Financial Statement & Credit Risk Analysis & Early Warning ... · © Barry M Frohlinger 1981 -2012 Financial Statement & Credit Risk Analysis & Early Warning Signs
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© Barry M Frohlinger 1981 - 2012
Financial Statement & Credit Risk Analysis & Early Warning Signs
© Barry M Frohlinger, Inc. copyright 1981 – 2017 These materials are the property of Barry M Frohlinger, Inc. If you are not enrolled in the Barry M Frohlinger program, it is illegal to possess these materials. 1
•You purchased an apartment on September 22, 2006 and paid Euro 550,000.
•The apartment is identical to your neighbors who sold their apartment today for Euro 600,000.
•What is the value of your apartment?
•______________Value
•______________Value
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•Book Value and Net Book Value
•Fair Market Value and Net Realizable Value
•Liquidation Value
•Enterprise Value
•Loanable Value
•Equity Value
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Similar/Identical/Relative Value
Similar Identical
3
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Value
• Several types and definitions of value sought by analysts. Some of the most common are:• Book Value and Net Book
– Book Value is the historic cost and – Net Book Value is the Book Value net of all expenses since the asset was put
into place» P,P,E [net] is a common example
• Fair Market value – The estimated amount for which an asset or liability should exchange on the
valuation date» between a willing buyer and a willing seller » in an arm's length transaction, » after proper marketing with a reasonable time for exposure in the open
market, with sufficient buyers and sellers » where the parties had each acted knowledgeably and prudently.
• Net realizable value – the FMV net of transaction costs
• Liquidation value – May be analyzed as either a forced liquidation or an orderly liquidation. – It assumes a seller is compelled to sell
• Enterprise Value– Economic [fair]value of the firm’s net operating assets [firm value]
• Loanable Value– The amount a lender is willing to lend to a borrower
• Equity Value – The residual value, provided by the owner
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Book and Net Book
Book Net Book FVAcc ReceivablesInventoryPPEIdentifiable [finite life] IntangibleNatural ResourcesDeferred Tax Assets
5
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Intangibles
Expense? 1983?Identifiable
Finite lifeIndefinite life
UnidentifiableGoodwill
6
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Your client would like to a new credit facility in the amount of $250 million. What are the appropriate steps?
?
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Credit Process
8
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Credit Process Overview [Profiles]
1. Deal Assessment2. Qualitative Risk Analysis & Historic Quantitative Analysis3. Forecasting/Sensitivity Analysis
a. Tool vs Modelb. Management, Bank, Stress?
4. Credit Decision/Debt [Capital] Structuring
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C’s and P’s of Credit
• Character• Capacity • Capital• Collateral• Conditions
• Cause
• Cross Sell
• People• Payment
• Protection• Perspective
• Purpose• Profiles • Profit [ROIC]
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Credit Process [Profiles] Overview
1. Deal Assessmenti. Characterii. Purpose and Cause and Lending Rationale
i. Cash Flow, Asset Conversion and Asset Protection Loans 2. Historic and Future Qualitative and Quantitative Analysis
i. Conditions [Economic, Industry, Business and Management Profiles]ii. Capacity and Capital
i. Earnings and Balance Sheet Profileii. Cash Flow and Liquidity Profileiii. Capital Structure Profile
iii. Cause 3. Forecasting and Sensitivity4. Credit Decision/Debt [Capital]Structuring
i. Legal Entity Profileii. Collateraliii. Covenantsiv. Deal Profitability
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The Balance Sheet, what is it?[Accounting]
Balance Sheet
Current Assets
Non Current Assets
Current Liabilities
Equity
NCL
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The Balance Sheet, what is it?[Accounting]
Balance Sheet
Cash
Non Current Operating
[Non Operating]Assets
ST Debt
Equity
Working LiabilitiesWorking AssetsLT Op Liabilities
LT Debt
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The Balance Sheet, what is it?[Accounting]
Balance Sheet
Cash
Monetary Assets
Payables
Equity
Debt
Non Monetary Assets [4]
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The Balance Sheet, what is it? [Accounting? Liquidity?]
Balance Sheet
Current Assets 100
Non Current Assets
350
Current Liabilities70
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The Balance Sheet, what is it? [Valuation]
Balance Sheet
Cash/Securities
5 Operating Assets
Supplier Financing
All Equity
All Debt
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The Balance Sheet, what is it? [Valuation]
Balance Sheet
Cash 100
5 Operating Assets 900
Supplier Financing 200
All Equity 500
All Debt 300
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The Balance Sheet, what is it?
Balance Sheet
Cash
5 Operating Assets
Supplier Financing
Equity
All Debt
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The Balance Sheet, what is it?
Balance Sheet
Cash
5 Operating
Assets
Supplier Financing
Total Equity
Total Debt
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The Balance Sheet, what is it? [Valuation]
Balance Sheet
Cash
Net Operating Assets Total Equity
Total Debt
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The Balance Sheet, what is it? [Valuation]
Balance Sheet
Cash
Net Operating Assets
Total Capital
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The Balance Sheet, what is it?[Valuation]
Balance Sheet
Net Operating Assets Invested Capital
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Enterprise Value, What is it?
HP Balance Sheet December-13
Cash 12,163Operating Liabilities 55,433
All remaining assets 93,513 Debt 22,587Equity 27,656
Total assets 105,676 Total Financing 105,676
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Enterprise Value, What is it? And how to calculate123
HP 2013 BV 2013 FV 2013 FVCash 12,163 12,163 12,163All remaining assets [Operating] 93,513
Total assets 105,676
Operating Liabilities 55,433Debt 22,587Equity 27,656Total Financing 105,676
HP 2013 BV 2013 FV 2013 FVCash 12,163 12,163 12,163Net Operating Assets 38,080
Total assets 50,243Debt 22,587 22,813$ Equity 27,656 44,366$ Total Financing 50,243
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Enterprise Value, How much to lend?
HP 2013 FVCash 12,163Net Operating Assets at FV 55,016
Total assets 67,719Debt $22,813 Equity $44,366
Total Financing 67,179
Net DebtGross DebtEnterprise Value
Debt/EV
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Debt/EV
26
Name EV equity net debt debt cash debt/EV net debt/EV Rating EBITDADebt/EBITDA EV/EBITDA
XOM 376000 352000 24000 29000 4,000 8% 6.40% AA+ 31,000 0.94 12.1 Home Depot 165000 150000 15000 17000 1,000 10% 9.10% A 13,600 1.25 12.1 Costco 63,000 63,000 0 7,000 7,000 11.1% 0.0% A- 4,800 1.46 13.1 Merck 165000 159000 6000 21000 15000 13% 3.60% AA- 14,400 1.46 11.5 United Technology 123000 117000 6000 20000 5000 16% 4.9% A 10,300 1.94 11.9 FedEx 54,000 47,000 7,000 9,000 2,000 16.7% 13.0% BBB 7,000 1.29 7.7 CISCO 110,000 143000 0 20,000 53,000 18% 0.00% AA- 14,200 1.41 7.7 Oracle 173,000 183,000 0 32,000 42000 18.5% 0.0% A 15,200 2.11 11.4 Target 61,000 50,000 11,000 13000 2000 21% 18.0% A 7,100 1.83 8.6 Kraft Heinz 112,000 93,000 21,000 25,000 4,000 22.3% 6.3% BBB - 4,300 5.81 26.0 Kroger 48000 37000 11000 12000 1000 25% 22.9% BBB 4,500 2.67 10.7 Amgen 120,000 117,000 3,000 30,000 27,000 25.0% 2.5% A 10,700 2.80 11.2 General Mills 41,000 31,000 10,000 11,000 1,000 26.8% 24.4% BBB 3,500 3.14 11.7 Flextronics 7100 6700 400 2100 1700 30% 5.60% BBB- 1,200 1.75 5.9 Royal Caribbean 25,000 17,000 8,000 8,000 1,000 32.0% 32.0% BB 2,100 3.81 11.9 DirectTV 59,000 43,000 16,000 20,000 4,000 33.9% 27.1% BBB 2,100 9.52 28.1 ATT 243000 167000 76000 83000 8000 34% 31.3% BBB+ 47,100 1.76 5.2 Becton Dickinson 28000 27000 1000 10000 9000 36% 3.6% A 2,900 3.45 9.7 International Paper 33,000 23,000 10,000 12,000 2,000 36.4% 30.3% BBB+ 3,700 3.24 8.9 Verizon 305000 203000 102000 113,000 11,000 37% 33.4% BBB+ 49,100 2.30 6.2 Southern Company 65,000 40,000 25,000 26,000 1,000 40.0% 38.5% A- 6,700 3.88 9.7 Eastman Chemical 18,000 10,000 8,000 9,000 1,000 50.0% 44.4% BBB 2,200 4.09 8.2 HCA 59,000 30,000 29,000 30,000 1,000 50.8% 49.2% BB 7,900 3.80 7.5 Clear Channel 8,000 3,000 5,000 5,000 0 62.5% 62.5% CCC+ 700 7.14 11.4 Sprint 49000 20000 29000 32,000 3,000 65.0% 59.2% B+ 7,900 4.05 6.2 MGM Resorts 21,000 9,000 12,000 14,000 2,000 66.7% 57.1% B + 1,900 7.37 11.1 NRG 27,000 7,000 20,000 22,000 2,000 81.5% 74.1% BB- 2,700 8.15 10.0
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EV and Tax
• EV/EBITDA
• What happens to EBITDA when– Interest expense rises– Tax expense falls– Depreciation expense increases– Amortization expense disappears
• What happened to 2018 EBITDA with a change in Corporate Tax Rates?
