Kraft Heinz Co - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 25, 2021
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 001-37482

The Kraft Heinz Company
(Exact name of registrant as specified in its charter)
Delaware | 46-2078182 | |||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
One PPG Place, | Pittsburgh, | Pennsylvania | 15222 | |||||||||||
(Address of principal executive offices) | (Zip Code) |
(412) 456-5700
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Common stock, $0.01 par value | KHC | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 23, 2021, there were 1,225,261,485 shares of the registrant’s common stock outstanding.
Table of Contents
Unless the context otherwise requires, the terms “we,” “us,” “our,” “Kraft Heinz,” and the “Company” each refer to The Kraft Heinz Company and all of its consolidated subsidiaries.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Kraft Heinz Company
Condensed Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Net sales | $ | 6,324 | $ | 6,441 | $ | 19,333 | $ | 19,246 | |||||||||||||||
Cost of products sold | 4,296 | 4,097 | 12,813 | 12,592 | |||||||||||||||||||
Gross profit | 2,028 | 2,344 | 6,520 | 6,654 | |||||||||||||||||||
Selling, general and administrative expenses, excluding impairment losses | 872 | 897 | 2,697 | 2,677 | |||||||||||||||||||
Goodwill impairment losses | — | 300 | 265 | 2,343 | |||||||||||||||||||
Intangible asset impairment losses | — | — | 78 | 1,056 | |||||||||||||||||||
Selling, general and administrative expenses | 872 | 1,197 | 3,040 | 6,076 | |||||||||||||||||||
Operating income/(loss) | 1,156 | 1,147 | 3,480 | 578 | |||||||||||||||||||
Interest expense | 415 | 314 | 1,443 | 1,066 | |||||||||||||||||||
Other expense/(income) | (138) | (73) | (191) | (232) | |||||||||||||||||||
Income/(loss) before income taxes | 879 | 906 | 2,228 | (256) | |||||||||||||||||||
Provision for/(benefit from) income taxes | 143 | 308 | 949 | 417 | |||||||||||||||||||
Net income/(loss) | 736 | 598 | 1,279 | (673) | |||||||||||||||||||
Net income/(loss) attributable to noncontrolling interest | 3 | 1 | 10 | 3 | |||||||||||||||||||
Net income/(loss) attributable to common shareholders | $ | 733 | $ | 597 | $ | 1,269 | $ | (676) | |||||||||||||||
Per share data applicable to common shareholders: | |||||||||||||||||||||||
Basic earnings/(loss) | $ | 0.60 | $ | 0.49 | $ | 1.04 | $ | (0.55) | |||||||||||||||
Diluted earnings/(loss) | 0.59 | 0.49 | 1.03 | (0.55) |
See accompanying notes to the condensed consolidated financial statements.
1
The Kraft Heinz Company
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Net income/(loss) | $ | 736 | $ | 598 | $ | 1,279 | $ | (673) | |||||||||||||||
Other comprehensive income/(loss), net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustments | (237) | 289 | 12 | (315) | |||||||||||||||||||
Net deferred gains/(losses) on net investment hedges | 96 | (200) | 52 | (51) | |||||||||||||||||||
Amounts excluded from the effectiveness assessment of net investment hedges | 4 | 5 | 14 | 21 | |||||||||||||||||||
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss) | (3) | (3) | (9) | (14) | |||||||||||||||||||
Net deferred gains/(losses) on cash flow hedges | (6) | 17 | (70) | 153 | |||||||||||||||||||
Amounts excluded from the effectiveness assessment of cash flow hedges | 7 | 6 | 21 | 18 | |||||||||||||||||||
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss) | 22 | (29) | 48 | (90) | |||||||||||||||||||
Net actuarial gains/(losses) arising during the period | (15) | (22) | 58 | (22) | |||||||||||||||||||
Net postemployment benefit losses/(gains) reclassified to net income/(loss) | (5) | (29) | (18) | (78) | |||||||||||||||||||
Total other comprehensive income/(loss) | (137) | 34 | 108 | (378) | |||||||||||||||||||
Total comprehensive income/(loss) | 599 | 632 | 1,387 | (1,051) | |||||||||||||||||||
Comprehensive income/(loss) attributable to noncontrolling interest | 4 | (3) | 9 | (3) | |||||||||||||||||||
Comprehensive income/(loss) attributable to common shareholders | $ | 595 | $ | 635 | $ | 1,378 | $ | (1,048) |
See accompanying notes to the condensed consolidated financial statements.
2
The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions, except per share data)
(Unaudited)
September 25, 2021 | December 26, 2020 | ||||||||||
ASSETS | |||||||||||
Cash and cash equivalents | $ | 2,273 | $ | 3,417 | |||||||
Trade receivables (net of allowances of $45 at September 25, 2021 and $48 at December 26, 2020) | 1,958 | 2,063 | |||||||||
Inventories | 2,839 | 2,773 | |||||||||
Prepaid expenses | 158 | 132 | |||||||||
Other current assets | 603 | 574 | |||||||||
Assets held for sale | 1,726 | 1,863 | |||||||||
Total current assets | 9,557 | 10,822 | |||||||||
Property, plant and equipment, net | 6,588 | 6,876 | |||||||||
Goodwill | 31,386 | 33,089 | |||||||||
Intangible assets, net | 44,803 | 46,667 | |||||||||
Other non-current assets | 2,563 | 2,376 | |||||||||
TOTAL ASSETS | $ | 94,897 | $ | 99,830 | |||||||
LIABILITIES AND EQUITY | |||||||||||
Commercial paper and other short-term debt | $ | 1 | $ | 6 | |||||||
Current portion of long-term debt | 1,034 | 230 | |||||||||
Trade payables | 4,380 | 4,304 | |||||||||
Accrued marketing | 908 | 946 | |||||||||
Interest payable | 285 | 358 | |||||||||
Other current liabilities | 1,841 | 2,200 | |||||||||
Liabilities held for sale | 6 | 17 | |||||||||
Total current liabilities | 8,455 | 8,061 | |||||||||
Long-term debt | 22,937 | 28,070 | |||||||||
Deferred income taxes | 11,389 | 11,462 | |||||||||
Accrued postemployment costs | 240 | 243 | |||||||||
Other non-current liabilities | 1,638 | 1,751 | |||||||||
TOTAL LIABILITIES | 44,659 | 49,587 | |||||||||
Commitments and Contingencies (Note 15) | |||||||||||
Equity: | |||||||||||
Common stock, $0.01 par value (5,000 shares authorized; 1,235 shares issued and 1,227 shares outstanding at September 25, 2021; 1,228 shares issued and 1,223 shares outstanding at December 26, 2020) | 12 | 12 | |||||||||
Additional paid-in capital | 53,823 | 55,096 | |||||||||
Retained earnings/(deficit) | (1,425) | (2,694) | |||||||||
Accumulated other comprehensive income/(losses) | (1,858) | (1,967) | |||||||||
Treasury stock, at cost (8 shares at September 25, 2021 and 5 shares at December 26, 2020) | (463) | (344) | |||||||||
Total shareholders' equity | 50,089 | 50,103 | |||||||||
Noncontrolling interest | 149 | 140 | |||||||||
TOTAL EQUITY | 50,238 | 50,243 | |||||||||
TOTAL LIABILITIES AND EQUITY | $ | 94,897 | $ | 99,830 |
See accompanying notes to the condensed consolidated financial statements.
3
The Kraft Heinz Company
Condensed Consolidated Statements of Equity
(in millions)
(Unaudited)
Common Stock | Additional Paid-in Capital | Retained Earnings/(Deficit) | Accumulated Other Comprehensive Income/(Losses) | Treasury Stock, at Cost | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||
Balance at December 26, 2020 | $ | 12 | $ | 55,096 | $ | (2,694) | $ | (1,967) | $ | (344) | $ | 140 | $ | 50,243 | |||||||||||||||||||||||||||
Net income/(loss) | — | — | 563 | — | — | 5 | 568 | ||||||||||||||||||||||||||||||||||
Other comprehensive income/(loss) | — | — | — | 69 | — | (2) | 67 | ||||||||||||||||||||||||||||||||||
Dividends declared-common stock ($0.40 per share) | — | (495) | — | — | — | — | (495) | ||||||||||||||||||||||||||||||||||
Exercise of stock options, issuance of other stock awards, and other | — | 77 | — | — | (29) | — | 48 | ||||||||||||||||||||||||||||||||||
Balance at March 27, 2021 | $ | 12 | $ | 54,678 | $ | (2,131) | $ | (1,898) | $ | (373) | $ | 143 | $ | 50,431 | |||||||||||||||||||||||||||
Net income/(loss) | — | — | (27) | — | — | 2 | (25) | ||||||||||||||||||||||||||||||||||
Other comprehensive income/(loss) | — | — | — | 178 | — | — | 178 | ||||||||||||||||||||||||||||||||||
Dividends declared-common stock ($0.40 per share) | — | (495) | — | — | — | — | (495) | ||||||||||||||||||||||||||||||||||
Exercise of stock options, issuance of other stock awards, and other | — | 72 | — | — | (19) | — | 53 | ||||||||||||||||||||||||||||||||||
Balance at June 26, 2021 | $ | 12 | $ | 54,255 | $ | (2,158) | $ | (1,720) | $ | (392) | $ | 145 | $ | 50,142 | |||||||||||||||||||||||||||
Net income/(loss) | — | — | 733 | — | — | 3 | 736 | ||||||||||||||||||||||||||||||||||
Other comprehensive income/(loss) | — | — | — | (138) | — | 1 | (137) | ||||||||||||||||||||||||||||||||||
Dividends declared-common stock ($0.40 per share) | — | (495) | — | — | — | — | (495) | ||||||||||||||||||||||||||||||||||
Exercise of stock options, issuance of other stock awards, and other | — | 63 | — | — | (71) | — | (8) | ||||||||||||||||||||||||||||||||||
Balance at September 25, 2021 | $ | 12 | $ | 53,823 | $ | (1,425) | $ | (1,858) | $ | (463) | $ | 149 | $ | 50,238 |
4
Common Stock | Additional Paid-in Capital | Retained Earnings/(Deficit) | Accumulated Other Comprehensive Income/(Losses) | Treasury Stock, at Cost | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||
Balance at December 28, 2019 | $ | 12 | $ | 56,828 | $ | (3,060) | $ | (1,886) | $ | (271) | $ | 126 | $ | 51,749 | |||||||||||||||||||||||||||
Net income/(loss) excluding redeemable noncontrolling interest | — | — | 378 | — | — | 3 | 381 | ||||||||||||||||||||||||||||||||||
Other comprehensive income/(loss) | — | — | — | (540) | — | (14) | (554) | ||||||||||||||||||||||||||||||||||
Dividends declared-common stock ($0.40 per share) | — | (492) | — | — | — | — | (492) | ||||||||||||||||||||||||||||||||||
Exercise of stock options, issuance of other stock awards, and other | — | 42 | (4) | — | 2 | — | 40 | ||||||||||||||||||||||||||||||||||
Balance at March 28, 2020 | $ | 12 | $ | 56,378 | $ | (2,686) | $ | (2,426) | $ | (269) | $ | 115 | $ | 51,124 | |||||||||||||||||||||||||||
Net income/(loss) excluding redeemable noncontrolling interest | — | — | (1,651) | — | — | (1) | (1,652) | ||||||||||||||||||||||||||||||||||
Other comprehensive income/(loss) | — | — | — | 130 | — | 12 | 142 | ||||||||||||||||||||||||||||||||||
Dividends declared-common stock ($0.40 per share) | — | (493) | — | — | — | — | (493) | ||||||||||||||||||||||||||||||||||
Exercise of stock options, issuance of other stock awards, and other | — | 105 | 1 | — | (61) | — | 45 | ||||||||||||||||||||||||||||||||||
Balance at June 27, 2020 | $ | 12 | $ | 55,990 | $ | (4,336) | $ | (2,296) | $ | (330) | $ | 126 | $ | 49,166 | |||||||||||||||||||||||||||
Net income/(loss) excluding redeemable noncontrolling interest | — | — | 597 | — | — | 1 | 598 | ||||||||||||||||||||||||||||||||||
Other comprehensive income/(loss) | — | — | — | 38 | — | (4) | 34 | ||||||||||||||||||||||||||||||||||
Dividends declared-common stock ($0.40 per share) | — | (494) | — | — | — | — | (494) | ||||||||||||||||||||||||||||||||||
Exercise of stock options, issuance of other stock awards, and other | — | 48 | — | — | (11) | — | 37 | ||||||||||||||||||||||||||||||||||
Balance at September 26, 2020 | $ | 12 | $ | 55,544 | $ | (3,739) | $ | (2,258) | $ | (341) | $ | 123 | $ | 49,341 |
See accompanying notes to the condensed consolidated financial statements.
