KHC 10Q 6/28/15


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number 001-37482
THE KRAFT HEINZ COMPANY
(Exact name of registrant as specified in its charter)

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

(412) 456-5700
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No X
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes X  No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer _
Accelerated filer _
Non-accelerated filer X
Smaller reporting company _
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No X  
The number of shares of the Registrant’s Common Stock outstanding as of August 2, 2015 was 1,212,833,289 shares.





PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements and Supplementary Data

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Second Quarter Ended
 
June 28, 2015
 
June 29, 2014
 
(Unaudited)
 
(In millions)
Sales
$
2,616

 
$
2,729

Cost of products sold
1,665

 
1,844

Gross profit
951

 
885

Selling, general and administrative expenses
473

 
511

2015 Merger related costs
34

 

Operating income
444

 
374

Interest income
10

 
6

Interest expense
394

 
168

Other expense, net
(255
)
 
(43
)
(Loss)/income before income taxes
(195
)
 
169

(Benefit from)/provision for income taxes
(35
)
 
34

Net (loss)/income
(160
)
 
135

Less: Net income attributable to the noncontrolling interest
4

 
8

Net (loss)/income attributable to The Kraft Heinz Company
$
(164
)
 
$
127

 
 
 
 
Net (loss)/income attributable to The Kraft Heinz Company
$
(164
)
 
$
127

Less: Preferred dividends
180

 
180

Net loss attributable to common shareholders
$
(344
)
 
$
(53
)
Basic and diluted loss per common share:
 
 
 
Net loss attributable to common shareholders
$
(0.91
)
 
$
(0.14
)
Average common shares outstanding - basic and diluted
380

 
377


See Notes to Condensed Consolidated Financial Statements.

The condensed consolidated financial statements for the second quarter and six months ended June 28, 2015 and June 29, 2014 reflect the results of operations and financial position of H.J. Heinz Holding Corporation for the periods presented and do not include the results of operations and financial position of Kraft Foods Group, Inc. because the merger was completed on July 2, 2015. 
_______________________________________

2



THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
(Unaudited)
 
(In millions)
Sales
$
5,094

 
$
5,529

Cost of products sold
3,166

 
3,690

Gross profit
1,928

 
1,839

Selling, general and administrative expenses
934

 
1,032

2015 Merger related costs
41

 

Operating income
953

 
807

Interest income
20

 
12

Interest expense
595

 
337

Other expense, net
(226
)
 
(64
)
Income before income taxes
152

 
418

Provision for income taxes
33

 
85

Net income
119

 
333

Less: Net income attributable to the noncontrolling interest
7

 
11

Net income attributable to The Kraft Heinz Company
$
112

 
$
322

 
 
 
 
Net income attributable to The Kraft Heinz Company
$
112

 
$
322

Less: Preferred dividends
360

 
360

Net loss attributable to common shareholders
$
(248
)
 
$
(38
)
Basic and diluted loss per common share:
 
 
 
Net loss attributable to common shareholders
$
(0.66
)
 
$
(0.10
)
Average common shares outstanding - basic and diluted
379

 
377


See Notes to Condensed Consolidated Financial Statements.

The condensed consolidated financial statements for the second quarter and six months ended June 28, 2015 and June 29, 2014 reflect the results of operations and financial position of H.J. Heinz Holding Corporation for the periods presented and do not include the results of operations and financial position of Kraft Foods Group, Inc. because the merger was completed on July 2, 2015. 
_______________________________________


3



THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Second Quarter Ended
 
June 28, 2015
 
June 29, 2014
 
(Unaudited)
 
(In millions)
Net (loss)/income
$
(160
)
 
$
135

Other comprehensive income/(loss), net of tax:
 
 
 
Foreign currency translation adjustments
361

 
181

Net deferred gains/(losses) on net investment hedges
(206
)
 
(44
)
Net pension and post-retirement benefit (losses)/gains
(18
)
 
(28
)
Reclassification of net pension and post-retirement benefit (gains)/losses to net income
8

 
(1
)
Net deferred (losses)/gains on cash flow hedges from periodic revaluations
(10
)
 
(100
)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings
137

 
(1
)
Total comprehensive income
112

 
142

Comprehensive (income)/loss attributable to the noncontrolling interest
5

 
3

Comprehensive income attributable to The Kraft Heinz Company
$
107

 
$
139


See Notes to Condensed Consolidated Financial Statements.

The condensed consolidated financial statements for the second quarter and six months ended June 28, 2015 and June 29, 2014 reflect the results of operations and financial position of H.J. Heinz Holding Corporation for the periods presented and do not include the results of operations and financial position of Kraft Foods Group, Inc. because the merger was completed on July 2, 2015. 
_______________________________________


4



THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
(Unaudited)
 
(In millions)
Net income
$
119

 
$
333

Other comprehensive income/(loss), net of tax:
 
 
 
Foreign currency translation adjustments
(433
)
 
295

Net deferred gains/(losses) on net investment hedges
226

 
(160
)
Net pension and post-retirement benefit (losses)/gains
(19
)
 
(28
)
Reclassification of net pension and post-retirement benefit (gains)/losses to net income
7

 
(2
)
Net deferred (losses)/gains on cash flow hedges from periodic revaluations
(77
)
 
(159
)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings
138

 
(4
)
Total comprehensive (loss)/income
(39
)
 
275

Comprehensive (income)/loss attributable to the noncontrolling interest
(6
)
 
14

Comprehensive (loss)/income attributable to The Kraft Heinz Company
$
(33
)
 
$
261


See Notes to Condensed Consolidated Financial Statements.

The condensed consolidated financial statements for the second quarter and six months ended June 28, 2015 and June 29, 2014 reflect the results of operations and financial position of H.J. Heinz Holding Corporation for the periods presented and do not include the results of operations and financial position of Kraft Foods Group, Inc. because the merger was completed on July 2, 2015.  
_______________________________________
    

5



THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 28, 2015
 
December 28, 2014
 
(Unaudited)
 
(In millions)
Assets
 
 
 
Current Assets:
 
 
 

Cash and cash equivalents
$
2,147

 
$
2,298

Trade receivables, net
795

 
851

Other receivables, net
226

 
384

Inventories:
 
 
 

Finished goods and work-in-process
978

 
962

Packaging material and ingredients
184

 
223

Total inventories
1,162

 
1,185

Prepaid expenses
191

 
139

Other current assets
68

 
58

Total current assets
4,589

 
4,915

Property, plant and equipment
2,786

 
2,796

Less accumulated depreciation
533

 
431

Total property, plant and equipment, net
2,253

 
2,365

Goodwill
14,741

 
14,959

Trademarks, net
11,285

 
11,455

Other intangibles, net
1,657

 
1,733

Other non-current assets
1,537

 
1,336

Total other non-current assets
29,220

 
29,483

Total assets
$
36,062

 
$
36,763

See Notes to Condensed Consolidated Financial Statements.

The condensed consolidated financial statements for the second quarter and six months ended June 28, 2015 and June 29, 2014 reflect the results of operations and financial position of H.J. Heinz Holding Corporation for the periods presented and do not include the results of operations and financial position of Kraft Foods Group, Inc. because the merger was completed on July 2, 2015.  
_______________________________________

6



THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 28, 2015
 
December 28, 2014
 
(Unaudited)
 
(In millions except share and per share amounts)
Liabilities and Equity
 
 
 
Current Liabilities:
 
 
 

Short-term debt
$
2

 
$
59

Portion of long-term debt due within one year
10

 
11

Trade payables
1,509

 
1,651

Other payables
99

 
203

Accrued interest
171

 
167

Accrued marketing
255

 
297

Other accrued liabilities
436

 
472

Income taxes
171

 
232

Total current liabilities
2,653

 
3,092

Long-term debt
13,626

 
13,586

Deferred income taxes
3,843

 
3,867

Non-pension postretirement benefits
191

 
197

Other non-current liabilities
448

 
336

Total long-term liabilities
18,108

 
17,986

Redeemable noncontrolling interest
27

 
29

9% Series A cumulative redeemable preferred stock, 80,000 authorized and issued shares, $0.01 par value
8,320

 
8,320

Equity:
 
 
 

Common stock, 397,960,266 shares issued, $0.01 par value
4

 
4

Warrants

 
367

Additional capital
7,454

 
7,320

Retained earnings

 

Accumulated other comprehensive loss
(719
)
 
(574
)
Total Kraft Heinz Company shareholders' equity
6,739

 
7,117

Noncontrolling interest
215

 
219

Total equity
6,954

 
7,336

Total liabilities and equity
$
36,062

 
$
36,763

See Notes to Condensed Consolidated Financial Statements.

