FINANCIAL STATEMENT ANALYSIS AND COMPARISON: KELLOG CO. Vs. KRAFT FOODS INC. Student 1 Student 2 Student 3 ACCT 3303 Fall 2024 Dr. Chiang Executive Summary This financial analysis report specifically focuses on two global companies, Kellogg Co. and Kraft Foods Inc., both which compete in the packaged/convenience food industry. After extensive review of both companies’ overall financial performance and strategies, the results conclude which company is recommended for investment. The introduction includes brief summary of the packaged/convenience food industry, as well as the current strategies of each company. The report provides an examination of both companies’ common-size and comparative income statements, and common-size and comparative balance sheets for the years of 2009, 2010, 2011, reflecting each companies’ financial performance and stability. Moreover, the report includes an analysis of different financial ratios based on liquidity, activity, profitability, and coverage. The pro forma balance sheets and income statements were also used to compare the three-year financial performance of both companies. All the various financial statements, including the pro forma statements and financial ratios were carefully evaluated to draw final conclusions of both companies and provide a recommendation for investment, and are provided in the appendix section of this report for detailed reference. The U.S. packaged/convenience food industry has experience major growth in the last decade, as well as worldwide. Kellogg Co. and Kraft Foods Inc. can be said to me two major known competitors within this industry. According to the information provided by the U.S. Securities and Exchange Commission (SEC), Kraft Foods Inc was originally known as National Dairy Products Corporation that was formed in 1923, and has now grown considerably being the second largest food company in the world, next to Nestle; with revenues estimating at $54 billion and earnings from continuing operations of $4 billion (before taxes) in 2011, and having 126,000 employees worldwide. Kraft Foods Inc. mostly manufactures and markets packaged foods such as, biscuits, confectionery, beverages, cheese, and convenience meals, and other packaged grocery products. In contrast, Kellogg Co. was founded in 1906, and had sales of more than $13 billion in 2011. Kellogg’s principle products are ready-to eat cereals, cookies, crackers, frozen waffles and vegetables, and fruit-flavored snacks just to name a few. Although Kellogg’s current revenues are less than that of Kraft Foods Inc.; it is the world’s leading producer of convenience foods and cereal, still making it a major competitor for Kraft Foods in the packaged food industry. Both companies have unique business strategies that give them competitive advantages within this industry. Kellogg Co. mainly focuses on their wellknown brands and overall snack business while also providing many choices of good quality cereals. Kraft Foods Inc. strategies center more on a global level, concentrating on the their consumers choice of brands and snacks. Furthermore, Kraft Foods Inc. strives to be a values and performance driven organization, aiming to please not just their customers, but also their employees, suppliers and communities. As this industry continues to expand, both companies will also continue to face competition, especially from generic producers of similar products. Being the top leaders of the packaged/convenience food industry, both they are also great companies for future investment opportunities. However, based on our thorough analysis of both companies, we would be in favor of Kraft Foods Inc. for long-term investment. Although both Kellogg and Kraft have some similarities in financial performance, we recommend Kraft Foods Inc. because of its overall price-to-book and price-to-earnings values, and that this company also shows strong profits and solid growth prospects. 2 Table of Contents Introduction ………………………………………..............................................................................4 Packaged/Convenience Food Industry………………………………………….........................4 Kellogg Co. vs. Kraft Foods Inc. Strategies…………………………………….........................4 Objectives………………………………………………………………………….....................5 Financial Analysis……………………………………………………………………………………...5 Common-Size Analysis……………………………………………………………....................5 Common-Size Income Statement Analysis……………………………………………..5 Common-Size Balance Sheet Analysis…………………………………………………5 Comparative Analysis…………………………………………………………………………..6 Comparative Income Statement Analysis………………………………………………6 Comparative Balance Sheet Analysis………………………………………..................6 Financial Ratio Analysis……………………………………………………………..................7 Liquidity………………………………………………………………………………...7 Activity……………………….