Kraft Heinz Co. 2021 Q3 Form 10-Q Summary
Business context and reporting period
Kraft Heinz manufactures and markets packaged food and beverage products globally across the United States, International, and Canada segments. The filing covers the three and nine months ended September 25, 2021, compared with September 26, 2020. Fiscal 2021 is a 52-week year ending December 25, 2021.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $6.324 billion | $6.441 billion | $19.333 billion | $19.246 billion |
| Operating income/(loss) | $1.156 billion | $1.147 billion | $3.480 billion | $578 million |
| Net income/(loss) attributable to common shareholders | $733 million | $597 million | $1.269 billion | $(676) million |
| Diluted EPS | $0.59 | $0.49 | $1.03 | $(0.55) |
| Adjusted EBITDA | $1.479 billion | $1.667 billion | $4.765 billion | $4.881 billion |
| Adjusted EPS | $0.65 | $0.70 | $2.15 | $2.09 |
- Q3 net sales declined 1.8%, while organic net sales increased 1.3%, reflecting 1.5 percentage points of pricing benefit partially offset by 0.2 points of unfavorable volume/mix.
- Nine-month net sales increased 0.5%, and organic net sales increased 0.5%, as 1.5 points of pricing more than offset 1.0 point of unfavorable volume/mix.
- Q3 gross profit was $2.028 billion, representing an approximately 32.1% gross margin versus 36.4% in the prior-year quarter. Nine-month gross margin was approximately 33.7% versus 34.6%.
- Q3 operating margin was approximately 18.3% versus 17.8%; nine-month operating margin was approximately 18.0% versus 3.0%, principally because of significantly lower impairment charges.
- Q3 Adjusted EBITDA declined 11.3%; nine-month Adjusted EBITDA declined 2.4%. Lower operating performance reflected inflation in commodities, logistics, procurement, and manufacturing costs.
- Net cash provided by operating activities was $2.448 billion for the nine months, down from $3.326 billion. Capital expenditures were $655 million versus $397 million.
- Investing cash flow was $2.744 billion, including $3.401 billion of proceeds from the Nuts Transaction. Financing cash flow was $(6.333) billion, including $4.145 billion of long-term debt repayments, $577 million of debt prepayment and extinguishment costs, and $1.469 billion of dividends paid.
- Cash and cash equivalents were $2.273 billion at September 25, 2021, compared with $3.417 billion at December 26, 2020. Approximately $1.2 billion was held by international subsidiaries.
- Long-term debt, including the current portion, was approximately $24.0 billion versus $28.3 billion at year-end 2020. No amounts were drawn under the $4.1 billion revolving facility, and the company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Q3 profitability benefited from the absence of the $300 million prior-year goodwill impairment related to the Cheese Transaction, but this benefit was offset in part by inflation, higher commodity and supply-chain costs, unfavorable commodity-hedge results, divestitures, and higher interest expense.
- Nine-month results benefited from substantially lower impairment losses: $343 million in 2021 versus $3.4 billion in 2020. The 2021 charges included $265 million of goodwill impairments and $78 million of intangible-asset impairments.
- The United States remained the largest segment but reported Q3 sales down 4.0% and Segment Adjusted EBITDA down 14.0%. International sales rose 4.4%, while Segment Adjusted EBITDA fell 9.1%. Canada sales rose 3.4%, while Segment Adjusted EBITDA fell 2.1%.
- The company completed the $3.4 billion Nuts Transaction in the second quarter and used proceeds, together with cash on hand, for debt reduction. It also completed tender offers, redemptions, and open-market repurchases of debt during 2021.
- The SEC investigation was settled in September 2021. Kraft Heinz paid a $62 million civil penalty, which had been accrued in the second quarter and recorded in SG&A.
- Other expense was income of $138 million in Q3, compared with $73 million in the prior-year quarter, aided by a $75 million gain from remeasuring an International disposal group that no longer met held-for-sale criteria and by favorable foreign-exchange results.
Guidance, outlook, commentary, and risks
- Management expects high-single-digit gross cost inflation as a percentage of cost of products sold in the second half of 2021 and expects inflation to remain elevated through at least the first half of 2022. Pricing actions and efficiency gains are intended to offset these pressures, but timing may differ from the timing of cost increases.
- 2021 capital expenditures are expected to be approximately $1.0 billion, primarily for capacity expansion. Capacity constraints, competitive labor conditions, and potential labor shortages could affect service levels, market share, results, and cash flows.
- The Cheese Transaction, valued at approximately $3.34 billion, was expected to close in the fourth quarter of 2021. The company disclosed that a closing in Q3 would have resulted in an estimated $1.25 billion non-cash impairment of retained Kraft and Velveeta brand intangibles; the actual charge depends on closing-date valuations.
- Additional acquisitions were announced, including Hemmer for approximately $225 million, expected to close in the first half of 2022, and BR Spices, expected to close in the fourth quarter of 2021, subject to customary conditions.
- Goodwill and indefinite-lived brands remain a major balance-sheet concentration: goodwill was $31.4 billion and indefinite-lived intangible assets were $40.7 billion. Reporting units and brands with limited excess fair value have heightened future impairment risk.
- COVID-19 continued to support retail demand relative to pre-pandemic levels but pressured foodservice demand. Changes in consumer behavior, restaurant closures, government restrictions, and new variants could affect results.
- The company faces securities class actions and derivative litigation for which potential losses cannot reasonably be estimated. An ERISA class action dismissal was appealed. Management does not expect currently pending ordinary-course legal matters to have a material adverse effect, but outcomes remain uncertain.
- Credit ratings were BB+ from Fitch and S&P and Baa3 from Moody’s. Downgraded ratings may restrict commercial-paper access and increase borrowing costs.
Most important facts for an investor to verify
- Whether pricing can offset sustained commodity, logistics, labor, and manufacturing inflation without further volume or mix deterioration.
- The closing-date accounting for the Cheese Transaction, including any Kraft and Velveeta impairment, sale gain or loss, and future license income.
- Progress and proceeds from divestitures and the use of transaction cash for debt reduction, acquisitions, capital expenditures, and dividends.
- Liquidity after approximately $1.0 billion of expected 2021 capital expenditures, $175 million of expected fourth-quarter Nuts-related cash taxes, and scheduled debt maturities.
- Changes in the fair value of the company’s substantial goodwill and brand assets, particularly reporting units and brands with limited valuation cushions.
- Developments in securities and derivative litigation, regulatory matters, COVID-19 exposure, foodservice demand, and supply-chain capacity constraints.
- The company’s non-GAAP measures, including Organic Net Sales, Adjusted EBITDA, and Adjusted EPS, against the corresponding U.S. GAAP results.