S-4 1 d678101ds4.htm FORM S-4 Form S-4
Table of Contents

As filed with the Securities and Exchange Commission on March 7, 2014

No. 333-           

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

H.J. Heinz Company

Hawk Acquisition Intermediate Corporation II

Additional Registrants Listed on Schedule A Hereto

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania

Delaware

 

2030

2030

 

25-0512520

46-2246679

(State or other jurisdiction of

incorporation or organization)

  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

1 PPG Place, Suite 3100

Pittsburgh, Pennsylvania 15222

(412) 456-5700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Daniel F. Shaw

Executive Vice President and General Counsel

1 PPG Place, Suite 3100

Pittsburgh, Pennsylvania 15222

(412) 456-5700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Joshua N. Korff, Esq.

Michael Kim, Esq.

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022-4675

(212) 446-4800

 

 

Approximate date of commencement of proposed sale of the securities to the public: The exchange will occur as soon as practicable after the effective date of this Registration Statement.

 

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Amount

to be
Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)

 

Amount of

Registration Fee

4 14% Second Lien Senior Secured Notes due 2020

  $3,100,000,000   $3,100,000,000   $399,280

Guarantees of 4 14% Second Lien Senior Secured Notes due 2020

  $3,100,000,000     (2)

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act.
(2) Pursuant to Rule 457(n), no additional registration fee is payable with respect to the guarantees.

 

 

The registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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Schedule A

 

Exact Name of
Additional Registrants

  

Jurisdiction of
Incorporation
or Formation

  

Principal Executive
Offices

   Primary
Standard
Industrial
Classification
Code
Number
   I.R.S.
Employer
Identification
No.

H.J. Heinz Company, L.P.

   DE    1 PPG Place, Suite 3100 Pittsburgh, PA 15222    2030    25-1872814

H.J. Heinz Finance Company

   DE    1 PPG Place, Suite 3100 Pittsburgh, PA 15222    2030    82-0382406

Heinz Credit LLC

   DE   

2541 North Stokesberry

Place, Suite 100

Meridian, ID 83646

   2030    25-1438328

Heinz GP LLC

   DE    1 PPG Place, Suite 3100 Pittsburgh, PA 15222    2030    01-0931566

Heinz Investment Company

   DE   

2541 North Stokesberry

Place, Suite 100

Meridian, ID 83646

   2030    25-1897141

Heinz Management L.L.C.

   DE    1 PPG Place, Suite 3100 Pittsburgh, PA 15222    2030    51-0289545

Heinz Purchasing Company

   DE    1 PPG Place, Suite 3100 Pittsburgh, PA 15222    2030    54-1216343

Heinz Thailand Limited

   DE    1 PPG Place, Suite 3100 Pittsburgh, PA 15222    2030    51-0387869

Heinz Transatlantic Holding LLC

   DE   

2541 North Stokesberry

Place, Suite 100

Meridian, ID 83646

   2030    52-2442775

HJH Overseas L.L.C.

   DE    1 PPG Place, Suite 3100 Pittsburgh, PA 15222    2030    82-0561819

Lea and Perrins, Inc.

   DE   

15-01 Pollitt Drive, Fair

Lawn, NJ 07410

   2030    22-1659168

Nancy’s Specialty Foods

   CA   

357 Sixth Avenue

Pittsburgh, PA 15222

   2030    94-2768718

Heinz Foreign Investment Company

   ID   

2541 North Stokesberry

Place, Suite 100

Meridian, ID 83646

   2030    75-3089897


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted

 

Preliminary Prospectus

Subject to Completion, Dated March 7, 2014

Prospectus

H.J. Heinz Company

$3,100,000,000

Exchange Offer for 4.25% Second Lien Senior Secured Notes due 2020

 

 

Offer for outstanding 4.25% Second Lien Senior Secured Notes due 2020, in the aggregate principal amount of $3,100,000,000 (which we refer to as the “Old Notes”) in exchange for up to $3,100,000,000 in aggregate principal amount of 4.25% Second Lien Senior Secured Notes due 2020 which have been registered under the Securities Act of 1933, as amended (which we refer to as the “Exchange Notes” and, together with the Old Notes, the “Notes”).

Terms of the Exchange Offer

 

    Expires 5:00 p.m., New York City time,             , 2014, unless extended.

 

    You may withdraw tendered outstanding Old Notes any time before the expiration or termination of the exchange offer.

 

    Not subject to any condition other than that the exchange offer does not violate applicable law or any interpretation of the staff of the Securities and Exchange Commission.

 

    We can amend or terminate the exchange offer.

 

    We will not receive any proceeds from the exchange offer.

 

    The exchange of Old Notes for the Exchange Notes should not be a taxable exchange for United States federal income tax purposes. See “Certain United States Federal Income Tax Considerations.”

Terms of the Exchange Notes

 

    The Exchange Notes will accrue interest at a rate per annum equal to 4.25% and will be payable semi-annually on each April 15 and October 15.

 

    The Exchange Notes will mature on October 15, 2020.

 

    We may redeem the Exchange Notes in whole or in part from time to time. See “Description of Exchange Notes.”

 

    The Exchange Notes will be our senior obligations, will be secured by a second priority lien on substantially all of our assets securing indebtedness under our senior secured revolving credit facility (the “Revolving Credit Facility”), subject to certain specified exceptions and permitted liens, and will rank equally in right of payment to all of our existing and future senior indebtedness.

 

    The Exchange Notes will be guaranteed on a second lien senior secured basis by each of our existing and future direct and indirect domestic subsidiaries that is a guarantor under the Revolving Credit Facility, and such guarantees will rank equally in right of payment to all other senior indebtedness of such guarantor.

 

    The Exchange Notes will be effectively subordinated to our existing and future first priority secured indebtedness, including the Revolving Credit Facility, to the extent of the value of the collateral securing such indebtedness and structurally subordinated to all indebtedness and obligations of our subsidiaries that do not guarantee the Exchange Notes.

 

    If we experience certain changes of control, we must offer to purchase the Exchange Notes at 101% of their aggregate principal amount, plus accrued and unpaid interest.

 

    The terms of the Exchange Notes are substantially identical to those on the outstanding Old Notes, except the transfer restrictions, registration rights and additional interest provisions related to the Old Notes do not apply to the Exchange Notes.

 

 

For a discussion of the specific risks that you should consider before tendering your outstanding Old Notes in the exchange offer, see “Risk Factors” beginning on page 21 of this prospectus.

There is no established trading market for the Old Notes or the Exchange Notes.

Each broker-dealer that receives Exchange Notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. A broker dealer who acquired Old Notes as a result of market making or other trading activities may use this exchange offer prospectus, as supplemented or amended from time to time, in connection with any resales of the Exchange Notes.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Exchange Notes or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                , 2014.


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Each broker-dealer that receives Exchange Notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. By so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”). A broker dealer who acquired Old Notes as a result of market making or other trading activities may use this prospectus, as supplemented or amended from time to time, in connection with any resales of the Exchange Notes. We have agreed that, for a period of up to 180 days after the closing of the exchange offer, we will make this prospectus available for use in connection with any such resale. See “Plan of Distribution.”

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy securities other than those specifically offered hereby or an offer to sell any securities offered hereby in any jurisdiction where, or to any person whom, it is unlawful to make such offer or solicitation. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our 4.25% Second Lien Senior Secured Notes due 2020.

 

 

 

 

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TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

RISK FACTORS

     21   

USE OF PROCEEDS

     36   

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

     37   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     43   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     45   

BUSINESS

     79   

MANAGEMENT

     88   

EXECUTIVE COMPENSATION

     93   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     119   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     121   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     122   

EXCHANGE OFFER

     125   

DESCRIPTION OF EXCHANGE NOTES

     134   

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

     214   

PLAN OF DISTRIBUTION

     215   

LEGAL MATTERS

     216   

EXPERTS

     216   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     216   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

For purposes of this prospectus, unless the context otherwise requires, the terms “we,” “us,”, “our” and the “Company” refer, collectively, to Hawk Acquisition Intermediate Corporation II (“Hawk II”), H.J. Heinz Company, and its subsidiaries. References to “the Issuer” are to H.J. Heinz Company alone, not including its subsidiaries. Hawk II is a holding company and has no activity, therefore the information for Hawk II is applicable and equal to the data disclosed for H.J. Heinz Company.

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:

 

    the ability of the Company to retain and hire key personnel and maintain relationships with customers, suppliers and other business partners,

 

    sales, volume, earnings, or cash flow growth,

 

    general economic, political, and industry conditions, including those that could impact consumer spending,

 

    competitive conditions, which affect, among other things, customer preferences and the pricing of products, production, and energy costs,

 

    competition from lower-priced private label brands,

 

    increases in the cost and restrictions on the availability of raw materials including agricultural commodities and packaging materials, the ability to increase product prices in response, and the impact on profitability,

 

    the ability to identify and anticipate and respond through innovation to consumer trends,

 

    the need for product recalls,

 

    the ability to maintain favorable supplier and customer relationships, and the financial viability of those suppliers and customers,

 

    currency valuations and devaluations and interest rate fluctuations,

 

    changes in credit ratings, leverage, and economic conditions, and the impact of these factors on our cost of borrowing and access to capital markets,

 

    our ability to effectuate our strategy, including our continued evaluation of potential opportunities, such as strategic acquisitions, joint ventures, divestitures and other initiatives, our ability to identify, finance and complete these transactions and other initiatives, and our ability to realize anticipated benefits from them,

 

    the ability to successfully complete cost reduction programs and increase productivity,

 

    the ability to effectively integrate acquired businesses,

 

    new products, packaging innovations and product mix,

 

    the effectiveness of advertising, marketing, and promotional programs,

 

    supply chain efficiency,

 

    cash flow initiatives,

 

    risks inherent in litigation, including tax litigation,

 

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    the ability to further penetrate and grow and the risk of doing business in international markets, particularly our emerging markets, economic or political instability in those markets, strikes, nationalization, and the performance of business in hyperinflationary environments, in each case, such as Venezuela; and the uncertain global macroeconomic environment and sovereign debt issues, particularly in Europe,

 

    changes in estimates in critical accounting judgments and changes in laws and regulations, including tax laws,

 

    the success of tax planning strategies,

 

    the possibility of increased pension expense and contributions and other people-related costs,

 

    the potential adverse impact of natural disasters, such as flooding and crop failures, and the potential impact of climate change,

 

    the ability to implement new information systems, potential disruptions due to failures in information technology systems, and risks associated with social media, and

 

    other factors described in “Risk Factors” below.

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.

MARKET AND INDUSTRY DATA

Some of the market and industry data contained, or incorporated by reference, in this prospectus are based on independent industry publications or other publicly available information. Although we believe that these independent sources are reliable, we have not independently verified and cannot assure you as to the accuracy or completeness of this information. As a result, you should be aware that the market and industry data contained in this prospectus, and our beliefs and estimates based on such data, may not be reliable.

TRADEMARKS, SERVICE MARKS AND COPYRIGHTS

We own rights to trademarks, logos, service marks or trade names that we use in connection with the operation of our business, including, but not limited to Heinz®, ABC®, Quero®, Classico®, Plasmon® and Master® brands. We also have rights to registered trademarks, which we have been licensed to use by third parties, including, but not limited to, Weight Watchers®, Jack Daniel’s® and T.G.I. Friday’s®. Other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks, service marks, tradenames and copyrights referred to in this prospectus are listed without the ® and TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and tradenames.

 

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SUMMARY

This summary highlights certain information about our business and about the Notes. For a more complete understanding of our business and the Notes, you should read this entire prospectus, including the section entitled “Risk Factors,” and the consolidated financial statements and related notes, which are included in this prospectus. Unless otherwise noted, references in this prospectus to “FY,” “Fiscal” or “Fiscal Year” refer to our reporting year, which, prior to Fiscal Year 2012, ended on the Wednesday nearest April 30. Beginning from Fiscal Year 2012, our twelve month reporting period ends on the Sunday nearest April 30. In October 2013, our board of directors approved a change in our fiscal year-end to the Sunday closest to December 31. The Successor period is the period from February 8 through December 29, 2013. The Predecessor period is the period prior to the Merger on June 7, 2013. The Transition Period is the combination of the Successor period and the Predecessor period from April 29, 2013 to June 7, 2013. For purposes of this prospectus, unless the context otherwise requires, the terms “we,” “us,”, “our” and the “Company” refer, collectively, to Hawk Acquisition Intermediate Corporation II (“Hawk II”), H.J. Heinz Company, and its subsidiaries. References to “the Issuer” are to H.J. Heinz Company alone, not including its subsidiaries. Hawk II is a holding company and has no activity, therefore the information for Hawk II is applicable and equal to the data disclosed for H.J. Heinz Company.

Our Company

Founded over 140 years ago in Pennsylvania by Henry J. Heinz, we are one of the world’s leading marketers and producers of healthy, convenient and affordable foods specializing in ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition and other food products. Our portfolio of foods is comprised of a global family of leading branded products, including one of the world’s most iconic and recognizable brands, Heinz, The World’s Favorite Ketchup ®. For Successor period and Predecessor period from April 29, 2013 to June 7, 2013, we generated $6.24 billion and $1.11 billion in consolidated net sales, respectively.

Heinz is the number one brand in ketchup with a global market share of 25% and a U.S. market share of 61% and as a brand is recognized as having the second largest brand value globally within the food industry, excluding the beverage and fast food industries, in Interbrand’s “Best Global Brands 2012” report. Overall, our products had number one or number two local market share positions in more than 50 countries in 2012, including major emerging market countries, and are enjoyed by families worldwide. We also operate a significant global foodservice platform. We believe that our long heritage and reputation for quality and innovation results in category-defining products, strong brand recognition and customer loyalty across our portfolio and around the world wherever our products are sold.

Our top 15 brands (our “Top 15 Brands”) generated approximately 72% of our net sales in the Transition Period. We coordinate product development and distribution across our Top 15 Brands, which also reflect our significant geographic diversity. Across developed market countries our Top 15 Brands are represented by our Heinz 57 namesake, as well as Ore-Ida, Smart Ones, Classico, T.G.I. Friday’s, Weight Watchers, Plasmon, Honig, Golden Circle and Watties. In high growth emerging market countries our Top 15 Brands are represented by Quero in Brazil, Master in China, ABC in Indonesia, Malaysia and the Middle East, Complan in India, the Middle East and Africa and Pudliszki in Poland along with the Heinz brand in many emerging market countries. For the Transition Period, we generated approximately one-third of net sales in the United States and the remaining two-thirds of net sales were generated in markets outside the United States with 25% of consolidated net sales derived from businesses in our emerging market countries.

Through our 65 principal food processing factories, we manufacture (and contract for the manufacture of) our category defining and differentiated products throughout the world.

 

 

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Our products are sold through our 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.

Core Categories

Our global portfolio of leading brands is focused in three core categories: (i) Ketchup and Sauces, (ii) Meals and Snacks and (iii) Infant/Nutrition. The below chart illustrates the percent of our sales derived from each of our core categories in the Transition Period.

Core Categories

 

LOGO

The table below highlights our local market leadership within our core categories.

 

Core Categories /
(2013 Global Market Size)

  

2013 Local Retail Market Position and Share

  

Key Brands

Ketchup and Sauces

($118 billion)

  

#1 in United States Ketchup – 61%

#1 in U.K. Ketchup – 79%

#1 in Canada Ketchup – 83%

   Heinz, Quero, Lea & Perrins, Classico, ABC, Master, Pudliszki
  

#2 in U.K. Ambient Salad Dressings – 23%

#1 in United States Worcestershire Sauce – 65%

  

Meals and Snacks

($220 billion)

  

#1 in U.K. Soup Ambient – 67%

#1 in U.K. Beans and Kids Meals – 65%

#1 in Australia Beans and Pasta – 65%

#1 in New Zealand Wet Soup – 54%

#1 in United States Frozen Potatoes – 42%

#2 in United States Frozen Nutritional Meals – 30%

#1 in U.K. Frozen Ready Meals – 67%

   Heinz, Quero, ABC, Wattie’s, Golden Circle, Honig, Ore-Ida, Smart Ones, Weight Watchers, Bagel Bites; T.G.I. Friday’s

Infant Nutrition

($58 billion)

  

#1 in Italy Baby Food – 53%

#1 in China Baby Cereal – 33%

#2 in Australia Infant Feeding (Wet) – 37%

   Heinz, Plasmon, Complan

Source: Euromonitor for Global Market Size data and Nielsen 52 week value shares (through November / December 2013) for Local Retail Market Position and Share data.

 

 

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Ketchup and Sauces

With leading market shares in this global and fragmented category, Ketchup and Sauces is our largest and fastest growing core category. Our Ketchup and Sauces category contains our core ketchup, sauces and condiments, including our iconic Heinz ketchup and gravy brand, Lea & Perrins condiments and sauces, Quero tomato products and condiments and sauces, Classico pasta sauce, ABC condiments and sauces, Master sauces and Pudliszki sauces, among others. For the Transition Period and Fiscal Year 2013, this category generated approximately $3.6 billion and $5.4 billion in net sales, respectively, or 49% and 47% of our consolidated net sales, respectively. Between Fiscal Years 2006 and 2013, we realized a 6% net sales compound annual growth rate (“CAGR”) within this category, and a 4.0% increase in the Transition Period over the comparable eight month period of Fiscal 2013. Critical to our growth in this segment has been the growth and development of our emerging market countries platform.

We believe Ketchup and Sauces will continue to be a leading category given the following factors: substantial upside in many of our developed market countries as we continue to gain share; rapid growth in emerging market countries where the competitive dynamics continue to position us favorably; lower levels of private label penetration in the category; and our continued product and packaging innovations. Additionally, we have the unique advantage of Heinz seed-related technology/science and innovation. We are recognized globally as a leading all-natural hybrid processed tomato seed producer, delivering 5 billion hybrid seeds annually to our farmers and processing partners in nearly 30 countries. Heinz tomato seeds have been bred to improve yield, uniformity, color, disease-resistance and other traits such as tenderness and taste.

Meals and Snacks

Our Meals and Snacks category consists principally of our ambient foods and frozen products offerings, including under our iconic Heinz brand, Quero tomato and vegetable-based snacks, ABC prepared meals, Ore-Ida frozen potatoes, Bagel Bites frozen snacks, T.G.I. Friday’s frozen snacks, Smart Ones and Weight Watchers frozen entrees and snacks, among others.

Our Meals and Snacks category is led by three brands—Heinz, Ore-Ida and Smart Ones. Recent growth stems from brand extension into relevant adjacencies and leveraging packaging innovation to deliver convenience and value. For the Transition Period, we generated $2.5 billion in net sales in this category, a decrease of 7% over the comparable eight month period of Fiscal 2013, accounting for 35% of consolidated net sales, and have realized a 2% net sales CAGR for the period from Fiscal Year 2006 to Fiscal Year 2013. In the Transition Period, $1.4 billion and $1.1 billion of our net sales came from the Frozen and Ambient portfolio, respectively.

Infant/Nutrition

Our Infant/Nutrition category consists of our Heinz branded dry meal products (such as cereal and noodles); wet meal offerings (jar food/pouch); supplements (milk mate); snacks (teething rusks) and infant milk formula. In addition to our Heinz branded products, this category contains strong local brands, including Complan children’s nutrition sold in India, the Middle East and Africa, and Plasmon sold in Italy, among other brands. For the Transition Period, we generated $0.7 billion in net sales in this category, a 2.3% reduction over the comparable eight month period of Fiscal 2013, accounting for approximately 10% of consolidated net sales. We have realized a 5% net sales CAGR for the period from Fiscal Year 2006 to Fiscal Year 2013.

Globally, Infant/Nutrition category sales in emerging market countries generated a 16% CAGR for the 2008 to 2013 period; additionally, sales in emerging market countries currently comprise 66% of category sales, while category sales in developed market countries comprise the 34% balance of category sales. Given the fragmented

 

 

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nature of the competitive landscape and potential for additional market penetration opportunities, especially in emerging market countries, we have continued to focus our Infant/Nutrition efforts on emerging market countries.

Industry Trends

According to industry source Euromonitor, the global packaged foods industry is estimated to be $2.3 trillion at retail prices in 2013 and is generally characterized by stable, resilient growth based on modest price and volume increases. Since 1999 the market value at retail prices has grown at a CAGR of 4.8%, with underlying volume surpassing 740 million tons in 2013. Moreover, excluding foreign currency effects, during this period the industry has never experienced a year of negative growth in market value. Our products currently compete in global categories totaling nearly $400 billion at retail prices in 2013. We believe the long-term fundamentals for the overall global packaged foods industry, as well as our current categories, will continue to be favorable. It is our view that key industry success drivers include: brand support and innovation; quality; value; taste and nutrition; and sustaining strong relationships with retailers.

Developed Market Countries

According to Euromonitor data, the developed market countries continue to be an important component of the packaged food industry, accounting for approximately 56% market value at retail prices in 2013. Of the top ten markets in the world, six are developed market countries, which in the aggregate account for approximately 40% of total global packaged foods market value at retail prices. The United States is one of the largest markets in the world for packaged foods with sales at retail prices of $360 billion in 2013. From 1999 through 2013, the market value for packaged foods at retail prices within developed market countries has grown at a CAGR of 2.3%. We expect several trends to support continued growth of packaged foods sales in the developed market countries including: snacking; convenience; an increased focus on health and wellness; and value for money.

Emerging Market Countries

According to Euromonitor data, while only accounting for approximately 44% of market value at retail prices in 2013, emerging market countries are driving gains in the global packaged foods industry. From 1999 to 2013, the market value of retail sales in emerging market countries grew at a 10.3% CAGR compared to the countries of the developed markets’ 2.3% CAGR over the same time period. The impact of recent economic contraction and current tepid recoveries in the economies of developed market countries have further highlighted packaged food companies’ desire to focus on emerging market countries, which are experiencing robust growth. There are a number of factors driving this expansion, including: relative higher population growth; higher consumer confidence compared to developed markets and rising levels of personal income; increased urbanization, along with the development of modern food retail and food service outlets; emerging preferences and desires for western brands and products, as well as fragmented competitive dynamics. As a result, we expect packaged foods growth in emerging market countries to continue at rates in excess of developed market countries, and for emerging market countries to represent a greater portion of the global packaged foods market value over time.

Competitive Strengths

Stable and Resilient Business

We believe we are well-positioned in a stable industry with consistent performance. Excluding currency fluctuations, our product categories have not experienced a year of negative growth in at least the past ten years. We have leading positions within our three core categories, a deep and broad product portfolio and a diverse geographic footprint.

 

 

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World-Class Iconic Brands and Leading Global Market Positions

Our globally recognized premier brands are critical to our growth and success. Our Top 15 Brands accounted for approximately 72% and 71% of our consolidated net sales in the Transition Period and Fiscal Year 2013, respectively. The Heinz brand alone generated $3.0 billion in consolidated net sales for the Transition Period.

 

LOGO

According to Interbrand, Heinz is recognized as having the second largest brand value globally within the packaged food industry in its “Best Global Brands 2012” report. Additionally, we have won numerous awards from our customers, vendors, industry and others attesting to our trusted brands, innovation and dynamic marketing. We have been ranked number one in our sector by our customers for the past 14 years in the University of Michigan’s “American Customer Satisfaction Index,” and number one across all industries in 2011. According to British-based magazine Creative Review in 2012, our international “Beanz Meanz Heinz” advertising slogan was named the best global advertising slogan of all time, ahead of Nike’s “Just Do It” and Apple’s “Think Different.”

We have the global number one market share in Ketchup and hold the number two global market share positions in both Sauces, Dressings and Condiments and Frozen Potatoes, in each case based on the 2013 retail value of aggregate sales. We hold the number three global share in Ambient Foods and Frozen Ready Meals, based on the retail value of aggregate sales in 2013. Globally, within Infant/Nutrition, we hold the number three market share position in Prepared Baby Food and number five market share position in Infant Nutrition, including formula, in each case based on the 2013 retail value of aggregate sales.

Exposure to Attractive Product Categories and End Markets

On a blended basis from Fiscal Year 2006 through Fiscal Year 2013, our core segment categories of Ketchup and Sauces, Meals and Snacks and Infant/Nutrition generated a 4% net sales CAGR, with Ketchup and Sauces generating an approximately 6% net sales CAGR, Meals and Snacks generating a 2% net sales CAGR and Infant/Nutrition registering approximately 5% net sales CAGR.

We continue to expect positive momentum in our core categories, particularly given a lower level of private label penetration in our categories and our deep exposure to the rapidly growing emerging market countries where our tiered branding strategy has allowed us to introduce the Heinz brand in some markets alongside strong local offerings, capitalize on new distribution channels and seize on the favorable demographic shifts.

Within our core categories, we also operate a significant Foodservice business (number one brand position in the United States in ketchup, as of 2013, portion control condiments and frozen soup, as of 2010, based on

 

 

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volume share of sales) that manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States and abroad. Trends such as rising incomes, the need for “food away from home,” convenience, a rapidly-growing middle class and increasing urbanization are fueling growth of foodservice outlets in emerging market countries.

Global, Diverse Portfolio with Strong, Profitable Emerging Market Country Growth

Approximately two thirds of the Transition Period and Fiscal Year 2013 net sales were generated in markets outside the United States. As a market leader, based on retail value of aggregate sales in 2013 in the U.K., Western Europe, Italy, Australia, New Zealand, Brazil, China, Indonesia, Russia, the Middle East and Africa, our geographically-diverse platform has opened up new opportunities to expand our product portfolio and distribution, particularly in emerging markets.

With 25% of total sales derived from our businesses in emerging market countries in the Transition Period, we maintain an above average degree of emerging market country exposure compared to our peer companies within the S&P 500 Packaged Foods Index (peer average of 13% as of June 2012). We have been operating in emerging market countries for 50 years and have significant breadth and experience operating in and entering into these markets. Additionally, we have a balanced exposure throughout our emerging market countries and are not overly reliant on any one market or region.

Balanced Emerging Market Countries Exposure With $1.8 Billion in Sales for the Transition Period

 

LOGO

Emerging market countries represent a significant growth for delivering our tiered branding strategy wherein we build strong local brands (mainstream brand), while introducing our Heinz brand (premium brand) in certain markets. Sales from emerging market countries have grown in recent years from 14% of total Fiscal Year 2010 Sales to 25% of total Transition Period Sales.

Leading Innovation Platform to Accelerate Growth

Innovation is a major component of our company’s growth strategy, reflecting our belief that innovation differentiates our products and enhances the consumer experience, convenience and value. During the past 24 months, we launched a variety of innovative new products, including Heinz Ketchup with Real Jalapeno (U.S.), Heinz Five Beanz (U.K.), Ore-Ida Simply (U.S.), Smart Ones breakfasts and snacks (U.S.) and Heinz tomato paste and locally-manufactured Heinz tomato ketchup (Brazil). Our company maintains a robust pipeline

 

 

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of new products and innovative packaging, fueled by research and development conducted at our Global Innovation and Quality Center in Pittsburgh, PA, and our Infant Nutrition Center of Excellence in Italy. We expect our new European Innovation Center in Nijmegen, The Netherlands, and our initiative to expand pouch packaging into new markets around the world, will help drive further growth.

Experienced Management to be Enhanced Under Equity Investor Ownership

We have been led by a seasoned management team with significant experience. Berkshire Hathaway Inc. (“Berkshire Hathaway”), one of our equity investors, is led by Chairman and CEO Warren Buffett and is widely recognized for its long history of successful investments, while 3G Special Situations Fund III, L.P., an affiliate of 3G Capital Partners Ltd. (“3G Capital” and, together with Berkshire Hathaway, the “Sponsors”), our other equity investor, has a strong history of generating value through operational excellence (e.g. Burger King Corporation and Anheuser-Busch InBev). This premier sponsorship backing our talented management team will serve to enhance our operating capabilities and competitive positioning.

Business Strategies

We have delivered strong financial performance through a clear and proven strategic framework. Our strategy has five main pillars: expanding the core portfolio; accelerating growth in emerging market countries; driving operational improvements through cost efficiencies and leveraging global scale; focusing on cash flow generation and deleveraging; and making talent an advantage. Around those pillars, our top line sales growth is driven by a trio of growth engines: emerging market countries, Top 15 Brands and global ketchup.

Expanding the Core Portfolio

Our global portfolio of leading brands is focused in three core categories: Ketchup and Sauces, Meals and Snacks and Infant/Nutrition. We intend to grow our core portfolio targeting trends in health and wellness, taste and convenience, as well as strategic acquisitions that enhance, complement or diversify our product lines. Through continuing to invest in our business by leveraging the science of innovation and pursuing adjacencies/channel opportunities, we will continue to expand our core categories.

Accelerating Growth in Emerging Market Countries

We continue to invest in our emerging market countries platform, including via strategic acquisitions, to achieve double-digit sales and profit growth. We believe Heinz was among the first food companies to recognize the potential of emerging markets. We have created and maintained an effective tiered brand strategy in certain geographies with a mainstream brand (including Quero in Brazil) and a premium brand (Heinz), which aids in continuing to build strong local brands, while raising brand awareness of our iconic heritage offerings. Through our long history of investment, we have developed a stable of leading brands in core categories across the world. By leveraging our infrastructure, we will continue to expand distribution and win with local and global customers.

Driving Operational Improvements through Cost Efficiencies and Leveraging Global Scale

We intend to continue our focus on rationalizing our Cost of Products Sold (“COGS”) and reducing our Selling, General and Administrative Expenses (“SG&A”). We plan to further reduce our COGS through leveraging our global scale, as one of the largest food companies in the world. We are taking or have taken numerous operational steps to enhance our infrastructure, including focusing on innovation transfer between our various business segments; strengthening our global procurement and overall supply chain logistics; and investing in Project Keystone, a multi-year program designed to drive productivity and make our Company much more efficient by adding capabilities, harmonizing global processes and standardizing our systems through SAP.

 

 

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Additionally, we plan on adopting Zero Based Budgeting techniques, a method of annual planning designed to build a strong ownership culture by requiring departmental budgets to estimate and justify costs and expenditures from a “zero base,” rather than focusing on the prior year’s base, to drive further efficiencies.

Focusing on Cash Flow Generation and Deleveraging

We intend to tie a portion of management’s incentive compensation to profitability and free cash flow generation, focusing on rapid deleveraging. We believe this compensation plan will foster an ownership mentality for management to encourage strong operational efficiency, which will ultimately build the business for the long term.

Making Talent an Advantage

We are focused on maintaining a best-in-class talent platform. The key to this strategy is maintaining effective business leadership and a “strong bench” of managers across the Company. We believe we offer one of the best career platforms through successful incentive programs, optimization and development of talent and allocating talent against the best opportunities creating an attractive mix of responsibility and visibility for all team members.

The Acquisition

On June 7, 2013, H.J. Heinz Company was acquired by H.J. Heinz Holding Corporation, a Delaware corporation controlled by the Sponsors (“Parent”), pursuant to the Agreement and Plan of Merger, dated February 13, 2013, as amended (the “Merger Agreement”), by and among the Company, Parent and Hawk Acquisition Sub, Inc. (“Merger Subsidiary”) in a transaction hereinafter referred to as the “Merger.” As a result of the Merger, all issued and outstanding shares of our common stock outstanding immediately prior to the effective time of the Merger was converted into the right to receive $72.50 in cash, without interest and less applicable withholding taxes thereon, and the Company continued as the surviving corporation in the Merger, becoming an indirect wholly owned subsidiary of Parent.

The total cash consideration paid in connection with the Merger was approximately $28.75 billion, including the assumption of the Company’s outstanding debt, which was funded from equity contributions from the Sponsors, as well as proceeds received by Merger Subsidiary from the Senior Credit Facilities and upon the issuance of the Notes. The Senior Credit Facilities consist of:

 

    $9.5 billion in senior secured term loans (the “Term Loan”), with tranches of 6 and 7 year maturities and fluctuating interest rates based on, at the Company’s election, base rate or LIBOR plus a spread on each of the tranches, with respective spreads ranging from 125-150 basis points for base rate loans with a 2% base rate floor and 225-250 basis points for LIBOR loans with a 1% LIBOR floor, and

 

    $2.0 billion senior secured revolving credit facility with a 5 year maturity and a fluctuating interest rate based on, at the Company’s election, base rate or LIBOR, with respective spreads ranging from 50-100 basis points for base rate loans and 150-200 basis points for LIBOR loans, on which nothing is currently drawn.

On June 7, 2013, this indebtedness was assumed by the Company.

In connection with the Merger, Parent issued to Berkshire Hathaway 80,000 shares of its 9% Cumulative Perpetual Series A Preferred Stock for $8 billion.

In the Merger, (i) each outstanding share of Company common stock (other than shares owned by the Company, Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent, and in each case not held on behalf of third parties) was cancelled and automatically converted into the right to receive $72.50 in

 

 

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cash, without interest and less applicable withholding taxes thereon (the “Merger Consideration”), (ii) each outstanding stock option, whether vested or unvested, was cancelled and automatically converted into the right to receive, with respect to each share subject to the option, the Merger Consideration less the exercise price per share, (iii) each outstanding Company phantom unit, whether vested or unvested, was cancelled and automatically converted into the right to receive the Merger Consideration, and (iv) each outstanding Company restricted stock unit (other than retention restricted stock units, which will remain subject to the vesting schedule pursuant to the existing terms of the applicable award agreements and that the general timing of payment would be in accordance with such terms), whether vested or unvested, was cancelled and automatically converted into the right to receive, with respect to each share subject to the restricted stock unit, the Merger Consideration plus any accrued and unpaid dividend equivalents, except that payment in respect of Company restricted stock units that have been deferred will be made in accordance with the terms of the award and the applicable deferral election made by the holder.

At the effective time of the Merger, each holder of a certificate formerly representing any shares of Company common stock or of book-entry shares no longer had any rights with respect to the shares, except for the right to receive the Merger Consideration upon surrender thereof.

Financing implications of the Merger on our historic debt

A substantial portion of the Company’s indebtedness was subject to acceleration upon a change of control or required the Company to offer holders the option to repurchase such indebtedness from such holders (assuming such change of control triggered certain downgrades in the ratings of the Company’s debt). Certain of the Company’s outstanding indebtedness at June 7, 2013 that was not subject to acceleration upon a change of control and that either did not contain change of control repurchase obligations or where the holders did not elect to have such indebtedness repurchased in a change of control offer remain outstanding.

On March 13, 2013, the Company launched a successful consent solicitation relating to the 7.125% Notes due 2039 seeking a waiver of the change of control provisions as applicable to the Merger Agreement.