…………………………………………………………7 Profitability………….………………………………………………………...………...7 Coverage……………...…………………………………………………………………7 Conclusions and Recommendation for Investment………………………………………................8 References……………………………………………………………………………………...............9 Appendices……………………………………………………………………………………………..10 3 Introduction Packaged/Convenience Food Industry The packaged food industry can be said to be highly concentrated with various companies dominating the market. In analyzing the food industry, two well known competitive companies are Kellogg Co. and Kraft Foods Inc., and both companies manufacture and market different types of ready-to-eat foods worldwide. Kellogg Company mainly produces and sells cereal products and convenience foods, while Kraft Foods Inc. mainly produces and sells snacks and packaged foods. Convenience and packaged foods came into the market after World War II due to the need for easy preparation and long-term storage by the military. In the U.S., the packaged food industry has recently experienced major growth, especially in 2011 because of the increase in commodity prices. Due to recent significant social, economic, and demographic changes the convenience food industry has grown by 70% in the last decade, and has become a huge market. Convenience foods help consumers save time and money because they require less preparation, and have longer shelf lives. In the next five years, the packaged and snack food market is expected to reach $380 billion in the U.S., and this increase is due to changing consumer behaviors and demographics. Business opportunities are also increasing in countries like Asia, Latin America, and Europe because of strong economic growth and the demand of convenience foods. The main trend of the packaged food industry can be said to be convenience, and new forms and sizes of packaging are revolutionizing the way Americans eat and cook. In terms of global market concentration, Kellogg Co. products are manufactured in 18 countries and sold in over 180 countries. In comparison, Kraft Foods Inc. has operations in about 70 countries and markets their products in approximately 170 countries. Kellogg Co. vs. Kraft Foods Inc. Strategies Both Kellogg Co. and Kraft Foods Inc. manufacture and market packaged and convenience foods globally and have comparable yet contrasting strategies that gives them each unique competitive advantages. Kellogg Co. is widely known for its cereals, and they value this advantage by focusing on their cereal business with continued investments and research and development. This helps them with their brand building, and allows them to have the number one share position in the U.S. cereal market, as well as globally. The company’s second strategy is to expand itself even more in the snack market. Kellogg Co. currently holds the number one position in the wholesome snack business and number two in the cookie and cracker business from the U.S. perspective. Kraft Foods Inc has a similar strategy as far as brand building, but differentiates by concentrating more on its global snack customers, and being a highly performance and values centered company. Globally, the company focuses on convenience foods as because of time constraints leading the need for on-the-go options, while keeping the trend of a healthier lifestyle in mind. Lastly, Kraft Foods Inc. is also a values-led and performance-driven organization, and accomplishes this by focusing on the needs, demands, and concerns of their customers, and also other stakeholders such as their employees, partners, suppliers, and communities. Overall, both companies give importance to brand building; and contrast in that Kellogg Co. continues to innovate in its cereal business, while Kraft Foods Inc. is more globally focused and value-based, helping it achieve high performance efficiency worldwide. 4 Objectives The main objective for the financial analysis report is to show the performance comparison of two competitive companies, Kellog Co., and Kraft Foods Inc for possible future investment. The report includes and examines the two companies’ common size and comparative balance sheets and income statements, as will as various profitability and risk ratios. The three most recent years are reported, covering the periods of 2011, 2010, and 2009 precisely. Also, pro forma balance sheets and pro forma income statements for both companies are provided to give the three-year comparison and overview. Financial Analysis Common-Size Analysis Common-Size Income Statement Analysis In analyzing the common-size income statement of both Kellogg Co. and Kraft Foods Inc. the first element that we can compare is the Cost of Goods Sold. As we can