Document



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

FORM 10-K
(Mark One)
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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=12956475&doc=20
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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common stock, $0.01 par value
KHC
The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 o No x
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 o No x
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

The aggregate market value of the shares of common stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock as of the last business day of the registrant’s most recently completed second quarter, was $38 billion. As of June 5, 2019, there were 1,219,938,804 shares of the registrant’s common stock outstanding.





Table of Contents

1




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

2




Forward-Looking Statements
This Annual Report on Form 10-K contains a number of forward-looking statements. Words such as “anticipate,” “reflect,” “invest,” “see,” “make,” “expect,” “give,” “deliver,” “drive,” “believe,” “improve,” “assess,” “reassess,” “remain,” “evaluate,” “grow,” “will,” “plan,” and variations of such words and similar future or conditional expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our plans, impacts of accounting standards and guidance, growth, legal matters, taxes, costs and cost savings, impairments, and dividends. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, many of which are difficult to predict and beyond our control.
Important factors that may affect our business and operations and that may cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, operating in a highly competitive industry; our ability to correctly predict, identify, and interpret changes in consumer preferences and demand, to offer new products to meet those changes, and to respond to competitive innovation; changes in the retail landscape or the loss of key retail customers; changes in our relationships with significant customers, suppliers, and other business relationships; our ability to maintain, extend, and expand our reputation and brand image; our ability to leverage our brand value to compete against private label products; our ability to drive revenue growth in our key product categories, increase our market share, or add products that are in faster-growing and more profitable categories; product recalls or product liability claims; unanticipated business disruptions; our ability to identify, complete, or realize the benefits from strategic acquisitions, alliances, divestitures, joint ventures, or other investments; our ability to realize the anticipated benefits from prior or future streamlining actions to reduce fixed costs, simplify or improve processes, and improve our competitiveness; our ability to successfully execute our strategic initiatives; the impacts of our international operations; economic and political conditions in the United States and in various other nations where we do business; changes in our management team or other key personnel and our ability to hire or retain key personnel or a highly skilled and diverse global workforce; risks associated with information technology and systems, including service interruptions, misappropriation of data, or breaches of security; impacts of natural events in the locations in which we or our customers, suppliers, distributors, or regulators operate; our ownership structure; our indebtedness and ability to pay such indebtedness; additional impairments of the carrying amounts of goodwill or other indefinite-lived intangible assets; exchange rate fluctuations; volatility in commodity, energy, and other input costs; volatility in the market value of all or a portion of the derivatives we use; increased pension, labor and people-related expenses; compliance with laws, regulations, and related interpretations and related legal claims or other regulatory enforcement actions, including additional risks and uncertainties related to our restatement and any potential actions resulting from the Securities and Exchange Commission’s ongoing investigation, as well as potential additional subpoenas, litigation, and regulatory proceedings; an inability to remediate the material weaknesses in our internal control over financial reporting or additional material weaknesses or other deficiencies in the future or the failure to maintain an effective system of internal controls; our failure to prepare and timely file our periodic reports; the restatement of certain of our previously issued consolidated financial statements, which resulted in unanticipated costs and may affect investor confidence and raise reputational issues; our ability to protect intellectual property rights; tax law changes or interpretations; the impact of future sales of our common stock in the public markets; our ability to continue to pay a regular dividend and the amounts of any such dividends; volatility of capital markets and other macroeconomic factors. For additional information on these and other factors that could affect our forward-looking statements, see Item 1A, Risk Factors. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this report, except as required by applicable law or regulation.

3




Explanatory Note
General
On May 2, 2019, management, in consultation with the Audit Committee of our Board of Directors, concluded that our audited consolidated financial statements and related disclosures for the fiscal years ended December 30, 2017 and December 31, 2016 included in our Annual Reports on Form 10-K, and each of our unaudited condensed consolidated financial statements for the quarterly and year-to-date periods in fiscal year 2017 and each of our unaudited condensed consolidated financial statements for the quarterly and year-to-date periods for the nine months ended September 29, 2018 included in our Quarterly Reports on Form 10-Q (unaudited condensed consolidated financial statements for the quarterly periods ended September 29, 2018, June 30, 2018, March 31, 2018, and September 30, 2017) and Form 10-Q/A (unaudited condensed consolidated financial statements for the quarterly periods ended July 1, 2017 and April 1, 2017) should no longer be relied upon due to misstatements that are described in greater detail below, and that we would restate such financial statements to make the necessary accounting corrections. We discussed this conclusion with our independent registered public accounting firm, PricewaterhouseCoopers LLP.
Restatement
This Annual Report on Form 10-K for the year ended December 29, 2018 includes audited consolidated financial statements at December 29, 2018 and December 30, 2017 and for the years ended December 29, 2018, December 30, 2017, and December 31, 2016, as well as relevant unaudited interim financial information for the quarterly periods ended December 29, 2018, September 29, 2018, June 30, 2018, March 31, 2018, December 30, 2017, September 30, 2017, July 1, 2017, and April 1, 2017. We have restated certain information within this Annual Report on Form 10-K, including our consolidated financial statements at December 30, 2017 and for the years ended December 30, 2017 and December 31, 2016, selected financial data at and for the year ended January 3, 2016, and the relevant unaudited interim financial information for the quarterly periods ended September 29, 2018, June 30, 2018, March 31, 2018, December 30, 2017, September 30, 2017, July 1, 2017, and April 1, 2017 (collectively known as the “Financial Statements”).
Restatement Background
As described in our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 6, 2019, management noted certain misstatements contained in the Financial Statements relating principally to the accounting treatment for supplier contracts and related arrangements. As previously disclosed, we received a subpoena from the SEC in October 2018related to our procurement area, specifically the accounting policies, procedures, and internal controls related to our procurement function, including, but not limited to, agreements, side agreements, and changes or modifications to agreements with our suppliers. Following the receipt of this subpoena, we, together with external counsel and forensic accountants, and subsequently, under the oversight of the Audit Committee of our Board of Directors (the “Audit Committee”), conducted an internal investigation into the procurement area and related matters. As a result of the findings from this internal investigation, which is now complete and which identified that multiple employees in the procurement area engaged in misconduct, we corrected prior period misstatements that generally increased the total cost of products sold in prior financial periods. These misstatements principally related to the incorrect timing of when certain cost and rebate elements associated with supplier contracts and related arrangements were initially recognized. The findings from the internal investigation did not identify any misconduct by any member of the senior management team. We continue to cooperate with the SEC concerning its investigation of these matters.
In connection with the internal investigation, we also conducted a comprehensive review of supplier contracts and related arrangements to identify other potential misstatements in the timing of the recognition of supplier rebates, incentive payments, and pricing arrangements. The review identified further misstatements, which we also investigated and have been unable to conclude if they resulted from the misconduct described above. These misstatements were primarily related to certain supplier contracts and related arrangements where the allocation of value of all or a portion of rebates and up-front payments to contractual elements in the current period should have been deferred and recognized over an applicable contractual period. We corrected these misstatements to defer the up-front consideration from suppliers when the retention or receipt of that consideration was contingent upon future events and to correctly recognize the consideration as a reduction of cost of products sold over the terms of the arrangements with the suppliers.

4




Our internal investigation and review identified adjustments that resulted in an understatement of cost of products sold totaling $208 million, including $175 million relating to the periods up through September 29, 2018 that are being restated in this Annual Report on Form 10-K. The misstatements of cost of products sold related to our internal investigation and review included $22 million for fiscal year 2018, $94 million for fiscal year 2017, $35 million for fiscal year 2016, and $24 million for fiscal year 2015. We do not believe that the misstatements are quantitatively material to any period presented in our prior financial statements. However, due to the qualitative nature of the matters identified in our internal investigation, including the number of years over which the misconduct occurred and the number of transactions, suppliers, and procurement employees involved, we determined that it would be appropriate to correct the misstatements in our previously issued consolidated financial statements by restating such financial statements. The restatement also included corrections for additional identified out-of-period and uncorrected misstatements in the impacted periods. Accordingly, we have restated our consolidated financial statements and the impacted amounts within the accompanying footnotes thereto.
In addition, the statements of income for fiscal years 2017 and 2016, as previously reported, did not originally reflect the adoption of accounting standards update (“ASU”) 2017-07 related to the presentation of net periodic benefit cost (pension and postretirement cost). This ASU was adopted in the first quarter of 2018 and was applied retrospectively for statement of income presentation of service cost components and other net periodic benefit cost components. The restated statements of income for fiscal years 2017 and 2016 reflect the retrospective application of ASU 2017-07 and are labeled “As Recast.”
Restatement of Previously Issued Consolidated Financial Statements
This Annual Report on Form 10-K restates amounts included in the 2017 Annual Report described above, including the audited consolidated financial statements at December 30, 2017 and for the fiscal years ended December 30, 2017 and December 31, 2016. In addition to the misstatements related to the supplier contracts and related arrangements, including the misstatements related to lease classification, we corrected additional identified out-of-period and uncorrected misstatements that were not material, individually or in the aggregate, to our consolidated financial statements. These misstatements were related to customer incentive program expense misclassifications, balance sheet misclassifications, income taxes, impairments, and other misstatements.
See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information.
The relevant unaudited interim financial information for the quarterly periods ended September 29, 2018, June 30, 2018, March 31, 2018, December 30, 2017, September 30, 2017, July 1, 2017, and April 1, 2017, has also been restated. The 2018 quarterly restatements will be effective with the filing of our future 2019 unaudited interim condensed consolidated financial statement filings in Quarterly Reports on Form 10-Q.
See Note 23, Quarterly Financial Information (Unaudited), in Item 8, Financial Statements and Supplementary Data, for such restated information, and see Supplemental Unaudited Quarterly Financial Information, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional interim financial information.
Selected financial information for the fiscal year ended January 3, 2016 has also been restated. See Item 6, Selected Financial Data.
This restatement resulted in the following decreases to our results:
 
For the Nine Months Ended
 
For the Year Ended
 
September 29,
2018
 
December 30,
2017
 
December 31,
2016
 
(in millions, except per share data)
Net income
$
(2
)
 
$
(58
)
 
$
(36
)
Adjusted EBITDA(a)
(35
)
 
(106
)
 
(79
)
Diluted earnings per common share

 
(0.04
)
 
(0.03
)
Adjusted EPS(a)
(0.01
)
 
(0.05
)
 
(0.02
)
(a)
Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures. See the Non-GAAP Financial Measures section within Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the related definitions and reconciliations.

5




Control Considerations
In connection with the restatement, management has assessed the effectiveness of our internal control over financial reporting. Based on this assessment, management identified material weaknesses in our internal control over financial reporting resulting in the conclusion by our Chief Executive Officer and Chief Financial Officer that our disclosure controls and procedures were not effective as of December 29, 2018. Management has taken and is taking additional steps to remediate the material weaknesses in our internal control over financial reporting. See Item 9A, Controls and Procedures, for additional information related to these material weaknesses in internal control over financial reporting and the related remedial measures.
Additional Information Specific to Goodwill and Indefinite-Lived Intangible Asset Impairment
We announced on February 21, 2019 that as part of our normal quarterly reporting procedures and planning processes for the fourth quarter of 2018, the fair values of certain goodwill and intangible assets were below their carrying amounts. As a result, we announced non-cash impairment losses of $15.4 billion to lower the carrying amount of goodwill in certain reporting units, primarily U.S. Refrigerated and Canada Retail, and certain intangible assets, primarily the Kraft and Oscar Mayer brands. As disclosed in our Current Report on Form 8-K filed with the SEC on May 6, 2019, we subsequently identified errors in the calculations performed in connection with the interim goodwill and indefinite-lived intangible asset impairment testing in the fourth quarter of 2018. Specifically, we identified certain errors in projected net cash flows and allocations to certain brands. Correcting this allocation error resulted in an increase to the impairment losses initially calculated for brands of approximately $278 million, partially offset by a reduction to the impairment losses initially calculated for reporting units of approximately $171 million.
In addition, the corrections to the carrying values on our balance sheet at December 29, 2018 recorded as part of the correction of the procurement-related misstatements described above resulted in an adjustment to the carrying amounts of certain reporting units, and therefore resulted in a reduction to goodwill impairment losses of approximately $92 million. The net impact of these misstatements was an increase of approximately $15 million from the $15.4 billion total impairment losses in the fourth quarter of 2018 previously announced in our earnings release and investor call on February 21, 2019.
As discussed in Item 9A, Controls and Procedures, of this Annual Report on Form 10-K, we did not design and maintain effective controls to reassess the level of precision used to review the allocation of cash flow projections to certain brands used as a basis for performing our fourth quarter 2018 interim impairment assessments in response to the significant reduction in, and in certain instances elimination of, the excess fair value over carrying amount for certain brands that resulted from the changing business environment. This material weakness resulted in the errors in the calculations performed in connection with the interim goodwill and indefinite-lived intangible asset impairment testing in the fourth quarter of 2018, as described above, because approximately five to ten percent of cash flows were not subjected to our control procedures. This material weakness arose during our interim impairment testing in the fourth quarter of 2018 due to the significant reduction in excess fair value over carrying amount for certain brands as noted above, which required us to increase the percentage of cash flows subject to our control procedures to nearly one hundred percent. This did not result in a misstatement of any previously reported consolidated financial statements but was determined to be a material weakness because it could have resulted in a material misstatement that would not have been prevented or detected.
PART I
Item 1. Business.
General
For 150 years, we have produced some of the world’s most beloved products at The Kraft Heinz Company (Nasdaq: KHC). Our Vision is To Be the Best Food Company, Growing a Better World. We are one of the largest global food and beverage companies, with 2018 net sales of approximately $26 billion. Our portfolio is a diverse mix of iconic and emerging brands. As the guardians of these brands and the creators of innovative new products, we are dedicated to the sustainable health of our people and our planet.
On July 2, 2015, through a series of transactions, we consummated the merger of Kraft Foods Group, Inc. (“Kraft”) with and into a wholly-owned subsidiary of H.J. Heinz Holding Corporation (“Heinz”) (the “2015 Merger”). At the closing of the 2015 Merger, Heinz was renamed The Kraft Heinz Company, and H. J. Heinz Company changed its name to Kraft Heinz Foods Company.
Before the consummation of the 2015 Merger, Heinz was controlled by Berkshire Hathaway Inc. (“Berkshire Hathaway”) and 3G Global Food Holdings, L.P. (“3G Capital”) (together, the “Sponsors”), following their acquisition of H. J. Heinz Company on June 7, 2013.

6




Reportable Segments
We manage and report our operating results through four segments. We have three reportable segments defined by geographic region: United States, Canada, and Europe, Middle East, and Africa (“EMEA”). Our remaining businesses are combined and disclosed as “Rest of World.” Rest of World comprises two operating segments: Latin America and Asia Pacific (“APAC”).
Our segments reflect a change, effective in the first quarter of our fiscal year 2018, to reorganize our international businesses to better align our global geographies. We moved our Middle East and Africa businesses from the historical Asia Pacific, Middle East, and Africa (“AMEA”) operating segment into the historical Europe reportable segment, forming the new EMEA reportable segment. The remaining businesses from the AMEA operating segment became the APAC operating segment. We have reflected this change in all historical periods presented.
See Note 22, Segment Reporting, in Item 8, Financial Statements and Supplementary Data, for our geographic financial information by segment.
Trademarks and Intellectual Property
Our trademarks are material to our business and are among our most valuable assets. Depending on the country, trademarks generally remain valid for as long as they are in use or their registration status is maintained. Trademark registrations generally are for renewable, fixed terms. Significant trademarks by segment based on net sales in 2018 were:
 
 
Majority Owned and Licensed Trademarks
United States
 
Kraft, Oscar Mayer, Heinz, Philadelphia, Lunchables, Velveeta, Planters, Maxwell House, Capri Sun*, Ore-Ida, Kool-Aid, Jell-O
Canada
 
Kraft, Cracker Barrel, Heinz, Philadelphia, Maxwell House, Classico, McCafe*, P’Tit Quebec, Tassimo*
EMEA
 
Heinz, Plasmon, Pudliszki, Honig, HP, Kraft, Benedicta, Karvan Cevitam
Rest of World
 
Heinz, ABC, Master, Quero, Kraft, Golden Circle, Wattie's, Glucon-D, Complan
*Used under license. Additionally, our license to use the McCafe brand in Canada will expire in December 2019.
In the fourth quarter of 2018, we announced our plans to divest certain assets and operations, predominantly in Canada and India, including the intellectual property rights to Cracker Barrel and P’Tit Quebec in Canada, as well as Glucon-D and Complan globally. See Note 5, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, for additional information on these transactions.
We sell certain products under brands we license from third parties. In 2018, brands used under licenses from third parties included Capri Sun packaged drink pouches for sale in the United States, TGI Fridays frozen snacks and appetizers in the United States and Canada, McCafe ground, whole bean, and on-demand single cup coffees in the United States and Canada, and Taco Bell Home Originals Mexican-style food products in U.S. grocery stores. In addition, in our agreements with Mondelēz International, Inc. (“Mondelēz International”) following the spin-off of Kraft from Mondelēz International in 2012, we each granted the other party various licenses to use certain of our and their respective intellectual property rights in named jurisdictions for certain periods of time.
We also own numerous patents worldwide. We consider our portfolio of patents, patent applications, patent licenses under patents owned by third parties, proprietary trade secrets, technology, know-how processes, and related intellectual property rights to be material to our operations. Patents, issued or applied for, cover inventions ranging from packaging techniques to processes relating to specific products and to the products themselves. While our patent portfolio is material to our business, the loss of one patent or a group of related patents would not have a material adverse effect on our business.
Our issued patents extend for varying periods according to the date of the patent application filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage as determined by the patent office or courts in the country, and the availability of legal remedies in the country.

