Discontinued Operations Discontinued Operations – component that (1) will be eliminated from ongoing operations, and (2) has no management involvement after disposal.
a component must be a product group or division, but not a brand
Discontinued operations are always reported net of taxes
Reported in two parts:
Part 1 - Gain or loss from operations of discontinued operations
Part 2 - Gain or loss from the disposal (FMV – BV)
Discontinued Operations Al Carbon’s Tacos operates Fire in the Hole Donuts (FITH), a subsidiary that management believes does not fit well in the company.
During 20X1, Al Carbon, announced a plan to sell FITH. Fire in the Hole lost $300 and $250 thousand during 20X1 and 20X2 respectively, and no buyer seemed interested in purchasing FITH. (See A)
However, in 20X3, FITH earned $100 thousand (see B) and Taco Joe agreed to purchase FITH for $500 thousand, $50 thousand more than the current net worth (see C).
The income statement disclosure related to the discontinued operation would be:
(in thousands of US$) 20X3 20X2 20X1 Income from continuing operations 3,000 2,500 2,000
Gain(Loss) from discontinued operations 100 (250) (300)
On December 22, 2003 GM completed a series of transactions that resulted in the split-off of Hughes from GM and the simultaneous sale of GM’s approximately 19.8% economic interest in Hughes to the News Corporation.
GENERAL MOTORS CORP. & SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31
(Dollars in millions)2004 2003 2002 Net sales $193,517 $185,837 $177,867
Cost of sales and other expenses 159,951 152,435 147,192
Selling, general, and administrative expenses 20,394 20,957 20,834
Interest expense 11,980 9,464 7,503
Total costs and expenses 192,325 182,856 175,529
Income before income taxes 1,192 2,981 2,338
Income tax (benefit) expense (911) 731 644
Equity income and minority interests 702 612 281
Income from continuing operations 2,805 2,862 1,975
(Loss) from discontinued operations – (219) (239)
Gain on sale of discontinued operations – 1,179 – Net income $2,805 $3,822 $1,736
Part 2 – GM sold Hughes in 2003 at a gain of $1.179 billion.
Part 1 – Hughes lost $458 million over 2002-2003.
Extraordinary Items Extraordinary Item – non recurring material items that differ from the entity’s business activities.
They are both:
Unusual in Nature – possess a high degree of abnormality
Write downs of receivables, inventories and equipment
Foreign currency gains and losses
Sale of PP&E and investments
It’s highly extraordinary my dear Watson.
Effects of a strike
Early extinguishment of debt
IFRS standards do not recognize extraordinary items.
Restructuring Charges Attention should be paid to items that may be unusual or infrequent, but not both. Restructuring charges are a common example.
Restructuring charges – usually relate to activities such as layoffs, closings, asset impairments.
Some companies report restructuring charges as unusual items (“other losses” or “other expenses”).
Restructuring charges are NOT “DE” items and should NOT be shown net of taxes.
Selling, general and administrative expenses 1,477.6 1,458.5 1,450.5
Other operating (income) expense (124.1) (60.2) (113.5)
Made for You costs 18.9 161.6 0
Special charge 0160.00
Total operating costs and expenses 9,939.79,659.58,600.5
Operating income 3,319.6 2,761.9 2,808.3
Interest expense 396.3 413.8 364.4
Nonoperating (income) expense 39.240.736.6
Income before provision for income taxes 2,884.1 2,307.4 2,407.3
Provision for income taxes 936.2757.3764.8
Net income $ 1,947.9 $ 1,550.1 $ 1,642.5
Why did income go down in 1998? Made for You – a new food preparation system that allows us to serve fresher, better-tasting food at high speed. The system supports future growth because it can more easily accommodate an expanded menu.
Special Charge – comprised of employee severance, lease cancellation and write-off of capitalized technology made obsolete.
How do we distinguish between restructuring and items that should have been normal expenditures in past years?
Selling, general and administrative expenses 870,415 682,625 556,320
Merger integration and store closing costs — — 37,790
Pre-opening expenses 18,831 16,364 10,781
INCOME FROM OPERATIONS 268,817 197,710 132,749
Gain on sale of investment — — (1,844)
Interest expense, net 11,290 10,025 12,959
INCOME BEFORE INCOME TAXES 257,527 187,685 121,634
Provision for income taxes 102,491 75,074 48,654
NET INCOME $155,036 $112,611 $72,980
EARNINGS PER COMMON SHARE:
Basic $1.42 $1.10 $0.73
Diluted $1.33 $1.02 $0.68
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 109,383 102,512 99,584
Diluted 116,504 110,790 107,958
In Notes: Merger integration and store closing costs associated with the purchase of Galyan’s of $37.8 million were recognized in 2005. The cost relates primarily to closing Dick’s stores in overlapping markets and advertising the re-branding and re-grand opening of the former Galyan’s stores.
Would have been 4.22% without merger costs Net income as a percent of sales for each of the years was:
3.99% 3.62% 2.78%
What is the reason for a significantly lower percentage during 2006?
Are you willing to “excuse” Dick’s Sporting Goods for this reason?
EARNINGS PER SHARE Earnings per share are required at the bottom of the income statement.
The Basic EPS Calculation:
Earnings (or loss) for period earnings applicable to senior securities*
Weighted average number of shares of CS
* for example, preferred stock dividends
The denominator is weighed to prevent end of year manipulation.
Diluted EPS must also be shown if the company has
convertible bonds and preferred stock, or
other agreements that potentially reduce common stockholders earnings
NI – PS Div
# shares Did you know: EPS is the only ratio GAAP tells us how to calculate?
IFRS and US GAAP calculate basic and diluted EPS similarly.
Earnings per share are required on the face of the income statement for all publicly-traded companies.
Discussion Question: Does Walmart use a single step or multistep income statement?
Thought question: If Company A has an EPS of $5, and Company B has an EPS of $4, which has higher profitability?
ANALYSIS OF AN INCOME STATEMENT McCormick & Co.
Consolidated Statement of Income
(millions except per share data)
for the year ended November 30
Cost of goods sold
Selling, general and administrative expense
Other income, net
Income from consolidated operations before income taxes
Does McCormick use a single step or multi-step income statement?
Multi-step – Non operating is shown separately.
What is the gross profit of McCormick for 2006?
$2,716.4 – 1,601.8 = $1,114.6 What is net income for McCormick in 2007?
$210.2 – 0.8 + 21.4 + 0.7 = 230.1 What is the number of shares outstanding for McCormick in 2007?
Basis EPS = $230.1 million / Shares = $1.78 ; Shares = 129.3 million
1. Profit Margin on Sales
Indicates: The relation of profits to sales.
Interpretation: Higher - less sales are needed to generate a desired level of profit.
How is the ratio improved? Hint: The denominator is the top of the IS and the numerator is the bottom of the IS. What is in between?
2. Return on Assets Indicates: How assets are utilized to achieve a profit.
Current Year Net Income
Average Total Assets
Options: Some add interest expense to the numerator to put leveraged and unleveraged entities on equal basis.
Higher - greater ability to produce profits.
3. Return on Stockholders' Equity
Indicates: The degree of profitability attributable to stockholders. Differs from ROA to extent that the entity is leveraged (has debt).
Current Year Net Income
Average Stockholders’ Equity
Options: Some subtract PS dividends from numerator to evaluate only amounts available to CS.
Interpretation: Higher - a greater degree of profits available to stockholders.