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 the third quarter of 2017, we announced our plans to reorganize certain of our international businesses to better align our global geographies. These plans include moving our Middle East and Africa businesses from the AMEA operating segment into the EMEA operating segment. The remaining AMEA businesses will become the APAC operating segment. We currently expect these changes to become effective in the first quarter of our fiscal year 2018. As a result, we expect to restate our Europe and Rest of World segments to reflect these changes for historical periods presented as of March 31, 2018.

See Note 19, Segment Reporting, to the consolidated financial statements for our financial information by segment.

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, while 2015 included a full year of Heinz results and post-2015 Merger results of Kraft. For comparability, we disclose in this report certain unaudited pro forma condensed combined financial information, which presents 2015 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, to the consolidated financial statements for additional information related to the 2015 Merger.

Integration and Restructuring Expenses:

In 2017, we substantially completed our multi-year program announced following the 2015 Merger (the “Integration Program”), for which we expect to incur cumulative pre-tax costs of approximately $2.1 billion. Approximately 60% of these costs will be cash expenditures. As of December 30, 2017, we have incurred cumulative pre-tax costs of $2,055 million related to the Integration Program. These costs primarily included 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.

Total expenses related to our restructuring activities, including the Integration Program, were $457 million in 2017, $1,012 million in 2016, and $1,023 million in 2015. Integration Program costs included in these totals were $339 million in 2017, $887 million in 2016, and $829 million in 2015.

We anticipate cumulative capital expenditures of approximately $1.4 billion related to the Integration Program. As of December 30, 2017, we have incurred $1.3 billion in capital expenditures since the inception of the Integration Program. The Integration Program was designed to reduce costs, integrate, and optimize our combined organization. Since the inception of the Integration Program, our cumulative pre-tax savings achieved are approximately $1,725 million, primarily benefiting the United States and Canada segments.

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

U.S. Tax Reform:

On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was enacted by the U.S. federal government. The legislation significantly changed U.S. tax law by, among other things, lowering the federal corporate tax rate from 35.0% to 21.0%, effective January 1, 2018, implementing a territorial tax system, and imposing a one-time toll charge on deemed repatriated earnings of foreign subsidiaries as of December 30, 2017. The two material items that impacted us in 2017 were the corporate tax rate reduction and the one-time toll charge. While the corporate tax rate reduction is effective January 1, 2018, we accounted for this anticipated rate change in 2017, the period of enactment.

We have estimated the provisional tax impacts related to the toll charge, certain components of the revaluation of deferred tax assets and liabilities, including depreciation and executive compensation, and the change in our indefinite reinvestment assertion. As a result, we recognized a net tax benefit of approximately $7.0 billion, including a reasonable estimate of our deferred income tax benefit of approximately $7.5 billion related to the corporate rate change, which was partially offset by a reasonable estimate of $312 million for the toll charge and approximately $125 million for other tax expenses, including a change in our indefinite reinvestment assertion.

See Critical Accounting Policies within this item and Note 8, Income Taxes, to the consolidated financial statements for additional information.

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 2015 fiscal year included a 53rd week of activity.

Series A Preferred Stock:

On June 7, 2016, we redeemed all outstanding shares of our Series A Preferred Stock. We funded this redemption primarily through the issuance of long-term debt in May 2016, as well as other sources of liquidity, including our commercial paper program, U.S. securitization program, and cash on hand.

See Equity and Dividends within this item, along with Note 16, Debt, and Note 17, 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. 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 for 2017 or 2016 as Kraft and Heinz were a combined company for these periods. 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 2015, 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 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				% Change			December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change
	(in millions, except per share data)											(in millions, except per share data)
Net sales	$	26,232			$	26,487			(1.0	)%		$	26,487			$	18,338			44.4	%
Operating income	6,773				6,142				10.3	%		6,142				2,639				132.7	%
Net income/(loss) attributable to common shareholders	10,999				3,452				218.6	%		3,452				(266		)		nm
Diluted earnings/(loss) per share	8.95				2.81				218.5	%		2.81				(0.34		)		nm

Net Sales:

	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				% Change			December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	26,232			$	26,487			(1.0	)%		$	26,487			$	18,338			44.4	%
Pro forma net sales(a)	26,232				26,487				(1.0	)%		26,487				27,447				(3.5	)%
Organic Net Sales(b)	26,169				26,432				(1.0	)%		26,817				26,728				0.3	%

(a)	There were no pro forma adjustments for 2017 or 2016, as Kraft and Heinz were a combined company for these periods. 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 30, 2017 compared to the Year Ended December 31, 2016:

Net sales and Organic Net Sales decreased 1.0% to $26.2 billion in 2017 compared to 2016 due to unfavorable volume/mix (1.5 pp) partially offset by higher pricing (0.5 pp). Volume/mix was unfavorable in the United States and Canada, partially offset by growth in Europe and Rest of World. Higher pricing in Rest of World and the United States was partially offset by lower pricing in Canada and Europe.

