Document

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

FORM 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12227320&doc=12
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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of April 28, 2018, there were 1,219,172,261 shares of the registrant’s common stock outstanding.



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
 
March 31,
2018
 
April 1,
2017
Net sales
$
6,304

 
$
6,324

Cost of products sold
4,059

 
4,125

Gross profit
2,245

 
2,199

Selling, general and administrative expenses
764

 
766

Operating income
1,481

 
1,433

Interest expense
317

 
313

Other expense/(income), net
(90
)
 
(130
)
Income/(loss) before income taxes
1,254

 
1,250

Provision for/(benefit from) income taxes
261

 
359

Net income/(loss)
993

 
891

Net income/(loss) attributable to noncontrolling interest

 
(2
)
Net income/(loss) attributable to common shareholders
$
993

 
$
893

Per share data applicable to common shareholders:
 
 
 
Basic earnings/(loss)
$
0.81

 
$
0.73

Diluted earnings/(loss)
0.81

 
0.73

Dividends declared
0.625

 
0.60


See accompanying notes to the condensed consolidated financial statements.




The Kraft Heinz Company
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(Unaudited)
 
For the Three Months Ended
 
March 31,
2018
 
April 1,
2017
Net income/(loss)
$
993

 
$
891

Other comprehensive income/(loss), net of tax:
 
 
 
Foreign currency translation adjustments
197

 
307

Net deferred gains/(losses) on net investment hedges
(74
)
 
(51
)
Net deferred gains/(losses) on cash flow hedges
22

 
(34
)
Net deferred losses/(gains) on cash flow hedges reclassified to net income
(13
)
 
20

Net actuarial gains/(losses) arising during the period

 
(10
)
Reclassification of net postemployment benefit losses/(gains)
(58
)
 
(55
)
Total other comprehensive income/(loss)
74

 
177

Total comprehensive income/(loss)
1,067

 
1,068

Comprehensive income/(loss) attributable to noncontrolling interest
(5
)
 
(4
)
Comprehensive income/(loss) attributable to common shareholders
$
1,072

 
$
1,072


See accompanying notes to the condensed consolidated financial statements.



The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions, except per share data)
(Unaudited)
 
March 31, 2018
 
December 30, 2017
ASSETS
 
 
 
Cash and cash equivalents
$
1,794

 
$
1,629

Trade receivables (net of allowances of $24 at March 31, 2018 and $23 at December 30, 2017)
1,044

 
921

Sold receivables
530

 
353

Income taxes receivable
150

 
582

Inventories
3,144

 
2,815

Other current assets
775

 
966

Total current assets
7,437

 
7,266

Property, plant and equipment, net
7,267

 
7,120

Goodwill
44,843

 
44,824

Intangible assets, net
59,600

 
59,449

Other assets
1,640

 
1,573

TOTAL ASSETS
$
120,787

 
$
120,232

LIABILITIES AND EQUITY
 
 
 
Commercial paper and other short-term debt
$
1,001

 
$
460

Current portion of long-term debt
2,742

 
2,743

Trade payables
4,241

 
4,449

Accrued marketing
567

 
680

Income taxes payable
291

 
152

Interest payable
345

 
419

Other current liabilities
1,142

 
1,229

Total current liabilities
10,329

 
10,132

Long-term debt
28,561

 
28,333

Deferred income taxes
14,085

 
14,076

Accrued postemployment costs
400

 
427

Other liabilities
949

 
1,017

TOTAL LIABILITIES
54,324

 
53,985

Commitments and Contingencies (Note 14)

 

Redeemable noncontrolling interest
8

 
6

Equity:
 
 
 
Common stock, $0.01 par value (5,000 shares authorized; 1,222 shares issued and 1,219 shares outstanding at March 31, 2018; 1,221 shares issued and 1,219 shares outstanding at December 30, 2017)
12

 
12

Additional paid-in capital
58,733

 
58,711

Retained earnings/(deficit)
8,718

 
8,589

Accumulated other comprehensive income/(losses)
(975
)
 
(1,054
)
Treasury stock, at cost (3 shares at March 31, 2018 and 2 shares at December 30, 2017)
(240
)
 
(224
)
Total shareholders' equity
66,248

 
66,034

Noncontrolling interest
207

 
207

TOTAL EQUITY
66,455

 
66,241

TOTAL LIABILITIES AND EQUITY
$
120,787

 
$
120,232


See accompanying notes to the condensed consolidated financial statements.



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 December 30, 2017
12

 
58,711

 
8,589

 
(1,054
)
 
(224
)
 
207

 
66,241

Net income/(loss) excluding redeemable noncontrolling interest

 

 
993

 

 

 
5

 
998

Other comprehensive income/(loss) excluding redeemable noncontrolling interest

 

 

 
79

 

 
(5
)
 
74

Dividends declared-common stock

 

 
(762
)
 

 

 

 
(762
)
Cumulative effect of accounting standards adopted in the period

 

 
(95
)
 

 

 

 
(95
)
Exercise of stock options, issuance of other stock awards, and other

 
22

 
(7
)
 

 
(16
)
 

 
(1
)
Balance at March 31, 2018
$
12

 
$
58,733

 
$
8,718

 
$
(975
)
 
$
(240
)
 
$
207

 
$
66,455


See accompanying notes to the condensed consolidated financial statements.



The Kraft Heinz Company
Condensed Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
 
For the Three Months Ended
 
March 31,
2018
 
April 1,
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income/(loss)
$
993

 
$
891

Adjustments to reconcile net income/(loss) to operating cash flows:
 
 
 

Depreciation and amortization
234

 
262

Amortization of postretirement benefit plans prior service costs/(credits)
(106
)
 
(82
)
Equity award compensation expense
7

 
11

Deferred income tax provision/(benefit)
(47
)
 
105

Pension contributions
(5
)
 
(11
)
Nonmonetary currency devaluation
47

 
8

Other items, net
(12
)
 
8

Changes in current assets and liabilities:
 
 
 
Trade receivables
(712
)
 
(1,040
)
Inventories
(312
)
 
(492
)
Accounts payable
(69
)
 
62

Other current assets
9

 
(67
)
Other current liabilities
386

 
(270
)
Net cash provided by/(used for) operating activities
413

 
(615
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Cash receipts on sold receivables
436

 
464

Capital expenditures
(223
)
 
(368
)
Payments to acquire business, net of cash acquired
(215
)
 

Other investing activities, net
6

 
38

Net cash provided by/(used for) investing activities
4

 
134

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of commercial paper
1,524

 
2,324

Repayments of commercial paper
(1,006
)
 
(2,068
)
Dividends paid-common stock
(897
)
 
(736
)
Other financing activities, net
3

 
(25
)
Net cash provided by/(used for) financing activities
(376
)
 
(505
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(10
)
 
13

Cash, cash equivalents, and restricted cash
 
 
 
Net increase/(decrease)
31

 
(973
)
Balance at beginning of period
1,769

 
4,255

Balance at end of period
$
1,800

 
$
3,282

 
 
 
 
Non-cash investing activities:
 
 
 
Beneficial interest obtained in exchange for securitized trade receivables
$
613

 
$
880


See accompanying notes to the condensed consolidated financial statements.



