XNYS:HNZ Quarterly Report 10-Q Filing - 1/25/2012

Effective Date 1/25/2012

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 25, 2012
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)

PENNSYLVANIA
 
25-0542520
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One PPG Place, Pittsburgh, Pennsylvania
(Address of Principal Executive Offices)
 
15222
(Zip Code)

Registrant’s telephone number, including area code: (412) 456-5700
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X  No   
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes X  No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X
Accelerated filer _
Non-accelerated filer _
Smaller reporting company _
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No X  
The number of shares of the Registrant’s Common Stock, par value $0.25 per share, outstanding as of January 25, 2012 was 319,891,131 shares.





PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements

H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Third Quarter Ended
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
(Unaudited)
(In thousands, Except per
Share Amounts)
Sales
$
2,918,077

 
$
2,722,350

Cost of products sold
1,877,355

 
1,694,057

Gross profit
1,040,722

 
1,028,293

Selling, general and administrative expenses
618,266

 
589,895

Operating income
422,456

 
438,398

Interest income
6,718

 
6,259

Interest expense
72,727

 
69,321

Other expense, net
(2,706
)
 
(1,321
)
Income before income taxes
353,741

 
374,015

Provision for income taxes
66,502

 
97,488

Net income
287,239

 
276,527

Less: Net income attributable to the noncontrolling interest
2,545

 
2,742

Net income attributable to H. J. Heinz Company
$
284,694

 
$
273,785

Net income per share attributable to H. J. Heinz Company common shareholders—diluted
$
0.88

 
$
0.84

Average common shares outstanding—diluted
322,713

 
324,199

Net income per share attributable to H. J. Heinz Company common shareholders—basic
$
0.89

 
$
0.85

Average common shares outstanding—basic
320,159

 
321,277

Cash dividends per share
$
0.48

 
$
0.45

 
 

 
 


See Notes to Condensed Consolidated Financial Statements.
_______________________________________


2



H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
Nine Months Ended
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
(Unaudited)
(In thousands, Except per
Share Amounts)
Sales
$
8,599,490

 
$
7,817,798

Cost of products sold
5,603,237

 
4,914,901

Gross profit
2,996,253

 
2,902,897

Selling, general and administrative expenses
1,846,499

 
1,641,985

Operating income
1,149,754

 
1,260,912

Interest income
25,686

 
14,954

Interest expense
218,859

 
203,401

Other expense, net
(3,742
)
 
(19,129
)
Income before income taxes
952,839

 
1,053,336

Provision for income taxes
190,505

 
274,272

Net income
762,334

 
779,064

Less: Net income attributable to the noncontrolling interest
14,517

 
13,417

Net income attributable to H. J. Heinz Company
$
747,817

 
$
765,647

Net income per share attributable to H. J. Heinz Company common shareholders—diluted
$
2.31

 
$
2.37

Average common shares outstanding—diluted
323,538

 
322,561

Net income per share attributable to H. J. Heinz Company common shareholders—basic
$
2.32

 
$
2.39

Average common shares outstanding—basic
320,850

 
319,613

Cash dividends per share
$
1.44

 
$
1.35

 
 

 
 


See Notes to Condensed Consolidated Financial Statements.
_______________________________________


3



H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
January 25, 2012
FY 2012
 
April 27, 2011*
FY 2011
 
(Unaudited)
 
 
 
(In Thousands)
Assets
 
 
 
Current Assets:
 

 
 

Cash and cash equivalents
$
848,911

 
$
724,311

Trade receivables, net
893,799

 
1,039,064

Other receivables, net
216,944

 
225,968

Inventories:
 

 
 

Finished goods and work-in-process
1,190,473

 
1,165,069

Packaging material and ingredients
325,883

 
286,477

Total inventories
1,516,356

 
1,451,546

Prepaid expenses
175,387

 
159,521

Other current assets
66,762

 
153,132

Total current assets
3,718,159

 
3,753,542

Property, plant and equipment
5,179,993

 
5,224,715

Less accumulated depreciation
2,771,285

 
2,719,632

Total property, plant and equipment, net
2,408,708

 
2,505,083

Goodwill
3,148,253

 
3,298,441

Trademarks, net
1,080,689

 
1,156,221

Other intangibles, net
407,595

 
442,563

Other non-current assets
1,198,098

 
1,074,795

Total other non-current assets
5,834,635

 
5,972,020

Total assets
$
11,961,502

 
$
12,230,645

_______________________________________
* The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
See Notes to Condensed Consolidated Financial Statements.
_______________________________________


4



H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
January 25, 2012
FY 2012
 
April 27, 2011*
FY 2011
 
(Unaudited)
 
 
 
(In Thousands)
Liabilities and Equity
 
 
 
Current Liabilities:
 

 
 

Short-term debt
$
31,361

 
$
87,800

Portion of long-term debt due within one year
815,475

 
1,447,132

Trade payables
1,096,690

 
1,337,620

Other payables
139,115

 
162,047

Accrued marketing
285,378

 
313,389

Other accrued liabilities
617,233

 
715,147

Income taxes
127,510

 
98,325

Total current liabilities
3,112,762

 
4,161,460

Long-term debt
4,177,902

 
3,078,128

Deferred income taxes
912,912

 
897,179

Non-pension postretirement benefits
213,369

 
216,172

Other non-current liabilities
529,023

 
570,571

Total long-term liabilities
5,833,206

 
4,762,050

Redeemable noncontrolling interest
111,643

 
124,669

Equity:
 

 
 

Capital stock
107,835

 
107,843

Additional capital
587,598

 
629,367

Retained earnings
7,547,021

 
7,264,678

 
8,242,454

 
8,001,888

Less:
 

 
 

   Treasury stock at cost (111,205 shares at January 25, 2012 and 109,818 shares at April 27, 2011)
4,681,943

 
4,593,362

Accumulated other comprehensive loss
710,260

 
299,564

Total H. J. Heinz Company shareholders’ equity
2,850,251

 
3,108,962

Noncontrolling interest
53,640

 
73,504

Total equity
2,903,891

 
3,182,466

Total liabilities and equity
$
11,961,502

 
$
12,230,645

_______________________________________
* The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

See Notes to Condensed Consolidated Financial Statements.
_______________________________________


