Equity Valuation - Anheuser Busch

[2008]

Equity Valuation and Analysis Anheuser-Busch

ROHAN PATIL

FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

Table of Contents I. Assessment of Financial Distress ...................................................................... 3 A. Altman Z- score ........................................................................................................ 3 B. Significance of the Altman Z- score ........................................................................... 3

II. Analysis of Historical Operating Performance ................................................. 3 A. Year to Year Trend Analysis ...................................................................................... 3 B. Ratio Analysis ........................................................................................................... 4 C. Financial Performance Discussion ............................................................................. 4

III. Financial Position (GAAP basis) and ROE (DuPont Analysis) ........................ 5 A. Return on Equity ...................................................................................................... 5 B. Liquidity Position ...................................................................................................... 5 C. Capital Structure Analysis ........................................................................................ 6 D. Ratio Analysis – Property Plant and Equipment......................................................... 7

IV. 3 Year Financial Forecast – Management Case ............................................... 8 A. Income Statement Forecast - 2007,2008,2009 .......................................................... 8 B. Statement of Free Cash Flows - 2007,2008,2009 ...................................................... 8 C. Fixed Charge Coverage Forecast - 2007,2008,2009 ................................................... 8 D. Analysis of Overall Trends and Analyst Comments .................................................... 9

V. 3 Year Financial Forecast – Independent Analyst Case ................................... 9 A. Independent Outside Review - Current State of the Beer Industry ............................ 9 B. Forecast of Selected Income Statement Variables - 2007,2008,2009 ........................ 9 C. Income Statement Forecast - 2007,2008,2009 ........................................................ 11 D. Statement of Free Cash Flows - 2007,2008,2009 .................................................... 11 E. Rationale for Selection of Variables and Financial Performance Trends................... 12

VI. Adjusted Financial Analysis (Non GAAP) ...................................................... 13 A. Adjusted Income Statement – 2005,2006 ............................................................... 13 B. Rationalization for Analyst Assumptions ................................................................ 14 C. Comparison of GAAP Analysis to Non GAAP Analysis ............................................. 14

VII. Appendix – Calculation Details ....................................................................... 16 VIII. References ........................................................................................................ 23

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

I. Assessment of Financial Distress A.

The Alt man Z – Score:

It is one of the best known bankruptcy prediction formulae. Using Multiple Discriminant Analysis (MDA) with five different financial and economic ratios, it helps indicate the probability of bankruptcy in the near future with considerable accuracy. Using the formula as shown in the appendix, we get a Z-score of 6.23 for 2006 and 5.61 for 2005.

B.

Significance of the Alt man Z – Scores:

Based on the empirical research we know that a z-score above 2.99 is a sign of a financially healthy company. With a Z-score of 6.23 and 5.61, Anheuser Busch has a very low probability of bankruptcy. * Please refer to Appendix for calculations

II. Analysis of Historical Operating Performance (GAAP Basis)

A.

Year to Year trend analysis: Relative change and dollar change for Fiscal year 2006 and 2005

Trend Analysis Income Stmt Items Net Sales Gross Profit Operating Income EBIT Interest Expense Net Income EBITDA

