Document

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

FORM 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2017
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number 001-37482
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11570621&doc=12
The Kraft Heinz Company
(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of April 29, 2017, there were 1,217,633,003 shares of the registrant’s common stock outstanding.



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.



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data.
The Kraft Heinz Company
Condensed Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
Net sales
$
6,364

 
$
6,570

Cost of products sold
4,063

 
4,192

Gross profit
2,301

 
2,378

Selling, general and administrative expenses
750

 
865

Operating income
1,551

 
1,513

Interest expense
313

 
249

Other expense/(income), net
(12
)
 
(8
)
Income/(loss) before income taxes
1,250

 
1,272

Provision for/(benefit from) income taxes
359

 
372

Net income/(loss)
891

 
900

Net income/(loss) attributable to noncontrolling interest
(2
)
 
4

Net income/(loss) attributable to common shareholders
$
893

 
$
896

Per share data applicable to common shareholders:
 
 
 
Basic earnings/(loss)
$
0.73

 
$
0.74

Diluted earnings/(loss)
0.73

 
0.73

Dividends declared
0.60

 
0.575


See accompanying notes to the condensed consolidated financial statements.


1


The Kraft Heinz Company
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(Unaudited)
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
Net income/(loss)
$
891

 
$
900

Other comprehensive income/(loss), net of tax:
 
 
 
Foreign currency translation adjustments
307

 
272

Net deferred gains/(losses) on net investment hedges
(51
)
 
(60
)
Net actuarial gains/(losses) arising during the period
(10
)
 

Reclassification of net postemployment benefit losses/(gains)
(55
)
 
(54
)
Net deferred gains/(losses) on cash flow hedges
(34
)
 
(18
)
Net deferred losses/(gains) on cash flow hedges reclassified to net income
20

 
(22
)
Total other comprehensive income/(loss)
177

 
118

Total comprehensive income/(loss)
1,068

 
1,018

Comprehensive income/(loss) attributable to noncontrolling interest
(4
)
 
11

Comprehensive income/(loss) attributable to common shareholders
$
1,072

 
$
1,007


See accompanying notes to the condensed consolidated financial statements.

2


The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
 
April 1, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
3,242

 
$
4,204

Trade receivables (net of allowances of $30 at April 1, 2017 and $20 at December 31, 2016)
886

 
769

Sold receivables
588

 
129

Inventories
3,151

 
2,684

Other current assets
1,008

 
967

Total current assets
8,875

 
8,753

Property, plant and equipment, net
6,693

 
6,688

Goodwill
44,300

 
44,125

Intangible assets, net
59,330

 
59,297

Other assets
1,604

 
1,617

TOTAL ASSETS
$
120,802

 
$
120,480

LIABILITIES AND EQUITY
 
 
 
Commercial paper and other short-term debt
$
909

 
$
645

Current portion of long-term debt
2,023

 
2,046

Trade payables
3,936

 
3,996

Accrued marketing
599

 
749

Accrued postemployment costs
157

 
157

Income taxes payable
424

 
255

Interest payable
346

 
415

Other current liabilities
989

 
1,238

Total current liabilities
9,383

 
9,501

Long-term debt
29,748

 
29,713

Deferred income taxes
20,910

 
20,848

Accrued postemployment costs
2,016

 
2,038

Other liabilities
801

 
806

TOTAL LIABILITIES
62,858

 
62,906

Commitments and Contingencies (Note 13)

 

Equity:
 
 
 
Common stock, $0.01 par value (5,000,000,000 shares authorized; 1,220,191,898 shares issued and 1,217,543,284 shares outstanding at April 1, 2017; 1,218,947,088 shares issued and 1,216,475,740 shares outstanding at December 31, 2016)
12

 
12

Additional paid-in capital
58,642

 
58,593

Retained earnings/(deficit)
750

 
588

Accumulated other comprehensive income/(losses)
(1,449
)
 
(1,628
)
Treasury stock, at cost
(223
)
 
(207
)
Total shareholders' equity
57,732

 
57,358

Noncontrolling interest
212

 
216

TOTAL EQUITY
57,944

 
57,574

TOTAL LIABILITIES AND EQUITY
$
120,802

 
$
120,480


See accompanying notes to the condensed consolidated financial statements.

3


The Kraft Heinz Company
Condensed Consolidated Statement of Equity
(in millions)
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings/(Deficit)
 
Accumulated Other Comprehensive Income/(Losses)
 
Treasury Stock
 
Noncontrolling Interest
 
Total Equity
Balance at December 31, 2016
$
12

 
$
58,593

 
$
588

 
$
(1,628
)
 
$
(207
)
 
$
216

 
$
57,574

Net income/(loss)

 

 
893

 

 

 
(2
)
 
891

Other comprehensive income/(loss)

 

 

 
179

 

 
(2
)
 
177

Dividends declared-common stock

 

 
(731
)
 

 

 

 
(731
)
Exercise of stock options, issuance of other stock awards, and other

 
49

 

 

 
(16
)
 

 
33

Balance at April 1, 2017
$
12

 
$
58,642

 
$
750

 
$
(1,449
)
 
$
(223
)
 
$
212

 
$
57,944


See accompanying notes to the condensed consolidated financial statements.

4


The Kraft Heinz Company
Condensed Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income/(loss)
$
891

 
$
900

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

Depreciation and amortization
262

 
363

Amortization of postretirement benefit plans prior service costs/(credits)
(82
)
 
(50
)
Equity award compensation expense
11

 
13

Deferred income tax provision/(benefit)
105

 
27

Pension contributions
(11
)
 
(169
)
Other items, net
16

 
(111
)
Changes in current assets and liabilities:
 
 
 
Trade receivables
(118
)
 
(38
)
Sold receivables
(458
)
 
(222
)
Inventories
(492
)
 
(273
)
Accounts payable
62

 
59

Other current assets
(67
)
 
(45
)
Other current liabilities
(270
)
 
(184
)
Net cash provided by/(used for) operating activities
(151
)
 
270

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(368
)
 
(303
)
Other investing activities, net
38

 
10

Net cash provided by/(used for) investing activities
(330
)
 
(293
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of commercial paper
2,324

 

Repayments of commercial paper
(2,068
)
 

Dividends paid-common stock
(736
)
 
(667
)
Other financing activities, net
(25
)
 
40

Net cash provided by/(used for) financing activities
(505
)
 
(627
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
13

 
44

Cash, cash equivalents, and restricted cash
 
 
 
Net increase/(decrease)
(973
)
 
(606
)
Balance at beginning of period
4,255

 
4,912

Balance at end of period
$
3,282

 
$
4,306


See accompanying notes to the condensed consolidated financial statements.

