Interpreting common-size income statements Thales Group (Thales is a French electronics firm that specializes in information systems. aerospace, and defense Thales applies IFRS and reports its results in millions of euros. Exhibit 4.10 presents common-size income statements for Thales€™s for three recent years, based on Thales€™s financial reports for fiscal 2007. Discuss the likely reasons for Thales€™ increasing profit margin over the three-yearperiod.

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Thales Group Common-Size Income Statements EXHIBIT 4.1o (in € millions) (Problem 32) 2005 Fiscal year ending December 31 2007 2006 € 12,295.6 € 10,264.3 (7.883.6) € 2,380.7 € 10,263.2 (7.900.1) € 2,363.1 Revenues 100.0% 100.0% 100.0% Cost of Sales (9,560.9) € 2,734.7 -77.8 -76.8 -77.0 Gross Profit 23.2% 22.2% 23.0% Research and Development Expenses (443.4) (360.8) (805.7) -3.5 (366.0) (818.8) -3.6 -3.6 Marketing and Selling Expenses General and Administrative Expenses Amortization of Intangibles . Income from Operations Restructuring Costs. .. Other Operating Income (Expense) Asset Impairments (841.0) 6.8 -7.8 -8.0 (560.4) (459.6) (455.5) -4.6 -4.5 -4.4 (127.9) -1.0 6.2% 7.4% 721.8 7.0% 762.0 754.6 (77.9) (212.5) (193.1) -2.1 -0.6 -1.9 (84.3) (34.2) -0.8 (96.5) (8.5) -0.8 -0.1 -0.3 Gain (Loss) on Disposal of Assets 3.5 0.2 158.3 1.5 432.1 22.9 € 1,019.7 Income of Operating Activities Financial Interest on Gross Debt..... 8.3% 5.4% 575.9 5.6% 549.1 (83.9) (100.3) (116.2) -0.8 -1.1 -0.8 Financial Income from Cash at Banks. 55.2 0.4 42.1 0.4 33.4 0.3 (45.1) (82.8) Cost of Net Financial Debt (41.8) -0.4% -0.4% -0.8% Other Financial Income (Expense) Other Components of Pension Charge. (34.0) (31.5) (10.2) -0.3 -0.3 -0.1 65.2 (19.0) (100.4) (33.6) (87.3) -0.3 0.5 -0.2 Income Tax Share in Net Income (Loss) of Equity Affiliates (157.7) -1.3 -1.0 -0.9 7.9 7.9 40.6 0.3 0.1 0.1 Net Income 888.7 391.1 343.1 7.2% 3.8% 3.3% Of which: Net Income, Group Share 887.4 3.8% 7.2% 388.0 333.9 3.3% Minority Interests 1.3 0.0% 3.1 0.0% 9.2 0.1%