The condensed consolidated financial statements for the second quarter and six months ended June 28, 2015 and June 29, 2014 reflect the results of operations and financial position of H.J. Heinz Holding Corporation for the periods presented and do not include the results of operations and financial position of Kraft Foods Group, Inc. because the merger was completed on July 2, 2015.  
_______________________________________


7



THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
(Unaudited)
 
(In millions)
Cash Flows from Operating Activities:
 
 
 
Net income
$
119

 
$
333

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation
131

 
284

Amortization
48

 
50

Amortization of deferred debt issuance costs
19

 
23

Deferred tax benefit
(254
)
 
(195
)
Pension contributions
(33
)
 
(46
)
Impairment loss on indefinite-lived intangibles
58

 
62

Venezuela devaluation
234

 

Loss on discontinuation of cash flow hedge
227

 

Other items, net
32

 
18

Changes in current assets and liabilities:
 
 
 
Receivables (includes proceeds from securitization)
(6
)
 
28

Inventories
(80
)
 
29

Prepaid expenses and other current assets
(66
)
 
(12
)
Accounts payable
13

 
42

Accrued liabilities
(35
)
 
(79
)
Income taxes
4

 
310

Cash provided by operating activities
411

 
847

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(163
)
 
(153
)
Proceeds from disposals of property, plant and equipment
7

 
40

Proceeds from net investment hedges
306

 

Other items, net

 
(2
)
Cash provided by/(used for) investing activities
150

 
(115
)
Cash Flows from Financing Activities:
 
 
 
Payments on long-term debt
(1,963
)
 
(50
)
Proceeds from long-term debt
2,000

 

Debt issuance costs
(18
)
 

Net payments on short-term debt
(53
)
 
(11
)
Preferred dividends
(360
)
 
(360
)
Other items, net
15

 
12

Cash used for financing activities
(379
)
 
(409
)
Effect of exchange rate changes on cash and cash equivalents
(333
)
 
23

Net (decrease)/increase in cash and cash equivalents
(151
)
 
346

Cash and cash equivalents at beginning of period
2,298

 
2,459

Cash and cash equivalents at end of period
$
2,147

 
$
2,805


See Notes to Condensed Consolidated Financial Statements.

The condensed consolidated financial statements for the second quarter and six months ended June 28, 2015 and June 29, 2014 reflect the results of operations and financial position of H.J. Heinz Holding Corporation for the periods presented and do not include the results of operations and financial position of Kraft Foods Group, Inc. because the merger was completed on July 2, 2015.  
_______________________________________

8

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




(1)
Basis of Presentation

Organization

On March 24, 2015, H.J. Heinz Holding Corporation entered into an Agreement and Plan of Merger, dated as of March 24, 2015, among Kraft Foods Group, Inc. (“Kraft”), Kite Merger Sub Corp., H.J. Heinz Holding Corporation and Kite Merger Sub LLC (the “Merger Agreement”).  Pursuant to the Merger Agreement, Kite Merger Sub Corp., a wholly owned subsidiary of H.J. Heinz Holding Corporation, merged with and into Kraft, with Kraft surviving as a wholly owned subsidiary of H.J. Heinz Holding Corporation.  We refer to this merger transaction as the 2015 Merger.  The 2015 Merger was consummated on July 2, 2015, which we refer to as the Merger Date, at which time H.J. Heinz Holding Corporation changed its name to “The Kraft Heinz Company” (the “Company” or “Kraft Heinz”). Before the consummation of the 2015 Merger, H.J. Heinz Holding Corporation was controlled by Berkshire Hathaway Inc. (“Berkshire Hathaway”) and 3G Special Situations Fund III, L.P. (“3G Capital,” and together with Berkshire Hathaway, the “Sponsors”) following their acquisition of H.J. Heinz Company on June 7, 2013 ("2013 Merger). The Sponsors initially owned 850 million shares of common stock in H.J. Heinz Holding Corporation, with Berkshire Hathaway having warrants to purchase approximately 46 million additional shares of common stock, which it exercised in June 2015. Prior to, but in connection with, the 2015 Merger, the Sponsors purchased an additional 500 million newly issued shares of the Company's common stock for an aggregate purchase price of approximately $10.0 billion. Immediately prior to the consummation of the 2015 Merger, each share of H.J. Heinz Holding Corporation issued and outstanding common stock was reclassified and changed into 0.443332 of a share of Kraft Heinz common stock. All share and per share amounts in the consolidated financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this conversion, including reclassifying an amount equal to the change in par value of common stock from additional paid-in capital. In the 2015 Merger, all outstanding shares of Kraft common stock (other than deferred shares and restricted shares) were converted into the right to receive, on a one-for-one basis, shares of Kraft Heinz common stock, on a tax-free basis. Upon the completion of the 2015 Merger, the Kraft shareholders of record received a special cash dividend of $16.50 per share. In addition, Berkshire Hathaway has an $8.0 billion preferred stock investment in Kraft Heinz which entitles it to a 9.0% annual dividend.

Unless the context otherwise requires, the terms "we," "us," "our" and the "Company" refer, collectively, to The Kraft Heinz Company, and its subsidiaries.

Basis of Presentation

For financial reporting and accounting purposes, H.J. Heinz Holding Corporation was the acquirer of Kraft in the 2015 Merger.  The condensed consolidated financial statements for the second quarter and six months ended June 28, 2015 and June 29, 2014 reflect the results of operations and financial position of H.J. Heinz Holding Corporation for the periods presented and do not include the results of operations and financial position of Kraft because the merger was completed on July 2, 2015. 

The interim condensed consolidated financial statements of the Company are unaudited and have been prepared following the rules and regulations of the United States Securities and Exchange Commission ("SEC"). In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the financial position and results of operations of these interim periods, have been included. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The results for interim periods are not necessarily indicative of the results to be expected for the full fiscal year due in part to the seasonal nature of our business. These statements should be read in conjunction with the Company's consolidated financial statements and related notes, and management's discussion and analysis of financial condition and results of operations as of and for the year ended December 28, 2014, as included in its Registration Statement filed on Form S-4 with the SEC, which was declared effective on June 2, 2015.

As previously reported, during the quarter ended March 29, 2015, the Company recorded out-of-period corrections in the amount of foreign currency translation gains and losses recorded for goodwill from the date of the 2013 Merger through December 28, 2014, as well as deferred taxes recognized in the 2013 Merger opening balance sheet. These corrections resulted in the net reduction of total Company goodwill of $40 million, a reduction in related deferred tax assets of $11 million and a reduction in total Company accumulated other comprehensive income of $51 million. The net impact of these corrections on goodwill at each of the segments was reductions of $10 million in North America, $18 million in Asia/Pacific, $6 million in Latin America and $10 million in RIMEA, and an increase of $4 million in Europe. These corrections did not have a material impact on the Company’s current and previously reported consolidated financial statements.

9

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)




(2)
Merger and Acquisition

As discussed in Note 1, on March 24, 2015, H.J. Heinz Holding Corporation entered into the 2015 Merger with Kraft. The 2015 Merger was consummated on July 2, 2015. The 2015 Merger will be accounted for under the acquisition method of accounting for business combinations pursuant to the provisions of Accounting Standards Codification (“ASC”) 805, “Business Combinations,” (“ASC 805”). Because the shareholders of H.J. Heinz Holding Corporation before the 2015 Merger own approximately 51% of the shares of Kraft Heinz common stock on a fully diluted basis as of the Merger Date and the directors and management of H.J. Heinz Holding Corporation retained a majority of board seats and key positions in the management of Kraft Heinz , H.J. Heinz Holding Corporation is considered to be the acquiring company for accounting purposes.

