Sunbeam Case

1a.  AdjustSunbeam’s1997Earningbefore interest andtaxesforone-time eventsandapparent(e.g.,doubtful accounts,depreciationexpense,andetc.)changesinaccounting policy. Becarefultoadjust forthings donein1996thathada carry-over effecton1997.Youmaywanttocomputesomecomparative ratiostofacilitateyouranalysis.Besuretoprovidethedetails ofandclearlylabelanycomputations.

 

1b.  Utilizingyouradjusted numbersfrom
(above)re-compute Sunbeam’soperatingcashflowsfor1997 (i.e.,computeanewcashflowsamount basedonyouradjustmentsto the     original  data).  Clearly  label  the  components  of  your computations.

 

Summarizeyourfindingsin1)a.and 1)b.(above),payingparticular attentiontoanyevidenceoffraud (becarefulnottolet20-20hindsight–i.e.,informationthatyou areawareof,butisnotincludedinthiscase–influence your conclusions).

 

2 YoureadaboutinyourtextandassessedintheStrategicAnalysisportionof yourproject,thefactorsthatMichaelPorteridentifiesasinfluencingand directingcompetitivestrategy.

 

Required:

a)Identifyeachofthosespecificfactors

b)Providespecificexamplesofaccounting informationthatmightbeusefulforassessingeachfactor.Besureto explain(briefly)howeachexamplemightbeused

 

• There are TWO parts to this examination. Part
1 = 13 points. Part 2 = 7 points. Total = 20
points.

• Write your answers in Standard English.
• Separately label each of your answers.

/ 20

SUNBEAM COMPLETES RECORD YEAR
FOR SALES, EARNINGS & GLOBAL EXPANSION

DELRAY BEACH, FLORIDA JANUARY 28, 1998 – Sunbeam Corporation (NYSE:SOC) today
announced record sales and earnings for its fourth quarter and full year 1997.
Sales for the quarter were $338 million, reflecting a 30.6% increase over the
prior year period on a comparable basis. Before the 1996 special charges taken
by the Company to restructure and reposition Sunbeam, earnings per share
(diluted) from continuing operations of $0.47 were $0.50 ahead of the loss of
$0.03 reported in the fourth quarter last year. Including these charges
earnings per share (diluted) rose $2.76 above the reported $2.29 loss reported
in 1996. On a year to date basis, revenue of $1.168 billion was 22.4% above
1996 on a comparable basis.

Albert J. Dunlap, Sunbeam’s Chairman and Chief Executive Officer, said “I
am very proud of the dramatic turnaround that we have achieved at Sunbeam in
such a short period of time as we continue to execute against our three year
growth plans. Our continuous sales increases of 13%, 17%, 28% and 31% in the
four quarters of 1997, for an overall sales increase of 22% for the year, are a
clear indication that our strategy is working.”

The Company’s three year strategy to achieve $1 billion in revenue
growth, which it embarked upon in 1997, was fueled by the addition of 25
international distribution/license agreements, the introduction of 35 new U.S.
products and 54 new international products along with the contribution from 22
factory outlet stores. “We experienced sales growth in all major channels of
distribution, in all regions of the world and in each of our five global
businesses, and we gained market share in all of our key product categories,
reversing a three year downward trend, ” said Mr. Dunlap.

Required:

PART 1 – There are a number of interesting differences between Sunbeam’s
1997 and 1996 balance sheets (e.g., receivables increased by $82 million,
inventories increased by $94 million, and pre-paid expenses decreased by $23
million, while long-term productive assets and liabilities remained
relatively unchanged), and between its 1997 and 1996 income statements
(e.g., during 1997 the company engaged in a number of “buy and hold”
transactions, gross margin increased dramatically and SG&A declined).

a. Adjust Sunbeam’s 1997 Earning before

interest and taxes for one-time events and apparent (e.g., doubtful
accounts, depreciation expense, and etc.) changes in accounting
policy. Be careful to adjust for things done in 1996 that had a
carry-over effect on 1997. You may want to compute some comparative
ratios to facilitate your analysis. Be sure to provide the details
of and clearly label any computations.

b. Utilizing your adjusted numbers from
1)a. (above) re-compute Sunbeam’s operating cash flows for 1997
(i.e., compute a new cash flows amount based on your adjustments to
the original data). Clearly label the components of your
computations.

c. Summarize your findings in 1)a. and
1)b. (above), paying particular attention to any evidence of fraud
(be careful not to let 20-20 hindsight – i.e., information that you
are aware of, but is not included in this case – influence your
conclusions).

SELECTED DATA FROM: SUNBEAM CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K

GENERAL
Sunbeam Corporation is a leading designer, manufacturer and marketer of
branded consumer products. The Company’s primary business is the manufacture,
marketing and distribution of durable household consumer products through mass
market and other distributors in the United States and internationally.

