Item 1. Business.
On July 2, 2015, through a series of transactions, we consummated the merger of Kraft Foods Group, Inc. (“Kraft”) with and into a wholly-owned subsidiary of H.J. Heinz Holding Corporation (“Heinz”) (the “2015 Merger”). At the closing of the 2015 Merger, Heinz was renamed The Kraft Heinz Company, and H. J. Heinz Company changed its name to Kraft Heinz Foods Company.
Our trademarks are material to our business and are among our most valuable assets. Depending on the country, trademarks generally remain valid for as long as they are in use or their registration status is maintained. Trademark registrations generally are for renewable, fixed terms. Significant trademarks by segment based on net sales in 20192022 were:
We also own numerous patents worldwide. We consider our portfolio of patents, patent applications, patent licenses under patents owned by third parties, proprietary trade secrets, technology, know-how processes, and related intellectual property rights to be material to our operations. Patents, issued or applied for, cover inventions ranging from packaging techniques to processes relating to specific products and to the products themselves. While our patent portfolio is material to our business, the loss of one patent or a group of related patents would not have a material adverse effect on our business.
Our issued patents extend for varying periods according to the date of the patent application filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage as determined by the patent office or courts in the country, and the availability of legal remedies in the country.
We manufacture (and contract for the manufacture of) our products from a wide variety of raw materials. We purchase and use large quantities of commodities, including dairy products, meat products, coffee beans, nuts, tomatoes, potatoes, soybean and vegetable oils, tomatoes, coffee beans, sugar and other sweeteners, other fruits and vegetables, corn products, and wheat products, and potatoes, 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 to operatein the manufacturing and distribution of our facilities.products. For commodities that we use across many of our product categories, such as corrugated paper and energy, we coordinate sourcing requirements and centralize procurement to leverage our scale. In addition, some of our product lines and brands separately source raw materials that are specific to their operations. We source these commodities from a variety of providers, including large, international producers and smaller, local, independent sellers. Where appropriate, we seek to establish preferred purchaser status and have developed strategic partnerships with many of our suppliers with the objective of achieving favorable pricing and dependable supply for many of our commodities. The prices of raw materials that we use in our products are affected by external factors, such as global competition for resources, currency fluctuations, severe weather or global climate change, pandemics, geopolitical conflicts, consumer, industrial, or investment demand, and changes in governmental regulation and trade, tariffs, alternative energy, and agricultural programs. In 2022, we continued to experience higher commodity costs and supply chain costs, including procurement, logistics, and manufacturing costs, largely due to inflationary pressures. We expect these costs to continue to increase and inflation to remain elevated through 2023.
Our procurement teams monitor worldwide supply and cost trends so we can obtain ingredients and packaging needed for production at competitive prices. Although the prices of our principal raw materials can be expected to fluctuate, we believe there will be an adequate supply of the raw materials we use and that they are generally available from numerous sources. We use a range of hedging techniques in an effort to limit the impact of price fluctuations on many of our principal raw materials. However, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in specific raw material costs. We actively monitor changes to commodity costs so that we can seek to mitigate the effect through pricing and other operational measures.
Although crops constituting certain of our raw food ingredients are harvested on a seasonal basis, the majority of our products are produced throughout the year.
Seasonal factors inherent in our business change the demand for products, including holidays, changes in seasons, or other annual events. While these factors influence our quarterly net sales, operating income/(loss), and cash flows at the product level, unless the timing of such events shift period-over-period (e.g., a shift in Easter timing), this seasonality does not typically have a significant effect on our consolidated results of operations or segment results.
For information related to our cash flows provided by/(used for) operating activities, including working capital items, see Liquidity and Capital Resources in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.
Employees
We had approximately 37,000 employees as of December 28, 2019.
Government Regulation
The manufacture and sale of consumer food and beverage products is highly regulated. Our business operations, including the production, transportation, storage, distribution, sale, display, advertising, marketing, labeling, quality, and safety of our products and their ingredients, and our occupational safety, health, and privacy practices, are subject to various laws and regulations. These laws and regulations are administered by federal, state, and local government agencies in the United States, as well as government entities and agencies outside the United States in markets where our products are manufactured, distributed or sold. In the United States, our activities are subject to regulation by various federal government agencies, including the Food and Drug Administration, U.S. Department of Agriculture, Federal Trade Commission, Department of Labor, Department of Commerce, and Environmental Protection Agency, as well as various state and local agencies. We are also subject to numerous similar and other laws and regulations outside of the United States in markets where our products are manufactured, distributed, or sold, including but not limited to laws and regulations governing food safety, health and safety, anti-corruption, and data privacy. In our business dealings, we are also required to comply with the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act, the U.S. Trade Sanctions Reform and Export Enhancement Act, and various other anti-corruption regulations in the regions in which we operate. We rely on legal and operational compliance programs, as well as in-house and outside counsel, to guide our businesses in complying with applicable laws and regulations of the countries in which we do business.regulations. In addition, the United Kingdom's withdrawal from the European Union (commonly referred to as “Brexit”) and other regulatory regime changes may add cost and complexity to our compliance efforts.
Environmental RegulationRegulation:
Our activities throughout the world are highly regulated and subject to government oversight regarding environmental matters. Various laws concerning the handling, storage, and disposal of hazardous materials and the operation of facilities in environmentally sensitive locations may impact aspects of our operations.
In the United States, where a significant portion of our business operates, these laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). CERCLA imposes joint and several liability on each potentially responsible party. We are involved in a number of active proceedings in the United States under CERCLA (and other similar state actions under similar legislation) related to our current operations and certain closed, inactive, or divested operations for which we retain liability.
As of December 28, 2019,31, 2022, we had accrued an amount we deemed appropriate for environmental remediation. Based on information currently available, we believe that the ultimate resolution of existing environmental remediation actions and our general compliance in general with environmental laws and regulations will not have a material effect on our earnings or financial condition. However, it is difficult to predict with certainty the potential impact of future compliance efforts and environmental remedial actions and, thus, future costs associated with such matters may exceed current reserves.
We are driven by our Purpose, our Vision—To sustainably grow by delighting more consumers globally, and our Values—We are consumer obsessed, We dare to do better every day, We champion great people, We demand diversity, We do the right thing, and We own it. We recognize that a strong company culture is vital to our overall success. Our Purpose, Vision, and Values are the foundation upon which our culture is built. They represent the expectations we have for ourselves and the environment we aspire to create for our Company.
Our people are at the heart of who we are at Kraft Heinz. We drive growth through development opportunities, career ownership, and autonomy and recognize and reward outstanding performance at every level, creating a true spirit of meritocracy. We strive to channel our employees’ passion, curiosity, and attitude to make an impact on our future and our legacy by leading as learners, acting as owners, and being change agents. Our Board of Directors (“Board”), through the Human Capital and Compensation Committee, oversees our human resources strategy, key policies, and our 2025 diversity, inclusion, and belonging aspirations.
Engagement and Retention:
We are committed to attracting, developing, and retaining diverse, world-class talent and creating an engaging and inclusive culture that embodies our Purpose, Vision, and Values. As of December 31, 2022, Kraft Heinz had approximately 37,000 employees globally. Driven by our Value We champion great people, we support our employees’ health, safety, and professional development and reward outstanding performance at every level. Our compensation, benefits, recognition, and LiveWell programs are designed to attract and engage highly skilled talent, meet individual and family needs, and inspire, celebrate, and engage our people and teams through active listening channels.
Guided by our Values, we conduct a global engagement survey annually to provide employees with an opportunity to share anonymous feedback with management across a variety of topic areas. The results, and comments are reviewed by the Board, senior leadership, managers, and human resources to help determine where changes are needed to support our people and teams.
Wellbeing and Safety:
Our employees’ health, safety, and wellbeing are a top priority. We establish and administer company-wide policies and processes to protect the health, safety, and security of our employees, subcontractors, and all those who visit our facilities, and to comply with applicable regulations. We review and monitor our performance closely to drive continuous improvement. To help us evaluate how effective our safety efforts are in lowering incidents rates, we use a Total Recordable Incident Rate (“TRIR”). TRIR is a medical incident rate based on the U.S. Occupational Safety and Health Administration (OSHA) record-keeping criteria (injuries per 200,000 hours). Our TRIR globally was 0.53 in 2022 and 0.62 in 2021.
Our global LiveWell program addresses physical, emotional, financial, and social health and wellbeing. We champion the LiveWell program’s holistic approach to wellbeing with enhanced programs, including healthcare benefits, disability, and employee assistance initiatives.
Diversity, Equity, Inclusion, and Belonging:
We live our Value of We demand diversity by focusing on three strategic areas: hiring and growing talent from diverse backgrounds and perspectives, developing inclusive leaders, and tracking and reporting our progress. Our Global Inclusion Council has been established to create strategic accountability for results. It also provides governance and oversight of reporting on diversity efforts and initiatives. The Council is comprised of executive leaders and members of the Board. In 2021, we shared our 2025 diversity, inclusion, and belonging aspirations, which include that 50% of our global management positions be filled by women and 30% of our salaried U.S. employee population identify as people of color. As of December 31, 2022:
•41% of employees in management positions globally identified as women;
•28% of salaried employees in the U.S. identified as people of color;
•40% of our Executive Leadership Team identified as women; and
•80% of our Executive Leadership Team identified as people of color.
As we work to meet our 2025 aspirations, we are focused on:
•Hiring and Growing Talent from Diverse Backgrounds and Perspectives through expanded recruiting partnerships with Historically Black Colleges and Universities and training and leveraging artificial intelligence in our hiring process to reduce bias. In addition, our Business Resource Groups (BRGs) offer learning and development opportunities and create a network of support for employees.
•Developing Inclusive Leaders through an interactive learning experience for managers on interrupting bias in our Organizational People Review process and their role in creating an inclusive environment.
•Tracking and Reporting Our Progress year over year through oversight by the Kraft Heinz Global Inclusion Council.
Learning and Development:
Through Kraft Heinz Ownerversity, we provide learning and development offerings to employees via live and virtual learning experiences. These offerings enable employees to execute with excellence in their roles, accelerate their learning curves, and grow great careers through continuous learning. With Ownerversity’s targeted platforms, employees can focus on timely and topical development areas including leadership, management excellence, functional capabilities, and diversity, equity, inclusion, and belonging. In 2022, our global women’s accelerator program, The WE Network, won a Brandon Hall Gold Award for Best Advance in Leadership Development for Women.
Rewards and Compensation:
Our Total Rewards strategy is designed to provide an array of meaningful and flexible programs for our diverse workforce. Total Rewards includes compensation elements of salary and wages and incentives, healthcare, savings and insurance plans, wellbeing plans, employee recognition programs, and other voluntary elected benefits. We aim for global consistency while respecting local market practices. The plans are designed to be market competitive and data-driven to promote our high-performance and results-oriented culture and realize our Purpose to Make Life Delicious for employees and their families.
Ethics and Transparency:
The Kraft Heinz Ethics Helpline is available to our partners, suppliers, customers, and consumers to ask questions or report potential violations of various policies and ethical guidelines, including our Code of Conduct, Supplier Guiding Principles, and Global Human Rights Policy.
We report more detailed information regarding our programs and initiatives related to our people and human capital management in our Environmental Social Governance Report (“ESG Report”). Our 2022 ESG Report, which provides our progress through 2021, is available on our website at www.kraftheinzcompany.com/esg. The information on our website, including our ESG Report, is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the Securities and Exchange Commission (“SEC”).
Information about our Executive Officers
The following are our executive officers as of February 8, 2020:
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| Name and Title | | Age | | TitleBusiness Experience in the Past Five Years |
Miguel Patricio, Chief Executive Officer and Chair of the Board | | 5356 | | Chief Executive Officer (since June 2019); Chair of the Board (since May 2022); Director (May 2021 to May 2022); and U.S. Zone President (July 2019 to February 2020). Chief of Special Global Projects–Marketing (January 2019 to June 2019) and Chief Marketing Officer (2012 to December 2018) at Anheuser-Busch InBev SA/NV (“AB InBev”), a multinational drink and brewing holdings company. |
Paulo Basilio | | 45 | | Andre Maciel, Executive Vice President and Global Chief Financial Officer | | 48 | | Executive Vice President and Global Chief Financial Officer (since March 2022); Senior Vice President, U.S. Chief Financial Officer, and Head of Digital Transformation (September 2019 to March 2022); Managing Director, Continental Europe (January 2019 to August 2019); Chief Financial Officer, U.S. (2017 to January 2019); and Head of U.S. Commercial Finance (2015 to 2017). |
Carlos Abrams-Rivera, Executive Vice President and President, North America | | 5255 | | Executive Vice President and President, North America (since December 2021); and U.S. Zone President (February 2020 to December 2021). Executive Vice President and President, Campbell Snacks (May 2019 to February 2020), President, Campbell Snacks (March 2018 to May 2019), and President, Pepperidge Farm (2015 to March 2018) at Campbell Soup Company, a food and beverage company. |
Nina BartonKathy Krenger, Senior Vice President and Global Chief Communications Officer | | 4655 | | Senior Vice President (since December 2021) and Global Chief GrowthCommunications Officer (since July 2021). Senior Vice President, Global Communications (2017 to July 2021) at Hyatt Hotels Corporation, a global hospitality company. |
Bruno Keller | | 38 | | Zone President Canada |
Rashida La Lande, | | 46 | | SeniorExecutive Vice President, Global General Counsel, and Chief Sustainability and Corporate Affairs Officer | | 49 | | Executive Vice President, Global General Counsel, and Chief Sustainability and Corporate Affairs Officer (since December 2021); Corporate Secretary (since January 2018 to May 2022); Head of CSRESG (formerly CSR) and Government Affairs; Corporate SecretaryAffairs (October 2018 to December 2021); and Senior Vice President and Global General Counsel (January 2018 to December 2021). Partner (2007 to January 2018) at Gibson, Dunn & Crutcher LLP, a global law firm. |
Marcos Eloi Lima, Executive Vice President and Global Chief Procurement Officer | | 45 | | Executive Vice President (since December 2021) and Chief Procurement Officer (since October 2019); and Advisor in the area of procurement (July 2019 to October 2019). Vice President Procurement & Sustainability Middle Americas Zone (2016 to July 2019) at AB InBev. |
Rafael Oliveira, Executive Vice President and President, International Markets | | 4548 | | Executive Vice President and President, International Markets (since December 2021); International Zone President International(July 2019 to December 2021); Zone President of EMEA (2016 to June 2019); Managing Director of Kraft Heinz UK & Ireland (2016 to 2016); and President of Kraft Heinz Australia, New Zealand, and Papua New Guinea (2014 to 2016). |
FlavioFlávio Barros Torres, Executive Vice President and Global Chief Supply Chain Officer | | 5054 | | Executive Vice President and Global Chief Supply Chain Officer (since December 2021); and Head of Global Operations (January 2020 to December 2021). Vice President Supply Global (2017 to 2019) at AB InBev. |
Melissa Werneck, Executive Vice President and Global Chief People Officer | | 50 | | Executive Vice President (since December 2021) and Global Chief People Officer (since 2016); and Head of Global Human Resources, Performance and Information Technology (2015 to 2016). |
Yang Xu Senior Vice President, Global Head of Corporate Development; Global Treasurer | | 43 | | Senior Vice President, Global Head of Corporate Development, and Global Treasurer (since March 2022); Global Head of Treasury and M&A (April 2021 to March 2022); and Senior Vice President, Global Treasurer, and Head of Global Business Excellence (July 2020 to April 2021). Senior Director, Corporate Treasury and Risk Management at Whirlpool Corporation, a major home appliance company (2016 to April 2018). |
Miguel Patricio became Chief Executive Officer in June 2019. Mr. Patricio had previously served asChief of Special Global Projects-Marketing at Anheuser-Busch Inbev SA/NV (“AB InBev”), a multinational drink and brewing holdings company, from January 2019 to June 2019. Prior to that, he served as the Chief Marketing Officer at AB InBev since 2012. Prior to his role as Chief Marketing Officer, since joining AB InBev in 1998, he also served as Zone President Asia Pacific, Zone President North America, Vice President Marketing of North America, and Vice President Marketing. Mr. Patricio has also held several senior positions across the Americas at The Coca-Cola Company and Johnson & Johnson. Mr. Patricio also invests in the 3G Special Situation Fund III (the “Fund”); his investment represents less than 1% of the Fund’s assets.
Paulo Basilio became Global Chief Financial Officer in September 2019. Prior to that role, Mr. Basilio served as Chief Business Planning and Development Officer from July 2019 to September 2019 and served as President of the U.S. Commercial Business from October 2017 to June 2019. Mr. Basilio previously served as Executive Vice President and Chief Financial Officer upon the closing of the 2015 Merger until October 2017. He had previously served as Chief Financial Officer of Heinz since June 2013. Previously, Mr. Basilio served as Chief Executive Officer of América Latina Logística (“ALL”), a logistics company, from September 2010 to June 2012, after having served in various roles at ALL, including Chief Operating Officer and Chief Financial Officer. Mr. Basilio has also been a partner of 3G Capital since July 2012.
Carlos Abrams-Rivera joined Kraft Heinz as U.S. Zone President on February 3, 2020. Prior to joining Kraft Heinz, Mr. Abrams-Rivera served as Executive Vice President and President, Campbell Snacks of Campbell Soup Company (“Campbell”), a multinational food company, since May 2019. Prior to that role, Mr. Abrams-Rivera served as President, Campbell Snacks from 2018 to May 2019 and President of Campbell’s Pepperidge Farm subsidiary from 2015 to 2018. Prior to joining Campbell, Mr. Abrams-Rivera held various leadership roles at Mondelēz International and Kraft Foods.
Nina Barton became Chief Growth Officer in September 2019. Prior to assuming her current role, Ms. Barton served as Zone President of Canada and President of Digital Growth from January 2019 to August 2019. Prior to that role, Ms. Barton served as President, Global Digital and Online Growth since October 2017, and from July 2015 through October 2017, she served as Senior Vice President of Marketing, Innovation and Research & Development for the U.S. business. From July 2013 through July 2015, she served as Vice President, Marketing at Kraft Foods Group, Inc. and managed the total coffee portfolio including the Maxwell House, Gevalia, and McCafe brands. Ms. Barton joined Kraft Foods in 2011 as Senior Marketing Director responsible for growing the Philadelphia cream cheese brand. Prior to that, Ms. Barton served in a variety of marketing and brand-building roles in the consumer products industry.
Bruno Keller assumed his current role as Zone President of Canada in September 2019. Previously, Mr. Keller had served as Head of Category Development for Canada since June 2018. From April 2017 to June 2018, he served as Managing Director for South Europe, and from June 2015 to April 2017, he served as Managing Director of Italy. Mr. Keller joined Kraft Heinz in 2014 as Director of Trade Marketing and Revenue Management in Italy. Prior to joining Kraft Heinz, Mr. Keller held management roles at AB InBev, Philip Morris, Pepsico, and Unilever.
Rashida La Lande joined Kraft Heinz as Senior Vice President, Global General Counsel and Corporate Secretary in January 2018. In October 2018, Ms. La Lande’s responsibilities expanded to include leadership of our corporate social responsibility and government affairs functions, and she was later appointed Head of Corporate Social Responsibility and Government Affairs in addition to her role as Senior Vice President, Global General Counsel and Corporate Secretary. Prior to joining Kraft Heinz, Ms. La Lande was a partner at the law firm of Gibson, Dunn & Crutcher, where she practiced from October 2000 to January 2018, and where she advised clients with respect to mergers and acquisitions, leveraged buyouts, private equity deals, and joint ventures. Throughout Ms. La Lande’s career, she has advised companies and private equity sponsors in the consumer products, retail, financial services, and technology industries.
Rafael Oliveira assumed his current role as Zone President International in July 2019. Prior to that role, he served as Zone President of EMEA from October 2016 to June 2019 after serving as the Managing Director of Kraft Heinz UK & Ireland. Mr. Oliveira joined Kraft Heinz in July 2014 and served as President of Kraft Heinz Australia, New Zealand, and Papua New Guinea until September 2016. Prior to joining Kraft Heinz, Mr. Oliveira spent 17 years in the financial industry, the final 10 of which he held a variety of leadership positions with Goldman Sachs.
Flavio Torres joined Kraft Heinz as Head of Global Operations in January 2020. Prior to joining Kraft Heinz, Mr. Torres served as Global Operations VP of AB InBev, a multinational drink and brewing holdings company, from 2017 to 2019. Prior to that role, Mr. Torres served as Supply Chain VP at Ambev S.A., a subsidiary of AB InBev, from 2014 to 2016. Mr. Torres joined AB InBev in 1994 and served in positions of increasing responsibility during his tenure.
Available Information
Our website address is www.kraftheinzcompany.com. The information on our website is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the Securities and Exchange Commission (the “SEC”).SEC. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), are available free of charge on our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including Kraft Heinz, that are electronically filed with the SEC.
Item 1A. Risk Factors.
Our business is subject to various risks and uncertainties. In addition to the risks described elsewhere in this Annual Report on Form 10-K, any of the risks and uncertainties described below could materially adversely affect our business, financial condition, and results of operations and should be considered when evaluating Kraft Heinz. Although the risks are organized and described separately, many of the risks are interrelated. While we believe we have identified and discussed the material risks affecting our business below, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be material that may adversely affect our business, performance, or financial condition in the future.
Industry Risks
We operate in a highly competitive industry.
The food and beverage industry is highly competitive across all of our product offerings. Our principal competitors in these categories are manufacturers as well asand retailers with their own branded and private label products. We compete based on product innovation, price, product quality, nutritional value, service, taste, convenience, brand recognition and loyalty, effectiveness of marketing and distribution, promotional activity, and the ability to identify and satisfy changing consumer preferences.
We may need to reduce our prices, or be restricted or delayed in our ability to increase prices, in response to competitive, and customer, consumer, regulatory, or macroeconomic pressures, including pressures in relationrelated to private label products that are generally sold at lower prices. These pressures have restricted, and may in the future continue to restrict, our ability to increase prices in response to commodity and other cost increases.increases, including those related to inflationary pressures. Additionally, we expect that there could be a difference between the timing of when we take pricing actions and the impact of those beneficial actions on our results of operations. Failure to effectively assess, timely change, and properly set proper pricing, promotions, or trade incentives may negatively impact the achievement ofour ability to achieve our objectives.
The rapid emergence of new distribution channels, particularly e-commerce, may create consumer price deflation, affecting our retail customer relationships and presenting additional challenges to increasing prices in response to commodity or other cost increases.increases, including those related to inflationary pressures. We may also need to increase or reallocate spending on marketing, retail trade incentives, materials, advertising, and new product, platform, or channel innovation to maintain or increase market share. These expenditures are subject to risks, including uncertainties about trade and consumer acceptance of our efforts. If we are unable to compete effectively, our profitability, financial condition, and operating results may decline.
Our success depends on our ability to correctly predict, identify, and interpret changes in consumer preferences and demand, to offer new products to meet those changes, and to respond to competitive innovation.
Consumer preferences for food and beverage products change continually and rapidly. Our success depends on our ability to predict, identify, and interpret the tastes and dietary habits of consumers and to offer products that appeal to consumer preferences, including with respect to health and wellness. If we do not offer products that appeal to consumers, our sales and market share will decrease, which could materially and adversely affect our product sales, financial condition, and operating results.
Moreover, weak economic conditions, recessions, inflation, severe or unusual weather events, global or local pandemics, including COVID-19, as well as other factors, could affect consumer preferences and demand, at times, causing a strain on our supply chain due, in part, to retailers, distributors, or carriers modifying their restocking, fulfillment, or shipping practices. Failure to adequately respond to these changes could adversely affect our product sales, financial condition, and operating results.
We must distinguish between short-term trends and long-term changes in consumer preferences. If we do not accurately predict which shifts in consumer preferences will be long-term, or if we fail to introduce new and improved products to satisfy those preferences, our sales could decline. In addition, because of our varied consumer base, we must offer an array of products that satisfysatisfies a broad spectrum of consumer preferences. If we fail to expand our product offerings successfully across product categories or platforms, or if we do not rapidly develop products in faster-growing or more profitable categories, demand for our products could decrease, which could materially and adversely affect our product sales, financial condition, and operating results.
Prolonged negative perceptions concerning the health, environmental, or social implications of certain food and beverage products, (including as they relate to obesityingredients, or other health concerns)packaging materials could influence consumer preferences and acceptance of some of our products and marketing programs. Our ability to refine the ingredient and nutrition profiles of and packaging for our products as well as to maintain focus on ethical sourcing and supply chain management opportunities to address evolving consumer preferences are important to our growth. We strive to respond to consumer preferences and social expectations, but we may not be successful in our efforts. Continued negative perceptions and failure to satisfy consumer preferences could materially and adversely affect our product sales, financial condition, and operating results.
In addition, achievingour growth depends on our successful development, introduction, and marketing of innovative new products and line extensions. There are inherent risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance or potential impacts on our existing product offerings. We may be required to increase expenditures for new product development. Successful innovation depends on our ability to correctly anticipate customer and consumer acceptance, to obtain, protect, and maintain necessary intellectual property rights, and to avoid infringing upon the intellectual property rights of others. We must also be able to respond successfully to technological advances by and intellectual property rights of our competitors, and failure to do so could compromise our competitive position and impact our product sales, financial condition, and operating results.
Changes in the retail landscape or the loss of key retail customers could adversely affect our financial performance.
Retail customers, such as supermarkets, warehouse clubs, and food distributors in our major markets, may continue to consolidate, resulting in fewer but larger customers for our business across various channels. Consolidation also producesThese larger retail customers that may seek to leverage their positions to improve their profitability by demanding improved efficiency, lower pricing, more favorable terms, increased promotional programs, or specifically-tailoredspecifically tailored product offerings. In addition, larger retailers have scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own private label products. Retail consolidation and increasing retailer power could materially and adversely affect our product sales, financial condition, and operating results.
Retail consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance may have a corresponding material and adverse effect on us.us, which could be material. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease, or cancel purchases of our products, or delay or fail to pay us for previous purchases, which could materially and adversely affect our product sales, financial condition, and operating results.
In addition, technology-based systems, which give consumers the ability to shop through e-commerce websites and mobile commerce applications, are also significantly altering the retail landscape in many of our markets. If we are unable to adjust to developments in these changing landscapes, we may be disadvantaged in key channels and with certain consumers, which could materially and adversely affect our product sales, financial condition, and operating results.