5


The Kraft Heinz Company
Notes to Condensed Consolidated Financial Statements
Note 1. Background and Basis of Presentation
Basis of Presentation:
Our interim condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted, in accordance with the rules of the Securities and Exchange Commission (the “SEC”). In management’s opinion, these interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary to present fairly our results for the periods presented.
The condensed consolidated balance sheet data at December 31, 2016 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. You should read these statements in conjunction with our audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2016. The results for interim periods are not necessarily indicative of future or annual results.
Organization:
On July 2, 2015, through a series of transactions, we consummated the merger of Kraft Foods Group, Inc. (“Kraft”) with and into a wholly-owned subsidiary of H.J. Heinz Holding Corporation (“Heinz”) (the “2015 Merger”). At the closing of the 2015 Merger, Heinz was renamed The Kraft Heinz Company (“Kraft Heinz”). Before the consummation of the 2015 Merger, Heinz was controlled by Berkshire Hathaway Inc. and 3G Global Food Holdings, L.P. (“3G Capital”), following their acquisition of H. J. Heinz Company (the “2013 Merger”) on June 7, 2013.
Accounting Standards Adopted in the Current Period:
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued accounting standards update (“ASU”) 2016-09 related to equity-based award accounting and presentation. Under this guidance, excess tax benefits upon the exercise of share- based payment awards are recognized in our tax provision rather than within equity. Cash flows related to excess tax benefits are classified as operating activities rather than financing activities. Additionally, cash flows related to employee tax withholdings on restricted share vesting are classified as financing activities. This ASU was effective in the first quarter of 2017. We adopted the guidance related to excess tax benefits on a prospective basis. As a result, we recognized a tax benefit of $8 million in our condensed consolidated statement of income for the three months ended April 1, 2017 related to our excess tax benefits upon the exercise of share-based payment awards. We retrospectively adopted the guidance related to cash flow classification of employee tax withholdings on restricted share vesting. There was no related impact on our statement of cash flows for the three months ended April 3, 2016. Our equity award compensation cost continues to reflect estimated forfeitures.
In August 2016, the FASB issued ASU 2016-15 related to the classification of certain cash payments and cash receipts on the statement of cash flows. This ASU provided guidance on eight specific cash flow classification matters, which must be adopted in the same period using a retrospective transition method. We early adopted this ASU in the first quarter of 2017. Only one classification matter impacted us. Specifically, now we classify cash payments for debt prepayment and debt extinguishment costs as cash outflows from financing activities rather than cash outflows from operating activities. This guidance did not impact our condensed consolidated statements of cash flows for the three months ended April 1, 2017 or April 3, 2016.
In November 2016, the FASB issued ASU 2016-18 requiring the statement of cash flows to explain the change in restricted cash and restricted cash equivalents, in addition to cash and cash equivalents. We early adopted this ASU in the first quarter of 2017. Accordingly, we restated our cash and cash equivalents balances in the condensed consolidated statements of cash flows to include restricted cash of $51 million at December 31, 2016, $108 million at April 3, 2016, and $75 million at January 3, 2016. Additionally, cash outflows from investing activities related to dividends paid on our Series A Preferred Stock were reduced to reflect $32 million which was moved to escrow and did not reflect a cash disbursement for the three months ended April 3, 2016. As required by the ASU, we have provided a reconciliation from cash and cash equivalents as presented on our condensed consolidated balance sheets to cash, cash equivalents, and restricted cash as reported on our condensed consolidated statements of cash flows. See Note 3, Restricted Cash, for this reconciliation, as well as a discussion of the nature of our restricted cash balances.

6


Recently Issued Accounting Standards:
In May 2014, the FASB issued ASU 2014-09, which superseded previously existing revenue recognition guidance. Under this ASU, companies will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the company expects to be entitled in exchange for those goods or services. This ASU will be effective beginning in the first quarter of our fiscal year 2018. The ASU may be applied using a full retrospective method or a modified retrospective transition method, with a cumulative-effect adjustment as of the date of adoption. While we are still evaluating the impact this ASU will have on our financial statements and related disclosures, we have completed our preliminary scoping reviews and have made progress in our assessment phase. We have focused our reviews on the revenue streams in the U.S., Canada, and Europe as they are our most significant. At this time, we believe the potential impacts on our existing accounting policies may be associated with our consumer incentive and trade promotion programs. We will adopt the new standard on January 1, 2018. We are still evaluating our application method. Our ability to adopt using the full retrospective method is dependent on a number of factors, including system readiness, which may include software procured from third-party providers, and finalizing our assessment of information necessary to restate prior period financial statements.
In February 2016, the FASB issued ASU 2016-02, which superseded previously existing leasing guidance. The ASU is intended to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The new guidance requires lessees to reflect most leases on their balance sheet as assets and obligations. This ASU will be effective beginning in the first quarter of our fiscal year 2019. Early adoption is permitted. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. While we are still evaluating the impact this ASU will have on our financial statements and related disclosures, we have initiated our scoping reviews and have made progress in our assessment phase. Based on our initial reviews, we expect that the adoption will increase the assets and liabilities on our condensed consolidated balance sheets. We are still evaluating our adoption date.
In October 2016, the FASB issued ASU 2016-16 related to the income tax accounting impacts of intra-entity transfers of assets other than inventory, such as intellectual property and property, plant and equipment. Under the new accounting guidance, current and deferred income taxes should be recognized upon transfer of the assets. Previously, recognition of current and deferred income taxes was prohibited until the asset was sold to an external third party. This ASU will be effective beginning in the first quarter of our fiscal year 2018. Early adoption is permitted but must be adopted in the first interim period of the annual period for which the ASU is adopted. The new guidance must be adopted on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. While we are still evaluating the impact that this ASU will have on our financial statements and related disclosures, we will adopt this ASU in the first quarter of 2018.
In January 2017, the FASB issued ASU 2017-04 related to goodwill impairment testing. This ASU eliminates Step 2 from the goodwill impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, the entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. Previously, if the fair value of a reporting unit was lower than its carrying amount (Step 1), an entity was required to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). Additionally, under the new standard, entities that have reporting units with zero or negative carrying amounts will no longer be required to perform the qualitative assessment to determine whether to perform Step 2 of the goodwill impairment test. As a result, reporting units with zero or negative carrying amounts will generally be expected to pass the simplified impairment test; however, additional disclosure will be required of those entities. This ASU will be effective in the first quarter of our fiscal year 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The new guidance must be adopted on a prospective basis. While we are still evaluating the timing of adoption, we currently do not expect this ASU to have a material impact on our financial statements and related disclosures.
In March 2017, the FASB issued ASU 2017-07 related to the presentation of net periodic benefit cost (pension and postretirement cost). Under the new guidance, the service cost component of net periodic benefit cost must be presented in the same statement of income line item as other employee compensation costs arising from services rendered by employees during the period. Other components of net periodic benefit cost must be disaggregated from the service cost component in the statements of income and must be presented outside the operating income subtotal. Additionally, only the service cost component will be eligible for capitalization in assets. The new guidance must be applied retrospectively for the statement of income presentation of service cost components and other net periodic benefit cost components and prospectively for the capitalization of the service cost components. The ASU will become effective in the first quarter of our fiscal year 2018. Early adoption is permitted but must occur within the first interim period of the annual period adopted. We are currently evaluating the impact that this ASU will have on our financial statements and related disclosures.

