Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
Organization
On July 2, 2015 (the “2015 Merger Date”) through a series of transactions, we consummated the merger of Kraft Foods Group, Inc. (“Kraft”) with and into a wholly-owned subsidiary of H.J. Heinz Holding Corporation (“Heinz”) (the “2015 Merger”). At the closing of the 2015 Merger, Heinz was renamed The Kraft Heinz Company (“Kraft Heinz”). Before the consummation of the 2015 Merger, Heinz was controlled by Berkshire Hathaway Inc. and 3G Global Food Holdings, L.P. (“3G Capital”), following their acquisition of H. J. Heinz Company on June 7, 2013.
Principles of Consolidation
The 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 four segments. We have three reportable segments defined by geographic region: United States, Canada, and Europe, Middle East, and Africa (“EMEA”). Our remaining businesses are combined and disclosed as “Rest of World.” Rest of World comprises two operating segments: Latin America and Asia Pacific (“APAC”).
During the third quarter of 2019, 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 EMEA, Latin America, and APAC zones to form the International zone. The International zone will be a reportable segment along with the United States and Canada in 2020. We also plan to move our Puerto Rico business from the Latin America zone to the United States zone to consolidate and streamline the management of our product categories and supply chain. These changes will be effective in the first quarter of 2020.
Use of Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires us to make accounting policy elections, estimates, and assumptions that affect the reported amount of assets, liabilities, reserves, and expenses. These policy elections, estimates, and assumptions are based on our best estimates and judgments. We evaluate our policy elections, estimates, and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We believe these estimates to be reasonable given the current facts available. We adjust our policy elections, estimates, and assumptions when facts and circumstances dictate. Market volatility, including foreign currency exchange rates, increases the uncertainty inherent in our estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from estimates. If actual amounts differ from estimates, we include the revisions in our consolidated results of operations in the period the actual amounts become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material effect on our consolidated financial statements.
Reclassifications
We made reclassifications to certain previously reported financial information to conform to our current period presentation.
Held for Sale
At December 29, 2018, we had classified certain assets and liabilities as held for sale in our consolidated balance sheet primarily relating to the previously announced divestiture of our equity interests in a subsidiary in India and our divestiture of certain assets and operations in Canada, which closed in 2019. At December 28, 2019, the assets and liabilities identified as held for sale in our consolidated balance sheet primarily relate to a business in our Rest of World segment, as well as certain other assets that are held for sale globally. See Note 4, Acquisitions and Divestitures, for additional information.
Note 2. Significant Accounting Policies
Revenue Recognition:
Our revenues are primarily derived from customer orders for the purchase of our products. We recognize revenues as performance obligations are fulfilled when control passes to our customers. We record revenues net of variable consideration, including consumer incentives and performance obligations related to trade promotions, excluding taxes, and including all shipping and handling charges billed to customers (accounting for shipping and handling charges that occur after the transfer of control as fulfillment costs). We also record a refund liability for estimated product returns and customer allowances as reductions to revenues within the same period that the revenue is recognized. We base these estimates principally on historical and current period experience factors. We recognize costs paid to third party brokers to obtain contracts as expenses as our contracts are generally less than one year.
Advertising, Consumer Incentives, and Trade Promotions:
We promote our products with advertising, consumer incentives, and performance obligations related to trade promotions. Consumer incentives and trade promotions include, but are not limited to, discounts, coupons, rebates, performance-based in-store display activities, and volume-based incentives. Variable consideration related to consumer incentive and trade promotion activities is recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization, redemption rates, and/or current period experience factors. We review and adjust these estimates at least quarterly based on actual experience and other information.
Advertising expenses are recorded in selling, general and administrative expenses (“SG&A”). For interim reporting purposes, we charge advertising to operations as a percentage of estimated full year sales activity and marketing costs. We then review and adjust these estimates each quarter based on actual experience and other information. We recorded advertising expenses of $534 million in 2019, $584 million in 2018, and $629 million in 2017, which represented costs to obtain physical advertisement spots in television, radio, print, digital, and social channels. We also incur other advertising and marketing costs such as shopper marketing, sponsorships, and agency advertisement conception, design, and public relations fees. Total advertising and marketing costs were $1.1 billion in 2019, 2018, and 2017.
Research and Development Expense:
We expense costs as incurred for product research and development within SG&A. Research and development expenses were approximately $112 million in 2019, $109 million in 2018, and $93 million in 2017.
Stock-Based Compensation:
We recognize compensation costs related to equity awards on a straight-line basis over the vesting period of the award, which is generally three to five years, or on a straight-line basis over the requisite service period for each separately vesting portion of the awards. These costs are primarily recognized within SG&A. We estimate expected forfeitures rather than recognizing forfeitures as they occur in determining our equity award compensation costs. We classify equity award compensation costs primarily within general corporate expenses. See Note 11, Employees’ Stock Incentive Plans, for additional information.
Postemployment Benefit Plans:
We maintain various retirement plans for the majority of our employees. These include pension benefits, postretirement health care benefits, and defined contribution benefits. The cost of these plans is charged to expense over an appropriate term based on, among other things, the cost component and whether the plan is active or inactive. Changes in the fair value of our plan assets result in net actuarial gains or losses. These net actuarial gains and losses are deferred into accumulated other comprehensive income/(losses) and amortized within other expense/(income) in future periods using the corridor approach. The corridor is 10% of the greater of the market-related value of the plan’s asset or projected benefit obligation. Any actuarial gains and losses in excess of the corridor are then amortized over an appropriate term based on whether the plan is active or inactive. See Note 12, Postemployment Benefits, for additional information.
Income Taxes:
We recognize income taxes based on amounts refundable or payable for the current year and record deferred tax assets or liabilities for any difference between the financial reporting and tax basis of our assets and liabilities. We also recognize deferred tax assets for temporary differences, operating loss carryforwards, and tax credit carryforwards. Inherent in determining our annual tax rate are judgments regarding business plans, planning opportunities, and expectations about future outcomes. Realization of certain deferred tax assets, primarily net operating loss and other carryforwards, is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods.
We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement.
Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect our results in the quarter of such change.
We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, we consider future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, we would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding adjustment to our provision for/(benefit from) income taxes. The resolution of tax reserves and changes in valuation allowances could be material to our results of operations for any period, but is not expected to be material to our financial position.
Common Stock and Preferred Stock Dividends:
Dividends are recorded as a reduction to retained earnings. When we have an accumulated deficit, dividends are recorded as a reduction of additional paid-in capital.
Cash and Cash Equivalents:
Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. Cash and cash equivalents that are legally restricted as to withdrawal or usage is classified in other current assets or other non-current assets, as applicable, on the consolidated balance sheets.
Inventories:
Inventories are stated at the lower of cost or net realizable value. We value inventories primarily using the average cost method.
Property, Plant and Equipment:
Property, plant and equipment are stated at historical cost and depreciated on the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods ranging from three years to 20 years and buildings and improvements over periods up to 40 years. Capitalized software costs are included in property, plant and equipment and amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed seven years. We review long-lived assets for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. Such conditions could include significant adverse changes in the business climate, current-period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an asset group will be disposed of before the end of its useful life. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of assets held for use, we group assets at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, the loss is calculated based on estimated fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Goodwill and Intangible Assets:
We maintain 19 reporting units, 11 of which comprise our goodwill balance. Our indefinite-lived intangible asset balance primarily consists of a number of individual brands. We test our reporting units and brands for impairment annually as of the first day of our second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit or brand is less than its carrying amount. Such events and circumstances could include a sustained decrease in our market capitalization, increased competition or unexpected loss of market share, increased input costs beyond projections (for example due to regulatory or industry changes), disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster or loss of a customer, supplier, or other significant business relationship), unexpected significant declines in operating results, significant adverse changes in the markets in which we operate, or changes in management strategy. We test reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. We test brands for impairment by comparing the estimated fair value of each brand with its carrying amount. If the carrying amount of a reporting unit or brand exceeds its estimated fair value, we record an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed the associated carrying amount of goodwill.
Definite-lived intangible assets are amortized on a straight-line basis over the estimated periods benefited. We review definite-lived intangible assets for impairment when conditions exist that indicate the carrying amount of the assets may not be recoverable. Such conditions could include significant adverse changes in the business climate, current-period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an asset group will be disposed of before the end of its useful life. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of definite-lived intangible assets held for use, we group assets at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, the loss is calculated based on estimated fair value. Impairment losses on definite-lived intangible assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
See Note 9, Goodwill and Intangible Assets, for additional information.
Leases:
We determine whether a contract is or contains a lease at contract inception based on the presence of identified assets and our right to obtain substantially all of the economic benefit from or to direct the use of such assets. When we determine a lease exists, we record a right-of-use (“ROU”) asset and corresponding lease liability on our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term. Lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets are recognized at commencement date at the value of the lease liability and are adjusted for any prepayments, lease incentives received, and initial direct costs incurred. Lease liabilities are recognized at lease commencement date based on the present value of remaining lease payments over the lease term. As the discount rate implicit in the lease is not readily determinable in most of our leases, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
We do not record lease contracts with a term of 12 months or less on our consolidated balance sheets.
We recognize fixed lease expense for operating leases on a straight-line basis over the lease term. For finance leases, we recognize amortization expense on the ROU asset and interest expense on the lease liability over the lease term.
We have lease agreements with non-lease components that relate to the lease components (e.g., common area maintenance such as cleaning or landscaping, insurance, etc.). We account for each lease and any non-lease components associated with that lease as a single lease component for all underlying asset classes. Accordingly, all costs associated with a lease contract are accounted for as lease costs.
Certain leasing arrangements require variable payments that are dependent on usage or output or may vary for other reasons, such as insurance and tax payments. Variable lease payments that do not depend on an index or rate are excluded from lease payments in the measurement of the ROU asset and lease liability and are recognized as expense in the period in which the payment occurs.
Our lease agreements do not include significant restrictions or covenants, and residual value guarantees are generally not included within our operating leases.
Financial Instruments:
As we source our commodities on global markets and periodically enter into financing or other arrangements abroad, we use a variety of risk management strategies and financial instruments to manage commodity price, foreign currency exchange rate, and interest rate risks. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. One way we do this is through actively hedging our risks through the use of derivative instruments. As a matter of policy, we do not use highly leveraged derivative instruments, nor do we use financial instruments for speculative purposes.
Derivatives are recorded on our consolidated balance sheets as assets or liabilities at fair value, which fluctuates based on changing market conditions.
Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others are not designated as hedging instruments and are marked to market through net income/(loss). The gains and losses on cash flow hedges are deferred as a component of accumulated other comprehensive income/(losses) and are recognized in net income/(loss) at the time the hedged item affects net income/(loss), in the same line item as the underlying hedged item. The excluded component on cash flow hedges is recognized in net income/(loss) over the life of the hedging relationship in the same income statement line item as the underlying hedged item. We also designate certain derivatives and non-derivatives as net investment hedges to hedge the net assets of certain foreign subsidiaries which are exposed to volatility in foreign currency exchange rates. Changes in the value of these derivatives and remeasurements of our non-derivatives designated as net investment hedges are calculated each period using the spot method, with changes reported in foreign currency translation adjustment within accumulated other comprehensive income/(losses). Such amounts will remain in accumulated other comprehensive income/(losses) until the complete or substantially complete liquidation of our investment in the underlying foreign operations. The excluded component on derivatives designated as net investment hedges is recognized in net income/(loss) within interest expense. The income statement classification of gains and losses related to derivative instruments not designated as hedging instruments is determined based on the underlying intent of the contracts. Cash flows related to the settlement of derivative instruments designated as net investment hedges of foreign operations are classified in the consolidated statements of cash flows within investing activities. All other cash flows related to derivative instruments are classified in the same line item as the cash flows of the related hedged item, which is generally within operating activities.
To qualify for hedge accounting, a specified level of hedging effectiveness between the hedging instrument and the item being hedged must be achieved at inception and maintained throughout the hedged period. When a hedging instrument no longer meets the specified level of hedging effectiveness, we reclassify the related hedge gains or losses previously deferred into other comprehensive income/(losses) to net income/(loss) within other expense/(income). We formally document our risk management objectives, our strategies for undertaking the various hedge transactions, the nature of and relationships between the hedging instruments and hedged items, and the method for assessing hedge effectiveness. Additionally, for qualified hedges of forecasted transactions, we specifically identify the significant characteristics and expected terms of the forecasted transactions. If it becomes probable that a forecasted transaction will not occur, the hedge will no longer be effective and all of the derivative gains or losses would be recognized in net income/(loss) in the current period.
Unrealized gains and losses on our commodity derivatives not designated as hedging instruments are recorded in cost of products sold and are included within general corporate expenses until realized. Once realized, the gains and losses are included within the applicable segment operating results. See Note 13, Financial Instruments, for additional information.
Our designated and undesignated derivative contracts include:
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Net investment hedges. We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. We manage this risk by utilizing derivative and non-derivative instruments, including cross-currency swap contracts, foreign exchange contracts, and certain foreign denominated debt designated as net investment hedges. We exclude the interest accruals on cross-currency swap contracts and the forward points on foreign exchange forward contracts from the assessment and measurement of hedge effectiveness. We recognize the interest accruals on cross-currency swap contracts in net income/(loss) within interest expense. We amortize the forward points on foreign exchange contracts into net income/(loss) within interest expense over the life of the hedging relationship.
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Foreign currency cash flow hedges. We use various financial instruments to mitigate our exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. Our principal foreign currency exposures that are hedged include the British pound sterling, euro, and Canadian dollar. These instruments include cross-currency swap contracts and foreign exchange forward and option contracts. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment. We exclude the interest accruals on cross-currency swap contracts and the forward points and option premiums or discounts on foreign exchange contracts from the assessment and measurement of hedge effectiveness and amortize such amounts into net income/(loss) in the same line item as the underlying hedged item over the life of the hedging relationship.
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Interest rate cash flow hedges. From time to time, we have used derivative instruments, including interest rate swaps, as part of our interest rate risk management strategy. We have primarily used interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations.
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Commodity derivatives. We are exposed to price risk related to forecasted purchases of certain commodities that we primarily use as raw materials. We enter into commodity purchase contracts primarily for dairy products, meat products, coffee beans, sugar, vegetable oils, wheat products, corn products, and cocoa products. These commodity purchase contracts generally are not subject to the accounting requirements for derivative instruments and hedging activities under the normal purchases and normal sales exception. We also use commodity futures, options, and swaps to economically hedge the price of certain commodity costs, including the commodities noted above, as well as packaging products, diesel fuel, and natural gas. We do not designate these commodity contracts as hedging instruments. We also occasionally use futures to economically cross hedge a commodity exposure.
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Translation of Foreign Currencies:
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period end. Income statement accounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of accumulated other comprehensive income/(losses) on the balance sheet. Gains and losses from foreign currency transactions are included in net income/(loss) for the period.
Highly Inflationary Accounting:
We apply highly inflationary accounting if the cumulative inflation rate in an economy for a three-year period meets or exceeds 100%. Under highly inflationary accounting, the financial statements of a subsidiary are remeasured into our reporting currency (U.S. dollars) based on the legally available exchange rate at which we expect to settle the underlying transactions. Exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in net income/(loss), rather than accumulated other comprehensive income/(losses) on the balance sheet, until such time as the economy is no longer considered highly inflationary. Certain non-monetary assets and liabilities are recorded at the applicable historical exchange rates. We apply highly inflationary accounting to the results of our subsidiaries in Venezuela and Argentina. The net monetary assets of our subsidiary in Argentina were approximately $1 million at December 28, 2019. See Note 15, Venezuela - Foreign Currency and Inflation, for additional information related to our subsidiary in Venezuela.
Note 3. New Accounting Standards
Accounting Standards Adopted in the Current Year
Leases:
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued accounting standards update (“ASU”) 2016-02 to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The updated guidance requires lessees to reflect the majority of leases on their balance sheets as assets and obligations. This ASU became effective beginning in the first quarter of our fiscal year 2019. We adopted this ASU in the first quarter of 2019 using a modified retrospective transition method and elected the following practical expedients: (i) the optional transition method that allows us to apply the guidance at the adoption date and recognize any adjustments that result from applying Accounting Standards Codification (“ASC”) Topic 842, Leases, to existing leases as a cumulative-effect adjustment to the opening balance of retained earnings/(deficit) in the period of adoption (i.e., the effective date); (ii) the package of practical expedients that allows us to carry forward our determination of whether a lease exists, the classification of a lease, and whether initial direct lease costs exist for purposes of transition to the new standard; (iii) the land easement option, which allows us to continue to use prior accounting conclusions reached in our accounting for land easements; and (iv) the short-term lease exemption whereby we will not record an asset or liability for short-term leases. The most significant impact of adoption on our consolidated financial statements was the recognition of ROU assets and lease liabilities for operating leases. Our accounting for finance leases remained substantially unchanged. Upon adoption, we had total lease assets of $821 million and total lease liabilities of $887 million. The adoption of this ASU did not result in a cumulative-effect adjustment to the opening balance of retained earnings/(deficit) and did not impact our consolidated statements of income or our cash flows. See Note 2, Significant Accounting Policies, for our lease accounting policy and Note 19, Leases, for additional information related to our lease arrangements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income:
In February 2018, the FASB issued ASU 2018-02 related to reclassifying tax effects stranded in accumulated other comprehensive income/(losses) because of the Tax Cuts and Jobs Act (“U.S. Tax Reform”) enacted on December 22, 2017. U.S. Tax Reform reduced the U.S. federal corporate tax rate from 35.0% to 21.0%. ASC Topic 740, Income Taxes, requires the remeasurement of deferred tax assets and liabilities as a result of such changes in tax laws or rates to be presented in net income/(loss) from continuing operations. However, the related tax effects of such deferred tax assets and liabilities may have been originally recorded in other comprehensive income/(loss). This ASU allows companies to reclassify such stranded tax effects from accumulated other comprehensive income/(losses) to retained earnings/(deficit). This reclassification adjustment is optional, and if elected, may be applied either to the period of adoption or retrospectively to the period(s) impacted by U.S. Tax Reform. Additionally, this ASU requires companies to disclose the policy election for stranded tax effects as well as the general accounting policy for releasing income tax effects from accumulated other comprehensive income/(losses). This ASU became effective beginning in the first quarter of our fiscal year 2019. We adopted this ASU on the first day of our fiscal year 2019 and made the policy election to reclassify stranded tax effects from accumulated other comprehensive income/(losses) to retained earnings/(deficit) in the period of adoption. The impact of this policy election was an increase to retained earnings/(deficit) and a corresponding decrease to accumulated other comprehensive income/(losses) of $136 million. We generally release income tax effects from accumulated other comprehensive income/(losses) when the entire portfolio of the item giving rise to the tax effect is disposed of, liquidated, or terminated.
