10-K



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

FORM 10-K
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 2016
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common stock, $0.01 par value
 
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
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer o
Accelerated filer o
 
Non-accelerated filer x 
(Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of June 26, 2015, the last business day of the registrant's most recently completed second quarter, the registrant's common stock was not publicly traded.
As of February 28, 2016, there were 1,215,189,526 shares of the registrant's common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its annual meeting of shareholders expected to be held on April 21, 2016 are incorporated by reference into Part III hereof.






The Kraft Heinz Company
Table of Contents

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






Forward-Looking Statements
This Annual Report on Form 10-K contains a number of forward-looking statements. Words such as “expect,” “improve,” “reassess,” “remain,” “will,” and variations of such words and similar expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding the 2015 Merger (as defined below), taxes, integration, dividends and plans. 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 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, increased competition; our ability to maintain, extend and expand our reputation and brand image; our ability to differentiate our products from other brands; the consolidation of retail customers; our ability to predict, identify and interpret changes in consumer preferences and demand; our ability to drive revenue growth in our key product categories, increase our market share, or add products; an impairment of the carrying value of goodwill or other indefinite-lived intangible assets; volatility in commodity, energy and other input costs; changes in our management team or other key personnel; our inability to realize the anticipated benefits from our cost savings initiatives; changes in relationships with significant customers and suppliers; execution of our international expansion strategy; changes in laws and regulations; legal claims or other regulatory enforcement actions; product recalls or product liability claims; unanticipated business disruptions; failure to successfully integrate Kraft Heinz; our ability to complete or realize the benefits from potential and completed acquisitions, alliances, divestitures or joint ventures; economic and political conditions in the nations in which we operate; the volatility of capital markets; increased pension, labor and people-related expenses; volatility in the market value of all or a portion of the derivatives we use; exchange rate fluctuations; disruptions in information technology networks and systems; our inability to protect intellectual property rights; impacts of natural events in the locations in which we or our customers, suppliers or regulators operate; our indebtedness and ability to pay such indebtedness; our dividend payments on our Series A Preferred Stock; tax law changes or interpretations; and other factors. For additional information on these and other factors that could affect our forward-looking statements, see “Risk Factors” below in this Annual Report on Form 10-K. 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.

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PART I 
Item 1. Business.
General
Kraft Heinz is one of the largest food and beverage companies in the world, with sales in more than 190 countries and territories. 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, under a host of iconic brands including HeinzKraftOscar Mayer, Planters, PhiladelphiaVelveeta, Lunchables, Maxwell House, Capri Sun, and Ore-Ida. A globally recognized producer of delicious foods, we provide products for all occasions whether at home, in restaurants or on the go. As of January 3, 2016, we had assets of $123 billion. Our common stock is listed on The NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “KHC”.
On July 2, 2015 (the “2015 Merger Date”), through a series of transactions, we consummated the merger of Kraft Foods Group, Inc. (“Kraft”) with and into a wholly-owned subsidiary of H.J. Heinz Holding Corporation (“Heinz”) (the “2015 Merger”). At the closing of the 2015 Merger, Heinz was renamed The Kraft Heinz Company and H. J. Heinz Company changed its name to Kraft Heinz Foods Company. While Kraft Heinz was organized as a Delaware corporation in 2013 (as Heinz), both Kraft and Heinz have been pioneers in the food industry for over 100 years.
Before the consummation of the 2015 Merger, primarily all of the common stock of Heinz was owned by Berkshire Hathaway Inc. (“Berkshire Hathaway”) and 3G Global Food Holdings LP (together with its affiliates, “3G Capital,” and together with Berkshire Hathaway, the “Sponsors”) following their acquisition of H. J. Heinz Company (the “2013 Merger”) on June 7, 2013 (the “2013 Merger Date”). Immediately prior to the consummation of the 2015 Merger, each share of Heinz issued and outstanding common stock was reclassified and changed into 0.443332 of a share of Kraft Heinz common stock. All share and per share amounts in this Annual Report on Form 10-K, including the consolidated financial statements and related notes have been retroactively adjusted for all historical Successor periods presented to give effect to this conversion, including reclassifying an amount equal to the change in value of common stock to additional paid-in capital. In the 2015 Merger, all outstanding shares of Kraft common stock were converted into the right to receive, on a one-for-one basis, shares of Kraft Heinz common stock. Deferred shares and restricted shares of Kraft were converted to deferred shares and restricted shares of Kraft Heinz, as applicable. In addition, upon the completion of the 2015 Merger, the Kraft shareholders of record immediately prior to the closing of the 2015 Merger received a special cash dividend of $16.50 per share. As a result of the 2015 Merger, our common stock began trading publicly on NASDAQ on July 6, 2015.
On June 7, 2013, H. J. Heinz Company was acquired by Heinz (formerly known as Hawk Acquisition Holding Corporation), a Delaware corporation controlled by the Sponsors, pursuant to the Agreement and Plan of Merger, dated February 13, 2013 (the “2013 Merger Agreement”), as amended by the Amendment to Agreement and Plan of Merger, dated March 4, 2013 (the “Amendment”), by and among H. J. Heinz Company, Heinz, and Hawk Acquisition Sub, Inc. (“Hawk”).
See Note 1, Background and Basis of Presentation, and Note 2, Merger and Acquisition, to the consolidated financial statements for further information on the 2015 Merger and the 2013 Merger.
Periods Presented
The 2013 Merger established a new accounting basis for Heinz. Accordingly, the consolidated financial statements present both Predecessor and Successor periods, which relate to the accounting periods preceding and succeeding the completion of the 2013 Merger. The Predecessor and Successor periods are separated by a vertical line on the face of the consolidated financial statements to highlight the fact that the financial information for such periods has been prepared under two different historical-cost bases of accounting.
Additionally, on October 21, 2013, our Board of Directors approved a change in our fiscal year-end from the Sunday closest to April 30 to the Sunday closest to December 31. In 2013, as a result of the change in fiscal year-end, the 2013 Merger, and the creation of Hawk, there are three 2013 reporting periods as described below.
The “Successor (Heinz, renamed to The Kraft Heinz Company at the closing of the 2015 Merger) Period” includes:
The consolidated financial statements for the year ended January 3, 2016 (a 53 week period, including a full year of Heinz results and post-2015 Merger results of Kraft);
The consolidated financial statements for the year ended December 28, 2014 (a 52 week period, including a full year of Heinz results); and
The period from February 8, 2013 through December 29, 2013 (the “2013 Successor Period”), reflecting:

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The creation of Hawk on February 8, 2013 and the activity from February 8, 2013 to June 7, 2013, which related primarily to the issuance of debt and recognition of associated issuance costs and interest expense; and
All activity subsequent to the 2013 Merger. Therefore, the 2013 Successor Period includes 29 weeks of operating activity (June 8, 2013 to December 29, 2013). We indicate on our financial statements the weeks of operating activities in this period.
The “Predecessor (H. J. Heinz Company) Period” includes, but is not limited to:
The consolidated financial statements of H. J. Heinz Company prior to the 2013 Merger on June 7, 2013, which includes the period from April 29, 2013 through June 7, 2013 (the “2013 Predecessor Period”); this represents six weeks of activity from April 29, 2013 through the 2013 Merger; and
The consolidated financial statements of H. J. Heinz Company for the fiscal year from April 30, 2012 to April 28, 2013 (“Fiscal 2013”).
Reportable Segments
Following the 2015 Merger, we revised our segment structure and began to manage and report our operating results through four segments. We have three reportable segments defined by geographic region: United States, Canada, and Europe. Our remaining businesses are combined and disclosed as “Rest of World.” Rest of World is comprised of three operating segments: Asia Pacific, Latin America, and Russia, India, the Middle East and Africa (“RIMEA”). We began to report on our reorganized segment structure during the third quarter of 2015 and have reflected this structure for all historical periods presented.
See Note 20, Segment Reporting, to the consolidated financial statements for financial information by segment.
Net Sales by Product Category
Product categories that contributed 10% or more to consolidated net sales for the years ended January 3, 2016 and December 28, 2014, the 2013 Successor Period, the 2013 Predecessor Period, and Fiscal 2013 were:
 
Successor
 
Predecessor
(H. J. Heinz Company)
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
April 29 - June 7,
2013
(6 weeks)
 
April 28,
2013
(52 weeks)
Condiments and sauces
32
%
 
50
%
 
49
%
 
48
%
 
47
%
Cheese and dairy
15
%
 
%
 
%
 
%
 
%
Ambient meals
10
%
 
14
%
 
14
%
 
13
%
 
14
%
Frozen and chilled meals
12
%
 
18
%
 
19
%
 
18
%
 
20
%
Infant/nutrition
5
%
 
10
%
 
10
%
 
11
%
 
10
%
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. For the year ended January 3, 2016 Wal-Mart Stores Inc., our largest customer, represented approximately 20% of our net sales. For the year ended December 28, 2014, the 2013 Successor Period, the 2013 Predecessor Period, and Fiscal 2013 Wal-Mart Stores Inc., represented approximately 10% of our net sales. Additionally, we have significant customers in different regions around the world; however, none of these customers individually are material to our consolidated business. For the year ended January 3, 2016, the five largest customers in our United States segment accounted for approximately 45% of United States segment sales, the five largest customers in our Canada segment accounted for approximately 75% of Canada segment sales, and the five largest customers in our Europe segment accounted for approximately 35% of our Europe segment sales.
Raw Materials and Packaging
We manufacture (and contract for the manufacture of) our products from a wide variety of raw food 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, wheat and other goods to manufacture our products. In addition, we purchase and use significant quantities of resins 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

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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/or 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, alternative energy, and agricultural programs.
The most significant cost components of our cheese products are dairy commodities, including milk and cheese. 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 in our meat business 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 world 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 world markets, where global market supply and demand is the primary driver of price. 
Our risk management group works with our procurement teams to 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. Our risk management group uses 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 any changes to commodity costs so that we can seek to mitigate the effect through pricing and other operational measures.
Competition
We face competition in all aspects of our business. Competitors include large national and international food and beverage companies and numerous local and regional companies. We compete with both branded and generic products, in addition to retailer brands, wholesalers, and cooperatives. We compete primarily 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 a new product requires substantial advertising and promotional expenditures.
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. Some of our significant trademarks by segment include:
 
 
Majority Owned and Licensed Trademarks
United States
 
Kraft, Oscar Mayer, Heinz, Planters, Velveeta, Philadelphia, Lunchables, Maxwell House, Capri Sun, Ore-Ida, Kool-Aid, Jell-O
Canada
 
Kraft, Heinz, Cracker Barrel, Philadelphia, Tassimo, Maxwell House
Europe
 
Heinz, Plasmon, Lea & Perrins
Rest of World
 
Heinz, ABC, Master, Quero, Golden Circle, Wattie's, Complan
Additionally, we 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 basic 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.

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We sell some products under brands we license from third parties, including Capri Sun packaged drink pouches for sale in the United States, T.G.I. Friday’s 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, Taco Bell Home Originals Mexican-style food products in U.S. grocery stores and Weight Watchers Smart Ones frozen entrees, snacks and desserts in the United States and Canada. In our agreements with Mondelēz International, Inc. (“Mondelēz International,” formerly known as Kraft Foods Inc.), we each granted the other party various licenses to use certain of our and their respective intellectual property rights in named jurisdictions for an agreed period of time following the spin-off of Kraft from Mondelēz International in 2012.
Research and Development
Our research and development focuses on achieving the following four objectives:
growth through product improvements and renovations, new products, and line extensions,
uncompromising product safety and quality,
superior customer satisfaction, and
cost reduction.
Research and development expense was $105 million in the year ended January 3, 2016, $58 million in the year ended December 28, 2014, $53 million in the 2013 Successor Period, $10 million in the 2013 Predecessor Period, and $93 million in Fiscal 2013.
Seasonality
Although crops constituting some of our raw food ingredients are harvested on a seasonal basis, most 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. These factors influence our quarterly sales, operating income and cash flows. Therefore, it is most meaningful to compare quarterly results to the same quarters of prior years.
Employees
We had approximately 42,000 employees as of January 3, 2016.
Regulation
Our business operations, including the production, storage, distribution, sale, display, advertising, marketing, labeling, quality and safety of our products, occupational safety and health practices, transportation and use of many of our products, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as laws and regulations administered by government entities and agencies outside the United States in markets in which our products are manufactured, distributed or sold.
We are required to comply with a variety of U.S. and Canadian laws and regulations, including but not limited to: the Federal Food, Drug and Cosmetic Act and various state laws governing food safety; the Food Safety Modernization Act; the Safe Food for Canadians Act; the Occupational Safety and Health Act; various federal and state laws and regulations governing competition and trade practices; various federal and state laws and regulations governing our employment practices, including those related to equal employment opportunity, such as the Equal Employment Opportunity Act and the National Labor Relations Act; customs and foreign trade laws and regulations; and laws regulating the sale of certain of our products in schools. We are also subject to numerous similar and other laws and regulations outside of North America, 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, the U.K. Bribery Act and the Trade Sanctions Reform and Export Enhancement Act. 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.
Environmental Regulation
Our activities throughout the world are highly regulated and subject to government oversight. 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.

