Case and Internet Research (Essay Sample)

Case and Internet Research
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Part One.
Question one.
Del Monte Foods Company and Subsidiaries
Common-size balance sheets for April 29th 2007 and 30th April 2006.
April 29, 2007April 30, 2006
Assets
Cash and cash equivalents0.28%12.69%
Restricted cash_____1.2
Trade accounts receivable, net of allowance5.720.56
Inventories17.7621.09
Prepaid expenses and other current assets2.913.09
Total current assets26.6744.64
Property, plant and equipment, net15.7517.70
Goodwill30.4620.94
Intangible assets, net26.2815.80
Other assets, net0.840.92
Total assets 100%100%
Liabilities and stockholder’s equity
Accounts payable and accrued expenses11.15%12.45%
Short-term borrowings 0.480.05
Current position of long-term debt0.641.62
Total current liabilities12.2714.12
Long-term debt42.7934.30
Deferred tax liabilities8.076.30
Other non-current liabilities5.039.03
Total liabilities68.1663.73
Stockholders’ equity
Common stock0.050.06
Additional paid-in capital22.4027.31
Treasury stock, at cost(2.92)(2.77)
Accumulated other comprehensive income (loss) 0.53(0.22)
Retained earnings11.7712.61
Total stockholders’ equity31.8436.27
Total liabilities100%100%
Question Two.
Unless stated otherwise, this paper compare values derived from 2006 and 2007 with the monetary values expressed in millions of dollars.
Cash and cash equivalents, and restricted cash.
Del Monte experiences a drastic change in its cash and cash equivalents value that falls from 12% of total assets to 0.3% of total assets. The monetary value of cash and cash equivalents falls from $459.9 to $13. Del Monte made the decision to acquire Meow-Mix and Milk-Bone by using cash in the transaction rather than using other sources of finance. Restricted cash is not available for immediate use and also shows a similar trend as cash and cash equivalents by moving from 1.2% of total assets to non-existent.
Inventories.
First of all, Del Monte operates as a manufacturing company producing food products for both humans and their pets. In 2006, the company reflects inventory as 21.1% of total assets, a typical range, while in 2007 this figure falls to 17.8% of total assets. Such a fall, inventory levels might be a cause for concern as a low inventory level may hinder potential opportunities to sell. On the contrary, the monetary value of inventory increases thanks to the acquisition of the two companies that increases the inventory value.
Accounts receivable.
The expression of accounts receivable in terms of total assets exhibits a decrease from 6.6% to 5.7%. In addition, the monetary value of the accounts receivable increased marginally from $237.8 to $261.1 but that increase falls short of the increase observed in total assets.
Prepaid expenses.
In the two years, the prepaid expenses remain below 5% of the total assets thus this value would be immaterial to the general balance sheet. Furthermore, it is important to note than a continued increase in the monetary value would worsen cash flow problems.
Net property, plant and equipment.
The monetary value of property, plant and equipment increases from $641.4 in 2006 to $718.6 in 2007. However, the property, plant and equipment value as a percentage of total assets decreases from 17.7% to 15.8% and this reduction could be explained by the overall increase in total assets. Furthermore, the increase in value ($77.2) results almost entirely from the costs of acquiring this class of assets from the two companies.
Goodwill and net intangible assets.
Amongst the balance sheet items, this class marks one of the biggest changes over the two year period. In fact, goodwill grows from $758.7 to $1389.3 while intangible assets increase from $572.4 to $1198.6. These figures double and indicates the decreases in percentages for several of the earlier asset classes. The acquisitions made by Del Monte occurred with little regard to the fair market values thus higher purchase prices were paid. The goodwill and intangible assets account for more than 55% of the total assets of Del Monte.
Accounts payable and accrued expenses.
The increase in accounts payable and accrued expenses summing to $57.8 results mainly from high costs allocations made by the two acquired companies, Meow-Mix and Milk-Bone. Despite this increase in liabilities not being so high, the company may run into problems when it comes to repayment due to low cash levels ($13).
Short-term borrowings.
This accounts marked the most notable percentage change of all balance sheets items by increasing to the tune of 1182.4%. Supposing this borrowing resulted from the decision to acquire the two companies, the aggressive financing strategy contravenes the matching principle. The short term borrowing only lasts for one financial period while the acquisitions resulted in increases in goodwill and intangible assets that have long lives. Therefore, this reveals a mismatching problem and should raise concerns amongst the investors of Del Monte.
Current portion of long-term debt.
The decrease in this liability of close to 50% shows that Del Monte paid $29.2 0f its long-term debts and this is a positive indicator.
Long-term debt
The long-term debt increased by $709.4 showing that the company sought long-term debt and the non-current assets levels also increased proportionately. This highlights a conservative matching principle and raises little concern in the eyes of the shareholders.
Deferred tax liabilities.
The increase in deferred taxes to the tune of $139.9 shows that Del Monte will have to pay more tax in the future. Deferred tax can improve the impression given by financial statements but it can also be a recipe for trouble as a company with low cash levels strives to meet its obligations in terms of tax. Therefore, this is a key factor that investors need to consider as they make theie investment decisions.
Additional paid-in capital and treasury stock.
The increase in additional paid-in capital indicates that Del Monte sold shares of stock above the par values of the stock. On the other hand, the decrease in treasury stock reveals that Del Monte made a repurchase of its shares.
Accumulated other comprehensive income (loss)
This account shows a 408% increase that could be attributed to gains to derivative instruments or adjustments made in relation to foreign currencies.
Retained earnings.
Del Monte increased the value of net profits reserve as retained earnings and this value grew from $456.8 to $537.1.
Capital-debt structure.
Debt manifests at about 70% while equity levels are about 30%. This kind of leveraging for a firm has both its pros and cons. High debt levels assure investors of higher returns on equity due to the benefits accruing from tax savings. However, a high debt portfolio increases the risks borne by the firm in case of default.
Concerns for investors and creditors.
From the balance sheet of Del Monte from 2006 to 2007, three key issues arise. First, the firm experiences an intense increase in short-term debt. Secondly, there is a drastic fall in the cash and cash equivalents. Lastly, the long-term and "other" assets increase so intensely that a revelation arises about the company growing as a result of acquisitions rather than naturally on its own. This information, as discussed earlier, would be a point of concern for both the creditors and investors seeking returns and payment of their dues.
Non-financial information.
This set of information plays an important role by serving as vital indicators as investors seek to make conclusive investment decisions. These could include relations with the workforce, the community and environment around the firm. This list also includes corporate governance and includes factors such as audit procedures, ethics considerations, director’s independence, executive pay, human rights policies and customer satisfaction as well as product safety information. Poor management of these issues spells out doom and presents some risks to the firm. On the other hand, sound management proves to translate in good financial management and indicates the intangible value of the firm such as a strong brand.
Part two.
April 28, 2013April 29, 2012
ASSETS
Cash and cash equivalents $594.2$402.8
Trade accounts receivable, net of allowance 191.7 195.3
Inv...