This case requires the analysis of Sunbeam Corporation's financial statements to determine the effects of various adjustments to the company's comparative performance in 1996 and 1997. This assignment requires significant time to complete. Please adjust your homework schedule accordingly. Between 1993 and 1996 Sunbeam's stock price declined 14%. In July 1996, with the stock price at $12.50 per share, the troubled company fired CEO Roger W. Schipke, and hired former paratrooper Albert Dunlap. Upon taking over, Dunlap said, If you're a little frustrated with the prior management, you're a tolerant man. I would have hung them. During the remainder of 1996 and 1997 Chainsaw Al eliminated 80 of SOC's 114 plants, warehouses, and offices and over one-half of the company's employees by ending or selling the related operations. Dunlap had been successful earlier with similar moves at Scott Paper. After 14 months as CEO, Dunlap was able to sell the company to Kimberly-Clark at a 150% premium. In the first full year of Dunlap's leadership. Sunbeam's performance appeared to improve dramatically. On December 31, the company's stock price was over $40 per share. 1. ITEM 7. Management Discussion and Analysis of Financial Condition and Results of Operation (MD&A) from the Sunbeam's 1997 10-K refers to Sunbeam's performance improvement between 1996 and 1997. Examine to Sunbeam's statement of cash flows from the 1997 10-K. Did earnings increase between 1996 and 1997? Did cash flow from operations increase between 1996 and 1997? b. In 1996 earnings are negative and cash from operations are positive. What are the major accruals causing the difference between the two numbers? How could these accruals be used to shift income from 1996 into 1997? c. In 1997 earnings are positive and cash from operations is negative. What are the major accruals causing the difference between the two numbers? How could these accruals be used to shift income from 1998 into 1997? 2. Refer the MD&A from the 1997 10k. In paragraph 2, management states that sales that 1997 grew 18.7%. a. Confirm this result on the income statement. b. Refer to footnote 9. Revenues from the discontinued furniture business were not included in sales reported on the income statement. What is the effect of including sales from discontinued operations in sales reported on the income statement? Did Sunbeam's total Net sales actually increase in fiscal 1997? c. Paragraph 4 of the MD&A describes Sunbeams early buy program. How does the program contribute to the difference between operating cash flow and net income in 1997? How does this program affect the timing and recording of sales in 1997 and 1998? d. Does MD&A provide any justification for the inventory build up in 1997? 3. Footnote 8 states that in 1996 the company took a "special charge of 337.6M and provides some description of the charge. a. Describe where the 337.6M charge appears on the Income Statement. b. How much of the 337.6M charge appears on the Statement of Cash Flows? Why is it added back to net income? c. If special charges had not been recorded in 1996, what would happen to the gross profit percentage in 1996 and 1997? What would happen to SG&A as a percent of sales in 1996 and 1997? (Just give the direction of the change, no amount is required) 4. From the section titled "YEAR ENDED DECEMBER 29, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995" in the 1997 10K. a Selling, general and administrative ("SG&A") expenses, excluding the impact of special charges described above, were 17.6% of sales in 1996 primarily as a result of an inflated cost structure that has been realigned for 1997 and beyond. In addition, $12.0 million fourth quarter 1996 media advertising campaign and one-time expenditures for market research, new packaging, and other growth plan initiatives resulted in higher than normal SG&A spending in 1996. Also included in 1996 SG&A costs were $7.7 million of compensation expense resulting from restricted stock awards made in connection with the employment of a new senior management team. Management indicates that 1996 SG&A expense included large one-time payments to the new management team i.e., Al Dunlap. This one-time compensation expense was $7.7m. How does this item affect SG&A as a percent of sales in 1996? SUNBEAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL YEARS ENDED DECEMBER 28, 1997 DECEMBER 29, 