Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
Organization
On July 2, 2015 (the “2015 Merger Date”) through a series of transactions, we consummated the merger of Kraft Foods Group, Inc. (“Kraft”) with and into a wholly-owned subsidiary of H.J. Heinz Holding Corporation (“Heinz”) (the “2015 Merger”). At the closing of the 2015 Merger, Heinz was renamed The Kraft Heinz Company (“Kraft Heinz”). Before the consummation of the 2015 Merger, Heinz was controlled by Berkshire Hathaway Inc. and 3G Global Food Holdings, LP (together, the “Sponsors”), following their acquisition of H. J. Heinz Company on June 7, 2013.
We operate on a 52- or 53-week fiscal year ending on the last Saturday in December in each calendar year. Unless the context requires otherwise, references to years and quarters contained herein pertain to our fiscal years and fiscal quarters. Our 2020 fiscal year was a 52-week period that ended on December 26, 2020, the 2019 fiscal year was a 52-week period that ended on December 28, 2019, and the 2018 fiscal year was a 52-week period that ended on December 29, 2018.
Principles of Consolidation
The consolidated financial statements include Kraft Heinz and all of our controlled subsidiaries. All intercompany transactions are eliminated.
Reportable Segments
In the first quarter of 2020, our internal reporting and reportable segments changed. We moved our Puerto Rico business from the Latin America zone to the United States zone to consolidate and streamline the management of our product categories and supply chain. We also combined our Europe, Middle East, and Africa (“EMEA”), Latin America, and Asia Pacific (“APAC”) zones to form the International zone as a result of certain previously announced organizational changes.
Therefore, effective in the first quarter of 2020, we manage and report our operating results through three reportable segments defined by geographic region: United States, International, and Canada. We have reflected these changes in all historical periods presented.
Considerations Related to COVID-19
In December 2019, an outbreak of illness caused by a novel coronavirus called COVID-19 (“COVID-19”) was identified in Wuhan, China. On January 31, 2020, the United States declared a public health emergency related to COVID-19 and, on March 11, 2020, the World Health Organization declared that the spread of COVID-19 qualified as a global pandemic. In an attempt to minimize transmission of COVID-19, significant social and economic restrictions have been imposed in the United States and abroad. Though various areas have begun relaxing such precautions, varying levels of restrictions remain in many places and may be increased. These restrictions, while necessary and important for public health, have negative and positive implications for portions of our business and the U.S. and global economies. In the preparation of these financial statements and related disclosures we have assessed the impact that COVID-19 has had on our estimates, assumptions, forecasts, and accounting policies and made additional disclosures, as necessary. As COVID-19 and its impacts are unprecedented and ever evolving, future events and effects related to the pandemic cannot be determined with precision and actual results could significantly differ from estimates or forecasts.
See Note 9, Goodwill and Intangible Assets, Note 12, Postemployment Benefits, and Note 18, Debt, for further discussion of COVID-19 considerations.
Use of Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires us to make accounting policy elections, estimates, and assumptions that affect the reported amount of assets, liabilities, reserves, and expenses. These accounting policy elections, estimates, and assumptions are based on our best estimates and judgments. We evaluate our policy elections, estimates, and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We believe these estimates to be reasonable given the current facts available. We adjust our policy elections, estimates, and assumptions when facts and circumstances dictate. Market volatility, including foreign currency exchange rates, increases the uncertainty inherent in our estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from estimates. If actual amounts differ from estimates, we include the revisions in our consolidated results of operations in the period the actual amounts become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material effect on our consolidated financial statements.
Reclassifications
We made reclassifications to certain previously reported financial information to conform to our current period presentation.
Held for Sale
At December 26, 2020, we classified certain assets and liabilities as held for sale in our consolidated balance sheet, primarily relating to the divestiture of certain of our cheese businesses, a business in our International segment, and certain manufacturing equipment and land use rights across the globe. At December 28, 2019, the assets and liabilities identified as held for sale in our consolidated balance sheet primarily related to businesses in our International segment, as well as certain manufacturing equipment and land use rights across the globe. See Note 4, Acquisitions and Divestitures, for additional information.
Note 2. Significant Accounting Policies
Revenue Recognition:
Our revenues are primarily derived from customer orders for the purchase of our products. We recognize revenues as performance obligations are fulfilled when control passes to our customers. We record revenues net of variable consideration, including consumer incentives and performance obligations related to trade promotions, excluding taxes, and including all shipping and handling charges billed to customers (accounting for shipping and handling charges that occur after the transfer of control as fulfillment costs). We also record a refund liability for estimated product returns and customer allowances as reductions to revenues within the same period that the revenue is recognized. We base these estimates principally on historical and current period experience factors. We recognize costs paid to third party brokers to obtain contracts as expenses as our contracts are generally less than one year.
Advertising, Consumer Incentives, and Trade Promotions:
We promote our products with advertising, consumer incentives, and performance obligations related to trade promotions. Consumer incentives and trade promotions include, but are not limited to, discounts, coupons, rebates, performance-based in-store display activities, and volume-based incentives. Variable consideration related to consumer incentive and trade promotion activities is recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization, redemption rates, and/or current period experience factors. We review and adjust these estimates at least quarterly based on actual experience and other information.
Advertising expenses are recorded in selling, general and administrative expenses (“SG&A”). For interim reporting purposes, we charge advertising to operations as a percentage of estimated full year sales activity and marketing costs. We then review and adjust these estimates each quarter based on actual experience and other information. We recorded advertising expenses of $646 million in 2020, $534 million in 2019, and $584 million in 2018, which represented costs to obtain physical advertisement spots in television, radio, print, digital, and social channels. We also incur other advertising and marketing costs such as shopper marketing, sponsorships, and agency advertisement conception, design, and public relations fees. Total advertising and marketing costs were $1.2 billion in 2020 and $1.1 billion in both 2019 and 2018.
Research and Development Expense:
We expense costs as incurred for product research and development within SG&A. Research and development expenses were approximately $119 million in 2020, $112 million in 2019, and $109 million in 2018.
Stock-Based Compensation:
We recognize compensation costs related to equity awards on a straight-line basis over the vesting period of the award, which is generally three to five years, or on a straight-line basis over the requisite service period for each separately vesting portion of the awards. These costs are primarily recognized within SG&A. We estimate expected forfeitures rather than recognizing forfeitures as they occur in determining our equity award compensation costs. We classify equity award compensation costs primarily within general corporate expenses. See Note 11, Employees’ Stock Incentive Plans, for additional information.
Postemployment Benefit Plans:
We maintain various retirement plans for the majority of our employees. These include pension benefits, postretirement health care benefits, and defined contribution benefits. The cost of these plans is charged to expense over an appropriate term based on, among other things, the cost component and whether the plan is active or inactive. Changes in the fair value of our plan assets result in net actuarial gains or losses. These net actuarial gains and losses are deferred into accumulated other comprehensive income/(losses) and amortized within other expense/(income) in future periods using the corridor approach. The corridor is 10% of the greater of the market-related value of the plan’s asset or projected benefit obligation. Any actuarial gains and losses in excess of the corridor are then amortized over an appropriate term based on whether the plan is active or inactive. See Note 12, Postemployment Benefits, for additional information.
Income Taxes:
We recognize income taxes based on amounts refundable or payable for the current year and record deferred tax assets or liabilities for any difference between the financial reporting and tax basis of our assets and liabilities. We also recognize deferred tax assets for temporary differences, operating loss carryforwards, and tax credit carryforwards. Inherent in determining our annual tax rate are judgments regarding business plans, planning opportunities, and expectations about future outcomes. Realization of certain deferred tax assets, primarily net operating loss and other carryforwards, is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods.
We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect our results in the quarter of such change.
We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, we consider future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, we would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding adjustment to our provision for/(benefit from) income taxes. The resolution of tax reserves and changes in valuation allowances could be material to our results of operations for any period, but is not expected to be material to our financial position.
Common Stock and Preferred Stock Dividends:
Dividends are recorded as a reduction to retained earnings. When we have an accumulated deficit, dividends are recorded as a reduction of additional paid-in capital.
Cash and Cash Equivalents:
Cash equivalents include term deposits with banks, money market funds, and all highly liquid investments with original maturities of three months or less. The fair value of cash equivalents approximates the carrying amount. Cash and cash equivalents that are legally restricted as to withdrawal or usage is classified in other current assets or other non-current assets, as applicable, on the consolidated balance sheets.
Inventories:
Inventories are stated at the lower of cost or net realizable value. We value inventories primarily using the average cost method.
Property, Plant and Equipment:
Property, plant and equipment are stated at historical cost and depreciated on the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods ranging from three years to 20 years and buildings and improvements over periods up to 40 years. Capitalized software costs are included in property, plant and equipment if we have the contractual right to take possession of the software at any time and it is feasible for us to either run the software on our own hardware or contract with a third party to host the software. These costs are amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed seven years. We review long-lived assets for impairment when conditions exist that indicate the carrying amount of the assets may not be fully 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 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 assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Hosted Cloud Computing Arrangement that is a Service Contract:
Deferred implementation costs for hosted cloud computing service arrangements are stated at historical cost and amortized on a straight-line basis over the term of the hosting arrangement that the implementation costs relate to. Deferred implementation costs for these arrangements are included in prepaid expenses and amortized to SG&A. The corresponding cash flows related to these arrangements will be reported within operating activities. We review the deferred implementation costs for impairment when we believe the deferred costs may no longer be recoverable. Such conditions could include situations where the arrangement is not expected to provide substantive service potential, a significant change occurs in the manner in which the arrangement is used or expected to be used, including early cancellation or termination of the arrangement, or situations where the arrangement has had, or will have, a significant change made to it. In instances where we have concluded that an impairment exists, we accelerate the deferred costs on the consolidated balance sheet for immediate expense recognition in SG&A.
Goodwill and Intangible Assets:
We maintain 15 reporting units, nine of which comprise our goodwill balance. Our indefinite-lived intangible asset balance primarily consists of a number of individual brands. We test our reporting units and brands for impairment annually as of the first day of our second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit or brand is less than its carrying amount. Such events and circumstances could include a sustained decrease in our market capitalization, increased competition or unexpected loss of market share, increased input costs beyond projections (for example due to regulatory or industry changes), disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster, pandemic, or loss of a customer, supplier, or other significant business relationship), unexpected significant declines in operating results, significant adverse changes in the markets in which we operate, or changes in management strategy. We test reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. We test brands for impairment by comparing the estimated fair value of each brand with its carrying amount. If the carrying amount of a reporting unit or brand exceeds its estimated fair value, we record an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed the associated carrying amount of goodwill.
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 9, Goodwill and Intangible Assets, for additional information.
Leases:
We determine whether a contract is or contains a lease at contract inception based on the presence of identified assets and our right to obtain substantially all the economic benefit from or to direct the use of such assets. When we determine a lease exists, we record a right-of-use (“ROU”) asset and corresponding lease liability on our consolidated balance sheet. ROU assets represent our right to use an underlying asset for the lease term. Lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets are recognized at the lease commencement date at the value of the lease liability and are adjusted for any prepayments, lease incentives received, and initial direct costs incurred. Lease liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease term. As the discount rate implicit in the lease is not readily determinable in most of our leases, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
We do not record lease contracts with a term of 12 months or less on our consolidated balance sheets.
We recognize fixed lease expense for operating leases on a straight-line basis over the lease term. For finance leases, we recognize amortization expense over the shorter of the estimated useful life of the underlying assets or the lease term. In instances of title transfer, expense is recognized over the useful life. Interest expense on a finance lease is recognized using the effective interest method over the lease term.
We have lease agreements with non-lease components that relate to the lease components (e.g., common area maintenance such as cleaning or landscaping, insurance, etc.). We account for each lease and any non-lease components associated with that lease as a single lease component for all underlying asset classes. Accordingly, all costs associated with a lease contract are accounted for as lease costs.
Certain leasing arrangements require variable payments that are dependent on usage or output or may vary for other reasons, such as insurance and tax payments. Variable lease payments that do not depend on an index or rate are excluded from lease payments in the measurement of the ROU asset and lease liability and are recognized as expense in the period in which the payment occurs.
Our lease agreements do not include significant restrictions or covenants, and residual value guarantees are generally not included within our leases.
Financial Instruments:
As we source our commodities on global markets and periodically enter into financing or other arrangements abroad, we use a variety of risk management strategies and financial instruments to manage commodity price, foreign currency exchange rate, and interest rate risks. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. One way we do this is through actively hedging our risks through the use of derivative instruments. As a matter of policy, we do not use highly leveraged derivative instruments, nor do we use financial instruments for speculative purposes.
Derivatives are recorded on our consolidated balance sheets as assets or liabilities at fair value, which fluctuates based on changing market conditions.
Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others are not designated as hedging instruments and are marked to market through net income/(loss). The gains and losses on cash flow hedges are deferred as a component of accumulated other comprehensive income/(losses) and are recognized in net income/(loss) at the time the hedged item affects net income/(loss), in the same line item as the underlying hedged item. The excluded component on cash flow hedges is recognized in net income/(loss) over the life of the hedging relationship in the same income statement line item as the underlying hedged item. We also designate certain derivatives and non-derivatives as net investment hedges to hedge the net assets of certain foreign subsidiaries which are exposed to volatility in foreign currency exchange rates. Changes in the value of these derivatives and remeasurements of our non-derivatives designated as net investment hedges are calculated each period using the spot method, with changes reported in foreign currency translation adjustment within accumulated other comprehensive income/(losses). Such amounts will remain in accumulated other comprehensive income/(losses) until the complete or substantially complete liquidation of our investment in the underlying foreign operations. The excluded component on derivatives designated as net investment hedges is recognized in net income/(loss) within interest expense. The income statement classification of gains and losses related to derivative instruments not designated as hedging instruments is determined based on the underlying intent of the contracts. Cash flows related to the settlement of derivative instruments designated as net investment hedges of foreign operations are classified in the consolidated statements of cash flows within investing activities. All other cash flows related to derivative instruments are classified in the same line item as the cash flows of the related hedged item, which is generally within operating activities.
To qualify for hedge accounting, a specified level of hedging effectiveness between the hedging instrument and the item being hedged must be achieved at inception and maintained throughout the hedged period. When a hedging instrument no longer meets the specified level of hedging effectiveness, we reclassify the related hedge gains or losses previously deferred into other comprehensive income/(losses) to net income/(loss) within other expense/(income). We formally document our risk management objectives, our strategies for undertaking the various hedge transactions, the nature of and relationships between the hedging instruments and hedged items, and the method for assessing hedge effectiveness. Additionally, for qualified hedges of forecasted transactions, we specifically identify the significant characteristics and expected terms of the forecasted transactions. If it becomes probable that a forecasted transaction will not occur, the hedge will no longer be effective and all of the derivative gains or losses would be recognized in net income/(loss) in the current period.
Unrealized gains and losses on our commodity derivatives not designated as hedging instruments are recorded in cost of products sold and are included within general corporate expenses until realized. Once realized, the gains and losses are included within the applicable segment operating results. See Note 13, Financial Instruments, for additional information.
Our designated and undesignated derivative contracts include:
•Net investment hedges. We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. We manage this risk by utilizing derivative and non-derivative instruments, including cross-currency swap contracts, foreign exchange contracts, and certain foreign denominated debt designated as net investment hedges. We exclude the interest accruals and any off-market values on cross-currency swap contracts and the forward points on foreign exchange forward contracts from the assessment and measurement of hedge effectiveness. We recognize the interest accruals and any amortization of off-market values on cross-currency swap contracts in net income/(loss) within interest expense. We amortize the forward points on foreign exchange contracts into net income/(loss) within interest expense over the life of the hedging relationship.
•Foreign currency cash flow hedges. We use various financial instruments to mitigate our exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. Our principal foreign currency exposures that are hedged include the euro, British pound sterling, and Canadian dollar. These instruments include cross-currency swap contracts and foreign exchange forward and option contracts. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment. We exclude the interest accruals on cross-currency swap contracts (when interest is not a hedged item) and the forward points and option premiums or discounts on foreign exchange contracts from the assessment and measurement of hedge effectiveness and amortize such amounts into net income/(loss) in the same line item as the underlying hedged item over the life of the hedging relationship.
•Interest rate cash flow hedges. From time to time, we have used derivative instruments, including interest rate swaps, as part of our interest rate risk management strategy. We have primarily used interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations.
•Commodity derivatives. We are exposed to price risk related to forecasted purchases of certain commodities that we primarily use as raw materials. We enter into commodity purchase contracts primarily for dairy products, meat products, coffee beans, vegetable oils, sugar, wheat products, corn products, and cocoa products. These commodity purchase contracts generally are not subject to the accounting requirements for derivative instruments and hedging activities under the normal purchases and normal sales exception. We also use commodity futures, options, and swaps to economically hedge the price of certain commodity costs, including the commodities noted above, as well as packaging products, natural gas, and diesel fuel. We do not designate these commodity contracts as hedging instruments. We also occasionally use futures to economically cross hedge a commodity exposure.
Translation of Foreign Currencies:
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period end. Income statement accounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of accumulated other comprehensive income/(losses) on the balance sheet. Gains and losses from foreign currency transactions are included in net income/(loss) for the period.
Highly Inflationary Accounting:
We apply highly inflationary accounting if the cumulative inflation rate in an economy for a three-year period meets or exceeds 100%. Under highly inflationary accounting, the financial statements of a subsidiary are remeasured into our reporting currency (U.S. dollars) based on the legally available exchange rate at which we expect to settle the underlying transactions. Exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in net income/(loss), rather than accumulated other comprehensive income/(losses) on the balance sheet, until such time as the economy is no longer considered highly inflationary. Certain non-monetary assets and liabilities are recorded at the applicable historical exchange rates. We apply highly inflationary accounting to the results of our subsidiaries in Venezuela and Argentina. The net monetary assets of our subsidiary in Argentina were insignificant at December 26, 2020. See Note 15, Venezuela - Foreign Currency and Inflation, for additional information related to our subsidiary in Venezuela.
Note 3. New Accounting Standards
Accounting Standards Adopted in the Current Year
Measurement of Current Expected Credit Losses:
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13 to update the methodology used to measure current expected credit losses (“CECL”). This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This ASU replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. This ASU became effective in the first quarter of 2020. We adopted this ASU and guidance on our first day of 2020 and, based on the insignificant impact of this ASU on our financial statements, a cumulative-effect adjustment to retained earnings/(deficit) was not deemed necessary.
Fair Value Measurement Disclosures:
In August 2018, the FASB issued ASU 2018-13 related to fair value measurement disclosures. This ASU removes the requirement to disclose the amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy, the policy for determining that a transfer has occurred, and valuation processes for Level 3 fair value measurements. Additionally, this ASU modifies the disclosures related to the measurement uncertainty for recurring Level 3 fair value measurements (by removing the requirement to disclose sensitivity to future changes) and the timing of liquidation of investee assets (by removing the timing requirement in certain instances). The guidance also requires new disclosures for Level 3 financial assets and liabilities, including the amount and location of unrealized gains and losses recognized in other comprehensive income/(loss) and additional information related to significant unobservable inputs used in determining Level 3 fair value measurements. This ASU became effective beginning in the first quarter of 2020. Early adoption of the guidance in whole was permitted. Alternatively, companies could have early adopted the portions of the guidance that removed or modified disclosures and delayed adoption of the additional disclosures until their effective date. Certain of the amendments in this ASU must be applied prospectively upon adoption, while other amendments must be applied retrospectively upon adoption. We elected to early adopt the provisions related to removing disclosures in the fourth quarter of 2018 on a retrospective basis. Accordingly, we removed certain disclosures from Note 12, Postemployment Benefits, and Note 13, Financial Instruments, in our Annual Report on Form 10-K for the year ended December 29, 2018. There was no other impact to our financial statement disclosures as a result of early adopting the provisions related to removing disclosures.
Implementation Costs Incurred in Hosted Cloud Computing Service Arrangements:
In August 2018, the FASB issued ASU 2018-15 related to accounting for implementation costs incurred in hosted cloud computing service arrangements. Under the new guidance, implementation costs incurred in a hosting arrangement that is a service contract should be expensed or deferred based on the nature of the costs and the project stage during which such costs are incurred. If the implementation costs qualify for deferral, they must be amortized over the term of the hosting arrangement and assessed for impairment. Additionally, the ASU requires disclosure of the nature of any hosted cloud computing service arrangement and requires financial statement presentation of the deferred costs be consistent with fees incurred under the hosting arrangement. This ASU became effective in the first quarter of 2020. We adopted this ASU in the first quarter of 2020 using a prospective transition method. The adoption of this ASU did not have a significant impact on our financial statements and related disclosures. See Note 2, Significant Accounting Policies, for our policy on accounting for hosted cloud computing service arrangements.
Disclosure Requirements for Certain Employer-Sponsored Benefit Plans:
In August 2018, the FASB issued ASU 2018-14 related to the disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans. The guidance requires sponsors of these plans to provide additional disclosures, including a narrative description of reasons for any significant gains or losses impacting the benefit obligation for the period. Additionally, this guidance eliminates certain previous disclosure requirements. This ASU became effective for our fiscal year ended December 26, 2020. We adopted this ASU for our annual disclosures and applied the ASU amendments on a retrospective basis to all periods presented as required. The adoption of this ASU did not have a significant impact on our financial statements.
Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762:
In March 2020, the Securities & Exchange Commission (the “SEC”) issued SEC Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, with an effective date of January 4, 2021 and early adoption permitted. The final rules amended disclosures in Rule 3-10 of Regulation S-X to replace the previously required condensed consolidating financial information with summarized financial information of the issuer and the guarantor and, among other things, require expanded qualitative disclosures. We chose to voluntarily comply with the amended rules effective for the quarterly period ended June 27, 2020, and for all periods thereafter, and we elected to provide the required information in Management’s Discussion and Analysis of Financial Condition and Results of Operations. In October 2020, the FASB issued ASU 2020-09 to reflect the changes in disclosure requirements made by the SEC in the FASB Accounting Standards Codification (“ASC”).
Accounting Standards Not Yet Adopted
Simplifying the Accounting for Income Taxes:
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. This ASU will be effective beginning in the first quarter of 2021. The adoption of this ASU will not have a significant impact on our financial statements and related disclosures.
Note 4. Acquisitions and Divestitures
Acquisitions
Primal Acquisition:
On January 3, 2019 (the “Primal Acquisition Date”), we acquired 100% of the outstanding equity interests in Primal Nutrition, LLC (“Primal Nutrition”) (the “Primal Acquisition”), a better-for-you brand primarily focused on condiments, sauces, and dressings, with growing product lines in healthy snacks and other categories. The Primal Kitchen brand holds leading positions in the e-commerce and natural channels.
The Primal Acquisition was accounted for under the acquisition method of accounting for business combinations. The total cash consideration paid for Primal Nutrition was $201 million. We utilized estimated fair values at the Primal Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. Such allocation for the Primal Acquisition was final as of September 28, 2019.
The final purchase price allocation to assets acquired and liabilities assumed in the Primal Acquisition was (in millions):
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|
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Cash
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$
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2
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Other current assets
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15
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Identifiable intangible assets
|
66
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Current liabilities
|
(6)
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Net assets acquired
|
77
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Goodwill on acquisition
|
124
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Total consideration
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$
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201
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The Primal Acquisition resulted in $124 million of tax deductible goodwill relating principally to planned expansion of the Primal Kitchen brand into new channels and categories. This goodwill was allocated to the United States segment.
The purchase price allocation to identifiable intangible assets acquired in the Primal Acquisition was:
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Fair Value
(in millions of dollars)
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Weighted Average Life
(in years)
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Definite-lived trademarks
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$
|
52.5
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|
|
15
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Customer-related assets
|
13.5
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|
|
20
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Total
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$
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66.0
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We valued trademarks using the relief from royalty method and customer-related assets using the distributor method. Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined 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 market comparables.
We used carrying values as of the Primal Acquisition Date to value certain current and non-current assets and liabilities, as we determined that they represented the fair value of those items at the Primal Acquisition Date.
Cerebos Acquisition:
On March 9, 2018 (the “Cerebos Acquisition Date”), we acquired 100% of the outstanding equity interests in Cerebos Pacific Limited (“Cerebos”) (the “Cerebos Acquisition”), an Australian food and beverage company.
The Cerebos Acquisition was accounted for under the acquisition method of accounting for business combinations. The total cash consideration paid for Cerebos was $244 million. We utilized estimated fair values at the Cerebos Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. Such allocation was final as of December 29, 2018.
The final purchase price allocation to assets acquired and liabilities assumed in the Cerebos Acquisition was (in millions):
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Cash
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$
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23
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Other current assets
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65
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Property, plant and equipment, net
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75
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Identifiable intangible assets
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100
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Trade and other payables
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(41)
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Other non-current liabilities
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(3)
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Net assets acquired
|
219
|
|
Goodwill on acquisition
|
25
|
|
Total consideration
|
$
|
244
|
|
The Cerebos Acquisition resulted in $25 million of non tax deductible goodwill relating principally to planned expansion of Cerebos brands into new categories and markets. This goodwill was allocated to the International segment.