5
The Kraft Heinz Company
Condensed Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
For the Nine Months Ended | |||||||||||
September 25, 2021 | September 26, 2020 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Net income/(loss) | $ | 1,279 | $ | (673) | |||||||
Adjustments to reconcile net income/(loss) to operating cash flows: | |||||||||||
Depreciation and amortization | 677 | 722 | |||||||||
Amortization of postemployment benefit plans prior service costs/(credits) | (5) | (92) | |||||||||
Equity award compensation expense | 155 | 114 | |||||||||
Deferred income tax provision/(benefit) | (120) | (343) | |||||||||
Postemployment benefit plan contributions | (21) | (20) | |||||||||
Goodwill and intangible asset impairment losses | 343 | 3,399 | |||||||||
Nonmonetary currency devaluation | 4 | 6 | |||||||||
Loss/(gain) on sale of business | (11) | 2 | |||||||||
Other items, net | 421 | 132 | |||||||||
Changes in current assets and liabilities: | |||||||||||
Trade receivables | 92 | (6) | |||||||||
Inventories | (264) | (441) | |||||||||
Accounts payable | 194 | 62 | |||||||||
Other current assets | (96) | (18) | |||||||||
Other current liabilities | (200) | 482 | |||||||||
Net cash provided by/(used for) operating activities | 2,448 | 3,326 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
Capital expenditures | (655) | (397) | |||||||||
Proceeds from sale of business, net of cash disposed | 3,401 | — | |||||||||
Other investing activities, net | (2) | 35 | |||||||||
Net cash provided by/(used for) investing activities | 2,744 | (362) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
Repayments of long-term debt | (4,145) | (4,395) | |||||||||
Proceeds from issuance of long-term debt | — | 3,500 | |||||||||
Debt prepayment and extinguishment costs | (577) | (101) | |||||||||
Proceeds from revolving credit facility | — | 4,000 | |||||||||
Repayments of revolving credit facility | — | (4,000) | |||||||||
Dividends paid | (1,469) | (1,467) | |||||||||
Other financing activities, net | (142) | (46) | |||||||||
Net cash provided by/(used for) financing activities | (6,333) | (2,509) | |||||||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (3) | (14) | |||||||||
Cash, cash equivalents, and restricted cash | |||||||||||
Net increase/(decrease) | (1,144) | 441 | |||||||||
Balance at beginning of period | 3,418 | 2,280 | |||||||||
Balance at end of period | $ | 2,274 | $ | 2,721 |
See accompanying notes to the condensed consolidated financial statements.
6
The Kraft Heinz Company
Notes to Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted, in accordance with the rules of the Securities and Exchange Commission (the “SEC”). In management’s opinion, these interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary to fairly state our results for the periods presented.
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 2021 fiscal year is scheduled to be a 52-week period ending on December 25, 2021, and the 2020 fiscal year was a 52-week period that ended on December 26, 2020.
The condensed consolidated balance sheet data at December 26, 2020 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These statements should be read in conjunction with our audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 26, 2020. The results for interim periods are not necessarily indicative of future or annual results.
Principles of Consolidation
The condensed consolidated financial statements include Kraft Heinz and all of our controlled subsidiaries. All intercompany transactions are eliminated.
Reportable Segments
We manage and report our operating results through three reportable segments defined by geographic region: United States, International, and Canada.
Considerations Related to COVID-19
The ongoing spread of COVID-19 throughout the United States and internationally, as well as measures implemented by governmental authorities and private businesses in an attempt to minimize transmission of the virus, including social distancing mandates, shelter-in-place orders, vaccine mandates, and business restrictions and shutdowns, and consumer responses have had and continue to have negative and positive implications for portions of our business. Though many areas have relaxed restrictions, varying levels remain throughout the world, are continuously evolving, and may be increased, including as a result of further outbreaks, resurgences, or the emergence of new variants.
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 8, Goodwill and Intangible Assets, Note 11, Postemployment Benefits, and Note 15, Commitments, Contingencies, and Debt, for further discussion of COVID-19 considerations.
Use of Estimates
We prepare our condensed consolidated financial statements in accordance with 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 condensed consolidated financial statements.
7
Reclassifications
We made reclassifications and adjustments to certain previously reported financial information to conform to our current period presentation. In the first quarter of 2021, we reclassified certain balances, which were previously reported in prepaid expenses, to inventories on our condensed consolidated balance sheets. Certain financial statement line items in our condensed consolidated balance sheet at December 26, 2020 and our condensed consolidated statement of cash flows for the nine months ended September 26, 2020, were adjusted as necessary. See Note 7, Inventories, for additional information.
Held for Sale
At September 25, 2021, we classified certain assets and liabilities as held for sale in our condensed consolidated balance sheet, primarily relating to the divestiture of certain of our cheese businesses and certain manufacturing equipment in the United States. At December 26, 2020, we classified certain assets and liabilities as held for sale in our condensed 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. See Note 4, Acquisitions and Divestitures, for additional information.
Note 2. Significant Accounting Policies
There were no significant changes to our accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 26, 2020.
Note 3. New Accounting Standards
Accounting Standards Adopted in the Current Year
Simplifying the Accounting for Income Taxes:
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2019-12 to simplify the accounting in Accounting Standards Codification (“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 became effective in the first quarter of 2021. The adoption of this ASU did not impact our financial statements or the related disclosures.
Note 4. Acquisitions and Divestitures
Acquisitions
Assan Foods Acquisition:
In June 2021, we entered into a definitive agreement with third parties Kibar Holding Anonim Şirketi and a holder of registered shares of Assan Gıda Sanayi ve Ticaret A.Ş. (“Assan Foods”) to acquire all of the outstanding equity interests in Assan Foods, a condiments and sauces manufacturer based in Turkey, for approximately $70 million of cash consideration (the “Assan Foods Acquisition”). As part of the Assan Foods Acquisition, we will assume the debt of Assan Foods, which was approximately $30 million as of September 25, 2021. The Assan Foods Acquisition closed in the fourth quarter of 2021.
Hemmer Acquisition:
In September 2021, we entered into a definitive agreement with certain third-party shareholders of Companhia Hemmer Indústria e Comércio (“Hemmer”) to acquire a majority of the outstanding equity interests of Hemmer for cash consideration of approximately 1.2 billion Brazilian reais (approximately $225 million at September 25, 2021) (the “Hemmer Acquisition”). Hemmer is a Brazilian food and beverage manufacturing company focused on the condiments and sauces category. The Hemmer Acquisition is expected to close in the first half of 2022, subject to customary closing conditions, including regulatory approvals.
Other Acquisitions:
In September 2021, we entered into a definitive agreement to acquire a majority stake in BR Spices Indústria e Comércio de Alimentos Ltda., a manufacturer of spices and other seasonings in Brazil. This acquisition is expected to close in the fourth quarter of 2021, subject to customary closing conditions, including regulatory approvals.
Deal Costs:
Related to our acquisitions, we incurred insignificant deal costs for the three and nine months ended September 25, 2021. We recognized these deal costs in selling, general and administrative expenses (“SG&A”). There were no deal costs related to acquisitions for the three and nine months ended September 26, 2020.
8
Divestitures
Nuts Transaction:
In February 2021, we entered into a definitive agreement with a third party, Hormel Foods Corporation (“Hormel”), to sell certain assets in our global nuts business for total consideration of approximately $3.4 billion (the “Nuts Transaction”). The net assets transferred in the Nuts Transaction included, 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 (collectively, the “Nuts Disposal Group”).
In the first quarter of 2021, we determined that the Nuts Disposal Group met the held for sale criteria. Accordingly, we presented the assets and liabilities of the Nuts Disposal Group as held for sale on the condensed consolidated balance sheet at March 27, 2021. As of February 10, 2021, the date the Nuts Disposal Group was determined to be held for sale, we tested the individual assets included within the Nuts Disposal Group for impairment. The net assets of the Nuts Disposal Group had an aggregate carrying amount above their $3.4 billion estimated fair value. We determined that the goodwill within the Nuts Disposal Group was partially impaired. As a result, we recorded a non-cash goodwill impairment loss of $230 million, which was recognized in SG&A, in the first quarter of 2021. Additionally, we recorded an estimated pre-tax loss on sale of business of $19 million in the first quarter of 2021 primarily related to estimated costs to sell, which was recognized in other expense/(income) on our condensed consolidated statement of income.
The Nuts Transaction closed in the second quarter of 2021. As a result of the Nuts Transaction closing, we recognized an incremental pre-tax loss on sale of business of $17 million in other expense/(income) on our condensed consolidated statement of income in the second quarter of 2021. In the third quarter of 2021, we recorded adjustments to our estimated costs to sell, which resulted in a pre-tax gain on sale of business of $1 million for the three months ended September 25, 2021. The total pre-tax loss on sale of business for the Nuts Transaction was $35 million for the nine months ended September 25, 2021.
The Nuts Transaction is not considered a strategic shift that will have a major effect on our operations or financial results; therefore, it was not reported as discontinued operations.
Cheese Transaction:
In September 2020, we entered into a definitive agreement with a third party, 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 $3.34 billion, including approximately $3.20 billion of cash consideration and approximately $140 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 “Cheese Disposal Group”).
Of the $3.34 billion total consideration, approximately $1.59 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 over approximately 30 years, as it does not constitute our ongoing major or central operations.
The remaining $1.75 billion of consideration was attributed to the Cheese Disposal Group. The net assets in the Cheese 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 Cheese 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 Cheese 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 Cheese 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 $140 million as noted above, which was the estimated fair value of the licensed portion of the Cracker Barrel brand.
In the second quarter of 2021, we assessed the fair value less costs to sell of the net assets of the Cheese Disposal Group and recorded an estimated pre-tax loss on sale of business of approximately $27 million, which was recognized in other expense/(income). As of September 25, 2021, we assessed the fair value less costs to sell of the net assets of the Cheese Disposal Group, and no additional pre-tax loss on sale of business was recorded.
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In the third quarter of 2020, we determined that the Cheese Disposal Group met the held for sale criteria. Accordingly, we have presented the assets and liabilities of the Cheese Disposal Group as held for sale on the condensed consolidated balance sheets at September 25, 2021 and December 26, 2020. As of September 15, 2020, the date the Cheese Disposal Group was determined to be held for sale, we tested the individual assets included within the Cheese Disposal Group for impairment. The net assets of the Cheese Disposal Group had an aggregate carrying amount above their then-current $1.78 billion estimated fair value. We determined that the goodwill within the Cheese 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.
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. If the Cheese Transaction had closed in the third quarter of 2021, we would have recorded an indefinite-lived intangible asset non-cash impairment loss of approximately $1.25 billion. The actual impairment loss 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 fourth quarter 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 pre-tax gain or loss on sale of business. While the consideration for the transaction is not expected to materially change, the actual pre-tax 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 8, 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:
In the fourth quarter of 2019, we determined a business in our International segment was held for sale and recorded an estimated pre-tax loss on sale of business of $71 million within other expense/(income). In the third quarter of 2021, we exhausted negotiations with our most recently identified buyer for this business. As of September 25, 2021, we determined that the related disposal group no longer met the held for sale criteria as there was no longer an active plan to sell and the sale was not probable within the next year. Accordingly, we reclassified the disposal group as held and used and remeasured the disposal group, which resulted in a $75 million pre-tax gain recorded in other expense/(income) on our condensed consolidated statements of income for the three and nine months ended September 25, 2021. Consistent with the presentation of the pre-tax loss recorded in the fourth quarter of 2019, this gain was included in loss/(gain) on sale of business within other expense/(income).The difference between the initial loss on sale of business and the gain resulting from remeasurement of the disposal group was due to foreign currency fluctuations.
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 of 2020, we deemed this business no longer held for sale and reversed the corresponding pre-tax loss. The related assets and liabilities were no longer classified as held for sale on our consolidated balance sheet at December 26, 2020.
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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”) (the “Heinz India Transaction”). 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 January 30, 2019 (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. We recorded tax indemnity liabilities related to the Heinz India Transaction totaling approximately $48 million as of the Heinz India Closing Date. 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 pre-tax gain on sale for the Heinz India Transaction. There were no changes to the tax indemnity liabilities during the nine months ended September 25, 2021. We recognized a gain of approximately $1 million related to local India tax recoveries in the first quarter of 2020.
See Note 4, Acquisitions and Divestitures, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 26, 2020 for additional details related to this transaction and the tax indemnity associated with the Heinz India Transaction.
Deal Costs:
Related to our divestitures, we incurred insignificant deal costs for the three and nine months ended September 25, 2021 and the three and nine months ended September 26, 2020. We recognized these deal costs in SG&A.
