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 September 29, 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=12527100&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 every Interactive Data File required to be submitted 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 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
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 October 27, 2018, there were 1,219,434,812 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.
The Kraft Heinz Company
Condensed Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net sales
$
6,378

 
$
6,280

 
$
19,368

 
$
19,241

Cost of products sold
4,271

 
4,077

 
12,651

 
12,406

Gross profit
2,107

 
2,203

 
6,717

 
6,835

Selling, general and administrative expenses
1,037

 
665

 
2,837

 
2,220

Operating income
1,070

 
1,538

 
3,880

 
4,615

Interest expense
327

 
306

 
962

 
926

Other expense/(income), net
(71
)
 
(127
)
 
(196
)
 
(510
)
Income/(loss) before income taxes
814

 
1,359

 
3,114

 
4,199

Provision for/(benefit from) income taxes
186

 
416

 
738

 
1,205

Net income/(loss)
628

 
943

 
2,376

 
2,994

Net income/(loss) attributable to noncontrolling interest
(2
)
 
(1
)
 
(3
)
 
(2
)
Net income/(loss) attributable to common shareholders
$
630

 
$
944

 
$
2,379

 
$
2,996

Per share data applicable to common shareholders:
 
 
 
 
 
 
 
Basic earnings/(loss)
$
0.52

 
$
0.78

 
$
1.95

 
$
2.46

Diluted earnings/(loss)
0.51

 
0.77

 
1.94

 
2.44

Dividends declared
0.625

 
0.625

 
1.875

 
1.825


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
 
For the Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income/(loss)
$
628

 
$
943

 
$
2,376

 
$
2,994

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(146
)
 
421

 
(817
)
 
1,179

Net deferred gains/(losses) on net investment hedges
13

 
(124
)
 
158

 
(327
)
Amounts excluded from the effectiveness assessment of net investment hedges
3

 

 
3

 

Net deferred losses/(gains) on net investment hedges reclassified to net income
(2
)
 

 
(2
)
 

Net deferred gains/(losses) on cash flow hedges
(16
)
 
(70
)
 
40

 
(136
)
Net deferred losses/(gains) on cash flow hedges reclassified to net income
12

 
51

 
(10
)
 
97

Net actuarial gains/(losses) arising during the period
17

 
(4
)
 
70

 
(13
)
Prior service credits/(costs) arising during the period

 

 

 
1

Net postemployment benefit losses/(gains) reclassified to net income
(58
)
 
(51
)
 
(133
)
 
(260
)
Total other comprehensive income/(loss)
(177
)
 
223

 
(691
)
 
541

Total comprehensive income/(loss)
451

 
1,166

 
1,685

 
3,535

Comprehensive income/(loss) attributable to noncontrolling interest
(4
)
 
(1
)
 
(16
)
 
(4
)
Comprehensive income/(loss) attributable to common shareholders
$
455

 
$
1,167

 
$
1,701

 
$
3,539


See accompanying notes to the condensed consolidated financial statements.

2


The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions, except per share data)
(Unaudited)
 
September 29, 2018
 
December 30, 2017
ASSETS
 
 
 
Cash and cash equivalents
$
1,366

 
$
1,629

Trade receivables (net of allowances of $24 at September 29, 2018 and $23 at December 30, 2017)
2,032

 
921

Sold receivables

 
353

Income taxes receivable
195

 
582

Inventories
3,287

 
2,815

Other current assets
710

 
966

Total current assets
7,590

 
7,266

Property, plant and equipment, net
7,216

 
7,120

Goodwill
44,308

 
44,824

Intangible assets, net
58,727

 
59,449

Other assets
1,889

 
1,573

TOTAL ASSETS
$
119,730

 
$
120,232

LIABILITIES AND EQUITY
 
 
 
Commercial paper and other short-term debt
$
973

 
$
460

Current portion of long-term debt
405

 
2,743

Trade payables
4,312

 
4,449

Accrued marketing
494

 
680

Income taxes payable
104

 
152

Interest payable
315

 
419

Other current liabilities
978

 
1,229

Total current liabilities
7,581

 
10,132

Long-term debt
30,998

 
28,333

Deferred income taxes
14,215

 
14,076

Accrued postemployment costs
394

 
427

Other liabilities
964

 
1,017

TOTAL LIABILITIES
54,152

 
53,985

Commitments and Contingencies (Note 14)

 

Redeemable noncontrolling interest
6

 
6

Equity:
 
 
 
Common stock, $0.01 par value (5,000 shares authorized; 1,222 shares issued and 1,219 shares outstanding at September 29, 2018; 1,221 shares issued and 1,219 shares outstanding at December 30, 2017)
12

 
12

Additional paid-in capital
58,793

 
58,711

Retained earnings
8,576

 
8,589

Accumulated other comprehensive income/(losses)
(1,732
)
 
(1,054
)
Treasury stock, at cost (3 shares at September 29, 2018 and 2 shares at December 30, 2017)
(264
)
 
(224
)
Total shareholders' equity
65,385

 
66,034

Noncontrolling interest
187

 
207

TOTAL EQUITY
65,572

 
66,241

TOTAL LIABILITIES AND EQUITY
$
119,730

 
$
120,232


See accompanying notes to the condensed consolidated financial statements.