• What happened to EV with a change in reduction in Corporate Tax Rates?
27
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Seminar Overview
•This seminar builds upon the prerequisite understanding of financial statement reporting and analysis
– it will develop the ability to perform an analysis of a company's financial and non financial information that is useful for making credit decisions.
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Credit and Risk Analytics
• What is it?• Financial analytics applies tools to financial statements to derive
inferences useful in making business decisions. • There are many classes of external users of financial statements.
– Creditors look for the ability of the borrower to pay interest and repay debt. – Shareholders need information to help in choosing among competing alternative
investments. • Credit Analytics is intended to determine the amount of risk in a single
name counterparty with the objective of determing whether to– Accept it or– Mitigate it or– Reject it
• Make sure you keep the proper mindset in analysis– Credit vs Equity Mindset
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Common elements of all credit analysis [Profiles]The Outlier in these risk profiles is the weak link
1) Business Risk Profile [including Management]2) Earnings Profile [including Accounting risk profile]3) Asset Profile4) Liquidity Profile5) Cash Flow Profile6) Capital Structure Profile7) Debt Instrument Profile8) Debt Maturity Profile9) Financial Profile10) Legal Structure Profile11) Projections Profile
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Company 11 Point Profiles Scorecard
31
Analysis KSF/Credit Implication Recommendation
Business Risk Profile Recommendation
Earnings Profile Recommendation
Asset Profile Recommendation
Liquidity Profile Recommendation
Cash Flow Profile
Capital Structure Profile Recommendation
Debt Instrument Profile Recommendation
Debt Maturity Profile Recommendation
Financial Profile
Legal Structure [borrowing entity] Profile
Recommendation
Cash Flow ProjectionsProfile
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Avon Snapshot
32
Analysis KSF/Credit Implication
Recommendation
Business Risk Profile
Earnings Profile
Asset Profile
Liquidity Profile
Cash Flow Profile
Capital StructureProfile
Debt Instrument Profile
Debt Maturity Profile
Financial Profile
Legal Structure Profile
Cash Flow Projections Profile
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Business Risk Profiles
q Revenue Volatilityq Technology, Commodities, Cyclical
q Life Cycle q Mature, Growth, Decline
q Cyclicality q Fixed Cost?
q Seasonalityq Competitors, including Barriers to Enter/Exit q Government Regulation q Dependence q Vulnerability to Substitutes or Disruptionsq Shifting Rivalryq Overall and General Risk Characteristics of the firm
q Scale, Franchise Strength, Geographic Footprintq Product Diversification, Market Shareq Currency, Commodities, Rates and Client Counterparty Credit Risk Management
q Supply Chain and Outbound logistics q Sales, Marketing and Competitionq Management
q Strategy Articulation and Executionq Effectiveness
q Track Record, Experience, Succession Planning, Depth & Breadth q Corporate Governance
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Business Risk Profile
34
ExcellentStrongSatisfactoryFairWeakVulnerable
Risk Description Mitigant Impact Recommendation
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Financial Risk Profile
35
Minimal
Modest
Intermediate
Significant
Aggressive
Highly Leveraged
Capital Structure Profile
Earnings Profile Minimal Debt Modest Debt Average Little Equity Financing
Strong Minimal Minimal Modest Intermediate
Satisfactory Minimal Modest Intermediate Significant
Fair Modest Intermediate Significant Aggressive
Weak Intermediate Significant Agressive Highly Leveraged
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Key Credit Principles
• Every loan must have at least ____________ ways out
• Small borrowers are riskier than large one
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Cs
• Character/Client– KYC– What is the industry, business and management risk profile?– What is the asset profile?– What is their cash flow profile?
• Can the cash flow be sustained? – What is the legal profile/structure?– Does the financing request make sense?
• Capacity– Adequacy of Cash Flow– Liquidity
• Capital– Does the firm have enough equity [based upon the risk profiles]?– Have you considered the Equity vs. Credit Mindset
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Cs • Collateral
– considered a secondary or even tertiary source of repayment for a loan. What is the purpose of the intended loan?
• Conditions– What is the appetite of the bank at the current time?– What are the risks profiles of the
• economy, • industry, • business and • management
– and are these acceptable risks?– What is the legal structure of the borrower?– What covenants and other terms are used in order to control actions of the borrower?– Covenants are important part of lending
• What is a covenant
• What is the intended purpose of covenants
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Default risk, The possibility that a borrower will defaultby failing to repay principal and interest in a timely mannerand the bank MAY suffer a loss.
Probabilityof
Default[borrower]
Losson
Default[structure]
DefaultRisk
=x
Exposure at
Defaultx Maturityx
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Question
• Is Measuring Earnings [Profit] a Key Component of Credit Analytics?
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Lending Rationale
• Lending Rationale is the analysis of the facility and not the company.
– There are three lending rationales:• Cash Flow Lending• Asset Protection • Asset Conversion Cycle
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Lending Rationales
• Cash Flow lending finances a firm’s permanent long term needs.– Primary source of repayment is cash flow
• profitability over time– Term loan with amortization of principle
• Asset Protection Lending– Financing of a relatively permanent need of accounts receivable and inventory– On a going concern basis, these loans are evergreen
• pay back of the principal is not expected. • In a distress situation, the liquidation of the assets being financed is the source of repayment.
– Financing provided to FI counterparties is also Asset Protection, CDS, ABF
• Asset Conversion Cycle lending is short term self liquidating loans made to finance a seasonal build up of inventory and/or accounts receivables.
– Primary Source of Repayment • Successful completion of the Asset Conversion Cycle
– Sale of inventory and collection of accounts receivable– Trade and Ag, Retail
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Lending Rationales
• Cash Flow Lending– C&I
• Asset Protection– Weak and/or Unsustainable Cash Flows – FI
• Financial Institution Analytics and Credit is different than C&I• Asset Conversion Cycle [Seasonal]
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Broadcast Wholesalers
Broadcast Wholesalers imports sportswear carrying the emblems of professional hockey teams.
Hockey items are ordered by Broadcast Wholesalers in March, imported in May, shipped to customers in July, and collections of receivables are completed by November. The company's terms of sale are net 30 days. The Company approaches the Bank each January, to request financing, with repayment completed by November.
1. What do these loans finance?_______________________________________________________________________
2. What is the lending rationale for these types of loans?_______________________________________________________________________
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Low High Low
Cash
Acc Rec
Inventory
Tangible Fixed
ST Debt
Acc Pay
LT Debt
Equity
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What is Operating Working Capital and Working Capital?
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A typical balance sheet: assets
2017 ASSETS
Cash $204 Accounts Receivable - Trade 16,931 Inventory 1,984 TOTAL CURRENT ASSETS 19,119 Gross Fixed Assets 4,129 less: Accumulated Depreciation (1,200) Net Fixed Assets 2,929 Other Assets 764 Intangibles 45,431 less: Accumulated Amortization (0) Net Intangible Assets 45,431 TOTAL ASSETS $68,243
Liquid assets
Net property plant & equipment [operating]
Goodwill & Identifiable Intangibles [operating]
Trading assets [operating]
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A typical balance sheet: Financing [liabilities and net worth]
Equity capital
2017 LIABILITIES
Notes Payable $0 Current Maturity Long-Term Debt 7,600 Accounts Payable - Trade 7,130 Accrued Liabilities 563 TOTAL CURRENT LIABILITIES 15,293 Long Term Debt 12,400 Subordinated Debt 8,400 TOTAL LIABILITIES $36,039
NET WORTH Common Stock $1,000 Paid In Capital 12,541 Retained Earnings 18,609 NET WORTH $32,150
TOTAL LIABILITIES & NET WORTH $68,243
Subordinated debt
Senior debt
Working Liabilities [operating]
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Low High Low
Cash 100
AR + Inventory 600
PPE 500 500 500
ST Debt 0
Acc Pay 150
LTD + Equity 1,050
W/C requirement
Working Capital 550
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Low High Low
Cash 1,100
AR + Inventory 600
PPE 500 500 500
ST Debt 0
Acc Pay 150
LTD + Equity 2,050
W/C requirement
Working Capital 1,550
More on Seasonality
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Reasons for loans [Cause]
• Borrowing Cause means ___________
• Borrowing Purpose means _________
• Risk is, Sources of Repayment, and Loan Structure must be tied to cause and purpose
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Courier Theater
Courier Theater is an operator of motion picture theaters, operating 100 movie theater sites with a total of 650 screens.Courier owns all the improvements to the sites; all the seating, the projection equipment, the escalators and elevators and all concession stand equipment. Courier has been in business for 47 years. The firm plans continued expansion in the coming years. Because of this expansion, the Company has approached the Bank for financing.