The final purchase price allocation to identifiable intangible assets acquired in the Cerebos Acquisition was:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
(in millions of dollars)
|
|
Weighted Average Life
(in years)
|
Definite-lived trademarks
|
$
|
87
|
|
|
22
|
Customer-related assets
|
13
|
|
|
12
|
Total
|
$
|
100
|
|
|
|
We valued trademarks using the relief from royalty method and customer-related assets using the distributor method. Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined 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 market comparables.
We used carrying values as of the Cerebos Acquisition Date to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items at the Cerebos Acquisition Date.
We valued finished goods and work-in-process inventory using a net realizable value approach. Raw materials and packaging inventory was valued using the replacement cost approach.
We valued property, plant and equipment using a combination of the income approach, the market approach, and the cost approach, which is based on the current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors.
Other Acquisitions:
In the third quarter of 2018, we had two additional acquisitions of businesses, including The Ethical Bean Coffee Company Ltd., a Canadian-based coffee roaster, and Wellio, Inc., a full-service meal planning and preparation technology start-up in the U.S. The aggregate consideration paid related to these acquisitions was $27 million.
Deal Costs:
Related to our acquisitions, we incurred aggregate deal costs of $2 million in 2019 and $20 million in 2018. We recognized these deal costs primarily in SG&A. There were no deal costs related to acquisitions in 2020.
Divestitures
Cheese Transaction:
In September 2020, we entered into a definitive agreement with an affiliate of Groupe Lactalis (“Lactalis”) to sell certain assets in our global cheese business, as well as to license certain trademarks, for total consideration of approximately $3.3 billion, including approximately $3.2 billion of cash consideration and approximately $75 million related to a perpetual license for the Cracker Barrel brand that Lactalis will grant to us for certain products (the “Cheese Transaction”). The Cheese Transaction has two primary components. The first component relates to the perpetual licenses for the Kraft and Velveeta brands that we will grant to Lactalis for certain cheese products (the “Kraft and Velveeta Licenses”). The second component relates to the net assets to be transferred to Lactalis (the “Disposal Group”), for which we recorded a $300 million impairment loss in the third quarter of 2020. We discuss the considerations related to each of these components in more detail below.
Of the $3.3 billion total consideration, approximately $1.5 billion was attributed to the Kraft and Velveeta Licenses based on the estimated fair value of the licensed portion of each brand. Lactalis will have rights to the Kraft and Velveeta brands in association with the manufacturing, distribution, marketing, and sale of certain cheese products in certain countries. Lactalis will also receive the rights to certain know-how in manufacturing the authorized cheese products. The license income will be recognized in the future as a reduction to SG&A, as it does not constitute our ongoing major or central operations.
The remaining $1.8 billion of consideration was attributed to the Disposal Group. The net assets in the Disposal Group are associated with our natural, grated, cultured, and specialty cheese businesses in the U.S., our grated cheese business in Canada, and our grated, processed, and natural cheese businesses outside the U.S. and Canada. The Disposal Group includes our global intellectual property rights to several brands, including, among others, Cracker Barrel, Breakstone’s, Knudsen, Athenos, Polly-O, and Hoffman’s, along with the Cheez Whiz brand in the majority of the countries outside of the U.S. and Canada. The Disposal Group also includes certain inventories, three manufacturing facilities and one distribution center in the U.S., and certain other manufacturing equipment.
Included in the consideration attributed to the Disposal Group is the perpetual license that Lactalis will grant to us for the Cracker Barrel brand for certain products, including macaroni and cheese. We determined that the Cracker Barrel license will be recognized on our consolidated balance sheet as an intangible asset upon closing of the Cheese Transaction, and increased the total consideration by approximately $75 million as noted above, which was the estimated fair value of the licensed portion of the Cracker Barrel brand.
In the third quarter of 2020, we determined that the Disposal Group met the held for sale criteria. Accordingly, we have presented the assets and liabilities of the Disposal Group as held for sale on the consolidated balance sheet at December 26, 2020. As of September 15, 2020, the date the Disposal Group was determined to be held for sale, we tested the individual assets included within the Disposal Group for impairment. The net assets of the Disposal Group had an aggregate carrying amount above their $1.8 billion estimated fair value. We determined that the goodwill within the Disposal Group was partially impaired. Accordingly, we recorded a non-cash impairment loss of $300 million, which was recognized in SG&A, in the third quarter of 2020. As of December 26, 2020, we assessed the fair value less costs to sell of the net assets of the Disposal Group and determined that their estimated fair value exceeded their carrying amount.
Additional considerations related to the Cheese Transaction include the treatment of the Kraft and Velveeta Licenses upon closing of the transaction. At the time the licensed rights are granted, we will reassess the remaining fair value of the retained portions of the Kraft and Velveeta brands and may record a charge to reduce the intangible asset carrying amounts to reflect the lower future cash flows expected to be generated after monetization of the licensed portion of each brand. Any potential reduction to the intangible asset carrying amounts will depend upon the excess fair value, if any, over carrying amount for each brand at the time we grant the perpetual licenses, which will be on the closing date of the Cheese Transaction. Changes in the fair value of the retained and licensed portions of each brand will impact the amount of any potential charges and the amount of license income that will be recognized, which, at this time, we would not expect to exceed the fair value of the perpetual licenses.
The Cheese Transaction is expected to close in the first half of 2021, subject to customary closing conditions, including regulatory approvals. Upon closing of the Cheese Transaction, and in addition to any potential impairment losses identified related to the Kraft and Velveeta brands noted above, we may recognize a gain or loss on sale of business. While the consideration for the transaction is not expected to materially change, the actual gain or loss on sale of business to be recognized will depend on, among other things, final transaction proceeds, inventory levels, and underlying costs as of the closing date, and changes in the estimated fair values of certain components of the consideration.
We utilized the excess earnings method under the income approach to estimate the fair value of the licensed portion of the Kraft brand and the relief from royalty method under the income approach to estimate the fair value of the licensed portions of the Velveeta brand and the Cracker Barrel brand. Some of the more significant assumptions inherent in estimating these fair values include the estimated future annual net sales and net cash flows for each brand, contributory asset charges, royalty rates (as a percentage of net sales that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations, long-term growth rates, and a discount rate that reflects the level of risk associated with the future earnings attributable to each brand. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, and guideline companies. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. See Note 9, Goodwill and Intangible Assets, for additional information on the underlying assumptions and sensitivities.
The Cheese Transaction is not considered a strategic shift that will have a major effect on our operations or financial results; therefore, it will not be reported as discontinued operations.
Other Potential Dispositions:
As of December 26, 2020, we were in negotiations with a prospective third-party buyer for the sale of one business in our International segment. We expect this potential transaction to close in the next 12 months. Related to this potential transaction, we recorded an estimated pre-tax loss of $71 million within other expense/(income) in the fourth quarter of 2019. We classified the related assets and liabilities as held for sale on the consolidated balance sheets at December 26, 2020 and December 28, 2019.
In the first quarter of 2020, we had deemed a separate business in our International segment held for sale and recorded an estimated pre-tax loss on sale of business of $3 million within other expense/(income). In the fourth quarter, we deemed this business no longer held for sale and reversed the corresponding pre-tax loss. The related assets and liabilities are no longer classified as held for sale on our consolidated balance sheet at December 26, 2020.
Heinz India Transaction:
In October 2018, we entered into a definitive agreement with two third-parties, Zydus Wellness Limited and Cadila Healthcare Limited (collectively, the “Buyers”), to sell 100% of our equity interests in Heinz India Private Limited (“Heinz India”) for approximately 46 billion Indian rupees (approximately $655 million at the Heinz India Closing Date (defined below)) (the “Heinz India Transaction”). In connection with the Heinz India Transaction, we transferred to the Buyers, among other assets and operations, our global intellectual property rights to several brands, including Complan, Glucon-D, Nycil, and Sampriti. Our core brands (i.e., Heinz and Kraft) were not transferred. The Heinz India Transaction closed on January 30, 2019 (the “Heinz India Closing Date”). Related to the Heinz India Transaction, we recognized a pre-tax gain in other expense/(income) of $249 million in 2019, including $246 million in the first quarter and $3 million in the third quarter.
The components of the pre-tax gain recognized in 2019 were as follows (in millions):
|
|
|
|
|
|
Proceeds
|
$
|
655
|
|
Less investment in Heinz India
|
(355)
|
|
Recognition of tax indemnification
|
(48)
|
|
Other
|
(3)
|
|
Pre-tax gain on sale of Heinz India
|
$
|
249
|
|
In connection with the Heinz India Transaction, we agreed to indemnify the Buyers from and against any tax losses for any taxable period prior to the Heinz India Closing Date, including taxes for which we are liable as a result of any transaction that occurred on or before such date. To determine the fair value of our tax indemnity we made various assumptions, including the range of potential dates the tax matters will be resolved, the range of potential future cash flows, the probabilities associated with potential resolution dates and potential future cash flows, and the discount rate. We recorded tax indemnity liabilities related to the Heinz India Transaction totaling approximately $48 million, including $18 million in other current liabilities and $30 million in other non-current liabilities on our consolidated balance sheet as of the Heinz India Closing Date. We also recorded a corresponding $48 million reduction of the gain on the Heinz India Transaction within other expense/(income) in our consolidated statement of income in the first quarter of 2019. Future changes to the fair value of these tax indemnity liabilities will continue to impact other expense/(income) throughout the life of the exposures as a component of the gain on sale for the Heinz India Transaction.
The other component of the pre-tax gain on the sale of Heinz India in the table above primarily related to losses on net investment hedges of our investment in Heinz India, which were settled in the first quarter of 2019, and were partially offset by the local India tax recovery in the third quarter of 2019.
In the first quarter of 2020, we recognized a pre-tax gain of approximately $1 million related to local India tax recoveries. In the fourth quarter of 2020, we adjusted the tax indemnity liabilities to fair value, resulting in a $3 million pre-tax loss on sale of business. Accordingly, we recognized a net pre-tax loss on sale of business of $2 million related to the Heinz India Transaction in 2020. This pre-tax loss was recognized within other expense/(income).
Canada Natural Cheese Transaction:
In November 2018, we entered into a definitive agreement with a third-party, Parmalat SpA (“Parmalat”), to sell certain assets in our natural cheese business in Canada for approximately 1.6 billion Canadian dollars (approximately $1.2 billion at the Canada Natural Cheese Closing Date (defined below)) (the “Canada Natural Cheese Transaction”). In connection with the Canada Natural Cheese Transaction, we transferred certain assets to Parmalat, including the intellectual property rights to Cracker Barrel in Canada and P’Tit Quebec globally. The Canada Natural Cheese Transaction closed on July 2, 2019 (the “Canada Natural Cheese Closing Date”). Related to the Canada Natural Cheese Transaction, we recognized a pre-tax gain of $242 million, which was included in other expense/(income) in 2019.
The components of the pre-tax gain were as follows (in millions):
|
|
|
|
|
|
Proceeds
|
$
|
1,236
|
|
Less carrying value of Canada Natural Cheese net assets
|
(995)
|
|
Other
|
1
|
|
Pre-tax gain resulting from Canada Natural Cheese Transaction
|
$
|
242
|
|
South Africa Transaction:
In May 2018, we sold our 50.1% interest in our South African subsidiary to our minority interest partner. This transaction included proceeds of $18 million. We recorded a pre-tax loss on the sale of a business of approximately $15 million, which was included in other expense/(income) on the consolidated statement of income for 2018.
Deal Costs:
Related to our divestitures, we incurred aggregate deal costs of $8 million in 2020, $17 million in 2019, and $3 million in 2018. We recognized these deal costs in SG&A.
Held for Sale
Our assets and liabilities held for sale, by major class, were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
$
|
33
|
|
|
$
|
27
|
|
Inventories
|
385
|
|
|
21
|
|
Property, plant and equipment, net
|
257
|
|
|
25
|
|
Goodwill (net of impairment of $300 at December 26, 2020 and $0 at December 28, 2019)
|
281
|
|
|
—
|
|
Intangible assets, net
|
873
|
|
|
23
|
|
Other
|
34
|
|
|
26
|
|
Total assets held for sale
|
$
|
1,863
|
|
|
$
|
122
|
|
LIABILITIES
|
|
|
|
Other
|
$
|
17
|
|
|
$
|
9
|
|
Total liabilities held for sale
|
$
|
17
|
|
|
$
|
9
|
|
The balances held for sale at December 26, 2020 primarily related to the Cheese Transaction, a business in our International segment, and certain manufacturing equipment and land use rights across the globe. The balances held for sale at December 28, 2019 primarily related to businesses in our International segment, as well as certain manufacturing equipment and land use rights across the globe.
Subsequent Event
On February 10, 2021, we entered into a definitive agreement with Hormel Foods Corporation (“Hormel”) to sell certain assets in our global nuts business for cash consideration of approximately $3.4 billion (the “Nuts Transaction”). The net assets to be transferred in the Nuts Transaction include, among other things, our intellectual property rights to the Planters brand and to the Corn Nuts brand, three manufacturing facilities in the U.S., and the associated inventories. We are currently evaluating the financial statement impacts of the Nuts Transaction, including its impact on the related goodwill and intangible assets. We currently expect to record a pre-tax loss of approximately $200 million to $300 million on the Nuts Transaction in the first quarter of 2021. The loss is expected to be classified primarily as a non-cash goodwill impairment. We will classify the related assets and liabilities as held for sale on our condensed consolidated balance sheet at March 27, 2021. The Nuts Transaction is expected to close in the first half of 2021, subject to customary closing conditions, including regulatory approvals. We do not expect the Nuts Transaction to qualify as discontinued operations.
Note 5. Restructuring Activities
As part of our restructuring activities, we incur expenses that qualify as exit and disposal costs under U.S. GAAP. These include severance and employee benefit costs and other exit costs. Severance and employee benefit costs primarily relate to cash severance, non-cash severance, including accelerated equity award compensation expense, and pension and other termination benefits. Other exit costs primarily relate to lease and contract terminations. We also incur expenses that are an integral component of, and directly attributable to, our restructuring activities, which do not qualify as exit and disposal costs under U.S. GAAP. These include asset-related costs and other implementation costs. Asset-related costs primarily relate to accelerated depreciation and asset impairment charges. Other implementation costs primarily relate to start-up costs of new facilities, professional fees, asset relocation costs, costs to exit facilities, and costs associated with restructuring benefit plans.
Employee severance and other termination benefit packages are primarily determined based on established benefit arrangements, local statutory requirements, and historical benefit practices. We recognize the contractual component of these benefits when payment is probable and estimable; additional elements of severance and termination benefits associated with non-recurring benefits are recognized ratably over each employee’s required future service period. Charges for accelerated depreciation are recognized on long-lived assets that will be taken out of service before the end of their normal service, in which case depreciation estimates are revised to reflect the use of the asset over its shortened useful life. Asset impairments establish a new fair value basis for assets held for disposal or sale, and those assets are written down to expected net realizable value if carrying value exceeds fair value. All other costs are recognized as incurred.
Restructuring Activities:
We have restructuring programs globally, which are focused primarily on workforce reduction and factory closure and consolidation. In 2020, we eliminated approximately 240 positions related to these programs. As of December 26, 2020, we expect to eliminate approximately 360 additional positions in 2021. In 2020, restructuring activities generated a $2 million net credit, which included $16 million of credits in other implementation costs, partially offset by $13 million of non-cash asset-related costs and $1 million of severance and employee benefit costs. Restructuring expenses totaled $108 million in 2019 and $368 million in 2018.
Our net liability balance for restructuring project costs that qualify as exit and disposal costs under U.S. GAAP (i.e., severance and employee benefit costs and other exit costs) was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Employee Benefit Costs
|
|
Other Exit Costs
|
|
Total
|
Balance at December 28, 2019
|
$
|
22
|
|
|
$
|
24
|
|
|
$
|
46
|
|
Charges/(credits)
|
1
|
|
|
—
|
|
|
1
|
|
Cash payments
|
(13)
|
|
|
(4)
|
|
|
(17)
|
|
Balance at December 26, 2020
|
$
|
10
|
|
|
$
|
20
|
|
|
$
|
30
|
|
We expect the liability for severance and employee benefit costs as of December 26, 2020 to be paid by the end of 2021. The liability for other exit costs primarily relates to lease obligations. The cash impact of these obligations will continue for the duration of the lease terms, which expire between 2021 and 2026.
Integration Program:
At the end of 2017, we had substantially completed our multi-year program announced following the 2015 Merger (the “Integration Program”), which was designed to reduce costs and integrate and optimize our combined organization, primarily in the United States and Canada reportable segments.
We incurred pre-tax costs related to the Integration Program of $92 million in 2018. No such expenses were incurred in 2019 or 2020.
Total Expenses:
Total expense/(income) related to restructuring activities, including the Integration Program, by income statement caption, were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Severance and employee benefit costs - Cost of products sold
|
$
|
—
|
|
|
$
|
(3)
|
|
|
$
|
12
|
|
Severance and employee benefit costs - SG&A
|
1
|
|
|
14
|
|
|
32
|
|
Severance and employee benefit costs - Other expense/(income)
|
—
|
|
|
4
|
|
|
6
|
|
Asset-related costs - Cost of products sold
|
13
|
|
|
29
|
|
|
59
|
|
Asset-related costs - SG&A
|
—
|
|
|
8
|
|
|
36
|
|
Other costs - Cost of products sold
|
(33)
|
|
|
22
|
|
|
123
|
|
Other costs - SG&A
|
34
|
|
|
32
|
|
|
35
|
|
Other costs - Other expense/(income)
|
(17)
|
|
|
2
|
|
|
157
|
|
|
$
|
(2)
|
|
|
$
|
108
|
|
|
$
|
460
|
|
We do not include our restructuring activities, including the Integration Program, within Segment Adjusted EBITDA (as defined in Note 22, Segment Reporting). The pre-tax impact of allocating such expenses to our segments would have been (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
United States
|
$
|
(10)
|
|
|
$
|
37
|
|
|
$
|
205
|
|
International
|
(15)
|
|
|
29
|
|
|
41
|
|
Canada
|
14
|
|
|
18
|
|
|
176
|
|
General corporate expenses
|
9
|
|
|
24
|
|
|
38
|
|
|
$
|
(2)
|
|
|
$
|
108
|
|
|
$
|
460
|
|
Note 6. Restricted Cash
The following table provides a reconciliation of cash and cash equivalents, as reported on our consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our consolidated statements of cash flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Cash and cash equivalents
|
$
|
3,417
|
|
|
$
|
2,279
|
|
Restricted cash included in other current assets
|
—
|
|
|
1
|
|
Restricted cash included in other non-current assets
|
1
|
|
|
—
|
|
Cash, cash equivalents, and restricted cash
|
$
|
3,418
|
|
|
$
|
2,280
|
|
At December 26, 2020 and December 28, 2019, cash and cash equivalents excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
Note 7. Inventories
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Packaging and ingredients
|
$
|
482
|
|
|
$
|
511
|
|
Work in process
|
268
|
|
|
364
|
|
Finished product
|
1,804
|
|
|
1,846
|
|
Inventories
|
$
|
2,554
|
|
|
$
|
2,721
|
|
At December 26, 2020 and December 28, 2019, inventories excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
Note 8. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Land
|
$
|
219
|
|
|
$
|
210
|
|
Buildings and improvements
|
2,514
|
|
|
2,447
|
|
Equipment and other
|
6,914
|
|
|
6,552
|
|
Construction in progress
|
792
|
|
|
1,033
|
|
|
10,439
|
|
|
10,242
|
|
Accumulated depreciation
|
(3,563)
|
|
|
(3,187)
|
|
Property, plant and equipment, net
|
$
|
6,876
|
|
|
$
|
7,055
|
|
At December 26, 2020 and December 28, 2019, property, plant and equipment, net, excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information. Depreciation expense was $705 million in 2020, $708 million in 2019, and $693 million in 2018.
Note 9. Goodwill and Intangible Assets
Goodwill:
Changes in the carrying amount of goodwill, by segment, were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
International
|
|
Canada
|
|
Total
|
Balance at December 28, 2019
|
$
|
29,601
|
|
|
$
|
3,401
|
|
|
$
|
2,544
|
|
|
$
|
35,546
|
|
Reclassified due to segment change
|
46
|
|
|
(46)
|
|
|
—
|
|
|
—
|
|
Impairment losses
|
(655)
|
|
|
(368)
|
|
|
(1,020)
|
|
|
(2,043)
|
|
Reclassified to assets held for sale
|
(563)
|
|
|
(6)
|
|
|
(12)
|
|
|
(581)
|
|
Translation adjustments and other
|
—
|
|
|
179
|
|
|
(12)
|
|
|
167
|
|
Balance at December 26, 2020
|
$
|
28,429
|
|
|
$
|
3,160
|
|
|
$
|
1,500
|
|
|
$
|
33,089
|
|
At December 26, 2020, goodwill excluded amounts classified as held for sale. Additionally, the amounts reclassified as held for sale above represent the goodwill that was tested and determined to be partially impaired in connection with the Cheese Transaction. The resulting impairment loss of $300 million was recognized as a reduction to current assets held for sale. See Note 4, Acquisitions and Divestitures, for additional information related to the Cheese Transaction and its financial statement impacts.
In the first quarter of 2020, our internal reporting and reportable segments changed. We moved our Puerto Rico business from the Latin America zone to the United States zone to consolidate and streamline the management of our product categories and supply chain. We also combined our EMEA, Latin America, and APAC zones to form the International zone as a result of certain previously announced organizational changes.
Therefore, effective in the first quarter of 2020, we manage and report our operating results through three reportable segments defined by geographic region: United States, International, and Canada. We have reflected the change in our segments, primarily the creation of the Puerto Rico reporting unit (discussed below), within the reclassified due to segment change line as an increase of $46 million in the United States segment and a corresponding decrease in the International segment.
The reorganization of our internal reporting and reportable segments changed the composition of certain of our reporting units: (i) Benelux was separated from the historical Northern Europe and Benelux reporting unit and combined with the historical Continental Europe reporting unit, creating two new reporting units, Northern Europe and Continental Europe; (ii) our historical Greater China reporting unit was combined with our historical Southeast Asia and India reporting units, creating the new Asia reporting unit; (iii) our historical Northeast Asia reporting unit was combined with our historical Australia and New Zealand reporting unit to form a single reporting unit called Australia, New Zealand, and Japan ("ANJ"); (iv) our historical Latin America Exports reporting unit (excluding Puerto Rico) was combined with our historical Brazil and Mexico reporting units to form a single reporting unit called Latin America ("LATAM"); and (v) Puerto Rico, which was previously included in our historical Latin America Exports reporting unit, became a standalone reporting unit.
2020 Goodwill Impairment Testing
As a result of this reorganization, we reassigned assets and liabilities to the applicable reporting units and allocated goodwill using a relative fair value approach. We performed an interim impairment test (or transition test) on the affected reporting units on both a pre- and post-reorganization basis.
We performed our pre-reorganization impairment test as of December 29, 2019, which was our first day of 2020. There were five reporting units affected by the reassignment of assets and liabilities that maintained a goodwill balance as of our pre-reorganization impairment test date. These reporting units were Latin America Exports, Northeast Asia, Northern Europe and Benelux, Continental Europe, and Greater China. The remaining reporting units affected by the reassignment of assets and liabilities did not maintain a goodwill balance as of our pre-reorganization impairment test date.
Two of the affected reporting units, Latin America Exports and Northeast Asia, were tested for impairment as of December 28, 2019, as part of our fourth quarter 2019 interim impairment test. Following the impairment test, the goodwill carrying amount of our Latin America Exports reporting unit was approximately $195 million and the goodwill carrying amount of our Northeast Asia reporting unit was approximately $83 million as of December 28, 2019. These carrying amounts were determined to equal the carrying amounts on December 29, 2019, the day of our pre-reorganization impairment test, for the Latin America Exports and Northeast Asia reporting units.
Additionally, as part of our pre-reorganization impairment test, we utilized the discounted cash flow method under the income approach to estimate the fair values as of December 29, 2019 of the three reporting units noted above that were not tested as part of our fourth quarter 2019 interim impairment test (Northern Europe and Benelux, Continental Europe, and Greater China) and concluded that no additional impairment charge was required. The goodwill carrying amount of our Northern Europe and Benelux reporting unit was approximately $2.1 billion and its fair value was between 20-50% over carrying amount. The goodwill carrying amount of our Continental Europe reporting unit was approximately $567 million and the goodwill carrying amount of our Greater China reporting unit was approximately $321 million and each had a fair value over carrying amount in excess of 50%.
We performed our post-reorganization impairment test as of December 29, 2019. There were six reporting units in scope for our post-reorganization impairment test: Northern Europe, Continental Europe, Asia, ANJ, LATAM, and Puerto Rico. As a result of our post-reorganization impairment test, we recognized a non-cash impairment loss of $226 million in SG&A in the first quarter of 2020 related to two reporting units contained within our International segment. We determined the factors contributing to the impairment loss were the result of circumstances described below.
