packaged food industry rate of return analysis

EQUITY RESEARCH–AMERICAS

Industry: Foods November 11, 1996 Michael J. Mauboussin 212/325-3108FD2427 Shelby Heard 212/325-4701

Packaged Food IndustryRate of Return Analysis

November 1996

• Industry returns drift lower in1995/1996.

• ROIC-to-cost-of-capitalspread explains valuation bet-ter than EPS or cash-flowgrowth.

• Detailed analysis of capitalallocation shows disparateresults.

• Valuations appear full.

Packaged Food Industry Rate of Return Analysis

2

Contents

Introduction 3

Industry Summary 3

Capital Allocation 5

Empirical Evidence 6

ChartsA ROIC-WACC Versus Enterprise Value/Invested Capital 8B Cash Flow Growth Versus Enterprise Value/Invested Capital 9C EPS Growth Versus Enterprise Value/Invested Capital 10

TablesA Prime Components of Pretax ROIC 1985–1995 4B ROIC Scorecard 4C Correlation of Three Financial Measures to Valuation 6

Company Tables1-411 Campbell Soup Company 115-911 ConAgra, Inc. 1610-14 CPC International 2215-19 General Mills 2820-24 H.J. Heinz & Company 3425-28 Hershey Foods 4029-31 Interstate Bakeries 4532-36 Kellogg Company 4937-41 McCormick & Company 5542-44 The Morningstar Group 6145-48 Nabisco 6549-53 Quaker Oats 7054-57 Ralcorp Holdings 7658-62 Ralston Purina 8163-67 Sara Lee Corporation 8768-71 Tyson Foods 9372-72 Packaged Foods Composite: Returns on Invested Capital (13 companies) 9873-72 Packaged Foods Composite: Returns on Invested Capital (16 companies) 10074-72 Packaged Foods Composite: Weighted Average Cost of Capital 10275-72 Support Data 10376-72 Packaged Food Industry Universe 104


3

Introduction

The purpose of this report is threefold. First, weupdate the return on invested capital trends for theindustry, highlighting both the directional changeand the composition of the change. Second, weprovide extensive data on capital allocation for theindustry. Finally, we set forth further empirical evi-dence demonstrating that a value-based frameworkis the best way to understand valuation—in directcontrast to the rules of thumb used by most finan-cial analysts.

Included for most of the companies in this report arefive tables: historical return on invested capital cal-culations, rate of return on incremental investment,a history of capital allocation among strategic busi-ness units, a value-driver matrix highlighting theexpectation for free cash flow, and a discounted-cash-flow model.

The following points summarize the key conclusionsfrom this report:

• The returns on invested capital (ROIC) for ourfood industry composite are drifting slightly lower.The data for the most recent period show a con-tinuation of a multiyear trend: operating margins areon a steady ascent, while invested capital turnover(sales divided by invested capital) is declining. Toillustrate, composite EBITA margins were 10.8% in1995, up 90 basis points from the 1990 level. How-ever, invested capital turnover was 1.7 times in therecent measurement period, down from 2.3 timesfive years earlier. Further, every major efficiencycomponent of invested capital showed deterioration,including inventories, receivables, overall workingcapital, fixed assets and goodwill/other. This trendis the basis for our contention that asset efficiencywill be central to improving ROICs, and hence rela-tive valuations, for the sector.

• Management’s capital allocation results havevaried widely across the food industry. In this re-port, we consider capital allocation on two levels.First, we calculate the cash-on-cash returns on in-cremental investment over time. Our research in thisarea is unique in that we consider all disbursementsof value (whether in the form of investment, stock,or restructuring charges) as “investment.” Second,we analyze where the capital has flowed on a seg-ment basis within each company. Our objective is todetermine whether or not capital is being allocated

to businesses with acceptable returns, versus onesthat offer the prospects of growth without commen-surate returns.

• Understanding returns on invested capital is thekey to understanding industry valuation. Whilemost market participants—from both Main Streetand Wall Street—adhere to the notion that accrual-accounting figures determine value, our empiricalresearch shows that value-based yardsticks explainvaluation significantly better than more conven-tional metrics (i.e., earnings-per-share growth, cash-flow growth). In turn, we believe analytical energycan best be spent understanding the interrelationamong earnings growth, capital intensity, andfinancing options, rather than focusing solely ongrowth.

• Valuations appear extended in the group. Thiscontention is based on value estimates generated byour discounted-cash-flow models. Our model de-rives value from three components: a free-cash-flowgrowth rate, a discount rate, and an assumed periodof competitive advantage (i.e., during which returnson investments are assumed to exceed the cost ofcapital). Each company-specific model lays out theassumptions that drive the valuation, and offerssensitivities around our base case.

Industry Summary

The rate of return on invested capital for the 16companies under our coverage was 12.9% in 1995,down 40 basis points from the preceding year. Thismodest deterioration is the result of worsening assetutilization, a trend that has emerged over the pastdecade. In 1995, net operating profit after tax(NOPAT) grew at a 7.3% rate, while investedcapital rose at a 10.4% clip. We anticipate that the1996 ROIC rate will advance from that of 1995,based largely on our expectation that invested capi-tal management will improve somewhat.

Table A shows the main components of pretaxROIC for our composite from 1985-1995 in five-year increments. Our main point is that higheroperating margins—realized in spite of a massiveacceleration in marketing spending—have beenovershadowed by a marked drop in asset efficiency.While a significant part of the asset efficiency isattributable to acquisition-related goodwill, workingcapital and net PP&E turns are trending down aswell.


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Table APrime Components of Pretax ROIC 1985–1995

1985 1990 1995NOPBT margin 8.7% 9.9% 10.8%Invested capital turnover 2.9 2.3 1.7Return on invested capital 25.1% 23.3% 18.8%Source: Company published data, CS First Boston estimates.

We have asserted for some time that “EfficientConsumer Response” (ECR) is a real industry-wideopportunity to improve capital efficiency, and havebeen frustrated with the slow pace of adoptingECR’s central principles within the food industry. 1

We suspect the inhibiting factor in embracing ECRis the potential short-term negative impact someECR steps would have on reported earnings pershare. As most executive compensation schemes arelinked to earnings, the interests of shareholders andmanagers are not always aligned.

Table BROIC Scorecard

Recent 3-Year ROIC Value-BasedCompany ROIC Trend GradeCampbell Soup 17.8% ↑↑ A -ConAgra 12.9 ↑↑ B -CPC International 13.3 ↓↓ B -General Mills 26.6 ↑↑ BH.J. Heinz 13.1 ↑↑ CHershey Foods 14.2 ↑↑ A -Interstate Bakeries 6.8 ↓↓ B -Kellogg 23.8 ↑↑ AMcCormick 12.1 ↓↓ A -Morningstar 9.9 ↑↑ BNabisco 7.7 ↓↓ C +Quaker Oats 8.1 ↓↓ B +Ralcorp Holdings 10.9 ↓↓ BRalston Purina 15.1 ↑↑ B +Sara Lee 14.8 ↑↑ B +Tyson Foods 9.0 ↓↓ BAverage 13.5% ↓↓Source: Company data, CS First Boston estimates.

Table B shows how the industry participants stackup in a few critical areas, including current ROICs,ROIC trends, and the level of commitment to value-based tools. The highest-ranked companies includeCampbell Soup, Hershey Foods, Kellogg, andGeneral Mills.

1See The Food Chain, April 4, 1996.

In recent months, a number of high-profile foodcompanies have embraced the value-based model.Examples include Hershey Foods, McCormick, andSara Lee. We are very encouraged by these devel-opments, and consider this shift fundamental to animproving ROIC case for the sector. Following areshort summaries of how our Buy-rated stocks lookwhen viewed through the ROIC lens.

KelloggA central tenet of our long-term investment recom-mendation of K shares is that the company’s returnon invested capital is likely to materially improveover the next five years. We estimate that K’s ROICwill be about 22% in 1996, and that the ratio couldreach 30% by 2000. The key to this improvement isa sustained rate of NOPAT growth ahead of in-vested capital growth. As a result, we anticipate thatthe company’s surplus cash flows will remain ro-bust for the foreseeable future and that the valuationwill improve lockstep with the higher returns.

General MillsGIS, since it shed its high-capital-growth, low-return restaurant operations, has catapulted to havethe highest ROIC in the sector. Further, the com-pany has indicated that capital needs in upcomingyears will be relatively modest. Accordingly, weanticipate ongoing strong returns as well as gener-ous surplus cash flows for General Mills.

Ralston PurinaRalston’s multiyear restructuring has left a core ofbusinesses (pet food, batteries, soy protein isolates)with attractive economics and growth prospects. Inparticular, we are forecasting a sharp ROIC im-provement in the battery segment as the businessevolves to higher-value-added products. In addition,RAL management has been among the most astutecapital allocators in the industry, suggesting thatresources are unlikely to be squandered.

Sara LeeWe believe SLE has entered into a new phase,where returns on invested capital promise to bebetter balanced with long-term growth objectives.We anticipate that the tangible results will includean improving return on invested capital trend, asharp acceleration in surplus cash flow, and an up-ward revaluation of the shares. The main source ofleverage is the personal-products division, currentlythe lowest ROIC operation within Sara Lee.


5

Quaker OatsDespite an overt sponsorship of value-based man-agement, Quaker has likely destroyed more share-holder value than any other food company in the1990s through its Snapple acquisition (1994). Thehuge purchase has set up an extraordinary dichot-omy in returns: the core food and Gatorade fran-chises would score favorably versus its peers (highteens), while Snapple has lost $150 million cumula-tively on a $1.8 billion invested capital base. Ourconstructive opinion hinges on the view that aggre-gate asset values are much higher than the currentshare price, and that management will be compelledto take meaningful steps to bring this value to thesurface.

McCormickMCCRK was on an ROIC slide from 1991 through1995, resulting in a depressed valuation and markedshare price underperformance. Over the past 12months, however, the company has righted itscourse by divesting low-return operations, reducingcapital spending, restructuring to further trim costs,and engaging in an active share-repurchase pro-gram. We believe MCCRK is a classic ROIC in-flection story, and see the typical benefits (i.e.,improved cash flow and valuation) accruing toshareholders.

Interstate BakeriesIBC still appears to have poor returns, but the im-provement in fiscal 1997 (change on the margin iswhat really drives the model) should be sharp. Spe-cifically, earnings for the company are expected todouble while invested capital will remain flat. Whilewe will never see IBC become a high-return business,we believe the improvement over the next few yearswill be sufficient to propel the shares on the upside.

Capital Allocation

In an industry that generates consistently high re-turns on capital and surplus cash (in a sources-minus-uses sense), capital allocation must be aprime focus of both managers and investors. Notsurprisingly, the goals of managers and the goals ofinvestors are not always synonymous—a notionwell documented by agency theory—largely becausethe incentives of managers (agents) are not thor-oughly consistent with shareholder wealth maximi-zation, the objective of shareholders (owners).

Managers generally fall into two traps. First, theypursue growth—including earnings growth, cash-flow growth, and asset growth—without properconsideration of returns. This is not too surprising,as compensation programs are often driven bygrowth measures, and bigger is almost alwaysconsidered better in corporate America. Second,managers often commit common cognitive errors,resulting in value destruction. Examples include anirrational escalation in commitment to an initial, butincorrect, course of action, and overconfidence.Ideally, we like to see that managers are “rational”and are subject to proper incentives. In this sense,Berkshire Hathaway Chairman Warren Buffett is amodel: his wealth is directly tied to Berkshire’sstock price (his salary is very modest), and his abil-ity to act rationally is truly rare.

Our first test of capital allocation, analyzed com-pany by company, is a detailed derivation of histori-cal free cash flow.2 Such a breakdown allows theinvestor to observe trends in sales growth and mar-gins, as well as gain a clear sense of how capital hasbeen reinvested in the business (working capital ver-sus capital expenditures versus acquisitions). Fur-ther, the structure is conducive to estimating rates ofreturn on incremental invested capital, a figure thatcan be extremely important in understanding futurevaluation trends and earnings power. 3 The bench-mark to attain is the opportunity cost of capital,which is roughly 10-11% for most of the food com-panies. As ROIC speaks to only part of the value-creation equation—the magnitude of investmentopportunities is the other—we have included calcu-lations of economic profit. Economic profit is thespread between the ROIC and the cost of capital,multiplied by the invested capital base.

Our second test of capital allocation involves seeingwhere the incremental funds are flowing, based onthe segment breakdown data presented for each

2Free cash flow here is not the typical sources-minus-usesdefinition used on Wall Street. Rather it is the differencebetween net operating profit after tax (NOPAT) and the in-vestment in future growth (I).3Two points here. First, rate of return on incremental capitalis defined as

NOPATT2 -NOPATT1/∑Investment(T1-T0).Second, it is practically impossible, as an outsider, to deter-mine whether the returns on incremental capital or returns onthe “base” capital are driving NOPAT. Our simplifying as-sumption is that returns on the “base” business are stable.


6

company. The goal is to judge whether or not in-cremental capital is being allocated to high-returnareas. Here again, we attempt to distinguish betweenthe pursuit of growth for growth’s sake (in recentyears, General Mills’ investment in restaurants andSara Lee’s investments in personal products standout as examples) and value-creating spending.

One of the best discussions we have seen on the is-sue of capital allocation is in the book The ValueImperative, written by the senior partners ofMarakon Associates.4 The authors lay out four keyprinciples of resource allocation:

• Zero-based resource allocation. The key notionhere is that managers consider only the amount ofcapital required to create wealth, with the explicitrecognition that past capital allocation need nothave any bearing on current capital allocation. Mostcompanies allocate capital spending with a signifi-cant inertia bias—every division gets a little moreor less capital than last year, without thorough con-sideration of how much is rationally justified. Be-havioral psychologists call this phenomenon“anchoring and adjusting,” and cite it as a primesource of suboptimal individual decision making.

• Fund strategies, not projects. Managers need toconsider their capital allocation in a strategy contextversus an accumulation of unattractive projects. Twoexamples serve to illuminate this point. First, a com-pany may have an attractive project within a divisionthat has a limited strategic life. Such an investmentmay appear to be net-present-value positive but isnot likely to be a wise investment. Second, a companymay realize that it has to make a net-present-valuenegative investment to maintain or enhance its long-term strategic position. This “cost of admission”should be funded. To state the obvious, managershave to be very careful, because a crafty strategicplanner can make virtually any project look good.

• Capital rationing. The culture of most organiza-tions fosters a sense that capital is “scarce but free”when in reality capital is accessible but costly. Theerror lies in a company’s mindset: most chief finan-cial officers set their capital expenditures to beconsistent with expected earnings and capitalizationconsiderations. Hence, managers naturally jockey

4The Value Imperative, McTaggart, Kontes, Mankins, FreePress, 1994, pps. 241-252.

for the largest amount of capital possible withinthese artificial constraints, generally to supportgrowth. What is overlooked is that all capital mustgenerate satisfactory returns, whether it is generatedinternally (retained earnings) or externally (capitalraised).

• Zero tolerance for bad growth. Few new prod-ucts or ventures deliver satisfactory returns. Thispoint does not suggest that companies should aban-don new opportunities, rather is underscores thatmanagers should not continue to fund projects thatdo not appear to be economically viable over thelong run. Very few businesses grow out of theirproblems, and good money often chases bad moneyfor the wrong reasons.

Empirical Evidence

Here we provide further evidence that a value-basedmodel is better than traditional accounting measuresin understanding how the market prices assets. Ouranalysis is straightforward: we performed linearregressions on the food industry using, alternatively,earnings-per-share growth, cash-flow growth, andthe ROIC-to-WACC spread as the independentvariable and enterprise value to invested capital (afancy proxy for price-to-book) as the dependentvariable. The estimates of long-term earnings andcash-flow growth were taken from Value Line, asource we assumed was a nonbiased proxy for theconsensus view.

Table C summarizes our findings. To our (mild)surprise, anticipated cash-flow and earnings-per-share growth showed no correlation with valuation(the r-squares were actually negative). At the sametime, the ROIC-to-WACC spread had a 77%r-square, with a t-statistic of 7.1. Charts A-C showthe same data graphically. While our number ofobservations is admittedly low, our experienceshows that the explanatory power of returns vastlyoutstrips that of earnings or cash-flow growth inindustry after industry.

Table CCorrelation of Three Financial Measures to ValuationIndependent Variable R-squaredROIC to WACC spread 77%Cash flow growth (1)EPS growth (6)Source: Company published data, CS First Boston estimates, Value Line.


7

It is logical to ponder why valuation myths, such asP/E to EPS growth rate, are perpetuated in the faceof such powerful evidence of their uselessness. Theanswer, in our view, is that such metrics are used asrules of thumb—formally called heuristics. Undercertain circumstances, these rules of thumb mayprovide reasonable results; unfortunately, they areunable to present consistent quality guidance in de-cision making. Not surprisingly, many leading in-vestors, including the aforementioned Warren

Buffett, stress the importance of understanding theeconomics of a business in an intelligent appraisalof the company’s value.

N.B.: CS First Boston Corporation may have, within the last three years,served as a manager or co-manager of a public offering of securities for ormakes a primary market in issues of any or all of the companies mentioned.

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0.5

336.

029

6.8

396.

652

7.8

613.

263

1.4

776.

786

4.4

995.

6

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

n12

7.3

141.

014

1.2

135.

916

4.0

170.

614

7.0

175.

621

2.6

265.

930

8.8

316.

633

3.0

343.

838

9.0

Defe

rred

taxe

s4.

616

.921

.036

.145

.048

.918

.7(7

4.7)

5.4

24.5

31.0

1.4

66.0

40.0

39.0

Tax

shie

ld10

.118

.112

.214

.813

.18.

47.

921

.235

.734

.332

.928

.024

.341

.849

.4Ad

just

ed ta

xes

132.

714

2.2

132.

411

4.5

132.

113

0.1

136.

227

1.5

242.

927

5.7

310.

734

3.2

291.

334

5.6

399.

4

Inve

sted

cap

ital c

alcu

latio

nCa

sh29

.432

.936

.639

.943

.844

.948

.756

.762

.162

.062

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.966

.953

.034

.0Ac

coun

ts re

ceiv

able

214.

323

7.3

278.

927

9.8

299.

033

8.9

486.

953

8.0

624.

552

7.4

577.

164

6.3

578.

063

1.0

618.

0In

vent

ory

470.

445

6.5

602.

562

3.1

610.

562

3.6

664.

781

6.0

819.

870

6.7

717.

980

4.2

786.

075

5.0

739.

0O

ther

cur

rent

ass

ets

35.3

25.3

35.8

24.9

31.5

42.7

90.5

100.

411

8.0

92.7

88.9

166.

214

1.0

142.

022

7.0

Curre

nt a

sset

s74

9.4

751.

995

3.8

967.

798

4.8

1,05

0.1

1,29

0.8

1,51

1.1

1,62

4.4

1,38

8.8

1,44

6.5

1,68

2.6

1,57

1.9

1,58

1.0

1,61

8.0

Acco

unts

pay

able

253.

825

5.8

277.

027

4.6

321.

737

4.8

446.

750

8.2

525.

248

2.4

497.

851

0.0

473.

055

6.0

568.

0Ac

crue

d ex

pens

es87

.310

0.3

135.

515

6.6

165.

817

4.7

236.

942

2.3

524.

244

5.7

413.

156

2.4

641.

062

3.0

679.

0In

com

e ta

xes

paya

ble

52.2

52.5

45.9

50.0

49.6

43.4

41.7

30.1

46.4

67.7

95.1

108.

711

7.0

120.

011

7.0

NIBC

Ls39

3.3

408.

645

8.3

481.

253

7.2

592.

972

5.3

960.

61,

095.

899

5.8

1,00

6.0

1,18

1.1

1,23

1.0

1,29

9.0

1,36

4.0

Net w

orki

ng c

apita

l35

6.1

343.

449

5.4

486.

644

7.6

457.

256

5.5

550.

552

8.6

393.

044

0.5

501.

534

0.9

282.

025

4.0

Net P

,P&

E81

5.4

889.

297

0.9

1,02

7.5

1,16

8.1

1,34

9.0

1,50

8.9

1,54

0.6

1,71

7.7

1,79

0.4

1,96

5.8

2,26

4.4

2,40

1.0

2,58

4.0

2,68

1.0

Goo

dwill/

othe

r11

5.0

118.

412

9.0

148.

913

0.2

171.

559

0.4

576.

651

1.0

640.

168

9.0

886.

991

4.0

2,05

0.0

2,33

3.0

Rest

ruct

urin

g ch

arge

s-

-

-

-

-

-

-

70

.117

0.6

170.

617

0.6

237.

729

3.8

338.

033

8.0

Inve

sted

cap

ital

1,28

6.4

1,35

0.9

1,59

5.3

1,66

3.0

1,74

5.9

1,97

7.7

2,66

4.8

2,73

7.8

2,92

7.9

2,99

4.1

3,26

5.9

3,89

0.5

3,94

9.7

5,25

4.0

5,60

6.0

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

12Tabl

e 1

Cam

pbel

l Sou

p Co

mpa

ny: R

etur

ns o

n In

vest

ed C

apita

l co

ntin

ued

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NOPB

T m

argi

n7.

6%10

.6%

10.0

%9.

3%9.

6%9.

6%9.

7%10

.0%

10.3

%13

.0%

14.8

%14

.8%

16.0

%16

.6%

18.2

%Ca

pita

l tur

ns2.

32.

42.

32.

42.

52.

31.

82.

12.

12.

11.

91.

71.

71.

41.

4Pr

etax

RO

IC17

.3%

25.9

%22

.9%

22.4

%24

.2%

21.8

%17

.7%

20.8

%21

.8%

26.8

%28

.3%

25.1

%27

.0%

23.0

%24

.9%

Tax

59.5

%40

.6%

36.2

%30

.7%

31.3

%30

.2%

28.8

%47

.8%

38.0

%34

.3%

33.6

%35

.2%

27.3

%28

.6%

28.6

%Re

turn

on

inve

sted

cap

ital

7.0%

15.4

%14

.6%

15.5

%16

.6%

15.2

%12

.6%

10.8

%13

.5%

17.6

%18

.8%

16.2

%19

.7%

16.5

%17

.8%

Retu

rn o

n in

cr. i

nv. c

ap.

-

182.

5%10

.3%

36.9

%38

.2%

4.6%

5.2%

(53.

7)%

52.5

%19

8.0%

31.4

%2.

9%24

5.3%

6.7%

37.3

%

Capi

tal t

urno

ver a

nalys

isIn

vent

ory

turn

s6.

37.

26.

16.

47.

27.

27.

37.

07.

68.

88.

78.

28.

59.

610

.4O

pera

ting

wkg.

cap

. tur

ns6.

87.

56.

16.

37.

47.

66.

96.

76.

88.

37.

97.

07.

58.

89.

7G

oodw

ill/ot

her t

urns

25.6

27.8

28.3

26.8

33.6

26.2

8.2

9.8

12.1

9.7

9.1

7.4

7.3

3.6

3.3

Net P

,P&

E tu

rns

3.6

3.7

3.8

3.9

3.7

3.3

3.2

3.7

3.6

3.5

3.2

2.9

2.8

2.8

2.9

Cost

of c

apita

l cal

cula

tion

Cost

of e

quity

17.3

%15

.0%

16.3

%14

.4%

11.8

%11

.3%

12.5

%12

.2%

12.4

%12

.2%

11.9

%11

.5%

12.0

%11

.5%

12.0

%Co

st o

f deb

t7.

8%6.

6%7.

3%5.

9%4.

8%5.

8%6.

2%5.

5%5.

9%5.

7%5.

2%4.

6%5.

2%4.

7%4.

6%De

bt/to

tal c

apita

l22

.4%

16.3

%14

.6%

13.9

%9.

8%9.

9%22

.7%

10.6

%12

.7%

9.4%

9.5%

11.1

%9.

0%12

.6%

8.7%

WAC

C15

.2%

13.6

%15

.0%

13.2

%11

.1%

10.8

%11

.1%

11.5

%11

.6%

11.5

%11

.3%

10.8

%11

.4%

10.6

%11

.4%

Retu

rn o

n av

g. in

v. c

ap.

-

15.8

%15

.8%

15.8

%17

.0%

16.1

%14

.5%

11.0

%14

.0%

17.8

%19

.6%

17.6

%19

.8%

18.8

%18

.3%

Econ

omic

pro

fit-

28

.212

.342

.610

0.3

100.

179

.0(1

3.9)

69.3

185.

926

0.7

246.

233

0.1

374.

837

9.2

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Char

t 1Ch

art 2

Cam

pbel

l Sou

p Co

mpa

ny: R

OIC

vs.

WAC

CCa

mpb

ell S

oup

Com

pany

: Eco

nom

ic Pr

ofit

9.0%

11.0

%

13.0

%

15.0

%

17.0

%

19.0

%

21.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

ROIC

WAC

C

(50.

0)0.0

50.0

100.

0

150.

0

200.

0

250.

0

300.

0

350.

0

400.

01983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

13Tabl

e 2

Cam

pbel

l Sou

p Co

mpa

ny: R

ates

of R

etur

n on

Incr

emen

tal I

nves

tmen

t

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Sale

s3,

988.

74,

378.

74,

490.

44,

868.

95,

672.

16,

205.

86,

204.

16,

263.

26,

586.

26,

690.

07,

278.

07,

678.

0EB

IT36

641

642

546

355

262

378

990

897

51,

027

1,17

61,

317

Adju

sted

taxe

s11

513

213

013

627

224

327

631

134

329

134

640

6Am

ortiz

atio

n of

goo

dwill

76

69

1617

1416

2018

3436

Net o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$258

$290

$300

$336

$297

$397

$527

$613

$651

$754

$864

$947

Chan

ge in

net

wor

king

cap

ital

($9)

($39

)$1

0$1

08($

15)

($22

)($

136)

$48

$61

($16

1)($

59)

($28

)Fi

xed

capi

tal (

net o

f dep

reci

atio

n)94

131

191

6168

169

123

111

106

142

119

126

Acqu

isiti

ons

(net

of d

ives

titur

es)

(12)

(6)

(17)

472

136

2011

328

252

(13)

1,24

310

6O

ther

*0

00

4119

120

10

015

2322

0In

vest

men

t in

futu

re g

row

th

7386

184

682

380

368

100

187

435

(9)

1,32

520

4

Free

Cas

h Fl

ow (F

CF)

185

204

117

(346

)(8

3)29

427

427

216

762

(461

)74

3

Valu

e dr

iver

s 19

90-1

995

Rate

s of

retu

rn o

n in

crem

enta

l inv

estm

ent

Defin

ition

sSa

les

3.2%

3 ye

ars

41%

NOPA

T=

EBIT

- ad

just

ed ta

xes

+ go

odw

illO

pera

ting

Mar

gin

14.0

%5

year

s43

%I

= Ch

g w

.c.+

Cap

ex

(net

) + A

cq. (

net)

Cash

Tax

Rat

e32

.9%

10 y

ears

24%

FCF

= NO

PAT

- IIn

crem

enta

l Wor

king

Cap

ital

-25.

0%In

crem

enta

l Fix

ed C

apita

l71

.8%

Acqu

isiti

ons

153.

3%O

ther

*24

.4%

Sour

ce: C

ompa

ny p

ublis

hed

data

.

* Inc

lude

s ca

sh o

utla

ys a

ssoc

iate

d w

ith re

stru

ctur

ing.

Rol

ling

3 ye

ar ra

te o

f ret

urn

on i

ncre

men

tal i

nves

tmen

t

0%5%10%

15%

20%

25%

30%

35%

40%

45%

1988

1989

1990

1991

1992

1993

1994

1995

1996


14

Table 3Campbell Soup Company: Value Driver Matrix

Sales growth Operating Working and fixed($ in millions) Sales base Units Pricing/mix margins capital needs (a) Business risk Other risk (b)

Soup $1,975 2-3% 3-4% 36-38% small low low

Frozen/pickles $875 0% 0% 8-11% small low low

Meal enhancement* $1,300 5-7% 2-3% 14-16% small low low

Other USA $365 3-4% 1-2% 12-14% small low low

USA $4,515 3-4% 2-3% 22-25% small low low

Pepperidge Farm $590 6-8% 1-2% 12-14% small low low

Int'l biscuit/confectionary $1,115 3-4% 1-2% 12-14% small medium low

Biscuit & confectionary $1,705 5-7% 1-2% 11-13% small medium medium

International $1,458 6-8% 2-3% 9-11% small medium mediumGrocery

Campbell Soup Company $7,678 4-5% 2-3% 18-20% 20-25% low low5 yr avg91-96 4.4% 15.9% 71.2% Beta = 1.05

Source: Company published data, CS First Boston estimates.

Note: (*) Includes V-8, Pace, Swanson, Prego.

(a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).

(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

15Tabl

e 4

Cam

pbel

l Sou

p Co

mpa

ny: D

CF A

nalys

is

NO

PAT

gro

wth

11%

Inve

sted

cap

ital g

row

thR

etur

n on

incr

emen

tal c

apita

lC

APFC

F Pr

ice

Inve

sted

cap

ital g

row

th8%

3-ye

ar5-

year

10-y

ear

3-ye

ar5-

year

10-y

ear

106.

7%$5

5.74

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

31%

16.0

%11

.9%

12.2

%30

.0%

43.3

%27

.8%

158.

6%$7

1.83

Deb

t2,

689

209.

4%$8

9.10

WA

CC

10.5

%18

9.1%

$80.

52

Cas

h53

Shar

es o

utst

andi

ng23

5

1996

A19

97E

1998

E19

99E

2000

E20

01E

2002

E20

03E

2004

E20

05E

2006

E20

07E

2008

E20

09E

2010

E20

11E

2012

E20

13E

2014

E20

15E

2016

E

NO

PAT

996

1,05

01,

144

1,27

01,

409

1,56

41,

737

1,92

82,

140

2,37

52,

636

2,92

63,

248

3,60

54,

002

4,44

24,

931

5,47

36,

075

6,74

47,

485

Inve

stm

ent i

n fu

ture

7035

435

650

554

658

963

668

774

280

286

693

51,

010

1,09

11,

178

1,27

21,

374

1,48

41,

603

1,73

11,

870

Free

Cas

h Fl

ow92

669

678

876

586

497

51,

100

1,24

01,

397

1,57

31,

770

1,99

12,

238

2,51

52,

824

3,17

03,

557

3,98

94,

473

5,01

35,

616

PV o

f FC

F92

663

064

656

758

059

360

561

863

064

265

466

667

768

970

071

272

373

474

575

676

6

Cum

ulat

ive

PV

of F

CF

926

630

1,27

61,

843

2,42

33,

016

3,62

14,

239

4,86

95,

510

6,16

46,

830

7,50

88,

197

8,89

79,

609

10,3

3111

,065

11,8

1012

,566

13,3

32

Res

idua

l Val

ue9,

507

10,0

3010

,924

12,1

2613

,459

14,9

4016

,583

18,4

0720

,432

22,6

8025

,175

27,9

4431

,018

34,4

2938

,217

42,4

2147

,087

52,2

6658

,016

64,3

9771

,481

PV o

f Res

idua

l Val

ue9,

507

9,07

98,

951

8,99

49,

037

9,08

09,

123

9,16

79,

211

9,25

59,

299

9,34

49,

388

9,43

39,

478

9,52

39,

569

9,61

59,

661

9,70

79,

753

Cor

pora

te V

alue

10,4

339,

710

10,2

2710

,837

11,4

6012

,096

12,7

4413

,406

14,0

7914

,765

15,4

6416

,174

16,8

9617

,630

18,3

7519

,132

19,9

0020

,680

21,4

7122

,272

23,0

85

Cas

h53

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

Deb

t2,

689

2,68

92,

689

2,68

92,

689

2,68

92,

689

2,68

92,

689

2,68

92,

689

2,68

92,

689

2,68

92,

689

2,68

92,

689

2,68

92,

689

2,68

92,

689

Shar

ehol

der v

alue

7,79

77,

121

7,63

88,

248

8,87

19,

507

10,1

5510

,817

11,4

9012

,176

12,8

7513

,585

14,3

0715

,041

15,7

8616

,543

17,3

1118

,091

18,8

8219

,683

20,4

96

Shar

es o

utst

andi

ng23

523

523

523

523

523

523

523

523

523

523

523

523

523

523

523

523

523

523

523

523

5

Shar

ehol

der v

alue

per

sha

re$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$8

0.52

$--.-

-$-

-.--

Year

12

34

56

78

910

1112

1314

1516

1718

1920

Inve

sted

cap

ital

5,60

65,

960

6,31

66,

821

7,36

77,

956

8,59

39,

280

10,0

2210

,824

11,6

9012

,625

13,6

3514

,726

15,9

0417

,177

18,5

5120

,035

21,6

3823

,369

25,2

38

Ret

urn

on in

vest

ed c

apita

l (av

g)17

.8%

18.2

%18

.6%

19.3

%19

.9%

20.4

%21

.0%

21.6

%22

.2%

22.8

%23

.4%

24.1

%24

.7%

25.4

%26

.1%

26.9

%27

.6%

28.4

%29

.2%

30.0

%30

.8%

Rat

e of

retu

rn o

n in

crem

enta

l cap

ital

26.4

%35

.3%

27.6

%28

.4%

29.2

%30

.0%

30.8

%31

.7%

32.6

%33

.5%

34.4

%35

.4%

36.4

%37

.4%

38.4

%39

.5%

40.6

%41

.7%

42.9

%

FCF

grow

th6.

7%7.

2%7.

6%8.

0%8.

3%8.

6%8.

8%9.

0%9.

1%9.

3%9.

4%

S ens

itivi

ty A

naly

sis

Inve

sted

cap

ital g

row

th

6%7%

8%9%

10%

9%69

.06

65.8

362

.21

58.1

553

.6

10%

78.4

275

.19

71.5

767

.51

62.9

6

11%

88.9

185

.68

82.0

578

.00

73.4

5

12%

100.

6797

.44

93.8

289

.76

85.2

1

13%

113.

8511

0.62

107.

0010

2.95

98.4

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

16Tabl

e 5

ConA

gra,

Inc.

: Ret

urns

on

Inve

sted

Cap

ital

fisca

l yea

r end

s M

ay19

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

96NO

PAT

calcu

latio

nSa

les

1,70

5.2

2,30

8.9

3,30

1.5

5,49

8.2

5,91

1.0

9,00

1.6

9,47

5.0

11,3

40.4

15,5

01.2

19,5

04.7

21,2

19.0

21,5

19.1

23,5

12.2

24,1

08.9

24,8

21.6

Cost

of g

oods

sol

d1,

501.

31,

970.

12,

837.

14,

846.

95,

150.

17,

925.

18,

389.

39,

873.

913

,846

.616

,932

.218

,195

.018

,640

.420

,452

.220

,778

.421

,322

.2G

ross

mar

gin

12.0

%14

.7%

14.1

%11

.8%

12.9

%12

.0%

11.5

%12

.9%

10.7

%13

.2%

14.3

%13

.4%

13.0

%13

.8%

14.1

%S,

G&A

126.

823

7.2

361.

545

7.3

540.

775

4.9

788.

61,

022.

01,

151.

31,

782.

92,

136.

32,

014.

32,

091.

02,

229.

22,

278.

1O

ther

inco

me

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Goo

dwill

amor

tizat

ion

0.0

0.0

0.0

0.0

0.0

0.0

15.0

20.6

31.2

56.0

81.1

90.8

73.6

71.4

68.7

NOP

BT77

.110

1.7

103.

019

3.9

220.

232

1.5

312.

046

5.1

534.

584

5.6

968.

895

5.2

1,04

2.6

1,17

2.7

1,29

0.0

Adju

sted

taxe

s30

.337

.834

.944

.483

.312

1.2

99.6

149.

019

5.2

466.

833

2.2

333.

337

9.0

413.

541

0.5

NOPA

T46

.863

.868

.114

9.5

137.

020

0.3

212.

431

6.1

339.

337

8.8

636.

762

1.9

663.

675

9.2

879.

5

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

n19

.329

.324

.559

.975

.112

2.8

85.4

114.

312

5.2

204.

021

5.3

239.

928

2.9

330.

337

1.3

Defe

rred

taxe

s1.

53.

84.

135

.811

.621

.611

.515

.6(5

.2)

(149

.6)

3.8

4.8

0.5

22.5

76.7

Tax

shie

ld12

.412

.414

.420

.319

.820

.125

.650

.364

.811

3.2

120.

798

.296

.610

5.7

115.

9Ad

just

ed ta

xes

30.3

37.8

34.9

44.4

83.3

121.

299

.614

9.0

195.

246

6.8

332.

233

3.3

379.

041

3.5

410.

