Following are selected disclosures from the Rohm and Haas Company (a specialty c

Question

Following are selected disclosures from the Rohm and Haas Company (a specialty chemical company) 2007 10-K

(in Millions)

2007

2006

Land

$146

$142

Buildings and Improvements

1,855

1,729

Machinery and equipment

6,155

5,721

Capitalized interest

352

340

Construction in progress

271

218

Land, buildings, and equipment, gross

8,779

8,150

Less: Accumulated depreciation

5,908

5,481

Total

$2,871

$2,669

The principal lives (in years) used in determining depreciation rates of various assets are: buildings and improvement (10–50); machinery and equipment (5–20); automobiles, trucks and tank cars (3–10); furniture and xtures, laboratory equipment and other assets (5–10); capitalized software (5–7). The principal life used in determining the depreciation rate for leasehold improvements is the years remaining in the lease term or the useful life (in years) of the asset, whichever is shorter.

Impairment of Long-lived Assets Long-lived assets, other than investments, goodwill and indenite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. Such circumstances would include items such as a signicant decrease in the market price of a long-lived asset, a signicant adverse change in the manner the asset is being used or planned to be used or in its physical condition or a history of operating or cash ow losses associated with the use of the asset . . . When such events or changes occur, we assess the recoverability of the asset by comparing the carrying value of the asset to the expected future cash ows associated with the asset’s planned future use and eventual disposition of the asset, if applicable . . . We utilize marketplace assumptions to calculate the discounted cash ows used in determining the asset’s fair value . . . For the year ended December 31, 2007, we recognized approximately $24 million of xed asset impairment charges.

Required

a. Compute the PPE turnover for 2007 (Sales in 2007 are $8,897 million). Does the level of its PPE turnover suggest that Rohm and Haas is capital intensive? Explain. (Hint: The median PPE turnover for all publicly traded companies is approximately 5.03 in 2007.)

b. Rohm and Haas reported depreciation expense of $412 million in 2007. Estimate the useful life, on average, for its depreciable PPE assets.

c. By what percentage are Rohm and Haas’ assets “used up” at year-end 2007? What implication does the assets used up computation have for forecasting cash ows?

d. Rohm and Haas reports an asset impairment charge in 2007. How do companies determine if assets are impaired? How do asset impairment charges affect Rohm and Haas’ cash ows for 2007? How would we treat these charges for analysis purposes?

(in Millions)

2007

2006

Land

$146

$142

Buildings and Improvements

1,855

1,729

Machinery and equipment

6,155

5,721

Capitalized interest

352

340

Construction in progress

271

218

Land, buildings, and equipment, gross

8,779

8,150

Less: Accumulated depreciation

5,908

5,481

Total

$2,871

$2,669

Explanation / Answer

Solution:

(A). PPE Turnover Ratio:

  PPE Turnover Ratio = $ 8,897 / 8,779 - 5,908

   = $ 8,897 / 2,871

   = 3.09

(B). PPE Turnover Ratio:

  PPE Turnover Ratio = $ 8,897 / 8,150 - 5,481

   = 8,897 - 2,669

   = 3.33

PPE Turnover Ratio = Net Sales / Gross Fixed Assets - Accumulated Depriciation

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