Kraft Heinz Has Procurement Problem, Takes $25 Million Charge after SEC Inquiry, WSJ reports

Kraft Heinz’s procurement division had an accounting problem that led to a Securities and Exchange Commission investigation and a $25 million charge in the fourth quarter, the Wall Street Journal reports.

The amount pales in comparison to the company’s other bad news Thursday — when it said it wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion dollars and it slashed dividends, sending the stock down 20% at one point, the Journal reports.

The procurement accounting case was “related to higher costs for ingredients and other expenses that should have been recorded in previous quarters,” the Journal reports.

Kraft Heinz, which also did an internal investigation, said it’s cooperating with the SEC but believes the charge doesn’t have a key impact on earnings because the company spends $11 billion on procurement a year, the Journal reports.

In a general business sense, Spend Matters Chief Research Officer Pierre Mitchell has looked at how any procurement department should work with finance departments.

"Based on our research, procurement executives need to be tightly aligned with finance executives, especially with controllers related to aligning supplier contracts and associated obligations, risk, and liabilities to financial statements," Mitchell says. "This is especially critical for global organizations with large commodity spending — especially in consumer packaged goods, where working capital demands are front and center. Things can go wrong on many fronts: commodity hedging, 'tax-efficient supply chain' models, third-party financing (e.g., reverse receivables factoring like P&G's efforts), rebates, pass throughs and other areas.

"Procurement executives have a fine balancing act in terms of aligning the interests of business units, finance (including audit and legal), shareholders and regulators with its own need to drive down total costs, optimize working capital (and not destroying value by just blindly stretching it), and tap supplier innovation. Getting this alignment is not easy, and that's why we've spent a lot of effort researching it (a free webinar replay on the research can be found here and here's a shorter fun read on it)."

Warren Buffett, a major investor in Kraft Heinz via his Berkshire Hathaway firm, lost more than $4 billion when Kraft Heinz’s stock fell after trading Thursday, CNBC reports Friday. CNBC also reports that the company's backers, 3G Capital, hasn't impressed Wall Street since it took over the company and runs it with a cost-cutting ethos and with many of its managers not being food industry veterans.

Bloomberg on Friday reports that Kraft Heinz’s overall losses likely rules it out from making any acquisitions, and analysts cut their ratings on the stock. Bloomberg has a comprehensive roundup of analysts’ input, and it puts Kraft Heinz’s losses into perspective with this:

“The shares plummeted as much as 28% to $34.70. Kraft’s plunge erased about $16 billion in market value. For perspective, that’s more than the entire value of packaged-food peers JM Smucker Co. or Campbell Soup Co.,” Bloomberg reports.

On Thursday, Kraft Heinz issued its fourth quarter and year-ending 2018 earnings report. On its 8-K disclosure form to the SEC about material or corporate events, the company didn't list anything about an SEC inquiry or the company's investigation and the $25 million charge, but its 8-K did include a link to the earnings report, which had a passage at the end under the heading "Supplemental Information":

"The Company received a subpoena in October 2018 from the U.S. Securities and Exchange Commission (the "SEC") associated with an investigation into the Company's procurement area, more specifically the Company's accounting policies, procedures, and internal controls related to its procurement function, including, but not limited to, agreements, side agreements, and changes or modifications to its agreements with its vendors.

"Following this initial SEC document request, the Company together with external counsel launched an investigation into the procurement area. In the fourth quarter of 2018, as a result of findings from the investigation, the Company recorded a $25 million increase to costs of products sold as an out of period correction as the Company determined the amounts were immaterial to the fourth quarter of 2018 and its previously reported 2018 and 2017 interim and year to date periods. Additionally, the Company is in the process of implementing certain improvements to its internal controls to mitigate the likelihood of this occurring in the future and has taken other remedial measures. The Company continues to cooperate fully with the U.S. Securities and Exchange Commission."

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Voices (2)

  1. Jason Busch:

    My guess is because $25MM was not material … and it pails in comparison to the write down of fake cheese and weenie brands.

  2. David Stewart:

    Why wasn’t the public made aware of the sec investigation back in October 2018? Class action lawsuit needs to be considered.

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