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 fairly state our results for the periods presented.
The condensed consolidated balance sheet data at December 30, 2017 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 December 30, 2017. The results for interim periods are not necessarily indicative of future or annual results.
New Accounting Pronouncements
Accounting Standards Adopted in the Current Year:
In March 2017, the Financial Accounting Standards Board (the “FASB”) issued accounting standards update (“ASU”) 2017-07 related to the presentation of net periodic benefit cost (pension and postretirement cost). This ASU became effective beginning in the first quarter of our fiscal year 2018. Under the new guidance, the service cost component of net periodic benefit cost must be presented in the same statement of income line item as other employee compensation costs arising from services rendered by employees during the period. Other components of net periodic benefit cost must be disaggregated from the service cost component in the statements of income and must be presented outside the operating income subtotal. Additionally, only the service cost component is eligible for capitalization in assets. The new guidance must be applied retrospectively for the statement of income presentation of service cost components and other net periodic benefit cost components and prospectively for the capitalization of service cost components. There is a practical expedient that allows us to use historical amounts disclosed in our Postemployment Benefits footnote as an estimation basis for retrospectively applying the statement of income presentation requirements. In the first quarter of 2018, we adopted this ASU using the practical expedient described above. The impact of retrospectively adopting this ASU on our historical statement of income is included in the table below. There was no associated impact to our condensed consolidated balance sheet at December 30, 2017 or our condensed consolidated statement of cash flows for the three months ended April 1, 2017.
In May 2014, the FASB issued ASU 2014-09, which superseded previously existing revenue recognition guidance. Under this ASU, companies must 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 to in exchange for those goods or services. The ASU may be applied using a full retrospective method or a modified retrospective transition method, with a cumulative-effect adjustment as of the date of adoption. The ASU also provides for certain practical expedients, including the option to expense as incurred the incremental costs of obtaining a contract, if the contract period is for one year or less. This ASU was effective beginning in the first quarter of our fiscal year 2018. We adopted this ASU in the first quarter of 2018 using the full retrospective method and the practical expedient described above. Upon adoption, we made the following policy elections: (i) we account for shipping and handling costs as contract fulfillment costs, and (ii) we exclude taxes imposed on and collected from customers in revenue producing transactions (e.g., sales, use, and value added taxes) from the transaction price. The impact of adopting this guidance was immaterial to our financial statements and related disclosures.
While the impact of the adoption of ASU 2014-09 was immaterial, at the same time we retrospectively corrected immaterial misclassifications in our statements of income principally related to customer incentive program expenses. The impact on our statement of income for the three months ended April 1, 2017 was a decrease to net sales of $40 million, a decrease to cost of products sold of $38 million, and a decrease to selling, general and administrative expenses (“SG&A”) of $2 million. These impacts are included in the table below. There was no associated impact to our condensed consolidated balance sheet at December 30, 2017 or our condensed consolidated statement of cash flows for the three months ended April 1, 2017.



The impacts of these ASUs and reclassifications on our historical statement of income were as follows (in millions):
 
For the Three Months Ended
 
April 1, 2017
 
As Reported
 
Adjustment
 
As Adjusted
Net sales
$
6,364

 
$
(40
)
 
$
6,324

Cost of products sold
4,063

 
62

 
4,125

Gross profit
2,301

 
(102
)
 
2,199

Selling, general and administrative expenses
750

 
16

 
766

Operating income
1,551

 
(118
)
 
1,433

Other expense/(income), net
(12
)
 
(118
)
 
(130
)
Income/(loss) before income taxes
1,250

 

 
1,250

In October 2016, the FASB issued ASU 2016-16 related to the income tax accounting impacts of intra-entity transfers of assets other than inventory, such as intellectual property and property, plant and equipment. Under the new accounting guidance, current and deferred income taxes should be recognized upon transfer of the assets. Previously, recognition of current and deferred income taxes was prohibited until the asset was sold to an external party. This ASU became effective beginning in the first quarter of our fiscal year 2018. We adopted this new guidance on a modified retrospective basis through a cumulative-effect adjustment of $95 million to decrease retained earnings in the first quarter of 2018.
In January 2017, the FASB issued ASU 2017-01 clarifying the definition of a business used in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU provides a screen for entities to determine if an integrated set of assets and activities (“set”) is not a business. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If this screen is not met, the entity then determines if the set meets the minimum requirement of a business. For a set to be a business, it must include an input and a substantive process which together significantly contribute to the ability to create outputs. This ASU became effective beginning in the first quarter of our fiscal year 2018. We adopted this ASU on a prospective basis. The adoption of this ASU did not impact our financial statements or related disclosures.
Accounting Standards Not Yet Adopted:
In February 2016, the FASB issued ASU 2016-02 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 updated guidance requires lessees to reflect most leases on their balance sheets as assets and obligations. The ASU also provides for certain practical expedients, which we are considering for adoption. This includes ASU 2018-01, which provides a practical expedient that allows companies to exclude existing or expired land easements from the lease assessment (though new land easements entered into after adoption must be assessed). This ASU will be effective beginning in the first quarter of our fiscal year 2019. Early adoption is permitted. The guidance must be adopted using a modified retrospective transition. We are currently evaluating the impact this ASU will have on our financial statements and related disclosures. We have completed our scoping reviews, identified our significant leases by geography and by asset type, and made progress in developing accounting policies and policy elections upon adoption of the standard. We have also developed a lease data extraction strategy and commenced data extraction efforts. Furthermore, we have identified an accounting system to support the future state leasing process and have started to develop our future state process design as part of the overall system implementation. Upon adoption, we expect that our financial statement disclosures will be expanded to present additional details of our leasing arrangements. At this time, we are unable to reasonably estimate the expected increase in assets and liabilities on our condensed consolidated balance sheets upon adoption. We will adopt this ASU on the first day of our fiscal year 2019.



In January 2017, the FASB issued ASU 2017-04 related to goodwill impairment testing. This ASU eliminates Step 2 from the goodwill impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, the entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. Previously, if the fair value of a reporting unit was lower than its carrying amount (Step 1), an entity was required to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). Additionally, under the new standard, entities that have reporting units with zero or negative carrying amounts will no longer be required to perform the qualitative assessment to determine whether to perform Step 2 of the goodwill impairment test. As a result, reporting units with zero or negative carrying amounts will generally be expected to pass the simplified impairment test; however, additional disclosure will be required of those entities. This ASU will be effective beginning in the first quarter of our fiscal year 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The new guidance must be adopted on a prospective basis. While we are still evaluating the timing of adoption, we currently do not expect this ASU to have a material impact on our financial statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12 related to accounting for hedging activities. This guidance will impact the accounting for our financial (i.e., foreign exchange and interest rate) and non-financial (i.e., commodity) hedging activities. Key components of this ASU that could impact us are as follows:
Grants the ability to hedge the risk associated with the change in a contractually specified component of the purchase or sale of a non-financial item instead of the total contractual price, which could allow more commodity contracts to qualify for hedge accounting;
Requires us to defer the entire change in value of the derivative, including the effective and ineffective portion, into other comprehensive income until the hedged item impacts net income. When released, the deferred hedge gains and losses, including the ineffective portion, will be recognized in the same statement of income line affected by the hedged item;
Allows us to recognize changes in the fair value of excluded components in other comprehensive income (which will be amortized into net income over the life of the derivative) or in net income in the related period;
Changes hedge effectiveness testing, including timing and allowable methods of testing; and,
Requires additional tabular disclosures in the footnotes to the financial statements.
The method for adopting the revised standard is modified retrospective. This ASU will be effective beginning in the first quarter of our fiscal year 2019. Early adoption is permitted, including in an interim period. We are currently evaluating the timing of adoption and the impact this ASU will have on our financial statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02 related to reclassifying tax effects stranded in accumulated other comprehensive income because of the Tax Cuts and Jobs Act enacted on December 22, 2017 (“U.S. Tax Reform”). U.S. Tax Reform reduced the U.S. federal corporate tax rate from 35.0% to 21.0%. Accounting Standards Codification Topic 740, Income Taxes, (“ASC 740”) requires the remeasurement of deferred tax assets and liabilities as a result of such changes in tax laws or rates to be presented in net income from continuing operations. However, the related tax effects of such deferred tax assets and liabilities may have been originally recorded in other comprehensive income. This ASU allows companies to reclassify such stranded tax effects from accumulated other comprehensive income to retained earnings. This reclassification adjustment is optional, and if elected, may be applied either to the period of adoption or retrospectively to the period(s) impacted by U.S. Tax Reform. Additionally, this ASU requires companies to disclose the policy election for stranded tax effects as well as the general accounting policy for releasing income tax effects from accumulated other comprehensive income. This guidance is effective in the first quarter of 2019. Early adoption is permitted, including in an interim period. We are currently evaluating the impact this ASU will have on our financial statements and related disclosures, including the timing of adoption and the application method.
Significant Accounting Policies
The following significant accounting policies were updated in the first quarter of 2018 to reflect changes upon adoption of ASU 2014-09 and ASU 2017-07. There were no other changes to our accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 30, 2017.
Revenue Recognition:
Our revenues are primarily derived from customer orders for the purchase of our products. We recognize revenues as performance obligations are fulfilled when control passes to our customers. We record revenues net of variable consideration including consumer incentives and performance obligations related to trade promotions, excluding taxes, and including all shipping and handling charges billed to customers (accounting for shipping and handling charges that occur after the transfer of control as fulfillment costs). We also record a refund liability for estimated product returns and customer allowances as reductions to revenues within the same period that the revenue is recognized. We base these estimates principally on historical and current period experience factors. We recognize costs paid to third party brokers to obtain contracts as expenses as our contracts are generally less than one year.



