01—Abstract
Summary
Summary of the 10-K filed February 16, 2018. Cited figures are marked; the original filing is the authoritative source.
The Kraft Heinz Company reported net sales of $26.2 billiona for fiscal 2017 (52 weeks ended December 30, 2017), down 1.0% from $26.5 billion in 2016, driven by unfavorable volume/mix (1.5 pp) partly offset by higher pricing (0.5 pp).
Operating income rose 10.3% to $6.8 billionb, helped by lower Integration Program and restructuring expenses, Integration Program savings and lower overhead costs. Adjusted EBITDA increased 1.9% to $7.9 billion and Adjusted EPS rose 6.6% to $3.55. Reported diluted EPS was $8.95, inflated by a net tax benefit of approximately $7.0 billion from the U.S. Tax Reform, which reduced the effective tax rate to a 98.7% benefit.
The company substantially completed its multi-year Integration Program, with cumulative pre-tax costs of $2,055 millionc against an expected total of approximately $2.1 billion, and cumulative pre-tax savings of approximately $1,725 million. Net cash provided by operating activities fell to $527 million from $2.6 billion, mainly due to a $1.2 billion pre-funding of postretirement benefit plans. Capital expenditures were $1,217 million, and the company expects 2018 capital expenditures of approximately $850 million.
Total debt was $31.1 billiond at year-end, with $2.5 billion of senior notes maturing in the third quarter of 2018 and a $4.0 billion undrawn revolving credit facility. The filing also disclosed a material weakness related to the misapplication of ASU 2016-15 in connection with restatements of the quarters ended April 1, 2017 and July 1, 2017, which management states has been remediated as of December 30, 2017. Sponsors 3G Capital and Berkshire Hathaway together own approximately 51% of common stock, and the Board declared a quarterly dividend of $0.625 per share on February 16, 2018.
02—Key points
Key Highlights
- Net sales declined 1.0% to $26.2 billion, with unfavorable volume/mix (1.5 pp) partly offset by higher pricing (0.5 pp); the United States segment declined 1.5% to $18.4 billion.
- Operating income increased 10.3% to $6.8 billion, and Adjusted EBITDA increased 1.9% to $7.9 billion, driven by Integration Program savings and lower overhead costs.
- Diluted EPS was $8.95, primarily reflecting a net tax benefit of approximately $7.0 billion from U.S. Tax Reform; Adjusted EPS was $3.55, up 6.6%.
- Net cash provided by operating activities fell to $527 million from $2.6 billion, reflecting a $1.2 billion pre-funding of postretirement benefit plans in 2017.
- The Integration Program was substantially completed, with cumulative pre-tax costs of $2,055 million and cumulative pre-tax savings of approximately $1,725 million.
- Total long-term debt including current portion was $31.1 billion, with approximately $2.5 billion of senior notes maturing in the third quarter of 2018 and a $4.0 billion undrawn senior unsecured revolving credit facility.
- A material weakness related to the adoption of ASU 2016-15 was identified in 2017 and management reports it has been remediated as of December 30, 2017; the quarterly dividend was $0.625 per share declared February 16, 2018.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Kraft Heinz kept $0.42.
- Revenue$26.23B100.0%
- Cost of revenue−$17.20B65.6%
- Gross profit$9.03B34.4%
- Operating costs−$2.98B11.3%
- Operating income$6.06B23.1%
- Interest, other & tax$4.88B18.6%
- Net income$10.94B41.7%
Where FY2017 revenue went
$26.23B- Cost of revenue: $17.04B, 65% of revenue
- Operating income: $6.06B, 23% of revenue
- R&D: $93.0M, 0.4% of revenue
- SG&A: $2.98B, 11% of revenue
Kept 23% as operating incomeR&D $93.0M · 0.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 16, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $26.23B$26.30B | −0.3% |
| Cost of Revenue | $17.04B$17.15B | −0.6% |
| Gross Profit | $9.03B$9.15B | −1.2% |
| R&D Expenses | $93.00M$120.00M | −22.5% |
| SG&A Expenses | $2.98B$3.54B | −16.1% |
| Operating Income | $6.06B$5.60B | +8.1% |
| Interest Expense | $1.23B$1.13B | +8.8% |
| Net Income | $10.94B$3.60B | +204.3% |
| EPS (Basic) | $8.98$2.81 | +219.6% |
| EPS (Diluted) | $8.91$2.78 | +220.5% |
| Shares Outstanding (Basic) | 1.22B1.22B | +0.1% |
| Shares Outstanding (Diluted) | 1.23B1.23B | +0.2% |
05—Questions
Frequently Asked Questions
How did underlying sales and profitability trend in 2017?
Net sales decreased 1.0% to $26.2 billion, and Organic Net Sales also decreased 1.0%, due to unfavorable volume/mix partly offset by higher pricing. Operating income increased 10.3% to $6.8 billion and Adjusted EBITDA increased 1.9% to $7.9 billion, primarily from lower integration and restructuring expenses, Integration Program savings and lower overhead costs, partly offset by higher input costs and lower Organic Net Sales.
Why did reported net income and EPS jump so sharply?
The company recognized a net tax benefit of approximately $7.0 billion from the U.S. Tax Reform enacted December 22, 2017, including a reasonable estimate of a $7.5 billion deferred income tax benefit from the lower corporate tax rate, partly offset by a $312 million toll charge and approximately $125 million of other tax expenses. This produced a 98.7% effective tax benefit and diluted EPS of $8.95, compared with $2.81 in 2016. Adjusted EPS, which excludes the U.S. Tax Reform impact, rose 6.6% to $3.55.
How much cash is the company generating and how is it funding dividends and debt?
Net cash provided by operating activities was $527 million in 2017, down from $2.6 billion in 2016, mainly because of the $1.2 billion postretirement pre-funding. Investing cash flow was $1.2 billion, and financing activities used $4.2 billion, including $2.9 billion of common stock dividends paid. Management expects to fund the roughly $2.5 billion of notes maturing in the third quarter of 2018 primarily with new long-term debt issuances, cash on hand and operating cash flow.
What risks did the filing disclose about internal controls and ownership?
The company disclosed a material weakness tied to the misapplication of ASU 2016-15, which led to restatements of the quarters ended April 1, 2017 and July 1, 2017. Management states the weakness was remediated and that disclosure controls were effective as of December 30, 2017. The Sponsors, 3G Capital and Berkshire Hathaway, own approximately 51% of common stock and can exert substantial influence over the Board and shareholder votes.
What is the outlook for capital spending and the Integration Program?
The company expects 2018 capital expenditures of approximately $850 million, down from $1.2 billion in 2017, mainly due to the wind-up of U.S. and Canadian footprint costs. The Integration Program was substantially completed in 2017, but the company expects to incur further Integration Program costs in 2018, and expects to eliminate approximately 5,200 positions, of which 4,900 had left the company as of December 30, 2017.
06—Continue