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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 June 25, 2022
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(s) | Name of each 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 July 23, 2022, there were 1,225,439,747 shares of the registrant’s common stock outstanding.
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.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains a number of forward-looking statements. Words such as “anticipate,” “reflect,” “invest,” “see,” “make,” “expect,” “give,” “deliver,” “drive,” “believe,” “improve,” “assess,” “reassess,” “remain,” “evaluate,” “grow,” “will,” “plan,” “intend,” and variations of such words and similar future or conditional expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our plans, impacts of accounting standards and guidance, growth, legal matters, taxes, costs and cost savings, impairments, and dividends. These forward-looking statements reflect management’s current expectations and are not guarantees of future performance and are subject to a number of risks and uncertainties, many of which are difficult to predict and beyond our control.
Important factors that may affect our business and operations and that may cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the impacts of COVID-19 and government and consumer responses; operating in a highly competitive industry; 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; changes in the retail landscape or the loss of key retail customers; changes in our relationships with significant customers or suppliers, or in other business relationships; our ability to maintain, extend, and expand our reputation and brand image; our ability to leverage our brand value to compete against private label products; our ability 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; product recalls or other product liability claims; climate change and legal or regulatory responses; our ability to identify, complete, or realize the benefits from strategic acquisitions, alliances, divestitures, joint ventures, or other investments; our ability to successfully execute our strategic initiatives; the impacts of our international operations; our ability to protect intellectual property rights; our ownership structure; our ability to realize the anticipated benefits from prior or future streamlining actions to reduce fixed costs, simplify or improve processes, and improve our competitiveness; our level of indebtedness, as well as our ability to comply with covenants under our debt instruments; additional impairments of the carrying amounts of goodwill or other indefinite-lived intangible assets; foreign exchange rate fluctuations; volatility in commodity, energy, and other input costs; volatility in the market value of all or a portion of the commodity derivatives we use; compliance with laws and regulations and related legal claims or regulatory enforcement actions; failure to maintain an effective system of internal controls; a downgrade in our credit rating; the impact of future sales of our common stock in the public market; our ability to continue to pay a regular dividend and the amounts of any such dividends; unanticipated business disruptions and natural events in the locations in which we or our customers, suppliers, distributors, or regulators operate; economic and political conditions in the United States and in various other nations where we do business (including inflationary pressures, general economic slowdown, or recession and the Russia and Ukraine conflict and its regional and global ramifications); changes in our management team or other key personnel and our ability to hire or retain key personnel or a highly skilled and diverse global workforce; risks associated with information technology and systems, including service interruptions, misappropriation of data, or breaches of security; increased pension, labor, and people-related expenses; changes in tax laws and interpretations; volatility of capital markets and other macroeconomic factors; and other factors. For additional information on these and other factors that could affect our forward-looking statements, see Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 25, 2021. We disclaim and do not undertake any obligation to update, revise, or withdraw any forward-looking statement in this report, except as required by applicable law or regulation.
