| Prime Contractors | | | Thebeau, Nicholas R | 6/29/2015 |

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A. What evidence do you see in Exhibit 3.35 of Prime’s strategic shift from refuse to animal care services?

Aside from year 8, Prime is generating persistent and large net income figures. However, during year 8 there is a large amount of depreciation, signifying large capital investments. Specifically, in years 6 through 7 the company invested roughly $3M in fixed assets. Based on this information I would say that the company was preparing for growth and purchased the assets to jump into the animal care services industry. They financed their investments through debt shown under the financing side of the cash flow statement, in particularly years 6-8. In years 9 and 10 they are divesting some of its business. Based on Prime’s sales mix (shown below), one would suggest that they are divesting a portion of their business or specifically the refuse branch. I would say the company is in a growth phase as it hasn’t sought equity financing and relied solely on debt. They are demonstrating just above the line cash at year end.

B. Discuss how Prime’s net income could decline between year 6 and 8 while its cash flow from operations increased
This is because of accrual accounting and non-cash items:

One major player of this is depreciation. As shown below depreciation is added back because it is a non-cash item which is deducted from revenue on the income statement. Because the company seemed to be in a growth stage as they were heavily investing in fixed assets, they must depreciate those assets based on their useful life.

Another major account impacting Prime’s cash flow statement is deferred income taxes. Deferred tax is a non-cash item; under the indirect method, deferred taxes are shown in the operating cash flow section as an adjustment to the profit (loss) before tax.