Advertising, Consumer Incentives, and Trade Promotions:
We promote our products with advertising, consumer incentives, and performance obligations related to trade promotions. Consumer incentives and trade promotions include, but are not limited to, discounts, coupons, rebates, performance based in-store display activities, and volume-based incentives. Variable consideration related to consumer incentive and trade promotion activities are recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization, redemption rates, or current period experience factors. We review and adjust these estimates each quarter based on actual experience and other information.
Postemployment Benefit Plans:
We maintain various retirement plans for the majority of our employees. These include pension benefits, postretirement health care benefits, and defined contribution benefits. The cost of these plans is charged to expense over the working life of the covered employees. We generally amortize net actuarial gains or losses in future periods within other expense/(income), net.
Note 2. Acquisition
On March 9, 2018 (the “Acquisition Date”), we acquired all of the outstanding equity interests in Cerebos Pacific Limited (“Cerebos”) (the “Acquisition”), an Australian and New Zealand food and beverage company with several iconic local brands. The Cerebos business manufactures, markets, and sells food and beverage products, including gravies, sauces, instant coffee, salt, herbs and spices, and tea. We have elected to exclude the results of Cerebos from the Acquisition Date through March 31, 2018 from our condensed consolidated statement of income for the first quarter of 2018. These results were insignificant and we expect to record them in the second quarter of 2018. The preliminary opening balance sheet of Cerebos was included in our condensed consolidated balance sheet at March 31, 2018. We have not included unaudited pro forma results, prepared in accordance with ASC 805, as if Cerebos had been acquired as of January 1, 2018, as it would not yield materially different results.
The Acquisition was accounted for under the acquisition method of accounting for business combinations. The total consideration paid for Cerebos was approximately $238 million. We utilized estimated fair values at the Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. The purchase price allocation for the Acquisition is preliminary and subject to adjustments.
The fair value estimates of the assets acquired are subject to adjustment during the measurement period (up to one year from the Acquisition Date). The primary areas of accounting for the Acquisition that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired, residual goodwill, and any related tax impact. The fair values of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While we believe that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired and liabilities assumed, we will evaluate any necessary information prior to finalization of the fair value. During the measurement period, we will adjust preliminary valuations assigned to assets and liabilities if new information is obtained about facts and circumstances that existed as of the Acquisition Date, if any, that, if known, would have resulted in revised values for these items as of that date. The impact of all changes, if any, that do not qualify as measurement period adjustments will be included in current period earnings.
The preliminary purchase price allocation to assets acquired and liabilities assumed in the Acquisition was (in millions):
Cash
$
23

Other current assets
65

Property, plant and equipment, net
77

Identifiable intangible assets
100

Trade and other payables
(40
)
Other non-current liabilities
(4
)
Net assets acquired
221

Goodwill on acquisition
17

Total consideration
$
238

The Acquisition preliminarily resulted in $17 million of non tax deductible goodwill relating principally to planned expansion of Cerebos brands into new categories and markets. Goodwill has been allocated to our segments as shown in Note 6, Goodwill and Intangible Assets.



The preliminary purchase price allocation to identifiable intangible assets acquired is:
 
Fair Value
(in millions of dollars)
 
Weighted Average Life
(in years)
Definite-lived trademarks
$
87

 
22
Customer-related assets
13

 
12
Total
$
100

 
 
We valued trademarks using the relief from royalty method and customer-related assets using the distributor method. Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management plans, and market comparables.
We used carrying values as of the Acquisition Date to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items at the Acquisition Date.
We valued finished goods and work-in-process inventory using a net realizable value approach. Raw materials and packaging inventory was valued using the replacement cost approach.
We valued property, plant and equipment using a combination of the income approach, the market approach and the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors.
We incurred merger costs of $9 million for the three months ended March 31, 2018 related to the Acquisition.
Note 3. Integration and Restructuring Expenses
As part of our restructuring activities, we incur expenses that qualify as exit and disposal costs under U.S. GAAP. These include severance and employee benefit costs and other exit costs. Severance and employee benefit costs primarily relate to cash severance, non-cash severance, including accelerated equity award compensation expense, and pension and other termination benefits. Other exit costs primarily relate to lease and contract terminations. 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 under U.S. GAAP. These include asset-related costs and other implementation costs. Asset-related costs primarily relate to accelerated depreciation and asset impairment charges. Other implementation costs primarily relate to start-up costs of new facilities, professional fees, asset relocation costs, and costs to exit facilities.
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. 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 value if carrying value exceeds fair value. All other costs are recognized as incurred.
Integration Program:
In July 2015, we announced a multi-year program (the “Integration Program”) designed to reduce costs, streamline and simplify our operating structure as well as optimize our production and supply chain network across our businesses in the United States and Canada segments. As of December 30, 2017, we had substantially completed our Integration Program. Approximately 60% of total Integration Program costs were reflected in cost of products sold and approximately 60% were cash expenditures.
Overall, as part of the Integration Program, we closed net six factories, consolidated our distribution network, and eliminated 4,900 positions. The Integration Program liability at March 31, 2018 related primarily to lease terminations in the U.S. and Canada.
As of March 31, 2018, we have incurred cumulative costs of $2,113 million, including $58 million for the three months ended March 31, 2018 and $127 million for the three months ended April 1, 2017. The $2,113 million of cumulative costs included $539 million of severance and employee benefit costs, $878 million of non-cash asset-related costs, $588 million of other implementation costs, and $108 million of other exit costs. The related amounts incurred during the three months ended March 31, 2018 were $20 million of non-cash asset-related costs and $38 million of other implementation costs.



