SEC Filing | The Kraft Heinz Company

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KHC 10Q 6/28/15

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2015



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 001-37482

THE KRAFT HEINZ COMPANY

(Exact name of registrant as specified in its charter)



DELAWARE		46-2078182
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One PPG Place, Pittsburgh, Pennsylvania (Address of Principal Executive Offices)		15222 (Zip Code)

(412) 456-5700

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer _	Accelerated filer _	Non-accelerated filer X	Smaller reporting company _
		(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X

The number of shares of the Registrant’s Common Stock outstanding as of August 2, 2015 was 1,212,833,289 shares.

PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements and Supplementary Data

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME



	Second Quarter Ended
	June 28, 2015			June 29, 2014
	(Unaudited)
	(In millions)
Sales	$	2,616		$	2,729
Cost of products sold	1,665			1,844
Gross profit	951			885
Selling, general and administrative expenses	473			511
2015 Merger related costs	34			—
Operating income	444			374
Interest income	10			6
Interest expense	394			168
Other expense, net	(255		)	(43		)
(Loss)/income before income taxes	(195		)	169
(Benefit from)/provision for income taxes	(35		)	34
Net (loss)/income	(160		)	135
Less: Net income attributable to the noncontrolling interest	4			8
Net (loss)/income attributable to The Kraft Heinz Company	$	(164	)	$	127

Net (loss)/income attributable to The Kraft Heinz Company	$	(164	)	$	127
Less: Preferred dividends	180			180
Net loss attributable to common shareholders	$	(344	)	$	(53	)
Basic and diluted loss per common share:
Net loss attributable to common shareholders	$	(0.91	)	$	(0.14	)
Average common shares outstanding - basic and diluted	380			377

See Notes to Condensed Consolidated Financial Statements.

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

_______________________________________

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME



	Six Months Ended
	June 28, 2015			June 29, 2014
	(Unaudited)
	(In millions)
Sales	$	5,094		$	5,529
Cost of products sold	3,166			3,690
Gross profit	1,928			1,839
Selling, general and administrative expenses	934			1,032
2015 Merger related costs	41			—
Operating income	953			807
Interest income	20			12
Interest expense	595			337
Other expense, net	(226		)	(64		)
Income before income taxes	152			418
Provision for income taxes	33			85
Net income	119			333
Less: Net income attributable to the noncontrolling interest	7			11
Net income attributable to The Kraft Heinz Company	$	112		$	322

Net income attributable to The Kraft Heinz Company	$	112		$	322
Less: Preferred dividends	360			360
Net loss attributable to common shareholders	$	(248	)	$	(38	)
Basic and diluted loss per common share:
Net loss attributable to common shareholders	$	(0.66	)	$	(0.10	)
Average common shares outstanding - basic and diluted	379			377

See Notes to Condensed Consolidated Financial Statements.

_______________________________________

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Second Quarter Ended
	June 28, 2015			June 29, 2014
	(Unaudited)
	(In millions)
Net (loss)/income	$	(160	)	$	135
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustments	361			181
Net deferred gains/(losses) on net investment hedges	(206		)	(44		)
Net pension and post-retirement benefit (losses)/gains	(18		)	(28		)
Reclassification of net pension and post-retirement benefit (gains)/losses to net income	8			(1		)
Net deferred (losses)/gains on cash flow hedges from periodic revaluations	(10		)	(100		)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings	137			(1		)
Total comprehensive income	112			142
Comprehensive (income)/loss attributable to the noncontrolling interest	5			3
Comprehensive income attributable to The Kraft Heinz Company	$	107		$	139

See Notes to Condensed Consolidated Financial Statements.

_______________________________________

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Six Months Ended
	June 28, 2015			June 29, 2014
	(Unaudited)
	(In millions)
Net income	$	119		$	333
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustments	(433		)	295
Net deferred gains/(losses) on net investment hedges	226			(160		)
Net pension and post-retirement benefit (losses)/gains	(19		)	(28		)
Reclassification of net pension and post-retirement benefit (gains)/losses to net income	7			(2		)
Net deferred (losses)/gains on cash flow hedges from periodic revaluations	(77		)	(159		)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings	138			(4		)
Total comprehensive (loss)/income	(39		)	275
Comprehensive (income)/loss attributable to the noncontrolling interest	(6		)	14
Comprehensive (loss)/income attributable to The Kraft Heinz Company	$	(33	)	$	261

See Notes to Condensed Consolidated Financial Statements.