1. What is the cause for the borrowings?_______________________________________________________________________
2. What is the purpose of the debt?_______________________________________________________________________
3. What is the lending rationale?_______________________________________________________________________
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Reasons for loans [Cause]
• Borrowing Causes include:– Sales growth [expansion]– Cash flow timing differences
• Permanent• Seasonal
– Profitability problems– Slowdown in AR or inventory turns [increased cash flow timing differences]– Industry changes
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Developing an Appropriate Capital Structure
• Make sure that the capital [debt] structure is consistent with the lending rationale
• Cause• Purpose• Rationale
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Security
ABL Cash Flow
Revolver: AR and InventoryTerm Loan: Property and Equipment
IG: Unsecured
Non IG: Lien on most assets
55
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Reasons for loans [Purpose]
• Borrowing Purposes include:– Dividends/Share Repurchase
– Acquisition/investments
– Bridge Financing– Finance AR and/or Inventory
• Seasonal and/or permanent
– Refinance debt or recapitalize
– Finance capital expenditures
– Refinance debt
• Maturing debt obligations
• Bonds with high coupons
• Loans with tight covenants
• Fully drawn credit facilities
• Callable bonds to extend maturities
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Financial Analytics
• The comparison of financial statements is accomplished by – setting up financial statements side by side– using common size numbers [%]
• Level [current year] Vertical Analysis– and reviewing the changes from year to year
• Trend [YoY] Horizontal Analysis• There is a three step process used for financial analysis:
– Profitability [earnings]– Liquidity
• Balance Sheet Management• Cash Flow Analysis
– Solvency • Capital Structure
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Level and Trend
2015 2016 2017 2018FB, goals 25 24 22 15BB, average .455 .454 .452 .448C, runs 45 46 47 52
58
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Financial Analytics
• Earnings Profile• Understanding sustainable, operating [unleveraged] earnings
• Cash Flow and Liquidity Profiles• Asset Profile• Measures of Liquidity
– Static and Dynamic • Sustainable cash flows
– Short run and long run • Distinguishing earnings from cash flow• Risks in debt maturity
• Capital Structure and Debt Profiles• Ratings and the rating agencies• The amount of debt available to a firm• Off balance sheet financing and the role in credit risk
• Using absolute [intrinsic] analysis in addition to peer comparisons [relative]
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Financial and Credit Analysis, Measurement of Earnings
• Do level first, the most recent year– You must prepare an adjusted income statement
• Make sure you understand the accounting– Revenue recognition, LIFO vs. FIFO, pensions, stock based compensation,
debt, fair value accounting, derivatives, currencies• Format & Adjusted• Ratios
• Analytics means ratios must be consistent• Level [Vertical] analysis entails
– relative analysis [peers is key] – Segments [granular]– absolute [intrinsic] analysis [benchmarks]
• After level, then do trend analysis– Make sure you distinguish between the credit and equity mindset– Trend needs to be an entire business cycle
• 50 bp, generally for materiality.
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Microsoft [Income Statement]Consistency?
2014 CommonSize
2013 Common Size
2012 Common Size
Revenue $86,833 100.0% $77,849 100.0% $73,723 100.0%Operating expenses:
Cost of revenue 26,934 31.0% 20,249 26.0% 17,530 23.8%Research and development 11,381 13.1% 10,411 13.4% 9,811 13.3%Sales and marketing 15,811 18.2% 15,276 19.6% 13,857 18.8%General and administrative 4,821 5.6% 5,149 6.6% 4,569 6.2%Operating income 27,886 32.1% 26,764 34.4% 27,956 37.9%
Other Income 66 0.1% -288 -0.4% 5,689 7.7%Tax Expense 5,746 6.6% 5,189 6.7% 5,289 7.2%Net Income $22,074 25.4% 21863 28.1% $16,978 23.0%
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Microsoft [Peers]
OPM 2014 2013 2012
Peers 32.4% 35.5% 37.1%
Microsoft 32.1% 34.4% 37.9%
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Peers
• Operational Characteristics– Industry– Products & Distribution Channel– Markets & Customers– Seasonality– Cyclicality– Strategy
• Financial Characteristics– Size– Leverage– Growth and/or Margins – Dividend Policy
63
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Profitability Metrics
• Key Profitability Metrics are:– Gross Profit Margin [Gross Profit/Revenue]– Operating Profit Margin [Operating Profit/Revenue]– EBITDA Margin [EBITDA/Revenue]– RROIC [NOPAT/Invested Capital]– Return on Equity [ROE] Net Income to Common Shareholders/Common Equity
– Revenue Growth [% growth, year over year [Y-o-Y]
64
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Microsoft [BS]
2014 2010
Cash 100,306 44,511
Operating Assets 72,078 41,602
Total Assets 172,384 86,113
Suppliers 59,955 33,999
Debt Financing 22,645 5,939
Owners 89,784 46,175
Total Financing 172,384 86,113
Operating Profit 27,886 [NOPAT_________]
24,157 [NOPAT________]
RROOA [OP/Op Assets]
Net Operating Assets
RROIC [NOPAT/Net Op Assets]
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Salary
$ USdollars 2017 2018 trend
IB $800,000 $808,000 1%
Average IB $900,000 $927,000 3%
SW $4,000 $4,200 5%
Average SW $3,400 $3,400 0%
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Bank
Assets Financing
Loans 100,000 Free Deposits 45,000
Interest Bearing Deposits
45,000
Equity 10,000
Rate on Loan 3% Deposit Cost 4%
Gross Interest Revenue
3,000
Interest Cost 1,800
Net Interest Income
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Verizon
Cash 3,563 Revenue 115,846Investment in Affiliates 3,401 Operating Profit 12,653Operating Assets 218,258 Interest Income 88Total Assets 225,222 Equity Earnings 324
Interest Expense -2,571Payables [operating] 78,262 Tax 1,029Debt 51,544 Non Controlling Interest -9,682Non Controlling Interest 56,580 Net Income to Common Equity 1,841
Common Equity 38,836Total Financing 225,222 RROOA
Return on CashReturn on Investment in AffiliatesReturn on Invested CapitalReturn on Common Equity
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The Kraft Heinz CompanyConsolidated Statements of Income(in millions, except per share data)
(Unaudited)
For the Year EndedDecember 29, 2018 December 30, 2017
Net sales $ 26,259 $ 26,085 Cost of products sold 17,309 16,948
Gross profit 8,950 9,137 Selling, general and administrative expenses, excluding impairment losses 3,204 2,951 Goodwill impairment losses —Intangible asset impairment losses 49 Selling, general and administrative expenses 3,204 3,000
Operating income/(loss) 5,746 6,137
Interest expense 1,288 1,234 Other expense/(income), net (183) (627)
Income/(loss) before income taxes 4,641 5,530
Depreciation and amortization (excluding integration and restructuring expenses) 950 Integration and restructuring expenses 296 RROOA Deal costs 23 RROIC Unrealized losses/(gains) on commodity hedges 21 Impairment Losses IMPAIRMENT Losses/(gains) on sale of business 15 Equity Value? Equity award compensation expense (excluding integration and restructuring expenses) 33
Cash and cash equivalents $ 1,130 Total current assets 9,091
Property, plant and equipment, net 7,212 Goodwill 44,824 Intangible assets, net 59,449 Other non-current assets 1,338
TOTAL ASSETS $ 121,914
Total current liabilities 7,432 Long-term debt 30,873 Deferred income taxes 12,298 Accrued postemployment costs 306 Other non-current liabilities 812
TOTAL LIABILITIES 51,721 Redeemable noncontrolling interest 3
Total shareholders' equity 70,072 Noncontrolling interest 118
TOTAL EQUITY 70,190 TOTAL LIABILITIES AND EQUITY $ 121,914
shares 1,221
debt trades at 99.34stock price feb 20 2019 $48.18
food companies EV/EBITDA 11.9X
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KHC
70
Op Profit 5,746 Integration and restructuring expenses 296 Deal costs 23 Unrealized losses/(gains) on commodity hedges 21 Losses/(gains) on sale of business 15 Adjusted OP 6,101 NOPAT 4,820
Op Assets $ 120,784 RROOA 5.05%
IC/Net Op Assets $ 99,936 RROIC 4.82%IC/Net Op Assets 99,936
EBITDA 7,084 multiple 11.9
EV $ 84,300
market value equity $ 58,828 MV debt $ 30,669 less cash $ (1,130)EV $ 88,367
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On Jan 14, 2013, Michael Dell, teaming up with private equity firm Silver Lake and Microsoft, offered $13.65 a share to buy out the company. Dell had 1.7 billion shares outstanding, the stock traded at $10.50 on Jan 13, 2013 and by on Jan 14, the stock price increased to $13.60. The balance sheet is listed below, [GAAP] The Market Value of debt and equity was calculated using market data on January 13, 2013. Comment on the change in the EV of the firm from Jan 13 to Jan 14, 2013.
Assets: All amounts in million of dollarsBalance Sheet 12.31.2012
Market Value on Jan 13, 2013
Cash & cash equivalents 12,777Accounts receivable, net 6,629Short-term financing receivables, net 3,213Inventories, net 1,382Other 3,967Total current assets 27,968PP&E, net 2,126Investments 2,565Long-term financing receivable, net 1,349Goodwill 9,304Purchased intangible assets, net 3,374Other non-current assets 854Total assets: 47,540
Liabilities & Stockholders Equity:Short-term borrowings 3,843 3,843Accounts payable 11,579Accrued and other 3,644Short-term deferred revenue 4,373Total current liabilities 23,439Long-term debt 5,242 5,400Long-term deferred revenue 3,971Other non-current liabilities 4,187Total liabilities: 36,839Total Dell stockholder's equity 10,701 17,850
Total liabilities & Equity 47,540
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Balance Sheet and IS• Key Questions:
– Do companies want large or small [on] balance sheet assets– Is profitability analysis important
• in Equity Analysis?• in Credit Analysis?
