filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Objective:
The following discussion provides an analysis of our financial condition and results of operations from management's perspective and should be read in conjunction with the condensed consolidated financial statements and related notes included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q. Our objective is to also provide discussion of material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides an understanding of our financial condition, results of operations, and cash flows.
Description of the Company:
We manufacture and market food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products throughout the world.
We manage and report our operating results through three reportable segments defined by geographic region: United States, International, and Canada.
During the fourth quarter of 2021, certain organizational changes were announced that will impact our future internal reporting and reportable segments. As a result of these changes, we plan to combine our United States and Canada zones to form the North America zone and expect to have two reportable segments, North America and International. We expect that any change to our reportable segments will be effective in the second quarter of 2022.
See Note 17, Segment Reporting, in Item 1, Financial Statements, for our financial information by segment.
Acquisitions and Divestitures:
In the first quarter of 2022, we closed the Just Spices Acquisition and, in the fourth quarter of 2021, we closed the Assan Foods Acquisition, both in our International segment. Additionally, we completed the Nuts Transaction in the second quarter of 2021 and the Cheese Transaction in the fourth quarter of 2021. The Nuts Transaction and the Cheese Transaction are not, individually or in the aggregate, considered a strategic shift that will have a major effect on our operations or financial results; therefore, the results of these businesses are included in continuing operations through the date of each sale in the prior year period. See Note 4, Acquisitions and Divestitures, in Item 1, Financial Statements, for additional information.
Russia and Ukraine Conflict:
For the year ended December 25, 2021 and for the three months ended March 26, 2022, approximately 1% of consolidated net sales were generated from our business in Russia. Additionally, net income/(loss) and Adjusted EBITDA from our business in Russia were each insignificant in 2021 and in the first quarter of 2022. We have approximately 1,100 employees in Russia. We have no operations or employees in Ukraine and insignificant net sales through distributors. Further, we have experienced cost increases globally for certain commodities, including packaging materials, energy, soybean and vegetable oils, corn products, and wheat products due to overall market demand and, in part, to the negative impact of the conflict between Russia and Ukraine on the global economy. We will continue to monitor the impact that this conflict has on our business; however, to date, the conflict between Russia and Ukraine has not had a material impact on our financial condition, results of operations, or cash flows.
Items Affecting Comparability of Financial Results
COVID-19 Impacts:
We continue to monitor the impact of COVID-19 on our business. In the first quarter of 2021, demand for our retail products remained strong compared to the comparable pre-pandemic period, while our foodservice business continued to experience decreased consumer demand compared to the comparable pre-pandemic period. In the first quarter of 2022, our foodservice business was in varying levels of recovery globally, with our International segment experiencing increased consumer demand and our United States and Canada segments experiencing decreased consumer demand compared to the comparable pre-pandemic period. COVID-19 and its impacts are unprecedented and continuously evolving, and the long-term impacts to our financial condition and results of operations are still uncertain.
Inflation and Supply Chain Impacts:
During the three months ended March 26, 2022, we have continued to experience higher than expected commodity costs and supply chain costs, including logistics, procurement, and manufacturing costs, largely due to inflationary pressures. We expect this cost inflation to remain elevated through at least the remainder of 2022. While these costs have a negative impact on our results of operations, we are currently taking measures to mitigate, and expect to continue to take measures to mitigate, the impact of this inflation through pricing actions and efficiency gains. However, there has been, and we expect that there could continue to be, a difference between the timing of when these beneficial actions impact our results of operations and when the cost inflation is incurred. Additionally, the pricing actions we take could result in a decrease in market share.
Further, given the increased demand for our products combined with industry-wide supply chain issues and our focus on rebuilding inventory, we have experienced capacity constraints for certain products when demand has exceeded our current manufacturing capacity. As discussed in Liquidity and Capital Resources, we are working to expand capacity through increased capital investments. We are also focused on increasing capacity through labor-related initiatives, including additional shifts and temporary labor. However, until these capacity constraints are alleviated, these constraints have negatively impacted and could again negatively impact our service levels, market share, financial condition, results of operations, or cash flows.
We have observed an increasingly competitive labor market. Increased employee turnover, changes in the availability of our workers, including as a result of COVID-19-related absences, and labor shortages in our supply chain have resulted in, and could continue to result in, increased costs and have, and could again, impact our ability to meet consumer demand, both of which could negatively affect our financial condition, results of operations, or cash flows.
Results of Operations
We disclose in this report certain non-GAAP financial measures. These non-GAAP financial measures assist management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our underlying operations. For additional information and reconciliations from our condensed consolidated financial statements see Non-GAAP Financial Measures.
Consolidated Results of Operations
Summary of Results:
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | % Change | |||||||||||||||||||||||||||||||||
| (in millions, except per share data) | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 6,045 | $ | 6,394 | (5.5) | % | |||||||||||||||||||||||||||||
| Operating income/(loss) | 1,115 | 1,089 | 2.4 | % | |||||||||||||||||||||||||||||||
| Net income/(loss) | 781 | 568 | 37.5 | % | |||||||||||||||||||||||||||||||
| Net income/(loss) attributable to common shareholders | 776 | 563 | 37.8 | % | |||||||||||||||||||||||||||||||
| Diluted EPS | 0.63 | 0.46 | 37.0 | % |
Net Sales:
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | % Change | |||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 6,045 | $ | 6,394 | (5.5) | % | |||||||||||||||||||||||||||||
| Organic Net Sales(a) | 6,081 | 5,694 | 6.8 | % |
(a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021:
Net sales decreased 5.5% to $6.0 billion for the three months ended March 26, 2022 compared to $6.4 billion for the three months ended March 27, 2021, including the unfavorable impacts of acquisitions and divestitures (11.2 pp) and foreign currency (1.1 pp). Organic Net Sales increased 6.8% to $6.1 billion for the three months ended March 26, 2022 compared to $5.7 billion for the three months ended March 27, 2021, primarily driven by higher pricing (9.0 pp), which more than offset unfavorable volume/mix (2.2 pp). Pricing was higher across all segments, while volume/mix was unfavorable across all segments.