2006 $15,717.10 $5,552.10 $2,719.60 $2,708.80 ($451.30) $1,965.20 $3,697.50

2005 $15,035.70 $5,429.40 $2,591.90 $2,594.60 ($454.50) $1,744.40 $3,573.60

Dollar Change $681.40 $122.70 $127.70 $114.20 ($3.20) $220.80 $123.90

Percentage Change 4.53% 2.26% 4.93% 4.40% -0.70% 12.66% 3.47%

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

B. Profitability Ratios Ratios Gross Margin Operating Margin EBIT Margin Interest Coverage Net Margin EBITDA Margin

2006 35.33% 17.30% 17.23% 6.00 12.50% 23.53%

2005 36.11% 17.24% 17.26% 5.71 11.60% 23.77%

C. Financial Performance 2005-2006 Starting out with the total domestic beer sales of the company, we saw declining sales in the fiscal year of 2005. Although the situation improved a little in 2006 with a marginal growth of 2.8%, the domestic beer segment has not performed well as compared to other segments. However, their aggressive foreign expansion in recent times has resulted in steep growth of about 7% in the international beer sales in 2006. This has primarily due to sales in China, Canada and Mexico. Overall, we saw a growth of 4.53% led by their international segment. Looking at the profitability analysis, we note the fact that cost associated with higher beer volume, increased packaging materials and plant operating costs for domestic beer and higher energy costs have considerable reduced the gross margin of the company. As the company enters new markets like China the marketing costs went up as expected. However, a steep decline in the domestic marketing costs has offset this increase resulting in a overall reduction in the operating expenses. The growth in the operating income is primarily due to reduction in operating expenses rather than growth in net sales. Thus, the financial performance of the company in US market has been flat but comparatively the international line of businesses has seen staggering growth in the fiscal year 2005-06.

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

III. Financial Position (GAAP Basis) and ROE (DuPont) Analysis A. Anheuser-Busch’s Return on Equit y (ROE) for 2006 and 2005 using the 3- Step DuPont model ROE  Pr ofitabilit y  Activity  Solvency

ROE 

NetIncome NetSales AverageTotalAsset   NetSales AverageTotalAssets AverageCommonEquity

Factor Profitability Activity Solvency ROE

Return on Equity 2006 0.1250 0.9545 4.3227 51.59%

2005 0.1160 0.9188 4.9159 52.40%

The ROE has reduced by 1.57 % during 2006. Among the three factors that influence the Return on Equity for Anheuser-Busch the financial leverage ratio (solvency) is primarily responsible for driving the change in ROE between fiscal 2006 and 2005. Change in the solvency has been over -12% indicating more leverage. This has reduced the overall ROE by 1.57%. B. Anheuser-Busch’s liquidit y posit ion as of Dec 31st 2006: We shall begin with the calculations of the liquidity ratios for Anheuser Busch. Liquidity Ratios Ratios Current Ratio Quick Ratio Cash Ratio Cash flow from operations Ratio

2006 0.81 0.51 0.18 1.21

2005 0.89 0.56 0.21 1.36

* Please refer to Appendix for calculations

As shown by the ratios here, the company has more short term liabilities than short-term assets. However, the company’s operating cash-flows are substantially higher than their current liabilities. Moving forward, with $ 2 billion revolving credit, $1.35 registered debt available for issuance we envisage no short-term credit crunch for the company in the near future.

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

C. Anheuser-Busch’s Capital Structure Analysis as of Dec 31st 2006:

Total Debt-to-Total Capital Ratio Components 2006 Total Debt

2005

$7,653.50

$7,972.10

Total Capital $11,592.20 Ratio → 0.6602 Total Debt-to-EBITDA Ratio Components 2006 Total Debt $7,653.50 EBITDA $3,697.50 Ratio → 2.0699

$11,651.90 0.6842 2005 $7,972.10 $3,573.60 2.2308

After conducting ratio analysis specifically on the debt ratios, it is clear that Anheuser-Busch is highly leveraged. Company enjoys a strategic and competitive advantage as it represents almost half the beer sales and almost 2/3 of the operating profits. We would like to say that the company has used this advantage to its benefit. It is clear that the cost of debt is substantially lower than the cost of equity. In recent times it has successfully conducted several leveraged buyouts that have substantially increased its long-term corporate debt. However, the company is still rated A+ by Fitch. Anheuser Busch operates with a working capital deficit. The accounts payable constitute a major portion of their current liabilities. The cash cycle of the company is of -16 days which indicates that the company is very efficient in terms of its operations and cash management. An important drawback in its capital structure that has come to light after implementation of FAS 158 is that A-B’s pension benefit plan is highly underfunded. This liability of over a billion dollars could create problems in the not-so-distant future. A detailed analysis of this section is recommended.

