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Dynamic quotes 
OFFON

THE KRAFT HEINZ COMPANY

(KHC)
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KRAFT HEINZ : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

04/30/2021 | 08:04am EDT

Overview

Description of the Company:
We manufacture and market food and beverage products, including condiments and
sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other
grocery products throughout the world.
We manage and report our operating results through three reportable segments
defined by geographic region: United States, International, and Canada.
See Note 17, Segment Reporting, in Item 1, Financial Statements, for our
financial information by segment.
Items Affecting Comparability of Financial Results
COVID-19 Impacts:
We have been actively monitoring the impact of COVID-19 on our business. In the
first quarter of 2020, specifically in March 2020, we experienced consolidated
net sales growth as higher demand for our retail products more than offset
declines in our foodservice business. These trends continued into the first
quarter of 2021, during which we continued to see strong levels of retail demand
compared to pre-pandemic periods. However, retail consumption declined when
compared to the first quarter of 2020 based on the strong consumer demand at the
beginning of the COVID-19 pandemic, particularly in March 2020. This increased
demand for our retail products could reverse in the future if consumer
purchasing behavior changes. We expect volatility in the demand for
away-from-home establishments to continue through the second quarter of 2021 and
potentially beyond, which is expected to negatively impact our foodservice
business. However, COVID-19 and its impacts are unprecedented and continuously
evolving, and the long-term impacts to our financial condition and results of
operations are still uncertain.
See Liquidity and Capital Resources for additional information related to the
impact of COVID-19 on our overall results. For information related to the impact
of COVID-19 on our segment results see Results of Operations by Segment.
Results of Operations
We disclose in this report certain non-GAAP financial measures. These non-GAAP
financial measures assist management in comparing our performance on a
consistent basis for purposes of business decision-making by removing the impact
of certain items that management believes do not directly reflect our underlying
operations. For additional information and reconciliations from our condensed
consolidated financial statements see Non-GAAP Financial Measures.
Consolidated Results of Operations
Summary of Results:
                                                                            For the Three Months Ended
                                                                                     March 28,
                                                              March 27, 2021           2020               % Change
                                                               (in millions, except per share
                                                                           data)
Net sales                                                    $       6,394          $  6,157                    3.9  %
Operating income/(loss)                                              1,089               770                   41.3  %
Net income/(loss)                                                      568               381                   49.0  %
Net income/(loss) attributable to common shareholders                  563               378                   48.9  %
Diluted EPS                                                           0.46              0.31                   48.4  %


Net Sales:
                                         For the Three Months Ended
                              March 27, 2021           March 28, 2020      % Change
                                        (in millions)
Net sales               $       6,394                 $        6,157          3.9  %
Organic Net Sales(a)            6,308                          6,151          2.5  %

(a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.

                                       29
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Three Months Ended March 27, 2021 Compared to the Three Months Ended March 28,
2020:
Net sales increased 3.9% to $6.4 billion for the three months ended March 27,
2021 compared to $6.2 billion for the three months ended March 28, 2020,
including the favorable impact of foreign currency (1.4 pp). Organic Net Sales
increased 2.5% to $6.3 billion for the three months ended March 27, 2021
compared to $6.2 billion for the three months ended March 28, 2020, driven by
higher pricing (1.5 pp) and favorable volume/mix (1.0 pp). Pricing was higher
across all segments, while favorable volume/mix in the United States and
International segments more than offset unfavorable volume/mix in Canada.
Net Income/(Loss):
                                                                          For the Three Months Ended
                                                              March 27,         March 28,
                                                                2021               2020               % Change
                                                                     (in millions)
Operating income/(loss)                                      $  1,089          $     770                   41.3  %
Net income/(loss)                                                 568                381                   49.0  %
Net income/(loss) attributable to common shareholders             563                378                   48.9  %
Adjusted EBITDA(a)                                              1,580              1,415                   11.6  %


(a)  Adjusted EBITDA is a non-GAAP financial measure. See the Non-GAAP Financial
Measures section at the end of this item.
Three Months Ended March 27, 2021 Compared to the Three Months Ended March 28,
2020:
Operating income/(loss) increased to income of $1.1 billion for the three months
ended March 27, 2021 compared to income of $770 million for the three months
ended March 28, 2020. This increase was primarily driven by unrealized gains on
commodity hedges in the current period compared to unrealized losses on
commodity hedges in the prior period, higher Organic Net Sales, lower general
corporate expenses, lower depreciation and amortization expenses, and favorable
changes in key commodity costs (which we define as dairy, meat, coffee, and
nuts), which more than offset higher supply chain costs and investments in
marketing and people.
Net income/(loss) increased to income of $568 million for the three months ended
March 27, 2021 compared to income of $381 million for the three months ended
March 28, 2020. This increase was driven by the operating income/(loss) factors
discussed above and a lower effective tax rate, partially offset by higher
interest expense and unfavorable changes in other expense/(income).
•Our effective tax rate of 19.3% for the three months ended March 27, 2021 was
favorably impacted by the geographic mix of pre-tax income and the impact of
certain net discrete items, including the reversal of uncertain tax position
reserves in certain U.S. state and foreign jurisdictions, favorable changes in
estimates of certain foreign taxes, and the revaluation of our deferred tax
balances due to changes in U.S. state tax rates. These impacts were partially
offset by the unfavorable impact of certain net discrete items, primarily due to
non-deductible goodwill impairment (8.2%) related to the Nuts Transaction. Our
effective tax rate of 29.6% for the three months ended March 28, 2020 was
unfavorably impacted by net discrete items, primarily related to non-deductible
goodwill impairments (9.1%), which were partially offset by a favorable
geographic mix of pre-tax income.
•Interest expense was $415 million for the three months ended March 27, 2021
compared to $310 million for the three months ended March 28, 2020. This
increase was primarily driven by a $106 million loss on extinguishment of debt
recognized in the current year period in connection with the Tender Offer.
•Other expense/(income) was $30 million of income for the three months ended
March 27, 2021 compared to $81 million of income for the three months ended
March 28, 2020. This change was primarily driven by a $29 million decrease in
amortization of prior service credits as compared to the prior year period, a
$42 million net loss on derivative activities in the first quarter of 2021
compared to an $18 million net loss on derivative activities in the first
quarter of 2020, and a $19 million loss on sale of business in the first quarter
of 2021 compared to a $2 million net loss on sales of businesses recorded in the
first quarter of 2020. These impacts were partially offset by a $36 million net
foreign exchange gain in the first quarter of 2021 as compared to a $17 million
net foreign exchange gain in the first quarter of 2020.
Adjusted EBITDA increased 11.6% to $1.6 billion for the three months ended
March 27, 2021 compared to $1.4 billion for the three months ended March 28,
2020, including Adjusted EBITDA growth across all segments, lower general
corporate expenses, and the favorable impact of foreign currency (1.2 pp).
                                       30
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Diluted EPS:
                                    For the Three Months Ended
                        March 27, 2021            March 28, 2020       % Change
                        (in millions, except per share data)
Diluted EPS       $       0.46                   $          0.31         48.4  %
Adjusted EPS(a)           0.72                              0.58         24.1  %


