Nestl é Module 10: A More Detailed Analysis of the Financial Reports

1. NestléModule 10: A More Detailed Analysis of the Financial Reports Dan Finan

2. Processed & Packaged Goods Industry

3. Overview of Nestle • Six reportable segments: • Zone Europe • Zone Americas • Zone Asia, Oceania and Africa • Nestle Waters • Nestle Nutrition • Other Food and Beverages

4. Overview of Nestle • Products are categorized under: • Powdered and Liquid Beverages • Milk Products and Ice cream • Prepared Dishes and Cooking Aids • Confectionery • Pet Care • Water • Pharmaceuticals • Nutrition

5. Abnormal Enterprise Income Growth Model Enterprise Value = $192,818

6. Potential Accounting AdjustmentsWhat effects will these have on valuation models? • Inventory Method (FIFOLIFO) • Accounting for Leases (OperatingCapital) • Special-Purpose Entities

7. Inventory Method • “Few differences between IFRS and U.S. GAAP loom larger than accounting for inventories, particularly the disallowance of LIFO in IFRS.” • “If LIFO were to disappear, many U.S. companies could face large income tax liabilities from accelerated income recognition.” --The Death of LIFO? Bloom and Cenker, Journal of Accountancy, January 2009

8. Inventory Method • Due to IFRS prohibiting LIFO… …Nestle utilizes FIFO and has no reason or incentive to present any information regarding the potential effect of LIFO on its financial performance.

9. Consequences of the “Operating” Classification for Lessees 1. The lease asset is not reported on the balance sheet. EATO is higher because reported NEA is lower 2. The lease liability is not reported on the balance sheet. B/S measures of financial leverage are improved; could lead to a better credit rating andthus a lower interest rate on borrowed funds. 3. RNEA appears higher. Improves the perceived quality of the company’s return on equity. • During the early years of the lease term, rent expense reported for an operating lease is less than the depreciation and interest expense reported for a capital lease. NI is higher in early years with an operating lease, but EPAT is lower for an operating lease because rent expense is an enterprise expense whereas only depreciation expense (and not interest expense) is an enterprise expense for a capital lease.

10. Note 20: Lease Commitments

11. Operating Lease Payments

12. Effects of Adjustments

13. Employee Stock Options • The 10-K does not contain adequate information to determine the adjustments for share-based compensation; only executive compensation is discussed. • No disclosure of the number of outstanding options and the relevant dates associated with them. • “The Restricted Stock Unit Plan (RSUP) will be replaced by the Performance Share Unit Plan (PSUP). Consequently, all Long-Term Incentive Plans at Nestlé will have performance criteria.”

14. Questions?