McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Statement Analysis K R Subramanyam John J Wild

Case-2 CC CHAPTER Applying Financial Statement Analysis

Case-3 Steps in Analyzing Financial Statements Explicitly define the analysis objectives Formulate specific questions and criteria consistent with the analysis objectives Identify the most effective and efficient tools of analysis Interpret the evidence

Case-4 Building Blocks of Financial Statement Analysis Six areas of inquiry—with varying degrees of importance: 1.Short-term liquidity. 2.Capital structure and solvency. 3.Return on invested capital. 4.Asset turnover. 5.Operating performance and profitability. 6.Forecasting and valuation. Applying the building blocks to financial statement analysis involves determining: Objectives of the analysis. Relative emphasis among the building blocks.

Case-5 Reporting on Financial Statement Analysis A good analysis report typically contains at least six sections devoted to: –Executive summary. Brief summary focused on important analysis results; it launches the analysis report. –Analysis overview. Background material on the company, its industry, and its economic environment. –Evidential matter. Financial statements and information used in the analysis. Assumptions. Identification of important assumptions regarding a company’s industry and business environment, and other important assumptions for estimates and forecasts, including its business strategy. –Crucial factors. Listing of important favorable and unfavorable factors, both quantitative and qualitative. –Inferences. Includes forecasts, estimates, interpretations, and conclusions drawing on all prior sections of the report.

Case-6 Specialization in Financial Statement Analysis Analysis usually viewed from the perspective of a “typical” company Recognizing the existence of several distinct factors –Special industry conditions –Government regulations –Social concerns –Political visibility –Understanding accounting peculiarities

Case-7 Case: Campbell Soup Co. Preliminary Financial Analysis

Case-8 Comparative Financial Statements Exhibit CC.2 CAMPBELL SOUP COMPANY Income Statements (millions) Year 11Year 10Year 9Year 8Year 7Year 6 Net sales$6,204.1$6,205.8$5,672.1$4,868.9$4,490.4$4,286.8 Costs and expenses: Cost of products sold$4,095.5$4,258.2$4,001.6$3,392.8$3,180.5$3,082.7 Marketing and selling expenses Administrative expenses Research and development expenses Interest expense Interest income(26.0)(17.6)(38.3)(33.2)(29.5)(27.4) Foreign exchange losses, net Other expense (income) (3.2)(9.5)5.5 Divestitures, restructuring, & unusual charges Total costs and expenses$5,531.9$6,034.2$5,570.7$4,480.3$4,082.9$3,900.0 Earnings before equity in affil. & M.I.$672.2$171.6$101.4$388.6$407.5$386.8 Equity in earnings of affiliates Minority interests(7.2)(5.7)(5.3)(6.3)(4.7)(3.9) Earnings before taxes$667.4$179.4$106.5$388.6$417.9$387.2 Taxes on earnings Earnings before cumulative effect$401.5$4.4$13.1$241.6$247.3$223.2 Cumulative effect of change for taxes Net earnings$401.5$4.4$13.1$274.1$247.3$223.2 Earnings per share$3.16$0.03$0.10$2.12*$1.90$1.72 Weighted-average shares outstanding $129.30$ Case: Campbell Soup Co.

