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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | | | | |
☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 28, 2020
or
| | | | | | | | |
☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number 001-37482
The Kraft Heinz Company
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
Delaware | | | | 46-2078182 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
One PPG Place, | Pittsburgh, | Pennsylvania | | 15222 |
(Address of Principal Executive Offices) | | | | (Zip Code) |
(412) 456-5700
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of exchange on which registered |
Common stock, $0.01 par value | KHC | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ | | | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 25, 2020, there were 1,221,833,078 shares of the registrant’s common stock outstanding.
Table of Contents
Unless the context otherwise requires, the terms “we,” “us,” “our,” “Kraft Heinz,” and the “Company” each refer to The Kraft Heinz Company and all of its consolidated subsidiaries.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Kraft Heinz Company
Condensed Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)
| | | | | | | | | | | |
| For the Three Months Ended | | |
| March 28, 2020 | | March 30, 2019 |
Net sales | $ | 6,157 | | | $ | 5,959 | |
Cost of products sold | 4,299 | | | 3,948 | |
Gross profit | 1,858 | | | 2,011 | |
Selling, general and administrative expenses, excluding impairment losses | 862 | | | 829 | |
Goodwill impairment losses | 226 | | | 620 | |
Selling, general and administrative expenses | 1,088 | | | 1,449 | |
Operating income/(loss) | 770 | | | 562 | |
Interest expense | 310 | | | 321 | |
Other expense/(income) | (81) | | | (380) | |
Income/(loss) before income taxes | 541 | | | 621 | |
Provision for/(benefit from) income taxes | 160 | | | 217 | |
Net income/(loss) | 381 | | | 404 | |
Net income/(loss) attributable to noncontrolling interest | 3 | | | (1) | |
Net income/(loss) attributable to common shareholders | $ | 378 | | | $ | 405 | |
Per share data applicable to common shareholders: | | | |
Basic earnings/(loss) | $ | 0.31 | | | $ | 0.33 | |
Diluted earnings/(loss) | 0.31 | | | 0.33 | |
See accompanying notes to the condensed consolidated financial statements.
The Kraft Heinz Company
Condensed Consolidated Statements of Comprehensive Income
(in millions)
(Unaudited)
| | | | | | | | | | | |
| For the Three Months Ended | | |
| March 28, 2020 | | March 30, 2019 |
Net income/(loss) | $ | 381 | | | | $ | 404 | |
Other comprehensive income/(loss), net of tax: | | | |
Foreign currency translation adjustments | (790) | | | 219 | |
Net deferred gains/(losses) on net investment hedges | 166 | | | (14) | |
Amounts excluded from the effectiveness assessment of net investment hedges | 5 | | | 4 | |
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss) | (6) | | | 2 | |
Net deferred gains/(losses) on cash flow hedges | 101 | | | (16) | |
Amounts excluded from the effectiveness assessment of cash flow hedges | 5 | | | 6 | |
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss) | (10) | | | (8) | |
Net postemployment benefit losses/(gains) reclassified to net income/(loss) | (25) | | | (58) | |
Total other comprehensive income/(loss) | (554) | | | 135 | |
Total comprehensive income/(loss) | (173) | | | 539 | |
Comprehensive income/(loss) attributable to noncontrolling interest | (11) | | | 11 | |
Comprehensive income/(loss) attributable to common shareholders | $ | (162) | | | $ | 528 | |
See accompanying notes to the condensed consolidated financial statements.
The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions, except per share data)
(Unaudited)
| | | | | | | | | | | |
| March 28, 2020 | | December 28, 2019 |
ASSETS | | | |
Cash and cash equivalents | $ | 5,403 | | | $ | 2,279 | |
Trade receivables (net of allowances of $43 at March 28, 2020 and $33 at December 28, 2019) | 2,321 | | | 1,973 | |
Inventories | 2,831 | | | 2,721 | |
Prepaid expenses | 485 | | | 384 | |
Other current assets | 535 | | | 618 | |
Assets held for sale | 133 | | | 122 | |
Total current assets | 11,708 | | | 8,097 | |
Property, plant and equipment, net | 6,813 | | | 7,055 | |
Goodwill | 35,062 | | | 35,546 | |
Intangible assets, net | 48,259 | | | 48,652 | |
Other non-current assets | 2,231 | | | 2,100 | |
TOTAL ASSETS | $ | 104,073 | | | $ | 101,450 | |
LIABILITIES AND EQUITY | | | |
Commercial paper and other short-term debt | $ | 6 | | | $ | 6 | |
Current portion of long-term debt | 1,242 | | | 1,022 | |
Trade payables | 3,956 | | | 4,003 | |
Accrued marketing | 681 | | | 647 | |
Interest payable | 374 | | | 384 | |
Other current liabilities | 1,664 | | | 1,804 | |
Liabilities held for sale | 11 | | | 9 | |
Total current liabilities | 7,934 | | | 7,875 | |
Long-term debt | 31,531 | | | 28,216 | |
Deferred income taxes | 11,839 | | | 11,878 | |
Accrued postemployment costs | 250 | | | 273 | |
Other non-current liabilities | 1,395 | | | 1,459 | |
TOTAL LIABILITIES | 52,949 | | | 49,701 | |
Commitments and Contingencies (Note 16) | | | |
Redeemable noncontrolling interest | — | | | — | |
Equity: | | | | |
Common stock, $0.01 par value (5,000 shares authorized; 1,225 shares issued and 1,222 shares outstanding at March 28, 2020; 1,224 shares issued and 1,221 shares outstanding at December 28, 2019) | 12 | | | 12 | |
Additional paid-in capital | 56,378 | | | 56,828 | |
Retained earnings/(deficit) | (2,686) | | | (3,060) | |
Accumulated other comprehensive income/(losses) | (2,426) | | | (1,886) | |
Treasury stock, at cost (3 shares at March 28, 2020 and 3 shares at December 28, 2019) | (269) | | | (271) | |
Total shareholders' equity | 51,009 | | | 51,623 | |
Noncontrolling interest | 115 | | | 126 | |
TOTAL EQUITY | 51,124 | | | 51,749 | |
TOTAL LIABILITIES AND EQUITY | $ | 104,073 | | | $ | 101,450 | |
See accompanying notes to the condensed consolidated financial statements.