The legacy Kraft businesses manufacture and market food and beverage products, including cheese, meats, refreshment beverages, coffee, packaged dinners, refrigerated meals, snack nuts, dressings, and other grocery products, primarily in the United States and Canada. Kraft’s product categories span breakfast, lunch, and dinner meal occasions. Total sales for Kraft during its most recent pre-acquisition year ended December 27, 2014 were $18.2 billion.

Under the acquisition method of accounting, total consideration exchanged was $52.9 billion, which included $42.5 billion related to the aggregate fair value of Kraft common stock as of July 2, 2015, $0.6 billion, which related to the fair value of replacement equity awards issued for Kraft’s outstanding stock incentive awards attributable to service periods prior to the 2015 Merger, and $9.8 billion related to the $16.50 per share special cash dividend. The operating results of the Kraft businesses will begin to be reported in our financial statements in the fiscal quarter ending September 27, 2015.

The following tables provide unaudited pro forma results of operations for the second quarter and six months ended June 28, 2015 and June 29, 2014, as if Kraft had been acquired as of the beginning of the first fiscal period presented. The pro forma results include certain purchase accounting adjustments. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of Kraft. Accordingly, such amounts are not necessarily indicative of the results if the 2015 Merger had occurred on the dates indicated or that may result in the future.
 
Second Quarter Ended
 
June 28, 2015
June 29, 2014
 
(In millions, except per share data)
Sales
$
7,129

$
7,474

Net income
$
390

$
494

Income per common share - basic
$
0.17

$
0.26

Income per common share - diluted
$
0.17

$
0.26


 
Six Months Ended
 
June 28, 2015
June 29, 2014
 
(In millions, except per share data)
Sales
$
13,957

$
14,634

Net income
$
1,134

$
894

Income per common share - basic
$
0.65

$
0.44

Income per common share - diluted
$
0.64

$
0.43


The most significant of the pro forma pre tax adjustments included in the pro forma results were to reflect the impact of 2015 Merger related costs, higher cost of products sold and selling, general and administrative expenses associated with the purchase accounting adjustments related to the step-up in inventory, amortization of intangible assets and depreciation of property, plant and equipment.

The preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in the 2015 Merger is based on estimated fair values at the date of acquisition. During the measurement period, we will continue to obtain information to assist in determining the fair value of net assets acquired, which may differ materially from these preliminary estimates. Measurement period adjustments that we determine to be material will be applied retrospectively as of the Merger Date.


10

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



The following is a summary of the preliminary purchase price allocation to the estimated fair values of assets acquired and liabilities assumed in the transaction:
 
(In millions)
Cash
$
408

Other current assets
3,685

Property, plant and equipment
4,365

Trademark and other intangibles
43,652

Other non-current assets
228

Trade and other payables
(3,510
)
Long-term debt
(9,293
)
Non-pension postretirement benefits and other noncurrent liabilities
(4,503
)
Deferred income tax liabilities
(15,042
)
Net assets acquired
19,990

Goodwill on acquisition
32,904

Total consideration
52,894

Preliminary fair value of shares exchanged and stock based compensation
43,081

Total cash consideration paid to Kraft shareholders
9,813

Cash and cash equivalents of Kraft at July 2, 2015
408

Acquisition of business, net of cash on hand
$
9,405


The 2015 Merger preliminarily resulted in $32.9 billion of non tax deductible goodwill relating principally to synergies expected to be achieved from the combined operations and planned growth in new markets. Goodwill has preliminarily been allocated to the segments comprising the legacy Kraft businesses.

The preliminary purchase price allocation to identifiable intangible assets acquired is as follows:
 
Preliminary fair value
 
Weighted average life
 
(In millions, except weighted average lives)
Indefinite-lived trademarks
$
38,768

 
 
Definite-lived trademarks
632

 
30
Customer relationships
2,901

 
20
Licenses
1,351

 
25
Total identifiable intangible assets
$
43,652

 
 

We preliminarily valued trademarks using either the excess earnings method or relief from royalty method, both variations of the income approach. Trademarks generating annual revenue in excess of $1.0 billion were preliminarily valued using the excess earnings method due to their significance to the cash flows of the business. The relief from royalty method was preliminarily used for the remaining brands and licenses. We preliminarily valued customer relationships using the distributor method, a variation of the excess earnings method discussed below that uses distributor-based inputs for margins and contributory asset charges.

The excess earnings method estimates fair value of an intangible asset by deducting expected costs, including income taxes, from expected revenues attributable to that asset to arrive at after-tax cash flows. From such after-tax cash flows, after-tax contributory asset charges are deducted to arrive at incremental after-tax cash flows. These resulting cash flows are discounted to a present value to which the tax amortization benefit is added to arrive at fair value. The relief from royalty method under the income approach estimates the cost savings that accrue to a company for which it would otherwise have to pay royalties or license fees on revenues earned through the use of the asset.

Some of the more significant assumptions inherent in the development of the valuations included the estimated annual net cash flows for each indefinite lived or definite lived intangible asset (including net revenues, cost of products sold, selling and marketing costs and working capital asset/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends as well as other factors. The assumptions used in the financial forecasts were determined utilizing primarily historical data, supplemented by current and anticipated market

11

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



conditions, product category growth rates, management plans, and market comparables. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. Preliminary assumptions may change and may result in significant changes to the final valuation.

We utilized existing carrying values to value trade receivables and payables, as well as other current and non-current assets and liabilities as we determined that they represented the fair value of those items at the Merger Date.

We preliminarily valued finished goods and work-in-process inventory using a net realizable value approach resulting in a step-up of $348 million which will be recognized in Cost of products sold in the period July 2, 2015 to September 27, 2015 as the related inventory will be sold. Raw materials and packaging inventory was valued using the replacement cost approach.

We preliminarily valued property, plant and equipment using a combination of the income approach, the market approach and the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors. We preliminarily estimated useful lives of the property, plant and equipment to be between 3 and 27 years.

Deferred income tax assets and liabilities as of the Merger Date represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases.

(3)
Segments
The Company has five reportable segments which are defined by geographic region including: North America, Europe, Asia/Pacific, Latin America and Russia, India, Middle East and Africa ("RIMEA"). Following the 2015 Merger described in Note 2, the Company will reevaluate its segment structure in the third quarter of 2015.
Descriptions of the Company’s reportable segments are as follows:
North America—This segment includes our U.S. consumer products business which manufactures, markets and sells ketchup, condiments, sauces, pasta meals, and frozen potatoes, entrees, snacks, and appetizers to the grocery channels and our U.S. foodservice business which manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States of America. The North America segment also includes our business in Canada.
Europe—This segment includes the Company’s operations in Europe (excluding Russia) and sells products in all of the Company’s categories.
Asia/Pacific—This segment includes the Company’s operations in Australia, New Zealand, Japan, China, Papua New Guinea, South Korea, Indonesia, and Singapore. This segment sells products in all of the Company's categories.
Latin America—This segment includes the Company’s operations in Brazil, Venezuela, Mexico, Costa Rica, and Panama that sell products in all of the Company’s categories.
RIMEA—This segment includes the Company’s operations in Russia, India, the Middle East and Africa that sell products in all of the Company’s categories.
The Company’s management evaluates performance based on several factors including net sales and Adjusted Earnings Before Interest, Tax, Depreciation and Amortization ("Adjusted EBITDA"). Inter-segment revenues, items below the operating income line of the consolidated statements of income and certain costs associated with Restructuring and Productivity Initiatives (see Note 5) and 2015 Merger related costs, are not presented by segment, since they are not reflected in the measure of segment profitability reviewed by the Company’s management.