5

Inve

sted

cap

ital c

alcu

latio

nCa

sh18

.923

.133

.043

.659

.190

.094

.811

3.4

120.

519

5.0

211.

221

5.2

166.

460

.011

3.7

Acco

unts

rece

ivab

le14

4.5

213.

333

0.3

400.

047

8.3

602.

475

4.4

1,09

4.9

1,30

0.0

1,22

8.9

1,29

0.4

1,42

1.4

1,58

9.6

1,54

0.0

1,42

8.4

Inve

ntor

y17

1.8

311.

040

4.8

579.

664

0.7

864.

01,

096.

11,

383.

11,

648.

82,

019.

82,

373.

92,

439.

22,

884.

43,

167.

33,

573.

4O

ther

cur

rent

ass

ets

10.2

26.2

23.6

39.7

35.9

45.8

57.9

302.

027

8.5

378.

535

2.1

369.

150

2.9

372.

945

1.4

Curre

nt a

sset

s34

5.4

573.

579

1.7

1,06

2.9

1,21

4.0

1,60

2.2

2,00

3.1

2,89

3.3

3,34

7.8

3,82

2.2

4,22

7.6

4,44

4.9

5,14

3.3

5,14

0.2

5,56

6.9

Acco

unts

pay

able

206.

936

9.0

514.

170

3.8

889.

699

4.5

1,20

3.8

1,42

7.4

1,39

0.1

2,36

3.4

2,63

7.6

1,45

9.6

1,61

0.5

1,57

4.8

1,85

6.9

Accr

ued

expe

nses

2.9

5.2

7.7

7.7

8.7

204.

438

5.8

832.

21,

149.

288

4.3

940.

82,

102.

92,

602.

62,

342.

22,

778.

0In

com

e ta

xes

paya

ble

7.6

6.0

15.1

21.8

15.8

24.8

23.6

20.0

45.4

45.1

112.

60.

00.

00.

00.

0NI

BCLs

217.

438

0.2

536.

973

3.3

914.

11,

223.

71,

613.

12,

279.

52,

584.

73,

292.

83,

691.

03,

562.

54,

213.

13,

917.

04,

634.

9

Net w

orki

ng c

apita

l12

8.0

193.

325

4.8

329.

629

9.9

378.

639

0.0

613.

876

3.1

529.

453

6.6

882.

493

0.2

1,22

3.2

932.

0

Net P

,P&E

122.

925

3.2

331.

237

3.8

427.

160

1.9

696.

182

5.5

1,03

4.7

1,94

1.5

2,27

6.8

2,38

8.2

2,58

6.3

2,79

6.0

2,82

0.5

Goo

dwill/

othe

r13

.527

.147

.955

.272

.698

.399

.914

4.7

285.

62,

907.

92,

856.

52,

807.

72,

756.

32,

864.

82,

809.

2Re

stru

ctur

ing

char

ges

-

-

-

-

-

-

-

-

4.8

4.8

4.8

4.8

4.8

4.8

240.

6

Inve

sted

cap

ital

264.

447

3.6

633.

975

8.6

799.

71,

078.

71,

185.

91,

584.

02,

088.

25,

383.

75,

674.

76,

083.

16,

277.

66,

888.

86,

802.

3

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

17Tabl

e 5

ConA

gra,

Inc.

: Ret

urns

on

Inve

sted

Cap

ital

cont

inue

d

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NOPB

T m

argi

n4.

5%4.

4%3.

1%3.

5%3.

7%3.

6%3.

3%4.

1%3.

4%4.

3%4.

6%4.

4%4.

4%4.

9%5.

2%Ca

pita

l tur

ns6.

44.

95.

27.

27.

48.

38.

07.

27.

43.

63.

73.

53.

73.

53.

6Pr

etax

RO

IC29

.2%

21.5

%16

.2%

25.6

%27

.5%

29.8

%26

.3%

29.4

%25

.6%

15.7

%17

.1%

15.7

%16

.6%

17.0

%19

.0%

Tax

39.3

%37

.2%

33.9

%22

.9%

37.8

%37

.7%

31.9

%32

.0%

36.5

%55

.2%

34.3

%34

.9%

36.4

%35

.3%

31.8

%Re

turn

on

inve

sted

cap

ital

17.7

%13

.5%

10.7

%19

.7%

17.1

%18

.6%

17.9

%20

.0%

16.3

%7.

0%11

.2%

10.2

%10

.6%

11.0

%12

.9%

Retu

rn o

n in

cr. i

nv. c

ap.

-

8.1%

2.7%

65.3

%(3

0.6)

%22

.7%

11.3

%26

.0%

4.6%

1.2%

88.6

%(3

.6)%

21.4

%15

.6%

(139

.1)%

Capi

tal t

urno

ver a

nalys

isIn

vent

ory

turn

s9.

97.

48.

29.

59.

210

.48.

68.

29.

49.

78.

98.

88.

27.

66.

9O

pera

ting

wkg.

cap

. tur

ns15

.614

.914

.919

.925

.819

.114

.710

.89.

922

.020

.79.

08.

27.

77.

9G

oodw

ill/ot

her t

urns

125.

985

.169

.099

.681

.491

.694

.978

.454

.36.

77.

47.

78.

58.

48.

8Ne

t P,P

&E tu

rns

13.9

9.1

10.0

14.7

13.8

15.0

13.6

13.7

15.0

10.0

9.3

9.0

9.1

8.6

8.8

Cost

of c

apita

l ana

lysis

Cost

of e

quity

17.6

%16

.0%

15.8

%15

.2%

12.7

%12

.2%

13.3

%13

.4%

13.4

%13

.1%

13.2

%12

.6%

13.0

%13

.0%

11.2

%Co

st o

f deb

t8.

1%6.

5%7.

8%6.

9%5.

4%6.

1%6.

5%6.

2%6.

5%6.

1%5.

7%5.

1%5.

3%5.

1%5.

1%De

bt/to

tal c

apita

l26

.4%

30.5

%29

.1%

20.1

%14

.8%

17.5

%26

.1%

25.3

%21

.2%

31.2

%29

.5%

32.9

%29

.5%

25.8

%21

.3%

WAC

C15

.1%

13.1

%13

.5%

13.5

%11

.6%

11.1

%11

.5%

11.6

%11

.9%

10.9

%11

.0%

10.1

%10

.7%

10.9

%9.

9%Re

turn

on

avg.

inv.

cap

.-

17

.3%

12.3

%21

.5%

17.6

%21

.3%

18.8

%22

.8%

18.5

%10

.1%

11.5

%10

.6%

10.7

%11

.5%

12.8

%Ec

onom

ic p

rofit

-

15.4

(6.4

)55

.246

.595

.782

.115

6.1

120.

3(2

8.5)

29.7

25.7

(0.4

)39

.919

9.4

Sour

ce: C

ompa

ny p

ublis

hed

data

; Dat

astre

am; A

nnua

l Sta

tistic

al D

iges

t, B

oard

of G

over

nors

of t

he F

eder

al R

eser

ve S

yste

m; C

S Fi

rst B

osto

n es

timat

es.

Char

t 3Ch

art 4

ConA

gra,

Inc.

: RO

IC v

s. W

ACC

ConA

gra,

Inc.

: Eco

nom

ic Pr

ofit

8.0%

10.0

%

12.0

%

14.0

%

16.0

%

18.0

%

20.0

%

22.0

%

24.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

ROIC

WAC

C

(50.

0)0.0

50.0

100.

0

150.

0

200.

0

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

18Tabl

e 6

ConA

gra,

Inc.

: Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Sale

s$5

,911

$9,0

02$9

,475

$11,

340

$15,

501

$19,

505

$21,

219

$21,

519

$23,

512

$24,

109

$24,

817

EBIT

220

322

297

445

503

790

888

864

969

1,10

11,

217

Adju

sted

taxe

s83

121

100

149

195

467

332

333

379

436

487

Amor

tizat

ion

of g

oodw

ill0

015

2131

5681

9174

7169

Net

ope

ratin

g pr

ofit

afte

r tax

es (N

OPA

T)$1

37$2

00$2

12$3

16$3

39$3

79$6

37$6

22$6

64$7

36$7

98

Cha

nge

in n

et w

orki

ng c

apita

l($

30)

$77

$11

$224

$149

($23

4)$7

$346

$48

$293

($29

1)Fi

xed

capi

tal (

net o

f dep

reci

atio

n)59

5959

8398

186

121

136

174

195

330

Acqu

isitio

ns (n

et o

f dive

stitu

res)

7622

076

180

1877

054

477

6126

178

Oth

er *

00

00

00

00

00

0In

vest

men

t in

futu

re g

rowt

h 10

635

614

748

726

572

267

255

928

374

911

7

Free

Cas

h Fl

ow (F

CF)

31(1

56)

65(1

71)

75(3

43)

(36)

6338

1(1

3)68

1

Valu

e dr

ivers

199

0-19

96Ra

tes

of re

turn

on

incr

emen

tal i

nves

tmen

tD

efin

ition

sSa

les

4.9%

3 ye

ars

11%

NO

PAT

= EB

IT -

adju

sted

taxe

s +

good

will

Ope

ratin

g M

argi

n4.

3%5

year

s14

%I

= C

hg w

.c.+

Cap

ex (n

et) +

Acq

. (ne

t)C

ash

Tax

Rat

e41

.8%

10 y

ears

15%

FCF

= N

OPA

T - I

Incr

emen

tal W

orki

ng C

apita

l3.

2%In

crem

enta

l Fix

ed C

apita

l21

.5%

Acqu

isitio

ns33

.7%

Oth

er*

0.0%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Incl

udes

cas

h ou

tlays

ass

ocia

ted

with

rest

ruct

urin

g.

Rol

ling

3 ye

ar ra

te o

f ret

urn

on in

crem

enta

l inv

estm

ent

0%5%10%

15%

20%

25%

30% 19

8919

9019

9119

9219

9319

9419

9519

96

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

19Tabl

e 7

ConA

gra,

Inc.

: Cap

ital A

lloca

tion

Ope

ratin

g in

com

e19

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

95A

gri-p

rodu

cts

45

48

47

51

75

80

86

79

84

83

74

Tr

adin

g &

pro

cess

ing

15

15

49

69

85

10

4

103

13

0

102

10

0

155

P

repa

red

food

s13

6

160

22

7

187

26

6

309

60

4

679

69

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ing

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mal

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1996

A19

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1998

E19

99E

2000

E20

01E

2002

E20

03E

2004

E20

05E

2006

E20

07E

2008

E20

09E

2010

E20

11E

2012

E20

13E

2014

E20

15E

2016

E

NO

PAT

880

870

944

1,02

91,

121

1,22

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332

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583

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Sen

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55.4

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55.4

55.4

55.4

55.4

55.4

55.4

55.4

Inve

sted

cap

ital

1,78

6.4

1,90

0.9

2,10

3.1

2,40

3.2

2,83

9.8

2,28

3.5

2,50

6.8

2,79

2.1

3,59

6.3

3,34

6.2

3,85

6.2

3,73

9.0

4,18

3.7

5,67

8.7

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

23Tabl

e 10

CPC

Inte

rnat

iona

l: Re

turn

s on

Inve

sted

Cap

ital

cont

inue

d

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

11.0

%9.

8%8.

9%8.

6%9.

6%10

.2%

12.2

%12

.9%

13.2

%13

.2%

13.2

%13

.5%

13.0

%13

.1%

Cap

ital t

urns

2.3

2.1

2.1

1.8

1.6

2.1

1.9

1.8

1.6

1.8

1.7

1.8

1.8

1.5

Pret

ax R

OIC

25.1

%20

.7%

18.4

%15

.1%

15.4

%21

.8%

23.0

%23

.5%

21.2

%24

.5%

22.6

%24

.3%

23.1

%19

.4%

Tax

35.8

%34

.8%

36.7

%26

.8%

24.2

%53

.2%

39.5

%34

.7%

38.6

%41

.8%

38.9

%39

.5%

42.9

%31

.5%

Ret

urn

on in

vest

ed c

apita

l16

.1%

13.5

%11

.7%

11.0

%11

.6%

10.2

%13

.9%

15.4

%13

.0%

14.3

%13

.8%

14.7

%13

.2%

13.3

%R

etur

n on

incr

. inv

. cap

.55

.4(2

8.0)

%(5

.3)%

6.6%

14.9

%17

.5%

51.4

%28

.3%

5.0%

(3.2

)%11

.0%

(13.

4)%

0.9%

13.5

%

Capi

tal t

urno

ver a

naly

sisIn

vent

ory

turn

s7.

77.

78.

57.

37.

39.

18.

28.

37.

48.

37.

48.

18.

28.

3O

pera

ting

wkg

. cap

. tur

ns5.

25.

05.

34.

94.

85.

75.

04.

94.

35.

04.

64.

94.

85.

4G

oodw

ill/ot

her t

urns

55.4

26.2

29.9

26.1

18.1

20.4

14.2

10.9

6.6

8.1

7.0

7.5

6.7

4.4

Net

P,P

&E tu

rns

3.4

3.4

3.2

2.6

2.3

3.0

2.8

2.9

3.0

3.3

3.1

3.2

3.3

2.9

Cost

of c

apita

l ana

lysis

Cos

t of e

quity

16.1

%14

.7%

15.6

%13

.4%

12.1

%12

.8%

12.8

%12

.4%

12.7

%12

.1%

12.2

%11

.6%

12.1

%11

.6%

Cos

t of d

ebt

6.0%

7.1%

7.0%

6.0%

4.9%

6.4%

6.1%

5.6%

5.8%

5.3%

5.1%

4.4%

5.3%

4.3%

Deb

t/tot

al c

apita

l15

.0%

19.4

%22

.8%

23.1

%31

.9%

22.0

%19

.2%

17.7

%20

.1%

16.8

%15

.9%

15.1

%16

.6%

21.4

%W

ACC

14.6

%13

.3%

13.6

%11

.7%

9.8%

11.4

%11

.5%

11.2

%11

.4%

11.0

%11

.1%

10.5

%11

.0%

10.0

%R

etur

n on

avg

. inv

. cap

.-

13

.9%

12.3

%11

.8%

12.6

%9.

1%14

.5%

16.2

%14

.7%

13.7

%14

.8%

14.5

%14

.0%

15.3

%Ec

onom

ic p

rofit

-

11.8

(27.

3)1.

973

.5(5

8.3)

71.8

131.

410

6.5

95.8

133.

414

8.4

118.

026

1.2

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Char

t 5Ch

art 6

CPC

Inte

rnat

iona

l: RO

IC v

s. W

ACC

CPC

Inte

rnat

iona

l: Ec

onom

ic Pr

ofit

7.0%

8.0%

9.0%

10.0

%

11.0

%

12.0

%

13.0

%

14.0

%

15.0

%

16.0

%

17.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

RO

IC

WA

CC

(100

.0)

(50.

0)0.0

50.0

100.

0

150.

0

200.

0

250.

0

300.

01983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

24Tabl

e 11

CPC

Inte

rnat

iona

l: Ra

tes

of R

etur

n on

Incr

emen

tal I

nves

tmen

t

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Sale

s$4

,210

$4,5

49$4

,903

$4,7

00$5

,103

$5,7

81$6

,189

$6,5

99$6

,738

$7,4

25$8

,432

EBIT

350

420

468

552

633

735

789

838

870

924

1,04

8Ad

just

ed ta

xes

9710

626

622

822

729

534

234

035

941

534

7Am

ortiz

atio

n of

goo

dwill

44

914

1318

2124

2429

37Ne

t ope

ratin

g pr

ofit

afte

r tax

es (N

OPA

T)$2

57$3

18$2

11$3

38$4

19$4

57$4

68$5

22$5

35$5

37$7

38

Chan

ge in

net

wor

king

capi

tal

$35

($13

)($

191)

$83

$96

$236

($12

3)$1

10($

87)

$76

$51

Fixe

d C

apita

l (ne

t of d

epre

ciat

ion)

269

184

2939

(12)

2530

5210

013

319

8Ac

quis

itions

(net

of d

ives

titur

es)

714

7(8

49)

162

152

356

(26)

221

7328

31,

146

Oth

er*

80

00

00

00

076

59In

vest

men

t in

futu

re g

rowt

h31

831

9(1

,011

)28

523

661

7(1

19)

382

8656

81,

454

Free

Cas

h Fl

ow (F

CF)

(62)

(0)

1,22

253

183

(159

)58

714

044

9(3

0)(7

16)

Valu

e dr

ivers

199

0-19

95Ra

tes

of re

turn

on

incr

emen

tal in

vest

men

tDe

finitio

nsSa

les

7.8%

3 ye

ars

21%

NOPA

T=

EBIT

- ad

just

ed ta

xes

+ go

odw

illO

pera

ting

Mar

gin

12.6

%5

year

s18

%I

= Ch

g w.

c.+C

ap e

x (n

et) +

Acq

. (ne

t)Ca

sh T

ax R

ate

40.3

%10

yea

rs29

%FC

F=

NOPA

T - I

Incr

emen

tal W

orki

ng C

apita

l9.

9%In

crem

enta

l Fixe

d C

apita

l20

.3%

Acqu

isitio

ns77

.4%

Oth

er*

5.1%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Incl

udes

cas

h ou

tlays

ass

ocia

ted

with

rest

ruct

urin

g.

Rol

ling

3 ye

ar

rate

of r

etur

n on

inc

rem

enta

l inv

estm

ent

-60%

-50%

-40%

-30%

-20%

-10%0%10%

20%

30%

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

25Tabl

e 12

CPC

Inte

rnat

iona

l: Ca

pita

l Allo

catio

nO

pera

ting

inco

me

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Con

sum

er fo

ods

318

34

4

400

44

7

495

56

8

640

67

5

706

73

8

817

B

akin

g-

-

-

-

-

-

-

-

-

-

40

Cor

n re

finin

g40

88

89

114

14

8

178

15

8

174

17

7

201

20

8

Tota

l35

8

432

48

8

561

64

3

746

79

8

849

88

3

939

1,

065

Asse

tsC

onsu

mer

food

s1,

521

1,90

4

2,

219

2,28

2

2,

661

3,47

2

3,

494

4,17

3

3,

997

4,51

6

5,

043

Bak

ing

-

-

-

-

-

-

-

-

-

1,21

5

C

orn

refin

ing

1,49

6

1,

746

1,04

2

1,

060

1,04

3

1,

018

1,01

6

99

9

1,06

3

1,

152

1,24

4

To

tal

3,01

6

3,

650

3,26

1

3,

342

3,70

4

4,

490

4,51

0

5,

172

5,06

0

5,

668

7,50

2

Cap

ital e

xpen

ditu

res

Con

sum

er fo

ods

154

16

3

226

16

6

143

18

2

211

24

0

248

24

8

253

B

akin

g-

-

-

-

-

-

-

-

-

-

34

Cor

n re

finin

g27

0

198

78

60

73

80

66

71

13

8

129

18

3

Tota

l42

4

361

30

4

226

21

5

262

27

7

311

38

6

377

47

0

Ret

urn

on a

sset

sC

onsu

mer

food

s20

.9%

18.1

%18

.0%

19.6

%18

.6%

16.4

%18

.3%

16.2

%17

.7%

16.3

%16

.2%

Bak

ing

-

-

-

-

-

-

-

-

-

-

3.3%

Cor

n re

finin

g2.

7%5.

1%8.

5%10

.7%

14.2

%17

.5%

15.6

%17

.4%

16.7

%17

.4%

16.7

%To

tal

11.9

%11

.8%

15.0

%16

.8%

17.4

%16

.6%

17.7

%16

.4%

17.4

%16

.6%

14.2

%

Sou

rce:

Com

pany

pub

lishe

d da

ta, C

S F

irst B

osto

n es

timat

es

-

1,00

0

2,00

0

3,00

0

4,00

0

5,00

0

6,00

0

Con

sum

erfo

ods

Bak

ing

Cor

nre

finin

g

Con

sum

er fo

ods

Bak

ing

Cor

n re

finin

g

67%

16%

17%

Ass

ets,

199

5

0%20%

40%

60%

80%

100%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Cor

n re

finin

g

Bak

ing

Con

sum

er fo

ods

Cap

ital e

xpen

ditu

res

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

26Tabl

e 13

CPC

Inte

rnat

iona

l: Va

lue

Drive

r Mat

rixSa

les

grow

thO

pera

ting

Wor

king

and

fixe

d(in

$ m

illion

s)Sa

les

base

Uni

tsPr

icin

gm

argi

nsca

pita

l nee

ds (a

)Bu

sine

ss ri

skO

ther

risk

(b)

Best

Foo

ds$1

,699

1-2%

1-2%

14-1

5%sm

all

low

low

Baki

ng$6

751-

2%1-

2%6-

7%sm

all

low

low

Euro

pean

Foo

ds$3

,438

6-8%

2-4%

10-1

2%sm

all

low

low

L.A.

Foo

ds$1

,023

10-1

5%0-

5%16

-17%

smal

lm

ediu

mm

ediu

m

Asia

$364

15-2

0%0%

17-1

9%sm

all

med

ium

med

ium

N.A

. Cor

n R

efin

ing

$816

1-2%

1-2%

18-2

0%sm

all

med

ium

med

ium

L.A.

Cor

n R

efin

ing

$358

8-10

%0%

14-1

5%sm

all

med

ium

med

ium

Asia

Cor

n R

efin

ing

$59

10%

+0%

----

med

ium

med

ium

med

ium

CPC

Inte

rnat

iona

l$8

,432

+4-6

%+1

-2%

13-1

4%10

-15%

med

ium

med

ium

5 yr

avg

90-9

57.

8%12

.9%

35.3

%

Bet

a =

0.90

Sour

ce: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

.

Not

e: (a

) Wor

king

and

fixe

d ca

pita

l nee

ds a

s a

% o

f cha

nge

in s

ales

(net

of n

on-c

ash

char

ges)

.

(b

) Oth

er ri

sks

incl

ude

vola

tility

in ra

w m

ater

ials

, cur

renc

y ris

k an

d re

inve

stm

ent r

isk.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

27Tabl

e 14

CPC

Inte

rnat

iona

l: DC

F An

alys

is

NO

PAT

gro

wth

10%

Inve

sted

cap

ital g

row

thR

etur

n on

incr

emen

tal c

apita

lC

APFC

F P

rice

Inve

sted

cap

ital g

row

th6%

3-ye

ar5-

year

10-y

ear

3-ye

ar5-

year

10-y

ear

1010

.9%

$54.

31

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

24%

5.9%

7.9%

7.0%

3.1%

9.7%

14.9

%15

11.2

%$7

0.37

Deb

t2,

723

2011

.3%

$87.

69

WA

CC

9.9%

1711

.3%

$77.

16

Cas

h10

0

Sha

res

outs

tand

ing

146

Yea

r 0 is

nor

mal

ized

1995

A19

96E

1997

E19

98E

1999

E20

00E

2001

E20

02E

2003

E20

04E

2005

E20

06E

2007

E20

08E

2009

E20

10E

2011

E20

12E

2013

E20

14E

2015

E

NO

PAT

755

733

800

879

967

1,06

41,

171

1,28

81,

416

1,55

81,

714

1,88

52,

074

2,28

12,

509

2,76

03,

036

3,34

03,

674

4,04

14,

445

Inve

stm

ent i

n fu

ture

355

598

238

391

414

439

466

493

523

554

588

623

660

700

742

787

834

884

937

993

1,05

3

Free

Cas

h Fl

ow40

013

556

148

955

362

570

579

489

31,

004

1,12

61,

262

1,41

31,

581

1,76

71,

974

2,20

22,

456

2,73

73,

048

3,39

3

PV

of F

CF

400

123

465

368

379

390

400

410

420

429

438

447

455

463

471

479

486

493

500

507

513

Cum

ulat

ive

PV

of F

CF

400

123

588

956

1,33

51,

725

2,12

52,

535

2,95

53,

384

3,82

24,

268

4,72

35,

187

5,65

86,

137

6,62

37,

116

7,61

68,

123

8,63

6

Res

idua

l Val

ue7,

627

7,40

28,

074

8,88

19,

769

10,7

4611

,821

13,0

0314

,303

15,7

3317

,307

19,0

3720

,941

23,0

3525

,339

27,8

7330

,660

33,7

2637

,098

40,8

0844

,889

PV

of R

esid

ual V

alue

7,62

76,

735

6,68

46,

690

6,69

66,

702

6,70

86,

714

6,72

06,

726

6,73

26,

738

6,74

46,

750

6,75

66,

762

6,76

86,

774

6,78

06,

786

6,79

2

Cor

pora

te V

alue

8,02

76,

858

7,27

27,

646

8,03

18,

427

8,83

39,

249

9,67

510

,109

10,5

5311

,006

11,4

6711

,937

12,4

1412

,898

13,3

9113

,890

14,3

9614

,909

15,4

28

Cas

h10

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

0

Deb

t2,

723

2,72

32,

723

2,72

32,

723

2,72

32,

723

2,72

32,

723

2,72

32,

723

2,72

32,

723

2,72

32,

723

2,72

32,

723

2,72

32,

723

2,72

32,

723

Sha

reho

lder

val

ue5,

404

4,23

54,

649

5,02

35,

408

5,80

46,

210

6,62

67,

052

7,48

67,

930

8,38

38,

844

9,31

49,

791

10,2

7510

,768

11,2

6711

,773

12,2

8612

,805

Sha

res

outs

tand

ing

146

146

146

146

146

146

146

146

146

146

146

146

146

146

146

146

146

146

146

146

146

Sha

reho

lder

val

ue p

er s

hare

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$7

7.16

$--.-

-$-

-.--

$--.-

-

Yea

r1

23

45

67

89

1011

1213

1415

1617

1819

20

Inve

sted

cap

ital

5,67

96,

276

6,51

56,

905

7,32

07,

759

8,22

58,

718

9,24

19,

796

10,3

8311

,006

11,6

6712

,367

13,1

0913

,895

14,7

2915

,613

16,5

4917

,542

18,5

95

Ret

urn

on in

vest

ed c

apita

l (av

g)13

.3%

12.3

%12

.5%

13.1

%13

.6%

14.1

%14

.6%

15.2

%15

.8%

16.4

%17

.0%

17.6

%18

.3%

19.0

%19

.7%

20.4

%21

.2%

22.0

%22

.8%

23.7

%24

.6%

Rat

e of

retu

rn o

n in

crem

enta

l cap

ital

11.1

%33

.6%

22.5

%23

.3%

24.2

%25

.1%

26.1

%27

.1%

28.1

%29

.2%

30.3

%31

.4%

32.6

%33

.8%

35.1

%36

.4%

37.8

%39

.2%

40.7

%

FCF

grow

th10

.9%

11.0

%11

.1%

11.2

%11

.2%

11.2

%11

.3%

11.3

%11

.3%

11.3

%11

.3%

Sen

sitiv

ity A

naly

sis

Inve

sted

cap

ital g

row

th

4%5%

6%7%

8%

8%66

.49

61.9

256

.82

51.1

344

.80

9%76

.11

71.5

366

.44

60.7

554

.42

10%

86.8

482

.26

77.1

671

.47

65.1

4

11%

98.7

994

.21

89.1

183

.43

77.0

9

12%

112.

1110

7.54

102.

4496

.75

90.4

2

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

28Tabl

e 15

Gen

eral

Mills

: Ret

urns

on

Inve

sted

Cap

ital

fisca

l yea

r end

s M

ay19

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

96NO

PAT

calc

ulat

ion

Sale

s5,

312.

15,

550.

85,

600.

84,

285.

24,

586.

65,

189.

35,

178.

85,

620.

66,

448.

37,

153.

27,

777.

88,

134.

68,

516.

95,

026.

75,

416.

0Co

st o

f goo

ds s

old

3,08

1.6

3,12

3.3

3,16

5.9

2,47

4.8

2,56

3.9

2,83

4.0

2,84

7.8

3,11

4.8

3,48

5.1

3,72

2.1

4,12

3.2

4,29

7.6

4,45

8.2

2,02

3.0

2,24

1.0

Gro

ss m

argi

n42

.0%

43.7

%43

.5%

42.2

%44

.1%

45.4

%45

.0%

44.6

%46

.0%

48.0

%47

.0%

47.2

%47

.7%

59.8

%58

.6%

S,G

&A1,

748.

71,

959.

11,

982.

51,

478.

51,

658.

81,

888.

11,

850.

51,

960.

82,

318.

12,

604.

42,

751.

92,

919.

43,

059.

32,

314.

72,

317.

8O

ther

inco

me

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Goo

dwill

amor

tizat

ion

6.2

5.2

4.1

2.8

1.8

3.0

2.7

3.5

4.0

5.0

5.4

3.4

4.0

5.0

5.0

NOP

BT48

8.0

473.

645

6.5

334.

736

5.7

470.

248

3.2

548.

564

9.1

831.

790

8.1

921.

01,

003.

469

4.0

862.

2Ad

just

ed ta

xes

207.

914

9.1

205.

515

4.9

138.

020

7.7

161.

524

3.9

230.

532

1.4

373.

533

8.7

364.

017

2.3

271.

3NO

PAT

280.

132

4.5

251.

017

9.8

227.

726

2.5

321.

730

4.7

418.

651

0.3

534.

658

2.3

639.

452

1.7

590.

9

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

n18

1.2

164.

616

5.3

80.5

140.

121

1.2

177.

420

2.2

239.

030

1.4

338.

934

7.6

283.

621

7.2

279.

4De

ferre

d ta

xes

7.8

42.5

(12.

0)(4

6.7)

19.9

16.0

30.2

(31.

2)20

.83.

2(1

2.5)

36.9

(42.

7)83

.446

.6Ta

x sh

ield

34.5

27.0

28.2

27.7

17.8

12.5

14.3

10.5

12.3

23.2

22.1

28.0

37.7

38.5

38.5

Adju

sted

taxe

s20

7.9

149.

120

5.5

154.

913

8.0

207.

716

1.5

243.

923

0.5

321.

437

3.5

338.

736

4.0

172.

327

1.3

Inve

sted

cap

ital c

alcu

latio

nCa

sh33

.455

.556

.042

.945

.951

.914

.610

.60.

739

.80.

581

.30.

213

.020

.6Ac

coun

ts re

ceiv

able

408.

646

8.3

550.

628

4.5

220.

023

6.7

230.

025

4.6

258.

730

6.3

291.

928

7.4

309.

727

7.3

337.

8In

vent

ory

660.

663

2.8

661.

737

7.7

350.

938

8.6

423.

537

0.1

394.

449

3.6

487.

243

9.0

488.

337

2.0

395.

5O

ther

cur

rent

ass

ets

156.

419

9.0

111.

655

7.6

43.2

60.9

317.

820

6.0

256.

324

2.6

255.

025

0.5

331.

023

4.6

240.

7Cu

rrent

ass

ets

1,25

9.0

1,35

5.6

1,37

9.9

1,26

2.7

660.

073

8.1

985.

984

1.3

910.

11,

082.

31,

034.

61,

058.

21,

129.

289

6.9

994.

6

Acco

unts

pay

able

333.

141

0.1

477.

836

0.8

382.

443

4.0

460.

843

6.8

518.

257

8.7

632.

561

7.0

650.

449

4.0

590.

7Ac

crue

d ex

pens

es21

7.1

215.

028

2.0

255.

826

7.7

276.

028

3.7

322.

134

2.7

382.

140

9.4

398.

245

4.9

411.

525

9.9

Inco

me

taxe

s pa

yabl

e68

.978

.074

.31.

497

.511

6.4

75.3

145.

712

8.7

159.

212

7.9

139.

717

8.3

108.

812

4.3

NIBC

Ls61

9.1

703.

183

4.1

618.

074

7.6

826.

481

9.8

904.

698

9.6

1,12

0.0

1,16

9.8

1,15

4.9

1,28

3.6

1,01

4.3

974.

9

Net w

orki

ng c

apita

l63

9.9

652.

554

5.8

644.

7(8

7.6)

(88.

3)16

6.1

(63.

3)(7

9.5)

(37.

7)(1

35.2

)(9

6.7)

(154

.4)

(117

.4)

19.7

Net P

,P&

E1,

054.

11,

197.

51,

229.

495

6.0

1,08

4.9

1,24

9.5

1,37

6.4

1,58

8.1

1,93

4.5

2,24

1.3

2,64

8.6

2,85

9.6

3,09

2.6

1,45

6.6

1,31

2.4

Goo

dwill/

othe

r19

8.0

187.

314

6.0

50.8

196.

956

.411

5.8

146.

026

4.4

340.

138

0.7

413.

459

2.1

790.

077

5.0

Rest

ruct

urin

g ch

arge

s-

-

-

30

.5

30.5

30

.5

30.5

30

.5

30.5

30

.5

30.5

30

.5

30.5

11

5.2

115.

2

Inve

sted

cap

ital

1,89

2.0

2,03

7.3

1,92

1.2

1,68

2.0

1,22

4.7

1,24

8.1

1,68

8.8

1,70

1.3

2,14

9.9

2,57

4.2

2,92

4.6

3,20

6.8

3,56

0.8

2,24

4.4

2,22

2.3

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

29Tabl

e 15

Gen

eral

Mills

: Ret

urns

on

Inve

sted

Cap

ital

cont

inue

d

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Ret

urn

on in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

9.2%

8.5%

8.2%

7.8%

8.0%

9.1%

9.3%

9.8%

10.1

%11

.6%

11.7

%11

.3%

11.8

%13

.8%

15.9

%C

apita

l tur

ns2.

82.

72.

92.

53.

74.

23.

13.

33.

02.

82.

72.

52.

42.

22.

4

Pret

ax R

OIC

25.8

%23

.2%

23.8

%19

.9%

29.9

%37

.7%

28.6

%32

.2%

30.2

%32

.3%

31.1

%28

.7%

28.2

%30

.9%

38.8

%Ta

x42

.6%

31.5

%45

.0%

46.3

%37

.7%

44.2

%33

.4%

44.5

%35

.5%

38.6

%41

.1%

36.8

%36

.3%

24.8

%31

.5%

Ret

urn

on in

vest

ed c

apita

l14

.8%

15.9

%13

.1%

10.7

%18

.6%

21.0

%19

.0%

17.9

%19

.5%

19.8

%18

.3%

18.2

%18

.0%

23.2

%26

.6%

Ret

urn

on in

cr. i

nv. c

ap.

-

30.6

%63

.3%

29.7

%(1

0.5)

%14

8.9%

13.4

%(1

36.2

)%25

.4%

21.6

%6.

9%16

.9%

16.1

%8.

9%(3

12.8

)%

Cap

ital t

urno

ver a

nalys

isIn

vent

ory

turn

s8.

08.

88.

511

.313

.113

.412

.215

.216

.314

.516

.018

.517

.413

.513

.7O

pera

ting

wkg.

cap

. tur

ns7.

28.

07.

614

.224

.327

.126

.929

.947

.832

.353

.174

.457

.732

.438

.0G

oodw

ill/o

ther

turn

s26

.829

.638

.484

.423

.392

.044

.738

.524

.421

.020

.419

.714

.46.

47.

0N

et P

,P&E

turn

s5.

04.

64.

64.

54.

24.

23.

83.

53.

33.

22.

92.

82.

83.

54.

1

Cos

t of c

apita

l ana

lysi

sC

ost o

f equ

ity17

.3%

15.0

%16

.0%

13.8

%12

.6%

13.1

%13

.2%

12.8

%13

.2%

12.6

%12

.7%

12.1

%12

.5%

12.1

%11

.0%

Cos

t of d

ebt

8.1%

6.9%

6.8%

6.0%

5.1%

6.6%

6.3%

5.8%

6.0%

5.5%

5.2%

4.5%

5.4%

4.4%

4.9%

Deb

t/tot

al c

apita

l14

.9%

15.2

%22

.9%

25.0

%12

.0%

8.4%

16.1

%10

.9%

11.7

%9.

7%9.

7%13

.5%

18.4

%16

.4%

15.0

%W

ACC

15.9

%13

.8%

13.9

%11

.9%

11.7

%12

.6%

12.1

%12

.1%

12.3

%11

.9%

12.0

%11

.1%

11.2

%10

.8%

10.1

%R

etur

n on

avg

. inv

. cap

.-

16

.5%

12.7

%10

.0%

15.7

%21

.2%

21.9

%18

.0%

21.7

%21

.6%

19.4

%19

.0%

18.9

%18

.0%

26.5

%Ec

onom

ic p

rofit

-

53.8

(23.

5)(3

3.7)

58.1

106.

814

4.4

99.9

181.

222

9.6

205.

724

1.8

260.

520

7.1

365.

5

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Not

e:

Res

ults

prio

r to

1994

refle

ct in

clus

ion

of re

stau

rant

ope

ratio

ns.