see, the Cost of Goods Sold for Kellogg Co. is lower than Kraft with an average of 3 years being 57.73% and 64.23% respectively. This reflects that Kellogg Co. has controlled their costs more efficiently and effectively than Kraft Foods Inc. Therefore; we can see that the gross profit of Kellogg Co. dominates a bigger part of sales than Kraft Inc does. This gives Kellogg Co. the advantage doing promotion campaigns or investing their money on research and development activities. The other figures we can analyze are the general selling and administrative costs. In measuring this area, we find that the percentages of two companies are similar in that they both decrease. It means both companies have been actively trying to control and reduce their selling and administrative costs. However, Kraft did it better than Kellogg with an average of 3 years being 23.13% and 26.13% respectively. In terms of net income percentages, both companies are facing a downtrend. While Kellogg has a three-year average at 9.64%, Kraft only has 6.28%. It reflects that in this period, they have been both are experiencing the increases in costs. Obviously the global effects of the financial crisis from 2008 have influenced the overall financial figures of both companies. Common-Size Balance Sheet Analysis The common-size balance sheet of Kellogg Co. shows that the company’s percentage of current asset to total asset is increasing throughout the last 3 years. In contrast, Kraft’s current asset to total asset percentage has been decreasing. Also, the average through 3 years of Kellogg is higher than Kraft being 24.2% and 17.6% respectively. Further analysis reveals that the increase in current assets of Kellogg Co. can be coming from the increase in liabilities because of the increase in sales of Kellogg has only increased slightly and we confirmed this when we analyzed the company’s liabilities elements. 5 The percentage of current liabilities to total liabilities and stockholder’s equity of both companies has been increasing throughout the last three years. However, Kellogg’s has been increasing faster than Kraft’s and is also higher than Kraft’s, being that Kellogg’s three year average of 25.05% is more than Kraft’s 17.77%. This is due to the fact that most of the components of Kellogg’s current liabilities is larger than that of Kraft’s. Furthermore, it demonstrates that Kellogg Co. has more short-term liabilities that they have to pay as compared to Kraft Foods Inc. The common-size balance sheets also show that not only does Kellogg Co. have short-term debt but they also have higher long-term debt obligations being that Kellogg’s is 42.31% while Kraft’s is only 26.61%. So, we can see that Kellogg Co. will paying a larger overall interest expense both in short-term and long-run. In general, both Kellogg Co. and Kraft Foods Inc. are facing a decreasing ability to pay their short-term liabilities. This can be found in the gap between current asset and current liabilities, because both companies have been decreasing throughout the last three years and are negative in 2011. Inventories of two companies have not changed much throughout the last three years. Kellogg’s is around 8.85% while Kraft’s is lower being 5.77%. We can see that that two companies both want to keep the inventory low so they can cut their costs in delivery. They only produce and store just enough inventories to meet consumer demands as needed. This is a wise and reasonable strategy that limits risk as today’s current economy has been on a downward slope. Comparative Analysis Comparative Income Statement Analysis Analysis of the comparative income statements reflect that Kellogg’s revenue increased at a average rate of 1.04%, and this mostly occurred in 2011 because they experienced a negative growth in 2009 and 2010. In contrast, the revenue of Kraft’s increased at a remarkable rate of 11.05% because they experienced a very high growth rate in 2010 of 26.97%. Thus, as a result, the cost of goods sold of Kraft’s also increased very fast, nearly ten times when compared to Kellogg’s, preciously being 10.14% verses 1.45%. The net income of Kraft Foods Inc. also increased at a very high rate averaging 32.81%, it was negative in 2010, and however the reason did not come from sales but their amortization of intangibles. At the same time, Kellogg Co. was facing a continuous decreasing in net income, a negative average of 0.89% in 2011. In short, while Kraft is growing with a very high speed in terms of revenue, cost of goods sold, and with their net income, Kellogg Co. on the other hand is growing very slow having a net income with a downward trend. Comparative Balance Sheet Analysis Kraft’s account receivables are increasing very fast. Even though it