Net Income/(Loss):
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | % Change | |||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Operating income/(loss) | $ | 1,115 | $ | 1,089 | 2.4 | % | |||||||||||||||||||||||||||||
| Net income/(loss) | 781 | 568 | 37.5 | % | |||||||||||||||||||||||||||||||
| Net income/(loss) attributable to common shareholders | 776 | 563 | 37.8 | % | |||||||||||||||||||||||||||||||
| Adjusted EBITDA(a) | 1,342 | 1,580 | (15.1) | % |
(a) Adjusted EBITDA is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021:
Operating income/(loss) increased 2.4% to $1.1 billion for the three months ended March 26, 2022 compared to $1.1 billion for the three months ended March 27, 2021, primarily driven by higher pricing, lower non-cash impairment losses in the current year period, and efficiency gains, which more than offset higher commodity costs, primarily in dairy, packaging materials, and meat; higher supply chain costs, reflecting inflationary pressure in procurement, logistics, and manufacturing costs; and the unfavorable impact of divestitures.
Net income/(loss) increased 37.5% to $781 million for the three months ended March 26, 2022 compared to $568 million for the three months ended March 27, 2021. This increase was driven by lower interest expense, favorable changes in other expense/(income), and the operating income/(loss) factors discussed above, which more than offset higher tax expense.
*•*Interest expense was $242 million for the three months ended March 26, 2022 compared to $415 million for the three months ended March 27, 2021. This decrease was primarily due to a $106 million loss on extinguishment of debt recognized in the prior year period in connection with the Q1 2021 Tender Offer. The remaining change in interest expense was a decrease of approximately $67 million compared to the prior year period, as our aggregate principal amount of senior notes was reduced by approximately $6.2 billion in 2021 through tender offers, redemptions, repurchases, and repayments.
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Other expense/(income) was $98 million of income for the three months ended March 26, 2022 compared to $30 million of income for the three months ended March 27, 2021. This change was primarily driven by an $11 million net gain on derivative activities in the first quarter of 2022 compared to a $42 million net loss on derivative activities in the first quarter of 2021 and a $1 million loss on sale of business in the first quarter of 2022 compared to a $19 million net loss on sales of businesses in the first quarter of 2021.
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Our effective tax rate for the three months ended March 26, 2022 was an expense of 19.6% on pre-tax income. Our effective tax rate was favorably impacted by the geographic mix of pre-tax income in various non-U.S. jurisdictions and the impact of certain net discrete items, primarily the reversal of uncertain tax position reserves in certain foreign jurisdictions. Our effective tax rate for the three months ended March 27, 2021 was an expense of 19.3% on pre-tax income. Our effective tax rate was favorably impacted by the geographic mix of pre-tax income and the impact of certain net discrete items, including the reversal of uncertain tax position reserves in certain U.S. state and foreign jurisdictions, favorable changes in estimates of certain foreign taxes, and the revaluation of our deferred tax balances due to changes in U.S. state tax rates. These impacts were partially offset by the unfavorable impact of certain net discrete items, primarily due to non-deductible goodwill impairment (8.2%) related to the Nuts Transaction.
Adjusted EBITDA decreased 15.1% to $1.3 billion for the three months ended March 26, 2022 compared to $1.6 billion for the three months ended March 27, 2021, primarily due to higher commodity costs, mainly in dairy, packaging materials, and meat; higher supply chain costs, reflecting inflationary pressure in procurement, logistics, and manufacturing costs; the unfavorable impact of divestitures (7.2 pp); and the unfavorable impact of foreign currency (0.6 pp), which more than offset higher pricing and efficiency gains.
Diluted EPS:
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | % Change | |||||||||||||||||||||||||||||||||
| (in millions, except per share data) | |||||||||||||||||||||||||||||||||||
| Diluted EPS | $ | 0.63 | $ | 0.46 | 37.0 | % | |||||||||||||||||||||||||||||
| Adjusted EPS(a) | 0.60 | 0.72 | (16.7) | % |
(a) Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021:
Diluted EPS increased 37.0% to $0.63 for the three months ended March 26, 2022 compared to $0.46 for the three months ended March 27, 2021, primarily driven by the net income/(loss) factors discussed above.
