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

100K characters. Original on sec.gov · Markdown

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

Overview

Objective:

The following discussion provides an analysis of our financial condition and results of operations from management's perspective and should be read in conjunction with the condensed consolidated financial statements and related notes included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q. Our objective is to also provide discussion of material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides an understanding of our financial condition, results of operations, and cash flows.

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.

In the first quarter of 2024, our internal reporting structure and reportable segments changed. We divided our International segment into three operating segments — Europe and Pacific Developed Markets (“EPDM” or “International Developed Markets”), West and East Emerging Markets (“WEEM”), and Asia Emerging Markets (“AEM”) — to enable enhanced focus on the different strategies required for each of these regions as part of our long-term strategic plan. Subsequently, we manage our operating results through four operating segments. We have two reportable segments defined by geographic region: North America and International Developed Markets. Our remaining operating segments, consisting of WEEM and AEM, are combined and disclosed as Emerging Markets. We have reflected this change in all historical periods presented.

See Note 16, Segment Reporting, in Item 1, Financial Statements, for our financial information by segment.

Acquisitions and Divestitures:

In the first quarter of 2024, we closed the sale of the Russia Infant Transaction and the Papua New Guinea Transaction. See Note 4, Acquisitions and Divestitures, in Item 1, Financial Statements, for additional information on divestiture activities.

Conflict Between Russia and Ukraine:

For the nine months ended September 28, 2024 and the year ended December 30, 2023, approximately 1% of consolidated net sales, operating income, and Adjusted Operating Income were generated from our business in Russia. As of September 28, 2024, less than 1% of consolidated total assets were located in Russia and we had approximately 800 employees in Russia. We have no operations or employees in Ukraine and insignificant net sales through distributors. We will continue to monitor the impact that this conflict has on our business; however, through the third quarter of 2024, the conflict between Russia and Ukraine did not have a material impact on our financial condition, results of operations, or cash flows.

Items Affecting Comparability of Financial Results

Inflation and Supply Chain Impacts:

During the nine months ended September 28, 2024, we experienced increased stability of input and supply chain costs as compared to the prior year period. We expect inflation to continue to moderate through the remainder of 2024 and to be lower than we experienced in 2023. While these costs have a negative impact on our results of operations, we have taken measures to mitigate the impact of this inflation through efficiency initiatives, pricing actions, and hedging strategies. However, there has been, and we expect that there could continue to be, a difference between the timing of when these beneficial actions impact our results of operations and when the cost inflation is incurred. Additionally, the pricing actions we have taken have, in some instances, negatively impacted, and could continue to negatively impact, our market share.

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 to the most closely comparable financial measures presented in our condensed consolidated financial statements, which are calculated in accordance with U.S. GAAP see Non-GAAP Financial Measures.

Consolidated Results of Operations

Summary of Results:

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023% ChangeSeptember 28, 2024September 30, 2023% Change
(in millions, except per share data)(in millions, except per share data)
Net sales$6,383$6,570(2.8)%$19,270$19,780(2.6)%
Operating income/(loss)(101)653(115.5)%1,7233,272(47.3)%
Net income/(loss)(290)254(214.2)%6142,089(70.6)%
Net income/(loss) attributable to common shareholders(290)262(210.7)%6132,098(70.8)%
Diluted EPS(0.24)0.21(214.3)%0.501.70(70.6)%

Net Sales:

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023% ChangeSeptember 28, 2024September 30, 2023% Change
(in millions)(in millions)
Net sales$6,383$6,570(2.8)%$19,270$19,780(2.6)%
Organic Net Sales(a)6,3996,543(2.2)%19,33219,671(1.7)%

(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 September 28, 2024 Compared to the Three Months Ended September 30, 2023:

Net sales decreased 2.8% to $6.4 billion for the three months ended September 28, 2024 compared to $6.6 billion for the three months ended September 30, 2023, including the unfavorable impacts of foreign currency (0.4 pp) and acquisitions and divestitures (0.2 pp). Organic Net Sales decreased 2.2% to $6.4 billion for the three months ended September 28, 2024 compared to $6.5 billion for the three months ended September 30, 2023, primarily due to the unfavorable volume/mix (3.4 pp), which more than offset higher pricing (1.2 pp). Higher pricing in North America and Emerging Markets was partially offset by lower pricing in International Developed Markets. Volume/mix in North America and International Developed Markets was unfavorable, while volume/mix in Emerging Markets was favorable.

Nine Months Ended September 28, 2024 Compared to the Nine Months Ended September 30, 2023:

Net sales decreased 2.6% to $19.3 billion for the nine months ended September 28, 2024 compared to $19.8 billion for the nine months ended September 30, 2023, including unfavorable impacts of foreign currency (0.7 pp) and acquisitions and divestitures (0.2 pp). Organic Net Sales decreased 1.7% to $19.3 billion for the nine months ended September 28, 2024 compared to $19.7 billion for the nine months ended September 30, 2023, primarily due to the unfavorable volume/mix (3.3 pp), which more than offset higher pricing (1.6 pp). Higher pricing in North America and Emerging Markets was partially offset by lower pricing in International Developed Markets. Volume/mix in both North America and International Developed Markets was unfavorable, while volume/mix in Emerging Markets was favorable.

Net Income/(Loss):

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023% ChangeSeptember 28, 2024September 30, 2023% Change
(in millions)(in millions)
Operating income/(loss)$(101)$653(115.5)%$1,723$3,272(47.3)%
Net income/(loss)(290)254(214.2)%6142,089(70.6)%
Net income/(loss) attributable to common shareholders(290)262(210.7)%6132,098(70.8)%
Adjusted Operating Income(a)1,3301,3121.4%3,9753,9081.7%

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

Three Months Ended September 28, 2024 Compared to the Three Months Ended September 30, 2023:

Operating income/(loss) decreased 115.5% to losses of $101 million for the three months ended September 28, 2024 compared to income of $653 million for the three months ended September 30, 2023, due to non-cash impairment losses that were $766 million higher in the current year period. Excluding the impact of these non-cash impairment losses, operating income/(loss) increased $12 million driven by higher pricing; the beneficial impact from our efficiency initiatives, primarily in procurement; and lower variable compensation expense, partially offset by unfavorable volume/mix; increased manufacturing expenses due, in part, to increased labor costs; and unfavorable changes in unrealized losses/(gains) on commodity hedges.

Net income/(loss) decreased 214.2% to losses of $290 million for the three months ended September 28, 2024 compared to income of $254 million for the three months ended September 30, 2023. This decrease was due to the unfavorable changes in operating income/(loss) factors discussed above, which more than offset the lower income tax expense and the favorable changes in other expense/(income). Interest expense was flat compared to the prior year period.

