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Transcript of Sample Project 2(1)
FINANCIAL STATEMENT ANALYSIS AND COMPARISON:
KELLOG CO.
Vs.
KRAFT FOODS INC.
Student 1
Student 2
Student 3
ACCT 3332 (23333)
Spring 2012
Dr. Chiang
2
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 well-known 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.
3
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
4
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.
5
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.
6
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 that is more than
double than that of Kellogg’s and the comparable numbers are 12.93% and 6.42%.
7
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
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
8
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.
9
References
"Convenience Food." Wikipedia. Wikimedia Foundation, 26 Apr. 2012. Web. 22 Mar. 2012.
<http://en.wikipedia.org/wiki/Convenience_food>.
"Friday Apr 27." Investopedia � 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>.
10
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
TOTAL ASSETS 100.00 100.00 100.00 100.00
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current Liabilities
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
Stockholders’ Equity
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
Non-Controlling Interests 0.02 (0.03) 0.03 0.003
11
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 100.00 100.00 100.00 100.00
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 3 Year Avg.
Net Sales 100 100 100 100
COGS 58.72 57.34 57.13 57.73
Selling, General and Administrative Expenses 26.31 26.61 26.96 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 9.31 10.00 9.61 9.64
Net Loss Attributable to Non-Controlling Interests (0.02) (0.06) (0.03) (0.03)
NET INCOME ATTRIBUTABLE TO KELLOGG CO. 9.33 10.06 9.64 9.67
12
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.
ASSETS:
Current Assets
Cash and Cash Equivalents 3.60 32.93 30.98 22.51
Accounts Receivable, net (0.17) 8.87 (0.64) 2.69
Inventories 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
TOTAL ASSETS 0.46 5.78 2.32 2.85
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current Liabilities
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
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
Stockholders' Equity
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
Non-Controlling Interests (150.00) (233.33) (57.14) (146.83)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 0.46 5.78 2.32 2.85
13
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 9.03 (1.06) (3.64) 1.45
Selling, General and Administrative Expenses 5.24 (2.68) (0.70) 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)
Income before Income Taxes (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
14
Table 5. Kellogg Co. Financial Statement Ratios
KELLOG CO.
FINANCIAL STATEMENT RATIOS
Years 2009, 2010, and 2011
2011 2010 2009 3 YEAR AVG.
I. Liquidity
Current Ratio 0.91 0.92 1.12 0.98
Acid- Test Ratio 0.50 0.51 0.62 0.54
II. Activity
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
III. Profitability
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%
Rate of Return on CS Equity 1170.4% 1180.95% 1150.47% 1167.3%
Earning per share 3.39 3.31 3.16 3.29
Payout Ratio 49.1% 46.8% 45.0% 47.0%
IV. Coverage
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
15
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
Other Assets 516 720 531
TOTAL ASSETS 11,901 11,847 11,200
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current Liabilities
Current Maturities of Long-Term Debt 761 952 1
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
Stockholders' Equity
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)
Accumulated Other Comprehensive Income (loss) (2,458) (1,914) (1,966)
Total Stockholders' Equity 1,760 2,158 2,272
Non-Controlling Interests 2 (4) 3
16
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 11,901 11,847 11,200
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 7,750 7,108 7,184
Selling, General and Administrative Expenses 3,472 3,299 3,390
Operating profit 1,976 1,990 2,001
Interest Expense 233 248 295
Other Income (expense), net (11) (22)
Income before income taxes 1,732 1,742 1,684
Income Taxes 503 502 476
Net Income 1,229 1,240 1,208
Net Loss Attributable to Non-Controlling Interests (2) (7) (4)
NET INCOME ATTRIBUTABLE TO KELLOGG CO. 1,231 1,247 1,212
17
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
TOTAL ASSETS 100.00 100.00 100.00 100.00
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current Liabilities
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
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
Retained Earnings 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
18
Non-Controlling Interests 0.12 0.11 0.14 0.13
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 100.00 100.00 100.00 100.00
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 3.47 4.11 3.19 3.59
Earnings from Continuing Operations before Income Taxes 8.78 7.40 10.18 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
19
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.
ASSETS:
Current Assets
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
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
Common Stock, no par value,
1,996,537,788 shares issued in 2011 and 2010
Additional Paid-in Capital 0.28 32.27 0.20 10.92
Retained Earnings 8.38 13.55 8.90 10.28
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)
20
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 28.47 4.55 13.08
Selling General and Administrative Expenses 1.16 36.62 1.99 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 17.49 9.32 44.94 23.92
Interest and Other Expense, net (6.87) 63.62 (0.24) 18.84
Earnings from Continuing Operations before Income Taxes 31.03 (7.70) 68.92 30.75
Provision for Income Taxes 6.80 0.97 72.64 26.80
Earning From Continuing Operations 42.16 (11.21) 67.46 32.81
Earnings and Gain from Discontinued Operations, net of income taxes (100.00) 654.13 (82.06) 157.36
Net Earnings (14.30) 36.69 4.67 9.02
Non-Controlling Interest (20.00) 257.14 (22.22) 71.64
NET EARNINGS ATTRIBUTABLE TO KRAFT INC. (14.27) 36.18 26.89 16.27
21
Table 12. Kraft Inc. Financial Statement Ratios
KRAFT INC.
FINANCIAL STATEMENT OF RATIOS
Years 2009, 2010, and 2011
2011 2010 2009 3 Years Avg.
I. Liquidity
Current Ratio 0.88 1.04 1.08 1.00
Acid-Test Ratio 0.45 0.58 0.64 0.55
II. Activity
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
III. Profitability
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%
Rate of Return on CS Equity _ _ _ _
Earning per share 1.99 2.35 2.04 2.13
Payout Ratio 57.9% 52.9% 56.7% 55.8%
IV. Coverage
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
22
Table 13. Kraft Inc. Pro Forma Balance Sheet
KRAFT INC.
PRO FORMA BALANCE SHEET
Years 2009, 2010, and 2011
(In Millions) 2011 2010 2009
ASSETS:
Current Assets
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
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
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)
23
Treasury Stock, at cost (7476) (8126) (8416)
Total Stockholders' Equity 35,217 35,834 25,876
Non-Controlling Interests 111 108 96
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 93,837 95,289 66,714
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
Asset Impairment and Exit Costs (7) 18 (64)
Losses on Divestitures, net 6 6
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 3,642 3,946
Provision for Income Taxes 1,225 1,147 1,136
Earning form Continuing Operations 3,547 2,495 2,810
Earnings and Gain from Discontinued Operations, net of income taxes 0 1,644 218
Net Earnings 3,547 4,139 3,028
Non-Controlling Interest 20 25 7
NET EARNINGS ATTRIBUTABLE TO KRAFT INC. 3,527 4,114 3,021