7


Note 2. Integration and Restructuring Expenses
As part of our restructuring activities, we incur expenses that qualify as exit and disposal costs under U.S. GAAP. These include severance and employee benefit costs and other exit costs. Severance and employee benefit costs primarily relate to cash severance, non-cash severance, including accelerated equity award compensation expense, and pension and other termination benefits. Other exit costs primarily relate to lease and contract terminations. We also incur expenses that are an integral component of, and directly attributable to, our restructuring activities, which do not qualify as exit and disposal costs under U.S. GAAP. These include asset-related costs and other implementation costs. Asset-related costs primarily relate to accelerated depreciation and asset impairment charges. Other implementation costs primarily relate to start-up costs of new facilities, professional fees, asset relocation costs, and costs to exit facilities.
Employee severance and other termination benefit packages are primarily determined based on established benefit arrangements, local statutory requirements, or historical benefit practices. We recognize the contractual component of these benefits when payment is probable and estimable; additional elements of severance and termination benefits associated with non-recurring benefits are recognized ratably over each employee’s required future service period. Charges for accelerated depreciation are recognized on long-lived assets that will be taken out of service before the end of their normal service, in which case depreciation estimates are revised to reflect the use of the asset over its shortened useful life. Asset impairments establish a new fair value basis for assets held for disposal or sale and those assets are written down to expected net realizable value if carrying value exceeds fair value. All other costs are recognized as incurred.
Integration Program:
Following the 2015 Merger, we announced a multi-year program (the “Integration Program”) designed to reduce costs, streamline and simplify our operating structure as well as optimize our production and supply chain network across our businesses in the United States and Canada segments. We expect to incur pre-tax costs of $2.0 billion related to the Integration Program, with approximately 60% reflected in cost of products sold within our United States and Canada segments. These pre-tax costs are comprised of the following categories:
Organization costs ($400 million) associated with our plans to streamline and simplify our operating structure, resulting in workforce reduction (primarily severance and employee benefit costs).
Footprint costs ($1.2 billion) associated with our plans to optimize our production and supply chain network, resulting in workforce reduction and facility closures and consolidations (primarily asset-related costs and severance and employee benefit costs).
Other costs ($400 million) incurred as a direct result of integration activities, including other exit costs (lease and contract terminations) and other implementation costs (professional services and other third-party fees).
Overall, as part of the Integration Program, we expect to eliminate 5,150 positions, close net six factories, and consolidate our distribution network. At April 1, 2017, the total Integration Program liability related primarily to the elimination of general salaried and factory positions across the United States and Canada, 3,800 of whom have left the company by April 1, 2017.
Related to the Integration Program, we incurred costs of $127 million for the three months ended April 1, 2017 and $241 million for the three months ended April 3, 2016. As of April 1, 2017, we have incurred approximately $1.8 billion of cumulative costs under the Integration Program, including $715 million of severance and employee benefit costs, $731 million of non-cash asset-related costs, $293 million of other implementation costs, and $104 million of other exit costs. We expect that approximately 60% of the Integration Program expenses will be cash expenditures.
Our liability balance for Integration Program costs that qualify as U.S. GAAP exit and disposal costs (i.e., severance and employee benefit costs and other exit costs), was (in millions):
 
Severance and Employee Benefit Costs
 
Other Exit Costs(a)
 
Total
Balance at December 31, 2016
$
99

 
$
10

 
$
109

Charges
34

 
9

 
43

Cash payments
(22
)
 
(1
)
 
(23
)
Non-cash utilization
(8
)
 
(2
)
 
(10
)
Balance at April 1, 2017
$
103

 
$
16

 
$
119

(a) Other exit costs primarily represent contract and lease terminations.
We expect that a substantial portion of the Integration Program liability as of April 1, 2017 will be paid in 2017.

8


Restructuring Activities:
In addition to our Integration Program in North America, we have a small number of other restructuring programs globally, which are focused primarily on workforce reduction and factory closure and consolidation. These programs resulted in expenses of of $21 million for the three months ended April 1, 2017, including $10 million severance and employee benefit costs, $1 million non-cash asset-related costs, and $10 million other implementation costs. Such expenses for the three months ended April 3, 2016 were $19 million, including $10 million severance and employee benefit costs, $8 million other implementation costs, and $1 million other exit costs.
Our liability balance for restructuring project costs that qualify as U.S. GAAP exit and disposal costs (i.e., severance and employee benefit costs and other exit costs), was (in millions):
 
Severance and Employee Benefit Costs
 
Other Exit Costs(a)
 
Total
Balance at December 31, 2016
$
12

 
$
25

 
$
37

Charges
10

 

 
10

Cash payments
(12
)
 
(1
)
 
(13
)
Non-cash utilization
(4
)
 

 
(4
)
Balance at April 1, 2017
$
6

 
$
24

 
$
30

(a) Other exit costs primarily represent contract and lease terminations.
We expect the liability for severance and employee benefit costs as of April 1, 2017 to be paid in 2017. The liability for other exit costs primarily relates to lease obligations associated with restructuring programs executed prior to the 2015 Merger. The cash impact of these obligations will continue for the duration of the lease terms, which expire between 2017 and 2026.
Total Integration and Restructuring:
Total expenses related to our Integration Program and restructuring activities recorded in cost of products sold and selling, general and administrative expenses (“SG&A”) for the years presented were (in millions):
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
Severance and employee benefit costs - COGS
$
19

 
$
6

Severance and employee benefit costs - SG&A
25

 
32

Asset-related costs - COGS
75

 
142

Asset-related costs - SG&A
7

 
14

Other costs - COGS
9

 
33

Other costs - SG&A
13

 
33

 
$
148

 
$
260

We do not include Integration Program and restructuring expenses within Segment Adjusted EBITDA (as defined in Note 15, Segment Reporting). The pre-tax impact of allocating such expenses to our segments would have been (in millions):
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
United States
$
108

 
$
199

Canada
10

 
18

Europe
14

 
15

Rest of World

 