We recognized a non-cash impairment loss of $83 million in our ANJ reporting unit within our International segment. This impairment was driven by the reporting unit reorganization discussed above. The combination of Australia and New Zealand, which was fully impaired in the fourth quarter of 2019, with Northeast Asia, created a new reporting unit with a fair value below carrying amount upon transition. The impairment of the ANJ reporting unit represents all of the goodwill of that reporting unit.
We recognized a non-cash impairment loss of $143 million in our LATAM reporting unit within our International segment. This impairment was driven by the reporting unit reorganization discussed above. The combination of Mexico and Brazil, neither of which had a goodwill balance as of the end of 2019, with Latin America Exports, which was partially impaired in 2019, created a new reporting unit with a fair value below carrying amount upon transition. The impairment of the LATAM reporting unit represents all of the goodwill of that reporting unit.
The remaining reporting units tested as part of our post-reorganization impairment test each had excess fair value over carrying amount as of December 29, 2019. The goodwill carrying amount of our Puerto Rico reporting unit was approximately $58 million and its fair value was less than 10% over carrying amount, the goodwill carrying amount of our Northern Europe reporting unit was approximately $1.7 billion and its fair value was between 20-50% over carrying amount, and the goodwill carrying amount of our Continental Europe reporting unit was approximately $920 million and the goodwill carrying amount of our Asia reporting unit was approximately $321 million and each had a fair value over carrying amount that was in excess of 50%.
We test our reporting units for impairment annually as of the first day of our second quarter, which was March 29, 2020, for our 2020 annual impairment test. In performing this test, we incorporated information that was known through the date of filing our Quarterly Report on Form 10-Q for the period ended June 27, 2020. We utilized the discounted cash flow method under the income approach to estimate the fair value of our reporting units. Through the performance of the 2020 annual impairment test, we identified impairments related to the U.S. Foodservice, Canada Retail, Canada Foodservice, and EMEA East reporting units. As a result, we recognized a non-cash impairment loss of $1.8 billion in SG&A in the second quarter of 2020 related to these four reporting units, which are located across our United States, International, and Canada segments. These impairments were primarily due to the completion of our enterprise strategy and five-year operating plan in the second quarter of 2020. Management, in completing the five-year operating plan, developed updated expectations regarding revenue growth and profitability opportunities associated with our reporting units and, as a result, has recalibrated our future investments to align with the opportunities for which we see greater potential for a return on those investments. Current expectations for the impacts of COVID-19 were incorporated into near-term cash flow forecasts as well as the discount rate and long-term growth rate valuation assumptions. Accordingly, in conjunction with these updated expectations, management updated and aligned our valuation assumptions, resulting in increases in fair value estimates for certain reporting units and decreases in fair value estimates for others.
We recognized an $815 million impairment loss in our Canada Retail reporting unit within our Canada segment. Through the completion of our enterprise strategy and five-year operating plan in the second quarter of 2020, we revised downward our outlook for net sales, margin, and cash flows in response to recently observed performance trends for this reporting unit. Additionally, through the 2020 annual impairment test performed in the second quarter, we also lowered our long-term revenue growth rate expectations and reflected declines in forecasted foreign currency exchange rates in Canada. After the impairment, the goodwill carrying amount of the Canada Retail reporting unit was approximately $1.2 billion.
We recognized a $655 million impairment loss in our U.S. Foodservice reporting unit within our United States segment and a $205 million impairment loss in our Canada Foodservice reporting unit within our Canada segment. Through the completion of our enterprise strategy and five-year operating plan in the second quarter of 2020, we established a revised downward outlook for net sales, margin, and cash flows. We also lowered our long-term revenue growth rate expectations for these foodservice businesses to reflect, in part, consumer shifts from restaurants to at-home consumption, which is expected to have a more sustained impact than previously anticipated due to the continued spread of COVID-19. Our then current expectations for the duration and intensity of the COVID-19 impact on away-from-home establishments were incorporated into the cash flow forecasts as well as into the discount rate and long-term growth rate valuation assumptions. However, given the evolving nature of COVID-19 and its impacts, there continues to be a high degree of uncertainty and these reporting units could be subject to additional impairments if there are further sustained changes in purchasing behaviors or government restrictions. After the impairment, the goodwill carrying amount of the U.S. Foodservice reporting unit was approximately $3.2 billion and the goodwill carrying amount of the Canada Foodservice reporting unit was approximately $148 million.
We recognized a $142 million impairment loss in our EMEA East reporting unit within our International segment. Through the completion of our enterprise strategy and five-year operating plan in the second quarter of 2020, we established a revised downward outlook for net sales, margin, and cash flows in response to lower expectations for margin and revenue growth opportunities for this reporting unit. The impairment of the EMEA East reporting unit represents all of the goodwill of that reporting unit.
On the first day of the third quarter of 2020, we reorganized the composition of our United States zone reporting structure to align to the management of our new platforms, which were established to support the execution of our new enterprise strategy and five-year operating plan. The reorganization of our internal reporting changed the composition of our reporting units wherein certain of our existing U.S. reporting units (U.S. Refrigerated, U.S. Grocery, and U.S. Foodservice) have been reorganized into the following new reporting units: Enhancers, Specialty, and Away From Home (“ESA”); Kids, Snacks, and Beverages (“KSB”); and Meal Foundations and Coffee (“MFC”).
As a result of this reorganization, we reassigned assets and liabilities to the applicable reporting units and allocated goodwill using the relative fair value approach. We performed an interim impairment test (or transition test) on the affected reporting units on both a pre- and post-reorganization basis.
We performed our pre-reorganization impairment test as of June 28, 2020, which was our first day of the third quarter of 2020. There were three reporting units (U.S. Refrigerated, U.S. Grocery, and U.S. Foodservice) affected by the reorganization that maintained a goodwill balance as of our pre-reorganization impairment test date. The impairment test did not result in an impairment of the three affected reporting units.
We performed our post-reorganization impairment test as of June 28, 2020. There were three reporting units in scope for our post-reorganization impairment test: ESA, KSB, and MFC. These reporting units, which were tested as part of our post-reorganization impairment test, each had excess fair value over carrying amount as of June 28, 2020. The goodwill carrying amount of our ESA reporting unit was approximately $11.6 billion and its fair value was between 20-50% over carrying amount. The goodwill carrying amount of our KSB reporting unit was approximately $10.8 billion and its fair value was between 10-20% over carrying amount. The goodwill carrying amount of our MFC reporting unit was approximately $6.5 billion and its fair value was less than 10% over carrying amount.
Additionally, in the third quarter of 2020, we announced the Cheese Transaction and determined that the related Disposal Group was held for sale. Accordingly, based on a relative fair value allocation, we reclassified $580 million of goodwill to assets held for sale, which included a portion of goodwill from seven of our reporting units. The goodwill reclassified to held for sale was primarily associated with our MFC reporting unit but also included goodwill from our KSB, ESA, Canada Retail, Puerto Rico, Continental Europe, and Asia reporting units. Two other reporting units, ANJ and LATAM, were impacted but do not have goodwill balances. Following the reclassification of a portion of goodwill from our reporting units, we determined that a triggering event had occurred for the remaining portion of each of the impacted reporting units, and we tested each for impairment as of September 15, 2020, the triggering event date. The triggering event impairment test did not result in an impairment of the remaining portion of any impacted reporting unit.
In the third quarter of 2020, we recorded a non-cash impairment loss of $300 million in SG&A, which was related to the Disposal Group’s goodwill. See Note 4, Acquisitions and Divestitures, for additional information on the Cheese Transaction and its financial statement impacts.
As of December 26, 2020, we maintain 15 reporting units, nine of which comprise our goodwill balance. These nine reporting units had an aggregate carrying amount of $33.1 billion at December 26, 2020. As of their latest 2020 impairment testing date, four reporting units had 10% or less fair value over carrying amount and an aggregate goodwill carrying amount of $7.5 billion, two reporting unit had between 10-20% fair value over carrying amount and a goodwill carrying amount of $12.5 billion, two reporting unit had between 20-50% fair value over carrying amount and a goodwill carrying amount of $12.5 billion, and one reporting unit had over 50% fair value over carrying amount and a goodwill carrying amount of $326 million. We test our reporting units for impairment annually as of the first day of our second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. No events occurred during the three months ended December 26, 2020 that indicated it was more likely than not that our goodwill was impaired.
2019 Goodwill Impairment Testing
In connection with the preparation of our first quarter 2019 financial statements, we concluded that it was more likely than not that the fair values of three of our pre-reorganization reporting units (EMEA East, Brazil and Latin America Exports) were below their carrying amounts. As such we performed an interim impairment test on these reporting units as of March 30, 2019. As a result of our interim impairment test, we recognized a non-cash impairment loss of $620 million in SG&A in the first quarter of 2019. We recorded a $286 million impairment loss in our EMEA East reporting unit, a $205 million impairment loss in our Brazil reporting unit, and a $129 million impairment loss in our Latin America Exports reporting unit. The impairment of the Brazil reporting unit represented all of the goodwill of that reporting unit. We determined the factors contributing to the impairment loss were the result of circumstances that arose during the first quarter of 2019. These reporting units were part of our International segment as discussed above.
We performed our 2019 annual impairment test as of March 31, 2019, which was the first day of our second quarter in 2019. We utilized the discounted cash flow method under the income approach to estimate the fair value of our reporting units. Through the performance of the 2019 annual impairment test, we identified an impairment related to the U.S. Refrigerated reporting unit. As a result, we recognized a non-cash impairment loss of $118 million in SG&A in the second quarter of 2019 within our United States segment. This impairment was primarily due to an increase in the discount rate used for fair value estimation.
In the fourth quarter of 2019, in connection with the preparation of our year-end financial statements, we determined that it was more likely than not that the fair values of three of our pre-reorganization reporting units (Australia and New Zealand, Latin America Exports, and Northeast Asia) were below their carrying amounts. As such, we performed an interim impairment test on these reporting units as of December 28, 2019. As a result of our interim impairment test, we recognized a non-cash impairment loss of $453 million in SG&A in the fourth quarter of 2019. We recognized a $357 million non-cash impairment loss in our Australia and New Zealand reporting unit and a $96 million non-cash impairment loss in our Latin America Exports reporting unit. The impairment of the Australia and New Zealand reporting unit represented all of the goodwill of that reporting unit. We determined the factors contributing to the impairment loss were the result of circumstances that arose during the fourth quarter of 2019. These reporting units were part of our International segment as discussed above. We concluded that an impairment charge was not required for our Northeast Asia reporting unit.
See Note 9, Goodwill and Intangible Assets, in our Annual Report on Form 10-K for the year ended December 28, 2019 for additional information on these 2019 impairment losses.
2018 Goodwill Impairment Testing
As a result of our 2018 annual impairment test, we recognized a non-cash impairment loss of $133 million in SG&A related to our pre-reorganization Australia and New Zealand reporting unit, which was within our International segment, as discussed above, in the second quarter of 2018. This impairment loss was primarily due to margin declines in the region.
For the fourth quarter of 2018, in connection with the preparation of our year-end financial statements, we assessed the changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units were below their carrying amounts. As we determined that it was more likely than not that the fair values of seven of our pre-reorganization reporting units were below their carrying amounts, we performed an interim impairment test on these reporting units as of December 29, 2018. As a result of our interim test, we recognized a non-cash impairment loss of $6.9 billion in SG&A related to five of our reporting units, including U.S. Refrigerated, Canada Retail, Southeast Asia, Northeast Asia, and Other Latin America. The other two reporting units we tested were determined not to be impaired.
See Note 10, Goodwill and Intangible Assets, in our Annual Report on Form 10-K for the year ended December 29, 2018 for additional information on these impairment losses.
Accumulated impairment losses to goodwill were $10.5 billion at December 26, 2020.
Additional Goodwill Considerations
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 requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, income tax rates, foreign currency exchange rates, or any factors that could be affected by COVID-19, change, or if management’s expectations or plans otherwise change, including updates to our long-term operating plans, then one or more of our reporting units might become impaired in the future. Additionally, any decisions to divest certain non-strategic assets could lead to the impairment of one or more of our reporting units in the future.
In 2020, the COVID-19 pandemic produced a short-term beneficial financial impact for our consolidated results. Retail sales increased due to higher than anticipated consumer demand for our products. The foodservice channel, however, experienced a negative impact from prolonged social distancing mandates limiting access to and capacity at away-from-home establishments for a longer period of time than was expected when they were originally put in place. Our ESA and Canada Foodservice reporting units are the most exposed of our reporting units to the long-term impacts to away-from-home establishments. Our U.S. Foodservice (now included within ESA) and Canada Foodservice reporting units were both impaired during our most recent annual impairment test, reflecting our best estimate at that time of the future outlook and risks of these businesses. The ESA and Canada Foodservice reporting units maintain an aggregate goodwill carrying amount of approximately $11.7 billion as of December 26, 2020. A number of factors could result in further future impairments of our foodservice businesses, including but not limited to: continued mandates around closures of dining rooms in restaurants, distancing of people within establishments resulting in fewer customers, the total number of restaurant closures, forthcoming changes in consumer preferences or regulatory requirements over product formats (e.g., table top packaging vs. single serve packaging), and consumer trends of dining-in versus dining-out. Given the evolving nature of and uncertainty driven by the COVID-19 pandemic, we will continue to evaluate the impact on our reporting units as adverse changes to these assumptions could result in future impairments.
Our reporting units that were impaired were written down to their respective fair values resulting in zero excess fair value over carrying amount as of the applicable impairment test dates. Accordingly, these and other reporting units that have 20% or less excess fair value over carrying amount as of their latest 2020 impairment testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Although the remaining reporting units have more than 20% excess fair value over carrying amount as of their latest 2020 impairment testing date, these amounts are also associated with the acquisition of H. J. Heinz Company by the Sponsors in 2013 and the 2015 Merger and are recorded on the balance sheet at their estimated acquisition date fair values. Therefore, if any assumptions, estimates, or market factors change in the future, these amounts are also susceptible to impairments.
Indefinite-lived intangible assets:
Changes in the carrying amount of indefinite-lived intangible assets, which primarily consisted of trademarks, were (in millions):
|
|
|
|
|
|
Balance at December 28, 2019
|
$
|
43,400
|
|
Impairment losses
|
(1,056)
|
|
Reclassified to assets held for sale
|
(228)
|
|
Translation adjustments
|
151
|
|
Balance at December 26, 2020
|
$
|
42,267
|
|
At December 26, 2020 and December 28, 2019, indefinite-lived intangible assets excluded amounts classified as held for sale. Indefinite-lived intangible assets reclassified to assets held for sale included the global Cracker Barrel trademark related to the Cheese Transaction. See Note 4, Acquisitions and Divestitures, for additional information on amounts held for sale.
2020 Indefinite-Lived Intangible Asset Impairment Testing
Our indefinite-lived intangible asset balance primarily consists of a number of individual brands, which had an aggregate carrying amount of $42.3 billion as of December 26, 2020. We test our brands for impairment annually as of the first day of our second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a brand is less than its carrying amount. As a result of the Cheese Transaction an assessment was made as to whether it was more likely or not that the fair value of the Kraft and/or Velveeta brands were less than their carrying value as of September 26, 2020. In performing our assessment, consideration was given to the estimated future cash flows for the retained portion of each brand coupled with the estimated allocation of the sale proceeds to the licensing rights transferred, and in doing so, we concluded that it was more likely than not that the fair value of each brand exceeded its carrying amount. Changes in the fair value of the retained and licensed portions of each brand will impact the amount of any potential impairment charges and the amount of license income that will be recognized, which, at this time, we would not expect to exceed the fair value of the perpetual licenses. See Note 4, Acquisitions and Divestitures, for additional information on the Cheese Transaction.
We performed our 2020 annual impairment test as of March 29, 2020, which is the first day of our second quarter in 2020. As a result of our 2020 annual impairment test, we recognized a non-cash impairment loss of $1.1 billion in SG&A in the second quarter of 2020 primarily related to nine brands (Oscar Mayer, Maxwell House, Velveeta, Cool Whip, Plasmon, ABC, Classico, Wattie’s, and Planters). We recorded impairment losses of $949 million in our United States segment, $100 million in our International segment, and $7 million in our Canada segment, consistent with the ownership of the trademarks. The impairment for these brands was largely due to the following factors:
•We recognized a $626 million impairment loss related to the Oscar Mayer brand. As the meats business has grown more competitive in the United States, we expect to require additional investments in marketing and packaging to
revitalize the brand and drive a higher rate of long-term revenue growth, but at a lower profit margin. As a result, we revised downward our revenue and margin expectations as part of the completion of our enterprise strategy and five-year operating plan in the second quarter of 2020. This brand had a carrying amount of $3.3 billion prior to this impairment and $2.7 billion after impairment.
•We recognized a $140 million impairment loss related to the Maxwell House brand, primarily due to downward revised revenue expectations that were established through the completion of our enterprise strategy and five-year operating plan in the second quarter of 2020 to reflect forecasted declines in the mainstream coffee category and distribution losses. Additionally, the discount rate assumption used for the fair value estimation increased to reflect a market participant’s perceived risk in the brand valuation. This brand had a carrying amount of $823 million prior to this impairment and $683 million after impairment.
•We recognized a $290 million impairment loss primarily related to seven other brands (Velveeta, Cool Whip, Plasmon, ABC, Classico, Wattie’s, and Planters). Through the completion of our enterprise strategy and five-year operating plan in the second quarter of 2020 and the development of valuation assumptions through the 2020 annual impairment test, we established new expectations for revenue growth, margins, long-term growth rates, and discount rates. Due to the low level of fair value over carrying amount for these brands, these changes in future cash flow expectations and valuation assumptions reduced the fair value estimates for these brands. These brands had an aggregate carrying value of $5.1 billion prior to this impairment and $4.8 billion after impairment.
The aggregate carrying amount associated with two additional brands (Kraft and Miracle Whip), which each had excess fair value over its carrying amount of 10% or less, was $13.6 billion as of the 2020 annual impairment test date (in this case, both brands had fair value over carrying amount of less than 1% due to impairments recorded in recent prior years). The aggregate carrying amount of an additional six brands (Lunchables, A1, Ore-Ida, Stove Top, Jet Puffed, and Quero), which each had fair value over its carrying amount of between 10-20%, was $4.1 billion as of the 2020 annual impairment test date. The aggregate carrying amount of brands with fair value over carrying amount between 20-50% was $6.9 billion, and the aggregate carrying amount of brands with fair value over carrying amount in excess of 50% was $9.3 billion as of the 2020 annual impairment test date.
2019 Indefinite-Lived Intangible Asset Impairment Testing
We performed our 2019 annual impairment test as of March 31, 2019, which was the first day of our second quarter in 2019. As a result of our 2019 annual impairment test, we recognized a non-cash impairment loss of $474 million in SG&A in the second quarter of 2019 primarily related to six brands (Miracle Whip, Velveeta, Lunchables, Maxwell House, Philadelphia, and Cool Whip). This impairment loss was recorded in our United States segment, consistent with the ownership of the trademarks. The impairment for these brands was largely due to an increase in the discount rate assumptions used for the fair value estimations. These brands had an aggregate carrying value of $13.5 billion prior to this impairment and $13.0 billion after this impairment.
In the fourth quarter of 2019, in connection with the preparation of our year-end financial statements, we determined that it was more likely than not that the fair values of two of our brands, Maxwell House and Wattie’s, were below their carrying amounts. As a result, we performed an interim impairment test on these brands as of December 28, 2019. While we determined that the Wattie’s brand was not impaired, we recognized a non-cash impairment loss of $213 million in SG&A in our United States segment, consistent with the ownership of the Maxwell House trademark, in the fourth quarter of 2019. We determined the factors contributing to the impairment loss were the result of circumstances that arose during the fourth quarter of 2019.
See Note 9, Goodwill and Intangible Assets, in our Annual Report on Form 10-K for the year ended December 28, 2019 for additional information on these 2019 impairment losses.
2018 Indefinite-Lived Intangible Asset Impairment Testing
As a result of our 2018 annual impairment test, we recognized a non-cash impairment loss of $101 million in SG&A in the second quarter of 2018. This impairment loss was due to net sales and margin declines related to the Quero brand in Brazil. The impairment loss was recorded in our International segment, consistent with the ownership of the trademark.
In the third quarter of 2018, we recognized a non-cash impairment loss of $215 million in SG&A related to the Smart Ones brand. This impairment loss was primarily due to reduced future investment expectations and continued sales declines in the third quarter of 2018. This impairment loss was recorded in our United States segment, consistent with the ownership of the trademark. We transferred the remaining carrying value of Smart Ones to definite-lived intangible assets.
For the fourth quarter of 2018, in connection with the preparation of our year-end financial statements, we determined that it was more likely than not that the fair values of six brands were below their carrying amounts. Therefore, we performed an interim impairment test on these brands as of December 29, 2018. As a result of our interim test, we recognized a non-cash impairment loss of $8.6 billion in SG&A related to five brands, including three that were valued using the excess earnings method (Kraft, Oscar Mayer, and Philadelphia) and two that were valued using the relief from royalty method (Velveeta and ABC). The other brand we tested was determined to not be impaired. The impairment losses for Kraft, Oscar Mayer, Philadelphia, and Velveeta were recorded in our United States segment, and the ABC impairment loss was recorded in our International segment, consistent with the ownership of each trademark. See Note 10, Goodwill and Intangible Assets, in our Annual Report on Form 10-K for the year ended December 29, 2018 for additional information on these impairment losses.
Additional Indefinite-Lived Intangible Asset Considerations
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual brands requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax considerations, discount rates, growth rates, royalty rates, contributory asset charges, and other market factors. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, income tax rates, foreign currency exchange rates, or any factors that could be affected by COVID-19, change, or if management’s expectations or plans otherwise change, including updates to our long-term operating plans, then one or more of our brands might become impaired in the future. Additionally, any decisions to divest certain non-strategic assets could lead to the impairment of one or more of our brands in the future.
As we consider the ongoing impact of the COVID-19 pandemic with regard to our indefinite-lived intangible assets, a number of factors could have a future adverse impact on our brands, including changes in consumer and consumption trends in both the short and long term, the extent of continued government mandates to shelter in place, total number of restaurant closures, economic declines, and reductions in consumer discretionary income. We have seen an increase in our retail business in the short-term that has more than offset declines in our foodservice business over the same period. Our brands are generally common across both the retail and foodservice businesses and the fair value of our brands are subject to a similar mix of positive and negative factors. Given the evolving nature and uncertainty driven by COVID-19 pandemic, we will continue to evaluate the impact on our brands.
Our brands that were impaired were written down to their respective fair values resulting in zero excess fair value over carrying amount as of the applicable impairment test dates. Accordingly, these and other brands that have 20% or less excess fair value over carrying amount as of their latest 2020 impairment testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Although the remaining brands have more than 20% excess fair value over carrying amount as of their latest 2020 impairment testing date, these amounts are also associated with the acquisition of H. J. Heinz Company by the Sponsors in 2013 and the 2015 Merger and are recorded on the balance sheet at their estimated acquisition date fair values. Therefore, if any assumptions, estimates, or market factors change in the future, these amounts are also susceptible to impairments.
Definite-lived intangible assets:
Definite-lived intangible assets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Trademarks
|
$
|
2,000
|
|
|
$
|
(478)
|
|
|
$
|
1,522
|
|
|
$
|
2,443
|
|
|
$
|
(469)
|
|
|
$
|
1,974
|
|
Customer-related assets
|
3,808
|
|
|
(942)
|
|
|
2,866
|
|
|
4,113
|
|
|
(845)
|
|
|
3,268
|
|
Other
|
15
|
|
|
(3)
|
|
|
12
|
|
|
14
|
|
|
(4)
|
|
|
10
|
|
|
$
|
5,823
|
|
|
$
|
(1,423)
|
|
|
$
|
4,400
|
|
|
$
|
6,570
|
|
|
$
|
(1,318)
|
|
|
$
|
5,252
|
|
At December 26, 2020 and December 28, 2019, definite-lived intangible assets excluded amounts classified as held for sale. Definite-lived intangible assets reclassified to assets held for sale at December 26, 2020 primarily related to the Cheese Transaction and included certain global trademarks with an aggregate carrying value of $366 million, including Breakstone’s, Knudsen, Athenos, Polly-O, and Hoffman’s, along with a portion of the Cheez Whiz brand, and customer-related assets with an aggregate carrying value of $257 million. See Note 4, Acquisitions and Divestitures, for additional information on amounts held for sale. Amortization expense for definite-lived intangible assets was $264 million in 2020, $286 million in 2019, and $290 million in 2018. Aside from amortization expense and the amounts reclassified to assets held for sale, the changes in definite-lived intangible assets from December 28, 2019 to December 26, 2020 primarily reflect the impact of foreign currency.
We estimate that amortization expense related to definite-lived intangible assets will be approximately $241 million in each of the next five years.