  • Our effective tax rate for the three months ended September 28, 2024 was an expense of 2.5% on pre-tax losses, compared to an expense of 44.7% on pre-tax income for the three months ended September 30, 2023. Our effective tax rate included a net unfavorable impact of goodwill and intangible asset impairment losses in both the current year period (23.1%), and in the prior year period (24.3%). The year-over-year change in the effective tax rate for the three-month period was primarily due to the unfavorable impact of goodwill and intangible asset impairment losses and the establishment of valuation allowances in certain foreign jurisdictions, partially offset by more favorable changes in estimates of certain 2022 U.S. income and deductions in the prior year period.

  • Other expense/(income) was $48 million of income for the three months ended September 28, 2024 compared to $35 million of income for the three months ended September 30, 2023. The year-over-year increase was primarily driven by an increase in non-cash net pension and postretirement non-service benefits.

Adjusted Operating Income increased 1.4% to $1.3 billion for the three months ended September 28, 2024 compared to $1.3 billion for the three months ended September 30, 2023, primarily driven by higher pricing; the beneficial impact from our efficiency initiatives, primarily in procurement; and lower variable compensation expense. These favorable impacts more than offset unfavorable volume/mix; increased manufacturing expenses due, in part, to increased labor costs, and the unfavorable impact of foreign currency (0.2 pp).

Nine Months Ended September 28, 2024 Compared to the Nine Months Ended September 30, 2023:

Operating income/(loss) decreased 47.3% to income of $1.7 billion for the nine months ended September 28, 2024 compared to income of $3.3 billion for the nine months ended September 30, 2023, due to non-cash impairment losses that were $1.6 billion higher in the current year period. Excluding the impact of these non-cash impairment losses, operating income/(loss) increased $71 million driven by higher pricing; the beneficial impact from our efficiency initiatives, primarily in procurement and logistics; and lower variable compensation expense, partially offset by unfavorable volume/mix; increased manufacturing expenses due, in part, to increased labor costs; and increased SG&A due to investments in advertising, technology, and research and development.

Net income/(loss) decreased 70.6% to income of $614 million for the nine months ended September 28, 2024 compared to income of $2.1 billion for the nine months ended September 30, 2023. This decrease was due to the unfavorable changes in operating income/(loss) factors discussed above and unfavorable changes in other expense/(income), partially offset by lower income tax expense. Interest expense was flat compared to the prior year period.

  • Our effective tax rate for the nine months ended September 28, 2024 was an expense of 43.9% on pre-tax income, compared to an expense of 22.1% on pre-tax income for the nine months ended September 30, 2023. Our effective tax rate included a net unfavorable impact of goodwill and intangible asset impairment losses in both the current year period (22.9%), and in the prior year period (3.9%). The year-over-year increase in the effective tax rate for the nine-month period was primarily due to the unfavorable impact of goodwill and intangible asset impairment losses, the establishment of valuation allowances in certain foreign jurisdictions, and the impact of a net decrease in uncertain tax position reserves in the prior year period.

  • Other expense/(income) was $56 million of income for the nine months ended September 28, 2024 compared to $94 million of income for the nine months ended September 30, 2023. The year-over-year decrease was primarily due to a $78 million net loss on the sale of businesses in 2024, which was partially offset by an increase in net pension and postretirement non-service benefits, an increase in interest income, and net foreign exchange gains in 2024.

Adjusted Operating Income increased 1.7% to $4.0 billion for the nine months ended September 30, 2023 compared to $3.9 billion for the nine months ended September 30, 2023, primarily driven by higher pricing; the beneficial impact from our efficiency initiatives, primarily in procurement and logistics; and lower variable compensation expense. These favorable impacts more than offset unfavorable volume/mix; increased manufacturing expenses due, in part, to increased labor costs; increased SG&A due to investments in advertising, technology, and research and development; and the unfavorable impact of foreign currency (0.5 pp).

Diluted EPS:

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023% ChangeSeptember 28, 2024September 30, 2023% Change
Diluted EPS$(0.24)$0.21(214.3)%$0.50$1.70(70.6)%
Adjusted EPS(a)0.750.724.2%2.222.200.9%

(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 September 28, 2024 Compared to the Three Months Ended September 30, 2023:

Diluted EPS decreased 214.3% to $(0.24) for the three months ended September 28, 2024 compared to $0.21 for the three months ended September 30, 2023, primarily due to the net income/(loss) factors discussed above, which more than offset the favorable impact of our common stock repurchases.

For the Three Months Ended
September 28, 2024September 30, 2023$ Change% Change
Diluted EPS$(0.24)$0.21$(0.45)(214.3)%
Restructuring activities—0.03(0.03)
Unrealized losses/(gains) on commodity hedges—(0.03)0.03
Impairment losses0.990.500.49
Nonmonetary currency devaluation—0.01(0.01)
Adjusted EPS(a)$0.75$0.72$0.034.2%
Key drivers of change in Adjusted EPS(a):
Results of operations$0.01
Effective tax rate0.01
Effect of common stock repurchases(b)0.01
$0.03

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

(b) Includes the impact of the change in the weighted average shares of common stock outstanding, including dilutive effect, which is primarily due to shares purchased pursuant to our publicly announced share repurchase program. See Note 15, Earnings Per Share, for more information on our weighted average shares outstanding.

Adjusted EPS increased 4.2% to $0.75 for the three months ended September 28, 2024 compared to $0.72 for the three months ended September 30, 2023. This increase was primarily due to higher Adjusted Operating Income, lower taxes on adjusted earnings, and the favorable impact of our common stock repurchases.

Nine Months Ended September 28, 2024 Compared to the Nine Months Ended September 30, 2023:

Diluted EPS decreased 70.6% to $0.50 for the nine months ended September 28, 2024 compared to $1.70 for the nine months ended September 30, 2023, primarily due to the net income/(loss) factors discussed above, which more than offset the favorable impact of our common stock repurchases.

For the Nine Months Ended
September 28, 2024September 30, 2023$ Change% Change
Diluted EPS$0.50$1.70$(1.20)(70.6)%
Restructuring activities—0.02(0.02)
Unrealized losses/(gains) on commodity hedges(0.02)(0.03)0.01
Impairment losses1.690.501.19
Nonmonetary currency devaluation—0.02(0.02)
Certain significant discrete income tax items—(0.01)0.01
Adjusted EPS(a)$2.22$2.20$0.020.9%
Key drivers of change in Adjusted EPS(a):
Results of operations$0.04
Effective tax rate(0.05)
Effect of common stock repurchases(b)0.03
$0.02

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

(b) Includes the impact of the change in the weighted average shares of common stock outstanding, including dilutive effect, which is primarily due to shares purchased pursuant to our publicly announced share repurchase program. See Note 15, Earnings Per Share, for more information on our weighted average shares outstanding.

Adjusted EPS increased 0.9% to $2.22 for the nine months ended September 28, 2024 compared to $2.20 for the nine months ended September 30, 2023. This increase was primarily due to higher Adjusted Operating Income and the favorable impact of our common stock repurchases, which more than offset higher taxes on adjusted earnings.

Results of Operations by Segment

We manage our operating results through four operating segments. We have two reportable segments defined by geographic region: North America and International Developed Markets. Our remaining operating segments, consisting of WEEM and AEM, are combined and disclosed as Emerging Markets.