7




Research and Development
Our research and development focuses on achieving the following four objectives:
product innovations, renovations, and new technologies to meet changing consumer needs and drive growth;
world-class and uncompromising food safety, quality, and consistency;
superior, customer-preferred product and package performance; and
continuous process improvement and product optimization in pursuit of cost reductions.
Competition
Our products are sold in highly competitive marketplaces, which have experienced increased concentration and the growing presence of e-commerce retailers, large-format retailers, and discounters. Competitors include large national and international food and beverage companies and numerous local and regional companies. We compete with both branded and private label products sold by retailers, wholesalers, and cooperatives. We compete on the basis of product quality and innovation, brand recognition and loyalty, service, the ability to identify and satisfy consumer preferences, the introduction of new products and the effectiveness of our advertising campaigns and marketing programs, distribution, shelf space, merchandising support, and price. Improving our market position or introducing new products requires substantial advertising and promotional expenditures.
Sales and Customers
Our products are sold through our own sales organizations and through independent brokers, agents, and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, drug stores, value stores, bakeries, pharmacies, mass merchants, club stores, foodservice distributors, and institutions, including hotels, restaurants, hospitals, health care facilities, and certain government agencies. Our products are also sold online through various e-commerce platforms and retailers. Our largest customer, Walmart Inc., represented approximately 21% of our net sales in 2018, approximately 21% of our net sales in 2017, and approximately 22% of our net sales in 2016.
Additionally, we have significant customers in different regions around the world; however, none of these customers are individually material to our consolidated business. In 2018, the five largest customers in our U.S. segment accounted for approximately 49% of U.S. segment net sales, the five largest customers in our Canada segment accounted for approximately 71% of Canada segment net sales, and the five largest customers in our EMEA segment accounted for approximately 26% of our EMEA segment net sales.
Net Sales by Product Category
In 2018, we reorganized the products within our product categories to reflect how we manage our business. We have reflected this change for all historical periods presented. The product categories that contributed 10% or more to consolidated net sales in any of the periods presented were:
 
December 29,
2018
 
December 30,
2017
 
December 31,
2016
Condiments and sauces
26
%
 
25
%
 
24
%
Cheese and dairy
20
%
 
21
%
 
21
%
Ambient foods
10
%
 
10
%
 
9
%
Frozen and chilled foods
10
%
 
10
%
 
10
%
Meats and seafood
10
%
 
10
%
 
10
%

8




Raw Materials and Packaging
We manufacture (and contract for the manufacture of) our products from a wide variety of raw materials. We purchase and use large quantities of commodities, including dairy products, meat products, coffee beans, nuts, tomatoes, potatoes, soybean and vegetable oils, sugar and other sweeteners, corn products, and wheat products, to manufacture our products. In addition, we purchase and use significant quantities of resins, metals, and cardboard to package our products and natural gas to operate our facilities. For commodities that we use across many of our product categories, such as corrugated paper and energy, we coordinate sourcing requirements and centralize procurement to leverage our scale. In addition, some of our product lines and brands separately source raw materials that are specific to their operations. We source these commodities from a variety of providers, including large, international producers and smaller, local, independent sellers. Where appropriate, we seek to establish preferred purchaser status and have developed strategic partnerships with many of our suppliers with the objective of achieving favorable pricing and dependable supply for many of our commodities. The prices of raw materials and agricultural materials that we use in our products are affected by external factors, such as global competition for resources, currency fluctuations, severe weather or global climate change, consumer, industrial or investment demand, and changes in governmental regulation and trade, tariffs, alternative energy, and agricultural programs.
Our procurement teams monitor worldwide supply and cost trends so we can obtain ingredients and packaging needed for production at competitive prices. Although the prices of our principal raw materials can be expected to fluctuate, we believe there will be an adequate supply of the raw materials we use and that they are generally available from numerous sources. We use a range of hedging techniques in an effort to limit the impact of price fluctuations on many of our principal raw materials. However, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in specific raw material costs. We actively monitor changes to commodity costs so that we can seek to mitigate the effect through pricing and other operational measures.
Seasonality and Working Capital
Although crops constituting certain of our raw food ingredients are harvested on a seasonal basis, the majority of our products are produced throughout the year.
Seasonal factors inherent in our business change the demand for products, including holidays, changes in seasons, or other annual events. While these factors influence our quarterly net sales, operating income/(loss), and cash flows at the product level, unless the timing of such events shift period-over-period (e.g., a shift in Easter timing), this seasonality does not typically have a significant effect on our consolidated results of operations or segment results.
For information related to our cash flows provided by/(used for) operating activities, including working capital items, see Liquidity and Capital Resources in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.
Employees
We had approximately 38,000 employees as of December 29, 2018.
Regulation
The manufacture and sale of consumer food and beverage products is highly regulated. Our business operations, including the production, transportation, storage, distribution, sale, display, advertising, marketing, labeling, quality and safety of our products and their ingredients, and our occupational safety, health, and privacy practices, are subject to various laws and regulations. These laws and regulations are administered by federal, state, and local government agencies in the United States, as well as government entities and agencies outside the United States in markets where our products are manufactured, distributed or sold. In the United States, our activities are subject to regulation by various federal government agencies, including the Food and Drug Administration, U.S. Department of Agriculture, Federal Trade Commission, Department of Labor, Department of Commerce, and Environmental Protection Agency, as well as various state and local agencies. We are also subject to numerous similar and other laws and regulations outside of the United States, including but not limited to laws and regulations governing food safety, health and safety, anti-corruption, and data privacy. In our business dealings, we are also required to comply with the Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act, the Trade Sanctions Reform and Export Enhancement Act, and various other anti-corruption regulations in the regions in which we operate. We rely on legal and operational compliance programs, as well as in-house and outside counsel, to guide our businesses in complying with applicable laws and regulations of the countries in which we do business. In addition, the United Kingdom's impending withdrawal from the European Union (commonly referred to as “Brexit”) and other regulatory regime changes may add cost and complexity to our compliance efforts.

9




Environmental Regulation
Our activities throughout the world are highly regulated and subject to government oversight regarding environmental matters. Various laws concerning the handling, storage, and disposal of hazardous materials and the operation of facilities in environmentally sensitive locations may impact aspects of our operations.
In the United States, where a significant portion of our business operates, these laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). CERCLA imposes joint and several liability on each potentially responsible party. We are involved in a number of active proceedings in the United States under CERCLA (and other similar state actions under similar legislation) related to our current operations and certain closed, inactive, or divested operations for which we retain liability.
As of December 29, 2018, we had accrued an amount we deemed appropriate for environmental remediation. Based on information currently available, we believe that the ultimate resolution of existing environmental remediation actions and our compliance in general with environmental laws and regulations will not have a material effect on our earnings or financial condition. However, it is difficult to predict with certainty the potential impact of future compliance efforts and environmental remedial actions and thus, future costs associated with such matters may exceed current reserves.
Information about our Executive Officers
The following are our executive officers as of June 5, 2019 and all persons chosen to become executive officers as of the filing date of this Annual Report on Form 10-K:
Name
 
Age
 
Title
Bernardo Hees
 
49
 
Chief Executive Officer
Miguel Patricio
 
53
 
Advisor and Incoming Chief Executive Officer
David Knopf
 
31
 
Executive Vice President and Chief Financial Officer
Nina Barton
 
45
 
Zone President of Canada and President of Digital Growth
Paulo Basilio
 
44
 
President of U.S. Commercial Business
Pedro Drevon
 
36
 
Zone President of Latin America
Rashida La Lande
 
45
 
Senior Vice President, Global General Counsel and Head of CSR and Government Affairs; Corporate Secretary
Rafael Oliveira
 
44
 
Zone President of EMEA
Rodrigo Wickbold
 
42
 
Zone President of APAC
Bernardo Hees became Chief Executive Officer upon the closing of the 2015 Merger. He had previously served as Chief Executive Officer of Heinz since June 2013. Previously, Mr. Hees served as Chief Executive Officer of Burger King Worldwide Holdings, Inc., a global fast food restaurant chain, from September 2010 to June 2013 and Burger King Worldwide, Inc. from June 2012 to June 2013 and as Chief Executive Officer of América Latina Logística (“ALL”), a logistics company, from January 2005 to September 2010. Mr. Hees has also been a partner at 3G Capital, a global investment firm, since July 2010. On April 22, 2019, we announced that Bernardo Hees will leave Kraft Heinz in 2019 to focus on other projects as a Partner of 3G Capital.
Miguel Patricio was appointed to succeed Mr. Hees as Chief Executive Officer and has served as Advisor to Kraft Heinz since May 5, 2019. Mr. Patricio has been Chief of Special Global Projects-Marketing at Anheuser-Busch Inbev SA/NV (“AB InBev”), a multinational drink and brewing holdings company, since January 1, 2019. Prior to that, he served as the Chief Marketing Officer at AB InBev since 2012. Prior to his role as Chief Marketing Officer, since joining AB InBev in 1998, he also served as Zone President Asia Pacific, Zone President North America, Vice President Marketing of North America, and Vice President Marketing. Mr. Patricio has also held several senior positions across the Americas at The Coca-Cola Company and Johnson & Johnson. Mr. Patricio also invests in the 3G Special Situation Fund III (the “Fund”); his investment represents less than 1% of the Fund’s assets.
David Knopf became Executive Vice President and Chief Financial Officer in October 2017. He had previously served as Vice President, Category Head of Planters Business since August 2016. Prior to that role, Mr. Knopf served as Vice President of Finance, Head of Global Budget & Business Planning, Zero-Based Budgeting, and Financial & Strategic Planning from July 2015 to August 2016. Prior to joining Kraft Heinz in July 2015, Mr. Knopf served in various roles at 3G Capital, including as an associate partner. Before joining 3G Capital in October 2013, Mr. Knopf served in various roles at Onex Partners, a private equity firm, and Goldman Sachs, a global investment banking, securities, and investment management firm. Mr. Knopf has also been a partner of 3G Capital since July 2015.

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Nina Barton became Zone President of Canada and President of Digital Growth effective January 1, 2019. Prior to assuming her current role, Ms. Barton had served as President, Global Digital and Online Growth since October 2017, and from July 2015 through October 2017, she served as Senior Vice President of Marketing, Innovation and Research & Development for the U.S. business. From July 2013 through July 2015, she served as Vice President, Marketing at Kraft Foods Group, Inc. and managed the total coffee portfolio including the Maxwell House, Gevalia, and McCafe brands. Ms. Barton joined Kraft Foods in 2011 as Senior Marketing Director responsible for growing the Philadelphia cream cheese brand. Prior to that, Ms. Barton served in a variety of marketing and brand-building roles in the consumer products industry.
Paulo Basilio assumed his current role as President of the U.S. Commercial Business in October 2017. Mr. Basilio previously served as Executive Vice President and Chief Financial Officer upon the closing of the 2015 Merger until October 2017. He had previously served as Chief Financial Officer of Heinz since June 2013. Previously, Mr. Basilio served as Chief Executive Officer of ALL from September 2010 to June 2012, after having served in various roles at ALL, including Chief Operating Officer, Chief Financial Officer, and Analyst. Mr. Basilio has also been a partner of 3G Capital since July 2012.
Pedro Drevon assumed his current role as Zone President of Latin America in October 2017. Previously he served as Managing Director for Kraft Heinz Brazil since August 2015. Prior to joining Kraft Heinz in 2015, Mr. Drevon served in various capacities at 3G Capital. Before joining 3G Capital in 2008, Mr. Drevon served in various roles at Banco BBM, a financial advisory and wealth management firm. Mr. Drevon has also been a partner of 3G Capital since January 2011.
Rashida La Lande joined Kraft Heinz as Senior Vice President, Global General Counsel and Corporate Secretary in January 2018. In October 2018, Ms. La Lande’s responsibilities expanded to include leadership of our corporate social responsibility and government affairs functions, and she was later appointed Head of Corporate Social Responsibility and Government Affairs in addition to her role as Senior Vice President, Global General Counsel and Corporate Secretary. Prior to joining Kraft Heinz, Ms. La Lande was a partner at the law firm of Gibson, Dunn & Crutcher, where she advised clients with respect to mergers and acquisitions, leveraged buyouts, private equity deals, and joint ventures. Throughout Ms. La Lande’s career, she has advised companies and private equity sponsors in the consumer products, retail, financial services, and technology industries.
Rafael Oliveira assumed his current role as Zone President of EMEA in October 2016 after serving as the Managing Director of Kraft Heinz UK & Ireland. Mr. Oliveira joined Kraft Heinz in July 2014 and served as President of Kraft Heinz Australia, New Zealand, and Papua New Guinea until September 2016. Prior to joining Kraft Heinz, Mr. Oliveira spent 17 years in the financial industry, the final 10 of which he held a variety of leadership positions with Goldman Sachs.
Rodrigo Wickbold assumed his current role as Zone President of APAC in January 2018 after serving as Chief Marketing Officer of APAC since January 2016. Prior to joining Kraft Heinz in January 2016, Mr. Wickbold served in various marketing and business leadership roles at Unilever, a consumer products company, since 2000, including as Global Senior Brand Manager - Skin Care.
Available Information
Our website address is www.kraftheinzcompany.com. The information on our website is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the Securities and Exchange Commission (the “SEC”). Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) are available free of charge on our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including Kraft Heinz, that are electronically filed with the SEC.
Item 1A. Risk Factors.
Industry Risks
We operate in a highly competitive industry.
The food and beverage industry is highly competitive across all of our product offerings. Our principal competitors in these categories are manufacturers, as well as retailers with their own branded and private label products. We compete based on product innovation, price, product quality, nutritional value, service, taste, convenience, brand recognition and loyalty, effectiveness of marketing and distribution, promotional activity, and the ability to identify and satisfy changing consumer preferences.
We may need to reduce our prices in response to competitive and customer pressures, including pressures in relation to private label products that are generally sold at lower prices. These pressures have restricted and may in the future continue to restrict our ability to increase prices in response to commodity and other cost increases. Failure to effectively assess, timely change and set proper pricing, promotions, or trade incentives may negatively impact the achievement of our objectives.

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The rapid emergence of new distribution channels, particularly e-commerce, may create consumer price deflation, affecting our retail customer relationships and presenting additional challenges to increasing prices in response to commodity or other cost increases. We may also need to increase or reallocate spending on marketing, retail trade incentives, materials, advertising, and new product or channel innovation to maintain or increase market share. These expenditures are subject to risks, including uncertainties about trade and consumer acceptance of our efforts. If we are unable to compete effectively, our profitability, financial condition, and operating results may decline.
Our success depends on our ability to correctly predict, identify, and interpret changes in consumer preferences and demand, to offer new products to meet those changes, and to respond to competitive innovation.
Consumer preferences for food and beverage products change continually and rapidly. Our success depends on our ability to predict, identify, and interpret the tastes and dietary habits of consumers and to offer products that appeal to consumer preferences, including with respect to health and wellness. If we do not offer products that appeal to consumers, our sales and market share will decrease, which could materially and adversely affect our product sales, financial condition, and operating results.
We must distinguish between short-term trends and long-term changes in consumer preferences. If we do not accurately predict which shifts in consumer preferences will be long-term, or if we fail to introduce new and improved products to satisfy those preferences, our sales could decline. In addition, because of our varied consumer base, we must offer an array of products that satisfy a broad spectrum of consumer preferences. If we fail to expand our product offerings successfully across product categories, or if we do not rapidly develop products in faster-growing or more profitable categories, demand for our products could decrease, which could materially and adversely affect our product sales, financial condition, and operating results.
Prolonged negative perceptions concerning the health implications of certain food and beverage products (including as they relate to obesity or other health concerns) could influence consumer preferences and acceptance of some of our products and marketing programs. We strive to respond to consumer preferences and social expectations, but we may not be successful in our efforts. Continued negative perceptions and failure to satisfy consumer preferences could materially and adversely affect our product sales, financial condition, and operating results.
In addition, achieving growth depends on our successful development, introduction, and marketing of innovative new products and line extensions. There are inherent risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance or potential impacts on our existing product offerings. We may be required to increase expenditures for new product development. Successful innovation depends on our ability to correctly anticipate customer and consumer acceptance, to obtain, protect, and maintain necessary intellectual property rights, and to avoid infringing upon the intellectual property rights of others. We must also be able to respond successfully to technological advances by and intellectual property rights of our competitors, and failure to do so could compromise our competitive position and impact our product sales, financial condition, and operating results.
Changes in the retail landscape or the loss of key retail customers could adversely affect our financial performance.
Retail customers, such as supermarkets, warehouse clubs, and food distributors in our major markets, may continue to consolidate, resulting in fewer but larger customers for our business across various channels. Consolidation also produces larger retail customers that may seek to leverage their positions to improve their profitability by demanding improved efficiency, lower pricing, more favorable terms, increased promotional programs, or specifically-tailored product offerings. In addition, larger retailers have scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own private label products. Retail consolidation and increasing retailer power could materially and adversely affect our product sales, financial condition, and operating results.
Retail consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance may have a corresponding material and adverse effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease, or cancel purchases of our products, or delay or fail to pay us for previous purchases, which could materially and adversely affect our product sales, financial condition, and operating results.
In addition, technology-based systems, which give consumers the ability to shop through e-commerce websites and mobile commerce applications, are also significantly altering the retail landscape in many of our markets. If we are unable to adjust to developments in these changing landscapes, we may be disadvantaged in key channels and with certain consumers, which could materially and adversely affect our product sales, financial condition, and operating results.