General corporate expenses
16

 
28

 
$
148

 
$
260


9


Note 3. Restricted Cash
The following table provides a reconciliation of cash and cash equivalents, as reported on our condensed consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our condensed consolidated statements of cash flows (in millions):
 
April 1,
2017
 
December 31, 2016
Cash and cash equivalents
$
3,242

 
$
4,204

Restricted cash included in other assets (current)
36

 
42

Restricted cash included in other assets (noncurrent)
4

 
9

Cash, cash equivalents, and restricted cash
$
3,282

 
$
4,255

Our restricted cash primarily relates to withholding taxes on our common stock dividends to 3G Capital.
Note 4. Inventories
Inventories at April 1, 2017 and December 31, 2016 were (in millions):
 
April 1, 2017
 
December 31, 2016
Packaging and ingredients
$
716

 
$
542

Work in process
493

 
388

Finished product
1,942

 
1,754

Inventories
$
3,151

 
$
2,684

The increase in inventories in the first quarter of 2017 is primarily due to seasonality, as well as lower net sales for the period.
Note 5. Goodwill and Intangible Assets
Goodwill:
Changes in the carrying amount of goodwill from December 31, 2016 to April 1, 2017, by segment, were (in millions):
 
United States
 
Canada
 
Europe
 
Rest of World
 
Total
Balance at December 31, 2016
$
33,696

 
$
4,913

 
$
2,778

 
$
2,738

 
$
44,125

Translation adjustments

 
44

 
51

 
80

 
175

Balance at April 1, 2017
$
33,696

 
$
4,957

 
$
2,829

 
$
2,818

 
$
44,300

We test goodwill for impairment at least annually in the second quarter or when a triggering event occurs. We performed our 2016 annual impairment testing in the second quarter of 2016. There was no impairment of goodwill as a result of our testing; however, we noted that one reporting unit within the Europe segment had an estimated fair value in excess of its carrying value of less than 10%. The goodwill carrying value of this reporting unit was $48 million as of April 4, 2016 (our 2016 annual impairment testing date).
Our goodwill balance consists of 18 reporting units and had an aggregate carrying value of $44.3 billion as of April 1, 2017. As a majority of our goodwill was recently recorded in connection with the 2013 Merger and the 2015 Merger, representing fair values as of those merger dates, there was not a significant excess of fair values over carrying values as of April 4, 2016 (our 2016 annual impairment testing date). We have a risk of future impairment to the extent that individual reporting unit performance does not meet our projections. Additionally, if our current assumptions and estimates, including projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors, are not met, or if valuation factors outside of our control change unfavorably, the estimated fair value of our goodwill could be adversely affected, leading to a potential impairment in the future. No events occurred during the period ended April 1, 2017 that indicated it was more likely than not that our goodwill was impaired. There were no accumulated impairment losses to goodwill as of April 1, 2017.

10


Indefinite-lived intangible assets:
Indefinite-lived intangible assets, which primarily consisted of trademarks, were (in millions):
Balance at December 31, 2016
$
53,307

Translation adjustments
80

Balance at April 1, 2017
$
53,387

We test indefinite-lived intangible assets for impairment at least annually in the second quarter or when a triggering event occurs. We performed our 2016 annual impairment testing in the second quarter of 2016. There was no impairment of indefinite-lived intangibles as a result of our testing; however, we noted that seven brands each had excess fair value over its carrying value of less than 10%. These brands had an aggregate carrying value of $6.1 billion at April 4, 2016 (our 2016 annual impairment testing date). Of the $6.1 billion aggregate carrying value, $5.6 billion was attributable to Velveeta, Lunchables, Maxwell House, and Cracker Barrel.
Our indefinite-lived intangible assets primarily consist of a large number of individual brands and had an aggregate carrying value of $53.4 billion as of April 1, 2017. As a majority of our indefinite-lived intangible assets were recently recorded in connection with the 2013 Merger and the 2015 Merger, representing fair values as of those merger dates, there was not a significant excess of fair values over carrying values as of April 4, 2016 (our 2016 annual impairment testing date). We have a risk of future impairment to the extent individual brand performance does not meet our projections. Additionally, if our current assumptions and estimates, including projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors, are not met, or if valuation factors outside of our control change unfavorably, the estimated fair values of our indefinite-lived intangible assets could be adversely affected, leading to potential impairments in the future. No events occurred during the period ended April 1, 2017 that indicated it was more likely than not that our indefinite-lived intangible assets were impaired.
Definite-lived intangible assets:
Definite-lived intangible assets at April 1, 2017 and December 31, 2016 were (in millions):
 
April 1, 2017
 
December 31, 2016
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Trademarks
$
2,346

 
$
(199
)
 
$
2,147

 
$
2,337

 
$
(172
)
 
$
2,165

Customer-related assets
4,199

 
(413
)
 
3,786

 
4,184

 
(369
)
 
3,815

Other
13

 
(3
)
 
10

 
13

 
(3
)
 
10

 
$
6,558

 
$
(615
)
 
$
5,943

 
$
6,534

 
$
(544
)
 
$
5,990

Amortization expense for definite-lived intangible assets was $67 million for the three months ended April 1, 2017 and $66 million for the three months ended April 3, 2016. Aside from amortization expense, the changes in definite-lived intangible assets from December 31, 2016 to April 1, 2017 reflect the impact of foreign currency. We estimate that annual amortization expense for definite-lived intangible assets for each of the next five years will be approximately $270 million.
Note 6. Income Taxes
The provision for income taxes consists of provisions for federal, state and foreign income taxes. We operate in an international environment; accordingly, the consolidated effective tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. Additionally, our quarterly income tax provision is determined based on our estimated full year effective tax rate, adjusted for tax attributable to infrequent or unusual items, which are recognized on a discrete period basis in the income tax provision for the period in which they occur.
Our effective tax rate was 28.7% for the three months ended April 1, 2017, compared to 29.2% for the three months ended April 3, 2016. The decrease in our effective tax rate was driven by the favorable impact of net discrete items, primarily related to reversals of uncertain tax position reserves in foreign jurisdictions. The favorable impact of current year discrete items was partially offset by the unfavorable impact of a higher percentage of U.S. income reflected in our estimated full year effective tax rate for 2017 compared to 2016.