Changes in the Directors and Officers of the Company

On June 7, 2013, in connection with the Merger and related transactions, William R. Johnson resigned as Chief Executive Officer of the Company and Arthur B. Winkleblack resigned as Chief Financial Officer of the Company. Bernardo Hees was appointed as Chief Executive Officer of the Company and Paulo Basilio was appointed as Chief Financial Officer of the Company, each effective as of the consummation of the Merger.

Also in accordance with terms of the Merger Agreement, as of the effective time of the Merger, each of William R. Johnson, Charles E. Bunch, Leonard S. Coleman Jr., John G. Drosdick, Edith E. Holiday, Candace Kendle, Franck J. Moison, Dean R. O’Hare, Nelson Peltz, Dennis H. Reilley, Lynn C. Swann, Thomas J. Usher and Michael F. Weinstein (the “Former Directors”) ceased serving as members of the board of directors of the Company and, in connection therewith, the Former Directors also ceased serving on any committees of which such Former Directors were members.

Warren Buffett, Alexandre Behring, Gregory Abel, Jorge Paulo Lemann, Marcel Herrmann Telles and Tracy Britt Cool were elected as new members of the board of directors of the Company on June 7, 2013.

 

 

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Corporate Structure

The chart below illustrates our basic corporate and debt structure.

 

LOGO

 

(1) The Senior Credit Facilities consist of $9.5 billion in senior secured term loans and the $2.0 billion Revolving Credit Facility.
(2) The Rollover Notes consist of the Company’s 6.375% Debentures due 2028, 6.250% Notes due 2030, 6.750% Notes due 2032 and 7.125% Notes due 2039.

 

 

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Our Investors

Berkshire Hathaway Inc.

Berkshire Hathaway is a holding company owning subsidiaries engaged in a number of diverse business activities. The most important of these are insurance businesses conducted on both a primary basis and a reinsurance basis. Berkshire Hathaway also owns and operates a large number of other businesses engaged in a variety of sectors. Berkshire Hathaway’s operating businesses are managed on a decentralized basis. There are essentially no centralized or integrated business functions (i.e. sales, marketing, purchasing, legal or human resources) and there is minimal involvement by Berkshire Hathaway’s corporate headquarters in the day- to- day business activities of the operating businesses. Berkshire Hathaway’s corporate office senior management participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. Berkshire Hathaway is domiciled in the state of Delaware, and its corporate headquarters are located in Omaha, Nebraska.

3G Capital

3G Capital is a multi-billion dollar, global investment firm focused on long-term value creation, with a particular emphasis on maximizing the potential of brands and businesses. The firm and its partners have a strong history of generating value through operational excellence, board involvement, deep sector expertise and an extensive global network. 3G Capital works in close partnership with management teams at its portfolio companies and places a strong emphasis on recruiting, developing and retaining top-tier talent. Affiliates of the firm and its partners have or had controlling or partial ownership stakes in global companies such as Burger King Corporation, Anheuser-Busch InBev, Lojas Americanas (the largest non-food and online retailer in Latin America), and ALL, the largest railroad and logistics company in Latin America. 3G Capital’s main office is in New York City.

 

 

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The Exchange Offer

On April 1, 2013, we sold, through a private placement exempt from the registration requirements of the Securities Act, $3,100,000,000 of our 4.25% Second Lien Senior Secured Notes due 2020, CUSIP No. 420088 AA4 and U24716 AA7, all of which are eligible to be exchanged for Exchange Notes. We refer to these notes as “Old Notes” in this prospectus.

Simultaneously with the private placement, we entered into the Registration Rights Agreement with the initial purchasers of the Old Notes. Under the Registration Rights Agreement, we are required to use our reasonable best efforts to cause a registration statement for substantially identical Notes, which will be issued in exchange for the Old Notes, to be filed with the United States Securities and Exchange Commission (the “SEC”) and to complete the exchange offer within 365 days after the issue date of the Old Notes. We refer to the notes to be registered under this exchange offer registration statement as “Exchange Notes” and collectively with the Old Notes, we refer to them as the “Notes” in this prospectus. You may exchange your Old Notes for Exchange Notes in this exchange offer. You should read the discussion under the headings “—Summary of Exchange Offer,” “Exchange Offer” and “Description of Exchange Notes” for further information regarding the Exchange Notes.

 

Securities Offered

$3.1 billion aggregate principal amount of 4.25% Second Lien Senior Secured Notes due 2020.

 

Exchange Offer

We are offering to exchange the Old Notes for a like principal amount at maturity of the Exchange Notes. Old Notes may be exchanged only in minimum principal denominations of $2,000 and integral principal multiples of $1,000 thereafter. The exchange offer is being made pursuant to the Registration Rights Agreement which grants holders of the Old Notes certain exchange and registration rights. This exchange offer is intended to satisfy those exchange and registration rights with respect to the Old Notes. After the exchange offer is complete, you will no longer be entitled to any exchange or registration rights with respect to your Old Notes.

 

Expiration Date; Withdrawal of Tender

The exchange offer will expire 5:00 p.m., New York City time, on             , 2014, or a later time if we choose to extend this exchange offer in our sole and absolute discretion. You may withdraw your tender of Old Notes at any time prior to the expiration date. All outstanding Old Notes that are validly tendered and not validly withdrawn will be exchanged. Any Old Notes not accepted by us for exchange for any reason will be returned to you at our expense as promptly as possible after the expiration or termination of the exchange offer.

 

Resales

We believe that you can offer for resale, resell and otherwise transfer the Exchange Notes without complying with the registration and prospectus delivery requirements of the Securities Act so long as:

 

    you acquire the Exchange Notes in the ordinary course of business;

 

    you are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the Exchange Notes;

 

 

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    you are not an “affiliate” of ours, as defined in Rule 405 of the Securities Act; and

 

    you are not a broker-dealer.

 

  If any of these conditions is not satisfied and you transfer any Exchange Notes without delivering a proper prospectus or without qualifying for a registration exemption, you may incur liability under the Securities Act. We do not assume, or indemnify you against, any such liability.

 

  Each broker-dealer acquiring Exchange Notes issued for its own account in exchange for Old Notes, which it acquired through market-making activities or other trading activities, must acknowledge that it will deliver a proper prospectus when any Exchange Notes issued in the exchange offer are transferred. A broker-dealer may use this prospectus for an offer to resell, a resale or other retransfer of the Exchange Notes issued in the exchange offer.

 

Conditions to the Exchange Offer

Our obligation to accept for exchange, or to issue the Exchange Notes in exchange for, any Old Notes is subject to certain customary conditions, including our determination that the exchange offer does not violate any law, statute, rule, regulation or interpretation by the Staff of the SEC or any regulatory authority or other foreign, federal, state or local government agency or court of competent jurisdiction, some of which may be waived by us. We currently expect that each of the conditions will be satisfied and that no waivers will be necessary. See “Exchange Offer—Conditions to the Exchange Offer.

 

Procedures for Tendering Old Notes held in the Form of Book-Entry Interests

The Old Notes were issued as global securities and were deposited upon issuance with Wells Fargo, National Association, which represent a 100% interest in those Old Notes, to The Depositary Trust Company (“DTC”).

 

  Beneficial interests in the outstanding Old Notes, which are held by direct or indirect participants in DTC, are shown on, and transfers of the Old Notes can only be made through, records maintained in book-entry form by DTC.

 

  You may tender your outstanding Old Notes by instructing your broker or bank where you keep the Old Notes to tender them for you. In some cases you may be asked to submit the letter of transmittal that may accompany this prospectus. By tendering your Old Notes you will be deemed to have acknowledged and agreed to be bound by the terms set forth under “Exchange Offer.” Your outstanding Old Notes must be tendered in minimum denominations of $2,000 and multiples of $1,000 thereafter.

 

 

In order for your tender to be considered valid, the exchange agent must receive a confirmation of book-entry transfer of your outstanding Old Notes into the exchange agent’s account at DTC,

 

 

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under the procedure described in this prospectus under the heading “Exchange Offer,” on or before 5:00 p.m., New York City time, on the expiration date of the exchange offer.

 

United States Federal Income Tax Considerations

The exchange offer should not result in any income, gain or loss to the holders of Old Notes or to us for United States federal income tax purposes. See “Certain United States Federal Income Tax Considerations.”

 

Use of Proceeds

We will not receive any proceeds from the issuance of the Exchange Notes in the exchange offer.

 

Exchange Agent

Wells Fargo, National Association is serving as the exchange agent for the exchange offer.

 

Shelf Registration Statement

In limited circumstances, holders of Old Notes may require us to register their Old Notes under a shelf registration statement.

Consequences of Not Exchanging Old Notes

If you do not exchange your Old Notes in the exchange offer, your Old Notes will continue to be subject to the restrictions on transfer currently applicable to the Old Notes. In general, you may offer or sell your Old Notes only:

 

    if they are registered under the Securities Act and applicable state securities laws;

 

    if they are offered or sold under an exemption from registration under the Securities Act and applicable state securities laws; or

 

    if they are offered or sold in a transaction not subject to the Securities Act and applicable state securities laws.

We do not currently intend to register the Old Notes under the Securities Act. Under some circumstances, however, holders of the Old Notes, including holders who are not permitted to participate in the exchange offer or who may not freely resell Exchange Notes received in the exchange offer, may require us to file, and to cause to become effective, a shelf registration statement covering resales of Old Notes by these holders. For more information regarding the consequences of not tendering your Old Notes and our obligation to file a shelf registration statement, see “Exchange Offer—Consequences of Exchanging or Failing to Exchange Old Notes” and “Description of Exchange Notes—Registration Rights.”

 

 

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Description of Exchange Notes

 

Issuer

H.J. Heinz Company.

 

Notes Offered

$3.1 billion aggregate principal amount of 4.25% Second Lien Senior Secured Notes due 2020.

 

Maturity Date

The Exchange Notes will mature on October 15, 2020.

 

Interest Payment Dates

Semi-annually in arrears on each April 15 and October 15.

 

Security

The Exchange Notes will be secured on a second-priority basis by the assets that secure our and our guarantors obligations under our Senior Secured Credit Facilities. For more information on the security granted, See “Description of Exchange Notes—Security.”

 

Ranking

The Exchange Notes will be our second-priority senior secured obligations and will be:

 

    equal in right of payment with all of our existing and future senior debt, including borrowings under our Senior Secured Credit Facilities;

 

    effectively junior to all of our existing and future first-priority senior secured debt, including borrowings under our Senior Secured Credit Facilities to the extent of the value of the collateral securing such debt;

 

    effectively senior to all of our existing and future unsecured senior debt to the extent of the value of collateral securing the Exchange Notes;

 

    senior in right of payment to all of our existing and future subordinated debt; and

 

    structurally subordinated to all existing and future liabilities of our non-guarantor subsidiaries.

 

Guarantors

The Exchange Notes will be guaranteed fully and unconditionally, and jointly and severally, by Parent and each of our wholly owned subsidiaries that guarantee our obligations under certain credit facilities (including the Senior Secured Credit Facilities (the “Guarantors”). In the future, the subsidiary guarantees may be released or terminated under certain circumstances.

 

  Excluding intercompany transactions, the non-guarantors accounted for (i) approximately $4,167.5 million, or 66.8% of our sales for the 29 week period ended December 29, 2013 and (ii) approximately $3,755.2 million, or 16.7% of our total liabilities as of December 29, 2013.

 

 

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Ranking of the Guarantees

The Guarantees will be the Guarantors’ second-priority senior secured obligations and will be:

 

    equal in right of payment with all of such guarantors’ existing and future senior debt, including borrowings under and guarantees of our Senior Secured Credit Facilities, but effectively senior to all such senior debt that is unsecured, to the extent of the value of the assets securing the Guarantees;

 

    effectively junior to all of such guarantors’ existing and future first-priority senior secured debt, including borrowings under and guarantees of our Senior Secured Credit Facilities, to the extent of the value of the collateral securing such debt;

 

    effectively senior to all of such guarantors’ existing and future unsecured senior debt to the extent of the value of the collateral securing the Guarantees;

 

    senior in right of payment to all of such guarantors’ existing and future subordinated debt; and

 

    structurally subordinated to all liabilities, including trade payables, of our non-guarantor subsidiaries.

 

  As of December 29, 2013, we had $9,476.3 million aggregate principal amount of first-priority senior secured indebtedness outstanding (with $2,000 million available for borrowing under the Revolving Credit Facility), $3,306.0 million aggregate principal amount of second-priority senior secured indebtedness outstanding and $1,943.8 million of other indebtedness outstanding.

 

Intercreditor Agreement

The security granted to secure the Exchange Notes and the Guarantees have also been granted to secure, on a first-priority basis, indebtedness under our Senior Secured Credit Facilities. In addition, the Indenture permits us to secure, on a pari passu basis with the Notes, additional indebtedness with liens on the collateral securing the Notes and the Guarantees under certain circumstances. The collateral agent for the Notes and the collateral agent under our Senior Secured Credit Facilities have entered into an intercreditor agreement (the “Intercreditor Agreement”) as to the relative priorities of their respective security interests in the assets securing the Exchange Notes and Guarantees and indebtedness and related guarantees under our Senior Secured Credit Facilities and certain other matters relating to the administration of security interests. See “Description of Exchange Notes—Intercreditor Agreement.”

 

Optional Redemption

We may redeem all or part of the Exchange Notes at any time prior to April 15, 2015 by paying a make-whole premium, plus accrued and unpaid interest to the redemption date. We may redeem all or part of the Exchange Notes at any time after April 15, 2015 at the redemption prices described in the section “Description of Exchange Notes—Optional Redemption” plus accrued and unpaid interest to the

 

 

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redemption date. In addition, at any time prior to April 15, 2015, we may redeem up to 40% of the aggregate principal amount of the Exchange Notes at a redemption price equal to 104.2500% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds from certain equity offerings. For more details, see “Description of Exchange Notes—Optional Redemption.”

 

Change of Control

If the Issuer experiences a change of control, the holders of the Exchange Notes will have the right to require the Issuer to offer to repurchase the Exchange Notes at a purchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest and Additional Amounts, if any, to the date of such repurchase. See “Description of Exchange Notes—Change of Control.”

 

Mandatory Offer to Repurchase Following Certain Asset Sales

If we sell certain assets, under certain conditions we must offer to repurchase the Exchange Notes at the prices listed under “Description of Exchange Notes—Certain Covenants—Limitation on Sales of Assets and Subsidiary Stock.”

 

Certain Covenants

The Indenture will limit, among other things, the ability of the Issuer and its Restricted Subsidiaries to:

 

    incur additional indebtedness or guarantee indebtedness;

 

    create liens or use assets as security in other transactions;

 

    declare or pay dividends, redeem stock or make other distributions to stockholders;

 

    make investments;

 

    merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;

 

    enter into transactions with affiliates;

 

    sell or transfer certain assets; and

 

    agree to certain restrictions on the ability of restricted subsidiaries to make payments to us.

 

  These covenants are subject to a number of important qualifications and limitations. In addition, certain of these covenants will be suspended for so long as the Exchange Notes have investment grade ratings from any two of Fitch Ratings, Inc., Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services. See “Description of Exchange Notes—Certain Covenants.”

 

Risk Factors

Investing in the Exchange Notes involves substantial risks. You should consider carefully all the information in this prospectus and, in particular, you should evaluate the specific risk factors set forth in the “Risk Factors” section in this prospectus before making a decision whether to invest in the Exchange Notes.

 

 

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Corporate Information

Hawk Acquisition Intermediate Corporation II is a Delaware corporation. Its principal executive offices are located at One PPG Place, Pittsburgh Pennsylvania, 15222 and its telephone number at that address is (412) 456-5700.

H.J. Heinz Company is a Pennsylvania corporation. Our principal executive offices are located at One PPG Place, Pittsburgh Pennsylvania, 15222 and our telephone number at that address is (412) 456-5700. Our website is located at http://www.heinz.com. Our website and the information contained on our website are not part of this prospectus.

 

 

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Summary Historical Consolidated Financial and Other Data

For purposes of this prospectus, unless the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer, collectively, to Hawk Acquisition Intermediate Corporation II (“Hawk II”), H.J. Heinz Company, and its subsidiaries. References to “the Issuer” are to H.J. Heinz Company alone, not including its subsidiaries. Hawk II is a holding company and has no activity, therefore the information for Hawk II is applicable and equal to the data disclosed for H.J. Heinz Company.

The following table sets forth our summary historical financial and other data for the periods and at the dates indicated. We have derived the income statement data for the successor period of twenty-nine weeks ended December 29, 2013, the predecessor period of six weeks ended June 7, 2013 and the fiscal years ended April 28, 2013, April 29, 2012 and April 27, 2011 and the balance sheet data as of December 29, 2013, April 28, 2013 and April 29, 2012, from our audited consolidated financial statements appearing elsewhere in this prospectus. Our historical operating results are not necessarily indicative of future operating results. The following summary historical consolidated financial and other data should be read in conjunction with the section titled “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto included elsewhere in this prospectus.

 

    Successor     Predecessor  
    February 8 -
December 29,
2013

(29 Weeks)
    April 29 -
June 7, 2013
(6 Weeks)
    April 28,
2013
(52 Weeks)
    April 29,
2012
(52 12 Weeks)
    April 27,
2011
(52 Weeks)
 
   

(in thousands)

       

Income Statement Data:

           

Sales

  $ 6,239,562      $ 1,112,872      $ 11,528,886      $ 11,507,572      $ 10,558,636   

Cost of products sold

    4,587,791        729,537        7,333,416        7,512,783        6,614,259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,651,771        383,335        4,195,470        3,994,789        3,944,377   

Selling, general and administrative expenses

    1,501,807        243,364        2,489,005        2,492,482        2,256,739   

Merger related costs

    157,938        112,188        44,814        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    (7,974     27,783        1,661,651        1,502,307        1,687,638   

Interest income

    13,071        2,878        27,795        34,547        22,548   

Interest expense

    408,503        35,350        283,607        293,009        272,660   

Unrealized gain on derivative instruments

    117,934        —          —          —          —     

Other expense, net

    (12,233     (125,638     (62,196     (7,756     (21,204
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    (297,705     (130,327     1,343,643        1,236,089        1,416,322   

Provision for income taxes

    (231,623     61,097        241,598        244,966        370,817   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    (66,082     (191,424     1,102,045        991,123        1,045,505   

Loss from discontinued operations, net of tax (2)

    (5,636     (1,273     (74,712     (51,215     (39,557
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    (71,718     (192,697     1,027,333        939,908        1,005,948   

Less: Net income attributable to the noncontrolling interest

    5,303        2,874        14,430        16,749        16,438   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Hawk Acquisition Intermediate Corporation II

  $ (77,021   $ (195,571   $ 1,012,903      $ 923,159      $ 989,510   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Successor     Predecessor  
    February 8 -
December 29,
2013

(29 Weeks)
    April 29 -
June 7, 2013

(6 Weeks)
    April 28,
2013
(52 Weeks)
    April 29,
2012
(52 12 Weeks)
    April 27,
2011
(52 Weeks)
 
          (in thousands)  

Cash Flow Data:

           

Cash provided by/(used for) operating activities

    35,058        (372,093     1,389,963        1,493,117        1,583,643   

Cash provided by / (used for) investing activities

    (21,671,431     (89,795     (373,120     (402,005     (949,632

Cash provided by/(used for) financing activities

    24,109,241        85,418        256,927        (362,835     (482,509

 

     Successor         Predecessor   
     As of
December 29,
2013
     As of
April 28,
2013
     As of
April 29,
2012
 
            (in thousands)  

Balance Sheet Data (at period end):

          

Cash and cash equivalents

   $ 2,458,992       $ 2,476,699       $ 1,330,441   

Total assets

   $ 38,972,348       $ 12,939,007       $ 11,983,293   

Total long-term debt and other non-current liabilities

   $ 19,504,346       $ 5,273,785       $ 6,410,751   

Total Hawk Acquisition Intermediate Corporation II shareholders’ equity

   $ 16,297,416       $ 2,801,531       $ 2,758,589   

 

 

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RISK FACTORS

In addition to the other information contained in this prospectus, you should carefully consider the risk factors set forth below before deciding to invest in the Notes. This Prospectus contains statements that constitute forward-looking statements regarding, among other matters, our intent, belief or current expectations about our business. These forward-looking statements are subject to risks, uncertainties and assumptions, as further discussed under “Disclosure Regarding Forward-Looking Statements.”

Risks Related to Our Business

Competitive product and pricing pressures in the food industry and the financial condition of customers and suppliers could adversely affect the Company’s ability to gain or maintain market share and/or profitability.

The Company operates in the highly competitive food industry, competing with other companies 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.

The Company’s performance may be adversely affected by economic and political conditions in the U.S. and in various other nations where it does business.

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, terrorist acts, and political unrest. Such factors in either domestic or foreign jurisdictions could materially and adversely affect our financial results. In addition, recent uncertainty in Europe, particularly in Greece, Italy, Ireland, Portugal and Spain could adversely affect our Euro-denominated assets and global operations.

 

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Increases in the cost and restrictions on the availability of raw materials could adversely affect our financial results.

The Company sources raw materials including agricultural commodities such as tomatoes, cucumbers, potatoes, onions, other fruits and vegetables, dairy products, meat, sugar and other sweeteners, including high fructose corn syrup, spices, and flour, as well as packaging materials such as glass, plastic, metal, paper, fiberboard, and other materials and inputs such as water, in order to manufacture products. The availability or cost of such commodities may fluctuate widely due to government policy and regulation, crop failures or shortages due to plant disease or insect and other pest infestation, weather conditions, potential impact of climate change, increased demand for biofuels, or other unforeseen circumstances. Additionally, the cost of raw materials and finished products may fluctuate due to movements in cross-currency transaction rates. To the extent that any of the foregoing or other unknown factors increase the prices of such commodities or materials and the Company is unable to increase its prices or adequately hedge against such changes in a manner that offsets such changes, the results of its operations could be materially and adversely affected. Similarly, if supplier arrangements and relationships result in increased and unforeseen expenses, the Company’s financial results could be materially and adversely impacted.

Disruption of our supply chain could adversely affect our business.

Damage or disruption to our manufacturing or distribution capabilities due to weather, natural disaster, fire, terrorism, pandemic, strikes, the financial and/or operational instability of key suppliers, distributors, warehousing and transportation providers, or brokers, or other reasons could impair our ability to manufacture or sell our products. To the extent the Company is unable to, or cannot, financially mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single location, there could be a materially adverse affect on our business and results of operations, and additional resources could be required to restore our supply chain.

Higher energy costs and other factors affecting the cost of producing, transporting, and distributing the Company’s products could adversely affect our financial results.

Rising fuel and energy costs may have a significant impact on the cost of operations, including the manufacture, transportation, and distribution of products. Fuel costs may fluctuate due to a number of factors outside the control of the Company, including government 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.

The results of the Company could be adversely impacted as a result of increased pension, labor, and people-related expenses.

Inflationary pressures and any shortages in the labor market could increase labor costs, which could have a material adverse effect on the Company’s consolidated operating results or financial condition. The Company’s labor costs 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 impact of various food safety issues, environmental, legal, tax, and other regulations and related developments could adversely affect the Company’s sales and profitability.

The Company is subject to numerous food safety and other laws and regulations regarding the manufacturing, marketing, and distribution of food products. These regulations govern matters such as

 

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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 effects on the Company’s results of operations.

The need for and effect of product recalls could have an adverse impact on the Company’s business.

If any of the Company’s products become misbranded or adulterated, the Company may need to conduct a product recall. The scope of such a recall could result in significant costs incurred as a result of the recall, potential destruction of inventory, and lost sales. Should consumption of any product cause injury, the Company may be liable for monetary damages as a result of a judgment against it. A significant product recall or product liability case could cause a loss of consumer confidence in the Company’s food products and could have a material adverse effect on the value of its brands and results of operations.

The failure of new product or packaging introductions to gain trade and consumer acceptance and changes in consumer preferences could adversely affect our sales.

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 failure to successfully integrate acquisitions and joint ventures into our existing operations or the failure to gain applicable regulatory approval for such transactions or divestitures could adversely affect our financial results.

The Company’s ability to efficiently integrate acquisitions and joint ventures into its existing operations also affects the financial success of such transactions. The Company may seek to expand its business through acquisitions and joint ventures, and may divest underperforming or non-core businesses. The Company’s success depends, in part, upon its ability to identify such acquisition, joint venture, and divestiture opportunities and to negotiate favorable contractual terms. Activities in such areas are regulated by numerous antitrust and competition laws in the U. S., the European Union, and other jurisdictions, and the Company may be required to obtain the approval of acquisition and joint venture transactions by competition authorities, as well as satisfy other legal requirements. The failure to obtain such approvals could materially and adversely affect our results.

The Company’s operations face significant foreign currency exchange rate exposure, which could negatively impact its operating results.

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

 

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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 failure to implement our growth plans could adversely affect the Company’s ability to increase net income and generate cash.

The success of the Company could be impacted by its inability to continue to execute on its growth plans regarding product innovation, implementing cost-cutting measures, improving supply chain efficiency, enhancing processes and systems, including information technology systems, on a global basis, and growing market share and volume. The failure to fully implement the plans, in a timely manner or within our cost estimates, could materially and adversely affect the Company’s ability to increase net income. Additionally, the Company’s ability to pay cash dividends will depend upon its ability to generate cash and profits, which, to a certain extent, is subject to economic, financial, competitive, and other factors beyond the Company’s control.

The Sponsors control us and may have conflicts of interest with us in the future.

As a result of the Merger on June 7, 2013, H. J. Heinz Company is now controlled by the Sponsors. The Sponsors beneficially own substantially all of the equity interests in Parent. The Sponsors have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of shareholders. For example, the Sponsors could cause us to make acquisitions that increase the amount of our indebtedness. Additionally, the Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. The Sponsors may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as the Sponsors continue to own a significant amount of the equity of Parent, they will continue to be able to strongly influence or effectively control our decisions.

Our business could be adversely impacted as a result of the Merger and significant costs, expenses and fees.

The Merger could cause disruptions to our business or business relationships, which could have an adverse impact on our financial condition, results of operations and cash flows. For example:

 

    the attention of our management may be directed to transaction-related considerations or activities and may be diverted from the day-to-day operations of our business;

 

    our associates may experience uncertainty about their future roles with us, which might adversely affect our ability to retain and hire key personnel and other employees; and

 

    vendors or other parties with which we maintain business relationships may experience uncertainty about our future and seek alternative relationships with third parties or seek to alter their business relationships with us.

In addition, we incurred significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger.

The Company is increasingly dependent on information technology, and potential disruption, cyber attacks, security problems, and expanding social media vehicles present new risks.

The Company is increasingly dependent on information technology systems to manage and support a variety of business processes and activities, and any significant breakdown, invasion, destruction, or interruption of these systems could negatively impact operations. In addition, there is a risk of business interruption and reputational damage from leakage of confidential information.

 

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The inappropriate use of certain media vehicles could cause brand damage or information leakage. Negative posts or comments about the Company on any social networking web site could seriously damage its reputation. In addition, the disclosure of non-public company sensitive information through external media channels could lead to information loss. Identifying new points of entry as social media continues to expand presents new challenges. Any business interruptions or damage to the Company’s reputation could negatively impact the Company’s financial condition and results of operation.

Risks Related to the Exchange Offer

Because there is no public market for the Exchange Notes, you may not be able to sell your Exchange Notes.

The Exchange Notes will be registered under the Securities Act of 1933, as amended, or the Securities Act, but will constitute a new issue of securities with no established trading market, and uncertainty exists with regard to:

 

    the liquidity of any trading market that may develop;

 

    the ability of holders to sell their Exchange Notes; or

 

    the price at which the holders would be able to sell their Exchange Notes.

If a trading market were to develop, the Exchange Notes might trade at higher or lower prices than their principal amount or purchase price, depending on many factors, including prevailing interest rates, the market for similar securities and our financial performance.

Any market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act, and may be limited during the exchange offer or the pendency of an applicable shelf registration statement. An active trading market might not exist for the New Notes and any trading market that does develop might not be liquid.

In addition, any holder of Exchange Notes who tenders in the exchange offer for the purpose of participating in a distribution of the Exchange Notes may be deemed to have received restricted securities, and if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.

The market for non-investment grade debt historically has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Notes. The market for the Notes, if any, may be subject to similar disruptions that could adversely affect their value. In addition, subsequent to their initial issuance, the Notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar Notes, our performance and other factors.

Your Old Notes will not be accepted for exchange if you fail to follow the exchange offer procedures.

We will issue Exchange Notes pursuant to this exchange offer only after a timely receipt of your Old Notes (including timely notation in book-entry form). Therefore, if you want to tender your Old Notes, please allow sufficient time to ensure timely delivery. If we do not receive your Old Notes, by the expiration date of the exchange offer, we will not accept your Old Notes for exchange. We are under no duty to give notification of defects or irregularities with respect to the tenders of Old Notes for exchange. If there are defects or irregularities with respect to your tender of Old Notes, we will not accept your Old Notes for exchange.

If you do not exchange your Old Notes, your Old Notes will continue to be subject to the existing transfer restrictions and you may be unable to sell your Old Notes.

We did not register the Old Notes, nor do we intend to do so following the exchange offer. The Old Notes that are not tendered will, therefore, continue to be subject to the existing transfer restrictions and may be

 

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transferred only in limited circumstances under the securities laws. If you do not exchange your Old Notes, you will be subject to existing transfer restrictions. As a result, if you hold Old Notes after the exchange offer, you may be unable to sell your Old Notes. If a large number of outstanding Old Notes are exchanged for Exchange Notes issued in the exchange offer, it may be difficult for holders of outstanding Old Notes that are not exchanged in the exchange offer to sell their Old Notes, since those Old Notes may not be offered or sold unless they are registered or there are exemptions from registration requirements under the Securities Act or state laws that apply to them. In addition, if there are only a small number of Old Notes outstanding, there may not be a very liquid market in those Old Notes. There may be few investors that will purchase unregistered securities in which there is not a liquid market.

If you exchange your Old Notes, you may not be able to resell the Exchange Notes you receive in the exchange offer without registering them and delivering a prospectus.

You may not be able to resell Exchange Notes you receive in the exchange offer without registering those Exchange Notes or delivering a prospectus. Based on interpretations by the SEC in no-action letters, we believe, with respect to Exchange Notes issued in the exchange offer, that:

 

    holders who are not “affiliates” of ours within the meaning of Rule 405 of the Securities Act;

 

    holders who acquire their Exchange Notes in the ordinary course of business;

 

    holders who do not engage in, intend to engage in, or have arrangements to participate in a distribution (within the meaning of the Securities Act) of the Exchange Notes; and

 

    holders who are not broker-dealers,

do not have to comply with the registration and prospectus delivery requirements of the Securities Act.

Holders described in the preceding sentence must tell us in writing at our request that they meet these criteria. Holders that do not meet these criteria could not rely on interpretations of the SEC in no-action letters, and would have to register the Exchange Notes they receive in the exchange offer and deliver a prospectus for them. In addition, holders that are broker-dealers may be deemed “underwriters” within the meaning of the Securities Act in connection with any resale of Exchange Notes acquired in the exchange offer. Holders that are broker-dealers must acknowledge that they acquired their outstanding Exchange Notes in market-making activities or other trading activities and must deliver a prospectus when they resell Exchange Notes they acquire in the exchange offer in order not to be deemed an underwriter.

If the exchange offer does not become effective by June 7, 2014, the Company will incur additional interest charges.

In the event that the exchange offer registration statement is not completed or is not declared effective by the SEC within 365 days after the Merger closing date, the interest rate will be increased, up to a maximum increase of 1.00% per annum, until the exchange offer registration is declared effective by the SEC.

Risks Related to Our Indebtedness and the Notes

We have substantial indebtedness. We may not be able to generate sufficient cash to service all of our indebtedness, including the Notes, and we may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations and to fund planned capital expenditures depends on our future performance and our ability to generate cash from our operations, which is subject, among other things, to the success of our business strategy, customer demand, increased competition,

 

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prevailing economic conditions and financial, competitive, legislative, legal, regulatory and other factors, including those other factors discussed in these “Risk Factors,” many of which are beyond our control.

As of December 29, 2013, we had $9,476.3 million aggregate principal amount of first-priority senior secured indebtedness outstanding (with $2,000 million available for borrowing under the Revolving Credit Facility), $3,306.0 million aggregate principal amount of second-priority senior secured indebtedness outstanding and $1,943.8 million of other indebtedness outstanding. We cannot assure you that we will be able to generate a level of cash flow from our operations sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the Notes, or that future borrowings will be available to us in an amount sufficient to enable us to service and repay the Notes and our other indebtedness or to fund our other liquidity needs. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the Notes, any of which will depend on our cash needs, our financial condition at such time, the then prevailing market conditions and the terms of our then existing debt instruments, including the Indenture, which may restrict us from adopting some of these alternatives. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could also harm our ability to incur additional indebtedness. In addition, any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations, and there can be no assurances that any assets which we could be required to dispose of could be sold or that, if sold, the timing of the sales and the amount of proceeds realized from those sales could be on acceptable terms.

We are subject to restrictive debt covenants, which limit our ability to take certain actions and perform certain corporate functions.

The Indenture and the agreement governing our Senior Secured Credit Facilities contain a number of significant covenants that, among other things, limit our ability to:

 

    incur additional indebtedness or guarantee indebtedness;

 

    create liens or use assets as security in other transactions;

 

    declare or pay dividends, redeem stock or make other distributions to stockholders;

 

    make investments;

 

    merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;

 

    enter into transactions with affiliates;

 

    sell or transfer certain assets; and

 

    agree to certain restrictions on the ability of the Issuer and restricted subsidiaries to make payments.

We cannot assure you that any of these limitations will not hinder our ability to finance future operations and capital needs and our ability to pursue business opportunities and activities that may be in our interest. In addition, our ability to comply with these covenants and restrictions may be affected by events beyond our control.

The Notes and each Guarantee will be structurally subordinated to present and future liabilities of our non-Guarantor subsidiaries.

