Wall Street Prep Restructurin ng Modeling Program INPUTTING HISTORICALS At this point, we must input historical income statement data for Borders for the last 2 years using the latest 10K and the latest three 10Qs. Inputting historical income statement results How far back should we go? - We use eight quarters worth of historical data so that we can get some sense of year over year growth rates as well as seasonality. In some circumstances, it may be appropriate to go back farther to better understand historical trends. Figure 1: We input eight quarters of historical income statement data Nonrecurring items If you compare the complete model s historical inputss against the reported results in the 10K and 10Qs, you ll notice they don t always match.. This is because we have excludedd items that we deemed to be nonrecurring. This is a subjective exercise which ultimately relies quite substantially on management s disclosures. We insertt comments in every income statement line item where we have made adjustments and list all of them for your convenience below: (c) s upport@ wallstreetprep.com by Wall Street Prep
Wall Street Prep Restructuring Modeling Program Table 1: Nonrecurring items Q1-5/1/09 Exclude $0.1m asset impairment and other write-downs Q2-7/31/09 Exclude loss from discontinued operations Q3-10/31/09 Exclude $0.2m asset impairment and other write-downs Exclude gain from disposal of discontinued operations Exclude gain from discontinued operations Q4-1/30/10 Exclude gain on sale of seasonal kiosk assets Exclude asset impairments and other write-downs Exclude gain from disposal of discontinued operations Exclude loss from discontinued operations Q1-5/1/10 Exclude gain from discontinued operations Q2-7/31/10 Exclude gain from disposal of discontinued operations Exclude gain from discontinued operations Q3-10/31/10 No adjustments Q4-1/29/11 Exclude asset impairments and other write-downs Exclude gain from disposal of discontinued operations Exclude gain from discontinued operations Data entry from the 10K for a quarterly model When building quarterly data, we need fourth quarter data but we are faced with a minor challenge in that the 10K only provides annual results. While we can use a fourth quarter press release to directly arrive at fourth quarter data, a press release is more likely to have abbreviated classifications for certain line items making comparison to prior quarters more challenging. As a result, it is often easier to simply input the full year data from the 10K and subtracting the prior three quarters. For example, Borders revenue for the full year ended January 29, 2011 was $2.3 billion. To arrive at fourth quarter revenue, we can simply subtract the prior three quarters revenues from the full-year total. Calculating EBITDA Below net income, we have a placeholder for EBITDA, which we will calculate later on. Although it is not usually a line item that you ll see on the income statement, it is a ubiquitous measure of profitability and an often-used metric for valuation, cash flow, and debt capacity analysis in restructuring analysis. As is typically the case, D&A is not disclosed separately on the income statement and is presumably aggregated into cost of sales and SG&A expenses. 2
Wall Street Prep Restructuring Modeling Program As a result, EBITDA should be calculated as gross profit, less SG&A expenses, plus depreciation and amortization expense. D&A expense can be found in the cash flow statement of the filings. Once located, input the D&A expense into the appropriate row in the PP&E schedule (scroll halfway down the model to find this schedule). Historical margins and growth Below the income statement, we calculate: Growth (latest four quarters) o Revenue (%) Margin (latest 8 quarters) o COGS (%) o Gross Profit (%) o SG&A Expense (%) o Tax Rate (%) o EBITDA (%) EPS and shares outstanding Those familiar with standard (non-bankruptcy) operating model construction may be wondering why we are not including a calculation of EPS in this buildup. This is because an analysis of future EPS performance is less meaningful in bankruptcy because a) the company is usually generating losses b) shareholders are usually wiped out in a bankruptcy and c) broad changes in capital structure and ownership obfuscate any operational trends that could be gleaned from observing changes in EPS over time. Inputting historical balance sheet data Assets - We input 4 quarters of historical results (this will be sufficient for our purposes). Notice that Borders did not include prepaid expenses and underwriting fees; we leave those lines blank in the model template. Liabilities - The liability side of the balance sheet is where the action is in a bankruptcy, as various liabilities get reclassified upon bankruptcy, and then again upon emergence from bankruptcy. 3
Wall Street Prep Restructuring Modeling Program Unfortunately, the way debt is classified on the balance sheet (short term debt, current portion of long term debt, and long term debt) is not very useful in analyzing a bankruptcy. For instance, Borders reports the following debt itemss on its balance sheet: Figure 2: Borders' Balance Sheet However, we need to go to the footnote to learn whatt comprisess short term debt, and what type of long term debt Borders has, since different tranches may have very different priority profiles. Here s what the footnotes reveal: Table 2: Important historical debt footnote disclosures from the 2010 10K Tranche Amount Other details Priority, security, and Lender(s) outstanding covenants Revolving 168.5 Availability: $100.44 First lien on Bank of credit facility Entered on March inventory, AR, cash America 31, 20100 and certain other (agent), Maximum collateral. and other commitment of First priority pledge lenders $970.5 through Julyy of equity interests in 31, 20111 and $700..0 certain subsidiaries through March 31, Second priority 2014. security interest in Borders had a $33.77 equity interests in outstanding letter of certain of our other credit subsidiaries, IP, and PP&E Term Loan 48.8 $80 initial loan Second liens on all GA tranche 1 Capital 1 Reflects borrowing base and availability restrictions. Minimumm excess availability formula is disclosedd in 1/29/2011 10K debt footnote, page 58. 4
Wall Street Prep Restructuring Modeling Program Term Loan 0. 0 tranche 2 Capital leases 1. 2 $10 initial loan assetss securing the revolver Primary liens on all other assets (agent), and other lenders Instead of inputting Short-term borrowings and current portion of long-term debt and Long-term debt, we input the revolver and term loan balances (from the table above) 2 2 : Figure 3: Reclassifying reported debt to a more useful model presentation 2 We assume the $1.2m in capital leasess are reported in Other Longg Term Liabilities. Additionally, the reported balance sheet values for Short-term borrowings and current portion of long-term debt and Long-term debt will not exactly equal the revolver and term loan balances disclosed in the footnotes. The company did not provide sufficient disclosuress to reconcile this - specifically, there is a $0.6 difference between the reported balances of short term debt and long term debt on thee balance sheet ($216.7+$ 1.2) and the footnote disclosure of the revolver and term loan tranches that make up those reported balances ($168.5+ $48.8). We reconcile by making an adjustment to Other Long Term Liabilities. 5
Wall Street Prep Restructuring Modeling Program Equity - Notice we simply inputted shareholders equity as one item instead of breaking it out into common stock, retained earnings, treasury stock, etc. We will discuss forecasting equity in a bankruptcy/restructuring a bit later. Balance check - We confirm that data entry has been done correctly be inserting a balance checker that ensures that assets = liabilities plus shareholders equity. 6