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.
In the second quarter of 2022, our internal reporting and reportable segments changed. We combined our United States and Canada zones to form the North America zone as a result of previously announced organizational changes, which are intended to advance and support our long-term growth plans by streamlining and synergizing our United States and Canada businesses. Subsequently, we manage and report our operating results through two reportable segments defined by geographic region: North America and International. We have reflected this change in all historical periods presented.
See Note 16, Segment Reporting, in Item 1, Financial Statements, for our financial information by segment.
Acquisitions and Divestitures:
We closed the Hemmer Acquisition in the second quarter of 2022, the Just Spices Acquisition in the first quarter of 2022, and the Assan Foods Acquisitions in the fourth quarter of 2021, each 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 on our acquisition and divestiture activities.
Russia and Ukraine Conflict:
For the nine months ended September 24, 2022, approximately 1% of consolidated net sales, Adjusted EBITDA, and net income/(loss) were generated from our business in Russia. For the year ended December 25, 2021, approximately 1% of consolidated net sales were generated from our business in Russia, while Adjusted EBITDA and net income/(loss) were each insignificant. As of September 24, 2022, we had 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, inflationary pressures, 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, through the third quarter of 2022, 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
Impairment Losses:
Our results of operations reflect goodwill impairment losses of $444 million, intangible asset impairment losses of $469 million, and property, plant and equipment, net asset impairment losses of $86 million for the nine months ended September 24, 2022 compared to goodwill impairment losses of $265 million and intangible asset impairment losses of $78 million for the nine months ended September 25, 2021. See Note 7, Goodwill and Intangible Assets, and Note 4, Acquisitions and Divestitures, in Item 1, Financial Statements, for additional information on these impairment losses.
Inflation and Supply Chain Impacts:
During the nine months ended September 24, 2022, we have continued to experience increasing commodity costs and supply chain costs, including logistics, procurement, and manufacturing costs, largely due to inflationary pressures, as compared to the prior year period. We expect this cost inflation to continue to remain elevated into 2023. 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 have, in some instances, negatively impacted and could continue to negatively impact our market share.
Further, given the 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 continue to negatively impact our service levels, market share, financial condition, results of operations, or cash flows.
We continue to observe a competitive labor market. Employee turnover, changes in the availability of our workers, 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, and 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 to the most closely comparable financial measures presented in our condensed consolidated financial statements, which are calculated in accordance with U.S. GAAP see Non-GAAP Financial Measures.
Consolidated Results of Operations
Summary of Results:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | % Change | September 24, 2022 | September 25, 2021 | % Change | ||||||||||||||||||||||||||||||
| (in millions, except per share data) | (in millions, except per share data) | ||||||||||||||||||||||||||||||||||
| Net sales | $ | 6,505 | $ | 6,324 | 2.9 | % | $ | 19,104 | $ | 19,333 | (1.2) | % | |||||||||||||||||||||||
| Operating income/(loss) | 751 | 1,156 | (35.0) | % | 2,408 | 3,480 | (30.8) | % | |||||||||||||||||||||||||||
| Net income/(loss) | 435 | 736 | (40.8) | % | 1,481 | 1,279 | 15.8 | % | |||||||||||||||||||||||||||
| Net income/(loss) attributable to common shareholders | 432 | 733 | (41.0) | % | 1,473 | 1,269 | 16.1 | % | |||||||||||||||||||||||||||
| Diluted EPS | 0.35 | 0.59 | (40.7) | % | 1.19 | 1.03 | 15.5 | % |
Net Sales:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | % Change | September 24, 2022 | September 25, 2021 | % Change | ||||||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||
| Net sales | $ | 6,505 | $ | 6,324 | 2.9 | % | $ | 19,104 | $ | 19,333 | (1.2) | % | |||||||||||||||||||||||
| Organic Net Sales(a) | 6,582 | 5,898 | 11.6 | % | 19,244 | 17,572 | 9.5 | % |
(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 September 24, 2022 Compared to the Three Months Ended September 25, 2021:
Net sales increased 2.9% to $6.5 billion for the three months ended September 24, 2022 compared to $6.3 billion for the three months ended September 25, 2021, including the unfavorable impacts of acquisitions and divestitures (6.4 pp) and foreign currency (2.3 pp). Organic Net Sales increased 11.6% to $6.6 billion for the three months ended September 24, 2022 compared to $5.9 billion for the three months ended September 25, 2021, primarily driven by higher pricing (15.4 pp), which more than offset unfavorable volume/mix (3.8 pp). Pricing was higher in both segments, while volume/mix was unfavorable in both segments.
Nine Months Ended September 24, 2022 Compared to the Nine Months Ended September 25, 2021:
Net sales decreased 1.2% to $19.1 billion for the nine months ended September 24, 2022 compared to $19.3 billion for the nine months ended September 25, 2021, including the unfavorable impacts of acquisitions and divestitures (9.0 pp) and foreign currency (1.7 pp). Organic Net Sales increased 9.5% to $19.2 billion for the nine months ended September 24, 2022 compared to $17.6 billion for the nine months ended September 25, 2021, primarily driven by higher pricing (12.3 pp), which more than offset unfavorable volume/mix (2.8 pp). Pricing was higher in both segments, while volume/mix was unfavorable in both segments.
Net Income/(Loss):
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | % Change | September 24, 2022 | September 25, 2021 | % Change | ||||||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||
| Operating income/(loss) | $ | 751 | $ | 1,156 | (35.0) | % | 2,408 | 3,480 | (30.8) | % | |||||||||||||||||||||||||
| Net income/(loss) | 435 | 736 | (40.8) | % | 1,481 | 1,279 | 15.8 | % | |||||||||||||||||||||||||||
| Net income/(loss) attributable to common shareholders | 432 | 733 | (41.0) | % | 1,473 | 1,269 | 16.1 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA(a) | 1,398 | 1,479 | (5.5) | % | 4,260 | 4,765 | (10.6) | % |
(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 September 24, 2022 Compared to the Three Months Ended September 25, 2021:
Operating income/(loss) decreased 35.0% to $751 million for the three months ended September 24, 2022 compared to $1.2 billion for the three months ended September 25, 2021, primarily due to higher supply chain costs, reflecting inflationary pressure in procurement, logistics, and manufacturing costs; higher commodity costs (mainly in dairy, packaging materials, soybean and vegetable oils, and energy); higher non-cash impairment losses in the current year period; the unfavorable impact of acquisitions and divestitures; unfavorable volume/mix; and higher unrealized losses on commodity hedges in the current year period. These decreases to operating income/(loss) more than offset higher pricing and efficiency gains compared to the prior year period.