3


The Kraft Heinz Company
Condensed Consolidated Statements of Equity
(in millions)
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
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

 

 
2,379

 

 

 
6

 
2,385

Other comprehensive income/(loss) excluding redeemable noncontrolling interest

 

 

 
(678
)
 

 
(13
)
 
(691
)
Dividends declared-common stock

 

 
(2,286
)
 

 

 

 
(2,286
)
Cumulative effect of accounting standards adopted in the period

 

 
(97
)
 

 

 

 
(97
)
Exercise of stock options, issuance of other stock awards, and other

 
82

 
(9
)
 

 
(40
)
 
(13
)
 
20

Balance at September 29, 2018
$
12

 
$
58,793

 
$
8,576

 
$
(1,732
)
 
$
(264
)
 
$
187

 
$
65,572


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 Nine Months Ended
 
September 29,
2018
 
September 30,
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income/(loss)
$
2,376

 
$
2,994

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

Depreciation and amortization
736

 
790

Amortization of postretirement benefit plans prior service costs/(credits)
(261
)
 
(247
)
Equity award compensation expense
44

 
36

Deferred income tax provision/(benefit)
96

 
492

Pension contributions
(45
)
 
(174
)
Impairment losses
499

 
49

Nonmonetary currency devaluation
131

 
36

Other items, net
17

 
(161
)
Changes in current assets and liabilities:
 
 
 
Trade receivables
(2,154
)
 
(2,061
)
Inventories
(663
)
 
(580
)
Accounts payable
145

 
123

Other current assets
(105
)
 
(137
)
Other current liabilities
83

 
(1,144
)
Net cash provided by/(used for) operating activities
899

 
16

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Cash receipts on sold receivables
1,296

 
1,633

Capital expenditures
(594
)
 
(956
)
Payments to acquire business, net of cash acquired
(248
)
 

Other investing activities, net
31

 
47

Net cash provided by/(used for) investing activities
485

 
724

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments of long-term debt
(2,727
)
 
(2,636
)
Proceeds from issuance of long-term debt
2,990

 
1,496

Proceeds from issuance of commercial paper
2,485

 
5,495

Repayments of commercial paper
(1,950
)
 
(5,709
)
Dividends paid-common stock
(2,421
)
 
(2,161
)
Other financing activities, net
(35
)
 
26

Net cash provided by/(used for) financing activities
(1,658
)
 
(3,489
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(128
)
 
43

Cash, cash equivalents, and restricted cash
 
 
 
Net increase/(decrease)
(402
)
 
(2,706
)
Balance at beginning of period
1,769

 
4,255

Balance at end of period
$
1,367

 
$
1,549

 
 
 
 
NON-CASH INVESTING ACTIVITIES:
 
 
 
Beneficial interest obtained in exchange for securitized trade receivables
$
938

 
$
1,936


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 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 nine months ended September 30, 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 to which the company expects to be entitled 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 September 30, 2017 was a decrease to net sales of $34 million, a decrease to cost of products sold of $32 million, and a decrease to selling, general and administrative expenses (“SG&A”) of $2 million. The impact on our statement of income for the nine months ended September 30, 2017 was a decrease to net sales of $114 million, a decrease to cost of products sold of $108 million, and a decrease to SG&A of $6 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 nine months ended September 30, 2017.

6


The impacts of these ASUs and reclassifications on our historical statements of income were as follows (in millions):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2017
 
September 30, 2017
 
As Reported
 
Adjustments
 
As Adjusted
 
As Reported
 
Adjustments
 
As Adjusted
Net sales
$
6,314

 
$
(34
)
 
$
6,280

 
$
19,355

 
$
(114
)
 
$
19,241

Cost of products sold
4,000

 
77

 
4,077

 
12,059

 
347

 
12,406

Gross profit
2,314

 
(111
)
 
2,203

 
7,296

 
(461
)
 
6,835

Selling, general and administrative expenses
653

 
12

 
665

 
2,163

 
57

 
2,220

Operating income
1,661

 
(123
)
 
1,538

 
5,133

 
(518
)
 
4,615

Other expense/(income), net
(4
)
 
(123
)
 
(127
)
 
8

 
(518
)
 
(510
)
Income/(loss) before income taxes
1,359

 

 
1,359

 
4,199

 

 
4,199

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 companies 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.
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, companies 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 companies. We early adopted this guidance on a prospective basis as of April 1, 2018 (our annual impairment testing date in the second quarter of 2018). As a result of adopting this ASU, we did not perform Step 2 while completing our impairment testing.
In August 2017, the FASB issued ASU 2017-12 related to accounting for hedging activities. This guidance impacted the accounting for financial (e.g., foreign exchange and interest rate) and non-financial (e.g., commodity) hedging activities. We early adopted this guidance on a modified retrospective basis in the third quarter of 2018. Upon adoption, we recognized an insignificant cumulative-effect adjustment to retained earnings. The most significant impacts of adoption are that we now:
Recognize changes in the fair value of excluded components in net income in the current period or in other comprehensive income (and then amortize into net income over the life of the hedging relationship);
Defer changes in the spot rate of the hedging instrument into other comprehensive income, while the excluded component (i.e., forward points or option premiums or discounts) is amortized into net income over the life of the hedging relationship. When the excluded component is released or the forecasted transaction occurs, it is recognized in the same income statement line item affected by the hedged item; and,
Present additional details in our tabular disclosures in the footnotes to the financial statements.
Additionally, ASU 2017-12 eliminated the requirement to separately measure and report hedge ineffectiveness; therefore, we removed disclosures related to hedge ineffectiveness. See our condensed consolidated statements of other comprehensive income, Note 1, Background and Basis of Presentation, Note 10, Financial Instruments, and Note 11, Accumulated Other Comprehensive Income/(Losses), for updated disclosures pursuant to ASU 2017-12.