• Analytics, Relative and Trend:– Calculate the OPM for the firm and compare to peers, segments and trends
• Analytics, Absolute [intrinsic]:– Calculate the RROOA for the firm and compare to the pretax cost of debt and observe the amount of assets financed with debt
– RROIC [compared to the WACC and observe Enterprise Value compared to Book Value of IC]
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Pepsi, Profits
73
2014 2014 CS
Revenue 66,683 100.0%
Cost of Sales 30,917 46.4%
SGA 25,453 38.0%
Operating Profit 10,313 15.5%
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Pepsi, Comment on Profits, You need to know that the average OPM for food and beverage companies is 15.3%
74
2014 CSRevenue 66,683 100.0%Cost of Sales 30,917 46.4%SGA 25,453 38.0%Operating Profit 10,313 15.5%Op Assets 61,026RROOA 16.9%Net Op Assets 35,030RROIC 19.1%
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ROIC
75
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
2011 2012 2013 2014
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Pepsi
76
RevenueOperating Profit
FLNA 14,502 4,102 QFNA 2,568 635 LA Foods 8,442 1,236 Pepsi NA Beverage 21,154 3,007 Europe 13,290 1,402 Asia 6,727 1,080
66,683 11,462
Corporate Expenses 1,149
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Pepsi You need to know that the average OPM for food companies is 11.9% and beverage companies is 18.6%
77
Revenue CS Operating Profit CS
FLNA 14,502 22% 4,102 28.3%
QFNA 2,568 4% 635 24.7%
LA Foods 8,442 13% 1,236 14.6%
Pepsi NA Beverage 21,154 32% 3,007 14.2%
Europe 13,290 20% 1,402 10.5%
Asia 6,727 10% 1,080 16.1%
66,683 100% 11,462 17.2%
Corporate 1,149
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Peers
0
5
10
15
20
25
30
Food Beverage Food & Beverage
FLNAQFNALA FoodsFood PeersPepsi NABeverage PeersEuropeAsiaFood & Bev Peers
78
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Segment
FLNA, 14,502
QFNA, 2,568
LA Foods, 8,442
Pepsi NA Beverage,
21,154
Europe, 13,290
Asia, 6,727
79
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OPM Pepsi
0%
5%
10%
15%
20%
25%
30%
FLNA QFNA LA Foods Pepsi NABeverage
Europe Asia
OPM
80
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Pepsi
81
Revenue CS Operating Profit CS Assets OP/Assets
FLNA 14,502 22% 4,102 28.3% 5,307 77.3%
QFNA 2,568 4% 635 24.7% 982 64.7%
LA Foods 8,442 13% 1,236 14.6% 4,760 26.0%
Pepsi NA Beverage 21,154 32% 3,007 14.2% 30,188 10.0%
Europe 13,290 20% 1,402 10.5% 13,902 10.1%
Asia 6,727 10% 1,080 16.1% 5,887 18.3%
66,683 100% 11,462 17.2%
Corporate 1,149 9,483
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Pepsi
0%10%20%30%40%50%60%70%80%90%
FLNA QFNA LA Foods Pepsi NABeverage
Europe Asia
ROA-Segment
82
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Earnings Profile
83
0
10000
20000
30000
40000
50000
60000
70000
80000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Revenue
0
2000
4000
6000
8000
10000
12000
14000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
EBITDA
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EBITDA margins [Earnings Profile]
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
84
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Earnings Profile
85
0%
5%
10%
15%
20%
25%
30%
FLNA QFNA LA Foods Pepsi NABeverage
Europe Asia
OPM
FLNA, 14,502
QFNA, 2,568
LA Foods, 8,442
Pepsi NA Beverage,
21,154
Europe, 13,290
Asia, 6,727
0
5
10
15
20
25
30
Food Beverage Food &Beverage
FLNA
QFNA
LA Foods
Food Peers
Pepsi NA
Beverage Peers
Europe
Asia
0.00%
5.00%
10.00%
15.00%
20.00%
2011 2012 2013 2014
ROIC
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Teva
• Teva Pharmaceutical Industries Ltd. is an Israeli multinational pharmaceutical company headquartered. It specializes primarily in generic drugs, but other business interests include active pharmaceutical ingredients and, to a lesser extent, proprietary pharmaceuticals. It is the largest generic drug manufacturer in the world and one of the 15 largest pharmaceutical companies worldwide.
• Abbott Laboratories is an American worldwide health care firm; it split off the research-based pharmaceuticals into Abbvie in 2013. In 2015, revenues were $20.4 billion.
• Abbott has a broad range of branded generic pharmaceuticals, medical devices, diagnostics, and nutrition products.• Allergan, Plc is a multi-national pharmaceutical that produces branded and generic drugs, and performs pharmaceutical research and
development. • Bristol-Myers Squibb is an American pharmaceutical company; manufactures prescription pharmaceuticals in several therapeutic
areas, including cancer, HIV/AIDS, cardiovascular disease, diabetes, hepatitis, rheumatoid arthritis and psychiatric disorders. • Eli Lilly and Company is an American global pharmaceutical company Lilly was the first company to mass-produce penicillin, the Salk
polio vaccine, and insulin. Its achievements include being one of the first pharmaceutical companies to produce human insulin using recombinant DNA including Humulin, Humalog, and the first approved biosimilar insulin product in the US Basaglar.
• Merck is an American pharmaceutical company and one of the largest pharmaceutical companies in the world. Merck's research and development effort has led to the approval of more new drugs than that of any other company.
• GlaxoSmithKline is a British pharmaceutical company. GSK was the world's sixth largest pharmaceutical company. GSK's drugs and vaccines earned £21.3 billion, with GSK consumer products earning £5.2 billion.
• Sanofi S.A. is a French multinational pharmaceutical company and the world's fifth-largest by prescription sales.[Sanofi engages in the research and development, manufacturing and marketing of pharmaceutical drugs principally in the prescription market, but the firm also develops over-the-counter medication.
• Mylan N.V. is an American global generic and specialty pharmaceuticals company registered in the Netherlands, with principal executive offices in the UK and global headquarters in Pennsylvania, US. Through acquisitions, Mylan grew from the third-largest generic and pharmaceuticals company in the United States to the second-largest generic and specialty pharmaceuticals company in the world.