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We are involved in a number of active proceedings in the United States under CERCLA (and other similar state actions and legislation) related to our current operations and certain closed, inactive, or divested operations for which we retain liability. We do not currently expect these to have a material effect on our earnings or financial condition.
As of January 3, 2016, 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.
Foreign Operations
For the year ended January 3, 2016, we generated a significant amount of our net sales from operations outside of the United States, and sell our products in more than 190 countries and territories. For additional information about our foreign operations, see Note 20, Segment Reporting, to the consolidated financial statements. Refer to Item 2, Properties, for more information on our manufacturing and other facilities. Also, for a discussion of risks related to our operations outside the United States, including currency risk, see Risk Factors in Item 1A.
Executive Officers of the Registrant
The following are our executive officers as of February 22, 2016:
Name
 
Age
 
Title
Bernardo Hees
 
46
 
Chief Executive Officer
Paulo Basilio
 
41
 
Executive Vice President and Chief Financial Officer
Matt Hill
 
45
 
Zone President of Europe
Emin Mammadov
 
39
 
Zone President of Russia, India and Middle East, Turkey & Africa
Eduardo Pelleissone
 
42
 
Executive Vice President of Global Operations
Carlos Piani
 
42
 
Zone President of Canada
Marcos Romaneiro
 
32
 
Zone President of Asia Pacific
Francisco Sa
 
50
 
Zone President of Latin America
James Savina
 
42
 
Senior Vice President, Global General Counsel and Corporate Secretary
George Zoghbi
 
49
 
Chief Operating Officer of U.S. Commercial business
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 since July 2010.
Paulo Basilio became Executive Vice President and Chief Financial Officer upon the closing of the 2015 Merger. 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 been a partner of 3G Capital since July 2012.
Matt Hill assumed his current role upon the closing of the 2015 Merger and had previously held the same role at Heinz since June 2013. Prior to his appointment, Mr. Hill was President of Heinz UK & Ireland since April 2012. Mr. Hill joined Heinz in 2010 as Chief Marketing Officer for the UK & Ireland and was subsequently appointed Chief Commercial Officer managing Sales and Marketing. Prior to joining Heinz, Mr. Hill spent 17 years at Unilever, a consumer goods company, in a variety of UK, European and Global marketing and leadership roles.
Emin Mammadov assumed his current role upon the closing of the 2015 Merger and had previously held the same role at Heinz since June 2013. Previously, Mr. Mammadov was President, Africa & Middle East from March 2013 to June 2013 and Managing Director of Heinz China Sauces from 2010 to March 2013. He also served as Marketing Director and then Commercial Director of Heinz Russia from 2006 to 2010.
Eduardo Pelleissone assumed his current role upon the closing of the 2015 Merger and had previously held the same role at Heinz since July 2013. Prior to joining Heinz, Mr. Pelleissone was Chief Executive Officer of ALL from May 2012 to June 2013. Prior

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to assuming that role, Mr. Pelleissone had held the roles of Chief Operating Officer from July 2011 to 2012 and Commercial Vice President of the Agriculture Segment at ALL from 2004 to 2011.
Carlos Piani was appointed Zone President of Canada on September 1, 2015. Prior to joining Kraft Heinz, Mr. Piani served as Chief Executive Officer of PDG Realty S.A. Empreendimentos e Participacoes, a real estate company, from August 2012 to August 2015. Previously, he served as Co-Head of Private Equity of Vinci Partners, an independent asset management firm, from April 2010 to August 2012 and as Chief Executive Officer of Companhia Energetica do Maranhao, an electricity distribution company, from March 2006 to April 2010.
Marcos Romaneiro assumed his current role upon the closing of the 2015 Merger and had previously held the same role at Heinz since June 2014. Prior to his appointment as Zone President of Heinz Asia Pacific, Mr. Romaneiro was Senior Vice President, Global Finance at Heinz from June 2013 to May 2014. From January 2012 to May 2013, Mr. Romaneiro was Vice President at 3G Capital and was responsible for sourcing, negotiating and executing private equity transactions. Prior to joining 3G Capital, Mr. Romaneiro worked at Cerberus Capital Management, a private equity firm, from January 2010 to December 2011. Mr. Romaneiro has also been a partner at 3G Capital since January 2015.
Francisco Sa assumed his current role upon the closing of the 2015 Merger and had previously held the same role at Heinz after joining in July 2014. Mr. Sa served as Zone President for Anheuser-Busch InBev NV/SA’s Latin America South business from January 2012 to January 2014 and as Zone President for Central and Eastern Europe from January 2008 to December 2011.
James Savina was appointed Senior Vice President, Global General Counsel and Corporate Secretary upon the closing of the 2015 Merger. Mr. Savina served as Kraft’s Senior Vice President, Deputy General Counsel and Chief Compliance Officer from March 2015 to July 2015, and Vice President, Associate General Counsel and Chief Compliance Officer from February 2013 to March 2015. Prior to joining Kraft in 2013, he served as Executive Director, Global Legal Investigations and Operations of Avon Products, Inc., a global manufacturer of beauty and related products, since April 2010.
George Zoghbi was appointed Chief Operating Officer of U.S. Commercial business upon the closing of the 2015 Merger. Mr. Zoghbi previously served as Kraft’s Chief Operating Officer since February 2015 and, before that, as Vice Chairman, Operations, R&D, Sales and Strategy since June 2014. He served as Executive Vice President and President, Cheese & Dairy and Exports from February 2013 until June 2014. Mr. Zoghbi served as Executive Vice President and President, Cheese and Dairy from October 1, 2012 to February 2013. Prior to that, he served as President, Cheese and Dairy of Mondelēz International, a global food and beverage company, since October 2009.
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 (the “Exchange Act”) are available free of charge on our website as soon as possible after we electronically file them with, or furnish them to, the SEC. You can also read, access and copy any document that we file, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Call the SEC at 1-800-SEC-0330 for information on the operation of the Public Reference Room. 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.
We operate in a highly competitive industry.
The food and beverage industry is highly competitive across all of our product offerings. We compete based on product innovation, price, product quality, brand recognition and loyalty, effectiveness of marketing and distribution, promotional activity, and the ability to identify and satisfy consumer preferences.
We may need to reduce our prices in response to competitive and customer pressures, including changing consumer preferences that may adversely impact the market for our products. These pressures may also restrict our ability to increase prices in response to commodity and other cost increases. We may also need to increase or reallocate spending on marketing, retail trade incentives, materials, advertising, and new product 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 suffer.

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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. 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. Increasing negative attention on the role of food and beverage marketing could adversely affect our brand image. It could also lead to stricter regulations and greater scrutiny of marketing practices. 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. Moreover, adverse publicity about legal or regulatory action against us, or our suppliers and, in some cases, our competitors, could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.
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. If we do not maintain, extend, and expand our reputation, 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 retailer brands and other economy brands.
In nearly all of our product categories, we compete with branded products as well as retailer and other economy brands, 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 retailer or other economy brands change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer retailer or other economy brands, 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.
The consolidation of retail customers could adversely affect us.
Retail customers, such as supermarkets, warehouse clubs and food distributors in our major markets, may consolidate, resulting in fewer customers for our business. Consolidation also produces larger retail customers that may seek to leverage their position to improve their profitability by demanding improved efficiency, lower pricing, increased promotional programs, or specifically tailored product offerings. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. 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.
Our financial 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. 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 fads, mid-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.

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Prolonged negative perceptions concerning the health implications of certain food and beverage products 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 impact 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.
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.
The food and beverage industry’s overall growth is generally linked to population growth. 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.
An impairment of the carrying value of goodwill or other indefinite-lived intangible assets could negatively affect our consolidated operating results.
We test goodwill and indefinite-lived intangible assets for impairment at least annually in the second quarter or when a triggering event occurs. We performed our annual impairment testing in the second quarter of 2015, prior to completion of the 2015 Merger.
The first step of the goodwill impairment test compares the reporting unit’s estimated fair value with its carrying value. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step would be applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill would be considered impaired and would be reduced to its implied fair value. We test indefinite-lived intangible assets for impairment by comparing the fair value of each intangible asset with its carrying value. If the carrying value exceeds fair value, the intangible asset would be considered impaired and would be reduced to fair value.
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 indefinite-lived intangible assets requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors. If current expectations of future growth rates are not met or market factors outside of our control, such as discount rates, change significantly, then one or more reporting units or intangible assets might become impaired in the future. Additionally, as goodwill and intangible assets associated with recently acquired businesses are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to an impairment risk if business operating results or macroeconomic conditions deteriorate.
An impairment of the carrying value of goodwill or other indefinite-lived intangible assets could negatively affect our operating results or net worth.

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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, soybean and vegetable oils, sugar and other sweeteners, corn products, tomatoes, cucumbers, potatoes, onions, other fruits and vegetables, spices, flour and wheat to manufacture our products. In addition, we purchase and use significant quantities of resins, cardboard, glass, plastic, metal, paper, fiberboard and other materials to package our products and we use other inputs, such as water and natural gas, 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, 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. Additionally, 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. 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.
We rely on our management team and other key personnel.
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. Any such loss or failure could adversely affect our product sales, financial condition, and operating results.
In particular, the success of the continued integration of Kraft and Heinz will depend in part on our ability to retain the talents and dedication of key employees. If key employees terminate their employment, or if an insufficient number of employees is retained to maintain effective operations, our business activities may be adversely affected and our management team’s attention may be diverted from successfully integrating Kraft and Heinz to hiring suitable replacements. In addition, we may not be able to locate suitable replacements for any key employees who leave, or offer employment to potential replacements on reasonable terms, all of which could adversely affect our product sales, financial condition, and operating results.
We may be unable to realize the anticipated benefits from 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, that we believe are important to position our business for future success and growth. We have evaluated changes to our organization 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 benefit of our 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 be efficient in executing our 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 on those areas with the most potential return on investment. If we are unable to realize the anticipated benefits from our efforts, we could be cost disadvantaged in the marketplace, and our competitiveness, production and profitability could decrease.

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Changes in our relationships with significant customers or suppliers could adversely impact us.
We have significant sales to certain significant customers. 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, the financial condition of such customers and suppliers is affected in large part by conditions and events that are beyond our control. A significant deterioration in the financial condition of significant customers and suppliers could materially and adversely affect our product sales, financial condition, and operating results.
We may not be able to successfully execute our international expansion strategy.
We plan to drive additional growth and profitability through international distribution channels. Consumer demand, behavior, taste and purchasing trends may differ in international 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 foreign 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. There can be no assurance that we will successfully complete any planned international expansion or that any new business will be profitable or meet our expectations.
Changes in laws and regulations could increase our costs.
Our activities throughout the world are highly regulated and subject to government oversight. Various laws and regulations govern food and beverage production, storage, distribution, sales, and marketing, as well as licensing, trade, tax, and environmental matters. Governing bodies regularly issue new regulations and changes to existing regulations. Our need to comply with new or revised regulations or their interpretation and application could materially and adversely affect our product sales, financial condition, and operating results.
Legal claims or other regulatory enforcement actions could subject us to civil and criminal penalties.
As a large food and beverage company, we operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Consequently, we are subject to heightened risk of legal claims or other regulatory enforcement actions. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies and procedures. Moreover, a failure to maintain effective control processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition, and operating results.
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 could decide to, or be required to, recall products due to suspected or confirmed product contamination, adulteration, misbranding, tampering, 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.

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.

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Unanticipated business disruptions could adversely affect our ability to provide our products to our customers.
We have a complex network of suppliers, owned 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, fire or explosion, terrorism, generalized labor unrest, or health pandemics, could damage or disrupt our operations or our suppliers’ or co-manufacturers’ 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.
The failure to integrate successfully the business and operations of Kraft and Heinz in the expected time frame may adversely affect our future results.
Prior to the 2015 Merger, Kraft and Heinz operated as independent companies. There can be no assurances that these businesses can be integrated successfully. It is possible that the integration process could result in the loss of key historical Kraft or Heinz employees, the loss of customers, the disruption of ongoing businesses, unexpected integration issues, or higher than expected integration costs. It is also possible that the overall post-merger integration process will take longer than originally anticipated. Specifically, the following issues, among others, must be addressed as we continue to integrate the operations of Kraft and Heinz in order to realize the anticipated benefits of the 2015 Merger:
combining the companies’ operations and corporate functions;
combining the businesses of Kraft and Heinz and meeting the capital requirements of the combined company in a manner that permits us to achieve the cost savings anticipated to result from the 2015 Merger, the failure of which could result in the material anticipated benefits of the 2015 Merger not being realized in the time frame currently anticipated, or at all;
integrating the companies’ technologies;
integrating and unifying the offerings and services available to historical Kraft and Heinz customers;
identifying and eliminating redundant and underperforming functions and assets;
harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;
integrating the companies’ financial reporting and internal control systems, including our ability to become compliant with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and the rules promulgated thereunder by the SEC;
maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors;
addressing possible differences in business backgrounds, corporate cultures and management philosophies;
integrating and consolidating the companies’ administrative and information technology infrastructure and computer systems;
coordinating distribution and marketing efforts;
managing the movement of certain positions to different locations; and
coordinating geographically dispersed organizations. 
In addition, at times the attention of certain members of our management may be focused on the integration of the businesses of Kraft and Heinz and diverted from day-to-day business operations, which may disrupt our business.