7


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 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. Among the practical expedients is an optional transition method that allows companies to apply the guidance at the adoption date and recognize a cumulative-effect adjustment to retained earnings on the adoption date. We plan to elect this practical expedient upon adoption. 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. We expect this guidance to have a significant impact on our financial statements; however, 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 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 (“ASC”) Topic 740, Income Taxes, 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 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 impact this ASU will have on our financial statements and related disclosures as well as the timing of adoption and the application method.
In August 2018, the FASB issued ASU 2018-13 related to fair value measurement disclosures. This ASU removes the requirement to disclose the amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy and the policy for determining that a transfer has occurred. Additionally, this ASU modifies the disclosures related to the measurement uncertainty for recurring Level 3 fair value measurements (by removing the requirement to disclose sensitivity to future changes) and the timing of liquidation of investee assets (by removing the timing requirement in certain instances). The guidance also requires new disclosures for Level 3 financial assets and liabilities, including the amount and location of unrealized gains and losses recognized in other comprehensive income and additional information related to significant unobservable inputs used in determining Level 3 fair value measurements. This ASU will be effective beginning in the first quarter of our fiscal year 2020. Early adoption of the guidance in whole is permitted. Alternatively, companies may early adopt removed or modified disclosures and delay adoption of the additional disclosures until their effective date. Some of the amendments in this ASU must be applied prospectively upon adoption, while other amendments must be applied retrospectively upon adoption. We are currently evaluating the impact this ASU will have on our financial statements and related disclosures as well as the timing of adoption.
In August 2018, the FASB issued ASU 2018-14 related to the disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans. The guidance requires sponsors of these plans to provide additional disclosures, including weighted-average interest rates used in the company’s cash balance plans and a narrative description of reasons for any significant gains or losses impacting the benefit obligation for the period. Additionally, this guidance eliminates certain previous disclosure requirements. This ASU will be effective beginning in the first quarter of our fiscal year 2020. Early adoption is permitted. This guidance must be applied on a retrospective basis to all periods presented. We are currently evaluating the impact this ASU will have on our financial statements and related disclosures as well as the timing of adoption.

8


In August 2018, the FASB issued ASU 2018-15 related to accounting for implementation costs incurred in hosted cloud computing service arrangements. Under the new guidance, implementation costs incurred in a hosting arrangement that is a service contract should be expensed or capitalized based on the nature of the costs and the project stage during which such costs are incurred. If the implementation costs qualify for capitalization, they must be amortized over the term of the hosting arrangement and assessed for impairment. Companies must disclose the nature of any hosted cloud computing service arrangements. This ASU also provides guidance for balance sheet and income statement presentation of capitalized implementation costs and statement of cash flows presentation for the related payments. This ASU will be effective beginning in the first quarter of our fiscal year 2020. Early adoption is permitted, including in an interim period. This guidance may be adopted either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact this ASU will have on our financial statements and related disclosures as well as the timing of adoption and the application method.
Significant Accounting Policies
The following significant accounting policies were updated in 2018 to reflect changes upon adoption of ASU 2014-09, ASU 2017-07, and ASU 2017-12. 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 is 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.
Financial Instruments:
As we source our commodities on global markets and periodically enter into financing or other arrangements abroad, we use a variety of risk management strategies and financial instruments to manage commodity price, foreign currency exchange rate, and interest rate risks. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. One way we do this is through actively hedging our risks through the use of derivative instruments. As a matter of policy, we do not use highly leveraged derivative instruments, nor do we use financial instruments for speculative purposes.
Derivatives are recorded on our consolidated balance sheets at fair value, which fluctuates based on changing market conditions.

9


Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others are not designated as hedging instruments and are marked to market through net income. The gains and losses on cash flow hedges are deferred as a component of accumulated other comprehensive income/(losses) and are recognized in net income at the time the hedged item affects net income, in the same line item as the underlying hedged item. The excluded component on cash flow hedges (i.e., forward points or option premiums or discounts) is recognized in net income over the life of the hedging relationship. We also designate certain derivatives and non-derivatives as net investment hedges to hedge the net assets of certain foreign subsidiaries which are exposed to volatility in foreign currency exchange rates. Changes in the value of these derivatives and remeasurements of our non-derivatives designated as net investment hedges are calculated each period using the spot method, with changes reported in foreign currency translation adjustment within accumulated other comprehensive income/(losses). Such amounts will remain in accumulated other comprehensive income/(losses) until the complete or substantially complete liquidation of our investment in the underlying foreign operations. The excluded component on derivatives designated as net investment hedges is recognized in net income within interest expense. The income statement classification of gains and losses related to derivative instruments not designated as hedging instruments is determined based on the underlying intent of the contracts. Cash flows related to the settlement of derivative instruments designated as net investment hedges of foreign operations are classified in the consolidated statements of cash flows within investing activities. All other cash flows related to derivative instruments are classified in the same line item as the cash flows of the related hedged item, which is generally within operating activities. For additional information on derivative activity within our operating results, see Note 10, Financial Instruments.
To qualify for hedge accounting, a specified level of hedging effectiveness between the hedging instrument and the item being hedged must be achieved at inception and maintained throughout the hedged period. When a hedging instrument no longer meets the specified level of hedging effectiveness, we reclassify the related hedge gains or losses previously deferred into other comprehensive income/(losses) to net income within other expense/(income), net. We formally document our risk management objectives, our strategies for undertaking the various hedge transactions, the nature of and relationships between the hedging instruments and hedged items, and the method for assessing hedge effectiveness. Additionally, for qualified hedges of forecasted transactions, we specifically identify the significant characteristics and expected terms of the forecasted transactions. If it becomes probable that a forecasted transaction will not occur, the hedge will no longer be effective and all of the derivative gains or losses would be recognized in net income in the current period.
Unrealized gains and losses on our commodity derivatives not designated as hedging instruments are recorded in general corporate expenses until realized. Once realized, the gains and losses are recorded within the applicable segment operating results.
When we use financial instruments, we are exposed to credit risk that a counterparty might fail to fulfill its performance obligations under the terms of our agreement. We minimize our credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure we have with each counterparty, and monitoring the financial condition of our counterparties. We also maintain a policy of requiring that all significant, non-exchange traded derivative contracts with a duration of greater than one year be governed by an International Swaps and Derivatives Association master agreement. We are also exposed to market risk as the value of our financial instruments might be adversely affected by a change in foreign currency exchange rates, commodity prices, or interest rates. We manage market risk by incorporating monitoring parameters within our risk management strategy that limit the types of derivative instruments and derivative strategies we use and the degree of market risk that we hedge with derivative instruments.
Net investment hedges:
We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. We manage this risk by utilizing derivative and non-derivative instruments, including cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges. We exclude the interest accruals on cross-currency swap contracts and the forward points on foreign exchange forward contracts from the assessment and measurement of hedge effectiveness. We recognize the interest accruals on cross-currency swap contracts in net income within interest expense. We amortize the forward points on foreign exchange contracts into net income within interest expense over the life of the hedging relationship.
Foreign currency cash flow hedges:
We use various financial instruments to mitigate our exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. Our principal foreign currency exposures that are hedged include the British pound sterling, euro, and Canadian dollar. These instruments include foreign exchange forward and option contracts. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment. We exclude forward points and option premiums or discounts from the assessment and measurement of hedge effectiveness and amortize such amounts into net income in the same line item as the underlying hedged item over the life of the hedging relationship.

10


Interest rate cash flow hedges: 
From time to time, we have used derivative instruments, including interest rate swaps, as part of our interest rate risk management strategy. We have primarily used interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations.
Commodity derivatives:
We are exposed to price risk related to forecasted purchases of certain commodities that we primarily use as raw materials. We enter into commodity purchase contracts primarily for dairy products, meat products, coffee beans, sugar, vegetable oils, wheat products, corn products, and cocoa products. These commodity purchase contracts generally are not subject to the accounting requirements for derivative instruments and hedging activities under the normal purchases and normal sales exception. We also use commodity futures, options, and swaps to economically hedge the price of certain commodity costs, including the commodities noted above, as well as packaging products, diesel fuel, and natural gas. We do not designate these commodity contracts as hedging instruments. We also occasionally use futures to economically cross hedge a commodity exposure.
Subsequent Events
On October 24, 2018, we entered into an agreement with Zydus Wellness Limited (“Zydus”) and Cadila Healthcare Limited (“Cadila”) (collectively, the “Buyers”) to sell 100% of our equity interests in Heinz India Private Limited (“Heinz India”) for approximately $625 million (the “Heinz India Transaction”). In connection with the Heinz India Transaction, we will transfer to the Buyers, among other assets and operations, our global intellectual property rights to several brands, including Complan, Glucon-D, Nycil, and Sampriti. Our core brands (i.e., Heinz and Kraft) will not be transferred. While this transaction is contingent on customary closing conditions, including regulatory approvals, we expect the Heinz India Transaction to be finalized in early 2019.
Note 2. Acquisitions and Divestiture
Cerebos Acquisition
On March 9, 2018 (the “Acquisition Date”), we acquired all of the outstanding equity interests in Cerebos Pacific Limited (“Cerebos”) (the “Cerebos 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. Cerebos is included in our condensed consolidated financial statements as of the Acquisition Date. We included the results of Cerebos from March 9 to March 31, 2018 in our condensed consolidated statement of income for the three months ended June 30, 2018. These results were insignificant. The preliminary opening balance sheet of Cerebos was included in our current period condensed consolidated balance sheet. 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 significantly different results.
The Cerebos Acquisition was accounted for under the acquisition method of accounting for business combinations. The total consideration paid for Cerebos was approximately $244 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 Cerebos 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 Cerebos 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 net income.

11


The preliminary purchase price allocation to assets acquired and liabilities assumed in the Cerebos Acquisition was (in millions):
Cash
$
23

Other current assets
65

Property, plant and equipment, net
75

Identifiable intangible assets
100

Trade and other payables
(41
)
Other non-current liabilities
(3
)
Net assets acquired
219

Goodwill on acquisition
25

Total consideration
$
244

From the Acquisition Date through the end of our third quarter 2018, we made insignificant measurement period adjustments. We made these measurement period adjustments to reflect facts and circumstances that existed as of the Acquisition Date and did not result from intervening events subsequent to such date.
The Cerebos Acquisition preliminarily resulted in $25 million of non tax deductible goodwill relating principally to planned expansion of Cerebos brands into new categories and markets. Goodwill was allocated to our segments as shown in Note 6, Goodwill and Intangible Assets.
The preliminary purchase price allocation to identifiable intangible assets acquired in the Cerebos Acquisition was:
 
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 the current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors.
We incurred deal costs of $2 million for the three months and $18 million for the nine months ended September 29, 2018 related to the Cerebos Acquisition.

12


Other Acquisitions
In the third quarter of 2018, we had two additional acquisitions of businesses. The aggregate consideration paid related to these acquisitions was $27 million. We incurred deal costs related to these acquisitions of $1 million for the three and nine months ended September 29, 2018.
Divestiture
On May 31, 2018, we sold our 50.1% interest in our South African subsidiary to our minority interest partner. The transaction included proceeds of $18 million, which are included in other investing activities, net on the condensed consolidated statement of cash flows for the nine months ended September 29, 2018. We recorded a pre-tax loss on sale of business of approximately $15 million. The pre-tax loss was included in SG&A on the condensed consolidated statements of income for the nine months ended September 29, 2018.
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, costs to exit facilities, and costs associated with restructuring benefit plans.
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 September 29, 2018 related primarily to lease terminations in the U.S. and Canada and the elimination of salaried positions in Canada and the U.S.
As of September 29, 2018, we have incurred cumulative costs of $2,145 million, including $10 million for the three months and $90 million for the nine months ended September 29, 2018 and $79 million for the three months and $157 million for the nine months ended September 30, 2017. The $2,145 million of cumulative costs included $542 million of severance and employee benefit costs, $890 million of non-cash asset-related costs, $604 million of other implementation costs, and $109 million of other exit costs. The related amounts incurred during the three months ended September 29, 2018 were $7 million of non-cash asset-related costs and $3 million of other implementation costs. The related amounts incurred during the nine months ended September 29, 2018 were $3 million of severance and employee benefit costs, $32 million of non-cash asset-related costs, $54 million of other implementation costs, and $1 million of other exit costs.
We expect to incur an insignificant amount of additional Integration Program costs in the fourth quarter of 2018.

13


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

Charges
3

 
1

 
4

Cash payments
(8
)
 
(3
)
 
(11
)
Non-cash utilization
(9
)
 
(5
)
 
(14
)
Balance at September 29, 2018
$
10

 
$
15

 
$
25

(a) Other exit costs primarily consist of lease and contract terminations.
We expect the liability for severance and employee benefit costs as of September 29, 2018 to be paid by the end of 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 other restructuring programs globally, which are focused primarily on workforce reduction, factory closure and consolidation, and benefit plan restructuring. Related to these programs, we expect to eliminate approximately 1,500 positions, 1,000 of which were eliminated during the nine months ended September 29, 2018. These programs resulted in expenses of $188 million during the nine months ended September 29, 2018, including $31 million of severance and employee benefit costs, $8 million of non-cash asset-related costs, $148 million of other implementation costs, and $1 million of other exit costs. Other restructuring expenses during the three months ended September 29, 2018 were $21 million, including $7 million of severance and employee benefit gains, $7 million of non-cash asset-related costs, and $21 million of other implementation costs. Other restructuring program expenses totaled $16 million for the three months and $80 million for the nine months ended September 30, 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
31

 
1

 
32

Cash payments
(23
)
 
(5
)
 
(28
)
Non-cash utilization
4

 

 
4

Balance at September 29, 2018
$
28

 
$
21

 
$
49

(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 September 29, 2018 to be paid by the end of 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.

14


Total Integration and Restructuring:
Total costs/(credits) related to the Integration Program and restructuring activities, by income statement caption, were (in millions):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Severance and employee benefit costs - COGS
$
(8
)
 
$
(17
)
 
$
17

 
$
1

Severance and employee benefit costs - SG&A
2

 
(4
)
 
12

 
49

Severance and employee benefit costs - Other expense/(income), net
(1
)
 
(4
)
 
5

 
(151
)
Asset-related costs - COGS
8

 
34

 
33

 
134

Asset-related costs - SG&A
6

 
8

 
7

 
21

Other costs - COGS
18

 
68

 
125

 
129

Other costs - SG&A
6

 
10

 
21

 
54

Other costs - Other expense/(income), net

 

 
58

 

 
$
31

 
$
95

 
$
278

 
$
237

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):
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
United States
$
23

 
$
75

 
$
144

 
$
118

Canada
4

 
(3
)
 
70

 
21

EMEA
(11
)
 
6

 
17

 
46

Rest of World
5

 

 
14

 
10

General corporate expenses
10

 
17

 
33

 
42

 
$
31

 
$
95

 
$
278

 
$
237

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):
 
September 29,
2018
 
December 30, 2017
Cash and cash equivalents
$
1,366

 
$
1,629

Restricted cash included in other assets (current)
1

 
140

Cash, cash equivalents, and restricted cash
$
1,367

 
$
1,769

Note 5. Inventories
Inventories consisted of the following (in millions):
 
September 29, 2018
 
December 30, 2017
Packaging and ingredients
$
635

 
$
560

Work in process
502

 
439

Finished product
2,150

 
1,816

Inventories
$
3,287

 
$
2,815


15


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

Impairment losses

 

 

 
(164
)
 
(164
)
Acquisitions

 
16

 

 
25

 
41

Translation adjustments and other

 
(132
)
 
(125
)
 
(136
)
 
(393
)
Balance at September 29, 2018
$
33,700

 
$
5,130

 
$
3,113

 
$
2,365

 
$
44,308

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, Acquisitions and Divestiture, for additional information related to our acquisitions.
Our goodwill balance consists of 20 reporting units and had an aggregate carrying value of $44.3 billion as of September 29, 2018. We test goodwill for impairment at least annually in the second quarter or when a triggering event occurs. We performed our 2018 annual impairment test as of April 1, 2018. As a result of our 2018 annual impairment test, we recognized a non-cash impairment loss of $164 million in SG&A related to our Australia and New Zealand reporting unit. This impairment loss was primarily due to margin declines in the region. The goodwill carrying value of this reporting unit was $509 million prior to its impairment. Additionally, five of our 20 reporting units each had excess fair value over its carrying value of less than 10%. As of the impairment test date, the goodwill carrying values associated with these reporting units were $4.7 billion for Canada Retail, $424 million for Latin America Exports, $407 million for Northeast Asia, $326 million for Southeast Asia, and $232 million for Other Latin America.
We generally utilize the discounted cash flow method under the income approach to estimate the fair value of our reporting units. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each reporting unit (including net sales, cost of products sold, SG&A, working capital, and capital expenditures), income tax rates, and a discount rate that appropriately reflects the risk inherent in each future cash flow stream. We selected 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 guideline companies.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. If our current assumptions and estimates, including future annual net cash flows, income tax rates, and discount rates, 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. Additionally, as a majority of our goodwill was recorded in connection with business combinations that occurred in 2015 and 2013, representing fair values as of the respective transaction dates, those amounts are more susceptible to an impairment risk if business operating results or macroeconomic conditions deteriorate. No events occurred during the period ended September 29, 2018 that indicated it was more likely than not that our goodwill was impaired.
Accumulated impairment losses to goodwill were $164 million at September 29, 2018. There were no accumulated impairment losses to goodwill at December 30, 2017.
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

Impairment losses
(316
)
Transfers to definite-lived intangible assets
(72
)
Translation adjustments
(229
)
Balance at September 29, 2018
$
53,038


