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H. J. HEINZ CORP II - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The Merger Heinz has been a pioneer in the food industry for over 140 years and possesses one of the world's best and most recognizable brands - Heinz ®. The Company has a global portfolio of leading brands focused in three core categories, Ketchup and Sauces, Meals and Snacks, and Infant/Nutrition. On August 1, 2014, the Company's Board of Directors approved a change to the Company's name from Hawk Acquisition Intermediate Corporation II to H. J. Heinz Corporation II. On February 13, 2013, Heinz entered into the Merger Agreement with Parent and Merger Subsidiary. The acquisition was consummated on June 7, 2013, and as a result, Merger Subsidiary merged with and into Heinz, with Heinz surviving as a wholly owned subsidiary of Holdings (together with its subsidiaries, the "Company"), which is in turn an indirect wholly owned subsidiary of Parent. Parent is controlled by Berkshire Hathaway Inc. and 3G Special Situations Fund III, L.P. (together the "Sponsors"). Holdings has no operations and its Balance Sheet is comprised solely of its investment in Heinz and share capital owned by its parent, Hawk Acquisition Intermediate Corporation I. Purchase Accounting Effects. The Merger was accounted for using the acquisition method of accounting which affected our results of operations in certain significant respects. The Sponsors' cost of acquiring the Company has been pushed-down to establish a new accounting basis for the Company. Accordingly, the accompanying interim condensed consolidated financial statements are presented for two periods, Predecessor and Successor, which relate to the accounting periods preceding and succeeding the completion of the Merger. The allocation of the total purchase price to the Company's net tangible and identifiable intangible assets were based on fair values as of the Merger date, as described further in Note 2 to the Financial Statements. The purchase accounting adjustment to inventory resulted in an increase in cost of products sold of approximately $259 million and $383 million in the three months and 15 weeks Successor periods ended September 22, 2013, respectively, as those products were sold to customers during the period subsequent to the Merger. The following are also reflected in our results of operations for the nine month period ended September 28, 2014 as compared with the comparable nine month period ended September 22, 2013: • Incremental amortization and depreciation of approximately $36 million on the step-up in basis of definite-lived tangible and intangible assets which was included within cost of products sold. • Incremental interest expense of $179 million related to new borrowings under the Senior Credit Facilities and the Exchange Notes issued in a private offering, in connection with the Merger. • The purchase accounting adjustment to eliminate pre Merger deferred pension costs resulted in a decrease in pension expense of approximately $17 million which was primarily reflected as a reduction in cost of products sold. • The purchase accounting adjustment to eliminate pre Merger deferred derivative gains related to foreign currency cash flow hedges resulted in an increase in cost of products sold of approximately $8 million. Periods Presented Successor - the condensed consolidated financial statements as of September 28, 2014, and for the period from February 8, 2013 through September 28, 2014. The accounts of Merger Subsidiary from inception on February 8, 2013 to the date of its merger into the Company on June 7, 2013 were included in the Successor period June 8, 2013 to December 29, 2013 as presented in the Registration Statement on Form S-4 which became effective May 7, 2014. The activity in Merger Subsidiary for the period February 8, 2013 to June 7, 2013 related primarily to the issuance of the Exchange Notes and recognition of associated issuance costs and interest expense. The cash was invested in a money market account until the completion of the Merger on June 7, 2013. Transition period - the period from April 29, 2013 to December 29, 2013. Predecessor - the condensed consolidated financial statements of the Company prior to the Merger on June 7, 2013. Executive Overview During the third quarter ended September 28, 2014, the Company's total sales were $2.59 billion, compared to $2.65 billion for the Successor period June 24 to September 22, 2013 (based on the Company's former fiscal month end). Volume decreased 3.9% primarily due to frozen meals and snacks category softness and share losses in our frozen potatoes and snacks businesses in U.S. 50 -------------------------------------------------------------------------------- Consumer Products, softness in Indonesian cordials sales following the festive period and the transition to a new distributor network, chilled beverage product rationalization and reduced promotional activity in the tuna and seafood category in Australia, and raw material and packaging supply constraints in Venezuela. Net pricing increased sales by 2.4%, driven primarily by price increases in Venezuela. Unfavorable foreign exchange translation rates decreased sales by 0.4%. Sales decreased 0.2% due to divestitures. In the third quarter ended September 28, 2014 and the Successor period from June 24 to September 22, 2013, gross profit, operating income and net income were significantly impacted by restructuring related costs and expenses. In addition, the Successor period from June 24 to September 22, 2013 was impacted by a non-cash charge to cost of sales for the step up in inventory value noted in The Merger section above. Adjusted earnings before interest, tax, depreciation and amortization ("Adjusted EBITDA") increased $149 million or 30.1%, to $646 million, primarily reflecting the reduction in cost of products sold and SG&A due to efficiencies driven by restructuring and productivity initiatives. Refer to EBITDA & Adjusted EBITDA (from Continuing Operations) within the Non-GAAP Measures section below for our definition of Adjusted EBITDA. See The Merger and Results of Continuing Operations sections for further analysis of our operating results for the quarter. Restructuring and Productivity Initiatives During the transition period and the first nine months of 2014, the Company invested in restructuring and productivity initiatives as part of its ongoing cost reduction efforts with the goal of driving efficiencies and creating fiscal resources that will be reinvested into the Company's business as well as to accelerate overall productivity on a global scale. As of September 28, 2014, these initiatives have resulted in the reduction of approximately 4,050 corporate and field positions across the Company's global business segments (excluding the factory closures noted below). Including charges incurred as of September 28, 2014, the Company currently estimates it will incur total charges of approximately $300 million related to severance benefits and other severance-related expenses related to the reduction in corporate and field positions, of which $289 million has been incurred through September 28, 2014. The ongoing annual cost savings is estimated to be approximately $250 million. The severance-related charges and cost savings assumptions that the Company expects to incur in connection with these work force reductions are subject to a number of assumptions and may differ from actual results. See Note 5, "Restructuring and Productivity Initiatives" for additional information on these productivity initiatives. There were no such charges in the first three months of 2013. In addition, the Company has announced the planned closure of 5 factories across the U.S., Canada and Europe during 2014. The number of employees expected to be impacted by these 5 plant closures and consolidation is approximately 1,600, of which 1,450 had left the Company as of September 28, 2014. The Company currently estimates it will incur charges of approximately $91 million related to severance benefits and other severance-related expenses related to these factory closures, of which $86 million