| For the Three Months Ended | |||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | $ Change | % Change | ||||||||||||||||||||
| Diluted EPS | $ | 0.63 | $ | 0.46 | $ | 0.17 | 37.0 | % | |||||||||||||||
| Restructuring activities | 0.01 | 0.01 | — | ||||||||||||||||||||
| Unrealized losses/(gains) on commodity hedges | (0.05) | (0.02) | (0.03) | ||||||||||||||||||||
| Impairment losses | 0.03 | 0.19 | (0.16) | ||||||||||||||||||||
| Losses/(gains) on sale of business | — | 0.02 | (0.02) | ||||||||||||||||||||
| Other losses/(gains) related to acquisitions and divestitures | (0.02) | — | (0.02) | ||||||||||||||||||||
| Debt prepayment and extinguishment costs | — | 0.06 | (0.06) | ||||||||||||||||||||
| Adjusted EPS(a) | $ | 0.60 | $ | 0.72 | $ | (0.12) | (16.7) | % | |||||||||||||||
| Key drivers of change in Adjusted EPS(a): | |||||||||||||||||||||||
| Results of operations | $ | (0.06) | |||||||||||||||||||||
| Results of divested operations | (0.08) | ||||||||||||||||||||||
| Interest expense | 0.04 | ||||||||||||||||||||||
| Other expense/(income) | 0.01 | ||||||||||||||||||||||
| Effective tax rate | (0.03) | ||||||||||||||||||||||
| $ | (0.12) |
(a) Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Adjusted EPS decreased 16.7% to $0.60 for the three months ended March 26, 2022 compared to $0.72 for the three months ended March 27, 2021. This decrease was primarily due to lower Adjusted EBITDA, which includes the unfavorable impact of our divestitures, and higher taxes on adjusted earnings, which more than offset lower interest expense.
Results of Operations by Segment
Management evaluates segment performance based on several factors, including net sales, Organic Net Sales, and Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as net income/(loss) from continuing operations before interest expense, other expense/(income), provision for/(benefit from) income taxes, and depreciation and amortization (excluding restructuring activities); in addition to these adjustments, we exclude, when they occur, the impacts of divestiture-related license income (e.g., income related to the sale of licenses in connection with the Cheese Transaction), restructuring activities, deal costs, unrealized gains/(losses) on commodity hedges (the unrealized gains and losses are recorded in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results), impairment losses, certain non-ordinary course legal and regulatory matters, and equity award compensation expense (excluding restructuring activities). Segment Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Under highly inflationary accounting, the financial statements of a subsidiary are remeasured into our reporting currency (U.S. dollars) based on the legally available exchange rate at which we expect to settle the underlying transactions. Exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in other expense/(income) on our condensed consolidated statement of income, as nonmonetary currency devaluation, rather than accumulated other comprehensive income/(losses) on our condensed consolidated balance sheet, until such time as the economy is no longer considered highly inflationary. See Note 2, Significant Accounting Policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 25, 2021, for additional information.
Net Sales:
| For the Three Months Ended | |||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| United States | $ | 4,214 | $ | 4,608 | |||||||||||||||||||
| International | 1,444 | 1,394 | |||||||||||||||||||||
| Canada | 387 | 392 | |||||||||||||||||||||
| Total net sales | $ | 6,045 | $ | 6,394 |
Organic Net Sales:
| For the Three Months Ended | |||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Organic Net Sales(a): | |||||||||||||||||||||||
| United States | $ | 4,214 | $ | 3,930 | |||||||||||||||||||
| International | 1,479 | 1,386 | |||||||||||||||||||||
| Canada | 388 | 378 | |||||||||||||||||||||
| Total Organic Net Sales | $ | 6,081 | $ | 5,694 |
(a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Drivers of the changes in net sales and Organic Net Sales for the three months ended March 26, 2022 compared to the three months ended March 27, 2021 were:
| Net Sales | Currency | Acquisitions and Divestitures | Organic Net Sales | Price | Volume/Mix | ||||||||||||||||||||||||||||||
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| United States | (8.5) | % | 0.0 pp | (15.7) pp | 7.2 | % | 9.3 pp | (2.1) pp | |||||||||||||||||||||||||||
| International | 3.6 | % | (4.9) pp | 1.8 pp | 6.7 | % | 8.2 pp | (1.5) pp | |||||||||||||||||||||||||||
| Canada | (1.5) | % | (0.2) pp | (3.8) pp | 2.5 | % | 8.0 pp | (5.5) pp | |||||||||||||||||||||||||||
| Kraft Heinz | (5.5) | % | (1.1) pp | (11.2) pp | 6.8 | % | 9.0 pp | (2.2) pp |
Adjusted EBITDA:
| For the Three Months Ended | |||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Segment Adjusted EBITDA: | |||||||||||||||||||||||
| United States | $ | 1,091 | $ | 1,280 | |||||||||||||||||||
| International | 242 | 283 | |||||||||||||||||||||
| Canada | 82 | 87 | |||||||||||||||||||||
| General corporate expenses | (73) | (70) | |||||||||||||||||||||
| Depreciation and amortization (excluding restructuring activities) | (217) | (222) | |||||||||||||||||||||
| Divestiture-related license income | 14 | — | |||||||||||||||||||||
| Restructuring activities | (19) | (18) | |||||||||||||||||||||
| Deal costs | (8) | (7) | |||||||||||||||||||||
| Unrealized gains/(losses) on commodity hedges | 92 | 37 | |||||||||||||||||||||
| Impairment losses | (55) | (230) | |||||||||||||||||||||
| Equity award compensation expense (excluding restructuring activities) | (34) | (51) | |||||||||||||||||||||
| Operating income/(loss) | 1,115 | 1,089 | |||||||||||||||||||||
| Interest expense | 242 | 415 | |||||||||||||||||||||
| Other expense/(income) | (98) | (30) | |||||||||||||||||||||
| Income/(loss) before income taxes | $ | 971 | $ | 704 |
United States:
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | % Change | |||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 4,214 | $ | 4,608 | (8.5) | % | |||||||||||||||||||||||||||||
| Organic Net Sales(a) | 4,214 | 3,930 | 7.2 | % | |||||||||||||||||||||||||||||||
| Segment Adjusted EBITDA | 1,091 | 1,280 | (14.8) | % |
(a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021:
Net sales decreased 8.5% to $4.2 billion for the three months ended March 26, 2022 compared to $4.6 billion for the three months ended March 27, 2021, including the unfavorable impact of divestitures (15.7 pp). Organic Net Sales increased 7.2% to $4.2 billion for the three months ended March 26, 2022 compared to $3.9 billion for the three months ended March 27, 2021, driven by higher pricing (9.3 pp), which more than offset unfavorable volume/mix (2.1 pp). Higher pricing was primarily driven by increases to mitigate rising input costs. Unfavorable volume/mix was primarily due to declines in frozen, meat, and condiments and sauces, which more than offset increases in foodservice and cheese.