The Kraft Heinz Company
Condensed Consolidated Statements of Equity
(in millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings/(Deficit) | | Accumulated Other Comprehensive Income/(Losses) | | Treasury Stock, at Cost | | Noncontrolling Interest | | Total Equity |
Balance at December 28, 2019 | $ | 12 | | | $ | 56,828 | | | $ | (3,060) | | | $ | (1,886) | | | $ | (271) | | | $ | 126 | | | $ | 51,749 | |
Net income/(loss) excluding redeemable noncontrolling interest | — | | | — | | | 378 | | | — | | | — | | | 3 | | | 381 | |
Other comprehensive income/(loss) | — | | | — | | | — | | | (540) | | | — | | | (14) | | | (554) | |
Dividends declared-common stock ($0.40 per share) | — | | | (492) | | | — | | | — | | | — | | | — | | | (492) | |
Exercise of stock options, issuance of other stock awards, and other | — | | | 42 | | | (4) | | | — | | | 2 | | | — | | | 40 | |
Balance at March 28, 2020 | $ | 12 | | | $ | 56,378 | | | $ | (2,686) | | | $ | (2,426) | | | $ | (269) | | | $ | 115 | | | $ | 51,124 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings/(Deficit) | | Accumulated Other Comprehensive Income/(Losses) | | Treasury Stock, at Cost | | Noncontrolling Interest | | Total Equity |
Balance at December 29, 2018 | $ | 12 | | | $ | 58,723 | | | $ | (4,853) | | | $ | (1,943) | | | $ | (282) | | | $ | 118 | | | $ | 51,775 | |
Net income/(loss) excluding redeemable noncontrolling interest | — | | | — | | | 405 | | | — | | | — | | | — | | | 405 | |
Other comprehensive income/(loss) | — | | | — | | | — | | | 123 | | | — | | | 12 | | | 135 | |
Dividends declared-common stock ($0.40 per share) | — | | | (488) | | | — | | | — | | | — | | | — | | | (488) | |
Cumulative effect of accounting standards adopted in the period | — | | | — | | | (136) | | | 136 | | | — | | | — | | | — | |
Exercise of stock options, issuance of other stock awards, and other | — | | | 17 | | | (2) | | | — | | | (9) | | | — | | | 6 | |
Balance at March 30, 2019 | $ | 12 | | | $ | 58,252 | | | $ | (4,586) | | | $ | (1,684) | | | $ | (291) | | | $ | 130 | | | $ | 51,833 | |
See accompanying notes to the condensed consolidated financial statements.
The Kraft Heinz Company
Condensed Consolidated Statements of Cash Flows
(in millions)
(Unaudited)
| | | | | | | | | | | |
| For the Three Months Ended | | |
| March 28, 2020 | | March 30, 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income/(loss) | $ | 381 | | | $ | 404 | |
Adjustments to reconcile net income/(loss) to operating cash flows: | | | |
Depreciation and amortization | 243 | | | 239 | |
Amortization of postretirement benefit plans prior service costs/(credits) | (31) | | | (77) | |
Equity award compensation expense | 33 | | | 9 | |
Deferred income tax provision/(benefit) | (46) | | | (67) | |
Postemployment benefit plan contributions | (9) | | | (13) | |
Goodwill and intangible asset impairment losses | 226 | | | 620 | |
Nonmonetary currency devaluation | 1 | | | 4 | |
Loss/(gain) on sale of business | 2 | | | (246) | |
Other items, net | 170 | | | (64) | |
Changes in current assets and liabilities: | | | |
Trade receivables | (423) | | | 116 | |
Inventories | (226) | | | (488) | |
Accounts payable | (2) | | | 64 | |
Other current assets | (148) | | | 14 | |
Other current liabilities | 41 | | | (211) | |
Net cash provided by/(used for) operating activities | 212 | | | 304 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Capital expenditures | (131) | | | (249) | |
Payments to acquire business, net of cash acquired | — | | | (200) | |
Proceeds from sale of business, net of cash disposed | — | | | 640 | |
Other investing activities, net | 9 | | | (14) | |
Net cash provided by/(used for) investing activities | (122) | | | 177 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Repayments of long-term debt | (407) | | | (1) | |
Proceeds from revolving credit facility | 4,000 | | | — | |
Proceeds from issuance of commercial paper | — | | | 377 | |
Repayments of commercial paper | — | | | (377) | |
Dividends paid | (488) | | | (488) | |
Other financing activities, net | — | | | (15) | |
Net cash provided by/(used for) financing activities | 3,105 | | | (504) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (71) | | | (11) | |
Cash, cash equivalents, and restricted cash | | | |
Net increase/(decrease) | 3,124 | | | (34) | |
Balance at beginning of period | 2,280 | | | 1,136 | |
Balance at end of period | $ | 5,404 | | | $ | 1,102 | |
See accompanying notes to the condensed consolidated financial statements.
