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Analyzing Industry Effects

Analyzing Industry Effects. ACTG 6920 Session 3 Professor Kile. SEGMENT DATA. Consolidated financial statements allow companies to hide the financial performance of individual companies within aggregated totals. SEGMENT DATA. However, the SEC, (under pressure

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Analyzing Industry Effects

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  1. Analyzing Industry Effects ACTG 6920 Session 3 Professor Kile

  2. SEGMENT DATA Consolidated financial statements allow companies to hide the financial performance of individual companies within aggregated totals.

  3. SEGMENT DATA However, the SEC, (under pressure from analysts), recognizes that disaggregated information about the performance of individual business segments is essential to understanding past performance, creditworthiness and the prospects For future performance.

  4. SEGMENT DATA Consequently, Companies are required by GAAP and the SEC to disclose a limited amount of segment disclosures.

  5. SEGMENT DATA FIRST LIMITATION: The SEC requires only one basis for segmentation. Segmentation can be based Upon products, services, Geography, legal organization, Customer base, distribution or Virtually any basis deemed approprate.

  6. SEGMENT DATA Management decides which basis of segmentation to provide.

  7. SEGMENT DATA Once management decides how to segment its reporting, any significant segment must be reported separately. Significant = 10% sales or 10% profit/loss or 10% assets.

  8. SEGMENT DATA Segmentation has to account for at least 75% of total sales.

  9. SEGMENT DATA Segment information is in a separate footnote (usually toward the end).

  10. SEGMENT DATA SECOND LIMITATION: Companies are only required to disclose by segment: REVENUE INCOME DEPRECIATION EXPENSE TOTAL ASSETS CAPITAL EXPENDITURES FOR PPE

  11. SEGMENT DATA SECOND LIMITATION: Companies are not required to disclose COST OF GOODS SOLD Or GROSS MARGIN by segment

  12. SEGMENT DATA Companies must reconcile segment breakdown to total (usually titled “Unallocated”).

  13. SEGMENT DATA Companies must disclose Major Customers (those comprising 10% or more of total sales).

  14. SEGMENT DATA Examples of Limitations: Coach – Business Week article and 10-K

  15. SEGMENT DATA Examples of Limitations: Coach Factory stores versus N. American Retail

  16. Item 1 Business Description The SEC requires that companies Provide extensive information about their operations in Item 1 of their 10-K. (The SEC reviews these disclosures)

  17. Item 1 Business Description Information required includes: Detailed description of business(es) Significant events in its history More information about segments Products & Markets & Distribution Raw Materials & Availability Product Development Discussion of Intangible Assets & of R&D Seasonality

  18. Item 1 Business Description Information required includes: Business practices that affect Working Captl Details about significant customers or groups Amounts and details about backlog Description of competitive conditions Exposure to environmental laws and liability Details about international risks

  19. Item 7 MD&A MD&A (item 7 of the 10-K) is an SEC required candid discussion of the business from a management perspective. This section is carefully reviewed by the SEC staff.

  20. Item 7 MD&A The MD&A requires a breakdown Of Price and Quantity. See CF Industries 10-K

  21. Item 7 MD&A The MD&A is also required in Quarterly reports (10-q).

  22. Usefulness of PxQ and COGS • Assuming a downward-sloping • demand curve, if there is an • increase in variable costs, and no • Corresponding increase in demand • in order to maximize profit, the firm • must. . . • Increase Price • Reduce Quantity • Recognize less Revenue & less Inc.

  23. Usefulness of PxQ and COGS The danger is that a company can report increased sales and yet decreased profits.

  24. Item 7 MD&A The MD&A also requires a breakdown or disclosure of Same Store Sales for retail. See TJX Companies Inc. 10-K Target Corp. 10-K

  25. Item 7 MD&A Same Store Sales Comparisons are also routinely disclosed. See Target Corp News Releases

  26. Industry Classifications Industry data is commonly provided according to industry classification coding systems. The most common: SIC codes NAICS codes GICS codes other less common and more specialized To pull data, you will need to know classifications for each of your company’s industries.

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