Segment Adjusted EBITDA decreased 14.8% to $1.1 billion for the three months ended March 26, 2022 compared to $1.3 billion for the three months ended March 27, 2021, as higher commodity costs, primarily in dairy, packaging materials, and meat; higher supply chain costs, reflecting inflationary pressure in logistics, procurement, and manufacturing costs; the impact of the Cheese Transaction and Nuts Transaction; and volume declines more than offset higher pricing and efficiency gains.
International:
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | % Change | |||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,444 | $ | 1,394 | 3.6 | % | |||||||||||||||||||||||||||||
| Organic Net Sales(a) | 1,479 | 1,386 | 6.7 | % | |||||||||||||||||||||||||||||||
| Segment Adjusted EBITDA | 242 | 283 | (14.4) | % |
(a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021:
Net sales increased 3.6% to $1.4 billion for the three months ended March 26, 2022 compared to $1.4 billion for the three months ended March 27, 2021, including the unfavorable impact of foreign currency (4.9 pp) and the favorable impact of acquisitions and divestitures (1.8 pp). Organic Net Sales increased 6.7% to $1.5 billion for the three months ended March 26, 2022 compared to $1.4 billion for the three months ended March 27, 2021, driven by higher pricing (8.2 pp), which more than offset unfavorable volume/mix was (1.5 pp). Higher pricing included increases across markets primarily to mitigate rising input costs. Unfavorable volume/mix was primarily due to declines in boxed dinners and condiments and sauces in the United Kingdom, condiments and sauces in China, and beverages in Australia and New Zealand, which more than offset higher foodservice sales across most markets and condiments and sauces growth in Brazil.
Segment Adjusted EBITDA decreased 14.4% to $242 million for the three months ended March 26, 2022 compared to $283 million for the three months ended March 27, 2021, primarily due to higher supply chain costs, reflecting inflationary pressure in procurement, manufacturing, and logistics costs; higher commodity costs; unfavorable volume/mix; and the unfavorable impact of foreign currency (3.6 pp), which more than offset higher pricing and efficiency gains.
Canada:
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | % Change | |||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 387 | $ | 392 | (1.5) | % | |||||||||||||||||||||||||||||
| Organic Net Sales(a) | 388 | 378 | 2.5 | % | |||||||||||||||||||||||||||||||
| Segment Adjusted EBITDA | 82 | 87 | (5.8) | % |
(a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021:
Net sales decreased 1.5% to $387 million for the three months ended March 26, 2022 compared to $392 million for the three months ended March 27, 2021 including the unfavorable impacts of divestitures (3.8 pp) and foreign currency (0.2 pp). Organic Net Sales increased 2.5% to $388 million for the three months ended March 26, 2022 compared to $378 million for the three months ended March 27, 2021, driven by higher pricing (8.0 pp), which more than offset unfavorable volume/mix (5.5 pp). Pricing was higher primarily driven by increases to mitigate rising input costs. Unfavorable volume/mix was primarily due to declines in condiments and sauces and coffee, which more than offset higher foodservice sales in the current year period.
Segment Adjusted EBITDA decreased 5.8% to $82 million for the three months ended March 26, 2022 compared to $87 million for the three months ended March 27, 2021, primarily due to higher commodity costs; higher supply chain costs, reflecting inflationary pressure in logistics and procurement; lower volume, and the unfavorable impact of divestitures, which more than offset higher pricing and efficiency gains.
Liquidity and Capital Resources
We believe that cash generated from our operating activities and our senior unsecured revolving credit facility (the “Senior Credit Facility”) will provide sufficient liquidity to meet our working capital needs, repayments of long-term debt, future contractual obligations, payment of our anticipated quarterly dividends, planned capital expenditures, restructuring expenditures, and contributions to our postemployment benefit plans for the next 12 months. An additional potential source of liquidity is access to capital markets. We intend to use our cash on hand for daily funding requirements.
Acquisitions and Divestitures:
In the first quarter of 2022, we closed the Just Spices Acquisition for cash consideration of approximately $243 million. In the second quarter of 2022, we closed the Hemmer Acquisition for preliminary cash consideration of approximately $252 million.
In connection with the Cheese Transaction, which closed in the fourth quarter of 2021, we expect to pay cash taxes of approximately $620 million in the second quarter of 2022, primarily to U.S. federal and state tax authorities.