86
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Teva Profits
87
Teva2015 adjusted IS Common Size
Revenue 19,652Cost of Good Sold 8296Gross Profit 11,356R&D 1,525Selling and Marketing 3,478General and Administrative 1,239Impairment 1,131Legal Settlements 631Operating Profit 3,352
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Teva Comps [9]
88
Symbol: ABT ABBV AGN BMY LLY MRK GSK SNY MYL AveragePeriod Ending: 12/31/15 12/31/15 12/31/15 12/31/15 12/31/15 12/31/15 12/31/15 12/31/15 12/31/15Fiscal Year 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-DecTotal Revenue $20,405,000 $22,859,000 $15,071,000 $16,560,000 $19,958,700 $39,498,000 $35,260,000 $37,870,000 $9,429,300Cost of Revenue $8,747,000 $4,500,000 $4,810,400 $3,909,000 $5,037,200 $14,934,000 $13,048,000 $11,861,000 $5,213,200
Gross Profit $11,658,000 $18,359,000 $10,260,600 $12,651,000 $14,921,500 $24,564,000 $22,212,000 $26,008,000 $4,216,100Operating ExpensesResearch and Development $1,405,000 $4,285,000 $2,358,500 $5,920,000 $4,796,400 $6,704,000 $5,247,000 $5,521,000 $671,900Sales, General and Admin. $6,785,000 $6,387,000 $4,679,600 $4,841,000 $6,432,400 $10,313,000 $1,751,000 $10,361,000 $2,180,700
Operating Income $3,468,000 $7,687,000 $3,222,500 $1,890,000 $3,692,700 $7,547,000 $15,214,000 $10,126,000 $1,363,500
Gross Profit Margin 57.1% 80.3% 68.1% 76.4% 74.8% 62.2% 63.0% 68.7% 44.7% 66.1%R&D/Sales 6.9% 18.7% 15.6% 35.7% 24.0% 17.0% 14.9% 14.6% 7.1% 17.2%Operating Profit Margin 17.0% 33.6% 21.4% 11.4% 18.5% 19.1% 43.1% 26.7% 14.5% 22.8%
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Teva
89
Teva2015 adjusted IS Common Size
Revenue 19,652 19,652 100.0%Cost of Good Sold 8296 8,296 42.2%Gross Profit 11,356 11,356 57.8%R&D 1,525 1,525 7.8%Selling and Marketing 3,478 3,478 17.7%General and Administrative 1,239 1,239 6.3%Impairment 1,131 -1,131 0Legal Settlements 631 -631 0Operating Profit 3,352 1,762 5,114 26.0%
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Teva
90
Teva2014 adjusted IS Common Size
Revenue 20,272 20,272 100.0%Cost of Good Sold 9216 9,216 45.5%Gross Profit 11,056 11,056 54.5%R&D 1,488 1,488 7.3%Selling and Marketing 3,861 3,861 19.0%General and Administrative 1,217 1,217 6.0%Impairment 650 -650 0Legal Settlements -111 111 0Operating Profit 3,951 539 4,490 22.1%
Teva2013 adjusted IS Common Size
Revenue 20,314 20,314 100.0%Cost of Good Sold 9607 9,607 47.3%Gross Profit 10,707 10,707 52.7%R&D 1,427 1,427 7.0%Selling and Marketing 4,080 4,080 20.1%General and Administrative 1,239 1,239 6.1%Impairment 788 -788 0Legal Settlements 1,524 -1,524 0Operating Profit 1,649 2,312 3,961 19.5%
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Comment on Trend
91
TEVA 2015 2014 2013revenue growth -3.1% -0.2%Gross Profit Margin 57.8% 54.5% 52.7%R&D 7.8% 7.3% 7.0%Selling and Marketing 17.7% 19.0% 20.1%General and Administrative 6.3% 6.0% 6.1%OPM 26.0% 22.1% 19.5%
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Comment on Trend
92
2017 2016 2015 2014 2013 2012 2011 2009 2008revenue growth 2.2% 11.5% -3.1% -0.2% 0.0% 10.9% 13.6% 16.0%gross profit margin 48.4% 57.2% 57.8% 54.5% 52.7% 52.4% 52.0% 56.2% 53.0%R&D/ sales 8.3% 9.6% 7.8% 7.3% 7.0% 6.7% 6.0% 5.9% 5.9%Selling 16.3% 17.6% 17.7% 19.0% 20.1% 19.1% 19.0% 18.4% 19.3%G&A 5.9% 5.6% 6.3% 6.0% 6.1% 6.1% 5.1% 5.4% 5.9%OPM 17.8% 24.3% 26.0% 22.1% 19.5% 20.6% 21.9% 26.6% 21.9%
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Credit Mindset, Debt Sizing and Service
Income Statement Balance Sheet #1 #2 #3
Revenue 20,000 Cash 0 0 0
Cost of Sales 11,000 Operating Assets 20,000 20,000 20,000
S, G, Admin 6,000 Total Assets 20,000 20,000 20,000
Operating Profit 3,000 Payables 3,000 3,000 3,000
Interest Income 0 Debt 5,000 10,000 15,000EBIT/Operating Profit 3,000 Equity 12,000 7,000 2,000
RROOA Cost of Debt 3% 6% 10%Debt/Assets 25% 50% 75%
EBIT 3,000 3,000 3,000
Interest 150 600 1,500
EBT 2,850 2,400 1,500
Tax [30%] 855 720 450
Net Income 1,995 1,680 1,050
ROE 24.0% 52.5%
Interest Coverage 5.0X 2.0X
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Ratio Medians
AAA AA A BBB BB B CCC EBIT interest coverage 25.8 19.5 8.0 4.7 2.2 1.2 [0.1]
EBITDA interest coverage 27.5 24.6 10.5 6.8 3.5 1.9 0.7 Funds from operations/total debt 203% 80% 48% 36% 22% 12% 3%
Free operating cash flow/total debt 128% 45% 25% 17% 8% 3% [3%] Pretax return on capital 28% 27% 18% 13% 11% 8% 1%
EBITDA/sales 23% 24% 18% 16% 15% 15% 9% Long term debt/capital 0% 21% 34% 40% 54% 73% 78%
Total debt/capitalization 5% 36% 43% 47% 58% 75% 92% Total debt/EBITDA 0.8 1.2 1.8 3.0 3.8 4.5 4.8
EBITDA/Assets 29% 24% 19% 15% 14% 11% 4% Number of companies 2 24 121 224 279 264 56
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Ratio Medians
1 EBIT interest coverage EBIT, including equity income Gross Interest Expense plus capitalized interest
2 EBITDA interest coverage EBITDA, including distributed equity income
Gross Interest Expense plus capitalized interest
3 Funds Flow/Total Debt Funds Flow All Debt
4 Free Operating Cash Flow/Total Debt
CFO - Cap X All Debt
5 Pretax Return on Capital EBIT All debt + Equity+ Non Controlling Interest
6 Operating EBITDA margin Operating EBITDA Sales
7 Long Term Debt/Capital Long Term Debt Long Term Debt + Equity + Non Controlling Interest
8 Total Debt/Capital All Debt All debt + Equity+ Non Controlling Interest
9 Total Debt/EBITDA All debt EBITDA, including distributed equity income
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Historical Default Rates - 1970 - 2010
Average cumulative default rates
1 year 5 years 10 years
AAA .00% .10% .49%
AA .02% .27% .62%
A .06% .76% 2.14%
BBB .18% 1.95% 4.90%
BB 1.16% 10.45% 20.10%
B 4.47% 26.17% 44.57%
CCC 18.16% 53.77% 72.38%
IG .09% 1.00% 2.57%
NIG 4.67% 21.80% 34.44%
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2000-2016
97
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EBITDA ratios
98
Debt repayment capacityEBITDA/[cash interest+cash tax+CapX+Dividends+7% debt]
Fixed Charge CoverageEBITDA/[cash interest+cash tax+CapX+Dividends+CPLTD]
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Tesla
• We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components.
• We are the first company to commercially produce a electric vehicle, the Tesla Roadster.
• The Tesla Roadster’s proprietary electric vehicle powertrain system is the foundation of our business.
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Income Statement, Tesla
[millions] 2015 2014 2013 2012 2011 2010 2009
Revenue 4,046 3,192 1,998 413 204 117 112
Cost of Sales -2,696 -2,122 -1,452 -313 -102 -66 -172
R&D -718 -465 -232 -274 -209 -93 -19
SGA -734 -248 -104 -96 -58 -55 -26
Stock based comp
-198 -156 -81 -30 -22
Depreciation -426 -388 -190 -80 -65 -50 -46
Operating Profit -717 -187 -61 -392 -252 -147 -51
Other -40 2 22 -2 -2 -6 -1
Interest Expense -119 -100 -33 0 0 -1 -3
Income Before Tax
-875 -285 -71 -394 -254 -154 -55
Tax -13 -9 -3 0 0 0 0
Net Income -818 -294 -74 -394 -254 -154 -55
EBITDA
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Balance Sheet, Teslamillions 2015 2014 2013 2012 2011 2010 2009
Cash 1,219 1,922 850 202 255 100 70
Accounts Receivables 169 227 50 26 10 7 3
Inventory 1,278 954 340 269 50 45 23
PPE 3,403 1,830 740 552 298 115 23
Operating Leases 1,791 767 299
Other 232 149 138 65 100 118 11
Total Assets 8,092 5,849 2,417 1,114 713 385 130
Payables 4,288 1,495 1,157 538 211 107 65
Convertible Debt 2,715 2,488 593 451 278 72 0
Convertible Pfd 0 0 0 0 0 0 319
Equity 1,089 912 667 125 224 206 -254
Shares [million] 131 126 123 114 105 95 7
Share price [12/31/2010]
$35
IPO price [7/19/2010] $17
Share price $212 $255 $211 $103
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Cash Flows, Tesla
2015 2014 2013 2012 2011 2010 2009
Net Income -888 -294 -74 -396 -254 -154 -55
Depreciation 426 390 190 80 65 10 7
Stock Based 198 156 81 30 22
Balance Sheet Changes
-260 -309 70 20 38 16 -33
Cash Flow from Ops
-524 -57 265 -266 -128 -128 -81
Capital Spending
-1,635 -970 -264 -239 -184 -105 -12
Borrowing 365 1,753 140 190 204 72 0
Issuance of Equity
1,150 390 490 245 240 289 0
Other -65 -56 26 20 32 -98 153
Change in Cash -709 1,060 650 -50 160 30 60
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Tesla, Enterprise Value, 2015
Market ValueDebt
Market Value Equity
Less cash EV
Market Survey
Earnings [EBITDA]
Multiple EV
Multiple of Earnings
Earnings [EBITDA]
Multiple EV
Multiple of Earnings [A]
$86,900 $703,000
Multiple of Earnings [F]
$12,400 $115,800
Multiple of Earnings [T]
$33,970 $327,900
R&D A=8,000 F=6,700 T=8,100 103
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Tesla
• In November 2016, Tesla acquired Solar City, an installer of rooftop solar panels, in an all stock transaction.
• Elon Musk owns 21 percent of Tesla and 22 percent of SolarCity, making him the largest shareholder of both companies.
• SolarCity stock price rose over 35% since the transaction was first announced in late June.