Changes in our relationships with significant customers or suppliers, or in other business relationships, could adversely impact us.
We derive significant portions of our sales from certain significant customers (see Sales and Customers within Item 1, Business). There can be no assurance thatSome or all of our significant customers willmay not continue to purchase our products in the same mix or quantities or on the same terms as in the past, particularly as increasingly powerful retailers may demand lower pricing and focus on developing their own brands. The loss of a significant customer or a material reduction in sales or a change in the mix of products we sell to a significant customer could materially and adversely affect our product sales, financial condition, and operating results.
Disputes with significant suppliers, including disputes related to pricing or performance, could adversely affect our ability to supply products to our customers and could materially and adversely affect our product sales, financial condition, and operating results. In addition, terminations of relationships with other significant contractual counterparties, including licensors, could adversely affect our portfolio, product sales, financial condition, and operating results.
In addition, the financial condition of such customers, suppliers, and other significant contractual counterparties are affected in large part by conditions and events that are beyond our control. Significant deteriorations in the financial conditions of significant customers or suppliers, andor in other business relationships, could materially and adversely affect our product sales, financial condition, and operating results.
Maintaining, extending, and expanding our reputation and brand image are essential to our business success.
We have many iconic brands with long-standing consumer recognition across the globe. Our success depends on our ability to maintain brand image for our existing products, extend our brands to new platforms, and expand our brand image with new product offerings.
We seek to maintain, extend, and expand our brand image through marketing investments, including advertising and consumer promotions, and product innovation. Negative perceptions on the role of food and beverage marketing could adversely affect our brand image or lead to stricter regulations and scrutiny of our marketing practices. Moreover, adverse publicity about legal or regulatory action against us, our quality and safety, our environmental or social impacts, our other environmental, social, human capital, or governance practices, our products becoming unavailable to consumers, or our suppliers and, in some cases, our competitors, could damage our reputation and brand image, undermine our customers’ or consumers’ confidence, and reduce demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. Furthermore,
existing or increased legal or regulatory restrictions on our advertising, consumer promotions, and marketing, or our response to those restrictions, could limit our efforts to maintain, extend, and expand our brands.
In addition, our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. We increasingly rely on social media and online dissemination of advertising campaigns. The growing use of social and digital media increases the speed and extent that information, including misinformation, and opinions can be shared. Negative posts or comments about us, our brands or our products, or our suppliers and, in some cases, our competitors, on social or digital media, whether or not valid, could seriously damage our brands and reputation. In addition, we might fail to appropriately target our marketing efforts, anticipate consumer preferences, or invest sufficiently in maintaining, extending, and expanding our brand image. If we do not maintain, extend, and expand our reputation or brand image, then our product sales, financial condition, and operating results could be materially and adversely affected.
We must leverage our brand value to compete against private label products.
In nearly all of our product categories, we compete with branded products as well as private label products, which are typically sold at lower prices. Our products must provide higher value and/or quality to our consumers than alternatives, particularly during periods of economic uncertainty.uncertainty or weakness or inflation. Consumers may not buy our products if relative differences in value and/or quality between our products and private label products change in favor of competitors’ products or if consumers perceive this type ofsuch a change. If consumers prefer private label products, then we could lose market share or sales volumesvolume, or shift our product mix could shift to lower margin offerings. A change in consumer preferences could also cause us to increase capital, marketing, and other expenditures, which could materially and adversely affect our product sales, financial condition, and operating results.
We may be unable to drive revenue growth in our key product categories or platforms, increase our market share, or add products that are in faster-growing and more profitable categories.
Our future results will depend on our ability to drive revenue growth in our key product categories andor platforms as well as growth in the food and beverage industry in the countriesgeographies in which we operate. Our future results will also depend on our ability to enhance our portfolio by adding innovative new products in faster-growing and more profitable categories or platforms and our ability to increase market share in our existing product categories.categories or platforms. Our failure to drive revenue growth, limit market share decreases in our key product categories or platforms, or develop innovative products for new and existing categories or platforms could materially and adversely affect our product sales, financial condition, and operating results.
Product recalls or other product liability claims could materially and adversely affect us.
Selling products for human consumption involves inherent legal and other risks, including product contamination, spoilage, product tampering, allergens, or other adulteration. We have decided and could in the future decide to, and have been or could in the future be required to, recall products due to suspected or confirmed product contamination, adulteration, product mislabeling or misbranding, tampering, undeclared allergens, or other deficiencies. Product recalls or market withdrawals could result in significant losses due to their costs, the destruction of product inventory, and lost sales due to the unavailability of the product for a period of time.
We could also be adversely affected if consumers lose confidence in the safety and quality of certainour food products or ingredients, or the food safety system generally. Adverse attention about these types of concerns, whether or not valid, may damage our reputation, discourage consumers from buying our products, or cause production and delivery disruptions that could negatively impact our net sales and financial condition.
We may also suffer losses if our products or operations violate applicable laws or regulations or if our products cause injury, illness, or death. In addition, our marketing could face claims of false or deceptive advertising or other criticism. A significant product liability or other legal judgment or a related regulatory enforcement action against us, or a significant product recall, may materially and adversely affect our reputation and profitability. Moreover, even if a product liability or fraud claim is unsuccessful, has no merit, or is not pursued to conclusion, the negative publicity surrounding assertions against our products or processes could materially and adversely affect our product sales, financial condition, and operating results.
Unanticipated business disruptions could adversely affect our ability to provide our products to our customers.
WeClimate change and legal or regulatory responses may have a complex networklong-term adverse impact on our business and results of suppliers, ownedoperations.
Global average temperatures are gradually increasing due to increased concentration of carbon dioxide and leased manufacturing locations, co-manufacturing locations, distribution networks,other greenhouse gases in the atmosphere, which is projected to contribute to significant changes in weather patterns around the globe, an increase in the frequency and information systems that support our ability to consistently provide our products to our customers. Factors that are hard to predict or beyond our control, such as weather, raw material shortages,severity of natural disasters, fires or explosions, political unrest, terrorism, generalized labor unrest, or health pandemics, such as the new coronavirus that originatedand changes in China, could damage or disrupt our operations or our suppliers’, co-manufacturers’ or distributors’ operations. These disruptionsagricultural productivity. Increasing concern over climate change may require additional resources to restore our supply chain or distribution network. If we cannot respond to disruptions in our operations, whether by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or if we are unable to quickly repair damage to our information, production, or supply systems, we may be late in delivering, or be unable to deliver, products to our customers and may also be unable to track orders, inventory, receivables, and payables. If that occurs, our customers’ confidence in us and long-termadversely impact demand for our products, or increase our operating costs, due to changes in consumer preferences that cause consumers to switch away from products or ingredients considered to have a high climate change impact.
Increased natural disasters and decreased agricultural productivity in certain regions of the world as a result of changing weather patterns may limit the availability or increase the cost of natural resources and commodities, including dairy products, meat products, soybean and vegetable oils, tomatoes, coffee beans, sugar and other sweeteners, other fruits and vegetables, corn products, wheat products, and potatoes, to manufacture our products, and could decline. Any of these eventsfurther decrease food security for communities around the world. Climate change, and its environmental impacts, could materially and adverselyalso affect our product sales, financial condition,ability, and our suppliers’ ability, to procure necessary commodities at costs and in quantities we currently experience and may require us to increase costs or make additional unplanned capital expenditures. Further, an increase in the frequency and severity of natural disasters could result in disruptions for us, our customers, suppliers, vendors, co-manufacturers, and distributors and impact our employees’ abilities to commute or work from home effectively. These disruptions could make it more difficult and costly for us to deliver our products, obtain raw materials or other supplies through our supply chain, maintain or resume operations, or perform other critical corporate functions, could reduce customer demand for our products, and could increase the cost of insurance.
Additionally, there is an increased focus by foreign, federal, state, and local regulatory and legislative bodies regarding environmental policies relating to climate change, regulating greenhouse gas emissions (including carbon pricing or a carbon tax), energy policies, disclosure obligations, and sustainability. Increased energy or compliance costs and expenses due to the impacts of climate change, as well as additional legal or regulatory requirements regarding climate change designed to reduce or mitigate the effects of carbon dioxide and other greenhouse gas emissions on the environment could be costly and may cause disruptions in, or an increase in the costs associated with, the running of our manufacturing and processing facilities and our business, as well as increase distribution and supply chain costs. Moreover, compliance with any such legal or regulatory requirements may require us to make significant changes to our business operations and long-term operating results.plans, which will likely incur substantial time, attention, and costs. Even if we make changes to align ourselves with such legal or regulatory requirements, we may still be subject to significant penalties if such laws and regulations are interpreted and applied in a manner inconsistent with our practices. The effects of climate change and legal or regulatory initiatives to address climate change could have a long-term adverse impact on our business and results of operations.
Finally, we might fail to effectively address increased attention from the media, stockholders, activists, and other stakeholders on climate change and related environmental sustainability matters. Such failure, or the perception that we have failed to act responsibly with respect to such matters or to effectively respond to new or additional regulatory requirements regarding climate change, whether or not valid, could result in adverse publicity and negatively affect our business and reputation. Additionally, from time to time we establish and publicly announce environmental, social, and governance goals, commitments, and aspirations, including to reduce our impact on the environment. Our ability to achieve any stated goal, target, or objective is subject to numerous factors and conditions, many of which are outside of our control. Examples of such factors include evolving regulatory requirements affecting sustainability standards or disclosures or imposing different requirements, the pace of changes in technology, the availability of requisite financing, and the availability of suppliers that can meet our sustainability and other standards. Furthermore, standards for tracking and reporting such matters continue to evolve. Our selection of voluntary disclosure frameworks and standards, and the interpretation or application of those frameworks and standards, may change from time to time or differ from those of others. Methodologies for reporting this data may be updated and previously reported data may be adjusted to reflect improvement in availability and quality of third-party data, changing assumptions, changes in the nature and scope of our operations, and other changes in circumstances. Our processes and controls for reporting sustainability and other matters across our operations and supply chain are evolving along with multiple disparate standards for identifying, measuring, and reporting sustainability metrics, including sustainability-related disclosures that may be required by the SEC and European and other regulators, and such standards may change over time, which could result in significant revisions to our current goals, reported progress in achieving such goals, or ability to achieve such goals in the future. If we fail to achieve, or are perceived to have failed or been delayed in achieving, or improperly report on our progress toward achieving these goals and commitments, it could negatively affect consumer preference for our products or investor confidence in our stock, as well as expose us to government enforcement actions and private litigation.
Business Risks
We may not successfully identify, complete, or realize the benefits from strategic acquisitions, divestitures, alliances, divestitures, joint ventures, or other investments.
From time to time, we have evaluated and may continue to evaluate acquisition candidates, alliances, joint ventures, or other investments that may strategically fit our business objectives, and, as a result of some of these evaluations, we have acquired businesses or assets that we deem to be a strategic fit. We have also divested and may consider divesting businesses that do not meet our strategic objectives or growth or profitability targets. These activities may present financial, managerial, and operational risks including, but not limited to, diversion of management’s attention from existing core businesses; difficulties in integrating, or inability to successfully integrate, acquired businesses, difficultiesincluding integrating or separating personnel and financial and other systems,systems; inability to effectively and immediately implement control environment processes across a diverse employee population,population; adverse effects on existing or acquired customer and supplier business relationships,relationships; and potential disputes with buyers, sellers, or partners. Activities in such areas are regulated by numerous antitrust and competition laws in the United States, Canada, the European Union, the United Kingdom, and other jurisdictions,elsewhere. We have in the past and we may in the future be required to obtain the approval of these transactions by competition authorities as well asor to satisfy other legal requirements.requirements, and we may be unable to obtain such approvals or satisfy such requirements, each of which may result in additional costs, time delays, or our inability to complete such transactions, which could materially and adversely affect our financial condition and operating results.
To the extent we undertake acquisitions, alliances, joint ventures, investments, or other developments outside our core regions or in new geographies or categories, we may face additional risks related to such developments. For example, risks related to foreign operations include compliance with U.S. laws affectingare discussed below under the risk factor titled “Our international operations outside of the United States, such as the FCPA, currency rate fluctuations, compliance with foreign regulationssubject us to additional risks and laws, including tax laws,costs and exposuremay cause our profitability to politically and economically volatile developing markets. Any of these factors could materially and adversely affect our product sales, financial condition, and operating results.decline.”
To the extent we undertake divestitures, we may face additional risks related to such activity.activities. For example, risks related to our ability to find appropriate buyers, to execute transactions on favorable terms, to separate divested businesses frombusiness operations with minimal impact to our remaining operations, and to effectively manage any transitional service arrangements. Further, our divestiture activities have in the past required, and may in the future require, us to recognize impairment charges. Any of these factors could materially and adversely affect our financial condition and operating results.
We may not be able to successfully execute our strategic initiatives.
We plan to continue to conduct strategic initiatives in various markets. Consumer demands, behaviors, tastes, and purchasing trends may differ in these markets and, as a result, our sales strategies may not be successful and our product sales may not meet expectations, or the margins on those sales may be less than currently anticipated. We may also face difficulties integrating new business operations with our current sourcing, distribution, information technology systems, and other operations. Additionally, we may not successfully complete any planned strategic initiatives, including achieving any previously announced productivity efficiencies and financial targets, any new business may not be profitable or meet our expectations, or any divestiture may not be completed without disruption. Any of these challenges could hinder our success in new markets or new distribution channels, which could adversely affect our results of operations and financial condition.
Our international operations subject us to additional risks and costs and may cause our profitability to decline.
We are a global company with sales and operations in numerous countries within developed and emerging markets. Approximately 30% of our 2022 net sales were generated outside of the United States. As a result, we are subject to risks inherent in global operations. These risks, which can vary substantially by market, are described in many of the risk factors discussed in this section, and also include:
•compliance with U.S. laws affecting operations outside of the United States, including anti-bribery and corruption laws such as the FCPA;
•changes in the mix of earnings in countries with differing statutory tax rates, the valuation of deferred tax assets and liabilities, tax laws or their interpretations, or tax audit implications;
•the imposition of increased or new tariffs, quotas, trade barriers, or similar restrictions on our sales or imports, trade agreements, regulations, taxes, or policies that might negatively affect our sales or costs;
•foreign currency devaluations or fluctuations in foreign currency values, including risks arising from the significant and rapid fluctuations in foreign currency exchange markets and the decisions made and positions taken to hedge such volatility;
•compliance with antitrust and competition laws, data privacy laws, human rights laws, and a variety of other local, national, and multi-national regulations and laws in multiple jurisdictions;
•discriminatory or conflicting fiscal policies in or across foreign jurisdictions;
•changes in capital controls, including foreign currency exchange controls, governmental foreign currency policies, or other limits on our ability to import raw materials or finished product into various countries or repatriate cash from outside the United States;
•challenges associated with cross-border product distribution, including economic sanctions, export controls, and labor restrictions;
•changes in local regulations and laws, the uncertainty of enforcement of remedies in foreign jurisdictions, and foreign ownership restrictions and the potential for nationalization or expropriation of property or other resources;
•risks and costs associated with political and economic instability, military conflict, corruption, anti-American sentiment, and social and ethnic unrest in the countries in which we operate;
•the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation, application, and enforceability of laws and regulations and the enforceability of contract rights and intellectual property rights;
•changing labor conditions and difficulties in staffing our operations;
•greater risk of uncollectible accounts or trade receivables and longer collection cycles; and
•design, implementation, and use of effective control environment processes across our various operations and employee base.
Slow economic growth or high unemployment in the markets in which we operate could constrain consumer spending, and declining consumer purchasing power could adversely impact our profitability. Any of these factors could result in increased costs or decreased sales, and could materially and adversely affect our product sales, financial condition, and results of operations.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
We consider our intellectual property rights, particularly and most notably our trademarks, but also our patents, trade secrets, trade dress, copyrights, and licensing agreements, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, trade secret, and trade dress laws, as well as licensing agreements, third-party nondisclosure and assignment agreements, policing of third-party misuses of our intellectual property, and securing our information technology systems. Our failure to develop or adequately protect our trademarks, products, new features of our products, or our technology, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially and adversely affect our product sales, business, and financial condition. We also license certain intellectual property, most notably trademarks, from third parties. To the extent that we are not able to contract with these third parties on favorable terms or maintain our relationships with these third parties, our rights to use certain intellectual property could be impacted, which may adversely impact our results from operations.
We may be unaware of intellectual property rights of others that may cover some of our technology, brands, or products. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Third-party claims of intellectual property infringement might also require us to enter into costly license agreements. We also may be subject to significant damages or injunctions against development and sale of certain products.
We may be unable to realize the anticipated benefits from prior or future streamlining actions to reduce fixed costs, simplify or improve processes, andor improve our competitiveness.
We have implemented a number of cost savings initiatives, including our multi-year program announced following the 2015 Merger,development of an operations center and strategic long-term collaboration with suppliers, that we believe are important to position our business for future success and growth. We have evaluated and continue to evaluate changes to our organizational structure and operations to enable us to reduce costs, simplify or improve processes, and improve our competitiveness. Our future success may depend upon our ability to realize the benefits of these or other cost savingscost-saving initiatives. In addition, certain of our initiatives may lead to increased costs in other aspects of our business such as increased conversion, outsourcing, or distribution costs. We must accurately predict costs and be efficient in executing any plans to achieve cost savings and operate efficiently in the highly competitive food and beverage industry, particularly in an environment of increased competitive activity.competition. To capitalize on our efforts, we must carefully evaluate investments in our business and execute in those areas with the most potential return on investment. If we are unable to realize the anticipated benefits from any cost-saving efforts, we could be cost disadvantaged in the marketplace, and our competitiveness, production, profitability, financial condition, and operating results could be adversely affected.
Berkshire Hathaway has the ability to exert influence over us and significant influence over matters requiring stockholder approval.
As of December 31, 2022, Berkshire Hathaway owns approximately 26.6% of our common stock. Three members of our Board are officers and/or directors of Berkshire Hathaway or its affiliates. As a result, Berkshire Hathaway has the potential to exercise influence over management and Board decisions, including those affecting our capital structure, such as the issuance of additional capital stock, the incurrence of additional indebtedness, the implementation of stock repurchase programs, and the declaration and amount of dividends. Berkshire Hathaway also has influence over any action requiring the approval of the holders of our common stock, including adopting any amendments to our charter, electing directors, and approving mergers or sales of substantially all of our capital stock or assets. In addition, Berkshire Hathaway is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Berkshire Hathaway may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those opportunities may not be available to us.
Financial Risks
Our level of indebtedness, as well as our ability to comply with covenants under our debt instruments, could adversely affect our business and financial condition.
We have a substantial amount of indebtedness and are permitted to incur a substantial amount of additional indebtedness, including secured debt. Our existing debt, together with any incurrence of additional indebtedness, could have important consequences, including, but not limited to:
•increasing our vulnerability to general adverse economic and industry conditions;
•limiting our ability to obtain additional financing for working capital, capital expenditures, research and development, debt service requirements, acquisitions, and general corporate or other purposes;
•resulting in a downgrade to our credit rating, which could adversely affect our cost of funds, including our commercial paper programs, liquidity, and access to capital markets;
•restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•limiting our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors who are not as highly leveraged;
•making it more difficult for us to make payments on our existing indebtedness;
•requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, payments of dividends, capital expenditures, and future business opportunities;
•exposing us to risks related to fluctuations in foreign currency, as we earn profits in a variety of foreign currencies and the majority of our debt is denominated in U.S. dollars; and
•in the case of any additional indebtedness, exacerbating the risks associated with our substantial financial leverage.
In addition, we may not generate sufficient cash flow from operations or future debt or equity financings may not be available to us to enable us to pay our indebtedness or to fund other needs. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to successfully executerefinance any of our strategic initiatives.indebtedness on favorable terms, or at all. Any inability to generate sufficient cash flow or to refinance our indebtedness on favorable terms could have a material adverse effect on our financial condition.
Our debt instruments contain customary representations, warranties, and covenants, including a financial covenant in our senior unsecured revolving credit facility (the “Senior Credit Facility”) to maintain a minimum shareholders’ equity (excluding accumulated other comprehensive income/(losses)). The creditors who hold our debt could accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt. If our operating performance declines, or if we are unable to comply with any covenant, such as our ability to timely prepare and file our periodic reports with the SEC, we have in the past needed and may in the future need to obtain waivers from the required creditors under our debt instruments to avoid being in default.
If we breach any covenants under our debt instruments and seek a waiver, we may not be able to obtain a waiver from the required creditors, or we may not be able to remedy compliance within the terms of any waivers approved by the required creditors. If this occurs, we would be in default under our debt instruments and unable to access our Senior Credit Facility. In addition, certain creditors could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
Additional impairments of the carrying amounts of goodwill or other indefinite-lived intangible assets could negatively affect our financial condition and results of operations.
As of December 31, 2022, we maintain 11 reporting units, seven of which comprise our goodwill balance. Our indefinite-lived intangible asset balance primarily consists of a number of individual brands. We plantest our reporting units and brands for impairment annually as of the first day of our third quarter, 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 continuea 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 conduct strategic initiativesexceed the associated carrying amount of goodwill.
Fair value determinations require considerable judgment and are sensitive to changes in various markets. Consumer demands, behaviors, tastesunderlying assumptions, estimates, and purchasing trends may differmarket 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 these marketsrelation 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, which could negatively affect our operating results or net worth. Furthermore, changes in reporting units, including as a result of integrating a new acquisition into an existing reporting unit that has a fair value below carrying amount of goodwill, have led, and could in the future lead, to an impairment of goodwill. Additionally, any decisions to divest certain non-strategic assets has led, and could in the future lead, to goodwill or intangible asset impairments.
Reporting units and brands that have 20% or less excess fair value over carrying amount as of the annual impairment test we performed as of June 26, 2022 (the “Q3 2022 Annual Impairment Test”) 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 after impairment of $16.4 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). 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 value of $19.4 billion, have more than 50% excess fair value over carrying amount as of the Q3 2022 Annual Impairment Test, these amounts are also associated with the 2013 Heinz Acquisition and the 2015 Merger and were initially recorded at the time of acquisition on our 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 net sales and net income may be exposed to foreign exchange rate fluctuations.
We derive a substantial portion of our net sales from international markets. We hold assets, incur liabilities, earn revenue, and pay expenses in a variety of currencies other than the U.S. dollar, primarily the Canadian dollar, euro, British pound sterling, Australian dollar, Brazilian real, Chinese renminbi, Indonesian rupiah, Russian ruble, and New Zealand dollar. Since our consolidated financial statements are reported in U.S. dollars, fluctuations in foreign currency exchange rates from period to period, which have been more volatile recently, will have an impact on our reported results. We have implemented foreign currency hedges intended to reduce our exposure to changes in foreign currency exchange rates. However, these hedging strategies may not be successful, and any of our unhedged foreign exchange exposures will continue to be subject to market fluctuations. In addition, in certain circumstances, we may incur costs in one currency related to services or meet expectations, or the margins on those sales may be less than currently anticipated. We may also face difficulties integrating new business operationsproducts for which we are paid in a different currency. As a result, factors associated with our current sourcing, distribution, information technology systems, and other operations. Any of these challengesinternational operations, including changes in foreign currency exchange rates, could hinder our success in new markets or new distribution channels. We may also face difficulties divesting business operations with minimal impact to the retained businesses. There can be no assurance that we will successfully complete any planned strategic initiatives, that any new business will be profitable or meet our expectations, or that any divestiture will be completed without disruption, which could adverselysignificantly affect our results of operations and financial condition.
Commodity, energy, and other input prices are volatile and could negatively affect our consolidated operating results.
We purchase and use large quantities of commodities, including dairy products, meat products, soybean and vegetable oils, tomatoes, coffee beans, sugar and other sweeteners, other fruits and vegetables, corn products, wheat products, and potatoes, 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 other inputs, such as electricity, natural gas, and water, to operate our facilities. We are also exposed to changes in oil prices, including diesel fuel, which influence both our packaging and transportation costs. Prices for commodities, energy, and other supplies are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, inflationary pressure, foreign currency fluctuations, severe weather, natural disasters, global climate change, water risk, pandemics, crop failures, crop shortages due to plant disease or insect and other pest infestation, consumer, industrial, or investment demand, and changes in governmental regulation and trade, tariffs, alternative energy, including increased demand for biofuels, and agricultural programs. Additionally, we may be unable to maintain favorable arrangements with respect to the costs of procuring raw materials, packaging, services, and transporting products, which could result in increased expenses and negatively affect our operations. Furthermore, the cost of raw materials and finished products may fluctuate due to changes in cross-currency transaction rates. In addition, disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine have caused, and could continue to cause, increased volatility of commodity and energy costs. Rising commodity, energy, and other input costs could materially and adversely affect our cost of operations, subjectincluding the manufacture, transportation, and distribution of our products, which could materially and adversely affect our financial condition and operating results.
Although we monitor our exposure to commodity and other input prices as an integral part of our overall risk management program, and seek to hedge against input price increases to the extent we deem appropriate, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in specific raw materials costs. For example, hedging our costs for one of our key commodities, dairy products, is difficult because dairy futures markets are not as liquid as many other commodities futures markets. Continued volatility or sustained increases in the prices of commodities and other supplies we purchase could increase the costs of our products, and our profitability could suffer. Moreover, increases in the prices of our products to additional riskscover these increased costs may result in lower sales volumes, or we may be constrained from increasing the prices of our products by competitive and consumer pressures. If we are not successful in our hedging activities, or if we are unable to price our products to cover increased costs, then commodity and other input price volatility or increases could materially and adversely affect our financial condition and operating results.
In 2022, we continued to experience higher commodity costs and supply chain costs, including procurement, logistics, and manufacturing costs, largely due to inflationary pressures. We expect these costs to continue to increase and inflation to remain elevated through 2023. Although we take measures to mitigate the impact of this inflation through pricing actions and efficiency gains, if these measures are not effective our financial condition, operating results, and cash flows could be materially adversely affected. Even if such measures are effective, we expect that there could 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.
Volatility in the market value of all or a portion of the derivatives we use to manage exposures to fluctuations in commodity prices may cause volatility in our profitability to decline.gross profit and net income.