16


Our indefinite-lived intangible assets primarily consist of a large number of individual brands and had an aggregate carrying value of $53.0 billion as of September 29, 2018. We test indefinite-lived intangible assets for impairment at least annually in the second quarter or when a triggering event occurs. We performed our 2018 annual impairment test as of April 1, 2018. As a result of our 2018 annual impairment test, we recognized a non-cash impairment loss of $101 million in SG&A in the second quarter of 2018. This impairment loss was due to net sales and margin declines related to the Quero brand in Brazil. Additionally, as of April 1, 2018, two brands (ABC and Smart Ones) each had excess fair value over its carrying value of less than 10%. These brands had an aggregate carrying value of $665 million as of April 1, 2018.
In the third quarter of 2018, we recognized a non-cash impairment loss of $215 million in SG&A related to the Smart Ones brand. This impairment loss was primarily due to reduced future investment expectations and continued sales declines in the third quarter of 2018. We transferred the remaining carrying value of Smart Ones to definite-lived intangible assets. No events occurred during the period ended September 29, 2018 that indicated it was more likely than not that our other indefinite-lived intangible assets were impaired.
As a result of our 2017 annual impairment testing, we recognized a non-cash impairment loss of $48 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 an Italian subsidiary.
We generally utilize the excess earnings method under the income approach to estimate the fair value of certain of our largest brands. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each brand (including net sales, cost of products sold, and SG&A), contributory asset charges, income tax considerations, a discount rate that reflects the level of risk associated with the future earnings attributable to the brand, and management’s intent to invest in the brand indefinitely. We selected 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 guideline companies.
We generally utilize the relief from royalty method under the income approach to estimate the fair value of our remaining brands. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net sales for each brand, royalty rates (as a percentage of revenue that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations, a discount rate that reflects the level of risk associated with the future cost savings attributable to the brand, and management’s intent to invest in the brand indefinitely. We selected 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 guideline companies.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual indefinite-lived intangible assets requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. If our current assumptions and estimates, including future annual net cash flows, royalty rates, contributory asset charges, income tax considerations, and discount rates, 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. Additionally, as a majority of our indefinite-lived intangible assets were recorded in connection with business combinations that occurred in 2015 and 2013, representing fair values as of the respective transaction dates, those amounts are more susceptible to an impairment risk if business operating results or macroeconomic conditions deteriorate.
Definite-lived intangible assets:
Definite-lived intangible assets were (in millions):
 
September 29, 2018
 
December 30, 2017
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Trademarks
$
2,501

 
$
(372
)
 
$
2,129

 
$
2,386

 
$
(288
)
 
$
2,098

Customer-related assets
4,205

 
(660
)
 
3,545

 
4,231

 
(544
)
 
3,687

Other
19

 
(4
)
 
15

 
14

 
(5
)
 
9

 
$
6,725

 
$
(1,036
)
 
$
5,689

 
$
6,631

 
$
(837
)
 
$
5,794


17


Amortization expense for definite-lived intangible assets was $75 million for the three months and $215 million for the nine months ended September 29, 2018 and $76 million for the three months and $220 million for the nine months ended September 30, 2017. Aside from amortization expense, the changes in definite-lived intangible assets from December 30, 2017 to September 29, 2018 primarily reflect additions of $100 million related to preliminary purchase accounting for Cerebos, transfers of $72 million from indefinite-lived intangible assets, impairment losses of $19 million, and foreign currency. The impairment of definite-lived intangible assets in the third quarter of 2018 related to trademarks which had carrying values that were deemed not to be recoverable. This non-cash impairment loss was recognized in SG&A. See Note 2, Acquisitions and Divestiture, for additional information related to our acquisition of Cerebos.
We estimate that amortization expense related to definite-lived intangible assets will be approximately $290 million for the next year and approximately $280 million for each of the four years thereafter.
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, our 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 22.8% for the three months ended September 29, 2018 compared to 30.6% for the three months ended September 30, 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, which was partially offset by tax associated with certain provisions of U.S. Tax Reform such as the federal tax on GILTI (defined below) and the unfavorable impact of net discrete items. The unfavorable impact of current year net discrete items was primarily driven by the revaluation of our deferred tax balances due to changes in state tax laws following U.S. Tax Reform and non-deductible currency devaluation losses, which were partially offset by favorability from discrete items, primarily related to reversals of uncertain tax position reserves in the U.S. and certain state jurisdictions and changes in estimates of certain 2017 U.S. income and deductions.
Our effective tax rate was 23.7% for the nine months ended September 29, 2018 compared to 28.7% for the nine months ended September 30, 2017The 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, which was partially offset by tax associated with certain provisions of U.S. Tax Reform such as the federal tax on GILTI (defined below) and the unfavorable impact of net discrete items. The unfavorable impact of current year net discrete items was primarily driven by the revaluation of our deferred tax balances due to changes in state tax laws following U.S. Tax Reform as well as the non-deductible impairment of goodwill and currency devaluation losses, which were partially offset by favorability from discrete items, primarily related to changes in estimates of certain 2017 U.S. income and deductions.
U.S. Tax Reform legislation enacted by the federal government on December 22, 2017 significantly changed U.S. tax laws 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. Other changes from U.S. Tax Reform include changes to bonus depreciation, revised deductions 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. While the 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 recorded insignificant measurement period adjustments in the second and third quarters of 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. federal and state income tax returns are filed in 2018.

18


We have undistributed historic earnings in foreign subsidiaries which are currently not considered to be indefinitely reinvested. We have recorded an estimate of deferred taxes of $94 million as of September 29, 2018 to reflect local country withholding taxes that will be owed when this cash is distributed in the future. Additionally, 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 vestings occurred in the first quarter of 2018. Other equity grants and vestings 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
2,143,730

 
64.37

Forfeited
(906,412
)
 
60.27

Exercised
(1,287,760
)
 
29.80

Outstanding at September 29, 2018
19,239,122

 
44.08

The aggregate intrinsic value of stock options exercised during the period was $46 million for the nine months ended September 29, 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
1,414,883

 
58.49

Forfeited
(184,210
)
 
78.36

Vested
(121,035
)
 
73.29

Outstanding at September 29, 2018
2,393,900

 
68.78

The aggregate fair value of RSUs that vested during the period was $8 million for the nine months ended September 29, 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
2,697,450

 
56.47

Forfeited
(246,364
)
 
63.32

Outstanding at September 29, 2018
3,266,469

 
59.37


19


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 September 29, 2018 and September 30, 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 in the first quarter of 2018, 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
 
For the Nine Months Ended
 
U.S. Plans
 
Non-U.S. Plans
 
U.S. Plans
 
Non-U.S. Plans
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Service cost
$
2

 
$
3

 
$
4

 
$
5

 
$
7

 
$
8

 
$
14

 
$
13

Interest cost
41

 
45

 
16

 
17

 
118

 
136

 
52

 
49

Expected return on plan assets
(60
)
 
(66
)
 
