Overview

Objective:

The following discussion provides an analysis of our financial condition and results of operations from management's perspective and should be read in conjunction with the condensed consolidated financial statements and related notes included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q. Our objective is to also provide discussion of material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides an understanding of our financial condition, results of operations, and cash flows.

Description of the Company: We manufacture and market food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products throughout the world.

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.

See Note 17, Segment Reporting, in Item 1, Financial Statements, for our financial information by segment.

Acquisitions and Divestitures: We closed the Hemmer Acquisition in the second quarter of 2022, the Just Spices Acquisition in the first quarter of 2022, and the Assan Foods Acquisitions in the fourth quarter of 2021, each in our International segment. Additionally, we completed the Nuts Transaction in the second quarter of 2021 and the Cheese Transaction in the fourth quarter of 2021. The Nuts Transaction and the Cheese Transaction are not, individually or in the aggregate, considered a strategic shift that will have a major effect on our operations or financial results; therefore, the results of these businesses are included in continuing operations through the date of each sale in the prior year period. See Note 4, Acquisitions and Divestitures, in Item 1, Financial Statements, for additional information.

Russia and Ukraine Conflict: For the year ended December 25, 2021 and for the six months ended June 25, 2022, approximately 1% of consolidated net sales were generated from our business in Russia. Additionally, net income/(loss) and Adjusted EBITDA from our business in Russia were each insignificant in 2021 and for the six months ended June 25, 2022. We have approximately 1,100 employees in Russia. We have no operations or employees in Ukraine and insignificant net sales through distributors. Further, we have experienced cost increases globally for certain commodities, including packaging materials, energy, soybean and vegetable oils, corn products, and wheat products due to overall market demand, inflationary pressures, and, in part, to the negative impact of the conflict between Russia and Ukraine on the global economy. We will continue to monitor the impact that this conflict has on our business; however, through the second quarter of 2022, the conflict between Russia and Ukraine has not had a material impact on our financial condition, results of operations, or cash flows.

Items Affecting Comparability of Financial Results

Impairment Losses: Our results of operations reflect goodwill impairment losses of $224 million, intangible asset impairment losses of $395 million, and property, plant and equipment, net asset impairment losses of $66 million for the six months ended June 25, 2022 compared to goodwill impairment losses of $265 million and intangible asset impairment losses of $78 million for the six months ended June 26, 2021. See Note 8, Goodwill and Intangible Assets, and Note 4, Acquisitions and Divestitures, in Item 1, Financial Statements, for additional information on these impairment losses.

COVID-19 Impacts: We continue to monitor the impact of COVID-19 on our business. In the first half of 2021, demand for our retail products remained strong compared to the comparable 2019 pre-pandemic period, while our foodservice business continued to experience decreased consumer demand compared to the comparable 2019 period. In the first half of 2022, our foodservice business was in varying levels of recovery globally, with our International segment experiencing increased consumer demand and our North America segment experiencing decreased consumer demand compared to the comparable 2019 period. COVID-19 and its impacts are unprecedented and continuously evolving, and the long-term impacts to our financial condition and results of operations are still uncertain.


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Inflation and Supply Chain Impacts: During the six months ended June 25, 2022, we have continued to experience increasing commodity costs and supply chain costs, including logistics, procurement, and manufacturing costs, largely due to inflationary pressures, as compared to the prior year period. We expect this cost inflation to increase and remain elevated through at least the remainder of 2022. While these costs have a negative impact on our results of operations, we are currently taking measures to mitigate, and expect to continue to take measures to mitigate, the impact of this inflation through pricing actions and efficiency gains. However, there has been, and we expect that there could continue to be, a difference between the timing of when these beneficial actions impact our results of operations and when the cost inflation is incurred. Additionally, the pricing actions we take have, in some instances, negatively impacted and could continue to negatively impact our market share.

Further, given the demand for our products combined with industry-wide supply chain issues and our focus on rebuilding inventory, we have experienced capacity constraints for certain products when demand has exceeded our current manufacturing capacity. As discussed in Liquidity and Capital Resources, we are working to expand capacity through increased capital investments. We are also focused on increasing capacity through labor-related initiatives, including additional shifts and temporary labor. However, until these capacity constraints are alleviated, these constraints have negatively impacted and could continue to negatively impact our service levels, market share, financial condition, results of operations, or cash flows.

We have observed an increasingly competitive labor market. Employee turnover, changes in the availability of our workers, including as a result of COVID-19-related absences, and labor shortages in our supply chain have resulted in, and could continue to result in, increased costs and have, and could again, impact our ability to meet consumer demand, both of which could negatively affect our financial condition, results of operations, and cash flows.

Results of Operations

We disclose in this report certain non-GAAP financial measures. These non-GAAP financial measures assist management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our underlying operations. For additional information and reconciliations from our condensed consolidated financial statements see Non-GAAP Financial Measures.

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