KRAFT HEINZ Overview
Description of the Company: We manufacture and market food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products throughout the world. We manage and report our operating results through four segments. We have three 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:Latin 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 withthe United States andCanada in 2020. We also plan to move ourPuerto Rico business from theLatin America zone tothe 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. See Note 22, Segment Reporting, in Item 8, Financial Statements and Supplementary Data, to the consolidated financial statements for our financial information by segment. See below for discussion and analysis of our financial condition and results of operations for 2019 compared to 2018. 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 endedDecember 29, 2018 for a detailed discussion of our financial condition and results of operations for 2018 compared to 2017. Items Affecting Comparability of Financial Results Impairment Losses: Our 2019 results of operations reflect goodwill impairment losses of$1.2 billion 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 billion in 2018. See Note 9,Goodwill and Intangible Assets, in Item 8, Financial Statements and Supplementary Data, for additional information on these impairment losses. Results of Operations We disclose in this report certain non-GAAP financial measures. These non-GAAP financial measures assist management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our underlying operations. For additional information and reconciliations from our consolidated financial statements see Non-GAAP Financial Measures. Consolidated Results of Operations Summary of Results:December 28, 2019
(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 %
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Net Sales : 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
Measures section at the end of this item.
Fiscal Year 2019 Compared to Fiscal Year 2018: Net sales decreased 4.9% to$25.0 billion in 2019 compared to$26.3 billion in 2018 primarily due to the unfavorable impacts of foreign currency (1.9 pp) and acquisitions and divestitures (1.3 pp). OrganicNet Sales decreased 1.7% to$25.0 billion in 2019 compared to$25.4 billion in 2018 due to unfavorable volume/mix (1.8 pp), partially offset by higher pricing (0.1 pp). Volume/mix was unfavorable inthe United States , Rest of World, and EMEA, which was partially offset by growth inCanada . Higher pricing inthe United States and Rest of World was partially offset by lower pricing inCanada , while pricing in EMEA was flat. Net Income/(Loss): 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) Adjusted EBITDA is a non-GAAP financial measure. See the Non-GAAP Financial
Measures section at the end of this item.
Fiscal Year 2019 Compared to Fiscal Year 2018: Operating income/(loss) increased 130.1% to income of$3.1 billion in 2019 compared to a loss of$10.2 billion in 2018. This increase was primarily driven by lower impairment losses in the current year. Impairment losses were$1.9 billion in 2019 compared to$15.9 billion in 2018. Excluding the impact of these impairment losses, operating income/(loss) decreased by$762 million primarily due to lower OrganicNet Sales , higher supply chain costs, the unfavorable impact of foreign currency (0.8 pp), higher general corporate expenses, and 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. Net income/(loss) attributable to common shareholders increased 119.0% to income of$1.9 billion in 2019 compared to a loss of$10.2 billion in 2018. This change was driven by the operating income/(loss) factors described above (primarily lower impairment losses in 2019 compared to 2018) and favorable impacts in other expense/(income), partially offset by a higher effective tax rate and higher interest expense, detailed as follows. • Other expense/(income) was$952 million of income in 2019 compared to$168
million of income in 2018. This increase was primarily driven by a
million net gain on sales of businesses in 2019 compared to a
loss on sale of our
non-cash settlement charge in the prior year related to the wind-up of our
Canadian salaried and Canadian hourly defined benefit pension plans, and a
to our Venezuelan operations as compared to the prior year period. The
$420 million net gain on sales of businesses in 2019 consisted of a $249
million gain on the sale of
("Heinz India Transaction"), a
assets in our natural cheese business in
Transaction"), and a $71 million loss on an anticipated sale of a
subsidiary within our Rest of World segment.
• The effective tax rate was 27.4% in 2019 on pre-tax income compared to
9.4% in 2018 on a pre-tax loss. The 2019 effective tax rate was higher
primarily driven by lower non-deductible goodwill impairments, partially
offset by a more favorable geographic mix of pre-tax income in various
non-
items. Current year unfavorable impacts primarily related to
non-deductible goodwill impairments, the impact of the federal tax on
global intangible low-taxed income ("GILTI"), an increase in uncertain tax
position reserves, the establishment of certain state valuation allowance
reserves, and the tax impacts from the Heinz India and Canada Natural
Cheese Transactions. These impacts were partially offset by the reversal
of certain withholding tax obligations and changes in estimates of certain
2018 U.S. income and deductions.
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• Interest expense was$1.4 billion in 2019 compared to$1.3 billion in 2018. This increase was primarily driven by a$98 million loss on extinguishment of debt recognized in connection with our debt tender
offers and redemptions completed in 2019. Excluding the impact of the loss
on extinguishment of debt, interest expense was generally flat as compared
to the prior year period.