The Kraft Heinz Company
Notes to Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted, in accordance with the rules of the Securities and Exchange Commission (the “SEC”). In management’s opinion, these interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary to fairly state our results for the periods presented.
The condensed consolidated balance sheet data at December 28, 2019 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These statements should be read in conjunction with our audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 28, 2019. The results for interim periods are not necessarily indicative of future or annual results.
Principles of Consolidation
The condensed consolidated financial statements include Kraft Heinz and all of our controlled subsidiaries. All intercompany transactions are eliminated.
Reportable Segments
In the first quarter of our fiscal year 2020, our internal reporting and reportable segments changed. We moved 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. We also combined our Europe, Middle East, and Africa (“EMEA”), Latin America, and Asia Pacific (“APAC”) zones to form the International zone as a result of certain previously announced organizational changes.
Therefore, effective in the first quarter of 2020, we manage and report our operating results through three reportable segments defined by geographic region: United States, International, and Canada. We have reflected these changes in all historical periods presented.
Considerations related to the novel coronavirus (“COVID-19”)
In December 2019, an outbreak of illness caused by a novel coronavirus called COVID-19 was identified in Wuhan, China. On January 31, 2020, the United States declared a public health emergency related to the novel coronavirus and on March 11, 2020, the World Health Organization declared that the spread of the novel coronavirus qualified as a global pandemic. In an attempt to minimize transmission of COVID-19, significant social and economic restrictions have been imposed in the United States and abroad. These restrictions, while necessary and important for public health, have negative implications for portions of our business and the U.S. and global economy. In the preparation of these financial statements and related disclosures we have assessed the impact that COVID-19 has had on our estimates, assumptions, forecasts, and accounting policies and made additional disclosures, as necessary. As the COVID-19 situation is unprecedented and ever evolving, future events and effects related to the illness cannot be determined with precision and actual results could significantly differ from estimates or forecasts.
See Note 8, Goodwill and Intangible Assets, Note 11, Postemployment Benefits, and Note 16, Commitments, Contingencies and Debt, for further discussion of COVID-19 considerations.
Use of Estimates
We prepare our condensed consolidated financial statements in accordance with U.S. GAAP, which requires us to make accounting policy elections, estimates, and assumptions that affect the reported amount of assets, liabilities, reserves, and expenses. These accounting policy elections, estimates, and assumptions are based on our best estimates and judgments. We evaluate our policy elections, estimates, and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We believe these estimates to be reasonable given the current facts available. We adjust our policy elections, estimates, and assumptions when facts and circumstances dictate. Market volatility, including foreign currency exchange rates, increases the uncertainty inherent in our estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from estimates. If actual amounts differ from estimates, we include the revisions in our consolidated results of operations in the period the actual amounts become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a material effect on our condensed consolidated financial statements.
Reclassifications
We made reclassifications to certain previously reported financial information to conform to our current period presentation.
Note 2. Significant Accounting Policies
The following significant accounting policies were updated in the first quarter of our fiscal year 2020 to reflect material changes in our cash equivalents holdings as well as to reflect changes upon the adoption of Accounting Standards Update (“ASU”) 2018-15 related to accounting for implementation costs incurred in hosted cloud computing service arrangements. There were no other changes to our accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 28, 2019.
Cash and Cash Equivalents:
Cash equivalents include demand deposits with banks, money market funds, and all highly liquid investments with original maturities of three months or less. The fair value of cash equivalents approximates the carrying amount. Cash and cash equivalents that are legally restricted as to withdrawal or usage is classified in other current assets or other non-current assets, as applicable, on the consolidated balance sheets.