Not all of our subsidiaries guarantee the Notes. Generally, claims of creditors of a non-guarantor subsidiary, including trade creditors and claims of preference shareholders (if any) of the subsidiary, will have priority with respect to the assets and earnings of the subsidiary over the claims of creditors of its parent entity, including claims by holders of the Notes under the Guarantees. In the event of any foreclosure, dissolution, winding up,

 

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liquidation, administration, reorganization or other insolvency or bankruptcy proceeding of any of our non-Guarantor subsidiaries, holders of their indebtedness and their trade creditors will generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to its parent entity as a shareholder. As such, the Notes and each Guarantee will each be structurally subordinated to the creditors (including trade creditors) and preference shareholders (if any) of our non-Guarantor subsidiaries. Excluding intercompany transactions, the non-Guarantor subsidiaries accounted for (i) approximately $4,167.5 million, or 66.8% of our sales for the 35 week period ended December 29, 2013 and (ii) approximately $3,755.2 million, or 16.7% of our total liabilities as of December 29, 2013. The covenants in the Notes permit us to incur additional indebtedness at subsidiaries which do not guarantee the Notes and in the future, the revenues and profitability of such entities could increase, possibly substantially.

The lien on the collateral securing the Notes will be junior and subordinate to the lien on the collateral securing our Senior Secured Credit Facilities and certain other first lien obligations.

The Notes will be secured by second-priority liens granted by the Company and the Guarantors on the Company’s assets and the assets of the Guarantors that secure obligations under the Senior Secured Credit Facilities and certain hedging and cash management obligations, subject to certain exceptions and permitted liens and encumbrances described in the security documents governing the Notes. As of December 29, 2013, we had $9,476 million aggregate principal amount of first priority senior secured indebtedness outstanding (with $2,000 million available for borrowing under the Revolving Credit Facility). As set out in more detail under “Description of Exchange Notes,” the lenders under our Senior Secured Credit Facilities and holders of certain of the Company’s hedging and cash management obligations will be entitled to receive all proceeds from the realization of the collateral under certain circumstances, including upon default in payment on, or the acceleration of, any obligations under the Company’s Senior Secured Credit Facilities, or in the event of the Company’s, or any Guarantor’s, bankruptcy, insolvency, liquidation, dissolution, reorganization or similar proceeding, to repay such obligations in full before the holders of the Notes will be entitled to any recovery from such collateral.

In addition, the Indenture and the related security documents permit the Company and the Guarantors to create additional liens (including the liens granted by the Company in respect of its guarantee of the 6.25% Guaranteed Notes due February 18, 2030 pursuant to the collateral documents securing the Notes offered hereby) under specified circumstances, which liens may rank pari passu with or senior to the liens on the collateral securing the Notes and the Guarantees. Any obligations secured by such liens may further limit the recovery from the realization of the collateral available to satisfy holders of the Notes.

Holders of the Notes will not control decisions regarding collateral.

The lenders under our Senior Secured Credit Facilities, as holders of first priority lien obligations, will, at all times prior to the discharge of such first priority lien obligations, control substantially all matters related to the collateral securing the Notes pursuant to the terms of the Intercreditor Agreement. The holders of the first priority lien obligations may cause the collateral agent thereunder (the “first lien agent”), in connection with an enforcement action, to dispose of, release, or foreclose on, or take other actions with respect to, the collateral (including amendments of and waivers under the security documents) with which holders of the Notes may disagree or that may be contrary to the interests of holders of the Notes, even after a default under the Notes. To the extent collateral is released from the lien securing the first priority lien obligations in connection with an enforcement action or in connection with a disposition that is permitted by the indenture governing the Notes, even if a default under the Notes exists, the second priority liens securing the Notes will also be released. If all of the first priority liens are released, other than in connection with payment in full of our Senior Secured Credit Facilities or any other first priority lien obligations secured by the collateral, and no event of default under the Indenture exists, all of the second priority liens will be released. In addition, the Intercreditor Agreement will generally provide that, so long as the first priority lien obligations are in effect, the holders of the first priority lien obligations may change, waive, modify or vary the security documents governing such first priority liens

 

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without the consent of the holders of the Notes (except under certain limited circumstances) and that the security documents governing the second priority liens will be automatically changed, waived and modified in the same manner (subject to certain limitations and exceptions). Further, the security documents governing the second priority liens may not be amended in any manner inconsistent with or in contravention of the Intercreditor Agreement without the consent of the first lien agent until the first priority lien obligations are paid in full. The Intercreditor Agreement will also prohibit second priority lienholders from foreclosing on the collateral until payment in full of the first priority lien obligations.

In the event of a foreclosure on the collateral by the holders of the first priority lien obligations, the proceeds from the sale of collateral may not be sufficient to satisfy all or any of the amounts outstanding under the Notes after payment in full of the obligations secured by first priority liens on the collateral.

It may be difficult to realize the value of the collateral securing the Notes.

The collateral securing the Notes will be subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the first lien agent and any other creditors that have the benefit of first liens on the collateral securing the Notes from time to time, whether on or after the date the Notes are issued. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the collateral securing the Notes as well as the ability of the collateral agent to realize or foreclose on such collateral.

The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. We cannot assure you that the fair market value of the collateral as of the date of this prospectus exceeds the principal amount of the debt secured thereby. The value of the assets pledged as collateral for the Notes could be impaired in the future as a result of changing economic conditions, our failure to implement our business strategy, competition, unforeseen liabilities and other future events. Accordingly, there may not be sufficient collateral to pay all or any of the amounts due on the Notes. Any claim for the difference between the amount, if any, realized by holders of the Notes from the sale of the collateral securing the Notes and the obligations under the Notes will rank equally in right of payment with all of our other unsecured unsubordinated indebtedness and other obligations, including trade payables. Additionally, in the event that a bankruptcy case is commenced by or against us, if the value of the collateral is less than the amount of principal and accrued and unpaid interest on the Notes and all other senior secured obligations, interest may cease to accrue on the Notes from and after the date the bankruptcy petition is filed.

To the extent that third parties enjoy prior liens on the collateral securing the Notes, to the extent permitted under the Indenture, such third parties may have rights and remedies with respect to the collateral subject to such liens that, if exercised, could adversely affect the value of the collateral. Additionally, the terms of the Indenture allow us to issue additional notes, additional debt that may rank pari passu with the Notes and incur change of control refinancing indebtedness in certain circumstances. The Indenture does not require that we maintain the current level of collateral or maintain a specific ratio of indebtedness to asset values. Under the Indenture, any such additional notes issued pursuant to the Indenture and change of control refinancing indebtedness or other additional debt incurred in accordance with the terms of the Indenture will rank pari passu with the Notes and be entitled to the same rights and priority with respect to the collateral. Thus, the issuance of any such additional debt and change of control refinancing indebtedness may have the effect of significantly diluting your ability to recover payment in full of the Notes from the then existing pool of collateral. Releases of collateral from the liens securing the Notes will be permitted under certain circumstances.

In the future, the obligation to grant additional security over assets, or a particular type or class of assets, whether as a result of the Merger or creation of future assets or subsidiaries, the designation of a previously unrestricted subsidiary or otherwise, is subject to the provisions of the Intercreditor Agreement. Furthermore, upon enforcement against any collateral or in insolvency, under the terms of the Intercreditor Agreement the

 

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claims of the holders of the Notes to the proceeds of such enforcement or insolvency will rank behind the claims of the holders of obligations under our Senior Secured Credit Facilities, which are first priority obligations, and holders of additional senior secured indebtedness (to the extent permitted to have a prior lien on the collateral by the Indenture). The security interest of the collateral agent is subject to practical problems generally associated with the realization of security interests in collateral. For example, the collateral agent may need to obtain the consent of a third party to obtain or enforce a security interest in a contract. The collateral agent may not be able to obtain any such consent. Also, the consents of any third parties may not necessarily be given when required to facilitate a foreclosure on such assets. Accordingly, the collateral agent may not have the ability to foreclose upon those assets and the value of the collateral may significantly decrease.

Rights of the holders of the Notes in the collateral may be adversely affected by the failure to perfect liens on certain collateral acquired in the future.

Applicable law requires that certain property and rights acquired after the grant of a general security interest, such as real property, equipment subject to a certificate and certain proceeds, can only be perfected at the time such property and rights are acquired and identified. The Trustee or the collateral agent may not monitor, or we may not inform the Trustee or the collateral agent of, the future acquisitions of property and rights that constitute collateral, and necessary action may not be taken to properly perfect the security interest in such after acquired collateral. The collateral agent for the Notes has no obligation to monitor the acquisition of additional property or rights that constitute collateral or the perfection of any security interest in favor of the Notes against third parties. In addition, as described further herein, even if the liens on collateral acquired in the future are properly perfected, such liens may potentially be avoidable as a preference in any bankruptcy proceeding under certain circumstances. See “—Risks Related to the Ownership of the Notes—Any future pledge of collateral provided after the Notes are issued might be avoided by a trustee in bankruptcy.”

The ability of the collateral agent to realize upon the capital stock securing the Notes will be automatically limited to the extent the pledge of such capital stock would require the filing with the SEC of separate financial statements for any of our subsidiaries.

Under Rule 3-16 of Regulation S-X, if the par value, book value as carried by us or market value (whichever is greatest) of the capital stock of any subsidiary pledged as part of the collateral is greater than or equal to 20% of the aggregate principal amount of the Notes then outstanding that are then registered or being registered, such subsidiary would be required to provide separate financial statements to the SEC. As a result, the Indenture and the related security documents provide that to the extent that separate financial statements of any of our subsidiaries would be required by the rules of the SEC due to the fact that such subsidiary’s capital stock secures the Notes, the pledge of such capital stock constituting collateral securing the Notes will automatically be limited such that the value of the portion of such capital stock that the holders of the Notes may realize upon will, in the aggregate, at no time exceed 19.9% of the aggregate principal amount of the then outstanding registered notes. See “Description of Exchange Notes—Security.” As a result, holders of the Notes could lose the benefit of a portion or all of the security interest securing the Notes in the capital stock or other securities of those subsidiaries. It may be more difficult, costly and time-consuming for the collateral agent to foreclose on the assets of a subsidiary than to foreclose on its capital stock or other securities, so the proceeds realized upon any such foreclosure could be significantly less than those that would have been received upon any sale of the capital stock or other securities of such subsidiary.

The collateral is subject to casualty risks.

Although we maintain insurance policies to insure against losses, there are certain losses that may be either uninsurable or not economically insurable, in whole or in part. As a result, it is possible that the insurance proceeds will not compensate us fully for our losses in the event of a catastrophic loss. If there is a total or partial loss of any of the pledged collateral, we cannot assure you that any insurance proceeds received by us will be sufficient to satisfy all the secured obligations, including the Notes.

 

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We will in most cases have control over the collateral, and the sale of particular assets by us could reduce the pool of assets securing the Notes and any future Guarantees.

The security documents allow us to remain in possession of, retain exclusive control over, freely operate, and collect, invest and dispose of any income from, the collateral securing the Notes and any future Guarantees. For example, so long as no default or event of default under the Indenture would result therefrom, we may, among other things, without any release or consent by the trustee, conduct ordinary course activities with respect to collateral, such as selling, factoring, abandoning or otherwise disposing of collateral and making ordinary course cash payments (including repayments of indebtedness). See “Description of Exchange Notes.”

Security interests over certain collateral may not be in place by closing or may not be perfected by closing. Creation or perfection of such security interests after the issue date of the Notes increases the risk that the liens granted by those security interests could be avoided.

Certain security interests in favor of the collateral agent, including mortgages on certain of our real properties, may not be in place or perfected as of the date on which the Exchange Offer is consummated. To the extent any liens on or security interest in the collateral securing the Notes are not perfected on or prior to such date, we will use our commercially reasonable efforts to have all such security interests perfected, to the extent required by the Indenture and the security documents, within a period of time to be agreed between the Issuer and the administrative agent under the credit facility. To the extent a security interest in certain collateral is granted or perfected after the date which is 30 days following the such date, that security interest would remain at risk of being voided as a preferential transfer by the pledgor, as debtor in possession, or by its trustee in bankruptcy) if we were to file for bankruptcy within 90 days after the grant or after perfection (or, under certain circumstances, a longer period).

The imposition of certain permitted liens could materially adversely affect the value of the collateral.

The collateral securing the Notes may also be subject to liens permitted under the terms of the Indenture, whether arising on or after the date the Notes are issued. The existence of any permitted liens could materially adversely affect the value of the collateral that could be realized by the holders of the Notes as well as the ability of the collateral agent to realize or foreclose on such collateral. In addition, the imposition of certain permitted liens will cause the relevant assets to become “excluded property,” which will not secure the Notes or the Guarantees. See “Description of Exchange Notes—Security” for the definition of “excluded property.”

We may be unable to refinance our indebtedness.

We may need to refinance all or a portion of our indebtedness, including the Notes, before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including our Senior Secured Credit Facilities, on commercially reasonable terms or at all. There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.

If the Notes are rated investment grade at any time by any two of Moody’s, Standard & Poor’s and Fitch, most of the restrictive covenants and corresponding events of default contained in the Indenture will be suspended.

If, at any time, the credit rating on the Notes, as determined by any two of Moody’s, Standard & Poor’s Rating Services and Fitch, equals or exceeds Baa3, BBB- or BBB-, respectively, or any equivalent replacement ratings, we will no longer be subject to most of the restrictive covenants and corresponding events of default contained in the Indenture. Any restrictive covenants or corresponding events of default that cease to apply to use as a result of achieving these ratings will be restored if the credit ratings on the Notes from at least two of these ratings agencies no longer equal or exceed these thresholds or in certain other circumstances. However, during any period in which these restrictive covenants are suspended, we may incur other indebtedness, make restricted payments and take other actions that would have been prohibited if these covenants had been in effect. If the

 

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restrictive covenants are later restored, the actions taken while the covenants were suspended will not result in an event of default under the Indenture even if they would constitute an event of default at the time the covenants are restored. Accordingly, if these covenants and corresponding events of default are suspended, holders of the Notes will have less credit protection than at the time the Notes are issued.

Each Guarantee will be subject to certain limitations on enforcement and may be limited by applicable laws or subject to certain defenses that may limit its validity and enforceability.

Parent and each Guarantor will guarantee the payment of the Notes on a second lien senior secured basis. Each Guarantee will provide the relevant holders of the Notes with a direct claim against the relevant Guarantor. However, the Indenture will provide that each Guarantee will be limited to the maximum amount that can be guaranteed by the relevant Guarantor without rendering the relevant Guarantee, as it relates to that Guarantor, voidable or otherwise ineffective or limited under applicable law, and enforcement of each Guarantee would be subject to certain generally available defenses. Enforcement of any of the Guarantees against any Guarantor will be subject to certain defenses available to Guarantors in the relevant jurisdiction. These laws and defenses generally include those that relate to corporate purpose or benefit, fraudulent conveyance or transfer, voidable preference, insolvency or bankruptcy challenges, financial assistance, preservation of share capital, thin capitalization, capital maintenance or similar laws, regulations or defenses affecting the rights of creditors generally. If one or more of these laws and defenses are applicable, a Guarantor may have no liability or decreased liability under its Guarantee depending on the amounts of its other obligations and applicable law. Limitations on the enforceability of judgments obtained in New York courts in such jurisdictions could also limit the enforceability of any Guarantee against any Guarantor.

In general, under bankruptcy or insolvency law and other laws, a court could (i) avoid or invalidate all or a portion of a Guarantor’s obligations under its Guarantee, (ii) direct that the holders of the Notes return any amounts paid under a Guarantee to the relevant Guarantor or to a fund for the benefit of the Guarantor’s creditors or (iii) take other action that is detrimental to you, typically if the court found that:

 

    the relevant Guarantee was incurred with actual intent to give preference to one creditor over another, hinder, delay or defraud creditors or shareholders of the Guarantor or, in certain jurisdictions, when the granting of the Guarantee has the effect of giving a creditor a preference or when the recipient was aware that the Guarantor was insolvent when it granted the relevant Guarantee;

 

    the Guarantor did not receive fair consideration or reasonably equivalent value or corporate benefit for the relevant Guarantee and the Guarantor was: (i) insolvent or rendered insolvent because of the relevant Guarantee; (ii) undercapitalized or became undercapitalized because of the relevant Guarantee; or (iii) intended to incur, or believed that it would incur, indebtedness beyond its ability to pay at maturity;

 

    the relevant Guarantee was held to exceed the corporate objects of the Guarantor or not to be in the best interests or for the corporate benefit of the Guarantor; or

 

    the amount paid or payable under the relevant Guarantee was in excess of the maximum amount permitted under applicable law.

These or similar laws may also apply to any future guarantee granted by any of our subsidiaries pursuant to the Indenture.

We cannot assure you which standard a court would apply in determining whether a Guarantor was “insolvent” at the relevant time or that, regardless of method of valuation, a court would not determine that a Guarantor was insolvent on that date, or a that a court would not determine, regardless of whether or not a Guarantor was insolvent on the date its Guarantee was issued, that payments to holders of the Notes constituted preferences, fraudulent transfers or conveyances on other grounds.

 

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The liability of each Guarantor under its Guarantee will be limited to the amount that will result in such Guarantee not constituting a preference, fraudulent conveyance or improper corporate distribution or otherwise being set aside. However, there can be no assurance as to what standard a court will apply in making a determination of the maximum liability of each Guarantor. There is a possibility that the entire Guarantee may be set aside, in which case the entire liability may be extinguished.

If a court decided that a Guarantee was a preference, fraudulent transfer or conveyance and voided such Guarantee, or held it unenforceable for any other reason, you may cease to have any claim in respect of the relevant Guarantor and would be a creditor solely of the Issuer and, if applicable, of any other Guarantor under the relevant Guarantee which has not been declared void. In the event that any Guarantee is invalid or unenforceable, in whole or in part, or to the extent the agreed limitation of the Guarantee obligations apply, the Notes would be effectively subordinated to all liabilities of the applicable Guarantor, and if we cannot satisfy our obligations under the Notes or any Guarantee is found to be a preference, fraudulent transfer or conveyance or is otherwise set aside, we cannot assure you that we can ever repay in full any amounts outstanding under the Notes.

Any future pledge of collateral provided after the Notes are issued might be avoided by a trustee in bankruptcy.

The Indenture and the security documents will require us to grant liens on certain assets that we or any Guarantor acquires after the Notes are issued. Any future guarantee or additional lien in favor of the collateral agent for the benefit of the holders of the Notes might be avoidable by the grantor (as debtor-in possession) or by its trustee in bankruptcy or other third parties if certain events or circumstances exist or occur. For instance, if the entity granting a future guarantee or additional lien was insolvent at the time of the grant and if such grant was made within 90 days before that entity commenced a bankruptcy proceeding (or one year before commencement of a bankruptcy proceeding if the creditor that benefited from the guarantee or lien is an “insider” under the U.S. Bankruptcy Code), and the granting of the future guarantee or additional lien enabled the holders of the Notes to receive more than they would if the grantor were liquidated under chapter 7 of the U.S. Bankruptcy Code, then such guarantee or lien could be avoided as a preferential transfer. Liens recorded or perfected after the issue date may be treated under bankruptcy law as if they were delivered to secure previously existing indebtedness. In bankruptcy proceedings commenced within 90 days of lien perfection, a lien given to secure previously existing indebtedness is materially more likely to be avoided as a preference by the bankruptcy court than if delivered and promptly recorded on the issue date. Accordingly, if we or any subsidiary guarantor were to file for bankruptcy protection after the issue date of the outstanding Notes and the liens had been perfected less than 90 days before the commencement of such bankruptcy proceeding, the liens securing the Notes may be particularly subject to challenge as a result of having been delivered after the issue date. To the extent that such challenge succeeded, the holders of the Notes would lose the benefit of the security that the collateral was intended to provide.

The voting provisions of the security agreement may limit the rights of the holders of the Notes with respect to the collateral, even during an event of default.

Following the Exchange Offer, we will be party to a security agreement that will govern the terms on which the collateral agent will receive, hold, administer, maintain, enforce and distribute the proceeds of all liens upon any of our property securing additional indebtedness secured by a lien that ranks equally with the Notes, including the Notes. In the event additional pari passu indebtedness is issued and secured equally and ratably with the Notes, the rights of holders of the Notes with respect to the collateral will be significantly limited by the terms of the voting provisions of the security agreement, even during an event of default under the Indenture governing the Notes. Under the security agreement, at any time additional pari passu indebtedness is outstanding, any actions that may be taken with respect to, or in respect of, the collateral will be at the direction of the holders of additional pari passu indebtedness, including the Notes, with the respective representatives for each series of additional pari passu indebtedness, following and in accordance with the applicable voting requirements under the documents governing such series, voting the total amount of additional pari passu indebtedness under such series as a block. See “Description of Exchange Notes—Security.”

 

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Rights of the holders of the Notes in the collateral securing the Notes may be adversely affected by bankruptcy proceedings and the holders of the Notes may not be entitled to post-petition interest in any bankruptcy proceeding.

The right of the collateral agent for the Notes to repossess and dispose of the collateral securing the Notes upon acceleration is likely to be significantly impaired by federal bankruptcy law if bankruptcy proceedings are commenced by or against us prior to or possibly even after the collateral agent has repossessed and disposed of the collateral. Under the U.S. Bankruptcy Code, pursuant to the automatic stay imposed upon a bankruptcy filing, a secured creditor, such as the collateral agent for the Notes, is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from a debtor, without bankruptcy court approval. Moreover, bankruptcy law permits the debtor to continue to retain and to use collateral, and the proceeds, products, rents or profits of the collateral, even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the collateral and may include cash payments or the granting of additional security, if and at such time as the court in its discretion determines, for any diminution in the value of the collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the Notes could be delayed following commencement of a bankruptcy case, whether or when the collateral agent would repossess or dispose of the collateral, or whether or to what extent the holders of the Notes would be compensated for any delay in payment or loss of value of the collateral through the requirements of “adequate protection.”

Furthermore, in the event the bankruptcy court determines that the value of the collateral is not sufficient to repay all amounts due on the Notes, the holders of the Notes would have “undersecured claims” as to the difference. Federal bankruptcy laws do not permit the payment or accrual of post-petition interest, costs and attorneys’ fees for “undersecured claims” during the debtor’s bankruptcy case. Other consequences of a finding of under-collateralization would be, among other things, a lack of entitlement to receive other “adequate protection” under federal bankruptcy laws with respect to the unsecured portion of the Notes. In addition, if any payments of post-petition interest had been made at the time of such a finding of under-collateralization, those payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the Notes.

We may not have the ability to raise the funds necessary to finance a change of control offer if required by the Indenture.

Upon the occurrence of a change of control, as defined in the Indenture, the Issuer will be required to make an offer to purchase the Notes at a price in cash equal to 101% of their aggregate principal amount, plus any accrued and unpaid interest and certain other amounts, to the date of repurchase. Upon a change of control, we may be required to offer to repurchase or repay our outstanding indebtedness, including the Notes. We cannot assure you that we would have sufficient resources to repurchase the Notes or repay our other indebtedness, if such debt is required to be repurchased or repaid, upon the occurrence of a change of control. In any case, third-party financing most likely would be required in order to provide the funds necessary for the Issuer to make the change of control offer for the Notes and to refinance any other indebtedness that would become payable upon the occurrence of such events. We may not be able to obtain such additional financing on terms favorable to us or at all. See “Description of Exchange Notes—Change of Control.”

The change of control provision contained in the Indenture may not necessarily afford you protection in the event of certain important corporate events, including a reorganization, restructuring, merger or other similar transaction involving us that may adversely affect you, because such corporate events may not involve a shift in voting power or beneficial ownership or, even if they do, may not constitute a “change of control” as defined in the Indenture. Except as described under “Description of Exchange Notes—Change of Control”, the Indenture will not contain provisions that would require the Issuer to offer to repurchase or redeem the Notes in the event of a reorganization, restructuring, merger, recapitalization or similar transaction.

 

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The definition of “change of control” in the Indenture will include a disposition of all or substantially all of the properties or assets of the Issuer and its subsidiaries taken as a whole to any person. Although there is a limited body of case law interpreting the phrase “all or substantially all”, there is no precise established definition of the phrase under applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty as to whether a particular transaction would involve a disposition of “all or substantially all” of the assets of the Issuer and its subsidiaries taken as a whole. As a result, it may be unclear as to whether a change of control has occurred and whether the Issuer is required to make an offer to repurchase the Notes.

 

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USE OF PROCEEDS

This exchange offer is intended to satisfy our obligations under the Registration Rights Agreement. We will not receive any cash proceeds from the issuance of the Exchange Notes. In consideration for issuing the Exchange Notes contemplated in this prospectus, we will receive outstanding securities in like principal amount, the form and terms of which are substantially the same as the form and terms of the Exchange Notes, except as otherwise described in this prospectus. The Old Notes surrendered in exchange for the Exchange Notes will be retired and cancelled. Accordingly, no additional debt will result from the exchange offer. We will bear the expense of the exchange offer.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

For purposes of this prospectus, unless the context otherwise requires, the terms “we,” “us,”, “our” and the “Company” refer, collectively, to Hawk Acquisition Intermediate Corporation II (“Hawk II”), H.J. Heinz Company, and its subsidiaries. References to “the Issuer” are to H.J. Heinz Company alone, not including its subsidiaries. Hawk II is a holding company and has no activity, therefore the information for Hawk II is applicable and equal to the data disclosed for H.J. Heinz Company.

The following unaudited pro forma condensed consolidated financial information has been derived by the application of pro forma adjustments related to the Merger, entry into the Senior Credit Facilities and the Notes (which we refer to as the “Transaction”) to our historical consolidated financial statements included elsewhere in this registration statement. The unaudited pro forma condensed consolidated statements of income for the transition period from April 29, 2013 to December 29, 2013, and the year ended April 28, 2013, gives effect to the Transactions as if they had occurred on April 30, 2012.

The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial information is presented for information purposes only and does not purport to represent what our actual consolidated results of operations or consolidated financial position would have been had the Transactions actually occurred on the dates indicated, nor do they purport to project our future consolidated results of operations or consolidated financial position for any future period or as of any future date. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the information included under the headings “Summary—Summary Historical Financial and Other Data,” “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and related notes included elsewhere in this registration statement. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma condensed consolidated financial information.

The Merger was accounted for as a business combination using the acquisition method of accounting and, accordingly, the purchase price was preliminarily allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective preliminary fair value, with any excess purchase price allocated to goodwill. The preliminary allocation of the purchase price reflects preliminary fair value estimates based on management analysis, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period as valuations are finalized. The Company has also not yet finalized its estimated acquisition date deferred taxes associated with planned repatriation of accumulated earnings of foreign subsidiaries. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the Merger Date. Refer to our historical consolidated financial statements and related notes included elsewhere within this registration statement.

In connection with the Merger, the cash consideration was funded from equity contributions from the Sponsors and cash of the Company, as well as proceeds received by Merger Subsidiary in connection with the debt financing pursuant to the Senior Credit Facilities and the Notes. On June 7, 2013, Merger Subsidiary’s indebtedness was assumed by the Company, substantially increasing the Company’s overall level of debt. Refer to our historical consolidated financial statements and related notes included elsewhere within this registration statement for a more thorough discussion of our new debt arrangements.

Our historical financial statements described above have been adjusted in the pro forma condensed consolidated statements of income to give effect to events that are (1) directly attributable to the Transactions, (2) factually supportable and (3) expected to have a continuing impact on us. The unaudited pro forma condensed consolidated statements of income do not reflect any non-recurring charges directly related to the Transactions that were incurred by us. These non-recurring charges are further described in the accompanying notes to the unaudited pro forma statements of income and include an increase in cost of products sold resulting from the fair value step-up in inventory, transaction-related costs such as financial advisory, legal and other professional fees and compensation costs resulting from the change in control and costs incurred to retire existing debt under change in control provisions.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME TRANSITION PERIOD APRIL 29, 2013 TO DECEMBER 29, 2013

 

(In thousands)    Successor
February 8 -
December 29, 2013
    Predecessor
April 29 -
June 7, 2013
    Adjustments     Pro Forma  

Sales

   $ 6,239,562      $ 1,112,872      $ —        $ 7,352,434   

Cost of products sold

     4,587,791        729,537        (376,258 )(1), (2)      4,941,070   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,651,771        383,335        376,258        2,411,364   

Selling, general and administrative expenses

     1,501,807        243,364        —          1,745,171   

Merger related costs

     157,938        112,188        (270,126 )(3)      —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss)/income

     (7,974     27,783        646,384        666,193   

Interest income

     13,071        2,878        —          15,949   

Interest expense

     408,503        35,350        19,816 (5)      463,669   

Unrealized gain on derivative instruments

     117,934        —          (117,934 )(4)      —     

Other expense, net

     (12,233     (125,638     130,267 (6),(8)      (7,604
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income from continuing operations before income taxes

     (297,705     (130,327     638,901        210,869   

Benefit from income taxes

     (231,623     61,097        186,498 (7)      15,972   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income from continuing operations

     (66,082     (191,424     452,404        194,898   

Less: Net income attributable to the noncontrolling interest

     5,303        2,874        —          8,177   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income from continuing operations attributable to Hawk Acquisition Intermediate Corporation II

   $ (71,385   $ (194,298   $ 452,404      $ 186,721   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the Unaudited Pro Forma Condensed Consolidated Statement of Income

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

FISCAL YEAR ENDED APRIL 28, 2013

 

(In thousands)    Predecessor     Adjustments     Pro Forma  

Sales

   $ 11,528,886      $ —        $ 11,528,886   

Cost of products sold

     7,333,416        58,305 (1), (2)      7,391,721   
  

 

 

   

 

 

   

 

 

 

Gross profit

     4,195,470        (58,305     4,137,165   

Selling, general and administrative expenses

     2,489,005        —          2,489,005   

Merger related costs

     44,814        (44,814 )(3)      —     
  

 

 

   

 

 

   

 

 

 

Operating income

     1,661,651        (13,491     1,648,160   

Interest income

     27,795        —          27,795   

Interest expense

     283,607        414,023 (5)      697,630   

Other expense, net

     (62,196     3,098 (6)      (59,098
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     1,343,643        (424,416     919,227   

Provision for income taxes.

     241,598        (157,529 )(7)      84,069   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,102,045        (266,887     835,158   

Less: Net income attributable to the noncontrolling interest

     14,430        —          14,430   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to Hawk Acquisition Intermediate Corporation II

   $ 1,087,615      $ (266,887   $ 820,728   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the Unaudited Pro Forma Condensed Consolidated Statement of Income

 

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Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income

 

(1) Represents adjustment to reverse the non-recurring amortization recorded in the Successor period of the inventory step up to estimated fair value recorded in purchase accounting ($383.3 million) and adjustment for increased amortization of $6.9 million and $57.0 million in the transition period and Fiscal Year 2013 respectively, resulting from the preliminary allocation of purchase price to definite-lived customer-related and other intangible assets. Accordingly, pro forma amortization for such intangible assets is $57.0 million and $87.8 million for the transition period and the year ended April 28, 2013, respectively. The increase is primarily related to the intangible asset for customer relationships with estimated average useful lives of 20 years. The following shows the calculation of the pro forma adjustment:

 

    

Transition period
April 29, 2013 -

December 29, 2013

     Fiscal Year
Ended
April 28, 2013
 

Pro forma amortization on customer-related and other intangible assets

   $ 57,036       $ 87,842   
  

 

 

    

 

 

 

Less:

     

Historical amortization on Predecessor customer-related and other intangible assets

     3,246         30,858   

Amortization on Successor customer-related and other intangible assets

     46,900         —     
  

 

 

    

 

 

 
     50,146         30,858   
  

 

 

    

 

 

 

Total pro forma adjustment to amortization on customer-related and other intangible assets

   $ 6,890       $ 56,984   
  

 

 

    

 

 

 

 

(2) Represents adjustment for increased depreciation of $0.2 million and $1.3 million in the transition period and Fiscal Year 2013 respectively, resulting from the preliminary allocation of purchase price to property, plant and equipment. Accordingly, pro forma depreciation is $267.0 million and $303.4 million for the transition period and the year ended April 28, 2013, respectively. The following shows the calculation of the pro forma adjustment:

 

     Transition period
April 29, 2013 -
December 29, 2013
     Fiscal Year
Ended
April 28, 2013
 

Pro forma depreciation on property, plant and equipment

   $ 267,019       $ 303,379   
  

 

 

    

 

 

 

Less:

     

Historical depreciation on Predecessor property, plant and equipment

     35,880         302,057   

Depreciation on Successor property, plant and equipment

     230,987         —     
  

 

 

    

 

 

 
     266,867         302,057   
  

 

 

    

 

 

 

Total pro forma adjustment to depreciation

   $ 152       $ 1,322   
  

 

 

    

 

 

 

 

(3) Represents the reversal of non-recurring charges and income directly related to the Transactions. These charges include financial advisory fees, legal, accounting, other professional fees directly related to the Transactions and compensation costs for certain key executives triggered by change of control of the Company.
(4) Prior to the Merger date, Merger Subsidiary entered into interest rate swaps to mitigate exposure to variable rate debt that was raised specifically to finance the acquisition. These agreements were not designated as hedging instruments prior to the acquisition date, and as such, we recognized the fair value of these instruments as an asset with related unrealized income of $117.9 million in the Successor period for the period from April 2, 2013 to June 7, 2013. Upon consummation of the acquisition, these interest rate swaps with an aggregate notional amount of $9 billion met the criteria for hedge accounting and were designated as hedges of future interest payments. As a result subsequent movements in fair value of these swaps are deferred on the Balance Sheet within the accumulated other comprehensive income component of shareholder’s equity. The pro forma adjustment removes the $117.9 million of derivative income as it is non-recurring.

