Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Description of the Company:

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

We manage and report our operating results through 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 fourth quarter of 2016, we reorganized our segments to reflect the following:

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

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

These changes are reflected in all historical periods presented and did not have a material impact on our condensed consolidated financial statements. See Note 18, Segment Reporting, to our consolidated financial statements for the year ended December 31, 2016 in our Annual Report on Form 10-K for additional information related to these changes.

Items Affecting Comparability of Financial Results

Integration and Restructuring Expenses:

Related to integration and restructuring activities (including the multi-year Integration Program announced following the 2015 Merger), we recognized gains of $6 million for the three months and expenses of $142 million for the six months ended July 1, 2017 and expenses of $284 million for the three months and $544 million for the six months ended July 3, 2016. Integration Program amounts included in these totals were gains of $49 million for the three months and expenses of $78 million for the six months ended July 1, 2017 and expenses of $259 million for the three months and $500 million for the six months ended July 3, 2016.

The gains of $6 million (total integration and restructuring) and $49 million (Integration Program) in the current period were driven by a curtailment gain of $168 million, which was classified as Integration Program expenses and more than offset other such expenses for the period. The curtailment gain resulted from postretirement plan remeasurements. These remeasurements were triggered by the number of cumulative headcount reductions after the closure of certain U.S. factories in the second quarter of 2017.

We expect to incur pre-tax costs of $2.0 billion related to the Integration Program. As of July 1, 2017, we have incurred cumulative costs of $1.8 billion. These costs primarily include severance and employee benefit costs (including cash and non-cash severance), costs to exit facilities (including non-cash costs such as accelerated depreciation), and other costs incurred as a direct result of integration activities related to the 2015 Merger.

Additionally, we anticipate capital expenditures of approximately $1.3 billion related to the Integration Program. As of July 1, 2017, we have incurred $1.2 billion in capital expenditures since the inception of the Integration Program. The Integration Program is designed to reduce costs, integrate, and optimize our combined organization and is expected to achieve $1.7 billion of pre-tax savings by the end of 2017, primarily benefiting the United States and Canada segments. Since the inception of the Integration Program, our cumulative pre-tax savings achieved are approximately $1,450 million.

See Note 2, Integration and Restructuring Expenses, to the condensed consolidated financial statements for additional information.

Series A Preferred Stock:

On June 7, 2016, we redeemed all outstanding shares of our Series A Preferred Stock. 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.

Results of Operations

We disclose in this report certain non-GAAP financial measures. These non-GAAP financial measures assist management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our underlying operations. For additional information and reconciliations from our condensed consolidated financial statements see Non-GAAP Financial Measures.

Consolidated Results of Operations

Summary of Results:

	For the Three Months Ended											For the Six Months Ended
	July 1, 2017				July 3, 2016				% Change			July 1, 2017				July 3, 2016				% Change
	(in millions, except per share data)											(in millions, except per share data)
Net sales	$	6,677			$	6,793			(1.7	)%		$	13,041			$	13,363			(2.4	)%
Operating income	1,921				1,636				17.5	%		3,472				3,149				10.3	%
Net income/(loss) attributable to common shareholders	1,159				770				50.5	%		2,052				1,666				23.2	%
Diluted earnings/(loss) per share	0.94				0.63				49.2	%		1.67				1.36				22.8	%

Net Sales:

	For the Three Months Ended											For the Six Months Ended
	July 1, 2017				July 3, 2016				% Change			July 1, 2017				July 3, 2016				% Change
	(in millions)											(in millions)
Net sales	$	6,677			$	6,793			(1.7	)%		$	13,041			$	13,363			(2.4	)%
Organic Net Sales(a)	6,726				6,784				(0.9	)%		13,105				13,341				(1.8	)%

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

Three Months Ended July 1, 2017 compared to the Three Months Ended July 3, 2016:

Net sales decreased 1.7% to $6.7 billion for the three months ended July 1, 2017 compared to the prior period, partially due to the unfavorable impact of foreign currency (0.8 pp). Organic Net Sales decreased 0.9% due to unfavorable volume/mix (0.5 pp) and lower pricing (0.4 pp). Volume/mix was unfavorable in the U.S. and Rest of World, which was partially offset by growth in Europe and Canada. Lower pricing in Canada, the U.S., and Europe, was partially offset by higher pricing in Rest of World.

Six Months Ended July 1, 2017 compared to the Six Months Ended July 3, 2016:

Net sales decreased 2.4% to $13.0 billion for the six months ended July 1, 2017 compared to the prior period, partially due to the unfavorable impact of foreign currency (0.6 pp). Organic Net Sales decreased 1.8% due to unfavorable volume/mix (2.1 pp), partially offset by higher pricing (0.3 pp). Volume/mix was unfavorable in the U.S. and Canada, which was partially offset by growth in Rest of World and Europe. Higher pricing in Rest of World and the U.S. was partially offset by lower pricing in Canada and Europe.