Net income/(loss) decreased 40.8% to income of $435 million for the three months ended September 24, 2022 compared to $736 million for the three months ended September 25, 2021. This decrease was due to the operating income/(loss) factors discussed above and unfavorable changes in other expense/(income), which more than offset lower interest expense and lower tax expense.
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Other expense/(income) was $22 million of income for the three months ended September 24, 2022 compared to $138 million of income for the three months ended September 25, 2021. This change was primarily driven by a $134 million net loss on derivative activities in the third quarter of 2022 compared to a $23 million net loss on derivative activities in the third quarter of 2021, a $76 million net gain on sales of businesses in the third quarter of 2021, and a $27 million decrease in net pension and postretirement non-service benefits compared to the prior year period. These impacts were partially offset by a $117 million net foreign exchange gain in the third quarter of 2022 compared to a $26 million net foreign exchange gain in the third quarter of 2021.
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Interest expense was $228 million for the three months ended September 24, 2022 compared to $415 million for the three months ended September 25, 2021. This decrease was primarily due to a $3 million net gain on extinguishment of debt recognized in the current period in connection with the Q3 2022 Repurchases compared to a $147 million loss on extinguishment of debt recognized in the prior year period in connection with the Q3 2021 Debt Redemption and the Q3 2021 Repurchases. The remaining change in interest expense was a decrease of approximately $37 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 and approximately $1.2 billion in 2022 through repurchases and repayments.
-
Our effective tax rate for the three months ended September 24, 2022 was an expense of 20.2% on pre-tax income. Our effective tax rate was impacted by the favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and certain favorable net discrete items, including the revaluation of deferred tax balances due to changes in state tax rates and favorable changes in estimates of certain 2021 U.S. income and deductions. These impacts were partially offset by the impact of certain unfavorable net discrete items, primarily non-deductible goodwill impairments (10.3%). Our effective tax rate for the three months ended September 25, 2021 was an expense of 16.2% on pre-tax income. Our effective tax rate was impacted by a favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and certain favorable net discrete items, primarily the tax impact related to a business in our International segment that no longer met the held for sale criteria and the revaluation of our deferred tax balances due to changes in state tax rates.
Adjusted EBITDA decreased 5.5% to $1.4 billion for the three months ended September 24, 2022 compared to $1.5 billion for the three months ended September 25, 2021, primarily due to higher supply chain costs, reflecting inflationary pressure in procurement, logistics, and manufacturing costs; higher commodity costs (mainly in dairy, packaging materials, soybean and vegetable oils, and energy); the unfavorable impact of acquisitions and divestitures (6.1 pp); unfavorable volume/mix; and the unfavorable impact of foreign currency (1.4 pp), which more than offset higher pricing and efficiency gains.
Nine Months Ended September 24, 2022 Compared to the Nine Months Ended September 25, 2021:
Operating income/(loss) decreased 30.8% to $2.4 billion for the nine months ended September 24, 2022 compared to $3.5 billion for the nine months ended September 25, 2021, primarily due to higher commodity costs (mainly in dairy, packaging materials, soybean and vegetable oils, meat, and energy); higher supply chain costs, reflecting inflationary pressure in procurement, logistics, and manufacturing costs; higher non-cash impairment losses in the current year period; the unfavorable impact of acquisitions and divestitures; and unfavorable volume/mix, which more than offset higher pricing and efficiency gains.
Net income/(loss) increased 15.8% to $1.5 billion for the nine months ended September 24, 2022 compared to $1.3 billion for the nine months ended September 25, 2021. This increase was driven by lower interest expense, lower tax expense, and favorable changes in other expense/(income), which more than offset the operating income/(loss) factors discussed above.
*•*Interest expense was $704 million for the nine months ended September 24, 2022 compared to $1.4 billion for the nine months ended September 25, 2021. This decrease was primarily due to a $12 million net gain on extinguishment of debt recognized in the current year period in connection with the 2022 Repurchases compared to a $571 million loss on extinguishment of debt recognized in the prior year period in connection with the 2021 Tender Offers, the 2021 Debt Redemptions, and the 2021 Repurchases. The remaining change in interest expense was a decrease of approximately $156 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 and approximately $1.2 billion in 2022 through repurchases and repayments.
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Our effective tax rate for the nine months ended September 24, 2022 was an expense of 22.7% on pre-tax income. Our effective tax rate was impacted by the favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and certain favorable net discrete items, primarily the revaluation of deferred tax balances due to changes in state tax rates. This impact was partially offset by the impact of certain unfavorable net discrete items, primarily non-deductible goodwill impairments (6.1%). Our effective tax rate for the nine months ended September 25, 2021 was an expense of 42.6% on pre-tax income. Our effective tax rate was unfavorably impacted by certain net discrete items, primarily the tax impact related to the Nuts Transaction (13.0%), the revaluation of our deferred tax balances due to changes in international and state tax rates (9.0%), mainly an increase in U.K. tax rates, and non-deductible goodwill impairments (3.2%). These impacts were partially offset by a favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and the impact of certain net discrete items, including the reversal of uncertain tax position reserves in certain U.S. state and non-U.S. jurisdictions.
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Other expense/(income) was $211 million of income for the nine months ended September 24, 2022 compared to $191 million of income for the nine months ended September 25, 2021. This change was primarily driven by a $254 million net foreign exchange gain in 2022 compared to a $56 million net foreign exchange gain in 2021. These impacts were partially offset by a $195 million net loss on derivative activities in 2022 compared to a $54 million net loss on derivative activities in 2021 and a $42 million decrease in net pension and postretirement non-service benefits compared to the prior year.
Adjusted EBITDA decreased 10.6% to $4.3 billion for the nine months ended September 24, 2022 compared to $4.8 billion for the nine months ended September 25, 2021, primarily due to higher commodity costs (mainly in dairy, packaging materials, soybean and vegetable oils, meat, and energy); higher supply chain costs, reflecting inflationary pressure in procurement, logistics, and manufacturing costs; the unfavorable impact of acquisitions and divestitures (6.3 pp); unfavorable volume/mix; and the unfavorable impact of foreign currency (1.0 pp), which more than offset higher pricing and efficiency gains.