Case-9 Comparative Financial Statements Case: Campbell Soup Co. Exhibit CC.3 CAMPBELL SOUP COMPANY Balance Sheets Year11Year 10Year 9Year 8Year 7Year 6 Assets Current assets: Cash and cash equivalents$178.90$80.70$120.90$85.80$145.00$ Other temporary investments Accounts receivable Inventories Prepaid expenses Total current assets$1,518.50$1,665.50$1,601.50$1,362.90$1,437.90$1, Plant assets, net of depreciation$1,790.40$1,717.70$1,540.60$1,508.90$1,349.00$1, Intangible assets, net of amortization — — Other assets Total assets$4,149.00$4,115.60$3,932.10$3,609.60$3,097.40$2, Liabilities and Shareowners’ Equity Current liabilities: Notes payable$282.20$202.30$271.50$138.00$93.50$88.90 Payable to suppliers and others Accrued liabilities Dividend payable — — — Accrued income taxes Total current liabilities$1,278.00$1,298.10$1,232.10$863.30$693.80$ Long-term debt$772.60$805.80$629.20$525.80$380.20$ Other liabilities, mainly deferred tax Shareowner’s equity: Preferred stock; authorized 40,000,000 sh.; none issued— — — — — — Capital stock, $0.15 par value; authorized 140,000,000 sh.; issued 135,622,676 sh Capital surplus Earnings retained in the business1, , , , , , Capital stock in treasury, at cost(270.40)(107.20)(70.70)(75.20)(46.80)(48.40) Cumulative translation adjustments (25.10) Total shareowner’s equity$1,793.40$1,691.80$1,778.30$1,895.00$1,736.10$1, Total liabilities and shareowners’ equity$4,149.00$4,115.60$3,932.10$3,609.60$3,097.40$2,762.80

Case-10 Comparative Financial Statements Case: Campbell Soup Co. Exhibit CC.4 CAMPBELL SOUP COMPANY Statements of Cash Flows For Years 6 to 11 ($ millions) Year 11Year 10Year 9Year 8Year 7Year 6Total Cash flows from operating activities: Net earnings$401.5$4.4$13.1$274.1$247.3$223.2$1,163.6 To reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ,044.1 Divestitures and restructuring provisions— — —699.7 Deferred taxes (67.8) Other, net Cumulative effect of accounting change— — — (32.5)— —(32.5) (Increase) decrease in accounts receivable17.1(60.4)(46.8)(104.3)(36.3)(3.6)(234.3) (Increase) decrease in inventories (113.2)54.2(3.9) Net change in other current assets and liabilities30.6(68.8)(0.6) Net cash provided by operating activities$805.2$448.4$357.3$466.6$468.3$463.8$3,009.6 Cash flows from investing activities: Purchases of plant assets$(361.1)$(387.6)$(284.1)$(245.3)$(303.7)$(235.3)$(1,817.1) Sale of plant assets — Businesses acquired(180.1)(41.6)(135.8)(471.9)(7.3)(20.0)(856.7) Sale of businesses — Increase in other assets(57.8)(18.6)(107.0)(40.3)(50.1)(18.0)(291.8) Net change in other temporary investments (60.7)(144.1)66.8 Net cash used in investing activities$(478.7)$(387.5)$(473.2)$(462.2)$(401.0)$(387.6) $(2,590.2) Cash flows from financing activities: Long-term borrowings$402.8$12.6$126.5$103.0$4.8$203.9$853.6 Repayments of long-term borrowings(129.9)(22.5)(53.6)(22.9)(23.9)(164.7)(417.5) Increase (decrease) in short-term borrowings*(137.9)(2.7) (20.7)4.6(40.1) Other short-term borrowings Repayments of other short-term borrowings(206.4)(89.8)(192.3)(87.6)(66.3)(88.5)(730.9) Dividends paid(137.5)(124.3)(86.7)(104.6)(91.7)(104.6)(649.4) Treasury stock purchases(175.6)(41.1)(8.1)(29.3)— — (254.1) Treasury stock issued †85.1 Other, net(0.1)(0.1) Net cash provided (used in) financing activities$(219.6)$(101.8)$163.1$(52.8)$(88.3)$(54.5)$(353.9) Effect of exchange rate change on cash$(8.7)$0.7$(12.1)$(10.8)$(7.1)$(3.7)$(41.7) Net increase (decrease) in cash and cash equivalents98.2(40.2)35.1(59.2)(28.1) Cash and cash equivalents at the beginning of year Cash and cash equivalents at end of year$178.9$80.7$120.9$85.8$145.0$173.1$178.9

