# Kraft Heinz Co (KHC) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from Kraft Heinz Co's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1637459/000163745922000018/khc-20211225.htm Accession: 0001637459-22-000018 Filing date: 2022-02-17 Report date: 2021-12-25 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/KHC/ All MD&A years: /company/KHC/mda/ Next year: /company/KHC/mda/fy2022/ (FY 2022) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview Objective: The following discussion provides an analysis of our financial condition and results of operations from management's perspective and should be read in conjunction with the consolidated financial statements and related notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Our objective is to also provide discussion of material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides an understanding of our financial condition, results of operations, and cash flows. See below for discussion and analysis of our financial condition and results of operations for 2021 compared to 2020. See Item 7, Management’s Discussions and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 26, 2020 for a detailed discussion of our financial condition and results of operations for 2020 compared to 2019. 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. During the fourth quarter of 2021, certain organizational changes were announced that will impact our future internal reporting and reportable segments. As a result of these changes, we plan to combine our United States and Canada zones to form the North America zone, and expect to have two reportable segments, North America and International. We expect that any change to our reportable segments will be effective in the second quarter of 2022. See Note 21, Segment Reporting, in Item 8, Financial Statements and Supplementary Data, for our financial information by segment. Acquisitions and Divestitures: In 2021, we completed the sale of certain assets in our global nuts business (the “Nuts Transaction”) as well as the sale of certain assets in our global cheese businesses (the “Cheese Transaction”). The Nuts Transaction and the Cheese Transaction are not, individually or in the aggregate, considered a strategic shift that will have a major effect on our operations or financial results; therefore, the results of these businesses are included in continuing operations through the date of each sale. Additionally, in 2021, we completed the acquisition of Assan Gıda Sanayi ve Ticaret A.Ş. (the “Assan Foods Acquisition”) and BR Spices Indústria e Comércio de Alimentos Ltda (the “BR Spices Acquisition”), both of which are in our International segment. See Note 4, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, for additional information. Items Affecting Comparability of Financial Results Impairment Losses: Our results of operations reflect goodwill impairment losses of $318 million and intangible asset impairment losses of $1.3 billion in 2021 compared to goodwill impairment losses of $2.3 billion and intangible asset impairment losses of $1.1 billion in 2020. See Note 4, Acquisitions and Divestitures, and Note 9, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for additional information on these impairment losses. COVID-19 Impacts: We have been actively monitoring the impact of COVID-19 on our business. In 2020, particularly in March and April, we experienced consolidated net sales growth as higher demand for our retail products more than offset declines in our foodservice business. In 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. Beginning in the second quarter of 2021 and continuing through year end, our foodservice business experienced increased consumer demand compared to the comparable 2020 periods, which were negatively impacted by the COVID-19 pandemic. However, 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. 24 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: In 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 at least 2022. While these costs have a negative impact on our results of operations, we are currently taking measures to mitigate, and expect to continue to take measures to mitigate, 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. Additionally, the pricing actions we take could result in a decrease in market share. Additionally, given the increased demand for our products combined with industry-wide supply chain issues, 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. We have observed an increasingly competitive labor market. Increased employee turnover, changes in the availability of our workers, including as a result of COVID-19-related absences, and labor shortages in our supply chain have resulted in, and could continue to result in, increased costs and have, and could again, impact our ability to meet consumer demand, both of 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 consolidated financial statements see Non-GAAP Financial Measures. Consolidated Results of Operations Summary of Results: [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020","","% Change"],["","(in millions, except per share data)"],["Net sales","$","26,042","","","$","26,185","","","(0.5)","%"],["Operating income/(loss)","3,460","","","2,128","","","62.6","%"],["Net income/(loss)","1,024","","","361","","","183.7","%"],["Net income/(loss) attributable to common shareholders","1,012","","","356","","","184.5","%"],["Diluted EPS","0.82","","","0.29","","","182.8","%"]] [[/GREPCENT_TABLE]] Net Sales: [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020","","% Change"],["","(in millions)"],["Net sales","$","26,042","","","$","26,185","","","(0.5)","%"],["Organic Net Sales(a)","23,714","","","23,293","","","1.8","%"]] [[/GREPCENT_TABLE]] (a)     Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. Fiscal Year 2021 Compared to Fiscal Year 2020: Net sales decreased 0.5% to $26.0 billion in 2021 compared to $26.2 billion in 2020, including the unfavorable impact of divestitures (3.5 pp) and the favorable impact of foreign currency (1.2 pp). Organic Net Sales increased 1.8% to $23.7 billion in 2021 compared to $23.3 billion in 2020, driven by higher pricing (2.3 pp), which more than offset unfavorable volume/mix (0.5 pp). Pricing was higher across all segments, while unfavorable volume/mix in our United States and Canada segments more than offset favorable volume/mix in our International segment. 25 Net Income/(Loss): [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020","","% Change"],["","(in millions)"],["Operating income/(loss)","$","3,460","","","$","2,128","","","62.6","%"],["Net income/(loss)","1,024","","","361","","","183.7","%"],["Net income/(loss) attributable to common shareholders","1,012","","","356","","","184.5","%"],["Adjusted EBITDA(a)","6,371","","","6,669","","","(4.5)","%"]] [[/GREPCENT_TABLE]] (a)    Adjusted EBITDA is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. Fiscal Year 2021 Compared to Fiscal Year 2020: Operating income/(loss) increased to $3.5 billion in 2021 compared to $2.1 billion in 2020, primarily driven by lower non-cash impairment losses in the current year. Non-cash impairment losses were $1.6 billion in 2021 compared to $3.4 billion in 2020. The remaining change in operating income/(loss) was a decrease of $447 million, primarily due to 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; the unfavorable impact of divestitures; higher restructuring expenses in the current period; and costs relating to the settlement of the previously disclosed SEC investigation. These decreases to operating income/(loss) more than offset efficiency gains, higher Organic Net Sales, the favorable impact of foreign currency, lower general corporate expenses, and lower depreciation and amortization expense. Net income/(loss) increased 183.7% to $1.0 billion in 2021 compared to $361 million in 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 interest expense and higher tax expense. Other expense/(income) was flat year over year. •Interest expense was $2.0 billion in 2021 compared to $1.4 billion in 2020. This increase was primarily driven by a $917 million loss on extinguishment of debt recognized in the current year period related to the $6.0 billion reduction in our aggregate principal amount of senior notes from our tender offers, debt redemptions, and open-market debt repurchases in 2021 compared to a $124 million loss on extinguishment of debt recognized in the prior year in connection with our tender offer and debt redemptions in 2020. The 2020 period also included $22 million of interest expense related to the $4.0 billion drawn on our Senior Credit Facility in the first quarter of 2020 and repaid in the second quarter of 2020. The remaining change in interest expense was a decrease of approximately $118 million compared to the prior year period, as our long-term debt balance and associated interest expense were reduced through tender offers, debt redemptions, debt repurchases, and repayments. •Our effective tax rate was 40.1% in 2021 compared to 65.0% in 2020. Our 2021 effective tax rate was unfavorably impacted by rate reconciling items, primarily the tax impacts related to acquisitions and divestitures, which mainly reflect the