We are a global company with salesuse commodity futures, options, and operations in numerous countries within developedswaps to economically hedge the price of certain input costs, including dairy products, vegetable oils, coffee beans, wheat products, corn products, sugar, meat products, and emerging markets. Approximately 29% of our 2019 net sales were generated outside of the United States. As a result, we are subject to risks inherent in global operations. These risks, which can vary substantially by market, are described in many of the risk factors discussed in this sectioncocoa products. We recognize gains and also include:
compliance with U.S. laws affecting operations outside of the United States, including anti-bribery laws such as the FCPA;
losses based on changes in the mixvalues of earningsthese commodity derivatives. We recognize these gains and losses in countries with differing statutory tax rates,cost of products sold in our consolidated statements of income to the extent we utilize the underlying input in our manufacturing process. We recognize the unrealized gains and losses on these commodity derivatives in general corporate expenses until realized; once realized, the gains and losses are recorded in the applicable segment’s operating results. Accordingly, changes in the valuationvalues of deferred tax assetsour commodity derivatives may cause volatility in our gross profit and liabilities, changes in tax laws or their interpretations, or tax audit implications;net income.
the imposition of increased or new tariffs, quotas, trade barriers, or similar restrictions on our sales or imports, trade agreements, regulations, taxes, or policies that might negatively affect our sales or costs;
currency devaluations or fluctuations in currency values;Regulatory Risks
Our compliance with antitrust and competition laws, data privacy laws, and a variety of other local, national, and multi-national regulations and laws in multiple jurisdictions;
discriminatory or conflicting fiscal policies in or across foreign jurisdictions;
changes in capital controls, including currency exchange controls, government currency policies, or other limits on our ability to import raw materials or finished product into various countries or repatriate cash from outside the United States;
challenges associated with cross-border product distribution;
changes in local regulations and laws, the uncertainty of enforcement of remedies in foreign jurisdictions, and foreign ownership restrictions and the potential for nationalization or expropriation of property or other resources;
risks and costs associated with political and economic instability, corruption, anti-American sentiment, and social and ethnic unrest in the countries in which we operate;
the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation, application, and enforceability of laws and regulations, and the enforceability of contract rightsrelated legal claims or regulatory enforcement actions, could expose us to significant liabilities and damage our reputation.
As a large, global food and beverage company, we operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Various laws and regulations govern our practices including, but not limited to, those related to advertising and marketing, product claims and labeling, food production, environmental matters (including climate change), intellectual property, rights;consumer protection and product liability, commercial disputes, trade and export controls, anti-trust, data privacy, labor and employment, workplace health and safety, and tax. As a consequence, we face a heightened risk of legal claims and regulatory enforcement actions in the ordinary course of business. In addition, the imposition of new laws, changes in laws or regulatory requirements or changing interpretations thereof, and differing or competing regulations and standards across the markets where our products are made, manufactured, distributed, and sold have in the past and could continue to result in higher compliance costs, capital expenditures, and higher production costs, adversely impacting our product sales, financial condition, and results of operations. Furthermore, actions we have taken or may take, or decisions we have made or may make, in response to pandemics (including the COVID-19 pandemic), may result in investigations, legal claims, or litigation against us. In addition, claims about the health impacts of consumption of our products, or ingredients, components, or substances present or allegedly present in those products or packaging, have resulted in, and could in the future result in, us being subject to regulations, fines, lawsuits, or taxes that could adversely impact our business.
risks arisingAs a result of any such legal claims or regulatory enforcement actions, we could be subject to monetary judgments, settlements, and civil and criminal actions, including fines, injunctions, product recalls, penalties, disgorgement of profits, or activity restrictions, which could materially and adversely affect our reputation, product sales, financial condition, results of operations, and cash flows. We evaluate these legal claims and regulatory enforcement actions to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and disclose relevant material litigation claims, legal proceedings, or regulatory enforcement actions as appropriate and in accordance with SEC rules and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Our assessments and estimates are based on the information available to management at the time and involve a significant amount of judgment. Actual outcomes or losses may differ materially from our current assessments and estimates. In addition, even if a claim is unsuccessful, without merit, or not pursued to completion, the cost of defending against or responding to such a claim, including expenses and management time, could adversely affect our financial condition and operating results.
If we fail to maintain an effective system of internal controls, we may not be able to accurately and timely report our financial results, which could negatively impact our business, investor confidence, and the price of our common stock.
If we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process, and report financial information accurately and to prepare financial statements within required time periods could be adversely affected, which could subject us to litigation, investigations, or penalties; negatively affect our liquidity, our access to capital markets, perceptions of our creditworthiness, our ability to complete acquisitions, our ability to maintain compliance with covenants under our debt instruments or derivative arrangements regarding the timely filing of periodic reports, or investor confidence in our financial reporting; or cause defaults, accelerations, or cross-accelerations under our debt instruments or derivative arrangements to the extent we are unable to obtain waivers from the significantrequired creditors or counterparties or to cure any breaches, any of which may require management resources or cause our stock price to decline.
A downgrade in our credit rating could adversely impact interest costs or access to future borrowings.
Our borrowing costs can be affected by short and rapid fluctuationslong-term credit ratings assigned by rating organizations. A decrease in currency exchangethese credit ratings could limit our access to capital markets and increase our borrowing costs, which could materially and adversely affect our financial condition and operating results. In February 2020, Moody’s Investor Services, Inc. (“Moody’s”) affirmed our long-term credit rating of Baa3 with a negative outlook and Fitch Ratings (“Fitch”) and S&P Global Ratings (“S&P”) downgraded our long-term credit rating from BBB- to BB+ with a stable outlook from Fitch and a negative outlook from S&P. The downgrades by Fitch and S&P adversely affected our ability to access the decisionscommercial paper market. These downgrades did not constitute a default or event of default under our debt instruments. Our long-term credit rating was upgraded from BB+ to BBB- by S&P in March 2022 and by Fitch in May 2022. Fitch upgraded our long-term debt credit rating from BBB- to BBB in November 2022. As of the date of this filing, our long-term debt is rated BBB- by S&P, BBB by Fitch and Baa3 by Moody’s, with a positive outlook from S&P and a stable outlook from Fitch and Moody’s.
Registered Securities Risks
Sales of our common stock in the public market could cause volatility in the price of our common stock or cause the share price to fall.
Sales of a substantial number of shares of our common stock in the public market, including sales of our common stock by Berkshire Hathaway, or the perception that these sales might occur, could depress the market price of our common stock, and could impair our ability to raise capital through the sale of additional equity securities. A sustained depression in the market price of our common stock has happened and could in the future happen, which could also reduce our market capitalization below the book value of net assets, which could increase the likelihood of recognizing goodwill or indefinite-lived intangible asset impairment losses that could negatively affect our financial condition and results of operations.
Kraft Heinz, 3G Global Food Holdings, and Berkshire Hathaway entered into a registration rights agreement requiring us to register for resale under the Securities Act all registrable shares held by 3G Capital and Berkshire Hathaway, which represents all shares of our common stock held by Berkshire Hathaway and 3G Capital as of the date of the closing of the 2015 Merger. As of December 31, 2022, registrable shares represented approximately 34.5% of all outstanding shares of our common stock. Although the registrable shares are subject to certain holdback and suspension periods, the registrable shares are not subject to a “lock-up” or similar restriction under the registration rights agreement. Accordingly, offers and sales of a large number of registrable shares may be made pursuant to an effective registration statement under the Securities Act in accordance with the terms of the registration rights agreement. Sales of our common stock by Berkshire Hathaway to other persons would likely result in an increase in the number of shares being traded in the public market and positions takenmay increase the volatility of the price of our common stock.
Our ability to hedgepay regular dividends to our stockholders and the amounts of any such volatility;dividends are subject to the discretion of the Board and may be limited by our financial condition, debt agreements, or limitations under Delaware law.
changing laborAlthough it is currently anticipated that we will continue to pay regular quarterly dividends, any such determination to pay dividends and the amounts thereof will be at the discretion of the Board and will be dependent on then-existing conditions, including our financial condition, income, legal requirements, including limitations under Delaware law, debt agreements, and difficultiesother factors the Board deems relevant. The Board has previously decided, and may in staffingthe future decide, in its sole discretion, to change the amount or frequency of dividends or discontinue the payment of dividends entirely. For these reasons, stockholders will not be able to rely on dividends to receive a return on investment. Accordingly, realization of any gain on shares of our operations;common stock may depend on the appreciation of the price of our common stock, which may not occur.
greater riskGeneral Risk Factors
Disruptions in the global economy caused by geopolitical conflicts, including the ongoing conflict between Russia and Ukraine, could adversely affect our business, financial condition and results of uncollectible accountsoperations.
Escalation of geopolitical tensions related to military conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, supply chain disruptions, changes in consumer demand, increased cyberattacks, and longer collection cycles;impacts on foreign exchange rates and
design, implementation, financial markets, any of which may adversely affect our business, financial condition, and useresults of effective control environment processes acrossoperations. Although we do not have operations in Ukraine, and our diverse operationsbusiness in Russia generated approximately 1% of our consolidated net sales for the year ended December 31, 2022, the military conflict between Russia and employee base.
In addition, politicalUkraine has caused, and could continue to cause, negative impacts on our business and the global economy. Governments in the United States, Canada, United Kingdom, and European Union have each imposed export controls and economic changes or volatility,sanctions on certain industry sectors and parties in Russia. Due in part to the negative impact of the Russia-Ukraine military conflict, we have experienced shortages in certain materials and increased costs in commodities including packaging materials, soybean and vegetable oils, energy, corn products, and wheat products. The effects of current geopolitical conflicts, terrorist activity,including the conflict between Russia and Ukraine, as well as potential future geopolitical tensions, could heighten many of our known risks described in this Item 1A, Risk Factors.
Unanticipated business disruptions and natural events in the locations in which we or our customers, suppliers, distributors, or regulators operate could adversely affect our ability to provide products to our customers or our results of operations.
We have a complex network of suppliers, owned and leased manufacturing locations, co-manufacturing locations, distribution networks, and information systems that support our ability to consistently provide our products to our customers. Factors that are hard to predict or beyond our control, such as weather or other geological events or natural disasters, including hurricanes, earthquakes, floods, tsunamis, or wild fires (whether as a result of climate change or otherwise), raw material shortages, fires or explosions, political unrest, geopolitical conflicts (including the ongoing conflict between Russia and Ukraine), terrorism, civil strife, acts of war, public corruption, expropriation, generalized labor unrest or labor shortages, or pandemics (including
COVID-19), could damage or disrupt our operations or the operations of our customers, suppliers, vendors, co-manufacturers, distributors, or regulators. These factors include, but are not limited to:
•natural disasters, labor strikes, or other disruptions at any of our facilities or our suppliers’ or distributors’ facilities may impair or delay the delivery of our products; and
•illness of our workforce, or the workforce of third parties with which we do business, due to influenza or pandemics, could disrupt production of our products in one or more of our manufacturing facilities, or cause our suppliers, vendors, distributors, or third-party manufacturers to fail to meet their obligations to us.
These or other disruptions may require additional resources to restore our supply chain or distribution network. While we insure against many of these events and other economic or political uncertainties could interruptcertain business interruption risks and negatively affecthave policies and procedures to manage business continuity planning, such insurance may not compensate us for any losses incurred and our business continuity plans may not effectively resolve the issues in a timely manner. To the extent we are unable to respond to disruptions in our operations, whether by finding alternative suppliers or customer demand. Slow economic growthreplacing capacity at key manufacturing or high unemploymentdistribution locations; to quickly repair damage to our information, production, or supply systems; or to financially mitigate the likelihood or potential impact of such events, or effectively manage them if they occur, we may be late in the marketsdelivering, or unable to deliver, products to our customers or to track orders, inventory, receivables, and payables. If that occurs, our customers’ confidence in which we operateus and long-term demand for our products could constrain consumer spending, and declining consumer purchasing power could adversely impact our profitability. Alldecline. Any of these factors could result in increased costs or decreased sales, andevents could materially and adversely affect our product sales, financial condition, and results of operations.
Our performance may be adversely affected by economic and political conditions in the United States and in various other nations where we do business.
Our performance has been in the past and may continue in the future to be impacted by economic and political conditions in the United States and in other nations where we do business. Economic and financial uncertainties in our international markets, including uncertainties surrounding the legal and regulatory effects of Brexit in the transition period and beyond, changes to major international trade arrangements, (e.g., the United States-Mexico-Canada Agreement), and the imposition of tariffs by certain foreign governments including China and Canada, could negatively impact our operations and sales. Though the United Kingdom formally withdrew from the European Union on January 31, 2020, the uncertainties around the impacts of Brexit remain during the transition period and while a new trade agreement is negotiated. As a result, we continue to evaluate the risks associated with the withdrawal, including the potential for supply chain disruptions and foreign currency volatility. Other factors impacting our operations in the United States and in international locations where we do business include changes in laws, export and import restrictions, foreign currency exchange rates, foreign currency devaluation, cash repatriation restrictions, recessionary conditions, foreign ownership restrictions, nationalization, the impact of hyperinflationary environments, terrorist acts, political unrest, and political unrest.military conflict. Such factors in either domestic or foreign jurisdictions, and our responses to them, could materially and adversely affect our product sales, financial condition, and operating results. For further information on Venezuela, see Note 15, Venezuela - Foreign Currency and Inflation, in Item 8, Financial Statements and Supplementary Data.
We rely on our management team and other key personnel and may be unable to hire or retain key personnel or a highly skilled and diverse global workforce.
We depend on the skills, working relationships, and continued services of key personnel, including our experienced management team. In addition, our ability to achieve our operating goals depends on our ability to identify, hire, train, and retain qualified individuals. We compete with other companies both within and outside of our industry for talented personnel, and we may lose key personnel or fail to attract, train, and retain other talented personnel and a diverse global workforce with the skills and in the locations we need to operate and grow our business. Unplanned turnover, failure to attract and develop personnel with key emerging capabilities such as e-commerce and digital marketing skills, or failure to develop adequate succession plans for leadership positions, including the Chief Executive Officer position, could deplete our institutional knowledge base and erode our competitiveness. Further, equity-based compensation is a key component of our compensation program and essential for attracting and retaining qualified personnel. As a result, the lack of positive performance in our stock price may adversely affect our ability to attract or retain key personnel. Changes in immigration laws and policies could also make it more difficult for us to recruit or relocate skilled employees. Any such loss, failure, or limitation could adversely affect our product sales, financial condition, and operating results.
We are significantly dependent on information technology, and we may be unable to protect our information systems against service interruption, misappropriation of data, or breaches of security.
We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic and financial information, to manage a variety of business processes and activities, and to comply with regulatory, legal, and tax requirements. We also depend on our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers, and suppliers. These information technology systems, some of which are managed by third parties, may be susceptible to damage, invasions, disruptions, or shutdowns due to hardware failures, computer viruses, hacker attacks and other cybersecurity risks, telecommunication failures, user errors, catastrophic events, or other factors. Geopolitical tensions or conflicts, such as the conflict between Russia and Ukraine, may further heighten the risk of cybersecurity attacks. If our information technology systems suffer severe damage, disruption, or shutdown, by unintentional or malicious actions of employees andor contractors or by cyberattacks, and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience business disruptions, reputational damage, transaction
errors, processing inefficiencies, the leakage of confidential information, and the loss of customers and sales, causing our product sales, financial condition, and operating results to be adversely affected and the reporting of our financial results to be delayed.
In addition, if we are unable to prevent security breaches or disclosure of non-public information, we may suffer financial and reputational damage, litigation or remediation costs, fines, or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, consumers, or suppliers.
Misuse, leakage, or falsification of information could result in violations of data privacy laws and regulations, damage to our reputation and credibility, loss of opportunities to acquire or divest of businesses or brands, and loss of our ability to commercialize products developed through research and development efforts and, therefore, could have a negative impact on net sales. In addition, we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us, our current or former employees, or to our suppliers or consumers, and may become subject to legal action and increased regulatory oversight. We could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems.
We are also subject to various laws and regulations that are continuously evolving and developing regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. Such laws and regulations, as well as their interpretation and application, may vary from jurisdiction to jurisdiction, which can result in inconsistent or conflicting requirements. The European Union’s General Data Protection Regulation (“GDPR”), which became effectiveand similar regulations implemented in May 2018,other non-U.S. geographies, adds a broad array of requirements with respect to personal data, including the public disclosure of significant data breaches, and imposes substantial penalties for non-compliance. The California Consumer Privacy Act (“CCPA”) and the California Privacy Rights Act (“CPRA”), which became effective onin January 1, 2020,2023 and amended the CCPA, among other things, imposesimpose additional requirements with respect to disclosure and deletion of personal information of California residents. The CCPA providesand CPRA provide civil penalties for violations, as well as a private right of action for data breaches. Similar legislation in Virginia, Colorado, Utah, and Connecticut, all of which have gone into effect or will go into effect during 2023, impose transparency and other obligations with respect to personal data of their respective residents and provide residents with similar rights. GDPR, CCPA, CPRA, and other privacy and data protection laws may increase our costs of compliance and risks of non-compliance, which could result in substantial penalties.
Our results of operations could be affected by natural events in the locations in which we or our customers, suppliers, distributors, or regulators operate.
We have been and may in the future be impacted by severe weather and other geological events, including hurricanes, earthquakes, floods, or tsunamis that could disrupt our operations or the operations of our customers, suppliers, distributors, or regulators. Natural disasters or other disruptions at any of our facilities or our suppliers’ or distributors’ facilities may impair or delay the delivery of our products. Influenza or other pandemics, such as the new coronavirus that originated in China, could disrupt production of our products, reduce demand for certain of our products, or disrupt the marketplace in the foodservice or retail environment with consequent material adverse effects on our results of operations. While we insure against many of these events and certain business interruption risks and have policies and procedures to manage business continuity planning, we cannot provide any assurance that such insurance will compensate us for any losses incurred as a result of natural or other disasters or that our business continuity plans will effectively resolve the issues in a timely manner. To the extent we are unable to, or cannot, financially mitigate the likelihood or potential impact of such events, or effectively manage such events if they occur, particularly when a product is sourced from a single location, there could be a material adverse effect on our business and results of operations, and additional resources could be required to restore our supply chain.
The Sponsors have substantial control over us and may have conflicts of interest with us in the future.
As of December 28, 2019, the Sponsors own approximately 47% of our common stock. Three of our current 11 directors had been directors of Heinz prior to the closing of the 2015 Merger and remained directors of Kraft Heinz pursuant to the merger agreement. In addition, the Board elected Joao M. Castro-Neves, a partner of 3G Capital, one of the Sponsors, effective June 12, 2019. Furthermore, Paulo Basilio, our Chief Financial Officer, is a partner of 3G Capital. As a result, the Sponsors have the potential to exercise influence over management and have substantial control over decisions of our Board of Directors as well as over any action requiring the approval of the holders of our common stock, including adopting any amendments to our charter, electing directors, and approving mergers or sales of substantially all of our capital stock or our assets. In addition, to the extent that the Sponsors were to collectively hold a majority of our common stock, they together would have the power to take shareholder action by written consent to adopt amendments to our charter or take other actions, such as corporate transactions, that require the vote of holders of a majority of our outstanding common stock. The directors designated by the Sponsors may have significant authority to effect decisions affecting our capital structure, including the issuance of additional capital stock, the incurrence of additional indebtedness, the implementation of stock repurchase programs, and the decision of whether to declare dividends and the amount of any such dividends. Additionally, the Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. The Sponsors may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as the Sponsors continue to own a significant amount of our equity, they will continue to be able to strongly influence or effectively control our decisions.
Financial Risks
Our level of indebtedness, as well as our ability to comply with covenants under our debt instruments, could adversely affect our business and financial condition.
We have a substantial amount of indebtedness, and are permitted to incur a substantial amount of additional indebtedness, including secured debt. Our existing debt, together with any incurrence of additional indebtedness, could have important consequences, including, but not limited to:
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing for working capital, capital expenditures, research and development, debt service requirements, acquisitions, and general corporate or other purposes;
resulting in a downgrade to our credit rating, which could adversely affect our cost of funds, including our commercial paper programs; liquidity; and access to capital markets;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors who are not as highly leveraged;
making it more difficult for us to make payments on our existing indebtedness;
requiring a substantial portion of cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, payments of dividends, capital expenditures, and future business opportunities;
exposing us to risks related to fluctuations in foreign currency, as we earn profits in a variety of currencies around the world and the majority of our debt is denominated in U.S. dollars; and
in the case of any additional indebtedness, exacerbating the risks associated with our substantial financial leverage.
In addition, there can be no assurance that we will generate sufficient cash flow from operations or that future debt or equity financings will be available to us to enable us to pay our indebtedness or to fund other needs. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. There is no assurance that we will be able to refinance any of our indebtedness on favorable terms, or at all. Any inability to generate sufficient cash flow or to refinance our indebtedness on favorable terms could have a material adverse effect on our financial condition.
Our indebtedness instruments contain customary representations, warranties and covenants, including a financial covenant in our senior unsecured revolving credit facility (the “Senior Credit Facility”) to maintain a minimum shareholders’ equity (excluding accumulated other comprehensive income/(losses)). The creditors who hold our debt could accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt. If our operating performance declines, or if we are unable to comply with any covenant, such as our ability to timely prepare and file our periodic reports with the SEC, we have in the past and may in the future need to obtain waivers from the required creditors under our indebtedness instruments to avoid being in default.
If we breach any covenants under our indebtedness instruments and seek a waiver, we may not be able to obtain a waiver from the required creditors, or we may not be able to remedy compliance within the terms of any waivers approved by the required creditors. If this occurs, we would be in default under our indebtedness instruments and unable to access our Senior Credit Facility. In addition, certain creditors could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
Additional impairments of the carrying amounts of goodwill or other indefinite-lived intangible assets could negatively affect our financial condition and results of operations.
We maintain 19 reporting units, 11 of which comprise our goodwill balance. Our indefinite-lived intangible asset balance primarily consists of a number of individual brands. We test our reporting units and brands for impairment annually as of the first day of our second quarter, 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 (for example due to regulatory or industry changes), disposals of significant brands or components of our business, unexpected business disruptions (for example due to a natural disaster 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, 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.
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. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, change, or if management’s expectations or plans otherwise change, including as a result of updates to our global five-year operating plan, then one or more of our reporting units or brands might become impaired in the future, which could negatively affect our operating results or net worth. We are currently actively reviewing the enterprise strategy for the Company. As part of this strategic review, we expect to develop updates to the five-year operating plan in 2020, which could impact the allocation of investments among reporting units and brands and impact growth expectations and fair value estimates. Additionally, as a result of this strategic review process, we could decide to divest certain non-strategic assets. As a result, the ongoing development of the enterprise strategy and underlying detailed business plans could lead to the impairment of one or more of our reporting units or brands in the future.
As a result of our annual and interim impairment tests, we recognized goodwill impairment losses of $7.0 billion and indefinite-lived intangible asset impairment losses of $8.9 billion in 2018, and goodwill impairment losses of $1.2 billion and indefinite-lived intangible asset impairment losses of $687 million in 2019. Our reporting units and brands that were impaired in 2018 and 2019 were written down to their respective fair values resulting in zero excess fair value over carrying amount as of the applicable impairment test dates. Accordingly, these and other individual reporting units and brands that have 20% or less excess fair value over carrying amount as of their latest 2019 impairment testing date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Reporting units with 10% or less fair value over carrying amount had an aggregate goodwill carrying amount of $32.4 billion as of their latest 2019 impairment testing date and included U.S. Grocery, U.S. Refrigerated, U.S. Foodservice, Canada Retail, Canada Foodservice, Latin America Exports, and EMEA East. Reporting units with between 10-20% fair value over carrying amount had an aggregate goodwill carrying amount of $676 million as of their latest 2019 impairment testing date and included Continental Europe and Northeast Asia. The aggregate goodwill carrying amount of reporting units with fair value over carrying amount between 20-50% was $2.4 billion and there were no reporting units with fair value over carrying amount in excess of 50% as of their latest 2019 impairment testing date. Brands with 10% or less fair value over carrying amount had an aggregate carrying amount after impairment of $26.2 billion as of their latest 2019 impairment testing date and included: Kraft, Philadelphia, Velveeta, Lunchables, Miracle Whip, Planters, Maxwell House, Cool Whip, and ABC. Brands with between 10-20% fair value over carrying amount had an aggregate carrying amount of $3.7 billion as of their latest 2019 impairment testing date and included Oscar Mayer, Jet Puffed, Wattie’s, and Quero. The aggregate carrying amount of brands with fair value over carrying amount between 20-50% was $4.2 billion as of their latest 2019 impairment testing date. Although the remaining brands have more than 50% excess fair value over carrying amount as of their latest 2019 impairment testing date, these amounts are also associated with the 2013 Heinz acquisition and the 2015 Merger and are recorded on the balance sheet at their estimated acquisition date fair values. Therefore, if any estimates, market factors, or assumptions, including those related to our enterprise strategy or business plans, change in the future, these amounts are also susceptible to impairments.
Our net sales and net income may be exposed to foreign exchange rate fluctuations.
We derive a substantial portion of our net sales from international operations. We hold assets and incur liabilities, earn revenue, and pay expenses in a variety of currencies other than the U.S. dollar, primarily the British pound sterling, euro, Australian dollar, Canadian dollar, New Zealand dollar, Brazilian real, Indonesian rupiah, Chinese renminbi, and Indian rupee. Since our consolidated financial statements are reported in U.S. dollars, fluctuations in exchange rates from period to period will have an impact on our reported results. We have implemented currency hedges intended to reduce our exposure to changes in foreign currency exchange rates. However, these hedging strategies may not be successful, and any of our unhedged foreign exchange exposures will continue to be subject to market fluctuations. In addition, in certain circumstances, we may incur costs in one currency related to services or products for which we are paid in a different currency. As a result, factors associated with international operations, including changes in foreign currency exchange rates, could significantly affect our results of operations and financial condition.
Commodity, energy, and other input prices are volatile and could negatively affect our consolidated operating results.
We purchase and use large quantities of commodities, including dairy products, meat products, coffee beans, nuts, tomatoes, potatoes, soybean and vegetable oils, sugar and other sweeteners, corn products, wheat products, cucumbers, onions, other fruits and vegetables, spices, cocoa products, and flour to manufacture our products. In addition, we purchase and use significant quantities of resins, metals, cardboard, glass, plastic, paper, fiberboard, and other materials to package our products, and we use other inputs, such as natural gas and water, to operate our facilities. We are also exposed to changes in oil prices, which influence both our packaging and transportation costs. Prices for commodities, energy, and other supplies are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, currency fluctuations, severe weather or global climate change, crop failures, or shortages due to plant disease or insect and other pest infestation, consumer, industrial, or investment demand, and changes in governmental regulation and trade, tariffs, alternative energy, including increased demand for biofuels, and agricultural programs. Additionally, we may be unable to maintain favorable arrangements with respect to the costs of procuring raw materials, packaging, services, and transporting products, which could result in increased expenses and negatively affect our operations. Furthermore, the cost of raw materials and finished products may fluctuate due to movements in cross-currency transaction rates. Rising commodity, energy, and other input costs could materially and adversely affect our cost of operations, including the manufacture, transportation, and distribution of our products, which could materially and adversely affect our financial condition and operating results.