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Income Statement, Tesla[millions] 2017 2016 2015 2014 2013 2012 2011 2010 2009
Revenue 11,759 7,000 4,046 3,192 1,998 413 204 117 112
Cost of Sales
-7,900 -4,750 -2,696 -2,122 -1,452 -313 -102 -66 -172
R&D -1,378 -834 -718 -465 -232 -274 -209 -93 -19
SGA -2,010 -802 -734 -248 -104 -96 -58 -55 -26
Stock based comp
-467 -334 -198 -156 -81 -30 -22
Depreciation -1,636 -947 -426 -388 -190 -80 -65 -50 -46
Operating Profit
-1,632 -667 -717 -187 -61 -392 -252 -147 -51
Other -106 119 -40 2 22 -2 -2 -6 -1
Interest Expense
-471 -199 -119 -100 -33 0 0 -1 -3
Income Before Tax
-2,209 -747 -875 -285 -71 -394 -254 -154 -55
Tax -31 -27 -13 -9 -3 0 0 0 0
Net Income -2,241 -773 -888 -294 -74 -394 -254 -154 -55
EBITDA
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Balance Sheet, Teslamillions 2017 2016 2015 2014 2013 2012 2011 2010 2009
Cash 3,522 3,498 1,219 1,922 850 202 255 100 70
Accounts Receivables
515 499 169 227 50 26 10 7 3
Inventory 2,263 2,067 1,278 954 340 269 50 45 23
PPE 16,374 11,903 3,403 1,830 740 552 298 115 23
Operating Leases 4,117 3,134 1,791 767 299
Other 1,864 1,563 232 149 138 65 100 118 11
Total Assets 28,655 22,664 8,092 5,849 2,417 1,114 713 385 130Payables 12,813 10,008 4,288 1,495 1,157 538 211 107 65
Debt 10,311 7,118 2,715 2,488 593 451 278 72 0
Convertible Pfd 0 0 0 0 0 0 319
Equity 5,531 5,538 1,089 912 667 125 224 206 -254
Shares [million] 169 161 131 126 123 114 105 95 7
Share price [12/31/2010]
$35
IPO price [7/19/2010]
$17
Share price $316 $214 $212 $255 $211 $103
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Cash Flows, Tesla
2017 2016 2015 2014 2013 2012 2011 2010 2009
Net Income -2,241 -773 -888 -294 -74 -396 -254 -154 -55
Depreciation 1,636 947 426 390 190 80 65 10 7
Stock Based 467 334 198 156 81 30 22
Balance Sheet Changes
78 -631 -260 -309 70 20 38 16 -33
Cash Flow from Ops
-60 -123 -524 -57 265 -266 -128 -128 -81
Capital Spending
-3,415 -1,280 -1,635 -970 -264 -239 -184 -105 -12
Borrowing 3,140 1,775 365 1,753 140 190 204 72 0
Issuance of Equity
260 1,844 1,150 390 490 245 240 289 0
Other 50 571 -65 -56 26 20 32 -98 153
Change in Cash
-25 2,279 -709 1,060 650 -50 160 30 60
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Tesla, Enterprise Value 2017
Market ValueDebt
Market Value Equity
Less cash EV
Market Survey
Earnings [EBITDA]
Multiple EV
Multiple of Earnings
Earnings [EBITDA]
Multiple EV
Multiple of Earnings [A]
$74,600 $763,000
Multiple of Earnings [F]
$13,200 $152,300
Multiple of Earnings [T]
$35,120 $317,900
CS $346 $2,900
Trina $412 $2,600 108
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Performance, 2015 MSFT Apple
Cash 108,579 205,666
Operating Assets 67,644 84,813
Total Assets 176,223 290,479
Suppliers 60,848 106,662
Lenders 35,292 64,462
Equity 80,083 119,355
Revenue 93,580 233,715
Operating Profit 28,161 71,230
NOPAT 18,305 46,300
Book Invested Capital [book value of equity plus book value of debt less cash]
6,796 -21,849
Enterprise Value [market value of equity plus market value of debt less cash]
340,000 553,000
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Yahoo
110
2014 2015 Fair Valuecash and mkt securities 10,222 6833Accounts Receivable 1,033 1,048Prepaids 420 603PPE, net 1,488 1,547Goodwill 5,152 808Intangibles 1,033 690Investment in Alibaba 39,868 31,172Investment in Affiliates 2,490 2,503Total Assets 61706 45204
Accounts Payables 1,232 1,278Tax payable on Alibaba ADSs 3,282 0Convertible Notes 1,170 1,233LT Liabilities 1,083 1,003Deferred Tax Alibaba Investment 16,154 12,611Common Equity 38,785 29,079Total Liabilites and Equity 61706 45204
Shares Outstanding 937 946Revenue 4,618 4,963Operating Profit 235 -233DA 1,027 1,070Share Price $50.11 $33.26 Enterprise Value
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Amdocs
111
Amdocs is a multinational corporation headquartered in Chesterfield, Missouri, with support and development centers located worldwide. The company specializes in software and services for communications, media and financial services providers and digital enterprises. Its offerings include business support systems (BSS), operational support systems (OSS), open network solutions, Internet of Things, big data analytics and entertainment and media solutions. The company has a customer base of over 350 customers in more than 85 countries. Amdocs went public in 1998 and its ordinary shares are listed on the NASDAQ Global Select Market under the symbol DOX.
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Amdocs
112
2015 adjusted IS Common Size
Revenue 3,643,538
Cost of Good Sold 2349488
Gross Profit 1,294,050
R&D 254,944
Selling and Marketing 440,085
Amortization 70,073
Restructuring 13,000
Operating Profit 515,948
Interest 2,544
Tax 67,241
Net Income 446,163
Equity 3,406,842
ROE
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Amdocs [Peers]
113
Symbol: HPQ IBM ORCL ACN average
Period Ending: 10/31/15 12/31/15 5/31/16 8/31/15Fiscal Year 31-Oct 31-Dec 31-May 31-Aug
Total Revenue $103,355,000 $81,741,000 $37,047,000 $32,914,424Cost of Revenue $78,596,000 $41,057,000 $7,479,000 $23,105,185
Gross Profit $24,759,000 $40,684,000 $29,568,000 $9,809,239
Operating ExpensesResearch and Development $3,502,000 $5,247,000 $5,787,000 $0
Sales, General and Admin. $13,612,000 $19,748,000 $9,039,000 $5,373,370Operating Income $7,645,000 $15,689,000 $14,742,000 $4,435,869Interest Expense $0 $468,000 $1,467,000 $14,578
Income Tax $1,780,000 $2,581,000 $2,541,000 $1,136,741Net Income $5,865,000 $12,640,000 $10,734,000 $3,284,550
Total Equity $27,768,000 $14,262,000 $47,289,000 $6,133,725
Gross Profit 24.0% 49.8% 79.8% 29.8% 45.8%R&D 3.4% 6.4% 15.6% 0.0% 6.4%Operating Profit Margin 7.4% 19.2% 39.8% 13.5% 20.0%
ROE 21.1% 88.6% 22.7% 53.5% 46.5%
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Amdocs
114
2015 adjusted IS Common SizeRevenue 3,643,538 3,643,538 100.0%Cost of Good Sold 2349488 2,349,488 64.5%Gross Profit 1,294,050 1,294,050 35.5%R&D 254,944 254,944 7.0%Selling and Marketing 440,085 440,085 12.1%Amortization 70,073 70,073 1.9%Restructuring 13,000 -13,000 0Operating Profit 515,948 13,000 528,948 14.5%
Interest 2,544 2,544Tax 67,241 67,241Net Income 446,163 13,000 459,163
Equity 3,406,842 3,406,842
ROE 13.5%
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First Data
• First Data Corporation is a provider of electronic commerce and payment solutions for merchants and financial institutions globally and has operations in 35 countries, serving approximately 6.2 million merchant locations.
• FDC was incorporated in 1989 and was the subject of an IPO in connection with a spin-off from American Express in 1992.
• On September 24, 2007, the Company was acquired KKR. The merger resulted in FDC becoming privately held.
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Income Statement, FDC 2014 2013 2012 2011 2010 2009
Revenue 11,152 10,809 10,680 10,714 10,380 9,314
Cost of Sales -2,741 -2,809 -2,864 -2,888 -3,023 -2,945
Other Operating Expenses -6,972 -6,877 -6,742 -6,884 -6,758 -5,924
Operating Profit 1,439 1,123 1,074 942 600 445
Other -58 -42 -87 131 30 -240
Interest Expense -1,753 -1,881 -1,897 -1,833 -1,800 -1,800
Income Before Tax -402 -800 -910 -760 -1,170 -1,594
Tax -82 -86 224 270 324 579
Net Income -484 -890 -685 -490 -847 -1,015
Equity Income 220 188 158 153 145 95
NCI -193 -177 -174 -180 -150 -90
Net Loss -458 -880 -701 -517 -852 -1,010
Depreciation 188 190 188 191 195 198
Amortization 870 902 976 1,044 1,075 1,100
EBITDA
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Balance Sheet, FDC
2014 2013 2012 2011 2010 2009
Cash 358 425 608 530 510 738
Accounts Receivables
1,752 1,764 1,848 2,050 2,170 2,455
Settlement Assets
7,555 7,540 9,173 9,192 8,201 8,392
PPE 930 849 856 940 950 1,050
Goodwill 17,017 17,248 17,283 17,299 17,300 17,450
Intangibles 4,349 5,053 5,644 6,344 7,155 8,120
Other 2,308 2,361 2,487 1,100 1,259 1,528
Total Assets 34,269 35,240 37,899 37,455 37,544 39,735
Payables 10,748 10,792 12,462 11,541 10,874 12,030
Debt 20,873 22,755 22,811 22,803 22,610 22,605
Equity 2,648 1,693 2,626 3,111 4,060 5,100
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Cash Flows, FDC
2014 2013 2012 2011 2010 2009
Net Income -458 -880 -701 -517 -852 -1,010
Depreciation 188 190 188 191 195 198
Amortization 870 902 976 1,044 1,075 1,100
Minority Interest 193 177 174 180 150 90
Other Changes 310 284 130 218 187 622
Cash Flow from Ops 1,103 673 767 1,116 755 1,000
Capital Spending -308 -184 -177 -203 -210 -200
Borrowing -2,105 -158 16 -211 14 -205
Other 1,243 -514 -483 -726 -787 -264
Change in Cash -67 -183 123 -24 -228 331
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Pier 1
• Pier 1 began in 1962 with a single store.