1996 DECEMBER 31, 1995 $ Net sales Cost of goods sold Selling, general and administrative expense Restructuring, impairment and other costs $1,168,182 837, 683 131,056 984,236 900,573 214,029 154,869 $1,016,883 809, 130 137, 508 199, 443 11,381 (1,218) (285,235) 13,588 3,738 70, 245 9,437 173 Operating earnings (less) Interest expense.... Other (income) expense, net Earnings (loss) from continuing operations before income taxes Income taxes (benefit): Current Deferred 189, 280 (302,561) 60, 635 8,369 57, 783 128, 062) 177,828) (2,105) 25, 146 66, 152 (105, 890) 23,041 123, 128 (196, 671) 8 39 132,430) 37,594 12,917 (13,713) Earnings (loss) from continuing operations Earnings from discontinued operations, net of taxes Loss on sale of discontinued operations, net of taxes Net earnings (loss) .. Earnings (loss) per share of common stock from continuing operations: Basic $ 109, 415 $ $ (228,262) ========== 50, 511 ========== === $ 1.45 $ (2.37) $ 0.46 === ====EEEE ==EEEE 0.45 1.41 ========== (2.37) ========== === Diluted Net earnings (los) per share of common stock: Basic Diluted $ 1.29 $ 0.62 ===== $ (2.75) ========== (2.75) 1.25 0.61 ====EEEE ========= ====== Weighted average common shares outstanding: Basic 84,945 81, 626 ========= 82,925 ========= 82,925 ==== Diluted 87,542 82,819 ===== ========== ====== See Notes to consolidated Financial Statements. F-3 SUNBEAM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) DECEMBER 28, 1997 DECEMBER 29, 1996 $ $ ASSETS Current assets: Cash and cash equivalents Receivables, net Inventories Net assets of discontinued operations and other assets held for sale Deferred income taxes Prepaid expenses and other current assets 52,378 295,550 256,180 11,526 213,438 162, 252 36,706 17, 191 102,847 93,689 40, 411 Total current assets Property, plant and equipment, net Trademarks and trade names, net Other assets 658,005 240,897 194,372 27,010 624,163 220,088 200, 262 28, 196 $1,120,284 $1,072, 709 EEEEEEEEEE EEEEEEEEEE $ $ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt and current portion of long-term debt Accounts payable Restructuring accrual Other current liabilities 668 105,580 10,938 80, 913 921 107, 319 63,834 99,509 198,099 194,580 141, 109 54,559 271,583 201, 115 152, 451 52, 308 Total current liabilities Long-term debt Other long-term liabilities Deferred income taxes Commitments and contingencies (Note 12) Shareholders' equity: Preferred stock (2,000,000 shares authorized, none outstanding) Common stock (issued 89,984,425 and 88, 441,479 shares) Paid-in capital Retained earnings Other 900 483,384 141, 134 (30,436) 884 447, 948 35, 118 (25, 310) 594,982 (63, 045) 458, 640 (63, 388) Treasury stock, at cost (4,454,394 and 4,478,814 shares) Total shareholders' equity 531,937 395, 252 $1,120, 284 ========== $1,072, 709 ========== See Notes to consolidated Financial Statements. F-4 SUNBEAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT FER SHARE AMOUNTS) COMMON STOCK PAID-IN CAPITAL RETAINED EARNINGS OTHER (NOTE 2) TREASURY STOCK $ 932 $ 461,876 $ 120,118) $ (174,0701 $ 285,990 50, 511 (3,2681 20 17,013 Balance at January 1, 1995 Net earnings ...... Common dividends ($.04 per share) Exercise of stock options Amortization of unearned compensation Retirement of treasury shares ........ Purchase of common stock for treasury Minimum pension liability Translation adjustments -- 582 (741 (37,1031 (66, 535) 103, 712 (13,091) (199) (5,145) Balance at December 31, 1995 878 441,786 266, 698 124,880) (83,4491 == (228, 2621 (3, 318) Net loss............ Common dividends ($.04 per share) Exercise of stock options Grant of restricted stock ... Amortization of unearned compensation Minimum pension liability ....... Retirement and sale of treasury shares Translation adjustments 7,313 (1,1201 15,466 (14, 346) 7,707 4,963 (311 4,595 1, 246 Balance at December 29, 1996 884 447,948 35,118 125,310) (63,388 109, 415 (3,3991 16 34,680 Net earnings ... Common dividends ($.04 per share) Exercise of stock options Amortization of unearned compensation Minimum pension liability Other stock issuances Translation adjustments 5,322 19,709) 756 343 (739) Balance at December 28, 1997 $ 900 $ 483,384 $ 141,134 $ 130, 436) $ (63,0451 ==== ========= ========== ========= ======EEE See Notes to consolidated Financial Statements. . F-5 SUNBEAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLONS (DOLLARS IN THOUSANDS FISCAL YEARS ENDED DECEMBER 28, 1997 DECEMBER 29, 1996 DECEMBER 31, 1995 $ 109, 415 $ 1228, 2621 $ 50, 511 38,577 44,174 47, 429 154,869 128, 800 13, 713 57,783 32,430 (77,8281 25, 146 OPERATING ACTIVITIES: Net earnings (loss! Adjustments to reconcile net earnings (loss) to net cash provided by (used in operating activities: Depreciation and amortization ........ Restructuring, impairment and other costs Other non-cash special charges Loss on sale of discontinued operations, net of taxes ...... Deferred income taxes Increase (decrease in cash from changes in working capital: Receivables, net Inventories Account payable Restructuring accrual Prepaid expenses and other current assets and liabilities Income taxes payable Payment of other long-term and non-operating liabilities Other, net ....... (84,576) (100, 810) (1,585) (43,378) (13,8291 (11,6511 14,735 (4,4991 (4,8741 9, 245 19,004) 52,844 (14,682) (26,546) 2,737 (21,9421 (27,0891 13,764 (8,821) (18,4521 (21,7191 10,805 Net cash provided by (used in operating activities (8,249) 14,163 81,516 (58, 258) (75,3361 (140,0531 45, 755 INVESTING ACTIVITIES: Capital expenditures Decrease in investments restricted for plant construction Proceeds from sale of divested operations and other assets ..... Purchase of businesses Other, net ...... 90,982 (13,0531 --- (860) Net cash provided by (used in investing activities 32,724 (76, 1961 (107, 3511 5,000 40,000 FINANCING ACTIVITIES: Net borrowings under revolving credit facility Issuance of long-term debt Payments of debt obligations Proceeds from exercise of stock options Purchase of common stock for treasury Sale of treasury stock .............. Payments of dividends on common stock Other financing activities 30,000 11,500 (1,7941 4,684 (12,157) 26,613 (5,4171 9,818 (13, 0911 13,399) 320 4,578 (3,3181 (364) ( (3,2681 (264) Net cash provided by financing activities 16,377 45,286 27,778 Net increase (decrease in cash and cash equivalents ......... Cash and cash equivalents at beginning of year 40, 852 11, 526 (16,747) 28, 273 1,943 26,330 Cash and cash equivalents at end of year $ 52,378 ========= $ 11, 526 ======== $ 28, 273 ========== See Notes to Consolidated Financial Statements. F-6 This case requires the analysis of Sunbeam Corporation's financial statements to determine the effects of various adjustments to the company's comparative performance in 1996 and 1997. This assignment requires significant time to complete. Please adjust your homework schedule accordingly. Between 1993 and 1996 Sunbeam's stock price declined 14%. In July 1996, with the stock price at $12.50 per share, the troubled company fired CEO Roger W. Schipke, and hired former paratrooper Albert Dunlap. Upon taking over, Dunlap said, If you're a little frustrated with the prior management, you're a tolerant man. I would have hung them. During the remainder of 1996 and 1997 Chainsaw Al eliminated 80 of SOC's 114 plants, warehouses, and offices and over one-half of the company's employees by ending or selling the related operations. Dunlap had been successful earlier with similar moves at Scott Paper. After 14 months as CEO, Dunlap was able to sell the company to Kimberly-Clark at a 150% premium. In the first full year of Dunlap's leadership. Sunbeam's performance appeared to improve dramatically. On December 31, the company's stock price was over $40 per share. 1. ITEM 7. Management Discussion and Analysis of Financial Condition and Results of Operation (MD&A) from the Sunbeam's 1997 10-K refers to Sunbeam's performance improvement between 1996 and 1997. Examine to Sunbeam's statement of cash flows from the 1997 10-K. Did earnings increase between 1996 and 1997? Did cash flow from operations increase between 1996 and 1997? b. In 1996 earnings are negative and cash from operations are positive. What are the major accruals causing the difference between the two numbers? How could these accruals be used to shift income from 1996 into 1997? c. In 1997 earnings are positive and cash from operations is negative. What are the major accruals causing the difference between the two numbers? How could these accruals be used to shift income from 1998 into 1997? 