We expect to incur additional Integration Program costs of approximately $30 million, primarily in the second quarter of 2018.
Our liability balance for Integration Program costs that qualify as exit and disposal costs under U.S. GAAP (i.e., severance and employee benefit costs and other exit costs), was (in millions):
 
Severance and Employee Benefit Costs
 
Other Exit Costs(a)
 
Total
Balance at December 30, 2017
$
24

 
$
22

 
$
46

Cash payments
(5
)
 
(1
)
 
(6
)
Non-cash utilization
(9
)
 

 
(9
)
Balance at March 31, 2018
$
10

 
$
21

 
$
31

(a) Other exit costs primarily consist of lease and contract terminations.
We expect the liability for severance and employee benefit costs as of March 31, 2018 to be paid by 2019. The liability for other exit costs primarily relates to lease obligations. The cash impact of these obligations will continue for the duration of the lease terms, which expire between 2019 and 2026.
Restructuring Activities:
In addition to our Integration Program in North America, we have a small number of other restructuring programs globally, which are focused primarily on workforce reduction and factory closure and consolidation. Related to these programs, we expect to eliminate approximately 700 positions, 70 of whom left the Company in the first quarter of 2018. These programs resulted in expenses of $32 million during the three months ended March 31, 2018, including $21 million of severance and employee benefit costs and $11 million of other implementation costs. Other restructuring program expenses totaled $21 million for the three months ended April 1, 2017.
Our liability balance for restructuring project costs that qualify as exit and disposal costs under U.S. GAAP (i.e., severance and employee benefit costs and other exit costs), was (in millions):
 
Severance and Employee Benefit Costs
 
Other Exit Costs(a)
 
Total
Balance at December 30, 2017
$
16

 
$
25

 
$
41

Charges/(credits)
21

 

 
21

Cash payments
(6
)
 
(1
)
 
(7
)
Non-cash utilization
9

 

 
9

Balance at March 31, 2018
$
40

 
$
24

 
$
64

(a) Other exit costs primarily consist of lease and contract terminations.
We expect a substantial portion of the liability for severance and employee benefit costs as of March 31, 2018 to be paid in 2018. The liability for other exit costs primarily relates to lease obligations. The cash impact of these obligations will continue for the duration of the lease terms, which expire between 2018 and 2026.
Total Integration and Restructuring:
Total expenses related to the Integration Program and restructuring activities, by income statement caption, were (in millions):
 
March 31,
2018
 
April 1,
2017
Severance and employee benefit costs - COGS
$
16

 
$
12

Severance and employee benefit costs - SG&A
5

 
19

Severance and employee benefit costs - Other expense/(income), net

 
13

Asset-related costs - COGS
20

 
75

Asset-related costs - SG&A

 
7

Other costs - COGS
40

 
9

Other costs - SG&A
9

 
13

 
$
90

 
$
148




We do not include Integration Program and restructuring expenses within Segment Adjusted EBITDA (as defined in Note 16, Segment Reporting). The pre-tax impact of allocating such expenses to our segments would have been (in millions):
 
March 31,
2018
 
April 1,
2017
United States
$
52

 
$
108

Canada
3

 
10

EMEA
21

 
14

Rest of World

 

General corporate expenses
14

 
16

 
$
90

 
$
148

In the first quarter of 2018, we reorganized our segment structure to move our Middle East and Africa businesses from the Rest of World segment to the Europe, Middle East, and Africa (“EMEA”) reportable segment. We have reflected this change in all historical periods presented. This change did not have a material impact on our current or any prior period results. See Note 16, Segment Reporting, for additional information.
Note 4. Restricted Cash
The following table provides a reconciliation of cash and cash equivalents, as reported on our condensed consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our condensed consolidated statements of cash flows (in millions):
 
March 31,
2018
 
December 30, 2017
Cash and cash equivalents
$
1,794

 
$
1,629

Restricted cash included in other assets (current)
6

 
140

Cash, cash equivalents, and restricted cash
$
1,800

 
$
1,769

Note 5. Inventories
Inventories consisted of the following (in millions):
 
March 31, 2018
 
December 30, 2017
Packaging and ingredients
$
588

 
$
560

Work in process
478

 
439

Finished product
2,078

 
1,816

Inventories
$
3,144

 
$
2,815




Note 6. Goodwill and Intangible Assets
Goodwill:
Changes in the carrying amount of goodwill, by segment, were (in millions):
 
United States
 
Canada
 
EMEA
 
Rest of World
 
Total
Balance at December 30, 2017
$
33,700

 
$
5,246

 
$
3,238

 
$
2,640

 
$
44,824

Translation adjustments

 
(128
)
 
107

 
23

 
2

Acquisition

 

 

 
17

 
17

Balance at March 31, 2018
$
33,700

 
$
5,118

 
$
3,345

 
$
2,680

 
$
44,843

In the first quarter of 2018, we reorganized our segment structure to move our Middle East and Africa businesses from the Rest of World segment to the EMEA reportable segment. We have reflected this change in all historical periods presented. Accordingly, the segment goodwill balances at December 30, 2017 reflect an increase of $179 million in EMEA and a corresponding decrease in Rest of World. This change did not have a material impact on our current or any prior period results. See Note 16, Segment Reporting, for additional information.
See Note 2, Acquisition, for additional information related to our acquisition of Cerebos.
We test goodwill for impairment at least annually in the second quarter or when a triggering event occurs. We performed our 2017 annual impairment test as of April 2, 2017. As a result of our 2017 annual impairment test, there was no impairment of goodwill. Each of our goodwill reporting units had excess fair value over its carrying value of at least 10% as of April 2, 2017.
Our goodwill balance consists of 20 reporting units and had an aggregate carrying value of $44.8 billion as of March 31, 2018. As a majority of our goodwill was recently recorded in connection with business combinations that occurred in 2015 and 2013, representing fair values as of the respective transaction dates, there was not a significant excess of fair values over carrying values as of April 2, 2017. We have a risk of future impairment to the extent that individual reporting unit performance does not meet our projections. Additionally, if our current assumptions and estimates, including projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors, are not met, or if valuation factors outside of our control 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 period ended March 31, 2018 that indicated it was more likely than not that our goodwill was impaired. There were no accumulated impairment losses to goodwill as of March 31, 2018.
Indefinite-lived intangible assets:
Changes in the carrying amount of indefinite-lived intangible assets, which primarily consisted of trademarks, were (in millions):
Balance at December 30, 2017
$
53,655

Translation adjustments
102

Balance at March 31, 2018
$
53,757

We test indefinite-lived intangible assets for impairment at least annually in the second quarter or when a triggering event occurs. We performed our 2017 annual impairment test as of April 2, 2017. As a result of our 2017 annual impairment test, we recognized a non-cash impairment loss of $49 million in SG&A in the second quarter of 2017. This loss was due to continued declines in nutritional beverages in India. The loss was recorded in our EMEA segment as the related trademark is owned by our Italian subsidiary. Each of our other brands had excess fair value over its carrying value of at least 10% as of April 2, 2017.
Our indefinite-lived intangible assets primarily consist of a large number of individual brands and had an aggregate carrying value of $53.8 billion as of March 31, 2018. As a majority of our indefinite-lived intangible assets were recently recorded in connection with business combinations that occurred in 2015 and 2013, representing fair values as of the respective transaction dates, there was not a significant excess of fair values over carrying values as of April 2, 2017. We have a risk of future impairment to the extent individual brand performance does not meet our projections. Additionally, if our current assumptions and estimates, including projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors, are not met, or if valuation factors outside of our control 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 period ended March 31, 2018 that indicated it was more likely than not that our indefinite-lived intangible assets were impaired.