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 2015 (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.

Net Income:

	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				% Change			December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change
	(in millions)											(in millions)
Operating income	$	6,773			$	6,142			10.3	%		$	6,142			$	2,639			132.7	%
Net income/(loss) attributable to common shareholders	10,999				3,452				218.6	%		3,452				(266		)		nm
Adjusted EBITDA(a)	7,930				7,778				1.9	%		7,778				6,739				15.4	%

(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 30, 2017 compared to the Year Ended December 31, 2016:

Operating income increased 10.3% to $6.8 billion in 2017 compared to $6.1 billion in 2016. This increase was primarily due to lower Integration Program and other restructuring expenses in the current period, savings from the Integration Program and other restructuring activities, and lower overhead costs, partially offset by higher input costs in local currency, lower Organic Net Sales, lower unrealized gains on commodity hedges in the current period, and the unfavorable impact of foreign currency (0.4 pp).

Net income/(loss) attributable to common shareholders increased 218.6% to $11.0 billion in 2017 compared to $3.5 billion in 2016. The increase was primarily due to a lower effective tax rate in the current period, the operating income factors discussed above, and the absence of the Series A Preferred Stock dividend in the current period, partially offset by higher interest expense and higher other expense/(income), net, detailed as follows:

•

The effective tax rate was a 98.7% benefit in 2017 compared to 27.5% expense in 2016. The change in the effective tax rate was primarily driven by the $7.0 billion tax benefit from U.S. Tax Reform, lower tax benefits associated with deferred tax effects of statutory rate changes, and taxes on income of foreign subsidiaries in the current period. See Note 8, Income Taxes, to the consolidated financial statements for additional information related to our effective tax rates.

•	The Series A Preferred Stock was fully redeemed on June 7, 2016. Accordingly, there were no dividends for 2017, compared to $180 million in the prior period. See Equity and Dividends within this item for additional information.

•	Interest expense increased to $1.2 billion in 2017 compared to $1.1 billion in 2016. This increase was primarily due to the May 2016 issuances of long-term debt and borrowings under our commercial paper programs, which began in the second quarter of 2016.

•

Other expense/(income), net was an expense of $9 million in 2017 compared to income of $15 million in 2016. This increase was primarily due to a $36 million nonmonetary currency devaluation loss in the current period compared to $24 million in the prior period related to our Venezuelan operations. See Note 13, Venezuela - Foreign Currency and Inflation, to the consolidated financial statements for additional information.

Adjusted EBITDA increased 1.9% to $7.9 billion in 2017 compared to 2016, primarily due to savings from the Integration Program and other restructuring activities and lower overhead costs, partially offset by higher input costs in local currency, a decline in Organic Net Sales, and the unfavorable impact of foreign currency (0.4pp). Segment Adjusted EBITDA results were as follows:

•	United States Segment Adjusted EBITDA increased primarily driven by Integration Program savings and lower overhead costs in the current period, partially offset by unfavorable key commodity costs, primarily in dairy, meat, and coffee, and volume/mix declines.

•	Europe Segment Adjusted EBITDA was flat primarily driven by productivity savings that were offset by higher input costs in local currency and the unfavorable impact of foreign currency (1.6 pp).

•	Rest of World Segment Adjusted EBITDA decreased primarily due to higher input costs in local currency, increased commercial investments, and the unfavorable impact of foreign currency (3.4 pp), partially offset by Organic Net Sales growth.

•	Canada Segment Adjusted EBITDA decreased primarily due to a decline in Organic Net Sales, partially offset by Integration Program savings, lower overhead costs in the current period, and the favorable impact of foreign currency (1.7 pp).

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 16, Debt, and Note 17, 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 8, 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.

Diluted EPS:

	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				% Change			December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change
	(in millions, except per share data)											(in millions, except per share data)
Diluted EPS	$	8.95			$	2.81			218.5	%		$	2.81			$	(0.34	)		nm
Adjusted EPS(a)	3.55				3.33				6.6	%		3.33				2.19				52.1	%

(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 30, 2017 compared to the Year Ended December 31, 2016:

Diluted EPS increased 218.5% to $8.95 in 2017 compared to $2.81 in 2016, primarily driven by the net income/(loss) attributable to common shareholders factors discussed above.

	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				$ Change				% Change
Diluted EPS	$	8.95			$	2.81			$	6.14			218.5	%
Integration and restructuring expenses	0.26				0.57				(0.31		)
Merger costs	—				0.02				(0.02		)
Unrealized losses/(gains) on commodity hedges	0.01				(0.02		)		0.03
Impairment losses	0.03				0.03				—
Nonmonetary currency devaluation	0.03				0.02				0.01
Preferred dividend adjustment	—				(0.10		)		0.10
U.S. Tax Reform	(5.73		)		—				(5.73		)
Adjusted EPS(a)	$	3.55			$	3.33			$	0.22			6.6	%
Key drivers of change in Adjusted EPS(a):
Results of operations									$	0.06
Change in preferred dividends									0.25
Change in interest expense									(0.06		)
Change in other expense/(income), net									(0.01		)
Change in effective tax rate and other									(0.02		)
									$	0.22

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

Adjusted EPS increased 6.6% to $3.55 in 2017 compared to $3.33 in 2016, primarily driven by the absence of Series A Preferred Stock dividends in the current period and Adjusted EBITDA growth despite the unfavorable impact of foreign currency, partially offset by higher interest expense.

