10-Q 1 khc10q4316.htm 10-Q 10-Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2016
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number 001-37482
The Kraft Heinz Company
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
 
46-2078182
(I.R.S. Employer Identification No.)
One PPG Place, Pittsburgh, Pennsylvania
(Address of Principal Executive Offices)
 
15222
(Zip Code)

Registrant’s telephone number, including area code: (412) 456-5700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
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 o
Accelerated filer o
 
Non-accelerated filer x 
(Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of May 1, 2016, there were 1,215,955,228 shares of the registrant's common stock outstanding.





The Kraft Heinz Company
Table of Contents

Unless the context otherwise requires, the terms “we,” “us,” “our,” “Kraft Heinz,” and the “Company” each refer to The Kraft Heinz Company.






PART I — FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data.
The Kraft Heinz Company
Condensed Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
Net sales
$
6,570

 
$
2,478

Cost of products sold
4,192

 
1,631

Gross profit
2,378

 
847

Selling, general and administrative expenses
865

 
338

Operating income
1,513

 
509

Interest expense
249

 
201

Other expense/(income), net
(8
)
 
(39
)
Income/(loss) before income taxes
1,272

 
347

Provision for/(benefit from) income taxes
372

 
68

Net income/(loss)
900

 
279

Net income/(loss) attributable to noncontrolling interest
4

 
3

Net income/(loss) attributable to Kraft Heinz
896

 
276

Preferred dividends

 
180

Net income/(loss) attributable to common shareholders
$
896

 
$
96

Per share data applicable to common shareholders:
 
 
 
Basic earnings/(loss)
$
0.74

 
$
0.26

Diluted earnings/(loss)
0.73

 
0.24

Dividends declared
0.575

 


See accompanying notes to the condensed consolidated financial statements.


1




The Kraft Heinz Company
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(Unaudited)
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
Net income/(loss)
$
900

 
$
279

Other comprehensive income/(loss), net of tax:
 
 
 
Foreign currency translation adjustments
272

 
(794
)
Net deferred gains/(losses) on net investment hedges
(60
)
 
432

Net postemployment benefit gains/(losses)

 
(1
)
Reclassification of net postemployment benefit losses/(gains)
(54
)
 

Net deferred gains/(losses) on cash flow hedges
(18
)
 
(67
)
Net deferred losses/(gains) on cash flow hedges reclassified to net income
(22
)
 
1

Total other comprehensive income/(loss)
118

 
(429
)
Total comprehensive income/(loss)
1,018

 
(150
)
Comprehensive income/(loss) attributable to noncontrolling interest
11

 
(11
)
Comprehensive income/(loss) attributable to Kraft Heinz
$
1,007

 
$
(139
)

See accompanying notes to the condensed consolidated financial statements.

2




The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
April 3, 2016
 
January 3, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
4,199

 
$
4,837

Trade receivables (net of allowances of $32 at April 3, 2016 and at January 3, 2016)
939

 
871

Sold receivables
805

 
583

Inventories
2,892

 
2,618

Other current assets
977

 
871

Total current assets
9,812

 
9,780

Property, plant and equipment, net
6,434

 
6,524

Goodwill
43,542

 
43,051

Intangible assets, net
62,049

 
62,120

Other assets
1,436

 
1,498

TOTAL ASSETS
$
123,273

 
$
122,973

LIABILITIES AND EQUITY
 
 
 
Trade payables
$
2,773

 
$
2,844

Accrued marketing
867

 
856

Accrued postemployment costs
164

 
328

Income taxes payable
575

 
417

Interest payable
266

 
401

Dividends payable
794

 
762

Other current liabilities
1,291

 
1,324

Total current liabilities
6,730

 
6,932

Long-term debt
25,167

 
25,151

Deferred income taxes
21,659

 
21,497

Accrued postemployment costs
2,380

 
2,405

Other liabilities
737

 
752

TOTAL LIABILITIES
56,673

 
56,737

Commitments and Contingencies (Note 12)

 

Redeemable noncontrolling interest
21

 
23

9.00% Series A cumulative compounding redeemable preferred stock, 80,000 authorized and issued shares at April 3, 2016 and January 3, 2016, $.01 par value
8,320

 
8,320

Equity:
 
 
 
Common stock, $.01 par value (5,000,000,000 shares authorized at April 3, 2016 and January 3, 2016; 1,216,075,938 shares issued and 1,215,541,052 shares outstanding at April 3, 2016; 1,214,391,614 shares issued and 1,213,978,752 shares outstanding at January 3, 2016)
12

 
12

Additional paid-in capital
58,438

 
58,375

Retained earnings/(deficit)
193

 

Accumulated other comprehensive income/(losses)
(560
)
 
(671
)
Treasury stock, at cost
(40
)
 
(31
)
Total shareholders' equity
58,043

 
57,685

Noncontrolling interest
216

 
208

TOTAL EQUITY
58,259

 
57,893

TOTAL LIABILITIES AND EQUITY
$
123,273

 
$
122,973


See accompanying notes to the condensed consolidated financial statements.

3




The Kraft Heinz Company
Condensed Consolidated Statement of Equity
(in millions)
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings/ (Deficit)
 
Accumulated Other Comprehensive Income/(Losses)
 
Treasury Stock
 
Noncontrolling Interest
 
Total Equity
Balance at January 3, 2016
$
12

 
$
58,375

 
$

 
$
(671
)
 
$
(31
)
 
$
208

 
$
57,893

Net income/(loss) excluding redeemable noncontrolling interest

 

 
896

 

 

 
4

 
900

Other comprehensive income/(loss) excluding redeemable noncontrolling interest

 

 

 
111

 

 
4

 
115

Dividends declared-common stock

 

 
(699
)
 

 

 

 
(699
)
Exercise of stock options, issuance of other stock awards, and other

 
63

 
(4
)
 

 
(9
)
 

 
50

Balance at April 3, 2016
$
12

 
$
58,438

 
$
193

 
$
(560
)
 
$
(40
)
 
$
216

 
$
58,259


See accompanying notes to the condensed consolidated financial statements.

4




The Kraft Heinz Company
Condensed Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income/(loss)
$
900

 
$
279

Adjustments to reconcile net income/(loss) to operating cash flows:
 
 
 
Depreciation and amortization
363

 
90

Amortization of postretirement benefit plans prior service credits
(50
)
 
(1
)
Equity award compensation expense
13

 
2

Deferred income tax provision
27

 
(48
)
Pension contributions
(169
)
 
(15
)
Other items, net
(111
)
 
31

Changes in current assets and liabilities:
 
 
 
Trade receivables
(38
)
 
(29
)
Sold receivables
(222
)
 
9

Inventories
(273
)
 
(96
)
Accounts payable
59

 
(63
)
Other current assets
(45
)
 
(41
)
Other current liabilities
(184
)
 
(201
)
Net cash provided by/(used for) operating activities
270

 
(83
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(303
)
 
(53
)
Other investing activities, net
(22
)
 
4

Net cash provided by/(used for) investing activities
(325
)
 
(49
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments of long-term debt
(6
)
 
(1,962
)
Proceeds from issuance of long-term debt

 
2,000

Dividends paid-Series A Preferred Stock

 
(180
)
Dividends paid-common stock
(667
)
 

Other financing activities, net
46

 
(72
)
Net cash provided by/(used for) financing activities
(627
)
 
(214
)
Effect of exchange rate changes on cash and cash equivalents
44

 
(53
)
Cash and cash equivalents:
 
 
 
Net increase/(decrease)
(638
)
 
(399
)
Balance at beginning of period
4,837

 
2,298

Balance at end of period
$
4,199

 
$
1,899


See accompanying notes to the condensed consolidated financial statements.

