The Portable MBA in Finance and Accounting, 3rd Edition

64 Understanding the Numbers

be inversely related. For example, excluding subtotals and the bottom line of
the income statement, C.R. Bard had a total of only eight line items on its 1997
to 1999 income statements. However, its other income and expense note (Ex-
hibit 2.21) includes numerous nonrecurring items.
A review only of C.R. Bard’s 1997 to 1999 income statements would have
yielded a single nonrecurring item. Depending on what is judged to be nonre-
curring, Bard’s other income and expense note yields an additional nine to
eleven nonrecurring items. As with the Sherwin-Williams note, there is a ten-
dency for nonrecurring items to offset each other. Notice that Bard booked a
$24.5 million gain in 1997, when it also had a restructuring charge of$44.1
million. Also, an asset write-down of $34.1 million partially offset a $48.6 mil-
lion gain from legal and patent settlements in 1998.^30
Careful analysis of the composition of other income and expense line
items is very important in locating nonrecurring items. As the disclosures of
both Sher win-Williams and C.R. Bard illustrate, this task is made far easier if
a note is provided detailing the line item’s composition. However, you should
not expect to be guided to the note by a reference attached to this line item in
the income statement.

NONRECURRING ITEMS IN MANAGEMENT’S
DISCUSSION AND ANALYSIS (MD&A)

Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is an annual and a quarterly Securities and Exchange
Commission reporting requirement. Provisions of this regulation have a direct
bearing on the goal of locating nonrecurring items. As part of the MD&A, the
SEC requires registrants to:

Describe any unusual or infrequent events or transactions or any significant

economic changes that materially affected the amount of reported income from

EXHIBIT 2.21 Composition of the other income and expense note:
C.R. Bard Inc., years ended December 31 (in thousands).
1997 1998 1999

Interest income $ (3,500) $(6,000) $(2,100)
Foreign exchange (gains) losses — (2,100) (900)
Legal and patent settlements, net 2,000 (48,600) —
Asset write-down 8,500 34,100 9,700
Restructuring 44,100 3,200 —
Gains from sale of product lines and other (24,500) — —
Acquired R&D — 6,400 —
Other, net — 10,100 (200)
Total $26,600 $(2,900) $ 6,500

SOURCE: C.R. Bard Inc., annual report, December 1999, 27.