Accounting Standards Not Yet Adopted
Measurement of Current Expected Credit Losses:
In June 2016, the FASB issued ASU 2016-13 to update the methodology used to measure current expected credit losses (“CECL”). This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This ASU replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. This ASU will be effective beginning in the first quarter of our fiscal year 2020. We do not expect this guidance to have a significant impact on our financial statements and related disclosures.
Fair Value Measurement Disclosures:
In August 2018, the FASB issued ASU 2018-13 related to fair value measurement disclosures. This ASU removes the requirement to disclose the amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy, the policy for determining that a transfer has occurred, and valuation processes for Level 3 fair value measurements. Additionally, this ASU modifies the disclosures related to the measurement uncertainty for recurring Level 3 fair value measurements (by removing the requirement to disclose sensitivity to future changes) and the timing of liquidation of investee assets (by removing the timing requirement in certain instances). The guidance also requires new disclosures for Level 3 financial assets and liabilities, including the amount and location of unrealized gains and losses recognized in other comprehensive income/(loss) and additional information related to significant unobservable inputs used in determining Level 3 fair value measurements. This ASU will be effective beginning in the first quarter of our fiscal year 2020. Early adoption of the guidance in whole is permitted. Alternatively, companies may early adopt removed or modified disclosures and delay adoption of the additional disclosures until their effective date. Certain of the amendments in this ASU must be applied prospectively upon adoption, while other amendments must be applied retrospectively upon adoption. We elected to early adopt the provisions related to removing disclosures in the fourth quarter of our fiscal year 2018 on a retrospective basis. Accordingly, we removed certain disclosures from Note 12, Postemployment Benefits and Note 13, Financial Instruments. There was no other impact to our financial statement disclosures as a result of early adopting the provisions related to removing disclosures.
Disclosure Requirements for Certain Employer-Sponsored Benefit Plans:
In August 2018, the FASB issued ASU 2018-14 related to the disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans. The guidance requires sponsors of these plans to provide additional disclosures, including weighted-average interest rates used in the company’s cash balance plans and a narrative description of reasons for any significant gains or losses impacting the benefit obligation for the period. Additionally, this guidance eliminates certain previous disclosure requirements. This ASU will be effective beginning with our Annual Report on Form 10-K for the year ended December 26, 2020. This guidance must be applied on a retrospective basis to all periods presented.
Implementation Costs Incurred in Hosted Cloud Computing Service Arrangements:
In August 2018, the FASB issued ASU 2018-15 related to accounting for implementation costs incurred in hosted cloud computing service arrangements. Under the new guidance, implementation costs incurred in a hosting arrangement that is a service contract should be expensed or capitalized based on the nature of the costs and the project stage during which such costs are incurred. If the implementation costs qualify for capitalization, they must be amortized over the term of the hosting arrangement and assessed for impairment. Companies must disclose the nature of any hosted cloud computing service arrangements. This ASU also provides guidance for balance sheet and income statement presentation of capitalized implementation costs and statement of cash flows presentation for the related payments. This ASU will be effective beginning in the first quarter of our fiscal year 2020. This guidance may be adopted either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We will prospectively adopt this guidance and do not expect that it will have a significant impact on our financial statements and related disclosures.
Simplifying the Accounting for Income Taxes:
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning in the first quarter of our fiscal year 2021. Early adoption is permitted. 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. We are currently evaluating the impact this ASU will have on our financial statements and related disclosures as well as the timing of adoption.
Note 4. Acquisitions and Divestitures
Acquisitions
Primal Acquisition:
On January 3, 2019 (the “Primal Acquisition Date”), we acquired 100% of the outstanding equity interests in Primal Nutrition, LLC (“Primal Nutrition”) (the “Primal Acquisition”), a better-for-you brand primarily focused on condiments, sauces, and dressings, with growing product lines in healthy snacks and other categories. The Primal Kitchen brand holds leading positions in the e-commerce and natural channels. The results of Primal Nutrition have been included in our consolidated financial statements for the year ended December 28, 2019. We have not included unaudited pro forma results as it would not yield significantly different results.
The Primal Acquisition was accounted for under the acquisition method of accounting for business combinations. The total cash consideration paid for Primal Nutrition was $201 million. We utilized estimated fair values at the Primal Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. The fair value estimates of the assets acquired and liabilities assumed were subject to adjustment during the measurement period (up to one year from the Primal Acquisition Date). The purchase price allocation for the Primal Acquisition was final as of September 28, 2019.
The final purchase price allocation to assets acquired and liabilities assumed in the Primal Acquisition was (in millions):
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Cash
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$
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2
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Other current assets
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15
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Identifiable intangible assets
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66
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Current liabilities
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(6
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)
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Net assets acquired
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77
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Goodwill on acquisition
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124
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Total consideration
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$
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201
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The Primal Acquisition resulted in $124 million of non tax deductible goodwill relating principally to planned expansion of the Primal Kitchen brand into new channels and categories. This goodwill was allocated to the United States segment as shown in Note 9, Goodwill and Intangible Assets.
The purchase price allocation to identifiable intangible assets acquired in the Primal Acquisition was:
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Fair Value
(in millions of dollars)
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Weighted Average Life
(in years)
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Definite-lived trademarks
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$
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52.5
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15
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Customer-related assets
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13.5
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20
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Total
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$
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66.0
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We valued trademarks using the relief from royalty method and customer-related assets using the distributor method. Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and market comparables.
We used carrying values as of the Primal Acquisition Date to value certain current and non-current assets and liabilities, as we determined that they represented the fair value of those items at the Primal Acquisition Date.
Cerebos Acquisition:
On March 9, 2018 (the “Cerebos Acquisition Date”), we acquired 100% of the outstanding equity interests in Cerebos Pacific Limited (“Cerebos”) (the “Cerebos Acquisition”), an Australian food and beverage company.
The Cerebos Acquisition was accounted for under the acquisition method of accounting for business combinations. The total cash consideration paid for Cerebos was $244 million. We utilized estimated fair values at the Cerebos Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. Such allocation was final as of December 29, 2018.
The final purchase price allocation to assets acquired and liabilities assumed in the Cerebos Acquisition was (in millions):
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Cash
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$
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23
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Other current assets
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65
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Property, plant and equipment, net
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75
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Identifiable intangible assets
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100
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Trade and other payables
|
(41
|
)
|
Other non-current liabilities
|
(3
|
)
|
Net assets acquired
|
219
|
|
Goodwill on acquisition
|
25
|
|
Total consideration
|
$
|
244
|
|
The Cerebos Acquisition resulted in $25 million of non tax deductible goodwill relating principally to planned expansion of Cerebos brands into new categories and markets. This goodwill was allocated to Rest of World as shown in Note 9, Goodwill and Intangible Assets.
The final purchase price allocation to identifiable intangible assets acquired in the Cerebos Acquisition was:
|
|
|
|
|
|
|
|
Fair Value
(in millions of dollars)
|
|
Weighted Average Life
(in years)
|
Definite-lived trademarks
|
$
|
87
|
|
|
22
|
Customer-related assets
|
13
|
|
|
12
|
Total
|
$
|
100
|
|
|
|
We valued trademarks using the relief from royalty method and customer-related assets using the distributor method. Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and market comparables.
We used carrying values as of the Acquisition Date to value trade receivables and payables, as well as certain other current and non-current assets and liabilities, as we determined that they represented the fair value of those items at the Acquisition Date.
We valued finished goods and work-in-process inventory using a net realizable value approach. Raw materials and packaging inventory was valued using the replacement cost approach.
We valued property, plant and equipment using a combination of the income approach, the market approach, and the cost approach, which is based on the current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors.
Other Acquisitions:
In the third quarter of 2018, we had two additional acquisitions of businesses, including The Ethical Bean Coffee Company Ltd., a Canadian-based coffee roaster, and Wellio, Inc., a full-service meal planning and preparation technology start-up in the U.S. The aggregate consideration paid related to these acquisitions was $27 million.
Deal Costs:
Related to our acquisitions, we incurred aggregate deal costs of $2 million in 2019 and $20 million in 2018. We recognized these deal costs primarily in SG&A. We did not incur any deal costs in 2017.
Divestitures
Potential Disposition:
As of December 28, 2019, we were in negotiations with a prospective buyer for 100% of the equity interests in a subsidiary within our Rest of World segment for cash of approximately $55 million. This subsidiary generated approximately $1 million of net income in 2019. The aggregate carrying value of net assets to be transferred and accumulated foreign currency losses to be released is expected to be approximately $126 million. As a result, we recorded a loss of approximately $71 million in 2019 related to this transaction. This loss was included in other expense/(income). In addition, we have classified the related assets and liabilities as held for sale on the consolidated balance sheet at December 28, 2019. We expect this transaction to close in the first half of 2020.
Heinz India Transaction:
In October 2018, we entered into a definitive agreement with two third-parties, Zydus Wellness Limited and Cadila Healthcare Limited (collectively, the “Buyers”), to sell 100% of our equity interests in Heinz India Private Limited (“Heinz India”) for approximately 46 billion Indian rupees (approximately $655 million at January 30, 2019) (the “Heinz India Transaction”). In connection with the Heinz India Transaction, we transferred to the Buyers, among other assets and operations, our global intellectual property rights to several brands, including Complan, Glucon-D, Nycil, and Sampriti. Our core brands (i.e., Heinz and Kraft) were not transferred. The Heinz India Transaction closed on January 30, 2019 (the “Heinz India Closing Date”). We recognized a pre-tax gain of $246 million in the first quarter of 2019. Additionally, in the third quarter of 2019, we recognized a recovery of local India taxes of $3 million, which was classified as gain on sale of business. As a result, we recognized pre-tax gains of $249 million in 2019. These pre-tax gains were included in other expense/(income).
The components of the pre-tax gain were as follows (in millions):
|
|
|
|
|
Proceeds
|
$
|
655
|
|
Less investment in Heinz India
|
(355
|
)
|
Recognition of tax indemnification
|
(48
|
)
|
Other
|
(3
|
)
|
Pre-tax gain on sale of Heinz India
|
$
|
249
|
|
In connection with the Heinz India Transaction we agreed to indemnify the Buyers from and against any tax losses for any taxable period prior to the Heinz India Closing Date, including taxes for which we are liable as a result of any transaction that occurred on or before such date. To determine the fair value of our tax indemnity we made various assumptions, including the range of potential dates the tax matters will be resolved, the range of potential future cash flows, the probabilities associated with potential resolution dates and potential future cash flows, and the discount rate. We recorded tax indemnity liabilities related to the Heinz India Transaction totaling approximately $48 million, including $18 million in other current liabilities and $30 million in other non-current liabilities on our consolidated balance sheet as of the Heinz India Closing Date. We also recorded a corresponding $48 million reduction of the gain on the Heinz India Transaction within other expense/(income) in our consolidated statement of income in the first quarter of 2019. Future changes to the fair value of these tax indemnity liabilities will continue to impact other expense/(income) throughout the life of the exposures as a component of the gain on sale for the Heinz India Transaction.
The other component of the pre-tax gain on the sale of Heinz India in the table above primarily related to losses on net investment hedges of our investment in Heinz India, which were settled in the first quarter of 2019, and were partially offset by the local India tax recovery in the third quarter of 2019.
Canada Natural Cheese Transaction:
In November 2018, we entered into a definitive agreement with a third-party, Parmalat SpA (“Parmalat”), to sell certain assets in our natural cheese business in Canada for approximately 1.6 billion Canadian dollars (approximately $1.2 billion at July 2, 2019) (the “Canada Natural Cheese Transaction”). In connection with the Canada Natural Cheese Transaction, we transferred certain assets to Parmalat, including the intellectual property rights to Cracker Barrel in Canada and P’Tit Quebec globally. The Canada Natural Cheese Transaction closed on July 2, 2019. We recognized a pre-tax gain of $242 million, which was included in other expense/(income) in 2019.
The components of the pre-tax gain were as follows (in millions):
|
|
|
|
|
Proceeds
|
$
|
1,236
|
|
Less carrying value of Canada Natural Cheese net assets
|
(995
|
)
|
Other
|
1
|
|
Pre-tax gain resulting from Canada Natural Cheese Transaction
|
$
|
242
|
|
South Africa Transaction:
In May 2018, we sold our 50.1% interest in our South African subsidiary to our minority interest partner. This transaction included proceeds of $18 million. We recorded a pre-tax loss on the sale of a business of approximately $15 million, which was included in other expense/(income) on the consolidated statement of income for 2018.
Deal Costs:
Related to our divestitures, we incurred aggregate deal costs of $17 million in 2019 and $3 million in 2018. We recognized these deal costs in SG&A. We did not incur any deal costs in 2017.
Held for Sale
Our assets and liabilities held for sale, by major class, were (in millions):
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
$
|
27
|
|
|
$
|
—
|
|
Inventories
|
21
|
|
|
92
|
|
Property, plant and equipment, net
|
25
|
|
|
139
|
|
Goodwill
|
—
|
|
|
669
|
|
Intangible assets, net
|
23
|
|
|
437
|
|
Other
|
26
|
|
|
39
|
|
Total assets held for sale
|
$
|
122
|
|
|
$
|
1,376
|
|
LIABILITIES
|
|
|
|
Trade payables
|
$
|
3
|
|
|
$
|
16
|
|
Other
|
6
|
|
|
39
|
|
Total liabilities held for sale
|
$
|
9
|
|
|
$
|
55
|
|
The change in assets and liabilities held for sale in 2019 was primarily related to the Heinz India Transaction closing on January 30, 2019 and the Canada Natural Cheese Transaction closing on July 2, 2019. The balances held for sale at December 28, 2019 primarily relate to a business in our Rest of World segment, as well as certain manufacturing equipment and land use rights across the globe.
Note 5. Restructuring Activities
As part of our restructuring activities, we incur expenses that qualify as exit and disposal costs under U.S. GAAP. These include severance and employee benefit costs and other exit costs. Severance and employee benefit costs primarily relate to cash severance, non-cash severance, including accelerated equity award compensation expense, and pension and other termination benefits. Other exit costs primarily relate to lease and contract terminations. We also incur expenses that are an integral component of, and directly attributable to, our restructuring activities, which do not qualify as exit and disposal costs under U.S. GAAP. These include asset-related costs and other implementation costs. Asset-related costs primarily relate to accelerated depreciation and asset impairment charges. Other implementation costs primarily relate to start-up costs of new facilities, professional fees, asset relocation costs, costs to exit facilities, and costs associated with restructuring benefit plans.
Employee severance and other termination benefit packages are primarily determined based on established benefit arrangements, local statutory requirements, or historical benefit practices. We recognize the contractual component of these benefits when payment is probable and estimable; additional elements of severance and termination benefits associated with non-recurring benefits are recognized ratably over each employee’s required future service period. Charges for accelerated depreciation are recognized on long-lived assets that will be taken out of service before the end of their normal service, in which case depreciation estimates are revised to reflect the use of the asset over its shortened useful life. Asset impairments establish a new fair value basis for assets held for disposal or sale, and those assets are written down to expected net realizable value if carrying value exceeds fair value. All other costs are recognized as incurred.
Restructuring Activities:
We have restructuring programs globally, which are focused primarily on workforce reduction and factory closure and consolidation. In 2019, we eliminated approximately 400 positions related to these programs. As of December 28, 2019, we expect to eliminate approximately 550 additional positions related to these programs primarily outside the U.S. due to the planned formation of the International zone in 2020. These programs resulted in expenses of $108 million in 2019, including $15 million of severance and employee benefit costs, $37 million of non-cash asset-related costs, and $55 million of other implementation costs, and $1 million of other exit costs. Restructuring expenses totaled $368 million in 2018 and $118 million in 2017.
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 29, 2018
|
$
|
32
|
|
|
$
|
33
|
|
|
$
|
65
|
|
Charges/(credits)
|
15
|
|
|
1
|
|
|
16
|
|
Cash payments
|
(21
|
)
|
|
(10
|
)
|
|
(31
|
)
|
Non-cash utilization
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Balance at December 28, 2019
|
$
|
22
|
|
|
$
|
24
|
|
|
$
|
46
|
|
We expect the liability for severance and employee benefit costs as of December 28, 2019 to be paid by the end of 2020. 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 2020 and 2026.
Integration Program:
At the end of 2017, we had substantially completed our multi-year program announced following the 2015 Merger (the “Integration Program”), which was designed to reduce costs and integrate and optimize our combined organization, primarily in the U.S. and Canada reportable segments.
We incurred pre-tax costs related to the Integration Program of $92 million in 2018 and $316 million in 2017. No such expenses were incurred in 2019.