Management evaluates segment performance based on several factors, including net sales, Organic Net Sales, and Segment Adjusted Operating Income. In the first quarter of 2024, certain measures utilized by management to evaluate segment performance changed, including a change from Segment Adjusted EBITDA to Segment Adjusted Operating Income in order to drive a stronger connection to our long-term strategic plan. Segment Adjusted Operating Income is defined as operating income/(loss) excluding, when they occur, the impacts of restructuring activities, deal costs, unrealized gains/(losses) on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results), impairment losses, and certain non-ordinary course legal and regulatory matters. Segment Adjusted Operating Income for Emerging Markets, which represents the aggregation of our WEEM and AEM operating segments, is defined and presented consistently with the Segment Adjusted Operating Income of our reportable segments — North America and International Developed Markets. Segment Adjusted Operating Income is a financial measure 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. Management also uses Segment Adjusted Operating Income to allocate resources. We have reflected this change from Segment Adjusted EBITDA to Segment Adjusted Operating Income in all historical periods presented.

Under highly inflationary accounting, the financial statements of a subsidiary are remeasured into our reporting currency (U.S. dollars) based on the legally available exchange rate at which we expect to settle the underlying transactions. Exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in other expense/(income) on our condensed consolidated statements of income, as nonmonetary currency devaluation, rather than accumulated other comprehensive income/(losses) on our condensed consolidated balance sheets, until such time as the economy is no longer considered highly inflationary. See Note 2, Significant Accounting Policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 30, 2023, for additional information. We apply highly inflationary accounting to the results of our subsidiaries in Venezuela, Argentina, and Turkey, which are all included in Emerging Markets.

Net Sales:

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023September 28, 2024September 30, 2023
(in millions)
Net sales:
North America$4,826$4,995$14,575$14,959
International Developed Markets8828832,6222,675
Emerging Markets6756922,0732,146
Total net sales$6,383$6,570$19,270$19,780

Organic Net Sales:

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023September 28, 2024September 30, 2023
(in millions)
Organic Net Sales(a):
North America$4,834$4,995$14,590$14,959
International Developed Markets8678832,6122,675
Emerging Markets6986652,1302,037
Total Organic Net Sales$6,399$6,543$19,332$19,671

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

Drivers of the changes in net sales and Organic Net Sales for the three and nine months ended September 28, 2024 compared to the three and nine months ended September 30, 2023 were:

Net SalesCurrencyAcquisitions and DivestituresOrganic Net SalesPriceVolume/Mix
For the Three Months Ended
North America(3.4)%(0.2) pp0.0 pp(3.2)%1.2 pp(4.4) pp
International Developed Markets(0.2)%1.6 pp0.0 pp(1.8)%(1.0) pp(0.8) pp
Emerging Markets(2.4)%(4.9) pp(2.4) pp4.9%3.8 pp1.1 pp
Kraft Heinz(2.8)%(0.4) pp(0.2) pp(2.2)%1.2 pp(3.4) pp
Net SalesCurrencyAcquisitions and DivestituresOrganic Net SalesPriceVolume/Mix
For the Nine Months Ended
North America(2.6)%(0.1) pp0.0 pp(2.5)%1.6 pp(4.1) pp
International Developed Markets(2.0)%0.4 pp0.0 pp(2.4)%(0.1) pp(2.3) pp
Emerging Markets(3.4)%(6.1) pp(1.9) pp4.6%3.3 pp1.3 pp
Kraft Heinz(2.6)%(0.7) pp(0.2) pp(1.7)%1.6 pp(3.3) pp

Adjusted Operating Income:

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023September 28, 2024September 30, 2023
(in millions)
Segment Adjusted Operating Income:
North America$1,237$1,245$3,793$3,701
International Developed Markets135129397376
Emerging Markets Segment Adjusted Operating Income(a)8488232286
General corporate expenses(126)(150)(447)(455)
Restructuring activities—(45)—(25)
Unrealized gains/(losses) on commodity hedges(3)483053
Impairment losses(1,428)(662)(2,282)(662)
Certain non-ordinary course legal and regulatory matters———(2)
Operating income/(loss)(101)6531,7233,272
Interest expense230228685683
Other expense/(income)(48)(35)(56)(94)
Income/(loss) before income taxes$(283)$460$1,094$2,683

(a) Segment Adjusted Operating Income for Emerging Markets, which represents the combination of our WEEM and AEM operating segments, is defined and presented consistently with the Segment Adjusted Operating Income of our reportable segments - North America and International Developed Markets.

North America:

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023% ChangeSeptember 28, 2024September 30, 2023% Change
(in millions)(in millions)
Net sales$4,826$4,995(3.4)%$14,575$14,959(2.6)%
Organic Net Sales(a)4,8344,995(3.2)%14,59014,959(2.5)%
Segment Adjusted Operating Income1,2371,245(0.6)%3,7933,7012.5%

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

Three Months Ended September 28, 2024 Compared to the Three Months Ended September 30, 2023:

Net sales decreased 3.4% to $4.8 billion for the three months ended September 28, 2024 compared to $5.0 billion for the three months ended September 30, 2023, including the unfavorable impacts of foreign currency (0.2 pp). Organic Net Sales decreased 3.2% to $4.8 billion for the three months ended September 28, 2024 compared to $5.0 billion for the three months ended September 30, 2023, primarily due to unfavorable volume/mix (4.4 pp), which more than offset higher pricing (1.2 pp). Higher pricing was taken in certain categories to mitigate higher input costs. Unfavorable volume/mix was primarily driven by shifts in consumer behavior due to economic uncertainty and a decline in Lunchables.

Segment Adjusted Operating Income decreased 0.6% to $1.2 billion for the three months ended September 28, 2024 compared to $1.2 billion for the three months ended September 30, 2023, primarily due to unfavorable volume/mix; increased manufacturing expenses due, in part, to increased labor costs; and the unfavorable impact of foreign currency (0.2 pp), which more than offset higher pricing; the beneficial impact from our efficiency initiatives, primarily in procurement; and lower variable compensation expense.

Nine Months Ended September 28, 2024 Compared to the Nine Months Ended September 30, 2023:

Net sales decreased 2.6% to $14.6 billion for the nine months ended September 28, 2024 compared to $15.0 billion for the nine months ended September 30, 2023, including the unfavorable impacts of foreign currency (0.1 pp). Organic Net Sales decreased 2.5% to $14.6 billion for the nine months ended September 28, 2024 compared to $15.0 billion for the nine months ended September 30, 2023, primarily due to unfavorable volume/mix (4.1 pp), which more than offset higher pricing (1.6 pp). Higher pricing was primarily driven by increases to mitigate higher input costs. Unfavorable volume/mix was primarily driven by shifts in consumer behavior due to economic uncertainty, a decline in Lunchables, and a temporary plant closure.