Held for Sale
Our assets and liabilities held for sale, by major class, were (in millions):
September 25, 2021 | |||||||||||||||||
Cheese Transaction | Other | Total | |||||||||||||||
ASSETS | |||||||||||||||||
Inventories | $ | 346 | $ | — | $ | 346 | |||||||||||
Property, plant and equipment, net | 255 | 2 | 257 | ||||||||||||||
Goodwill (net of impairment of $300) | 281 | — | 281 | ||||||||||||||
Intangible assets, net | 850 | — | 850 | ||||||||||||||
Other | 5 | — | 5 | ||||||||||||||
Reserve for disposal groups | (13) | — | (13) | ||||||||||||||
Total assets held for sale | $ | 1,724 | $ | 2 | $ | 1,726 | |||||||||||
LIABILITIES | |||||||||||||||||
Other | 6 | — | 6 | ||||||||||||||
Total liabilities held for sale | $ | 6 | $ | — | $ | 6 |
December 26, 2020 | |||||||||||||||||
Cheese Transaction | Other | Total | |||||||||||||||
ASSETS | |||||||||||||||||
Cash and cash equivalents | $ | — | $ | 33 | $ | 33 | |||||||||||
Inventories | 373 | 12 | 385 | ||||||||||||||
Property, plant and equipment, net | 243 | 14 | 257 | ||||||||||||||
Goodwill (net of impairment of $300) | 281 | — | 281 | ||||||||||||||
Intangible assets, net | 850 | 23 | 873 | ||||||||||||||
Other | 10 | 24 | 34 | ||||||||||||||
Total assets held for sale | $ | 1,757 | $ | 106 | $ | 1,863 | |||||||||||
LIABILITIES | |||||||||||||||||
Other | 7 | 10 | 17 | ||||||||||||||
Total liabilities held for sale | $ | 7 | $ | 10 | $ | 17 |
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Other balances held for sale at September 25, 2021 primarily related to manufacturing equipment in the U.S. Other balances held for sale at December 26, 2020 primarily related to a business in our International segment as well as certain manufacturing equipment and land use rights across the globe. We recorded non-cash goodwill impairment losses of $300 million in the third quarter of 2020 related to the Cheese Transaction. As a result, goodwill held for sale in the table above is presented net of cumulative goodwill impairment losses of $300 million at September 25, 2021 and December 26, 2020.
Note 5. Restructuring Activities
See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 26, 2020 for additional information on our restructuring activities.
Restructuring Activities:
We have restructuring programs globally, which are focused primarily on workforce reduction and factory closure and consolidation. For the nine months ended September 25, 2021, we eliminated approximately 390 positions related to these programs. As of September 25, 2021, we expect to eliminate approximately 10 additional positions during the remainder of 2021. Total restructuring expenses during the nine months ended September 25, 2021 were $52 million and included $10 million of severance and employee benefit costs and $42 million of other implementation costs. Restructuring expenses during the three months ended September 25, 2021 were $15 million and included $4 million of severance and employee benefit costs and $11 million of other implementation costs. Total restructuring expenses were $9 million for the three months and $13 million for the nine months ended September 26, 2020.
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 26, 2020 | $ | 10 | $ | 20 | $ | 30 | |||||||||||
Charges/(credits) | 10 | — | 10 | ||||||||||||||
Cash payments | (15) | (3) | (18) | ||||||||||||||
Balance at September 25, 2021 | $ | 5 | $ | 17 | $ | 22 |
We expect the liability for severance and employee benefit costs as of September 25, 2021 to be paid by the end of 2022. 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 2022 and 2026.
Total Expenses:
Total expense/(income) related to restructuring activities, by income statement caption, were (in millions):
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Severance and employee benefit costs - Cost of products sold | $ | — | $ | (1) | $ | 4 | $ | (1) | |||||||||||||||
Severance and employee benefit costs - SG&A | 4 | (1) | 6 | (7) | |||||||||||||||||||
Asset-related costs - Cost of products sold | — | — | — | (2) | |||||||||||||||||||
Other costs - Cost of products sold | — | (2) | — | (1) | |||||||||||||||||||
Other costs - SG&A | 11 | 12 | 42 | 23 | |||||||||||||||||||
Other costs - Other expense/(income) | — | 1 | — | 1 | |||||||||||||||||||
$ | 15 | $ | 9 | $ | 52 | $ | 13 |
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We do not include our restructuring activities within Segment Adjusted EBITDA (as defined in Note 17, Segment Reporting). The pre-tax impact of allocating such expenses to our segments would have been (in millions):
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
United States | $ | — | $ | 2 | $ | 2 | $ | 4 | |||||||||||||||
International | 1 | — | 7 | (2) | |||||||||||||||||||
Canada | 4 | 7 | 4 | 12 | |||||||||||||||||||
General corporate expenses | 10 | — | 39 | (1) | |||||||||||||||||||
$ | 15 | $ | 9 | $ | 52 | $ | 13 |
Note 6. Restricted Cash
The following table provides a reconciliation of cash and cash equivalents, as reported on our condensed consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our condensed consolidated statements of cash flows (in millions):
September 25, 2021 | December 26, 2020 | ||||||||||
Cash and cash equivalents | $ | 2,273 | $ | 3,417 | |||||||
Restricted cash included in other non-current assets | 1 | 1 | |||||||||
Cash, cash equivalents, and restricted cash | $ | 2,274 | $ | 3,418 |
At December 26, 2020, 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):
September 25, 2021 | December 26, 2020 | ||||||||||
Packaging and ingredients | $ | 569 | $ | 482 | |||||||
Spare parts | 210 | 219 | |||||||||
Work in process | 268 | 268 | |||||||||
Finished products | 1,792 | 1,804 | |||||||||
Inventories | $ | 2,839 | $ | 2,773 |
At September 25, 2021 and December 26, 2020, inventories excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
In the first quarter of 2021, we reclassified certain balances from prepaid expenses to inventories on our condensed consolidated balance sheets. See Note 1, Basis of Presentation, for additional information.
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Note 8. 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 26, 2020 | $ | 28,429 | $ | 3,160 | $ | 1,500 | $ | 33,089 | |||||||||||||||
Impairment losses | (35) | — | — | (35) | |||||||||||||||||||
Divestitures | (1,653) | — | (9) | (1,662) | |||||||||||||||||||
Translation adjustments and other | 4 | (35) | 25 | (6) | |||||||||||||||||||
Balance at September 25, 2021 | $ | 26,745 | $ | 3,125 | $ | 1,516 | $ | 31,386 |
At September 25, 2021 and December 26, 2020, goodwill excluded amounts classified as held for sale related to the Cheese Transaction. Additionally, the amounts included in divestitures in the table above represent the goodwill that was previously reclassified to assets held for sale and tested and determined to be partially impaired in connection with the Nuts Transaction. The resulting impairment loss of $230 million was recognized in the first quarter of 2021. The Nuts Transaction closed in the second quarter of 2021. See Note 4, Acquisitions and Divestitures, for additional information related to the Cheese Transaction and the Nuts Transaction and their financial statement impacts.
2021 Year-to-Date Goodwill Impairment Testing
In the first quarter of 2021, we announced the Nuts Transaction and determined that the Nuts Disposal Group was held for sale. Accordingly, based on a relative fair value allocation, we reclassified $1.7 billion of goodwill to assets held for sale, which included a portion of goodwill from four of our reporting units. The Nuts Transaction primarily affected our Kids, Snacks, and Beverages (“KSB”) reporting unit but also affected, to a lesser extent, our Enhancers, Specialty, and Away From Home (“ESA”), Canada Foodservice, and Puerto Rico reporting units. These reporting units were evaluated for impairment prior to their representative inclusion in the Nuts Disposal Group as well as on a post-reclassification basis. The fair value of all reporting units was determined to be in excess of their carrying amounts in both scenarios and, therefore, no impairment was recorded.
We test our reporting units for impairment annually as of the first day of our second quarter, which was March 28, 2021 for our 2021 annual impairment test. In performing this test, we incorporated information that was known through the date of filing of our Quarterly Report on Form 10-Q for the period ended June 26, 2021. We utilized the discounted cash flow method under the income approach to estimate the fair value of our reporting units. As a result of our 2021 annual impairment test, we recognized a non-cash impairment loss of approximately $35 million in SG&A in the second quarter of 2021 related to our Puerto Rico reporting unit within our United States segment. With the update of our five-year operating plan in the second quarter of 2021, we established a revised downward outlook for net sales for this reporting unit. After the impairment, the goodwill carrying amount of the Puerto Rico reporting unit is approximately $14 million.
As of September 25, 2021, we maintain 14 reporting units, nine of which comprise our goodwill balance. These nine reporting units had an aggregate goodwill carrying amount of $31.4 billion at September 25, 2021. As of the 2021 annual impairment test date, six reporting units had 20% or less fair value over carrying amount and an aggregate goodwill carrying amount of $28.3 billion, two reporting units had between 20-50% fair value over carrying amount and a goodwill carrying amount of $2.2 billion, and one reporting unit had over 50% fair value over carrying amount and a goodwill carrying amount of $961 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.
2020 Year-to-Date Goodwill Impairment Testing
As previously disclosed, in the first quarter of 2020, following changes to our internal reporting and reportable segments, the composition of certain of our reporting units changed and 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 no impairment losses resulting from our pre-reorganization impairment test.
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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, Australia, New Zealand, and Japan (“ANJ”), Latin America (“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, including $83 million related to our ANJ reporting unit and $143 million related to our LATAM reporting unit, which represented all of the goodwill associated with these reporting units. 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.
We performed our 2020 annual impairment test as of March 29, 2020, which was the first day of our second quarter in 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 our 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, which included an $815 million impairment loss in our Canada Retail reporting unit within our Canada segment, a $655 million impairment loss in our U.S. Foodservice reporting unit within our United States segment, a $205 million impairment loss in our Canada Foodservice reporting unit within our Canada segment, and a $142 million impairment loss in our EMEA East reporting unit within our International segment. These impairments were primarily due to the completion of our enterprise strategy and five-year operating plan in the second quarter of 2020.
As previously disclosed, in the third quarter of 2020, following changes to our United States zone reporting structure, the composition of certain of our reporting units changed and 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 no impairment losses resulting from this pre-reorganization impairment test.
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 Meal Foundations and Coffee (“MFC”). These reporting units, which were tested as part of this post-reorganization impairment test, each had excess fair value over carrying amount as of June 28, 2020.
Additionally, in the third quarter of 2020, we announced the Cheese Transaction and determined that the Cheese 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. 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 units.
In the third quarter of 2020, we recorded a non-cash impairment loss of $300 million in SG&A, which was related to the Cheese Disposal Group’s goodwill. See Note 4, Acquisitions and Divestitures, for additional information on the Cheese Transaction and its financial statement impacts.
See Note 9, Goodwill and Intangible Assets, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 26, 2020 for additional information.
Accumulated impairment losses to goodwill were $10.8 billion as of September 25, 2021.
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.
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In 2020 and continuing into 2021, the COVID-19 pandemic produced and has continued to produce a short-term beneficial financial impact to our consolidated results. Retail sales have increased compared to pre-pandemic periods due to higher than anticipated consumer demand for our products. The foodservice channel, however, has 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 Canada Foodservice reporting unit is the most exposed of our reporting units to the long-term impacts to away-from-home establishments as it is our only standalone foodservice reporting unit. While our other reporting units have varying levels of exposure to the foodservice channel, they also have exposure to the retail channel, which offsets some of the risk associated with the potential long-term impacts of shifts in net sales between retail and away-from-home establishments. Our Canada Foodservice reporting unit was impaired during our 2020 annual impairment test, reflecting our best estimate at that time of the future outlook and risks of this business. The Canada Foodservice reporting unit maintains an aggregate goodwill carrying amount of approximately $156 million as of September 25, 2021. A number of factors could result in further future impairments of our foodservice (or away-from-home) businesses, including but not limited to: 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 the 2021 annual 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 the 2021 annual impairment testing date, these amounts are also associated with the acquisition of H. J. Heinz Company in 2013 by Berkshire Hathaway Inc. and 3G Global Food Holdings, LP (the “2013 Heinz Acquisition”) and the merger of Kraft Foods Group, Inc. with and into H.J. Heinz Holding Corporation in 2015 (the “2015 Merger”) and are recorded on the condensed consolidated 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 26, 2020 | $ | 42,267 | |||
Impairment losses | (69) | ||||
Divestitures | (1,487) | ||||
Translation adjustments | 31 | ||||
Balance at September 25, 2021 | $ | 40,742 |
At September 25, 2021 and December 26, 2020, indefinite-lived intangible assets excluded amounts classified as held for sale related to the Cheese Transaction. Indefinite-lived intangible asset amounts included in divestitures in the table above represent amounts previously reclassified to assets held for sale related to the Planters trademark in connection with the Nuts Transaction, which closed in the second quarter of 2021. See Note 4, Acquisitions and Divestitures, for additional information on the Cheese Transaction and the Nuts Transaction.
2021 Year-to-Date Indefinite-Lived Intangible Asset Impairment Testing
We performed our 2021 annual impairment test as of March 28, 2021, which was the first day of our second quarter in 2021. As a result of our 2021 annual impairment test, we recognized a non-cash impairment loss of $69 million in SG&A in the second quarter of 2021 related to two brands, Plasmon and Maxwell House. We recorded non-cash impairment losses of $45 million in our International segment related to Plasmon and $24 million in our United States segment related to Maxwell House, consistent with the ownership of the trademarks. The impairment of the Plasmon brand was largely due to downward revised revenue expectations for infant nutrition in Italy. The impairment of the Maxwell House brand was primarily due to downward revised revenue expectations for mainstream coffee in the U.S. These brands had an aggregate carrying amount of $822 million prior to this impairment and $753 million after impairment.