Diluted EPS:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | % Change | September 24, 2022 | September 25, 2021 | % Change | ||||||||||||||||||||||||||||||
| Diluted EPS | $ | 0.35 | $ | 0.59 | (40.7) | % | $ | 1.19 | $ | 1.03 | 15.5 | % | |||||||||||||||||||||||
| Adjusted EPS(a) | 0.63 | 0.65 | (3.1) | % | 1.93 | 2.15 | (10.2) | % |
(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 September 24, 2022 Compared to the Three Months Ended September 25, 2021:
Diluted EPS decreased 40.7% to $0.35 for the three months ended September 24, 2022 compared to $0.59 for the three months ended September 25, 2021, primarily due to the net income/(loss) factors discussed above.
| For the Three Months Ended | |||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ Change | % Change | ||||||||||||||||||||
| Diluted EPS | $ | 0.35 | $ | 0.59 | $ | (0.24) | (40.7) | % | |||||||||||||||
| Restructuring activities | 0.01 | 0.01 | — | ||||||||||||||||||||
| Unrealized losses/(gains) on commodity hedges | 0.05 | 0.02 | 0.03 | ||||||||||||||||||||
| Impairment losses | 0.23 | — | 0.23 | ||||||||||||||||||||
| Losses/(gains) on sale of business | (0.01) | (0.06) | 0.05 | ||||||||||||||||||||
| Nonmonetary currency devaluation | 0.01 | — | 0.01 | ||||||||||||||||||||
| Debt prepayment and extinguishment costs | (0.01) | 0.09 | (0.10) | ||||||||||||||||||||
| Adjusted EPS(a) | $ | 0.63 | $ | 0.65 | $ | (0.02) | (3.1) | % | |||||||||||||||
| Key drivers of change in Adjusted EPS(a): | |||||||||||||||||||||||
| Results of operations | $ | 0.03 | |||||||||||||||||||||
| Results of divested operations | (0.06) | ||||||||||||||||||||||
| Interest expense | 0.03 | ||||||||||||||||||||||
| Other expense/(income) | (0.02) | ||||||||||||||||||||||
| $ | (0.02) |
(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 3.1% to $0.63 for the three months ended September 24, 2022 compared to $0.65 for the three months ended September 25, 2021. This decrease was primarily due to lower Adjusted EBITDA, which includes the unfavorable impact of our divestitures, and unfavorable changes in other expense/(income), which more than offset lower interest expense and lower equity award compensation expense.
Nine Months Ended September 24, 2022 Compared to the Nine Months Ended September 25, 2021:
Diluted EPS increased 15.5% to $1.19 for the nine months ended September 24, 2022 compared to $1.03 for the nine months ended September 25, 2021, primarily driven by the net income/(loss) factors discussed above.
| For the Nine Months Ended | |||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | $ Change | % Change | ||||||||||||||||||||
| Diluted EPS | $ | 1.19 | $ | 1.03 | $ | 0.16 | 15.5 | % | |||||||||||||||
| Restructuring activities | 0.02 | 0.03 | (0.01) | ||||||||||||||||||||
| Deal costs | 0.01 | — | 0.01 | ||||||||||||||||||||
| Unrealized losses/(gains) on commodity hedges | 0.04 | (0.01) | 0.05 | ||||||||||||||||||||
| Impairment losses | 0.70 | 0.26 | 0.44 | ||||||||||||||||||||
| Certain non-ordinary course legal and regulatory matters | — | 0.05 | (0.05) | ||||||||||||||||||||
| Losses/(gains) on sale of business | (0.01) | 0.23 | (0.24) | ||||||||||||||||||||
| Other losses/(gains) related to acquisitions and divestitures | (0.02) | — | (0.02) | ||||||||||||||||||||
| Nonmonetary currency devaluation | 0.01 | — | 0.01 | ||||||||||||||||||||
| Debt prepayment and extinguishment costs | (0.01) | 0.37 | (0.38) | ||||||||||||||||||||
| Certain significant discrete income tax items | — | 0.19 | (0.19) | ||||||||||||||||||||
| Adjusted EPS(a) | $ | 1.93 | $ | 2.15 | $ | (0.22) | (10.2) | % | |||||||||||||||
| Key drivers of change in Adjusted EPS(a): | |||||||||||||||||||||||
| Results of operations | $ | (0.07) | |||||||||||||||||||||
| Results of divested operations | (0.20) | ||||||||||||||||||||||
| Interest expense | 0.10 | ||||||||||||||||||||||
| Effective tax rate | (0.05) | ||||||||||||||||||||||
| $ | (0.22) |
(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 10.2% to $1.93 for the nine months ended September 24, 2022 compared to $2.15 for the nine months ended September 25, 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, lower equity award compensation expense, and higher divestiture-related license income.
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. We apply highly inflationary accounting to the results of our subsidiaries in Venezuela, Argentina, and Turkey, which are all in our International segment.
Net Sales:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| North America | $ | 5,016 | $ | 4,941 | $ | 14,656 | $ | 15,143 | |||||||||||||||
| International | 1,489 | 1,383 | 4,448 | 4,190 | |||||||||||||||||||
| Total net sales | $ | 6,505 | $ | 6,324 | $ | 19,104 | $ | 19,333 |
Organic Net Sales:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Organic Net Sales(a): | |||||||||||||||||||||||
| North America | $ | 5,030 | $ | 4,537 | $ | 14,688 | $ | 13,450 | |||||||||||||||
| International | 1,552 | 1,361 | 4,556 | 4,122 | |||||||||||||||||||
| Total Organic Net Sales | $ | 6,582 | $ | 5,898 | $ | 19,244 | $ | 17,572 |
(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 and nine months ended September 24, 2022 compared to the three and nine months ended September 25, 2021 were:
| Net Sales | Currency | Acquisitions and Divestitures | Organic Net Sales | Price | Volume/Mix | ||||||||||||||||||||||||||||||
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||
| North America | 1.5 | % | (0.3) pp | (9.1) pp | 10.9 | % | 15.3 pp | (4.4) pp | |||||||||||||||||||||||||||
| International | 7.7 | % | (9.8) pp | 3.6 pp | 13.9 | % | 15.7 pp | (1.8) pp | |||||||||||||||||||||||||||
| Kraft Heinz | 2.9 | % | (2.3) pp | (6.4) pp | 11.6 | % | 15.4 pp | (3.8) pp |
| Net Sales | Currency | Acquisitions and Divestitures | Organic Net Sales | Price | Volume/Mix | ||||||||||||||||||||||||||||||
| For the Nine Months Ended | |||||||||||||||||||||||||||||||||||
| North America | (3.2) | % | (0.2) pp | (12.2) pp | 9.2 | % | 12.6 pp | (3.4) pp | |||||||||||||||||||||||||||
| International | 6.2 | % | (7.2) pp | 2.9 pp | 10.5 | % | 11.6 pp | (1.1) pp | |||||||||||||||||||||||||||
| Kraft Heinz | (1.2) | % | (1.7) pp | (9.0) pp | 9.5 | % | 12.3 pp | (2.8) pp |
Adjusted EBITDA:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Segment Adjusted EBITDA: | |||||||||||||||||||||||
| North America | $ | 1,213 | $ | 1,273 | $ | 3,734 | $ | 4,131 | |||||||||||||||
| International | 243 | 252 | 733 | 821 | |||||||||||||||||||
| General corporate expenses | (58) | (46) | (207) | (187) | |||||||||||||||||||
