Financial Analysis: Tools and Techniques Phần 3 pot

78 Financial Analysis: Tools and Techniques familiar management decision context, of the sources and uses of the ultimate cash flows is given at the bottom of the diagram. This representation will be a useful reference when we discuss the inter- pretation of cash flow statements in the next section, as we follow the convention of the three decisional areas, and the general rules governing cash inflows and outflows. Interpreting Funds Flow Data We’re now ready to examine in more detail the use and implications of a company’s funds flow information, as normally represented in its cash flow statements. As we discussed in Chapter 2, companies that are publicly held and publish regular finan- cial statements are required by the SEC to provide a statement of cash flows along FIGURE 3–11 Generalized Funds Flow Model Investment Operations Financing Management Decision Context Current assets Fixed assets Current liabilities Other assets Long-term liabilities Shareholders’ equity Sales revenue Cost of sales Operating expenses Write- offs (non- cash) Net income or loss Investments (increases) in current, fixed, and other assets are uses of cash; reductions in any asset are sources of cash. Profitable operations are a source of cash; losses drain cash from the system. Note: Accounting write-offs like depreciation or special provisions do not represent cash and must be adjusted for (reversed) to arrive at cash flow. Trade credit, accruals, and new short- and long-term financing (increases in liabilities and stock issues) are sources of cash; repayments of debt, dividends, and repurchases of stock are uses of cash. hel78340_ch03.qxd 9/27/01 11:00 AM Page 78 CHAPTER 3 Managing Operating Funds 79 with balance sheets and income statements. Where such statements aren’t readily available, however, or in situations where the analyst wishes to project future funds movements, it’s relatively straightforward to develop meaningful cash flow state- ments from standard balance sheets and income statements. With the help of the cash flow statement, we can develop many insights about the actual funds changes that took place, and also obtain clues for further analysis of the nature and quality of management decisions in operations, investments, and financing. In this section, we’ll illustrate how to quickly draw up a basic cash flow statement from available balance sheets and income statements, and discuss the major principles involved in transforming this accounting information into the funds flow pattern in which we are interested. For this purpose, we’ll again use the 1997 and 1996 TRW Inc. financial statements originally shown in Chapter 2 as Figures 2–9 and 2–11. We’ll work back from these to develop a derived cash flow statement, which we can then compare to the more detailed one published by TRW. Not having access to the detailed records of the company, we’ll find that our own version of the cash flow statement will approximate, but not be identical to, the key funds movements shown in TRW’s statement. This is because some informational details required are not directly represented on the published statements. We’ll begin with a look at the differences in the key balance sheet items be- tween the two dates, and sort these into a listing of funds sources and uses as a convenient way of identifying positive and negative cash flows. This format is called a sources and uses statement, mainly distinguished from the formal cash flow statement by the arrangement of the information, which in the latter case fol- lows our three familiar decisional areas. Then we’ll turn to the income statement to obtain additional details necessary to expand our insights in the operational area of funds movements. The objective is not accounting refinement, but simply an understanding of the principles involved in transforming data about key changes into cash flow patterns. TRW’s consolidated balance sheets are reproduced as Figure 3–12, which also shows changes in the accounts between the two balance sheet dates. To de- velop a cash flow statement, these changes must be classified as either funds uses or sources. We’ve done this in Figure 3–13, where increases and decreases in as- sets and liabilities are assigned to the appropriate categories, following the rules we displayed earlier in Figure 3–11. However, some of the balance sheet cate- gories are too broad for our purpose. As a result, several of the funds flows cannot be specifically delineated: • Net profit (or loss) from operations is not recognized as such, but is part of the net change in retained earnings. • Cash dividends are also immersed in the net change in retained earnings. hel78340_ch03.qxd 9/27/01 11:00 AM Page 79 80 Financial Analysis: Tools and Techniques FIGURE 3–12 TRW INC. AND SUBSIDIARIES Consolidated Balance Sheets at December 31 ($ millions) Source: Adapted from 1997 TRW Inc. annual report. 1997 1996 Change Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . $ 70 $ 386 $ Ϫ 316 Accounts receivable . . . . . . . . . . . . . . . . . . . . 1,617 1,378 ϩ 239 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 573 524 ϩ 49 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 79 69 ϩ 10 Deferred income taxes . . . . . . . . . . . . . . . . . . 96 424 Ϫ 328 ______ ______ _______ Total current assets . . . . . . . . . . . . . . . . . . . 2,435 2,781 Ϫ 346 ______ ______ _______ Property, plant, and equipment at cost . . . . . . . 6,074 5,880 ϩ 194 Less: Allowances for depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 3,453 3,400 ϩ 53 ______ ______ _______ Total property, plant, and equipment —net . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,621 2,480 ϩ 141 Intangible assets: Intangibles arising from acquisitions . . . . . . . 673 258 ϩ 415 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 31 ϩ 201 ______ ______ _______ 905 289 ϩ 616 ______ ______ _______ Less: Accumulated amortization . . . . . . . . . . . . 94 78 ϩ 16 ______ ______ _______ Total intangible assets—net . . . . . . . . . . . . . 811 211 ϩ 600 Investments in affiliated companies . . . . . . . . . 139 51 ϩ 88 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 376 ϩ 28 ______ ______ _______ Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,410 $5,899 ϩ 511 ______ ______ _______ Liabilities and Shareholders’ Investment Current liabilities: Short-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 411 $ 52 $ ϩ 359 Accrued compensation . . . . . . . . . . . . . . . . . . 338 386 Ϫ 48 Trade accounts payable . . . . . . . . . . . . . . . . . 859 781 ϩ 78 Other accruals . . . . . . . . . . . . . . . . . . . . . . . . 846 775 ϩ 71 Dividends payable . . . . . . . . . . . . . . . . . . . . . 38 39 Ϫ 1 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 99 52 ϩ 47 Current portion of long-term debt . . . . . . . . . . . 128 72 ϩ 56 ______ ______ _______ Total current liabilities . . . . . . . . . . . . . . . . . 2,719 2,157 ϩ 562 ______ ______ _______ Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . 788 767 ϩ 21 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,117 458 ϩ 659 Deferred income taxes . . . . . . . . . . . . . . . . . . . 57 272 Ϫ 215 Minority interests in subsidiaries . . . . . . . . . . . . 105 56 ϩ 49 Shareholders’ investment: Serial Preference Stock II . . . . . . . . . . . . . . . . 1 1 0 Common stock . . . . . . . . . . . . . . . . . . . . . . . . 78 80 Ϫ 2 Other capital . . . . . . . . . . . . . . . . . . . . . . . . . . 462 437 ϩ 25 Retained earnings . . . . . . . . . . . . . . . . . . . . . 1,776 1,978 Ϫ 202 Cumulative translation adjustments . . . . . . . . (130) 47 Ϫ 177 Treasury shares—cost in excess of par . . . . . (563) (354) Ϫ 209 ______ ______ _______ Total shareholders’ investment . . . . . . . . . . 1,624 2,189 Ϫ 565 ______ ______ _______ Total liabilities and shareholders’ investment . . $6,410 $5,899 ϩ 511 ______ ______ _______ hel78340_ch03.qxd 9/27/01 11:00 AM Page 80 CHAPTER 3 Managing Operating Funds 81 • Depreciation and amortization write-offs are buried in the changes in the respective accounts for accumulated depreciation and amortization. • Special items, such as write-offs and adjustments incurred with acquisitions or restructuring activities, are combined in the net amounts of affected accounts. • New investments in facilities, as well as acquisitions, disposals, and divestments, are similarly netted out in the balance sheet accounts. FIGURE 3–13 TRW INC. AND SUBSIDIARIES Statement of Balance Sheet Changes For the Year Ended December 31, 1997 ($ millions) Sources: Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 316 Decrease in deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 Increase in allowances for depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Increase in accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Increase in short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 Increase in trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Increase in other accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Increase in income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Increase in current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 56 Increase in long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Increase in long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 659 Increase in minority interests in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 49 Increase in other capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ______ $2,078 ______ Uses: Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Increase in prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Increase in property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 194 Increase in intangibles arising from acquisitions . . . . . . . . . . . . . . . . . . . . . 415 Increase in other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Increase in investments in affiliated companies . . . . . . . . . . . . . . . . . . . . . . 88 Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Decrease in accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Decrease in dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Decrease in deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 Decrease in common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Decrease in retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 Decrease in cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . 177 Increase in treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 ______ $2,078 ______ hel78340_ch03.qxd 9/27/01 11:00 AM Page 81 82 Financial Analysis: Tools and Techniques TRW’s statement of earnings, or income statement, reproduced in Figure 3–14, provides us with helpful information on the first four elements, while we have to rely on additional information from the company about the amount of new investments, acquisitions, disposals, and divestments. We’ve provided some of these data in summarized form at the bottom of the income statement. The simple sources and uses statement in Figure 3–13 is an indication of the broad financial implications of growth to record sales volume and earnings from continuing operations, the remaining impact of restructuring activities in 1996, and the significant effects of two major acquisitions in 1997. The key net funds sources were: • A net increase in long-term debt of $659 million, accompanied by an increase of $59 million in the current portion of long-term debt. This change occurred in connection with the $1.0 billion acquisition of BDM International, an information technology company, and the acquisition of an 80 percent interest in Magna International, an automotive component company, for approximately $0.5 billion. • A net increase in short-term debt of $359 million, also part of the funding of TRW’s growth and of temporary financing needs related to the acquisitions. • A significant reduction of cash and cash equivalents of $316 million, reflecting part of the financing changes put in place during 1997 and the cash transactions involved in the two acquisitions. • A reduction in the company’s deferred income tax assets, which represents a timing shift in actual tax payments, effectively using accumulated credit and thereby conserving cash. This was, to a large extent, offset by a reduction in deferred income tax liabilities, and a reverse shift in the timing of tax payments, effectively requiring the use of cash to reduce tax obligations. The two opposing cash flows netted out to a $113 million source. • Other sources reflect a variety of working capital changes and minor increases in minority interests and other capital. • The period’s depreciation and amortization, which we would expect to be major sources, are so far hidden in the overall changes of the accumulated allowances shown on the balance sheet. The major net funds uses during 1997 were: • Large increases in intangible assets caused by the acquisition ($415 million) and by other investments ($201 million). • An increase of $239 million in accounts receivable, reflecting volume growth and the impact of the acquisitions. • A net increase of $194 million in property, plant, and equipment, reflecting new capital spending as well as disposals, and the impact of the hel78340_ch03.qxd 9/27/01 11:00 AM Page 82 CHAPTER 3 Managing Operating Funds 83 FIGURE 3–14 TRW INC. AND SUBSIDIARIES Statements of Earnings For the Years Ended December 31, 1997 and 1996 ($ millions) Source: Adapted from 1997 TRW Inc. annual report. 1997 1996 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,831 $ 9,857 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,826 8,376 ______ _______ Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,005 1,481 Administrative and selling expenses . . . . . . . . . . . . . . . . . 684 613 Research and development expenses . . . . . . . . . . . . . . . . 461 412 Purchased in-process research and development . . . . . . . 548 — Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 84 Other expenses (income) net . . . . . . . . . . . . . . . . . . . . . . . (3) 70 ______ _______ Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,765 1,179 ______ _______ Earnings (loss) from continuing operations before taxes Excluding purchased R&D; special charges (’96) . . . . . . 788 687 Reported earnings (loss) before income taxes . . . . . . . . (240) 302 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 120 ______ _______ Earnings (loss) from continuing operations Excluding purchased R&D; special charges (’96) . . . . . . $ 499 $ 434 Reported earnings (loss) after income taxes . . . . . . . . . . (49) 182 Discontinued operations, gain on disposition, after tax . . . — 298 ______ _______ Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (49) $ 480 Preference dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 ______ _______ Earnings (loss) applicable to common stock . . . . . . . . . . . $ (49) $ 479 ______ _______ Per share of common stock: Average number of shares outstanding (millions) Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123.7 132.8 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123.7 128.7 Diluted net earnings (loss) per share From continuing operations Excluding purchased R&D; special charges . . . . . . . . . $ 4.03 $ 3.27 Reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.40) $ 1.37 From discontinued operations . . . . . . . . . . . . . . . . . . . . . — $ 2.25 ______ _______ Diluted net earnings (loss) per share . . . . . . . . . . . . . . . . $ (0.40) $ 3.62 ______ _______ Basic net earnings (loss) per share From continuing operations Excluding purchased R&D; special charges . . . . . . . $ 4.03 $ 3.29 Reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.40) $ 1.41 From discontinued operations . . . . . . . . . . . . . . . . . . . . — $ 2.31 ______ _______ Basic net earnings (loss) per share . . . . . . . . . . . . . . . . . . $ (0.40) $ 3.72 ______ _______ Book value per share (year-end) . . . . . . . . . . . . . . . . . . . . $ 13.19 $ 17.29 Tangible book value per share (year-end) . . . . . . . . . . . . . $ 6.58 $ 15.62 Other data ($ millions): Depreciation of property, plant, and equipment . . . . . . . . . $ 480 $ 442 Amortization of intangibles, other assets . . . . . . . . . . . . . . 10 10 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549 500 Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 148 hel78340_ch03.qxd 9/27/01 11:00 AM Page 83 84 Financial Analysis: Tools and Techniques acquisitions, accompanied by an increase of $88 million in investments in affiliated companies. • A retained earnings decrease of $202 million, despite record earnings from ongoing operations, due to a major write-off of purchased research and development of $544 million and dividend payments of $154 million. • Repurchases of shares in the open market that amounted to $209 million, a continuation of the share repurchase policy TRW has carried out over several years. • Unfavorable currency translation that caused a drain of $177 million. Although we do, at this point, have a broad picture of TRW’s sources and uses of funds, we should make a few modifications to our statement using what information is readily available to us: 1. The net change in retained earnings can be separated into profit or loss from operations and cash dividends paid. In the case of TRW, we know from the income statement that there was net income (earnings) for 1997 of $499 million from ongoing operations before a write-off of $548 million of purchased research and development after the acquisition of BMD International. The net amount, a loss of $49 million, must have been subtracted from retained earnings. The income statement further indicated that cash dividends paid were $154 million, which was also subtracted from retained earnings. The total of these two amounts is $203 million, very close to the change in retained earnings of $202. The $1.0 million is due to the difference between dividends declared and dividends actually paid, and to other small adjustments. 2. The amount of depreciation and amortization charged against income during the period should be shown as a positive funds movement, in order to reverse the impact of these noncash charges. Normally the largest is depreciation of plant and equipment, followed by amortization of patents, licenses, and other intangibles. In some cases, depletion of mineral deposits and standing timber is charged. We remember that such write-offs reflect the apportionment of past expenditures and do not involve current cash flows, serving to mask the total cash generation implicit in net income. Therefore, they must be added back to income to arrive at cash flow. This proper practice, however, results in a common misconception—to view depreciation and amortization as actual sources of cash. Remember that depreciation and amortization as such do not create any cash—they are only accounting entries that reduce reported income and thus understate the actual cash flow obtained. They do, of course, directly affect the amount of income taxes paid, but this positive funds impact has already been recognized in the income tax charge which was deducted before hel78340_ch03.qxd 9/27/01 11:00 AM Page 84 CHAPTER 3 Managing Operating Funds 85 arriving at net income. In TRW’s case, depreciation and amortization were shown at the bottom of the income statement as $480 million and $10 million, respectively. These amounts should be listed as sources because their addition in effect restores net income to its pre–write-off level. 3. Capital expenditures for new investment are often provided as a line item in published statements and in a company’s annual report. If we did not have direct information about new investments, acquisitions, disposals, and divestments made during the period, we would have to approximate the amount of funds used by arguing that the net change of the property, plant, and equipment account was affected by two main elements: • The amount of depreciation charged during the year. • All the other transactions combined. Because we know that the net change in TRW’s property, plant, and equip- ment was an increase of $141 million (increase in gross property of $194 million less increase in allowances for depreciation of $53 million), we can derive the net effect of all the other movements by adding back the amount of depreciation of $480 million, for a net change in investments of $621 million. This result sug- gests, at the very least, that the actual new investments of $549 million shown below the income statement in Figure 3–14 must have been accompanied by some additional amounts, both positive, due to the acquisitions, and perhaps negative, due to disposals of equipment. We can use the same approach to approximate the net change in intangible investments by adding back the amortization charge of $10 million to the net balance sheet change of $600 million, for a total of $610 million. Note that the company separated intangibles into two categories: those arising from acquisitions (essentially the difference between the purchase price and the recorded value of the assets), and other intangibles, such as intellec- tual property. As we’ll see, the published cash flow information provided by the company shows the details of the positive and negative movements in this area. Now we can assemble a modified sources and uses statement in Figure 3–15, using the basic information displayed earlier in Figure 3–13. The statement will be improved somewhat by the adjustments we’ve discussed in owners’ eq- uity, net income, and plant and equipment, but will be somewhat lacking in terms of understanding the specific impact of TRW’s two major acquisitions in 1997. We’ve rearranged the derived TRW data in our three familiar areas of manage- ment decisions: operations, investment, and financing, as well as by sources and uses to highlight the specific impact of each element. This provides a preliminary picture of the effect of TRW management decisions in 1997. We observe that operational decisions resulted in a net funds source of $951 million, which represents the 1997 net loss of $49 million—adjusted for the write- off of $548 million of purchased research and development related to the ac- quisition of BDM International, depreciation of $480 million, amortization of hel78340_ch03.qxd 9/27/01 11:00 AM Page 85 86 Financial Analysis: Tools and Techniques $10 million, and reduction in deferred taxes of $113 million. The final two items represent changes in working capital elements, with net changes in current liabil- ities providing a source of $147 million, and net changes in current assets (other than cash; see bottom of statement) amounting to a use of $298 million. Funds required for investment amounted to $1,895 million, which included our derived capital investment figure of $621 million, plus a similarly derived FIGURE 3–15 TRW INC. AND SUBSIDIARIES Derived Funds Sources and Uses Statement For the Year Ended December 31, 1997 ($ millions) Sources Uses Funds from Operations: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49 Write-off of purchased research and development . . . . . . . $ 548 Depreciation (noncash item) . . . . . . . . . . . . . . . . . . . . . . . . 480 Amortization (noncash item) . . . . . . . . . . . . . . . . . . . . . . . . 10 Change in deferred income taxes (net) . . . . . . . . . . . . . . . 113 Change in current liabilities (payables, accruals, taxes, dividends, etc.) . . . . . . . . . 147 Change in current assets other than cash (receivables, inventories, prepaid expenses) . . . . . . . . — 298 ______ _______ Total operational funds flows . . . . . . . . . . . . . . . . . . . . . 1,298 347 ______ _______ Net funds from operations . . . . . . . . . . . . . . . . . . . . . . . 951 ______ Funds for Investment: Capital investments (adjusted for depreciation of $480) . . 621 Investment in intangible assets (adjusted for amortization of $10) . . . . . . . . . . . . . . . . . 610 Purchased research and development . . . . . . . . . . . . . . . . 548 Investment in affiliated companies . . . . . . . . . . . . . . . . . . . 88 Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 _______ Total investment funds flows . . . . . . . . . . . . . . . . . . . . . 1,895 _______ Funds from Financing: Increase in short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 359 Increase in long-term debt (including current portion) . . . . 715 Increase in long-term liabilities . . . . . . . . . . . . . . . . . . . . . . 21 Increase in minority interests . . . . . . . . . . . . . . . . . . . . . . . 49 Decrease in common stock . . . . . . . . . . . . . . . . . . . . . . . . 2 Increase in other capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Increase in treasury shares . . . . . . . . . . . . . . . . . . . . . . . . 209 Currency translation adjustments . . . . . . . . . . . . . . . . . . . . 177 Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 Adjustments to retained earnings . . . . . . . . . . . . . . . . . . . . 1 ______ _______ Financing funds flows . . . . . . . . . . . . . . . . . . . . . . . . . . 1,170 542 ______ _______ Net funds provided by financing . . . . . . . . . . . . . . . . . . 628 Change in Cash: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 ______ Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,895 $1,895 ______ _______ hel78340_ch03.qxd 9/27/01 11:00 AM Page 86 TEAMFLY Team-Fly ® CHAPTER 3 Managing Operating Funds 87 investment of $610 million in intangible assets. We must also reflect here the known purchase of research and development of $548 million during the acquisi- tion of BDM International in 1997, which was written off against earnings in the same year, as shown above. Smaller uses are the investment in affiliated com- panies of $88 million, and the increase in other assets of $28 million. Funds from financing decisions, a net amount of $628 million, are charac- terized by significant increases in TRW’s debt, with short-term debt raised by $359 million and long-term debt growth of $715 million, largely related to the major acquisitions. Other capital grew by $25 million, while repurchases of stock for cash raised treasury shares by $209 million. Currency translations affected cash negatively by $177 million, and dividends paid amounted to $154 million. Minor elements account for the remainder. A check of the company’s annual report reveals that, as we know, actual 1997 capital investment for new property, plant, and equipment was $549 million, as compared to our derived total of $621. We also learn that the total cost of the acquisitions, net of cash acquired, was $1,270 million. This figure could not be di- rectly derived from the balance sheet changes because the acquired assets were in part written off ($548 million of purchased research and development was charged against earnings), and the various assets and liabilities were merged with the balance sheet totals. However, we can regard the combined increase in intan- gible assets of $1,150 million ($610 million largely due to the acquisitions, and purchased research and development of $540 million) as a reasonable proxy for the cost of the acquisitions, even though this total falls short by $120 million. These differences can only be reconciled by inside information not available in the published data. When we compare TRW’s actual cash flow statement, reproduced in Figure 3–16, to our derived statement in Figure 3–15, we find that, apart from differences in presentation, the figures we have developed are directionally representative. The various items on which the statements disagree—and some of them are signifi- cant—require more detailed knowledge. This is particularly true of details in the fi- nancing section, which reflects a lot of information not available to us, and in the investment section, where the major aspect is the acquisition of BDM International and Magna International. The impact of these acquisitions, which were made for cash, is reflected there as the original total amount of $1,270, financed temporarily by a large increase in short-term debt. As the three companies were combined, as- sets and liabilities were consolidated and the difference between the price and the recorded values brought about the sizable increase in intangibles (goodwill). For purposes of the TRW cash flow statement, the intangibles increases we had recog- nized separately are part of acquisition cost shown, and the changes specified in the financing section are designed to highlight the acquisition transaction. From an overall standpoint, however, the totals in the three major funds flow categories are reasonable approximations of the TRW presentation, varying by no more than $78 million in the largest category—the funds used for investment—and by far less in the other two, $3 million and $52 million respectively. hel78340_ch03.qxd 9/27/01 11:00 AM Page 87 [...]... ( 130 ) (5 63) 1 80 437 1,978 47 (35 4) Liabilities and Shareholders’ Investment 52 38 6 781 775 39 52 72 Total shareholders’ investment 1,624 2,189 Total liabilities and shareholders’ investment $6,410 $5,899 Source: Adapted from 1997 TRW Inc annual report hel7 834 0_ch04.qxd 9/27/01 11:07 AM Page 100 100 Financial Analysis: Tools and Techniques F I G U R E 4 3 TRW INC AND. .. discontinued operations 1 23. 7 1 23. 7 132 .8 128.7 $4. 03 (0.40) — $ 3. 27 1 .37 2.25 $ (0.40) $ 3. 62 $4. 03 (0.40) — $ 3. 29 1.41 2 .31 Basic net earnings (loss) per share $ (0.40) $ 3. 72 Cash dividends paid Book value per share (year-end) Tangible book value per share (year-end) Other data ($ millions): Depreciation of property, plant, and equipment Amortization... cash, and the analyst must assess the nature and quality of the company’s cash conversion cycle Excessive lags in receivables and payables, and a steady buildup in inventories, for example, can significantly affect the normal cash conversion patterns and lead to distortions in the company’s financial system performance hel7 834 0_ch04.qxd 9/27/01 11:07 AM Page 112 112 Financial Analysis: Tools and Techniques. ..hel7 834 0_ch 03. qxd 9/27/01 11:00 AM Page 88 88 Financial Analysis: Tools and Techniques F I G U R E 3 16 TRW INC AND SUBSIDIARIES Statements of Cash Flows For the Years Ended December 31 , 1997 and 1996 ($ millions) 1997 1996 $ (49) $ 480 Operating Activities: Net earnings (loss) ... before interest and taxes, based on average assets, is as follows for TRW: Return on average total assets before interest and taxes: Net profit before interest and taxes (EBIT) $8 63 ϭ ϭ 14.0% (1996: 13. 3%) Average assets $6,154 or Return on average net assets before interest and taxes: $8 63 Net profit before interest and taxes (EBIT) ϭ ϭ 23. 2% (1996: 20.5%) Average net assets (capitalization) $3, 716 If we... the following two steps, using TRW’s figures: (1) Sales per day: Sales $10, 831 ϭ ϭ $30 .09/day (1996: $27 .38 /day) Days in the year 36 0 hel7 834 0_ch04.qxd 9/27/01 11:07 AM Page 111 CHAPTER 4 Assessment of Business Performance 111 and (2) Days outstanding: Accounts receivable $1,617 ϭ Sales per day $30 .09 ϭ 53. 7 days (1996: 50 .3 days) TRW is showing a slowdown in the turnover of its total receivables from... 2, 435 2,781 Property, plant, and equipment at cost Less: Allowances for depreciation and amortization 6,074 3, 4 53 5,880 3, 400 Total property, plant & equipment—net Intangible assets Intangibles arising from acquisitions Other 2,621 2,480 6 73 232 258 31 Total intangible assets ... exchange rate changes on cash Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 912 1 13 (89) (154) (247) 41 576 (29) (31 6) 38 6 $ 70 (127) 51 (91) (148) (36 1) 51 (625) (6) 32 7 59 $ 38 6 Supplemental Cash Flow Information: Interest paid (net of amount... Therefore, the economics of sound cash management requires that any time there is a lag in cash receipts it should be minimized, and disbursements should be hel7 834 0_ch 03. qxd 9/27/01 11:00 AM 90 Page 90 Financial Analysis: Tools and Techniques made no sooner than required by commercial and legal terms Ways to achieve time compression range from the use of lockboxes, to which remittances from customers are... 9/27/01 11:07 AM 104 Page 104 Financial Analysis: Tools and Techniques In its published data TRW reported that the pretax operating margin for its two major businesses, a measure which corresponds to EBIT, was 9.0 percent (9.4 percent for 1996) for the automotive segment (65 percent of 1997 sales), and 8.4 percent (7 .3 percent for 1996) for space, defense, and information systems (35 percent of 1997 sales), . investment and by far less in the other two, $3 million and $52 million respectively. hel7 834 0_ch 03. qxd 9/27/01 11:00 AM Page 87 88 Financial Analysis: Tools and Techniques FIGURE 3 16 TRW INC. AND. retained earnings. hel7 834 0_ch 03. qxd 9/27/01 11:00 AM Page 79 80 Financial Analysis: Tools and Techniques FIGURE 3 12 TRW INC. AND SUBSIDIARIES Consolidated Balance Sheets at December 31 ($ millions) Source:. should be minimized, and disbursements should be hel7 834 0_ch 03. qxd 9/27/01 11:00 AM Page 89 90 Financial Analysis: Tools and Techniques made no sooner than required by commercial and legal terms.