McDonald's has a Debt Rating of A [S&P] and A3 [Moody's] and a CP rating of A-1/P-2.

Transcription

1 CASE 1: MCDONALD'S CORPORATION Excerpts from McDonald's Corporation's 2009 financial statements are attached. Also, excerpts from Wendy s International, YUM and Burger King financial statements are attached for peer comparison. [Burker King completed its IPO in May 2006]. Other possible comparable companies [comps] for McDonald's are Applebee's International [casual dining], Brinker International [casual dining including Chili's and Macaroni Grill], Outback Steakhouse, Papa John's International, Darden Restaurants [Red Lobster], Ruby Tuesday, CKE Restaurants [Hardee's], Cheesecake Factory, CBRL [Cracker Barrel and Jack in the Box] and Starbucks. McDonald's has a Debt Rating of A [S&P] and A3 [Moody's] and a CP rating of A-1/P-2. McDonald s McDonald's develops, operates, franchises and services a worldwide system of restaurants which prepare, assemble, package and sell a limited menu of value-priced foods. These restaurants are operated by the Company or by franchisees who are independent third parties. The Company's franchising program is designed to assure consistency and quality. The Company is selective in granting franchises and is not in the practice of franchising to investor groups or passive investors. Franchisees supply capital--initially, by purchasing equipment, signs, seating and decor, and over the long term, by reinvesting in the business. The Company shares the investment by owning or leasing the land and building. Franchisees contribute to the Company's revenues through payment of rent and service fees or royalties based upon a percent of sales, with specified minimum payments. This percentage is generally 8-10% of sales. The conventional franchise arrangement typically lasts 20 years and franchising practices are generally consistent throughout the world. Training begins at the restaurant with one-on-one instruction and videotapes. Aspiring restaurant managers progress through a development program of classes in management and operations, as well as learning computer skills. Managers are eligible to attend the advanced operations and management class at one of the six Hamburger University (H.U.) campuses in the U.S., Germany, England, Japan, Brazil or Australia. The curriculum at H.U. concentrates on skills and practices essential to driving the Company's strategies of delivering customer satisfaction and increasing market share. The Company's global brand is well-known. Marketing and promotional activities are designed to nurture this brand image and differentiate the Company from competitors by focusing on value, taste and customer satisfaction. Barry M Frohlinger, Inc All content herein is copyright protected 1

2 Products McDonald's restaurants offer a substantially uniform menu consisting of hamburgers and cheeseburgers, including the Big Mac and Quarter Pounder with Cheese, the Filet-O-Fish, several chicken sandwiches, french fries, Chicken McNuggets, salads, milk shakes, McFlurries, sundaes and cones, pies, cookies and soft drinks and other beverages. The Company tests new products on an ongoing basis. The Company, its franchisees and affiliates purchase food products and packaging from numerous independent suppliers. Quality specifications for food products are established and strictly enforced. Alternative sources of these items are generally available. Quality assurance labs work to ensure that the Company's high standards are consistently met. The quality assurance process involves ongoing testing and on-site inspections of suppliers' facilities. Independently owned and operated distribution centers distribute products and supplies to most McDonald's restaurants. The restaurants then prepare, assemble and package these products using specially designed production techniques and equipment to obtain uniform standards of quality. Competition McDonald's restaurants compete with international, national, regional, and local retailers of food products. The Company competes on the basis of price, convenience and service and by offering quality food products. The Company's competition in the broadest perspective includes restaurants, quick-service eating establishments, pizza parlors, coffee shops, street vendors, convenience food stores, delicatessens, and supermarkets. In the U.S., there are approximately 600,000 restaurants that generated about $400 billion in annual sales in McDonald s restaurant business accounts for 2.4% of those restaurants and 7.3% of the sales. The average American consumes about 150 restaurant meals per year. PROPERTIES The Company identifies and develops sites that offer convenience to customers and provide for long-term sales and profit potential. To assess potential, the Company analyzes traffic and walking patterns, census data, school enrollments and other relevant data. The Company's experience and access to advanced technology aids in evaluating this information. The company continues to be one of the world's leading purchaser of commercial satellite photography. McDonald's generally owns or secures long-term land and building leases for restaurant sites, which ensures long-term tenure and helps control related costs. Restaurant profitability for both the Company and franchisees is important; therefore, ongoing efforts are made to control average development costs through construction and design efficiencies, standardization and by leveraging the Company's global sourcing system. The firm is the world's largest owner of retail property, owning more than 30,000 outlets worldwide. Data for McDonald's: Systemwide restaurants by type Operated by franchisees 26,209 Operated by the Company 6,257 Number of countries at year end 114 Total systemwide sales [including company operated restaurants] totaled $70 billion in Barry M Frohlinger, Inc All content herein is copyright protected 2

3 Suppliers The Company and its affiliates and subsidiaries do not supply, food, paper, or related items to any McDonald's restaurants. The Company relies upon independent suppliers that are required to meet and maintain the Company's standards and specifications. Food Product Beef Potatoes Apples U.S. Production 27 billion pounds 49 billion pounds 11 billion pounds McDonald s Purchases 1 billion pound 1 billion pounds 50 million pounds McDonald s Share 4% 2%.5% Financial Services Provided to McDonald's McDonald's uses a full range of banking products, including: 1. Term Loan for equipment finance and Real Estate Loans 2. Cash Management, including Disbursements and Collections 3. Corporate Finance 4. Import Financing 5. Leasing Financing 6. Trade Services 7. Foreign Exchange 8. Interest Rate and Equity Derivatives 9. Franchisee Financing 10. Supplier Financing 11. Advisory Services Barry M Frohlinger, Inc All content herein is copyright protected 3