impacts of the Nuts Transaction and Cheese Transaction, partially offset by current year capital losses; the revaluation of our deferred tax balances due to changes in international and state tax rates, mainly an increase in U.K. tax rates; the impact of the federal tax on GILTI; and non-deductible goodwill impairments. These impacts were partially offset by a favorable geographic mix of pre-tax income in various non-U.S. jurisdictions. Our 2020 effective tax rate was unfavorably impacted by rate reconciling items, primarily related to non-deductible goodwill impairments, the impact of the federal tax on GILTI, and the revaluation of our deferred tax balances due to changes in international tax laws. These impacts were partially offset by a more favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and the favorable impact of establishing certain deferred tax assets for state tax deductions. •Other expense/(income) was $295 million of income in 2021 compared to $296 million of income in 2020. This change was primarily driven by an $86 million net loss on derivative activities in 2021 compared to a $154 million net gain on derivative activities in 2020 and a $115 million decrease in non-cash amortization of postemployment benefit plans prior service credits as compared to the prior year period. These impacts were partially offset by a $101 million net foreign exchange gain in 2021 compared to a $162 million net foreign exchange loss in 2020, a $44 million net gain on sales of businesses in 2021 compared to a $2 million net loss on sales of businesses in 2020, and a $26 million loss on the dissolution of a joint venture in 2020. Adjusted EBITDA decreased 4.5% to $6.4 billion in 2021 compared to $6.7 billion in 2020, including the unfavorable impact of divestitures (2.2 pp) and the favorable impact of foreign currency (0.9 pp). Lower Adjusted EBITDA in the United States more than offset lower general corporate expenses and Adjusted EBITDA growth in our Canada and International segments. 26 Diluted Earnings Per Share (“EPS”): [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020","","% Change"],["","(in millions, except per share data)"],["Diluted EPS","$","0.82","","","$","0.29","","","182.8","%"],["Adjusted EPS(a)","2.93","","","2.88","","","1.7","%"]] [[/GREPCENT_TABLE]] (a)    Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. Fiscal Year 2021 Compared to Fiscal Year 2020: Diluted EPS increased 182.8% to $0.82 in 2021 compared to $0.29 in 2020, primarily driven by the net income/(loss) factors discussed above. [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020","","$ Change","","% Change"],["Diluted EPS","$","0.82","","","$","0.29","","","$","0.53","","","182.8","%"],["Restructuring activities","0.05","","","\u2014","","","0.05"],["Unrealized losses/(gains) on commodity hedges","0.01","","","\u2014","","","0.01"],["Impairment losses","1.07","","","2.59","","","(1.52)"],["Certain non-ordinary course legal and regulatory matters","0.05","","","\u2014","","","0.05"],["Losses/(gains) on sale of business(a)","0.15","","","(0.01)","","","0.16"],["Debt prepayment and extinguishment costs","0.59","","","0.08","","","0.51"],["Certain significant discrete income tax items","0.19","","","(0.07)","","","0.26"],["Adjusted EPS(b)","$","2.93","","","$","2.88","","","$","0.05","","","1.7","%"],["Key drivers of change in Adjusted EPS(b):"],["Results of operations","","","","","$","(0.08)"],["Results of divested operations","","","","","(0.10)"],["Interest expense","","","","","0.09"],["Other expense/(income)","","","","","(0.02)"],["Effective tax rate","","","","","0.18"],["Effect of dilutive equity awards(c)","","","","","(0.02)"],["","","","","","$","0.05"]] [[/GREPCENT_TABLE]] (a)    Includes a gain on the remeasurement of a disposal group that was reclassified as held and used in the third quarter of 2021. See Note 4, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, for additional information. (b)     Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. (c)    Represents the impact of changes in weighted average shares outstanding, primarily due to the dilutive effect of outstanding equity awards. Adjusted EPS increased 1.7% to $2.93 in 2021 compared to $2.88 in 2020 primarily driven by lower taxes on adjusted earnings, lower interest expense, and lower depreciation and amortization costs, which more than offset lower Adjusted EBITDA, which includes the impact of our divestitures, higher equity award compensation expense, and unfavorable changes in other expense/(income). Results of Operations by Segment Management evaluates segment performance based on several factors, including net sales, Organic 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 divestiture-related license income (e.g., income related to the sale of licenses in connection with the Cheese Transaction), 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. 27 Under highly inflationary accounting, the financial statements of a subsidiary are remeasured into our reporting currency (U.S. dollars) based on the legally available exchange rate at which we expect to settle the underlying transactions. Exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in other expense/(income) on our consolidated statement of income, as nonmonetary currency devaluation, rather than accumulated other comprehensive income/(losses) on our consolidated balance sheet, until such time as the economy is no longer considered highly inflationary. See Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, for additional information. Net Sales: [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020"],["","(in millions)"],["Net sales:"],["United States","$","18,604","","","$","19,204"],["International","5,691","","","5,341"],["Canada","1,747","","","1,640"],["Total net sales","$","26,042","","","$","26,185"]] [[/GREPCENT_TABLE]] Organic Net Sales: [[GREPCENT_TABLE]] [["","2021 Compared to 2020"],["","December 25, 2021","","December 26, 2020"],["","(in millions)"],["Organic Net Sales(a):"],["United States","$","16,667","","","$","16,403"],["International","5,463","","","5,299"],["Canada","1,584","","","1,591"],["Total Organic Net Sales","$","23,714","","","$","23,293"]] [[/GREPCENT_TABLE]] (a)     Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. Drivers of the changes in net sales and Organic Net Sales were: [[GREPCENT_TABLE]] [["","Net Sales","","Currency","","Acquisitions and Divestitures","","Organic Net Sales","","Price","","Volume/Mix"],["2021 Compared to 2020"],["United States","(3.1)","%","","0.0 pp","","(4.7) pp","","1.6","%","","2.1 pp","","(0.5) pp"],["International","6.5","%","","3.4 pp","","0.0 pp","","3.1","%","","2.6 pp","","0.5 pp"],["Canada","6.5","%","","7.0 pp","","(0.1) pp","","(0.4)","%","","2.9 pp","","(3.3) pp"],["Kraft Heinz","(0.5)","%","","1.2 pp","","(3.5) pp","","1.8","%","","2.3 pp","","(0.5) pp"]] [[/GREPCENT_TABLE]] 28 Adjusted EBITDA: [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020"],["","(in millions)"],["Segment Adjusted EBITDA:"],["United States","$","5,157","","","$","5,557"],["International","1,066","","","1,058"],["Canada","419","","","389"],["General corporate expenses","(271)","","","(335)"],["Depreciation and amortization (excluding restructuring activities)","(910)","","","(955)"],["Divestiture-related license income","4","","","\u2014"],["Restructuring activities","(84)","","","(15)"],["Deal costs","(11)","","","(8)"],["Unrealized gains/(losses) on commodity hedges","(17)","","","6"],["Impairment losses","(1,634)","","","(3,413)"],["Certain non-ordinary course legal and regulatory matters","(62)","","","\u2014"],["Equity award compensation expense (excluding restructuring activities)","(197)","","","(156)"],["Operating income/(loss)","3,460","","","2,128"],["Interest expense","2,047","","","1,394"],["Other expense/(income)","(295)","","","(296)"],["Income/(loss) before income taxes","$","1,708","","","$","1,030"]] [[/GREPCENT_TABLE]] United States: [[GREPCENT_TABLE]] [["","2021 Compared to 2020"],["","December 25, 2021","","December 26, 2020","","% Change"],["","(in millions)"],["Net sales","$","18,604","","","$","19,204","","","(3.1)","%"],["Organic Net Sales(a)","16,667","","","16,403","","","1.6","%"],["Segment Adjusted EBITDA","5,157","","","5,557","","","(7.2)","%"]] [[/GREPCENT_TABLE]] (a)     Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. Fiscal Year 2021 Compared to Fiscal Year 2020: Net sales decreased 3.1% to $18.6 billion in 2021 compared to $19.2 billion in 2020, including the unfavorable impact of divestitures (4.7 pp). Organic Net Sales increased 1.6% to $16.7 billion in 2021 compared to $16.4 billion in 2020, driven by higher pricing (2.1 pp), which more than offset unfavorable volume/mix (0.5 pp). Higher pricing was primarily driven by increases to mitigate rising input costs. Unfavorable volume/mix was primarily due to extraordinary COVID-19-related retail takeaway and the negative impact from exiting the McCafé licensing agreement, both in the prior year period, which more than offset higher foodservice sales and favorable changes in retail inventory levels versus the prior year period. Segment Adjusted EBITDA decreased 7.2% to $5.2 billion in 2021 compared to $5.6 billion in 2020, including the unfavorable impact of divestitures (2.5 pp). The remaining change was primarily due to higher commodity costs, including key commodity and packaging costs; higher supply chain costs, reflecting inflationary pressure in logistics, procurement, and manufacturing costs; and lower volume more than offset higher pricing and efficiency gains. International: [[GREPCENT_TABLE]] [["","2021 Compared to 2020"],["","December 25, 2021","","December 26, 2020","","% Change"],["","(in millions)"],["Net sales","$","5,691","","","$","5,341","","","6.5","%"],["Organic Net Sales(a)","5,463","","","5,299","","","3.1","%"],["Segment Adjusted EBITDA","1,066","","","1,058","","","0.7","%"]] [[/GREPCENT_TABLE]] (a)    Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. 