Eskimo Pie Corporation (Abridged)

Harvard Business School Case 9-293-084

Case Software 2-202-701 (Version 2, Revised 12/14/01)

Copyright © 2001 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Table B 1991 Leading Frozen Novelty Brands

Brand Company Unit Share

Popsicle Unilever 7.6%

Klondike Empire of Carolin 5.4%
Eskimo Pie Eskimo Pie 5.3%
Snickers Mars 4.8%
Weight Watchers H.J. Heinz 4.3%
Exhibit 1 Historical Financial Information

Year Ended December 31,

1987 1988 1989 1990

Income Statement Data (in thousands):

Net salesa 30769 36695 46709 47198
Cost of goods sold 21,650 25,635 31,957 31,780
Gross profita 9,119 11,060 14,752 15,418
Advertising and sales promotions 4,742 4,241 5,030 5,130
General and administrative 6,068 5,403 6,394 7,063
Operating income (loss) (1,691) 1,416 3,328 3,225
Interest income 308 550 801 1,004
Interest expense (88) (107) (88) (67)
Other income (expense)-netb 1,738 (77) (108) (20)
Income taxes 96 729 1,511 1,616
Net income $ 171 $ 1,053 $ 2,422 $ 2,526
NI
Balance Sheet Data (in thousands):
Cash $ 5,550 $ 8,109 $ 10,723 $ 13,191
Working capital 9,342 11,107 10,830 11,735
Total assets 20,857 23,006 26,159 29,518
Long-term debt 1,269 1,094 919 744
Stockholders' equity 16,162 17,215 18,215 19,496
Short D 3,426 4,697 7,025 9,278
Per Share Data: 4,695 5,791 7,944 10,022
Weighted average number
of common shares outstanding 3,316 3,316 3,316 3,316
Net income per share $ 0.05 $ 0.32 $ 0.73 $ 0.76
Cash dividend per share - - $ 0.40 $ 0.40
a
Beginning in 1991 the Company increased prices for products and assumed responsibility for advertising and sales
promotion costs previously shared with licensees. This change in business practice accounts for approximately one-half
of the increase in net sales for 1991 with a similar impact on 1991 gross profit.
b
Includes the gain on sale of building of approximately $1,700,000 in 1987.

Year Ended December 31,

Free Cash Flow to Firm
1991 1992 1993
Net sales 61,000.02 78,838.13 101,892.61
Cost of goods sold 42,085.92 54,393.03 70,299.07
Gross profit 18,914.09 24,445.10 31,593.53
Advertising and sales promotions 5,753.38 6,452.52 7,236.61
General and administrative 8,177.17 9,467.09 10,960.50
Operating income (loss) 4,983.54 8,525.50 13,396.43
Income taxes 1,993.42 3,410.20 5,358.57
Net Operating Profit After Tax 2,990.13 5,115.30 8,037.86
Add Depreciation 1352 1352 1352
Less Capital Expenditure+Depreciation 41 41 41
Less Increase Working Capital 3,188 4,055 5,156
Free Cash Flow to Firm 1,112.74 2,371.63 4,192.54
Dis
TV
Dis
PV of TS
TV
 Forecast
1991 1992 1993 คา่ เฉลี่ย geomean

61,000.02 78,838.13 101,892.61 29.2428% $ 15.8654 8.1944084064932 $ 19.2596

42,085.92 54,393.03 70,299.07 68.9933% $0.689933 0.689829352278 $ 0.7036
18,914.09 24,445.10 31,593.53
5,753.38 6,452.52 7,236.61 12.1517% 0.121517 0.15
8,177.17 9,467.09 10,960.50 15.7747% 0.157747 0.20
4,983.54 8,525.50 13,396.43
0.00 0.00 0.00 0.01001
-74.66 -83.20 -92.71 11.4350% 11.5481033 11.4350 14.4204545
0.00 0.00 0.00
2,023.28 3,443.48 5,395.66
3,034.92 5,165.22 8,093.49
2990.13 5115.30 8037.86