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Our indefinite-lived intangible asset balance primarily consists of a number of individual brands, which had an aggregate carrying amount of $40.7 billion at September 25, 2021. As of the 2021 annual impairment test date, brands with 20% or less fair value over carrying amount had an aggregate carrying amount after impairment of $22.5 billion, brands with between 20-50% fair value over carrying amount had an aggregate carrying amount of $6.5 billion, and brands that had over 50% fair value over carrying amount had an aggregate carrying amount of $11.8 billion. 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.
2020 Year-to-Date Indefinite-Lived Intangible Asset Impairment Testing
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), which included 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. We recognized a $626 million impairment loss related to the Oscar Mayer brand, a $140 million impairment loss related to the Maxwell House brand, and a $290 million impairment loss primarily related to seven other brands (Velveeta, Cool Whip, Plasmon, ABC, Classico, Wattie’s, and Planters).
See Note 9, Goodwill and Intangible Assets, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 26, 2020 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 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, as compared to pre-pandemic levels, 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 the 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 individual brands that have 20% or less excess fair value over carrying amount as of the 2021 annual 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 the 2021 annual impairment testing date, these amounts are also associated with the 2013 Heinz Acquisition and the 2015 Merger and are recorded on the condensed consolidated 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.
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Definite-lived intangible assets:
Definite-lived intangible assets were (in millions):
September 25, 2021 | December 26, 2020 | ||||||||||||||||||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
Trademarks | $ | 1,958 | $ | (534) | $ | 1,424 | $ | 2,000 | $ | (478) | $ | 1,522 | |||||||||||||||||||||||
Customer-related assets | 3,630 | (1,010) | 2,620 | 3,808 | (942) | 2,866 | |||||||||||||||||||||||||||||
Other | 20 | (3) | 17 | 15 | (3) | 12 | |||||||||||||||||||||||||||||
$ | 5,608 | $ | (1,547) | $ | 4,061 | $ | 5,823 | $ | (1,423) | $ | 4,400 |
At September 25, 2021 and December 26, 2020, definite-lived intangible assets excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information on amounts held for sale.
Amortization expense for definite-lived intangible assets was $60 million for the three months and $180 million for the nine months ended September 25, 2021 and $68 million for the three months and $204 million for the nine months ended September 26, 2020. Aside from amortization expense, the change in definite-lived intangible assets from December 26, 2020 to September 25, 2021 primarily reflects the assets sold in connection with the Nuts Transaction, including certain customer-related assets with a net carrying value of $133 million and the Corn Nuts trademark with a net carrying value of $25 million, $9 million of non-cash impairment losses related to a trademark in our International segment, $2 million of additions related to an acquired license, and the impact of foreign currency. The impairment of definite-lived intangible assets in the second quarter of 2021 related to a trademark that had a net carrying value that was deemed not to be recoverable. This $9 million non-cash impairment loss was recognized in SG&A in the second quarter of 2021.
We estimate that amortization expense related to definite-lived intangible assets will be approximately $239 million for each of the next five years.
Note 9. Income Taxes
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 are affected by income/(loss) before income taxes. Further, 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 quarterly income tax provision is determined based on our estimated full year effective tax rate, adjusted for tax attributable to infrequent or unusual items, which are recognized on a discrete period basis in the income tax provision for the period in which they occur.
Our effective tax rate for the three months ended September 25, 2021 was an expense of 16.2% on pre-tax income. Our effective tax rate was impacted by a favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and certain favorable net discrete items, primarily the tax impact related to a business in our International segment that no longer met the held for sale criteria and the revaluation of our deferred tax balances due to changes in state tax rates.
Our effective tax rate for the three months ended September 26, 2020 was an expense of 34.1% on pre-tax income. Our effective tax rate was unfavorably impacted by certain net discrete items, primarily the revaluation of our deferred tax balances due to changes in international tax laws (7.8%) and non-deductible goodwill impairment (7.1%) related to the Cheese Transaction. These impacts were partially offset by the reversal of uncertain tax position reserves in the U.S. and certain state jurisdictions and favorable changes in estimates of certain 2019 U.S. income and deductions.
Our effective tax rate for the nine months ended September 25, 2021 was an expense of 42.6% on pre-tax income. Our effective tax rate was unfavorably impacted by certain net discrete items, primarily the tax impact related to the Nuts Transaction (13.0%), the revaluation of our deferred tax balances due to changes in international and state tax rates (9.0%), mainly an increase in U.K. tax rates, and non-deductible goodwill impairments (3.2%). These impacts were partially offset by a favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and the impact of certain net discrete items, including the reversal of uncertain tax position reserves in certain U.S. state and foreign jurisdictions.
Our effective tax rate for the nine months ended September 26, 2020 was an expense of 163.1% on pre-tax losses. Our effective tax rate was unfavorably impacted by certain net discrete items, primarily related to non-deductible goodwill impairments (202.8%) and the revaluation of our deferred tax balances due to changes in international tax laws. These impacts were partially offset by the impact of certain net discrete items, including the favorable impact of establishing certain deferred tax assets for state tax deductions.
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Other Income Tax Matters:
In the second quarter of 2021, as a result of the Nuts Transaction, we reclassified approximately $435 million of deferred income tax liabilities to income taxes payable, which is presented within other current liabilities, on our condensed consolidated balance sheet. In the third quarter of 2021, we paid approximately $525 million of cash taxes related to the Nuts Transaction. We expect to pay cash taxes of approximately $175 million in the fourth quarter of 2021 related to the Nuts Transaction.
Note 10. Employees’ Stock Incentive Plans
Stock Options:
Our stock option activity and related information was:
Number of Stock Options | Weighted Average Exercise Price (per share) | ||||||||||
Outstanding at December 26, 2020 | 13,479,668 | $ | 43.71 | ||||||||
Granted | 1,021,901 | 37.05 | |||||||||
Forfeited | (642,018) | 53.30 | |||||||||
Exercised | (1,712,957) | 26.76 | |||||||||
Outstanding at September 25, 2021 | 12,146,594 | 45.03 |
The aggregate intrinsic value of stock options exercised during the period was $20 million for the nine months ended September 25, 2021.
Restricted Stock Units:
Our restricted stock unit (“RSU”) activity and related information was:
Number of Units | Weighted Average Grant Date Fair Value (per share) | ||||||||||
Outstanding at December 26, 2020 | 14,235,922 | $ | 31.32 | ||||||||
Granted | 3,235,971 | 36.55 | |||||||||
Forfeited | (1,116,522) | 30.82 | |||||||||
Vested | (3,454,250) | 29.64 | |||||||||
Outstanding at September 25, 2021 | 12,901,121 | 33.13 |
The aggregate fair value of RSUs that vested during the period was $131 million for the nine months ended September 25, 2021.
Performance Share Units:
Our performance share unit (“PSU”) activity and related information was:
Number of Units | Weighted Average Grant Date Fair Value (per share) | ||||||||||
Outstanding at December 26, 2020 | 7,778,710 | $ | 33.16 | ||||||||
Granted | 1,571,066 | 35.03 | |||||||||
Forfeited | (608,284) | 41.88 | |||||||||
Vested | (1,816,180) | 29.16 | |||||||||
Outstanding at September 25, 2021 | 6,925,312 | 33.87 |
The aggregate fair value of PSUs that vested during the period was $69 million for the nine months ended September 25, 2021.
Note 11. Postemployment Benefits
See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 26, 2020 for additional information on our postemployment related accounting policies.
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Pension Plans
Components of Net Pension Cost/(Benefit):
Net pension cost/(benefit) consisted of the following (in millions):
For the Three Months Ended | |||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Service cost | $ | 1 | $ | 2 | $ | 4 | $ | 4 | |||||||||||||||
Interest cost | 24 | 33 | 7 | 9 | |||||||||||||||||||
Expected return on plan assets | (50) | (52) | (23) | (26) | |||||||||||||||||||
Settlements | (2) | (3) | — | — | |||||||||||||||||||
Other | — | — | — | 1 | |||||||||||||||||||
Net pension cost/(benefit) | $ | (27) | $ | (20) | $ | (12) | $ | (12) |
For the Nine Months Ended | |||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Service cost | $ | 4 | $ | 5 | $ | 12 | $ | 12 | |||||||||||||||
Interest cost | 67 | 98 | 22 | 28 | |||||||||||||||||||
Expected return on plan assets | (140) | (157) | (71) | (77) | |||||||||||||||||||
Amortization of prior service costs/(credits) | — | — | 1 | — | |||||||||||||||||||
Amortization of unrecognized losses/(gains) | — | — | 1 | 1 | |||||||||||||||||||
Settlements | (8) | (3) | — | — | |||||||||||||||||||
Special/contractual termination benefits | 3 | — | — | — | |||||||||||||||||||
Other | — | — | — | 1 | |||||||||||||||||||
Net pension cost/(benefit) | $ | (74) | $ | (57) | $ | (35) | $ | (35) |
We present all non-service cost components of net pension cost/(benefit) within other expense/(income) on our condensed consolidated statements of income. In 2021, we recognized special/contractual termination benefits related to the Nuts Transaction, including a loss of $3 million for the nine months ended September 25, 2021. These special/contractual termination benefits are recorded in other expense/(income) as a component of our pre-tax loss/(gain) on sale of business on the condensed consolidated statement of income for the nine months ended September 25, 2021.
Employer Contributions:
Related to our non-U.S. pension plans, we contributed $11 million during the nine months ended September 25, 2021 and plan to make further contributions of approximately $4 million during the remainder of 2021. We did not contribute to our U.S. pension plans during the nine months ended September 25, 2021 and do not plan to make contributions during the remainder of 2021. Estimated future contributions take into consideration current economic conditions, including the impacts of COVID-19, which at this time are expected to have minimal impact on expected contributions for the remainder of 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.
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Postretirement Plans
Components of Net Postretirement Cost/(Benefit):
Net postretirement cost/(benefit) consisted of the following (in millions):
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Service cost | $ | 1 | $ | 2 | $ | 4 | $ | 5 | |||||||||||||||
Interest cost | 5 | 8 | 15 | 25 | |||||||||||||||||||
Expected return on plan assets | (12) | (12) | (36) | (37) | |||||||||||||||||||
Amortization of prior service costs/(credits) | (2) | (31) | (6) | (92) | |||||||||||||||||||
Amortization of unrecognized losses/(gains) | (4) | (3) | (12) | (10) | |||||||||||||||||||
Curtailments | — | — | (4) | — | |||||||||||||||||||
Net postretirement cost/(benefit) | $ | (12) | $ | (36) | $ | (39) | $ | (109) |
We present all non-service cost components of net postretirement cost/(benefit) within other expense/(income) on our condensed consolidated statements of income. For the nine months ended September 25, 2021, we recognized a curtailment gain of $4 million related to the Nuts Transaction. This gain is recorded in other expense/(income) as a component of our pre-tax loss/(gain) on sale of business on the condensed consolidated statement of income for the nine months ended September 25, 2021.
Employer Contributions:
During the nine months ended September 25, 2021, we contributed $10 million to our postretirement benefit plans. We plan to make further contributions of approximately $4 million to our postretirement benefit plans during the remainder of 2021. Estimated future contributions take into consideration current economic conditions, including the impacts of COVID-19, which at this time are expected to have minimal impact on expected contributions for the remainder of 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.
Note 12. Financial Instruments
See our consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 26, 2020 for additional information on our overall risk management strategies, our use of derivatives, and our related accounting policies.
Derivative Volume:
The notional values of our outstanding derivative instruments were (in millions):
Notional Amount | |||||||||||
September 25, 2021 | December 26, 2020 | ||||||||||
Commodity contracts | $ | 574 | $ | 384 | |||||||
Foreign exchange contracts | 2,754 | 3,658 | |||||||||
Cross-currency contracts | 7,239 | 8,189 |
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Fair Value of Derivative Instruments:
The fair values and the levels within the fair value hierarchy of derivative instruments recorded on the condensed consolidated balance sheets were (in millions):
September 25, 2021 | |||||||||||||||||||||||||||||||||||
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) | $ | — | $ | — | $ | 18 | $ | 30 | $ | 18 | $ | 30 | |||||||||||||||||||||||
Cross-currency contracts(b) | — | — | 272 | 273 | 272 | 273 | |||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
Commodity contracts(c) | 52 | 12 | 11 | — | 63 | 12 | |||||||||||||||||||||||||||||
Foreign exchange contracts(a) | — | — | 2 | 7 | 2 | 7 | |||||||||||||||||||||||||||||
Total fair value | $ | 52 | $ | 12 | $ | 303 | $ | 310 | $ | 355 | $ | 322 |
(a) At September 25, 2021, the fair value of our derivative assets was recorded in other current assets ($14 million) and other non-current assets ($6 million), and the fair value of our derivative liabilities was recorded in other current liabilities ($34 million) and other non-current liabilities ($3 million).
