Chapter 19, Problem 19.12BYP

Real World Case 19–12

Reporting EPS; discontinued operations; Kaman Corporation

• LO19–13

Real World Financials

Kaman Corporation, headquartered in Bloomfield, Connecticut, was incorporated in 1945. It is a diversified company that conducts business in the aerospace and distribution markets. The following is an excerpt from the comparative income statements (beginning with earnings from continuing operations) from Kaman’s 2015 annual report ($ in thousands). A disclosure note from Kaman’s 2015 annual report is shown below.

An income statement sometimes includes discontinued operations. Kaman Corporation reports income from discontinued operations.

17. COMPUTATION OF EARNINGS PER SHARE (in part)

The computation of basic earnings per share is based on net earnings divided by the weighted average number of shares of common stock outstanding for each year. The computation of diluted earnings per share includes the common stock equivalency of dilutive options granted to employees under the Stock Incentive Plan.

Excluded from the diluted earnings per share calculation for the years ended December 31, 2015, 2014 and 2013, respectively, are 487,071, 342,994 and 391,717 shares associated with equity awards granted to employees that are anti-dilutive based on the average stock price. Convertible Notes for the years ended December 31, 2015, 2014 and 2013, shares issuable under the Convertible Notes that were dilutive during the period were included in the calculation of earnings per share as the conversion price for the Convertible Notes was less than the average share price of the Company’s stock. Warrants excluded from the diluted earnings per share calculation for the years ended December 31, 2015, 2014 and 2013, respectively were 3,422,477, 3,411,539, and 3,404,626 shares, issuable under the warrants sold in connection with the Company’s Convertible Note offering as they would be anti-dilutive.

Required:

1. The disclosure note shows adjustments for “shares issuable under the Convertible Notes that were dilutive during the period were included in the calculation of earnings per share.” What other adjustments might be needed? Explain why and how these adjustments are made to the weighted-average shares outstanding.

2. The disclosure note indicates that the effect of some of the equity awards granted to employees were not included because they would be antidilutive. What does that mean? Why not include antidilutive securities?

3. Based on the information provided, prepare the presentation of basic and diluted earnings per share for 2015, 2014, and 2013 that Kaman reports in its 2015 annual report.

To determine

Earnings per share (EPS): The amount of earnings made available to each common share is referred to as earnings per share. Dilutive securities like convertible bonds, convertible preferred stock, and stock options, reduce the EPS by increasing the common shares.

Use the following formula to determine EPS:

$\begin{array}{c}\begin{array}{l}\text{Earnings }\\ \text{per share}\end{array}\}\text{ = }\frac{\text{Earnings available to common shareholders}}{\text{Weighted average number of common shares outstanding}}\\ \text{= }\frac{\text{Net income –Preferred dividends}}{\text{Weighted average number of common shares outstanding}}\end{array}$

To indicate: The other adjustments required for computation of diluted EPS

Explanation of Solution

The following are the other adjustments required for computation of diluted EPS:

• Dilutive securities like restricted stock awards, restricted stock units, conversion, and contingent shares increase the potential number of shares.
• If the stock options would be considered while computing diluted EPS, if the share price on that date is less than average market price. This is because exercisable options are assumed to be exercised, and eventually increase the number of shares.
• Additional number of shares would be issued under certain contingent conditions, or occurrence of some situation in future. So, the fulfilled contingent agreement would increase the number of weighted average number of shares while computing diluted EPS.
• While computing diluted EPS, it is assumed that the convertible bonds are converted into common shares. This increases the number of common shares in the denominator, and increases the numerator, earnings available to common shareholders, as after-tax interest which had been avoided due to conversion of bonds, increases net income. This conversion dilutes the EPS.

To determine

To indicate: The reason for not including antidilutive securities in the computation of diluted EPS.

Explanation of Solution

The amount of earnings made available to each common share is referred to as earnings per share (EPS). In the computation of basic EPS, dilutive securities like are convertible bonds, convertible preferred stock, and stock options are not included. But in the computation of diluted EPS, dilutive securities are included, if the effect of the securities is not antidilutive. If the conversion of dilutive securities would not reduce the diluted EPS in comparison to basic EPS, the effect of conversion of securities into common shares is antidilutive. Such securities which have nil effect on dilution of EPS are referred to as antidilutive.