5




The Kraft Heinz Company
Notes to Condensed Consolidated Financial Statements
Note 1. Background and Basis of Presentation
Basis of Presentation:
Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted, in accordance with the rules of the Securities and Exchange Commission (the “SEC”). In management's opinion, these interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary to present fairly our results for the periods presented.
The condensed consolidated balance sheet data at January 3, 2016 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. You should read these statements in conjunction with our audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended January 3, 2016. The results for interim periods are not necessarily indicative of future or annual results.
Organization:
On July 2, 2015 (the “2015 Merger Date”), through a series of transactions, we consummated the merger of Kraft Foods Group, Inc. (“Kraft”) with and into a wholly-owned subsidiary of H.J. Heinz Holding Corporation (“Heinz”) (the “2015 Merger”). At the closing of the 2015 Merger, Heinz was renamed The Kraft Heinz Company (“Kraft Heinz”).
Before the consummation of the 2015 Merger, Heinz was controlled by Berkshire Hathaway Inc. (“Berkshire Hathaway”) and 3G Global Food Holdings, L.P. (“3G Capital,” and together with Berkshire Hathaway, the “Sponsors”) following their acquisition of H. J. Heinz Company (the “2013 Merger”) on June 7, 2013 (the “2013 Merger Date”).
Immediately prior to the consummation of the 2015 Merger, each share of Heinz issued and outstanding common stock was reclassified and changed into 0.443332 of a share of Kraft Heinz common stock. All share and per share amounts in the condensed consolidated financial statements and related notes have been retroactively adjusted for the historical period presented to give effect to this conversion, including reclassifying an amount equal to the change in value of common stock to additional paid-in capital. In the 2015 Merger, all outstanding shares of Kraft common stock were converted into the right to receive, on a one-for-one basis, shares of Kraft Heinz common stock. Deferred shares and restricted shares of Kraft were converted to deferred shares and restricted shares of Kraft Heinz, as applicable.
Changes in Accounting and Reporting:
In the third quarter of 2015, we made the following changes in accounting and reporting to harmonize our accounting and reporting as Kraft Heinz:
We made a voluntary change in accounting policy to classify certain warehouse and distribution costs (including shipping and handling costs) associated with the distribution of finished product to our customers as cost of products sold, which were previously recorded in selling, general and administrative expenses (“SG&A”). We made this voluntary change in accounting policy because we believe this presentation is preferable, as the classification in cost of products sold better reflects the cost of producing and distributing products. Additionally, this presentation enhances the comparability of our financial statements with industry peers and aligns with how we now internally manage and review costs. As required by U.S. GAAP, the change has been reflected in the condensed consolidated statements of income through retrospective application of the change in accounting policy. The impact of this change resulted in an increase in cost of products sold and a decrease in SG&A of $151 million for the three months ended March 29, 2015.
We made a voluntary change in accounting policy to classify our trademark and license intangible asset impairments and amortization in SG&A, which were previously recorded in cost of products sold. We made this voluntary change in accounting policy because we believe this presentation is preferable, as removing these expenses from cost of products sold better aligns cost of products sold with costs directly associated with generating revenue. Additionally, this presentation enhances the comparability of our financial statements with industry peers and aligns with how we now internally manage and review costs. As required by U.S. GAAP, the change has been reflected in the condensed consolidated statements of income through retrospective application of the change in accounting policy. The impact of this change was an increase in SG&A and a decrease in cost of products sold by $5 million for the three months ended March 29, 2015.

6




We determined that we had previously misclassified customer related intangible asset amortization. Such costs were previously included in cost of products sold but should have been included in SG&A. We have revised the classification to report these expenses in SG&A in the condensed consolidated statements of income for the applicable prior period presented. The impact of this revision was to increase SG&A and decrease cost of products sold by $16 million for the three months ended March 29, 2015. This misstatement was not material to any prior period financial statements.
Consistent with our consolidated financial statements in our Annual Report on Form 10-K for the year ended January 3, 2016, we separately presented sold receivables on our consolidated balance sheets and consolidated statements of cash flows. Our prior period cash flow balances have been reclassified to conform with the current period presentation.
Recently Issued Accounting Standards:
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update (“ASU”) that superseded previously existing revenue recognition guidance. Under this ASU, companies will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the company expects to be entitled in exchange for those goods or services. This ASU will be effective beginning in the first quarter of our fiscal year 2018. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption.We are currently evaluating the impact that this ASU will have on our financial statements and related disclosures.
In September 2015, the FASB issued an ASU intended to simplify the accounting for measurement period adjustments in a business combination. Measurement period adjustments are changes to provisional amounts recorded when the accounting for a business combination is incomplete as of the end of a reporting period. The measurement period can extend for up to a year following the transaction date. During the measurement period, companies may make adjustments to provisional amounts when information necessary to complete the measurement is received. The ASU requires companies to recognize these adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. Companies are no longer required to retroactively apply measurement period adjustments to all periods presented. We early adopted this ASU in 2015. See Note 2, Merger and Acquisition, for additional information on measurement period adjustments.
In February 2016, the FASB issued an ASU that superseded previously existing leasing guidance. The ASU is intended to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The new guidance requires lessees to reflect most leases on their balance sheet as assets and obligations. This ASU will be effective beginning in the first quarter of our fiscal year 2019. Early adoption is permitted. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients.We are currently evaluating the impact that this ASU will have on our financial statements and related disclosures.
In March 2016, the FASB issued an ASU intended to simplify equity-based award accounting and presentation. The ASU impacts income tax accounting related to equity-based awards, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. This ASU will be effective beginning in the first quarter of our fiscal year 2017. Early adoption is permitted. We are currently evaluating the impact that this ASU will have on our financial statements and related disclosures.
Note 2. Merger and Acquisition
Transaction Overview:
The 2015 Merger was accounted for under the acquisition method of accounting for business combinations and Heinz was considered to be the acquiring company. Under the acquisition method of accounting, total consideration exchanged was (in millions):
Aggregate fair value of Kraft common stock
$
42,502

$16.50 per share special cash dividend
9,782

Fair value of replacement equity awards
353

Total consideration exchanged
$
52,637


7




Valuation Assumptions and Preliminary Purchase Price Allocation:
We utilized estimated fair values at the 2015 Merger Date for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. Our purchase price allocation is substantially complete with the exception of identifiable intangible assets and certain income tax accounts. As we continue to integrate Kraft businesses, we may obtain additional information on the acquired identifiable intangible assets which, if significant, could require revisions to preliminary valuation assumptions, estimates and resulting fair values. Amounts for certain income tax accounts are also subject to change pending the filing of Kraft's pre-acquisition tax returns and the receipt of information from taxing authorities, which, if significant, could require revisions to preliminary assumptions and estimates. If we determine that any measurement period adjustments are significant, we will recognize those adjustments, including any related impacts to deferred tax positions, goodwill or net income, in the reporting period in which the adjustments are determined.
The preliminary purchase price allocation to assets acquired and liabilities assumed in the transaction was (in millions):
Cash
$
314