_______________________________________

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	June 28, 2015		December 28, 2014
	(Unaudited)
	(In millions)
Assets
Current Assets:
Cash and cash equivalents	$	2,147	$	2,298
Trade receivables, net	795		851
Other receivables, net	226		384
Inventories:
Finished goods and work-in-process	978		962
Packaging material and ingredients	184		223
Total inventories	1,162		1,185
Prepaid expenses	191		139
Other current assets	68		58
Total current assets	4,589		4,915
Property, plant and equipment	2,786		2,796
Less accumulated depreciation	533		431
Total property, plant and equipment, net	2,253		2,365
Goodwill	14,741		14,959
Trademarks, net	11,285		11,455
Other intangibles, net	1,657		1,733
Other non-current assets	1,537		1,336
Total other non-current assets	29,220		29,483
Total assets	$	36,062	$	36,763

See Notes to Condensed Consolidated Financial Statements.

_______________________________________

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	June 28, 2015			December 28, 2014
	(Unaudited)
	(In millions except share and per share amounts)
Liabilities and Equity
Current Liabilities:
Short-term debt	$	2		$	59
Portion of long-term debt due within one year	10			11
Trade payables	1,509			1,651
Other payables	99			203
Accrued interest	171			167
Accrued marketing	255			297
Other accrued liabilities	436			472
Income taxes	171			232
Total current liabilities	2,653			3,092
Long-term debt	13,626			13,586
Deferred income taxes	3,843			3,867
Non-pension postretirement benefits	191			197
Other non-current liabilities	448			336
Total long-term liabilities	18,108			17,986
Redeemable noncontrolling interest	27			29
9% Series A cumulative redeemable preferred stock, 80,000 authorized and issued shares, $0.01 par value	8,320			8,320
Equity:
Common stock, 397,960,266 shares issued, $0.01 par value	4			4
Warrants	—			367
Additional capital	7,454			7,320
Retained earnings	—			—
Accumulated other comprehensive loss	(719		)	(574		)
Total Kraft Heinz Company shareholders' equity	6,739			7,117
Noncontrolling interest	215			219
Total equity	6,954			7,336
Total liabilities and equity	$	36,062		$	36,763

See Notes to Condensed Consolidated Financial Statements.

_______________________________________

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended
	June 28, 2015			June 29, 2014
	(Unaudited)
	(In millions)
Cash Flows from Operating Activities:
Net income	$	119		$	333
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	131			284
Amortization	48			50
Amortization of deferred debt issuance costs	19			23
Deferred tax benefit	(254		)	(195		)
Pension contributions	(33		)	(46		)
Impairment loss on indefinite-lived intangibles	58			62
Venezuela devaluation	234			—
Loss on discontinuation of cash flow hedge	227			—
Other items, net	32			18
Changes in current assets and liabilities:
Receivables (includes proceeds from securitization)	(6		)	28
Inventories	(80		)	29
Prepaid expenses and other current assets	(66		)	(12		)
Accounts payable	13			42
Accrued liabilities	(35		)	(79		)
Income taxes	4			310
Cash provided by operating activities	411			847
Cash Flows from Investing Activities:
Capital expenditures	(163		)	(153		)
Proceeds from disposals of property, plant and equipment	7			40
Proceeds from net investment hedges	306			—
Other items, net	—			(2		)
Cash provided by/(used for) investing activities	150			(115		)
Cash Flows from Financing Activities:
Payments on long-term debt	(1,963		)	(50		)
Proceeds from long-term debt	2,000			—
Debt issuance costs	(18		)	—
Net payments on short-term debt	(53		)	(11		)
Preferred dividends	(360		)	(360		)
Other items, net	15			12
Cash used for financing activities	(379		)	(409		)
Effect of exchange rate changes on cash and cash equivalents	(333		)	23
Net (decrease)/increase in cash and cash equivalents	(151		)	346
Cash and cash equivalents at beginning of period	2,298			2,459
Cash and cash equivalents at end of period	$	2,147		$	2,805

See Notes to Condensed Consolidated Financial Statements.

_______________________________________

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(1)	Basis of Presentation

Organization

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

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

Basis of Presentation

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

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

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

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

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)


(2)	Merger and Acquisition

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

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

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

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



	Second Quarter Ended
	June 28, 2015		June 29, 2014
	(In millions, except per share data)
Sales	$	7,129	$	7,474
Net income	$	390	$	494
Income per common share - basic	$	0.17	$	0.26
Income per common share - diluted	$	0.17	$	0.26



	Six Months Ended
	June 28, 2015		June 29, 2014
	(In millions, except per share data)
Sales	$	13,957	$	14,634
Net income	$	1,134	$	894
Income per common share - basic	$	0.65	$	0.44
Income per common share - diluted	$	0.64	$	0.43

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

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

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

The following is a summary of the preliminary purchase price allocation to the estimated fair values of assets acquired and liabilities assumed in the transaction:



	(In millions)
Cash	$	408
Other current assets	3,685
Property, plant and equipment	4,365
Trademark and other intangibles	43,652
Other non-current assets	228
Trade and other payables	(3,510		)
Long-term debt	(9,293		)
Non-pension postretirement benefits and other noncurrent liabilities	(4,503		)
Deferred income tax liabilities	(15,042		)
Net assets acquired	19,990
Goodwill on acquisition	32,904
Total consideration	52,894
Preliminary fair value of shares exchanged and stock based compensation	43,081
Total cash consideration paid to Kraft shareholders	9,813
Cash and cash equivalents of Kraft at July 2, 2015	408
Acquisition of business, net of cash on hand	$	9,405

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

The preliminary purchase price allocation to identifiable intangible assets acquired is as follows:



	Preliminary fair value		Weighted average life
	(In millions, except weighted average lives)
Indefinite-lived trademarks	$	38,768
Definite-lived trademarks	632		30
Customer relationships	2,901		20
Licenses	1,351		25
Total identifiable intangible assets	$	43,652

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

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

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

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

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

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

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

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

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


(3)	Segments

The Company has five reportable segments which are defined by geographic region including: North America, Europe, Asia/Pacific, Latin America and Russia, India, Middle East and Africa ("RIMEA"). Following the 2015 Merger described in Note 2, the Company will reevaluate its segment structure in the third quarter of 2015.

Descriptions of the Company’s reportable segments are as follows:

North America—This segment includes our U.S. consumer products business which manufactures, markets and sells ketchup, condiments, sauces, pasta meals, and frozen potatoes, entrees, snacks, and appetizers to the grocery channels and our U.S. foodservice business which manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States of America. The North America segment also includes our business in Canada.

Europe—This segment includes the Company’s operations in Europe (excluding Russia) and sells products in all of the Company’s categories.

Asia/Pacific—This segment includes the Company’s operations in Australia, New Zealand, Japan, China, Papua New Guinea, South Korea, Indonesia, and Singapore. This segment sells products in all of the Company's categories.

Latin America—This segment includes the Company’s operations in Brazil, Venezuela, Mexico, Costa Rica, and Panama that sell products in all of the Company’s categories.

RIMEA—This segment includes the Company’s operations in Russia, India, the Middle East and Africa that sell products in all of the Company’s categories.

The Company’s management evaluates performance based on several factors including net sales and Adjusted Earnings Before Interest, Tax, Depreciation and Amortization ("Adjusted EBITDA"). Inter-segment revenues, items below the operating income line of the consolidated statements of income and certain costs associated with Restructuring and Productivity Initiatives (see Note 5) and 2015 Merger related costs, are not presented by segment, since they are not reflected in the measure of segment profitability reviewed by the Company’s management.

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

The following tables present information about the Company’s reportable segments:



	Second Quarter Ended
	June 28, 2015			June 29, 2014
	(In millions)
Net external sales:
North America	$	1,021		$	966
Europe	620			766
Asia/Pacific	495			583
Latin America	291			200
RIMEA	189			214
Consolidated Totals	$	2,616		$	2,729
Segment Adjusted EBITDA:
North America	$	324		$	293
Europe	225			236
Asia/Pacific	96			108
Latin America	66			30
RIMEA	43			45
Non-Operating	(15		)	(19		)
Adjusted EBITDA	739			693
Restructuring:
Severance related costs^(a)	8			30
Other restructuring costs^(a)	2			25
Asset write-offs^(a)	25			3
Other special items^(b)	27			37
Venezuela inventory write-down	49			—
2015 Merger related costs^(c)	34			—
Depreciation, including accelerated depreciation for restructuring	66			137
Amortization	23			26
Stock based compensation	3			1
Interest expense, net^(d)	384			161
Other expense, net^(e)	255			42
Impairment loss on indefinite-lived trademarks^(f)	58			62
(Loss)/income before income taxes	$	(195	)	$	169

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)



	Six Months Ended
	June 28, 2015			June 29, 2014
	(In millions)
Net external sales:
North America	$	2,010		$	2,135
Europe	1,246			1,529
Asia/Pacific	940			1,075
Latin America	555			399
RIMEA	343			391
Consolidated Totals	$	5,094		$	5,529
Segment Adjusted EBITDA:
North America	$	610		$	655
Europe	440			452
Asia/Pacific	181			180
Latin America	119			62
RIMEA	74			74
Non-Operating	(34		)	(41		)
Adjusted EBITDA	1,390			1,382
Restructuring:
Severance related costs^(a)	13			84
Other restructuring costs^(a)	12			38
Asset write-offs^(a)	27			10
Other special items^(b)	52			45
Venezuela inventory write-down	49			—
2015 Merger related costs^(c)	41			—
Depreciation, including accelerated depreciation for restructuring	131			284
Amortization	48			50
Stock based compensation	6			2
Interest expense, net^(d)	575			325
Other expense, net^(e)	226			64
Impairment loss on indefinite-lived trademarks^(f)	58			62
Income before income taxes	$	152		$	418

_____________________________________


(a)	See Note 5 for further details on restructuring and productivity initiatives.