Adjusted EBITDA decreased 13.7% to$6.1 billion in 2019 compared to$7.0 billion in 2018. This decrease was primarily due to lower OrganicNet Sales , higher supply chain costs, the unfavorable impact of foreign currency (2.8 pp), higher general corporate expenses, and the unfavorable impact of divestitures. Diluted EPS: 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) Adjusted EPS is a non-GAAP financial measure. See the Non-GAAP Financial
Measures section at the end of this item.
Fiscal Year 2019 Compared to Fiscal Year 2018: Diluted EPS increased 118.9% to earnings of$1.58 in 2019 compared to a loss of$8.36 in 2018 primarily driven by the net income/(loss) attributable to common shareholders factors discussed above. 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 - 0.06U.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) 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% to$2.85 in 2019 compared to$3.51 in 2018 primarily due to lower Adjusted EBITDA and higher depreciation and amortization expenses, partially offset by favorable changes in other expense/(income) and lower interest expense. 24 -------------------------------------------------------------------------------- Results of Operations by Segment Management evaluates segment performance based on several factors, including net sales, OrganicNet 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); in addition to these adjustments, we exclude, when they occur, the impacts of integration and restructuring expenses, 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, and equity award compensation expense (excluding integration and restructuring expenses). 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), rather than accumulated other comprehensive income/(losses) on the 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.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 Organic Net Sales: December 28, 2019 December 29, 2018 (in millions) OrganicNet 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) Organic
Measures section at the end of this item.
Drivers of the changes in net sales and Organic
Acquisitions
and
Net Sales Currency 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
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Adjusted EBITDA:
December 28 ,
2019
(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:
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) Organic
Measures section at the end of this item.
Fiscal Year 2019 Compared to Fiscal Year 2018: Net sales and OrganicNet Sales both decreased 2.0% to$17.8 billion in 2019 compared to$18.1 billion in 2018. This decrease was primarily due to unfavorable volume/mix (2.4 pp), partially offset by higher pricing (0.4 pp). Unfavorable volume/mix was primarily due to unfavorable changes in retail inventory levels versus the prior year and lower shipments in 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 meat and cheese, which more than offset lower key-commodity driven pricing on coffee and nuts. Segment Adjusted EBITDA decreased 7.8% to$4.8 billion in 2019 compared to$5.2 billion in 2018. This decrease was primarily due to lower OrganicNet 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
Measures section at the end of this item.
26-------------------------------------------------------------------------------- Fiscal Year 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). OrganicNet 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, primarily due to higher promotional costs versus the prior year, particularly in condiments and sauces 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 pp). Excluding the currency impact, Segment Adjusted EBITDA decreased primarily due to lower OrganicNet Sales , the Canada Natural Cheese Transaction which closed onJuly 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
Measures section at the end of this item.
Fiscal Year 2019 Compared to Fiscal Year 2018: Net sales decreased 6.2% to$2.6 billion in 2019 compared to$2.7 billion in 2018 driven by the unfavorable impacts of foreign currency (4.3 pp) and acquisitions and divestitures (0.7 pp). OrganicNet Sales decreased 1.2% to$2.7 billion in 2019 compared to$2.7 billion in 2018 due to unfavorable volume/mix (1.2 pp) while pricing was flat versus 2018. Unfavorable volume/mix was primarily due to the adverse impact of extended negotiations with key retailers, lower shipments of meals, and ongoing weakness in infant nutrition, partially offset by foodservice growth. Pricing was flat primarily due to lower pricing in infant nutrition, partially offset by price increases in meals. Segment Adjusted EBITDA decreased 8.7% to$661 million in 2019 compared to$724 million in 2018, including the unfavorable impact of foreign currency (4.2 pp). Excluding the currency impact, the decrease was primarily due to higher supply chain costs in the current year and the benefit from the postemployment benefits accounting change 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
Measures section at the end of this item.
Fiscal Year 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 to the unfavorable impact of foreign currency (10.3 pp, including 6.9 pp from the devaluation of the Venezuelan bolivar) and the unfavorable impact of acquisitions and divestitures (3.9 pp). OrganicNet Sales decreased 0.1% to$2.8 billion in 2019 compared to$2.8 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 pricing was primarily driven by price increases inBrazil andMexico . 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 pp from the devaluation of the Venezuelan bolivar) and costs not expected to repeat, from a combination of higher labor-related expenses from the impact of the Holidays Act inNew Zealand , as well as asset- and inventory-related write-offs inAustralia ,New Zealand , andLatin America . Excluding these factors, the decrease in Segment Adjusted EBITDA was primarily due to higher supply chain costs and the Heinz India Transaction which closed onJanuary 30, 2019 . 27 --------------------------------------------------------------------------------
Critical Accounting Estimates
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