What are Non-GAAP Financial Measures?

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Amgen is a biotechnology firm that develops and manufactures human therapeutics that fight cancer, kidney disease, rheumatoid arthritis and other serious illnesses. As part of its 2008 financial report, the Company issued non-GAAP financial measures to facilitate additional analysis by investors.

QUESTIONS:

  • In one paragraph, briefly describe non-GAAP financial measures and how they differ from GAAP.
  • Does the SEC allow non-GAAP financial measures?
  • What non-GAAP financial measures did Amgen report? Explain some of specific issues they addressed in this supplemental information.

SOURCES:

PR Newswire. (2009). Amgen’s Fourth Quarter 2008 Adjusted Earnings Per Share Increased 6 Percent to $1.06; Full Year 2008 Adjusted Earnings Per Share, Fierce BioTech (Retrievable online at http://www.fiercebiotech.com/press-releases/amgens-fourth-quarter-2008-adjusted-earnings-share-increased-6-percent-1-06-full-year#ixzz0Yk4GRVCZ)

U.S. Securities and Exchange Commission. (2002). Final Rule: Conditions for Use of Non-GAAP Financial Measures, Release No. 33-8176; 34-47226; FR-65; FILE NO. S7-43-02 (Retrievable online at http://www.sec.gov/rules/final/33-8176.htm)

Really? A New Credit Card Fee?

Posted by & filed under Accounting Principles, All Articles, Financial Reporting and Analysis.

During the time that you thought the U.S. Congress was going to slowdown the generation of credit card fees, here comes another. American Express is sending out notices to customers who use co-branded credit cards with Delta Air Lines, JetBlue, Hilton Hotels, and Starwood Hotels that require a reinstatement fee. These fees will be levied in order to get back your reward points, in the event that you are late with a regular credit card payment.

QUESTIONS:

  1. The article says that by charging this fee, the company will create additional fees on future balances. Explain your understanding of how this works.
  2. Where should the transactions (both the fees and the rewards) mentioned in this article be reported in the American Express financial statements?
  3. What is a co-branded card? Explain how American Express and Delta Air Lines benefits in this arrangement.

SOURCE: Weber, H.R. “Another Credit Card Fee is About to Fly.” Knoxvillebiz.com (Retrievable online at http://www.knoxnews.com/news/2009/nov/18/another-credit-card-fee-about-fly/)

Boosting Liquidity

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On Tuesday, November 24, 2009, U.S. Airways announced several ways that it will boost its current and future liquidity. Since beginning its innovative slot transaction with Delta Air Lines, the company has been trying to realign a number of financial areas to focus on their most profitable flying operations.

QUESTIONS:

  1. What is liquidity and explain the most common liquidity ratios?
  2. One of the areas that U.S. Airways is tweaking is capital expenditures by deferral of the delivery of 54 Airbus aircraft. Explain how that will affect the financial statements.
  3. Using numbers in the article, explain how a current ratio of 1.4:1 might be affected.

SOURCE: RTTNews. “US Airways To Defer Aircraft Delivery To Boost Liquidity,” (Retrievable online at http://rttnews.com/Content/TopStories.aspx?Id=1139103)

Raising funds with Stock Warrants

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The biotechnology firm, Dendreon Corporation, is a company which is developing the prostate cancer drug Provenge. On Friday, November 20, the U.S. Food and Drug Administration (FDA) accepted its application to market the vaccine to treat men with advanced prostrate cancer. If the FDA approves it, the drug would be the first in a new class of treatments, which uses live human cells to activate a patient’s own immune system.

QUESTIONS:

  1. Unfortunately, as the Seattle Times article indicates, financing of this new venture has been troublesome at times. What is the mechanism of the stock warrant that the article talks about as a way in which the company raised money to continue its work in April 2008?
  2. Why did the warrants result in a second-quarter loss in 2009?
  3. What journal entry would Dendreon Corporation make to initially record the stock warrants in April 2008?

SOURCES:

Instant-Coffee Wars

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Starbucks has been working on a closely guarded secret for 20 years – Via Ready Brew instant coffee. A month after its launch, Nestle, the maker of Taster’s Choice, has begun an aggressive campaign against the new interloper. This campaign includes free samples of Nescafe’s “sticks,” direct mailings, and Web commercials.

QUESTIONS:

  1. How should Nestle account for the free samples of coffee?
  2. Starbucks rolled out Via after 20 years of secretive internal research and development (R&D). Assuming that Starbucks spent a million dollars each year for the R&D, how would this be reflected in their financial statements?
  3. Use some of the following facts laid out in the article:

Assume that Starbucks and Nestle are the only major companies in the instant coffee industry, which generates $21 billion worldwide in annual sales with 5% in the U.S.

Starbucks sells a 12-pack of single-serve pouches for $9.95.

Nestle sells seven 12-packs of single-serve pouches for $12.16.

If Nestle sells seven 12-packs for every one 12-pack sold by Starbucks, what amount of U.S. sales would each company share? How many pouches should be produced by each company to meet this demand?

SOURCE: Andrejczak, M. “Instant-Coffee War: Nestle Takes Aim at Starbucks,” Wall Street Journal – Market Watch (Retrievable online at http://www.marketwatch.com/story/instant-coffee-war-brewing-nestle-vs-starbucks-2009-11-18)

Are Things Improving for Sears Holding Corporation?