 

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(5) The pro forma adjustments to interest expense in the transition period include the reversal of interest incurred by Merger Subsidiary (Successor) on the Notes in the period February 8, 2013 to June 7, 2013, which is included in the historical financial statements of the Successor, in the amount of $24.5 million. The balance of the pro forma adjustment in the transition period, and the pro forma adjustment for fiscal year end April 28, 2013, is necessary to reflect the interest costs on the Term Loan and the Notes less the interest previously recognized on debt paid off as a result of the Transactions. The interest adjustments on the Term Loan are based on LIBOR rate outstanding during the applicable period, subject to a 1% LIBOR floor. As LIBOR throughout the period has been substantially lower than the 1% floor, an analysis of a 1/8% movement in LIBOR has not been presented as it would not provide relevant information to the pro forma statements. The following shows the calculation of the pro forma adjustment:

 

     Transition
period
April 29, 2013 -
December 29,
2013
    Fiscal Year
Ended
April 28,

2013
 

Interest on the Term Loan of approximately $9,500 million aggregate principal amount and $3,100 million aggregate principal amount of the Notes at an estimated blended interest of 3.69%(i)

     53,631        464,805   

Amortization of $320.8 million of debt issuance costs arising from the Term Loan and the Notes(ii)

     6,019        52,163   

Amortization of $32.5 million of original issue discount arising from the Term Loan and the Notes(ii)

     540        4,684   
  

 

 

   

 

 

 

Total interest expense on the Term Loan and the Notes less:

   $ 60,191      $ 521,651   
  

 

 

   

 

 

 

Historical interest expense on existing debt excluding the Rollover Notes

     (14,424     (112,355

Interest expense incurred in the period February 8 to June 7, 2013 by Merger Subsidiary

     (24,520     —     

Amortization of debt issuance costs arising from the Notes in the period February 8 to June 7, 2013 by Merger Subsidiary

     (2,190     —     

Historical amortization of original issue discount

     (181     (4,943
  

 

 

   

 

 

 

Total interest expense on existing debt excluding the Rollover Notes

     (41,315     (117,298
  

 

 

   

 

 

 

Settlement of debt related hedge contracts

     940        9,670   
  

 

 

   

 

 

 

Total pro forma adjustment of interest expense

   $ 19,816      $ 414,023   
  

 

 

   

 

 

 

 

  (i) The estimated blended interest rate is based on LIBOR plus an assumed spread on each of the tranches, with a 1.0% LIBOR floor.
  (ii) Amortization of original issue discount and debt issuance costs over the estimated weighted average maturities of the Term Loan and the Notes. Pro forma amortization adjustments were estimated on a straight-line basis which is considered to approximate the effective yield method.

 

(6) Represents adjustment to eliminate amortization of deferred finance costs on debt paid off as a result of the Transactions of $(0.9 million) and $(3.1 million) in the period February 8, 2013 to June 7, 2013 and the fiscal year ended April 28, 2013, respectively, which are included in the historical financial statements of the Predecessor in other expense, net.
(7) Represents the income tax benefit associated with the non-recurring charges removed from the pro forma statement of income, using a combined federal and state statutory tax rate of 38.25% where applicable for both the transition period and fiscal year ended April 28, 2013, respectively. The tax effect of the transaction related costs in the transition period was a blended rate of 31.5% due to the non-deductibility of certain costs. The tax effect of the incremental amortization expense of our customer-related intangible assets and the amortization of the inventory step up to estimated fair value was based on a blended statutory tax rate of approximately 30% based on jurisdictions where these assets reside.

 

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(8) The transition period included $129.4 million loss from the extinguishment of debt for debt required to be paid upon closing as a result of the change in control and as such a pro forma adjustment was made to remove this charge as it is directly related to the Transactions and non-recurring.

Items Not Reflected in Unaudited Pro Forma Financial Information

As a direct result of the Transactions, the Company incurred certain material, non-recurring charges all of which are discussed above. As these charges will not have a continuing impact on our operations, they have been excluded from the pro forma statements of income reflected here.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial data for the Company and its subsidiaries for each of the five fiscal years 2009 through 2013 and for the periods from April 29 to June 7 2013 (Predecessor) and February 8 to December 29, 2013 (Successor). All amounts are in thousands.

 

    Successor     Predecessor  
    February 8 -
December 29,
2013
(29 Weeks)
    April 29 -
June 7,
2013
(6 Weeks)
    April 28,
2013
(52 Weeks)
    April 29,
2012
(52 1/2 Weeks)
    April 27,
2011
(52 Weeks)
    April 28,
2010
(52 Weeks)
    April 29,
2009
(52 Weeks)
 

Sales(1)

  $ 6,239,562      $ 1,112,872      $ 11,528,886      $ 11,507,572      $ 10,558,636      $ 10,323,968      $ 9,826,298   

Interest expense(1)

  $ 408,503      $ 35,350      $ 283,607      $ 293,009      $ 272,660      $ 293,574      $ 336,509   

(Loss)/income from continuing operations(1)

  $ (66,082   $ (191,424   $ 1,102,045      $ 991,123      $ 1,045,505      $ 962,840      $ 969,186   

(Loss)/income from continuing operations attributable to H.J. Heinz Company common shareholders(1)

  $ (71,385   $ (194,298   $ 1,087,615      $ 974,374      $ 1,029,067      $ 945,389      $ 954,297   

Short-term debt and current portion of long-term debt

  $ 251,454        NA      $ 2,160,393      $ 246,708      $ 1,534,932      $ 59,020      $ 65,638   

Long-term debt, exclusive of current portion(2)

  $ 14,617,646        NA      $ 3,848,339      $ 4,779,981      $ 3,078,128      $ 4,559,152      $ 5,076,186   

Total assets

  $ 38,972,348        NA      $ 12,939,007      $ 11,983,293      $ 12,230,645      $ 10,075,711      $ 9,664,184   

 

(1) Amounts exclude the operating results as well as any associated impairment charges and losses on sale related to the Company’s Shanghai LongFong Foods business in China and U.S. Foodservice frozen desserts business, which were divested in Fiscal 2013, as well as the private label frozen desserts business in the U.K. and the Kabobs and Appetizers And, Inc. businesses in the U.S., which were divested in Fiscal 2010, and all of which have been presented as discontinued operations.
(2) Long-term debt, exclusive of current portion, includes $122.5 million, $128.4 million, $150.5 million, $207.1 million, and $251.5 million of hedge accounting adjustments associated with interest rate swaps at April 28, 2013, April 29, 2012, April 27, 2011, April 28, 2010, and April 29, 2009, respectively. There were no interest rate swaps requiring such hedge accounting adjustments at December 29, 2013.

The Successor period results include the following special items:

 

    The Company incurred Merger related costs of $157.9 million consisting primarily of advisory fees, legal, accounting and other professional costs, as well as severance and compensation arrangements pursuant to existing agreements with certain former executives and employees in connection with the Merger. See Note 4, “Merger and Acquisition” to our Consolidated Financial Statements, contained elsewhere in this prospectus, for further explanation.

 

    The Company is investing in restructuring and productivity initiatives as part of its ongoing cost reduction efforts with the goal of driving efficiencies and creating fiscal resources that will be reinvested into the Company’s business as well as to accelerate overall productivity on a global scale. The Company recorded pre-tax costs related to these initiatives of $410.4 million in the Successor period. See Note 7, “Restructuring and Productivity Initiatives” to our Consolidated Financial Statements contained elsewhere in this prospectus for further explanation.

The results of the Predecessor period from April 29, 2013 to June 7, 2013 include the following special items:

 

    Prior to consummation of the Merger, the Company incurred Merger related costs of $112.2 million resulting from the acceleration of expense for stock options, restricted stock units and other compensation plans pursuant to the existing change in control provisions of those plans. The Company also recorded a loss from the extinguishment of debt of $129.4 million for debt required to be repaid upon closing as a result of the change in control. See Note 4, “Merger and Acquisition” to our Consolidated Financial Statements, contained elsewhere in this prospectus, for further explanation.

 

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Fiscal 2013 results include the following special items:

 

    As a result of the Merger, the Company incurred $44.8 million pre-tax of transaction-related costs, including legal, accounting and other professional fees, during the fourth quarter of Fiscal 2013. See Note 4, “Merger and Acquisition” to our Consolidated Financial Statements, contained elsewhere in this prospectus, for further explanation.

 

    Also during the fourth quarter of Fiscal 2013, the Company closed a factory in South Africa resulting in a $3.5 million pre-tax charge primarily related to asset write-downs.

 

    On February 8, 2013, the Venezuelan government announced the devaluation of its currency relative to the U.S. dollar, changing the official exchange rate from 4.30 to 6.30, resulting in a $42.7 million pre-tax currency translation loss during the fourth quarter of Fiscal 2013. See Note 20, “Venezuela- Foreign Currency”, to our Consolidated Financial Statements, contained elsewhere in this prospectus, for further explanation.

 

    During the third quarter of Fiscal 2013, the Company renegotiated the terms of the Foodstar Holdings Pte (“Foodstar”) earn-out that was due in 2014 resulting in a $12.1 million pre-tax charge in SG&A. See Note 13, “Fair Value Measurements” to our Consolidated Financial Statements, contained elsewhere in this prospectus, for further explanation.

Fiscal 2012 results from continuing operations include expenses of $205.4 million pre-tax for productivity initiatives. See Note 7, “Restructuring and Productivity Initiatives” to our Consolidated Financial Statements, contained elsewhere in this prospectus, for further explanation of these initiatives.

Fiscal 2010 results from continuing operations include expenses of $35.9 million pre-tax for upfront productivity charges and a gain of $15.0 million pre-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.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the accompanying notes, included elsewhere in this prospectus. This section of the prospectus contains forward-looking statements that involve substantial risks and uncertainties, such as statements about our plans, objectives, expectations and intentions. These statements may be identified by the use of forward-looking terminology such as “anticipate”, “believe”, “continue”, “could”, “estimate”, “intend”, “may”, “might”, “plan”, “potential”, “predict”, “should”, or “will” or the negative thereof or other variations thereon or comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in the section titled “Risk Factors” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which apply on and as of the date of this prospectus.

For purposes of this Section, unless the context otherwise requires, the terms “we,” “us,”, “our” and the “Company” refer, collectively, to Hawk Acquisition Intermediate Corporation II (“Hawk II”), H.J. Heinz Company, and its subsidiaries. References to “the Issuer” are to H.J. Heinz Company alone, not including its subsidiaries. Hawk II is a holding company and has no activity, therefore the information for Hawk II is applicable and equal to the data disclosed for H.J. Heinz Company.

Overview

The Merger

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.

On February 13, 2013, the Company entered into the Merger Agreement with Parent and Merger Subsidiary. The terms of the Merger Agreement were unanimously approved by the Company’s Board of Directors on February 13, 2013 and by the majority of votes cast at a special shareholder meeting on April 30, 2013. The acquisition was consummated on June 7, 2013, and as a result, Merger Subsidiary merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings, which is in turn an indirect wholly owned subsidiary of Parent. Parent is controlled by the Sponsors. Upon the completion of the Merger, the Company’s shareholders received $72.50 in cash for each share of common stock. The total aggregate value of the Merger consideration was approximately $28.75 billion, including the assumption of the Company’s outstanding debt. The Merger consideration was funded through a combination of equity contributed by the Sponsors totaling $16.5 billion and proceeds from long-term borrowings totaling $12.6 billion. The Company’s capital structure is further discussed under Liquidity and Financial Position.

Purchase Accounting Effects. The Merger was accounted for using the acquisition method of accounting which affected our results of operations in certain significant respects. The Sponsors’ cost of acquiring the Company has been pushed down to establish a new accounting basis for the Company. Accordingly, the accompanying interim consolidated financial statements are presented for two periods, Predecessor and Successor, which relate to the accounting periods preceding and succeeding the completion of the Merger. The allocation of the total purchase price to the Company’s net tangible and identifiable intangible assets was based on preliminary estimated fair values as of the Merger date, as described further in Note 4 to the Financial

 

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Statements. In addition to the transaction related expenses discussed further below, the following are reflected in our results of operations for the Successor period from February 8, 2013 to December 29, 2013:

 

    The purchase accounting adjustment to inventory resulted in an increase in cost of products sold of approximately $383 million as those products were sold to customers during the period subsequent to the Merger.

 

    Incremental amortization of approximately $34 million on the step-up in basis of definite-lived intangible assets which was included within cost of products sold.

 

    Incremental interest expense of $226 million related to new borrowings under the Senior Credit Facilities and the Notes issued in a private offering, in connection with the Merger.

 

    The purchase accounting adjustment to deferred pension costs resulted in a decrease in pension expense of approximately $17 million which was primarily reflected in cost of products sold.

 

    The purchase accounting adjustment to deferred derivative gains related to foreign currency cash flow hedges resulted in an increase in cost of products sold of approximately $14 million.

 

    We recognized a gain of $118 million on interest rate swap agreements entered into by Merger Subsidiary prior to the Merger to mitigate exposure to variable rate debt that was raised to finance the acquisition. These agreements were not designated as hedging instruments prior to the Merger date, and as such, we recorded the gain due to changes in fair value of these instruments, and separately reflected the gain in the accompanying statement of operations. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Subsidiary. As of the Merger date, these interest rate swaps were designated as cash flow hedges of the variable interest payments on the term notes issued in connection with the Merger, with changes in fair value of the derivatives reflected in other comprehensive income from that date forward.

Transaction Related Expenses. During the Successor period, the Company incurred $157.9 million in Merger related costs on a pretax basis, including $70.0 million consisting primarily of advisory fees, legal, accounting and other professional costs. The Company also incurred $87.9 million during the Successor period related to severance and compensation arrangements pursuant to existing agreements with certain former executives and employees in connection with the Merger. These amounts are separately reflected in the accompanying statement of operations for the Successor period.

Prior to consummation of the Merger, the Company incurred $112.2 million of Merger related costs, including $48.1 million resulting from the acceleration of expense for stock options, restricted stock units and other compensation plans pursuant to the existing change in control provisions of those plans, and $64.0 million of professional fees. These amounts are separately reflected in Merger related costs in the accompanying statement of operations for the Predecessor period. The Company also recorded a loss from the extinguishment of debt of approximately $129.4 million for debt required to be repaid upon closing as a result of the change in control which is reflected in Other (expense) income, net, in the accompanying statement of operations for the Predecessor period.

 

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Periods Presented

SuccessorThe consolidated financial statements as of December 29, 2013, and for the period from February 8, 2013 through December 29, 2013, include the accounts of Merger Subsidiary from inception on February 8, 2013 and the accounts of the Company subsequent to the closing of the Merger on June 7, 2013. The activity in the period February 8, 2013 to April 28, 2013 related primarily to the issuance of the Second Lien Senior Secured Notes due 2020 and recognition of associated issuance costs and interest expense. The cash was invested in a money market account until the completion of the Merger on June 7, 2013. See Note 10 for further details. The following represents the condensed financial information for Merger Subsidiary for the period February 8, 2013 to April 28, 2013 and as at April 28, 2013:

Hawk Acquisition Intermediate Corporation II (Successor)

Condensed Statement of Operations

For the Period from February 8, 2013 through April 28, 2013

 

    

February 8 - April 28,
2013

(In thousands)

 

Merger related costs

   $ 19,713   
  

 

 

 

Operating loss

     (19,713

Unrealized loss on derivative instrument

     (65,294

Interest Expense, net

     (10,743
  

 

 

 

Loss from continuing operations before income tax

     (95,750

Benefit from income taxes

     37,842   
  

 

 

 

Net loss

   $ (57,908
  

 

 

 

Hawk Acquisition Intermediate Corporation II (Successor)

Condensed Balance Sheet

As of April 28, 2013

 

     April 28, 2013
(In thousands)
 

Cash

   $ 3,011,750   

Other assets

     125,231   
  

 

 

 

Total assets

   $ 3,136,981   
  

 

 

 

Notes payable

   $ 3,100,000   

Other liabilities

     94,889   
  

 

 

 

Total liabilities

     3,194,889   
  

 

 

 

Shareholder’s deficit

     (57,908
  

 

 

 

Total liabilities and shareholder’s deficit

   $ 3,136,981   
  

 

 

 

Predecessor—the consolidated financial statements of the Company prior to the Merger on June 7, 2013.

Transition period—the combination of the Successor and the Predecessor period from April 29, 2013 to June 7, 2013.

Fiscal 2013—the fiscal year from April 30, 2012 to April 28, 2013.

 

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Fiscal 2012—the fiscal year from April 28, 2011 to April 29, 2012.

Fiscal 2011—the fiscal year from April 29, 2010 to April 27, 2011.

Executive Overview

The Company’s total sales were $6.24 billion for the Successor period and $1.11 billion for the Predecessor period, compared to $7.44 billion for the eight months ended December 23, 2012 (based on the Company’s former fiscal month end). The decline in sales was principally due to unfavorable foreign exchange translation rates which decreased sales by 1.8%, partially offset by an increase in volume of 0.8% as favorable volume in emerging markets coupled with 2.2% of incremental volume due to an extra week of sales in the Successor period to align to the new year end exceeded declines in developed markets. Volume in the Successor period was unfavorably impacted by category softness and reduced promotional pricing mainly in the U.S. when compared to the prior year period and by one extra month of sales (approximating 0.5% of sales) being reported in Brazil in the prior year period as the subsidiary’s fiscal reporting was conformed to the Company’s fiscal period. Net pricing increased sales by 0.3%, driven by price increases in Brazil, Indonesia and U.S. Foodservice. Divestitures decreased sales by 0.4%

In the Successor and Predecessor periods February 8, 2013 to December 29, 2013, and April 29, 2013 to June 7, 2013, respectively, gross profit, operating income and net income have been significantly impacted by Merger and restructuring related costs and expenses. In addition, for the Successor period, the effects of the new basis of accounting resulted in increased non-cash charges to cost of sales for the step up in inventory value, increased amortization expense associated with the fair value adjustments to intangible assets and the increased borrowings to fund the Merger resulted in higher interest costs compared to prior year quarter. See “—The Merger” and “—The Results of Operation” sections for further information on the Merger related costs and expenses and further analysis of our operating results for the quarter.

Transition Period Restructuring and Productivity Initiatives

During the transition period, the Company invested in restructuring and productivity initiatives as part of its ongoing cost reduction efforts with the goal of driving efficiencies and creating fiscal resources that will be reinvested into the Company’s business as well as to accelerate overall productivity on a global scale. As of December 29, 2013, these initiatives have resulted in the reduction of approximately 3,400 corporate and field positions across the Company’s global business segments as well as the closure and consolidation of manufacturing and corporate office facilities. Including charges incurred as of December 29, 2013, the Company currently estimates it will incur total charges of approximately $300 million related to severance benefits and other severance-related expenses related to the reduction in corporate and field positions and the ongoing annual cost savings is estimated to be approximately $250 million. The severance-related charges and cost savings assumptions that the Company expects to incur in connection with these work force reductions are subject to a number of assumptions and may differ from actual results.

On November 14, 2013, the Company announced the planned closure of 3 factories in the U.S. and Canada by the middle of calendar year 2014. The number of employees expected to be impacted by these 3 plant closures and consolidation is approximately 1,350. The Company currently estimates it will incur total charges of approximately $63 million for severance benefits and other severance-related expenses related to these factory closures. In addition the Company will recognize accelerated depreciation on assets to be disposed of. In the Successor period, the Company incurred an immaterial amount of severance benefits and other severance-related expenses, and $55.6 million in accelerated depreciation related to these factory closures. The ongoing annual cost savings is estimated to be approximately $55 million. The severance-related charges and cost savings assumptions that the Company expects to incur in connection with these factory workforce reductions and factory closures are subject to a number of assumptions and may differ from actual results. The Company may also incur other charges not currently contemplated due to events that may occur as a result of, or related to, these cost reductions.

 

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The Company recorded pre-tax costs related to these productivity initiatives of $410 million in the Successor period and $6 million in the Predecessor period which were recorded in the Non-Operating segment. See Note 7 to our Consolidated Financial Statements contained elsewhere in this prospectus for additional information on these productivity initiatives. There were no such charges in the eight months ended December 23, 2012.

Fiscal 2012 Productivity Initiatives

On May 26, 2011, the Company announced that it would invest in productivity initiatives during Fiscal 2012 designed to increase manufacturing effectiveness and efficiency as well as accelerate overall productivity on a global scale. The Company recorded costs related to these productivity initiatives of $205.4 million pre-tax during the fiscal year ended April 29, 2012, all of which were reported in the Non-Operating segment. In addition, after-tax charges of $18.9 million were recorded in losses from discontinued operations for the fiscal year ended April 29, 2012. See Note 7 to our Consolidated Financial Statements contained elsewhere in this prospectus and the “Liquidity and Financial Position” section below for additional information on these productivity initiatives.

Discontinued Operations

In the third quarter of Fiscal 2013, the Company’s Board of Directors approved management’s plan to sell Shanghai LongFong Foods (“LongFong”), a maker of frozen products in China which was previously reported in the Asia/Pacific segment. During the fourth quarter of Fiscal 2013, the Company secured an agreement with a buyer and during the Successor period, the sale was completed, resulting in an insignificant pre-tax and after-tax loss which was recorded in discontinued operations in the Successor period. As a result, LongFong’s net assets were classified as held for sale and the Company adjusted the carrying value to estimated fair value, recording a $36.0 million pre-tax and after-tax non-cash goodwill impairment charge to discontinued operations during the third quarter of Fiscal 2013. The net assets held for sale related to LongFong as of April 28, 2013 were reported in Other current assets, Other non-current assets, Other accrued liabilities and Other non-current liabilities on the consolidated balance sheet as of April 28, 2013 as they were not material for separate balance sheet presentation.

During the first quarter of Fiscal 2013, the Company completed the sale of its U.S. Foodservice frozen desserts business, resulting in a $32.7 million pre-tax ($21.1 million after-tax) loss which has been recorded in discontinued operations.

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:

 

     Successor     Predecessor  
     February 8 -
December 29, 2013
    April 29 -
June 7, 2013
    April 28,
2013 FY 2013
    April 29,
2012 FY 2012
    April 27,
2011 FY 2011
 
     (In millions)  

Sales

   $ 2.9      $ 1.2      $ 47.7      $ 141.5      $ 148.0   

Net after-tax losses

   $ (5.6   $ (1.3   $ (17.6   $ (51.2   $ (39.6

Tax benefit on losses

   $ —        $ —        $ 0.6      $ 1.4      $ 2.6   

Results of Continuing Operations

On October 21, 2013, the Company’s Board of Directors approved a change in the Company’s fiscal year end from the Sunday closest to April 30 to the Sunday closest to December 31. As a result of this change, the consolidated financial statements include presentation of the Successor period from February 8, 2013 through December 29, 2013 and the Predecessor period from April 29, 2013 through June 7, 2013. As a result, the following discussion compares our results of operations for the 35 week transition period to our results of operations for the eight months, or 34 weeks, ended December 23, 2012.

 

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On March 14, 2012 the Company’s Board of Directors authorized a change in the Company’s fiscal year end from the Wednesday nearest April 30 to the Sunday nearest April 30. The change in the fiscal year end resulted in Fiscal 2012 changing from a 53 week year to a 52 1/2 week year and was intended to better align the Company’s financial reporting period with its business partners and production schedules. This change did not have a material impact on the Company’s financial statements.

Throughout this discussion, data for all periods except as of and for the eight months ended December 23, 2012, are derived from our audited consolidated financial statements, which appear in our Consolidated Financial Statements contained elsewhere in this prospectus. All data as of and for the eight months ended December 23, 2012, are derived from our unaudited consolidated financial information, which is presented in the table below and in Note 22 to our Consolidated Financial Statements contained elsewhere in this prospectus.

 

     Successor     Predecessor  
     February 8 -
December 29, 2013
(29 Weeks)
    April 29 -
June 7, 2013
(6 Weeks)
    April 30 -
December 23, 2012
(34 Weeks)
 
                 (Unaudited)  
     (In thousands)  

Sales

   $ 6,239,562      $ 1,112,872      $ 7,438,060   

Cost of products sold

     4,587,791        729,537        4,746,057   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,651,771        383,335        2,692,003   

Selling, general and administrative expenses

     1,501,807        243,364        1,606,902   

Merger related costs

     157,938        112,188        —     
  

 

 

   

 

 

   

 

 

 

Operating (loss)/income

     (7,974     27,783        1,085,101   

Interest income

     13,071        2,878        20,459   

Interest expense

     408,503        35,350        188,544   

Unrealized gain on derivative instruments

     117,934        —          —     

Other expense, net

     (12,233     (125,638     (5,216
  

 

 

   

 

 

   

 

 

 

(Loss)/income from continuing operations before income taxes

     (297,705     (130,327     911,800   

(Benefit from)/provision for income taxes

     (231,623     61,097        142,528   
  

 

 

   

 

 

   

 

 

 

(Loss)/income from continuing operations

     (66,082     (191,424     769,272   

Loss from discontinued operations, net of tax

     (5,636     (1,273     (36,322
  

 

 

   

 

 

   

 

 

 

Net (loss)/income

     (71,718     (192,697     732,950   

Less: Net income attributable to the noncontrolling interest

     5,303        2,874        10,619   

Net (loss)/income attributable to Hawk Acquisition Intermediate Corporation II

   $ (77,021   $ (195,571   $ 722,331   
  

 

 

   

 

 

   

 

 

 

The Company’s revenues are generated via the sale of products in the following categories:

 

     Successor     Predecessor  
     February 8 -
December 29,
2013
(29 Weeks)
    April 29 -
June 7,

2013
(6 Weeks)
     April 30 -
December 23,
2012
(34 weeks)
     April 28,
2013
(52 Weeks)
     April 29,
2012
(52 1/2 Weeks)
     April 27,
2011
(52 Weeks)
 
     (In thousands)  

Ketchup and Sauces

   $ 3,081,347      $ 533,932       $ 3,476,252       $ 5,375,788       $ 5,232,607       $ 4,607,326   

Meals and Snacks

     2,185,831        359,412         2,736,800         4,240,808         4,337,995         4,134,836   

Infant/Nutrition

     624,359        118,528         760,670         1,189,015         1,232,248         1,175,438   

Other

     348,025        101,000         464,338         723,275         704,722         641,036   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,239,562      $ 1,112,872       $ 7,438,060       $ 11,528,886       $ 11,507,572       $ 10,558,636   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Company Results - The period from February 8, 2013 through December 29, 2013 (Successor) and the period from April 29, 2013 through June 7, 2013 (Predecessor) compared to Eight Months Ended December 23, 2012

Sales were $6.24 billion for the Successor period and $1.11 billion for the Predecessor period, respectively, compared to $7.44 billion for the eight months ended December 23, 2012, a decrease of $86 million or 1.2% period over period. Volume increased 0.8%, as favorable volume in emerging markets coupled with an extra week of sales in the Successor period to align to the new year end (approximating 2.2% of incremental volume) exceeded declines in developed markets. Volume in the current eight month period was unfavorably impacted by reduced promotional pricing mainly in the U.S. when compared to the prior year period and by one extra month of sales (approximating 0.5% of sales) being reported in Brazil in the prior year period as the subsidiary’s fiscal reporting was conformed to the Company’s fiscal period as the subsidiary no longer required an earlier closing date to facilitate timely reporting. Net pricing increased sales by 0.3%, driven by price increases in Brazil, Indonesia and U.S. Foodservice partially offset by price decreases in Australia, New Zealand, Italy and Venezuela. Divestitures decreased sales by 0.4% and unfavorable foreign exchange translation rates decreased sales by 1.8%.

Gross profit decreased $657 million or 24.4% to $1.65 billion for the Successor period and $383 million for the Predecessor, respectively, from a gross profit of $2.69 billion for the eight months ended December 23, 2012, and gross profit margin decreased to 27.7% from 36.2%. These decreases are primarily related to higher cost of products sold in the Successor period associated with the purchase accounting adjustments related to the step up in value of inventory ($383 million) and incremental amortization of the preliminary step-up in basis of definite lived intangible assets ($34 million). Gross profit was also negatively impacted by restructuring and productivity initiatives of $169 million for the Successor period and $6 million for the Predecessor period, respectively. The restructuring and productivity related charges are recorded in the non-operating segment.

Selling, general and administrative expenses (“SG&A”) increased $138 million, or 8.6% to $1.50 billion for the Successor period and $243 million for the Predecessor period, and increased as a percentage of sales to 23.7% from 21.6% period over period. The increase in SG&A is attributable to severance related to the restructuring and productivity initiatives of $242 million.

Merger related costs in the Successor period include $70 million consisting primarily of advisory fees, legal, accounting and other professional costs and $87.9 million related to severance and compensation arrangements pursuant to existing agreements with certain former executives and employees in connection with the Merger. In the Predecessor period, Merger related costs include $48 million resulting from the acceleration of stock options, restricted stock units and other compensation plans, and $64 million of professional fees.

Operating income decreased $1.07 billion to an operating loss of $8 million for the Successor period and an operating income of $28 million for the Predecessor period, respectively, reflecting the decrease in gross profit discussed above and the impact of the merger related charges.

Net interest expense increased $260 million, to $395 million for the Successor period and $32 million for the Predecessor period, respectively, reflecting higher average debt balances resulting from the Merger. Included in the Successor period is $25 million of interest expense incurred by Merger Subsidiary prior to the consummation of the Merger. Other income (expense), net, decreased $133 million, to an expense of $12 million for the Successor period and expense of $126 million for the Predecessor period, respectively, primarily related to the costs for early extinguishment of debt related to the Merger.

Prior to the Merger, Merger Subsidiary entered into interest rate swap agreements to mitigate exposure to variable rate debt that was raised to finance the acquisition. These agreements were not designated as hedging instruments prior to the Merger date, and as such, we recorded a gain of $118 million in the Successor period due to changes in fair value of these instruments, and separately reflected the gain in the accompanying statement of operations. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Subsidiary.

 

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For the Successor period the Company recorded a tax benefit of $232 million, or 77.8% of pretax loss. For the Predecessor period the Company recorded a tax expense of $61 million, or (46.9%) of pretax loss. In the eight months ended December 23, 2012, the Company recorded a tax expense of $143 million, or 15.6% of pretax income.

The tax benefit in the Successor period included a benefit of $107 million related to the impact on deferred taxes of a 300 basis point statutory tax rate reduction in the United Kingdom which was enacted during July 2013, and a favorable jurisdictional income mix. The benefit of the statutory tax rate reduction in the United Kingdom was favorably impacted by the increase in deferred tax liabilities recorded in purchase accounting for the Merger.

The tax provision for the Predecessor period April 29, 2013 to June 7, 2013 was principally caused by the effect of repatriation costs of approximately $100 million for earnings of foreign subsidiaries distributed during the period and the effect of current period nondeductible Merger related costs.

The tax provision for the eight months ended December 23, 2012 included the $63 million tax benefit that occurred as a result of an increase in the tax basis of both fixed and intangible assets resulting from a tax-free reorganization in a foreign jurisdiction, a $13 million tax benefit from an intangible asset revaluation for tax purposes elected by a foreign subsidiary, and a benefit of $10 million related to a 200 basis point statutory tax rate reduction also in the United Kingdom.

The net loss from continuing operations attributable to H. J. Heinz Company was $71 million for the Successor period and $194 million for the Predecessor period, compared to net income of $759 million in the eight months ended December 23, 2012.

Operating Results by Segment Business

The following discussion compares the operating results by business segment for the period from February 8, 2013 through December 29, 2013 (Successor) and the period from April 29, 2013 through June 7, 2013 (Predecessor) compared to the eight months ended December 23, 2012. All data for the eight months ended December 23, 2012, are derived from our unaudited consolidated financial information, which is presented in the table below:

 

    Successor     Predecessor     Successor     Predecessor     Successor     Predecessor  
    February 8 -
December 29,
2013
    April 29 -
June 7,

2013
    February 8 -
December 29,
2013
    April 29 -
June 7,
2013
    February 8 -
December 29,
2013
    April 29 -
June 7,
2013
 
    Net External Sales     Gross Profit     Operating Income (Loss)  
    (In thousands)  

North American Consumer Products

  $ 1,669,924      $ 307,971      $ 547,009      $ 123,357      $ 269,642      $ 65,459   

Europe

    1,829,607        284,657        575,231        98,220        195,235        32,918   

Asia/Pacific

    1,328,488        272,116        290,385        92,895        11,833        37,616   

U.S. Foodservice

    772,598        135,688        192,604        38,579        84,273        15,531   

Rest of World

    638,945        112,440        215,107        35,673        74,238        10,560   

Non-Operating

    —          —          (168,565     (5,389     (643,195     (134,301
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Totals

  $ 6,239,562      $ 1,112,872      $ 1,651,771      $ 383,335      $ (7,974   $ 27,783   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Predecessor  
     April 30 - December 23, 2012  
     Net External
Sales
     Gross Profit      Operating
Income (Loss)
 
     (In thousands)  

North American Consumer Products

   $ 2,047,516       $ 855,759       $ 505,418   

Europe

     2,124,441         815,198         374,519   

Asia/Pacific

     1,647,494         517,640         169,432   

U.S. Foodservice

     871,974         244,772         101,162   

Rest of World

     746,635         255,112         82,025   

Non-Operating

     —           3,522         (147,455
  

 

 

    

 

 

    

 

 

 

Consolidated Totals

   $ 7,438,060       $ 2,692,003       $ 1,085,101   
  

 

 

    

 

 

    

 

 

 

North American Consumer Products

Sales of the North American Consumer Products segment decreased $70 million, or 3.4%, to $1.67 billion for the Successor period and $308 million for the Predecessor period, respectively. Lower net price of 0.7% reflects increased promotional activity on frozen appetizers and snacks, frozen potatoes and frozen meals and sides, partially offset by higher pricing from reduced ketchup promotions in the U.S. Volume was down 1.8% reflecting category softness in frozen potatoes and frozen nutritional entrees, along with a reduction in Heinz® Ketchup promotional activity, partially offset by 2.6% of incremental volume due to the extra week of sales to align to the new year end. Unfavorable Canadian exchange translation rates decreased sales 0.8%.

Gross profit decreased $185 million, or 21.7%, to $547 million for the Successor period and $123 million for the Predecessor period, and the gross profit margin decreased to 33.9% from 41.8%. These decreases are primarily related to higher cost of products sold associated with the preliminary purchase accounting adjustments related to the step up in value of inventory, and lower volume. Operating income decreased $170 million to $270 million for the Successor period and $65 million for the Predecessor period reflecting the decline in gross profit, partially offset by lower SG&A primarily related to the current year restructuring initiatives.

Europe

Heinz Europe sales decreased $10 million, or 0.5%, to $1.83 billion for the Successor period and $285 million for the Predecessor period. Volume was up 0.2% as 2.0% of incremental volume due to the extra week of sales to align to the new year end as well as strong performance in Russia and Germany was largely offset by soft category sales in the U.K., Italy and The Netherlands. Volume in the U.K. was also impacted by the strategic decision to realign promotional activity and by the timing of sales related to the Project Keystone(1) go-live in May 2013. Net pricing decreased 0.4% primarily reflecting higher pricing in Benelux and Eastern Europe which was more than offset by pricing declines in Italy and Russia. The divestitures of a small soup business in Germany and a non-core product line in Russia decreased sales 1.4%. Favorable exchange translation rates increased sales 1.1%.

Gross profit decreased $142 million, or 17.4%, to $575 million for the Successor period and $98 million for the Predecessor period, while the gross profit margin decreased to 31.9% from 38.4%. These decreases are primarily related to higher cost of products sold associated with the preliminary purchase accounting adjustments related to the step up in value of inventory. Operating income decreased $146 million to $195 million for the Successor period and operating income of $33 million for the Predecessor period, reflecting the decline in gross profit and higher SG&A expenses primarily related to increased marketing spend in Russia and Italy.

