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

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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%.

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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.

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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>.

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

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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

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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


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)


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


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


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


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)


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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

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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


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



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


Accounts Receivable, net 6.78 6.86 7.79 7.14

Inventories 6.08 5.57 5.66 5.77


Other Current Assets 1.33 1.04 0.98 1.12


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


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



Long-Term Debt 24.61 28.19 27.02 26.61


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


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


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


Table 9. Kraft Inc. Common Size Statement of Income

KRAFT INC.

COMMON SIZE STATEMENT OF INCOME

Years 2009, 2010, and 2011


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


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


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



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



1,996,537,788 shares issued in 2011 and 2010

Additional Paid-in Capital 0.28 32.27 0.20 10.92


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


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



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

Sample Project 2(1)

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