Definite-lived intangible assets:
Definite-lived intangible assets were (in millions):
 
March 31, 2018
 
December 30, 2017
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Trademarks
$
2,478

 
$
(317
)
 
$
2,161

 
$
2,386

 
$
(288
)
 
$
2,098

Customer-related assets
4,254

 
(588
)
 
3,666

 
4,231

 
(544
)
 
3,687

Other
21

 
(5
)
 
16

 
14

 
(5
)
 
9

 
$
6,753

 
$
(910
)
 
$
5,843

 
$
6,631

 
$
(837
)
 
$
5,794

Amortization expense for definite-lived intangible assets was $70 million for the three months ended March 31, 2018 and $67 million for the three months ended April 1, 2017. Additionally, we recorded $87 million of trademarks and $13 million of customer-related assets as part of the Cerebos acquisition. Aside from amortization expense and purchase accounting adjustments, the changes in definite-lived intangible assets from December 30, 2017 to March 31, 2018 primarily reflect the impact of foreign currency. We estimate that amortization expense related to definite-lived intangible assets will be approximately $275 million for each of the next five years.
Note 7. 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 effective tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. Additionally, our quarterly income tax provision is determined based on our estimated full year effective tax rate, adjusted for tax attributable to infrequent or unusual items, which are recognized on a discrete period basis in the income tax provision for the period in which they occur.
Our effective tax rate was 20.8% for the three months ended March 31, 2018 compared to 28.7% for the three months ended April 1, 2017. The decrease in our effective tax rate was mostly driven by the favorable impact of U.S. Tax Reform, primarily related to the lower federal corporate tax rate. This favorability was partially offset by tax associated with certain provisions of U.S. Tax Reform such as the federal tax on GILTI (defined below). Additionally, in the prior year we had favorability from net discrete items, primarily related to reversals of uncertain tax position reserves in foreign jurisdictions.
U.S. Tax Reform legislation enacted by the federal government on December 22, 2017 significantly changed U.S. tax law by, among other things, lowering the federal corporate tax rate from 35.0% to 21.0%, effective January 1, 2018, and imposing a one-time toll charge on deemed repatriated earnings of foreign subsidiaries as of December 30, 2017. In addition, there were many new provisions, including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income provisions (“GILTI”), the base erosion anti-abuse tax (“BEAT”), and a deduction for foreign-derived intangible income (“FDII”).
Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017 provides us with up to one year to finalize accounting for the impacts of U.S. Tax Reform. When the initial accounting for U.S Tax Reform impacts is incomplete, we may include provisional amounts when reasonable estimates can be made. As of December 30, 2017, we had made reasonable estimates of our deferred income tax benefit related to the corporate rate change, the toll charge, and other tax expenses, including a change in our indefinite reinvestment assertion related to historic earnings of foreign subsidiaries as of December 30, 2017. In the first quarter of 2018, we recorded a measurement period adjustment to reduce income tax expense and reduce deferred tax liabilities each by approximately $20 million. We did not record any other measurement period adjustments to our provisional U.S. Tax Reform amounts during the three months ended March 31, 2018.
The ultimate impacts of U.S. Tax Reform may differ from our provisional amounts due to gathering additional information to more precisely compute the amount of tax, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take. We expect to revise our U.S. Tax Reform impact estimates as we refine our analysis of the new rules and as new guidance is issued. We expect to finalize accounting for the impacts of U.S. Tax Reform when the 2017 U.S. corporate income tax return is filed in 2018.
We have undistributed historic earnings in foreign subsidiaries which are currently not considered to be indefinitely reinvested. We have recorded a reasonable estimate of deferred taxes of $96 million as of March 31, 2018 to reflect local country withholding taxes that will be owed when this cash is distributed in the future. Additionally, as of March 31, 2018, we consider the unremitted current year earnings of certain international subsidiaries that impose local country taxes on dividends to be indefinitely reinvested. For those undistributed earnings considered to be indefinitely 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.



See Note 8, Income Taxes, to our consolidated financial statements for the year ended December 30, 2017 in our Annual Report on Form 10-K for additional information related to U.S. Tax Reform impacts.
Note 8. Employees’ Stock Incentive Plans
Our annual equity award grants and vesting occurred in the first quarter of 2018. Other off-cycle equity grants and vesting 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 December 30, 2017
19,289,564

 
$
41.63

Granted
1,420,250

 
66.89

Forfeited
(408,067
)
 
44.45

Exercised
(476,048
)
 
32.19

Outstanding at March 31, 2018
19,825,699

 
43.61

The aggregate intrinsic value of stock options exercised during the period was $20 million for the three months ended March 31, 2018.
Restricted Stock Units:
Our restricted stock unit (“RSU”) activity and related information was:
 
Number of Units
 
Weighted Average Grant Date Fair Value
(per share)
Outstanding at December 30, 2017
1,284,262

 
$
81.91

Granted
1,352,251

 
58.78

Forfeited
(49,633
)
 
86.85

Vested
(113,671
)
 
73.12

Outstanding at March 31, 2018
2,473,209

 
69.57

The aggregate fair value of RSUs that vested during the period was $8 million for the three months ended March 31, 2018.
Performance Share Units:
Our performance share unit (“PSU”) activity and related information was:
 
Number of Units
 
Weighted Average Grant Date Fair Value
(per share)
Outstanding at December 30, 2017
815,383

 
$
70.16

Granted
2,595,333

 
56.82

Forfeited
(32,812
)
 
69.02

Outstanding at March 31, 2018
3,377,904

 
59.92

Note 9. Postemployment Benefits
We capitalize a portion of net pension and postretirement cost/(benefit) into inventory based on our production activities. The amounts capitalized into inventory as of March 31, 2018 and April 1, 2017 are included in the net pension and postretirement cost/(benefit) tables below. Beginning January 1, 2018, only the service cost component of net pension and postretirement cost/(benefit) is capitalized into inventory. As part of the adoption of ASU 2017-07, we recognized a one-time favorable credit of $42 million within cost of products sold related to amounts that were previously capitalized into inventory. Included in this credit was $28 million related to prior service credits that were previously capitalized to inventory.



Pension Plans
Components of Net Pension Cost/(Benefit):
Net pension cost/(benefit) consisted of the following (in millions):
 
For the Three Months Ended
 
U.S. Plans
 
Non-U.S. Plans
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Service cost
$
2

 
$
3

 
$
5

 
$
4

Interest cost
39

 
45

 
19

 
16

Expected return on plan assets
(63
)
 
(65
)
 
(48
)
 
(43
)
Amortization of unrecognized losses/(gains)

 

 
1

 

Special/contractual termination benefits

 
7

 
1

 
6

Other

 
2

 

 
(9
)
Net pension cost/(benefit)
$
(22
)
 
$
(8
)
 
$
(22
)
 
$
(26
)
We present all non-service cost components of net pension cost/(benefit) within other expense/(income), net on our condensed consolidated statements of income.
Employer Contributions:
During the three months ended March 31, 2018, we contributed $5 million to our non-U.S. pension plans. We did not contribute to our U.S. pension plans. Based on our contribution strategy, we plan to make further contributions of approximately $50 million to our non-U.S. pension plans during the remainder of 2018. We do not plan to make contributions to our U.S. pension plans in 2018. However, our actual contributions and plans may change due to many factors, including the timing of regulatory approval for the windup of certain non-U.S. pension plans, changes in tax, employee benefit, or other laws and regulations, 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 (in millions):
 
For the Three Months Ended
 
March 31,
2018
 
April 1,
2017
Service cost
$
2

 
$
2

Interest cost
11

 
13

Expected return on plan assets
(12
)
 

Amortization of prior service costs/(credits)
(78
)
 
(90
)
Net postretirement cost/(benefit)
$
(77
)
 
$
(75
)
We present all non-service cost components of net postretirement cost/(benefit) within other expense/(income), net on our condensed consolidated statements of income.
Employer Contributions:
During the three months ended March 31, 2018, we contributed $17 million to our postretirement benefit plans. Based on our contribution strategy, we plan to make further contributions of approximately $10 million to our postretirement benefit plans during the remainder of 2018. However, our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual postretirement plan asset performance or interest rates, or other factors.
Note 10. Financial Instruments
See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 30, 2017 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 outstanding derivative instruments were (in millions):
 
March 31, 2018
 
December 30, 2017
Commodity contracts
$
389

 
$
272

Foreign exchange contracts
3,447

 
2,876

Cross-currency contracts
3,161

 
3,161

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 were (in millions):
 
March 31, 2018
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
(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
$

 
$

 
$
12

 
$
28

 
$

 
$

 
$
12

 
$
28

Cross-currency contracts

 

 
329

 

 

 

 
329

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
6

 
11

 

