Kraft Heinz Co. — Q3 2022 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 24, 2022, compared with September 25, 2021. Kraft Heinz manufactures and markets food and beverage products globally, with reportable segments of North America and International. The company changed its segment structure in Q2 2022 by combining the United States and Canada into North America and recast prior periods accordingly.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Net sales | $6.505 billion | $6.324 billion | 2.9% |
| Gross profit | $1.843 billion | $2.028 billion | (9.1%) |
| Gross margin | 28.3% | 32.1% | Down 380 bps |
| Operating income | $751 million | $1.156 billion | (35.0%) |
| Operating margin | 11.5% | 18.3% | Down 660 bps |
| Net income attributable to common shareholders | $432 million | $733 million | (41.0%) |
| Diluted EPS | $0.35 | $0.59 | (40.7%) |
| Adjusted EBITDA | $1.398 billion | $1.479 billion | (5.5%) |
| Adjusted EPS | $0.63 | $0.65 | (3.1%) |
| Metric | Nine months 2022 | Nine months 2021 | Change |
|---|---|---|---|
| Net sales | $19.104 billion | $19.333 billion | (1.2%) |
| Operating income | $2.408 billion | $3.480 billion | (30.8%) |
| Net income attributable to common shareholders | $1.473 billion | $1.269 billion | 16.1% |
| Diluted EPS | $1.19 | $1.03 | 15.5% |
| Adjusted EBITDA | $4.260 billion | $4.765 billion | (10.6%) |
| Adjusted EPS | $1.93 | $2.15 | (10.2%) |
Organic net sales increased 11.6% in Q3 and 9.5% year to date, driven primarily by pricing of 15.4% and 12.3%, respectively. Higher pricing was partly offset by unfavorable volume and mix of 3.8% in Q3 and 2.8% year to date.
Q3 segment results were mixed: North America sales increased 1.5% and Segment Adjusted EBITDA declined 4.8%; International sales increased 7.7% and Segment Adjusted EBITDA declined 3.7%. Year-to-date Segment Adjusted EBITDA declined 9.6% in North America and 10.8% internationally.
Cash flow, debt and liquidity
- Operating cash flow was $1.517 billion for the first nine months, down from $2.448 billion in the prior-year period, primarily due to inventory rebuilding, higher input costs and lower Adjusted EBITDA.
- Capital expenditures were $632 million year to date. Management expects approximately $1.0 billion of capital expenditures for full-year 2022, primarily for capacity expansion, cost improvement, maintenance and technology.
- Investing cash flow was a use of $1.038 billion, including $481 million for acquisitions and $632 million of capital expenditures.
- Financing cash flow was a use of $2.811 billion, including $1.157 billion of long-term debt repayments and $1.470 billion of dividends paid.
- Cash and cash equivalents were $997 million at September 24, 2022, compared with $3.445 billion at December 25, 2021. Approximately $817 million was held by international subsidiaries.
- Long-term debt, including the current portion, was $20.1 billion, down from $21.8 billion at year-end 2021. Total debt had a carrying value of $20.1 billion and an estimated fair value of $18.4 billion.
- The company repurchased approximately $448 million principal amount of senior notes during the first nine months and repaid notes at maturity totaling approximately $702 million.
- A new $4.0 billion senior unsecured revolving credit facility matures July 8, 2027. No amounts were drawn at September 24, 2022, and the company was in compliance with its financial covenants.
- Long-term debt ratings were BBB- from S&P and Fitch and Baa3 from Moody’s. S&P and Fitch had positive and stable outlooks, respectively; Moody’s outlook was stable.
Material changes, unusual items and outlook
- Inflation in commodities, packaging, energy, logistics, procurement and manufacturing reduced margins. Management expects cost inflation to remain elevated into 2023 and is relying on pricing and efficiency gains to mitigate it.
- Pricing actions have supported organic sales but contributed to unfavorable volume and mix and may continue to pressure market share. Capacity constraints, labor shortages and supply-chain disruption also affected service levels and demand fulfillment.
- Q3 included $314 million of impairment losses, consisting primarily of $220 million of goodwill impairment and $74 million of intangible asset impairment. Year-to-date impairment losses totaled $999 million, including $444 million of goodwill, $469 million of intangible assets and $86 million of property, plant and equipment.
- Goodwill and brand valuations remain sensitive to discount rates, growth, margins, foreign exchange and inflation. Reporting units and brands with limited excess fair value include CNAC, Continental Europe, TMA and several major brands; the filing identifies heightened future impairment risk.
- The company acquired Just Spices for approximately $243 million and Hemmer for approximately $279 million during 2022. It also completed the sale of its powdered cheese business on September 30, 2022 for estimated consideration of approximately $110 million and expects to recognize a gain in Q4.
- Foreign exchange and derivative results were volatile. Q3 other expense was $22 million of income versus $138 million of income in the prior year, primarily reflecting a $134 million derivative loss and partially offset by a $117 million foreign-exchange gain.
- Restructuring expense was $37 million year to date; approximately 470 positions had been eliminated, with approximately 70 additional eliminations expected during the remainder of 2022.
- Management believes operating cash flow, cash on hand, commercial paper, the revolving facility and capital-market access will provide sufficient liquidity for the next 12 months.
- The company declared a fourth-quarter cash dividend of $0.40 per share, payable December 30, 2022.
Risks and contingencies
Key risks include persistent inflation and commodity volatility, pricing-related volume or share loss, labor and capacity constraints, foreign exchange exposure, geopolitical and Russia-Ukraine effects, impairment of goodwill and brands, leverage and credit-rating changes, cybersecurity and operational disruptions, regulatory matters and litigation. The company disclosed securities class-action and derivative lawsuits for which the potential loss cannot reasonably be estimated due to the early stage of the proceedings. Management does not expect currently pending legal matters to have a material adverse effect, although it intends to defend the lawsuits vigorously.
Investor verification points
- Verify whether pricing can continue to offset inflation without further volume, mix or market-share deterioration.
- Assess the sustainability of adjusted earnings after excluding nearly $1.0 billion of year-to-date impairment losses and other adjustments.
- Monitor goodwill and brand headroom, particularly CNAC, Continental Europe, TMA, Kraft, Ore-Ida, Jet Puffed and Plasmon.
- Reconcile debt reduction, upcoming maturities, interest expense and liquidity against the $4.0 billion revolving facility and covenant requirements.
- Track working-capital recovery, inventory levels and operating cash flow after the 2022 inventory rebuild.
- Evaluate the effect of acquisitions, the powdered cheese divestiture and prior cheese and nuts divestitures on recurring revenue and EBITDA comparability.
- Review the status and potential exposure of the securities class-action and derivative litigation.