Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, Financial Statements and Supplementary Data.

Description of the Company:

We manufacture and market food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products throughout the world.

We manage and report our operating results through four segments. We have three reportable segments defined by geographic region: United States, Canada, and Europe. Our remaining businesses are combined and disclosed as “Rest of World”. Rest of World is comprised of two operating segments: Latin America and AMEA.

In 2016, we reorganized our segments to reflect the following:

•	our Russia business moved from the Rest of World segment to the Europe segment;

•	management of our Global Procurement Office moved from one of our European subsidiaries to our global headquarters, which resulted in moving the related costs from the Europe segment to general corporate expenses; and

•	certain historical Kraft export businesses moved from our United States segment to our Rest of World and Europe segments.

These changes are reflected in all historical periods presented and did not have a material impact on our financial statements.

See Note 18, Segment Reporting, to the consolidated financial statements for additional information on these changes.

Items Affecting Comparability of Financial Results

The 2015 Merger:

We completed the 2015 Merger on July 2, 2015. As a result, 2016 was the first full year of combined Kraft and Heinz results, 2015 included a full year of Heinz results and post-2015 Merger results of Kraft, and 2014 included the results of Heinz only. For comparability, we disclose in this report certain unaudited pro forma condensed combined financial information, which presents 2015 and 2014 as if the 2015 Merger had been consummated on December 30, 2013 (the first business day of our 2014 fiscal year) and combines the historical results of Heinz and Kraft. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information section at the end of this item for additional information.

See Note 1, Background and Basis of Presentation, and Note 2, Merger and Acquisition, to the consolidated financial statements for additional information related to the 2015 Merger.

53rd Week:

On December 9, 2016, our Board of Directors approved a change to our fiscal year end from Sunday to Saturday. Effective December 31, 2016, we operate on a 52 or 53-week fiscal year ending on the last Saturday in December in each calendar year. In prior years, we operated on a 52 or 53-week fiscal year ending the Sunday closest to December 31. As a result, we occasionally have a 53rd week in a fiscal year. Our year ended January 3, 2016 includes a 53rd week of activity.

See Note 1, Background and Basis of Presentation, to the consolidated financial statements for additional information on our change in fiscal year end.

Integration and Restructuring Expenses:

We recorded expenses related to our restructuring activities, including the multi-year program announced following the 2015 Merger (the “Integration Program”), totaling $1.0 billion in 2016, $1.0 billion in 2015, and $637 million in 2014. Integration Program expenses included in these totals were $887 million in 2016 and $829 million in 2015. We expect to incur pre-tax costs of $2.0 billion related to the Integration Program. These costs primarily include severance and employee benefit costs, including cash and non-cash severance, costs to exit facilities, including non-cash costs such as accelerated depreciation, and other costs incurred as a direct result of integration activities related to the 2015 Merger.

Additionally, we anticipate capital expenditures of approximately $1.3 billion related to the Integration Program. As of December 31, 2016, we have incurred $801 million in capital expenditures since the inception of the Integration Program. The Integration Program is designed to reduce costs, integrate, and optimize our combined organization and is expected to achieve $1.7 billion of pre-tax savings by the end of 2017, primarily benefiting the United States and Canada segments. Since the inception of the Integration Program, our cumulative pre-tax savings achieved are approximately $1,175 million.

See Note 3, Integration and Restructuring Expenses, to the consolidated financial statements for additional information.

Series A Preferred Stock:

On June 7, 2016, we redeemed all outstanding shares of our Series A Preferred Stock for $8.3 billion. The redemption was primarily funded through debt issuances in May 2016, including $5.0 billion and €1.8 billion aggregate principal amounts of notes, as well as other sources of liquidity, including our commercial paper program, U.S. securitization program, and cash on hand. Following the redemption, we no longer pay quarterly Series A Preferred Stock dividends.

See Equity and Dividends within this item, along with Note 11, Debt, and Note 12, Capital Stock, to the consolidated financial statements for additional information.

Results of Operations

Due to the size of Kraft’s business relative to the size of Heinz’s business prior to the 2015 Merger, and for purposes of comparability, the Results of Operations include certain unaudited pro forma condensed combined financial information (the “pro forma financial information”) adjusted to assume that Kraft and Heinz were a combined company for the full year 2015 and for 2014. This pro forma financial information reflects combined historical results, final purchase accounting adjustments, and adjustments to align accounting policies. The pro forma adjustments impacted our consolidated results and all of our segments. There are no pro forma adjustments in 2016 as Kraft and Heinz were a combined company for the entire period. For more information see Supplemental Unaudited Pro Forma Condensed Combined Financial Information.

In addition, we disclose in this report certain non-GAAP financial measures, which, for the prior year periods, are derived from the pro forma financial information. 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 consolidated financial statements see Supplemental Unaudited Pro Forma Condensed Combined Financial Information and Non-GAAP Financial Measures.

Consolidated Results of Operations

Summary of Results:

	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change			January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)				% Change
	(in millions, except per share data)											(in millions, except per share data)
Net sales	$	26,487			$	18,338			44.4	%		$	18,338			$	10,922			67.9	%
Operating income	6,142				2,639				132.7	%		2,639				1,568				68.3	%
Net income/(loss) attributable to common shareholders	3,452				(266		)		nm			(266		)		(63		)		nm
Diluted earnings/(loss) per share	2.81				(0.34		)		nm			(0.34		)		(0.17		)		nm

Net Sales:

	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change			January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	26,487			$	18,338			44.4	%		$	18,338			$	10,922			67.9	%
Pro forma net sales(a)	26,487				27,447				(3.5	)%		27,447				29,122				(5.8	)%
Organic Net Sales(b)	26,817				26,728				0.3	%		28,286				28,741				(1.6	)%

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

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

Year Ended December 31, 2016 compared to the Year Ended January 3, 2016:

Net sales increased 44.4% to $26.5 billion in 2016 compared to 2015, primarily driven by the 2015 Merger.

Pro forma net sales decreased 3.5%, primarily due to the unfavorable impacts of foreign currency (2.5 pp), 53rd week of shipments in the prior period (1.2 pp), and divestitures (0.1 pp). Excluding these impacts, Organic Net Sales increased 0.3% due to higher net pricing (0.3 pp) and neutral volume/mix (0.0 pp). Net pricing was higher in Rest of World, United States, and Canada despite deflation in key commodities (which we define as dairy, meat, coffee and nuts) in the United States and Canada, primarily in dairy, coffee, and meats in the United States. These price increases were partially offset by lower net pricing in Europe. Neutral volume/mix was primarily due to declines in meats and foodservice in the United States, partially offset by growth of condiments and sauces globally, and coffee and refrigerated meal combinations in the United States.

Year Ended January 3, 2016 compared to the Year Ended December 28, 2014:

Net sales increased 67.9% to $18.3 billion in 2015 compared to 2014, primarily driven by the 2015 Merger.

Pro forma net sales decreased 5.8%, primarily due to the unfavorable impacts of foreign currency (5.2 pp) and divestitures (0.2 pp), partially offset by the favorable impact of a 53rd week of shipments (1.2 pp). Excluding these impacts, Organic Net Sales declined 1.6% as unfavorable volume/mix (2.6 pp) was partially offset by higher net pricing (1.0 pp). Unfavorable volume/mix was driven primarily by lower shipments in refreshment beverages, frozen meals, foodservice, and boxed dinners in the United States and Canada, partially offset by growth in Rest of World. Net pricing was higher in nearly all segments despite deflation in key commodities in United States and Canada.

Net Income:

	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change			January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)				% Change
	(in millions, except per share data)											(in millions, except per share data)
Operating income	$	6,142			$	2,639			132.7	%		$	2,639			$	1,568			68.3	%
Net income/(loss) attributable to common shareholders	3,452				(266		)		nm			(266		)		(63		)		nm
Adjusted EBITDA(a)	7,778				6,739				15.4	%		6,739				6,526				3.3	%

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

Year Ended December 31, 2016 compared to the Year Ended January 3, 2016:

Operating income increased 132.7% to $6.1 billion in 2016 compared to $2.6 billion in 2015. This increase was primarily driven by the 2015 Merger, as well as the following:

•	Savings from the Integration Program and other restructuring activities and favorable pricing net of key commodity costs in United States and Canada.

•	Non-cash costs of $347 million relating to the fair value adjustment of Kraft’s inventory in purchase accounting in the prior period.

The increase in operating income was partially offset by unfavorable impacts of $188 million from foreign currency and $62 million from a 53rd week of shipments in the prior period.

Net income/(loss) attributable to common shareholders increased $3.7 billion to income of $3.5 billion in 2016 compared to a loss of $266 million in 2015. The increase was due to the growth in operating income, fewer Series A Preferred Stock dividend payments, lower other expense/(income), net, lower interest expense, and a lower effective tax rate, detailed as follows:

•

Series A Preferred Stock dividend cash distributions decreased to $180 million in 2016 compared to $900 million in 2015. This decrease was primarily due to the redemption of the Series A Preferred Stock on June 7, 2016. In addition, due to the December 8, 2015 common stock dividend declaration, we were required to accelerate payment of the March 7, 2016 preferred dividend to December 8, 2015. This resulted in one Series A Preferred Stock dividend payment in the current period compared to five in the prior period.

•	Other expense/(income), net improved to income of $15 million in 2016, compared to expense of $305 million in 2015. The decrease was primarily due to a $234 million nonmonetary currency devaluation loss related to our Venezuelan subsidiary in the prior period and call premiums of $105 million related to our 2015 debt refinancing activities.