has been incurred through September 28, 2014. In addition the Company will recognize accelerated depreciation on assets to be disposed of. The ongoing annual cost savings is estimated to be approximately $80 million. The severance-related charges and cost savings assumptions that the Company expects to incur in connection with these factory workforce reductions and factory closures are subject to a number of assumptions and may differ from actual results. The Company may also incur other charges not currently contemplated due to events that may occur as a result of, or related to, these cost reductions. Furthermore, the Company announced the planned closure of an additional factory in Europe in the first half of 2015 due to the expiration of a license to manufacture a non-core product. The number of employees expected to be impacted by this plant closure is approximately 200. The Company expects to incur charges of approximately $12 million related to severance benefits and other severance-related expenses related to this factory closure which it recorded in the quarter ended September 28, 2014. In addition, the Company recognized $33 million in non-cash asset write-downs due to the planned closure. The Company recorded pre-tax costs related to these productivity initiatives of $81 million and $338 million in the three and nine months ended September 28, 2014, respectively, which were recorded in the Non-Operating segment. See Note 5. Charges in the Successor period February 8 to September 22, 2013 and the Predecessor period December 24, 2012, to June 7, 2013 were $70 million and $6 million, respectively. 51 --------------------------------------------------------------------------------Discontinued Operations In January 2013, the Company's Board of Directors approved management's plan to sell Shanghai LongFong Foods ("LongFong"), a maker of frozen products in China which was previously reported in the Asia/Pacific segment. As a result, LongFong's net assets were classified as held for sale and the Company adjusted the carrying value to estimated fair value, recording a $36 million pre-tax and after-tax non-cash goodwill impairment charge to discontinued operations in January 2013. The sale was completed in June 2014, resulting in an insignificant pre-tax and after-tax loss which was recorded in discontinued operations in the Successor period. See Note 6. THREE MONTHS ENDED SEPTEMBER 28, 2014 (SUCCESSOR) AND SEPTEMBER 22, 2013 (SUCCESSOR)Results of Continuing Operations On October 21, 2013, our board of directors approved a change in our fiscal year-end from the Sunday closest to April 30 to the Sunday closest to December 31. As a result of this change, the Company filed its Annual Report for the transition period beginning on April 29, 2013 and ending on December 29, 2013 in its Registration Statement. Sales were $2.59 billion for the quarter ended September 28, 2014 compared with $2.65 billion for the quarter ended September 22, 2013, a decrease of $53 million, or 2.0%. Volume decreased 3.9% primarily due to frozen meals and snacks category softness and share losses in our frozen potatoes and snacks businesses in U.S. Consumer Products, softness in Indonesian cordials sales following the festive period and the transition to a new distributor network, chilled beverage product rationalization and reduced promotional activity in the tuna and seafood category in Australia, and raw material and packaging supply constraints in Venezuela. Net pricing increased sales by 2.4%, driven primarily by price increases in Venezuela. Unfavorable foreign exchange rates decreased sales by 0.4%. Sales decreased 0.2% due to divestitures. Gross profit was $916 million for the quarter ended September 28, 2014 compared with $660 million for the quarter ended September 22, 2013, an increase of $256 million, or 38.8%, and gross profit margin increased to 35.3% from 24.9%. The third quarter of 2014 included charges in cost of products sold for restructuring and productivity initiatives of $68 million (which are recorded in the non-operating segment). In addition, it included incremental costs totaling $23 million, primarily for additional logistics costs incurred related to the U.S. SAP go-live, which was launched in the second quarter of 2014, along with equipment relocation charges not specifically related to restructuring activities. The quarter ended September 22, 2013, incurred higher cost of products sold associated with the purchase accounting step up in inventory value of $259 million, and $21 million primarily in severance and employee benefit costs relating to the reduction of corporate and field positions across the Company. The remaining improvement in gross profit was due to reduced cost of products sold resulting from restructuring and productivity related initiatives. Selling, general and administrative expenses ("SG&A") were $507 million for the quarter ended September 28, 2014 compared with $572 million for the quarter ended September 22, 2013, a decrease of $65 million, or 11.4%, and decreased as a percentage of sales to 19.5% from 21.6%. The third quarter of 2014 included charges for restructuring and productivity initiatives of $13 million (which are recorded in the non-operating segment). In addition, it included incremental costs totaling $41 million, primarily for additional warehousing and other logistics costs incurred related to the U.S. SAP go-live and employee benefit costs not associated with our restructuring activities (which are recorded in the non-operating segment). The quarter ended September 22, 2013, included $47 million primarily in severance and employee benefit costs relating to the reduction of corporate and field positions across the Company, professional fees, and contract and lease termination costs. The remaining decrease in SG&A is attributable to lower fixed selling and distribution and general and administrative expense primarily resulting from restructuring and productivity related initiatives and lower marketing expense. Merger related costs in the quarter ended September 22, 2013 were $98 million consisting primarily of advisory fees, legal, accounting and other professional costs. Net interest expense was $157 million for the quarter ended September 28, 2014 compared with $161 million for the quarter ended September 22, 2013, a decrease of $3 million, reflecting higher interest income as a result of higher average cash and cash equivalent balances. Other expense, net, was $37 million for the quarter ended September 28, 2014 compared with $10 million for the quarter ended September 22, 2013, an increase of $28 million. The increase is primarily related to additional unrealized currency losses in the quarter ended September 28, 2014. 52 -------------------------------------------------------------------------------- Tax expense was $40 million or 18.8% of pretax income for the quarter ended September 28, 2014, compared with a tax benefit of $176 million or 97.5% of pretax loss for the quarter ended September 22, 2013. The difference in effective tax rates is primarily driven by the prior year period including a $107 million benefit related to the impact on deferred taxes of a 300 basis point statutory tax rate reduction in the United Kingdom which was enacted during July 2013 as well as the prior year benefiting from significant restructuring charges recorded in the United States, which has a high relative statutory tax rate. The net income from continuing operations attributable to H. J. Heinz Corporation II was $172 million for the quarter ended September 28, 2014 compared with a net loss from continuing operations of $7 million for the quarter ended September 22, 2013, an increase in income of $178 million period over period. Adjusted EBITDA was $646 million for the quarter ended September 28, 2014 compared with $497 million for the quarter ended September 22, 2013, an increase of $149 million, or 30.1%, primarily reflecting the reduction in cost of products sold and SG&A due to efficiencies driven by restructuring and productivity initiatives. OPERATING RESULTS BY BUSINESS SEGMENT In the first quarter of 2014, the Company transitioned to new