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Changes in our relationships with significant customers, suppliers, or other business relationships could adversely impact us.
We derive significant portions of our sales from certain significant customers (see Sales and Customers within Item 1, Business). There can be no assurance that all of our significant customers will continue to purchase our products in the same mix or quantities or on the same terms as in the past, particularly as increasingly powerful retailers may demand lower pricing and focus on developing their own brands. The loss of a significant customer or a material reduction in sales or a change in the mix of products we sell to a significant customer could materially and adversely affect our product sales, financial condition, and operating results.
Disputes with significant suppliers, including disputes related to pricing or performance, could adversely affect our ability to supply products to our customers and could materially and adversely affect our product sales, financial condition, and operating results. In addition, terminations of relationships with other significant contractual counterparties, including licensors, could adversely affect our portfolio, product sales, financial condition, and operating results.
In addition, the financial condition of such customers, suppliers, and other significant contractual counterparties are affected in large part by conditions and events that are beyond our control. Significant deteriorations in the financial conditions of significant customers, suppliers, and other business relationships could materially and adversely affect our product sales, financial condition, and operating results.
Maintaining, extending, and expanding our reputation and brand image are essential to our business success.
We have many iconic brands with long-standing consumer recognition across the globe. Our success depends on our ability to maintain brand image for our existing products, extend our brands to new platforms, and expand our brand image with new product offerings.
We seek to maintain, extend, and expand our brand image through marketing investments, including advertising and consumer promotions, and product innovation. Negative perceptions on the role of food and beverage marketing could adversely affect our brand image or lead to stricter regulations and scrutiny of marketing practices. Moreover, adverse publicity about legal or regulatory action against us, our quality and safety, our environmental or social impacts, our products becoming unavailable to consumers, or our suppliers and, in some cases, our competitors, could damage our reputation and brand image, undermine our customers’ confidence, and reduce demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. Furthermore, existing or increased legal or regulatory restrictions on our advertising, consumer promotions, and marketing, or our response to those restrictions, could limit our efforts to maintain, extend, and expand our brands.
In addition, our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. We increasingly rely on social media and online dissemination of advertising campaigns. The growing use of social and digital media increases the speed and extent that information, including misinformation, and opinions can be shared. Negative posts or comments about us, our brands or our products, or our suppliers and, in some cases, our competitors, on social or digital media, whether or not valid, could seriously damage our brands and reputation. In addition, we might fail to appropriately target our marketing efforts, anticipate consumer preferences, or invest sufficiently in maintaining, extending, and expanding our brand image. If we do not maintain, extend, and expand our reputation or brand image, then our product sales, financial condition, and operating results could be materially and adversely affected.
We must leverage our brand value to compete against private label products.
In nearly all of our product categories, we compete with branded products as well as private label products, which are typically sold at lower prices. Our products must provide higher value and/or quality to our consumers than alternatives, particularly during periods of economic uncertainty. Consumers may not buy our products if relative differences in value and/or quality between our products and private label products change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer private label products, then we could lose market share or sales volumes or shift our product mix to lower margin offerings. A change in consumer preferences could also cause us to increase capital, marketing, and other expenditures, which could materially and adversely affect our product sales, financial condition, and operating results.
We may be unable to drive revenue growth in our key product categories, increase our market share, or add products that are in faster-growing and more profitable categories.
Our future results will depend on our ability to drive revenue growth in our key product categories and growth in the food and beverage industry in the countries in which we operate. Our future results will also depend on our ability to enhance our portfolio by adding innovative new products in faster-growing and more profitable categories and our ability to increase market share in our existing product categories. Our failure to drive revenue growth, limit market share decreases in our key product categories, or develop innovative products for new and existing categories could materially and adversely affect our product sales, financial condition, and operating results.

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Product recalls or other product liability claims could materially and adversely affect us.
Selling products for human consumption involves inherent legal and other risks, including product contamination, spoilage, product tampering, allergens, or other adulteration. We have decided and could in the future decide to, and have been or could in the future be required to, recall products due to suspected or confirmed product contamination, adulteration, product mislabeling or misbranding, tampering, undeclared allergens, or other deficiencies. Product recalls or market withdrawals could result in significant losses due to their costs, the destruction of product inventory, and lost sales due to the unavailability of the product for a period of time.
We could be adversely affected if consumers lose confidence in the safety and quality of certain food products or ingredients, or the food safety system generally. Adverse attention about these types of concerns, whether or not valid, may damage our reputation, discourage consumers from buying our products, or cause production and delivery disruptions that could negatively impact our net sales and financial condition.
We may also suffer losses if our products or operations violate applicable laws or regulations, or if our products cause injury, illness, or death. In addition, our marketing could face claims of false or deceptive advertising or other criticism. A significant product liability or other legal judgment or a related regulatory enforcement action against us, or a significant product recall, may materially and adversely affect our reputation and profitability. Moreover, even if a product liability or fraud claim is unsuccessful, has no merit, or is not pursued, the negative publicity surrounding assertions against our products or processes could materially and adversely affect our product sales, financial condition, and operating results.
Unanticipated business disruptions could adversely affect our ability to provide our products to our customers.
We have a complex network of suppliers, owned and leased manufacturing locations, co-manufacturing locations, distribution networks, and information systems that support our ability to consistently provide our products to our customers. Factors that are hard to predict or beyond our control, such as weather, raw material shortages, natural disasters, fires or explosions, political unrest, terrorism, generalized labor unrest, or health pandemics, could damage or disrupt our operations or our suppliers’, co-manufacturers’ or distributors’ operations. These disruptions may require additional resources to restore our supply chain or distribution network. If we cannot respond to disruptions in our operations, whether by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or if we are unable to quickly repair damage to our information, production, or supply systems, we may be late in delivering, or be unable to deliver, products to our customers and may also be unable to track orders, inventory, receivables, and payables. If that occurs, our customers’ confidence in us and long-term demand for our products could decline. Any of these events could materially and adversely affect our product sales, financial condition, and operating results.
Business Risks
We may not successfully identify, complete, or realize the benefits from strategic acquisitions, alliances, divestitures, joint ventures, or other investments.
From time to time, we have evaluated and may continue to evaluate acquisition candidates, alliances, joint ventures, or other investments that may strategically fit our business objectives, and we have divested and may consider divesting businesses that do not meet our strategic objectives or growth or profitability targets. These activities may present financial, managerial, and operational risks including, but not limited to, diversion of management’s attention from existing core businesses, difficulties integrating or separating personnel and financial and other systems, inability to effectively and immediately implement control environment processes across a diverse employee population, adverse effects on existing or acquired customer and supplier business relationships, and potential disputes with buyers, sellers, or partners. Activities in such areas are regulated by numerous antitrust and competition laws in the United States, Canada, the European Union, and other jurisdictions, and we may be required to obtain the approval of these transactions by competition authorities, as well as to satisfy other legal requirements.
To the extent we undertake acquisitions, alliances, joint ventures, investments, or other developments outside our core regions or in new categories, we may face additional risks related to such developments. For example, risks related to foreign operations include compliance with U.S. laws affecting operations outside of the United States, such as the FCPA, currency rate fluctuations, compliance with foreign regulations and laws, including tax laws, and exposure to politically and economically volatile developing markets. Any of these factors could materially and adversely affect our product sales, financial condition, and operating results.

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We may be unable to realize the anticipated benefits from prior or future streamlining actions to reduce fixed costs, simplify or improve processes, and improve our competitiveness.
We have implemented a number of cost savings initiatives, including our Integration Program (as defined in Overview, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations), that we believe are important to position our business for future success and growth. We have evaluated and continue to evaluate changes to our organizational structure to enable us to reduce costs, simplify or improve processes, and improve our competitiveness. Our future success may depend upon our ability to realize the benefits of these or other cost savings initiatives. In addition, certain of our initiatives may lead to increased costs in other aspects of our business such as increased conversion, outsourcing, or distribution costs. We must accurately predict costs and be efficient in executing any plans to achieve cost savings and operate efficiently in the highly competitive food and beverage industry, particularly in an environment of increased competitive activity. To capitalize on our efforts, we must carefully evaluate investments in our business, and execute in those areas with the most potential return on investment. If we are unable to realize the anticipated benefits from any cost-saving efforts, we could be cost disadvantaged in the marketplace, and our competitiveness, production, profitability, financial conditions, and operating results could be adversely affected.
We may not be able to successfully execute our strategic initiatives.
We plan to continue to conduct strategic initiatives in various markets. Consumer demands, behaviors, tastes and purchasing trends may differ in these markets and, as a result, our sales may not be successful or meet expectations, or the margins on those sales may be less than currently anticipated. We may also face difficulties integrating new business operations with our current sourcing, distribution, information technology systems, and other operations. Any of these challenges could hinder our success in new markets or new distribution channels. We may also face difficulties divesting business operations with minimal impact to the retained businesses. There can be no assurance that we will successfully complete any planned strategic initiatives, that any new business will be profitable or meet our expectations, or that any divestiture will be completed without disruption, which could adversely affect our results of operations and financial condition.
Our international operations subject us to additional risks and costs and may cause our profitability to decline.
We are a global company with sales and operations in numerous countries within developed and emerging markets. Approximately 31% of our 2018 net sales were generated outside of the United States. As a result, we are subject to risks inherent in global operations. These risks, which can vary substantially by market, are described in many of the risk factors discussed in this section and also include:
compliance with U.S. laws affecting operations outside of the United States, including anti-bribery laws such as the FCPA;
changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws or their interpretations, or tax audit implications;
the imposition of increased or new tariffs, quotas, trade barriers, or similar restrictions on our sales or imports, trade agreements, regulations, taxes, or policies that might negatively affect our sales or costs;
currency devaluations or fluctuations in currency values;
compliance with antitrust and competition laws, data privacy laws, and a variety of other local, national, and multi-national regulations and laws in multiple jurisdictions;
discriminatory or conflicting fiscal policies in or across foreign jurisdictions;
changes in capital controls, including currency exchange controls, government currency policies, or other limits on our ability to import raw materials or finished product into various countries or repatriate cash from outside the United States;
challenges associated with cross-border product distribution;
changes in local regulations and laws, the uncertainty of enforcement of remedies in foreign jurisdictions, and foreign ownership restrictions and the potential for nationalization or expropriation of property or other resources;
risks and costs associated with political and economic instability, corruption, anti-American sentiment, and social and ethnic unrest in the countries in which we operate;
the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation, application, and enforceability of laws and regulations and the enforceability of contract rights and intellectual property rights;
risks arising from the significant and rapid fluctuations in currency exchange markets and the decisions made and positions taken to hedge such volatility;
changing labor conditions and difficulties in staffing our operations;
greater risk of uncollectible accounts and longer collection cycles; and

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design, implementation, and use of effective control environment processes across our diverse operations and employee base.
In addition, political and economic changes or volatility, geopolitical conflicts, terrorist activity, political unrest, civil strife, acts of war, public corruption, expropriation, and other economic or political uncertainties could interrupt and negatively affect our business operations or customer demand. Slow economic growth or high unemployment in the markets in which we operate could constrain consumer spending, and declining consumer purchasing power could adversely impact our profitability. All of these factors could result in increased costs or decreased sales, and could materially and adversely affect our product sales, financial condition, and results of operations.
Our performance may be adversely affected by economic and political conditions in the United States and in various other nations where we do business.
Our performance has been in the past and may continue in the future to be impacted by economic and political conditions in the United States and in other nations where we do business. Economic and financial uncertainties in our international markets, including uncertainties surrounding the legal and regulatory effects of Brexit, changes to major international trade arrangements (e.g., the United States-Mexico-Canada Agreement), and the imposition of tariffs by certain foreign governments, including China and Canada, in response to the imposition of tariffs or modification of trade relationships by the United States, could negatively impact our operations and sales. Other factors impacting our operations in the United States and in international locations where we do business include export and import restrictions, currency exchange rates, currency devaluation, cash repatriation restrictions, recessionary conditions, foreign ownership restrictions, nationalization, the impact of hyperinflationary environments, terrorist acts, and political unrest. Such factors in either domestic or foreign jurisdictions, and our responses to them, could materially and adversely affect our product sales, financial condition, and operating results. For further information on Venezuela, see Note 16, Venezuela - Foreign Currency and Inflation, in Item 8, Financial Statements and Supplementary Data.
We rely on our management team and other key personnel and may be unable to hire or retain key personnel or a highly skilled and diverse global workforce.
We depend on the skills, working relationships, and continued services of key personnel, including our experienced management team. In addition, our ability to achieve our operating goals depends on our ability to identify, hire, train, and retain qualified individuals. We compete with other companies both within and outside of our industry for talented personnel, and we may lose key personnel or fail to attract, train, and retain other talented personnel and a diverse global workforce with the skills and in the locations we need to operate and grow our business. Unplanned turnover, failure to attract and develop personnel with key emerging capabilities such as e-commerce and digital marketing skills, or failure to develop adequate succession plans for leadership positions, including the Chief Executive Officer position, could deplete our institutional knowledge base and erode our competitiveness. Changes in immigration laws and policies could also make it more difficult for us to recruit or relocate skilled employees. Any such loss, failure, or limitation could adversely affect our product sales, financial condition, and operating results.
We are significantly dependent on information technology, and we may be unable to protect our information systems against service interruption, misappropriation of data, or breaches of security.
We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic and financial information, to manage a variety of business processes and activities, and to comply with regulatory, legal, and tax requirements. We also depend on our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers, and suppliers. These information technology systems, some of which are managed by third parties, may be susceptible to damage, invasions, disruptions, or shutdowns due to hardware failures, computer viruses, hacker attacks and other cybersecurity risks, telecommunication failures, user errors, catastrophic events or other factors. If our information technology systems suffer severe damage, disruption, or shutdown, by unintentional or malicious actions of employees and contractors or by cyber-attacks, and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience business disruptions, reputational damage, transaction errors, processing inefficiencies, the leakage of confidential information, and the loss of customers and sales, causing our product sales, financial condition, and operating results to be adversely affected and the reporting of our financial results to be delayed.
In addition, if we are unable to prevent security breaches or disclosure of non-public information, we may suffer financial and reputational damage, litigation or remediation costs, fines, or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, consumers, or suppliers.

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Misuse, leakage, or falsification of information could result in violations of data privacy laws and regulations, damage to our reputation and credibility, loss of opportunities to acquire or divest of businesses or brands, and loss of ability to commercialize products developed through research and development efforts and, therefore, could have a negative impact on net sales. In addition, we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us, our current or former employees, or to our suppliers or consumers, and may become subject to legal action and increased regulatory oversight. We could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems.
Our results of operations could be affected by natural events in the locations in which we or our customers, suppliers, distributors, or regulators operate.
We have been and may in the future be impacted by severe weather and other geological events, including hurricanes, earthquakes, floods, or tsunamis that could disrupt our operations or the operations of our customers, suppliers, distributors, or regulators. Natural disasters or other disruptions at any of our facilities or our suppliers’ or distributors’ facilities may impair or delay the delivery of our products. Influenza or other pandemics could disrupt production of our products, reduce demand for certain of our products, or disrupt the marketplace in the foodservice or retail environment with consequent material adverse effects on our results of operations. While we insure against many of these events and certain business interruption risks and have policies and procedures to manage business continuity planning, we cannot provide any assurance that such insurance will compensate us for any losses incurred as a result of natural or other disasters or that our business continuity plans will effectively resolve the issues in a timely manner. To the extent we are unable to, or cannot, financially mitigate the likelihood or potential impact of such events, or effectively manage such events if they occur, particularly when a product is sourced from a single location, there could be a material adverse effect on our business and results of operations, and additional resources could be required to restore our supply chain.
The Sponsors have substantial control over us and may have conflicts of interest with us in the future.
As of December 29, 2018, the Sponsors own approximately 49% of our common stock. Four of our current 11 directors had been directors of Heinz prior to the closing of the 2015 Merger and remained directors of Kraft Heinz pursuant to the merger agreement. In addition, the Board elected Joao M. Castro-Neves, a partner of 3G Capital, one of the Sponsors, effective June 12, 2019. Furthermore, some of our executive officers, including Bernardo Hees, our Chief Executive Officer, are partners of 3G Capital. As a result, the Sponsors have the potential to exercise influence over management and have substantial control over decisions of our Board of Directors as well as over any action requiring the approval of the holders of our common stock, including adopting any amendments to our charter, electing directors, and approving mergers or sales of substantially all of our capital stock or our assets. In addition, to the extent that the Sponsors were to collectively hold a majority of our common stock, they together would have the power to take shareholder action by written consent to adopt amendments to our charter or take other actions, such as corporate transactions, that require the vote of holders of a majority of our outstanding common stock. The directors designated by the Sponsors may have significant authority to effect decisions affecting our capital structure, including the issuance of additional capital stock, the incurrence of additional indebtedness, the implementation of stock repurchase programs, and the decision of whether to declare dividends and the amount of any such dividends. Additionally, the Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. The Sponsors may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as the Sponsors continue to own a significant amount of our equity, they will continue to be able to strongly influence or effectively control our decisions.
Financial Risks
Our level of indebtedness, as well as our failure to comply with covenants under our debt instruments, could adversely affect our business and financial condition.
We have a substantial amount of indebtedness, and are permitted to incur a substantial amount of additional indebtedness, including secured debt. Our existing debt, together with any incurrence of additional indebtedness, could have important consequences, including, but not limited to:
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing for working capital, capital expenditures, research and development, debt service requirements, acquisitions, and general corporate or other purposes;
resulting in a downgrade to our credit rating, which could adversely affect our cost of funds, including our commercial paper programs; liquidity; and access to capital markets;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors who are not as highly leveraged;

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making it more difficult for us to make payments on our existing indebtedness;
requiring a substantial portion of cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, payments of dividends, capital expenditures, and future business opportunities;
exposing us to risks related to fluctuations in foreign currency, as we earn profits in a variety of currencies around the world and substantially all of our debt is denominated in U.S. dollars; and
in the case of any additional indebtedness, exacerbating the risks associated with our substantial financial leverage.
In addition, there can be no assurance that we will generate sufficient cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our indebtedness or to fund other needs. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. There is no assurance that we will be able to refinance any of our indebtedness on favorable terms, or at all. Any inability to generate sufficient cash flow or to refinance our indebtedness on favorable terms could have a material adverse effect on our financial condition.
Our indebtedness instruments contain customary representations, warranties and covenants, including a financial covenant in our senior unsecured revolving credit facility (the “Senior Credit Facility”) to maintain a minimum shareholders’ equity (excluding accumulated other comprehensive income/(losses)). The creditors who hold our debt could accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt. If our operating performance declines, or if we are unable to comply with any covenant, such as our ability to timely prepare and file our periodic reports with the SEC, we have needed and may in the future need to obtain waivers from the required creditors under our indebtedness instruments to avoid being in default.
During the period from December 29, 2018 to the filing date of this Annual Report on Form 10-K, due to the delays in the preparation of our financial statements for the fiscal year ended December 29, 2018 and the fiscal quarter ended March 30, 2019, we were not in compliance with certain reporting covenants under the Senior Credit Facility. As previously disclosed, we entered into two waiver agreements with respect to the Senior Credit Facility, pursuant to which the lenders, as party to the Senior Credit Facility, and JPMorgan Chase Bank, N.A., as administrative agent, granted temporary waivers of compliance by us with respect to the requirement to furnish the lenders a copy of the consolidated financial statements for our fiscal year ended December 29, 2018 no later than June 28, 2019 and for our fiscal quarter ended March 30, 2019 no later than July 31, 2019. The filing of this Annual Report on Form 10-K will constitute compliance with the requirement to furnish the lenders a copy of the consolidated financial statements for our fiscal year ended December 29, 2018 no later than June 28, 2019. We also currently expect to file our Quarterly Report on Form 10-Q for the quarter ended March 30, 2019 on or before July 31, 2019 in compliance with the requirement to furnish the lenders a copy of the consolidated financial statements for such quarter no later than July 31, 2019. For further information related to the two waiver agreements, see Liquidity and Capital Resources in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
However, we may not be able to secure similar waivers for any future delays in our periodic reports with the SEC. Furthermore, if we breach any covenants under our indebtedness instruments and seek a waiver, we may not be able to obtain a waiver from the required creditors, or we may not be able to remedy compliance within the terms of any waivers approved by the required creditors. If this occurs, we would be in default under our indebtedness instruments and unable to access our Senior Credit Facility. In addition, certain creditors could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
Additional impairments of the carrying amounts of goodwill or other indefinite-lived intangible assets could negatively affect our financial condition and results of operations.
Our goodwill balance consists of 20 reporting units, and our indefinite-lived intangible asset balance primarily consists of a number of individual brands. We test our reporting units and brands for impairment annually as of the first day of our second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit or brand is less than its carrying amount. Such events and circumstances could include a sustained decrease in our market capitalization, increased competition or unexpected loss of market share, increased input costs beyond projections (for example due to regulatory or industry changes), disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster or loss of a customer, supplier, or other significant business relationship), unexpected significant declines in operating results, or significant adverse changes in the markets in which we operate. We test reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. We test brands for impairment by comparing the estimated fair value of each brand with its carrying amount. If the carrying amount of a reporting unit or brand exceeds its estimated fair value, we record an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed to the associated carrying amount of goodwill.