experience a little decrease in 2011, the overall three-year average shows that it is five times to that of Kellogg’s with comparable averages being 11.19% to that of 2.69%. When comparing the both companies in the same time period, the revenues of Kraft’s have increased tremendously and at a faster rate then that of Kellogg’s. This increase of account receivables has helped Kraft’s total current asset have an average 6 that is more than double than that of Kellogg’s and the comparable numbers are 12.93% and 6.42%. In sum, all the figures are in favor of Kraft Foods Inc. because Kellogg Co. has to consider decreasing its liabilities. In analyzing Kellogg’s liabilities, we found that they are increasing both in the short-term and long-term, and overall has an average which is ten times higher than that of Kraft’s. Finally, if Kellogg’s continue to use their financial leverage with at this increasing speed, they will eventually face problems in the long run with major interest expenses. Financial Ratio Analysis Liquidity Current Ratio and Acid Test Ratio: The current ratio of both companies is quite steady and balanced with the average around 1, specifically Kraft’s is 1 and Kellogg’s is 0.98. This reveals that both companies have enough current assets that are easy to convert to pay for their current debts. The acid-test ratio figures confirms that both Kellogg’s and Kraft’s ability to pay for their current debts is equivalent being that Kraft’s is 0.55, while Kellogg’s is 0.54 respectively. Activity The receivables turnover ratio shows us that Kellogg Co. can collect their receivables better than Kraft Inc. with averages of 11.14 and 8.21, respectively. However, based on the numbers throughout the last three years, we find that Kraft has been trying to improve their numbers and it is reflected in their increasing ratio figures year after year. In general, the high inventory turnover implies for the strong sales, but in this case, Kellogg has a good ratio because they do not have extra inventory due to weak sales. In contrast of Kellogg Co., Kraft’s inventories are higher in number because they want to provide enough for their high consumer product demands. However, if we based this on asset figures, Kellogg Co. seems to manage their assets better than Kraft Foods Inc due to the having an average of 1.11, and Kraft’s is 0.50 respectively. Profitability The overall profit margin of Kellogg’s is better than that of Kraft’s averaging 9.7%, while Kraft’s is about 7.5%. The return on assets of Kellogg’s is also higher than that of Kraft’s with an average of 10.7%, and Kraft’s being just 4.5%. Thus, we can conclude that Kellogg Co. controls its costs and uses its assets better than Kraft Foods Inc. The earning per share of Kraft shows us a good trend of its packaged/convenience food business. It is continuously increasing throughout the last three years, while in contrast Kellogg’s has been decreasing the last three years. Coverage The time interest earned ratio can be used to analyze if a company can make its interest payments on their bond and other debt obligations. This analysis shows that Kellogg has an interest 7 earned ratio of 8.48 and Kraft has 3.35, reflecting that Kellogg’s is much more higher. That means that Kellogg Co. can pay their interest expenses better than Kraft Foods Inc can. However, it could also mean that Kellogg Co. is not using their debt efficiently in its business processes. Overall, we conclude that since Kellogg Co. has a higher return on their assets and less cost, this company might be doing slightly better in this area of financial analysis. Conclusions and Recommendation for Investment It is clear to see that both companies, Kellog Co. and Kraft Foods Inc. are profitable globally competitive companies within the packaged/convenience food industry. Both companies will continue to face competition from generic manufactures and increasing commodity costs. To continue to be successful competitors in the packaged/convenience food market both companies need to keep focus on innovation, and continuation of brand building, as consumers’ preferences and demands keep changing. The analysis concludes that while Kellogg has very good experiences in keeping low cost and low inventories and uses their assets to keep a high profit margin, Kraft have a very remarkable growth with all the two digit growth rates. With the very good price to book value that shows the uptrend of their stock, Kraft Foods Inc. is much more appealing as far as investment than Kellogg Co. overall. While Kraft Foods Inc. still faces risk in the long run with its increasing liabilities; it’s stock is still reflecting a steady increasing trend. Both companies have similar strategies in brand building, and are somewhat comparable in financial performance. The only concerns regarding Kraft Foods Inc. would be that it has a lower dividend than Kellogg Co., and the company might not be as liquid given its current liabilities. But, the obvious choice and recommendation for long-term investment would be Kraft Foods Inc., because it will give a higher yield profit to the stockholder, and investing in Kraft Foods Inc. would less risky given the company’s better three-year financial performance and sustained growth. 