To determine

To prepare: The presentation of basic and diluted EPS for 2015, 2014, and 2013 as reported by Corporation K in its 2015 annual report.

Explanation of Solution

Corporation K would present the basic and diluted earnings per share, in its 2015 annual report, as shown below:

Earnings per share	2015	2014	2013
Basic:
Earnings per share from continuing operations	$2.22	$2.43	$2.21
Earnings per share from discontinued operations	-	(0.11)	(0.09)
Earnings per share from disposal of discontinued operations	-	(0.18)	0.02
Basic earnings per share	$2.22	$2.14	$2.14
Diluted:
Earnings per share from continuing operations	$2.17	$2.37	$2.17
Earnings per share from discontinued operations	-	(0.11)	(0.09)
Earnings per share from disposal of discontinued operations	-	(0.18)	0.02
Diluted earnings per share	$2.17	$2.08	$2.10

Table (1)

Working Notes:

Compute basic earnings per share from continuing operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing}\\ \text{operations}\end{array}\}\text{=}\frac{\text{Earnings from continuing operations in 2013}}{\text{Weighted average number of shares outstanding in 2013}}\\ \text{=}\frac{\text{\$59,066,000}}{\text{26,744,000}}\\ \text{= \$2}\text{.21}\end{array}$

Compute basic earnings per share from loss of discontinued operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from loss of }\\ \text{discontinued operations}\end{array}\}\text{ = }\frac{\text{Loss from discontinued operations in 2013}}{\text{Weighted average number of shares outstanding in 2013}}\\ \text{=}\frac{\text{\$}\left(\text{2,386,000}\right)}{\text{26,744,000}}\\ \text{= \$}\left(\text{0}\text{.09}\right)\end{array}$

Compute basic earnings per share from disposal of discontinued operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from disposal of }\\ \text{discontinued operations}\end{array}\}\text{ = }\frac{\text{Gain on disposal of discontinued operations in 2013}}{\text{Weighted average number of shares outstanding in 2013}}\\ \text{=}\frac{\text{\$420,000}}{\text{26,744,000}}\\ \text{= \$0}\text{.02}\end{array}$

Compute total basic earnings per share in 2013.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings }\\ \text{per share }\end{array}\}\text{ = }\frac{\text{Net earnings in 2013}}{\text{Weighted average number of shares outstanding in 2013}}\\ \text{=}\frac{\text{\$57,100,000}}{\text{26,744,000}}\\ \text{= \$2}\text{.14}\end{array}$

Compute diluted earnings per share from continuing operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from continuing operations in 2013}}{\text{Weighted average number of shares outstanding in 2013}}\\ \text{=}\frac{\text{\$59,066,000}}{\text{27,143,000}}\\ \text{= \$2}\text{.17}\end{array}$

Compute diluted earnings per share from discontinued operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from discontinued}\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Loss from discontinued operations in 2013}}{\text{Weighted average number of shares outstanding in 2013}}\\ \text{=}\frac{\$\left(\text{2,386,000}\right)}{\text{27,143,000}}\\ \text{= \$}\left(\text{0}\text{.09}\right)\end{array}$

Compute diluted earnings per share from disposal of discontinued operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from disposal of }\\ \text{discontinued operations}\end{array}\}\text{=}\frac{\text{Gain on disposal of discontinued operations in 2013}}{\text{Weighted average number of shares outstanding in 2013}}\\ \text{=}\frac{\text{\$420,000}}{\text{27,143,000}}\\ \text{= \$0}\text{.02}\end{array}$

Compute total diluted earnings per share in 2013.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings }\\ \text{per share }\end{array}\}\text{ = }\frac{\text{Net earnings in 2013}}{\text{Weighted average number of shares outstanding in 2013}}\\ \text{=}\frac{\text{\$57,100,000}}{\text{27,143,000}}\\ \text{= \$2}\text{.10}\end{array}$

Compute basic earnings per share from continuing operations in 2014.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing}\\ \text{operations}\end{array}\}\text{=}\frac{\text{Earnings from continuing operations in 2014}}{\text{Weighted average number of shares outstanding in 2014}}\\ \text{=}\frac{\text{\$65,780,000}}{\text{27,053,000}}\\ \text{= \$2}\text{.43}\end{array}$