•

Interest expense decreased to $1.1 billion in 2016 compared to $1.3 billion in 2015. This decrease was primarily due to a $236 million write-off of debt issuance costs related to 2015 debt refinancing activities and a $227 million loss released from accumulated other comprehensive income/(losses) due to the early termination of certain interest rate swaps in the prior period as well as lower interest rates following our debt refinancing in connection with the 2015 Merger. These were partially offset by the assumption of $8.6 billion aggregate principal amount of Kraft’s long-term debt obligations in the 2015 Merger, the issuance of new long-term debt in conjunction with the redemption of our Series A Preferred Stock, and new borrowings under our commercial paper program. See Note 11, Debt, and Note 12, Capital Stock, to the consolidated financial statements for additional information.

•

The effective tax rate was 27.5% in 2016, compared to 36.2% in 2015. The change in effective tax rate was primarily driven by higher earnings repatriation charges and the nondeductible nonmonetary currency devaluation loss related to our Venezuelan subsidiary in the prior period, partially offset by lower tax benefits associated with taxes on income of foreign subsidiaries, tax exempt income, and deferred tax effects of statutory rate changes in the current period. See Note 7, Income Taxes, to the consolidated financial statements for a discussion of effective tax rates.

Adjusted EBITDA increased 15.4% to $7.8 billion in 2016 compared to 2015, primarily driven by savings from the Integration Program and other restructuring activities and favorable pricing net of key commodity costs, partially offset by the unfavorable impact of foreign currency (3.4 pp) and a 53rd week of shipments in the prior period (approximately 1.5 pp). Segment Adjusted EBITDA results were as follows:

•	United States Segment Adjusted EBITDA growth was primarily driven by savings from the Integration Program and favorable pricing net of key commodity costs, partially offset by volume/mix declines and the impact of a 53rd week of shipments (approximately 1.5 pp) in the prior period.

•	Canada Segment Adjusted EBITDA growth was primarily driven by savings from the Integration Program and favorable pricing net of key commodity costs, partially offset by higher input costs in local currency, unfavorable impact of foreign currency (4.4 pp), and a 53rd week of shipments (approximately 1.5 pp) in the prior period.

•	Europe Segment Adjusted EBITDA decreased primarily due to unfavorable impact of foreign currency (6.5 pp), lower pricing, impact of a 53rd week of shipments (approximately 1.0 pp) in the prior period as well as an increase in marketing investments, partially offset by savings in manufacturing costs.

•	Rest of World Segment Adjusted EBITDA decreased due to unfavorable impact of foreign currency (17.4 pp), increased marketing investments, and a 53rd week of shipments (approximately 1.0 pp) in the prior period, partially offset by organic sales growth.

Year Ended January 3, 2016 compared to the Year Ended December 28, 2014:

Operating income increased 68.3% to $2.6 billion in 2015 compared to 2014 driven primarily by the 2015 Merger, as well as a$64 million favorable impact due to a 53rd week of shipments in 2015, which were partially offset by the following:

•	Integration Program and other restructuring expenses, merger costs, and depreciation and amortization expense that were higher in 2015 than 2014.

•	Non-cash costs of $347 million relating to the fair value adjustment of Kraft’s inventory in purchase accounting in 2015.

•	Unfavorable impact from foreign currency of $284 million.

•	Nonmonetary currency devaluation loss of $49 million related to the write-down of inventory for our Venezuelan subsidiary in 2015.

Net income/(loss) attributable to common shareholders decreased $203 million to a loss of $266 million in 2015 compared to a loss of $63 million in 2014. The decrease was due to higher interest expense, higher other expense/(income), net, more Series A Preferred Stock dividend payments, and a higher effective tax rate, which, combined, more than offset growth in operating income. These drivers are detailed as follows:

•

Interest expense increased to $1.3 billion in 2015 compared to $686 million in 2014. This increase was primarily due to a $236 million write-off of debt issuance costs related to 2015 debt refinancing activities and a $227 million loss released from accumulated other comprehensive income/(losses) due to the early termination of certain interest rate swap contracts. The remaining increase was due to the assumption of $8.6 billion aggregate principal amount of Kraft’s long-term debt obligations in the 2015 Merger, partially offset by interest savings following our 2015 debt refinancing activities.

•	Other expense/(income), net increased to $305 million in 2015 compared to $79 million in 2014. This increase was primarily due to a $234 million nonmonetary currency devaluation loss related to our Venezuelan subsidiary and call premiums of $105 million related to our 2015 debt refinancing activities, compared to currency losses of $99 million in the prior year.

•

Series A Preferred Stock dividend cash distributions increased to $900 million in 2015 compared to $720 million in 2014. Due to the December 8, 2015 common stock dividend declaration, we were required to accelerate payment of the Series A Preferred Stock dividend from March 7, 2016 to December 8, 2015. Accordingly, there were two cash distributions for Series A Preferred Stock during the fourth quarter of 2015. This resulted in five Series A Preferred Stock dividend payments in 2015 compared to four payments in 2014.

•

The effective tax rate was 36.2% in 2015 compared to 16.3% in 2014, primarily driven by higher earnings repatriation charges and the nondeductible nonmonetary currency devaluation loss related to our Venezuelan subsidiary in 2015, partially offset by increased benefits from statutory tax rate changes. See Note 7, Income Taxes, to the consolidated financial statements for a discussion of effective tax rates.

Adjusted EBITDA increased 3.3% to $6.7 billion in 2015 compared to 2014, driven primarily by savings from the Integration Program and other restructuring activities, favorable pricing net of key commodity costs, and the benefit of a 53rd week of shipments (approximately 1.0 pp), partially offset by the unfavorable impact of foreign currency (6.3 pp) and unfavorable volume/mix. Segment Adjusted EBITDA results were as follows:

•	United States Segment Adjusted EBITDA growth was primarily driven by favorable pricing net of key commodity costs, savings from the Integration Program and other restructuring activities, and the favorable impact of a 53rd week of shipments (approximately 1.0 pp), partially offset by unfavorable volume/mix.

•	Rest of World Segment Adjusted EBITDA growth was primarily driven by savings from restructuring activities and other ongoing productivity efforts as well as the favorable impact of a 53rd week of shipments (approximately 1.0 pp), partially offset by the unfavorable impact of foreign currency (27.6 pp) and higher local input costs.

•	Canada Segment Adjusted EBITDA decreased primarily due to the unfavorable impact of foreign currency (14.6 pp), unfavorable volume/mix, and higher input costs in local currency, partially offset by savings from the Integration Program and other restructuring activities, lower marketing spending, and the favorable impact of a 53rd week of shipments (approximately 1.0 pp).

•	Europe Segment Adjusted EBITDA decreased primarily due to unfavorable impact of foreign currency (15.0 pp) and increased marketing investments partially offset by lower input costs, savings from restructuring activities and other ongoing productivity efforts, favorable product mix and the favorable impact of a 53rd week of shipments (approximately 1.0 pp).

Diluted EPS:

	December 31, 2016 (52 weeks)			January 3, 2016 (53 weeks)			% Change			January 3, 2016 (53 weeks)			December 28, 2014 (52 weeks)			% Change
	(in millions, except per share data)									(in millions, except per share data)
Diluted EPS	2.81			(0.34	)		nm			(0.34	)		(0.17	)		nm
Adjusted EPS(a)	3.33			2.19			52.1	%		2.19			1.98			10.6	%

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

Year Ended December 31, 2016 compared to the Year Ended January 3, 2016:

Diluted EPS increased to earnings of $2.81 in 2016 compared to a loss of $0.34 in 2015. The increase in diluted earnings/(loss) per share was driven primarily by the net income/(loss) attributable to common shareholders factors discussed above, partially offset by the effect of an increase in the weighted average shares of common stock outstanding compared to the prior period and a 53rd week of shipments in the prior period.

	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				$ Change				% Change
Diluted EPS	$	2.81			$	(0.34	)		$	3.15			nm
Pro forma adjustments(a)	—				1.04				(1.04		)
Pro forma diluted EPS	2.81				0.70				2.11				301.4	%
Integration and restructuring expenses	0.57				0.61				(0.04		)
Merger costs	0.02				0.49				(0.47		)
Unrealized losses/(gains) on commodity hedges	(0.02		)		(0.02		)		—
Impairment losses	0.03				0.03				—
Losses/(gains) on sale of business	—				(0.01		)		0.01
Nonmonetary currency devaluation	0.02				0.24				(0.22		)
Preferred dividend adjustment	(0.10		)		0.15				(0.25		)
Adjusted EPS(b)	$	3.33			$	2.19			$	1.14			52.1	%
Key drivers of change in Adjusted EPS(b):
Results of operations									$	0.77
Change in preferred dividends									0.34
Change in interest expense									(0.04		)
Change in other expense/(income), net									(0.03		)
53rd week of shipments									(0.03		)
Change in effective tax rate and other									0.13
									$	1.14

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

(b)	Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.

Adjusted EPS increased 52.1% to $3.33 in 2016 compared to $2.19 in 2015, primarily driven by Adjusted EBITDA growth despite the unfavorable impact of foreign currency, fewer Series A Preferred Stock dividends and a lower effective tax rate, partially offset by higher interest expense, higher other expense/(income), net, and a 53rd week of shipments in the prior period.

Year Ended January 3, 2016 compared to the Year Ended December 28, 2014:

Diluted EPS decreased to a loss of $0.34 in 2015 compared to a loss of $0.17 in 2014. The decrease was driven primarily by the net income/(loss) attributable to common shareholders factors discussed above, partially offset by the effect of an increase in the weighted average shares of common stock outstanding following the 2015 Merger and a 53rd week of shipments.