(42
)
 
(47
)
 
(187
)
 
(197
)
 
(134
)
 
(133
)
Amortization of unrecognized losses/(gains)

 

 
1

 

 

 

 
2

 
1

Settlements
(1
)
 
3

 

 

 
(3
)
 
3

 
58

 

Curtailments

 

 

 

 

 

 
(1
)
 

Special/contractual termination benefits

 
5

 

 

 

 
18

 
6

 
8

Other

 

 

 
(6
)
 

 
2

 

 
(15
)
Net pension cost/(benefit)
$
(18
)
 
$
(10
)
 
$
(21
)
 
$
(31
)
 
$
(65
)
 
$
(30
)
 
$
(3
)
 
$
(77
)
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 nine months ended September 29, 2018, we contributed $45 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 $10 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 wind-up of a non-U.S. pension plan, 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
 
For the Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Service cost
$
2

 
$
2

 
$
6

 
$
7

Interest cost
11

 
12

 
33

 
37

Expected return on plan assets
(12
)
 

 
(37
)
 

Amortization of prior service costs/(credits)
(77
)
 
(77
)
 
(233
)
 
(250
)
Curtailments

 
(9
)
 

 
(177
)
Net postretirement cost/(benefit)
$
(76
)
 
$
(72
)
 
$
(231
)
 
$
(383
)

20


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 nine months ended September 29, 2018, we contributed $20 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
Derivative Volume:
The notional values of our outstanding derivative instruments were (in millions):
 
September 29, 2018
 
December 30, 2017
Commodity contracts
$
464

 
$
272

Foreign exchange contracts
3,367

 
2,876

Cross-currency contracts
9,061

 
3,161

The increase in our derivative volume for cross-currency contracts was primarily driven by the addition of new Canadian dollar and British pound sterling cross-currency swaps. A portion of these new contracts is being used to offset existing cross-currency contracts that are no longer designated as hedging instruments. The remaining portion of the new contracts is designated as net investment hedges. There was no material change in market risk of the overall cross-currency contract portfolio during the nine months ended September 29, 2018.
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):
 
September 29, 2018
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Total Fair Value
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts(a)
$

 
$

 
$
23

 
$
5

 
$
23

 
$
5

Cross-currency contracts(b)

 

 
32

 
32

 
32

 
32

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts(c)
10

 
24

 

 

 
10

 
24

Foreign exchange contracts(c)

 

 
9

 
20

 
9

 
20

Cross-currency contracts(b)

 

 
462

 
26

 
462

 
26

Total fair value
$
10

 
$
24

 
$
526

 
$
83

 
$
536

 
$
107


21


 
December 30, 2017
 
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Total Fair Value
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts(a)
$

 
$

 
$
8

 
$
42

 
$
8

 
$
42

Cross-currency contracts(b)

 

 
344

 

 
344

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts(c)
4

 
8

 

 

 
4

 
8

Foreign exchange contracts(c)

 

 
17

 
3

 
17

 
3

Cross-currency contracts(b)

 

 
19

 

 
19

 

Total fair value
$
4

 
$
8

 
$
388

 
$
45

 
$
392

 
$
53

(a)
At September 29, 2018, the fair value of our derivative assets was recorded in other current assets ($21 million) and other assets ($2 million), and the fair value of our derivative liabilities was recorded in other current liabilities. At December 30, 2017, the fair value of our derivative assets was recorded in other current assets, and the fair value of our derivative liabilities was recorded in other current liabilities ($41 million) and other liabilities ($1 million).
(b)
The fair value of these derivative assets and liabilities was recorded within other assets and other liabilities.
(c)
The fair value of these derivative assets and liabilities was recorded within other current assets and other current liabilities.
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 $73 million at September 29, 2018 and $23 million at December 30, 2017. At September 29, 2018, collateral of $26 million was posted related to commodity derivative margin requirements. This was included in other current assets on our condensed consolidated balance sheet at September 29, 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, options, 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. Foreign exchange options are valued using an income approach based on a Black-Scholes-Merton formula. This formula uses present value techniques and reflects the time value and intrinsic value based on observable market rates. Cross-currency swaps are valued based on observable market spot and swap rates.
There have been no transfers between Levels 1 and 2 in any period presented. We did not have any Level 3 financial assets or liabilities in any period presented.
Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.
Net Investment Hedging:
At September 29, 2018, we had the following items designated as net investment hedges:
Non-derivative foreign denominated debt with principal amounts of €2,550 million and £400 million;
Foreign exchange contracts denominated in Chinese renminbi with an aggregate notional amount of $198 million; and,
Cross-currency contracts with notional amounts of £1.0 billion ($1.4 billion) and C$2.1 billion ($1.6 billion).
The component of the gains and losses on our net investment in these designated foreign operations, driven by changes in foreign exchange rates, are economically offset by fair value movements on the effective portion of our cross-currency contracts and foreign exchange contracts and remeasurements of our foreign denominated debt.

22


Interest Rate Hedging:
From time to time we have had derivatives designated as interest rate hedges, including interest rate swaps. We no longer have any outstanding interest rate swaps. We continue to amortize the realized hedge losses that were deferred into accumulated other comprehensive income/(losses) into interest expense through the original maturity of the related long-term debt instruments.
Cash Flow Hedge Coverage:
At September 29, 2018, we had entered into foreign exchange contracts designated as cash flow hedges for periods not exceeding the next 15 months.
Deferred Hedging Gains and Losses on Cash Flow Hedges:
Based on our valuation at September 29, 2018 and assuming market rates remain constant through contract maturities, we expect transfers to net income/(loss) of unrealized gains for foreign currency cash flow hedges during the next 12 months to be approximately $11 million. 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.
Concentration of Credit Risk:
Counterparties to our foreign exchange derivatives consist of major international financial institutions. We continually monitor our positions and the credit ratings of the counterparties involved and, by policy, limit the amount of our credit exposure to any one party. While we may be exposed to potential losses due to the credit risk of non-performance by these counterparties, losses are not anticipated. We closely monitor the credit risk associated with our counterparties and customers and to date have not experienced material losses.
Economic Hedging:
We enter into certain derivative contracts not designated as hedging instruments in accordance with our risk management strategy which have an economic impact of largely mitigating commodity price risk and foreign currency exposures. Gains and losses are recorded in net income/(loss) as a component of cost of products sold for our commodity contracts and other expense/(income), net for our cross currency and foreign exchange contracts.
Derivative Impact on the Statements of Comprehensive Income:
The following table presents the pre-tax amounts of derivative gains/(losses) deferred into accumulated other comprehensive income/(losses) and the income statement line item that will be affected when reclassified to net income/(loss) (in millions):
Accumulated Other Comprehensive Income/(Losses) Component
 