segments, which are aligned to the new organizational structure implemented during the transition period. These new segments reflect how senior management run the business from an organizational perspective and look at the internal management reporting used for decision-making. The Company has reclassified the segment data for the prior period to conform to the current period's presentation. North America Sales for the North America segment were $982 million for the quarter ended September 28, 2014 compared with $1.05 billion for the quarter ended September 22, 2013, a decrease of $67 million, or 6.4%. Volume was down 5.5% primarily due to frozen meals and snacks category softness and share losses in our frozen potatoes and snacks businesses in U.S. Consumer Products and lower promotional activity in Canada, partially offset by U.S. Foodservice. Lower net price of 0.2% was due to increased promotional activity in U.S. Consumer Products, partially offset by a reduction in such activities in Canada. Unfavorable Canadian exchange rates decreased sales 0.7%. Gross profit was $382 million for the quarter ended September 28, 2014 compared with $271 million for the quarter ended September 22, 2013, an increase of $111 million, or 41.1%, and gross profit margin increased to 38.9% from 25.8%. These increases are primarily related to lower cost of products sold as a result of various restructuring and productivity initiatives and the purchase accounting step up in inventory value of $115 million recorded in the quarter ended September 22, 2013, largely offset by the lower volumes noted above. Adjusted EBITDA was $281 million for the quarter ended September 28, 2014 compared with $261 million for the quarter ended September 22, 2013, an increase of $20 million, or 7.7%, reflecting the increase in gross profit noted above and lower SG&A primarily due to reduced costs related to workforce reductions and lower marketing spend. Europe Sales for Heinz Europe were $696 million for the quarter ended September 28, 2014 compared with $694 million for the quarter ended September 22, 2013, an increase of $2 million, or 0.3%. Volume was down 0.5% as increases in the U.K. soup and beans category and Sweden were offset by similar levels of declines across the rest of the segment. Net pricing decreased 1.4% as increased promotional activity in the U.K. and Italy to counteract category softness were partially offset by higher pricing in Eastern Europe. Favorable exchange rates increased sales 2.9%. The divestiture of a small soup business in Germany decreased sales 0.6%. Gross profit was $296 million for the quarter ended September 28, 2014 compared with $186 million for the quarter ended September 22, 2013, an increase of $110 million, or 59.5%, and gross profit margin increased to 42.5% from 26.8%. These increases are primarily related to lower cost of products sold as a result of various restructuring and productivity initiatives and the purchase accounting step up in inventory value of $72 million recorded in the quarter ended September 22, 2013. Adjusted EBITDA was $205 million for the quarter ended September 28, 2014 compared with $144 million for the quarter ended September 22, 2013, an increase of $62 million, or 43.0%, reflecting the increase in gross profit and lower SG&A primarily related to productivity initiatives. 53 --------------------------------------------------------------------------------Asia/Pacific Heinz Asia/Pacific sales were $476 million for the quarter ended September 28, 2014 compared with $532 million for the quarter ended September 22, 2013, a decrease of $57 million, or 10.6%. Volume decreased 9.9% largely a result of softness in Indonesian cordials sales following the festive period and the transition to a new distributor network, and chilled beverage product rationalization and reduced promotional activity in the tuna and seafood category in Australia. Pricing increased 1.5%, due to reduced promotional spend in Australia and increased pricing in China. Unfavorable foreign exchange translation rates, primarily in Indonesia, Australia and Japan, partially offset by favorable foreign exchange rates in New Zealand, decreased sales by 2.2%. Gross profit was $149 million for the quarter ended September 28, 2014 compared with $102 million for the quarter ended September 22, 2013, an increase of $47 million, or 45.8%, and the gross profit margin increased to 31.4% from 19.2%. These increases are primarily related to lower cost of products sold as a result of various restructuring and productivity initiatives and the purchase accounting step up in inventory value of $67 million recorded in the quarter ended September 22, 2013. Adjusted EBITDA was $78 million for the quarter ended September 28, 2014 compared with $68 million for the quarter ended September 22, 2013, an increase of $10 million, or 15.0%, due to the increase in gross profit and lower SG&A primarily related to productivity initiatives. Latin America Sales for the Latin America segment were $266 million for the quarter ended September 28, 2014 compared with $212 million for the quarter ended September 22, 2013, an increase of $54 million, or 25.6%. Volume decreased 2.8% primarily in Venezuela, driven by raw material and packaging supply constraints, which were partially offset by increased volume from strong Heinz brand market share growth in Brazil. Pricing increased sales 29.6% primarily in Venezuela. Unfavorable foreign exchange rates primarily in Brazil decreased sales by 1.1%. Gross profit was $111 million for the quarter ended September 28, 2014 compared with $60 million for the quarter ended September 22, 2013, an increase of $51 million, or 84.9%, while gross profit margin increased to 41.9% from 28.5%. These increases are primarily related to lower cost of products sold as a result of various restructuring and productivity initiatives and the purchase accounting step up in inventory value of $6 million recorded in the quarter ended September 22, 2013. Adjusted EBITDA was $70 million for the quarter ended September 28, 2014 compared with $30 million for the quarter ended September 22, 2013, an increase of $40 million, or 132.0%, due to the increase in gross profit and lower SG&A primarily related to productivity initiatives. RIMEA Sales for RIMEA were $174 million for the quarter ended September 28, 2014 compared with $160 million for the quarter ended September 22, 2013, an increase of $14 million, or 9.0%, period over period. Volume increased 10.5% as growth was realized across the segment. Pricing increased sales by 3.5%, largely due to price increases in Russia and India. Unfavorable foreign exchange rates decreased sales 5.1%. Gross profit was $66 million for the quarter ended September 28, 2014 compared with $57 million for the quarter ended September 22, 2013, an increase of $9 million, or 16.3%, and gross profit margin increased to 38.0% from 35.6%. The gross profit margin improvement was primarily due to lower cost of products sold as a result of various restructuring and productivity initiatives. Adjusted EBITDA was $29 million for the quarter ended September 28, 2014 compared with $20 million for the quarter ended September 22, 2013, an increase of $10 million, or 49.0%, due to the increase in gross profit and lower SG&A primarily related to productivity initiatives. NINE MONTHS ENDED SEPTEMBER 28, 2014 (SUCCESSOR), PERIOD FROM FEBRUARY 8 - SEPTEMBER 22, 2013 (SUCCESSOR), AND PERIOD FROM DECEMBER 24, 2012 - JUNE 7, 2013 (PREDECESSOR)Results of Continuing Operations Sales were $8.12 billion for the nine months ended September 28, 2014, compared with $3.15 billion for the Successor period from February 8 to September 22, 2013, and $5.20 billion for the Predecessor period from December 24, 2012 to June 7, 2013, a decrease of $231 million, or 2.8%, period over period. Volume decreased 3.3% primarily due to frozen meals and snacks category softness and share losses in our frozen potatoes, meals and snacks businesses in U.S. Consumer Products, soft soup and frozen meals categories in the U.K., chilled beverage product rationalization and reduced promotional activity in the tuna and seafood category