Net Income:

	For the Three Months Ended											For the Six Months Ended
	July 1, 2017				July 3, 2016				% Change			July 1, 2017				July 3, 2016				% Change
	(in millions)											(in millions)
Operating income	$	1,921			$	1,636			17.5	%		$	3,472			$	3,149			10.3	%
Net income/(loss) attributable to common shareholders	1,159				770				50.5	%		2,052				1,666				23.2	%
Adjusted EBITDA(a)	2,101				2,087				0.7	%		3,986				4,038				(1.3	)%

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

Three Months Ended July 1, 2017 compared to the Three Months Ended July 3, 2016:

Operating income increased 17.5% to $1.9 billion for the three months ended July 1, 2017 compared to $1.6 billion in the prior period. This increase was primarily due to lower Integration Program and other restructuring expenses in the current period, and improved commercial results, partially offset by lower unrealized gains on commodity hedges in the current period, and the unfavorable impact from foreign currency (1.3 pp).

Net income/(loss) attributable to common shareholders increased 50.5% to $1.2 billion for the three months ended July 1, 2017 compared to $770 million in the prior period. The increase was due to the growth in operating income, the absence of the Series A Preferred Stock dividend in the current period, and a lower effective tax rate, partially offset by higher interest expense and higher other expense/(income), net, detailed as follows:

•	The Series A Preferred Stock was fully redeemed on June 7, 2016. Accordingly, for the three months ended July 1, 2017 there were no cash distributions for the related dividend, compared to cash distributions of $180 million in the prior period.

•	Interest expense increased to $307 million for the three months ended July 1, 2017 compared to $264 million in the prior period. This increase was primarily due to the May 2016 issuances of long-term debt in conjunction with the redemption of our Series A Preferred Stock on June 7, 2016, and borrowings under our commercial paper program, which began in the second quarter of 2016.

•	Other expense/(income), net increased to $24 million for the three months ended July 1, 2017 compared to $6 million in the prior period. This increase was primarily due to a $25 million nonmonetary devaluation loss in the current period compared to $7 million in the prior period related to our Venezuelan operations.

•

Our effective tax rate decreased to 27.1% for the three months ended July 1, 2017 compared to 30.1% in the prior period. The decrease in our effective tax rate was driven by the favorable impact of net discrete items, primarily related to reversals of uncertain tax position reserves in the U.S., and a favorable mix of income among our foreign subsidiaries. The favorable impact of current year net discrete items and foreign subsidiary income mix was partially offset by the unfavorable impact of a higher percentage of U.S. income reflected in our estimated full year effective tax rate for 2017 compared to 2016.

Adjusted EBITDA increased 0.7% to $2.1 billion for the three months ended July 1, 2017 compared to the prior period, primarily due to savings from the Integration Program and other restructuring activities, partially offset by higher input costs in local currency, a decline in Organic Net Sales, the unfavorable impact of foreign currency (1.2 pp), and higher commercial investments. Segment Adjusted EBITDA results were as follows:

•	United States Segment Adjusted EBITDA increased primarily due to Integration Program savings, partially offset by unfavorable key commodity costs (which we define as dairy, meat, coffee and nuts), primarily in cheese and coffee, and a decline in Organic Net Sales.

•	Rest of World Segment Adjusted EBITDA decreased primarily due to higher commercial investments, higher input costs in local currency, and the unfavorable impact of foreign currency (3.0 pp), partially offset by Organic Net Sales growth.

•	Europe Segment Adjusted EBITDA decreased primarily due to higher input costs in local currency, the unfavorable impact of foreign currency (6.2 pp), and lower pricing, partially offset by productivity savings.

•	Canada Segment Adjusted EBITDA decreased primarily due to lower pricing and the unfavorable impact of foreign currency (3.5 pp), partially offset by Integration Program savings.

Six Months Ended July 1, 2017 compared to the Six Months Ended July 3, 2016:

Operating income increased 10.3% to $3.5 billion for the six months ended July 1, 2017 compared to $3.1 billion in the prior period. This increase was primarily due to lower Integration Program and other restructuring expenses in the current period, partially offset by lower unrealized gains on commodity hedges in the current period, the unfavorable impact of foreign currency (1.2 pp), and lower commercial results.

Net income/(loss) attributable to common shareholders increased 23.2% to $2.1 billion for the six months ended July 1, 2017 compared to $1.7 billion in the prior period. The increase was due to the growth in operating income, the absence of the Series A Preferred Stock dividend in the current period, and a lower effective tax rate, partially offset by higher interest expense and higher other expense/(income), net, detailed as follows:

•	The Series A Preferred Stock was fully redeemed on June 7, 2016. Accordingly, for the six months ended July 1, 2017 there were no cash distributions for the related dividend, compared to cash distributions of $180 million in the prior period.

•	Interest expense increased to $620 million for the six months ended July 1, 2017 compared to $513 million in the prior period. This increase was primarily due to the May 2016 issuances of long-term debt in conjunction with the redemption of our Series A Preferred Stock on June 7, 2016, and borrowings under our commercial paper program, which began in the second quarter of 2016.

•	Other expense/(income), net increased to $12 million of expense for the six months ended July 1, 2017 compared to $2 million of income in the prior period. This increase was primarily due to a $33 million nonmonetary devaluation loss in the current period compared to $7 million in the prior period related to our Venezuelan operations.