Char

t 7Ch

art 8

Gen

eral

Mills

: RO

IC v

s. W

ACC

Gen

eral

Mills

: Eco

nom

ic Pr

ofit

9.0%

11.0

%

13.0

%

15.0

%

17.0

%

19.0

%

21.0

%

23.0

%

25.0

%

27.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

RO

IC

WAC

C

(50.

0)0.0

50.0

100.

0

150.

0

200.

0

250.

0

300.

0

350.

0

400.

01983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

30Tabl

e 16

Gen

eral

Mills

: Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Sale

s$4

,587

$5,1

89$5

,179

$5,6

21$6

,448

$7,1

53$7

,778

$8,1

35$8

,517

$5,0

27$5

,416

EBIT

364

467

481

545

645

827

903

985

774

689

858

Adju

sted

taxe

s13

820

816

224

423

132

137

433

936

417

227

1Am

ortiz

atio

n of

goo

dwill

23

34

45

53

45

5N

et o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$228

$262

$322

$305

$419

$510

$535

$649

$414

$522

$592

Cha

nge

in n

et w

orki

ng c

apita

l($

557)

($1)

$254

($22

9)($

16)

$42

($98

)$3

9($

58)

$37

$137

Fixe

d ca

pita

l (ne

t of d

epre

ciat

ion)

134

200

261

285

352

331

445

347

39(3

5)(5

3)Ac

quis

itions

(net

of d

ivest

iture

s)(3

85)

(87)

13(5

86)

(32)

(23)

(47)

5614

1(1

40)

40O

ther

*0

00

00

00

570

270

Inve

stm

ent i

n fu

ture

gro

wth

(809

)11

352

8(5

30)

304

350

300

499

122

(111

)12

4

Free

Cas

h Fl

ow1,

036

150

(207

)83

511

516

023

415

029

263

346

7

Valu

e dr

ivers

199

1-19

96Ra

tes

of re

turn

on

incr

emen

tal i

nves

tmen

tD

efin

ition

sSa

les

-5.4

%3

year

s-1

1%NO

PAT

= EB

IT -

adju

sted

taxe

s +

good

will

Ope

ratin

g M

argi

n12

.0%

5 ye

ars

7%I

= C

hg w

.c.+

Cap

ex (n

et) +

Acq

. (ne

t)C

ash

Tax

Rat

e36

.6%

10 y

ears

48%

FCF

= N

OPA

T - I

Incr

emen

tal W

orki

ng C

apita

l-5

.7%

Incr

emen

tal F

ixed

Cap

ital

-61.

9%Ac

quis

itions

-1.6

%O

ther

*-4

.8%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Incl

udes

cas

h ou

tlays

ass

ocia

ted

with

rest

ruct

urin

g.

Not

e: R

esul

ts p

rior t

o 19

94 in

clud

e re

stau

rant

ope

ratio

ns.

Rol

ling

3 ye

ar ra

te o

f ret

urn

on in

crem

enta

l inv

estm

ent

-50%0%50

%

100%

150%

200%

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

31Tabl

e 17

Gen

eral

Mills

: Cap

ital A

lloca

tion

Ope

ratin

g in

com

e19

8519

8619

8719

8819

8919

9019

9119

9219

9319

94C

onsu

mer

food

s18

6

235

32

5

355

40

3

476

56

6

689

71

9

706

R

esta

uran

ts

47

71

81

88

114

15

4

152

17

3

189

19

4

Spe

cial

ty re

taili

ng &

oth

er(3

7)

16

26

-

-

-

-

-

-

-

Tota

l19

6

322

43

2

443

51

8

630

71

8

862

90

8

900

Iden

tifia

ble

asse

tsC

onsu

mer

food

s1,

639

1,29

8

1,

393

1,73

5

1,

572

2,10

1

2,

479

2,73

9

2,

865

3,15

0

R

esta

uran

ts

690

55

6

683

93

7

862

1,

189

1,42

3

1,

566

1,78

5

2,

049

Spe

cial

ty re

taili

ng &

oth

er33

3

232

20

4

-

-

-

-

-

-

-

Tota

l2,

663

2,08

5

2,

280

2,67

2

2,

434

3,29

0

3,

902

4,30

5

4,

650

5,19

8

Cap

ital e

xpen

ditu

res

Con

sum

er fo

ods

126

15

5

153

22

1

257

30

0

280

39

8

322

21

1

Res

taur

ants

50

74

14

6

190

18

5

241

27

5

298

30

2

349

S

peci

alty

reta

iling

& o

ther

28

17

30

-

-

-

-

-

-

-

To

tal

204

24

5

329

41

1

442

54

0

555

69

5

624

56

0

Ret

urn

on id

entif

iabl

e as

sets

Con

sum

er fo

ods

11.3

%18

.1%

23.3

%20

.5%

25.7

%22

.6%

22.8

%25

.2%

25.1

%22

.4%

Res

taur

ants

6.

8%12

.7%

11.9

%9.

4%13

.2%

13.0

%10

.7%

11.0

%10

.6%

9.5%

Spe

cial

ty re

taili

ng &

oth

er-1

1.1%

6.9%

12.9

%-

-

-

-

-

-

-

To

tal

7.3%

15.4

%18

.9%

16.6

%21

.3%

19.1

%18

.4%

20.0

%19

.5%

17.3

%

Sou

rce:

Com

pany

pub

lishe

d da

ta, C

S F

irst B

osto

n es

timat

es

-50

0

1,0

00

1,5

00

2,0

00

2,5

00

3,0

00

3,5

00

Con

sum

erfo

ods

Res

taur

ants

Con

sum

er f

ood

s

Res

tau

ran

ts

61%

39%

Iden

tifia

ble

Ass

ets,

199

4

0%10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

Spe

cial

ty re

taili

ng &

othe

r

Res

taur

ants

Con

sum

er fo

ods

Cap

ital e

xpen

ditu

res

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

32Tabl

e 18

Gen

eral

Mills

: Val

ue D

river

Mat

rixSa

les

grow

thO

pera

ting

Wor

king

and

fixe

d(in

$ m

illion

s)

Sale

s ba

seU

nits

Pric

ing/

Mix

mar

gins

capi

tal n

eeds

(a)

Busi

ness

risk

Oth

er ri

sk (b

)Bi

g G

$2,2

103-

4%0%

20-2

3%sm

all

low

low

Des

serts

450

3-4%

2-3%

12-1

4%sm

all

low

low

Flou

r (Ba

king

& re

tail)

320

1-2%

0-1%

9-10

%sm

all

low

low

Hel

per/P

otat

o/Si

de D

ishe

s35

03-

4%2-

3%12

-14%

smal

llo

wlo

w

Snac

ks50

55-

6%0-

1%12

-14%

smal

llo

wlo

w

Yogu

rt32

55-

6%0-

1%11

-13%

smal

llo

wlo

w

Inte

rnat

iona

l/Oth

er1,

255

8-10

%0-

1%11

-13%

smal

llo

wlo

w

Gen

eral

Mills

$5

,415

3-4%

1-2%

15-1

8%35

-40%

low

low

5 yr

avg

3.1%

14.7

%24

.7%

B

eta=

1.00

So

urce

: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

.

Not

e: (a

) Wor

king

and

fixe

d ca

pita

l nee

ds a

s a

% o

f cha

nge

in s

ales

(net

of n

on-c

ash

char

ges)

.

(

b) O

ther

risk

s in

clud

e vo

latil

ity in

raw

mat

eria

ls, c

urre

ncy

risk

and

rein

vest

men

t ris

k.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

33Tabl

e 19

Gen

eral

Mills

: DCF

Ana

lysis

NO

PA

T gr

owth

9%C

APFC

F Pr

ice

Inve

sted

cap

ital g

row

th4%

103.

3%$4

4.92

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

167%

155.

3%$5

4.89

Deb

t1,

622

206.

3%$6

4.06

WA

CC

11.3

%18

6.0%

$60.

48

Cas

h0

Sha

res

outs

tand

ing

159

Yea

r 0 is

nor

mal

ized

1996

A19

97E

1998

E19

99E

2000

E20

01E

2002

E20

03E

2004

E20

05E

2006

E20

07E

2008

E20

09E

2010

E20

11E

2012

E20

13E

2014

E20

15E

2016

E

NO

PAT

591

576

661

720

785

855

932

1,01

61,

108

1,20

71,

316

1,43

51,

564

1,70

41,

858

2,02

52,

207

2,40

62,

623

2,85

93,

116

Inve

stm

ent i

n fu

ture

(281

)(6

1)(1

63)

8083

8690

9497

101

105

109

114

118

123

128

133

138

144

150

156

Free

Cas

h Fl

ow87

263

682

364

070

276

984

292

31,

011

1,10

61,

211

1,32

51,

450

1,58

61,

735

1,89

72,

074

2,26

82,

479

2,70

92,

960

PV

of F

CF

872

572

665

465

458

451

444

437

430

423

417

410

403

396

389

383

376

370

363

357

350

Cum

ulat

ive

PV

of F

CF

872

572

1,23

71,

702

2,16

02,

611

3,05

53,

492

3,92

24,

346

4,76

25,

172

5,57

55,

971

6,36

16,

743

7,11

97,

489

7,85

28,

209

8,55

9

Res

idua

l Val

ue5,

247

5,11

05,

866

6,39

36,

969

7,59

68,

280

9,02

59,

837

10,7

2211

,687

12,7

3913

,886

15,1

3616

,498

17,9

8319

,601

21,3

6523

,288

25,3

8427

,669

PV

of R

esid

ual V

alue

5,24

74,

593

4,73

84,

642

4,54

84,

455

4,36

54,

276

4,18

94,

104

4,02

03,

939

3,85

93,

780

3,70

33,

628

3,55

43,

482

3,41

13,

342

3,27

4

Cor

pora

te V

alue

6,11

95,

165

5,97

56,

344

6,70

77,

066

7,41

97,

768

8,11

18,

450

8,78

39,

111

9,43

49,

751

10,0

6410

,372

10,6

7410

,971

11,2

6411

,551

11,8

33

Cas

h0

00

00

00

00

00

00

00

00

00

00

Deb

t1,

622

1,62

21,

622

1,62

21,

622

1,62

21,

622

1,62

21,

622

1,62

21,

622

1,62

21,

622

1,62

21,

622

1,62

21,

622

1,62

21,

622

1,62

21,

622

Shar

ehol

der v

alue

4,49

63,

543

4,35

34,

721

5,08

55,

443

5,79

76,

146

6,48

96,

827

7,16

07,

488

7,81

18,

129

8,44

28,

749

9,05

29,

349

9,64

19,

928

10,2

11

Sha

res

outs

tand

ing

159

159

159

159

159

159

159

159

159

159

159

159

159

159

159

159

159

159

159

159

159

Shar

ehol

der v

alue

per

sha

re$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

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-$-

-.--

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-.--

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-$6

0.48

$--.-

-$-

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Yea

r1

23

45

67

89

1011

1213

1415

1617

1819

20

Inve

sted

cap

ital

2,22

22,

162

1,99

92,

079

2,16

22,

248

2,33

82,

432

2,52

92,

630

2,73

52,

845

2,95

83,

077

3,20

03,

328

3,46

13,

599

3,74

33,

893

4,04

9

Ret

urn

on in

vest

ed c

apita

l (av

g)26

.6%

26.3

%31

.8%

35.3

%37

.0%

38.8

%40

.7%

42.6

%44

.7%

46.8

%49

.1%

51.4

%53

.9%

56.5

%59

.2%

62.0

%65

.0%

68.2

%71

.4%

74.9

%78

.5%

Rat

e of

retu

rn o

n in

crem

enta

l cap

ital

-139

.9%

-36.

5%81

.1%

85.0

%89

.0%

93.3

%97

.8%

102.

5%10

7.4%

112.

6%11

8.0%

123.

7%12

9.6%

135.

9%14

2.4%

149.

2%15

6.4%

163.

9%17

1.8%

FCF

grow

th3.

3%3.

9%4.

3%4.

7%5.

0%5.

3%5.

6%5.

8%6.

0%6.

1%6.

3%

S ens

itiv

ity A

naly

sis

Inve

sted

cap

ital g

row

th

2%3%

4%5%

6%

7%50

.91

49.9

448

.87

47.6

746

.32

8%56

.39

55.4

354

.35

53.1

551

.81

9%62

.53

61.5

660

.48

59.2

857

.94

10%

69.3

968

.42

67.3

566

.15

64.8

11%

77.0

776

.11

75.0

373

.83

72.4

8

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

34Tabl

e 20

H.J.

Hei

nz &

Com

pany

: Ret

urns

on

Inve

sted

Cap

ital

fisca

l yea

r end

s Ap

rily

p19

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

96NO

PAT

calcu

latio

nSa

les

3,68

8.5

3,73

8.4

3,95

3.8

4,04

7.9

4,36

6.2

4,63

9.5

5,24

4.2

5,80

0.9

6,08

5.7

6,64

7.1

6,58

1.9

7,10

3.4

7,04

6.7

8,08

6.8

9,11

2.3

Cost

of g

oods

sol

d2,

384.

22,

355.

82,

446.

22,

475.

52,

622.

22,

779.

83,

174.

23,

550.

23,

726.

64,

063.

44,

102.

84,

530.

64,

381.

75,

119.

65,

775.

4G

ross

mar

gin

35.4

%37

.0%

38.1

%38

.8%

39.9

%40

.1%

39.5

%38

.8%

38.8

%38

.9%

37.7

%36

.2%

37.8

%36

.7%

36.6

%S,

G&A

942.

198

6.2

1,05

3.4

1,08

1.0

1,19

2.8

1,26

6.7

1,38

2.1

1,44

7.1

1,43

7.2

1,54

6.6

1,59

4.0

1,71

1.9

1,72

3.7

1,81

1.4

2,04

9.3

Oth

er in

com

e0.

00.

00.

00.

00.

00.

00.

00.

00.

00.

00.

00.

00.

00.

00.

0G

oodw

ill am

ortiz

atio

n5.

25.

55.

75.

95.

910

.713

.922

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.841

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.059

.877

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.2NO

PBT

367.

440

2.0

459.

849

7.4

557.

060

3.6

701.

982

5.7

949.

41,

065.

992

6.6

909.

91,

001.

11,

232.

81,

376.

8Ad

just

ed ta

xes

130.

414

7.5

146.

716

8.2

182.

320

0.4

229.

528

2.3

308.

233

8.9

388.

829

1.3

308.

731

3.2

481.

4NO

PAT

237.

025

4.5

313.

132

9.2

374.

740

3.2

472.

454

3.4

641.

272

7.0

537.

761

8.6

692.

491

9.7

895.

4

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

n10

6.1

136.

116

4.7

179.

319

8.0

226.

123

6.6

284.

730

7.0

335.

034

6.1

263.

131

9.4

347.

036

4.3

Defe

rred

taxe

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811

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.228

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16.3

53.5

99.9

(28.

6)Ta

x sh

ield

27.1

23.2

21.4

24.3

26.7

5.0

13.0

16.8

29.4

39.0

33.6

44.5

42.7

66.1

88.4

Adju

sted

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147.

514

6.7

168.

218

2.3

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9.5

282.

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8.8

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313.

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1.4

Inve

sted

cap

ital c

alcu

latio

nCa

sh36

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coun

ts re

ceiv

able

358.

329

7.0

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3.5

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6.3

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8.9

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703.

862

5.3

700.

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8.4

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6.9

797.

190

2.7

993.

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7.9

1,03

4.9

1,18

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1,14

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1,37

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Oth

er c

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nt a

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2.5

127.

313

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nt a

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145.

21,

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51,

139.

51,

253.

81,

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51,

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01,

595.

31,

833.

51,

872.

32,

073.

02,

470.

12,

219.

62,

696.

83,

029.

4

Acco

unts

pay

able

296.

924

2.3

287.

328

2.1

324.

233

3.4

397.

140

7.1

460.

051

5.5

512.

953

3.8

575.

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0.7

870.

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crue

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pens

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7.9

215.

323

2.8

238.

825

7.4

317.

336

1.2

385.

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5.3

339.

146

8.9

669.

554

6.9

689.

876

2.6

Inco

me

taxe

s pa

yabl

e26

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.347

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.160

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8.2

58.6

130.

579

.217

5.7

NIBC

Ls52

1.3

509.

259

2.3

568.

867

0.2

743.

881

8.7

847.

189

8.6

920.

01,

119.

91,

262.

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252.

71,

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81,

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6

Net w

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ng c

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l62

3.9

494.

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7.2

570.

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3.6

594.

864

5.3

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395

3.1

1,20

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01,

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01,

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8

Net P

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647.

467

0.4

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775

9.7

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91,

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81,

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12,

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22,

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8.6

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83,

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2Re

stru

ctur

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ges

-

-

-

-

-

-

-

-

-

-

-

-

-

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Inve

sted

cap

ital

1,53

7.3

1,44

7.5

1,47

9.5

1,59

9.0

1,80

6.1

2,10

2.1

2,58

5.9

2,97

4.8

3,40

8.6

3,76

7.9

4,60

4.7

5,40

6.0

5,05

6.6

6,63

1.2

6,84

7.8

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

35Tabl

e 20

H.J.

Hei

nz &

Com

pany

: Ret

urns

on

Inve

sted

Cap

ital

cont

inue

d

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NOPB

T m

argi

n10

.0%

10.8

%11

.6%

12.3

%12

.8%

13.0

%13

.4%

14.2

%15

.6%

16.0

%14

.1%

12.8

%14

.2%

15.2

%15

.1%

Capi

tal t

urns

2.4

2.6

2.7

2.5

2.4

2.2

2.0

1.9

1.8

1.8

1.4

1.3

1.4

1.2

1.3

Pret

ax R

OIC

23.9

%27

.8%

31.1

%31

.1%

30.8

%28

.7%

27.1

%27

.8%

27.9

%28

.3%

20.1

%16

.8%

19.8

%18

.6%

20.1

%Ta

x35

.5%

36.7

%31

.9%

33.8

%32

.7%

33.2

%32

.7%

34.2

%32

.5%

31.8

%42

.0%

32.0

%30

.8%

25.4

%35

.0%

Retu

rn o

n in

vest

ed c

apita

l15

.4%

17.6

%21

.2%

20.6

%20

.7%

19.2

%18

.3%

18.3

%18

.8%

19.3

%11

.7%

11.4

%13

.7%

13.9

%13

.1%

Retu

rn o

n in

cr. i

nv. c

ap.

-

(19.

5)%

182.

8%13

.5%

22.0

%9.

6%14

.3%

18.2

%22

.6%

23.9

%(2

2.6)

%10

.1%

(21.

1)%

14.4

%(1

1.2)

%

Capi

tal t

urno

ver a

nalys

isIn

vent

ory

turn

s5.

26.

05.

65.

76.

16.

26.

66.

46.

16.

96.

46.

06.

25.

96.

1O

pera

ting

wkg.

cap

. tur

ns4.

85.

55.

65.

35.

35.

45.

95.

85.

25.

94.

94.

45.

14.

85.

0G

oodw

ill/ot

her t

urns

13.9

13.2

14.9

15.1

14.6

9.9

7.6

6.7

6.7

6.1

3.8

3.5

3.7

2.8

3.0

Net P

,P&E

turn

s5.

75.

65.

45.

34.

74.

54.

24.

23.

93.

93.

43.

33.

33.

23.

5

Cost

of c

apita

l ana

lysis

Cost

of e

quity

16.8

%14

.8%

15.0

%14

.3%

11.6

%11

.3%

12.4

%12

.3%

12.6

%12

.0%

11.9

%11

.4%

11.6

%11

.7%

8.2%

Cost

of d

ebt

7.8%

6.5%

7.3%

6.9%

5.0%

5.7%

6.1%

6.2%

6.0%

5.7%

5.4%

4.7%

5.0%

5.1%

0.6%

Debt

/tota

l cap

ital

22.3

%15

.7%

15.5

%12

.7%

9.2%

14.1

%12

.9%

13.1

%13

.5%

11.4

%17

.2%

21.5

%20

.5%

16.4

%20

.8%

WAC

C14

.8%

13.5

%13

.8%

13.4

%11

.0%

10.5

%11

.6%

11.5

%11

.7%

11.3

%10

.8%

9.9%

10.3

%10

.6%

6.7%

Retu

rn o

n av

g. in

v. c

ap.

-

17.1

%21

.4%

21.4

%22

.0%

20.6

%20

.2%

19.5

%20

.1%

20.3

%12

.8%

12.4

%13

.2%

15.7

%13

.3%

Econ

omic

pro

fit-

53

.411

1.2

123.

018

7.9

197.

120

0.2

223.

226

7.6

320.

986

.512

1.1

154.

930

0.5

447.

2

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Char

t 9Ch

art 1

0H.

J. H

einz

& C

ompa

ny: R

OIC

vs.

WAC

CH.

J. H

einz

& C

ompa

ny: E

cono

mic

Prof

it

0.0%

5.0%

10.0

%

15.0

%

20.0

%

25.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

ROIC

WAC

C

0.0

50.0

100.

0

150.

0

200.

0

250.

0

300.

0

350.

0

400.

0

450.

01983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

36Tabl

e 21

H.J.

Hei

nz &

Com

pany

: Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Sale

s$4

,366

$4,6

39$5

,244

$5,8

01$6

,086

$6,6

47$6

,582

$7,1

03$7

,047

$8,0

87$9

,112

EBIT

551

593

688

804

922

1,03

788

51,

059

941

1,15

61,

288

Adju

sted

taxe

s18

220

023

028

230

833

938

929

130

931

348

1Am

ortiz

atio

n of

goo

dwill

611

1422

2829

4249

6077

89N

et o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$375

$403

$472

$543

$641

$727

$538

$817

$692

$920

$895

Cha

nge

in n

et w

orki

ng c

apita

l$1

3$1

1$5

1$1

03$1

87$1

7$1

$255

($24

1)$2

40$1

4Fi

xed

Cap

ital (

net o

f dep

reci

atio

n)11

880

119

197

215

178

161

245

7510

480

Acqu

isitio

ns (n

et o

f dive

stitu

res)

00

269

9550

8723

036

8(1

70)

1,12

674

Oth

er*

00

00

00

9019

20

00

Inve

stm

ent i

n Fu

ture

Gro

wth

131

9143

839

545

128

248

21,

060

(336

)1,

470

168

Free

Cas

h Fl

ow (F

CF)

244

312

3414

819

044

556

(244

)1,

028

(550

)72

8

Valu

e dr

ivers

199

0-19

96Ra

tes

of re

turn

on

incr

emen

tal i

nves

tmen

tD

efin

ition

sSa

les

6.5%

3 ye

ars

4%NO

PAT

= EB

IT -

adju

sted

taxe

s +

good

will

Ope

ratin

g M

argi

n14

.3%

5 ye

ars

6%I

= C

hg w

.c.+

Cap

ex (n

et) +

Acq

. (ne

t)C

ash

Tax

Rat

e33

.3%

10 y

ears

12%

FCF

= N

OPA

T - I

Incr

emen

tal W

orki

ng C

apita

l11

.6%

Incr

emen

tal F

ixed

Cap

ital

34.2

%Ac

quis

itions

69.6

%O

ther

*11

.5%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Incl

udes

cas

h ou

tlays

ass

ocia

ted

with

rest

ruct

urin

g.

Rolli

ng 3

yea

r rat

e of

retu

rn o

n in

crem

ent

al in

vest

men

t

-5%0%5%10%

15%

20%

25%

30%

35%

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

37Tabl

e 22

H.J.

Hei

nz &

Com

pany

: Cap

ital A

lloca

tion

Ope

ratin

g in

com

e19

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

96D

omes

tic33

7

371

37

3

423

46

8

567

54

2

698

52

3

454

65

7

740

C

anad

a41

42

38

31

47

55

58

42

77

53

59

61

E

urop

e85

113

14

7

184

22

9

241

37

0

299

35

6

325

28

3

336

O

ther

28

25

35

50

61

59

67

68

98

10

9

157

15

0

Tota

l49

1

551

59

3

688

80

3

922

1,

037

1,10

7

1,

053

941

1,

156

1,28

8

Iden

tifia

ble

asse

tsD

omes

tic1,

591

1,72

5

1,

981

2,00

1

2,

380

2,60

5

2,

655

3,36

1

3,

930

3,65

7

4,

812

4,80

2

C

anad

a14

7

150

18

7

203

23

5

257

29

3

384

36

7

336

34

9

298

E

urop

e55

6

775

1,

001

1,13

4

1,

115

1,33

5

1,

668

1,83

5

1,

772

1,55

1

1,

979

2,29

0

O

ther

179

18

8

196

26

7

273

29

1

320

35

2

752

83

7

1,10

6

1,

234

Tota

l2,

474

2,83

7

3,

364

3,60

5

4,

002

4,48

7

4,

935

5,93

2

6,

821

6,38

1

8,

247

8,62

4

Cap

ital e

xpen

ditu

res

Dom

estic

98

11

5

102

11

5

166

20

2

199

22

7

267

15

5

188

18

6

Can

ada

16

19

13

15

12

33

20

20

25

13

14

10

Eur

ope

33

64

58

93

128

99

111

63

102

66

72

65

Oth

er12

9

11

15

17

22

15

22

37

42

67

33

To

tal

159

20

6

185

23

8

323

35

5

345

33

1

431

27

5

342

29

4

Ret

urn

on a

sset

sD

omes

tic21

.2%

21.5

%18

.8%

21.2

%19

.7%

21.8

%20

.4%

20.8

%13

.3%

12.4

%13

.7%

15.4

%C

anad

a28

.2%

28.1

%20

.5%

15.4

%19

.8%

21.4

%19

.9%

10.9

%21

.0%

15.9

%16

.8%

20.6

%E

urop

e15

.3%

14.6

%14

.7%

16.2

%20

.5%

18.0

%22

.2%

16.3

%20

.1%

21.0

%14

.3%

14.7

%O

ther

15.7

%13

.2%

17.7

%18

.6%

22.3

%20

.3%

21.0

%19

.3%

13.0

%13

.0%

14.2

%12

.2%

Tota

l19

.9%

19.4

%17

.6%

19.1

%20

.1%

20.5

%21

.0%

18.7

%15

.4%

14.8

%14

.0%

14.9

%S

ourc

e: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

-500

1,00

01,

500

2,00

02,

500

3,00

03,

500

4,00

04,

500

5,00

0

Dom

estic

Can

ada

Eur

ope

Oth

er

Dom

estic

Can

ada

Eur

ope

Oth

er

56%

14%

Iden

tifia

ble

asse

ts, 1

996

3%

27%

0%20%

40%

60%

80%

100%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Oth

er

Eur

ope

Can

ada

Dom

estic

Cap

ital e

xpen

ditu

res

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

38Tabl

e 23

H.J.

Hei

nz &

Com

pany

: Val

ue D

river

Mat

rixSa

les

grow

thO

pera

ting

Wor

king

and

fixe

d($

in m

illion

s)Sa

les

base

Uni

tsPr

icin

g/m

ixm

argi

nsca

pita

l nee

ds (a

)Bu

sine

ss ri

skO

ther

risk

(b)

Hei

nz U

SA$1

,730

1-2%

0-2%

24-2

6%sm

all

low

low

Hei

nz P

et$1

,095

1-3%

0%14

-16%

med

ium

low

low

Wei

ght W

atch

ers

$975

0%0-

2%12

-15%

med

ium

low

low

Ore

-Ida

$1,0

003-

5%0%

14-1

6%m

ediu

mlo

wlo

w

Star

kist

$820

2-4%

0-2%

8-10

%m

ediu

mm

ediu

mm

ediu

m

Bake

ry/o

ther

$270

3-5%

1-2%

10-1

2%sm

all

low

med

ium

U.K

.$1

,060

1-3%

0-2%

11-1

3%sm

all

low

med

ium

Asia

Pac

ific

$1,0

855-

10%

3-4%

11-1

3%sm

all

low

low

Euro

pe$1

,075

3-5%

3-4%

17-1

9%sm

all

low

med

ium

H.J

.H

einz

$9,1

10+3

-4%

1-2%

16-1

8%30

-35%

lo

wm

ediu

m5

yr a

vg91

-96

6.5%

14%

45.8

%

Bet

a =

0.90

Sour

ce: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

.

Not

e: (a

) Wor

king

and

fixe

d ca

pita

l nee

ds a

s a

% o

f cha

nge

in s

ales

(net

of d

epre

ciat

ion)

.

(b

) Oth

er ri

sks

incl

ude

vola

tility

in ra

w m

ater

ials

, cur

renc

y ris

k an

d re

inve

stm

ent r

isk.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

39Tabl

e 24

H.J.

Hei

nz &

Com

pany

: DCF

Ana

lysis

NO

PAT

grow

th9%

Inve

sted

cap

ital g

row

thR

etur

n on

incr

emen

tal c

apita

lC

APFC

F P

rice

Inve

sted

cap

ital g

row

th4%

3-ye

ar5-

year

10-y

ear

3-ye

ar5-

year

10-y

ear

1017

.8%

$26.

01

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

34%

12.7

%13

.8%

15.3

%40

.3%

15.0

%17

.2%

1515

.2%

$33.

19

Deb

t3,

583

2013

.8%

$40.

42

WA

CC

9.9%

1714

.6%

$36.

08

Cas

h10

0

Sha

res

outs

tand

ing

390

Yea

r 0 is

nor

mal

ized

1996

A19

97E

1998

E19

99E

2000

E20

01E

2002

E20

03E

2004

E20

05E

2006

E20

07E

2008

E20

09E

2010

E20

11E

2012

E20

13E

2014

E20

15E

2016

E

NO

PAT

895

927

999

1,08

91,

187

1,29

31,

410

1,53

71,

675

1,82

61,

990

2,16

92,

365

2,57

72,

809

3,06

23,

338

3,63

83,

966

4,32

24,

711

Inve

stm

ent i

n fu

ture

587

434

390

307

319

332

345

359

373

388

404

420

437

454

472

491

511

531

553

575

598

Free

Cas

h Fl

ow30

849

260

978

286

896

21,

065

1,17

81,

302

1,43

81,

586

1,74

91,

928

2,12

32,

337

2,57

12,

827

3,10

73,

413

3,74

84,

114

PV

of F

CF

308

448

504

589

595

600

605

609

612

615

618

620

621

623

624

625

625

625

625

624

624

Cum

ulat

ive

PV

of F

CF

308

448

953

1,54

22,

136

2,73

63,

341

3,95

04,

562

5,17

75,

794

6,41

47,

035

7,65

88,

282

8,90

79,

532

10,1

5710

,781

11,4

0612

,029

Res

idua

l Val

ue9,

051

9,36

610

,096

11,0

0511

,996

13,0

7514

,252

15,5

3516

,933

18,4

5720

,118

21,9

2823

,902

26,0

5328

,398

30,9

5433

,740

36,7

7640

,086

43,6

9447

,626

PV

of R

esid

ual V

alue

9,05

18,

523

8,36

08,

293

8,22

58,

158

8,09

28,

026

7,96

17,

897

7,83

27,

769

7,70

67,

643

7,58

17,

519

7,45

87,

398

7,33

87,

278

7,21

9

Cor

pora

te V

alue

9,35

98,

971

9,31

39,

834

10,3

6210

,895

11,4

3311

,976

12,5

2313

,073

13,6

2714

,183

14,7

4115

,301

15,8

6316

,426

16,9

9017

,554

18,1

1918

,684

19,2

48

Cas

h10

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

010

0

Deb

t3,

583

3,58

33,

583

3,58

33,

583

3,58

33,

583

3,58

33,

583

3,58

33,

583

3,58

33,

583

3,58

33,

583

3,58

33,

583

3,58

33,

583

3,58

33,

583

Sha

reho

lder

val

ue5,

877

5,48

95,

830

6,35

26,

879

7,41

27,

951

8,49

39,

040

9,59

110

,144

10,7

0011

,259

11,8

1912

,381

12,9

4413

,507

14,0

7214

,636

15,2

0115

,766

Sha

res

outs

tand

ing

390

390

390

390

390

390

390

390

390

390

390

390

390

390

390

390

390

390

390

390

390

Sha

reho

lder

val

ue p

er s

hare

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$3

6.08

$--.-

-$-

-.--

$--.-

-

Yea

r1

23

45

67

89

1011

1213

1415

1617

1819

20

Inve

sted

cap

ital

6,84

87,

282

7,67

27,

978

8,29

88,

629

8,97

59,

334

9,70

710

,095

10,4

9910

,919

11,3

5611

,810

12,2

8212

,774

13,2

8513

,816

14,3

6914

,943

15,5

41

Ret

urn

on in

vest

ed c

apita

l (av

g)13

.1%

13.1

%13

.4%

13.9

%14

.6%

15.3

%16

.0%

16.8

%17

.6%

18.4

%19

.3%

20.3

%21

.2%

22.3

%23

.3%

24.4

%25

.6%

26.8

%28

.1%

29.5

%30

.9%

Rat

e of

retu

rn o

n in

crem

enta

l cap

ital

16.6

%23

.1%

31.9

%33

.5%

35.1

%36

.8%

38.5

%40

.4%

42.3

%44

.4%

46.5

%48

.7%

51.1

%53

.5%

56.1

%58

.8%

61.6

%64

.6%

67.7

%

FCF

grow

th17

.8%

17.1

%16

.5%

16.0

%15

.6%

15.2

%14

.9%

14.6

%14

.3%

14.1

%13

.8%

Sen

siti

vity

Ana

lysi

s

Inve

sted

cap

ital g

row

th

2%3%

4%5%

6%

7%30

.97

29.3

427

.53

25.5

123

.26

8%35

.02

33.3

931

.57

29.5

527

.30

9%39

.52

37.8

936

.08

34.0

631

.81

10%

44.5

542

.92

41.1

139

.09

36.8

4

11%

50.1

548

.52

46.7

144

.69

42.4

4

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

40Tabl

e 25

Hers

hey

Food

s: R

etur

ns o

n In

vest

ed C

apita

lca

lend

ar y

ear

y19

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

95NO

PAT

calc

ulat

ion

Sale

s1,

565.

71,

706.

11,

848.

51,

996.

22,

169.

62,

433.

82,

168.

02,

421.

02,

715.

62,

899.

23,

219.

83,

488.

23,

606.

33,

690.

7C

ost o

f goo

ds s

old

1,08

4.7

1,16

8.1

1,26

9.8

1,35

5.8

1,45

3.4

1,61

2.1

1,32

6.5

1,45

5.6

1,58

8.4

1,69

4.4

1,83

3.4

1,99

5.5

2,09

7.6

2,12

6.3

Gro

ss m

argi

n30

.7%

31.5

%31

.3%

32.1

%33

.0%

33.8

%38

.8%

39.9

%41

.5%

41.6

%43

.1%

42.8

%41

.8%

42.4

%S,

G&A

301.

633

2.8

355.

839

5.5

445.

552

7.6

575.

565

5.0

776.

781

4.5

958.

21,

035.

51,

034.

11,

053.

8O

ther

inco

me

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Goo

dwill

amor

tizat

ion

1.7

1.8

2.7

2.7

3.0

6.6

8.2

11.2

12.2

12.7

12.7

12.9

14.2

14.8

NO

PBT

181.

120

7.0

225.

524

7.5

273.

630

0.7

274.

332

1.5

362.

740

3.0

440.

947

0.2

488.

852

5.4

Adju

sted

taxe

s68

.984

.394

.793

.310

6.5

125.

710

1.7

117.

514

2.1

136.

613

7.3

193.

818

9.0

182.

6N

OPA

T11

2.2

122.

713

0.9

154.

316

7.1

174.

917

2.6

204.

022

0.7

266.

430

3.6

276.

429

9.8

342.

8

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

n77

.489

.210

2.1

112.

312

8.1

121.

291

.611

8.9

145.

614

3.9

158.

421

3.6

174.

818

5.8

Def

erre

d ta

xes

12.1

12.2

12.2

24.5

26.1

4.9

1.3

9.1

12.9

17.5

31.5

30.1

0.2

20.2

Tax

shie

ld3.

67.

34.

85.

54.

59.

411

.47.

89.

310

.210

.410

.314

.417

.1Ad

just

ed ta

xes

68.9

84.3

94.7

93.3

106.

512

5.7

101.

711

7.5

142.

113

6.6

137.

319

3.8

189.

018

2.6

Inve

sted

cap

ital c

alcu

latio

nC

ash

15.7

17.1

18.5

20.0

21.7

15.0

21.7

24.2

26.6

29.0

24.1

16.0

26.7

32.3

Acco

unts

rece

ivab

le65

.156

.581

.076

.677

.412

1.5

166.

812

1.9

143.

015

9.8

173.

629

5.0

331.

732

6.0

Inve

ntor

y17

8.6

194.

