Kraft Foods Group Inc. (NASDAQ:KRFT)

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Kraft Foods Group Inc., effective income tax rate (EITR) reconciliation

	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
U.S. federal statutory tax rate	35.00%	35.00%	35.00%
U.S. state and local income taxes, net of federal tax benefit	0.20%	1.70%	2.30%
Domestic manufacturing deduction	-4.60%	-1.20%	-2.70%
Foreign rate differences	-2.20%	-1.10%	-1.10%
Changes in uncertain tax positions	-0.90%	0.20%	-0.80%
Other	-1.70%	-1.00%	0.40%
Effective tax rate	25.80%	33.60%	33.10%

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

The effective tax rate exhibited a significant decline over the analyzed period, moving from 33.10% in 2012 to 25.80% in 2014. While the rate remained relatively stable between 2012 and 2013, a substantial reduction occurred in 2014, driven by a combination of increased deductions and reduced regional tax burdens.

Statutory and Regional Tax Impact: The U.S. federal statutory tax rate remained constant at 35.00% across all three years. In contrast, the impact of U.S. state and local income taxes, net of federal tax benefits, showed a consistent downward trend, decreasing from 2.30% in 2012 to 1.70% in 2013, and reaching a minimum of 0.20% in 2014.
Domestic Manufacturing Deduction: The domestic manufacturing deduction provided a continuous benefit to the effective tax rate. After a slight reduction in the benefit from -2.70% in 2012 to -1.20% in 2013, the benefit expanded significantly to -4.60% in 2014, serving as a primary contributor to the overall decline in the effective tax rate.
International and Other Adjustments: Foreign rate differences provided a stable benefit of -1.10% in both 2012 and 2013, which then doubled to -2.20% in 2014. Additionally, other miscellaneous items transitioned from a positive impact of 0.40% in 2012 to a benefit of -1.70% by 2014, further lowering the final tax obligation.
Uncertain Tax Positions: Changes in uncertain tax positions demonstrated volatility throughout the period. A benefit of -0.80% was recorded in 2012, which shifted to a positive charge of 0.20% in 2013, before reverting to a benefit of -0.90% in 2014.

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Kraft Foods Group Inc., components of deferred tax assets and liabilities

US$ in millions

	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
Pension benefits	407)	104)	730)
Postretirement benefits	1,355)	1,238)	1,418)
Other employee benefits	113)	122)	102)
Other	471)	497)	442)
Deferred income tax assets	2,346)	1,961)	2,692)
Valuation allowance	(20)	(3)	(26)
Net deferred income tax assets	2,326)	1,958)	2,666)
Trade names	(828)	(828)	(977)
Property, plant and equipment	(979)	(949)	(969)
Debt exchange	(350)	(384)	(418)
Other	(66)	(65)	(17)
Deferred income tax liabilities	(2,223)	(2,226)	(2,381)
Net deferred income tax assets (liabilities)	103)	(268)	285)

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

The company's deferred tax position exhibited significant volatility between 2012 and 2014, transitioning from a net asset position to a net liability position in 2013 before returning to a net asset status by the end of 2014.

Deferred Income Tax Assets Analysis: Gross deferred income tax assets decreased from 2,692 million USD in 2012 to 1,961 million USD in 2013, before recovering to 2,346 million USD in 2014. This fluctuation was primarily driven by pension benefits, which declined sharply from 730 million USD in 2012 to 104 million USD in 2013, and subsequently rose to 407 million USD in 2014. Postretirement benefits remained the most substantial component of assets throughout the period, fluctuating between 1,238 million USD and 1,418 million USD. The valuation allowance remained relatively immaterial, reaching its lowest point of 3 million USD in 2013.
Deferred Income Tax Liabilities Analysis: Total deferred income tax liabilities demonstrated a gradual overall decline from 2,381 million USD in 2012 to 2,223 million USD in 2014. Liabilities associated with trade names decreased from 977 million USD in 2012 to 828 million USD in 2013 and remained stagnant through 2014. A consistent downward trend was observed in debt exchange liabilities, which reduced from 418 million USD in 2012 to 350 million USD in 2014. Liabilities related to property, plant, and equipment remained relatively stable, ending 2014 at 979 million USD.
Net Tax Position Synthesis: The net deferred income tax position shifted from a net asset of 285 million USD in 2012 to a net liability of 268 million USD in 2013, and then returned to a net asset of 103 million USD in 2014. The evidence suggests that the overall net position was more sensitive to the volatility of employee-related tax assets than to the steady reduction in tax liabilities.