	January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)				$ Change				% Change
Diluted EPS	$	(0.34	)		$	(0.17	)		$	(0.17	)		nm
Pro forma adjustments(a)	1.04				1.48				(0.44		)
Pro forma diluted EPS	0.70				1.31				(0.61		)		(46.6	)%
Integration and restructuring expenses	0.61				0.47				0.14
Merger costs	0.49				0.04				0.45
Unrealized losses/(gains) on commodity hedges	(0.02		)		0.05				(0.07		)
Impairment losses	0.03				0.11				(0.08		)
Losses/(gains) on sale of business	(0.01		)		—				(0.01		)
Nonmonetary currency devaluation	0.24				—				0.24
Preferred dividend adjustment	0.15				—				0.15
Adjusted EPS(b)	$	2.19			$	1.98			$	0.21			10.6	%
Key drivers of change in Adjusted EPS(b):
Results of operations									0.21
Change in other expense/(income), net									0.07
Change in interest expense									0.03
53rd week of shipments									0.03
Change in effective tax rate and other									(0.13		)
									$	0.21

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

(b)	Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.

Adjusted EPS increased 10.6% to $2.19 in 2015 compared to $1.98 in 2014, driven primarily by higher Adjusted EBITDA despite the unfavorable impact of foreign currency, lower other expense/(income), net, lower interest expense, and a 53rd week of shipments, partially offset by a higher effective tax rate.

Results of Operations by Segment

Management evaluates segment performance based on several factors including net sales and segment adjusted earnings before interest, tax, depreciation, and amortization (“Segment Adjusted EBITDA”). Management uses Segment Adjusted EBITDA to evaluate segment performance and allocate resources. Segment Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations. These items include depreciation and amortization (including amortization of postretirement benefit plans prior service credits), equity award compensation expense, integration and restructuring expenses, merger costs, unrealized gains/(losses) on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results), impairment losses, gains/(losses) on the sale of a business, and nonmonetary currency devaluation (e.g., remeasurement gains and losses). In addition, consistent with the manner in which management evaluates segment performance and allocates resources, Segment Adjusted EBITDA includes the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013.

Net Sales:

	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)
	(in millions)
Net sales:
United States	$	18,641			$	10,943			$	3,615
Canada	2,309				1,437				631
Europe	2,366				2,656				3,233
Rest of World	3,171				3,302				3,443
Total net sales	$	26,487			$	18,338			$	10,922

Pro Forma Net Sales:

	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)
	(in millions)
Pro forma net sales(a):
United States	$	18,641			$	18,932			$	19,346
Canada	2,309				2,386				2,811
Europe	2,366				2,657				3,233
Rest of World	3,171				3,472				3,732
Total pro forma net sales	$	26,487			$	27,447			$	29,122

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

Organic Net Sales:

	2016 Compared to 2015								2015 Compared to 2014
	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)
	(in millions)
Organic Net Sales(a):
United States	$	18,641			$	18,699			$	18,699			$	19,346
Canada	2,393				2,359				2,733				2,811
Europe	2,520				2,588				3,022				3,126
Rest of World	3,263				3,082				3,832				3,458
Total Organic Net Sales	$	26,817			$	26,728			$	28,286			$	28,741

(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 pro forma net sales and Organic Net Sales were:

	Pro Forma Net Sales(a)			Impact of Currency			Impact of Divestitures			Impact of 53rd Week			Organic Net Sales			Price			Volume/Mix
2016 Compared to 2015
United States	(1.5	)%		0.0	pp		0.0	pp		(1.2	) pp		(0.3	)%		0.2	pp		(0.5	) pp
Canada	(3.2	)%		(3.5	) pp		0.0	pp		(1.1	) pp		1.4	%		0.6	pp		0.8	pp
Europe	(11.0	)%		(5.8	) pp		(1.6	) pp		(1.0	) pp		(2.6	)%		(2.5	) pp		(0.1	) pp
Rest of World	(8.7	)%		(13.2	) pp		0.0	pp		(1.4	) pp		5.9	%		3.2	pp		2.7	pp
Kraft Heinz	(3.5	)%		(2.5	) pp		(0.1	) pp		(1.2	) pp		0.3	%		0.3	pp		0.0	pp
2015 Compared to 2014
United States	(2.1	)%		0.0	pp		0.0	pp		1.2	pp		(3.3	)%		0.0	pp		(3.3	) pp
Canada	(15.1	)%		(13.4	) pp		0.0	pp		1.1	pp		(2.8	)%		2.2	pp		(5.0	) pp
Europe	(17.8	)%		(13.6	) pp		(1.9	) pp		1.0	pp		(3.3	)%		1.6	pp		(4.9	) pp
Rest of World	(7.0	)%		(19.1	) pp		0.0	pp		1.3	pp		10.8	%		5.2	pp		5.6	pp
Kraft Heinz	(5.8	)%		(5.2	) pp		(0.2	) pp		1.2	pp		(1.6	)%		1.0	pp		(2.6	) pp

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

Adjusted EBITDA:

	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)
	(in millions)
Segment Adjusted EBITDA:
United States	$	5,862			$	4,690			$	4,421
Canada	642				541				615
Europe	781				938				939
Rest of World	657				742				732
General corporate expenses	(164		)		(172		)		(181		)
Depreciation and amortization (excluding integration and restructuring expenses)	(536		)		(779		)		(924		)
Integration and restructuring expenses	(1,012		)		(1,117		)		(743		)
Merger costs	(30		)		(194		)		(68		)
Amortization of inventory step-up	—				(347		)		—
Unrealized gains/(losses) on commodity hedges	38				41				(79		)
Impairment losses	(53		)		(58		)		(221		)
Gains/(losses) on sale of business	—				21				—
Nonmonetary currency devaluation	(4		)		(57		)		—
Equity award compensation expense (excluding integration and restructuring expenses)	(39		)		(61		)		(108		)
Other pro forma adjustments	—				(1,549		)		(2,815		)
Operating income	6,142				2,639				1,568
Interest expense	1,134				1,321				686
Other expense/(income), net	(15		)		305				79
Income/(loss) before income taxes	$	5,023			$	1,013			$	803

United States:

	2016 Compared to 2015											2015 Compared to 2014
	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change			January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	18,641			$	10,943			70.3	%		$	10,943			$	3,615			202.7	%
Pro forma net sales(a)	18,641				18,932				(1.5	)%		18,932				19,346				(2.1	)%
Organic Net Sales(b)	18,641				18,699				(0.3	)%		18,699				19,346				(3.3	)%
Segment Adjusted EBITDA	5,862				4,690				25.0	%		4,690				4,421				6.1	%

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

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

Year Ended December 31, 2016 compared to the Year Ended January 3, 2016:

Net sales increased 70.3% to $18.6 billion primarily driven by the 2015 Merger. Pro forma net sales decreased 1.5% due to a 53rd week of shipments in the prior period (1.2 pp). Organic Net Sales decreased 0.3% due to unfavorable volume/mix (0.5 pp) partially offset by higher net pricing (0.2 pp). Unfavorable volume/mix was primarily due to declines in meats, foodservice, ready-to-drink beverages, and nuts that were partially offset by gains in coffee and innovation-related gains in refrigerated meal combinations and boxed dinners. Net pricing was higher despite deflation in key commodities, primarily in dairy, coffee, and meats.

Segment Adjusted EBITDA increased 25.0% primarily due to savings from the Integration Program and favorable pricing net of key commodity costs, partially offset by volume/mix declines across several categories and the impact of a 53rd week of shipments (approximately 1.5 pp) in the prior period.

Year Ended January 3, 2016 compared to the Year Ended December 28, 2014:

Net sales increased 202.7% to $10.9 billion primarily driven by the 2015 Merger. Pro forma net sales decreased 2.1% despite the favorable impact from a 53rd week of shipments (1.2 pp). Organic Net Sales decreased 3.3% primarily due to unfavorable volume/mix (3.3 pp). Net pricing was neutral across most categories despite deflation in key commodities. Unfavorable volume/mix was driven by lower shipments in ready-to-drink beverages, powdered beverages, and boxed dinners that reflected category trends and the volume loss associated with higher net pricing, category, and market share declines in frozen meals, and lower foodservice shipments. These declines were partially offset by favorable volume/mix primarily from innovation in refrigerated meal combinations and coffee.

Segment Adjusted EBITDA increased 6.1% primarily driven by favorable pricing net of key commodity costs, savings from the Integration Program and other restructuring activities, and the favorable impact of a 53rd week of shipments (approximately 1.0 pp), partially offset by unfavorable volume/mix.

Canada:

	2016 Compared to 2015											2015 Compared to 2014
	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change			January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	2,309			$	1,437			60.7	%		$	1,437			$	631			127.7	%
Pro forma net sales(a)	2,309				2,386				(3.2	)%		2,386				2,811				(15.1	)%
Organic Net Sales(b)	2,393				2,359				1.4	%		2,733				2,811				(2.8	)%
Segment Adjusted EBITDA	642				541				18.7	%		541				615				(12.0	)%

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

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

Year Ended December 31, 2016 compared to the Year Ended January 3, 2016:

Net sales increased 60.7% to $2.3 billion primarily driven by the 2015 Merger. Pro forma net sales decreased 3.2% due to the unfavorable impact of foreign currency (3.5 pp) and a 53rd week of shipments in the prior period (1.1 pp). Organic Net Sales increased 1.4% driven by favorable volume/mix (0.8 pp) and higher net pricing (0.6 pp). Favorable volume/mix reflected higher shipments of condiments and sauces and gains in foodservice that were partially offset by lower shipments in cheese versus the prior year. Price increases were driven by significant pricing actions taken to offset higher input costs in local currency.