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In the third quarter of 2009, Sears Holding Corporation narrowed its losses from $146 million in the previous quarter to $127 million. Despite this, shares of Sears’ stock have almost doubled during 2009.

QUESTIONS:

  1. The article mentioned that because of inventory management, the company’s gross margin widened by 0.4 percentage points to 27.2%. What are some of the things that were done? Explain how each of these examples you cited would affect the financial statements?
  2. The article mentioned that Sears cut $101 million of selling, general and administrative expenses. Where does this appear in the financial statements?
  3. One of the things that Sears has done to increase sales is to bring layaway back to its K-Mart stores. Explain how revenue recognition works in a layaway situation, where a deposit is required to hold merchandise at the store until it is fully paid for. Include journal entries, where possible, in your explanation example.

SOURCE: Cheng, A. “Sears Loss Narrows As it Controls Inventory, Expenses,” Wall Street Journal – Market Watch (Retrievable online at http://www.marketwatch.com/story/sears-loss-narrows-on-cost-controls-2009-11-19)

New Rules for Gift Cards

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New rules were announced on November 16, 2009, regarding stricter rules to govern fees and expiration dates for gift cards, gift certificates, and general use pre-paid cards. While the rules have not be enacted and are open for comment for the next month, proposals include the prohibition of dormancy fees for a year and the extension of expiration periods to at least five years from the time the funds were loaded and the card sold and issued.

QUESTIONS:

  1. How would you classify gift cards on the financial statements?
  2. If a $50 gift card has a five year period before it expires, how should the company selling the card recognize income on it?
  3. Under the proposed changes, issuers can still charge inactivity fees for gift cards, are limited to one fine per month after a 12-month period. In addition, monthly maintenance fees, balance-inquiry fees and re-loading fees will be allowed. How should these fees be recorded by the issuing companies?

SOURCE: Jaffe, C. “No Gifts, Please,” Wall Street Journal- Market Watch (Retrievable online at http://www.marketwatch.com/story/gift-card-fees-keep-on-giving-to-card-issuers-2009-11-18)

Searching for Free Cash Flow

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The South Africa-based company, Harmony Gold, is having problems securing ongoing funding after using up more than $1 billion U.S. Its latest quarterly report shows that the company is grappling to produce free cash flow.

QUESTIONS:

  1. What is free cash flow and why is this a worry for the company?
  2. With respect to free cash flow, why was it a good sign to analysts that Harmony paid its first dividend in five years on September 21, 2009?
  3. Explain each of the following in terms of helping or hurting Harmony’s free cash flow position:
    1. Cash raised from selling residual shares in Gold Fields, after an earlier bid for the company failed.
    2. Incremental cash increases earned from the rising price of gold sales
    3. Significant projects to replace aging assets used in the mining process

SOURCE: Sergeant, B. “For Harmony Gold, Free Cash Flow Remains Elusive,” Mineweb – Gold News (Retrievable online at http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=91685&sn=Detail)

Timeshare Worries in a Recession

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Marriott International, the well-known hotelier, saw operating losses in its third quarter of 2009, as a result of its venture to move into financing time-shares during a slowing real estate market. In addition, the sluggish economy has not helped its primary business segment that caters to cash-based lodging for business and leisure travelers. As a result, Marriott’s credit profile shows a somber ‘BBB-‘ debt rating assigned to its long-term debt, which some describe as on the border between investment and junk bond status. In fact, some analysts are worried that Marriott may violate its key loan covenant: its leverage ratio.

QUESTIONS:

  1. What is a junk bond?
  2. Why is this borderline rating a bad thing for Marriott?
  3. Explain what a loan covenant ratio is. Assuming that Marriott’s covenant is tied to either the debt to equity ratio or the cash debt coverage ratio, describe how aggressively managing costs and accelerating debt reduction would help Marriott avoid a violation of its covenant.

SOURCE: Phillips, D. “Timeshare Business Unwelcome Guest at Marriott International,” BNET – Companies in the Buzz (Retrievable online at http://industry.bnet.com/travel/10003824/timeshare-business-unwelcome-guest-at-marriott-international/)

Debt Exchange

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In an 11th-hour effort to avoid filing for Chapter 11 bankruptcy, commercial lender CIT Group Inc. offered its bondholders a debt exchange. The exchange offer expired on October 29, 2009. According to this exchange plan, CIT bondholders of older notes would receive between $700 and $900 in new debt plus between 0.41 and 3.26 of new preferred shares for every existing $1,000 bond tendered.

QUESTIONS:

  1. Explain how this exchange would benefit CIT Group Inc. What are the potential costs or benefits for the bondholder?
  2. Assume that you are a bondholder that takes advantage of the exchange. You hold 5 bonds and exchange them for $800 plus 3 shares of new preferred stock when the stock has a stated value of $1.20 per share. What journal entry would you make?
  3. Assume the same information as in question 2 and make the journal entry that CIT Group Inc. would record on the exchange date.

SOURCE: Blandeburgo, B. “CIT Offers Debt Exchange, Draws Up Bankruptcy Plans,” Money Morning (Retrievable online at http://www.moneymorning.com/2009/10/03/cit-banking/)