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(c)	$	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 for 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.

Results of Operations by Segment

Management evaluates segment performance based on several factors, including net sales, Organic 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 (excluding integration and restructuring expenses; 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 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)
	(in millions)
Net sales:
United States	$	18,353			$	18,641			$	10,943
Canada	2,190				2,309				1,437
Europe	2,393				2,366				2,656
Rest of World	3,296				3,171				3,302
Total net sales	$	26,232			$	26,487			$	18,338

Pro Forma Net Sales:

	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)
	(in millions)
Pro forma net sales(a):
United States	$	18,353			$	18,641			$	18,932
Canada	2,190				2,309				2,386
Europe	2,393				2,366				2,657
Rest of World	3,296				3,171				3,472
Total pro forma net sales	$	26,232			$	26,487			$	27,447

(a)	There were no pro forma adjustments for 2017 or 2016, as Kraft and Heinz were a combined company for these periods. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

Organic Net Sales:

	2017 Compared to 2016								2016 Compared to 2015
	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)
	(in millions)
Organic Net Sales(a):
United States	$	18,353			$	18,641			$	18,641			$	18,699
Canada	2,148				2,309				2,393				2,359
Europe	2,385				2,366				2,520				2,588
Rest of World	3,283				3,116				3,263				3,082
Total Organic Net Sales	$	26,169			$	26,432			$	26,817			$	26,728

(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
2017 Compared to 2016
United States	(1.5	)%		0.0 pp		0.0 pp		0.0 pp		(1.5	)%		0.4 pp		(1.9) pp
Canada	(5.2	)%		1.8 pp		0.0 pp		0.0 pp		(7.0	)%		(1.7) pp		(5.3) pp
Europe	1.1	%		0.3 pp		0.0 pp		0.0 pp		0.8	%		(0.9) pp		1.7 pp
Rest of World	3.9	%		(1.5) pp		0.0 pp		0.0 pp		5.4	%		4.6 pp		0.8 pp
Kraft Heinz	(1.0	)%		0.0 pp		0.0 pp		0.0 pp		(1.0	)%		0.5 pp		(1.5) pp
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

(a)	There were no pro forma adjustments for 2017 or 2016, as Kraft and Heinz were a combined company for these periods. See the Supplemental Unaudited Pro Forma Condensed Combined Financial Information at the end of this item.

Adjusted EBITDA:

	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)
	(in millions)
Segment Adjusted EBITDA:
United States	$	6,001			$	5,862			$	4,690
Canada	639				642				541
Europe	781				781				938
Rest of World	617				657				742
General corporate expenses	(108		)		(164		)		(172		)
Depreciation and amortization (excluding integration and restructuring expenses)	(583		)		(536		)		(779		)
Integration and restructuring expenses	(457		)		(1,012		)		(1,117		)
Merger costs	—				(30		)		(194		)
Amortization of inventory step-up	—				—				(347		)
Unrealized gains/(losses) on commodity hedges	(19		)		38				41
Impairment losses	(49		)		(53		)		(58		)
Gains/(losses) on sale of business	—				—				21
Nonmonetary currency devaluation	—				(4		)		(57		)
Equity award compensation expense (excluding integration and restructuring expenses)	(49		)		(39		)		(61		)
Other pro forma adjustments	—				—				(1,549		)
Operating income	6,773				6,142				2,639
Interest expense	1,234				1,134				1,321
Other expense/(income), net	9				(15		)		305
Income/(loss) before income taxes	$	5,530			$	5,023			$	1,013

United States:

	2017 Compared to 2016											2016 Compared to 2015
	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				% Change			December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	18,353			$	18,641			(1.5	)%		$	18,641			$	10,943			70.3	%
Pro forma net sales(a)	18,353				18,641				(1.5	)%		18,641				18,932				(1.5	)%
Organic Net Sales(b)	18,353				18,641				(1.5	)%		18,641				18,699				(0.3	)%
Segment Adjusted EBITDA	6,001				5,862				2.4	%		5,862				4,690				25.0	%

(a)	There were no pro forma adjustments for 2017 or 2016, as Kraft and Heinz were a combined company for these periods. 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 30, 2017 compared to the Year Ended December 31, 2016:

Net sales and Organic Net Sales decreased 1.5% to $18.4 billion due to unfavorable volume/mix (1.9 pp) partially offset by higher pricing (0.4 pp). Unfavorable volume/mix was primarily driven by distribution losses in nuts, cheese, and meat, and lower shipments in foodservice. The decline was partially offset by gains in refrigerated meal combinations, boxed dinners, and frozen meals. Pricing was higher driven primarily by price increases in cheese.