5



H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
(Unaudited)
(Thousands of Dollars)
Cash Flows from Operating Activities:
 

 
 

Net income
$
762,334

 
$
779,064

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 
Depreciation
217,620

 
181,002

Amortization
33,965

 
31,371

Deferred tax (benefit)/provision
(71,533
)
 
121,627

Pension contributions
(15,490
)
 
(16,288
)
Other items, net
87,859

 
78,882

Changes in current assets and liabilities, excluding effects of acquisitions and divestitures:
 

 
 

Receivables (includes proceeds from securitization)
46,128

 
57,305

Inventories
(126,627
)
 
(105,498
)
Prepaid expenses and other current assets
(13,705
)
 
(2,329
)
Accounts payable
(182,333
)
 
35,068

Accrued liabilities
(76,976
)
 
(80,043
)
Income taxes
82,272

 
61,394

Cash provided by operating activities
743,514

 
1,141,555

Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(274,498
)
 
(195,218
)
Proceeds from disposals of property, plant and equipment
6,926

 
4,947

Acquisitions, net of cash acquired
(3,250
)
 
(135,409
)
Sale of short-term investments
47,976

 

Change in restricted cash
(39,052
)
 
(9,900
)
Other items, net
(8,732
)
 
(1,545
)
Cash used for investing activities
(270,630
)
 
(337,125
)
Cash Flows from Financing Activities:
 

 
 

Payments on long-term debt
(831,553
)
 
(36,788
)
Proceeds from long-term debt
1,310,903

 
222,023

Net payments on commercial paper and short-term debt
(56,943
)
 
(160,275
)
Dividends
(464,901
)
 
(434,085
)
Exercise of stock options
74,518

 
129,049

Purchase of treasury stock
(201,904
)
 

Acquisition of subsidiary shares from noncontrolling interests
(54,824
)
 

Other items, net
5,479

 
23,091

Cash used for financing activities
(219,225
)
 
(256,985
)
Effect of exchange rate changes on cash and cash equivalents
(129,059
)
 
21,337

Net increase in cash and cash equivalents
124,600

 
568,782

Cash and cash equivalents at beginning of year
724,311

 
483,253

Cash and cash equivalents at end of period
$
848,911

 
$
1,052,035


See Notes to Condensed Consolidated Financial Statements.
_______________________________________

6



H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)    Basis of Presentation
The interim condensed consolidated financial statements of H. J. Heinz Company, together with its subsidiaries (collectively referred to as the “Company”), are unaudited. In the opinion of management, all adjustments, which are of a normal and recurring nature, except those which have been disclosed elsewhere in this Quarterly Report on Form 10-Q, necessary for a fair statement of the results of operations of these interim periods, have been included. The results for interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the Company’s business. These statements should be read in conjunction with the Company’s consolidated financial statements and related notes, and management’s discussion and analysis of financial condition and results of operations which appear in the Company’s Annual Report on Form 10-K for the year ended April 27, 2011.

(2)    Recently Issued Accounting Standards

In December 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment on disclosures about offsetting assets and liabilities.  The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. The Company is required to adopt this amendment on the first day of Fiscal 2014 and will provide the disclosures required by this amendment retrospectively for all comparative periods presented.  This adoption will only impact the notes to the financial statements and not the financial results.
In September 2011, the FASB issued an amendment to the disclosure requirements for multiemployer pension plans. This amendment requires an employer who participates in multiemployer pension plans to provide additional quantitative and qualitative disclosures to help financial statement users better understand the plans in which an employer participates, the level of the employer's participation in the plans, and the financial health of significant plans. The disclosures also will enable users of financial information to obtain additional information outside of the financial statements. The amendment does not change the current recognition and measurement guidance for an employer's participation in a multiemployer plan. The Company will adopt this amendment in the fourth quarter of Fiscal 2012 and will apply the provisions of this amendment retrospectively. The adoption of this amendment will only impact the notes to the consolidated financial statements, not the financial results.
In September 2011, the FASB issued an amendment to the goodwill impairment standard. This amendment is intended to reduce the cost and complexity of the annual impairment test by providing entities with the option of performing a qualitative assessment to determine whether further impairment testing is necessary. An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then perform a qualitative assessment in any subsequent period. The Company is required to adopt this amendment starting in Fiscal 2013 for annual and interim goodwill impairment tests; however, the Company will be early adopting this amendment for the Fiscal 2012 annual impairment tests which will be performed during the fourth quarter of Fiscal 2012. This amendment does not impact our results of operations or financial position.

In June 2011, the FASB issued an amendment on the presentation of comprehensive income. This amendment is intended to improve comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This amendment eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this amendment, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The statement(s) would need to be presented with equal prominence as the other primary financial statements. While the options for presenting other comprehensive income change under this amendment, many items will not change. Those items remaining the same include the items that constitute net income and other comprehensive income; when an item of other comprehensive income must be reclassified to net income; and the earnings-per-share computation. The Company is required to adopt this amendment retrospectively on the first day of Fiscal 2013. This adoption will only impact the presentation of the Company's financial statements, not the financial results.

In May 2011, the FASB issued an amendment to revise the wording used to describe the requirements for measuring fair

7



value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the current requirements. Some of the amendments clarify the FASB's intent about the application of existing fair value measurement requirements, such as specifying that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements such as specifying that, in the absence of a Level 1 input (refer to Note 14 for additional information), a reporting entity should apply premiums or discounts when market participants would do so when pricing the asset or liability. The Company is required to adopt this amendment on the first day of the fourth quarter of Fiscal 2012 and this adoption is not expected to have an impact on the Company's financial statements.

In December 2010, the FASB issued an amendment to the disclosure requirements for business combinations. This amendment clarifies that if a public entity is required to disclose pro forma information for business combinations, the entity should disclose such pro forma information as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This amendment also expands the supplemental pro forma disclosures for business combinations to include a description of the nature and amount of material nonrecurring pro forma adjustments directly attributable to the business combination included in reported pro forma revenue and earnings. The Company adopted this amendment on the first day of Fiscal 2012 and will apply such amendment for any business combinations that are material on an individual or aggregate basis if and when they occur.

