Kraft Heinz (KHC) has left investors shocked after reporting a major loss in Q4 2018, driven by a staggering $ 15.4 billion write-down to a number of its brands. The company also published a survey of the SEC in the accounting policies.
The market sent stocks that plunged into the wake of the news. A few pristine investors have suggested buying dips, but we're not so sure. In fact, the world's fifth largest food and beverage business may well interfere with the investor's stomach. A closer inspection of both the write-down and the SEC survey suggests that things can actually be worse than they already seem to be.
Not your average write-down
Because of its sheer size alone, the Kraft Heinz write-down is remarkable. At $ 15.4 billion, it is the seventh largest write-down since 2009. The write-down came from two sources: $ 8.3 billion from an intangible asset write-down of Kraft and Oscar Mayer brands and $ 7.1 billion from a goodwill write-down to its North American refrigeration and retail.
But the size is not the problem here. The reason why this write-down is so unusual is that it seems to have come almost out of nowhere. Kraft Heinz conducts regular reviews of his various business units, including annual impairment testing. This leads to a relatively regular recognition of impairment of goodwill, with adjustment of the balance sheet to the balance sheet.
Kraft Heinz performs conventional main performance tests in other quarters each year, and 2018 was no exception. When the company reported Q3 revenues, it recognized significant write-down costs:
"We test goodwill for impairment at least once a year in the second quarter or when a triggering event occurs. We performed our annual impairment test for 2018 as of April 1, 2018. As a result of our annual impairment test for 2018, we recognized a non-cash write-down of $ 164 million in SG&A related to Australia and the New Zealand reporting unit, mainly due to the margins of the region, of which $ 509 million before the write-down. Additionally, five of the 20 reporting units had a fair value over book value of less than 10%, and as of the impairment test date, goodwill related to this reporting unit was $ 4.7 billion for Canada Retail, $ 424 million for Latin America exports. $ 407 million for Northeast Asia, $ 326 million for Southeast Asia and 2 $ 32 million for other Latin America. "
With" five out of 20 "of their reporting units apparently having significant over-value, there was always a chance that things could get worse, but for the situation to have changed so dramatically in less than six months, The shocking. Kraft Heinz was obviously either walloped out of the blue or it has been reticent to recognize the real extent of degradation so far, while the company may attempt to claim that this is a one-time adjustment was the fact that it was not telegraphed – and triggered in such a short time – to be considered a serious red flag and warning sign that this may not be the end of the case. [SEC]
The SEC digs into the books
The write-down was not the only thing that blinded investors this week. Kraft Heinz also revealed that his accounting principles had come under SEK scrutiny and received summons from the regulator, which stated that it had launched its own internal investigation in response. on the SEC's probe, and registered $ 25 million in additional costs:
"Following this initial SEC document request, the company, together with external advisor, launched an investigation of the procurement area. In the fourth quarter of 2018, as a result of the survey surveys, the company recorded a $ 25 million increase in the cost of products sold as a flawless period when the company determined that the amounts were negligible for the fourth quarter of 2018 and its previously reported 2018 and 2017 interim and annual periods. In addition, the company is in the process of making certain improvements to its internal controls to reduce the likelihood of this occurring in the future and has taken other measures. The company continues to fully cooperate with the US Securities and Exchange Commission. "
While a SEC survey is never something an investor wants to see, yet Kraft Heinz does what it does the right way: collaborate, launch an internal survey, quickly recognize cost adjustments, and promising new controls to prevent misconduct So far, so good.
But again it is more to this story if we dig a little deeper, according to the company's own timeline of events, it seems that the SEC may have sniffed around for reasons other than the $ 25 million adjustment that Audit Analytics, a specialized research equipment, concludes that history is far from over:
"In other words, there was another outstanding issue that triggered the SEC review. Details of what that problem could be were not given in the revenue release or on the conference call. "
If there is more to the SEC survey, which certainly has not ended, it may mean more unpleasant surprises down the road.
Investor's Eye View
Kraft Heinz was down in a quick 27, 5% on Friday among a number of analysts downgrades. The violent market reaction will usually lead us to snoop for a bargain opportunity, but in this case, we suspect there may be more issues ahead.
Core business has obviously taken a serious A myopic focus on cost reduction has led Kraft Heinz to lose focus on maintaining its brands, even as consumer tastes continue to change, the current brands are unable to resonate with a new generation of consumers. little success in introducing new and profitable demands.
Kraft Heinz has promised a return on strong revenue growth and better margins, with a focus on improving their more mugs, restore market position and create new opportunities. Given how quickly the consumer market has developed, these races seem somewhat doubtful.
And even though the company follows through on operational promises, other problems subvert the surface. Further brand deterioration may damage the stock price, and with the recent surprise, there is little reason to be sure that this was the last significant write-down in the cards. The SEC survey provides even more red flags. It's a big question mark, and Kraft Heinz has done little to remove the investor's fear so far.
While investors believe that this dip is worth buying, we will go to the sidelines until we get clarity on the company's long-standing past prospects in a rapidly changing world.
Enlightenment: I / We have no positions in any of the aforementioned shares, and no plans to start any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.