- Kraft Heinz was charged by the U.S. Securities and Exchange Commission "with engaging in a long-running expense management scheme" that resulted in the restatement of several years of financial reporting. The CPG giant, which did not admit to or deny the SEC's findings, agreed to pay a civil penalty of $62 million.
- The SEC also charged Eduardo Pelleissone, Kraft Heinz's former chief operating officer, and Klaus Hofmann, its former chief procurement officer, for their misconduct related to the scheme.
- The financial regulator said that between the last quarter of 2015 and the end of 2018, Kraft Heinz "engaged in various types of accounting misconduct" that "improperly" reduced the company's cost of goods sold. The accounting improprieties resulted in Kraft Heinz reporting inflated adjusted EBITDA, a key earnings performance metric for investors.
Kraft Heinz stunned the world in February 2019 when, in a bombshell earnings report, it made several announcements that undermined any impression the company had given of stability.
In that earnings report, the company wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion, resulting in a $12.6 billion net loss. It slashed its dividends more than 36%. And it disclosed an investigation by the SEC into its procurement accounting and control policies. These disclosures were catastrophic to Kraft Heinz’s stock price, which immediately fell by almost a third. They were also catastrophic to Kraft Heinz’s leadership at the time, which was summarily ousted.
Under the leadership of CEO Miguel Patricio, who was tapped to head the company in April 2019, Kraft Heinz has turned things around. New operating, positioning and marketing strategies, as well as strategic divestments and a new regime of transparency, have moved the food giant into a position of sales growth, even prior to the pandemic.
These charges bookend the financial issues first disclosed in February 2019 and are a reminder of the way things were. According to the charges, Pelleissone and Hofmann took advantage of a procurement division that didn’t have proper oversight control. They ignored warning signs that internal controls were being circumvented, and instead improperly approved financial statements, the SEC said. The regulator also charged that Pelleissone pressured the procurement division to meet unrealistic savings targets.
Overhauling the procurement division was one of Patricio’s top priorities when taking the helm of Kraft Heinz. Many far-reaching changes have been made under new leadership, including reworking incentives and bringing in a new crop of employees. And so far, progress has been good.
For its part, Kraft Heinz is putting the past behind it. The company has paid the $62 million civil penalty, which was reflected in its second-quarter earnings report. The company also has agreed to refrain from future violations of this kind.
"We have fully cooperated with the SEC throughout its investigation and took prompt and extensive remedial action and proactive steps to improve our internal policies, procedures, and internal controls over financial reporting," the company said in an emailed statement. "The internal control weaknesses we identified and disclosed in 2019 were fully remediated in 2020. Kraft Heinz is much stronger today because of the actions we took and embedded into our company culture."
Pelleissone and Hofmann also have agreed to penalties, which will effectively keep the issue in the past. Pelleissone is paying a civil penalty of $300,000 with interest of $14,211.31. Subject to court approval, Hofmann has agreed to a civil penalty of $100,000, which also bars him from serving as an officer or director of a public company for five years.