•

Our effective tax rate decreased to 27.8% for the six months ended July 1, 2017 compared to 29.7% in the prior period. The decrease in our effective tax rate was driven by the favorable impact of net discrete items, primarily related to reversals of uncertain tax position reserves in foreign jurisdictions and the U.S., and a favorable mix of income among our foreign subsidiaries. The favorable impact of current year net discrete items and foreign subsidiary income mix was partially offset by the unfavorable impact of a higher percentage of U.S. income reflected in our estimated full year effective tax rate for 2017 compared to 2016.

Adjusted EBITDA decreased 1.3% to $4.0 billion for the six months ended July 1, 2017 compared to the prior period, primarily due to higher local input costs, a decline in Organic Net Sales, and the unfavorable impact of foreign currency (1.1 pp), partially offset by savings from the Integration Program and other restructuring activities. Segment Adjusted EBITDA results were as follows:

•	Rest of World Segment Adjusted EBITDA decreased primarily due to increased commercial investments, higher input costs in local currency, and the unfavorable impact of foreign currency (2.9 pp), partially offset by Organic Net Sales growth.

•	Europe Segment Adjusted EBITDA decreased primarily due to higher input costs in local currency, and the unfavorable impact of foreign currency (7.9 pp), partially offset by productivity savings.

•	Canada Segment Adjusted EBITDA decreased primarily due to a decline in Organic Net Sales, and the unfavorable impact of foreign currency (1.0 pp), partially offset by Integration Program savings.

•	United States Segment Adjusted EBITDA increased primarily due to Integration Program savings, partially offset by unfavorable key commodity costs, primarily in cheese, coffee, and meat, and volume/mix declines.

Diluted EPS:

	For the Three Months Ended											For the Six Months Ended
	July 1, 2017				July 3, 2016				% Change			July 1, 2017				July 3, 2016				% Change
	(in millions, except per share data)											(in millions, except per share data)
Diluted EPS	$	0.94			$	0.63			49.2	%		$	1.67			$	1.36			22.8	%
Adjusted EPS(a)	0.98				0.85				15.3	%		1.82				1.58				15.2	%

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

Three Months Ended July 1, 2017 compared to the Three Months Ended July 3, 2016:

Diluted EPS increased 49.2% to $0.94 for the three months ended July 1, 2017 compared to $0.63 in the prior period, primarily driven by the net income/(loss) attributable to common shareholders factors discussed above.

	For the Three Months Ended
	July 1, 2017				July 3, 2016				$ Change				% Change
Diluted EPS	$	0.94			$	0.63			$	0.31			49.2	%
Integration and restructuring expenses	—				0.16				(0.16		)
Merger costs	—				0.01				(0.01		)
Unrealized losses/(gains) on commodity hedges	(0.01		)		(0.02		)		0.01
Impairment losses	0.03				0.03				—
Nonmonetary currency devaluation	0.02				—				0.02
Preferred dividend adjustment(a)	—				0.04				(0.04		)
Adjusted EPS(b)	$	0.98			$	0.85			$	0.13			15.3	%
Key drivers of change in Adjusted EPS(b):
Results of operations									$	—
Change in preferred dividends									0.10
Change in interest expense									(0.02		)
Change in effective tax rate and other									0.05
									$	0.13

(a)	For Adjusted EPS, we present the impact of the Series A Preferred Stock dividend payments on an accrual basis. Accordingly, we included an adjustment to EPS to exclude $51 million of Series A Preferred Stock dividends from the second quarter of 2016 (to reflect that it had been redeemed on June 7, 2016).

(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 15.3% to $0.98 for the three months ended July 1, 2017, compared to $0.85 in the prior period, primarily driven by the absence of a Series A Preferred Stock dividend in the current period and a lower effective tax rate, partially offset by higher interest expense.

Six Months Ended July 1, 2017 compared to the Six Months Ended July 3, 2016:

Diluted EPS increased 22.8% to $1.67 for the six months ended July 1, 2017 compared to $1.36 in the prior period, primarily driven by the net income/(loss) attributable to common shareholders factors discussed above.

	For the Six Months Ended
	July 1, 2017				July 3, 2016				$ Change				% Change
Diluted EPS	$	1.67			$	1.36			$	0.31			22.8	%
Integration and restructuring expenses	0.08				0.30				(0.22		)
Merger costs	—				0.02				(0.02		)
Unrealized losses/(gains) on commodity hedges	0.01				(0.03		)		0.04
Impairment losses	0.03				0.03				—
Nonmonetary currency devaluation	0.03				0.01				0.02
Preferred dividend adjustment(a)	—				(0.11		)		0.11
Adjusted EPS(b)	$	1.82			$	1.58			$	0.24			15.2	%
Key drivers of change in Adjusted EPS(b):
Results of operations									$	(0.02	)
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									0.06
									$	0.24

(a)

For Adjusted EPS, we present the impact of the Series A Preferred Stock dividend payments on an accrual basis. Accordingly, we included an adjustment to EPS to include $180 million of Series A Preferred Stock dividends in the first quarter of 2016 (to reflect the March 7, 2016 Series A Preferred Stock dividend that was paid in December 2015), 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).

(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 15.2% to $1.82 for the six months ended July 1, 2017 compared to $1.58 in the prior period, primarily driven by the absence of a Series A Preferred Stock dividend in the current period, a lower effective tax rate, and higher other expense/(income), net, partially offset by higher interest expense and lower Adjusted EBITDA.