In December 2010, the FASB issued an amendment to the accounting requirements for goodwill and other intangibles. This amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The Company adopted this amendment on the first day of Fiscal 2012. This adoption did not have an impact on the Company's financial statements.


(3)    Productivity Initiatives

The Company announced on May 26, 2011 that it will invest in productivity initiatives during Fiscal 2012 designed to increase manufacturing effectiveness and efficiency as well as accelerate overall productivity on a global scale. The Company originally anticipated investing at least $130 million of cash and $160 million of pre-tax income ($0.35 per share) on these initiatives during Fiscal 2012. These initiatives included:

The establishment of a European supply chain hub in the Netherlands in order to consolidate and centrally lead procurement, manufacturing, logistics and inventory control,

The exit of at least five factories, including two in Europe, two in the U.S., and one in Asia/Pacific in order to enhance manufacturing effectiveness and efficiency, and

A reduction of the global workforce by approximately 800 to 1,000 positions.

The Company continues to look for opportunities to drive shareholder value in this difficult economic environment, and on November 9, 2011, the Company's Board of Directors gave its approval for the Company to invest an incremental $20 million cash and $55 million of pre-tax income ($0.15 per share) on additional productivity initiatives during Fiscal 2012. These projects are expected to result in the potential closure of another three factories worldwide and a further reduction of the global workforce of up to 1,000 employees. Certain projects included in the plan are subject to consultation and any necessary agreements being reached with appropriate employee representative bodies, trade unions, and works councils.

The Company recorded costs related to these productivity initiatives of $33.8 million pre-tax ($22.8 million after-tax or $0.07 per share) during the third quarter ended January 25, 2012 and $111.6 million pre-tax ($76.8 million after-tax or $0.24 per share) during the nine months ended January 25, 2012, all of which were reported in the Non-Operating segment. These pre-tax costs were comprised of the following:

$11.0 million and $39.6 million for the third quarter and nine months ended January 25, 2012, respectively, relating to asset write-offs and accelerated depreciation for the closure of six factories, including two in Europe,

8



three in the U.S. and one in Asia/Pacific,

$9.4 million and $38.4 million for the third quarter and nine months ended January 25, 2012, respectively, for severance and employee benefit costs relating to the reduction of the global workforce by approximately 830 positions through the nine months ended January 25, 2012, and

$13.4 million and $33.6 million for the third quarter and nine months ended January 25, 2012, respectively, associated with other implementation costs, primarily for professional fees, contract termination and relocation costs for the establishment of the European supply chain hub and to improve manufacturing efficiencies in the Asia/Pacific segment.

Of the $33.8 million total pre-tax charges for the third quarter ended January 25, 2012, $22.2 million was recorded in cost of products sold and $11.5 million in selling, general and administrative expenses (“SG&A”). Of the $111.6 million total pre-tax charges for the nine months ended January 25, 2012, $81.1 million was recorded in cost of products sold and $30.5 million in SG&A.

The Company does not include restructuring charges in the results of its reportable segments. The pre-tax impact of allocating such charges to segment results would have been as follows:
 
 
Fiscal 2012
 
 
Third Quarter Ended January 25, 2012
 
Nine Months Ended January 25, 2012
 
 
(Millions of Dollars)
North American Consumer Products
 
$
3.8

 
$
7.2

Europe
 
9.0

 
23.4

Asia/Pacific
 
11.8

 
43.7

U.S. Foodservice
 
8.7

 
34.8

Rest of World
 
0.1

 
2.1

Non-Operating
 
0.3


0.3

     Total restructuring charges
 
$
33.8

 
$
111.6

(Totals may not add due to rounding)

Activity in other accrued liability balances for restructuring charges were as follows:
(Millions of Dollars)
 
 
 
 
 
Reserve balance at April 27, 2011
 
$

Cash payments
 
(62.6
)
Restructuring charges
 
72.0

Reserve balance at January 25, 2012
 
$
9.5

(Totals may not add due to rounding)

The majority of the amount included in other accrued liabilities at January 25, 2012 related to these initiatives is expected to be paid in the fourth quarter of Fiscal 2012.



9




(4)    Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended January 25, 2012 and fiscal year ended April 27, 2011, by reportable segment, are as follows:
 
North
American
Consumer
Products
 
Europe
 
Asia/Pacific
 
U.S.
Foodservice
 
Rest of
World
 
Total
 
(Thousands of Dollars)
Balance at April 28, 2010
$
1,102,891

 
$
1,106,744

 
$
289,425

 
$
257,674

 
$
14,184

 
$
2,770,918

Acquisitions

 

 
77,345

 

 
300,227

 
377,572

Purchase accounting adjustments

 
(278
)
 
(10,688
)
 

 

 
(10,966
)
Translation adjustments
8,846

 
114,774

 
35,998

 

 
1,299

 
160,917

Balance at April 27, 2011
1,111,737

 
1,221,240

 
392,080

 
257,674

 
315,710

 
3,298,441

Purchase accounting adjustments

 

 

 

 
1,380

 
1,380

Translation adjustments
(8,093
)
 
(103,344
)
 
2,868

 

 
(42,999
)
 
(151,568
)
Balance at January 25, 2012
$
1,103,644

 
$
1,117,896

 
$
394,948

 
$
257,674

 
$
274,091

 
$
3,148,253


During the second quarter of Fiscal 2012, the Company finalized the purchase price allocation for the Coniexpress S.A. Industrias Alimenticias ("Coniexpress") acquisition in Brazil resulting primarily in immaterial adjustments between goodwill, income taxes and non-pension postretirement benefits.