8 References "Convenience Food." Wikipedia. Wikimedia Foundation, 26 Apr. 2012. Web. 22 Mar. 2012. <http://en.wikipedia.org/wiki/Convenience_food>. "Friday Apr 27." Investopedia â“ The Web's Largest Investing Resource. Web. 2 Apr. 2012. <http://www.investopedia.com>. "Global Snack Foods Market to Reach $380 Billion by 2017, According to New Report by Global Industry Analysts, Inc." Press Release Distribution. Web. 22 Mar. 2012. <http://www.prweb.com/releases/snack_foods/salted_snacks/prweb9382719.htm> "K: Summary for Kellogg Company Common Stock- Yahoo! Finance." Yahoo! Finance. Web. 15 Mar. 2012. <http://finance.yahoo.com/q?s=k>. "Kellogg Co. Form 10-K." U.S. Securities and Exchange Commission (Home Page). Web. 17 Mar. 2012. <http://www.sec.gov/Archives/edgar/data/55067/000119312512085976/d279714d10k.htm>. "KFT: Summary for Kraft Foods Inc. Common Stock- Yahoo! Finance." Yahoo! Finance. Web. 15 Mar. 2012. <http://finance.yahoo.com/q?s=kft>. "Kraft Foods Inc. Form 10-K." U.S. Securities and Exchange Commission (Home Page). Web. 16 Mar. 2012. <http://www.sec.gov/Archives/edgar/data/1103982/000119312512080318/d277353d10k.htm>. "Kraft Foods." Wikipedia. Wikimedia Foundation, 12 Apr. 2012. Web. 27 Apr. 2012. <http://en.wikipedia.org/wiki/Kraft_Foods>. "Strategies." Kraft Foods. Web. 14 Apr. 2012. <http://www.kraftfoodscompany.com/about/strategies/index.aspx>. "Strategy." Kellogg Company. Web. 13 Apr. 2012. <http://investor.kelloggs.com/strategy.cfm>. 9 Appendices Table 1. Kellogg Co. Common Size Balance Sheet KELLOG CO. COMMON SIZE BALANCE SHEET Years 2009, 2010, and 2011 (In Percentages) 2011 2010 2009 3-Year Avg. ASSETS: Current Assets Cash and Cash Equivalents 3.87 3.75 2.98 3.53 Accounts Receivable, net A/R 9.98 10.04 9.76 9.93 Inventories 9.51 8.91 8.13 8.85 Other Current Assets 2.08 1.90 1.97 1.98 Total Current Assets 25.43 24.61 22.84 24.29 Property, net 27.57 26.40 26.88 26.95 Goodwill 30.44 30.62 32.53 31.20 Other Intangibles, net 12.22 12.29 13.02 12.51 Other Assets 4.34 6.08 4.74 5.05 100.00 100.00 100.00 100.00 Current Maturities of Long-Term Debt 6.39 8.04 0.01 4.81 Notes Payable 1.97 0.37 0.39 0.91 Account Payable 9.99 9.70 9.62 9.77 Other Current Liabilities 9.49 8.77 10.41 9.56 Total Current Liabilities 27.84 26.88 20.43 25.05 Long-Term Debt 42.32 41.43 43.17 42.31 Deferred Income Taxes 5.35 5.88 3.79 5.01 Pension Liability 4.71 2.24 3.84 3.59 Other Liabilities 4.97 5.39 8.46 6.27 TOTAL LIABILITIES 85.19 81.82 79.69 82.23 Common Stock, $.25 par value, 1,000,000,000 shares authorized Issued: 419,484,087 shares in 2011, 419,272,027 shares in 2010, and 419,058,168 shares in 2009 0.88 0.89 0.94 0.90 Capital in excess of par value 4.39 4.18 4.21 4.26 Retained Earnings 56.47 51.68 48.94 52.36 Treasure Stock at cost 37,678,215 shares in 2009 and 36,981,580 shares in 2008 (26.30) (22.37) (16.25) (21.64) Accumulated Other Comprehensive Income (loss) (20.65) (16.16) (17.55) (18.12) TOTAL STOCKHOLDER’S EQUITY 14.79 18.22 20.29 17.76 TOTAL ASSETS LIABILITIES AND STOCKHOLDER'S EQUITY: Current Liabilities Stockholders’ Equity 10 (In Percentages) 2011 2010 2009 3-Year Avg. Non-Controlling Interests 0.02 (0.03) 0.03 0.003 100.00 100.00 100.00 100.00 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Table 2. Kellogg Co. Common Size Statement of Income KELLOG CO. COMMON SIZE STATEMENT OF INCOME Years 2009, 2010, and 2011 (In Percentages) 2011 2010 2009 Net Sales 100 100 100 3 Year Avg. 100 COGS Selling, General and Administrative Expenses 58.72 26.31 57.34 26.61 57.13 26.96 57.73 26.63 Operating Profit 14.97 16.05 15.91 15.65 Interest Expense 1.77 2.00 2.35 2.04 Other income (expense), net (0.08) 0.00 (0.17) (0.09) Income before Income Taxes 13.12 14.05 13.39 13.52 Income Taxes 3.81 4.05 3.79 3.88 Net Income Net Loss Attributable to Non-Controlling Interests 9.31 (0.02) 10.00 (0.06) 9.61 (0.03) 9.64 (0.03) NET INCOME ATTRIBUTABLE TO KELLOGG CO. 9.33 10.06 9.64 9.67 11 Table 3. Kellogg Co. Comparative Balance Sheet KELLOG CO. COMPARATIVE BALANCE SHEET Years 2009, 2010 and 2011 (In Percentages) 2011 2010 2009 3-Year Avg. Cash and Cash Equivalents 3.60 Accounts Receivable, net (0.17) 32.93 30.98 22.51 8.87 (0.64) Inventories 2.69 7.20 16.04 1.45 8.23 Other Current Assets 9.78 1.81 (17.84) (2.09) Total