Property, Plant and Equipment:
Property, plant and equipment are stated at historical cost and depreciated on the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods ranging from three years to 20 years and buildings and improvements over periods up to 40 years. Capitalized software costs are included in property, plant and equipment if we have the contractual right to take possession of the software at any time and it is feasible for us to either run the software on our own hardware or contract with a third party to host the software. These costs are amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed seven years. We review long-lived assets for impairment when conditions exist that indicate the carrying amount of the assets may not be fully 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 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 assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Hosted Cloud Computing Arrangement that is a Service Contract:
Deferred implementation costs for hosted cloud computing service arrangements are stated at historical cost and amortized on the straight-line method over the term of the hosting arrangement which the implementation costs relate to. Deferred implementation costs for these arrangements are included in prepaid expenses and amortized to selling, general and administrative expenses (“SG&A”). The corresponding cash flows related to these arrangements will be reported within operating activities. We review the deferred implementation costs for impairment when we believe the deferred costs may no longer be recoverable. Such conditions could include situations where the arrangement is not expected to provide substantive service potential, a significant change occurs in the manner in which the arrangement is used or expected to be used, including early cancellation or termination of the arrangement, or situations where the arrangement has had, or will have, a significant change made to it. In instances where we have concluded that an impairment exists, we accelerate the deferred costs on the consolidated balance sheet for immediate expense recognition in SG&A.
Note 3. New Accounting Standards
Accounting Standards Adopted in the Current Year
Measurement of Current Expected Credit Losses:
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13 to update the methodology used to measure current expected credit losses (“CECL”). This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This ASU replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. This ASU became effective in the first quarter of our fiscal year 2020. We adopted this ASU and guidance on the first day of our fiscal year 2020 and, based on the insignificant impact of this ASU on our financial statements, a cumulative-effect adjustment to retained earnings/(deficit) was not deemed necessary.
Fair Value Measurement Disclosures:
In August 2018, the FASB issued ASU 2018-13 related to fair value measurement disclosures. This ASU removes the requirement to disclose the amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy, the policy for determining that a transfer has occurred, and valuation processes for Level 3 fair value measurements. Additionally, this ASU modifies the disclosures related to the measurement uncertainty for recurring Level 3 fair value measurements (by removing the requirement to disclose sensitivity to future changes) and the timing of liquidation of investee assets (by removing the timing requirement in certain instances). The guidance also requires new disclosures for Level 3 financial assets and liabilities, including the amount and location of unrealized gains and losses recognized in other comprehensive income/(loss) and additional information related to significant unobservable inputs used in determining Level 3 fair value measurements. This ASU became effective beginning in the first quarter of our fiscal year 2020. Early adoption of the guidance in whole was permitted. Alternatively, companies could have early adopted the portions of the guidance that removed or modified disclosures and delayed adoption of the additional disclosures until their effective date. Certain of the amendments in this ASU must be applied prospectively upon adoption, while other amendments must be applied retrospectively upon adoption. We elected to early adopt the provisions related to removing disclosures in the fourth quarter of our fiscal year 2018 on a retrospective basis. Accordingly, we removed certain disclosures from Note 12, Postemployment Benefits, and Note 13, Financial Instruments, in our Annual Report on Form 10-K for the year ended December 29, 2018. There was no other impact to our financial statement disclosures as a result of early adopting the provisions related to removing disclosures.
Implementation Costs Incurred in Hosted Cloud Computing Service Arrangements:
In August 2018, the FASB issued ASU 2018-15 related to accounting for implementation costs incurred in hosted cloud computing service arrangements. Under the new guidance, implementation costs incurred in a hosting arrangement that is a service contract should be expensed or deferred based on the nature of the costs and the project stage during which such costs are incurred. If the implementation costs qualify for deferral, they must be amortized over the term of the hosting arrangement and assessed for impairment. Additionally, the ASU requires disclosure of the nature of any hosted cloud computing service arrangement and requires financial statement presentation of the deferred costs be consistent with fees incurred under the hosting arrangement. This ASU became effective in the first quarter of our fiscal year 2020. We adopted this ASU in the first quarter of our fiscal year 2020 using a prospective transition method. The adoption of this ASU did not have a significant impact on our financial statements and related disclosures. See Note 2, Significant Accounting Policies, for our policy on accounting for hosted cloud computing service arrangements.
Accounting Standards Not Yet Adopted
Disclosure Requirements for Certain Employer-Sponsored Benefit Plans:
In August 2018, the FASB issued ASU 2018-14 related to the disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans. The guidance requires sponsors of these plans to provide additional disclosures, including weighted-average interest rates used in the company’s cash balance plans and a narrative description of reasons for any significant gains or losses impacting the benefit obligation for the period. Additionally, this guidance eliminates certain previous disclosure requirements. This ASU will be effective for fiscal years ending after December 15, 2020, and our Annual Report on Form 10-K for the year ended December 26, 2020 will reflect the adoption of this ASU. This guidance must be applied on a retrospective basis to all periods presented.
Simplifying the Accounting for Income Taxes:
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning in the first quarter of our fiscal year 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. We are currently evaluating the impact this ASU will have on our financial statements and related disclosures as well as the timing of adoption.
Note 4. Acquisitions and Divestitures
Acquisitions
Primal Acquisition:
On January 3, 2019 (the “Primal Acquisition Date”), we acquired 100% of the outstanding equity interests in Primal Nutrition, LLC (“Primal Nutrition”) (the “Primal Acquisition”), a better-for-you brand primarily focused on condiments, sauces, and dressings, with growing product lines in healthy snacks and other categories. The Primal Kitchen brand holds leading positions in the e-commerce and natural channels. We have not included unaudited pro forma results as it would not yield significantly different results.