Other current assets
3,423

Property, plant and equipment
4,193

Identifiable intangible assets
49,749

Other non-current assets
214

Trade and other payables
(3,011
)
Long-term debt
(9,286
)
Net postemployment benefits and other non-current liabilities
(4,734
)
Deferred income tax liabilities
(17,416
)
Net assets acquired
23,446

Goodwill on acquisition
29,191

Total consideration
52,637

Fair value of shares exchanged and equity awards
42,855

Total cash consideration paid to Kraft shareholders
9,782

Cash and cash equivalents of Kraft at the 2015 Merger Date
314

Acquisition of business, net of cash on hand
$
9,468

During the first quarter of 2016, we updated the 2015 Merger purchase price allocation to adjust deferred and current income tax liabilities as of the 2015 Merger Date for pre-merger Kraft federal income tax returns and revised estimates. This measurement period adjustment was reflected in the table above as an increase to goodwill of $162 million, with corresponding adjustments to deferred income tax liabilities and trade and other payables. This measurement period adjustment is also reflected in our goodwill table in Note 5, Goodwill and Intangible Assets.
The 2015 Merger preliminarily resulted in $29.2 billion of non tax deductible goodwill relating principally to synergies expected to be achieved from the combined operations and planned growth in new markets. Goodwill has preliminarily been allocated to our segments as shown in Note 5, Goodwill and Intangible Assets.

8




Pro Forma Results:
The following table provides unaudited pro forma results, prepared in accordance with ASC 805, for the three months ended March 29, 2015, as if Kraft had been acquired as of December 30, 2013.
 
For the Three Months Ended
 
March 29, 2015
 
(in millions, except per share data)
Net sales
$
6,830

Net income
738

Basic earnings per share
0.47

Diluted earnings per share
0.46

The unaudited pro forma results include certain preliminary purchase accounting adjustments. We have made pro forma adjustments to exclude deal costs (“Deal Costs”) of $24 million ($15 million net of tax) for the three months ended March 29, 2015, because such costs are nonrecurring and are directly attributable to the 2015 Merger.
The unaudited pro forma results do not include any anticipated cost savings or other effects of future integration efforts. Unaudited pro forma amounts are not necessarily indicative of results had the 2015 Merger occurred on December 30, 2013 or of future results.
Note 3. Integration and Restructuring Expenses
Following the 2015 Merger, we announced a multi-year program (the “Integration Program”) designed to reduce costs, integrate, and optimize the combined organization. As part of these activities, we incur expenses (primarily employee separations, lease terminations and other direct exit costs) that qualify as exit and disposal costs under U.S. GAAP. We also incur expenses that are an integral component of, and directly attributable to, our restructuring activities, which do not qualify as exit and disposal costs (primarily accelerated depreciation, asset impairments, implementation costs such as new facility relocation and start-up costs, and other incremental costs).

Employee severance and other termination benefit packages are primarily determined based on established benefit arrangements, local statutory requirements or historical benefit practices. We recognize the contractual component of these benefits when payment is probable and estimable; additional elements of severance and termination benefits associated with non-recurring benefits are recognized ratably over each employee’s required future service period. Asset-related costs consist primarily of accelerated depreciation, and to a lesser degree asset impairments. Charges for accelerated depreciation are recognized on long-lived assets that will be taken out of service before the end of their normal service, in which case depreciation estimates are revised to reflect the use of the asset over its shortened useful life. Asset impairments establish a new fair value basis for assets held for disposal or sale and those assets are written down to expected net realizable if carrying value exceeds fair value. All other costs are recognized as incurred.
Integration Program:
We currently expect the Integration Program will result in $1.9 billion of pre-tax costs, with approximately 60% reflected in cost of products sold, comprised of the following categories:
Organization costs ($650 million) associated with our plans to streamline and simplify our operating structure, resulting in workforce reduction. These costs will primarily include: severance and employee benefits (cash severance, non-cash severance, including accelerated equity award compensation expense, and pension and other termination benefits). Beginning in August 2015, we announced a new, streamlined structure for our businesses in the United States and Canada segments. This resulted in the reduction of salaried positions across the United States and Canada. We currently expect to eliminate 2,650 positions in connection with this reduction.
Footprint costs ($1.1 billion) associated with our plans to optimize our production and supply chain network, resulting in facility closures and consolidations. These costs will primarily include: asset-related costs (accelerated depreciation and asset impairment charges), costs to exit facilities, relocation and start-up costs of new facilities, and severance and employee benefits. On November 4, 2015, we announced the closure of seven factories and began consolidation of our distribution network. In a staged process, production in these locations will shift to other existing factories in the United States and Canada. Overall, we expect to eliminate 2,600 positions in connection with these activities.
Other costs ($150 million) incurred as a direct result of restructuring activities, primarily including: contract and lease terminations, professional fees, and other incremental third-party fees.

9




As of April 3, 2016, we have incurred $1.1 billion of cumulative costs under the Integration Program, including: $590 million of severance and employee benefit costs, $292 million of non-cash asset-related costs, $125 million of other implementation costs, and $63 million of other exit costs. We expect that approximately 60% of the Integration Program expenses will be cash expenditures. Our Integration Program costs during the three months ended April 3, 2016 were (in millions):
 
For the Three Months Ended
 
April 3, 2016
Severance and employee benefit costs
$
28

Asset-related costs
156

Other exit costs
8

Other implementation costs
49

 
$
241

At April 3, 2016, the total Integration Program liability related primarily to the elimination of general salaried and footprint-related positions across the United States and Canada, 2,650 of whom have left the company by April 3, 2016. The liability balance associated with the Integration Program, which qualifies as U.S. GAAP exit and disposal costs, was (in millions):
 
Severance and Employee Benefit Costs
 
Other Exit Costs(a)
 
Total
Balance at January 3, 2016
$
185

 
$
23

 
$
208

Charges
28

 
8

 
36

Cash payments
(48
)
 
(22
)
 
(70
)
Non-cash utilization
(9
)
 

 
(9
)
Balance at April 3, 2016
$
156

 
$
9

 
$
165

(a) Other exit costs primarily represent contract and lease terminations.
We expect that a substantial portion of the April 3, 2016 Integration Program liability will be paid in 2016.
Restructuring Activities:
Prior to the 2015 Merger, we executed a number of other restructuring activities focused primarily on work force reduction and factory closure and consolidation. Those programs, which are substantially complete, resulted in the elimination of 8,100 positions and cumulative $560 million severance and employee benefit costs, $340 million non-cash asset-related costs, and $360 million other exit costs through April 3, 2016. Related to these restructuring activities, we incurred expenses of $19 million for the three months ended April 3, 2016.
As of April 3, 2016, the liability balance associated with active restructuring projects, which qualifies as U.S. GAAP exit and disposal costs, was (in millions):
 
Severance and Employee Benefit Costs
 
Other Exit Costs(a)
 
Total
Balance at January 3, 2016
$
25

 
$
30

 
$
55

Charges
10

 
1

 
11

Cash payments
(20
)
 
(1
)
 
(21
)
Balance at April 3, 2016
$
15

 
$
30

 
$
45

(a) Other exit costs primarily represent contract and lease terminations.