• Since then, Pier 1 has grown to over 1,100 locations and has become the largest specialty retailer of imported home furnishings and decor.
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Pier 1, Income Statement
2008 2007Net Sales 1,512 1,623Cost of Sales 1,072 1,149Selling, General, Administrative 527 700Operating Profit (88) (226)Non Operating Income 11 14Interest Expense (16) (16)Earnings Before Tax (93) (228)Tax (2) 1Net Earnings (95) (227)
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Pier 1, Balance Sheet
FYE 2008 3rd Qtr 2008 FYE 2007
Cash 83 30 167
Acc Receivables 17 30 18
Inventory 412 573 360
Other Current Asset 58 62 85
Properties 124 121 150
Other Assets 46 44 45
Total Assets 740 860 825
Short Term Debt 0 110 0
Accounts Payable 106 121 95
Gift Cards 64 64 66
Accruals 130 130 140
Long Term Debt 180 180 180
Equity 260 255 344
Working Capital 270 270 329
Working Capital Needs 187 350 162
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Financial Analytics, Earnings
•How is Avon doing financially?– Always start with profits
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Financial Analytics
•Who are the peers [comparable companies] of Avon?
•Unlike most of Avon’s CPG competitors, which sell their products through third-party retail establishments (e.g., drug stores, department stores), – Avon’s business is conducted worldwide primarily in one channel, direct
selling
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Common Size
Avon Peers
2005 2004 2005 2004
Sales 8,150 7,748 XXXX XXXX
Profit 846 846 XXXX XXXX
Margin 9.7% 9.8%
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Profitability Analysis
• Profitability is the result of a large number of management policies and decisions.
• Analyze the financials from top down.– Start with revenues and move down the income statement to operating profit– Operating Profit is the most important subtotal on the income statement as it is
• Unleveraged • Core Business
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Ratio Analysis
• Start with Operating Profit [Operating EBIT] for profitability ratios • Why is Operating Profit so important?
• The use and definition of ratios should be relevant for the purpose used and valid for the specific company
– Cross-check with • planned ratio and rules of thumb• industry averages and key competitors
• Distinguish clearly between level and trend analysis• Make sure you understand the definitions of ratios• Make sure you analyze segments• Make sure you understand the rating agency view• Credit Mindset:
– RROOA is more important than OPM
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Measurement of Earnings
• Profitability Analysis– Mechanics, Analysis and Interpretation
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The business cycle
• Define Seasonal and Cyclical businesses
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Economies grow unevenly
129
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
1977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016
Change in GDP Recession
1977-2016 average
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Sales and profits in a recession
• Understanding Operating Leverage is Critical. Define Operating Leverage:
_________________________________________________________
_________________________________________________________
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Operating leverage
2017 2018
Revenue 10,000
Growth XXXXXXX 20%
Fixed costs 9,000
Variable costs 500
Op Profit
Operating Margin
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Operating leverage
2017 2018
Revenue 10,000 8,000
Growth XXXXXXX -20%
Fixed costs 9,000 9,000
Variable costs 500 400
Op Profit 500 -1,400
Operating Margin 5%
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Operating leverage
2017 2018
Revenue 10,000
Growth XXXXXXX 20%
Fixed costs 500
Variable costs 9,000
Op Profit 500
Operating Margin 5%
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Operating leverage
2017 2018
Revenue 10,000 8,000
Growth XXXXXXX -20%
Fixed costs 500 500
Variable costs 9,000 7,200
Op Profit 500 300
Operating Margin 5% 4%
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Sales & Earnings
• What happens in a recession to a procyclical business
– Sales?
– Earnings?
– Operating Cash Flow?
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Analytically Adjusted Income Statement
• Companies use different presentation formats for their income statements. • In addition, the accounting rules for the income statement do not always reflect
comparability with – prior years or – forecasts or – with other firms.
• Most companies prepare their balance sheets and statements of cash flows in formats that are comparable to other companies.
• The analyst/associate must adjust the income statement by considering both – reported financial statements and – analytically adjusted income statement
• and must clearly identify any amounts and ratios as – reported or adjusted
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Reformatting
• REFORMATTING – places amounts from the income statement into one of five sections:
• Operating • Non-Operating• Interest Expense, Gross• Tax Provision• Items Segregated for Analysis [net of tax]:
– Equity Income [leveraged after tax income]– NonControlling Interest [financial cost]– Items that Relate to More than One Year [non recurring]
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Format
Income statement Reported1 Sales 10,0002 COGS (3,500)3 Selling, general, and administrative costs (4,500)4 Other operating expenses (100)5 Other operating expenses6 Other operating expenses7 = Operating Profit [Op EBIT] 1,900
8 Interest income 409 Other non-operating income (expense) (20)
10 Other non-operating income (expense)11 Other non-operating income (expense)12 = EBIT 1,920
13 Gross interest expense (300)
14 = EBT 1,620
15 Total tax expense (450)
16 = Income from continuing operations before equity income 1,170
17 Equity income 5018 (Income attributable to non-controlling interest) (10)
19 Discontinued operations (100)20 Reclassified items21 = Net income 1,110
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FormatIncome statement Reported
1 Sales 10,000
2 COGS (3,500)
3 Selling, general, and administrative costs (4,500)
4 Other operating expenses (100)
5 = Other operating expenses
6 Other operating expenses
7 = Operating Profit 1,900
8 Interest income 40
9 Other non-operating income (expense) (20)
10 Other non-operating income (expense)
11 Other non-operating income (expense)
12 = EBIT 1,920
13 Gross interest expense (300)
14 = EBT 1,620
15 Total tax expense (450)
16 = Income from continuing operations before equity income 1,170
17 Equity income 50
18 (Income attributable to non-controlling interest) (10)
19 Discontinued operations (100)
20 Reclassified items
21 = Net income 1,110
22 Depreciation 200
23 Amortization 50
24 Stock Based Compensation 40
25 Credit EBITDA 2,210
26 Operating EBITDA 2,190
27 Credit EBIT 1,970
28 Funds Flow 1,460
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Reformatting
• Operating: Sales & services and all the related expenses for operating the core business but excluding financing income and expense
• Non-Operating: Recurring Income, but not part of the core business• Interest Expense, Gross• Tax Provision• Items Segregated for Analysis [net of tax]:
– Equity Income [leveraged after tax income]– NonControlling Interest [financial cost]– Items that Relate to More than One Year
• gains & losses that relate to more than one year (or to a different year),– cumulative effect of change in accounting; – gain (loss) from of discontinued operations;– loss on early retirement of long-term debt; – Lifo liquidation gains; – Asset or goodwill impairment, writedowns, restructuring charges, acquisition related
charges, litigations, and gain and loss on the sale of assets.
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Adjust
Income statement Reported 1 Recurring
1 Sales 10,000 10,000
2 COGS (3,500) (3,500)
3 Selling, general, and administrative costs (4,500) (4,500)
4 Other operating expenses (100) 100 0
5 = Other operating expenses 0
6 Other operating expenses 0
7 = Operating Profit 1,900 100 2,000
8 Interest income 40 40
9 Other non-operating income (expense) (20)
10 Other non-operating income (expense)
11 Other non-operating income (expense) 0
12 = EBIT 1,920 100 2,020
13 Gross interest expense (300) (300)
14 = EBT 1,620 100 1,720
15 Total tax expense (450) (450)
16 = Income from continuing operations before equity income 1,170 100 1,270
17 Equity income 50 50
18 (Income attributable to non-controlling interest) (10) (10)
19 Discontinued operations (100) (100)
20 Reclassified items (100) (100)
21 = Net income 1,110 0 1,110
22 Depreciation 200 200
23 Amortization 50 50
24 Stock Based Compensation 40 40
25 Credit EBITDA 2,210 100 2,310
26 Operating EBITDA 2,190 100 2,290
27 Credit EBIT 1,970 100 2,070
28 Funds Flow 1,460 100 1,560
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Earnings Analysis, Cash Flow Lending
• Format and Adjust the Income Statement• Do level first
– the most recent year
• Level entails both – Relative analysis [peers] and – absolute analysis– Level analysis is also done at the segment level
• After level, then do trend analysis– Make sure you distinguish between the credit and equity mindset– Do trend for the entire business cycle
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AAIS
• Par and Pfizer
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A typical income statement
Sales Revenue 10,000
Cost of Sales (6,000)
Selling and General Expenses (2,000)
SUBTOTAL
Depreciation (400)
Amortization (60)
Stock Based Compensation (40)
SUBTOTAL
Interest Expense (500)
Earnings Before Tax 1,000
Tax Expense (350)
Net Income 650
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Explorations in EBITDA.
