Kraft Heinz Co annual report, FY2022

Kraft Heinz Co. 2022 Form 10-K Summary

Business context and reporting period

The Kraft Heinz Company manufactures and markets branded food and beverage products globally, including condiments and sauces, cheese and dairy, meals, meats, beverages, coffee, and grocery products. The company reports through two geographic segments: North America and International. Fiscal 2022 was a 53-week year ended December 31, 2022, compared with a 52-week year ended December 25, 2021.

Financial performance and key metrics

Metric	2022	2021	Change
Net sales	$26.485 billion	$26.042 billion	1.7%
Organic net sales	$26.249 billion	$23.917 billion	9.8%
Operating income	$3.634 billion	$3.460 billion	5.0%
Net income attributable to common shareholders	$2.363 billion	$1.012 billion	133.4%
Diluted EPS	$1.91	$0.82	132.9%
Adjusted EBITDA	$6.003 billion	$6.371 billion	(5.8%)
Adjusted EPS	$2.78	$2.93	(5.1%)
Net cash provided by operating activities	$2.469 billion	$5.364 billion	Decrease of $2.895 billion

Gross profit was $8.122 billion, representing an approximately 30.7% gross margin, compared with approximately 33.3% in 2021.
Operating margin was approximately 13.7%, compared with approximately 13.3% in 2021. Net margin attributable to common shareholders was approximately 8.9%, compared with approximately 3.9% in 2021.
North America net sales were $20.340 billion, essentially flat year over year; organic net sales increased 9.2%. Segment Adjusted EBITDA declined 5.2% to $5.284 billion.
International net sales increased 8.0% to $6.145 billion; organic net sales increased 11.6%. Segment Adjusted EBITDA declined 4.6% to $1.017 billion, including a 7.2-percentage-point unfavorable foreign-exchange impact.
Pricing increased 13.2 percentage points on a consolidated organic basis but was partly offset by a 3.4-percentage-point unfavorable volume/mix impact.
Capital expenditures were $916 million, compared with $905 million in 2021. Cash used for investing activities was $1.091 billion, and cash used for financing activities was $3.714 billion.
Cash and cash equivalents were $1.040 billion at year-end, including $707 million held by international subsidiaries. Total current assets were $7.897 billion versus total current liabilities of $9.028 billion.
Long-term debt, including the current portion, was $20.064 billion, down from $21.801 billion. The company had no commercial paper outstanding and no borrowings under its $4.0 billion revolving credit facility at year-end.
The company paid approximately $1.960 billion of common-stock dividends in 2022. The board subsequently declared a quarterly dividend of $0.40 per share payable March 31, 2023.

Material changes versus the prior comparable period

Reported sales growth was limited by an 8.0-percentage-point unfavorable impact from acquisitions and divestitures and a 2.0-percentage-point unfavorable currency impact. The 53rd week contributed 1.9 percentage points.
Reported net income and EPS increased substantially primarily because 2021 included significant debt extinguishment losses and higher tax expense. Interest expense fell to $921 million from $2.047 billion, and the effective tax rate declined to 20.2% from 40.1%.
Adjusted EBITDA and Adjusted EPS declined despite pricing and efficiency gains because of inflation-driven commodity, procurement, logistics, and manufacturing costs, unfavorable volume/mix, divestitures, and foreign exchange.
Operating cash flow declined materially because 2021 benefited from proceeds associated with the Cheese Transaction, while 2022 included higher inventory investment, increased input costs, supplier-payment timing, and the wind-down of product-financing arrangements.
The company acquired Just Spices for approximately $243 million and Hemmer for approximately $279 million, and sold its business-to-business powdered cheese business for approximately $108 million, recording a pre-tax gain of approximately $26 million.
2022 included $999 million of impairment losses, consisting of $444 million of goodwill, $469 million of intangible assets, and $86 million of property, plant, and equipment. The comparable 2021 impairment total was $1.634 billion, primarily involving goodwill and intangible assets.
The company recorded a $210 million expense related to a securities class-action lawsuit, net of expected insurance recoveries and contributions from other defendants. A preliminary settlement was reached in February 2023, subject to court approval.

Guidance, outlook, commentary, and risks

Management expects commodity and supply-chain costs to continue increasing and inflation to remain elevated through 2023. Pricing actions and efficiency gains are intended to mitigate the effects, but may lag cost inflation and may negatively affect market share.
Management expects approximately $1.1 billion of capital expenditures in 2023, focused on capacity expansion, maintenance, cost improvement, innovation, and technology.
The company expects approximately 560 additional positions to be eliminated in 2023 as part of restructuring programs. The 2022 restructuring liability was $39 million at year-end.
Management stated that operating cash flow, commercial paper capacity, the revolving credit facility, and capital-market access should provide sufficient liquidity for the next 12 months. Approximately €750 million of senior notes mature in June 2023.
Key operating risks include inflation and commodity volatility, supply-chain and capacity constraints, pricing-related volume and market-share pressure, retailer concentration, private-label competition, foreign-exchange movements, geopolitical conflict, and changing consumer preferences.
Walmart represented approximately 21% of consolidated 2022 net sales. Approximately 30% of sales were generated outside the United States.
Goodwill and brand valuations remain sensitive to discount rates, growth assumptions, margins, foreign exchange, inflation, and market capitalization. Goodwill was $30.833 billion and indefinite-lived intangible assets were approximately $38.552 billion at year-end. Several reporting units and brands had limited excess fair value and were identified as having heightened future impairment risk.
The IRS is examining 2018 and 2019 transfer-pricing matters and expects to issue a Notice of Proposed Adjustment. The ultimate outcome is uncertain and could result in additional tax, interest, and penalties.
Berkshire Hathaway owned approximately 26.6% of common stock at December 31, 2022 and may significantly influence matters requiring stockholder approval.
Long-term debt ratings at filing were BBB- from S&P, BBB from Fitch, and Baa3 from Moody’s. The company was in compliance with its debt covenants at year-end.

Important facts for investors to verify

Whether pricing can continue to offset inflation without further volume declines, market-share losses, or margin pressure.
The sustainability of operating cash flow after inventory rebuilding, supplier-finance changes, acquisitions, debt maturities, dividends, and planned capital expenditures.
The refinancing or repayment plan for the approximately €750 million of notes maturing in June 2023 and other near-term contractual obligations.
Potential future goodwill, brand, or other asset impairments, particularly for reporting units and brands with low excess fair value.
The final outcome and payment obligations associated with the securities class-action settlement and other derivative litigation.
The potential tax exposure from the IRS transfer-pricing examination and the company’s approximately $455 million of unrecognized tax benefits.
Changes in retailer concentration, especially Walmart’s approximately 21% contribution to consolidated sales, and the impact of private-label competition.
The distinction between GAAP results and management’s non-GAAP measures, particularly Adjusted EBITDA, Adjusted EPS, and Organic Net Sales.