10




Total Integration and Restructuring:
Our total Integration Program and restructuring expenses were (in millions):
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
Severance and employee benefit costs - COGS
$
6

 
$
10

Severance and employee benefit costs - SG&A
32

 
2

Asset-related costs - COGS
142

 
3

Asset-related costs - SG&A
14

 

Other exit costs - COGS
33

 
17

Other exit costs - SG&A
33

 
11

 
$
260

 
$
43

We do not include Integration Program and restructuring expenses within Segment Adjusted EBITDA. See Note 14, Segment Reporting, for additional information on our segment structure. The pre-tax impact of allocating such expenses to our segments would have been (in millions):
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
United States
$
199

 
$
9

Canada
18

 
1

Europe
15

 
25

Rest of World

 
4

Non-Operating
28

 
4

 
$
260

 
$
43

Note 4. Inventories
Inventories at April 3, 2016 and January 3, 2016 were (in millions):
 
April 3, 2016
 
January 3, 2016
Packaging and ingredients
$
624

 
$
563

Work in process
411

 
393

Finished product
1,857

 
1,662

Inventories
$
2,892

 
$
2,618

The increase in inventories in the first quarter of 2016 is primarily due to an increase in inventory production ahead of planned facility closures and consolidations under our Integration Program, combined with the impact of seasonality. See Note 3, Integration and Restructuring Expenses, for additional information on the Integration Program.
Note 5. Goodwill and Intangible Assets
Goodwill:
In the first quarter of 2016, we moved certain of our export businesses and their related goodwill balances from our United States segment to our Rest of World and Europe segments. We have reflected this change in all historical periods presented. Accordingly, the segment goodwill balances at January 3, 2016 reflect a decrease of $2.5 billion in the United States, an increase of $2.5 billion in Rest of World, and an increase of $57 million in Europe.

11




Changes in the carrying amount of goodwill from January 3, 2016 to April 3, 2016, by segment, were (in millions):
 
United States
 
Canada
 
Europe
 
Rest of World
 
Total
Balance at January 3, 2016
$
31,227

 
$
4,796

 
$
3,209

 
$
3,819

 
$
43,051

2015 Merger measurement period adjustments
162

 

 

 

 
162

Translation adjustments

 
297

 
(74
)
 
106

 
329

Balance at April 3, 2016
$
31,389

 
$
5,093

 
$
3,135

 
$
3,925

 
$
43,542

In connection with the 2015 Merger, we recorded $29.2 billion of goodwill in purchase accounting, representing the preliminary fair value as of the 2015 Merger Date. As of the issuance date of this report, the assignment of goodwill to reporting units was also preliminary. During the first quarter of 2016, we updated the 2015 Merger purchase price allocation to adjust deferred and current income tax liabilities as of the 2015 Merger Date for pre-merger Kraft federal income tax returns and revised estimates. This measurement period adjustment was reflected in the table above as an increase of $162 million to goodwill in the United States segment. See Note 2, Merger and Acquisition, for additional information on this measurement period adjustment.
We test goodwill for impairment at least annually in the second quarter or when a triggering event occurs. We performed our annual impairment testing in the second quarter of 2015, prior to the completion of the 2015 Merger. During our annual goodwill impairment test, we noted that the historical Heinz North America Consumer Products reporting unit had an estimated fair value in excess of its carrying value of less than 10%.
If our current expectations of future growth rates are not met or if valuation factors outside of our control, such as discount rates, change unfavorably, the estimated fair value of our goodwill could be adversely affected, leading to a potential impairment in the future. No events occurred during the three months ended April 3, 2016 that indicated it was more likely than not that our goodwill was impaired. Additionally, there were no accumulated impairment losses to goodwill as of April 3, 2016.
Indefinite-lived intangible assets:
In connection with the 2015 Merger, we recorded $45.1 billion of indefinite-lived intangible assets in purchase accounting, representing the preliminary fair values as of the 2015 Merger Date.
Indefinite-lived intangible assets, which primarily consisted of trademarks, were $55.8 billion at April 3, 2016 and at January 3, 2016.
We test indefinite-lived intangible assets for impairment at least annually in the second quarter or when a triggering event occurs. We performed our annual impairment testing in the second quarter of 2015, prior to the completion of the 2015 Merger. During our annual indefinite-lived intangible asset impairment testing, we noted that 21 brands had excess fair values over their carrying values of less than 10%. These brands had an aggregate carrying value of $2.5 billion as of the date of our 2015 impairment test.
If our current expectations of future growth rates are not met or if valuation factors outside of our control, such as discount rates, change unfavorably, the estimated fair values of our indefinite-lived intangible assets could be adversely affected, leading to potential impairments in the future. No events occurred during the three months ended April 3, 2016 that indicated it was more likely than not that our indefinite-lived intangible assets were impaired.
Definite-lived intangible assets:
Definite-lived intangible assets at April 3, 2016 and January 3, 2016 were (in millions):
 
April 3, 2016
 
January 3, 2016
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Trademarks
$
2,362

 
$
(97
)
 
$
2,265

 
$
2,346

 
$
(70
)
 
$
2,276

Customer-related assets
4,231

 
(251
)
 
3,980

 
4,218

 
(209
)
 
4,009

Other
14

 
(3
)
 
11

 
15

 
(4
)
 
11

 
$
6,607

 
$
(351
)
 
$
6,256

 
$
6,579

 
$
(283
)
 
$
6,296

Amortization expense for definite-lived intangible assets was $66 million for the three months ended April 3, 2016 and $23 million for the three months ended March 29, 2015. Aside from amortization expense, the changes in definite-lived intangible assets from January 3, 2016 to April 3, 2016 reflect the impact of foreign currency. We estimate that annual amortization expense for definite-lived intangible assets for each of the next five years will be approximately $276 million.