Although we monitor our exposure to commodity prices as an integral part of our overall risk management program, and seek to hedge against input price increases to the extent we deem appropriate, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in specific raw materials costs. For example, hedging our costs for one of our key commodities, dairy products, is difficult because dairy futures markets are not as developed as many other commodities futures markets. Continued volatility or sustained increases in the prices of commodities and other supplies we purchase could increase the costs of our products, and our profitability could suffer. Moreover, increases in the prices of our products to cover these increased costs may result in lower sales volumes, or we may be constrained from increasing the prices of our products by competitive and consumer pressures. If we are not successful in our hedging activities, or if we are unable to price our products to cover increased costs, then commodity and other input price volatility or increases could materially and adversely affect our financial condition and operating results.
Volatility in the market value of all or a portion of the derivatives we use to manage exposures to fluctuations in commodity prices may cause volatility in our gross profit and net income.
We use commodity futures, options, and swaps to economically hedge the price of certain input costs, including dairy products, meat products, coffee beans, sugar, vegetable oils, wheat products, corn products, cocoa products, packaging products, diesel fuel, and natural gas. We recognize gains and losses based on changes in the values of these commodity derivatives. We recognize these gains and losses in cost of products sold in our consolidated statements of income to the extent we utilize the underlying input in our manufacturing process. We recognize these gains and losses in general corporate expenses in our segment operating results until we sell the underlying products, at which time we reclassify the gains and losses to segment operating results. Accordingly, changes in the values of our commodity derivatives may cause volatility in our gross profit and net income.
Our results could be adversely impacted as a result of increased pension, labor, and people-related expenses.
Inflationary pressures, and any shortages in the labor market, increased employee turnover, and changes in the availability of our workers could increase labor costs, which could have a material adverse effect on our consolidated operating results or financial condition. Our labor costs include the cost of providing employee benefits in the United States, Canada, and other foreign jurisdictions, including pension, health and welfare, and severance benefits. Any declines in market returns could adversely impact the funding of pension plans, the assets of which are invested in a diversified portfolio of equity and fixed-income securities and other investments. Additionally, the annual costs of benefits vary with increased costs of health care and the outcome of collectively-bargainedcollectively bargained wage and benefit agreements.
Furthermore, we may be subject to increased costs or experience adverse effects to our operating results if we are unable to renew collectively bargained agreements on satisfactory terms. Our financial condition and ability to meet the needs of our customers could be materially and adversely affected if strikes or work stoppages andor interruptions occur as a result of delayed negotiations with union-represented employees both in and outside of the United States.
Regulatory Risks
Compliance with laws, regulations, and related interpretations and related legal claims or other regulatory enforcement actions could impact our business, and we face additional risks and uncertainties relatedWe continue to any potential actions resulting from the SEC’s ongoing investigation, as well as potential additional subpoenas, litigation, and regulatory proceedings.
Asobserve a large, global food and beverage company, we operate in a highly-regulated environment with constantly-evolving legal and regulatory frameworks. Various laws and regulations govern production, storage, distribution, sales, advertising, labeling, including on-pack claims, information or disclosures, marketing, licensing, trade,competitive labor tax, environmental matters, privacy, as well as health and safety and data protection practices. Government authorities regularly change laws and regulations and their interpretations. In particular, Brexit could result in a new regulatory regimemarket. Employee turnover, changes in the United Kingdom that may or may not follow that of the European Union, and the creation of new and divergent laws and regulations could increase the cost and complexityavailability of our compliance. In addition, this shiftworkers, and labor shortages in regime could create a number of legal and accounting complexities with respect to existing relationships, including uncertainty regarding the continuity of contracts entered into by entitiesour supply chain have resulted in, the United Kingdom or the European Union. Our compliance with new or revised laws and regulations, or the interpretation and application of existing laws and regulations, could materially and adversely affect our product sales, financial condition, and results of operations. As a consequence of the legal and regulatory environment in which we operate, we are faced with a heightened risk of legal claims and regulatory enforcement actions.
As previously disclosed on February 21, 2019, we received a subpoena in October 2018 from the SEC related to our procurement area, specifically the accounting policies, procedures, and internal controls related to our procurement function, including, but not limited to, agreements, side agreements, and changes or modifications to agreements with our suppliers. Following the receipt of this subpoena, we, together with external counsel and forensic accountants, and subsequently, under the oversight of the Audit Committee, conducted an internal investigation into our procurement area and related matters. The SEC has issued additional subpoenas seeking information related to our financial reporting, internal controls, disclosures, our assessment of goodwill and intangible asset impairments, our communications with certain shareholders, and other procurement-related information and materials in connection with its investigation. The United States Attorney’s Office for the Northern District of Illinois (“USAO”) is also reviewing this matter. We and certain of our current and former officers and directors are currently defendants in a consolidated securities class action lawsuit, a class action lawsuit brought under the Employee Retirement Income Security Act (“ERISA”), a consolidated stockholder derivative action pending in federal court, and eight stockholder derivative actions pending in the Delaware Court of Chancery.
We are cooperating with the SEC and USAO, and intend to vigorously defend the civil lawsuits. We are unable, at this time, to estimate our potential liability in these matters. In connection with the securities and ERISA class action lawsuits and the stockholder derivative actions, we may be required to pay judgments, settlements, or other penalties and incur other costs and expenses. See Item 3, Legal Proceedings, and Note 17, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, for additional information.
In connection with the SEC and USAO investigations, we could be required to pay significant civil or criminal penalties and become subject to injunctions, cease and desist orders, and other equitable remedies. The SEC and USAO investigations have not been resolved as of the filing of this Annual Report on Form 10-K. We can provide no assurances as to the outcome or timing of any governmental or regulatory investigation.
We have incurred, and may continue to incur, significant expenses related to legal, accounting, and other professional services in connection with the internal investigation, the SEC investigation, and related legal and regulatory matters. These expenses have adversely affected, and could continue to adverselyresult in, increased costs and have, and could again, impact our ability to meet consumer demand, both of which could negatively affect our business, financial condition, and cash flows.
As a result of matters associated with the internal investigation related to the SEC investigation and various lawsuits, we are exposed to greater risks associated with litigation, regulatory proceedings, and government enforcement actions and additional subpoenas. Any future investigations or additional lawsuits may have a material adverse effect on our business, financial condition, results of operations, andor cash flows.
We identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we experience additional material weaknesses or other deficiencies in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately and timely report our financial results, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports, and the price of our common stock may decline.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effectiveness of our system of internal control. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act, which requires us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting.
Consistent with the prior year and in connection with our 2019 year-end assessment of internal control over financial reporting, we determined that, as of December 28, 2019, we did not maintain effective internal control over financial reporting because of a material weakness in our risk assessment process related to designing and maintaining controls sufficient to appropriately respond to changes in our business environment. This material weakness in risk assessment also contributed to a material weakness arising from supplier contracts and related arrangements, and we have taken and are taking certain remedial steps to improve our internal control over financial reporting. For further discussion of the material weaknesses identified and our remedial efforts, see Item 9A, Controls and Procedures.
Remediation efforts place a significant burden on management and add increased pressure to our financial resources and processes. As a result, we may not be successful in making the improvements necessary to remediate the material weaknesses identified by management, be able to do so in a timely manner, or be able to identify and remediate additional control deficiencies, including material weaknesses, in the future.
If we are unable to successfully remediate our existing or any future material weaknesses or other deficiencies in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected; our liquidity, our access to capital markets, the perceptions of our creditworthiness, and our ability to complete acquisitions may be adversely affected; we may be unable to maintain compliance with applicable securities laws, The Nasdaq Stock Market LLC (“Nasdaq”) listing requirements, and the covenants under our debt instruments or derivative arrangements regarding the timely filing of periodic reports; we may be subject to regulatory investigations and penalties; investors may lose confidence in our financial reporting; we may suffer defaults, accelerations, or cross-accelerations under our debt instruments or derivative arrangements to the extent we are unable to obtain waivers from the required creditors or counterparties or are unable to cure any breaches; and our stock price may decline.
Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to raise debt or equity capital.
We did not file our Annual Report on Form 10-K for the year ended December 29, 2018 or our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2019 within each respective timeframe required by the SEC, meaning we did not remain current in our reporting requirements with the SEC. As such, we are not currently eligible to use a registration statement on Form S-3 that would allow us to continuously incorporate by reference our SEC reports into the registration statement, or to use “shelf” registration statements to conduct offerings, until we have maintained our status as a current filer for approximately one year. This limits our ability to access the public markets to raise debt or equity capital, which could prevent us from pursuing transactions or implementing business strategies that we might otherwise believe are beneficial to our business. If we wish to pursue a public offering now, we would be required to file a registration statement on Form S-1 and have it reviewed and declared effective by the SEC. Doing so would likely take significantly longer than using a registration statement on Form S-3 and increase our transaction costs, and the necessity of using a Form S-1 for a public offering of registered securities could, to the extent we are not able to conduct offerings using alternative methods, adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.
We restated certain of our previously issued consolidated financial statements, which resulted in unanticipated costs and may affect investor confidence and raise reputational issues.
As discussed in the Explanatory Note, in Note 2, Restatement of Previously Issued Consolidated Financial Statements, and in Note 23, Quarterly Financial Data (Unaudited), in our Annual Report on Form 10-K for the year ended December 29, 2018, we restated our consolidated financial statements and related disclosures for the years ended December 30, 2017 and December 31, 2016 and restated each of the quarterly and year-to-date periods for the nine months ended September 29, 2018 and for fiscal year 2017, following the identification of misstatements as a result of the internal investigation conducted. We do not believe that the misstatements were quantitatively material to any period presented in our prior financial statements. However, due to the qualitative nature of the matters identified in our internal investigation, including the number of years over which the misconduct occurred and the number of transactions, suppliers, and procurement employees involved, we determined that it would be appropriate to correct the misstatements in our previously issued consolidated financial statements by restating such financial statements. The restatement also included corrections for additional identified out-of-period and uncorrected misstatements in the impacted periods. As a result, we incurred unanticipated costs for accounting and legal fees in connection with or related to the restatement, and have become subject to a number of additional risks and uncertainties, which may affect investor confidence in the accuracy of our financial disclosures and may raise reputational issues for our business.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
We consider our intellectual property rights, particularly and most notably our trademarks, but also our patents, trade secrets, trade dress, copyrights, and licensing agreements, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, trade secret, and trade dress laws, as well as licensing agreements, third-party nondisclosure and assignment agreements, and policing of third-party misuses of our intellectual property. Our failure to develop or adequately protect our trademarks, products, new features of our products, or our technology, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business and financial condition. We also license certain intellectual property, most notably trademarks, from third parties. To the extent that we are not able to contract with these third parties on favorable terms or maintain our relationships with these third parties, our rights to use certain intellectual property could be impacted.
We may be unaware of intellectual property rights of others that may cover some of our technology, brands, or products. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Third-party claims of intellectual property infringement might also require us to enter into costly license agreements. We also may be subject to significant damages or injunctions against development and sale of certain products.
Changes in tax laws and interpretations could adversely affect our business.
We are subject to income and other taxes in the United States and in numerous foreign jurisdictions. Our domestic and foreign tax liabilities are dependent on the jurisdictions in which profits are determined to be earned and taxed. Additionally, the amount of taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we operate. A number of factors influence our effective tax rate, including changes in tax laws and treaties as well as the interpretation of existing laws and rules. Federal, state, and local governments and administrative bodies within the United States, which represents the majority of our operations, and other foreign jurisdictions have implemented, or are considering, a variety of broad tax, trade, and other regulatory reforms that may impact us. For example,We continue to monitor the Tax CutsInflation Reduction Act of 2022 and Jobs Act (the “U.S. Tax Reform”) enactedrelated regulatory developments to evaluate their potential impact on December 22, 2017 resulted in changes in our corporatebusiness, tax rate, our deferred income taxes, and the taxation of foreign earnings. Relatedly, changes in tax laws resulting fromfinancial results. Additionally, the Organization for Economic Co-operation and Development’s (“OECD”) multi-jurisdictionalDevelopment (OECD), a global coalition of member countries, proposed a two-pillar plan to reform international taxation. The proposals aim to ensure a fairer distribution of action to address base erosionprofits among countries and profit sharing (“BEPS”) could impact our effectiveimpose a floor on tax rate.competition through the introduction of a global minimum tax. It is not currently possible to accurately determine the potential comprehensive impact of these or future changes, but these changes could have a material impact on our businesseffective tax rate, financial condition, and financial condition.
Significant judgment, knowledge, and experience are required in determining our worldwide provision for income taxes. Our future effective tax rate is impacted by a number of factors including changes in the valuation of our deferred tax assets and liabilities, changes in geographic mix of income, increaseschanges in expenses not deductible for tax, including impairment of goodwill, and changes in available tax credits. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are also regularly subject to audits by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits, including transfer pricing matters, and any related litigation could be materially different from our historical income tax provisions and accruals. For example, we are currently under examination by the Internal Revenue Service (“IRS”) for income taxes for the years 2018 and 2019. We have received a draft economist report and expect to receive a Notice of Proposed Adjustment relating to transfer pricing with our foreign subsidiaries asserting that our U.S. taxable income for 2018 and 2019 should have been higher, which would result in additional U.S. tax expense for 2018 and 2019 plus interest and potential penalties. We intend to vigorously contest the position taken by the IRS; however, the ultimate outcome of this matter is uncertain, and if we are required to pay the IRS additional U.S. taxes, interest, and potential penalties, our results of operations and cash flows could be materially affected. Economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes more difficult. The results of an audit or litigation could adversely affect our financial statements in the period or periods for which that determination is made.
Registered Securities Risks
Sales of our common stock in the public market could cause volatility in the price of our common stock or cause the share price to fall.
Sales of a substantial number of shares of our common stock in the public market, sales of our common stock by the Sponsors, or the perception that these sales might occur, could depress the market price of our common stock, and could impair our ability to raise capital through the sale of additional equity securities. A sustained depression in the market price of our common stock has happened (which was a contributing factor to our decision to perform interim impairment tests for certain reporting units and brands in 2018 and 2019, for which we ultimately recorded impairment losses) and could in the future happen, which could also reduce our market capitalization below the book value of net assets, which could increase the likelihood of recognizing goodwill or indefinite-lived intangible asset impairment losses that could negatively affect our financial condition and results of operations.
Kraft Heinz, 3G Capital, and Berkshire Hathaway entered into a registration rights agreement requiring us to register for resale under the Securities Act all registrable shares held by 3G Capital and Berkshire Hathaway, which represents all shares of our common stock held by the Sponsors as of the date of the closing of the 2015 Merger. As of December 28, 2019, registrable shares represented approximately 47% of all outstanding shares of our common stock. Although the registrable shares are subject to certain holdback and suspension periods, the registrable shares are not subject to a “lock-up” or similar restriction under the registration rights agreement. Accordingly, offers and sales of a large number of registrable shares may be made pursuant to an effective registration statement under the Securities Act in accordance with the terms of the registration rights agreement. Sales of our common stock by the Sponsors to other persons would likely result in an increase in the number of shares being traded in the public market and may increase the volatility of the price of our common stock.
Our ability to pay regular dividends to our shareholders and the amounts of any such dividends are subject to the discretion of the Board of Directors and may be limited by our financial condition, debt agreements, or limitations under Delaware law.
Although it is currently anticipated that we will continue to pay regular quarterly dividends, any such determination to pay dividends and the amounts thereof will be at the discretion of the Board of Directors and will be dependent on then-existing conditions, including our financial condition, income, legal requirements, including limitations under Delaware law, debt agreements, and other factors the Board of Directors deems relevant. The Board of Directors has decided, and may in the future decide, in its sole discretion, to change the amount or frequency of dividends or discontinue the payment of dividends entirely. For these reasons, shareholders will not be able to rely on dividends to receive a return on investment. Accordingly, realization of any gain on shares of our common stock may depend on the appreciation of the price of our common stock, which may never occur.
Volatility of capital markets or macroeconomic factors could adversely affect our business.
Changes in financial and capital markets, including market disruptions, limited liquidity, uncertainty regarding Brexit in the transition period and beyond, and interest rate volatility, may increase the cost of financing as well as the risks of refinancing maturing debt. Our U.S. dollar variable rate debt uses LIBOR as a benchmark for determining interest rates and the Financial Conduct Authority in the United Kingdom intends to phase out LIBOR by the end of 2021. While we do not expect that the transition from LIBOR, including any legal or regulatory changes made in response to its future phase out, or the risks related to its discontinuance will have a material effect on our financing costs, the impact is uncertain at this time.
SomeAdditionally, some of our customers, suppliers, and counterparties are highly leveraged. Consolidations in some of the industries in which our customers operate have created larger customers, some of which are highly leveraged and facing increased competition and continued credit market volatility. These factors have caused some customers to be less profitable, increasing our exposure to credit risk. A significant adverse change in the financial and/or credit position of a customer, supplier, or counterparty could require us to assume greater credit risk relating to that customer or counterparty and could limit our ability to collect receivables. This could have an adverse impact on our financial condition and liquidity.
A downgrade in our credit rating could adversely impact interest costs or access to future borrowings.
Our borrowing costs can be affected by short and long-term credit ratings assigned by rating organizations. A decrease in these credit ratings could limit our access to capital markets and increase our borrowing costs, which could materially and adversely affect our financial condition and operating results. On February 14, 2020, Moody’s Investor Services, Inc. (“Moody’s”) affirmed our long-term credit rating of Baa3 with a negative outlook and Fitch Ratings (“Fitch”) and S&P Global Ratings (“S&P”) downgraded our long-term credit rating from BBB- to BB+ with a stable outlook from Fitch and a negative outlook from S&P. The downgrades by Fitch and S&P reduce our senior debt below investment grade, potentially resulting in higher borrowing costs on future financings and potentially limiting access to our commercial paper program and other sources of funding which may result in us having to use more expensive sources of liquidity, such as our Senior Credit Facility. These downgrades do not constitute a default or event of default under our debt instruments. However, as two ratings agencies have downgraded our long-term credit rating to below investment grade status, we are subject to certain financial covenants in our 4.875% Second Lien Senior Secured Notes due February 15, 2025 (the “2025 Notes”).
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate co-headquarters are located in Pittsburgh, Pennsylvania and Chicago, Illinois. Our co-headquarters are leased and house certain executive offices, our U.S. business units, and our administrative, finance, legal, and human resource functions. We maintain additional owned and leased offices throughout the regions in which we operate.
We manufacture our products in our network of manufacturing and processing facilities located throughout the world. As of December 28, 2019,31, 2022, we operated 8378 manufacturing and processing facilities. We own 8072 and lease threesix of these facilities. Our manufacturing and processing facilities count by segment as of December 28, 201931, 2022 was:
| | | | | | | | | | | |
| Owned | | Leased |
| North America | 32 | | 3 |
| International | 40 | | 3 |
|
| | | |
| | Owned | | Leased |
| United States | 40 | | 1 |
| Canada | 1 | | 1 |
| EMEA | 13 | | — |
| Rest of World | 26 | | 1 |
We maintain all of our manufacturing and processing facilities in good condition and believe they are suitable and are adequate for our present needs. We also enter into co-manufacturing arrangements with third parties if we determine it is advantageous to outsource the production of any of our products.
In 2019,2022, we transferred ownership of our facility in Ontario, Oregon as part of a long-term third-party manufacturing agreement in our North America segment. Additionally, we divested certain assets and operations predominantlyassociated with our business-to-business powdered cheese business in Canada and India,our North America segment, including, among other things, a manufacturing facility in Albany, Minnesota. We also acquired one owned manufacturing facility in Canada and one owned and one leased facility in India.our International segment. See Note 4, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, for additional information on these transactions.our acquisitions and divestitures.
Item 3. Legal Proceedings.
See Note 17,15, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on The Nasdaq Stock Market LLC (Nasdaq) under the ticker symbol “KHC”.“KHC.” At February 8, 2020,11, 2023, there were approximately 47,00040,000 holders of record of our common stock.
See Equity and Dividends in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of cash dividends declared on our common stock.
Comparison of Cumulative Total Return
The following graph compares the cumulative total return on our common stock with the cumulative total return of the Standard & Poor's (“S&P”)&P 500 Index and the S&P Consumer Staples Food and Soft Drink Products, which we consider to be our peer group. Companies included in the S&P Consumer Staples Food and Soft Drink Products index change periodically and are presented on the basis of the index as it is comprised on December 28, 2019.31, 2022. This graph covers the five-year period from July 6, 2015 (the first day our common stock began trading on Nasdaq) through December 27, 201929, 2017 (the last trading day of our fiscal year 2019)2017) through December 30, 2022 (the last trading day of our fiscal year 2022). The graph shows total shareholder return assuming $100 was invested on July 6, 2015December 29, 2017 and the dividends were reinvested on a daily basis.
|
| | | | | | | | | | | |
| | Kraft Heinz | | S&P 500 | | S&P Consumer Staples Food and Soft Drink Products |
| July 6, 2015 | $ | 100.00 |
| | $ | 100.00 |
| | $ | 100.00 |
|
| December 31, 2015 | 102.07 |
| | 99.85 |
| | 110.18 |
|
| December 30, 2016 | 125.99 |
| | 111.79 |
| | 114.98 |
|
| December 29, 2017 | 115.44 |
| | 136.20 |
| | 128.53 |
|
| December 28, 2018 | 67.49 |
| | 129.11 |
| | 121.93 |
|
| December 27, 2019 | 51.78 |
| | 171.50 |
| | 157.80 |
|
| | | | | | | | | | | | | | | | | |
| Kraft Heinz | | S&P 500 | | S&P Consumer Staples Food and Soft Drink Products |
| December 29, 2017 | $ | 100.00 | | | $ | 100.00 | | | $ | 100.00 | |
| December 28, 2018 | 58.45 | | | 94.80 | | | 96.69 | |
| December 27, 2019 | 44.85 | | | 126.06 | | | 124.43 | |
| December 24, 2020 | 52.49 | | | 146.73 | | | 131.03 | |
| December 23, 2021 | 55.16 | | | 189.93 | | | 148.98 | |
| December 30, 2022 | 66.43 | | | 156.88 | | | 164.32 | |
The above performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.
Issuer Purchases of Equity Securities During the Three Months Ended December 28, 201931, 2022
Our share repurchase activity in the three months ended December 28, 201931, 2022 was: |
| | | | | | | | | | | | | | |
| | | Total Number of Shares Purchased(a) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(b) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| 9/29/2019 - 11/2/2019 | | 15,166 |
| | $ | 27.84 |
| | — |
| | $ | — |
|
| 11/3/2019 - 11/30/2019 | | 128,625 |
| | 32.19 |
| | — |
| | — |
|
| 12/1/2019 - 12/28/2019 | | 43,491 |
| | 31.48 |
| | — |
| | — |
|
| Total | | 187,282 |
| | | | — |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Number of Shares Purchased(a) | | Average Price
Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(b) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
9/25/2022 — 10/29/2022 | | 2,779,689 | | | $ | 34.99 | | | — | | | $ | — | |
10/30/2022 — 11/26/2022 | | 433,574 | | | 37.73 | | | — | | | — | |
11/27/2022 — 12/31/2022 | | 97,208 | | | 40.23 | | | — | | | — | |
| Total | | 3,310,471 | | | | | — | | | |
| |
(a) Includes (1) shares repurchased to offset the dilutive effect of the exercise of stock options using option exercise proceeds and the vesting restricted stock units (“RSUs”) and performance share units (“PSUs”) and (2) shares withheld for tax liabilities associated with the vesting of RSUs and PSUs. (b) We do not have any publicly-announced share repurchase plans or programs. (a)
| Includes the following types of share repurchase activity, when they occur: (1) shares repurchased in connection with the exercise of stock options (including periodic repurchases using option exercise proceeds), (2) shares withheld for tax liabilities associated with the vesting of restricted stock units, and (3) shares repurchased related to employee benefit programs (including our annual bonus swap program) or to offset the dilutive effect of equity issuances. |
| |
(b)
| We do not have any publicly announced share repurchase plans or programs. |
Item 6. Selected Financial Data.
The following table presents selected consolidated financial data for the last five fiscal years. Our fiscal years 2019, 2018, 2017, and 2016 include a full year of Kraft Heinz results. Our fiscal year 2015 includes a full year of Heinz results and post-merger Kraft results.[Reserved].