Results of Operations by Segment

Management evaluates segment performance based on several factors, including net sales, Organic Net Sales, and Segment Adjusted EBITDA. Management uses Segment Adjusted EBITDA to evaluate segment performance and allocate resources. Segment Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations. These items include depreciation and amortization (including amortization of postretirement benefit plans prior service credits), equity award compensation expense, integration and restructuring expenses, merger costs, unrealized gains/(losses) on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results), impairment losses, gains/(losses) on the sale of a business, and nonmonetary currency devaluation (e.g., remeasurement gains and losses).

Net Sales:

	For the Three Months Ended								For the Six Months Ended
	July 1, 2017				July 3, 2016				July 1, 2017				July 3, 2016
	(in millions)
Net sales:
United States	$	4,634			$	4,692			$	9,186			$	9,407
Canada	597				638				1,040				1,142
Europe	595				625				1,138				1,208
Rest of World	851				838				1,677				1,606
Total net sales	$	6,677			$	6,793			$	13,041			$	13,363

Organic Net Sales:

	For the Three Months Ended								For the Six Months Ended
	July 1, 2017				July 3, 2016				July 1, 2017				July 3, 2016
	(in millions)
Organic Net Sales(a):
United States	$	4,634			$	4,692			$	9,186			$	9,407
Canada	618				638				1,047				1,142
Europe	620				625				1,202				1,208
Rest of World	854				829				1,670				1,584
Total Organic Net Sales	$	6,726			$	6,784			$	13,105			$	13,341

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

Drivers of the changes in net sales and Organic Net Sales were:

	Net Sales			Impact of Currency		Organic Net Sales			Price		Volume/Mix
Three Months Ended July 1, 2017 compared to Three Months Ended July 3, 2016
United States	(1.2	)%		0.0 pp		(1.2	)%		(0.4) pp		(0.8) pp
Canada	(6.4	)%		(3.3) pp		(3.1	)%		(3.7) pp		0.6 pp
Europe	(4.9	)%		(4.1) pp		(0.8	)%		(1.6) pp		0.8 pp
Rest of World	1.6	%		(1.4) pp		3.0	%		3.7 pp		(0.7) pp
Kraft Heinz	(1.7	)%		(0.8) pp		(0.9	)%		(0.4) pp		(0.5) pp
Six Months Ended July 1, 2017 compared to Six Months Ended July 3, 2016
United States	(2.4	)%		0.0 pp		(2.4	)%		0.1 pp		(2.5) pp
Canada	(8.9	)%		(0.6) pp		(8.3	)%		(2.5) pp		(5.8) pp
Europe	(5.8	)%		(5.3) pp		(0.5	)%		(1.1) pp		0.6 pp
Rest of World	4.4	%		(1.0) pp		5.4	%		4.3 pp		1.1 pp
Kraft Heinz	(2.4	)%		(0.6) pp		(1.8	)%		0.3 pp		(2.1) pp

Adjusted EBITDA:

	For the Three Months Ended								For the Six Months Ended
	July 1, 2017				July 3, 2016				July 1, 2017				July 3, 2016
	(in millions)
Segment Adjusted EBITDA:
United States	$	1,566			$	1,518			$	3,038			$	3,011
Canada	189				192				315				343
Europe	202				221				372				401
Rest of World	180				202				326				368
General corporate expenses	(36		)		(46		)		(65		)		(85		)
Depreciation and amortization (excluding integration and restructuring expenses)	(137		)		(124		)		(269		)		(285		)
Integration and restructuring expenses	6				(284		)		(142		)		(544		)
Merger costs	—				(14		)		—				(29		)
Unrealized gains/(losses) on commodity hedges	13				37				(29		)		45
Impairment losses	(48		)		(53		)		(48		)		(53		)
Nonmonetary currency devaluation	—				(2		)		—				(3		)
Equity award compensation expense (excluding integration and restructuring expenses)	(14		)		(11		)		(26		)		(20		)
Operating income	1,921				1,636				3,472				3,149
Interest expense	307				264				620				513
Other expense/(income), net	24				6				12				(2		)
Income/(loss) before income taxes	$	1,590			$	1,366			$	2,840			$	2,638

United States:

	For the Three Months Ended											For the Six Months Ended
	July 1, 2017				July 3, 2016				% Change			July 1, 2017				July 3, 2016				% Change
	(in millions)											(in millions)
Net sales	$	4,634			$	4,692			(1.2	)%		$	9,186			$	9,407			(2.4	)%
Organic Net Sales(a)	4,634				4,692				(1.2	)%		9,186				9,407				(2.4	)%
Segment Adjusted EBITDA	1,566				1,518				3.2	%		3,038				3,011				0.9	%

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

Three Months Ended July 1, 2017 compared to the Three Months Ended July 3, 2016:

Net sales and Organic Net Sales decreased 1.2% to $4.6 billion due to unfavorable volume/mix (0.8 pp) and lower pricing (0.4 pp). Unfavorable volume/mix was primarily driven by distribution losses in cheese and meat and lower shipments in foodservice. The decline was partially offset by the benefit from a shift in Easter-related sales as well as gains in frozen, boxed dinners, and condiments and sauces. Pricing was lower primarily due to timing of trade promotion recognition in the prior period, partially offset by current year price increases in cheese.