Segment Adjusted EBITDA increased 2.4% primarily driven by Integration Program savings and lower overhead costs, partially offset by unfavorable key commodity costs, primarily in dairy, meat, and coffee, as well as unfavorable volume/mix.

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 meat, 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 meat.

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.

Canada:

	2017 Compared to 2016											2016 Compared to 2015
	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				% Change			December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	2,190			$	2,309			(5.2	)%		$	2,309			$	1,437			60.7	%
Pro forma net sales(a)	2,190				2,309				(5.2	)%		2,309				2,386				(3.2	)%
Organic Net Sales(b)	2,148				2,309				(7.0	)%		2,393				2,359				1.4	%
Segment Adjusted EBITDA	639				642				(0.5	)%		642				541				18.7	%

(a)	There were no pro forma adjustments for 2017 or 2016, as Kraft and Heinz were a combined company for these periods. 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 30, 2017 compared to the Year Ended December 31, 2016:

Net sales decreased 5.2% to $2.2 billion, including the favorable impact of foreign currency (1.8 pp). Organic Net Sales decreased 7.0% due to unfavorable volume/mix (5.3 pp) and lower pricing (1.7 pp). Volume/mix was unfavorable across several categories and was most pronounced in cheese, coffee, and boxed dinners, primarily due to delayed execution of go-to-market agreements with key retailers, retail distribution losses (primarily in cheese), and lower inventory levels at retail versus the prior year. Lower pricing was due to higher promotional activity, primarily in cheese.

Segment Adjusted EBITDA decreased 0.5%, including favorable impact of foreign currency (1.7 pp). Excluding the currency impact, Segment Adjusted EBITDA decreased primarily due to lower Organic Net Sales partially offset by Integration Program savings and lower overhead costs in the current period.

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.

Europe:

	2017 Compared to 2016											2016 Compared to 2015
	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				% Change			December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	2,393			$	2,366			1.1	%		$	2,366			$	2,656			(10.9	)%
Pro forma net sales(a)	2,393				2,366				1.1	%		2,366				2,657				(11.0	)%
Organic Net Sales(b)	2,385				2,366				0.8	%		2,520				2,588				(2.6	)%
Segment Adjusted EBITDA	781				781				—	%		781				938				(16.7	)%

(a)	There were no pro forma adjustments for 2017 or 2016, as Kraft and Heinz were a combined company for these periods. 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 30, 2017 compared to the Year Ended December 31, 2016:

Net sales increased 1.1% to $2.4 billion, including favorable impact of foreign currency (0.3 pp). Organic Net Sales increased 0.8% driven by favorable volume/mix (1.7 pp), partially offset by lower pricing (0.9 pp). Favorable volume/mix was primarily driven by higher shipments in foodservice and growth in condiments and sauces, partially offset by ongoing declines in infant nutrition in Italy. Lower pricing was primarily due to higher promotional activity in the UK and Italy versus the prior period.

Segment Adjusted EBITDA was flat, including the unfavorable impact of foreign currency (1.6 pp). Excluding the currency impact, the increase was primarily driven by productivity savings, partially offset by higher input costs in local currency.

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.

Rest of World:

	2017 Compared to 2016											2016 Compared to 2015
	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				% Change			December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)				% Change
	(in millions)											(in millions)
Net sales	$	3,296			$	3,171			3.9	%		$	3,171			$	3,302			(4.0	)%
Pro forma net sales(a)	3,296				3,171				3.9	%		3,171				3,472				(8.7	)%
Organic Net Sales(b)	3,283				3,116				5.4	%		3,263				3,082				5.9	%
Segment Adjusted EBITDA	617				657				(6.1	)%		657				742				(11.5	)%

(a)	There were no pro forma adjustments for 2017 or 2016, as Kraft and Heinz were a combined company for these periods. 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 30, 2017 compared to the Year Ended December 31, 2016:

Net sales increased 3.9% to $3.3 billion despite the unfavorable impact of foreign currency (1.5 pp). Organic Net Sales increased 5.4% driven by higher pricing (4.6 pp) and favorable volume/mix (0.8 pp). Higher pricing was primarily driven by pricing actions taken 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 volume/mix declines in several markets associated with distributor network re-alignment.

Segment Adjusted EBITDA decreased 6.1% including the unfavorable impact of foreign currency (3.4 pp). Excluding the currency impact, Segment Adjusted EBITDA decreased primarily due to higher input costs in local currency and higher commercial investments partially offset by Organic Net Sales growth.

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.

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. Consumer incentives and trade promotions include, but are not limited to, discounts, coupons, rebates, performance based in-store display activities, 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, redemption rates, or current period experience factors. We review and adjust these estimates each quarter based on actual experience and other information.