(a)  Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial
Measures section at the end of this item.
Three Months Ended March 27, 2021 Compared to the Three Months Ended March 28,
2020:
Diluted EPS increased 48.4% to $0.46 for the three months ended March 27, 2021
compared to $0.31 for the three months ended March 28, 2020 primarily driven by
the net income/(loss) factors discussed above.
                                                                          For the Three Months Ended
                                                    March 27,          March 28,
                                                       2021               2020             $ Change             % Change
Diluted EPS                                        $    0.46          $    0.31          $    0.15                   48.4  %
Restructuring activities                                0.01                  -               0.01
Unrealized losses/(gains) on commodity hedges          (0.02)              0.09              (0.11)
Impairment losses                                       0.19               0.18               0.01
Losses/(gains) on sale of business                      0.02                  -               0.02
Debt prepayment and extinguishment costs                0.06                  -               0.06
Adjusted EPS(a)                                    $    0.72          $    0.58          $    0.14                   24.1  %

Key drivers of change in Adjusted EPS(a):
Results of operations                                                                    $    0.11
Other expense/(income)                                                                       (0.02)
Effective tax rate                                                                            0.05
                                                                                         $    0.14


(a)   Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial
Measures section at the end of this item.
Adjusted EPS increased 24.1% to $0.72 for the three months ended March 27, 2021
compared to $0.58 for the three months ended March 28, 2020 primarily driven by
higher Adjusted EBITDA, a lower effective tax rate, and lower depreciation and
amortization costs, which more than offset unfavorable changes in other
expense/(income) and higher equity award compensation expense.
Results of Operations by Segment
Management evaluates segment performance based on several factors, including net
sales, Organic Net Sales, and Segment Adjusted EBITDA. Segment Adjusted EBITDA
is defined as net income/(loss) from continuing operations before interest
expense, other expense/(income), provision for/(benefit from) income taxes, and
depreciation and amortization (excluding restructuring activities); in addition
to these adjustments, we exclude, when they occur, the impacts of restructuring
activities, deal costs, unrealized gains/(losses) on commodity hedges (the
unrealized gains and losses are recorded in general corporate expenses until
realized; once realized, the gains and losses are recorded in the applicable
segment's operating results), impairment losses, and equity award compensation
expense (excluding restructuring activities). Segment Adjusted EBITDA is a tool
that can assist management and investors in comparing our performance on a
consistent basis by removing the impact of certain items that management
believes do not directly reflect our underlying operations.
Under highly inflationary accounting, the financial statements of a subsidiary
are remeasured into our reporting currency (U.S. dollars) based on the legally
available exchange rate at which we expect to settle the underlying
transactions. Exchange gains and losses from the remeasurement of monetary
assets and liabilities are reflected in net income/(loss), rather than
accumulated other comprehensive income/(losses) on the balance sheet, until such
time as the economy is no longer considered highly inflationary. The exchange
gains and losses from remeasurement are recorded in current net income and are
classified within other expense/(income), as nonmonetary currency devaluation.
See Note 2, Significant Accounting Policies, to the consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 26,
2020, for additional information.
                                       31
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Net Sales:
                             For the Three Months Ended
                         March 27, 2021            March 28, 2020
                                   (in millions)
Net sales:
United States     $        4,608                  $        4,495
International              1,394                           1,301
Canada                       392                             361
Total net sales   $        6,394                  $        6,157


Organic Net Sales:
                                     For the Three Months Ended
                                 March 27, 2021            March 28, 2020
                                           (in millions)
Organic Net Sales(a):
United States             $        4,608                  $        4,495
International                      1,330                           1,295
Canada                               370                             361
Total Organic Net Sales   $        6,308                  $        6,151


(a)   Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP
Financial Measures section at the end of this item.
Drivers of the changes in net sales and Organic Net Sales for the three months
ended March 27, 2021 compared to the three months ended March 28, 2020 were:
                                                                                   Acquisitions and          Organic Net
                                         Net Sales             Currency              Divestitures               Sales               Price            Volume/Mix
United States                                   2.5  %              0.0 pp                     0.0 pp               2.5  %            1.0 pp                1.5 pp
International                                   7.2  %              4.5 pp                     0.0 pp               2.7  %            2.2 pp                0.5 pp
Canada                                          8.8  %              6.3 pp                     0.0 pp               2.5  %            4.9 pp              (2.4) pp
Kraft Heinz                                     3.9  %              1.4 pp                     0.0 pp               2.5  %            1.5 pp                1.0 pp


Adjusted EBITDA:
                                                                           

For the Three Months Ended

March 27, 2021 March 28, 2020

                                                                                     (in millions)
Segment Adjusted EBITDA:
United States                                                          $        1,280          $        1,209
International                                                                     283                     245
Canada                                                                             87                      55
General corporate expenses                                                        (70)                    (94)

Depreciation and amortization (excluding restructuring activities)

     (222)                   (243)
Restructuring activities                                                          (18)                      -
Deal costs                                                                         (7)                      -
Unrealized gains/(losses) on commodity hedges                                      37                    (143)
Impairment losses                                                                (230)                   (226)

Equity award compensation expense (excluding restructuring activities)

      (51)                    (33)
Operating income/(loss)                                                         1,089                     770
Interest expense                                                                  415                     310
Other expense/(income)                                                            (30)                    (81)
Income/(loss) before income taxes                                      $    

704 $ 541

                                       32
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United States:
                                           For the Three Months Ended
                                March 27, 2021           March 28, 2020      % Change
                                          (in millions)
Net sales                 $       4,608                 $        4,495          2.5  %
Organic Net Sales(a)              4,608                          4,495          2.5  %
Segment Adjusted EBITDA           1,280                          1,209          5.8  %


(a)   Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP
Financial Measures section at the end of this item.
Three Months Ended March 27, 2021 Compared to the Three Months Ended March 28,
2020:
Net sales and Organic Net Sales both increased 2.5% to $4.6 billion for the
three months ended March 27, 2021 compared to $4.5 billion for the three months
ended March 28, 2020, driven by favorable volume/mix (1.5 pp) and higher pricing
(1.0 pp). Favorable volume/mix was primarily driven by favorable changes in
retail inventory levels versus the prior year, which more than offset lower
foodservice sales due to the COVID-19 pandemic, the negative impact from exiting
the McCafé licensing agreement, and lower retail takeaway versus the prior year
period. Higher pricing was primarily driven by reduced promotional activity
versus the prior year and increases in foodservice.
Segment Adjusted EBITDA increased 5.8% to $1.3 billion for the three months
ended March 27, 2021 compared to $1.2 billion for the three months ended
March 28, 2020, as pricing gains, favorable mix, volume growth, and favorable
changes in key commodity costs more than offset higher supply chain costs and
investments in marketing and people.
International:
                                           For the Three Months Ended
                                March 27, 2021           March 28, 2020      % Change
                                          (in millions)
Net sales                 $       1,394                 $        1,301          7.2  %
Organic Net Sales(a)              1,330                          1,295          2.7  %
Segment Adjusted EBITDA             283                            245         15.5  %


(a)  Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP
Financial Measures section at the end of this item.
Three Months Ended March 27, 2021 Compared to the Three Months Ended March 28,
2020:
Net sales increased 7.2% to $1.4 billion for the three months ended March 27,
2021 compared to $1.3 billion for the three months ended March 28, 2020,
including the favorable impact of foreign currency (4.5 pp). Organic Net Sales
increased 2.7% to $1.3 billion for the three months ended March 27, 2021
compared to $1.3 billion for the three months ended March 28, 2020, driven by
higher pricing (2.2 pp) and favorable volume/mix (0.5 pp). Higher pricing was
primarily driven by increases in the United Kingdom, Latin America, and
Australia. Favorable volume/mix was primarily driven by growth in condiments and
sauces, which more than offset declines in meals and lower foodservice sales due
to the COVID-19 pandemic.
Segment Adjusted EBITDA increased 15.5% to $283 million for the three months
ended March 27, 2021 compared to $245 million for the three months ended
March 28, 2020, as Organic Net Sales growth and the favorable impact of foreign
currency (5.3 pp) more than offset investments in marketing.
Canada:
                                             For the Three Months Ended
                                  March 27, 2021             March 28, 2020       % Change
                                             (in millions)
Net sales                 $         392                     $           361          8.8  %
Organic Net Sales(a)                370                                 361          2.5  %
Segment Adjusted EBITDA              87                                  55         57.4  %

(a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.

