Borders Group, Inc., CASE 11-4 PART I and Part II
Account_tutor528 CHAPTERII • ExpandedAnalysis
CASE 11-4 BOOKS UNLIMITED*-PART I
Borders Group, Inc., presented this information in its 10-Ks:
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except per share data)
Sales |
| ]an.31,2009
$3,242.1 | Feb.2,200B
$3,555.1 | Feb.3,2007
$3,532.3 |
Other revenue |
| 33.3 | 42.3 | 37.1 |
Total revenue |
| $3,275.4 | $3,597.4 | $3,569.4 |
Cost of merchandise sold (includes occupancy) |
| 2,484.8 | 2,668.3 | 2,615.7 |
Gross margin |
| 790.6 | 929.1 | 953.7 |
Selling,general, and administrative expenses |
| 839.6 | 907.0 | 879.8 |
Pre-opening expense |
| 2.B | 5.0 | 8.1 |
Goodwill impairment |
| 40.3 |
|
|
Assetimpairments and other write-downs |
| 57.1 | 13.0 | 60.6 |
Operating income (loss) |
| (149.2) | 4.1 | 5.2 |
Interest expense, net |
| 5.3 | 43.1 | 29.9 |
Loss before income tax |
| (154.5) | (39.0) | (24.7) |
Income tax provision (benefit) |
| 30.2 | (19.1) | (2.8) |
Lossfrom continuing operations |
| $ (184.7) | $ (19.9) | $ (21.9) |
Loss from operations of discontinued operations | (net |
|
|
|
of incometax benefit of $0.9, $2.9 and $15.2) |
| (1.7) | (8.7) | (129.4) |
Lossfrom disposal of discontinued operations (net
of income tax benefit of$3.1, $7.6 and $0.0) Lossfrom discontinued operations (netof tax) Net loss
Lossper common share data (Note 2)
Basic:
Loss from continuing operations per common
(0.3) (12B.8)
(2.0) (137.5) (129.4)
s (186.7) $ (157.4) $ (151.3)
share $ (3.07) | $ (0.34) | $ (0.35) | |
Lossfrom discontinued operations per | |||
common share | $ (0.03) | $ (2.34) | $ (2.09) |
Net lossper common share | $ (3.10) | $ (2.68) | $ (2.44) |
Weighted-average common shares outstanding | 60.2 | 58.7 | 61.9 |
""Borders Group, Inc., through our subsidiaries, Borders, Inc.("Borders"), Walden BookCompany, Inc.("Walden
books"), and others (individually and collectively, "we," "our" or the "Company"), is an operator of book, music
,and movie supemor,es andmall-based bookstores." lOoK ,"0'
SourceiBorders Group, Inc 2010 10-K
CHAPTER I I • ExpandedAnalysis 529
CONSOLIDATED BALANCE SHEETS
(Dollars in millions except share amounts)
Fiscal Year Ended
Assets |
| Jan. 31,2009 | Feb.2,200B |
Current assets: |
|
|
|
Cash and cash equivalents |
| $ 53.6 | $ 58.5 |
Merchandise inventories |
| 915.2 | 1,242.0 |
Accounts receivable and other current assets |
| 102.4 | 103.5 |
Current assets of discontinued operations |
|
| 102.0 |
Total current assets |
| 1,071.2 | 1,506.0 |
Property and equipment, net |
| 494.2 | 592.8 |
Other assets |
| 39.4 | 64.9 |
Deferred income taxes |
| 4.0 | 44.9 |
Goodwill |
| 0.2 | 40.5 |
Noncurrent assets of discontinued operations |
|
| 53.6 |
Total assets |
| $1,609.0 | $2,302.7 |
Liabilities, Minority Interest and Stockholders' | Equity |
|
|
Current liabilities; |
|
|
|
Short-term borrowings and current portion oflong-term debt | $ 329.8 | $ 548.6 | |
Trade accounts payable | 350.0 | 511.9 | |
Accrued payroll and other liabilities | 279.8 | 321.6 | |
Taxes, including income taxes | 30.1 | 18.3 | |
Deferred income taxes | 4.0 | 9.9 | |
Current liabilities of discontinued operations
Total current liabilities
Long-term debt
Other long-term liabilities
Noncurrent liabilities of discontinued operations
Contingencies (Note 8)
Totalliabilities
Minority interest
