Kraft Heinz Co. 2020 Form 10-K Summary
Business Context and Reporting Period
Kraft Heinz manufactures and markets global food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, beverages, coffee, and grocery products. The fiscal year ended December 26, 2020, comprised 52 weeks; the comparable fiscal year ended December 28, 2019 also comprised 52 weeks. Effective in 2020, the Company reported three geographic segments: United States, International, and Canada.
COVID-19 increased retail and at-home consumption, more than offsetting lower foodservice and away-from-home demand. The Company had approximately 38,000 employees and 81 manufacturing and processing facilities at year-end. Walmart represented approximately 22% of 2020 net sales.
Financial Results and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $26.185 billion | $24.977 billion | 4.8% |
| Organic net sales | $26.320 billion | $24.718 billion | 6.5% |
| Gross profit | $9.177 billion | $8.147 billion | 12.6% |
| Operating income | $2.128 billion | $3.070 billion | (30.7%) |
| Net income attributable to common shareholders | $356 million | $1.935 billion | (81.6%) |
| Diluted EPS | $0.29 | $1.58 | (81.6%) |
| Adjusted EBITDA | $6.669 billion | $6.064 billion | 10.0% |
| Adjusted EPS | $2.88 | $2.85 | 1.1% |
| Net cash from operating activities | $4.929 billion | $3.552 billion | +$1.377 billion |
| Capital expenditures | $596 million | $768 million | (22.4%) |
Gross margin was approximately 35.0%, operating margin approximately 8.1%, net margin approximately 1.4%, and Adjusted EBITDA margin approximately 25.5% in 2020. The filing does not provide a company-wide GAAP margin target.
- United States net sales increased 7.6% to $19.204 billion; Segment Adjusted EBITDA increased 15.1% to $5.557 billion.
- International net sales increased 1.7% to $5.341 billion, while organic net sales increased 4.7%; Segment Adjusted EBITDA increased 5.4% to $1.058 billion.
- Canada net sales decreased 12.8% to $1.640 billion, primarily because of divestitures and foreign exchange; Segment Adjusted EBITDA decreased 20.2% to $389 million.
- Retail-driven volume and mix contributed 3.4 percentage points to organic net sales growth, while pricing contributed 3.1 percentage points.
Cash Flow, Liquidity, Debt, and Capital Structure
- Cash and cash equivalents were $3.417 billion at December 26, 2020, compared with $2.279 billion at the prior year-end.
- Long-term debt, including the current portion, was $28.300 billion, compared with $29.238 billion at December 28, 2019. Total debt had a carrying value of $28.3 billion and estimated fair value of $32.1 billion.
- The Company issued $3.5 billion of senior notes in May 2020 and used the proceeds to fund tender offers, debt redemptions, and related costs. It repaid a $4.0 billion revolving credit facility draw during the second quarter after borrowing it as a precautionary measure during the first quarter.
- The Senior Credit Facility provided commitments of $4.1 billion through July 2023 and $4.0 billion through July 2024. No amount was drawn at year-end, and the Company was in compliance with its financial covenants.
- Fitch and S&P downgraded the Company’s long-term debt rating from BBB- to BB+ in February 2020; Moody’s maintained a Baa3 rating. The filing states that the downgrades may increase borrowing costs and constrain commercial paper access.
- Cash dividends paid were $1.958 billion in 2020. The Board declared a subsequent quarterly dividend of $0.40 per share payable March 26, 2021.
Material Changes Versus the Prior Comparable Period
- GAAP earnings declined sharply because 2020 impairment losses increased to $3.399 billion from $1.899 billion in 2019, including $2.343 billion of goodwill impairments and $1.056 billion of intangible-asset impairments.
- Adjusted EBITDA improved despite higher variable compensation, marketing investment, supply-chain costs, COVID-19 operating costs, and unfavorable commodity costs.
- Other income declined to $296 million from $952 million, reflecting lower gains on business sales, higher foreign exchange losses, and a $26 million loss on dissolution of a joint venture. These effects were partly offset by higher derivative gains.
- The effective tax rate increased to 65.0% from 27.4%, primarily due to nondeductible goodwill impairments, GILTI, and deferred-tax revaluations.
- The Company entered into an agreement to sell certain global cheese assets and license certain trademarks to Groupe Lactalis for approximately $3.3 billion, including approximately $3.2 billion in cash. The transaction was expected to close in the first half of 2021.
- After year-end, the Company agreed to sell its global nuts business to Hormel for approximately $3.4 billion and expected a pre-tax loss of approximately $200 million to $300 million, primarily from a non-cash goodwill impairment.
Fourth-Quarter 2020 Snapshot
| Metric | Q4 2020 | Q4 2019 |
|---|---|---|
| Net sales | $6.939 billion | $6.536 billion |
| Gross profit | $2.523 billion | $2.107 billion |
| Net income attributable to common shareholders | $1.032 billion | $182 million |
| Diluted EPS | $0.84 | $0.15 |
Quarterly results were affected by the timing and magnitude of impairment and other unusual items; the filing does not provide a clear standalone fourth-quarter adjusted EBITDA figure in the provided text.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2021 capital expenditures of approximately $900 million, subject to change because of COVID-19.
- Management expected demand volatility, particularly in foodservice, to continue through the first quarter of 2021 and potentially beyond. The long-term effects of COVID-19 remained uncertain.
- Further goodwill and brand impairments remain a significant risk. At year-end, reporting units with 10% or less excess fair value had $7.5 billion of goodwill, and reporting units with 10% to 20% excess fair value had $12.5 billion.
- The Company faces ongoing SEC subpoenas and a review by the U.S. Attorney’s Office concerning procurement, financial reporting, incentive plans, debt issuances, internal controls, disclosures, personnel, and impairment assessments. Related securities, ERISA, and shareholder derivative lawsuits were unresolved, and potential liability could not be estimated.
- Management concluded that internal control over financial reporting was effective as of December 26, 2020, following remediation of previously disclosed material weaknesses. The independent auditor issued an unqualified opinion.
- Key operating risks include retailer concentration, private-label competition, commodity and packaging costs, foreign exchange, foodservice weakness, product recalls, cybersecurity, regulatory compliance, pension and labor costs, and substantial leverage.
Most Important Facts for Investors to Verify
- Whether retail demand remains elevated after pandemic-related consumption shifts and whether foodservice recovery offsets any normalization in at-home demand.
- The closing, cash proceeds, debt-reduction impact, and potential brand impairment effects of the Lactalis cheese transaction.
- The final accounting and realized proceeds from the post-year-end nuts transaction, including the expected $200 million to $300 million pre-tax loss.
- The sustainability of Adjusted EBITDA growth versus weak GAAP earnings and the extent to which future results depend on excluding impairment and other unusual items.
- Debt maturities, refinancing costs, credit ratings, commercial paper access, and compliance with the minimum shareholders’ equity covenant.
- Potential additional goodwill or indefinite-lived intangible-asset impairments, particularly in foodservice, Canada, and brands with limited excess fair value.
- Developments in the SEC and USAO investigations and related civil litigation, including any material penalties, settlements, or control deficiencies.