Case-11 Case: Campbell Soup Co. - Comparative Financial Statements

Case-12 Case: Campbell Soup Co. - Further Analysis

Case-13 Case: Campbell Soup Co. -- Further Analysis Exhibit CC.6 CAMPBELL SOUP COMPANY Common-Size Income Statements Year 11Year 10Year 9Year 8Year 7Year 6 Net sales %100.00%100.00%100.00%100.00%100.00% Costs and expenses: Cost of products sold 66.01%68.62%70.55%69.68%70.83%71.91% Marketing and selling expenses Administrative expenses Research and development expenses Interest expense Interest income (0.42)(0.28)(0.68)(0.68)(0.66)(0.64) Foreign exchange losses, net Other expense (income) (0.07)(0.21)0.13 Divestitures, restructuring & unusual charges — — — Total costs and expenses 89.17%97.23%98.21%92.02%90.93%90.98% Earnings before equity in earnings of affiliates and minority interests 10.83%2.77%1.79%7.98%9.07%9.02% Equity in earnings of affiliates Minority interests(0.12)(0.09)(0.09)(0.13)(0.10)(0.09) Earnings before taxes10.76%2.89%1.88%7.98%9.31%9.03% Taxes on earnings Earnings before cumulative effect of accounting change6.47%0.07%0.23%4.96%5.51%5.21% Cumulative effect of change in accounting for income taxes — — — 0.67 — — Net earnings6.47%0.07%0.23%5.63%5.51%5.21%

Case-14 Case: Campbell Soup Co. -- Further Analysis Exhibit CC.7 CAMPBELL SOUP COMPANY Common-Size Balance Sheets Year 11Year 10Year 9Year 8Year 7Year 6Industry Composite Year 11 Current assets: Cash and cash equivalents4.31%1.96%3.07%2.38%4.69%5.61%3.4% Other temporary investments Accounts receivable Inventories Prepaid expenses Total current assets36.60%40.47%40.73%37.76%46.43%48.31%60.70% Plant assets, net of depreciation43.15%41.74%39.18%41.80%43.55%42.28%21.0% Intangible assets, net of amortization — — Other assets Total assets100.00%100.00%100.00%100.00%100.00%100.00%100.00% Current liabilities: Notes payable6.80%4.92%6.90%3.82%3.02%3.22%6.7% Payable to suppliers and others Accrued liabilities Dividend payable — — — Accrued income taxes Total current liabilities30.80%31.54%31.33%23.92%22.40%22.66%32.70% Long-term debt18.62%19.58%16.00%14.57%12.27%13.11%19.7% Other liabilities, mainly deferred taxes Shareowner’s equity: Preferred stock; auth 40,000,000 sh.; none issued — — — — — — Capital stock, $0.15 par value; authorized 140,000,000 sh.; issued 135,622,676 sh Capital surplus Earnings retained in the business Capital stock in treasury, at cost Cumulative translation adjustments Total shareowner’s equity43.22%41.11%45.23%52.50%56.05%55.70%46.10% Total liabilities and equity100.00%100.00%100.00%100.00%100.00%100.00%100.00%

Case-15 Case: Campbell Soup Co. -- Further Analysis Exhibit CC.8 CAMPBELL SOUP COMPANY Trend Index of Selected Accounts (Year 6 = 100) Year 11Year 10Year 9Year 8Year 7Year 6 Cash and cash equivalents115%52%78%55%93%$155.1 Accounts receivable Temporary investments Inventory Total current assets ,334.8 Total current liabilities Working capital Plant assets, net ,168.1 Other assets Long-term debt Total liabilities ,223.9 Shareowners’ equity ,538.9 Net sales ,268.8 Cost of products sold ,082.7 Admin. and research expenses Marketing and sales expenses Interest expense Total costs and expenses ,900.0 Earnings before taxes Net income1802*6*

Case-16 Case: Campbell Soup Co. -- Further Analysis Exhibit CC.9 CAMPBELL SOUP COMPANY Per Share Results Year 11Year 10Year 9Year 8Year 7Year 6 Sales$48.85$47.88$43.87$37.63$34.57$33.10 Net income Dividends Book value Average shares outstanding (mil)