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As detailed in Note 10, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, as a result of our 2018 annual impairment test in the second quarter of 2018, we recognized a goodwill impairment loss of $133 million and an indefinite-lived intangible asset impairment loss of $101 million. Additionally, as part of our interim impairment test in the third quarter of 2018, we recognized an indefinite-lived intangible asset impairment loss of $215 million and a definite-lived intangible asset impairment loss of $3 million.
For the fourth quarter of 2018, in connection with the preparation of our year-end financial statements, we assessed the changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units or brands were below their carrying amounts. Although our annual impairment test is performed during the second quarter, we perform this qualitative assessment each interim reporting period.
While there was no single determinative event or factor, the consideration in totality of several factors that developed during the fourth quarter of 2018 led us to conclude that it was more likely than not that the fair values of certain reporting units and brands were below their carrying amounts. These factors included: (i) a sustained decrease in our share price in November and December of 2018, which reduced our market capitalization below the book value of net assets; (ii) the completion of our fourth quarter results, which were below management’s expectations due to several factors such as higher than expected supply chain costs and increased competition; (iii) the development and approval of our 2019 annual operating plan in December 2018, which provided additional insights into expectations and priorities for the coming years, such as lower growth and margin expectations; (iv) the announcement in November 2018 to sell certain assets in our natural cheese portfolio in Canada, which changed the composition and use of the remaining assets and brands in the associated reporting unit; (v) fluctuations in foreign exchange rates in certain countries; (vi) increased interest rates in certain locations, including an increase in the United States in December 2018; and (vii) increased and prolonged economic and regulatory uncertainty in the United States and global economies as of the end of December 2018.
Accordingly, we performed an interim impairment test on these reporting units and brands as of December 29, 2018. As a result of our interim impairment test, we recognized goodwill impairment losses of $6.9 billion and indefinite-lived intangible asset impairment losses of $8.6 billion in the fourth quarter of 2018.
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 and brands requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax considerations, discount rates, growth rates, royalty rates, contributory asset charges, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, change, or if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating plan, then one or more of our reporting units or brands might become impaired in the future. As detailed in Note 10, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, we recorded impairment losses totaling $15.9 billion for the year ended December 29, 2018. Our reporting units and brands that were impaired in 2018 were written down to their respective fair values resulting in zero excess fair value over carrying amount as of their latest 2018 impairment testing dates. Accordingly, these and other individual reporting units and brands that have 20% or less excess fair value over carrying amount as of their latest testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Reporting units with a heightened risk of future impairments had an aggregate goodwill carrying amount of $29.0 billion at December 29, 2018 and included: U.S. Grocery, U.S. Refrigerated, Canada Retail, Latin America Exports, Southeast Europe, Australia and New Zealand, and Northeast Asia. Of the $29.0 billion with a heightened risk of future impairments, $9.3 billion is attributable to reporting units with 0% excess fair value over carrying amount. Brands with a heightened risk of future impairments had an aggregate carrying amount of $29.3 billion at December 29, 2018 and included: Kraft, Philadelphia, Oscar Mayer, Velveeta, Miracle Whip, Planters, A1, Cool Whip, Stove Top, ABC, and Quero. Of the $29.3 billion with a heightened risk of future impairments, $24.0 billion is attributable to brands with 0% excess fair value over carrying amount. Although the remaining reporting units and brands have more than 20% excess fair value over carrying amount as of their latest 2018 impairment testing date, these amounts are also associated with the 2013 Heinz acquisition and the 2015 Merger and are recorded on the balance sheet at their estimated acquisition date fair values. Therefore, if any assumptions, estimates, or market factors change in the future, these amounts are also susceptible to impairments, which could negatively affect our operating results or net worth.

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Our net sales and net income may be exposed to foreign exchange rate fluctuations.
We derive a substantial portion of our net sales from international operations. We hold assets and incur liabilities, earn revenue, and pay expenses in a variety of currencies other than the U.S. dollar, primarily the British pound sterling, euro, Australian dollar, Canadian dollar, New Zealand dollar, Brazilian real, Indonesian rupiah, Chinese renminbi, and Indian rupee. Since our consolidated financial statements are reported in U.S. dollars, fluctuations in exchange rates from period to period will have an impact on our reported results. We have implemented currency hedges intended to reduce our exposure to changes in foreign currency exchange rates. However, these hedging strategies may not be successful, and any of our unhedged foreign exchange exposures will continue to be subject to market fluctuations. In addition, in certain circumstances, we may incur costs in one currency related to services or products for which we are paid in a different currency. As a result, factors associated with international operations, including changes in foreign currency exchange rates, could significantly affect our results of operations and financial condition.
Commodity, energy, and other input prices are volatile and could negatively affect our consolidated operating results.
We purchase and use large quantities of commodities, including dairy products, meat products, coffee beans, nuts, tomatoes, potatoes, soybean and vegetable oils, sugar and other sweeteners, corn products, wheat products, cucumbers, onions, other fruits and vegetables, spices, and flour to manufacture our products. In addition, we purchase and use significant quantities of resins, metals, cardboard, glass, plastic, paper, fiberboard, and other materials to package our products, and we use other inputs, such as natural gas and water, to operate our facilities. We are also exposed to changes in oil prices, which influence both our packaging and transportation costs. Prices for commodities, energy, and other supplies are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, currency fluctuations, severe weather or global climate change, crop failures, or shortages due to plant disease or insect and other pest infestation, consumer, industrial, or investment demand, and changes in governmental regulation and trade, tariffs, alternative energy, including increased demand for biofuels, and agricultural programs. Additionally, we may be unable to maintain favorable arrangements with respect to the costs of procuring raw materials, packaging, services, and transporting products, which could result in increased expenses and negatively affect our operations. Furthermore, the cost of raw materials and finished products may fluctuate due to movements in cross-currency transaction rates. Rising commodity, energy, and other input costs could materially and adversely affect our cost of operations, including the manufacture, transportation, and distribution of our products, which could materially and adversely affect our financial condition and operating results.
Although we monitor our exposure to commodity prices as an integral part of our overall risk management program, and seek to hedge against input price increases to the extent we deem appropriate, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in specific raw materials costs. For example, hedging our costs for one of our key commodities, dairy products, is difficult because dairy futures markets are not as developed as many other commodities futures markets. Continued volatility or sustained increases in the prices of commodities and other supplies we purchase could increase the costs of our products, and our profitability could suffer. Moreover, increases in the prices of our products to cover these increased costs may result in lower sales volumes, or we may be constrained from increasing the prices of our products by competitive and consumer pressures. If we are not successful in our hedging activities, or if we are unable to price our products to cover increased costs, then commodity and other input price volatility or increases could materially and adversely affect our financial condition and operating results.
Volatility in the market value of all or a portion of the derivatives we use to manage exposures to fluctuations in commodity prices may cause volatility in our gross profit and net income.
We use commodity futures, options, and swaps to economically hedge the price of certain input costs, including dairy products, meat products, coffee beans, sugar, vegetable oils, wheat products, corn products, cocoa products, packaging products, diesel fuel, and natural gas. We recognize gains and losses based on changes in the values of these commodity derivatives. We recognize these gains and losses in cost of products sold in our consolidated statements of income to the extent we utilize the underlying input in our manufacturing process. We recognize these gains and losses in general corporate expenses in our segment operating results until we sell the underlying products, at which time we reclassify the gains and losses to segment operating results. Accordingly, changes in the values of our commodity derivatives may cause volatility in our gross profit and net income.
Our results could be adversely impacted as a result of increased pension, labor, and people-related expenses.
Inflationary pressures and any shortages in the labor market could increase labor costs, which could have a material adverse effect on our consolidated operating results or financial condition. Our labor costs include the cost of providing employee benefits in the United States, Canada, and other foreign jurisdictions, including pension, health and welfare, and severance benefits. Any declines in market returns could adversely impact the funding of pension plans, the assets of which are invested in a diversified portfolio of equity and fixed-income securities and other investments. Additionally, the annual costs of benefits vary with increased costs of health care and the outcome of collectively-bargained wage and benefit agreements.

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Furthermore, we may be subject to increased costs or experience adverse effects to our operating results if we are unable to renew collectively bargained agreements on satisfactory terms. Our financial condition and ability to meet the needs of our customers could be materially and adversely affected if strikes or work stoppages and interruptions occur as a result of delayed negotiations with union-represented employees both in and outside of the United States.
Regulatory Risks
Compliance with laws, regulations, and related interpretations and related legal claims or other regulatory enforcement actions could impact our business, and we face additional risks and uncertainties related to any potential actions resulting from the SEC’s ongoing investigation, as well as potential additional subpoenas, litigation, and regulatory proceedings.
As a large, global food and beverage company, we operate in a highly-regulated environment with constantly-evolving legal and regulatory frameworks. Various laws and regulations govern production, storage, distribution, sales, advertising, labeling, including on-pack claims, information or disclosures, marketing, licensing, trade, labor, tax, environmental matters, privacy, as well as health and safety and data protection practices. Government authorities regularly change laws and regulations and their interpretations. In particular, Brexit could result in a new regulatory regime in the United Kingdom that may or may not follow that of the European Union, and the creation of new and divergent laws and regulations could increase the cost and complexity of our compliance. In addition, this shift in regime could create a number of legal and accounting complexities with respect to existing relationships, including uncertainty regarding the continuity of contracts entered into by entities in the United Kingdom or the European Union. Our compliance with new or revised laws and regulations, or the interpretation and application of existing laws and regulations, could materially and adversely affect our product sales, financial condition, and results of operations. As a consequence of the legal and regulatory environment in which we operate, we are faced with a heightened risk of legal claims and regulatory enforcement actions.
As previously disclosed on February 21, 2019, we received a subpoena in October 2018 from the SEC related to our procurement area, specifically the accounting policies, procedures, and internal controls related to our procurement function, including, but not limited to, agreements, side agreements, and changes or modifications to agreements with our suppliers. Following the receipt of this subpoena, we, together with external counsel and forensic accountants, and subsequently, under the oversight of the Audit Committee, conducted an internal investigation into our procurement area and related matters. Following our earnings release and investor call on February 21, 2019, when we announced the results of our interim assessment of goodwill and intangible asset impairments, the SEC requested additional information related to our financial reporting, internal controls, and disclosures, our assessment of goodwill and intangible asset impairments, and our communications with certain shareholders. It is our understanding that the United States Attorney’s Office for the Northern District of Illinois also is reviewing this matter, working with the SEC and receiving materials from it. After our earnings release, four securities class action lawsuits, one class action lawsuit under the Employee Retirement Income Security Act (“ERISA”), and five stockholder derivative actions were filed against us and certain of our current and former officers, directors, and employees. One of the securities class action lawsuits was voluntarily dismissed without prejudice, while the other matters are still pending.
We intend to vigorously defend against these lawsuits. We are unable, at this time, to estimate our potential liability in these matters, but we may be required to pay judgments, settlements, or other penalties and incur other costs and expenses in connection with the securities and ERISA class action lawsuits and the stockholder derivative actions. See Item 3, Legal Proceedings, and Note 18, Commitment and Contingencies, in Item 8, Financial Statements and Supplementary Data, for additional information.
Furthermore, if the SEC commences legal action as a result of the investigation, we could be required to pay significant penalties and become subject to injunctions, cease and desist orders, and other equitable remedies. The SEC investigation will not be resolved as a result of the completion of the internal investigation and the filing of this Annual Report on Form 10-K. We can provide no assurances as to the outcome or timing of any governmental or regulatory investigation.
We have incurred, and may continue to incur, significant expenses related to legal, accounting, and other professional services in connection with the internal investigation, the SEC investigation, and related legal and regulatory matters. These expenses, the delay in timely filing this Annual Report on Form 10-K, the delay in timely filing our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2019, and the diversion of the attention of the management team that has occurred, and is expected to continue, has adversely affected, and could continue to adversely affect, our business, financial condition, and cash flows.
As a result of matters associated with the internal investigation related to the SEC investigation and various lawsuits, we are exposed to greater risks associated with litigation, regulatory proceedings, and government enforcement actions and additional subpoenas. Any future investigations or additional lawsuits may have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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We identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we experience additional material weaknesses or other deficiencies in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately and timely report our financial results, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports, and the price of our common stock may decline.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effectiveness of our system of internal control. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act, which requires us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting.
In connection with our most recent year-end assessment of internal control over financial reporting, we determined that, as of December 29, 2018, we did not maintain effective internal control over financial reporting because of a material weakness in our risk assessment process related to designing and maintaining controls sufficient to appropriately respond to changes in our business environment. This material weakness in risk assessment also contributed to material weaknesses arising from (i) supplier contracts and related arrangements, and (ii) goodwill and indefinite-lived intangible asset impairment testing, and we have taken and are taking certain remedial steps to improve our internal control over financial reporting. For further discussion of the material weaknesses identified and our remedial efforts, see Item 9A, Controls and Procedures.
Remediation efforts place a significant burden on management and add increased pressure to our financial resources and processes. As a result, we may not be successful in making the improvements necessary to remediate the material weaknesses identified by management, be able to do so in a timely manner, or be able to identify and remediate additional control deficiencies, including material weaknesses, in the future.
If we are unable to successfully remediate our existing or any future material weaknesses or other deficiencies in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected; our liquidity, our access to capital markets, the perceptions of our creditworthiness, and our ability to complete acquisitions may be adversely affected; we may be unable to maintain or regain compliance with applicable securities laws, The Nasdaq Stock Market LLC (“Nasdaq”) listing requirements, and the covenants under our debt instruments or derivative arrangements regarding the timely filing of periodic reports; we may be subject to regulatory investigations and penalties; investors may lose confidence in our financial reporting; we may suffer defaults, accelerations, or cross-accelerations under our debt instruments or derivative arrangements to the extent we are unable to obtain waivers from the required creditors or counterparties or are unable to cure any breaches; and our stock price may decline.
Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to raise debt or equity capital, restricts our ability to issue equity securities, including within the Kraft Heinz Savings Plan and the Kraft Heinz Union Savings Plan (collectively, the “Plan”), and could impact our listing on Nasdaq.
We did not file our Annual Report on Form 10-K for the year ended December 29, 2018 or our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2019 within each respective timeframe required by the SEC, meaning we have not remained current in our reporting requirements with the SEC. This limits our ability to access the public markets to raise debt or equity capital, which could prevent us from pursuing transactions or implementing business strategies that we might otherwise believe are beneficial to our business. We are not currently eligible to use a registration statement on Form S-3 that would allow us to continuously incorporate by reference our SEC reports into the registration statement, or to use “shelf” registration statements to conduct offerings, until approximately one year from the date we regain and maintain status as a current filer. If we wish to pursue a public offering now, we would be required to file a registration statement on Form S-1 and have it reviewed and declared effective by the SEC. Doing so would likely take significantly longer than using a registration statement on Form S-3 and increase our transaction costs, and the necessity of using a Form S-1 for a public offering of registered securities could, to the extent we are not able to conduct offerings using alternative methods, adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.

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In addition, as a result of the failure to remain current in our reporting requirements with the SEC, we are not currently eligible to use Form S-8 registration statements. As a result, on April 23, 2019, the administrator of the Plan issued a notice to Plan participants advising participants of a blackout period during which participants are prohibited from acquiring beneficial ownership of additional interests in The Kraft Heinz Company Stock Fund. If we are not able to become and remain current in our reporting requirements with the SEC, it restricts our ability to maintain The Kraft Heinz Company Stock Fund or issue other equity securities to our employees.
As previously disclosed, we also received notices from Nasdaq regarding our noncompliance with Nasdaq Listing Rule 5250(c)(1), which requires listed companies to timely file all required periodic financial reports with the SEC. We timely submitted our plan to regain compliance, and Nasdaq granted the Company until September 11, 2019 to regain compliance, subject to our compliance with certain terms outlined in the notice received on May 15, 2019, including filing this Annual Report on Form 10-K for the fiscal year ended December 29, 2018 and filing our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2019, which we expect to file as promptly as practicable following the filing of this Annual Report on Form 10-K. If we are not able to file before September 11, 2019, however, our common stock may be subject to delisting by Nasdaq.
We reached a determination to restate certain of our previously issued consolidated financial statements, which resulted in unanticipated costs and may affect investor confidence and raise reputational issues.
As discussed in the Explanatory Note, in Note 2, Restatement of Previously Issued Consolidated Financial Statements, and in Note 23, Quarterly Financial Data (Unaudited), in this Annual Report on Form 10-K, we reached a determination to restate our consolidated financial statements and related disclosures for the years ended December 30, 2017 and December 31, 2016 and to restate each of the quarterly and year-to-date periods for the nine months ended September 29, 2018 and for fiscal year 2017, following the identification of misstatements as a result of the internal investigation conducted. We do not believe that the misstatements are quantitatively material to any period presented in our prior financial statements. However, due to the qualitative nature of the matters identified in our internal investigation, including the number of years over which the misconduct occurred and the number of transactions, suppliers, and procurement employees involved, we determined that it would be appropriate to correct the misstatements in our previously issued consolidated financial statements by restating such financial statements. The restatement also included corrections for additional identified out-of-period and uncorrected misstatements in the impacted periods. As a result, we have incurred unanticipated costs for accounting and legal fees in connection with or related to the restatement, and have become subject to a number of additional risks and uncertainties, which may affect investor confidence in the accuracy of our financial disclosures and may raise reputational issues for our business.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
We consider our intellectual property rights, particularly and most notably our trademarks, but also our patents, trade secrets, trade dress, copyrights, and licensing agreements, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, trade secret, and trade dress laws, as well as licensing agreements, third-party nondisclosure and assignment agreements, and policing of third-party misuses of our intellectual property. Our failure to develop or adequately protect our trademarks, products, new features of our products, or our technology, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business and financial condition. We also license certain intellectual property, most notably trademarks, from third parties. To the extent that we are not able to contract with these third parties on favorable terms or maintain our relationships with these third parties, our rights to use certain intellectual property could be impacted.
We may be unaware of intellectual property rights of others that may cover some of our technology, brands, or products. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Third-party claims of intellectual property infringement might also require us to enter into costly license agreements. We also may be subject to significant damages or injunctions against development and sale of certain products.

