analyzing industry effects

Analyzing Industry Effects

ACTG 6920 Session 3Professor Kile

SEGMENT DATA

Consolidated financial statements allowcompanies to hide the financial performance of individual companies within aggregated totals.

SEGMENT DATA

However, the SEC, (under pressurefrom analysts), recognizes that disaggregated information aboutthe performance of individual business segments is essential tounderstanding past performance, creditworthiness and the prospectsFor future performance.

SEGMENT DATA

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

SEGMENT DATA

FIRST LIMITATION:FIRST LIMITATION:The SEC requires only onebasis for segmentation.

Segmentation can be based Upon products, services, Geography, legal organization,Customer base, distribution orVirtually any basis deemed approprate.

SEGMENT DATA

Management decides which basis of segmentation toprovide.

SEGMENT DATA

Once management decideshow to segment its reporting,any significant segment must be reported separately.

Significant = 10% sales or10% profit/loss or 10% assets.

SEGMENT DATA

Segmentation has to accountfor at least 75% of total sales.

SEGMENT DATA

Segment information isin a separate footnote(usually toward the end).

SEGMENT DATA

SECOND LIMITATION:SECOND LIMITATION:Companies are only required to disclose by segment:REVENUEINCOMEDEPRECIATION EXPENSETOTAL ASSETSCAPITAL EXPENDITURES FOR PPE

SEGMENT DATA

SECOND LIMITATION:SECOND LIMITATION:Companies are not required to disclose COST OF GOODS SOLDOr GROSS MARGIN by segment

SEGMENT DATA

Companies must reconcile segmentbreakdown to total (usually titled“Unallocated”).

SEGMENT DATA

Companies must disclose MajorCustomers (those comprising10% or more of total sales).

SEGMENT DATA

Examples of Limitations:Coach – Business Week article and 10-K

SEGMENT DATA

Examples of Limitations: Coach

Factory stores versusN. American Retail

Item 1 Business Description

The SEC requires that companiesProvide extensive information about their operations in Item 1 of their 10-K.

(The SEC reviews these disclosures)

Item 1 Business Description

Information required includes:Detailed description of business(es)Significant events in its historyMore information about segmentsProducts & Markets & DistributionRaw Materials & AvailabilityProduct DevelopmentDiscussion of Intangible Assets & of R&DSeasonality

Item 1 Business Description

Information required includes:Business practices that affect Working CaptlDetails about significant customers or groupsAmounts and details about backlogDescription of competitive conditionsExposure to environmental laws and liabilityDetails about international risks

Item 7 MD&A

MD&A (item 7 of the 10-K) is an SEC required candid discussion of thebusiness from a managementperspective. This section iscarefully reviewed by the SEC staff.

Item 7 MD&A

The MD&A requires a breakdownOf Price and Quantity.

See CF Industries 10-K

Item 7 MD&A

The MD&A is also required inQuarterly reports (10-q).

Usefulness of PxQ and COGS

Assuming a downward-slopingdemand curve, if there is anincrease in variable costs, and noCorresponding increase in demandin order to maximize profit, the firmmust. . .1.Increase Price2.Reduce Quantity3.Recognize less Revenue & less Inc.

Usefulness of PxQ and COGS

The danger is that a company canreport increased sales and yetdecreased profits.

Item 7 MD&A

The MD&A also requires a breakdown or disclosure of Same Store Sales forretail.

See TJX Companies Inc. 10-KTarget Corp. 10-K

Item 7 MD&A

Same Store Sales Comparisons are alsoroutinely disclosed.

See Target Corp News Releases

Industry Classifications

Industry data is commonly providedaccording to industry classification coding systems. The most common:SIC codesNAICS codesGICS codesother less common and more specialized

To pull data, you will need to know classifications for each of your company’s industries.