Total Expenses:
Total expense/(income) related to restructuring activities, including the Integration Program, by income statement caption, were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Severance and employee benefit costs - COGS
|
$
|
(3
|
)
|
|
$
|
12
|
|
|
$
|
9
|
|
Severance and employee benefit costs - SG&A
|
14
|
|
|
32
|
|
|
26
|
|
Severance and employee benefit costs - Other expense/(income)
|
4
|
|
|
6
|
|
|
(149
|
)
|
Asset-related costs - COGS
|
29
|
|
|
59
|
|
|
191
|
|
Asset-related costs - SG&A
|
8
|
|
|
36
|
|
|
26
|
|
Other costs - COGS
|
22
|
|
|
123
|
|
|
264
|
|
Other costs - SG&A
|
32
|
|
|
35
|
|
|
67
|
|
Other costs - Other expense/(income)
|
2
|
|
|
157
|
|
|
—
|
|
|
$
|
108
|
|
|
$
|
460
|
|
|
$
|
434
|
|
We do not include our restructuring activities, including the Integration Program, within Segment Adjusted EBITDA (as defined in Note 22, Segment Reporting). The pre-tax impact of allocating such expenses to our segments would have been (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
United States
|
$
|
37
|
|
|
$
|
205
|
|
|
$
|
270
|
|
Canada
|
18
|
|
|
176
|
|
|
34
|
|
EMEA
|
16
|
|
|
16
|
|
|
56
|
|
Rest of World
|
13
|
|
|
25
|
|
|
13
|
|
General corporate expenses
|
24
|
|
|
38
|
|
|
61
|
|
|
$
|
108
|
|
|
$
|
460
|
|
|
$
|
434
|
|
Note 6. Restricted Cash
The following table provides a reconciliation of cash and cash equivalents, as reported on our consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our consolidated statements of cash flows (in millions):
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Cash and cash equivalents
|
$
|
2,279
|
|
|
$
|
1,130
|
|
Restricted cash included in other current assets
|
1
|
|
|
1
|
|
Restricted cash included in other non-current assets
|
—
|
|
|
5
|
|
Cash, cash equivalents, and restricted cash
|
$
|
2,280
|
|
|
$
|
1,136
|
|
At December 28, 2019, cash and cash equivalents excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
Note 7. Inventories
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Packaging and ingredients
|
$
|
511
|
|
|
$
|
510
|
|
Work in process
|
364
|
|
|
343
|
|
Finished product
|
1,846
|
|
|
1,814
|
|
Inventories
|
$
|
2,721
|
|
|
$
|
2,667
|
|
At December 28, 2019 and December 29, 2018, inventories excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
Note 8. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Land
|
$
|
210
|
|
|
$
|
218
|
|
Buildings and improvements
|
2,447
|
|
|
2,375
|
|
Equipment and other
|
6,552
|
|
|
5,904
|
|
Construction in progress
|
1,033
|
|
|
1,165
|
|
|
10,242
|
|
|
9,662
|
|
Accumulated depreciation
|
(3,187
|
)
|
|
(2,584
|
)
|
Property, plant and equipment, net
|
$
|
7,055
|
|
|
$
|
7,078
|
|
At December 28, 2019 and December 29, 2018, property, plant and equipment, net, excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information. Depreciation expense was $708 million in 2019, $693 million in 2018, and $753 million in 2017.
Note 9. Goodwill and Intangible Assets
Goodwill:
Changes in the carrying amount of goodwill, by segment, were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
EMEA
|
|
Rest of World
|
|
Total
|
Balance at December 29, 2018
|
$
|
29,597
|
|
|
$
|
2,438
|
|
|
$
|
3,074
|
|
|
$
|
1,394
|
|
|
$
|
36,503
|
|
Impairment losses
|
(118
|
)
|
|
—
|
|
|
(292
|
)
|
|
(787
|
)
|
|
(1,197
|
)
|
Acquisitions
|
124
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
130
|
|
Translation adjustments and other
|
(2
|
)
|
|
106
|
|
|
17
|
|
|
(11
|
)
|
|
110
|
|
Balance at December 28, 2019
|
$
|
29,601
|
|
|
$
|
2,544
|
|
|
$
|
2,805
|
|
|
$
|
596
|
|
|
$
|
35,546
|
|
In the first quarter of 2019, we completed the acquisition of Primal Nutrition. Additionally, at December 29, 2018, goodwill excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information related to this acquisition, as well as amounts held for sale.
We maintain 19 reporting units, 11 of which comprise our goodwill balance. These 11 reporting units had an aggregate carrying amount of $35.5 billion as of December 28, 2019. 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.
In connection with the preparation of the first quarter financial statements, which occurred concurrently with the preparation of the second quarter financial statements due to the delay in the filing of our Annual Report on Form 10-K for the year ended December 29, 2018, we concluded that it was more likely than not that the fair values of three of our 19 reporting units (EMEA East, Brazil and Latin America Exports) were below their carrying amounts. The factors that led to this conclusion included: (i) changes in management structure which triggered the reorganization of the EMEA East and Latin America Exports reporting units in the first quarter; (ii) new management in certain of these reporting units coupled with the development of our five-year operating plan assumptions for each of these reporting units in the first quarter, which established revised expectations and priorities for the coming years in response to current market factors, such as lower revenue growth and margin expectations; (iii) increases in discount rates used to value reporting units in these regions due to expectations of increased risk in these emerging markets; and (iv) fluctuations in forecasted foreign exchange rates in certain countries.
We recognized a non-cash impairment loss of $620 million in SG&A in the first quarter of 2019 related to the three reporting units noted above that are contained within our EMEA and Rest of World segments. We determined the factors contributing to the impairment loss were the result of circumstances that arose during the first quarter of 2019.
We recognized a $286 million impairment loss in our EMEA East reporting unit within our EMEA segment. In the first quarter of 2019, we reorganized our reporting units to combine Russia, Poland, Middle East, and Distributors operations into the EMEA East reporting unit as a result of changing our management structure. Following this reorganization, we established a new management team in the region at the beginning of 2019 that developed a new five-year operating plan for the region, which established a revised downward outlook for net sales, margin, and cash flows in response to lower expectations for margin and revenue growth opportunities in the region. As a result of this planning process, management revised its expectations downward in relation to the anticipated long-term impact of white space growth opportunities in Middle East and Africa and the impact of discounter store growth in Russia. Additionally, there were declines in forecasted foreign exchange rates in the region. After the impairment, the goodwill carrying amount of the EMEA East reporting unit was approximately $144 million.
We recognized a $205 million impairment loss in our Brazil reporting unit within our Rest of World segment. During the first quarter, we observed lower than expected performance in launches of new products coupled with the de-listing of certain existing products as well as higher costs due to changes in our sourcing approach to support revenue growth plans. We developed a new five-year operating plan for the region in the first quarter of 2019, which produced a revised outlook for net sales and margins in contemplation of these events and after considering their potential long-term impacts. Additionally, there were declines in forecasted foreign exchange rates in the region. The impairment of the Brazil reporting unit represents all of the goodwill of that reporting unit.
We recognized a $129 million impairment loss in our Latin America Exports reporting unit within our Rest of World segment. In the first quarter of 2019, we reorganized our reporting units to combine Puerto Rico and our Other Latin America Exports business with Costa Rica, Panama, Colombia, Argentina, and Andinos operations (which were part of the previously fully impaired Other Latin America reporting unit and thus had previously been identified as having a fair value less than carrying amount) into the Latin America Exports reporting unit as a result of changing our management structure. We developed a new five-year operating plan for the region in the first quarter of 2019, which produced a revised downward outlook for net sales and margins and adjusted cash flow forecasts to reflect lower expectations in the market, higher costs associated with changes in our sourcing approach, and increased investments in the business to support growth in these emerging markets. After the impairment, the goodwill carrying amount of the Latin America Exports reporting unit was approximately $297 million.
We performed our 2019 annual impairment test as of March 31, 2019, which is the first day of our second quarter in 2019 (this was performed concurrently with the preparation of the first and second quarter 2019 financial statements due to the delay in the filing of our Annual Report on Form 10-K for the year ended December 29, 2018). We utilized the discounted cash flow method under the income approach to estimate the fair value of our reporting units. Through the performance of the 2019 annual impairment test, we identified an impairment related to the U.S. Refrigerated reporting unit. This impairment was primarily due to an increase in the discount rate assumption used for the fair value estimation. The increase in the discount rate was applied to reflect a market participants’ perceived risk in the valuation implied by the sustained reduction in our stock price and, hence, market capitalization (which decreased approximately 25% from December 29, 2018 to the March 31, 2019 annual impairment test date and sustained this decline through June 29, 2019). Since this valuation assumption change was made in connection with the annual impairment test in the second quarter of 2019 and was not indicative of events or conditions that would have constituted a triggering event during the first quarter of 2019, we recorded a non-cash impairment loss of $118 million in SG&A in the second quarter of 2019 within our United States segment. The goodwill carrying amount of this reporting unit was $7.0 billion after the impairment.
The goodwill carrying amounts associated with an additional six reporting units, which each had excess fair value over its carrying amount of 10% or less based on the results of our 2019 annual impairment assessment, were $18.6 billion for U.S. Grocery, $3.9 billion for U.S. Foodservice, $2.1 billion for Canada Retail, $370 million for Australia and New Zealand, $368 million for Canada Foodservice, and $83 million for Northeast Asia as of the annual impairment test date. The goodwill carrying amount associated with one additional reporting unit, which had excess fair value over its carrying amount between 10-20%, was $593 million for Continental Europe as of the annual impairment test date. The aggregate goodwill carrying amount of reporting units with fair value over carrying amount between 20-50% was $2.4 billion as of the annual impairment test date, and there were no reporting units with fair value over carrying amount in excess of 50%.
In the fourth quarter of 2019, in connection with the preparation of our year-end financial statements, we determined that it was more likely than not that the fair values of three of our 19 reporting units (Australia and New Zealand, Latin America Exports, and Northeast Asia) were below their carrying amounts. The factors that led to this determination included: (i) the completion of our fourth quarter 2019 results, which were below management’s expectations in these regions due to higher supply chain costs and reduced revenue growth; and (ii) new management of these reporting units coupled with the development and approval of our 2020 annual operating plan, which established revised expectations and priorities for the coming years in response to current market factors, such as lower revenue growth and margin expectations.
We recognized a non-cash impairment loss of $453 million in SG&A in the fourth quarter of 2019 related to two of the reporting units noted above that are contained within our Rest of World segment. We determined the factors contributing to the impairment loss were the result of circumstances described below that arose during the fourth quarter of 2019.
We recognized a $357 million non-cash impairment loss in our Australia and New Zealand reporting unit within our Rest of World segment. During the fourth quarter, we observed lower than expected revenue and profitability driven by increased operational costs, portfolio rationalization projects, declines in sales categories within Australia and New Zealand, and reduced market share realization for specific categories in New Zealand. Additionally, we established a new management team in the region that developed a 2020 annual operating plan, which set lower expectations for revenue growth and profit margins in the coming years in response to current market factors. The impairment of the Australia and New Zealand reporting unit represents all of the goodwill of that reporting unit.
We recognized a $96 million non-cash impairment loss in our Latin America Exports reporting unit within our Rest of World segment. During the fourth quarter, we observed lower than expected revenue and profitability due to higher supply chain costs along with less favorable expansion into new channels and loss of certain significant customers. Additionally, we established a new management team in the region that developed a 2020 annual operating plan, which set lower expectations for revenue growth and profit margins in the coming years in response to current market factors. After the impairment, the goodwill carrying amount of the Latin America Exports reporting unit was approximately $195 million.
We concluded that an impairment charge was not required for our Northeast Asia reporting unit since declines in expectations for 2020, which were partially offset by lower discount rates, were not substantial enough to cause the fair value of the reporting unit to be below its carrying amount. The goodwill carrying amount of the Northeast Asia reporting unit is approximately $83 million and the fair value is between 10-20% over carrying amount.
The decline in forecasted cash flows of Australia and New Zealand, Latin America Exports, and Northeast Asia were all partially offset by lower market driven discount rates that limited the declines in fair value. Should market interest rates increase in future periods, the likelihood for further impairment will rise.
During the third quarter of 2019, 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 EMEA, Latin America, and APAC zones to form the International zone. The International zone will be a reportable segment along with the United States and Canada in 2020. We also plan to move our Puerto Rico business from the Latin America zone to the United States zone to consolidate and streamline the management of our product categories and supply chain. These changes will be effective in the first quarter of 2020. As a result of the transition, we expect to perform impairment testing immediately before and after reorganizing our reporting unit structure. When we perform the transition impairment test associated with the reorganization in the first quarter of 2020, we anticipate that a substantial portion of the remaining goodwill carrying amounts for the Latin America Exports and Northeast Asia reporting units (with carrying amounts of $195 million and $83 million, respectively) may be subject to additional impairments.
As a result of our 2018 annual impairment test, we recognized a non-cash impairment loss of $133 million in SG&A related to our Australia and New Zealand reporting unit within our Rest of World segment in the second quarter of 2018. This impairment loss was primarily due to margin declines in the region.
For the fourth quarter of 2018, in connection with the preparation of our year-end financial statements, we assessed the changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any reporting units were below their carrying amounts. As we determined that it was more likely than not that the fair values of seven reporting units were below their carrying amounts, we performed an interim impairment test on these reporting units as of December 29, 2018. As a result of our interim test, we recognized a non-cash impairment loss of $6.9 billion in SG&A related to five reporting units, including U.S. Refrigerated, Canada Retail, Southeast Asia, Northeast Asia, and Other Latin America. The other two reporting units we tested were determined to not be impaired. See Note 10, Goodwill and Intangible Assets, in our Annual Report on Form 10-K for the year ended December 29, 2018 for additional information on these impairment losses.
Accumulated impairment losses to goodwill were $8.2 billion at December 28, 2019.
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, change, or if management’s expectations or plans otherwise change, including as a result of updates to our global five-year operating plan, then one or more of our reporting units might become impaired in the future. We are currently actively reviewing the enterprise strategy for the Company. As part of this strategic review, we expect to develop updates to the five-year operating plan in 2020, which could impact the allocation of investments among reporting units and impact growth expectations and fair value estimates. Additionally, as a result of this strategic review process, we could decide to divest certain non-strategic assets. As a result, the ongoing development of the enterprise strategy and underlying detailed business plans could lead to the impairment of one or more of our reporting units in the future.
Our reporting units that were impaired in 2018 and 2019 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 reporting units that have 20% or less excess fair value over carrying amount as of their latest 2019 impairment testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Although the remaining reporting units have more than 20% excess fair value over carrying amount as of their latest 2019 impairment testing date, these amounts are also associated with the 2013 Heinz acquisition and the 2015 Merger and are recorded on the balance sheet at their estimated acquisition date fair values. Therefore, if any estimates, market factors, or assumptions, including those related to our enterprise strategy or business plans, 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 29, 2018
|
$
|
43,966
|
|
Impairment losses
|
(687
|
)
|
Reclassified to assets held for sale
|
(9
|
)
|
Translation adjustments
|
130
|
|
Balance at December 28, 2019
|
$
|
43,400
|
|
At December 28, 2019 and December 29, 2018, indefinite-lived intangible assets excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information on amounts held for sale.
Our indefinite-lived intangible asset balance primarily consists of a number of individual brands, which had an aggregate carrying amount of $43.4 billion as of December 28, 2019. 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.
We performed our 2019 annual impairment test as of March 31, 2019, which is the first day of our second quarter in 2019. As a result of our 2019 annual impairment test, we recognized a non-cash impairment loss of $474 million in SG&A in the second quarter of 2019 primarily related to six brands (Miracle Whip, Velveeta, Lunchables, Maxwell House, Philadelphia, and Cool Whip). This impairment loss was recorded in our United States segment, consistent with the ownership of the trademarks. The impairment for these brands was largely due to an increase in the discount rate assumptions used for the fair value estimations. The increase in the discount rate was applied to reflect a market participants’ perceived risk in the valuation implied by the sustained reduction in our stock price and, hence, market capitalization (which decreased approximately 25% from December 29, 2018 to the March 31, 2019 annual impairment test date and sustained this decline through June 29, 2019).
For Miracle Whip and Maxwell House, the reduction in fair value was also driven by lower expectations of near and long-term net sales growth that were adjusted in the second quarter of 2019 due to anticipated trends in consumer preferences. For Lunchables, the reduction in fair value was also due to lower forecasted net sales and royalty rate assumptions associated with lower profit margin expectations driven by pricing actions at certain customers. For Velveeta, Philadelphia, and Cool Whip, no assumption changes other than the discount rate had a meaningful impact on the estimated fair value of brands. Since these valuation assumption changes were made in connection with the annual impairment test in the second quarter of 2019 and were not indicative of events or conditions that would have constituted a triggering event during the first quarter of 2019, we recorded the non-cash impairment loss in the second quarter of 2019. These brands had an aggregate carrying value of $13.5 billion prior to this impairment and $13.0 billion after impairment.
The aggregate carrying amount associated with an additional three brands (Kraft, Planters, and ABC), which each had excess fair value over its carrying amount of 10% or less, was $13.4 billion as of the annual impairment test date. The aggregate carrying amount of an additional three brands (Oscar Mayer, Jet Puffed, and Quero), which each had fair value over its carrying amount of between 10-20%, was $3.6 billion as of the annual impairment test date. The aggregate carrying amount of brands with fair value over carrying amount between 20-50% was $4.2 billion, and the aggregate carrying amount of brands with fair value over carrying amount in excess of 50% was $9.3 billion as of the annual impairment test date.
