01—Abstract
Summary
Summary of the 10-Q filed July 31, 2024. Cited figures are marked; the original filing is the authoritative source.
Kraft Heinz reported a sharp drop in second-quarter 2024 profitability, driven mainly by a non-cash goodwill impairment.
For the three months ended June 29, 2024, net sales fell 3.6% to $6.5 billiona (from $6.7 billion), with Organic Net Sales down 2.4%, primarily due to unfavorable volume/mix (3.4 pp) that more than offset higher pricing (1.0 pp). Operating income fell 62.1% to $522 million, reflected an $854 million goodwill impairment tied to the Meat & Cheese (MC) reporting unit following the Q2 North America reorganization, and diluted EPS was $0.08 versus $0.81 a year earlier. Excluding impairments and other non-GAAP items, Adjusted Operating Income rose 2.0% to $1,380 million and Adjusted EPS declined 1.3% to $0.78.
For the six months ended June 29, 2024, net sales decreased 2.4% to $12.9 billionb and Organic Net Sales decreased 1.5%, while Adjusted Operating Income increased 1.9% to $2.6 billion. Operating cash flow rose to $1.71 billion from $1.58 billion, supported by working capital improvements in inventory and accounts payable, though capital expenditures and share repurchases ($537 million year to date) increased.
Total debt carrying value was $19.9 billionc, no commercial paper or Senior Credit Facility borrowings were outstanding, and the board declared a $0.40 per share quarterly dividend payable September 27, 2024. Investors should also note the uncertain tax exposure from IRS transfer pricing proposals (approximately $200 million for 2018 and $210 million for 2019 in additional tax, plus penalties of about $85 million each year, for which no reserves were recorded), the remaining goodwill and brand headroom sensitivity flagged by management, and an ongoing Clean Water Act matter in Kendallville, Indiana.
02—Key points
Key Highlights
- Operating income fell 62.1% to $522 million in Q2 2024, primarily due to an $854 million non-cash goodwill impairment in the Meat & Cheese reporting unit.
- Diluted EPS was $0.08 for Q2 2024 versus $0.81 in Q2 2023; Adjusted EPS was $0.78 versus $0.79, down 1.3%.
- Q2 net sales decreased 3.6% to $6.5 billion, with Organic Net Sales down 2.4% driven by volume/mix (3.4 pp) partially offset by pricing (1.0 pp).
- Adjusted Operating Income increased 2.0% to $1,380 million in Q2 2024, driven by lower commodity costs, higher pricing and reduced logistics costs.
- Effective tax rate for Q2 2024 was 71.1%, largely due to non-deductible goodwill impairments (56.5 percentage points).
- Six-month operating cash flow rose to $1.7 billion; the company repurchased $537 million of common stock and paid $969 million in dividends.
- IRS NOPAs on transfer pricing could add roughly $200 million (2018) and $210 million (2019) in U.S. federal tax plus penalties of about $85 million each; no reserves have been recorded and the company intends to contest them.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2024, Kraft Heinz kept $0.02.
- Revenue$6.48B100.0%
- Cost of revenue−$4.18B64.6%
- Gross profit$2.29B35.4%
- Operating costs−$1.77B27.4%
- Operating income$522.0M8.1%
- Interest, other & tax−$420.0M6.5%
- Net income$102.0M1.6%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2024filed July 31, 2024Financial Statements
Q2 FY2024 against Q2 FY2023
| Line item | Q2 FY2024Q2 FY2023 | Change |
|---|---|---|
| Revenue | $6.48B$6.49B | −0.2% |
| Cost of Revenue | $4.18B$4.38B | −4.4% |
| Gross Profit | $2.29B$2.11B | +8.6% |
| SG&A Expenses | $1.77B$870.00M | +103.7% |
| Operating Income | $522.00M$1.24B | −58.0% |
| Interest Expense | $229.00M$227.00M | +0.9% |
| Net Income | $102.00M$836.00M | −87.8% |
| EPS (Basic) | $0.08$0.68 | −88.2% |
| EPS (Diluted) | $0.08$0.68 | −88.2% |
| Shares Outstanding (Basic) | 1.21B1.23B | −1.1% |
| Shares Outstanding (Diluted) | 1.22B1.23B | −1.5% |
05—Questions
Frequently Asked Questions
Why did operating income and EPS decline so sharply in the second quarter of 2024?
The decline was primarily due to a non-cash goodwill impairment of $854 million recorded in SG&A in North America, related to the Meat & Cheese reporting unit after the Q2 North America reorganization. Unfavorable volume/mix, higher SG&A from advertising and technology investments, and a 71.1% effective tax rate also contributed. Diluted EPS was $0.08 versus $0.81, while Adjusted EPS was $0.78 versus $0.79.
How is the business performing excluding the impairment?
Adjusted Operating Income rose 2.0% to $1,380 million for Q2 2024, driven by lower commodity costs (including hedges), higher pricing and reduced logistics costs, which more than offset unfavorable volume/mix and higher SG&A. Net sales declined 3.6% to $6.5 billion, with Organic Net Sales down 2.4%.
What is the company's liquidity and debt position?
Cash and cash equivalents were $900 million at June 29, 2024. Long-term debt including the current portion was $19.9 billion. No commercial paper or Senior Credit Facility amounts were outstanding, and the $4.0 billion revolving facility was undrawn. Operating cash flow was $1.71 billion for the six months, and capital expenditures are expected to be about $1.1 billion in 2024.
What are the main risks flagged in the filing?
Management notes that the reporting units and brands with 20% or less fair value over carrying amount have heightened risk of future impairments if assumptions change. A 50-basis-point increase in discount rates could reduce fair value of those reporting units by $4.4 billion. The company also faces the IRS transfer pricing NOPAs for 2018 through 2019, a Kendallville, Indiana Clean Water Act matter, and a construction delay on a synthetic lease distribution facility whose impact is not yet determinable.
What shareholder returns were announced?
The Board declared a $0.40 per share dividend payable September 27, 2024 to holders of record on August 30, 2024. Year-to-date dividends paid were $969 million. Under a $3.0 billion share repurchase program, about $2.4 billion remained authorized as of June 29, 2024, after roughly 9 million shares were bought in the first half of 2024.
06—Continue