Kraft Heinz Co. 2016 Q1 SEC Filing Summary
Business context and reporting period
The filing covers the unaudited quarter ended April 3, 2016. Kraft Heinz manufactures and markets food and beverage products globally across four segments: United States, Canada, Europe, and Rest of World. The July 2, 2015 Kraft merger substantially changed the company’s scale, making reported year-over-year comparisons with the March 29, 2015 period less comparable. Management therefore emphasizes pro forma and non-GAAP measures.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $6.570 billion | $2.478 billion | 165.1% |
| Pro forma net sales | $6.570 billion | $6.830 billion | (3.8%) |
| Organic net sales | $6.720 billion | $6.644 billion | 1.1% |
| Gross profit | $2.378 billion | $847 million | 180.6% |
| Operating income | $1.513 billion | $509 million | 197.2% |
| Net income attributable to Kraft Heinz | $896 million | $276 million | 224.6% |
| Net income attributable to common shareholders | $896 million | $96 million | 833.3% |
| Diluted EPS | $0.73 | $0.24 | 204.2% |
| Adjusted EBITDA | $1.951 billion | $1.609 billion | 21.3% |
| Adjusted EPS | $0.73 | $0.53 | 37.7% |
| Operating cash flow | $270 million | $(83) million | Improved $353 million |
Reported gross margin was approximately 36.2%, operating margin approximately 23.0%, and net income attributable to common shareholders was approximately 13.6% of sales. The effective tax rate increased to 29.2% from 19.5%, primarily because of the merger-related change in the company’s geographic earnings mix. Interest expense increased to $249 million from $201 million.
Cash and cash equivalents were $4.199 billion at April 3, 2016, compared with $4.837 billion at January 3, 2016. Capital expenditures were $303 million, and cash used in financing activities was $627 million, including $667 million of common stock dividends. Long-term debt was $25.167 billion; total debt fair value was approximately $27.0 billion versus carrying value of $25.3 billion. The company reported compliance with debt covenants and no draws on its $4.0 billion revolving credit facility.
Material changes versus the prior comparable period
- Reported sales and earnings increased primarily because Q1 2016 included the combined Kraft Heinz business, whereas Q1 2015 largely reflected pre-merger Heinz.
- On a pro forma basis, sales declined 3.8%, reflecting a 4.5 percentage-point foreign-currency headwind and a 0.4 percentage-point divestiture impact. Organic sales increased 1.1%, driven by 0.8 percentage points of volume/mix and 0.3 percentage points of pricing.
- Adjusted EBITDA increased 21.3%, supported by integration savings and favorable pricing net of commodity costs, partly offset by a 6.0 percentage-point foreign-currency impact.
- Integration and restructuring expenses increased to $260 million from $43 million. Q1 2016 included $241 million of Integration Program costs and $19 million of other restructuring costs.
- The Integration Program had incurred $1.1 billion of cumulative costs by April 3, 2016. Inventory increased to $2.892 billion from $2.618 billion, primarily because of production ahead of planned facility closures and consolidations and seasonal factors.
- Foreign currency materially affected Canada, Europe, and Rest of World results. Rest of World was particularly affected by the Venezuelan bolivar devaluation.
- The company retrospectively changed certain cost classifications between cost of products sold and SG&A and revised a prior intangible-amortization classification. These changes affected presentation but were not material to prior-period financial statements.
Guidance, outlook, commentary, and risks
- Management expects the $1.9 billion Integration Program to generate $1.5 billion of pre-tax savings by 2017. Approximately $225 million of savings were realized in Q1 2016 and approximately $350 million cumulatively since inception.
- The program is expected to eliminate approximately 2,650 salaried positions and 2,600 positions through facility and distribution-network changes. Seven factories were announced for closure or consolidation.
- Management expects approximately $1.1 billion of Integration Program-related capital expenditures and approximately $1.6 billion of total 2016 capital expenditures. It expects approximately 60% of Integration Program costs to be cash expenditures.
- The company expects to contribute up to approximately $150 million to U.S. pension plans and $25 million to non-U.S. plans during the remainder of 2016.
- The company intends to redeem its $8.320 billion of 9.00% Series A cumulative compounding redeemable preferred stock during Q2 2016, primarily using new debt, commercial paper, securitization proceeds, and cash on hand.
- Management expects operating cash flow, cash on hand, the revolving facility, and commercial paper program to satisfy working capital, restructuring, capital expenditure, pension, debt, and dividend needs. Commodity cost volatility is expected to continue.
- Key risks include merger integration and failure to achieve cost savings, foreign exchange and Venezuelan operating conditions, commodity and energy costs, high leverage, goodwill and intangible-asset impairment, pension obligations, competitive and consumer-demand pressures, legal and regulatory matters, product recalls, cybersecurity and operational disruptions, and dividend or tax-related changes.
- The company disclosed no material changes to previously reported market risks or risk factors. Pending legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Reconcile reported growth with pro forma and organic results; the 165.1% reported sales increase is not an underlying growth rate.
- Track whether the $1.5 billion savings target and 2017 timing remain achievable relative to cumulative costs and workforce reductions.
- Verify funding, refinancing terms, and leverage after the planned preferred-stock redemption and any related debt issuance.
- Monitor foreign-currency effects, especially Venezuela, Europe, Canada, and Rest of World, along with commodity-cost trends.
- Assess goodwill and indefinite-lived intangible-asset impairment exposure; several reporting units or brands had less than 10% excess fair value in prior testing.
- Evaluate cash conversion, inventory levels, pension contributions, restructuring cash payments, and the sustainability of the $2.30 annualized common dividend.