In the fourth quarter of 2019, in connection with the preparation of our year-end financial statements, we determined that it was more likely than not that the fair values of two of our brands, Maxwell House and Wattie’s, were below their carrying amounts. The factors that led us to the determination to test for impairment were the same fourth quarter considerations outlined in the goodwill impairment discussion above. As we determined that it was more likely than not that the fair values of these two brands were below their carrying amounts, we performed an interim impairment test on these brands as of December 28, 2019.
We recognized a non-cash impairment loss of $213 million in SG&A in our United States segment, consistent with the ownership of the Maxwell House trademark. The reduction in fair value of the Maxwell House trademark was driven by expectations of near-term net sales and profitability declines outlined in the 2020 annual operating plan in response to consumer shifts from mainstream coffee brands to premium coffee brands. These shifts in expectations were partially offset by declines in market driven discount rates observed in the fourth quarter of 2019. Should market interest rates increase in future periods, the likelihood for further impairment will increase. We determined the factors contributing to the impairment loss were the result of circumstances that arose during the fourth quarter of 2019. This brand had a carrying value of approximately $823 million after the recorded impairment.
The Wattie’s brand was determined to not be impaired. The carrying amount of the Wattie’s brand is approximately $94 million and the fair value is between 10-20% over the carrying amount.
As a result of our 2018 annual impairment test, we recognized a non-cash impairment loss of $101 million in SG&A in the second quarter of 2018. This impairment loss was due to net sales and margin declines related to the Quero brand in Brazil. The impairment loss was recorded in our Rest of World segment, consistent with the ownership of the trademark.
In the third quarter of 2018, we recognized a non-cash impairment loss of $215 million in SG&A related to the Smart Ones brand. This impairment loss was primarily due to reduced future investment expectations and continued sales declines in the third quarter of 2018. This impairment loss was recorded in our United States segment, consistent with the ownership of the trademark. We transferred the remaining carrying value of Smart Ones to definite-lived intangible assets.
For the fourth quarter of 2018, in connection with the preparation of our year-end financial statements, we assessed the changes in circumstances that occurred during the quarter to determine if it was more likely than not that the fair values of any brands were below their carrying amounts. As we determined that it was more likely than not that the fair values of six brands were below their carrying amounts, we performed an interim impairment test on these brands as of December 29, 2018. As a result of our interim test, we recognized a non-cash impairment loss of $8.6 billion in SG&A related to five brands, including three that were valued using the excess earnings method (Kraft, Oscar Mayer, and Philadelphia) and two that were valued using the relief from royalty method (Velveeta and ABC). The other brand we tested was determined to not be impaired. The impairment losses for Kraft, Oscar Mayer, Philadelphia, and Velveeta were recorded in our United States segment, and the ABC impairment loss was recorded in our Rest of World segment, consistent with the ownership of each trademark. See Note 10, Goodwill and Intangible Assets, in our Annual Report on Form 10-K for the year ended December 29, 2018 for additional information on these impairment losses.
As a result of our 2017 annual impairment testing, we recognized a non-cash impairment loss of $49 million in SG&A in the second quarter of 2017. This loss was due to continued declines in nutritional beverages in India. The loss was recorded in our EMEA segment as the related trademark is owned by an Italian subsidiary.
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, change, or if management’s expectations or plans otherwise change, including as a result of updates to our global five-year operating plan, then one or more of our brands might become impaired in the future. We are currently actively reviewing the enterprise strategy for the Company. As part of this strategic review, we expect to develop updates to the five-year operating plan in 2020, which could impact the allocation of investments among brands and impact growth expectations and fair value estimates. Additionally, as a result of this strategic review process, we could decide to divest certain non-strategic assets. As a result, the ongoing development of the enterprise strategy and underlying detailed business plans could lead to the impairment of one or more of our brands in the future.
Our brands that were impaired in 2018 and 2019 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 their latest 2019 impairment testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Although the remaining brands have more than 20% excess fair value over carrying amount as of their latest 2019 impairment testing date, these amounts are also associated with the 2013 Heinz acquisition and the 2015 Merger and are recorded on the balance sheet at their estimated acquisition date fair values. Therefore, if any estimates, market factors, or assumptions, including those related to our enterprise strategy or business plans, change in the future, these amounts are also susceptible to impairments.
Definite-lived intangible assets:
Definite-lived intangible assets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Trademarks
|
$
|
2,443
|
|
|
$
|
(469
|
)
|
|
$
|
1,974
|
|
|
$
|
2,474
|
|
|
$
|
(402
|
)
|
|
$
|
2,072
|
|
Customer-related assets
|
4,113
|
|
|
(845
|
)
|
|
3,268
|
|
|
4,097
|
|
|
(681
|
)
|
|
3,416
|
|
Other
|
14
|
|
|
(4
|
)
|
|
10
|
|
|
18
|
|
|
(4
|
)
|
|
14
|
|
|
$
|
6,570
|
|
|
$
|
(1,318
|
)
|
|
$
|
5,252
|
|
|
$
|
6,589
|
|
|
$
|
(1,087
|
)
|
|
$
|
5,502
|
|
Amortization expense for definite-lived intangible assets was $286 million in 2019, $290 million in 2018, and $278 million in 2017. Aside from amortization expense, the changes in definite-lived intangible assets from December 29, 2018 to December 28, 2019 primarily reflect additions of $66 million related to purchase accounting for Primal Nutrition, impairment losses of $15 million, and foreign currency. At December 28, 2019 and December 29, 2018, definite-lived intangible assets excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information related to our acquisition of Primal Nutrition, as well as amounts held for sale.
We estimate that amortization expense related to definite-lived intangible assets will be approximately $277 million in 2020 and approximately $277 million in each of the four years thereafter.
Note 10. Income Taxes
U.S. Tax Reform:
On December 22, 2017, U.S. Tax Reform legislation was enacted by the federal government. The legislation significantly changed U.S. tax laws by, among other things, lowering the federal corporate tax rate from 35.0% to 21.0%, effective January 1, 2018 and imposing a one-time toll charge on deemed repatriated earnings of foreign subsidiaries as of December 30, 2017. In addition, there were many new provisions, including changes to bonus depreciation, revised deductions for executive compensation and interest expense, a tax on global intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”), and a deduction for foreign-derived intangible income (“FDII”). While the corporate tax rate reduction was effective January 1, 2018, we accounted for this anticipated rate change in 2017, the period of enactment.
Staff Accounting Bulletin No. 118 issued by the Securities and Exchange Commission (the “SEC”) in December 2017 provided us with up to one year to finalize accounting for the impacts of U.S. Tax Reform and allowed for provisional estimates when actual amounts could not be determined. As of December 30, 2017, we had made estimates of our deferred income tax benefit related to the corporate rate change, the toll charge, certain components of the revaluation of deferred tax assets and liabilities, including depreciation and executive compensation, and a change in our indefinite reinvestment assertion. In connection with U.S. Tax Reform, we reassessed our international investment assertion and no longer consider the historic earnings of our foreign subsidiaries as of December 30, 2017 to be indefinitely reinvested. We made an estimate of local country withholding taxes that would be owed when our historic earnings are distributed. Additionally, we elected to account for the tax on GILTI as a period cost and thus did not adjust any of the deferred tax assets and liabilities of our foreign subsidiaries for U.S. Tax Reform.
As of December 29, 2018, we had finalized our accounting for U.S. Tax Reform. The final impact (the majority of which was recorded in 2017, the period of enactment) was a net tax benefit of approximately $7.1 billion, including a deferred tax benefit of approximately $7.5 billion related to the corporate rate change, partially offset by tax expense of $224 million related to the toll charge and $120 million for other tax expenses, including the deferred tax liability recorded for changing our indefinite reinvestment assertion.
As of December 28, 2019, we have recorded a deferred tax liability of $20 million on approximately $300 million of historic earnings related to local withholding taxes that will be owed when this cash is distributed. As of December 29, 2018, we had recorded a deferred tax liability of $78 million on $1.2 billion of historic earnings. The decreases in our deferred tax liability and historic earnings are primarily due to repatriation. Related to these distributions, we reduced our historic earnings by approximately $700 million and recorded tax expenses of approximately $40 million and reduced the deferred tax liability accordingly. Additionally, we reduced our historic earnings by approximately $110 million following the ratification of the U.S. tax treaty with Spain which eliminated withholding tax on Spanish distributions and resulted in a tax benefit of approximately $11 million and a corresponding decrease in our deferred tax liability. Finally, we reduced our historic earnings by approximately $30 million related to a held for sale business in our Rest of World segment, which resulted in a tax benefit of approximately $6 million.
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 and 2019 earnings of certain international subsidiaries is approximately $70 million.
Provision for/(Benefit from) Income Taxes:
Income/(loss) before income taxes and the provision for/(benefit from) income taxes, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Income/(loss) before income taxes:
|
|
|
|
|
|
United States
|
$
|
796
|
|
|
$
|
(10,305
|
)
|
|
$
|
3,811
|
|
International
|
1,865
|
|
|
(1,016
|
)
|
|
1,639
|
|
Total
|
$
|
2,661
|
|
|
$
|
(11,321
|
)
|
|
$
|
5,450
|
|
|
|
|
|
|
|
Provision for/(benefit from) income taxes:
|
|
|
|
|
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
466
|
|
|
$
|
444
|
|
|
$
|
765
|
|
U.S. state and local
|
116
|
|
|
134
|
|
|
(47
|
)
|
International
|
439
|
|
|
322
|
|
|
295
|
|
|
1,021
|
|
|
900
|
|
|
1,013
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
(209
|
)
|
|
(1,843
|
)
|
|
(6,590
|
)
|
U.S. state and local
|
(7
|
)
|
|
(121
|
)
|
|
97
|
|
International
|
(77
|
)
|
|
(3
|
)
|
|
(2
|
)
|
|
(293
|
)
|
|
(1,967
|
)
|
|
(6,495
|
)
|
Total provision for/(benefit from) income taxes
|
$
|
728
|
|
|
$
|
(1,067
|
)
|
|
$
|
(5,482
|
)
|
In the first quarter of 2017, we prospectively adopted ASU 2016-09. We now record tax benefits related to the exercise of stock options and other equity instruments within our tax provision, rather than within equity. Accordingly, we recognized a tax benefit in our statements of income of $12 million in 2019, $12 million in 2018, and $22 million in 2017 related to tax benefits upon the exercise of stock options and other equity instruments.
Effective Tax Rate:
The effective tax rate on income/(loss) before income taxes differed from the U.S. federal statutory tax rate for the following reasons:
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
U.S. federal statutory tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
Tax on income of foreign subsidiaries
|
(7.5
|
)%
|
|
3.4
|
%
|
|
(4.8
|
)%
|
Domestic manufacturing deduction
|
—
|
%
|
|
—
|
%
|
|
(1.5
|
)%
|
U.S. state and local income taxes, net of federal tax benefit
|
1.1
|
%
|
|
1.6
|
%
|
|
1.1
|
%
|
Audit settlements and changes in uncertain tax positions
|
1.3
|
%
|
|
(0.3
|
)%
|
|
(0.2
|
)%
|
U.S. Tax Reform discrete income tax benefit
|
—
|
%
|
|
0.5
|
%
|
|
(129.0
|
)%
|
Global intangible low-taxed income
|
1.8
|
%
|
|
(0.5
|
)%
|
|
—
|
%
|
Goodwill impairment
|
9.3
|
%
|
|
(15.1
|
)%
|
|
—
|
%
|
Wind-up of non-U.S. pension plans
|
—
|
%
|
|
(0.4
|
)%
|
|
—
|
%
|
Losses/(gains) related to acquisitions and divestitures
|
1.0
|
%
|
|
0.1
|
%
|
|
—
|
%
|
Movement of valuation allowance reserves
|
1.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
(1.9
|
)%
|
|
(0.9
|
)%
|
|
(1.2
|
)%
|
Effective tax rate
|
27.4
|
%
|
|
9.4
|
%
|
|
(100.6
|
)%
|
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 U.S. Tax Reform, goodwill impairment, and other items on the effective tax rate shown in the table above are affected by income/(loss) before income taxes. Fluctuations in the amount of income generated across locations around the world could impact comparability of reconciling items between periods. Additionally, small movements in tax rates due to a change in tax law or a change in tax rates that causes us to revalue our deferred tax balances produces volatility in our effective tax rate.
The 2019 effective tax rate was higher primarily driven by lower non-deductible goodwill impairments, partially offset by a more favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and a decrease in unfavorable rate reconciling items. Current year unfavorable impacts primarily related to non-deductible goodwill impairments, the impact of the federal tax on GILTI, an increase in uncertain tax position reserves, the establishment of certain state valuation allowance reserves, and the tax impacts from the Heinz India and Canada Natural Cheese Transactions. These impacts were partially offset by the reversal of certain withholding tax obligations and changes in estimates of certain 2018 U.S. income and deductions. In the prior year, we had an unfavorable impact from rate reconciling items, primarily related to non-deductible goodwill impairments, the revaluation of our deferred tax balances due to changes in state tax laws, non-deductible currency devaluation losses, and the wind-up of non-U.S. pension plans, which were partially offset by changes in estimates of certain 2017 U.S. income and deductions.
The 2018 effective tax rate was lower, primarily due to a decrease in the U.S. federal statutory rate, non-deductible items (including goodwill impairments, nonmonetary currency devaluation losses, and the wind-up of non-U.S. pension plans), the impact of the federal tax on GILTI, and the revaluation of our deferred tax balances due to changes in state tax laws following U.S. Tax Reform, which were partially offset by the benefit from intangible asset impairment losses in the fourth quarter of 2018. See Note 9, Goodwill and Intangible Assets, for additional information related to our impairment losses in the fourth quarter of 2018.
The tax provision for the 2017 tax year benefited from U.S. Tax Reform enacted on December 22, 2017. The related income tax benefit of 129.0% in 2017 primarily reflects adjustments to our deferred tax positions for the lower federal income tax rate, partially offset by our provision for the one-time toll charge.
Deferred Income Tax Assets and Liabilities:
The tax effects of temporary differences and carryforwards that gave rise to deferred income tax assets and liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Deferred income tax liabilities:
|
|
|
|
Intangible assets, net
|
$
|
11,230
|
|
|
$
|
11,571
|
|
Property, plant and equipment, net
|
773
|
|
|
735
|
|
Other
|
252
|
|
|
410
|
|
Deferred income tax liabilities
|
12,255
|
|
|
12,716
|
|
Deferred income tax assets:
|
|
|
|
Benefit plans
|
(112
|
)
|
|
(172
|
)
|
Other
|
(474
|
)
|
|
(470
|
)
|
Deferred income tax assets
|
(586
|
)
|
|
(642
|
)
|
Valuation allowance
|
112
|
|
|
81
|
|
Net deferred income tax liabilities
|
$
|
11,781
|
|
|
$
|
12,155
|
|
At December 28, 2019 and December 29, 2018, deferred income tax liabilities excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
The decrease in deferred tax liabilities from December 29, 2018 to December 28, 2019 was primarily driven by intangible asset impairment losses recorded in 2019. See Note 9, Goodwill and Intangible Assets, for additional information.
At December 28, 2019, foreign operating loss carryforwards totaled $364 million. Of that amount, $35 million expire between 2020 and 2039; the other $329 million do not expire. We have recorded $104 million of deferred tax assets related to these foreign operating loss carryforwards. Deferred tax assets of $73 million have been recorded for U.S. state and local operating loss carryforwards. These losses expire between 2020 and 2039.
Uncertain Tax Positions:
At December 28, 2019, our unrecognized tax benefits for uncertain tax positions were $406 million. If we had recognized all of these benefits, the impact on our effective tax rate would have been $369 million. It is reasonably possible that our unrecognized tax benefits will decrease by as much as $24 million in the next 12 months primarily due to the progression of federal, state, and foreign audits in process. Our unrecognized tax benefits for uncertain tax positions are included in income taxes payable and other non-current liabilities on our consolidated balance sheets.
The changes in our unrecognized tax benefits were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Balance at the beginning of the period
|
$
|
387
|
|
|
$
|
408
|
|
|
$
|
389
|
|
Increases for tax positions of prior years
|
28
|
|
|
9
|
|
|
2
|
|
Decreases for tax positions of prior years
|
(39
|
)
|
|
(81
|
)
|
|
(35
|
)
|
Increases based on tax positions related to the current year
|
60
|
|
|
74
|
|
|
135
|
|
Decreases due to settlements with taxing authorities
|
(20
|
)
|
|
(3
|
)
|
|
(59
|
)
|
Decreases due to lapse of statute of limitations
|
(10
|
)
|
|
(10
|
)
|
|
(24
|
)
|
Reclassified to liabilities held for sale
|
—
|
|
|
(10
|
)
|
|
—
|
|
Balance at the end of the period
|
$
|
406
|
|
|
$
|
387
|
|
|
$
|
408
|
|
Our unrecognized tax benefits increased during 2019 mainly as a result of a net increase for tax positions related to the current and prior years in the U.S. and certain state and foreign jurisdictions which were partially offset by decreases related to audit settlements with federal, state, and foreign taxing authorities and statute of limitations expirations. Our unrecognized tax benefits decreased during 2018 mainly as a result of audit settlements with federal, state, and foreign taxing authorities and statute of limitations expirations.
We include interest and penalties related to uncertain tax positions in our tax provision. Our provision for/(benefit from) income taxes included a $5 million expense in 2018 and a $24 million benefit in 2017 related to interest and penalties. The expense related to interest and penalties in 2019 was insignificant. Accrued interest and penalties were $62 million as of December 28, 2019 and December 29, 2018.
Other Income Tax Matters:
In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, Italy, the Netherlands, the United Kingdom, and the United States. As of December 28, 2019, we have substantially concluded all national income tax matters through 2016 for the Netherlands, through 2015 for the United States, through 2014 for Australia, through 2012 for the United Kingdom, and through 2011 for Canada and Italy. We have substantially concluded all state income tax matters through 2007.