• EBITDA is one of the most widely used financial metrics. – However, there is much confusion about the calculation, the use and the
interpretation of EBITDA.• What does EBITDA measure?
– Profits?
– Liquidity?
– Solvency?
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Explorations in EBITDA.
• EBITDA is one of the most widely used financial metrics. • First, we need to understand what EBITDA measures:
• EBITDA measures the• Unleveraged [before interest cost]• Pretax [this is a problem]
• Expected [Potential] Operating Cash Flow of the Firm
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Explorations in EBITDA.
• EBITDA is a profit measure, but does not include D or A [or S]• EBITDA is a liquidity measure
• but only when accrual and cash accounting are similar
• EBITDA is a solvency measure• but ignores tax and CAP X• Also, the capital structure
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Expected [Potential] Cash Flow of the Firm is the Long Run Cash Flow from Operations
• EBITDA is the Expected [Potential] Cash Flow of the Firm• EBITDA can be the same as the
• Net Cash Flow from Operations [in the long run, before interest and tax]• The assumption is that ultimately accrual accounting profit converts to
cash flow• EBITDA is a good proxy of Unleveraged Pretax Operating Cash Flow in either of
these two scenarios1) The firm has a short cash cycle, i.e. the investment in accounts
receivable and inventory is small or it is financed by the suppliers2) The firm is not growing
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Explorations in EBITDA.
• History of EBITDA– EBIT has been used as an analytic tool for decades
• It measures earnings without regard to the capital structure– Before January 1982, there were very few leveraged buyouts
• Pan Atlantic Steamship - 1955• Orkin - 1964• Borin - 1973
– In January 1982, former Treasury Secretary William Simon acquired Gibson Greetings for $80 million, with only $1 million in equity [$330,000 from Simon].
– Within one year, Gibson completed a $290 million IPO and Simon made $66 million
– Over the next 10 years, there were more than 2,000 LBOs– Why did buyouts start in 1982?
• Change in ERISA rules, interest rates, capital gains rate lowered in 1981
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EBITDA History
• These buyouts often created significant goodwill• In the 1980’s, goodwill was expensed [amortized]
• Many financial sponsors of these buyouts complained that the amortization of goodwill should be ignored when calculating EBIT
• The argument was the Amortization [A] of Goodwill had no impact on • Real Cash Earnings• Firm Liquidity• Debt Servicing Capabilities
• Note: Be sure to understand any amortization of identifiable intangible assets and whether they need replacement
• EBIT was soon replaced by EBITA as a financial metric
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EBITDA
• “People who use EBITDA are either trying to con you or they’re conning themselves. Telecoms, for example, spend every dime that’s coming in. Interest and taxes are real costs.
• Trumpeting EBITDA is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?”
151
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CapX and Depreciation
2014 2015 2016 2017 2018
Net Income -250 -250 -250 -250
depreciation 250 250 250 250
BS changes
Net CFOps 0 0 0 0
CapX -1,000
Net CFInv -1,000
152
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Explorations in EBITDA
• Within a short period of time, EBITDA replaced EBITA• EBIT
• Adjust for the Amortization of Goodwill– Why?
– Amortization of Goodwill never impacts Cash Flow From Operations– Goodwill doesn’t need to be “replaced”
– EBITA• Do you want to adjust for Depreciation of Tangible Fixed Assets?
– Why? Not sure– Depreciation of Tangible Fixed Assets never impacts CFO
» But, the firm still needs to reinvest in the business» Cap X
» Which a claim on CFO– EBITDA
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Explorations in EBITDA
• EBITDA has always had the following problems– EBITDA is an accrual accounting measure
• ignores the changes in working capital accounts in the balance sheet– EBITDA ignores any capital spending which the firm may need to make [and other
“investing” activities which give rise to amortization]– EBITDA ignores income tax, which is a “real” operating cost
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Explorations in EBITDA, Distributor
2008 2010
Traditional EBITDA $122.3 million ($ 7.8 million)
Chg in AR ($ 55.7 million) $115.5 million
Chg In Inventory ($ 76.4 million) $ 82.0 million
Net Cash Flow from Operations ($ 35.7 million) $114.4 million
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Explorations in EBITDA, Trucking
2016
Traditional EBITDA $317.5 million
Chg in AR & Inventory $5.5 million
Net Cash Flow from Operations $190.1 million
Depreciation $166.4 million
Capital Spending $195.3 million
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Explorations in EBITDA, Pharma
2016
Traditional EBITDA $12,017 million
Chg in AR & Inventory $100 million
Net Cash Flow from Operations $9,144 million
Depreciation & Amortization $ 3,940 million
Capital Spending $ 1,015 million
No Amortization of Goodwill, but amortization of finite life intangibles is in the DA
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Explorations in EBITDA
• EBITDA is one of the most widely used financial metrics. • However, there is much confusion about the calculation of EBITDA.• Which items should be included or excluded from the calculation?
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Explorations in EBITDA
• When should the analyst use each of the following: – EBITDA– EBITA– EBIT– EBITDAR– EBITDAP– EBITDAS– EBITDARPS– EBITDA [Equity]– EBITDA [NCI]– EB [n] ITDA– Adjusted or Proforma EBITDA
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EBITDA[s]
• Then in 2003, accounting changed rules for amortization to only amortize finite lived indentifiable intangibles
• And since 2005, firms are required to expense stock based compensation.
• So EBITDa or EBITDaS?
160
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Calculating EBITDA, Bigger Concerns
• Which items should be included or excluded from the calculation? – Interest Income, – Operating Lease Cost [rent],– Non Controlling Interest, – Equity Income and/or Dividends Received from Affiliates,– Pension Cost,– Post Retirement Medical Cost,– Stock-based compensation expense
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Calculating EBITDA, Bigger Concerns
• Which Unusual Items [Special Items] should be adjusted in calculating EBITDA?– LIFO gain or LIFO charge, – Foreign Exchange Gain and Losses,– Restructuring Charges and Litigation Charge,– Gain or Loss on Sale of Asset,– Gain or Loss on Early Redemption of Debt, – Impairment of Tangible and/or Intangible Assets,– Hedging Gains or Losses– Merger related costs
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Profitability Ratios
• Sales Growth– Increase in sales from one year to the next
• Margin– Income statement amount related to sales
• Gross Profit Margin– Gross margin is the “value added" provided by the firm.
• [Revenues - Cost of Sales]• Operating Profit Margin
– An indication of the firm's true profitability. – This is considered one of the purest measure of the operating performance of the company, reflective of its recurring capabilities.
• [Revenues - Cost of Sales-Selling, Gen and Administrative Costs]• EBITDA [Earnings Before Interest, Tax and Depreciation and Amortization Expenses]
– Same as Operating Profit, but before depreciation and amortization expenses.• Total Asset Turnover [Sales/Assets]
– A measure of the amount of business [revenue] relative to assets• Return on Assets [this must be unleveraged] [RROOA]
– This is a measure of the profit relative to the firm’s assets • Operating Profit/Operating Assets
• Return on Invested Capital[this must be unleveraged]– This is a measure of the profit relative to the firm’s assets, financed by capital
• Net Operating Profit after tax/net Operating Assets• Return on Common stockholder's Equity
– This is a measure of the return on owner's investment in the firm. • NI to Common Owner /Common Equity
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Profitability Measures
Sales
Sales Growth
Gross Profit Margin
Operating Profit Margin
EBITDA
Total Asset Turnover
Return on operating assets
Return on Invested CapitalReturn on equity
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Profitability Analysis
• The following variables contribute to earnings:– environment [external]– operations [internal]– capital structure (debt vs. equity)– infrequent transactions
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Common Size [OPM in 2014 11.3%]
Operating EBITDA margins
1995 2000 2005 2006 2007 2008 2009 2010 2011 2014
18.2% 18.0% 17.8% 18.1% 18.4% 18.9% 18.2% 21.0% 20.9% 20.1%
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Developing an Appropriate Capital Structure
• Make sure that the capital structure is consistent with the lending rationale• Cause• Purpose• Rationale
• Then the lending rationale should be consistent with the debt structuring
• All loans need __________________________ ways out
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8 Types of C&I Balance Sheets [Asset Profiles]
A B C D A1 B1 C1 D1
OPWC
NCA
PPE
Intangible
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Cash Flows
169
Statement of Cash Flow
Net IncomeDepreciationAmortization
Chg in WC needChg in Acc RecChg in InventoryChg in PrepaidsChg in Acc PayChg in AccrualsChg in Tax Payable
Cash Flow from Operations
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Sales Growth [10%]
170
2016 2017revenue 10,000EBITDA 1,000Funds Flow 600CFO
2016 2017
acc receivables 1,000inventory 800prepaids 100
acc payables 800accruals 900tax payable 150
Non cash WC [WCR]
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Sales Growth [10%]
171
2016 2017revenue 10,000EBITDA 500Funds Flow 300CFO
2016 2017
acc receivables 2,000inventory 800prepaids 100
acc payables 400accruals 400tax payable 100
Non cash WC [WCR]
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Sales Growth [1%]
172
2016 2017revenue 10,000EBITDA 500Funds Flow 300CFO
2016 2017
acc receivables 2,000inventory 800prepaids 100
acc payables 400accruals 400tax payable 100
Non cash WC [WCR]
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