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 | | For the Six Months Ended |
| June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
Net sales | $ | 6,554 | | | $ | 6,615 | | | $ | 12,599 | | | $ | 13,009 | |
Cost of products sold | 4,570 | | | 4,324 | | | 8,684 | | | 8,517 | |
Gross profit | 1,984 | | | 2,291 | | | 3,915 | | | 4,492 | |
Selling, general and administrative expenses, excluding impairment losses | 812 | | | 943 | | | 1,639 | | | 1,825 | |
Goodwill impairment losses | 235 | | | 35 | | | 224 | | | 265 | |
Intangible asset impairment losses | 395 | | | 78 | | | 395 | | | 78 | |
Selling, general and administrative expenses | 1,442 | | | 1,056 | | | 2,258 | | | 2,168 | |
Operating income/(loss) | 542 | | | 1,235 | | | 1,657 | | | 2,324 | |
Interest expense | 234 | | | 613 | | | 476 | | | 1,028 | |
Other expense/(income) | (91) | | | (23) | | | (189) | | | (53) | |
Income/(loss) before income taxes | 399 | | | 645 | | | 1,370 | | | 1,349 | |
Provision for/(benefit from) income taxes | 134 | | | 670 | | | 324 | | | 806 | |
Net income/(loss) | 265 | | | (25) | | | 1,046 | | | 543 | |
Net income/(loss) attributable to noncontrolling interest | — | | | 2 | | | 5 | | | 7 | |
Net income/(loss) attributable to common shareholders | $ | 265 | | | $ | (27) | | | $ | 1,041 | | | $ | 536 | |
Per share data applicable to common shareholders: | | | | | | | |
Basic earnings/(loss) | $ | 0.22 | | | $ | (0.02) | | | $ | 0.85 | | | $ | 0.44 | |
Diluted earnings/(loss) | 0.21 | | | (0.02) | | | 0.84 | | | 0.43 | |
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 | | For the Six Months Ended |
| June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
Net income/(loss) | $ | 265 | | | $ | (25) | | | $ | 1,046 | | | $ | 543 | |
Other comprehensive income/(loss), net of tax: | | | | | | | |
Foreign currency translation adjustments | (651) | | | 190 | | | (684) | | | 249 | |
Net deferred gains/(losses) on net investment hedges | 205 | | | (49) | | | 257 | | | (44) | |
Amounts excluded from the effectiveness assessment of net investment hedges | 9 | | | 5 | | | 18 | | | 10 | |
Net deferred losses/(gains) on net investment hedges reclassified to net income/(loss) | (5) | | | (3) | | | (13) | | | (6) | |
Net deferred gains/(losses) on cash flow hedges | (38) | | | (35) | | | (72) | | | (64) | |
Amounts excluded from the effectiveness assessment of cash flow hedges | 1 | | | 7 | | | 8 | | | 14 | |
Net deferred losses/(gains) on cash flow hedges reclassified to net income/(loss) | 27 | | | (1) | | | 49 | | | 26 | |
Net actuarial gains/(losses) arising during the period | (143) | | | 71 | | | (143) | | | 73 | |
Net postemployment benefit losses/(gains) reclassified to net income/(loss) | (7) | | | (7) | | | (11) | | | (13) | |
Total other comprehensive income/(loss) | (602) | | | 178 | | | (591) | | | 245 | |
Total comprehensive income/(loss) | (337) | | | 153 | | | 455 | | | 788 | |
Comprehensive income/(loss) attributable to noncontrolling interest | (4) | | | 2 | | | — | | | 5 | |
Comprehensive income/(loss) attributable to common shareholders | $ | (333) | | | $ | 151 | | | $ | 455 | | | $ | 783 | |
See accompanying notes to the condensed consolidated financial statements.
The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions, except per share data)
(Unaudited) | | | | | | | | | | | |
| June 25, 2022 | | December 25, 2021 |
ASSETS | | | |
Cash and cash equivalents | $ | 1,518 | | | $ | 3,445 | |
Trade receivables (net of allowances of $49 at June 25, 2022 and $48 at December 25, 2021) | 2,145 | | | 1,957 | |
Inventories | 3,433 | | | 2,729 | |
Prepaid expenses | 191 | | | 136 | |
Other current assets | 760 | | | 716 | |
Assets held for sale | 91 | | | 11 | |
Total current assets | 8,138 | | | 8,994 | |
Property, plant and equipment, net | 6,568 | | | 6,806 | |
Goodwill | 31,176 | | | 31,296 | |
Intangible assets, net | 42,960 | | | 43,542 | |
Other non-current assets | 2,834 | | | 2,756 | |
TOTAL ASSETS | $ | 91,676 | | | $ | 93,394 | |
LIABILITIES AND EQUITY | | | |
Commercial paper and other short-term debt | $ | 47 | | | $ | 14 | |