718

6.0

192.

723

7.5

285.

430

8.8

309.

837

9.1

436.

945

7.2

453.

444

5.7

397.

6O

ther

cur

rent

ass

ets

13.4

12.4

30.5

32.4

50.9

63.0

73.5

83.3

113.

176

.628

5.0

124.

614

4.6

166.

4Cu

rrent

ass

ets

272.

828

0.6

315.

932

1.7

387.

548

4.9

570.

753

9.3

661.

870

2.4

940.

088

9.0

948.

792

2.3

Acco

unts

pay

able

45.3

67.1

96.4

87.8

103.

013

0.4

128.

810

2.2

127.

613

7.9

127.

212

5.7

115.

412

7.1

Accr

ued

expe

nses

65.3

68.3

85.6

88.6

93.8

121.

514

4.3

142.

917

0.2

226.

324

0.8

302.

034

7.3

308.

1In

com

e ta

xes

paya

ble

11.4

10.3

14.2

9.3

17.0

16.4

17.4

22.1

19.1

22.0

5.7

35.6

8.7

15.5

NIB

CLs

122.

014

5.7

196.

218

5.7

213.

726

8.3

290.

526

7.2

316.

938

6.2

373.

746

3.3

471.

545

0.7

Net

wor

king

capi

tal

150.

813

5.0

119.

713

6.0

173.

821

6.5

280.

227

2.1

344.

931

6.2

566.

342

5.7

477.

247

1.6

Net

P,P

&E53

9.9

575.

164

2.6

701.

879

3.3

863.

073

6.0

829.

995

2.1

1,14

5.7

1,29

6.0

1,46

0.9

1,46

8.4

1,43

6.0

Goo

dwill/

othe

r52

.651

.379

.366

.214

9.0

261.

637

1.3

373.

441

7.6

421.

725

7.9

473.

445

3.6

472.

3R

estru

ctur

ing

char

ges

-

-

-

-

-

-

-

-

-

-

-

-

2.9

29.1

Inve

sted

cap

ital

743.

376

1.4

841.

690

4.0

1,11

6.1

1,34

1.1

1,38

7.5

1,47

5.4

1,71

4.6

1,88

3.6

2,12

0.2

2,36

0.1

2,40

2.1

2,40

9.0

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

41Tabl

e 25

Hers

hey

Food

s: R

etur

ns o

n In

vest

ed C

apita

l co

ntin

ued

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

11.6

%12

.1%

12.2

%12

.4%

12.6

%12

.4%

12.7

%13

.3%

13.4

%13

.9%

13.7

%13

.5%

13.6

%14

.2%

Cap

ital t

urns

2.1

2.2

2.2

2.2

1.9

1.8

1.6

1.6

1.6

1.5

1.5

1.5

1.5

1.5

Pret

ax R

OIC

24.4

%27

.2%

26.8

%27

.4%

24.5

%22

.4%

19.8

%21

.8%

21.2

%21

.4%

20.8

%19

.9%

20.4

%21

.8%

Tax

38.1

%40

.7%

42.0

%37

.7%

38.9

%41

.8%

37.1

%36

.6%

39.2

%33

.9%

31.1

%41

.2%

38.7

%34

.8%

Ret

urn

on in

vest

ed c

apita

l15

.1%

16.1

%15

.6%

17.1

%15

.0%

13.0

%12

.4%

13.8

%12

.9%

14.1

%14

.3%

11.7

%12

.5%

14.2

%R

etur

n on

incr

. inv

. cap

.-

58

.2%

10.2

%37

.5%

6.1%

3.5%

(5.1

)%35

.8%

7.0%

27.1

%15

.7%

(11.

3)%

55.8

%61

7.8%

Capi

tal t

urno

ver a

naly

sisIn

vent

ory

turn

s8.

88.

89.

910

.49.

18.

57.

07.

87.

26.

67.

07.

78.

19.

3O

pera

ting

wkg

. cap

. tur

ns7.

99.

310

.811

.010

.28.

86.

37.

36.

96.

36.

45.

65.

46.

2G

oodw

ill/ot

her t

urns

29.8

33.3

23.3

30.1

14.6

9.3

5.8

6.5

6.5

6.9

12.5

7.4

8.0

7.8

Net

P,P

&E tu

rns

2.9

3.0

2.9

2.8

2.7

2.8

2.9

2.9

2.9

2.5

2.5

2.4

2.5

2.6

Cost

of c

apita

l ana

lysis

Cos

t of e

quity

15.8

%14

.6%

15.4

%13

.2%

11.9

%12

.6%

12.6

%12

.2%

12.5

%11

.9%

12.0

%11

.4%

11.9

%11

.0%

Cos

t of d

ebt

6.0%

7.1%

7.0%

6.0%

4.9%

6.4%

6.1%

5.6%

5.8%

5.3%

5.1%

4.4%

5.3%

4.4%

Deb

t/tot

al c

apita

l15

.4%

11.9

%9.

8%6.

9%9.

0%13

.3%

10.9

%6.

8%8.

1%8.

4%11

.3%

10.7

%10

.3%

13.3

%W

ACC

14.3

%13

.7%

14.6

%12

.7%

11.3

%11

.8%

11.9

%11

.8%

12.0

%11

.3%

11.2

%10

.6%

11.2

%10

.2%

Ret

urn

on a

vg. i

nv. c

ap.

-

16.3

%16

.3%

17.7

%16

.5%

14.2

%12

.6%

14.3

%13

.8%

14.8

%15

.2%

12.3

%12

.6%

14.3

%Ec

onom

ic p

rofit

-

19.5

14.1

43.4

53.3

30.3

9.9

35.6

29.5

62.2

79.0

38.2

32.5

98.5

Char

t 11

Char

t 12

Hers

hey

Food

s: R

OIC

vs.

WAC

CHe

rshe

y Fo

ods:

Eco

nom

ic Pr

ofit

8.0%

10.0

%

12.0

%

14.0

%

16.0

%

18.0

%

20.0

%

22.0

%

24.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

ROIC

WAC

C

(50.

0)0.0

50.0

100.

0

150.

0

200.

0

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

42Tabl

e 26

Hers

hey

Food

s: R

ates

of R

etur

n on

Incr

emen

tal I

nves

tmen

t

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Sale

s$1

,996

$2,1

70$2

,434

$2,1

68$2

,421

$2,7

16$2

,899

$3,2

20$3

,488

$3,6

06$3

,691

EBIT

245

271

294

266

310

351

390

428

457

475

511

Adju

sted

taxe

s93

106

126

102

118

142

137

137

194

189

183

Amor

tizat

ion

of g

oodw

ill3

37

811

1213

1313

1415

Net o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$154

$167

$175

$173

$204

$221

$266

$303

$276

$300

$343

Chan

ge in

net

wor

king

capi

tal

$16

$38

$43

$64

($8)

$73

($29

)$2

50($

141)

$52

($6)

Fixe

d C

apita

l (ne

t of d

epre

ciat

ion)

6580

4458

107

113

154

165

112

2222

Acqu

isitio

ns (n

et o

f div

estit

ures

)(6

)11

514

7(9

0)0

7844

179

(95)

013

Oth

er*

00

00

00

00

015

17In

vest

men

t in

futu

re g

rowt

h76

233

233

3299

264

169

594

(124

)89

46

Free

Cas

h Fl

ow (F

CF)

78(6

6)(5

8)14

110

5(4

3)97

(290

)40

021

129

7

Valu

e dr

ivers

199

0-19

95Ra

tes

of re

turn

on

incr

emen

tal in

vest

men

tDe

finitio

nsSa

les

6.3%

3 ye

ars

7%NO

PAT

= EB

IT -

adju

sted

taxe

s +

good

will

Ope

ratin

g M

argi

n13

.3%

5 ye

ars

12%

I=

Chg

w.c.

+Cap

ex

(net

) + A

cq. (

net)

Cash

Tax

Rat

e37

.6%

10 y

ears

11%

FCF

= NO

PAT

- IIn

crem

enta

l Wor

king

Cap

ital

20.5

%In

crem

enta

l Fixe

d C

apita

l60

.1%

Acqu

isitio

ns22

.5%

Oth

er*

3.4%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Incl

udes

cas

h ou

tlays

ass

ocia

ted

with

rest

ruct

urin

g.

Rol

ling

3 ye

ar ra

te o

f ret

urn

on i

ncre

men

tal i

nves

tmen

t

0%5%10%

15%

20%

25%

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

43Tabl

e 27

Hers

hey

Food

s: C

apita

l Allo

catio

nO

pera

ting

inco

me

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Dom

estic

239

25

7

307

34

4

382

41

9

447

44

7

499

Fo

reig

n7

9

4

6

9

9

11

(78)

12

Tota

l-

-

24

6

266

31

0

351

39

0

428

45

7

368

51

1

Iden

tifia

ble

asse

tsD

omes

tic1,

312

1,50

6

1,

561

1,82

0

2,

003

2,35

3

2,

282

2,33

8

2,

336

Fore

ign

232

25

9

253

25

8

338

32

0

573

55

3

495

To

tal

-

-

1,54

4

1,

765

1,81

4

2,

079

2,34

2

2,

673

2,85

5

2,

891

2,83

1

Retu

rn o

n id

entif

iabl

e as

sets

Dom

estic

18.2

%17

.0%

19.6

%18

.9%

19.0

%17

.8%

19.6

%19

.1%

21.4

%Fo

reig

n3.

1%3.

6%1.

4%2.

4%2.

6%2.

8%1.

9%-1

4.1%

2.4%

Tota

l15

.9%

15.1

%17

.1%

16.9

%16

.7%

16.0

%16

.0%

12.7

%18

.0%

Sour

ce: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

-500

1,00

0

1,50

0

2,00

0

2,50

0

Dom

estic

Fore

ign

Dom

estic

Fore

ign

83%

17%

Iden

tifia

ble

asse

ts. 1

995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

44Tabl

e 28

Hers

hey

Food

s: V

alue

Driv

er M

atrix

Sale

s gr

owth

Ope

ratin

gW

orki

ng a

nd fi

xed

(in $

milli

ons)

Sale

s ba

seU

nits

Pric

ing/

Mix

mar

gins

capi

tal n

eeds

(a)

Busi

ness

risk

Oth

er ri

sk (b

)H

ersh

ey C

hoco

late

$2

,700

3-4%

1-2%

15-1

7%sm

all

low

low

N.A

.H

ersh

ey G

roce

ry$2

001-

2%1-

2%6-

9%sm

all

low

low

Her

shey

Pas

ta$4

103-

4%1-

2%9-

11%

med

ium

med

ium

med

ium

Gro

upH

ersh

ey$3

805-

10%

0%4-

6%m

ediu

mm

ediu

mm

ediu

mIn

tern

atio

nal

Her

shey

Food

s$3

,690

3-5%

1-2%

13-1

5%25

-30%

low

low

5 yr

avg

90-9

56.

3%13

.4%

84.0

%

Beta

= 1

.00

Sour

ce: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

.

Not

e: (a

) Wor

king

and

fixe

d ca

pita

l nee

ds a

s a

% o

f cha

nge

in s

ales

(net

of d

epre

ciat

ion

char

ges)

.

(b)

Oth

er ri

sks

incl

ude

vola

tility

in ra

w m

ater

ials

, cur

renc

y ris

k an

d re

inve

stm

ent r

isk.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

45Tabl

e 29

Inte

rsta

te B

aker

ies:

Ret

urns

on

Inve

sted

Cap

ital

fisca

l yea

r end

s M

ay19

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

96NO

PAT

calc

ulat

ion

Sale

s66

8.3

666.

468

5.6

703.

670

8.8

749.

385

5.0

1,07

9.3

1,10

4.6

1,10

6.7

1,14

5.9

1,16

5.6

1,14

2.7

1,22

2.8

2,87

8.2

Cost

of g

oods

sol

d38

3.5

383.

339

2.0

393.

038

4.8

402.

344

9.6

564.

557

3.5

562.

358

2.2

590.

058

1.2

630.

91,

453.

2G

ross

mar

gin

42.6

%42

.5%

42.8

%44

.1%

45.7

%46

.3%

47.4

%47

.7%

48.1

%49

.2%

49.2

%49

.4%

49.1

%48

.4%

49.5

%S,

G&

A26

7.2

276.

028

8.7

300.

630

9.0

326.

338

7.1

480.

748

2.2

482.

649

0.1

504.

250

5.2

534.

61,

336.

7O

ther

inco

me

0.0

0.0

0.1

0.0

0.1

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Goo

dwill

amor

tizat

ion

0.0

0.0

0.0

0.0

0.3

1.7

10.0

11.5

11.6

9.9

7.2

7.2

7.2

6.0

7.5

NOPB

T17

.67.

25.

110

.015

.422

.528

.445

.660

.571

.780

.878

.563

.563

.395

.8Ad

just

ed ta

xes

7.6

3.5

2.2

7.0

0.8

4.3

(7.1

)21

.121

.023

.428

.812

.330

.727

.617

.3NO

PAT

10.0

3.6

2.8

2.9

14.6

18.2

35.4

24.4

39.5

48.3

52.0

66.2

32.8

35.7

78.5

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

n4.

91.

10.

03.

60.

35.

2(5

.8)

(1.8

)1.

96.

318

.623

.220

.219

.029

.6De

ferre

d ta

xes

0.0

0.0

0.3

(1.8

)0.

92.

714

.2(1

.8)

1.6

2.6

(0.7

)17

.5(4

.9)

(1.8

)23

.2Ta

x sh

ield

2.7

2.5

2.6

1.6

1.4

1.9

12.9

21.1

20.7

19.7

9.5

6.6

5.6

6.7

10.8

Adju

sted

taxe

s7.

63.

52.

27.

00.

84.

3(7

.1)

21.1

21.0

23.4

28.8

12.3

30.7

27.6

17.3

Inve

sted

cap

ital c

alcu

latio

nCa

sh6.

46.

24.

07.

07.

17.

58.

65.

79.

41.

12.

24.

65.

03.

70.

0Ac

coun

ts re

ceiv

able

46.1

42.2

43.8

45.8

51.2

52.3

68.1

68.4

63.0

67.4

73.0

71.3

71.7

75.2

179.

5In

vent

ory

17.3

16.5

16.7

16.0

15.1

17.8

22.9

21.8

21.0

22.2

22.9

22.3

21.0

24.2

67.3

Oth

er c

urre

nt a

sset

s2.

71.

538

.31.

44.

61.

94.

23.

23.

23.

64.

520

.517

.117

.271

.5Cu

rrent

ass

ets

72.5

66.4

102.

870

.277

.979

.510

3.8

99.1

96.6

94.3

102.

611

8.7

114.

912

0.3

318.

3

Acco

unts

pay

able

26.7

22.9

24.2

25.2

25.9

26.1

42.2

44.0

45.5

45.0

45.4

41.9

47.8

49.0

135.

4Ac

crue

d ex

pens

es35

.535

.054

.434

.334

.234

.966

.774

.167

.181

.068

.562

.558

.259

.120

0.2

Inco

me

taxe

s pa

yabl

e0.

30.

20.

02.

01.

84.

60.

00.

00.

00.

08.

74.

50.

00.

00.

0NI

BCLs

62.5

58.0

78.6

61.5

62.0

65.6

108.

911

8.1

112.

712

6.0

122.

610

8.9

106.

010

8.1

335.

7

Net w

orki

ng c

apita

l10

.08.

424

.28.

816

.013

.9(5

.0)

(19.

0)(1

6.1)

(31.

7)(2

0.0)

9.8

8.9

12.2

(17.

4)

Net P

,P&E

111.

511

7.3

104.

710

2.7

108.

511

7.5

228.

922

1.4

212.

921

5.8

214.

622

0.4

215.

422

3.0

817.

4G

oodw

ill/ot

her

4.7

4.3

3.0

2.4

5.3

10.7

306.

929

6.4

283.

827

4.7

256.

424

7.6

244.

425

5.1

350.

8Re

stru

ctur

ing

char

ges

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Inve

sted

cap

ital

126.

113

0.0

131.

911

3.8

129.

814

2.1

530.

749

8.7

480.

645

8.8

451.

047

7.8

468.

849

0.3

1,15

0.8

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

46Tabl

e 29

Inte

rsta

te B

aker

ies:

Ret

urns

on

Inve

sted

Cap

ital

cont

inue

d

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NOPB

T m

argi

n2.

6%1.

1%0.

7%1.

4%2.

2%3.

0%3.

3%4.

2%5.

5%6.

5%7.

1%6.

7%5.

6%5.

2%3.

3%Ca

pita

l tur

ns5.

35.

15.

26.

25.

55.

31.

62.

22.

32.

42.

52.

42.

42.

52.

5Pr

etax

RO

IC13

.9%

5.5%

3.8%

8.7%

11.9

%15

.8%

5.3%

9.1%

12.6

%15

.6%

17.9

%16

.4%

13.5

%12

.9%

8.3%

Tax

43.3

%49

.4%

44.4

%70

.4%

5.3%

19.1

%(2

4.9)

%46

.3%

34.7

%32

.6%

35.6

%15

.7%

48.4

%43

.6%

18.0

%Re

turn

on

inve

sted

cap

ital

7.9%

2.8%

2.1%

2.6%

11.2

%12

.8%

6.7%

4.9%

8.2%

10.5

%11

.5%

13.9

%7.

0%7.

3%6.

8%Re

turn

on

incr

. inv

. cap

.-

(1

65.0

)%(4

3.6)

%(0

.8)%

72.5

%29

.4%

4.4%

34.3

%(8

3.2)

%(4

0.4)

%(4

7.4)

%53

.0%

369.

1%13

.8%

6.5%

Capi

tal t

urno

ver a

nalys

isIn

vent

ory

turn

s38

.640

.341

.243

.947

.142

.137

.349

.552

.649

.950

.052

.254

.450

.542

.8O

pera

ting

wkg.

cap

. tur

ns18

.218

.618

.919

.217

.617

.017

.523

.428

.724

.822

.722

.525

.424

.325

.8G

oodw

ill/ot

her t

urns

143.

715

6.4

226.

729

4.5

132.

770

.22.

83.

63.

94.

04.

54.

74.

74.

88.

2Ne

t P,P

&E tu

rns

6.0

5.7

6.5

6.9

6.5

6.4

3.7

4.9

5.2

5.1

5.3

5.3

5.3

5.5

3.5

Cost

of c

apita

l ana

lysis

Cost

of e

quity

16

.8%

15.0

%15

.4%

14.3

%11

.7%

11.5

%12

.5%

12.4

%12

.4%

12.1

%12

.1%

11.5

%11

.9%

12.0

%11

.7%

Cost

of d

ebt

9.3%

7.0%

8.7%

7.2%

6.4%

7.1%

7.1%

7.4%

7.8%

7.3%

6.9%

6.3%

6.9%

6.5%

10.6

%De

bt/to

tal c

apita

l84

.2%

78.3

%77

.1%

47.3

%38

.3%

39.5

%0.

0%0.

0%0.

0%80

.8%

36.9

%35

.4%

45.4

%42

.5%

24.1

%W

ACC

10.5

%8.

8%10

.3%

10.9

%9.

7%9.

8%12

.5%

12.4

%12

.4%

8.2%

10.2

%9.

7%9.

6%9.

7%11

.4%

Retu

rn o

n av

g. in

v. c

ap.

-

2.8%

2.1%

2.4%

12.0

%13

.4%

10.5

%4.

7%8.

1%10

.3%

11.4

%14

.3%

6.9%

7.4%

9.6%

Econ

omic

pro

fit-

(7

.6)

(10.

6)(1

0.5)

2.8

4.9

(6.6

)(3

9.4)

(21.

4)9.

75.

721

.4(1

2.9)

(10.

6)(1

5.3)

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Char

t 13

Char

t 14

Inte

rsta

te B

aker

ies:

RO

IC v

s. W

ACC

Inte

rsta

te B

aker

ies:

Eco

nom

ic Pr

ofit

0.0%

2.0%

4.0%

6.0%

8.0%

10.0

%

12.0

%

14.0

%

16.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

RO

IC

WAC

C

(40.

0)

(30.

0)

(20.

0)

(10.

0)0.0

10.0

20.0

30.0

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

47Tabl

e 30

Inte

rsta

te B

aker

ies

Corp

orat

ion:

Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Sale

s$7

09$7

49$8

55$1

,079

$1,1

05$1

,107

$1,1

46$1

,166

$1,1

43$1

,223

$2,8

78EB

IT15

2118

2949

6274

7156

5788

Adju

sted

taxe

s1

4(7

)21

2123

2912

3128

17Am

ortiz

atio

n of

goo

dwill

02

1012

1210

77

76

8N

et o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$14

$18

$35

$20

$40

$48

$52

$66

$33

$36

$79

Cha

nge

in n

et w

orki

ng c

apita

l$7

($2)

($19

)($

14)

$3($

16)

$12

$30

($1)

$3($

30)

Fixe

d Ca

pita

l (ne

t of d

epre

ciatio

n)11

168

(4)

(4)

(2)

(1)

67

00

Acqu

isiti

ons

(net

of d

ives

titur

es)

00

467

00

00

00

00

Oth

er*

00

00

00

00

00

0In

vest

men

t in

futu

re g

row

th18

1445

6(1

8)(1

)(1

8)11

366

3(3

0)

Free

Cas

h Fl

ow (F

CF)

(4)

4(4

21)

3841

6641

3027

3210

8

Valu

e dr

ivers

199

0-19

96Ra

tes

of re

turn

on

incr

emen

tal in

vest

men

tD

efin

ition

sSa

les

21.1

%3

year

s28

%N

OPA

T=

EBIT

- ad

just

ed ta

xes

+ go

odwi

llO

pera

ting

Mar

gin

4.7%

5 ye

ars

81%

I=

Chg

w.c

.+C

ap e

x (n

et) +

Acq

. (ne

t)Ca

sh T

ax R

ate

34.3

%10

yea

rs13

%FC

F=

NOPA

T - I

Incr

emen

tal W

orkin

g C

apita

l-0

.1%

Incr

emen

tal F

ixed

Capi

tal

0.5%

Acqu

isiti

ons

0.0%

Oth

er*

0.0%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Incl

udes

cas

h ou

tlays

ass

ocia

ted

with

rest

ruct

urin

g.

Rol

ling

3 ye

ar r

ate

of r

etur

n on

incr

emen

tal i

nves

tmen

t

-350

%

-300

%

-250

%

-200

%

-150

%

-100

%

-50%0%50

%

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

48Tabl

e 31

Inte

rsta

te B

aker

ies

Corp

orat

ion:

DCF

Ana

lysis

NO

PA

T gr

owth

8%In

vest

ed c

apita

l gro

wth

Ret

urn

on in

crem

enta

l cap

ital

CAP

FCF

Pric

e

Inve

sted

cap

ital g

row

th1%

3-ye

ar5-

year

10-y

ear

3-ye

ar5-

year

10-y

ear

1012

.5%

$42.

71

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

153%

2.8%

0.4%

15.5

%-1

97.0

%51

.0%

8.7%

1511

.1%

$50.

13

Deb

t30

020

10.4

%$6

0.45

WA

CC

10.0

%14

11.3

%$5

0.13

Cas

h0

Sha

res

outs

tand

ing

37

Yea

r 0 is

nor

mal

ized

1996

A19

97E

1998

E19

99E

2000

E20

01E

2002

E20

03E

2004

E20

05E

2006

E20

07E

2008

E20

09E

2010

E20

11E

2012

E20

13E

2014

E20

15E

2016

E

NO

PAT

7911

113

014

115

216

417

819

220

722

424

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82

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14

Free

Cas

h Fl

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110

129

129

141

153

166

180

195

211

229

248

269

291

316

342

370

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8887

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ive

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036

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207

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532

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Res

idua

l Val

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1,52

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645

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918

2,07

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2,41

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610

2,81

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044

3,28

73,

550

3,83

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141

4,47

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7

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1,01

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Cor

pora

te V

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1,10

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286

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440

1,51

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591

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738

1,81

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288

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415

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538

Cas

h0

00

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Deb

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outs

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ing

3737

3737

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3737

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Shar

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per

sha

re$-

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Yea

r1

23

45

67

89

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1213

1415

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Inve

sted

cap

ital

1,15

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0

Ret

urn

on in

vest

ed c

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l (av

g)6.

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12.2

%13

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13.9

%14

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15.9

%17

.0%

18.2

%19

.4%

20.8

%22

.2%

23.8

%25

.4%

27.2

%29

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31.1

%33

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35.5

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Rat

e of

retu

rn o

n in

crem

enta

l cap

ital

1298

.1%

1043

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97.7

%10

4.5%

111.

8%11

9.5%

127.

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6.6%

146.

1%15

6.2%

167.

1%17

8.7%

191.

0%20

4.3%

218.

4%23

3.6%

249.

8%26

7.1%

285.

6%

FCF

grow

th12

.5%

12.1

%11

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11.5

%11

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11.1

%10

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10.8

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10.5

%10

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S ens

itiv

ity A

naly

sis

Inve

sted

cap

ital g

row

th

0%1%

2%3%

4%

6%43

.87

42.0

440

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37.8

535

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45.9

143

.90

41.7

239

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8%51

.96

50.1

348

.12

45.9

443

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9%56

.57

54.7

352

.73

50.5

448

.13

10%

61.5

959

.76

57.7

655

.57

53.1

8

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

49Tabl

e 32

Kello

gg C

ompa

ny: R

etur

ns o

n In

vest

ed C

apita

lca

lend

ar y

ear

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

NOPA

T ca

lcul

atio

nSa

les

2,36

7.1

2,38

1.1

2,60

2.4

2,93

0.1

3,34

0.7

3,79

3.0

4,34

8.8

4,65

1.7

5,18

1.4

5,78

6.6

6,19

0.6

6,29

5.4

6,56

2.0

7,00

3.7

Cos

t of g

oods

sol

d1,

442.

21,

412.

31,

488.

41,

605.

01,

744.

61,

939.

32,

233.

42,

413.

82,

676.

62,

828.

72,

987.

72,

989.

02,

950.

73,

177.

7G

ross

mar

gin

39.1

%40

.7%

42.8

%45

.2%

47.8

%48

.9%

48.6

%48

.1%

48.3

%51

.1%

51.7

%52

.5%

55.0

%54

.6%

S,G

&A

529.

255

4.4

650.

876

6.7

948.

71,

162.

51,

321.

31,

505.

41,

618.

81,

930.

02,

140.

12,

237.

52,

448.

72,

566.

7O

ther

inco

me

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Goo

dwill

amor

tizat

ion

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

NO

PBT

395.

741

4.4

463.

255

8.4

647.

469

1.2

794.

173

2.5

886.

01,

027.

91,

062.

81,

068.

91,

162.

61,

259.

3Ad

just

ed ta

xes

159.

316

9.2

178.

320

8.9

270.

724

2.0

265.

927

3.2

280.

841

1.9

351.

938

1.6

426.

648

8.2

NO

PAT

236.

424

5.2

284.

934

9.5

376.

744

9.2

528.

245

9.3

605.

261

6.0

710.

968

7.3

736.

077

1.1

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

n18

3.1

201.

322

5.6

246.

326

7.7

269.

829

4.3

244.

931

1.9

378.

238

7.6

353.

442

4.6

456.

2D

efer

red

taxe

s27

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.541

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.8(3

.4)

58.2

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5.0)

15.3

(8.2

)Ta

x sh

ield

3.3

(13.

6)(5

.9)

14.3

28.0

9.7

7.4

24.9

27.1

32.5

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just

ed ta

xes

159.

316

9.2

178.

320

8.9

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724

2.0

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1.9

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938

1.6

426.

648

8.2

Inve

sted

cap

ital c

alcu

latio

nC

ash

23.8

24.0

25.9

29.0

33.0

38.0

44.0

47.0

52.0

58.0

66.3

63.0

66.0

70.0

Acco

unts

rece

ivab

le14

0.7

157.

118

2.5

203.

921

7.5

275.

140

4.6

355.

243

0.2

420.

051

9.1

536.

856

4.5

590.

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vent

ory

227.

721

6.8

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124

5.9

265.

431

0.9

362.

239

4.0

359.

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1.1

416.

440

3.1

396.

337

6.7

Oth

er c

urre

nt a

sset

s35

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76.6

151.

017

3.9

174.

820

7.1

206.

424

0.1

Cur

rent

ass

ets

428.

143

8.3

468.

551

9.3

564.

571

3.7

922.

287

2.8

992.

91,

053.

01,

176.

61,

210.

01,

233.

21,

276.

9

Acco

unts

pay

able

99.1

116.

812

7.4

189.

726

2.8

311.

936

5.3

250.

924

7.1

289.

831

3.8

308.

833

4.5

370.

8Ac

crue

d ex

pens

es12

0.1

138.

914

4.7

190.

421

5.8

276.

629

9.8

306.

037

6.2

455.

844

1.2

451.

750

3.0

640.

5In

com

e ta

xes

paya

ble

81.9

85.0

51.4

29.4

72.2

113.

578

.22.

110

3.7

129.

710

4.1

65.9

72.0

64.2

NIB

CLs

301.

134

0.7

323.

540

9.5

550.

870

2.0

743.

355

9.0

727.

087

5.3

859.

182

6.4

909.

51,

075.

5

Net

wor

king

cap

ital

127.

097

.614

5.0

109.

813

.711

.717

8.9

313.

826

5.9

177.

731

7.5

383.

632

3.7

201.

4

Net

P,P

&E

682.

274

3.2

856.

01,

035.

91,

281.

11,

738.

82,

131.

92,

406.

32,

595.

42,

646.

52,

662.

72,

768.

42,

892.

82,

784.

8G

oodw

ill/ot

her

51.1

60.9

59.6

72.1

73.5

140.

210

2.8

78.0

112.

610

6.3

115.

722

3.6

141.

020

1.0

Res

truct

urin

g ch

arge

s-

-

-

-

-

-

-

-

-

-

-

-

-

47

.5

Inve

sted

cap

ital

860.

390

1.7

1,06

0.6

1,21

7.8

1,36

8.3

1,89

0.7

2,41

3.6

2,79

8.1

2,97

3.9

2,93

0.5

3,09

5.9

3,37

5.6

3,35

7.5

3,23

4.7

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

50Tabl

e 32

Kello

gg C

ompa

ny: R

etur

ns o

n In

vest

ed C

apita

l co

ntin

ued

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Ret

urn

on in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

16.7

%17

.4%

17.8

%19

.1%

19.4

%18

.2%

18.3

%15

.7%

17.1

%17

.8%

17.2

%17

.0%

17.7

%18

.0%

Cap

ital t

urns

2.8

2.6

2.5

2.4

2.4

2.0

1.8

1.7

1.7

2.0

2.0

1.9

2.0

2.2

Pret

ax R

OIC

46.0

%46

.0%

43.7

%45

.9%

47.3

%36

.6%

32.9

%26

.2%

29.8

%35

.1%

34.3

%31

.7%

34.6

%38

.9%

Tax

40.2

%40

.8%

38.5

%37

.4%

41.8

%35

.0%

33.5

%37

.3%

31.7

%40

.1%

33.1

%35

.7%

36.7

%38

.8%

Ret

urn

on in

vest

ed c

apita

l27

.5%

27.2

%26

.9%

28.7

%27

.5%

23.8

%21

.9%

16.4

%20

.4%

21.0

%23

.0%

20.4

%21

.9%

23.8

%R

etur

n on

incr

. inv

. cap

.-

21.2

%25

.0%

41.1

%18

.1%

13.9

%15

.1%

(17.

9)%

83.0

%(2

4.9)

%57

.4%

(8.4

)%(2

69.5

)%(2

8.6)

%

Cap

ital t

urno

ver a

naly

sis

Inve

ntor

y tu

rns

10.4

11.0

11.8

11.9

12.6

12.2

12.0

11.8

14.4

14.4

14.9

15.6

16.6

18.6

Ope

ratin

g w

kg. c

ap. t

urns

8.8

9.3

9.4

11.3

15.2

13.8

10.8

9.3

9.5

10.9

10.0

10.0

10.5

11.8

Goo

dwill/

othe

r tur

ns46

.339

.143

.740

.645

.527

.142

.359

.646

.054

.453

.528

.246

.534

.8N

et P

,P&

E tu

rns

3.5

3.2

3.0

2.8

2.6

2.2

2.0

1.9

2.0

2.2

2.3

2.3

2.3

2.5

Cos

t of c

apita

l ana

lysi

sC

ost o

f equ

ity16

.1%

14.7

%15

.6%

13.4

%12

.1%

12.8

%12

.8%

12.4

%12

.7%

12.1

%12

.2%

11.6

%11

.9%

11.3

%C

ost o

f deb

t5.

8%6.

8%6.

6%5.

5%4.

6%6.

3%5.

9%5.

5%5.

6%5.

2%4.

9%4.

3%5.

2%4.

2%D

ebt/t

otal

cap

ital

1%1.

5%22

.1%

9.3%

5.8%

6.3%

8.3%

9.3%

6.9%

2.9%

3.2%

6.5%

6.8%

5.0%

WAC

C16

.0%

14.6

%13

.6%

12.7

%11

.7%

12.4

%12

.3%

11.8

%12

.3%

11.9

%12

.0%

11.2

%11

.4%

10.9

%R

etur

n on

avg

. inv

. cap

.-

27.8

%29

.0%

30.7

%29

.1%

27.6

%24

.5%

17.6

%21

.0%

20.9

%23

.6%

21.2

%21

.9%

23.4

%Ec

onom

ic p

rofit

-

11

6.4

151.

620

5.3

225.

724

7.6

264.

615

2.4

251.

626

4.0

349.

432

6.3

350.

741

0.3

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Char

t 15

Char

t 16

Kello

gg C

ompa

ny: R

OIC

vs.

WAC

CKe

llogg

Com

pany

: Eco

nom

ic Pr

ofit

8.0%

13.0

%

18.0

%

23.0

%

28.0

%

33.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

ROIC

WAC

C

0.0

50.0

100.

0

150.

0

200.

0

250.

0

300.

0

350.

0

400.

0

450.

0

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

51Tabl

e 33

Kello

gg C

ompa

ny: R

ates

of R

etur

n on

Incr

emen

tal I

nves

tmen

t

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Sale

s$2

,930

$3,3

41$3

,793

$4,3

49$4

,652

$5,1

81$5

,787

$6,1

91$6

,295

$6,5

62$7

,004

EBIT

558

647

691

794

733

886

1,02

81,

063

1,06

91,

163

1,25

9Ad

just

ed ta

xes

209

271

242

266

273

281

412

352

382

427

488

Net o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$350

$377

$449

$528

$459

$605

$616

$711

$687

$736

$771

Chan

ge in

net

wor

king

cap

ital

($35

)($

96)

($2)

$167

$135

($48

)($

88)

$140

$66

($60

)($

122)

Capi

tal E

xpen

ditu

res

(net

of d

epre

ciat

ion)

170

237

355

353

326

102

8622

316

698

57Ac

quis

ition

s (n

et o

f div

estit

ures

)0

00

00

00

(115

)(9

6)(9

5)0

Oth

er*

00

00

00

00

00

40In

vest

men

t in

Futu

re G

row

th (I

)13

514

035

352

046

154

(3)

248

136

(57)

(25)

Free

Cas

h Fl

ow (F

CF)

215

236

968

(2)

551

619

463

551

793

797

Valu

e dr

iver

s 19

90-1

995

Rate

s of

retu

rn o

n in

crem

enta

l inv

estm

ent

Defin

ition

sSa

les

6.2%

3 ye

ars

18%

NOPA

T=

EBIT

- ad

just

ed ta

xes

+ go

odwi

llO

pera

ting

Mar

gin

17.5

%5

year

s44

%I

= Ch

g w.

c.+C

ap e

x (n

et) +

Acq

. (ne

t)Ca

sh T

ax R

ate

36.2

%10

yea

rs21

%FC

F=

NOPA

T - I

Incr

emen

tal W

orki

ng C

apita

l40

.2%

Incr

emen

tal F

ixed

Cap

ital

-16.

8%Ac

quis

ition

s2.

2%O

ther

*19

.4%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Inclu

des

cash

out

lays

ass

ocia

ted

with

rest

ruct

urin

g.