Segment Adjusted EBITDA increased 18.7% despite the unfavorable impact of foreign currency (4.4 pp). This increase was primarily driven by Integration Program savings and favorable pricing net of key commodity costs, partially offset by higher input costs in local currency and the impact of a 53rd week of shipments (approximately 1.5 pp) in the prior period.

Year Ended January 3, 2016 compared to the Year Ended December 28, 2014:

Net sales increased 127.7% to $1.4 billion primarily driven by the 2015 Merger. Pro forma net sales decreased 15.1% primarily due to the unfavorable impact of foreign currency (13.4 pp), partially offset by the favorable impact of a 53rd week of shipments (1.1 pp). Organic Net Sales decreased 2.8% primarily due to unfavorable volume/mix (5.0 pp), partially offset by higher net pricing (2.2 pp). Unfavorable volume/mix reflected lower shipments in foodservice, refreshment beverages, and infant nutrition and the volume impact of higher net pricing in on-demand coffee and boxed dinners. Higher net pricing in most categories reflected pricing actions related to higher input costs in local currency.

Segment Adjusted EBITDA decreased 12.0% primarily due to the unfavorable impact of foreign currency (14.6 pp). Excluding the currency impact, Segment Adjusted EBITDA increased primarily due to savings from the Integration Program and other restructuring activities, lower marketing spending, and the favorable impact of a 53rd week of shipments (approximately 1.0 pp), which were partially offset by unfavorable volume/mix and higher input costs in local currency.

Europe:

	2016 Compared to 2015											2015 Compared to 2014
	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change			January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	2,366			$	2,656			(10.9	)%		$	2,656			$	3,233			(17.8	)%
Pro forma net sales(a)	2,366				2,657				(11.0	)%		2,657				3,233				(17.8	)%
Organic Net Sales(b)	2,520				2,588				(2.6	)%		3,022				3,126				(3.3	)%
Segment Adjusted EBITDA	781				938				(16.7	)%		938				939				(0.1	)%

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

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

Year Ended December 31, 2016 compared to the Year Ended January 3, 2016:

Net sales decreased 10.9% to $2.4 billion, reflecting the unfavorable impacts of foreign currency, divestitures, and a 53rd week of shipments in the prior period. Pro forma net sales decreased 11.0% partially due to the unfavorable impacts of foreign currency (5.8 pp), divestitures (1.6 pp), and a 53rd week of shipments in the prior period (1.0 pp). Organic Net Sales decreased 2.6% due to lower net pricing (2.5 pp) and unfavorable volume/mix (0.1 pp). Lower net pricing was primarily due to increased promotional activity across most categories versus the prior period. Unfavorable volume/mix was primarily due to lower shipments across most categories in the UK partially offset by growth in condiments and sauces.

Segment Adjusted EBITDA decreased 16.7% partially due to the unfavorable impact of foreign currency (6.5 pp). Excluding the currency impact, the Segment Adjusted EBITDA decline was primarily due to lower net pricing, the impact of a 53rd week of shipments (approximately 1.0 pp) in the prior period as well as an increase in marketing investments, partially offset by savings in manufacturing costs.

Year Ended January 3, 2016 compared to the Year Ended December 28, 2014:

Net sales and pro forma net sales decreased 17.8% to $2.7 billion, including the unfavorable impacts of foreign currency (13.6 pp) and divestitures (1.9 pp), partially offset by favorable impact of a 53rd week of shipments (1.0 pp). Organic Net Sales decreased 3.3% as unfavorable volume/mix (4.9 pp) was partially offset by higher net pricing (1.6 pp). Higher net pricing reflected lower promotional spending in beans and price increases in ketchup. Unfavorable volume/mix was driven primarily by the volume impact of higher net pricing in beans and ketchup, declines in infant nutrition in Italy, and increased competitive activity in soup, partially offset by growth in frozen potatoes.

Segment Adjusted EBITDA decreased 0.1% primarily due to the unfavorable impact of foreign currency (15.0 pp) and increased marketing investments, partially offset by lower input costs, savings from restructuring activities and other ongoing productivity efforts, favorable product mix, and the favorable impact of a 53rd week of shipments (approximately 1.0 pp).

Rest of World:

	2016 Compared to 2015											2015 Compared to 2014
	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change			January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	3,171			$	3,302			(4.0	)%		$	3,302			$	3,443			(4.1	)%
Pro forma net sales(a)	3,171				3,472				(8.7	)%		3,472				3,732				(7.0	)%
Organic Net Sales(b)	3,263				3,082				5.9	%		3,832				3,458				10.8	%
Segment Adjusted EBITDA	657				742				(11.5	)%		742				732				1.4	%

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

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

Year Ended December 31, 2016 compared to the Year Ended January 3, 2016:

Net sales decreased 4.0% to $3.2 billion, reflecting the unfavorable impacts of foreign currency and a 53rd week of shipments in the prior period, which were partially offset by the inclusion of twelve months of the Kraft business in the current period. Pro forma net sales decreased 8.7% due to the unfavorable impacts of foreign currency (13.2 pp, including a 10.5 pp impact from the devaluation of the Venezuelan bolivar) and a 53rd week of shipments in the prior period (1.4 pp). Organic Net Sales increased 5.9% driven by higher net pricing (3.2 pp) and favorable volume/mix (2.7 pp). Higher net pricing was driven primarily by pricing actions to offset higher input costs in local currency, primarily in Latin America. Favorable volume/mix was primarily driven by growth in condiments and sauces across all regions, partially offset by declines in nutritional beverages in India.

Segment Adjusted EBITDA decreased 11.5% primarily due to the unfavorable impact of foreign currency (17.4 pp, including a 14.0 pp impact from the devaluation of the Venezuelan bolivar). Excluding the currency impact, Segment Adjusted EBITDA increased, primarily driven by organic sales growth that was partially offset by increased marketing investments and a 53rd week of shipments (approximately 1.0 pp) in the prior period.

Year Ended January 3, 2016 compared to the Year Ended December 28, 2014:

Net sales decreased 4.1% to $3.3 billion, reflecting the unfavorable impact of foreign currency, which was partially offset by the inclusion of six months of the Kraft business in 2015. Pro forma net sales decreased 7.0%, reflecting the unfavorable impact of foreign currency (19.1 pp, including 7.5 pp from the devaluation of the Venezuelan bolivar), partially offset by the favorable impact of a 53rd week of shipments (1.3 pp). Organic Net Sales increased 10.8%, driven by higher net pricing (5.2 pp) and favorable volume/mix (5.6 pp). Higher net pricing was driven by pricing actions taken in response to the hyper-inflationary economy in Venezuela as well as pricing actions related to higher input costs in local currencies. Favorable volume/mix was driven primarily by growth in condiments and sauces across all businesses as well as sauces in Asia, partially offset by declines in nutritional beverages in India.

Segment Adjusted EBITDA increased 1.4%, primarily driven by savings from restructuring activities and other ongoing productivity efforts as well as the favorable impact of a 53rd week of shipments (approximately 1.0 pp), partially offset by the unfavorable impact of foreign currency (27.6 pp, including the impact of the devaluation of the Venezuelan bolivar) and higher local currency input costs.

Critical Accounting Policies

Note 1, Background and Basis of Presentation, to the consolidated financial statements includes a summary of the significant accounting policies we used to prepare our consolidated financial statements. The following is a review of the more significant assumptions and estimates, as well as the accounting policies we used to prepare our consolidated financial statements.

Principles of Consolidation:

The consolidated financial statements include The Kraft Heinz Company, as well as our wholly-owned and majority-owned subsidiaries. All intercompany transactions are eliminated.

Revenue Recognition:

We recognize revenues when title and risk of loss pass to our customers. We record revenues net of consumer incentives and trade promotions and include all shipping and handling charges billed to customers. We also record provisions for estimated product returns and customer allowances as reductions to revenues within the same period that the revenue is recognized. We base these estimates principally on historical and current period experience factors.

Advertising, Consumer Incentives, and Trade Promotions:

We promote our products with advertising, consumer incentives, and trade promotions.

Advertising expenses are recorded in selling, general and administrative expenses (“SG&A”). We recorded advertising expense of $708 million in 2016, $464 million in 2015, and $241 million in 2014. For interim reporting purposes, we charge advertising to operations as a percentage of estimated full year sales activity and marketing costs. We review and adjust these estimates each quarter based on actual experience and other information.

Consumer incentives and trade promotions include, but are not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. Consumer incentive and trade promotion activities are recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization and redemption rates. We review and adjust these estimates each quarter based on actual experience and other information.

Goodwill and Intangible Assets:

The carrying value of goodwill and indefinite-lived intangible assets was $97.4 billion at December 31, 2016 and $98.9 billion at January 3, 2016. These balances are largely attributable to asset valuations performed in connection with the 2013 Merger and the 2015 Merger. See Note 2, Merger and Acquisition, and Note 6, Goodwill and Intangible Assets, for additional information.

We test goodwill and indefinite-lived intangible assets for impairment at least annually in the second quarter or when a triggering event occurs. The first step of the goodwill impairment test compares the reporting unit’s estimated fair value with its carrying value. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step would be applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill would be considered impaired and would be reduced to its implied fair value. We test indefinite-lived intangible assets for impairment by comparing the fair value of each intangible asset with its carrying value. If the carrying value exceeds fair value, the intangible asset would be considered impaired and would be reduced to fair value.