The Primal Acquisition was accounted for under the acquisition method of accounting for business combinations. The total cash consideration paid for Primal Nutrition was $201 million. We utilized estimated fair values at the Primal Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. Such allocation for the Primal Acquisition was final as of September 28, 2019. The Primal Acquisition resulted in $124 million of tax deductible goodwill, which was allocated to the United States segment.
See Note 4, Acquisitions and Divestitures, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 28, 2019 for the final purchase price allocation, valuation methodology, and other information related to the Primal Acquisition.
Deal Costs:
Related to our acquisitions, we incurred aggregate deal costs of $2 million for the three months ended March 30, 2019. We recognized these deal costs in SG&A. There were no deal costs related to acquisitions for the three months ended March 28, 2020.
Divestitures
Potential Dispositions:
As of March 28, 2020, we were in negotiations with prospective third-party buyers for the sale of two businesses in our International segment. We expect these transactions to close in 2020. Related to the first transaction, we recorded an estimated loss of $71 million within other expense/(income) in the fourth quarter of 2019 and classified the related assets and liabilities as held for sale on the condensed consolidated balance sheets at March 28, 2020 and December 28, 2019. Related to the second transaction, we recorded an estimated loss of $3 million within other expense/(income) in the first quarter of 2020 and classified the related assets and liabilities as held for sale on the condensed consolidated balance sheet at March 28, 2020.
See Note 4, Acquisitions and Divestitures, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 28, 2019 for additional information related to the first transaction.
Heinz India Transaction:
In October 2018, we entered into a definitive agreement with two third-parties, Zydus Wellness Limited and Cadila Healthcare Limited (collectively, the “Buyers”), to sell 100% of our equity interests in Heinz India Private Limited (“Heinz India”) for approximately 46 billion Indian rupees (approximately $655 million at January 30, 2019) (the “Heinz India Transaction”). In connection with the Heinz India Transaction, we transferred to the Buyers, among other assets and operations, our global intellectual property rights to several brands, including Complan, Glucon-D, Nycil, and Sampriti. Our core brands (i.e., Heinz and Kraft) were not transferred. The Heinz India Transaction closed on January 30, 2019 (the “Heinz India Closing Date”). Related to the Heinz India Transaction, we recognized a pre-tax gain in other expense/(income) of $249 million in 2019, including $246 million in the first quarter and $3 million in the third quarter. Additionally, in the first quarter of 2020, we recognized a gain of approximately $1 million related to local India tax recoveries.
In connection with the Heinz India Transaction we agreed to indemnify the Buyers from and against any tax losses for any taxable period prior to the Heinz India Closing Date, including taxes for which we are liable as a result of any transaction that occurred on or before such date. We recorded tax indemnity liabilities related to the Heinz India Transaction totaling approximately $48 million as of the Heinz India Closing Date. Future changes to the fair value of these tax indemnity liabilities will continue to impact other expense/(income) throughout the life of the exposures as a component of the gain on sale for the Heinz India Transaction.
See Note 4, Acquisitions and Divestitures, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 28, 2019 for additional details related to the gain on sale and tax indemnity associated with the Heinz India Transaction.
Canada Natural Cheese Transaction:
In November 2018, we entered into a definitive agreement with a third-party, Parmalat SpA (“Parmalat”), to sell certain assets in our natural cheese business in Canada for approximately 1.6 billion Canadian dollars (approximately $1.2 billion at July 2, 2019) (the “Canada Natural Cheese Transaction”). In connection with the Canada Natural Cheese Transaction, we transferred certain assets to Parmalat, including the intellectual property rights to Cracker Barrel in Canada and P’Tit Quebec globally. The Canada Natural Cheese Transaction closed on July 2, 2019. See Note 4, Acquisitions and Divestitures, to the consolidated financial statements in our Annual Form on 10-K for the year ended December 28, 2019 for additional information related to the Canada Natural Cheese Transaction.
Deal Costs:
Related to our divestitures, we incurred aggregate deal costs of $6 million for the three months ended March 30, 2019. We recognized these deal costs in SG&A. There were no deal costs related to divestitures for the three months ended March 28, 2020.
Held for Sale
Our assets and liabilities held for sale, by major class, were (in millions):
| | | | | | | | | | | |
| March 28, 2020 | | December 28, 2019 |
ASSETS | | | |
Cash and cash equivalents | $ | 26 | | | $ | 27 | |
Inventories | 28 | | | 21 | |
Property, plant and equipment, net | 33 | | | 25 | |
Intangible assets, net | 21 | | | 23 | |
Other | 25 | | | 26 | |
Total assets held for sale | $ | 133 | | | $ | 122 | |
LIABILITIES | | | |
Trade payables | $ | 3 | | | $ | 3 | |
Other | 8 | | | 6 | |
Total liabilities held for sale | $ | 11 | | | $ | 9 | |
The balances held for sale at March 28, 2020 and December 28, 2019 primarily related to businesses in our International segment, as well as certain manufacturing equipment and land use rights across the globe.
