company has $488.6 million of foreign lines of credit available at April 28, 2010.


59


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Long-term debt was comprised of the following as of April 28, 2010 and April 29, 2009:
 
                 
    2010     2009  
    (Dollars in thousands)  
 
Commercial Paper (variable rate)
  $ 232,829     $ 639,958  
7.125% U.S. Dollar Notes due August 2039
    624,531        
8.0% Heinz Finance Preferred Stock due July 2013
    350,000       350,000  
5.35% U.S. Dollar Notes due July 2013
    499,888       499,853  
6.625% U.S. Dollar Notes due July 2011
    749,878       749,773  
6.00% U.S. Dollar Notes due March 2012
    599,187       598,744  
U.S. Dollar Remarketable Securities due December 2020
    119,000       800,000  
6.375% U.S. Dollar Debentures due July 2028
    230,619       230,360  
6.25% British Pound Notes due February 2030
    188,928       183,440  
6.75% U.S. Dollar Notes due March 2032
    440,942       440,867  
Japanese Yen Credit Agreement due October 2012 (variable rate)
    159,524        
Australian Dollar Credit Agreement (variable rate)
          204,287  
Canadian Dollar Credit Agreement (variable rate)
          39,917  
Other U.S. Dollar due May 2010—November 2034 (1.04—7.90)%
    110,339       55,609  
Other Non-U.S. Dollar due May 2010—March 2022 (7.00—11.00)%
    61,558       36,244  
                 
      4,367,223       4,829,052  
Hedge Accounting Adjustments (See Note 12)
    207,096       251,475  
Less portion due within one year
    (15,167 )     (4,341 )
                 
Total long-term debt
  $ 4,559,152     $ 5,076,186  
                 
Weighted-average interest rate on long-term debt, including the impact of applicable interest rate swaps
    4.45 %     5.31 %
                 
 
During Fiscal 2009, the Company completed the sale of $500 million 5.35% Notes due 2013. Also, during Fiscal 2009, the Company’s HFC subsidiary completed the sale of $350 million or 3,500 shares of its Series B Preferred Stock. The proceeds from both transactions were used for general corporate purposes, including the repayment of commercial paper and other indebtedness incurred to redeem HFC’s Series A Preferred Stock.
 
HFC’s 3,500 mandatorily redeemable preferred shares are classified as long-term debt. Each share of preferred stock is entitled to annual cash dividends at a rate of 8% or $8,000 per share. On July 15, 2013, each share will be redeemed for $100,000 in cash for a total redemption price of $350 million.
 
Annual maturities of long-term debt during the next five fiscal years are $15.2 million in 2011, $1,401.8 million in 2012, $446.6 million in 2013 (includes the commercial paper in the table above), $872.8 million in 2014 and $1.9 million in 2015.


60


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
8.   Supplemental Cash Flows Information
 
                         
    2010     2009     2008  
    (Dollars in thousands)  
 
Cash Paid During the Year For:
                       
Interest
  $ 305,332     $ 310,047     $ 360,698  
                         
Income taxes
  $ 138,953     $ 203,298     $ 261,283  
                         
Details of Acquisitions:
                       
Fair value of assets
  $ 16,072     $ 478,440     $ 165,093  
Liabilities(1)
    4,644       181,093       13,489  
                         
Cash paid
    11,428       297,347       151,604  
Less cash acquired
          3,449        
                         
Net cash paid for acquisitions
  $ 11,428     $ 293,898     $ 151,604  
                         
 
 
(1) Includes obligations to sellers of $11.5 million in 2008.
 
During the second quarter of Fiscal 2010, HFC issued $681 million of 30 year notes and paid $217.5 million of cash in exchange for $681 million of its outstanding dealer remarketable securities. The $681 million of notes exchanged was a non-cash transaction and has been excluded from the consolidated statement of cash flows for the year ended April 28, 2010. See Note 7 for additional information.
 
The Company recognized $41.8 million of property, plant and equipment and debt in Fiscal 2010 related to contractual arrangements that contain a lease. These non-cash transactions have been excluded from the consolidated statement of cash flows for the year ended April 28, 2010.
 
9.   Employees’ Stock Incentive Plans and Management Incentive Plans
 
As of April 28, 2010, the Company had outstanding stock option awards, restricted stock units and restricted stock awards issued pursuant to various shareholder-approved plans and a shareholder-authorized employee stock purchase plan. The compensation cost related to these plans recognized in general and administrative expenses, and the related tax benefit was $33.4 million and $10.3 million for the fiscal year ended April 28, 2010, $37.9 million and $12.8 million for the fiscal year ended April 29, 2009, and $31.7 million and $11.1 million for the fiscal year ended April 30, 2008, respectively.
 