 

 

 

 
6

 
11

Foreign exchange contracts

 

 
14

 
5

 

 

 
14

 
5

Cross-currency contracts

 

 
18

 

 

 

 
18

 

Total fair value
$
6

 
$
11

 
$
373

 
$
33

 
$

 
$

 
$
379

 
$
44

 
December 30, 2017
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
(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
$

 
$

 
$
8

 
$
42

 
$

 
$

 
$
8

 
$
42

Cross-currency contracts

 

 
344

 

 

 

 
344

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
4

 
8

 

 

 

 

 
4

 
8

Foreign exchange contracts

 

 
17

 
3

 

 

 
17

 
3

Cross-currency contracts

 

 
19

 

 

 

 
19

 

Total fair value
$
4

 
$
8

 
$
388

 
$
45

 
$

 
$

 
$
392

 
$
53

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 $30 million at March 31, 2018 and $23 million at December 30, 2017. No material amounts of collateral were received or posted on our derivative assets and liabilities at March 31, 2018.
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 swaps, foreign exchange forwards and swaps, and cross-currency swaps. Commodity swaps 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 and swaps 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.
The fair values of our derivative assets 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 March 31, 2018, the principal amounts of foreign denominated debt designated as net investment hedges totaled €2,550 million and £400 million.
At March 31, 2018, our cross-currency swaps designated as net investment hedges consisted of:
Instrument
 
Notional
(local)
(in billions)
 
Notional
(USD)
(in billions)
 
Maturity
Cross-currency swap
 
£
0.8

 
$
1.4

 
October 2019
Cross-currency swap
 
C$
1.8

 
$
1.6

 
December 2019
We also periodically enter into shorter-dated foreign exchange contracts that are designated as net investment hedges. At March 31, 2018, we had Chinese renminbi foreign exchange contracts with an aggregate USD notional amount of $221 million.
Hedge Coverage:
At March 31, 2018, we had entered into contracts designated as hedging instruments, which hedge transactions for the following durations:
foreign exchange contracts for periods not exceeding the next 21 months; and
cross-currency contracts for periods not exceeding the next 21 months.
At March 31, 2018, 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 nine months; and
foreign exchange contracts for periods not exceeding the next 11 months.
cross-currency contracts for periods not exceeding the next 19 months.
Hedge Ineffectiveness:
We record pre-tax gains or losses reclassified from accumulated other comprehensive income/(losses) due to ineffectiveness for foreign exchange contracts related to forecasted transactions in other expense/(income), net.
Deferred Hedging Gains and Losses:
Based on our valuation at March 31, 2018 and assuming market rates remain constant through contract maturities, we expect transfers to net income/(loss) of unrealized losses for foreign currency cash flow hedges during the next 12 months to be insignificant. Additionally, we expect transfers to net income/(loss) of unrealized losses for interest rate cash flow hedges during the next 12 months to be insignificant.



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:
 
March 31,
2018
 
April 1,
2017
 
Commodity Contracts
 
Foreign Exchange
Contracts
 
Cross-Currency Contracts
 
Interest Rate Contracts
 
Commodity Contracts
 
Foreign Exchange
Contracts
 
Cross-Currency Contracts
 
Interest Rate
Contracts
 
(in millions)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) recognized in other comprehensive income/(loss) (effective portion)
$

 
$
25

 
$

 
$

 
$

 
$
(39
)
 
$

 
$

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

 
(11
)
 
(11
)
 

 

 
(4
)
 
(30
)
 

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

 
$
14

 
$
(11
)
 
$

 
$

 
$
(43
)
 
$
(30
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges reclassified to net income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold (effective portion)
$

 
$
(5
)
 
$

 
$

 
$

 
$
(1
)
 
$

 
$

Other expense/(income), net

 
18

 

 

 

 
(15
)
 

 

Interest expense

 

 

 
(1
)
 

 

 

 
(1
)
 

 
13

 

 
(1
)
 

 
(16
)
 

 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) on derivatives recognized in cost of products sold
(5
)
 

 

 

 
(37
)
 

 

 

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

 
20

 
(1
)
 

 

 
2

 
(1
)
 

 
(5
)
 
20

 
(1
)
 

 
(37
)
 
2

 
(1
)
 

Total gains/(losses) recognized in statements of income
$
(5
)
 
$
33

 
$
(1
)
 
$
(1
)
 
$
(37
)
 
$
(14
)
 
$
(1
)
 
$
(1
)
Related to our non-derivative, foreign denominated debt instruments designated as net investment hedges, we recognized pre-tax losses of $103 million for the three months ended March 31, 2018 and $44 million for the three months ended April 1, 2017. These amounts were recognized in other comprehensive income/(loss) for the periods then ended.



Note 11. Accumulated Other Comprehensive Income/(Losses)
The components of, and changes in, accumulated other comprehensive income/(losses), net of tax, were as follows (in millions):
 
Foreign Currency Translation Adjustments
 
Net Postemployment Benefit Plan Adjustments
 
Net Cash Flow Hedge Adjustments
 
Total
Balance as of December 30, 2017
$
(1,587
)
 
$
549

 
$
(16
)
 
$
(1,054
)
Foreign currency translation adjustments
202

 

 

 
202

Net deferred gains/(losses) on net investment hedges
(74
)
 

 

 
(74
)
Net deferred gains/(losses) on cash flow hedges

 

 
22

 
22

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

 

 
(13
)
 
(13
)
Reclassification of net postemployment benefit losses/(gains)

 
(58
)
 

 
(58
)
Total other comprehensive income/(loss)
128

 
(58
)
 
9

 
79

Balance as of March 31, 2018
$
(1,459
)
 
$
491

 
$
(7
)
 
$
(975
)
Reclassification of net postemployment benefit losses/(gains) included amounts reclassified to net income and amounts reclassified into inventory (consistent with our capitalization policy).
The gross amount and related tax benefit/(expense) recorded in, and associated with, each component of other comprehensive income/(loss) were as follows (in millions):
 
For the Three Months Ended
 
March 31,
2018
 
April 1,
2017
 
Before Tax Amount
 
Tax
 
Net of Tax Amount
 
Before Tax Amount
 
Tax
 
Net of Tax Amount
Foreign currency translation adjustments
$
202

 
$

 
$
202

 
$
309

 
$

 
$
309

Net deferred gains/(losses) on net investment hedges
(125
)
 
51

 
(74
)
 
(78
)
 
27

 
(51
)
Net deferred gains/(losses) on cash flow hedges
25

 
(3
)
 
22

 
(39
)
 
5

 
(34
)
Net deferred losses/(gains) on cash flow hedges reclassified to net income
(12
)
 
(1
)
 
(13
)
 
17

 
3

 
20

Net actuarial gains/(losses) arising during the period

 

 

 
(12
)
 
2

 
(10
)
Reclassification of net postemployment benefit losses/(gains)
(77
)
 
19

 
(58
)
 
(90
)
 
35

 
(55
)



The amounts reclassified from accumulated other comprehensive income/(losses) 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/(Loss) is Presented
 
 
For the Three Months Ended
 
 
 
 
March 31,
2018
 
April 1,
2017
 
 
Losses/(gains) on cash flow hedges:
 
 
 
 
 

Foreign exchange contracts
 
$
5

 
$
1

 
Cost of products sold
Foreign exchange contracts
 
(18
)
 
15

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

 
1

 
Interest expense
Losses/(gains) on cash flow hedges before income taxes
 
(12
)
 
17

 
 
Losses/(gains) on cash flow hedges, income taxes
 
(1
)
 
3

 
 
Losses/(gains) on cash flow hedges
 
$
(13
)
 
$
20

 
 
 
 
 
 
 
 
 
Losses/(gains) on postemployment benefits:
 
 
 
 
 

Amortization of unrecognized losses/(gains)
 