We performed our annual impairment testing in the second quarter of 2016. No impairment of goodwill was reported as a result of our 2016 annual goodwill impairment test; however, we noted that one reporting unit within the Europe segment had an estimated fair value in excess of its carrying value of less than 10%. The goodwill carrying value of this reporting unit was $48 million as of April 4, 2016 (our goodwill impairment testing date). In addition, there was no impairment of indefinite-lived intangibles as a result of our testing; however, we noted that seven brands each had excess fair value over its carrying value of less than 10%. These brands had an aggregate carrying value of $6.1 billion at April 4, 2016 (our indefinite-lived intangible asset impairment testing date). Of the $6.1 billion aggregate carrying value, $5.6 billion was attributable to Velveeta, Lunchables, Maxwell House, and Cracker Barrel.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating the fair value of individual reporting units and indefinite-lived intangible assets requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors. If current expectations of future growth rates are not met or market factors outside of our control, such as discount rates, change significantly, then one or more reporting units or intangible assets might become impaired in the future. Additionally, as goodwill and intangible assets associated with recently acquired businesses are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to an impairment risk if business operating results or macroeconomic conditions deteriorate.

Postemployment Benefit Plans:

We maintain various retirement plans for the majority of our employees. These include pension benefits, postretirement health care benefits, and defined contribution benefits. The cost of these plans is charged to expense over the working life of the covered employees. We generally amortize net actuarial gains or losses in future periods within cost of products sold and SG&A.

For our postretirement benefit plans, our 2017 health care cost trend rate assumption will be 6.3%. We established this rate based upon our most recent experience as well as our expectation for health care trend rates going forward. We anticipate the weighted average assumed ultimate trend rate will be 4.9%. The year in which the ultimate trend rate is reached varies by plan, ranging between the years 2022 and 2027. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have had the following effects, increase/(decrease) in cost and obligation, as of December 31, 2016 (in millions):

	One-Percentage-Point
	Increase				Decrease
Effect on annual service and interest cost	$	6			$	(5	)
Effect on postretirement benefit obligation	74				(63		)

Our 2017 discount rate assumption is 4.0% for service cost and 3.1% for interest cost for our postretirement plans. Our 2017 discount rate assumption is 4.3% for service cost and 3.6% for interest cost for our U.S. pension plans and 3.2% for service cost and 2.3% for interest cost for our non-U.S. pension plans. We model these discount rates using a portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. Changes in our discount rates were primarily the result of changes in bond yields year-over-year.

In 2016, we changed the method we use to estimate the service cost and interest cost components of net pension cost/(benefit) and net postretirement benefit plans cost resulting in a decrease to these cost components. We now use a full yield curve approach to estimate service cost and interest cost by applying the specific spot rates along the yield curve used to determine the benefit obligation to the relevant projected cash flows. Previously, we estimated service cost and interest cost using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We made this change to provide a more precise measurement of service cost and interest cost by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates. This change will not affect the measurement of our total benefit obligations. We accounted for this change prospectively as a change in accounting estimate.

Our 2017 expected rate of return on plan assets is 5.7% for our U.S. pension plans and 4.8% for our non-U.S. pension plans. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current and future asset allocation, and estimates of future long-term returns by asset class. We attempt to maintain our target asset allocation by re-balancing between asset classes as we make contributions and monthly benefit payments.

While we do not anticipate further changes in the 2017 assumptions for our U.S. and non-U.S. pension and postretirement benefit plans, as a sensitivity measure, a 100-basis point change in our discount rate or a 100-basis-point change in the expected rate of return on plan assets would have had the following effects, increase/(decrease) in cost, as of December 31, 2016 (in millions):

	U.S. Plans								Non-U.S. Plans
	100-Basis-Point								100-Basis-Point
	Increase				Decrease				Increase				Decrease
Effect of change in discount rate on pension costs	$	12			$	(13	)		$	7			$	(12	)
Effect of change in expected rate of return on plan assets on pension costs	(46		)		46				(37		)		37
Effect of change in discount rate on postretirement costs	(1		)		(10		)		—				1

Income Taxes:

We compute our annual tax rate based on the statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we earn income. Significant judgment is required in determining our annual tax rate and in evaluating the uncertainty of our tax positions. We recognize a benefit for tax positions that we believe will more likely than not be sustained upon examination. The amount of benefit recognized is the largest amount of benefit that we believe has more than a 50% probability of being realized upon settlement. We regularly monitor our tax positions and adjust the amount of recognized tax benefit based on our evaluation of information that has become available since the end of our last financial reporting period. The annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the amount of recognized tax benefits, we do not consider information that has become available after the balance sheet date, however we do disclose the effects of new information whenever those effects would be material to our financial statements. Unrecognized tax benefits represent the difference between the amount of benefit taken or expected to be taken in a tax return and the amount of benefit recognized for financial reporting. These unrecognized tax benefits are recorded primarily within other liabilities on the consolidated balance sheets.

We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, we consider future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, we would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. The resolution of tax reserves and changes in valuation allowances could be material to our results of operations for any period, but is not expected to be material to our financial position.

We have a significant amount of undistributed earnings of foreign subsidiaries that are considered to be indefinitely reinvested. We do not recognize U.S. taxes on undistributed earnings of foreign subsidiaries which are considered to be indefinitely reinvested or which may be remitted tax free in certain situations. We do recognize U.S. taxes on undistributed earnings in foreign subsidiaries which are currently not considered to be indefinitely reinvested.

We intend to continue to reinvest the majority of our foreign subsidiary earnings to support our priorities for growth in international markets and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. If we decided at a later date to repatriate these funds to the U.S., we would be required to provide taxes on these amounts based on the applicable U.S. tax rates net of credits for foreign taxes already paid. It is not practicable to determine the deferred tax liability associated with the indefinitely reinvested undistributed earnings. We believe it is not practicable because there is a significant amount of uncertainty with respect to the tax impact. This uncertainty results from the significant judgment required to analyze the amount of foreign tax credits attributable to the earnings, the ability to use foreign tax credits to offset the U.S. tax on the earnings, the potential timing of any distributions, as well as the local withholding tax and other indirect tax consequences that may arise due to the potential distribution of these earnings.

New Accounting Pronouncements

See Note 1, Background and Basis of Presentation, to the consolidated financial statements for a discussion of new accounting pronouncements.

Contingencies

See Note 16, Commitments and Contingencies, to the consolidated financial statements for a discussion of contingencies.

Commodity Trends

We purchase and use large quantities of commodities, including dairy products, meat products, coffee beans, nuts, tomatoes, potatoes, soybean and vegetable oils, sugar and other sweeteners, corn products, and wheat to manufacture our products. In addition, we purchase and use significant quantities of resins, metals, and cardboard to package our products and natural gas to operate our facilities. We continuously monitor worldwide supply and cost trends of these commodities.

Markets for our key commodities were volatile in 2016. We expect commodity cost volatility to continue in 2017. 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.

Liquidity and Capital Resources

We believe that cash generated from our operating activities, our Revolving Credit Facility (as defined below), our securitization programs, and our commercial paper program will provide sufficient liquidity to meet our working capital needs, expected Integration Program and restructuring expenditures, planned capital expenditures, contributions to our postemployment benefit plans, future contractual obligations, and payment of our anticipated quarterly dividends. We intend to use our cash on hand and our commercial paper program for daily funding requirements. Overall, we do not expect any negative effects on our funding sources that would have a material effect on our short-term or long-term liquidity.

Cash Flow Activity for 2016 compared to 2015:

Net Cash Provided by/Used for Operating Activities:

Net cash provided by operating activities was $5.2 billion in 2016 compared to $2.5 billion in 2015. The increase in cash provided by operating activities was primarily due to an increase in operating income as a result of the 2015 Merger.

Changes in current assets and liabilities were favorable in 2016, driven primarily by favorable changes in accounts payable and receivables. Changes in accounts payable were favorable due to payment term extensions from vendor renegotiations. Changes in receivables were favorable primarily as a result of increasing our U.S. securitization program in May 2016. These favorable changes were partially offset by unfavorable changes in other current liabilities, and to a lesser degree, inventories. The change in other current liabilities was driven primarily by increased payments in 2016 related to income taxes.

Net Cash Provided by/Used for Investing Activities:

Net cash used for investing activities was $1.1 billion in 2016 compared to $9.7 billion in 2015. The decrease in cash used for investing activities was driven by payments to acquire Kraft in connection with the 2015 Merger. The decrease in cash used for investing activities was partially offset by an increase in capital expenditures to $1.2 billion in 2016, which was primarily due to integration and restructuring activities in the United States. We expect 2017 capital expenditures to be approximately $1.2 billion, including capital expenditures required for our ongoing integration and restructuring activities. Cash used for investing activities also reflected lower proceeds from cash settlements of net investment hedges in 2016 than in 2015.

Net Cash Provided by/Used for Financing Activities:

Net cash used for financing activities was $4.6 billion in 2016 compared to net cash provided by financing activities of $10.2 billion in 2015. This decrease in cash provided by financing activities was primarily driven by proceeds of $10.0 billion from our issuance of common stock to the Sponsors in connection with the 2015 Merger, the Series A Preferred Stock redemption in June 2016, and the impact of five common stock cash distributions in 2016 compared to two such cash distributions in 2015. The decrease in cash provided by financing activities was partially offset by net proceeds from our long-term debt issuances in May 2016 and net proceeds from our issuance of commercial paper, which were our primary sources of funding for the Series A Preferred Stock redemption. Additionally, in the prior year we had a benefit from proceeds from the issuance of long-term debt, which were largely offset by repayments of long-term debt. Our cash used for financing activities in 2016 also reflected the impact of one cash distribution related to our Series A Preferred Stock in 2016 compared to five such cash distributions in 2015. See Equity and Dividends within this item for further information on cash distributions related to common stock and Series A Preferred Stock.