Total goodwill accumulated impairment losses for the Company since Fiscal 2003 were $84.6 million consisting of $54.5 million for Europe, $2.7 million for Asia/Pacific and $27.4 million for Rest of World as of April 28, 2010, April 27, 2011 and January 25, 2012.
Trademarks and other intangible assets at January 25, 2012 and April 27, 2011, subject to amortization expense, are as follows:
 
January 25, 2012
 
April 27, 2011
 
Gross
 
Accum
Amort
 
Net
 
Gross
 
Accum
Amort
 
Net
 
(Thousands of Dollars)
Trademarks
$
279,956

 
$
(85,476
)
 
$
194,480

 
$
297,020

 
$
(83,343
)
 
$
213,677

Licenses
208,186

 
(162,515
)
 
45,671

 
208,186

 
(158,228
)
 
49,958

Recipes/processes
88,674

 
(34,567
)
 
54,107

 
90,553

 
(31,988
)
 
58,565

Customer-related assets
213,388

 
(64,709
)
 
148,679

 
224,173

 
(57,555
)
 
166,618

Other
49,236

 
(25,836
)
 
23,400

 
79,045

 
(54,833
)
 
24,212

 
$
839,440

 
$
(373,103
)
 
$
466,337

 
$
898,977

 
$
(385,947
)
 
$
513,030


Amortization expense for trademarks and other intangible assets was $7.5 million and $7.0 million for the third quarters ended January 25, 2012 and January 26, 2011, respectively, and $24.4 million and $20.8 million for the nine months ended January 25, 2012 and January 26, 2011, respectively. The remaining reduction in net trademarks and other intangible assets, subject to amortization expense, since April 27, 2011 is primarily due to translation adjustments. Based upon the amortizable intangible assets recorded on the balance sheet as of January 25, 2012, annual amortization expense for each of the next five fiscal years is estimated to be approximately $30 million.
Intangible assets not subject to amortization at January 25, 2012 totaled $1,021.9 million and consisted of $886.2 million of trademarks, $116.0 million of recipes/processes, and $19.7 million of licenses. Intangible assets not subject to amortization at April 27, 2011 totaled $1,085.7 million and consisted of $942.5 million of trademarks, $122.5 million of recipes/processes, and $20.7 million of licenses. The reduction in intangible assets, not subject to amortization expense, since April 27, 2011 is primarily due to translation adjustments.

10




(5)    Income Taxes
The total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $48.9 million and $70.7 million, on January 25, 2012 and April 27, 2011, respectively. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $36.8 million and $56.5 million, on January 25, 2012 and April 27, 2011, respectively. It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $24.4 million in the next 12 months primarily due to the expiration of statutes of limitations in various foreign jurisdictions along with the progression of federal, state, and foreign audits in process.
The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The total amounts of interest and penalties accrued at January 25, 2012 were $14.6 million and $13.5 million, respectively. The corresponding amounts of accrued interest and penalties at April 27, 2011 were $27.3 million and $21.1 million, respectively.
The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates in an international environment with almost 70% of its sales outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, Italy, the United Kingdom and the United States. The Company has substantially concluded all national income tax matters for years through Fiscal 2009 for the U.S. and the United Kingdom, and through Fiscal 2007 for Australia, Canada, and Italy.
During the second quarter of Fiscal 2012, a foreign subsidiary of the Company exercised a tax option under local law to revalue certain of its intangible assets, increasing the local tax basis by $220.2 million. This revaluation resulted in a reduction in Fiscal 2012 tax expense, fully recognized in the second quarter, of $34.9 million reflecting the deferred tax benefit from the higher tax basis partially offset by the current tax liability arising from this revaluation of $34.8 million. The subsidiary paid $10.4 million of the $34.8 million during the second quarter of Fiscal 2012 and will pay $13.9 million in the second quarter of Fiscal 2013 with the remainder due during the second quarter of Fiscal 2014. The tax benefit from the higher basis amortization will result in a reduction in cash taxes over the five year tax amortization period totaling $69.1 million partially offset by the $34.8 million aforementioned tax payments.
The effective tax rate for the nine months ended January 25, 2012 was 20.0% compared to 26.0% last year. The decrease in the effective tax rate is primarily the result of the revaluation noted above, the reversal of an uncertain tax position liability due to the expiration of the statute of limitations in a foreign tax jurisdiction during the third quarter, the beneficial resolution of a foreign tax case recorded in the second quarter, and a statutory tax rate reduction in the United Kingdom that was enacted during the first quarter of Fiscal 2012. These current year benefits were partially offset by the inclusion of a benefit in the prior year resulting from the release of valuation allowances.

(6)    Employees’ Stock Incentive Plans and Management Incentive Plans
At January 25, 2012, the Company had outstanding stock option awards, restricted stock units and restricted stock awards issued pursuant to various shareholder-approved plans and a shareholder-authorized employee stock purchase plan, as described on pages 62 to 67 of the Company’s Annual Report on Form 10-K for the fiscal year ended April 27, 2011. The compensation cost related to these plans recognized in SG&A and the related tax benefit are as follows:
 
Third Quarter Ended
 
Nine Months Ended
 
January 25, 2012
 
January 26, 2011
 
January 25, 2012
 
January 26, 2011
 
(In Millions)
Pre-tax compensation cost
$
8.5

 
$
8.8

 
$
27.0

 
$
24.7

Tax benefit
2.8

 
2.8

 
8.9

 
7.9

After-tax compensation cost
$
5.7

 
$
6.0

 
$
18.1

 
$
16.8

The Company granted 1,649,119 and 1,730,515 option awards to employees during the nine months ended January 25, 2012 and January 26, 2011, respectively. The weighted average fair value per share of the options granted during the nine months ended January 25, 2012 and January 26, 2011, as computed using the Black-Scholes pricing model, was $5.80 and $5.36, respectively. The awards granted in Fiscal 2012 were sourced from the Fiscal Year 2003 Stock Incentive Plan. The awards granted in Fiscal 2011 were sourced from the 2000 Stock Option Plan and the Fiscal 2003 Stock Incentive Plan. The weighted average assumptions used to estimate the fair values are as follows:

11



 
Nine Months Ended
 
January 25,
2012
 
January 26,
2011
Dividend yield
3.7%
 
3.9%
Expected volatility
20.9%
 
20.5%
Weighted-average expected life (in years)
5.0
 
5.5
Risk-free interest rate
1.0%
 
1.7%

The Company granted 457,783 and 473,056 restricted stock units to employees during the nine months ended January 25, 2012 and January 26, 2011 at weighted average grant prices of $52.28 and $46.55, respectively.
In the first quarter of Fiscal 2012, the Company granted performance awards as permitted in the Fiscal Year 2003 Stock Incentive Plan, subject to the achievement of certain performance goals. These performance awards are tied to the Company’s Relative Total Shareholder Return (“Relative TSR”) ranking within the defined Long-term Performance Program (“LTPP”) peer group and the two-year average after-tax Return on Invested Capital (“ROIC”) metrics. The Relative TSR metric is based on the two-year cumulative return to shareholders from the change in stock price and dividends paid between the starting and ending dates. The starting value was based on the average of each LTPP peer group company stock price for the 60 trading days prior to and including April 27, 2011. The ending value will be based on the average stock price for the 60 trading days prior to and including the close of the Fiscal 2013 year end, plus dividends paid over the two year performance period. The compensation cost related to LTPP awards recognized in SG&A and the related tax benefit are as follows:
 