12

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



The following tables present information about the Company’s reportable segments:
 
Second Quarter Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
Net external sales:
 
 
 
North America
$
1,021

 
$
966

Europe
620

 
766

Asia/Pacific
495

 
583

Latin America
291

 
200

RIMEA
189

 
214

Consolidated Totals
$
2,616

 
$
2,729

Segment Adjusted EBITDA:
 
 
 
North America
$
324

 
$
293

Europe
225

 
236

Asia/Pacific
96

 
108

Latin America
66

 
30

RIMEA
43

 
45

Non-Operating
(15
)
 
(19
)
  Adjusted EBITDA
739

 
693

Restructuring:
 
 
 
  Severance related costs(a) 
8

 
30

  Other restructuring costs(a)
2

 
25

  Asset write-offs(a)
25

 
3

Other special items(b)
27

 
37

Venezuela inventory write-down
49

 

2015 Merger related costs(c)
34

 

Depreciation, including accelerated depreciation for restructuring
66

 
137

Amortization
23

 
26

Stock based compensation
3

 
1

Interest expense, net(d)
384

 
161

Other expense, net(e)
255

 
42

Impairment loss on indefinite-lived trademarks(f)
58

 
62

  (Loss)/income before income taxes
$
(195
)
 
$
169


13

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
Net external sales:
 
 
 
North America
$
2,010

 
$
2,135

Europe
1,246

 
1,529

Asia/Pacific
940

 
1,075

Latin America
555

 
399

RIMEA
343

 
391

Consolidated Totals
$
5,094

 
$
5,529

Segment Adjusted EBITDA:
 
 
 
North America
$
610

 
$
655

Europe
440

 
452

Asia/Pacific
181

 
180

Latin America
119

 
62

RIMEA
74

 
74

Non-Operating
(34
)
 
(41
)
  Adjusted EBITDA
1,390

 
1,382

Restructuring:
 
 
 
  Severance related costs(a) 
13

 
84

  Other restructuring costs(a)
12

 
38

  Asset write-offs(a)
27

 
10

Other special items(b)
52

 
45

Venezuela inventory write-down
49

 

2015 Merger related costs(c)
41

 

Depreciation, including accelerated depreciation for restructuring
131

 
284

Amortization
48

 
50

Stock based compensation
6

 
2

Interest expense, net(d)
575

 
325

Other expense, net(e)
226

 
64

Impairment loss on indefinite-lived trademarks(f)
58

 
62

  Income before income taxes
$
152

 
$
418

_____________________________________
(a)
See Note 5 for further details on restructuring and productivity initiatives.
(b)
Includes project implementation costs and charges that management believes do not directly reflect our core operations. The six months ended June 28, 2015 includes pension related costs, lease impairment charges, severance charges, consulting and advisory charges, and contract termination fees. The six months ended June 29, 2014 includes incremental costs primarily for additional warehousing and other logistics costs incurred related to the acceleration of sales ahead of the U.S. SAP go-live, which was launched in the second quarter of 2014, along with equipment relocation charges and consulting and advisory charges.
(c)
Represents legal and professional fees associated with the 2015 Merger. See Note 2.
(d)
Includes a release of $227 million from other accumulated comprehensive income to interest expense which occurred during the second quarter ended June 28, 2015. This release relates to the early termination of certain interest rate swaps contracts. See Note 10.
(e)
Includes a $234 million foreign exchange devaluation loss in Venezuela which was recorded to other expense, net during the second quarter ended June 28, 2015. See Note 17.
(f)
See Note 6 for further details on the impairment loss on indefinite-lived trademarks.

14

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



The Company’s revenues are generated via the sale of products in the following categories:
 
Second Quarter Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
Ketchup and Sauces
$
1,432

 
$
1,387

Meals and Snacks
778

 
836

Infant/Nutrition
264

 
311

Other
142

 
195

Total
$
2,616

 
$
2,729

 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
Ketchup and Sauces
$
2,662

 
$
2,742

Meals and Snacks
1,627

 
1,850

Infant/Nutrition
517

 
586

Other
288

 
351

Total
$
5,094

 
$
5,529


(4)
Recently Issued Accounting Standards

In July 2015, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Under this ASU, companies are required to measure inventory using the lower of cost and net realizable value, which is defined as the estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU impacts companies who use the first-in, first-out method (FIFO), the average costing method, or methods of inventory measurement other than the last-in, first-out (LIFO) and retail inventory methods, which have been excluded from the scope of this ASU due to the substantial cost and burden of transitioning these methods. The Company is required to apply these new requirements prospectively for fiscal years beginning after December 15, 2016, including the interim periods therein. The Company is currently evaluating the impact the application of this Update will have on its consolidated financial statements.

In July 2015, the FASB voted to approve a one-year extension of the effective date for the new revenue recognition standard (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)), which was originally issued in May 2014 and was set to become effective in 2017. As a result of the July 9, 2015 vote, public companies will be required to adopt the revenue recognition ASU for fiscal years beginning after December 15, 2017 but may choose to adopt as of the original date for fiscal years beginning after December 15, 2016. The standard will apply to Quarterly Reports and other interim-period reports issued for that year. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In May 2015, the FASB released ASU 2015-08, Business Combinations (Topic 805): Pushdown Accounting-Amendments to Securities and Exchange Commission ("SEC") Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update). This Update brings existing guidance into conformity with a recent consensus on the FASB Emerging Issues Tasks Force, ASU 2014-17 - Business Combination (Topic 805): Pushdown Accounting, which provided guidance on the application of the push down basis of accounting for entities acquired in purchase transactions. The Company does not expect this update to have a material impact on the consolidated financial statements.

In April 2015, the FASB released ASU 2015-05, providing guidance on accounting for cloud computing fees. This is an update to Subtopic 350-40, Intangibles - Goodwill and Other - Internal-Use Software. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company is required to adopt this standard during the first quarter of 2016; however, early adoption is permitted. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

15

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)




The FASB issued simplified guidance on valuing retirement plan assets in April 2015 through ASU 2015-04 Compensation - Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. A reporting entity with a fiscal year-end that does not coincide with a month-end may incur more costs than other entities when measuring the fair value of plan assets of a defined benefit pension or other postretirement benefit plan. This is because information about the fair value of plan assets obtained from a third-party service provider typically is reported as of the month-end. That information then is adjusted to reflect the fair value of plan assets as of the fiscal year-end. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. An entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments in this update. The Company is permitted to adopt this amended guidance prospectively in the first quarter of 2016. Early adoption of this standard is allowed. The Company does not expect this update to have a material impact on the consolidated financial statements.

During April 2015, the FASB released ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this update are effective for financial statements issued by the Company for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued. An entity should apply the new guidance on a retrospective basis. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amended guidance modifies the analysis that companies must perform in order to determine whether a legal entity should be consolidated. The amended guidance simplifies current consolidation rules by (a) reducing the number of consolidation models, (b) eliminating the risk that a reporting entity may have to consolidate a legal entity solely based on a fee arrangement with another legal entity, (c) placing more weight on the risk of loss in order to identify the party that has a controlling financial interest, (d) reducing the number of instances that related party guidance needs to be applied when determining the party that has a controlling financial interest, and (e) changing rules for companies in certain industries that ordinarily employ limited partnership or VIE structures. The Company is required to adopt this amended guidance for interim and annual periods beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. A reporting entity may apply the amendments in this update using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

(5)
Restructuring and Productivity Initiatives

Phase 1: During the period from April 29, 2013 to December 29, 2013 (the "Transition Period") and the first nine months of 2014, the Company invested in restructuring and productivity initiatives as part of its ongoing cost reduction efforts with the goal of driving efficiencies and creating fiscal resources that will be reinvested into the Company's business as well as to accelerate overall productivity on a global scale. The number of employees impacted by these initiatives was approximately 4,050, all of whom had left the Company as of June 28, 2015, and comprised of corporate and field positions across the Company's global business segments. With respect to these restructuring and productivity initiatives, the Company incurred total charges of $289 million related to severance benefits and other severance-related expenses from inception through its conclusion in December 2014.
Footprint: In addition, the Company announced the planned closure and consolidation of 5 factories across the U.S., Canada and Europe during 2014.  The number of employees impacted by these 5 plant closures and consolidation was approximately 1,600, all of whom had left the Company as of June 28, 2015. With respect to these factory closures, the Company incurred charges of $91 million related to severance benefits and other severance-related expenses through its conclusion in March 2015. 
License Expiration: Furthermore, in the fourth quarter of 2014, the Company announced the planned closure of one additional factory in Europe in the first half of 2015 due to the expiration of a license to manufacture a non-core product. The number of employees impacted by this plant closure was approximately 200, all of whom had left the Company as of June 28, 2015. With respect to this factory closure, the Company incurred charges of approximately $11 million related to severance benefits and other severance-related expenses through its conclusion in June 2015. In addition, the Company recognized $37 million in non-cash