in Australia, softness in Indonesian cordials sales following the transition to a new distributor network, and raw material and packaging supply constraints in Venezuela. Net pricing increased sales by 1.9%, driven by price increases in Venezuela, 54 --------------------------------------------------------------------------------Indonesia, China and India, and reduced trade promotions in US Foodservice, partially offset by increased promotional activity in US Consumer Products, the U.K. and Italy. Unfavorable foreign exchange rates decreased sales by 1.2%. Sales decreased 0.2% due to divestitures. Gross profit was $2.75 billion for the nine months ended September 28, 2014, compared with $713 million for the Successor period from February 8 to September 22, 2013, and $1.89 billion for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $155 million, or 5.9%, period over period, while gross profit margin increased to 33.9% from 31.1%. The first nine months of 2014 included a non-cash impairment charge of $62 million on its indefinite lived trademarks, primarily in its North American frozen meals and snacks business due to continued category softness driving lower than anticipated sales. This impairment was recorded in the non-operating segment. The first nine months of 2014 included charges in cost of products sold for restructuring and productivity initiatives of $293 million (which are recorded in the non-operating segment) and incremental amortization of $36 million following the step-up in basis of definite-lived tangible and intangible assets due to purchase accounting adjustments. In addition, it included incremental costs totaling $45 million, primarily for additional logistics costs incurred related to the U.S. SAP go-live, along with equipment relocation charges and consulting and advisory charges not specifically related to restructuring activities (which are recorded in the non-operating segment). The Successor period February 8 to September 22, 2013, incurred higher cost of products sold associated with the purchase accounting step up in inventory value of $383 million. It also included $23 million primarily in severance and employee benefit costs relating to the reduction of corporate and field positions across the Company. Gross profit in the current year was positively impacted by reduced costs of product sold as a result of restructuring and productivity initiatives. SG&A were $1.54 billion for the nine months ended September 28, 2014, compared with $681 million for the Successor period from February 8 to September 22, 2013, and $1.13 billion for the Predecessor period from December 24, 2012 to June 7, 2013, a decrease of $267 million, or 14.8%, period over period, and decreased as a percentage of sales to 18.9% from 21.6% period over period. The first nine months of 2014 included charges for restructuring and productivity initiatives of $45 million (which are recorded in the non-operating segment). In addition, it included incremental costs totaling $68 million, primarily for additional warehousing and other logistics costs incurred related to the U.S. SAP go-live and employee benefit costs not associated with our restructuring activities (which are recorded in the non-operating segment). The Successor period February 8 to September 22, 2013 included $47 million primarily in severance and employee benefit costs relating to the reduction of corporate and field positions across the Company. The remaining decrease in SG&A is attributable to lower fixed selling and distribution and general and administrative expense primarily resulting from restructuring and productivity related initiatives and lower marketing expense. Merger related costs in the Successor period from February 8 to September 22, 2013 were $154 million consisting primarily of advisory fees, legal, accounting and other professional costs. In the Predecessor period, Merger related costs of $157 million include $48 million resulting from the acceleration of stock options, restricted stock units and other compensation plans pursuant to the existing change in control provisions of those plans, and $109 million of professional fees. Net interest expense was $482 million for the nine months ended September 28, 2014, compared with $220 million for the Successor period from February 8 to September 22, 2013, and $120 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $142 million, reflecting higher average debt balances resulting from the Merger. Prior to the Merger, Merger Subsidiary entered into interest rate swap agreements to mitigate exposure to variable rate debt that was raised to finance the acquisition. These agreements were not designated as hedging instruments prior to the Merger date, and as such, we recorded a gain of $118 million in the Successor period from February 8 to September 22, 2013 due to changes in fair value of these instruments, and separately reflected the gain in the accompanying condensed consolidated statement of operations. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Subsidiary. Upon consummation of the acquisition, these interest rate swaps with an aggregate notional amount of $9.0 billion met the criteria for hedge accounting and were designated as hedges of future interest payments. Other expense, net, was $101 million for the nine months ended September 28, 2014, compared with $9 million for the Successor period from February 8 to September 22, 2013, and $183 million for the Predecessor period from December 24, 2012 to June 7, 2013, a decrease of $90 million. The decrease is primarily related to the costs for early extinguishment of debt ($129 million) related to the Merger and a $43 million charge in relation to the currency devaluation in Venezuela in the Predecessor period, partially offset by $85 million of currency losses in the nine months ended September 28, 2014, including $23 million realized in Venezuela (see Note 17), and a $15 million increase in net payments made on the cross currency swaps (see Note 16). Tax expense was $125 million or 19.8% of pretax income for the nine months ended September 28, 2014, compared with a tax benefit of $187 million or 80.4% of pretax loss for the Successor period from February 8 to September 22, 2013, and tax expense of $160 million or 53.1% of pretax income for the Predecessor period from December 24, 2012 to June 7, 2013. The Predecessor period effective tax rate is higher than the current and Successor periods effective tax rates primarily due to significant repatriation 55 -------------------------------------------------------------------------------- costs incurred as a result of distributions of foreign earnings during the Predecessor period. The prior year Successor period included a $107 million benefit related to the impact on deferred taxes of a 300 basis point statutory tax rate reduction in the United Kingdom which was enacted during July 2013. Both the Predecessor and prior year Successor periods included nondeductible transaction costs which increased the effective tax rate in comparison with the current period. The Company's effective tax rate in 2014 is lower than the federal statutory rate of 35% primarily due to lower tax rates on earnings in certain foreign jurisdictions and the effects of tax free interest. The net income from continuing operations attributable to H. J. Heinz Corporation II was $494 million for the nine months ended September 28, 2014, compared with a net loss from continuing operations of $48 million for the Successor period from February 8 to September 22, 2013, and net income from continuing operations of $135 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $407 million. Adjusted EBITDA was $2.03 billion for the nine months ended September 28, 2014, compared with $581 million for the Successor period from February 8 to September 22, 2013, and $946 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $500 million, or 32.7%, primarily reflecting the reduction in cost of products sold and SG&A due to efficiencies driven by restructuring and productivity initiatives. OPERATING RESULTS BY BUSINESS SEGMENT In the first quarter of 2014, the Company transitioned to new