(b) At September 25, 2021, the fair value of our derivative assets was recorded in other current assets ($71 million) and other non-current assets ($201 million), and the fair value of our derivative liabilities was recorded in other current liabilities ($54 million) and other non-current liabilities ($219 million).
(c) At September 25, 2021, the fair value of our derivative assets was recorded in other current assets ($62 million) and other non-current assets ($1 million), and the fair value of derivative liabilities was recorded in other current liabilities.
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 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 condensed consolidated balance sheets. If the derivative financial instruments had been netted on the condensed consolidated balance sheets, the asset and liability positions each would have been reduced by $225 million at September 25, 2021 and $315 million at December 26, 2020. We had collected collateral related to commodity derivative margin requirements of $31 million at September 25, 2021 and $25 million at December 26, 2020, which was included in other current liabilities on our condensed 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.
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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 September 25, 2021, 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 £677 million ($900 million), C$1.4 billion ($1.1 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 $117 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 September 25, 2021, we had euro intercompany loans with an aggregate notional amount of $214 million and a British pound sterling intercompany loan with an aggregate notional amount of $124 million designated as net investment hedges.
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.
Cash Flow Hedge Coverage:
At September 25, 2021, 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 seven years.
Deferred Hedging Gains and Losses on Cash Flow Hedges:
Based on our valuation at September 25, 2021 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 $16 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.
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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) | ||||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | |||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||
Foreign exchange contracts | $ | — | $ | — | $ | (1) | $ | 1 | Net sales | |||||||||||||||||||||||
Foreign exchange contracts | 24 | (8) | (16) | 41 | Cost of products sold | |||||||||||||||||||||||||||
Foreign exchange contracts (excluded component) | — | (1) | — | (2) | Cost of products sold | |||||||||||||||||||||||||||
Cross-currency contracts | (33) | 45 | (65) | 138 | Other expense/(income) | |||||||||||||||||||||||||||
Cross-currency contracts (excluded component) | 7 | 7 | 21 | 20 | Other expense/(income) | |||||||||||||||||||||||||||
Cross-currency contracts | (5) | (4) | (15) | (7) | Interest expense | |||||||||||||||||||||||||||
Net investment hedges: | ||||||||||||||||||||||||||||||||
Foreign exchange contracts | 2 | 1 | 2 | 3 | Other expense/(income) | |||||||||||||||||||||||||||
Foreign exchange contracts (excluded component) | 1 | (1) | 1 | (2) | Interest expense | |||||||||||||||||||||||||||
Cross-currency contracts | 98 | (223) | 31 | (91) | Other expense/(income) | |||||||||||||||||||||||||||
Cross-currency contracts (excluded component) | 5 | 7 | 17 | 23 | Interest expense | |||||||||||||||||||||||||||
Total gains/(losses) recognized in statements of comprehensive income | $ | 99 | $ | (177) | $ | (25) | $ | 124 |
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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):
For the Three Months Ended | |||||||||||||||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | ||||||||||||||||||||||||||||||||||
Cost of products sold | Interest expense | Other expense/(income) | Cost of products sold | Interest expense | Other expense/(income) | ||||||||||||||||||||||||||||||
Total amounts presented in the condensed consolidated statements of income in which the following effects were recorded | $ | 4,296 | $ | 415 | $ | (138) | $ | 4,097 | $ | 314 | $ | (73) | |||||||||||||||||||||||
Gains/(losses) related to derivatives designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||||||||||||
Foreign exchange contracts | $ | (13) | $ | — | $ | — | $ | 5 | $ | — | $ | — | |||||||||||||||||||||||
Foreign exchange contracts (excluded component) | (1) | — | — | — | — | — | |||||||||||||||||||||||||||||
Cross-currency contracts | — | (6) | (22) | — | — | 42 | |||||||||||||||||||||||||||||
Cross-currency contracts (excluded component) | — | — | 7 | — | (4) | 7 | |||||||||||||||||||||||||||||
Net investment hedges: | |||||||||||||||||||||||||||||||||||
Foreign exchange contracts (excluded component) | — | — | — | — | (1) | — | |||||||||||||||||||||||||||||
Cross-currency contracts (excluded component) | — | 4 | — | — | 5 | — | |||||||||||||||||||||||||||||
Gains/(losses) related to derivatives not designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
Commodity contracts | 53 | — | — | 44 | — | — | |||||||||||||||||||||||||||||
Foreign exchange contracts | — | — | (13) | — | — | 1 | |||||||||||||||||||||||||||||
Cross-currency contracts | — | — | 5 | — | — | — | |||||||||||||||||||||||||||||
Total gains/(losses) recognized in statements of income | $ | 39 | $ | (2) | $ | (23) | $ | 49 | $ | — | $ | 50 |
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For the Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | ||||||||||||||||||||||||||||||||||||||||
Cost of products sold | SG&A | Interest expense | Other expense/(income) | Cost of products sold | Interest expense | Other expense/(income) | |||||||||||||||||||||||||||||||||||
Total amounts presented in the condensed consolidated statements of income in which the following effects were recorded | $ | 12,813 | $ | 3,040 | $ | 1,443 | $ | (191) | $ | 12,592 | $ | 1,066 | $ | (232) | |||||||||||||||||||||||||||
Gains/(losses) related to derivatives designated as hedging instruments: | |||||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | $ | (32) | $ | (1) | $ | — | $ | — | $ | 16 | $ | — | $ | — | |||||||||||||||||||||||||||
Foreign exchange contracts (excluded component) | (2) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Interest rate contracts | — | — | — | — | — | (2) | — | ||||||||||||||||||||||||||||||||||
Cross-currency contracts | — | — | (16) | (50) | — | — | 83 | ||||||||||||||||||||||||||||||||||
Cross-currency contracts (excluded component) | — | — | — | 20 | — | (7) | 21 | ||||||||||||||||||||||||||||||||||
Net investment hedges: | |||||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts (excluded component) | — | — | 1 | — | — | (2) | — | ||||||||||||||||||||||||||||||||||
Cross-currency contracts (excluded component) | — | — | 11 | — | — | 20 | — | ||||||||||||||||||||||||||||||||||
Gains/(losses) related to derivatives not designated as hedging instruments: | |||||||||||||||||||||||||||||||||||||||||
Commodity contracts | 147 | — | — | — | (120) | — | — | ||||||||||||||||||||||||||||||||||
Foreign exchange contracts | — | — | — | (33) | — | — | (27) | ||||||||||||||||||||||||||||||||||
Cross-currency contracts | — | — | — | 9 | — | — | — | ||||||||||||||||||||||||||||||||||
Total gains/(losses) recognized in statements of income | $ | 113 | $ | (1) | $ | (4) | $ | (54) | $ | (104) | $ | 9 | $ | 77 |
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 gains of $27 million for the three months and $32 million for the nine months ended September 25, 2021 and pre-tax losses of $46 million for the three months and pre-tax gains of $19 million for the nine months ended September 26, 2020. These amounts were recognized in other comprehensive income/(loss).
Other Financial Instruments:
The carrying amounts of cash equivalents approximated fair values at September 25, 2021 and December 26, 2020. Money market funds are included in cash and cash equivalents on the condensed consolidated balance sheets. The fair value of money market funds was $137 million at September 25, 2021 and $144 million at December 26, 2020. These are considered Level 1 financial assets and are valued using quoted prices in active markets for identical assets.
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Note 13. 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 26, 2020 | $ | (2,218) | $ | 158 | $ | 93 | $ | (1,967) | |||||||||||||||
Foreign currency translation adjustments | 13 | — | — | 13 | |||||||||||||||||||
Net deferred gains/(losses) on net investment hedges | 52 | — | — | 52 | |||||||||||||||||||
Amounts excluded from the effectiveness assessment of net investment hedges | 14 | — | — | 14 | |||||||||||||||||||
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss) | (9) | — | — | (9) | |||||||||||||||||||
Net deferred gains/(losses) on cash flow hedges | — | — | (70) | (70) | |||||||||||||||||||
Amounts excluded from the effectiveness assessment of cash flow hedges | — | — | 21 | 21 | |||||||||||||||||||
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss) | — | — | 48 | 48 | |||||||||||||||||||
Net actuarial gains/(losses) arising during the period | — | 58 | — | 58 | |||||||||||||||||||
Net postemployment benefit losses/(gains) reclassified to net income/(loss) | — | (18) | — | (18) | |||||||||||||||||||
Total other comprehensive income/(loss) | 70 | 40 | (1) | 109 | |||||||||||||||||||
Balance as of September 25, 2021 | $ | (2,148) | $ | 198 | $ | 92 | $ | (1,858) |
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):
For the Three Months Ended | |||||||||||||||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | ||||||||||||||||||||||||||||||||||
Before Tax Amount | Tax | Net of Tax Amount | Before Tax Amount | Tax | Net of Tax Amount | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments | $ | (238) | $ | — | $ | (238) | $ | 293 | $ | — | $ | 293 | |||||||||||||||||||||||
Net deferred gains/(losses) on net investment hedges | 127 | (31) | 96 | (268) | 68 | (200) | |||||||||||||||||||||||||||||
Amounts excluded from the effectiveness assessment of net investment hedges | 6 | (2) | 4 | 6 | (1) | 5 | |||||||||||||||||||||||||||||
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss) | (4) | 1 | (3) | (4) | 1 | (3) | |||||||||||||||||||||||||||||
Net deferred gains/(losses) on cash flow hedges | (14) | 8 | (6) | 33 | (16) | 17 | |||||||||||||||||||||||||||||
Amounts excluded from the effectiveness assessment of cash flow hedges | 7 | — | 7 | 6 | — | 6 | |||||||||||||||||||||||||||||
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss) | 35 | (13) | 22 | (50) | 21 | (29) | |||||||||||||||||||||||||||||
Net actuarial gains/(losses) arising during the period | (20) | 5 | (15) | (30) | 8 | (22) | |||||||||||||||||||||||||||||
Net postemployment benefit losses/(gains) reclassified to net income/(loss) | (8) | 3 | (5) | (37) | 8 | (29) |
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For the Nine Months Ended | |||||||||||||||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | ||||||||||||||||||||||||||||||||||
Before Tax Amount | Tax | Net of Tax Amount | Before Tax Amount | Tax | Net of Tax Amount | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments | $ | 13 | $ | — | $ | 13 | $ | (309) | $ | — | $ | (309) | |||||||||||||||||||||||
Net deferred gains/(losses) on net investment hedges | 65 | (13) | 52 | (69) | 18 | (51) | |||||||||||||||||||||||||||||
Amounts excluded from the effectiveness assessment of net investment hedges | 18 | (4) | 14 | 21 | — | 21 | |||||||||||||||||||||||||||||
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss) | (12) | 3 | (9) | (18) | 4 | (14) | |||||||||||||||||||||||||||||
Net deferred gains/(losses) on cash flow hedges | (97) | 27 | (70) | 173 | (20) | 153 | |||||||||||||||||||||||||||||
Amounts excluded from the effectiveness assessment of cash flow hedges | 21 | — | 21 | 18 | — | 18 | |||||||||||||||||||||||||||||
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss) | 81 | (33) | 48 | (111) | 21 | (90) | |||||||||||||||||||||||||||||
Net actuarial gains/(losses) arising during the period | 78 | (20) | 58 | (30) | 8 | (22) | |||||||||||||||||||||||||||||
Net postemployment benefit losses/(gains) reclassified to net income/(loss) | (24) | 6 | (18) | (104) | 26 | (78) |
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 | ||||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | |||||||||||||||||||||||||||||
Losses/(gains) on net investment hedges: | ||||||||||||||||||||||||||||||||
Foreign exchange contracts(a) | $ | — | $ | 1 | $ | (1) | $ | 2 | Interest expense | |||||||||||||||||||||||
Cross-currency contracts(a) | (4) | (5) | (11) | (20) | Interest expense | |||||||||||||||||||||||||||
Losses/(gains) on cash flow hedges: | ||||||||||||||||||||||||||||||||
Foreign exchange contracts(b) | 14 | (5) | 34 | (16) | Cost of products sold | |||||||||||||||||||||||||||
Foreign exchange contracts(b) | — | — | 1 | — | SG&A | |||||||||||||||||||||||||||
Cross-currency contracts(b) | 15 | (49) | 30 | (104) | Other expense/(income) | |||||||||||||||||||||||||||
Cross-currency contracts(b) | 6 | 4 | 16 | 7 | Interest expense | |||||||||||||||||||||||||||
Interest rate contracts(c) | — | — | — | 2 | Interest expense | |||||||||||||||||||||||||||
Losses/(gains) on hedges before income taxes | 31 | (54) | 69 | (129) | ||||||||||||||||||||||||||||
Losses/(gains) on hedges, income taxes | (12) | 22 | (30) | 25 | ||||||||||||||||||||||||||||
Losses/(gains) on hedges | $ | 19 | $ | (32) | $ | 39 | $ | (104) | ||||||||||||||||||||||||
Losses/(gains) on postemployment benefits: | ||||||||||||||||||||||||||||||||
Amortization of unrecognized losses/(gains)(d) | $ | (3) | $ | (3) | $ | (10) | $ | (9) | ||||||||||||||||||||||||
Amortization of prior service costs/(credits)(d) | (2) | (31) | (5) | (92) | ||||||||||||||||||||||||||||
Settlement and curtailment losses/(gains)(d) | (3) | (3) | (9) | (3) | ||||||||||||||||||||||||||||
Losses/(gains) on postemployment benefits before income taxes | (8) | (37) | (24) | (104) | ||||||||||||||||||||||||||||
Losses/(gains) on postemployment benefits, income taxes | 3 | 8 | 6 | 26 | ||||||||||||||||||||||||||||
Losses/(gains) on postemployment benefits | $ | (5) | $ | (29) | $ | (18) | $ | (78) |
(a) Represents recognition of the excluded component in net income/(loss).