11


Note 7. Employees’ Stock Incentive Plans
Our annual equity award grants and vesting occurred in the first quarter of 2017. Other off-cycle equity grants may occur throughout the year.
Stock Options:
Our stock option activity and related information was:
 
Number of Stock Options
 
Weighted Average Exercise Price
(per share)
Outstanding at December 31, 2016
20,560,140

 
$
37.39

Granted
1,170,685

 
91.40

Forfeited
(126,206
)
 
44.78

Exercised
(1,126,852
)
 
34.00

Outstanding at April 1, 2017
20,477,767

 
40.62

The aggregate intrinsic value of stock options exercised during the period was $65 million for the three months ended April 1, 2017.
Restricted Stock Units:
Our restricted stock unit (“RSU”) activity and related information was:
 
Number of Units
 
Weighted Average Grant Date Fair Value
(per share)
Outstanding at December 31, 2016
806,744

 
$
71.95

Granted
1,640,535

 
84.97

Forfeited
(19,395
)
 
76.65

Vested
(117,958
)
 
72.96

Outstanding at April 1, 2017
2,309,926

 
81.15

The aggregate fair value of RSUs that vested during the period was $11 million for the three months ended April 1, 2017.
Total Equity Awards:
The compensation cost related to equity awards was primarily recognized in general corporate expenses within SG&A. Equity award compensation cost and the related tax benefit was (in millions):
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
Pre-tax compensation cost
$
11

 
$
13

Tax benefit
(3
)
 
(4
)
After-tax compensation cost
$
8

 
$
9

Unrecognized compensation cost related to unvested equity awards was $220 million at April 1, 2017 and is expected to be recognized over a weighted average period of four years.

12


Note 8. Postemployment Benefits
Pension Plans
Components of Net Pension Cost/(Benefit):
Net pension cost/(benefit) consisted of the following (in millions):
 
For the Three Months Ended
 
U.S. Plans
 
Non-U.S. Plans
 
April 1,
2017
 
April 3,
2016
 
April 1,
2017
 
April 3,
2016
Service cost
$
3

 
$
3

 
$
4

 
$
6

Interest cost
45

 
53

 
16

 
21

Expected return on plan assets
(65
)
 
(74
)
 
(43
)
 
(46
)
Settlements

 
(6
)
 

 

Special/contractual termination benefits
7

 

 
6

 

Other
2

 

 
(9
)
 

Net pension cost/(benefit)
$
(8
)
 
$
(24
)
 
$
(26
)
 
$
(19
)
We capitalized a portion of net pension costs/(benefits) into inventory based on our production activities. These amounts are included in the table above.
Employer Contributions:
In the first quarter of 2017, we contributed $11 million to our non-U.S. pension plans. We did not contribute to our U.S. pension plans in the first quarter of 2017. Based on our contribution strategy, we plan to make further contributions of approximately $150 million to our U.S. plans and approximately $45 million to our non-U.S. plans during the remainder of 2017. However, our actual contributions and plans may change due to many factors, including timing of regulatory approval for the windup of our Canadian plans; changes in tax, employee benefit, or other laws; tax deductibility; significant differences between expected and actual pension asset performance or interest rates; or other factors.
Postretirement Plans
Components of Net Postretirement Cost/(Benefit):
Net postretirement cost/(benefit) consisted of the following (in millions):
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
Service cost
$
2

 
$
4

Interest cost
13

 
16

Amortization of prior service costs/(credits)
(90
)
 
(82
)
Net postretirement cost/(benefit)
$
(75
)
 
$
(62
)
We capitalized a portion of net postretirement costs/(benefits) into inventory based on our production activities. These amounts are included in the table above.

13


Note 9. Accumulated Other Comprehensive Income/(Losses)
The components of, and changes in, accumulated other comprehensive income/(losses), net of tax, were as follows (in millions):
 
Foreign Currency Translation Adjustments
 
Net Postemployment Benefit Plan Adjustments
 
Net Cash Flow Hedge Adjustments
 
Total
Balance as of December 31, 2016
$
(2,412
)
 
$
772

 
$
12

 
$
(1,628
)
Foreign currency translation adjustments
309

 

 

 
309

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

 

 
(51
)
Net postemployment benefit gains/(losses) arising during the period

 
(10
)
 

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

 
(55
)
 

 
(55
)
Net deferred gains/(losses) on cash flow hedges

 

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

 

 
20

 
20

Total other comprehensive income/(loss)
258

 
(65
)
 
(14
)
 
179

Balance as of April 1, 2017
$
(2,154
)
 
$
707

 
$
(2
)
 
$
(1,449
)
Reclassification of net postemployment benefit losses/(gains) included amounts reclassified to net income and amounts reclassified into inventory (consistent with our capitalization policy).
The gross amount and related tax benefit/(expense) recorded in, and associated with, each component of other comprehensive income/(loss) were as follows (in millions):
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
 
Before Tax Amount
 
Tax
 
Net of Tax Amount
 
Before Tax Amount
 
Tax
 
Net of Tax Amount
Foreign currency translation adjustments
$
309

 
$

 
$
309

 
$
265

 
$

 
$
265

Net deferred gains/(losses) on net investment hedges
(78
)
 
27

 
(51
)
 
(84
)
 
24

 
(60
)
Net actuarial gains/(losses) arising during the period
(12
)
 
2

 
(10
)
 

 

 

Reclassification of net postemployment benefit losses/(gains)
(90
)
 
35

 
(55
)
 
(88
)
 
34

 
(54
)
Net deferred gains/(losses) on cash flow hedges
(39
)
 
5

 
(34
)
 
(28
)
 
10

 
(18
)
Net deferred losses/(gains) on cash flow hedges reclassified to net income
17

 
3

 
20

 
(26
)
 
4

 
(22
)

14


The amounts reclassified from accumulated other comprehensive income/(losses) were as follows (in millions):
Accumulated Other Comprehensive Income/(Losses) Component
 
 Reclassified from Accumulated Other Comprehensive Income/(Losses)
 
Affected Line Item in the Statement Where Net Income/(Loss) is Presented
 
 
For the Three Months Ended
 
 
 
 
April 1,
2017
 
April 3,
2016
 
 
Losses/(gains) on cash flow hedges:
 
 
 
 


     Foreign exchange contracts
 
$

 
$
(1
)

Net sales
     Foreign exchange contracts
 
1

 
(29
)

Cost of products sold
     Foreign exchange contracts
 
15

 
3

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

 
1


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

 
(26
)

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

 
4


 
Losses/(gains) on cash flow hedges
 
$
20

 
$
(22
)

 
 
 
 
 
 
 
 
Losses/(gains) on postemployment benefits:
 
 
 
 


Amortization of unrecognized losses/(gains)
 
$

 
$

 
(a)
Amortization of prior service costs/(credits)
 
(90
)
 
(82
)

(a)
Settlement and curtailments losses/(gains)
 

 
(6
)

(a)
Losses/(gains) on postemployment benefits before income taxes
 
(90
)
 
(88
)

 
Losses/(gains) on postemployment benefits income taxes
 
35

 
34


 
Losses/(gains) on postemployment benefits
 
$
(55
)
 
$
(54
)