segments, which are aligned to the new organizational structure implemented during the transition period. These new segments reflect how senior management run the business from an organizational perspective and look at the internal management reporting used for decision-making. The Company has reclassified the segment data for the prior period to conform to the current period's presentation. North America Sales for the North America segment were $3.12 billion for the nine months ended September 28, 2014, compared with $1.22 billion for the Successor period from February 8 to September 22, 2013, and $2.09 billion for the Predecessor period from December 24, 2012 to June 7, 2013, a decrease of $196 million, or 5.9%, period over period. Volume was down 5.1% primarily due to frozen meals and snacks category softness and share losses in our frozen potatoes, meals and snacks businesses in U.S. Consumer Products. Higher net price of 0.2% reflects reduced trade promotions in U.S. Foodservice and Canada, offset by an increase in such activities in U.S. Consumer Products. Unfavorable Canadian exchange rates decreased sales 1.0%. Gross profit was $1.25 billion for the nine months ended September 28, 2014, compared with $274 million for the Successor period from February 8 to September 22, 2013, and $800 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $180 million, or 16.7%, period over period, and gross profit margin increased to 40.1% from 32.4%. These increases are primarily related to lower cost of products sold as a result of various restructuring and productivity initiatives and the purchase accounting step up in inventory value of $174 million recorded in the Successor period February 8 to September 22, 2013, partially offset by lower volumes noted above and higher cost of products sold associated with the amortization of the purchase accounting adjustments relative to customer related assets. Adjusted EBITDA was $937 million for the nine months ended September 28, 2014, compared with $295 million for the Successor period from February 8 to September 22, 2013, and $517 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $125 million, or 15.5%, reflecting increase in gross profit noted above and lower SG&A primarily related to reduced costs related to workforce reductions and lower marketing spend. Europe Sales for Heinz Europe were $2.22 billion for the nine months ended September 28, 2014, compared with $815 million for the Successor period from February 8 to September 22, 2013, and $1.37 billion for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $44 million, or 2.0%, period over period. Volume was down 2.0% due primarily to soft soup and frozen meals category sales in the U.K., infant food in Italy, and, to a lesser extent, increased competition in the Benelux countries and Eastern Europe, partially offset by strong market performance in Sweden. Net pricing decreased 0.4% due to increased trade spend in the U.K. and Italy to counteract category softness partially offset by higher pricing in the Benelux countries and Eastern Europe. Favorable exchange rates increased sales 5.1%. The divestiture of a small soup business in Germany decreased sales 0.7%. Gross profit was $946 million for the nine months ended September 28, 2014, compared with $200 million for the Successor period from February 8 to September 22, 2013, and $519 million for the Predecessor period from December 24, 2012 to June 7, 56 -------------------------------------------------------------------------------- 2013, an increase of $228 million, or 31.7%, period over period, while the gross profit margin increased to 42.5% from 32.9%. These increases are primarily related to lower cost of products sold as a result of various restructuring and productivity initiatives and the purchase accounting step up in inventory value of $106 million recorded in the Successor period February 8 to September 22, 2013, partially offset by higher cost of products sold associated with the amortization of the purchase accounting adjustments relative to customer related assets and lower volume. Adjusted EBITDA was $657 million for the nine months ended September 28, 2014, compared with $170 million for the Successor period from February 8 to September 22, 2013, and $292 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $195 million, or 42.2%, reflecting the increase in gross profit and lower SG&A primarily related to productivity initiatives. Asia/Pacific Heinz Asia/Pacific sales were $1.55 billion for the nine months ended September 28, 2014, compared with $653 million for the Successor period from February 8 to September 22, 2013, and $1.02 billion for the Predecessor period from December 24, 2012 to June 7, 2013, a decrease of $125 million, or 7.5%, period over period. Volume decreased 3.3% primarily as a result of chilled beverage product rationalization and reduced promotional activity in the tuna and seafood category in Australia, and softness in Indonesian cordials sales following the transition to a new distributor network. Pricing increased 1.9%, due to increased pricing in Indonesia and China, partially offset by increased promotional activity in New Zealand. Unfavorable foreign exchange rates primarily in Australia and Indonesia, decreased sales by 6.1%. Gross profit was $488 million for the nine months ended September 28, 2014, compared with $118 million for the Successor period from February 8 to September 22, 2013, and $328 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $41 million, or 9.2%, period over period, while the gross profit margin increased to 31.5% from 26.6%. These increases are primarily related to lower cost of products sold as a result of the various restructuring and productivity initiatives undertaken in the prior year and the purchase accounting step up in inventory value of $90 million recorded in the Successor period February 8 to September 22, 2013, partially offset by higher cost of products sold associated with the amortization of the purchase accounting adjustments relative to customer related assets. Adjusted EBITDA was $258 million for the nine months ended September 28, 2014, compared with $84 million for the Successor period from February 8 to September 22, 2013, and $137 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $36 million, or 16.4%, due to the increase in gross profit and lower SG&A primarily related to restructuring and productivity initiatives. Latin America Sales for the Latin America segment were $665 million for the nine months ended September 28, 2014, compared with $251 million for the Successor period from February 8 to September 22, 2013, and $390 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $24 million, or 3.8%, period over period. Volume decreased 8.4% as product shortages in Venezuela, driven by raw material and packaging supply constraints, were partially offset by increased ketchup volume and market expansion in Mexico. Pricing increased sales 16.7% primarily in Venezuela. Unfavorable foreign exchange rates primarily in Brazil decreased sales by 4.5%. Gross profit was $247 million for the nine months ended September 28, 2014, compared with $71 million for the Successor period from February 8 to September 22, 2013, and $122 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $54 million, or 27.7%, period over period, and gross profit margin increased to 37.2% from 30.2%. These increases are primarily related to lower cost of products sold as a result of the various restructuring and productivity initiatives undertaken in the prior year and the purchase accounting step up in inventory value of $8 million recorded in the Successor period February 8 to September 22, 2013, partially offset by higher cost of products sold associated with the amortization of the purchase accounting adjustments relative to customer related assets. Adjusted EBITDA was $132 million for the nine months ended September 28, 2014, compared with $35 million for the Successor period from February 8 to September 22, 2013, and $38 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $59 million, or 80.7%, reflecting the increase in gross profit and lower SG&A resulting from restructuring and productivity initiatives, primarily in Venezuela. RIMEA Sales for RIMEA were $565 million for the nine months ended September 28, 2014, compared with $208 million for the Successor period from February 8 to September 22, 2013, and $335 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $22 million, or 4.0%, period over period. Volume increased 8.2% led by growth in Russia and our Africa, Middle East and Turkey region. Pricing increased sales by 4.4%, largely due to increasing commodity prices in India and price increases on ketchup in the Middle East. Unfavorable foreign exchange rates decreased sales 8.6%. 