$
1

 
$

 
(a)
Amortization of prior service costs/(credits)
 
(78
)
 
(90
)
 
(a)
Losses/(gains) on postemployment benefits before income taxes
 
(77
)
 
(90
)
 
 
Losses/(gains) on postemployment benefits, income taxes
 
19

 
35

 
 
Losses/(gains) on postemployment benefits
 
$
(58
)
 
$
(55
)
 
 
(a)
These components are included in the computation of net periodic postemployment benefit costs. See Note 9, 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 12. Venezuela - Foreign Currency and Inflation
We have a subsidiary in Venezuela that manufactures and sells a variety of products, primarily in the condiments and sauces and infant and nutrition categories. We apply highly inflationary accounting to the results of our Venezuelan subsidiary and include these results in our consolidated financial statements. Under highly inflationary accounting, the functional currency of our Venezuelan subsidiary is the U.S. dollar (the reporting currency of Kraft Heinz), although the majority of its transactions are in Venezuelan bolivars. As a result, we must revalue the results of our Venezuelan subsidiary to U.S. dollars. We revalue the income statement using daily weighted average DICOM rates, and we revalue the bolivar denominated monetary assets and liabilities at the period-end DICOM spot rate. The resulting revaluation gains and losses are recorded in current net income, rather than accumulated other comprehensive income. These gains and losses are classified within other expense/(income), net as nonmonetary currency devaluation on our condensed consolidated statements of income.
In February 2018, the Venezuelan government eliminated the official exchange rate of BsF10 per U.S. dollar, which was available through the Sistema de Divisa Protegida (“DIPRO”) for purchases and sales of essential items, including food products. At December 30, 2017, we had outstanding requests of $26 million for payment of invoices for the purchase of ingredients and packaging materials for the years 2012 through 2015, all of which were requested for payment at BsF6.30 per U.S. dollar (the DIPRO rate until March 10, 2016). Following the elimination of this preferential rate, we determined that these outstanding requests, which were approved by the Venezuelan government, were no longer collectible. There was no impact on our condensed consolidated statement of income for the three months ended March 31, 2018.
Following elimination of the DIPRO rate, the Sistema de Divisa Complementaria (“DICOM”) is the only foreign currency exchange mechanism legally available to us for converting Venezuelan bolivars to U.S. dollars. The auction-based DICOM system was temporarily frozen in September 2017 but reopened in February 2018. The last published DICOM rate before the auction freeze was BsF3,345 per U.S. dollar compared to BsF25,000 per U.S. dollar upon reopening in February 2018. The DICOM rate at March 31, 2018 was BsF49,478 per U.S. dollar. We did not obtain any U.S. dollars at DICOM rates during the three months ended March 31, 2018. As of March 31, 2018, we believe the DICOM rate is the most appropriate legally available rate at which to translate the results of our Venezuelan subsidiary. We continue to monitor the DICOM rate, and the nonmonetary assets supported by the underlying operations in Venezuela, for impairment.



We remeasured the bolivar denominated assets and liabilities of our Venezuelan subsidiary at March 31, 2018 using the DICOM spot rate of BsF49,478 per U.S. dollar. We remeasured the income statement of our Venezuelan subsidiary for the three months ended March 31, 2018 using a weighted average rate of BsF18,081 per U.S. dollar. Remeasurements of the monetary assets and liabilities and operating results of our Venezuelan subsidiary at DICOM rates resulted in nonmonetary currency devaluation losses of $47 million for the three months ended March 31, 2018 and $8 million for the three months ended April 1, 2017. These losses were recorded in other expense/(income), net in the condensed consolidated statements of income for the periods then ended.
In addition to DICOM, there is an unofficial market for obtaining U.S. dollars with Venezuelan bolivars. The exact exchange rate is widely debated but is generally accepted to be substantially higher than the latest published DICOM rate. We have not transacted at any unofficial market rates in 2018 and have no plans to transact at unofficial market rates in the foreseeable future.
Outside of accessing the DICOM market, our Venezuelan subsidiary obtains U.S. dollars through exports and royalty payments. These U.S. dollars are primarily used for purchases of tomato paste and spare parts for manufacturing, as well as a limited amount of other operating costs. As of March 31, 2018, our Venezuelan subsidiary has sufficient U.S. dollars to fund these operational needs in the foreseeable future. However, further deterioration of the economic environment or regulation changes could jeopardize our export business. Our Venezuelan subsidiary has increasingly sourced production inputs locally, including tomato paste and sugar, in order to reduce reliance on U.S. dollars, which we expect to continue in the foreseeable future.
Our results of operations in Venezuela reflect a controlled subsidiary. We continue to have sufficient currency liquidity and pricing flexibility to control our operations. 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 or further deterioration of the economic environment could impact our ability to control our Venezuelan operations and could lead us to deconsolidate our Venezuelan subsidiary in the future. We currently do not expect to make any new investments or contributions into Venezuela.
Note 13. Financing Arrangements
We utilize accounts receivable securitization and factoring programs (the “Programs”) globally for our working capital needs and to provide efficient liquidity. We operate these Programs such that we generally utilize the majority of the available aggregate cash consideration limits. We account for transfers of receivables pursuant to the Programs as a sale and remove them from our condensed consolidated balance sheets. Under the Programs, we generally receive cash consideration up to a certain limit and record a non-cash exchange for sold receivables for the remainder of the purchase price. We maintain a “beneficial interest,” or a right to collect cash, in the sold receivables. Cash receipts from the payments on sold receivables (which are cash receipts on the underlying trade receivables that have already been securitized in these Programs) are classified as investing activities and presented as cash receipts on sold receivables on our condensed consolidated statements of cash flows.
At March 31, 2018, we had accounts receivable securitization and factoring programs in place in the U.S. and in various countries across the globe. Generally, each of these programs automatically renews annually until terminated by either party, except our U.S. securitization program, which expires in May 2018. Additionally, our U.S. securitization program utilizes a bankruptcy-remote special-purpose entity (“SPE”). The SPE is wholly-owned by a subsidiary of Kraft Heinz and its sole business consists of the purchase or acceptance, through capital contributions of receivables and related assets, from a Kraft Heinz subsidiary and subsequent transfer of such receivables and related assets to a bank. Although the SPE is included in our condensed consolidated financial statements, it is a separate legal entity with separate creditors who will be entitled, upon its liquidation, to be satisfied out of the SPE's assets prior to any assets or value in the SPE becoming available to Kraft Heinz or its subsidiaries.
The carrying value of trade receivables removed from our condensed consolidated balance sheets in connection with the Programs was $1.2 billion at March 31, 2018 and $1.0 billion at December 30, 2017. In exchange for the sale of trade receivables, we received cash of $659 million at March 31, 2018 and $673 million at December 30, 2017 and recorded sold receivables of $530 million at March 31, 2018 and $353 million at December 30, 2017. The carrying value of sold receivables approximated the fair value at March 31, 2018 and December 30, 2017.
We act as servicer for certain of the Programs and did not record any related servicing assets or liabilities as of March 31, 2018 or December 30, 2017 because they were not material to the financial statements.
Additionally, we enter into various structured payable arrangements to facilitate supply from our vendors. Balance sheet classification is based on the nature of the agreements with our various vendors. For certain arrangements, we classify amounts outstanding within other current liabilities on our condensed consolidated balance sheets. We had approximately $141 million on our condensed consolidated balance sheets at March 31, 2018 and approximately $188 million at December 30, 2017 related to these arrangements.