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

C. The Enterprise value of Anheuser-Busch is $47,010.37 million. The enterprise value takes into account the value of debt as well as equity and hence is unaffected by the company’s capital structure. Cash is subtracted because when it is paid out as dividend, it reduces the net cost to the purchaser. Therefore the business was only the reduced amount to start with. The same effect is accomplished when the cash is used to pay down debt. The ratio of the Enterprise value to EBITDA  12.7141 This ratio is significant as it is not influenced by capital structure and taxes. The inverse of this ratio tells us that the cash return on investment for Anheuser-Busch  7.86% *See Appendix for calculations

D. Average total life span of Anheuser-Busch’s property, plant and equipment at December 31st 2006  18.92 years Average age of Anheuser-Busch’s property, plant and equipment at December 31st 2006  9.91 years Additionally, the relative age of A-B’s property, plant and equipment at December 31st 2006  52.35% Outcome of the ratios. The average relative age of the plants and equipments is about half their useful lives. Thus, in out opinion there are no major purchases of plants and equipments in the near future

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

IV. 3-Year Financial forecast – Management Case (with predefined assumptions) A.

Inco me Statement Forecast for 2007, 2008 and 2009.

CONSOLIDATED STATEMENT OF INCOME Year Ended December 31 (in millions, except per share) Net sales Cost of sales Gross profit

2007 16,172.90 10,433.91 5,738.99

2008 16,852.16 10,845.17 6,006.99

2009 17,357.72 11,142.75 6,214.97

Marketing, distribution and administrative expenses Restructuring Expense Operating income

(2,978.19) (8.50) 2,752.30

(3,106.87) (13.00) 2,887.11

(3,174.87) (17.00) 3,023.10

Interest expense Other income/(expense), net Income before income taxes

(461.23) (15.00) 2,276.07

(471.38) 24.00 2,439.74

(481.75) 14.00 2,555.35

Provision for income taxes Equity income, net of tax Net income

(853.53) 597.63 2,020.18

(914.90) 606.60 2,131.43

(958.26) 615.70 2,212.79

B.

Statement of Cash flows for 2007, 2008, 2009. Statement of Free Cash Flows Components 2007 2008 EBITDA $3,759.22 $3,962.87 - Maintenance CapEx ($295.75) ($323.75) - Dividends ($80.81) ($85.26) Free cash flow $3,382.66 $3,553.86

C.

2009 $4,118.82 ($367.50) ($88.51) $3,662.81

Fixed charge coverage ratio for 2007, 2008, 2009. The Fixed charge coverage ratios for year: 2007  4.29 2008  4.35 2009  4.24

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

D.

Overall trends based on the 3-year cash flo w forecast, the 3-year inco me statement forecast, and the 3-year fixed charge coverage forecast: Looking at the trends in the free cash flow statement presented above we notice that the there is steady growth of free cash flow over the three years. This trend is accompanied by steady growth in sales as well as net income. With the absence of any major acquisitions we would like to ascertain that company will most likely experience overall organic growth in all of its major segments. We see no substantial change in the fixed charge coverage ratio.

V.

3-Year Financial Forecast: Independent analyst assumptions A.

Current State of the Beer/Alcoho lic beverage industry based on independent outside review

. The U.S. brewing industry is a dynamic part of our national economy, contributing billions of dollars in wages and taxes. An indication of beer’s importance is its inclusion in the basket of goods the government uses to calculate the Consumer Price Index. The industry today includes more than 2,000 brewers and importer establishments and over 2,700 beer distributor facilities across the country but is dominated by three producers who command a nearly 80 percent market share as of 1997 -- Anheuser-Busch (45%), Miller Brewing (23%), and Adolph Coors (10. In recent years, the industry has seen a flat trend of sales growth. However in 2006, the industry recorded 2.2% growth, hitting an all-time record of over 210 million barrels of beer. B.

Income Statement forecast for selected variables: 2007, 2008, and 2009. Projected Outlook: Looking at the trend in the beer consumption in US for last 3-year, we note that the consumption level has been almost flat. Thus, assuming a recessionary environment in 2007 wherein the consumption of the beer is expected to decrease, we expect that their domestic sales would decrease from their current levels. However, the company has well diversified investments in foreign breweries and establishments. Given that the international sales accounted for 32% of their net income as reported in 2006, the impact of recession would be cushioned. In our opinion, the company might experience flat sales growth or even slight decline in overall sales for 2007.

