Business Context and Reporting Period
Company: The Kraft Heinz Company (KHC)
Filing Type: Form 8-K (Current Report)
Date of Report: May 2, 2019 (Event Date)
Reporting Period: The filing addresses restatements for fiscal years ended December 31, 2016, and December 30, 2017, as well as interim periods through September 29, 2018. It also addresses the fiscal year ended December 29, 2018, for which the Annual Report on Form 10-K was delayed.
Key Financial Metrics and Restatement Impact
The Company announced a determination to restate consolidated financial statements due to misstatements in procurement accounting, supplier rebate recognition, and impairment testing. The filing provides preliminary unaudited estimates of the impact on key metrics:
| Metric | 2016 (Restated) | 2017 (Restated) | 2018 (Restated) |
|---|---|---|---|
| Net Income/(Loss) | $3,622 million | $10,921 million | $(10,265) million |
| Adjusted EBITDA | $7,724 million | $7,810 million | $7,014 million |
| Diluted EPS | $2.80 | $8.90 | $(8.37) |
| Adjusted EPS | $3.32 | $3.49 | $3.50 |
Specific Adjustments:
- Procurement Misstatements: Total adjustments of approximately $208 million were identified, increasing the cost of products sold in prior periods. The cumulative net misstatement to previously reported statements was approximately $181 million.
- Impairment Errors: Errors in goodwill and intangible asset impairment testing in Q4 2018 resulted in a net increase of approximately $13 million to non-cash impairment losses (totaling $15.4 billion).
- Capital Leases: Correction of improperly classified embedded capital leases reduced 2018 Adjusted EBITDA by approximately $33 million.
Material Changes Versus Prior Periods
The restatements result in the following percentage changes compared to previously reported or furnished figures:
- 2016 Net Income: Decreased by 0.5% ($20 million reduction).
- 2017 Net Income: Decreased by 0.6% ($69 million reduction).
- 2018 Net Loss: Decreased by 0.3% ($27 million reduction in loss).
- Adjusted EBITDA: Decreased by 0.7% in 2016, 1.5% in 2017, and 1.0% in 2018.
The Company states that while the misstatements are not quantitatively material to any individual prior year or quarter, they are qualitatively significant due to the nature of the misconduct and the number of transactions involved.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook:
- Filing Delays: The Company will not timely file its Form 10-K for fiscal year 2018 or its Form 10-Q for the period ended March 30, 2019, due to the time required to complete the investigation and restatement.
- Internal Controls: Management anticipates identifying and reporting two or more material weaknesses in internal controls over financial reporting in the upcoming 2018 Annual Report.
- Remediation: The Company has implemented personnel actions and improvements to internal controls to mitigate future occurrences.
Risks and Contingencies:
- SEC Investigation: The Company received additional SEC subpoenas on March 1, 2019, regarding goodwill impairments and procurement matters. The scope and outcome of the investigation are uncertain.
- Litigation: Several lawsuits have been filed against the Company, its Board, and officers relating to the disclosed matters. The Company intends to vigorously defend against these suits.
- Future Adjustments: The restated numbers are preliminary and unaudited; further adjustments may be required upon completion of the 2018 Annual Report.
Key Facts for Investor Verification
- Restatement Scope: Verify the final restated figures for 2016, 2017, and 2018 once the Form 10-K is filed, as current numbers are preliminary and unaudited.
- Internal Control Weaknesses: Monitor the upcoming 10-K for the specific identification of material weaknesses in internal controls.
- SEC Investigation Status: Track the progress of the SEC investigation and any potential penalties or settlements arising from the procurement misconduct and impairment errors.
- Legal Exposure: Assess the potential financial impact of ongoing shareholder lawsuits related to the accounting irregularities.
- Future Reporting: Confirm the timeline for the delayed filing of the Q1 2019 Form 10-Q and the 2018 Form 10-K.