Cash Flow Activity for 2015 compared to 2014:

Net Cash Provided by/Used for Operating Activities:

Cash provided by operating activities was $2.5 billion in 2015 compared to $2.1 billion in 2014. The increase in cash provided by operating activities was primarily due to an increase in operating income in 2015 as a result of the 2015 Merger, partially offset by an increase in pension contributions and working capital improvements that were less pronounced than 2014.

Net Cash Provided by/Used for Investing Activities:

Net cash used in investing activities was $9.7 billion in 2015 compared to $349 million in 2014. The increase in cash used in investing activities was primarily driven by our payments to acquire Kraft and also included proceeds from our net investment hedges of $488 million. Capital expenditures were $648 million in 2015.

Net Cash Provided by/Used for Financing Activities:

Net cash provided by financing activities was $10.2 billion in 2015 compared to net cash used of $1.8 billion in 2014. The $10.2 billion of cash provided by financing activities was primarily driven by $10.0 billion proceeds from issuance of common stock to the Sponsors. Our cash provided by financing activities also included $14.8 billion proceeds from issuances of long-term debt partially offset by long-term debt repayments of $12.3 billion and the payment of our quarterly common stock cash dividend starting in the third quarter of 2015. Additionally, related to the Series A Preferred Stock we made cash distributions of $900 million in 2015, which reflected five dividend payments compared to cash distributions of $720 million in 2014, which reflected four dividend payments.

Cash Held by International Subsidiaries:

At December 31, 2016, approximately $1.3 billion of cash and cash equivalents were held by international subsidiaries.

We have provided for a deferred tax liability of $21 million for undistributed earnings not considered to be indefinitely reinvested.

We consider the unremitted earnings of our international subsidiaries that have not been previously taxed in the United States to be indefinitely reinvested. For those undistributed earnings considered to be indefinitely reinvested, our intent is to reinvest these earnings in our international operations, and our current plans do not demonstrate a need to repatriate the accumulated earnings to fund our United States cash requirements. If we decide at a later date to repatriate these earnings to the United States, we would be required to pay taxes on these amounts based on the applicable United States tax rates net of credits for foreign taxes already paid.

Further, certain previously taxed earnings have not yet been remitted and certain intercompany loans have not yet been repaid. As a result, in future periods, we believe that we could remit approximately $2.8 billion of cash to the United States without incurring any additional material tax expense.

Total Debt:

In 2016, together with Kraft Heinz Foods Company, we commenced a commercial paper program. As of December 31, 2016, we had $642 million of commercial paper outstanding, with a weighted average interest rate of 1.074%. During the year ended December 31, 2016, the maximum amount of commercial paper outstanding was $1.2 billion. We had no commercial paper outstanding at January 3, 2016.

We maintain our Senior Credit Facilities comprised of our $4.0 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) and a $600 million senior unsecured loan facility (the “Term Loan Facility” and, together with the Revolving Credit Facility, the “Senior Credit Facilities”). 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 $1.0 billion. Our Senior Credit Facilities contain customary representations, covenants, and events of default. At December 31, 2016, $600 million aggregate principal amount of our Term Loan Facility was outstanding. No amounts were drawn on our Revolving Credit Facility at December 31, 2016, at January 3, 2016, or during the years ended December 31, 2016 and January 3, 2016.

Our long-term debt, including the current portion, was $31.8 billion at December 31, 2016 and $25.2 billion at January 3, 2016. The increase during the period was driven by new issuances of long-term debt during the second quarter of 2016. We used the net proceeds from these issuances primarily to redeem all outstanding shares of our Series A Preferred Stock for $8.3 billion. Our long-term debt contains customary representations, covenants, and events of default, and we were in compliance with all such covenants at December 31, 2016.

See Note 11, Debt, to the consolidated financial statements for additional information.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements:

We do not have guarantees or other off-balance sheet financing arrangements that we believe are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

See Note 13, Financing Arrangements, to the consolidated financial statements for a discussion of our accounts receivable securitization and factoring programs.

Aggregate Contractual Obligations:

The following table summarizes our contractual obligations at December 31, 2016 (in millions):

	Payments Due
	2017			2018-2019			2020-2021			2022 and Thereafter			Total
Long-term debt(a)	3,251			5,015			5,138			36,872			50,276
Capital leases(b)	27			18			19			58			122
Operating leases(c)	94			169			104			107			474
Purchase obligations(d)	1,861			1,039			377			366			3,643
Other long-term liabilities(e)	187			322			287			597			1,393
Total	5,420			6,563			5,925			38,000			55,908

(a)	Amounts represent the expected cash payments of our long-term debt, including interest on variable and fixed rate long-term debt. Interest on variable rate long-term debt is calculated based on interest rates at December 31, 2016.

(b)	Amounts represent the expected cash payments of our capital leases, including expected cash payments of interest expense.

(c)	Operating leases represent the minimum rental commitments under non-cancelable operating leases.

(d)

We have purchase obligations for materials, supplies, property, plant and equipment, and co-packing, storage and distribution services based on projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology, and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. A few of these obligations are long-term and are based on minimum purchase requirements. Certain purchase obligations contain variable pricing components, and, as a result, actual cash payments are expected to fluctuate based on changes in these variable components. Due to the proprietary nature of some of our materials and processes, certain supply contracts contain penalty provisions for early terminations. We do not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. We exclude amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities from the table above.

(e)

Other long-term liabilities primarily consist of postretirement benefit commitments. Future benefit payments for our postretirement benefit plans through 2026 are expected to be $1.3 billion. We are unable to reliably estimate the timing of the payments beyond 2026. Certain long-term liabilities related to income taxes, insurance accruals, and other accruals included on the consolidated balance sheet are excluded from the above table as we are unable to estimate the timing of payments for these items.

During the second quarter of 2016, we redeemed all outstanding shares of our Series A Preferred Stock, therefore we no longer pay Series A Preferred Stock dividends. See Note 12, Capital Stock, to the consolidated financial statements for additional information.

Pension contributions were $344 million in 2016. We estimate that 2017 pension contributions will be approximately $150 million to our U.S. plans and approximately $35 million to our non-U.S. plans. Beyond 2017, we are unable to reliably estimate the timing of contributions to our pension plans. Our contributions depend on many factors, including changes in tax, employee benefit, or other laws, tax deductibility, significant differences between expected and actual pension asset performance or interest rates, and other factors. As such, expected pension contributions for 2017 have been excluded from the above table.

At December 31, 2016, the amount of net unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was approximately $395 million. The timing of payments will depend on the progress of examinations with tax authorities. We do not expect a significant tax payment related to these obligations within the next year. We are unable to make a reasonably reliable estimate as to if or when any significant cash settlements with taxing authorities may occur; therefore, we have excluded the amount of net unrecognized tax benefits from the above table.

Equity and Dividends

Series A Preferred Stock:

On June 7, 2016, we redeemed all outstanding shares of our Series A Preferred Stock, therefore we no longer pay Series A Preferred Stock dividends.

Prior to the redemption, we made cash distributions of $180 million in 2016 compared to $900 million in 2015 and $720 million in 2014. Our Series A Preferred Stock entitled holders to a 9.00% annual dividend, to be paid in four dividends, in arrears on each March 7, June 7, September 7, and December 7, in cash. In 2015, there were five dividend payments because, concurrent with the declaration of our common stock dividend on December 8, 2015, we also declared and paid the Series A Preferred Stock dividend that would otherwise have been payable on March 7, 2016. Accordingly, there were no cash distributions related to our Series A Preferred Stock in the first quarter of 2016, resulting in only one dividend payment in 2016 prior to redemption.

See Note 12, Capital Stock, to the consolidated financial statements for a discussion of the Series A Preferred Stock.

Common Stock Dividends:

We paid common stock dividends of $3.6 billion in 2016 and $1.3 billion in 2015. No common stock dividends were paid in 2014. Additionally, on February 15, 2017, our Board of Directors declared a cash dividend of $0.60 per share of common stock, which is payable on March 17, 2017 to shareholders of record on March 3, 2017. The present annualized dividend rate is $2.40 per share of common stock.

The declaration of dividends is subject to the discretion of our Board of Directors and depends on various factors, including our net income, financial condition, cash requirements, future prospects, and other factors that our Board of Directors deems relevant to its analysis and decision making.

Supplemental Unaudited Pro Forma Condensed Combined Financial Information

The following unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the 2015 Merger, which was consummated on July 2, 2015, and the related equity investments, based on the historical results of operations of Heinz and Kraft. See Note 1, Background and Basis of Presentation, and Note 2, Merger and Acquisition, to the consolidated financial statements for additional information on the 2015 Merger.

The following unaudited pro forma condensed combined statements of income for the years ended January 3, 2016 and December 28, 2014 are based on the historical financial statements of Heinz and Kraft after giving effect to the 2015 Merger, related equity investments, and the assumptions and adjustments described in the accompanying notes to these unaudited pro forma condensed combined statements of income.

The Kraft Heinz statement of income information for the year ended January 3, 2016 was derived from the consolidated financial statements included elsewhere in this Form 10-K. The historical Kraft statement of income includes information for the six months ended June 27, 2015 derived from Kraft’s unaudited condensed consolidated financial statements included in our Current Report on Form 8-K filed with the SEC on July 7, 2016 and information for the period from June 27, 2015 to July 2, 2015 derived from Kraft’s books and records.