| Depreciation and amortization (excluding restructuring activities) | (227) | (228) | (676) | (677) | |||||||||||||||||||
| Divestiture-related license income | 14 | — | 41 | — | |||||||||||||||||||
| Restructuring activities | (8) | (15) | (38) | (52) | |||||||||||||||||||
| Deal costs | — | (2) | (8) | (8) | |||||||||||||||||||
| Unrealized gains/(losses) on commodity hedges | (84) | (27) | (65) | 12 | |||||||||||||||||||
| Impairment losses | (314) | — | (999) | (343) | |||||||||||||||||||
| Certain non-ordinary course legal and regulatory matters | — | — | — | (62) | |||||||||||||||||||
| Equity award compensation expense (excluding restructuring activities) | (28) | (51) | (107) | (155) | |||||||||||||||||||
| Operating income/(loss) | 751 | 1,156 | 2,408 | 3,480 | |||||||||||||||||||
| Interest expense | 228 | 415 | 704 | 1,443 | |||||||||||||||||||
| Other expense/(income) | (22) | (138) | (211) | (191) | |||||||||||||||||||
| Income/(loss) before income taxes | $ | 545 | $ | 879 | $ | 1,915 | $ | 2,228 |
North America:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | % Change | September 24, 2022 | September 25, 2021 | % Change | ||||||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||
| Net sales | $ | 5,016 | $ | 4,941 | 1.5 | % | $ | 14,656 | $ | 15,143 | (3.2) | % | |||||||||||||||||||||||
| Organic Net Sales(a) | 5,030 | 4,537 | 10.9 | % | 14,688 | 13,450 | 9.2 | % | |||||||||||||||||||||||||||
| Segment Adjusted EBITDA | 1,213 | 1,273 | (4.8) | % | 3,734 | 4,131 | (9.6) | % |
(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 September 24, 2022 Compared to the Three Months Ended September 25, 2021:
Net sales increased 1.5% to $5.0 billion for the three months ended September 24, 2022 compared to $4.9 billion for the three months ended September 25, 2021, including the unfavorable impacts of divestitures (9.1 pp) and foreign currency (0.3 pp). Organic Net Sales increased 10.9% to $5.0 billion for the three months ended September 24, 2022 compared to $4.5 billion for the three months ended September 25, 2021, driven by higher pricing (15.3 pp), which more than offset unfavorable volume/mix (4.4 pp). Higher pricing was primarily driven by increases to mitigate rising input costs. Unfavorable volume/mix was primarily due to declines in meat, frozen, foodservice, condiments and sauces, and coffee, which more than offset increases in refrigerated meal combinations.
Segment Adjusted EBITDA decreased 4.8% to $1.2 billion for the three months ended September 24, 2022 compared to $1.3 billion for the three months ended September 25, 2021, primarily due to higher supply chain costs, reflecting inflationary pressure in procurement, logistics, and manufacturing costs; higher commodity costs (mainly in dairy, packaging materials, and soybean and vegetable oils); the unfavorable impact of the Cheese Transaction (6.7 pp); unfavorable volume/mix; and the unfavorable impact of foreign currency (0.2 pp). These decreases to Segment Adjusted EBITDA more than offset higher pricing and efficiency gains.
Nine Months Ended September 24, 2022 Compared to the Nine Months Ended September 25, 2021:
Net sales decreased 3.2% to $14.7 billion for the three months ended September 24, 2022 compared to $15.1 billion for the nine months ended September 25, 2021, including the unfavorable impacts of divestitures (12.2 pp) and foreign currency (0.2 pp). Organic Net Sales increased 9.2% to $14.7 billion for the nine months ended September 24, 2022 compared to $13.5 billion for the nine months ended September 25, 2021, driven by higher pricing (12.6 pp), which more than offset unfavorable volume/mix (3.4 pp). Higher pricing was primarily driven by increases to mitigate rising input costs. Unfavorable volume/mix was primarily due to declines in frozen, meat, condiments and sauces, coffee, desserts, and powdered beverages, which more than offset increases in refrigerated meal combinations and foodservice.
Segment Adjusted EBITDA decreased 9.6% to $3.7 billion for the nine months ended September 24, 2022 compared to $4.1 billion for the nine months ended September 25, 2021, primarily due to higher commodity costs (mainly in dairy, packaging materials, meat, and soybean and vegetable oils); higher supply chain costs, reflecting inflationary pressure in procurement, logistics, and manufacturing costs; the unfavorable impact of the Cheese Transaction and Nuts Transaction (7.3 pp); unfavorable volume/mix; and the unfavorable impact of foreign currency (0.1 pp). These decreases to Segment Adjusted EBITDA more than offset higher pricing and efficiency gains.
International:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | % Change | September 24, 2022 | September 25, 2021 | % Change | ||||||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,489 | $ | 1,383 | 7.7 | % | $ | 4,448 | $ | 4,190 | 6.2 | % | |||||||||||||||||||||||
| Organic Net Sales(a) | 1,552 | 1,361 | 13.9 | % | 4,556 | 4,122 | 10.5 | % | |||||||||||||||||||||||||||
| Segment Adjusted EBITDA | 243 | 252 | (3.7) | % | 733 | 821 | (10.8) | % |
(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 September 24, 2022 Compared to the Three Months Ended September 25, 2021:
Net sales increased 7.7% to $1.5 billion for the three months ended September 24, 2022 compared to $1.4 billion for the three months ended September 25, 2021, including the favorable impact of acquisitions and divestitures (3.6 pp) and the unfavorable impact of foreign currency (9.8 pp). Organic Net Sales increased 13.9% to $1.6 billion for the three months ended September 24, 2022 compared to $1.4 billion for the three months ended September 25, 2021, driven by higher pricing (15.7 pp), which more than offset unfavorable volume/mix (1.8 pp). Higher pricing included increases across markets primarily to mitigate rising input costs. Unfavorable volume/mix was primarily due to declines across categories in Australia and New Zealand and declines in boxed dinners in the United Kingdom, which more than offset higher foodservice sales across most markets and growth in condiments and sauces in China.
Segment Adjusted EBITDA decreased 3.7% to $243 million for the three months ended September 24, 2022 compared to $252 million for the three months ended September 25, 2021, primarily due to higher supply chain costs, reflecting inflationary pressure in procurement, manufacturing, and logistics costs; higher commodity costs, including in packaging and energy; and the unfavorable impact of foreign currency (8.6 pp), which more than offset higher pricing and efficiency gains.