Advertising expenses are recorded in selling, general and administrative expenses (“SG&A”). 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. We recorded advertising expenses of $629 million in 2017, $708 million in 2016, and $464 million in 2015.

Goodwill and Intangible Assets:

The carrying value of goodwill and indefinite-lived intangible assets was $98.5 billion at December 30, 2017 and $97.4 billion at December 31, 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 7, 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 2017. No impairment of goodwill was reported as a result of our 2017 annual goodwill impairment test. Each of our goodwill reporting units had excess fair value over its carrying value of at least 10% as of April 2, 2017 (our goodwill impairment testing date). Additionally, as a result of our annual indefinite-lived intangible asset impairment tests, we recognized a non-cash impairment loss of $49 million in SG&A in 2017. This loss was due to continued declines in nutritional beverages in India. The loss was recorded in our Europe segment as the related trademark is owned by our Italian subsidiary. Each of our other brands had excess fair value over its carrying value of at least 10% as of April 2, 2017.

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 of our 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.

Definite-lived intangible assets are amortized on a straight-line basis over the estimated periods benefited, and are reviewed when appropriate for possible impairment.

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 2018 health care cost trend rate assumption will be 6.7%. 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 2018 and 2030. 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 30, 2017 (in millions):

	One-Percentage-Point
	Increase				(Decrease)
Effect on annual service and interest cost	$	4			$	(3	)
Effect on postretirement benefit obligation	55				(47		)

Our 2018 discount rate assumption will be 3.6% for service cost and 3.0% for interest cost for our postretirement plans. Our 2018 discount rate assumption will be 3.8% for service cost and 3.3% for interest cost for our U.S. pension plans and 3.0% for service cost and 2.2% 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 plan costs 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 2018 expected return on plan assets will be 4.4% (net of applicable taxes) for our postretirement plans. Our 2018 expected rate of return on plan assets will be 5.5% for our U.S. pension plans and 4.5% 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 2018 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 (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	$	9			$	(19	)		$	8			$	(21	)
Effect of change in expected rate of return on plan assets on pension costs	(46		)		46				(41		)		41
Effect of change in discount rate on postretirement costs	(4		)		(9		)		—				(1		)
Effect of change in expected rate of return on plan assets on postretirement costs	(11		)		11				—				—

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.

U.S. Tax Reform significantly changed U.S. tax law by, among other things, lowering the federal corporate tax rate from 35.0% to 21.0%, effective January 1, 2018, implementing a territorial tax system, and imposing a one-time toll charge on deemed repatriated earnings of foreign subsidiaries as of December 30, 2017. In addition, there are many new provisions, including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income provisions (“GILTI”), the base erosion anti-abuse tax (“BEAT”), and a deduction for foreign-derived intangible income (“FDII”). The two material items that impacted us in 2017 were the corporate tax rate reduction and the one-time toll charge. While the corporate tax rate reduction is effective January 1, 2018, we accounted for this anticipated rate change in 2017, the period of enactment.

The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides us with up to one year to finalize accounting for the impacts of U.S. Tax Reform. When the initial accounting for U.S Tax Reform impacts is incomplete, we may include provisional amounts when reasonable estimates can be made or continue to apply the prior tax law if a reasonable estimate cannot be made. We have estimated the provisional tax impacts related to the toll charge, certain components of the revaluation of deferred tax assets and liabilities, including depreciation and executive compensation, and the change in our indefinite reinvestment assertion. As a result, we recognized a net tax benefit of approximately $7.0 billion, including a reasonable estimate of our deferred income tax benefit of approximately $7.5 billion related to the corporate rate change, which was partially offset by a reasonable estimate of $312 million for the toll charge and approximately $125 million for other tax expenses, including a change in our indefinite reinvestment assertion. We have elected to account for the tax on GILTI as a period cost and thus have not adjusted any of the deferred tax assets and liabilities of our foreign subsidiaries for U.S. Tax Reform. The ultimate impact may differ from these provisional amounts due to gathering additional information to more precisely compute the amount of tax, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take. We expect to finalize accounting for the impacts of U.S. Tax Reform when the 2017 U.S. corporate income tax return is filed in 2018.

In connection with U.S. Tax Reform, we have also reassessed our international investment assertions and no longer consider the historic earnings of our foreign subsidiaries as of December 30, 2017 to be indefinitely reinvested. We have made a reasonable estimate of local country withholding taxes that would be owed when our historic earnings are distributed. As a result, we have recorded deferred income taxes of $96 million on approximately $1.2 billion of historic 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 15, Commitments and Contingencies, to the consolidated financial statements for a discussion of our 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.

We define our key commodities in the United States and Canada as dairy, meat, coffee, and nuts. In 2017, we experienced cost increases in our key commodities, including dairy, meat, and coffee, while costs for nuts were flat. 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.