Rollin

g 3

year

rate

of r

etur

n on

incr

emen

tal i

nves

tmen

t

0%5%10%

15%

20%

25%

30%

35%

40%

45%

50% 19

8819

8919

9019

9119

9219

9319

9419

95

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

52Tabl

e 34

Kello

gg C

ompa

ny: C

apita

l Allo

catio

nO

pera

ting

inco

me

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

US

A/C

anad

a23

4

259

31

0

350

31

3

325

38

8

452

45

2

709

76

8

Eur

ope

39

53

70

87

97

10

8

130

14

2

140

27

9

332

O

ther

are

as8

7

16

44

61

69

88

89

89

175

15

9

Tota

l28

1

319

39

6

480

47

0

503

60

6

683

68

1

1,16

3

1,

259

Iden

tifia

ble

asse

tsU

SA

/Can

ada

1,18

8

1,

411

1,69

1

1,

743

1,81

8

1,

890

1,95

3

2,

137

2,40

2

2,

252

2,29

7

E

urop

e36

6

453

73

4

893

90

2

1,13

0

1,

167

1,11

4

1,

049

1,25

8

1,

275

Oth

er a

reas

172

22

0

256

66

3

670

72

9

806

76

4

786

95

8

843

To

tal

1,72

6

2,

084

2,68

1

3,

298

3,39

0

3,

749

3,92

6

4,

015

4,23

7

4,

467

4,41

5

Ret

urn

on id

entif

iabl

e as

sets

US

A/C

anad

a19

.7%

18.3

%18

.3%

20.1

%17

.2%

17.2

%19

.9%

21.2

%18

.8%

31.5

%33

.4%

Eur

ope

10.6

%11

.7%

9.6%

9.8%

10.7

%9.

6%11

.2%

12.7

%13

.3%

22.2

%26

.0%

Oth

er a

reas

4.6%

3.1%

6.3%

6.6%

9.1%

9.5%

10.9

%11

.6%

11.3

%18

.3%

18.9

%To

tal

16.3

%15

.3%

14.8

%14

.6%

13.9

%13

.4%

15.4

%17

.0%

16.1

%26

.0%

28.5

%

Sou

rce:

Com

pany

pub

lishe

d da

ta, C

S F

irst B

osto

n es

timat

es -500

1,00

0

1,50

0

2,00

0

2,50

0

US

A/C

anad

aE

urop

eO

ther

are

as

US

A/C

anad

a

Eur

ope

Oth

er a

reas

52%

29%

19%

Iden

tifia

ble

asse

ts, 1

995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

53Tabl

e 35

Kello

gg C

ompa

ny: V

alue

Driv

er M

atrix

Sale

s gr

owth

Ope

ratin

gW

orki

ng a

nd fi

xed

(in $

milli

ons)

Sale

s ba

seU

nits

Pric

ing/

Mix

mar

gins

capi

tal n

eeds

(a)

Busi

ness

risk

Oth

er ri

sk (b

)R

-T-E

Cer

eal

$3,2

002-

3%1-

2%16

-18%

smal

llo

wlo

wU

.S.A

Con

veni

ence

Foo

ds$1

,230

4-5%

1-2%

23-2

5%sm

all

low

low

R-T

-E C

erea

l$1

,829

4-5%

2-3%

17-1

9%sm

all

med

ium

med

ium

Euro

peR

-T-E

Cer

eal

$355

8-10

%0%

21-2

3%m

ediu

mm

ediu

mm

ediu

mLa

tin A

mer

ica

R-T

-E C

erea

l$3

908-

10%

0%12

-14%

med

ium

med

ium

med

ium

Asia

Kello

ggCo

mpa

ny$7

,004

5-7%

1-2%

17-1

9%20

-35%

low

low

5 yr

avg

90-9

56.

2%17

.5%

42.8

%

Beta

= 1

.00

Sour

ce: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

.

Not

e: (a

) Wor

king

and

fixe

d ca

pita

l nee

ds a

s a

% o

f cha

nge

in s

ales

(net

of n

on-c

ash

char

ges)

.

(b

) Oth

er ri

sks

incl

ude

vola

tility

in ra

w m

ater

ials

, cur

renc

y ris

k an

d re

inve

stm

ent r

isk.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

54Tabl

e 36

Kello

gg C

ompa

ny: D

CF A

nalys

is

NO

PA

T gr

owth

11%

Inve

sted

cap

ital g

row

thR

etur

n on

incr

emen

tal c

apita

lC

APFC

F Pr

ice

Inve

sted

cap

ital g

row

th3%

3-ye

ar5-

year

10-y

ear

3-ye

ar5-

year

10-y

ear

1011

.7%

$53.

81

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

153%

4.6%

6.8%

12.2

%30

.6%

25.4

%18

.4%

1511

.6%

$68.

71

Deb

t99

520

11.6

%$8

3.89

WAC

C11

.0%

1811

.6%

$77.

79

Cas

h20

0

Sha

res

outs

tand

ing

212

Yea

r 0 is

nor

mal

ized

1995

A19

96E

1997

E19

98E

1999

E20

00E

2001

E20

02E

2003

E20

04E

2005

E20

06E

2007

E20

08E

2009

E20

10E

2011

E20

12E

2013

E20

14E

2015

E

NO

PAT

771

707

817

907

1,00

71,

117

1,24

01,

377

1,52

81,

696

1,88

32,

090

2,32

02,

575

2,85

83,

173

3,52

23,

909

4,33

94,

816

5,34

6

Inve

stm

ent i

n fu

ture

189

(79)

113

9810

110

410

711

011

411

712

112

412

813

213

614

014

414

815

315

716

2

Free

Cas

h Fl

ow58

278

570

480

990

61,

013

1,13

31,

266

1,41

41,

579

1,76

21,

966

2,19

22,

443

2,72

23,

033

3,37

83,

761

4,18

64,

659

5,18

4

PV

of F

CF

582

708

571

592

597

602

606

611

615

618

622

625

628

631

633

636

638

640

642

644

645

Cum

ulat

ive

PV

of F

CF

582

708

1,27

91,

870

2,46

73,

069

3,67

64,

287

4,90

15,

520

6,14

16,

766

7,39

48,

025

8,65

89,

294

9,93

210

,571

11,2

1311

,857

12,5

02

Res

idua

l Val

ue7,

023

6,43

67,

441

8,26

09,

168

10,1

7711

,296

12,5

3913

,918

15,4

4917

,148

19,0

3521

,129

23,4

5326

,032

28,8

9632

,075

35,6

0339

,519

43,8

6648

,691

PV

of R

esid

ual V

alue

7,02

35,

799

6,04

26,

043

6,04

46,

045

6,04

66,

047

6,04

86,

049

6,05

16,

052

6,05

36,

054

6,05

56,

056

6,05

76,

058

6,06

06,

061

6,06

2

Cor

pora

te V

alue

7,60

56,

506

7,32

07,

913

8,51

19,

114

9,72

210

,334

10,9

5011

,569

12,1

9212

,818

13,4

4714

,079

14,7

1315

,350

15,9

8916

,630

17,2

7317

,918

18,5

64

Cas

h40

020

020

020

020

020

020

020

020

020

020

020

020

020

020

020

020

020

020

020

020

0

Deb

t99

599

599

599

599

599

599

599

599

599

599

599

599

599

599

599

599

599

599

599

599

5

Shar

ehol

der v

alue

7,01

05,

711

6,52

57,

118

7,71

68,

319

8,92

79,

539

10,1

5510

,774

11,3

9712

,023

12,6

5213

,284

13,9

1814

,555

15,1

9415

,835

16,4

7817

,123

17,7

69

Sha

res

outs

tand

ing

212

212

212

212

212

212

212

212

212

212

212

212

212

212

212

212

212

212

212

212

212

Shar

ehol

der v

alue

per

sha

re$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$7

7.79

$--.-

-$-

-.--

Yea

r1

23

45

67

89

1011

1213

1415

1617

1819

20

Inve

sted

cap

ital

3,23

53,

156

3,26

93,

368

3,46

93,

573

3,68

03,

790

3,90

44,

021

4,14

24,

266

4,39

44,

526

4,66

24,

801

4,94

55,

094

5,24

75,

404

5,56

6

Ret

urn

on in

vest

ed c

apita

l (av

g)23

.8%

22.1

%25

.4%

27.3

%29

.4%

31.7

%34

.2%

36.9

%39

.7%

42.8

%46

.1%

49.7

%53

.6%

57.7

%62

.2%

67.1

%72

.3%

77.9

%83

.9%

90.4

%97

.5%

Rat

e of

retu

rn o

n in

crem

enta

l cap

ital

-140

.4%

79.2

%10

1.7%

109.

6%11

8.1%

127.

3%13

7.2%

147.

8%15

9.3%

171.

7%18

5.0%

199.

4%21

4.9%

231.

6%24

9.6%

268.

9%28

9.8%

312.

3%33

6.6%

FCF

grow

th11

.7%

11.7

%11

.7%

11.7

%11

.7%

11.6

%11

.6%

11.6

%11

.6%

11.6

%11

.6%

S ens

itivi

ty A

naly

sis

Inve

sted

cap

ital g

row

th

1%2%

3%4%

5%

9%65

.84

64.7

563

.53

62.1

860

.66

10%

72.5

771

.48

70.2

668

.90

67.3

8

11%

80.1

079

.01

77.7

976

.44

74.9

2

12%

88.5

487

.45

86.2

384

.87

83.3

6

13%

97.9

996

.90

95.6

894

.33

92.8

1

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

55Tabl

e 37

McC

orm

ick &

Com

pany

: Ret

urns

on

Inve

sted

Cap

ital

fisca

l yea

r end

s N

ovem

ber

y19

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

95NO

PAT

calc

ulat

ion

Sale

s71

7.7

743.

278

8.4

873.

097

5.7

1,07

8.5

1,18

3.9

1,24

6.1

1,32

3.0

1,42

7.9

1,47

1.4

1,55

6.6

1,69

4.8

1,85

8.7

Cos

t of g

oods

sol

d44

9.7

464.

350

3.0

564.

663

7.4

710.

279

3.8

805.

983

8.2

886.

588

7.4

953.

41,

066.

61,

211.

5G

ross

mar

gin

37.3

%37

.5%

36.2

%35

.3%

34.7

%34

.1%

33.0

%35

.3%

36.6

%37

.9%

39.7

%38

.7%

37.1

%34

.8%

S,G

&A20

7.9

212.

222

0.2

247.

927

1.4

305.

231

1.8

338.

235

7.7

395.

841

6.8

422.

742

9.5

446.

1O

ther

inco

me

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Goo

dwill

amor

tizat

ion

4.0

4.9

3.9

6.3

5.0

8.1

2.6

2.9

3.3

3.4

3.8

3.8

5.7

6.0

NO

PBT

64.0

71.6

69.1

66.9

71.9

71.2

80.8

104.

913

0.4

149.

017

1.0

184.

320

4.3

207.

0Ad

just

ed ta

xes

28.5

30.8

30.8

27.2

30.3

25.3

30.2

27.7

52.3

44.9

68.1

98.2

70.3

57.5

NO

PAT

35.5

40.8

38.2

39.7

41.7

45.9

50.6

77.2

78.1

104.

110

2.9

86.1

134.

114

9.5

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

n22

.825

.724

.818

.121

.518

.322

.829

.538

.642

.853

.060

.557

.953

.7D

efer

red

taxe

s0.

00.

00.

00.

00.

04.

84.

014

.4(2

.6)

8.4

(3.4

)(2

5.8)

2.3

15.7

Tax

shie

ld5.

75.

06.

09.

08.

811

.711

.512

.511

.110

.411

.711

.814

.719

.5Ad

just

ed ta

xes

28.5

30.8

30.8

27.2

30.3

25.3

30.2

27.7

52.3

44.9

68.1

98.2

70.3

57.5

Inve

sted

cap

ital c

alcu

latio

nC

ash

4.9

3.1

4.1

2.6

4.4

7.4

11.3

12.5

5.3

6.0

1.8

12.8

15.6

12.5

Acco

unts

rece

ivab

le74

.774

.990

.495

.110

9.6

113.

412

4.5

118.

314

4.3

149.

715

8.0

175.

120

8.8

224.

0In

vent

ory

149.

113

8.9

160.

916

8.3

187.

821

8.8

220.

821

7.7

238.

826

8.6

282.

232

1.3

374.

538

3.2

Oth

er c

urre

nt a

sset

s9.

811

.513

.713

.522

.827

.630

.239

.720

.520

.826

.131

.058

.851

.1Cu

rrent

ass

ets

238.

522

8.4

269.

127

9.6

324.

736

7.2

386.

838

8.2

408.

944

5.2

468.

154

0.2

657.

767

0.7

Acco

unts

pay

able

47.1

38.0

57.1

59.0

81.9

85.3

72.4

75.8

96.0

95.0

108.

511

3.9

128.

213

6.7

Accr

ued

expe

nses

63.1

69.2

80.5

85.3

89.0

98.9

152.

313

9.5

160.

017

6.4

170.

817

7.4

244.

220

1.9

Inco

me

taxe

s pa

yabl

e11

.014

.210

.612

.511

.611

.58.

69.

719

.410

.617

.816

.914

.311

.0N

IBC

Ls12

1.2

121.

414

8.1

156.

818

2.4

195.

723

3.3

225.

027

5.5

282.

029

7.1

308.

238

6.8

349.

6

Net

wor

king

capi

tal

117.

310

7.0

121.

012

2.8

142.

317

1.5

153.

616

3.3

133.

416

3.2

171.

023

2.0

270.

932

1.2

Net

P,P

&E11

3.7

128.

514

0.0

181.

717

7.4

198.

522

8.4

330.

135

4.0

378.

541

8.5

465.

650

4.6

524.

8G

oodw

ill/ot

her

18.3

19.1

60.8

61.9

56.5

63.9

117.

586

.616

2.3

177.

720

2.7

261.

734

4.0

372.

2R

estru

ctur

ing

char

ges

-

-

-

-

-

-

-

-

-

-

-

-

13.4

13.4

Inve

sted

cap

ital

249.

325

4.7

321.

836

6.4

376.

243

3.9

499.

557

9.9

649.

671

9.4

792.

395

9.3

1,13

2.9

1,23

1.5

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

56Tabl

e 37

McC

orm

ick &

Com

pany

: Ret

urns

on

Inve

sted

Cap

ital

cont

inue

d

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

8.9%

9.6%

8.8%

7.7%

7.4%

6.6%

6.8%

8.4%

9.9%

10.4

%11

.6%

11.8

%12

.1%

11.1

%C

apita

l tur

ns2.

92.

92.

42.

42.

62.

52.

42.

12.

02.

01.

91.

61.

51.

5Pr

etax

RO

IC25

.7%

28.1

%21

.5%

18.3

%19

.1%

16.4

%16

.2%

18.1

%20

.1%

20.7

%21

.6%

19.2

%18

.0%

16.8

%Ta

x44

.5%

43.0

%44

.6%

40.6

%42

.1%

35.5

%37

.4%

26.4

%40

.1%

30.1

%39

.8%

53.3

%34

.4%

27.8

%R

etur

n on

inve

sted

cap

ital

14.2

%16

.0%

11.9

%10

.8%

11.1

%10

.6%

10.1

%13

.3%

12.0

%14

.5%

13.0

%9.

0%11

.8%

12.1

%R

etur

n on

incr

. inv

. cap

.-

98

.3%

(3.8

)%3.

3%20

.0%

7.3%

7.2%

33.1

%1.

3%37

.3%

(1.7

)%(1

0.0)

%27

.6%

15.7

%

Capi

tal t

urno

ver a

naly

sisIn

vent

ory

turn

s4.

85.

34.

95.

25.

24.

95.

45.

75.

55.

35.

24.

84.

54.

9O

pera

ting

wkg

. cap

. tur

ns4.

14.

24.

14.

34.

54.

44.

34.

84.

64.

44.

44.

13.

74.

0G

oodw

ill/ot

her t

urns

39.3

38.8

13.0

14.1

17.3

16.9

10.1

14.4

8.2

8.0

7.3

5.9

4.9

5.0

Net

P,P

&E tu

rns

6.3

5.8

5.6

4.8

5.5

5.4

5.2

3.8

3.7

3.8

3.5

3.3

3.4

3.5

Cost

of c

apita

l ana

lysis

Cos

t of e

quity

17.0

%15

.7%

16.2

%14

.9%

12.7

%13

.7%

13.4

%13

.2%

13.6

%13

.3%

12.8

%12

.5%

12.8

%12

.7%

Cos

t of d

ebt

6.4%

7.1%

7.1%

6.2%

5.1%

6.6%

6.2%

5.8%

6.1%

5.6%

5.3%

4.5%

5.5%

4.5%

Deb

t/tot

al c

apita

l19

.0%

16.8

%26

.0%

25.9

%25

.7%

40.5

%30

.4%

17.4

%20

.1%

14.4

%13

.0%

18.5

%27

.6%

25.1

%W

ACC

15.0

%14

.2%

13.8

%12

.7%

10.7

%10

.8%

11.2

%11

.9%

12.1

%12

.2%

11.9

%11

.0%

10.8

%10

.7%

Ret

urn

on a

vg. i

nv. c

ap.

-

16.2

%13

.3%

11.5

%11

.2%

11.3

%10

.8%

14.3

%12

.7%

15.2

%13

.6%

9.8%

12.8

%12

.6%

Econ

omic

pro

fit-

5.

0(1

.5)

(4.0

)1.

82.

2(1

.8)

12.9

3.7

21.0

13.3

(10.

1)21

.123

.5

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Char

t 17

Char

t 18

McC

orm

ick &

Com

pany

: RO

IC v

s. W

ACC

McC

orm

ick &

Com

pany

: Eco

nom

ic Pr

ofit

8.0%

9.0%

10.0

%

11.0

%

12.0

%

13.0

%

14.0

%

15.0

%

16.0

%

17.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

RO

IC

WA

CC

(15.

0)

(10.

0)

(5.0

)

0.0

5.0

10.0

15.0

20.0

25.0

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

57Tabl

e 38

McC

orm

ick &

Com

pany

: Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Sale

s$8

73$9

76$1

,078

$1,1

84$1

,246

$1,3

23$1

,428

$1,4

71$1

,557

$1,6

95$1

,859

EBIT

6167

6395

102

127

146

167

182

199

201

Adju

sted

taxe

s27

3025

3028

5245

6898

7058

Amor

tizat

ion

of g

oodw

ill6

58

33

33

44

66

Net o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$40

$42

$46

$67

$77

$78

$104

$103

$88

$134

$150

Chan

ge in

net

wor

king

cap

ital

$2$2

0$2

9($

18)

$10

($30

)$3

0$8

$61

$39

$50

Fixe

d Ca

pita

l (ne

t of d

epre

ciat

ion)

4667

5323

2124

3442

3031

24Ac

quis

ition

s (n

et o

f div

estit

ures

)0

06

148

180

4476

830

Oth

er*

00

00

00

00

033

0In

vest

men

t in

futu

re g

rowt

h (I)

4787

8919

3912

6493

166

185

75

Free

Cas

h Fl

ow (F

CF)

(41)

(82)

(81)

(16)

(36)

(9)

(60)

(89)

(163

)(1

80)

(69)

Valu

e dr

iver

s 19

90-1

995

Rate

s of

retu

rn o

n in

crem

enta

l inve

stm

ent

Defin

ition

sSa

les

7.0%

3 ye

ars

11%

NOPA

T=

EBIT

- ad

just

ed ta

xes

+ go

odwi

llO

pera

ting

Mar

gin

11.0

%5

year

s14

%I

= Ch

g w

.c.+

Cap

ex (n

et) +

Acq

. (ne

t)Ca

sh T

ax R

ate

38.3

%10

yea

rs14

%FC

F=

NOPA

T - I

Incr

emen

tal W

orki

ng C

apita

l29

.5%

Incr

emen

tal F

ixed

Cap

ital

34.3

%Ac

quis

ition

s41

.2%

Oth

er*

6.1%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Inclu

des

cash

out

lays

ass

ocia

ted

with

rest

ruct

urin

g.

Rollin

g 3

year

rate

of r

etur

n on

incr

emen

tal i

nves

tmen

t

0%10%

20%

30%

40%

50%

60%

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

58Tabl

e 39

McC

orm

ick &

Com

pany

: Cap

ital A

lloca

tion

Ope

ratin

g in

com

e19

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

95N

orth

Am

eric

a/U

nit e

27

28

27

35

130

55

64

91

93

10

3

85

Eu

rope

0

3

2

2

(2)

7

3

3

6

6

10

Oth

er c

ount

ries

1

(1

)

1

(0)

8

6

14

1

1

(2

)

3

Tota

l28

30

31

36

13

6

69

81

95

100

10

7

98

Asse

tsN

orth

Am

eric

a/U

nit e

462

50

4

575

62

2

735

78

1

874

98

6

1,15

8

1,

324

1,33

2

Eu

rope

85

88

102

10

4

91

12

5

111

12

6

136

20

3

224

O

ther

cou

ntrie

s35

36

41

44

39

41

47

18

20

42

58

Tota

l58

2

629

71

8

770

86

5

947

1,

032

1,13

1

1,

313

1,56

9

1,

614

Retu

rn o

n as

sets

Nor

th A

mer

ica/

Uni

t e5.

8%5.

6%4.

7%5.

6%17

.7%

7.1%

7.4%

9.3%

8.1%

7.8%

6.4%

Euro

pe0.

4%3.

0%2.

3%1.

6%-2

.6%

6.0%

2.3%

2.1%

4.1%

2.9%

4.5%

Oth

er c

ount

ries

1.9%

-2.7

%2.

3%-0

.9%

20.0

%15

.8%

29.4

%7.

0%3.

9%-4

.2%

4.6%

Tota

l4.

8%4.

7%4.

3%4.

7%15

.7%

7.3%

7.8%

8.4%

7.6%

6.8%

6.0%

Sour

ce: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

-200

400

600

800

1,00

0

1,20

0

1,40

0

Nor

thAm

eric

a/U

nite

dSt

ates

Euro

peO

ther

coun

tries

Nor

th A

mer

ica/

Uni

ted

Stat

es

Euro

pe

Oth

er c

ount

ries

83%

14%

3%

Asse

ts, 1

995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

59Tabl

e 40

McC

orm

ick &

Com

pany

: Val

ue D

river

Mat

rixSa

les

grow

thO

pera

ting

Wor

king

and

fixe

d($

in m

illion

s)Sa

les

base

Uni

tsPr

icin

g/M

ixm

argi

nsca

pita

l nee

ds (a

)Bu

sine

ss ri

skO

ther

risk

(b)

Con

sum

er P

rodu

cts

$560

2-3%

2-3%

14-1

6%m

ediu

mlo

wm

ediu

m

Indu

stria

l/Foo

dser

vice

$690

6-8%

0-2%

11-1

3%m

ediu

mlo

wm

ediu

m

Inte

rnat

iona

l$4

106-

8%2-

4%5-

7%m

ediu

mlo

wm

ediu

m

Pack

agin

g$1

654-

6%1-

3%11

-13%

med

ium

low

med

ium

Gilr

oy$3

54-

6%0-

2%8-

10%

smal

llo

wlo

w

McC

orm

ick

&C

ompa

ny$1

,860

4-6%

2-3%

11-1

4%40

-45%

low

med

ium

5-yr

avg

90-9

55.

0%11

.0%

69.9

%

Bet

a =

1.10

Sour

ce: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

.

Not

e: (a

) Wor

king

and

fixe

d ca

pita

l nee

ds a

s a

% o

f cha

nge

in s

ales

(net

of n

on-c

ash

char

ges)

.

(b

) Oth

er ri

sks

incl

ude

vola

tility

in ra

w m

ater

ials

, cur

renc

y ris

k an

d re

inve

stm

ent r

isk.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

60Tabl

e 41

McC

orm

ick &

Com

pany

: DCF

Ana

lysis

NO

PA

T gr

owth

11%

Inve

sted

cap

ital g

row

thR

etur

n on

incr

emen

tal c

apita

lC

AP

FCF

Pric

e

Inve

sted

cap

ital g

row

th2%

3-ye

ar5-

year

10-y

ear

3-ye

ar5-

year

10-y

ear

1021

.7%

$19.

62

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

81%

15.8

%13

.6%

13.5

%9.

3%12

.3%

12.7

%15

18.3

%$2

6.15

Deb

t44

720

16.6

%$3

3.09

WA

CC

10.3

%15

18.3

%$2

6.15

Cas

h15

0

Sha

res

outs

tand

ing

79

Yea

r 0 is

nor

mal

ized

1995

A19

96E

1997

E19

98E

1999

E20

00E

2001

E20

02E

2003

E20

04E

2005

E20

06E

2007

E20

08E

2009

E20

10E

2011

E20

12E

2013

E20

14E

2015

E

NO

PAT

150

9911

413

414

816

518

320

322

525

027

830

834

238

042

246

851

957

764

071

078

9

Inve

stm

ent i

n fu

ture

115

2714

2526

2627

2828

2929

3030

3132

3233

3434

3536

Free

Cas

h Fl

ow35

7210

010

812

313

815

617

619

722

224

827

831

234

939

043

648

754

360

667

575

3

PV

of F

CF

3565

8281

8385

8788

9092

9395

9697

9910

010

110

210

410

510

6

Cum

ulat

ive

PV

of F

CF

3565

147

228

311

395

482

570

660

752

845

940

1,03

61,

133

1,23

21,

332

1,43

31,

535

1,63

91,

744

1,84

9

Res

idua

l Val

ue1,

450

959

1,10

61,

298

1,44

01,

599

1,77

51,

970

2,18

62,

427

2,69

42,

990

3,31

93,

684

4,08

94,

539

5,03

95,

593

6,20

86,

891

7,64

9

PV

of R

esid

ual V

alue

1,45

087

090

996

797

397

998

599

199

71,

004

1,01

01,

016

1,02

31,

029

1,03

51,

042

1,04

81,

055

1,06

21,

068

1,07

5

Cor

pora

te V

alue

1,48

593

51,

056

1,19

51,

283

1,37

41,

467

1,56

11,

658

1,75

51,

855

1,95

62,

058

2,16

22,

267

2,37

42,

481

2,59

02,

701

2,81

22,

924

Cas

h15

015

015

015

015

015

015

015

015

015

015

015

015

015

015

015

015

015

015

015

015

0

Deb

t44

744

744

744

744

744

744

744

744

744

744

744

744

744

744

744

744

744

744

744

744

7

Sha

reho

lder

val

ue1,

188

638

759

898

986

1,07

71,

170

1,26

41,

361

1,45

81,

558

1,65

91,

761

1,86

51,

970

2,07

72,

184

2,29

32,

404

2,51

52,

627

Sha

res

outs

tand

ing

7979

7979

7979

7979

7979

7979

7979

7979

7979

7979

79

Sha

reho

lder

val

ue p

er s

hare

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$2

6.15

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-

Yea

r1

23

45

67

89

1011

1213

1415

1617

1819

20

Inve

sted

cap

ital

1,23

21,

259

1,27

31,

298

1,32

41,

351

1,37

81,

405

1,43

31,

462

1,49

11,

521

1,55

11,

582

1,61

41,

646

1,67

91,

713

1,74

71,

782

1,81

8

Ret

urn

on in

vest

ed c

apita

l (av

g)12

.1%

7.9%

9.0%

10.4

%11

.3%

12.3

%13

.4%

14.6

%15

.9%

17.3

%18

.8%

20.5

%22

.3%

24.2

%26

.4%

28.7

%31

.2%

34.0

%37

.0%

40.3

%43

.8%

Rat

e of

ret

urn

on in

crem

enta

l cap

ital

55.6

%14

1.3%

57.8

%62

.9%

68.5

%74

.5%

81.1

%88

.2%

96.0

%10

4.5%

113.

7%12

3.7%

134.

6%14

6.5%

159.

5%17

3.5%

188.

8%20

5.5%

223.

6%

FCF

gro

wth

21.7

%20

.8%

20.0

%19

.4%

18.8

%18

.3%

17.9

%17

.5%

17.2

%16

.9%

16.6

%

Sen

sitiv

ity A

naly

sis

Inve

sted

cap

ital g

row

th0%

1%2%

3%4%

9%23

.87

22.9

021

.84

20.6

819

.40

.

10%

25.9

324

.96

23.9

022

.74

21.4

6

11%

28.1

827

.21

26.1

524

.99

23.7

1

12%

30.6

329

.67

28.6

127

.44

26.1

6

13%

33.3

032

.34

31.2

830

.11

28.8

4

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

61Tabl

e 42

The

Mor

ning

star

Gro

up: R

etur

ns o

n In

vest

ed C

apita

lC

alen

dar y

ear

1991

1992

1993

1994

1995

NO

PAT

calc

ulat

ion

Sal

es31

9.7

351.

339

6.7

292.

330

4.7

Cos

t of g

oods

sol

d36

1.3

309.

830

3.0

222.

523

2.9

Gro

ss m

argi

n-1

3.0%

11.8

%23

.6%

23.9

%23

.6%

S,G

&A

99.1

82.0

84.9

51.8

51.4

Oth

er in

com

e15

9.7

59.3

0.0

0.0

0.0

Goo

dwill

am

ortiz

atio

n4.

85.

04.

22.

82.

3N

OP

BT

23.8

23.9

13.0

20.9

22.7

Adj

uste

d ta

xes

7.8

3.6

4.3

7.2

10.6

NO

PA

T16

.020

.38.

713

.712

.1

Adju

sted

taxe

s ca

lcul

atio

nTa

x pr

ovis

ion

1.4

0.0

1.9

5.5

6.1

Def

erre

d ta

xes

0.0

0.0

0.0

0.0

(3.1

)Ta

x sh

ield

6.5

3.5

2.4

1.7

1.5

Adj

uste

d ta

xes

7.8

3.6

4.3

7.2

10.6

Inve

sted

cap

ital c

alcu

latio

nC

ash

3.5

3.5

3.3

2.2

3.0

Acc

ount

s re

ceiv

able

35.4

30.6

36.6

30.5

28.0

Inve

ntor

y16

.610

.815

.110

.511

.1O

ther

cur

rent

ass

ets

5.5

6.0

10.0

5.1

5.5

Cur

rent

ass

ets

61.1

50.9

65.1

48.2

47.7

Acc

ount

s pa

yabl

e23

.520

.224

.417

.321

.5A

ccru

ed e

xpen

ses

17.2

11.3

48.8

16.3

14.4

Inco

me

taxe

s pa

yabl

e0.

00.

00.

63.

01.

5N

IBC

Ls40

.731

.673

.936

.637

.4

Net

wor

king

cap

ital

20.4

19.3

(8.8

)11

.610

.3

Net

P,P

&E

48.8

46.0

56.2

46.6

50.3

Goo

dwill

/oth

er10

6.1

90.7

99.2

70.4

61.9

Res

truct

urin

g ch

arge

s-

-

-

-

-

Inve

sted

cap

ital

175.

215

6.1

146.

612

8.7

122.

5

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

62Tabl

e 42

The

Mor

ning

star

Gro

up: R

etur

ns o

n In

vest

ed C

apita

l co

ntin

ued

1991

1992

1993

1994

1995

Ret

urn

on in

vest

ed c

apita

l cal

cula

tion

NO

PB

T m

argi

n7.

5%6.

8%3.

3%7.

2%7.

5%C

apita

l tur

ns1.

82.

32.

72.

32.

5P

reta

x R

OIC

13.6

%15

.3%

8.9%

16.2

%18

.6%

Tax

32.9

%15

.0%

33.3

%34

.5%

46.8

%R

etur

n on

inve

sted

cap

ital

9.1%

13.0

%5.

9%10

.6%

9.9%

Ret

urn

on in

cr. i

nv. c

ap.

9.1%

(22.

4)%

123.

2%(2

7.9)

%25

.8%

Cap

ital t

urno

ver a

naly

sis

Inve

ntor

y tu

rns

19.2

32.6

26.2

27.7

27.4

Ope

ratin

g w

kg. c

ap. t

urns

11.2

16.6

14.5

12.3

17.2

Goo

dwill

/oth

er tu

rns

3.0

3.9

4.0

4.2

4.9

Net

P,P

&E

turn

s6.

67.

67.

16.

36.

1

Cos

t of c

apita

l ana

lysi

sC

ost o

f equ

ity-

11

.9%

11.0

%11

.5%

10.6

%C

ost o

f deb

t-

6.

7%5.

9%6.

8%6.

1%D

ebt/t

otal

cap

ital

-

39.5

%55

.5%

37.9

%26

.8%

WA

CC

-

9.8%

8.2%

9.7%

9.4%

Ret

urn

on a

vg. i

nv. c

ap.

-

12.3

%5.

7%9.

9%9.

6%E

cono

mic

pro

fit-

4.

0(3

.7)

0.3

0.3

Sou

rce:

Com

pany

pub

lishe

d da

ta; D

atas

trea

m; A

nnua

l Sta

tistic

al D

iges

t, B

oard

of G

over

nors

of t

he

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Char

t 19

Char

t 20

The

Mor

ning

star

Gro

up: R

OIC

vs.

WAC

CTh

e M

orni

ngst

ar G

roup

: Eco

nom

ic Pr

ofit

4.0

%

5.0

%

6.0

%

7.0

%

8.0

%

9.0

%

10

.0%

11

.0%

12

.0%

13

.0%

19

92

19

93

19

94

19

95

WA

CC

RO

IC

(4.0

)

(3.0

)

(2.0

)

(1.0

)

0.0

1.0

2.0

3.0

4.0

5.0

19

92

19

93

19

94

19

95

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

63Tabl

e 43

The

Mor

ning

star

Gro

up: R

ates

of R

etur

n on

Incr

emen

tal I

nves

tmen

t

1992

1993

1994

1995

Sale

s35

1.3

396.

729

2.3

304.

7EB

IT19

918

20Ad

just

ed ta

xes

3.6

4.3

7.2

11Am

ortiz

atio

n of

goo

dwill

5.0

4.2

2.8

2N

et o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$20

$9$1

4$1

2

Cha

nge

in n

et w

orki

ng c

apita

l($

1)$2

8$2

0($

1)Fi

xed

Cap

ital (

net o

f dep

reci

atio

n)(3

)0

36

Acqu

isiti

ons

(net

of d

ives

titur

es)

(9)

30(5

0)(3

)O

ther

*3

05

0In

vest

men

t in

futu

re g

row

th

(10)

58(2

2)1

Free

Cas

h Fl

ow (F

CF)

30(4

9)35

11

Valu

e dr

iver

s: 1

992-

1995

Rat

es o

f ret

urn

on in

crem

enta

l inv

estm

ent

Def

initi

ons

Sale

s-4

.6%

3 ye

ars

-30%

NO

PAT

= EB

IT -

adju

sted

taxe

s +

good

will

Ope

ratin

g In

com

e4.

9%I

= C

hg w

.c.+

Cap

ex

(net

) + A

cq. (

net)

Incr

emen

tal W

orki

ng C

apita

l-9

8.9%

FCF

= N

OPA

T - I

Incr

emen

tal F

ixed

Cap

ital

-13.

0%Ac

quis

ition

s68

.6%

Oth

er*

-16.

8%

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

64Tabl

e 44

The

Mor

ning

star

Gro

up: D

CF A

nalys

is

NO

PA

T gr

owth

7%C

APFC

F Pr

ice

Inve

sted

cap

ital g

row

th5%

1015

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$18.

60

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

15%

1512

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$22.

23

Deb

t17

520

11.4

%$2

5.62

WA

CC

9.6%

1512

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$22.

23

Cas

h0

Sha

res

outs

tand

ing

15

Yea

r 0 is

nor

mal

ized

1995

A19

96E

1997

E19

98E

1999

E20

00E

2001

E20

02E

2003

E20

04E

2005

E20

06E

2007

E20

08E

2009

E20

10E

2011

E20

12E

2013

E20

14E

2015

E

NO

PAT

1226

3740

4346

4952

5660

6469

7379

8490

9610

311

011

812

6

Inve

stm

ent i

n fu

ture

19

1014

1415

1617

1818

1920

2122

2425

2627

2930

32

Free

Cas

h Fl

ow11

1727

2628

3133

3638

4145

4852

5660

6570

7682

8895

PV

of F

CF

1116

2320

2019

1919

1818

1818

1717

1716

1616

1615

15

Cum

ulat

ive

PV

of F

CF

1116

3858

7897

116

135

153

171

189

206

224

241

257

274

290

306

321

337

352

Res

idua

l Val

ue12

627

038

741

444

347

450

754

358

162

266

571

276

181

587

293

399

81,

068

1,14

31,

223

1,30

8

PV

of R

esid

ual V

alue

126

246

322

314

307

299

292

285

278

272

265

259

252

246

240

235

229

223

218

213

208

Cor

pora

te V

alue

136

262

360

372

384

396

408

420

431

443

454

465

476

487

498

508

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529

539

549

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h0

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00

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00

00

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t17

517

517

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517

517

517

517

517

517

517

517

517

517

517

517

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5

Shar

ehol

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(39)

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123

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303

318

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448

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600

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Ret

urn

on in

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l (av

g)9.