 
(a)
These components are included in the computation of net periodic postemployment benefit costs. See Note 8, Postemployment Benefits, for additional information.
In this note we have excluded activity and balances related to noncontrolling interest (which was primarily comprised of foreign currency translation adjustments) due to its insignificance.
Note 10. Financial Instruments
See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2016 for additional information on our overall risk management strategies, our use of derivatives, and our related accounting policies.
Derivative Volume:
The notional values of our derivative instruments at April 1, 2017 and December 31, 2016 were (in millions):
 
Notional Amount
 
April 1, 2017
 
December 31, 2016
Commodity contracts
$
641

 
$
459

Foreign exchange contracts
3,048

 
2,997

Cross-currency contracts
3,173

 
3,173


15


Fair Value of Derivative Instruments:
The fair values and the levels within the fair value hierarchy of derivative instruments recorded on the consolidated balance sheets at April 1, 2017 and December 31, 2016 were (in millions):
 
April 1, 2017
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$

 
$
35

 
$
23

 
$

 
$

 
$
35

 
$
23

Cross-currency contracts

 

 
549

 
40

 

 

 
549

 
40

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
16

 
39

 
2

 
3

 

 

 
18

 
42

Foreign exchange contracts

 

 
37

 
1

 

 

 
37

 
1

Cross-currency contracts

 

 
43

 

 

 

 
43

 

Total fair value
$
16

 
$
39

 
$
666

 
$
67

 
$

 
$

 
$
682

 
$
106

 
December 31, 2016
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total Fair Value
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$

 
$

 
$
69

 
$
13

 
$

 
$

 
$
69

 
$
13

Cross-currency contracts

 

 
580

 
36

 

 

 
580

 
36

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
28

 
7

 

 

 

 

 
28

 
7

Foreign exchange contracts

 

 
35

 
30

 

 

 
35

 
30

Cross-currency contracts

 

 
44

 

 

 

 
44

 

Total fair value
$
28

 
$
7

 
$
728

 
$
79

 
$

 
$

 
$
756

 
$
86

Our derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. We elect to record the gross assets and liabilities of our derivative financial instruments on the consolidated balance sheets. If the derivative financial instruments had been netted on the consolidated balance sheets, the asset and liability positions each would have been reduced by $69 million at April 1, 2017 and $67 million at December 31, 2016. No material amounts of collateral were received or posted on our derivative assets and liabilities at April 1, 2017.
Level 1 financial assets and liabilities consist of commodity future and options contracts and are valued using quoted prices in active markets for identical assets and liabilities.
Level 2 financial assets and liabilities consist of commodity forwards, foreign exchange forwards, and cross-currency swaps. Commodity forwards are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount. Foreign exchange forwards are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Cross-currency swaps are valued based on observable market spot and swap rates.
Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.
There have been no transfers between Levels 1, 2, and 3 in any period presented.
The fair values of our asset derivatives are recorded within other current assets and other assets. The fair values of our liability derivatives are recorded within other current liabilities and other liabilities.

16


Net Investment Hedging:
At April 1, 2017, the principal amounts of foreign denominated debt designated as net investment hedges totaled €2,550 million and £400 million.
At April 1, 2017, our cross-currency swaps designated as net investment hedges consisted of:
Instrument
 
Notional
(local)
(in billions)
 
Notional
(USD)
(in billions)
 
Maturity
Cross-currency swap
 
£
0.8

 
$
1.4

 
October 2019
Cross-currency swap
 
C$
1.8

 
$
1.6

 
December 2019
We also periodically enter into shorter-dated foreign currency contracts that are designated as net investment hedges. At April 1, 2017, we had a Chinese renminbi foreign currency contract with an aggregate USD notional amount of $120 million.
Hedge Coverage:
At April 1, 2017, we had entered into contracts designated as hedging instruments, which hedge transactions for the following durations:
foreign exchange contracts for periods not exceeding the next 14 months and
cross-currency contracts for periods not exceeding the next three years.
At April 1, 2017, we had entered into contracts not designated as hedging instruments, which hedge economic risks for the following durations:
commodity contracts for periods not exceeding the next 18 months,
foreign exchange contracts for periods not exceeding the next 11 months, and
cross-currency contracts for periods not exceeding the next two years.
Hedge Ineffectiveness:
We record pre-tax gains or losses reclassified from accumulated other comprehensive income/(losses) due to ineffectiveness for foreign exchange contracts related to forecasted transactions in other expense/(income), net.
Deferred Hedging Gains and Losses:
Based on our valuation at April 1, 2017 and assuming market rates remain constant through contract maturities, we expect transfers to net income/(loss) of unrealized gains for foreign currency cash flow hedges during the next 12 months to be insignificant. Additionally, we expect transfers to net income/(loss) of unrealized losses for interest rate cash flow hedges during the next 12 months to be insignificant.

17


Derivative Impact on the Statements of Income and Statements of Comprehensive Income:
The following tables present the pre-tax effect of derivative instruments on the consolidated statements of income and statements of comprehensive income:
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
 
Commodity Contracts
 
Foreign Exchange
Contracts
 
Cross-Currency Contracts
 
Interest Rate Contracts
 
Commodity Contracts
 
Foreign Exchange
Contracts
 
Cross-Currency Contracts
 
Interest Rate
Contracts
 
(in millions)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) recognized in other comprehensive income (effective portion)
$

 
$
(39
)
 
$

 
$

 
$

 
$
(27
)
 
$

 
$

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

 
(4
)
 
(30
)
 

 

 

 
(65
)
 

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

 
$
(43
)
 
$
(30
)
 
$

 
$

 
$
(27
)
 
$
(65
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges reclassified to net income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$

 
$

 
$

 
$

 
$

 
$
1

 
$

 
$

Cost of products sold (effective portion)

 
(1
)
 

 

 

 
29

 

 

Other expense/(income), net

 
(15
)
 

 

 

 
(3
)
 

 

Interest expense

 

 

 
(1
)
 

 

 

 
(1
)
 

 
(16
)
 

 
(1
)
 

 
27

 

 
(1
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains/(losses) on derivatives recognized in cost of products sold
(37
)
 

 

 

 
(18
)
 

 

 

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

 
2

 
(1
)
 

 

 
(75
)
 
(7
)
 

 
(37
)
 
2

 
(1
)
 

 
(18
)
 
(75
)
 
(7
)
 

Total gains/(losses) recognized in statements of income
$
(37
)
 
$
(14
)
 
$
(1
)
 
$
(1
)
 
$
(18
)
 
$
(48
)
 
$
(7
)
 
$
(1
)
Related to our non-derivative, foreign denominated debt instruments designated as net investment hedges, we recognized pre-tax losses in other comprehensive income/(loss) of $44 million for the three months ended April 1, 2017 and $19 million for the three months ended April 3, 2016.