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | (Unaudited) |
| | December 28, 2019 (52 weeks) | | December 29, 2018 (52 weeks) | | December 30,
2017
(52 weeks) | | December 31,
2016
(52 weeks)(g) | | January 3,
2016
(53 weeks) |
| | (in millions, except per share data) |
| Period Ended: | | | | | | | | | |
Net sales(a) | $ | 24,977 |
| | $ | 26,268 |
| | $ | 26,076 |
| | $ | 26,300 |
| | $ | 18,318 |
|
Income/(loss)(b)(c)(d) | 1,933 |
| | (10,254 | ) | | 10,932 |
| | 3,606 |
| | 614 |
|
Income/(loss) attributable to common shareholders(b)(c)(d) | $ | 1,935 |
| | (10,192 | ) | | 10,941 |
| | 3,416 |
| | (299 | ) |
| Income/(loss) per common share: | | | | | | | | | |
Basic(b)(c)(d) | $ | 1.59 |
| | (8.36 | ) | | 8.98 |
| | 2.81 |
| | (0.38 | ) |
Diluted(b)(c)(d) | 1.58 |
| | (8.36 | ) | | 8.91 |
| | 2.78 |
| | (0.38 | ) |
| | | | | | | | | | |
| | | | | | | | (Unaudited) |
| | December 28,
2019 | | December 29,
2018 | | December 30,
2017 | | December 31,
2016 | | January 3,
2016 |
| | (in millions, except per share data) |
| As of: | | | | | | | | | |
Total assets(c) | 101,450 |
| | 103,461 |
| | 120,092 |
| | 120,617 |
| | 123,110 |
|
Long-term debt(e) | 28,216 |
| | 30,770 |
| | 28,308 |
| | 29,712 |
| | 25,148 |
|
Redeemable preferred stock(f) | — |
| | — |
| | — |
| | — |
| | 8,320 |
|
| Cash dividends per common share | 1.60 |
| | 2.50 |
| | 2.45 |
| | 2.35 |
| | 1.70 |
|
| |
(a) | The increase in net sales in 2016 compared to the prior year was primarily driven by the 2015 Merger. |
| |
(b) | The increases in income/(loss), income/(loss) attributable to common shareholders, and basic and diluted income/(loss) per common share in 2017 compared to 2016 were primarily driven by U.S. Tax Reform, which was enacted in December 2017. See Note 10, Income Taxes, in Item 8, Financial Statements and Supplementary Data, for additional information.
|
| |
(c) | The decreases in income/(loss), income/(loss) attributable to common shareholders, and basic and diluted income/(loss) per common share in 2018 compared to 2017, and the decrease in total assets from December 30, 2017 to December 29, 2018, were primarily driven by non-cash impairment losses in 2018. See Note 9, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for additional information.
|
| |
(d) | The increases in income/(loss), income/(loss) attributable to common shareholders, and basic and diluted income/(loss) per common share in 2019 compared to 2018, were primarily driven by higher non-cash impairment losses in 2018. See Note 9, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for additional information.
|
| |
(e) | Amounts exclude the current portion of long-term debt. |
| |
(f) | On June 7, 2016, we redeemed all outstanding shares of our 9.00% cumulative compounding preferred stock, Series A. See Equity and Dividends in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, along with Note 19, Debt, and Note 20, Capital Stock, in Item 8, Financial Statements and Supplementary Data, in our Annual Report on Form 10-K for the year ended December 29, 2018 for additional information.
|
| |
(g) | On December 9, 2016, our Board of Directors approved a change to our fiscal year end from Sunday to Saturday. Effective December 31, 2016, we operate on a 52- or 53-week fiscal year ending on the last Saturday in December in each calendar year. In prior years, we operated on a 52- or 53-week fiscal year ending the Sunday closest to December 31. As a result, we occasionally have a 53rd week in a fiscal year. Our 2015 fiscal year includes a 53rd week of activity. |
Item 7. 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 consolidated financial statements and related notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. 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.
See below for discussion and analysis of our financial condition and results of operations for 2022 compared to 2021. See Item 7, Management’s Discussions 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 detailed discussion of our financial condition and results of operations for 2021 compared to 2020.
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 four segments. We have threetwo reportable segments defined by geographic region: United States, Canada, and EMEA. Our remaining businesses are combined and disclosed as “Rest of World.” Rest of World comprises two operating segments: LatinNorth America and APAC.
During the third quarter of 2019, 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 EMEA, Latin America, and APAC zones to form the International zone. The International zone will be a reportable segment along with the United States and CanadaInternational. We have reflected this change in 2020. We also plan to move our Puerto Rico business from the Latin America zone to the United States zone to consolidate and streamline the management of our product categories and supply chain. These changes will be effective in the first quarter of 2020.all historical periods presented.
See Note 22,20, Segment Reporting, in Item 8, Financial Statements and Supplementary Data, to the consolidated financial statements for our financial information by segment.
See below for discussionAcquisitions and analysisDivestitures:
In 2022, we completed the acquisition of Companhia Hemmer Indústria e Comércio (the “Hemmer Acquisition”) and Just Spices GmbH (the “Just Spices Acquisition”), both of which are in our International segment. Additionally, in 2022, we completed the sale of our business-to-business powdered cheese business (the “Powdered Cheese Transaction”). The Powdered Cheese Transaction is not considered a strategic shift that will have a major effect on our operations or financial condition andresults; therefore, the results of this business are included in continuing operations for 2019 compared to 2018. through the date of sale.
In 2021, we completed the acquisition of Assan Gıda Sanayi ve Ticaret A.Ş. (the “Assan Foods Acquisition”) and BR Spices Indústria e Comércio de Alimentos Ltda (the “BR Spices Acquisition”), both of which are in our International segment. Additionally, in 2021, we completed the sale of certain assets in our global nuts business (the “Nuts Transaction”) as well as the sale of certain assets in our global cheese businesses (the “Cheese Transaction”). 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 Item 7,Note 4, Management’s DiscussionsAcquisitions and Analysis of Financial Condition and Results of OperationsDivestitures, in our Annual Report on Form 10-KItem 8, Financial Statements and Supplementary Data, for additional information.
Conflict Between Russia and Ukraine:
For the year ended December 29, 201831, 2022, approximately 1% of consolidated net sales, net income/(loss), and Adjusted EBITDA 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 net income/(loss) and Adjusted EBITDA were each insignificant. As of December 31, 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, soybean and vegetable oils, energy, 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 2022, the conflict between Russia and Ukraine did not have a detailed discussion ofmaterial impact on our financial condition, and results of operations, for 2018 compared to 2017.or cash flows.
Items Affecting Comparability of Financial Results
Impairment Losses:
Our 2019 results of operations reflect goodwill impairment losses of $1.2 billion$444 million, intangible asset impairment losses of $469 million, and property, plant, and equipment, net asset impairment losses of $86 million in 2022 compared to goodwill impairment losses of $318 million and intangible asset impairment losses of $702 million compared to goodwill impairment losses of $7.0 billion and intangible asset impairment losses of $8.9$1.3 billion in 2018.2021. See Note 9,4, Acquisitions and Divestitures, and Note 8, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for additional information on these impairment losses.
We operate on a 52- or 53-week fiscal year ending on the last Saturday in December in each calendar year. Our 2022 fiscal year ended December 31, 2022 includes a 53rd week of activity. Our 2021 fiscal year was a 52-week period that ended on December 25, 2021.
Inflation and Supply Chain Impacts:
During the year ended December 31, 2022, we continued to experience increasing commodity costs and supply chain costs, including procurement, logistics, and manufacturing costs, largely due to inflationary pressures, as compared to the prior year period. We expect these costs to continue to increase and inflation to remain elevated through 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 current level of demand for our products combined with industry-wide supply chain issues, we have experienced capacity constraints for certain products when demand has exceeded our current manufacturing capacity. As discussed in Liquidity and Capital Resources, we continue to focus on rebuilding inventory and expanding capacity through increased capital investments, which have resulted in an increased ability to meet customer demand. However, these capacity constraints have negatively impacted, and could continue to negatively impact, our market share, financial condition, results of operations, or cash flows, until we return to optimal service levels.
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 fromto the most closely comparable financial measures presented in our consolidated financial statements, which are calculated in accordance with U.S. GAAP see Non-GAAP Financial Measures.
Consolidated Results of Operations
Summary of Results:
|
| | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | % Change |
| | (in millions, except per share data) | | |
| Net sales | $ | 24,977 |
| | $ | 26,268 |
| | (4.9 | )% |
| Operating income/(loss) | 3,070 |
| | (10,205 | ) | | 130.1 | % |
| Net income/(loss) attributable to common shareholders | 1,935 |
| | (10,192 | ) | | 119.0 | % |
| Diluted EPS | 1.58 |
| | (8.36 | ) | | 118.9 | % |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | % Change |
| (in millions, except per share data) | | |
| Net sales | $ | 26,485 | | | $ | 26,042 | | | 1.7 | % |
| Operating income/(loss) | 3,634 | | | 3,460 | | | 5.0 | % |
| Net income/(loss) | 2,368 | | | 1,024 | | | 131.3 | % |
| Net income/(loss) attributable to common shareholders | 2,363 | | | 1,012 | | | 133.4 | % |
| Diluted EPS | 1.91 | | | 0.82 | | | 132.9 | % |
Net Sales:
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | % Change |
| (in millions) | | |
| Net sales | $ | 26,485 | | | $ | 26,042 | | | 1.7 | % |
Organic Net Sales(a) | 26,249 | | | 23,917 | | | 9.8 | % |
(a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
|
| | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | % Change |
| | (in millions) | | |
| Net sales | $ | 24,977 |
| | $ | 26,268 |
| | (4.9 | )% |
Organic Net Sales(a) | 24,961 |
| | 25,393 |
| | (1.7 | )% |
| |
(a) | Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
|
Fiscal Year 20192022 Compared to Fiscal Year 2018:2021:
Net sales decreased 4.9%increased 1.7% to $25.0$26.5 billion in 20192022 compared to $26.3$26.0 billion in 2018 primarily due to2021, including the unfavorable impacts of foreign currency (1.9 pp) and acquisitions and divestitures (1.3(8.0 pp) and foreign currency (2.0 pp) and the favorable impact of a 53rd week of shipments (1.9 pp). Organic Net Sales decreased 1.7%increased 9.8% to $25.0$26.2 billion in 20192022 compared to $25.4$23.9 billion in 2018 due to unfavorable volume/mix (1.8 pp), partially offset2021, primarily driven by higher pricing (0.1(13.2 pp), which more than offset unfavorable volume/mix (3.4 pp). Volume/Pricing was higher in both segments, while volume/mix was unfavorable in the United States, Rest of World, and EMEA, which was partially offset by growth in Canada. Higher pricing in the United States and Rest of World was partially offset by lower pricing in Canada, while pricing in EMEA was flat.both segments.
Net Income/(Loss):
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | % Change |
| (in millions) | | |
| Operating income/(loss) | $ | 3,634 | | | $ | 3,460 | | | 5.0 | % |
| Net income/(loss) | 2,368 | | | 1,024 | | | 131.3 | % |
| Net income/(loss) attributable to common shareholders | 2,363 | | | 1,012 | | | 133.4 | % |
Adjusted EBITDA(a) | 6,003 | | | 6,371 | | | (5.8) | % |
|
| | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | % Change |
| | (in millions) | | |
| Operating income/(loss) | $ | 3,070 |
| | $ | (10,205 | ) | | 130.1 | % |
| Net income/(loss) attributable to common shareholders | 1,935 |
| | (10,192 | ) | | 119.0 | % |
Adjusted EBITDA(a) | 6,064 |
| | 7,024 |
| | (13.7 | )% |
| |
(a) | (a) Adjusted EBITDA is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. |
Fiscal Year 20192022 Compared to Fiscal Year 2018:2021:
Operating income/(loss) increased 130.1%5.0% to income of $3.1$3.6 billion in 20192022 compared to a loss of $10.2$3.5 billion in 2018. This increase was2021, primarily driven by higher pricing, lower non-cash impairment losses in the current year. Impairment losses were $1.9 billion in 2019 compared to $15.9 billion in 2018. Excludingyear period, efficiency gains, and the favorable impact of these impairment losses, operating income/(loss) decreased by $762 million primarily due to lower Organic Net Sales,a 53rd week of shipments, which more than offset 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, energy, and meat); the unfavorable impact of foreign currency (0.8 pp), higher general corporate expenses,acquisitions and divestitures; unfavorable volume/mix; and an accrual related to the unfavorable impact of divestitures, partially offset by lower restructuring expenses in the current period. See Note 9, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for additional information on our impairment losses.previously disclosed securities class action lawsuit.
Net income/(loss) attributableincreased 131.3% to common shareholders increased 119.0% to income of $1.9$2.4 billion in 20192022 compared to a loss of $10.2$1.0 billion in 2018.2021. This changeincrease was driven by lower interest expense, the operating income/(loss) factors describeddiscussed above, (primarilyand lower impairment losses in 2019 compared to 2018) and favorable impactstax expense, which more than offset unfavorable changes in other expense/(income), partially offset by a higher effective tax rate and higher interest.
•Interest expense detailed as follows.
Other expense/(income) was $952$921 million of income in 20192022 compared to $168 million of income$2.0 billion in 2018.2021. This increasedecrease was primarily driven bydue to a $420$38 million net gain on salesextinguishment of businessesdebt recognized in 2019the current year period in connection with our debt repurchases in 2022 compared to a $15$917 million loss on saleextinguishment of our South Africa subsidiary in 2018, a $162 million non-cash settlement chargedebt recognized in the prior year related to the wind-upperiod in connection with our tender offers, debt redemptions, and debt repurchases in 2021. The remaining change in interest expense was a decrease of our Canadian salaried and Canadian hourly defined benefit pension plans, and a $136approximately $171 million decrease in nonmonetary currency devaluation losses related to our Venezuelan operations as compared to the prior year period. The $420 million net gain on salesperiod, as our aggregate principal amount of businessessenior notes was reduced by approximately $6.2 billion in 2019 consisted of a $249 million gain on the sale of Heinz India Private Limited (“Heinz India”) (“Heinz India Transaction”), a $242 million gain on the sale of certain assets2021 through tender offers, redemptions, repurchases, and repayments and approximately $1.5 billion in our natural cheese business in Canada (“Canada Natural Cheese Transaction”),2022 through repurchases and a $71 million loss on an anticipated sale of a subsidiary within our Rest of World segment.repayments.
The•Our effective tax rate was 27.4%20.2% in 2019 on pre-tax income2022 compared to 9.4%40.1% in 2018 on a pre-tax loss. The 20192021. Our 2022 effective tax rate was higher primarily drivenimpacted by lower non-deductible goodwill impairments, partially offset by a morethe favorable geographic mix of pre-tax income in various non-U.S. jurisdictions and acertain favorable items, primarily the decrease in deferred tax liabilities due to the merger of certain foreign entities, the revaluation of deferred tax balances due to changes in state tax laws, and changes in estimates of certain 2021 U.S. income and deductions. This impact was partially offset by the impact of certain unfavorable rate reconciling items. Current year unfavorable impactsitems, primarily related to non-deductible goodwill impairments, the impact of the federal tax on global intangible low-taxed income (“GILTI”), and the establishment of uncertain tax positions and valuation allowance reserves. Our 2021 effective tax rate was unfavorably impacted by rate reconciling items, primarily the tax impacts related to acquisitions and divestitures, which mainly reflect the impacts of the Nuts Transaction and Cheese Transaction, partially offset by 2021 capital losses; the revaluation of our deferred tax balances due to changes in international and state tax rates, mainly an increase in uncertainU.K. tax position reserves,rates; the establishmentimpact of certain state valuation allowance reserves,the federal tax on GILTI; and the tax impacts from the Heinz India and Canada Natural Cheese Transactions.non-deductible goodwill impairments. These impacts were partially offset by the reversala favorable geographic mix of certain withholding tax obligations and changespre-tax income in estimatesvarious non-U.S. jurisdictions.
•Other expense/(income) was $253 million of certain 2018 U.S. income and deductions.
Interest expense was $1.4 billion in 20192022 compared to $1.3 billion$295 million of income in 2018.2021. This increasechange was primarily driven by a $98$79 million decrease in net pension and postretirement non-service benefits and a $25 million net gain on sales of businesses in 2022 compared to a $44 million net gain on sales of businesses in 2021. These impacts were partially offset by a $50 million net loss on extinguishment of debt recognizedderivative activities in connection with our debt tender offers and redemptions completed in 2019. Excluding the impact of the2022 compared to an $86 million net loss on extinguishment of debt,derivative activities in 2021 and a $12 million increase in interest expense was generally flatincome as compared to the prior year period.
Adjusted EBITDA decreased 13.7%5.8% to $6.1$6.0 billion in 20192022 compared to $7.0$6.4 billion in 2018. This decrease was2021, primarily due to lower Organic Net Sales, 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, energy, and meat); the unfavorable impact of acquisitions and divestitures (6.1 pp); unfavorable volume/mix; and the unfavorable impact of foreign currency (2.8(1.3 pp), which more than offset higher general corporate expenses,pricing, efficiency gains, and the unfavorablefavorable impact of divestitures.a 53rd week of shipments (1.9 pp).
Diluted EPS:Earnings Per Share (“EPS”):
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | % Change |
| (in millions, except per share data) | | |
| Diluted EPS | $ | 1.91 | | | $ | 0.82 | | | 132.9 | % |
Adjusted EPS(a) | 2.78 | | | 2.93 | | | (5.1) | % |
|
| | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | % Change |
| | (in millions, except per share data) | | |
| Diluted EPS | $ | 1.58 |
| | $ | (8.36 | ) | | 118.9 | % |
Adjusted EPS(a) | 2.85 |
| | 3.51 |
| | (18.8 | )% |
| |
(a) | (a)Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. |
Fiscal Year 20192022 Compared to Fiscal Year 2018:2021:
Diluted EPS increased 118.9%132.9% to earnings of $1.58$1.91 in 20192022 compared to a loss of $8.36$0.82 in 20182021, primarily driven by the net income/(loss) attributable to common shareholders factors discussed above.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | $ Change | | % Change |
| Diluted EPS | $ | 1.91 | | | $ | 0.82 | | | $ | 1.09 | | | 132.9 | % |
| Restructuring activities | 0.05 | | | 0.05 | | | — | | | |
| | | | | | | |
| Unrealized losses/(gains) on commodity hedges | 0.04 | | | 0.01 | | | 0.03 | | | |
| Impairment losses | 0.70 | | | 1.07 | | | (0.37) | | | |
| Certain non-ordinary course legal and regulatory matters | 0.13 | | | 0.05 | | | 0.08 | | | |
| Losses/(gains) on sale of business | (0.01) | | | 0.15 | | | (0.16) | | | |
| Other losses/(gains) related to acquisitions and divestitures | (0.02) | | | — | | | (0.02) | | | |
| Nonmonetary currency devaluation | 0.01 | | | — | | | 0.01 | | | |
| Debt prepayment and extinguishment (benefit)/costs | (0.03) | | | 0.59 | | | (0.62) | | | |
| Certain significant discrete income tax items | — | | | 0.19 | | | (0.19) | | | |
Adjusted EPS(b) | $ | 2.78 | | | $ | 2.93 | | | $ | (0.15) | | | (5.1) | % |
| | | | | | | |
Key drivers of change in Adjusted EPS(a): | | | | | | | |
| Results of operations | | | | | $ | 0.01 | | | |
| Results of divested operations | | | | | (0.26) | | | |
| 53rd week | | | | | 0.06 | | | |
| Interest expense | | | | | 0.13 | | | |
| Other expense/(income) | | | | | (0.03) | | | |
| Effective tax rate | | | | | (0.06) | | | |
| | | | | $ | (0.15) | | | |
|
| | | | | | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | $ Change | | % Change |
| Diluted EPS | $ | 1.58 |
| | $ | (8.36 | ) | | $ | 9.94 |
| | 118.9 | % |
| Integration and restructuring expenses | 0.07 |
| | 0.32 |
| | (0.25 | ) | | |
| Deal costs | 0.02 |
| | 0.02 |
| | — |
| | |
| Unrealized losses/(gains) on commodity hedges | (0.04 | ) | | 0.01 |
| | (0.05 | ) | | |
| Impairment losses | 1.38 |
| | 11.28 |
| | (9.90 | ) | | |
| Losses/(gains) on sale of business | (0.23 | ) | | 0.01 |
| | (0.24 | ) | | |
| Other losses/(gains) related to acquisitions and divestitures | — |
| | 0.02 |
| | (0.02 | ) | | |
| Nonmonetary currency devaluation | 0.01 |
| | 0.12 |
| | (0.11 | ) | | |
| Debt prepayment and extinguishment costs | 0.06 |
| | — |
| | 0.06 |
| | |
U.S. Tax Reform discrete income tax expense/(benefit) | — |
| | 0.09 |
| | (0.09 | ) | | |
Adjusted EPS(a) | $ | 2.85 |
| | $ | 3.51 |
| | $ | (0.66 | ) | | (18.8 | )% |
| | | | | | | | |
Key drivers of change in Adjusted EPS(a): | | | | | | | |
| Results of operations | | | | | $ | (0.64 | ) | | |
| Results of divested operations | | | | | (0.05 | ) | | |
| Interest expense | | | | | 0.01 |
| | |
| Other expense/(income) | | | | | 0.02 |
| | |
| | | | | | $ | (0.66 | ) | | |
| |
(a) | (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 18.8%5.1% to $2.85$2.78 in 20192022 compared to $3.51$2.93 in 20182021 primarily due to lower Adjusted EBITDA, which includes the unfavorable impact of our divestitures, higher taxes on adjusted earnings, and higher depreciation and amortization expenses, partially offset by favorableunfavorable changes in other expense/(income), which more than offset lower interest expense, the favorable impact of a 53rd week of shipments, higher divestiture-related license income, and lower interestequity award compensation 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 integration and restructuring expenses)activities); in addition to these adjustments, we exclude, when they occur, the impacts of integration anddivestiture-related license income (e.g., income related to the sale of licenses in connection with the Cheese Transaction), restructuring expenses,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 integration and restructuring expenses)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 net income/(loss),other expense/(income) on our consolidated statement of income, as nonmonetary currency devaluation, rather than accumulated other comprehensive income/(losses) on theour consolidated balance sheet, until such time as the economy is no longer considered highly inflationary. The exchange gains and losses from remeasurement are recorded in current net income/(loss) and are classified within other expense/(income), as nonmonetary currency devaluation. See Note 15, Venezuela - Foreign Currency and Inflation, and Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, 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:
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in millions) |
| Net sales: | | | |
| United States | $ | 17,756 |
| | $ | 18,122 |
|
| Canada | 1,882 |
| | 2,173 |
|
| EMEA | 2,551 |
| | 2,718 |
|
| Rest of World | 2,788 |
| | 3,255 |
|
| Total net sales | $ | 24,977 |
| | $ | 26,268 |
|
| | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| (in millions) |
| Net sales: | | | |
| North America | $ | 20,340 | | | $ | 20,351 | |
| International | 6,145 | | | 5,691 | |
| Total net sales | $ | 26,485 | | | $ | 26,042 | |
Organic Net Sales:
| | | | | | | | | | | |
| 2022 Compared to 2021 |
| December 31, 2022 | | December 25, 2021 |
| (in millions) |
Organic Net Sales(a): | | | |
| North America | $ | 20,050 | | | $ | 18,361 | |
| International | 6,199 | | | 5,556 | |
| Total Organic Net Sales | $ | 26,249 | | | $ | 23,917 | |
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in millions) |
Organic Net Sales(a): | | | |
| United States | $ | 17,756 |
| | $ | 18,122 |
|
| Canada | 1,700 |
| | 1,732 |
|
| EMEA | 2,666 |
| | 2,697 |
|
| Rest of World | 2,839 |
| | 2,842 |
|
| Total Organic Net Sales | $ | 24,961 |
| | $ | 25,393 |
|
| |
(a) | (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 were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Currency | | Acquisitions and Divestitures | | 53rd Week | | Organic Net Sales | | Price | | Volume/Mix |
| 2022 Compared to 2021 | | | | | | | | | | | | | |
| North America | (0.1) | % | | (0.4) pp | | (10.8) pp | | 1.9 pp | | 9.2 | % | | 13.0 pp | | (3.8) pp |
| International | 8.0 | % | | (8.1) pp | | 2.8 pp | | 1.7 pp | | 11.6 | % | | 13.5 pp | | (1.9) pp |
| Kraft Heinz | 1.7 | % | | (2.0) pp | | (8.0) pp | | 1.9 pp | | 9.8 | % | | 13.2 pp | | (3.4) pp |
|
| | | | | | | | | | | | | |
| | Net Sales | | Currency | | Acquisitions and Divestitures | | Organic Net Sales | | Price | | Volume/Mix |
| 2019 Compared to 2018 | | | | | | | | | | | |
| United States | (2.0 | )% | | 0.0 pp | | 0.0 pp | | (2.0 | )% | | 0.4 pp | | (2.4) pp |
| Canada | (13.4 | )% | | (2.1) pp | | (9.4) pp | | (1.9 | )% | | (3.4) pp | | 1.5 pp |
| EMEA | (6.2 | )% | | (4.3) pp | | (0.7) pp | | (1.2 | )% | | 0.0 pp | | (1.2) pp |
| Rest of World | (14.3 | )% | | (10.3) pp | | (3.9) pp | | (0.1 | )% | | 1.2 pp | | (1.3) pp |
| Kraft Heinz | (4.9 | )% | | (1.9) pp | | (1.3) pp | | (1.7 | )% | | 0.1 pp | | (1.8) pp |
Adjusted EBITDA:
| | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| | (in millions) |
| Segment Adjusted EBITDA: | | | |
| North America | $ | 5,284 | | | $ | 5,576 | |
| International | 1,017 | | | 1,066 | |
| General corporate expenses | (298) | | | (271) | |
| Depreciation and amortization (excluding restructuring activities) | (922) | | | (910) | |
| Divestiture-related license income | 56 | | | 4 | |
| Restructuring activities | (74) | | | (84) | |
| Deal costs | (9) | | | (11) | |
| Unrealized gains/(losses) on commodity hedges | (63) | | | (17) | |
| Impairment losses | (999) | | | (1,634) | |
| Certain non-ordinary course legal and regulatory matters | (210) | | | (62) | |
| Equity award compensation expense | (148) | | | (197) | |
| Operating income/(loss) | 3,634 | | | 3,460 | |
| Interest expense | 921 | | | 2,047 | |
| Other expense/(income) | (253) | | | (295) | |
| Income/(loss) before income taxes | $ | 2,966 | | | $ | 1,708 | |
|
| | | | | | | |
| | December 28, 2019 | | December 29, 2018 |
| | (in millions) |
| Segment Adjusted EBITDA: | | | |
| United States | $ | 4,809 |
| | $ | 5,218 |
|
| Canada | 487 |
| | 608 |
|
| EMEA | 661 |
| | 724 |
|
| Rest of World | 363 |
| | 635 |
|
| General corporate expenses | (256 | ) | | (161 | ) |
| Depreciation and amortization (excluding integration and restructuring expenses) | (985 | ) | | (919 | ) |
| Integration and restructuring expenses | (102 | ) | | (297 | ) |
| Deal costs | (19 | ) | | (23 | ) |
| Unrealized gains/(losses) on commodity hedges | 57 |
| | (21 | ) |
| Impairment losses | (1,899 | ) | | (15,936 | ) |
| Equity award compensation expense (excluding integration and restructuring expenses) | (46 | ) | | (33 | ) |
| Operating income | 3,070 |
| | (10,205 | ) |
| Interest expense | 1,361 |
| | 1,284 |
|
| Other expense/(income) | (952 | ) | | (168 | ) |
| Income/(loss) before income taxes | $ | 2,661 |
| | $ | (11,321 | ) |
United States: | | | | | | | | | | | | | | | | | |
| 2022 Compared to 2021 |
| December 31, 2022 | | December 25, 2021 | | % Change |
| (in millions) | | |
| Net sales | $ | 20,340 | | | $ | 20,351 | | | (0.1) | % |
Organic Net Sales(a) | 20,050 | | | 18,361 | | | 9.2 | % |
| Segment Adjusted EBITDA | 5,284 | | | 5,576 | | | (5.2) | % |
|
| | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | % Change |
| | (in millions) | | |
| Net sales | $ | 17,756 |
| | $ | 18,122 |
| | (2.0 | )% |
Organic Net Sales(a) | 17,756 |
| | 18,122 |
| | (2.0 | )% |
| Segment Adjusted EBITDA | 4,809 |
| | 5,218 |
| | (7.8 | )% |
| |
(a) | (a) Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item. |
Fiscal Year 20192022 Compared to Fiscal Year 2018:2021:
Net sales and Organic Net Sales both decreased 2.0%0.1% to $17.8$20.3 billion in 20192022 compared to $18.1$20.4 billion in 2018. This decrease was primarily due to2021, including the unfavorable volume/mix (2.4impacts of divestitures (10.8 pp) and foreign currency (0.4 pp), partially offset by the favorable impact of a 53rd week of shipments (1.9 pp). Organic Net Sales increased 9.2% to $20.1 billion in 2022 compared to $18.4 billion in 2021, driven by higher pricing (0.4(13.0 pp), which more than offset unfavorable volume/mix (3.8 pp). Higher pricing was primarily driven by increases to mitigate rising input costs. Unfavorable volume/mix was primarily due to unfavorable changesdeclines in retail inventory levels versus the prior year and lower shipments infrozen, meat, cheese, and coffee, partially offset by growth in nuts as well as condiments and sauces. Higher pricing was primarily driven by price increases to reflect higher key-commodity costs for meatsauces, coffee, ready-to-drink beverages, and cheese, which more than offset lower key-commodity driven pricing on coffee and nuts.desserts.