Note 10. Income Taxes
Provision for/(Benefit from) Income Taxes:
Income/(loss) before income taxes and the provision for/(benefit from) income taxes, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Income/(loss) before income taxes:
|
|
|
|
|
|
United States
|
$
|
363
|
|
|
$
|
796
|
|
|
$
|
(10,305)
|
|
Non-U.S.
|
667
|
|
|
1,865
|
|
|
(1,016)
|
|
Total
|
$
|
1,030
|
|
|
$
|
2,661
|
|
|
$
|
(11,321)
|
|
|
|
|
|
|
|
Provision for/(benefit from) income taxes:
|
|
|
|
|
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
634
|
|
|
$
|
466
|
|
|
$
|
444
|
|
U.S. state and local
|
91
|
|
|
116
|
|
|
134
|
|
Non-U.S.
|
287
|
|
|
439
|
|
|
322
|
|
|
1,012
|
|
|
1,021
|
|
|
900
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
(232)
|
|
|
(209)
|
|
|
(1,843)
|
|
U.S. state and local
|
(109)
|
|
|
(7)
|
|
|
(121)
|
|
Non-U.S.
|
(2)
|
|
|
(77)
|
|
|
(3)
|
|
|
(343)
|
|
|
(293)
|
|
|
(1,967)
|
|
Total provision for/(benefit from) income taxes
|
$
|
669
|
|
|
$
|
728
|
|
|
$
|
(1,067)
|
|
We record tax benefits related to the exercise of stock options and other equity instruments within our tax provision. Accordingly, we recognized a tax benefit in our consolidated statements of income of $4 million in 2020, $12 million in 2019, and $12 million in 2018 related to tax benefits upon the exercise of stock options and other equity instruments.
Effective Tax Rate:
The effective tax rate on income/(loss) before income taxes differed from the U.S. federal statutory tax rate for the following reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
U.S. federal statutory tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Tax on income of foreign subsidiaries
|
(26.1)
|
%
|
|
(7.5)
|
%
|
|
3.4
|
%
|
U.S. state and local income taxes, net of federal tax benefit
|
0.6
|
%
|
|
1.1
|
%
|
|
1.6
|
%
|
Audit settlements and changes in uncertain tax positions
|
3.7
|
%
|
|
1.3
|
%
|
|
(0.3)
|
%
|
Global intangible low-taxed income
|
6.5
|
%
|
|
1.8
|
%
|
|
(0.5)
|
%
|
Goodwill impairment
|
57.2
|
%
|
|
9.3
|
%
|
|
(15.1)
|
%
|
Losses/(gains) related to acquisitions and divestitures
|
0.1
|
%
|
|
1.0
|
%
|
|
0.1
|
%
|
Movement of valuation allowance reserves
|
(0.4)
|
%
|
|
1.3
|
%
|
|
0.1
|
%
|
Deferred tax effect of tax law changes
|
(2.1)
|
%
|
|
(0.5)
|
%
|
|
(0.9)
|
%
|
Other
|
4.5
|
%
|
|
(1.4)
|
%
|
|
—
|
%
|
Effective tax rate
|
65.0
|
%
|
|
27.4
|
%
|
|
9.4
|
%
|
The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment; accordingly, the consolidated effective tax rate is a composite rate reflecting the earnings in various locations and the applicable tax rates. Additionally, the calculation of the percentage point impact of goodwill impairment and other items on the effective tax rate shown in the table above are affected by income/(loss) before income taxes. The percentage point impacts on the effective tax rates fluctuate due to income/(loss) before income taxes, which included goodwill and intangible asset impairment losses in all years presented in the table. Fluctuations in the amount of income generated across locations around the world could impact comparability of reconciling items between periods. Additionally, small movements in tax rates due to a change in tax law or a change in tax rates that causes us to revalue our deferred tax balances produces volatility in our effective tax rate.
Our 2020 effective tax rate of 65.0% was unfavorably impacted by rate reconciling items, primarily related to non-deductible goodwill impairments, the impact of the federal tax on global intangible low-taxed income (“GILTI”), and the revaluation of our deferred tax balances due to changes in international tax laws. These impacts were partially offset by a more favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and the favorable impact of establishing certain deferred tax assets for state tax deductions.
Our 2019 effective tax rate of 27.4% was unfavorably impacted by rate reconciling items, primarily related to non-deductible goodwill impairments, the impact of the federal tax on GILTI, an increase in uncertain tax position reserves, the establishment of certain state valuation allowance reserves, and the tax impacts from the Heinz India Transaction and Canada Natural Cheese Transaction. These impacts were partially offset by the reversal of certain withholding tax obligations and changes in estimates of certain 2018 U.S. income and deductions.
Our 2018 effective tax rate of 9.4% was unfavorably impacted by rate reconciling items, primarily related to non-deductible goodwill impairments, the revaluation of our deferred tax balances due to changes in state tax laws, the impact of the federal tax on GILTI, non-deductible currency devaluation losses, and the wind-up of non-U.S. pension plans. These impacts were partially offset by the benefit from intangible asset impairment losses in the fourth quarter of 2018 and changes in estimates of certain 2017 U.S. income and deductions.
See Note 9, Goodwill and Intangible Assets, for additional information related to our impairment losses.
U.S. Tax Reform:
On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was enacted by the federal government. The legislation significantly changed U.S. tax laws by, among other things, lowering the federal corporate tax rate and imposing a one-time toll charge on deemed repatriated earnings of foreign subsidiaries as of December 30, 2017. Staff Accounting Bulletin No. 118 issued by the SEC in December 2017 provided us with up to one year to finalize accounting for the impacts of U.S. Tax Reform and allowed for provisional estimates when actual amounts could not be determined. As of December 29, 2018, we had finalized our accounting for U.S. Tax Reform.
Deferred Income Tax Assets and Liabilities:
The tax effects of temporary differences and carryforwards that gave rise to deferred income tax assets and liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Deferred income tax liabilities:
|
|
|
|
Intangible assets, net
|
$
|
11,041
|
|
|
$
|
11,230
|
|
Property, plant and equipment, net
|
764
|
|
|
773
|
|
Other
|
183
|
|
|
252
|
|
Deferred income tax liabilities
|
11,988
|
|
|
12,255
|
|
Deferred income tax assets:
|
|
|
|
Benefit plans
|
(177)
|
|
|
(112)
|
|
Other
|
(581)
|
|
|
(474)
|
|
Deferred income tax assets
|
(758)
|
|
|
(586)
|
|
Valuation allowance
|
105
|
|
|
112
|
|
Net deferred income tax liabilities
|
$
|
11,335
|
|
|
$
|
11,781
|
|
At December 26, 2020 and December 28, 2019, deferred income tax liabilities excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
The decrease in deferred tax liabilities from December 28, 2019 to December 26, 2020 was primarily driven by intangible asset impairment losses recorded in 2020. See Note 9, Goodwill and Intangible Assets, for additional information.
At December 26, 2020, foreign operating loss carryforwards totaled $460 million. Of that amount, $28 million expire between 2021 and 2040; the other $432 million do not expire. We have recorded $132 million of deferred tax assets related to these foreign operating loss carryforwards. Deferred tax assets of $44 million have been recorded for U.S. state and local operating loss carryforwards. These losses expire between 2021 and 2039.
Uncertain Tax Positions:
At December 26, 2020, our unrecognized tax benefits for uncertain tax positions were $421 million. If we had recognized all of these benefits, the impact on our effective tax rate would have been $383 million. It is reasonably possible that our unrecognized tax benefits will decrease by as much as $26 million in the next 12 months primarily due to the progression of federal, state, and foreign audits in process. Our unrecognized tax benefits for uncertain tax positions are included in income taxes payable and other non-current liabilities on our consolidated balance sheets.
The changes in our unrecognized tax benefits were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Balance at the beginning of the period
|
$
|
406
|
|
|
$
|
387
|
|
|
$
|
408
|
|
Increases for tax positions of prior years
|
13
|
|
|
28
|
|
|
9
|
|
Decreases for tax positions of prior years
|
(34)
|
|
|
(39)
|
|
|
(81)
|
|
Increases based on tax positions related to the current year
|
57
|
|
|
60
|
|
|
74
|
|
Decreases due to settlements with taxing authorities
|
(8)
|
|
|
(20)
|
|
|
(3)
|
|
Decreases due to lapse of statute of limitations
|
(13)
|
|
|
(10)
|
|
|
(10)
|
|
Reclassified to liabilities held for sale
|
—
|
|
|
—
|
|
|
(10)
|
|
Balance at the end of the period
|
$
|
421
|
|
|
$
|
406
|
|
|
$
|
387
|
|
Our unrecognized tax benefits increased during 2020 and 2019 mainly as a result of a net increase for tax positions related to the current and prior years in the U.S. and certain state and foreign jurisdictions which were partially offset by decreases related to audit settlements with federal, state, and foreign taxing authorities and statute of limitations expirations.
We include interest and penalties related to uncertain tax positions in our tax provision. Our provision for/(benefit from) income taxes included a $10 million expense in 2020 and a $5 million expense in 2018 related to interest and penalties. The expense related to interest and penalties in 2019 was insignificant. Accrued interest and penalties were $72 million as of December 26, 2020 and $62 million as of December 28, 2019.
Other Income Tax Matters:
In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Brazil, Canada, Italy, the Netherlands, the United Kingdom, and the United States. As of December 26, 2020, we have substantially concluded all national income tax matters through 2018 for the Netherlands, through 2016 for the United States, through 2015 for Australia, through 2012 for the United Kingdom and Canada, through 2011 for Italy, and through 2006 for Brazil. We have substantially concluded all U.S. state income tax matters through 2007.
As of December 26, 2020 and December 28, 2019, we had recorded a deferred tax liability of approximately $20 million on approximately $300 million of historic earnings related to local withholding taxes that will be owed when this cash is distributed.
Subsequent to January 1, 2018, we consider the unremitted earnings of certain international subsidiaries that impose local country taxes on dividends to be indefinitely reinvested. For those undistributed earnings considered to be indefinitely reinvested, our intent is to reinvest these funds in our international operations, and our current plans do not demonstrate a need to repatriate the accumulated earnings to fund our U.S. cash requirements. The amount of unrecognized deferred tax liabilities for local country withholding taxes that would be owed related to our 2018, 2019, and 2020 accumulated earnings of certain international subsidiaries is approximately $20 million.
Note 11. Employees’ Stock Incentive Plans
We grant equity awards, including stock options, restricted stock units (“RSUs”), and performance share units (“PSUs”), to select employees to provide long-term performance incentives to our employees.
Stock Plans
We had activity related to equity awards from the following plans in 2020, 2019, and 2018:
2020 Omnibus Incentive Plan:
On May 7, 2020, our stockholders approved The Kraft Heinz Company 2020 Omnibus Incentive Plan (the “2020 Omnibus Plan”), which was adopted by our Board of Directors on March 2, 2020. The 2020 Omnibus Plan became effective March 2, 2020 (the “Plan Effective Date”) and will expire on the tenth anniversary of the Plan Effective Date. The 2020 Omnibus Plan authorizes the issuance of up to 36 million shares of our common stock for awards to employees, non-employee directors, and other key personnel. The 2020 Omnibus Plan provides for the grant of options, stock appreciation rights, restricted stock, RSUs, deferred stock, performance awards, other stock-based awards, and cash-based awards. Equity awards granted under the 2020 Omnibus Plan include awards that vest in full at the end of a three-year period as well as awards that vest in annual installments over three or four years beginning on the second anniversary of the original grant date. Non-qualified stock options have a maximum exercise term of 10 years from the date of the grant. As of the Plan Effective Date, awards will no longer be granted under The Kraft Heinz Company 2016 Omnibus Incentive Plan, the H. J. Heinz Holding Corporation 2013 Omnibus Incentive Plan, Kraft Foods Group, Inc. 2012 Performance Incentive Plan, or any other equity plans other than the 2020 Omnibus Plan.
2016 Omnibus Incentive Plan:
In April 2016, our Board of Directors approved the 2016 Omnibus Incentive Plan (“2016 Omnibus Plan”), which authorized grants of options, stock appreciation rights, RSUs, deferred stock, performance awards, investment rights, other stock-based awards, and cash-based awards. This plan authorizes the issuance of up to 18 million shares of our common stock. Equity awards granted under the 2016 Omnibus Plan prior to 2019 generally have a five-year cliff vest period. Equity awards granted under the 2016 Omnibus Plan in 2019 include three-year and five-year cliff vest periods as well as awards that become exercisable in annual installments over three to four years beginning on the second anniversary of the original grant date. Non-qualified stock options have a maximum exercise term of 10 years. Equity awards granted under the 2016 Omnibus Plan since inception include non-qualified stock options, RSUs, and PSUs.
2013 Omnibus Incentive Plan:
Prior to approval of the 2016 Omnibus Plan, we issued non-qualified stock options to select employees under the 2013 Omnibus Incentive Plan (“2013 Omnibus Plan”). As a result of the 2015 Merger, each outstanding Heinz stock option was converted into 0.443332 of a Kraft Heinz stock option. Following this conversion, the 2013 Omnibus Plan authorized the issuance of up to 17,555,947 shares of our common stock. Non-qualified stock options awarded under the 2013 Omnibus Plan have a five-year cliff vest period and a maximum exercise term of 10 years. These non-qualified stock options will continue to vest and become exercisable in accordance with the terms and conditions of the 2013 Omnibus Plan and the relevant award agreements.
Kraft 2012 Performance Incentive Plan:
Prior to the 2015 Merger, Kraft issued equity-based awards, including stock options and RSUs, under its Kraft Foods Group, Inc. 2012 Performance Incentive Plan (“2012 Performance Incentive Plan”). As a result of the 2015 Merger, each outstanding Kraft stock option was converted into an option to purchase a number of shares of our common stock based upon an option adjustment ratio, and each outstanding Kraft RSU was converted into one Kraft Heinz RSU. These Kraft Heinz equity awards will continue to vest and become exercisable in accordance with the terms and conditions that were applicable immediately prior to the completion of the 2015 Merger. These options generally become exercisable in three annual installments beginning on the first anniversary of the original grant date, and have a maximum exercise term of 10 years. RSUs generally cliff vest on the third anniversary of the original grant date. In accordance with the terms of the 2012 Performance Incentive Plan, vesting generally accelerates for holders of Kraft awards who are terminated without cause within 2 years of the 2015 Merger Date.
In addition, prior to the 2015 Merger, Kraft issued performance-based, long-term incentive awards (“Performance Shares”), which vested based on varying performance, market, and service conditions. In connection with the 2015 Merger, all outstanding Performance Shares were converted into cash awards, payable in two installments: (i) a 2015 pro-rata payment based upon the portion of the Performance Share cycle completed prior to the 2015 Merger and (ii) the remaining value of the award to be paid on the earlier of the first anniversary of the closing of the 2015 Merger and a participant's termination without cause.
Stock Options
We use the Black-Scholes model to estimate the fair value of stock option grants. Our weighted average Black-Scholes fair value assumptions were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Risk-free interest rate
|
0.45
|
%
|
|
1.46
|
%
|
|
2.75
|
%
|
Expected term
|
6.5 years
|
|
6.5 years
|
|
7.5 years
|
Expected volatility
|
33.6
|
%
|
|
31.2
|
%
|
|
21.3
|
%
|
Expected dividend yield
|
5.7
|
%
|
|
5.3
|
%
|
|
3.6
|
%
|
Weighted average grant date fair value per share
|
$
|
4.77
|
|
|
$
|
4.11
|
|
|
$
|
10.26
|
|
The risk-free interest rate represented the constant maturity U.S. Treasury rate in effect at the grant date, with a remaining term equal to the expected life of the options. The expected life is the period over which our employees are expected to hold their options. Due to the lack of historical data, we calculated expected life using the weighted average vesting period and the contractual term of the options. We estimated volatility using a blended volatility approach of term-matched historical volatility from our daily stock prices and weighted average implied volatility. We estimated the expected dividend yield using the quarterly dividend divided by the three-month average stock price, annualized and continuously compounded.
Our stock option activity and related information was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted Average Exercise Price
(per share)
|
|
Aggregate Intrinsic Value
(in millions)
|
|
Average Remaining Contractual Term
|
Outstanding at December 28, 2019
|
17,638,500
|
|
|
$
|
41.22
|
|
|
|
|
|
Granted
|
523,514
|
|
|
30.57
|
|
|
|
|
|
Forfeited
|
(1,090,768)
|
|
|
63.45
|
|
|
|
|
|
Exercised
|
(3,591,578)
|
|
|
23.58
|
|
|
|
|
|
Outstanding at December 26, 2020
|
13,479,668
|
|
|
43.71
|
|
|
$
|
54
|
|
|
5 years
|
Exercisable at December 26, 2020
|
8,560,075
|
|
|
38.54
|
|
|
35
|
|
|
3 years
|
The aggregate intrinsic value of stock options exercised during the period was $24 million in 2020, $10 million in 2019, and $67 million in 2018.
Cash received from options exercised was $85 million in 2020, $17 million in 2019, and $56 million in 2018. The tax benefit realized from stock options exercised was $16 million in 2020, $18 million in 2019, and $23 million in 2018.
Our unvested stock options and related information was:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted Average Grant Date Fair Value
(per share)
|
Unvested options at December 28, 2019
|
6,098,932
|
|
|
$
|
9.04
|
|
Granted
|
523,514
|
|
|
4.77
|
|
Forfeited
|
(353,235)
|
|
|
9.41
|
|
Vested
|
(1,349,618)
|
|
|
9.74
|
|
Unvested options at December 26, 2020
|
4,919,593
|
|
|
8.37
|
|
Restricted Stock Units
RSUs represent a right to receive one share or the value of one share upon the terms and conditions set forth in the applicable plan and award agreement.
We used the stock price on the grant date to estimate the fair value of our RSUs. Certain of our RSUs are not dividend eligible. We discounted the fair value of these RSUs based on the dividend yield. Dividend yield was estimated using the quarterly dividend divided by the three-month average stock price, annualized and continuously compounded. The grant date fair value of RSUs is amortized to expense over the vesting period.
The weighted average grant date fair value per share of our RSUs granted during the year was $29.27 in 2020, $25.77 in 2019, and $58.59 in 2018. All RSUs granted in 2020 and 2019 were dividend eligible. Our expected dividend yield was 3.31% in 2018.
Our RSU activity and related information was:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Grant Date Fair Value
(per share)
|
Outstanding at December 28, 2019
|
9,395,909
|
|
|
$
|
33.51
|
|
Granted
|
5,849,696
|
|
|
29.27
|
|
Forfeited
|
(825,272)
|
|
|
34.63
|
|
Vested
|
(184,411)
|
|
|
63.62
|
|
Outstanding at December 26, 2020
|
14,235,922
|
|
|
31.32
|
|
The aggregate fair value of RSUs that vested during the period was $6 million in 2020, $2 million in 2019, and $9 million in 2018.
Performance Share Units
PSUs represent a right to receive one share or the value of one share upon the terms and conditions set forth in the applicable plan and award agreement and are subject to achievement or satisfaction of performance or market conditions specified by the Compensation Committee of our Board of Directors.
For our PSUs that are tied to performance conditions, we used the stock price on the grant date to estimate the fair value. The PSUs are not dividend eligible; therefore, we discounted the fair value of the PSUs based on the dividend yield. Dividend yield was estimated using the quarterly dividend divided by the three-month average stock price, annualized and continuously compounded. The grant date fair value of PSUs is amortized to expense on a straight-line basis over the requisite service period for each separately vesting portion of the awards. We adjust the expense based on the likelihood of future achievement of performance metrics.
In 2019, in addition to the performance-based PSUs granted, we granted PSUs to our Chief Executive Officer that are tied to market-based conditions. The grant date fair value of these PSUs was determined based on a Monte Carlo simulation model. A discount was applied to the Monte Carlo valuation to reflect the lack of marketability during a mandatory post-vest holding period of three years. The related compensation expense is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. The number of PSUs that ultimately vest is based on achievement of the market-based components.
The weighted average grant date fair value per share of our PSUs granted during the year was $28.50 in 2020, $25.31 in 2019, and $56.31 in 2018. Our expected dividend yield was 5.10% in 2020, 5.39% in 2019, and 3.31% in 2018.
Our PSU activity and related information was:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Grant Date Fair Value
(per share)
|
Outstanding at December 28, 2019
|
6,813,659
|
|
|
$
|
36.03
|
|
Granted
|
1,645,244
|
|
|
28.50
|
|
Forfeited
|
(680,193)
|
|
|
50.58
|
|
Vested
|
—
|
|
|
—
|
|
Outstanding at December 26, 2020
|
7,778,710
|
|
|
33.16
|
|
Total Equity Awards
Equity award compensation cost and the related tax benefit was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Pre-tax compensation cost
|
$
|
156
|
|
|
$
|
46
|
|
|
$
|
33
|
|
Related tax benefit
|
(33)
|
|
|
(9)
|
|
|
(7)
|
|
After-tax compensation cost
|
$
|
123
|
|
|
$
|
37
|
|
|
$
|
26
|
|
Unrecognized compensation cost related to unvested equity awards was $374 million at December 26, 2020 and is expected to be recognized over a weighted average period of 2 years.
Note 12. Postemployment Benefits
We maintain various retirement plans for the majority of our employees. Current defined benefit pension plans are provided primarily for certain domestic union and foreign employees. Local statutory requirements govern many of these plans. The pension benefits of our unionized workers are in accordance with the applicable collective bargaining agreement covering their employment. Defined contribution plans are provided for certain domestic unionized, non-union hourly, and salaried employees as well as certain employees in foreign locations.
We provide health care and other postretirement benefits to certain of our eligible retired employees and their eligible dependents. Certain of our U.S. and Canadian employees may become eligible for such benefits. We may modify plan provisions or terminate plans at our discretion. The postretirement benefits of our unionized workers are in accordance with the applicable collective bargaining agreement covering their employment.
We remeasure our postemployment benefit plans at least annually.
We capitalize a portion of net pension and postretirement cost/(benefit) into inventory based on our production activities. Beginning January 1, 2018, only the service cost component of net pension and postretirement cost/(benefit) is capitalized into inventory. As part of the adoption of ASU 2017-07 in the first quarter of 2018, we recognized a one-time favorable credit of $42 million within cost of products sold related to amounts that were previously capitalized into inventory. Included in this credit was $28 million related to prior service credits that were previously capitalized to inventory.
Pension Plans
In 2018, we settled our Canadian salaried and Canadian hourly defined benefit pension plans, which resulted in settlement charges of $162 million for the year ended December 29, 2018. Additionally, the settlement of these plans impacted the projected benefit obligation, accumulated benefit obligation, fair value of plan assets, and service costs associated with our non-U.S. pension plans.
Obligations and Funded Status:
The projected benefit obligations, fair value of plan assets, and funded status of our pension plans were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 26, 2020
|
|
December 28, 2019
|
Benefit obligation at beginning of year
|
$
|
4,501
|
|
|
$
|
4,060
|
|
|
$
|
2,187
|
|
|
$
|
1,930
|
|
Service cost
|
6
|
|
|
7
|
|
|
16
|
|
|
17
|
|
Interest cost
|
123
|
|
|
163
|
|
|
38
|
|
|
51
|
|
Benefits paid
|
(189)
|
|
|
(331)
|
|
|
(115)
|
|
|
(122)
|
|
Actuarial losses/(gains)(a)
|
421
|
|
|
602
|
|
|
144
|
|
|
252
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Currency
|
—
|
|
|
—
|
|
|
84
|
|
|
59
|
|
Settlements(b)
|
(671)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special/contractual termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
Benefit obligation at end of year
|
4,191
|
|
|
4,501
|
|
|
2,359
|
|
|
2,187
|
|
Fair value of plan assets at beginning of year
|
4,835
|
|
|
4,219
|
|
|
2,841
|
|
|
2,689
|
|
Actual return on plan assets
|
652
|
|
|
947
|
|
|
176
|
|
|
177
|
|
Employer contributions
|
—
|
|
|
—
|
|
|
15
|
|
|
19
|
|
Benefits paid
|
(189)
|
|
|
(331)
|
|
|
(114)
|
|
|
(122)
|
|
Currency
|
—
|
|
|
—
|
|
|
108
|
|
|
78
|
|
Settlements(b)
|
(671)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
Fair value of plan assets at end of year
|
4,627
|
|
|
4,835
|
|
|
3,023
|
|
|
2,841
|
|
Net pension liability/(asset) recognized at end of year
|
$
|
(436)
|
|
|
$
|
(334)
|
|
|
$
|
(664)
|
|
|
$
|
(654)
|
|
(a) These actuarial losses were primarily due to a change in the discount rate assumption utilized in measuring plan obligations.
(b) Represents the full settlement of pension benefit obligations of $509 million through the purchase of a group annuity contract and an additional $162 million in lump sum payments.
The accumulated benefit obligation, which represents benefits earned to the measurement date, was $4.2 billion at December 26, 2020 and $4.5 billion at December 28, 2019 for the U.S. pension plans. The accumulated benefit obligation for the non-U.S. pension plans was $2.2 billion at December 26, 2020 and $2.1 billion at December 28, 2019.