Compute basic earnings per share from discontinued operations in 2014.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from discontinued}\\ \text{operations}\end{array}\}\text{=}\frac{\text{Earnings from discontinued operations in 2014}}{\text{Weighted average number of shares outstanding in 2014}}\\ \text{=}\frac{\$\left(\text{2,924,000}\right)}{\text{27,053,000}}\\ \text{= \$}\left(\text{0}\text{.11}\right)\end{array}$

Compute basic earnings per share from disposal of discontinued operations in 2014.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from loss on }\\ \text{discontinued}\\ \text{operations}\end{array}\}\text{=}\frac{\text{Loss on disposal of discontinued operations in 2014}}{\text{Weighted average number of shares outstanding in 2014}}\\ \text{=}\frac{\text{\$}\left(\text{4,984,000}\right)}{\text{27,053,000}}\\ \text{= \$}\left(\text{0}\text{.18}\right)\end{array}$

Compute total basic earnings per share in 2014.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings}\\ \text{per share }\end{array}\}\text{=}\frac{\text{Net earnings in 2014}}{\text{Weighted average number of shares outstanding in 2014}}\\ \text{=}\frac{\text{\$57,872,000}}{\text{27,053,000}}\\ \text{= \$2}\text{.14}\end{array}$

Compute diluted earnings per share from continuing operations in 2014.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from continuing}\\ \text{operations}\end{array}\}\text{=}\frac{\text{Earnings from continuing operations in 2014}}{\text{Weighted average number of shares outstanding in 2014}}\\ \text{=}\frac{\text{\$65,780,000}}{\text{27,777,000}}\\ \text{= \$2}\text{.37}\end{array}$

Compute diluted earnings per share from discontinued operations in 2014.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from discontinued}\\ \text{operations}\end{array}\}\text{=}\frac{\text{Earnings from discontinued operations in 2014}}{\text{Weighted average number of shares outstanding in 2014}}\\ \text{=}\frac{\text{\$}\left(\text{2,924,000}\right)}{\text{27,777,000}}\\ \text{= \$}\left(\text{0}\text{.11}\right)\end{array}$

Compute diluted earnings per share from disposal of discontinued operations in 2014.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from discontinued}\\ \text{operations}\end{array}\}\text{=}\frac{\text{Loss on disposal of discontinued operations in 2014}}{\text{Weighted average number of shares outstanding in 2014}}\\ \text{=}\frac{\text{\$}\left(\text{4,984,000}\right)}{\text{27,777,000}}\\ \text{= \$}\left(\text{0}\text{.18}\right)\end{array}$

Compute total diluted earnings per share in 2014.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings }\\ \text{per share }\end{array}\}\text{ = }\frac{\text{Net earnings}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$57,872,000}}{\text{27,777,000}}\\ \text{= \$2}\text{.08}\end{array}$

Compute basic earnings per share from continuing operations in 2015.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{=}\frac{\text{Earnings from continuing operations in 2015}}{\text{Weighted average number of shares outstanding in 2015}}\\ \text{=}\frac{\text{\$60,438,000}}{\text{27,177,000}}\\ \text{= \$2}\text{.22}\end{array}$

Compute basic earnings per share in 2015.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings }\\ \text{per share }\end{array}\}\text{=}\frac{\text{Net earnings in 2015}}{\text{Weighted average number of shares outstanding in 2015}}\\ \text{=}\frac{\text{\$60,438,000}}{\text{27,177,000}}\\ \text{= \$2}\text{.22}\end{array}$

Compute basic earnings per share from continuing operations in 2015.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from continuing}\\ \text{operations}\end{array}\}\text{=}\frac{\text{Earnings from continuing operations in 2015}}{\text{Weighted average number of shares outstanding in 2015}}\\ \text{=}\frac{\text{\$60,438,000}}{\text{27,868,000}}\\ \text{= \$2}\text{.17}\end{array}$

Compute total diluted earnings per share in 2015.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings}\\ \text{per share }\end{array}\}\text{=}\frac{\text{Net earnings in 2015}}{\text{Weighted average number of shares outstanding in 2015}}\\ \text{=}\frac{\text{\$60,438,000}}{\text{27,868,000}}\\ \text{= \$2}\text{.17}\end{array}$