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1. Discuss whether or not you would eliminate the restructuring charges when using earnings to forecast the future profitability of Borden.

2. Discuss whether or not you would eliminate the impairments when using earnings to forecast the future profitability of Borden.

Prior to Year 14, Borden, inc. derived approximately 75 percent of its revenues from branded food products and 25 percent from packaging and industrial products. The geographical sales mix was comprised of approximately 67 percent in the United States and 33 percent from other countries although interestingly, the firm's manufacturing and processing facilities were equally split between the United States and other countries. In Year 14 and Year 15. Borden was acquired by a firm that specialized in takeovers and buyouts of established firms. As a result, the firm experienced substantial business realignments and financial restructuring during this period. The data file for this exam presents income statements for Borden for Year 14. Year 15, and Year 16. The notes to the financial statements reveal the following additional information 1. Restructuring Charges and Discontinued Operations. For years, Borden reported continually increasing sales while maintaining a profit margin of approximately 4 percent. Borden regularly purchased branded food products companies and other businesses with the cash flows generated by its mature food products business. Sales and earnings started declining in Year 10, however, brought on by deteriorating market positions in certain branded food products segments and difficulties in managing the diverse set of businesses in which Borden competed. As a result, Borden embarked on a major restructuring program in Year 10. The restructuring program involved both organizational changes and divestiture of its North American snacks, seafood,jams, and jellies, and other businesses. Four years later, Borden embarked on another restructuring brought on by factors similar to those identified in Year 10. (The firm reported no restructuring charges in Year 11. Year 12. or Year 13.) The restructuring charges/credits in Year 14 Year 15. and Year 16 related to streamlining operations and the charges involved employee severances and relocations and plant closings. part of which Borden included in continuing operations and part of which it included in income from discontinued operations The loss on disposal recognized in Year 14 represented a pre tax charge of 5637 million (5490 million after takes) to provide for the expected future disposal of the North American businesses described above. The charges and credits in Year 15 and Year 16 related to these businesses as well 2. Loss/Gain on Divestitures, In Year 16, the firm redesigned its operating structure and made the decision to divest additional businesses. The firm recorded a $245 million charge related to the estimated losses on the disposal or consolidation of these businesses. The firm indicated that a large portion of the charge related to the excess of net book values over expected proceeds 3. Impairment Losses In Year 15. Borden wrote down goodwill, plant, and equipment totaling $293 million. The firm concluded that ongoing and projected operating losses reported by the businesses represented by these assets indicated that the carrying values of the assets were not expected to be recovered by their future cash flows. The firm stated that the future cash flow projections were measured at the business level which is the level at which the business is managed. A similar write down of $8 million was recorded in Year 16, 2 Borden, Inc. Income Statement amounts in millions) 3 4 Year 16 Year 15 Year 14 $5,944 (18) (4.136) (1,811) 11 (245) (8) (140) (15) (24) (8442) 5 Continuing Operations 6 Sales 7 Other Income (Expense)-Net 8 Cost of Goods Sold 9 Selling and Administrative 10 Restructuring Expense 11 Gain on Divestitures 12 Impairment Losses 13 Interest 14 Interest 15 Income Taxes 16 Income (Loss) from Continuing Operations 17 Discontinued Operations (net of tax effects) 18 Income (Loss) from Operations 19 (Loss) on Disposal 20 Gain (Loss) from Discontinued Operations 21 22 Accounting Changes (net of tax effect) 23 Postretirement Benefits Other than Pensions 24 Net Income (Loss) $6,261 (138) (4,240) (1.963) (15) 59 (293) (143) (41) (53) ($566) $6,226 35 (4,083) (2,045) (115) 15 0 (140) (41) 51 (597) $9 67 $76 $27 (59) (532) ($26) (490) (5516) -18 (5366) ($598) (5631) D Year 16 Year 15 Year 14 ($366) 157 245 -53 8 7 10 ($598) 193 95 -57 293 -631 224 637 53 0 41 61 -27 30 3 -242 17 9 6 Borden, Inc. 7 Statement of Cash Flows amounts in millions) (Problem 6.5) 8 9 Operations 1 Net Income (Loss) 2 Depreciation and Amortization 3 Loss on Disposal-Discontinued Operations 4 Restructuring 5 Impairment Losses 6 (Increase) Decrease in Accounts Receivable 7 (Increase) Decrease in Inventories 8 Increase (Decrease) in Accounts Payable 9 Increase (Decrease) in Current and Deferred Taxes 0 Other Changes in Working Capital Accounts -1 Cash Flow from Operations -2 3 Investing 14 Capital Expenditures 5 Divestiture of Businesses and Sale of Securities 56 Purchase of Businesses 37 Cash Flow from Investing 38 Financing 29 Increase in Long-term Debt 50 Issuance of Capital Stock 51 Reduction in Long-term Debt 52 Dividends 53 Other 54 Cash Flow from Financing 55 Change in Cash 56 Cash-Beginning of Year 57 Cash-End of Year -44 50 24 -7 -92 92 82 152 ($150) 409 0 (S203) 289 (6) $ 80 ($192) 3 998 (436) (43) (472) ($142) 20 125 $ 145 $ 