16

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



asset write-downs for impairment of long-lived assets to be disposed. In the six months ended June 28, 2015, the Company incurred $9 million in contract termination fees related to this factory closure.
Phase II: In the fourth quarter of 2014 and in the first quarter of 2015, the Company invested in restructuring and productivity initiatives as part of its ongoing cost reduction efforts with the goal of driving efficiencies and creating fiscal resources that will be reinvested into the Company's business as well as to accelerate overall productivity on a global scale. The number of employees impacted by these initiatives was approximately 1,050, all of whom had left the Company as of June 28, 2015, and comprised of corporate and field positions across the Company's global business segments. With respect to these restructuring and productivity initiatives, the Company recognized $30 million in non-cash asset write-downs in 2014 for impairment of long-lived assets to be disposed. The Company incurred total charges of approximately $68 million related to severance benefits and other severance-related expenses from project inception through its conclusion in March 2015.
In the second quarter of 2015, the Company announced the planned closure and consolidation of 2 factories across the U.S. during 2015 and the elimination of corporate and field positions across Asia/Pacific during 2015. The number of employees impacted by these initiatives was approximately 700, of which 400 had left the company as of June 28, 2015. With respect to these restructuring and productivity initiatives, the Company recognized $21 million in non-cash asset write-downs for impairment of assets to be disposed. The Company incurred charges of approximately $8 million related to severance benefits and other severance-related expenses from project inception through June 28, 2015.
Integration Program: Following the 2015 Merger, the Company approved an integration program (the “Integration Program”) designed to integrate and optimize the organization following the 2015 Merger. As a result, the Company expects to incur material charges due to exit and disposal activities.  As part of the Integration Program, the Company expects to, among other things, reduce its existing workforce and incur certain one-time severance and postretirement benefit costs.
The Company continues to evaluate actions and the costs of the Integration Program and therefore is currently unable to make a determination of an estimate of the total amount or range of amounts for each major type of cost expected to be incurred in connection with the Integration Program, or a range of amounts of the charges that will result in future cash expenditures.  The Company is also currently unable to determine the duration of the plan, but expects that the plan will be implemented over a multi-year period.
The Company recorded pre-tax costs related to these initiatives in the second quarter and six months ended June 28, 2015 and June 29, 2014, which were comprised of the following:
 
Second Quarter Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
Severance and employee benefit costs
$
8

 
$
30

Non-cash asset write-downs and accelerated depreciation
25

 
62

Other exit costs (a)
2

 
25

     Total productivity charges
$
35

 
$
117

 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
Severance and employee benefit costs
$
13

 
$
84

Non-cash asset write-downs and accelerated depreciation
27

 
135

Other exit costs (a)
12

 
38

     Total productivity charges
$
52

 
$
257

______________________________________
(a)
Other exit costs primarily represent professional fees, and contract and lease termination costs.

Of the $35 million total pre-tax charges for the three months ended June 28, 2015, $32 million was recorded in cost of products sold and $3 million in selling, general and administrative expenses ("SG&A"). Of the $117 million total pre-tax charges for the three months ended June 29, 2014, $107 million was recorded in cost of products sold and $10 million in SG&A.

Of the $52 million total pre-tax charges for the six months ended June 28, 2015, $48 million was recorded in cost of products sold and $4 million SG&A. Of the $257 million total pre-tax charges for the three months ended June 29, 2014, $225 million was recorded in cost of products sold and $32 million in SG&A.

17

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)




The Company does not include restructuring and productivity charges in the results of its reportable segments. The pre-tax impact of allocating such charges to segment results would have been as follows:
 
Second Quarter Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
North America
$
27

 
$
72

Europe
4

 
34

Asia/Pacific
4

 
8

Latin America

 

RIMEA

 
1

Non-Operating

 
2

     Total productivity charges
$
35

 
$
117


 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
North America
$
30

 
$
156

Europe
14

 
63

Asia/Pacific
7

 
18

Latin America
1

 

RIMEA

 
2

Non-Operating

 
18

     Total productivity charges
$
52

 
$
257


Activity in other accrued liability balances for restructuring and productivity charges incurred were as follows:
 
Severance and other severance related costs
Other exit costs (a)
Total
 
(In millions)
Accrual balance at December 28, 2014
$
53

$
26

$
79

2015 restructuring and productivity initiatives
13

12

25

Cash payments
(50
)
(13
)
(63
)
Accrual balance at June 28, 2015
$
16

$
25

$
41

______________________________________
(a)
Other exit costs primarily represent professional fees, and contract and lease termination costs.

The majority of the amount included in the accrual balance at June 28, 2015 is expected to be paid in 2015.

18

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)




(6)
Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the period from December 28, 2014 to June 28, 2015, by reportable segment, are as follows:
 
North America
 
Europe
 
Asia/Pacific
 
Latin America
 
RIMEA
 
Total
 
(In millions)
Balance at December 28, 2014
$
10,102

 
$
3,454

 
$
1,034

 
$
197

 
$
172

 
$
14,959

Translation adjustments
(77
)
 
(12
)
 
(95
)
 
(33
)
 
(12
)
 
(229
)
Other
(4
)
 
(94
)
 
9

 
(1
)
 
101

 
11

Balance at June 28, 2015
$
10,021

 
$
3,348

 
$
948

 
$
163

 
$
261

 
$
14,741


Subsequent to the 2013 Merger, the Company chose the second quarter for its annual goodwill and indefinite-lived intangible asset impairment testing. In relation to the goodwill impairment test, the Company bypassed the qualitative assessment and performed a quantitative assessment over each of its 16 reporting units. The fair values of each reporting unit exceeded their carrying values and as such no goodwill impairments were identified. As of the 2015 impairment testing date, the North America Consumer Products reporting unit was the only reporting unit which had fair value in excess of carrying value of less than 10%. Of the $14.7 billion total goodwill recorded as at June 28, 2015, this reporting unit had a goodwill carrying value of approximately $7.9 billion. If current expectations of future growth rates are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then this reporting unit might become impaired in the future and as such a partial write down of this goodwill could be necessary. There are no accumulated impairment losses to goodwill as of June 28, 2015.

In relation to the annual indefinite-lived intangible assets impairment test, the Company elected to utilize a quantitative approach and took a non-cash impairment charge of $58 million, which was recorded in cost of goods sold for the second quarter and six months ended June 28, 2015. The impairment was primarily related to category declines within frozen soup in the US, frozen meals and snacks primarily in the UK, and for pasta sauce in North America. The Company's annual impairment assessment in the second quarter of 2014 resulted in the Company recording a non-cash impairment charge of $62 million on its indefinite lived trademarks, which was recorded within cost of products sold during the period ended June 29, 2014. The impairment was primarily in its North American frozen meals and snacks business due to continued category softness driving lower than anticipated sales. If current expectations of future growth rates are not met or specific valuation factors outside of our control, such as discount rates, change significantly, then one or more trademarks might become impaired in the future.

The Company's indefinite-lived intangible assets are comprised of a large number of individual brands with an aggregate carrying value of $11.7 billion as of June 28, 2015. These brands were adjusted to their estimated fair value in connection with the 2013 Merger. Because the 2013 Merger occurred recently and the fact that the Company has a large number of individual brands across categories and geographies which are tested separately for impairment, and as evidenced by the Company's 2014 impairment charges, the Company continues to have risk of future impairment to the extent individual brand performance does not meet the Company's projections. As of the Company's most recent impairment test date, it had approximately 21 brands which had an estimated fair value exceeding carrying value by less than 10%. The aggregate carrying value of such brands at June 28, 2015 was approximately $2.4 billion.
Intangible assets not subject to amortization at June 28, 2015 totaled $11.7 billion and consisted of $11.3 billion of trademarks, $371 million of licenses, and $42 million of other intangibles. Intangible assets not subject to amortization at December 28, 2014 totaled $11.9 billion and consisted of $11.5 billion of trademarks, $371 million of licenses, and $45 million of other intangible assets. The decrease in intangible assets, not subject to amortization, since December 28, 2014, is due to foreign currency translation adjustments.