Current portion of long-term debt | 1,147 | | | 740 | |
Trade payables | 4,778 | | | 4,753 | |
Accrued marketing | 892 | | | 804 | |
Interest payable | 265 | | | 268 | |
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Other current liabilities | 1,990 | | | 2,485 | |
| | | |
Total current liabilities | 9,119 | | | 9,064 | |
Long-term debt | 19,724 | | | 21,061 | |
Deferred income taxes | 10,465 | | | 10,536 | |
Accrued postemployment costs | 203 | | | 205 | |
Long-term deferred income | 1,505 | | | 1,534 | |
Other non-current liabilities | 1,658 | | | 1,542 | |
TOTAL LIABILITIES | 42,674 | | | 43,942 | |
Commitments and Contingencies (Note 15) | | | |
Redeemable noncontrolling interest | 40 | | | 4 | |
Equity: | | | |
Common stock, $0.01 par value (5,000 shares authorized; 1,240 shares issued and 1,225 shares outstanding at June 25, 2022; 1,235 shares issued and 1,224 shares outstanding at December 25, 2021) | 12 | | | 12 | |
Additional paid-in capital | 52,520 | | | 53,379 | |
Retained earnings/(deficit) | (640) | | | (1,682) | |
Accumulated other comprehensive income/(losses) | (2,410) | | | (1,824) | |
Treasury stock, at cost (15 shares at June 25, 2022 and 11 shares at December 25, 2021) | (686) | | | (587) | |
Total shareholders' equity | 48,796 | | | 49,298 | |
Noncontrolling interest | 166 | | | 150 | |
TOTAL EQUITY | 48,962 | | | 49,448 | |
TOTAL LIABILITIES AND EQUITY | $ | 91,676 | | | $ | 93,394 | |
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 25, 2021 | $ | 12 | | | $ | 53,379 | | | $ | (1,682) | | | $ | (1,824) | | | $ | (587) | | | $ | 150 | | | $ | 49,448 | |
Net income/(loss) excluding redeemable noncontrolling interest | — | | | — | | | 776 | | | — | | | — | | | 4 | | | 780 | |
Other comprehensive income/(loss) | — | | | — | | | — | | | 12 | | | — | | | (1) | | | 11 | |
Dividends declared-common stock ($0.40 per share) | — | | | (492) | | | — | | | — | | | — | | | — | | | (492) | |
Exercise of stock options, issuance of other stock awards, and other | — | | | 67 | | | 1 | | | — | | | (18) | | | — | | | 50 | |
Balance at March 26, 2022 | $ | 12 | | | $ | 52,954 | | | $ | (905) | | | $ | (1,812) | | | $ | (605) | | | $ | 153 | | | $ | 49,797 | |
Net income/(loss) excluding redeemable noncontrolling interest | — | | | — | | | 265 | | | — | | | — | | | 2 | | | 267 | |
Other comprehensive income/(loss) | — | | | — | | | — | | | (598) | | | — | | | (4) | | | (602) | |
Dividends declared-common stock ($0.40 per share) | — | | | (494) | | | — | | | — | | | — | | | — | | | (494) | |
Exercise of stock options, issuance of other stock awards, and other | — | | | 60 | | | — | | | — | | | (81) | | | 15 | | | (6) | |
Balance at June 25, 2022 | $ | 12 | | | $ | 52,520 | | | $ | (640) | | | $ | (2,410) | | | $ | (686) | | | $ | 166 | | | $ | 48,962 | |
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| 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 26, 2020 | $ | 12 | | | $ | 55,096 | | | $ | (2,694) | | | $ | (1,967) | | | $ | (344) | | | $ | 140 | | | $ | 50,243 | |
Net income/(loss) | — | | | — | | | 563 | | | — | | | — | | | 5 | | | 568 | |
Other comprehensive income/(loss) | — | | | — | | | — | | | 69 | | | — | | | (2) | | | 67 | |
Dividends declared-common stock ($0.40 per share) | — | | | (495) | | | — | | | — | | | — | | | — | | | (495) | |
Exercise of stock options, issuance of other stock awards, and other | — | | | 77 | | | — | | | — | | | (29) | | | — | | | 48 | |
Balance at March 27, 2021 | $ | 12 | | | $ | 54,678 | | | $ | (2,131) | | | $ | (1,898) | | | $ | (373) | | | $ | 143 | | | $ | 50,431 | |
Net income/(loss) | — | | | — | | | (27) | | | — | | | — | | | 2 | | | (25) | |
Other comprehensive income/(loss) | — | | | — | | | — | | | 178 | | | — | | | — | | | 178 | |
Dividends declared-common stock ($0.40 per share) | — | | | (495) | | | — | | | — | | | — | | | — | | | (495) | |
Exercise of stock options, issuance of other stock awards, and other | — | | | 72 | | | — | | | — | | | (19) | | | — | | | 53 | |
Balance at June 26, 2021 | $ | 12 | | | $ | 54,255 | | | $ | (2,158) | | | $ | (1,720) | | | $ | (392) | | | $ | 145 | | | $ | 50,142 | |
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See accompanying notes to the condensed consolidated financial statements.