Note 11. Employees’ Stock Incentive Plans
We grant equity awards, including stock options, restricted stock units (“RSUs”), and performance share units (“PSUs”), to select employees to provide long-term performance incentives to our employees.
Stock Plans
We had activity related to equity awards from the following plans in 2019, 2018, and 2017:
2016 Omnibus Incentive Plan:
In April 2016, our Board of Directors approved the 2016 Omnibus Incentive Plan (“2016 Omnibus Plan”), which authorized grants of options, stock appreciation rights, RSUs, deferred stock, performance awards, investment rights, other stock-based awards, and cash-based awards. This plan authorizes the issuance of up to 18 million shares of our common stock. Equity awards granted under the 2016 Omnibus Plan prior to 2019 generally have a five-year cliff vest period. Equity awards granted under the 2016 Omnibus Plan in 2019 include three-year and five-year cliff vest periods as well as awards that become exercisable in annual installments over three to four years beginning on the second anniversary of the original grant date. Non-qualified stock options have a maximum exercise term of 10 years. Equity awards granted under the 2016 Omnibus Plan since inception include non-qualified stock options, RSUs, and PSUs.
2013 Omnibus Incentive Plan:
Prior to approval of the 2016 Omnibus Plan, we issued non-qualified stock options to select employees under the 2013 Omnibus Incentive Plan (“2013 Omnibus Plan”). As a result of the 2015 Merger, each outstanding Heinz stock option was converted into 0.443332 of a Kraft Heinz stock option. Following this conversion, the 2013 Omnibus Plan authorized the issuance of up to 17,555,947 shares of our common stock. Non-qualified stock options awarded under the 2013 Omnibus Plan have a five-year cliff vest period and a maximum exercise term of 10 years. These non-qualified stock options will continue to vest and become exercisable in accordance with the terms and conditions of the 2013 Omnibus Plan and the relevant award agreements.
Kraft 2012 Performance Incentive Plan:
Prior to the 2015 Merger, Kraft issued equity-based awards, including stock options and RSUs, under its 2012 Performance Incentive Plan. As a result of the 2015 Merger, each outstanding Kraft stock option was converted into an option to purchase a number of shares of our common stock based upon an option adjustment ratio, and each outstanding Kraft RSU was converted into one Kraft Heinz RSU. These Kraft Heinz equity awards will continue to vest and become exercisable in accordance with the terms and conditions that were applicable immediately prior to the completion of the 2015 Merger. These options generally become exercisable in three annual installments beginning on the first anniversary of the original grant date, and have a maximum exercise term of 10 years. RSUs generally cliff vest on the third anniversary of the original grant date. In accordance with the terms of the 2012 Performance Incentive Plan, vesting generally accelerates for holders of Kraft awards who are terminated without cause within 2 years of the 2015 Merger Date.
In addition, prior to the 2015 Merger, Kraft issued performance-based, long-term incentive awards (“Performance Shares”), which vested based on varying performance, market, and service conditions. In connection with the 2015 Merger, all outstanding Performance Shares were converted into cash awards, payable in two installments: (i) a 2015 pro-rata payment based upon the portion of the Performance Share cycle completed prior to the 2015 Merger and (ii) the remaining value of the award to be paid on the earlier of the first anniversary of the closing of the 2015 Merger and a participant's termination without cause.
Stock Options
We use the Black-Scholes model to estimate the fair value of stock option grants. Our weighted average Black-Scholes fair value assumptions were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Risk-free interest rate
|
1.46
|
%
|
|
2.75
|
%
|
|
2.25
|
%
|
Expected term
|
6.5 years
|
|
|
7.5 years
|
|
|
7.5 years
|
|
Expected volatility
|
31.2
|
%
|
|
21.3
|
%
|
|
19.6
|
%
|
Expected dividend yield
|
5.3
|
%
|
|
3.6
|
%
|
|
2.8
|
%
|
Weighted average grant date fair value per share
|
$
|
4.11
|
|
|
$
|
10.26
|
|
|
$
|
14.24
|
|
The risk-free interest rate represented the constant maturity U.S. Treasury rate in effect at the grant date, with a remaining term equal to the expected life of the options. The expected life is the period over which our employees are expected to hold their options. Due to the lack of historical data, we calculated expected life using the weighted average vesting period and the contractual term of the options. In 2019 and 2018, we estimated volatility using a blended volatility approach of term-matched historical volatility from our daily stock prices and weighted average implied volatility. In 2017, we estimated volatility using a blended approach of implied volatility and peer volatility. We calculated peer volatility as the average of the term-matched, leverage-adjusted historical volatilities of Colgate-Palmolive Co., The Coca-Cola Company, Mondelēz International, Altria Group, Inc., PepsiCo, Inc., and Unilever plc. We estimated the expected dividend yield using the quarterly dividend divided by the three-month average stock price, annualized and continuously compounded.
Our stock option activity and related information was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted Average Exercise Price
(per share)
|
|
Aggregate Intrinsic Value
(in millions)
|
|
Average Remaining Contractual Term
|
Outstanding at December 29, 2018
|
18,259,965
|
|
|
$
|
44.64
|
|
|
|
|
|
Granted
|
1,880,648
|
|
|
25.41
|
|
|
|
|
|
Forfeited
|
(1,771,653
|
)
|
|
66.89
|
|
|
|
|
|
Exercised
|
(730,460
|
)
|
|
23.81
|
|
|
|
|
|
Outstanding at December 28, 2019
|
17,638,500
|
|
|
41.22
|
|
|
$
|
42
|
|
|
4 years
|
Exercisable at December 28, 2019
|
11,539,568
|
|
|
33.89
|
|
|
51
|
|
|
3 years
|
The aggregate intrinsic value of stock options exercised during the period was $10 million in 2019, $67 million in 2018, and $124 million in 2017.
Cash received from options exercised was $17 million in 2019, $56 million in 2018, and $66 million in 2017. The tax benefit realized from stock options exercised was $18 million in 2019, $23 million in 2018, and $44 million in 2017.
Our unvested stock options and related information was:
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted Average Grant Date Fair Value
(per share)
|
Unvested options at December 29, 2018
|
7,767,917
|
|
|
$
|
10.16
|
|
Granted
|
1,880,648
|
|
|
4.11
|
|
Vested
|
(2,140,396
|
)
|
|
7.12
|
|
Forfeited
|
(1,409,237
|
)
|
|
11.51
|
|
Unvested options at December 28, 2019
|
6,098,932
|
|
|
9.04
|
|
Restricted Stock Units
RSUs represent a right to receive one share or the value of one share upon the terms and conditions set forth in the plan and the applicable award agreement.
We used the stock price on the grant date to estimate the fair value of our RSUs. Certain of our RSUs are not dividend-eligible. We discounted the fair value of these RSUs based on the dividend yield. Dividend yield was estimated using the quarterly dividend divided by the three-month average stock price, annualized and continuously compounded. The grant date fair value of RSUs is amortized to expense over the vesting period.
The weighted average grant date fair value per share of our RSUs granted during the year was $25.77 in 2019, $58.59 in 2018, and $91.25 in 2017. Our expected dividend yield was 5.39% in 2019 and 3.31% in 2018. All RSUs granted in 2017 were dividend-eligible.
Our RSU activity and related information was:
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Grant Date Fair Value
(per share)
|
Outstanding at December 29, 2018
|
2,338,958
|
|
|
$
|
68.49
|
|
Granted
|
8,091,999
|
|
|
25.77
|
|
Forfeited
|
(959,485
|
)
|
|
50.16
|
|
Vested
|
(75,563
|
)
|
|
76.38
|
|
Outstanding at December 28, 2019
|
9,395,909
|
|
|
33.51
|
|
The aggregate fair value of RSUs that vested during the period was $2 million in 2019, $9 million in 2018, and $12 million in 2017.
Performance Share Units
PSUs represent a right to receive one share or the value of one share upon the terms and conditions set forth in the plan and the applicable award agreement and are subject to achievement or satisfaction of performance or market conditions specified by the Compensation Committee of our Board of Directors.
For our PSUs that are tied to performance conditions, we used the stock price on the grant date to estimate the fair value. The PSUs are not dividend-eligible; therefore, we discounted the fair value of the PSUs based on the dividend yield. Dividend yield was estimated using the quarterly dividend divided by the three-month average stock price, annualized and continuously compounded. The grant date fair value of PSUs is amortized to expense on a straight-line basis over the requisite service period for each separately vesting portion of the awards. We adjust the expense based on the likelihood of future achievement of performance metrics.
In 2019, in addition to the performance-based PSUs granted, we granted PSUs to our Chief Executive Officer that are tied to market-based conditions. The grant date fair value of these PSUs was determined based on a Monte Carlo simulation model. A discount was applied to the Monte Carlo valuation to reflect the lack of marketability during a mandatory post-vest holding period of three years. The related compensation expense is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. The number of PSUs that ultimately vest is based on achievement of the market-based components.
The weighted average grant date fair value per share of our PSUs granted during the year was $25.31 in 2019, $56.31 in 2018, and $79.85 in 2017. Our expected dividend yield was 5.39% in 2019, 3.31% in 2018, and 2.73% in 2017.
Our PSU activity and related information was:
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Grant Date Fair Value
(per share)
|
Outstanding at December 29, 2018
|
3,252,056
|
|
|
$
|
59.24
|
|
Granted
|
4,832,626
|
|
|
25.31
|
|
Forfeited
|
(1,271,023
|
)
|
|
54.67
|
|
Outstanding at December 28, 2019
|
6,813,659
|
|
|
36.03
|
|
Total Equity Awards
Equity award compensation cost and the related tax benefit was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Pre-tax compensation cost
|
$
|
46
|
|
|
$
|
33
|
|
|
$
|
46
|
|
Related tax benefit
|
(9
|
)
|
|
(7
|
)
|
|
(14
|
)
|
After-tax compensation cost
|
$
|
37
|
|
|
$
|
26
|
|
|
$
|
32
|
|
Unrecognized compensation cost related to unvested equity awards was $365 million at December 28, 2019 and is expected to be recognized over a weighted average period of three years.
Note 12. Postemployment Benefits
We maintain various retirement plans for the majority of our employees. Current defined benefit pension plans are provided primarily for certain domestic union and foreign employees. Local statutory requirements govern many of these plans. The pension benefits of our unionized workers are in accordance with the applicable collective bargaining agreement covering their employment. Defined contribution plans are provided for certain domestic unionized, non-union hourly, and salaried employees as well as certain employees in foreign locations.
We provide health care and other postretirement benefits to certain of our eligible retired employees and their eligible dependents. Certain of our U.S. and Canadian employees may become eligible for such benefits. We may modify plan provisions or terminate plans at our discretion. The postretirement benefits of our unionized workers are in accordance with the applicable collective bargaining agreement covering their employment.
We remeasure our postemployment benefit plans at least annually.
We capitalize a portion of net pension and postretirement cost/(benefit) into inventory based on our production activities. Beginning January 1, 2018, only the service cost component of net pension and postretirement cost/(benefit) is capitalized into inventory. As part of the adoption of ASU 2017-07 in the first quarter of 2018, we recognized a one-time favorable credit of $42 million within cost of products sold related to amounts that were previously capitalized into inventory. Included in this credit was $28 million related to prior service credits that were previously capitalized to inventory.
Pension Plans
In 2018, we settled our Canadian salaried and Canadian hourly defined benefit pension plans, which resulted in settlement charges of $162 million for the year ended December 29, 2018. Additionally, the settlement of these plans impacted the projected benefit obligation, accumulated benefit obligation, fair value of plan assets, and service costs associated with our non-U.S. pension plans.
Obligations and Funded Status:
The projected benefit obligations, fair value of plan assets, and funded status of our pension plans were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 28, 2019
|
|
December 29, 2018
|
Benefit obligation at beginning of year
|
$
|
4,060
|
|
|
$
|
4,719
|
|
|
$
|
1,930
|
|
|
$
|
3,464
|
|
Service cost
|
7
|
|
|
10
|
|
|
17
|
|
|
19
|
|
Interest cost
|
163
|
|
|
158
|
|
|
51
|
|
|
67
|
|
Benefits paid
|
(331
|
)
|
|
(191
|
)
|
|
(122
|
)
|
|
(126
|
)
|
Actuarial losses/(gains)
|
602
|
|
|
(447
|
)
|
|
252
|
|
|
(118
|
)
|
Plan amendments
|
—
|
|
|
1
|
|
|
—
|
|
|
14
|
|
Currency
|
—
|
|
|
—
|
|
|
59
|
|
|
(175
|
)
|
Settlements
|
—
|
|
|
(190
|
)
|
|
—
|
|
|
(1,221
|
)
|
Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Special/contractual termination benefits
|
—
|
|
|
—
|
|
|
4
|
|
|
7
|
|
Other
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
Benefit obligation at end of year
|
4,501
|
|
|
4,060
|
|
|
2,187
|
|
|
1,930
|
|
Fair value of plan assets at beginning of year
|
4,219
|
|
|
4,785
|
|
|
2,689
|
|
|
4,156
|
|
Actual return on plan assets
|
947
|
|
|
(185
|
)
|
|
177
|
|
|
49
|
|
Employer contributions
|
—
|
|
|
—
|
|
|
19
|
|
|
57
|
|
Benefits paid
|
(331
|
)
|
|
(191
|
)
|
|
(122
|
)
|
|
(126
|
)
|
Currency
|
—
|
|
|
—
|
|
|
78
|
|
|
(221
|
)
|
Settlements
|
—
|
|
|
(190
|
)
|
|
—
|
|
|
(1,221
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Fair value of plan assets at end of year
|
4,835
|
|
|
4,219
|
|
|
2,841
|
|
|
2,689
|
|
Net pension liability/(asset) recognized at end of year
|
$
|
(334
|
)
|
|
$
|
(159
|
)
|
|
$
|
(654
|
)
|
|
$
|
(759
|
)
|
The accumulated benefit obligation, which represents benefits earned to the measurement date, was $4.5 billion at December 28, 2019 and $4.1 billion at December 29, 2018 for the U.S. pension plans. The accumulated benefit obligation for the non-U.S. pension plans was $2.1 billion at December 28, 2019 and $1.7 billion at December 29, 2018.
The combined U.S. and non-U.S. pension plans resulted in net pension assets of $988 million at December 28, 2019 and $918 million at December 29, 2018. We recognized these amounts on our consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Other non-current assets
|
$
|
1,081
|
|
|
$
|
999
|
|
Other current liabilities
|
(4
|
)
|
|
(4
|
)
|
Accrued postemployment costs
|
(89
|
)
|
|
(77
|
)
|
Net pension asset/(liability) recognized
|
$
|
988
|
|
|
$
|
918
|
|
For certain of our U.S. and non-U.S. plans that were underfunded based on accumulated benefit obligations in excess of plan assets, the projected benefit obligations, accumulated benefit obligations, and the fair value of plan assets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 28, 2019
|
|
December 29, 2018
|
Projected benefit obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
162
|
|
|
$
|
146
|
|
Accumulated benefit obligation
|
—
|
|
|
—
|
|
|
156
|
|
|
139
|
|
Fair value of plan assets
|
—
|
|
|
—
|
|
|
70
|
|
|
65
|
|
All of our U.S. plans were overfunded based on plan assets in excess of accumulated benefit obligations as of December 28, 2019 and December 29, 2018.
For certain of our U.S. and non-U.S. plans that were underfunded based on projected benefit obligations in excess of plan assets, the projected benefit obligations, accumulated benefit obligations, and the fair value of plan assets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 28, 2019
|
|
December 29, 2018
|
Projected benefit obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
162
|
|
|
$
|
148
|
|
Accumulated benefit obligation
|
—
|
|
|
—
|
|
|
156
|
|
|
141
|
|
Fair value of plan assets
|
—
|
|
|
—
|
|
|
70
|
|
|
67
|
|
All of our U.S. plans were overfunded based on plan assets in excess of projected benefit obligations as of December 28, 2019 and December 29, 2018.
We used the following weighted average assumptions to determine our projected benefit obligations under the pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 28, 2019
|
|
December 29, 2018
|
Discount rate
|
3.4
|
%
|
|
4.4
|
%
|
|
2.0
|
%
|
|
2.9
|
%
|
Rate of compensation increase
|
4.1
|
%
|
|
4.1
|
%
|
|
3.7
|
%
|
|
3.9
|
%
|
Discount rates for our U.S. and non-U.S. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans.
Components of Net Pension Cost/(Benefit):
Net pension cost/(benefit) consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Service cost
|
$
|
7
|
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
17
|
|
|
$
|
19
|
|
|
$
|
19
|
|
Interest cost
|
163
|
|
|
158
|
|
|
178
|
|
|
51
|
|
|
67
|
|
|
66
|
|
Expected return on plan assets
|
(229
|
)
|
|
(247
|
)
|
|
(262
|
)
|
|
(143
|
)
|
|
(175
|
)
|
|
(180
|
)
|
Amortization of unrecognized losses/(gains)
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
1
|
|
Settlements
|
—
|
|
|
(4
|
)
|
|
2
|
|
|
1
|
|
|
158
|
|
|
—
|
|
Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Special/contractual termination benefits
|
—
|
|
|
—
|
|
|
19
|
|
|
4
|
|
|
7
|
|
|
9
|
|
Other
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
Net pension cost/(benefit)
|
$
|
(59
|
)
|
|
$
|
(83
|
)
|
|
$
|
(50
|
)
|
|
$
|
(69
|
)
|
|
$
|
77
|
|
|
$
|
(100
|
)
|
We present all non-service cost components of net pension cost/(benefit) within other expense/(income) on our consolidated statements of income.