 

(1) Project Keystone is a multi-year global program designed to drive productivity and make Heinz much more competitive by adding capabilities, harmonizing global processes and standardizing our systems through SAP

 

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Asia/Pacific

Heinz Asia/Pacific sales decreased $47 million, or 2.8%, to $1.33 billion for the Successor period and $272 million for the Predecessor period, as unfavorable exchange translation rates decreased sales by 6.3%. Volume increased 3.1% largely a result of the 1.7% of incremental volume due to the extra week of sales to align to the new year end and continued strong performance of Master® branded sauces in China and Heinz branded infant feeding products in China as well as frozen products in Japan and ABC® sauces in Indonesia. These increases were partially offset by declines in Glucon D® and Complan® branded products in India. Pricing increased 0.4%, as price increases on ABC® sauces in Indonesia and Master® branded sauces in China were offset by higher promotion spending in Australia and New Zealand.

Gross profit decreased $134 million, or 26.0%, to $290 million for the Successor period and $93 million for the Predecessor period, while the gross profit margin decreased to 23.9% from 31.4%. These decreases are related to higher cost of products sold associated with the preliminary purchase accounting adjustments related to the step up in value of inventory, as well as, unfavorable foreign exchange translation rates. Operating income decreased $120 million to $12 million for the Successor period and $38 million for the Predecessor period, reflecting the decline in gross profit, partially offset by lower SG&A expense across the region including lower marketing spend in India. SG&A in the prior year benefited from a gain on the sale of excess land in Indonesia.

U.S. Foodservice

Sales of the U.S. Foodservice segment increased $36 million, or 4.2%, to $773 million for the Successor period and $136 million for the Predecessor period. Pricing increased sales 2.0%, largely due to price increases on ketchup and other sauces and condiments partially offset by pricing decreases on frozen soup. Volume increased by 2.1% largely a result of the 3.0% of incremental volume from the extra week of sales to align to the new year end and increases primarily in ketchup and other sauces and condiments partially offset by volume declines in frozen soup.

Gross profit decreased $14 million, or 5.6%, to $193 million for the Successor period and $39 million for the Predecessor period and the gross profit margin decreased to 25.5% from 28.1%. These decreases are primarily related to higher cost of products sold associated with the preliminary purchase accounting adjustments related to the step up in value of inventory partially offset by increased volume and pricing. Operating income decreased $1 million to $84 million for the Successor period and $16 million for the Predecessor period reflecting the decline in gross profit offset by lower SG&A primarily related to the current year restructuring initiatives.

Rest of World

Sales for Rest of World increased $5 million, or 0.6%, to $639 million for the Successor period and $112 million for the Predecessor period. Volume increased 3.3% largely as a result of 1.8% of incremental volume due to the extra week of sales to align to the new year end and volume gains across the segment which were partially offset by the one extra month of sales reported in Brazil in the prior year as discussed above, the impact of which was split evenly between the Ketchup & Sauces and Meals & Snacks categories and mainly impacted Quero® branded sales. Pricing increased sales by 2.6%, largely due to price increases on Quero® branded products in Brazil, partially offset by price decreases in Venezuela. (See the “Venezuela- Foreign Currency and Inflation” section below for further discussion on inflation in Venezuela.) Foreign exchange translation rates decreased sales 5.3%.

Gross profit decreased $4 million, or 1.7%, to $215 million for the Successor period and $36 million for the Predecessor period while the gross profit margin decreased to 33.4% from 34.2%. The decrease in gross profit is primarily related to higher cost of products sold associated with the preliminary purchase accounting adjustments related to the step up in value of inventory and the lower volume in Brazil resulting from the extra month of

 

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results in the prior year period, partially offset by reduced cost of products sold in Mexico following the switch to local production, expansion of higher margin Complan® branded products in Nigeria, and the favorable impact of the higher pricing. Operating income increased $3 million to $74 million for the Successor period and $11 million for the Predecessor period, primarily reflecting the decline in gross profit which was more than offset by lower SG&A primarily related to the current year restructuring initiatives.

Fiscal 2013 Company Results - Fiscal Year Ended April 28, 2013 compared to Fiscal Year Ended April 29, 2012

Sales for Fiscal 2013 increased $21 million, or 0.2%, to $11.53 billion. Volume increased 1.0%, as volume gains in emerging markets were partially offset by declines in the U.S., Continental Europe, Australia and Italy. Emerging markets volume included an extra month of results for Brazil, which was more than offset by the Company’s decision to exit the T.G.I Friday’s® frozen meals business in the U.S. Emerging markets, the Company’s top 15 brands and global ketchup continued to be the Company’s primary growth drivers, with organic sales growth of 16.8%, 3.6% and 4.6%, respectively (reported sales growth of 14.3%, 0.8%, and 2.8%, respectively). Net pricing increased sales by 2.1%, driven by price increases across the emerging markets, as well as in Continental Europe and U.S. Foodservice. Divestitures decreased sales by 0.3%, and unfavorable foreign exchange rates decreased sales by 2.5%.

Gross profit increased $201 million, or 5.0%, to $4.20 billion, and gross profit margin increased 170 basis points to 36.4%. Current year gross profit includes the previously discussed $3.5 million charge related to the closure of a factory in South Africa. Excluding this charge and charges for productivity initiatives in Fiscal 2012, gross profit margin increased 60 basis points, and gross profit increased $74 million, or 1.8%, as the benefits from higher pricing, volume and productivity initiatives were offset by a $104 million unfavorable impact from foreign exchange and higher commodity costs.

SG&A increased $41 million, or 1.7%, to $2.53 billion, and increased as a percentage of sales to 22.0% from 21.7%. Current year SG&A includes the previously discussed special items of $12 million for the Foodstar earn-out settlement and $45 million in transaction-related costs associated with the Merger Agreement. Excluding these current year special items and charges for productivity initiatives in Fiscal 2012, SG&A increased $60 million, or 2.5%, to $2.48 billion and increased as a percentage of sales to 21.5% from 21.0%. The increase in aggregate spending reflects higher marketing spending, incremental investments in Project Keystone, and strategic investments to drive growth in emerging markets partially offset by a $66 million impact from foreign exchange translation rates, reduced pension expense and effective cost management in developed markets.

Operating income increased $159 million, or 10.6%, to $1.66 billion. Excluding the special items in the current year and charges for productivity initiatives in Fiscal 2012, operating income increased $14 million, or 0.8%, to $1.72 billion.

Net interest expense decreased $3 million, to $256 million, reflecting a $9 million decrease in interest expense and a $7 million decrease in interest income, both of which are driven by lower interest rates. Other expense, net, increased $54 million, to $62 million in the current year, primarily due to a $43 million currency translation loss previously discussed recorded during the fourth quarter of Fiscal 2013 resulting from the devaluation of the Venezuelan currency relative to the U.S. dollar, changing the official exchange rate from 4.30 to 6.30. The remaining increase is due to other currency losses this year compared to currency gains last year.

The effective tax rate for Fiscal 2013 decreased to 18.0% from 19.8% in the prior year on a reported basis. Excluding special items in the current year and productivity initiatives last year, the effective rate was 18.2% compared to 21.3% last year. The decrease in the effective tax rate is primarily the result of increased benefits from the revaluation of the tax basis of certain foreign assets, which includes our Fiscal 2013 reorganization, and

 

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reduced charges for the repatriation of current year foreign earnings. See below in “-Liquidity and Financial Position” for further explanation. These amounts were partially offset by lower current year benefits from tax free interest and tax on income of foreign subsidiaries. The prior year also contained a benefit from the resolution of a foreign tax case. Both periods contained a benefit of approximately $15 million from the reversal of an uncertain tax position liability due to the expiration of the statute of limitations in a foreign tax jurisdiction as well as benefits in each year related to 200 basis point statutory tax rate reductions in the United Kingdom.

Income from continuing operations attributable to H. J. Heinz Company was $1.09 billion, an increase of 11.6% compared to $974 million in the prior year on a reported basis. Excluding special items(2), income from continuing operations was $1.17 billion, an increase of 4.5% compared to $1.12 billion in the prior year excluding charges for productivity initiatives.

The impact of fluctuating translation exchange rates in Fiscal 2013 has had a relatively consistent impact on all components of operating income on the consolidated statement of income.

Fiscal Year 2013 Operating Results by Business Segment

North American Consumer Products

Sales of the North American Consumer Products segment decreased $46 million, or 1.4%, to $3.20 billion. Volume decreased 1.1% despite volume improvements in Heinz® ketchup and mayonnaise, Ore-Ida® and non-branded frozen potatoes, Classico® pasta sauces and Delimex® frozen snacks. These volume improvements were more than offset by the planned exit of T.G.I Friday’s® frozen meals and volume declines in Smart Ones® frozen products, reflecting category softness and the discontinuation of bagged meals, and in T.G.I Friday’s® frozen snacks. Higher net price of 0.6% reflects price increases in Heinz® ketchup and Smart Ones® frozen products, reflecting reduced promotions, partially offset by increased promotions on Ore-Ida® frozen potatoes. Sales were also unfavorably impacted by 0.7% from the Company’s strategic decision to exit the Boston Market® license. Unfavorable Canadian exchange translation rates decreased sales 0.2%

Gross profit increased $7 million, or 0.6%, to $1.33 billion, and the gross profit margin increased to 41.7% from 40.9%. Gross margin increased as productivity improvements and slightly higher pricing more than offset increased commodity costs. Operating income decreased $21 million, or 2.6% to $791 million, largely due to higher marketing (+9%) and increased selling and distribution expense (“S&D”) and general and administrative expenses (“G&A”) in Canada related to the implementation of Project Keystone.

Europe

Heinz Europe sales decreased $127 million, or 3.7%, to $3.31 billion, reflecting a 3.4% decline from foreign exchange translation rates. Net pricing increased 0.9%, driven by lower promotions across Continental Europe and on Aunt Bessie’s® frozen potatoes in the U.K. and higher pricing on Heinz® ketchup in Russia, partially offset by higher promotions on Heinz® soup and beans in the U.K. Volume decreased 0.8%, as strong performance in Heinz® ketchup, our Russian business and Heinz® soup in the U.K. were more than offset by volume declines in Heinz® beans and pasta meals and frozen meals in the U.K. and the impact from weak economies and soft category sales in Italy and Continental Europe. The divestitures of two small businesses decreased sales 0.5%.

Gross profit decreased $44 million, or 3.3%, to $1.28 billion, while the gross profit margin increased slightly to 38.5% from 38.3%. The gross margin improvement reflects higher pricing, productivity improvements

 

(2)  All Fiscal 2013 results excluding special items are non-GAAP measures used for management reporting and incentive compensation purposes. See “-Non-GAAP Measures” section below for the reconciliation of all Fiscal 2013 non-GAAP measures to the reported GAAP measures.

 

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and favorable cross currency rate movements related to the sourcing of finished goods across the European supply chain, partially offset by higher commodity costs. The $44 million decrease in gross profit was due to the impact of unfavorable foreign exchange translation rates. Operating income decreased $16 million, or 2.6%, to $593 million, as lower G&A costs reflecting reduced pension and incentive compensation expense were more than offset by unfavorable foreign exchange translation rates and increased investments in our emerging markets businesses.

Asia/Pacific

Heinz Asia/Pacific sales increased $33 million, or 1.3%, to $2.53 billion, despite unfavorable exchange translation rates decreasing sales by 3.0%. Volume increased 2.7%, largely a result of growth in ABC® products in Indonesia, Glucon D® and Nycil® branded products in India resulting from an excellent summer season and increased marketing, strong performance in Japan and continued strong performance of Heinz® and Master® branded sauces in China. These increases were partially offset by declines in soup and infant feeding in Australia and Complan® nutritional beverages in India. Pricing increased 1.6%, due to ABC® products in Indonesia, Complan® nutritional beverages in India and Master® branded sauces in China, partially offset by higher promotional spending in Australia.

Despite unfavorable foreign exchange translation rates, gross profit increased $48 million, or 6.3%, to $805 million, and the gross profit margin increased to 31.8% from 30.3%. The higher gross margin reflects productivity improvements and higher pricing, partially offset by higher commodity costs, particularly sugar costs in Indonesia. SG&A increased as investments in marketing and improved capabilities in our emerging markets businesses were partially offset by foreign exchange translation rates and a gain in the current year on the sale of excess land in Indonesia. Operating income increased by $31 million, or 13.3%, to $266 million. Australia’s operating income improved this year as a result of savings from last year’s productivity initiatives.

U.S. Foodservice

Sales of the U.S. Foodservice segment increased $25 million, or 1.9%, to $1.37 billion. Pricing increased sales 2.7%, largely due to price increases across this segment’s product portfolio to offset commodity cost increases. Volume decreased by 0.8%, as improvements in sauces were offset by declines in frozen soup and ketchup.

Gross profit increased $16 million, or 4.2%, to $406 million, and the gross profit margin increased to 29.6% from 29.0%, as higher pricing more than offset increases in manufacturing and commodity costs. Operating income increased $16 million, or 9.6%, to $186 million, which was primarily due to higher gross profit.

Rest of World

Sales for Rest of World increased $137 million, or 14.0%, to $1.12 billion. Volume increased 12.3% due primarily to increases in both Quero® and Heinz® branded products in Brazil, Heinz® baby food in Mexico reflecting the launch of pouch packaging, and Complan® nutritional beverages in the Middle East. Approximately 60% of the volume gains in Brazil are a result of the favorable impacts from marketing and promotional activities, increased distribution and the successful introduction of Heinz® branded ketchup into this market. Approximately one-third of the volume gains in this segment and 40% of Brazil’s volume gains are a result of one extra month of sales reported in Brazil in the current year, as the business no longer requires an earlier closing date to facilitate timely reporting. This extra month impact was split evenly between the Ketchup & Sauces and Meals & Snacks categories and mainly impacted Quero® branded sales. Pricing across the region increased sales by 11.3%, largely due to price increases on Quero® branded products in Brazil as well as increases in Venezuela taken to mitigate inflation. Venezuela’s pricing was still significantly favorable despite the unfavorable pricing impact of the devaluation of the Venezuelan currency relative to the U.S. dollar that occurred at the beginning of the fourth quarter of this year. (See the “Venezuela- Foreign Currency and Inflation” section below for further discussion on inflation in Venezuela.) Foreign exchange translation rates decreased sales 9.6%.

 

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Gross profit increased $46 million, or 14.0%, to $373 million, due to strong results in Brazil which are a result of significant growth in this business and the extra month of results in the current year, partially offset by unfavorable foreign exchange translation rates and the impact from the Venezuelan currency devaluation. Gross profit margin increased slightly to 33.5% from 33.4% as higher pricing and productivity improvements were offset by increased commodity and other manufacturing costs particularly in Venezuela and Brazil. Operating income increased $8 million, or 7.2%, to $113 million, due to strong performance in Brazil.

Fiscal 2012 Company Results - Fiscal Year Ended April 29, 2012 compared to Fiscal Year Ended April 27, 2011

Sales for Fiscal 2012 increased $949 million, or 9.0%, to $11.51 billion. Net pricing increased sales by 3.7%, driven by price increases across the Company, particularly in the U.S., Latin America, U.K. and China. Volume decreased 0.1%, as favorable volume in emerging markets, Japan and Germany were more than offset by declines in the U.S., Australia and Italy. Emerging markets, global ketchup and the Company’s top 15 brands continued to be the most significant growth drivers, with organic sales growth of 17.6%, 8.0%, and 5.0%, respectively (43.1%, 9.7% and 12.3%, respectively, reported). Acquisitions, net of divestitures, increased sales by 3.6%. Foreign exchange translation rates increased sales by 1.8%.

Gross profit increased $50 million, or 1.3%, to $3.99 billion however, the gross profit margin decreased 270 basis points to 34.7%. Excluding charges for productivity initiatives, gross profit increased $180 million, or 4.6%, to $4.12 billion, largely due to higher pricing, acquisitions and a $59 million favorable impact from foreign exchange, partially offset by lower volume and commodity cost inflation. Gross profit margin excluding charges for productivity initiatives reflected industry-wide price and cost pressure and decreased 160 basis points to 35.8%, resulting from higher commodity and other costs, the impact of acquisitions and unfavorable sales mix, partially offset by higher pricing and productivity improvements.

SG&A increased $236 million, or 10.4% to $2.49 billion. Excluding charges for productivity initiatives, SG&A increased $160 million, or 7.1% to $2.42 billion, and decreased as a percentage of sales to 21.0% versus 21.4% last year. This increase in SG&A reflects a $36 million unfavorable impact from foreign exchange translation rates, as well as increases from acquisitions, higher marketing spending and incremental investments in Project Keystone. In addition, S&D was unfavorably impacted by higher fuel prices, particularly in the U.S., and G&A were higher as a result of strategic investments to drive growth in emerging markets, partially offset by effective cost management in developed markets and lower incentive compensation expense. SG&A, excluding marketing and charges for productivity initiatives, decreased as percentage of sales by 40 basis points, to 17.0%.

Operating income decreased $185 million, or 11.0%, to $1.50 billion. Excluding charges for productivity initiatives, operating income was up $20 million, or 1.2%, to $1.71 billion.

Net interest expense increased $8 million, to $258 million, reflecting a $20 million increase in interest expense, partially offset by a $12 million increase in interest income. The increase in interest income is mainly due to earnings on short-term investments and the increase in interest expense is largely due to interest rate mix in the Company’s debt portfolio and acquisitions made in Fiscal 2011. Other expenses, net, decreased $13 million, to $8 million, primarily due to currency gains in Fiscal 2012 compared to currency losses in Fiscal 2011.

The effective tax rate for Fiscal 2012 was 19.8%. Excluding charges for productivity initiatives, the effective tax rate was 21.3% in Fiscal 2012 compared to 26.2% in Fiscal 2011. The decrease in the effective tax rate is primarily the result of the increased benefits from the revaluation of the tax basis of foreign assets, the reversal of an uncertain tax position liability due to the expiration of the statute of limitations in a foreign tax jurisdiction, the beneficial resolution of a foreign tax case, and lower tax on the income of foreign subsidiaries primarily resulting from a statutory tax rate reduction in the U.K. These benefits were partially offset by the Fiscal 2012 expense for changes in valuation allowances.

 

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Income from continuing operations attributable to H. J. Heinz Company was $974 million, a decrease of 5.3%. Excluding charges for productivity initiatives(3), income from continuing operations attributable to H. J. Heinz Company was $1.12 billion compared to $1.03 billion in Fiscal 2011, an increase of 8.7%. This increase was largely due to higher sales and a lower effective tax rate, partially offset by a lower gross margin and investments in marketing, emerging markets capabilities and Project Keystone.

The impact of fluctuating translation exchange rates in Fiscal 2012 has had a relatively consistent impact on all components of operating income on the consolidated statement of income.

Fiscal Year 2012 Operating Results by Business Segment

North American Consumer Products

Sales of the North American Consumer Products segment decreased $24 million, or 0.7%, to $3.24 billion. Higher net price of 2.8% reflects price increases across the leading brands and reduced trade promotions. Despite volume gains from new product launches, overall volume declined 2.3% across most of our key brands reflecting reduced promotional activity and the impact of price increases. Sales were also unfavorably impacted by 1.6% from the Company’s strategic decision to exit the Boston Market® license effective July 2011. Favorable Canadian exchange translation rates increased sales 0.3%.

Gross profit decreased $51 million, or 3.7%, to $1.32 billion, and the gross profit margin decreased to 40.9% from 42.1%. Gross profit declined as higher pricing and productivity improvements were more than offset by increased commodity and fuel costs, lower volume and the impact from the exit of the Boston Market® license. The decline in gross margin is due to higher commodity costs and unfavorable sales mix. Operating income decreased $21 million, or 2.5% to $812 million, as the decline in gross profit was partially offset by a decrease in G&A reflecting effective cost management, lower incentive compensation expenses and decreased S&D largely due to lower volume.

Europe

Heinz Europe sales increased $204 million, or 6.3%, to $3.44 billion. Net pricing increased 3.7%, driven by price increases across Europe and reduced promotions in the U.K. Volume increased by 0.6% as growth in ketchup across Europe, soup in the U.K., sauces in Germany and Heinz® branded sauces in Russia were offset by declines in Italian infant nutrition and frozen products in the U.K. The Italian infant nutrition business was unfavorably impacted by weakness in the Italian economy and corresponding softness in the category. Favorable foreign exchange translation rates increased sales by 1.9%.

Gross profit increased $52 million, or 4.1%, to $1.32 billion, while the gross profit margin decreased to 38.3% from 39.1%. The $52 million increase in gross profit is due to favorable net pricing, increased volume and foreign exchange translation rates. The decrease in the gross margin reflects the benefits from higher pricing and productivity improvements which were more than offset by higher commodity costs, unfavorable sales mix and a Fiscal 2011 gain on the sale of distribution rights on Amoy® products to ethnic channels in the U.K. Operating income increased $28 million, or 4.8%, to $609 million, due to higher pricing, increased volume and favorable foreign currency translation, partially offset by increased marketing investments.

Asia/Pacific

Heinz Asia/Pacific sales increased $253 million, or 11.3%, to $2.50 billion. Favorable exchange translation rates increased sales by 5.4%. The acquisition of Foodstar in China during the third quarter of Fiscal 2011

 

(3)  All Fiscal 2012 results excluding charges for productivity initiatives are non-GAAP measures used for management reporting and incentive compensation purposes. See “Non-GAAP Measures” section below for the reconciliation of all Fiscal 2012 non-GAAP measures to the reported GAAP measures.

 

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increased sales 3.2%. Pricing increased 2.1% and volume increased 0.5%. Total segment volume was negatively impacted by poor operating results in Australia. The Australian business has been impacted by a challenging market environment, higher promotions and reduced market demand. Price increases were realized on ABC® products in Indonesia, Complan® products in India, and Heinz® infant feeding products in China. Significant volume growth occurred in Complan® nutritional beverages in India, frozen potatoes and sauces in Japan, ABC® sauces in Indonesia, and Heinz® and Master® branded sauces and Heinz® branded infant feeding products in China. Beyond Australia, volume declines were noted in Glucon D® and Nycil® branded products in India.

Gross profit increased $46 million, or 6.4%, to $758 million, and the gross profit margin decreased to 30.3% from 31.7%. The $46 million increase in gross profit largely reflects favorable net pricing and foreign exchange translation rates and the Foodstar acquisition, partially offset by weakness in Australia, and Fiscal 2011 gains from the favorable renegotiation of a long-term supply contract in Australia and the sale of a factory in India. The decline in gross margin is a result of higher commodity costs and poor operating results in Australia which were only partially offset by higher pricing and productivity improvements. SG&A increased as a result of foreign exchange translation rates, the Foodstar acquisition, increased marketing and investments to improve capabilities in our emerging markets businesses. Operating income decreased by $19 million, or 7.4%, to $235 million, reflecting results in Australia.

U.S. Foodservice

Sales of the U.S. Foodservice segment increased $7 million, or 0.5%, to $1.35 billion. Pricing increased sales 2.3%, largely due to price increases across this segment’s product portfolio to offset commodity cost increases. Volume decreased by 1.8%, due largely to ongoing weakness in restaurant foot traffic at some key customers, which was beginning to improve at the end of Fiscal 2012, and the impact of price increases.

Gross profit decreased $27 million, or 6.5%, to $390 million, and the gross profit margin decreased to 29.0% from 31.1%, as pricing and productivity improvements were more than offset by increased commodity and fuel costs and unfavorable volume and product mix. Operating income decreased $14 million, or 7.4%, to $170 million, which is primarily due to higher commodity costs, partially offset by a decrease in G&A expenses which reflects effective cost management, including reduced incentive compensation expense.

Rest of World

Sales for Rest of World increased $509 million, or 108.3%, to $979 million. The acquisition of Coniexpress S.A. Industrias Alimenticias (“Coniexpress” or “Quero”) in Brazil, which was completed at the end of Fiscal 2011, increased sales 76.6%. Higher pricing increased sales by 21.5%, largely due to price increases in Latin America taken to mitigate inflation. (See the “Venezuela—Foreign Currency and Inflation” section below for further discussion on inflation in Venezuela.) Volume increased 11.9% mainly due to increases in Heinz® ketchup and baby food in Latin America. Volume in Latin America was unfavorably impacted in Fiscal 2011 by labor disruptions which occurred in Venezuela. Ketchup and sauces in South Africa and improvements across product categories in the Middle East also drove favorable volume. Foreign exchange translation rates decreased sales 1.7%.

Gross profit increased $158 million, or 93.2%, to $327 million, due mainly to the Quero acquisition in Brazil and higher pricing and volume, partially offset by increased commodity costs. The gross profit margin declined to 33.4% from 36.0% primarily reflecting the impact of the Quero acquisition. Operating income increased $52 million, or 96.9%, to $105 million resulting from higher pricing and volume and the Quero acquisition.

 

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Liquidity and Financial Position

In connection with the Merger, the cash consideration was funded from equity contributions from the Sponsors and cash of the Company, as well as proceeds received by Merger Subsidiary in connection with the following debt financing pursuant to the Senior Credit Facilities and the Notes:

 

    $9.5 billion in senior secured term loans, with tranches of 6 and 7 year maturities and fluctuating interest rates based on, at the Company’s election, base rate or LIBOR plus a spread on each of the tranches, with respective spreads ranging from 125-150 basis points for base rate loans with a 2% base rate floor and 225-250 basis points for LIBOR loans with a 1% LIBOR floor. Prior to the Merger, Merger Subsidiary entered into interest rate swaps to mitigate exposure to the variable interest rates on these term loans and as a result, the rate on future interest payments beginning in January 2015 and extending through July 2020 have been fixed at an average fixed rate of 4.5%,

 

    $2.0 billion senior secured revolving credit facility with a 5 year maturity and a fluctuating interest rate based on, at the Company’s election, base rate or LIBOR, with respective spreads ranging from 50-100 basis points for base rate loans and 150-200 basis points for LIBOR loans, on which nothing is currently drawn, and

 

    $3.1 billion of 4.25% secured second lien notes with a 7.5 year maturity, which are required to be exchanged within one year of consummation of the Merger Agreement for registered notes.

On June 7, 2013, Merger Subsidiary’s indebtedness was assumed by the Company, substantially increasing the Company’s overall level of debt. Refer to Note 10 to our Consolidated Financial Statements for a more thorough discussion of our new debt arrangements.

Cash provided by operating activities was $35 million for the Successor period and cash used for operating activities was $372 million for the Predecessor period, compared to cash provided by operating activities of $350 million for the eight months ended December 23, 2012. The decline reflects the operating loss in the transition period resulting from merger and restructuring related costs and charges incurred on the early extinguishment of debt. The decline also reflects unfavorable movements in accounts payable and income taxes, additional pension funding, partially offset by favorable movements in inventories.

Cash provided by operating activities in Fiscal 2013 was $1.39 billion compared to $1.49 billion in Fiscal 2012. The decline reflects unfavorable movements in receivables, inventories and income taxes as well as increased pension contributions and cash paid in the current year for transaction costs related to the Merger. The unfavorable movement in receivables is largely due to an increase in cash received under the accounts receivable securitization program during Fiscal 2013. These were partially offset by favorable movements in payables. In addition, the settlement of the Foodstar earn-out resulted in a cash payment of $60 million, of which $15 million was reported in cash from operating activities and $45 million was reported in cash from financing activities on the consolidated cash flow statement. Cash paid in Fiscal 2013 for Fiscal 2012 productivity initiatives was $74 million ($29 million of which were capital expenditures) compared to $122 million ($25 million of which were net capital expenditures) in the prior year.

For Fiscal 2012, cash provided by operating activities was $1.49 billion compared to $1.58 billion in Fiscal 2011. The decline in Fiscal 2012 versus Fiscal 2011 reflects the cash impact of spending on productivity initiatives, as well as unfavorable movements in accounts payable and accrued income taxes, partially offset by favorable movements in receivables and inventories. Cash required for productivity initiatives was $122 million.

Cash used for investing activities totaled $21.7 billion for the Successor period and $89.8 million for the Predecessor period, compared to $205 million for the eight months ended December 23, 2012. Reflected in our cash flows used in investing activities for the Successor period is the merger consideration, net of cash on hand, of $21.5 billion.

 

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For Fiscal 2013, cash used for investing activities totaled $373 million compared to $402 million in Fiscal 2012. Capital expenditures totaled $399 million (3.4% of sales) compared to $419 million (3.6% of sales) in Fiscal 2012, which was in-line with planned levels. Proceeds from disposals of property, plant and equipment were $19 million compared to $10 million in Fiscal 2012. The increase was primarily due to cash received for the sale of land in Indonesia in the current year. Proceeds from divestitures were $17 million in Fiscal 2013 compared to $4 million in Fiscal 2012. The Fiscal 2013 decrease in restricted cash was $4 million compared to an increase in restricted cash of $39 million in Fiscal 2012, which primarily represented collateral that the Company was required to maintain in connection with a total rate of return swap entered into during the third quarter of Fiscal 2012. Cash received for the sale of short-term investments in Brazil in Fiscal 2012 was $57 million.

For Fiscal 2012, cash used for investing activities totaled $402 million compared to $950 million of Fiscal 2011. Capital expenditures totaled $419 million (3.6% of sales) compared to $336 million (3.1% of sales) in Fiscal 2011, which was in-line with planned levels. Higher capital spending reflects increased investments in Project Keystone, capacity projects in emerging markets and productivity initiatives. Cash paid for acquisitions in Fiscal 2012 totaled $3 million compared to $618 million in Fiscal 2011 primarily related to Coniexpress in Brazil and Foodstar in China.

Cash provided by financing activities totaled $24.1 billion for the Successor period and $85.4 million for the Predecessor period, compared to cash used for financing activities of $824 million in the eight months ended December 23, 2012. The Merger was funded by equity contributions from the Sponsors totaling $16.5 billion as well as proceeds of approximately $11.5 billion under Senior Credit Facilities (of which $9.5 billion was drawn at the close of the transaction), and $3.1 billion upon the issuance of the Notes. The Company used such proceeds, which was partially offset by $320.8 million of debt issuance costs, to repay $4.2 billion of the Predecessor’s outstanding short and long term debt and associated hedge contracts. Net cash used in the eight months of Fiscal 2013 primarily related to an additional interest acquired in Coniexpress for $80 million and dividend payments of $334 million.

For Fiscal 2013, cash provided by financing activities totaled $257 million compared to cash used of $363 million in Fiscal 2012.

 

    Proceeds from long-term debt were $205 million in Fiscal 2013 and $1.91 billion in Fiscal 2012. During the first quarter of Fiscal 2013, the Company entered into a new variable rate three year 15 billion Japanese yen denominated credit agreement. The proceeds were swapped to 188.5 million U.S. dollars and the interest rate was fixed at 2.22%. During the fourth quarter of Fiscal 2012, the Company issued $300 million 1.50% Notes due 2017 and $300 million 2.85% Notes due 2022. 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. 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.

 

    Fiscal 2013 proceeds from debt issuances were used to terminate a variable rate three year 15 billion Japanese yen denominated credit agreement that was due October 2012, and settle the associated swap, which had an immaterial impact to the Company’s consolidated statement of income. Overall, payments on long-term debt were $224 million in Fiscal 2013 compared to $1.44 billion in Fiscal 2012. The prior year proceeds from debt issuances were used for the repayment of commercial paper and to pay off the Company’s $750 million of notes which matured on July 15, 2011 and $600 million notes which matured on March 15, 2012.

 

    Net proceeds on commercial paper and short-term debt were $1.09 billion in Fiscal 2013 compared to net payments of $43 million in Fiscal 2012.

 

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    Cash payments for treasury stock purchases, net of cash from option exercises, used $26 million of cash in the Fiscal 2013 compared to $119 million in Fiscal 2012. The Company repurchased 2.4 million shares of stock at a total cost of $139 million in Fiscal 2013 and 3.9 million shares of stock at a total cost of $202 million in Fiscal 2012. Under the terms of the Merger Agreement, the Company suspended its share repurchase program from February 13, 2013 through the closing of the acquisition on June 7, 2013.

 

    Dividend payments totaled $666 million in Fiscal 2013, compared to $619 million in Fiscal 2012, reflecting an increase in the annualized dividend per common share to $2.06. Until the effective time of the Merger, the Merger Agreement permitted the Company to continue to declare and pay regular quarterly cash dividends not to exceed $0.515 per share of common stock with record dates and payment dates that were substantially consistent with the Company’s past practice. The Merger Agreement did not permit the Company to pay a prorated dividend for the quarter in which the merger was completed.

 

    During the first quarter of Fiscal 2013, the Company acquired an additional 15% interest in Coniexpress S.A. Industrias Alimenticias (“Coniexpress”) for $80 million. Prior to the transaction, the Company owned 80% of this business. During the second quarter of Fiscal 2012, the Company acquired an additional 10% interest in P.T. Heinz ABC Indonesia for $55 million. P.T. Heinz ABC Indonesia is a 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.

For Fiscal 2011, cash used for financing activities totaled $483 million. Proceeds from long-term debt were $230 million relating to a variable rate, three-year 16 billion Japanese yen denominated credit agreement which was swapped to $193 million and the interest rate was fixed at 2.66%. Payments on long-term debt were $46 million as the proceeds discussed above were used in the funding of the Foodstar acquisition and for general corporate purposes. Net payments on commercial paper and short-term debt were $193 million. Cash proceeds from option exercises, net of treasury stock purchases, provided $85 million of cash. The Company purchased 1.4 million shares of stock at a total cost of $70 million. Dividend payments totaled $580 million.

At December 29, 2013, the Company had total debt of $14.87 billion and cash and cash equivalents of $2.46 billion.

In order to more efficiently manage foreign cash, we had a taxable distribution of earnings from certain foreign subsidiaries to the U.S. in the Predecessor period ended June 7, 2013 totaling approximately $420 million which resulted in a charge to our provision for income taxes of approximately $100 million in the same period. We were able to use existing foreign tax credit carryforwards to offset the tax liability created by such distributions such that there were no incremental cash taxes incurred in the period. Prior to the Merger, our intent was to reinvest the accumulated earnings of our foreign subsidiaries in our international operations, except where remittance could be made tax free in certain situations, and our plans did not demonstrate a need to repatriate them to fund our cash requirements in the U.S. and, accordingly, a liability for the related deferred income taxes was not reflected in the Company’s financial statements as of April 28, 2013. While we continue to expect to reinvest a substantial portion of the future earnings of our foreign subsidiaries in our international operations, as of the Acquisition date we determined that a portion of our accumulated unremitted foreign earnings are likely to be needed to meet U.S. cash needs. For the portion of unremitted foreign earnings preliminarily determined not to be permanently reinvested, a deferred tax liability of approximately $345 million is recorded. The Company currently anticipates repatriating the majority of the accumulated unremitted earnings which are no longer permanently reinvested during 2014 resulting in the utilization of a substantial portion of its foreign tax credit carryforwards. As of December 29, 2013, the Company has not yet finalized its estimate of acquisition date deferred taxes associated with repatriation plans and further adjustments of this estimate may be made as the purchase price allocation is finalized during the measurement period.