14923.3878 18978.0573 24134.3765 27.1699% 0.271699 0.269790054909726 0.30

0.1889317 -0.0249392 0.0835641735919 0.082519
951.64536321 1734.6465527 2622.5508554 5308.84277
66,087.9306
41,339.8425 Vu 46,648.6852
- 26.7988 - 29.8632 - 33.2781 89.9401
85,387.7878
19,299.8572
13,945.3939 Vl 60,684.0193 50,662.0193
share outstand 3316
price per shar 18.30
$ 27.2898 ### 29.24 29.24 29.24 $22.5541 15.4799
0.698596539 0.68417 0.67333

0.12 0.11 0.11

0.15 0.14 0.15

0.01499 0.01715 0.06833

10.22429907 10.4432 11.1045

0.30 0.23 0.25

63,662.0193
Exhibit 2 Cash Flow Summary

Year Ended December 31,

1989 1990

Operating activities:
Net income $ 2,422 $ 2,526
Depreciation 1,006 1,352
Amortization 175 118
Deferred income taxes 250 (58)
Pension liability and other (154) (156)
Decrease (increase) in receivables 1,212 (734)
Decrease (increase) in inventories and
prepaid expenses (524) (51)
Increase (decrease) in payables to parent 2,054 (621)
Increase (decrease) in accounts payable and
accrued expenses 143 3,006
Net cash provided by operating activities 6,595 5,382

Investing activities
Capital expendituresa (2,358) (1,311) 41
Other (121) (101)
Net cash used in investing activities (2,479) (1,412)

Financing activities
Cash dividends (1,327) (1,327)
Principal payments on long-term debt (175) (175)
Net cash used in financing activities (1,502) (1,502)
Increase (decrease) in cash and cash equivalents 2,614 2,468
Cash and cash equivalents at beginning of year 8,109 10,723
Cash and cash equivalents at end of year $ 10,723 $ 13,191

a
Capital expenditures in 1989 are principally related to equipment acquired for use by licensees and, in 1990, an expansion of an ingredients manu
1990, an expansion of an ingredients manufacturing facility.
Exhibit 3 Distribution and Market Share of Eskimo Pie, Heath, and Welch's Frozen Novelties

1987 1988 1989 1990 1991

Distribution of at least one Eskimo
product at U.S. Grocery Stores 76.3% 78.1% 91.2% 95.6% 97.9%

Unit Market Share of Eskimo

products 3.3 3.9 5.7 6.8 7.5
Exhibit 4 Industry Information for Frozen Novelties

Industry Units Advertising

Revenues Sold % Change Average Spending
Year (millions) (millions) in Sales Price (millions)

1980 $590 N/A N.A N/A $2

1981 680 N/A 15.3% N/A 4
1982 770 457 13.2 $1.69 17
1983 940 525 22.1 1.79 23
1984 1,100 577 17.0 1.90 32
1985 1,300 643 18.2 2.02 44
1986 1,400 681 7.7 2.06 77
1987 1,500 717 7.1 2.09 38
1988 1,355 637 -9.7 2.13 26
1989 1,332 623 -1.7 2.19 40
1990 1,321 590 -0.8 2.24 21
Exhibit 6 Projected Income Statements for Eskimo Pie by Goldman Sachsa

Year Ended December 31,

1991 1992 1993

Net Sales $56,655 $59,228 $59,961

Operating expenses 52,610 54,755 55,337
Operating income 4,045 4,473 4,624
Interest income 828 890 1,058 1991-1993
Interest expense 52.5 38.5 24.5 TV
Pretax income 4,821 5,324 5,657 Dis
Income taxes 1,928 2,130 2,263 TS
Tax rate 40.00% 40.00% 40.00%
Net income $2,893 $3,195 $3,394
Margin 5.10% 5.40% 5.70% Dis
Earning per share $0.87 $0.96 $1.03 TS
Average shares outstanding 3,316.00 3,316.00 3,316.00 Value

a
Adjusted for 2.5 to 1.0 stock split in March 1992

Int TS 21 15.4 9.8

WACC
 2,923.80 3,217.80 3,409.20
2,442.40 2,245.42 1,987.29 6675.1153
20,854.4939
12,156.49
18.84 12.40 7.08 38.3258
28,333.81
7,479.32 Rsl
5,404.29 0.1971
5,442.6161
17,599.11079 BB
5.2362721784191

Rd 11.44

0.1527372
Exhibit 7 Hypothetical Proceeds from an Initial Public Offering

Total for firm:

Offer Price $ 14.00 $ 16.00
Special dividend 4.52 4.52
Total per share $ 18.52 $ 20.52

Shares outstandinga 3,316 3,316

Total Proceedsa $ 61,412 $ 68,044

1991 Net Incomea $ 3,749 $ 3,749

Implied P/E Multiple 12.38 14.15

Reynolds' proceeds:
Shares owneda 2,789 2,789
Per share proceeds:
Stock price 14.00 16.00
Special dividend 4.52 4.52
Total per share 18.52 20.52
Total for holdingsa 51, 645 57,222

a
Units are in thousands.
`
Exhibit 8b Information about Comparable Companies

Operating
Company Sales Cash Flowab Incomeb Net Incomeb

Ben & Jerry's 97.0 6.7 10.2 3.7

Dreyer's Grand Ice Cream 354.9 24.1 37.0 15.9

Empire of Carolina, Inc. 243.1 16.8 37.4 8.8

Steve's Homemade Ice Cream 35.1 2.7 3.9 1.8

Hershey Foods Corp. 2,899.2 292.3 463.0 219.5

Tootsie Roll Inds. 207.9 32.5 47.2 25.5

a
Cash flow is defined as earnings before interest after tax (EBIAT) plus depreciation.
b
Before extraordinary items.
Book Value Market Value
of Equity of Equity Total Debt

26.3 110.1 2.8

113.1 534.0 44.3

45.1 51.4 89.8

11.1 37.4 3.1

1,335.3 4,002.5 282.9

152.8 728.8 0.0

Exhibit 8c Monthly Stock Returns for the S&P500 Composite and for Comparable Companies

EMPIRE OF
BEN & CAROLINA STEVE'S HERSHEY TOOTSIE
JERRY'S DREYER'S INC ICE CREAM FOODS ROLL S&P 500
Jan-88 -0.0517 0.1509 0.0677 0.9000 0.0561 0.0122 0.0404
Feb-88 0.0909 -0.0492 0.1212 -0.1842 0.0301 -0.0763 0.0418
Mar-88 0.1500 0.0259 0.0541 0.0323 -0.0660 0.0141 -0.0333
Apr-88 -0.0580 0.1513 0.0282 -0.0625 -0.0303 0.0443 0.0094
May-88 -0.0462 0.0073 -0.0750 0.1000 -0.0248 0.0509 0.0032
Jun-88 0.0484 0.1304 0.0541 0.1818 0.0591 -0.0183 0.0433
Jul-88 0.0000 -0.0256 0.0282 0.0256 0.0000 0.0370 -0.0054
Aug-88 -0.0308 -0.0658 0.1750 -0.0250 -0.0284 -0.0357 -0.0386
Sep-88 0.0318 0.0845 -0.1277 -0.1026 0.0526 0.0101 0.0397
Oct-88 0.1462 0.1299 -0.0707 -0.0571 0.0950 0.0408 0.0260
Nov-88 -0.1544 0.0115 0.0000 -0.0909 -0.0804 -0.0863 -0.0189
Dec-88 -0.0635 0.0682 0.3421 0.1000 0.0400 0.0320 0.0147
Jan-89 0.0848 -0.0426 0.0220 0.3939 -0.0144 -0.0750 0.0711
Feb-89 -0.0781 -0.1000 0.1923 0.0761 -0.0029 -0.0721 -0.0289
Mar-89 -0.0678 -0.0864 -0.0161 -0.0505 0.0443 0.0372 0.0208
Apr-89 0.1636 0.0811 -0.1784 0.0000 0.0708 0.0628 0.0501
May-89 -0.0156 0.2125 0.0600 -0.1277 0.0150 0.0546 0.0351
Jun-89 -0.0476 0.0103 0.1132 0.0976 0.1572 0.0666 -0.0079
Jul-89 0.1167 0.0918 0.3241 0.0444 0.0566 0.0931 0.0884
Aug-89 -0.0149 0.2056 0.0577 0.0000 -0.0516 0.0444 0.0155
Sep-89 0.0152 -0.0698 0.1273 -0.0426 0.0000 0.0229 -0.0065
Oct-89 -0.1194 -0.1583 0.1629 -0.1000 0.0379 -0.0451 -0.0252
Nov-89 0.0339 0.1584 -0.0694 0.0741 0.0130 0.0727 0.0165
Dec-89 0.0328 -0.0513 -0.2836 -0.0460 0.0399 -0.0086 0.0214
Jan-90 -0.1587 -0.0811 -0.1875 -0.1566 -0.1115 -0.0719 -0.0688
Feb-90 0.0189 0.1765 -0.2051 0.3000 -0.0841 0.0590 0.0085
Mar-90 0.0370 0.0833 0.1613 -0.0769 0.0948 0.0244 0.0243
Apr-90 -0.0714 0.0154 0.3056 -0.2619 0.0158 0.0386 -0.0269
May-90 0.3077 0.1591 -0.2979 0.0645 0.0913 0.1689 0.0920
Jun-90 0.0147 0.0654 0.1212 -0.3636 0.0750 0.0129 -0.0089
Jul-90 0.0870 -0.0245 -0.1892 0.0714 0.0266 -0.0114 -0.0052
Aug-90 -0.2267 -0.1006 -0.1500 -0.1778 -0.0065 -0.2052 -0.0943
Sep-90 -0.0948 -0.0140 -0.0196 -0.4324 -0.0493 0.0235 -0.0512
Oct-90 -0.0095 0.0213 0.0000 -0.0476 -0.0450 -0.0036 -0.0067
Nov-90 0.0577 0.2569 0.0000 0.7000 0.0210 0.1000 0.0599
Dec-90 0.0727 -0.0422 -0.1200 -0.2647 0.0714 0.0599 0.0248
Jan-91 0.0848 0.1047 0.2046 -0.0800 0.0600 0.0215 0.0415
Feb-91 0.0938 0.1368 -0.0566 0.1304 0.0088 0.0991 0.0673
Mar-91 0.1000 0.0944 -0.0800 0.1154 0.0251 0.0875 0.0222
Apr-91 -0.0260 -0.1017 0.2174 0.3103 -0.0184 0.0363 0.0004
May-91 0.0667 0.0094 0.2143 -0.1974 0.0991 0.0225 0.0386
Jun-91 -0.0375 0.0766 -0.0441 -0.0492 -0.0712 -0.0110 -0.0479
Jul-91 0.2857 0.0000 -0.0154 -0.0345 0.0276 0.1114 0.0449
Aug-91 0.1515 -0.0174 0.1875 0.9643 0.0059 0.0178 0.0197
Sep-91 0.1491 -0.0425 0.1053 -0.1273 -0.0716 0.0208 -0.0191
Oct-91 0.0458 0.0093 0.2143 0.6250 0.0611 0.0622 0.0119
Nov-91 0.0146 0.0734 0.0392 -0.2821 -0.0729 0.0364 -0.0439
Dec-91 0.0648 0.1897 -0.2642 0.8214 0.1678 0.1453 0.1116
Exhibit 9 Selected Financial Market Data, November 1991

I. Treasury Yields
90 day 4.56%
Six months 4.61%
One year 4.64%
Five years 6.62%
Ten years 7.42%
Thirty years 7.92%

II. Corporate Borrowing Rates

Long-term Bond Yields
AA 8.74%
A 9.27%
BBB 9.56%
BB 11.44%
B 14.68%
Floating Rates
Prime rate 7.50%
Prime commercial paper (6 months 4.76%