Case-17 Case: Campbell Soup Co. -- Further Analysis Exhibit CC.10 CAMPBELL SOUP COMPANY Common-Size Statements of Cash Flows* Year 11Year 10Year 9Year 8Year 7Year 6Total Cash flows from operating activities: Net earnings26.89%0.54%1.15%25.14%38.42%27.88%21.54% To reconcile net earnings to net cash provided by operating activities: Depreciation and amortization Divestitures and restructuring provisions — — — Deferred taxes (5.93) Other, net Cumulative effect of accounting change — — — (2.98) — — (0.60) (Increase) decrease in accounts receivable 1.15(7.39)(4.09)(9.57)(5.64)(0.45)(4.34) (Increase) decrease in inventories (9.90)4.97(0.61) Net change in other current assets & liabilities 2.05 (8.42) (0.05) Net cash provided by operating activities 53.92%54.86% 31.25%42.80% 72.76%57.94% 55.72% Cash flows from investing activities: Purchase of plant assets(24.18)% (47.42)%(24.85)%(22.50)%(47.19)%(29.39)%(33.64)% Sale of plant assets — Businesses acquired(12.06)(5.09)(11.88)(43.28)(1.13)(2.50)(15.86) Sale of businesses — 2.56 Increase in other assets(3.87)(2.28)(9.36)(3.70)(7.78)(2.25)(5.40) Net change in other temporary investments (9.43)(18.00) 1.24 Net cash used in investing activities (32.06)% (47.41)% (41.39)% (42.39)% (62.31)% (48.42)% (47.95)% Cash flows from financing activities: Long-term borrowings26.97%1.54%11.07%9.45%0.75%25.47%15.80% Repayments of long-term borrowings(8.70)(2.75)(4.69)(2.10)(3.71)(20.57)(7.73) Increase (decrease) in short-term borrowings(9.23)(0.33) (3.22)0.57(0.74) Other short-term borrowings Repayments of other short-term borrowings(13.82)(10.99)(16.82)(8.03)(10.30)(11.06)(13.53) Dividends paid(9.21)(15.21)(7.58)(9.59)(14.25)(13.07)(12.02) Treasury stock purchases(11.76)(5.03)(0.71)(2.69) — — (4.70) Treasury stock issued Other, net (0.01) (0.01) Net cash provided (used in) financing activities (14.71)% (12.46)% 14.27% (4.84)% (13.72)% (6.81)% (6.55)% Effect of exchange rate change on cash (0.58)% 0.09% (1.06)% (0.99)% (1.10)% (0.46)% (0.77)% Net increase (decrease) in cash & equivalents6.58(4.92)3.07(5.43)(4.37)

Case-18 Case: Campbell Soup Co. Chart of summary cash inflows and cash outflows: Cash Flow Analysis and Forecasting

Case-19 Case: Campbell Soup Co. – Cash Flow Analysis and Forecasting Exhibit CC.11 CAMPBELL SOUP COMPANY Analysis of Cash Flow Ratios ($ millions) (1) (2) *All amounts are from the statement of cash flows. † Numerator amounts are form the statement of cash flows and denominator amounts are from the balance sheet

Case-20 Case: Campbell Soup Co. – Short-term Liquidity Analysis Exhibit CC.12 CAMPBELL SOUP COMPANY Short-Term Liquidity Analysis UnitsMeasure Year 11Year 10Year 9Year 8Year 7Year 6Year 11 Industry Composite 1. RatioCurrent ratio RatioAcid-test ratio TimesAccounts receivable turnover TimesInventory turnover DaysDays’ sales in receivables DaysDays’ sales in inventory DaysApproximate conversion period PercentCash to current assets11.78%4.84% 7.55%6.30%10.14%11.62%5.60% 9. PercentCash to current liabilities14.00%6.22% 9.81%9.94%20.90%24.77%10.40% 10. DaysLiquidity index M$’sWorking capital DaysDays’ purchases in accounts payable DaysAverage net trade cycle PercentCFO to average current liabilities 62.51%35.44%34.10%60.22%71.36%77.34%