We used the following weighted average assumptions to determine our net pension costs for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Discount rate - Service cost
|
4.6
|
%
|
|
3.8
|
%
|
|
4.2
|
%
|
|
3.3
|
%
|
|
3.0
|
%
|
|
3.2
|
%
|
Discount rate - Interest cost
|
4.1
|
%
|
|
3.6
|
%
|
|
3.6
|
%
|
|
2.6
|
%
|
|
2.9
|
%
|
|
2.1
|
%
|
Expected rate of return on plan assets
|
5.7
|
%
|
|
5.5
|
%
|
|
5.7
|
%
|
|
5.4
|
%
|
|
4.5
|
%
|
|
4.8
|
%
|
Rate of compensation increase
|
4.1
|
%
|
|
4.1
|
%
|
|
4.1
|
%
|
|
3.9
|
%
|
|
3.9
|
%
|
|
4.0
|
%
|
Discount rates for our U.S. and non-U.S. plans were developed from a model portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. We determine our expected rate of return on plan assets from the plan assets' historical long-term investment performance, target asset allocation, and estimates of future long-term returns by asset class.
Plan Assets:
The underlying basis of the investment strategy of our defined benefit plans is to ensure that pension funds are available to meet the plans’ benefit obligations when they are due. Our investment objectives include: investing plan assets in a high-quality, diversified manner in order to maintain the security of the funds; achieving an optimal return on plan assets within specified risk tolerances; and investing according to local regulations and requirements specific to each country in which a defined benefit plan operates. The investment strategy expects equity investments to yield a higher return over the long term than fixed-income securities, while fixed-income securities are expected to provide certain matching characteristics to the plans’ benefit payment cash flow requirements. Our investment policy specifies the type of investment vehicles appropriate for the applicable plan, asset allocation guidelines, criteria for the selection of investment managers, procedures to monitor overall investment performance as well as investment manager performance. It also provides guidelines enabling the applicable plan fiduciaries to fulfill their responsibilities.
Our weighted average asset allocations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 28, 2019
|
|
December 29, 2018
|
Fixed-income securities
|
83
|
%
|
|
84
|
%
|
|
43
|
%
|
|
45
|
%
|
Equity securities
|
15
|
%
|
|
14
|
%
|
|
39
|
%
|
|
34
|
%
|
Cash and cash equivalents
|
2
|
%
|
|
2
|
%
|
|
14
|
%
|
|
16
|
%
|
Real estate
|
—
|
%
|
|
—
|
%
|
|
2
|
%
|
|
3
|
%
|
Certain insurance contracts
|
—
|
%
|
|
—
|
%
|
|
2
|
%
|
|
2
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Our pension investment strategy for U.S. plans is designed to align our pension assets with our projected benefit obligation to reduce volatility by targeting an investment of approximately 85% of our U.S. plan assets in fixed-income securities and approximately 15% in return-seeking assets, primarily equity securities.
For pension plans outside the United States, our investment strategy is subject to local regulations and the asset/liability profiles of the plans in each individual country. In aggregate, the long-term asset allocation targets of our non-U.S. plans are broadly characterized as a mix of approximately 78% fixed-income securities and annuity contracts, and approximately 22% in return-seeking assets, primarily equity securities and real estate.
The fair value of pension plan assets at December 28, 2019 was determined using the following fair value measurements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Corporate bonds and other fixed-income securities
|
$
|
3,642
|
|
|
$
|
—
|
|
|
$
|
3,639
|
|
|
$
|
3
|
|
Government bonds
|
358
|
|
|
358
|
|
|
—
|
|
|
—
|
|
Total fixed-income securities
|
4,000
|
|
|
358
|
|
|
3,639
|
|
|
3
|
|
Equity securities
|
775
|
|
|
775
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents
|
414
|
|
|
413
|
|
|
1
|
|
|
—
|
|
Real estate
|
45
|
|
|
—
|
|
|
—
|
|
|
45
|
|
Certain insurance contracts
|
49
|
|
|
—
|
|
|
—
|
|
|
49
|
|
Fair value excluding investments measured at net asset value
|
5,283
|
|
|
1,546
|
|
|
3,640
|
|
|
97
|
|
Investments measured at net asset value(a)
|
2,393
|
|
|
|
|
|
|
|
Total plan assets at fair value
|
$
|
7,676
|
|
|
|
|
|
|
|
|
|
(a)
|
Amount includes cash collateral of $226 million associated with our securities lending program, which is reflected as an asset, and a corresponding securities lending payable of $226 million, which is reflected as a liability. The net impact on total plan assets at fair value is zero.
|
The fair value of pension plan assets at December 29, 2018 was determined using the following fair value measurements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Corporate bonds and other fixed-income securities
|
$
|
3,089
|
|
|
$
|
—
|
|
|
$
|
3,089
|
|
|
$
|
—
|
|
Government bonds
|
366
|
|
|
366
|
|
|
—
|
|
|
—
|
|
Total fixed-income securities
|
3,455
|
|
|
366
|
|
|
3,089
|
|
|
—
|
|
Equity securities
|
665
|
|
|
665
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents
|
422
|
|
|
419
|
|
|
3
|
|
|
—
|
|
Real estate
|
79
|
|
|
—
|
|
|
—
|
|
|
79
|
|
Certain insurance contracts
|
53
|
|
|
—
|
|
|
—
|
|
|
53
|
|
Fair value excluding investments measured at net asset value
|
4,674
|
|
|
1,450
|
|
|
3,092
|
|
|
132
|
|
Investments measured at net asset value(a)
|
2,234
|
|
|
|
|
|
|
|
Total plan assets at fair value
|
$
|
6,908
|
|
|
|
|
|
|
|
|
|
(a)
|
Amount includes cash collateral of $269 million associated with our securities lending program, which is reflected as an asset, and a corresponding securities lending payable of $269 million, which is reflected as a liability. The net impact on total plan assets at fair value is zero.
|
The following section describes the valuation methodologies used to measure the fair value of pension plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified.
Corporate Bonds and Other Fixed-Income Securities. These securities consist of publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds). Such investments are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data. As such, these securities are included in Level 2. A limited number of these securities are in default and included in Level 3.
Government Bonds. These securities consist of direct investments in publicly traded U.S. fixed interest obligations (principally debentures). Such investments are valued using quoted prices in active markets. These securities are included in Level 1.
Equity Securities. These securities consist of direct investments in the stock of publicly traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.
Cash and Cash Equivalents. This consists of direct cash holdings and institutional short-term investment vehicles. Direct cash holdings are valued based on cost, which approximates fair value and are classified as Level 1. Certain institutional short-term investment vehicles are valued daily and are classified as Level 1. Other cash equivalents that are not traded on an active exchange, such as bank deposits, are classified as Level 2.
Real Estate. These holdings consist of real estate investments and are generally classified as Level 3.
Certain Insurance Contracts. This category consists of group annuity contracts that have been purchased to cover a portion of the plan members and have been classified as Level 3.
Investments Measured at Net Asset Value. This category consists of pooled funds, short-term investments and partnership/corporate feeder interests.
|
|
•
|
Pooled funds. The fair values of participation units held in collective trusts are based on their net asset values, as reported by the managers of the collective trusts and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. Investments in the collective trusts can be redeemed on each business day based upon the applicable net asset value per unit. Investments in the international large/mid cap equity collective trust can be redeemed on the last business day of each month and at least one business day during the month.
|
The mutual fund investments are not traded on an exchange, and a majority of these funds are held in a separate account managed by a fixed income manager. The fair values of these investments are based on their net asset values, as reported by the managers and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. The objective of the account is to provide superior return with reasonable risk, where performance is expected to exceed Barclays Long U.S. Credit Index. Investments in this account can be redeemed with a written notice to the investment manager.
|
|
•
|
Short-term investments. Short-term investments largely consist of a money market fund, the fair value of which is based on the net asset value reported by the manager of the fund and supported by the unit prices of actual purchase and sale transactions. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. The money market fund is designed to provide safety of principal, daily liquidity, and a competitive yield by investing in high quality money market instruments. The investment objective of the money market fund is to provide the highest possible level of current income while still maintaining liquidity and preserving capital.
|
|
|
•
|
Partnership/corporate feeder interests. Fair value estimates of the equity partnership are based on their net asset values, as reported by the manager of the partnership. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. Investments in the equity partnership may be redeemed once per month upon 10 days’ prior written notice to the General Partner, subject to the discretion of the General Partner. The investment objective of the equity partnership is to seek capital appreciation by investing primarily in equity securities.
|
The fair values of the corporate feeder are based upon the net asset values of the equity master fund in which it invests. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. Investments in the corporate feeder can be redeemed quarterly with at least 90 days’ notice. The investment objective of the corporate feeder is to generate long-term returns by investing in large, liquid equity securities with attractive fundamentals.
Changes in our Level 3 plan assets for the year ended December 28, 2019 included (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
December 29, 2018
|
|
Additions
|
|
Net Realized Gain/(Loss)
|
|
Net Unrealized Gain/(Loss)
|
|
Net Purchases, Issuances and Settlements
|
|
Transfers Into/(Out of) Level 3
|
|
December 28, 2019
|
Real estate
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
(38
|
)
|
|
$
|
—
|
|
|
$
|
45
|
|
Corporate bonds and other fixed-income securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
Certain insurance contracts
|
53
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(5
|
)
|
|
—
|
|
|
49
|
|
Total Level 3 investments
|
$
|
132
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
(43
|
)
|
|
$
|
3
|
|
|
$
|
97
|
|
Changes in our Level 3 plan assets for the year ended December 29, 2018 included (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
December 30, 2017
|
|
Additions
|
|
Net Realized Gain/(Loss)
|
|
Net Unrealized Gain/(Loss)
|
|
Net Purchases, Issuances and Settlements
|
|
Transfers Into/(Out of) Level 3
|
|
December 29, 2018
|
Real estate
|
$
|
262
|
|
|
$
|
—
|
|
|
$
|
49
|
|
|
$
|
(7
|
)
|
|
$
|
(210
|
)
|
|
$
|
(15
|
)
|
|
$
|
79
|
|
Certain insurance contracts
|
983
|
|
|
—
|
|
|
(82
|
)
|
|
(3
|
)
|
|
(845
|
)
|
|
—
|
|
|
53
|
|
Total Level 3 investments
|
$
|
1,245
|
|
|
$
|
—
|
|
|
$
|
(33
|
)
|
|
$
|
(10
|
)
|
|
$
|
(1,055
|
)
|
|
$
|
(15
|
)
|
|
$
|
132
|
|
Net purchases, issuances and settlements of $845 million principally related to insurance contract settlements in Canada in connection with the wind-up of our Canadian salaried and hourly defined benefit pension plans.
Employer Contributions:
In 2019, we contributed $19 million to our non-U.S. pension plans. We did not contribute to our U.S. pension plans. We estimate that 2020 pension contributions will be approximately $19 million to our non-U.S. pension plans. We do not plan to make contributions to our U.S. pension plans in 2020. Our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual pension asset performance or interest rates, or other factors.
Future Benefit Payments:
The estimated future benefit payments from our pension plans at December 28, 2019 were (in millions):
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
2020
|
$
|
343
|
|
|
$
|
75
|
|
2021
|
340
|
|
|
75
|
|
2022
|
331
|
|
|
80
|
|
2023
|
323
|
|
|
79
|
|
2024
|
314
|
|
|
80
|
|
2025-2029
|
1,364
|
|
|
438
|
|
Postretirement Plans
Obligations and Funded Status:
The accumulated benefit obligation, fair value of plan assets, and funded status of our postretirement benefit plans were (in millions):
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Benefit obligation at beginning of year
|
$
|
1,294
|
|
|
$
|
1,553
|
|
Service cost
|
6
|
|
|
8
|
|
Interest cost
|
46
|
|
|
45
|
|
Benefits paid
|
(129
|
)
|
|
(136
|
)
|
Actuarial losses/(gains)
|
94
|
|
|
(142
|
)
|
Plan amendments
|
(1
|
)
|
|
(21
|
)
|
Currency
|
6
|
|
|
(13
|
)
|
Curtailments
|
(3
|
)
|
|
—
|
|
Benefit obligation at end of year
|
1,313
|
|
|
1,294
|
|
Fair value of plan assets at beginning of year
|
1,044
|
|
|
1,188
|
|
Actual return on plan assets
|
187
|
|
|
(26
|
)
|
Employer contributions
|
13
|
|
|
19
|
|
Benefits paid
|
(130
|
)
|
|
(137
|
)
|
Fair value of plan assets at end of year
|
1,114
|
|
|
1,044
|
|
Net postretirement benefit liability/(asset) recognized at end of year
|
$
|
199
|
|
|
$
|
250
|
|
We recognized the net postretirement benefit asset/(liability) on our consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Other current liabilities
|
$
|
(15
|
)
|
|
$
|
(14
|
)
|
Accrued postemployment costs
|
(184
|
)
|
|
(236
|
)
|
Net postretirement benefit asset/(liability) recognized
|
$
|
(199
|
)
|
|
$
|
(250
|
)
|
All of our postretirement benefit plans were underfunded based on accumulated postretirement benefit obligations in excess of plan assets. The accumulated benefit obligations and the fair value of plan assets were (in millions):
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Accumulated benefit obligation
|
$
|
1,313
|
|
|
$
|
1,294
|
|
Fair value of plan assets
|
1,114
|
|
|
1,044
|
|
We used the following weighted average assumptions to determine our postretirement benefit obligations:
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Discount rate
|
3.1
|
%
|
|
4.2
|
%
|
Health care cost trend rate assumed for next year
|
6.5
|
%
|
|
6.7
|
%
|
Ultimate trend rate
|
4.9
|
%
|
|
4.9
|
%
|
Discount rates for our plans were developed from a model portfolio of high-quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. Our expected health care cost trend rate is based on historical costs and our expectation for health care cost trend rates going forward.
The year that the health care cost trend rate reaches the ultimate trend rate varies by plan and ranges between 2020 and 2030 as of December 28, 2019.
Assumed health care costs trend rates have a significant impact on the amounts reported for the postretirement benefit plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects, increase/(decrease) in cost and obligation, as of December 28, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
One-Percentage-Point
|
|
Increase
|
|
(Decrease)
|
Effect on annual service and interest cost
|
$
|
3
|
|
|
$
|
(2
|
)
|
Effect on postretirement benefit obligation
|
55
|
|
|
(47
|
)
|
Components of Net Postretirement Cost/(Benefit):
Net postretirement cost/(benefit) consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Service cost
|
$
|
6
|
|
|
$
|
8
|
|
|
$
|
10
|
|
Interest cost
|
46
|
|
|
45
|
|
|
49
|
|
Expected return on plan assets
|
(53
|
)
|
|
(50
|
)
|
|
—
|
|
Amortization of prior service costs/(credits)
|
(306
|
)
|
|
(311
|
)
|
|
(328
|
)
|
Amortization of unrecognized losses/(gains)
|
(8
|
)
|
|
—
|
|
|
—
|
|
Curtailments
|
(5
|
)
|
|
—
|
|
|
(177
|
)
|
Net postretirement cost/(benefit)
|
$
|
(320
|
)
|
|
$
|
(308
|
)
|
|
$
|
(446
|
)
|
We present all non-service cost components of net postretirement cost/(benefit) within other expense/(income) on our consolidated statements of income.
The amortization of prior service credits was primarily driven by plan amendments in 2015 and 2016. We estimate that amortization of prior service credits will be approximately $123 million in 2020, $8 million in 2021, $6 million in 2022, $6 million in 2023, and $2 million in 2024.
In 2017, we remeasured certain of our postretirement plans and recognized a curtailment gain of $177 million. The curtailment was triggered by the number of cumulative headcount reductions after the closure of certain U.S. factories during the year. The resulting gain is attributed to accelerating a portion of the previously deferred actuarial gains and prior service credits. The headcount reductions and factory closures were part of our Integration Program. See Note 5, Restructuring Activities, for additional information.
We used the following weighted average assumptions to determine our net postretirement benefit plans cost for the years ended:
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Discount rate - Service cost
|
4.2
|
%
|
|
3.6
|
%
|
|
4.0
|
%
|
Discount rate - Interest cost
|
3.8
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
Expected rate of return on plan assets
|
5.4
|
%
|
|
4.4
|
%
|
|
—
|
%
|
Health care cost trend rate
|
6.5
|
%
|
|
6.7
|
%
|
|
6.3
|
%
|
Discount rates for our plans were developed from a model portfolio of high-quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. We determine our expected rate of return on plan assets from the plan assets' target asset allocation and estimates of future long-term returns by asset class. Our expected health care cost trend rate is based on historical costs and our expectation for health care cost trend rates going forward.
Plan Assets:
In December 2017, we made a cash contribution of approximately $1.2 billion to pre-fund a portion of our U.S. postretirement plan benefits following enactment of U.S. Tax Reform on December 22, 2017. The underlying basis of the investment strategy of our U.S. postretirement plans is to ensure that funds are available to meet the plans’ benefit obligations when they are due by investing plan assets in a high-quality, diversified manner in order to maintain the security of the funds. The investment strategy expects equity investments to yield a higher return over the long term than fixed-income securities, while fixed-income securities are expected to provide certain matching characteristics to the plans’ benefit payment cash flow requirements.
Our weighted average asset allocations were:
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
Fixed-income securities
|
65
|
%
|
|
65
|
%
|
Equity securities
|
31
|
%
|
|
27
|
%
|
Cash and cash equivalents
|
4
|
%
|
|
8
|
%
|
Our postretirement benefit plan investment strategy is subject to local regulations and the asset/liability profiles of the plans in each individual country. Our investment strategy is designed to align our postretirement benefit plan assets with our postretirement benefit obligation to reduce volatility. In aggregate, our long-term asset allocation targets are broadly characterized as a mix of approximately 70% in fixed-income securities and approximately 30% in return-seeking assets, primarily equity securities.