Segment Adjusted EBITDA decreased 7.8%5.2% to $4.8$5.3 billion in 20192022 compared to $5.2$5.6 billion in 2018. This decrease was primarily due to lower Organic Net Sales, cost inflation in procurement and manufacturing, strategic investments, and supply chain losses.
Canada:
|
| | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | % Change |
| | (in millions) | | |
| Net sales | $ | 1,882 |
| | $ | 2,173 |
| | (13.4 | )% |
Organic Net Sales(a) | 1,700 |
| | 1,732 |
| | (1.9 | )% |
| Segment Adjusted EBITDA | 487 |
| | 608 |
| | (19.9 | )% |
| |
(a) | Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
|
FiscalYear 2019 Compared to Fiscal Year 2018:
Net sales decreased 13.4% to $1.9 billion in 2019 compared to $2.2 billion in 2018 primarily due to the unfavorable impacts of acquisitions and divestitures (9.4 pp) and foreign currency (2.1 pp). Organic Net Sales decreased 1.9% to $1.7 billion in 2019 compared to $1.7 billion in 2018 due to lower pricing (3.4 pp), partially offset by favorable volume/mix (1.5 pp). Pricing was lower across categories,2021, primarily due to higher promotionalcommodity costs versus(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 prior year, particularly in condimentsunfavorable impact of the Cheese Transaction and saucesNuts Transaction (6.7 pp); unfavorable volume/mix; and cheese. Favorable volume/mix was primarily driven by growth in condiments and sauces, spreads, and cheese.
Segment Adjusted EBITDA decreased 19.9% to $487 million in 2019 compared to $608 million in 2018 partially due to the unfavorable impact of foreign currency (1.9(0.2 pp). Excluding the currency impact,These decreases to Segment Adjusted EBITDA decreased primarily due to lowermore than offset higher pricing, efficiency gains, and the favorable impact of a 53rd week of shipments (1.9 pp).
International:
| | | | | | | | | | | | | | | | | |
| 2022 Compared to 2021 |
| December 31, 2022 | | December 25, 2021 | | % Change |
| (in millions) | | |
| Net sales | $ | 6,145 | | | $ | 5,691 | | | 8.0 | % |
Organic Net Sales(a) | 6,199 | | | 5,556 | | | 11.6 | % |
| Segment Adjusted EBITDA | 1,017 | | | 1,066 | | | (4.6) | % |
(a) Organic Net Sales is a non-GAAP financial measure. See the Canada Natural Cheese Transaction which closed on July 2, 2019, and higher input costs.
EMEA:
|
| | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | % Change |
| | (in millions) | | |
| Net sales | $ | 2,551 |
| | $ | 2,718 |
| | (6.2 | )% |
Organic Net Sales(a) | 2,666 |
| | 2,697 |
| | (1.2 | )% |
| Segment Adjusted EBITDA | 661 |
| | 724 |
| | (8.7 | )% |
| |
(a) | Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
|
Fiscal Year 20192022 Compared to Fiscal Year 2018:2021:
Net sales decreased 6.2%increased 8.0% to $2.6$6.1 billion in 20192022 compared to $2.7$5.7 billion in 2018 driven by2021, including the favorable impacts of acquisitions and divestitures (2.8 pp) and a 53rd week of shipments (1.7 pp) and the unfavorable impactsimpact of foreign currency (4.3 pp) and acquisitions and divestitures (0.7(8.1 pp). Organic Net Sales decreased 1.2%increased 11.6% to $2.7$6.2 billion in 20192022 compared to $2.7$5.6 billion in 2018 due to2021, driven by higher pricing (13.5 pp), which more than offset unfavorable volume/mix (1.2(1.9 pp) while. Higher pricing was flat versus 2018.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, declines in boxed dinners and condiments and sauces in the adverse impact of extended negotiations with key retailers, lower shipments of meals,United Kingdom, and ongoing weaknessdeclines in condiments and sauces and infant nutrition partiallyin Russia, which more than offset byhigher foodservice sales across most markets and growth. Pricing was flat primarily due to lower pricing in infant nutrition, partially offset by price increases in meals.Brazil.
Segment Adjusted EBITDA decreased 8.7%4.6% to $661 million$1.0 billion in 20192022 compared to $724 million$1.1 billion in 2018, including the unfavorable impact of foreign currency (4.2 pp). Excluding the currency impact, the decrease was2021, primarily due to higher supply chain costs, reflecting inflationary pressure in the current yearprocurement, logistics, and the benefit from the postemployment benefits accounting changemanufacturing costs; higher commodity costs, including in the prior year.
Rest of World:
|
| | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | % Change |
| | (in millions) | | |
| Net sales | $ | 2,788 |
| | $ | 3,255 |
| | (14.3 | )% |
Organic Net Sales(a) | 2,839 |
| | 2,842 |
| | (0.1 | )% |
| Segment Adjusted EBITDA | 363 |
| | 635 |
| | (42.8 | )% |
| |
(a) | Organic Net Sales is a non-GAAP financial measure. See the Non-GAAP Financial Measures section at the end of this item.
|
FiscalYear 2019 Compared to Fiscal Year 2018:
Net sales decreased 14.3% to $2.8 billion in 2019 compared to $3.3 billion in 2018 due topackaging and energy; the unfavorable impact of foreign currency (10.3 pp, including 6.9 pp(7.2 pp); and unfavorable volume/mix, which more than offset higher pricing, efficiency gains, and the favorable impact of a 53rd week of shipments (1.6 pp).
Liquidity and Capital Resources
We believe that cash generated from our operating activities, commercial paper programs, and 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 devaluationnext 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 the fourth quarter of 2022, we received approximately $108 million of cash consideration following the closing of the Venezuelan bolivar)Powdered Cheese Transaction.
In the second quarter of 2021, we received approximately $3.4 billion of cash consideration following the closing of the Nuts Transaction. In connection with the Nuts Transaction, we paid approximately $700 million of cash taxes in the second half of 2021, primarily to U.S. federal and state tax authorities. We primarily utilized the post-tax transaction proceeds, along with cash on hand, to fund opportunistic repayments of long-term debt, including our tender offers in the second quarter of 2021 and our debt redemption and open market debt repurchases in the third quarter of 2021.
In the fourth quarter of 2021, we received approximately $3.2 billion of cash consideration following the closing of the Cheese Transaction. In connection with the Cheese Transaction, we paid approximately $620 million of cash taxes in the second quarter of 2022, primarily to U.S. federal and state tax authorities. We primarily utilized the post-tax transaction proceeds to fund our open market debt repurchases and tender offer in the fourth quarter of 2021.
Additionally, in the fourth quarter of 2021, we completed the Assan Foods Acquisition, which included cash consideration of approximately $70 million, and the unfavorable impactBR Spices Acquisition for an insignificant amount of cash consideration.
See Note 4, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, for additional information on our acquisitions and divestitures (3.9 pp). Organic divestitures. See Note 16, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information on our debt transactions.
Cash Flow Activity for 2022 Compared to 2021:
Net Sales decreased 0.1% to $2.8Cash Provided by/Used for Operating Activities:
Net cash provided by operating activities was $2.5 billion in 2019for the year ended December 31, 2022 compared to $2.8$5.4 billion in 2018 primarily due to unfavorable volume/mix (1.3 pp), partially offset by higher pricing (1.2 pp). Unfavorable volume/mix was due to ongoing weakness in infant nutrition, partially offset by growth in condiments and sauces. Higher pricingfor the year ended December 25, 2021. This decrease was primarily driven by price increases in Brazil and Mexico.
Segment Adjusted EBITDA decreased 42.8% to $363 million in 2019 compared to $635 million in 2018, including the unfavorable impact of foreign currency (22.6 pp, including 20.8 ppproceeds from the devaluationsale of licenses in connection with the Venezuelan bolivar)Cheese Transaction in 2021, higher cash outflows for inventories, primarily related to stock rebuilding, increased input costs, and costs not expectedthe acceleration of payments to repeat, from a combinationsuppliers attributed to the wind-down of higher labor-related expenses from the impact of the Holidays Act in New Zealand,our existing product financing arrangements, as well as asset-lower Adjusted EBITDA. These impacts were partially offset by lower cash outflows for interest primarily due to the reduction of long-term debt throughout 2022 and inventory-related write-offs2021.
Net Cash Provided by/Used for Investing Activities:
Net cash used for investing activities was $1.1 billion for the year ended December 31, 2022 compared to net cash provided by investing activities of $4.0 billion for the year ended December 25, 2021. This decrease was primarily driven by proceeds from the Nuts Transaction and Cheese Transaction in Australia, New Zealand,2021, as well as payments for the Just Spices Acquisition and Latin America. Excluding these factors,Hemmer Acquisition in 2022. These impacts were partially offset by increased proceeds from the decreasesettlement of net investment hedges and proceeds from the Powdered Cheese Transaction in Segment Adjusted EBITDA2022. We had 2022 capital expenditures of $916 million compared to 2021 capital expenditures of $905 million. We expect 2023 capital expenditures to be approximately $1.1 billion, primarily driven by capital investments for capacity expansion, maintenance, cost improvement and innovation projects, and technology.
Net Cash Provided by/Used for Financing Activities:
Net cash used for financing activities was $3.7 billion for the year ended December 31, 2022 compared to $9.3 billion for the year ended December 25, 2021. This change was primarily due to higher repayments of long-term debt and debt prepayment and extinguishment costs in 2021 related to our tender offers, debt repurchases, and debt redemptions in 2021. See Note 16, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information on our debt repayments.
Cash Held by International Subsidiaries:
Of the $1.0 billion cash and cash equivalents on our consolidated balance sheet at December 31, 2022, $707 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, if repatriated, related to our 2018 through 2022 accumulated earnings of certain international subsidiaries is approximately $50 million.
Our undistributed historic earnings in foreign subsidiaries through December 31, 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 $90 million of historic earnings at December 31, 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 $1.1 billion at December 31, 2022 and $820 million at December 25, 2021.
Product Financing Arrangements:
We enter into various product financing arrangements to facilitate supply chainfrom our vendors. In the fourth quarter of 2022, we began to wind-down our existing product financing arrangements, with final impacts of the wind-down expected to extend into 2023. We continue to have access to these programs to facilitate supply from our vendors in the future, if we choose to do so. See Note 14, Financing Arrangements, in Item 8, Financial Statements and Supplementary Data, 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”), BBB by 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. Fitch upgraded our long-term debt credit rating from BBB- to BBB in November 2022.
From time to time, we obtain funding through our commercial paper programs. We had no commercial paper outstanding at December 31, 2022, at December 25, 2021, or during the year ended December 25, 2021. The maximum amount of commercial paper outstanding during the year ended December 31, 2022 was $198 million, under our U.S. commercial paper program.
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 December 31, 2022, our previous credit facility (the “Previous Senior Credit Facility”) at December 25, 2021, or on either the Senior Credit Facility or Previous Senior Credit Facility during the years ended December 31, 2022 and December 25, 2021.
Our 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 December 31, 2022.
Long-Term Debt:
Our long-term debt, including the current portion, was $20.1 billion at December 31, 2022 and $21.8 billion at December 25, 2021. This decrease was primarily due to approximately $315 million aggregate principal amount of floating rate senior notes that were repaid at maturity in August 2022, approximately $381 million aggregate principal amount of senior notes that were repaid at maturity in June 2022, approximately $6 million aggregate principal amount of senior notes that were repaid at maturity in March 2022, and approximately $755 million aggregate principal amount of senior notes repurchased in connection with the debt repurchases in 2022, as well as changes in foreign currency exchange rates on our foreign-denominated debt. We used cash on hand to fund our debt repurchases in 2022 and to pay related fees and expenses.
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 December 31, 2022.
See Note 16, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information on our long-term debt activity.
Equity and Dividends:
We paid dividends on our common stock of $2.0 billion in 2022, 2021, and 2020, respectively. Additionally, in the first quarter of 2023, our Board declared a cash dividend of $0.40 per share of common stock, which is payable on March 31, 2023 to stockholders of record on March 10, 2023.
The declaration of dividends is subject to the discretion of our Board and depends on various factors, including our net income, financial condition, cash requirements, future prospects, and other factors that our Board deems relevant to its analysis and decision making.
Aggregate Contractual Obligations:
Related to our current and long-term material cash requirements, the following table summarizes our aggregate contractual obligations at December 31, 2022, which we expect to primarily fund with cash from operating activities (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Material Cash Requirements |
| 2023 | | 2024-2025 | | 2026-2027 | | 2028 and Thereafter | | Total |
Long-term debt(a) | $ | 1,690 | | | $ | 2,322 | | | $ | 5,319 | | | $ | 24,656 | | | $ | 33,987 | |
Finance leases(b) | 30 | | | 34 | | | 19 | | | 68 | | | 151 | |
Operating leases(c) | 150 | | | 223 | | | 160 | | | 292 | | | 825 | |
Purchase obligations(d) | 487 | | | 766 | | | 297 | | | 261 | | | 1,811 | |
Other long-term liabilities(e) | 57 | | | 142 | | | 38 | | | 135 | | | 372 | |
| Total | $ | 2,414 | | | $ | 3,487 | | | $ | 5,833 | | | $ | 25,412 | | | $ | 37,146 | |
(a) Amounts represent the expected cash payments of our long-term debt, including interest on long-term debt.
(b) Amounts represent the expected cash payments of our finance leases, including expected cash payments of interest expense.
(c) Operating leases represent the minimum rental commitments under non-cancellable operating leases net of sublease income.
(d) We have purchase obligations for materials, supplies, property, plant and equipment, and co-packing, storage, and distribution services based on projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology, and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. Several of these obligations are long-term and are based on minimum purchase requirements. Certain purchase obligations contain variable pricing components, and, as a result, actual cash payments are expected to fluctuate based on changes in these variable components. Due to the proprietary nature of some of our materials and processes, certain supply contracts contain penalty provisions for early terminations. We do not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations.
(e) Other long-term liabilities primarily consist of estimated payments for the one-time toll charge related to 2017 U.S. tax reform, as well as postretirement benefit commitments. Certain other long-term liabilities related to income taxes, insurance accruals, and other accruals included on the consolidated balance sheet are excluded from the above table as we are unable to estimate the timing of payments for these items.
Pension plan contributions were $11 million in 2022. We estimate that 2023 pension plan contributions will be approximately $11 million. Postretirement benefit plan contributions were $12 million in 2022. We estimate that 2023 postretirement benefit plan contributions will be approximately $12 million. Estimated future contributions take into consideration current economic conditions, which at this time are expected to have minimal impact on expected contributions for 2023. Beyond 2023, we are unable to reliably estimate the timing of contributions to our pension or postretirement plans. Our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual pension or postretirement asset performance or interest rates, or other factors. As such, estimated pension and postretirement plan contributions for 2023 have been excluded from the above table.
At December 31, 2022, the amount of net unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was approximately $555 million. The timing of payments will depend on the progress of examinations with tax authorities. We are unable to make a reasonably reliable estimate as to if or when any significant cash settlements with taxing authorities may occur; therefore, we have excluded the amount of net unrecognized tax benefits from the above table.
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 Kraft Heinz Foods Company (“KHFC”), our 100% owned operating subsidiary (the “Guarantee”). See Note 16, Debt, in Item 8, Financial Statements and Supplementary Data, 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 Year Ended |
| December 31, 2022 |
| Net sales | $ | 17,329 | |
Gross profit(a) | 5,775 | |
| Goodwill impairment losses | — | |
| Intercompany service fees and other recharges | 3,829 | |
| Operating income/(loss) | 1,089 | |
| Equity in earnings/(losses) of subsidiaries | 2,114 | |
| Net income/(loss) | 2,363 | |
| Net income/(loss) attributable to common shareholders | 2,363 | |
(a) In 2022, the Obligor Group recorded $398 million of net sales to the non-guarantor subsidiaries and $38 million of purchases from the non-guarantor subsidiaries.
Summarized Balance Sheets
| | | | | |
| December 31, 2022 |
| ASSETS | |
| Current assets | $ | 4,218 | |
Current assets due from affiliates(a) | 1,788 | |
| Non-current assets | 5,445 | |
| Goodwill | 8,823 | |
| Intangible assets, net | 2,102 | |
Non-current assets due from affiliates(b) | 195 | |
| LIABILITIES | |
| Current liabilities | $ | 4,915 | |
Current liabilities due to affiliates(a) | 1,791 | |
| Non-current liabilities | 21,372 | |
Non-current liabilities due to affiliates(b) | 591 | |
(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, tomatoes, coffee beans, sugar and other sweeteners, other fruits and vegetables, corn products, wheat products, and potatoes, 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 year ended December 31, 2022, we experienced higher commodity costs primarily for dairy, packaging materials, soybean and vegetable oils, energy (including diesel fuel, electricity, and natural gas), and meat as compared to the prior year period. These increases were 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 increase and inflation to remain elevated through 2023. 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.
In 2022, dairy commodities, primarily milk, cream, and cheese, were the most significant cost components of our cheese products. We purchase our dairy raw material requirements from independent third parties, such as agricultural cooperatives and independent processors. Market supply and demand, as well as government programs, significantly influence the prices for milk and other dairy products. Significant cost components of our meat products include pork, beef, and poultry, which we primarily purchase from applicable local markets. Livestock feed costs and the Heinz India Transaction which closed on January 30, 2019.global supply and demand for U.S. meats influence the prices of these meat products.
Critical Accounting Estimates
Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, includes a summary of the significant accounting policies we used to prepare our consolidated financial statements. The following is a review of the more significant assumptions and estimates as well as accounting policies we used to prepare our consolidated financial statements.
Revenue Recognition:
Our revenues are primarily derived from customer orders for the purchase of our products. We recognize revenues as performance obligations are fulfilled when control passes to our customers. We record revenues net of variable consideration, including consumer incentives and performance obligations related to trade promotions, excluding taxes, and including all shipping and handling charges billed to customers (accounting for shipping and handling charges that occur after the transfer of control as fulfillment costs). We also record a refund liability for estimated product returns and customer allowances as reductions to revenues within the same period that the revenue is recognized. We base these estimates principally on historical and current period experience factors. We recognize costs paid to third party brokers to obtain contracts as expenses as our contracts are generally less than one year.
Advertising, Consumer Incentives, and Trade Promotions:
We promote our products with advertising, consumer incentives, and performance obligations related to trade promotions. Consumer incentives and trade promotions include, but are not limited to, discounts, coupons, rebates, performance-based in-store display activities, and volume-based incentives. Variable consideration related to consumer incentive and trade promotion activities is recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization, redemption rates, and/or current period experience factors. We review and adjust these estimates at least quarterly based on actual experience and other information.
Advertising expenses are recorded in selling, general and administrative expenses (“SG&A”). For interim reporting purposes, we charge advertising to operations as a percentage of estimated full year sales activity and marketing costs. We then review and adjust these estimates each quarter based on actual experience and other information. We recordedOur definition of advertising expenses of $534 millionincludes advertising production costs, in-store advertising costs, agency fees, brand promotions and events, and sponsorships, in 2019, $584 million in 2018, and $629 million in 2017, which representedaddition to costs to obtain physical advertisement spotsadvertising in television, radio, print, digital, and social channels. We recorded advertising expenses of $945 million in 2022, $1,039 million in 2021, and $1,070 million in 2020. We also incur othermarket research costs, which are recorded in SG&A but are excluded from advertising and marketing costs such as shopper marketing, sponsorships, and agency advertisement conception, design, and public relations fees. Total advertising and marketing costs were $1.1 billion in 2019, 2018, and 2017.expenses.
Goodwill and Intangible Assets:
WeAs of December 31, 2022, we maintain 1911 reporting units, 11seven of which comprise our goodwill balance. These 11seven reporting units had an aggregate goodwill carrying amount of $35.5$30.8 billion as ofat December 28, 2019.31, 2022. Our indefinite-lived intangible asset balance primarily consists of a number of individual brands, which had an aggregate carrying amount of $43.4$38.6 billion as of December 28, 2019.31, 2022.
We test our reporting units and brands for impairment annually as of the first day of our secondthird quarter, 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, (for example due to regulatory or industry changes), 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.
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 as a result of updates to our global five-yearlong-term operating plan,plans, then one or more of our reporting units or brands might become impaired in the future. We are currently actively reviewing the enterprise strategy for the Company. As part of this strategic review, we expect to develop updates to the five-year operating plan in 2020, which could impact the allocation of investments among reporting units and brands and impact growth expectations and fair value estimates. Additionally, as a result of this strategic review process, we could decideany decisions to divest certain non-strategic assets. As a result, the ongoing development of the enterprise strategyassets has led, and underlying detailed business plans could lead to the impairment of one or more of our reporting units or brands in the future lead, to goodwill or a decision to amortize indefinite-lived intangible assets over a defined period of time.asset impairments.
As detailed in Note 9,8, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, we recorded impairment losses related to goodwill and indefinite-lived intangible assets in the current year and in the prior year.assets. Our reporting units and brands that were impaired in 2018 and 2019 were written down to their respective fair values resulting in zero excess fair value over carrying amount as of the applicable impairment test dates. Accordingly, these and other individual reporting units and brands that have 20% or less excess fair value over carrying amount as of their latest 2019 impairment testing datethe Q3 2022 Annual Impairment Test have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future.
Reporting units with 10%20% or less fair value over carrying amount had an aggregate goodwill carrying amount after impairment of $32.4$16.4 billion as of their latest 2019 impairment testing datethe Q3 2022 Annual Impairment Test and included U.S. Grocery, U.S. Refrigerated, U.S. Foodservice,Taste, Meals, and Away from Home (TMA), Canada Retail, Canada Foodservice, Latinand North America Exports,Coffee (CNAC), and EMEA East.Continental Europe. Reporting units with between 10-20%20-50% fair value over carrying amount had an aggregate goodwill carrying amount of $676 million$14.5 billion as of their latest 2019 impairment testing datethe Q3 2022 Annual Impairment Test and included ContinentalFresh, Beverages, and Desserts (FBD), Northern Europe, Asia, and Northeast Asia. The aggregate goodwill carrying amount ofLatin America (LATAM). Our reporting units withthat have less than 1% excess fair value over carrying amount between 20-50% was $2.4 billionas of the Q3 2022 Annual Impairment Test are considered at a heightened risk of future impairments and there were noinclude our CNAC and Continental Europe reporting units, with fair value overwhich had an aggregate goodwill carrying amount in excessafter impairment of 50% as$2.4 billion. Our four remaining reporting units had no goodwill carrying amount at the time of their latest 2019 impairment testing date. the Q3 2022 Annual Impairment Test.
Brands with 10%20% or less fair value over carrying amount had an aggregate carrying amount after impairment of $26.2$16.6 billion as of their latest 2019 impairment testing datethe Q3 2022 Annual Impairment Test and included: included Kraft, PhiladelphiaOscar Mayer, Velveeta, Lunchables,Miracle Whip, PlantersOre-Ida, Maxwell House, Cool Whip, and ABC. Brands with between 10-20% fair value over carrying amount had an aggregate carrying amount of $3.7 billion as of their latest 2019 impairment testing date and included Oscar Mayer, Jet Puffed, Wattie’s, andQuero Plasmon.The aggregate carrying amount of brands with fair value over carrying amount between 20-50% was $4.2$2.5 billion as of their latest 2019 impairment testing date.the Q3 2022 Annual Impairment Test. Although the remaining brands, with a carrying valueamount of $9.2$19.4 billion, have more than 50% excess fair value over carrying amount as of their latest 2019 impairment testing date,the Q3 2022 Annual Impairment Test, these amounts are also associated with the 2013 Heinz acquisitionAcquisition and the 2015 Merger and arewere initially recorded at the time of acquisition on theour consolidated balance sheet at their estimated acquisition date fair values. Therefore, if any assumptions, estimates, or market factors or assumptions, including those related to our enterprise strategy or business plans, 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.
As detailed in Note 4, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, the Cheese Transaction closed in the fourth quarter of 2021. We received total consideration of approximately $3.3 billion, which included approximately $1.6 billion primarily attributed to the Kraft and Velveeta licenses that we granted to Lactalis and approximately $141 million attributed to the Cracker Barrel license that Lactalis granted to us, the amounts of which were based on the estimated fair values of the licensed portion of each brand as of the closing date of the Cheese Transaction.