Nine Months Ended September 24, 2022 Compared to the Nine Months Ended September 25, 2021:
Net sales increased 6.2% to $4.4 billion for the nine months ended September 24, 2022 compared to $4.2 billion for the nine months ended September 25, 2021, including the favorable impact of acquisitions and divestitures (2.9 pp) and the unfavorable impact of foreign currency (7.2 pp). Organic Net Sales increased 10.5% to $4.6 billion for the nine months ended September 24, 2022 compared to $4.1 billion for the nine months ended September 25, 2021, driven by higher pricing (11.6 pp), which more than offset unfavorable volume/mix (1.1 pp). Higher pricing included increases across markets primarily to mitigate rising input costs. Unfavorable volume/mix was primarily due to declines across categories in Australia and New Zealand and declines in boxed dinners and condiments and sauces in the United Kingdom, which more than offset higher foodservice sales across most markets and growth in Brazil.
Segment Adjusted EBITDA decreased 10.8% to $733 million for the nine months ended September 24, 2022 compared to $821 million for the nine months ended September 25, 2021, primarily due to higher supply chain costs, reflecting inflationary pressure in procurement, manufacturing, and logistics costs; higher commodity costs, including in packaging and energy; the unfavorable impact of foreign currency (5.9 pp); and unfavorable volume/mix, which more than offset higher pricing and efficiency gains.
Liquidity and Capital Resources
We believe that cash generated from our operating activities, commercial paper programs, and our 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 and commercial paper programs 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 cash consideration of approximately $279 million.
In connection with the Cheese Transaction, which closed in the fourth quarter of 2021, we paid 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 Nine Months Ended September 24, 2022 Compared to the Nine Months Ended September 25, 2021:
Net Cash Provided by/Used for Operating Activities:
Net cash provided by operating activities was $1.5 billion for the nine months ended September 24, 2022 compared to $2.4 billion for the nine months ended September 25, 2021. This decrease was primarily driven by higher cash outflows for inventories primarily related to stock rebuilding and increased input costs and lower Adjusted EBITDA. 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 $1.0 billion for the nine months ended September 24, 2022 compared to net cash provided by investing activities of $2.7 billion for the nine months ended September 25, 2021. This change was primarily driven by proceeds from the Nuts Transaction in the prior year period as well as payments for the Just Spices Acquisition and Hemmer Acquisition and working capital adjustments related to the Cheese Transaction in the current year period. Capital expenditures were largely flat year over year. 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, Hemmer Acquisition, the Nuts Transaction, and the Cheese Transaction.
Net Cash Provided by/Used for Financing Activities:
Net cash used for financing activities was $2.8 billion for the nine months ended September 24, 2022 compared to $6.3 billion for the nine months ended September 25, 2021. This change was primarily due to higher repayments of long-term debt and debt prepayment and extinguishment costs in 2021 related to the 2021 Tender Offers, 2021 Repurchases, and 2021 Debt Redemptions. See Note 14, Commitments, Contingencies, and Debt, in Item 1, Financial Statements, for additional information on our debt repayments.
Cash Held by International Subsidiaries:
Of the $1.0 billion cash and cash equivalents on our condensed consolidated balance sheet at September 24, 2022, $817 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 $45 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 $130 million of historic earnings at September 24, 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 $880 million at September 24, 2022 and $820 million at December 25, 2021.
Product Financing Arrangements:
We enter into various product financing arrangements to facilitate supply from our vendors. Beginning in the fourth quarter of 2022, we intend to wind-down our existing product financing arrangement, with final impacts of the wind-down expected to extend into 2023. We will continue to have access to these programs should we decide to facilitate supply from our vendors through these programs at a later time. See Note 13, Financing Arrangements, in Item 1*, Financial Statements*, for additional information on our product financing arrangements.
Borrowing Arrangements:
As of the date of this filing, our long-term debt is rated BBB- by S&P Global Ratings (“S&P”) and Fitch Ratings (“Fitch”) and Baa3 by Moody’s Investor Services, Inc. (“Moody’s”), with a positive outlook from S&P and a stable outlook from Fitch and 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. Our long-term credit rating was upgraded from BB+ to BBB- by S&P in March 2022 and by Fitch in May 2022.
From time to time, we obtain funding through our U.S. commercial paper program. We had no commercial paper outstanding at September 24, 2022 or at December 25, 2021. The maximum amount of commercial paper outstanding during the nine months ended September 24, 2022 was $198 million.
Our Senior Credit Facility provides for a revolving commitment of $4.0 billion through July 8, 2027. 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 $1.0 billion.
No amounts were drawn on our Senior Credit Facility at September 24, 2022, our Previous Senior Credit Facility at December 25, 2021, or on either the Senior Credit Facility or Previous Senior Credit Facility during the nine months ended September 24, 2022 or September 25, 2021.
The Credit Agreement contains customary 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 September 24, 2022.
Long-Term Debt:
Our long-term debt, including the current portion, was $20.1 billion at September 24, 2022 and $21.8 billion at December 25, 2021. This decrease was primarily due to the $315 million aggregate principal amount of floating rate senior notes that were repaid at maturity in August 2022, the $381 million aggregate principal amount of senior notes that were repaid at maturity in June 2022, the $6 million aggregate principal amount of senior notes that were repaid at maturity in March 2022, and the approximately $448 million aggregate principal amount of senior notes repurchased in connection with the 2022 Repurchases, as well as changes in foreign currency exchange rates on our foreign-denominated debt. We used cash on hand to fund the 2022 Repurchases and to pay fees and expenses in connection therewith.
We have aggregate principal amounts of senior notes of approximately 750 million euros maturing in June 2023.
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 September 24, 2022.
See Note 14, Commitments, Contingencies, and Debt, in Item 1, Financial Statements, for additional information on our borrowing arrangements and 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 long-term debt.
Equity and Dividends:
We paid common stock dividends of $1.5 billion for the nine months ended September 24, 2022 and $1.5 billion for the nine months ended September 25, 2021. Additionally, in the fourth quarter of 2022, our Board of Directors declared a cash dividend of $0.40 per share of common stock, which is payable on December 30, 2022 to stockholders of record on November 25, 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 Nine Months Ended | |||||
| September 24, 2022 | |||||
| Net sales | $ | 12,445 | |||
| Gross profit(a) | 4,074 | ||||
| Intercompany service fees and other recharges | 2,415 | ||||
| Operating income/(loss) | 1,035 | ||||
| Equity in earnings/(losses) of subsidiaries | 972 | ||||
| Net income/(loss) | 1,473 | ||||
| Net income/(loss) attributable to common shareholders | 1,473 |
(a) For the nine months ended September 24, 2022, the Obligor Group recorded $302 million of net sales to the non-guarantor subsidiaries and $28 million of purchases from the non-guarantor subsidiaries.
