Kraft Heinz Co. (NASDAQ:KHC)

The financial performance from 2015 to 2019 is characterized by a persistent inability to generate positive economic profit, indicating that the net operating profit after taxes was consistently insufficient to cover the cost of invested capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited significant volatility throughout the period. An initial upward trend was observed from 2015 to 2017, with values rising from 1,418 million US$ to 5,287 million US$. This growth was abruptly reversed in 2018, where NOPAT plummeted to a deficit of 11,194 million US$, before recovering to 2,719 million US$ in 2019.

Cost of Capital

A consistent downward trajectory in the cost of capital is evident, declining from 14.62% in 2015 to 11.48% by 2019. This steady reduction suggests a decrease in the weighted average cost of financing over the five-year duration.

Invested Capital

Invested capital peaked in 2017 at 112,007 million US$ after a period of growth from 105,133 million US$ in 2015. Subsequently, a contraction phase occurred, with invested capital decreasing to 96,541 million US$ in 2018 and further to 94,307 million US$ in 2019, reflecting a reduction in the capital base.

Economic Profit

Economic profit remained negative for the entire analyzed period, confirming that the entity did not create economic value. Between 2015 and 2017, the deficit narrowed from 13,953 million US$ to 10,293 million US$. However, the severe contraction in NOPAT in 2018 led to a peak deficit of 22,593 million US$. By 2019, the economic profit deficit improved to its lowest level in the period, reaching 8,103 million US$, driven by the recovery of NOPAT and the reduction of both invested capital and the cost of 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.

Between 2015 and 2019, a consistent failure to generate positive economic value is observed, as indicated by persistently negative economic profit and economic spread ratios. This suggests that the company's return on capital remained below its cost of capital throughout the entire analyzed period.

Economic Profit Analysis

Economic profit demonstrated significant volatility. A gradual improvement was noted between 2015 and 2017, with losses narrowing from -13,953 million USD to -10,293 million USD. This trend was sharply reversed in 2018, when economic profit plummeted to -22,593 million USD. A strong recovery occurred in 2019, with the loss reducing to -8,103 million USD, the most favorable result in the five-year series.

Invested Capital Trends

Invested capital experienced an initial upward trend, rising from 105,133 million USD in 2015 to a peak of 112,007 million USD in 2017. Following this peak, a contraction is observed, with capital decreasing to 96,541 million USD in 2018 and further declining to 94,307 million USD by the end of 2019.

Economic Spread Ratio Evaluation

The economic spread ratio mirrored the fluctuations of economic profit, remaining negative throughout the period. The ratio improved from -13.27% in 2015 to -9.19% in 2017, before experiencing a severe deterioration to -23.40% in 2018. By December 31, 2019, the ratio improved to -8.59%, marking the narrowest spread between the return on capital and the cost of capital within the observed timeframe.

Between 2015 and 2019, the entity consistently reported negative economic profit, indicating that the returns generated were insufficient to cover the cost of capital employed throughout the analyzed period.

Economic Profit Trends

Economic profit exhibited significant volatility. After a period of gradual improvement from negative 13,953 million USD in 2015 to negative 10,293 million USD in 2017, a substantial deterioration occurred in 2018, where the deficit expanded to negative 22,593 million USD. A strong recovery followed in 2019, with economic profit improving to negative 8,103 million USD, the lowest deficit recorded in the five-year span.

Net Sales Performance

A sharp increase in net sales was observed between 2015 and 2016, rising from 18,338 million USD to 26,487 million USD. Revenue levels remained relatively stable between 2016 and 2018, before a moderate decline to 24,977 million USD occurred in 2019. The lack of correlation between the stability of net sales and the volatility of economic profit suggests that the fluctuations in economic value were driven by operating expenses or changes in the cost of capital rather than revenue fluctuations.

Economic Profit Margin Analysis

The economic profit margin remained negative for the entire duration, signifying a consistent destruction of economic value. The margin improved from negative 76.09% in 2015 to negative 39.24% by 2017. This trend was sharply reversed in 2018, when the margin plummeted to negative 86.01%. By 2019, the margin recovered to negative 32.44%, marking the most favorable efficiency level in terms of economic value creation during the period.