Kraft Heinz Co. (NASDAQ:KHC)

The period under review demonstrates significant fluctuations in financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, beginning at US$1,418 million in 2015, increasing substantially to US$4,237 million in 2016 and US$5,287 million in 2017, before experiencing a substantial decline to a loss of US$11,194 million in 2018, and a partial recovery to US$2,719 million in 2019.

The cost of capital generally decreased over the period, moving from 14.64% in 2015 to 11.49% in 2019. However, this decrease in cost of capital did not consistently translate into improved economic profit.

Invested capital remained relatively stable between 2015 and 2017, fluctuating around US$105-112 billion. A decrease was observed in 2018 and 2019, falling to US$96,541 million and US$94,307 million respectively.

Economic Profit Trend

Economic profit consistently remained negative throughout the analyzed period. The magnitude of the negative economic profit increased from US$-13,973 million in 2015 to US$-22,606 million in 2018, representing the lowest point in the period. While the negative economic profit lessened to US$-8,115 million in 2019, it remained substantial.

Relationship between NOPAT and Economic Profit

The significant decline in NOPAT in 2018 directly contributed to the largest negative economic profit for the period. The partial recovery in NOPAT in 2019 resulted in a less negative economic profit, indicating a correlation between operating profitability and economic profit.

Impact of Cost of Capital

Despite a decreasing cost of capital, economic profit did not improve proportionally. This suggests that the decline in NOPAT had a more significant impact on economic profit than the reduction in the cost of capital, particularly in 2018. The lower cost of capital in 2019 partially mitigated the negative economic profit, but did not eliminate it.

Invested Capital and Economic Profit

The reduction in invested capital in 2018 and 2019 did not lead to a corresponding improvement in economic profit. This suggests that the primary driver of the negative economic profit was insufficient NOPAT generation relative to the capital employed, rather than an excessive level of invested capital.

Net Income (Loss) Attributable to Kraft Heinz

The net income showed significant volatility over the five-year period. Starting at $634 million in 2015, it experienced a substantial increase to $3,632 million in 2016 and peaked at $10,999 million in 2017. However, this trend reversed sharply in 2018, resulting in a significant net loss of $10,192 million. The company partially recovered in 2019, reporting net income of $1,935 million. This pattern suggests the company faced exceptional events or impairments in 2018 that drastically affected profitability.

Net Operating Profit After Taxes (NOPAT)

The NOPAT followed a similar trajectory to net income, indicating alignment between operating performance and net profitability. NOPAT increased from $1,418 million in 2015 to $4,237 million in 2016 and further to $5,287 million in 2017, reflecting improving operational efficiency or profitability. The figure then dropped markedly to a negative $11,194 million in 2018, consistent with the reported net loss. In 2019, NOPAT rebounded to $2,719 million, indicating a recovery in operating profit after taxes but remaining below the peak levels observed in 2017. This pattern underscores a volatile period with a significant downturn followed by a partial recovery.

Summary of Trends

Overall, both net income and NOPAT exhibited growth from 2015 to 2017, followed by a substantial deterioration in 2018, which indicates major adverse developments during that year. The recovery in 2019 points to improvement but not a full restoration to prior peak levels. Such fluctuations suggest the presence of extraordinary losses or impairments in 2018, impacting both reported net income and operating profit after taxes.

The financial data reveals notable fluctuations in the provision for (benefit from) income taxes over the five-year period. Initially, the provision increased significantly from 366 million US dollars in 2015 to 1381 million US dollars in 2016. Subsequently, there was a sharp reversal, with the provision moving into a substantial benefit position, showing -5460 million US dollars in 2017 and a continued benefit of -1067 million US dollars in 2018. In 2019, the provision returned to a positive value of 728 million US dollars, indicating a reversion to a tax expense position.

In contrast, cash operating taxes exhibited a different pattern, showing more stability and less volatility. The amount rose from 1157 million US dollars in 2015 to a peak of 1815 million US dollars in 2016, followed by a decline to 1448 million US dollars in 2017. Afterward, cash operating taxes decreased further to 1177 million US dollars in 2018 but increased again to 1312 million US dollars in 2019. Overall, cash operating taxes remained within a narrower range compared to the provision for income taxes, reflecting relatively steadier tax cash payments despite fluctuations in tax provisions.

The divergence between the provision for income taxes and cash operating taxes suggests that significant non-cash tax items affected the income tax provision, particularly in 2017 and 2018. These years experienced considerable tax benefits recorded in the provision, which could be linked to one-time adjustments, changes in tax laws, or deferred tax asset/liability movements. Meanwhile, cash taxes paid remained consistently positive and relatively stable, highlighting the difference between accounting tax expenses and actual cash outflows related to taxes.

