Consumer Products

Kraft Heinz Investors Now Must Trust That Things Are Normalizing and Restatements Are Not That Material

Kraft Heinz Co. (NASDAQ: KHC) has had a hard time finding friends as its share price continued to erode. On top of no real growth and changing consumer preferences on what they want to buy in the grocery stores, Kraft Heinz had an internal accounting probe that was nearly impossible for most investors and analysts on Wall Street to anticipate the outcome.

Kraft Heinz filed its 2018 annual report (Form 10-K) with the Securities and Exchange Commission (SEC) on Friday. The food giant also announced that Joao M. Castro-Neves was elected to its board of directors, with an effective date of June 12, 2019.

In addition to the 2018 annual report filing, the company also restated its audited consolidated financial statements for fiscal year 2017 and 2016. Multiple quarterly filings were also shown to be restated.

The one issue inside the press release that will be hung on the most is this: The misstatements were not quantitatively material as the cumulative impact of the restatements from 2015 to 2018 was less than 1% of net income for each applicable period. The misstatements were also said to be consistent with what Kraft Heinz had disclosed on May 6, 2019. Still, the company said:

However, due to the qualitative nature of the matters identified in our internal investigation, including the number of years over which the misconduct occurred and the number of transactions, suppliers, and procurement employees involved, the Company determined that it would be appropriate to correct the misstatements in our previously issued consolidated financial statements by restating such financial statements… The Company’s internal investigation into its procurement area and assessment of internal controls is now complete, and the Company continues to cooperate with the SEC in its investigation. As a result of the internal investigation and material weaknesses identified, the Company is taking actions to improve internal policies and procedures and to strengthen internal control over financial reporting.

Alex Behring, Kraft Heinz board chair, said of the issue:

We are pleased that Kraft Heinz is returning to a path of normalization. The adjustments to correct prior year misstatements are in line with the preliminary amounts disclosed in our Form 8-K filed on May 6, 2019. In addition, we are thrilled to welcome Joao to the Board, as he brings significant consumer sector expertise to Kraft Heinz.

Also, the Kraft Heinz board’s Compensation Committee approved the employment terms of incoming Chief Executive Officer Miguel Patricio. The terms are largely performance-driven and are based on sustained and significant growth in long-term shareholder value. To demonstrate his commitment to Kraft Heinz, Patricio also is investing $20 million of his own money to purchase Kraft Heinz shares that will be issued in the future and will be subject to a four-year restriction on transfer. He also will receive a performance-based stock award that will entitle him to receive between 200,000 and 600,000 shares of Kraft Heinz common stock, depending on the company’s stock price appreciating to between $45 and $55 per share (or approximately 55% to 90% above the current stock price) during the first three years of his employment. If Patricio receives these additional performance share units, he will be required to hold them for an additional three-year period. As far as a salary, he will receive the following:

  • A base salary of $1,000,000 per year
  • A one-time signing bonus of $1,000,000 and a target annual bonus opportunity at 300% of base salary
  • An equity award in the form of performance share units and restricted stock units (with a grant date fair value of $20 million and $15 million respectively, for an aggregate equity award of $35 million)

Shares of Kraft Heinz were last seen trading up 5% at $30.30 early Monday. That may be a great jump after the probe has ended, but the 52-week range of $26.96 to $64.99 should spell out how bad things were. To show further how bad things were over time, note that Kraft Heinz was more than a $90 stock back in mid-2017.