Summarized Balance Sheets
| September 24, 2022 | December 25, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets | $ | 5,608 | $ | 6,484 | |||||||
| Current assets due from affiliates(a) | 1,806 | 2,890 | |||||||||
| Non-current assets | 5,381 | 5,709 | |||||||||
| Goodwill | 8,823 | 8,860 | |||||||||
| Intangible assets, net | 2,133 | 2,222 | |||||||||
| Non-current assets due from affiliates(b) | 207 | 207 | |||||||||
| LIABILITIES | |||||||||||
| Current liabilities | $ | 5,140 | $ | 5,091 | |||||||
| Current liabilities due to affiliates(a) | 1,954 | 5,922 | |||||||||
| Non-current liabilities | 21,583 | 23,120 | |||||||||
| Non-current liabilities due to affiliates(b) | 581 | 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 nine months ended September 24, 2022, we experienced higher commodity costs primarily for dairy, packaging materials, soybean and vegetable oils, meat, and energy, including diesel fuel, electricity, and natural gas, as compared to the prior year period. These increases are primarily driven by overall market demand, inflationary pressures, and, in part, by the negative impact of the conflict between Russia and Ukraine on the global economy. We anticipate commodity costs to continue to remain elevated into 2023 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. Our critical accounting estimates and assumptions related to goodwill and intangible assets are described below. 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.
Goodwill and Intangible Assets:
As of September 24, 2022, we maintain 11 reporting units, seven of which comprise our goodwill balance. These seven reporting units had an aggregate goodwill carrying amount of $30.6 billion at September 24, 2022. Our indefinite-lived intangible asset balance primarily consists of a number of individual brands, which had an aggregate carrying amount of $38.2 billion as of September 24, 2022.
We test our reporting units and brands for impairment annually, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit or brand is less than its carrying amount. Such events and circumstances could include a sustained decrease in our market capitalization, increased competition or unexpected loss of market share, increased input costs beyond projections, disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster, pandemic, or loss of a customer, supplier, or other significant business relationship), unexpected significant declines in operating results, significant adverse changes in the markets in which we operate, changes in income tax rates, changes in interest rates, or changes in management strategy. We test reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. We test brands for impairment by comparing the estimated fair value of each brand with its carrying amount. If the carrying amount of a reporting unit or brand exceeds its estimated fair value, we record an impairment loss based on the difference between fair value and carrying amount, in the case of reporting units, not to exceed the associated carrying amount of goodwill. See Note 7, Goodwill and Intangible Assets, in Item 1, Financial Statements, for a discussion of the timing of the annual impairment test.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units and brands requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax considerations, discount rates, growth rates, royalty rates, contributory asset charges, and other market factors. Our current expectations also include certain assumptions that could be negatively impacted if we are unable to meet our pricing expectations in relation to inflation. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, income tax rates, foreign currency exchange rates, or inflation, change, or if management’s expectations or plans otherwise change, including updates to our long-term operating plans, then one or more of our reporting units or brands might become impaired in the future. Additionally, any decisions to divest certain non-strategic assets has led and could in the future lead to goodwill or intangible asset impairments.
As detailed in Note 7, Goodwill and Intangible Assets, in Item 1, Financial Statements, we recorded impairment losses related to goodwill and indefinite-lived intangible assets. Our brands that were impaired were written down to their respective fair values resulting in zero excess fair value over carrying amount as of the applicable impairment test dates. Our reporting units and brands that have 20% or less excess fair value over carrying amount as of the Q3 2022 Annual Impairment Test date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future.
Reporting units with 20% or less fair value over carrying amount had an aggregate goodwill carrying amount of $16.7 billion as of the Q3 2022 Annual Impairment Test and included Taste, Meals, and Away from Home (TMA), Canada and North America Coffee (CNAC), and Continental Europe. Reporting units with between 20-50% fair value over carrying amount had an aggregate goodwill carrying amount of $14.5 billion as of the Q3 2022 Annual Impairment Test and included Fresh, Beverages, and Desserts (FBD), Northern Europe, Asia, and Latin America (LATAM). Our reporting units that have less than 1% excess fair value over carrying amount as of the Q3 2022 Annual Impairment Test are considered at a heightened risk of future impairments and include our CNAC and Continental Europe reporting units, which had an aggregate goodwill carrying amount of $2.6 billion. Our four remaining reporting units had no goodwill carrying amount at the time of the Q3 2022 Annual Impairment Test. As discussed in Note 4, Acquisitions and Divestitures, and Note 7, Goodwill and Intangible Assets, in Item 1, Financial Statements, goodwill was subsequently added to our LATAM reporting unit as a result of the Hemmer Acquisition in the second quarter of 2022.
Brands with 20% or less fair value over carrying amount had an aggregate carrying amount after impairment of $16.6 billion as of the Q3 2022 Annual Impairment Test and included Kraft, Oscar Mayer, Miracle Whip, Ore-Ida, Maxwell House, Cool Whip, Jet Puffed, and Plasmon. The aggregate carrying amount of brands with fair value over carrying amount between 20-50% was $2.5 billion as of the Q3 2022 Annual Impairment Test. Although the remaining brands, with a carrying amount of $19.4 billion, have more than 50% excess fair value over carrying amount as of the Q3 2022 Annual Impairment Test date, these amounts are also associated with the 2013 Heinz Acquisition and the 2015 Merger and are recorded on our condensed consolidated balance sheet at their estimated acquisition date fair values. Therefore, if any assumptions, estimates, or market factors change in the future, these amounts are also susceptible to impairments. Our brands that have less than 5% excess fair value over carrying amount as of the Q3 2022 Annual Impairment Test are considered at a heightened risk of future impairments and include our Kraft, Ore-Ida, Jet Puffed, and Plasmon brands, which had an aggregate carrying amount of $11.3 billion.
We generally utilize the discounted cash flow method under the income approach to estimate the fair value of our reporting units. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each reporting unit (including net sales, cost of products sold, SG&A, depreciation and amortization, working capital, and capital expenditures), income tax rates, long-term growth rates, and a discount rate that appropriately reflects the risks inherent in each future cash flow stream. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies.
We utilize the excess earnings method under the income approach to estimate the fair value of certain of our largest brands. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net cash flows for each brand (including net sales, cost of products sold, and SG&A), contributory asset charges, income tax considerations, long-term growth rates, a discount rate that reflects the level of risk associated with the future earnings attributable to the brand, and management’s intent to invest in the brand indefinitely. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies.
We utilize the relief from royalty method under the income approach to estimate the fair value of our remaining brands. Some of the more significant assumptions inherent in estimating the fair values include the estimated future annual net sales for each brand, royalty rates (as a percentage of net sales that would hypothetically be charged by a licensor of the brand to an unrelated licensee), income tax considerations, long-term growth rates, a discount rate that reflects the level of risk associated with the future cost savings attributable to the brand, and management’s intent to invest in the brand indefinitely. We selected the assumptions used in the financial forecasts using historical data, supplemented by current and anticipated market conditions, estimated product category growth rates, management’s plans, and guideline companies.