2. Refer the MD&A from the 1997 10k. In paragraph 2, management states that sales that 1997 grew 18.7%. a. Confirm this result on the income statement. b. Refer to footnote 9. Revenues from the discontinued furniture business were not included in sales reported on the income statement. What is the effect of including sales from discontinued operations in sales reported on the income statement? Did Sunbeam's total Net sales actually increase in fiscal 1997? c. Paragraph 4 of the MD&A describes Sunbeams early buy program. How does the program contribute to the difference between operating cash flow and net income in 1997? How does this program affect the timing and recording of sales in 1997 and 1998? d. Does MD&A provide any justification for the inventory build up in 1997? 3. Footnote 8 states that in 1996 the company took a "special charge of 337.6M and provides some description of the charge. a. Describe where the 337.6M charge appears on the Income Statement. b. How much of the 337.6M charge appears on the Statement of Cash Flows? Why is it added back to net income? c. If special charges had not been recorded in 1996, what would happen to the gross profit percentage in 1996 and 1997? What would happen to SG&A as a percent of sales in 1996 and 1997? (Just give the direction of the change, no amount is required) 4. From the section titled "YEAR ENDED DECEMBER 29, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995" in the 1997 10K. a Selling, general and administrative ("SG&A") expenses, excluding the impact of special charges described above, were 17.6% of sales in 1996 primarily as a result of an inflated cost structure that has been realigned for 1997 and beyond. In addition, $12.0 million fourth quarter 1996 media advertising campaign and one-time expenditures for market research, new packaging, and other growth plan initiatives resulted in higher than normal SG&A spending in 1996. Also included in 1996 SG&A costs were $7.7 million of compensation expense resulting from restricted stock awards made in connection with the employment of a new senior management team. Management indicates that 1996 SG&A expense included large one-time payments to the new management team i.e., Al Dunlap. This one-time compensation expense was $7.7m. How does this item affect SG&A as a percent of sales in 1996? SUNBEAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL YEARS ENDED DECEMBER 28, 1997 DECEMBER 29, 1996 DECEMBER 31, 1995 $ Net sales Cost of goods sold Selling, general and administrative expense Restructuring, impairment and other costs $1,168,182 837, 683 131,056 984,236 900,573 214,029 154,869 $1,016,883 809, 130 137, 508 199, 443 11,381 (1,218) (285,235) 13,588 3,738 70, 245 9,437 173 Operating earnings (less) Interest expense.... Other (income) expense, net Earnings (loss) from continuing operations before income taxes Income taxes (benefit): Current Deferred 189, 280 (302,561) 60, 635 8,369 57, 783 128, 062) 177,828) (2,105) 25, 146 66, 152 (105, 890) 23,041 123, 128 (196, 671) 8 39 132,430) 37,594 12,917 (13,713) Earnings (loss) from continuing operations Earnings from discontinued operations, net of taxes Loss on sale of discontinued operations, net of taxes Net earnings (loss) .. Earnings (loss) per share of common stock from continuing operations: Basic $ 109, 415 $ $ (228,262) ========== 50, 511 ========== === $ 1.45 $ (2.37) $ 0.46 === ====EEEE ==EEEE 0.45 1.41 ========== (2.37) ========== === Diluted Net earnings (los) per share of common stock: Basic Diluted $ 1.29 $ 0.62 ===== $ (2.75) ========== (2.75) 1.25 0.61 ====EEEE ========= ====== Weighted average common shares outstanding: Basic 84,945 81, 626 ========= 82,925 ========= 82,925 ==== Diluted 87,542 82,819 ===== ========== ====== See Notes to consolidated Financial Statements. F-3 SUNBEAM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) DECEMBER 28, 1997 DECEMBER 29, 1996 $ $ ASSETS Current assets: Cash and cash equivalents Receivables, net Inventories Net assets of discontinued operations and other assets held for sale Deferred income taxes Prepaid expenses and other current assets 52,378 295,550 256,180 11,526 213,438 162, 252 36,706 17, 191 102,847 93,689 40, 411 Total current assets Property, plant and equipment, net Trademarks and trade names, net Other assets 658,005 240,897 194,372 27,010 624,163 220,088 200, 262 28, 196 $1,120,284 $1,072, 709 EEEEEEEEEE EEEEEEEEEE $ $ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt and current portion of long-term debt Accounts payable Restructuring accrual Other current liabilities 668 105,580 10,938 80, 913 921 107, 319 63,834 99,509 198,099 