18


Note 11. Financing Arrangements
We account for transfers of receivables pursuant to our accounts receivable securitization and factoring programs (the “Programs”) as a sale and remove them from our condensed consolidated balance sheets. Under the Programs, we generally receive cash consideration up to a certain limit and a receivable for the remainder of the purchase price (“Deferred Purchase Price”).
In March 2017, we amended our European receivables factoring program to reduce the cash consideration limit. As a result, our aggregate cash consideration limit related to our foreign denominated Programs, after applying applicable hold-backs, was $193 million U.S. dollars at April 1, 2017, compared to $245 million at December 31, 2016. Additionally, in February 2017, we elected to reduce the cash consideration limit related to our U.S. securitization program from $800 million to $500 million. There were no other changes to the Programs during the three months ended April 1, 2017.
The cash consideration and carrying amount of receivables removed from the condensed consolidated balance sheets in connection with the Programs were $616 million at April 1, 2017 and $904 million at December 31, 2016. The fair value of the Deferred Purchase Price for the Programs was $588 million at April 1, 2017 and $129 million at December 31, 2016. The Deferred Purchase Price is included in sold receivables on the condensed consolidated balance sheets and had a carrying value which approximated its fair value at April 1, 2017 and December 31, 2016.
See Note 14, Financing Arrangements, to our consolidated financial statements for the year ended December 31, 2016 in our Annual Report on Form 10-K for additional information on the Programs.
Note 12. Venezuela - Foreign Currency and Inflation
We apply highly inflationary accounting to the results of our Venezuelan subsidiary and include these results in our consolidated financial statements. Our results of operations in Venezuela reflect a controlled subsidiary. We continue to have sufficient currency liquidity and pricing flexibility to run our operations. However, the continuing economic uncertainty, strict labor laws, and evolving government controls over imports, prices, currency exchange, and payments present a challenging operating environment. Increased restrictions imposed by the Venezuelan government or further deterioration of the economic environment could impact our ability to control our Venezuelan operations and could lead us to deconsolidate our Venezuelan subsidiary in the future.
At April 1, 2017, there were two exchange rates legally available to us for converting Venezuelan bolivars to U.S. dollars, including:
the official exchange rate of BsF10 per U.S. dollar available through the Sistema de Divisa Protegida (“DIPRO”), which is available for purchases and sales of essential items, including food products, and
an alternative exchange rate available through the Sistema de Divisa Complementaria (“DICOM”), which is available for all transactions not covered by DIPRO and is a free-floating exchange rate format.
The DICOM rate (formerly the Marginal Currency System “SIMADI”) averaged BsF694 per U.S. dollar during the first quarter of 2017 and was BsF710 per U.S. dollar at April 1, 2017. We have had access to U.S. dollars at DICOM rates in 2017. As of April 1, 2017, we believe that the DICOM rate is the most appropriate legally available rate at which to translate the results of our Venezuelan subsidiary.
We have had no settlements at the official exchange rate of BsF10 per U.S. dollar in 2017. At April 1, 2017, we had outstanding requests of $26 million for payment of invoices for the purchase of ingredients and packaging materials for the years 2012 through 2015, all of which were requested for payment at BsF6.30 per U.S. dollar (the official exchange rate until March 10, 2016).
During the three months ended April 1, 2017, we remeasured the monetary assets and liabilities, as well as the operating results, of our Venezuelan subsidiary at floating DICOM rates. This remeasurement resulted in a nonmonetary currency devaluation loss of $8 million for the three months ended April 1, 2017, which was recorded in other expense/(income), net, in the condensed consolidated statement of income for the period then ended. We continue to monitor the DICOM rate, and the nonmonetary assets supported by the underlying operations in Venezuela, for impairment. The currency has ranged between BsF674 and BsF710 per U.S. dollar from December 31, 2016 to April 1, 2017. No triggers for impairment resulted from this movement.

19


Note 13. Commitments, Contingencies and Debt
Legal Proceedings
We are routinely involved in legal proceedings, claims, and governmental inquiries, inspections or investigations (“Legal Matters”) arising in the ordinary course of our business.
On April 1, 2015, the Commodity Futures Trading Commission (“CFTC”) filed a formal complaint against Mondelēz International (formerly known as Kraft Foods Inc.) 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.
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.
Debt
Borrowing Arrangements:
We had commercial paper outstanding of $900 million at April 1, 2017 and $642 million at December 31, 2016.
See Note 11, Debt, to our consolidated financial statements for the year ended December 31, 2016 in our Annual Report on Form 10-K for additional information on our borrowing arrangements.
Fair Value of Debt:
At April 1, 2017, the aggregate fair value of our total debt was $33.4 billion as compared with a carrying value of $32.7 billion. At December 31, 2016, the aggregate fair value of our total debt was $33.2 billion as compared with a carrying value of $32.4 billion. We determined the fair value of our short-term debt using Level 1 quoted prices in active markets. We determined the fair value of our long-term debt using Level 2 inputs. Fair values are generally estimated based on quoted market prices for identical or similar instruments.
Series A Preferred Stock:
On June 7, 2016, we redeemed all outstanding shares of our 9.00% cumulative compounding preferred stock, Series A (“Series A Preferred Stock”). We funded this redemption primarily through the issuance of long-term debt, as well as other sources of liquidity, including our commercial paper program, U.S. securitization program, and cash on hand. In connection with the redemption, all Series A Preferred Stock was canceled and automatically retired, and we no longer pay any associated dividends.

20


Note 14. Earnings Per Share
Our earnings per common share (“EPS”) were:
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
 
(in millions, except per share amounts)
Basic Earnings Per Common Share:
 
 
 
Net income/(loss) attributable to common shareholders
$
893

 
$
896

Weighted average shares of common stock outstanding
1,217

 
1,215

Net earnings/(loss)
$
0.73

 
$
0.74

Diluted Earnings Per Common Share:
 
 
 
Net income/(loss) attributable to common shareholders
$
893

 
$
896

Weighted average shares of common stock outstanding
1,217

 
1,215

Effect of dilutive securities:
 
 
 
Equity awards
12

 
10

Weighted average shares of common stock outstanding, including dilutive effect
1,229

 
1,225

Net earnings/(loss)
$
0.73

 
$
0.73

We use the treasury stock method to calculate the dilutive effect of outstanding equity awards in the denominator for diluted earnings per common share. Anti-dilutive shares were 1 million for the three months ended April 1, 2017 and 3 million for the three months ended April 3, 2016.
Note 15. Segment Reporting
We manufacture and market food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products, throughout the world.
We 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 two operating segments: Latin America; and Asia Pacific, Middle East, and Africa (“AMEA”).
In the fourth quarter of 2016, we reorganized our segments to reflect the following:
our Russia business moved from the Rest of World segment to the Europe segment and
management of our Global Procurement Office moved from one of our European subsidiaries to our global headquarters, which resulted in moving the related costs from the Europe segment to general corporate expenses.
These changes are reflected in all historical periods presented and did not have a material impact on our financial statements. See Note 18, Segment Reporting, to our consolidated financial statements for the year ended December 31, 2016 in our Annual Report on Form 10-K for additional information related to these changes.
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 is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations. 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/(losses) on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results), impairment losses, gains/(losses) on the sale of a business, and nonmonetary currency devaluation (e.g., remeasurement gains and losses).
Management does not use assets by segment to evaluate performance or allocate resources. Therefore, we do not disclose assets by segment.

