Kraft Heinz Co. 10-Q Summary
Business Context and Reporting Period
The Kraft Heinz Company manufactures and markets food and beverage products globally, including condiments and sauces, cheese and dairy, meals, meats, beverages, coffee, and grocery products. The filing covers the quarter and six months ended June 26, 2021, compared with the periods ended June 27, 2020. Reportable segments are United States, International, and Canada.
Key Financial Metrics
| Metric | Three Months Ended June 26, 2021 | Three Months Ended June 27, 2020 | Six Months Ended June 26, 2021 | Six Months Ended June 27, 2020 |
|---|---|---|---|---|
| Net sales | $6.615 billion | $6.648 billion | $13.009 billion | $12.805 billion |
| Operating income/(loss) | $1.235 billion | $(1.339) billion | $2.324 billion | $(569) million |
| Net income/(loss) attributable to common shareholders | $(27) million | $(1.651) billion | $536 million | $(1.273) billion |
| Diluted EPS | $(0.02) | $(1.35) | $0.43 | $(1.04) |
| Adjusted EBITDA | $1.706 billion | $1.799 billion | $3.286 billion | $3.214 billion |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $2.029 billion | $2.216 billion |
Second-quarter gross profit was $2.291 billion, implying a gross margin of approximately 34.6%, compared with 36.9% in the prior-year quarter. Operating margin was approximately 18.7%, compared with negative 20.1% in the prior-year quarter, primarily because 2020 included substantially higher impairment charges. Adjusted EBITDA margin was approximately 25.8%, compared with 27.1%.
For the first six months, gross profit was $4.492 billion, or approximately 34.5% of sales, compared with 33.7% in the prior-year period. Adjusted EBITDA margin was approximately 25.3%, compared with 25.1%.
- Organic net sales decreased 2.1% in the second quarter and increased 0.2% for the first six months. Higher pricing was offset by unfavorable volume and mix.
- Second-quarter segment sales were $4.738 billion in the United States, $1.413 billion internationally, and $464 million in Canada. Six-month sales were $9.346 billion, $2.807 billion, and $856 million, respectively.
- Six-month Segment Adjusted EBITDA was $2.654 billion in the United States, $569 million internationally, and $204 million in Canada.
- Cash and cash equivalents were $3.941 billion at June 26, 2021, including approximately $1.9 billion held by international subsidiaries.
- Long-term debt, including the current portion, was approximately $25.1 billion, compared with $28.3 billion at December 26, 2020. Total debt had a carrying value of approximately $25.2 billion and fair value of $29.1 billion.
- Total assets were $97.038 billion and total equity was $50.142 billion at June 26, 2021.
Material Changes Versus the Prior Comparable Period
- Net sales declined 0.5% in the quarter but increased 1.6% for the six months. Foreign currency benefited reported sales, while divestitures reduced sales and volume/mix was unfavorable.
- Operating and net income improved substantially because impairment losses declined to $113 million in the quarter and $343 million year to date, from $2.9 billion and $3.1 billion, respectively, in the comparable 2020 periods.
- Adjusted EBITDA declined 5.2% in the quarter but increased 2.2% year to date. United States profitability declined, while International and Canada improved.
- Interest expense increased to $613 million in the quarter and $1.028 billion year to date, driven largely by losses on debt tenders, redemptions, and repurchases. The 2021 debt transactions reduced principal debt outstanding by approximately $3.1 billion, excluding related premiums and costs.
- Operating cash flow declined to $2.029 billion from $2.216 billion, reflecting higher compensation and tax payments, increased promotional activity, and working-capital effects.
- Investing cash flow was $3.027 billion, including approximately $3.435 billion of net proceeds from the sale of the global nuts business to Hormel.
- Financing cash outflow was $4.555 billion, including $3.090 billion of debt repayments, $433 million of debt prepayment and extinguishment costs, and $979 million of dividends.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects 2021 capital expenditures of approximately $1.0 billion, compared with $596 million in 2020, primarily for capacity expansion and delayed projects. The estimate may change because of COVID-19 conditions.
- Management expects to pay approximately $700 million of cash taxes in the second half of 2021 related primarily to the nuts transaction.
- The $4.0 billion Senior Credit Facility was undrawn at quarter-end. Commitments totaled $4.1 billion through July 6, 2023 and $4.0 billion through July 6, 2025. The company stated that operating cash flow and available credit should fund expected needs for the next 12 months.
- The Cheese Transaction with Lactalis, valued at approximately $3.34 billion, was expected to close in the second half of 2021. Management disclosed that a second-quarter closing would have resulted in an estimated $1.33 billion non-cash impairment of retained Kraft and Velveeta brand value; the actual charge could differ.
- The company entered into an agreement to acquire Assan Foods for approximately $70 million in cash and assumed debt of approximately $30 million, subject to closing conditions and regulatory approvals.
- The SEC investigation remains ongoing. The company recorded a $62 million accrual in SG&A during the quarter and stated that the ultimate liability could differ, although any amount beyond the accrual is not expected to materially affect financial condition, results, or cash flow.
- COVID-19 continued to support retail demand relative to pre-pandemic levels but negatively affected foodservice demand. Management identified foodservice exposure, consumer behavior, restaurant restrictions, and potential future impairment as continuing risks.
- Goodwill and indefinite-lived intangible assets remained significant at $31.477 billion and $40.824 billion, respectively. Reporting units and brands with limited valuation headroom remain susceptible to additional impairment from weaker growth, margins, exchange rates, discount rates, commodity costs, or changes in consumer demand.
- Key operating risks include commodity and packaging inflation, foreign exchange volatility, competition, customer and supplier relationships, debt and credit ratings, regulatory matters, litigation, tax changes, supply-chain disruption, and the ability to maintain dividends.
Most Important Facts for Investors to Verify
- Whether the reported improvement in GAAP earnings is sustainable after excluding impairments, debt extinguishment costs, divestiture effects, the SEC accrual, and discrete tax items.
- The closing terms and final accounting impact of the Cheese Transaction, including any Kraft and Velveeta impairment and final gain or loss on sale.
- The final cash-tax burden from the nuts transaction and the use of proceeds from the nuts and cheese transactions.
- Progress against the approximately $1.0 billion 2021 capital expenditure plan and the impact of commodity and packaging inflation on margins.
- Changes in foodservice recovery, retail demand normalization, volume/mix, and pricing effectiveness.
- Potential additional goodwill or brand impairments, particularly for reporting units and brands with 20% or less valuation headroom.
- The status and eventual cost of the SEC investigation and related securities, derivative, and ERISA litigation.
- Debt maturities, refinancing needs, credit ratings, covenant compliance, and the company’s ability to sustain quarterly dividends.