19

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



Other intangible assets at June 28, 2015 and December 28, 2014, subject to amortization, are as follows:
 
June 28, 2015
 
December 28, 2014
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
(In millions)
Customer-related assets
$
1,284

 
$
(129
)
 
$
1,155

 
$
1,315

 
$
(99
)
 
$
1,216

Licenses
119

 
(42
)
 
77

 
118

 
(31
)
 
87

Other
15

 
(3
)
 
12

 
15

 
(2
)
 
13

 
$
1,418

 
$
(174
)
 
$
1,244

 
$
1,448

 
$
(132
)
 
$
1,316

Amortization expense for customer-related and other intangible assets was $22 million and $44 million for the three and six months ended June 28, 2015, respectively, and was $23 million and $46 million for the three and six months ended June 29, 2014, respectively. The remaining reduction in net customer-related and other intangible assets from December 28, 2014 to June 28, 2015 is related to foreign currency translation adjustments. Based upon the amortizable intangible assets recorded on the balance sheet as of June 28, 2015, average annual amortization expense for each of the next five years is estimated to be approximately $79 million.

(7)
Income Taxes
The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates in an international environment with almost 70% of its sales outside the U.S.  Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, Italy, the Netherlands, the United Kingdom and the United States. The Company has substantially concluded all national income tax matters for years through Fiscal 2012 for the Netherlands and the United Kingdom, through Fiscal 2011 for the U.S., through Fiscal 2010 for Australia and Italy, and through Fiscal 2009 for Canada.
The effective tax rate for the six months ended June 28, 2015 was 21.8% compared to 20.3% in the prior year. The increase in the effective tax rate is primarily the result of the current period including higher repatriation costs, lower amounts of tax exempt income, and higher nondeductible costs related to the foreign exchange devaluation loss for Venezuela; partially offset by a lower blended statutory tax rate and the release of approximately $7 million of valuation allowance as the result of ongoing profitability in two foreign jurisdictions.
The total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $75 million and $71 million on June 28, 2015 and December 28, 2014, respectively. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $63 million and $58 million on June 28, 2015 and December 28, 2014, respectively. It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $28 million in the next 12 months primarily due to the progression of federal, state and foreign audits in process.
The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The total amounts of interest accrued at June 28, 2015 and December 28, 2014 were $13 million and $13 million, respectively. The corresponding amounts of accrued penalties at June 28, 2015 and December 28, 2014 were $7 million and $8 million, respectively.

(8)
Employees’ Stock Incentive Plans

In October 2013, the Board adopted the H.J. Heinz Holding Corporation 2013 Omnibus Incentive Plan (the “2013 Omnibus Plan”) which authorizes the issuance of up to 17,555,947 shares of the Company's capital stock. The Company grants non-qualified stock options under the 2013 Omnibus Plan to select employees and Directors with a five-year cliff vesting provided the employee is continuously employed by the Company or one of its subsidiaries or affiliates. If a participant is involuntarily terminated without cause, 20% of their options will vest, on an accelerated basis, for each full year of service after the grant date.

In 2015 and 2014, options were also issued in conjunction with a Bonus Swap Program whereby participants could elect to use a portion of their calculated non-equity incentive compensation (after all required taxes and deductions) to purchase shares of Common Stock in the Company. Participants who elected to purchase such shares were granted matching stock options.


20

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



The compensation cost related to equity plans and the related tax benefit is primarily recognized in SG&A as follows:
 
Second Quarter Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
Pre-tax compensation cost
$
3

 
$
2

Tax benefit
1

 
1

After-tax compensation cost
$
2

 
$
1

 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
(In millions)
Pre-tax compensation cost
$
5

 
$
4

Tax benefit
2

 
1

After-tax compensation cost
$
3

 
$
3


Unrecognized compensation cost related to unvested option awards under the 2013 Omnibus Plan was $43 million as of June 28, 2015 and $38 million as of June 29, 2014.
A summary of the Company’s stock option activity and related information is as follows:
 
Number of Options
 
(In millions)
Options outstanding at December 28, 2014
8

Options granted
2

Options forfeited

Options exercised

Options outstanding at June 28, 2015
10


(9)
Pensions and Other Post-Retirement Benefits
The Company's employees participate in various employee benefit plans that were in place prior to the 2013 Merger.
The components of net periodic benefit (income)/expense are as follows:
 
Second Quarter Ended
 
June 28, 2015
 
June 29, 2014
 
June 28, 2015
 
June 29, 2014
 
Pension Benefits
 
Other Retiree Benefits
 
(In millions)
Service cost
$
7

 
$
8

 
$
1

 
$
1

Interest cost
26

 
35

 
2

 
2

Expected return on plan assets
(45
)
 
(55
)
 

 

Amortization of prior service credit

 

 
(2
)
 
(2
)
Amortization of unrecognized loss
1

 

 

 

Net settlement losses
9

 

 

 

Net periodic benefit (income)/expense
$
(2
)
 
$
(12
)
 
$
1

 
$
1


21

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
June 28, 2015
 
June 29, 2014
 
Pension Benefits
 
Other Retiree Benefits
 
(In millions)
Service cost
$
13

 
$
15

 
$
2

 
$
2

Interest cost
52

 
70

 
4

 
4

Expected return on plan assets
(93
)
 
(111
)
 

 

Amortization of prior service credit

 

 
(3
)
 
(3
)
Amortization of unrecognized loss
2

 

 

 

Net settlement losses
9

 

 

 

Net periodic benefit (income)/expense
$
(17
)
 
$
(26
)
 
$
3

 
$
3


During the second quarter of 2015, the Company realized a curtailment gain of $2 million on the United Kingdom defined benefit plans. As a result of the associated remeasurement, the Company deferred to accumulated other comprehensive income an increase in the projected benefit obligation of $15 million, net of tax.
During the second quarter of 2015, the Company realized a settlement loss of $11 million on a Canadian defined benefit plan. As a result of the associated remeasurement, the Company deferred to accumulated other comprehensive income an increase in the projected benefit obligation of $4 million, net of tax.

The amounts recognized for pension benefits as other non-current assets on the Company's condensed consolidated balance sheets were $617 million as of June 28, 2015 and $581 million as of December 28, 2014.

During the first six months of 2015, the Company contributed $33 million to these defined benefit plans. The Company expects to make cash contributions of approximately $60 million for the year ended January 3, 2016.  However, actual contributions may be affected by pension asset and liability valuations during the year.

(10)
Comprehensive Income/(Loss)
The following tables summarize the allocation of total comprehensive income between The Kraft Heinz Company and the noncontrolling interest for the three and six months ended June 28, 2015 and June 29, 2014, respectively:
 
Second Quarter Ended
 
June 28, 2015
 
June 29, 2014
 
The Kraft Heinz Company
 
Noncontrolling
Interest
 
Total
 
The Kraft Heinz Company
 
Noncontrolling
Interest
 
Total
 
(In millions)
Net (loss)/income
$
(164
)
 
$
4

 
$
(160
)
 
$
127

 
$
8

 
$
135

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
360

 
1

 
361

 
186

 
(5
)
 
181

Net deferred losses on net investment hedges
(206
)
 

 
(206
)
 
(44
)
 

 
(44
)
Net pension and post-retirement benefit losses
(18
)
 

 
(18
)
 
(28
)
 

 
(28
)
Reclassification of net pension and post-retirement benefit losses/(gains) to net income
8

 

 
8

 
(1
)
 

 
(1
)
Net deferred losses on cash flow hedges from periodic revaluations
(10
)
 

 
(10
)
 
(100
)
 

 
(100
)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings
137

 

 
137

 
(1
)
 

 
(1
)
Total comprehensive income
107

 
5

 
112

 
139

 
3

 
142


22

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
The Kraft Heinz Company
 
Noncontrolling
Interest
 
Total
 
The Kraft Heinz Company
 
Noncontrolling
Interest
 
Total
 
(In millions)
Net income
$
112

 
$
7

 
$
119

 
$
322

 
$
11

 
$
333

Other comprehensive (loss)/income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(420
)
 
(13
)
 
(433
)
 
292

 
3

 
295

Net deferred gains/(losses) on net investment hedges
226

 

 
226

 
(160
)
 

