Introduction: Understanding projections

• Example of a driver (simple sales driver)

– Take the last reported year’s sales growth rate, and project that growth rate to
future years (called “straight-lining projections”)

Calculation (black cells)

Formula in Excel =E7*(1+F50)

Calculation (black cells)

Historical inputs (blue cells) Simple “Straight-Line” References (black cells)
driver (blue cells) Formula in Excel: =F50

– See “Modeling techniques” section for a detailed discussion of formatting

rules

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 Introduction: Modeling techniques
• Formatting (cont’d)
– Maintain standard formatting of numbers throughout your model
• Formatting cells in Excel: Click “Alt + F + E” (or Ctrl + 1) opens a format
cells window and allows you to select desired formats
• To format multiples (to get the “x” in 13.4x, for example) or any other
customized formatting you may need, click on ‘Custom’ within the
‘Numbers’ tab of the “Format Cell” window.

$ sign only shown on first row

of worksheet and
highlighted financial results

EPS and share price data: always

Negative numbers shown using parenthesis carry to 2 decimals ($25.43):

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Step 4. Customize level of detail on the income statement See Notes
• Make modifications to line items to identify non-recurring charges (unusual items)
• Important: See detailed instructions on treatment of non-recurring items in self-study guide

1
Treatment of Unusual Items (Non-Recurring Charges)
• Pull unusual items (disclosed in footnotes below) out of appropriate expense lines (CGS and
SG&A in this case)
• Separate into newly added line items for unusual items below EBIT.
2 • Then tax-effect all tax-deductible adjustments using the marginal tax rate (38% per 10K,
footnote 7)
• Calculate per share impact of unusual items

Comments (See ‘Step 4 Notes’ for detailed discussion)

• Note EPS and EBIT are now higher after adjusting for non-recurring charges. This occurred
since unusual expense have been excluded from EBIT and EPS.
• Remember - the level of detail and what you choose to emphasize ultimately depends on the
purpose of your model!
• Spend the time to conceptually understand the end-goal of your analysis and it will greatly
3 simplify your task in the long-run.

Footnote 1 – 2002 EPS is adjusted by $0.02 per share to reflect the effect of dilutive earnings (See AR-39, footnote 12)
Footnote 2 - Pre-tax unusual items excluded from EPS:
• $19.2m FY 2000 gain in SG&A: Pre tax gain allocated to SG&A (AR Footnote 1+11)
• $5.7m FY 2001 charge in CGS: (AR Footnote 1+11): Q4 Charge to reflect inventory markdown to net realizable value.
• $343.3m FY 2001 charge in SG&A: AR footnote 1+11: $346.8 Q4 restructuring and impairment charge and $3.5 litigation gain
• $3.2m FY 2002 charge in SG&A ($2.0m after tax). Q4 2002 press release.
Step 5. Forecast sales “top-line” growth. See Notes
• Sales drivers vary for different industries – MD&A, Conference call transcripts, Equity Research reports provide a useful guide.
• Sales projections may be as simple as “straight-lining” last year’s sales growth, or vastly more detailed
• Always be conservative

References (black cells)

Drivers (blue cells)

Management expects 8-11% sales growth in 2003.

Reduce by 50 basis points for each year thereafter to
be conservative (see supplementary companion guide)
Step 6. Forecast operating costs. See Notes
• “Straight-line” or “follow the trend” unless other guidance available (i.e., management-hosted quarterly conference call transcripts often prove useful)
• Project expenses down to EBITDA. Do NOT yet project D&A, interest expense – they are driven off more detailed drivers to be discussed later

Calculations (black cells)

Net Sales
Less: CGS
Less: SG&A
EBITDA

Margins in this industry are

declining – read research, MD&A
for insights
Drivers (blue cells)

20 basis point annual decline reflects company

cost-cutting initiatives
Step 13. Prepare to project balance sheet items.
• So far we have projected sales and expenses on the income statement down to EBITDA. We now turn to the balance sheet.
• The first projections on balance sheet will be of current assets and current liabilities (Working Capital).
– Note that cash and current debt are not projected yet -– in fact, projecting cash and debt balances is the final step in building an earnings projection
model because they are dependent on the levels of all other cash flows, which, in turn, are dependent on all balance sheet and income statement
projections – which are yet to be complete. Note: don’t worry if this sounds confusing now, it will become clearer soon.
• Working capital projections will be made on a separate worksheet from the 3 core statements (BS, IS, CF), and projections will be linked back.

Sales and Cost of Goods Sold Drivers

Income Statement

Working Current Assets and Current

Liabilities Projections
Balance Sheet
Capital Historical Current Assets
and Current Liabilities

Net Change in
Working Capital
Projections

Cash Flow
Statement
Step 14. Input historical information. See Notes
• Input historical information. Maintain standard formatting throughout model
• Make sure historical balances balance – insert an automatic balance check

Insert Footnote:
Non-current assets in 2000 include deferred
income taxes and intangible assets. See
supplementary companion notes.

Calculation
s

Note: Conceptually understand why Assets = Liabilities + Shareholder’s Equity

• Insert a balance check to make sure historical balance sheet balances (Formula in Excel = =IF(D42=D19,"Yes","No")
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