Segment Adjusted Operating Income increased 2.5% to $3.8 billion for the nine months ended September 28, 2024 compared to $3.7 billion for the nine months ended September 30, 2023, primarily driven by higher pricing; the beneficial impact from our efficiency initiatives, primarily in procurement and logistics; and lower variable compensation expense. These favorable impacts more than offset unfavorable volume/mix; increased manufacturing expenses due, in part, to increased labor cost; increased SG&A due to investments in advertising, research and development, and technology; increased depreciation expense; and the unfavorable impact of foreign currency (0.1 pp).

International Developed Markets:

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023% ChangeSeptember 28, 2024September 30, 2023% Change
(in millions)(in millions)
Net sales$882$883(0.2)%$2,622$2,675(2.0)%
Organic Net Sales(a)867883(1.8)%2,6122,675(2.4)%
Segment Adjusted Operating Income1351294.2%3973765.6%

(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 September 28, 2024 Compared to the Three Months Ended September 30, 2023:

Net sales decreased 0.2% to $882 million for the three months ended September 28, 2024 compared to $883 million for the three months ended September 30, 2023, including the favorable impacts of foreign currency (1.6 pp). Organic Net Sales decreased 1.8% to $867 million for the three months ended September 28, 2024 compared to $883 million for the three months ended September 30, 2023, primarily due to lower pricing (1.0 pp) and unfavorable volume/mix (0.8 pp). Lower pricing was predominantly the result of increased investments in trade within the United Kingdom. Unfavorable volume/mix was due in part to a temporary pause in shipments due to a contract negotiation with certain customers within our Continental Europe region.

Segment Adjusted Operating Income increased 4.2% to $135 million for the three months ended September 28, 2024 compared to $129 million for the three months ended September 30, 2023, primary driven by lower variable compensation expense and the favorable impact of foreign currency (2.2 pp), which more than offset lower pricing and unfavorable volume/mix.

Nine Months Ended September 28, 2024 Compared to the Nine Months Ended September 30, 2023:

Net sales decreased 2.0% to $2.6 billion for the nine months ended September 28, 2024 compared to $2.7 billion for the nine months ended September 30, 2023, including the favorable impacts of foreign currency (0.4 pp). Organic Net Sales decreased 2.4% to $2.6 billion for the nine months ended September 28, 2024 compared to $2.7 billion for the nine months ended September 30, 2023, primarily due to unfavorable volume/mix (2.3 pp) and lower pricing (0.1 pp). Unfavorable volume/mix was due to lower sales in New Zealand due to inventory reduction by a regional customer, and a temporary pause in shipments due to a contract negotiation with certain customers within our Continental Europe region. Lower pricing was predominantly the result of increased investments in trade within the United Kingdom.

Segment Adjusted Operating Income increased 5.6% to $397 million for the nine months ended September 28, 2024 compared to $376 million for the nine months ended September 30, 2023, primarily driven by lapping the prior year business disruption caused by Cyclone Gabrielle within our ANJ region, lower variable compensation expense, and the favorable impact of foreign currency (1.7 pp). These favorable impacts to Segment Adjusted Operating Income more than offset unfavorable volume/mix, increased advertising expense, and lower pricing.

Emerging Markets:

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023% ChangeSeptember 28, 2024September 30, 2023% Change
(in millions)(in millions)
Net sales$675$692(2.4)%$2,073$2,146(3.4)%
Organic Net Sales(a)6986654.9%2,1302,0374.6%
Segment Adjusted Operating Income(b)8488(4.5)%232286(19.0)%

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

(b) Segment Adjusted Operating Income for Emerging Markets, which represents the combination of our WEEM and AEM operating segments, is defined and presented consistently with the Segment Adjusted Operating Income of our reportable segments - North America and International Developed Markets.

Three Months Ended September 28, 2024 Compared to the Three Months Ended September 30, 2023:

Net sales decreased 2.4% to $675 million for the three months ended September 28, 2024 compared to $692 million for the three months ended September 30, 2023, including the unfavorable impacts of foreign currency (4.9 pp) and acquisitions and divestitures (2.4 pp). Organic Net Sales increased 4.9% to $698 million for the three months ended September 28, 2024 compared to $665 million for the three months ended September 30, 2023, primarily driven by higher pricing (3.8 pp) and favorable volume/mix (1.1 pp). Higher pricing was taken primarily in our Eastern Europe region to address higher input costs, which more than offset lower pricing in Brazil as a result of maintaining price gaps to competition. Favorable volume/mix within our Eastern Europe and Asia regions more than offset unfavorable volume/mix in Brazil.

Segment Adjusted Operating Income decreased 4.5% to $84 million for the three months ended September 28, 2024 compared to $88 million for the three months ended September 30, 2023, primarily due to higher supply chain costs reflecting inflationary pressures in our Eastern Europe and LATAM regions, the unfavorable impact of foreign currency (3.5 pp), and increased SG&A as a result of our investments in our go-to-market strategy, primarily in LATAM. These unfavorable impacts to Segment Adjusted Operating Income more than offset higher pricing, favorable volume/mix, and lower variable compensation expense.

Nine Months Ended September 28, 2024 Compared to the Nine Months Ended September 30, 2023:

Net sales decreased 3.4% to $2.1 billion for the nine months ended September 28, 2024 compared to $2.1 billion for the nine months ended September 30, 2023, including the unfavorable impacts of foreign currency (6.1 pp) and acquisitions and divestitures (1.9 pp). Organic Net Sales increased 4.6% to $2.1 billion for the nine months ended September 28, 2024 compared to $2.0 billion for the nine months ended September 30, 2023, primarily driven by higher pricing (3.3 pp) and favorable volume/mix (1.3 pp). Higher pricing was taken primarily in our Eastern Europe region to address higher input costs, which more than offset lower pricing in Brazil as a result of maintaining price gaps to competition. Favorable volume/mix within our Eastern Europe and Asia regions more than offset unfavorable volume/mix in Brazil.

Segment Adjusted Operating Income decreased 19.0% to $232 million for the nine months ended September 28, 2024 compared to $286 million for the nine months ended September 30, 2023, primarily due to higher supply chain costs reflecting inflationary pressures in our Eastern Europe and LATAM regions, the unfavorable impact of foreign currency (6.5 pp); and increased SG&A as a result of our investments in our go-to-market strategy, primarily in LATAM. These unfavorable impacts to Segment Adjusted Operating Income more than offset higher pricing, favorable volume/mix, and lower variable compensation expense.

Liquidity and Capital Resources

We believe that cash generated from our operating activities, commercial paper programs, and our senior unsecured revolving credit facility (the “Senior Credit Facility”) will provide sufficient liquidity to meet our working capital needs, repayments of long-term debt, future contractual obligations, payment of our anticipated quarterly dividends, planned capital expenditures, restructuring expenditures, and contributions to our postemployment benefit plans for the next 12 months. An additional potential source of liquidity is access to capital markets. We intend to use our cash on hand and commercial paper programs for daily funding requirements.