(b)

Includes project implementation costs and charges that management believes do not directly reflect our core operations. The six months ended June 28, 2015 includes pension related costs, lease impairment charges, severance charges, consulting and advisory charges, and contract termination fees. The six months ended June 29, 2014 includes incremental costs primarily for additional warehousing and other logistics costs incurred related to the acceleration of sales ahead of the U.S. SAP go-live, which was launched in the second quarter of 2014, along with equipment relocation charges and consulting and advisory charges.


(c)	Represents legal and professional fees associated with the 2015 Merger. See Note 2.


(d)	Includes a release of $227 million from other accumulated comprehensive income to interest expense which occurred during the second quarter ended June 28, 2015. This release relates to the early termination of certain interest rate swaps contracts. See Note 10.


(e)	Includes a $234 million foreign exchange devaluation loss in Venezuela which was recorded to other expense, net during the second quarter ended June 28, 2015. See Note 17.


(f)	See Note 6 for further details on the impairment loss on indefinite-lived trademarks.

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

The Company’s revenues are generated via the sale of products in the following categories:



	Second Quarter Ended
	June 28, 2015		June 29, 2014
	(In millions)
Ketchup and Sauces	$	1,432	$	1,387
Meals and Snacks	778		836
Infant/Nutrition	264		311
Other	142		195
Total	$	2,616	$	2,729



	Six Months Ended
	June 28, 2015		June 29, 2014
	(In millions)
Ketchup and Sauces	$	2,662	$	2,742
Meals and Snacks	1,627		1,850
Infant/Nutrition	517		586
Other	288		351
Total	$	5,094	$	5,529


(4)	Recently Issued Accounting Standards

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

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

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

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

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

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

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

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


(5)	Restructuring and Productivity Initiatives

Phase 1: During the period from April 29, 2013 to December 29, 2013 (the "Transition Period") and the first nine months of 2014, the Company invested in restructuring and productivity initiatives as part of its ongoing cost reduction efforts with the goal of driving efficiencies and creating fiscal resources that will be reinvested into the Company's business as well as to accelerate overall productivity on a global scale. The number of employees impacted by these initiatives was approximately 4,050, all of whom had left the Company as of June 28, 2015, and comprised of corporate and field positions across the Company's global business segments. With respect to these restructuring and productivity initiatives, the Company incurred total charges of $289 million related to severance benefits and other severance-related expenses from inception through its conclusion in December 2014.

Footprint: In addition, the Company announced the planned closure and consolidation of 5 factories across the U.S., Canada and Europe during 2014. The number of employees impacted by these 5 plant closures and consolidation was approximately 1,600, all of whom had left the Company as of June 28, 2015. With respect to these factory closures, the Company incurred charges of $91 million related to severance benefits and other severance-related expenses through its conclusion in March 2015.

License Expiration: Furthermore, in the fourth quarter of 2014, the Company announced the planned closure of one additional factory in Europe in the first half of 2015 due to the expiration of a license to manufacture a non-core product. The number of employees impacted by this plant closure was approximately 200, all of whom had left the Company as of June 28, 2015. With respect to this factory closure, the Company incurred charges of approximately $11 million related to severance benefits and other severance-related expenses through its conclusion in June 2015. In addition, the Company recognized $37 million in non-cash

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

asset write-downs for impairment of long-lived assets to be disposed. In the six months ended June 28, 2015, the Company incurred $9 million in contract termination fees related to this factory closure.

Phase II: In the fourth quarter of 2014 and in the first quarter of 2015, the Company invested in restructuring and productivity initiatives as part of its ongoing cost reduction efforts with the goal of driving efficiencies and creating fiscal resources that will be reinvested into the Company's business as well as to accelerate overall productivity on a global scale. The number of employees impacted by these initiatives was approximately 1,050, all of whom had left the Company as of June 28, 2015, and comprised of corporate and field positions across the Company's global business segments. With respect to these restructuring and productivity initiatives, the Company recognized $30 million in non-cash asset write-downs in 2014 for impairment of long-lived assets to be disposed. The Company incurred total charges of approximately $68 million related to severance benefits and other severance-related expenses from project inception through its conclusion in March 2015.

In the second quarter of 2015, the Company announced the planned closure and consolidation of 2 factories across the U.S. during 2015 and the elimination of corporate and field positions across Asia/Pacific during 2015. The number of employees impacted by these initiatives was approximately 700, of which 400 had left the company as of June 28, 2015. With respect to these restructuring and productivity initiatives, the Company recognized $21 million in non-cash asset write-downs for impairment of assets to be disposed. The Company incurred charges of approximately $8 million related to severance benefits and other severance-related expenses from project inception through June 28, 2015.

