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A Reformulation: Intel Corporation

INTEL CORPORATION

Intel Corporation

Reformulated Income Statement

Net revenue $26,273


Cost of sales $12,144
Research and development 2,509
Marketing, general and administrative 3,076
Purchased in-process R & D 165 17,894

Operating income before tax 8,379


Tax as reported 3,069
Tax on financing income 288 2,781
Operating income after tax 5,598

Interest income 792


Interest expense (34)
Net financing income before tax 758
Tax on financing income (.38) (288)
Unrealized gain on investments 545 1,015

Comprehensive income 6,613

Notes: 1. The “other” included with interest income could be operating income.

2. Comprehensive income is reported net income (6,068) +

unrealized gain on securities (545).


Reformulated Balance Sheet

Operating Assets

Cash $ 163
Accounts receivable 3,527
Inventories 1,582
Deferred tax assets 618
Other current assets 122
Property, plant and equipment, net 11,609
Other assets 1,022
18,643
Operating Liabilities

Accounts payable 1,244


Deferred income 606
Accrued compensation 1,285
Accrued advertising 458
Other accrued liabilities 1,094
Income taxes payable 958
Deferred tax liabilities 1,387 7,032

Net Operating Assets 11,611

Financial Assets

Cash equivalents 1,875


Short-term investments 5,272
Trading assets 316
Long-term investments 5,365
12,828
Financial Liabilities

Short-term debt 159


Long-term debt 702
Put warrant obligation 201 1,062

Net Financial Assets 11,766

Common Stockholders’ Equity 23,377

Notes: 1. The operating cash component of cash and cash equivalents was

deemed to be $163 million. The remainder is a financial

asset.
2. Trading assets are deemed part of financing activities.

3. Footnotes reveal that long-term investments are investments in

debt securities.

(a) % in net financial assets = 11,766 = 50.3%


23,377

(b) % of income in net financing income = 1,015 =


15.3%
6,613
Operating Profitability: Southwest Airlines

The reformulated statements are as follows:

1991 1992 1993 1994


Operating income:
Reported1 61.9 180.2 289.3 348.9
Tax reported (16.9) (55.8) (105.4) (129.7)
Tax shield (6.3) (11.7) (10.4) (7.5)
OI after tax 38.7 112.7 173.5 211.7

Net interest expense:


Reported 18.0 33.3 29.6 21.4
Tax shield (.35) 6.3 11.7 10.4 7.5
11.7 21.6 19.2 13.9

Comprehensive Income: 27.0 91.1 154.3 197.8

NOA 1,018 1,238 1,443 1,675


NFO2 389 358 389 436
CSE 629 880 1,054 1,239

Notes:

1. Includes “other items” in non-operating expense. What are these?

2. NFO = Long-term debt + CMLTD −(0 .9 x cash). Ten percent of cash is

deemed working cash. Deposits on flight equipment purchases are

operating and, if interest is earned on these, it should be put in operating

income (if identifiable).

a) FCF ≡ C − I = OI − ∆ NOA

1991 (112.3)
1992 (107.3)
1993 (31.5)
1994 (20.3)

b) RNOA = OI/ ave. NOA


1991 4.1%
1992 10.0
1993 12.9
1994 13.6

c) NBC = net financial expenses/ ave. NFO

1991 3.6
1992 5.8
1993 5.1
1994 3.4

d) What is the BIG PICTURE? Southwest has become increasingly profitable in

its operations. Like many growing companies, it’s generating negative free

cash flow because of investment in new aircraft (see property, plant and

equipment). However, free cash flow is increasing due to the increased

profitability and a decline in the rate of investment. The negative free cash

flow was satisfied by increased borrowing from 1990-1992, but in 1993-94

debt was actually reduced. How was this done with negative free cash flow?

By selling off financial assets (in cash equivalents).