Cash Flow Activity for the Nine Months Ended September 28, 2024 Compared to the Nine Months Ended September 30, 2023:

Net Cash Provided by/Used for Operating Activities:

Net cash provided by operating activities was $2.8 billion for the nine months ended September 28, 2024 compared to $2.6 billion for the nine months ended September 30, 2023. This increase was primarily due to favorable changes in working capital driven by accounts payable and the lapping of prior year cash payments associated with the settlement of the consolidated securities class action lawsuit, which were partially offset by higher cash outflows for inventory and variable compensation in the 2024 period compared to the 2023 period. Further, net cash provided by operating activities was favorably impacted by increased Adjusted Operating Income.

Net Cash Provided by/Used for Investing Activities:

Net cash used for investing activities was $849 million for the nine months ended September 28, 2024 compared to $738 million for the nine months ended September 30, 2023. This change was primarily driven by our payments to acquire the TGI Friday License. This was offset by favorable hedging settlements in the current period. We expect 2024 capital expenditures to be approximately $1.1 billion compared to the 2023 capital expenditures of $1.0 billion. Our 2024 capital expenditures are expected to be primarily driven by maintenance projects, capital investments focused on generating growth, including capacity expansion and digital projects, as well as investments in technology.

Net Cash Provided by/Used for Financing Activities:

Net cash used for financing activities was $2.0 billion for the nine months ended September 28, 2024 compared to $1.8 billion for the nine months ended September 30, 2023. This change was primarily due to increased common stock repurchases pursuant to our publicly announced share repurchase program, partially offset by reduced debt repayments in the current year period compared to the prior year. See Note 14, Commitments, Contingencies, and Debt for additional information on our debt issuances and repayments.

Cash Held by International Subsidiaries:

Of the $1.3 billion cash and cash equivalents on our condensed consolidated balance sheet at September 28, 2024, $850 million was held by international subsidiaries.

Subsequent to January 1, 2018, we consider the unremitted earnings of certain international subsidiaries that impose local country taxes on dividends to be indefinitely reinvested. For those undistributed earnings considered to be indefinitely reinvested, our intent is to reinvest these funds in our international operations, and our current plans do not demonstrate a need to repatriate the accumulated earnings to fund our U.S. cash requirements. The amount of unrecognized deferred tax liabilities for local country withholding taxes that would be owed, if repatriated, related to our 2018 through 2024 accumulated earnings of certain international subsidiaries is approximately $70 million.

Our undistributed historic earnings in foreign subsidiaries through December 31, 2017 are currently not considered to be indefinitely reinvested. Our deferred tax liability associated with these undistributed historical earnings was insignificant at September 28, 2024 and December 30, 2023 and relates to local withholding taxes that will be owed when this cash is distributed.

Trade Payables Programs:

We maintain agreements with third party administrators that allow participating suppliers to track payment obligations from us, and, at the sole discretion of the supplier, sell one or more of those payment obligations to participating financial institutions. We have no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions related to these programs. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. We estimate that the amounts outstanding under these programs were $0.8 billion at September 28, 2024 and December 30, 2023. See Note 13, Financing Arrangements, in Item 1, Financial Statement, for additional information on our trade payables programs.

Borrowing Arrangements:

From time to time, we obtain funding through our commercial paper programs. We had no commercial paper outstanding at September 28, 2024, at December 30, 2023, or during the nine months ended September 28, 2024 or September 30, 2023.

Our Senior Credit Facility provides for a revolving commitment of $4.0 billion through July 8, 2029. Subject to certain conditions, we may increase the amount of revolving commitments and/or add tranches of term loans in a combined aggregate amount of up to $1.0 billion.

No amounts were drawn on our Senior Credit Facility at September 28, 2024 or December 30, 2023, or during the nine months ended September 28, 2024 or September 30, 2023.

Our credit agreement contains customary representations, warranties, and covenants that are typical for these types of facilities and could, upon the occurrence of certain events of default, restrict our ability to access our Senior Credit Facility. We were in compliance with all financial covenants as of September 28, 2024.

Long-Term Debt:

Our long-term debt, including the current portion, was $20.1 billion at September 28, 2024 and $20.0 billion at December 30, 2023. This increase was primarily due to the issuance of the 2024 Notes, as well as changes in foreign currency exchange rates on our foreign-denominated debt, partially offset by the 550 million euro aggregate principle amount of senior notes that were repaid at maturity in May 2024.

We have aggregate principal amounts of senior notes of approximately 600 million euros maturing in May 2025.

We may from time to time seek to retire or purchase our outstanding debt through redemptions, tender offers, cash purchases, prepayments, refinancing, exchange offers, open market or privately negotiated transactions, Rule 10b5-1 plans, or otherwise.

Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all financial covenants as of September 28, 2024.

See Note 14, Commitments, Contingencies, and Debt, in Item 1, Financial Statements, for additional information on our long-term debt activity and Note 16, Debt, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 30, 2023 for additional information on our borrowing arrangements and long-term debt.

Equity and Dividends:

We paid dividends on our common stock of $1.5 billion for the nine months ended September 28, 2024 and the nine months ended September 30, 2023. Additionally, in the fourth quarter of 2024, our Board of Directors declared a cash dividend of $0.40 per share of common stock, which is payable on December 27, 2024 to stockholders of record on November 29, 2024.

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.

On November 27, 2023, we announced that the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $3.0 billion, exclusive of fees, of the Company’s common stock through December 26, 2026. We are not obligated to repurchase any specific number of shares and the program may be modified, suspended, or discontinued at any time. Under the program, shares may be repurchased in open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), privately negotiated transactions, transactions structured through investment banking institutions, or other means. We purchased no shares during the three months ended September 28, 2024 and 9 million shares during the nine months ended September 28, 2024 and had approximately $2.4 billion remaining authorization under the share repurchase program as of September 28, 2024. The share repurchase program is in addition to our share repurchases to offset the dilutive effect of equity-based compensation.

Aggregate Contractual Obligations:

In the first quarter of 2024, we issued the 2024 Notes, which mature in 2029. See Note 14, Commitments, Contingencies and Debt, in Item 1, Financial Statements, for additional information. There were no other material changes to our aggregate contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 30, 2023.

Supplemental Guarantor Information:

The Kraft Heinz Company (as the “Parent Guarantor”) fully and unconditionally guarantees all the senior unsecured registered notes (collectively, the “KHFC Senior Notes”) issued by KHFC, our 100% owned operating subsidiary (the “Guarantee”). See Note 14, Commitments, Contingencies, and Debt, in Item 1, Financial Statements, and Note 16, Debt, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 30, 2023 for additional descriptions of these guarantees.

The payment of the principal, interest and premium, when applicable, on the KHFC Senior Notes is fully and unconditionally guaranteed on a senior unsecured basis by the Parent Guarantor, pursuant to the terms and conditions of the applicable indenture. None of the Parent Guarantor’s subsidiaries guarantee the KHFC Senior Notes.