 
(160
)
Net pension and post-retirement benefit losses
(19
)
 

 
(19
)
 
(28
)
 

 
(28
)
Reclassification of net pension and post-retirement benefit losses/(gains) to net income
7

 

 
7

 
(2
)
 

 
(2
)
Net deferred losses on cash flow hedges from periodic revaluations
(77
)
 

 
(77
)
 
(159
)
 

 
(159
)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings
138

 

 
138

 
(4
)
 

 
(4
)
Total comprehensive (loss)/income
(33
)
 
(6
)
 
(39
)
 
261

 
14

 
275

The tax (expense)/benefit associated with each component of other comprehensive income/(loss) is as follows:
 
Second Quarter Ended
 
The Kraft Heinz Company
 
Noncontrolling
Interest
 
Total
 
(In millions)
June 29, 2014
 
 
 
 
 
Net deferred gains/(losses) on net investment hedges
$
27

 
$

 
$
27

Net pension and post-retirement benefit gains/(losses)
$
7

 
$

 
$
7

Reclassification of net pension and post-retirement benefit (gains)/losses to net income
$
(1
)
 
$

 
$
(1
)
Net deferred gains/(losses) on cash flow hedges from periodic revaluations
$
48

 
$

 
$
48

Net deferred (gains)/losses on cash flow hedges reclassified to earnings
$
(2
)
 
$

 
$
(2
)
 
 
 
 
 
 
June 28, 2015
 

 
 

 
 

Net deferred gains/(losses) on net investment hedges
$
124

 
$

 
$
124

Net pension and post-retirement benefit gains/(losses)
$
5

 
$

 
$
5

Reclassification of net pension and post-retirement benefit losses/(gains) to net income
$
2

 
$

 
$
2

Net deferred (losses)/gains on cash flow hedges from periodic revaluations
$
(2
)
 
$

 
$
(2
)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings
$
86

 
$

 
$
86


23

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



 
Six Months Ended
 
The Kraft Heinz Company
 
Noncontrolling
Interest
 
Total
 
(In millions)
June 29, 2014
 
 
 
 
 
Net deferred gains/(losses) on net investment hedges
$
99

 
$

 
$
99

Net pension and post-retirement benefit gains/(losses)
$
7

 
$

 
$
7

Reclassification of net pension and post-retirement benefit (gains)/losses to net income
$
(1
)
 
$

 
$
(1
)
Net deferred gains/(losses) on cash flow hedges from periodic revaluations
$
79

 
$

 
$
79

Net deferred (gains)/losses on cash flow hedges reclassified to earnings
$
(5
)
 
$

 
$
(5
)
 
 
 
 
 
 
June 28, 2015
 
 
 
 
 
Net deferred (losses)/gains on net investment hedges
$
(195
)
 
$

 
$
(195
)
Net pension and post-retirement benefit gains/(losses)
$
6

 
$

 
$
6

Reclassification of net pension and post-retirement benefit losses/(gains) to net income
$
3

 
$

 
$
3

Net deferred gains/(losses) on cash flow hedges from periodic revaluations
$
43

 
$

 
$
43

Net deferred losses/(gains) on cash flow hedges reclassified to earnings
$
84

 
$

 
$
84

The following table provides a summary of the changes in the carrying amount of accumulated other comprehensive (loss)/income, net of tax, by component attributable to The Kraft Heinz Company:

Foreign currency translation adjustments

Net pension and post retirement benefit

Net cash flow hedges

Total

(In millions)
Balance as of December 28, 2014
(574
)
 
61

 
(61
)
 
(574
)
Foreign currency translation adjustments
(420
)
 

 

 
(420
)
Net deferred gains/(losses) on net investment hedges
226

 

 

 
226

Net pension and post-retirement benefit (losses)/gains

 
(19
)
 

 
(19
)
Reclassification of net pension and post-retirement benefit losses(gains) to earnings

 
7

 

 
7

Net deferred (losses)/gains on cash flow hedges from periodic revaluations

 

 
(77
)
 
(77
)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings

 

 
138

 
138

Net current-period other comprehensive (loss)/income
(194
)
 
(12
)
 
61

 
(145
)
Balance as of June 28, 2015
$
(768
)
 
$
49

 
$

 
$
(719
)

24

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)



The following tables present the affected earnings line for reclassifications out of accumulated other comprehensive income/(loss), net of tax, by component attributable to The Kraft Heinz Company for the three and six months ended June 28, 2015 and June 29, 2014, respectively:
Accumulated other comprehensive (loss)/income component

 Reclassified from accumulated other comprehensive (loss)/income to earnings

Line affected by reclassification
 
 
Three Months Ended June 28, 2015
 
Three Months Ended
June 29, 2014
 
 
 
 
(In millions)
 
 
(Losses)/gains on cash flow hedges:


 
 


     Foreign exchange contracts
 
$
(1
)
 
$
(1
)

Sales
     Foreign exchange contracts
 
11

 
4


Cost of products sold
     Interest rate swap contracts
 
(233
)
 


Interest expense
 
 
(223
)
 
3


(Losses)/gains in income before income taxes
 
 
86

 
(2
)

Benefit from/(provision for) income taxes
 
 
$
(137
)
 
$
1


(Losses)/gains in net (loss)/income
(Losses)/gains on pension and post retirement benefit:
 
 
 
 


     Amortization of unrecognized (losses)/gains
 
$
(1
)
 
$


(a)
     Prior service (cost)/credit
 
2

 
2


(a)
     Settlement loss
 
(11
)
 


(a)
 
 
(10
)
 
2


(Losses)/gains in income before income taxes
 
 
2

 
(1
)

Benefit from/(provision for) income taxes
 
 
$
(8
)
 
$
1


(Losses)/gains in net (loss)/income

Accumulated other comprehensive (loss)/income component
 
 Reclassified from accumulated other comprehensive (loss)/income to earnings
 
Line affected by reclassification
 
 
Six Months Ended June 28, 2015
 
Six Months Ended June 29, 2014
 
 
 
 
(In millions)
 
 
(Losses)/gains on cash flow hedges:
 
 
 
 
 
 
     Foreign exchange contracts
 
$
(2
)
 
$
(1
)
 
Sales
     Foreign exchange contracts
 
16

 
9

 
Cost of products sold
     Foreign exchange contracts
 
1

 
1

 
Other expense, net
     Interest rate swap contracts
 
(237
)
 

 
Interest expense
 
 
(222
)
 
9

 
(Losses)/gains in income before income taxes
 
 
84

 
(5
)
 
Benefit from/(provision for) income taxes
 
 
$
(138
)
 
$
4

 
(Losses)/gains in net income
(Losses)/gains on pension and post retirement benefit:
 
 
 
 
 
 
     Amortization of unrecognized (losses)/gains
 
$
(2
)
 
$

 
(a)
     Prior service credit/(cost)
 
3

 
3

 
(a)
     Settlement loss
 
(11
)
 

 
(a)
 
 
(10
)
 
3

 
(Losses)/gains in income before income taxes
 
 
3

 
(1
)
 
Benefit from/(provision for) income taxes
 
 
$
(7
)
 
$
2

 
(Losses)/gains in net income
______________________________________
(a)
As these components are included in the computation of net periodic pension and post retirement benefit costs refer to Note 9 for further details.