(b) Includes amortization of the excluded component and the effective portion of the related hedges.
(c) 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.
(d) These components are included in the computation of net periodic postemployment benefit costs. See Note 11, Postemployment Benefits, for additional information.
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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 14. Financing Arrangements
We enter into various product financing arrangements to facilitate supply from our vendors. Balance sheet classification is based on the nature of the 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 condensed consolidated balance sheets. We had approximately $103 million at September 25, 2021 and approximately $236 million at December 26, 2020 on our condensed 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 condensed consolidated balance sheet. No receivables were sold under this accounts receivable factoring program during the three or nine months ended September 25, 2021, and there were no amounts outstanding at September 25, 2021 or December 26, 2020. Any proceeds from the sales of receivables are included in cash flows from operating activities on the condensed consolidated statements of cash flows.
Note 15. Commitments, Contingencies, and Debt
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. The Company filed a motion to dismiss the consolidated amended class action complaint, which motion the court denied in an order dated August 11, 2021.
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. The Company filed a motion to dismiss the amended complaint, which motion the court granted in an order dated August 23, 2021, before entering judgment in favor of the Company on September 14, 2021. The plaintiffs filed a notice of appeal on October 13, 2021.
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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. The court appointed lead plaintiffs and plaintiffs’ counsel on October 21, 2021. We expect the lead plaintiffs to file a consolidated amended complaint.
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:
On September 3, 2021, The Kraft Heinz Company reached a settlement with the SEC, concluding and resolving in its entirety the previously disclosed SEC investigation. Under the terms of the settlement, we, without admitting or denying the findings in the administrative order issued by the SEC, agreed to pay a civil penalty of $62 million and to cease and desist from violations of specified provisions of the federal securities laws and rules promulgated thereunder. We recorded an accrual for the full amount of the penalty in the second quarter of 2021, which was reflected in other current liabilities on the condensed consolidated balance sheet at June 26, 2021 and in SG&A on the condensed consolidated statements of income, and paid the penalty in the third quarter of 2021. As previously disclosed, the United States Attorney’s Office for the Northern District of Illinois (“USAO”) had been reviewing the matter. We have not received any contact from the USAO within the past 18 months.
Debt
We may from time to time seek to retire or purchase our outstanding debt through redemptions, tender offers, cash purchases, prepayments, refinancing, exchange offers, open market or privately negotiated transactions, Rule 10b5-1 plans, or otherwise. Cash payments related to debt extinguishment are classified as cash outflows from financing activities on the condensed consolidated statements of cash flows. Any gains or losses on extinguishment of debt are recognized in interest expense on the condensed consolidated statements of income.
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 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 provide a $400 million euro equivalent swing line facility, which is available under the $4.0 billion Senior Credit Facility limit, for short-term loans denominated in euros on a same-day basis. In March 2020, we entered into an extension letter agreement (the “2020 Extension Agreement”), which extends $3.9 billion under the Senior Credit Facility from July 6, 2023 to July 6, 2024. The revolving loans and commitments of each lender that did not agree to the 2020 Extension Agreement continue to terminate on 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, or $100 million in aggregate. Following the execution of the Amendment, the Senior Credit Facility provides for $4.1 billion through July 6, 2023 and $4.0 billion through July 6, 2024. On April 9, 2021, we entered into an extension letter agreement (the “2021 Extension Agreement”), which extends the maturity date of $4.0 billion under the Senior Credit Facility from July 6, 2024 to July 6, 2025.
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In the first quarter of 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 borrowed $4.0 billion under our Senior Credit Facility. We repaid the full $4.0 billion during the second quarter of 2020. No amounts were drawn on our Senior Credit Facility at September 25, 2021, at December 26, 2020, or during the nine months ended September 25, 2021.
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 September 25, 2021.
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. In March 2021, we amended the uncommitted revolving credit line agreement to extend the final maturity date of the agreement from June 9, 2021 to June 9, 2022. As of September 25, 2021, no amounts had been drawn on this facility.
See Note 18, Debt, to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 26, 2020 for additional information on our borrowing arrangements.
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Long-term Debt Transactions:
The table below summarizes our aggregate principal amount of long-term debt outstanding, excluding financing leases, before and after our current year debt transactions, specifically tender offers, debt redemptions, open-market debt repurchases, and debt repayments (in millions):
Aggregate Principal Amount Outstanding as of December 26, 2020 | Tender Offers | Open Market Debt Repurchases | Debt Redemptions | Debt Repayments | Aggregate Principal Amount Outstanding as of September 25, 2021 | ||||||||||||||||||||||||||||||
3.500% senior notes due June 2022(a) | $ | 631 | $ | — | $ | — | $ | — | $ | — | $ | 631 | |||||||||||||||||||||||
4.000% senior notes due June 2023(a)(d) | 447 | — | — | 447 | — | — | |||||||||||||||||||||||||||||
3.950% senior notes due July 2025(a)(f) | 1,609 | 812 | — | 797 | — | — | |||||||||||||||||||||||||||||
3.000% senior notes due June 2026(a)(c) | 2,000 | 88 | 36 | — | — | 1,876 | |||||||||||||||||||||||||||||
6.375% senior notes due July 2028(b) | 235 | 17 | — | — | — | 218 | |||||||||||||||||||||||||||||
4.625% senior notes due January 2029(b)(c)(e) | 1,100 | 345 | 28 | — | — | 727 | |||||||||||||||||||||||||||||
3.750% senior notes due April 2030(b)(c) | 1,000 | 254 | 3 | — | — | 743 | |||||||||||||||||||||||||||||
6.750% senior notes due March 2032(b) | 437 | 66 | — | — | — | 371 | |||||||||||||||||||||||||||||
5.000% senior notes due July 2035(b)(c)(e) | 1,000 | 187 | 15 | — | — | 798 | |||||||||||||||||||||||||||||
6.875% senior notes due January 2039(b)(c)(e) | 878 | 29 | 15 | — | — | 834 | |||||||||||||||||||||||||||||
7.125% senior notes due August 2039(b)(c) | 931 | 51 | 4 | — | — | 876 | |||||||||||||||||||||||||||||
4.625% senior notes due October 2039(b)(e) | 500 | 101 | — | — | — | 399 | |||||||||||||||||||||||||||||
6.500% senior notes due February 2040(b)(c)(e) | 788 | 39 | 18 | — | — | 731 | |||||||||||||||||||||||||||||
5.000% senior notes due June 2042(b)(c)(e) | 2,000 | 334 | 68 | — | — | 1,598 | |||||||||||||||||||||||||||||
5.200% senior notes due July 2045(c)(e) | 2,000 | — | 144 | — | — | 1,856 | |||||||||||||||||||||||||||||
4.375% senior notes due June 2046(c)(e) | 3,000 | — | 97 | — | — | 2,903 | |||||||||||||||||||||||||||||
Floating rate senior notes due February 2021(g) | 111 | — | — | — | 111 | — | |||||||||||||||||||||||||||||
3.125% senior notes due September 2021(g) | 34 | 34 | — | ||||||||||||||||||||||||||||||||
Other long-term debt(h) | 9,192 | — | — | — | — | 9,073 | |||||||||||||||||||||||||||||
Total | $ | 27,893 | $ | 2,323 | $ | 428 | $ | 1,244 | $ | 145 | $ | 23,634 |
(a) Included in the Q1 2021 Tender Offer (defined below).
(b) Included in the Q2 2021 Tender Offers (defined below).
(c) Included in the Q2 2021 Repurchases (defined below).
(d) Included in the Q2 2021 Debt Redemption (defined below).
(e) Included in the Q3 2021 Repurchases (defined below).
(f) Included in the Q3 2021 Debt Redemption (defined below).
(g) Repaid at maturity.
(h) Represents the aggregate principal amount of all of our long-term debt obligations, excluding finance leases, that were not impacted by current year debt transactions. Foreign-denominated long-term debt is reflected at the foreign currency exchange rate in effect at each period end.
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Tender Offers:
2021 Tender Offers
In February 2021, KHFC commenced a cash tender offer to purchase up to the maximum combined aggregate purchase price of $1.0 billion, including principal and premium but excluding accrued and unpaid interest (the “2021 Maximum Tender Amount”), of its outstanding 3.950% senior notes due July 2025, 3.000% senior notes due June 2026, 4.000% senior notes due June 2023, and 3.500% senior notes due June 2022 (the “Q1 2021 Tender Offer”), listed in order of priority. Based on participation, KHFC elected to settle the Q1 2021 Tender Offer on the early settlement date, March 9, 2021. Since the aggregate purchase price of the senior notes validly tendered and not validly withdrawn as of the early tender time exceeded the 2021 Maximum Tender Amount, we did not accept for purchase any of the 3.500% senior notes due June 2022 or the 4.000% senior notes due June 2023. The aggregate principal amount of senior notes validly tendered and accepted was approximately $900 million. Refer to the table above for the amount extinguished by senior notes in the Q1 2021 Tender Offer.
In June 2021, KHFC commenced cash tender offers to purchase up to the maximum combined aggregate purchase price of $2.8 billion, including principal and premium but excluding accrued and unpaid interest, of its 5.000% Senior Note due June 2042, 5.000% Senior Notes due July 2035, 4.625% Senior Notes due January 2029, 4.625% Senior Notes due October 2039, 3.750% Senior Notes due April 2030, 6.500% Senior Notes due February 2040, 6.375% Senior Notes due July 2028, 6.750% Senior Notes due March 2032, 6.875% Senior Notes due January 2039, and 7.125% Senior Notes Due August 2039 (the “Q2 2021 Tender Offers” and, together with the Q1 2021 Tender Offer, the “2021 Tender Offers”), listed in order of priority. KHFC settled the Q2 2021 Tender Offers on June 14, 2021 and June 16, 2021. The aggregate principal amount of senior notes validly tendered and accepted was approximately $1.4 billion. Refer to the table above for the amount extinguished by senior notes in the Q2 2021 Tender Offers.
Related to the 2021 Tender Offers, we recognized a loss on extinguishment of debt of $362 million within interest expense on the condensed consolidated statement of income for the nine months ended September 25, 2021, which included a loss of $106 million in the first quarter of 2021 related to the Q1 2021 Tender Offer and a loss of $256 million in the second quarter of 2021 related to the Q2 2021 Tender Offers. These losses primarily reflect the payment of early tender premiums and fees associated with the 2021 Tender Offers as well as the write-off of unamortized premiums, debt issuance costs, and discounts. Related to the 2021 Tender Offers, we recognized debt prepayment and extinguishment costs of $369 million on the condensed consolidated statement of cash flows for the nine months ended September 25, 2021, which reflects the $362 million loss on extinguishment of debt adjusted for the non-cash write-off of unamortized premiums of $20 million, unamortized debt issuance costs of $7 million, and unamortized discounts of $6 million.
2020 Tender Offer
In May 2020, KHFC commenced a cash tender offer to purchase up to the maximum combined aggregate purchase price of $2.2 billion, excluding accrued and unpaid interest (the “2020 Maximum Tender Amount”), 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”), listed in order of priority. As a result of the 2020 Tender Offer, KHFC extinguished approximately $2.1 billion aggregate principal amounts of senior notes in the second quarter of 2020. None of the 3.000% senior notes due June 2026 were tendered based on the aggregate principal amount of senior notes validly tendered exceeding the 2020 Maximum Tender Amount. See Note 18, Debt, to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 26, 2020 for additional information on the 2020 Tender Offer.
In connection with the 2020 Tender Offer, we recognized a loss on extinguishment of debt of $71 million within interest expense on the condensed consolidated statement of income for the nine months ended September 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. Related to the 2020 Tender Offer, we recognized debt prepayment and extinguishment costs of $68 million on the condensed consolidated statement of cash flows for the nine months ended September 26, 2020, 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.