Note 5. Restructuring Activities
As part of our restructuring activities, we incur expenses that qualify as exit and disposal costs under U.S. GAAP. These include severance and employee benefit costs and other exit costs. Severance and employee benefit costs primarily relate to cash severance, non-cash severance, including accelerated equity award compensation expense, and pension and other termination benefits. Other exit costs primarily relate to lease and contract terminations. We also incur expenses that are an integral component of, and directly attributable to, our restructuring activities, which do not qualify as exit and disposal costs under U.S. GAAP. These include asset-related costs and other implementation costs. Asset-related costs primarily relate to accelerated depreciation and asset impairment charges. Other implementation costs primarily relate to start-up costs of new facilities, professional fees, asset relocation costs, costs to exit facilities, and costs associated with restructuring benefit plans.
Employee severance and other termination benefit packages are primarily determined based on established benefit arrangements, local statutory requirements, or historical benefit practices. We recognize the contractual component of these benefits when payment is probable and estimable; additional elements of severance and termination benefits associated with non-recurring benefits are recognized ratably over each employee’s required future service period. Charges for accelerated depreciation are recognized on long-lived assets that will be taken out of service before the end of their normal service, in which case depreciation estimates are revised to reflect the use of the asset over its shortened useful life. Asset impairments establish a new fair value basis for assets held for disposal or sale, and those assets are written down to expected net realizable value if carrying value exceeds fair value. All other costs are recognized as incurred.
Restructuring Activities:
We have restructuring programs globally, which are focused primarily on workforce reduction and factory closure and consolidation. For the three months ended March 28, 2020, we eliminated approximately 80 positions outside of the U.S. related to these programs. As of March 28, 2020, we expect to eliminate approximately 250 additional positions outside the U.S. related to these programs primarily due to the formation of the International zone. Total restructuring expenses during the three months ended March 28, 2020 were insignificant and included $3 million of credits in severance and employee benefit costs, $2 million of other implementation costs, and $1 million of other exit costs. Restructuring expenses totaled $27 million for the three months ended March 30, 2019.
Our net liability balance for restructuring project costs that qualify as exit and disposal costs under U.S. GAAP (i.e., severance and employee benefit costs and other exit costs) was (in millions):
| | | | | | | | | | | | | | | | | |
| Severance and Employee Benefit Costs | | Other Exit Costs | | Total |
Balance at December 28, 2019 | $ | 22 | | | $ | 24 | | | $ | 46 | |
Charges/(credits) | (3) | | | 1 | | | (2) | |
Cash payments | (7) | | | (1) | | | (8) | |
Balance at March 28, 2020 | $ | 12 | | | $ | 24 | | | $ | 36 | |
We expect the majority of the liability for severance and employee benefit costs as of March 28, 2020 to be paid by the end of 2020. The liability for other exit costs primarily relates to lease obligations. The cash impact of these obligations will continue for the duration of the lease terms, which expire between 2020 and 2026.
Total Expenses:
Total expense/(income) related to restructuring activities, by income statement caption, were (in millions):
| | | | | | | | | | | |
| For the Three Months Ended | | |
| March 28, 2020 | | March 30, 2019 |
Severance and employee benefit costs - COGS | $ | 1 | | | $ | — | |
Severance and employee benefit costs - SG&A | (4) | | | 1 | |
Asset-related costs - COGS | — | | | 2 | |
Asset-related costs - SG&A | — | | | 7 | |
Other costs - COGS | — | | | 7 | |
Other costs - SG&A | 3 | | | 10 | |
| $ | — | | | $ | 27 | |
We do not include our restructuring activities within Segment Adjusted EBITDA (as defined in Note 18, Segment Reporting). The pre-tax impact of allocating such expenses to our segments would have been (in millions):
| | | | | | | | | | | |
| For the Three Months Ended | | |
| March 28, 2020 | | March 30, 2019 |
United States | $ | — | | | $ | 19 | |
International | (1) | | | 4 | |
Canada | 1 | | | 2 | |
General corporate expenses | — | | | 2 | |
| $ | — | | | $ | 27 | |
Note 6. Restricted Cash
The following table provides a reconciliation of cash and cash equivalents, as reported on our condensed consolidated balance sheets, to cash, cash equivalents, and restricted cash, as reported on our condensed consolidated statements of cash flows (in millions):
| | | | | | | | | | | |
| March 28, 2020 | | December 28, 2019 |
Cash and cash equivalents | $ | 5,403 | | | $ | 2,279 | |
Restricted cash included in other current assets | 1 | | | 1 | |
Cash, cash equivalents, and restricted cash | $ | 5,404 | | | $ | 2,280 | |
The increase in cash and cash equivalents at March 28, 2020 compared to December 28, 2019 was primarily related to the $4.0 billion draw on our senior unsecured revolving credit facility, partially offset by dividends paid and long-term debt repayments. See Note 16, Commitments, Contingencies and Debt, for additional information on our borrowing arrangements and debt repayments. At March 28, 2020 and December 28, 2019, cash and cash equivalents excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
Note 7. Inventories
Inventories consisted of the following (in millions):
| | | | | | | | | | | |
| March 28, 2020 | | December 28, 2019 |
Packaging and ingredients | $ | 666 | | | $ | 511 | |
Work in process | 377 | | | 364 | |
Finished products | 1,788 | | | 1,846 | |
Inventories | $ | 2,831 | | | $ | 2,721 | |
At March 28, 2020 and December 28, 2019, inventories excluded amounts classified as held for sale. See Note 4, Acquisitions and Divestitures, for additional information.