See Note 4, Acquisitions and Divestitures, in Item 1, Financial Statements, for additional information on our acquisitions and divestitures.
Cash Flow Activity for the Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021:
Net Cash Provided by/Used for Operating Activities:
Net cash provided by operating activities was $486 million for the three months ended March 26, 2022 compared to $810 million for the three months ended March 27, 2021. This decrease was primarily driven by lower Adjusted EBITDA and higher cash outflows for inventories primarily related to stock rebuilding and increased input costs. These impacts were partially offset by lower cash outflows for interest primarily due to prior year reduction of long-term debt and lower cash outflows for variable compensation in 2022 compared to 2021.
Net Cash Provided by/Used for Investing Activities:
Net cash used for investing activities was $469 million for the three months ended March 26, 2022 compared to $216 million for the three months ended March 27, 2021. This change was primarily driven by payments for the Just Spices Acquisition and working capital adjustments related to the Cheese Transaction, which were partially offset by lower capital expenditures in 2022 compared to 2021. We expect 2022 capital expenditures to be approximately $1.0 billion as compared to 2021 capital expenditures of $905 million. Our 2022 capital expenditures are primarily for capital investments, largely for capacity expansion and cost improvement projects, maintenance, and technology. See Note 4, Acquisitions and Divestitures, in Item 1, Financial Statements, for additional information on the Just Spices Acquisition and the Cheese Transaction.
Net Cash Provided by/Used for Financing Activities:
Net cash used for financing activities was $485 million for the three months ended March 26, 2022 compared to $1.6 billion for the three months ended March 27, 2021. This change was primarily due to higher repayments of long-term debt and debt prepayment and extinguishment costs in 2021 related to the Q1 2021 Tender Offer. See Note 15, Commitments, Contingencies, and Debt, in Item 1, Financial Statements, for additional information on our debt repayments.
Cash Held by International Subsidiaries:
Of the $3.0 billion cash and cash equivalents on our condensed consolidated balance sheet at March 26, 2022, $979 million was held by international subsidiaries.
Subsequent to January 1, 2018, we consider the unremitted earnings of certain international subsidiaries that impose local country taxes on dividends to be indefinitely reinvested. For those undistributed earnings considered to be indefinitely reinvested, our intent is to reinvest these funds in our international operations, and our current plans do not demonstrate a need to repatriate the accumulated earnings to fund our U.S. cash requirements. The amount of unrecognized deferred tax liabilities for local country withholding taxes that would be owed related to our 2018 through 2022 accumulated earnings of certain international subsidiaries is approximately $55 million.
Our undistributed historic earnings in foreign subsidiaries through December 30, 2017 are currently not considered to be indefinitely reinvested. Related to these undistributed historic earnings, we had recorded a deferred tax liability of approximately $10 million on approximately $135 million of historic earnings at March 26, 2022 and a deferred tax liability of approximately $10 million on approximately $135 million of historic earnings at December 25, 2021. The deferred tax liability relates to local withholding taxes that will be owed when this cash is distributed.
Trade Payables Programs:
In order to manage our cash flow and related liquidity, we work with our suppliers to optimize our terms and conditions, which include the extension of payment terms. Our current payment terms with our suppliers, which we deem to be commercially reasonable, generally range from 0 to 200 days. We also maintain agreements with third party administrators that allow participating suppliers to track payment obligations from us, and, at the sole discretion of the supplier, sell one or more of those payment obligations to participating financial institutions. We have no economic interest in a supplier’s decision to enter into these agreements and no direct financial relationship with the financial institutions. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. Supplier participation in these agreements is voluntary. We estimate that the amounts outstanding under these programs were $795 million at March 26, 2022 and $820 million at December 25, 2021.
Borrowing Arrangements:
As of the date of this filing, our long-term debt is rated BBB- by S&P Global Ratings (“S&P”), Baa3 by Moody’s Investor Services, Inc. (“Moody’s”), and BB+ by Fitch Ratings (“Fitch”), with a positive outlook from Fitch and S&P and a stable outlook from Moody’s. In February 2020, Fitch and S&P downgraded our long-term credit rating from BBB- to BB+. These downgrades adversely affected our ability to access the commercial paper market. These downgrades did not constitute a default or event of default under any of our debt instruments. Our ability to borrow under the Senior Credit Facility was not affected by the downgrades. In March 2022, S&P upgraded our long-term credit rating from BB+ to BBB-.
We maintain our Senior Credit Facility, which, following certain amendments made in 2020 and 2021, provides for a revolving commitment of $4.1 billion through July 6, 2023 and $4.0 billion through July 6, 2025. Subject to certain conditions, we may increase the amount of revolving commitments and/or add tranches of term loans in a combined aggregate amount of up to $900 million.
No amounts were drawn on our Senior Credit Facility at March 26, 2022, at December 25, 2021, or during the three months ended March 26, 2022 or March 27, 2021.
The credit agreement dated July 6, 2015, as amended, which provides the Senior Credit Facility, contains representations, warranties, and covenants that are typical for these types of facilities and could upon the occurrence of certain events of default restrict our ability to access our Senior Credit Facility. We were in compliance with all financial covenants as of March 26, 2022.
Long-Term Debt:
Our long-term debt, including the current portion, was $21.7 billion at March 26, 2022 and $21.8 billion at December 25, 2021. In March 2022, we repaid $6 million aggregate principal amount of senior notes that matured in the first quarter of 2022.