9%13

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15.0

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15.6

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16.2

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16.8

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Rat

e of

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n in

crem

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l cap

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125.

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21.9

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22.8

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23.6

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24.5

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25.5

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26.5

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27.5

%

FCF

grow

th15

.3%

14.6

%14

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13.5

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12.7

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12.1

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11.6

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Sens

itiv

ity A

naly

sis

Inve

sted

cap

ital g

row

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3%4%

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816

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14.3

212

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20.7

619

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17.2

015

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7%25

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23.9

222

.23

20.3

618

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27.4

125

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23.8

521

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31.2

329

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27.6

725

.62

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

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turn

An

aly

sis

65Tabl

e 45

Nabi

sco:

Ret

urns

on

Inve

sted

Cap

ital

cale

ndar

yea

r

1993

1994

1995

NOPA

T ca

lcul

atio

nSa

les

7,02

5.0

7,69

9.0

8,29

4.0

Cos

t of g

oods

sol

d3,

848.

04,

295.

04,

776.

0G

ross

mar

gin

45.2

%44

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42.4

%S,

G&A

2,46

3.0

2,51

7.0

2,61

6.0

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er in

com

e0.

00.

00.

0G

oodw

ill a

mor

tizat

ion

218.

022

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sted

taxe

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4.8

144.

730

8.6

NO

PAT

797.

296

7.3

820.

4

Adju

sted

taxe

s ca

lcul

atio

nTa

x pr

ovis

ion

51.0

224.

022

2.0

Def

erre

d ta

xes

(80.

0)82

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x sh

ield

3.8

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6Ad

just

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xes

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sted

cap

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ash

112.

024

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ther

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cur

rent

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king

cap

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(157

.0)

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036

.0

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P,P

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2,53

7.0

2,87

3.0

3,13

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/oth

er7,

466.

07,

514.

07,

547.

0R

estru

ctur

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-

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sted

cap

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6.0

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38.0

10,7

15.0

Pa

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d F

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d I

nd

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ry R

ate

of

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turn

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aly

sis

66Tabl

e 45

Nabi

sco:

Ret

urns

on

Inve

sted

Cap

ital

cont

inue

d

1993

1994

1995

Ret

urn

on in

vest

ed c

apita

l cal

cula

tion

NO

PB

T m

argi

n13

.3%

14.4

%13

.6%

Cap

ital t

urns

0.7

0.7

0.8

Pre

tax

RO

IC9.

5%10

.6%

10.5

%T

ax14

.5%

13.0

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Ret

urn

on in

vest

ed c

apita

l8.

1%9.

2%7.

7%R

etur

n on

incr

. inv

. cap

.8.

1%24

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(83.

0)%

Cap

ital t

urno

ver

anal

ysis

Inve

ntor

y tu

rns

10.0

9.8

9.6

Ope

ratin

g w

kg.

cap.

tur

ns(2

6.1)

(87.

5)9.

5G

oodw

ill/o

ther

tur

ns0.

91.

01.

1N

et P

,P&

E t

urns

1.5

1.5

1.5

Cos

t of c

apita

l ana

lysi

sC

ost

of e

quity

11.4

%11

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11.3

%C

ost

of d

ebt

4.9%

5.6%

4.4%

Deb

t/to

tal c

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l40

.0%

41.9

%34

.0%

WA

CC

8.8%

9.3%

9.0%

Ret

urn

on a

vg.

inv.

cap

.16

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9.5%

7.7%

Eco

nom

ic p

rofit

364.

122

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31.6

)

Fre

e ca

sh fl

ow(9

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.8)

275.

364

3.4

Sou

rce:

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pany

pub

lishe

d da

ta;

Dat

astr

eam

; A

nnua

l Sta

tistic

al

Dig

est,

Boa

rd o

f G

over

nors

of

the

Fed

eral

Res

erve

Sys

tem

; C

S F

irst

Bos

ton

estim

ates

.

Char

t 21

Char

t 22

Nabi

sco:

RO

IC v

s. W

ACC

Nabi

sco:

Eco

nom

ic Pr

ofit

6.0

%

8.0

%

10

.0%

12

.0%

14

.0%

16

.0%

18

.0%

19

93

19

94

19

95

RO

IC

WA

CC

(15

0.0

)

(10

0.0

)

(50

.0)

0.0

50

.0

10

0.0

15

0.0

20

0.0

25

0.0

30

0.0

35

0.0

40

0.0

19

93

19

94

19

95

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

67Tabl

e 46

Nabi

sco:

Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1992

1993

1994

1995

Sale

s$6

,707

$7,0

25$7

,699

$8,2

94EB

IT69

871

488

690

2Ad

just

ed ta

xes

262

135

145

309

Amor

tizat

ion

of g

oodw

ill21

221

822

522

7N

et o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$649

$797

$966

$820

Cha

nge

in n

et w

orki

ng c

apita

l$1

80$6

0$9

7$1

04Fi

xed

Cap

ital (

net o

f dep

reci

atio

n)13

318

523

726

9Ac

quis

ition

s (n

et o

f div

estit

ures

)38

5(3

35)

449

129

Oth

er*

00

00

Inve

stm

ent i

n fu

ture

gro

wth

69

8(9

0)78

350

2

Free

Cas

h Fl

ow (F

CF)

(50)

888

183

318

Valu

e dr

iver

s: 1

992-

1995

Rat

es o

f ret

urn

on in

crem

enta

l inv

estm

ent

Def

initi

ons

Sale

s7.

3%3

year

s12

%N

OPA

T=

EBIT

- ad

just

ed ta

xes

+ go

odw

illO

pera

ting

Inco

me

10.8

%I

= C

hg w

.c.+

Cap

ex

(net

) + A

cq. (

net)

Incr

emen

tal W

orki

ng C

apita

l27

.8%

FCF

= N

OPA

T - I

Incr

emen

tal F

ixed

Cap

ital

51.9

%Ac

quis

ition

s39

.6%


68

Table 47Nabisco: Value Driver Matrix

Sales growth OCC Working and fixed($ in millions) Sales base Units Pricing/mix margins capital needs (a) Business risk Other risk (b)

Nabisco Biscuit $3,573 4-6% 1-2% 16-20% small low low

Specialty $571 3-5% 1-2% 25-29% small low low

Planters $525 0% 1-2% 8-11% small low medium

Lifesavers $522 4-5% 0% 8-10% small low low

Fleischmanns/Parkay $397 0% 1-2% 7-9% small low low

Food Service $432 5-7% 1-2% 22-26% small low low

Canada $607 2-3% 2-3% 8-10% small low low

International $1,667 20-30% 0% 11-13% medium medium medium

Nabisco$8,294 5-8% 1-2% 14-17% small small small


Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges). (b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

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turn

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aly

sis

69Tabl

e 48

Nabi

sco:

DCF

Ana

lysis

NO

PA

T gr

owth

9%C

APFC

F Pr

ice

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sted

cap

ital g

row

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59

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ied

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R o

n in

crem

enta

l cap

ital

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70

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t4,

726

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33

WA

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83

Cas

h10

0

Sha

res

outs

tand

ing

267

Yea

r 0 is

nor

mal

ized

1995

A19

96E

1997

E19

98E

1999

E20

00E

2001

E20

02E

2003

E20

04E

2005

E20

06E

2007

E20

08E

2009

E20

10E

2011

E20

12E

2013

E20

14E

2015

E

NO

PAT

820

986

1,09

21,

190

1,29

71,

414

1,54

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680

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11,

996

2,17

52,

371

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817

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13,

347

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724

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0

Inve

stm

ent i

n fu

ture

474

503

458

584

613

644

676

710

745

782

821

863

906

951

999

1,04

81,

101

1,15

61,

214

1,27

41,

338

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Cas

h Fl

ow34

648

363

360

668

477

086

597

01,

086

1,21

31,

354

1,50

91,

679

1,86

62,

072

2,29

82,

547

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13,

121

3,45

03,

812

PV

of F

CF

346

440

525

458

470

482

493

503

513

522

530

538

545

552

558

563

568

573

577

581

585

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ulat

ive

PV

of F

CF

346

440

965

1,42

21,

892

2,37

42,

867

3,37

13,

884

4,40

54,

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8,34

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267

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267

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267

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rn o

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21.1

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Pa

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oo

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e 49

Qua

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on

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s Ju

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5.9

2,43

6.6

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7.0

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5.3

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5.9

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9.7

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sted

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1982

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1984

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1986

1987

1988

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1992

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1994

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Cost

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%22

.1%

20.7

%10

.4%

Econ

omic

pro

fit-

34

.366

.124

.780

.714

4.7

10.1

176.

981

.411

9.5

123.

223

3.7

195.

627

.8

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.*

Star

ting

in 1

996,

the

fisca

l yea

r will

end

in D

ecem

ber.

Char

t 23

Char

t 24

Qua

ker O

ats:

RO

IC v

s. W

ACC

Qua

ker O

ats:

Eco

nom

ic Pr

ofit

7.0%

9.0%

11.0

%

13.0

%

15.0

%

17.0

%

19.0

%

21.0

%

23.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

WA

CC

RO

IC

0.0

50.0

100.

0

150.

0

200.

0

250.

01983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

72Tabl

e 50

Qua

ker O

ats:

Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Stub

ESa

les

$3,3

48$3

,454

$4,4

21$4

,508

$4,8

79$5

,031

$5,4

91$5

,576

$5,7

31$5

,955

$6,3

65$2

,725

EBIT

333

342

450

413

445

501

530

546

586

603

410

175

Adju

sted

taxe

s14

011

912

816

727

173

170

217

181

232

151

64G

oodw

ill Am

ortiz

atio

n6.

14.

813

.015

.218

.222

.222

.423

.626

.333

.963

.822

.0Ne

t ope

ratin

g pr

ofit

afte

r tax

es (N

OPA

T)$1

99$2

28$3

34$2

61$4

36$3

50$3

83$3

52$4

31$4

05$3

22$1

33

Chan

ge in

net

wor

king

cap

ital

$12

$9$2

37($

42)

$109

($11

0)($

274)

($16

4)($

145)

$35

($15

6)$3

71Ca

pita

l Exp

endi

ture

s (n

et o

f dep

reci

atio

n)37

6983

6315

513

585

.344

.141

.737

.813

5.2

50.0

Acqu

isiti

ons

(net

of d

ives

titur

es)

(33)

(16)

482

(18)

86(1

2)0.

0(1

6.5)

(1.2

)96

.062

3.1

0.0

Oth

er*

00

1114

950

0.0

0.0

27.6

55.6

57.5

Inve

stm

ent i

n fu

ture

gro

wth

1762

814

1844

514

(188

)(1

36)

(77)

224

660

421

Free

Cas

h Fl

ow (F

CF)

182

166

(479

)24

4(9

)33

657

148

850

818

1(3

38)

(288

)

Valu

e dr

iver

s 19

90-1

995

Rate

s of

retu

rn o

n in

crem

enta

l inv

estm

ent

Defin

ition

sSa

les

4.8%

3 ye

ars

-279

%NO

PAT

= EB

IT -

adju

sted

taxe

s +

good

will

Ope

ratin

g M

argi

n9.

3%5

year

s17

%I

= Ch

g w

.c.+

Cap

ex (n

et) +

Acq

. (ne

t)Ca

sh T

ax R

ate

35.4

%10

yea

rs10

%FC

F=

NOPA

T - I

Incr

emen

tal W

orki

ng C

apita

l-6

1.0%

Incr

emen

tal F

ixed

Cap

ital

35.9

%Ac

quis

ition

s51

.7%

Oth

er*

10.5

%So

urce

: Com

pany

pub

lishe

d da

ta.

* Inc

lude

s ca

sh o

utla

ys a

ssoc

iate

d w

ith re

stru

ctur

ing.

Rol

ling

3 ye

ar r

ate

of re

turn

on

incr

emen

tal i

nves

tmen

t

-300

%

-250

%

-200

%

-150

%

-100

%

-50%0%50%

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

73Tabl

e 51

Qua

ker O

ats:

Cap

ital A

lloca

tion

Ope

ratin

g in

com

e19

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

95U

S &

Can

adia

n G

roce

ry

218

22

9

338

29

7

337

33

1

411

39

3

432

48

8

386

In

tern

atio

nal G

roce

ry P

ro56

59

89

70

10

9

153

97

95

12

0

88

20

Fish

er P

rice

43

45

72

95

810

-

-

-

-

-

-

Sp

ecia

lty re

taili

ng14

16

-

-

-

-

-

-

-

-

-

To

tal

331

34

9

499

46

1

1,25

6

48

4

508

48

8

552

57

7

405

Iden

tifia

ble

Asse

tsU

S &

Can

adia

n G

roce

ry

889

1,

005

2,17

9

1,

952

2,14

9

2,

565

2,33

0

2,

139

2,01

6

2,

185

4,16

3

In

tern

atio

nal G

roce

ry P

ro40

7

423

53

6

471

50

4

761

68

6

901

80

0

859

66

4

Fish

er P

rice

384

43

7

534

55

2

569

-

-

-

-

-

-

Sp

ecia

lty re

taili

ng13

0

160

-

-

-

-

-

-

-

-

-

To

tal

1,81

0

2,

025

3,25

0

2,

975

3,22

2

3,

326

3,01

6

3,

040

2,81

6

3,

043

4,82

7

Cap

ital e

xpen

ditu

res

US

& C

anad

ian

Gro

cery

52

92

13

8

144

18

1

215

16

7

111

10

7

124

20

2

Inte

rnat

iona

l Gro

cery

Pro

19

17

26

26

42

61

74

66

65

51

74

Fi

sher

Pric

e13

17

18

38

50

-

-

-

-

-

-

Spec

ialty

reta

iling

22

20

-

-

-

-

-

-

-

-

-

Tota

l10

7

147

18

2

207

27

2

276

24

1

176

17

2

175

27

6

Ret

urn

on a

sset

sU

S &

Can

adia

n G

roce

ry

24.6

%22

.8%

15.5

%15

.2%

15.7

%12

.9%

17.6

%18

.4%

21.4

%22

.4%

9.3%

Inte

rnat

iona

l Gro

cery

Pro

13.8

%13

.9%

16.6

%14

.9%

21.7

%20

.1%

14.2

%10

.5%

15.0

%10

.3%

3.0%

Fish

er P

rice

11.2

%10

.3%

13.5

%17

.1%

142.

3%-

-

-

-

-

-

Sp

ecia

lty re

taili

ng10

.7%

9.7%

-

-

-

-

-

-

-

-

-

Tota

l18

.3%

17.2

%15

.4%

15.5

%39

.0%

14.6

%16

.8%

16.0

%19

.6%

18.9

%8.

4%S

ourc

e: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

-500

1,00

01,

500

2,00

02,

500

3,00

03,

500

4,00

04,

500

US

&

Can

adia

n

Gro

cery

Pro

duct

s

Inte

rnat

iona

l

Gro

cery

Pro

duct

s

US

& C

anad

ian

Gro

cery

Pro

duct

s

Inte

rnat

iona

l Gro

cery

Pro

duct

s

Iden

tifia

ble

asse

ts, 1

995

86%

14%

0%20%

40%

60%

80%

100%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Spec

ialty

reta

iling

Fish

er P

rice

Inte

rnat

iona

l Gro

cery

Prod

ucts

US

& C

anad

ian

Gro

cery

Pro

duct

s

Cap

ital e

xpen

ditu

res

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

74Tabl

e 52

Qua

ker O

ats:

Val

ue D

river

Mat

rixSa

les

grow

thO

pera

ting

Wor

king

and

fixe

d($

in m

illion

s)Sa

les

base

Uni

tsPr

icin

g/M

ixm

argi

nsca

pita

l nee

ds (a

)Bu

sine

ss ri

skO

ther

risk

(b)

Gat

orad

e (d

omes

tic)

$1,0

405-

7%0%

13-1

5%m

ediu

mm

ediu

mlo

w

Snap

ple

(dom

estic

)$5

645%

0%0%

med

ium

high

med

ium

Gat

orad

e/Sn

appl

e (in

t'l)$3

5415

%0%

6-8%

med

ium

med

ium

low

R-T

-E C

erea

ls$6

332-

3%0%

13-1

5%sm

all

low

low

Who

leso

me

snac

ks$2

746-

8%1-

2%18

-20%

smal

llo

wlo

w

Hot

Cer

eals

$371

3-4%

0%27

-30%

smal

llo

wlo

w

Gol

den

Gra

in$3

332-

3%1-

2%10

-12%

smal

llo

wlo

w

Can

ada

$200

0-1%

1-2%

5-7%

smal

llo

wlo

w

Food

ser

vice

$560

4-6%

1-2%

5-8%

smal

llo

wlo

w

Oth

er$9

030-

1%1-

2%9-

11%

smal

llo

wlo

w

Euro

pe$2

892-

3%2-

3%6-

8%m

ediu

mm

ediu

mm

ediu

m

Latin

Am

eric

a/As

ia fo

od$4

3320

%+

0%4-

6%m

ediu

mhi

ghhi

gh

Qua

ker

Oat

s$5

,954

6-8%

0-2%

10-1

3%10

-15%

lo

wlo

w5

yr a

vg(9

0-95

)4.

8%9.

0%-1

4.6%

B

eta

= 1.

15So

urce

: The

Qua

ker O

ats

Com

pany

, CS

Firs

t Bos

ton

estim

ates

.N

ote:

(a) W

orki

ng a

nd fi

xed

capi

tal n

eeds

as

a %

of c

hang

e in

sal

es (n

et o

f non

-cas

h ch

arge

s).

(b

) Oth

er ri

sks

incl

ude

vola

tility

in ra

w m

ater

ials

, cur

renc

y ris

k an

d re

inve

stm

ent r

isk.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

75Tabl

e 53

Qua

ker O

ats:

DCF

Ana

lysis

NO

PAT

gro

wth

12%

Inve

sted

cap

ital g

row

thR

etur

n on

incr

emen

tal c

apita

lC

APFC

F P

rice

Inve

sted

cap

ital g

row

th3%

3-ye

ar5-

year

10-y

ear

3-ye

ar5-

year

10-y

ear

107.

7%$3

0.17

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

64%

19.8

%6.

8%10

.2%

26.5

%4.

1%18

.3%

159.

6%$4

2.71

Deb

t1,

400

2010

.4%

$56.

68

WA

CC

10.5

%14

9.3%

$40.

09

Cas

h0

Sha

res

outs

tand

ing

135

Yea

r 0 is

nor

mal

ized

1995

A19

96E

1997

E19

98E

1999

E20

00E

2001

E20

02E

2003

E20

04E

2005

E20

06E

2007

E20

08E

2009

E20

10E

2011

E20

12E

2013

E20

14E

2015

E

NO

PAT

293

285

355

397

445

498

558

625

700

784

878

983

1,10

11,

233

1,38

21,

547

1,73

31,

941

2,17

42,

435

2,72

7

Inve

stm

ent i

n fu

ture

(60)

115

(7)

111

114

118

121

125

129

133

137

141

145

149

154

158

163

168

173

178

184

Free

Cas

h Fl

ow35

317

036

228

633

038

043

750

057

165

174

184

395

61,

084

1,22

81,

389

1,57

01,

773

2,00

12,

256

2,54

3

PV

of F

CF

353

154

296

212

222

231

240

249

257

265

273

281

289

296

303

311

318

325

332

339

345

Cum

ulat

ive

PV

of F

CF

353

154

450

662

884

1,11

41,

354

1,60

31,

860

2,12

52,

398

2,67

92,

968

3,26

43,

567

3,87

84,

196

4,52

14,

852

5,19

15,

536

Res

idua

l Val

ue2,

789

2,71

53,

378

3,78

34,

237

4,74

55,

315

5,95

36,

667

7,46

78,

363

9,36

610

,490

11,7

4913

,159

14,7

3816

,507

18,4

8820

,706

23,1

9125

,974

PV

of R

esid

ual V

alue

2,78

92,

457

2,76

62,

804

2,84

22,

881

2,92

02,

959

3,00

03,

040

3,08

23,

124

3,16

63,

209

3,25

33,

297

3,34

23,

387

3,43

33,

480

3,52

7

Cor

pora

te V

alue

3,14

22,

610

3,21

63,

466

3,72

63,

995

4,27

44,

562

4,85

95,

165

5,48

05,

803

6,13

46,

473

6,82

07,

175

7,53

77,

908

8,28

58,

671

9,06

3

Cas

h0

00

00

00

00

00

00

00

00

00

00

Deb

t1,

400

1,40

01,

400

1,40

01,

400

1,40

01,

400

1,40

01,

400

1,40

01,

400

1,40

01,

400

1,40

01,

400

1,40

01,

400

1,40

01,

400

1,40

01,

400

Sha

reho

lder

val

ue1,

742

1,21

01,

816

2,06

62,

326

2,59

52,

874

3,16

23,

459

3,76

54,

080

4,40

34,

734

5,07

35,

420

5,77

56,

137

6,50

86,

885

7,27

17,

663

Sha

res

outs

tand

ing

135

135

135

135

135

135

135

135

135

135

135

135

135

135

135

135

135

135

135

135

135

Sha

reho

lder

val

ue p

er s

hare

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$40.

09$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-

Yea

r1

23

45

67

89

1011

1213

1415

1617

1819

20

Inve

sted

cap

ital

3,59

53,

711

3,70

33,

814

3,92

94,

047

4,16

84,

293

4,42

24,

555

4,69

14,

832

4,97

75,

126

5,28

05,

438

5,60

25,

770

5,94

36,

121

6,30

5

Ret

urn

on in

vest

ed c

apita

l (av

g)8.

1%7.

8%9.

6%10

.6%

11.5

%12

.5%

13.6

%14

.8%

16.1

%17

.5%

19.0

%20

.7%

22.5

%24

.4%

26.6

%28

.9%

31.4

%34

.1%

37.1

%40

.4%

43.9

%

Rat

e of

retu

rn o

n in

crem

enta

l cap

ital

60.3

%-5

82.9

%42

.9%

46.6

%50

.7%

55.2

%60

.0%

65.2

%70

.9%

77.1

%83

.8%

91.2

%99

.1%

107.

8%11

7.2%

127.

5%13

8.6%

150.

7%16

3.9%

FCF

grow

th7.

7%8.

2%8.

7%9.

0%9.

3%9.

6%9.

8%10

.0%

10.1

%10

.3%

10.4

%

Sen

sitiv

ity A

naly

sis

Inve

sted

cap

ital g

row

th

1%2%

3%4%

5%

10%

35.8

234

.12

32.2

730

.25

28.0

4

11%

39.5

637

.86

36.0

133

.99

31.7

8

12%

43.6

441

.94

40.0

938

.06

35.8

6

13%

48.0

846

.38

44.5

342

.540

.30

14%

52.9

251

.22

49.3

647

.34

45.1

3

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

76Tabl

e 54

Ralco

rp H

oldi

ngs:

Ret

urns

on

Inve

sted

Cap

ital

fisca

l yea

r end

s Se

ptem

ber

yp

1993

1994

1995

NO

PAT

cal

cula

tion

Sal

es90

2.8

987.

01,

013.

4C

ost o

f goo

ds s

old

480.

152

4.2

530.

4G

ross

mar

gin

46.8

%46

.9%

47.7

%S

,G&

A33

4.4

362.

537

8.1

Oth

er in

com

e0.

00.

00.

0G

oodw

ill a

mor

tizat

ion

0.0

0.0

0.0

NO

PB

T88

.310

0.3

104.

9A

djus

ted

taxe

s27

.740

.640

.8N

OP

AT

60.6

59.7

64.1

Adju

sted

taxe

s ca

lcul

atio

nTa

x pr

ovis

ion

33.2

34.3

21.4

Def

erre

d ta

xes

6.5

(1.6

)(8

.7)

Tax

shie

ld1.

04.

710

.7A

djus

ted

taxe

s27

.740

.640

.8

Inve

sted

cap

ital c

alcu

latio

nC

ash

0.2

0.0

0.0

Acc

ount

s re

ceiv

able

40.9

79.0

86.3

Inve

ntor

y82

.494

.111

0.1

Oth

er c

urre

nt a

sset

s10

.810

.411

.1A

djus

ted

curre

nt a

sset

s13

4.3

183.

520

7.5

Acc

ount

s pa

yabl

e78

.610

1.7

69.4

Acc

rued

exp

ense

s0.

00.

033

.4In

com

e ta

xes

paya

ble

0.7

0.0

0.0

NIB

CLs

79.3

101.

710

2.8

Net

wor

king

cap

ital

55.0

81.8

104.

7

Net

P,P

&E

412.

641

6.2

434.

4G

oodw

ill/o

ther

79.5

100.

449

.0R

estru

ctur

ing

char

ges

-

-

-

Inve

sted

cap

ital

547.

159

8.4

588.

1

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

77Tabl

e 54

Ralco

rp H

oldi

ngs:

Ret

urns

on

Inve

sted

Cap

ital

cont

inue

d

1993

1994

1995

Ret

urn

on in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

9.8%

10.2

%10

.4%

Cap

ital t

urns

1.7

1.6

1.7

Pret

ax R

OIC

16.1

%16

.8%

17.8

%Ta

x31

.4%

40.5

%38

.9%

Ret

urn

on in

vest

ed c

apita

l11

.1%

10.0

%10

.9%

Ret

urn

on in

cr. i

nv. c

ap.

(144

.2)%

(1.7

)%(4

2.3)

%

Cap

ital t

urno

ver a

naly

sisIn

vent

ory

turn

s11

.010

.59.

2O

pera

ting

wkg.

cap

. tur

ns20

.213

.88.

0G

oodw

ill/o

ther

turn

s11

.49.

820

.7N

et P

,P&E

turn

s2.

22.

42.

3

Cos

t of c

apita

l ana

lysis

Cos

t of e

quity

-

12.1

%11

.8%

Cos

t of d

ebt

-

5.7%

4.9%

Deb

t/tot

al c

apita

l-

38

.9%

33.1

%W

ACC

-

9.6%

9.5%

Ret

urn

on a

vg. i

nv. c

ap.

-

10.4

%10

.8%

Econ

omic

pro

fit-

4.

77.

8

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boar

d of

Gov

erno

rs o

f the

Fed

eral

Res

erve

Syst

em; C

S Fi

rst B

osto

n es

timat

es.

Not

e: S

pun-

off R

alco

rp 4

/199

4

Char

t 25

Char

t 26

Ralco

rp H

oldi

ngs:

RO

IC v

s. W

ACC

Ralco

rp H

oldi

ngs:

Eco

nom

ic Pr

ofit

9.0

%

9.2

%

9.4

%

9.6

%

9.8

%

10

.0%

10

.2%

10

.4%

10

.6%

10

.8%

11

.0%

19

94

19

95

RO

IC

WA

CC

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

19

94

19

95

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

78Tabl

e 55

Ralco

rp H

oldi

ngs:

Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1993

1994

1995

Sale

s90

2.8

987.

01,

013.

4EB

IT88

100

105

Adju

sted

taxe

s28

4141

Net

ope

ratin

g pr

ofit

afte

r tax

es (N

OPA

T)$6

1$6

0$6

4

Cha

nge

in n

et w

orki

ng c

apita

l$2

7$2

3Fi

xed

Cap

ital (

net o

f dep

reci

atio

n)16

(7)

19Ac

quisi

tions

(net

of d

ivest

iture

s)91

390

Oth

er*

00

8In

vest

men

t in

futu

re g

row

th

106

6042

\ Free

Cas

h Fl

ow (F

CF)

(46)

022

Valu

e dr

iver

s: 1

994-

1995

Def

initio

nsSa

les

1.3%

NO

PAT

= EB

IT -

adju

sted

taxe

s +

good

will

Ope

ratin

g In

com

e10

.3%

I=

Chg

w.c

.+C

ap e

x (n

et) +

Acq

. (ne

t)In

crem

enta

l Wor

king

Cap

ital

188.

3%FC

F=

NO

PAT

- IIn

crem

enta

l Fixe

d C

apita

l48

.9%

Acqu

isitio

ns14

8.5%

Oth

er*

28.6

%So

urce

: Com

pany

pub

lishe

d da

ta.

* In

clud

es c

ash

outla

ys a

ssoc

iate

d w

ith re

stru

ctur

ing.


79

Table 56Ralcorp Holdings: Value Driver Matrix

Sales growth Operating Working and fixed (in $ millions) Sales base Units Pricing/Mix margins capital needs (a) Business risk Other risk (b)Cereal $670 3% 2% 12-13% small low low

Baby Food $147 0% 2% 7-9% small low low

Cookie & Cracker $69 2% 2% 4-8% small low low

Resorts $127 8% 0% 4-5% small low low

Ralcorp Holdings $1,013 2-3% 1-2% 10-12% 20-30% low low

(a)Working and fixed capital needs as a percent of change in sales.

(b)Other risks include volatility in raw materials, currency risk, and reinvestment risk.



80

Table 57Ralcorp Holdings: Sum of the Parts Analysis

Ski resorts: $310 million* $165 million (debt)* $145 milion (22% of Vail)

Branded cereal: $570 million* $210-240 million* $330-360 million of GIS stock

Sales EBITDAWhat is left: Private label cereal $250 $5

Beech Nut baby food 150 15Cookie & cracker 80 10Total $480 $30

Current value: $1,070 million* $380 million debt* $690 million equity

Aggregate deal value: $880 million

Stub value: $190 million

Multiples: 0.4x sales ; 6.3x EBITDA

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

81Tabl

e 58

Ralst

on P

urin

a: R

etur

ns o

n In

vest

ed C

apita

lfis

cal y

ear e

nds

Sept

embe

r19

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

96NO

PAT

calc

ulat

ion

Sale

s4,

802.

64,

872.

44,

980.

15,

863.

95,

514.

65,

868.

05,

875.

96,

658.

37,

101.

47,

375.

87,

752.

47,

902.

25,

234.

85,

622.

16,

114.

3C

ost o

f goo

ds s

old

3,67

2.6

3,55

9.4

3,65

2.8

3,70

8.4

3,17

7.9

3,13

4.6

3,11

4.7

3,65

3.2

3,86

4.1

3,97

4.3

4,22

3.1

4,32

2.0

3,02

9.6

3,27

1.9

3,66

8.1

Gro

ss m

argi

n23

.5%

26.9

%26

.7%

36.8

%42

.4%

46.6

%47

.0%

45.1

%45

.6%

46.1

%45

.5%

45.3

%42

.1%

41.8

%40

.0%

S,G

&A

751.

281

4.5

814.

61,

561.

31,

678.

82,

017.

71,

955.

12,

213.

82,

356.

92,

513.

82,

716.

22,

755.

31,

527.

01,

605.

71,

660.

9O

ther

inco

me

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Goo

dwill

amor

tizat

ion

0.0

0.0

0.0

0.0

18.8

78.6

51.5

50.0

68.5

49.7

54.5

63.7

43.5

50.0

57.0

NO

PBT

378.

849

8.5

512.

759

4.2

676.

779

4.3

857.

684

1.3

948.

993

7.4

867.

688

8.6

721.

779

4.5

842.

3Ad

just

ed ta

xes

145.

818

9.7

206.

227

5.1

343.

029

8.2

297.

928

8.9

315.

932

5.4

323.

531

6.2

328.

530

6.9

290.

6NO

PAT

233.

130

8.8

306.

531

9.1

333.

749

6.1

559.

755

2.4

633.

061

2.0

544.

157

2.4

393.

248

7.6

551.

7

Adju

sted

taxe

s ca

lcul

atio

nTa

x pr

ovis

ion

85.9

207.

319

5.1

225.

028

7.6

237.

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525

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255.

922

1.4

239.

118

6.1

228.

421

4.7

Def

erre

d ta

xes

(38.

0)33

.85.

91.

86.

516

.027

.518

.321

.79.

8(9

.8)

13.4

(65.

6)(6

.0)

(3.6

)Ta

x sh

ield

21.9

16.2

17.0

51.9

61.9

76.3

83.0

82.7

78.9

79.3

92.3

90.5

76.8

72.5

72.3

Adju

sted

taxe

s14

5.8

189.

720

6.2

275.

134

3.0

298.

229

7.9

288.

931

5.9

325.

432

3.5

316.

232

8.5

306.

929

0.6

Inve

sted

cap

ital c

alcu

latio

nC

ash

48.0

48.8

49.6

58.7

55.0

58.6

59.0

66.6

71.0

74.0

59.5

57.9

77.1

44.3

61.1

Acco

unts

rece

ivab

le22

8.7

255.

727

6.5

259.

947

8.7

512.

852

6.9

636.

367

2.8

672.

083

3.9

763.

282

9.1

801.

484

5.6

Inve

ntor

y41

2.3

382.

835

9.4

359.

463

1.7

577.

655

9.9

677.

870

2.1

735.

577

5.7

803.

772

9.9

766.

281

6.2

Oth

er c

urre

nt a

sset

s60

.072

.272

.879

.266

.590

.024

6.8

126.

399

.311

0.5

111.

217

1.2

174.

215

1.1

149.

3C

urre

nt a

sset

s74

9.0

759.

575

8.3

757.

21,

231.

91,

239.

01,

392.

61,

507.

01,

545.

21,

592.

01,

780.

31,

796.

01,

810.

31,

763.

01,

872.

2

Acco

unts

pay

able

236.

049

0.3

474.

759

5.9

822.

878

4.9

753.

182

4.9

839.

891

7.1

1,05

7.8

1,04

1.7

984.

387

5.5

407.

9Ac

crue

d ex

pens

es21

1.7

20.0

20.5

20.0

21.0

21.7

25.6

33.8

34.2

38.3

39.7

40.8

39.1

36.4

507.

7In

com

e ta

xes

paya

ble

18.7

9.7

8.9

16.7

45.3

61.1

92.6

89.5

63.5

61.4

63.7

25.1

31.7

22.9

0.0

NIB

CLs

466.

452

0.0

504.

163

2.6

889.

186

7.7

871.

394

8.2

937.

51,

016.

81,

161.

21,

107.

61,

055.

193

4.8

915.

6

Net

wor

king

cap

ital

282.

623

9.5

254.

212

4.6

342.

837

1.3

521.

355

8.8

607.

757

5.2

619.

168

8.4

755.

282

8.2

956.

6

Net

P,P

&E1,

181.

01,

080.

61,

053.

71,

501.

41,

973.

01,

731.

31,

711.

91,

765.

62,

032.

52,

183.

72,

306.

42,

331.

61,

897.

41,

350.

91,

455.

9G

oodw

ill/ot

her

118.

614

3.0

130.

319

3.3

637.

162

8.6

595.

274

3.8

755.

875

8.2

1,04

5.5

931.

685

1.8

1,15

7.7

1,16

0.2

Res

truct

urin

g ch

arge

s-

-

-

-

-

-

-

-

-

-

22

.922

.963

.288

.688

.6

Inve

sted

cap

ital

1,58

2.2

1,46

3.1

1,43

8.2

1,81

9.3

2,95

2.9

2,73

1.2

2,82

8.4

3,06

8.2

3,39

6.0

3,51

7.1

3,99

3.9

3,97

4.5

3,56

7.6

3,42

5.4

3,66

1.3

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

82Tabl

e 58

Ralst

on P

urin

a: R

etur

ns o

n In

vest

ed C

apita

l co

ntin

ued

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

7.9%

10.2

%10

.3%

10.1

%12

.3%

13.5

%14

.6%

12.6

%13

.4%

12.7

%11

.2%

11.2

%13

.8%

14.1

%13

.8%

Capi

tal t

urns

3.0

3.3

3.5

3.2

1.9

2.1

2.1

2.2

2.1

2.1

1.9

2.0

1.5

1.6

1.7

Pret

ax R

OIC

23.9

%34

.1%

35.6

%32

.7%

22.9

%29

.1%

30.3

%27

.4%

27.9

%26

.7%

21.7

%22

.4%

20.2

%23

.2%

23.0

%Ta

x38

.5%

38.1

%40

.2%

46.3

%50

.7%

37.5

%34

.7%

34.3

%33

.3%

34.7

%37

.3%

35.6

%45

.5%

38.6

%34

.5%

Retu

rn o

n in

vest

ed c

apita

l14

.7%

21.1

%21

.3%

17.5

%11

.3%

18.2

%19

.8%

18.0

%18

.6%

17.4

%13

.6%

14.4

%11

.0%

14.2

%15

.1%

Retu

rn o

n in

cr. i

nv. c

ap.

-

(63.

6)%

9.2%

3.3%

1.3%

(73.

2)%

65.4

%(3

.0)%

24.6

%(1

7.3)

%(1

4.2)

%(1

46.0

)%44

.1%

(66.

4)%

27.2

%

Capi

tal t

urno

ver a

nalys

isIn

vent

ory

turn

s11

.612

.713

.916

.38.

710

.210

.59.