Note 8. Goodwill and Intangible Assets
Goodwill:
Changes in the carrying amount of goodwill, by segment, were (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| United States | | International | | Canada | | Total |
Balance at December 28, 2019 | $ | 29,647 | | | $ | 3,355 | | | $ | 2,544 | | | $ | 35,546 | |
Impairment losses | — | | | (226) | | | — | | | (226) | |
Translation adjustments and other | — | | | (94) | | | (164) | | | (258) | |
Balance at March 28, 2020 | $ | 29,647 | | | $ | 3,035 | | | $ | 2,380 | | | $ | 35,062 | |
In the first quarter of our fiscal year 2020, our internal reporting and reportable segments changed. We moved 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. We also combined our EMEA, Latin America, and APAC zones to form the International zone as a result of certain previously announced organizational changes.
Therefore, effective in the first quarter of 2020, we manage and report our operating results through three reportable segments defined by geographic region: United States, International, and Canada. We have reflected these changes in all historical periods presented. Accordingly, the segment goodwill balances at December 28, 2019 reflect an increase of $46 million in the United States and a corresponding decrease in International.
The reorganization of our internal reporting and reportable segments changed the composition of certain of our reporting units: (i) Benelux was separated from the historical Northern Europe and Benelux reporting unit and combined with the historical Continental Europe reporting unit, creating two new reporting units, Northern Europe and Continental Europe; (ii) our historical Greater China reporting unit was combined with our historical Southeast Asia and India reporting units, creating the new Asia reporting unit; (iii) our historical Northeast Asia reporting unit was combined with our historical Australia and New Zealand reporting unit to form a single reporting unit called Australia, New Zealand, and Japan ("ANJ"); (iv) our historical Latin America Exports reporting unit (excluding Puerto Rico) was combined with our historical Brazil and Mexico reporting units to form a single reporting unit called Latin America ("LATAM"); and (v) Puerto Rico, which was previously included in our historical Latin America Exports reporting unit became its own reporting unit included in the United States reportable segment.
As a result of this reorganization, we reassigned assets and liabilities to the applicable reporting units and allocated goodwill using the relative fair value approach. We performed an interim impairment test (or transition test) on the affected reporting units on both a pre- and post-reorganization basis.
We performed our pre-reorganization impairment test as of December 29, 2019, which was the first day of our fiscal year 2020. There were five reporting units affected by the reassignment of assets and liabilities that maintained a goodwill balance as of our pre-reorganization impairment test date. These reporting units were Latin America Exports, Northeast Asia, Northern Europe and Benelux, Continental Europe, and Greater China. The remaining reporting units affected by the reassignment of assets and liabilities did not maintain a goodwill balance as of our pre-reorganization impairment test date.
Two of the affected reporting units, Latin America Exports and Northeast Asia, were tested for impairment as of December 28, 2019, as part of our fourth quarter 2019 interim impairment testing. Following the impairment test, the goodwill carrying amount of our Latin America Exports reporting unit was approximately $195 million and the goodwill carrying amount of our Northeast Asia reporting unit was approximately $83 million as of December 28, 2019. These carrying amounts were determined to equal the carrying amounts on December 29, 2019, the day of our pre-reorganization impairment test, for the Latin America Exports and Northeast Asia reporting units.
Additionally, as part of our pre-reorganization impairment test, we utilized the discounted cash flow method under the income approach to estimate the fair values as of December 29, 2019 of the three reporting units noted above that were not tested as part of our fourth quarter 2019 interim impairment test (Northern Europe and Benelux, Continental Europe, and Greater China) and concluded that no additional impairment charge was required. The goodwill carrying amount of our Northern Europe and Benelux reporting unit was approximately $2.1 billion and its fair value was between 20-50% over carrying amount. The goodwill carrying amount of our Continental Europe reporting unit was approximately $567 million and the goodwill carrying amount of our Greater China reporting unit was approximately $321 million and each had a fair value over carrying amount in excess of 50%.
We performed our post-reorganization impairment test as of December 29, 2019. There were six reporting units in scope for our post-reorganization impairment test: Northern Europe, Continental Europe, Asia, ANJ, LATAM, and Puerto Rico. As a result of our post-reorganization impairment test, we recognized a non-cash impairment loss of $226 million in SG&A in the first quarter of 2020 related to two reporting units contained within our International segment. We determined the factors contributing to the impairment loss were the result of circumstances described below.