29 Fiscal Year 2021 Compared to Fiscal Year 2020: Net sales increased 6.5% to $5.7 billion in 2021 compared to $5.3 billion in 2020, including the favorable impact of foreign currency (3.4 pp). Acquisitions and divestitures had an insignificant impact on net sales. Organic Net Sales increased 3.1% to $5.5 billion in 2021 compared to $5.3 billion in 2020, driven by higher pricing (2.6 pp) and favorable volume/mix (0.5 pp). Higher pricing included increases across markets primarily to mitigate rising input costs. Favorable volume/mix was primarily driven by higher foodservice sales in the current year period. Segment Adjusted EBITDA increased 0.7% to $1.1 billion in 2021 compared to $1.1 billion in 2020, primarily driven by efficiency gains, higher pricing, favorable mix, and the favorable impact of foreign currency (3.7 pp), which more than offset higher supply chain costs, reflecting inflationary pressure in manufacturing, procurement, and logistics; higher commodity costs; and lower volume. Canada: [[GREPCENT_TABLE]] [["","2021 Compared to 2020"],["","December 25, 2021","","December 26, 2020","","% Change"],["","(in millions)"],["Net sales","$","1,747","","","$","1,640","","","6.5","%"],["Organic Net Sales(a)","1,584","","","1,591","","","(0.4)","%"],["Segment Adjusted EBITDA","419","","","389","","","7.8","%"]] [[/GREPCENT_TABLE]] (a)    Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. Fiscal Year 2021 Compared to Fiscal Year 2020: Net sales increased 6.5% to $1.7 billion in 2021 compared to $1.6 billion in 2020, including the favorable impact of foreign currency (7.0 pp) and the unfavorable impact of divestitures (0.1 pp). Organic Net Sales decreased 0.4% to $1.6 billion in 2021 compared to $1.6 billion in 2020, due to unfavorable volume/mix (3.3 pp), which more than offset higher pricing (2.9 pp). Unfavorable volume/mix was primarily due to extraordinary COVID-19-related retail takeaway in the prior year period, which more than offset higher foodservice sales in the current year period. Pricing was higher primarily driven by increases to mitigate rising input costs, particularly in condiments and sauces and foodservice. Segment Adjusted EBITDA increased 7.8% to $419 million in 2021 compared to $389 million in 2020, primarily driven by higher pricing, efficiency gains, and the favorable impact of foreign currency (7.1 pp), which more than offset lower volume; higher supply chain costs, reflecting inflationary pressure in manufacturing, procurement, and logistics; and higher commodity costs. Liquidity and Capital Resources We believe that cash generated from our operating activities and Senior Credit Facility will provide sufficient liquidity to meet our working capital needs, repayments of long-term debt, future contractual obligations, payment of our anticipated quarterly dividends, planned capital expenditures, restructuring expenditures, and contributions to our postemployment benefit plans for the next 12 months and to fund our announced acquisitions. An additional potential source of liquidity is access to capital markets. We intend to use our cash on hand for daily funding requirements. Acquisitions and Divestitures: In the second quarter of 2021, we received approximately $3.4 billion of cash consideration following the closing of the Nuts Transaction. In connection with the Nuts Transaction, we paid approximately $700 million of cash taxes in the second half of 2021, primarily to U.S. federal and state tax authorities. We primarily utilized the post-tax transaction proceeds, along with cash on hand, to fund opportunistic repayments of long-term debt, including our tender offers in the second quarter of 2021 and our debt redemption and open market debt repurchases in the third quarter of 2021. In the fourth quarter of 2021, we received approximately $3.2 billion of cash consideration following the closing of the Cheese Transaction. In connection with the Cheese Transaction, we expect to pay cash taxes of approximately $620 million in the first half of 2022, primarily to U.S. federal and state tax authorities. We primarily utilized the post-tax transaction proceeds to fund our open market debt repurchases and tender offer in the fourth quarter of 2021. 30 Additionally, in the fourth quarter of 2021, we completed the Assan Foods Acquisition, which included cash consideration of approximately $70 million, and the BR Spices Acquisition for an insignificant amount of cash consideration. In January 2022, we closed on our purchase of a majority stake in Just Spices GmbH for cash consideration of approximately $243 million. We expect to close on our purchase of a majority stake in Companhia Hemmer Indústria e Comércio in the first half of 2022 for cash consideration of approximately 1.2 billion Brazilian reais (approximately $211 million at December 25, 2021). See Note 4, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, for additional information on our acquisitions and divestitures. See Note 17, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information on our debt transactions. Cash Flow Activity for 2021 Compared to 2020: Net Cash Provided by/Used for Operating Activities: Net cash provided by operating activities was $5.4 billion for the year ended December 25, 2021 compared to $4.9 billion for the year ended December 26, 2020. This increase was primarily driven by proceeds from the sale of licenses in connection with the Cheese Transaction, favorable changes in accounts payable compared to the prior year, largely due to favorable payment terms, and lower cash outflows for inventories. These impacts were partially offset by higher cash tax payments on divestitures in 2021 related to the Nuts Transaction, higher cash outflows for variable compensation in 2021 compared to 2020, higher cash outflows from increased promotional activity versus the prior year period, and lower Adjusted EBITDA. Net Cash Provided by/Used for Investing Activities: Net cash provided by investing activities was $4.0 billion for the year ended December 25, 2021 compared to net cash used for investing activities of $522 million for the year ended December 26, 2020. This change was primarily driven by proceeds from the sale of net assets in connection with the Nuts Transaction and the Cheese Transaction in the current year, partially offset by higher capital expenditures in 2021 compared to 2020 and the payments for the Assan Foods Acquisition and the BR Spices Acquisition in 2021. We had 2021 capital expenditures of $905 million compared to 2020 capital expenditures of $596 million. This increase is primarily due to increased capital investments, largely for capacity expansion, and the COVID-19 pandemic, which caused delays in our planned 2020 projects and spend. We expect 2022 capital expenditures to be approximately $1.0 billion, primarily driven by increased capital investments, largely for capacity expansion and cost improvement projects, maintenance, and technology. Net Cash Provided by/Used for Financing Activities: Net cash used for financing activities was $9.3 billion for the year ended December 25, 2021 compared to $3.3 billion for the year ended December 26, 2020. This change was primarily due to prior year proceeds from long-term debt issuances, higher repayments of long-term debt and debt prepayment and extinguishment costs in 2021 compared to 2020, and higher cash outflows related to equity awards in 2021 compared to 2020. See Note 17, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information on our long-term debt activity. Cash Held by International Subsidiaries: Of the $3.4 billion cash and cash equivalents on our consolidated balance sheet at December 25, 2021, $867 million was held by international subsidiaries. Subsequent to January 1, 2018, we consider the unremitted earnings of certain international subsidiaries that impose local country taxes on dividends to be indefinitely reinvested. For those undistributed earnings considered to be indefinitely reinvested, our intent is to reinvest these funds in our international operations, and our current plans do not demonstrate a need to repatriate the accumulated earnings to fund our U.S. cash requirements. The amount of unrecognized deferred tax liabilities for local country withholding taxes that would be owed related to our 2018 through 2021 accumulated earnings of certain international subsidiaries is approximately $50 million. Our undistributed historic earnings in foreign subsidiaries through December 30, 2017 are currently not considered to be indefinitely reinvested. Related to these undistributed historic earnings, we had recorded a deferred tax liability of approximately $10 million on approximately $135 million of historic earnings at December 25, 2021 and a deferred tax liability of approximately $20 million on approximately $300 million of historic earnings at December 26, 2020. The deferred tax liability relates to local withholding taxes that will be owed when this cash is distributed. 