                                       33
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Three Months Ended March 27, 2021 Compared to the Three Months Ended March 28,
2020:
Net sales increased 8.8% to $392 million for the three months ended March 27,
2021 compared to $361 million for the three months ended March 28, 2020
including the favorable impact of foreign currency (6.3 pp). Organic Net Sales
increased 2.5% to $370 million for the three months ended March 27, 2021
compared to $361 million for the three months ended March 28, 2020, driven by
higher pricing (4.9 pp), which more than offset unfavorable volume/mix (2.4 pp).
Pricing was higher primarily due to favorable trade expense compared to the
prior year period and higher pricing in cheese and foodservice. Unfavorable
volume/mix was primarily due to lower foodservice sales related to the COVID-19
pandemic and declines in condiments and sauces and boxed dinners, which more
than offset increases in cheese.
Segment Adjusted EBITDA increased 57.4% to $87 million for the three months
ended March 27, 2021 compared to $55 million for the three months ended
March 28, 2020, primarily driven by pricing gains, lower supply chain costs, and
the favorable impact of foreign currency (9.6 pp).
Liquidity and Capital Resources
In February 2020, Fitch Ratings ("Fitch") and S&P Global Ratings ("S&P")
downgraded our long-term credit rating from BBB- to BB+. These downgrades
adversely affect our ability to access the commercial paper market. In addition,
we could experience an increase in interest costs as a result of the downgrades.
These downgrades do not constitute a default or event of default under any of
our debt instruments. Limitations on or elimination of our ability to access the
commercial paper program may require us to borrow under the Senior Credit
Facility, if necessary to meet liquidity needs. Our ability to borrow under the
Senior Credit Facility is not affected by the downgrades. As of the date of this
filing, our long-term debt is rated BB+ by both Fitch and S&P and Baa3 by
Moody's Investor Services, Inc. ("Moody's"), with a positive outlook from Fitch
and a stable outlook from Moody's and S&P.
We believe that cash generated from our operating activities and Senior Credit
Facility will provide sufficient liquidity to meet our working capital needs,
repayments of long-term debt, future contractual obligations, payment of our
anticipated quarterly dividends, planned capital expenditures, restructuring
expenditures, and contributions to our postemployment benefit plans for the next
12 months. An additional potential source of liquidity is access to capital
markets. We intend to use our cash on hand for daily funding requirements.
Cash Flow Activity For the Three Months Ended March 27, 2021 Compared to the
Three Months Ended March 28, 2020:
Net Cash Provided by/Used for Operating Activities:
Net cash provided by operating activities was $810 million for the three months
ended March 27, 2021 compared to $212 million for the three months ended
March 28, 2020. This increase was primarily driven by favorable changes in trade
receivables, largely due to the timing of receipts, Adjusted EBITDA, cash
collateral related to our commodity derivative margin requirements, and
inventories. These impacts were partially offset by higher cash outflows for
variable compensation in 2021 compared to 2020.
Net Cash Provided by/Used for Investing Activities:
Net cash used for investing activities was $216 million for the three months
ended March 27, 2021 compared to $122 million for the three months ended
March 28, 2020. This change was primarily driven by higher capital expenditures
in 2021 compared to 2020. We expect 2021 capital expenditures to be
approximately $900 million as compared to 2020 capital expenditures of
$596 million. This increase is primarily due to increased capital investments,
largely for capacity expansion, and the COVID-19 pandemic, which caused delays
in our planned 2020 projects and spend. Given the continuing COVID-19 pandemic,
our estimates of 2021 capital expenditures are subject to change.
Net Cash Provided by/Used for Financing Activities:
Net cash used for financing activities was $1.6 billion for the three months
ended March 27, 2021 compared to net cash provided by financing activities of
$3.1 billion for the three months ended March 28, 2020. This change was
primarily driven by the $4.0 billion draw on our Senior Credit Facility in 2020
and higher repayments of long-term debt and debt prepayment and extinguishment
costs in 2021 compared to 2020. Higher repayments of long-term debt were
primarily driven by the Tender Offer. See Note 15, Commitments, Contingencies
and Debt, in Item 1, Financial Statements, for additional information on our
borrowing arrangements, the Tender Offer, and debt repayments.
Cash Held by International Subsidiaries:
Of the $2.4 billion cash and cash equivalents on our condensed consolidated
balance sheet at March 27, 2021, $1.5 billion was held by international
subsidiaries.
                                       34
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Subsequent to January 1, 2018, we consider the unremitted earnings of certain
international subsidiaries that impose local country taxes on dividends to be
indefinitely reinvested. For those undistributed earnings considered to be
indefinitely reinvested, our intent is to reinvest these funds in our
international operations, and our current plans do not demonstrate a need to
repatriate the accumulated earnings to fund our U.S. cash requirements. The
amount of unrecognized deferred tax liabilities for local country withholding
taxes that would be owed related to our 2018 through 2021 accumulated earnings
of certain international subsidiaries is approximately $55 million.
Our undistributed historic earnings in foreign subsidiaries through December 30,
2017 are currently not considered to be indefinitely reinvested. Related to
these undistributed historic earnings, we had recorded a deferred tax liability
of approximately $20 million on approximately $320 million of historic earnings
at March 27, 2021 and a deferred tax liability of approximately $20 million on
approximately $300 million of historic earnings at December 26, 2020. The
deferred tax liability relates to local withholding taxes that will be owed when
this cash is distributed.
Trade Payables Programs:
In order to manage our cash flow and related liquidity, we work with our
suppliers to optimize our terms and conditions, which include the extension of
payment terms. Our current payment terms with our suppliers, which we deem to be
commercially reasonable, generally range from 0 to 200 days. We also maintain
agreements with third party administrators that allow participating suppliers to
track payment obligations from us, and, at the sole discretion of the supplier,
sell one or more of those payment obligations to participating financial
institutions. We have no economic interest in a supplier's decision to enter
into these agreements and no direct financial relationship with the financial
institutions. Our obligations to our suppliers, including amounts due and
scheduled payment terms, are not impacted. Supplier participation in these
agreements is voluntary. We estimate that the amounts outstanding under these
programs were $675 million at March 27, 2021 and $740 million at December 26,
2020.
Borrowing Arrangements:
We maintain our Senior Credit Facility, which, following the execution of the
Amendment in October 2020 and the 2021 Extension Agreement in April 2021,
provides aggregate commitments of $4.1 billion through July 6, 2023 and