57 -------------------------------------------------------------------------------- Gross profit was $215 million for the nine months ended September 28, 2014, compared with $67 million for the Successor period from February 8 to September 22, 2013, and $123 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $25 million, or 13.0%, period over period, and gross profit margin increased to 38.2% from 35.1%. These increases are primarily related to lower cost of products sold as a result of the various restructuring and productivity initiatives undertaken in the prior year and the purchase accounting step up in inventory value of $5 million recorded in the Successor period February 8 to September 22, 2013, partially offset by higher cost of products sold associated with the amortization of the purchase accounting adjustments relative to customer related assets. Adjusted EBITDA was $103 million for the nine months ended September 28, 2014, compared with $27 million for the Successor period from February 8 to September 22, 2013, and $48 million for the Predecessor period from December 24, 2012 to June 7, 2013, an increase of $27 million, or 36.3%, primarily reflecting lower SG&A costs in Russia and India. Liquidity and Financial Position In connection with the Merger, the cash consideration was funded from equity contributions from the Sponsors and cash of the Company, as well as proceeds received by Merger Subsidiary in connection with the following debt financing pursuant to the Senior Credit Facilities and the Exchange Notes: • $9.5 billion in senior secured term loans, with tranches of 6 and 7 year maturities and fluctuating interest rates based on, at the Company's election, base rate or LIBOR plus a spread on each of the tranches, with respective spreads ranging from 125-150 basis points for base rate loans with a 2% base rate floor and 225-250 basis points for LIBOR loans with a 1% LIBOR floor. Prior to the Merger, Merger Subsidiary entered into interest rate swaps to mitigate exposure to the variable interest rates on these term loans and as a result, the rate on future interest payments beginning in January 2015 and extending through July 2020 have been fixed at an average fixed rate of 2.1%, • $2.0 billion senior secured revolving credit facility with a 5 year maturity and a fluctuating interest rate based on, at the Company's election, base rate or LIBOR, with respective spreads ranging from 50-100 basis points for base rate loans and 150-200 basis points for LIBOR loans, on which nothing is currently, or has been, drawn, and • $3.1 billion of 4.25% Exchange Notes. Cash provided by operating activities was $1.3 billion for the nine months ended September 28, 2014, compared to cash used for operating activities of $192 million for the Successor period February 8 to June 23, 2013 and cash provided by operating activities of $668 million for the Predecessor period December 24, 2012 to June 7, 2013. The increase primarily reflects operating losses in the transition period resulting from merger and restructuring related costs and charges incurred on the early extinguishment of debt as well as a reduction in cash taxes paid during 2014. In addition favorable movements in accounts receivable and accounts payable along with reduced pension contributions were partially offset by unfavorable movements in inventory and accrued liabilities. Cash used in the current year in relation to productivity and restructuring initiatives totaled $180 million. Cash used for investing activities totaled $209 million for the nine months ended September 28, 2014, compared to $21.6 billion for the Successor period February 8 - September 22, 2013, which included the merger consideration, net of cash on hand, of $21.5 billion, and $258 million for the Predecessor period December 24, 2012 - June 7, 2013. Other than the merger consideration, the decline is due to reduced capital expenditures and increased proceeds from disposals of property, plant and equipment. Cash used for financing activities totaled $611 million for the nine months ended September 28, 2014, compared to cash provided by financing activities of $24.3 billion for the Successor period February 8 - September 22, 2013 and cash used for financing activities of $481 million in the Predecessor period December 24, 2012 - June 7, 2013. The merger was funded by equity contributions from the Sponsors totaling $16.5 billion as well as proceeds of approximately $11.5 billion under Senior Credit Facilities (of which $9.5 billion was drawn at the close of the transaction), and $3.1 billion upon the issuance of the Exchange Notes. The Company used such proceeds, which was partially offset by $321 million of debt issuance costs, to repay $4.2 billion of the Predecessor's outstanding short and long term debt and associated hedge contracts, as well as decreases in net proceeds on commercial paper and short term debt in the prior year. Berkshire Hathaway has an $8.0 billion preferred stock investment in Parent which requires a 9.0% annual dividend to be paid quarterly in cash or in-kind. The Company made distributions totaling $540 million in cash to Hawk Acquisition Intermediate Corporation I (the immediate parent of Holdings) during the nine months ended September 28, 2014, and expects to continue to make quarterly cash distributions to fund this dividend. 58 -------------------------------------------------------------------------------- The effect of exchange rate changes on cash and cash equivalents was unfavorable by $117 million during the nine months ended September 28, 2014 due to adverse exchange rate movements primarily in the pound sterling and euro, both in relation to the USD. At September 28, 2014, the Company had total debt of $14.6 billion and cash and cash equivalents of $2.9 billion. The Senior Credit Facilities contain certain customary representations and warranties, affirmative covenants and events of default. As of September 28, 2014, the Company is in compliance with these credit facility covenants. Prior to the Merger, our intent was to reinvest the accumulated earnings of our foreign subsidiaries in our international operations, except where remittance could be made tax free in certain situations, and our plans did not demonstrate a need to repatriate them to fund our U.S. cash requirements. Accordingly, a liability for the related deferred income taxes was not reflected in the Company's financial statements. While we continue to expect to reinvest a substantial portion of the future earnings of our foreign subsidiaries in our international operations, as of the Merger date we determined that a portion of our accumulated unremitted foreign earnings were likely to be needed to meet U.S. cash needs. For the portion of unremitted foreign earnings determined not to be permanently reinvested as of September 28, 2014, a deferred tax liability of approximately $131 million is currently recorded. The Company currently anticipates repatriating a substantial portion of the accumulated unremitted earnings which are no longer permanently reinvested during 2014 resulting in the utilization of the majority of its foreign tax credit carryforwards. The Company's 2013 and 2014 repatriation plans have provided access to international cash which is expected to meet the U.S. cash requirements for the foreseeable future. The Company will continue to monitor the credit markets to determine the appropriate mix of long-term debt and short-term debt going forward. The Company believes that its operating cash flow, existing