01—Abstract
Summary
Summary of the 10-K filed February 14, 2020. Cited figures are marked; the original filing is the authoritative source.
The Kraft Heinz Company's 10-K for fiscal 2019 reports net sales of $24.98 billiona, down 4.9% from $26.27 billion in 2018, with Organic Net Sales down 1.7% to $24.96 billion.
Operating income rebounded to $3.07 billionb from a loss of $10.21 billion, driven mainly by lower impairment losses ($1.90 billion in 2019 versus $15.94 billion in 2018). Net income attributable to common shareholders was $1.94 billion, or $1.58 diluted EPS, while Adjusted EBITDA fell 13.7% to $6.06 billion and Adjusted EPS fell 18.8% to $2.85. Cash from operations rose to $3.55 billion, and the company reduced long-term debt to $29.2 billion through tender offers and redemptions.
The filing discloses two material weaknesses in internal control over financial reporting, one in risk assessment and one in accounting for supplier contracts, and the company states it did not maintain effective internal control as of December 28, 2019. It also describes an ongoing SEC investigation and USAO review related to procurement, several securities and ERISA class actions, and derivative suits. The company was not current in its periodic reporting in 2019, which limits its use of Form S-3.
Fitch and S&P downgraded the company's long-term ratings to below investment grade on February 14, 2020, and Moody's affirmed its Baa3 rating with a negative outlook. The company is pursuing a strategic review of its enterprise strategy, and it plans to combine its EMEA, Latin America and APAC zones into an International segment in 2020. Goodwill impairments of $1.20 billionc and intangible impairments of $702 million were recorded in 2019, and the filing warns of possible further impairments.
02—Key points
Key Highlights
- Net sales declined 4.9% to $24.98 billion; Organic Net Sales declined 1.7%, driven by unfavorable volume/mix (1.8 pp).
- Operating income of $3.07 billion versus a $10.21 billion loss in 2018, primarily due to lower impairment losses ($1.90 billion vs. $15.94 billion).
- Diluted EPS of $1.58 versus a loss of $8.36 in 2018; Adjusted EPS fell 18.8% to $2.85.
- Adjusted EBITDA fell 13.7% to $6.06 billion, reflecting lower Organic Net Sales, higher supply chain costs and currency effects.
- Two material weaknesses in internal control over financial reporting remain unremediated as of December 28, 2019; the SEC and USAO investigations are unresolved.
- Long-term debt declined to $29.2 billion, and the company completed $2.9 billion of tender offers and redemptions funded by $3.0 billion of new senior notes.
- Fitch and S&P downgraded long-term ratings to below investment grade on February 14, 2020; the company declared a $0.40 quarterly dividend.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Kraft Heinz kept $0.08.
- Revenue$24.98B100.0%
- Cost of revenue−$16.83B67.4%
- Gross profit$8.15B32.6%
- Operating costs−$5.08B20.3%
- Operating income$3.07B12.3%
- Interest, other & tax−$1.14B4.5%
- Net income$1.94B7.7%
Where FY2019 revenue went
$24.98B- Cost of revenue: $16.83B, 67% of revenue
- SG&A: $5.08B, 20% of revenue
- Net income: $1.94B, 7.7% of revenue
- R&D: $112.0M, 0.4% of revenue
- Interest, other & tax: $1.14B, 4.5% of revenue
Kept 7.7% as net incomeR&D $112.0M · 0.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 14, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $24.98B$26.27B | −4.9% |
| Cost of Revenue | $16.83B$17.35B | −3.0% |
| Gross Profit | $8.15B$8.92B | −8.7% |
| R&D Expenses | $112.00M$109.00M | +2.8% |
| SG&A Expenses | $5.08B$19.13B | −73.5% |
| Operating Income | $3.07B-$10.21B | +130.1% |
| Interest Expense | $1.36B$1.28B | +6.0% |
| Net Income | $1.94B-$10.19B | +119.0% |
| EPS (Basic) | $1.59$-8.36 | +119.0% |
| EPS (Diluted) | $1.58$-8.36 | +118.9% |
| Shares Outstanding (Basic) | 1.22B1.22B | +0.2% |
| Shares Outstanding (Diluted) | 1.22B1.22B | +0.4% |
05—Questions
Frequently Asked Questions
Why did Kraft Heinz report a much higher operating income in 2019 than in 2018?
Operating income was $3.07 billion in 2019 compared with a loss of $10.21 billion in 2018. The filing attributes the change primarily to lower impairment losses: $1.90 billion in 2019 versus $15.94 billion in 2018. Excluding impairments, operating income decreased by $762 million, mainly due to lower Organic Net Sales, higher supply chain costs, and unfavorable foreign currency.
What are the material weaknesses in internal controls, and has the company remediated them?
The company identified a material weakness in its risk assessment process, related to designing controls to respond to changes in its business environment, and a related material weakness in controls over supplier contracts and related arrangements. Both remained unremediated as of December 28, 2019. A previously reported weakness over impairment assessment precision was remediated. Management aims to complete the remaining improvements during 2020.
How did the credit rating downgrades affect the company's liquidity?
On February 14, 2020, Fitch and S&P downgraded the long-term rating from BBB- to BB+. The filing says this could limit access to the commercial paper market and increase interest costs, but the company does not expect any change in its plans to access liquidity over the next year. The $4.0 billion Senior Credit Facility remained undrawn, and its availability is not affected by the downgrades.
What regulatory and legal matters are pending?
The SEC is investigating matters related to the company's procurement area, and the USAO for the Northern District of Illinois is reviewing the matter. The company is cooperating and has not resolved either investigation. It also faces securities class actions, an ERISA class action, and multiple stockholder derivative suits. The company states it cannot reasonably estimate the potential range of loss from the lawsuits due to their early stage.
Will the company continue paying dividends?
The Board declared a cash dividend of $0.40 per share on February 13, 2020, payable March 27, 2020. Dividends paid totaled $1.95 billion in 2019, down from $3.18 billion in 2018. The filing notes that future dividends are at the Board's discretion and depend on financial condition, debt agreements and Delaware law.
06—Continue