$4.0 billion through July 6, 2025. Subject to certain conditions, we may
increase the amount of revolving commitments and/or add additional tranches of
term loans in a combined aggregate amount of up to $900 million.
In the first quarter of 2020, as a precautionary measure to preserve financial
flexibility in light of the uncertainty in the global economy resulting from the
COVID-19 pandemic, we borrowed $4.0 billion under our Senior Credit Facility. No
amounts were drawn on our Senior Credit Facility at March 27, 2021, at
December 26, 2020, or during the three months ended March 27, 2021.
The Senior Credit Facility contains representations, warranties, and covenants
that are typical for these types of facilities and could upon the occurrence of
certain events of default restrict our ability to access our Senior Credit
Facility. We were in compliance with all financial covenants during the three
months ended March 27, 2021.
Long-Term Debt:
Our long-term debt, including the current portion, was $27.2 billion at
March 27, 2021 and $28.3 billion at December 26, 2020. This decrease was
primarily related to the approximately $900 million aggregate principal amount
of certain senior notes that were validly tendered in March 2021 in the Tender
Offer and the $111 million aggregate principal amount of senior notes that were
repaid at maturity in February 2021. We used cash on hand to fund the Tender
Offer and to pay fees and expenses in connection therewith.
We have aggregate principal amounts of senior notes of approximately $34 million
maturing in September 2021 and approximately $6 million maturing in March 2022.
On April 1, 2021, we issued a notice of redemption by KHFC of all of its 4.000%
senior notes due June 2023, of which $447 million aggregate principal amount is
outstanding. The effective date of this redemption is May 1, 2021. We expect to
fund these long-term debt repayments primarily with cash on hand and cash
generated from our operating activities.
We also may choose to repurchase outstanding notes through open-market
purchases, through 10b5-1 plans, by means of private purchases, or otherwise,
from time to time.
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In September 2020, we entered into the Cheese Transaction, which includes
approximately $3.2 billion of cash consideration. In February 2021, we entered
into the Nuts Transaction, which includes approximately $3.4 billion of cash
consideration. The Nuts Transaction is expected to close in the second quarter
of 2021 and the Cheese Transaction is expected to close in the second half of
2021, both are subject to customary closing conditions. We expect to use
post-tax transaction proceeds from the Nuts Transaction and the Cheese
Transaction, along with cash generated from our operating activities, to support
our capital allocation priorities, including investments in the business and
opportunistic repayments of long-term debt. See Note 4, Acquisitions and
Divestitures, in Item 1, Financial Statements, for additional information on the
Cheese Transaction and the Nuts Transaction.
Our long-term debt contains customary representations, covenants, and events of
default. We were in compliance with all financial covenants during the three
months ended March 27, 2021.
See Note 15, Commitments, Contingencies and Debt, in Item 1, Financial
Statements, for additional information on our long-term debt activity in 2021
and Note 18, Debt, to the consolidated financial statements in our Annual Report
on Form 10-K for the year ended December 26, 2020 for additional information on
our borrowing arrangements and long-term debt.
Supplemental Guarantor Information:
The Kraft Heinz Company (as the "Parent Guarantor") fully and unconditionally
guarantees all the senior unsecured registered notes (collectively, the "KHFC
Senior Notes") issued by KHFC, our 100% owned operating subsidiary (the
"Guarantee"). See Note 15, Commitments, Contingencies and Debt, in Item 1,
Financial Statements, and Note 18, Debt, to the consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 26,
2020 for additional descriptions of these guarantees.
The payment of the principal, premium, and interest on the KHFC Senior Notes is
fully and unconditionally guaranteed on a senior unsecured basis by the Parent
Guarantor, pursuant to the terms and conditions of the applicable indenture.
None of the Parent Guarantor's subsidiaries guarantee the KHFC Senior Notes.
The Guarantee is the Parent Guarantor's senior unsecured obligation and is: (i)
pari passu in right of payment with all of the Parent Guarantor's existing and
future senior indebtedness; (ii) senior in right of payment to all of the Parent
Guarantor's future subordinated indebtedness; (iii) effectively subordinated to
all of the Parent Guarantor's existing and future secured indebtedness to the
extent of the value of the assets secured by that indebtedness; and (iv)
effectively subordinated to all existing and future indebtedness and other
liabilities of the Parent Guarantor's subsidiaries.
The KHFC Senior Notes are obligations exclusively of KHFC and the Parent
Guarantor and not of any of the Parent Guarantor's other subsidiaries.
Substantially all of the Parent Guarantor's operations are conducted through its
subsidiaries. The Parent Guarantor's other subsidiaries are separate legal
entities that have no obligation to pay any amounts due under the KHFC Senior
Notes or to make any funds available therefor, whether by dividends, loans, or
other payments. Except to the extent the Parent Guarantor is a creditor with
recognized claims against its subsidiaries, all claims of creditors (including
trade creditors) and holders of preferred stock, if any, of its subsidiaries
will have priority with respect to the assets of such subsidiaries over its
claims (and therefore the claims of its creditors, including holders of the KHFC
Senior Notes). Consequently, the KHFC Senior Notes are structurally subordinated
to all liabilities of the Parent Guarantor's subsidiaries and any subsidiaries
that it may in the future acquire or establish. The obligations of the Parent
Guarantor will terminate and be of no further force or effect in the following
circumstances: (i) (a) KHFC's exercise of its legal defeasance option or, except
in the case of a guarantee of any direct or indirect parent of KHFC, covenant
defeasance option in accordance with the applicable indenture, or KHFC's
obligations under the applicable indenture have been discharged in accordance
with the terms of the applicable indenture or (b) as specified in a supplemental
indenture to the applicable indenture; and (ii) the Parent Guarantor has
delivered to the trustee an officer's certificate and an opinion of counsel,
each stating that all conditions precedent provided for in the applicable
indenture have been complied with. The Guarantee is limited by its terms to an
amount not to exceed the maximum amount that can be guaranteed by the Parent
Guarantor without rendering the Guarantee voidable under applicable law relating
to fraudulent conveyance or fraudulent transfer or similar laws affecting the
rights of creditors generally.
The following tables present summarized financial information for the Parent
Guarantor and KHFC (as subsidiary issuer of the KHFC Senior Notes) (together,
the "Obligor Group"), on a combined basis after the elimination of all
intercompany balances and transactions between the Parent Guarantor and
subsidiary issuer and investments in any subsidiary that is a non-guarantor.
                                       36
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Summarized Statement of Income