The Guarantee is the Parent Guarantor’s senior unsecured obligation and is: (i) pari passu in right of payment with all of the Parent Guarantor’s existing and future senior indebtedness; (ii) senior in right of payment to all of the Parent Guarantor’s future subordinated indebtedness; (iii) effectively subordinated to all of the Parent Guarantor’s existing and future secured indebtedness to the extent of the value of the assets secured by that indebtedness; and (iv) effectively subordinated to all existing and future indebtedness and other liabilities of the Parent Guarantor’s subsidiaries.

The KHFC Senior Notes are obligations exclusively of KHFC and the Parent Guarantor and not of any of the Parent Guarantor’s other subsidiaries. Substantially all of the Parent Guarantor’s operations are conducted through its subsidiaries. The Parent Guarantor’s other subsidiaries are separate legal entities that have no obligation to pay any amounts due under the KHFC Senior Notes or to make any funds available therefor, whether by dividends, loans, or other payments. Except to the extent the Parent Guarantor is a creditor with recognized claims against its subsidiaries, all claims of creditors (including trade creditors) and holders of preferred stock, if any, of its subsidiaries will have priority with respect to the assets of such subsidiaries over its claims (and therefore the claims of its creditors, including holders of the KHFC Senior Notes). Consequently, the KHFC Senior Notes are structurally subordinated to all liabilities of the Parent Guarantor’s subsidiaries and any subsidiaries that it may in the future acquire or establish. The obligations of the Parent Guarantor will terminate and be of no further force or effect in the following circumstances: (i) (a) KHFC’s exercise of its legal defeasance option or, except in the case of a guarantee of any direct or indirect parent of KHFC, covenant defeasance option in accordance with the applicable indenture, or KHFC’s obligations under the applicable indenture have been discharged in accordance with the terms of the applicable indenture or (b) as specified in a supplemental indenture to the applicable indenture; and (ii) the Parent Guarantor has delivered to the trustee an officer’s certificate and an opinion of counsel, each stating that all conditions precedent provided for in the applicable indenture have been complied with. The Guarantee is limited by its terms to an amount not to exceed the maximum amount that can be guaranteed by the Parent Guarantor without rendering the Guarantee voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally.

The following tables present summarized financial information for the Parent Guarantor and KHFC (as subsidiary issuer of the KHFC Senior Notes) (together, the “Obligor Group”), on a combined basis after the elimination of all intercompany balances and transactions between the Parent Guarantor and subsidiary issuer and investments in any subsidiary that is a non-guarantor.

Summarized Statement of Income

For the Nine Months Ended
September 28, 2024
Net sales$12,552
Gross profit(a)4,890
Intercompany service fees and other recharges3,454
Operating income/(loss)866
Equity in earnings/(losses) of subsidiaries489
Net income/(loss)614
Net income/(loss) attributable to common shareholders614

(a) For the nine months ended September 28, 2024, the Obligor Group recorded $339 million of net sales to the non-guarantor subsidiaries and $50 million of purchases from the non-guarantor subsidiaries.

Summarized Balance Sheets

September 28, 2024December 30, 2023
ASSETS
Current assets$5,014$4,347
Current assets due from affiliates(a)586529
Non-current assets5,6935,665
Goodwill8,8238,823
Intangible assets, net1,9091,993
Non-current assets due from affiliates(b)2816
LIABILITIES
Current liabilities$4,391$4,461
Current liabilities due to affiliates(a)1,4112,055
Non-current liabilities21,37121,429
Non-current liabilities due to affiliates(b)706500

(a) Represents receivables and short-term lending due from and payables and short-term lending due to non-guarantor subsidiaries.

(b) Represents long-term lending due from and long-term borrowings due to non-guarantor subsidiaries.

Commodity Trends

We purchase and use large quantities of commodities, including dairy products, meats, sugar and other sweeteners, tomatoes, edible oils, coffee beans, wheat products, fruits and vegetables, and eggs to manufacture our products. In addition, we purchase and use significant quantities of resins, fiberboard, and cardboard to package our products, and we use electricity, diesel fuel, and natural gas in the manufacturing and distribution of our products. We continuously monitor worldwide supply and cost trends of these commodities.

During the nine months ended September 28, 2024, we experienced lower commodity costs primarily for edible oils, wheat products, meats and eggs, while costs for cheese and dairy, and coffee increased. We manage commodity cost volatility primarily through pricing and risk management strategies including utilizing a range of commodity hedging techniques in an effort to limit the impact of price fluctuations on many of our principal raw materials. However, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in specific raw material costs. As a result of these risk management strategies, our commodity costs may not immediately correlate with market price trends.

See our Annual Report on Form 10-K for the year ended December 30, 2023 for additional information on how we manage commodity costs.

Critical Accounting Estimates

Our significant accounting policies are described in Note 2, Significant Accounting Policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 30, 2023.

We prepare our condensed consolidated financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments, and assumptions. Our critical accounting estimates and assumptions related to goodwill and intangible assets are described below. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 30, 2023 for a discussion of our other critical accounting estimates and assumptions.

Goodwill and Intangible Assets:

As of September 28, 2024, we maintain 12 reporting units, eight of which comprise our goodwill balance. These eight reporting units had an aggregate goodwill carrying amount of $28.9 billion at September 28, 2024. Our indefinite-lived intangible asset balance primarily consists of a number of individual brands, which had an aggregate carrying amount of $38.0 billion as of September 28, 2024.

We test our reporting units and brands for impairment annually, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit or brand is less than its carrying amount. Such events and circumstances could include a sustained decrease in our market capitalization, increased competition or unexpected loss of market share, increased input costs beyond projections, disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster, pandemic, or loss of a customer, supplier, or other significant business relationship), unexpected significant declines in operating results, significant adverse changes in the markets in which we operate, changes in income tax rates, changes in interest rates, or changes in management strategy. We test reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. We test brands for impairment by comparing the estimated fair value of each brand with its carrying amount. If the carrying amount of a reporting unit or brand exceeds its estimated fair value, we record an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed the associated carrying amount of goodwill. See Note 7, Goodwill and Intangible Assets, in Item 1, Financial Statements, for a discussion of the timing of the annual impairment test.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units and brands requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows (including net sales, cost of products sold, SG&A, depreciation and amortization, working capital, and capital expenditures), income tax considerations, discount rates, growth rates, royalty rates, contributory asset charges, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, market capitalization, income tax rates, foreign currency exchange rates, or inflation, change, or if management’s expectations or plans otherwise change, including updates to our long-term operating plans, then one or more of our reporting units or brands might become impaired in the future. Additionally, any decisions to divest certain non-strategic assets has led and could in the future lead to goodwill or intangible asset impairments.

As detailed in Note 7, Goodwill and Intangible Assets, in Item 1, Financial Statements, we recorded impairment losses related to goodwill and indefinite-lived intangible assets. Our reporting units and brands that were impaired in 2024 and 2023 were written down to their respective fair values resulting in zero excess fair value over carrying amount as of the applicable impairment test dates. Our reporting units and brands that have 20% or less excess fair value over carrying amount as of the 2024 annual impairment test have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future.