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Changes in tax laws and interpretations could adversely affect our business.
We are subject to income and other taxes in the United States and in numerous foreign jurisdictions. Our domestic and foreign tax liabilities are dependent on the jurisdictions in which profits are determined to be earned and taxed. Additionally, the amount of taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we operate. A number of factors influence our effective tax rate, including changes in tax laws and treaties as well as the interpretation of existing laws and rules. Federal, state, and local governments and administrative bodies within the United States, which represents the majority of our operations, and other foreign jurisdictions have implemented, or are considering, a variety of broad tax, trade, and other regulatory reforms that may impact us. For example, the Tax Cuts and Jobs Act (the “U.S. Tax Reform”) enacted on December 22, 2017 resulted in changes in our corporate tax rate, our deferred income taxes, and the taxation of foreign earnings. The comprehensive impact of U.S. Tax Reform is yet to be determined, and future guidance and interpretations may have adverse or uncertain effects. Relatedly, changes in tax laws resulting from the Organization for Economic Co-operation and Development’s (“OECD”) multi-jurisdictional plan of action to address base erosion and profit sharing (“BEPS”) could impact our effective tax rate. It is not currently possible to accurately determine the potential comprehensive impact of these or future changes, but these changes could have a material impact on our business and financial condition.
Significant judgment, knowledge, and experience are required in determining our worldwide provision for income taxes. Our future effective tax rate is impacted by a number of factors including changes in the valuation of our deferred tax assets and liabilities, changes in geographic mix of income, increases in expenses not deductible for tax, including impairment of goodwill, and changes in available tax credits. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are also regularly subject to audits by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes more difficult. The results of an audit or litigation could adversely affect our financial statements in the period or periods for which that determination is made.
Registered Securities Risks
Sales of our common stock in the public market could cause volatility in the price of our common stock or cause the share price to fall.
Sales of a substantial number of shares of our common stock in the public market, sales of our common stock by the Sponsors, or the perception that these sales might occur, could depress the market price of our common stock, and could impair our ability to raise capital through the sale of additional equity securities. A sustained depression in the market price of our common stock has happened (in November and December 2018, which was a contributing factor to our decision to perform an interim impairment test for certain reporting units and brands in the fourth quarter of 2018, for which we ultimately recorded impairment losses) and could in the future happen, which could also reduce our market capitalization below the book value of net assets, which could increase the likelihood of recognizing goodwill or indefinite-lived intangible asset impairment losses that could negatively affect our financial condition and results of operations.
Kraft Heinz, 3G Capital, and Berkshire Hathaway entered into a registration rights agreement requiring us to register for resale under the Securities Act all registrable shares held by 3G Capital and Berkshire Hathaway, which represents all shares of our common stock held by the Sponsors as of the date of the closing of the 2015 Merger. As of December 29, 2018, registrable shares represented approximately 49% of all outstanding shares of our common stock. Although the registrable shares are subject to certain holdback and suspension periods, the registrable shares are not subject to a “lock-up” or similar restriction under the registration rights agreement. Accordingly, offers and sales of a large number of registrable shares may be made pursuant to an effective registration statement under the Securities Act in accordance with the terms of the registration rights agreement. Sales of our common stock by the Sponsors to other persons would likely result in an increase in the number of shares being traded in the public market and may increase the volatility of the price of our common stock.
Our ability to pay regular dividends to our shareholders and the amounts of any such dividends are subject to the discretion of the Board of Directors and may be limited by our financial condition, debt agreements, or limitations under Delaware law.
Although it is currently anticipated that we will continue to pay regular quarterly dividends, any such determination to pay dividends and the amounts thereof will be at the discretion of the Board of Directors and will be dependent on then-existing conditions, including our financial condition, income, legal requirements, including limitations under Delaware law, debt agreements, and other factors the Board of Directors deems relevant. The Board of Directors has decided, and may in the future decide, in its sole discretion, to change the amount or frequency of dividends or discontinue the payment of dividends entirely. For these reasons, shareholders will not be able to rely on dividends to receive a return on investment. Accordingly, realization of any gain on shares of our common stock may depend on the appreciation of the price of our common stock, which may never occur.

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Volatility of capital markets or macroeconomic factors could adversely affect our business.
Changes in financial and capital markets, including market disruptions, limited liquidity, uncertainty regarding Brexit, and interest rate volatility, including as a result of the use or discontinued use of certain benchmark rates such as LIBOR, may increase the cost of financing as well as the risks of refinancing maturing debt. In addition, our borrowing costs can be affected by short and long-term ratings assigned by rating organizations. A decrease in these ratings could limit our access to capital markets and increase our borrowing costs, which could materially and adversely affect our financial condition and operating results.
Some of our customers and counterparties are highly leveraged. Consolidations in some of the industries in which our customers operate have created larger customers, some of which are highly leveraged and facing increased competition and continued credit market volatility. These factors have caused some customers to be less profitable, increasing our exposure to credit risk. A significant adverse change in the financial and/or credit position of a customer or counterparty could require us to assume greater credit risk relating to that customer or counterparty and could limit our ability to collect receivables. This could have an adverse impact on our financial condition and liquidity.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate co-headquarters are located in Pittsburgh, Pennsylvania and Chicago, Illinois. Our co-headquarters are leased and house certain executive offices, our U.S. business units, and our administrative, finance, legal, and human resource functions. We maintain additional owned and leased offices throughout the regions in which we operate.
We manufacture our products in our network of manufacturing and processing facilities located throughout the world. As of December 29, 2018, we operated 84 manufacturing and processing facilities. We own 81 and lease three of these facilities. Our manufacturing and processing facilities count by segment as of December 29, 2018 was:
 
Owned
 
Leased
United States
40
 
1
Canada
2
 
EMEA
12
 
Rest of World
27
 
2
We maintain all of our manufacturing and processing facilities in good condition and believe they are suitable and are adequate for our present needs. We also enter into co-manufacturing arrangements with third parties if we determine it is advantageous to outsource the production of any of our products.
In the fourth quarter of 2018, we announced our plans to divest certain assets and operations, predominantly in Canada and India, including one owned manufacturing facility in Canada and one owned and one leased facility in India. See Note 5, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, for additional information on these transactions.
Item 3. Legal Proceedings.
See Note 18, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on Nasdaq under the ticker symbol “KHC”. At June 5, 2019, there were approximately 49,000 holders of record of our common stock.
See Equity and Dividends in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of cash dividends declared on our common stock.

25




Comparison of Cumulative Total Return
The following graph compares the cumulative total return on our common stock with the cumulative total return of the Standard & Poor's (“S&P”) 500 Index and the S&P Consumer Staples Food and Soft Drink Products, which we consider to be our peer group. Companies included in the S&P Consumer Staples Food and Soft Drink Products index change periodically and are presented on the basis of the index as it is comprised on December 29, 2018. This graph covers the period from July 6, 2015 (the first day our common stock began trading on Nasdaq) through December 28, 2018 (the last trading day of our fiscal year 2018). The graph shows total shareholder return assuming $100 was invested on July 6, 2015 and the dividends were reinvested on a daily basis.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12956475&doc=22
 
Kraft Heinz
 
S&P 500
 
S&P Consumer Staples Food and Soft Drink Products
July 6, 2015
$
100.00

 
$
100.00

 
$
100.00

December 31, 2015
102.07

 
99.85

 
110.18

December 30, 2016
125.99

 
111.79

 
114.98

December 29, 2017
115.44

 
136.20

 
128.53

December 28, 2018
67.49

 
129.11

 
121.93

The above performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.

26




Issuer Purchases of Equity Securities During the Three Months Ended December 29, 2018
Our share repurchase activity in the three months ended December 29, 2018 was:
 
 
Total Number
of Shares Purchased(a)
 
Average Price 
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(b)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
9/30/2018 - 11/3/2018
 
48,358

 
$
55.58

 

 
$

11/4/2018 - 12/1/2018
 
79,925

 
52.18

 

 

12/2/2018 - 12/29/2018
 
231,409

 
49.16

 

 

Total
 
359,692

 
 
 

 
 
(a)  
Includes the following types of share repurchase activity, when they occur: (1) shares repurchased in connection with the exercise of stock options (including periodic repurchases using option exercise proceeds), (2) shares withheld for tax liabilities associated with the vesting of restricted stock units, and (3) shares repurchased related to employee benefit programs (including our annual bonus swap program) or to offset the dilutive effect of equity issuances.
(b) 
We do not have any publicly announced share repurchase plans or programs.
Item 6. Selected Financial Data.
The following table presents selected consolidated financial data for the last five fiscal years. Our fiscal years 2018, 2017, and 2016 include a full year of Kraft Heinz results. Our fiscal year 2015 includes a full year of Heinz results and post-merger Kraft results. Our fiscal year 2014 includes a full year of Heinz results.
Certain prior period amounts have been restated for the correction of misstatements described below. This information should be read in conjunction with the “Explanatory Note” immediately preceding Item 1 of this Annual Report on Form 10-K, with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K, including further details related to the misstatements discussed in Note 2, Restatement of Previously Issued Consolidated Financial Statements.
 
 
 
As Restated
 
 
 
 
 
 
 
 
 
(Unaudited)
 
 
 
December 29,
2018
(52 weeks)
 
December 30,
2017
(52 weeks)
 
December 31,
2016
(52 weeks)
(h)
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
(in millions, except per share data)
Period Ended:
 
 
 
 
 
 
 
 
 
Net sales(a)(b)(c)
$
26,268

 
$
26,076

 
$
26,300

 
$
18,318

 
$
10,922

Income/(loss)(c)(d)(e)
(10,254
)
 
10,932

 
3,606

 
614

 
672

Income/(loss) attributable to common shareholders(c)(d)(e)
(10,192
)
 
10,941

 
3,416

 
(299
)
 
(63
)
Income/(loss) per common share:
 
 
 
 
 
 
 
 
 
Basic(c)(d)(e)
(8.36
)
 
8.98

 
2.81

 
(0.38
)
 
(0.17
)
Diluted(c)(d)(e)
(8.36
)
 
8.91

 
2.78

 
(0.38
)
 
(0.17
)
 
 
 
 
 
 
 
 
 
 
 
 
 
As Restated
 
 
 
 
 
 
 
(Unaudited)
 
 
 
December 29,
2018
 
December 30,
2017
 
December 31,
2016
 
January 3,
2016
 
December 28,
2014
 
(in millions, except per share data)
As of:
 
 
 
 
 
 
 
 
 
Total assets(b)(c)(e)
103,461

 
120,092

 
120,617

 
123,110

 
36,571

Long-term debt(b)(c)(f)
30,770

 
28,308

 
29,712

 
25,148

 
13,358

Redeemable preferred stock(g)

 

 

 
8,320

 
8,320

Cash dividends per common share
2.50

 
2.45

 
2.35

 
1.70

 

(a)
As previously disclosed, we adopted a new accounting standard related to revenue recognition in the first quarter of 2018, and at the same time, we retrospectively corrected immaterial misclassifications in our statements of income principally related to customer incentive program expense misclassifications. This resulted in net sales decreases of $147 million in 2017, $152 million in 2016, and $55 million in 2015.
(b)
The increases in net sales in 2016 and in 2015 compared to the prior year, and the increases in total assets and long-term debt from December 28, 2014 to January 3, 2016, were primarily driven by the 2015 Merger.

27




(c)
We have restated previously disclosed consolidated financial data for fiscal years 2017, 2016, and 2015, as well as the related balance sheet dates, to correct misstatements principally related to supplier contracts and related arrangements, as well as other identified out-of-period and uncorrected misstatements. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information.
(d)
The increases in income/(loss), income/(loss) attributable to common shareholders, and basic and diluted income/(loss) per common share in 2017 compared to 2016 were primarily driven by U.S. Tax Reform, which was enacted in December 2017. See Note 11, Income Taxes, in Item 8, Financial Statements and Supplementary Data, for additional information.
(e)
The decreases in income/(loss), income/(loss) attributable to common shareholders, and basic and diluted income/(loss) per common share in 2018 compared to 2017, and the decrease in total assets from December 30, 2017 to December 29, 2018, were primarily driven by non-cash impairment losses in 2018. See Note 10, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for additional information.
(f)
Amounts exclude the current portion of long-term debt.
(g)
On June 7, 2016, we redeemed all outstanding shares of our 9.00% cumulative compounding preferred stock, Series A (“Series A Preferred Stock”). See Equity and Dividends in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, along with Note 19, Debt, and Note 20, Capital Stock, in Item 8, Financial Statements and Supplementary Data, for additional information.
(h)
On December 9, 2016, our Board of Directors approved a change to our fiscal year end from Sunday to Saturday. Effective December 31, 2016, we operate on a 52- or 53-week fiscal year ending on the last Saturday in December in each calendar year. In prior years, we operated on a 52- or 53-week fiscal year ending the Sunday closest to December 31. As a result, we occasionally have a 53rd week in a fiscal year. Our 2015 fiscal year includes a 53rd week of activity.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, Financial Statements and Supplementary Data.
Restatement of Previously Issued Consolidated Financial Statements:
We have restated our previously issued consolidated financial statements contained in this Annual Report on Form 10-K. Refer to the “Explanatory Note” preceding Item 1, Business, for background on the restatement, the fiscal periods impacted, control considerations, and other information.
In addition, we have restated certain previously reported financial information at December 30, 2017 and for the fiscal years ended December 30, 2017 and December 31, 2016 in this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to information within the Consolidated Results of Operations, Results of Operations by Segment, and Non-GAAP Financial Measures sections. We have also included certain restated quarterly information in the Supplemental Quarterly Financial Information section at the end of this item.
See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our consolidated financial statements.
Description of the Company:
We manufacture and market food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products throughout the world.
We manage and report our operating results through four segments. We have three reportable segments defined by geographic region: United States, Canada, and EMEA. Our remaining businesses are combined and disclosed as “Rest of World.” Rest of World comprises two operating segments: Latin America and APAC.
Our segments reflect a change, effective in the first quarter of our fiscal year 2018, to reorganize our international businesses to better align our global geographies. We moved our Middle East and Africa businesses from the historical AMEA operating segment into the historical Europe reportable segment, forming the new EMEA reportable segment. The remaining businesses from the AMEA operating segment became the APAC operating segment. We have reflected this change in all historical periods presented.
See Note 22, Segment Reporting, in Item 8, Financial Statements and Supplementary Data, to the consolidated financial statements for our financial information by segment.

28




Items Affecting Comparability of Financial Results
Impairment Losses:
Our 2018 results reflect goodwill and intangible asset impairment losses of $15.9 billion compared to $49 million in 2017. The increase was primarily driven by impairment losses of $15.5 billion recognized in the fourth quarter of 2018.
For the fourth quarter of 2018, in connection with the preparation of our year-end financial statements, we assessed the changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units or brands were below their carrying amounts. Although our annual impairment test is performed during the second quarter, we perform this qualitative assessment each interim reporting period.
While there was no single determinative event or factor, the consideration in totality of several factors that developed during the fourth quarter of 2018 led us to conclude that it was more likely than not that the fair values of certain reporting units and brands were below their carrying amounts. These factors included: (i) a sustained decrease in our share price in November and December of 2018, which reduced our market capitalization below the book value of net assets; (ii) the completion of our fourth quarter results, which were below management’s expectations due to several factors such as higher than expected supply chain costs and increased competition; (iii) the development and approval of our 2019 annual operating plan in December 2018, which provided additional insights into expectations and priorities for the coming years, such as lower growth and margin expectations; (iv) the announcement in November 2018 to sell certain assets in our natural cheese portfolio in Canada, which changed the composition and use of the remaining assets and brands in the associated reporting unit; (v) fluctuations in foreign exchange rates in certain countries; (vi) increased interest rates in certain locations, including an increase in the United States in December 2018; and (vii) increased and prolonged economic and regulatory uncertainty in the United States and global economies as of the end of December 2018.
As we determined that it was more likely than not that the fair values of certain reporting units or brands were below their carrying amounts, we performed an interim impairment test as of December 29, 2018. As a result of our interim impairment test, we recognized goodwill impairment losses of $6.9 billion and indefinite-lived intangible asset impairment losses of $8.6 billion in the fourth quarter of 2018.
See Critical Accounting Estimates within this item and Note 10, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, to the consolidated financial statements for additional information.
U.S. Tax Reform:
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. In addition, there were many new provisions, including changes to bonus depreciation, revised deductions for executive compensation and interest expense, a tax on global intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”), and a deduction for foreign-derived intangible income (“FDII”). While the corporate tax rate reduction was effective January 1, 2018, we accounted for this anticipated rate change in 2017, the period of enactment. As a result of U.S. Tax Reform, we recorded a net tax benefit of approximately $7.0 billion in 2017. As a result, U.S. Tax Reform significantly impacted our provision for/(benefit from) income taxes and our effective tax rate, primarily in 2017, resulting in a lack of comparability year over year.
See Note 11, Income Taxes, in Item 8, Financial Statements and Supplementary Data, for additional information.
Integration and Restructuring Expenses:
At the end of 2017, we had substantially completed our multi-year program announced following the 2015 Merger (the “Integration Program”), which was designed to reduce costs and integrate and optimize our combined organization. As of December 29, 2018, we had incurred cumulative pre-tax costs of $2,146 million related to the Integration Program. These costs primarily included severance and employee benefit costs (including cash and non-cash severance), costs to exit facilities (including non-cash costs such as accelerated depreciation), and other costs incurred as a direct result of integration activities. Approximately 60% of total Integration Program costs were cash expenditures. As of December 29, 2018, we had incurred approximately $1.4 billion in capital expenditures related to the Integration Program since its inception in 2015.
Related to our restructuring activities, including the Integration Program, we recognized expenses of $460 million in 2018, $434 million in 2017, and $1.0 billion in 2016. Integration Program expenses included in these totals were $92 million in 2018, $316 million, in 2017, and $887 million in 2016.
See Note 6, Integration and Restructuring Expenses, in Item 8, Financial Statements and Supplementary Data, for additional information.