 

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At December 29, 2013, approximately $1.4 billion of cash and short-term investments were held by international subsidiaries. A portion of the undistributed earnings of certain of the subsidiaries is not considered to be permanently reinvested for which deferred taxes of $345 million have been provided or taxes have been previously paid. As a result, the Company can repatriate up to $2.6 billion of cash to the U.S. without incurring any additional tax expense. For those undistributed earnings considered to be permanently reinvested, our intent is to reinvest these funds in our international operations and our current plans do not demonstrate a need to repatriate the accumulated earnings to fund our U.S. cash requirements. If we decide at a later date to repatriate these funds to the U.S., the Company would be required to provide taxes on these amounts based on the applicable U.S. tax rates net of credits for foreign taxes already paid.

Berkshire Hathaway has an $8.0 billion preferred stock investment in Parent which requires a 9.0% annual dividend to be paid quarterly in cash or in-kind. The Company made two distributions totaling $360 million in cash to Holdings during the Successor period and expects to continue to make quarterly cash distributions to fund this dividend.

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 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 and interest payments. 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.

Contractual Obligations and Other Commitments

Contractual Obligations

The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements and unconditional purchase obligations. In addition, the Company has purchase obligations for materials, supplies, services and property, plant and equipment as part of the ordinary conduct of business. A few of these obligations are long-term and are based on minimum purchase requirements. Certain purchase obligations contain variable pricing components, and, as a result, actual cash payments are expected to fluctuate based on changes in these variable components. Due to the proprietary nature of some of the Company’s materials and processes, certain supply contracts contain penalty provisions for early terminations. The Company does not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations.

The following table represents the contractual obligations of the Company as of December 29, 2013:

 

     Fiscal Year         
     2014      2015-2016      2017-2018      2019 Forward      Total  
     (In thousands)  

Long Term Debt (1)

   $ 585,724       $ 1,608,122       $ 1,479,042       $ 16,886,521       $ 20,559,409   

Capital Lease Obligations

     13,154         21,826         6,334         10,439         51,753   

Operating Leases

     137,360         112,919         91,320         160,237         501,836   

Purchase Obligations

     1,309,655         454,390         160,057         132,709         2,056,811   

Other Long Term Liabilities Recorded on the Balance Sheet

     113,576         144,671         106,791         317,131         682,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,159,469       $ 2,341,928       $ 1,843,544       $ 17,507,037       $ 23,851,978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts include expected cash payments for interest on fixed rate long-term debt and fixed payments on interest rate swap contracts beginning in 2015 used to mitigate the variable interest payments on the Term Loans Facilities (see Note 10 to our Consolidated Financial Statements contained elsewhere in this prospectus). Due to the uncertainty of forecasting expected variable rate interest payments on the Term Loan Facilities up until 2015 and other variable rate debt not covered by such swap contracts, those amounts are not included in the table.

 

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Other long-term liabilities primarily consist of certain specific incentive compensation arrangements and pension and postretirement benefit commitments. Pension benefits are expected to continue into the foreseeable future, but the Company has not included anything in the 2019 Forward column as it is unable to estimate the amount of such benefit payments. Defined benefit plan contributions for the next fiscal year are expected to be approximately $67 million; however, actual contributions may be affected by pension asset and liability valuation changes during the year. Payments of postretirement benefits for the next fiscal year are expected to be approximately $14.7 million. Long-term liabilities related to income taxes and insurance accruals included on the consolidated balance sheet are excluded from the table above as the Company is unable to estimate the timing of the payments for these items.

At December 29, 2013, 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 $62 million. The timing of payments will depend on the progress of examinations with tax authorities. The Company does not expect a significant tax payment related to these obligations within the next year. The Company is unable to make a reasonably reliable estimate as to when any significant cash settlements with taxing authorities may occur.

Off-Balance Sheet Arrangements and Other Commitments

The Company does not have guarantees or other off-balance sheet financing arrangements that we believe are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

As of April 28, 2013, the Company was a party to two operating leases for buildings and equipment, one of which also includes land, under which the Company has guaranteed supplemental payment obligations of approximately $150 million at the termination of these leases. On June 3, 2013, the Company paid $88.7 million to buy-out one of these leases and recorded it within Property, plant and equipment on the balance sheet as of that date.

On May 31, 2013, the Company entered into an amendment of the $175 million accounts receivables securitization program that extended the term until May 30, 2014. Prior to this amendment, the Company accounted for transfers of receivables pursuant to this program as a sale and removed them from the consolidated balance sheet. This amendment results in the transfers no longer qualifying for sale treatment under U.S. GAAP. As a result, all transfers are accounted for subsequent to this amendment as secured borrowings and the receivables sold pursuant to this program are included on the balance sheet as trade receivables, along with the Deferred Purchase Price. The amount of trade receivables included on the balance sheet at December 29, 2013 which are acting as collateral for these borrowings was $140 million. The Company acted as servicer for $159 million and $162 million of U.S. trade receivables sold through this program that were not recognized on the balance sheet as of April 28, 2013 and April 29, 2012, respectively. In addition, the Company acted as servicer for approximately $76.5 million, $184 million and $206 million of trade receivables which were sold to unrelated third parties without recourse as of December 29, 2013, April 28, 2013 and April 29, 2012, respectively.

The Company has not recorded any servicing assets or liabilities as of December 29, 2013 and April 28, 2013 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.

No significant credit guarantees existed between the Company and third parties as of December 29, 2013.

 

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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)  
     December 29,
2013
     April 28,
2013
     April 29,
2012
     December 29,
2013
    April 28,
2013
    April 29,
2012
 
     (In millions)  

Purpose of Hedge:

               

Intercompany cash flows

   $ 1,300       $ 402       $ 1,090       $ (1   $ (3   $ 13   

Forecasted purchases of raw materials and finished goods and foreign currency denominated obligations

     753         422         578         34        21        (5

Forecasted sales and foreign currency denominated assets

     397         49         245         1        11        9   

Net investment hedges

     8,300         —           —           (191     —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 10,750       $ 873       $ 1,913       $ (157   $ 29      $ 17   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

As of December 29, 2013, the Company’s foreign currency contracts mature within two 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.

We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. Beginning in October 2013, we have used cross currency swaps to hedge a portion of our net investment in such foreign operations against adverse movements in exchange rates. We designated cross currency swap contracts with a total notional value of $8.3 billion between pound sterling and USD, the Euro and USD, the Australian Dollar and USD, and the Japanese Yen and USD, as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates, are economically offset by movements in the fair values of our cross currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in foreign currency translation adjustments within accumulated other comprehensive income (loss), net of tax. The net unrealized loss totaled $(190.6) million as of December 29, 2013. Such amounts will remain in other comprehensive income (loss) until the complete or substantially complete liquidation of our investment in the underlying foreign operations.

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 15 to our Consolidated Financial Statements contained elsewhere in this prospectus)

 

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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 $14.87 billion, $6.01 billion (including $122 million relating to hedge accounting adjustments) and $5.03 billion (including $128 million relating to hedge accounting adjustments) at December 29, 2013, April 28, 2013 and April 29, 2012, respectively. The Company’s debt obligations are summarized in Note 10 to our Consolidated Financial Statements contained elsewhere in this prospectus.

In order to manage interest rate exposure, the Company historically utilized interest rate swaps to convert fixed-rate debt to floating. These derivatives were 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 were attributable to the hedged risk, were recognized in current period earnings. The following table presents additional information related to interest rate contracts designated as fair value hedges by the Company (these derivatives were terminated as part of the Merger agreement):

 

     April 28,
2013
    April 29,
2012
 
     (Dollars in millions)  

Pay floating swaps—notional amount

   $ 160      $ 160   

Net unrealized gains

   $ 33      $ 36   

Weighted average maturity (years)

     7.2        8.2   

Weighted average receive rate

     5.87     6.09

Weighted average pay rate

     1.48     1.57

Prior to the Merger date, Merger Subsidiary entered into interest rate swaps to mitigate exposure to variable rate debt that was raised to finance the acquisition. These agreements were not designated as hedging instruments prior to the acquisition date, and as such, we recognized the fair value of these instruments as an asset with income of $118 million in the Successor period. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Subsidiary. Upon consummation of the acquisition, these interest rate swaps with an aggregate notional amount of $9 billion met the criteria for hedge accounting and were designated as hedges of future interest payments. The net unrealized gains on the interest rate swaps was $148 million as of December 29, 2013 and the weighted average maturity of the contracts is 6.2 years. The swap agreements do not become effective until January 2, 2015, therefore there have been no amounts exchanged through the eight months ended December 29, 2013.

The Company entered into a three-year total rate of return swap with an unaffiliated international financial institution during the third quarter of Fiscal 2012 with a notional amount of $119 million. This instrument was being used as an economic hedge to reduce the interest cost related to the Company’s $119 million remarketable securities. The swap was being accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of interest income. As a result of the Merger, the remarketable securities were repaid and the associated total rate of return swap was terminated. During the fiscal year ended April 28, 2013, the Company recorded a $2 million reduction in interest income, representing changes in the fair value of the swap and interest earned on the arrangement. Net unrealized losses totaled $1 million as of April 28, 2013. In connection with this swap, the Company was required to maintain a restricted cash collateral balance of $34 million with the counterparty for the term of the swap. See Note 15 to our Consolidated Financial Statements for additional information.

The Company had outstanding cross-currency interest rate swaps with a total notional amount of $316 million and $386 million as of April 28, 2013 and April 29, 2012, respectively, which were designated as cash flow hedges of the future payments of loan principal and interest associated with certain foreign denominated variable rate debt obligations. As a result of the merger, these contracts were terminated in May 2013. As a result of exchange rate movement between the Japanese Yen and the U.S. Dollar throughout the fiscal

 

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year, net losses of $70 million on the cross-currency derivatives were reclassified from other comprehensive loss to other expense, net during Fiscal 2013. This net loss on the derivative was offset by a currency gain on the principal balance of the underlying debt obligation. Net unrealized (losses)/gains related to these swaps totaled $(72) million and $20 million as of April 28, 2013 and April 29, 2012, respectively.

Effect of Hypothetical 10% Fluctuation in Market Prices: As of December 29, 2013, the potential gain or loss in the fair value of the Company’s outstanding foreign currency contracts, interest rate contracts and cross-currency interest rate swaps assuming a hypothetical 10% fluctuation in currency and swap rates would be approximately:

 

     Fair Value
Effect
 
     (In millions)  

Foreign currency contracts

   $ 27   

Interest rate swap contracts

   $ 82   

Cross-currency interest rate swaps

   $ 1,068   

However, it should be noted that any change in the fair value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. In relation to currency contracts, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.

Venezuela- Foreign Currency and Inflation

The Company applies highly inflationary accounting to its business in Venezuela. Under highly inflationary accounting, the financial statements of our Venezuelan subsidiary are remeasured into the Company’s reporting currency (U.S. dollars) and exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings, rather than accumulated other comprehensive loss on the balance sheet, until such time as the economy is no longer considered highly inflationary. The impact of applying highly inflationary accounting for Venezuela on our consolidated financial statements is dependent upon movements in the official exchange rate between the Venezuelan bolivar fuerte and the U.S. dollar and the amount of net monetary assets and liabilities included in our subsidiary’s balance sheet.

On March 18, 2013, the Venezuelan government announced the creation of a new foreign exchange mechanism called the Complimentary System of Foreign Currency Acquirement (or SICAD, which stands for Sistema Complimentario de Administración de Divisas). It operates similar to an auction system and allows entities in specific sectors to bid for U.S. dollar to be used for specified import transactions. In December 2013, the regulation that created the SICAD mechanism was amended to require the Central Bank of Venezuela to include on its website the weekly average exchange rate implied by transactions settled via the SICAD auction mechanism. For the weeks of December 23 and December 30, 2013, the SICAD rate posted on the website of the Central Bank of Venezuela was 11.3 BsF/US$. The Company settles its foreign currency denominated payables through the Venezuelan currency exchange board, known as CADIVI. In January 2014, the Venezuelan government announced the formation of the National Center of Foreign Trade (CENCOEX) to replace CADIVI. In addition, the government changed SICAD to include certain types of transactions, including dividends and royalties. The Company has never participated in the SICAD mechanism and has no plans to do so. As a result, the official exchange rate will continue to be used to remeasure the financial statements into U. S. dollars.

On February 8, 2013, the Venezuelan government announced the devaluation of its currency relative to the U.S. dollar, changing the official exchange rate from 4.30 to 6.30 BsF/US$. As a result, the Company recorded a $43 million pre-tax currency translation loss, which was reflected within other expense, net, on the consolidated statement of income during the fourth quarter of Fiscal 2013 ($39 million after-tax loss).

 

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During Fiscal 2012, the Venezuelan government announced that it will be instituting price controls on a number of food and personal care products sold in the country. Such controls have impacted the products that the Company currently sells within this country. In Fiscal 2013, sales in Venezuela represented approximately 3% of the Company’s total sales.

The amount of net monetary assets and liabilities included in our subsidiary’s balance sheet was $109 million at December 29, 2013 translated at the official exchange rate of 6.30 BsF/US$.

Recently Issued Accounting Standards

See Note 3 to our Consolidated Financial Statements contained elsewhere in this prospectus.

Non-GAAP Measures

Included in this report are measures of financial performance that are not defined by generally accepted accounting principles in the United States (“GAAP”). Each of the measures is used in reporting to the Company’s executive management and as a component of the Board of Directors’ measurement of the Company’s performance for incentive compensation purposes. Management and the Board of Directors believed that these measures provided useful information to investors, and included these measures in other communications to investors.

For each of these non-GAAP financial measures, a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure has been provided. In addition, an explanation of why management believes the non-GAAP measure provides useful information to investors and any additional purposes for which management uses the non-GAAP measure are provided below. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure.

Results Excluding Special Items

Management believes that this measure provides useful information to investors because it is the profitability measure used to evaluate earnings performance on a comparable year-over-year basis.

 

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Transition Period Results Excluding Charges for Productivity Initiatives and Merger Related Costs

The adjustments were charges in the transition period for productivity initiatives and merger related costs that, in management’s judgment, significantly affect the year-over-year assessment of operating results. See “—The Merger” and “—Transition Period Productivity Initiatives” sections for further explanation of these charges and the following reconciliation of the Company’s Successor and Predecessor results excluding charges for merger related costs and productivity initiatives to the relevant GAAP measure.

 

     Successor  
     February 8 - December 29, 2013  

(Continuing Operations)

   Sales      Gross
Profit
     SG&A      Merger
Related
Costs
     Operating
(Loss) /
Income
    Unrealized
gain on
derivative
instruments
     Pre-Tax
(Loss) /
Income
    Net (Loss) /
Income
attributable to
Hawk
Acquisition
Intermediate
Corporation II
 
     (In thousands)  

Reported results

   $ 6,239,562       $ 1,651,771       $ 1,501,807       $ 157,938       $ (7,974   $ 117,934       $ (297,705   $ (71,385

Charges for productivity initiatives and merger related costs, and unrealized gain on derivative instruments

     —           168,667         239,332         157,938         565,936        117,934         475,142        336,547   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Results excluding charges for productivity initiatives and merger related costs, and unrealized gain on derivative instruments

   $ 6,239,562       $ 1,820,438       $ 1,262,475       $ —         $ 557,962      $ —         $ 177,437      $ 265,162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Predecessor  
     April 29 - June 7, 2013  

(Continuing Operations)

   Sales      Gross
Profit
     SG&A      Merger
Related
Costs
     Operating
Income
     Pre-Tax
(Loss) /
Income
    Net Loss
attributable to
Hawk
Acquisition
Intermediate
Corporation II
 
     (In thousands)  

Reported results

   $ 1,112,872       $ 383,335       $ 243,364       $ 112,188       $ 27,783       $ (130,327   $ (194,298

Charges for productivity initiatives and merger related costs

     —           5,725         317         112,188         118,230         247,598        180,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Results excluding charges for productivity initiatives and merger related costs

   $ 1,112,872       $ 389,060       $ 243,047       $ —         $ 146,013       $ 117,271      $ (13,655
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

There were no such adjustments in the eight months ended December 23, 2012.

Fiscal 2013 Results Excluding Special Items

The special items are charges in Fiscal 2013 related to the following that, in management’s judgment, significantly affect the year-over-year assessment of operating results:

Transaction-related costs, including legal, accounting and other professional fees, recorded during the fourth quarter of Fiscal 2013 as a result of the Merger. See Note 4 to our Consolidated Financial Statements for further explanation.

A charge primarily related to asset write-downs for the closure of a factory in South Africa.

A currency translation loss recorded in our Venezuelan business due to a devaluation of its currency relative to the U.S. dollar during the fourth quarter of Fiscal 2013. See Note 20 to our Consolidated Financial Statements for further explanation.

 

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A charge for the Company’s early settlement of the earn-out payment that was due in 2014 related to the Fiscal 2011 acquisition of Foodstar. See Note 13 to our Consolidated Financial Statements for further explanation.

The following is the reconciliation of the Company’s Fiscal 2013 results excluding these charges to the relevant GAAP measures.

 

     Fiscal Year Ended  
     April 28, 2013  

(Continuing Operations)

   Sales      Gross Profit      SG&A      Operating
Income
     Pre-Tax
Income
     Net Income
attributable to
Hawk
Acquisition
Intermediate
Corporation II
 
     (Amounts in thousands except per share amounts)  

Reported results

   $ 11,528,886       $ 4,195,470       $ 2,533,819       $ 1,661,651       $ 1,343,643       $ 1,087,615   

Merger related costs

     —           —           44,814         44,814         44,814         27,752   

Charge for South Africa factory closure

     —           3,543         —           3,543         3,543         2,550   

Currency translation loss in Venezuela

     —           —           —           —           42,698         39,132   

Charge for settlement of Foodstar earn-out

     —           —           12,081         12,081         12,081         12,081   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Results excluding special items

   $ 11,528,886       $ 4,199,013       $ 2,476,924       $ 1,722,089       $ 1,446,779       $ 1,169,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Totals may not add due to rounding)

Fiscal 2012 Results Excluding Charges for Productivity Initiatives

The adjustments were charges in Fiscal 2012 for productivity initiatives that, in management’s judgment, significantly affect the year-over-year assessment of operating results. See the above “-Fiscal 2012 Productivity Initiatives” section for further explanation of these charges and the following reconciliation of the Company’s Fiscal 2012 results excluding charges for productivity initiatives to the relevant GAAP measure.

 

     Fiscal Year Ended  
     April 29, 2012  

(Continuing Operations)

   Sales      Gross Profit      SG&A      Operating
Income
     Pre-Tax
Income
     Net Income
attributable to
Hawk
Acquisition
Intermediate
Corporation II
 

Reported results

   $ 11,507,572       $ 3,994,789       $ 2,492,482       $ 1,502,307       $ 1,236,089       $ 974,374   

Charges for productivity initiatives

     —           129,938         75,480         205,418         205,418         143,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Results excluding charges for productivity initiatives

   $ 11,507,572       $ 4,124,727       $ 2,417,002       $ 1,707,725       $ 1,441,507       $ 1,118,348   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA & Adjusted EBITDA (from Continuing Operations)

EBITDA is defined as earnings (net income or loss) before interest, taxes, depreciation and amortization, and is used by management to measure operating performance of the business. Adjusted EBITDA is a tool intended to assist our management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our

 

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core operations. These items include share-based compensation and non-cash compensation expense, other operating (income) expenses, net, and all other specifically identified costs associated with projects, transaction costs, restructuring and related professional fees. EBITDA and Adjusted EBITDA are intended to provide additional information only and do not have any standard meaning prescribed by generally accepted accounting principles in the U.S. or U.S. GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income or other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as measures of our liquidity. The Company’s definition of EBITDA may not be comparable to similarly titled measures used by other companies.

We believe that EBITDA and adjusted EBITDA are useful to investors, analysts and other external users of our consolidated financial statements because they are widely used by investors to measure operating performance without regard to items such as income taxes, net interest expense, depreciation and amortization, non-cash stock compensation expense and other one-time items, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired.

Because of their limitations, neither EBITDA nor adjusted EBITDA should be considered as a measure of discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. Additionally, our presentation of Adjusted EBITDA is different than Adjusted EBITDA as defined in our debt agreements.

 

     Successor     Predecessor  
     February 8 -
December 29,
2013
    April 29 -
June 7,
2013
    April 30 -
December 23,
2012 FY 2013
    April 28,
2013
 
     (29 Weeks)     (6 Weeks)     (34 Weeks)     (52 Weeks)  
     (In thousands)  

(Loss)/income from continuing operations, net of tax

   $ (66,082   $ (191,424   $ 769,272      $ 1,102,045   

Interest expense, net

     395,432        32,472        168,085        255,812   

(Benefit from)/provision for income tax

     (231,623     61,097        142,528        241,598   

Depreciation, including accelerated depreciation for restructuring

     230,987        35,880        194,420        302,057   

Amortization

     48,975        4,276        27,833        42,161   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 377,689      $ (57,699   $ 1,302,138      $ 1,943,673   

Amortization of inventory step-up

     383,300        —          —          —     

Merger related costs

     157,938        112,188        —          44,814   

Severance related costs

     283,142        —          —          —     

Other special charges/(income)

     61,830        (12,136     (5,798     584   

Asset write downs

     2,405        —          —          —     

Unrealized gain on derivative instruments

     (117,934     —          —          —     

Loss from the extinguishment of debt

     —          129,367        —          —     

Other expense/(income), net

     12,233        (3,729     5,216        62,196   

Stock based compensation

     4,800        4,318        36,600        51,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 1,165,403      $ 172,309      $ 1,338,156      $ 2,102,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

The decrease in (loss)/income from continuing operations, net of tax in the transition period was driven by productivity initiatives, merger related costs, and an increase in interest expense related to new borrowings under the new Senior Credit Facilities and the Notes. The decrease was partially offset by an unrealized gain on interest rate swap agreements that served as economic hedges of future interest payments on new borrowings and a decrease in income tax expense. Adjusted EBITDA for the transition period was flat versus the eight months of fiscal year 2013 as category softness and reduced promotional pricing mainly in the U.S. during the transition

 

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period along with one extra week of global sales to align with the new calendar year, was offset by one extra month of sales being reported in Brazil in the prior year as the subsidiary’s fiscal reporting was conformed to the Company’s fiscal period as the subsidiary no longer required an earlier closing date to facilitate timely reporting, the timing of sales in the U.K. related to the Project Keystone go-live in May, and unfavorable exchange translation rates.

Discussion of Significant Accounting Estimates

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Marketing Costs—Trade promotions are an important component of the sales and marketing of the Company’s products and are critical to the support of the business. Trade promotion costs include amounts paid to retailers to offer temporary price reductions for the sale of the Company’s products to consumers, amounts paid to obtain favorable display positions in retailers’ stores, and amounts paid to customers for shelf space in retail stores. Accruals for trade promotions are initially recorded at the time of sale of product to the customer based on an estimate of the expected levels of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer participation, and sales and payment trends with similar previously offered programs. Our original estimated costs of trade promotions may change in the future as a result of changes in customer participation, particularly for new programs and for programs related to the introduction of new products. We perform monthly evaluations of our outstanding trade promotions, making adjustments where appropriate to reflect changes in estimates. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorization process for deductions taken by a customer from amounts otherwise due to the Company. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by the Company’s customers for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time and could have a significant impact on the Company’s results of operations depending on how actual results of the programs compare to original estimates.

We offer coupons to consumers in the normal course of our business. Expenses associated with this activity, which we refer to as coupon redemption costs, are accrued in the period in which the coupons are offered. The initial estimates made for each coupon offering are based upon historical redemption experience rates for similar products or coupon amounts. We perform monthly evaluations of outstanding coupon accruals that compare actual redemption rates to the original estimates. We review the assumptions used in the valuation of the estimates and determine an appropriate accrual amount. Adjustments to our initial accrual may be required if actual redemption rates vary from estimated redemption rates.

Long-lived Assets, including Property, Plant and Equipment—Long-lived assets are recorded at their respective cost basis on the date of acquisition. Buildings, equipment and leasehold improvements are depreciated on a straight-line basis over the estimated useful life of such assets. The Company reviews long-lived assets, including intangibles with finite useful lives, and property, plant and equipment, whenever circumstances change such that the recorded value of an asset, or asset group, may not be recoverable. Factors that may affect recoverability include changes to the planned use of the asset and the closing of facilities. The estimates implicit in a recoverability test require significant judgment on the part of management, and require assumptions that can include: future volume trends and revenue and expense growth rates developed in connection with the Company’s internal projections and annual operating plans, and in addition, external factors such as changes in macroeconomic trends. As each is management’s best estimate on then available information, resulting estimates

 

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may differ from actual cash flows and estimated fair values. When the carrying value of an asset, or asset group, exceeds the future undiscounted cash flows, an impairment is indicated and the asset is written down to its fair value.

Goodwill and Indefinite-Lived Intangibles—Carrying values of goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually, or when circumstances indicate that a possible impairment may exist. Indicators such as unexpected adverse economic factors, unanticipated technological change or competitive activities, decline in expected cash flows, lower growth rates, loss of key personnel, and changes in regulation, may signal that an asset has become impaired.

All goodwill is assigned to reporting units, which are primarily one level below our operating segments. Goodwill is assigned to the reporting unit that benefits from the cash flows arising from each business combination. The Company performs its impairment tests of goodwill at the reporting unit level. Subsequent to the Merger no annual impairment tests have yet been carried out but must be performed within 12 months of the date of the Merger. The Company tests goodwill for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors, including reporting unit specific operating results as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass this qualitative assessment for some or all of its reporting units and perform a two-step quantitative test.

The Company’s estimates of fair value when testing for impairment of both goodwill and intangible assets with indefinite lives under the quantitative assessment are based on a discounted cash flow model as management believes forecasted cash flows are the best indicator of fair value. A number of significant assumptions and estimates are involved in the application of the discounted cash flow model, including future volume trends, revenue and expense growth rates, terminal growth rates, weighted-average cost of capital, tax rates, capital spending and working capital changes. The assumptions used in the discounted cash flow models are determined utilizing historical data, current and anticipated market conditions, product category growth rates, management plans, and market comparables. Most of these assumptions vary among the reporting units, but generally, higher assumed growth rates and discount rates are utilized for tests of reporting units for which the principal market is an emerging market compared to those for which the principal market is a developed market. For each of the reporting units tested quantitatively in Fiscal 2013, we used a market-participant, risk-adjusted-weighted-average cost of capital to discount the projected cash flows of those operations or assets. Such discount rates ranged from 7% to 15% in Fiscal 2013. 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. For years prior to the Merger, we validated our fair values for reasonableness by comparing the sum of the fair values for all of our reporting units to our market capitalization and a reasonable control premium.

During the second quarter of Fiscal 2013, the Company changed its annual goodwill impairment testing date from the fourth quarter to the third quarter of each year. As such, the Company completed its annual review of goodwill during the third quarter of Fiscal 2013. We performed a qualitative assessment over nine of the Company’s 19 reporting units. The results of the quantitative tests performed for these nine reporting units in prior periods were considered, and these tests each indicated that the fair values of these reporting units significantly exceeded their carrying amounts. We concluded that there were no significant events in Fiscal 2013 which had a material impact on the fair values of these reporting units.

For the reporting units which were tested quantitatively, the fair values of each reporting unit significantly exceeded their carrying values. No impairments related to continuing operations were identified during the Company’s annual assessment of goodwill.

Indefinite-lived intangible assets are tested for impairment by either performing a qualitative evaluation or a quantitative calculation of fair value and comparison to carrying amount. The qualitative evaluation is an assessment of factors including, but not limited to, changes in management, overall financial performance, and

 

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other entity-specific events. The objective of the qualitative evaluation is to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The Company can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets. During the fourth quarter of Fiscal 2013, the Company completed its annual review of indefinite-lived intangible assets. No impairments were identified during the Company’s annual assessment of indefinite-lived intangible assets.

As a result of the Merger, the carrying value of the Company’s goodwill and indefinite-lived intangible assets has increased substantially and therefore the Company’s exposure to impairment has increased. The Company has not performed an annual impairment test for goodwill or indefinite-lived intangible assets in the transition period ended December 29, 2013 and has not identified any interim impairment triggers subsequent to the Merger, however, the Company will be required to perform an annual impairment test within one year of the Merger (before June 2014). Fair value estimates used in testing for impairment of goodwill and indefinite-lived intangible assets require judgment and are sensitive to changes in underlying assumptions. Examples of events or circumstances that could reasonably be expected to have an adverse effect on underlying key assumptions and estimated fair value of our reporting units and brands would include a significant decrease in projected future revenues and cash flows, failure to realize all of our projected cost savings, significant prolonged weakness in demand for our products in a specific market or category, adverse competitive pressures that affect our longer term volume and pricing trends and volatility in the equity and debt markets or other country specific factors which could result in a higher discount rate.

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 (income)/expense related to defined benefit programs of $33 million, $17 million, $(4) million, $25 million, and $27 million for the Successor period February 8, 2013 to December 29, 2013, the Predecessor period April 29, 2013 to June 7, 2013, and fiscal years 2013, 2012, and 2011 respectively, which reflected expected return on plan assets of $116 million, $29 million, $251 million, $235 million, and $229 million, respectively. The Company contributed $152 million and $7 million to the defined benefit plans in the Successor period February 8, 2013 to December 29, 2013 and the Predecessor period April 29, 2013 to June 7, 2013, respectively. The Company contributed $69 million to its pension plans in Fiscal 2013 and $23 million in Fiscal 2012. The Company expects to contribute approximately $67 million to its pension plans in Calendar Year 2014.

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 6.2% for the Successor Period ended December 29, 2013, 8.1% for the Predecessor Period ended June 7, 2013 and the year ended April 28, 2013, and 8.2% for the years ended April 29, 2012 and April 27, 2011. For purposes of calculating expense for 2014, the weighted average rate of return will be 6.2%.

 

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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 was 4.5% for the Successor Period ended December 29, 2013, 4.1% for the Predecessor Period ended June 7, 2013, 4.0% for the year ended April 28, 2013, and 4.8% for the year ended April 29, 2012.

Deferred gains and losses result from actual experience differing from expected financial and actuarial assumptions. The pension plans currently have a deferred gain of $99.5 million at December 29, 2013. Deferred gains and losses outside the corridor are amortized through the actuarial calculation into annual expense over the estimated average remaining service period of plan participants, which is currently 10 years. However, if all or almost all of a plan’s participants are inactive, deferred gains and losses are amortized through the actuarial calculation into annual expense over the estimated average remaining life expectancy of the inactive participants.

The Company’s investment policy provides general guidelines to assist plan fiduciaries in making certain decisions with respect to the investment of Plan assets. Those guidelines primarily relate to the selection and monitoring of investment vehicles, investment managers and asset allocation strategies.

The Company’s defined benefit pension plans’ weighted average actual and target asset allocation at December 29, 2013 and April 28, 2013 were as follows:

 

     Plan Assets at     Target Allocation at  

Asset Category

   December 29,
2013
    April 28,
2013
    December 29,
2013
    April 28,
2013
 

Equity securities

     53     62     58     58

Debt securities

     26     29     33     33

Real estate

     8     8     8     8

Cash and cash equivalents

     13     1     1     1
  

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company also provides certain postretirement health care benefits. The postretirement health care benefit expense and obligation are determined using the Company’s assumptions regarding health care cost trend rates. The health care trend rates are developed based on historical cost data, the near-term outlook on health care trends and the likely long-term trends. The postretirement health care benefit obligation at December 29, 2013 was determined using an average initial health care trend rate of 6.0% which gradually decreases to an average ultimate rate of 4.8% in 8 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 $0.9 million and increase the benefit obligation by $15.7 million. A one percentage point decrease in the assumed health care cost trend rates would decrease the service and interest cost by $0.8 million and decrease the benefit obligation by $14.2 million.

 

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Sensitivity of Assumptions

If we assumed a 100 basis point change in the following rates, the Company’s 2014 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

     $(417     $519   

Discount rate used in determining net pension expense

     <$1        $(5

Long-term rate of return on assets used in determining net pension expense

     $(19     $19   

Other benefits

    

Discount rate used in determining projected benefit obligation

     $(18     $20   

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 other non-current liabilities.

The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.

The Company has a significant amount of undistributed earnings of foreign subsidiaries that are considered to be indefinitely reinvested. Our intent is to continue to reinvest these earnings to support our priorities for growth in international markets and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. If we decided at a later date to repatriate these funds to the U.S., the Company would be required to provide taxes on these amounts based on the applicable U.S. tax rates net of credits for foreign taxes already paid. The Company has not determined the deferred tax liability associated with these undistributed earnings, as such determination is not practicable. The Company believes it is not practicable to calculate the deferred tax liability associated with these undistributed earnings as there is a significant amount of uncertainty with respect to the tax impact resulting from the significant judgment required to analyze the amount of foreign tax credits attributable to the earnings, the potential timing of any distributions, as well as the local withholding tax and other indirect tax consequences that may arise due to the potential distribution of these earnings. While we continue to expect to reinvest a substantial portion of the prior and future earnings of our foreign subsidiaries in

 

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our international operations, as of the Acquisition date we determined that a portion of our accumulated undistributed foreign earnings are likely to be needed to meet U.S. cash needs. For the portion of unremitted foreign earnings preliminarily determined not to be permanently reinvested, a deferred tax liability of approximately $342 million is recorded at December 29, 2013. The Company has not yet finalized its estimate of acquisition date deferred taxes associated with repatriation plans and further adjustments of this estimate may be made as the purchase price allocation is finalized during the measurement period.