31 Trade Payables Programs: In order to manage our cash flow and related liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. Our current payment terms with our suppliers, which we deem to be commercially reasonable, generally range from 0 to 200 days. We also maintain agreements with third party administrators that allow participating suppliers to track payment obligations from us, and, at the sole discretion of the supplier, sell one or more of those payment obligations to participating financial institutions. We have no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. Supplier participation in these agreements is voluntary. We estimate that the amounts outstanding under these programs were $820 million at December 25, 2021 and $740 million at December 26, 2020. Borrowing Arrangements: In February 2020, Fitch and S&P downgraded our long-term credit rating from BBB- to BB+. These downgrades adversely affect our ability to access the commercial paper market. In addition, we could experience an increase in interest costs as a result of the downgrades. These downgrades do not constitute a default or event of default under any of our debt instruments. Limitations on or elimination of our ability to access the commercial paper program may require us to borrow under the Senior Credit Facility, if necessary to meet liquidity needs. Our ability to borrow under the Senior Credit Facility is not affected by the downgrades. As of the date of this filing, our long-term debt is rated BB+ by both Fitch and S&P and Baa3 by Moody’s, with a positive outlook from Fitch and S&P and a stable outlook from Moody’s. We have historically obtained funding through our U.S. and European commercial paper programs. We had no commercial paper outstanding at December 25, 2021, at December 26, 2020, or during the years ended December 25, 2021 or December 26, 2020. We maintain our Senior Credit Facility, which, following the execution of a commitment increase amendment to the Credit Agreement in October 2020 and the extension letter agreement in April 2021, provides for a revolving commitment of $4.1 billion through July 6, 2023 and $4.0 billion through July 6, 2025. Subject to certain conditions, we may increase the amount of revolving commitments and/or add tranches of term loans in a combined aggregate amount of up to $900 million. 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 December 25, 2021, at December 26, 2020, or during the years ended December 25, 2021 and December 28, 2019. The Credit Agreement 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. We were in compliance with all financial covenants as of December 25, 2021. Long-Term Debt: Our long-term debt, including the current portion, was $21.8 billion at December 25, 2021 and $28.3 billion at December 26, 2020. This decrease was primarily driven by the approximately $4.1 billion aggregate principal amount of senior notes that were settled in connection with tender offers in 2021, the approximately $1.2 billion aggregate principal amount of senior notes redeemed in 2021, the approximately $738 million aggregate principal amount of senior notes repurchased under Rule 10b5-1 plans in 2021, the $111 million aggregate principal amount of senior notes that were repaid at maturity in February 2021, and the $34 million aggregate principal amount of senior notes that were repaid at maturity in September 2021. We used cash on hand and proceeds from the Nuts Transaction to fund our tender offers in the second quarter of 2021 and our debt redemption and open market debt repurchases in the third quarter of 2021 and to pay fees and expenses in connection therewith. We used proceeds from the Cheese Transaction to fund our open market repurchases and tender offer in the fourth quarter of 2021 and to pay fees and expenses in connection therewith. We have aggregate principal amounts of senior notes of approximately $6 million maturing in March 2022, approximately $381 million maturing in June 2022, and approximately $315 million maturing in August 2022. We may from time to time seek to retire or purchase our outstanding debt through redemptions, tender offers, cash purchases, prepayments, refinancing, exchange offers, open market or privately-negotiated transactions, Rule 10b5-1 plans, or otherwise. Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all financial covenants during the year ended December 25, 2021. See Note 17, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information on our long-term debt activity. See Note 4, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, for additional information on the Nuts Transaction and Cheese Transaction. 32 Equity and Dividends: We paid common stock dividends of $2.0 billion in 2021, 2020, and 2019. Additionally, in the first quarter of 2022, our Board declared a cash dividend of $0.40 per share of common stock, which is payable on March 25, 2022 to stockholders of record on March 11, 2022. The declaration of dividends is subject to the discretion of our Board and depends on various factors, including our net income, financial condition, cash requirements, future prospects, and other factors that our Board deems relevant to its analysis and decision making. Aggregate Contractual Obligations: Related to our current and long-term material cash requirements, the following table summarizes our aggregate contractual obligations at December 25, 2021, which we expect to primarily fund with cash from operating activities (in millions): [[GREPCENT_TABLE]] [["","Material Cash Requirements"],["","2022","","2023-2024","","2025-2026","","2027 and Thereafter","","Total"],["Long-term debt(a)","$","1,640","","","$","3,305","","","$","3,644","","","$","28,645","","","$","37,234"],["Finance leases(b)","46","","","56","","","34","","","169","","","305"],["Operating leases(c)","155","","","214","","","150","","","229","","","748"],["Purchase obligations(d)","541","","","772","","","401","","","282","","","1,996"],["Other long-term liabilities(e)","39","","","125","","","98","","","167","","","429"],["Total","$","2,421","","","$","4,472","","","$","4,327","","","$","29,492","","","$","40,712"]] [[/GREPCENT_TABLE]] (a)    Amounts represent the expected cash payments of our long-term debt, including interest on variable and fixed rate long-term debt. Interest on variable rate long-term debt is calculated based on interest rates at December 25, 2021. (b)    Amounts represent the expected cash payments of our finance leases, including expected cash payments of interest expense. (c)    Operating leases represent the minimum rental commitments under non-cancellable operating leases net of sublease income. (d)    We have purchase obligations for materials, supplies, property, plant and equipment, and co-packing, storage, and distribution services based on projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology, and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. Several of these obligations are long-term and are based on minimum purchase requirements. Certain purchase obligations contain variable pricing components, and, as a result, actual cash payments are expected to fluctuate based on changes in these variable components. Due to the proprietary nature of some of our materials and processes, certain supply contracts contain penalty provisions for early terminations. We do not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. (e)    Other long-term liabilities primarily consist of estimated payments for the one-time toll charge related to 2017 U.S. tax reform, as well as postretirement benefit commitments. Certain other long-term liabilities related to income taxes, insurance accruals, and other accruals included on the consolidated balance sheet are excluded from the above table as we are unable to estimate the timing of payments for these items. Pension plan contributions were $15 million in 2021. We estimate that 2022 pension plan contributions will be approximately $12 million. Postretirement benefit plan contributions were $12 million in 2021. We estimate that 2022 postretirement benefit plan contributions will be approximately $13 million. Estimated future contributions take into consideration current economic conditions, which at this time are expected to have minimal impact on expected contributions for 2022. Beyond 2022, we are unable to reliably estimate the timing of contributions to our pension or postretirement plans. Our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual pension or postretirement asset performance or interest rates, or other factors. As such, estimated pension and postretirement plan contributions for 2022 have been excluded from the above table. At December 25, 2021, the amount of net unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was approximately $521 million. The timing of payments will depend on the progress of examinations with tax authorities. We do not expect a significant tax payment related to these obligations within the next year. We are unable to make a reasonably reliable estimate as to if or when any significant cash settlements with taxing authorities may occur; therefore, we have excluded the amount of net unrecognized tax benefits from the above table. Supplemental Guarantor Information: The Kraft Heinz Company (as the “Parent Guarantor”) fully and unconditionally guarantees all the senior unsecured registered notes (collectively, the “KHFC Senior Notes”) issued by Kraft Heinz Foods Company (“KHFC”), our 100% owned operating subsidiary (the “Guarantee”). See Note 17, Debt, in Item 8, Financial Statements and Supplementary Data, for additional descriptions of these guarantees. The payment of the principal, premium, and interest on the KHFC Senior Notes is fully and unconditionally guaranteed on a senior unsecured basis by the Parent Guarantor, pursuant to the terms and conditions of the applicable indenture. None of the Parent Guarantor’s subsidiaries guarantee the KHFC Senior Notes. 