We have aggregate principal amounts of senior notes of approximately $381 million maturing in June 2022 and approximately $315 million maturing in August 2022.
We may from time to time seek to retire or purchase our outstanding debt through redemptions, tender offers, cash purchases, prepayments, refinancing, exchange offers, open market or privately-negotiated transactions, Rule 10b5-1 plans, or otherwise.
Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all financial covenants as of March 26, 2022.
See Note 15, Commitments, Contingencies, and Debt, in Item 1, Financial Statements, for additional information on our long-term debt activity and Note 17, Debt, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 25, 2021 for additional information on our borrowing arrangements and long-term debt.
Equity and Dividends:
We paid common stock dividends of $490 million for the three months ended March 26, 2022 and $489 million for the three months ended March 27, 2021. Additionally, in the second quarter of 2022, our Board of Directors declared a cash dividend of $0.40 per share of common stock, which is payable on June 24, 2022 to stockholders of record on May 27, 2022.
The declaration of dividends is subject to the discretion of our Board of Directors and depends on various factors, including our net income, financial condition, cash requirements, future prospects, and other factors that our Board of Directors deems relevant to its analysis and decision making.
Aggregate Contractual Obligations:
There were no material changes to our aggregate contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 25, 2021.
Supplemental Guarantor Information:
The Kraft Heinz Company (as the “Parent Guarantor”) fully and unconditionally guarantees all the senior unsecured registered notes (collectively, the “KHFC Senior Notes”) issued by KHFC, our 100% owned operating subsidiary (the “Guarantee”). See Note 17, Debt, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 25, 2021 for additional descriptions of these guarantees.
The payment of the principal, premium, and interest on the KHFC Senior Notes is fully and unconditionally guaranteed on a senior unsecured basis by the Parent Guarantor, pursuant to the terms and conditions of the applicable indenture. None of the Parent Guarantor’s subsidiaries guarantee the KHFC Senior Notes.
The Guarantee is the Parent Guarantor’s senior unsecured obligation and is: (i) pari passu in right of payment with all of the Parent Guarantor’s existing and future senior indebtedness; (ii) senior in right of payment to all of the Parent Guarantor’s future subordinated indebtedness; (iii) effectively subordinated to all of the Parent Guarantor’s existing and future secured indebtedness to the extent of the value of the assets secured by that indebtedness; and (iv) effectively subordinated to all existing and future indebtedness and other liabilities of the Parent Guarantor’s subsidiaries.
The KHFC Senior Notes are obligations exclusively of KHFC and the Parent Guarantor and not of any of the Parent Guarantor’s other subsidiaries. Substantially all of the Parent Guarantor’s operations are conducted through its subsidiaries. The Parent Guarantor’s other subsidiaries are separate legal entities that have no obligation to pay any amounts due under the KHFC Senior Notes or to make any funds available therefor, whether by dividends, loans, or other payments. Except to the extent the Parent Guarantor is a creditor with recognized claims against its subsidiaries, all claims of creditors (including trade creditors) and holders of preferred stock, if any, of its subsidiaries will have priority with respect to the assets of such subsidiaries over its claims (and therefore the claims of its creditors, including holders of the KHFC Senior Notes). Consequently, the KHFC Senior Notes are structurally subordinated to all liabilities of the Parent Guarantor’s subsidiaries and any subsidiaries that it may in the future acquire or establish. The obligations of the Parent Guarantor will terminate and be of no further force or effect in the following circumstances: (i) (a) KHFC’s exercise of its legal defeasance option or, except in the case of a guarantee of any direct or indirect parent of KHFC, covenant defeasance option in accordance with the applicable indenture, or KHFC’s obligations under the applicable indenture have been discharged in accordance with the terms of the applicable indenture or (b) as specified in a supplemental indenture to the applicable indenture; and (ii) the Parent Guarantor has delivered to the trustee an officer’s certificate and an opinion of counsel, each stating that all conditions precedent provided for in the applicable indenture have been complied with. The Guarantee is limited by its terms to an amount not to exceed the maximum amount that can be guaranteed by the Parent Guarantor without rendering the Guarantee voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally.
The following tables present summarized financial information for the Parent Guarantor and KHFC (as subsidiary issuer of the KHFC Senior Notes) (together, the “Obligor Group”), on a combined basis after the elimination of all intercompany balances and transactions between the Parent Guarantor and subsidiary issuer and investments in any subsidiary that is a non-guarantor.
Summarized Statement of Income
| For the Three Months Ended | |||||
| March 26, 2022 | |||||
| Net sales | $ | 3,918 | |||
| Gross profit(a) | 1,438 | ||||
| Intercompany service fees and other recharges | 902 | ||||
| Operating income/(loss) | 319 | ||||
| Equity in earnings/(losses) of subsidiaries | 568 | ||||
| Net income/(loss) | 776 | ||||
| Net income/(loss) attributable to common shareholders | 776 |
(a) For the three months ended March 26, 2022, the Obligor Group recorded $93 million of net sales to the non-guarantor subsidiaries and $7 million of purchases from the non-guarantor subsidiaries.
