Module 07 Financial Accounting Project - Analysis, Free Cash Flow, and Cash Conversion Cycle

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ABC, Inc.

Rasmussen Student

Rasmussen College

Author Note

This research is being submitted on June 2, 2013, for Mark Jonas

A141/ACG1033 Section 14 Financial Accounting II.

ABC, Inc. CONSOLIDATED STATEMENT OF EARNINGS
Years Ended:	2007	2006
Net Sales	$782,431,000	$732,794,000
Cost of Goods Sold	640,637,000	596,284,000
Gross Profit	141,794,000	136,510,000
Selling, and general administrative expenses	109,861,000	103,775,000
Operating Profit	31,933,000	32,735,000
Other Income
Interest Income	1,139,000	1,556,000
Interest Expense	(1,026,000)	(105,000)
	113,000	1,451,000
Earnings Before Income Taxes	32,046,000	34,186,000
Income Tax Expense	9,976,000	10,440,000
Net Earnings	$22,070,000	$23,746,000

ABC, Inc. CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended:	2007	2006
Cash Flows From Operating Activities
Net Earnings	$22,070,000	$23,746,000
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and Amortization	26,269,000	22,241,000
Loss on disposal of fixed assets	366,000	-
Deferred income taxes	(6,322,000)	(1,055,000)
Stock based compensation expense	2,170,000	-
Changes in operating assets and liabilities, net of effect from acquired net assets
Trading securities	(11,262,000)	36,988,000
Accounts receivable	3,543,000	8,121,000
Inventories	(4,974,000)	(17,734,000)
Prepaid expenses	2,000,000	(1,815,000)
Accounts payable	(5,844,000)	(1,321,000)
Accrued expenses	9,640,000	6,834,000
Income taxes	7,230,000	(2,601,000)
Net cash provided by operating activities	44,886,000	73,404,000
Cash flows from investing activities
Purchase of property and equipment	(25,729,000)	(31,986,000)
Purchase of other assets	(682,000)	-
Net assets acquired, net of cash acquired	-	(3,464,000)
Sale and maturity of available-for-sale- securities	2,001,000	754,000
Net cash used in investing activities	(24,410,000)	34,696,000
Cash flows from financing activities
Proceeds from short-term borrowings	120,776,000	47,625,000
Payments on short-term borrowings	(120,776,000)	(47,625,000)
Proceeds from issuance of common stock	1,075,000	902,000
Tax benefit from stock option exercises	89,000	135,000
Repurchase of common stock	(19,773,000)	(14,931,000)
Dividends paid	(5,332,000)	(5,497,000)
Net cash used in financing activities	(23,941,000)	(19,391,000)
Effect of exchange rate changes on cash and cash equiv	(393,000)	(7,000)
Net increase (decrease) in cash and equivalents	(3,858,000)	19,310,000
Cash and equivalents at beginning of year	40,075,000	20,765,000
Cash and equivalents at end of year	$36,217,000	$40,075,000
Supplemental disclosure of cash payments for:
Income taxes	$8,983,000	$14,404,000
Interest	$1,026,000	$105,000

The company uses the indirect method for accounting purposes when reporting cash flows from operations. The net cash provided/used from operations compared to the net income amount on the income statement for 2007 and 2006 is not trending in the same direction. The largest adjustment item in the cash flows from operations is trading securities. The largest inflow and outflow of cash for investing activities proceeds from short-term borrowings and payments on short-term borrowings. Unrealized gain on securities available-for-sale had a net tax of $2,000 and $14,000. The unrealized gain (loss) on derivative instruments net tax was $569,000 and $(447,000). Property and equipment purchases of $1,279,000 and $2,777,000 were included in accounts payable.

ABC, Inc., purchases company common stock primarily to offset the dilution created by employee stock option programs and because the Board of Directors believe the company common stock is an excellent use of its excess cash. The Board approved a $20 million repurchase program and there is no expiration date. The company has a $75,000,000 unsecured bank credit agreement for the documentary and stand-by letters of credit and for working capital purposes and is limited to $60 million. The company has agreements with certain finance companies to provide snowmobile and ATV floor plan financing for the North American dealers. These agreements improve ABCs liquidly by financing dealer purchases of products without requiring substantial use of the company’s working capital. The company also believes current available cash and cash generated from operations provide sufficient funding in the event there is a requirement to perform under this agreement.

Cash Conversion Cycle

The cash conversion cycle (CCC) measures the time in days that it will take ABC to sell inventory, collect receivables, and pay its bills. As a rule, the lower the number, the better this is because as the CCC shortens, cash becomes free for a company to invest in new equipment, or other activities to boost return. It can also monitor by how useful in comparing close competitors and assessing management efficiency. Then CCC formulas is as follows:

CCC = days inventory outstanding (DIO) + days sales outstanding (DSO) – days payable outstanding (DPO)

The CCC figure for ABC for the trailing 12 months is 82.8.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months (The Motley Fool, 2013).

Quarterly fluctuations in the CCC below:

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter (The Motley Fool, 2013).

On a 12 month basis, the trend At ABC looked great; at 82.8 days, it was 22.3 days worse than the five year average of 60.5 days. The biggest contributor to that degradation was DSO and that worsened 36.9 when compared to the five year average (The Motley Fool, 2013). The CCC trend for ABC looks good at 46.4 days. It is 31.0 days better than the average of the past eight quarters but is doing better than average and with the last 12 month coming in worse. It has a mixed review in the cash conversion checkup (The Motley Fool, 2013).

References

ABC, Inc. (2007, March 31). ABC INC. FORM 10-K. Retrieved from

The Motley Fool. (2013). What ABC's Earnings Headlines Didn't Tell You. Retrieved from

ABC, Inc.