33 The Guarantee is the Parent Guarantor’s senior unsecured obligation and is: (i) pari passu in right of payment with all of the Parent Guarantor’s existing and future senior indebtedness; (ii) senior in right of payment to all of the Parent Guarantor’s future subordinated indebtedness; (iii) effectively subordinated to all of the Parent Guarantor’s existing and future secured indebtedness to the extent of the value of the assets secured by that indebtedness; and (iv) effectively subordinated to all existing and future indebtedness and other liabilities of the Parent Guarantor’s subsidiaries. The KHFC Senior Notes are obligations exclusively of KHFC and the Parent Guarantor and not of any of the Parent Guarantor’s other subsidiaries. Substantially all of the Parent Guarantor’s operations are conducted through its subsidiaries. The Parent Guarantor’s other subsidiaries are separate legal entities that have no obligation to pay any amounts due under the KHFC Senior Notes or to make any funds available therefor, whether by dividends, loans, or other payments. Except to the extent the Parent Guarantor is a creditor with recognized claims against its subsidiaries, all claims of creditors (including trade creditors) and holders of preferred stock, if any, of its subsidiaries will have priority with respect to the assets of such subsidiaries over its claims (and therefore the claims of its creditors, including holders of the KHFC Senior Notes). Consequently, the KHFC Senior Notes are structurally subordinated to all liabilities of the Parent Guarantor’s subsidiaries and any subsidiaries that it may in the future acquire or establish. The obligations of the Parent Guarantor will terminate and be of no further force or effect in the following circumstances: (i) (a) KHFC’s exercise of its legal defeasance option or, except in the case of a guarantee of any direct or indirect parent of KHFC, covenant defeasance option in accordance with the applicable indenture, or KHFC’s obligations under the applicable indenture have been discharged in accordance with the terms of the applicable indenture or (b) as specified in a supplemental indenture to the applicable indenture; and (ii) the Parent Guarantor has delivered to the trustee an officer’s certificate and an opinion of counsel, each stating that all conditions precedent provided for in the applicable indenture have been complied with. The Guarantee is limited by its terms to an amount not to exceed the maximum amount that can be guaranteed by the Parent Guarantor without rendering the Guarantee voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. The following tables present summarized financial information for the Parent Guarantor and KHFC (as subsidiary issuer of the KHFC Senior Notes) (together, the “Obligor Group”), on a combined basis after the elimination of all intercompany balances and transactions between the Parent Guarantor and subsidiary issuer and investments in any subsidiary that is a non-guarantor. Summarized Statement of Income [[GREPCENT_TABLE]] [["","For the Year Ended"],["","December 25, 2021"],["Net sales","$","17,374"],["Gross profit(a)","6,270"],["Goodwill impairment losses","230"],["Intercompany service fees and other recharges","3,813"],["Operating income/(loss)","1,254"],["Equity in earnings/(losses) of subsidiaries","1,360"],["Net income/(loss)","1,012"],["Net income/(loss) attributable to common shareholders","1,012"]] [[/GREPCENT_TABLE]] (a)    In 2021, the Obligor Group recorded $435 million of net sales to the non-guarantor subsidiaries and $31 million of purchases from the non-guarantor subsidiaries. 34 Summarized Balance Sheets [[GREPCENT_TABLE]] [["","December 25, 2021"],["ASSETS"],["Current assets","$","6,484"],["Current assets due from affiliates(a)","2,890"],["Non-current assets","5,709"],["Goodwill","8,860"],["Intangible assets, net","2,222"],["Non-current assets due from affiliates(b)","207"],["LIABILITIES"],["Current liabilities","$","5,091"],["Current liabilities due to affiliates(a)","5,922"],["Non-current liabilities","23,120"],["Non-current liabilities due to affiliates(b)","600"]] [[/GREPCENT_TABLE]] (a)    Represents receivables and short-term lending due from and payables and short-term lending due to non-guarantor subsidiaries. (b)    Represents long-term lending due from and long-term borrowings due to non-guarantor subsidiaries. Commodity Trends We purchase and use large quantities of commodities, including dairy products, meat products, coffee beans, soybean and vegetable oils, sugar and other sweeteners, tomatoes, potatoes, corn products, wheat products, nuts, and cocoa products, to manufacture our products. In addition, we purchase and use significant quantities of resins, fiberboard, metals, and cardboard to package our products, and we use electricity, diesel fuel, and natural gas in the manufacturing and distribution of our products. We continuously monitor worldwide supply and cost trends of these commodities. Following the closing of the Nuts Transaction in the second quarter of 2021, our purchase and use of nuts has significantly decreased. As such, we no longer consider nuts to be one of our key commodities in the United States and Canada. We define our key commodities in the United States and Canada as dairy, meat, and coffee. In 2021, we experienced cost increases for meat and coffee, while costs for dairy decreased. We also experienced cost increases for packaging materials due to market demand. We anticipate higher commodity costs to continue through at least 2022 due to inflationary pressures. We manage commodity cost volatility primarily through pricing and risk management strategies. As a result of these risk management strategies, our commodity costs may not immediately correlate with market price trends. In 2021, dairy commodities, primarily milk and cheese, were the most significant cost components of our cheese products. Following the closing of the Cheese Transaction, we expect dairy commodities, primarily milk, cream, and cheese, to be the most significant components of our cheese products in 2022. We purchase our dairy raw material requirements from independent third parties, such as agricultural cooperatives and independent processors. Market supply and demand, as well as government programs, significantly influence the prices for milk and other dairy products. Significant cost components of our meat products include pork, beef, and poultry, which we primarily purchase from applicable local markets. Livestock feed costs and the global supply and demand for U.S. meats influence the prices of these meat products. The most significant cost component of our coffee products is coffee beans, which we purchase on global markets. Quality and availability of supply, currency fluctuations, and consumer demand for coffee products impact coffee bean prices. Critical Accounting Estimates Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, includes a summary of the significant accounting policies we used to prepare our consolidated financial statements. The following is a review of the more significant assumptions and estimates as well as accounting policies we used to prepare our consolidated financial statements. 