Summarized Balance Sheets
| March 26, 2022 | December 25, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets | $ | 6,528 | $ | 6,484 | |||||||
| Current assets due from affiliates(a) | 1,654 | 2,890 | |||||||||
| Non-current assets | 5,217 | 5,709 | |||||||||
| Goodwill | 8,860 | 8,860 | |||||||||
| Intangible assets, net | 2,192 | 2,222 | |||||||||
| Non-current assets due from affiliates(b) | 207 | 207 | |||||||||
| LIABILITIES | |||||||||||
| Current liabilities | $ | 5,002 | $ | 5,091 | |||||||
| Current liabilities due to affiliates(a) | 3,133 | 5,922 | |||||||||
| Non-current liabilities | 23,198 | 23,120 | |||||||||
| Non-current liabilities due to affiliates(b) | 599 | 600 |
(a) Represents receivables and short-term lending due from and payables and short-term lending due to non-guarantor subsidiaries.
(b) Represents long-term lending due from and long-term borrowings due to non-guarantor subsidiaries.
Commodity Trends
We purchase and use large quantities of commodities, including dairy products, meat products, soybean and vegetable oils, sugar and other sweeteners, tomatoes, coffee beans, potatoes, corn products, wheat products, nuts, and cocoa products, to manufacture our products. In addition, we purchase and use significant quantities of resins, fiberboard, metals, and cardboard to package our products, and we use electricity, diesel fuel, and natural gas in the manufacturing and distribution of our products. We continuously monitor worldwide supply and cost trends of these commodities.
During the three months ended March 26, 2022, we experienced higher commodity costs for dairy, packaging materials, and meat as compared to the prior year period. We also experienced cost increases for energy, including diesel fuel, electricity, and natural gas; soybean and vegetable oils; corn products; and wheat products. These increases are primarily driven by overall market demand and, in part, by the negative impact of the conflict between Russia and Ukraine on the global economy. We anticipate higher commodity costs to continue through at least 2022 due to inflationary pressures. We manage commodity cost volatility primarily through pricing and risk management strategies. As a result of these risk management strategies, our commodity costs may not immediately correlate with market price trends.
See our Annual Report on Form 10-K for the year ended December 25, 2021 for additional information on how we manage commodity costs.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2, Significant Accounting Policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 25, 2021.
We prepare our condensed consolidated financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments, and assumptions. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 25, 2021 for a discussion of our other critical accounting estimates and assumptions.
New Accounting Pronouncements
See Note 3, New Accounting Standards, in Item 1, Financial Statements, for a discussion of new accounting pronouncements.
Contingencies
See Note 15, Commitments, Contingencies, and Debt, in Item 1, Financial Statements, for a discussion of our contingencies.
Non-GAAP Financial Measures
The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP.
To supplement the condensed consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Organic Net Sales, Adjusted EBITDA, and Adjusted EPS, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income/(loss), diluted EPS, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.
Management uses these non-GAAP financial measures to assist in comparing our performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes do not directly reflect our underlying operations. Management believes that presenting our non-GAAP financial measures (i.e., Organic Net Sales, Adjusted EBITDA, and Adjusted EPS) is useful to investors because it (i) provides investors with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating our results. We believe that the presentation of these non-GAAP financial measures, when considered together with the corresponding U.S. GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting our business than could be obtained absent these disclosures.
Organic Net Sales is defined as net sales excluding, when they occur, the impact of currency, acquisitions and divestitures, and a 53rd week of shipments. We calculate the impact of currency on net sales by holding exchange rates constant at the previous year’s exchange rate, with the exception of highly inflationary subsidiaries, for which we calculate the previous year’s results using the current year’s exchange rate. Organic Net Sales is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Adjusted EBITDA is defined as net income/(loss) from continuing operations before interest expense, other expense/(income), provision for/(benefit from) income taxes, and depreciation and amortization (excluding restructuring activities); in addition to these adjustments, we exclude, when they occur, the impacts of divestiture-related license income (e.g., income related to the sale of licenses in connection with the Cheese Transaction), restructuring activities, deal costs, unrealized losses/(gains) on commodity hedges, impairment losses, certain non-ordinary course legal and regulatory matters, and equity award compensation expense (excluding restructuring activities). Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Adjusted EPS is defined as diluted EPS excluding, when they occur, the impacts of restructuring activities, deal costs, unrealized losses/(gains) on commodity hedges, impairment losses, certain non-ordinary course legal and regulatory matters, losses/(gains) on the sale of a business, other losses/(gains) related to acquisitions and divestitures (e.g., tax and hedging impacts), nonmonetary currency devaluation (e.g., remeasurement gains and losses), debt prepayment and extinguishment costs, and certain significant discrete income tax items (e.g., U.S. and non-U.S. tax reform), and including, when they occur, adjustments to reflect preferred stock dividend payments on an accrual basis. We believe Adjusted EPS provides important comparability of underlying operating results, allowing investors and management to assess operating performance on a consistent basis.