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We may not successfully identify or complete strategic acquisitions, alliances, divestitures or joint ventures.
From time to time, we may evaluate acquisition candidates, alliances or joint ventures that may strategically fit our business objectives or we 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, the European Union, and other jurisdictions, and we may be required to obtain the approval of acquisition and joint venture transactions by competition authorities, as well as to satisfy other legal requirements. In addition, to the extent we undertake acquisitions, alliances or joint ventures or other developments outside our core geography 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 Foreign Corrupt Practices Act, 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.
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. Such conditions and factors include changes in applicable laws and regulations, including changes in food and drug laws, accounting standards and critical accounting estimates, taxation requirements and environmental laws. Other factors impacting our operations in the United States, Venezuela, Russia and other 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 could materially and adversely affect our financial results. For further information on Venezuela, see Note 17, Venezuela - Foreign Currency and Inflation, to the consolidated financial statements.
Volatility of capital markets or macro-economic factors could adversely affect our business.
Changes in financial and capital markets, including market disruptions, limited liquidity, and interest rate volatility, 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 and increased 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.
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.
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 operating results and net income.
We use commodity futures and options to partially hedge the price of certain input costs, including dairy products, coffee beans, meat products, wheat, corn products, soybean oils, sugar, and natural gas. Changes in the values of these derivatives are currently recorded in net income, resulting in volatility in both gross profits and net income. We report 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 report these gains and losses in the unallocated corporate items line in our segment operating results until we sell the underlying

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products, at which time we reclassify the gains and losses to segment operating results. We may experience volatile earnings as a result of these accounting treatments.
Our net sales and net income may be exposed to 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, and Chinese renminbi. Since our consolidated financial statements are denominated 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, financial condition and cash flows.
We are significantly dependent on information technology.
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, 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 and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience business disruptions, transaction errors, processing inefficiencies, 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 or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, consumers, or suppliers.
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, 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, and trade secret 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 obtain 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.
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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Our results of operations could be affected by natural events in the locations in which we or our customers, suppliers or regulators operate.
We may 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 and regulators. Natural disasters or other disruptions at any of our facilities or our suppliers’ 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 certain business interruption risks, we cannot provide any assurance that such insurance will compensate us for any losses incurred as a result of natural or other disasters. 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.
Our indebtedness levels could impact our business.
Our ability to make payments on and to refinance our indebtedness, including any future debt that we may incur, will depend on our ability to generate cash from operations, financings, or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take disadvantageous actions, including reducing spending on marketing, retail trade incentives, advertising and product innovation, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets, or dedicating an unsustainable level of our cash flows from operations to the payment of principal and interest on our indebtedness. The creditors who hold our debt could also 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, we may in the future need to obtain waivers from the required creditors under our indebtedness instruments to avoid being in default. If we breach the covenants under our indebtedness instruments and seek a waiver, we may not be able to obtain a waiver from the required creditors. If this occurs, we would be in default under our indebtedness instruments, the creditors could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
Our indebtedness could also impair our ability to obtain additional financing for working capital, capital expenditures, or general corporate purposes, especially if the ratings assigned to our debt securities by rating organizations were revised downward. In addition, our leverage could put us at a competitive disadvantage compared to less-leveraged competitors that could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our ability to withstand competitive pressures and to react to changes in the food and beverage industry could be impaired, making us more vulnerable in the event of a general downturn in economic conditions, in our industry, or in our business.
Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations and make strategic acquisitions, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under our existing indebtedness.
We have a substantial amount of indebtedness, and are permitted to incur a substantial amount of additional indebtedness, including secured debt. The existing debt together with the incurrence of additional indebtedness could have important consequences. For example, our indebtedness could:
limit our ability to obtain additional financing for working capital, capital expenditures, research and development, debt service requirements, acquisitions and general corporate or other purposes;
result in a downgrade to our credit rating;
restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
limit 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;
increase our vulnerability to general economic and industry conditions;
make it more difficult for us to make payments on our existing indebtedness;
require 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, capital expenditures and future business opportunities; and

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in the case of any additional indebtedness, exacerbate the risks associated with our substantial financial leverage.
In addition, the credit agreement and indentures governing our indebtedness contain various covenants that limit our ability to engage in specified types of transactions. These covenants will limit our ability to, among other things, incur or permit to exist certain liens or merge or consolidate with or into, another company, in each case with customary exceptions.
The terms of our Series A Preferred Stock provide for a 9.00% annual dividend, payment of which could adversely affect our results of operations and could result in a net loss.
The terms of our Series A Preferred Stock provide for a 9.00% annual dividend. These dividend payments resulted in a net loss attributable to Kraft Heinz’s common shareholders in our fiscal year ended January 3, 2016, despite having otherwise generated $634 million in net income during that period. To the extent dividend payments to holders of the 9.00% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) exceed our net income (before taking into account such payments) in any fiscal year, a net loss would result. Even if such dividend payments do not exceed our net income, the payment obligation will have a negative impact on our results of operations. In addition, the ability to pay these dividend payments is also subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. While we currently intend to refinance the Series A Preferred Stock in 2016, there can be no assurance that we will be able to successfully undertake such refinancing.
The Sponsors have substantial control over us and may have conflicts of interest with us in the future.
The Sponsors (together with employees who were Heinz stockholders prior to the consummation of the 2015 Merger) own approximately 51% of our common stock. Six of our 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, some of our executive officers, including Bernardo Hees, our Chief Executive Officer, are partners of 3G Capital, one of the Sponsors. 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 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, incurrence of additional indebtedness, the implementation of stock repurchase programs and the decision of whether or not to declare 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.
Future 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, 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.
Kraft Heinz, 3G Global Food Holdings LP 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 Global Food Holdings LP and Berkshire Hathaway Inc., 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 the closing of the 2015 Merger, registrable shares represented approximately 51% of our outstanding common stock on a fully diluted basis. 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, sales of a large number of registrable shares may be made upon registration of such shares with the SEC in accordance with the terms of the registration rights agreement. Registration and sales of our common stock effected pursuant to the registration rights agreement will increase the number of shares being sold 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 is subject to the discretion of the Board of Directors and may be limited by our debt agreements, limitations under Delaware law and the rights of holders of Series A Preferred Stock.
Although it is currently anticipated that we will continue pay regular quarterly dividends, any such determination to pay dividends will be at the discretion of the Board of Directors and will be dependent on then-existing conditions, including our financial

16




condition, income, legal requirements, including limitations under Delaware law, the rights of holders of shares of the Series A Preferred Stock to receive dividends in respect of such shares prior to us being permitted to pay any dividends in respect of our common stock and other factors the Board of Directors deems relevant. The Board of Directors may, in its sole discretion, 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.
We may not generate U.S. earnings and profits sufficient for distributions paid to shareholders to be treated as dividends for U.S. federal income tax purposes.
Although it is currently anticipated that we will continue to pay regular quarterly dividends, our earnings (as determined under U.S. tax principles) may not be sufficient for all or a portion of these distributions to be treated as dividends for U.S. federal income tax purposes. If our earnings and profits are not sufficient, these distributions would be treated as a return of capital to each shareholder, up to the extent of the shareholder’s tax basis. If a shareholder does not have sufficient tax basis, these distributions could result in taxable gains to the shareholder. Shareholders should consult their tax advisors for a full understanding of all of the tax consequences of the receipt of dividends, including distributions in excess of our earnings and profits.
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 our executive offices, certain U.S. business units, and our administrative, finance, 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 January 3, 2016, we operated 89 manufacturing and processing facilities. We own 86 and lease three of these facilities. Our manufacturing and processing facilities count by segment as of January 3, 2016 was:
 
 
Owned
 
Leased
United States
 
45
 
1
Canada
 
3
 
Europe
 
9
 
Rest of World
 
29
 
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.
Several of our current manufacturing and processing facilities are scheduled to be closed within the next two years. See Note 3, Integration and Restructuring Expenses, to the consolidated financial statements for additional information.
Item 3. Legal Proceedings.
We are routinely involved in legal proceedings, claims, and governmental inquiries, inspections or investigations (“Legal Matters”) arising in the ordinary course of our business.
On April 1, 2015, the Commodity Futures Trading Commission (“CFTC”) filed a formal complaint against Mondelēz International and Kraft in the U.S. District Court for the Northern District of Illinois, Eastern Division, related to activities involving the trading of December 2011 wheat futures contracts. The complaint alleges that Mondelēz International and Kraft (1) manipulated or attempted to manipulate the wheat markets during the fall of 2011, (2) violated position limit levels for wheat futures, and (3) engaged in non-competitive trades by trading both sides of exchange-for-physical Chicago Board of Trade wheat contracts. As previously disclosed by Kraft, these activities arose prior to the October 1, 2012 spin-off of Kraft by Mondelēz International to its shareholders and involve the business now owned and operated by Mondelēz International or its affiliates. The Separation and Distribution Agreement between Kraft and Mondelēz International, dated as of September 27, 2012, governs the allocation of liabilities between Mondelēz International and Kraft and, accordingly, Mondelēz International will predominantly bear the costs of this matter and any monetary penalties or other payments that the CFTC may impose. We do not expect this matter to have a material adverse effect on our financial condition, results of operations, or business.

17




As previously disclosed, six lawsuits were filed in connection with the 2015 Merger against Kraft, members of its board of directors, Heinz, Kite Merger Sub Corp., and Kite Merger Sub LLC. The plaintiffs in these matters alleged, among other things, that (i) the Form S-4 contained material omissions and misleading statements, and (ii) the members of the Kraft board of directors breached their fiduciary duties in connection with the 2015 Merger. The plaintiffs sought, among other things, injunctive relief and damages. As disclosed in Kraft’s Form 8-K filed on June 24, 2015, on June 23, 2015, Kraft entered into a memorandum of understanding with the plaintiffs providing for the settlement of all of these lawsuits. On October 28, 2015, we executed a stipulation of settlement with the plaintiffs formalizing the terms of the memorandum of understanding. On November 10, 2015, the U.S. District Court for the Eastern District of Virginia issued an order preliminarily approving the settlement and providing for notice to Kraft’s shareholders regarding the proposed settlement. On February 18, 2016, the court held a hearing regarding the proposed settlement.  The court indicated that it intends to approve the settlement and requested that Plaintiffs’ counsel provide certain additional information. We do not expect this matter to have a material adverse effect on our financial condition or results of operations.
While we cannot predict with certainty the results of Legal Matters in which we are currently involved or may in the future be involved, we do not expect that the ultimate costs to resolve any of the Legal Matters that are currently pending will have a material adverse effect on our financial condition or results of operations.
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 February 28, 2016, there were approximately 56,000 holders of record of our common stock.
Our stock began publicly trading on July 6, 2015. Our quarterly highest and lowest market prices are:
 
2015 Quarters
 
First
 
Second
 
Third
 
Fourth
Market price-high
NA
 
NA
 
$
81.20

 
$
79.94

Market price-low
NA
 
NA
 
$
61.42

 
$
68.65

Dividends declared
NA
 
NA
 
$
0.55

 
$
1.15


18




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 Products, which we consider to be our peer group. This graph covers the period from July 6, 2015 (the first day our common stock began trading on NASDAQ) through December 31, 2015 (the last trading day of our fiscal year). The graph shows total shareholder return assuming $100 was invested on July 6, 2015 and the dividends were reinvested on a daily basis.
 
Kraft Heinz
S&P 500
S&P Consumer Staples Food Products
July 6, 2015
$100.00
$100.00
$100.00
September 25, 2015
$101.24
$93.79
$100.21
December 31, 2015
$102.07
$99.85
$106.90
The above performance group 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.
Issuer Purchases of Equity Securities during the Quarter ended January 3, 2016
Our share repurchase activity for the three months ended January 3, 2016 was:
 
 
Total Number
of Shares(a)
 
Average Price 
Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plan or Program
 
Dollar Value of Shares that May Yet be Purchased Under the Plan or Program
9/28/2015 - 11/1/2015
 
67,963

 
$
75.57

 

 
 
11/2/2015 - 11/29/2015
 
119,622

 
73.91

 

 
 
11/30/2015 - 1/3/2016
 
38,560

 
72.81

 

 
$

For the Quarter Ended January 3, 2016
 
226,145

 
 
 

 
 
(a)  
Includes shares tendered by individuals who used shares to pay the related taxes for grants of restricted stock units (“RSUs”) that vested.

19




Item 6. Selected Financial Data.
The following table presents selected consolidated financial data for each of the three fiscal years 2011 through 2013, the 2013 Predecessor Period, the 2013 Successor Period, and the fiscal years ended December 28, 2014 and January 3, 2016.
 
Successor
 
Predecessor
(H. J. Heinz Company)
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
April 29 - June 7,
2013
(6 weeks)
 
April 28,
2013
(52 weeks)
 
April 29,
2012
(52 1/2 weeks)(d)
 
April 27,
2011
(52 weeks)
Period Ended:
(in millions, except per share data)
Net sales(a)(e)
$
18,338

 
$
10,922

 
$
6,240

 
$
1,113

 
$
11,529

 
$
11,508

 
$
10,559

Income/(loss) from continuing operations(a)
647

 
672

 
(66
)
 
(191
)
 
1,102

 
992

 
1,046

(Loss)/income from continuing operations attributable to common shareholders(a)
(266
)
 
(63
)
 
(1,118
)
 
(194
)
 
1,088

 
974

 
1,029

(Loss)/income from continuing operations per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
(0.34
)
 
(0.17
)
 
(2.97
)
 
(0.60
)
 
3.39

 
3.03

 
3.21

Diluted
(0.34
)
 
(0.17
)
 
(2.97
)
 
(0.60
)
 
3.37

 
3.01

 
3.18

As of:
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets(c)(e)
122,973

 
36,571

 
38,681

 
NA

 
12,920

 
11,960

 
12,217

Long-term debt(b)(c)(e)
25,151

 
13,358

 
14,326

 
NA

 
3,830

 
4,757

 
3,065

Redeemable preferred stock
8,320

 
8,320

 
8,320

 
NA

 

 

 

Cash dividends per common share
1.70

 

 

 

 
2.06

 
1.92

 
1.80

(a)
Amounts exclude the operating results as well as any associated impairment charges and losses on sale related to the Company's Shanghai LongFong Foods business in China and U.S. Foodservice frozen desserts business, which were divested in Fiscal 2013.
(b)
Amounts include interest rate swap hedge accounting adjustments of $123 million at April 28, 2013, $128 million at April 29, 2012, and $151 million at April 27, 2011. There were no interest rate swaps requiring such hedge accounting adjustments at January 3, 2016, December 28, 2014, or December 29, 2013. Amounts exclude the current portion of long-term debt.
(c)
As discussed in Note 1, Background and Basis of Presentation, to the consolidated financial statements, we early-adopted accounting guidance to simplify the presentation of debt issuance costs. As a result, we reclassified unamortized debt issuance costs from other assets to long-term debt on the consolidated balance sheets, including $228 million at December 28, 2014, $292 million at December 29, 2013, $19 million at April 28, 2013, $23 million at April 29, 2012, and $14 million at April 27, 2011.
(d)
On March 14, 2012, our Board of Directors authorized a change in fiscal year end from the Wednesday nearest April 30 to the Sunday nearest April 30. This change resulted in a 52 1/2-week-long fiscal year ended April 29, 2012 (“Fiscal 2012”).
(e)
The increases in net sales, total assets, and long-term debt from the year ended December 28, 2014 to the year ended January 3, 2016 reflect the impact of the 2015 Merger. See Note 2, Merger and Acquisition, to the consolidated financial statements for additional information.
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.
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.
Items Affecting Comparability of Financial Results
The 2015 Merger
We completed the 2015 Merger on July 2, 2015. See Note 1, Background and Basis of Presentation, and Note 2, Merger and Acquisition, to the consolidated financial statements for additional information.