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

Projected Variables: Sales: From our discussion above, we are of the opinion that the company will experience a decline in the net sales of beer of about 1% in 2007. However, in the following year, although the economy is expected to recover in the second half, we expect the sales to increase by only 2%. This growth is held back because of the advent of a new competitor and post-recessionary economic conditions. After a slack period of these two years, we expect the company to recover quickly and overcome the competition given its dominating presence and brand name. Our projection is that in 2009 the company’s net sales will grow by about 5%. Gross Margin: After analyzing various factors affecting the production cost of the beer, we have a reason to believe that the cost of packaging materials, energy costs, aluminum costs and plant operating costs are on an upward trend. Thus, in the future we expect a declining gross margin. It would be reasonable to anticipate the decline in the gross margin to be 1% for 2007. Additionally, the higher incremental expenses and increase in the beer ingredient costs would be reflected through the decline of 1.5 % in gross margin of 2008 and 2009. Marketing, distribution and administrative expenses: We expect the MD&A expense to follow the current trend (i.e. moving average of last three years). Interest Expense: Given that the company works on a working capital deficit basis and its not likely to change its policy within the next couple of years, the interest expense would go up by about 3%. Given that the company will have higher average usage of the revolving credit facility during 2008 and 2009 to fund the increased beer ingredient cost, the interest expense is expected to grow at a rate of 4%. Income Statement Forecast for selected variables Components 2007 2008 2009 Sales Growth -1.00% 2.00% 5.00% Gross Margin -1.00% -1.50% -1.50% MD& A expense* -18.41% -18.44% -18.29% Interest expense* -2.99% -3.05% -3.02% * Expressed as percentage of Net Sales

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

C.

Inco me Statement forecast for years 2007, 2008, 2009 as a co mbinat ion o f the management case and the independent analyst case.

CONSOLIDATED STATEMENT OF INCOME Year Ended December 31 (in millions, except per share) 2007 Net sales 15,559.93 Cost of sales 10,218.95 Gross profit 5,340.98

2008 15,871.13 10,661.40 5,209.73

2009 16,664.68 11,444.44 5,220.25

Marketing, distribution and administrative expenses Restructuring Expense Operating income

(2,865.31) (8.50) 2,752.30

(2,926.01) (13.00) 2,887.11

(3,048.11) (17.00) 3,023.10

Interest expense Other income/(expense), net Income before income taxes

(464.84) (15.00) 1,987.33

(483.43) 24.00 1,811.29

(502.77) 14.00 1,666.37

Provision for income taxes Equity income, net of tax Net income

(745.25) 597.63 1,839.71

(679.23) 606.60 1,738.65

(624.89) 615.70 1,657.18

D.

Statement of Free Cash flows for years 2007, 2008, 2009 as a combinat ion of the management case and the independent analyst case. Statement of Free Cash Flows Components 2007 2008 EBITDA $3,474.09 $3,346.47 - Maintainence CapEx ($295.75) ($323.75) - Dividends ($73.59) ($69.55) Free cash flow $3,104.75 $2,953.18

2009 $3,250.86 ($367.50) ($66.29) $2,817.07

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

E.

Rationale for Select ion of Variables and Financial Performance Trends The variables selected here capture the entire financial performance of the company. With percentage change in net sales we are trying to gauge the top-line growth of the company. But the overall profitability depends on the company’s performance in cutting the cost of production as well. This is indicated by the gross margin forecast. In the beer industry it is clear that advertising costs constitute a major portion of their operating costs. Also distribution expense is considerably high. This part is indicated by the MD&A expense. The effects of the organic growth and increases in the expenses on the capital structure of the company are indicated by the change in the interest expense. Higher the debt more is the interest expense. Thus using these variables we are able to capture the performance of the company on the front end of the business with sales and marketing costs and cost of sales and also, we are able to predict the effects on the backend i.e. the way they can finance this growth as indicated by the interest expense. In our analysis, we expect that the sales of the company are likely to decline due to a recessionary domestic market. However, effective cost management may help the company in keeping its production costs under control. Also, with more competition in the domestic markets and newly entered international markets, the cost of marketing is likely to go up initially. But later on, it is expected top be inline with the current trend. As in the past, we expect the company to finance higher costs of production with debt which would increase the interest expense considerably.