29




Results of Operations
We disclose in this report certain non-GAAP financial measures. These non-GAAP financial measures assist management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our underlying operations. For additional information and reconciliations from our consolidated financial statements see Non-GAAP Financial Measures.
The restatement described in the Overview section within this item did not significantly impact the drivers of our consolidated results of operations or our results of operations by segment. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information.
In addition, during the period between December 29, 2018 and the filing of this Annual Report on Form 10-K, certain industry trends impacting our results of operations as described herein, including increased costs in procurement and logistics, pricing pressure as a result of increased private label competition, and consumer trends focused on health and wellness, have continued.
Consolidated Results of Operations
Summary of Results:
 
 
 
As Restated & Recast
 
 
 
As Restated & Recast
 
 
 
December 29,
2018
 
December 30,
2017
 
% Change
 
December 30,
2017
 
December 31,
2016
 
% Change
 
(in millions, except per share data)
 
 
 
(in millions, except per share data)
 
 
Net sales
$
26,268

 
$
26,076

 
0.7
 %
 
$
26,076

 
$
26,300

 
(0.9
)%
Operating income/(loss)
(10,220
)
 
6,057

 
(268.7
)%
 
6,057

 
5,601

 
8.1
 %
Net income/(loss) attributable to common shareholders
(10,192
)
 
10,941

 
(193.2
)%
 
10,941

 
3,416

 
220.3
 %
Diluted EPS
(8.36
)
 
8.91

 
(193.8
)%
 
8.91

 
2.78

 
220.5
 %
Net Sales:
 
 
 
As Restated
 
 
 
As Restated
 
 
 
December 29,
2018
 
December 30,
2017
 
% Change
 
December 30,
2017
 
December 31,
2016
 
% Change
 
(in millions)
 
 
 
(in millions)
 
 
Net sales
$
26,268

 
$
26,076

 
0.7
%
 
$
26,076

 
$
26,300

 
(0.9
)%
Organic Net Sales(a)
26,105

 
25,876

 
0.9
%
 
25,963

 
26,188

 
(0.9
)%
(a)
Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section within this item.
Fiscal Year 2018 Compared to Fiscal Year 2017:
Net sales increased 0.7% to $26.3 billion in 2018 compared to $26.1 billion in 2017, despite the unfavorable impact of foreign currency (0.6 pp) and the net favorable impact of acquisitions and divestitures (0.4 pp). Organic Net Sales increased 0.9% to $26.1 billion in 2018 compared to $25.9 billion in 2017 driven by favorable volume/mix (0.9 pp). Volume/mix was favorable in all segments. Pricing was flat, with lower pricing in the United States and Canada offset by higher pricing in Rest of World (primarily driven by highly inflationary environments in certain markets within Latin America) and EMEA.
Fiscal Year 2017 Compared to Fiscal Year 2016:
Net sales decreased 0.9% to $26.1 billion in 2017 compared to $26.3 billion in 2016. The impacts of foreign currency and acquisitions and divestitures were flat. Organic Net Sales decreased 0.9% to $26.0 billion in 2017 compared to $26.2 billion in 2016 due to unfavorable volume/mix (1.5 pp), partially offset by higher pricing (0.6 pp). Volume/mix was unfavorable in the United States and Canada, partially offset by growth in Rest of World and EMEA. Higher pricing in Rest of World and the United States was partially offset by lower pricing in Canada and EMEA.

30




Net Income:
 
 
 
As Restated & Recast
 
 
 
As Restated & Recast
 
 
 
December 29,
2018
 
December 30,
2017
 
% Change
 
December 30,
2017
 
December 31,
2016
 
% Change
 
(in millions)
 
 
 
(in millions)
 
 
Operating income/(loss)
$
(10,220
)
 
$
6,057

 
(268.7
)%
 
$
6,057

 
$
5,601

 
8.1
%
Net income/(loss) attributable to common shareholders
(10,192
)
 
10,941

 
(193.2
)%
 
10,941

 
3,416

 
220.3
%
Adjusted EBITDA(a)
7,024

 
7,664

 
(8.3
)%
 
7,664

 
7,574

 
1.2
%
(a)
Adjusted EBITDA is a non-GAAP financial measure. See the Non-GAAP Financial Measures section within this item.
Fiscal Year 2018 Compared to Fiscal Year 2017:
Operating income/(loss) decreased 268.7% to a loss of $10.2 billion in 2018 compared to income of $6.1 billion in 2017. This decrease was primarily due to higher impairment losses in 2018. Impairment losses were $15.9 billion in 2018 compared to $49 million in 2017. The remaining $390 million decrease in operating income/(loss) was due to higher input costs and strategic investments. These decreases to operating income/(loss) were partially offset by lower Integration Program and other restructuring expenses, the favorable impact of foreign currency (4.2 pp), the benefit from the postemployment benefits accounting change adopted in the first quarter of 2018, savings from Integration Program and other restructuring activities, and productivity savings. See Note 10, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for additional information on our impairment losses.
Net income/(loss) attributable to common shareholders decreased 193.2% to a loss of $10.2 billion in 2018 compared to income of $10.9 billion in 2017. The decrease was primarily due to the operating income/(loss) factors described above (primarily higher impairment losses in 2018), as well as a lower tax benefit, unfavorable changes in other expense/(income), net, and higher interest expense, which are detailed as follows:
The effective tax rate was a benefit of 9.4% in 2018 on a pre-tax loss compared to a benefit of 100.6% in 2017 on pre-tax income. The 2018 effective tax rate was lower, primarily due to a decrease in the U.S. federal statutory rate, non-deductible items (including goodwill impairments, nonmonetary currency devaluation losses, and the wind-up of non-U.S. pension plans), the impact of the federal tax on GILTI, and the revaluation of our deferred tax balances due to changes in state tax laws following U.S. Tax Reform, which were partially offset by the benefit from intangible asset impairment losses in the fourth quarter of 2018. See Note 11, Income Taxes, in Item 8, Financial Statements and Supplementary Data, for additional information related to our effective tax rates.
Other expense/(income), net was income of $183 million in 2018 compared to income of $627 million in 2017. This decrease was primarily due to a $162 million non-cash settlement charge in 2018 related to the wind-up of our Canadian salaried and Canadian hourly defined benefit pension plans compared to a $177 million non-cash curtailment gain from postretirement plan remeasurements in 2017. In addition, this decrease was due to a $146 million nonmonetary currency devaluation loss in the current period compared to a $36 million loss in the prior period related to our Venezuelan operations. See Note 16, Venezuela - Foreign Currency and Inflation, in Item 8, Financial Statements and Supplementary Data, for additional information.
Interest expense was $1.3 billion in 2018 compared to $1.2 billion in 2017. This increase was primarily driven by $3.0 billion aggregate principal amount of long-term debt issued in June 2018. See Note 19, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information.
Adjusted EBITDA decreased 8.3% to $7.0 billion in 2018 compared to $7.7 billion in 2017, primarily due to higher input costs, strategic investments, higher overhead costs, and the unfavorable impact of foreign currency (0.5 pp), partially offset by savings from Integration Program and other restructuring activities, and productivity savings.
Fiscal Year 2017 Compared to Fiscal Year 2016:
Operating income/(loss) increased 8.1% to $6.1 billion in 2017 compared to $5.6 billion in 2016. This increase was primarily driven by savings from the Integration Program and other restructuring activities, lower Integration Program and other restructuring expenses in 2017, and lower overhead costs, partially offset by higher input costs in local currency, lower Organic Net Sales, lower unrealized gains on commodity hedges in 2017, and the unfavorable impact of foreign currency (0.4 pp).

31




Net income/(loss) attributable to common shareholders increased 220.3% to $10.9 billion in 2017 compared to $3.4 billion in 2016. The increase was primarily driven by U.S. Tax Reform, the operating income/(loss) factors discussed above, the absence of the Series A Preferred Stock dividend in 2017, and favorable changes in other expense/(income), net, partially offset by higher interest expense, detailed as follows:
The effective tax rate was a 100.6% benefit in 2017 compared to 27.0% expense in 2016. The change in the effective tax rate was primarily driven by the $7.0 billion tax benefit from U.S. Tax Reform, lower tax benefits associated with deferred tax effects of statutory rate changes, and taxes on income of foreign subsidiaries in 2017. See Note 11, Income Taxes, in Item 8, Financial Statements and Supplementary Data, for additional information related to our effective tax rates.
The Series A Preferred Stock was fully redeemed on June 7, 2016. Accordingly, there were no dividends for 2017, compared to $180 million in 2016. See Equity and Dividends within this item for additional information.
Other expense/(income), net was $627 million of income in 2017 compared to $472 million of income in 2016. This increase was primarily driven by a $177 million non-cash curtailment gain from postretirement plan remeasurements in 2017. This was partially offset by a $36 million nonmonetary currency devaluation loss in 2017 compared to $24 million in 2016 related to our Venezuelan operations. See Note 16, Venezuela - Foreign Currency and Inflation, in Item 8, Financial Statements and Supplementary Data, for additional information.
Interest expense increased to $1.2 billion in 2017 compared to $1.1 billion in 2016. This increase was primarily driven by the May 2016 issuances of long-term debt and borrowings under our commercial paper programs, which began in the second quarter of 2016.
Adjusted EBITDA increased 1.2% to $7.7 billion in 2017 compared to $7.6 billion in 2016, primarily driven by savings from the Integration Program and other restructuring activities and lower overhead costs, partially offset by higher input costs in local currency, the unfavorable impact of foreign currency (0.2 pp), and a decline in Organic Net Sales.
Diluted EPS:
 
 
 
As Restated
 
 
 
As Restated
 
 
 
December 29,
2018
 
December 30,
2017
 
% Change
 
December 30,
2017
 
December 31,
2016
 
% Change
 
(in millions, except per share data)
 
 
 
(in millions, except per share data)
 
 
Diluted EPS
$
(8.36
)
 
$
8.91

 
(193.8
)%
 
$
8.91

 
$
2.78

 
220.5
%
Adjusted EPS(a)
3.51

 
3.50

 
0.3
 %
 
3.50

 
3.31

 
5.7
%
(a)
Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section within this item.

32




Fiscal Year 2018 Compared to Fiscal Year 2017:
Diluted EPS decreased 193.8% to a loss of $8.36 in 2018 compared to earnings of $8.91 in 2017, primarily due to the net income/(loss) attributable to common shareholders factors discussed above.
 
 
 
As Restated
 
 
 
 
 
December 29,
2018
 
December 30,
2017
 
$ Change
 
% Change
Diluted EPS
$
(8.36
)
 
$
8.91

 
$
(17.27
)
 
(193.8
)%
Integration and restructuring expenses
0.32

 
0.24

 
0.08

 
 
Deal costs
0.02

 

 
0.02

 
 
Unrealized losses/(gains) on commodity hedges
0.01

 
0.01

 

 
 
Impairment losses
11.28

 
0.03

 
11.25

 
 
Losses/(gains) on sale of business
0.01

 

 
0.01

 
 
Other losses/(gains) related to acquisitions and divestitures
0.02

 

 
0.02

 
 
Nonmonetary currency devaluation
0.12

 
0.03

 
0.09

 
 
U.S. Tax Reform discrete income tax expense/(benefit)
0.09

 
(5.72
)
 
5.81

 
 
Adjusted EPS(a)
$
3.51

 
$
3.50

 
$
0.01

 
0.3
 %
 
 
 
 
 
 
 
 
Key drivers of change in Adjusted EPS(a):
 
 
 
 
 
 
 
Results of operations
 
 
 
 
$
(0.37
)
 
 
Change in interest expense
 
 
 
 
(0.03
)
 
 
Change in effective tax rate
 
 
 
 
0.39

 
 
Effect of dilutive equity awards
 
 
 
 
0.02

 
 
 
 
 
 
 
$
0.01

 
 
(a)
Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Adjusted EPS increased 0.3% to $3.51 in 2018 compared to $3.50 in 2017, driven by lower taxes on adjusted earnings in the current period, the benefit from the postemployment benefits accounting change adopted in the first quarter of 2018, and the effect of dilutive equity awards, partially offset by lower Adjusted EBITDA, higher interest expense, and higher depreciation and amortization in the current period. We have excluded the effect of dilutive equity awards in 2018 as their inclusion would have had an anti-dilutive effect on EPS because of the net loss attributable to common shareholders. In 2017, the effect of dilutive equity awards was included.

33




Fiscal Year 2017 Compared to Fiscal Year 2016:
Diluted EPS increased 220.5% to $8.91 in 2017 compared to $2.78 in 2016, primarily driven by the net income/(loss) attributable to common shareholders factors discussed above.
 
As Restated
 
 
 
 
 
December 30,
2017
 
December 31,
2016
 
$ Change
 
% Change
Diluted EPS
$
8.91

 
$
2.78

 
$
6.13

 
220.5
%
Integration and restructuring expenses
0.24

 
0.57

 
(0.33
)
 
 
Deal costs

 
0.02

 
(0.02
)
 
 
Unrealized losses/(gains) on commodity hedges
0.01

 
(0.02
)
 
0.03

 
 
Impairment losses
0.03

 
0.04

 
(0.01
)
 
 
Nonmonetary currency devaluation
0.03

 
0.02

 
0.01

 
 
Preferred dividend adjustment

 
(0.10
)
 
0.10

 
 
U.S. Tax Reform discrete income tax expense/(benefit)
(5.72
)
 

 
(5.72
)
 
 
Adjusted EPS(a)
$
3.50

 
$
3.31

 
$
0.19

 
5.7
%
 
 
 
 
 
 
 
 
Key drivers of change in Adjusted EPS(a):
 
 
 
 
 
 
 
Results of operations
 
 
 
 
$
0.03

 
 
Change in preferred dividends
 
 
 
 
0.25

 
 
Change in interest expense
 
 
 
 
(0.06
)
 
 
Change in effective tax rate and other
 
 
 
 
(0.03
)
 
 
 
 
 
 
 
$
0.19

 
 
(a)
Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Adjusted EPS increased 5.7% to $3.50 in 2017 compared to $3.31 in 2016, primarily driven by the absence of Series A Preferred Stock dividends in 2017 and Adjusted EBITDA growth despite the unfavorable impact of foreign currency, partially offset by higher interest expense.
Results of Operations by Segment
Management evaluates segment performance based on several factors, including net sales, Organic Net Sales, and segment adjusted earnings before interest, tax, depreciation, and amortization (“Segment Adjusted EBITDA”). Segment Adjusted EBITDA is defined as net income/(loss) from continuing operations before interest expense, other expense/(income), net, provision for/(benefit from) income taxes, and depreciation and amortization (excluding integration and restructuring expenses); in addition to these adjustments, we exclude, when they occur, the impacts of integration and restructuring expenses, deal costs, unrealized gains/(losses) on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results), impairment losses, gains/(losses) on the sale of a business, other gains/(losses) related to acquisitions and divestitures (e.g., tax and hedging impacts), nonmonetary currency devaluation (e.g., remeasurement gains and losses), and equity award compensation expense (excluding integration and restructuring expenses). Segment Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Under highly inflationary accounting, the functional currency of our Venezuelan subsidiary is the U.S. dollar. As a result, we must revalue the results of our Venezuelan subsidiary to U.S. dollars. We revalue the income statement using daily weighted average Sistema de Divisa Complementaria (“DICOM”) rates, and we revalue the bolivar denominated monetary assets and liabilities at the period-end DICOM spot rate. The resulting revaluation gains and losses are recorded in current net income and are classified within other expense/(income), net as nonmonetary currency devaluation. See Note 16, Venezuela - Foreign Currency and Inflation, in Item 8, Financial Statements and Supplementary Data, for additional information.