The fair value of postretirement benefit plan assets at December 28, 2019 was determined using the following fair value measurements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Government bonds
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds and other fixed-income securities
|
592
|
|
|
—
|
|
|
592
|
|
|
—
|
|
Total fixed-income securities
|
625
|
|
|
33
|
|
|
592
|
|
|
—
|
|
Equity securities
|
188
|
|
|
188
|
|
|
—
|
|
|
—
|
|
Fair value excluding investments measured at net asset value
|
813
|
|
|
221
|
|
|
592
|
|
|
—
|
|
Investments measured at net asset value
|
301
|
|
|
|
|
|
|
|
Total plan assets at fair value
|
$
|
1,114
|
|
|
|
|
|
|
|
The fair value of postretirement benefit plan assets at December 29, 2018 was determined using the following fair value measurements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Government bonds
|
$
|
26
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds and other fixed-income securities
|
567
|
|
|
—
|
|
|
567
|
|
|
—
|
|
Total fixed-income securities
|
593
|
|
|
26
|
|
|
567
|
|
|
—
|
|
Equity securities
|
146
|
|
|
146
|
|
|
—
|
|
|
—
|
|
Fair value excluding investments measured at net asset value
|
739
|
|
|
172
|
|
|
567
|
|
|
—
|
|
Investments measured at net asset value
|
305
|
|
|
|
|
|
|
|
Total plan assets at fair value
|
$
|
1,044
|
|
|
|
|
|
|
|
The following section describes the valuation methodologies used to measure the fair value of postretirement benefit plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified.
Corporate Bonds and Other Fixed-Income Securities. These securities consist of publicly traded U.S. and non-U.S. fixed interest obligations (principally corporate bonds an tax-exempt municipal bonds). Such investments are valued through consultation and evaluation with brokers in the institutional market using quoted prices and other observable market data. As such, these securities are included in Level 2.
Government Bonds. These securities consist of direct investments in publicly traded U.S. fixed interest obligations (principally debentures). Such investments are valued using quoted prices in active markets. These securities are included in Level 1.
Equity Securities. These securities consist of direct investments in the stock of publicly traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.
Investments Measured at Net Asset Value. This category consists of pooled funds and short-term investments.
|
|
•
|
Pooled funds. The fair values of participation units held in collective trusts are based on their net asset values, as reported by the managers of the collective trusts and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. Investments in the collective trusts can be redeemed on each business day based upon the applicable net asset value per unit. Investments in the international large/mid cap equity collective trust can be redeemed on the last business day of each month and at least one business day during the month.
|
The mutual fund investments are not traded on an exchange. The fair values of the mutual fund investments that are not traded on an exchange are based on their net asset values, as reported by the managers and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy.
|
|
•
|
Short-term investments. Short-term investments largely consist of a money market fund, the fair value of which is based on the net asset value reported by the manager of the fund and supported by the unit prices of actual purchase and sale transactions. The fair value of these investments measured at net asset value is excluded from the fair value hierarchy. The money market fund is designed to provide safety of principal, daily liquidity, and a competitive yield by investing in high quality money market instruments. The investment objective of the money market fund is to provide the highest possible level of current income while still maintaining liquidity and preserving capital.
|
Employer Contributions:
In 2019, we contributed $12 million to our postretirement benefit plans. We estimate that 2020 postretirement benefit plan contributions will be approximately $15 million. Our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual postretirement plan asset performance or interest rates, or other factors.
Future Benefit Payments:
Our estimated future benefit payments for our postretirement plans at December 28, 2019 were (in millions):
|
|
|
|
|
2020
|
$
|
125
|
|
2021
|
114
|
|
2022
|
114
|
|
2023
|
107
|
|
2024
|
101
|
|
2025-2029
|
413
|
|
Other Plans
We sponsor and contribute to employee savings plans that cover eligible salaried, non-union, and union employees. Our contributions and costs are determined by the matching of employee contributions, as defined by the plans. Amounts charged to expense for defined contribution plans totaled $88 million in 2019, $85 million in 2018, and $78 million in 2017.
Accumulated Other Comprehensive Income/(Losses)
Our accumulated other comprehensive income/(losses) pension and postretirement benefit plans balances, before tax, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
Total
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 28, 2019
|
|
December 29, 2018
|
Net actuarial gain/(loss)
|
$
|
74
|
|
|
$
|
175
|
|
|
$
|
209
|
|
|
$
|
177
|
|
|
$
|
283
|
|
|
$
|
352
|
|
Prior service credit/(cost)
|
(14
|
)
|
|
(14
|
)
|
|
153
|
|
|
458
|
|
|
139
|
|
|
444
|
|
|
$
|
60
|
|
|
$
|
161
|
|
|
$
|
362
|
|
|
$
|
635
|
|
|
$
|
422
|
|
|
$
|
796
|
|
The net postemployment benefits recognized in other comprehensive income/(loss), consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
Net postemployment benefit gains/(losses) arising during the period:
|
|
|
|
|
|
Net actuarial gains/(losses) arising during the period - Pension Benefits
|
$
|
(103
|
)
|
|
$
|
8
|
|
|
$
|
45
|
|
Net actuarial gains/(losses) arising during the period - Postretirement Benefits
|
41
|
|
|
66
|
|
|
71
|
|
Prior service credits/(costs) arising during the period - Pension Benefits
|
—
|
|
|
(15
|
)
|
|
1
|
|
Prior service credits/(costs) arising during the period - Postretirement Benefits
|
1
|
|
|
21
|
|
|
24
|
|
|
(61
|
)
|
|
80
|
|
|
141
|
|
Tax benefit/(expense)
|
(5
|
)
|
|
(19
|
)
|
|
(55
|
)
|
|
$
|
(66
|
)
|
|
$
|
61
|
|
|
$
|
86
|
|
|
|
|
|
|
|
Reclassification of net postemployment benefit losses/(gains) to net income/(loss):
|
|
|
|
|
|
Amortization of unrecognized losses/(gains) - Pension Benefits
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
1
|
|
Amortization of unrecognized losses/(gains) - Postretirement Benefits
|
(8
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service costs/(credits) - Postretirement Benefits
|
(306
|
)
|
|
(311
|
)
|
|
(328
|
)
|
Net settlement and curtailment losses/(gains) - Pension Benefits
|
1
|
|
|
153
|
|
|
2
|
|
Net settlement and curtailment losses/(gains) - Postretirement Benefits
|
(1
|
)
|
|
—
|
|
|
(177
|
)
|
Other losses/(gains) on postemployment benefits
|
1
|
|
|
—
|
|
|
—
|
|
|
(312
|
)
|
|
(156
|
)
|
|
(502
|
)
|
Tax (benefit)/expense
|
78
|
|
|
38
|
|
|
193
|
|
|
$
|
(234
|
)
|
|
$
|
(118
|
)
|
|
$
|
(309
|
)
|
As of December 28, 2019, we expect to amortize $123 million of postretirement benefit plans prior service credits from accumulated other comprehensive income/(losses) into net postretirement benefit plans costs/(benefits) during 2020. We do not expect to amortize any other significant postemployment benefit losses/(gains) into net pension or net postretirement benefit plan costs/(benefits) during 2020.
Note 13. Financial Instruments
We maintain a policy of requiring that all significant, non-exchange traded derivative contracts be governed by an International Swaps and Derivatives Association master agreement, and these master agreements and their schedules contain certain obligations regarding the delivery of certain financial information upon demand.
Derivative Volume:
The notional values of our outstanding derivative instruments were (in millions):
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
December 28, 2019
|
|
December 29, 2018
|
Commodity contracts
|
$
|
475
|
|
|
$
|
478
|
|
Foreign exchange contracts
|
3,045
|
|
|
3,263
|
|
Cross-currency contracts
|
4,035
|
|
|
10,146
|
|
The decrease in our derivative volume for cross-currency contracts was primarily driven by the settlement of Canadian dollar and British pound sterling cross-currency swaps in the fourth quarter of 2019.
Fair Value of Derivative Instruments:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values and the levels within the fair value hierarchy of derivative instruments recorded on the consolidated balance sheets were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Total Fair Value
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts(a)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
20
|
|
|
$
|
7
|
|
|
$
|
20
|
|
Cross-currency contracts(b)
|
—
|
|
|
—
|
|
|
200
|
|
|
88
|
|
|
200
|
|
|
88
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts(c)
|
42
|
|
|
6
|
|
|
—
|
|
|
2
|
|
|
42
|
|
|
8
|
|
Foreign exchange contracts(a)
|
—
|
|
|
—
|
|
|
6
|
|
|
3
|
|
|
6
|
|
|
3
|
|
Total fair value
|
$
|
42
|
|
|
$
|
6
|
|
|
$
|
213
|
|
|
$
|
113
|
|
|
$
|
255
|
|
|
$
|
119
|
|
|
|
(a)
|
At December 28, 2019, the fair value of our derivative assets was recorded in other current assets ($12 million) and other non-current assets ($1 million), and the fair value of our derivative liabilities was recorded in other current liabilities.
|
|
|
(b)
|
At December 28, 2019, the fair value of our derivative assets was recorded in other non-current assets and the fair value of our derivative liabilities was recorded in other non-current liabilities.
|
|
|
(c)
|
At December 28, 2019, the fair value of our derivative assets was recorded in other current assets and the fair value of derivative liabilities was recorded in other current liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2018
|
|
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)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51
|
|
|
$
|
26
|
|
|
$
|
51
|
|
|
$
|
26
|
|
Cross-currency contracts(b)
|
—
|
|
|
—
|
|
|
139
|
|
|
3
|
|
|
139
|
|
|
3
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts(a)
|
5
|
|
|
27
|
|
|
—
|
|
|
2
|
|
|
5
|
|
|
29
|
|
Foreign exchange contracts(a)
|
—
|
|
|
—
|
|
|
5
|
|
|
42
|
|
|
5
|
|
|
42
|
|
Cross-currency contracts(b)
|
—
|
|
|
—
|
|
|
557
|
|
|
119
|
|
|
557
|
|
|
119
|
|
Total fair value
|
$
|
5
|
|
|
$
|
27
|
|
|
$
|
752
|
|
|
$
|
192
|
|
|
$
|
757
|
|
|
$
|
219
|
|
|
|
(a)
|
The fair value of derivative assets was recorded in other current assets and the fair value of derivative liabilities was recorded in other current liabilities.
|
|
|
(b)
|
The fair value of derivative assets was recorded in other current assets ($557 million) and other non-current assets ($139 million), and the fair value of derivative liabilities was recorded within other current liabilities ($119 million) and other non-current liabilities ($3 million).
|
Our derivative financial instruments are subject to master netting arrangements that allow for the offset of assets and liabilities in the event of default or early termination of the contract. We elect to record the gross assets and liabilities of our derivative financial instruments on the consolidated balance sheets. If the derivative financial instruments had been netted on the consolidated balance sheets, the asset and liability positions each would have been reduced by $108 million at December 28, 2019 and $124 million at December 29, 2018. At December 28, 2019, we had collected collateral of $25 million related to commodity derivative margin requirements. This was included in other current liabilities on our consolidated balance sheet at December 28, 2019. At December 29, 2018, collateral of $32 million was posted related to commodity derivative margin requirements. This was included in prepaid expenses on our consolidated balance sheet at December 29, 2018.
Level 1 financial assets and liabilities consist of commodity future and options contracts and are valued using quoted prices in active markets for identical assets and liabilities.
Level 2 financial assets and liabilities consist of commodity swaps, foreign exchange forwards, options, and swaps, and cross-currency swaps. Commodity swaps are valued using an income approach based on the observable market commodity index prices less the contract rate multiplied by the notional amount. Foreign exchange forwards and swaps are valued using an income approach based on observable market forward rates less the contract rate multiplied by the notional amount. Foreign exchange options are valued using an income approach based on a Black-Scholes-Merton formula. This formula uses present value techniques and reflects the time value and intrinsic value based on observable market rates. Cross-currency swaps are valued based on observable market spot and swap rates.
We did not have any Level 3 financial assets or liabilities in any period presented.
Our calculation of the fair value of financial instruments takes into consideration the risk of nonperformance, including counterparty credit risk.
Net Investment Hedging:
At December 28, 2019, we had the following items designated as net investment hedges:
|
|
•
|
Non-derivative foreign denominated debt with principal amounts of €2,550 million and £400 million;
|
|
|
•
|
Cross-currency contracts with notional amounts of £1.0 billion ($1.4 billion), C$2.1 billion ($1.6 billion), and ¥9.6 billion ($85 million); and
|
|
|
•
|
Foreign exchange contracts denominated in Chinese renminbi with an aggregate notional amount of $162 million.
|
We periodically use non-derivative instruments such as non-U.S. dollar financing transactions or non-U.S. dollar assets or liabilities, including intercompany loans, to hedge the exposure of changes in underlying foreign currency denominated subsidiary net assets, and they are designated as net investment hedges. At December 28, 2019, we had a euro intercompany loan with aggregate notional amount of $76 million.
The component of the gains and losses on our net investment in these designated foreign operations, driven by changes in foreign exchange rates, are economically offset by fair value movements on the effective portion of our cross-currency contracts and foreign exchange contracts and remeasurements of our foreign denominated debt.
Interest Rate Hedging:
From time to time we have had derivatives designated as interest rate hedges, including interest rate swaps. We no longer have any outstanding interest rate swaps. We continue to amortize the realized hedge losses that were deferred into accumulated other comprehensive income/(losses) into interest expense through the original maturity of the related long-term debt instruments.
Cash Flow Hedge Coverage:
At December 28, 2019, we had entered into foreign exchange contracts designated as cash flow hedges for periods not exceeding the next 25 months and into cross-currency contracts designated as cash flow hedges for periods not exceeding the next four years.
Deferred Hedging Gains and Losses on Cash Flow Hedges:
Based on our valuation at December 28, 2019 and assuming market rates remain constant through contract maturities, 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 be insignificant. Additionally, we expect transfers to net income/(loss) of unrealized losses on foreign currency cash flow hedges during the next 12 months to be approximately $12 million.
Concentration of Credit Risk:
Counterparties to our foreign exchange derivatives consist of major international financial institutions. We continually monitor our positions and the credit ratings of the counterparties involved and, by policy, limit the amount of our credit exposure to any one party. While we may be exposed to potential losses due to the credit risk of non-performance by these counterparties, losses are not anticipated. We closely monitor the credit risk associated with our counterparties and customers and to date have not experienced material losses.
Economic Hedging:
We enter into certain derivative contracts not designated as hedging instruments in accordance with our risk management strategy which have an economic impact of largely mitigating commodity price risk and foreign currency exposures. Gains and losses are recorded in net income/(loss) as a component of cost of products sold for our commodity contracts and other expense/(income) for our cross currency and foreign exchange contracts.
Divestiture Hedging:
We entered into foreign exchange derivative contracts to economically hedge the foreign currency exposure related to the Heinz India Transaction. In 2018, the related derivative losses were $20 million, including $17 million recorded within other expense/(income) and $3 million recorded within interest expense. These derivative contracts settled in the first quarter of 2019 resulting in a gain of $5 million, including a gain of $6 million recorded within other expense/(income) and a loss of $1 million recorded within interest expense. These losses are classified as other losses/(gains) related to acquisitions and divestitures. Additionally, we entered into foreign exchange contracts which were designated as net investment hedges related to our investment in Heinz India. Related to these net investment hedges, we had unrealized hedge losses of $10 million as of December 29, 2018, which were recognized in accumulated other comprehensive income/(losses). In 2019, these net investment hedges settled at a loss of $6 million. This loss was subsequently reclassified from accumulated other comprehensive income/(losses) to other expense/(income) in the consolidated statement of income in the first quarter of 2019 when the Heinz India Transaction closed. These losses are classified as losses/(gains) on the sale of a business. See Note 4, Acquisitions and Divestitures, for additional information related to the Heinz India Transaction.