We recognized a non-cash impairment loss of $83 million in our ANJ reporting unit within our International segment. This impairment was driven by the reporting unit reorganization discussed above. The combination of Australia and New Zealand, which was fully impaired in the fourth quarter of 2019, with Northeast Asia, created a new reporting unit with a fair value below carrying amount upon transition. The impairment of the ANJ reporting unit represents all of the goodwill of that reporting unit.
We recognized a non-cash impairment loss of $143 million in our LATAM reporting unit within our International segment. This impairment was driven by the reporting unit reorganization discussed above. The combination of Mexico and Brazil, which were fully impaired in 2019, with Latin America Exports, which was partially impaired in 2019, created a new reporting unit with a fair value below carrying amount upon transition. The impairment of the LATAM reporting unit represents all of the goodwill of that reporting unit.
The remaining reporting units tested as part of our post-reorganization impairment test each had excess fair value over carrying amount as of December 29, 2019. The goodwill carrying amount of our Puerto Rico reporting unit was approximately $58 million and its fair value was less than 10% over carrying amount, the goodwill carrying amount of our Northern Europe reporting unit was approximately $1.7 billion and its fair value was 20-50% over carrying amount, and the goodwill carrying amount of our Continental Europe reporting unit was approximately $920 million and the goodwill carrying amount of our Asia reporting unit was approximately $321 million and each had a fair value over carrying amount that was in excess of 50%.
As of March 28, 2020, we maintain 15 reporting units, 10 of which comprise our goodwill balance. These 10 reporting units had an aggregate carrying amount of $35.1 billion at March 28, 2020. For these 10 reporting units, as of their latest impairment testing date, seven reporting units had 10% or less fair value over carrying amount, one reporting unit had between 20-50% fair value over carrying amount, and two reporting units had over 50% fair value over carrying amount. We test our reporting units 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 is less than its carrying amount.
In connection with the preparation of our first quarter 2019 financial statements, we concluded that it was more likely than not that the fair values of three of our pre-reorganization reporting units (EMEA East, Brazil and Latin America Exports) were below their carrying amounts. As such, we performed an interim impairment test on these reporting units as of March 30, 2019. As a result of our interim impairment test, we recognized a non-cash impairment loss of $620 million in SG&A in the first quarter of 2019. We recorded a $286 million impairment loss in our EMEA East reporting unit, a $205 million impairment loss in our Brazil reporting unit, and a $129 million impairment loss in our Latin America Exports reporting unit. The impairment of the Brazil reporting unit represented all of the goodwill of that reporting unit. We determined the factors contributing to the impairment loss were the result of circumstances that arose during the first quarter of 2019. See Note 9, Goodwill and Intangible Assets, in our Annual Report on Form 10-K for the year ended December 28, 2019 for additional information on these impairment losses. These reporting units are part of our International segment as discussed above.
Accumulated impairment losses to goodwill were $8.4 billion at March 28, 2020.
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 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 rates, discount rates, growth rates, 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 or any factors that could be affected by COVID-19, 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 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 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 in the future.
During the first quarter of 2020, primarily in March, the COVID-19 pandemic has produced a short-term beneficial financial impact for our consolidated results. Retail sales have increased due to higher than anticipated consumer demand for our products. The foodservice channel however, has experienced a negative impact from shelter in place mandates limiting access to away from home establishments. A number of factors could result in future impairment of our foodservice reporting units, including but not limited to: continued mandates around closures of dining rooms in restaurants, distancing of people within an establishment resulting in fewer customers, the total number of restaurant closures, forthcoming changes in consumer preferences or regulatory requirements over product formats (e.g., table top packaging vs single serve packaging), and consumer trends of dining-in versus dining-out. Our U.S. Foodservice and Canada Foodservice reporting units are the most exposed of our reporting units to the long-term impacts to away from home establishments. These two reporting units were identified during our most recent annual impairment test as both having excess fair value over carrying amount of less than 10%, with an aggregate goodwill carrying amount of approximately $4.3 billion. Additionally, in assessing whether the impacts of COVID-19 resulted in a triggering event for one or both of these reporting units, we assessed potential scenarios for the future recovery and growth of away from home establishments as well as the impacts of declining interest rates and other valuation assumptions. We concluded that, due to the temporary nature of the shelter in place orders, the most probable expectation as of March 28, 2020, was a return to a normal level of operations within approximately two years. Based on these assumptions and analysis, we determined there was no interim triggering event as it was not more likely than not that the fair value of these reporting units is less than their carrying amounts. Given the evolving nature and uncertainty driven by the COVID-19 pandemic, we will continue to evaluate the impact on our reporting units as changes to these assumptions could result in future impairments.
Our reporting units that were impaired in 2019 and 2020 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 that have 20% or less excess fair value over carrying amount as of their latest impairment test date have a heightened risk of future impairments if any assumptions, estimates, or market factors change in the future. Although the remaining reporting units have more than 20% excess fair value over carrying amount as of their latest impairment test 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 assumptions, estimates, or market factors change in the future, these amounts are also susceptible to impairments.
Indefinite-lived intangible assets: