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.

Cost of Capital

The cost of capital generally decreased over the period, moving from 14.64% in 2015 to 11.49% in 2019. The largest decrease occurred between 2017 and 2018, falling from 13.93% to 11.82%. This suggests a decreasing risk profile or changes in the company’s capital structure.

Invested Capital

Invested capital initially increased from US$105,133 million in 2015 to US$112,007 million in 2017, then decreased to US$96,541 million in 2018 and further to US$94,307 million in 2019. The decline in invested capital from 2017 onwards may indicate asset sales, reduced investment in operations, or changes in working capital management.

Economic Profit

Economic profit remained negative throughout the entire period, indicating that the company’s returns did not exceed its cost of capital. The magnitude of the economic loss varied considerably. The largest loss was recorded in 2018 at US$22,606 million, coinciding with the lowest NOPAT and a significant decrease in invested capital. While the economic loss decreased to US$8,115 million in 2019, it remained substantial, despite the improvement in NOPAT. The losses in earlier years (2015-2017) were comparatively smaller, but still negative.

The substantial decline in NOPAT in 2018 appears to be the primary driver of the largest economic loss in that year. The decreasing cost of capital did not fully offset the negative impact of lower profitability and, to a lesser extent, the reduction in invested capital. The partial recovery in NOPAT in 2019 led to a reduced economic loss, but the company continued to destroy economic value during this period.

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$13,974 million in 2015 and decreased to a loss of US$12,026 million in 2016. A subsequent improvement was noted in 2017, with the loss narrowing to US$10,313 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 -8.61%, 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’s return on capital employed was less than 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 in 2018 at -22,606 US$ millions. A substantial improvement was observed in 2019, with economic profit increasing to -8,115 US$ millions, representing a significant, though still negative, shift.

Net Sales

Net sales increased notably from 2015 to 2016, rising from 18,338 US$ millions to 26,487 US$ millions. Following this increase, net sales remained relatively stable between 2016 and 2018, fluctuating within a narrow range around 26,200 US$ millions. A decline in net sales was then observed in 2019, decreasing to 24,977 US$ millions.

Economic Profit Margin

The economic profit margin mirrored the trend in economic profit. It began at -76.20% in 2015, improved to -45.40% in 2016, and then continued to worsen, reaching -86.06% in 2018. The margin improved considerably in 2019 to -32.49%, aligning with the improvement in economic profit. The substantial negative values across all years indicate a consistent failure to generate economic value, despite fluctuations in sales performance.

The most pronounced change occurred between 2018 and 2019, where both economic profit and the economic profit margin experienced substantial positive shifts. While the company continued to operate at an economic loss in 2019, the reduced magnitude suggests potential improvements in capital allocation or operational efficiency during that period. The correlation between net sales and economic profit margin is not straightforward, as the largest sales increase did not coincide with the best margin performance.