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Kraft Foods Group Inc., Financial Data: Reported vs. Adjusted

Kraft Foods Group Inc., adjustments to financial statements

US$ in millions

	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
Adjustment to Current Assets
Current assets (as reported)	4,791)	4,908)	4,823)
Less: Current deferred tax assets, net	384)	360)	420)
Current assets (adjusted)	4,407)	4,548)	4,403)
Adjustment to Total Assets
Total assets (as reported)	22,947)	23,148)	23,329)
Less: Current deferred tax assets, net	384)	360)	420)
Total assets (adjusted)	22,563)	22,788)	22,909)
Adjustment to Total Liabilities
Total liabilities (as reported)	18,582)	17,961)	19,757)
Less: Noncurrent deferred tax liabilities, net	340)	662)	288)
Total liabilities (adjusted)	18,242)	17,299)	19,469)
Adjustment to Equity
Equity (as reported)	4,365)	5,187)	3,572)
Less: Net deferred tax assets (liabilities)	103)	(268)	285)
Equity (adjusted)	4,262)	5,455)	3,287)
Adjustment to Net Earnings
Net earnings (as reported)	1,043)	2,715)	1,642)
Add: Deferred income tax expense (benefit)	(361)	708)	470)
Net earnings (adjusted)	682)	3,423)	2,112)

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

The removal of deferred taxes results in a consistent reduction of both reported assets and liabilities over the observed three-year period. A gradual downward trend is evident in total assets, with adjusted values remaining lower than reported figures from 2012 through 2014. Total liabilities exhibited a fluctuation, decreasing between 2012 and 2013 before rising in 2014, while adjusted liabilities consistently remained below reported levels.

Asset and Liability Adjustments: The consistent gap between reported and adjusted totals for both current and total assets indicates the systematic removal of deferred tax assets. Similarly, the lower adjusted values for total liabilities suggest the elimination of deferred tax liabilities, effectively reducing the gross size of the balance sheet.
Equity Fluctuations: The impact of these adjustments on equity is inconsistent across the timeframe. Adjusted equity was lower than reported equity in 2012 and 2014, but exceeded reported equity in 2013. This suggests that the net effect of removing deferred tax assets and liabilities on the company's book value shifted between these periods.
Net Earnings Variance: A notable divergence is observed in profitability metrics. In 2012 and 2013, adjusted net earnings were significantly higher than reported net earnings, implying that the removal of deferred tax considerations had a positive impact on the bottom line. However, in 2014, this trend reversed, with adjusted net earnings falling below reported earnings, indicating a change in the nature of tax adjustments affecting periodic income.

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Kraft Foods Group Inc., Financial Ratios: Reported vs. Adjusted

Kraft Foods Group Inc., adjusted financial ratios

	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
Current Ratio
Reported current ratio	1.00	1.44	1.34
Adjusted current ratio	0.92	1.33	1.22
Net Profit Margin
Reported net profit margin	5.73%	14.90%	8.95%
Adjusted net profit margin	3.75%	18.79%	11.52%
Total Asset Turnover
Reported total asset turnover	0.79	0.79	0.79
Adjusted total asset turnover	0.81	0.80	0.80
Financial Leverage
Reported financial leverage	5.26	4.46	6.53
Adjusted financial leverage	5.29	4.18	6.97
Return on Equity (ROE)
Reported ROE	23.89%	52.34%	45.97%
Adjusted ROE	16.00%	62.75%	64.25%
Return on Assets (ROA)
Reported ROA	4.55%	11.73%	7.04%
Adjusted ROA	3.02%	15.02%	9.22%

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

The comparative analysis of reported and adjusted financial ratios from 2012 to 2014 reveals a distinct divergence resulting from the removal of deferred taxes. While reported figures generally show a decline in liquidity and profitability toward the end of the period, the adjusted ratios indicate a more pronounced volatility in returns and a consistently tighter liquidity position.

Liquidity Position: The current ratio increased from 2012 to 2013 before experiencing a sharp decline in 2014. A consistent gap is observed where the adjusted current ratio remains lower than the reported ratio across all three years, reaching 0.92 in 2014. This suggests that the inclusion of deferred tax assets in reported figures artificially inflated the perceived short-term liquidity of the organization.
Profitability and Returns: Net profit margin, Return on Equity (ROE), and Return on Assets (ROA) all reached their peak in 2013. Between 2012 and 2013, the adjusted ratios for these metrics were significantly higher than the reported values, suggesting that deferred tax adjustments initially enhanced the appearance of profitability. However, this trend reversed sharply in 2014, where adjusted figures fell well below reported levels. Most notably, Adjusted ROE plummeted from 62.75% in 2013 to 16.00% in 2014, compared to a reported ROE of 23.89% for the same year.
Asset Efficiency and Financial Leverage: Total asset turnover remained remarkably stable, with reported values holding at 0.79 and adjusted values fluctuating minimally between 0.80 and 0.81, indicating that tax adjustments had negligible impact on operational efficiency. Financial leverage showed higher volatility, dropping from a reported 6.53 in 2012 to 4.46 in 2013, before increasing to 5.26 in 2014. The adjusted leverage followed a similar trajectory, though it was higher than the reported figure in 2012 and 2014.

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	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
As Reported
Selected Financial Data (US$ in millions)
Current assets	4,791)	4,908)	4,823)
Current liabilities	4,773)	3,410)	3,606)
Liquidity Ratio
Current ratio¹	1.00	1.44	1.34
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted current assets	4,407)	4,548)	4,403)
Current liabilities	4,773)	3,410)	3,606)
Liquidity Ratio
Adjusted current ratio²	0.92	1.33	1.22

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

2014 Calculations

¹ Current ratio = Current assets ÷ Current liabilities
= 4,791 ÷ 4,773 = 1.00

² Adjusted current ratio = Adjusted current assets ÷ Current liabilities
= 4,407 ÷ 4,773 = 0.92

An analysis of the liquidity position over the observed three-year period reveals a pattern of moderate growth followed by a notable contraction. Both reported and adjusted metrics peaked in 2013, with a subsequent decline in 2014 that significantly impacted short-term solvency indicators.

Current Asset Trends: Reported current assets increased from US$ 4,823 million in 2012 to US$ 4,908 million in 2013, before decreasing to US$ 4,791 million in 2014. Adjusted current assets mirrored this trajectory, rising from US$ 4,403 million in 2012 to US$ 4,548 million in 2013, and then falling to US$ 4,407 million in 2014. The consistent variance between reported and adjusted values indicates a recurring adjustment that reduces the recognized asset base.
Current Ratio Performance: The reported current ratio showed an upward trend from 1.34 in 2012 to 1.44 in 2013, followed by a sharp decline to 1.00 in 2014. The adjusted current ratio followed a corresponding path, improving from 1.22 in 2012 to 1.33 in 2013, before dropping to 0.92 in 2014.
Liquidity and Solvency Insights: A systematic divergence is observed between reported and adjusted ratios, with the adjusted ratio consistently remaining lower. While the reported current ratio maintained a neutral position of 1.00 in 2014, the adjusted current ratio fell below the critical threshold to 0.92. This indicates that after adjustments, current assets were no longer sufficient to cover current liabilities by the end of the 2014 period.

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	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
As Reported
Selected Financial Data (US$ in millions)
Net earnings	1,043)	2,715)	1,642)
Net revenues	18,205)	18,218)	18,339)
Profitability Ratio
Net profit margin¹	5.73%	14.90%	8.95%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net earnings	682)	3,423)	2,112)
Net revenues	18,205)	18,218)	18,339)
Profitability Ratio
Adjusted net profit margin²	3.75%	18.79%	11.52%

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

2014 Calculations

¹ Net profit margin = 100 × Net earnings ÷ Net revenues
= 100 × 1,043 ÷ 18,205 = 5.73%

² Adjusted net profit margin = 100 × Adjusted net earnings ÷ Net revenues
= 100 × 682 ÷ 18,205 = 3.75%

Financial performance between 2012 and 2014 was characterized by a significant peak in profitability during the 2013 fiscal year, followed by a substantial contraction in 2014. Both reported and adjusted metrics indicate a period of high volatility in net earnings and profit margins.

Net Earnings Trends: Reported net earnings increased from US$ 1,642 million in 2012 to US$ 2,715 million in 2013, before decreasing to US$ 1,043 million in 2014. Adjusted net earnings exhibited more pronounced swings, rising from US$ 2,112 million in 2012 to a peak of US$ 3,423 million in 2013, then falling sharply to US$ 682 million in 2014.
Net Profit Margin Analysis: The reported net profit margin grew from 8.95% in 2012 to 14.90% in 2013, then declined to 5.73% in 2014. The adjusted net profit margin followed a similar trajectory but with higher amplitude, starting at 11.52% in 2012, peaking at 18.79% in 2013, and dropping to 3.75% in 2014.
Relationship Between Reported and Adjusted Margins: A divergence in the relationship between reported and adjusted figures is observed over the three-year period. In 2012 and 2013, the adjusted net profit margin was consistently higher than the reported margin, indicating that certain non-recurring items had a negative impact on reported earnings. Conversely, in 2014, the adjusted net profit margin of 3.75% fell below the reported margin of 5.73%, suggesting that the adjustments applied in the final year further reduced the calculated profitability.

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	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
As Reported
Selected Financial Data (US$ in millions)
Net revenues	18,205)	18,218)	18,339)
Total assets	22,947)	23,148)	23,329)
Activity Ratio
Total asset turnover¹	0.79	0.79	0.79
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Net revenues	18,205)	18,218)	18,339)
Adjusted total assets	22,563)	22,788)	22,909)
Activity Ratio
Adjusted total asset turnover²	0.81	0.80	0.80

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

2014 Calculations

¹ Total asset turnover = Net revenues ÷ Total assets
= 18,205 ÷ 22,947 = 0.79

² Adjusted total asset turnover = Net revenues ÷ Adjusted total assets
= 18,205 ÷ 22,563 = 0.81

A consistent contraction in the total asset base is observed from December 2012 through December 2014. This decline is reflected in both the reported and adjusted asset valuations, indicating a systematic reduction in the organization's resource base over the analyzed three-year period.

Total Asset Trends: Reported total assets decreased steadily from 23,329 million US$ in 2012 to 22,947 million US$ in 2014. Adjusted total assets followed a nearly identical trajectory, declining from 22,909 million US$ to 22,563 million US$ over the same interval.
Asset Turnover Performance: The reported total asset turnover ratio remained completely stagnant at 0.79 throughout the three-year period. In contrast, the adjusted total asset turnover ratio exhibited a marginal upward trend, remaining at 0.80 in 2012 and 2013 before increasing to 0.81 in 2014.
Operational Efficiency Insights: The divergence between the stagnant reported turnover and the slightly improving adjusted turnover suggests that the reduction in the adjusted asset base contributed to a marginal increase in efficiency. The increase to 0.81 in 2014 indicates that the company generated slightly more revenue per unit of adjusted asset toward the end of the period.

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	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
As Reported
Selected Financial Data (US$ in millions)
Total assets	22,947)	23,148)	23,329)
Equity	4,365)	5,187)	3,572)
Solvency Ratio
Financial leverage¹	5.26	4.46	6.53
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted total assets	22,563)	22,788)	22,909)
Adjusted equity	4,262)	5,455)	3,287)
Solvency Ratio
Adjusted financial leverage²	5.29	4.18	6.97

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

2014 Calculations

¹ Financial leverage = Total assets ÷ Equity
= 22,947 ÷ 4,365 = 5.26

² Adjusted financial leverage = Adjusted total assets ÷ Adjusted equity
= 22,563 ÷ 4,262 = 5.29

A consistent, marginal decline in total assets is observed between December 2012 and December 2014, with both reported and adjusted asset values decreasing steadily each year. Conversely, equity levels demonstrated significant fluctuation, experiencing a substantial increase in 2013 before retreating in 2014, although the 2014 figures remained elevated relative to the 2012 baseline.

Reported Financial Leverage: The reported financial leverage ratio exhibited a V-shaped trend, decreasing from 6.53 in 2012 to a low of 4.46 in 2013, before rising to 5.26 in 2014.
Adjusted Financial Leverage: The adjusted financial leverage ratio followed a similar pattern, starting at 6.97 in 2012, dropping sharply to 4.18 in 2013, and increasing to 5.29 in 2014.
Comparative Analysis of Leverage: The relationship between reported and adjusted leverage shifted over the observed period. In 2012, adjusted leverage was higher than reported leverage, whereas in 2013, the adjusted ratio was lower than the reported figure. By 2014, the two metrics converged closely, with adjusted leverage slightly exceeding reported leverage. This suggests that the impact of tax-related adjustments on the capital structure was most pronounced in 2013, coinciding with the peak in adjusted equity.

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	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
As Reported
Selected Financial Data (US$ in millions)
Net earnings	1,043)	2,715)	1,642)
Equity	4,365)	5,187)	3,572)
Profitability Ratio
ROE¹	23.89%	52.34%	45.97%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net earnings	682)	3,423)	2,112)
Adjusted equity	4,262)	5,455)	3,287)
Profitability Ratio
Adjusted ROE²	16.00%	62.75%	64.25%

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

2014 Calculations

¹ ROE = 100 × Net earnings ÷ Equity
= 100 × 1,043 ÷ 4,365 = 23.89%

² Adjusted ROE = 100 × Adjusted net earnings ÷ Adjusted equity
= 100 × 682 ÷ 4,262 = 16.00%

The financial performance between December 2012 and December 2014 is characterized by a period of growth in 2013 followed by a substantial contraction in 2014. The divergence between reported and adjusted metrics suggests that non-recurring items had a significant impact on the bottom line and the subsequent calculation of return on equity.

Net Earnings Trends: Reported net earnings grew from US$ 1,642 million in 2012 to a peak of US$ 2,715 million in 2013, before declining to US$ 1,043 million in 2014. Adjusted net earnings exhibited more extreme volatility; they rose from US$ 2,112 million in 2012 to US$ 3,423 million in 2013, then experienced a sharp reduction to US$ 682 million in 2014.
Equity Position: Both reported and adjusted equity showed a significant increase in 2013. Reported equity rose from US$ 3,572 million to US$ 5,187 million, while adjusted equity increased from US$ 3,287 million to US$ 5,455 million. In 2014, equity levels contracted, with reported equity falling to US$ 4,365 million and adjusted equity decreasing to US$ 4,262 million.
Return on Equity (ROE) Analysis: Reported ROE increased from 45.97% in 2012 to 52.34% in 2013, before dropping to 23.89% in 2014. Adjusted ROE remained relatively stable and significantly higher than reported figures during the first two years, moving from 64.25% in 2012 to 62.75% in 2013. However, adjusted ROE experienced a severe collapse in 2014, falling to 16.00%, which represents a significant decline in adjusted profitability relative to the equity base.

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	Dec 27, 2014	Dec 28, 2013	Dec 29, 2012
As Reported
Selected Financial Data (US$ in millions)
Net earnings	1,043)	2,715)	1,642)
Total assets	22,947)	23,148)	23,329)
Profitability Ratio
ROA¹	4.55%	11.73%	7.04%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net earnings	682)	3,423)	2,112)
Adjusted total assets	22,563)	22,788)	22,909)
Profitability Ratio
Adjusted ROA²	3.02%	15.02%	9.22%

Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).

2014 Calculations

¹ ROA = 100 × Net earnings ÷ Total assets
= 100 × 1,043 ÷ 22,947 = 4.55%

² Adjusted ROA = 100 × Adjusted net earnings ÷ Adjusted total assets
= 100 × 682 ÷ 22,563 = 3.02%

An analysis of financial performance between 2012 and 2014 reveals a period of significant volatility in earnings and return on assets, contrasted by a relatively stable asset base. While the company experienced a substantial peak in profitability during 2013, there was a sharp contraction in both reported and adjusted metrics by the end of 2014.

Net Earnings Performance: Reported net earnings grew from 1,642 million US$ in 2012 to a peak of 2,715 million US$ in 2013, before declining steeply to 1,043 million US$ in 2014. Adjusted net earnings followed a similar but more volatile trajectory, rising from 2,112 million US$ in 2012 to 3,423 million US$ in 2013, and subsequently falling to 682 million US$ in 2014. The divergence between reported and adjusted earnings was most pronounced in 2014, where adjusted earnings were significantly lower than reported figures, indicating the impact of specific non-recurring adjustments.
Asset Base Stability: Total assets remained relatively consistent over the three-year period, exhibiting a slight downward trend. Reported total assets decreased marginally from 23,329 million US$ in 2012 to 22,947 million US$ in 2014. Similarly, adjusted total assets showed a gradual decline from 22,909 million US$ in 2012 to 22,563 million US$ in 2014. This stability suggests that the fluctuations in profitability were driven by operational or accounting factors rather than significant changes in the company's capital structure or asset scale.
Return on Assets (ROA) Trends: The Return on Assets experienced a dramatic arc, peaking in 2013. Reported ROA increased from 7.04% in 2012 to 11.73% in 2013, before dropping to 4.55% in 2014. The Adjusted ROA exhibited even greater variance, rising from 9.22% in 2012 to a high of 15.02% in 2013, and then falling sharply to 3.02% in 2014. The fact that Adjusted ROA fell below Reported ROA in 2014 suggests that the adjustments made to net earnings for that period negatively impacted the perceived efficiency of asset utilization compared to previous years.

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