Integration Program: Following the 2015 Merger, the Company approved an integration program (the “Integration Program”) designed to integrate and optimize the organization following the 2015 Merger. As a result, the Company expects to incur material charges due to exit and disposal activities. As part of the Integration Program, the Company expects to, among other things, reduce its existing workforce and incur certain one-time severance and postretirement benefit costs.

The Company continues to evaluate actions and the costs of the Integration Program and therefore is currently unable to make a determination of an estimate of the total amount or range of amounts for each major type of cost expected to be incurred in connection with the Integration Program, or a range of amounts of the charges that will result in future cash expenditures. The Company is also currently unable to determine the duration of the plan, but expects that the plan will be implemented over a multi-year period.

The Company recorded pre-tax costs related to these initiatives in the second quarter and six months ended June 28, 2015 and June 29, 2014, which were comprised of the following:



	Second Quarter Ended
	June 28, 2015		June 29, 2014
	(In millions)
Severance and employee benefit costs	$	8	$	30
Non-cash asset write-downs and accelerated depreciation	25		62
Other exit costs ^(a)	2		25
Total productivity charges	$	35	$	117



	Six Months Ended
	June 28, 2015		June 29, 2014
	(In millions)
Severance and employee benefit costs	$	13	$	84
Non-cash asset write-downs and accelerated depreciation	27		135
Other exit costs ^(a)	12		38
Total productivity charges	$	52	$	257

______________________________________


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

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

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

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

The Company does not include restructuring and productivity charges in the results of its reportable segments. The pre-tax impact of allocating such charges to segment results would have been as follows:



	Second Quarter Ended
	June 28, 2015		June 29, 2014
	(In millions)
North America	$	27	$	72
Europe	4		34
Asia/Pacific	4		8
Latin America	—		—
RIMEA	—		1
Non-Operating	—		2
Total productivity charges	$	35	$	117



	Six Months Ended
	June 28, 2015		June 29, 2014
	(In millions)
North America	$	30	$	156
Europe	14		63
Asia/Pacific	7		18
Latin America	1		—
RIMEA	—		2
Non-Operating	—		18
Total productivity charges	$	52	$	257

Activity in other accrued liability balances for restructuring and productivity charges incurred were as follows:



	Severance and other severance related costs			Other exit costs (a)			Total
	(In millions)
Accrual balance at December 28, 2014	$	53		$	26		$	79
2015 restructuring and productivity initiatives	13			12			25
Cash payments	(50		)	(13		)	(63		)
Accrual balance at June 28, 2015	$	16		$	25		$	41

______________________________________


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

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

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)


(6)	Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the period from December 28, 2014 to June 28, 2015, by reportable segment, are as follows:



	North America			Europe			Asia/Pacific			Latin America			RIMEA			Total
	(In millions)
Balance at December 28, 2014	$	10,102		$	3,454		$	1,034		$	197		$	172		$	14,959
Translation adjustments	(77		)	(12		)	(95		)	(33		)	(12		)	(229		)
Other	(4		)	(94		)	9			(1		)	101			11
Balance at June 28, 2015	$	10,021		$	3,348		$	948		$	163		$	261		$	14,741

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

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

The Company's indefinite-lived intangible assets are comprised of a large number of individual brands with an aggregate carrying value of $11.7 billion as of June 28, 2015. These brands were adjusted to their estimated fair value in connection with the 2013 Merger. Because the 2013 Merger occurred recently and the fact that the Company has a large number of individual brands across categories and geographies which are tested separately for impairment, and as evidenced by the Company's 2014 impairment charges, the Company continues to have risk of future impairment to the extent individual brand performance does not meet the Company's projections. As of the Company's most recent impairment test date, it had approximately 21 brands which had an estimated fair value exceeding carrying value by less than 10%. The aggregate carrying value of such brands at June 28, 2015 was approximately $2.4 billion.

Intangible assets not subject to amortization at June 28, 2015 totaled $11.7 billion and consisted of $11.3 billion of trademarks, $371 million of licenses, and $42 million of other intangibles. Intangible assets not subject to amortization at December 28, 2014 totaled $11.9 billion and consisted of $11.5 billion of trademarks, $371 million of licenses, and $45 million of other intangible assets. The decrease in intangible assets, not subject to amortization, since December 28, 2014, is due to foreign currency translation adjustments.