Third Quarter Ended
 
Nine Months Ended
 
January 25, 2012
 
January 26, 2011
 
January 25, 2012
 
January 26, 2011
 
(In Millions)
Pre-tax compensation cost
$
3.2

 
$
5.7

 
$
14.2

 
$
18.3

Tax benefit
1.1

 
2.0

 
5.0

 
6.4

After-tax compensation cost
$
2.1

 
$
3.7

 
$
9.2

 
$
11.9


(7)    Pensions and Other Post-Retirement Benefits
The components of net periodic benefit cost are as follows:
 
Third Quarter Ended
 
January 25, 2012
 
January 26, 2011
 
January 25, 2012
 
January 26, 2011
 
Pension Benefits
 
Other Retiree Benefits
 
(Thousands of Dollars)
Service cost
$
8,262

 
$
8,169

 
$
1,478

 
$
1,581

Interest cost
34,273

 
35,806

 
2,844

 
3,184

Expected return on plan assets
(57,665
)
 
(57,745
)
 

 

Amortization of prior service cost/(credit)
493

 
622

 
(1,533
)
 
(1,288
)
Amortization of unrecognized loss
20,691

 
19,536

 
274

 
401

Settlement charge

 
861

 

 

Net periodic benefit cost
$
6,054

 
$
7,249

 
$
3,063

 
$
3,878



12



 
Nine Months Ended
 
January 25, 2012
 
January 26, 2011
 
January 25, 2012
 
January 26, 2011
 
Pension Benefits
 
Other Retiree Benefits
 
(Thousands of Dollars)
Service cost
$
25,318

 
$
24,002

 
$
4,475

 
$
4,709

Interest cost
104,759

 
105,597

 
8,591

 
9,500

Expected return on plan assets
(176,202
)
 
(170,315
)
 

 

Amortization of prior service cost/(credit)
1,486

 
1,830

 
(4,595
)
 
(3,869
)
Amortization of unrecognized loss
62,857

 
57,892

 
821

 
1,203

Settlement charge

 
861

 

 

Net periodic benefit cost
$
18,218

 
$
19,867

 
$
9,292

 
$
11,543


The amounts recognized for pension benefits as other non-current assets on the Condensed Consolidated Balance Sheets were $673.2 million as of January 25, 2012 and $644.6 million as of April 27, 2011.

During the first nine months of Fiscal 2012, the Company contributed $15 million to these defined benefit plans. The Company expects to make combined cash contributions of approximately $25 million in Fiscal 2012; however, actual contributions may be affected by pension asset and liability valuations during the year.

(8)    Segments
The Company’s segments are primarily organized by geographical area. The composition of segments and measure of segment profitability are consistent with that used by the Company’s management.
Descriptions of the Company’s reportable segments are as follows:
North American Consumer Products—This segment primarily manufactures, markets and sells ketchup, condiments, sauces, pasta meals, and frozen potatoes, entrees, snacks, and appetizers to the grocery channels in the United States of America and includes our Canadian business.
Europe—This segment includes the Company’s operations in Europe and sells products in all of the Company’s categories.
Asia/Pacific—This segment includes the Company’s operations in Australia, New Zealand, India, Japan, China, Papua New Guinea, South Korea, Indonesia, Vietnam and Singapore. This segment’s operations include products in all of the Company’s categories.
U.S. Foodservice—This segment primarily manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States of America including ketchup, condiments, sauces, frozen soups and desserts.
Rest of World—This segment includes the Company’s operations in Africa, Latin America, and the Middle East that sell products in all of the Company’s categories.
The Company’s management evaluates performance based on several factors including net sales, operating income, and the use of capital resources. Inter-segment revenues, items below the operating income line of the consolidated statements of income, and certain costs associated with the corporation-wide productivity initiatives (see Note 3) are not presented by segment, since they are not reflected in the measure of segment profitability reviewed by the Company’s management.

13



The following table presents information about the Company’s reportable segments:
 
Third Quarter Ended
 
Nine Months Ended
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
(Thousands of Dollars)
Net external sales:
 

 
 

 
 
 
 
North American Consumer Products
$
829,866

 
$
839,296

 
$
2,398,758

 
$
2,404,033

Europe
854,693

 
831,898

 
2,536,712

 
2,343,340

Asia/Pacific
632,142

 
583,972

 
1,895,733

 
1,673,517

U.S. Foodservice
359,501

 
353,320

 
1,036,755

 
1,044,272

Rest of World
241,875

 
113,864

 
731,532

 
352,636

Consolidated Totals
$
2,918,077

 
$
2,722,350

 
$
8,599,490

 
$
7,817,798

Operating income/(loss):
 

 
 

 
 
 
 
North American Consumer Products
$
227,251

 
$
235,442

 
$
619,956

 
$
630,486

Europe
161,697

 
163,490

 
443,606

 
414,282

Asia/Pacific
54,023

 
43,211

 
155,257

 
173,087

U.S. Foodservice
48,264

 
47,778

 
114,296

 
138,393

Rest of World
18,363

 
8,001

 
82,778

 
36,669

Other:
 

 
 

 
 

 
 

Non-Operating(a)
(53,362
)
 
(59,524
)
 
(154,531
)
 
(132,005
)
Productivity initiatives(b)
(33,780
)
 

 
(111,608
)
 

Consolidated Totals
$
422,456

 
$
438,398

 
$
1,149,754

 
$
1,260,912

_______________________________________
(a)
Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments.
(b)
See Note 3 for further details.
The Company’s revenues are generated via the sale of products in the following categories:

 
Third Quarter Ended
 
Nine Months Ended
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
(Thousands of Dollars)
Ketchup and Sauces
$
1,261,567

 
$
1,139,184

 
$
3,840,379

 
$
3,345,108

Meals and Snacks
1,206,011

 
1,148,823

 
3,322,702

 
3,145,174

Infant/Nutrition
280,308

 
284,614

 
903,930

 
846,663

Other
170,191

 
149,729

 
532,479

 
480,853

Total
$
2,918,077

 
$
2,722,350

 
$
8,599,490

 
$
7,817,798




14




(9)    Income Per Common Share
The following are reconciliations of income to income applicable to common stock and the number of common shares outstanding used to calculate basic EPS to those shares used to calculate diluted EPS:

 
Third Quarter Ended
 
Nine Months Ended
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
(In Thousands)
Income attributable to H. J. Heinz Company
$
284,694

 
$
273,785

 
$
747,817

 
$
765,647

Allocation to participating securities(a)
1,151

 
630

 
1,939

 
1,583

Preferred dividends
3

 
3

 
8

 
9

Income applicable to common stock
$
283,540

 
$
273,152

 
$
745,870

 
$
764,055

 
 
 
 
 
 
 
 
Average common shares outstanding—basic
320,159

 
321,277

 
320,850

 
319,613

Effect of dilutive securities:
 

 
 

 
 

 
 

Convertible preferred stock
102

 
104

 
96

 
104

Stock options, restricted stock and the global stock purchase plan
2,452

 
2,818

 
2,592

 
2,844

Average common shares outstanding—diluted
322,713

 
324,199

 
323,538

 
322,561

_______________________________________

(a) Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid).
Diluted earnings per share is based upon the average shares of common stock and dilutive common stock equivalents outstanding during the periods presented. Common stock equivalents arising from dilutive stock options, restricted common stock units, and the global stock purchase plan are computed using the treasury stock method.
Options to purchase an aggregate of 0.7 million shares of common stock for the third quarter and nine months ended January 25, 2012 and 2.3 million shares of common stock for the third quarter and nine months ended January 26, 2011 were not included in the computation of diluted earnings per share because inclusion of these options would be anti-dilutive. These options expire at various points in time through 2018.

15






(10)    Comprehensive Income
The following table provides a summary of comprehensive income/(loss) attributable to H. J. Heinz Company:
 
Third Quarter Ended
 
Nine Months Ended
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
January 25, 2012
FY 2012
 
January 26, 2011
FY 2011
 
 
 
(Thousands of Dollars)
 
 
Net income
$
287,239

 
$
276,527

 
$
762,334

 
$
779,064

Other comprehensive income/(loss), net of tax:
 

 
 

 
 

 
 

Foreign currency translation adjustments
(113,519
)
 
65,989

 
(484,309
)
 
229,735

Reclassification of net pension and post-retirement benefit losses to net income
13,646

 
13,673

 
40,870

 
39,846

Net deferred gains on derivatives from periodic revaluations
2,931

 
3,260

 
29,796

 
11,386

Net deferred losses/(gains) on derivatives reclassified to earnings
285

 
(10,241
)
 
(16,513
)
 
(17,986
)
Total comprehensive income
190,582

 
349,208

 
332,178

 
1,042,045

Comprehensive (income)/loss attributable to the noncontrolling interest
(3,949
)
 
(2,517
)
 
4,943

 
(15,158
)
Comprehensive income attributable to H. J. Heinz Company
$
186,633

 
$
346,691

 
$
337,121

 
$
1,026,887

The following table summarizes the allocation of total comprehensive income/(loss) between H. J. Heinz Company and the noncontrolling interest for the third quarter and nine months ended January 25, 2012:

 
Third Quarter Ended
 
Nine Months Ended
 
H. J. Heinz
Company
 
Noncontrolling
Interest
 
Total
 
H. J. Heinz
Company
 
Noncontrolling
Interest
 
Total
 
(Thousands of Dollars)
Net income
$
284,694

 
$
2,545

 
$
287,239

 
$
747,817

 
$
14,517

 
$
762,334

Other comprehensive income/(loss), net of tax:
 

 
 

 
 

 
 

 
 

 
 

Foreign currency translation adjustments
(114,958
)
 
1,439

 
(113,519
)
 
(464,613
)
 
(19,696
)
 
(484,309
)
Reclassification of net pension and postretirement benefit losses to net income
13,646

 

 
13,646

 
40,841

 
29

 
40,870

Net deferred gains/(losses) on derivatives from periodic revaluations
2,978

 
(47
)
 
2,931

 
29,880

 
(84
)
 
29,796

Net deferred losses/(gains) on derivatives reclassified to earnings
273

 
12

 
285

 
(16,804
)
 
291

 
(16,513
)
Total comprehensive income/(loss)
$
186,633

 
$
3,949

 
$
190,582

 
$
337,121

 
$
(4,943
)
 
$
332,178


16




 
(11)    Changes in Equity
The following table provides a summary of the changes in the carrying amounts of total equity, H. J. Heinz Company shareholders’ equity and equity attributable to the noncontrolling interest:
 
 
 
H. J. Heinz Company
 
 
 
Total
 
Capital
Stock
 
Additional
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accum
OCI
 
Noncontrolling
Interest
 
(Thousands of Dollars)
Balance as of April 27, 2011
$
3,182,466

 
$
107,843

 
$
629,367

 
$
7,264,678

 
$
(4,593,362
)
 
$
(299,564
)
 
$
73,504

Comprehensive income(a)
345,661

 

 

 
747,817

 

 
(410,240
)
 
8,084

Dividends paid to shareholders of H. J. Heinz Company
(464,901
)
 

 

 
(464,901
)
 

 

 

Dividends paid to noncontrolling interest
(8,063
)
 

 

 

 

 

 
(8,063
)
Stock options exercised, net of shares tendered for payment
80,579

 

 
(13,639
)
 

 
94,218

 

 

Stock option expense
9,206

 

 
9,206

 

 

 

 

Restricted stock unit activity
11,141

 

 
(2,464
)
 

 
13,605

 

 

Conversion of preferred into common stock

 
(8
)
 
(539
)
 

 
547

 

 

Shares reacquired
(201,904
)
 

 

 

 
(201,904
)
 

 

Acquisition of subsidiary shares from noncontrolling interests(b)
(54,824
)
 

 
(34,483
)
 

 

 
(456
)
 
(19,885
)
Other
4,530

 

 
150

 
(573
)
 
4,953

 

 

Balance as of January 25, 2012
$
2,903,891

 
$
107,835

 
$
587,598

 
$
7,547,021

 
$
(4,681,943
)
 
$
(710,260
)
 
$
53,640

_______________________________________
(a) The allocation of the individual components of comprehensive income attributable to H. J. Heinz Company and the noncontrolling interest is disclosed in Note 10.
(b) During the second quarter of Fiscal 2012, the Company acquired an additional 10% interest in P.T. Heinz ABC Indonesia for $54.8 million. P.T. Heinz ABC Indonesia is an Indonesian subsidiary of the Company that manufacturers Asian sauces and condiments as well as juices and syrups. Prior to the transaction, the Company owned 65% of this business.

