The Kraft Heinz Company — Q1 2022 Form 10-Q Summary
Business context and reporting period
Kraft Heinz manufactures and markets food and beverage products globally, including condiments and sauces, cheese and dairy, meals, meats, beverages, coffee, and other grocery products. The filing covers the three months ended March 26, 2022, compared with the three months ended March 27, 2021. Fiscal 2022 is scheduled to contain 53 weeks. Reportable segments were United States, International, and Canada; the Company expects to combine the United States and Canada into North America beginning in the second quarter of 2022.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $6.045 billion | $6.394 billion | (5.5%) |
| Organic net sales | $6.081 billion | $5.694 billion | 6.8% |
| Gross profit | $1.931 billion | $2.201 billion | (12.3%) |
| Gross margin | 31.9% | 34.4% | (2.5 pts) |
| Operating income | $1.115 billion | $1.089 billion | 2.4% |
| Operating margin | 18.4% | 17.0% | 1.4 pts |
| Net income | $781 million | $568 million | 37.5% |
| Diluted EPS | $0.63 | $0.46 | 37.0% |
| Adjusted EBITDA | $1.342 billion | $1.580 billion | (15.1%) |
| Adjusted EPS | $0.60 | $0.72 | (16.7%) |
| Operating cash flow | $486 million | $810 million | (40.0%) |
Organic net sales growth was driven by 9.0 percentage points of pricing, partially offset by a 2.2-point unfavorable volume/mix impact. Reported sales included an 11.2-point unfavorable impact from acquisitions and divestitures and a 1.1-point unfavorable currency impact.
Cash and cash equivalents were $2.978 billion at March 26, 2022, compared with $3.445 billion at December 25, 2021. Total debt was approximately $21.8 billion, including $21.7 billion of long-term debt and current maturities. The Company had no borrowings under its $4.1 billion/$4.0 billion Senior Credit Facility and was in compliance with financial covenants.
Material changes versus the prior comparable period
- Reported sales declined because the 2021 divestitures of the Nuts and cheese businesses more than offset organic pricing growth. Organic sales increased in each geographic segment, while volume/mix declined in each segment.
- Adjusted EBITDA fell despite pricing and efficiency gains, as higher dairy, packaging, meat, energy, logistics, procurement, and manufacturing costs exceeded those benefits.
- Operating income increased primarily because the prior-year period included a $230 million goodwill impairment, while Q1 2022 included an $11 million goodwill impairment reduction and a $66 million impairment loss on a U.S. manufacturing facility held for sale.
- Net income and reported EPS benefited from lower interest expense. Q1 2021 included a $106 million debt extinguishment loss, and aggregate senior-note principal had been reduced by approximately $6.2 billion during 2021.
- Operating cash flow decreased by $324 million, primarily because of lower adjusted EBITDA and increased inventory investment related to rebuilding stock and higher input costs.
- The Company acquired 85% of Just Spices for approximately $243 million in January 2022. The acquisition generated preliminary goodwill of $167 million. The Hemmer acquisition closed on March 31, 2022, after quarter-end, for preliminary cash consideration of approximately $252 million.
Guidance, outlook, risks, and unusual items
- Management expects elevated commodity and supply-chain cost inflation to continue through at least the remainder of 2022. Pricing actions and efficiency initiatives are intended to mitigate these pressures, but timing differences may weigh on results and pricing could reduce market share.
- Capacity constraints, labor shortages, employee turnover, COVID-19-related absences, and supply-chain disruptions have affected service levels and could continue to affect sales, margins, cash flow, and market share.
- Expected 2022 capital expenditures are approximately $1.0 billion, versus $905 million in 2021, primarily for capacity expansion, cost improvement, maintenance, and technology.
- The Company expected to pay approximately $620 million of cash taxes in the second quarter of 2022 related to the Cheese Transaction. It also had senior notes of approximately $381 million maturing in June 2022 and $315 million maturing in August 2022.
- Russia represented approximately 1% of consolidated net sales, with insignificant Russian net income and Adjusted EBITDA in Q1 2022. Management reported no material financial impact from the Russia-Ukraine conflict through the filing date, but cited related commodity and energy cost increases.
- Goodwill and brand impairment testing is sensitive to discount rates, growth, margins, foreign exchange, inflation, and other market assumptions. The planned segment reorganization is expected to require an interim impairment or transition test in Q2 2022.
- The Company faces securities class-action and stockholder derivative litigation related to alleged misleading disclosures, internal controls, cost-cutting measures, and insider trading. The potential loss range could not reasonably be estimated; management expects no material adverse effect from currently pending ordinary-course legal matters.
- The Board declared a $0.40-per-share dividend payable June 24, 2022. Management stated that operating cash flow and available credit are expected to provide sufficient liquidity for the next 12 months.
Most important facts for investors to verify
- Whether pricing can continue to offset inflation without causing further volume, mix, or market-share deterioration.
- The sustainability of reported earnings growth after excluding prior-year debt-extinguishment costs, goodwill impairment, derivative gains, and other unusual items.
- Progress on inventory rebuilding, capacity expansion, labor availability, and the expected $1.0 billion 2022 capital-spending program.
- Liquidity after the anticipated $620 million tax payment, the Hemmer acquisition payment, dividends, capital expenditures, and upcoming debt maturities.
- The final purchase-price accounting and integration performance for Just Spices, Assan Foods, and Hemmer.
- Results of the Q2 2022 segment reorganization and related goodwill and brand impairment testing.
- Developments in the securities and derivative litigation and any impact on financial statements or cash flows.