Reporting units with 10% or less fair value over carrying amount, including reporting units that were impaired as part of the Q3 2024 annual impairment test resulting in zero excess fair value over carrying value, had an aggregate goodwill carrying amount after impairment of $22.5 billion as of the 2024 annual impairment test and included TMS, MC, AFH, CNAC, and Continental Europe. Our Northern Europe reporting unit had 10-20% fair value over carrying amount with an aggregate goodwill carrying amount of $1.7 billion as of the 2024 annual impairment test. Our HD and Asia reporting units had 20-50% fair value over carrying amount with an aggregate goodwill carrying amount of $4.6 billion as of the 2024 annual impairment test. Our reporting units that have less than 5% excess fair value over carrying amount as of the 2024 annual impairment test are considered at a heightened risk of future impairments and include our TMS, Continental Europe, and AFH reporting units, which had an aggregate goodwill carrying amount of $19.1 billion. Our four remaining reporting units had no goodwill carrying amount at the time of the 2024 annual impairment test.

Our brands with 10% or less fair value over carrying amount, comprised entirely of brands that were impaired as part of the Q3 2024 annual test resulting in zero excess fair value over carrying amount, had an aggregate carrying amount of $1.2 billion as of the annual 2024 annual impairment test and included Lunchables, Claussen, and Wattie’s. Brands with 10-20% fair value over carrying amount had an aggregate carrying amount of $16.9 billion as of the 2024 annual impairment test and included A1, Bagel Bites, Kraft, Oscar Mayer, and Velveeta. The aggregate carrying amount of brands with fair value over carrying amount 20-50% was $2.8 billion as of the 2024 annual impairment test. Although the remaining brands, with a carrying amount of $16.9 billion, have more than 50% excess fair value over carrying amount as of the 2024 annual impairment test, these amounts are also susceptible to impairments if any assumptions, estimates, or market factors significantly change in the future. Our brands that have less than 5% excess fair value over carrying value as of the 2024 annual impairment test are considered at a heightened risk of future impairments and include our Lunchables, Classen, and Wattie’s brands which had an aggregate carrying amount of $1.2 billion.

We generally utilize the discounted cash flow method under the income approach to estimate the fair value of our reporting units. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each reporting unit (including net sales, cost of products sold, SG&A, depreciation and amortization, working capital, and capital expenditures), income tax rates, long-term growth rates, and a discount rate that appropriately reflects the risks inherent in each future cash flow stream. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies.

We utilize the excess earnings method under the income approach to estimate the fair value of certain of our largest brands. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each brand (including net sales, cost of products sold, and SG&A), contributory asset charges, income tax considerations, long-term growth rates, a discount rate that reflects the level of risk associated with the future earnings attributable to the brand, and management’s intent to invest in the brand indefinitely. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies.

We utilize the relief from royalty method under the income approach to estimate the fair value of our remaining brands. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net sales for each brand, royalty rates (as a percentage of net sales that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations, long-term growth rates, a discount rate that reflects the level of risk associated with the future cost savings attributable to the brand, and management’s intent to invest in the brand indefinitely. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies.

The discount rates, long-term growth rates, and royalty rates used to estimate the fair values of our reporting units and our brands with 20% or less excess fair value over carrying amount, as well as the goodwill or brand carrying amounts, as of the 2024 annual impairment test for each reporting unit and brand were as follows:

Goodwill or Brands Carrying Amount (in billions)Discount RateLong-Term Growth RateRoyalty Rate
MinimumMaximumMinimumMaximumMinimumMaximum
Reporting units$24.27.8%12.0%1.3%4.0%
Brands (excess earnings method)14.58.3%8.6%1.3%1.8%
Brands (relief from royalty method)3.68.4%9.3%0.5%2.0%4.0%20.0%

Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each annual and interim impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation. However, as it is reasonably possible that changes in assumptions could occur, as a sensitivity measure, we have presented the estimated effects of isolated changes in discount rates, long-term growth rates, and royalty rates on the fair values of our reporting units and brands with 20% or less excess fair value over carrying amount. These estimated changes in fair value are not necessarily representative of the actual impairment that would be recorded in the event of a fair value decline.

If we had changed the assumptions used to estimate the fair value of our reporting units and brands with 20% or less excess fair value over carrying amount, as a result of the 2024 annual impairment test for each of these reporting units and brands, these isolated changes, which are reasonably possible to occur, would have led to the following increase/(decrease) in the aggregate fair value of these reporting units and brands (in billions):

Discount RateLong-Term Growth RateRoyalty Rate
50-Basis-Point25-Basis-Point100-Basis-Point
IncreaseDecreaseIncreaseDecreaseIncreaseDecrease
Reporting units$(4.0)$4.7$2.0$(1.8)
Brands (excess earnings method)(1.2)1.40.5(0.5)
Brands (relief from royalty method)(0.2)0.30.1(0.1)$0.3$(0.3)

Definite-lived intangible assets are amortized on a straight-line basis over the estimated periods benefited. We review definite-lived intangible assets for impairment when conditions exist that indicate the carrying amount of the assets may not be recoverable. Such conditions could include significant adverse changes in the business climate, current-period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an asset group will be disposed of before the end of its useful life. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of definite-lived intangible assets held for use, we group assets at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, the loss is calculated based on estimated fair value. Impairment losses on definite-lived intangible assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

See Note 7, Goodwill and Intangible Assets, in Item 1, Financial Statements, for our impairment testing results.

New Accounting Pronouncements

See Note 3, New Accounting Standards, in Item 1, Financial Statements, for a discussion of new accounting pronouncements.

Contingencies

See Note 14, Commitments, Contingencies, and Debt, in Item 1, Financial Statements, for a discussion of our contingencies.

Non-GAAP Financial Measures

The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP.

To supplement the condensed consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Organic Net Sales, Adjusted Operating Income, and Adjusted EPS, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income/(loss), diluted EPS, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

Management uses these non-GAAP financial measures to assist in comparing our performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes do not directly reflect our underlying operations. We believe that Organic Net Sales, Adjusted Operating Income, and Adjusted EPS provide important comparability of underlying operating results, allowing investors and management to assess the Company’s operating performance on a consistent basis.

Management believes that presenting our non-GAAP financial measures is useful to investors because it (i) provides investors with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating our results. We believe that the presentation of these non-GAAP financial measures, when considered together with the corresponding U.S. GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting our business than could be obtained absent these disclosures.

Organic Net Sales is defined as net sales excluding, when they occur, the impact of currency, acquisitions and divestitures, and a 53rd week of shipments. We calculate the impact of currency on net sales by holding exchange rates constant at the previous year’s exchange rate, with the exception of highly inflationary subsidiaries, for which we calculate the previous year’s results using the current year’s exchange rate.