Open Market Debt Repurchases:
During the nine months ended September 25, 2021, we repurchased approximately $428 million of certain of our senior notes under Rule 10b5-1 plans, including $207 million in the second quarter of 2021 (the “Q2 2021 Repurchases”) and $221 million in the third quarter of 2021 (the “Q3 2021 Repurchases” and, together with the Q2 2021 Repurchases, the “2021 Repurchases”). Refer to the table above to see which senior notes had amounts extinguished as part of the 2021 Repurchases.
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In connection with the 2021 Repurchases, we recognized a loss on extinguishment of debt of approximately $80 million within interest expense on the condensed consolidated statement of income for the nine months ended September 25, 2021, which included a loss of $28 million in the second quarter of 2021 related to the Q2 2021 Repurchases and a loss of $52 million in the third quarter of 2021 related to the Q3 2021 Repurchases. These losses primarily reflect the payment of premiums associated with the repurchases as well as the write-off of unamortized debt issuance costs, premiums, and discounts. Related to the 2021 Repurchases, we recognized debt prepayment and extinguishment costs of $82 million on the condensed consolidated statement of cash flows for the nine months ended September 25, 2021, which reflect the $80 million loss on extinguishment of debt adjusted for the non-cash write-off of unamortized premiums of $5 million, unamortized discounts of $1 million, and unamortized debt issuance costs of $2 million.
In the third quarter of 2021, we initiated purchase transactions for approximately $44 million aggregate principal amount of certain of our senior notes due in February 2040, July 2045, and June 2046, which settled in the fourth quarter of 2021. These notes were included in the current portion of long-term debt on our condensed consolidated balance sheet at September 25, 2021. Our condensed consolidated financial statements as of September 25, 2021 do not reflect the extinguishment of these notes as they occurred in the fourth quarter of 2021.
Debt Redemptions:
2021 Debt Redemptions
In April 2021, KHFC issued a notice of redemption of all of its 4.000% senior notes due June 2023, effective May 1, 2021 (the “Q2 2021 Debt Redemption”). Prior to the redemption, approximately $447 million aggregate principal amount was outstanding.
In June 2021, KHFC issued a notice of redemption of all of its 3.950% senior notes due July 2025, effective July 14, 2021 (the “Q3 2021 Debt Redemption” and, together with the Q2 2021 Debt Redemption, the “2021 Debt Redemptions”). Prior to the redemption, approximately $797 million aggregate principal amount was outstanding.
In connection with the 2021 Debt Redemptions, we recognized a loss on extinguishment of debt of $129 million within interest expense on the condensed consolidated statement of income for the nine months ended September 25, 2021, which included a loss of $34 million in the second quarter of 2021 related to the Q2 2021 Debt Redemption and a loss of $95 million in the third quarter of 2021 related to the Q3 2021 Debt Redemption. These losses primarily reflect the payment of premiums and fees associated with the redemptions as well as the write-off of unamortized debt issuance costs. Related to the 2021 Debt Redemptions, we recognized debt prepayment and extinguishment costs of $126 million on the condensed consolidated statement of cash flows for the nine months ended September 25, 2021, which reflect the $129 million loss on extinguishment of debt adjusted for the non-cash write-off of unamortized debt issuance costs of $3 million.
2020 Debt Redemptions
Concurrently with the commencement of the 2020 Tender Offer, KHFC issued a notice of conditional redemption 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 4.875% second lien senior notes due 2025 (the “2020 Debt Redemptions”). The 2020 Debt Redemptions were effective and completed in the second quarter of 2020.
In connection with the 2020 Debt Redemptions, we recognized a loss on extinguishment of debt of $38 million within interest expense on the condensed consolidated statement of income for the nine months ended September 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. Related to the 2020 Debt Redemptions, we recognized debt prepayment and extinguishment costs of $33 million on the consolidated statement of cash flows for the nine months ended September 26, 2020, which reflect the $38 million loss on extinguishment of debt adjusted for the non-cash write-off of unamortized debt issuance costs of $5 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 2020 Debt Redemptions and to pay fees and expenses in connection therewith.
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Debt Issuance Costs:
Debt issuance costs related to the 2020 Notes were $31 million.
Debt Repayments:
In February 2021, we repaid $111 million aggregate principal amount of senior notes that matured in the period.
In September 2021, we repaid $34 million aggregate principal amount of senior notes that matured in the period.
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.
Fair Value of Debt:
At September 25, 2021, the aggregate fair value of our total debt was $28.4 billion as compared with a carrying value of $24.0 billion. 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. Our short-term debt had a carrying value that approximated its fair value at September 25, 2021 and December 26, 2020. 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.
Note 16. Earnings Per Share
Our earnings per common share (“EPS”) were:
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
(in millions, except per share data) | |||||||||||||||||||||||
Basic Earnings Per Common Share: | |||||||||||||||||||||||
Net income/(loss) attributable to common shareholders | $ | 733 | $ | 597 | $ | 1,269 | $ | (676) | |||||||||||||||
Weighted average shares of common stock outstanding | 1,225 | 1,223 | 1,224 | 1,222 | |||||||||||||||||||
Net earnings/(loss) | $ | 0.60 | $ | 0.49 | $ | 1.04 | $ | (0.55) | |||||||||||||||
Diluted Earnings Per Common Share: | |||||||||||||||||||||||
Net income/(loss) attributable to common shareholders | $ | 733 | $ | 597 | $ | 1,269 | $ | (676) | |||||||||||||||
Weighted average shares of common stock outstanding | 1,225 | 1,223 | 1,224 | 1,222 | |||||||||||||||||||
Effect of dilutive equity awards | 11 | 6 | 11 | — | |||||||||||||||||||
Weighted average shares of common stock outstanding, including dilutive effect | 1,236 | 1,229 | 1,235 | 1,222 | |||||||||||||||||||
Net earnings/(loss) | $ | 0.59 | $ | 0.49 | $ | 1.03 | $ | (0.55) |
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 for the nine months ended September 26, 2020. Therefore, we have excluded the dilutive effects of equity awards for the nine months ended September 26, 2020 as their inclusion would have had an anti-dilutive effect on EPS. Anti-dilutive shares were 8 million for the three months and 7 million for the nine months ended September 25, 2021 and 8 million for the three months and 16 million for the nine months ended September 26, 2020.
Note 17. Segment Reporting
We manage and report our operating results through three reportable segments defined by geographic region: United States, International, and Canada.
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 restructuring activities); in addition to these adjustments, we exclude, when they occur, the impacts of restructuring activities, deal costs, unrealized gains/(losses) on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results), impairment losses, certain non-ordinary course legal and regulatory matters, and equity award compensation expense (excluding restructuring activities). 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.
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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):
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Net sales: | |||||||||||||||||||||||
United States | $ | 4,521 | $ | 4,710 | $ | 13,867 | $ | 14,122 | |||||||||||||||
International | 1,383 | 1,325 | 4,190 | 3,931 | |||||||||||||||||||
Canada | 420 | 406 | 1,276 | 1,193 | |||||||||||||||||||
Total net sales | $ | 6,324 | $ | 6,441 | $ | 19,333 | $ | 19,246 |
Segment Adjusted EBITDA was (in millions):
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Segment Adjusted EBITDA: | |||||||||||||||||||||||
United States | $ | 1,173 | $ | 1,363 | $ | 3,827 | $ | 4,050 | |||||||||||||||
International | 252 | 277 | 821 | 797 | |||||||||||||||||||
Canada | 100 | 103 | 304 | 268 | |||||||||||||||||||
General corporate expenses | (46) | (76) | (187) | (234) | |||||||||||||||||||
Depreciation and amortization (excluding restructuring activities) | (228) | (232) | (677) | (722) | |||||||||||||||||||
Restructuring activities | (15) | (8) | (52) | (12) | |||||||||||||||||||
Deal costs | (2) | (9) | (8) | (9) | |||||||||||||||||||
Unrealized gains/(losses) on commodity hedges | (27) | 70 | 12 | (47) | |||||||||||||||||||
Impairment losses | — | (300) | (343) | (3,399) | |||||||||||||||||||
Certain non-ordinary course legal and regulatory matters | — | — | (62) | — | |||||||||||||||||||
Equity award compensation expense (excluding restructuring activities) | (51) | (41) | (155) | (114) | |||||||||||||||||||
Operating income/(loss) | 1,156 | 1,147 | 3,480 | 578 | |||||||||||||||||||
Interest expense | 415 | 314 | 1,443 | 1,066 | |||||||||||||||||||
Other expense/(income) | (138) | (73) | (191) | (232) | |||||||||||||||||||
Income/(loss) before income taxes | $ | 879 | $ | 906 | $ | 2,228 | $ | (256) |
Net sales by platform were (in millions):
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Taste Elevation | $ | 1,873 | $ | 1,836 | $ | 5,709 | $ | 5,318 | |||||||||||||||
Fast Fresh Meals | 1,590 | 1,561 | 4,674 | 4,668 | |||||||||||||||||||
Easy Meals Made Better | 1,236 | 1,159 | 3,541 | 3,585 | |||||||||||||||||||
Real Food Snacking | 332 | 598 | 1,454 | 1,682 | |||||||||||||||||||
Flavorful Hydration | 440 | 437 | 1,345 | 1,276 | |||||||||||||||||||
Easy Indulgent Desserts | 246 | 244 | 710 | 693 | |||||||||||||||||||
Other | 607 | 606 | 1,900 | 2,024 | |||||||||||||||||||
Total net sales | $ | 6,324 | $ | 6,441 | $ | 19,333 | $ | 19,246 |
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Net sales by product category were (in millions):
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Condiments and sauces | $ | 1,789 | $ | 1,696 | $ | 5,432 | $ | 5,030 | |||||||||||||||
Cheese and dairy | 1,217 | 1,226 | 3,645 | 3,636 | |||||||||||||||||||
Ambient foods | 724 | 691 | 2,059 | 2,128 | |||||||||||||||||||
Frozen and chilled foods | 666 | 669 | 1,997 | 1,929 | |||||||||||||||||||
Meats and seafood | 679 | 637 | 1,958 | 1,871 | |||||||||||||||||||
Refreshment beverages | 443 | 438 | 1,352 | 1,281 | |||||||||||||||||||
Coffee | 200 | 218 | 614 | 808 | |||||||||||||||||||
Infant and nutrition | 115 | 113 | 341 | 338 | |||||||||||||||||||
Desserts, toppings and baking | 277 | 274 | 801 | 780 | |||||||||||||||||||
Nuts and salted snacks | 6 | 250 | 458 | 754 | |||||||||||||||||||
Other | 208 | 229 | 676 | 691 | |||||||||||||||||||
Total net sales | $ | 6,324 | $ | 6,441 | $ | 19,333 | $ | 19,246 |
Note 18. Other Financial Data
Condensed Consolidated Statements of Income Information
Other expense/(income) consists of the following (in millions):
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | September 25, 2021 | September 26, 2020 | ||||||||||||||||||||
Amortization of prior service costs/(credits) | $ | (2) | $ | (31) | $ | (5) | $ | (92) | |||||||||||||||
Net pension and postretirement non-service cost/(benefit)(a) | (55) | (45) | (162) | (131) | |||||||||||||||||||
Loss/(gain) on sale of business(b) | (76) | — | (11) | 2 | |||||||||||||||||||
Interest income | (4) | (6) | (13) | (23) | |||||||||||||||||||
Foreign exchange losses/(gains) | (26) | 57 | (56) | 81 | |||||||||||||||||||
Derivative losses/(gains) | 23 | (50) | 54 | (77) | |||||||||||||||||||
Other miscellaneous expense/(income) | 2 | 2 | 2 | 8 | |||||||||||||||||||
Other expense/(income) | $ | (138) | $ | (73) | $ | (191) | $ | (232) |
(a) Excludes amortization of prior service costs/(credits).
(b) Includes a gain on the remeasurement of a disposal group that was reclassified as held and used in the third quarter of 2021.
We present all non-service cost components of net pension cost/(benefit) and net postretirement cost/(benefit) within other expense/(income) on our condensed consolidated statements of income. See Note 11, 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 12, Financial Instruments, for information related to our derivative impacts.
Other expense/(income) was $138 million of income for the three months ended September 25, 2021 compared to $73 million of income for the three months ended September 26, 2020. This change was primarily driven by a $26 million net foreign exchange gain in the third quarter of 2021 compared to a $57 million net foreign exchange loss in the third quarter of 2020, a $76 million net gain on sales of businesses in the third quarter of 2021, primarily related to a business in our International segment that no longer met the held for sale criteria, and a $10 million increase in net pension and postretirement non-service benefits as compared to the prior year period. These impacts were partially offset by a $23 million net loss on derivative activities in the third quarter of 2021 compared to a $50 million net gain on derivative activities in the third quarter of 2020 and a $29 million decrease in amortization of prior service credits as compared to the prior year period.