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

VI. Adjusted Financial Analysis (Non GAAP) A. Adjusted inco me statement for fiscal 2005, 2006 based on analyst’s normalizat ion of the company’s earnings.

CONSOLIDATED STATEMENT OF INCOME Year Ended December 31 (in millions, except per share)

2006 17,957.80 (2,240.70) 15,717.10 (10,165.00) 5,552.10

Adjustments 0.00 0.00 727.00 44.00 771.00

Adjusted 17,957.80 (2,240.70) 16,444.10 (10,121.00) 6,323.10

2005 17,253.50 (2,217.80) 15,035.70 (9,606.30) 5,429.40

710.20 45.00 755.20

Adjusted 17,253.50 (2,217.80) 15,745.90 (9,561.30) 6,184.60

Depreciation Expense Marketing, distribution and administrative expenses

0.00 (2,832.50)

(26.16) (401.20)

(26.16) (3,233.70)

0.00 (2,837.50)

(20.41) (439.20)

(20.41) (3,276.70)

Operating income

2,719.60

343.64

3,063.24

2,486.90

295.59

2,887.49

Interest expense Interest capitalized Interest income Net effective gains/(losses) from derivative instruments Litigation settlement Other income/(expense), net

(451.30) 17.60 1.80 0.00

(34.34) (17.60)

(454.50) 19.90 2.40 0.00

(32.96) (19.90)

(51.70)

(485.64) 0.00 1.80 (51.70)

6.50

(487.46) 0.00 2.40 6.50

(10.80)

(274.10)

0.00 (284.90)

(105.00) 2.70

105.00 (277.50)

0.00 (274.80)

2,276.90

(34.10)

2,242.80

2,057.40

76.73

2,134.13

46.66

(853.84) 588.80 1,977.76

(811.10) 498.10 1,744.40

39.57

Net income

(900.50) 588.80 1,965.20

(771.53) 498.10 1,860.71

Basic earnings per share Diluted earnings per share

2.55 2.53

2.57 2.55

2.24 2.23

Gross sales Excise taxes

Net sales Cost of sales

Gross profit

Income before income taxes Provision for income taxes Equity income, net of tax

12.56

Adjustments

116.31

2.41 2.40

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

B. Rationalizat ion for excluding (including) individual items on (not on) the GAAP inco me statement for 2005, 2006. Following are the adjustments made based on the information given in the footnotes and the Management Discussion and Analysis (MD&A): 1.

From the footnotes we find that the company has included the cost of delivery of their products in the Marketing, distribution and administrative expense. Since delivery of these products is not the main business of the company, we are of the opinion that these expenses, although recurring, should be treated as non-operating. Thus, they have been removed from the MD&A expense and added to the other non-operating expense. (Reference - footnote 1. page 47, Delivery costs) Costs incurred in fiscal year 2006 and 2005 are $274.1 million, $277.5 million respectively.

Adjustment: Removed from MD&A expense. Added to other non-operating expense. 2.

Company deducts the cost of sales promotion from the net sales as given in the footnotes. We think that it would be more appropriate if we include these costs in the MD&A expense as other costs like advertising costs. (Reference footnote 1. page 48, Advertizing and promotional costs) Costs incurred in fiscal year 2006 and 2005 are $675.3 million, $716.7 million respectively.

Adjustment: Removed from net sales. Added to MD&A expense. 3. Company has capitalized the interest as required by the US GAAP. But for the purpose of analysis we treat it as an expense and add it back to the interest expense. (Reference - page31. Interest Capitalized) Interest Capitalized in fiscal year 2006 and 2005, are $17.6 million and $19.9 million respectively. Adjustment: Removed as a separate line item. Added back to the interest expense. 4.