Current Assets 3.84 13.96 1.47 6.42 Property, net 4.89 3.92 2.63 3.81 Goodwill (0.14) (0.41) 0.16 (0.13) Other Intangibles, net (0.14) (0.14) (0.21) (0.16) Other Assets (28.33) 35.59 34.77 14.01 0.46 5.78 2.32 2.85 Current Maturities of Long-Term Debt (20.06) 95,100.00 0.00 31,693.31 Notes Payable 431.82 0.00 (96.83) 111.66 Account Payable 3.48 6.69 (5.11) 1.69 Other Current Liabilities 8.66 (10.89) 13.31 3.69 Total Current Liabilities 4.05 39.16 (35.59) 2.54 ASSETS: Current Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDER'S EQUITY: Current Liabilities Long-Term Debt 2.63 1.51 18.85 7.66 Deferred Income Taxes (8.61) 64.00 41.67 32.35 Pension Liability 111.32 (38.37) (31.85) 13.70 Other Liabilities (7.36) (32.52) 0.74 (13.04) Total Liabilities 4.60 8.61 (5.96) 2.41 Common Stock, $.25 par value, 1,000,000,000 shares authorized Issued: 419,484,087 shares in 2011, 419,272,027 shares in 2010, and 419,058,168 shares in 2009 0.00 0.00 0.00 0.00 Capital in excess of par value 5.45 4.87 7.76 6.03 Retained Earnings 9.78 11.69 13.34 11.61 Treasure stock at cost 37,678,215 shares in 2009 and 36,981,580 shares in 2008 18.11 45.60 1.68 21.80 Accumulated Other Comprehensive Income (loss) 28.42 (2.64) (8.17) 5.87 Total Stockholders' Equity (18.44) (5.02) 56.91 11.15 Stockholders' Equity 12 (In Percentages) Non-Controlling Interests TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 2011 2010 2009 3-Year Avg. (150.00) (233.33) (57.14) (146.83) 0.46 5.78 2.32 2.85 Table 4. Kellogg Co. Comparative Statement of Income KELLOG CO. COMPARATIVE STATEMENT OF INCOME Years 2009, 2010, and 2011 (In Percentages) 2011 2010 2009 3 Year AVG. Net Sales 6.46 (1.42) (1.93) 1.04 COGS Selling, General and Administrative Expenses 9.03 5.24 (1.06) (2.68) (3.64) (0.70) 1.45 0.62 Operating Profit (0.70) (0.55) 2.46 0.40 Interest Expense (6.05) (15.93) (4.22) (8.73) Other Income (expense), net (100.00) 57.14 (21.43) (0.57) 3.44 3.25 2.04 Income Taxes 0.20 5.46 (1.86) 1.27 Net Income (0.89) 2.65 5.41 2.39 Net Loss Attributable to Non-Controlling Interests (71.43) 75.00 100.00 34.52 Net Income Attributable to Kellogg Co. (1.28) 2.89 5.57 2.39 Income before Income Taxes 13 Table 5. Kellogg Co. Financial Statement Ratios KELLOG CO. FINANCIAL STATEMENT RATIOS Years 2009, 2010, and 2011 2011 2010 2009 3 YEAR AVG. Current Ratio 0.91 0.92 1.12 0.98 Acid- Test Ratio 0.50 0.51 0.62 0.54 Receivable Turnover 11.10 10.86 11.47 11.14 Inventory Turnover 7.08 7.23 7.95 7.42 Asset Turnover 1.11 1.08 1.14 1.11 Profit Margin on Sales 9.3% 10.1% 9.6% 9.7% Rate of Return on Assets 10.4% 10.8% 10.9% 10.7% 1170.4% 1180.95% 1150.47% 1167.3% 3.39 3.31 3.16 3.29 49.1% 46.8% 45.0% 47.0% Debt to Total Assets Ratio 0.85 0.82 0.80 0.82 Times Interest Earned 8.48 8.02 6.78 7.76 Cash Debt Coverage Ratio 0.16 0.10 0.18 0.15 Book Value per share 4.85 5.72 5.93 5.50 I. Liquidity II. Activity III. Profitability Rate of Return on CS Equity Earning per share Payout Ratio IV. Coverage 14 Table 6. Kellogg Co. Pro Forma Balance Sheet KELLOG CO. PRO FORMA BALANCE SHEET Years 2009, 2010 (In Millions) 2011 2010 2009 ASSETS: Current Assets Cash and Cash Equivalents 460 444 334 Accounts Receivable, net 1,188 1,190 1,093 Inventories 1,132 1,056 910 Other Current Assets 247 225 221 Total Current Assets 3,027 2,915 2,558 Property, net 3,281 3,128 3,010 Goodwill 3,623 3,628 3,643 Other Intangibles, net 1,454 1,456 1,458 516 720 531 11,901 11,847 11,200 761 952 1 Other Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDER'S EQUITY: Current Liabilities Current Maturities of Long-Term Debt Notes Payable 234 44 44 Account Payable 1,189 1,149 1,077 Other Current Liabilities 1,129 1,039 1,166 Total Current Liabilities 3,313 3,184 2,288 Long-Term Debt 5,037 4,908 4,835 Deferred Income Taxes 637 697 425 Pension Liability 560 265 430 Other Liabilities 592 639 947 Total Liabilities 10,139 9,693 8,925 Common Stock, $.25 par value, 1,000,000,000 shares authorized Issued: 419,484,087 shares in 2011, 419,272,027 shares in 2010, and 419,058,168 shares in 2009 105 105 105 Capital in excess of par value 522 495 472 Retained Earnings 6,721 6,122 5,481 Treasure Stock at cost 37,678,215 shares in 2009 and 36,981,580 shares in 2008 (3,130) (2,650) (1,820) Stockholders' Equity 15 (In Millions) 2011 2010 2009 Accumulated Other Comprehensive Income (loss) (2,458) (1,914) (1,966) Total Stockholders' Equity 1,760 2,158 2,272 2 (4) 3 11,901 11,847 11,200 Non-Controlling Interests TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Table 7. Kellogg Co. Pro Forma Income Statement KELLOG CO. PRO FORMA INCOME STATEMENT Years 2009, 201 (In USD) 2011 2010 2009 Net Sales 13,198 12,397 12,575 COGS Selling, General and Administrative Expenses 7,750 3,472 7,108 3,299 7,184 3,390 Operating