Total liabilities and minority interest
Stockholders' equity:
Common stock, 300,000,000 shares authorized; 59,903,232 and
57.5
993.7 1,467.8
6.4 5.4
345.8 325.0
25.4
1,345.9 1,823.6
0.5 2.2
1,346.4 1,825.8
58,794,224 shares issued and outstanding atJanuary 31, 2009 and February 2, 2008, respectively |
186.9 |
184.0 |
Accumulated other comprehensive income | 11.9· | 42.4 |
Retained earnings | 63.8 | 250.5 |
Total stockholders' equity | 262.6 | 476.9 |
Total liabilities, minority interest and stockholders' equity | $1,609.0 | $2,302.7 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
Cash provided by (used for);
1an.31,2009
FiscalYear Ended, Feb.2,200B
Feb.3,2007
Net loss | $(186.7) | $(157.4) | $(151.3) |
Net loss from discontinued operations | (2.0) | (137.5) | (129.4) |
Net [055 from continuing operations | (184.7) | (19.9) | (21.9) |
Operations
|
Adjustments to reconcile net Jossfromcontinuing operations to operating cash flows:
(continued)
CHAPTER II • ExpandedAnalysis 531
Required
a. Compute the following liquidity ratios for 2009 and 2008:
1. Days' sales in inventory
2. Inventory turnover (useending inventory)
3. Working capital
4. Current ratio
5. Cash ratio
6. Salesto working capital (use ending working capital)
7. Operating cash flowlcurrent maturities of long-term debt and current notes payable
.b. Compute the following long-term debt-paying ability for 2009 and 2008:
1. Debt ratio
2. Operating cash flow/total debt
c. Compute the following profitability ratios for 2009 and 2008:
1.Net profit margin
2. Return on assets (use end of year total assets)
3. Return on total equity (use end of year total equity)
4. Grossprofit margin
d. Compute or obtain the followinginvestor analysis:
1. Earnings per common share
2. Operating cash flowlcash dividends
e. Comment on the results in (a), (b), (c) and (d). f. Comment onthe trend in net income (loss).
g. Comment on significant trends (items) in the Consolidated St;tement ofCash Flows. h. Using these ratios for 2009 and 2008, comment using theBeaver Study on possible
financial failure:
1.Cash flow/total debt
2. Net income/total assets (return on assets)
3. Total debt/total assets (debt ratio)
CASE II~5BOOKS UNLIMITED-PART 2
Borders Group, Inc. presented this information in its 10-K:*
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollarsin millions except per share data)
Jan. 30,2010 Jan. 31,2009 Feb. 2,2008
Sales |
| $2,791.1 | $3,242.1 | $3,555.1 |
Other revenue |
| 32.8 | 33.3 | 42.3 |
Total revenue |
| $2,823.9 | $3,275.4 | $3,597.4 |
Cost of merchandise | sold (includes occupancy) | 2,191.3 | 2,484.8 | 2,668.3 |
Gross margin |
| 632.6 | 790.6 | 929.1 |
Selling, general and administrative expenses | 711.3 | 842.4 | 912.0 | |
Goodwill impairment |
| 40.3 |
| |
Assetimpairments and other writedowns | 16.2 | 57.1 | 13.0 | |
Operating income (loss) | (94.9) | (149.2) | 4.1 | |
Interest expense | 24.1 | 45.4 | 43.1 | |
Warrant/put expense (income) | 20.7 | (40.1) |
| |
Total interest expense | 44.8 | 5.3 | 43.1 | |
(continued)
UBorders Group, Inc., through our subsidiaries including Borders, Inc. ("Borders") (individually and collectively, "we," "our" or the "Company"), is an operator of book and moviesuperstores andmall-based bookstores." lO-K Source:Borders Group, Inc 2010 lO-K
(CASE 11-4 CONTINUED)
Operations (continued)
Fiscal Year Ended, .