259 (585) 616 6 (493) (36) (150) ($142) 25 100 $ 125 ($177) 53 (9) -$ 133 ($536) 275 12 (129) (127) 400 ($105) -86 186 $ 100 50 Table 1 Prior to Year 14, Borden, inc. derived approximately 75 percent of its revenues from branded food products and 25 percent from packaging and industrial products. The geographical sales mix was comprised of approximately 67 percent in the United States and 33 percent from other countries although interestingly, the firm's manufacturing and processing facilities were equally split between the United States and other countries. In Year 14 and Year 15. Borden was acquired by a firm that specialized in takeovers and buyouts of established firms. As a result, the firm experienced substantial business realignments and financial restructuring during this period. The data file for this exam presents income statements for Borden for Year 14. Year 15, and Year 16. The notes to the financial statements reveal the following additional information 1. Restructuring Charges and Discontinued Operations. For years, Borden reported continually increasing sales while maintaining a profit margin of approximately 4 percent. Borden regularly purchased branded food products companies and other businesses with the cash flows generated by its mature food products business. Sales and earnings started declining in Year 10, however, brought on by deteriorating market positions in certain branded food products segments and difficulties in managing the diverse set of businesses in which Borden competed. As a result, Borden embarked on a major restructuring program in Year 10. The restructuring program involved both organizational changes and divestiture of its North American snacks, seafood,jams, and jellies, and other businesses. Four years later, Borden embarked on another restructuring brought on by factors similar to those identified in Year 10. (The firm reported no restructuring charges in Year 11. Year 12. or Year 13.) The restructuring charges/credits in Year 14 Year 15. and Year 16 related to streamlining operations and the charges involved employee severances and relocations and plant closings. part of which Borden included in continuing operations and part of which it included in income from discontinued operations The loss on disposal recognized in Year 14 represented a pre tax charge of 5637 million (5490 million after takes) to provide for the expected future disposal of the North American businesses described above. The charges and credits in Year 15 and Year 16 related to these businesses as well 2. Loss/Gain on Divestitures, In Year 16, the firm redesigned its operating structure and made the decision to divest additional businesses. The firm recorded a $245 million charge related to the estimated losses on the disposal or consolidation of these businesses. The firm indicated that a large portion of the charge related to the excess of net book values over expected proceeds 3. Impairment Losses In Year 15. Borden wrote down goodwill, plant, and equipment totaling $293 million. The firm concluded that ongoing and projected operating losses reported by the businesses represented by these assets indicated that the carrying values of the assets were not expected to be recovered by their future cash flows. The firm stated that the future cash flow projections were measured at the business level which is the level at which the business is managed. A similar write down of $8 million was recorded in Year 16, 2 Borden, Inc. Income Statement amounts in millions) 3 4 Year 16 Year 15 Year 14 $5,944 (18) (4.136) (1,811) 11 (245) (8) (140) (15) (24) (8442) 5 Continuing Operations 6 Sales 7 Other Income (Expense)-Net 8 Cost of Goods Sold 9 Selling and Administrative 10 Restructuring Expense 11 Gain on Divestitures 12 Impairment Losses 13 Interest 14 Interest 15 Income Taxes 16 Income (Loss) from Continuing Operations 17 Discontinued Operations (net of tax effects) 18 Income (Loss) from Operations 19 (Loss) on Disposal 20 Gain (Loss) from Discontinued Operations 21 22 Accounting Changes (net of tax effect) 23 Postretirement Benefits Other than Pensions 24 Net Income (Loss) $6,261 (138) (4,240) (1.963) (15) 59 (293) (143) (41) (53) ($566) $6,226 35 (4,083) (2,045) (115) 15 0 (140) (41) 51 (597) $9 67 $76 $27 (59) (532) ($26) (490) (5516) -18 (5366) ($598) (5631) D Year 16 Year 15 Year 14 ($366) 157 245 -53 8 7 10 ($598) 193 95 -57 293 -631 224 637 53 0 41 61 -27 30 3 -242 17 9 6 Borden, Inc. 7 Statement of Cash Flows amounts in millions) (Problem 6.5) 8 9 Operations 1 Net Income (Loss) 2 Depreciation and Amortization 3 Loss on Disposal-Discontinued Operations 4 Restructuring 5 Impairment Losses 6 (Increase) Decrease in Accounts Receivable 7 (Increase) Decrease in Inventories 8 Increase (Decrease) in Accounts Payable 9 Increase (Decrease) in Current and Deferred Taxes 0 Other Changes in Working Capital Accounts -1 Cash Flow from Operations -2 3 Investing 14 Capital Expenditures 5 Divestiture of Businesses and Sale of Securities 56 Purchase of Businesses 37 Cash Flow from Investing 38 Financing 29 Increase in Long-term Debt 50 Issuance of Capital Stock 51 Reduction in Long-term Debt 52 Dividends 53 Other 54 Cash Flow from Financing 55 Change in Cash 56 Cash-Beginning of Year 57 Cash-End of Year -44 50 24 -7 -92 92 82 152 ($150) 409 0 (S203) 289 (6) $ 80 ($192) 3 998 (436) (43) (472) ($142) 20 125 $ 145 $ 259 (585) 616 6 (493) (36) (150) ($142) 25 100 $ 125 ($177) 53 (9) -$ 133 ($536) 275 12 (129) (127) 400 ($105) -86 186 $ 100 50 Table 1

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