                                                                                  For the Three
                                                                                  Months Ended
                                                                                 March 27, 2021
Net sales                                                                       $        4,325
Gross profit(a)                                                                          1,611
Goodwill impairment losses                                                                 230

Intercompany service fees and other recharges                                            1,031
Operating income/(loss)                                                                    127
Equity in earnings/(losses) of subsidiaries                                                754
Net income/(loss)                                                                          563
Net income/(loss) attributable to common shareholders                                      563


(a)  For the three months ended March 27, 2021, the Obligor Group recorded
$119 million of net sales to the non-guarantor subsidiaries and $8 million of
purchases from the non-guarantor subsidiaries.
Summarized Balance Sheets
                                                 March 27, 2021      December 26, 2020
ASSETS
Current assets                                  $        7,322      $            6,978
Current assets due from affiliates(a)                    2,538                   3,233
Non-current assets                                       5,396                   5,562
Goodwill                                                 8,860                  10,510
Intangible assets, net                                   2,311                   2,475
Non-current assets due from affiliates(b)                  207              

207

LIABILITIES

Current liabilities                             $        4,295      $       

4,611

Current liabilities due to affiliates(a)                 5,302              

5,160

Non-current liabilities                                 29,385              

30,251

Non-current liabilities due to affiliates(b)             2,000                   2,000


(a)  Represents receivables and short-term lending due from and payables and
short-term lending due to non-guarantor subsidiaries.
(b)  Represents long-term lending due from and long-term borrowings due to
non-guarantor subsidiaries.
Commodity Trends
We purchase and use large quantities of commodities, including dairy products,
meat products, coffee beans, nuts, tomatoes, potatoes, soybean and vegetable
oils, sugar and other sweeteners, corn products, wheat products, and cocoa
products, to manufacture our products. In addition, we purchase and use
significant quantities of resins, metals, and cardboard to package our products,
and we use natural gas, electricity, and diesel fuel in the manufacturing and
distribution of our products. We continuously monitor worldwide supply and cost
trends of these commodities.
We define our key commodities in the United States and Canada as dairy, meat,
coffee, and nuts. During the three months ended March 27, 2021, we experienced
cost decreases for dairy and nuts, while costs for meat and coffee increased. We
manage commodity cost volatility primarily through pricing and risk management
strategies. As a result of these risk management strategies, our commodity costs
may not immediately correlate with market price trends.
See our Annual Report on Form 10-K for the year ended December 26, 2020 for
additional information on how we manage commodity costs.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the first quarter of 2021, we completed the Tender Offer, which reduced our
long-term debt maturing in 2025 and 2026. See Note 15, Commitments,
Contingencies and Debt, in Item 1, Financial Statements, for additional
information. There were no other material changes to our off-balance sheet
arrangements or aggregate contractual obligations from those disclosed in our
Annual Report on Form 10-K for the year ended December 26, 2020.
                                       37
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Equity and Dividends
We paid common stock dividends of $489 million for the three months ended
March 27, 2021 and $488 million for the three months ended March 28, 2020.
Additionally, on April 29, 2021, our Board of Directors declared a cash dividend
of $0.40 per share of common stock, which is payable on June 25, 2021 to
shareholders of record on May 28, 2021.
The declaration of dividends is subject to the discretion of our Board of
Directors and depends on various factors, including our net income, financial
condition, cash requirements, future prospects, and other factors that our Board
of Directors deems relevant to its analysis and decision making.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2, Significant
Accounting Policies, to the consolidated financial statements in our Annual
Report on Form 10-K for the year ended December 26, 2020.
We prepare our condensed consolidated financial statements in conformity with
U.S. GAAP. The preparation of these financial statements requires the use of
estimates, judgments, and assumptions. Our critical accounting estimates and
assumptions related to goodwill and intangible assets are described below. See
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, in our Annual Report on Form 10-K for the year ended December 26,
2020 for a discussion of our other critical accounting estimates and
assumptions.
Goodwill and Intangible Assets:
As of March 27, 2021, we maintain 14 reporting units, nine of which comprise our
goodwill balance. These nine reporting units had an aggregate goodwill carrying
amount of $31.4 billion at March 27, 2021. Our indefinite-lived intangible asset
balance primarily consists of a number of individual brands, which had an
aggregate carrying amount of $40.8 billion as of March 27, 2021.
We test our reporting units and brands for impairment annually as of the first
day of our second quarter, or more frequently if events or circumstances
indicate it is more likely than not that the fair value of a reporting unit or
brand is less than its carrying amount. Such events and circumstances could
include a sustained decrease in our market capitalization, increased competition
or unexpected loss of market share, increased input costs beyond projections
(for example due to regulatory or industry changes), disposals of significant
brands or components of our business, unexpected business disruptions (for
example due to a natural disaster, pandemic, or loss of a customer, supplier, or
other significant business relationship), unexpected significant declines in
operating results, significant adverse changes in the markets in which we
operate, or changes in management strategy. We test reporting units for
impairment by comparing the estimated fair value of each reporting unit with its
carrying amount. We test brands for impairment by comparing the estimated fair
value of each brand with its carrying amount. If the carrying amount of a
reporting unit or brand exceeds its estimated fair value, we record an
impairment loss based on the difference between fair value and carrying amount,
in the case of reporting units, not to exceed to the associated carrying amount
of goodwill.
Fair value determinations require considerable judgment and are sensitive to
changes in underlying assumptions, estimates, and market factors. Estimating the
fair value of individual reporting units and brands requires us to make
assumptions and estimates regarding our future plans, as well as industry,
economic, and regulatory conditions. These assumptions and estimates include
estimated future annual net cash flows, income tax considerations, discount
rates, growth rates, royalty rates, contributory asset charges, and other market
factors. If current expectations of future growth rates and margins are not met,
if market factors outside of our control, such as discount rates, income tax
rates, foreign currency exchange rates, or any factors that could be affected by
COVID-19, change, or if management's expectations or plans otherwise change,
including updates to our long-term operating plans, then one or more of our
reporting units or brands might become impaired in the future. Additionally, any
decisions to divest certain non-strategic assets could lead to the impairment of
one or more of our reporting units or brands in the future.
In 2020 and continuing into 2021, the COVID-19 pandemic produced and has
continued to produce a short-term beneficial financial impact for our
consolidated results. Retail sales have increased due to higher than anticipated
consumer demand for our products. The foodservice channel, however, has
experienced a negative impact from prolonged social distancing mandates limiting
access to and capacity at away-from-home establishments for a longer period of
time than was expected when they were originally put in place. Our Canada
Foodservice reporting unit is the most exposed of our reporting units to the
long-term impacts to away-from-home establishments. While our other reporting
units have varying levels of exposure to the foodservice channel, they also have
exposure to the retail channel, which offsets some of the risk associated with
the potential long-term impacts of shifts in net sales between retail and
away-from-home establishments. Our Canada Foodservice reporting unit was
impaired during our 2020 annual impairment test, reflecting our best estimate at
that time of the future outlook and risks of this business. The Canada
Foodservice reporting unit maintains an aggregate goodwill carrying amount of
approximately $157 million as of March 27, 2021. A number of factors could
result in further future impairments of our foodservice businesses,