12




Note 6. Income Taxes
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment; accordingly, the consolidated income tax rate is a composite rate reflecting the earnings and applicable tax rates in various locations.
The effective tax rate for the three months ended April 3, 2016 was 29.2%, reflecting the favorable benefit of pre-tax income in non-U.S. jurisdictions and certain tax exempt income. Our effective tax rate increased in comparison to the effective tax rate of 19.5% for the three months ended March 29, 2015. The increase in our effective tax rate was driven by the 2015 Merger. With the 2015 Merger, our operations in the United States and Canada increased and resulted in higher blended statutory tax rates and a larger amount of tax exempt income.
Note 7. Employees’ Stock Incentive Plans
Our annual equity award grants and vesting occurred in the first quarter of 2016. Other off-cycle equity grants may occur throughout the year.
Stock Options:
Our stock option activity and related information was:
 
Number of Stock Options
 
Weighted Average Exercise Price
(per share)
Outstanding at January 3, 2016
24,205,612

 
$
34.86

Options granted
1,139,620

 
77.66

Options forfeited
(303,636
)
 
37.02

Options exercised
(1,295,303
)
 
34.47

Outstanding at April 3, 2016
23,746,293

 
36.91

The aggregate intrinsic value of stock options exercised during the period was $54 million for the three months ended April 3, 2016.
Restricted Stock Units:
Our restricted stock unit (“RSU”) activity and related information was:
 
Number of Units
 
Weighted Average Grant Date Fair Value
(per share)
RSUs at January 3, 2016
968,444

 
$
70.14

Granted
481,767

 
77.51

Forfeited
(29,141
)
 
73.02

Vested
(376,961
)
 
72.96

RSUs at April 3, 2016
1,044,109

 
72.44

The aggregate fair value of RSUs that vested during the period was $28 million for the three months ended April 3, 2016.
Total Equity Awards:
The compensation cost related to equity awards was primarily recognized in general corporate expenses within SG&A. Equity award compensation cost and the related tax benefit was (in millions):
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
Pre-tax compensation cost
$
13

 
$
2

Tax benefit
(4
)
 
(1
)
After-tax compensation cost
$
9

 
$
1

Unrecognized compensation cost related to unvested equity awards was $129 million at April 3, 2016 and is expected to be recognized over a weighted average period of three years.

13




Note 8. Postemployment Benefits
In the first quarter of 2016, we changed the method that we use to estimate the service cost and interest cost components of net pension cost/(benefit) and net postretirement cost/(benefit). We use a full yield curve approach to estimate service cost and interest cost by applying the specific spot rates along the yield curve used to determine the benefit obligation to the relevant projected cash flows. Previously, we estimated service cost and interest cost using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We made this change to provide a more precise measurement of service cost and interest cost by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. The change resulted in a decrease of approximately $20 million in service cost and interest cost in the first quarter of 2016 compared to what our costs would have been under the previous method. This change did not affect the measurement of our total benefit obligations. We have accounted for this change prospectively as a change in accounting estimate.
Pension Plans
Components of Net Pension Cost/(Benefit):
Net pension cost/(benefit) consisted of the following for the three months ended April 3, 2016 and March 29, 2015 (in millions):
 
U.S. Plans
 
Non-U.S. Plans
 
For the Three Months Ended
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
 
April 3, 2016
 
March 29, 2015
Service cost
$
3

 
$
1

 
$
6

 
$
5

Interest cost
53

 
5

 
21

 
21

Expected return on plan assets
(74
)
 
(5
)
 
(46
)
 
(43
)
Amortization of unrecognized losses/(gains)

 
1

 

 

Settlements
(6
)
 

 

 

Net pension cost/(benefit)
$
(24
)
 
$
2

 
$
(19
)
 
$
(17
)
We capitalized a portion of net pension costs/(benefits) into inventory based on our production activities. These amounts are included in the table above.
Employer Contributions:
During the three months ended April 3, 2016, we contributed $161 million to our U.S. pension plans, which included contributions related to the settlement of our U.S. nonqualified pension plan that was terminated effective December 31, 2015. During the three months ended April 3, 2016, we contributed $8 million to our non-U.S. pension plans. Based on our contribution strategy, we plan to make further contributions of up to approximately $150 million to our U.S. plans and approximately $25 million to our non-U.S. plans during the remainder of 2016. However, our actual contributions may differ due to many factors, including changes in tax, employee benefit, or other laws, tax deductibility, significant differences between expected and actual pension asset performance or interest rates, or other factors.
Postretirement Plans
Components of Net Postretirement Cost/(Benefit):
Net postretirement cost/(benefit) consisted of the following for the three months ended April 3, 2016 and March 29, 2015 (in millions):
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
Service cost
$
4

 
$
1

Interest cost
16

 
2

Amortization of prior service costs/(credits)
(82
)
 
(1
)
Net postretirement cost /(benefit)
$
(62
)
 
$
2

We capitalized a portion of net postretirement costs/(benefits) into inventory based on our production activities. These amounts are included in the table above.

14




Note 9. Accumulated Other Comprehensive Income/(Losses)
The components of, and changes in, accumulated other comprehensive income/(losses) were as follows (net of tax):
 
Foreign Currency Translation Adjustments
 
Net Postemployment Benefit Plan Adjustments
 
Net Cash Flow Hedge Adjustments
 
Total
 
(in millions)
Balance as of January 3, 2016
$
(1,646
)
 
$
922

 
$
53

 
$
(671
)
Foreign currency translation adjustments
265

 

 

 
265

Net deferred gains/(losses) on net investment hedges
(60
)
 

 

 
(60
)
Reclassification of net postemployment benefit losses/(gains)

 
(54
)
 

 
(54
)
Net deferred gains/(losses) on cash flow hedges

 

 
(18
)
 
(18
)
Net deferred losses/(gains) on cash flow hedges reclassified to net income

 

 
(22
)
 
(22
)
Total other comprehensive income/(loss)
205

 
(54
)
 
(40
)
 
111

Balance as of April 3, 2016
$
(1,441
)
 
$
868

 
$
13

 
$
(560
)
Reclassification of net postemployment benefit losses/(gains) included amounts reclassified to net income and amounts reclassified to inventory (consistent with our capitalization policy).
The tax benefit/(expense) recorded in and associated with each component of other comprehensive income/(loss) for the three months ended April 3, 2016 and March 29, 2015 were as follows (in millions):
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
Net deferred gains/(losses) on net investment hedges
$
24

 
$
(319
)
Net postemployment benefit gains/(losses)

 
1

Reclassification of net postemployment benefit losses/(gains)
34

 

Net deferred gains/(losses) on cash flow hedges
10

 
45

Net deferred losses/(gains) on cash flow hedges reclassified to net income
4

 
2


15




The amounts reclassified from accumulated other comprehensive income/(losses) in the three months ended April 3, 2016 and March 29, 2015 were as follows (in millions):
Accumulated Other Comprehensive Income/(Losses) Component
 
 Reclassified from Accumulated Other Comprehensive Income/(Losses)
Affected Line Item in the Statement Where Net Income is Presented
 
 
For the Three Months Ended
 
 
 
 
April 3, 2016
 
March 29, 2015
 
 
Losses/(gains) on cash flow hedges:
 

 
 


     Foreign exchange contracts
 
$
(1
)
 
$
1


Net sales
     Foreign exchange contracts
 
(29
)
 
(5
)

Cost of products sold
     Foreign exchange contracts
 
3

 
(1
)
 
Other expense/(income), net
     Interest rate contracts
 
1

 
4


Interest expense
Losses/(gains) on cash flow hedges before income taxes
 
(26
)
 
(1
)


Losses/(gains) on cash flow hedges income taxes
 
4

 
2



Losses/(gains) on cash flow hedges
 
$
(22
)
 
$
1



 
 
 
 
 
 
 
Losses/(gains) on postemployment benefits:
 
 
 
 


Amortization of unrecognized losses/(gains)
 
$

 
$
1

 
(a)
Amortization of prior service costs/(credits)
 
(82
)
 
(1
)

(a)
Settlement and curtailments losses/(gains)
 
(6
)
 


(a)
Losses/(gains) on postemployment benefits before income taxes
 
(88
)
 



Losses/(gains) on postemployment benefits income taxes
 
34

 