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

Other intangible assets at June 28, 2015 and December 28, 2014, subject to amortization, are as follows:



	June 28, 2015							December 28, 2014
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
	(In millions)
Customer-related assets	$	1,284	$	(129	)	$	1,155	$	1,315	$	(99	)	$	1,216
Licenses	119		(42		)	77		118		(31		)	87
Other	15		(3		)	12		15		(2		)	13
	$	1,418	$	(174	)	$	1,244	$	1,448	$	(132	)	$	1,316

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


(7)	Income Taxes

The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates in an international environment with almost 70% of its sales outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, Italy, the Netherlands, the United Kingdom and the United States. The Company has substantially concluded all national income tax matters for years through Fiscal 2012 for the Netherlands and the United Kingdom, through Fiscal 2011 for the U.S., through Fiscal 2010 for Australia and Italy, and through Fiscal 2009 for Canada.

The effective tax rate for the six months ended June 28, 2015 was 21.8% compared to 20.3% in the prior year. The increase in the effective tax rate is primarily the result of the current period including higher repatriation costs, lower amounts of tax exempt income, and higher nondeductible costs related to the foreign exchange devaluation loss for Venezuela; partially offset by a lower blended statutory tax rate and the release of approximately $7 million of valuation allowance as the result of ongoing profitability in two foreign jurisdictions.

The total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $75 million and $71 million on June 28, 2015 and December 28, 2014, respectively. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $63 million and $58 million on June 28, 2015 and December 28, 2014, respectively. It is reasonably possible that the amount of unrecognized tax benefits will decrease by as much as $28 million in the next 12 months primarily due to the progression of federal, state and foreign audits in process.

The Company classifies interest and penalties on tax uncertainties as a component of the provision for income taxes. The total amounts of interest accrued at June 28, 2015 and December 28, 2014 were $13 million and $13 million, respectively. The corresponding amounts of accrued penalties at June 28, 2015 and December 28, 2014 were $7 million and $8 million, respectively.


(8)	Employees’ Stock Incentive Plans

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

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

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

The compensation cost related to equity plans and the related tax benefit is primarily recognized in SG&A as follows:



	Second Quarter Ended
	June 28, 2015		June 29, 2014
	(In millions)
Pre-tax compensation cost	$	3	$	2
Tax benefit	1		1
After-tax compensation cost	$	2	$	1



	Six Months Ended
	June 28, 2015		June 29, 2014
	(In millions)
Pre-tax compensation cost	$	5	$	4
Tax benefit	2		1
After-tax compensation cost	$	3	$	3

Unrecognized compensation cost related to unvested option awards under the 2013 Omnibus Plan was $43 million as of June 28, 2015 and $38 million as of June 29, 2014.

A summary of the Company’s stock option activity and related information is as follows:



	Number of Options
	(In millions)
Options outstanding at December 28, 2014	8
Options granted	2
Options forfeited	—
Options exercised	—
Options outstanding at June 28, 2015	10


(9)	Pensions and Other Post-Retirement Benefits

The Company's employees participate in various employee benefit plans that were in place prior to the 2013 Merger.

The components of net periodic benefit (income)/expense are as follows:



	Second Quarter Ended
	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014
	Pension Benefits						Other Retiree Benefits
	(In millions)
Service cost	$	7		$	8		$	1		$	1
Interest cost	26			35			2			2
Expected return on plan assets	(45		)	(55		)	—			—
Amortization of prior service credit	—			—			(2		)	(2		)
Amortization of unrecognized loss	1			—			—			—
Net settlement losses	9			—			—			—
Net periodic benefit (income)/expense	$	(2	)	$	(12	)	$	1		$	1

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)



	Six Months Ended
	June 28, 2015			June 29, 2014			June 28, 2015			June 29, 2014
	Pension Benefits						Other Retiree Benefits
	(In millions)
Service cost	$	13		$	15		$	2		$	2
Interest cost	52			70			4			4
Expected return on plan assets	(93		)	(111		)	—			—
Amortization of prior service credit	—			—			(3		)	(3		)
Amortization of unrecognized loss	2			—			—			—
Net settlement losses	9			—			—			—
Net periodic benefit (income)/expense	$	(17	)	$	(26	)	$	3		$	3

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

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

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

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


(10)	Comprehensive Income/(Loss)

The following tables summarize the allocation of total comprehensive income between The Kraft Heinz Company and the noncontrolling interest for the three and six months ended June 28, 2015 and June 29, 2014, respectively:



	Second Quarter Ended
	June 28, 2015								June 29, 2014
	The Kraft Heinz Company			Noncontrolling Interest		Total			The Kraft Heinz Company			Noncontrolling Interest			Total
	(In millions)
Net (loss)/income	$	(164	)	$	4	$	(160	)	$	127		$	8		$	135
Other comprehensive income, net of tax:
Foreign currency translation adjustments	360			1		361			186			(5		)	181
Net deferred losses on net investment hedges	(206		)	—		(206		)	(44		)	—			(44		)
Net pension and post-retirement benefit losses	(18		)	—		(18		)	(28		)	—			(28		)
Reclassification of net pension and post-retirement benefit losses/(gains) to net income	8			—		8			(1		)	—			(1		)
Net deferred losses on cash flow hedges from periodic revaluations	(10		)	—		(10		)	(100		)	—			(100		)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings	137			—		137			(1		)	—			(1		)
Total comprehensive income	107			5		112			139			3			142