Segment Adjusted EBITDA increased 3.2% primarily due to Integration Program savings, partially offset by unfavorable key commodity costs, primarily in cheese and coffee, and lower Organic Net Sales.

Six Months Ended July 1, 2017 compared to the Six Months Ended July 3, 2016:

Net sales and Organic Net Sales decreased 2.4% to $9.2 billion due to unfavorable volume/mix (2.5 pp) partially offset by higher pricing (0.1 pp). Unfavorable volume/mix was primarily driven by distribution losses in cheese and meat, lower shipments in foodservice, and declines in nuts. The decline was partially offset by gains in refrigerated meal combinations, boxed dinners, and frozen meals. Higher pricing primarily reflected current year price increases in cheese, partially offset by timing of trade promotion recognition in the prior period.

Segment Adjusted EBITDA increased 0.9% primarily due to Integration Program savings, partially offset by unfavorable key commodity costs, primarily in cheese, coffee, and meat, and volume/mix declines.

Canada:

	For the Three Months Ended											For the Six Months Ended
	July 1, 2017				July 3, 2016				% Change			July 1, 2017				July 3, 2016				% Change
	(in millions)											(in millions)
Net sales	$	597			$	638			(6.4	)%		$	1,040			$	1,142			(8.9	)%
Organic Net Sales(a)	618				638				(3.1	)%		1,047				1,142				(8.3	)%
Segment Adjusted EBITDA	189				192				(1.2	)%		315				343				(8.0	)%

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

Three Months Ended July 1, 2017 compared to the Three Months Ended July 3, 2016:

Net sales decreased 6.4% to $597 million, including the unfavorable impact of foreign currency (3.3 pp). Organic Net Sales decreased 3.1% due to lower pricing (3.7 pp) partially offset by favorable volume/mix (0.6 pp). Pricing was lower across most categories primarily due to higher promotional levels versus the prior period. Favorable volume/mix reflected growth in condiments and sauces, partially offset by retail distribution losses (primarily in cheese).

Segment Adjusted EBITDA decreased 1.2%, including the unfavorable impact of foreign currency (3.5 pp). Excluding the currency impact, Segment Adjusted EBITDA increased primarily due to Integration Program savings, partially offset by lower pricing.

Six Months Ended July 1, 2017 compared to the Six Months Ended July 3, 2016:

Net sales decreased 8.9% to $1.0 billion, including the unfavorable impact of foreign currency (0.6 pp). Organic Net Sales decreased 8.3% due to unfavorable volume/mix (5.8 pp) and lower pricing (2.5 pp). Volume/mix was unfavorable across most categories and was most pronounced in cheese and coffee, primarily due to delayed execution of go-to-market agreements with key retailers and retail distribution losses (primarily in cheese). Lower pricing was primarily due to higher promotional levels versus the prior period.

Segment Adjusted EBITDA decreased 8.0%, including the unfavorable impact of foreign currency (1.0 pp). Excluding the currency impact, the decrease was primarily due to lower Organic Net Sales, partially offset by Integration Program savings.

Europe:

	For the Three Months Ended											For the Six Months Ended
	July 1, 2017				July 3, 2016				% Change			July 1, 2017				July 3, 2016				% Change
	(in millions)											(in millions)
Net sales	$	595			$	625			(4.9	)%		$	1,138			$	1,208			(5.8	)%
Organic Net Sales(a)	620				625				(0.8	)%		1,202				1,208				(0.5	)%
Segment Adjusted EBITDA	202				221				(8.6	)%		372				401				(7.2	)%

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

Three Months Ended July 1, 2017 compared to the Three Months Ended July 3, 2016:

Net sales decreased 4.9% to $595 million, including the unfavorable impact of foreign currency (4.1 pp). Organic Net Sales decreased 0.8% due to lower pricing (1.6 pp) partially offset by favorable volume/mix (0.8 pp). Lower pricing was primarily due to higher promotional activity, primarily in the UK and Italy, versus the prior period. Favorable volume/mix was driven primarily by growth in condiments and sauces and higher shipments in foodservice, partially offset by shipment timing versus the prior period, and declines in infant nutrition in Italy.

Segment Adjusted EBITDA decreased 8.6%, including the unfavorable impact of foreign currency (6.2 pp). Excluding the currency impact, the decrease was primarily due to higher input costs in local currency and lower pricing, partially offset by productivity savings.

Six Months Ended July 1, 2017 compared to the Six Months Ended July 3, 2016:

Net sales decreased 5.8% to $1.1 billion, including the unfavorable impact of foreign currency (5.3 pp). Organic Net Sales decreased 0.5% due to lower pricing (1.1 pp) partially offset by favorable volume/mix (0.6 pp). Lower pricing was primarily due to higher promotional activity in the UK and Italy versus the prior period. Favorable volume/mix was driven by higher shipments in foodservice and growth in condiments and sauces, partially offset by declines in infant nutrition in Italy.

Segment Adjusted EBITDA decreased 7.2%, including the unfavorable impact of foreign currency (7.9 pp). Excluding the currency impact, Segment Adjusted EBITDA increased primarily due to productivity savings partially offset by higher input costs in local currency.