Operating Profitability: Southwest Airlines

The reformulated statements are as follows:

1991 1992 1993 1994


Operating income:
Reported1 61.9 180.2 289.3 348.9
Tax reported (16.9) (55.8) (105.4) (129.7)
Tax shield (6.3) (11.7) (10.4) (7.5)
OI after tax 38.7 112.7 173.5 211.7

Net interest expense:


Reported 18.0 33.3 29.6 21.4
Tax shield (.35) 6.3 11.7 10.4 7.5
11.7 21.6 19.2 13.9

Comprehensive Income: 27.0 91.1 154.3 197.8

NOA 1,018 1,238 1,443 1,675


NFO2 389 358 389 436
CSE 629 880 1,054 1,239

Notes:

1. Includes “other items” in non-operating expense. What are these?

2. NFO = Long-term debt + CMLTD −(0 .9 x cash). Ten percent of cash is

deemed working cash. Deposits on flight equipment purchases are

operating and, if interest is earned on these, it should be put in operating

income (if identifiable).

a) FCF ≡ C − I = OI − ∆ NOA

1991 (112.3)
1992 (107.3)
1993 (31.5)
1994 (20.3)

b) RNOA = OI/ ave. NOA

1991 4.1%
1992 10.0
1993 12.9
1994 13.6

c) NBC = net financial expenses/ ave. NFO

1991 3.6
1992 5.8
1993 5.1
1994 3.4
e) What is the BIG PICTURE? Southwest has become increasingly profitable in

its operations. Like many growing companies, it’s generating negative free

cash flow because of investment in new aircraft (see property, plant and

equipment). However, free cash flow is increasing due to the increased

profitability and a decline in the rate of investment. The negative free cash

flow was satisfied by increased borrowing from 1990-1992, but in 1993-94

debt was actually reduced. How was this done with negative free cash flow?

By selling off financial assets (in cash equivalents).

Financial Statement Analysis: Ben & Jerry’s


First reformulate the financial statements (as in Exercise 10.6 in

Chapter 10):

Balance Sheets
1996 1995
Operating assets (OA):

Trade receivables 8.7 11.7


Inventories 15.4 12.6
Other current operating assets 7.1 7.5
Plant, net 65.1 59.6
Equity investments 1.0 1.0
Other long-term operating assets 2.5 2.4
99.8 94.8
Operating Liabilities (OL):

Trade payables and accrued expenses 17.4 16.5


Deferred tax liability 4.8 22.2 3.5 20.0

Net operating assets (NOA) 77.6


74.8
Net financial assets (NFA):
Short-term investments 36.6 35.4
Other receivables 0.3 0.9
Current debt (0.6) (0.5)
Long-term debt (31.1) 5.2 (32.0) 3.8

Common shareholders’ equity (CSE) 82.8


78.6

Averages for 1996:


NOA 76.2 OA 97.3
NFA 4.5 OL 21.1
CSE 80.7 76.2

Income Statements

1996 1995

Net sales 167.1 155.3


Cost of sales 115.2 109.1
Gross profit 51.9 46.2
SG&A expense (45.5) (36.4)
Other income (expense) 0.2 (0.6)
OI 6.6 9.2
Tax reported 2.4 3.5
Tax on financing income 0.1 2.5 (0.1) 3.4
OI after tax 4.1 5.8
Interest income 1.7 1.7
Interest expense (2.0) (1.5)
Net interest before tax (0.3) .2
Tax (35%) (0.1) 0.1
Net financial expense .2 .1
Net comprehensive income 3.9 5.9

[Note: There is no dirty-surplus income as cumulative currency adjustments did


not change.]

NOA 76.2 OA 97.3


NFA 4.5 OL 21.1
CSE 80.7 76.2

NFO −5.2
(a) FLEV = = = -0.063
CSE 82 .8
OL 22 .2
OLLEV = = = 0.286
NOA 77 .6
OI
(b) RNOA =
Ave . NOA

4.1
=
76 .2

= 5.38%

(c) RNOA = PM x ATO

4.1
PM = = 2.45%
167 .1

167 .1
ATO = = 2.19 (use average NOA)
76 .2

A Sales PM (before tax) can also be calculated by excluding Other Income:

6.4
Sales PM = = 3.83%
167 .1

Decompose PM:

Gross margin ratio 31.06%


SG and A expense ratio (27.23)
Other income ratio 0.12
Tax ratio (1.50)
2.45%

Decompose ATO

Turnover Inverse

167 .1
Accounts receivable turnover = = 16.38 0.0611
10 .2

167 .1
Inventory turnover = = 11.94 0.0838
14 .0

167 .1
Other current asset turnover = = 22.89 0.0437
7.3

167 .1
PPE turnover = = 2.68 0.3731
62 .4
167 .1
Other asset turnover = = 47.74 0.0209
3 .5

167 .1
Operating liability turnover = = (7.92) -0.1263
21 .1

Total ATO 2.19 0.4563

[Average NOA items used in denominators.]