25

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)





(11)
Changes in Equity
As a result of the 2015 Merger, each share of H.J. Heinz Holding Corporation's issued and outstanding common stock was reclassified and changed into 0.443332 of a share of Kraft Heinz common stock.
The following table provides a summary of the changes in the carrying amounts of total equity, The Kraft Heinz Company shareholders' equity and equity attributable to the noncontrolling interest:
 
Common Stock
 
Warrants
 
Additional Capital
 
Retained Earnings
 
Accumulated
OCI
 
Noncontrolling
Interest
 
Total
 
(In millions)
Balance as of December 28, 2014
$
4

 
$
367

 
$
7,320

 
$

 
$
(574
)
 
$
219

 
$
7,336

Comprehensive income/(loss) (a)

 

 

 
112

 
(145
)
 
(4
)
 
(37
)
Dividends paid to shareholder

 

 
(254
)
 
(106
)
 

 

 
(360
)
Capital contribution (b)

 

 
15

 

 

 

 
15

Stock option expense

 

 
6

 

 

 

 
6

Exercise of warrants (c)

 
(367
)
 
367

 

 

 

 

Other (d)

 

 

 
(6
)
 

 

 
(6
)
Balance at June 28, 2015
$
4

 
$

 
$
7,454

 
$

 
$
(719
)
 
$
215

 
$
6,954

______________________________________
(a)
The allocation of the individual components of comprehensive income/(loss) attributable to The Kraft Heinz Company and the noncontrolling interest is disclosed in Note 10. Comprehensive loss attributable to the redeemable noncontrolling interest is $2 million for the six months ended June 28, 2015.
(b)
This balance represents the purchase of shares by employees primarily through the Bonus Swap Program. See Note 8.
(c)
In June 2015, Berkshire Hathaway exercised a warrant to purchase an additional 46 million of H.J. Heinz Holding Corporation common shares at an exercise price of $0.01 per common share, which were subsequently reclassified and changed into approximately 20 million shares of Kraft Heinz common stock (see Notes 1 and 13).
(d)
In June 2015, there was a $6 million adjustment to the maximum redemption value of the redeemable noncontrolling interest.

26

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)




(12)
Debt
The Company's long-term debt consisted of the following:
 
June 28, 2015
 
December 28, 2014
 
(Unaudited)
 
(In millions)
Term B-1 Loan
$
2,123

 
$
2,769

Term B-2 Loan
4,283

 
5,588

$3.10 billion 4.25% Second Lien Senior Secured Notes due 2020
3,100

 
3,100

$2.00 billion 4.875% Second Lien Senior Secured Notes due 2025
2,000

 

Other U.S. Dollar Debt due May 2013 — November 2034 (0.94%—7.96%)
10

 
10

Other Non-U.S. Dollar Debt due May 2013 — May 2023 (3.50%—11.00%)
46

 
53

2.00% U.S. Dollar Notes due September 2016
58

 
58

1.50% U.S. Dollar Notes due March 2017
18

 
18

3.125% U.S. Dollar Notes due September 2021
34

 
34

2.85% U.S. Dollar Notes due March 2022
6

 
6

$235 million 6.375% U.S. Dollar Debentures due July 2028
256

 
257

£125 million 6.25% British Pound Notes due February 2030
207

 
206

$437 million 6.75% U.S. Dollar Notes due March 2032
474

 
475

$931 million 7.125% U.S. Dollar Notes due August 2039
1,021

 
1,023

 
13,636

 
13,597

Less portion due within one year
(10
)
 
(11
)
Total long-term debt
$
13,626

 
$
13,586

Weighted-average interest rate on long-term debt, including the impact of applicable interest rate swaps
4.21
%
 
4.02
%
Senior Credit Facilities

The Senior Credit Facilities are with a syndicate of banks and other financial institutions and provide financing of up to $9.5 billion and consist of (i)(a) term B-1 loans in an aggregate principal amount of $2.95 billion (the “B-1 Loans”) and (b) term B-2 loans in aggregate principal amount of $6.55 billion (the “B-2 Loans”) in each case under the senior secured term loan facilities (the “Term Loan Facilities”) and (ii) revolving loans of up to $2.0 billion (including revolving loans, swingline loans and letters of credit), a portion of which may be denominated in Euro, Sterling, Australian Dollars, Japanese Yen or New Zealand Dollars, under the new senior secured revolving loan facilities (the “Revolving Credit Facilities” and, together with the Term Loan Facilities, the "Senior Credit Facilities").

The borrower under the Senior Credit Facilities is H. J. Heinz Company, a wholly owned subsidiary of Kraft Heinz. The obligations of H. J. Heinz Company under the Senior Credit Facilities are guaranteed by H.J. Heinz Holding Corporation ("Holdings") and each direct and indirect, existing and future, domestic material wholly-owned restricted subsidiary of Kraft Heinz. The Senior Credit Facilities and any swap agreements and cash management arrangements provided by any party to the Senior Credit Facilities or any of its affiliates are expected to be secured on a first priority basis by a perfected security interest in substantially all of the Company's and each guarantor's tangible and intangible assets (subject to certain exceptions), including U.S. registered intellectual property, owned real property above a value to be agreed and all of the capital stock of the borrower and all capital stock directly held by the borrower or any subsidiary guarantor of each of its wholly-owned material restricted subsidiaries (limited to 65% of the capital stock of foreign subsidiaries).

The Senior Credit Facilities contain a number of customary affirmative and negative covenants that, among other things, limits or restricts the ability of the Company and its restricted subsidiaries to incur additional indebtedness (including guarantee obligations); incur liens; engage in mergers, consolidations, liquidations and dissolutions (other than the 2013 Merger); sell assets; pay dividends and make other payments in respect of capital stock; make acquisitions, investments, loans and advances; pay and modify the terms of certain indebtedness; engage in certain transactions with affiliates; enter into negative pledge clauses and clauses restricting subsidiary distributions; and change its line of business.

27

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)




In addition, under the Senior Credit Facilities, the Company is required to comply with a specified first lien senior secured leverage ratio to the extent any loans are outstanding under the New Revolving Credit Facility or Letters of Credit issued and outstanding thereunder exceed $50 million as of the end of any fiscal quarter. The Senior Credit Facilities also contain certain customary representations and warranties, affirmative covenants and events of default. As of June 28, 2015, the Company is in compliance with these credit facility covenants.

4.25% Second Lien Senior Secured Notes

On April 1, 2013, in connection with the 2013 Merger, Merger Subsidiary completed the private placement of $3.1 billion aggregate principal amount of 4.25% Second Lien Senior Secured Notes due 2020 (the “2020 Notes”) to initial purchasers for resale by the Initial Purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act 1933, as amended ("Securities Act") and to persons outside the United States under Regulation S of the Securities Act. The 2020 Notes were issued pursuant to an indenture (the “Indenture”), dated as of April 1, 2013, by and among Hawk Acquisition Sub, Inc., Holdings and Wells Fargo Bank, National Association, as trustee (in such capacity, the “Trustee”) and as collateral agent (in such capacity, the “Collateral Agent”).

The 2020 Notes are jointly and severally, unconditionally guaranteed on a senior secured basis, by Holdings and each direct and indirect, existing and future, domestic material wholly-owned restricted subsidiary that guarantee our obligations under the Senior Credit Facilities.

The Indenture (as supplemented by the Supplemental Indenture) limits the ability of the Company and its restricted subsidiaries to incur additional indebtedness or guarantee indebtedness; create liens or use assets as security in other transactions; declare or pay dividends, redeem stock or make other distributions to stockholders; make investments; merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; enter into transactions with affiliates; sell or transfer certain assets; and agree to certain restrictions on the ability of restricted subsidiaries to make payments to us. We were in compliance with these covenants as of June 28, 2015.

4.875% Second Lien Senior Secured Notes

On January 30, 2015, H. J. Heinz Company completed the private placement of $2.0 billion aggregate principal amount of 4.875% Second Lien Senior Secured Notes due 2025 (the “2025 Notes”) to initial purchasers for resale by the Initial Purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to persons outside the United States under Regulation S of the Securities Act. The 2025 Notes were issued pursuant to an indenture (the “Indenture”), dated as of January 30, 2015, by and among H. J. Heinz Company and MUFG Union Bank, N.A., as trustee (in such capacity, the “Trustee”) and Wells Fargo Bank, National Association, as collateral agent (in such capacity, the “Collateral Agent”). The 2025 Notes are jointly and severally, unconditionally guaranteed on a senior secured basis, by Holdings and each direct and indirect, existing and future, domestic material wholly-owned restricted subsidiary that guarantee our obligations under the Senior Credit Facilities.  The 2025 Notes are issued under Rule 144A for life and will not be registered. 

The Indenture (as supplemented by the Supplemental Indenture) limits the ability of the Company and its restricted subsidiaries to incur additional indebtedness or guarantee indebtedness; create liens or use assets as security in other transactions; declare or pay dividends, redeem stock or make other distributions to stockholders; make investments; merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; enter into transactions with affiliates; sell or transfer certain assets; and agree to certain restricti