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Comprehensive Problem 1 – SUNSHINE SYSTEMS

SunShine Systems (trends, ratios stock performance) (LO3) SunShine Systems is a leading supplier of computer related products, including servers, workstations, storage devices, and network switches.[footnoteRef:1] [1: ]

In the letter to stockholders as part of the 2012 annual report, President and CEO Scott G. McNealy offered the following remarks:

Fiscal 2012 was clearly a mixed bag for Sun, the industry, and the economy as a whole. Still, we finished with revenue growth of 16 percent—and that’s significant. We believe it’s a good indication that Sun continued to pull away from the pack and gain market share. For that, we owe a debt of gratitude to our employees worldwide, who aggressively brought costs down— even as they continued to bring exciting new products to market.

The statement would not appear to be telling you enough. For example, McNealy says the year was a mixed bag with revenue growth of 16 percent. But what about earnings? You can delve further by examining the income statement in Exhibit 1. Also, for additional analysis of other factors, consolidated balance sheet(s) are presented in Exhibit 2 on page 92.

1. Referring to Exhibit 1, compute the annual percentage change in net income per common share-diluted (second numerical line from the bottom) for 2009-2010, 2010–2011, and 2011–2012.

2. Also in Exhibit 1, compute net income/net revenue (sales) for each of the four years. Begin with 2009.

3. What is the major reason for the change in the answer for Question 2 between 2011 and 2012? To answer this question for each of the two years, take the ratio of the major income statement accounts to net revenues (sales).

Cost of sales

Research and development

Selling, general and administrative expense

Provision for income tax

4. Compute return on stockholders’ equity for 2011 and 2012 using data from Exhibits 1 and 2.

Exhibit 1

SUNSHINE SYSTEMS, INC.

Summary Consolidated Statement of Income (in millions)

2012

2011

2010

2009

Dollars

Dollars

Dollars

Dollars

Net revenues

$18,450

$15,850

$12,005

$9,982

Costs and expenses:

Cost of sales

10,055

7,590

5,690

4,710

Research and development

2,020

1,680

1,280

1,040

Selling, general and administrative

4,530

4,075

3,230

2,830

Goodwill amortization

260

70

25

9

In-process research and development

75

18

130

180

Total costs and expenses

16,940

13,433

10,355

8,769

Operating Income

1,510

2,417

1,650

1,213

Gain (loss) on strategic investments

(80)

200

–

–

Interest income, net

355

175

95

40

Income before taxes

1,785

2,792

1,745

1,253

Provision for income taxes

580

890

570

380

Cumulative effect of change
in accounting principle, net

(50)

–

–

–

Net income

$ 1155

$ 1,902

$ 1,175

$ 873

Net income per common share—diluted

$ 0.34

$ 0.56

$ 0.36

$ 0.28

Shares used in the calculation of net income per common share—diluted

3,390

3,382

3,272

3,100

5. Analyze your results to Question 4 more completely by computing ratios 1, 2a, 2b, and 3b (all from this chapter) for 2011 and 2012. Actually the answer to ratio 1 can be found as part of the answer to question 2, but it is helpful to look at it again.

What do you think was the main contributing factor to the change in return on stockholders’ equity between 2000 and 2001? Think in terms of the Du Pont system of analysis.

6. The average stock prices for each of the four years shown in Exhibit 1 were as follows:

2009 12 1/2

2010 18 3/4

2011 27 1/2

2012 10 1/2

a. Computer the price/earnings (P/E) ratio for each year. That is, take the stock price shown above and divide by net income per common stock-dilution from Exhibit 1.

b. Why do you think the P/E has changed from its 2011 level to its 2012 level?

A brief review of P/E ratios can be found under the topic of Price-Earnings Ratio Applied to Earnings per Share in Chapter 2.

Comprehensive Problem 2 (Continued)

Exhibit 2

SUNSHINE SYSTEMS, INC

Consolidated Balance Sheets (in millions)

Assets

2012

2011

Current assets:

Cash and cash equivalents

$ 1,480

$ 1,855

Short-term investments

395

635

Accounts receivable, net allowances of $410 in 2012 and
$534 in 2011

2,975

2,710

Inventories

1,063

565

Deferred tax assets

1,112

683

Prepaids and other current assets

979

492

Total current assets

8004

6,940

Property, plant and equipment, net

2,710

2,105

Long-term investments

4,680

4,506

Goodwill, net of accumulated amortization of $349 in 2012 and
$88 in 2011

2,061

185

Other assets, net

850

545

$18,305

$14,281

Liabilities and Stockholders’ Equity

Current liabilities:

Short-term borrowings

$ 5

$ 10

Accounts payable

1,070

944

Accrued payroll-related liabilities

498

771

Accrued liabilities and other

1,384

1,175

Deferred revenues and customer deposits

1,847

1,299

Warranty reserve

335

221

Income taxes payable

100

230

Total current liabilities

5,239

4,650

Deferred income taxes

754

587

Long-term debt and other obligations

1,710

1,730

Total debt

$ 7,703

$ 6,967

Commitments and contingencies
Stockholders’ equity:

Preferred stock, $0.001 par value, 10 shares authorized (1 share which has been designated as Series A Preferred participating stock): no shares issued and outstanding

–

–

Common stock and additional paid-in-capital, $0.00067 par value, 7,200 shares authorized; issued: 3,536 shares in 2012 and 3,495 shares in 2011

6,238

2,728

Treasury stock, at cost: 288 shares in 2012 and 301 shares in 2011

(2,435)

(1,438)

Deferred equity compensation

(75)

(20)

Retained earnings

6,905

5,969

Accumulated other comprehensive income (loss)

(31)

75

Total stockholders’ equity

10,602

7,314

$18,305

$14,281

7. The book values per share for the same four years discussed in the preceding question were:

2009 $1.38

2010 $1.75

2011 $2.20

2012 $3.50

a. Compute the ratio of price to book value for each year.

b. Is there any dramatic shift in the ratios worthy of note?