Total Reported Debt & Leases

The total reported debt and leases increased significantly from 25,825 million USD in 2015 to a peak of 32,787 million USD in 2016. After reaching this peak, the amount decreased slightly over the next three years, ending at 29,845 million USD in 2019. This indicates an overall rise in leverage in 2016, followed by some reduction, although debt levels remained higher than in 2015.

Shareholders’ Equity

Shareholders’ equity showed variability during the period. It was relatively stable between 2015 (57,685 million USD) and 2016 (57,358 million USD), then increased notably to 66,034 million USD in 2017. After this peak, equity declined sharply in 2018 to 51,657 million USD and remained nearly constant through 2019 at 51,623 million USD. This pattern suggests a significant equity event or adjustment between 2017 and 2018, followed by stabilization at a lower level.

Invested Capital

The invested capital gradually increased from 105,133 million USD in 2015 to a peak of 112,007 million USD in 2017. However, this was followed by a marked decline over the next two years, reaching 94,307 million USD by 2019. This trajectory shows an initial expansion of capital investment, succeeded by a contraction, which aligns with the observed reductions in debt and equity during the latter years.

The period under review demonstrates a volatile performance in economic value creation. Economic profit consistently remained negative across all reported years, although the magnitude of the loss fluctuated. Invested capital experienced an initial increase before declining in later years. The economic spread ratio, a key indicator of profitability relative to capital employed, exhibited significant variation.

Economic Profit

Economic profit began at a loss of US$13,973 million in 2015 and decreased to a loss of US$12,025 million in 2016. A subsequent improvement was noted in 2017, with the loss narrowing to US$10,312 million. However, 2018 saw a substantial deterioration, reaching a loss of US$22,606 million, the largest loss in the observed period. The final year, 2019, showed a partial recovery, with the loss decreasing to US$8,115 million.

Invested Capital

Invested capital increased from US$105,133 million in 2015 to US$111,350 million in 2016 and further to US$112,007 million in 2017, representing a period of capital investment. A notable decline then occurred, with invested capital falling to US$96,541 million in 2018 and continuing to US$94,307 million in 2019. This suggests a potential reduction in capital expenditure or asset disposals.

Economic Spread Ratio

The economic spread ratio mirrored the trends in economic profit. It started at -13.29% in 2015 and improved to -10.80% in 2016, then to -9.21% in 2017. A significant decline was observed in 2018, reaching -23.42%, indicating a substantial underperformance relative to the cost of capital. The ratio improved somewhat in 2019, reaching -8.60%, but remained negative throughout the period. The fluctuations suggest a changing relationship between profitability and the capital employed to generate it.

The consistent negative economic profit and economic spread ratio indicate that the entity did not generate returns exceeding its cost of capital during the analyzed timeframe. The large swing in the economic spread ratio in 2018 warrants further investigation to understand the underlying drivers of the significant decline in profitability relative to invested capital.

The period under review demonstrates significant fluctuations in economic profit and, consequently, the economic profit margin. Economic profit consistently remained negative across all reported years, indicating the company did not generate returns exceeding its cost of capital. However, the magnitude of the economic loss varied considerably.

Economic Profit

Economic profit exhibited a decreasing trend from 2015 to 2018, reaching its most negative value of -22,606 million US dollars in 2018. A substantial improvement was then observed in 2019, with economic profit increasing to -8,115 million US dollars. This suggests a potential shift in the company’s ability to generate returns, although still below the cost of capital.

Net Sales

Net sales increased notably from 2015 to 2016, rising from 18,338 million US dollars to 26,487 million US dollars. Following this increase, net sales remained relatively stable between 2016 and 2018, fluctuating within a narrow range around 26,200 million US dollars. A decline in net sales was then observed in 2019, decreasing to 24,977 million US dollars. This suggests potential challenges in maintaining revenue growth towards the end of the period.

Economic Profit Margin

The economic profit margin mirrored the trend in economic profit, remaining negative throughout the period. The margin was most unfavorable in 2018, reaching -86.06 percent. Prior to this, the margin showed some improvement from -76.20 percent in 2015 to -39.31 percent in 2017. The margin improved significantly in 2019 to -32.49 percent, aligning with the improvement in economic profit. The substantial negative margin in 2018 indicates a particularly large shortfall between returns and the cost of capital during that year.

The correlation between economic profit and economic profit margin is strong, as expected. The improvement observed in 2019 suggests potential operational or financial adjustments that positively impacted profitability, but further investigation is needed to determine the sustainability of this trend and the underlying drivers of the changes.