20




2013 Periods Presented
In Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for purposes of comparing the results for the year ended December 28, 2014 to the prior year, we compare our year ended December 28, 2014 to the 2013 Successor Period and the unaudited Predecessor period from December 24, 2012 through June 7, 2013. We believe this is the most appropriate way to compare our full year 2014 results to a comparable prior year period. All data for the unaudited Predecessor period December 24, 2012 to June 7, 2013 is derived from our unaudited consolidated financial information, which is presented in the tables below, and represents a different period than the Predecessor period April 29, 2013 to June 7, 2013 included in Item 8, Financial Statements and Supplementary Data.
53rd week
Our year end date for financial reporting purposes is the Sunday closest to December 31. As a result, we occasionally have a 53rd week in a fiscal year. Our year ended January 3, 2016 includes a 53rd week of activity. Additionally, the 2013 Successor Period and the unaudited Predecessor period from December 24, 2012 through June 7, 2013 combined is equal to 53 weeks of activity.
Integration and Restructuring Expenses
Related to Integration and Restructuring, we recorded expenses of $1.0 billion in the year ended January 3, 2016, expenses of $637 million in the year ended December 28, 2014, expenses of $411 million in the 2013 Successor Period, a benefit of $6 million in the 2013 Predecessor Period, and expenses of $1 million in Fiscal 2013.
These expenses include our multi-year $1.9 billion Integration Program which we announced following the 2015 Merger. The costs primarily include organization costs, including cash and non-cash severance, footprint costs to exit facilities, and other costs incurred as a direct result of restructuring activities related to the 2015 Merger. Additionally, we anticipate capital expenditures of approximately $1.1 billion related to the Integration Program and have recognized $225 million in the year ended January 3, 2016. The Integration Program is designed to reduce costs, integrate and optimize our combined organization and is expected to achieve $1.5 billion of pre-tax savings by 2017, primarily benefiting the United States and Canada segments. We realized approximately $125 million of pre-tax savings in the year ended January 3, 2016.
These expenses also include costs associated with other restructuring activities focused primarily on work-force reductions and factory closures and consolidations in relation to the 2013 Merger.
See Note 3, Integration and Restructuring Expenses, to the consolidated financial statements for additional information.
Results of Continuing Operations for Year Ended January 3, 2016 compared to Year Ended December 28, 2014:
Due to the size of Kraft's business relative to the size of Heinz's business prior to the 2015 Merger, and for purposes of comparability, the Results of Continuing Operations for Year Ended January 3, 2016 compared to Year Ended December 28, 2014 include certain unaudited pro forma results adjusted to assume that Kraft and Heinz were a combined company for both periods presented, which includes combining historical results, reflecting preliminary purchase accounting adjustments, and aligning accounting policies for both historical periods presented. These pro forma adjustments impacted the consolidated results as well as our United States and Canada segments. In addition, we include certain non-GAAP financial measures derived from these unaudited pro forma results. These pro forma adjustments and 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 core operations. For additional information and reconciliations from our consolidated financial statements, see Supplemental Unaudited Pro Forma Condensed Combined Financial Information and Non-GAAP Financial Measures.
Consolidated Results of Continuing Operations
Year Ended January 3, 2016 compared to Year Ended December 28, 2014:
Summary of Results
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
% Change
 
(in millions, except per share data)
 
 
Net sales
$
18,338

 
$
10,922

 
67.9
%
Operating income
$
2,639

 
$
1,568

 
68.3
%
Net loss attributable to common shareholders
$
(266
)
 
$
(63
)
 
nm

Diluted loss per share
$
(0.34
)
 
$
(0.17
)
 
nm


21




Net Sales
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
% Change
 
(in millions)
 
 
Net sales
$
18,338

 
$
10,922

 
67.9
 %
Pro forma net sales
$
27,447

 
$
29,122

 
(5.8
)%
Net sales increased 67.9% to $18.3 billion in the year ended January 3, 2016 compared to the year ended December 28, 2014, primarily driven by the 2015 Merger.
Pro forma net sales decreased 5.8% in the year ended January 3, 2016 compared to the year ended December 28, 2014, due primarily to the unfavorable impacts of foreign currency (5.2 pp) and divestitures (0.2 pp), partially offset by the favorable impact of a 53rd week of shipments (1.2 pp). Excluding these impacts, Pro Forma Organic Net Sales(1) declined 1.6% as unfavorable volume/mix (2.6 pp) was partially offset by higher net pricing (1.0 pp). Unfavorable volume/mix was driven primarily by lower shipments in refreshment beverages, frozen meals, foodservice and boxed dinners in our United States and Canada segments, partially offset by growth in Rest of World. Higher net pricing in nearly all segments was reduced by the negative impact (approximately 1.0 pp) of lower overall key commodity costs (dairy, meat, coffee and nuts) in the United States and Canada.
(1) Pro Forma Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Operating Income
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
% Change
 
(in millions)
 
 
Operating income
$
2,639

 
$
1,568

 
68.3
%
Adjusted Pro Forma EBITDA(2)
$
6,739

 
$
6,526

 
3.3
%
(2) Adjusted Pro Forma EBITDA is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Operating income increased 68.3% to $2.6 billion for the year ended January 3, 2016, driven primarily by the 2015 Merger. In addition to the 2015 Merger, we also recognized a benefit from a 53rd week of shipments partially offset by Integration and Restructuring expenses, the impact of non-cash costs related to the fair value adjustment of Kraft's inventory in purchase accounting, the unfavorable impact of foreign currency, merger costs, a nonmonetary loss to write down inventory at our Venezuelan subsidiary, and higher depreciation and amortization expense.
Adjusted Pro Forma EBITDA increased 3.3% to $6.7 billion in the year ended January 3, 2016 compared to the year ended December 28, 2014, driven primarily by savings from Integration and Restructuring activities and other ongoing productivity efforts, favorable pricing net of commodity costs, and the benefit (approximately 1.0 pp) of the 53rd week of shipments, partially offset by the unfavorable impact of foreign currency (6.3 pp) and unfavorable volume/mix.
Net Income and Diluted EPS
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
% Change
 
(in millions, except per share data)
 
 
Net loss attributable to common shareholders
$
(266
)
 
$
(63
)
 
nm

Diluted loss per share
$
(0.34
)
 
$
(0.17
)
 
       nm

Adjusted Pro Forma EPS(3)
$
2.19

 
$
1.98

 
10.6
%
(3) Adjusted Pro Forma EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Net loss attributable to common shareholders increased $203 million to $266 million for the year ended January 3, 2016. The increase in operating income was more than offset by higher interest expense, other expense, the provision for income taxes, and an additional preferred dividend payment as follows:
Interest expense increased to $1.3 billion for the year ended January 3, 2016, compared to $686 million in the prior year period. This increase was due primarily to a $236 million write-off of debt issuance costs related to 2015 refinancing

22




activities and a $227 million expense related to the termination of certain interest rate swap contracts. The remaining increase was due to the assumption of $8.6 billion of Kraft's long-term debt obligations in the 2015 Merger, partially offset by interest savings following our 2015 refinancing activities.
Other expense, net increased to $305 million for the year ended January 3, 2016, compared to $79 million in the prior year period. This increase was primarily due to a $234 million nonmonetary currency devaluation charge related to our Venezuelan subsidiary and call premiums of $105 million related to our 2015 refinancing activities, compared to currency losses of $99 million in the prior year.
The effective tax rate was 36.2% for the year ended January 3, 2016 compared to 16.3% for the year ended December 28, 2014, primarily driven by higher earnings repatriation charges, non-deductibility of nonmonetary Venezuela devaluation loss and higher charges for foreign uncertain tax positions, partially offset by increased benefits from statutory tax rate changes as well as additional benefits from foreign income taxed at lower statutory rates. See Note 8, Income Taxes, to the consolidated financial statements for a discussion of income tax rates.
The Series A Preferred Stock entitles holders to a 9.00% annual dividend to be paid quarterly in arrears on each March 7, June 7, September 7, and December 7, in cash. While the Series A Preferred Stock remains outstanding, if we declare or pay a dividend on our common stock, we must also declare and pay in full the dividend on the Series A Preferred Stock for the then-current quarterly period. We made cash distributions of $900 million during the year ended January 3, 2016 which reflects five payments due to the fact that, in connection with the declaration of our dividend on our common stock on December 8, 2015, we also declared and paid the dividend on the Series A Preferred Stock for the quarterly period that ends March 7, 2016. 
Diluted loss per share increased $0.17 to a diluted loss per share of $0.34 in the year ended January 3, 2016. The increase in diluted loss per share was driven primarily by the net income factors discussed above, partially offset by the effect of an increase in the weighted average shares of common stock outstanding following the 2015 Merger.
Adjusted Pro Forma EPS increased 10.6% to $2.19 for the year ended January 3, 2016 compared to $1.98 for the year ended December 28, 2014, driven primarily by favorable Adjusted Pro Forma EBITDA despite the unfavorable impact of foreign currency, lower other expense, net, and lower interest expense, partially offset by a higher tax rate.
Results of Continuing Operations by Segment
Year Ended January 3, 2016 compared to Year Ended December 28, 2014:
Following the 2015 Merger, we revised our segment structure and began to manage and report our operating results through four segments. We have three reportable segments defined by geographic region: United States, Canada, and Europe. Our remaining businesses are combined and disclosed as “Rest of World”. Rest of World is comprised of three operating segments: Asia Pacific, Latin America, and RIMEA. We began to report on our reorganized segment structure during the third quarter of 2015 and have reflected this structure for all historical periods presented.
Management evaluates segment performance based on several factors including net sales and segment adjusted earnings before interest, tax, depreciation and amortization (“Segment Adjusted EBITDA”). Management uses Segment Adjusted EBITDA to evaluate segment performance and allocate resources. Segment Adjusted EBITDA assists management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations. These items include depreciation and amortization (including amortization of postretirement benefit plans prior service credits), equity award compensation expense, integration and restructuring expenses, merger costs, unrealized gains and losses on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment operating results), impairment losses, gain/loss associated with the sale of a business, nonmonetary currency devaluation, and certain general corporate expenses. In addition, consistent with the manner in which management evaluates segment performance and allocates resources, Segment Adjusted EBITDA includes the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013.

23




 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
(in millions)
Net sales:
 
 
 
United States
$
11,124

 
$
3,615

Canada
1,437

 
631

Europe
2,485

 
2,973

Rest of World
3,292

 
3,703

Total net sales
$
18,338

 
$
10,922


 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
(in millions)
Pro forma net sales:
 
 
 
United States
$
19,284

 
$
19,635

Canada
2,386

 
2,811

Europe
2,485

 
2,973

Rest of World
3,292

 
3,703

Total pro forma net sales
$
27,447

 
$
29,122


 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
(in millions)
Segment Adjusted EBITDA:
 
 
 
United States
$
4,783

 
$
4,499

Canada
541

 
615

Europe
909

 
898

Rest of World
670

 
689

General corporate expenses
(164
)
 
(175
)
Depreciation and amortization (excluding integration and restructuring expenses)
(779
)
 
(924
)
Integration and restructuring expenses
(1,117
)
 
(743
)
Merger costs
(194
)
 
(68
)
Amortization of inventory step-up
(347
)
 

Unrealized gains/(losses) on commodity hedges
41

 
(79
)
Impairment losses
(58
)
 
(221
)
Gain on sale of business
21

 

Nonmonetary currency devaluation
(57
)
 

Equity award compensation expense (excluding integration and restructuring expenses)
(61
)
 
(108
)
 Other pro forma adjustments(a)
(1,549
)
 
(2,815
)
Operating income
2,639

 
1,568

Interest expense
1,321

 
686

Other expense, net
305

 
79

Income from continuing operations before income taxes
$
1,013

 
$
803

(a) See Supplemental Unaudited Pro Forma Condensed Combined Financial Information for additional information. 