The discount rates, long-term growth rates, and royalty rates used to estimate the fair values of our reporting units and our brands with 10%20% or less excess fair value over carrying amount, as well as the goodwill or brand carrying amounts, as of the latest 2019 impairment testing dateQ3 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 | $ | 32.4 |
| | 6.8 | % | | 10.3 | % | | 1.0 | % | | 4.0 | % | | | | |
Brands (excess earnings method) | 19.4 |
| | 7.7 | % | | 7.8 | % | | 0.8 | % | | 2.0 | % | | | | |
Brands (relief from royalty method) | 6.8 |
| | 7.0 | % | | 10.7 | % | | 0.5 | % | | 3.5 | % | | 7.0 | % | | 20.0 | % |
The discount rates, long-term growth rates, and royalty rates used to estimate the fair values of our reporting units and brands with between 10-20% excess fair value over carry amount, as well as the goodwill or brand carrying amounts, as of the latest 2019 impairment testing date for each reporting unit or brand, were as follows:
| | | | Goodwill or Brand Carrying Amount
(in billions) | | Discount Rate | | Long-Term Growth Rate | | Royalty Rate | | Goodwill or Brand Carrying Amount
(in billions) | | Discount Rate | | Long-Term Growth Rate | | Royalty Rate |
| | | Minimum | | Maximum | | Minimum | | Maximum | | Minimum | | Maximum | | Minimum | | Maximum | | Minimum | | Maximum | | Minimum | | Maximum |
| Reporting units | $ | 0.7 |
| | 6.5 | % | | 11.3 | % | | 2.5 | % | | 3.5 | % | | | | | Reporting units | $ | 16.4 | | | 7.0 | % | | 8.0 | % | | 1.5 | % | | 2.0 | % | | | | |
Brands (excess earnings method) | 3.3 |
| | 7.8 | % | | 7.8 | % | | 1.0 | % | | 1.0 | % | | | | | Brands
(excess earnings method) | 14.9 | | | 7.7 | % | | 7.8 | % | | 1.0 | % | | 1.5 | % | |
Brands (relief from royalty method) | 0.4 |
| | 7.6 | % | | 10.3 | % | | 1.3 | % | | 4.0 | % | | 1.0 | % | | 17.0 | % | 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 10%20% or less excess fair value over carrying amount and between 10-20% 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 10%20% or less excess fair value over carrying amount, as of the latest 2019 impairment testing dateQ3 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 | $ | (5.5 | ) | | $ | 6.6 |
| | $ | 2.7 |
| | $ | (2.4 | ) | | | | |
| Brands (excess earnings method) | (1.4 | ) | | 1.7 |
| | 0.6 |
| | (0.6 | ) | | | | |
| Brands (relief from royalty method) | (0.5 | ) | | 0.6 |
| | 0.2 |
| | (0.2 | ) | | $ | 0.6 |
| | $ | (0.6 | ) |
If we had changed the assumptions used to estimate the fair value of our reporting units and brands with between 10-20% excess fair value over carrying amount, as of the latest 2019 impairment testing date 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) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Discount Rate | | Long-Term Growth Rate | | Royalty Rate |
| | 50-Basis-Point | | 100-Basis-Point |
| | Increase | | Decrease | | Increase | | Decrease | | Increase | | Decrease |
| Reporting units | $ | (0.2 | ) | | $ | 0.2 |
| | $ | 0.1 |
| | $ | (0.1 | ) | | | | |
| Brands (excess earnings method) | (0.3 | ) | | 0.3 |
| | 0.1 |
| | (0.1 | ) | | | | |
| Brands (relief from royalty method) | — |
| | — |
| | — |
| | — |
| | $ | 0.1 |
| | $ | (0.1 | ) |
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 9,8, Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for our impairment testing results.
Postemployment Benefit Plans:
We maintain various retirement plans for the majority of our employees. These include pension benefits, postretirement health care benefits, and defined contribution benefits. The cost of these plans is charged to expense over an appropriate term based on, among other things, the cost component and whether the plan is active or inactive. Changes in the fair value of our plan assets result in net actuarial gains or losses. These net actuarial gains and losses are deferred into accumulated other comprehensive income/(losses) and amortized within other expense/(income) in future periods using the corridor approach. The corridor is 10% of the greater of the market-related value of the plan’s asset or projected benefit obligation. Any actuarial gains and losses in excess of the corridor are then amortized over an appropriate term based on whether the plan is active or inactive.
For our postretirement benefit plans, our 20202023 health care cost trend rate assumption will be 6.5%6.6%. We established this rate based upon our most recent experience as well as our expectation for health care trend rates going forward. We anticipate the weighted average assumed ultimate trend rate will be 4.9%4.8%. The year in which the ultimate trend rate is reached varies by plan, ranging between the years 20202023 and 2030. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have had the following effects, increase/(decrease) in cost and obligation, as of December 28, 2019 (in millions):
|
| | | | | | | |
| | One-Percentage-Point |
| | Increase | | (Decrease) |
| Effect on annual service and interest cost | $ | 3 |
| | $ | (2 | ) |
| Effect on postretirement benefit obligation | 55 |
| | (47 | ) |
Our 20202023 discount rate assumption will be 3.3%5.5% for service cost and 2.7%5.4% for interest cost for our postretirement plans. Our 20202023 discount rate assumption will be 3.6%5.7% for service cost and 3.0%5.5% for interest cost for our U.S. pension plans and 2.5%5.3% for service cost and 1.8%5.0% for interest cost for our non-U.S. pension plans. We model these discount rates using a portfolio of high quality, fixed-income debt instruments with durations that match the expected future cash flows of the plans. Changes in our discount rates were primarily the result of changes in bond yields year-over-year.
Our 20202023 expected return on plan assets will be 4.7%6.3% (net of applicable taxes) for our postretirement plans. Our 20202023 expected rate of return on plan assets will be 4.5%6.6% for our U.S. pension plans and 3.8%5.1% for our non-U.S. pension plans. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current and future asset allocation, and estimates of future long-term returns by asset class. We attempt to maintain our target asset allocation by re-balancing between asset classes as we make contributions and monthly benefit payments.
While we do not anticipate further changes in the 20202023 assumptions for our U.S. and non-U.S. pension and postretirement benefit plans, as a sensitivity measure, a 100-basis-point change in our discount rate or a 100-basis-point change in the expected rate of return on plan assets would have the following effects, increase/(decrease) in cost (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| 100-Basis-Point | | 100-Basis-Point |
| Increase | | Decrease | | Increase | | Decrease |
| Effect of change in discount rate on pension costs | $ | 8 | | | $ | (11) | | | $ | (3) | | | $ | 4 | |
| Effect of change in expected rate of return on plan assets on pension costs | (30) | | | 30 | | | (17) | | | 17 | |
| Effect of change in discount rate on postretirement costs | — | | | — | | | (1) | | | 1 | |
| Effect of change in expected rate of return on plan assets on postretirement costs | (8) | | | 8 | | | — | | | — | |
|
| | | | | | | | | | | | | | | |
| | U.S. Plans | | Non-U.S. Plans |
| | 100-Basis-Point | | 100-Basis-Point |
| | Increase | | Decrease | | Increase | | Decrease |
| Effect of change in discount rate on pension costs | $ | 11 |
| | $ | (27 | ) | | $ | 8 |
| | $ | (5 | ) |
| Effect of change in expected rate of return on plan assets on pension costs | (47 | ) | | 47 |
| | (28 | ) | | 28 |
|
| Effect of change in discount rate on postretirement costs | (8 | ) | | 6 |
| | (1 | ) | | (1 | ) |
| Effect of change in expected rate of return on plan assets on postretirement costs | (11 | ) | | 11 |
| | — |
| | — |
|
Income Taxes:
We compute our annual tax rate based on the statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we earn income. Significant judgment is required in determining our annual tax rate and in evaluating the uncertainty of our tax positions. We recognize a benefit for tax positions that we believe will more likely than not be sustained upon examination. The amount of benefit recognized is the largest amount of benefit that we believe has more than a 50% probability of being realized upon settlement. We regularly monitor our tax positions and adjust the amount of recognized tax benefit based on our evaluation of information that has become available since the end of our last financial reporting period. The annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the amount of recognized tax benefits, we do not consider information that has become available after the balance sheet date, however we do disclose the effects of new information whenever those effects would be material to our financial statements. Unrecognized tax benefits represent the difference between the amount of benefit taken or expected to be taken in a tax return and the amount of benefit recognized for financial reporting. These unrecognized tax benefits are recorded primarily within other non-current liabilities on the consolidated balance sheets.
We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, we consider future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, we would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or decrease to income. The resolution of tax reserves and changes in valuation allowances could be material to our results of operations for any period but is not expected to be material to our financial position.
New Accounting Pronouncements
See Note 3, New Accounting Standards, in Item 8, Financial Statements and Supplementary Data, for a discussion of new accounting pronouncements.
Contingencies
See Note 17,15, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, for a discussion of our contingencies.
Commodity Trends
We purchase and use large quantities of commodities, including dairy products, meat products, coffee beans, nuts, tomatoes, potatoes, soybean and vegetable oils, sugar and other sweeteners, corn products, and wheat products to manufacture our products. In addition, we purchase and use significant quantities of resins, metals, and cardboard to package our products and natural gas to operate our facilities. We continuously monitor worldwide supply and cost trends of these commodities.
We define our key commodities in the United States and Canada as dairy, meat, coffee, and nuts. In 2019, we experienced cost increases for dairy and meat, while costs for nuts and coffee decreased. 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.
Dairy commodities, primarily milk and cheese, are the most significant cost components of our cheese products. We purchase our dairy raw material requirements from independent third parties, such as agricultural cooperatives and independent processors. Market supply and demand, as well as government programs, significantly influence the prices for milk and other dairy products. Significant cost components of our meat products include pork, beef, and poultry, which we primarily purchase from applicable local markets. Livestock feed costs and the global supply and demand for U.S. meats influence the prices of these meat products. The most significant cost component of our coffee products is coffee beans, which we purchase on global markets. Quality and availability of supply, currency fluctuations, and consumer demand for coffee products impact coffee bean prices. The most significant cost components in our nut products include peanuts, cashews, and almonds, which we purchase on both domestic and global markets, where global market supply and demand is the primary driver of prices.
Liquidity and Capital Resources
On February 14, 2020, Fitch and S&P downgraded our long-term credit rating from BBB- to BB+ with a stable outlook from Fitch and a negative outlook from S&P. As a result of the downgrades, our ability to borrow under our commercial paper program may be adversely affected for a period of time due to limitations on or elimination of our ability to access the commercial paper market. In addition, we could experience an increase in interest costs as a result of the downgrades. We do not expect any change in our plans to access liquidity over the next year as a result of the downgrades. These downgrades do not constitute a default or event of default under any of our debt instruments. Limitations on or elimination of our ability to access the commercial paper program may require us to borrow under the Senior Credit Facility, if necessary to meet liquidity needs. Our ability to borrow under the Senior Credit Facility is not affected by the downgrades.
We believe that cash generated from our operating activities and Senior Credit Facility will provide sufficient liquidity to meet our working capital needs, future contractual obligations (including repayments of long-term debt), payment of our anticipated quarterly dividends, planned capital expenditures, restructuring expenditures, and contributions to our postemployment benefit plans. An additional potential source of liquidity is access to capital markets. We intend to use our cash on hand for daily funding requirements and access to our Senior Credit Facility, if necessary. Overall, while we are not currently eligible to use a registration statement on Form S-3 for any public offerings of registered debt or equity securities to raise capital, we do not expect our ineligibility to use a registration statement on Form S-3 to have any negative effects on our funding sources that would have a material effect on our short-term or long-term liquidity.
Cash Flow Activity for 2019 Compared to 2018:
Net Cash Provided by/Used for Operating Activities:
Net cash provided by operating activities was $3.6 billion for the year ended December 28, 2019 compared to $2.6 billion for the year ended December 29, 2018. This increase was primarily driven by higher collections on trade receivables resulting from the reduction of receivables recorded as a non-cash exchange for sold receivables as we unwound all of our accounts receivable securitization and factoring programs (the “Programs”) in 2018 and as our trade receivables balance was higher at the end of 2018 compared to the end of 2017. This increase was partially offset by a federal tax refund received in the prior year, tax payments associated with the Heinz India Transaction, and increased cash payments for employee bonuses in 2019. See Note 16, Financing Arrangements, in Item 8, Financial Statements and Supplementary Data, for additional information on our Programs.
Net Cash Provided by/Used for Investing Activities:
Net cash provided by investing activities was $1.5 billion for the year ended December 28, 2019 compared to $288 million for the year ended December 29, 2018. This increase was primarily driven by proceeds from our Canada Natural Cheese Transaction and Heinz India Transaction, proceeds from our net investment hedges, lower capital expenditures, and lower cash payments to acquire businesses year over year. These increases in cash provided by investing activities were partially offset by lower cash collections on previously sold receivables, as we unwound all of our Programs in 2018. We expect 2020 capital expenditures to be approximately $750 million. See Note 4, Acquisitions and Divestitures, in Item 8, Financial Statements and Supplementary Data, for additional information on the Canada Natural Cheese Transaction, the Heinz India Transaction, and our acquisitions.
Net Cash Provided by/Used for Financing Activities:
Net cash used for financing activities was $3.9 billion for the year ended December 28, 2019 compared to $3.4 billion for the year ended December 29, 2018. This increase was primarily driven by higher repayments of long-term debt and higher debt prepayment and extinguishment costs, primarily related to our tender offers in September 2019 and debt redemptions in October 2019. These increases to net cash used for financing activities were partially offset by decreased cash distributions related to our dividends and lower net repayments of commercial paper. Proceeds from long-term debt issuances were mostly flat year over year. See Note 18, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information on our tender offers. See Equity and Dividends in this item for additional information on our dividends.
Cash Held by International Subsidiaries:
Of the $2.3 billion cash and cash equivalents on our consolidated balance sheet at December 28, 2019, $869 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 and 2019 accumulated earnings of certain international subsidiaries is approximately $70 million.
Our undistributed historic earnings in foreign subsidiaries through December 30, 2017 are currently not considered to be indefinitely reinvested. As of December 28, 2019, we have recorded a deferred tax liability of $20 million on approximately $300 million of historic earnings related to local withholding taxes that will be owed when this cash is distributed. As of December 29, 2018, we had recorded a deferred tax liability of $78 million on $1.2 billion of historic earnings. The decreases in our deferred tax liability and historic earnings are primarily due to repatriation. Related to these distributions, we reduced our historic earnings by approximately $700 million and recorded tax expenses of approximately $40 million and reduced the deferred tax liability accordingly. Additionally, we reduced our historic earnings by approximately $110 million following the ratification of the U.S. tax treaty with Spain, which eliminated withholding tax on Spanish distributions and resulted in a tax benefit of approximately $11 million and a corresponding decrease in our deferred tax liability. Finally, we reduced our historic earnings by approximately $30 million related to a held for sale business in our Rest of World segment, which resulted in a tax benefit of approximately $6 million.
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 $370 million at December 28, 2019 and $440 million at December 29, 2018.
Borrowing Arrangements:
We have historically obtained funding through our U.S. and European commercial paper programs. We had no commercial paper outstanding at December 28, 2019 or at December 29, 2018. The maximum amount of commercial paper outstanding during the year ended December 28, 2019 was $200 million.
We maintain our $4.0 billion Senior Credit Facility, and subject to certain conditions, we may increase the amount of revolving commitments and/or add additional 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 December 28, 2019, at December 29, 2018, or during the years ended December 28, 2019, December 29, 2018, and December 30, 2017. 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 December 28, 2019.
Long-Term Debt:
Our long-term debt, including the current portion, was $29.2 billion at December 28, 2019 and $31.1 billion at December 29, 2018. This decrease was primarily related to the $2.9 billion aggregate principal amount of certain senior notes and second lien senior secured notes that were validly tendered in September 2019, the redemption of approximately $1.5 billion aggregate principal amount of senior notes in October 2019, and the repayment of $350 million aggregate principal amount of senior notes that matured in August 2019. These decreases to long-term debt were partially offset by the $3.0 billion aggregate principal amount of senior notes issued in September 2019. We used the proceeds from the issuance of these senior notes, together with cash on hand, to fund our tender offers in September 2019 and to pay fees and expenses in connection therewith, and to fund the partial redemption of $1.3 billion aggregate principal amount of our 2.800% senior notes due July 2020 and 300 million Canadian dollar senior notes due July 2020.
We repaid approximately $405 million aggregate principal amount of senior notes on February 10, 2020. We have aggregate principal amount of senior notes of approximately 500 million Canadian dollars and $200 million maturing in July 2020. We expect to fund these long-term debt repayments primarily with cash on hand and cash generated from our operating activities.
Our long-term debt contains customary representations, covenants, and events of default. We were in compliance with all financial covenants as of December 28, 2019.
See Note 18, Debt, in Item 8, Financial Statements and Supplementary Data, for additional information related to our long-term debt.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements:
We do not have guarantees or other off-balance sheet financing arrangements that we believe are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources.
We have utilized accounts receivable securitization and factoring programs globally for our working capital needs and to provide efficient liquidity. During 2018, we had Programs in place in various countries across the globe. In the second quarter of 2018, we unwound our U.S. securitization program, which represented the majority of our Programs, using proceeds from the issuance of long-term debt in June 2018. As of December 29, 2018, we had unwound all of our Programs.
See Note 16, Financing Arrangements, in Item 8, Financial Statements and Supplementary Data, for a discussion of our Programs and other financing arrangements.
Aggregate Contractual Obligations:
The following table summarizes our contractual obligations at December 28, 2019 (in millions):
|
| | | | | | | | | | | | | | |
| | Payments Due |
| | 2020 | | 2021-2022 | | 2023-2024 | | 2025 and Thereafter | | Total |
Long-term debt(a) | 2,222 |
| | 5,394 |
| | 4,434 |
| | 35,773 |
| | 47,823 |
|
Finance leases(b) | 33 |
| | 96 |
| | 17 |
| | 80 |
| | 226 |
|
Operating leases(c) | 163 |
| | 210 |
| | 108 |
| | 156 |
| | 637 |
|
Purchase obligations(d) | 1,324 |
| | 1,038 |
| | 493 |
| | 89 |
| | 2,944 |
|
Other long-term liabilities(e) | 47 |
| | 87 |
| | 125 |
| | 155 |
| | 414 |
|
| Total | 3,789 |
| | 6,825 |
| | 5,177 |
| | 36,253 |
| | 52,044 |
|
| |
(a) | Amounts represent the expected cash payments of our long-term debt, including interest on variable and fixed rate long-term debt. Interest on variable rate long-term debt is calculated based on interest rates at December 28, 2019. |
| |
(b) | Amounts represent the expected cash payments of our finance leases, including expected cash payments of interest expense. |
| |
(c) | Operating leases represent the minimum rental commitments under non-cancellable operating leases net of sublease income. |
| |
(d) | We have purchase obligations for materials, supplies, property, plant and equipment, and co-packing, storage, and distribution services based on projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology, and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. Several of these obligations are long-term and are based on minimum purchase requirements. Certain purchase obligations contain variable pricing components, and, as a result, actual cash payments are expected to fluctuate based on changes in these variable components. Due to the proprietary nature of some of our materials and processes, certain supply contracts contain penalty provisions for early terminations. We do not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. We exclude amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities from the table above. |
| |
(e) | Other long-term liabilities primarily consist of estimated payments for the one-time toll charge related to U.S. Tax Reform, as well as postretirement benefit commitments. Certain other long-term liabilities related to income taxes, insurance accruals, and other accruals included on the consolidated balance sheet are excluded from the above table as we are unable to estimate the timing of payments for these items. |
Pension plan contributions were $19 million in 2019. We estimate that 2020 pension plan contributions will be approximately $19 million. Beyond 2020, we are unable to reliably estimate the timing of contributions to our pension plans. Our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual pension asset performance or interest rates, or other factors. As such, estimated pension plan contributions for 2020 have been excluded from the above table.
Postretirement benefit plan contributions were $12 million in 2019. We estimate that 2020 postretirement benefit plan contributions will be approximately $15 million. Beyond 2020, we are unable to reliably estimate the timing of contributions to our postretirement benefit plans. Our actual contributions and plans may change due to many factors, including changes in tax, employee benefit, or other laws and regulations, tax deductibility, significant differences between expected and actual postretirement plan asset performance or interest rates, or other factors. As such, estimated postretirement benefit plan contributions for 2020 have been excluded from the above table.
At December 28, 2019, the amount of net unrecognized tax benefits for uncertain tax positions, including an accrual of related interest and penalties along with positions only impacting the timing of tax benefits, was approximately $468 million. The timing of payments will depend on the progress of examinations with tax authorities. We do not expect a significant tax payment related to these obligations within the next year. We are unable to make a reasonably reliable estimate as to if or when any significant cash settlements with taxing authorities may occur; therefore, we have excluded the amount of net unrecognized tax benefits from the above table.
Equity and Dividends
We paid common stock dividends of $2.0 billion in 2019, $3.2 billion in 2018, and $2.9 billion in 2017. Additionally, on February 13, 2020, our Board of Directors declared a cash dividend of $0.40 per share of common stock, which is payable on March 27, 2020 to shareholders of record on March 13, 2020.
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.