Losses/(gains) on postemployment benefits
 
$
(54
)
 
$




(a)
These components are included in the computation of net periodic postemployment benefit costs. See Note 8, Postemployment Benefits, for additional information.
In this note we have excluded activity and balances related to noncontrolling interest (which was primarily comprised of foreign currency translation adjustments) due to its insignificance.
Note 10. Financial Instruments
See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended January 3, 2016 for additional information on our overall risk management strategies, our use of derivatives, and our related accounting policies.
Derivative Volume:
The notional values of our derivative instruments at April 3, 2016 and January 3, 2016 were (in millions):
 
Notional Amount
 
April 3, 2016
 
January 3, 2016
Commodity contracts
$
667

 
$
787

Foreign exchange contracts
3,312

 
3,458

Cross-currency contracts
4,328

 
4,328


16




Fair Value of Derivative Instruments:
The fair values and the levels within the fair value hierarchy of derivative instruments recorded on the condensed consolidated balance sheets at April 3, 2016 and January 3, 2016 were (in millions):
 
April 3, 2016
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$

 
$
24

 
$
34

 
$

 
$

 
$
24

 
$
34

Cross-currency contracts

 

 
531

 

 

 

 
531

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
26

 
22

 

 
6

 

 

 
26

 
28

Foreign exchange contracts

 

 
43

 
7

 

 

 
43

 
7

Cross-currency contracts

 

 
40

 

 

 

 
40

 

Total fair value
$
26

 
$
22

 
$
638

 
$
47

 
$

 
$

 
$
664

 
$
69

 
January 3, 2016
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$

 
$
46

 
$
6

 
$

 
$

 
$
46

 
$
6

Cross-currency contracts

 

 
605

 

 

 

 
605

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
24

 
29

 
1

 
7

 

 

 
25

 
36

Foreign exchange contracts

 

 
88

 
13

 

 

 
88

 
13

Cross-currency contracts

 

 
47

 

 

 

 
47

 

Total fair value
$
24

 
$
29

 
$
787

 
$
26

 
$

 
$

 
$
811

 
$
55

Our derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. We elect to record the gross assets and liabilities of our derivative financial instruments on the condensed consolidated balance sheets. If the derivative financial instruments had been netted on the condensed consolidated balance sheets, the asset and liability positions each would have been reduced by $54 million at April 3, 2016 and $44 million at January 3, 2016. No material amounts of collateral were received or posted on our derivative assets and liabilities at April 3, 2016.
Level 1 financial assets and liabilities consist of commodity future and options contracts and are valued using quoted prices in active markets for identical assets and liabilities.
Level 2 financial assets and liabilities consist of commodity forwards, foreign exchange forwards, and cross-currency swaps. Commodity forwards are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount. Foreign exchange forwards are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Cross-currency swaps are valued based on observable market spot and swap rates.
Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.
There have been no transfers between Levels 1, 2, and 3 in any period presented.

17




The fair values of our asset derivatives are recorded within other current assets and other assets. The fair values of our liability derivatives are recorded within other current liabilities and other liabilities.
Net Investment Hedging:
At April 3, 2016, the principal amounts of foreign denominated debt designated as net investment hedges totaled €750 million and £400 million.
At April 3, 2016, our cross-currency swaps consisted of:
Instrument
 
Notional
(local)
(in billions)
 
Notional
(USD)
(in billions)
 
Maturity
Cross-currency swap
 
£
0.8

 
$
1.4

 
October 2019
Cross-currency swap
 
0.9

 
1.1

 
October 2019
Cross-currency swap
 
C$
1.8

 
1.6

 
December 2019
Hedge Coverage:
At April 3, 2016, we had entered into contracts designated as hedging instruments, which hedge transactions for the following durations:
foreign currency contracts for periods not exceeding the next two years, and
cross-currency contracts for periods not exceeding the next four years.
At April 3, 2016, we had entered into contracts not designated as hedging instruments, which hedge economic risks for the following durations:
commodity contracts for periods not exceeding the next 12 months,
foreign exchange contracts for periods not exceeding the next two years, and
cross-currency contracts for periods not exceeding the next three years.
Hedge Ineffectiveness:
We record pre-tax gains or losses reclassified from accumulated other comprehensive income/(losses) due to ineffectiveness in:
other expense/(income), net for foreign exchange contracts related to forecasted transactions.
Deferred Hedging Gains and Losses:
Based on our valuation at April 3, 2016 and assuming market rates remain constant through contract maturities, we expect to transfer unrealized gains of $9 million (net of taxes) for foreign currency cash flow hedges to net income during the next 12 months. We expect transfers to net income of unrealized losses for interest rate cash flow hedges during the next 12 months to be insignificant.

18




Derivative Impact on the Statements of Income and Statements of Comprehensive Income:
The following tables present the pre-tax effect of derivative instruments on the condensed consolidated statements of income and statements of comprehensive income for the three months ended April 3, 2016 and March 29, 2015 (in millions):
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
 
Commodity Contracts
 
Foreign Exchange
Contracts
 
Cross-Currency Contracts
 
Interest Rate Contracts
 
Commodity Contracts
 
Foreign Exchange
Contracts
 
Cross-Currency Contracts
 
Interest Rate
Contracts
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) recognized in other comprehensive income (effective portion)
$

 
$
(27
)
 
$

 
$

 
$

 
$
8

 
$

 
$
(120
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) recognized in other comprehensive income (effective portion)

 

 
(65
)
 

 

 

 
751

 

Total gains/(losses) recognized in other comprehensive income (effective portion)
$

 
$
(27
)
 
$
(65
)
 
$

 
$

 
$
8

 
$
751

 
$
(120
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges reclassified to net income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$

 
$
1

 
$

 
$

 
$

 
$
(1
)
 
$

 
$

Cost of products sold (effective portion)

 
29

 

 

 

 
5

 

 

Other expense/(income), net

 
(3
)
 

 

 

 
1

 

 

Interest expense

 

 

 
(1
)
 

 

 

 
(4
)
 

 
27

 

 
(1
)
 

 
5

 

 
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) on derivatives recognized in cost of products sold
(18
)
 

 

 

 

 

 

 

Gains/(losses) on derivatives recognized in other expense/(income), net

 
(75
)
 
(7
)
 

 

 
49

 

 
11

 
(18
)
 
(75
)
 
(7
)
 

 

 
49

 

 
11

Total gains/(losses) recognized in statements of income
$
(18
)
 
$
(48
)
 
$
(7
)
 
$
(1
)
 
$

 
$
54

 
$

 
$
7

Related to our non-derivative, foreign denominated debt instruments designated as net investment hedges, we recognized a $19 million pre-tax loss in other comprehensive income/(loss) for the three months ended April 3, 2016.
Note 11. Venezuela - Foreign Currency and Inflation
In February 2016, the Venezuela government announced the following changes to its foreign currency exchange mechanisms, which were effective on March 10, 2016:
the official exchange rate of BsF6.30 per U.S. dollar, which was available through the government-operated National Center of Foreign Commerce (“CENCOEX”), was devalued to BsF10 per U.S. dollar;
the CENCOEX was replaced with the Sistema de Divisa Protegida (“DIPRO”), which is available for purchases and sales of essential items, including food products;
the Complimentary System of Foreign Currency Acquirement (“SICAD”) was eliminated; and
the Marginal Currency System (“SIMADI”) was replaced with the Sistema de Divisa Complementaria (“DICOM”), which is available for all transactions not covered by DIPRO and is a free-floating exchange format.