Case-21 Case: Campbell Soup Co. – Short-term Liquidity Analysis Exhibit CC.13 CAMPBELL SOUP COMPANY Common-Size Analysis of Current Assets and Current Liabilities Year 11Year 10Year 9Year 8Year 7Year 6Year 11 Industry Composite Current assets: Cash and cash equivalents11.78%4.85%7.55%6.30%10.09%11.62%5.60% Other temporary investments — Accounts receivable Inventories Prepaid expenses Total current assets100.00%100.00%100.00%100.00%100.00%100.00%100.00% Current liabilities: Notes payable22.08%15.58%22.04%15.99%13.48%14.20%20.49% Payable to suppliers and others Accrued liabilities Dividend payable — — — =48.32 Accrued income taxes Total current liabilities100.00%100.00%100.00%100.00%100.00%100.00%100.00%

Case-22 Case: Campbell Soup Co. – Inventory Data

Case-23 Case: Campbell Soup Co. – Inventory Data Exhibit CC.15 CAMPBELL SOUP COMPANY Inventory Data Using FIFO versus LIFO ($ mil.) Year 11Year 10Year 9Year 8Year 7Year 6 Beginning inventory$904.4$904.0$745.9$706.0$688.5$707.0 Production inputs (same as LIFO)3,982.44,262.04,152.93,433.93,193.63,070.1 Goods available for sale$4,886.8$5,166.0$4,898.8$4,139.9$3,882.1$3,777.1 Less: Ending inventory Cost of products sold (FIFO)$4,090.5$4,261.6$3,994.8$3,394.0$3,176.1$3,088.6 Cost of products sold (LIFO)$4,095.5$4,258.2$4,001.6$3,392.8$3,180.5$3,082.7 Effect of restatement to FIFO increases (decreases) cost of products sold by:$(5.0)$3.4$(6.8)$1.2$(4.4) $5.9 Net of tax* effect of restatement to FIFO decreases (increases) net income by:$(3.3)$2.2$(4.5)$0.8$(2.4) $3.2

Case-24 Case: Campbell Soup Co. – Capital Structure and Solvency Exhibit CC.16 CAMPBELL SOUP COMPANY Analysis of Capital Structure (mil.) Year 11Year 10Year 9Year 8Year 7Year 6 Long-term liabilities: Notes payable$757.8$792.9$610.3$507.1$358.8$346.7 Capital lease obligation Total long-term debt$772.6$805.8$629.2$525.8$380.2$362.3 Deferred income taxes* Other long-term liabilities Total long-term liabilities$924.9$951.9$757.8$681.7$520.0$478.2 Current liabilities†1,278.01,298.11, Total liabilities$2,202.9$2,250.0$1,989.9$1,545.0$1,213.8$1,104.3 Equity capital: Common shareholders’ equity$1,793.4$1,691.8$1,778.3$1,895.0$1,736.1$1,538.9 Minority interests Deferred income taxes* Total equity capital$1,946.1$1,865.6$1,942.2$2,064.6$1,883.6$1,658.5 Total liabilities and equity$4,149.0$4,115.6$3,932.1$3,609.6$2,097.4$2,762.8

Case-25 Case: Campbell Soup Co. – Capital Structure and Solvency

Case-26 Case: Campbell Soup Co. – Capital Structure and Solvency Exhibit CC.17 CAMPBELL SOUP COMPANY Common-Size Analysis of Capital Structure Year 11Year 10Year 9Year 8Year 7Year 6 Long-term liabilities: Notes payable18.26%19.27%15.52%14.05%11.59%12.55% Capital lease obligation Total long-term debt18.62%19.58%16.00%14.57%12.28%13.11% Deferred income taxes* Other long-term liabilities Total long-term liabilities22.29%23.13%19.27%18.88%16.79%17.31% Current liabilities† Total liabilities53.09%54.67%50.61%42.80%39.19%39.97% Equity capital: Common shareholders’ equity43.22%41.11%45.22%52.50%56.05%55.70% Minority interests Deferred income taxes* Total equity capital46.91%45.33%49.39%57.20%60.81%60.03% Total liabilities and equity100.00%100.00%100.00%100.00%100.00%100.00%