21


Net sales by segment were (in millions):
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
Net sales:
 
 
 
United States
$
4,552

 
$
4,715

Canada
443

 
504

Europe
543

 
583

Rest of World
826

 
768

Total net sales
$
6,364

 
$
6,570

Segment Adjusted EBITDA was (in millions):
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
Segment Adjusted EBITDA:
 
 
 
United States
$
1,472

 
$
1,493

Canada
126

 
151

Europe
170

 
180

Rest of World
146

 
166

General corporate expenses
(29
)
 
(39
)
Depreciation and amortization (excluding integration and restructuring expenses)
(132
)
 
(161
)
Integration and restructuring expenses
(148
)
 
(260
)
Merger costs

 
(15
)
Unrealized gains/(losses) on commodity hedges
(42
)
 
8

Nonmonetary currency devaluation

 
(1
)
Equity award compensation expense (excluding integration and restructuring expenses)
(12
)
 
(9
)
Operating income
1,551

 
1,513

Interest expense
313

 
249

Other expense/(income), net
(12
)
 
(8
)
Income/(loss) before income taxes
$
1,250

 
$
1,272

In the first quarter of 2017, we reorganized the products within our product categories to reflect how we manage our business. We have reflected this change for all historical periods presented. Our net sales by product category were (in millions):
 
For the Three Months Ended
 
April 1,
2017
 
April 3,
2016
Condiments and sauces
$
1,513

 
$
1,564

Cheese and dairy
1,299

 
1,366

Ambient meals
583

 
590

Frozen and chilled meals
653

 
627

Meats and seafood
660

 
696

Refreshment beverages
372

 
408

Coffee
350

 
383

Infant and nutrition
188

 
190

Desserts, toppings and baking
196

 
210

Nuts and salted snacks
232

 
260

Other
318

 
276

Total net sales
$
6,364

 
$
6,570


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Note 16. Supplemental Financial Information
We fully and unconditionally guarantee the notes issued by our wholly owned operating subsidiary, Kraft Heinz Foods Company. See Note 11, Debt, to our consolidated financial statements for the year ended December 31, 2016 in our Annual Report on Form 10-K for additional descriptions of these guarantees. None of our other subsidiaries guarantee these notes.
Set forth below are the condensed consolidating financial statements presenting the results of operations, financial position and cash flows of Kraft Heinz (as parent guarantor), Kraft Heinz Foods Company (as subsidiary issuer of the notes), and the non-guarantor subsidiaries on a combined basis and eliminations necessary to arrive at the total reported information on a consolidated basis. This condensed consolidating financial information has been prepared and presented pursuant to the SEC Regulation S-X Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or being Registered.” This information is not intended to present the financial position, results of operations, and cash flows of the individual companies or groups of companies in accordance with U.S. GAAP. Eliminations represent adjustments to eliminate investments in subsidiaries and intercompany balances and transactions between or among the parent guarantor, subsidiary issuer, and the non-guarantor subsidiaries.

23


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

 
$
4,360

 
$
2,166

 
$
(162
)
 
$
6,364

Cost of products sold

 
2,714

 
1,511

 
(162
)
 
4,063

Gross profit

 
1,646

 
655

 

 
2,301

Selling, general and administrative expenses

 
184

 
566

 

 
750

Intercompany service fees and other recharges

 
1,108

 
(1,108
)
 

 

Operating income

 
354

 
1,197

 

 
1,551

Interest expense

 
303

 
10

 

 
313

Other expense/(income), net

 
17

 
(29
)
 

 
(12
)
Income/(loss) before income taxes

 
34

 
1,216

 

 
1,250

Provision for/(benefit from) income taxes

 
(12
)
 
371

 

 
359

Equity in earnings of subsidiaries
893

 
847

 

 
(1,740
)
 

Net income/(loss)
893

 
893

 
845

 
(1,740
)
 
891

Net income/(loss) attributable to noncontrolling interest

 

 
(2
)
 

 
(2
)
Net income/(loss) excluding noncontrolling interest
$
893

 
$
893

 
$
847

 
$
(1,740
)
 
$
893

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

 
$
1,072

 
$
1,842

 
$
(2,914
)
 
$
1,072


24


The Kraft Heinz Company
Condensed Consolidating Statements of Income
For the Three Months Ended April 3, 2016
(in millions)
(Unaudited)
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
4,471

 
$
2,241

 
$
(142
)
 
$
6,570

Cost of products sold

 
2,832

 
1,502

 
(142
)
 
4,192

Gross profit

 
1,639

 
739

 

 
2,378

Selling, general and administrative expenses

 
277

 
588

 

 
865

Intercompany service fees and other recharges

 
1,214

 
(1,214
)
 

 

Operating income

 
148

 
1,365

 

 
1,513

Interest expense

 
235

 
14

 

 
249

Other expense/(income), net

 
31

 
(39
)
 

 
(8
)
Income/(loss) before income taxes

 
(118
)
 
1,390

 

 
1,272

Provision for/(benefit from) income taxes

 
(58
)
 
430

 

 
372

Equity in earnings of subsidiaries
896

 
956

 

 
(1,852
)
 

Net income/(loss)
896

 
896

 
960

 
(1,852
)
 
900

Net income/(loss) attributable to noncontrolling interest

 

 
4

 

 
4

Net income/(loss) excluding noncontrolling interest
$
896

 
$
896

 
$
956

 
$
(1,852
)
 
$
896

 
 
 
 
 
 
 
 
 
 
Comprehensive income/(loss) excluding noncontrolling interest
$
1,007

 
$
1,007

 
$
1,149

 
$
(2,156
)
 
$
1,007




25


The Kraft Heinz Company
Condensed Consolidating Balance Sheets
As of April 1, 2017
(in millions)
(Unaudited)
 
Parent Guarantor
 
Subsidiary Issuer
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
1,929

 
$
1,313

 
$

 
$
3,242

Trade receivables