The Kraft Heinz Company
Reconciliation of Net Sales to Organic Net Sales
(dollars in millions)
(Unaudited)
| Net Sales | Currency | Acquisitions and Divestitures | Organic Net Sales | Price | Volume/Mix | ||||||||||||||||||||||||||||||
| Three Months Ended March 26, 2022 | |||||||||||||||||||||||||||||||||||
| United States | $ | 4,214 | $ | — | $ | — | $ | 4,214 | |||||||||||||||||||||||||||
| International | 1,444 | (65) | 30 | 1,479 | |||||||||||||||||||||||||||||||
| Canada | 387 | (1) | — | 388 | |||||||||||||||||||||||||||||||
| Kraft Heinz | $ | 6,045 | $ | (66) | $ | 30 | $ | 6,081 | |||||||||||||||||||||||||||
| Three Months Ended March 27, 2021 | |||||||||||||||||||||||||||||||||||
| United States | $ | 4,608 | $ | — | $ | 678 | $ | 3,930 | |||||||||||||||||||||||||||
| International | 1,394 | 3 | 5 | 1,386 | |||||||||||||||||||||||||||||||
| Canada | 392 | — | 14 | 378 | |||||||||||||||||||||||||||||||
| Kraft Heinz | $ | 6,394 | $ | 3 | $ | 697 | $ | 5,694 |
| Year-over-year growth rates | |||||||||||||||||||||||||||||||||||
| United States | (8.5) | % | 0.0 pp | (15.7) pp | 7.2 | % | 9.3 pp | (2.1) pp | |||||||||||||||||||||||||||
| International | 3.6 | % | (4.9) pp | 1.8 pp | 6.7 | % | 8.2 pp | (1.5) pp | |||||||||||||||||||||||||||
| Canada | (1.5) | % | (0.2) pp | (3.8) pp | 2.5 | % | 8.0 pp | (5.5) pp | |||||||||||||||||||||||||||
| Kraft Heinz | (5.5) | % | (1.1) pp | (11.2) pp | 6.8 | % | 9.0 pp | (2.2) pp |
The Kraft Heinz Company
Reconciliation of Net Income/(Loss) to Adjusted EBITDA
(in millions)
(Unaudited)
| For the Three Months Ended | |||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | ||||||||||||||||||||||
| Net income/(loss) | $ | 781 | $ | 568 | |||||||||||||||||||
| Interest expense | 242 | 415 | |||||||||||||||||||||
| Other expense/(income) | (98) | (30) | |||||||||||||||||||||
| Provision for/(benefit from) income taxes | 190 | 136 | |||||||||||||||||||||
| Operating income/(loss) | 1,115 | 1,089 | |||||||||||||||||||||
| Depreciation and amortization (excluding restructuring activities) | 217 | 222 | |||||||||||||||||||||
| Divestiture-related license income | (14) | — | |||||||||||||||||||||
| Restructuring activities | 19 | 18 | |||||||||||||||||||||
| Deal costs | 8 | 7 | |||||||||||||||||||||
| Unrealized losses/(gains) on commodity hedges | (92) | (37) | |||||||||||||||||||||
| Impairment losses | 55 | 230 | |||||||||||||||||||||
| Equity award compensation expense (excluding restructuring activities) | 34 | 51 | |||||||||||||||||||||
| Adjusted EBITDA | $ | 1,342 | $ | 1,580 |
The Kraft Heinz Company
Reconciliation of Diluted EPS to Adjusted EPS
(Unaudited)
| For the Three Months Ended | |||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | ||||||||||||||||||||||
| Diluted EPS | $ | 0.63 | $ | 0.46 | |||||||||||||||||||
| Restructuring activities(a) | 0.01 | 0.01 | |||||||||||||||||||||
| Unrealized losses/(gains) on commodity hedges(b) | (0.05) | (0.02) | |||||||||||||||||||||
| Impairment losses(c) | 0.03 | 0.19 | |||||||||||||||||||||
| Losses/(gains) on sale of business(d) | — | 0.02 | |||||||||||||||||||||
| Other losses/(gains) related to acquisitions and divestitures(e) | (0.02) | — | |||||||||||||||||||||
| Debt prepayment and extinguishment costs(f) | — | 0.06 | |||||||||||||||||||||
| Adjusted EPS | $ | 0.60 | $ | 0.72 |
(a) Gross expenses included in restructuring activities were $19 million ($14 million after-tax) for the three months ended March 26, 2022 and $18 million ($13 million after tax) for the three months ended March 27, 2021 and were recorded in the following income statement line items:
-
Cost of products sold included expenses of $4 million for the three months ended March 26, 2022 and $3 million for the three months ended March 27, 2021; and
-
SG&A included expenses of $15 million for the three months ended March 26, 2022 and $15 million for the three months ended March 27, 2021.
(b) Gross expenses/(income) included in unrealized losses/(gains) on commodity hedges were income of $92 million ($69 million after-tax) for the three months ended March 26, 2022 and $37 million ($27 million after-tax) for the three months ended March 27, 2021 and were recorded in cost of products sold.
(c) Gross impairment losses included the following:
-
Income related to goodwill impairment of $11 million ($11 million after-tax) for the three months ended March 26, 2022 and goodwill impairment losses of $230 million ($230 million after-tax) for the three months ended March 27, 2021 and were recorded in SG&A.
-
Property, plant and equipment asset impairment losses of $66 million ($50 million after-tax) for the three months ended March 26, 2022, which were recorded in cost of products sold.
(d) Gross expenses/(income) included in losses/(gains) on sale of business were expenses of $1 million ($1 million after-tax) for the three months ended March 26, 2022 and $19 million ($19 million after-tax) for the three months ended March 27, 2021 and were recorded in other expense/(income).
(e) Gross expenses/(income) included in other losses/(gains) related to acquisitions and divestitures were income of $38 million ($29 million after-tax) for the three months ended March 26, 2022 and were recorded in other expense/(income).
(f) Gross expenses included in debt prepayment and extinguishment costs were $106 million ($80 million after-tax) for the three months ended March 27, 2021 and were recorded in interest expense.
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