Venezuela - Foreign Currency and Inflation

The Company has a subsidiary in Venezuela that manufactures and sells a variety of products, primarily in the ketchup, condiments and sauces and infant feeding categories. 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), based on the legally available exchange rate at which we expect to settle the underlying transaction. 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. Certain non-monetary assets and liabilities are recorded at the applicable historical exchange rates.

There are currently three exchange rates legally available to us for converting bolivars to U.S. dollars, including:


•	the official exchange rate of BsF6.30 per U.S. dollar, which is available through the government-operated National Center of Foreign Commerce (“CENCOEX”) and is applicable to import activities related to certain necessities, including food products;


•	the Complimentary System of Foreign Currency Acquirement (“SICAD I”) rate of approximately BsF12 per U.S. dollar, which operates similar to an auction system and allows entities in specific sectors to bid for U.S. dollars to be used for specified import transactions; and


•	the Marginal Currency System (“SIMADI”) rate, which has averaged approximately BsF195 per U.S. dollar since commencement of trading, was BsF197.7 per U.S. dollar at June 28, 2015, and is an open-market exchange format that allows for legal trading of foreign currency based upon supply and demand.

Prior to February 2015, a fourth foreign exchange market mechanism (SICAD II) was available to us. SICAD II became effective on March 24, 2014 and was the market through which U.S. dollars were to be obtained for the remittance of dividends. This market had significantly higher foreign exchange rates than those available through the other foreign exchange mechanisms, with published weighted average daily exchange rates of approximately BsF50 per U.S. dollar. During 2014, the Company had limited access to the SICAD II market mechanism and converted 150 million bolivars into $3 million USD, recognizing a $23 million transactional currency loss which was recorded in other expense, net, in the condensed consolidated statements of operations for the second quarter and six months ended June 29, 2014. In February 2015, the SICAD I and SICAD II foreign currency exchange systems were merged. The published exchange rate for the combined SICAD mechanism continues to be approximately BsF12 per U.S. dollar.

The Company has had limited access to, and settlements at, the current official exchange rate of BsF6.30 per U.S. dollar during the second quarter and six months ended June 28, 2015. We currently have $23 million of outstanding requests as at June 28, 2015 for payment of invoices for the purchase of ingredients and packaging materials for the years from 2012 through 2015. The Company was not invited and did not participate in the SICAD mechanism during the second quarter and six months ended June 28, 2015, and has no intent to participate in this mechanism for the foreseeable future. Additionally, the Company did not have any settlements at SIMADI rates during the second quarter and six months ending June 28, 2015. As a result, up until June 2015, we had determined that the official CENCOEX rate of BsF6.30 per U.S. dollar was the most appropriate rate to use for remeasurement.

In June 2015, due to the continued lack of liquidity and increasing economic uncertainty, the Company reevaluated the rate that should be used to remeasure the monetary assets and liabilities of our Venezuelan subsidiary. As of June 28, 2015, we determined that the SIMADI rate of BsF197.7 per U.S. dollar was the most appropriate legally available rate and remeasured our net monetary assets of our Venezuelan subsidiary, resulting in a charge of $234 million recorded in other expense, net, in the condensed consolidated statements of operations for the second quarter and six months ended June 28, 2015. Additionally, we have assessed the non-monetary assets of our Venezuelan subsidiary for impairment, which resulted in a $49 million charge to write down inventory to the lower of cost or market, which was recorded in cost of goods sold in the condensed consolidated statements of operations for the second quarter and six months ended June 28, 2015.

Subsequent to the devaluation, our Venezuelan subsidiary included $8 million of bolivar denominated net monetary assets and liabilities on its balance sheet at June 28, 2015, including bolivar denominated cash and cash equivalents of approximately $10 million. It recognized $188 million and $352 million of sales for the second quarter and six months ended June 28, 2015, representing approximately 7% of total Company sales, and operating income of $4 million (net of the $49 million inventory write down) and $51 million for the second quarter and six months then ended, representing approximately 1% and 5%, respectively, of total Company operating income. If we had used the SIMADI exchange rate for the six months ended June 28, 2015, the sales and operating income would be less than 1% of the total Company.