19




At April 3, 2016, there were two exchange rates legally available to us for converting Venezuelan bolivars to U.S. dollars, including:
the official exchange rate of BsF10 per U.S. dollar available through DIPRO; and
the DICOM rate, which has averaged approximately BsF201 per U.S. dollar since commencement of trading, and was BsF276 per U.S. dollar at April 3, 2016.
We have had limited access to, and settlements at, the official exchange rate of BsF6.30 and no settlements at the official exchange rate of BsF10 per U.S. dollar during the three months ended April 3, 2016. We had outstanding requests of $26 million at April 3, 2016 for payment of invoices for the purchase of ingredients and packaging materials for the years from 2012 through 2015, all of which were requested for payment at the BsF6.30 per U.S. dollar rate.
Due to the continued lack of liquidity and increasing economic uncertainty, as of April 3, 2016, we continue to believe that the DICOM rate (formerly SIMADI) is the most appropriate legally available rate.
Our Venezuelan subsidiary recognized net sales of $18 million and operating income of $7 million for the three months ended April 3, 2016. Our results of operations in Venezuela reflect a controlled subsidiary. However, the continuing economic uncertainty, strict labor laws, and evolving government controls over imports, prices, currency exchange and payments present a challenging operating environment. Increased restrictions imposed by the Venezuelan government could impact our ability to control our Venezuelan operations and could lead us to deconsolidate our Venezuelan subsidiary in the future.
Note 12. Commitments, Contingencies and Debt
Legal Proceedings:
We are routinely involved in legal proceedings, claims, and governmental inquiries, inspections or investigations (“Legal Matters”) arising in the ordinary course of our business.
On April 1, 2015, the Commodity Futures Trading Commission (“CFTC”) filed a formal complaint against Mondelēz International and Kraft in the U.S. District Court for the Northern District of Illinois, Eastern Division, related to activities involving the trading of December 2011 wheat futures contracts. The complaint alleges that Mondelēz International and Kraft (1) manipulated or attempted to manipulate the wheat markets during the fall of 2011, (2) violated position limit levels for wheat futures, and (3) engaged in non-competitive trades by trading both sides of exchange-for-physical Chicago Board of Trade wheat contracts. As previously disclosed by Kraft, these activities arose prior to the October 1, 2012 spin-off of Kraft by Mondelēz International to its shareholders and involve the business now owned and operated by Mondelēz International or its affiliates. The Separation and Distribution Agreement between Kraft and Mondelēz International, dated as of September 27, 2012, governs the allocation of liabilities between Mondelēz International and Kraft and, accordingly, Mondelēz International will predominantly bear the costs of this matter and any monetary penalties or other payments that the CFTC may impose. We do not expect this matter to have a material adverse effect on our financial condition, results of operations, or business.
As previously disclosed, six lawsuits were filed in connection with the 2015 Merger against Kraft, members of its board of directors, Heinz, Kite Merger Sub Corp., and Kite Merger Sub LLC. The plaintiffs in these matters alleged, among other things, that (i) the Registration Statement on Form S-4 relating to the 2015 Merger contained material omissions and misleading statements, and (ii) the members of the Kraft board of directors breached their fiduciary duties in connection with the 2015 Merger. The plaintiffs sought, among other things, injunctive relief and damages. As disclosed in Kraft’s Form 8-K filed on June 24, 2015, on June 23, 2015, Kraft entered into a memorandum of understanding with the plaintiffs providing for the settlement of all of these lawsuits. On October 28, 2015, we executed a stipulation of settlement with the plaintiffs formalizing the terms of the memorandum of understanding. On November 10, 2015, the U.S. District Court for the Eastern District of Virginia issued an order preliminarily approving the settlement and providing for notice to Kraft’s shareholders regarding the proposed settlement. On March 10, 2016, the Court issued a final order approving the settlement.  In accordance with the Stipulation of Settlement and final order, all claims against defendants in these matters have been dismissed with prejudice.
While we cannot predict with certainty the results of Legal Matters in which we are currently involved or may in the future be involved, we do not expect that the ultimate costs to resolve any of the Legal Matters that are currently pending will have a material adverse effect on our financial condition or results of operations.
Fair Value of Debt:
At April 3, 2016, the aggregate fair value of our total debt was $27.0 billion as compared with the carrying value of $25.3 billion. We determined the fair value of our long-term debt using Level 2 inputs. Fair values are generally estimated based on quoted market prices for identical or similar instruments.

20




Series A Preferred Stock:
We currently intend to redeem the 9.00% Series A Cumulative Compounding Redeemable Preferred Stock (“Series A Preferred Stock”) during the second quarter of 2016. We expect to fund this redemption primarily through the issuance of new debt securities, as well as other sources of liquidity, including our commercial paper program, U.S. securitization program, and cash on hand.
Note 13. Earnings Per Share
As a result of the stock conversion prior to the 2015 Merger, all historical per share data, numbers of shares, and numbers of equity awards outstanding were retroactively adjusted. See Note 1, Background and Basis of Presentation, for additional information.
Our earnings per common share (“EPS”) for the three months ended April 3, 2016 and March 29, 2015 were:
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
 
(in millions, except per share amounts)
Basic Earnings Per Common Share:
 
 
 
Net income/(loss) attributable to common shareholders
$
896

 
$
96

Weighted average shares of common stock outstanding
1,215

 
377

Net earnings/(loss)
$
0.74

 
$
0.26

Diluted Earnings Per Common Share:
 
 
 
Net income/(loss) attributable to common shareholders
$
896

 
$
96

Weighted average shares of common stock outstanding
1,215

 
377

Effect of dilutive securities:
 
 
 
Warrants

 
21

Equity awards
10

 
1

Weighted average shares of common stock outstanding, including dilutive effect
1,225

 
399

Net earnings/(loss)
$
0.73

 
$
0.24

We use the treasury stock method to calculate the dilutive effect of outstanding warrants and equity awards in the denominator for diluted earnings per common share. Anti-dilutive shares were 3 million for the three months ended April 3, 2016. There were no anti-dilutive shares for the three months ended March 29, 2015.
Note 14. Segment Reporting
We manufacture and market food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products, throughout the world.
We manage and report our operating results through four segments. We have three reportable segments defined by geographic region: United States, Canada, and Europe. Our remaining businesses are combined and disclosed as “Rest of World”. Rest of World is comprised of three operating segments: Asia Pacific, Latin America, and Russia, India, the Middle East and Africa (“RIMEA”).
Management evaluates segment performance based on several factors including net sales and segment adjusted earnings before interest, tax, depreciation, and amortization (“Segment Adjusted EBITDA”). Management uses Segment Adjusted EBITDA to evaluate segment performance and allocate resources. Segment Adjusted EBITDA assists 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 core operations. These items include depreciation and amortization (including amortization of postretirement benefit plans prior service credits), equity award compensation expense, integration and restructuring expenses, merger costs, unrealized gains and losses on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment operating results), impairment losses, gains/(losses) associated with the sale of a business, nonmonetary currency devaluation, and certain general corporate expenses. In addition, consistent with the manner in which management evaluates segment performance and allocates resources, Segment Adjusted EBITDA includes the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013. There are no pro forma adjustments to any of the numbers disclosed in this note to the condensed consolidated financial statements except for the Segment Adjusted EBITDA reconciliation.