The combined U.S. and non-U.S. pension plans resulted in net pension assets of $1.1 billion at December 26, 2020 and $988 million at December 28, 2019. We recognized these amounts on our consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Other non-current assets
|
$
|
1,205
|
|
|
$
|
1,081
|
|
Other current liabilities
|
(6)
|
|
|
(4)
|
|
Accrued postemployment costs
|
(99)
|
|
|
(89)
|
|
Net pension asset/(liability) recognized
|
$
|
1,100
|
|
|
$
|
988
|
|
For certain of our U.S. and non-U.S. plans that were underfunded based on accumulated benefit obligations in excess of plan assets, the projected benefit obligations, accumulated benefit obligations, and the fair value of plan assets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 26, 2020
|
|
December 28, 2019
|
Projected benefit obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181
|
|
|
$
|
162
|
|
Accumulated benefit obligation
|
—
|
|
|
—
|
|
|
174
|
|
|
156
|
|
Fair value of plan assets
|
—
|
|
|
—
|
|
|
76
|
|
|
70
|
|
All of our U.S. plans were overfunded based on plan assets in excess of accumulated benefit obligations as of December 26, 2020 and December 28, 2019.
For certain of our U.S. and non-U.S. plans that were underfunded based on projected benefit obligations in excess of plan assets, the projected benefit obligations, accumulated benefit obligations, and the fair value of plan assets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 26, 2020
|
|
December 28, 2019
|
Projected benefit obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181
|
|
|
$
|
162
|
|
Accumulated benefit obligation
|
—
|
|
|
—
|
|
|
174
|
|
|
156
|
|
Fair value of plan assets
|
—
|
|
|
—
|
|
|
76
|
|
|
70
|
|
All of our U.S. plans were overfunded based on plan assets in excess of projected benefit obligations as of December 26, 2020 and December 28, 2019.
We used the following weighted average assumptions to determine our projected benefit obligations under the pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 26, 2020
|
|
December 28, 2019
|
Discount rate
|
2.8
|
%
|
|
3.4
|
%
|
|
1.5
|
%
|
|
2.0
|
%
|
Rate of compensation increase
|
4.0
|
%
|
|
4.1
|
%
|
|
3.5
|
%
|
|
3.7
|
%
|
Discount rates for our U.S. and non-U.S. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans.
Components of Net Pension Cost/(Benefit):
Net pension cost/(benefit) consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Service cost
|
$
|
6
|
|
|
$
|
7
|
|
|
$
|
10
|
|
|
$
|
16
|
|
|
$
|
17
|
|
|
$
|
19
|
|
Interest cost
|
123
|
|
|
163
|
|
|
158
|
|
|
38
|
|
|
51
|
|
|
67
|
|
Expected return on plan assets
|
(206)
|
|
|
(229)
|
|
|
(247)
|
|
|
(103)
|
|
|
(143)
|
|
|
(175)
|
|
Amortization of unrecognized losses/(gains)
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
Settlements
|
(24)
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
1
|
|
|
158
|
|
Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
Special/contractual termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
7
|
|
Net pension cost/(benefit)
|
$
|
(101)
|
|
|
$
|
(59)
|
|
|
$
|
(83)
|
|
|
$
|
(48)
|
|
|
$
|
(69)
|
|
|
$
|
77
|
|
We present all non-service cost components of net pension cost/(benefit) within other expense/(income) on our consolidated statements of income.
We used the following weighted average assumptions to determine our net pension costs for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Discount rate - Service cost
|
3.5
|
%
|
|
4.6
|
%
|
|
3.8
|
%
|
|
2.5
|
%
|
|
3.3
|
%
|
|
3.0
|
%
|
Discount rate - Interest cost
|
2.8
|
%
|
|
4.1
|
%
|
|
3.6
|
%
|
|
1.8
|
%
|
|
2.6
|
%
|
|
2.9
|
%
|
Expected rate of return on plan assets
|
4.4
|
%
|
|
5.7
|
%
|
|
5.5
|
%
|
|
3.8
|
%
|
|
5.4
|
%
|
|
4.5
|
%
|
Rate of compensation increase
|
4.1
|
%
|
|
4.1
|
%
|
|
4.1
|
%
|
|
3.7
|
%
|
|
3.9
|
%
|
|
3.9
|
%
|
Discount rates for our U.S. and non-U.S. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. We determine our expected rate of return on plan assets from the plan assets' historical long-term investment performance, target asset allocation, and estimates of future long-term returns by asset class.
Plan Assets:
The underlying basis of the investment strategy of our defined benefit plans is to ensure that pension funds are available to meet the plans’ benefit obligations when they are due. Our investment objectives include: investing plan assets in a high-quality, diversified manner in order to maintain the security of the funds; achieving an optimal return on plan assets within specified risk tolerances; and investing according to local regulations and requirements specific to each country in which a defined benefit plan operates. The investment strategy expects equity investments to yield a higher return over the long term than fixed-income securities, while fixed-income securities are expected to provide certain matching characteristics to the plans’ benefit payment cash flow requirements. Our investment policy specifies the type of investment vehicles appropriate for the applicable plan, asset allocation guidelines, criteria for the selection of investment managers, procedures to monitor overall investment performance as well as investment manager performance. It also provides guidelines enabling the applicable plan fiduciaries to fulfill their responsibilities.
Our weighted average asset allocations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 26, 2020
|
|
December 28, 2019
|
Fixed-income securities
|
81
|
%
|
|
83
|
%
|
|
57
|
%
|
|
43
|
%
|
Equity securities
|
16
|
%
|
|
15
|
%
|
|
23
|
%
|
|
39
|
%
|
Cash and cash equivalents
|
3
|
%
|
|
2
|
%
|
|
18
|
%
|
|
14
|
%
|
Real estate
|
—
|
%
|
|
—
|
%
|
|
1
|
%
|
|
2
|
%
|
Certain insurance contracts
|
—
|
%
|
|
—
|
%
|
|
1
|
%
|
|
2
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Our pension investment strategy for U.S. plans is designed to align our pension assets with our projected benefit obligation to reduce volatility by targeting an investment of approximately 85% of our U.S. plan assets in fixed-income securities and approximately 15% in return-seeking assets, primarily equity securities.
For pension plans outside the United States, our investment strategy is subject to local regulations and the asset/liability profiles of the plans in each individual country. In aggregate, the long-term asset allocation targets of our non-U.S. plans are broadly characterized as a mix of approximately 78% fixed-income securities and annuity contracts, and approximately 22% in return-seeking assets, primarily equity securities and real estate.
The fair value of pension plan assets at December 26, 2020 was determined using the following fair value measurements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Corporate bonds and other fixed-income securities
|
$
|
3,532
|
|
|
$
|
—
|
|
|
$
|
3,531
|
|
|
$
|
1
|
|
Government bonds
|
320
|
|
|
320
|
|
|
—
|
|
|
—
|
|
Total fixed-income securities
|
3,852
|
|
|
320
|
|
|
3,531
|
|
|
1
|
|
Equity securities
|
232
|
|
|
232
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents
|
545
|
|
|
542
|
|
|
3
|
|
|
—
|
|
Real estate
|
35
|
|
|
—
|
|
|
—
|
|
|
35
|
|
Certain insurance contracts
|
47
|
|
|
—
|
|
|
—
|
|
|
47
|
|
Fair value excluding investments measured at net asset value
|
4,711
|
|
|
1,094
|
|
|
3,534
|
|
|
83
|
|
Investments measured at net asset value(a)
|
2,939
|
|
|
|
|
|
|
|
Total plan assets at fair value
|
$
|
7,650
|
|
|
|
|
|
|
|
(a) Amount includes cash collateral of $227 million associated with our securities lending program, which is reflected as an asset, and a corresponding securities lending payable of $227 million, which is reflected as a liability. The net impact on total plan assets at fair value is zero.
The fair value of pension plan assets at December 28, 2019 was determined using the following fair value measurements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Corporate bonds and other fixed-income securities
|
$
|
3,642
|
|
|
$
|
—
|
|
|
$
|
3,639
|
|
|
$
|
3
|
|
Government bonds
|
358
|
|
|
358
|
|
|
—
|
|
|
—
|
|
Total fixed-income securities
|
4,000
|
|
|
358
|
|
|
3,639
|
|
|
3
|
|
Equity securities
|
775
|
|
|
775
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents
|
414
|
|
|
413
|
|
|
1
|
|
|
—
|
|
Real estate
|
45
|
|
|
—
|
|
|
—
|
|
|
45
|
|
Certain insurance contracts
|
49
|
|
|
—
|
|
|
—
|
|
|
49
|
|
Fair value excluding investments measured at net asset value
|
5,283
|
|
|
1,546
|
|
|
3,640
|
|
|
97
|
|
Investments measured at net asset value(a)
|
2,393
|
|
|
|
|
|
|
|
Total plan assets at fair value
|
$
|
7,676
|
|
|
|
|
|
|
|
(a) Amount includes cash collateral of $226 million associated with our securities lending program, which is reflected as an asset, and a corresponding securities lending payable of $226 million, which is reflected as a liability. The net impact on total plan assets at fair value is zero.
The following section describes the valuation methodologies used to measure the fair value of pension plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified.
Corporate Bonds and Other Fixed-Income Securities. These securities consist of publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds). Such investments are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data. As such, these securities are included in Level 2. A limited number of these securities are in default and included in Level 3.
Government Bonds. These securities consist of direct investments in publicly traded U.S. fixed interest obligations (principally debentures). Such investments are valued using quoted prices in active markets. These securities are included in Level 1.
Equity Securities. These securities consist of direct investments in the stock of publicly traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.
Cash and Cash Equivalents. This consists of direct cash holdings and institutional short-term investment vehicles. Direct cash holdings are valued based on cost, which approximates fair value and are classified as Level 1. Certain institutional short-term investment vehicles are valued daily and are classified as Level 1. Other cash equivalents that are not traded on an active exchange, such as bank deposits, are classified as Level 2.
Real Estate. These holdings consist of real estate investments and are generally classified as Level 3.
Certain Insurance Contracts. This category consists of group annuity contracts that have been purchased to cover a portion of the plan members and have been classified as Level 3.
Investments Measured at Net Asset Value. This category consists of pooled funds, short-term investments, and partnership/corporate feeder interests.
•Pooled funds. The fair values of participation units held in collective trusts are based on their net asset values, as reported by the managers of the collective trusts and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. Investments in the collective trusts can be redeemed on each business day based upon the applicable net asset value per unit. Investments in the international large/mid cap equity collective trust can be redeemed on the last business day of each month and at least one business day during the month.
The mutual fund investments are not traded on an exchange, and a majority of these funds are held in a separate account managed by a fixed income manager. The fair values of these investments are based on their net asset values, as reported by the managers and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. The objective of the account is to provide superior return with reasonable risk, where performance is expected to exceed Barclays Long U.S. Credit Index. Investments in this account can be redeemed with a written notice to the investment manager.
•Short-term investments. Short-term investments largely consist of a money market fund, the fair value of which is based on the net asset value reported by the manager of the fund and supported by the unit prices of actual purchase and sale transactions. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. The money market fund is designed to provide safety of principal, daily liquidity, and a competitive yield by investing in high quality money market instruments. The investment objective of the money market fund is to provide the highest possible level of current income while still maintaining liquidity and preserving capital.
•Partnership/corporate feeder interests. Fair value estimates of the equity partnership are based on their net asset values, as reported by the manager of the partnership. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. Investments in the equity partnership may be redeemed once per month upon 10 days’ prior written notice to the General Partner, subject to the discretion of the General Partner. The investment objective of the equity partnership is to seek capital appreciation by investing primarily in equity securities.
The fair values of the corporate feeder are based upon the net asset values of the equity master fund in which it invests. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. Investments in the corporate feeder can be redeemed quarterly with at least 90 days’ notice. The investment objective of the corporate feeder is to generate long-term returns by investing in large, liquid equity securities with attractive fundamentals.
Changes in our Level 3 plan assets for the year ended December 26, 2020 included (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
December 28, 2019
|
|
Additions
|
|
Net Realized Gain/(Loss)
|
|
Net Unrealized Gain/(Loss)
|
|
Net Purchases, Issuances and Settlements
|
|
Transfers Into/(Out of) Level 3
|
|
December 26, 2020
|
Real estate
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
(6)
|
|
|
$
|
—
|
|
|
$
|
(3)
|
|
|
$
|
35
|
|
Corporate bonds and other fixed-income securities
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
1
|
|
Certain insurance contracts
|
49
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
(5)
|
|
|
—
|
|
|
47
|
|
Total Level 3 investments
|
$
|
97
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
(3)
|
|
|
$
|
(5)
|
|
|
$
|
(5)
|
|
|
$
|
83
|
|
Changes in our Level 3 plan assets for the year ended December 28, 2019 included (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
December 29, 2018
|
|
Additions
|
|
Net Realized Gain/(Loss)
|
|
Net Unrealized Gain/(Loss)
|
|
Net Purchases, Issuances and Settlements
|
|
Transfers Into/(Out of) Level 3
|
|
December 28, 2019
|
Real estate
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
(38)
|
|
|
$
|
—
|
|
|
$
|
45
|
|
Corporate bonds and other fixed-income securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
Certain insurance contracts
|
53
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(5)
|
|
|
—
|
|
|
49
|
|
Total Level 3 investments
|
$
|
132
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
(43)
|
|
|
$
|
3
|
|
|
$
|
97
|
|
Employer Contributions:
In 2020, we contributed $15 million to our non-U.S. pension plans. We did not contribute to our U.S. pension plans. We estimate that 2021 pension contributions will be approximately $14 million to our non-U.S. pension plans. We do not plan to make contributions to our U.S. pension plans in 2021. Estimated future contributions take into consideration current economic conditions, including COVID-19, which at this time are expected to have minimal impact on expected contributions for 2021. Our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual pension asset performance or interest rates, or other factors.
Future Benefit Payments:
The estimated future benefit payments from our pension plans at December 26, 2020 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
2021
|
$
|
320
|
|
|
$
|
81
|
|
2022
|
311
|
|
|
81
|
|
2023
|
303
|
|
|
81
|
|
2024
|
295
|
|
|
82
|
|
2025
|
285
|
|
|
84
|
|
2026-2030
|
1,176
|
|
|
454
|
|
Postretirement Plans
Obligations and Funded Status:
The accumulated benefit obligation, fair value of plan assets, and funded status of our postretirement benefit plans were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Benefit obligation at beginning of year
|
$
|
1,313
|
|
|
$
|
1,294
|
|
Service cost
|
6
|
|
|
6
|
|
Interest cost
|
33
|
|
|
46
|
|
Benefits paid
|
(108)
|
|
|
(129)
|
|
Actuarial losses/(gains)(a)
|
56
|
|
|
94
|
|
Plan amendments
|
—
|
|
|
(1)
|
|
Currency
|
2
|
|
|
6
|
|
Curtailments
|
—
|
|
|
(3)
|
|
Benefit obligation at end of year
|
1,302
|
|
|
1,313
|
|
Fair value of plan assets at beginning of year
|
1,114
|
|
|
1,044
|
|
Actual return on plan assets
|
134
|
|
|
187
|
|
Employer contributions
|
13
|
|
|
13
|
|
Benefits paid
|
(108)
|
|
|
(130)
|
|
Fair value of plan assets at end of year
|
1,153
|
|
|
1,114
|
|
Net postretirement benefit liability/(asset) recognized at end of year
|
$
|
149
|
|
|
$
|
199
|
|
(a) These actuarial losses were primarily due to a change in the discount rate assumption utilized in measuring plan obligations.
We recognized the net postretirement benefit asset/(liability) on our consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Other non-current assets
|
$
|
4
|
|
|
$
|
—
|
|
Other current liabilities
|
(8)
|
|
|
(15)
|
|
Accrued postemployment costs
|
(145)
|
|
|
(184)
|
|
Net postretirement benefit asset/(liability) recognized
|
$
|
(149)
|
|
|
$
|
(199)
|
|
For certain of our postretirement benefit plans that were underfunded based on accumulated postretirement benefit obligations in excess of plan assets, the accumulated benefit obligations and the fair value of plan assets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Accumulated benefit obligation
|
$
|
153
|
|
|
$
|
1,313
|
|
Fair value of plan assets
|
—
|
|
|
1,114
|
|
We used the following weighted average assumptions to determine our postretirement benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Discount rate
|
2.3
|
%
|
|
3.1
|
%
|
Health care cost trend rate assumed for next year
|
6.2
|
%
|
|
6.5
|
%
|
Ultimate trend rate
|
4.8
|
%
|
|
4.9
|
%
|
Discount rates for our plans were developed from a model portfolio of high-quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. Our expected health care cost trend rate is based on historical costs and our expectation for health care cost trend rates going forward.
The year that the health care cost trend rate reaches the ultimate trend rate varies by plan and ranges between 2021 and 2030 as of December 26, 2020. Assumed health care costs trend rates have a significant impact on the amounts reported for the postretirement benefit plans.
Components of Net Postretirement Cost/(Benefit):
Net postretirement cost/(benefit) consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Service cost
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
8
|
|
Interest cost
|
33
|
|
|
46
|
|
|
45
|
|
Expected return on plan assets
|
(49)
|
|
|
(53)
|
|
|
(50)
|
|
Amortization of prior service costs/(credits)
|
(122)
|
|
|
(306)
|
|
|
(311)
|
|
Amortization of unrecognized losses/(gains)
|
(14)
|
|
|
(8)
|
|
|
—
|
|
Curtailments
|
—
|
|
|
(5)
|
|
|
—
|
|
Net postretirement cost/(benefit)
|
$
|
(146)
|
|
|
$
|
(320)
|
|
|
$
|
(308)
|
|
We present all non-service cost components of net postretirement cost/(benefit) within other expense/(income) on our consolidated statements of income.
The amortization of prior service credits was primarily driven by plan amendments in 2015 and 2016. We estimate that amortization of prior service credits will be approximately $8 million in 2021, $6 million in both 2022 and 2023, and $2 million in both 2024 and 2025.
We used the following weighted average assumptions to determine our net postretirement benefit plans cost for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Discount rate - Service cost
|
3.3
|
%
|
|
4.2
|
%
|
|
3.6
|
%
|
Discount rate - Interest cost
|
2.7
|
%
|
|
3.8
|
%
|
|
3.0
|
%
|
Expected rate of return on plan assets
|
4.7
|
%
|
|
5.4
|
%
|
|
4.4
|
%
|
Health care cost trend rate
|
6.2
|
%
|
|
6.5
|
%
|
|
6.7
|
%
|
Discount rates for our plans were developed from a model portfolio of high-quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. We determine our expected rate of return on plan assets from the plan assets' target asset allocation and estimates of future long-term returns by asset class. Our expected health care cost trend rate is based on historical costs and our expectation for health care cost trend rates going forward.
Plan Assets:
The underlying basis of the investment strategy of our U.S. postretirement plans is to ensure that funds are available to meet the plans’ benefit obligations when they are due by investing plan assets in a high-quality, diversified manner in order to maintain the security of the funds. The investment strategy expects equity investments to yield a higher return over the long term than fixed-income securities, while fixed-income securities are expected to provide certain matching characteristics to the plans’ benefit payment cash flow requirements.
Our weighted average asset allocations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Fixed-income securities
|
62
|
%
|
|
65
|
%
|
Equity securities
|
34
|
%
|
|
31
|
%
|
Cash and cash equivalents
|
4
|
%
|
|
4
|
%
|
Our postretirement benefit plan investment strategy is subject to local regulations and the asset/liability profiles of the plans in each individual country. Our investment strategy is designed to align our postretirement benefit plan assets with our postretirement benefit obligation to reduce volatility. In aggregate, our long-term asset allocation targets are broadly characterized as a mix of approximately 70% in fixed-income securities and approximately 30% in return-seeking assets, primarily equity securities.
The fair value of postretirement benefit plan assets at December 26, 2020 was determined using the following fair value measurements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Government bonds
|
$
|
121
|
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds and other fixed-income securities
|
596
|
|
|
—
|
|
|
596
|
|
|
—
|
|
Total fixed-income securities
|
717
|
|
|
121
|
|
|
596
|
|
|
—
|
|
Equity securities
|
218
|
|
|
218
|
|
|
—
|
|
|
—
|
|
Fair value excluding investments measured at net asset value
|
935
|
|
|
339
|
|
|
596
|
|
|
—
|
|
Investments measured at net asset value
|
218
|
|
|
|
|
|
|
|
Total plan assets at fair value
|
$
|
1,153
|
|
|
|
|
|
|
|
The fair value of postretirement benefit plan assets at December 28, 2019 was determined using the following fair value measurements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Government bonds
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds and other fixed-income securities
|
592
|
|
|
—
|
|
|
592
|
|
|
—
|
|
Total fixed-income securities
|
625
|
|
|
33
|
|
|
592
|
|
|
—
|
|
Equity securities
|
188
|
|
|
188
|
|
|
—
|
|
|
—
|
|
Fair value excluding investments measured at net asset value
|
813
|
|
|
221
|
|
|
592
|
|
|
—
|
|
Investments measured at net asset value
|
301
|
|
|
|
|
|
|
|
Total plan assets at fair value
|
$
|
1,114
|
|
|
|
|
|
|
|
The following section describes the valuation methodologies used to measure the fair value of postretirement benefit plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified.
Corporate Bonds and Other Fixed-Income Securities. These securities consist of publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds and tax-exempt municipal bonds). Such investments are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data. As such, these securities are included in Level 2.
Government Bonds. These securities consist of direct investments in publicly traded U.S. fixed interest obligations (principally debentures). Such investments are valued using quoted prices in active markets. These securities are included in Level 1.
Equity Securities. These securities consist of direct investments in the stock of publicly traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.
Investments Measured at Net Asset Value. This category consists of pooled funds and short-term investments.
•Pooled funds. The fair values of participation units held in collective trusts are based on their net asset values, as reported by the managers of the collective trusts and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. Investments in the collective trusts can be redeemed on each business day based upon the applicable net asset value per unit. Investments in the international large/mid cap equity collective trust can be redeemed on the last business day of each month and at least one business day during the month.
The mutual fund investments are not traded on an exchange. The fair values of the mutual fund investments that are not traded on an exchange are based on their net asset values, as reported by the managers and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy.
•Short-term investments. Short-term investments largely consist of a money market fund, the fair value of which is based on the net asset value reported by the manager of the fund and supported by the unit prices of actual purchase and sale transactions. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. The money market fund is designed to provide safety of principal, daily liquidity, and a competitive yield by investing in high quality money market instruments. The investment objective of the money market fund is to provide the highest possible level of current income while still maintaining liquidity and preserving capital.
Employer Contributions:
In 2020, we contributed $12 million to our postretirement benefit plans. We estimate that 2021 postretirement benefit plan contributions will be approximately $14 million. Estimated future contributions take into consideration current economic conditions, including COVID-19, which at this time are expected to have minimal impact on expected contributions for 2021. Our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual postretirement plan asset performance or interest rates, or other factors.
Future Benefit Payments:
Our estimated future benefit payments for our postretirement plans at December 26, 2020 were (in millions):
|
|
|
|
|
|
2021
|
$
|
116
|
|
2022
|
115
|
|
2023
|
108
|
|
2024
|
101
|
|
2025
|
95
|
|
2026-2030
|
386
|
|
Other Plans
We sponsor and contribute to employee savings plans that cover eligible salaried, non-union, and union employees. Our contributions and costs are determined by the matching of employee contributions, as defined by the plans. Amounts charged to expense for defined contribution plans totaled $91 million in 2020, $88 million in 2019, and $85 million in 2018.
Accumulated Other Comprehensive Income/(Losses)
Our accumulated other comprehensive income/(losses) pension and postretirement benefit plans balances, before tax, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
Total
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 26, 2020
|
|
December 28, 2019
|
Net actuarial gain/(loss)
|
$
|
(3)
|
|
|
$
|
74
|
|
|
$
|
224
|
|
|
$
|
209
|
|
|
$
|
221
|
|
|
$
|
283
|
|
Prior service credit/(cost)
|
(14)
|
|
|
(14)
|
|
|
31
|
|
|
153
|
|
|
17
|
|
|
139
|
|
|
$
|
(17)
|
|
|
$
|
60
|
|
|
$
|
255
|
|
|
$
|
362
|
|
|
$
|
238
|
|
|
$
|
422
|
|
The net postemployment benefits recognized in other comprehensive income/(loss), consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Net postemployment benefit gains/(losses) arising during the period:
|
|
|
|
|
|
Net actuarial gains/(losses) arising during the period - Pension Benefits
|
$
|
(55)
|
|
|
$
|
(103)
|
|
|
$
|
8
|
|
Net actuarial gains/(losses) arising during the period - Postretirement Benefits
|
29
|
|
|
41
|
|
|
66
|
|
Prior service credits/(costs) arising during the period - Pension Benefits
|
—
|
|
|
—
|
|
|
(15)
|
|
Prior service credits/(costs) arising during the period - Postretirement Benefits
|
—
|
|
|
1
|
|
|
21
|
|
|
(26)
|
|
|
(61)
|
|
|
80
|
|
Tax benefit/(expense)
|
4
|
|
|
(5)
|
|
|
(19)
|
|
|
$
|
(22)
|
|
|
$
|
(66)
|
|
|
$
|
61
|
|
|
|
|
|
|
|
Reclassification of net postemployment benefit losses/(gains) to net income/(loss):
|
|
|
|
|
|
Amortization of unrecognized losses/(gains) - Pension Benefits
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Amortization of unrecognized losses/(gains) - Postretirement Benefits
|
(14)
|
|
|
(8)
|
|
|
—
|
|
Amortization of prior service costs/(credits) - Postretirement Benefits
|
(122)
|
|
|
(306)
|
|
|
(311)
|
|
Net settlement and curtailment losses/(gains) - Pension Benefits
|
(24)
|
|
|
1
|
|
|
153
|
|
Net settlement and curtailment losses/(gains) - Postretirement Benefits
|
—
|
|
|
(1)
|
|
|
—
|
|
Other losses/(gains) on postemployment benefits
|
—
|
|
|
1
|
|
|
—
|
|
|
(158)
|
|
|
(312)
|
|
|
(156)
|
|
Tax (benefit)/expense
|
40
|
|
|
78
|
|
|
38
|
|
|
$
|
(118)
|
|
|
$
|
(234)
|
|
|
$
|
(118)
|
|
Note 13. Financial Instruments
We maintain a policy of requiring that all significant, non-exchange traded derivative contracts be governed by an International Swaps and Derivatives Association master agreement, and these master agreements and their schedules contain certain obligations regarding the delivery of certain financial information upon demand.