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Other expense/(income) was $191 million of income for the nine months ended September 25, 2021 compared to $232 million of income for the nine months ended September 26, 2020. This change was primarily driven by a $54 million net loss on derivative activities in 2021 compared to a $77 million net gain on derivative activities in 2020, and an $87 million decrease in amortization of prior service credits as compared to the prior year period. These impacts were partially offset by a $56 million net foreign exchange gain in 2021 compared to an $81 million net foreign exchange loss in 2020, a $31 million increase in net pension and postretirement non-service benefits as compared to the prior year period, and an $11 million net gain on sales of businesses in 2021 compared to a $2 million net loss on sales of businesses in 2020.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Description of the Company:
We manufacture and market food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products throughout the world.
We manage and report our operating results through three reportable segments defined by geographic region: United States, International, and Canada.
See Note 17, Segment Reporting, in Item 1, Financial Statements, for our financial information by segment.
Items Affecting Comparability of Financial Results
Impairment Losses:
Our results of operations reflect goodwill impairment losses of $265 million and intangible asset impairment losses of $78 million for the nine months ended September 25, 2021 compared to goodwill impairment losses of $2.3 billion and intangible asset impairment losses of $1.1 billion for the nine months ended September 26, 2020. See Note 8, Goodwill and Intangible Assets, in Item 1, Financial Statements, for additional information on these impairment losses.
COVID-19 Impacts:
We have been actively monitoring the impact of COVID-19 on our business. During the nine months ended September 26, 2020, particularly in March and April 2020, we experienced consolidated net sales growth as higher demand for our retail products more than offset declines in our foodservice business. During the nine months ended September 25, 2021, we continued to experience strong retail demand compared to pre-pandemic periods. However, retail consumption declined when compared to the comparable 2020 period based on the strong consumer demand early on in the COVID-19 pandemic, particularly in March and April 2020. In the second and third quarters of 2021, our foodservice business experienced increased consumer demand compared to the comparable prior year periods, which were negatively impacted by the COVID-19 pandemic. We continue to see decreased foodservice demand in certain parts of our global business, including the United States and Canada, compared to pre-pandemic periods. COVID-19 and its impacts are unprecedented and continuously evolving, and the long-term impacts to our financial condition and results of operations are still uncertain.
See Liquidity and Capital Resources for additional information related to the impact of COVID-19 on our overall results. For information related to the impact of COVID-19 on our segment results see Results of Operations by Segment.
Inflation and Supply Chain Impacts:
During the nine months ended September 25, 2021, we experienced higher than expected commodity costs and supply chain costs, including logistics, procurement, and manufacturing costs, largely due to inflationary pressures. We expect this cost inflation to remain elevated through the remainder of 2021 and to continue into at least the first half of 2022. While these costs have a negative impact on our results of operations, we are currently managing and expect to continue to manage the impact of this inflation through pricing actions and efficiency gains. However, we expect that there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost inflation is incurred. Currently, we expect to experience high-single-digit gross cost inflation as a percentage of cost of products sold in the second half of 2021, though this is an estimate and could change as circumstances evolve.
Additionally, given the increased demand for our products, we have experienced capacity constraints for certain products when demand has exceeded our current manufacturing capacity. As discussed in Liquidity and Capital Resources, we are working to expand capacity through increased capital investments. However, until these capacity constraints are alleviated, these constraints have the potential to impact our service levels, market share, financial condition, results of operations, or cash flows.
While we have not experienced any material labor shortage to date, we have observed an increasingly competitive labor market. Increased employee turnover, changes in the availability of our workers, or labor shortages in our supply chain could result in increased costs and impact our ability to meet consumer demand, which could negatively affect our financial condition, results of operations, or cash flows.
Results of Operations
We disclose in this report certain non-GAAP financial measures. These non-GAAP financial measures assist management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our underlying operations. For additional information and reconciliations from our condensed consolidated financial statements see Non-GAAP Financial Measures.
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Consolidated Results of Operations
Summary of Results:
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | % Change | September 25, 2021 | September 26, 2020 | % Change | ||||||||||||||||||||||||||||||
(in millions, except per share data) | (in millions, except per share data) | ||||||||||||||||||||||||||||||||||
Net sales | $ | 6,324 | $ | 6,441 | (1.8) | % | $ | 19,333 | $ | 19,246 | 0.5 | % | |||||||||||||||||||||||
Operating income/(loss) | 1,156 | 1,147 | 0.8 | % | 3,480 | 578 | 502.3 | % | |||||||||||||||||||||||||||
Net income/(loss) | 736 | 598 | 23.2 | % | 1,279 | (673) | 289.9 | % | |||||||||||||||||||||||||||
Net income/(loss) attributable to common shareholders | 733 | 597 | 23.0 | % | 1,269 | (676) | 287.6 | % | |||||||||||||||||||||||||||
Diluted EPS | 0.59 | 0.49 | 20.4 | % | 1.03 | (0.55) | 287.3 | % |
Net Sales:
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | % Change | September 25, 2021 | September 26, 2020 | % Change | ||||||||||||||||||||||||||||||
(in millions) | (in millions) | ||||||||||||||||||||||||||||||||||
Net sales | $ | 6,324 | $ | 6,441 | (1.8) | % | $ | 19,333 | $ | 19,246 | 0.5 | % | |||||||||||||||||||||||
Organic Net Sales(a) | 6,260 | 6,182 | 1.3 | % | 18,566 | 18,466 | 0.5 | % |
(a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Three Months Ended September 25, 2021 Compared to the Three Months Ended September 26, 2020:
Net sales decreased 1.8% to $6.3 billion for the three months ended September 25, 2021 compared to $6.4 billion for the three months ended September 26, 2020, including the unfavorable impact of divestitures (4.0 pp) and the favorable impact of foreign currency (0.9 pp). Organic Net Sales increased 1.3% to $6.3 billion for the three months ended September 25, 2021 compared to $6.2 billion for the three months ended September 26, 2020, primarily driven by higher pricing (1.5 pp), which more than offset unfavorable volume/mix (0.2 pp). Pricing was higher across all segments, while volume/mix was unfavorable in our Canada and United States segments and flat in our International segment.
Nine Months Ended September 25, 2021 Compared to the Nine Months Ended September 26, 2020:
Net sales increased 0.5% to $19.3 billion for the nine months ended September 25, 2021 compared to $19.2 billion for the nine months ended September 26, 2020, including the favorable impact of foreign currency (1.6 pp) and the unfavorable impact of divestitures (1.6 pp). Organic Net Sales increased 0.5% to $18.6 billion for the nine months ended September 25, 2021 compared to $18.5 billion for the nine months ended September 26, 2020, driven by higher pricing (1.5 pp), which more than offset unfavorable volume/mix (1.0 pp). Pricing was higher across all segments, while volume/mix was unfavorable across all segments.
Net Income/(Loss):
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||
September 25, 2021 | September 26, 2020 | % Change | September 25, 2021 | September 26, 2020 | % Change | ||||||||||||||||||||||||||||||
(in millions) | (in millions) | ||||||||||||||||||||||||||||||||||
Operating income/(loss) | $ | 1,156 | $ | 1,147 | 0.8 | % | 3,480 | 578 | 502.3 | % | |||||||||||||||||||||||||
Net income/(loss) | 736 | 598 | 23.2 | % | 1,279 | (673) | 289.9 | % | |||||||||||||||||||||||||||
Net income/(loss) attributable to common shareholders | 733 | 597 | 23.0 | % | 1,269 | (676) | 287.6 | % | |||||||||||||||||||||||||||
Adjusted EBITDA(a) | 1,479 | 1,667 | (11.3) | % | 4,765 | 4,881 | (2.4) | % |
(a) Adjusted EBITDA is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
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Three Months Ended September 25, 2021 Compared to the Three Months Ended September 26, 2020:
Operating income/(loss) increased to $1.2 billion for the three months ended September 25, 2021 compared to $1.1 billion for the three months ended September 26, 2020, primarily driven by a $300 million non-cash goodwill impairment loss in the prior year period related to the Cheese Transaction, and efficiency gains, higher Organic Net Sales, and lower general corporate expenses. These increases to operating income/(loss) more than offset higher supply chain costs, reflecting inflationary pressure in logistics, procurement, and manufacturing costs; higher commodity costs, including key commodity (which we define as dairy, meat, and coffee) and packaging costs; unrealized losses on commodity hedges in the current year period compared to unrealized gains on commodity hedges in the prior year period; and the unfavorable impact of divestitures.
Net income/(loss) increased 23.2% to $736 million for the three months ended September 25, 2021 compared to $598 million for the three months ended September 26, 2020. This increase was driven by lower tax expense, favorable changes in other expense/(income), and the operating income/(loss) factors discussed above, which more than offset higher interest expense.
•Our effective tax rate for the three months ended September 25, 2021 was an expense of 16.2% on pre-tax income. Our effective tax rate was impacted by a favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and certain favorable net discrete items, primarily the tax impact related to a business in our International segment that no longer met the held for sale criteria and the revaluation of our deferred tax balances due to changes in state tax rates. Our effective tax rate for the three months ended September 26, 2020 was an expense of 34.1% on pre-tax income. Our effective tax rate was unfavorably impacted by certain net discrete items, primarily the revaluation of our deferred tax balances due to changes in international tax laws (7.8%) and non-deductible goodwill impairment (7.1%) related to the Cheese Transaction. These impacts were partially offset by the reversal of uncertain tax position reserves in the U.S. and certain state jurisdictions and favorable changes in estimates of certain 2019 U.S. income and deductions.
•Other expense/(income) was $138 million of income for the three months ended September 25, 2021 compared to $73 million of income for the three months ended September 26, 2020. This change was primarily driven by a $26 million net foreign exchange gain in the third quarter of 2021 compared to a $57 million net foreign exchange loss in the third quarter of 2020, a $76 million net gain on sales of businesses in the third quarter of 2021, primarily related to a business in our International segment that no longer met the held for sale criteria, and a $10 million increase in net pension and postretirement non-service benefits as compared to the prior year period. These impacts were partially offset by a $23 million net loss on derivative activities in the third quarter of 2021 compared to a $50 million net gain on derivative activities in the third quarter of 2020 and a $29 million decrease in amortization of prior service credits as compared to the prior year period.
•Interest expense was $415 million for the three months ended September 25, 2021 compared to $314 million for the three months ended September 26, 2020. This increase was primarily driven by a $147 million loss on extinguishment of debt recognized in the current year period in connection with the Q3 2021 Debt Redemption and the Q3 2021 Repurchases. The remaining change in interest expense was a decrease compared to the prior year period as our long-term debt balance was reduced through tender offers, redemptions, repurchases, and repayments.
Adjusted EBITDA decreased 11.3% to $1.5 billion for the three months ended September 25, 2021 compared to $1.7 billion for the three months ended September 26, 2020, as lower Adjusted EBITDA in the United States, International, and Canada segments more than offset lower general corporate expenses and the favorable impact of foreign currency (0.6 pp).
Nine Months Ended September 25, 2021 Compared to the Nine Months Ended September 26, 2020:
Operating income/(loss) increased to $3.5 billion for the nine months ended September 25, 2021 compared to $578 million for the nine months ended September 26, 2020, primarily driven by lower non-cash impairment losses in the current year period. Non-cash impairment losses were $343 million for the nine months ended September 25, 2021 compared to $3.4 billion for the nine months ended September 26, 2020. The remaining change in operating income/(loss) was a decrease of $154 million, primarily due to higher supply chain costs, reflecting inflationary pressure in logistics, procurement, and manufacturing costs; higher commodity costs, including key commodity and packaging costs; costs relating to the settlement of the previously disclosed SEC investigation; and the unfavorable impact of divestitures. These decreases to operating income/(loss) more than offset efficiency gains, higher Organic Net Sales, unrealized gains on commodity hedges in the current year period compared to unrealized losses on commodity hedges in the prior year period, lower depreciation and amortization expense, lower general corporate expenses, and the favorable impact of foreign currency.
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Net income/(loss) increased 289.9% to income of $1.3 billion for the nine months ended September 25, 2021 compared to a loss of $673 million for the nine months ended September 26, 2020. This increase was driven by the operating income/(loss) factors discussed above (primarily lower non-cash impairment losses in the current year period), which more than offset higher tax expense, higher interest expense, and unfavorable changes in other expense/(income).
•Our effective tax rate for the nine months ended September 25, 2021 was an expense of 42.6% on pre-tax income. Our effective tax rate was unfavorably impacted by certain net discrete items, primarily the tax impact related to the Nuts Transaction (13.0%), the revaluation of our deferred tax balances due to changes in international and state tax rates (9.0%), mainly an increase in U.K. tax rates, and non-deductible goodwill impairments (3.2%). These impacts were partially offset by a favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and the impact of certain net discrete items, including the reversal of uncertain tax position reserves in certain U.S. state and foreign jurisdictions. Our effective tax rate for the nine months ended September 26, 2020 was an expense of 163.1% on pre-tax losses. Our effective tax rate was unfavorably impacted by certain net discrete items, primarily related to non-deductible goodwill impairments (202.8%) and the revaluation of our deferred tax balances due to