Rest of World:

	For the Three Months Ended											For the Six Months Ended
	July 1, 2017				July 3, 2016				% Change			July 1, 2017				July 3, 2016				% Change
	(in millions)											(in millions)
Net sales	$	851			$	838			1.6	%		$	1,677			$	1,606			4.4	%
Organic Net Sales(a)	854				829				3.0	%		1,670				1,584				5.4	%
Segment Adjusted EBITDA	180				202				(11.6	)%		326				368				(11.7	)%

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

Three Months Ended July 1, 2017 compared to the Three Months Ended July 3, 2016:

Net sales increased 1.6% to $851 million despite the unfavorable impact of foreign currency (1.4 pp). Organic Net Sales increased 3.0% driven by higher pricing (3.7 pp), partially offset by unfavorable volume/mix (0.7 pp). Higher pricing was primarily driven by pricing actions taken to offset higher input costs in local currency, primarily in Latin America. Unfavorable volume/mix was primarily driven by lower shipments in India (following implementation of the goods and services tax and continued deterioration of nutritional beverages), unfavorable shipment timing on seasonal holiday categories in Indonesia, and declines in several markets associated with distributor network re-alignment. These volume/mix declines were partially offset by growth in condiments and sauces across the regions.

Segment Adjusted EBITDA decreased 11.6%, including the unfavorable impact of foreign currency (3.0 pp). Excluding the currency impact, Segment Adjusted EBITDA decreased primarily due to higher commercial investments, and higher input costs in local currency, partially offset by Organic Net Sales growth.

Six Months Ended July 1, 2017 compared to the Six Months Ended July 3, 2016:

Net sales increased 4.4% to $1.7 billion despite the unfavorable impact of foreign currency (1.0 pp). Organic Net Sales increased 5.4% driven by higher pricing (4.3 pp) and favorable volume/mix (1.1 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 the region, partially offset by volume/mix declines in several markets associated with distributor network re-alignment.

Segment Adjusted EBITDA decreased 11.7%, including the unfavorable impact of foreign currency (2.9 pp). Excluding the currency impact, Segment Adjusted EBITDA decreased primarily due to higher commercial investments, and higher input costs in local currency, partially offset by Organic Net Sales growth.

Liquidity and Capital Resources

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

Cash Flow Activity for 2017 compared to 2016:

Net Cash Provided by/Used for Operating Activities:

Net cash used for operating activities was $178 million for the six months ended July 1, 2017 compared to net cash provided by operating activities of $899 million for the six months ended July 3, 2016. The change was primarily driven by the timing of payments related to customer promotional activities, income taxes, and employee bonuses, lower collections on trade receivables as more were non-cash exchanged for sold receivables, and increased inventory costs, primarily driven by higher key commodity costs in the U.S. These changes were partially offset by lower pension contributions in the current year.

Net Cash Provided by/Used for Investing Activities:

Net cash provided by investing activities was $423 million for the six months ended July 1, 2017 compared to $753 million for the six months ended July 3, 2016. The decrease in cash provided by investing activities was primarily due to increased capital expenditures of $176 million as well as lower cash inflows from our accounts receivable securitization and factoring programs. The increase in capital expenditures was primarily due to increased integration and restructuring activities in the U.S. and Canada. We expect 2017 capital expenditures to be approximately $1.2 billion, including capital expenditures required for our ongoing integration and restructuring activities.

Net Cash Provided by/Used for Financing Activities:

Net cash used for financing activities was $3.0 billion for the six months ended July 1, 2017 compared to $2.2 billion for the six months ended July 3, 2016. This increase was primarily driven by long-term debt repayments in the second quarter of 2017 and increased cash distributions related to common stock dividends. Together, these items exceeded prior year net cash outflows related to our Series A Preferred Stock redemption and the related preferred dividend payments prior to redemption on June 7, 2016. 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 for further information on our Series A Preferred Stock dividends and common stock dividends.

Cash Held by International Subsidiaries:

Of the $1.4 billion cash and cash equivalents on our condensed consolidated balance sheet at July 1, 2017, $0.9 billion was held by international subsidiaries.

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

Certain previously taxed earnings have not yet been remitted and certain intercompany loans have not yet been repaid. As a result, in future periods, we believe that we could remit up to approximately $2.0 billion of cash to the U.S. without incurring any additional significant income tax expense.

Total Debt:

We had commercial paper outstanding of $1.1 billion at July 1, 2017 and $642 million at December 31, 2016. The maximum amount of commercial paper outstanding during the six months ended July 1, 2017 was not significantly different than the amount outstanding at July 1, 2017.

We maintain our Senior Credit Facilities (as defined below) comprised of our $4.0 billion senior unsecured revolving credit facility (the “Revolving Credit Facility”) and a $600 million senior unsecured loan facility (the “Term Loan Facility” and, together with the Revolving Credit Facility, the “Senior Credit Facilities”). Subject to certain conditions, we may increase the amount of revolving commitments and/or add additional tranches of term loans in a combined aggregate amount of up to $1.0 billion. Our Senior Credit Facilities contain customary representations, covenants, and events of default. At July 1, 2017, $600 million aggregate principal amount of our Term Loan Facility was outstanding. No amounts were drawn on our Revolving Credit Facility at July 1, 2017 or during the six months ended July 1, 2017.