The discount rates, long-term growth rates, and royalty rates used to estimate the fair values of our reporting units and our brands with 20% or less excess fair value over carrying amount, as well as the goodwill or brand carrying amounts, as of the Q3 2022 Annual Impairment Test for each reporting unit or brand, were as follows:
| Goodwill or Brand Carrying Amount (in billions) | Discount Rate | Long-Term Growth Rate | Royalty Rate | ||||||||||||||||||||||||||||||||||||||
| Minimum | Maximum | Minimum | Maximum | Minimum | Maximum | ||||||||||||||||||||||||||||||||||||
| Reporting units | $ | 16.7 | 7.0 | % | 8.0 | % | 1.5 | % | 2.0 | % | |||||||||||||||||||||||||||||||
| Brands (excess earnings method) | 14.9 | 7.7 | % | 7.8 | % | 1.0 | % | 1.5 | % | ||||||||||||||||||||||||||||||||
| Brands (relief from royalty method) | 1.7 | 7.5 | % | 8.5 | % | 0.5 | % | 2.0 | % | 4.0 | % | 20.0 | % |
Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each annual and interim impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation. However, as it is reasonably possible that changes in assumptions could occur, as a sensitivity measure, we have presented the estimated effects of isolated changes in discount rates, long-term growth rates, and royalty rates on the fair values of our reporting units and brands with 20% or less excess fair value over carrying amount. These estimated changes in fair value are not necessarily representative of the actual impairment that would be recorded in the event of a fair value decline.
If we had changed the assumptions used to estimate the fair value of our reporting units and brands with 20% or less excess fair value over carrying amount, as of the Q3 2022 Annual Impairment Test for each of these reporting units and brands, these isolated changes, which are reasonably possible to occur, would have led to the following increase/(decrease) in the aggregate fair value of these reporting units and brands (in billions):
| Discount Rate | Long-Term Growth Rate | Royalty Rate | |||||||||||||||||||||||||||||||||
| 50-Basis-Point | 25-Basis-Point | 100-Basis-Point | |||||||||||||||||||||||||||||||||
| Increase | Decrease | Increase | Decrease | Increase | Decrease | ||||||||||||||||||||||||||||||
| Reporting units | $ | (2.8) | $ | 3.4 | $ | 1.4 | $ | (1.3) | |||||||||||||||||||||||||||
| Brands (excess earnings method) | (1.2) | 1.4 | 0.5 | (0.5) | |||||||||||||||||||||||||||||||
| Brands (relief from royalty method) | (0.1) | 0.2 | 0.1 | (0.1) | $ | 0.2 | $ | (0.2) |
Definite-lived intangible assets are amortized on a straight-line basis over the estimated periods benefited. We review definite-lived intangible assets for impairment when conditions exist that indicate the carrying amount of the assets may not be recoverable. Such conditions could include significant adverse changes in the business climate, current-period operating or cash flow losses, significant declines in forecasted operations, or a current expectation that an asset group will be disposed of before the end of its useful life. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of definite-lived intangible assets held for use, we group assets at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, the loss is calculated based on estimated fair value. Impairment losses on definite-lived intangible assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
See Note 7, Goodwill and Intangible Assets, in Item 1, Financial Statements, for our impairment testing results.
New Accounting Pronouncements
See Note 3, New Accounting Standards, in Item 1, Financial Statements, for a discussion of new accounting pronouncements.
Contingencies
See Note 14, 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. We believe that Organic Net Sales, Adjusted EBITDA, and Adjusted EPS provide important comparability of underlying operating results, allowing investors and management to assess the Company’s operating performance on a consistent basis.
Management believes that presenting our non-GAAP financial measures 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.
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 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.
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 September 24, 2022 | |||||||||||||||||||||||||||||||||||
| North America | $ | 5,016 | $ | (14) | $ | — | $ | 5,030 | |||||||||||||||||||||||||||
| International | 1,489 | (131) | 68 | 1,552 | |||||||||||||||||||||||||||||||
| Kraft Heinz | $ | 6,505 | $ | (145) | $ | 68 | $ | 6,582 | |||||||||||||||||||||||||||
| Three Months Ended September 25, 2021 | |||||||||||||||||||||||||||||||||||
| North America | $ | 4,941 | $ | — | $ | 404 | $ | 4,537 | |||||||||||||||||||||||||||
| International | 1,383 | 6 | 16 | 1,361 | |||||||||||||||||||||||||||||||
| Kraft Heinz | $ | 6,324 | $ | 6 | $ | 420 | $ | 5,898 |
| Year-over-year growth rates | |||||||||||||||||||||||||||||||||||
| North America | 1.5 | % | (0.3) pp | (9.1) pp | 10.9 | % | 15.3 pp | (4.4) pp | |||||||||||||||||||||||||||
| International | 7.7 | % | (9.8) pp | 3.6 pp | 13.9 | % | 15.7 pp | (1.8) pp | |||||||||||||||||||||||||||
| Kraft Heinz | 2.9 | % | (2.3) pp | (6.4) pp | 11.6 | % | 15.4 pp | (3.8) pp |
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 | ||||||||||||||||||||||||||||||
| Nine Months Ended September 24, 2022 | |||||||||||||||||||||||||||||||||||
| North America | $ | 14,656 | $ | (32) | $ | — | $ | 14,688 | |||||||||||||||||||||||||||
| International | 4,448 | (287) | 179 | 4,556 | |||||||||||||||||||||||||||||||
| Kraft Heinz | $ | 19,104 | $ | (319) | $ | 179 | $ | 19,244 | |||||||||||||||||||||||||||
| Nine Months Ended September 25, 2021 | |||||||||||||||||||||||||||||||||||
| North America | $ | 15,143 | $ | — | $ | 1,693 | $ | 13,450 | |||||||||||||||||||||||||||
| International | 4,190 | 14 | 54 | 4,122 | |||||||||||||||||||||||||||||||
| Kraft Heinz | $ | 19,333 | $ | 14 | $ | 1,747 | $ | 17,572 |
| Year-over-year growth rates | |||||||||||||||||||||||||||||||||||
| North America | (3.2) | % | (0.2) pp | (12.2) pp | 9.2 | % | 12.6 pp | (3.4) pp | |||||||||||||||||||||||||||
| International | 6.2 | % | (7.2) pp | 2.9 pp | 10.5 | % | 11.6 pp | (1.1) pp | |||||||||||||||||||||||||||
| Kraft Heinz | (1.2) | % | (1.7) pp | (9.0) pp | 9.5 | % | 12.3 pp | (2.8) pp |
The Kraft Heinz Company
Reconciliation of Net Income/(Loss) to Adjusted EBITDA
(dollars in millions)
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Net income/(loss) | $ | 435 | $ | 736 | $ | 1,481 | $ | 1,279 | |||||||||||||||
| Interest expense | 228 | 415 | 704 | 1,443 | |||||||||||||||||||
| Other expense/(income) | (22) | (138) | (211) | (191) | |||||||||||||||||||