21




In the first quarter of 2016, we moved certain historical Kraft export businesses from our United States segment to our Rest of World and Europe segments to align with our long-term go-to-market strategies. We began to manage and report our results reflecting this change in the first quarter of 2016 and have reflected this change in all pro forma historical information presented. The impact of this change is not material to current or prior period results. This change did not impact our Integration Program and restructuring expenses disclosed by segment in Note 3, Integration and Restructuring Expenses.
Management does not use assets by segment to evaluate performance or allocate resources and therefore, we do not disclose assets by segment.
Our net sales by segment and Segment Adjusted EBITDA were:
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
 
(in millions)
Net sales:
 
 
 
United States
$
4,715

 
$
868

Canada
504

 
121

Europe
553

 
626

Rest of World
798

 
863

Total net sales
$
6,570

 
$
2,478

 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
 
(in millions)
Segment Adjusted EBITDA:
 
 
 
United States
$
1,493

 
$
1,123

Canada
151

 
113

Europe
177

 
214

Rest of World
167

 
190

General corporate expenses
(37
)
 
(31
)
Depreciation and amortization (excluding integration and restructuring expenses)
(161
)
 
(216
)
Integration and restructuring expenses
(260
)
 
(81
)
Merger costs
(15
)
 
(13
)
Unrealized gains/(losses) on commodity hedges
8

 
2

Nonmonetary currency devaluation
(1
)
 

Equity award compensation expense (excluding integration and restructuring expenses)
(9
)
 
(19
)
 Other pro forma adjustments

 
(773
)
Operating income
1,513

 
509

Interest expense
249

 
201

Other expense/(income), net
(8
)
 
(39
)
Income/(loss) before income taxes
$
1,272

 
$
347


22




Our net sales by product category were:
 
For the Three Months Ended
 
April 3, 2016
 
March 29, 2015
 
(in millions)
Condiments and sauces
$
1,576

 
$
1,230

Cheese and dairy
1,384

 

Ambient meals
586

 
334

Frozen and chilled meals
620

 
471

Meats and seafood
705

 
44

Refreshment beverages
407

 

Coffee
392

 

Infant and nutrition
191

 
253

Desserts, toppings and baking
206

 

Nuts and salted snacks
264

 

Other
239

 
146

Total net sales
$
6,570

 
$
2,478

Note 15. Supplemental Financial Information
We fully and unconditionally guarantee the notes issued by our 100% owned operating subsidiary, Kraft Heinz Foods Company. See Note 12, Debt, in our Annual Report on Form 10-K, for additional descriptions of these guarantees. None of our other subsidiaries guarantee these notes.
    
Set forth below are the condensed consolidating financial statements presenting the results of operations, financial position and cash flows of The Kraft Heinz Company (as parent guarantor), Kraft Heinz Foods Company (as subsidiary issuer of the notes), and the non-guarantor subsidiaries on a combined basis and eliminations necessary to arrive at the total reported information on a consolidated basis. This condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or being Registered.” This information is not intended to present the financial position, results of operations, and cash flows of the individual companies or groups of companies in accordance with U.S. GAAP. Eliminations represent adjustments to eliminate investments in subsidiaries and intercompany balances and transactions between or among the parent guarantor, subsidiary issuer, and the non-guarantor subsidiaries.

23




The Kraft Heinz Company
Condensed Consolidating Statements of Income
For the Three Months Ended April 3, 2016
(in millions)
(Unaudited)

 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
4,471

 
$
2,241

 
$
(142
)
 
$
6,570

Cost of products sold

 
2,832

 
1,502

 
(142
)
 
4,192

Gross profit

 
1,639

 
739

 

 
2,378

Selling, general and administrative expenses

 
277

 
588

 

 
865

Intercompany service fees and other recharges

 
1,214

 
(1,214
)
 

 

Operating income

 
148

 
1,365

 

 
1,513

Interest expense

 
235

 
14

 

 
249

Other expense/(income), net

 
31

 
(39
)
 

 
(8
)
Income/(loss) before income taxes

 
(118
)
 
1,390

 

 
1,272

Equity in earnings of subsidiaries
896

 
956

 

 
(1,852
)
 

Provision for/(benefit from) income taxes

 
(58
)
 
430

 

 
372

Net income/(loss)
896

 
896

 
960

 
(1,852
)
 
900

Net income/(loss) attributable to noncontrolling interest

 

 
4

 

 
4

Net income/(loss) excluding noncontrolling interest
$
896

 
$
896

 
$
956

 
$
(1,852
)
 
$
896

 
 
 
 
 
 
 
 
 
 
Comprehensive income/(loss) excluding noncontrolling interest
$
1,007

 
$
1,007

 
$
1,149

 
$
(2,156
)
 
$
1,007


24




The Kraft Heinz Company
Condensed Consolidating Statements of Income
For the Three Months Ended March 29, 2015
(in millions)
(Unaudited)

 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
925

 
$
1,612

 
$
(59
)
 
$
2,478

Cost of products sold

 
618

 
1,072

 
(59
)
 
1,631

Gross profit

 
307

 
540

 

 
847

Selling, general and administrative expenses

 
136

 
202

 

 
338

Intercompany service fees and other recharges

 
(11
)
 
11

 

 

Operating income

 
182

 
327

 

 
509

Interest expense

 
166

 
35

 

 
201

Other expense/(income), net

 
(3
)
 
(36
)
 

 
(39
)
Income/(loss) before income taxes

 
19

 
328

 

 
347

Equity in earnings of subsidiaries
276

 
257

 

 
(533
)
 

Provision for/(benefit from) income taxes

 

 
68

 

 
68

Net income/(loss)
276

 
276

 
260

 
(533
)
 
279

Net income/(loss) attributable to noncontrolling interest

 

 
3

 

 
3

Net income/(loss) excluding noncontrolling interest
$
276

 
$
276

 
$
257

 
$
(533
)
 
$
276

 
 
 
 
 
 
 
 
 
 
Comprehensive income/(loss) excluding noncontrolling interest
$
(139
)
 
$
(139
)
 
$
(544
)
 
$
683

 
$
(139
)

25




The Kraft Heinz Company
Condensed Consolidating Balance Sheets
As of April 3, 2016
(in millions)
(Unaudited)

 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
2,561

 
$
1,638

 
$

 
$
4,199

Trade receivables

 
66

 
873

 

 
939

Receivables due from affiliates

 
386

 
106

 
(492
)
 

Sold receivables

 
767

 
38

 

 
805

Inventories

 
1,943

 
949

 

 
2,892

Short-term lending due from affiliates

 
3,594

 
4,038

 
(7,632
)
 

Other current assets

 
452

 
877

 
(352
)
 
977

Total current assets

 
9,769