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SunShine Systems, Inc.

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.

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.

Comprehensive Problem 2 (Continued)

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. SEE RATIOS ON PAGE 59 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?

SunShine Systems, Inc. SunShine Systems, Inc. Summary Consolidated Statement of Income (in millions) Consolidated Balance Sheets (in millions) Assets 2012 2011 Net Revenues $18,450 $15,850 $12,005 $9,982 Current Assets: Costs and expenses Cash and cash equivalents $1,480 $1,855 Cost of sales 10,055 7,590 5,690 4,710 Short-term investments 395 635 Research and development 2,020 1,680 1,280 1,040 Accounts receivable, net al owances of Sel ing, general and administrative 4,530 4,075 3,230 2,830 $410 in 2012 and $534 in 2011 2,975 2,710 Goodwil amortization 260 70 25 9.0 Inventories 1,063 565 In-process research and development 75 18 130 180 Deferred tax assets 1,112 683 Total costs and expenses Prepaids and other current assets 979 492 Operating Income Total current assets Gain (loss) on strategic investments (80) 200 - - Property, plant and equipment, net 2,710 2,105 Interest income, net 355 175 95 40 Long-term investments 4,680 4,506 Income before taxes 1,785 2,792 1,745 1,253 Goodwil , net of accumulated amortization of $349 in 2012 Provision for income taxes 580 890 570 380 and $88 in 2011 2,061 185 Cumulative effect of change Other assets, net 850 545 in accounting principle, net (50) - - - Net income Liabilities and Stockholders' Equity Net income per common share-diluted $0.34 $0.56 $0.36 $0.28 Current liabilities: Shares used in the calculation of net Short-term borrowings $5 $10 income per common share - diluted 3,390 3,382 3,272 3,100 Accounts payable 1,070 944 Accrued payrol -related liabilities 498 771 Average Stock Prices Book Values Per Share Accrued liabilities and other 1,384 1,175 2009 12 1/2 $1.38 Deferred revenues and customer deposits 1,847 1,299 2010 18 3/4 $1.75 Warranty reserve 335 221 2011 27 1/2 $2.20 Income taxes payable 100 230 2012 10 1/2 $3.50 Total current liabilities Deferred income taxes 754 587 Long-term debt and other obligations 1,710 1,730 YOUR NAME: 0 Total debt Commitments and contingencies Solutions: Stockholders' equity: Part 1: Percentage change in net income per common share-diluted Preferred stock, $0.001 par value, 10 shares authorized (1 share which has been designated as Series A Preferred 2009 0.28 participating stock): no shares issues and outstanding - - 2010 0.36 0.08 Common stock and additional paid-in-capital, $0.00067 par value par value, 7,200 shares authorized; issues: 3,536 shares in 2012 2010 0.36 and 3,495 shares in 2011 6,238 2,728 2011 0.56 0.2 Treasurey stock, at cost: 288 shares in 2012 and 301 shares in 2011 (2,435) (1,438) Deferred equity compensation (75) (20) 2011 0.56 Retained earnings 6,905 5,969 2012 0.34 -0.22 Accumulated other comprehensive income (loss) (31) 75 Total stockholders' equity Part 2: Profit Margin 2009 2010 2011 2012 Net income $- $- $- $- Net revenues $9,982 $12,005 $15,850 $18,450 Part 3: Percent of net revenue Part 6: P/E 2011 2012 2009 2010 2011 2012 Net Revenues $15,850 $18,450 Share prices 12.50 18.75 27.50 10.50 Cost of sales 7,590 10,055 EPS $0.28 $0.36 $0.56 $0.34 Research and development 1,680 2,020 S,G, and A 4,075 4,530 P/E Provision for income taxes 890 580 Part 4: Return on stockholders' equity Part 7: Price to book value 2011 2012 2009 2010 2011 2012 Net income $- $- Share prices 12.50 18.75 27.50 10.50 Stockholders' equity - - Book value $1.38 $1.75 $2.20 $3.50 P/BV Part 5: Various Ratios 2011 2012 1 Net income Net revenues (sales) 2a Net income Total Assets 2b Net income x Sales Sales Total Assets 3b Return on assets (1-Debt/Assets) 2012 Dol ars 2011 Dol ars 2010 Dol ars 2009 Dol ars owner: INSTRUCTIONS 1. Perform the calculations necessary to fil in the light green cel s. See examples to guide your computations in Table 2-1 and Table 2-4 in your text. 2. After performing Step 1, perform the calculations necessary to complete the dark green cel s. I provide you some guidance so see the comment boxes. 3. The purple cel s are for responses to the thought questions posed in the assignment. 4. The yel ow cel s comprise the financial data that wil be the basis for your computations. 5. Please put in your name and section in the acqua spaces provided below. 6. Return this assignment to me by uploading it in Blackboard. IMPORTANT: The identity of the financial ratios you wil compute in Part 5 may be found in pages 59-60 of your text. owner: Percentage Change = (New Amount - Old Amount)/Old Amount OR The Change or the Dif erence or the Increment divided by the Old Amount owner: The term "Net Revenues" typical y is another way to say "Sales" so knowing that is the case you can see the ratio you are computing in page 59 of your text owner: Here we use the Percentage of Sales approach where we divide items by Sales. Don’t forget that "Net Revenues" is another way to say "Sales." Page 106-107 in your text discusses the Percent of Sales (aka Net Revenue) Method. owner: See pages 28-29 of your text owner: See pages 59-60 in your text to identify these ratios. 2b and 3b deal with the DuPont System. owner: See the middle opf page 32. You are comparing the price of a share with its bok value hence the P/BV Ratio
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This question was asked on Jan 22, 2013.

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