Derivative Volume:
The notional values of our outstanding derivative instruments were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
December 26, 2020
|
|
December 28, 2019
|
Commodity contracts
|
$
|
384
|
|
|
$
|
475
|
|
Foreign exchange contracts
|
3,658
|
|
|
3,045
|
|
Cross-currency contracts
|
8,189
|
|
|
4,035
|
|
The increase in our derivative volume for cross-currency contracts was driven by the addition of new euro cross-currency contracts. The new contracts are designated either as cash flow hedges or net investment hedges. The cash flow hedges are being used to mitigate the foreign currency exposure created by non-derivative foreign-denominated debt instruments that are no longer designated as net investment hedges.
Fair Value of Derivative Instruments:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values and the levels within the fair value hierarchy of derivative instruments recorded on the consolidated balance sheets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Total Fair Value
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts(a)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
46
|
|
|
$
|
9
|
|
|
$
|
46
|
|
Cross-currency contracts(b)
|
—
|
|
|
—
|
|
|
298
|
|
|
333
|
|
|
298
|
|
|
333
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts(c)
|
50
|
|
|
14
|
|
|
3
|
|
|
1
|
|
|
53
|
|
|
15
|
|
Foreign exchange contracts(a)
|
—
|
|
|
—
|
|
|
20
|
|
|
9
|
|
|
20
|
|
|
9
|
|
Total fair value
|
$
|
50
|
|
|
$
|
14
|
|
|
$
|
330
|
|
|
$
|
389
|
|
|
$
|
380
|
|
|
$
|
403
|
|
(a) At December 26, 2020, the fair value of our derivative assets was recorded in other current assets ($28 million) and other non-current assets ($1 million), and the fair value of our derivative liabilities was recorded in other current liabilities ($50 million) and other non-current liabilities ($5 million).
(b) At December 26, 2020, the fair value of our derivative assets was recorded in other non-current assets, and the fair value of our derivative liabilities was recorded in other current liabilities ($41 million) and other non-current liabilities ($292 million).
(c) At December 26, 2020, the fair value of our derivative assets was recorded in other current assets and the fair value of derivative liabilities was recorded in other current liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Total Fair Value
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts(a)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
20
|
|
|
$
|
7
|
|
|
$
|
20
|
|
Cross-currency contracts(b)
|
—
|
|
|
—
|
|
|
200
|
|
|
88
|
|
|
200
|
|
|
88
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts(c)
|
42
|
|
|
6
|
|
|
—
|
|
|
2
|
|
|
42
|
|
|
8
|
|
Foreign exchange contracts(a)
|
—
|
|
|
—
|
|
|
6
|
|
|
3
|
|
|
6
|
|
|
3
|
|
Total fair value
|
$
|
42
|
|
|
$
|
6
|
|
|
$
|
213
|
|
|
$
|
113
|
|
|
$
|
255
|
|
|
$
|
119
|
|
(a) At December 28, 2019, the fair value of our derivative assets was recorded in other current assets ($12 million) and other non-current assets ($1 million), and the fair value of our derivative liabilities was recorded in other current liabilities.
(b) At December 28, 2019, the fair value of our derivative assets was recorded in other non-current assets, and the fair value of our derivative liabilities was recorded in other non-current liabilities.
(c) At December 28, 2019, the fair value of our derivative assets was recorded in other current assets, and the fair value of our derivative liabilities was recorded in other current liabilities.
Our derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. We elect to record the gross assets and liabilities of our derivative financial instruments on the consolidated balance sheets. If the derivative financial instruments had been netted on the consolidated balance sheets, the asset and liability positions each would have been reduced by $315 million at December 26, 2020 and $108 million at December 28, 2019. At December 26, 2020 and December 28, 2019, we had collected collateral of $25 million related to commodity derivative margin requirements, which was included in other current liabilities on our consolidated balance sheets.
Level 1 financial assets and liabilities consist of commodity future and options contracts and are valued using quoted prices in active markets for identical assets and liabilities.
Level 2 financial assets and liabilities consist of commodity swaps, foreign exchange forwards, options, and swaps, and cross-currency swaps. Commodity swaps are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount. Foreign exchange forwards and swaps are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Foreign exchange options are valued using an income approach based on a Black-Scholes-Merton formula. This formula uses present value techniques and reflects the time value and intrinsic value based on observable market rates. Cross-currency swaps are valued based on observable market spot and swap rates.
We did not have any Level 3 financial assets or liabilities in any period presented.
Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.
Net Investment Hedging:
At December 26, 2020, we had the following items designated as net investment hedges:
•Non-derivative foreign denominated debt with principal amounts of €650 million and £400 million;
•Cross-currency contracts with notional amounts of £1.0 billion ($1.4 billion), C$2.1 billion ($1.6 billion), €1.9 billion ($2.1 billion), and ¥9.6 billion ($85 million); and
•Foreign exchange contracts denominated in Chinese renminbi with an aggregate notional amount of $51 million.
We periodically use non-derivative instruments such as non-U.S. dollar financing transactions or non-U.S. dollar assets or liabilities, including intercompany loans, to hedge the exposure of changes in underlying foreign currency denominated subsidiary net assets, and they are designated as net investment hedges. At December 26, 2020, we had Chinese renminbi intercompany loans with an aggregate notional amount of $120 million.
The component of the gains and losses on our net investment in these designated foreign operations, driven by changes in foreign exchange rates, are economically offset by fair value movements on the effective portion of our cross-currency contracts and foreign exchange contracts and remeasurements of our foreign denominated debt.
Interest Rate Hedging:
From time to time we have had derivatives designated as interest rate hedges, including interest rate swaps. We no longer have any outstanding interest rate swaps. We continue to amortize the realized hedge losses that were deferred into accumulated other comprehensive income/(losses) into interest expense through the original maturity of the related long-term debt instruments.
Cash Flow Hedge Coverage:
At December 26, 2020, we had entered into foreign exchange contracts designated as cash flow hedges for periods not exceeding the next two years and into cross-currency contracts designated as cash flow hedges for periods not exceeding the next eight years.
Deferred Hedging Gains and Losses on Cash Flow Hedges:
Based on our valuation at December 26, 2020 and assuming market rates remain constant through contract maturities, we expect transfers to net income/(loss) of unrealized losses on foreign currency cash flow hedges during the next 12 months to be approximately $20 million. Additionally, we expect transfers to net income/(loss) of unrealized gains on cross-currency cash flow hedges and unrealized losses on interest rate cash flow hedges during the next 12 months to each be insignificant.
Concentration of Credit Risk:
Counterparties to our foreign exchange derivatives consist of major international financial institutions. We continually monitor our positions and the credit ratings of the counterparties involved and, by policy, limit the amount of our credit exposure to any one party. While we may be exposed to potential losses due to the credit risk of non-performance by these counterparties, losses are not anticipated. We closely monitor the credit risk associated with our counterparties and customers and to date have not experienced material losses.
Economic Hedging:
We enter into certain derivative contracts not designated as hedging instruments in accordance with our risk management strategy, which have an economic impact of largely mitigating commodity price risk and foreign currency exposures. Gains and losses are recorded in net income/(loss) as a component of cost of products sold for our commodity contracts and other expense/(income) for our cross currency and foreign exchange contracts.
Divestiture Hedging:
We entered into foreign exchange derivative contracts to economically hedge the foreign currency exposure related to the Heinz India Transaction. In 2018, the related derivative losses were $20 million, including $17 million recorded within other expense/(income) and $3 million recorded within interest expense. These derivative contracts settled in the first quarter of 2019 resulting in a gain of $5 million, including a gain of $6 million recorded within other expense/(income) and a loss of $1 million recorded within interest expense. These losses are classified as other losses/(gains) related to acquisitions and divestitures. Additionally, we entered into foreign exchange contracts which were designated as net investment hedges related to our investment in Heinz India. Related to these net investment hedges, we had unrealized hedge losses of $10 million as of December 29, 2018, which were recognized in accumulated other comprehensive income/(losses). In 2019, these net investment hedges settled at a loss of $6 million. This loss was subsequently reclassified from accumulated other comprehensive income/(losses) to other expense/(income) in the condensed consolidated statement of income in the first quarter of 2019 when the Heinz India Transaction closed. These losses are classified as losses/(gains) on the sale of a business. See Note 4, Acquisitions and Divestitures, for additional information related to the Heinz India Transaction.
Derivative Impact on the Statements of Comprehensive Income:
The following table presents the pre-tax amounts of derivative gains/(losses) deferred into accumulated other comprehensive income/(losses) and the income statement line item that will be affected when reclassified to net income/(loss) (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income/(Losses) Component
|
|
Gains/(Losses) Recognized in Other Comprehensive Income/(Losses) Related to Derivatives Designated as Hedging Instruments
|
|
Location of Gains/(Losses) When Reclassified to Net Income/(Loss)
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Net sales
|
Foreign exchange contracts
|
|
(2)
|
|
|
(36)
|
|
|
64
|
|
|
Cost of products sold
|
Foreign exchange contracts (excluded component)
|
|
(2)
|
|
|
2
|
|
|
(2)
|
|
|
Cost of products sold
|
Foreign exchange contracts
|
|
—
|
|
|
(23)
|
|
|
56
|
|
|
Other expense/(income)
|
Foreign exchange contracts (excluded component)
|
|
—
|
|
|
—
|
|
|
3
|
|
|
Other expense/(income)
|
Cross-currency contracts
|
|
221
|
|
|
43
|
|
|
(4)
|
|
|
Other expense/(income)
|
Cross-currency contracts (excluded component)
|
|
26
|
|
|
28
|
|
|
1
|
|
|
Other expense/(income)
|
Cross-currency contracts
|
|
(11)
|
|
|
—
|
|
|
—
|
|
|
Interest expense
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
1
|
|
|
13
|
|
|
(11)
|
|
|
Other expense/(income)
|
Foreign exchange contracts (excluded component)
|
|
(2)
|
|
|
(1)
|
|
|
(3)
|
|
|
Interest expense
|
Cross-currency contracts
|
|
(370)
|
|
|
(67)
|
|
|
214
|
|
|
Other expense/(income)
|
Cross-currency contracts (excluded component)
|
|
30
|
|
|
30
|
|
|
13
|
|
|
Interest expense
|
Total gains/(losses) recognized in statements of comprehensive income
|
|
$
|
(108)
|
|
|
$
|
(11)
|
|
|
$
|
331
|
|
|
|
Derivative Impact on the Statements of Income:
The following tables present the pre-tax amounts of derivative gains/(losses) reclassified from accumulated other comprehensive income/(losses) to net income/(loss) and the affected income statement line items (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
Cost of products sold
|
|
Interest expense
|
|
Other expense/ (income)
|
|
Cost of products sold
|
|
Interest expense
|
|
Other expense/ (income)
|
Total amounts presented in the consolidated statements of income in which the following effects were recorded
|
$
|
17,008
|
|
|
$
|
1,394
|
|
|
$
|
(296)
|
|
|
$
|
16,830
|
|
|
$
|
1,361
|
|
|
$
|
(952)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(losses) related to derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
(22)
|
|
Foreign exchange contracts (excluded component)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest rate contracts
|
—
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
Cross-currency contracts
|
—
|
|
|
(11)
|
|
|
143
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Cross-currency contracts (excluded component)
|
—
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
28
|
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6)
|
|
Foreign exchange contracts (excluded component)
|
—
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
Cross-currency contracts (excluded component)
|
—
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
—
|
|
Gains/(losses) related to derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
(69)
|
|
|
—
|
|
|
—
|
|
|
43
|
|
|
—
|
|
|
—
|
|
Foreign exchange contracts
|
—
|
|
|
—
|
|
|
(15)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
Cross-currency contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Total gains/(losses) recognized in statements of income
|
$
|
(50)
|
|
|
$
|
10
|
|
|
$
|
154
|
|
|
$
|
66
|
|
|
$
|
25
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2018
|
|
Cost of products sold
|
|
Interest expense
|
|
Other expense/ (income)
|
Total amounts presented in the consolidated statements of income in which the following effects were recorded
|
$
|
17,347
|
|
|
$
|
1,284
|
|
|
$
|
(168)
|
|
|
|
|
|
|
|
Gains/(losses) related to derivatives designated as hedging instruments:
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
(2)
|
|
|
$
|
—
|
|
|
$
|
56
|
|
Foreign exchange contracts (excluded component)
|
(2)
|
|
|
—
|
|
|
3
|
|
Interest rate contracts
|
—
|
|
|
(4)
|
|
|
—
|
|
Cross-currency contracts
|
—
|
|
|
—
|
|
|
(7)
|
|
Cross-currency contracts (excluded component)
|
—
|
|
|
—
|
|
|
1
|
|
Net investment hedges:
|
|
|
|
|
|
Foreign exchange contracts (excluded component)
|
—
|
|
|
(3)
|
|
|
—
|
|
Cross-currency contracts (excluded component)
|
—
|
|
|
13
|
|
|
—
|
|
Gains/(losses) related to derivatives not designated as hedging instruments:
|
|
|
|
|
|
Commodity contracts
|
(44)
|
|
|
—
|
|
|
—
|
|
Foreign exchange contracts
|
—
|
|
|
—
|
|
|
(84)
|
|
Cross-currency contracts
|
—
|
|
|
—
|
|
|
4
|
|
Total gains/(losses) recognized in statements of income
|
$
|
(48)
|
|
|
$
|
6
|
|
|
$
|
(27)
|
|
Non-Derivative Impact on Statements of Comprehensive Income:
Related to our non-derivative foreign denominated debt instruments designated as net investment hedges, we recognized pre-tax losses of $57 million in 2020 and pre-tax gains of $52 million in 2019 and $174 million in 2018. These amounts were recognized in other comprehensive income/(loss).
Other Financial Instruments:
The carrying amounts of cash equivalents approximated fair values at December 26, 2020 and December 28, 2019. Money market funds are included in cash and cash equivalents on the consolidated balance sheets. The fair value of money market funds was $144 million at December 26, 2020 and $94 million at December 28, 2019. These are considered Level 1 financial assets and are valued using quoted prices in active markets for identical assets.
Note 14. Accumulated Other Comprehensive Income/(Losses)
The components of, and changes in, accumulated other comprehensive income/(losses), net of tax, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Net Postemployment Benefit Plan Adjustments
|
|
Net Cash Flow Hedge Adjustments
|
|
Total
|
Balance as of December 30, 2017
|
$
|
(1,587)
|
|
|
$
|
549
|
|
|
$
|
(16)
|
|
|
$
|
(1,054)
|
|
Foreign currency translation adjustments
|
(1,173)
|
|
|
—
|
|
|
—
|
|
|
(1,173)
|
|
Net deferred gains/(losses) on net investment hedges
|
284
|
|
|
—
|
|
|
—
|
|
|
284
|
|
Amounts excluded from the effectiveness assessment of net investment hedges
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss)
|
(7)
|
|
|
—
|
|
|
—
|
|
|
(7)
|
|
Net deferred gains/(losses) on cash flow hedges
|
—
|
|
|
—
|
|
|
99
|
|
|
99
|
|
Amounts excluded from the effectiveness assessment of cash flow hedges
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss)
|
—
|
|
|
—
|
|
|
(44)
|
|
|
(44)
|
|
Net actuarial gains/(losses) arising during the period
|
—
|
|
|
58
|
|
|
—
|
|
|
58
|
|
Prior service credits/(costs) arising during the period
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Net postemployment benefit losses/(gains) reclassified to net income/(loss)
|
—
|
|
|
(118)
|
|
|
—
|
|
|
(118)
|
|
Total other comprehensive income/(loss)
|
(889)
|
|
|
(57)
|
|
|
57
|
|
|
(889)
|
|
Balance as of December 29, 2018
|
(2,476)
|
|
|
492
|
|
|
41
|
|
|
(1,943)
|
|
Foreign currency translation adjustments
|
239
|
|
|
—
|
|
|
—
|
|
|
239
|
|
Net deferred gains/(losses) on net investment hedges
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Amounts excluded from the effectiveness assessment of net investment hedges
|
22
|
|
|
—
|
|
|
—
|
|
|
22
|
|
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss)
|
(16)
|
|
|
—
|
|
|
—
|
|
|
(16)
|
|
Net deferred gains/(losses) on cash flow hedges
|
—
|
|
|
—
|
|
|
(10)
|
|
|
(10)
|
|
Amounts excluded from the effectiveness assessment of cash flow hedges
|
—
|
|
|
—
|
|
|
29
|
|
|
29
|
|
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss)
|
—
|
|
|
—
|
|
|
(41)
|
|
|
(41)
|
|
Net actuarial gains/(losses) arising during the period
|
—
|
|
|
(70)
|
|
|
—
|
|
|
(70)
|
|
Prior service credits/(costs) arising during the period
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Net postemployment benefit losses/(gains) reclassified to net income/(loss)
|
—
|
|
|
(234)
|
|
|
—
|
|
|
(234)
|
|
Cumulative effect of accounting standards adopted in the period(a)
|
—
|
|
|
114
|
|
|
22
|
|
|
136
|
|
Total other comprehensive income/(loss)
|
246
|
|
|
(189)
|
|
|
—
|
|
|
57
|
|
Balance at December 28, 2019
|
(2,230)
|
|
|
303
|
|
|
41
|
|
|
(1,886)
|
|
Foreign currency translation adjustments
|
324
|
|
|
—
|
|
|
—
|
|
|
324
|
|
Net deferred gains/(losses) on net investment hedges
|
(321)
|
|
|
—
|
|
|
—
|
|
|
(321)
|
|
Amounts excluded from the effectiveness assessment of net investment hedges
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss)
|
(17)
|
|
|
—
|
|
|
—
|
|
|
(17)
|
|
Net deferred gains/(losses) on cash flow hedges
|
—
|
|
|
—
|
|
|
144
|
|
|
144
|
|
Amounts excluded from the effectiveness assessment of cash flow hedges
|
—
|
|
|
—
|
|
|
24
|
|
|
24
|
|
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss)
|
—
|
|
|
—
|
|
|
(116)
|
|
|
(116)
|
|
Net actuarial gains/(losses) arising during the period
|
—
|
|
|
(27)
|
|
|
—
|
|
|
(27)
|
|
Net postemployment benefit losses/(gains) reclassified to net income/(loss)
|
—
|
|
|
(118)
|
|
|
—
|
|
|
(118)
|
|
Total other comprehensive income/(loss)
|
12
|
|
|
(145)
|
|
|
52
|
|
|
(81)
|
|
Balance at December 26, 2020
|
$
|
(2,218)
|
|
|
$
|
158
|
|
|
$
|
93
|
|
|
$
|
(1,967)
|
|
(a) In the first quarter of 2019, we adopted ASU 2018-02 related to reclassifying tax effects stranded in accumulated other comprehensive income/(losses). See Note 3, New Accounting Standards, in our Annual Report on Form 10-K for the year ended December 28, 2019 for additional information.
The gross amount and related tax benefit/(expense) recorded in, and associated with, each component of other comprehensive income/(loss) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
|
Before Tax Amount
|
|
Tax
|
|
Net of Tax Amount
|
|
Before Tax Amount
|
|
Tax
|
|
Net of Tax Amount
|
|
Before Tax Amount
|
|
Tax
|
|
Net of Tax Amount
|
Foreign currency translation adjustments
|
$
|
324
|
|
|
$
|
—
|
|
|
$
|
324
|
|
|
$
|
239
|
|
|
$
|
—
|
|
|
$
|
239
|
|
|
$
|
(1,173)
|
|
|
$
|
—
|
|
|
$
|
(1,173)
|
|
Net deferred gains/(losses) on net investment hedges
|
(426)
|
|
|
105
|
|
|
(321)
|
|
|
(2)
|
|
|
3
|
|
|
1
|
|
|
377
|
|
|
(93)
|
|
|
284
|
|
Amounts excluded from the effectiveness assessment of net investment hedges
|
28
|
|
|
(2)
|
|
|
26
|
|
|
29
|
|
|
(7)
|
|
|
22
|
|
|
10
|
|
|
(3)
|
|
|
7
|
|
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss)
|
(23)
|
|
|
6
|
|
|
(17)
|
|
|
(23)
|
|
|
7
|
|
|
(16)
|
|
|
(10)
|
|
|
3
|
|
|
(7)
|
|
Net deferred gains/(losses) on cash flow hedges
|
209
|
|
|
(65)
|
|
|
144
|
|
|
(16)
|
|
|
6
|
|
|
(10)
|
|
|
116
|
|
|
(17)
|
|
|
99
|
|
Amounts excluded from the effectiveness assessment of cash flow hedges
|
24
|
|
|
—
|
|
|
24
|
|
|
30
|
|
|
(1)
|
|
|
29
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss)
|
(175)
|
|
|
59
|
|
|
(116)
|
|
|
(48)
|
|
|
7
|
|
|
(41)
|
|
|
(45)
|
|
|
1
|
|
|
(44)
|
|
Net actuarial gains/(losses) arising during the period
|
(30)
|
|
|
3
|
|
|
(27)
|
|
|
(65)
|
|
|
(5)
|
|
|
(70)
|
|
|
74
|
|
|
(16)
|
|
|
58
|
|
Prior service credits/(costs) arising during the period
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
6
|
|
|
(3)
|
|
|
3
|
|
Net postemployment benefit losses/(gains) reclassified to net income/(loss)
|
(158)
|
|
|
40
|
|
|
(118)
|
|
|
(312)
|
|
|
78
|
|
|
(234)
|
|
|
(156)
|
|
|
38
|
|
|
(118)
|
|
The amounts reclassified from accumulated other comprehensive income/(losses) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income/(Losses) Component
|
|
Reclassified from Accumulated Other Comprehensive Income/(Losses) to Net Income/(Loss)
|
|
Affected Line Item in the Statements of Income
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
|
|
Losses/(gains) on net investment hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts(a)
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
Other expense/(income)
|
Foreign exchange contracts(b)
|
|
2
|
|
|
1
|
|
|
3
|
|
|
Interest expense
|
Cross-currency contracts(b)
|
|
(25)
|
|
|
(30)
|
|
|
(13)
|
|
|
Interest expense
|
Losses/(gains) on cash flow hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts(c)
|
|
(19)
|
|
|
(23)
|
|
|
4
|
|
|
Cost of products sold
|
Foreign exchange contracts(c)
|
|
—
|
|
|
22
|
|
|
(59)
|
|
|
Other expense/(income)
|
Cross-currency contracts(c)
|
|
(169)
|
|
|
(51)
|
|
|
6
|
|
|
Other expense/(income)
|
Cross-currency contracts(c)
|
|
11
|
|
|
—
|
|
|
—
|
|
|
Interest expense
|
Interest rate contracts(d)
|
|
2
|
|
|
4
|
|
|
4
|
|
|
Interest expense
|
Losses/(gains) on hedges before income taxes
|
|
(198)
|
|
|
(71)
|
|
|
(55)
|
|
|
|
Losses/(gains) on hedges, income taxes
|
|
65
|
|
|
14
|
|
|
4
|
|
|
|
Losses/(gains) on hedges
|
|
$
|
(133)
|
|
|
$
|
(57)
|
|
|
$
|
(51)
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses/(gains) on postemployment benefits:
|
|
|
|
|
|
|
|
|
Amortization of unrecognized losses/(gains)(e)
|
|
$
|
(12)
|
|
|
$
|
(7)
|
|
|
$
|
2
|
|
|
|
Amortization of prior service costs/(credits)(e)
|
|
(122)
|
|
|
(306)
|
|
|
(311)
|
|
|
|
Settlement and curtailment losses/(gains)(e)
|
|
(24)
|
|
|
—
|
|
|
153
|
|
|
|
Other losses/(gains) on postemployment benefits
|
|
—
|
|
|
1
|
|
|
—
|
|
|
|
Losses/(gains) on postemployment benefits before income taxes
|
|
(158)
|
|
|
(312)
|
|
|
(156)
|
|
|
|
Losses/(gains) on postemployment benefits, income taxes
|
|
40
|
|
|
78
|
|
|
38
|
|
|
|
Losses/(gains) on postemployment benefits
|
|
$
|
(118)
|
|
|
$
|
(234)
|
|
|
$
|
(118)
|
|
|
|
(a) Represents the reclassification of hedge losses/(gains) resulting from the complete or substantially complete liquidation of our investment in the underlying foreign operations.