24




United States
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
% Change
 
(in millions)
 
 
Net sales
$
11,124

 
$
3,615

 
207.7
 %
Pro forma net sales
$
19,284

 
$
19,635

 
(1.8
)%
Segment Adjusted EBITDA
$
4,783

 
$
4,499

 
6.3
 %
Net sales increased 207.7% to $11.1 billion, primarily driven by the 2015 Merger. Pro forma net sales decreased 1.8%, despite a benefit (1.2 pp) from the 53rd week of shipments. Pro Forma Organic Net Sales decreased 3.0%, due primarily to unfavorable volume/mix (3.0 pp). Pricing was neutral as higher net pricing across most categories was offset by the negative impact (approximately 1.5 pp) of lower overall key commodity costs (dairy, meat, coffee and nuts). Unfavorable volume/mix was driven by lower shipments in ready-to-drink beverages, powdered beverages and boxed dinners that reflected category trends and the volume loss associated with higher net pricing, category and market share declines in frozen meals, and lower foodservice shipments. These declines were partially offset by favorable volume/mix primarily from innovation in refrigerated meal combinations and coffee.
Segment Adjusted EBITDA increased 6.3%, driven by favorable pricing net of commodity costs, savings from Integration and Restructuring activities and the favorable impact of the 53rd week of shipments, partially offset by unfavorable volume/mix.
Canada
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
% Change
 
(in millions)
 
 
Net sales
$
1,437

 
$
631

 
127.7
 %
Pro forma net sales
$
2,386

 
$
2,811

 
(15.1
)%
Segment Adjusted EBITDA
$
541

 
$
615

 
(12.0
)%
Net sales increased 127.7% to $1.4 billion, primarily driven by the 2015 Merger. Pro forma net sales decreased 15.1%, due primarily to the unfavorable impact of foreign currency (13.4 pp), partially offset by the benefit (1.1 pp) of the 53rd week of shipments. Pro Forma Organic Net Sales decreased 2.8%, due primarily to unfavorable volume/mix (5.0 pp), partially offset by higher net pricing (2.2 pp). Unfavorable volume/mix reflected lower shipments in foodservice, refreshment beverages and infant nutrition and the volume impact of higher net pricing in on-demand coffee and boxed dinners. Higher net pricing in most categories reflected pricing actions related to higher input costs in local currency that was partially offset by the negative impact (approximately 0.5 pp) of lower key commodity costs (dairy, meat, coffee and nuts).
Segment Adjusted EBITDA decreased 12.0%, due primarily to the unfavorable impact of foreign currency (14.6 pp). Excluding currency, savings from Integration and Restructuring activities, lower marketing spending and the favorable impact of the 53rd week of shipments were partially offset by unfavorable volume/mix and higher input costs in local currency.
Europe
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
% Change
 
(in millions)
 
 
Net sales
$
2,485

 
$
2,973

 
(16.4
)%
Pro forma net sales
$
2,485

 
$
2,973

 
(16.4
)%
Segment Adjusted EBITDA
$
909

 
$
898

 
1.2
 %
Net sales decreased 16.4%, including the unfavorable impacts of foreign currency (11.4 pp) and divestitures (2.1 pp), partially offset by the benefit (0.9 pp) of the 53rd week of shipments. Pro Forma Organic Net Sales decreased 3.8% as unfavorable volume/mix (4.5 pp) was partially offset by higher net pricing (0.7 pp). Higher net pricing reflected lower promotional spending in beans and price increases in ketchup. Unfavorable volume/mix was driven primarily by the volume impact of higher net pricing in beans and ketchup, declines in infant nutrition in Italy and increased competitive activity in soup, partially offset by growth in frozen potatoes.

25




Segment Adjusted EBITDA increased 1.2%, driven by lower input costs, savings from Restructuring activities and other ongoing productivity efforts, favorable product mix and the benefit of the 53rd week of shipments, partially offset by the unfavorable impact of foreign currency (14.3 pp) and increased marketing investments.
Rest of World
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
% Change
 
(in millions)
 
 
Net sales
$
3,292

 
$
3,703

 
(11.1
)%
Pro forma net sales
$
3,292

 
$
3,703

 
(11.1
)%
Segment Adjusted EBITDA
$
670

 
$
689

 
(2.8
)%
Net sales decreased 11.1%, due to the unfavorable impact of foreign currency (21.8 pp, including 7.1 pp from the devaluation of the Venezuelan bolivar), partially offset by the benefit (1.5 pp) of the 53rd week of shipments. Pro Forma Organic Net Sales increased 9.2%, driven by both higher net pricing (6.3 pp) and favorable volume/mix (2.9 pp). Higher net pricing reflected the effects of the hyper-inflationary Venezuelan economy prior to our June 28, 2015 currency devaluation as well as pricing actions related to higher input costs in local currencies. Favorable volume/mix was driven primarily by growth in ketchup and condiments across all businesses as well as sauces in Asia, partially offset by declines in nutritional beverages in India.
Segment Adjusted EBITDA decreased 2.8%, due primarily to the unfavorable impact of foreign currency (31.0 pp, including the impact of the devaluation of the Venezuelan bolivar) and higher local input costs. This decrease was partially offset by savings from Restructuring activities and other ongoing productivity efforts as well as the favorable impact of the 53rd week of shipments.
Results of Continuing Operations for Year Ended December 28, 2014 compared to the 2013 Successor Period and the unaudited Predecessor period from December 24, 2012 through June 7, 2013:
The following discussion presents the operating results for the year ended December 28, 2014, as compared to the 2013 Successor Period, and the unaudited Predecessor period from December 24, 2012 through June 7, 2013. We believe this is the most appropriate way to compare our full year 2014 results to a comparable prior year period. The results for the year ended December 28, 2014 and the twenty-nine weeks from February 8 through December 29, 2013 are derived from our audited consolidated financial statements. All data for the unaudited Predecessor period December 24, 2012 to June 7, 2013 is derived from our unaudited consolidated financial information, which is presented in the tables below, and represents a different period than the Predecessor period April 29, 2013 to June 7, 2013 included in Item 8, Financial Statements and Supplementary Data.
The Results of Continuing Operations and Results of Continuing Operations by Segment for the Year Ended December 28, 2014 compared to the 2013 Successor Period and the unaudited Predecessor period from December 24, 2012 through June 7, 2013 do not include unaudited pro forma adjustments to reflect the 2015 Merger. Consistent with internal management reporting, there are no pro forma adjustments in any of the 2013 periods presented as it would be impracticable to develop adjustments that would be meaningful. The information would not be meaningful due to the difficulty of interpreting these pro forma impacts on the various durations of the multiple 2013 periods presented, as well as, the length of time that has passed since 2013 makes it difficult to assess how the company would have performed if Kraft and Heinz had been a combined company at that time.
Consolidated Results of Continuing Operations:
Year Ended December 28, 2014 compared to the 2013 Successor Period and the unaudited Predecessor period from December 24, 2012 through June 7, 2013:
Summary of Results
 
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
 
(in millions)
Net sales
$
10,922

 
$
6,240

 
$
5,204

Operating income/(loss)
$
1,568

 
$
(8
)
 
$
604

Net income/(loss) from continuing operations
$
672

 
$
(66
)
 
$
142


26




Net Sales
 
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
 
(in millions)
Net sales
$
10,922

 
$
6,240

 
$
5,204

Net sales decreased 4.6% to $10.9 billion for the year ended December 28, 2014, compared to the sum of $6.2 billion for the 2013 Successor Period, and $5.2 billion for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. This decrease included the negative impacts of unfavorable foreign exchange rates (2.0 pp), a 53rd week of shipments in the 2013 Successor Period to align to the new year-end (1.4 pp) and divestitures (0.2 pp). Excluding these impacts, Organic Net Sales(1) decreased 1.0%, due to unfavorable volume/mix (4.0 pp), partially offset by higher net pricing (3.0 pp). Unfavorable volume/mix was due primarily to frozen nutritional meals category declines and share losses in our frozen potatoes, meals and snacks businesses in United States consumer products, reduced trade promotions in U.S. foodservice products, raw material and packaging supply constraints in Venezuela, and global product rationalization. Higher net pricing was driven by price increases in United States consumer products and Rest of World, as well as reduced trade promotions in U.S. foodservice products and Canada, partially offset by increased promotional activity in Europe.
(1) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Operating Income
 
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
 
(in millions)
Operating income/(loss)
$
1,568

 
$
(8
)
 
$
604

Adjusted EBITDA(2)
$
2,840

 
$
1,165

 
$
946

(2) Adjusted EBITDA is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Operating income increased $972 million to $1,568 million for the year ended December 28, 2014, compared to the sum of an operating loss of $8 million for the 2013 Successor Period, and operating income of $604 million for the unaudited Predecessor period from December 24, 2012 to June 7, 2013.
The increase was driven primarily by savings from restructuring and productivity related initiatives, overall lower impacts of purchase accounting and merger costs, partially offset by the unfavorable impacts of intangible asset impairment, foreign currency and restructuring costs as well as the 53rd week of shipments in the 2013 Successor Period.
Adjusted EBITDA increased 34.2% to $2.8 billion for the year ended December 28, 2014, compared to the sum of $1.2 billion for the 2013 Successor Period, and $946 million for the Predecessor period from December 24, 2012 to June 7, 2013. This increase was primarily due to efficiencies driven by restructuring and productivity initiatives, partially offset by the unfavorable impact of foreign currency and the 53rd week of shipments in the 2013 Successor Period.
Net Income
 
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
 
(in millions)
Net income/(loss)
$
657

 
$
(77
)
 
$
95

Net income increased $639 million to $657 million for the year ended December 28, 2014, compared to the sum of a net loss of $77 million for the 2013 Successor Period, and net income of $95 million for the unaudited Predecessor period from December 24,

27




2012 to June 7, 2013. This increase was driven by higher operating income and the absence of $46 million of losses from discontinued operations in previous periods, partially offset by higher interest expense, higher income taxes and higher other expense, net as follows:
Interest expense increased $147 million to $686 million for the year ended December 28, 2014, compared to the sum of $409 million for the 2013 Successor Period and $130 million for the unaudited Predecessor period from December 24, 2012 to June 7, 2013 largely reflecting higher average debt balances resulting from the 2013 Merger. Included in net interest expense for 2014 is $45 million of amortization of 2013 Merger-related debt costs. Included in net interest expense for the 2013 Successor Period is $29 million of amortization of 2013 Merger-related debt costs.
Our effective tax rate was a 16.3% provision for the year ended December 28, 2014 compared to a 77.8% benefit for the 2013 Successor Period and a 53.1% provision for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. The year ended December 28, 2014 tax provision reflected favorable jurisdictional income mix. The 2013 Successor Period tax benefit reflected favorable impacts of a 300 basis point statutory rate reduction in the United Kingdom. The unaudited Predecessor period from December 24, 2012 to June 7, 2013 tax rate included the effect of repatriation costs of approximately $100 million for earnings of foreign subsidiaries distributed during the period.
Other expense/(income), net decreased $26 million to $79 million expense for the year ended December 28, 2014, compared to the sum of $119 million income for the 2013 Successor Period, and $172 million expense for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. The year ended December 28, 2014 included an increase in currency losses of $83 million. The 2013 Successor Period included $118 million gain recognized on undesignated interest rate swaps associated with variable rate debt. The unaudited Predecessor period from December 24, 2012 to June 7, 2013 reflected $129 million of cost for early extinguishment of debt as well as a $43 million charge related to currency devaluations in Venezuela.
Results of Continuing Operations by Segment
Year Ended December 28, 2014 compared to the 2013 Successor Period and the unaudited Predecessor period from December 24, 2012 through June 7, 2013:
Following the 2015 Merger, we revised our segment structure and began to manage and report our operating results through four segments. We have three reportable segments defined by geographic region: United States, Canada, and Europe. Our remaining businesses are combined and disclosed as “Rest of World”. Rest of World is comprised of three operating segments: Asia Pacific, Latin America, and RIMEA. We began to report on our reorganized segment structure during the third quarter of 2015 and have reflected this structure for all historical periods presented.
Management evaluates segment performance based on several factors including net sales and Segment Adjusted EBITDA. Management uses Segment Adjusted EBITDA to evaluate segment performance and allocate resources. Segment Adjusted EBITDA assists management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations. These items include depreciation and amortization (including amortization of postretirement benefit plans prior service credits), equity award compensation expense, integration and restructuring expenses, merger costs, unrealized gains and losses on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment operating results), impairment losses, gain/loss associated with the sale of a business, nonmonetary currency devaluation, and certain general corporate expenses.
Net sales by segment included (in millions):
  
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
Net sales:
 
 
 
 
 
United States
$
3,615

  
$
2,072

 
$
1,759

Canada
631

 
371

 
331

Europe
2,973

  
1,659

 
1,366

Rest of World
3,703

  
2,138

 
1,748

Total net sales
$
10,922


$
6,240

 
$
5,204


28




Adjusted EBITDA by segment included (in millions):
  
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
United States
$
1,138

 
$
519

 
$
433

Canada
193

 
99

 
84

Europe
897

 
349

 
292

Rest of World
689

 
256

 
223

General corporate expenses
(77
)
 
(58
)
 
(86
)
 
$
2,840

 
$
1,165

 
$
946

United States
 
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
 
(in millions)
Net sales
$
3,615

 
$
2,072

 
$
1,759

Segment Adjusted EBITDA
$
1,138

 
$
519

 
$
433

Net sales decreased 5.6% to $3.6 billion for the year ended December 28, 2014, compared to the sum of $2.1 billion for the 2013 Successor Period, and $1.8 billion for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. This decrease included the unfavorable impact (1.7 pp) of a 53rd week of shipments in the 2013 Successor Period to align to the new year-end. Excluding the impact of the 53rd week of shipments, Organic Net Sales decreased 3.9%, due primarily to unfavorable volume/mix (5.8 pp), partially offset by higher net pricing (1.9 pp). Unfavorable volume/mix was due primarily to frozen nutritional meals category softness and share losses in Heinz’s frozen potatoes, meals and snacks businesses, product rationalization in consumer products, and reduced trade promotions in foodservice. Higher net pricing reflected increased pricing in consumer products coupled with reduced trade promotions in foodservice.
Segment Adjusted EBITDA increased 19.5% to $1.1 billion for the year ended December 28, 2014, compared to the sum of $519 million for the 2013 Successor Period, and $433 million for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. This increase was primarily driven by savings from restructuring and productivity initiatives and the favorable impact of higher net pricing, partially offset by unfavorable volume/mix and the unfavorable impact of the 53rd week of shipments in the 2013 Successor Period.
Canada
 
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
 
(in millions)
Net sales
$
631

 
$
371

 
$
331

Segment Adjusted EBITDA
$
193

 
$
99

 
$
84

Net sales decreased 10.1% to $631 million for the year ended December 28, 2014, compared to the sum of $371 million for the 2013 Successor Period, and $331 million for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. This decrease included the impacts of unfavorable Canadian exchange rates (6.7 pp) and a 53rd week of shipments in the 2013 Successor Period (1.5 pp) to align to the new year-end. Excluding the impacts of foreign currency and the 53rd week of shipments, Organic Net Sales decreased 1.9%, due primarily to unfavorable volume/mix (3.5 pp), partially offset by higher net pricing (1.6 pp). Unfavorable volume/mix was due primarily to reduced trade promotions that drove higher net pricing.