Jan. 31,2009 Feb. 2, 200S Feb. 3, 2007
Decrease in minority interest 004 0.6
Decrease (increase) in deferred income taxes 34.5 (3.7) (24.7) Decrease (increase) in other long-term assets 23.6 0.3 (1.3) (Decrease)increase inother long-term
liabilities (14.9) 4.5 8.8
Goodwill impairment 40.3
Asset impairments and other write-downs 57.1 13.0 60.6
Cash provided by (used for) current assetsand
current Iiabilities:
Decrease (increase) in inventories 321.4 52.2 (23.3) Decrease (increase) in accounts receivable 10.2 13.3 (7.5) Decrease (increase) in prepaid expenses 9.8 (1.0) 10.4
Decrease in accounts payable (160.2) (59.2) (55.7) Increase (decrease) in taxes payable 13.7 (36.4) (70.0)
(Decrease)increase inaccrued payroll and
other liabilities (29.2) 32.2 50.8
Net cash provided by operating activities of
continuing operations 233.6 105.0 39.1
Investing
Capital expenditures (79.9) (131.3) (165.6) Investment in Paperchase (3.6) (O.S)
Proceeds from the saleof discontinued operations 97.3 20.4
Proceeds from sale of investments
Net cash provided by (used for) investing
---
21.6
activities of continuing operations 13.8 (111.7) (144.0) Financing
Proceeds from the excess tax benefit ofoptions
exercised 0.5 0.9 4.3
Net (repayment of) funding from credit facility (261.7) 43.4 303.4
Funding from short-term note financing 42.5
Issuance of long-term debt 1.2 0.4
Repayment of long-term debt (1.4)
Repayment of long-term capital lease obligations (0.4) (004) (0.1) Issuance of common stock (0.4) 3.1 21.9
Repurchase of common stock (0.2) (0.6) (14S.7)
Payment of cash dividends (6.5) (19.4) (25.2) Net cash (used for)provided by financing
activities of continuing operations (226.4) 27.4 155.6
Effect of exchange rates oncash and cash
equivalents of continuing operations (0.9) 0.8 (0.6) Net cash (used for) provided by operating activities
of discontinued operations (21.3) (0.7) 16.2
Net cash used forinvesting activities of
discontinued operations (6.5) (17.S) (41.9) Net cash (usedfor) provided byfinancing activities
of discontinued operations (41.9) 13.9
Effectof exchange rates on cash and cash
equivalents of discontinued operations 2.S (0.2) 0.5
Net cash used for discontinued operations (25.0) (60.6) (11.3) Net increase (decrease) in cash and cash equivalents (4.9) (39.1) 38.8
Cash and cash equivalents at beginning of year 58.5 97.6 58.S
Cash and cashequivalents atend of year
Supplemental cash flow disclosures:
-s-5-3.6 $ 58.5 $ 97.6
Interest paid $ 36.3 $ 43.8 $ 32.S Income taxes (received) paid s (34.6) s 12.4 $ 63.5
(CASE 11-5 CONTINUEO)
Lossbeforeincome tax. | Jan. 30,2010
(139.7) | Jan. 31, 2009
(154.5) | Feb. 2, 2008 (39.0) |
Income tax provision (benefit) | (29.5) | 30.2 | (19.1) |
Loss from continuing operations | $ (110.2) | $ (184.7) | $ (19.9) |
Lossfrom operations of discontinued operations (net | |||
ofincome tax benefitof $-, $0.9 and $2.9) |
| (1.7) | (8.7) |
Gain (loss)from disposal ofdiscontinued operations (net of income tax benefit of $-,$3.1 and $7.6) |
0.8 |
(0.3) |
. (128.8) |
Gain (loss) from discontinued operations
(netoftax) Net loss
Lossper common share data (Note2)
Basic:
Loss from continuing operations per common
0.8 (2.0) (137.5)
$ (109.4) $ (186.7) $ (157.4)
share
|
Gain (loss) from discontinued operations per common share
Net losspercommon share
Weighted-average common shares outstanding
$ (1.83)
$ (3.07)
$ (0.34)
(inmillions)
60.1 60.2 58.7
CONSOLIDATED BALANCE SHEETS (Dollars in millions except share amounts)
Current assets:
Assets
FiscalYearEnded
Jan. 30, 2010 Jan.31,2009
Cash and cashequivalents | $ 37.0 | $ 53.6 |
Merchandise inventories | 873.8 | 915.2 |
Accounts receivable and other current assets | 76.5 | 102.4 |
Deferred income taxes | 1.0 |
|
Total current assets | 9B8.3 | 1,071.2 |
Property and equipment, net | 392.8 | 494.2 |
Other assets | 39.9 | 39.4 |
Deferred income taxes | 3.9 | 4.0 |
Goodwill | 0.3 | 0.2 |
Total assets | $1,425.2 | $1,609.0 |
Liabilities and Stockholders' Equity
Current liabilities;
Short-term borrowings and current portion of long-term debt
Trade accounts payable
Accrued payroll and other liabilities Taxes, including incometaxes Deferred incometaxes
Total current liabilities
Long-term debt
Other long-term liabilities
Contingencies (Note 8) Total liabilities
.Stockholders' equity;
Common stock, 300,000,000 shares authorized; 59,869,384 and 59,903,232 shares issuedand outstanding atjanuary
$ 275.4 $ 329.8
350.8 350.0
257.4 279.8
44.1 30.1
4.0
927.7 993.7
6.6 6.4
332.6 345.8
1,266.9 1,345.9
31, 2010 and January 31,2009, respectively
Accumulated other comprehensive income
Retained earnings (deficit) Total stockholders' equity
Total liabilitiesand stockholders' equity
187.2
16.7 (45.6)
158.3
$1,425.2
187.4
11.9
63.8
263.1
$1,609.0
CHAPTER I I • Expanded Analysis 533
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in miJIions)
FiscalYearEnded,
]an.30,2010 Jan. 31,2009 Feb. 2, 200B
Cashprovided by (used for): |
| |||
Net loss |
| $(109.4) | . $(186.7) | $(157.4) |
Net income (loss) from discontinued | operations | 0.8 | (2.0) | (137.5) |
Loss from continuing operations |
| (110.2) | (184.7) | (19.9) |
Operations
|
Adjustments to reconcile net lossfrom continuing operations to operating cash flows:
|
Cash provided by (used for) current assets and current liabilities:
',:
v
Net cashprovided by operating activities of continuing operations
56.1
--23-3.6 105.0
|
Investing
.:'
'.'/~.