(b) Represents recognition of the excluded component in net income/(loss).
(c) Includes amortization of the excluded component and the effective portion of the related hedges.
(d) Represents amortization of realized hedge losses that were deferred into accumulated other comprehensive income/(losses) through the maturity of the related long-term debt instruments.
(e) These components are included in the computation of net periodic postemployment benefit costs. See Note 12, Postemployment Benefits, for additional information.
In this note we have excluded activity and balances related to noncontrolling interest due to their insignificance. This activity was primarily related to foreign currency translation adjustments.
Note 15. Venezuela - Foreign Currency and Inflation
We have a subsidiary in Venezuela that manufactures and sells a variety of products, primarily in the condiments and sauces and infant and nutrition categories. We apply highly inflationary accounting to the results of our Venezuelan subsidiary and include these results in our consolidated financial statements. Under highly inflationary accounting, the functional currency of our Venezuelan subsidiary is the U.S. dollar (our reporting currency), although the majority of its transactions are in Venezuelan bolivars. As a result, we must revalue the results of our Venezuelan subsidiary to U.S. dollars.
As of December 26, 2020, companies and individuals are allowed to use an auction-based system at private and public banks to obtain foreign currency. This is the only foreign currency exchange mechanism legally available to us for converting Venezuelan bolivars to U.S. dollars. Published daily by the Banco Central de Venezuela, the exchange rate (“BCV Rate”) is calculated as the weighted average rate of participating banking institutions with active exchange operations. We believe the BCV Rate is the most appropriate legally available rate at which to translate the results of our Venezuelan subsidiary. Therefore, we revalue the income statement using the weighted average BCV Rates, and we revalue the bolivar-denominated monetary assets and liabilities at the period-end BCV Rate. The resulting revaluation gains and losses are recorded in current net income/(loss) rather than accumulated other comprehensive income/(losses). These gains and losses are classified within other expense/(income) as nonmonetary currency devaluation on our consolidated statements of income.
The BCV Rate at December 26, 2020 was BsS1,037,851.25 per U.S. dollar compared to BsS45,874.81 at December 28, 2019. The weighted average rate was BsS358,601.64 for 2020, BsS13,955.68 for 2019, and BsS25.06 for 2018. Remeasurements of the bolivar-denominated monetary assets and liabilities and operating results of our Venezuelan subsidiary at BCV Rates resulted in nonmonetary currency devaluation losses of $6 million in 2020, $10 million in 2019, and $146 million in 2018. These losses were recorded in other expense/(income) in the consolidated statements of income.
Our Venezuelan subsidiary obtains U.S. dollars primarily through private and public bank auctions, customer payments, and royalty payments. These U.S. dollars are primarily used for purchases of tomato paste and spare parts for manufacturing, as well as a limited amount of other operating costs. As of December 26, 2020, our Venezuelan subsidiary had sufficient U.S. dollars to fund these operational needs in the foreseeable future. However, further deterioration of the economic environment or regulation changes could jeopardize our export business.
In addition to the bank auctions described above, there is an unofficial market for obtaining U.S. dollars with Venezuelan bolivars. The exact exchange rate is widely debated but is generally accepted to be substantially higher than the latest published BCV Rate. We have not transacted at any unofficial market rates and have no plans to transact at unofficial market rates in the foreseeable future.
Our results of operations in Venezuela reflect those of a controlled subsidiary. However, the continuing economic uncertainty, strict labor laws, and evolving government controls over imports, prices, currency exchange, and payments present a challenging operating environment. Increased restrictions imposed by the Venezuelan government along with further deterioration of the economic environment could impact our ability to control our Venezuelan operations and could lead us to deconsolidate our Venezuelan subsidiary in the future.
Note 16. Financing Arrangements
We enter into various structured payable and product financing arrangements to facilitate supply from our vendors. Balance sheet classification is based on the nature of the arrangements. For programs determined to be financing arrangements, we have concluded that our obligations to our suppliers, including amounts due and scheduled payment terms, are impacted by their participation in the program and therefore we classify amounts outstanding within other current liabilities on our consolidated balance sheets. We had approximately $236 million at December 26, 2020 and approximately $253 million at December 28, 2019 on our consolidated balance sheets related to these arrangements.
Transfers of Financial Assets:
During the fourth quarter of 2020, we entered into a nonrecourse accounts receivable factoring program whereby certain eligible receivables are sold to third party financial institutions in exchange for cash. The program provides us with an additional means for managing liquidity. Under the terms of the arrangement, we act as the collecting agent on behalf of the financial institutions to collect amounts due from customers for the receivables sold. We account for the transfer of receivables as a true sale at the point control is transferred through derecognition of the receivable on our consolidated balance sheet. Receivables sold under this accounts receivable factoring program were approximately $50 million during 2020, with no amount outstanding as of December 26, 2020. The incremental costs of factoring receivables under this arrangement were insignificant for the year ended December 26, 2020. The proceeds from the sales of receivables are included in cash from operating activities in the consolidated statement of cash flows.
Note 17. Commitments and Contingencies
Legal Proceedings
We are involved in legal proceedings, claims, and governmental inquiries, inspections, or investigations (“Legal Matters”) arising in the ordinary course of our business. While we cannot predict with certainty the results of Legal Matters in which we are currently involved or may in the future be involved, we do not expect that the ultimate costs to resolve the Legal Matters that are currently pending will have a material adverse effect on our financial condition, results of operations, or cash flows.
Class Actions and Stockholder Derivative Actions:
The Kraft Heinz Company and certain of our current and former officers and directors are currently defendants in a consolidated securities class action lawsuit pending in the United States District Court for the Northern District of Illinois, Union Asset Management Holding AG, et al. v. The Kraft Heinz Company, et al. The consolidated amended class action complaint, which was filed on August 14, 2020 and also names 3G Capital, Inc. and several of its subsidiaries and affiliates (“3G Entities”) as defendants, asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, based on allegedly materially false or misleading statements and omissions in public statements, press releases, investor presentations, earnings calls, Company documents, and SEC filings regarding the Company’s business, financial results, and internal controls, and further alleges the 3G Entities engaged in insider trading and misappropriated the Company’s material, non-public information. The plaintiffs seek damages in an unspecified amount, attorneys’ fees, and other relief.
In addition, our Employee Benefits Administration Board and certain of The Kraft Heinz Company’s current and former officers and employees are currently defendants in an Employee Retirement Income Security Act (“ERISA”) class action lawsuit, Osborne v. Employee Benefits Administration Board of Kraft Heinz, et al., which is pending in the United States District Court for the Northern District of Illinois. Plaintiffs in the lawsuit purport to represent a class of current and former employees who were participants in and beneficiaries of various retirement plans which were co-invested in a commingled investment fund known as the Kraft Foods Savings Plan Master Trust (the “Master Trust”) during the period of May 4, 2017 through February 21, 2019. An amended complaint was filed on June 28, 2019. The amended complaint alleges violations of Section 502 of ERISA based on alleged breaches of obligations as fiduciaries subject to ERISA by allowing the Master Trust to continue investing in our common stock, and alleges additional breaches of fiduciary duties by current and former officers for their purported failure to monitor Master Trust fiduciaries. The plaintiffs seek damages in an unspecified amount, attorneys’ fees, and other relief.
Certain of The Kraft Heinz Company’s current and former officers and directors and the 3G Entities are also named as defendants in a stockholder derivative action, In re Kraft Heinz Shareholder Derivative Litigation, which had been previously consolidated in the United States District Court for the Western District of Pennsylvania, and is now pending in the United States District Court for the Northern District of Illinois. That complaint, which was filed on July 31, 2019, asserts state law claims for alleged breaches of fiduciary duties and unjust enrichment, as well as federal claims for contribution for alleged violations of Sections 10(b) and 21D of the Exchange Act and Rule 10b-5 promulgated thereunder, based on allegedly materially false or misleading statements and omissions in public statements and SEC filings, and for implementing cost cutting measures that allegedly damaged the Company. The plaintiffs seek damages in an unspecific amount, attorneys’ fees, and other relief. A further consolidated amended complaint is expected after appointment of a lead plaintiff.
Certain of The Kraft Heinz Company’s current and former officers and directors and the 3G Entities are also named as defendants in a consolidated stockholder derivative action, In re Kraft Heinz Company Derivative Litigation, which was filed in the Delaware Court of Chancery. The consolidated amended complaint, which was filed on April 27, 2020, alleges state law claims, contending that the 3G Entities were controlling shareholders who owed fiduciary duties to the Company, and that they breached those duties by allegedly engaging in insider trading and misappropriating the Company’s material, non-public information. The complaint further alleges that certain of The Kraft Heinz Company’s current and former officers and directors breached their fiduciary duties to the Company by purportedly making materially misleading statements and omissions regarding the Company’s financial performance and the impairment of its goodwill and intangible assets, and by supposedly approving or allowing the 3G Entities’ alleged insider trading. The complaint seeks relief against the defendants in the form of damages, disgorgement of all profits obtained from the alleged insider trading, contribution and indemnification, and an award of attorneys’ fees and costs.
We intend to vigorously defend against these lawsuits; however, we cannot reasonably estimate the potential range of loss, if any, due to the early stage of these proceedings.
United States Government Investigations:
As previously disclosed on February 21, 2019, we received a subpoena in October 2018 from the SEC related to our procurement area, specifically the accounting policies, procedures, and internal controls related to our procurement function, including, but not limited to, agreements, side agreements, and changes or modifications to agreements with our suppliers. Following the receipt of this subpoena, we, together with external counsel and forensic accountants, and subsequently, under the oversight of the Audit Committee, conducted an internal investigation into our procurement area and related matters. The SEC has issued additional subpoenas seeking information related to our financial reporting, incentive plans, debt issuances, internal controls, disclosures, personnel, our assessment of goodwill and intangible asset impairments, our communications with certain stockholders, and other related information and materials in connection with its investigation. The United States Attorney’s Office for the Northern District of Illinois (“USAO”) is also reviewing this matter. We cannot predict the eventual scope, duration, or outcome of any potential SEC legal action or other action or whether it could have a material impact on our financial condition, results of operations, or cash flows. We have been responsive to the ongoing subpoenas and other document requests and will continue to cooperate fully with any governmental or regulatory inquiry or investigation.
Other Commitments and Contingencies
Purchase Obligations:
We have purchase obligations for materials, supplies, property, plant and equipment, and co-packing, storage, and distribution services based on projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology, and professional services.
As of December 26, 2020, our take-or-pay purchase obligations were as follows (in millions):
|
|
|
|
|
|
2021
|
$
|
579
|
|
2022
|
422
|
|
2023
|
339
|
|
2024
|
215
|
|
2025
|
135
|
|
Thereafter
|
124
|
|
Total
|
$
|
1,814
|
|
Redeemable Noncontrolling Interest:
In 2016, we entered into a joint venture with a minority partner to manufacture, package, market, and distribute food products. We controlled the operations and included this business in our consolidated results. Our minority partner had put options that, if it chose to exercise, would require us to purchase portions of its equity interest at a future date. The minority partner’s put options were reflected on our consolidated balance sheets as a redeemable noncontrolling interest. We previously accreted the redeemable noncontrolling interest to its estimated redemption value over the term of the put options. During 2020, we issued a notice of termination to our minority partner, indicating our intent to dissolve and liquidate the joint venture as provided for within our agreement. The joint venture was dissolved in December 2020. As a result of this dissolution, we recognized a pre-tax loss of approximately $26 million in other expense/(income) for the year ended December 26, 2020.
Note 18. Debt
Borrowing Arrangements:
On July 6, 2015, together with Kraft Heinz Foods Company (“KHFC”), our 100% owned operating subsidiary, we entered into a credit agreement (as amended, the “Credit Agreement”), which provides for a $4.0 billion senior unsecured revolving credit facility (as amended, the “Senior Credit Facility”). In June 2018, we entered into an agreement that became effective on July 6, 2018 to extend the maturity date of our Senior Credit Facility from July 6, 2021 to July 6, 2023 and to establish a $400 million euro equivalent swing line facility, which is available under the $4.0 billion revolving credit facility limit for short-term loans denominated in euros on a same-day basis. On March 23, 2020, we entered into an extension letter agreement (the “Extension Agreement”), which extends $3.9 billion of the revolving loans and commitments under the Credit Agreement from July 6, 2023 to July 6, 2024. The revolving loans and commitments of each lender that did not agree to the Extension Agreement shall continue to terminate on the existing maturity date of July 6, 2023. On October 9, 2020, we entered into the Commitment Increase Amendment (the “Amendment”) to the Credit Agreement, which provides for incremental revolving commitments by two additional lenders in the amount of $50 million each, for an aggregate commitment of $100 million. Following the execution of the Amendment, the revolving loans and commitments available under the Credit Agreement are $4.1 billion through July 6, 2023 and $4.0 billion through July 6, 2024.
On March 12, 2020, as a precautionary measure to preserve financial flexibility in light of the uncertainty in the global economy resulting from the COVID-19 pandemic, we provided notice to our lenders to borrow the full available amount under our Senior Credit Facility. As such, a total of $4.0 billion was drawn on our Senior Credit Facility during the first quarter of 2020. We repaid the full $4.0 billion revolver draw during the second quarter of 2020. No amounts were drawn on our Senior Credit Facility at December 26, 2020, at December 28, 2019, or during the years ended December 28, 2019 and December 29, 2018.
The Senior Credit Facility includes a $1.0 billion sub-limit for borrowings in alternative currencies (i.e., euro, British pound sterling, Canadian dollars, or other lawful currencies readily available and freely transferable and convertible into U.S. dollars), as well as a letter of credit sub-facility of up to $300 million. Subject to certain conditions, we may increase the amount of revolving commitments and/or add additional tranches of term loans in a combined aggregate amount of up to $900 million.
Any committed borrowings under the Senior Credit Facility bear interest at a variable annual rate based on LIBOR/EURIBOR/CDOR loans or an alternate base rate/Canadian prime rate, in each case subject to an applicable margin based upon the long-term senior unsecured, non-credit enhanced debt rating assigned to us. The borrowings under the Senior Credit Facility have interest rates based on, at our election, base rate, LIBOR, EURIBOR, CDOR, or Canadian prime rate plus a spread ranging from 87.5 to 175 basis points for LIBOR, EURIBOR, and CDOR loans, and 0 to 75 basis points for base rate or Canadian prime rate loans.
The Senior Credit Facility contains representations, warranties, and covenants that are typical for these types of facilities and could upon the occurrence of certain events of default restrict our ability to access our Senior Credit Facility. Our Senior Credit Facility requires us to maintain a minimum shareholders’ equity (excluding accumulated other comprehensive income/(losses)) of at least $35 billion. We were in compliance with this covenant as of December 26, 2020.
The obligations under the Credit Agreement are guaranteed by KHFC in the case of indebtedness and other liabilities of any subsidiary borrower and by The Kraft Heinz Company in the case of indebtedness and other liabilities of any subsidiary borrower and KHFC.
In March 2020, together with KHFC, we entered into an uncommitted revolving credit line agreement which provides for borrowings up to $300 million. Each borrowing under this uncommitted revolving credit line agreement is due within six months of the disbursement date and the final maturity date of the agreement is June 9, 2021. As of December 26, 2020, no amounts had been drawn on this facility.
We have historically obtained funding through our U.S. and European commercial paper programs. We had no commercial paper outstanding at December 26, 2020, at December 28, 2019, or during the year ended December 26, 2020. The maximum amount of commercial paper outstanding during the year ended December 28, 2019 was $200 million.
Long-Term Debt:
The following table summarizes our long-term debt obligations.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priority (a)
|
|
Maturity Dates
|
|
Interest Rates (b)
|
|
Carrying Values
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
|
|
|
|
|
|
|
(in millions)
|
U.S. dollar notes:
|
|
|
|
|
|
|
|
|
|
|
2025 Notes(c)
|
|
Senior Secured Notes
|
|
February 15, 2025
|
|
4.875%
|
|
$
|
—
|
|
|
$
|
971
|
|
Other U.S. dollar notes(d)(e)
|
|
Senior Notes
|
|
2020–2050
|
|
0.776%–7.125%
|
|
24,251
|
|
|
24,127
|
|
Euro notes(d)
|
|
Senior Notes
|
|
2023–2028
|
|
1.500%–2.250%
|
|
3,100
|
|
|
2,834
|
|
Canadian dollar notes(f)
|
|
Senior Notes
|
|
July 6, 2020
|
|
1.903%
|
|
—
|
|
|
382
|
|
British pound sterling notes:
|
|
|
|
|
|
|
|
|
|
|
2030 Notes(g)
|
|
Senior Notes
|
|
February 18, 2030
|
|
6.250%
|
|
175
|
|
|
170
|
|
Other British pound sterling notes(d)
|
|
Senior Notes
|
|
July 1, 2027
|
|
4.125%
|
|
539
|
|
|
519
|
|
Other long-term debt
|
|
Various
|
|
2020–2035
|
|
0.500%–5.500%
|
|
41
|
|
|
48
|
|
Finance lease obligations
|
|
|
|
|
|
|
|
194
|
|
|
187
|
|
Total long-term debt
|
|
|
|
|
|
|
|
28,300
|
|
|
29,238
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
230
|
|
|
1,022
|
|
Long-term debt, excluding current portion
|
|
|
|
|
|
|
|
$
|
28,070
|
|
|
$
|
28,216
|
|
(a) Priority of debt indicates the order which debt would be paid if all debt obligations were due on the same day. Senior secured debt takes priority over unsecured debt. Senior debt has greater seniority than subordinated debt.
(b) Floating interest rates are stated as of December 26, 2020, with the exception of the Canadian dollar notes’ rate, which is stated as of the date the notes matured.
(c) The 4.875% Second Lien Senior Secured Notes due February 15, 2025 (the “2025 Notes”) were redeemed during 2020 as part of the First 2020 Debt Redemptions (defined below). Kraft Heinz had fully and unconditionally guaranteed these notes.
(d) Kraft Heinz fully and unconditionally guarantees these notes, which were issued by KHFC.
(e) Includes current year issuances (the “2020 Notes”) described below.
(f) Kraft Heinz fully and unconditionally guaranteed these notes, which were issued by Kraft Heinz Canada ULC (formerly Kraft Canada Inc.).
(g) The 6.250% Pound Sterling Senior Secured Notes due February 18, 2030 (the “2030 Notes”) were issued by H.J. Heinz Finance UK Plc. Kraft Heinz and KHFC fully and unconditionally guarantee the 2030 Notes. This guarantee was previously secured and senior in right of payment of existing and future unsecured and subordinated indebtedness; however, following the redemption of the 2025 Notes, the 2030 Notes are no longer guaranteed on a secured basis. The 2030 Notes now rank pari passu in right of payment with all of our existing and future senior obligations. Kraft Heinz became guarantor of the 2030 Notes in connection with the 2015 Merger. The 2030 Notes were previously only guaranteed by KHFC.
Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all such covenants at December 26, 2020.
At December 26, 2020, our long-term debt excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
At December 26, 2020, aggregate principal maturities of our long-term debt excluding finance leases were (in millions):
|
|
|
|
|
|
2021
|
$
|
152
|
|
2022
|
957
|
|
2023
|
1,365
|
|
2024
|
673
|
|
2025
|
1,611
|
|
Thereafter
|
23,135
|
|
Tender Offers:
In May 2020, KHFC commenced a tender offer to purchase for cash up to the maximum combined aggregate purchase price of $2.2 billion, excluding accrued and unpaid interest, of its outstanding floating rate senior notes due February 2021, 3.500% senior notes due June 2022, 3.500% senior notes due July 2022, floating rate senior notes due August 2022, 4.000% senior notes due June 2023, 3.950% senior notes due July 2025, and 3.000% senior notes due June 2026 (the “2020 Tender Offer”).
The aggregate principal amounts of senior notes before and after the 2020 Tender Offer and the amounts validly tendered pursuant to the 2020 Tender Offer were (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Principal Amount Outstanding Before Tender Offer
|
|
Amount Validly Tendered
|
|
Aggregate Principal Amount Outstanding After Tender Offer
|
Floating rate senior notes due February 2021
|
$
|
650
|
|
|
$
|
539
|
|
|
$
|
111
|
|
3.500% senior notes due June 2022
|
1,119
|
|
|
488
|
|
|
631
|
|
3.500% senior notes due July 2022
|
446
|
|
|
144
|
|
|
302
|
|
Floating rate senior notes due August 2022
|
500
|
|
|
185
|
|
|
315
|
|
4.000% senior notes due June 2023
|
838
|
|
|
391
|
|
|
447
|
|
3.950% senior notes due July 2025
|
2,000
|
|
|
391
|
|
|
1,609
|
|
3.000% senior notes due June 2026
|
2,000
|
|
|
—
|
|
|
2,000
|
|
In connection with the 2020 Tender Offer, we recognized a loss on extinguishment of debt of $71 million within interest expense on the consolidated statement of income for the year ended December 26, 2020. This loss primarily reflects the payment of early tender premiums and fees associated with the 2020 Tender Offer as well as the write-off of unamortized debt issuance costs, premiums, and discounts. The cash payments related to the debt extinguishment are classified as cash outflows from financing activities on the consolidated statement of cash flows. In 2020, debt prepayment and extinguishment costs per the consolidated statement of cash flows related to the 2020 Tender Offer were $68 million, which reflect the $71 million loss on extinguishment of debt adjusted for the non-cash write-off of unamortized premiums of $1 million, unamortized debt issuance costs of $3 million, and unamortized discounts of $1 million.
In September 2019, KHFC commenced an offer to purchase for cash any and all of its outstanding 5.375% senior notes due February 2020 (the “First 2019 Tender Offer”). The First 2019 Tender Offer expired on September 9, 2019 with a settlement date of September 10, 2019. Additionally, on September 11, 2019, KHFC commenced an offer to purchase for cash up to the maximum combined aggregate purchase price of $2.5 billion, excluding accrued and unpaid interest, of its outstanding 3.500% senior notes due June 2022, 3.500% senior notes due July 2022, 4.000% senior notes due June 2023, and 2025 Notes (the “Second 2019 Tender Offer” and, together with the First 2019 Tender Offer, the “2019 Tender Offers”). The Second 2019 Tender Offer settled on September 26, 2019.
The aggregate principal amounts of senior notes validly tendered pursuant to the 2019 Tender Offers was $2.7 billion and the aggregate principal amount of 2025 Notes validly tendered pursuant to the 2019 Tender Offers was $224 million.
In connection with the 2019 Tender Offers, we recognized a loss on extinguishment of debt of $88 million within interest expense on the consolidated statement of income for the year ended December 28, 2019. The cash payments related to the debt extinguishment are classified as cash outflows from financing activities on the consolidated statement of cash flows. In 2019, debt prepayment and extinguishment costs per the consolidated statement of cash flows related to the 2019 Tender Offers were $91 million, which reflect the $88 million loss on extinguishment of debt adjusted for the non-cash write-off of unamortized premiums of $10 million, unamortized debt issuance costs of $5 million, and unamortized discounts of $2 million.
Debt Redemptions:
Concurrently with the commencement of the 2020 Tender Offer, we issued a notice of conditional redemption by KHFC of all of its $300 million outstanding aggregate principal amount of 3.375% senior notes due June 2021 and $976 million outstanding aggregate principal amount of its 2025 Notes (the “First 2020 Debt Redemptions”). The First 2020 Debt Redemptions were effective and completed in the second quarter of 2020.
In September 2020, we issued a notice of redemption by KHFC of all of its 3.500% senior notes due July 2022, of which $302 million aggregate principal amount was outstanding (the “Second 2020 Debt Redemption” and, together with the First 2020 Debt Redemption, the “2020 Debt Redemptions”). The effective date of the Second 2020 Debt Redemption was October 24, 2020.
In connection with the 2020 Debt Redemptions, we recognized a loss on extinguishment of debt of $53 million within interest expense on the consolidated statement of income for the year ended December 26, 2020. This loss primarily reflects the payment of premiums and fees associated with the redemptions as well as the write-off of unamortized debt issuance costs. The cash payments related to the debt extinguishment are classified as cash outflows from financing activities on the consolidated statement of cash flows. In 2020, debt prepayment and extinguishment costs per the consolidated statement of cash flows related to the 2020 Debt Redemptions were $48 million, which reflect the $53 million loss on extinguishment of debt adjusted for the non-cash write-off of unamortized debt issuance costs of $5 million.
Following the redemption of our 2025 Notes, our 6.250% Pound Sterling senior notes due 2030 are no longer guaranteed on a secured basis. The 6.250% Pound Sterling senior notes due 2030 now rank pari passu in right of payment with all of our existing and future senior obligations.