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 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 earnings per common share (“EPS”),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 (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 integration and restructuring expenses)activities); in addition to these adjustments, we exclude, when they occur, the impacts of integration anddivestiture-related license income (e.g., income related to the sale of licenses in connection with the Cheese Transaction), restructuring expenses,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 integration and restructuring expenses)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 earnings per shareEPS excluding, when they occur, the impacts of integration and restructuring expenses,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 (benefit)/costs, and U.S. Tax Reformcertain significant discrete income tax expense/(benefit)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 | | 53rd Week | | Organic Net Sales | | Price | | Volume/Mix |
| 2022 | | | | | | | | | | | | | |
| North America | $ | 20,340 | | | $ | (67) | | | $ | — | | | $ | 357 | | | $ | 20,050 | | | | | |
| International | 6,145 | | | (430) | | | 279 | | | 97 | | | 6,199 | | | | | |
| Kraft Heinz | $ | 26,485 | | | $ | (497) | | | $ | 279 | | | $ | 454 | | | $ | 26,249 | | | | | |
| | | | | | | | | | | | | |
| 2021 | | | | | | | | | | | | | |
| North America | $ | 20,351 | | | $ | — | | | $ | 1,990 | | | $ | — | | | $ | 18,361 | | | | | |
| International | 5,691 | | | 26 | | | 109 | | | — | | | 5,556 | | | | | |
| Kraft Heinz | $ | 26,042 | | | $ | 26 | | | $ | 2,099 | | | $ | — | | | $ | 23,917 | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Net Sales | | Currency | | Acquisitions and Divestitures | | Organic Net Sales | | Price | | Volume/Mix |
| 2019 | | | | | | | | | | | |
| United States | $ | 17,756 |
| | $ | — |
| | $ | — |
| | $ | 17,756 |
| | | | |
| Canada | 1,882 |
| | (45 | ) | | 227 |
| | 1,700 |
| | | | |
| EMEA | 2,551 |
| | (115 | ) | | — |
| | 2,666 |
| | | | |
| Rest of World | 2,788 |
| | (102 | ) | | 51 |
| | 2,839 |
| | | | |
| Kraft Heinz | $ | 24,977 |
| | $ | (262 | ) | | $ | 278 |
| | $ | 24,961 |
| | | | |
| | | | | | | | | | | | |
| 2018 | | | | | | | | | | | |
| United States | $ | 18,122 |
| | $ | — |
| | $ | — |
| | $ | 18,122 |
| | | | |
| Canada | 2,173 |
| | — |
| | 441 |
| | 1,732 |
| | | | |
| EMEA | 2,718 |
| | — |
| | 21 |
| | 2,697 |
| | | | |
| Rest of World | 3,255 |
| | 243 |
| | 170 |
| | 2,842 |
| | | | |
| Kraft Heinz | $ | 26,268 |
| | $ | 243 |
| | $ | 632 |
| | $ | 25,393 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year-over-year growth rates | | | | | | | | | | | | | |
| North America | (0.1) | % | | (0.4) pp | | (10.8) pp | | 1.9 pp | | 9.2 | % | | 13.0 pp | | (3.8) pp |
| International | 8.0 | % | | (8.1) pp | | 2.8 pp | | 1.7 pp | | 11.6 | % | | 13.5 pp | | (1.9) pp |
| Kraft Heinz | 1.7 | % | | (2.0) pp | | (8.0) pp | | 1.9 pp | | 9.8 | % | | 13.2 pp | | (3.4) pp |
|
| | | | | | | | | | | | | |
| Year-over-year growth rates | | | | | | | | | | | |
| United States | (2.0 | )% | | 0.0 pp | | 0.0 pp | | (2.0 | )% | | 0.4 pp | | (2.4) pp |
| Canada | (13.4 | )% | | (2.1) pp | | (9.4) pp | | (1.9 | )% | | (3.4) pp | | 1.5 pp |
| EMEA | (6.2 | )% | | (4.3) pp | | (0.7) pp | | (1.2 | )% | | 0.0 pp | | (1.2) pp |
| Rest of World | (14.3 | )% | | (10.3) pp | | (3.9) pp | | (0.1 | )% | | 1.2 pp | | (1.3) pp |
| Kraft Heinz | (4.9 | )% | | (1.9) pp | | (1.3) pp | | (1.7 | )% | | 0.1 pp | | (1.8) 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 |
| 2018 | | | | | | | | | | | |
| United States | $ | 18,122 |
| | $ | — |
| | $ | — |
| | $ | 18,122 |
| | | | |
| Canada | 2,173 |
| | (5 | ) | | 443 |
| | 1,735 |
| | | | |
| EMEA | 2,718 |
| | 66 |
| | 19 |
| | 2,633 |
| | | | |
| Rest of World | 3,255 |
| | (75 | ) | | 334 |
| | 2,996 |
| | | | |
| Kraft Heinz | $ | 26,268 |
| | $ | (14 | ) | | $ | 796 |
| | $ | 25,486 |
| | | | |
| | | | | | | | | | | | |
| 2017 | | | | | | | | | | | |
| United States | $ | 18,230 |
| | $ | — |
| | $ | — |
| | $ | 18,230 |
| | | | |
| Canada | 2,177 |
| | — |
| | 430 |
| | 1,747 |
| | | | |
| EMEA | 2,585 |
| | — |
| | 56 |
| | 2,529 |
| | | | |
| Rest of World | 3,084 |
| | 144 |
| | 165 |
| | 2,775 |
| | | | |
| Kraft Heinz | $ | 26,076 |
| | $ | 144 |
| | $ | 651 |
| | $ | 25,281 |
| | | | |
|
| | | | | | | | | | | | | |
| Year-over-year growth rates | | | | | | | | | | | |
| United States | (0.6 | )% | | 0.0 pp | | 0.0 pp | | (0.6 | )% | | (0.9) pp | | 0.3 pp |
| Canada | (0.2 | )% | | (0.3) pp | | 0.7 pp | | (0.6 | )% | | (0.4) pp | | (0.2) pp |
| EMEA | 5.1 | % | | 2.5 pp | | (1.5) pp | | 4.1 | % | | 0.9 pp | | 3.2 pp |
| Rest of World | 5.6 | % | | (7.6) pp | | 5.2 pp | | 8.0 | % | | 6.1 pp | | 1.9 pp |
| Kraft Heinz | 0.7 | % | | (0.6) pp | | 0.5 pp | | 0.8 | % | | 0.0 pp | | 0.8 pp |
The Kraft Heinz Company
Reconciliation of Net Income/(Loss) to Adjusted EBITDA
(in millions)
(Unaudited)
| | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| Net income/(loss) | $ | 2,368 | | | $ | 1,024 | |
| Interest expense | 921 | | | 2,047 | |
| Other expense/(income) | (253) | | | (295) | |
| Provision for/(benefit from) income taxes | 598 | | | 684 | |
| Operating income/(loss) | 3,634 | | | 3,460 | |
| Depreciation and amortization (excluding restructuring activities) | 922 | | | 910 | |
| Divestiture-related license income | (56) | | | (4) | |
| Restructuring activities | 74 | | | 84 | |
| Deal costs | 9 | | | 11 | |
| Unrealized losses/(gains) on commodity hedges | 63 | | | 17 | |
| Impairment losses | 999 | | | 1,634 | |
| Certain non-ordinary course legal and regulatory matters | 210 | | | 62 | |
| Equity award compensation expense | 148 | | | 197 | |
| Adjusted EBITDA | $ | 6,003 | | | $ | 6,371 | |
|
| | | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | December 30, 2017 |
| Net income/(loss) | $ | 1,933 |
| | $ | (10,254 | ) | | $ | 10,932 |
|
| Interest expense | 1,361 |
| | 1,284 |
| | 1,234 |
|
| Other expense/(income) | (952 | ) | | (168 | ) | | (627 | ) |
| Provision for/(benefit from) income taxes | 728 |
| | (1,067 | ) | | (5,482 | ) |
| Operating income/(loss) | 3,070 |
| | (10,205 | ) | | 6,057 |
|
| Depreciation and amortization (excluding integration and restructuring expenses) | 985 |
| | 919 |
| | 907 |
|
| Integration and restructuring expenses | 102 |
| | 297 |
| | 583 |
|
| Deal costs | 19 |
| | 23 |
| | — |
|
| Unrealized losses/(gains) on commodity hedges | (57 | ) | | 21 |
| | 19 |
|
| Impairment losses | 1,899 |
| | 15,936 |
| | 49 |
|
| Equity award compensation expense (excluding integration and restructuring expenses) | 46 |
| | 33 |
| | 49 |
|
| Adjusted EBITDA | $ | 6,064 |
| | $ | 7,024 |
| | $ | 7,664 |
|
The Kraft Heinz Company
Reconciliation of Diluted EPS to Adjusted EPS
(Unaudited)
| | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| Diluted EPS | $ | 1.91 | | | $ | 0.82 | |
Restructuring activities(a) | 0.05 | | | 0.05 | |
| | | |
Unrealized losses/(gains) on commodity hedges(b) | 0.04 | | | 0.01 | |
Impairment losses(c) | 0.70 | | | 1.07 | |
Certain non-ordinary course legal and regulatory matters(d) | 0.13 | | | 0.05 | |
Losses/(gains) on sale of business(e) | (0.01) | | | 0.15 | |
Other losses/(gains) related to acquisitions and divestitures(f) | (0.02) | | | — | |
Nonmonetary currency devaluation(g) | 0.01 | | | — | |
Debt prepayment and extinguishment (benefit)/costs(h) | (0.03) | | | 0.59 | |
Certain significant discrete income tax items(i) | — | | | 0.19 | |
| Adjusted EPS | $ | 2.78 | | | $ | 2.93 | |
|
| | | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | | December 30, 2017 |
| Diluted EPS | $ | 1.58 |
| | $ | (8.36 | ) | | $ | 8.91 |
|
Integration and restructuring expenses(a) | 0.07 |
| | 0.32 |
| | 0.24 |
|
Deal costs(b) | 0.02 |
| | 0.02 |
| | — |
|
Unrealized losses/(gains) on commodity hedges(c) | (0.04 | ) | | 0.01 |
| | 0.01 |
|
Impairment losses(d) | 1.38 |
| | 11.28 |
| | 0.03 |
|
Losses/(gains) on sale of business(e) | (0.23 | ) | | 0.01 |
| | — |
|
Other losses/(gains) related to acquisitions and divestitures(f) | — |
| | 0.02 |
| | — |
|
Nonmonetary currency devaluation(g) | 0.01 |
| | 0.12 |
| | 0.03 |
|
Debt prepayment and extinguishment costs(h) | 0.06 |
| | — |
| | — |
|
U.S. Tax Reform discrete income tax expense/(benefit)(i) | — |
| | 0.09 |
| | (5.72 | ) |
| Adjusted EPS | $ | 2.85 |
| | $ | 3.51 |
| | $ | 3.50 |
|
| |
(a) | Gross expenses included in integration and restructuring expenses were $108 million in 2019 ($83 million after-tax), $460 million in 2018 ($396 million after-tax) and $434 million in 2017 ($305 million after-tax) and were recorded in the following income statement line items: |
| |
• | Cost of products sold included $48 million in 2019, $194 million in 2018, and$464 million in 2017;
|
SG&A included $54 million in 2019, $103 million in 2018, and $119 million in 2017; and
Other expense/(a) Gross expenses/(income) included expensein restructuring activities were expenses of $6$74 million ($56 million after-tax) in 2019, expense of $1632022 and $84 million ($64 million after-tax) in 2018,2021 and were recorded in the following income of $149 million in 2017.statement line items:
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(b) | Gross expenses included in deal costs were $19 million in 2019 ($18 million after-tax) and $23 million in 2018 ($19 million after-tax) and were recorded in the following income statement line items: |
•Cost of products sold included $4expenses of $27 million in 2018;2022 and $13 million in 2021;
•SG&A included $19expenses of $47 million in 20192022 and $19$70 million in 2018.2021; and
| |
(c) | Gross expenses/(income) included in unrealized losses/(gains) on commodity hedges were income of $57 million in 2019 ($43 million after-tax) and expenses of $21 million in 2018 ($16 million after-tax) and $19 million in 2017 ($12 million after-tax) and were recorded in cost of products sold. |
| |
(d) | Gross impairment losses, which were recorded in SG&A, included the following: |
•Other expense/(income) included expenses of $1 million in 2021.
(b) Gross expenses/(income) included in unrealized losses/(gains) on commodity hedges were expenses of $63 million ($48 million after-tax) in 2022 and $17 million ($13 million after-tax) in 2021 and were recorded in cost of products sold.
(c) Gross impairment losses included the following:
•Goodwill impairment losses of $1.2$444 million ($444 million after-tax) in 2022 and $318 million ($318 million after-tax) in 2021, which were recorded in SG&A;
•Intangible asset impairment losses of $469 million ($358 million after-tax) in 2022 and $1.3 billion in 2019 ($1.21.0 billion after-tax) in 2021, which were recorded in SG&A; and
•Property, plant and $7.0 billionequipment asset impairment losses of $86 million ($65 million after-tax) in 20182022, which were recorded in cost of products sold.
(d) Gross expenses included in certain non-ordinary course legal and regulatory matters were $210 million ($7.0 billion161 million after-tax); in 2022 and $62 million ($62 million after-tax) in 2021 and were recorded in SG&A. The 2022 expenses relate to an accrual in connection with the previously disclosed securities class action lawsuit. The 2021 expenses relate to the settlement of the previously disclosed SEC investigation. See Note 15, Commitments and Contingencies, in Item 8, Financial Statements and Supplementary Data, for additional information.
| |
• | Intangible asset impairment losses of $702 million in 2019 ($537 million after-tax), $8.9 billionin 2018 ($6.8 billion after-tax), and $49 million in 2017 ($36 million after-tax).
|
| |
(e) | (e) Gross expenses/(income) included in losses/(gains) on sale of business were income of $420 million in 2019 ($275 million after-tax) and losses of $15 million in 2018 ($15 million after-tax) and were recorded in other expense/(income). |
| |
(f) | Gross expenses/(income) included in other losses/(gains) related to acquisitions and divestitures were income of $5 million in 2019 ($5 million after-tax) and expenses of $27 million in 2018 ($15 million after-tax) and were recorded in the following income statement line items: |
Interest expense included $1 million in 2019 and $3 million in 2018;
Other expense/(income) included in losses/(gains) on sale of business were income of $6$25 million ($17 million after-tax) in 20192022 and income of $44 million (expenses of $181 million after-tax) in 2021 and were recorded in other expense/(income).
(f) Gross expenses/(income) included in other losses/(gains) related to acquisitions and divestitures were income of $38 million ($29 million after-tax) in 2022 and were recorded in other expense/(income).
(g) Gross expenses included in nonmonetary currency devaluation were $17 million ($17 million after-tax) in 2022 and were recorded in other expense/(income).
(h) Gross expenses/(income) included in debt prepayment and extinguishment (benefit)/costs were income of $38 million ($35 million after-tax) in 2022 and expenses of $17$917 million ($728 million after-tax) in 2021 and were recorded in interest expense.
(i) Certain significant discrete income tax items were an expense of $235 million in 2018; and
Provision for/(benefit from) income taxes included $7 million2021. The impact in 2018.
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(g) | Gross expenses included in nonmonetary currency devaluation were $10 million in 2019 ($10 million after-tax), $146 million in 2018 ($146 million after-tax), and $36 million in 2017 ($36 million after-tax) and were recorded in other expense/(income). |
| |
(h) | Gross expenses included in debt prepayment and extinguishment costs were $98 million in 2019 ($73 million after-tax) and were recorded in interest expense. |
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(i) | U.S. Tax Reform discrete income tax expense/(benefit) was an expense of $104 million in 2018 and a benefit of $7.0 billion in 2017. Expenses in 2018 primarily related to the revaluation of our deferred tax balances due to changes in state tax laws following U.S. Tax Reform. These expenses were partially offset by net benefits related to changes in U.S. tax reserves, U.S. Tax Reform measurement period adjustments, changes in estimates of certain 2017 U.S. income tax deductions, and the release of valuation allowances related to foreign tax credits. The benefit in 2017 was related to the enactment of U.S. Tax Reform. See Note 10, Income Taxes, in Item 8, Financial Statements and Supplementary Data, for additional information.
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2021 relates to the revaluation of our deferred tax balances due to an increase in U.K. tax rates.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks from adverse changes in commodity prices, foreign exchange rates, and interest rates. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that volatility in these markets may have on our operating results. We maintain risk management policies that principally use derivative financial instruments to reduce significant, unanticipated fluctuations in earnings and cash flows that may arise from variations in commodity prices, foreign currency exchange rates, and interest rates. We manage market risk by incorporating parameters within our risk management strategy that limit the types of derivative instruments, the derivative strategies we use, and the degree of market risk that we hedge with derivative instruments. See Note 2, Significant Accounting Policies, and Note 13,12, Financial Instruments, in Item 8, Financial Statements and Supplementary Data, for details of our market risk management policies and the financial instruments used to hedge those exposures.
When we use financial instruments, we are exposed to credit risk that a counterparty might fail to fulfill its performance obligations under the terms of our agreement. We minimize our credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure we have with each counterparty, and monitoring the financial condition of our counterparties. We maintain a policy of requiring that all significant, non-exchange traded derivative contracts are governed by an International Swaps and Derivatives Association master agreement. By policy, we do not engage in speculative or leveraged transactions, nor do we hold or issue financial instruments for trading purposes.
Effect of Hypothetical 10% Fluctuation in Market Prices:
The potential gain or loss on the fair value of our outstanding commodity contracts, foreign exchange contracts, and cross-currency swap contracts, assuming a hypothetical 10% fluctuation in commodity prices and foreign currency exchange rates, would have been (in millions):
| | | | December 28,
2019 | | December 29,
2018 | | December 31,
2022 | | December 25,
2021 |
| Commodity contracts | $ | 43 |
| | $ | 38 |
| Commodity contracts | $ | 94 | | | $ | 56 | |
| Foreign currency contracts | 73 |
| | 100 |
| Foreign currency contracts | 71 | | | 130 | |
| Cross-currency swap contracts | 412 |
| | 402 |
| Cross-currency swap contracts | 211 | | | 318 | |
It should be noted that any change in the fair value of our derivative contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. In relation to foreign currency contracts, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. Our utilization of financial instruments in managing market risk exposures described above is consistent with the prior year. Changes in our portfolio of financial instruments are a function of our results of operations, debt repayments and debt issuances, market effects on debt and foreign currency, and our acquisition and divestiture activities.
Effect of Hypothetical 1% Fluctuation in LIBOR and CDOR:
Based on our current variable rate debt balance as of December 28, 2019, a hypothetical 1% increase in LIBOR and CDOR would increase our annual interest expense by approximately $12 million. The Financial Conduct Authority in the United Kingdom intends to phase out LIBOR by the end of 2021. Given our current variable rate debt outstanding, we do not anticipate a significant impact to our annual interest expense as a result of the transition.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and ShareholdersStockholders of The Kraft Heinz Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Kraft Heinz Company and its subsidiaries (the “Company”) as of December 28, 201931, 2022 and December 29, 2018,25, 2021, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 28, 2019,31, 2022, including the related notes and financial statement schedule listed in the index appearing under Item 15(a) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 28, 2019,31, 2022, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 28, 201931, 2022 and December 29, 2018,25, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 201931, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain,maintained, in all material respects, effective internal control over financial reporting as of December 28, 2019,31, 2022, based on criteria established in Internal Control - Integrated Framework (2013)issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to the risk assessment component of internal control, as the Company did not appropriately design controls in response to the risk of material misstatement due to changes in their business environment. The risk assessment material weakness gave rise to an additional material weakness as the Company did not design and maintain effective controls over the accounting for supplier contracts and related arrangements.COSO.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2019consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidatedfinancial statements.
Change in Accounting Principle
As discussed in Note3to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above.Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment
As described in Notes 2 and 98 to the consolidated financial statements, the Company’s consolidated goodwill balance was $35.5$30.8 billion as of December 28, 2019. Management tests31, 2022. Historically, management tested reporting units for impairment annually as of the first day of the second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Management recognized non-cashBeginning in the third quarter of 2022 and for subsequent annual periods, management voluntarily changed the annual impairment losses in selling, general and administrative costs (SG&A)assessment date to the first day of $1.2 billion for the year ended December 28, 2019.third quarter. Reporting units are tested for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recorded based on the difference between the fair value and carrying amount, not to exceed the associated carrying amount of goodwill. Management generallyrecognized non-cash goodwill impairment losses of $444 million for the year ended December 31, 2022. Management utilizes the discounted cash flow method under the income approach to estimate the fair value of reporting units. Estimating the fair value of reporting units requires the use of estimates andAs disclosed by management, management’s cash flow projections included significant assumptions including estimated future annual net cash flows (includingrelated to net sales, cost of products sold, SG&A,selling, general, and administrative costs (SG&A), depreciation and amortization, working capital, and capital expenditures),expenditures, income tax rates, discount rates, long-term growth rates, and other market factors.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessmentassessments is a critical audit matter are there was(i) the significant judgment by management when developing the fair value measurement of the reporting units. This in turn led tounits; (ii) a high degree of auditor judgment, subjectivity, and effort in performing our procedures and in evaluating management’s cash flow projections and significant assumptions includingrelated to net sales, cost of products sold, SG&A, discount rates, and long-term growth rates. In addition,rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment,assessments, including controls over the valuation of the Company’s reporting units. These procedures also included, among others (i) testing management’s process for developing the fair value estimates,of the reporting units; (ii) evaluating the appropriateness of the discounted cash flow method,method; (iii) testing the completeness and accuracy of underlying data used in
the fair value estimates,method; and (iv) evaluating management’s cash flow projections andthe significant assumptions includingrelated to net sales, cost of products sold, SG&A, discount rates and long-term growth rates. Evaluating management’s assumptions related to net sales, cost of products sold, SG&A, discount rates and long-term growth rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit,unit; (ii) the consistency with external market data,and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of (i) the Company’s discounted cash flow method and certain significant assumptions, including(ii) the discount ratesrate and long-term growth rates.
Indefinite-Lived Intangible Assets Impairment Assessment
As described in Notes 2 and 98 to the consolidated financial statements, the Company’s consolidated indefinite-lived intangible assets balance, which consists primarily of individual brands, was $43.4$38.6 billion as of December 28, 2019. Management conducts an31, 2022. Historically, management tested brands for impairment test annually as of the first day of the second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a brand is less than its carrying amount. Management recognized non-cashBeginning in the third quarter of 2022 and for subsequent annual periods, management voluntarily changed the annual impairment lossesassessment date to the first day of $687 million in SG&A for the year ended December 28, 2019.third quarter. Brands are tested for impairment by comparing the estimated fair value of each brand with its carrying amount. If the carrying amount of a brand exceeds its estimated fair value, an impairment loss is recorded based on the difference between the fair value and carrying amount. Management recognized non-cash indefinite-lived intangible asset impairment losses of $462 million for the year ended December 31, 2022. As disclosed by management, management utilizes either an excess earnings method or relief from royalty method to estimate the fair value of its brands. The determination of fair value usingUsing the excess earnings method, requires the use of estimates andmanagement’s cash flow projections included significant assumptions including the estimated future annual net cash flows for each brand (includingrelating to net sales, cost of products sold, and SG&A),&A, contributory asset charges, income tax considerations, long-term growth rates, discount rates, and other market factors. The determination of fair value usingUsing the relief from royalty method, requires the use of estimates andmanagement’s cash flow projections included significant assumptions including estimated future annualrelated to net sales, for each brand, royalty rates, income tax considerations, long-term growth rates, discount rates, and other market factors.
The principal considerations for our determination that performing procedures relating to the indefinite-lived intangible assets impairment assessment is a critical audit matter are there was(i) the significant judgment by management when developing the fair value measurement of the brands. This in turn led tobrands; (ii) a high degree of auditor judgment, subjectivity, and effort in performing our procedures and evaluating management’s significant assumptions related to indefinite-lived intangible assets and in evaluating management’s cash flow projections and significant assumptions, including net sales, cost of products sold, SG&A, long-term growth rates and discount rates for the excess earnings method and net sales, royalty rates, long-term growth rates and discount rates for the relief from royalty method. In addition,method; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. As previously disclosed by management, a material weakness existed during the year related to this matter.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s indefinite-lived intangible assets impairment assessment, including controls over the valuation of the Company’s indefinite-lived intangible assets. These procedures also included, among others (i) testing management’s process for developing the fair value estimates,of the brands; (ii) evaluating the appropriateness of the excess earnings and relief from royalty methods,methods; (iii) testing the completeness and accuracy of underlying data used in the fair value estimates,methods; and (iv) evaluating management’s cash flow projections andthe significant assumptions includingused by management related to net sales, cost of products sold, SG&A, long-term growth rates and discount rates for the excess earnings method and net sales, royalty rates, long-term growth rates and discount rates for the relief from royalty method. Evaluating management’s assumptions related to net sales, cost of products sold, SG&A, long-term growth rates and discount rates for the excess earnings method and net sales, royalty rates, long-term growth rates and discount rates for the relief from royalty method involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the brand,individual brands; (ii) the consistency with external market data,and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of (i) the Company’s excess earnings and relief from royalty methods and certain significant assumptions, including(ii) the royalty rates,rate for the relief from royalty method and long-term growth ratesrate and discount rates.rate assumptions for the excess earnings method and relief from royalty method.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 14, 202016, 2023
We have served as the Company’s or its predecessors' auditor since 1979.
The Kraft Heinz Company
Consolidated Statements of Income
(in millions, except per share data)
| | | | December 28, 2019 | | December 29, 2018 | | December 30, 2017 | | December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| Net sales | $ | 24,977 |
| | $ | 26,268 |
| | $ | 26,076 |
| Net sales | $ | 26,485 | | | $ | 26,042 | | | $ | 26,185 | |
| Cost of products sold | 16,830 |
| | 17,347 |
| | 17,043 |
| Cost of products sold | 18,363 | | | 17,360 | | | 17,008 | |
| Gross profit | 8,147 |
| | 8,921 |
| | 9,033 |
| Gross profit | 8,122 | | | 8,682 | | | 9,177 | |
| Selling, general and administrative expenses, excluding impairment losses | 3,178 |
| | 3,190 |
| | 2,927 |
| Selling, general and administrative expenses, excluding impairment losses | 3,575 | | | 3,588 | | | 3,650 | |
| Goodwill impairment losses | 1,197 |
| | 7,008 |
| | — |
| Goodwill impairment losses | 444 | | | 318 | | | 2,343 | |
| Intangible asset impairment losses | 702 |
| | 8,928 |
| | 49 |
| Intangible asset impairment losses | 469 | | | 1,316 | | | 1,056 | |
| Selling, general and administrative expenses | 5,077 |
| | 19,126 |
| | 2,976 |
| Selling, general and administrative expenses | 4,488 | | | 5,222 | | | 7,049 | |
| Operating income/(loss) | 3,070 |
| | (10,205 | ) | | 6,057 |
| Operating income/(loss) | 3,634 | | | 3,460 | | | 2,128 | |
| Interest expense | 1,361 |
| | 1,284 |
| | 1,234 |
| Interest expense | 921 | | | 2,047 | | | 1,394 | |
| Other expense/(income) | (952 | ) | | (168 | ) | | (627 | ) | Other expense/(income) | (253) | | | (295) | | | (296) | |
| Income/(loss) before income taxes | 2,661 |
| | (11,321 | ) | | 5,450 |
| Income/(loss) before income taxes | 2,966 | | | 1,708 | | | 1,030 | |
| Provision for/(benefit from) income taxes | 728 |
| | (1,067 | ) | | (5,482 | ) | Provision for/(benefit from) income taxes | 598 | | | 684 | | | 669 | |
| Net income/(loss) | 1,933 |
| | (10,254 | ) | | 10,932 |
| Net income/(loss) | 2,368 | | | 1,024 | | | 361 | |
| Net income/(loss) attributable to noncontrolling interest | (2 | ) | | (62 | ) | | (9 | ) | Net income/(loss) attributable to noncontrolling interest | 5 | | | 12 | | | 5 | |
| Net income/(loss) attributable to common shareholders | $ | 1,935 |
| | $ | (10,192 | ) | | $ | 10,941 |
| Net income/(loss) attributable to common shareholders | $ | 2,363 | | | $ | 1,012 | | | $ | 356 | |
| Per share data applicable to common shareholders: | | | | | | Per share data applicable to common shareholders: | | | | | |
| Basic earnings/(loss) | $ | 1.59 |
| | $ | (8.36 | ) | | $ | 8.98 |
| Basic earnings/(loss) | $ | 1.93 | | | $ | 0.83 | | | $ | 0.29 | |
| Diluted earnings/(loss) | 1.58 |
| | (8.36 | ) | | 8.91 |
| Diluted earnings/(loss) | 1.91 | | | 0.82 | | | 0.29 | |
See accompanying notes to the consolidated financial statements.
The Kraft Heinz Company
Consolidated Statements of Comprehensive Income
(in millions)
| | | | December 28, 2019 | | December 29, 2018 | | December 30, 2017 | | December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| Net income/(loss) | $ | 1,933 |
| | $ | (10,254 | ) | | $ | 10,932 |
| Net income/(loss) | $ | 2,368 | | | $ | 1,024 | | | $ | 361 | |
| Other comprehensive income/(loss), net of tax: | | | | | | Other comprehensive income/(loss), net of tax: | |
| Foreign currency translation adjustments | 246 |
| | (1,187 | ) | | 1,185 |
| Foreign currency translation adjustments | (914) | | | (236) | | | 327 | |
| Net deferred gains/(losses) on net investment hedges | 1 |
| | 284 |
| | (353 | ) | Net deferred gains/(losses) on net investment hedges | 343 | | | 169 | | | (321) | |
| Amounts excluded from the effectiveness assessment of net investment hedges | 22 |
| | 7 |
| | — |
| Amounts excluded from the effectiveness assessment of net investment hedges | 32 | | | 35 | | | 26 | |
| Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss) | (16 | ) | | (7 | ) | | — |
| Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss) | (28) | | | (29) | | | (17) | |
| Net deferred gains/(losses) on cash flow hedges | (10 | ) | | 99 |
| | (113 | ) | Net deferred gains/(losses) on cash flow hedges | (72) | | | (91) | | | 144 | |
| Amounts excluded from the effectiveness assessment of cash flow hedges | 29 |
| | 2 |
| | — |
| Amounts excluded from the effectiveness assessment of cash flow hedges | 14 | | | 27 | | | 24 | |
| Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss) | (41 | ) | | (44 | ) | | 85 |
| Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss) | 26 | | | 68 | | | (116) | |
| Net actuarial gains/(losses) arising during the period | (70 | ) | | 58 |
| | 69 |
| Net actuarial gains/(losses) arising during the period | (386) | | | 232 | | | (27) | |
| Prior service credits/(costs) arising during the period | 1 |
| | 3 |
| | 17 |
| |
| | Net postemployment benefit losses/(gains) reclassified to net income/(loss) | (234 | ) | | (118 | ) | | (309 | ) | Net postemployment benefit losses/(gains) reclassified to net income/(loss) | (8) | | | (26) | | | (118) | |
| Total other comprehensive income/(loss) | (72 | ) | | (903 | ) | | 581 |
| Total other comprehensive income/(loss) | (993) | | | 149 | | | (78) | |
| Total comprehensive income/(loss) | 1,861 |
| | (11,157 | ) | | 11,513 |
| Total comprehensive income/(loss) | 1,375 | | | 1,173 | | | 283 | |
| Comprehensive income/(loss) attributable to noncontrolling interest | 5 |
| | (76 | ) | | (3 | ) | Comprehensive income/(loss) attributable to noncontrolling interest | (2) | | | 18 | | | 8 | |
| Comprehensive income/(loss) attributable to common shareholders | $ | 1,856 |
| | $ | (11,081 | ) | | $ | 11,516 |
| Comprehensive income/(loss) attributable to common shareholders | $ | 1,377 | | | $ | 1,155 | | | $ | 275 | |
See accompanying notes to the consolidated financial statements.