The Company has two plans from which it can issue equity based awards, the Fiscal Year 2003 Stock Incentive Plan (the “2003 Plan”), which was approved by shareholders on September 12, 2002, and the 2000 Stock Option Plan (the “2000 Plan”), which was approved by shareholders on September 12, 2000. The Company’s primary means for issuing equity-based awards is the 2003 Plan. Pursuant to the 2003 Plan, the Management Development & Compensation Committee is authorized to grant a maximum of 9.4 million shares for issuance as restricted stock units or restricted stock. Any available shares may be issued as stock options. The maximum number of shares that may be granted under this plan is 18.9 million shares. Shares issued under these plans are sourced from available treasury shares.


61


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
 
Stock options generally vest over a period of one to four years after the date of grant. Awards granted between Fiscal 2004 and Fiscal 2006 generally had a maximum term of ten years. Beginning in Fiscal 2006, awards have a maximum term of seven years.
 
In accordance with their respective plans, stock option awards are forfeited if a holder voluntarily terminates employment prior to the vesting date. The Company estimates forfeitures based on an analysis of historical trends updated as discrete new information becomes available and will be re-evaluated on an annual basis. Compensation cost in any period is at least equal to the grant-date fair value of the vested portion of an award on that date.
 
The Company presents all benefits of tax deductions resulting from the exercise of stock-based compensation as operating cash flows in the consolidated statements of cash flows, except the benefit of tax deductions in excess of the compensation cost recognized for those options (“excess tax benefits”) which are classified as financing cash flows. For the fiscal year ended April 28, 2010, $6.9 million of cash tax benefits was reported as an operating cash inflow and $2.4 million of excess tax benefits as a financing cash inflow. For the fiscal year ended April 29, 2009, $9.5 million of cash tax benefits was reported as an operating cash inflow and $4.8 million of excess tax benefits as a financing cash inflow. For the fiscal year ended April 30, 2008, $2.7 million of cash tax benefits was reported as an operating cash inflow and $1.7 million of excess tax benefits as a financing cash inflow.
 
As of April 28, 2010, 2,653 shares remained available for issuance under the 2000 Plan. During the fiscal year ended April 28, 2010, 8,715 shares were forfeited and returned to the plan. During the fiscal year ended April 28, 2010, 34,143 shares were issued from the 2000 Plan.
 
A summary of the Company’s 2003 Plan at April 28, 2010 is as follows:
 
         
    2003 Plan  
    (Amounts in
 
    thousands)  
 
Number of shares authorized
    18,869  
Number of stock option shares granted
    (6,620 )
Number of stock option shares cancelled/forfeited and returned to the plan
    181  
Number of restricted stock units and restricted stock issued
    (4,143 )
         
Shares available for grant as stock options
    8,287  
         
 
During Fiscal 2010, the Company granted 1,768,226 option awards to employees sourced from the 2000 and 2003 Plans. The weighted average fair value per share of the options granted during the fiscal years ended April 28, 2010, April 29, 2009 and April 30, 2008 as computed using the Black-Scholes pricing model was $4.71, $5.75, and $6.25, respectively. The weighted average assumptions used to estimate these fair values are as follows:
 
                         
    Fiscal Year Ended
    April 28,
  April 29,
  April 30,
    2010   2009   2008
 
Dividend yield
    4.3 %     3.3 %     3.3 %
Expected volatility
    20.2 %     14.9 %     15.8 %
Expected term (years)
    5.5       5.5       5.0  
Risk-free interest rate
    2.7 %     3.1 %     4.3 %
 
The dividend yield assumption is based on the current fiscal year dividend payouts. The expected volatility of the Company’s common stock at the date of grant is estimated based on a historic daily


62


 

H. J. Heinz Company and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
volatility rate over a period equal to the average life of an option. The weighted average expected life of options is based on consideration of historical exercise patterns adjusted for changes in the contractual term and exercise periods of current awards. The risk-free interest rate is based on the U.S. Treasury (constant maturity) rate in effect at the date of grant for periods corresponding with the expected term of the options.
 
A summary of the Company’s stock option activity and related information is as follows:
 
                         
          Weighted
       
          Average
       
    Number of
    Exercise Price
    Aggregate
 
    Options     (per share)     Intrinsic Value  
    (Amounts in thousands, except per share data)  
 
Options outstanding at May 2, 2007
    24,797     $ 40.39     $ 1,001,600  
Options granted
    1,352       45.54       61,579  
Options exercised
    (2,116 )     37.31       (78,960 )
Options cancelled/forfeited and returned to the plan
    (1,899 )     51.32       (97,461 )
                         
Options outstanding at April 30, 2008
    22,134       40.06       886,758