Dairy commodities, primarily milk and cheese, are the most significant cost components of our cheese products. We purchase our dairy raw material requirements from independent third parties, such as agricultural cooperatives and independent processors. Market supply and demand, as well as government programs, significantly influence the prices for milk and other dairy products. Significant cost components in our meat business include pork, beef, and poultry, which we primarily purchase from applicable local markets. Livestock feed costs and the global supply and demand for U.S. meats influence the prices of these meat products. The most significant cost component of our coffee products is coffee beans, which we purchase on global markets. Quality and availability of supply, currency fluctuations, and consumer demand for coffee products impact coffee bean prices. The most significant cost components in our nut products include peanuts, cashews, and almonds, which we purchase on both domestic and global markets, where global market supply and demand is the primary driver of prices.

Liquidity and Capital Resources

We believe that cash generated from our operating activities, securitization programs, commercial paper programs, and Senior Credit Facility (as defined below) will provide sufficient liquidity to meet our working capital needs, restructuring expenditures, planned capital expenditures, contributions to our postemployment benefit plans, future contractual obligations (including repayments of long-term debt), and payment of our anticipated quarterly common stock dividends. We intend to use our cash on hand and our commercial paper programs 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 2017 compared to 2016:

Net Cash Provided by/Used for Operating Activities:

Net cash provided by operating activities was $527 million for the year ended December 30, 2017 compared to $2.6 billion for the year ended December 31, 2016. The decrease in cash provided by operating activities was primarily driven by the $1.2 billion pre-funding of our postretirement benefit plans in 2017, lower collections on receivables as more were non-cash exchanged for sold receivables, favorable changes in accounts payable from vendor payment term renegotiations that were less pronounced than the prior year, and increased cash payments of employee bonuses in 2017. The decrease in cash provided by operating activities was partially offset by lower cash payments for income taxes in 2017 driven by our pre-funding of postretirement plan benefits following U.S. Tax Reform enactment on December 22, 2017.

Net Cash Provided by/Used for Investing Activities:

Net cash provided by investing activities was $1.2 billion for the year ended December 30, 2017 compared to $1.5 billion for the year ended December 31, 2016. The decrease in cash provided by investing activities was primarily due to lower cash inflows from our accounts receivable securitization and factoring programs, as well as lower proceeds from cash settlements on net investment hedges. Capital expenditures were flat in 2017 compared to 2016. We expect 2018 capital expenditures to be approximately $850 million. The expected decrease is primarily attributed to the wind-up of footprint costs in the U.S. and Canada related to our Integration Program.

Net Cash Provided by/Used for Financing Activities:

Net cash used for financing activities was $4.2 billion for the year ended December 30, 2017 compared to $4.6 billion for the year ended December 31, 2016. The decrease was driven by the benefit of fewer dividend payments in 2017 compared to 2016, which more than offset higher net repayments of long-term debt and commercial paper in 2017 compared to 2016, including cash outflows associated with the redemption of our Series A Preferred Stock in 2016. Dividend payments were lower in 2017 compared to 2016 due to the absence of the Series A Preferred Stock dividend and the impact of four common stock cash distributions in 2017 compared to five such distributions in 2016. See Equity and Dividends for additional information on cash distributions related to common stock and Series A Preferred Stock.

Cash Flow Activity for 2016 compared to 2015:

Net Cash Provided by/Used for Operating Activities:

Net cash provided by operating activities was $2.6 billion in 2016 compared to $1.3 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, as well as favorable changes in accounts payable due to payment term extensions from vendor renegotiations. The increase in cash provided by operating activities was partially offset by lower collections on receivables as more were non-cash exchanged for sold receivables, as well as unfavorable changes in other current liabilities, and to a lesser degree, inventories. The change in other current liabilities was primarily driven by increased payments in 2016 related to income taxes.

Net Cash Provided by/Used for Investing Activities:

Net cash provided by investing activities was $1.5 billion in 2016 compared to net cash used for investing activities of $8.3 billion in 2015. The change was primarily driven by increased cash inflows from our accounts receivable securitization and factoring programs, partially offset by an increase in capital expenditures and lower proceeds from cash settlements on net investment hedges. Capital expenditures increased to $1.2 billion in 2016 primarily due to integration and restructuring activities in the United States. The change also reflected cash paid to acquire Kraft in 2015. See Note 2, Merger and Acquisition, to the consolidated financial statements for additional information on the 2015 Merger.

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 $10.0 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 additional information on cash distributions related to common stock and Series A Preferred Stock.

Cash Held by International Subsidiaries:

Of the $1.6 billion cash and cash equivalents on our consolidated balance sheet at December 30, 2017, $1.1 billion was held by international subsidiaries.

In the future, we could repatriate up to approximately $6.5 billion of international cash to the U.S. without incurring any additional significant income tax expense. Our approximately $5.0 billion of unremitted historic earnings of our foreign subsidiaries was taxed via the U.S. Tax Reform toll charge in 2017. In connection with U.S. Tax Reform, we have also reassessed our international investment assertions and no longer consider these earnings to be indefinitely reinvested. We have made a reasonable estimate of local country withholding taxes that would be owed when our historic earnings are distributed. As a result, we have recorded an estimate of $96 million related to deferred income taxes to reflect local country withholding taxes that will be owed when this cash is distributed. The remaining amount of up to approximately $1.5 billion represents intercompany loans and previously taxed income which could be repatriated to the U.S. without incurring any additional significant income tax expense.