                                       38
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including but not limited to: continued mandates around closures of dining rooms
in restaurants, distancing of people within establishments resulting in fewer
customers, the total number of restaurant closures, forthcoming changes in
consumer preferences or regulatory requirements over product formats (e.g.,
table top packaging vs. single serve packaging), and consumer trends of
dining-in versus dining-out. Given the evolving nature of and uncertainty driven
by the COVID-19 pandemic, we will continue to evaluate the impact on our
reporting units as adverse changes to these assumptions could result in future
impairments.
As we consider the ongoing impact of the COVID-19 pandemic with regard to our
indefinite-lived intangible assets, a number of factors could have a future
adverse impact on our brands, including changes in consumer and consumption
trends in both the short and long term, the extent of continued government
mandates to shelter in place, total number of restaurant closures, economic
declines, and reductions in consumer discretionary income. We have seen an
increase in our retail business in the short-term that has more than offset
declines in our foodservice business over the same period. Our brands are
generally common across both the retail and foodservice businesses and the fair
value of our brands are subject to a similar mix of positive and negative
factors. Given the evolving nature and uncertainty driven by COVID-19 pandemic,
we will continue to evaluate the impact on our brands.
As detailed in Note 8, Goodwill and Intangible Assets, in Item 1, Financial
Statements, we recorded impairment losses related to goodwill and
indefinite-lived intangible assets in the prior year. Our reporting units and
brands that were impaired were written down to their respective fair values
resulting in zero excess fair value over carrying amount as of the applicable
impairment test dates. Accordingly, these and other reporting units and brands
that have 20% or less excess fair value over carrying amount as of their latest
impairment testing date have a heightened risk of future impairments if any
assumptions, estimates, or market factors change in the future.
Reporting units with 10% or less fair value over carrying amount had an
aggregate goodwill carrying amount of $7.3 billion as of their latest impairment
testing date and included: Meal Foundations and Coffee, Canada Retail, and
Puerto Rico. Reporting units with between 10-20% fair value over carrying amount
had an aggregate goodwill carrying amount of $11.1 billion as of their latest
impairment testing date and included KSB, Northern Europe, and Canada
Foodservice. Reporting units with between 20-50% fair value over carrying amount
had an aggregate goodwill carrying amount of $12.4 billion as of their latest
impairment testing date and included ESA and Continental Europe. The Asia
reporting unit had a fair value over carrying amount in excess of 50% and a
goodwill carrying amount of $326 million as of its latest impairment testing
date.
Brands with 10% or less fair value over carrying amount had an aggregate
carrying amount after impairment of $20.3 billion as of their latest impairment
testing date and included: Kraft, Oscar Mayer, Velveeta, Miracle Whip, Maxwell
House, Cool Whip, Classico, ABC, Plasmon, and Wattie's (each of these brands had
a fair value over carrying amount of less than 1% due to impairments recorded in
the current and recent prior years). Brands with 10-20% fair value over carrying
amount had an aggregate carrying amount of $4.1 billion as of their latest
impairment testing date and included: Lunchables, A1, Ore-Ida, Stove Top, Jet
Puffed, and Quero. The aggregate carrying amount of brands with fair value over
carrying amount between 20-50% was $6.6 billion as of their latest impairment
testing date. Although the remaining brands, with a carrying value of $9.3
billion, have more than 50% excess fair value over carrying amount as of their
latest impairment testing date, these amounts are also associated with the 2013
Heinz Acquisition and the 2015 Merger and are recorded on the balance sheet at
their estimated acquisition date fair values. Therefore, if any assumptions,
estimates, or market factors change in the future, these amounts are also
susceptible to impairments.
We generally utilize the discounted cash flow method under the income approach
to estimate the fair value of our reporting units. Some of the more significant
assumptions inherent in estimating the fair values include the estimated future
annual net cash flows for each reporting unit (including net sales, cost of
products sold, SG&A, depreciation and amortization, working capital, and capital
expenditures), income tax rates, long-term growth rates, and a discount rate
that appropriately reflects the risks inherent in each future cash flow stream.
We selected the assumptions used in the financial forecasts using historical
data, supplemented by current and anticipated market conditions, estimated
product category growth rates, management's plans, and guideline companies.
We utilize the excess earnings method under the income approach to estimate the
fair value of certain of our largest brands. Some of the more significant
assumptions inherent in estimating the fair values include the estimated future
annual net cash flows for each brand (including net sales, cost of products
sold, and SG&A), contributory asset charges, income tax considerations,
long-term growth rates, a discount rate that reflects the level of risk
associated with the future earnings attributable to the brand, and management's
intent to invest in the brand indefinitely. We selected the assumptions used in
the financial forecasts using historical data, supplemented by current and
anticipated market conditions, estimated product category growth rates,
management's plans, and guideline companies.
                                       39
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We utilize the relief from royalty method under the income approach to estimate
the fair value of our remaining brands. Some of the more significant assumptions
inherent in estimating the fair values include the estimated future annual net
sales for each brand, royalty rates (as a percentage of net sales that would
hypothetically be charged by a licensor of the brand to an unrelated licensee),
income tax considerations, long-term growth rates, a discount rate that reflects
the level of risk associated with the future cost savings attributable to the
brand, and management's intent to invest in the brand indefinitely. We selected
the assumptions used in the financial forecasts using historical data,
supplemented by current and anticipated market conditions, estimated product
category growth rates, management's plans, and guideline companies.
As detailed in Note 4, Acquisitions and Divestitures, in Item 1, Financial
Statements, in the third quarter of 2020, we entered into the Cheese Transaction
for total consideration of approximately $3.3 billion. The total consideration
includes approximately $1.5 billion attributed to the Kraft and Velveeta
licenses that we will grant to Lactalis and approximately $75 million attributed
to the Cracker Barrel license that Lactalis will grant to us, the amounts of
which were based on the estimated fair values of the licensed portion of each
brand. We utilized the excess earnings method under the income approach to
estimate the fair value of the licensed portion of the Kraft brand and the
relief from royalty method under the income approach to estimate the fair value
of the licensed portions of the Velveeta brand and the Cracker Barrel brand.
Some of the more significant assumptions inherent in estimating these fair
values include the estimated future annual net sales and net cash flows for each
brand, contributory asset charges, royalty rates (as a percentage of net sales
that would hypothetically be charged by a licensor of the brand to an unrelated
licensee), income tax considerations, long-term growth rates, and a discount
rate that reflects the level of risk associated with the future earnings
attributable to each brand. We selected the assumptions used in the financial
forecasts using historical data, supplemented by current and anticipated market
conditions, estimated product category growth rates, and guideline companies. As
of March 27, 2021, we assessed the fair value less costs to sell of the net
assets of the Cheese Disposal Group and determined that their estimated fair
value exceeded their carrying amount.
At the time the licensed rights are granted, we will reassess the remaining fair
value of the retained portions of the Kraft and Velveeta brands and may record a
charge to reduce the intangible asset carrying amounts to reflect the lower
future cash flows expected to be generated after monetization of the licensed
portion of each brand. Any potential reduction to the intangible asset carrying
amounts will depend upon the excess fair value, if any, over carrying amount for
each brand at the time we grant the perpetual licenses, which will be on the
closing date of the Cheese Transaction. Changes in the fair value of the
retained and licensed portions of each brand will impact the amount of any
potential charges and the amount of license income that will be recognized,
which, at this time, we would not expect to exceed the fair value of the
perpetual licenses.
The discount rates, long-term growth rates, and royalty rates used to estimate
the fair values of our reporting units and our brands with 10% or less excess
fair value over carrying amount, as well as the goodwill or brand carrying
amounts, as of the latest impairment testing date for each reporting unit or
brand, were as follows:

                            Goodwill or Brand                     Discount Rate                            Long-Term Growth Rate                            Royalty Rate
                             Carrying Amount
                              (in billions)                Minimum                Maximum               Minimum              Maximum                Minimum                Maximum
Reporting units             $           7.3                       6.5  %               6.8  %                0.5  %               1.8  %
Brands
(excess earnings method)               16.3                       7.0  %               7.8  %                0.8  %               1.5  %
Brands
(relief from royalty
method)                                 4.0                       7.1  %               9.0  %                0.5  %               4.0  %                   5.0  %              20.0  %


The discount rates, long-term growth rates, and royalty rates used to estimate
the fair values of our reporting units and our brands with 10-20% excess fair
value over carry amount, as well as the goodwill or brand carrying amounts, as
of the latest impairment testing date for each reporting unit or brand, were as
follows:

                            Goodwill or Brand                    Discount Rate                            Long-Term Growth Rate                            Royalty Rate
                             Carrying Amount
                              (in billions)               Minimum                Maximum               Minimum              Maximum                Minimum                Maximum
Reporting units             $         11.1                       6.8  %               7.0  %                1.0  %               1.5  %
Brands
(excess earnings method)               1.4                       7.5  %               7.5  %                1.0  %               1.0  %
Brands
(relief from royalty
method)                                2.7                       7.0  %               8.0  %                1.5  %               3.0  %                   1.0  %              20.0  %


                                       40
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Assumptions used in impairment testing are made at a point in time and require
significant judgment; therefore, they are subject to change based on the facts
and circumstances present at each annual and interim impairment test date.
Additionally, these assumptions are generally interdependent and do not change
in isolation. However, as it is reasonably possible that changes in assumptions
could occur, as a sensitivity measure, we have presented the estimated effects
of isolated changes in discount rates, long-term growth rates, and royalty rates
on the fair values of our reporting units and brands with 10% or less excess
fair value over carrying amount and 10-20% excess fair value over carrying
amount. These estimated changes in fair value are not necessarily representative
of the actual impairment that would be recorded in the event of a fair value
decline.
If we had changed the assumptions used to estimate the fair value of our
reporting units and brands with 10% or less excess fair value over carrying
amount, as of the latest impairment testing date for each of these reporting
units and brands, these isolated changes, which are reasonably possible to
occur, would have led to the following increase/(decrease) in the aggregate fair
value of these reporting units and brands (in billions):
                                           Discount Rate                      Long-Term Growth Rate                        Royalty Rate
                                           50-Basis-Point                         25-Basis-Point                         100-Basis-Point
                                    Increase            Decrease           Increase            Decrease            Increase             Decrease
Reporting units                   $     (2.0)         $     2.5          $      1.1          $    (1.0)
Brands (excess earnings method)         (1.1)               1.3                 0.5               (0.5)
Brands (relief from royalty
method)                                 (0.2)               0.3                 0.2               (0.2)         $     0.3             $    (0.3)


If we had changed the assumptions used to estimate the fair value of our
reporting units and brands with 10-20% excess fair value over carrying amount,
as of the latest impairment testing date for each of these reporting units and
brands, these isolated changes, which are reasonably possible to occur, would
have led to the following increase/(decrease) in the aggregate fair value of
these reporting units and brands (in billions):
                                               Discount Rate                               Long-Term Growth Rate                              Royalty Rate
                                                                        50-Basis-Point                                                      100-Basis-Point
                                    Increase                 Decrease             Increase                     Decrease               Increase             Decrease
Reporting units                       (2.3)                        2.8               1.2                           (1.1)
Brands (excess earnings method)       (0.1)                        0.1                 -                              -
Brands (relief from royalty
method)                               (0.2)                        0.3               0.1                           (0.1)           $     0.3             $    (0.3)


Definite-lived intangible assets are amortized on a straight-line basis over the
estimated periods benefited. We review definite-lived intangible assets for
impairment when conditions exist that indicate the carrying amount of the assets
may not be recoverable. Such conditions could include significant adverse
changes in the business climate, current-period operating or cash flow losses,
significant declines in forecasted operations, or a current expectation that an
asset group will be disposed of before the end of its useful life. We perform
undiscounted operating cash flow analyses to determine if an impairment exists.
When testing for impairment of definite-lived intangible assets held for use, we
group assets at the lowest level for which cash flows are separately
identifiable. If an impairment is determined to exist, the loss is calculated
based on estimated fair value. Impairment losses on definite-lived intangible
assets to be disposed of, if any, are based on the estimated proceeds to be
received, less costs of disposal.
See Note 8, Goodwill and Intangible Assets, in Item 1, Financial Statements, for
our impairment testing results.
New Accounting Pronouncements
See Note 3, New Accounting Standards, in Item 1, Financial Statements, for a
discussion of new accounting pronouncements.
Contingencies
See Note 15, Commitments, Contingencies and Debt, in Item 1, Financial
Statements, for a discussion of our contingencies.
                                       41
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Non-GAAP Financial Measures
The non-GAAP financial measures we provide in this report should be viewed in
addition to, and not as an alternative for, results prepared in accordance with
U.S. GAAP.
To supplement the condensed consolidated financial statements prepared in
accordance with U.S. GAAP, we have presented Organic Net Sales, Adjusted EBITDA,
and Adjusted EPS, which are considered non-GAAP financial measures. The non-GAAP
financial measures presented may differ from similarly titled non-GAAP financial
measures presented by other companies, and other companies may not define these
non-GAAP financial measures in the same way. These measures are not substitutes
for their comparable U.S. GAAP financial measures, such as net sales, net
income/(loss), diluted EPS, or other measures prescribed by U.S. GAAP, and there
are limitations to using non-GAAP financial measures.
Management uses these non-GAAP financial measures to assist in comparing our
performance on a consistent basis for purposes of business decision making by
removing the impact of certain items that management believes do not directly
reflect our underlying operations. Management believes that presenting our
non-GAAP financial measures (i.e., Organic Net Sales, Adjusted EBITDA, and
Adjusted EPS) is useful to investors because it (i) provides investors with
meaningful supplemental information regarding financial performance by excluding
certain items, (ii) permits investors to view performance using the same tools
that management uses to budget, make operating and strategic decisions, and
evaluate historical performance, and (iii) otherwise provides supplemental
information that may be useful to investors in evaluating our results. We
believe that the presentation of these non-GAAP financial measures, when
considered together with the corresponding U.S. GAAP financial measures and the
reconciliations to those measures, provides investors with additional
understanding of the factors and trends affecting our business than could be
obtained absent these disclosures.
Organic Net Sales is defined as net sales excluding, when they occur, the impact
of currency, acquisitions and divestitures, and a 53rd week of shipments. We
calculate the impact of currency on net sales by holding exchange rates constant
at the previous year's exchange rate, with the exception of highly inflationary
subsidiaries, for which we calculate the previous year's results using the
current year's exchange rate. Organic Net Sales 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.
Adjusted EBITDA is defined as net income/(loss) from continuing operations
before interest expense, other expense/(income), provision for/(benefit from)
income taxes, and depreciation and amortization (excluding restructuring
activities); in addition to these adjustments, we exclude, when they occur, the
impacts of restructuring activities, deal costs, unrealized losses/(gains) on
commodity hedges, impairment losses, and equity award compensation expense
(excluding restructuring activities). 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.
Adjusted EPS is defined as diluted earnings per share excluding, when they
occur, the impacts of restructuring activities, deal costs, unrealized
losses/(gains) on commodity hedges, impairment losses, losses/(gains) on the
sale of a business, other losses/(gains) related to acquisitions and
divestitures (e.g., tax and hedging impacts), nonmonetary currency devaluation
(e.g., remeasurement gains and losses), debt prepayment and extinguishment
costs, and U.S. Tax Reform discrete income tax expense/(benefit), and including,
when they occur, adjustments to reflect preferred stock dividend payments on an
accrual basis. We believe Adjusted EPS provides important comparability of
underlying operating results, allowing investors and management to assess
operating performance on a consistent basis.
                                       42
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                            The Kraft Heinz Company
                Reconciliation of Net Sales to Organic Net Sales
                             (dollars in millions)
                                  (Unaudited)
                                                                             Acquisitions
                                                                                  and             Organic Net
                                        Net Sales          Currency          Divestitures            Sales              Price            Volume/Mix
Three Months Ended March 27, 2021
United States                         $    4,608          $      -          $          -          $   4,608
International                              1,394                64                     -              1,330
Canada                                       392                22                     -                370
Kraft Heinz                           $    6,394          $     86          $          -          $   6,308