Input Costs

In general, the effects of cost inflation may be experienced by the Company in future periods. During the Successor period February 8, 2013 to December 29, 2013, the Predecessor period April 29, 2013 to June 7, 2013, and Fiscals 2013, 2012, and 2011, the Company experienced wide-spread inflationary increases in commodity input costs, which is expected to continue in the year ended December 28, 2014. Price increases and continued productivity improvements are expected to more than offset these cost increases.

Stock Market Information

Prior to the Fiscal 2013 year end, H. J. Heinz Company common stock was traded principally on The New York Stock Exchange under the symbol HNZ. As a result of the Merger, the common stock of the Company is now privately held by a subsidiary of Parent, the sole shareholder of the Company. The Company’s stock is no longer traded on The New York Stock Exchange or any other stock exchange or public market. As a result Earnings per share information has not been presented.

Quantitative and Qualitative Disclosures About Market Risk.

This information is set forth elsewhere in this prospectus on pages 66 through 68.

 

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BUSINESS

Our Company

Founded over 140 years ago in Pennsylvania by Henry J. Heinz, we are one of the world’s leading marketers and producers of healthy, convenient and affordable foods specializing in ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition and other food products. Our portfolio of foods is comprised of a global family of leading branded products, including one of the world’s most iconic and recognizable brands, Heinz, The World’s Favorite Ketchup ®. For the Successor period and Predecessor period from April 29, 2013 to June 7, 2013, we generated $6.24 billion and $1.11 billion in consolidated net sales, respectively.

Heinz is the number one brand in ketchup with a global market share of 25% and a U.S. market share of 61% and as a brand is recognized as having the second largest brand value globally within the food industry, excluding the beverage and fast food industries, in Interbrand’s “Best Global Brands 2012” report. Overall, our products had number one or number two local market share positions in more than 50 countries in 2012, including major emerging market countries, and are enjoyed by families worldwide. We also operate a significant global foodservice platform. We believe that our long heritage and reputation for quality and innovation results in category-defining products, strong brand recognition and customer loyalty across our portfolio and around the world wherever our products are sold.

Our top 15 brands (our “Top 15 Brands”) generated approximately 72% of our net sales in the Transition Period. We coordinate product development and distribution across our Top 15 Brands, which also reflect our significant geographic diversity. Across developed market countries our Top 15 Brands are represented by our Heinz 57 namesake, as well as Ore-Ida, Smart Ones, Classico, T.G.I. Friday’s, Weight Watchers, Plasmon, Honig, Golden Circle and Watties. In high growth emerging market countries our Top 15 Brands are represented by Quero in Brazil, Master in China, ABC in Indonesia, Malaysia and the Middle East, Complan in India, the Middle East and Africa and Pudliszki in Poland along with the Heinz brand in many emerging market countries. For the Transition Period, we generated approximately one-third of net sales in the United States and the remaining two-thirds of net sales were generated in markets outside the United States with 25% of consolidated net sales derived from businesses in our emerging market countries.

Through our 65 principal food processing factories, we manufacture (and contract for the manufacture of) our category defining and differentiated products throughout the world.

Our products are sold through our 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.

 

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Core Categories

Our global portfolio of leading brands is focused in three core categories: (i) Ketchup and Sauces, (ii) Meals and Snacks and (iii) Infant/Nutrition. The below chart illustrates the percent of our sales derived from each of our core categories in the Transition Period.

Core Categories

 

LOGO

The table below highlights our local market leadership within our core categories.

 

Core Categories /
(2013 Global Market Size)

  

2013 Local Retail Market Position and Share

   Key Brands

Ketchup and Sauces

($118 billion)

  

#1 in United States Ketchup – 61%

#1 in U.K. Ketchup – 79%

#1 in Canada Ketchup – 83%

   Heinz, Quero, Lea & Perrins,
Classico, ABC, Master, Pudliszki
  

#2 in U.K. Ambient Salad Dressings – 23%

#1 in United States Worcestershire Sauce – 65%

  

Meals and Snacks

($220 billion)

  

#1 in U.K. Soup Ambient – 67%

#1 in U.K. Beans and Kids Meals – 65%

#1 in Australia Beans and Pasta – 65%

#1 in New Zealand Wet Soup – 54%

#1 in United States Frozen Potatoes – 42%

#2 in United States Frozen Nutritional Meals – 30%

#1 in U.K. Frozen Ready Meals – 67%

   Heinz, Quero, ABC, Wattie’s,
Golden Circle, Honig, Ore-Ida,
Smart Ones, Weight Watchers,
Bagel Bites; T.G.I. Friday’s

Infant Nutrition

($58 billion)

  

#1 in Italy Baby Food – 53%

#1 in China Baby Cereal – 33%

#2 in Australia Infant Feeding (Wet) – 37%

   Heinz, Plasmon, Complan
     

Source: Euromonitor for Global Market Size data and Nielsen 52 week value shares (through November / December 2013) for Local Retail Market Position and Share data.

Ketchup and Sauces

With leading market shares in this global and fragmented category, Ketchup and Sauces is our largest and fastest growing core category. Our Ketchup and Sauces category contains our core ketchup, sauces and

 

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condiments, including our iconic Heinz ketchup and gravy brand, Lea & Perrins condiments and sauces, Quero tomato products and condiments and sauces, Classico pasta sauce, ABC condiments and sauces, Master sauces and Pudliszki sauces, among others. For the Transition Period and Fiscal Year 2013, this category generated approximately $3.6 billion and $5.4 billion in net sales, respectively, or 49% and 47% of our consolidated net sales, respectively. Between Fiscal Years 2006 and 2013, we realized a 6% net sales compound annual growth rate (“CAGR”) within this category, and a 4.0% increase in the Transition Period over the comparable eight month period of Fiscal 2013. Critical to our growth in this segment has been the growth and development of our emerging market countries platform.

We believe Ketchup and Sauces will continue to be a leading category given the following factors: substantial upside in many of our developed market countries as we continue to gain share; rapid growth in emerging market countries where the competitive dynamics continue to position us favorably; lower levels of private label penetration in the category; and our continued product and packaging innovations. Additionally, we have the unique advantage of Heinz seed-related technology/science and innovation. We are recognized globally as a leading all-natural hybrid processed tomato seed producer, delivering 5 billion hybrid seeds annually to our farmers and processing partners in nearly 30 countries. Heinz tomato seeds have been bred to improve yield, uniformity, color, disease-resistance and other traits such as tenderness and taste.

Meals and Snacks

Our Meals and Snacks category consists principally of our ambient foods and frozen products offerings, including under our iconic Heinz brand, Quero tomato and vegetable-based snacks, ABC prepared meals, Ore-Ida frozen potatoes, Bagel Bites frozen snacks, T.G.I. Friday’s frozen snacks, Smart Ones and Weight Watchers frozen entrees and snacks, among others.

Our Meals and Snacks category is led by three brands—Heinz, Ore-Ida and Smart Ones. Recent growth stems from brand extension into relevant adjacencies and leveraging packaging innovation to deliver convenience and value. For the Transition Period, we generated $2.5 billion in net sales in this category, a decrease of 7% over the comparable eight month period of Fiscal 2013, accounting for 35% of consolidated net sales, and have realized a 2% net sales CAGR for the period from Fiscal Year 2006 to Fiscal Year 2013. In the Transition Period, $1.4 billion and $1.1 billion of our net sales came from the Frozen and Ambient portfolio, respectively.

Infant/Nutrition

Our Infant/Nutrition category consists of our Heinz branded dry meal products (such as cereal and noodles); wet meal offerings (jar food/pouch); supplements (milk mate); snacks (teething rusks) and infant milk formula. In addition to our Heinz branded products, this category contains strong local brands, including Complan children’s nutrition sold in India, the Middle East and Africa, and Plasmon sold in Italy, among other brands. For the Transition Period, we generated $0.7 billion in net sales in this category, a 2.3% reduction over the comparable eight month period of Fiscal 2013, accounting for approximately 10% of consolidated net sales. We have realized a 5% net sales CAGR for the period from Fiscal Year 2006 to Fiscal Year 2013.

Globally, Infant/Nutrition category sales in emerging market countries generated an 16% CAGR for the 2008 to 2013 period; additionally, sales in emerging market countries currently comprise 66% of category sales, while category sales in developed market countries comprise the 34% balance of category sales. Given the fragmented nature of the competitive landscape and potential for additional market penetration opportunities, especially in emerging market countries, we have continued to focus our Infant/Nutrition efforts on emerging market countries.

 

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Industry Trends

According to industry source Euromonitor, the global packaged foods industry is estimated to be $2.2 trillion at retail prices in 2012 and is generally characterized by stable, resilient growth based on modest price and volume increases. Since 1999 the market value at retail prices has grown at a CAGR of 4.8%, with underlying volume surpassing 730 million tons in 2012. Moreover, excluding foreign currency effects, during this period the industry has never experienced a year of negative growth in market value. Our products currently compete in global categories totaling $372 billion at retail prices in 2012. We believe the long-term fundamentals for the overall global packaged foods industry, as well as our current categories, will continue to be favorable. It is our view that key industry success drivers include: brand support and innovation; quality; value; taste and nutrition; and sustaining strong relationships with retailers.

Developed Market Countries

According to Euromonitor data, the developed market countries continue to be an important component of the packaged food industry, accounting for approximately 56% market value at retail prices in 2013. Of the top ten markets in the world, six are developed market countries, which in the aggregate account for approximately 40% of total global packaged foods market value at retail prices. The United States is one of the largest markets in the world for packaged foods with sales at retail prices of $360 billion in 2013. From 1999 through 2013, the market value for packaged foods at retail prices within developed market countries has grown at a CAGR of 2.3%. We expect several trends to support continued growth of packaged foods sales in the developed market countries including: snacking; convenience; an increased focus on health and wellness; and value for money.

Emerging Market Countries

According to Euromonitor data, while only accounting for approximately 44% of market value at retail prices in 2013, emerging market countries are driving gains in the global packaged foods industry. From 1999 to 2013, the market value of retail sales in emerging market countries grew at a 10.3% CAGR compared to the countries of the developed markets’ 2.3% CAGR over the same time period. The impact of recent economic contraction and current tepid recoveries in the economies of developed market countries have further highlighted packaged food companies’ desire to focus on emerging market countries, which are experiencing robust growth. There are a number of factors driving this expansion, including: relative higher population growth; higher consumer confidence compared to developed markets and rising levels of personal income; increased urbanization, along with the development of modern food retail and food service outlets; emerging preferences and desires for western brands and products, as well as fragmented competitive dynamics. As a result, we expect packaged foods growth in emerging market countries to continue at rates in excess of developed market countries, and for emerging market countries to represent a greater portion of the global packaged foods market value over time.

Competitive Strengths

Stable and Resilient Business

We believe we are well-positioned in a stable industry with consistent performance. Excluding currency fluctuations, our product categories have not experienced a year of negative growth in at least the past ten years. We have leading positions within our three core categories, a deep and broad product portfolio and a diverse geographic footprint.

 

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World-Class Iconic Brands and Leading Global Market Positions

Our globally recognized premier brands are critical to our growth and success. Our Top 15 Brands accounted for approximately 72% and 71% of our consolidated net sales in the Transition Period and Fiscal Year 2013, respectively. The Heinz brand alone generated $3.0 billion in consolidated net sales for the Transition Period.

 

LOGO

According to Interbrand, Heinz is recognized as having the second largest brand value globally within the packaged food industry in its “Best Global Brands 2012” report. Additionally, we have won numerous awards from our customers, vendors, industry and others attesting to our trusted brands, innovation and dynamic marketing. We have been ranked number one in our sector by our customers for the past 14 years in the University of Michigan’s “American Customer Satisfaction Index,” and number one across all industries in 2011. According to British-based magazine Creative Review in 2012, our international “Beanz Meanz Heinz” advertising slogan was named the best global advertising slogan of all time, ahead of Nike’s “Just Do It” and Apple’s “Think Different.”

We have the global number one market share in Ketchup and hold the number two global market share positions in both Sauces, Dressings and Condiments and Frozen Potatoes, in each case based on the 2013 retail value of aggregate sales. We hold the number three global share in Ambient Foods and Frozen Ready Meals, based on the retail value of aggregate sales in 2013. Globally, within Infant/Nutrition, we hold the number three market share position in Prepared Baby Food and number five market share position in Infant Nutrition, including formula, in each case based on the 2013 retail value of aggregate sales.

Exposure to Attractive Product Categories and End Markets

On a blended basis from Fiscal Year 2006 through Fiscal Year 2013, our core segment categories of Ketchup and Sauces, Meals and Snacks and Infant/Nutrition generated a 4% net sales CAGR, with Ketchup and Sauces generating an approximately 6% net sales CAGR, Meals and Snacks generating a 2% net sales CAGR and Infant/Nutrition registering approximately 5% net sales CAGR.

We continue to expect positive momentum in our core categories, particularly given a lower level of private label penetration in our categories and our deep exposure to the rapidly growing emerging market countries where our tiered branding strategy has allowed us to introduce the Heinz brand in some markets alongside strong local offerings, capitalize on new distribution channels and seize on the favorable demographic shifts.

Within our core categories, we also operate a significant Foodservice business (number one brand position in the United States in ketchup, as of 2013, portion control condiments and frozen soup, as of 2010, based on volume share of sales) that manufactures, markets and sells branded and customized products to commercial and

 

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non-commercial food outlets and distributors in the United States and abroad. Trends such as rising incomes, the need for “food away from home,” convenience, a rapidly-growing middle class and increasing urbanization are fueling growth of foodservice outlets in emerging market countries.

Global, Diverse Portfolio with Strong, Profitable Emerging Market Country Growth

Approximately two thirds of the Transition Period and Fiscal Year 2013 net sales were generated in markets outside the United States. As a market leader, based on retail value of aggregate sales in 2013 in each of the U.K., Western Europe, Italy, Australia, New Zealand, Brazil, China, Indonesia, Russia, the Middle East and Africa, our geographically-diverse platform has opened up new opportunities to expand our product portfolio and distribution, particularly in emerging markets.

With 25% of total sales derived from our businesses in emerging market countries in the Transition Period, we maintain an above average degree of emerging market country exposure compared to our peer companies within the S&P 500 Packaged Foods Index (peer average of 13% as of June 2012). We have been operating in emerging market countries for 50 years and have significant breadth and experience operating in and entering into these markets. Additionally, we have a balanced exposure throughout our emerging market countries and are not overly reliant on any one market or region.

Balanced Emerging Market Countries Exposure With $1.8 Billion in Sales for the Transition Period

 

LOGO

Emerging market countries represent a significant growth for delivering our tiered branding strategy wherein we build strong local brands (mainstream brand), while introducing our Heinz brand (premium brand) in certain markets. Sales from emerging market countries have grown in recent years from 14% of total Fiscal Year 2010 Sales to 25% of total Transition Period Sales.

Leading Innovation Platform to Accelerate Growth

Innovation is a major component of our company’s growth strategy, reflecting our belief that innovation differentiates our products and enhances the consumer experience, convenience and value. During the past 24 months, we launched a variety of innovative new products, including Heinz Ketchup with Real Jalapeno (U.S.), Heinz Five Beanz (U.K.), Ore-Ida Simply (U.S.), Smart Ones breakfasts and snacks (U.S.) and Heinz tomato paste and locally-manufactured Heinz tomato ketchup (Brazil). Our company maintains a robust pipeline of new products and innovative packaging, fueled by research and development conducted at our Global Innovation and Quality Center in Pittsburgh, PA, and our Infant Nutrition Center of Excellence in Italy. We expect our new European Innovation Center in Nijmegen, The Netherlands, and our initiative to expand pouch packaging into new markets around the world, will help drive further growth.

 

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Experienced Management to be Enhanced Under Equity Investor Ownership

We have been led by a seasoned management team with significant experience. Berkshire Hathaway Inc. (“Berkshire Hathaway”), one of our equity investors, is led by Chairman and CEO Warren Buffett and is widely recognized for its long history of successful investments, while 3G Special Situations Fund III, L.P., an affiliate of 3G Capital Partners Ltd. (“3G Capital” and, together with Berkshire Hathaway, the “Sponsors”), our other equity investor, has a strong history of generating value through operational excellence (e.g. Burger King Corporation and Anheuser-Busch InBev). This premier sponsorship backing our talented management team will serve to enhance our operating capabilities and competitive positioning.

Business Strategies

We have delivered strong financial performance through a clear and proven strategic framework. Our strategy has five main pillars: expanding the core portfolio; accelerating growth in emerging market countries; driving operational improvements through cost efficiencies and leveraging global scale; focusing on cash flow generation and deleveraging; and making talent an advantage. Around those pillars, our top line sales growth is driven by a trio of growth engines: emerging market countries, Top 15 Brands and global ketchup.

Expanding the Core Portfolio

Our global portfolio of leading brands is focused in three core categories: Ketchup and Sauces, Meals and Snacks and Infant/Nutrition. We intend to grow our core portfolio targeting trends in health and wellness, taste and convenience, as well as strategic acquisitions that enhance, complement or diversify our product lines. Through continuing to invest in our business by leveraging the science of innovation and pursuing adjacencies/channel opportunities, we will continue to expand our core categories.

Accelerating Growth in Emerging Market Countries

We continue to invest in our emerging market countries platform, including via strategic acquisitions, to achieve double-digit sales and profit growth. We believe Heinz was among the first food companies to recognize the potential of emerging markets. We have created and maintained an effective tiered brand strategy in certain geographies with a mainstream brand (including Quero in Brazil) and a premium brand (Heinz), which aids in continuing to build strong local brands, while raising brand awareness of our iconic heritage offerings. Through our long history of investment, we have developed a stable of leading brands in core categories across the world. By leveraging our infrastructure, we will continue to expand distribution and win with local and global customers.

Driving Operational Improvements through Cost Efficiencies and Leveraging Global Scale

We intend to continue our focus on rationalizing our Cost of Products Sold (“COGS”) and reducing our Selling, General and Administrative Expenses (“SG&A”). We plan to further reduce our COGS through leveraging our global scale, as one of the largest food companies in the world. We are taking or have taken numerous operational steps to enhance our infrastructure, including focusing on innovation transfer between our various business segments; strengthening our global procurement and overall supply chain logistics; and investing in Project Keystone, a multi-year program designed to drive productivity and make our Company much more efficient by adding capabilities, harmonizing global processes and standardizing our systems through SAP. Additionally, we plan on adopting Zero Based Budgeting techniques, a method of annual planning designed to build a strong ownership culture by requiring departmental budgets to estimate and justify costs and expenditures from a “zero base,” rather than focusing on the prior year’s base, to drive further efficiencies.

 

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Focusing on Cash Flow Generation and Deleveraging

We intend to tie a portion of management’s incentive compensation to profitability and free cash flow generation, focusing on rapid deleveraging. We believe this compensation plan will foster an ownership mentality for management to encourage strong operational efficiency, which will ultimately build the business for the long term.

Make Talent an Advantage

We are focused on maintaining a best-in-class talent platform. The key to this strategy is maintaining effective business leadership and a “strong bench” of managers across the Company. We believe we offer one of the best career platforms through successful incentive programs, optimization and development of talent and allocating talent against the best opportunities creating an attractive mix of responsibility and visibility for all team members.

Properties and Trademarks

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

     15         4      

Heinz, Classico, Jack Daniel’s*, Wyler’s, Heinz Bell ’Orto, Chef Francisco, Ore-Ida, Bagel Bites, Weight Watchers* Smart Ones, Poppers, T.G.I. Friday’s*, Delimex, Escalon, PPI, Nancy’s, Lea & Perrins, Renee’s Gourmet, HP

Europe

     17         —        

Heinz, Orlando, Karvan Cevitam, Roosvicee, Weight Watchers*, Farley’s, Plasmon, Nipiol, Pudliszki, Honig, De Ruijter, Aunt Bessie*, Lea & Perrins, HP, Amoy*, Daddies, Wyko, Benedicta

Asia/Pacific

     21         —        

Heinz, Wattie’s, ABC, Farley’s, Greenseas, Ocean Blue, Ox & Palm, Ore-Ida, Lea & Perrins, HP, Classico, Weight Watchers*, Cottee’s, Complan, Glucon D, Golden Circle, Original Juice Co., Master, Guanghe

Rest of World

     6         2      

Heinz, Farley’s, Complan, HP, Lea & Perrins, Classico, Wattie’s, Quero

  

 

 

    

 

 

    
     59         6       * Used under license
  

 

 

    

 

 

    

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.

 

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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 the Successor period from February 8, 2013 through December 29, 2013, the Predecessor period from April 29, 2013 through June 7, 2013, Fiscal 2013, 2012 and 2011, one customer, Wal-Mart Stores Inc., represented approximately 10% of the Company’s sales. In addition, the Company has sales to a third party which is controlled by one of the Sponsors totaling less than 1% of the Company’s consolidated net 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 2014 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 had approximately 28,700 full time employees, including open positions, at December 29, 2013.

Segment information is set forth in this report in Note 17 to our Consolidated Financial Statements contained elsewhere in this prospectus.

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.

 

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MANAGEMENT

The operations of Hawk II are managed by the officers of H.J. Heinz Company and the sections of this prospectus discussing management changes and executive compensation speaks to the officers of H.J. Heinz Company, (which includes the officers of Hawk II). The directors of Hawk II and H.J. Heinz Company are the same.

Directors, Executive Officers and Key Employees

Board of Directors

Our current Board of Directors consists of six members, who have been elected pursuant to a shareholders’ agreement among the Sponsors and Holdings. All of the directors are employees of the Sponsors or their respective subsidiaries and are therefore deemed to be affiliates of the Company. The names of our current directors, along with their present positions and qualifications, their principal occupations and directorships held with public corporations during the past five years, their ages and the year first elected as a director are set forth below.

 

Name

   Age      Year First Elected a Director  

Gregory Abel

     52         2013   

Alexandre Behring

     47         2013   

Tracy Britt Cool

     29         2013   

Warren E. Buffett

     83         2013   

Jorge Paulo Lemann

     74         2013   

Marcel Herrmann Telles

     64         2013   

Gregory Abel
Age: 52

Chairman, Director, Chief Executive Officer and President, MidAmerican Energy Holdings Company (“MidAmerican”), an electric and natural gas service provider with more than 8.4 million customers worldwide; Chairman, Director and Chief Executive Officer, PacifiCorp, an affiliate of MidAmerican; Chairman and Director, Nothern Powergrid Holdings Company, an affiliate of MidAmerican; Director, Kern River Gas Transmission Company, Northern Natural Gas Company, NV Energy, Inc. and HomeServices of America, Inc., the second-largest residential real estate brokerage firm in the United States, all affiliates of MidAmerican.

Mr. Abel serves on the board and executive committee of the Edison Electric Institute and the Greater Des Moines Partnership. He also serves on the H.J. Heinz Company board of directors, the Nuclear Electric Insurance Limited board of directors; the Kum & Go, L.C. board of directors; the executive board of the Mid-Iowa Council Boy Scouts of America; the American Football Coaches Foundation board of directors and is a past member of the Drake University board of trustees. Mr. Abel has experience as chief executive officer and director of multiple energy companies. Due to his service as a director in a highly-regulated industry and his management experience, he provides the Board of Directors with strong operational skills.

Alexandre Behring

Age: 47

Managing Partner 3G Capital (2004—present); Director and Chairman, Burger King Worldwide Holdings, Inc. (October 2010-present).

Mr. Behring has served on our Board of Directors since June 2013. Mr. Behring is a co-founder of 3G Capital and has been its managing partner since 2004. Previously, Mr. Behring spent 10 years at GP Investments, Latin America’s largest private-equity firm, including eight years as a partner and member of the firm’s

 

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Investment Committee. He served for seven years, from 1998 through 2004, as CEO of America Latina Logistica (“ALL”), Latin America’s largest railroad and logistics company. He served as a director of ALL until December 2011. Mr. Behring also serves as an alternate director of Lojas Americanas S.A., a retail chain operator based in Brazil. From July 2008 to May 2011, Mr. Behring served as a director of CSX Corporation, a U.S. rail-based transportation company. Mr. Behring is also currently a director of Burger King Worldwide, Inc., an affiliate of 3G Capital.

Mr. Behring was selected to be a member of the Board of Directors because of his extensive leadership experience in developing and operating both public and private companies. Mr. Behring’s particular qualifications and operational, financial and strategic skills strengthen the Board of Directors’ collective knowledge and capabilities.

Tracy Britt Cool

Age: 29

Chairman, Benjamin Moore, a leading manufacturer and retailer of paints and architectural coatings (June 2012-present); Chairman, Larson-Juhl, a manufacturer and distributor of wood and metal framing products (January 2012-present); Chairman, Oriental Trading, a direct merchant of party suppliers, arts and crafts, toys and novelties (November 2012-present); Chairman, Johns Manville, a manufacturer of commercial and industrial roofing systems, fire-protection systems, thermal and acoustical insulation, glass textile wall coverings and flooring (November 2012-present)

Ms. Cool received her B.A. from Harvard University in 2007 and her M.B.A. from Harvard Business School in 2009. Ms. Cool was hired by Berkshire Hathaway in December 2009 as Financial Assistant to the Berkshire Hathaway Chairman. Ms. Cool is also a co-founder of Smart Woman Securities, a nonprofit organization with the goal of educating women about managing their finances.

Ms. Cool has experience as chairman of several Berkshire Hathaway subsidiaries, as well as insight into financial, investment and other complex subjects as a result of her experience as Financial Assistant to the Chairman of Berkshire Hathaway.

Warren Buffett

Age: 83

Chairman and Chief Executive Officer, Berkshire Hathaway Inc. (1970-present); Director, The Washington Post Company (May 1996-May 2011)

Mr. Buffett brings over 43 years of experience as Chairman and Chief Executive Officer of publicly traded and private companies, providing the Board of Directors with a strong background in finance, investing and other complex subjects. His extensive experience in investing and building companies provides the Board of Directors with strong leadership and an investor’s perspective. Mr. Buffett has pledged all of his Berkshire shares, representing 99% of his net worth, to philanthropic endeavors.

Mr. Buffett has significant investment experience, including the evaluation of strategic opportunities and challenges of the Company’s business and its competitive and financial position, as well as experience in public and private company financial reporting practices.

Jorge Paulo Lemann

Age: 74

Founding Partner, 3G Capital (2004-present); Director, Anheuser-Busch InBev (2004-present)

Mr. Lemann founded and was senior partner of Banco de Investimentos Garantia S.A. in Brazil from 1971 through June 1998. Until early 2005, Mr. Lemann was Director of The Gillette Company, Swiss Re and of Lojas

 

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Americanas. He was also Chairman of the Latin American Advisory Committee of the New York Stock Exchange. Mr. Lemann is co-founder and Board of Directors member of Fundação Estudar, a non-profit organization that provides scholarships for Brazilians and Endeavor, an international non-profit organization that supports entrepreneurs in emerging markets. Mr. Lemann is a member of JP Morgan International Council since 2002.

Mr. Lemann has experience as a director of a consumer products company and has a strong international experience in the beverage industry. He also has broad knowledge of strategy, investing and business development.

Marcel Herrmann Telles

Age: 64

Founding Partner, 3G Capital (2004-present); Director, Anheuser-Busch InBev (2004-present); Director, AmBev (2000-present)

Marcel Herrmann Telles has served on our Board of Directors since June 2013. Mr. Telles served as a member of the board of directors of Lojas Americanas S.A., and as Chief Executive Officer of Companhia Cervejaria Brahma (which became AmBev in 2002) from 1989 to 1999. He also served as a member of the board of directors of Burger King Worldwide Holdings, Inc. from 2010 to 2013. From 2009 to 2013, he served as a member of the Advisory Board of ITAU-UNIBANCO, a banking conglomerate based in Brazil. He serves on the board of directors of Fundação Estudar, a not-for-profit foundation in Brazil, and on the board of directors of ISMART, a not-for-profit foundation.

Mr. Telles has experience as the chief executive officer of a large brewing company and major consumer brand and as a director of multiple public and private companies in various industries. He has knowledge of strategy and business development, finance, supply chain management and distribution and leadership development.

See “Certain Relationships and Related Transactions, and Director Independence—Related Person Transactions” for a discussion of certain arrangements and understandings regarding the nomination and selection of certain of our directors.

Executive Officers

The names and ages of our current executive officers, along with their positions and qualifications, are set forth below.

 

Name

   Age    Position

Bernardo Hees

   44    Chief Executive Officer

Paulo Basilio

   39    Chief Financial Officer

Matt Hill

   43    Zone President of Heinz Europe

Eduardo Luz

   41    Zone President of Heinz North America

Eduardo Pelleissone

   40    Executive Vice President of Operations

Hein Schumacher

   42    Zone President of Heinz Asia Pacific

Bernardo Hees is the Chief Executive Officer of the Company. Previously, Mr. Hees served as Chief Executive Officer Burger King Worldwide Holdings, Inc. from 2010 to June 2013 and Burger King Worldwide, Inc. from June 2012 to June 2013 and as Chief Executive Officer of ALL from January 2005 to September 2010. Mr. Hees has also been a Partner at 3G Capital since July 2010. Mr. Hees has experience as Chief Executive Officer of Burger King and for a large railroad and logistics company based in Brazil. He has knowledge of strategy and business development, finance, marketing and consumer insight, risk assessment, leadership

 

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development and succession planning. Mr. Hees earned a degree in Economics from the Pontifícia Universidade Católica (Brazil) and a Masters in Business Administration (“MBA”) from the University of Warwick (United Kingdom). Mr. Hees joined Heinz in June 2013.

Paulo Basilio is the Chief Financial Officer of the Company. Mr. Basilio joined Heinz in June 2013. Mr. Basilio is a partner at an affiliate of 3G Capital and previously served as Chief Executive Officer of ALL from 2010 to 2012, after having served as ALL’s Chief Operating Officer, Chief Financial Officer and Analyst. Mr. Basilio holds a M.Sc. in Economics from Fundacao Getulio Vargas in Brazil.

Matt Hill is the Zone President of Heinz Europe since June 2013. Prior to his appointment, Mr. Hill was President of Heinz UK & Ireland, the second largest business for the Company globally. Mr. Hill joined Heinz in 2010 as Chief Marketing Officer for the UK & Ireland and was promoted after four months to Chief Commercial Officer managing Sales and Marketing, and responsible for delivery of the Annual Plan. He was promoted to President UK & Ireland in April 2012. Prior to joining the Company, Mr. Hill spent 17 years at Unilever in a variety of UK, European and Global marketing roles including 7 years at a Vice President level. Mr. Hill has 20 years’ experience in the consumer packaged goods food industry. He brings experience of chilled, ambient and frozen product categories, of retail and foodservice channels, and of developed and emerging markets. Matt is an Economics graduate from the University of Warwick (United Kingdom). He is based in the United Kingdom and travels extensively throughout Europe.

Eduardo Luz is the Zone President for Heinz North America since January of 2014. Mr. Luz spent his whole career in the consumer packaged goods industry, occupying general management, sales and marketing positions in companies such as AB-InBev and Unilever. Prior to joining Heinz, Mr. Luz was CEO of a privately-owned Brazilian consumer packaged goods company, Flora, from 2011-2013. He has experience in diverse CPG categories such as Beverages, Personal Care, Home Care and Foods, and has worked on international assignments in four different continents. In his current role at Heinz, Mr. Luz has profit and loss and sales and marketing responsibilities for North America, encompassing both the Consumer Products and Food Service business segments for the United States and Canada. Mr. Luz holds a Master’s degree in Business Administration from The Wharton School, with concentrations in Marketing and Operations.

Eduardo Pelleissone is the Executive Vice President of Operations. Prior to joining the Company, Mr. Pelleissone was Chief Executive Officer of ALL. Previously, Mr. Pelleissone held the roles of Chief Operating Officer, Managing Director and General Manager of Agricultural Products at ALL. Before joining ALL, Mr. Pelleissone held several positions at Glencore Importadora e Exportadora SA. Mr. Pelleissone also serves as a Chairman of Brado Logistics S/A, Vetria Mining S/A, and Ritmo Logistics S/A, all subsidiaries of ALL. In addition, Mr. Pelleissone is a director of the Federation of Industries of the State of Sao Paulo, Brazil, the largest professional association of Brazilian industry, and is a director of the National Association of Rail Transport, a Brazilian civil nonprofit entity that promotes the development and improvement of rail transport in Brazil. In his role as Vice President of Operations, Mr. Pelleissone has responsibility for supply chain, procurement and operations. Mr. Pelleissone has an MBA in Logistics, Operations and Services from COPPEAD in Brazil.

Hein Schumacher is the Zone President of Heinz Asia Pacific since June 2013. Prior to being appointed Zone President of Heinz Asia Pacific, Mr. Schumacher had been President of Heinz Greater China since 2011 and previously held the positions of Vice President Finance Heinz Europe, Vice President and Chief Strategy Officer for the Company and Vice President and Chief Financial Officer of Heinz Continental Europe. Mr. Schumacher worked with Royal Ahold NV and Unilever NV prior to the Company in various roles and countries. He graduated in Banking and Finance from the Amsterdam Academy for Banking and Finance and also holds a Master’s degree in politics and international affairs from the University of Amsterdam, The Netherlands. Mr. Schumacher joined Heinz in 2003.

On June 7, 2013, the Company’s former Chief Executive Officer, William R. Johnson, and former Chief Financial Officer, Arthur Winkleblack resigned from their positions as executive officers of the Company. Since

 

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June 7, 2013, the Company has also announced the departures of the following executive officers: Ted Bobby, Executive Vice President, General Counsel and Corporate Secretary; Dave Ciesinski, Vice President of Transition; Steve Clark, Senior Vice President, Chief People Officer; Ed McMenamin, Senior Vice President, Finance; David Moran, Executive Vice President, President & CEO of Heinz North America & Global Infant Nutrition; Meg Nollen, Senior Vice President of Strategy & Investor Relations; Bob Ostryniec, Senior Vice President, Chief Supply Chain Officer & Global ERM; Chris Warmoth, Executive Vice President, Heinz Asia Pacific; Dave Woodward, Executive Vice President, President & CEO of Heinz Europe; Roel van Neerbos, President, Heinz Continental Europe; Diane Owen, Senior Vice President, Corporate Audit; Garry Price, Senior Vice President of Global Strategy and Audit; Kristen Clark, Chief People Officer; Fernando Pocaterra, Zone President of Latin America; John Mastalerz, Principal Accounting Officer and Brendan Foley, Zone President of Heinz North America.