profit 1,976 1,990 2,001 233 248 295 1,742 1,684 Interest Expense Other Income (expense), net (11) Income before income taxes 1,732 (22) Income Taxes 503 502 476 Net Income 1,229 1,240 1,208 (2) (7) (4) 1,231 1,247 1,212 Net Loss Attributable to Non-Controlling Interests NET INCOME ATTRIBUTABLE TO KELLOGG CO. 16 Table 8. Kraft Inc. Common Size Balance Sheet KRAFT INC. COMMON SIZE BALANCE SHEET Years 2009, 2010, and 2011 (In Percentages) 2011 2010 2009 3-Year Avg ASSETS: Current Assets Cash and Cash Equivalents 2.10 2.60 3.15 2.62 Accounts Receivable, net 6.78 6.86 7.79 7.14 Inventories 6.08 5.57 5.66 5.77 Deferred Income Taxes 0.97 0.94 1.09 1.00 Other Current Assets 1.33 1.04 0.98 1.12 Total Current Assets 17.27 17.02 18.67 17.65 Property, Plan and Equipment, net 14.72 14.47 16.03 15.07 Goodwill 39.75 39.73 43.12 40.86 Other Intangibles, net 26.84 27.25 20.13 24.74 Prepaid Pension Assets 0.03 0.09 0.17 0.10 Other Assets 1.39 1.44 1.89 1.57 100.00 100.00 100.00 100.00 Short-Term Borrowings 0.19 0.79 0.68 0.55 Current Portion of Long-Term Debt 3.89 1.17 0.77 1.94 Account Payable 5.89 5.68 5.64 5.74 Accrued Marketing 3.05 2.64 3.27 2.99 Accrued Employment Costs 1.45 1.36 1.76 1.52 Other Current Liabilities 5.17 4.81 5.10 5.03 Total Current Liabilities 19.66 16.43 17.22 17.77 Long-Term Debt 24.61 28.19 27.02 26.61 Deferred Income Taxes 7.18 8.38 6.76 7.44 Accrued Pension Costs 3.83 2.50 2.65 2.99 Accrued Postretirement Health Care Costs 3.45 3.20 4.22 3.62 Other Liabilities 3.62 3.58 3.20 3.47 Total Liabilities 62.35 62.28 61.07 61.90 TOTAL ASSETS LIABILITIES AND STOCKHOLDER'S EQUITY: Current Liabilities Stockholders' Equity Common Stock, no par value, 1,996,537,788 shares issued in 2011 and 2010 0.00 0.00 0.00 0.00 Additional Paid-in Capital 33.37 32.78 35.39 33.85 17 (In Percentages) 2010 2009 Retained Earnings 2011 19.19 17.44 21.94 19.52 Accumulated Other Comprehensive Income (loss) (7.07) (4.08) (5.93) (5.69) Treasury Stock, at cost (7.97) (8.53) (12.62) (9.70) Total Stockholders' Equity 37.53 37.61 38.79 37.97 Non-Controlling Interests 0.12 0.11 0.14 0.13 100.00 100.00 100.00 100.00 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 3-Year Avg Table 9. Kraft Inc. Common Size Statement of Income KRAFT INC. COMMON SIZE STATEMENT OF INCOME Years 2009, 2010, and 2011 (In Percentages) 2011 2010 2009 3 Year Avg. Net Sales 100.00 100.00 100.00 100.00 COGS 65.02 63.62 64.04 64.23 Gross Profit 34.98 36.38 35.96 35.77 Selling General and Administrative Expenses 22.33 24.39 22.67 23.13 Asset Impairment and Exit Costs (0.01) 0.04 (0.17) (0.05) Losses on Divestitures, net 0.00 0.01 0.02 0.01 Amortization of Intangibles 0.41 0.43 0.07 0.30 Operating Income 12.25 11.51 13.37 12.38 Interest and Other Expense, net Earnings from Continuing Operations before Income Taxes 3.47 8.78 4.11 7.40 3.19 10.18 3.59 8.79 Provision for income taxes 2.25 2.33 2.93 2.51 Earning form Continuing Operations 6.52 5.07 7.25 6.28 Earnings and Gain from Discontinued Operations, net of income taxes 0.00 3.34 0.56 1.30 Net Earnings 6.52 8.41 7.81 7.58 Non-Controlling Interest 0.04 0.05 0.02 0.04 NET EARNINGS ATTRIBUTABLE TO KRAFT FOODS 6.49 8.36 7.80 7.55 18 Table 10. Kraft Inc. Comparative Balance Sheet KRAFT INC. COMPARATIVE BALANCE SHEET Years 2009, 2010, and 2011 (In Percentages) 2011 2010 2009 3 Year Avg. Cash and Cash Equivalents (20.44) 18.09 68.89 22.18 Accounts Receivable, net (2.72) 25.82 10.48 11.19 Inventories 7.46 40.66 (2.73) 15.13 Deferred Income Taxes 1.56 23.01 (9.20) 5.12 Other Current Assets 25.78 52.53 (21.38) 18.98 Total Current Assets (0.12) 30.25 8.66 12.93 Property, Plan and Equipment, net 0.15 28.98 7.82 12.32 Goodwill (1.48) 31.61 4.29 11.47 Other Intangibles, net (2.99) 93.34 3.89 31.41 Prepaid Pension Assets (63.95) (25.22) 105.36 5.40 Other Assets (4.60) 8.90 2.19 2.16 TOTAL ASSETS (1.52) 42.83 5.61 15.64 ASSETS: Current Assets LIABILITIES AND STOCKHOLDER'S EQUITY: Current Liabilities Short-Term Borrowings (75.73) 65.56 (49.50) (19.89) Current Portion of Long-Term Debt 227.71 117.35 (32.94) 104.04 Account Payable 2.14 43.63 11.65 19.14 Accrued Marketing 13.84 15.31 20.97 16.71 Accrued Employment Costs 5.65 9.96 23.55 13.05 Other Current Liabilities 6.05 34.56 4.55 15.05 Total Current Liabilities 17.78 36.28 4.05 19.37 Long-Term Debt (14.01) 49.02 (3.04) 10.65 Deferred Income Taxes (15.61) 77.11 10.93 24.14 Accrued Pension Costs 51.01 34.96 (25.43) 20.18 Accrued Postretirement Health Care Costs 6.30 8.17 5.15 6.54 Other Liabilities (0.59) 59.78 3.04 20.74 Total Liabilities (1.41) 45.67 (0.18) 14.69 Stockholders' Equity 19 (In Percentages) 2011 2010 2009 3 Year Avg. 0.28 32.27 0.20 10.92 10.28 Common Stock, no par value, 1,996,537,788 shares issued in 2011 and 2010 Additional Paid-in Capital