34




Net Sales:
 
 
 
As Restated
 
December 29,
2018
 
December 30,
2017
 
December 31,
2016
 
(in millions)
Net sales:
 
 
 
 
 
United States
$
18,122

 
$
18,230

 
$
18,469

Canada
2,173

 
2,177

 
2,302

EMEA
2,718

 
2,585

 
2,586

Rest of World
3,255

 
3,084

 
2,943

Total net sales
$
26,268

 
$
26,076

 
$
26,300

Organic Net Sales:
 
2018 Compared to 2017
 
2017 Compared to 2016
 
 
 
As Restated
 
December 29,
2018
 
December 30,
2017
 
December 30,
2017
 
December 31,
2016
 
(in millions)
Organic Net Sales(a):
 
 
 
 
 
 
 
United States
$
18,122

 
$
18,230

 
$
18,230

 
$
18,469

Canada
2,178

 
2,177

 
2,135

 
2,302

EMEA
2,633

 
2,529

 
2,549

 
2,529

Rest of World
3,172

 
2,940

 
3,049

 
2,888

Total Organic Net Sales
$
26,105

 
$
25,876

 
$
25,963

 
$
26,188

(a)
Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section within this item.
Drivers of the changes in net sales and Organic Net Sales were:
 
Net Sales
 
Currency
 
Acquisitions and Divestitures
 
Organic Net Sales
 
Price
 
Volume/Mix
2018 Compared to 2017
 
 
 
 
 
 
 
 
 
 
 
United States
(0.6
)%
 
0.0 pp
 
0.0 pp
 
(0.6
)%
 
(0.9) pp
 
0.3 pp
Canada
(0.2
)%
 
(0.3) pp
 
0.0 pp
 
0.1
 %
 
(0.6) pp
 
0.7 pp
EMEA
5.1
 %
 
2.5 pp
 
(1.5) pp
 
4.1
 %
 
0.9 pp
 
3.2 pp
Rest of World
5.6
 %
 
(7.6) pp
 
5.3 pp
 
7.9
 %
 
5.4 pp
 
2.5 pp
Kraft Heinz
0.7
 %
 
(0.6) pp
 
0.4 pp
 
0.9
 %
 
0.0 pp
 
0.9 pp
 
 
 
 
 
 
 
 
 
 
 
 
2017 Compared to 2016 (As Restated)
 
 
 
 
 
 
 
 
 
 
 
United States
(1.3
)%
 
0.0 pp
 
0.0 pp
 
(1.3
)%
 
0.5 pp
 
(1.8) pp
Canada
(5.4
)%
 
1.9 pp
 
0.0 pp
 
(7.3
)%
 
(1.8) pp
 
(5.5) pp
EMEA
 %
 
(0.5) pp
 
(0.3) pp
 
0.8
 %
 
(0.5) pp
 
1.3 pp
Rest of World
4.8
 %
 
(0.8) pp
 
0.0 pp
 
5.6
 %
 
4.2 pp
 
1.4 pp
Kraft Heinz
(0.9
)%
 
0.0 pp
 
0.0 pp
 
(0.9
)%
 
0.6 pp
 
(1.5) pp

35




Adjusted EBITDA:
 
 
 
As Restated & Recast
 
December 29,
2018
 
December 30,
2017
 
December 31,
2016
 
(in millions)
Segment Adjusted EBITDA:
 
 
 
 
 
United States
$
5,218

 
$
5,873

 
$
5,744

Canada
608

 
636

 
632

EMEA
724

 
673

 
741

Rest of World
635

 
590

 
621

General corporate expenses
(161
)
 
(108
)
 
(164
)
Depreciation and amortization (excluding integration and restructuring expenses)
(919
)
 
(907
)
 
(875
)
Integration and restructuring expenses
(297
)
 
(583
)
 
(992
)
Deal costs
(23
)
 

 
(30
)
Unrealized gains/(losses) on commodity hedges
(21
)
 
(19
)
 
38

Impairment losses
(15,936
)
 
(49
)
 
(71
)
Gains/(losses) on sale of business
(15
)
 

 

Nonmonetary currency devaluation

 

 
(4
)
Equity award compensation expense (excluding integration and restructuring expenses)
(33
)
 
(49
)
 
(39
)
Operating income/(loss)
(10,220
)
 
6,057

 
5,601

Interest expense
1,284

 
1,234

 
1,134

Other expense/(income), net
(183
)
 
(627
)
 
(472
)
Income/(loss) before income taxes
$
(11,321
)
 
$
5,450

 
$
4,939

United States:
 
2018 Compared to 2017
 
2017 Compared to 2016
 
 
 
As Restated & Recast
 
 
 
As Restated & Recast
 
 
 
December 29,
2018
 
December 30,
2017
 
% Change
 
December 30,
2017
 
December 31,
2016
 
% Change
 
(in millions)
 
 
 
(in millions)
 
 
Net sales
$
18,122

 
$
18,230

 
(0.6
)%
 
$
18,230

 
$
18,469

 
(1.3
)%
Organic Net Sales(a)
18,122

 
18,230

 
(0.6
)%
 
18,230

 
18,469

 
(1.3
)%
Segment Adjusted EBITDA
5,218

 
5,873

 
(11.2
)%
 
5,873

 
5,744

 
2.2
 %
(a)
Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section within this item.
Fiscal Year 2018 Compared to Fiscal Year 2017:
Net sales and Organic Net Sales decreased 0.6% to $18.1 billion in 2018 compared to $18.2 billion in 2017 primarily due to lower pricing (0.9 pp), partially offset by favorable volume/mix (0.3 pp). Pricing was lower across most categories, particularly in ready-to-drink beverages, cheese, and meat, partially offset by increases in boxed dinners and condiments and sauces. Favorable volume/mix across several categories, particularly in ready-to-drink beverages, was partially offset by lower shipments in cheese.
Segment Adjusted EBITDA decreased 11.2% to $5.2 billion in 2018 compared to $5.9 billion in 2017 primarily due to non-key commodity cost inflation, lower Organic Net Sales, strategic investments, and higher overhead costs, partially offset by favorable key commodity costs, and Integration Program savings.
Fiscal Year 2017 Compared to Fiscal Year 2016:
Net sales and Organic Net Sales decreased 1.3% to $18.2 billion in 2018 compared to $18.5 billion in 2017 due to unfavorable volume/mix (1.8 pp), partially offset by higher pricing (0.5 pp). Unfavorable volume/mix was primarily driven by distribution losses in nuts, cheese, and meat, and lower shipments in foodservice. The decline was partially offset by gains in refrigerated meal combinations, boxed dinners, and frozen meals. Pricing was higher driven primarily by price increases in cheese.

36




Segment Adjusted EBITDA increased 2.2% to $5.9 billion in 2017 compared to $5.7 billion in 2016 primarily driven by Integration Program savings and lower overhead costs, partially offset by unfavorable key commodity costs, primarily in dairy, meat, and coffee, as well as unfavorable volume/mix.
Canada:
 
2018 Compared to 2017
 
2017 Compared to 2016
 
 
 
As Restated & Recast
 
 
 
As Restated & Recast
 
 
 
December 29,
2018
 
December 30,
2017
 
% Change
 
December 30,
2017
 
December 31,
2016
 
% Change
 
(in millions)
 
 
 
(in millions)
 
 
Net sales
$
2,173

 
$
2,177

 
(0.2
)%
 
$
2,177

 
$
2,302

 
(5.4
)%
Organic Net Sales(a)
2,178

 
2,177

 
0.1
 %
 
2,135

 
2,302

 
(7.3
)%
Segment Adjusted EBITDA
608

 
636

 
(4.4
)%
 
636

 
632

 
0.7
 %
(a)
Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section within this item.
Fiscal Year 2018 Compared to Fiscal Year 2017:
Net sales decreased 0.2% to $2.2 billion in 2018 compared to $2.2 billion in 2017 due to the unfavorable impact of foreign currency (0.3 pp). Organic Net Sales increased 0.1% to $2.2 billion in 2018 compared to $2.2 billion in 2017 driven by favorable volume/mix (0.7 pp), partially offset by lower pricing (0.6 pp). Favorable volume/mix was primarily driven by higher shipments in cheese and coffee, primarily due to earlier execution of go-to-market agreements with key retailers, partially offset by lower shipments in condiments and sauces. Lower pricing in cheese was partially offset by increases across a number of categories, particularly in foodservice.
Segment Adjusted EBITDA decreased 4.4% to $608 million in 2018 compared to $636 million in 2017, partially due to the unfavorable impact of foreign currency (0.3 pp). Excluding the currency impact, Segment Adjusted EBITDA decreased primarily due to lower pricing, higher overhead costs, and higher input costs in local currency.
Fiscal Year 2017 Compared to Fiscal Year 2016:
Net sales decreased 5.4% to $2.2 billion in 2017 compared to $2.3 billion in 2016, despite the favorable impact of foreign currency (1.9 pp). Organic Net Sales decreased 7.3% to $2.1 billion in 2017 compared to $2.3 billion in 2016 due to unfavorable volume/mix (5.5 pp) and lower pricing (1.8 pp). Volume/mix was unfavorable across several categories and was most pronounced in cheese, coffee, and boxed dinners, primarily due to delayed execution of go-to-market agreements with key retailers, retail distribution losses (primarily in cheese), and lower inventory levels at retail versus the prior year. Lower pricing was due to higher promotional activity, primarily in cheese.
Segment Adjusted EBITDA increased 0.7% to $636 million in 2017 compared to $632 million in 2016, despite the favorable impact of foreign currency (1.7 pp). Excluding the currency impact, Segment Adjusted EBITDA decreased primarily due to lower Organic Net Sales partially offset by Integration Program savings and lower overhead costs in 2017.
EMEA:
 
2018 Compared to 2017
 
2017 Compared to 2016
 
 
 
As Restated & Recast
 
 
 
As Restated & Recast
 
 
 
December 29,
2018
 
December 30,
2017
 
% Change
 
December 30,
2017
 
December 31,
2016
 
% Change
 
(in millions)
 
 
 
(in millions)
 
 
Net sales
$
2,718

 
$
2,585

 
5.1
%
 
$
2,585

 
$
2,586

 
 %
Organic Net Sales(a)
2,633

 
2,529

 
4.1
%
 
2,549

 
2,529

 
0.8
 %
Segment Adjusted EBITDA
724

 
673

 
7.6
%
 
673

 
741

 
(9.3
)%
(a)
Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section within this item.

37




Fiscal Year 2018 Compared to Fiscal Year 2017:
Net sales increased 5.1% to $2.7 billion in 2018 compared to $2.6 billion in 2017 driven by the favorable impact of foreign currency (2.5 pp), partially offset by the unfavorable impact of acquisitions and divestitures (1.5 pp). Organic Net Sales increased 4.1% to $2.6 billion in 2018 compared to $2.5 billion in 2017 driven by favorable volume/mix (3.2 pp) and higher pricing (0.9 pp). Favorable volume/mix was primarily driven by growth in condiments and sauces, including the addition of Kraft products in certain regions, and gains in foodservice. Pricing was higher, primarily driven by higher pricing in Middle East and Africa, and favorable timing of promotional activity versus the prior year in the UK, partially offset by lower pricing in eastern Europe.
Segment Adjusted EBITDA increased 7.6% to $724 million in 2018 compared to $673 million in 2017, including the favorable impact of foreign currency (3.2 pp). Excluding the currency impact, the increase was primarily driven by Organic Net Sales growth, productivity savings, and the benefit from the postemployment benefits accounting change adopted in the first quarter of 2018, partially offset by higher supply chain costs in the Middle East and Africa.
Fiscal Year 2017 Compared to Fiscal Year 2016:
Net sales were flat at $2.6 billion in 2017 and in 2016, despite the unfavorable impacts of foreign currency (0.5 pp) and acquisitions and divestitures (0.3 pp). Organic Net Sales increased 0.8% to $2.5 billion in 2017 compared to $2.5 billion in 2016 driven by favorable volume/mix (1.3 pp), partially offset by lower pricing (0.5 pp). Favorable volume/mix was primarily driven by higher shipments in foodservice and growth in condiments and sauces, partially offset by ongoing declines in infant nutrition in Italy. Pricing was lower, primarily driven by higher promotional activity in the UK and Italy versus the prior period, partially offset by higher pricing in the Middle East and Africa.
Segment Adjusted EBITDA decreased 9.3% to $673 million in 2017 compared to $741 million in 2016, including the unfavorable impact of foreign currency (1.4 pp). Excluding the currency impact, the decrease was due to higher input costs in local currency, partially offset by productivity savings.
Rest of World:
 
2018 Compared to 2017
 
2017 Compared to 2016
 
 
 
As Restated & Recast
 
 
 
As Restated & Recast
 
 
 
December 29,
2018
 
December 30,
2017
 
% Change
 
December 30,
2017
 
December 31,
2016
 
% Change
 
(in millions)
 
 
 
(in millions)
 
 
Net sales
$
3,255

 
$
3,084

 
5.6
%
 
$
3,084

 
$
2,943

 
4.8
 %
Organic Net Sales(a)
3,172

 
2,940

 
7.9
%
 
3,049

 
2,888

 
5.6
 %
Segment Adjusted EBITDA
635

 
590

 
7.5
%
 
590

 
621

 
(5.0
)%
(a)
Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section within this item.
Fiscal Year 2018 Compared to Fiscal Year 2017:
Net sales increased 5.6% to $3.3 billion in 2018 compared to $3.1 billion in 2017, despite the unfavorable impact of foreign currency (7.6 pp, including 5.1 pp from the devaluation of the Venezuelan bolivar), which more than offset the favorable impact of acquisitions and divestitures (5.3 pp). Organic Net Sales increased 7.9% to $3.2 billion in 2018 compared to $2.9 billion in 2017 driven by higher pricing (5.4 pp) and favorable volume/mix (2.5 pp). Pricing was higher primarily driven by highly inflationary environments in certain markets within Latin America. Favorable volume/mix was driven by growth across several categories, which was most pronounced in condiments and sauces, partially offset by lower shipments in Southeast Asia.
Segment Adjusted EBITDA increased 7.5% to $635 million in 2018 compared to $590 million in 2017, despite the unfavorable impact of foreign currency (12.7 pp, including 11.4 pp from the devaluation of the Venezuelan bolivar). Excluding the currency impact, the increase in Segment Adjusted EBITDA was primarily driven by Organic Net Sales growth, partially offset by higher input costs in local currency.

38




Fiscal Year 2017 Compared to Fiscal Year 2016:
Net sales increased 4.8% to $3.1 billion in 2017 compared to $2.9 billion in 2016, despite the unfavorable impact of foreign currency (0.8 pp, including 2.0 pp from the devaluation of the Venezuelan bolivar). Organic Net Sales increased 5.6% to $3.0 billion in 2017 compared to $2.9 billion in 2016 driven by higher pricing (4.2 pp) and favorable volume/mix (1.4 pp). Higher pricing was primarily driven by pricing actions taken to offset higher input costs in local currency, primarily in Latin America. Favorable volume/mix was primarily driven by growth in condiments and sauces across all regions partially offset by volume/mix declines in several markets associated with distributor network re-alignment.
Segment Adjusted EBITDA decreased 5.0% to $590 million in 2017 compared to $621 million in 2016, including the unfavorable impact of foreign currency (2.9 pp, including 3.5 pp from the devaluation of the Venezuelan bolivar). Excluding the currency impact, Segment Adjusted EBITDA decreased primarily due to higher input costs in local currency and higher commercial investments, partially offset by Organic Net Sales growth.
Critical Accounting Estimates
Note 3, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, includes a summary of the significant accounting policies we used to prepare our consolidated financial statements. The following is a review of the more significant assumptions and estimates as well as accounting policies we used to prepare our consolidated financial statements.
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, and/or current period experience factors. We review and adjust these estimates at least quarterly based on actual experience and other information.
Advertising expenses are recorded in selling, general and administrative expenses (“SG&A”). For interim reporting purposes, we charge advertising to operations as a percentage of estimated full year sales activity and marketing costs. We review and adjust these estimates each quarter based on actual experience and other information. We recorded advertising expenses of $584 million in 2018, $629 million in 2017, and $708 million in 2016, which represented costs to obtain physical advertisement spots in television, radio, print, digital, and social channels. The decrease in advertising expenses in 2018 compared to 2017 was driven by a shift from traditional ad spaces to non-traditional ad spaces. We also incur other advertising and marketing costs such as shopper marketing, sponsorships, and agency advertisement conception, design, and public relations fees. Total advertising and marketing costs were $1,140 million in 2018, $1,115 million in 2017, and $1,221 million in 2016.
Goodwill and Intangible Assets:
Our goodwill balance consists of 20 reporting units and had an aggregate carrying amount of $36.5 billion as of December 29, 2018. Our indefinite-lived intangible asset balance primarily consists of a number of individual brands, which had an aggregate carrying amount of $44.0 billion as of December 29, 2018.

39




We test our reporting units and brands for impairment annually as of the first day of our second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit or brand is less than its carrying amount. Such events and circumstances could include a sustained decrease in our market capitalization, increased competition or unexpected loss of market share, increased input costs beyond projections (for example due to regulatory or industry changes), disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster or loss of a customer, supplier, or other significant business relationship), unexpected significant declines in operating results, or significant adverse changes in the markets in which we operate. We test reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. We test brands for impairment by comparing the estimated fair value of each brand with its carrying amount. If the carrying amount of a reporting unit or brand exceeds its estimated fair value, we record an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed to the associated carrying amount of goodwill.
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 and brands requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax considerations, discount rates, growth rates, royalty rates, contributory asset charges, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, change, or if management’s expectations or plans otherwise change, including as a result of the development of our global five-year operating plan, then one or more of our reporting units or brands might become impaired in the future. As detailed in Note 10, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, we recorded impairment losses totaling $15.9 billion for the year ended December 29, 2018. Our reporting units and brands that were impaired in 2018 were written down to their respective fair values resulting in zero excess fair value over carrying amount as of their latest 2018 impairment testing dates. Accordingly, these and other individual reporting units and brands that have 20% or less excess fair value over carrying amount as of their latest testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Reporting units with a heightened risk of future impairments had an aggregate goodwill carrying amount of $29.0 billion at December 29, 2018 and included: U.S. Grocery, U.S. Refrigerated, Canada Retail, Latin America Exports, Southeast Europe, Australia and New Zealand, and Northeast Asia. Of the $29.0 billion with a heightened risk of future impairments, $9.3 billion is attributable to reporting units with 0% excess fair value over carrying amount. Brands with a heightened risk of future impairments had an aggregate carrying amount of $29.3 billion at December 29, 2018 and included: Kraft, Philadelphia, Oscar Mayer, Velveeta, Miracle Whip, Planters, A1, Cool Whip, Stove Top, ABC, and Quero. Of the $29.3 billion with a heightened risk of future impairments, $24.0 billion is attributable to brands with 0% excess fair value over carrying amount. Although the remaining reporting units and brands have more than 20% excess fair value over carrying amount as of their latest 2018 impairment testing date, these amounts are also associated with the 2013 Heinz acquisition and the 2015 Merger and are recorded on the balance sheet at their estimated acquisition date fair values. Therefore, if any assumptions, estimates, or market factors change in the future, these amounts are also susceptible to impairments.
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, depreciation and amortization, working capital, and capital expenditures), income tax rates, long-term growth rates, and a discount rate that appropriately reflects the risks 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’s plans, and guideline companies.
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, long-term growth rates, 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’s 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 net sales that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations, long-term growth rates, 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’s plans, and guideline companies.