Total Debt:

In 2017, we obtained funding through our U.S. and European commercial paper programs. As of December 30, 2017, we had $448 million of commercial paper outstanding, with a weighted average interest rate of 1.541%. As of December 31, 2016, we had $642 million of commercial paper outstanding, with a weighted average interest rate of 1.074%. The maximum amount of commercial paper outstanding during the year ended December 30, 2017 was $1.2 billion.

We maintain our $4.0 billion senior unsecured revolving credit facility (the “Senior Credit Facility”). 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 Facility contains customary representations, covenants, and events of default. No amounts were drawn on our Senior Credit Facility at December 30, 2017, at December 31, 2016, or during the years ended December 30, 2017, December 31, 2016, and January 3, 2016.

In August 2017, we repaid $600 million aggregate principal amount of our previously outstanding senior unsecured loan facility (the “Term Loan Facility”). Accordingly, there were no amounts outstanding on the Term Loan Facility at December 30, 2017. At December 31, 2016, $600 million aggregate principal amount of our Term Loan Facility was outstanding.

Our long-term debt, including the current portion, was $31.1 billion at December 30, 2017 and $31.8 billion at December 31, 2016. The decrease in long-term debt was primarily due to our June 2017 repayment of approximately $2.0 billion aggregate principal amount of senior notes that matured in the period and our August 2017 repayment of the $600 million aggregate principal amount Term Loan Facility. The decrease was partially offset by approximately $1.5 billion aggregate principal amount of long-term debt issued in August 2017. Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all such covenants at December 30, 2017. See Note 16, Debt, to the consolidated financial statements for additional information.

We have approximately $2.5 billion aggregate principal amount and $C200 million aggregate principal amount of senior notes that will mature in the third quarter of 2018. We expect to fund these long-term debt repayments primarily with new long-term debt issuances, cash on hand, and cash generated from our operating activities.

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 14, Financing Arrangements, to the consolidated financial statements for a discussion of our accounts receivable securitization and factoring programs and other financing arrangements.

Aggregate Contractual Obligations:

The following table summarizes our contractual obligations at December 30, 2017 (in millions):

	Payments Due
	2018			2019-2020			2021-2022			2023 and Thereafter			Total
Long-term debt(a)	3,939			5,653			6,200			32,779			48,571
Capital leases(b)	35			34			64			1			134
Operating leases(c)	103			164			99			165			531
Purchase obligations(d)	1,558			1,251			446			439			3,694
Other long-term liabilities(e)	80			106			94			280			560
Total	5,715			7,208			6,903			33,664			53,490

(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 30, 2017.

(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 estimated payments for the one-time toll charge related to U.S. tax reform, as well as postretirement benefit commitments. Certain other 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. Future payments related to other long-term liabilities decreased primarily due to payments of $1.2 billion in 2017 to pre-fund a portion of our U.S. postretirement plan benefits. See Note 10, Postemployment Benefits, to the consolidated financial statements for additional information.

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 17, Capital Stock, to the consolidated financial statements for additional information.

Pension plan contributions were $330 million in 2017. We estimate that 2018 pension plan contributions will be approximately $50 million. Beyond 2018, we are unable to reliably estimate the timing of contributions to our pension plans. Our actual contributions and plans may change due to many factors, including the timing of regulatory approval for the windup of certain non-U.S. pension plans, changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual pension asset performance or interest rates, or other factors. As such, estimated pension plan contributions for 2018 have been excluded from the above table.

Postretirement benefit plan contributions were $1.3 billion in 2017, including payments of $1.2 billion to pre-fund a portion of our U.S. postretirement plan benefits following enactment of U.S. Tax Reform on December 22, 2017. We estimate that 2018 postretirement benefit plan contributions will be approximately $15 million. Beyond 2018, we are unable to reliably estimate the timing of contributions to our postretirement benefit plans. Our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual postretirement plan asset performance or interest rates, or other factors. As such, estimated postretirement benefit plan contributions for 2018 have been excluded from the above table.

At December 30, 2017, 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 $428 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 Dividends:

On June 7, 2016, we redeemed all outstanding shares of our Series A Preferred Stock. Accordingly, we no longer pay any associated dividends, and there were no such dividend payments in 2017.

Prior to the redemption, we made cash distributions of $180 million in the second quarter of 2016 compared to $900 million in 2015. 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, 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 17, 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 $2.9 billion in 2017, $3.6 billion in 2016, and $1.3 billion in 2015. Additionally, on February 16, 2018, our Board of Directors declared a cash dividend of $0.625 per share of common stock, which is payable on March 23, 2018 to shareholders of record on March 9, 2018.