The historical Heinz statement of income information for the year ended December 28, 2014 was derived from the consolidated financial statements included elsewhere in this Form 10-K. The historical Kraft statement of income information for the year ended December 28, 2014 was derived from its consolidated financial statements included in Kraft’s Annual Report on Form 10-K for the year ended December 27, 2014.

The unaudited pro forma condensed combined statements of income are presented as if the 2015 Merger had been consummated on December 30, 2013, the first business day of our 2014 fiscal year, and combine the historical results of Heinz and Kraft. This is consistent with internal management reporting. The unaudited pro forma condensed combined statements of income set forth below primarily give effect to the following assumptions and adjustments:

•	Application of the acquisition method of accounting;

•	The issuance of Heinz common stock to the Sponsors in connection with the equity investments;

•	The pre-closing Heinz share conversion;

•	The exchange of one share of Kraft Heinz common stock for each share of Kraft common stock; and

•	Conformance of accounting policies.

The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. We utilized estimated fair values at the 2015 Merger Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. This allocation was final as of July 3, 2016.

The unaudited pro forma condensed combined financial information has been prepared in accordance with SEC Regulation S-X Article 11 and is not necessarily indicative of the results of operations that would have been realized had the transactions been completed as of the dates indicated, nor are they meant to be indicative of our anticipated combined future results. In addition, the accompanying unaudited pro forma condensed combined statements of income do not reflect any additional anticipated synergies, operating efficiencies, cost savings, or any integration costs that may result from the 2015 Merger.

The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma condensed combined statements of income to give effect to unaudited pro forma events that are (1) directly attributable to the transaction, (2) factually supportable and (3) are expected to have a continuing impact on the results of operations of the combined company. As a result, under SEC Regulation S-X Article 11, certain expenses such as deal costs and non-cash costs related to the fair value step-up of inventory (“Inventory Step-up Costs”), if applicable, are eliminated from pro forma results in the periods presented. In contrast, under the ASC 805 presentation in Note 2, Merger and Acquisition, to the consolidated financial statements, these expenses are required to be included in prior year pro forma results.

The unaudited pro forma condensed combined financial information, including the related notes, should be read in conjunction with the historical consolidated financial statements and related notes of Kraft, and with our consolidated financial statements included elsewhere in this Form 10-K. The historical SEC filings of Kraft are available to the public at the SEC’s website at www.sec.gov.

The Kraft Heinz Company

Pro Forma Condensed Combined Statements of Income

(in millions, except per share data)

(Unaudited)

	January 3, 2016				December 28, 2014
Net sales	$	27,447			$	29,122
Cost of products sold	18,299				20,146
Gross profit	9,148				8,976
Selling, general and administrative expenses	4,613				4,593
Operating income	4,535				4,383
Interest expense	1,528				1,113
Other expense/(income), net	289				57
Income/(loss) before income taxes	2,718				3,213
Provision for/(benefit from) income taxes	944				880
Net income/(loss)	1,774				2,333
Net income/(loss) attributable to noncontrolling interest	13				15
Net income/(loss) attributable to Kraft Heinz	1,761				2,318
Preferred dividends	900				720
Net income/(loss) attributable to common shareholders	$	861			$	1,598
Basic common shares outstanding	1,202				1,192
Diluted common shares outstanding	1,222				1,222
Per share data applicable to common shareholders:
Basic earnings/(loss)	$	0.72			$	1.34
Diluted earnings/(loss)	0.70				1.31

The Kraft Heinz Company

Pro Forma Condensed Combined Statement of Income

For the Year Ended January 3, 2016

(in millions, except per share data)

(Unaudited)

	Kraft Heinz				Historical Kraft				Pro Forma Adjustments				Pro Forma
Net sales	$	18,338			$	9,109			$	—			$	27,447
Cost of products sold	12,577				6,103				(381		)		18,299
Gross profit	5,761				3,006				381				9,148
Selling, general and administrative expenses	3,122				1,532				(41		)		4,613
Operating income	2,639				1,474				422				4,535
Interest expense	1,321				247				(40		)		1,528
Other expense/(income), net	305				(16		)		—				289
Income/(loss) before income taxes	1,013				1,243				462				2,718
Provision for/(benefit from) income taxes	366				400				178				944
Net income/(loss)	647				843				284				1,774
Net income/(loss) attributable to noncontrolling interest	13				—				—				13
Net income/(loss) attributable to Kraft Heinz	634				843				284				1,761
Preferred dividends	900				—				—				900
Net income/(loss) attributable to common shareholders	$	(266	)		$	843			$	284			$	861
Basic common shares outstanding	786				—				416				1,202
Diluted common shares outstanding	786				—				436				1,222
Per share data applicable to common shareholders:
Basic earnings/(loss)	$	(0.34	)		$	—			$	1.06			$	0.72
Diluted earnings/(loss)	(0.34		)		—				1.04				0.70

The Kraft Heinz Company

Pro Forma Condensed Combined Statement of Income

For the Year Ended December 28, 2014

(in millions, except per share data)

(Unaudited)

	Historical Heinz				Historical Kraft				Pro Forma Adjustments				Pro Forma
Net sales	$	10,922			$	18,200			$	—			$	29,122
Cost of products sold	7,645				13,248				(747		)		20,146
Gross profit	3,277				4,952				747				8,976
Selling, general and administrative expenses	1,709				3,062				(178		)		4,593
Operating income	1,568				1,890				925				4,383
Interest expense	686				507				(80		)		1,113
Other expense/(income), net	79				(22		)		—				57
Income/(loss) before income taxes	803				1,405				1,005				3,213
Provision for/(benefit from) income taxes	131				363				386				880
Net income/(loss)	672				1,042				619				2,333
Net income/(loss) attributable to noncontrolling interest	15				—				—				15
Net income/(loss) attributable to Kraft Heinz	657				1,042				619				2,318
Preferred dividends	720				—				—				720
Net income/(loss) attributable to common shareholders	$	(63	)		$	1,042			$	619			$	1,598
Basic common shares outstanding	377				593				222				1,192
Diluted common shares outstanding	377				600				245				1,222
Per share data applicable to common shareholders:
Basic earnings/(loss)	$	(0.17	)		$	1.76			$	(0.25	)		$	1.34
Diluted earnings/(loss)	(0.17		)		1.74				(0.26		)		1.31

The Kraft Heinz Company

Summary of Pro Forma Adjustments

(in millions)

(Unaudited)

	January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)
Impact to cost of products sold:
Postemployment benefit costs(a)	$	(34	)		$	(747	)
Inventory step-up(b)	(347		)		—
Impact to cost of products sold	$	(381	)		$	(747	)
Impact to selling, general and administrative expenses:
Depreciation and amortization(c)	$	84			$	168
Compensation expense(d)	31				68
Postemployment benefit costs(a)	11				(414		)
Deal costs(e)	(167		)		—
Impact to selling, general and administrative expenses	$	(41	)		$	(178	)
Impact to interest expense:
Interest expense(f)	$	(40	)		$	(80	)
Impact to interest expense	$	(40	)		$	(80	)

Adjustments included in the accompanying unaudited pro forma condensed combined statements of income are as follows:

(a)

Represents the change to align Kraft's accounting policy to our accounting policy for postemployment benefit plans. Kraft historically elected a mark-to-market accounting policy and recognized net actuarial gains or losses and changes in the fair value of plan assets immediately in earnings upon remeasurement. Our policy is to initially record such items in other comprehensive income/(loss). Also represents the elimination of Kraft’s historical amortization of postemployment benefit plan prior service credits.

(b)	Represents the elimination of nonrecurring non-cash costs related to the fair value adjustment of Kraft’s inventory. See Note 2, Merger and Acquisition, to the consolidated financial statements for additional information on the determination of fair values.

(c)

Represents incremental amortization resulting from the fair value adjustment of Kraft’s definite-lived intangible assets in connection with the 2015 Merger. The net change in depreciation expense resulting from the fair value adjustment of property, plant, and equipment was insignificant. See Note 2, Merger and Acquisition, to the consolidated financial statements for additional information on the determination of fair values.

(d)	Represents the incremental compensation expense due to the fair value remeasurement of certain of Kraft’s equity awards in connection with the 2015 Merger. See Note 8, Employees’ Stock Incentive Plans, to the consolidated financial statements for additional information on the conversion of Kraft’s equity awards in connection with the 2015 Merger.

(e)	Represents the elimination of non-recurring deal costs incurred in connection with the 2015 Merger.

(f)	Represents the incremental change in interest expense resulting from the fair value adjustment of Kraft’s long-term debt in connection with the 2015 Merger, including the elimination of the historical amortization of deferred financing fees and amortization of original issuance discount.

We calculated the income tax effect of the pro forma adjustments using a 38.5% weighted average statutory tax rate for the periods presented.

Additionally, for 2015, we calculated the unaudited pro forma weighted average number of basic shares outstanding by adding the Kraft Heinz weighted average number of basic shares outstanding (which included the Sponsors' shares and the converted Kraft shares weighted for the period from the 2015 Merger through the year ended January 3, 2016) and the Sponsors' shares (as converted) and the converted Kraft shares (both weighted from the beginning of the year through the 2015 Merger Date). We calculated the unaudited pro forma weighted average number of diluted shares outstanding by adding the effect of dilutive securities to the unaudited pro forma weighted average number of basic shares outstanding, including dilutive securities related to Kraft Heinz. The Kraft Heinz diluted EPS calculation did not include these securities as Kraft Heinz was in a net loss position and such securities were anti-dilutive.