194,580 141, 109 54,559 271,583 201, 115 152, 451 52, 308 Total current liabilities Long-term debt Other long-term liabilities Deferred income taxes Commitments and contingencies (Note 12) Shareholders' equity: Preferred stock (2,000,000 shares authorized, none outstanding) Common stock (issued 89,984,425 and 88, 441,479 shares) Paid-in capital Retained earnings Other 900 483,384 141, 134 (30,436) 884 447, 948 35, 118 (25, 310) 594,982 (63, 045) 458, 640 (63, 388) Treasury stock, at cost (4,454,394 and 4,478,814 shares) Total shareholders' equity 531,937 395, 252 $1,120, 284 ========== $1,072, 709 ========== See Notes to consolidated Financial Statements. F-4 SUNBEAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT FER SHARE AMOUNTS) COMMON STOCK PAID-IN CAPITAL RETAINED EARNINGS OTHER (NOTE 2) TREASURY STOCK $ 932 $ 461,876 $ 120,118) $ (174,0701 $ 285,990 50, 511 (3,2681 20 17,013 Balance at January 1, 1995 Net earnings ...... Common dividends ($.04 per share) Exercise of stock options Amortization of unearned compensation Retirement of treasury shares ........ Purchase of common stock for treasury Minimum pension liability Translation adjustments -- 582 (741 (37,1031 (66, 535) 103, 712 (13,091) (199) (5,145) Balance at December 31, 1995 878 441,786 266, 698 124,880) (83,4491 == (228, 2621 (3, 318) Net loss............ Common dividends ($.04 per share) Exercise of stock options Grant of restricted stock ... Amortization of unearned compensation Minimum pension liability ....... Retirement and sale of treasury shares Translation adjustments 7,313 (1,1201 15,466 (14, 346) 7,707 4,963 (311 4,595 1, 246 Balance at December 29, 1996 884 447,948 35,118 125,310) (63,388 109, 415 (3,3991 16 34,680 Net earnings ... Common dividends ($.04 per share) Exercise of stock options Amortization of unearned compensation Minimum pension liability Other stock issuances Translation adjustments 5,322 19,709) 756 343 (739) Balance at December 28, 1997 $ 900 $ 483,384 $ 141,134 $ 130, 436) $ (63,0451 ==== ========= ========== ========= ======EEE See Notes to consolidated Financial Statements. . F-5 SUNBEAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLONS (DOLLARS IN THOUSANDS FISCAL YEARS ENDED DECEMBER 28, 1997 DECEMBER 29, 1996 DECEMBER 31, 1995 $ 109, 415 $ 1228, 2621 $ 50, 511 38,577 44,174 47, 429 154,869 128, 800 13, 713 57,783 32,430 (77,8281 25, 146 OPERATING ACTIVITIES: Net earnings (loss! Adjustments to reconcile net earnings (loss) to net cash provided by (used in operating activities: Depreciation and amortization ........ Restructuring, impairment and other costs Other non-cash special charges Loss on sale of discontinued operations, net of taxes ...... Deferred income taxes Increase (decrease in cash from changes in working capital: Receivables, net Inventories Account payable Restructuring accrual Prepaid expenses and other current assets and liabilities Income taxes payable Payment of other long-term and non-operating liabilities Other, net ....... (84,576) (100, 810) (1,585) (43,378) (13,8291 (11,6511 14,735 (4,4991 (4,8741 9, 245 19,004) 52,844 (14,682) (26,546) 2,737 (21,9421 (27,0891 13,764 (8,821) (18,4521 (21,7191 10,805 Net cash provided by (used in operating activities (8,249) 14,163 81,516 (58, 258) (75,3361 (140,0531 45, 755 INVESTING ACTIVITIES: Capital expenditures Decrease in investments restricted for plant construction Proceeds from sale of divested operations and other assets ..... Purchase of businesses Other, net ...... 90,982 (13,0531 --- (860) Net cash provided by (used in investing activities 32,724 (76, 1961 (107, 3511 5,000 40,000 FINANCING ACTIVITIES: Net borrowings under revolving credit facility Issuance of long-term debt Payments of debt obligations Proceeds from exercise of stock options Purchase of common stock for treasury Sale of treasury stock .............. Payments of dividends on common stock Other financing activities 30,000 11,500 (1,7941 4,684 (12,157) 26,613 (5,4171 9,818 (13, 0911 13,399) 320 4,578 (3,3181 (364) ( (3,2681 (264) Net cash provided by financing activities 16,377 45,286 27,778 Net increase (decrease in cash and cash equivalents ......... Cash and cash equivalents at beginning of year 40, 852 11, 526 (16,747) 28, 273 1,943 26,330 Cash and cash equivalents at end of year $ 52,378 ========= $ 11, 526 ======== $ 28, 273 ========== See Notes to Consolidated Financial Statements. F-6