29




Segment Adjusted EBITDA increased 5.5% to $193 million for the year ended December 28, 2014, compared to the sum of $99 million for the 2013 Successor Period, and $84 million for the unaudited Predecessor period from December 24, 2012 to June 7, 2013, driven primarily by savings from restructuring and productivity initiatives, partially offset by the negative impact of foreign currency, unfavorable volume/mix and the unfavorable impact of the 53rd week of shipments in the 2013 Successor Period.
Europe
 
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
 
(in millions)
Net sales
$
2,973

 
$
1,659

 
$
1,366

Segment Adjusted EBITDA
$
897

 
$
349

 
$
292

Net sales decreased 1.7% to $3.0 billion for the year ended December 28, 2014, compared to the sum of $1.7 billion for the 2013 Successor Period, and $1.4 billion for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. This decrease included the impacts of favorable foreign exchange rates (2.6 pp), a 53rd week of shipments in the 2013 Successor Period (1.1 pp) to align to the new year-end and divestitures (0.6 pp). Excluding these impacts, Organic Net Sales decreased 2.6% due to unfavorable volume/mix (2.6 pp) as net pricing was essentially flat. Unfavorable volume/mix was due primarily to product rationalization coupled with soft soup and frozen meals category sales in the U.K., infant food in Italy, and, to a lesser extent, increased competition in the Benelux Union and Eastern Europe, partially offset by strong market performance in Sweden.
Segment Adjusted EBITDA increased 39.9% to $897 million for the year ended December 28, 2014, compared to the sum of $349 million for the 2013 Successor Period, and $292 million for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. This increase was driven primarily by savings from restructuring and productivity initiatives, the favorable impact of foreign currency, partially offset by unfavorable volume/mix and the impact of the 53rd week of shipments in the 2013 Successor Period.
Rest of World
 
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7,
2013
(24 weeks)
 
(in millions)
Net sales
$
3,703

 
$
2,138

 
$
1,748

Segment Adjusted EBITDA
$
689

 
$
256

 
$
223

Net sales decreased 4.7% to $3.7 billion for the year ended December 28, 2014, compared to the sum of $2.1 billion for the 2013 Successor Period, and $1.7 billion for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. This decrease included the impacts of unfavorable foreign exchange rates (6.6 pp) and a 53rd week of shipments in the 2013 Successor Period (1.3 pp) to align to the new year-end. Excluding the impacts of foreign currency and the 53rd week of shipments, Organic Net Sales increased 3.2% driven by higher net pricing (6.5 pp), partially offset by unfavorable volume/mix (3.3 pp). Higher net pricing was driven by increased pricing in China, Indonesia and Australia, as well as higher commodity-driven pricing in India, partially offset by increased promotional activity in New Zealand. Unfavorable volume/mix was due primarily to reduced promotional activity in the tuna and seafood category and product rationalizations in Australia, softness in Indonesian sales following the transition to a new distributor network, increased competition in vegetables in Brazil, and the impact of a product recall in China, partially offset by favorable volume/mix in Russia driven by growth in infant feeding and the Africa, Middle East, and Turkey region driven by growth in ketchup, condiments and sauces.
Segment Adjusted EBITDA increased 43.8% to $689 million for the year ended December 28, 2014, compared to the sum of $256 million for the 2013 Successor Period, and $223 million for the unaudited Predecessor period from December 24, 2012 to June 7, 2013. This increase was driven primarily by savings from restructuring and productivity initiatives and higher net pricing, partially offset by the negative impact of foreign currency, unfavorable volume/mix and the unfavorable impact of the 53rd week of shipments in the 2013 Successor Period.

30




Discontinued Operations
See Note 4, Discontinued Operations, to the consolidated financial statements for a discussion of divested businesses.
Critical Accounting Policies
Note 1, Background and Basis of Presentation, to the consolidated financial statements 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 the accounting policies we used to prepare our consolidated financial statements.
Principles of Consolidation:
The consolidated financial statements include The Kraft Heinz Company, as well as our wholly-owned and majority-owned subsidiaries. All intercompany transactions are eliminated. Our year end date for financial reporting purposes is the Sunday closest to December 31. As a result, we occasionally have a 53rd week in a fiscal year. Our year ended January 3, 2016 includes a 53rd week of activity. The year end date of certain of our U.S. and Canada businesses is the Saturday closest to December 31.
Revenue Recognition:
We recognize revenues when title and risk of loss pass to our customers. We record revenues net of consumer incentives and trade promotions and include all shipping and handling charges billed to customers. We also record provisions 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.
Advertising, Consumer Incentives, and Trade Promotions:
We promote our products with advertising, consumer incentives, and trade promotions.
Advertising expenses are recorded in selling, general and administrative expenses (“SG&A”). We recorded advertising expense of $464 million in the year ended January 3, 2016, $241 million in the year ended December 28, 2014, $190 million in the 2013 Successor Period, $22 million in the 2013 Predecessor Period, and $305 million in Fiscal 2013. 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.
Consumer incentives and trade promotions include, but are not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. Consumer incentive and trade promotion activities are recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization and redemption rates. We review and adjust these estimates each quarter based on actual experience and other information.
Goodwill and Intangible Assets:
As a result of the 2013 Merger and the 2015 Merger, the carrying value of goodwill and indefinite-lived intangible assets is substantial as of January 3, 2016: $43.1 billion of goodwill and $55.8 billion of indefinite-lived intangible assets. As more fully described in Note 7, Goodwill and Intangible Assets, to the consolidated financial statements, valuations attributed to the 2015 Merger, $29.0 billion goodwill and $45.1 billion indefinite-lived intangible assets, are preliminary and potentially subject to change.
We test goodwill and indefinite-lived intangible assets for impairment at least annually in the second quarter or when a triggering event occurs. We performed our annual impairment testing in the second quarter of 2015, prior to completion of the 2015 Merger.
The first step of the goodwill impairment test compares the reporting unit’s estimated fair value with its carrying value. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step would be applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill would be considered impaired and would be reduced to its implied fair value. We test indefinite-lived intangible assets for impairment by comparing the fair value of each intangible asset with its carrying value. If the carrying value exceeds fair value, the intangible asset would be considered impaired and would be reduced to fair value.
No impairment of goodwill was reported as a result of our 2015 or 2014 annual goodwill impairment tests; however, the historical Heinz North America Consumer Products reporting unit had an estimated fair value in excess of its carrying value of less than 10%. As a result of our annual indefinite-lived intangible asset impairment tests, we recognized non-cash impairment losses of $58 million in the year ended January 3, 2016 and $221 million in the year ended December 28, 2014.
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 indefinite-lived intangible assets requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based

31




discount rates, and other market factors. If current expectations of future growth rates are not met or market factors outside of our control, such as discount rates, change significantly, then one or more reporting units or intangible assets might become impaired in the future. Additionally, as goodwill and intangible assets associated with recently acquired businesses are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to an impairment risk if business operating results or macroeconomic conditions deteriorate.
Postemployment Benefit Plans:
We provide a range of benefits to our eligible employees and retirees. These include defined benefit pension, postretirement benefit plans, defined contribution, and multiemployer pension and medical benefits. We maintain various retirement plans for the majority of our employees. The cost of these plans is charged to expense over the working life of the covered employees. We generally amortize net actuarial gains or losses and changes in the fair value of plan assets in future periods within cost of sales and SG&A.
For our postretirement benefit plans, our 2016 health care cost trend rate assumption will be 6.5%. 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 2016 and 2024. 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 the following effects, increase/(decrease) in cost and obligation, as of January 3, 2016:
 
One-Percentage-Point
 
Increase
 
Decrease
 
(in millions)
Effect on annual service and interest cost
$
8

 
$
(7
)
Effect on postretirement benefit obligation
126

 
(104
)
Our 2016 discount rate assumption is 4.2% for our postretirement plans. Our 2016 discount rate assumption is 4.3% for our U.S. pension plans and 3.8% 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 benefit obligations. Changes in our discount rates were primarily the result of changes in bond yields year-over-year.
Beginning in 2016, we will change the method we use to estimate the service cost and interest cost components of net pension cost/(benefit) and net postretirement benefit plans cost resulting in a decrease to these cost components. We will 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 are making 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 will account for this change prospectively as a change in accounting estimate.
Our 2016 expected rate of return on plan assets is 5.7% for our U.S. pension plans and 5.8% 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 rebalancing between asset classes as we make contributions and monthly benefit payments.
While we do not anticipate further changes in the 2016 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 actual rate of return on plan assets would have the following effects, increase/(decrease) in cost, as of January 3, 2016:
 
U.S. Plans
 
Non-U.S. Plans
 
100-Basis-Point
 
100-Basis-Point
 
Increase
 
Decrease
 
Increase
 
Decrease
 
(in millions)
Effect of change in discount rate on pension costs
$
9

 
$
(24
)
 
$
7

 
$
(9
)
Effect of change in expected rate of return on plan assets on pension costs
(52
)
 
52

 
(34
)
 
34

Effect of change in discount rate on postretirement benefit plans costs
(4
)
 
(9
)
 

 
1

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

32




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 liabilities on the balance sheet.
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 charge 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.
We have a significant amount of undistributed earnings of foreign subsidiaries that are considered to be indefinitely reinvested. We do not recognize U.S. taxes on undistributed earnings of foreign subsidiaries which are considered to be indefinitely reinvested or which may be remitted tax free in certain situations. We do recognize U.S. taxes on undistributed earnings in foreign subsidiaries which are currently not considered to be indefinitely reinvested.
We intend to continue to reinvest the majority of our foreign subsidiary earnings to support our priorities for growth in international markets and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. If we decided at a later date to repatriate these funds to the U.S., we would be required to provide taxes on these amounts based on the applicable U.S. tax rates net of credits for foreign taxes already paid. It is not practicable to determine the deferred tax liability associated with the indefinitely reinvested undistributed earnings. We believe it is not practicable because there is a significant amount of uncertainty with respect to the tax impact. This uncertainty results from the significant judgment required to analyze the amount of foreign tax credits attributable to the earnings, the ability to use foreign tax credits to offset the U.S. tax on the earnings, the potential timing of any distributions, as well as the local withholding tax and other indirect tax consequences that may arise due to the potential distribution of these earnings.
New Accounting Pronouncements
See Note 1, Background and Basis of Presentation, to the consolidated financial statements for a discussion of new accounting pronouncements.
Contingencies
See Note 18, Commitments and Contingencies, to the consolidated financial statements for a discussion of contingencies.
Commodity Trends
We purchase and use large quantities of commodities, including dairy products, meat products, tomatoes, coffee beans, nuts, potatoes, soybean and vegetable oils, sugar and other sweeteners, corn products, and wheat 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.
Markets for our key commodities were volatile for the year ended January 3, 2016. We expect commodity cost volatility to continue in 2016. We manage commodity cost volatility primarily through pricing and risk management strategies. As a result of these risk management strategies, our commodity cost experience may not immediately correlate with market price trends.
Liquidity and Capital Resources
We believe that cash generated from our operating activities, and our Revolving Credit Facility (as defined below), will provide sufficient liquidity to meet our working capital needs, expected integration and restructuring expenditures, planned capital expenditures and contributions to our postemployment benefit plans, future contractual obligations, and payment of our anticipated quarterly dividends. We intend to use our cash on hand and our Revolving Credit Facility for daily funding requirements. Overall, 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.