Note 14. 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. 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.
Redeemable Noncontrolling Interest
In 2017, we commenced operations of a joint venture with a minority partner to manufacture, package, market, and distribute refrigerated soups and meal sides. We control operations and include this business in our consolidated results. Our minority partner has put options that, if it chooses to exercise them, would require us to purchase portions of its equity interest at a future date. These put options will become exercisable beginning in 2025 (on the eighth anniversary of the product launch date) at a price to be determined at that time based upon an independent third party valuation. The minority partner’s put options are reflected on our condensed consolidated balance sheets as a redeemable noncontrolling interest. We accrete the redeemable noncontrolling interest to its estimated redemption value over the term of the put options. At March 31, 2018, we estimate the redemption value to be approximately $100 million.
Debt
Borrowing Arrangements:
We had commercial paper outstanding of $965 million at March 31, 2018 and $448 million at December 30, 2017.
See Note 16, Debt, to our consolidated financial statements for the year ended December 30, 2017 in our Annual Report on Form 10-K for additional information on our borrowing arrangements.
Fair Value of Debt:
At March 31, 2018, the aggregate fair value of our total debt was $32.6 billion as compared with a carrying value of $32.3 billion. At December 30, 2017, the aggregate fair value of our total debt was $33.0 billion as compared with a carrying value of $31.5 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.
Note 15. Earnings Per Share
Our earnings per common share (“EPS”) were:
 
For the Three Months Ended
 
March 31,
2018
 
April 1,
2017
 
(in millions, except per share data)
Basic Earnings Per Common Share:
 
 
 
Net income/(loss) attributable to common shareholders
$
993

 
$
893

Weighted average shares of common stock outstanding
1,219

 
1,217

Net earnings/(loss)
$
0.81

 
$
0.73

Diluted Earnings Per Common Share:
 
 
 
Net income/(loss) attributable to common shareholders
$
993

 
$
893

Weighted average shares of common stock outstanding
1,219

 
1,217

Effect of dilutive equity awards
9

 
12

Weighted average shares of common stock outstanding, including dilutive effect
1,228

 
1,229

Net earnings/(loss)
$
0.81

 
$
0.73

We use the treasury stock method to calculate the dilutive effect of outstanding equity awards in the denominator for diluted EPS. Anti-dilutive shares were 5 million for the three months ended March 31, 2018 and 1 million for the three months ended April 1, 2017.



Note 16. 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.
In the first quarter of our fiscal year 2018, we reorganized certain of our international businesses to better align our global geographies. As a result, we moved our Middle East and Africa businesses from the historical Asia Pacific, Middle East, and Africa (“AMEA”) operating segment into the historical Europe reportable segment, forming the new EMEA reportable segment. The remaining businesses from the AMEA operating segment became the Asia Pacific (“APAC”) operating segment. We have reflected this change in all historical periods presented.
Therefore, effective in the first quarter of 2018, we manage and report our operating results through four segments. We have three reportable segments defined by geographic region: United States, Canada, and EMEA. Our remaining businesses are combined and disclosed as “Rest of World”. Rest of World is comprised of two operating segments: Latin America and APAC.
Management evaluates segment performance based on several factors, including net sales and Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as net income/(loss) from continuing operations before interest expense, other expense/(income), net, provision for/(benefit from) income taxes, and depreciation and amortization (excluding integration and restructuring expenses); in addition to these adjustments, we exclude, when they occur, the impacts of integration and restructuring expenses, merger costs, unrealized gains/(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’s operating results), impairment losses, gains/(losses) on the sale of a business, nonmonetary currency devaluation (e.g., remeasurement gains and losses), and equity award compensation expense (excluding integration and restructuring expenses). Segment Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations. Management uses Segment Adjusted EBITDA to evaluate segment performance and allocate resources.
Management does not use assets by segment to evaluate performance or allocate resources. Therefore, we do not disclose assets by segment.
Net sales by segment were (in millions):
 
For the Three Months Ended
 
March 31,
2018
 
April 1,
2017
Net sales:
 
 
 
United States
$
4,368

 
$
4,518

Canada
484

 
440

EMEA
685

 
597

Rest of World
767

 
769

Total net sales
$
6,304

 
$
6,324




Segment Adjusted EBITDA was (in millions):
 
For the Three Months Ended
 
March 31,
2018
 
April 1,
2017
Segment Adjusted EBITDA:
 
 
 
United States
$
1,382

 
$
1,464

Canada
134

 
125

EMEA
182

 
140

Rest of World
143

 
144

General corporate expenses
(46
)
 
(29
)
Depreciation and amortization (excluding integration and restructuring expenses)
(206
)
 
(222
)
Integration and restructuring expenses
(90
)
 
(135
)
Merger costs
(9
)
 

Unrealized gains/(losses) on commodity hedges
(2
)
 
(42
)
Equity award compensation expense (excluding integration and restructuring expenses)
(7
)
 
(12
)
Operating income
1,481

 
1,433

Interest expense
317

 
313

Other expense/(income), net
(90
)
 
(130
)
Income/(loss) before income taxes
$
1,254

 
$
1,250

In the first quarter of 2018, we reorganized the products within our product categories to reflect how we manage our business. We have reflected this change for all historical periods presented. Net sales by product category were (in millions):
 
For the Three Months Ended
 
March 31,
2018
 
April 1,
2017
Condiments and sauces
$
1,625

 
$
1,536

Cheese and dairy
1,251

 
1,292

Ambient meals
634

 
607

Frozen and chilled meals
604

 
648

Meats and seafood
608

 
657

Refreshment beverages
375

 
369

Coffee
357

 
349

Infant and nutrition
199

 
188

Desserts, toppings and baking
193

 
194

Nuts and salted snacks
190

 
231

Other
268

 
253

Total net sales
$
6,304

 
$
6,324

Note 17. Supplemental Financial Information
We fully and unconditionally guarantee the notes issued by our 100% owned operating subsidiary, Kraft Heinz Foods Company. See Note 16, Debt, to our consolidated financial statements for the year ended December 30, 2017 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 Kraft Heinz (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 the Securities and Exchange Commission 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.



The Kraft Heinz Company
Condensed Consolidating Statements of Income
For the Three Months Ended March 31, 2018
(in millions)
(Unaudited)
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
4,169

 
$
2,262

 
$
(127
)
 
$
6,304

Cost of products sold

 
2,588

 
1,598

 
(127
)
 
4,059

Gross profit

 
1,581

 
664

 

 
2,245

Selling, general and administrative expenses

 
183

 
581

 

 
764

Intercompany service fees and other recharges

 
1,155

 
(1,155
)
 

 

Operating income

 
243

 
1,238

 

 
1,481

Interest expense

 
298

 
19

 

 
317

Other expense/(income), net

 
(159
)
 
69

 

 
(90
)
Income/(loss) before income taxes

 
104

 
1,150

 

 
1,254

Provision for/(benefit from) income taxes

 
(27
)
 
288

 

 
261

Equity in earnings of subsidiaries
993

 
862

 

 
(1,855
)
 

Net income/(loss)
993

 
993

 
862

 
(1,855
)
 
993

Net income/(loss) attributable to noncontrolling interest

 

 

 

 

Net income/(loss) excluding noncontrolling interest
$
993

 
$
993

 
$
862

 
$
(1,855
)
 
$
993

 
 
 
 
 
 
 
 
 
 
Comprehensive income/(loss) excluding noncontrolling interest
$
1,072

 
$
1,072

 
$
1,165

 
$
(2,237
)
 
$
1,072




The Kraft Heinz Company
Condensed Consolidating Statements of Income
For the Three Months Ended April 1, 2017
(in millions)
(Unaudited)
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
4,329

 
$
2,157

 
$
(162
)
 
$
6,324

Cost of products sold

 
2,762

 
1,525

 
(162
)
 
4,125

Gross profit

 
1,567

 
632

 

 
2,199

Selling, general and administrative expenses

 
196

 
570

 

 
766

Intercompany service fees and other recharges

 
1,108

 
(1,108
)
 

 

Operating income

 
263

 
1,170