Litigation expense was a one time charge and it is certainly not related to operations of their business. Thus, it is treated as a non-operating expense. (Reference - the income statement)

Adjustment: Removed from the operating expense. Added as a separate line item to the non-operating expense.

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

5.

Net sales have been reported including net of effective gains (losses) from the hedging activity. In order to get a better picture of the net sales of the company we have treated the hedging gain(loss) as a separate line item. These hedging gains (loss) are non-recurring in a sense that they may or may not be similar and are too uncertain to predict next year. (Reference - page 52. Derivative and other financial instruments) Net effective gains (loss) for the fiscal year of 2006 and 2005 are $(51.7) million and $ 6.5 million respectively.

Adjustment: Removed from net sales. Added as a separate line item in the non-operating gains (losses). 6.

Company has several operating leases which we have capitalized. (Reference - page 36. Management Discussion and Analysis)

Adjustment: Based on certain assumptions, we calculate the interest expense and the depreciation expense for the year 2006 and 2005 *. We remove the rent expense from the cost of sales. Add back the interest part of the payment to the interest expense and the depreciation of the capital lease is added as a separate line item in the operating expenses. C. The return on equit y and return on assets (Non GAAP) Return on Equity for 2006 = 0.4989 Return on Assets for 2006 = 0.1200 The return on equity and return on assets (GAAP) Return on Equity for 2006 = 0.5021 Return on Assets for 2006 = 0.1208 The difference between the GAAP and Non GAAP ROE and ROA is very small.

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

VII.

I.A]

Appendix – Calculation Details

Z = 1.2 x Working Capital / Total Assets + 1.4 x Retained Earnings / Total Assets + 3.3 EBIT / Total Assets + 0.6 x Market Value of Equity / Book Value of Debt + 1.0 x Sales / Total Assets Z-Score Calculations Z-score components 2006 Short term Assets $1,829.50 + Short term Liabilities $2,246.10 Working Capital $4,075.60 Total Assets $16,377.20 Net Sales $15,717.10 Retained Earnings $16,741.00 Closing Price on Dec. 31st (per share) $49.20 x Weighted avg shares outstanding $777.50 Market Value of Equity $38,253.00 Book Value of Debt $7,653.50 Operating Income $2,719.60 + Non-operating income(expense) ($10.80) EBIT $2,708.80

2005 $1,758.70 $1,982.60 $3,741.30 $16,555.00 $15,035.70 $15,698.00 $42.96 $798.90 $34,320.74 $7,972.10 $2,486.90 $2.70 $2,594.60

* All dollar amounts in the above table are in millions of dollars except per share values

III.A] ROE Calculations ROE Components 2006 Net Sales $15,717.10 Net Income $1,965.20 Average Total Asset $16,466.10 Average Common Equity $3,809.25

2005 $15,035.70 $1,744.40 $16,364.20 $3,328.85

* All dollar amounts in the above table are in millions of dollars

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

III.B] Liquidity Ratio Calculations Ratios 2006

2005

Current Assets ÷ Current Liabilities Current Ratio

$1,829.50 $2,246.10 0.81

$1,758.70 $1,982.60 0.89

Cash + Marketable securities + Accounts receivable ÷ Current Liabilities Quick Ratio

$219.20 $195.20 $720.20 $2,246.10 0.51

$225.80 $197.00 $681.40 $1,982.60 0.56

Cash + Marketable securities ÷ Current Liabilities Cash Ratio

$219.20 $195.20 $2,246.10 0.18

$225.80 $197.00 $1,982.60 0.21

Cash flow from operations ÷ Current Liabilities Cash flow from operations Ratio

$2709.4 $2,246.10 1.21

$2701.9 $1,982.60 1.36

* All dollar amounts in the above table are in millions of dollars except per share values

III.C] Capital Structure Calculations Components 2006 Total Debt $7,653.50 Total Shareholder's equity + Total Debt Total Capital