33




Cash Flow Activity
 
Successor
 
Predecessor
(H. J. Heinz Company)
(Unaudited)
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
 
February 8 - December 29,
2013
(29 weeks)
 
December 24, 2012 - June 7, 2013
(24 weeks)
 
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net income/(loss)
$
647

 
$
672

 
$
(72
)
 
$
102

Adjustments to reconcile net income/(loss) to operating cash flows:
 
 
 
 
 
 
 
Depreciation and amortization
740

 
530

 
280

 
164

Amortization of inventory step-up
347

 

 
383

 

Pension contributions
(286
)
 
(102
)
 
(152
)
 
(28
)
Impairment losses on indefinite-lived intangible assets
58

 
221

 

 

Other items, net
294

 
22

 
(337
)
 
78

Changes in current assets and liabilities:
 
 
 
 
 
 
 
Trade receivables and sold receivables
416

 
15

 
(121
)
 
140

Inventories
25

 
153

 
84

 
46

Accounts payable
(119
)
 
562

 
(90
)
 
65

Other current assets
114

 
(20
)
 
46

 
(41
)
Other current liabilities
231

 
87

 
14

 
142

Net cash provided by operating activities
2,467

 
2,140

 
35

 
668

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Capital expenditures
(648
)
 
(399
)
 
(202
)
 
(292
)
Acquisition of business, net of cash on hand
(9,468
)
 

 
(21,494
)
 

Proceeds from net investment hedges
488

 

 

 

Other investing activities, net
(76
)
 
50

 
25

 
34

Net cash used for investing activities
(9,704
)
 
(349
)
 
(21,671
)
 
(258
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Repayments of long-term debt
(12,314
)
 
(1,103
)
 
(2,670
)
 
(450
)
Proceeds from issuance of long-term debt
14,834

 

 
12,575

 
5

Debt issuance costs
(98
)
 

 
(321
)
 

Net (payments)/proceeds on short-term debt
(49
)
 
(3
)
 
(1,641
)
 
297

Dividends
(2,202
)
 
(720
)
 
(360
)
 
(332
)
Capital contributions
10,000

 

 
16,500

 

Other financing activities, net
12

 
6

 
26

 
(2
)
Net cash (used for)/provided by financing activities
10,183

 
(1,820
)
 
24,109

 
(482
)
Effect of exchange rate changes on cash and cash equivalents
(407
)
 
(132
)
 
(14
)
 
(140
)
Net (decrease)/increase
2,539

 
(161
)
 
2,459

 
(212
)
Balance at beginning of period
2,298

 
2,459

 

 
2,282

Balance at end of period
$
4,837

 
$
2,298

 
$
2,459

 
$
2,070


34





Cash Flow Activity for the Year Ended January 3, 2016 compared to Year Ended December 28, 2014
Net Cash Provided by Operating Activities:
Cash provided by operating activities was $2.5 billion in the year ended January 3, 2016 compared to $2.1 billion in the year ended December 28, 2014. The increase in cash provided by operating activities was primarily due to an increase in operating income as a result of the 2015 Merger, partially offset by an increase in pension contributions and working capital improvements that were less pronounced than prior year.
Net Cash Used in Investing Activities:
Net cash used in investing activities was $9.7 billion in the year ended January 3, 2016 and $349 million in the year ended December 28, 2014. The increase in cash used in investing activities was primarily driven by our payments to acquire Kraft and also included proceeds from our net investment hedges of $488 million. Capital expenditures were $648 million for the year ended January 3, 2016. We expect 2016 capital expenditures to be approximately $1.6 billion, including capital expenditures required for our ongoing integration and restructuring activities.
Net Cash Provided by/Used in Financing Activities:
Net cash provided by financing activities was $10.2 billion in the year ended January 3, 2016 compared to net cash used of $1.8 billion in the year ended December 28, 2014. The $10.2 billion of cash provided by financing activities was primarily driven by $10.0 billion proceeds from issuance of common stock to the Sponsors. Our cash provided by financing activities also included $14.8 billion proceeds from issuances of long-term debt partially offset by long-term debt repayments of $12.3 billion and the payment of our quarterly common stock cash dividend starting in the third quarter of 2015. Additionally, related to our Series A Preferred Stock we made cash distributions of $900 million in the year ended January 3, 2016, which reflected five dividend payments compared to cash distributions of $720 million in the year ended December 28, 2014 which reflected four dividend payments. See Equity and Dividends for further information on our cash distributions related to our Series A Preferred Stock.
Cash Flow Activity for Year Ended December 28, 2014 compared to the 2013 Successor Period and the unaudited Predecessor period from December 24, 2012 through June 7, 2013
Cash provided by operating activities was $2.1 billion for the Successor Period ended December 28, 2014 compared to cash provided by operating activities of $35 million for the 2013 Successor Period, and cash provided by operating activities of $668 million for the Predecessor period December 24, 2012 to June 7, 2013, an increase of $1.4 billion. The increase primarily reflects the improvements in our profitability following the various restructuring and productivity initiatives undertaken subsequent to the 2013 Merger, coupled with higher 2013 Merger-related costs and charges on the early extinguishment of debt in the prior periods. In addition, we extended our payment terms with suppliers generating approximately $540 million of incremental cash in the Successor Period ended December 28, 2014. The increase also reflects favorable movements in inventory, receivables as well as lower pension contributions and cash taxes, partially offset by cash used for restructuring initiatives.

Cash used for investing activities totaled $349 million for the year ended December 28, 2014, compared with $21.7 billion for the 2013 Successor Period, and $258 million for the Predecessor period December 24, 2012 to June 7, 2013. The cash used in 2014 for investing activities primarily represented capital expenditures, net of proceeds from the disposal of property, plant and equipment. The 2013 Successor Period reflected the 2013 Merger consideration, net of cash on hand, of $21.5 billion.
Cash used for financing activities was $1.8 billion for the year ended December 28, 2014, compared with cash provided by financing activities of $24.1 billion for the 2013 Successor Period, and cash used for financing activities of $482 million for the Predecessor period December 24, 2012 to June 7, 2013. Our cash used in 2014 was driven by repayment of $133 million of our B-1 Loans, repayment of $867 million of our B-2 Loans, and $720 million of Series A Preferred Stock dividends to Berkshire Hathaway. In the 2013 Successor Period, cash provided by financing activities reflected the funding of the 2013 Merger including equity contributions from the Sponsors totaling $16.5 billion, proceeds of approximately $9.5 billion in senior secured term loans, and proceeds of $3.1 billion upon the issuance of 4.250% Second Lien Senior Secured Notes, these proceeds were partially offset by $321 million of debt issuance costs. We used the funding from the 2013 Merger to repay $4.2 billion of H. J. Heinz Company outstanding short and long term debt and associated hedge contracts.
Cash held by international subsidiaries:
At January 3, 2016, approximately $1.6 billion of cash and short-term investments were held by international subsidiaries.
We have provided a deferred tax liability of $22 million for undistributed earnings not considered to be indefinitely reinvested. Except as noted below, we consider the unremitted earnings of our non-U.S subsidiaries that have not been previously taxed in the US, 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

35




earnings to fund our United States cash requirements. Further, certain previously taxed earnings have not yet been remitted and certain intercompany loans have not been repaid. As a result, in future periods, we believe that we could remit approximately $4.2 billion of cash to the United States without incurring any additional material tax expense. If we decide at a later date to repatriate these funds to the United States, we would be required to pay taxes on these amounts based on the applicable United States tax rates net of credits for foreign taxes already paid. Notwithstanding the above, for the year ended January 3, 2016, we incurred tax expense of approximately $222 million related to the repatriation of foreign earnings. We repatriated these foreign earnings as part of the integration of Kraft and Heinz international structures post-merger, to make better use of our excess foreign cash, and to align our capital structure with our strategic and operational needs. The remaining undistributed earnings of our foreign subsidiaries continue to be indefinitely reinvested and would not be available for use in the United States without incurring United States federal and state income tax consequences.
We also made taxable distributions of earnings in in the year ended December 28, 2014 and in the 2013 Predecessor period. We did not have significant taxable distributions of foreign earnings in the 2013 successor period or for Fiscal 2013. For the distributions of earnings in the year ended December 28, 2014, we incurred tax expense of approximately $64 million. The 2014 distributions used the majority of our United States foreign tax credit carry forwards. In the 2013 Predecessor period, our taxable distributions of earnings resulted in a charge to our provision for income taxes of approximately $100 million. We were able to use existing foreign tax credit carryforwards to offset the tax liability created by this distribution and therefore, there were not incremental cash taxes incurred.
Total Debt:
Our long-term debt increased to $25.2 billion at January 3, 2016 as compared to $13.4 billion at December 28, 2014. See Note 12, Debt, to the consolidated financial statements for information on our debt, including the impacts of the 2015 Merger and other transactions that occurred during year ended January 3, 2016. Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all covenants as of January 3, 2016.
We maintain our Senior Credit Facilities comprised of our $4.0 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) and a $600 million Term Loan Facility (together with the Revolving Credit Facility, the “Senior Credit Facilities”). Our Senior Credit Facilities contain customary representations, covenants, and events of default. At January 3, 2016, $600 million aggregate principal amount of our Term Loan Facility was outstanding. No amounts were drawn on our Revolving Credit Facility at January 3, 2016 or during the year ended January 3, 2016. For further description of our Senior Credit Facilities, see Note 12, Debt, to the consolidated financial statements.
Series A Preferred Stock:
We currently intend to refinance the Series A Preferred Stock in 2016 through issuance of debt, other capital market initiatives, as well as any excess liquidity we may have available on our balance sheet.
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 likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
See Note 15, Financing Arrangements, to the consolidated financial statements for a discussion of our accounts receivable securitization and factoring programs.

36




Aggregate Contractual Obligations:
The following table summarizes our contractual obligations at January 3, 2016 (in millions):
 
Payments Due
 
2016
 
2017-2018
 
2019-2020
 
2021 and Thereafter
 
Total
Long-term debt(a)
$
1,111

 
$
6,732

 
$
5,370

 
$
26,736

 
$
39,949

Capital leases(b)
22

 
37

 
13

 
67

 
139

Operating leases(c)
120

 
225

 
158

 
235

 
738

Purchase obligations(d)
2,409

 
1,978

 
412

 
253

 
5,052

Preferred dividends(e)
540

 
1,440

 
1,440

 
360

 
3,780

Other long-term liabilities(f)
194

 
352

 
323

 
678

 
1,547

Total
$
4,396

 
$
10,764

 
$
7,716

 
$
28,329

 
$
51,205

(a)
Amounts represent the expected cash payments of our long-term debt, including interest on variable and fixed rate long-term debt and interest rate swap contracts.
(b)
Amounts represent the expected cash payments of our capital leases, including expected cash payments of interest expense.
(c)
Operating leases represent the minimum rental commitments under non-cancelable operating leases.
(d)
Amounts represent commitments to purchase materials, supplies, property, plant and equipment, and co-packing, storage and distribution services based on projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology, and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. A few of these obligations are long-term and are based on minimum purchase requirements. Certain purchase obligations contain variable pricing components, and, as a result, actual cash payments are expected to fluctuate based on changes in these variable components. Due to the proprietary nature of some of our materials and processes, certain supply contracts contain penalty provisions for early terminations. We do not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. We exclude amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities from the table above.
(e)
Berkshire Hathaway has an $8.0 billion preferred stock investment in Kraft Heinz which entitles it to a 9.00% annual dividend to be paid quarterly in cash or in-kind. We currently intend to refinance the Series A Preferred Stock in 2016. However, there can be no assurance that we will be able to successfully undertake such refinancing, and as such, we have reflected continued quarterly cash distributions in all periods presented in the table above. See Note 13, Preferred Stock and Warrants, to the consolidated financial statements for additional information.
(f)
Other long-term liabilities primarily consist of certain specific incentive compensation arrangements and postretirement benefit commitments. Future benefit payments for our postretirement benefit plans through 2025 are expected to be $1.4 billion. We are unable to reliably estimate the timing of the payments beyond 2025. Long-term liabilities related to income taxes, insurance accruals, and other accruals included on the consolidated balance sheet are excluded from the above table as we are unable to estimate the timing of payments for these items.
Pension contributions were $286 million for the year ended January 3, 2016. We estimate that 2016 pension contributions will be approximately $315 million to our U.S. plans and approximately $30 million to our non-U.S. plans. Our U.S. contributions include approximately $160 million in the first quarter of 2016 related to the termination of our U.S. nonqualified pension plan that was effective December 31, 2015. Beyond 2016, we are unable to reliably estimate the timing of contributions to our pension plans. Our contributions depend on many factors, including changes in tax, employee benefit, or other laws, tax deductibility, significant differences between expected and actual pension asset performance or interest rates, and other factors. As such, expected pension contributions for 2016 have been excluded from the above table.
At January 3, 2016, the total amount of unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was approximately $397 million. The timing of payments will depend on the progress of examinations with tax authorities. We do not expect a significant tax payment related to these obligations within the next year. We are unable to make a reasonably reliable estimate as to when any significant cash settlements with taxing authorities may occur; therefore, we have excluded the amount of gross unrecognized tax benefits from the above table.