Our long-term debt, including the current portion, was $30.0 billion at July 1, 2017 and $31.8 billion at December 31, 2016. The decrease in long-term debt was primarily due to our repayment of approximately $2.0 billion aggregate principal amount of senior notes that matured in the second quarter of 2017. We funded these long-term debt repayments primarily with cash on hand and our commercial paper programs. Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all such covenants at July 1, 2017.

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 as dairy, meat, coffee, and nuts. During the six months ended July 1, 2017, we experienced increases in our key commodities, including cheese, coffee, and meat, while costs for nuts were flat. We expect commodity cost volatility to continue over the remainder of the year. 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.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

We repaid $2.0 billion aggregate principal amount of senior notes that matured in the second quarter of 2017. We funded these long-term debt repayments primarily with cash on hand and our commercial paper programs.

There were no other material changes to our off-balance sheet arrangements or aggregate contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Equity and Dividends

Series A Preferred Stock Dividends:

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

Prior to the redemption, we made cash distributions of $180 million in the six months ended July 3, 2016 related to the Series A Preferred Stock dividend. There were no cash distributions related to our Series A Preferred Stock for the three months ended April 3, 2016 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.

Common Stock Dividends:

We paid common stock dividends of $1.4 billion for the six months ended July 1, 2017 and $1.3 billion for the six months ended July 3, 2016. Additionally, on August 3, 2017, our Board of Directors declared a cash dividend of $0.625 per share of common stock, which is payable on September 15, 2017 to shareholders of record on August 18, 2017.

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.

Significant Accounting Estimates

We prepare our condensed consolidated financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments, and assumptions. Our significant accounting policies are described in Note 1, Background and Basis of Presentation, to our consolidated financial statements for the year ended December 31, 2016 in our Annual Report on Form 10-K. Our significant accounting assumptions and estimates are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2016 in our Annual Report on Form 10-K.

Recently Issued Accounting Standards

See Note 1, Background and Basis of Presentation, to the condensed consolidated financial statements for a discussion of recently issued accounting standards.

Contingencies

See Note 13, Commitments, Contingencies and Debt, to the condensed consolidated financial statements for a discussion of our contingencies.

Non-GAAP Financial Measures

Our non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with 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, 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 is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

Adjusted EBITDA is defined as net income/(loss) from continuing operations before interest expense, other expense/(income), net, provision for/(benefit from) income taxes; in addition to these adjustments, we exclude, when they occur, the impacts of depreciation and amortization (excluding integration and restructuring expenses) (including amortization of postretirement benefit plans prior service credits), integration and restructuring expenses, merger costs, unrealized losses/(gains) on commodity hedges, impairment losses, losses/(gains) on the sale of a business, nonmonetary currency devaluation (e.g., remeasurement gains and losses), and equity award compensation expense (excluding integration and restructuring expenses). Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

Adjusted EPS is defined as diluted earnings per share excluding, when they occur, the impacts of integration and restructuring expenses, merger costs, unrealized losses/(gains) on commodity hedges, impairment losses, losses/(gains) on the sale of a business, and nonmonetary currency devaluation (e.g., remeasurement gains and losses), and including when they occur, adjustments to reflect preferred stock dividend payments on an accrual basis. 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

For the Three Months Ended July 1, 2017 and July 3, 2016

(dollars in millions)

(Unaudited)

	Net Sales				Impact of Currency				Organic Net Sales				Price		Volume/Mix
July 1, 2017
United States	$	4,634			$	—			$	4,634
Canada	597				(21		)		618
Europe	595				(25		)		620
Rest of World	851				(3		)		854
	$	6,677			$	(49	)		$	6,726
July 3, 2016
United States	$	4,692			$	—			$	4,692
Canada	638				—				638
Europe	625				—				625
Rest of World	838				9				829
	$	6,793			$	9			$	6,784

Year-over-year growth rates
United States	(1.2	)%		0.0 pp		(1.2	)%		(0.4) pp		(0.8) pp
Canada	(6.4	)%		(3.3) pp		(3.1	)%		(3.7) pp		0.6 pp
Europe	(4.9	)%		(4.1) pp		(0.8	)%		(1.6) pp		0.8 pp
Rest of World	1.6	%		(1.4) pp		3.0	%		3.7 pp		(0.7) pp
Kraft Heinz	(1.7	)%		(0.8) pp		(0.9	)%		(0.4) pp		(0.5) pp

The Kraft Heinz Company

Reconciliation of Net Sales to Organic Net Sales

For the Six Months Ended July 1, 2017 and July 3, 2016

(dollars in millions)

(Unaudited)

	Net Sales				Impact of Currency				Organic Net Sales				Price		Volume/Mix
July 1, 2017
United States	$	9,186			$	—			$	9,186
Canada	1,040				(7		)		1,047
Europe	1,138				(64		)		1,202
Rest of World	1,677				7				1,670
	$	13,041			$	(64	)		$	13,105
July 3, 2016
United States	$	9,407			$	—			$	9,407
Canada	1,142				—				1,142
Europe	1,208				—				1,208
Rest of World	1,606				22				1,584
	$	13,363			$	22			$	13,341