35 Revenue Recognition: Our revenues are primarily derived from customer orders for the purchase of our products. We recognize revenues as performance obligations are fulfilled when control passes to our customers. We record revenues net of variable consideration, including consumer incentives and performance obligations related to trade promotions, excluding taxes, and including all shipping and handling charges billed to customers (accounting for shipping and handling charges that occur after the transfer of control as fulfillment costs). We also record a refund liability for estimated product returns and customer allowances as reductions to revenues within the same period that the revenue is recognized. We base these estimates principally on historical and current period experience factors. We recognize costs paid to third party brokers to obtain contracts as expenses as our contracts are generally less than one year. Advertising, Consumer Incentives, and Trade Promotions: We promote our products with advertising, consumer incentives, and performance obligations related to trade promotions. Consumer incentives and trade promotions include, but are not limited to, discounts, coupons, rebates, performance-based in-store display activities, and volume-based incentives. Variable consideration related to consumer incentive and trade promotion activities is recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization, redemption rates, and/or current period experience factors. We review and adjust these estimates at least quarterly based on actual experience and other information. Advertising expenses are recorded in selling, general and administrative expenses (“SG&A”). For interim reporting purposes, we charge advertising to operations as a percentage of estimated full year sales activity and marketing costs. We then review and adjust these estimates each quarter based on actual experience and other information. In 2021, we updated our definition of advertising expenses to reflect a more comprehensive view of costs that promote our brands to create or stimulate a desire to buy our products. Our definition of advertising expenses now includes advertising production costs, in-store advertising costs, agency fees, brand promotions and events, and sponsorships, in addition to costs to obtain advertising in television, radio, print, digital, and social channels. We have reflected these changes in all historical periods presented. We recorded advertising expenses of $1,039 million in 2021, $1,070 million in 2020, and $976 million in 2019. We also incur market research costs, which are recorded in SG&A but are excluded from advertising expenses. Goodwill and Intangible Assets: As of December 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 $31.3 billion at December 25, 2021. Our indefinite-lived intangible asset balance primarily consists of a number of individual brands, which had an aggregate carrying amount of $39.4 billion as of December 25, 2021. We test our reporting units and brands for impairment annually as of the first day of our second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit or brand is less than its carrying amount. Such events and circumstances could include a sustained decrease in our market capitalization, increased competition or unexpected loss of market share, increased input costs beyond projections, disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster, pandemic, or loss of a customer, supplier, or other significant business relationship), unexpected significant declines in operating results, significant adverse changes in the markets in which we operate, changes in income tax rates, changes in interest rates, or changes in management strategy. We test reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. We test brands for impairment by comparing the estimated fair value of each brand with its carrying amount. If the carrying amount of a reporting unit or brand exceeds its estimated fair value, we record an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed the associated carrying amount of goodwill. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units and brands requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, 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 reporting units or brands might become impaired in the future. Additionally, any decisions to divest certain non-strategic assets has led and could in the future lead to goodwill or intangible asset impairments. In 2020 and 2021, the COVID-19 pandemic has produced 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 36 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 $154 million as of December 25, 2021. A number of factors could result in further future impairments of our foodservice 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, 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. 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. As detailed in Note 9, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, we recorded impairment losses related to goodwill and indefinite-lived intangible assets. Our reporting units and 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 reporting units and brands that have 20% or less excess fair value over carrying amount as of their latest 2021 impairment testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Reporting units with 20% or less fair value over carrying amount had an aggregate goodwill carrying amount of $28.3 billion as of their latest 2021 impairment testing date and included: Enhancers, Specialty, and Away from Home (ESA), Kids, Snacks, and Beverages (KSB), Meal Foundations and Coffee (MFC), Canada Retail, Canada Foodservice, and Puerto Rico. Reporting units with between 20-50% fair value over carrying amount had an aggregate goodwill carrying amount of $2.2 billion as of their latest 2021 impairment testing date and included Northern Europe and Asia. The Continental Europe reporting unit had a fair value over carrying amount in excess of 50% and a goodwill carrying amount of $961 million as of its latest 2021 impairment testing date. Our reporting units that have less than 3% excess fair value over carrying amount as of their latest 2021 impairment testing date are considered at a heightened risk of future impairments and include our Canada Retail and Puerto Rico reporting units, which had an aggregate goodwill carrying amount of $1.4 billion. Additionally, our reporting units with no goodwill carrying amount as of their latest 2021 impairment testing date are at risk of future impairment to the extent there is newly acquired goodwill assigned to the reporting unit and the fair value of the reporting unit (including the acquisition fair value) does not exceed the carrying amount of the reporting unit (including the acquired net assets). Brands with 20% or less fair value over carrying amount had an aggregate carrying amount after impairment of $21.3 billion as of their latest 2021 impairment testing date and included: Kraft, Oscar Mayer, Velveeta, Miracle Whip, Lunchables, Ore-Ida, Maxwell House, Classico, Cool Whip, Jet Puffed, Plasmon, and Wattie’s. The aggregate carrying amount of brands with fair value over carrying amount between 20-50% was $6.5 billion as of their latest 2021 impairment testing date. Although the remaining brands, with a carrying amount of $11.8 billion, have more than 50% excess fair value over carrying amount as of their latest 2021 impairment testing date, these amounts are also associated with the 2013 Heinz Acquisition and the 2015 Merger and are recorded on our 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. Our brands that have less than 3% excess fair value over carrying amount as of their latest 2021 impairment testing date are considered at a heightened risk of future impairments and include our Kraft, Miracle Whip, Ore-Ida, Maxwell House, Classico, and Plasmon brands, which had an aggregate carrying amount of $14.2 billion. We generally utilize the discounted cash flow method under the income approach to estimate the fair value of our reporting units. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each reporting unit (including net sales, cost of products sold, SG&A, depreciation and amortization, working capital, and capital expenditures), income tax rates, long-term growth rates, and a discount rate that appropriately reflects the risks inherent in each future cash flow stream. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies. 37 We utilize the excess earnings method under the income approach to estimate the fair value of certain of our largest brands. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each brand (including net sales, cost of products sold, and SG&A), contributory asset charges, income tax considerations, long-term growth rates, a discount rate that reflects the level of risk associated with the future earnings attributable to the brand, and management’s intent to invest in the brand indefinitely. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies. We utilize the relief from royalty method under the income approach to estimate the fair value of our remaining brands. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net sales for each brand, royalty rates (as a percentage of net sales that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations, long-term growth rates, a discount rate that reflects the level of risk associated with the future cost savings attributable to the brand, and management’s intent to invest in the brand indefinitely. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies. As detailed in Note 4, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, the Cheese Transaction closed in the fourth quarter of 2021. We received total consideration of approximately $3.34 billion, which included approximately $1.59 billion primarily attributed to the Kraft and Velveeta licenses that we granted to Lactalis and approximately $141 million attributed to the Cracker Barrel license that Lactalis granted to us, the amounts of which were based on the estimated fair values of the licensed portion of each brand as of the closing date of the Cheese Transaction. 