40




The discount rates, long-term growth rates, and royalty rates we used to estimate the fair values of our reporting units and brands with 20% or less excess fair value over carrying amount, as of the latest 2018 impairment testing date for each reporting unit or brand, were as follows:
 
Goodwill Carrying Value
(in billions)
 
Discount Rate
 
Long-Term Growth Rate
 
Royalty Rate
 
 
Minimum
 
Maximum
 
Minimum
 
Maximum
 
Minimum
 
Maximum
Reporting units
$
29.0

 
7.0
%
 
10.7
%
 
1.5
%
 
4.7
%
 
 
 
 
Brands
(excess earnings method)
24.4

 
7.5
%
 
7.5
%
 
0.8
%
 
2.1
%
 
 
 
 
Brands
(relief from royalty method)
4.9

 
7.5
%
 
10.2
%
 
0.5
%
 
4.0
%
 
1.0
%
 
20.0
%
Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each annual and interim impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation. However, as it is reasonably possible that changes in assumptions could occur, as a sensitivity measure, we have presented the estimated effects of isolated changes in discount rates, long-term growth rates, and royalty rates for our reporting units and brands with 20% or less excess fair value over carrying amount. If we had changed the assumptions used to estimate the fair value of our reporting units and brands with 20% or less excess fair value over carrying amount, as of the latest testing date for each of these reporting units and brands, these isolated changes, which are reasonably possible to occur, would have led to the following increase/(decrease) in the aggregate fair value of these reporting units and brands (in billions):
 
Discount Rate
 
Long-Term Growth Rate
 
Royalty Rate
 
50-Basis-Point
 
25-Basis-Point
 
100-Basis-Point
 
Increase
 
Decrease
 
Increase
 
Decrease
 
Increase
 
Decrease
Reporting units(a)
$
(5.3
)
 
$
6.3

 
$
2.6

 
$
(2.4
)
 
 
 
 
Brands (excess earnings method)(a)
(1.9
)
 
2.3

 
0.9

 
(0.8
)
 
 
 
 
Brands (relief from royalty method)(a)
(0.4
)
 
0.5

 
0.2

 
(0.2
)
 
$
0.4

 
$
(0.4
)
(a)
A reduction in fair value would not necessarily cause an impairment in all cases, but due to the low or zero excess fair value over carrying amount for these reporting units and brands, it is reasonably possible that a reduction in fair value would lead to an impairment.
Definite-lived intangible assets are amortized on a straight-line basis over the estimated periods benefited. We review definite-lived intangible assets for impairment when conditions exist that indicate the carrying amount of the assets may not be recoverable. Such conditions could include significant adverse changes in the business climate, current-period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an asset group will be disposed of before the end of its useful life. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of definite-lived intangible assets held for use, we group assets at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, the loss is calculated based on estimated fair value. Impairment losses on definite-lived intangible assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
See Note 10, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for details related to our 2018 impairment testing.
Although our annual impairment test is performed during the second quarter, we perform a qualitative assessment each interim reporting period to determine if it is more likely than not that the fair value of any reporting unit is below its carrying amount. While we have not completed such impairment assessment for the first fiscal quarter of 2019, nor have we completed our 2019 annual impairment testing as of the first day of our second fiscal quarter, it is reasonably possible that an impairment of certain reporting units or brands could occur based on continued industry trends impacting our results of operations.
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 an appropriate term based on, among other things, the cost component and whether the plan is active or inactive. Changes in the fair value of our plan assets result in net actuarial gains or losses. These net actuarial gains and losses are deferred into accumulated other comprehensive income/(losses) and amortized within other expense/(income), net in future periods using the corridor approach. The corridor is 10% of the greater of the market-related value of the plan’s asset or projected benefit obligation. Any actuarial gains and losses in excess of the corridor are then amortized over an appropriate term based on whether the plan is active or inactive.

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For our postretirement benefit plans, our 2019 health care cost trend rate assumption will be 6.7%. We established this rate based upon our most recent experience as well as our expectation for health care trend rates going forward. We anticipate the weighted average assumed ultimate trend rate will be 4.9%. The year in which the ultimate trend rate is reached varies by plan, ranging between the years 2019 and 2030. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have had the following effects, increase/(decrease) in cost and obligation, as of December 29, 2018 (in millions):
 
One-Percentage-Point
 
Increase
 
(Decrease)
Effect on annual service and interest cost
$
3

 
$
(3
)
Effect on postretirement benefit obligation
48

 
(41
)
Our 2019 discount rate assumption will be 4.3% for service cost and 4.1% for interest cost for our postretirement plans. Our 2019 discount rate assumption will be 4.6% for service cost and 4.4% for interest cost for our U.S. pension plans and 3.4% for service cost and 3.3% for interest cost for our non-U.S. pension plans. We model these discount rates using a portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. Changes in our discount rates were primarily the result of changes in bond yields year-over-year.
In 2016, we changed the method we use to estimate the service cost and interest cost components of net pension cost/(benefit) and net postretirement benefit plan costs resulting in a decrease to these cost components. We now use a full yield curve approach to estimate service cost and interest cost by applying the specific spot rates along the yield curve used to determine the benefit obligation to the relevant projected cash flows. Previously, we estimated service cost and interest cost using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We made this change to provide a more precise measurement of service cost and interest cost by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. This change will not affect the measurement of our total benefit obligations. We accounted for this change prospectively as a change in accounting estimate.
Our 2019 expected return on plan assets will be 5.4% (net of applicable taxes) for our postretirement plans. Our 2019 expected rate of return on plan assets will be 5.7% for our U.S. pension plans and 5.4% for our non-U.S. pension plans. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current and future asset allocation, and estimates of future long-term returns by asset class. We attempt to maintain our target asset allocation by re-balancing between asset classes as we make contributions and monthly benefit payments.
While we do not anticipate further changes in the 2019 assumptions for our U.S. and non-U.S. pension and postretirement benefit plans, as a sensitivity measure, a 100-basis-point change in our discount rate or a 100-basis-point change in the expected rate of return on plan assets would have the following effects, increase/(decrease) in cost (in millions):
 
U.S. Plans
 
Non-U.S. Plans
 
100-Basis-Point
 
100-Basis-Point
 
Increase
 
Decrease
 
Increase
 
Decrease
Effect of change in discount rate on pension costs
$
11

 
$
(17
)
 
$
(2
)
 
$
(7
)
Effect of change in expected rate of return on plan assets on pension costs
(41
)
 
41

 
(27
)
 
27

Effect of change in discount rate on postretirement costs
(8
)
 
1

 

 
(1
)
Effect of change in expected rate of return on plan assets on postretirement costs
(10
)
 
10

 

 


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Income Taxes:
We compute our annual tax rate based on the statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we earn income. Significant judgment is required in determining our annual tax rate and in evaluating the uncertainty of our tax positions. We recognize a benefit for tax positions that we believe will more likely than not be sustained upon examination. The amount of benefit recognized is the largest amount of benefit that we believe has more than a 50% probability of being realized upon settlement. We regularly monitor our tax positions and adjust the amount of recognized tax benefit based on our evaluation of information that has become available since the end of our last financial reporting period. The annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the amount of recognized tax benefits, we do not consider information that has become available after the balance sheet date, however we do disclose the effects of new information whenever those effects would be material to our financial statements. Unrecognized tax benefits represent the difference between the amount of benefit taken or expected to be taken in a tax return and the amount of benefit recognized for financial reporting. These unrecognized tax benefits are recorded primarily within other non-current liabilities on the consolidated balance sheets.
We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, we consider future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, we would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or decrease to income. The resolution of tax reserves and changes in valuation allowances could be material to our results of operations for any period but is not expected to be material to our financial position.
New Accounting Pronouncements
See Note 4, New Accounting Standards, in Item 8, Financial Statements and Supplementary Data, for a discussion of new accounting pronouncements.
Contingencies
See Note 18, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, for a discussion of our contingencies.
Commodity Trends
We purchase and use large quantities of commodities, including dairy products, meat products, coffee beans, nuts, tomatoes, potatoes, soybean and vegetable oils, sugar and other sweeteners, corn products, and wheat products to manufacture our products. In addition, we purchase and use significant quantities of resins, metals, and cardboard to package our products and natural gas to operate our facilities. We continuously monitor worldwide supply and cost trends of these commodities.
We define our key commodities in the United States and Canada as dairy, meat, coffee, and nuts. In 2018, we experienced cost decreases for dairy, coffee, and meat, while costs for nuts increased. We manage commodity cost volatility primarily through pricing and risk management strategies. As a result of these risk management strategies, our commodity costs may not immediately correlate with market price trends.
Dairy commodities, primarily milk and cheese, are the most significant cost components of our cheese products. We purchase our dairy raw material requirements from independent third parties, such as agricultural cooperatives and independent processors. Market supply and demand, as well as government programs, significantly influence the prices for milk and other dairy products. Significant cost components of our meat products include pork, beef, and poultry, which we primarily purchase from applicable local markets. Livestock feed costs and the global supply and demand for U.S. meats influence the prices of these meat products. The most significant cost component of our coffee products is coffee beans, which we purchase on global markets. Quality and availability of supply, currency fluctuations, and consumer demand for coffee products impact coffee bean prices. The most significant cost components in our nut products include peanuts, cashews, and almonds, which we purchase on both domestic and global markets, where global market supply and demand is the primary driver of prices.
Liquidity and Capital Resources
We believe that cash generated from our operating activities, commercial paper programs, and Senior Credit Facility will provide sufficient liquidity to meet our working capital needs, future contractual obligations (including repayments of long-term debt), payment of our anticipated quarterly dividends, planned capital expenditures, restructuring expenditures, and contributions to our postemployment benefit plans. An additional potential source of liquidity is access to capital markets. We intend to use our cash on hand and our commercial paper programs for daily funding requirements. Overall, while, as noted above, we are not currently eligible to use a registration statement on Form S-3, we do not expect any negative effects on our funding sources that would have a material effect on our short-term or long-term liquidity.

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During the period from December 29, 2018 to the filing date of this Annual Report on Form 10-K, due to the delays in the preparation of our financial statements for the fiscal year ended December 29, 2018 and the fiscal quarter ended March 30, 2019, we were not in compliance with certain reporting covenants under the Senior Credit Facility and certain indentures. As a result, we obtained temporary waivers from certain creditors under our indebtedness instruments. The filing of this Annual Report on Form 10-K will constitute compliance with the requirement to furnish the lenders a copy of the consolidated financial statements for our fiscal year ended December 29, 2018 no later than June 28, 2019. We also currently expect to file our Quarterly Report on Form 10-Q for the quarter ended March 30, 2019 on or before July 31, 2019 in compliance with the requirement to furnish the lenders a copy of the consolidated financial statements for such quarter no later than July 31, 2019. See the “Total Debt” section below for additional information.
Cash Flow Activity for 2018 Compared to 2017:
Net Cash Provided by/Used for Operating Activities:
Net cash provided by operating activities was $2.6 billion for the year ended December 29, 2018 compared to $501 million for the year ended December 30, 2017. This increase was primarily driven by decreased postemployment benefit contributions in 2018, the timing of income tax payments, higher collections on trade receivables as fewer were non-cash exchanged for sold receivables in connection with the unwind of all of our accounts receivable securitization and factoring programs (the “Programs”) in 2018, and decreased cash payments for employee bonuses in 2018. These increases in cash provided by operating activities were partially offset by unfavorable changes in accounts payable, primarily due to the timing of payments.
Net Cash Provided by/Used for Investing Activities:
Net cash provided by investing activities was $288 million for the year ended December 29, 2018 compared to $1.2 billion for the year ended December 30, 2017. This decrease was primarily due to lower cash collections on previously sold receivables of $990 million, as we unwound all of our Programs in 2018, and cash payments to acquire businesses in 2018, primarily Cerebos Pacific Limited. These decreases in cash provided by investing activities were partially offset by decreased capital expenditures, which was driven by the wind-up of Integration Program footprint costs in the prior year. We expect 2019 capital expenditures to be approximately $800 million. Refer to Item 8, Financial Statements and Supplementary Data, including Note 17, Financing Arrangements, for additional information on our Programs, Note 5, Acquisitions and Divestitures, for additional information on our 2018 acquisitions, and Note 6, Integration and Restructuring Expenses, for additional information on the Integration Program.
Net Cash Provided by/Used for Financing Activities:
Net cash used for financing activities was $3.4 billion for the year ended December 29, 2018 compared to $4.2 billion for the year ended December 30, 2017. This decrease was primarily driven by increased proceeds from long-term debt issuances, which more than offset increased cash distributions related to our dividends, higher net repayments of commercial paper, and higher repayments of long-term debt. See Note 19, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information on our long-term debt issuances and repayments. See Equity and Dividends in this item for additional information on our dividends.
Cash Flow Activity for 2017 Compared to 2016:
Net Cash Provided by/Used for Operating Activities:
Net cash provided by operating activities was $501 million for the year ended December 30, 2017 compared to $2.6 billion for the year ended December 31, 2016. The decrease in cash provided by operating activities was primarily driven by the $1.2 billion pre-funding of our postretirement benefit plans in 2017, lower collections on receivables as more were non-cash exchanged for sold receivables, favorable changes in accounts payable from vendor payment term renegotiations that were less pronounced than the prior year, and increased cash payments of employee bonuses in 2017. The decrease in cash provided by operating activities was partially offset by lower cash payments for income taxes in 2017 driven by our pre-funding of postretirement plan benefits following U.S. Tax Reform enactment on December 22, 2017.
Net Cash Provided by/Used for Investing Activities:
Net cash provided by investing activities was $1.2 billion for the year ended December 30, 2017 compared to $1.5 billion for the year ended December 31, 2016. The decrease in cash provided by investing activities was primarily due to lower cash inflows from our Programs, as well as lower proceeds from cash settlements on net investment hedges. Capital expenditures were flat in 2017 compared to 2016.
Net Cash Provided by/Used for Financing Activities:
Net cash used for financing activities was $4.2 billion for the year ended December 30, 2017 compared to $4.6 billion for the year ended December 31, 2016. The decrease was driven by the benefit of fewer dividend payments in 2017 compared to 2016, which more than offset higher net repayments of long-term debt and commercial paper in 2017 compared to 2016, including cash outflows associated with the redemption of our Series A Preferred Stock in 2016. Dividend payments were lower in 2017 compared to 2016 due to the absence of the Series A Preferred Stock dividend and the impact of four common stock cash distributions in 2017 compared to five such distributions in 2016. See Equity and Dividends for additional information on cash distributions related to common stock and Series A Preferred Stock.

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Cash Held by International Subsidiaries:
Of the $1.1 billion cash and cash equivalents on our consolidated balance sheet at December 29, 2018, $923 million was held by international subsidiaries.
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. The amount of unrecognized deferred tax liabilities for local country withholding taxes that would be owed related to our current year earnings of certain international subsidiaries is approximately $20 million.
Our historic earnings in foreign subsidiaries through December 30, 2017 are undistributed and currently not considered to be indefinitely reinvested. As of December 29, 2018, we have recorded a deferred tax liability of $78 million on $1.2 billion of historic earnings related to local withholding taxes that will be owed when this cash is distributed.
Total Debt:
We obtain funding through our U.S. and European commercial paper programs. At December 29, 2018, we had no commercial paper outstanding. At December 30, 2017, we had commercial paper outstanding of $448 million with a weighted average interest rate of 1.541%. The maximum amount of commercial paper outstanding during the year ended December 29, 2018 was $1.1 billion.
We maintain our $4.0 billion Senior Credit Facility, and subject to certain conditions, we may increase the amount of revolving commitments and/or add additional tranches of term loans in a combined aggregate amount of up to $1.0 billion. No amounts were drawn on our Senior Credit Facility at December 29, 2018, at December 30, 2017, or during the years ended December 29, 2018, December 30, 2017, and December 31, 2016. In June 2018, we entered into an agreement that became effective on July 6, 2018 to extend the maturity date of our Senior Credit Facility from July 6, 2021 to July 6, 2023 and to establish a $400 million euro equivalent swing line facility, which is available under the $4.0 billion revolving credit facility limit for short-term loans denominated in euros on a same-day basis. The Senior Credit Facility contains representations, warranties, and covenants that are typical for these types of facilities and could upon the occurrence of certain events of default restrict our ability to access our Senior Credit Facility. We were in compliance with all financial covenants during the year ended December 29, 2018.
During the period from December 29, 2018 to the filing date of this Annual Report on Form 10-K, due to the delays in the preparation of our financial statements for the fiscal year ended December 29, 2018 and the fiscal quarter ended March 30, 2019, we were not in compliance with certain reporting covenants under the Senior Credit Facility.
However, as previously disclosed, on March 22, 2019, we entered into a Waiver and Consent No. 1 (the “Original Waiver”) with respect to the Senior Credit Facility, pursuant to which the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, granted a temporary waiver of compliance by us with respect to the requirement to furnish the lenders a copy of the consolidated financial statements for our fiscal year ended December 29, 2018. Pursuant to the Original Waiver, we were required to provide consolidated financial statements no later than May 14, 2019. Due to additional delays in our financial reporting, on May 10, 2019, we entered into a Waiver and Consent No. 2 (the “Second Waiver”) with respect to the Senior Credit Facility, pursuant to which the lenders, as party to the Senior Credit Facility, and JPMorgan Chase Bank, N.A., as administrative agent, granted a temporary waiver of compliance by us with respect to the requirements to furnish the lenders copies of the consolidated financial statements for our fiscal year ended December 29, 2018 and for the fiscal quarter ended March 30, 2019. Pursuant to the Second Waiver and in order to remedy our noncompliance, we are required to provide consolidated financial statements for our fiscal year ended December 29, 2018 no later than June 28, 2019 and for our fiscal quarter ended March 30, 2019 no later than July 31, 2019. If we had not obtained these waivers, we would not have been able to access our Senior Credit Facility.
Our long-term debt, including the current portion, was $31.1 billion at December 29, 2018 and $31.0 billion at December 30, 2017. Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all financial covenants during the year ended December 29, 2018.
During the period from December 29, 2018 to the filing date of this Annual Report on Form 10-K, due to the delays in the preparation of our financial statements for the fiscal year ended December 29, 2018 and the fiscal quarter ended March 30, 2019, we were not in compliance with certain reporting covenants under certain indentures. The filing of this Annual Report on Form 10-K will constitute compliance with the requirement to furnish the lenders a copy of the consolidated financial statements for our fiscal year ended December 29, 2018 no later than June 28, 2019. We also currently expect to file our Quarterly Report on Form 10-Q for the quarter ended March 30, 2019 on or before July 31, 2019 in compliance with the requirement to furnish the lenders a copy of the consolidated financial statements for such quarter no later than July 31, 2019.

45




Under our existing indentures, if we do not file required reports within specified time periods, the trustee or holders of at least 30% in the case of our Second Lien Senior Secured Notes due 2025 and 25% in the case of any other series of notes may deliver a notice of default for such series of notes which would commence the applicable cure period under such indenture. As of June 5, 2019, none of the cure periods under our existing indentures have been triggered in connection with our failure to comply with the respective reporting covenants set forth in such indentures. However, if a cure period is triggered under such indentures and we fail to file our annual and interim financial statements within such cure period, any outstanding notes issued thereunder would become callable.
Our senior notes maturing in 2019 and 2020 include aggregate principal amounts of approximately $350 million in August 2019, approximately $900 million in February 2020, and approximately 800 million Canadian dollars and $1.5 billion in July 2020. We expect to fund these long-term debt repayments primarily with cash on hand, cash generated from our operating activities, proceeds from our divestiture in Canada, and potential new issuances of short-term or long-term debt.
See Note 19, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information related to our long-term debt.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements:
We do not have guarantees or other off-balance sheet financing arrangements that we believe are reasonably l