Case-27 Case: Campbell Soup Co. – Capital Structure and Solvency Exhibit CC.18 CAMPBELL SOUP COMPANY Capital Structure and Solvency Ratios Year 11Year 10Year 9Year 8Year 7Year 6Year 11 Industry Composite 1.Total debt to equity Total debt ratio Long-term debt to equity Adjusted long-term debt to equity — 5.Equity to total debt Fixed assets to equity Current liabilities to total liabilities Earnings to fixed charges — 9.Cash flow to fixed charges —

Case-28 (continued)

Case-29 Case: Campbell Soup Co. – Financial Leverage

Case-30 Case: Campbell Soup Co. -- Analysis of Asset Utilization Exhibit CC.20 CAMPBELL SOUP COMPANY Asset Utilization Ratios Year 11Year 10Year 9Year 8Year 7Year 6Year 11 Industry Composite 1.Sales to cash and equivalents Sales to receivables Sales to inventories Sales to working capital Sales to fixed assets Sales to other assets* Sales to total assets Sales to short-term liabilities

Case-31 Analysis of Operating Performance and Profitability Exhibit CC.21 CAMPBELL SOUP COMPANY Analysis of Profit Margin Ratios Profit margins Year 11Year 10Year 9Year 8Year 7Year 6Year 11 Industry Composite 1.Gross profit margin34.00%31.38%29.45%30.32%29.17%28.09%29.30% 2.Operating profit margin12.63%4.69%3.54%9.09%10.46%10.34% — 3.Net profit margin6.47%0.07%0.23%5.63%5.51%5.21%6.60%

Case-32 Analysis of Operating Performance and Profitability

Case-33 Analysis of Operating Performance and Profitability Exhibit CC.22 CAMPBELL SOUP COMPANY Analysis of Depreciation Year 11Year 10Year 9Year 8Year 7Year 6 1.Accumulated depreciation as a percent of gross plant assets* 44.6%42.3%43.1%43.7%46.6%48.6% 2.Annual depreciation expenses as a percent of gross plant 7.7% 7.7% 7.6% 6.9% 6.4%6.4% 3.Annual depreciation expenses as a percent of sales 3.1% 3.0% 3.1%3.3% 3.1%2.8%

Case-34 Analysis of Operating Performance and Profitability Exhibit CC.23 CAMPBELL SOUP COMPANY Analysis of Discretionary Expenditures ($ mil.) Year 11Year 10Year 9Year 8Year 7Year 6 Net sales$6,204.1$6,205.8$5,672.1$4,868.9$4,490.4$4,286.8 Plant assets (net)*1,406.51,386.91,322.61,329.11, Maintenance and repairs Advertising Research & development (R&D) Maintenance and repairs ÷ sales2.8%2.9%3.1%3.2%3.3%3.4% Maintenance and repairs ÷ plant Advertising ÷ sales R&D ÷ sales

Case-35 Forecasting and Valuation – Income Statement INCOME STATEMENT Year 12 estimateYear 11Year 10Year 9Year 8Year 7Year 6 NET SALES COST OF GOODS GROSS PROFIT SELLING GENERAL & ADMINISTRATIVE EXPENSE INTEREST & OTHER EXPENSE INCOME BEFORE TAX INCOME TAX EXPENSE CUMULATIVE EFFECT OF ACCOUNTING CHANGE NET INCOME OUTSTANDING SHARES

Case-36 Forecasting and Valuation – Balance Sheet

Case-37 Forecasting and Valuation

Case-38 Forecasting and Valuation

Case-39 Market Measures