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)



	Six Months Ended
	June 28, 2015									June 29, 2014
	The Kraft Heinz Company			Noncontrolling Interest			Total			The Kraft Heinz Company			Noncontrolling Interest		Total
	(In millions)
Net income	$	112		$	7		$	119		$	322		$	11	$	333
Other comprehensive (loss)/income, net of tax:
Foreign currency translation adjustments	(420		)	(13		)	(433		)	292			3		295
Net deferred gains/(losses) on net investment hedges	226			—			226			(160		)	—		(160		)
Net pension and post-retirement benefit losses	(19		)	—			(19		)	(28		)	—		(28		)
Reclassification of net pension and post-retirement benefit losses/(gains) to net income	7			—			7			(2		)	—		(2		)
Net deferred losses on cash flow hedges from periodic revaluations	(77		)	—			(77		)	(159		)	—		(159		)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings	138			—			138			(4		)	—		(4		)
Total comprehensive (loss)/income	(33		)	(6		)	(39		)	261			14		275

The tax (expense)/benefit associated with each component of other comprehensive income/(loss) is as follows:



	Second Quarter Ended
	The Kraft Heinz Company			Noncontrolling Interest		Total
	(In millions)
June 29, 2014
Net deferred gains/(losses) on net investment hedges	$	27		$	—	$	27
Net pension and post-retirement benefit gains/(losses)	$	7		$	—	$	7
Reclassification of net pension and post-retirement benefit (gains)/losses to net income	$	(1	)	$	—	$	(1	)
Net deferred gains/(losses) on cash flow hedges from periodic revaluations	$	48		$	—	$	48
Net deferred (gains)/losses on cash flow hedges reclassified to earnings	$	(2	)	$	—	$	(2	)

June 28, 2015
Net deferred gains/(losses) on net investment hedges	$	124		$	—	$	124
Net pension and post-retirement benefit gains/(losses)	$	5		$	—	$	5
Reclassification of net pension and post-retirement benefit losses/(gains) to net income	$	2		$	—	$	2
Net deferred (losses)/gains on cash flow hedges from periodic revaluations	$	(2	)	$	—	$	(2	)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings	$	86		$	—	$	86

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)



	Six Months Ended
	The Kraft Heinz Company			Noncontrolling Interest		Total
	(In millions)
June 29, 2014
Net deferred gains/(losses) on net investment hedges	$	99		$	—	$	99
Net pension and post-retirement benefit gains/(losses)	$	7		$	—	$	7
Reclassification of net pension and post-retirement benefit (gains)/losses to net income	$	(1	)	$	—	$	(1	)
Net deferred gains/(losses) on cash flow hedges from periodic revaluations	$	79		$	—	$	79
Net deferred (gains)/losses on cash flow hedges reclassified to earnings	$	(5	)	$	—	$	(5	)

June 28, 2015
Net deferred (losses)/gains on net investment hedges	$	(195	)	$	—	$	(195	)
Net pension and post-retirement benefit gains/(losses)	$	6		$	—	$	6
Reclassification of net pension and post-retirement benefit losses/(gains) to net income	$	3		$	—	$	3
Net deferred gains/(losses) on cash flow hedges from periodic revaluations	$	43		$	—	$	43
Net deferred losses/(gains) on cash flow hedges reclassified to earnings	$	84		$	—	$	84

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



	Foreign currency translation adjustments			Net pension and post retirement benefit			Net cash flow hedges			Total
	(In millions)
Balance as of December 28, 2014	(574		)	61			(61		)	(574		)
Foreign currency translation adjustments	(420		)	—			—			(420		)
Net deferred gains/(losses) on net investment hedges	226			—			—			226
Net pension and post-retirement benefit (losses)/gains	—			(19		)	—			(19		)
Reclassification of net pension and post-retirement benefit losses(gains) to earnings	—			7			—			7
Net deferred (losses)/gains on cash flow hedges from periodic revaluations	—			—			(77		)	(77		)
Net deferred losses/(gains) on cash flow hedges reclassified to earnings	—			—			138			138
Net current-period other comprehensive (loss)/income	(194		)	(12		)	61			(145		)
Balance as of June 28, 2015	$	(768	)	$	49		$	—		$	(719	)

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)

