01—Abstract
Summary
Summary of the 10-K filed June 7, 2019. Cited figures are marked; the original filing is the authoritative source.
The Kraft Heinz Company's Form 10-K for fiscal year ended December 29, 2018 was filed late, after an internal investigation into its procurement area and a restatement of prior periods.
The company restated its 2017 and 2016 financial statements and certain 2018 quarterly information to correct misstatements in the timing of supplier rebates, up-front payments, and related arrangements, which understated cost of products sold by $208 milliona in total. Management concluded that internal control over financial reporting was not effective as of December 29, 2018, citing multiple material weaknesses. The SEC's investigation is ongoing, and several securities class actions, an ERISA class action and stockholder derivative suits have been filed.
Financially, net sales rose 0.7% to $26.3 billionb in 2018, but the company recorded goodwill and intangible asset impairment losses of $15.9 billion, producing an operating loss of $10.2 billion and a net loss attributable to common shareholders of $10.2 billion, or $(8.36) per diluted share. Adjusted EBITDA declined 8.3% to $7.0 billion and Adjusted EPS was flat at $3.51. Cash from operations was $2.6 billion, and cash and cash equivalents stood at $1.1 billion at year end.
Total long-term debt including the current portion was $31.1 billionc. The company was not in compliance with certain reporting covenants under its Senior Credit Facility and indentures because of the filing delays.
It obtained two waivers, and the filing of this 10-K satisfies the covenant requirement to furnish annual financial statements by June 28, 2019. The company also received a Nasdaq notice and has until September 11, 2019 to regain compliance with its periodic filing requirement, and it is not currently eligible to use Form S-3 or S-8.
02—Key points
Key Highlights
- Net sales of $26.3 billion in 2018, up 0.7% from $26.1 billion in 2017; Organic Net Sales up 0.9%.
- Impairment losses of $15.9 billion in 2018, including $6.9 billion of goodwill and $8.6 billion of indefinite-lived intangible assets in Q4 2018, driving an operating loss of $10.2 billion and a net loss attributable to common shareholders of $10.2 billion ($(8.36) per diluted share).
- Adjusted EBITDA decreased 8.3% to $7.0 billion; Adjusted EPS was $3.51 versus $3.50 in 2017.
- Restatement of 2017 and 2016 financial statements and certain 2018 quarterly data for supplier contract misstatements totaling $208 million in understated cost of products sold; management identified multiple material weaknesses and concluded internal control over financial reporting was not effective as of December 29, 2018.
- The SEC investigation is ongoing and the U.S. Attorney's Office for the Northern District of Illinois is also reviewing the matter; three securities class actions, one ERISA class action and five stockholder derivative actions have been filed.
- Net cash provided by operating activities was $2.6 billion in 2018 versus $501 million in 2017; long-term debt including current portion was $31.1 billion at December 29, 2018.
- Covenant non-compliance from late filings was addressed through two waivers under the Senior Credit Facility; the Nasdaq listing requires filing by September 11, 2019 to avoid potential delisting.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2018, Kraft Heinz lost $0.39.
- Revenue$26.27B100.0%
- Cost of revenue−$17.35B66.0%
- Gross profit$8.92B34.0%
- Operating costs−$19.13B72.8%
- Operating income−$10.21B38.8%
- Interest, other & tax$13.0M0.0%
- Net income−$10.19B38.8%
04—Financials
Financial Highlights
Figures from 10-KFY2018filed June 7, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $26.27B$26.23B | +0.1% |
| Cost of Revenue | $17.35B$17.04B | +1.8% |
| Gross Profit | $8.92B$9.03B | −1.2% |
| R&D Expenses | $109.00M$93.00M | +17.2% |
| SG&A Expenses | $19.13B$2.98B | +542.7% |
| Operating Income | -$10.21B$6.06B | −268.5% |
| Interest Expense | $1.28B$1.23B | +4.1% |
| Net Income | -$10.19B$10.94B | −193.2% |
| EPS (Basic) | $-8.36$8.98 | −193.1% |
| EPS (Diluted) | $-8.36$8.91 | −193.8% |
| Shares Outstanding (Basic) | 1.22B1.22B | +0.1% |
| Shares Outstanding (Diluted) | 1.22B1.23B | −0.7% |
05—Questions
Frequently Asked Questions
Why did the company restate prior financial statements?
An internal investigation following an October 2018 SEC subpoena found that employees in the procurement area engaged in misconduct and that supplier rebates, incentives and up-front payments were recognized in the wrong periods. The company corrected these misstatements, which understated cost of products sold by $208 million, and also corrected other out-of-period misstatements and lease classification errors. The company does not believe the misstatements were quantitatively material to any prior period, but restated because of their qualitative nature.
What drove the large loss in 2018?
The loss was driven primarily by $15.9 billion of goodwill and intangible asset impairment losses. The Q4 2018 interim impairment test followed a sustained decline in share price in November and December 2018 that pushed market capitalization below book value of net assets, along with fourth-quarter results below expectations, a lower-growth 2019 operating plan, and other factors. Impaired units and brands were written down to zero excess fair value.
Is the company current with its SEC and listing requirements?
No. The company did not file this 10-K or its Q1 2019 Form 10-Q within the required timeframes, so it is not current in its SEC reporting. It is therefore not eligible to use Form S-3 or S-8 registration statements, and the Plan issued a blackout notice on April 23, 2019. Nasdaq granted an extension to September 11, 2019 to regain compliance, subject to filing this 10-K and the Q1 2019 10-Q.
What changes in leadership were disclosed?
Bernardo Hees, Chief Executive Officer, will leave Kraft Heinz in 2019, and Miguel Patricio was appointed as his successor and has served as Advisor since May 5, 2019. David Knopf became Executive Vice President and Chief Financial Officer in October 2017. The filing also notes that Joao M. Castro-Neves was elected to the Board effective June 12, 2019, and Marcel Herrmann Telles will retire from the Board on the same date.
What dividends has the company declared?
The company paid common stock dividends of $3.2 billion in 2018. On February 21, 2019 the Board declared a $0.40 per share dividend payable March 22, 2019, and on May 21, 2019 it declared another $0.40 per share dividend payable June 14, 2019. The filing states that dividends remain at the discretion of the Board and that the company currently anticipates continuing regular quarterly dividends.
06—Continue