The Kraft Heinz Company
Condensed Consolidated Statements of Cash Flows
(in millions)
(Unaudited) | | | | | | | | | | | |
| For the Six Months Ended |
| June 25, 2022 | | June 26, 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income/(loss) | $ | 1,046 | | | $ | 543 | |
Adjustments to reconcile net income/(loss) to operating cash flows: | | | |
Depreciation and amortization | 456 | | | 449 | |
Amortization of postemployment benefit plans prior service costs/(credits) | (7) | | | (3) | |
Divestiture-related license income | (27) | | | — | |
Equity award compensation expense | 79 | | | 104 | |
Deferred income tax provision/(benefit) | (107) | | | (114) | |
Postemployment benefit plan contributions | (11) | | | (14) | |
Goodwill and intangible asset impairment losses | 619 | | | 343 | |
Nonmonetary currency devaluation | 10 | | | 4 | |
Loss/(gain) on sale of business | (1) | | | 65 | |
Other items, net | (86) | | | 278 | |
Changes in current assets and liabilities: | | | |
Trade receivables | (222) | | | 62 | |
Inventories | (768) | | | (227) | |
Accounts payable | 202 | | | 220 | |
Other current assets | (70) | | | (67) | |
Other current liabilities | (325) | | | 386 | |
Net cash provided by/(used for) operating activities | 788 | | | 2,029 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Capital expenditures | (435) | | | (431) | |
Payments to acquire business, net of cash acquired | (481) | | | — | |
| | | |
Proceeds from sale of business, net of cash disposed and working capital adjustments | (20) | | | 3,435 | |
Other investing activities, net | 15 | | | 23 | |
Net cash provided by/(used for) investing activities | (921) | | | 3,027 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Repayments of long-term debt | (660) | | | (3,090) | |
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Debt prepayment and extinguishment costs | (16) | | | (433) | |
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Dividends paid | (980) | | | (979) | |
Other financing activities, net | (66) | | | (53) | |
Net cash provided by/(used for) financing activities | (1,722) | | | (4,555) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (72) | | | 23 | |
Cash, cash equivalents, and restricted cash | | | |
Net increase/(decrease) | (1,927) | | | 524 | |
Balance at beginning of period | 3,446 | | | 3,418 | |
Balance at end of period | $ | 1,519 | | | $ | 3,942 | |
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.
We operate on a 52- or 53-week fiscal year ending on the last Saturday in December in each calendar year. Unless the context requires otherwise, references to years and quarters contained herein pertain to our fiscal years and fiscal quarters. Our 2022 fiscal year is scheduled to be a 53-week period ending on December 31, 2022, and our 2021 fiscal year was a 52-week period that ended on December 25, 2021.
The condensed consolidated balance sheet data at December 25, 2021 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 25, 2021. The results for interim periods are not necessarily indicative of future or annual results.
Principles of Consolidation
The condensed consolidated financial statements include The Kraft Heinz Company and all of our controlled subsidiaries. All intercompany transactions are eliminated.
Reportable Segments
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 two reportable segments defined by geographic region: North America and International. We have reflected this change in all historical periods presented.
Considerations Related to COVID-19
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 COVID-19 and its impacts are unprecedented and ever evolving, future events and effects related to the pandemic cannot be determined with precision and actual results could significantly differ from estimates or forecasts. See Note 8, Goodwill and Intangible Assets, 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 and adjustments to certain previously reported financial information to conform to our current period presentation.
Held for Sale
At June 25, 2022, we classified certain assets as held for sale in our condensed consolidated balance sheet, including certain property, plant and equipment, net in our North America segment related to the sale of a manufacturing facility, as well as inventory in our International segment and certain manufacturing equipment and land use rights across the globe. At December 25, 2021, we classified certain assets as held for sale in our condensed consolidated balance sheet, including inventory in our International segment and certain manufacturing equipment and land use rights across the globe. See Note 4, Acquisitions and Divestitures, for additional information.
Note 2. Significant Accounting Policies
There were no significant changes to our accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 25, 2021.