Analyze operating liability leverage:

RNOA = ROOA + (OLLEV × OLSPREAD)

Implicit interest on operating liabilities = OL × 4%

= 21.1 × 4.0%

= 0.844

(A 4% after-tax rate is assumed.)

4.1 +0.844
Return on operating assets (ROOA) =
97 .3

= 5.08%

OL
Operating liability leverage =
NOA

21 .1
= (using averages for year)
76 .2

= 0.277

Operating liability leverage

Spread (OLSPREAD) = ROOA – 4.0%

= 1.08%

So,

RNOA = 5.08% + (0.277 × 1.08%)

= 5.38%
Financial Statement Analysis: Ben & Jerry’s
First reformulate the financial statements (as in Exercise 10.6 in

Chapter 10):

Balance Sheets
1996 1995
Operating assets (OA):

Trade receivables 8.7 11.7


Inventories 15.4 12.6
Other current operating assets 7.1 7.5
Plant, net 65.1 59.6
Equity investments 1.0 1.0
Other long-term operating assets 2.5 2.4
99.8 94.8
Operating Liabilities (OL):

Trade payables and accrued expenses 17.4 16.5


Deferred tax liability 4.8 22.2 3.5 20.0

Net operating assets (NOA) 77.6


74.8
Net financial assets (NFA):
Short-term investments 36.6 35.4
Other receivables 0.3 0.9
Current debt (0.6) (0.5)
Long-term debt (31.1) 5.2 (32.0) 3.8

Common shareholders’ equity (CSE) 82.8


78.6

Averages for 1996:


NOA 76.2 OA 97.3
NFA 4.5 OL 21.1
CSE 80.7 76.2

Income Statements

1996 1995

Net sales 167.1 155.3


Cost of sales 115.2 109.1
Gross profit 51.9 46.2
SG&A expense (45.5) (36.4)
Other income (expense) 0.2 (0.6)
OI 6.6 9.2
Tax reported 2.4 3.5
Tax on financing income 0.1 2.5 (0.1) 3.4
OI after tax 4.1 5.8
Interest income 1.7 1.7
Interest expense (2.0) (1.5)
Net interest before tax (0.3) .2
Tax (35%) (0.1) 0.1
Net financial expense .2 .1
Net comprehensive income 3.9 5.9

[Note: There is no dirty-surplus income as cumulative currency adjustments did


not change.]

NOA 76.2 OA 97.3


NFA 4.5 OL 21.1
CSE 80.7 76.2

NFO −5.2
(a) FLEV = = = -0.063
CSE 82 .8
OL 22 .2
OLLEV = = = 0.286
NOA 77 .6

OI
(b) RNOA =
Ave . NOA

4.1
=
76 .2

= 5.38%

(c) RNOA = PM x ATO

4.1
PM = = 2.45%
167 .1

167 .1
ATO = = 2.19 (use average NOA)
76 .2

A Sales PM (before tax) can also be calculated by excluding Other Income:


6.4
Sales PM = = 3.83%
167 .1

Decompose PM:

Gross margin ratio 31.06%


SG and A expense ratio (27.23)
Other income ratio 0.12
Tax ratio (1.50)
2.45%

Decompose ATO

Turnover Inverse

167 .1
Accounts receivable turnover = = 16.38 0.0611
10 .2

167 .1
Inventory turnover = = 11.94 0.0838
14 .0

167 .1
Other current asset turnover = = 22.89 0.0437
7.3

167 .1
PPE turnover = = 2.68 0.3731
62 .4

167 .1
Other asset turnover = = 47.74 0.0209
3 .5

167 .1
Operating liability turnover = = (7.92) -0.1263
21 .1

Total ATO 2.19 0.4563

[Average NOA items used in denominators.]

Analyze operating liability leverage:

RNOA = ROOA + (OLLEV × OLSPREAD)

Implicit interest on operating liabilities = OL × 4%

= 21.1 × 4.0%
= 0.844

(A 4% after-tax rate is assumed.)

4.1 +0.844
Return on operating assets (ROOA) =
97 .3

= 5.08%

OL
Operating liability leverage =
NOA

21 .1
= (using averages for year)
76 .2

= 0.277

Operating liability leverage

Spread (OLSPREAD) = ROOA – 4.0%

= 1.08%

So,

RNOA = 5.08% + (0.277 × 1.08%)

= 5.38%