RESTRUCTURING AND GROWTH PLAN
In the Fall of 1996, under newly elected Chairman, Albert J. Dunlap, the
Company announced a major restructuring and growth plan. The restructuring
portion of the plan was completed during 1997, resulting in a significant
reduction in employees, facilities and costs, all of which is anticipated to
generate approximately $225 million in annual savings for the Company. The
Company’s restructuring plan included the closure of 18 factories, 43
warehouses and 5 headquarters, resulting in the consolidation of all corporate
offices into a single headquarters office located in Delray Beach, Florida and
an operations center at its Hattiesburg manufacturing and distribution
facility.

The Company’s operating results for 1996 include the effects of a pre-tax
special charge of $337.6 million recorded in conjunction with the
implementation of its restructuring and growth plan announced in November 1996.
Approximately 20% of the charge was for cash items primarily for severance
costs and lease and other facility exit costs.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Sales of Outdoor Cooking products increased in 1997 after three straight
years of declines as a result of increased merchandising and advertising
programs, new distribution and the introduction of an entirely new line of
grills and accessories for the 1998 season that began to ship in the fourth
quarter of 1997 under a new “early buy” marketing program that included among
other things, extended credit terms with due dates in the second quarter of
1998. The Company sold approximately $50.0 million of Outdoor Cooking Products
under this program in the fourth quarter of 1997. The early buy program for
Outdoor Cooking products is designed to improve customer service levels and
production efficiencies with more level seasonal production and distribution
activities that have historically peaked in the first half of each year and to
drive additional retail sell-through of Outdoor Cooking products by reducing
the likelihood of retail stock-outs during the important first and second
quarter 1998 selling season.

Selling, general and administrative (“SG&A”) expenses, excluding the
impact of special charges described above, were 17.6% of sales in 1996
primarily as a result of an inflated cost structure that has been realigned for
1997 and beyond. In addition, a $12.0 million fourth quarter 1996 media
advertising campaign and one-time expenditures for market research, new
packaging, and other growth plan initiatives resulted in higher than normal
SG&A spending in 1996. Also included in 1996 SG&A costs were $7.7 million of
compensation expense resulting from restricted stock awards made in connection
with the employment of a new senior management team.

LIQUIDITY AND CAPITAL RESOURCES
As of December 28, 1997, the Company had cash and cash equivalents of
$52.4 million and total debt of $195.2 million. Cash used in operating
activities during 1997 was $8.2 million compared to $14.2 million provided by
operating activities in 1996. This decrease is primarily attributable to an
increase in earnings before non-cash charges in 1997 and the utilization of tax
benefits generated from the implementation of the Company’s restructuring plan,
offset by higher accounts receivable due to increased sales in 1997 and certain
seasonal dating terms, increased inventory levels in 1997 necessary to support
continued anticipated sales growth and the Company’s initiatives to improve
customer service levels and 1997 cash expenditures required to implement the
restructuring plan.

In addition, cash used in operating activities reflects $59 million of
proceeds from the sale of trade accounts receivable under the Company’s
revolving trade accounts receivable securitization program entered into in
December 1997 as more fully described in Note 3 to the Company’s consolidated
financial statements.

Cash provided by investing activities also reflects $91.0 million in
proceeds from sales of businesses, assets and product categories determined to
be non-core to the Company’s ongoing operations in conjunction with the 1996
restructuring plan. Cash used in investing activities for 1995 includes the
purchase of a portion of the Company’s furniture business, which was
subsequently divested in full in March 1997.

Cash provided by financing activities totaled $16.4 million in 1997 and
reflects net borrowings of $5.0 million under the Company’s revolving credit
facility, $12.2 million of debt repayments related to the divested furniture
operations and other assets sold and $26.6 million in cash proceeds from the
exercise of stock options, substantially all by former employees of the
Company. In 1996, cash provided by financing activities of $45.3 million was
primarily from increased revolving credit facility borrowings to support
working capital and capital spending requirements, $11.5 million in new
issuances of long-term debt and $4.6 million in proceeds from the sale of
treasury shares to certain executives of the Company. In July 1997, the Company
reduced the amount of available borrowings under its September 1996 unsecured
five year revolving credit facility from $500 million to $250 million.

SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except EPS)
YEAR ENDED THREE MONTHS ENDED
————————— —————————
DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29,
1997 1996 1997 1996
———— ———— ———— ————

Net sales $1,168.2 $984.2 $338.1 $268.9
Cost of goods sold 837.7 900.6(a) 238.7 309.3(a)
———— ———— ———— ————
Gross profit (deficit) 330.5 83.6 99.4 (40.4)
% of sales 28.3% 8.5% 29.4% -15.0%
Selling, general &
administrative expense 131.1 214.0(b) 32.7 94.(b)
Restructuring, impairment
and other costs – 154.9 – 154.9
———— ———— ———— ————
Operating earnings/(loss) 199.4 (285.3) 66.7 (289.4)
% of sales 17.1% -29.0% 19.7% -107.6%
Interest expense and
other, net 10.2 17.3 4.1 4.0
———— ———— ———— ————
Earnings (loss) from continuing operations
before income taxes 189.2 (302.6) 62.6 (293.4)
Income taxes (benefit) 66.1 (105.9) 20.9 (103.0)
———— ———— ———— ————
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS 123.1 (196.7) 41.7 (190.4)
Earnings (loss) from discontinued operations,
net of tax (13.7) (32.4) – (32.4)
———— ———— ———— ————
Loss on sale of discontinued
operations, net (13.7) (32.4) – (32.4)
Net earnings (loss) $109.4 ($228.3) $41.7 ($234.7)
============ ============ ============ ============

(a) Includes special charges of $92.3
(b) Includes special charges of $42.5

SUNBEAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
December 28, December 29,
1997 1996
———— ————
ASSETS
Current assets:
Cash and cash equivalents $52.4 $11.5
Receivables, net 295.5 213.4
Inventories 256.2 162.3
Net assets of discontinued operations and other assets
held for sale – 102.
Deferred income taxes 36.7 93.7
Prepaid expenses and other current assets 17.2 40.4
———— ————
Total current assets 658.0 624.1

Property, plant and equipment, net 240.9 220.1
Trademarks and trade names, net 194.4 200.3
Other assets 27.0 28.2
———— ————
$1,120.3 $1,072.7
============ ============
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable 105.6 107.3
Restructuring accrual 10.9 63.8
Other current liabilities 81.6 100.4
———— ————
Total current liabilities 198.1 271.5

Long-term debt 194.6 201.1
Deferred income taxes 54.6 52.3
Non-operating and other long-term liabilities 141.1 152.5

Shareholders’ equity 531.9 395.3
———— ————
$1,120.3 $1,072.7
============ ============

SUNBEAM CORPORATION AND SUBSIDIARIES – CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

FISCAL YEARS ENDED DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995 _
OPERATING ACTIVITIES:
Net earnings (loss) ……. $ 109,415 $ (228,262) $ 50,511
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 38,577 47,429 44,174
Restructuring, impairment & other — 154,869 —
Other non-cash special charges — 128,800 —
Loss on sale of discontinued
operations, net of taxes … 13,713 32,430 —
Deferred income taxes ……. 57,783 (77,828) 25,146
Increase (decrease) in cash from changes
in working capital:
Receivables, net ………… (84,576) (13,829) (4,499)
Inventories …………….. (100,810) (11,651) (4,874)
Account payable …………. (1,585) 14,735 9,245
Restructuring accrual ……. (43,378) — —
Prepaid expenses and other current
Assets and liabilities ….. (9,004) 2,737 (8,821)
Income taxes payable …….. 52,844 (21,942) (18,452)
Payment of other long-term and
non-operating liabilities .. (14,682) (27,089) (21,719)
Other, net ……………… (26,546) 13,764 10,805
Net cash provided by (used in)
operating activities ……. (8,249) 14,163 81,516

INVESTING ACTIVITIES:
Capital expenditures ……. (58,258) (75,336) (140,053)
Decrease in restricted investments — — 45,755
Proceeds from sale of divested
Operations and other assets 90,982 — —
Purchase of businesses — — (13,053)
Other, net …………….. — (860) —
Net cash provided by (used in)
investing activities …… 32,724 (76,196) (107,351)

FINANCING ACTIVITIES:
Net borrowings (revolving credit) 5,000 30,000 40,000
Issuance of long-term debt . — 11,500 —
Payments of debt obligations (12,157) (1,794) (5,417)
Proceeds from exercise of
stock options …………. 26,613 4,684 9,818
Purchase of treasury stock.. — — (13,091)
Sale of treasury stock ….. — 4,578 —
Payments of common dividends (3,399) (3,318) (3,268)
Other financing activities . 320 (364) (264)
Net cash provided by financing 16,377 45,286 27,778
Net increase (decrease) in
cash and cash equivalents . 40,852 (16,747) 1,943
Cash and cash equivalents
at beginning of year …… 11,526 28,273 26,330
Cash and cash equivalents
at end of year ………… $ 52,378 $ 11,526 $ 28,273

SUNBEAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION
The Company recognizes revenues from product sales principally at the time
of shipment to customers. In limited circumstances, at the customers request
the Company may sell seasonal product on a bill and hold basis provided that
the goods are completed, packaged and ready for shipment, such goods are
segregated and the risks of ownership and legal title have passed to the
customer. The amount of such bill and hold sales at December 29, 1997 was
approximately 3% of consolidated revenues.