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



Accumulated other comprehensive (loss)/income component	Reclassified from accumulated other comprehensive (loss)/income to earnings						Line affected by reclassification
	Three Months Ended June 28, 2015			Three Months Ended June 29, 2014
	(In millions)
(Losses)/gains on cash flow hedges:
Foreign exchange contracts	$	(1	)	$	(1	)	Sales
Foreign exchange contracts	11			4			Cost of products sold
Interest rate swap contracts	(233		)	—			Interest expense
	(223		)	3			(Losses)/gains in income before income taxes
	86			(2		)	Benefit from/(provision for) income taxes
	$	(137	)	$	1		(Losses)/gains in net (loss)/income
(Losses)/gains on pension and post retirement benefit:
Amortization of unrecognized (losses)/gains	$	(1	)	$	—		(a)
Prior service (cost)/credit	2			2			(a)
Settlement loss	(11		)	—			(a)
	(10		)	2			(Losses)/gains in income before income taxes
	2			(1		)	Benefit from/(provision for) income taxes
	$	(8	)	$	1		(Losses)/gains in net (loss)/income



Accumulated other comprehensive (loss)/income component	Reclassified from accumulated other comprehensive (loss)/income to earnings						Line affected by reclassification
	Six Months Ended June 28, 2015			Six Months Ended June 29, 2014
	(In millions)
(Losses)/gains on cash flow hedges:
Foreign exchange contracts	$	(2	)	$	(1	)	Sales
Foreign exchange contracts	16			9			Cost of products sold
Foreign exchange contracts	1			1			Other expense, net
Interest rate swap contracts	(237		)	—			Interest expense
	(222		)	9			(Losses)/gains in income before income taxes
	84			(5		)	Benefit from/(provision for) income taxes
	$	(138	)	$	4		(Losses)/gains in net income
(Losses)/gains on pension and post retirement benefit:
Amortization of unrecognized (losses)/gains	$	(2	)	$	—		(a)
Prior service credit/(cost)	3			3			(a)
Settlement loss	(11		)	—			(a)
	(10		)	3			(Losses)/gains in income before income taxes
	3			(1		)	Benefit from/(provision for) income taxes
	$	(7	)	$	2		(Losses)/gains in net income

______________________________________


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

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)


(11)	Changes in Equity

As a result of the 2015 Merger, each share of H.J. Heinz Holding Corporation's issued and outstanding common stock was reclassified and changed into 0.443332 of a share of Kraft Heinz common stock.

The following table provides a summary of the changes in the carrying amounts of total equity, The Kraft Heinz Company shareholders' equity and equity attributable to the noncontrolling interest:



	Common Stock		Warrants			Additional Capital			Retained Earnings			Accumulated OCI			Noncontrolling Interest			Total
	(In millions)
Balance as of December 28, 2014	$	4	$	367		$	7,320		$	—		$	(574	)	$	219		$	7,336
Comprehensive income/(loss) (a)	—		—			—			112			(145		)	(4		)	(37		)
Dividends paid to shareholder	—		—			(254		)	(106		)	—			—			(360		)
Capital contribution (b)	—		—			15			—			—			—			15
Stock option expense	—		—			6			—			—			—			6
Exercise of warrants (c)	—		(367		)	367			—			—			—			—
Other (d)	—		—			—			(6		)	—			—			(6		)
Balance at June 28, 2015	$	4	$	—		$	7,454		$	—		$	(719	)	$	215		$	6,954

______________________________________


(a)	The allocation of the individual components of comprehensive income/(loss) attributable to The Kraft Heinz Company and the noncontrolling interest is disclosed in Note 10. Comprehensive loss attributable to the redeemable noncontrolling interest is $2 million for the six months ended June 28, 2015.


(b)	This balance represents the purchase of shares by employees primarily through the Bonus Swap Program. See Note 8.


(c)	In June 2015, Berkshire Hathaway exercised a warrant to purchase an additional 46 million of H.J. Heinz Holding Corporation common shares at an exercise price of $0.01 per common share, which were subsequently reclassified and changed into approximately 20 million shares of Kraft Heinz common stock (see Notes 1 and 13).


(d)	In June 2015, there was a $6 million adjustment to the maximum redemption value of the redeemable noncontrolling interest.

THE KRAFT HEINZ COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(Unaudited)


(12)	Debt

The Company's long-term debt consisted of the following:



	June 28, 2015		December 28, 2014
	(Unaudited)
	(In millions)
Term B-1 Loan	$	2,123	$	2,769
Term B-2 Loan	4,283		5,588
$3.10 billion 4.25% Second Lien Senior Secured Notes due 2020	3,100		3,100
$2.00 billion 4.875% Second Lien Senior Secured Notes due 2025	2,000		—
Other U.S. Dollar Debt due May 2013 — November 2034 (0.94%—7.96%)	10		10
Other Non-U.S. Dollar Debt due May 2013 — May 2023 (3.50%—11.00%)	46		53
2.00% U.S. Dollar Notes due September 2016	58		58
1.50% U.S. Dollar Notes due March 2017	18		18
3.125% U.S. Dollar Notes due September 2021	34		34