Year-over-year growth rates
United States	(2.4	)%		0.0 pp		(2.4	)%		0.1 pp		(2.5) pp
Canada	(8.9	)%		(0.6) pp		(8.3	)%		(2.5) pp		(5.8) pp
Europe	(5.8	)%		(5.3) pp		(0.5	)%		(1.1) pp		0.6 pp
Rest of World	4.4	%		(1.0) pp		5.4	%		4.3 pp		1.1 pp
Kraft Heinz	(2.4	)%		(0.6) pp		(1.8	)%		0.3 pp		(2.1) pp

The Kraft Heinz Company

Reconciliation of Net Income/(Loss) to Adjusted EBITDA

(in millions)

(Unaudited)

	For the Three Months Ended								For the Six Months Ended
	July 1, 2017				July 3, 2016				July 1, 2017				July 3, 2016
Net income/(loss)	$	1,160			$	955			$	2,051			$	1,855
Interest expense	307				264				620				513
Other expense/(income), net	24				6				12				(2		)
Provision for/(benefit from) income taxes	430				411				789				783
Operating income	1,921				1,636				3,472				3,149
Depreciation and amortization (excluding integration and restructuring expenses)	137				124				269				285
Integration and restructuring expenses	(6		)		284				142				544
Merger costs	—				14				—				29
Unrealized losses/(gains) on commodity hedges	(13		)		(37		)		29				(45		)
Impairment losses	48				53				48				53
Nonmonetary currency devaluation	—				2				—				3
Equity award compensation expense (excluding integration and restructuring expenses)	14				11				26				20
Adjusted EBITDA	$	2,101			$	2,087			$	3,986			$	4,038

The Kraft Heinz Company

Reconciliation of Diluted EPS to Adjusted EPS

(Unaudited)

	For the Three Months Ended								For the Six Months Ended
	July 1, 2017				July 3, 2016				July 1, 2017				July 3, 2016
Diluted EPS	$	0.94			$	0.63			$	1.67			$	1.36
Integration and restructuring expenses(a)(b)	—				0.16				0.08				0.30
Merger costs(a)(b)	—				0.01				—				0.02
Unrealized losses/(gains) on commodity hedges(a)(b)	(0.01		)		(0.02		)		0.01				(0.03		)
Impairment losses(a)(b)	0.03				0.03				0.03				0.03
Nonmonetary currency devaluation(a)(c)	0.02				—				0.03				0.01
Preferred dividend adjustment(d)	—				0.04				—				(0.11		)
Adjusted EPS	$	0.98			$	0.85			$	1.82			$	1.58

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

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

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

•	Expenses recorded in cost of products sold of $2 million for the three months and $3 million for the six months ended July 3, 2016 (there were no such expenses for the three and six months ended July 1, 2017); and

•	Expenses recorded in other expense/(income), net, of $25 million for the three months and $33 million for the six months ended July 1, 2017 and $7 million for the three and six months ended July 3, 2016.

(d)

For Adjusted EPS, we present the impact of the Series A Preferred Stock dividend payments on an accrual basis. Accordingly, we included an adjustment to EPS to include $180 million of Series A Preferred Stock dividends in the first quarter of 2016 (to reflect the March 7, 2016 Series A Preferred Stock dividend that was paid in December 2015), 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).

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains a number of forward-looking statements. Words such as “expect,” “improve,” “reassess,” “remain,” “will,” “plan,” and variations of such words and similar expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our plans, growth, taxes, cost savings, impacts of accounting guidance, and dividends. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, many of which are difficult to predict and beyond our control.

Important factors that affect our business and operations and that may cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, increased competition; our ability to maintain, extend and expand our reputation and brand image; our ability to differentiate our products from other brands; the consolidation of retail customers; our ability to predict, identify and interpret changes in consumer preferences and demand; our ability to drive revenue growth in our key product categories, increase our market share, or add products; an impairment of the carrying value of goodwill or other indefinite-lived intangible assets; volatility in commodity, energy and other input costs; changes in our management team or other key personnel; our inability to realize the anticipated benefits from our cost savings initiatives; changes in relationships with significant customers and suppliers; execution of our international expansion strategy; changes in laws and regulations; legal claims or other regulatory enforcement actions; product recalls or product liability claims; unanticipated business disruptions; failure to successfully integrate the business and operations of Kraft Heinz in the expected time frame; our ability to complete or realize the benefits from potential and completed acquisitions, alliances, divestitures or joint ventures; economic and political conditions in the nations in which we operate; the volatility of capital markets; increased pension, labor and people-related expenses; volatility in the market value of all or a portion of the derivatives we use; exchange rate fluctuations; risks associated with information technology and systems, including service interruptions, misappropriation of data or breaches of security; our inability to protect intellectual property rights; impacts of natural events in the locations in which we or our customers, suppliers or regulators operate; our indebtedness and ability to pay such indebtedness; tax law changes or interpretations; restatements of our consolidated financial statements and our ability to remediate material weaknesses; and other factors. For additional information on these and other factors that could affect our forward-looking statements, see “Risk Factors” below in this Quarterly Report on Form 10-Q. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this report, except as required by applicable law or regulation.