Retained Earnings 8.38 13.55 8.90 Accumulated Other Comprehensive Income (loss) 70.62 (1.64) (34.02) 11.65 Treasury Stock, at cost (8.00) (3.45) (3.42) (4.95) Total Stockholders' Equity (1.72) 38.48 16.06 17.61 Non-Controlling Interests 2.78 12.50 57.38 24.22 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (1.52) 42.83 5.61 15.64 Table 11. Kraft Inc. Comparative Statement of Income KRAFT INC. COMPARATIVE STATEMENT OF INCOME Years 2009, 2010, and 2011 (In Millions USD) 2011 2010 2009 3 Year Avg. Net Sales 10.48 26.97 (4.29) 11.05 COGS 12.92 26.13 (8.63) 10.14 Gross Profit 6.22 1.16 28.47 36.62 4.55 1.99 13.08 13.26 Asset Impairment and Exit Costs (138.89) (128.13) (106.25) (124.42) Losses on Divestitures, net (100.00) 0.00 (93.48) (64.49) Amortization of Intangibles 6.64 711.54 13.04 243.74 Operating Income Earnings from Continuing Operations before Income Taxes 17.49 (6.87) 31.03 9.32 63.62 (7.70) 44.94 (0.24) 68.92 23.92 18.84 30.75 Provision for Income Taxes 6.80 0.97 72.64 26.80 42.16 (100.00) (11.21) 654.13 67.46 (82.06) 32.81 157.36 Non-Controlling Interest (14.30) (20.00) 36.69 257.14 4.67 (22.22) 9.02 71.64 NET EARNINGS ATTRIBUTABLE TO KRAFT INC. (14.27) 36.18 26.89 16.27 Selling General and Administrative Expenses Interest and Other Expense, net Earning From Continuing Operations Earnings and Gain from Discontinued Operations, net of income taxes Net Earnings 20 Table 12. Kraft Inc. Financial Statement Ratios KRAFT INC. FINANCIAL STATEMENT OF RATIOS Years 2009, 2010, and 2011 2011 2010 2009 3 Years Avg. Current Ratio 0.88 1.04 1.08 1.00 Acid-Test Ratio 0.45 0.58 0.64 0.55 Receivable Turnover 8.43 8.39 7.83 8.21 Inventory Turnover 6.42 6.89 6.48 6.60 Asset Turnover 0.57 0.61 0.60 0.59 Profit Margin on Sales 6.5% 8.4% 7.8% 7.5% Rate of Return on Assets 3.7% 5.1% 4.7% 4.5% _ _ _ _ I. Liquidity II. Activity III. Profitability Rate of Return on CS Equity Earning per share 1.99 2.35 2.04 2.13 57.9% 52.9% 56.7% 55.8% Debt to Total Assets Ratio 0.624 0.623 0.611 0.619 Times Interest Earned 3.53 2.80 4.19 3.51 Cash Debt Coverage Ratio 0.077 0.063 0.125 0.088 Book Value per share 2404% 20.50 17.51 20.68 Payout Ratio IV. Coverage 21 Table 13. Kraft Inc. Pro Forma Balance Sheet KRAFT INC. PRO FORMA BALANCE SHEET Years 2009, 2010, and 2011 (In Millions) 2011 2010 2009 Cash and Cash Equivalents 1,974 2,481 2,101 Accounts Receivable, net 6,361 6,539 5,197 Inventories 5,706 5,310 3,775 Deferred Income Taxes 912 898 730 Other Current Assets 1,249 993 651 Total Current Assets 16,202 16,221 12,454 Property, Plan and Equipment, net 13,813 13,792 10,693 Goodwill 37,297 37,856 28,764 Other Intangibles, net 25,186 25,963 13,429 ASSETS: Current Assets Prepaid Pension Assets 31 86 115 Other Assets 1,308 1,371 1,259 TOTAL ASSETS 93,837 95,289 66,714 LIABILITIES AND STOCKHOLDER'S EQUITY: Current Liabilities Short-Term Borrowings 182 750 453 Current Portion of Long-Term Debt 3,654 1,115 513 Account Payable 5,525 5,409 3,766 Accrued Marketing 2,863 2,515 2,181 Accrued Employment Costs 1,365 1,292 1,175 Other Current Liabilities 4,856 4,579 3,403 Total Current Liabilities 18,445 15,660 11,491 Long-Term Debt 23,095 26,859 18,024 Deferred Income Taxes 6,738 7,984 4,508 Accrued Pension Costs 3,597 2,382 1,765 Accrued Postretirement Health Care Costs 3,238 3,046 2,816 Other Liabilities 3,396 3,416 2,138 22 (In Millions) 2011 2010 2009 Total Liabilities 58,509 59,347 40,742 Stockholders' Equity Common Stock, no par value, 1,996,537,788 shares issued in 2011 and 2010 - - - Additional Paid-in Capital 31,318 31,231 23,611 Retained Earnings 18,012 16,619 14,636 Accumulated Other Comprehensive Income (loss) (6637) (3890) (3955) Treasury Stock, at cost (7476) (8126) (8416) Total Stockholders' Equity 35,217 35,834 25,876 Non-Controlling Interests 111 108 96 93,837 95,289 66,714 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Table 14. Kraft Inc. Pro Forma Statement of Income KRAFT INC. PRO FORMA STATEMENT OF INCOME Years 2009, 2010, and 2011 Net Sales 54,365 49,207 38,754 COGS 35,350 31,305 24,819 Gross Profit 19,015 17,902 13,935 Selling General and Administrative Expenses 12,140 12,001 8,784 (7) 18 (64) 6 6 Asset Impairment and Exit Costs Losses on Divestitures, net Amortization of Intangibles 225 211 26 Operating Income 6,657 5,666 5,183 Interest and Other Expense, net 1,885 2,024 1,237 Earnings from Continuing Operations before Income Taxes 4,772 1,225 3,642 1,147 3,946 1,136 Earnings and Gain from Discontinued Operations, net of income taxes 3,547 0 2,495 1,644 2,810 218 Net Earnings 3,547 4,139 3,028 20 25 7 3,527 4,114 3,021 Provision for Income Taxes Earning form Continuing Operations Non-Controlling Interest NET EARNINGS ATTRIBUTABLE TO KRAFT INC. 23
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