810

.110

.010

.09.

87.

27.

37.

5O

pera

ting

wkg

. cap

. tur

ns11

.932

.930

.925

0.6

19.2

19.2

17.6

13.6

13.3

15.0

14.0

15.0

9.1

8.1

4.9

Goo

dwill/

othe

r tur

ns40

.534

.138

.230

.38.

79.

39.

99.

09.

49.

77.

48.

56.

14.

95.

3Ne

t P,P

&E tu

rns

4.1

4.5

4.7

3.9

2.8

3.4

3.4

3.8

3.5

3.4

3.4

3.4

2.8

4.2

4.2

Cos

t of c

apita

l ana

lysis

Cost

of e

quity

16.2

%14

.6%

15.5

%14

.2%

11.7

%11

.1%

12.2

%11

.9%

12.5

%11

.7%

11.5

%10

.8%

11.5

%11

.0%

11.0

%Co

st o

f deb

t7.

2%6.

8%7.

2%6.

5%5.

5%7.

0%6.

8%6.

1%6.

6%5.

9%5.

3%4.

6%5.

6%4.

9%4.

8%De

bt/to

tal c

apita

l24

.6%

13.1

%11

.6%

20.2

%30

.5%

23.0

%23

.7%

28.8

%30

.0%

29.6

%37

.1%

38.7

%31

.7%

29.2

%25

.7%

WAC

C14

.0%

13.6

%14

.6%

12.6

%9.

8%10

.2%

10.9

%10

.2%

10.7

%10

.0%

9.2%

8.4%

9.6%

9.2%

9.4%

Retu

rn o

n av

g. in

v. c

ap.

-

20.3

%21

.1%

19.6

%14

.0%

17.5

%20

.1%

18.7

%19

.6%

17.7

%14

.5%

14.4

%10

.4%

13.9

%15

.6%

Econ

omic

prof

it-

10

1.5

95.2

113.

398

.920

6.2

255.

625

1.3

287.

326

7.9

197.

723

7.6

30.4

165.

221

8.6

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dige

st, B

oard

of G

over

nors

of t

he F

eder

al R

eser

ve S

yste

m; C

S Fi

rst B

osto

n es

timat

es.

Note

: 199

4 an

d fo

llow

ing

figur

es re

fer t

o R

alst

on P

urin

a G

roup

; prio

r to

1994

, Ral

ston

Pur

ina

Com

pany

.

Char

t 27

Char

t 28

Ralst

on P

urin

a: R

OIC

vs.

WAC

CRa

lston

Pur

ina:

Eco

nom

ic Pr

ofit

6.0%

8.0%

10.0

%

12.0

%

14.0

%

16.0

%

18.0

%

20.0

%

22.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

RO

IC

WA

CC

0.0

50.0

100.

0

150.

0

200.

0

250.

0

300.

01983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

83Tabl

e 59

Ralst

on P

urin

a: R

ates

of R

etur

n on

Incr

emen

tal I

nves

tmen

t

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

**19

9519

96Sa

les

$5,8

64$5

,515

$5,8

68$5

,876

$6,6

58$7

,101

$7,3

76$7

,752

$7,9

02$5

,235

$5,6

22$6

,114

EBIT

594

658

699

806

791

852

884

807

825

689

745

785

Adju

sted

taxe

s27

534

329

829

828

931

632

532

431

632

930

729

1Am

ortiz

atio

n of

goo

dwill

019

7952

5069

5055

6444

5057

Net O

pera

ting

Prof

it af

ter t

axes

(NO

PAT)

$319

$334

$479

$560

$552

$605

$608

$538

$572

$404

$488

$552

Chan

ge in

net

wor

king

cap

ital

($13

0)$2

18$2

9$1

50$3

8$4

9($

33)

$44

$69

$67

$73

$128

Capi

tal E

xpen

ditu

res

(net

of d

epre

ciat

ion)

85(9

7)(8

)25

3213

218

526

4235

(16)

74Ac

quis

ition

s (n

et o

f div

estit

ures

)47

51,

117

(516

)0

(136

)55

031

514

339

138

25O

ther

*0

483

020

00

00

1029

0In

vest

men

t in

futu

re g

rowt

h43

01,

287

(492

)17

5(4

7)23

615

338

525

515

122

422

8

Free

Cas

h Fl

ow (F

CF)

(111

)(9

53)

971

384

599

369

455

153

318

253

263

324

Valu

e dr

iver

s 19

90-1

995

Rate

s of

retu

rn o

n in

crem

enta

l inv

estm

ent

Defin

ition

sSa

les

-4.6

%3

year

s-3

%NO

PAT

= EB

IT -

adju

sted

taxe

s +

good

will

Ope

ratin

g M

argi

n11

.7%

5 ye

ars

-5%

I=

Chg

w.c

.+C

ap e

x (n

et) +

Acq

. (ne

t)Ca

sh T

ax R

ate

39.9

%10

yea

rs9%

FCF

= N

OPA

T - I

Incr

emen

tal W

orki

ng C

apita

l-1

8.2%

Incr

emen

tal F

ixed

Cap

ital

-27.

4%Ac

quis

ition

s-4

6.7%

Oth

er*

-2.6

%So

urce

: Com

pany

pub

lishe

d da

ta.

* In

clud

es c

ash

outla

ys a

ssoc

iate

d w

ith re

stru

ctur

ing.

Rol

ling

3 ye

ar r

ate

of re

turn

on

incr

emen

tal i

nves

tmen

t

-40%

-30%

-20%

-10%0%10%

20%

30%

1988

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

84Tabl

e 60

Ralst

on P

urin

a: C

apita

l Allo

catio

n

Ope

ratin

g pr

ofit

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Pet

& h

uman

food

s45

6

525

52

4

578

54

5

621

61

2

513

49

2

353

34

8

Oth

er c

onsu

mer

pro

duct

s22

49

16

4

186

19

0

216

25

7

272

31

0

311

35

8

Agr

icul

tura

l pro

duct

s69

84

34

43

50

46

43

38

48

43

43

Tota

l54

7

658

72

1

807

78

4

884

91

2

822

85

0

708

74

8

Asse

ts a

t yea

r end

Pet

& h

uman

food

s1,

689

1,73

4

1,

664

1,55

8

1,

667

1,64

0

1,

809

1,81

4

1,

816

1,49

1

1,

145

Oth

er c

onsu

mer

pro

duct

s18

8

2,00

8

2,

018

2,03

3

2,

421

2,43

4

2,

474

2,95

7

2,

920

2,76

9

2,

965

Agr

icul

tura

l pro

duct

s47

9

468

18

2

302

29

4

320

34

9

379

33

5

362

45

7

Tota

l2,

356

4,21

0

3,

864

3,89

3

4,

382

4,39

5

4,

632

5,15

1

5,

072

4,62

2

4,

567

Prop

erty

add

ition

sP

et &

hum

an fo

ods

97

11

9

132

12

8

107

13

6

192

15

5

164

15

3

51

O

ther

con

sum

er p

rodu

cts

13

14

44

62

78

15

4

136

12

5

125

13

5

121

A

gric

ultu

ral p

rodu

cts

38

32

7

15

22

41

47

27

22

22

35

To

tal

147

16

5

183

20

4

207

33

1

375

30

8

311

30

9

208

Ret

urn

on a

sset

sP

et &

hum

an fo

ods

27.0

%30

.3%

31.5

%37

.1%

32.7

%37

.9%

33.8

%28

.3%

27.1

%23

.7%

30.4

%O

ther

con

sum

er p

rodu

cts

11.8

%2.

4%8.

1%9.

1%7.

8%8.

9%10

.4%

9.2%

10.6

%11

.2%

12.1

%A

gric

ultu

ral p

rodu

cts

14.4

%17

.9%

18.6

%14

.3%

17.0

%14

.5%

12.3

%9.

9%14

.3%

11.9

%9.

3%To

tal

23.2

%15

.6%

18.7

%20

.7%

17.9

%20

.1%

19.7

%16

.0%

16.7

%15

.3%

16.4

%S

ourc

e: C

ompa

ny p

ublis

hed

data

, CS

Firs

t Bos

ton

estim

ates

-500

1,00

0

1,50

0

2,00

0

2,50

0

3,00

0

Pet

&hu

man

food

s

Oth

erco

nsum

erpr

oduc

ts

Agr

icul

tura

lpr

oduc

ts

Pet

& h

uman

food

s

Oth

er c

onsu

mer

prod

ucts

Agr

icul

tura

l pro

duct

s

Asse

ts a

t yea

r end

, 199

5

25%

65%

10%

0%10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Agr

icul

tura

lpr

oduc

ts

Oth

erco

nsum

erpr

oduc

ts

Pet

& h

uman

food

s

Prop

erty

add

ition

s

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

85Tabl

e 61

Ralst

on P

urin

a: V

alue

Driv

er M

atrix

Sale

s gr

owth

Ope

ratin

gW

orki

ng a

nd fi

xed

(in $

milli

ons)

Sale

s ba

seU

nits

Pric

ing/

Mix

mar

gins

capi

tal n

eeds

(a)

Busi

ness

risk

Oth

er ri

sk (b

)

Pet f

oods

$2,1

002-

3%1-

2%18

-19%

smal

llo

wlo

w

Ever

eady

Bat

tery

$2,3

900%

6-7%

12-1

4%sm

all

low

low

Soy

Prot

ein

$395

8%2%

18-2

0%sm

all

low

low

Agric

ultu

ral P

rodu

cts

$1,2

295%

0%4-

5%m

ediu

mlo

wlo

w

Ral

ston

Pur

ina

$6,1

141-

2%5-

6%13

-14%

20-3

0%lo

wlo

wG

roup

(a)W

orki

ng a

nd fi

xed

capi

tal n

eeds

as

a pe

rcen

t of c

hang

e in

sal

es.

(b)O

ther

risk

s in

clud

e vo

latil

ity in

raw

mat

eria

ls, c

urre

ncy

risk,

and

rein

vest

men

t ris

k.

Sour

ce:R

alst

on P

urin

a C

ompa

ny, C

S Fi

rst B

osto

n es

timat

es.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

86Tabl

e 62

Ralst

on P

urin

a: D

CF A

nalys

is

NO

PA

T gr

owth

8%C

APFC

F Pr

ice

Inve

sted

cap

ital g

row

th6%

100.

0%$9

5.45

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

40%

152.

8%$8

2.86

Deb

t1,

689

204.

2%$6

9.91

WA

CC

9.4%

173.

5%$8

7.94

Cas

h0

Sha

res

outs

tand

ing

102

Yea

r 0 is

nor

mal

ized

1996

A19

97E

1998

E19

99E

2000

E20

01E

2002

E20

03E

2004

E20

05E

2006

E20

07E

2008

E20

09E

2010

E20

11E

2012

E20

13E

2014

E20

15E

2016

E

NO

PAT

552

554

598

645

697

753

813

878

948

1,02

41,

106

1,19

51,

290

1,39

31,

505

1,62

51,

755

1,89

62,

047

2,21

12,

388

Inve

stm

ent i

n fu

ture

(256

)(1

85)

(181

)19

821

022

223

525

026

528

029

731

533

435

437

539

842

244

747

450

253

2

Free

Cas

h Fl

ow80

873

977

844

848

753

157

862

868

474

480

987

995

61,

039

1,13

01,

227

1,33

41,

449

1,57

31,

709

1,85

6

PV

of F

CF

808

676

650

342

340

339

337

335

333

331

329

327

325

323

321

319

317

315

312

310

308

Cum

ulat

ive

PV

of F

CF

808

676

1,32

61,

668

2,00

82,

347

2,68

43,

019

3,35

23,

684

4,01

34,

341

4,66

64,

989

5,31

15,

630

5,94

66,

261

6,57

36,

883

7,19

1

Res

idua

l Val

ue5,

870

5,89

86,

359

6,86

77,

417

8,01

08,

651

9,34

310

,090

10,8

9811

,770

12,7

1113

,728

14,8

2616

,012

17,2

9318

,677

20,1

7121

,785

23,5

2725

,410

PV

of R

esid

ual V

alue

5,87

05,

392

5,31

35,

245

5,17

85,

112

5,04

74,

982

4,91

84,

856

4,79

44,

732

4,67

24,

612

4,55

34,

495

4,43

74,

381

4,32

54,

270

4,21

5

Cor

pora

te V

alue

6,67

86,

068

6,63

96,

913

7,18

77,

459

7,73

18,

001

8,27

18,

539

8,80

79,

073

9,33

89,

601

9,86

410

,124

10,3

8410

,642

10,8

9811

,153

11,4

06

Cas

h0

00

00

00

00

00

00

00

00

00

00

Deb

t1,

689

1,68

91,

689

1,68

91,

689

1,68

91,

689

1,68

91,

689

1,68

91,

689

1,68

91,

689

1,68

91,

689

1,68

91,

689

1,68

91,

689

1,68

91,

689

Shar

ehol

der v

alue

4,98

84,

378

4,95

05,

224

5,49

75,

770

6,04

16,

312

6,58

16,

850

7,11

77,

383

7,64

87,

912

8,17

48,

435

8,69

48,

952

9,20

99,

464

9,71

7

Sha

res

outs

tand

ing

102

102

102

102

102

102

102

102

102

102

102

102

102

102

102

102

102

102

102

102

102

Shar

ehol

der v

alue

per

sha

re$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$--.-

-$-

-.--

$87.

94$-

-.--

$--.-

-$-

-.--

Yea

r1

23

45

67

89

1011

1213

1415

1617

1819

20

Inve

sted

cap

ital

3,66

1.3

3,47

63,

296

3,49

33,

703

3,92

54,

160

4,41

04,

675

4,95

55,

253

5,56

85,

902

6,25

66,

631

7,02

97,

451

7,89

88,

372

8,87

49,

406

Ret

urn

on in

vest

ed c

apita

l (av

g)15

.1%

15.5

%17

.6%

19.0

%19

.4%

19.7

%20

.1%

20.5

%20

.9%

21.3

%21

.7%

22.1

%22

.5%

22.9

%23

.4%

23.8

%24

.2%

24.7

%25

.2%

25.6

%26

.1%

Rat

e of

retu

rn o

n in

crem

enta

l cap

ital

-23.

4%-2

6.4%

26.1

%26

.6%

27.1

%27

.6%

28.1

%28

.7%

29.2

%29

.8%

30.3

%30

.9%

31.5

%32

.1%

32.7

%33

.3%

33.9

%34

.6%

35.2

%

FCF

grow

th0.

0%0.

8%1.

4%2.

0%2.

4%2.

8%3.

2%3.

5%3.

8%4.

0%4.

2%

S ens

itiv

ity A

naly

sis

Inve

sted

cap

ital g

row

th4%

5%6%

7%8%

6%75

.98

72.5

068

.63

64.3

159

.48

7%85

.10

81.6

377

.76

73.4

368

.61

8%95

.29

91.8

287

.94

83.6

278

.79

9%10

6.65

103.

1899

.31

94.9

890

.16

10%

119.

3411

5.86

111.

9910

7.67

102.

84

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

87Tabl

e 63

Sara

Lee

Cor

pora

tion:

Ret

urns

on

Inve

sted

Cap

ital

fisca

l yea

r end

s Ju

ney

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

NO

PAT

calc

ulat

ion

Sale

s6,

039.

06,

572.

07,

000.

08,

117.

07,

938.

09,

154.

610

,424

.011

,718

.011

,606

.012

,381

.013

,243

.014

,580

.015

,536

.017

,719

.018

,624

.0C

ost o

f goo

ds s

old

4,05

6.5

4,39

4.1

4,73

0.8

5,60

4.0

5,40

3.1

6,30

9.6

7,09

6.8

8,04

0.4

7,75

4.7

8,07

2.1

8,30

6.0

9,03

9.0

9,70

0.0

11,0

23.0

11,4

70.0

Gro

ss m

argi

n32

.8%

33.1

%32

.4%

31.0

%31

.9%

31.1

%31

.9%

31.4

%33

.2%

34.8

%37

.3%

38.0

%37

.6%

37.8

%38

.4%

S,G

&A1,

687.

21,

845.

61,

924.

92,

121.

72,

122.

82,

328.

72,

717.

52,

936.

12,

992.

33,

359.

23,

891.

04,

377.

04,

570.

05,

292.

05,

603.

0O

ther

inco

me

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Goo

dwill

amor

tizat

ion

6.9

9.1

11.2

18.2

23.1

33.6

53.1

65.4

82.9

91.6

118.

413

9.4

154.

316

4.6

180.

0N

OP

BT30

2.2

341.

535

5.6

409.

543

5.1

549.

966

2.8

806.

894

1.9

1,04

1.3

1,16

4.4

1,30

3.4

1,42

0.3

1,56

8.6

1,73

1.0

Adju

sted

taxe

s90

.481

.365

.411

1.9

182.

520

9.0

206.

123

2.1

239.

421

3.2

420.

638

5.2

391.

050

2.3

467.

7N

OPA

T21

1.8

260.

129

0.2

297.

625

2.6

340.

945

6.7

574.

770

2.5

828.

174

3.7

918.

31,

029.

31,

066.

31,

263.

3

Adju

sted

taxe

s ca

lcul

atio

nTa

x pr

ovis

ion

100.

611

3.3

126.

013

9.1

132.

118

0.8

188.

022

9.0

243.

029

5.0

340.

037

8.0

392.

141

5.0

462.

0D

efer

red

taxe

s20

.948

.471

.348

.4(2

4.5)

(2.2

)18

.447

.558

.912

7.6

(45.

0)24

.056

.2(1

7.0)

60.0

Tax

shie

ld10

.716

.410

.621

.225

.826

.036

.650

.655

.345

.835

.631

.255

.170

.365

.7Ad

just

ed ta

xes

90.4

81.3

65.4

111.

918

2.5

209.

020

6.1

232.

123

9.4

213.

242

0.6

385.

239

1.0

502.

346

7.7

Inve

sted

cap

ital c

alcu

latio

nC

ash

60.4

65.7

70.0

81.2

79.4

91.5

104.

211

7.5

116.

112

3.8

132.

414

5.8

155.

417

7.2

186.

0Ac

coun

ts re

ceiv

able

497.

654

4.2

580.

958

3.8

651.

061

0.0

717.

581

3.7

922.

294

6.0

1,18

0.0

1,17

1.0

1,47

2.0

1,65

3.0

1,72

8.0

Inve

ntor

y76

5.1

761.

386

3.3

883.

093

6.3

1,01

1.7

1,12

7.5

1,45

2.0

1,65

3.7

1,70

6.9

2,16

0.0

2,28

0.0

2,56

7.0

2,83

0.0

2,80

7.0

Oth

er c

urre

nt a

sset

s34

.124

.650

.136

.436

.035

.865

.311

6.6

123.

014

2.1

157.

020

0.0

241.

024

3.0

303.

0C

urre

nt a

sset

s1,

357.

21,

395.

71,

564.

31,

584.

41,

702.

71,

749.

02,

014.

52,

499.

72,

815.

02,

918.

93,

629.

43,

796.

84,

435.

44,

903.

25,

024.

0

Acco

unts

pay

able

736.

988

1.8

926.

344

1.3

404.

651

0.6

769.

796

6.5

884.

386

3.7

1,11

0.0

1,15

1.0

1,25

3.0

1,43

6.0

1,59

2.0

Accr

ued

expe

nses

0.0

0.0

0.0

586.

759

5.6

766.

390

5.2

988.

11,

187.

71,

237.

71,

795.

01,

799.

02,

290.

02,

562.

02,

495.

0In

com

e ta

xes

paya

ble

8.0

23.3

7.0

20.5

39.7

20.9

11.8

10.1

68.5

52.2

4.0

50.0

13.0

66.0

101.

0N

IBC

Ls74

4.8

905.

293

3.3

1,04

8.5

1,04

0.0

1,29

7.8

1,68

6.7

1,96

4.7

2,14

0.5

2,15

3.6

2,90

9.0

3,00

0.0

3,55

6.0

4,06

4.0

4,18

8.0

Net

wor

king

cap

ital

612.

449

0.6

631.

053

6.0

662.

845

1.3

327.

853

5.0

674.

676

5.3

720.

479

6.8

879.

483

9.2

836.

0

Net

P,P

&E76

5.1

825.

683

7.9

946.

399

6.3

1,24

0.6

1,41

6.7

1,77

3.0

2,20

4.1

2,38

9.1

2,57

3.0

2,87

8.0

2,90

0.0

2,96

4.0

3,00

7.0

Goo

dwill/

othe

r25

2.0

259.

229

0.1

627.

070

5.7

874.

41,

417.

72,

061.

02,

432.

62,

702.

93,

535.

03,

803.

04,

154.

04,

430.

04,

514.

0R

estru

ctur

ing

char

ges

-

-

-

-

-

-

-

-

-

-

-

-

205.

620

5.6

205.

6

Inve

sted

cap

ital

1,62

9.5

1,57

5.4

1,75

8.9

2,10

9.3

2,36

4.7

2,56

6.2

3,16

2.2

4,36

9.0

5,31

1.4

5,85

7.2

6,82

8.4

7,47

7.8

8,13

9.0

8,43

8.8

8,56

2.6

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

88Tabl

e 63

Sara

Lee

Cor

pora

tion:

Ret

urns

on

Inve

sted

Cap

ital

cont

inue

d

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Ret

urn

on in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

5.0%

5.2%

5.1%

5.0%

5.5%

6.0%

6.4%

6.9%

8.1%

8.4%

8.8%

8.9%

9.1%

8.9%

9.3%

Capi

tal t

urns

3.7

4.2

4.0

3.8

3.4

3.6

3.3

2.7

2.2

2.1

1.9

1.9

1.9

2.1

2.2

Pret

ax R

OIC

18.5

%21

.7%

20.2

%19

.4%

18.4

%21

.4%

21.0

%18

.5%

17.7

%17

.8%

17.1

%17

.4%

17.5

%18

.6%

20.2

%Ta

x29

.9%

23.8

%18

.4%

27.3

%41

.9%

38.0

%31

.1%

28.8

%25

.4%

20.5

%36

.1%

29.5

%27

.5%

32.0

%27

.0%

Ret

urn

on in

vest

ed c

apita

l13

.0%

16.5

%16

.5%

14.1

%10

.7%

13.3

%14

.4%

13.2

%13

.2%

14.1

%10

.9%

12.3

%12

.6%

12.6

%14

.8%

Ret

urn

on in

cr. i

nv. c

ap.

-

(89.

4)%

16.4

%2.

1%(1

7.6)

%43

.8%

19.4

%9.

8%13

.6%

23.0

%(8

.7)%

26.9

%16

.8%

12.3

%15

9.1%

Cap

ital t

urno

ver a

naly

sis

Inve

ntor

y tu

rns

7.9

8.6

8.1

9.2

8.5

9.0

9.2

8.1

7.0

7.3

6.1

6.4

6.1

6.3

6.6

Ope

ratin

g w

kg. c

ap. t

urns

11.5

15.5

13.5

7.9

6.7

8.2

9.7

9.0

6.9

6.9

5.9

6.3

5.6

5.8

6.3

Goo

dwill/

othe

r tur

ns24

.025

.424

.112

.911

.210

.57.

45.

74.

84.

63.

73.

83.

74.

04.

1N

et P

,P&E

turn

s7.

98.

08.

48.

68.

07.

47.

46.

65.

35.

25.

15.

15.

46.

06.

2

Cos

t of c

apita

l ana

lysi

sC

ost o

f equ

ity17

.5%

15.2

%15

.8%

14.7

%12

.1%

11.7

%12

.9%

12.9

%12

.8%

12.2

%12

.0%

11.4

%12

.0%

11.6

%11

.7%

Cos

t of d

ebt

8.6%

6.6%

7.7%

6.2%

5.1%

6.0%

6.3%

5.8%

5.9%

5.8%

5.3%

4.7%

5.1%

4.6%

4.7%

Deb

t/tot

al c

apita

l29

.2%

27.5

%22

.7%

21.3

%16

.0%

15.3

%19

.8%

22.7

%21

.8%

15.9

%12

.6%

17.0

%21

.9%

16.1

%12

.7%

WAC

C14

.9%

12.8

%14

.0%

12.9

%11

.0%

10.8

%11

.6%

11.3

%11

.3%

11.2

%11

.2%

10.2

%10

.5%

10.5

%10

.8%

Ret

urn

on a

vg. i

nv. c

ap.

-

16.2

%17

.4%

15.4

%11

.3%

13.8

%15

.9%

15.3

%14

.5%

14.8

%11

.7%

12.8

%13

.2%

12.9

%14

.9%

Econ

omic

pro

fit-

54

.957

.348

.66.

174

.312

4.3

150.

315

5.6

203.

636

.118

5.4

208.

519

8.1

345.

3

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Char

t 29

Char

t 30

Sara

Lee

Cor

pora

tion:

RO

IC v

s. W

ACC

Sara

Lee

Cor

pora

tion:

Eco

nom

ic Pr

ofit

9.0%

10.0

%

11.0

%

12.0

%

13.0

%

14.0

%

15.0

%

16.0

%

17.0

%

18.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

RO

IC

WAC

C

0.0

50.0

100.

0

150.

0

200.

0

250.

0

300.

0

350.

0

400.

0

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

89Tabl

e 64

Sara

Lee

Cor

pora

tion:

Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Sale

s$7

,938

$9,1

55$1

0,42

4$1

1,71

8$1

1,60

6$1

2,38

1$1

3,24

3$1

4,58

0$1

5,53

6$1

7,71

9$1

8,62

4EB

IT41

251

661

074

285

995

01,

046

1,16

51,

266

1,40

41,

551

Adju

sted

taxe

s18

220

920

623

223

921

342

138

539

150

246

8Am

ortiz

atio

n of

goo

dwill

2334

5365

8392

118

139

154

170

180

Net

ope

ratin

g pr

ofit

afte

r tax

es (N

OPA

T)25

334

145

757

570

282

974

391

91,

029

1,07

21,

263

Cha

nge

in n

et w

orki

ng c

apita

l$1

27($

212)

($12

4)$2

07$1

40$9

1($

45)

$76

$83

($40

)($

3)Fi

xed

Cap

ital (

net o

f dep

reci

atio

n)80

119

248

316

304

201

110

309

214

4488

Acqu

isitio

ns (n

et o

f dive

stitu

res)

-60

235

654

506

168

193

532

390

412

156

204

Oth

er*

00

034

00

124

00

139

0In

vest

men

t in

futu

re g

rowt

h (I)

147

142

779

1,06

361

248

572

177

570

929

928

9

Free

Cas

h Fl

ow (F

CF)

105

199

(322

)(4

88)

9134

423

144

321

773

974

Valu

e dr

ivers

199

0-19

95Ra

tes

of re

turn

on

incr

emen

tal i

nves

tmen

tD

efin

ition

sSa

les

8.5%

3 ye

ars

19%

NO

PAT

= EB

IT -

adju

sted

taxe

s +

good

will

Ope

ratin

g M

argi

n8.

0%5

year

s15

%I

= C

hg w

.c.+

Cap

ex (n

et) +

Acq

. (ne

t)C

ash

Tax

Rat

e32

.2%

10 y

ears

18%

FCF

= N

OPA

T - I

Incr

emen

tal W

orki

ng C

apita

l2.

6%In

crem

enta

l Fix

ed C

apita

l15

.5%

Acqu

isitio

ns30

.2%

Oth

er*

4.2%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Incl

udes

cas

h ou

tlays

ass

ocia

ted

with

rest

ruct

urin

g.

Rol

ling

3 ye

ar ra

te o

f ret

urn

on in

crem

enta

l inv

estm

ent

0%5%10%

15%

20%

25%

30%

35% 19

8919

9019

9119

9219

9319

9419

9519

96

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

90Tabl

e 65

Sara

Lee

Cor

pora

tion:

Cap

ital A

lloca

tion

Pret

ax in

com

e19

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

96C

onsu

mer

food

s20

9

202

27

1

326

35

9

372

41

6

449

51

6

594

66

6

735

P

erso

nal p

rodu

cts

102

11

6

146

17

9

257

38

8

424

50

4

536

51

9

579

63

1

Hou

seho

ld &

per

sona

l car

e79

95

98

10

5

97

98

112

93

11

2

154

15

9

185

To

tal

390

412

515

609

713

858

951

1,04

6

1,16

4

1,26

7

1,40

4

1,55

1

Asse

tsC

onsu

mer

food

s1,

826

1,88

4

2,

312

2,15

8

2,

778

3,13

5

3,

079

3,27

5

3,

315

3,54

6

4,

150

4,18

4

P

erso

nal p

rodu

cts

650

76

7

750

1,

083

2,31

9

3,

271

3,72

3

5,

691

6,57

7

6,

741

6,85

4

6,

807

Hou

seho

ld &

per

sona

l car

e74

0

853

1,

131

1,77

2

1,

426

1,23

0

1,

044

1,02

3

91

0

1,37

7

1,

426

1,61

2

To

tal

3,21

6

3,50

4

4,19

3

5,01

2

6,52

3

7,63

6

7,84

6

9,98

9

10,8

02

11,6

64

12,4

30

12,6

02

Cap

ital e

xpen

ditu

res

Con

sum

er fo

ods

170

11

4

144

20

2

249

21

1

193

17

8

190

17

8

182

23

1

Per

sona

l pro

duct

s58

74

10

6

217

25

4

335

27

7

286

49

5

409

26

3

273

H

ouse

hold

& p

erso

nal c

are

25

34

38

29

38

39

53

46

43

41

35

38

Tota

l25

2

22

2

28

7

44

8

54

0

58

5

52

3

51

0

72

8

62

8

48

0

54

2

Ret

urn

on a

sset

sC

onsu

mer

food

s11

.4%

10.7

%11

.7%

15.1

%12

.9%

11.9

%13

.5%

13.7

%15

.6%

16.8

%16

.0%

17.6

%P

erso

nal p

rodu

cts

15.7

%15

.1%

19.4

%16

.5%

11.1

%11

.9%

11.4

%8.

9%8.

1%7.

7%8.

4%9.

3%H

ouse

hold

& p

erso

nal c

are

10.7

%11

.1%

8.7%

5.9%

6.8%

8.0%

10.7

%9.

1%12

.3%

11.2

%11

.2%

11.5

%To

tal

12.1

%11

.7%

12.3

%12

.2%

10.9

%11

.2%

12.1

%10

.5%

10.8

%10

.9%

11.3

%12

.3%

Sou

rce:

Com

pany

pub

lishe

d da

ta, C

S F

irst B

osto

n es

timat

es

-

1,0

00

2,0

00

3,0

00

4,0

00

5,0

00

6,0

00

7,0

00

Con

su

me

rfo

od

sP

ers

ona

lp

rod

uct

sH

ous

eh

old

& p

ers

ona

lca

re

Con

sum

er f

ood

s

Per

son

al p

rod

uct

s

Hou

seho

ld &

per

son

alca

re

33%

54%

13%

Asse

ts, 1

996

0%20%

40%

60%

80%

100%

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Hou

seho

ld &

pers

onal

car

e

Per

sona

lpr

oduc

ts

Con

sum

er fo

ods

Cap

ital e

xpen

ditu

res

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

91Tabl

e 66

Sara

Lee

Cor

pora

tion:

Val

ue D

river

Mat

rixSa

les

grow

thO

pera

ting

Wor

king

and

fixe

d

($ in

milli

ons)

Sale

s ba

seU

nits

Pric

ing/

Mix

mar

gins

capi

tal n

eeds

(a)

Busi

ness

ris

kO

ther

risk

(b)

Pack

aged

Mea

ts$3

,440

2-3%

0-1%

5-7%

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mal

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1996

A19

97E

1998

E19

99E

2000

E20

01E

2002

E20

03E

2004

E20

05E

2006

E20

07E

2008

E20

09E

2010

E20

11E

2012

E20

13E

2014

E20

15E

2016

E

NO

PAT

1,26

31,

313

1,41

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556

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Ret

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Net

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sted

Cap

ital

cont

inue

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1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Retu

rn o

n in

vest

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l cal

cula

tion

NO

PBT

mar

gin

5.0%

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Cost

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11.6

%9.

4%10

.4%

10.4

%10

.5%

9.7%

10.0

%9.

3%R

etur

n on

avg

. inv

. cap

.-

8.

5%17

.1%

27.4

%23

.5%

23.2

%14

.5%

24.0

%12

.8%

10.9

%10

.4%

9.2%

8.5%

9.8%

Econ

omic

pro

fit-

(4

.8)

9.4

44.3

51.1

67.6

19.3

200.

749

.613

.4(2

.2)

(12.

0)(4

7.4)

17.9

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Char

t 31

Char

t 32

Tyso

n Fo

ods:

RO

IC v

s. W

ACC

Tyso

n Fo

ods:

Eco

nom

ic Pr

ofit

5.0%

10.0

%

15.0

%

20.0

%

25.0

%

30.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

RO

IC

WA

CC

Eco

nom

ic p

rofit

(50.

0)0.0

50.0

100.

0

150.

0

200.

0

250.

01983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

95Tabl

e 69

Tyso

n Fo

ods:

Rat

es o

f Ret

urn

on In

crem

enta

l Inv

estm

ent

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Sale

s$1

,136

$1,5

04$1

,786

$1,9

36$2

,538

$3,8

25$3

,922

$4,1

69$4

,707

$5,1

10$5

,511

EBIT

8911

514

618

421

132

733

333

237

640

947

2Ad

just

ed ta

xes

2020

2229

(114

)79

111

112

157

167

135

Amor

tizat

ion

of g

oodw

ill13

00

04

2629

3031

3026

Net o

pera

ting

prof

it af

ter t

axes

(NO

PAT)

$82

$96

$124

$155

$329

$273

$252

$249

$250

$271

$362

Chan

ge in

net

wor

king

capi

tal

$55

($60

)$1

30$3

5$4

2$8

1$7

7$6

3$1

51$1

31$2

23Fi

xed

Cap

ital (

net o

f dep

reci

atio

n)40

7572

1648

6610

7(1

1)80

7416

8Ac

quis

itions

(net

of d

ives

titur

es)

055

00

1,37

40

00

271

8335

0O

ther

*0

00

00

00

00

00

Inve

stm

ent i

n fu

ture

gro

wth

9571

202

511,

465

147

184

5250

228

874

2

Free

Cas

h Fl

ow (F

CF)

(13)

25(7

8)10

4(1

,135

)12

668

197

(252

)(1

6)(3

79)

Valu

e dr

ivers

199

0-19

95Ra

tes

of re

turn

on

incr

emen

tal in

vest

men

tDe

finitio

nsSa

les

7.6%

3 ye

ars

13%

NOPA

T=

EBIT

- ad

just

ed ta

xes

+ go

odw

illO

pera

ting

Mar

gin

8.3%

5 ye

ars

8%I

= Ch

g w.

c.+C

ap e

x (n

et) +

Acq

. (ne

t)Ca

sh T

ax R

ate

33.9

%10

yea

rs9%

FCF

= NO

PAT

- IIn

crem

enta

l Wor

king

Cap

ital

43.1

%In

crem

enta

l Fixe

d C

apita

l28

.6%

Acqu

isitio

ns41

.8%

Oth

er*

0.0%

Sour

ce: C

ompa

ny p

ublis

hed

data

.*

Incl

udes

cas

h ou

tlays

ass

ocia

ted

with

rest

ruct

urin

g.

Rolli

ng 3

yea

r rat

e of

ret

urn

on i

ncre

men

tal i

nves

tmen

t

-10%0%10

%

20%

30%

40%

50%

60%

70%

80%

1988

1989

1990

1991

1992

1993

1994

1995


96

Table 70Tyson Foods: Value Driver Matrix

Sales growth Operating Working and fixedSales base Units Pricing/Mix margins capital needs (a) Business risk Other risk (b)

Poultry

Food service $2,010 8-10% 3-5% segment + medium low low

Retail $945 6-8% 2-4% segment - small low low

Wholesale clubs $410 10% 2-4% segment + medium low low

International $575 10%+ 4-6% segment - medium medium medium

Other $160 5-7% 0% segment + small low lowTotal $4,100 8-10% 3-5% 8-9% medium low low

Other

Seafood $270

Beef/Pork $490

Mexican $160

Prepared $220

Animal feed/Other $270Total $1,410 4-6% 0-2% 8-10% small low low

TysonFoods $5,510 7-9% 2-3% 8-10% 25-35% low low

5-yr avg90-95 7.6% 8.2% 71.7% Beta = 0.80


Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).

(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

97Tabl

e 71

Tyso

n Fo

ods:

DCF

Ana

lysis

NO

PA

T gr

owth

11%

Inve

sted

cap

ital g

row

thR

etur

n on

incr

emen

tal c

apita

lC

APFC

F Pr

ice

Inve

sted

cap

ital g

row

th3%

3-ye

ar5-

year

10-y

ear

3-ye

ar5-

year

10-y

ear

1022

.3%

$20.