Note 3. New Accounting Standards
Accounting Standards Not Yet Adopted
Accounting for Contract Assets and Contract Liabilities from Contracts with Customers:
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08 to amend the accounting for contract assets and contract liabilities acquired in a business combination under Accounting Standards Codification (“ASC”) 805, Business Combinations. The guidance requires entities engaged in a business combination to recognize and measure contract assets acquired and contract liabilities assumed in accordance with ASC 606, Revenue from Contracts with Customers, rather than at fair value on the acquisition date. The amendments also apply to other contracts such as contract liabilities arising from nonfinancial assets under ASC 610-20, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets. The ASU will be effective beginning in the first quarter of 2023. Early adoption is permitted, including in an interim period. We currently expect to adopt ASU 2021-08 in the first quarter of 2023 on a prospective basis. While the impact of these amendments is dependent on the nature of any future transactions, we currently do not expect this ASU to have a significant impact on our financial statements and related disclosures.
Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting:
In March 2020, the FASB issued ASU 2020-04 to provide temporary optional expedients and exceptions to the U.S. GAAP guidance for accounting for contracts, hedging relationships, and other transactions affected by the transition from discontinued reference rates, such as the London Interbank Offered Rate (LIBOR), to alternative reference rates. The new accounting requirements can be applied from March 12, 2020 through December 31, 2022. While we currently do not expect this new guidance to have a significant impact on our financial statements or related disclosures, we continue to evaluate our contracts and the optional expedients provided by the new standard.
Note 4. Acquisitions and Divestitures
Acquisitions
Hemmer Acquisition:
On March 31, 2022 (the “Hemmer Acquisition Date”), we acquired a majority of the outstanding equity interests of Companhia Hemmer Indústria e Comércio (“Hemmer”), a Brazilian food and beverage manufacturing company focused on the condiments and sauces category, from certain third-party shareholders (the “Hemmer Acquisition”).
The Hemmer Acquisition was accounted for under the acquisition method of accounting for business combinations. Total cash consideration related to the Hemmer Acquisition was approximately 1.3 billion Brazilian reais (approximately $279 million at the Hemmer Acquisition Date). A noncontrolling interest was recognized at fair value, which was determined to be the noncontrolling interest’s proportionate share of the acquiree’s identifiable net assets, as of the Hemmer Acquisition Date. As of the Hemmer Acquisition Date, we acquired 94% of the outstanding shares of Hemmer.
We entered into foreign exchange derivative contracts to economically hedge the foreign currency exposure related to the cash consideration for the Hemmer Acquisition. See Note 12, Financial Instruments, for additional information.
We utilized fair values at the Hemmer Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed.
The fair value estimates of the assets acquired are subject to adjustment during the measurement period (up to one year from the Hemmer Acquisition Date). The primary areas of accounting for the Hemmer Acquisition that are not yet finalized relate to the fair value of certain intangible assets and tangible net assets acquired, residual goodwill, and any related tax impact. The fair values of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While we believe that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired and liabilities assumed, we will evaluate any additional information prior to finalization of the fair value. During the measurement period, we will adjust preliminary valuations assigned to assets and liabilities if new information is obtained about facts and circumstances that existed as of the Hemmer Acquisition Date, that, if known, would have resulted in revised values for these items as of that date. The impact of all changes, if any, that do not qualify as measurement period adjustments will be included in current period earnings.
The preliminary purchase price allocation to assets acquired and liabilities assumed in the Hemmer Acquisition was (in millions):
| | | | | |
| Initial Allocation |
Cash | $ | 1 | |
Trade receivables | 13 | |
Inventories | 17 | |
Other current assets | 2 | |
Property, plant and equipment, net | 14 | |
Identifiable intangible assets | 122 | |
Other non-current assets | 13 | |
Short-term debt | (9) | |
Trade payables | (11) | |
Other current liabilities | (31) | |
Long-term debt | (11) | |
Other non-current liabilities | (44) | |
Net assets acquired | 76 | |
Noncontrolling interest | (16) | |
Goodwill on acquisition | 219 | |
Total consideration | $ | 279 | |
The Hemmer Acquisition preliminarily resulted in $219 million of non-tax deductible goodwill relating principally to Hemmer’s long-term experience and large presence operating in emerging markets. This goodwill was assigned to the Latin America (“LATAM”) reporting unit within our International segment. See Note 8, Goodwill and Intangible Assets, for additional information.