(12)    Debt

On December 1, 2011, the Company remarketed the $119 million remarketable securities at a rate of 6.049%. The next remarketing is scheduled for December 1, 2014. On the same date, the Company entered into a total rate of return swap with a notional amount of $119 million as an economic hedge to reduce the interest cost related to these remarketable securities (see Note 15 for further details).

During the second quarter of Fiscal 2012, the Company issued $300 million 2.00% Notes due 2016 and $400 million 3.125% Notes due 2021. The proceeds from both transactions will be used for the repayment of commercial paper and to pre-fund the repayment of the Company's $600 million notes maturing on March 15, 2012.
During the first quarter of Fiscal 2012, the Company modified its $1.2 billion credit agreement to increase the available borrowings under the facility to $1.5 billion as well as to extend its maturity date from April 2012 to June 2016. This credit agreement supports 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.

17



During the first quarter of Fiscal 2012, the Company issued $500 million of private placement notes at an average interest rate of 3.48% with maturities of three, five, seven and ten years. Additionally, during the first quarter of Fiscal 2012, the Company issued $100 million of private placement notes at an average interest rate of 3.38% with maturities of five and seven years. These proceeds were used to pay off the Company's $750 million of notes, which matured on July 15, 2011.
Certain of the Company's debt agreements contain customary covenants, including a leverage ratio covenant. The Company was in compliance with all of its debt covenants as of January 25, 2012.

(13)    Financing Arrangements
In Fiscal 2010, the Company entered into a three-year $175 million accounts receivable securitization program. For the sale of receivables under the program, the Company receives initial cash funding and a deferred purchase price. The initial cash funding was $137.0 million and $134.2 million during the nine months ended January 25, 2012 and January 26, 2011, respectively, resulting in an increase of cash for sales under this program for the nine months ended January 25, 2012 and January 26, 2011 of $108.0 million and $50.0 million, respectively. The fair value of the deferred purchase price was $84.4 million and $173.9 million as of January 25, 2012 and April 27, 2011, respectively. The increases in cash proceeds related to the deferred purchase price were $89.5 million and $21.9 million for the nine months ended January 25, 2012 and January 26, 2011, respectively. This deferred purchase price is included as a trade receivable on the condensed consolidated balance sheets and has a carrying value which approximates fair value as of January 25, 2012 and April 27, 2011, due to the nature of the short-term underlying financial assets.
In addition, the Company acted as servicer for approximately $150 million and $146 million of trade receivables which were sold to unrelated third parties without recourse as of January 25, 2012 and April 27, 2011, respectively. These trade receivables are short-term in nature. The proceeds from these sales are also recognized on the statements of cash flows as a component of operating activities.
The Company has not recorded any servicing assets or liabilities as of January 25, 2012 or April 27, 2011 for the arrangements discussed above because the fair value of these servicing agreements as well as the fees earned were not material to the financial statements.

(14)    Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below:
Level 1:  Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2:  Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:  Unobservable inputs for the asset or liability.
As of January 25, 2012 and April 27, 2011, the fair values of the Company’s assets and liabilities measured on a recurring basis are categorized as follows:

 
January 25, 2012
 
April 27, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Thousands of Dollars)
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivatives(a)
$

 
$
100,461

 
$

 
$
100,461

 
$

 
$
115,705

 
$

 
$
115,705

Short-term investments(b)
$
9,224

 
$

 
$

 
$
9,224

 
$
60,125

 
$

 
$

 
$
60,125

Total assets at fair value
$
9,224

 
$
100,461

 
$

 
$
109,685

 
$
60,125

 
$
115,705

 
$

 
$
175,830

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivatives(a)
$

 
$
18,980

 
$

 
$
18,980

 
$

 
$
43,007

 
$

 
$
43,007

Earn-out(c)
$

 
$

 
$
46,492

 
$
46,492

 
$

 
$

 
$
45,325

 
$
45,325

Total liabilities at fair value
$

 
$
18,980

 
$
46,492

 
$
65,472

 
$

 
$
43,007

 
$
45,325

 
$
88,332

_______________________________________

18



(a)
Foreign currency derivative contracts are valued based on observable market spot and forward rates and classified within Level 2 of the fair value hierarchy. Interest rate swaps are valued based on observable market swap rates and classified within Level 2 of the fair value hierarchy. Cross-currency interest rate swaps are valued based on observable market spot and swap rates and classified within Level 2 of the fair value hierarchy.

(b)
The Company acquired Coniexpress in Brazil in Fiscal 2011. The acquisition included short-term investments that are valued based on observable market rates and classified within Level 1 of the fair value hierarchy.

(c)
The Company acquired Foodstar Holding Pte (“Foodstar”) in China in Fiscal 2011. Consideration for this acquisition included a potential earn-out payment in Fiscal 2014 contingent upon certain net sales and EBITDA (earnings before interest, taxes, depreciation and amortization) targets during Fiscals 2013 and 2014. The fair value of the earn-out was estimated using a discounted cash flow model and is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Key assumptions in determining the fair value of the earn-out include the discount rate, and revenue and EBITDA projections for Fiscals 2013 and 2014. As of January 25, 2012 there were no significant changes to the fair value of the earn-out recorded for Foodstar at the acquisition date. A change in fair value of the earn-out could have a material impact on the Company's earnings.