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. In the fourth quarter of 2021, at the time the licensed rights were granted, we reassessed the remaining fair value of the retained portions of the Kraft and Velveeta brands and recorded a non-cash intangible asset impairment loss related to the Kraft brand of approximately $1.24 billion, which was recognized in SG&A. The discount rates, long-term growth rates, and royalty rates used to estimate the fair values of our reporting units and our brands with 20% or less excess fair value over carrying amount, as well as the goodwill or brand carrying amounts, as of their latest 2021 impairment testing date for each reporting unit or brand, were as follows: [[GREPCENT_TABLE]] [["","Goodwill or Brand Carrying Amount (in billions)","","Discount Rate","","Long-Term Growth Rate","","Royalty Rate"],["","","Minimum","","Maximum","","Minimum","","Maximum","","Minimum","","Maximum"],["Reporting units","$","28.3","","","6.5","%","","7.0","%","","1.0","%","","1.5","%"],["Brands (excess earnings method)","15.0","","","7.0","%","","7.2","%","","0.8","%","","1.5","%"],["Brands (relief from royalty method)","6.2","","","7.0","%","","7.5","%","","0.5","%","","2.0","%","","5.0","%","","20.0","%"]] [[/GREPCENT_TABLE]] Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each annual and interim impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation. However, as it is reasonably possible that changes in assumptions could occur, as a sensitivity measure, we have presented the estimated effects of isolated changes in discount rates, long-term growth rates, and royalty rates on the fair values of our reporting units and brands with 20% or less excess fair value over carrying amount. These estimated changes in fair value are not necessarily representative of the actual impairment that would be recorded in the event of a fair value decline. 38 If we had changed the assumptions used to estimate the fair value of our reporting units and brands with 20% or less excess fair value over carrying amount, as of their latest 2021 impairment testing date for each of these reporting units and brands, these isolated changes, which are reasonably possible to occur, would have led to the following increase/(decrease) in the aggregate fair value of these reporting units and brands (in billions): [[GREPCENT_TABLE]] [["","Discount Rate","","Long-Term Growth Rate","","Royalty Rate"],["","50-Basis-Point","","25-Basis-Point","","100-Basis-Point"],["","Increase","","Decrease","","Increase","","Decrease","","Increase","","Decrease"],["Reporting units","$","(5.6)","","","$","6.8","","","$","3.2","","","$","(2.9)"],["Brands (excess earnings method)","(1.2)","","","1.4","","","0.5","","","(0.5)"],["Brands (relief from royalty method)","(0.5)","","","0.7","","","0.2","","","(0.2)","","","$","0.6","","","$","(0.6)"]] [[/GREPCENT_TABLE]] Definite-lived intangible assets are amortized on a straight-line basis over the estimated periods benefited. We review definite-lived intangible assets for impairment when conditions exist that indicate the carrying amount of the assets may not be recoverable. Such conditions could include significant adverse changes in the business climate, current-period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an asset group will be disposed of before the end of its useful life. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of definite-lived intangible assets held for use, we group assets at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, the loss is calculated based on estimated fair value. Impairment losses on definite-lived intangible assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. See Note 9, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for our impairment testing results. Postemployment Benefit Plans: We maintain various retirement plans for the majority of our employees. These include pension benefits, postretirement health care benefits, and defined contribution benefits. The cost of these plans is charged to expense over an appropriate term based on, among other things, the cost component and whether the plan is active or inactive. Changes in the fair value of our plan assets result in net actuarial gains or losses. These net actuarial gains and losses are deferred into accumulated other comprehensive income/(losses) and amortized within other expense/(income) in future periods using the corridor approach. The corridor is 10% of the greater of the market-related value of the plan’s asset or projected benefit obligation. Any actuarial gains and losses in excess of the corridor are then amortized over an appropriate term based on whether the plan is active or inactive. For our postretirement benefit plans, our 2022 health care cost trend rate assumption will be 5.9%. We established this rate based upon our most recent experience as well as our expectation for health care trend rates going forward. We anticipate the weighted average assumed ultimate trend rate will be 4.8%. The year in which the ultimate trend rate is reached varies by plan, ranging between the years 2022 and 2030. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. Our 2022 discount rate assumption will be 3.0% for service cost and 2.2% for interest cost for our postretirement plans. Our 2022 discount rate assumption will be 3.2% for service cost and 2.6% for interest cost for our U.S. pension plans and 2.4% for service cost and 1.8% for interest cost for our non-U.S. pension plans. We model these discount rates using a portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. Changes in our discount rates were primarily the result of changes in bond yields year-over-year. Our 2022 expected return on plan assets will be 5.0% (net of applicable taxes) for our postretirement plans. Our 2022 expected rate of return on plan assets will be 4.6% for our U.S. pension plans and 2.6% for our non-U.S. pension plans. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current and future asset allocation, and estimates of future long-term returns by asset class. We attempt to maintain our target asset allocation by re-balancing between asset classes as we make contributions and monthly benefit payments. 39 While we do not anticipate further changes in the 2022 assumptions for our U.S. and non-U.S. pension and postretirement benefit plans, as a sensitivity measure, a 100-basis-point change in our discount rate or a 100-basis-point change in the expected rate of return on plan assets would have the following effects, increase/(decrease) in cost (in millions): [[GREPCENT_TABLE]] [["","U.S. Plans","","Non-U.S. Plans"],["","100-Basis-Point","","100-Basis-Point"],["","Increase","","Decrease","","Increase","","Decrease"],["Effect of change in discount rate on pension costs","$","9","","","$","(25)","","","$","10","","","$","(2)"],["Effect of change in expected rate of return on plan assets on pension costs","(43)","","","43","","","(29)","","","29"],["Effect of change in discount rate on postretirement costs","1","","","(1)","","","(1)","","","1"],["Effect of change in expected rate of return on plan assets on postretirement costs","(11)","","","11","","","\u2014","","","\u2014"]] [[/GREPCENT_TABLE]] Income Taxes: We compute our annual tax rate based on the statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we earn income. Significant judgment is required in determining our annual tax rate and in evaluating the uncertainty of our tax positions. We recognize a benefit for tax positions that we believe will more likely than not be sustained upon examination. The amount of benefit recognized is the largest amount of benefit that we believe has more than a 50% probability of being realized upon settlement. We regularly monitor our tax positions and adjust the amount of recognized tax benefit based on our evaluation of information that has become available since the end of our last financial reporting period. The annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the amount of recognized tax benefits, we do not consider information that has become available after the balance sheet date, however we do disclose the effects of new information whenever those effects would be material to our financial statements. Unrecognized tax benefits represent the difference between the amount of benefit taken or expected to be taken in a tax return and the amount of benefit recognized for financial reporting. These unrecognized tax benefits are recorded primarily within other non-current liabilities on the consolidated balance sheets. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, we consider future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, we would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or decrease to income. The resolution of tax reserves and changes in valuation allowances could be material to our results of operations for any period but is not expected to be material to our financial position. New Accounting Pronouncements See Note 3, New Accounting Standards, in Item 8, Financial Statements and Supplementary Data, for a discussion of new accounting pronouncements. Contingencies See Note 16, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, for a discussion of our contingencies. Non-GAAP Financial Measures The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP. To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Organic Net Sales, Adjusted EBITDA, and Adjusted EPS, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income/(loss), diluted EPS, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures. 40 Management uses these non-GAAP financial measures to assist in comparing our performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes do not directly reflect our underlying operations. Management believes that presenting our non-GAAP financial measures (i.e., Organic Net Sales, Adjusted EBITDA, and Adjusted EPS) is useful to investors because it (i) provides investors with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating our results. We believe that the presentation of these non-GAAP financial measures, when considered together with the corresponding U.S. GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting our business than could be obtained absent these disclosures. Organic Net Sales is defined as net sales excluding, when they occur, the impact of currency, acquisitions and divestitures, and a 53rd week of shipments. We calculate the impact of currency on net sales by holding exchange rates constant at the previous year’s exchange rate, with the exception of highly inflationary subsidiaries, for which we calculate the previous year’s results using the current year’s exchange rate. Organic Net Sales is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations. Adjusted EBITDA is defined as net income/(loss) from continuing operations before interest expense, other expense/(income), 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 divestiture-related license income (e.g., income related to the sale of licenses in connection with the Cheese Transaction), restructuring activities, deal costs, unrealized losses/(gains) on commodity hedges, impairment losses, certain non-ordinary course legal and regulatory matters, and equity award compensation expense (excluding restructuring activities). 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. In 2021, we revised the definition of Adjusted EBITDA to adjust for the impact of certain legal and regulatory matters arising outside the ordinary course of our business and divestiture-related license income, as management believes such matters, when they occur, do not directly reflect our underlying operations. Adjusted EPS is defined as diluted EPS excluding, when they occur, the impacts of restructuring activities, deal costs, unrealized losses/(gains) on commodity hedges, impairment losses, certain non-ordinary course legal and regulatory matters, losses/(gains) on the sale of a business, other losses/(gains) related to acquisitions and divestitures (e.g., tax and hedging impacts), nonmonetary currency devaluation (e.g., remeasurement gains and losses), debt prepayment and extinguishment costs, and certain significant discrete income tax items (e.g., U.S. and non-U.S. tax reform), and including, when they occur, adjustments to reflect preferred stock dividend payments on an accrual basis. We believe Adjusted EPS provides important comparability of underlying operating results, allowing investors and management to assess operating performance on a consistent basis. In 2021, we revised the definition of Adjusted EPS to adjust for the impact of certain legal and regulatory matters arising outside the ordinary course of our business and certain significant discrete income tax items beyond U.S. tax reform, as management believes such matters, when they occur, do not directly reflect our underlying operations. 41 The Kraft Heinz Company Reconciliation of Net Sales to Organic Net Sales (dollars in millions) (Unaudited) [[GREPCENT_TABLE]] [["","Net Sales","","Currency","","Acquisitions and Divestitures","","Organic Net Sales","","Price","","Volume/Mix"],["2021"],["United States","$","18,604","","","$","\u2014","","","$","1,937","","","$","16,667"],["International","5,691","","","205","","","23","","","5,463"],["Canada","1,747","","","114","","","49","","","1,584"],["Kraft Heinz","$","26,042","","","$","319","","","$","2,009","","","$","23,714"],["2020"],["United States","$","19,204","","","$","\u2014","","","$","2,801","","","$","16,403"],["International","5,341","","","22","","","20","","","5,299"],["Canada","1,640","","","\u2014","","","49","","","1,591"],["Kraft Heinz","$","26,185","","","$","22","","","$","2,870","","","$","23,293"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Year-over-year growth rates"],["United States","(3.1)","%","","0.0 pp","","(4.7) pp","","1.6","%","","2.1 pp","","(0.5) pp"],["International","6.5","%","","3.4 pp","","0.0 pp","","3.1","%","","2.6 pp","","0.5 pp"],["Canada","6.5","%","","7.0 pp","","(0.1) pp","","(0.4)","%","","2.9 pp","","(3.3) pp"],["Kraft Heinz","(0.5)","%","","1.2 pp","","(3.5) pp","","1.8","%","","2.3 pp","","(0.5) pp"]] [[/GREPCENT_TABLE]] 42 The Kraft Heinz Company Reconciliation of Net Income/(Loss) to Adjusted EBITDA (in millions) (Unaudited) [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020"],["Net income/(loss)","$","1,024","","","$","361"],["Interest expense","2,047","","","1,394"],["Other expense/(income)","(295)","","","(296)"],["Provision for/(benefit from) income taxes","684","","","669"],["Operating income/(loss)","3,460","","","2,128"],["Depreciation and amortization (excluding restructuring activities)","910","","","955"],["Divestiture-related license income","(4)","","","\u2014"],["Restructuring activities","84","","","15"],["Deal costs","11","","","8"],["Unrealized losses/(gains) on commodity hedges","17","","","(6)"],["Impairment losses","1,634","","","3,413"],["Certain non-ordinary course legal and regulatory matters","62","","","\u2014"],["Equity award compensation expense (excluding restructuring activities)","197","","","156"],["Adjusted EBITDA","$","6,371","","","$","6,669"]] [[/GREPCENT_TABLE]] 43 The Kraft Heinz Company Reconciliation of Diluted EPS to Adjusted EPS (Unaudited) [[GREPCENT_TABLE]] [["","December 25, 2021","","December 26, 2020"],["Diluted EPS","$","0.82","","","$","0.29"],["Restructuring activities(a)","0.05","","","\u2014"],["Unrealized losses/(gains) on commodity hedges(b)","0.01","","","\u2014"],["Impairment losses(c)","1.07","","","2.59"],["Certain non-ordinary course legal and regulatory matters(d)","0.05","","","\u2014"],["Losses/(gains) on sale of business(e)","0.15","","","(0.01)"],["Debt prepayment and extinguishment costs(f)","0.59","","","0.08"],["Certain significant discrete income tax items(g)","0.19","","","(0.07)"],["Adjusted EPS","$","2.93","","","$","2.88"]] [[/GREPCENT_TABLE]] (a)    Gross expenses/(income) included in restructuring activities were expenses of $84 million ($64 million after-tax) in 2021 and income of $2 million ($3 million after-tax) in 2020 and were recorded in the following income statement line items: •Cost of products sold included expenses of $13 million in 2021 and income of $20 million in 2020; •SG&A included expenses of $70 million in 2021 and $35 million in 2020; and •Other expense/(income) included expenses of $1 million in 2021 and income of $17 million in 2020. (b)    Gross expenses/(income) included in unrealized losses/(gains) on commodity hedges were expenses of $17 million ($13 million after-tax) in 2021 and income of $6 million ($4 million after-tax) in 2020 and were recorded in cost of products sold. (c)    Gross impairment losses included the following: •Goodwill impairment losses of $318 million ($318 million after-tax) in 2021 and $2.3 billion ($2.3 billion after-tax) in 2020, which were recorded in SG&A; •Intangible asset impairment losses of $1.3 billion ($1.0 billion after-tax) in 2021 and $1.1 billion ($829 million after-tax) in 2020, which were recorded in SG&A; and •Property, plant and equipment asset impairment losses of $14 million ($1 million after-tax) in 2020, which were recorded in cost of products sold. (d)    Gross expenses included in certain non-ordinary course legal and regulatory matters were $62 million ($62 million after-tax) in 2021 and were recorded in SG&A. These expenses relate to the settlement of the previously disclosed SEC investigation. (e)    Gross expenses/(income) included in losses/(gains) on sale of business were income of $44 million (expenses of $181 million after-tax) in 2021 and expenses of $2 million (income of $6 million after-tax) in 2020 and were recorded in other expense/(income). (f)    Gross expenses included in debt prepayment and extinguishment costs were $917 million ($728 million after-tax) in 2021 and $124 million ($93 million after-tax) in 2020 and were recorded in interest expense. (g)    Certain significant discrete income tax items were an expense of $235 million in 2021 and a benefit of $81 million in 2020. The impact in 2021 relates to the revaluation of our deferred tax balances due to an increase in U.K. tax rates. The benefit in 2020 relates to the revaluation of our deferred tax balances due to changes in state tax laws following U.S. tax reform and subsequent clarification or interpretation of state tax laws. 44