....~,
|
'~.~;~
activities of continuing operations
Financing
| |||||||||||||||||||||||||||||||||||||
Proceeds from the excess tax benefit ofoptions
(17.9)
--1-3.8 (111.7)
Net cash provided by (usedfor)financing activities of continuing operations
Effect of exchange rates on cash and cash equivalents of continuing operations
Net cash provided by (used for)operating activities ofdiscontinued operations
Net cash used for investing activities of discontinued operations
Net cash usedforfinancing activities of discontinued operations
0.3
0.8
(226.4) 27.4 (0.9) 0.8 (21.3) (0.7) (6.5) (17.8)
(41.9)
(continued)
534 CHAPTER I I • ExpandedAnalysis
(CASE I 1-5CONTINUED)
Effect of exchange rates on cash and cash
Fiscal YearEnded,
Jan. 30, 2010 Jan.31, 2009 Feb.2, 2008
equivalents of discontinued operations 2.8 (0.2) Net cash provided by (usedfor) discontinued
operations 0.8 (25.0) (60.6)
Net decreaseincash and cash equivalents (16.6) ~) (39.1) Cash and cash equivalents at beginning of year 53.6 58.5 97.6
Cash and cash equivalents at end of year $ 37.0 $ 53.6 $ 58.5
Supplemental cashflow disclosures:
Interest paid $ 16.6 $ 36.3 $ 43.8
Net income taxes (received) paid $ (42.5) $ (34.6) $ 12.4
REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders ofBorders Group, Inc.
We have audited the accompanying consolidated balance sheets of Borders Group, Inc. and subsidiaries asofJanuary 30,2010 andJanuary 31, 2009 and therelated consolidated state ments of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 30, 2010. Our audits also included the financial statement schedule listed intheIndex at Item 15(a)(2). Thesefinancial statements and schedule aretheresponsi bility of the Company's management. Our responsibility is to express an opinion onthese fi nancial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (UnitedStates). Those standards require that we plan and per form the audit to obtain reasonable assurance about whether the financial statements are freeofmaterial misstatement. Anaudit includes examining, onatest basis,evidence support ing the amounts and disclosures inthe financial statements. Anaudit alsoincludes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basisfor our opinion.
Inour opinion, the financial statements referred to above present fairly, inallmaterial
respects, the consolidated financial position ofBorders Group, Inc.and subsidiaries atJanu ary 30, 2010 and January 31, 2009 and the consolidated results of theiroperations and their cash flows for each ofthe three years in the period ended January 30, 2010, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairlyinallmaterial respects the information setforth therein.
As discussed in Note 7 to the consolidated financial statements, in 2007 the Company adopted the required provisions of the guidance originally issued in Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (codi fied in FASBASCTopic 740, Income Taxes).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Borders Group, Inc.'s internal control over fi nancial reporting asof January 30, 2010, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread way Commission and our report dated April 1, 2010 expressed an unqualified opinion thereon.
Detroit, Michigan
April 1, 2010
/s/ERNST &YOUNG LLP
CHAPTER II • Expanded Analysis 535
;-. '
:" '
::-1~" .:'
~:
Required
a. Perform a horizontal common-size analysis of the consolidated statements of operations usingsales through gross margin for2008,2009,and2010.Usethefiscalyear ended February 2,2008asthe base. Comment.
b. Performa verticalcommon-sizeanalysis of the consolidated statements ofoperations using sales through grossmargin for2008,2009,and2010.Usesales as the base.Comment.
c. For the years ended January 31, 2009 and January 30,2010,compute thefollowing ratios. Comment.
1.Cash flow/total debt
2. Net income/total assets (return on assets)
3. Total debt/total assets {debtratio}
Note: These are the ratios that the Beaverstudy indicated were the bestfor forecasting failure (inthe order of theirpredictive power).
d. For theconsolidated statements of cash flowsfor the fiscalyear ended February 2, 2008, January 31,2009and January 30, 2010,comment on the significance of the decrease in inventories on the net cash provided by operating activities of continuing operations.
e. Consolidated Statements of Cash Flows (dollars inmillions) {InPart}:
Fiscalyear ended
January 30,
2010
January February2,
31,2009 2008
Supplementalcashflow disclosures: |
| ||
Interestpaid | $ 16.6 | $36.3 | $43.8 |
Net incometaxes(received)paid | $(42.5) | $(34.6) | $12.4 |
f. Comment on the audit report dated April 1,2010. |
|
|
|
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