Derivative Impact on the Statements of Comprehensive Income:
The following table presents the pre-tax amounts of derivative gains/(losses) deferred into accumulated other comprehensive income/(losses) and the income statement line item that will be affected when reclassified to net income/(loss) (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income/(Losses) Component
|
|
Gains/(Losses) Recognized in Other Comprehensive Income/(Losses) Related to Derivatives Designated as Hedging Instruments
|
|
Location of Gains/(Losses) When Reclassified to Net Income/(Loss)
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Net sales
|
Foreign exchange contracts
|
|
(36
|
)
|
|
64
|
|
|
(42
|
)
|
|
Cost of products sold
|
Foreign exchange contracts (excluded component)
|
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
Cost of products sold
|
Foreign exchange contracts
|
|
(23
|
)
|
|
56
|
|
|
(82
|
)
|
|
Other expense/(income)
|
Foreign exchange contracts (excluded component)
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Other expense/(income)
|
Cross-currency contracts
|
|
43
|
|
|
(4
|
)
|
|
—
|
|
|
Other expense/(income)
|
Cross-currency contracts (excluded component)
|
|
28
|
|
|
1
|
|
|
—
|
|
|
Other expense/(income)
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
13
|
|
|
(11
|
)
|
|
(23
|
)
|
|
Other expense/(income)
|
Foreign exchange contracts (excluded component)
|
|
(1
|
)
|
|
(3
|
)
|
|
—
|
|
|
Interest expense
|
Cross-currency contracts
|
|
(67
|
)
|
|
214
|
|
|
(184
|
)
|
|
Other expense/(income)
|
Cross-currency contracts (excluded component)
|
|
30
|
|
|
13
|
|
|
—
|
|
|
Interest expense
|
Total gains/(losses) recognized in statements of comprehensive income
|
|
$
|
(11
|
)
|
|
$
|
331
|
|
|
$
|
(330
|
)
|
|
|
Derivative Impact on the Statements of Income:
The following tables present the pre-tax amounts of derivative gains/(losses) reclassified from accumulated other comprehensive income/(losses) to net income/(loss) and the affected income statement line items (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
Cost of products sold
|
|
Interest expense
|
|
Other expense/ (income)
|
|
Cost of products sold
|
|
Interest expense
|
|
Other expense/ (income)
|
Total amounts presented in the consolidated statements of income in which the following effects were recorded
|
$
|
16,830
|
|
|
$
|
1,361
|
|
|
$
|
(952
|
)
|
|
$
|
17,347
|
|
|
$
|
1,284
|
|
|
$
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(losses) related to derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
(22
|
)
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
56
|
|
Foreign exchange contracts (excluded component)
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
3
|
|
Interest rate contracts
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
Cross-currency contracts
|
—
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
Cross-currency contracts (excluded component)
|
—
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign exchange contracts (excluded component)
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
Cross-currency contracts (excluded component)
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
Gains/(losses) related to derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
43
|
|
|
—
|
|
|
—
|
|
|
(44
|
)
|
|
—
|
|
|
—
|
|
Foreign exchange contracts
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(84
|
)
|
Cross-currency contracts
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Total gains/(losses) recognized in statements of income
|
$
|
66
|
|
|
$
|
25
|
|
|
$
|
33
|
|
|
$
|
(48
|
)
|
|
$
|
6
|
|
|
$
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
Cost of products sold
|
|
Interest expense
|
|
Other expense/ (income)
|
Total amounts presented in the consolidated statements of income in which the following effects were recorded
|
$
|
17,043
|
|
|
$
|
1,234
|
|
|
$
|
(627
|
)
|
|
|
|
|
|
|
Gains/(losses) related to derivatives designated as hedging instruments:
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(81
|
)
|
Interest rate contracts
|
—
|
|
|
(4
|
)
|
|
—
|
|
Gains/(losses) related to derivatives not designated as hedging instruments:
|
|
|
|
|
|
Commodity contracts
|
(37
|
)
|
|
—
|
|
|
—
|
|
Foreign exchange contracts
|
—
|
|
|
—
|
|
|
54
|
|
Cross-currency contracts
|
—
|
|
|
—
|
|
|
(2
|
)
|
Total gains/(losses) recognized in statements of income
|
$
|
(37
|
)
|
|
$
|
(4
|
)
|
|
$
|
(29
|
)
|
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 $52 million in 2019 and $174 million in 2018 and pre-tax losses of $425 million in 2017. These amounts were recognized in other comprehensive income/(loss).
Note 14. Accumulated Other Comprehensive Income/(Losses)
The components of, and changes in, accumulated other comprehensive income/(losses), net of tax, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Net Postemployment Benefit Plan Adjustments
|
|
Net Cash Flow Hedge Adjustments
|
|
Total
|
Balance as of December 31, 2016
|
$
|
(2,413
|
)
|
|
$
|
772
|
|
|
$
|
12
|
|
|
$
|
(1,629
|
)
|
Foreign currency translation adjustments
|
1,179
|
|
|
—
|
|
|
—
|
|
|
1,179
|
|
Net deferred gains/(losses) on net investment hedges
|
(353
|
)
|
|
—
|
|
|
—
|
|
|
(353
|
)
|
Net deferred gains/(losses) on cash flow hedges
|
—
|
|
|
—
|
|
|
(113
|
)
|
|
(113
|
)
|
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss)
|
—
|
|
|
—
|
|
|
85
|
|
|
85
|
|
Net postemployment benefit gains/(losses) arising during the period
|
—
|
|
|
86
|
|
|
—
|
|
|
86
|
|
Net postemployment benefit losses/(gains) reclassified to net income/(loss)
|
—
|
|
|
(309
|
)
|
|
—
|
|
|
(309
|
)
|
Total other comprehensive income/(loss)
|
826
|
|
|
(223
|
)
|
|
(28
|
)
|
|
575
|
|
Balance as of December 30, 2017
|
(1,587
|
)
|
|
549
|
|
|
(16
|
)
|
|
(1,054
|
)
|
Foreign currency translation adjustments
|
(1,173
|
)
|
|
—
|
|
|
—
|
|
|
(1,173
|
)
|
Net deferred gains/(losses) on net investment hedges
|
284
|
|
|
—
|
|
|
—
|
|
|
284
|
|
Amounts excluded from the effectiveness assessment of net investment hedges
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss)
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
Net deferred gains/(losses) on cash flow hedges
|
—
|
|
|
—
|
|
|
99
|
|
|
99
|
|
Amounts excluded from the effectiveness assessment of cash flow hedges
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss)
|
—
|
|
|
—
|
|
|
(44
|
)
|
|
(44
|
)
|
Net postemployment benefit gains/(losses) arising during the period
|
—
|
|
|
61
|
|
|
—
|
|
|
61
|
|
Net postemployment benefit losses/(gains) reclassified to net income/(loss)
|
—
|
|
|
(118
|
)
|
|
—
|
|
|
(118
|
)
|
Total other comprehensive income/(loss)
|
(889
|
)
|
|
(57
|
)
|
|
57
|
|
|
(889
|
)
|
Balance as of December 29, 2018
|
(2,476
|
)
|
|
492
|
|
|
41
|
|
|
(1,943
|
)
|
Foreign currency translation adjustments
|
239
|
|
|
—
|
|
|
—
|
|
|
239
|
|
Net deferred gains/(losses) on net investment hedges
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Amounts excluded from the effectiveness assessment of net investment hedges
|
22
|
|
|
—
|
|
|
—
|
|
|
22
|
|
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss)
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
(16
|
)
|
Net deferred gains/(losses) on cash flow hedges
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
(10
|
)
|
Amounts excluded from the effectiveness assessment of cash flow hedges
|
—
|
|
|
—
|
|
|
29
|
|
|
29
|
|
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss)
|
—
|
|
|
—
|
|
|
(41
|
)
|
|
(41
|
)
|
Net postemployment benefit gains/(losses) arising during the period
|
—
|
|
|
(69
|
)
|
|
—
|
|
|
(69
|
)
|
Net postemployment benefit losses/(gains) reclassified to net income/(loss)
|
—
|
|
|
(234
|
)
|
|
—
|
|
|
(234
|
)
|
Cumulative effect of accounting standards adopted in the period(a)
|
—
|
|
|
114
|
|
|
22
|
|
|
136
|
|
Total other comprehensive income/(loss)
|
246
|
|
|
(189
|
)
|
|
—
|
|
|
57
|
|
Balance at December 28, 2019
|
$
|
(2,230
|
)
|
|
$
|
303
|
|
|
$
|
41
|
|
|
$
|
(1,886
|
)
|
|
|
(a)
|
In the first quarter of 2019, we adopted ASU 2018-02 related to reclassifying tax effects stranded in accumulated other comprehensive income/(losses). See Note 3, New Accounting Standards, for additional information.
|
Reclassification of net postemployment benefit losses/(gains) included amounts reclassified to net income and amounts reclassified into inventory (consistent with our capitalization policy).
The gross amount and related tax benefit/(expense) recorded in, and associated with, each component of other comprehensive income/(loss) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
|
Before Tax Amount
|
|
Tax
|
|
Net of Tax Amount
|
|
Before Tax Amount
|
|
Tax
|
|
Net of Tax Amount
|
|
Before Tax Amount
|
|
Tax
|
|
Net of Tax Amount
|
Foreign currency translation adjustments
|
$
|
239
|
|
|
$
|
—
|
|
|
$
|
239
|
|
|
$
|
(1,173
|
)
|
|
$
|
—
|
|
|
$
|
(1,173
|
)
|
|
$
|
1,179
|
|
|
$
|
—
|
|
|
$
|
1,179
|
|
Net deferred gains/(losses) on net investment hedges
|
(2
|
)
|
|
3
|
|
|
1
|
|
|
377
|
|
|
(93
|
)
|
|
284
|
|
|
(632
|
)
|
|
279
|
|
|
(353
|
)
|
Amounts excluded from the effectiveness assessment of net investment hedges
|
29
|
|
|
(7
|
)
|
|
22
|
|
|
10
|
|
|
(3
|
)
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss)
|
(23
|
)
|
|
7
|
|
|
(16
|
)
|
|
(10
|
)
|
|
3
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net deferred gains/(losses) on cash flow hedges
|
(16
|
)
|
|
6
|
|
|
(10
|
)
|
|
116
|
|
|
(17
|
)
|
|
99
|
|
|
(123
|
)
|
|
10
|
|
|
(113
|
)
|
Amounts excluded from the effectiveness assessment of cash flow hedges
|
30
|
|
|
(1
|
)
|
|
29
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss)
|
(48
|
)
|
|
7
|
|
|
(41
|
)
|
|
(45
|
)
|
|
1
|
|
|
(44
|
)
|
|
85
|
|
|
—
|
|
|
85
|
|
Net actuarial gains/(losses) arising during the period
|
(65
|
)
|
|
(5
|
)
|
|
(70
|
)
|
|
74
|
|
|
(16
|
)
|
|
58
|
|
|
116
|
|
|
(47
|
)
|
|
69
|
|
Prior service credits/(costs) arising during the period
|
1
|
|
|
—
|
|
|
1
|
|
|
6
|
|
|
(3
|
)
|
|
3
|
|
|
25
|
|
|
(8
|
)
|
|
17
|
|
Net postemployment benefit losses/(gains) reclassified to net income/(loss)
|
(312
|
)
|
|
78
|
|
|
(234
|
)
|
|
(156
|
)
|
|
38
|
|
|
(118
|
)
|
|
(502
|
)
|
|
193
|
|
|
(309
|
)
|
The amounts reclassified from accumulated other comprehensive income/(losses) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income/(Losses) Component
|
|
Reclassified from Accumulated Other Comprehensive Income/(Losses) to Net Income/(Loss)
|
|
Affected Line Item in the Statements of Income
|
|
|
December 28, 2019
|
|
December 29, 2018
|
|
December 30, 2017
|
|
|
Losses/(gains) on net investment hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts(a)
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other expense/(income)
|
Foreign exchange contracts(b)
|
|
1
|
|
|
3
|
|
|
—
|
|
|
Interest expense
|
Cross-currency contracts(b)
|
|
(30
|
)
|
|
(13
|
)
|
|
—
|
|
|
Interest expense
|
Losses/(gains) on cash flow hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts(c)
|
|
(23
|
)
|
|
4
|
|
|
—
|
|
|
Cost of products sold
|
Foreign exchange contracts(c)
|
|
22
|
|
|
(59
|
)
|
|
81
|
|
|
Other expense/(income)
|
Cross-currency contracts(b)
|
|
(51
|
)
|
|
6
|
|
|
—
|
|
|
Other expense/(income)
|
Interest rate contracts(d)
|
|
4
|
|
|
4
|
|
|
4
|
|
|
Interest expense
|
Losses/(gains) on hedges before income taxes
|
|
(71
|
)
|
|
(55
|
)
|
|
85
|
|
|
|
Losses/(gains) on hedges, income taxes
|
|
14
|
|
|
4
|
|
|
—
|
|
|
|
Losses/(gains) on hedges
|
|
$
|
(57
|
)
|
|
$
|
(51
|
)
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses/(gains) on postemployment benefits:
|
|
|
|
|
|
|
|
|
Amortization of unrecognized losses/(gains)(e)
|
|
$
|
(7
|
)
|
|
$
|
2
|
|
|
$
|
1
|
|
|
|
Amortization of prior service costs/(credits)(e)
|
|
(306
|
)
|
|
(311
|
)
|
|
(328
|
)
|
|
|
Settlement and curtailment losses/(gains)(e)
|
|
—
|
|
|
153
|
|
|
(175
|
)
|
|
|
Other losses/(gains) on postemployment benefits
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
Losses/(gains) on postemployment benefits before income taxes
|
|
(312
|
)
|
|
(156
|
)
|
|
(502
|
)
|
|
|
Losses/(gains) on postemployment benefits, income taxes
|
|
78
|
|
|
38
|
|
|
193
|
|
|
|
Losses/(gains) on postemployment benefits
|
|
$
|
(234
|
)
|
|
$
|
(118
|
)
|
|
$
|
(309
|
)
|
|
|
|
|
(a)
|
Represents the reclassification of hedge losses/(gains) resulting from the complete or substantially complete liquidation of our investment in the underlying foreign operations.
|
|
|
(b)
|
Represents recognition of the excluded component in net income/(loss).
|
|
|
(c)
|
Includes amortization of the excluded component and the effective portion of the related hedges.
|
|
|
(d)
|
Represents amortization of realized hedge losses that were deferred into accumulated other comprehensive income/(losses) through the maturity of the related long-term debt instruments.
|
|
|
(e)
|
These components are included in the computation of net periodic postemployment benefit costs. See Note 12, Postemployment Benefits, for additional information.
|
In this note we have excluded activity and balances related to noncontrolling interest due to its insignificance. This activity was primarily related to foreign currency translation adjustments.
Note 15. Venezuela - Foreign Currency and Inflation
We have a subsidiary in Venezuela that manufactures and sells a variety of products, primarily in the condiments and sauces and infant and nutrition categories. We apply highly inflationary accounting to the results of our Venezuelan subsidiary and include these results in our consolidated financial statements. Under highly inflationary accounting, the functional currency of our Venezuelan subsidiary is the U.S. dollar (the reporting currency of Kraft Heinz), although the majority of its transactions are in Venezuelan bolivars. As a result, we must revalue the results of our Venezuelan subsidiary to U.S. dollars.
As of December 28, 2019, companies and individuals are allowed to use an auction-based system at private and public banks to obtain foreign currency. This is the only foreign currency exchange mechanism legally available to us for converting Venezuelan bolivars to U.S. dollars. Published daily by the Banco Central de Venezuela, the exchange rate (“BCV Rate”) is calculated as the weighted average rate of participating banking institutions with active exchange operations. We believe the BCV Rate is the most appropriate legally available rate at which to translate the results of our Venezuelan subsidiary. Therefore, we revalue the income statement using the weighted average BCV Rates, and we revalue the bolivar-denominated monetary assets and liabilities at the period-end BCV Rate. The resulting revaluation gains and losses are recorded in current net income/(loss), rather than accumulated other comprehensive income/(losses). These gains and losses are classified within other expense/(income) as nonmonetary currency devaluation on our consolidated statements of income.
The BCV Rate at December 28, 2019 was BsS45,874.81 per U.S. dollar compared to BsS638.18 at December 29, 2018. The weighted average rate was BsS13,955.68 for 2019, BsS25.06 for 2018, and BsS0.02 for 2017. Remeasurements of the bolivar-denominated monetary assets and liabilities and operating results of our Venezuelan subsidiary at BCV Rates resulted in nonmonetary currency devaluation losses of $10 million in 2019, $146 million in 2018, and $36 million in 2017. These losses were recorded in other expense/(income) in the consolidated statements of income.
Our Venezuelan subsidiary obtains U.S. dollars through private and public bank auctions, royalty payments, and exports. These U.S. dollars are primarily used for purchases of tomato paste and spare parts for manufacturing, as well as a limited amount of other operating costs. As of December 28, 2019, our Venezuelan subsidiary had sufficient U.S. dollars to fund these operational needs in the foreseeable future. However, further deterioration of the economic environment or regulation changes could jeopardize our export business.
In addition to the bank auctions described above, there is an unofficial market for obtaining U.S. dollars with Venezuelan bolivars. The exact exchange rate is widely debated but is generally accepted to be substantially higher than the latest published BCV Rate. We have not transacted at any unofficial market rates and have no plans to transact at unofficial market rates in the foreseeable future.
Our results of operations in Venezuela reflect a controlled subsidiary. However, the continuing economic uncertainty, strict labor laws, and evolving government controls over imports, prices, currency exchange, and payments present a challenging operating environment. Increased restrictions imposed by the Venezuelan government along with further deterioration of the economic environment could impact our ability to control our Venezuelan operations and could lead us to deconsolidate our Venezuelan subsidiary in the future.
Note 16. Financing Arrangements
We enter into various structured payable and product financing arrangements to facilitate supply from our vendors. Balance sheet classification is based on the nature of the arrangements. For certain arrangements, we have concluded that our obligations to our suppliers, including amounts due and scheduled payment terms, are impacted by their participation in the program and therefore we classify amounts outstanding within other current liabilities on our consolidated balance sheets. We had approximately $253 million at December 28, 2019 and approximately $267 million at December 29, 2018 on our consolidated balance sheets related to these arrangements.
We have utilized accounts receivable securitization and factoring programs (the “Programs”) globally for our working capital needs and to provide efficient liquidity. During 2018, we had Programs in place in various countries across the globe. In the second quarter of 2018, we unwound our U.S. securitization program, which represented the majority of our Programs, using proceeds from the issuance of long-term debt in June 2018. As of December 29, 2018, we had unwound all of our Programs. As a result, there were no related amounts on our consolidated balance sheets at December 28, 2019 or December 29, 2018.
We operated the Programs such that we generally utilized the majority of the available aggregate cash consideration limits. We accounted for transfers of receivables pursuant to the Programs as a sale and removed them from our consolidated balance sheets. Under the Programs, we generally received cash consideration up to a certain limit and recorded a non-cash exchange for sold receivables for the remainder of the purchase price. We maintained a “beneficial interest,” or a right to collect cash, in the sold receivables. Cash receipts from the payments on sold receivables (which are cash receipts on the underlying trade receivables that have already been securitized in these Programs) were classified as investing activities and presented as cash receipts on sold receivables on our consolidated statements of cash flows.
Note 17. Commitments and Contingencies