430 NoNoperatiNg items, provisioNs, aNd reserves periods when the expenses were recognized, rather than in the years when the corresponding benefi ts were reaped. At the same time, litigation expenses are real, so a valuation of Boston Scientifi c must incorporate them. Although time-consuming, an analysis of the company’s current exposure to litigation and an analysis of average litigation expenses across all medical-technology companies could provide valuable insights. When classifi cation is unclear, measure ROIC with and without the expense. If the expense is lumpy, smooth the expense over the period in which the expense was generated. searching the Notes for hidden one-time items The income statement does not explicitly report every nonoperating expense or one-time charge. These can also be embedded in cost of sales or selling expenses. To fi nd embedded expenses, read the management discussion and analysis section in the company’s annual report. The section details the changes in cost of sales and other expenses from year to year and will sometimes report unusual items. In 2011, Boston Scientifi c reported such an expense: During the fi rst quarter of 2011, we reversed $20 million of previously established allowances for doubtful accounts against long-outstanding receivables in Greece. During the fi rst quarter of 2011, the Greek government converted these receivables into bonds, which we were able to monetize, reducing our allowance for doubtful accounts as a credit to selling, general and administrative expenses. EXHIBIT 21.2 Boston Scientific: Litigation Expenses by Year $ million Average litigation expense: $484 million 2004 75 2005 780 2006 0 2007 365 2008 334 2009 2,022 2010 (104) 2011 48 2012 192 2013 221 2014 1,036 2015 1,105 2016 804 2017 285 2018 103 Source: Boston Scientific annual reports. Nonoperating Expenses and One-Time Charges  431 Whether you make an adjustment to NOPAT for such an expense depends on whether the charge is large enough to affect perceptions of performance. If it is not, don’t bother. An adjustment could make your analysis overly com- plex and time-consuming. Analyzing Each Nonoperating Item for Impact on Future Operations In Kimberly-Clark’s 2018 annual report, the company writes, “The 2018 Global Restructuring Program will reduce our structural cost base by streamlining and simplifying our manufacturing supply chain and overhead organization. The restructuring is expected to generate annual pre-tax cost savings of $500 to $550 [million] by the end of 2021.” If credible, such projections should be incorporated into your forecast of future cash flow. More broadly, academic researchers have been examining the predictive component of special items and one-time charges. Early research pointed to the low persistence of special items, indicating that they are in fact transitory and should not be incorporated into forecasts. However, this research exam- ined persistence only on a year-to-year basis. In 2009, researchers extended the window to multiple years and found persistence in special items for com- panies with strong core profits.1 In other words, a highly profitable company that reports a series of, say, restructuring charges is likely to continue with similar charges in the future. Persistence was low for companies with little operating profit. One reason special items may persist year after year for profitable compa- nies is that management may be shifting ongoing operating costs into special items to meet certain earnings targets, as many academic researchers believe they do. This belief also appears common among research analysts, as they decrease their earnings forecasts following the disclosure of a special item.2 Although the research showing that special items are used to manage earn- ings is persuasive, it remains unclear how to relate the research results to an individual company. Judgment is required: pay close attention to companies disclosing special items. If the special items seem likely to recur, especially in a challenging economy, adjust your forecasts accordingly. A comprehensive list of nonoperating items and one-time charges is imprac- tical, but the following items are the most common: amortization of acquired intangibles; asset write-offs, including write-offs of goodwill and purchased R&D; restructuring charges; litigation charges; and gains and losses on asset sales. Since each of these nonoperating items requires a particular adjustment, we will work through them one by one. 1 P. M. Fairfield, K. A. Kitching, and V. W. Tang, “Are Special Items Informative about Future Profit Margins?” Review of Accounting Studies 14, nos. 2–3 (2009): 204–236. 2 N. Li, H. Su, W. Dong, and K. Zhu, “The Effect of Non-recurring Items on Analysts’ Earnings Fore- casts,” China Journal of Accounting Research 11, no. 1 (2018): 21–31.