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 year ended January 3, 2016 is 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 this unaudited pro forma condensed combined statement 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 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

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

Summary of Pro Forma Adjustments

(in millions)

(Unaudited)

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

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 9, Employees’ Stock Incentive Plans, to the consolidated financial statements for additional information on the conversion of Kraft’s equity awards in connection with the 2015 Merger.

(e)	Represents the elimination of 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.

Non-GAAP Financial Measures

The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with 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, and 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, nonmonetary currency devaluation (e.g., remeasurement gains and losses), and U.S. Tax Reform, 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 Net Sales to Organic Net Sales

(dollars in millions)

(Unaudited)

	Net Sales				Impact of Currency				Organic Net Sales				Price		Volume/Mix
2017 (52 weeks)
United States	$	18,353			$	—			$	18,353
Canada	2,190				42				2,148
Europe	2,393				8				2,385
Rest of World	3,296				13				3,283
	$	26,232			$	63			$	26,169
2016 (52 weeks)
United States	$	18,641			$	—			$	18,641
Canada	2,309				—				2,309
Europe	2,366				—				2,366
Rest of World	3,171				55				3,116
	$	26,487			$	55			$	26,432

Year-over-year growth rates
United States	(1.5	)%		0.0 pp		(1.5	)%		0.4 pp		(1.9) pp
Canada	(5.2	)%		1.8 pp		(7.0	)%		(1.7) pp		(5.3) pp
Europe	1.1	%		0.3 pp		0.8	%		(0.9) pp		1.7 pp
Rest of World	3.9	%		(1.5) pp		5.4	%		4.6 pp		0.8 pp
Kraft Heinz	(1.0	)%		0.0 pp		(1.0	)%		0.5 pp		(1.5) pp

The Kraft Heinz Company

Reconciliation of Pro Forma Net Sales to Organic Net Sales

(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 for 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 Income/(Loss) to Adjusted EBITDA

(in millions)

(Unaudited)

	December 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)
Pro forma net income/(loss)(a)	$	10,990			$	3,642			$	1,774
Interest expense	1,234				1,134				1,528
Other expense/(income), net	9				(15		)		289
Provision for/(benefit from) income taxes	(5,460		)		1,381				944
Operating income	6,773				6,142				4,535
Depreciation and amortization (excluding integration and restructuring expenses)	583				536				779
Integration and restructuring expenses	457				1,012				1,117
Merger costs	—				30				194
Unrealized losses/(gains) on commodity hedges	19				(38		)		(41		)
Impairment losses	49				53				58
Losses/(gains) on sale of business	—				—				(21		)
Nonmonetary currency devaluation	—				4				57
Equity award compensation expense (excluding integration and restructuring expenses)	49				39				61
Adjusted EBITDA	$	7,930			$	7,778			$	6,739

(a)	There were no pro forma adjustments for 2017 or 2016, as Kraft and Heinz were a combined company for these periods. 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 30, 2017 (52 weeks)				December 31, 2016 (52 weeks)				January 3, 2016 (53 weeks)
Pro forma diluted EPS(a)	$	8.95			$	2.81			$	0.70
Integration and restructuring expenses(b)(c)	0.26				0.57				0.61
Merger costs(b)(d)	—				0.02				0.49
Unrealized losses/(gains) on commodity hedges(b)(c)	0.01				(0.02		)		(0.02		)
Impairment losses(b)(c)	0.03				0.03				0.03
Losses/(gains) on sale of business(b)(c)	—				—				(0.01		)
Nonmonetary currency devaluation(b)(e)	0.03				0.02				0.24
Preferred dividend adjustment(f)	—				(0.10		)		0.15
U.S. Tax Reform(g)	(5.73		)		—				—
Adjusted EPS	$	3.55			$	3.33			$	2.19

(a)	There were no pro forma adjustments for 2017 or 2016, as Kraft and Heinz were a combined company for these periods. 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 assessments of individual items.

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

(d)	Merger costs included 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 2017);

•	Expenses recorded in SG&A were $28 million in 2016 and $188 million in 2015 (there were no such expenses in 2017);

•	Expenses recorded in interest expense were $466 million in 2015 (there were no such expenses in 2017 or 2016); and,

•	Expenses recorded in other expense/(income), net, were $144 million in 2015 (there were no such expenses in 2017 or 2016).

(e)	Nonmonetary currency devaluation included the following gross expenses:

•	Expenses recorded in cost of products sold were $4 million in 2016 and $57 million in 2015 (there were no such expenses in 2017); and

•	Expenses recorded in other expense/(income), net, were $36 million in 2017, $24 million in 2016, and $234 million in 2015.

(f)

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).

(g)	U.S. Tax Reform included a tax benefit of $7.0 billion in 2017 related to enactment of the Tax Cuts and Jobs Act by the U.S. government on December 22, 2017. There were no such expenses in 2016 or 2015. See Overview at the beginning of this item for additional information.