cash balances, together with the credit facilities and other available capital market financing, will be adequate to meet the Company's cash requirements for operations, including capital spending, debt maturities and interest payments. While the Company is confident that its needs can be financed, there can be no assurance that increased volatility and disruption in the global capital and credit markets will not impair its ability to access these markets on commercially acceptable terms. Venezuela- Foreign Currency and Inflation We apply highly inflationary accounting to our business in Venezuela. Under highly inflationary accounting, the financial statements of our Venezuelan subsidiary are remeasured into our reporting currency (U.S. dollars), based on the exchange rate at which we expect to remit dividends in U.S. dollars, (which we currently determine to be the official exchange rate of 6.30 BsF/US$). Exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings, rather than accumulated other comprehensive loss on the balance sheet, until such time as the economy is no longer considered highly inflationary. The impact of applying highly inflationary accounting for Venezuela on our consolidated financial statements is therefore dependent upon movements in the official exchange rate between the Venezuelan bolivar fuerte and the U.S. dollar. On February 8, 2013, the Venezuelan government announced the devaluation of its currency relative to the U.S. dollar, changing the official exchange rate from 4.30 to 6.30. As a result, the Company recorded a $43 million pre-tax currency translation loss, which was reflected within other expense, net, on the condensed consolidated statement of operations in the first quarter of 2013. In March 2013, the Venezuelan government announced the creation of a new foreign exchange mechanism called the Complimentary System of Foreign Currency Acquirement (or SICAD, which stands for Sistema Complimentario de Administración de Divisas). It operates similar to an auction system and allows entities in specific sectors to bid for U.S. dollar to be used for specified import transactions. In January 2014, the government in Venezuela announced certain changes to the regulations governing the currency exchange market. The current official exchange rate remains applicable to import activities related to certain necessities, including food products. In February 2014, the Venezuelan government established a new foreign exchange market mechanism (SICAD II), which became effective on March 24, 2014 and may be the market through which U.S. dollars will be obtained for the remittance of dividends. This market has significantly higher foreign exchange rates than those available through the other foreign exchange mechanisms. Between March 24, 2014 and September 28, 2014 the published weighted average daily exchange rate was between 49.02 bolivars per USD and 51.86 bolivars per USD. The Company has had limited access to the SICAD II market mechanism and has converted 164 million bolivars into $3 million USD, recognizing a transactional currency loss of $2 million and $23 million for the three and nine months ended September 28, 2014, respectively, which has been recorded in other expense, net, in the condensed consolidated statements of operations. The Company has also had access to, and had settlements at, the current official rate in this period and has outstanding requests for settlement at the official rate. Management continues to believe the official rate is legally available and appropriate for the 59 -------------------------------------------------------------------------------- Company's operations in Venezuela. While there is considerable uncertainty with respect to the actual rates to be realized in the circumstances, as of September 28, 2014 we continue to believe it is appropriate to remeasure our Venezuelan monetary assets and liabilities at the official rate of 6.30 bolivars per U.S. dollar. The amount of net monetary assets and liabilities included in our Venezuelan subsidiary's balance sheet was $144 million at September 28, 2014. Contractual Obligations The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements and unconditional purchase obligations. In addition, the Company has purchase obligations for materials, supplies, services, and property, plant and equipment as part of the ordinary conduct of business. A few of these obligations are long-term and are based on minimum purchase requirements. Certain purchase obligations contain variable pricing components, and, as a result, actual cash payments are expected to fluctuate based on changes in these variable components. Due to the proprietary nature of some of the Company's materials and processes, certain supply contracts contain penalty provisions for early terminations. The Company does not believe that a material amount of penalties are reasonably likely to be incurred under these contracts based upon historical experience and current expectations. There have been no material changes to contractual obligations during the nine months ended September 28, 2014. For additional information, refer to Company's Registration Statement on Form S-4 which became effective May 7, 2014. As of the end of the third quarter of 2014, the total potential cash payments for gross unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was approximately $80 million. The timing of payments will depend on the progress of examinations with tax authorities. The Company does not expect a significant tax payment related to these obligations within the next year. The Company is unable to make a reasonably reliable estimate as to when cash settlements with taxing authorities may occur. Recently Issued Accounting Standards See Note 4 to the Condensed Consolidated Financial Statements in Part I Item 1 of this Form 10-Q. Non-GAAP Measures Included in this report are measures of financial performance that are not defined by generally accepted accounting principles in the United States ("GAAP"). Each of the measures is used in reporting to the Company's executive management and as a component of the Board of Directors' measurement of the Company's performance for incentive compensation purposes. Management and the Board of Directors believe that these measures provide useful information to investors, and include these measures in other communications to investors. For each of these non-GAAP financial measures, a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure has been provided. In addition, an explanation of why management believes the non-GAAP measure provides useful information to investors and any additional purposes for which management uses the non-GAAP measure are provided below. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure. EBITDA & Adjusted EBITDA (from Continuing Operations) EBITDA is defined as earnings from continuing operations (net income or loss) before interest, taxes, depreciation and amortization, and is used by management to measure operating performance of the business. Adjusted EBITDA is a tool intended to assist our management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations. These items include share-based compensation and non-cash compensation expense, other operating (income) expenses, net, and all other specifically identified costs associated with projects, transaction costs, restructuring and related professional fees. EBITDA and Adjusted EBITDA are intended to provide additional information only and do not have any standard meaning prescribed by generally accepted accounting principles in the U.S. or U.S. GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income or other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as measures of our liquidity. The Company's definition of EBITDA may not be comparable to similarly titled measures used by other companies. We believe that EBITDA and Adjusted EBITDA are useful to investors, analysts and other external users of our condensed consolidated financial statements because they are widely used by investors to measure operating performance without regard to 60 -------------------------------------------------------------------------------- items