Adjusted Operating Income is defined as operating income excluding, when they occur, the impacts restructuring activities, deal costs, unrealized gains/(losses) on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results), impairment losses, and certain non-ordinary course legal and regulatory matters.

Adjusted EPS is defined as diluted EPS excluding, when they occur, the impacts of restructuring activities, deal costs, unrealized losses/(gains) on commodity hedges, impairment losses, certain non-ordinary course legal and regulatory matters, losses/(gains) on the sale of a business, other losses/(gains) related to acquisitions and divestitures (e.g., tax and hedging impacts), nonmonetary currency devaluation (e.g., remeasurement gains and losses), debt prepayment and extinguishment (benefit)/costs, and certain significant discrete income tax items (e.g., U.S. and non-U.S. tax reform), and including, when they occur, adjustments to reflect preferred stock dividend payments on an accrual basis.

The Kraft Heinz Company

Reconciliation of Net Sales to Organic Net Sales

(dollars in millions)

(Unaudited)

Net SalesCurrencyAcquisitions and DivestituresOrganic Net SalesPriceVolume/Mix
Three Months Ended September 28, 2024
North America$4,826$(8)$—$4,834
International Developed Markets88215—867
Emerging Markets675(23)—698
Kraft Heinz$6,383$(16)$—$6,399
Three Months Ended September 30, 2023
North America$4,995$—$—$4,995
International Developed Markets883——883
Emerging Markets6921116665
Kraft Heinz$6,570$11$16$6,543
Year-over-year growth rates
North America(3.4)%(0.2) pp0.0 pp(3.2)%1.2 pp(4.4) pp
International Developed Markets(0.2)%1.6 pp0.0 pp(1.8)%(1.0) pp(0.8) pp
Emerging Markets(2.4)%(4.9) pp(2.4) pp4.9%3.8 pp1.1 pp
Kraft Heinz(2.8)%(0.4) pp(0.2) pp(2.2)%1.2 pp(3.4) pp

The Kraft Heinz Company

Reconciliation of Net Sales to Organic Net Sales

(dollars in millions)

(Unaudited)

Net SalesCurrencyAcquisitions and DivestituresOrganic Net SalesPriceVolume/Mix
Nine Months Ended September 28, 2024
North America$14,575$(15)$—$14,590
International Developed Markets2,62210—2,612
Emerging Markets2,073(69)122,130
Kraft Heinz$19,270$(74)$12$19,332
Nine Months Ended September 30, 2023
North America$14,959$—$—$14,959
International Developed Markets2,675——2,675
Emerging Markets2,14659502,037
Kraft Heinz$19,780$59$50$19,671
Year-over-year growth rates
North America(2.6)%(0.1) pp0.0 pp(2.5)%1.6 pp(4.1) pp
International Developed Markets(2.0)%0.4 pp0.0 pp(2.4)%(0.1) pp(2.3) pp
Emerging Markets(3.4)%(6.1) pp(1.9) pp4.6%3.3 pp1.3 pp
Kraft Heinz(2.6)%(0.7) pp(0.2) pp(1.7)%1.6 pp(3.3) pp

The Kraft Heinz Company

Reconciliation of Operating Income/(Loss) to Adjusted Operating Income

(dollars in millions)

(Unaudited)

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023September 28, 2024September 30, 2023
Operating income/(loss)$(101)$653$1,723$3,272
Restructuring activities—45—25
Unrealized losses/(gains) on commodity hedges3(48)(30)(53)
Impairment losses1,4286622,282662
Certain non-ordinary course legal and regulatory matters———2
Adjusted Operating Income$1,330$1,312$3,975$3,908

The Kraft Heinz Company

Reconciliation of Diluted EPS to Adjusted EPS

(Unaudited)

For the Three Months EndedFor the Nine Months Ended
September 28, 2024September 30, 2023September 28, 2024September 30, 2023
Diluted EPS$(0.24)$0.21$0.50$1.70
Restructuring activities(a)—0.03—0.02
Unrealized losses/(gains) on commodity hedges(b)—(0.03)(0.02)(0.03)
Impairment losses(c)0.990.501.690.50
Losses/(gains) on sale of business(d)——0.05—
Nonmonetary currency devaluation(e)—0.01—0.02
Certain significant discrete income tax items(f)———(0.01)
Adjusted EPS$0.75$0.72$2.22$2.20

(a) Gross expenses/(income) included in restructuring activities was income of $7 million ($5 million after-tax) for the three months and $8 million ($6 million after-tax) for the nine months ended September 28, 2024 and expenses of $45 million ($37 million after-tax) for the three months and $27 million ($22 million after-tax) for the nine months ended September 30, 2023 and were recorded in the following income statement line items:

  • Cost of products sold included expenses of $2 million for the nine months ended September 28, 2024 and expenses of $44 million for the three and nine months ended September 30, 2023; and

  • SG&A included income of $2 million for the nine months ended September 28, 2024 and expenses of $1 million for the three months and income of $19 million for the nine months ended September 30, 2023.

  • Other expense/(income) included income of $7 million for the three months and $8 million for the nine months ended September 28, 2024 and expenses of $2 million for the nine months ended September 30, 2023.

(b) Gross expenses/(income) included in unrealized losses/(gains) on commodity hedges were expenses of $3 million ($2 million after-tax) for the three months and income of $30 million ($22 million after-tax) for the nine months ended September 28, 2024 and income of $48 million ($36 million after-tax) for the three months and $53 million ($40 million after-tax) for the nine months ended September 30, 2023.

(c) Gross impairment losses included the following:

  • Goodwill impairment losses of $707 million ($659 million after-tax) for the three months and $1.6 billion ($1.5 billion after-tax) for the nine months ended September 28, 2024 and $510 million ($510 million after-tax) for the three and nine months ended September 30, 2023, which were recorded in SG&A;

  • Intangible asset impairment losses of $721 million ($541 million after-tax) for the three and nine months ended September 28, 2024 and $152 million ($116 million after-tax) for the three and nine months ended September 30, 2023.

(d) Gross expenses/(income) included in losses/(gains) on sale of business were expenses of zero ($4 million after-tax) for the three months and expenses of $78 million ($57 million after-tax) for the nine months ended September 28, 2024 and expenses of $2 million ($2 million after-tax) for the nine months ended September 30, 2023, and were recorded in other expense/(income).

(e) Gross expenses included in nonmonetary currency devaluation were $3 million ($3 million after-tax) for the three months and $7 million ($7 million after-tax) for the nine months ended September 28, 2024 and $9 million ($9 million after-tax) for the three months and $27 million ($27 million after-tax) for the nine months ended September 30, 2023 and were recorded in other expense/(income).

(f) Certain significant discrete income tax items were a benefit of $17 million for the nine months ended September 30, 2023. The benefit represents the reversal of uncertain tax position reserves related to the U.S. Tax Cuts and Jobs Act resulting from a conclusion of the Internal Revenue Service’s income tax examination for the year 2017 and the lapsing of the statute of limitations for such year.

Previous: Item 1. Financial Statements. · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk.