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Del Monte Foods Case Study

1883 words - 8 pages

Unless otherwise stated, I am comparing values from 2006 to 2007 in order to cut down on writing. Monetary values are in millions of dollars unless otherwise stated. Common-size balance sheet is attached.

Cash, Cash Equivalents, and Restricted Cash
Del Monte Foods exhibit a dramatic change in cash and cash equivalents going from 12% of total assets to 0.3% of total assets. In monetary terms, cash and equivalents fall from $459.9 to a mere $13. Del Monte Foods acquired two companies (Meow-Mix and Milk-Bone), choosing to invest using cash over other financing sources. Restricted cash (not available for immediate use) has also exhibited a similar trend as cash and equivalents. It goes ...view middle of the document...

I will mention, however, that if prepaid expenses continue to increase (in monetary value) as they did between 2006 and 2007, the cash flow problem could be exacerbated.

Net Property, Plant, and Equipment
Property, plant, and equipment increase from $641.4 in 2006 to $718.6 in 2007. As a percentage of total assets, property, plant, and equipment decreases from 17.7% to 15.8%. This can be attributed to the greater percentage increase in total assets as compared to the percentage increase in property, plant, and equipment. Note again that the $77.2 increase in property, plant, and equipment is due almost entirely to the costs allocated to Meow-Mix’s and Milk-Bones’ properties, plants, and equipment ($71.6 total).

Goodwill and Net Intangible Assets
Of all the balance sheet items, goodwill and intangible assets see some of the biggest changes between 2006 and 2007. Goodwill increases from $758.7 to $1389.3 (an 83% increase and up 10 percentage points as a share of total assets). Net intangible assets see a similar and more dramatic trend with an increase from $572.5 to $1198.6 (a 109.4% increase and up almost 10 percentage points as a share of total assets). The decreases in percentages-of-total-assets for several of the preceding asset categories are explained by the dramatic changes in goodwill and intangible assets. Between 2006 and 2007, Del Monte Foods acquired the Meow-Mix and Milk-Bone brands for a price in excess of their fair market values. This is illustrated by the allocation of purchase price to Meow-Mix ($420.8 for goodwill) and Milk-Bone ($219.5 for goodwill). Del Monte Foods also acquired the intangible assets of Meow-Mix ($307.0) and Milk-Bone ($330.0) which could include patents, proprietary production methods, etc. Together, goodwill and intangible assets make up over 55% of total assets at April 29, 2007.

Accounts Payable and Accrued Expenses
While there is an increase in accounts payable and accrued expenses ($57.8), this increase is due, in large part, to the costs allocated to the accounts payable and accrued expenses of Meow-Mix and Milk-Bone ($39.2). While the increase in this liability account is not very dramatic, a company with very low levels of cash (e.g., $13), will run into problems when it comes time to repay these payables.

Short-Term Borrowings
This account shows the most dramatic percentage change of all the balance sheet accounts. From 2006 to 2007, there was a 1,182.4% increase in short-term borrowing. If this borrowing was to finance the acquisition of Meow-Mix and Milk-Bone, this illustrates aggressive financing or even mismatching (according to the matching principle). The acquisition resulted in the biggest increases for the non-current asset categories. The matching principle says to align the life of an asset and the length of a liability. Clearly goodwill and intangible assets are long-lived (even indefinite) while short-term borrowing is less than one year. This sends a...

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