Gains/(Losses) Recognized in Other Comprehensive Income/(Losses) Related to Derivatives Designated as Hedging Instruments
 
Location of Gains/(Losses) When Reclassified to Net Income/(Loss)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
 
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$

 
$

 
$

 
$
1

 
Net sales
Foreign exchange contracts
 
(5
)
 
(24
)
 
27

 
(49
)
 
Cost of products sold
Foreign exchange contracts (excluded component)
 
(2
)
 

 
(2
)
 

 
Cost of products sold
Foreign exchange contracts
 
(12
)
 
(52
)
 
19

 
(99
)
 
Other expense/(income), net
Foreign exchange contracts (excluded component)
 
2

 

 
2

 

 
Other expense/(income), net
Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
8

 
(6
)
 
10

 
(18
)
 
SG&A
Foreign exchange contracts (excluded component)
 
1

 

 
1

 

 
Interest expense
Cross-currency contracts
 
(18
)
 
(81
)
 
78

 
(177
)
 
SG&A
Cross-currency contracts (excluded component)
 
6

 

 
6

 

 
Interest expense
Total gains/(losses) recognized in statements of comprehensive income
 
$
(20
)
 
$
(163
)
 
$
141

 
$
(342
)
 
 

23


Derivative Impact on the Statements of Income:
The following tables present the pre-tax amounts of derivative gains/(losses) reclassified from accumulated other comprehensive income/(losses) to net income/(loss) and the affected income statement line items:
 
For the Three Months Ended
 
September 29,
2018
 
September 30,
2017
 
Cost of products sold
 
Interest expense
 
Other expense/ (income), net
 
Cost of products sold
 
Interest expense
 
Other expense/ (income), net
 
(in millions)
Total amounts presented in the condensed consolidated statements of income in which the following effects were recorded
$
4,271

 
$
327

 
$
(71
)
 
$
4,077

 
$
306

 
$
(127
)
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) related to derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
1

 
$

 
$
(12
)
 
$
2

 
$

 
$
(52
)
Foreign exchange contracts (excluded component)
(1
)
 

 
2

 

 

 

Interest rate contracts

 
(1
)
 

 

 
(1
)
 

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
Cross-currency contracts (excluded component)

 
6

 

 

 

 

Gains/(losses) related to derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
(17
)
 

 

 
4

 

 

Foreign exchange contracts

 

 
(12
)
 

 

 
27

Cross-currency contracts

 

 
2

 

 

 

Total gains/(losses) recognized in statements of income
$
(17
)
 
$
5

 
$
(20
)
 
$
6

 
$
(1
)
 
$
(25
)
 
For the Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
Cost of products sold
 
Interest expense
 
Other expense/ (income), net
 
Cost of products sold
 
Interest expense
 
Other expense/ (income), net
 
(in millions)
Total amounts presented in the condensed consolidated statements of income in which the following effects were recorded
$
12,651

 
$
962

 
$
(196
)
 
$
12,406

 
$
926

 
$
(510
)
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) related to derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
(8
)
 
$

 
$
19

 
$
5

 
$

 
$
(98
)
Foreign exchange contracts (excluded component)
(1
)
 

 
2

 

 

 

Interest rate contracts

 
(3
)
 

 

 
(3
)
 

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
Cross-currency contracts (excluded component)

 
6

 

 

 

 

Gains/(losses) related to derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
(32
)
 

 

 
(33
)
 

 

Foreign exchange contracts

 

 
(56
)
 

 

 
55

Cross-currency contracts

 

 
1

 

 

 
(2
)
Total gains/(losses) recognized in statements of income
$
(41
)
 
$
3

 
$
(34
)
 
$
(28
)
 
$
(3
)
 
$
(45
)

24


Non-Derivative Impact on Statements of Comprehensive Income:
Related to our non-derivative, foreign denominated debt instruments designated as net investment hedges, we recognized pre-tax gains of $26 million for the three months and $118 million for the nine months ended September 29, 2018 and pre-tax losses of $113 million for the three months and $373 million for the nine months ended September 30, 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
(804
)
 

 

 
(804
)
Net deferred gains/(losses) on net investment hedges
158

 

 

 
158

Amounts excluded from the effectiveness assessment of net investment hedges
3

 

 

 
3

Net deferred losses/(gains) on net investment hedges reclassified to net income
(2
)
 

 

 
(2
)
Net deferred gains/(losses) on cash flow hedges

 

 
40

 
40

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

 

 
(10
)
 
(10
)
Net postemployment benefit gains/(losses) arising during the period

 
70

 

 
70

Net postemployment benefit losses/(gains) reclassified to net income

 
(133
)
 

 
(133
)
Total other comprehensive income/(loss)
(645
)
 
(63
)
 
30

 
(678
)
Balance as of September 29, 2018
$
(2,232
)
 
$
486

 
$
14

 
$
(1,732
)
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:
 
For the Three Months Ended
 
September 29,
2018
 
September 30,
2017
 
Before Tax Amount
 
Tax
 
Net of Tax Amount
 
Before Tax Amount
 
Tax
 
Net of Tax Amount
 
(in millions)
Foreign currency translation adjustments
$
(144
)
 
$

 
$
(144
)
 
$
421

 
$

 
$
421

Net deferred gains/(losses) on net investment hedges