$3,938.70 $7,653.50 $11,592.20

2005 $7,972.10 $3,679.80 $7,972.10 $11,651.90

* All dollar amounts in the above table are in millions of dollars

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

Enterprise Value Calculations Components 2006 Common stock price per share $49.20 x No. of shares outstanding 777.5 Market Capital $38,253.00 + Fair value of all stock options* $1,170.00 Common Equity at equity value $39,423.00 Total Debt ÷ Market value of Debt Total Debt at market value

$7,653.50 $102.00 $7,806.57

Minority Interest at market value Associated company at market value Preferred Equity at market value Cash and Cash Equivalents Enterprise Value

($219.20) $47,010.37

*All stock options (in the money and out of the money) calculated using Black-Scholes Option Pricing Formula with the data given in the footnotes.

Enterprise Value = common equity at value + debt at market value + minority interest at market value, if any - associate company at market value + preferred equity at market value - cash and cash equivalents III.D] Depreciation Ratio Calculations Components 2006 Ending investment $18,710.60 ÷ Depreciation Expense $988.70 Average total life span 18.9244462 Accumulated depriciation ÷ Depreciation Expense Average Age

($9,794.50) $988.70 9.9064428

Accumulated depriciation ÷ Ending investment Relative age

($9,794.50) $18,710.60 52.347%

* All dollar amounts in the above table are in millions of dollars

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

IV. B] Calculations of EBIT , EBITDA and CapEx Components 2007 2008 Operating Income $2,752.30 $2,887.11 + Non-operating items ($15.00) $24.00 EBIT $2,737.30 $2,911.11 + Restructuring Expenses $8.50 $13.00 + Depreciation and amortization $1,013.42 $1,038.75 EBITDA $3,759.22 $3,962.87 Total Capital Expenditure $845.00 $925.00 x 0.35 Maintainance CapEx 295.75 323.75

2009 $3,023.10 $14.00 $3,037.10 $17.00 $1,064.72 $4,118.82 $1,050.00 367.50

* All dollar amounts in the above table are in millions of dollars

IV. C] Calculations for Fixed Charges Components 2007 2008 Interest Expense $461.23 $471.38 + Maintainence CapEx $295.75 $323.75 + Dividends $80.81 $85.26 + Principal debt repayments $24.60 $19.50 + Operating lease rent expense $17.50 $13.30 Fixed Charge $879.89 $913.18

2009 $481.75 $367.50 $88.51 $21.80 $15.60 $975.16

* All dollar amounts in the above table are in millions of dollars

Components EBITDA + Operating lease rent expense EBITDAR

EBITDAR Calculation 2007 $3,759.22 $17.50 $3,776.72

2008 $3,962.87

2009 $4,118.82

$13.30 $3,976.17

$15.60 $4,134.42

*EBITDAR  Earnings before interest, taxes, depreciation, amortization and rent expense. Calculations for Fixed Charge Coverage Components 2007 2008 EBITDAR $3,776.72 $3,976.17 ÷ Fixed Charge $879.89 $913.18 Fixed Charge Coverage Ratio 4.29 4.35

2009 $4,134.42 $975.16 4.24

* All dollar amounts in the above table are in millions of dollars

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

V. C] Calculations of EBIT , EBITDA and CapEx Components 2007 2008 Operating Income $2,467.17 $2,270.72 +/- Non-operating items ($15.00) $24.00 EBIT $2,452.17 $2,294.72 Depreciation and amortization $1,013.42 $1,038.75 Restructuring Charges $8.50 $13.00 EBITDA $3,474.09 $3,346.47 Total Capital Expenditure $845.00 $925.00 x 0.35 Maintainance CapEx $295.75 $323.75

2009 $2,155.14 $14.00 $2,169.14 $1,064.72 $17.00 $3,250.86 $1,050.00 $367.50

* All dollar amounts in the above table are in millions of dollars

VI. A]

Calculations for capitalization of operating leases Present Value

Years 1 2 3 4 5 6 7 8 Total

Payment (adjusted) $44.00 $29.50 $29.50 $21.50 $21.50 $90.33 $90.33 $90.33 $417.00

2006 Discount Factor 0.92593 0.85734 0.79383 0.73503 0.68058 0.63017 0.58349 0.54027

Present Value $40.74 $25.29 $23.42 $15.80 $14.63 $56.93 $52.71 $48.80 $176.81

Using the payment function in Excel, we calculate the average annual payment for the lease to be -$30.77 million.

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

Years 0 1 2 3 4 5 6 7 8

Calculating the interest payments Opening Liability Interest Principal $176.81 $160.19 $142.24 $122.85 $101.91 $79.29 $54.87 $28.49

$14.14 $12.82 $11.38 $9.83 $8.15 $6.34 $4.39 $2.28

$16.62 $17.95 $19.39 $20.94 $22.62 $24.42 $26.38 $28.49

Ending Liability $176.81 $160.19 $142.24 $122.85 $101.91 $79.29 $54.87 $28.49 $0.00

Operating Lease to Capital Lease Operating Total Expense Rent $44.00 $59.00 $43.00 $271.00

Depreciations

Interest

Total Expense

$22.10 $44.20 $44.20 $88.41

$14.14 $12.82 $11.38 $9.83

$36.25 $57.02 $55.58 $98.23

* Assuming no salvage value

2005 Years 1 2 3 4 5 6 7 8 Total

Payment (adjusted) $45.00 $30.50 $30.50 $24.50 $24.50 $131.00 $131.00 $131.00 $548.00

Discount Factor 0.92593 0.85734 0.79383 0.73503 0.68058 0.63017 0.58349 0.54027

Present Value $41.67 $26.15 $24.21 $18.01 $16.67 $82.55 $76.44 $70.78 $209.26

Using the payment function in Excel, we calculate the average annual payment for the lease to be -$36.41 million.

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

Years 0 1 2 3 4 5 6 7 8

Calculating the interest payments Opening Liability Interest Principal $209.26 $195.24 $180.09 $163.73 $146.06 $126.97 $106.36 $84.10

$16.74 $15.62 $14.41 $13.10 $11.68 $10.16 $8.51 $6.73

$14.03 $15.15 $16.36 $17.67 $19.08 $20.61 $22.26 $24.04

Ending Liability $209.26 $195.24 $180.09 $163.73 $146.06 $126.97 $106.36 $84.10 $60.06

Operating Lease to Capital Lease Operating Total Expense Rent $44.00 $59.00 $43.00 $271.00

Depreciations

Interest

Total Expense

$22.10 $44.20 $44.20 $88.41

$16.74 $15.62 $14.41 $13.10

$38.84 $59.82 $58.61 $101.50

* Assuming no salvage value

The point of these calculations is to get the interest and depreciation value of the capital lease which would affect the income statement based on our assumptions.

VI. C] Calculations for ROE and ROA Components Non GAAP GAAP Net Income $1,965.20 $1,977.76 ÷ Total Equity $3,938.70 $3,938.70 Return on Equity 0.4989 0.5021 Net Income ÷ Total Assets Return on Assets

$1,965.20 $16,377.20 0.1200

$1,977.76 $16,377.20 0.1208

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FINANCIAL STATEMENT ANALYSIS – ANHEUSER-BUSCH

VIII. REFERENCES

Cover page: http://www.psfk.com/wp-content/uploads/s19031.gridserver.com/wpcontent/uploads/psfk.com/anheuser_busch_beer.jpg http://rimkus.com/images/Business-Interruption.jpg Anheuser-Busch logo: http://www.fuhrerwholesale.com/images/AB3%20copy.gif Stuart School of Business logo: www.stuart.iit.edu Other Web References: http://thegazz.com/gblogs/beerstoyou/files/2007/08/beer-growth.jpg http://www.deed.state.mn.us/bizdev/PDFs/beer.pdf http://www.beerservesamerica.com/economic/index.phtml Text Reference: 1) White, Sondhi, Fried – The Analysis and Use of Financial Statements, 3rd edition 2) Needles et al. – Principles of Accounting, 7th edition

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