Three Months Ended March 28, 2020
United States                         $    4,495          $      -          $          -          $   4,495
International                              1,301                 6                     -              1,295
Canada                                       361                 -                     -                361
Kraft Heinz                           $    6,157          $      6          $          -          $   6,151



Year-over-year growth rates
United States                  2.5  %      0.0 pp      0.0 pp     2.5  %      1.0 pp        1.5 pp
International                  7.2  %      4.5 pp      0.0 pp     2.7  %      2.2 pp        0.5 pp
Canada                         8.8  %      6.3 pp      0.0 pp     2.5  %      4.9 pp      (2.4) pp
Kraft Heinz                    3.9  %      1.4 pp      0.0 pp     2.5  %      1.5 pp        1.0 pp



                                       43
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                            The Kraft Heinz Company
             Reconciliation of Net Income/(Loss) to Adjusted EBITDA
                                 (in millions)
                                  (Unaudited)
                                                                               For the Three Months Ended
                                                                         March 27, 2021          March 28, 2020
Net income/(loss)                                                       $          568          $          381
Interest expense                                                                   415                     310
Other expense/(income)                                                             (30)                    (81)
Provision for/(benefit from) income taxes                                          136                     160
Operating income/(loss)                                                          1,089                     770

Depreciation and amortization (excluding restructuring activities)

       222                     243
Restructuring activities                                                            18                       -
Deal costs                                                                           7                       -
Unrealized losses/(gains) on commodity hedges                                      (37)                    143
Impairment losses                                                                  230                     226

Equity award compensation expense (excluding restructuring activities)

        51                      33
Adjusted EBITDA                                                         $        1,580          $        1,415



                                       44
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                            The Kraft Heinz Company
                 Reconciliation of Diluted EPS to Adjusted EPS
                                  (Unaudited)
                                                                              For the Three Months Ended
                                                                       March 27, 2021           March 28, 2020
Diluted EPS                                                           $         0.46          $          0.31
Restructuring activities(a)                                                     0.01                        -
Unrealized losses/(gains) on commodity hedges(b)                               (0.02)                    0.09
Impairment losses(c)                                                            0.19                     0.18
Losses/(gains) on sale of business(d)                                           0.02                        -
Debt prepayment and extinguishment costs(e)                                     0.06                        -
Adjusted EPS                                                          $         0.72          $          0.58


(a)  Gross expenses included in restructuring activities were $18 million
($13 million after-tax) for the three months ended March 27, 2021 and were
recorded in the following income statement line items:
•Cost of products sold included expenses of $3 million for the three months
ended March 27, 2021 and $1 million for the three months ended March 28, 2020;
and
•SG&A included expenses of $15 million for the three months ended March 27, 2021
and income of $1 million for the three months ended March 28, 2020.
(b)  Gross expenses/(income) included in unrealized losses/(gains) on commodity
hedges were income of $37 million ($27 million after-tax) for the three months
ended March 27, 2021 and expenses of $143 million ($108 million after-tax) for
the three months ended March 28, 2020 and were recorded in cost of products
sold.
(c)  Gross impairment losses, all of which related to goodwill, were $230
million ($230 million after-tax) for the three months ended March 27, 2021 and
$226 million ($226 million after-tax) for the three months ended March 28, 2020
and were recorded in SG&A.
(d)  Gross expenses included in losses/(gains) on sale of business were
$19 million ($19 million after-tax) for the three months ended March 27, 2021
and $2 million ($2 million after-tax) for the three months ended March 28, 2020
and were recorded in other expense/(income).
(e)  Gross expenses included in debt prepayment and extinguishment costs were
$106 million ($80 million after-tax) for the three months ended March 27, 2021
and were recorded in interest expense.
                                       45
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements. Words such as "anticipate," "reflect," "invest," "see," "make,"
"expect," "give," "deliver," "drive," "believe," "improve," "assess,"
"reassess," "remain," "evaluate," "grow," "will," "plan," "intend," and
variations of such words and similar future or conditional expressions are
intended to identify forward-looking statements. These forward-looking
statements include, but are not limited to, statements regarding our plans,
impacts of accounting standards and guidance, growth, legal matters, taxes,
costs and cost savings, impairments, and dividends. These forward-looking
statements reflect management's current expectations and are not guarantees of
future performance and are subject to a number of risks and uncertainties, many
of which are difficult to predict and beyond our control.
Important factors that may affect our business and operations and that may cause
actual results to differ materially from those in the forward-looking statements
include, but are not limited to, the impacts of COVID-19 and government and
consumer responses; operating in a highly competitive industry; our ability to
correctly predict, identify, and interpret changes in consumer preferences and
demand, to offer new products to meet those changes, and to respond to
competitive innovation; changes in the retail landscape or the loss of key
retail customers; changes in our relationships with significant customers or
suppliers, or in other business relationships; our ability to maintain, extend,
and expand our reputation and brand image; our ability to leverage our brand
value to compete against private label products; our ability to drive revenue
growth in our key product categories or platforms, increase our market share, or
add products that are in faster-growing and more profitable categories; product
recalls or other product liability claims; our ability to identify, complete, or
realize the benefits from strategic acquisitions, alliances, divestitures, joint
ventures, or other investments; our ability to successfully execute our
strategic initiatives; the impacts of our international operations; our ability
to protect intellectual property rights; our ownership structure; our ability to
realize the anticipated benefits from prior or future streamlining actions to
reduce fixed costs, simplify or improve processes, and improve our
competitiveness; our level of indebtedness, as well as our ability to comply
with covenants under our debt instruments; additional impairments of the
carrying amounts of goodwill or other indefinite-lived intangible assets;
foreign exchange rate fluctuations; volatility in commodity, energy, and other
input costs; volatility in the market value of all or a portion of the commodity
derivatives we use; compliance with laws, regulations, and related
interpretations and related legal claims or other regulatory enforcement
actions, including additional risks and uncertainties related to any potential
actions resulting from the SEC's ongoing investigation, as well as potential
additional subpoenas, litigation, and regulatory proceedings; failure to
maintain an effective system of internal controls; a downgrade in our credit
rating; the impact of future sales of our common stock in the public market; our
ability to continue to pay a regular dividend and the amounts of any such
dividends; unanticipated business disruptions and natural events in the
locations in which we or our customers, suppliers, distributors, or regulators
operate; economic and political conditions in the United States and in various
other nations where we do business; changes in our management team or other key
personnel and our ability to hire or retain key personnel or a highly skilled
and diverse global workforce; risks associated with information technology and
systems, including service interruptions, misappropriation of data, or breaches
of security; increased pension, labor, and people-related expenses; changes in
tax laws and interpretations; volatility of capital markets and other
macroeconomic factors; and other factors. For additional information on these
and other factors that could affect our forward-looking statements, see Item 1A,
Risk Factors, in our Annual Report on Form 10-K for the year ended December 26,
2020. We disclaim and do not undertake any obligation to update, revise, or
withdraw any forward-looking statement in this report, except as required by
applicable law or regulation.
                                       46

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