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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Executive Overview- Fiscal 2011
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 2011, the Company reported record diluted earnings per share from continuing
operations of $3.06, compared to $2.87 in the prior year, an increase of 6.6%, overcoming a $0.06
per share unfavorable impact from currency translation and translation hedges and a $0.02 per share
unfavorable impact for acquisition costs from our recent acquisition in Brazil. Given that almost twothirds
of the Company’s sales and net income are generated outside of the U.S., foreign currency
movements can have a significant impact on the Company’s financial results.
The Company generated record sales of $10.7 billion in Fiscal 2011, a 2.0% increase versus prior
year. Full year sales benefited from combined volume and pricing gains of 1.9% reflecting effective
consumer marketing investments and new product development. Foreign exchange unfavorably
impacted sales by 0.5% while acquisitions increased sales 0.6%. In Fiscal 2011, the Company
continued to execute its strategy to grow in emerging economies by completing two important
acquisitions in these markets. On November 2, 2010, the Company acquired Foodstar Holding Pte
(“Foodstar”), a manufacturer of soy sauces and fermented bean curd in China and on April 1, 2011,
the Company acquired an 80% stake in Coniexpress S.A. Industrias Alimenticias (“Coniexpress”), a
leading Brazilian manufacturer of the Quero» brand of tomato-based sauces, tomato paste, ketchup,
condiments and vegetables. The Coniexpress acquisition will accelerate the Company’s growth in
Latin America and gives the Company its first major business in Brazil, the world’s fifth most
populous nation. Overall, emerging markets continued to be an important growth driver in Fiscal
2011, with combined volume and pricing gains of 14.4% and representing 16.2% of total Company
sales for the year. Our top 15 brands also performed well, with combined volume and pricing gains of
3.8% driven primarily by the Heinz», Complan», ABC», Smart Ones» and Ore-Ida» brands.
EPS from continuing operations for Fiscal 2011 also reflects a 70 basis point improvement in the
gross profit margin. The increased gross profit margin reflected productivity improvements and
higher net pricing, partially offset by higher commodity input costs. The improvement in gross
margin was partially offset by investments in global process and system upgrades in Fiscal 2011.
Operating income increased 5.7% in Fiscal 2011, despite the unfavorable impact of foreign currency,
transaction costs related to the Coniexpress acquisition in Brazil and the investment in global
systems capabilities. The Company reported record net income in Fiscal 2011 of $990 million
compared to $914 million from continuing operations in Fiscal 2010. In Fiscal 2010, the Company
incurred $28 million in after-tax charges for targeted workforce reductions and non-cash asset writeoffs
that were part of a corporate-wide initiative to improve productivity. These prior year charges
were partially offset by after-tax gains in the prior year of $11 million related to a property sale in the
Netherlands and $15 million on a total rate of return swap. In Fiscal 2011, the Company generated
record cash flow from operating activities of $1.58 billion, a $321 million increase from the prior year.
Management believes these Fiscal 2011 results are indicative of the effectiveness of the
Company’s business plan, which is focused on the following four strategic pillars:
• Accelerate Growth in Emerging Markets
• Expand the Core Portfolio
• Strengthen and Leverage Global Scale
• Make Talent an Advantage
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