RECLASSIFICATION

In December 1997, the Company entered into a revolving trade accounts
receivable securitization program to sell without recourse, through a wholly-
owned subsidiary, certain trade accounts receivable. The maximum amount of
receivables that can be sold through this program is $70 million. At December
28, 1997, the Company had received approximately $59 million from the sale of
trade accounts receivable. The proceeds from the sale were used to reduce
borrowings under the Company’s revolving credit facility. Costs of the program,
which primarily consist of the purchaser’s financing cost of issuing commercial
paper backed by the receivables, totaled $.2 million during 1997, and have been
classified as interest expense in the accompanying Consolidated Statements of
Operations. The Company, as agent for the purchaser of the receivables, retains
collection and administrative responsibilities for the purchased receivables.

7. SUPPLEMENTARY FINANCIAL STATEMENT DATA
Supplementary Balance Sheet data at the end of each fiscal year is as
follows (in thousands):

1997 1996 _
Receivables:
Trade …………………………….. $ 305,219 $ 227,043
Sundry ……………………………. 7,794 2,412 _
313,013 229,455
Valuations allowances ………………. (17,463) (16,017)_
$ 295,550 $ 213,438 _
Inventories:
Finished goods ……………………… $ 142,976 $ 84,813
Work in process …………………….. 26,237 25,167
Raw materials and supplies …………… 86,967 52,272_
$ 256,180 $ 162,252_
Property, plant and equipment:
Land ……………………………….. $ 1,793 $ 2,524
Buildings and improvements ……………. 98,054 95,619
Machinery and equipment ………………. 245,824 258,199_
345,671 356,342
Accumulated depreciation and amortization .. (104,774) (136,254)
$ 240,897 $ 220,088_
Trademarks and trade names:
Gross ……………………………….. $ 237,095 $ 245,307
Accumulated amortization ………………. (42,723) (45,045)_

$ 194,372 $ 200,262 _

8. RESTRUCTURING, IMPAIRMENT AND OTHER COSTS
Amounts included in Restructuring, Impairment and Other Costs in 1996 in

the accompanying Consolidated Statement of Operations include cash items such
as severance and other employee costs of $43.0 million, lease obligations and
other exit costs associated with facility closures of $12.6 million, $7.5
million of start-up costs on back office outsourcing initiatives and other
costs related to the implementation of the restructuring and growth plan. Non-
cash Restructuring, Impairment and Other Costs in 1996 include $91.8 million
related to asset [property, plant & equipment] write-downs to net realizable
value for disposals of excess facilities and equipment and non-core product
lines, write-offs of redundant computer systems from the administrative back-
office consolidations and outsourcing initiatives and intangible, packaging and
other asset write-downs related to exited product lines and SKU reductions.

9. DISCONTINUED OPERATIONS AND OTHER ASSETS HELD FOR SALE
As part of the restructuring plan and redefinition of its core businesses,
the Company also announced the divestiture of the furniture business, by a sale
of assets. In February 1997, the Company entered into an agreement to sell the
business to U.S. Industries, Inc. which was completed on March 17, 1997. In
connection with the sale of these assets (primarily inventory, property, plant
and equipment), the Company received $69 million in cash. The Company retained
accounts receivable related to the furniture business of approximately $50.0
million as of the closing date.

11. CUSTOMER AND GEOGRAPHIC DATA

Classes of products which contributed more than 10% to consolidated sales
were outdoor home use durable products $325.8 million in 1997 and $256.9
million in 1996, and indoor home use durable products $769.6 million in 1997
and $680.7 million in 1996. Sales of outdoor cooking products accounted for
approximately 34% of the Company’s domestic net sales in 1997. The Company’s
largest customer (Wal-Mart) accounted for approximately 21% of consolidated net
sales in 1997 and 19% in 1996 and 1995.

VALUATION AND QUALIFYING ACCOUNTS: FISCAL YEARS 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES PERIOD _
Allowance for doubtful
accounts and cash discounts: $ (2,000)(a)
Fiscal year ended 8,948 (b)
December 28, 1997.. $16,017 $ 8,411 17 (c) $17,463
$ (233)(a)
Fiscal year ended 19,911 (b)
December 29, 1996 …… $12,326 $23,369 — (c) $16,017
$ 715(a)
Fiscal year ended 6,988 (b)
December 31, 1995 …… $ 9,416 $10,651 38 (c) $12,326
—————-
Notes: (a) Reclassified to/from accrued liabilities for customer deductions.
(b) Accounts written off as uncollectible.
(c) Foreign currency translation adjustment.

PART 2 – (7 Points)
You read about in your text and assessed in the Strategic Analysis portion of
your project, the factors that Michael Porter identifies as influencing and
directing competitive strategy.

Required:

a) dentify each of those specific factors
b) Provide specific examples of accounting

information that might be useful for assessing each factor. Be sure to
explain (briefly) how each example might be used