37




Equity and Dividends
Series A Preferred Stock:
Our Series A Preferred Stock entitles holders to a 9.00% annual dividend to be paid quarterly in arrears on each March 7, June 7, September 7, and December 7, in cash. While the Series A Preferred Stock remains outstanding, if we declare or pay a dividend on our common stock, we must also declare and pay in full the dividend on the Series A Preferred Stock for the then-current quarterly period. We made cash distributions of $900 million during the year ended January 3, 2016 which reflects five payments due to the fact that, in connection with the declaration of our dividend on our common stock on December 8, 2015, we also declared and paid the dividend on the Series A Preferred Stock for the quarterly period that ends March 7, 2016We expect to continue to make cash distributions to pay this dividend as long as the Series A Preferred Stock remains outstanding. We made cash distributions of $720 million in the year ended December 28, 2014 and $360 million in the 2013 Successor Period. The Series A Preferred Stock was issued in connection with the 2013 Merger and therefore, there were no preferred dividends paid in any of the Predecessor periods.
See Note 13, Preferred Stock and Warrants, to the consolidated financial statements for a discussion of the Series A Preferred Stock.
Common Stock Dividends:
We paid common stock dividends of $1.3 billion in the year ended January 3, 2016. No common stock dividends were paid in the year ended December 28, 2014, the 2013 Successor Period, or the 2013 Predecessor Period. We paid common stock dividends of $666 million in Fiscal 2013.
On December 8, 2015, our Board of Directors declared a cash dividend of $0.575 per share of common stock, which was paid on January 15, 2016, to shareholders of record on December 23, 2015. In connection with this dividend we recorded $762 million of dividends payable as of January 3, 2016. Additionally, on February 25, 2016, our Board of Directors declared a cash dividend of $0.575 per share of common stock, which is payable on April 8, 2016, to shareholders of record on March 18, 2016. The present annualized dividend rate is $2.30 per share of common stock. The declaration of dividends is subject to the discretion of our Board of Directors and depends on various factors, including our net income, financial condition, cash requirements, future prospects, and other factors that our Board of Directors deems relevant to its analysis and decision making.
Supplemental Unaudited Pro Forma Condensed Combined Financial Information
The following unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the 2015 Merger, which was consummated on July 2, 2015, and the related equity investments, based on the historical results of operations of Heinz and Kraft. See Note 1, Background and Basis of Presentation, and Note 2, Merger and Acquisition, to the consolidated financial statements for additional information on the 2015 Merger.
The following unaudited pro forma condensed combined statements of income for the years ended January 3, 2016 and December 28, 2014 are based on the historical financial statements of Heinz and Kraft after giving effect to the 2015 Merger, related equity investments, and the assumptions and adjustments described in the accompanying notes to these unaudited pro forma condensed combined statements of income.
The Kraft Heinz statement of income information for the year ended January 3, 2016 was derived from the consolidated financial statements included elsewhere in this Form 10-K. The historical Kraft statement of income includes information for the six months ended June 27, 2015 derived from Kraft's unaudited condensed consolidated financial statements included in our Form 8-K dated August 10, 2015 and information for June 27, 2015 to July 2, 2015 derived from Kraft's books and records.
The Heinz statement of income information for the year ended December 28, 2014 was derived from the consolidated financial statements included elsewhere in this Form 10-K. The Kraft statement of income information for the year ended December 28, 2014 was derived from its consolidated financial statements included in Kraft’s Annual Report on Form 10-K for the year ended December 27, 2014.
The unaudited pro forma condensed combined statements of income are presented as if the 2015 Merger had been consummated on December 30, 2013, the first business day of our 2014 fiscal year, and combine the historical results of Heinz and Kraft. This is consistent with internal management reporting. The unaudited pro forma condensed combined statements of income set forth below primarily give effect to the following assumptions and adjustments:
Application of the acquisition method of accounting;
The issuance of Heinz common stock to the Sponsors in connection with the equity investments;
The pre-closing Heinz share conversion;

38




The exchange of one share of Kraft Heinz common stock for each share of Kraft common stock; and
Conformance of accounting policies.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized estimated fair values at the 2015 Merger Date for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. Our purchase price allocation is substantially complete with the exception of identifiable intangible assets, certain income tax accounts and goodwill. 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 our preliminary estimates.
The unaudited pro forma condensed combined financial information has been prepared in accordance with SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results. In addition, the accompanying unaudited pro forma condensed combined statements of income do not reflect any additional anticipated synergies, operating efficiencies, cost savings or any integration costs that may result from the 2015 Merger.
The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma condensed combined statements of income to give effect to unaudited pro forma events that are (1) directly attributable to the transaction, (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of the combined company. As a result, under SEC Regulation S-X Article 11, certain expenses such as deal costs (“Deal Costs”) and the fair value step-up of Kraft’s inventory (“Inventory Step-up Costs”) are eliminated from pro forma results in both periods presented. In contrast, under the ASC 805 presentation in Note 2, Merger and Acquisition, to the consolidated financial statements, these expenses are required to be included in prior year pro forma results.
The unaudited pro forma condensed combined financial information, including the related notes, should be read in conjunction with the historical consolidated financial statements and related notes of Kraft, and with our consolidated financial statements included elsewhere in this Form 10-K. The historical SEC filings of Kraft are available to the public at the SEC website at www.sec.gov.

39




The Kraft Heinz Company
Pro Forma Condensed Combined Statements of Income
(in millions, except per share data)
(Unaudited)
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
Net sales
$
27,447

 
$
29,122

Cost of products sold
18,299

 
20,146

Gross profit
9,148

 
8,976

Selling, general and administrative expenses
4,613

 
4,593

Operating income
4,535

 
4,383

Interest expense
1,528

 
1,113

Other expense, net
289

 
57

Income before income taxes
2,718

 
3,213

Provision for income taxes
944

 
880

Net income
1,774

 
2,333

Net income attributable to noncontrolling interest
13

 
15

Net income attributable to Kraft Heinz
$
1,761

 
$
2,318

Preferred dividends
900

 
720

Net income attributable to common shareholders
$
861

 
$
1,598

 
 
 
 
Basic common shares outstanding
1,202

 
1,192

Diluted common shares outstanding
1,222

 
1,222

 
 
 
 
Per share data applicable to common shareholders:
 
 
 
Basic earnings
$
0.72

 
$
1.34

Diluted earnings
$
0.70

 
$
1.31







40




The Kraft Heinz Company
Pro Forma Condensed Combined Statement of Income
For the Year Ended January 3, 2016
(in millions, except per share data)
(Unaudited)
 
Kraft Heinz
 
Historical Kraft
 
Pro Forma Adjustments
 
Pro Forma
Net sales
$
18,338

 
$
9,109

 
$

 
$
27,447

Cost of products sold
12,577

 
6,103

 
(381
)
 
18,299

Gross profit
5,761

 
3,006

 
381

 
9,148

Selling, general and administrative expenses
3,122

 
1,532

 
(41
)
 
4,613

Operating income
2,639

 
1,474

 
422

 
4,535

Interest expense
1,321

 
247

 
(40
)
 
1,528

Other expense/(income), net
305

 
(16
)
 

 
289

Income before income taxes
1,013

 
1,243

 
462

 
2,718

Provision for income taxes
366

 
400

 
178

 
944

Net income
647

 
843

 
284

 
1,774

Net income attributable to noncontrolling interest
13

 

 

 
13

Net income attributable to Kraft Heinz
$
634

 
$
843

 
$
284

 
$
1,761

Preferred dividends
900

 

 

 
900

Net (loss)/income attributable to common shareholders
$
(266
)
 
$
843

 
$
284

 
$
861

 
 
 
 
 
 
 
 
Basic common shares outstanding
786

 

 
416

 
1,202

Diluted common shares outstanding
786

 

 
436

 
1,222

 
 
 
 
 
 
 
 
Per share data applicable to common shareholders:
 
 
 
 
 
 
 
Basic (loss)/earnings
$
(0.34
)
 
$

 
$
1.06

 
$
0.72

Diluted (loss)/earnings
$
(0.34
)
 
$

 
$
1.04

 
$
0.70






41




The Kraft Heinz Company
Pro Forma Condensed Combined Statement of Income
For the Year Ended December 28, 2014
(in millions, except per share data)
(Unaudited)
 
Historical Heinz
 
Historical Kraft
 
Pro Forma Adjustments
 
Pro Forma
Net sales
$
10,922

 
$
18,200

 
$

 
$
29,122

Cost of products sold
7,645

 
13,248

 
(747
)
 
20,146

Gross profit
3,277

 
4,952

 
747

 
8,976

Selling, general and administrative expenses
1,709

 
3,062

 
(178
)
 
4,593

Operating income
1,568

 
1,890

 
925

 
4,383

Interest expense
686

 
507

 
(80
)
 
1,113

Other expense/(income), net
79

 
(22
)
 

 
57

Income before income taxes
803

 
1,405

 
1,005

 
3,213

Provision for income taxes
131

 
363

 
386

 
880

Net income
672

 
1,042

 
619

 
2,333

Net income attributable to noncontrolling interest
15

 

 

 
15

Net income attributable to Kraft Heinz
$
657

 
$
1,042

 
$
619

 
$
2,318

Preferred dividends
720

 

 

 
720

Net (loss)/income attributable to common shareholders
$
(63
)
 
$
1,042

 
$
619

 
$
1,598

 
 
 
 
 
 
 
 
Basic common shares outstanding
377

 
593

 
222

 
1,192

Diluted common shares outstanding
377

 
600

 
245

 
1,222

 
 
 
 
 
 
 
 
Per share data applicable to common shareholders:
 
 
 
 
 
 
 
Basic (loss)/earnings
$
(0.17
)
 
$
1.76

 
$
(0.25
)
 
$
1.34

Diluted (loss)/earnings
$
(0.17
)
 
$
1.74

 
$
(0.26
)
 
$
1.31



42




The Kraft Heinz Company
Summary of Pro Forma Adjustments
(in millions)
(Unaudited)
 
January 3,
2016
(53 weeks)
 
December 28,
2014
(52 weeks)
Impact to cost of products sold:
 
 
 
Postemployment benefit costs(a)
$
(34
)
 
$
(747
)
Inventory step-up(b)
(347
)
 

Impact to cost of products sold
$
(381
)
 
$
(747
)
 
 
 
 
Impact to selling, general and administrative expenses:
 
 
 
Depreciation and amortization(c)
$
84

 
$
168

Compensation expense(d)
31

 
68

Postemployment benefit costs(a)
11

 
(414
)
Deal costs(e)
(167
)
 

Impact to selling, general and administrative expenses
$
(41
)
 
$
(178
)
 
 
 
 
Impact to interest expense:
 
 
 
Interest expense(f)
$
(40
)
 
$
(80
)
Impact to interest expense
$
(40
)
 
$
(80
)
Adjustments included in the accompanying unaudited pro forma condensed combined statements of operations are as follows:
(a)
Represents the change to align Kraft's accounting policy to our accounting policy for postemployment benefit plans. Kraft historically elected a mark-to-market accounting policy and recognized net actuarial gains or losses and changes in the fair value of plan assets immediately in earnings upon remeasurement. Our policy is to initially record such items in other comprehensive income/(loss). Also represents the elimination of Kraft’s historical amortization of postemployment benefit plan prior service credits.
(b)
Represents the elimination of nonrecurring non-cash costs related to the fair value adjustment of Kraft’s inventory. See Note 2, Merger and Acquisition, to the consolidated financial statements for additional information on the determination of fair values.
(c)
Represents incremental amortization resulting from the fair value adjustment of Kraft’s definite-lived intangible assets in connection with the 2015 Merger. The net change in depreciation expense resulting from the fair value adjustment of property, plant, and equipment was insignificant. See Note 2, Merger and Acquisition, to the consolidated financial statements for additional information on the determination of fair values.
(d)
Represents the incremental compensation expense due to the fair value remeasurement of certain of Kraft’s equity awards in connection with the 2015 Merger. See Note 9, Employees' Stock Incentive Plans, to the consolidated financial statements for additional information on the conversion of Kraft’s equity awards in connection with the 2015 Merger.
(e)
Represents the elimination of nonrecurring deal costs incurred in connection with the 2015 Merger.
(f)
Represents the incremental change in interest expense resulting from the fair value adjustment of Kraft’s long-term debt in connection with the 2015 Merger, including the elimination of the historical amortization of deferred financing fees and amortization of original issuance discount.
We calculated the income tax effect of the pro forma adjustments using a 38.5% weighted average statutory tax rate for both periods presented.



43




For the year ended December 28, 2014, we calculated the unaudited pro forma weighted average number of basic shares outstanding by adding Heinz’s historical weighted average number of basic shares outstanding, the 500 million shares issued to the Sponsors in connection with their equity investments (after giving effect to the pre-closing Heinz conversion ratio of 0.443332) and the historical weighted average number of basic shares of Kraft, which were converted on a 1:1 basis into shares of Kraft Heinz. We calculated the unaudited pro forma weighted average number of diluted shares outstanding by adding the effect of dilutive securities to the unaudited pro forma weighted average number of basic shares outstanding, including dilutive securities related to historical Heinz. The historical Heinz diluted EPS calculation did not include these securities as historical Heinz was in a net loss position and such securities were anti-dilutive.
For the year ended January 3, 2016, we calculated the unaudited pro forma weighted average number of basic shares outstanding by adding the Kraft Heinz weighted average number of basic shares outstanding (which included the Sponsors' shares and the converted Kraft shares weighted for the period from the 2015 Merger through the year ended January 3, 2016), and the Sponsors' shares (as converted) and the converted Kraft shares (both weighted from the beginning of the year through the 2015 Merger Date). We calculated the unaudited pro forma weighted average number of diluted shares outstanding by adding the effect of dilutive securities to the unaudited pro forma weighted average number of basic shares outstanding, including dilutive securities related to Kraft Heinz. The Kraft Heinz diluted EPS calculation did not include these securities as Kraft Heinz was in a net loss position and such securities were anti-dilutive.
Non-GAAP Financial Measures
We use different Non-GAAP financial measures for the comparison of the year ended January 3, 2016 to the year ended December 28, 2014 and for the comparison of the year ended December 28, 2014 to 2013 Successor Period and the unaudited Predecessor period from December 24, 2013 through June 7, 2013 as our pro forma adjustments are only included when we compare the year ended January 3, 2016 to the year ended December 28, 2014. Our unaudited pro forma condensed combined statements of income are presented as if the 2015 Merger had been consummated on December 30, 2013, the first business day of our 2014 fiscal year.
Consistent with internal management reporting, there are no pro forma adjustments in any of the 2013 periods presented as it would be impracticable to develop adjustments that would be meaningful. The information would not be meaningful due to the difficulty of interpreting these pro forma impacts on the various durations of the multiple 2013 periods presented, as well as, the length of time that has passed since 2013 makes it difficult to assess how the company would have performed if Kraft and Heinz had been a combined company at that time.
Our pro forma financial information and our non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with accounting principles generally accepted in the United States of America(“U.S. GAAP”).
The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. Pro Forma Organic Net Sales, Adjusted Pro Forma EBITDA, Adjusted Pro Forma EPS, Organic Net Sales, and Adjusted EBITDA are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, operating income, earnings per common share (“EPS”), or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.
Management uses these Non-GAAP financial measures to as