For 2014, we calculated the unaudited pro forma weighted average number of basic shares outstanding by adding Heinz’s historical weighted average number of basic shares outstanding, the 500 million shares issued to the Sponsors in connection with their equity investments (after giving effect to the pre-closing Heinz conversion ratio of 0.443332) and the historical weighted average number

of basic shares of Kraft, which were converted on a 1:1 basis into shares of Kraft Heinz. We calculated the unaudited pro forma weighted average number of diluted shares outstanding by adding the effect of dilutive securities to the unaudited pro forma weighted average number of basic shares outstanding, including dilutive securities related to historical Heinz. The historical Heinz diluted EPS calculation did not include these securities as historical Heinz was in a net loss position and such securities were anti-dilutive.

Non-GAAP Financial Measures

Our non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

To supplement the 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 earnings per common share (“EPS”), or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

Management uses these non-GAAP financial measures to 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 acquisitions, currency, 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 Venezuela following our June 28, 2015 currency devaluation, for which we calculate the previous year’s results using the current year’s exchange rate. Organic Net Sales for any period prior to the 2015 Merger Date includes the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013. 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), net, provision for/(benefit from) income taxes; in addition to these adjustments, we exclude, when they occur, the impacts of depreciation and amortization (excluding integration and restructuring expenses) (including amortization of postretirement benefit plans prior service credits), integration and restructuring expenses, merger costs, unrealized losses/(gains) on commodity hedges, impairment losses, losses/(gains) on the sale of a business, nonmonetary currency devaluation (e.g., remeasurement gains and losses), and equity award compensation expense (excluding integration and restructuring expenses). Adjusted EBITDA for any period prior to the 2015 Merger Date includes the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013. 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 integration and restructuring expenses, merger costs, unrealized losses/(gains) on commodity hedges, impairment losses, losses/(gains) on the sale of a business, and nonmonetary currency devaluation (e.g., remeasurement gains and losses), and including when they occur, adjustments to reflect preferred stock dividend payments on an accrual basis. Adjusted EPS for any period prior to the 2015 Merger Date includes the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013. We believe Adjusted EPS provides important comparability of underlying operating results, allowing investors and management to assess operating performance on a consistent basis.

The Kraft Heinz Company

Reconciliation of Pro Forma Net Sales to Organic Net Sales

For the Years Ended December 31, 2016 and January 3, 2016

(dollars in millions)

(Unaudited)

	Pro Forma Net Sales(a)				Impact of Currency				Impact of Divestitures				Impact of 53rd Week				Organic Net Sales				Price		Volume/Mix
2016 (52 weeks)
United States	$	18,641			$	—			$	—			$	—			$	18,641
Canada	2,309				(84		)		—				—				2,393
Europe	2,366				(154		)		—				—				2,520
Rest of World	3,171				(92		)		—				—				3,263
	$	26,487			$	(330	)		$	—			$	—			$	26,817
2015 (53 weeks)
United States	$	18,932			$	—			$	—			$	233			$	18,699
Canada	2,386				—				—				27				2,359
Europe	2,657				—				42				27				2,588
Rest of World	3,472				351				—				39				3,082
	$	27,447			$	351			$	42			$	326			$	26,728

Year-over-year growth rates
United States	(1.5	)%		0.0	pp		0.0	pp		(1.2	) pp		(0.3	)%		0.2	pp		(0.5	) pp
Canada	(3.2	)%		(3.5	) pp		0.0	pp		(1.1	) pp		1.4	%		0.6	pp		0.8	pp
Europe	(11.0	)%		(5.8	) pp		(1.6	) pp		(1.0	) pp		(2.6	)%		(2.5	) pp		(0.1	) pp
Rest of World	(8.7	)%		(13.2	) pp		0.0	pp		(1.4	) pp		5.9	%		3.2	pp		2.7	pp
Kraft Heinz	(3.5	)%		(2.5	) pp		(0.1	) pp		(1.2	) pp		0.3	%		0.3	pp		0.0	pp

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

The Kraft Heinz Company

Reconciliation of Pro Forma Net Sales to Organic Net Sales

For the Years Ended January 3, 2016 and December 28, 2014

(dollars in millions)

(Unaudited)

	Pro Forma Net Sales(a)				Impact of Currency				Impact of Divestitures				Impact of 53rd Week				Organic Net Sales				Price		Volume/Mix
2015 (53 weeks)
United States	$	18,932			$	—			$	—			$	233			$	18,699
Canada	2,386				(378		)		—				31				2,733
Europe	2,657				(439		)		42				32				3,022
Rest of World	3,472				(404		)		—				44				3,832
	$	27,447			$	(1,221	)		$	42			$	340			$	28,286
2014 (52 weeks)
United States	$	19,346			$	—			$	—			$	—			$	19,346
Canada	2,811				—				—				—				2,811
Europe	3,233				—				107				—				3,126
Rest of World	3,732				274				—				—				3,458
	$	29,122			$	274			$	107			$	—			$	28,741

Year-over-year growth rates
United States	(2.1	)%		0.0	pp		0.0	pp		1.2	pp		(3.3	)%		0.0	pp		(3.3	) pp
Canada	(15.1	)%		(13.4	) pp		0.0	pp		1.1	pp		(2.8	)%		2.2	pp		(5.0	) pp
Europe	(17.8	)%		(13.6	) pp		(1.9	) pp		1.0	pp		(3.3	)%		1.6	pp		(4.9	) pp
Rest of World	(7.0	)%		(19.1	) pp		0.0	pp		1.3	pp		10.8	%		5.2	pp		5.6	pp
Kraft Heinz	(5.8	)%		(5.2	) pp		(0.2	) pp		1.2	pp		(1.6	)%		1.0	pp		(2.6	) pp

(a)	See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information within this item.

The Kraft Heinz Company

Reconciliation of Pro Forma Net Income/(Loss) to Adjusted EBITDA

(in millions)

(Unaudited)

	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)
Pro forma net income/(loss)(a)	$	3,642			$	1,774			$	2,333
Interest expense	1,134				1,528				1,113
Other expense/(income), net	(15		)		289				57
Provision for/(benefit from) income taxes	1,381				944				880
Operating income	6,142				4,535				4,383
Depreciation and amortization (excluding integration and restructuring expenses)	536				779				924
Integration and restructuring expenses	1,012				1,117				743
Merger costs	30				194				68
Unrealized losses/(gains) on commodity hedges	(38		)		(41		)		79
Impairment losses	53				58				221
Losses/(gains) on sale of business	—				(21		)		—
Nonmonetary currency devaluation	4				57				—
Equity award compensation expense (excluding integration and restructuring expenses)	39				61				108
Adjusted EBITDA	$	7,778			$	6,739			$	6,526

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

The Kraft Heinz Company

Reconciliation of Pro Forma Diluted EPS to Adjusted EPS

(Unaudited)

	December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				December 28, 2014 (52 weeks)
Pro forma diluted EPS(a)	$	2.81			$	0.70			$	1.31
Integration and restructuring expenses(b)(c)	0.57				0.61				0.47
Merger costs(b)(d)	0.02				0.49				0.04
Unrealized losses/(gains) on commodity hedges(b)(e)	(0.02		)		(0.02		)		0.05
Impairment losses(b)(e)	0.03				0.03				0.11
Losses/(gains) on sale of business(b)(e)	—				(0.01		)		—
Nonmonetary currency devaluation(b)(f)	0.02				0.24				—
Preferred dividend adjustment(g)	(0.10		)		0.15				—
Adjusted EPS	$	3.33			$	2.19			$	1.98

(a)	There were no pro forma adjustments in 2016, as Kraft and Heinz were a combined company for the entire period. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

(b)	Income tax expense associated with these items is based on applicable jurisdictional tax rates and deductibility assessment of individual items.

(c)	Integration and restructuring expenses include the following gross expenses:

•	Expenses recorded in cost of products sold were $711 million in 2016, $479 million in 2015, and $535 million in 2014;

•	Expenses recorded in SG&A were $301 million in 2016, $638 million in 2015, and $208 million in 2014; and,

•	Expenses recorded in other expense/(income), net, were $23 million in 2014 (there were no such expenses in 2016 or 2015).

(d)	Merger costs include the following gross expenses:

•	Expenses recorded in cost of products sold were $2 million in 2016 and $6 million in 2015 (there were no such expenses in 2014);

•	Expenses recorded in SG&A were $28 million in 2016, $188 million in 2015, and $68 million in 2014;

•	Expenses recorded in interest expense were $466 million in 2015 (there were no such expenses in 2016 or 2014); and,

•	Expenses recorded in other expense/(income), net, were $144 million in 2015 (there were no such expenses in 2016 or 2014).

(e)	Refer to the reconciliation of pro forma net income/(loss) to Adjusted EBITDA for the related gross expenses.

(f)	Nonmonetary currency devaluation includes the following gross expenses/(income):

•	Expenses recorded in cost of products sold of $4 million in 2016 and $57 million in 2015 (there were no such expenses in 2014) and

•	Expenses recorded in other expense/(income), net, of $24 million in 2016 and $234 million in 2015 (there were no such expenses in 2014).

(g)

For Adjusted EPS, we present the impact of the Series A Preferred Stock dividend payments on an accrual basis. Accordingly, we included adjustments to EPS to exclude $180 million of Series A Preferred Stock dividends from the fourth quarter of 2015 (to reflect the March 7, 2016 Series A Preferred Stock dividend that was paid in December 2015), to include such $180 million Series A Preferred Stock dividend payment in the first quarter of 2016, and to exclude $51 million of Series A Preferred Stock dividends from the second quarter of 2016 (to reflect that it was redeemed on June 7, 2016).