In September 2019, concurrently with the commencement of the First 2019 Tender Offer, we issued a notice of redemption by Kraft Heinz Canada ULC, our 100% owned subsidiary, of all of Kraft Heinz Canada ULC’s outstanding 2.700% Canadian dollar senior notes due July 2020, of which 300 million Canadian dollar aggregate principal amount was outstanding, and a notice of partial redemption by KHFC of $800 million of KHFC’s 2.800% senior notes due July 2020, of which $1.5 billion aggregate principal amount was outstanding (the “First 2019 Debt Redemptions”). The effective date of the First 2019 Debt Redemptions was October 3, 2019.
Concurrently with the commencement of the Second 2019 Tender Offer, we issued a second notice of partial redemption providing for the redemption of $500 million aggregate principal amount of KHFC’s remaining 2.800% senior notes due July 2020 (the “Second 2019 Debt Redemption” and, together with the First 2019 Debt Redemptions, the “2019 Debt Redemptions”). The effective date of the Second 2019 Debt Redemption was October 11, 2019. Following the 2019 Debt Redemptions, KHFC’s 2.800% senior notes due July 2020 had $200 million aggregate principal amount outstanding.
In connection with the 2019 Debt Redemptions we recognized a loss on extinguishment of debt of $10 million within interest expense on the consolidated statement of income for the year ended December 28, 2019. The cash payments related to the debt extinguishment are classified as cash outflows from financing activities on the consolidated statement of cash flows. In 2019, debt prepayment and extinguishment costs per the consolidated statement of cash flows related to the 2019 Debt Redemptions were $8 million, which reflect the $10 million loss on extinguishment of debt adjusted for the non-cash write-off of unamortized debt issuance costs of $2 million.
Debt Issuances:
In May 2020, KHFC issued $1,350 million aggregate principal amount of 3.875% senior notes due May 2027, $1,350 million aggregate principal amount of 4.250% senior notes due March 2031, and $800 million aggregate principal amount of 5.500% senior notes due June 2050 (collectively, the “2020 Notes”). The 2020 Notes are fully and unconditionally guaranteed by The Kraft Heinz Company as to payment of principal, premium, and interest on a senior unsecured basis. We used the proceeds from the 2020 Notes to fund the 2020 Tender Offer and First 2020 Debt Redemptions and to pay fees and expenses in connection therewith.
A tabular summary of the 2020 Notes is included below.
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|
|
|
|
|
|
|
|
|
|
Aggregate Principal Amount
|
|
|
(in millions)
|
3.875% senior notes due May 2027
|
|
$
|
1,350
|
|
4.250% senior notes due March 2031
|
|
1,350
|
|
5.500% senior notes due June 2050
|
|
800
|
|
Total senior notes issued
|
|
$
|
3,500
|
|
In September 2019, KHFC issued $1,000 million aggregate principal amount of 3.750% senior notes due April 2030, $500 million aggregate principal amount of 4.625% senior notes due October 2039, and $1,500 million aggregate principal amount of 4.875% senior notes due October 2049 (collectively, the “2019 Notes”). The 2019 Notes are fully and unconditionally guaranteed by The Kraft Heinz Company as to payment of principal, premium, and interest on a senior unsecured basis. We used the proceeds from the 2019 Notes to fund the Second 2019 Tender Offer and to pay fees and expenses in connection therewith and to fund the Second 2019 Debt Redemption.
In June 2018, KHFC issued $300 million aggregate principal amount of 3.375% senior notes due June 2021, $1,600 million aggregate principal amount of 4.000% senior notes due June 2023, and $1,100 million aggregate principal amount of 4.625% senior notes due January 2029 (collectively, the “2018 Notes”). The 2018 Notes are fully and unconditionally guaranteed by The Kraft Heinz Company as to payment of principal, premium, and interest on a senior unsecured basis.
We used approximately $500 million of the proceeds from the 2018 Notes in connection with the wind-down of our U.S. securitization program in the second quarter of 2018. We also used proceeds from the 2018 Notes to refinance a portion of our commercial paper borrowings in the second quarter of 2018, to repay certain notes that matured in July and August 2018, and for other general corporate purposes.
Debt Issuance Costs:
Debt issuance costs are reflected as a direct deduction of our long-term debt balance on the consolidated balance sheets. We incurred debt issuance costs of $31 million in 2020, $25 million in 2019, and $15 million in 2018. Unamortized debt issuance costs were $130 million at December 26, 2020 and $119 million at December 28, 2019. Amortization of debt issuance costs was $11 million in 2020, $15 million in 2019, and $16 million in 2018.
Debt Premium:
Unamortized debt premiums are presented on the consolidated balance sheets as a direct addition to the carrying amount of debt. Unamortized debt premium, net, was $344 million at December 26, 2020 and $358 million at December 28, 2019. Amortization of our debt premium, net, was $14 million in 2020, $34 million in 2019, and $65 million in 2018.
Debt Repayments:
In February 2020, we repaid $405 million aggregate principal amount of senior notes that matured in the period.
In July 2020, we repaid $200 million aggregate principal amount of senior notes and 500 million Canadian dollars aggregate principal amount of senior notes that matured in the period.
In August 2019, we repaid $350 million aggregate principal amount of senior notes that matured in the period.
In July and August 2018, we repaid $2.7 billion aggregate principal amount of senior notes that matured in the period. We funded these long-term debt repayments primarily with proceeds from the 2018 Notes issued in June 2018.
Fair Value of Debt:
At December 26, 2020, the aggregate fair value of our total debt was $32.1 billion as compared with a carrying value of $28.3 billion. At December 28, 2019, the aggregate fair value of our total debt was $31.1 billion as compared with a carrying value of $29.2 billion. Our short-term debt had a carrying value that approximated its fair value at December 26, 2020 and December 28, 2019. We determined the fair value of our long-term debt using Level 2 inputs. Fair values are generally estimated based on quoted market prices for identical or similar instruments.
Subsequent Event:
We repaid approximately $111 million aggregate principal amount of senior notes on February 10, 2021.
Note 19. Leases
We adopted ASU 2016-02, Leases (Topic 842), in the first quarter of 2019 using a modified retrospective transition method. The most significant impact of adoption on our consolidated financial statements was the recognition of ROU assets and lease liabilities for operating leases. Upon adoption, we had total lease assets of $821 million and total lease liabilities of $887 million. The adoption of this ASU in the first quarter of 2019 did not result in a cumulative-effect adjustment to the opening balance of retained earnings/(deficit) and did not impact our consolidated statements of income or our cash flows.
We have operating and finance leases, primarily for warehouse, production, and office facilities and equipment. Our lease contracts have remaining contractual lease terms of up to 20 years, some of which include options to extend the term by up to 10 years. We include renewal options that are reasonably certain to be exercised as part of the lease term. Additionally, some lease contracts include termination options. We do not expect to exercise the majority of our termination options and generally exclude such options when determining the term of our leases. See Note 2, Significant Accounting Policies, for our lease accounting policy.
The components of our lease costs were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Operating lease costs
|
$
|
173
|
|
|
$
|
191
|
|
Finance lease costs:
|
|
|
|
Amortization of right-of-use assets
|
31
|
|
|
27
|
|
Interest on lease liabilities
|
7
|
|
|
6
|
|
Short-term lease costs
|
20
|
|
|
13
|
|
Variable lease costs
|
1,313
|
|
|
1,270
|
|
Sublease income
|
(11)
|
|
|
(14)
|
|
Total lease costs
|
$
|
1,533
|
|
|
$
|
1,493
|
|
Our variable lease costs primarily consist of inventory related costs, such as materials, labor, and overhead components in our manufacturing and distribution arrangements that also contain a fixed component related to an embedded lease. These variable lease costs are determined based on usage or output or may vary for other reasons such as changes in material prices, taxes, or insurance. Certain of our variable lease costs are based on fluctuating indices or rates. These leases are included in our ROU assets and lease liabilities based on the index or rate at the lease commencement date. The future variability in these indices and rates is unknown; therefore, it is excluded from our future minimum lease payments and is not a component of our ROU assets or lease liabilities.
We had no losses/(gains) on sale and leaseback transactions in 2020. Losses/(gains) on sale and leaseback transactions, net, were insignificant for 2019.
Supplemental balance sheet information related to our leases was (in millions, except lease term and discount rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
Operating
Leases
|
|
Finance
Leases
|
|
Operating
Leases
|
|
Finance
Leases
|
Right-of-use assets
|
$
|
562
|
|
|
$
|
195
|
|
|
$
|
542
|
|
|
$
|
185
|
|
Lease liabilities (current)
|
135
|
|
|
78
|
|
|
147
|
|
|
28
|
|
Lease liabilities (non-current)
|
475
|
|
|
116
|
|
|
454
|
|
|
158
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term
|
7 years
|
|
9 years
|
|
6 years
|
|
9 years
|
Weighted average discount rate
|
3.8
|
%
|
|
3.7
|
%
|
|
4.0
|
%
|
|
3.4
|
%
|
Operating lease ROU assets are included in other non-current assets and finance lease ROU assets are included in property, plant and equipment, net, on our consolidated balance sheets. The current portion of operating lease liabilities is included in other current liabilities, and the current portion of finance lease liabilities is included in the current portion of long-term debt on our consolidated balance sheets. The non-current portion of operating lease liabilities is included in other non-current liabilities, and the non-current portion of finance lease liabilities is included in long-term debt on our consolidated balance sheets. At December 26, 2020, operating and finance lease ROU assets, the current portion of operating and finance lease liabilities, and the non-current portion of operating and finance lease liabilities excluded amounts classified as held for sale. At December 28, 2019, operating lease ROU assets, the current portion of operating lease liabilities, and the non-current portion of operating lease liabilities excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
Cash flows arising from lease transactions were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash inflows/(outflows) from operating leases
|
$
|
(191)
|
|
|
$
|
(196)
|
|
Operating cash inflows/(outflows) from finance leases
|
(7)
|
|
|
(6)
|
|
Financing cash inflows/(outflows) from finance leases
|
(35)
|
|
|
(28)
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
|
|
Operating leases
|
147
|
|
|
42
|
|
Finance leases
|
39
|
|
|
12
|
|
Future minimum lease payments for leases in effect at December 26, 2020 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Finance
Leases
|
2021
|
$
|
156
|
|
|
$
|
84
|
|
2022
|
118
|
|
|
30
|
|
2023
|
89
|
|
|
16
|
|
2024
|
73
|
|
|
11
|
|
2025
|
65
|
|
|
9
|
|
Thereafter
|
193
|
|
|
86
|
|
Total future undiscounted lease payments
|
694
|
|
|
236
|
|
Less imputed interest
|
(84)
|
|
|
(42)
|
|
Total lease liability
|
$
|
610
|
|
|
$
|
194
|
|
At December 26, 2020, our operating and finance leases that had not yet commenced were approximately $123 million. This balance is primarily composed of a 20-year lease for a warehouse facility with a future minimum lease commitment of $109 million. We expect to take control of the leased asset in 2022.
Note 20. Capital Stock
Common Stock
Our Second Amended and Restated Certificate of Incorporation authorizes the issuance of up to 5.0 billion shares of common stock.
Shares of common stock issued, in treasury, and outstanding were (in millions of shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
|
|
Treasury Shares
|
|
Shares Outstanding
|
Balance at December 30, 2017
|
1,221
|
|
|
(2)
|
|
|
1,219
|
|
Exercise of stock options, issuance of other stock awards, and other
|
3
|
|
|
(2)
|
|
|
1
|
|
Balance at December 29, 2018
|
1,224
|
|
|
(4)
|
|
|
1,220
|
|
Exercise of stock options, issuance of other stock awards, and other
|
—
|
|
|
1
|
|
|
1
|
|
Balance at December 28, 2019
|
1,224
|
|
|
(3)
|
|
|
1,221
|
|
Exercise of stock options, issuance of other stock awards, and other
|
4
|
|
|
(2)
|
|
|
2
|
|
Balance at December 26, 2020
|
1,228
|
|
|
(5)
|
|
|
1,223
|
|
Note 21. Earnings Per Share
Our earnings per common share (“EPS”) were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
|
(in millions, except per share data)
|
Basic Earnings Per Common Share:
|
|
|
|
|
|
Net income/(loss) attributable to common shareholders
|
$
|
356
|
|
|
$
|
1,935
|
|
|
$
|
(10,192)
|
|
Weighted average shares of common stock outstanding
|
1,223
|
|
|
1,221
|
|
|
1,219
|
|
Net earnings/(loss)
|
$
|
0.29
|
|
|
$
|
1.59
|
|
|
$
|
(8.36)
|
|
Diluted Earnings Per Common Share:
|
|
|
|
|
|
Net income/(loss) attributable to common shareholders
|
$
|
356
|
|
|
$
|
1,935
|
|
|
$
|
(10,192)
|
|
Weighted average shares of common stock outstanding
|
1,223
|
|
|
1,221
|
|
|
1,219
|
|
Effect of dilutive equity awards
|
5
|
|
|
3
|
|
|
—
|
|
Weighted average shares of common stock outstanding, including dilutive effect
|
1,228
|
|
|
1,224
|
|
|
1,219
|
|
Net earnings/(loss)
|
$
|
0.29
|
|
|
$
|
1.58
|
|
|
$
|
(8.36)
|
|
We use the treasury stock method to calculate the dilutive effect of outstanding equity awards in the denominator for diluted EPS. We had net losses attributable to common shareholders in 2018. Therefore, we excluded the dilutive effects of equity awards in 2018 as their inclusion would have had an anti-dilutive effect on EPS. Anti-dilutive shares were 9 million in 2020, 10 million in 2019, and 13 million in 2018.
Note 22. Segment Reporting
In the first quarter of 2020, our internal reporting and reportable segments changed. We moved our Puerto Rico business from the Latin America zone to the United States zone to consolidate and streamline the management of our product categories and supply chain. We also combined our EMEA, Latin America, and APAC zones to form the International zone as a result of certain previously announced organizational changes.
Therefore, effective in the first quarter of 2020, we manage and report our operating results through three reportable segments defined by geographic region: United States, International, and Canada. We have reflected these changes in all historical periods presented.
Management evaluates segment performance based on several factors, including net sales and Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as net income/(loss) from continuing operations before interest expense, other expense/(income), provision for/(benefit from) income taxes, and depreciation and amortization (excluding integration and restructuring expenses); in addition to these adjustments, we exclude, when they occur, the impacts of integration and restructuring expenses, deal costs, unrealized gains/(losses) on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results), impairment losses, and equity award compensation expense (excluding integration and restructuring expenses). 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. Management uses Segment Adjusted EBITDA to evaluate segment performance and allocate resources.
Management does not use assets by segment to evaluate performance or allocate resources. Therefore, we do not disclose assets by segment.
Net sales by segment were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Net sales:
|
|
|
|
|
|
United States
|
$
|
19,204
|
|
|
$
|
17,844
|
|
|
$
|
18,218
|
|
International
|
5,341
|
|
|
5,251
|
|
|
5,877
|
|
Canada
|
1,640
|
|
|
1,882
|
|
|
2,173
|
|
Total net sales
|
$
|
26,185
|
|
|
$
|
24,977
|
|
|
$
|
26,268
|
|
Segment Adjusted EBITDA was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Segment Adjusted EBITDA:
|
|
|
|
|
|
United States
|
$
|
5,557
|
|
|
$
|
4,829
|
|
|
$
|
5,242
|
|
International
|
1,058
|
|
|
1,004
|
|
|
1,335
|
|
Canada
|
389
|
|
|
487
|
|
|
608
|
|
General corporate expenses
|
(335)
|
|
|
(256)
|
|
|
(161)
|
|
Depreciation and amortization (excluding integration and restructuring expenses)
|
(955)
|
|
|
(985)
|
|
|
(919)
|
|
Integration and restructuring expenses
|
(15)
|
|
|
(102)
|
|
|
(297)
|
|
Deal costs
|
(8)
|
|
|
(19)
|
|
|
(23)
|
|
Unrealized gains/(losses) on commodity hedges
|
6
|
|
|
57
|
|
|
(21)
|
|
Impairment losses
|
(3,413)
|
|
|
(1,899)
|
|
|
(15,936)
|
|
Equity award compensation expense (excluding integration and restructuring expenses)
|
(156)
|
|
|
(46)
|
|
|
(33)
|
|
Operating income/(loss)
|
2,128
|
|
|
3,070
|
|
|
(10,205)
|
|
Interest expense
|
1,394
|
|
|
1,361
|
|
|
1,284
|
|
Other expense/(income)
|
(296)
|
|
|
(952)
|
|
|
(168)
|
|
Income/(loss) before income taxes
|
$
|
1,030
|
|
|
$
|
2,661
|
|
|
$
|
(11,321)
|
|
Total depreciation and amortization expense by segment was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Depreciation and amortization expense:
|
|
|
|
|
|
United States
|
$
|
609
|
|
|
$
|
609
|
|
|
$
|
626
|
|
International
|
221
|
|
|
231
|
|
|
221
|
|
Canada
|
35
|
|
|
35
|
|
|
39
|
|
General corporate expenses
|
104
|
|
|
119
|
|
|
97
|
|
Total depreciation and amortization expense
|
$
|
969
|
|
|
$
|
994
|
|
|
$
|
983
|
|
Total capital expenditures by segment were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Capital expenditures:
|
|
|
|
|
|
United States
|
$
|
318
|
|
|
$
|
393
|
|
|
$
|
388
|
|
International
|
212
|
|
|
283
|
|
|
360
|
|
Canada
|
29
|
|
|
27
|
|
|
21
|
|
General corporate expenses
|
37
|
|
|
65
|
|
|
57
|
|
Total capital expenditures
|
$
|
596
|
|
|
$
|
768
|
|
|
$
|
826
|
|
Net sales by platform were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Taste Elevation
|
$
|
7,072
|
|
|
$
|
6,873
|
|
|
$
|
7,134
|
|
Fast Fresh Meals
|
6,457
|
|
|
5,950
|
|
|
6,194
|
|
Easy Meals Made Better
|
4,909
|
|
|
4,314
|
|
|
4,350
|
|
Real Food Snacking
|
2,296
|
|
|
2,201
|
|
|
2,198
|
|
Flavorful Hydration
|
1,648
|
|
|
1,495
|
|
|
1,502
|
|
Easy Indulgent Desserts
|
999
|
|
|
919
|
|
|
909
|
|
Other
|
2,804
|
|
|
3,225
|
|
|
3,981
|
|
Total net sales
|
$
|
26,185
|
|
|
$
|
24,977
|
|
|
$
|
26,268
|
|
Net sales by product category were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Condiments and sauces
|
$
|
6,813
|
|
|
$
|
6,406
|
|
|
$
|
6,752
|
|
Cheese and dairy
|
5,131
|
|
|
4,890
|
|
|
5,287
|
|
Ambient foods
|
2,954
|
|
|
2,475
|
|
|
2,576
|
|
Frozen and chilled foods
|
2,599
|
|
|
2,371
|
|
|
2,548
|
|
Meats and seafood
|
2,515
|
|
|
2,406
|
|
|
2,505
|
|
Refreshment beverages
|
1,655
|
|
|
1,504
|
|
|
1,507
|
|
Coffee
|
1,062
|
|
|
1,271
|
|
|
1,438
|
|
Infant and nutrition
|
433
|
|
|
512
|
|
|
756
|
|
Desserts, toppings and baking
|
1,121
|
|
|
1,032
|
|
|
1,038
|
|
Nuts and salted snacks
|
1,047
|
|
|
966
|
|
|
967
|
|
Other
|
855
|
|
|
1,144
|
|
|
894
|
|
Total net sales
|
$
|
26,185
|
|
|
$
|
24,977
|
|
|
$
|
26,268
|
|
Concentration of Risk:
Our largest customer, Walmart Inc., represented approximately 22% of our net sales in 2020 and approximately 21% of our net sales in both 2019 and 2018. All of our segments have sales to Walmart Inc.
Geographic Financial Information:
We had significant sales in the United States, Canada, and the United Kingdom. Our net sales by geography were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Net sales:
|
|
|
|
|
|
United States
|
$
|
19,204
|
|
|
$
|
17,844
|
|
|
$
|
18,218
|
|
Canada
|
1,640
|
|
|
1,882
|
|
|
2,173
|
|
United Kingdom
|
1,103
|
|
|
1,007
|
|
|
1,071
|
|
Other
|
4,238
|
|
|
4,244
|
|
|
4,806
|
|
Total net sales
|
$
|
26,185
|
|
|
$
|
24,977
|
|
|
$
|
26,268
|
|
We had significant long-lived assets in the United States. Long-lived assets are comprised of property, plant and equipment, net of related accumulated depreciation. Our long-lived assets by geography were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
Long-lived assets:
|
|
|
|
United States
|
$
|
4,705
|
|
|
$
|
5,004
|
|
Other
|
2,171
|
|
|
2,051
|
|
Total long-lived assets
|
$
|
6,876
|
|
|
$
|
7,055
|
|
At December 26, 2020 and December 28, 2019, long-lived assets by geography excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
Note 23. Other Financial Data
Consolidated Statements of Income Information
Other expense/(income)
Other expense/(income) consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020
|
|
December 28, 2019
|
|
December 29, 2018
|
Amortization of prior service costs/(credits)
|
$
|
(122)
|
|
|
$
|
(306)
|
|
|
$
|
(311)
|
|
Net pension and postretirement non-service cost/(benefit)(a)
|
(201)
|
|
|
(172)
|
|
|
(40)
|
|
Loss/(gain) on sale of business
|
2
|
|
|
(420)
|
|
|
15
|
|
Interest income
|
(27)
|
|
|
(36)
|
|
|
(35)
|
|
Foreign exchange losses/(gains)
|
162
|
|
|
10
|
|
|
166
|
|
Derivative losses/(gains)
|
(154)
|
|
|
(39)
|
|
|
27
|
|
Other miscellaneous expense/(income)
|
44
|
|
|
11
|
|
|
10
|
|
Other expense/(income)
|
$
|
(296)
|
|
|
$
|
(952)
|
|
|
$
|
(168)
|
|
(a) Excludes amortization of prior service costs/(credits).
We present all non-service cost components of net pension cost/(benefit) and net postretirement cost/(benefit) within other expense/(income) on our consolidated statements of income. See Note 12, Postemployment Benefits, for additional information on these components, including any curtailments and settlements, as well as information on our prior service credit amortization. See Note 4, Acquisitions and Divestitures, for additional information related to our loss/(gain) on sale of business. See Note 15, Venezuela - Foreign Currency and Inflation, for information related to our nonmonetary currency devaluation losses. See Note 13, Financial Instruments, for information related to our derivative impacts.
Other expense/(income) was $296 million of income in 2020 compared to $952 million of income in 2019. This change was primarily driven by a $2 million net loss on sales of businesses in 2020 compared to a $420 million net gain on sales of businesses in 2019, a $184 million decrease in non-cash amortization of prior service credits as compared to the prior year period, a $162 million net foreign exchange loss in 2020 compared to a $10 million net foreign exchange loss in 2019, and a $26 million loss on the dissolution of a joint venture. These impacts were partially offset by a $154 million net gain on derivative activities in 2020 compared to a $39 million net gain on derivative activities in 2019. As we estimate the amortization of prior service credits to be insignificant in 2021, we are forecasting a negative impact to other expense/(income) in 2021 compared to 2020 of approximately $114 million. See Note 17, Commitments and Contingencies, for additional information related to our dissolved joint venture.
Other expense/(income) was $952 million of income in 2019 compared to $168 million of income in 2018. This change was primarily driven by a $420 million net gain on sales of businesses in 2019 compared to a $15 million loss on sale of business in 2018, a $162 million non-cash settlement charge in the prior year related to the wind-up of our Canadian salaried and Canadian hourly defined benefit pension plans, and a $136 million decrease in nonmonetary currency devaluation losses related to our Venezuelan operations as compared to the prior year period. The increase also reflects a $28 million gain related to the excluded component on our cross-currency contracts designated as cash flow hedges as compared to the prior period gain of $1 million.
Note 24. Quarterly Financial Data (Unaudited)
Our quarterly financial data for 2020 and 2019 is summarized as follows:
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2020 Quarters
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Fourth
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Third
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Second
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First
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(in millions, except per share data)
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Net sales
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$
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6,939
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$
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6,441
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$
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6,648
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$
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6,157
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Gross profit
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2,523
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2,344
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2,452
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1,858
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Net income/(loss)
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1,034
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598
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(1,652)
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381
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Net income/(loss) attributable to common shareholders
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1,032
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597
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(1,651)
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378
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Per share data applicable to common shareholders:
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Basic earnings/(loss)
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$
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0.84
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$
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0.49
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$
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(1.35)
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$
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0.31
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Diluted earnings/(loss)
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0.84
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0.49
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(1.35)
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0.31
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2019 Quarters
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Fourth
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Third
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Second
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First
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(in millions, except per share data)
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Net sales
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$
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6,536
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$
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6,076
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$
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6,406
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$
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5,959
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Gross profit
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2,107
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1,947
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2,082
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2,011
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Net income/(loss)
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183
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|
898
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448
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404
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Net income/(loss) attributable to common shareholders
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182
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899
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449
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405
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Per share data applicable to common shareholders:
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Basic earnings/(loss)
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$
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0.15
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$
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0.74
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$
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0.37
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$
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0.33
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Diluted earnings/(loss)
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0.15
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0.74
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0.37
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0.33
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