Corporate Governance

Election of Members to the Board of Directors

The Sponsors are party to a shareholders’ agreement with H.J. Heinz Holding Corporation (“Holdings”), the indirect parent corporation of the Company, pursuant to which the members of the Board of Directors of the Company are nominated and elected. For so long as each Sponsor owns at least 66% of the common stock of Holdings originally acquired by such Sponsor, such Sponsor is entitled to nominate and elect three representatives to the board of directors of Holdings and each of its subsidiaries (including the Company). Following the closing of the Merger, all of the current members of the Board of Directors of the Company were so elected, in accordance with the provisions of the Company’s Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State, and the Company’s Amended and Restated Bylaws.

Board Committees

Since the closing of the Merger, when there ceased to be any public listing or trading market for our common stock, our Board of Directors has not established any committees of the Board of Directors and the entire Board of Directors shall act collectively in lieu of any such committees.

Code of Ethics

The Company has adopted a Global Code of Conduct applicable to all directors, officers and employees of the Company, including our chief executive officer, chief financial officer and principal accounting officer. The Global Code of Conduct is posted on our website at www.heinz.com. We intend to disclose on our website any amendments to or waivers of this Global Code of Conduct.

 

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EXECUTIVE COMPENSATION

Discussion and Analysis

The operations of Hawk II are managed by the officers of H.J. Heinz Company and the sections of this prospectus discussing management changes and executive compensation speaks to the officers of H.J. Heinz Company, (which includes the officers of Hawk II). The directors of Hawk II and H. J. Heinz Company are the same.

The following discussion and analysis of compensation arrangements of our named executive officers should be read together with the compensation tables and related disclosures with respect to our current plans, considerations, expectations and determinations regarding compensation.

Introduction

The Merger was consummated on June 7, 2013, after the completion of the Company’s 2013 fiscal year, which ended on April 28, 2013. On October 15, 2013, the Board of Directors approved the change of the Company’s fiscal year end from the Sunday closest to April 30, to the Sunday closest to December 31. As a result, the Company’s revised 2013 fiscal year (“2013T”) reflects an 8-month period, from April 29, 2013 to December 29, 2013.

This Compensation Discussion and Analysis (“CD&A”) provides the disclosure required by Item 402(t) of Regulation S-K for 2013T and outlines compensation earned during 2013T by our named executive officers (the “NEOs”) along with the former executive officers who would have been one of the Company’s NEOs had they still been serving as an executive officer at the end of the fiscal year. This CD&A includes the payments that were made to our former executive officers in connection with the Merger, which were described in detail in the definitive proxy statement for the acquisition filed with the SEC on March 27, 2013.

For 2013T (April 29, 2013 to December 29, 2013), the Company’s “NEOs”, were the following five executives:

 

    Bernardo Hees, Chief Executive Officer (or “CEO”);

 

    Paulo Basilio, Chief Financial Officer (or “CFO”);

 

    Kristen Clark, SVP, Chief People Officer;

 

    Fernando Pocaterra, Zone President, Latin America; and

 

    Brendan Foley, Zone President, North America.

Also included are four former executive officers who would have been one of the Company’s NEOs had they still been serving as an executive officer at the end of the fiscal year:

 

    William R. Johnson, former Chairman, President & CEO;

 

    Arthur B. Winkleblack, former EVP & CFO;

 

    David C. Moran, former EVP & President & CEO of Heinz North America & Global Infant Nutrition; and

 

    Theodore N. Bobby, former EVP & General Counsel.

For purposes of this CD&A the “Committee” refers to the Management Development & Compensation Committee of the Board of Directors of the Company before the Merger and the decisions made by such Committee. Following the Merger, the Board of Directors of the Company did not designate a compensation committee and until it does so, the full Board of Directors of the Company will be responsible for all compensation committee functions.

 

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Key Elements of our NEO Compensation Program—2013T

Compensation Philosophy

Our compensation philosophy is based on pay-for-performance. This philosophy incorporates the Company’s achievement of specific goals as well as achievement by employees of individual performance goals, or “Management by Objectives” (“MBOs”). Our compensation programs are designed to support our business initiatives by:

 

    Rewarding superior financial and operational performance;

 

    Placing a significant portion of compensation at risk if performance goals are not achieved;

 

    Aligning the interests of the NEOs with those of our owners; and

 

    Enabling us to attract, retain and motivate top talent.

In making determinations about compensation, the Board of Directors places great emphasis on the following factors specific to the relevant individual and his or her role:

 

    An individual’s performance and long-term potential; and

 

    The nature and scope of the individual’s responsibilities and his or her effectiveness in supporting our long-term goals.

Elements of Compensation and Benefit Programs

To achieve our goals, the Board of Directors utilizes the following components of compensation: (1) base salaries, (2) an Annual Incentive Plan, (3) discretionary stock option grants that may be awarded from time to time (4) benefits and, (5) limited perquisites.

Compensation Objectives and Principles—2013T

The 2013T NEO compensation programs were designed to reward superior financial performance and achieve the following objectives, which were previously established by the Committee and the Board of Directors:

 

    Link the pay opportunity for each NEO to the performance of the Company, through the achievement of the financial and strategic objectives established by the Board of Directors;

 

    Align the interests of NEOs to our owners by paying a significant portion of compensation (annual bonus plus stock options) as performance-based compensation;

 

    Provide competitive compensation to attract and retain superior executive talent for the long term; and

 

    Provide a balance between risk and potential reward for NEOs by:

 

    Achieving a balance of short-term and long-term goals;

 

    Discouraging unnecessary or excessive assumption of risks that would threaten the reputation or sustainability of the Company; and

 

    Encouraging appropriate assumption of risk for competitive advantage.

The key principles that have guided the Company’s decision-making process on executive compensation matters include:

 

    Applying a broader and more flexible orientation, generally a range around the median of comparator company compensation, which provided the ability to:

 

    Establish pay levels commensurate with each NEO’s individual performance;

 

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    Manage salaries and total compensation opportunity based on changing business conditions; and

 

    Differentiate compensation based on a number of factors, including performance.

Executive Pay Guidelines—2013T

The Company’s Executive Pay Guidelines continued into the beginning of 2013T and were later updated for the new CEO and CFO. The Long Term Incentive Program (“LTIP”) Awards included the value that would have been granted under historic practice as restricted stock units and stock options. Long Term Performance Program Award guidelines are also shown below, as applicable. The 2013T Executive Pay Guidelines, which are expressed as a percentage of base salary and reflect target award opportunities, are shown below.

Current Executives

 

     Annual Incentive    

LTIP Awards

   Stock Options     

LTPP Awards

CEO

     200   0      Discretionary       0

CFO

     150   0      Discretionary       0

Other NEOs

     70   50% or 55%      Discretionary       40% or 75%

Former Executives

 

     Annual Incentive     LTIP Awards     Stock Options      LTPP Awards  

Chairman, President & CEO

     220     320     0         275

Executive Vice Presidents

     100     165     0         85

Cash Compensation—2013T

Base Salaries

Base salaries are paid in accordance with standard market practice and are the foundation for all of the NEO compensation programs as the target amounts of incentives are linked to salary, as set forth in the Executive Pay Guidelines. As salary changes, the target Annual Incentive Plan (the “AIP”) typically changes proportionately. Salaries of the NEOs have typically been reviewed on an annual basis, as well as at the time of a promotion or other change in responsibilities. Salary increases, if any, were based on an evaluation of the individual’s most recent performance rating and difficulty of replacement. For 2013T, an increase in base salary was approved for Kristen Clark, Fernando Pocaterra and Brendan Foley as they moved into new senior leadership roles after the close of the acquisition. The MD&CC approved no salary increases for the former executive officers.

Annual Cash Incentive Awards

NEOs have been eligible to earn annual cash awards under the AIP (see the chart under “Management Development and Compensation Committee Decisions—Performance Measurements—Financial Metrics”). The AIP was intended to reward NEOs for achieving targeted levels of performance. The upside and downside variation around the target award opportunity facilitated the objective of varying annual cash compensation to reflect our operating performance and the contribution of each NEO. The 2013T target awards and payments are described below in the narrative following the Summary Compensation Table under the heading “Annual Incentive Plan-Material Factors.”

 

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Long-Term Incentive Compensation—2013T

Overview

Our Long-Term Incentive (“LTI”) Compensation Program consisted of cash-based awards with an equal value as to the previously awarded performance-based RSUs, stock options and LTPP awards pursuant to historic practice. These cash-based awards were granted on May 8, 2013 and, as per the Merger Agreement, were paid after the close of the acquisition based on a prorated number of full and partial months between the grant date and June 7, 2013.

Long Term Incentive Program

In 2013T, the Committee approved cash awards to reflect the value of previously awarded performance-based RSUs and stock options. Target awards were based on the established Executive Pay Guidelines. In making this grant, the Committee determined the value of the award to be granted to participants and the vesting and forfeiture provisions. The vesting date of the grant awarded in May 2013 was the earlier of the close of the acquisition or the third anniversary of the grant. The award would be forfeited for any termination prior to the vesting date. The Company’s LTIP is described below under “Long Term Incentive Program—Material Factors.”

Long-Term Performance Program

In 2013T, the Company did grant the LTPP award however without the performance-based metrics of total shareholder return and after-tax return on invested capital. The LTPP awards provided for similar target values with cash payments based on the portion of the 24-month period completed from grant date until close of the acquisition on June 7, 2013. The target LTPP awards for NEOs were based on the established Executive Pay Guidelines. The Company’s two LTPPs are described below under “Long Term Performance Programs—Material Factors.”

Stock Options—New Program

In 2013T, the Board of Directors approved the number of non-qualified stock options of the H.J. Heinz Holding Company to grant to each NEO. The stock option awards for NEOs are discretionary. All options were granted at an exercise price equal to the value of the Company’s Common Stock on the date of grant. Accordingly, the stock options would have value only if the market price of the Company’s stock increases after the grant date. The stock options vest 100% on July 1, 2018 for active employment and a pro-rata vesting schedule dependent on the termination reason. The Company’s Stock Option Program is described below under “Stock Options—Material Factors.”

Cash Equivalent RSU Replacement

During 2013T, Senior Management established a cash-based RSU replacement award for those who were previously eligible for an annual grant of performance-based RSUs. The award was meant to replace the award opportunity during the 6-month period of July 1, 2013 to December 29, 2013. The Company’s award program is described below under “Cash Equivalent RSU Replacement-Material Factors.” The award will vest 25% on each anniversary of the grant date.

Management Development and Compensation Committee Decisions—2013T

Analytical Tools

Historically, the Company has analyzed NEO compensation by utilizing Tally Sheets and reviewing peer group compensation data. However for 2013T, no such analysis was performed due to the transition to a privately-held Company and the shortened reporting period.

Independent Executive Compensation Advisor—2013T

In determining total compensation and allocating the elements of total compensation for Messrs. Johnson, Winkleblack, Moran and Bobby, the Committee was assisted by: (i) the ex-CEO and the ex-Chief People Officer, who made recommendations regarding potential changes to the NEO pay programs (the ex-CEO did not

 

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participate in discussions regarding his pay) based on the transition to a privately-held company; (ii) an independent executive compensation consultant from Mercer retained exclusively by the Committee to advise the Committee on all matters related to CEO and other NEO compensation for the period from April 29, 2013 until June 7, 2013; and (iii) the Total Rewards staff within the Company’s Human Resources Department, which acted as a liaison between the Committee and its executive compensation consultant and collected information and prepared materials for the Committee’s use in making compensation decisions. Since the selection of the individual Mercer consultant by the Committee in Fiscal Year 2007, the Mercer consultant did not provide any services to management or other Company employees. The Committee’s consultant participated in two Committee meetings during the period from April 29, 2013 until June 7, 2013.

In 2013T, Mercer received $4,133 in fees from the Company in connection with the services related to executive and director compensation. Mercer and its affiliates also received an additional $76,918 in fees from the Company in 2013T in connection with its provision of other services, which consisted primarily of services related to compensation tools and surveys, as well as our subsidiaries’ generally available pension plans as requested by the pension plan trustees. The Mercer teams that provide these services are independently managed and are separate from the compensation consultant who provided executive and director compensation services. The decision to engage Mercer on all other compensation-related services was made by management and the pension plan trustees and reported to the Committee.

Performance Measurements—2013T

Performance was Measured and Rewarded Based on Both:

 

1. Total Company and/or business unit financial metrics; and

 

2. Individual performance.

Financial Metrics

The financial metrics, as described further under “Annual Incentive Plan-Material Factors,” used for all NEO compensation programs are similar to those that the investment community uses to project the future return from a company’s stock:

 

1. Sales growth;

 

2. Profitability; and

 

3. Cash flow generation.

The specifics regarding how these metrics determined equity awards and incentive plan payouts are described below under “Annual Incentive Plan—Material Factors.”

Individual Performance

Our MBO process was used by the Board of Directors to establish individual performance goals for each of the current NEOs and then to measure actual results against those goals. Without any NEOs present, the Board of Directors assigned a performance rating to each current NEO.

The Company measures individual achievement based on a participant’s overall achievement of his or her MBOs, expressed as a percentage of completion (with 100% being completion of all MBOs). If a participant’s Individual Achievement is less than 50%, then he or she will not receive a bonus payout for that year even if the Business Achievement target is met. At the end of each year, the Board of Directors evaluates the CEO and reviews the individual performance evaluations that the CEO completed for each NEO.

 

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For 2013T, the CEO and CFO had four key performance indicators that were evaluated to measure performance of the relevant MBO. Each MBO was expressed as a percentage of completion (with 100% being full completion). The MBOs included both quantitative and qualitative metrics associated with the responsibilities of each individual NEO. The results for the NEOs were 100% of target.

Additional Information—2013T

Risk Analysis of NEO Compensation Policies and Practices

Members of the Company’s management team reviewed the design of the Company’s annual and long-term incentive programs for NEOs in achieving the Company’s objective of an appropriate balance between risk and potential reward for executives. Based on an assessment of current programs it was concluded that the 2013T executive compensation plans were designed in a manner to:

 

    Achieve a balance of short and long-term results aligned with key stakeholder interests;

 

    Discourage executives from taking unnecessary or excessive risks that would threaten the reputation and/or sustainability of the Company; and

 

    Encourage appropriate assumption of risk to the extent necessary for competitive advantage purposes.

Payments Initiated as A Result of the Close of the Transaction on June 7, 2013 and Termination of Employment

As a result of the close of the acquisition on June 7, 2013, the following payments were used to determine the fiscal year NEOs and are included in the Bonus column of the Summary Compensation Table, because performance results were set at target levels.

 

1. FY13-14 LTPP—value based on prorating target award value 55.49% (404 days out of 728 days);

 

2. FY14-15 LTPP—value based on prorating target award value 8.33% (2 months out of 24 months); and

 

3. FY14 LTIP—value based on prorating target award value 5.55% (2 months out of 36 months).

As a result of the close of the acquisition on June 7, 2013, the following three payments were used to determine the fiscal year NEOs and are included in the All Other Compensation column of the Summary Compensation Table:

 

1. Unvested RSUs—value of unvested RSUs based on the Merger cash price $72.50 per share;

 

2. Accrued Cash Dividend Equivalents—value of accrued cash dividend equivalents associated with each unvested RSU; and

 

3. Outstanding Stock Options—value of the intrinsic gain from outstanding stock options based on the Merger cash price of $72.50 per share.

As a result of the close of the acquisition on June 7, 2013 the H. J. Heinz Company Supplemental Executive Retirement Plan (“SERP”) was terminated on October 31, 2013, and these payments were also used to determine the fiscal year NEOs and are included in the All Other Compensation column of the Summary Compensation Table.

 

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Additionally, as a result of the close of the Merger on June 7, 2013 and terminations of employment, the following payments were included in the determination of the 2013T NEOs and are reported in the All Other Compensation column of the Summary Compensation Table except for pro-rated bonus which is reported as Non-Equity Incentive Plan Compensation:

 

1. Severance Protection Agreement Payments

Messrs. Johnson, Winkleblack, Moran and Bobby had severance protection agreements (SPAs). Under these SPAs the following payments were made and were included in the determination of the NEOs.

 

    All accrued compensation and a pro-rated bonus;

 

    A lump sum payment equal to three times the sum of the executive’s annual salary and his three-year actual bonus average (for Fiscal Years 2011, 2012, and 2013) as severance pay;

 

    A lump sum payment of a retirement benefit determined by taking into account an additional three years of age, service, and contributions for purposes of calculating such retirement benefits; and

 

    Life insurance, (except for that of William R. Johnson, which was fully funded), medical, dental, and hospitalization benefits for the former executives and their dependents for three years, at the same level as immediately prior to the change in control or at the same level as other similarly situated executives who continued in the employ of the Company. These amounts may be reduced to the extent that the executive becomes eligible for any such benefits pursuant to a subsequent employer’s benefit plans.

In addition, the following payments were made, as applicable, to all NEOs, except Bernardo Hees and Paulo Basilio:

 

1. Retention RSUs and Accrued Cash Dividend Equivalent—value of retention RSUs based on the Merger cash price $72.50 per share along with the value of the accrued cash dividend equivalents;

 

2. Employees’ Retirement System of H. J. Heinz Company Plan “A/D” for Salaried and Non-Union Hourly Employees (“Plan A”)payments made pursuant to Plan A; and

 

3. SERPpayments made under the SERP.

Management Changes In 2013T

Effective June 7, 2013, Bernardo Hees became Chief Executive Officer and Paulo Basilio became Chief Financial Officer. Effective July 1, 2013, executive-level appointments included Kristen Clark (SVP, Chief People Officer), Fernando Pocaterra (Zone President, Latin America), and Brendan Foley (Zone President, North America).

In addition to the Company’s five new NEOs for 2013T, we have provided disclosure for W.R. Johnson and A.B. Winkleblack as former CEO and CFO, respectively. We have also provided disclosure for D.C. Moran, and T.N. Bobby elsewhere in this section, as required by Item 402(a)(3)(iv) of Regulation S-K, as these two executive officers would have been Company NEOs had they still been serving as an executive officer at the end of 2013T.

 

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SUMMARY COMPENSATION TABLE (2013T)

 

                Bonus (1) (d)           Non-Equity Incentive
Plan Compensation (g)
                   

Name and

Principal Position (a)

  Year
(2) (b)
    Salary ($)
(c)
    Annual
Incentive
Plan
Awards
($)
    Long
Term
Incentive
Awards
($)
    Stock
Awards
($) (e)
    Option
Awards
(3) ($) (f)
    Annual
Incentive
Plan
Awards
(4) ($)
    Long Term
Performance
Program
Awards ($)
    Change in
Pension
Value &
Nonqualified
Deferred
Compensation
Earnings
(5) ($) (h)
    All Other
Compen-
sation
(6) (7)
(8) (9) ($) (i)
    Total
($) (j)
 

B. Hees

    2013T        561,538        —          —          —          7,290,000        1,166,667        —          —          151,275        9,169,480   

Chief Executive Officer

                     

P.L. Basilio

    2013T        280,769        —          —          —          2,916,000        437,500        —          —          152,825        3,787,094   

Chief Financial Officer

                     

K.C. Clark (10)

    2013T        296,827        210,000        108,603        —          729,000               —          —          5,453,078        6,797,508   

SVP, Chief People Officer

                     

F.E. Pocaterra (10)

    2013T        325,600        46,667        123,653        —          729,000        378,933        —          39,890        3,070,320        4,714,063   

Zone President, Heinz Latin America

                     

B.M. Foley (10)

    2013T        319,405        233,333        196,270        —          1,215,000        —          —          19,987        2,349,856        4,333,851   

Zone President, Heinz North America

                     

W.R. Johnson (11)(12)

    2013T        150,000        —          2,512,956        —                 369,566        —          50,517        107,409,498        110,492,537   

Former Chairman, President &

    2013        1,295,019        2,860,000        3,500,000        1,559,993        2,600,000        —          —          81,662        1,202,415        13,099,089   

Chief Executive Officer

    2012        1,299,618        —                 1,560,011        2,499,997        3,400,000        4,338,125        1,794,928        1,264,140        16,156,819   

A.B. Winkleblack (12)

    2013T        77,885        —          428,087        —          —          87,223        —          411,615        20,179,882        21,184,692   

Former Executive Vice President

    2013        672,414        675,000        573,750        539,983        573,748        —          —          169,241        290,402        3,494,538   

& Chief Financial Officer

    2012        674,809        —                 540,010        573,748        801,300        697,255        172,628        308,772        3,768,522   

D.C. Moran (12)

    2013T        118,558        —          434,429        —          —          139,411        —          358,570        28,981,755        30,032,723   

Former Executive Vice President &

    2013        682,375        411,000        582,250        548,006        582,248        264,638        —          24,036        2,472,672        5,567,225   

President and Chief Executive

    2012        684,847        —          —          547,995        582,250        783,994        713,346        162,241        1,748,264        5,222,937   

Officer of Heinz North America & Global Infant/Nutrition

                     

T.N. Bobby (12)

    2013T        83,077        —          304,418        —          —          97,690        —          4,604,940        16,884,967        21,975,092   

Former Executive Vice President and General Counsel

                     

 

(1) Pursuant to the separation agreements for Ms. Clark and Mr. Foley, the 2013T AIP awards were paid at 100% of target and for Mr. Pocaterra, the personal portion (20%) of the AIP reported was paid at 100% of target. Pursuant to the cash-based LTI awards, the prorated portion of the FY13-14 LTPP, FY14-15 LTPP and FY14 LTIP were paid at 100% of target. The payments that are fixed at 100% of target pursuant to the agreements are reported in this column (d). The portions of the awards that will be paid based on actual results against target are reported in column (g).
(2) “2013T” represents the transition fiscal year period of April 29, 2013 to December 29, 2013. “2012 and “2013” reflect the previously disclosed fiscal year compensation.
(3) The value of the stock option awards is equal to their grant date fair value as computed in accordance with FASB ASC Topic 718. For a discussion of the assumptions made in the valuation of the stock option awards in this column (f), see Note 12, “Employees’ Stock Incentive Plans and Management Incentive Plans” to our Consolidated Financial Statements contained elsewhere in this prospectus.
(4) Amounts reported in this column (g) reflect the portions of the 2013T AIP awards that are attributable to either actual business unit or individual performance results against target, as described in Footnote (1) above.
(5) Includes for 2013T for Ms. Clark and Messrs. Pocaterra, Foley, Johnson, Winkleblack, Moran, and Bobby, respectively, the following amounts: (i) the annual change in net present value of pension benefits for each executive, which is the difference between the accrued lump sum values for pension accruals as of May 1, 2013 and December 29, 2013: $0, $39,890, $19,987, $0, $411,615, $358,570, and $4,604,940, respectively; and (ii) for Mr. Johnson, the portion of interest accrued (but not currently paid or payable) on deferred compensation at a rate above 120% of the long-term Applicable Federal Rate (“AFR”): $50,517. Messrs. Hees and Basilio do not participate in this program which results in no reported value.
(6)

In accordance with SEC rules, disclosure of perquisites and other personal benefits is omitted if the aggregate amount of such compensation for an executive is less than $10,000 for the year. If the total amount is $10,000 or more, each perquisite must be identified by type, and if the amount of any perquisite exceeds the greater of $25,000 or 10% of total perquisites, the dollar value must be disclosed. Perquisites and other personal benefits provided to NEOs

 

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  include financial counseling, tax preparation services, allowance for an automobile, executive group umbrella liability insurance, private security and limited use of the corporate aircraft. Neither Messrs. Hees nor Basilio received any personal benefits from these perquisites as they elected not to participate in the programs.
(7) In addition to the perquisites described in Footnote (6) above, this column includes for 2013T for Messrs. Hees, Basilio, Pocaterra, Foley, Johnson, Winkleblack, Moran, Bobby, and Ms. Clark, the amounts contributed by the Company under its Employee Retirement and Savings Plan and the Excess Plan: $0, $2,406, $74,819, $47,812, $664,517, $190,443, $197,359, $152,683, and $50,259, respectively. The 2013T paid premiums allocable to executive life insurance provided through the Company were $1,275 and $419 for Messrs. Hees and Basilio, respectively. The executive life premiums for the other NEOs were paid during the last full fiscal year, therefore, no premiums were paid on their behalf during 2013T. The amounts in column (i) do not include any value attributable to the Executive Estate Life Insurance Program (see the description in “Executive Estate Life Insurance Program” below).
(8) Ms. Clark returned to the U.S. on September 30, 2013. The Company’s Global Assignment Program (the “Program”) is designed to relocate and support employees who are sent on assignment outside their home country. In addition to place the employees in the same economic condition in the host country as they would have been in their home country. Among other benefits, the Program provided a housing allowance comprised of a housing budget of ($50,529) and home country property management ($1,500); a utilities allowance ($2,000); destination services ($241); a cost of living allowance to help offset the difference in the cost of goods and services in the home location, compared to the cost of the same or similar goods and services in the host location ($12,219). These benefits are paid on a tax free basis. The Company also provided tax preparation services and audit support services, if needed ($20,809) and tax equalization designed to ensure that the employee pays tax at the same state and federal rates as if the employee remained in the employee’s home country, including a tax payment and gross-up for additional U.S. taxes paid as a result of the global assignment ($1,147,573), and the Company will assume responsibility for foreign taxes while on assignment ($1,692,618). This arrangement is designed to ensure that there is no undue hardship or windfall due to taxes while on assignment. The larger than normal gross-up and foreign tax payments are related to the accelerated cash payment of the Heinz equity at the time of the close of the acquisition.

 

     Benefits under the Program that were paid to or on behalf of Ms. Clark in Canadian Dollars (“CAD”) have been converted from CAD to United States Dollars (“USD”) using the average daily exchange rate for 2013T, which was 0.96246 USD per CAD.

 

     Mr. Moran returned to the U.S. on May 1, 2013. The Company’s Global Assignment Program (the “Program”) is designed to relocate and support employees who are sent on assignment outside their home country. In addition to place the employees in the same economic condition in the host country as they would have been in their home country. Among other benefits, the Program provides a utilities allowance ($810); destination services ($1,774); a cost of living allowance to help offset the difference in the cost of goods and services in the home location, compared to the cost of the same or similar goods and services in the host location ($2,625); and a home leave allowance ($4,234). Additionally, the Program provides certain other benefits to assist employees, including shipment and storage of personal effects ($41,431). These benefits are paid on a tax free basis. The Company also provided tax preparation services and audit support services, if needed ($74,229) and tax equalization designed to ensure that the employee pays tax at the same state and federal rates as if the employee remained in the employee’s home country, including a gross-up for additional U.S. taxes paid as a result of the global assignment ($2,237,144), and the Company will assume responsibility for foreign taxes while on assignment ($7,203,743). This arrangement is designed to ensure that there is no undue hardship or windfall due to taxes while on assignment. The larger than normal gross-up and foreign tax payments are related to the accelerated cash payment of the Heinz equity at the time of the close of the acquisition.

 

     Benefits under the Program that were paid to or on behalf of Mr. Moran in British pound sterling (“GBP”) have been converted from GBP to United States Dollars (“USD”) using the average daily exchange rate for 2013T, which was 1.5727 USD per GBP.

 

(9) Messrs. Hees and Basilio received benefits associated with their personal relocation to Pittsburgh in the amount of $150,000, respectively.
(10) Ms. Clark and Messrs. Pocaterra and Foley were separated from the Company on January 10, 2014 and no separation payments are included in the table.
(11) Mr. Johnson received monies pursuant to a consulting arrangement with the Company as a result of his separation from the Company on June 7, 2013.
(12) The amounts for Messrs. Johnson, Winkleblack, Moran and Bobby include an aggregate payment of $48,778,361; $12,246,929; $11,527,246; and $9,080,488, respectively, representing the payment of the cashout of equity awards that were outstanding at the Merger closing.

The following narrative provides additional information about the various 2013T compensation plans, programs, and policies reflected in the Summary Compensation Table, although the Executive Estate Life Insurance Program did not result in any compensation reported in the Table for 2013T.

Executive Estate Life Insurance Program

In December 2001, we adopted an Executive Estate Life Insurance Program (“EELIP”) for certain eligible executives. Under the EELIP, in 2001 and 2002, eligible executives relinquished compensation in exchange for a loan from the Company equal to 150% of the amount relinquished (“EELIP Loans”). The proceeds of each EELIP Loan were used to fund a life insurance policy purchased by the executive’s family trust. Each of the EELIP Loans was subject to vesting, and the Company will automatically be repaid the amount of the then outstanding principal and interest of the applicable EELIP Loan from the proceeds of the policy after the death of the participant and/or the death of the participant’s spouse, as applicable. Mr. Johnson had an outstanding EELIP Loan to the Company that fully vested on or before September 2003. This EELIP Loan accrues interest at the annual rate of 4.99%. As of December 29, 2013, the total amount due to the Company plus the accrued interest under the EELIP Loan was $8,799,326. The EELIP Loan to Mr. Johnson is permitted to remain outstanding under the Sarbanes-Oxley Act of 2002, so long as the terms are not materially modified.

 

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Annual Incentive Plan—Material Factors

In 2013T, the AIP provided an annual cash incentive for possible award to the NEOs. The maximum award for any one participant was 240% of target and 120% of target for Messrs. Hees and Basilio.

Additionally, in 2013T, NEOs were eligible to earn annual cash awards with reference to the metrics established for the AIP in the following manner:

 

    The maximum award amount for each NEO was determined as described above;

 

    The award that would have been payable to each NEO under the AIP was determined with reference to the achievement of established metrics and other goals under the AIP (the “AIP Bonus”); and

AIP metrics are comprised of Company-wide financial metrics, business unit financial metrics, and personal goals. The Company-wide metrics for financial performance for the 2013T AIP were:

 

  1. Operating Income (“OI”)

 

       OI = NSV–operating costs

 

  2. Operating Free Cash Flow (“OFCF”)

 

       OFCF = cash flow from operating activities–capital expenditures + proceeds from dispositions of property, plant, and equipment

 

  3. Net Sales Value (“NSV”)

 

       NSV = gross sales–deals and allowances, excluding the impact of foreign currency

 

       The Business Unit (“BU”) specific metrics for financial performance were:

 

  4. Business Unit Operating Income (“BU OI”)

 

       BU OI = NSV–operating costs

 

  5. Business Unit Operating Free Cash Flow (“BU OFCF”)

 

       BU OFCF = cash flow from operating activities–(intercompany royalties, as applicable, and dividend income/expense)–capital expenditures + proceeds from dispositions of property, plant, and equipment

 

  6. Business Unit Net Sales Value (“BU NSV”)

 

       BU NSV = external gross sales–deals and allowances

 

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For 2013T, the specific targets and weightings for the NEOs were:

 

Name    Weighting     Metrics    Threshold to
Maximum
Range
 

B. Hees

     100  

MBOs

     0      120

B.L. Basilio

     100  

MBOs

     0      120

K.C. Clark

     80  

Total Heinz OI

     90 %(1)       110
    

Total Heinz OFCF

     80 %(1)       115
          

Total Heinz NSV

     95 %(1)       105
       20  

Personal Goals

     0      200

F.E. Pocaterra &

     80  

BU OI

     80 %(1)       110

B.M Foley

    

BU OFCF

     80 %(1)       115
          

BU NSV

     95 %(1)       105
       20  

Personal Goals

     0      200

W.R. Johnson

     80  

Total Heinz OI

     90 %(1)       110

A.B. Winkleblack

    

Total Heinz OFCF

     80 %(1)       115

D.C. Moran

          

Total Heinz NSV

     95 %(1)       105

T.N. Bobby

     20  

Personal Goals

     0      200

 

(1) Minimum performance required to earn a payment under the AIP’s financial metrics.

The Board of Directors assessed the Company’s performance in 2013T and the NEO’s achievement of individual MBOs in determining annual incentive bonuses under the AIP. The Company achieved 123.4% of target for OI, OFCF and NSV. The Latin America zone performance was between target and maximum of the respective financial targets.

The bonuses were paid in cash to each NEO after the end of 2013T.

 

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GRANTS OF PLAN-BASED AWARDS (2013T)

 

                Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
    All
Other
Stock
Awards:

Number
of
Shares
of
Stock or
Units
(#)
  All Other
Option
Awards:

Number of
Securities
Underlying
Options
(#)
    Exercise
or Base
Price of
Option
Awards
($ / Sh)
       

Name

 

Award Type

  Action Date   Grant Date   Minimum
($)
    Target
($)
    Maximum
($)
          Grant
Date
Fair
Value
of Stock
and
Option
Awards
 

B. Hees

 

AIP (1)

    June 7, 2013   $ —        $ 1,166,667      $ 1,400,000           
 

Options (2)

  October 15, 2013   October 16, 2013             3,000,000      $ 10.00        7,290,000   

P.L. Basilio

 

AIP (3)

    June 7, 2013   $ —        $ 437,500      $ 525,000           
 

Options (2)

  October 15, 2013   October 16, 2013             1,200,000      $ 10.00        2,916,000   

K.C. Clark

 

AIP (4)

    May 31, 2013   $ 210,000      $ 210,000      $ 210,000           
 

FY14-15 LTPP (5)

  May 8, 2013   May 8, 2013   $ —        $ 166,000      $ 166,000           
 

FY14 LTIP (6)

  May 8, 2013   May 8, 2013   $ —        $ 207,500      $ 207,500           
 

Options (2)

  October 15, 2013   October 16, 2013             300,000      $ 10.00        729,000   
 

RSU Replacement (7)

  October 21, 2013   December 1, 2013   $ —        $ 67,500      $ 67,500           

F.E. Pocaterra

 

AIP (8)

    May 31, 2013   $ 46,667      $ 233,333      $ 513,333           
 

FY14-15 LTPP (5)

  May 8, 2013   May 8, 2013   $ —        $ 174,720      $ 174,720           
 

FY14 LTIP (6)

  May 8, 2013   May 8, 2013   $ —        $ 218,400      $ 218,400           
 

Options (2)

  October 15, 2013   October 16, 2013             300,000      $ 10.00        729,000   
 

RSU Replacement (7)

  October 21, 2013   December 1, 2013   $ —        $ 75,000      $ 75,000           

B.M. Foley

 

AIP (4)

    May 31, 2013   $ 233,333      $ 233,333      $ 233,333           
 

FY14-15 LTPP (5)

  May 8, 2013   May 8, 2013   $ —        $ 300,755      $ 300,755           
 

FY14 LTIP (6)

  May 8, 2013   May 8, 2013   $ —        $ 220,553      $ 220,553           
 

Options (2)

  October 15, 2013   October 16, 2013             500,000      $ 10.00        1,215,000   
 

RSU Replacement (7)

  October 21, 2013   December 1, 2013   $ —        $ 87,500      $ 87,500           

W.R. Johnson

 

Pro Rata Bonus (9)