4 DISCUSSION QUESTIONS [review solution notes at the end of the McDonald s case 1 ]: A. Describe the business[es] of McDonald s. A2. Who are McDonald s peers? A3. Are McDonald s peers in similar businesses? A4. List the key differences between McDonald s and its peers B. What do you believe is the nature of each of the following accounts and does the balance of each at yearend 2009 seem reasonable for McDonald's business 2? [Note; calculate the days outstanding of each of the four; and make a comment about the reasonableness of the amounts from your calculations, and compare the amounts to peers. Note: YUM does not list accounts payable and accruals separately but aggregates the amounts]. 1. Accounts receivable. [calculated as receivables/revenue * 360] 2. Inventories. [calculated as inventory/cost of sales * 360] 3. Accounts payable. [calculated as paybles/cost of sales * 360] 4. Other accrued liabilities. [calculated as accruals/operating expenses *360] C. What do you believe is the nature of McDonald s property and does the balance at yearend 2009 seem reasonable for McDonald's business? 1 See solution notes on pages For this question, consider what you believe to be the size of the average balance of each account in days, the impact of each account on the firm's liquidity and what opportunity exists to increase or decrease each account. Barry M Frohlinger, Inc All content herein is copyright protected 4

5 D. Check the computation of each of the following amounts: Trading Assets [accounts receivable + inventories + prepaids] Spontaneous [accounts payable + all Financing accrued liabilities, excluding notes payable and cmltd and dividends payables] Change 1, [dr] 2, [cr] Operating Working Capital Working Capital Current Ratio Working Capital Requirement[trading assets less spontaneous financing] [current assets less current liabilities] [current assets/current liabilities] -1, , [cr] E. Does McDonald's have a large amount of trading assets? F. How is the Company's investment in trading assets financed? G. From the Company's perspective, is its way of financing trading assets favorable? H. Do you consider McDonald's spontaneous financing to be permanent? I. During 2009 & 2008, McDonald's operating working capital was negative, while the working capital was positive amounts. Discuss the implications to an analyst. Barry M Frohlinger, Inc All content herein is copyright protected 5

6 J. Many analysts believe that the current ratio should be at least 2 to 1. McDonald's is less that this. Comment. K. The Company's inventory decreased slightly during Is this decrease during 2009 consistent with your expectations based on a review of the income statement [hint: look at cost of good sold in 2008 and 2009]? [see solution notes on page 10] L. Comment on the 2009 cash provided by operations compared to the: 2009 net income 2009 Funds Flow from Operations [net income before depreciation & amortization, sometimes also called traditional cash flow or potential cash flow or expected cash flow or long run cash flow] M. Compare the 2009 Funds Flow with the 2009 EBITDA. Reconcile the two amounts. end of discussion questions [review the solution notes at the end of the case] Barry M Frohlinger, Inc All content herein is copyright protected 6

7 McDonald s Consolidated statement of income Years ended December 31, IN MILLIONS REVENUES Sales by Company- operated restaurants 15, , ,611.0 Revenues from franchised and affiliated restaurants 7, , ,175.6 Total revenues 22, , ,786.6 OPERATING COSTS AND EXPENSES Company- operated restaurant expenses Food & paper 5, , ,487.4 Payroll & employee benefits 3, , ,331.6 Occupancy & other operating expenses 3, , ,922.7 Franchised restaurants occupancy expenses 1, , ,139.7 Selling, general & administrative expenses 2, , ,367.0 Impairment and other charges (credits), net (61.1 ) 6.0 1,670.3 Other operating expense, net (222.3) (165.2) (11.1) Total operating costs and expenses 15, , ,907.6 Operating income 6, , ,879.0 Interest expense- net of capitalized interest of $11.7, $12.3 and $ Nonoperating (income) expense, net (24.3 ) (77.6 ) (103.2 (94.9 (160.1 Income before provision for income taxes and cumulative effect of accounting change 6, , ,572.1 Provision for income taxes 1, , ,237.1 Income before cumulative effect of accounting change 4, , ,335.0 Income from discontinued operations (net of taxes of $34.5) 60.1 Net income $ 4, , ,395.1 Barry M Frohlinger, Inc All content herein is copyright protected 7

8 McDonald s Consolidated balance sheet IN MILLIONS ASSETS Current assets Cash and equivalents $ 1, ,063.4 Accounts and notes receivable 1, Inventories, at cost, not in excess of market Prepaid expenses and other current assets Total current assets 3, ,517.6 Other assets Investments in and advances to affiliates 1, ,222.3 Goodwill, net 2, ,237.4 Miscellaneous 1, ,229.7 Total other assets 5, ,689.4 Property and equipment Property and equipment, at cost 33, ,152.4 Accumulated depreciation and amortization (11,909.0) (10,897.9) Net property and equipment 21, ,254.5 Total assets $ $ 30,224.9 $ 28,461.5 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Notes payable $ 0 $ Accounts payable $ $ Income taxes Other taxes Accrued interest Accrued payroll and other liabilities 1, ,459.2 Current maturities of long-term debt Total current liabilities 2, ,537.9 Long-term debt 10, ,186.0 Other long-term liabilities 1, ,410.1 Deferred income taxes 1, Shareholders equity 14, ,382.6 Total liabilities and shareholders equity $ 30,224.9 $ 28,461.5 Barry M Frohlinger, Inc All content herein is copyright protected 8

9 McDonald s Consolidated statement of cash flows In millions FYE Dec 31, Operating activities Net income $ 4,551.0 $ 4,313.2 $ 2,395.1 Adjustments to reconcile to cash provided by operations Charges and credits: Depreciation and amortization 1, , ,214.1 Deferred income taxes (39.1 ) Income taxes audit benefit (316.4 ) Impairment and other charges (credits), net (61.1 ) 6.0 1,670.3 Gain on sale of investment (94.9 ) (160.1 ) Gains on dispositions of discontinued operations (68.6 ) Share-based compensation Other (347.1 ) 90.5 (85.3 ) Changes in working capital items: Accounts receivable (42.0 ) 16.1 (100.2 ) Inventories, prepaid expenses and other current assets 1.0 (11.0 ) (29.6 ) Accounts payable (2.2 ) (40.1 ) (36.7 ) Income taxes Other accrued liabilities Cash provided by operations 5, , ,876.3 Investing activities Property and equipment expenditures (1,952.1 ) (2,135.7 ) (1,946.6 ) Purchases of restaurant businesses (145.7 ) (147.0 ) (228.8 ) Sales of restaurant businesses and property Latam transaction, net Proceeds on sale of investment Proceeds from disposals of discontinued operations, net Other (108.4 ) (50.2 ) (181.0 ) Cash used for investing activities (1,655.3 ) (1,624.7 ) (1,150.1 ) Financing activities Net short-term borrowings (285.4 ) Long-term financing issuances 1, , ,116.8 Long-term financing repayments (664.6 ) (2,698.5 ) (1,645.5 ) Treasury stock purchases (2,797.4 ) (3,919.3 ) (3,943.0 ) Common stock dividends (2,235.5 ) (1,823.4 ) (1,765.6 ) Proceeds from stock option exercises ,137.6 Excess tax benefit on share-based compensation Other (13.1 ) (89.8 ) (201.7 ) Cash used for financing activities (4,421.0 ) (4,114.5 ) (3,996.3 ) Effect of exchange rates on cash and equivalents 57.9 (95.9 ) Cash and equivalents increase (decrease) (267.4 ) 82.1 (146.8 ) Cash and equivalents at beginning of year 2, , ,128.1 Cash and equivalents at end of year $ 1,796.0 $ 2,063.4 $ 1,981.3 Supplemental cash flow disclosures Interest paid $ $ $ Income taxes paid 1, , ,436.2 See Notes to consolidated financial statements. Barry M Frohlinger, Inc All content herein is copyright protected 9

10 Solutions McDonald s [Questions K & L & M] Year 2009 Revenue 15, Net Income 4, Cost of Good Sold -5, DA 1, Payroll -3, Share-based compensation Occupancy -3, Funds Flow 5, Franchise Revenue 7, Franchise Occupancy -1, EBITDA 8, SGA -2, Charges 61.1 Interest Other Tax -1, Operating Profit 6, Nonoperating Income Funds Flow 5, EBIT 6, Interest EBT 6, Tax -1, Net Income 4, Revenue 15, , % CGS 5, % Inventory % Revenue 15, , % Net Income 4, EBITDA 8, Fund flow 5, Cash Flow from Operations 5, Barry M Frohlinger, Inc All content herein is copyright protected 10

11 WENDY'S INTERNATIONAL, INC. Wendy s International, Inc. was incorporated in The Company is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service and fast-casual restaurants serving high quality food. At January 3, 2010, there were 6,650 restaurants in operation; 1,529 were operated by the Company and 5,121 by the Company s franchisees. In 2008, the company mergered Arby s following the 2006 spin off its interest in Hortons and Baja Fresh restaurants. Each Wendy s restaurant offers a relatively standard menu featuring hamburgers and filet of chicken breast sandwiches, which are prepared to order with the customer s choice of condiments. The Company does not sell food or supplies to its franchisees. However, the Company has arranged for volume purchases of its products. Barry M Frohlinger, Inc All content herein is copyright protected 11

12 Wendy s/arby s Group, Inc. and Subsidiaries Consolidated Balance Sheet (In Thousands) Jan 3, Dec 28, ASSETS Current assets: Cash and cash equivalents $ 591,719 $ 90,090 Restricted cash equivalents 1,114 20,792 Accounts and notes receivable 88,004 97,258 Inventories 23,024 24,646 Prepaid expenses and other current assets 28,098 28,990 Deferred income tax benefit 66,557 37,923 Advertising funds restricted assets 80,476 81,139 Total current assets 878, ,838 Restricted cash equivalents 6,242 34,032 Notes receivable 39,295 34,608 Investments 107, ,052 Properties 1,619,248 1,770,372 Goodwill 881, ,775 Other intangible assets 1,392,883 1,411,473 Deferred costs and other assets 50,717 27,470 Total assets $ 4,975,416 $ 4,645,620 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Current portion of long-term debt $ 22,127 $ 30,426 Accounts payable 103, ,340 Accrued expenses and other current liabilities 269, ,584 Advertising funds 80,476 81,139 Total current liabilities 475, ,489 Long-term debt 1,500,784 1,081,151 Deferred income 13,195 16,859 Deferred income taxes 475, ,243 Other liabilities 174, ,433 Commitments and contingencies Stockholders equity: Total stockholders equity 2,336,339 2,383,445 Total liabilities and stockholders equity $ 4,975,416 $ 4,645,620 Barry M Frohlinger, Inc All content herein is copyright protected 12

13 WENDY S/ARBY S GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Amounts) Year Ended January 3, December 28, December 30, Revenues: Sales $ 3,198,348 $ 1,662,291 $ 1,113,436 Franchise revenues 382, , ,281 3,580,835 1,822,761 1,263,717 Costs and expenses: Cost of sales 2,728,484 1,415, ,633 General and administrative 452, , ,375 Depreciation and amortization 190,251 88,315 66,277 Goodwill impairment - 460,075 - Impairment of other long-lived assets 82,132 19,203 7,045 Facilities relocation and corporate restructuring 11,024 3,913 85,417 Gain on sale of consolidated business - - (40,193 ) Other operating expense, net 4, ,468,859 2,236,411 1,243,817 Operating profit (loss) 111,976 (413,650 ) 19,900 Interest expense (126,708 ) (67,009 ) (61,331 ) Investment (expense) income, net (3,008 ) 9,438 62,110 Other than temporary losses on investments (3,916 ) (112,741 ) (9,909 ) Other income (expense), net 1,523 2,710 (4,038 ) (Loss) income from continuing operations before income taxes (20,133 ) (581,252 ) 6,732 Benefit from income taxes 23,649 99,294 8,354 Income (loss) from continuing operations 3,516 (481,958) 15,086 Income from discontinued operations, net of income taxes 1,546 2, Net income (loss) $ 5,062 $ (479,741 ) $ 16,081 Barry M Frohlinger, Inc All content herein is copyright protected 13

14 WENDY S/ARBY S GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) January 3, Dec 28, Dec 30, Cash flows from continuing operating activities: Net income (loss) $ 5,062 $ (479,741 ) $ 16,081 Adjustments to net income (loss) Depreciation and amortization 190,251 88,315 66,277 Impairment of other long-lived assets 82,132 19,203 7,045 Write-off and amortization of deferred financing costs 15,820 8,885 2,038 Share-based compensation provision 15,294 9,129 9,990 Distributions received from joint venture 14,583 2,864 - Non-cash rent expense 12,618 3,103 1,528 Accretion of long-term debt 10,400 2, Provision for doubtful accounts 8, Operating investment adjustments, net (see below) 2, ,357 (33,525 ) Deferred income tax benefit, net (40,127 ) (105,276 ) (10,777 ) Equity in earnings in joint venture (8,499 ) (1,974 ) - Income from discontinued operations (1,546 ) (2,217 ) (995) Net receipt (recognition) of vendor incentive (791) (6,459 ) (990) Goodwill impairment - 460,075 - Gain on sale of consolidated business - - (40,193 ) Other, net (4,317 ) (3,886 ) 47 Changes in operating assets and liabilities: Accounts and notes receivable (6,074 ) (4,187 ) 15,022 Inventories 1,879 (140) (987) Prepaid expenses and other current assets 3,987 8,808 (3,123 ) Accounts payable, accrued expenses, and other current liabilities (2,527 ) (31,376 ) (7,444 ) Net cash provided by continuing operating activities 298,798 73,605 20,804 Cash flows from continuing investing activities: Capital expenditures (101,914 ) (106,989 ) (72,990 ) Investment activities, net 38,141 51,066 51,531 Proceeds from dispositions 10,882 1,322 2,734 Cost of acquisitions, less cash acquired (2,357 ) (9,622 ) (4,094 ) Increase in cash from merger with Wendy s - 199,785 - Cost of merger with Wendy s (608) (18,403 ) (17,121 ) Other, net 237 (228) 16 Net cash (used in) provided by continuing investing activities (55,619 ) 116,931 (39,924 ) Cash flows from continuing financing activities: Proceeds from long-term debt 607,507 37,753 23,060 Repayments of notes payable and long-term debt (210,371 ) (177,883 ) (24,505 ) Repurchases of common stock (72,927 ) - - Deferred financing costs (38,399 ) - - Dividends paid (27,976 ) (30,538 ) (32,117 ) Distributions to non-controlling interests (156) (1,144 ) (13,494 ) Other, net 1,715 (1,113 ) (3,147 ) Net cash provided by (used in) continuing financing activities 259,393 (172,925 ) (50,203 ) Net cash provided by (used in) before effect of exchange rate changes on cash 502,572 17,611 (69,323) Effect of exchange rate changes on cash 2,725 (4,123 ) - Net cash provided by (used in) continuing operations 505,297 13,488 (69,323 ) Net cash used in operating activities of discontinued operations (3,668 ) (1,514 ) (713) Net increase (decrease) in cash and cash equivalents 501,629 11,974 (70,036 ) Barry M Frohlinger, Inc All content herein is copyright protected 14

15 Burger King is the world s second largest fast food hamburger restaurant, or FFHR, chain as measured by the number of restaurants and system-wide sales. Burger King Corporation was founded in 1954 in Miami, Florida, by James McLamore and David Edgerton. In its Florida beginnings 50 years ago, a BURGER KING hamburger cost 18 and an Original WHOPPER Sandwich cost 37. By 1967, when the Company was acquired by the Minneapolis-based Pillsbury, 8,000 employees were working in 274 different restaurant locations. In 1988, Grand Metropolitan, plc acquired Pillsbury. In 1997, Grand Metropolitan merged with Guinness to create Diageo, plc. In December 2002, Diageo sold Burger King Corporation to an equity sponsor group comprised of Texas Pacific Group, Bain Capital, and Goldman Sachs Capital Partners. This marked the first time in more than 35 years that Burger King Corporation was a privately-held company. BK has 1,187 company-owned restaurants and 9,917 were owned by franchisees. Of these restaurants, 65% were located in the United States and 35% were located in international markets. Restaurants feature flame-broiled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other reasonably-priced food items. During our more than 50 years of operating history, we have developed a scalable and cost-efficient quick service hamburger restaurant model that offers customers fast food at modest prices. We believe that the Burger King and Whopper brands are two of the world s most widelyrecognized consumer brands. We generate revenues from three sources: sales at our company restaurants; royalties and franchise fees paid to us by our franchisees; and property income from certain franchise restaurants that lease or sublease property from us. Approximately 90% of our restaurants are franchised and we have a higher percentage of franchise restaurants to company restaurants than our major competitors in the fast food hamburger category. Barry M Frohlinger, Inc All content herein is copyright protected 15

16 BURGER KING HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In millions, except share data) As of June 30, ASSETS Current assets: Cash and cash equivalents $ $ Trade and notes receivable, net Inventory Prepaids and other current assets, net Deferred income taxes, net Total current assets Property and equipment, net 1, ,013.2 Intangible assets, net 1, ,062.7 Goodwill Net investment in property leased to franchisees Other assets, net Total assets $ 2,747.2 $ 2,707.1 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable $ $ Accrued advertising Other accrued liabilities Current portion of long term debt and capital leases Total current liabilities Term debt, net of current portion Capital leases, net of current portion Other liabilities, net Deferred income taxes, net Total liabilities 1, ,732.3 Commitments and Contingencies Stockholders equity: Total stockholders equity 1, Total liabilities and stockholders equity $ 2,747.2 $ 2,707.1 Barry M Frohlinger, Inc All content herein is copyright protected 16

17 BURGER KING HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Income (In millions, except per share data) Years Ended June 30, Revenues: Company restaurant revenues $ 1,839.3 $ 1,880.5 $ 1,795.9 Franchise revenues Total revenues 2, , ,454.7 Company restaurant expenses: Food, paper and product costs Payroll and employee benefits Occupancy and other operating costs Total Company restaurant expenses 1, , ,538.0 Selling, general and administrative expenses Property expenses Other operating (income) expenses, net (0.7 ) 1.9 (0.6 ) Total operating costs and expenses 2, , ,100.5 Income from operations Interest expense Interest income (1.0 ) (2.7 ) (5.9 ) Total interest expense, net Income before income taxes Income tax expense Net income $ $ $ Barry M Frohlinger, Inc All content herein is copyright protected 17

18 BURGER KING HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended June 30, (In millions) 2008 Cash flows from operating activities: Net income $ $ $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Impairment of long-lived assets 0.5 Impairment on non-restaurant properties 2.9 Gain on hedging activities (1.6 ) (1.3 ) (2.0 ) Loss (gain) on remeasurement of foreign denominated transactions (55.6 ) Gain on refranchisings and dispositions of assets (9.5 ) (11.0 ) (16.8 ) Bad debt expense (recoveries), net (2.7 ) Stock-based compensation Deferred income taxes Changes in current assets and liabilities, excluding acquisitions and dispositions: Trade and notes receivable (15.9 ) 2.1 (8.6 ) Prepaids and other current assets (1.4 ) (35.4 ) 14.9 Accounts and drafts payable (20.8 ) Accrued advertising 6.4 (7.7 ) 11.1 Other accrued liabilities (22.3 ) (20.8 ) (6.2 ) Other long-term assets and liabilities, net (1.5 ) 3.8 (28.4 ) Net cash provided by operating activities Cash flows from investing activities: Payments for property and equipment (150.3 ) (204.0 ) (178.2 ) Proceeds from refranchisings, disposition of asset and restaurant closures Payments for acquired franchisee operations, net of cash acquired (14.0 ) (67.9 ) (54.2 ) Other investing activities Net cash used for investing activities (134.9 ) (242.0 ) (199.3 ) Cash flows from financing activities: Repayments of term debt and capital leases (67.7 ) (7.4 ) (55.5 ) Borrowings under revolving credit facility and other Repayments of revolving credit facility (38.5 ) (144.3 ) Proceeds from stock option exercises Dividends paid on common stock (34.2 ) (34.1 ) (34.2 ) Excess tax benefits from stock-based compensation Repurchases of common stock (2.7 ) (20.3 ) (35.4 ) Net cash used for financing activities (96.9 ) (105.5 ) (62.0 ) Effect of exchange rates on cash and cash equivalents (12.7 ) (7.6 ) 14.4 Increase (decrease) in cash and cash equivalents 65.9 (44.3 ) (3.5 ) Barry M Frohlinger, Inc All content herein is copyright protected 18

19 YUM In 1997, PepsiCo announced its decision to spin-off its restaurant businesses to shareholders as an independent public company. In 2002, YUM completed the acquisition of Long John Silver s ( LJS ) and A&W All-American Food Restaurants ( A&W ). YUM is the world s largest quick service restaurant ( QSR ) company based on number of system units, with over 37,000 units in more than 100 countries. There are 7,416 company operated units and 29,311 franchised units worldwide. Through the five concepts of KFC, Pizza Hut, Taco Bell, LJS, and A&W, the Company develops, operates, franchises and licenses a worldwide system of restaurants which prepare, package and sell a menu of competitively priced food items. In all five of its Concepts, the Company either operates units or they are operated by independent franchisees or licensees under the terms of franchise or license agreements. KFC was founded in Kentucky, by Colonel Harland D. Sanders, an early developer of the quick service food business and a pioneer of the restaurant franchise concept. The Colonel perfected his secret blend of 11 herbs and spices for Kentucky Fried Chicken in 1939 and signed up his first franchisee in KFC has more than 12,000 units throughout the world. Pizza Hut operates throughout the world. The first Pizza Hut restaurant was opened in Today, Pizza Hut is the largest restaurant chain in the world specializing in the sale of readyto-eat pizza products, with more than 15,000 units. Taco Bell specializes in Mexican style food products, including various types of tacos and burritos, salads, nachos and other related items. The first Taco Bell restaurant was opened in 1962 by Glen Bell in California. There are more than 8,000 Taco Bell units throughout the world. LJS was opened in LJS features a variety of seafood items, including meals featuring batter-dipped fish, chicken, shrimp, hushpuppies and portable snack items. LJS units typically feature a distinctive seaside/nautical theme. There are more than 1,000 units worldwide. A&W was founded in Lodi, California by Roy Allen in 1919 and the first A&W franchise unit opened in A&W serves A&W draft Root Beer and a signature A&W Root Beer float, as well as hot dogs and all-american pure-beef hamburgers A&W operates 700 units worldwide. Barry M Frohlinger, Inc All content herein is copyright protected 19

20 Consolidated Statements of Income YUM! Brands, Inc. and Subsidiaries Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007 (in millions, except per share data) Revenues Company sales $ 9,413 $ 9,843 $ 9,100 Franchise and license fees and income 1,423 1,461 1,335 Total revenues 10,836 11,304 10,435 Costs and Expenses, Net Company restaurants Food and paper 3,003 3,239 2,824 Payroll and employee benefits 2,154 2,370 2,305 Occupancy and other operating expenses 2,777 2,856 2,644 Company restaurant expenses 7,934 8,465 7,773 General and administrative expenses 1,221 1,342 1,293 Franchise and license expenses Closures and impairment (income) expenses Refranchising (gain) loss (26 ) (5 ) (11 ) Other (income) expense (104 ) (157 ) (71 ) Total costs and expenses, net 9,246 9,787 9,078 Operating Profit 1,590 1,517 1,357 Interest expense, net Income Before Income Taxes 1,396 1,291 1,191 Income tax provision Net Income including noncontrolling interest 1, Net Income noncontrolling interest 12 8 Net Income YUM! Brands, Inc. $ 1,071 $ 964 $ 909 Barry M Frohlinger, Inc All content herein is copyright protected 20

21 Consolidated Statements of Cash Flows YUM! Brands, Inc. and Subsidiaries Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007 (in millions) Cash Flows Operating Activities Net Income including noncontrolling interest Depreciation and amortization $ 1, $ $ Closures and impairment (income) expenses Refranchising (gain) loss (26 ) (5 ) (11 ) Contributions to defined benefit pension plans (280 ) (66 ) (8 ) Gain upon consolidation of a former unconsolidated affiliate in China Gain on sale of interest in Japan unconsolidated affiliate (68 ) (100 ) Deferred income taxes Equity income from investments in unconsolidated affiliates 72 (36 ) 1 (41 ) (41 ) (51 ) Distributions of income received from unconsolidated affiliates Excess tax benefit from share-based compensation (59 ) (44 ) (74 ) Share-based compensation expense Changes in accounts and notes receivable Changes in inventories 3 27 (6 ) (8 ) (4 ) (31 ) Changes in prepaid expenses and other current assets (7 ) 4 (6 ) Changes in accounts payable and other current liabilities (62 ) Changes in income taxes payable (95 ) Other non-cash charges and credits, net Net Cash Provided by Operating Activities 82 1, , ,551 Cash Flows Investing Activities Capital spending (797 ) (935 ) (726 ) Proceeds from refranchising of restaurants Acquisition of restaurants from franchisees 194 (24 ) 266 (35 ) 117 (4 ) Acquisitions and disposals of investments Sales of property, plant and equipment (115 ) Other, net Net Cash Used in Investing Activities (19 ) (727 ) (9 ) (641 ) 13 (416 ) Cash Flows Financing Activities Proceeds from long-term debt ,195 Repayments of long-term debt (528 ) (268 ) (24 ) Revolving credit facilities, three months or less, net (295 ) 279 (149 ) Short-term borrowings by original maturity More than three months proceeds More than three months payments 1 (184 ) Three months or less, net Repurchase shares of Common Stock (8 ) (11 ) (1,628 ) (8 ) (1,410 ) Excess tax benefit from share-based compensation Employee stock option proceeds Dividends paid on Common Stock (362 ) (322 ) (273 ) Other, net Net Cash Used in Financing Activities (20 ) (542 ) (1,459 ) (12 ) (678 ) Effect of Exchange Rates on Cash and Cash Equivalents (15 ) (11 ) 13 Net Increase (Decrease) in Cash and Cash Equivalents 120 (590 ) 470 Change in Cash and Cash Equivalents due to consolidation of entities in China Cash and Cash Equivalents Beginning of Year Cash and Cash Equivalents End of Year $ $ $ Barry M Frohlinger, Inc All content herein is copyright protected 21

22 Consolidated Balance Sheets YUM! Brands, Inc. and Subsidiaries December 26, 2009 and December 27, 2008 (in millions) ASSETS Current Assets Cash and cash equivalents $ 353 $ 216 Accounts and notes receivable, net Inventories Prepaid expenses and other current assets Deferred income taxes Advertising cooperative assets, restricted Total Current Assets 1, Property, plant and equipment, net 3,899 3,710 Goodwill Intangible assets, net Investments in unconsolidated affiliates Other assets Deferred income taxes Total Assets $ 7,148 $ 6,527 LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) Current Liabilities Accounts payable and other current liabilities $ 1,413 $ 1,473 Income taxes payable Short-term borrowings Advertising cooperative liabilities Total Current Liabilities 1,653 1,722 Long-term debt 3,207 3,564 Other liabilities and deferred credits 1,174 1,335 Total Liabilities 6,034 6,621 Shareholders Equity (Deficit) Total Shareholders Equity (Deficit) YUM! Brands, Inc. 1,025 (108 ) Noncontrolling interest Total Shareholders Equity (Deficit) 1,114 (94 ) Total Liabilities and Shareholders Equity (Deficit) $ 7,148 $ 6,527 Barry M Frohlinger, Inc All content herein is copyright protected 22

23 CASE 1: MCDONALD'S CORPORATION SOLUTIONS Barry M Frohlinger, Inc All content herein is copyright protected 23

24 ROW # Mc Donald's Wendy's YUM Burger King Company Company Company Company revenues revenues revenues revenues Franchised Franchised Franchised Franchised revenues revenues revenues revenues Cost of Sales Cost of Sales Cost of Sales Cost of Sales Selling General Selling General Selling General Selling General 4 Admin Admin Admin Admin Payroll Payroll Payroll Payroll Occupancy Occupancy 0 0 Occupancy Occupancy Franchised - Franchised - Franchised - Franchised - 7 Occupancy Occupancy 0 0 Occupancy Occupancy S, G, Admin S, G, Admin 0 0 S, G, Admin S, G, Admin Accounts Receivable Accounts Receivable Accounts Receivable Accounts Receivable Inventory Inventory Inventory Inventory Accounts Accounts Accounts Accounts 11 Payable Payable Payable Payable Accruals Accruals Accruals Accruals Other taxes Other Other taxes Other taxes Other Other Other Other 14 accruals accruals accruals accruals AR Days AR Days AR Days AR Days INV days 7 7 INV days 3 6 INV days INV days AP days AP days AP days AP days Accruals in days Accruals in days Accruals in days Accruals in days Cash Cycle in days Cash Cycle in days Cash Cycle in days Cash Cycle in days Total Costs Total Costs Total Costs Total Costs Total AP + Accruals Total AP + Accruals Total AP + Accruals Total AP + Accruals Total AP + Accruals in days Total AP + Accruals in days Total AP + Accruals in days Total AP + Accruals days Op WC Op WC Op WC Op WC Barry M Frohlinger, Inc All content herein is copyright protected 24

25 McDonald s Wendy s YUM Burger King 24 Company owned stores 6,257 Company owned stores 1529 Company owned stores 7416 Company owned stores Franchised 26,209 Franchised 5121 Franchised Franchised Revenue/company Revenue/company owned Revenue/company Revenue/company owned owned stores 2,471 stores 2,092 owned stores 1269 stores Revenue/franchised stores 278 Revenue/franchised stores 75 Revenue/franchised stores 49 Revenue/franchised stores Total Property Total Property 1619 Total Property 3899 Total Property Total Number of Stores Total Number of Stores 6650 Total Number of Stores Total Number of Stores Notes: a. Row 4 = sum of rows 5,6,7,8 b. Row 12 = Row c. Row 15 = row 9/row2*360 d. Row 16 = row 10/row 3*360 e. Row 17 = row 11/row 3*360 f. Row 18 = rwo 12/row 4*360 g. Row 19 = row h. Row 20 = row 3+4 i. Row 21 = row Note that YUM has no accruals, only an accounts called payables. Row 22 is an attempt to make all four firms comparable by adding all accounts payable and accruals together. Barry M Frohlinger, Inc All content herein is copyright protected 25

26 CASE 2: PAR PHARMACEUTICAL Par Pharmaceutical's 2009 financial statements are attached (footnotes have been omitted). Par and its subsidiary, Quad, market a comprehensive line of generic tablets, capsules and injectables and will introduce liquids, ointments, creams & lotions during fiscal DISCUSSION QUESTIONS: [*] 1. In its Annual Report, Par states "the financial condition of the Company continued to strengthen in 2009 as working capital increased by almost $5,000 or 14% to $38,465 at October 1, 2009." Comment on the amount of working capital, the increase in working capital and the connection to liquidity. Complete this table to help answer this question. PAR Accounts Receivable Days 2 Inventory Days 3 Accounts Payables Days 4 Net Trade Cycle 5 Net Cash Cycle 6 Working Assets 7 Working Liabilities 8 Operating Working Capital 9 Change in Operating Working Capital a 10 Operating Working Capital/Sales 11 Working Capital Barry M Frohlinger, Inc All content herein is copyright protected 26

27 2. Par's 2009 cash provided by operating activities is much less than its 2009 net income. Explain each significant reason for this difference and comment from the viewpoint of a financial analyst (who is interested in all aspects of cash flow and liquidity). [First, complete the following table, calculate "Funds Flow also referred to as potential cash flow from operating activities" for 2009]. After calculating Funds Flow, reconcile the Funds Flow with the Cash Flow from Operations and compare the difference between Operating Cash Flow and Funds Flow with the Change in Operating Working Capital from the Balance Sheet. Then compare the cash flow with the claims on the cash flow from operations. PAR Net Income Depreciation & Amortization Other Non Operating Adjustments Funds Flow Reported Cash From Operations Balance Sheet Management [= difference between FF and CFO] Capital Expenditures Dividends Mandatory Capital Spending Cash Flow after Cap X and Dividends Free Cash Flow in the Long Run [FF less Mandatory CAPX and dividends] Borrowings Equity [issuances or purchases] Other Investing Change in Cash 3. Comment on the adequacy of Par's cash flows from operating activities for the one year [*] Par has a "provision for equity interest in subsidiary at issue in certain litigation" in 2009 and These provisions are based upon a share of the profits of a subsidiary and have been added to other 1ong-terrn liabilities. This can be considered non-recurring, not operating and unrelated to the current year. Barry M Frohlinger, Inc All content herein is copyright protected 27

28 Consolidated Statements of Income and Retained Earnings Year Ended October 1. October 3. September Net sales $ 99,548 $78,684 $39,357 Dividend, interest and other income 1,043 1, Total revenues 100,591 79,775 39,885 Costs and expenses: Cost of goods sold 48,593 38,599 20,223 Product development 6,546 4,065 2,828 Selling, general and administrative 21,102 15,633 7,812 Interest Expense 1, Provision for litigation 3, ,816 59,963 31,531 Income before provision for income taxes 19,775 19,812 8,354 Provision for income taxes: State 1, Federal 7,384 8,341 3,337 8,665 8,898 3,712 Net income 11,110 10,914 4,642 Cash dividend (221) Barry M Frohlinger, Inc All content herein is copyright protected 28

29 Consolidated Balance Sheets October 1, October 3, ASSETS Current Assets Cash and cash equivalents $ 5,903 $ 3,190 Marketable Securities 4,556 17,454 Accounts receivable, net 20,399 13,130 Inventories 18,666 13,805 Deferred tax benefit 2,424 1,244 Prepaid expenses and other current assets 798 1,053 Total current assets 52,746 49,876 Property, plant and equipment, net 30,255 21,606 Restricted cash and investments 3,111 4,543 Deferred charges and other assets 3,842 2,122 $89,954 $78,147 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 833 $ 686 Accounts payable 5,132 5,457 Salaries and employee benefits 4,774 3,063 Accrued expenses and other current liabilities 3,277 5,868 Income taxes 265 1,167 Total current liabilities 14,281 16,241 Long-term debt, less current portion 15,021 15,232 Deferred income taxes 1,606 1,161 Other 5,220 1,603 Shareholders' equity: Common Stock Additional paid-in capital 19,146 20,119 Retained earnings 34,570 23,681 Total shareholders' equity 53,826 43,910 $89,954 $78,147 Barry M Frohlinger, Inc All content herein is copyright protected 29

30 Consolidated Statements of Cash Flows Year Ended Oct 1. Oct 3. Sept Cash flows from operating activities: Net income $11,110 $ 10,914 $ 4,642 Adjustments to reconcile net income to Net cash provided by operating activities Depreciation and amortization 2,260 1,348 1,125 Deferred taxes (735) (1,959) 814 Other 3, (145) Changes in assets and liabilities: Increase in accounts receivable (7,269) (3,557) (4,764) Increase in inventory (4,861) (5,405) (3,984) (Increase) decrease in prepaid expenses and other current assets 97 (335) (494) Increase (decrease) in accounts payable (478) 1,252 2,250 Increase (decrease) in accrued expenses and other current liabilities (916) 4,745 2,560 Increase (decrease) in income taxes payable (902) 1, Net cash provided by operating activities 1,441 8,826 2,561 Cash flows from investing activities: Capital expenditures (10,961) (7,916) (4,321) (Increase) decrease in restricted cash 1,469 (1,762) (2,576) (Increase) decrease in securities 12,898 (14,489) 635 Purchase of minority interest in sub (570) Purchase of other investments (650) Other (226) 175 (696) Net cash provided (used) by investing activities 2,530 (24,562) (6,958) Cash flows from financing activities: Sale of stock in public offering 12,313 Borrowings under long-term debt 6,734 9,010 7,227 Proceeds from issuance of note payable 2,100 Proceeds from issuance of capital stock 907 1, Payments of long-term debt (6,798) (4,463) (3,397) Payment of note payable (2,100) Purchase of capital stock (1,880) Cash dividend (221) Net cash provided (used) by financing activities (1,258) 5,929 16,315 Net increase (decrease) in cash 2,713 (9,807) 11,918 Cash at beginning of year 3,190 12,997 1,079 Cash and cash equivalents at end of year $ 5,903 $ 3,190 $12,997 Barry M Frohlinger, Inc All content herein is copyright protected 30

31 STATIC LIQUIDITY PAR Accounts Receivable Days Inventory Days Accounts Payables Days Net Trade Cycle Net Cash Cycle Working Assets 42,287 29,232 7 Working Liabilities 13,448 15,555 8 Operating Working Capital 28,839 13,677 9 Change in Operating Working Capital a -15, Operating Working Capital/Sales 29.0% 17.4% 11 Cash Cycle Very Long Moderate 12 Working Capital 38,465 33,635 Dynamic Liquidity PAR Total Average Net Income 11,110 10,914 22,024 11,012 Depreciation & Amortization 2,260 1,348 3,608 1,804 Other Non Operating Adjustments 3, ,919 1,960 Funds Flow 16,505 13,046 29,551 14,776 Reported Cash From Operations 1,441 8,826 10,267 5,134 Balance Sheet Management -15,064-4,220-1,9284 (9,642) Capital Expenditures -10,961-7,916-18,877 (9,439) Dividends (111) Mandatory Capital Spending -2,260-1,348-3,608-1,804 Free Cash Flow to Lenders -9, ,831 (4,416) Free Cash Flow Before Dividends Paid [private company] -9, ,610 (4,305) Free Cash Flow in the Long Run 14,024 11,698 25,722 12,861 Borrowings -64 4,547 4,483 2,242 Equity [issuances or purchases] , Other Investing 13,491-16,646-3,155-1,578 Change in Cash 2,713-9,807-7,094-3,547 Note: Mandatory Capital Spending is an estimate based upon depreciation expense [a] the change in Operating Working Capital is shown as a negative number [dr] as this is the presentation for the Statement of Cash Flow Barry M Frohlinger, Inc All content herein is copyright protected 31

32 CASE 3: Carnival Required: 1. Calculate Operating Working Capital for Carnival at the end of fiscal Calculate the Capital Investment of the Firm [Investment in all of the NonCurrent Assets -- Property, Plant Equipment and Intangible and any other NonCurrent Assets] at year end Calculate the Funds Flow [called the potential operating cash flow] for fiscal Calculate these four amounts ratios: Operating Working Capital Non Current Assets/Total Assets PPE/Non Current Assets PPE/Sales Barry M Frohlinger, Inc All content herein is copyright protected 32

33 Carnival s mission is to deliver exceptional vacation experiences through some of the world's best-known cruise brands that cater to a variety of different geographic regions and lifestyles, all at an outstanding value unrivalled on land or at sea. The multi-night cruise industry has grown significantly over the past decade, but still remains a relatively small part of the wider global vacation market in which cruise companies compete for the discretionary income spent by vacationers. The global cruise industry carried 17.2 million passengers in The principal regions from which cruise passengers are sourced are North America, which has increased by an estimated compound annual growth rate of 4.6% between 2001 and 2009, and Western Europe where cruise passengers have increased by a compound annual growth rate of approximately 10.5%. In Europe, cruising represents a smaller proportion of the overall vacation market than it does in North America. Carnival Cruise Lines began operations in 1972 is a leader in offering fun, memorable vacations at an affordable price. This brand is widely recognized as the "Fun Ships," with 22 contemporary ships operating voyages generally from three to eight days. Princess, whose brand name was made famous by the Love Boat television show, has been providing cruises since Princess, the world's third largest cruise line, operates a fleet of 17 modern ships. Holland America Line, with 136 years of cruising experience, operates a premium fleet of 14 ships. Seabourn provides ultra-luxury cruising vacations in a unique, small-yacht style that focuses on personalized services, all-suite accommodations, superb cuisine and unique experiences. Cruising offers a broad range of products to suit vacationing guests of many ages, backgrounds and interests. Cruise brands can be broadly classified as offering contemporary, premium and luxury cruise experiences. The contemporary experience typically includes cruises on larger ships that last seven days or less, have a more casual ambiance and are less expensive than premium or luxury cruises. The premium experience typically includes cruises on more intermediate-sized ships that last from seven to 14 days and appeal to the more experienced cruise guest who is usually more affluent and older. The luxury experience is usually characterized by small vessel size, very high standards of accommodation and service, higher prices and exotic itineraries to ports which are inaccessible to larger ships. Carnival is the leading provider of cruise vacations in all the largest vacation markets in the world, which are comprised of North America, Europe, Australia and New Zealand, Asia and South America, with product offerings in each of the three classifications noted above. As of January 28, 2010, the summary by brand of our passenger capacity, the number of cruise ships we operate, and the primary areas in which they are marketed is as follows: Passenger Capacity Number of Cruise Ships Cruise Brands Primary Market Carnival Cruise Lines 54, North America Princess Cruises 37, North America Costa Cruises 28, Europe Holland America Line 21, North America P&O Cruises 11,998 6 United Kingdom AIDA Cruises 9,862 6 Germany Ibero Cruises 5,010 4 Spain and Brazil P&O Cruises Australia 4,744 3 Australia and New Zealand Cunard Line 4,608 2 UK and North America Ocean Village 1,578 1 UK The Yachts of Seabourn 1,074 4 North America 180,746* 93 *Approximately 45% of global passenger capacity Barry M Frohlinger, Inc All content herein is copyright protected 33