such as income taxes, net interest expense, depreciation and amortization, non-cash stock compensation expense and other one-time items, which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired. Because of their limitations, neither EBITDA nor Adjusted EBITDA should be considered as a measure of discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. Additionally, our presentation of Adjusted EBITDA is different than Adjusted EBITDA as defined in our debt agreements. Successor June 30 - June 24 - September 28, September 22, 2014 2013 (13 weeks) (13 weeks) Income/(loss) from continuing operations, net of tax $ 173,981 $ (4,495 ) Interest expense, net 157,469 160,911 Provision for/(benefit from) income taxes 40,227 (175,729 ) Depreciation, including accelerated depreciation for restructuring 70,571 72,272 Amortization 24,681 20,771 EBITDA $ 466,929 $ 73,730 Amortization of inventory step-up - 259,195 Merger related costs - 97,798 Severance related costs 29,059 64,915 Asset write-offs 38,429 - Other exit and implementation restructuring costs 10,617 2,444 Other special items 59,987 (10,937 ) Other expense, net (excluding amortization) 37,450 9,819 Stock based compensation 3,978 - Adjusted EBITDA $ 646,449 $ 496,964 61-------------------------------------------------------------------------------- Successor Predecessor December 30, February 8 - 2013 - September September 22, December 24, 2012 - 28, 2014 2013 June 7, 2013 (39 weeks) (15 weeks) (24 weeks) (Unaudited) (In thousands) Income/(loss) from continuing operations, net of tax $ 506,986 $ (45,632 ) $ 141,350 Interest expense, net 481,936 219,970 120,200 Provision for/(benefit from) income taxes 124,851 (186,856 ) 160,166 Depreciation, including accelerated depreciation for restructuring 354,298 85,110 143,516 Amortization 74,324 22,256 21,044 EBITDA $ 1,542,395 $ 94,848 $ 586,276 Amortization of inventory step-up - 383,300 - Merger related costs - 153,791 157,002 Severance related costs 112,756 67,500 1,866 Asset write-offs 48,718 - - Other exit and implementation restructuring costs 48,985 2,444 3,659 Loss from extinguishment of debt - - 129,367 Unrealized gain on derivative instruments - (117,934 ) - Other special items 106,029 (11,445 ) (11,908 ) Foodstar earn-out - - 12,081 Other expense, net (excluding amortization) 101,241 8,928 49,446 Stock based compensation 6,162 - 18,520 Impairment loss on indefinite-lived trademarks 61,774 - - Adjusted EBITDA $ 2,028,060 $ 581,432 $ 946,309 Adjusted EBITDA in the three and nine months ended September 28, 2014, increased $149 million or 30.1%, to $646 million, and $500 million or 32.7% to $2.0 billion, respectively, primarily reflecting the reduction in cost of products sold and SG&A due to efficiencies driven by prior year productivity initiatives. Discussion of Significant Accounting Estimates In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company addresses in its Annual Report for the transition period ended December 29, 2013 included in the Registration Statement on Form S-4, which became effective May 7, 2014, its most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. No changes to such policies as discussed in the Registration Statement have occurred as of September 28, 2014. 62 -------------------------------------------------------------------------------- CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION Statements about future growth, profitability, costs, expectations, plans, or objectives included in this report, including in management's discussion and analysis, and the financial statements and footnotes, are forward-looking statements based on management's estimates, assumptions, and projections. These forward-looking statements are subject to risks, uncertainties, assumptions and other important factors, many of which may be beyond the Company's control and could cause actual results to differ materially from those expressed or implied in this report and the financial statements and footnotes. Uncertainties contained in such statements include, but are not limited to: • the ability of the Company to retain and hire key personnel and maintain relationships with customers, suppliers and other business partners, • sales, volume, earnings, or cash flow growth, • general economic, political, and industry conditions, including those that could impact consumer spending, • competitive conditions, which affect, among other things, customer preferences and the pricing of products, production, and energy costs, • competition from lower-priced private label brands, • increases in the cost and restrictions on the availability of raw materials including agricultural commodities and packaging materials, the ability to increase product prices in response, and the impact on profitability, • the ability to identify and anticipate and respond through innovation to consumer trends, • the need for product recalls, • the ability to maintain favorable supplier and customer relationships, and the financial viability of those suppliers and customers, • currency valuations and devaluations and interest rate fluctuations, • our substantial level of indebtedness and related debt-service obligations, • changes in credit ratings, leverage, and economic conditions, and the impact of these factors on our cost of borrowing and access to capital markets, • our ability to effectuate our strategy, including our continued evaluation of potential opportunities, such as strategic acquisitions, joint ventures, divestitures and other initiatives, our ability to identify, finance and complete these transactions and other initiatives, and our ability to realize anticipated benefits from them, • the ability to successfully complete cost reduction programs and increase productivity including our restructuring and productivity initiatives, • the ability to effectively integrate acquired businesses, • new products, packaging innovations, and product mix, • the effectiveness of advertising, marketing, and promotional programs, • supply chain efficiency, • cash flow initiatives, • risks inherent in litigation, including tax litigation, 63 --------------------------------------------------------------------------------• the ability to further penetrate and grow and the risk of doing business in international markets, particularly our emerging markets, economic or political instability in those markets, strikes, nationalization, and the performance of business in hyperinflationary environments, in each case, such as Venezuela; and the uncertain global macroeconomic environment and sovereign debt issues, particularly in Europe, • political or social unrest, economic instability, as well as tensions, conflict or war in a specific country or region, such as the recent events in the Ukraine, the increasingly hostile relations between Russia and the Ukraine and the sanctions imposed against Russia by the U.S. and Europe, and by Russia against the U.S. and European countries, which could have an adverse impact on our business, • changes in estimates in critical accounting judgments and changes in laws and regulations, including tax laws, • not meeting expectations of future growth rates or significant changes in specific valuation factors outside of our control, such as discount rates, leading to the possibility of one or more trademarks becoming impaired in the future, • the success of tax planning strategies, • the possibility of increased pension expense and contributions and other people-related costs, • the potential adverse impact of natural disasters, such as flooding and crop failures, and the potential impact of climate change, • the ability to implement new information systems, potential disruptions due to failures in information technology systems, and risks associated with social media, and • other factors described in "Risk Factors" and "Cautionary Statement Relevant to Forward-Looking Information" in the Company's Annual Report for the transition period ended December 29, 2013 included in the Registration Statement on Form S-4, which became effective May 7, 2014. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the securities laws. |