Kraft Heinz Company — Q3 2023 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 and nine months ended September 30, 2023, compared with September 24, 2022. The company reports through North America and International segments and operates on a 52- or 53-week fiscal year.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Net sales | $6.570 billion | $6.505 billion | +1.0% |
| Gross profit | $2.235 billion | $1.843 billion | +21.3% |
| Gross margin | 34.0% | 28.3% | +5.7 percentage points |
| Operating income | $653 million | $751 million | -13.1% |
| Operating margin | 9.9% | 11.5% | -1.6 percentage points |
| Net income | $254 million | $435 million | -41.7% |
| Net income attributable to common shareholders | $262 million | $432 million | -39.5% |
| Diluted EPS | $0.21 | $0.35 | -40.0% |
| Adjusted EBITDA | $1.565 billion | $1.398 billion | +11.9% |
| Adjusted EPS | $0.72 | $0.63 | +14.3% |
For the nine months, net sales increased 3.5% to $19.780 billion, operating income increased 35.9% to $3.272 billion, net income increased 41.0% to $2.089 billion, diluted EPS increased 42.9% to $1.70, Adjusted EBITDA increased 9.3% to $4.657 billion, and Adjusted EPS increased 14.0% to $2.20.
Q3 organic net sales increased 1.7%, driven by 7.1 percentage points of pricing, partly offset by 5.4 percentage points of unfavorable volume and mix. Nine-month organic net sales increased 4.9%, with 10.8 percentage points of pricing offset by 5.9 percentage points of unfavorable volume and mix.
North America Q3 sales declined 0.4% to $4.995 billion, while Segment Adjusted EBITDA increased 14.6% to $1.390 billion. International Q3 sales increased 5.7% to $1.575 billion, and Segment Adjusted EBITDA increased 6.8% to $259 million.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow for the nine months was $2.620 billion, compared with $1.517 billion in the prior-year period.
- Capital expenditures were $779 million through nine months; management expects approximately $1.1 billion for full-year 2023.
- Cash used in investing activities was $738 million, compared with $1.038 billion in the prior-year period.
- Cash used in financing activities was $1.816 billion, including $1.474 billion of dividends and $823 million of long-term debt repayments, partly offset by $657 million of new long-term debt issuance.
- Cash and cash equivalents were $1.052 billion at September 30, 2023; total cash, cash equivalents, and restricted cash were $1.054 billion.
- Total long-term debt, including the current portion, was $19.878 billion, compared with $20.064 billion at December 31, 2022. No commercial paper was outstanding.
- The $4.0 billion senior unsecured revolving credit facility was extended to July 8, 2028. No amounts were drawn, and the company was in compliance with its financial covenants.
- The company issued €600 million of floating-rate senior notes due May 2025 and repaid €750 million of notes at maturity in June 2023.
- Dividends paid during the first nine months were $1.474 billion. The board declared an additional $0.40 per-share dividend payable December 29, 2023.
Material changes versus the prior comparable period
- Pricing and efficiency gains improved Adjusted EBITDA, but pricing-related volume and mix declines, higher supply-chain costs, inflation, and increased SG&A pressured reported results.
- Q3 included $662 million of non-cash impairment losses, consisting of $510 million of goodwill impairments and $152 million of intangible-asset impairments. The prior-year Q3 included $314 million of impairment losses.
- The 2023 goodwill impairments primarily affected the Canada and North America Coffee reporting unit ($452 million) and Continental Europe ($58 million). Brand impairments primarily involved Maxwell House, Cool Whip, and two other brands.
- The Q3 effective tax rate increased to 44.7% from 20.2%, primarily because of non-deductible goodwill impairments and an increase in uncertain tax position reserves.
- Restructuring expenses were $45 million in Q3 2023 versus $7 million in Q3 2022. Approximately 460 positions had been eliminated through nine months, with approximately 300 additional eliminations expected during the remainder of 2023.
- The company paid its remaining liability related to the securities class-action settlement during Q3; the settlement received final court approval in September 2023.
- Accounts receivable factoring generated $863 million of proceeds during the first nine months, with no factored receivables outstanding at September 30, 2023. Supplier-finance obligations included in trade payables were estimated at $0.8 billion, down from $1.1 billion at year-end 2022.
Guidance, outlook, commentary, and risks
Management expects inflation to moderate during the remainder of 2023 and to be below 2022 levels. The company intends to mitigate cost inflation through pricing, efficiency gains, and hedging, but acknowledged that pricing may continue to pressure market share and volume.
Management believes operating cash flow, cash on hand, commercial paper capacity, the revolving credit facility, and potential capital-markets access will provide sufficient liquidity for the next 12 months, including working capital, debt maturities, dividends, capital expenditures, restructuring, and benefit-plan contributions.
Two International businesses are subject to potential divestiture agreements. The company anticipates a collective pre-tax loss on sale of approximately $100 million, including approximately $60 million from releasing accumulated foreign-currency translation losses, although closing timing remains uncertain.
Management received IRS Notices of Proposed Adjustment related to transfer pricing for 2018 and 2019. The proposed additional federal tax is approximately $200 million for 2018 and $210 million for 2019, excluding interest, with proposed penalties of approximately $85 million for each year. Kraft Heinz disputes the positions, has recorded no reserve, and intends to contest the matter.
Key risks include consumer trade-down and private-label competition, pricing elasticity, market-share loss, commodity and energy-cost volatility, foreign-exchange movements, inflation, supply-chain disruption, impairment of goodwill and brands, leverage and refinancing requirements, tax disputes, litigation, geopolitical conditions, cyber and technology risks, and the ability to sustain dividends.
Goodwill and brand valuations remain particularly sensitive to discount rates, growth, margins, market capitalization, inflation, foreign exchange, and other assumptions. Reporting units and brands with limited excess fair value are exposed to additional impairment risk.
Most important facts for investors to verify
- Whether pricing-driven volume and mix declines stabilize, particularly in North America and developed International markets.
- Whether inflation moderates as expected and whether efficiency gains offset supply-chain, commodity, marketing, and technology costs.
- The sustainability of Adjusted EBITDA and Adjusted EPS growth relative to reported GAAP earnings, which were materially reduced by impairments and tax effects.
- Potential additional goodwill or brand impairments, especially for reporting units with less than 5% excess fair value and brands with limited valuation cushion.
- The outcome and potential cash impact of the IRS transfer-pricing dispute, including proposed taxes, interest, and penalties.
- The timing and economics of the planned International divestitures and the anticipated approximately $100 million pre-tax loss.
- Debt maturities, including approximately €550 million of senior notes maturing in May 2024 and the floating-rate notes due May 2025.
- The effect of supplier-finance programs, receivables factoring, dividends, and planned $1.1 billion of 2023 capital expenditures on free cash flow and liquidity.
- Any changes to reportable segments following organizational changes announced November 1, 2023, expected to take effect in early 2024.