| Provision for/(benefit from) income taxes | 110 | 143 | 434 | 949 | |||||||||||||||||||
| Operating income/(loss) | 751 | 1,156 | 2,408 | 3,480 | |||||||||||||||||||
| Depreciation and amortization (excluding restructuring activities) | 227 | 228 | 676 | 677 | |||||||||||||||||||
| Divestiture-related license income | (14) | — | (41) | — | |||||||||||||||||||
| Restructuring activities | 8 | 15 | 38 | 52 | |||||||||||||||||||
| Deal costs | — | 2 | 8 | 8 | |||||||||||||||||||
| Unrealized losses/(gains) on commodity hedges | 84 | 27 | 65 | (12) | |||||||||||||||||||
| Impairment losses | 314 | — | 999 | 343 | |||||||||||||||||||
| Certain non-ordinary course legal and regulatory matters | — | — | — | 62 | |||||||||||||||||||
| Equity award compensation expense (excluding restructuring activities) | 28 | 51 | 107 | 155 | |||||||||||||||||||
| Adjusted EBITDA | $ | 1,398 | $ | 1,479 | $ | 4,260 | $ | 4,765 |
The Kraft Heinz Company
Reconciliation of Diluted EPS to Adjusted EPS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Diluted EPS | $ | 0.35 | $ | 0.59 | $ | 1.19 | $ | 1.03 | |||||||||||||||
| Restructuring activities(a) | 0.01 | 0.01 | 0.02 | 0.03 | |||||||||||||||||||
| Deal costs(b) | — | — | 0.01 | — | |||||||||||||||||||
| Unrealized losses/(gains) on commodity hedges(c) | 0.05 | 0.02 | 0.04 | (0.01) | |||||||||||||||||||
| Impairment losses(d) | 0.23 | — | 0.70 | 0.26 | |||||||||||||||||||
| Certain non-ordinary course legal and regulatory matters(e) | — | — | — | 0.05 | |||||||||||||||||||
| Losses/(gains) on sale of business(f) | (0.01) | (0.06) | (0.01) | 0.23 | |||||||||||||||||||
| Other losses/(gains) related to acquisitions and divestitures(g) | — | — | (0.02) | — | |||||||||||||||||||
| Nonmonetary currency devaluation(h) | 0.01 | — | 0.01 | — | |||||||||||||||||||
| Debt prepayment and extinguishment costs(i) | (0.01) | 0.09 | (0.01) | 0.37 | |||||||||||||||||||
| Certain significant discrete income tax items(j) | — | — | — | 0.19 | |||||||||||||||||||
| Adjusted EPS | $ | 0.63 | $ | 0.65 | $ | 1.93 | $ | 2.15 |
(a) Gross expenses included in restructuring activities were $7 million ($6 million after-tax) for the three months and $37 million ($28 million after-tax) for the nine months ended September 24, 2022 and $15 million ($12 million after tax) for the three months and $52 million ($40 million after-tax) for the nine months ended September 25, 2021 and were recorded in the following income statement line items:
-
Cost of products sold included expenses of $5 million for the three months and $15 million for the nine months ended September 24, 2022 and $4 million for the nine months ended September 25, 2021; and
-
SG&A included expenses of $3 million for the three months and $23 million for the nine months ended September 24, 2022 and $15 million for the three months and $48 million for the nine months ended September 25, 2021.
-
Other expense/(income) included income of $1 million for the three and nine months ended September 24, 2022.
(b) Gross expenses included in deal costs were $8 million ($5 million after-tax) for the nine months ended September 24, 2022 and $2 million ($1 million after-tax) for the three months and $8 million ($2 million after-tax) for the nine months ended September 25, 2021.
(c) Gross expenses/(income) included in unrealized losses/(gains) on commodity hedges were expenses of $84 million ($63 million after-tax) for the three months and $65 million ($49 million after-tax) for the nine months ended September 24, 2022 and expenses of $27 million ($20 million after-tax) for the three months and income of $12 million ($9 million after-tax) for the nine months ended September 25, 2021 and were recorded in cost of products sold.
(d) Gross impairment losses included the following:
-
Goodwill impairment losses of $220 million ($220 million after-tax) for the three months and $444 million ($444 million after-tax) for the nine months ended September 24, 2022 and $265 million ($265 million after-tax) for the nine months ended September 25, 2021, which were recorded in SG&A;
-
Intangible asset impairment losses of $74 million ($55 million after-tax) for the three months and $469 million ($358 million after-tax) for the nine months ended September 24, 2022 and $78 million ($59 million after-tax) for the nine months ended September 25, 2021, which were recorded in SG&A; and
-
Property, plant and equipment, net asset impairment losses of $20 million ($15 million after-tax) for the three months and $86 million ($65 million after-tax) for the nine months ended September 24, 2022, which were recorded in cost of products sold.
(e) Gross expenses included in certain non-ordinary course legal and regulatory matters were $62 million ($62 million after-tax) for the nine months ended September 25, 2021 and were recorded in SG&A. These expenses related to an accrual in connection with the previously disclosed SEC investigation.
(f) Gross expenses/(income) included in losses/(gains) on sale of business were a tax benefit of $7 million for the three months and income of $1 million ($8 million after-tax) for the nine months ended September 24, 2022 and $76 million ($72 million after-tax) for the three months and $11 million (expenses of $280 million after-tax) for the nine months ended September 25, 2021 and were recorded in other expense/(income).
(g) Gross expenses/(income) included in other losses/(gains) related to acquisitions and divestitures were income of $38 million ($29 million after-tax) for the nine months ended September 24, 2022 and were recorded in other expense/(income).
(h) Gross expenses included in nonmonetary currency devaluation were $6 million ($6 million after-tax) for the three months and $16 million ($16 million after-tax) for the nine months ended September 24, 2022 and $4 million ($4 million after-tax) for the nine months ended September 25, 2021 and were recorded in other expense/(income).
(i) Gross expenses/(income) included in debt prepayment and extinguishment costs were income of $3 million ($9 million after-tax) for the three months and $12 million ($16 million after-tax) for the nine months ended September 24, 2022 and expenses of $147 million ($115 million after-tax) for the three months and $571 million ($450 million after-tax) for the nine months ended September 25, 2021 and were recorded in interest expense.
(j) Certain significant discrete income tax items were a benefit of $1 million for the three months and an expense of $235 million for the nine months ended September 25, 2021. This expense related to the revaluation of our deferred tax balances due to an increase in U.K. tax rates.
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