There have been no transfers between Levels 1, 2 and 3 in Fiscals 2012 and 2011.
The Company recognized $11.0 million and $39.6 million of non-cash asset write-offs during the third quarter and nine months ended January 25, 2012 related to six factory closures. These factory closures are directly linked to the Company's Fiscal 2012 productivity initiatives (see Note 3). These charges reduced the Company's carrying value in the assets to estimated fair value, which is not material.
As of January 25, 2012 and April 27, 2011, the aggregate fair value of the Company’s debt obligations, based on market quotes, approximated the recorded value, with the exception of the 7.125% notes issued as part of the dealer remarketable securities exchange transaction, which occurred in Fiscal 2010. The book value of these notes has been reduced as a result of the cash payments made in connection with that exchange.

(15)    Derivative Financial Instruments and Hedging Activities
The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain derivative financial instruments to manage its foreign currency, debt and interest rate exposures. At January 25, 2012, the Company had outstanding currency exchange, interest rate, and cross-currency interest rate derivative contracts with notional amounts of $1.96 billion, $760 million and $399 million, respectively. At April 27, 2011, the Company had outstanding currency exchange, interest rate, and cross-currency interest rate derivative contracts with notional amounts of $1.86 billion, $1.51 billion and $377 million, respectively.

19



The following table presents the fair values and corresponding balance sheet captions of the Company’s derivative instruments as of January 25, 2012 and April 27, 2011:
 
January 25, 2012
 
April 27, 2011
 
Foreign
Exchange
Contracts
 
Interest
Rate
Contracts
 
Cross-
Currency
Interest Rate
Swap
Contracts
 
Foreign
Exchange
Contracts
 
Interest
Rate
Contracts
 
Cross-
Currency
Interest Rate
Swap
Contracts
 
(Dollars in Thousands)
Assets:
 

 
 

 
 

 
 

 
 

 
 

Derivatives designated as hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

Other receivables, net
$
18,392

 
$
10,260

 
$
23,717

 
$
28,139

 
$
38,703

 
$

Other non-current assets
6,287

 
30,443

 
10,792

 
7,913

 
16,723

 
14,898

 
24,679

 
40,703

 
34,509

 
36,052

 
55,426

 
14,898

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

Other receivables, net
570

 

 

 
9,329

 

 

Other non-current assets

 

 

 

 

 

 
570

 

 

 
9,329

 

 

Total assets
$
25,249

 
$
40,703

 
$
34,509

 
$
45,381

 
$
55,426

 
$
14,898

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

Derivatives designated as hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

Other payables
$
8,801

 
$

 
$
2,666

 
$
27,804

 
$

 
$
6,125

Other non-current liabilities
466

 

 

 
8,054

 

 

 
9,267

 

 
2,666

 
35,858

 

 
6,125

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

Other payables
6,308

 
739

 

 
1,024

 

 

Other non-current liabilities

 

 

 

 

 

 
6,308

 
739

 

 
1,024

 

 

Total liabilities
$
15,575

 
$
739

 
$
2,666

 
$
36,882

 
$

 
$
6,125


Refer to Note 14 for further information on how fair value is determined for the Company’s derivatives.

20



The following table presents the pre-tax effect of derivative instruments on the statement of income for the third quarters ended January 25, 2012 and January 26, 2011:
 
Third Quarter Ended
 
January 25, 2012
 
January 26, 2011
 
Foreign Exchange
Contracts
 
Interest Rate
Contracts
 
Cross-Currency
Interest Rate
Swap Contracts
 
Foreign Exchange
Contracts
 
Interest Rate
Contracts
 
Cross-Currency
Interest Rate
Swap Contracts
 
 
 
 
 
(Dollars in Thousands)
 
 
 
 
Cash flow hedges:
 

 
 

 
 

 
 

 
 

 
 

Net gains/(losses) recognized in other comprehensive loss (effective portion)
$
13,634

 
$

 
$
(8,985
)
 
$
10,091

 
$

 
$
(2,335
)
Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion):
 

 
 

 
 

 
 

 
 

 
 

Sales
$
1,456

 
$

 
$

 
$
1,361

 
$

 
$

Cost of products sold
(4,419
)
 

 

 
(5,491
)
 

 

Selling, general and administrative expenses
(57
)
 

 

 
(53
)
 

 

Other income/(expense), net
12,875

 

 
(8,373
)
 
21,825

 

 
571

Interest income/(expense)
33

 
(59
)
 
(1,449
)
 
33

 

 
(1,214
)
 
9,888

 
(59
)
 
(9,822
)
 
17,675

 

 
(643
)
Fair value hedges:
 

 
 

 
 

 
 

 
 

 
 

Net losses recognized in other expense, net

 
(4,113
)
 

 

 
(25,207
)
 

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

Net losses recognized in other expense, net
(1,846
)
 

 

 
(998
)
 

 

Net losses recognized in interest income

 
(739
)
 

 

 

 

 
(1,846
)
 
(739
)
 

 
(998
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total amount recognized in statement of income
$
8,042

 
$
(4,911
)
 
$
(9,822
)
 
$
16,677

 
$
(25,207
)
 
$
(643
)


21



The following table presents the pre-tax effect of derivative instruments on the statement of income for the nine months ended January 25, 2012 and January 26, 2011:
 
Nine Months Ended
 
January 25, 2012
 
January 26, 2011
 
Foreign Exchange
Contracts
 
Interest Rate
Contracts
 
Cross-Currency
Interest Rate
Swap Contracts
 
Foreign Exchange
Contracts
 
Interest Rate
Contracts
 
Cross-Currency
Interest Rate
Swap Contracts
 
 
 
 
 
(Dollars in Thousands)
 
 
 
 
Cash flow hedges:
 

 
 

 
 

 
 

 
 

 
 

Net gains/(losses) recognized in other comprehensive loss (effective portion)
$
31,965

 
$
(2,341
)
 
$
18,644

 
$
3,064

 
$

 
$
18,202

Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion):
 

 
 

 
 

 
 

 
 

 
 

Sales
$
5,549

 
$

 
$

 
$
2,037

 
$

 
$

Cost of products sold
(14,223
)
 

 

 
(14,679
)
 

 

Selling, general and administrative expenses
48

 

 

 
(189
)
 

 

Other income, net
20,878

 

 
21,289

 
21,477

 

 
24,607

Interest income/(expense)
214

 
(88
)
 
(4,392
)