80

Impl

ied

RO

R o

n in

crem

enta

l cap

ital

26%

18.0

%12

.1%

26.7

%11

.5%

9.3%

10.4

%15

19.2

%$3

3.42

Deb

t2,

046

2017

.5%

$48.

32

WA

CC

8.6%

1419

.7%

$30.

71

Cas

h0

Sha

res

outs

tand

ing

145

Yea

r 0 is

nor

mal

ized

1995

A19

96E

1997

E19

98E

1999

E20

00E

2001

E20

02E

2003

E20

04E

2005

E20

06E

2007

E20

08E

2009

E20

10E

2011

E20

12E

2013

E20

14E

2015

E

NO

PAT

362

203

324

360

400

444

492

547

607

673

747

830

921

1,02

21,

135

1,25

91,

398

1,55

21,

722

1,91

22,

122

Inve

stm

ent i

n fu

ture

288

709

323

152

157

162

166

171

177

182

187

193

199

205

211

217

224

230

237

244

252

Free

Cas

h Fl

ow75

(506

)2

208

243

282

326

375

430

492

560

637

722

818

924

1,04

21,

174

1,32

11,

485

1,66

81,

871

PV

of F

CF

75(4

66)

116

217

418

719

921

022

223

424

525

726

827

929

130

231

332

433

634

735

8

Cum

ulat

ive

PV

of F

CF

75(4

66)

(464

)(3

02)

(128

)59

258

468

690

924

1,16

91,

426

1,69

31,

973

2,26

32,

565

2,87

83,

203

3,53

93,

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4,24

4

Res

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l Val

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205

2,36

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766

4,18

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6,34

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7,81

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PV

of R

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4,20

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173

3,19

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263

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Cor

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82,

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4,96

85,

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5,66

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6,40

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7,20

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6

Cas

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100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

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2,04

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1,52

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12,

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145

145

145

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145

145

145

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145

145

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145

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Shar

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per

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Yea

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23

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1213

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1617

1819

20

Inve

sted

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4,04

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5,07

65,

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6,06

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16,

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6,82

27,

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7,23

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7,67

97,

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8,14

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2

Ret

urn

on in

vest

ed c

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l (av

g)9.

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6%6.

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0%7.

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10.9

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12.7

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14.8

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17.1

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Rat

e of

retu

rn o

n in

crem

enta

l cap

ital

17.1

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26.0

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30.2

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35.1

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40.7

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47.3

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54.9

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63.8

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74.1

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86.1

%

FCF

grow

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21.5

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19.2

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18.4

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17.8

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Sens

itiv

ity A

naly

sis

Inve

sted

cap

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row

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24.8

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615

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26.2

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9

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35.6

132

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29.3

9

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543

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40.9

537

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34.7

3

NOPAT growth

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

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sis

98Tabl

e 72

Pack

aged

Foo

ds C

ompo

site:

Ret

urns

on

Inve

sted

Cap

ital

13 c

ompa

nies

, fis

cal y

ear

p,

y19

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

95NO

PAT

calc

ulat

ion

Sale

s37

,037

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.542

,886

.046

,997

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,396

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.560

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1,92

5.7

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sol

d25

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ross

mar

gin

31.7

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32.1

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33.7

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34.5

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33.3

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34.9

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S,G

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564.

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7.5

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12.1

8.9

12.3

22.3

9.6

9.8

11.8

9.1

10.9

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11.0

17.0

Goo

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35.6

42.6

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5.6

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just

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5.1

1,28

2.6

1,33

5.6

1,46

2.2

1,71

3.5

1,97

9.7

1,94

5.1

2,04

7.6

2,57

5.6

3,18

0.4

3,40

4.6

3,39

0.0

3,59

4.2

3,44

3.3

NO

PAT

1,95

8.9

2,28

6.4

2,43

4.0

2,62

6.8

2,86

9.6

3,38

4.3

3,85

0.9

4,54

7.2

5,16

7.0

5,73

0.9

5,91

3.7

6,29

7.6

6,62

6.5

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8.3

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

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306.

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ed ta

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2.6

1,33

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3.5

1,97

9.7

1,94

5.1

2,04

7.6

2,57

5.6

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3,40

4.6

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Inve

sted

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104.

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vent

ory

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5,14

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5,23

8.7

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0.6

6,28

5.6

6,82

9.1

8,04

7.2

8,93

7.9

9,46

0.9

10,5

75.6

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11.1

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Oth

er c

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8.7

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83.6

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89.5

12,3

77.4

14,1

78.1

16,3

44.3

18,2

28.0

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27.9

20,9

35.7

22,0

30.1

23,8

62.5

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28.0

Acco

unts

pay

able

2,62

6.3

3,22

7.8

3,66

7.7

3,46

5.4

4,23

8.1

4,57

9.7

5,20

4.4

5,83

5.8

5,97

4.2

7,13

1.7

8,05

3.4

6,85

3.4

7,28

0.4

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6.0

Accr

ued

expe

nses

1,38

6.4

1,28

5.7

1,51

0.1

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9.1

2,41

6.7

3,15

7.1

3,71

3.4

4,60

6.5

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6.9

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Inco

me

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IBC

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Net

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king

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tal

4,08

8.6

3,81

1.1

4,18

9.2

4,28

2.6

3,74

4.4

3,90

4.0

4,62

5.0

5,32

1.8

6,01

3.5

5,33

9.5

5,71

5.0

6,49

5.7

6,50

4.7

7,09

2.7

Net

P,P

&E7,

961.

08,

389.

59,

135.

610

,139

.312

,044

.513

,162

.714

,329

.616

,365

.618

,728

.920

,931

.322

,800

.824

,583

.525

,231

.524

,679

.4G

oodw

ill/ot

her

1,25

7.8

1,39

2.6

1,47

1.8

1,84

9.4

2,76

3.1

3,49

3.3

5,27

9.6

7,22

8.3

8,48

4.5

11,4

79.1

13,2

71.1

14,4

27.5

14,7

97.3

20,6

21.9

Res

truct

urin

g ch

arge

s-

55

.455

.485

.985

.985

.985

.915

6.0

261.

326

1.3

284.

237

2.0

926.

01,

173.

0

Inve

sted

cap

ital

13,3

07.4

13,5

93.3

14,7

96.6

16,2

71.3

18,5

52.1

20,5

60.0

24,2

34.1

28,9

15.7

33,2

26.9

37,7

49.9

41,7

86.9

45,5

06.8

46,5

33.4

52,3

93.9

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

99Tabl

e 72

Pack

aged

Foo

ds C

ompo

site:

Ret

urns

on

Inve

sted

Cap

ital

cont

inue

d

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

8.7%

9.1%

8.8%

8.7%

9.3%

9.3%

9.5%

9.6%

9.9%

10.4

%10

.2%

10.1

%10

.4%

10.6

%C

apita

l tur

ns2.

82.

92.

92.

92.

72.

82.

52.

42.

32.

32.

22.

12.

11.

9Pr

etax

RO

IC24

.2%

26.3

%25

.5%

25.1

%24

.7%

26.1

%23

.9%

22.8

%23

.3%

23.6

%22

.3%

21.3

%22

.0%

20.6

%Ta

x39

.2%

35.9

%35

.4%

35.8

%37

.4%

36.9

%33

.6%

31.0

%33

.3%

35.7

%36

.5%

35.0

%35

.2%

32.0

%R

etur

n on

inve

sted

cap

ital

14.7

%16

.8%

16.4

%16

.1%

15.5

%16

.5%

15.9

%15

.7%

15.6

%15

.2%

14.2

%13

.8%

14.2

%14

.0%

Ret

urn

on in

cr. i

nv. c

ap.

-

114.

6%12

.3%

13.1

%10

.6%

25.6

%12

.7%

14.9

%14

.4%

12.5

%4.

5%10

.3%

32.0

%12

.0%

Capi

tal t

urno

ver a

naly

sisIn

vent

ory

turn

s7.

88.

48.

39.

08.

59.

18.

98.

58.

79.

18.

68.

78.

28.

0O

pera

ting

wkg

. cap

. tur

ns7.

38.

58.

38.

78.

58.

98.

88.

37.

99.

38.

97.

87.

37.

0G

oodw

ill/ot

her t

urns

29.4

28.0

29.1

25.4

17.9

16.5

11.5

9.5

9.2

7.5

6.9

6.6

6.6

4.9

Net

P,P

&E tu

rns

4.7

4.7

4.7

4.6

4.1

4.4

4.2

4.2

4.2

4.1

4.0

3.9

3.9

4.1

Cost

of c

apita

l ana

lysis

Cos

t of e

quity

16.8

%15

.0%

15.7

%14

.2%

12.1

%12

.1%

12.8

%12

.5%

12.8

%12

.3%

12.2

%11

.6%

12.1

%11

.8%

Cos

t of d

ebt

7.4%

6.9%

7.3%

6.3%

5.2%

6.4%

6.3%

6.0%

6.2%

5.7%

5.4%

4.7%

5.4%

4.8%

Deb

t/tot

al c

apita

l28

.2%

24.8

%25

.9%

20.2

%18

.2%

18.8

%17

.1%

17.2

%17

.4%

20.9

%17

.9%

19.9

%21

.9%

22.0

%W

ACC

14.1

%13

.0%

13.5

%12

.6%

10.8

%11

.0%

11.7

%11

.4%

11.6

%10

.9%

11.0

%10

.2%

10.6

%10

.2%

Ret

urn

on a

vg. i

nv. c

ap.

-

17.0

%17

.1%

16.9

%16

.5%

17.3

%17

.2%

17.1

%16

.6%

16.1

%14

.9%

14.4

%14

.4%

14.8

%Ec

onom

ic p

rofit

-

540.

951

6.1

669.

598

9.5

1,23

4.4

1,24

0.8

1,52

1.9

1,55

7.6

1,86

6.2

1,55

4.6

1,82

8.3

1,73

6.7

2,26

7.4

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Note

: D

ata

is a

n ag

greg

atio

n of

thos

e of

CPB

, CAG

, CPC

, GIS

, HN

Z, H

SY, I

BC, K

, MC

CR

K, O

AT, R

AL, S

LE, T

YSN

A

Char

t 33

Char

t 34

Pack

aged

Foo

ds C

ompo

site:

RO

IC v

s. W

ACC

Pack

aged

Foo

ds C

ompo

site:

Eco

nom

ic Pr

ofit

9.0%

10.0

%

11.0

%

12.0

%

13.0

%

14.0

%

15.0

%

16.0

%

17.0

%

18.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

RO

IC

WA

CC

0.0

500.

0

1,00

0.0

1,50

0.0

2,00

0.0

2,50

0.0

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

100

Tabl

e 73

Pack

aged

Foo

ds C

ompo

site:

Ret

urns

on

Inve

sted

Cap

ital

16 c

ompa

nies

, fis

cal y

ear

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

NOPA

T ca

lcul

atio

nSa

les

37,0

37.7

39,0

57.5

42,8

86.0

46,9

97.4

49,3

96.4

57,5

07.5

60,7

66.5

68,7

29.1

77,9

10.0

86,4

08.4

91,5

60.5

103,

831.

810

7,01

1.3

111,

537.

9C

ost o

f goo

ds s

old

25,2

86.1

26,2

55.1

29,1

15.5

31,9

80.6

32,7

27.5

38,0

34.2

39,7

75.6

45,3

63.4

51,9

60.0

56,9

84.1

59,7

14.5

66,7

14.5

69,3

08.7

72,0

34.2

Gro

ss m

argi

n31

.7%

32.8

%32

.1%

32.0

%33

.7%

33.9

%34

.5%

34.0

%33

.3%

34.1

%34

.8%

35.7

%35

.2%

35.4

%S,

G&A

8,56

4.6

9,28

4.5

10,0

55.6

11,0

02.7

12,1

71.3

14,3

01.0

15,4

00.0

17,0

20.5

18,5

43.1

21,0

06.7

22,9

96.4

27,1

03.3

26,9

60.4

28,2

77.2

Oth

er in

com

e7.

515

.512

.18.

912

.322

.39.

69.

811

.816

8.8

70.2

13.6

11.0

17.0

Goo

dwill

amor

tizat

ion

29.4

35.6

42.6

65.9

73.2

169.

419

5.6

239.

832

3.9

348.

642

2.3

693.

370

0.7

784.

9N

OPB

T3,

224.

03,

569.

03,

769.

64,

088.

94,

583.

15,

364.

05,

796.

06,

594.

77,

742.

68,

935.

19,

342.

110

,720

.911

,453

.912

,028

.3Ad

just

ed ta

xes

1,26

5.1

1,28

2.6

1,33

5.6

1,46

2.2

1,71

3.5

1,97

9.7

1,94

5.1

2,04

7.6

2,57

5.6

3,18

8.2

3,40

8.2

3,55

6.8

3,78

6.6

3,80

3.4

NO

PAT

1,95

8.9

2,28

6.4

2,43

4.0

2,62

6.8

2,86

9.6

3,38

4.3

3,85

0.9

4,54

7.2

5,16

7.0

5,74

6.9

5,93

4.0

7,16

4.1

7,66

7.3

8,22

4.9

Adju

sted

taxe

s ca

lcula

tion

Tax

prov

isio

n1,

155.

91,

306.

81,

443.

51,

461.

41,

753.

92,

003.

01,

818.

41,

997.

72,

372.

42,

779.

92,

960.

33,

147.

43,

391.

53,

456.

4D

efer

red

taxe

s80

.518

8.1

276.

924

6.2

295.

026

5.7

139.

831

5.1

270.

311

4.7

14.0

42.8

106.

939

2.3

Tax

shie

ld18

9.7

163.

916

9.0

246.

925

4.5

242.

526

6.5

365.

047

3.5

523.

046

1.9

452.

350

2.1

739.

2Ad

just

ed ta

xes

1,26

5.1

1,28

2.6

1,33

5.6

1,46

2.2

1,71

3.5

1,97

9.7

1,94

5.1

2,04

7.6

2,57

5.6

3,18

8.2

3,40

8.2

3,55

6.8

3,78

6.6

3,80

3.4

Inve

sted

cap

ital c

alcu

latio

nC

ash

333.

338

1.0

421.

945

2.4

488.

656

2.3

569.

961

2.2

617.

877

6.3

778.

899

5.2

1,05

7.9

852.

0Ac

coun

ts re

ceiv

able

2,98

7.8

3,19

2.7

3,70

5.9

3,64

6.4

4,26

5.7

4,73

7.6

5,25

2.9

6,02

2.7

6,95

9.1

6,95

3.8

7,78

2.7

8,49

5.3

9,26

9.7

10,1

20.6

Inve

ntor

y4,

721.

94,

634.

65,

145.

25,

238.

75,

780.

66,

285.

66,

829.

18,

047.

28,

937.

99,

477.

610

,586

.311

,808

.612

,773

.213

,799

.4O

ther

cur

rent

ass

ets

463.

355

6.9

505.

694

6.1

454.

679

2.0

1,52

6.4

1,66

2.2

1,71

3.2

1,58

1.3

1,83

8.7

2,09

8.4

2,40

9.5

2,27

1.2

Curre

nt a

sset

s8,

506.

38,

765.

29,

778.

710

,283

.610

,989

.512

,377

.414

,178

.116

,344

.318

,228

.018

,789

.020

,986

.623

,397

.525

,510

.327

,043

.2

Acco

unts

pay

able

2,62

6.3

3,22

7.8

3,66

7.7

3,46

5.4

4,23

8.1

4,57

9.7

5,20

4.4

5,83

5.8

5,97

4.2

7,15

5.3

8,07

3.7

8,23

8.5

8,61

6.3

8,38

7.9

Accr

ued

expe

nses

1,38

6.4

1,28

5.7

1,51

0.1

2,18

9.1

2,41

6.7

3,15

7.1

3,71

3.4

4,60

6.5

5,46

9.2

5,40

4.1

6,28

9.2

8,02

9.0

9,33

3.9

10,5

91.7

Inco

me

taxe

s pa

yabl

e40

5.1

440.

641

1.6

346.

559

0.3

736.

763

5.4

580.

277

1.2

869.

888

9.4

745.

081

0.9

819.

8N

IBC

Ls4,

417.

74,

954.

15,

589.

56,

001.

07,

245.

18,

473.

59,

553.

211

,022

.512

,214

.613

,429

.215

,252

.317

,012

.518

,761

.219

,799

.5

Net

wor

king

capi

tal

4,08

8.6

3,81

1.1

4,18

9.2

4,28

2.6

3,74

4.4

3,90

4.0

4,62

5.0

5,32

1.8

6,01

3.5

5,35

9.8

5,73

4.3

6,38

4.9

6,74

9.1

7,24

3.7

Net

P,P

&E7,

961.

08,

389.

59,

135.

610

,139

.312

,044

.513

,162

.714

,329

.616

,365

.618

,728

.920

,980

.122

,846

.927

,589

.428

,567

.328

,296

.1G

oodw

ill/ot

her

1,25

7.8

1,39

2.6

1,47

1.8

1,84

9.4

2,76

3.1

3,49

3.3

5,27

9.6

7,22

8.3

8,48

4.5

11,5

85.2

13,3

61.8

22,0

72.2

22,4

82.1

28,2

79.8

Res

truct

urin

g ch

arge

s-

55

.455

.485

.985

.985

.985

.915

6.0

261.

326

1.3

284.

237

2.0

926.

01,

173.

0

Inve

sted

cap

ital

13,3

07.4

13,5

93.3

14,7

96.6

16,2

71.3

18,5

52.1

20,5

60.0

24,2

34.1

28,9

15.7

33,2

26.9

37,9

25.1

41,9

43.0

56,0

46.5

57,7

98.4

63,8

19.5

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

101

Tabl

e 73

Pack

aged

Foo

ds C

ompo

site:

Ret

urns

on

Inve

sted

Cap

ital

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Retu

rn o

n in

vest

ed c

apita

l cal

cula

tion

NO

PBT

mar

gin

8.7%

9.1%

8.8%

8.7%

9.3%

9.3%

9.5%

9.6%

9.9%

10.3

%10

.2%

10.3

%10

.7%

10.8

%C

apita

l tur

ns2.

82.

92.

92.

92.

72.

82.

52.

42.

32.

32.

21.

91.

91.

7Pr

etax

RO

IC24

.2%

26.3

%25

.5%

25.1

%24

.7%

26.1

%23

.9%

22.8

%23

.3%

23.6

%22

.3%

19.1

%19

.8%

18.8

%Ta

x39

.2%

35.9

%35

.4%

35.8

%37

.4%

36.9

%33

.6%

31.0

%33

.3%

35.7

%36

.5%

33.2

%33

.1%

31.6

%R

etur

n on

inve

sted

cap

ital

14.7

%16

.8%

16.4

%16

.1%

15.5

%16

.5%

15.9

%15

.7%

15.6

%15

.2%

14.1

%12

.8%

13.3

%12

.9%

Ret

urn

on in

cr. i

nv. c

ap.

-

114.

6%12

.3%

13.1

%10

.6%

25.6

%12

.7%

14.9

%14

.4%

12.3

%4.

7%8.

7%28

.7%

9.3%

Capi

tal t

urno

ver a

naly

sisIn

vent

ory

turn

s7.

88.

48.

39.

08.

59.

18.

98.

58.

79.

18.

68.

88.

48.

1O

pera

ting

wkg

. cap

. tur

ns7.

38.

58.

38.

78.

58.

98.

88.

37.

99.

38.

98.

68.

07.

2G

oodw

ill/ot

her t

urns

29.4

28.0

29.1

25.4

17.9

16.5

11.5

9.5

9.2

7.5

6.9

4.7

4.8

3.9

Net

P,P

&E tu

rns

4.7

4.7

4.7

4.6

4.1

4.4

4.2

4.2

4.2

4.1

4.0

3.8

3.7

3.9

Cost

of c

apita

l ana

lysis

Cos

t of e

quity

16.8

%15

.0%

15.7

%14

.2%

12.1

%12

.1%

12.8

%12

.5%

12.8

%11

.4%

11.3

%9.

4%9.

8%9.

6%C

ost o

f deb

t7.

4%6.

9%7.

3%6.

3%5.

2%6.

4%6.

3%6.

0%6.

2%5.

3%5.

0%3.

8%4.

4%3.

9%D

ebt/t

otal

cap

ital

28.2

%24

.8%

25.9

%20

.2%

18.2

%18

.8%

17.1

%17

.2%

17.4

%19

.4%

16.7

%16

.1%

17.8

%17

.9%

WAC

C14

.1%

13.0

%13

.5%

12.6

%10

.8%

11.0

%11

.7%

11.4

%11

.6%

10.2

%10

.3%

8.5%

8.9%

8.5%

Ret

urn

on a

vg. i

nv. c

ap.

-

17.0

%17

.1%

16.9

%16

.5%

17.3

%17

.2%

17.1

%16

.6%

16.2

%14

.9%

14.6

%13

.5%

13.5

%Ec

onom

ic p

rofit

-

540.

951

6.1

669.

598

9.5

1,23

4.4

1,24

0.8

1,52

1.9

1,55

7.6

2,11

7.1

1,83

7.0

2,98

5.2

2,62

7.2

3,02

7.0

Sour

ce:

Com

pany

pub

lishe

d da

ta; D

atas

tream

; Ann

ual S

tatis

tical

Dig

est,

Boa

rd o

f Gov

erno

rs o

f the

Fed

eral

Res

erve

Sys

tem

; CS

Firs

t Bos

ton

estim

ates

.

Note

: 19

83-1

990

data

is a

n ag

greg

atio

n of

thos

e of

CPB

, CAG

, CPC

, GIS

, HN

Z, H

SY, I

BC, K

, MC

CR

K, O

AT, R

AL, S

LE, T

YSN

A

1

991

& 19

92 d

ata

is a

n ag

greg

atio

n of

the

abov

e pl

us M

STR

1

993

& 19

94 d

ata

is a

n ag

greg

atio

n of

all

of th

e ab

ove

plus

NA

and

RAH

Char

t 35

Char

t 36

Pack

aged

Foo

ds C

ompo

site:

RO

IC v

s. W

ACC

Pack

aged

Foo

ds C

ompo

site:

Eco

nom

ic Pr

ofit

7.0

%

9.0

%

11.0

%

13.0

%

15.0

%

17.0

%

19.0

%

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

RO

IC

WA

CC

0.0

500

.0

1,0

00

.0

1,5

00

.0

2,0

00

.0

2,5

00

.0

3,0

00

.0

3,5

00

.0

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

102

Tabl

e 74

Pack

aged

Foo

ds C

ompo

site:

Wei

ghte

d Av

erag

e Co

st o

f Cap

ital

Def

initi

onW

ACC

= (%

equ

ity to

tota

l cap

ital)(

cost

of e

quity

) + (%

deb

t to

tota

l cap

ital)(

cost

of d

ebt)

Cos

t of e

quity

= ri

sk fr

ee ra

te +

(be

ta)*

(equ

ity ri

sk p

rem

ium

)

Cos

t of d

ebt =

(ris

k fre

e ra

te +

spr

ead)

*(1-

tax

rate

)

Ass

um

ptio

ns

Ris

k fre

e ra

te =

30-

year

gov

ernm

ent T

reas

ury

bond

rate

* =

6.8%

Equi

ty ri

sk p

rem

ium

=4.

9%

Tax

rate

=38

.0%

Indu

stria

l bon

d sp

read

s*:

Rat

ing

Spre

adR

atin

gSp

read

AAA

0.44

%BB

B+0.

92%

AA+

0.47

%BB

B1.

08%

AA0.

47%

BBB-

1.13

%

AA-

0.58

%BB

+1.

31%

A+0.

64%

BB2.

30%

A0.

72%

BB-

2.89

%

A-0.

76%

Pack

aged

Foo

d C

ompa

nies

Deb

t/Ta

rg d

ebt/

Cur

rent

Cur

rent

Com

pany

tota

l cap

tota

l cap

Beta

bond

ratin

gW

ACC

Cam

pbel

l Sou

p 12

.4%

20.0

%1.

05AA

-10

.5%

Con

Agra

23

.8%

25.0

%1.

00BB

B10

.0%

CP

C In

tern

atio

nal

19.0

%20

.0%

0.90

A9.

9%

Gen

eral

Mill

s 15

.0%

15.0

%1.

15A+

11.3

%

H.J

. Hei

nz

20.7

%20

.0%

0.90

A+9.

9%

Her

shey

Foo

ds9.

1%15

.0%

1.00

AA-

10.6

%

Inte

rsta

te B

aker

ies

15.6

%30

.0%

1.00

BB-

10.0

%

Kello

gg6.

8%10

.0%

1.00

AAA

11.0

%

McC

orm

ick

18.8

%25

.0%

1.10

A10

.3%

Mor

ning

star

40.0

%25

.0%

0.85

B+9.

6%

Nab

isco

Hol

ding

s C

orp.

31.9

%30

.0%

1.05

BBB

9.8%

Qua

ker O

ats

22.3

%25

.0%

1.15

A-10

.5%

Ral

corp

Hol

ding

s35

.9%

30.0

%1.

00BB

B-9.

7%

Ral

ston

Pur

ina

18.2

%25

.0%

0.85

A-9.

4%

Sara

Lee

11

.2%

15.0

%1.

10AA

-11

.0%

Tyso

n Fo

ods

32.1

%35

.0%

0.80

A-8.

6%

10.1

%

* 30

-yea

r Tre

asur

y bo

nd r

ate

and

spre

ads,

as

of 1

0/25

/96

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

103

Tabl

e 75

Supp

ort D

ata

Ent.

Valu

e/Pr

iceSh

ares

Cur

rent

Ente

rpris

eIn

vest

edC

urre

ntR

OIC

-WAC

CIn

v. C

ap.

EPS

Cas

h flo

wC

ompa

nyYe

ar(1

1/03

)(M

M)

Deb

tVa

lue

Cap

ital*

RO

IC*

WAC

CSp

read

Mul

tiple

grow

th ra

tegr

owth

rate

Cam

pbel

l Sou

p 19

9681

.00

235

2,68

9.0

21,6

83.5

5,60

617

.8%

10.5

%7.

3%3.

9X

12.0

%11

.0%

Con

Agra

19

9651

.00

245

3,90

0.0

16,4

15.0

6,80

212

.9%

10.0

%2.

9%2.

4X

13.5

%9.

5%C

PC In

tern

atio

nal

1995

79.3

814

62,

723.

014

,313

.65,

679

13.3

%9.

9%3.

4%2.

5X

13.0

%12

.0%

Gen

eral

Mills

1996

57.5

015

91,

622.

410

,787

.92,

222

26.6

%11

.3%

15.3

%4.

9X

12.0

%9.

0%H

.J. H

einz

19

9635

.25

390

3,58

2.5

17,3

30.0

6,84

813

.1%

9.9%

3.2%

2.5

X11

.5%

10.0

%H

ersh

ey F

oods

1995

49.8

815

477

0.7

8,45

1.4

2,40

914

.2%

10.6

%3.

6%3.

5X

11.5

%10

.5%

Inte

rsta

te B

aker

ies

1996

43.8

837

300.

01,

924.

71,

151

6.8%

10.0

%-3

.2%

1.7

XKe

llogg

1995

64.7

521

199

5.2

14,6

70.4

3,23

523

.8%

11.0

%12

.9%

4.5

X7.

5%7.

0%M

cCor

mic

k19

9524

.38

7944

7.0

2,38

2.4

1,23

212

.1%

10.3

%1.

8%1.

9X

8.0%

7.0%

Mor

ning

star

1995

17.5

015

175.

043

7.5

123

9.9%

9.6%

0.2%

3.6

X16

.0%

12.5

%N

abis

co H

oldi

ngs

Cor

p.19

9537

.75

267

4,72

6.0

14,8

12.8

10,7

157.

7%9.

8%-2

.2%

1.4

X15

.5%

9.0%

Qua

ker O

ats

1995

36.0

013

51,

400.

06,

267.

63,

595

8.1%

10.5

%-2

.4%

1.7

X5.

0%6.

0%R

alco

rp H

oldi

ngs

1995

20.3

833

375.

91,

046.

658

810

.9%

9.7%

1.2%

1.8

X3.

5%3.

5%R

alst

on P

urin

a 19

9673

.88

102

1,67

4.6

9,19

5.1

3,66

115

.1%

9.4%

5.7%

2.5

X12

.5%

7.5%

Sara

Lee

19

9637

.50

485

2,29

6.0

20,4

98.3

8,56

314

.8%

11.0

%3.

7%2.

4X

11.0

%9.

5%Ty

son

Food

s19

9529

.75

145

2,04

6.2

6,36

7.9

4,04

59.

0%8.

6%0.

3%1.

6X

13.0

%11

.0%

G

roup

Ave

rage

s46

.23

177

1,85

7.7

10,4

11.6

4,15

4.54

13.5

%10

.1%

3.4%

2.7

X10

.3%

8.4%

* Bas

ed o

n m

ost c

urre

nt fi

scal

yea

r end

.So

urce

: Com

pany

pub

lishe

d da

ta, V

alue

Lin

e, C

S Fi

rst B

osto

n es

timat

es

Pa

cka

ge

d F

oo

d I

nd

ust

ry R

ate

of

Re

turn

An

aly

sis

This

mem

oran

dum

is fo

r inf

orm

ativ

e pu

rpos

es o

nly.

Und

er n

o ci

rcum

stan

ces

is it

to b

e us

ed o

r con

side

red

as a

n of

fer t

o se

ll, o

r a s

olic

itatio

n of

any

offe

r to

buy,

any

sec

urity

. Whi

le th

e in

form

atio

n co

ntai

ned

here

in h

as b

een

obta

ined

from

sou

rces

bel

ieve

d to

be

relia

ble,

we

do n

ot re

pres

ent t

hat i

t is

accu

rate

or c

ompl

ete

and

it sh

ould

not

be

relie

d up

on a

s su

ch. W

e m

ay fr

om ti

me

to ti

me

have

long

or s

hort

posi

tions

in a

nd b

uy a

nd s

ell s

ecur

ities

refe

rred

to h

erei

n. T

his

firm

may

from

tim

e to

tim

e pe

rform

inve

stm

ent b

anki

ng o

r oth

er s

ervi

ces

for,

or s

olic

it in

vest

men

t ban

king

or o

ther

bus

ines

s fro

m, a

ny c

ompa

ny m

entio

ned

in th

is re

port.

© 1

996,

CS

Firs

t Bos

ton

Cor

pora

tion

Tabl

e 76

Pack

aged

Foo

d In

dust

ry U

nive

rse

Est

imat

edP

rice

52-W

kS

hare

sFi

scal

EP

SP

/E R

atio

Div

iden

dsgr

owth

rate

Com

pany

Rat

ing

TKR

FY(1

1/08

)R

ange

(MM

)95

A96

E97

E96

E97

E$

%

3-5

year

sC

ampb

ell S

oup

Hol

dC

PB

JUL

81.1

384

-51

235

2.80

3.17

A3.

6025

.622

.51.

381.

711

%C

onA

gra

Hol

dC

AG

MA

Y52

.00

52-3

824

52.

062.

34A

2.65

22.2

19.6

0.95

1.8

12%

CP

C In

tern

atio

nal

Hol

dC

PC

DE

C79

.88

80-6

514

63.

673.

954.

4520

.217

.91.

642.

111

%G

ener

al M

ills

Buy

GIS

MA

Y58

.25

61-5

215

92.

353.

00A

3.10

19.4

18.8

2.00

3.4

12%

H.J

. Hei

nz

Hol

dH

NZ

AP

R36

.63

37-3

039

01.

591.

75A

1.92

20.9

19.1

1.16

3.2

10%

Her

shey

Foo

dsH

old

HS

YD

EC

49.8

852

-30

154

1.70

2.00

2.20

24.9

22.7

0.72

1.4

10%

Inte

rsta

te B

aker

ies

Buy

IBC

MA

Y45

.25

46-2

037

0.45

0.86

A1.

9552

.623

.20.

541.

220

%K

ello

ggB

uyK

DE

C66

.75

81-6

321

13.

483.

073.

6521

.718

.31.

682.

513

%M

cCor

mic

kB

uyM

CC

RK

NO

V23

.75

26-1

979

1.17

1.12

1.30

21.2

18.3

0.56

2.4

11%

Mor

ning

star

Hol

dM

STR

DE

C17

.38

19-1

015

0.75

0.92

1.30

18.9

13.4

0.00

0.0

15%

Nab

isco

Hol

ding

s C

orp.

Hol

dN

AD

EC

38.7

539

-27

267

1.18

1.40

1.70

27.7

22.8

0.62

1.6

20%

Qua

ker O

ats

Buy

OA

TJU

N38

.25

38-3

013

50.

771.

351.

8028

.321

.31.

143.

020

%R

alco

rp H

oldi

ngs

Hol

dR

AH

SE

P20

.63

29-1

933

1.40

0.98

A0.

8521

.024

.30.

000.

010

%R

alst

on P

urin

a #

Buy

RA

LS

EP

76.1

376

-56

102

3.10

3.56

A4.

0521

.418

.81.

201.

613

%S

ara

Lee

#B

uyS

LEJU

N38

.75

39-3

048

51.

621.

83A

2.05

21.2

18.9

0.84

2.2

12%

Tyso

n Fo

ods

Hol

dTY

SN

A S

EP

28.3

830

-21

145

1.51

0.60

1.40

47.3

20.3

0.12

0.4

13%

G

roup

Ave

rage

46.9

81.

851.

992.

4425

.920

.00.

912.

2S

&P

500

730.

8234

.00

38.3

541

.35

19.1

17.7

13.9

51.

9

Not

e: (

#) =

prim

ary.

199

6 1

997

Cal

enda

r E

PS

P/E

Rat

io

Rel

ativ

e P

/EE

BIT

DA

Ent

erpr

ise/

Ent

erpr

ise/

Com

pany

95A

96E

97E

96E

97E

96E

97E

1996

1997

Deb

tE

BIT

DA

EB

ITD

AC

ampb

ell S

oup

3.00

3.45

3.90

23.5

20.8

23.4

17.7

7.05

8.00

2,68

9.0

13.1

11.6

Con

Agr

a 2.

202.

502.

8520

.818

.29.

13.

27.

207.

953,

900.

09.

48.

5C

PC

Inte

rnat

iona

l3.

673.

954.

4520

.217

.96.

11.

610

.40

11.3

52,

723.

09.

58.

7G

ener

al M

ills

2.50

2.95

3.50

19.7

16.6

3.6

(5.8

)6.

457.

401,

622.

410

.69.

2H

.J. H

einz

1.

701.

902.

1019

.317

.41.

2(1

.3)

4.90

5.25

3,58

2.5

9.3

8.7

Her

shey

Foo

ds1.

702.

002.

2024

.922

.730

.928

.34.

605.

0577

0.7

11.9

10.9

Inte

rsta

te B

aker

ies

0.75

1.55

2.20

29.2

20.6

53.2

16.4

6.30

7.35

300.

08.

57.

3K

ello

gg3.

483.

073.

6521

.718

.314

.13.

56.

307.

3599

5.2

11.3

9.7

McC

orm

ick

1.17

1.12

1.30

21.2

18.3

11.3

3.4

2.55

3.05

447.

011

.59.

6M

orni

ngst

ar0.

750.

921.

3018

.913

.4(0

.9)

(24.

4)2.

103.

5017

5.0

13.8

8.3

Nab

isco

Foo

ds1.

181.

401.

7027

.722

.845

.229

.05.

455.

954,

726.

010

.49.

5Q

uake

r Oat

s 0.

771.

351.

8028

.321

.348

.720

.24.

705.

501,

400.

010

.38.

8R

alco

rp H

oldi

ngs

1.34

1.00

1.05

20.6

19.6

8.2

11.1

3.60

4.10

375.

98.

97.

8R

alst

on P

urin

a3.

153.

504.

0021

.819

.014

.17.

710

.10

10.8

01,

651.

49.

18.

6S

ara

Lee

1.70

1.95

2.20

19.9

17.6

4.3

(0.3

)4.

755.

102,

296.

09.

28.

5Ty

son

Food

s1.

440.

451.

6063

.117

.723

0.9

0.3

3.45

5.05

2,04

6.2

12.3

8.4

G

roup

Ave

rage

(wei

ghte

d)22

.218

.916

.56.

710

.39.

2S

&P

500

34.0

038

.35

41.3

519

.117

.70.

00.

0

CS

Firs

t Bos

ton

Mic

hael

J. M

aubo

ussi

n (2

12) 3

25-3

108

packaged food industry rate of return analysis

Documents