The preliminary purchase price allocation to identifiable intangible assets acquired in the Hemmer Acquisition was:
| | | | | | | | | | | |
| Fair Value (in millions of dollars) | | Weighted Average Life (in years) |
Definite-lived trademarks | $ | 101 | | | 13 |
Customer-related assets | 21 | | | 15 |
Total | $ | 122 | | | |
We valued trademarks using the relief from royalty method and customer-related assets using the distributor method. Some of the more significant assumptions inherent in developing the valuations included the estimated annual net cash flows for each definite-lived intangible asset (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends, as well as other factors. We determined 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 market comparables.
We used carrying values as of the Hemmer Acquisition Date to value certain current and non-current assets and liabilities, as we determined that they represented the fair value of those items at such date.
Just Spices Acquisition:
On January 18, 2022 (the “Just Spices Acquisition Date”), we acquired 85% of the shares of Just Spices GmbH (“Just Spices”), a German-based company focused on direct-to-consumer sales of premium spice blends, from certain third-party shareholders (the “Just Spices Acquisition”).
The Just Spices Acquisition was accounted for under the acquisition method of accounting for business combinations. Total cash consideration related to the Just Spices Acquisition was approximately 214 million euros (approximately $243 million at the Just Spices Acquisition Date). A noncontrolling interest was recognized at fair value, which was determined to be the noncontrolling interest’s proportionate share of the acquiree’s identifiable net assets, as of the Just Spices Acquisition Date. Under the terms of certain transaction agreements, Just Spices’ other equity holders each have a put option to require us to purchase the remaining equity interests beginning three years after the Just Spices Acquisition Date. If the put option is not exercised, we have a call option to acquire the remaining equity interests of Just Spices. Considering the contractual terms related to the noncontrolling interest, it is classified as redeemable noncontrolling interest on our condensed consolidated balance sheet.
Subsequent to the Just Spices Acquisition, the redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value and its carrying amount adjusted for the net income/(loss) attributable to the noncontrolling interest.
We utilized fair values at the Just Spices Acquisition Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. The purchase price allocation for the Just Spices Acquisition is preliminary and subject to adjustment.
The fair value estimates of the assets acquired are subject to adjustment during the measurement period (up to one year from the Just Spices Acquisition Date). The primary areas of accounting for the Just Spices Acquisition that are not yet finalized relate to the fair value of certain tangible net assets acquired, residual goodwill, and any related tax impact. The fair values of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While we believe that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired and liabilities assumed, we will evaluate any additional information prior to finalization of the fair value. During the measurement period, we will adjust preliminary valuations assigned to assets and liabilities if new information is obtained about facts and circumstances that existed as of the Just Spices Acquisition Date, that, if known, would have resulted in revised values for these items as of that date. The impact of all changes, if any, that do not qualify as measurement period adjustments will be included in current period earnings.
The preliminary purchase price allocation to assets acquired and liabilities assumed in the Just Spices Acquisition was (in millions):
| | | | | | | | | | | | | | | | | |
| Initial Allocation(a) | | Adjustments | | Updated Allocation |
Cash | $ | 2 | | | $ | — | | | $ | 2 | |
Trade receivables | 4 | | | — | | | 4 | |
Inventories | 7 | | | — | | | 7 | |
Other current assets | 9 | | | — | | | 9 | |
Property, plant and equipment, net | 1 | | | — | | | 1 | |
Identifiable intangible assets | 172 | | | — | | | 172 | |
| | | | | |
Trade payables | (10) | | | — | | | (10) | |
Other current liabilities | (12) | | | — | | | (12) | |
Other non-current liabilities | (54) | | | — | | | (54) | |
Net assets acquired | 119 | | | — | | | 119 | |
Redeemable noncontrolling interest | (43) | | | 4 | | | (39) | |
Goodwill on acquisition | 167 | | | (4) | | | 163 | |
Total consideration | $ | 243 | | | $ | — | | | $ | 243 | |
(a) As reported in Note 4, Acquisitions and Divestitures, to our condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the three months ended March 26, 2022.
The Just Spices Acquisition preliminarily resulted in $167 million of non-tax deductible goodwill relating principally to Just Spices’ social media presence. This goodwill was assigned to the Continental Europe reporting unit within our International segment. In the second quarter of 2022, certain insignificant measurement period adjustments were made to the initial allocation, and the preliminary amount of goodwill was adjusted to $163 million. See Note 8, Goodwill and Intangible Assets, for additional information.