Deliverable 2
Due Date: Wednesday, May 15, 2019 at 11:59 p.m.
- Use each company’s most recent Form 10-K to read the debt footnote(s). Answer the following questions and include the answers in your deliverable:Does each company use short- or long-term debt?Is the debt from banks or is it publicly traded?Does the debt carry covenants that provide protection to creditors?Was there any mention of default or renegotiated covenants?NOTE: See Financial Statement Analysis & Valuation, Appendix C, pages C-18 and C- 19 for an example.
- Using the Excel worksheet provided separately, compute the following ratios for three years for each company:Return on equityTimes interest earnedCurrent ratioQuick ratioDebt-to-equity ratioCompare the ratios calculated over time for each company. Is the company more or less liquid or solvent? Compare the companies to determine which company is more liquid and solvent. Include the results of this work in your deliverable.NOTE: See Financial Statement Analysis & Valuation, Appendix C, pages C-28 and C- 31 for an example.
- Conclude with an assessment about each company’s liquidity or solvency. You should express an opinion about whether each company has an appropriate level and types of debt and whether you expect each company to continue operating with its existing capital structure.NOTE: See Financial Statement Analysis & Valuation, Appendix C, pages C-30 and C- 31 for an example.
Financial Analyst New Hire Instructions and Training Program
Summarize the result of your work in a formal deliverable before submitting it to the dropbox assigned in TritonEd. Use the ODH letterhead provided separately as the basis for formatting your deliverable. In addition, the Excel worksheet used for your calculations should be submitted in the same dropbox as the deliverable
Deliverable 3Due Date: Monday, June 3, 2019 at 11:59 p.m.
- Using the Excel worksheets provided separately, complete a parsimonious forecast and discounted cash flow valuation for each company. Include a screen capture of the results in your deliverable.
- Summarize in your deliverable key notes to the forecast and valuation for each company, explaining your main assumptions and providing sources for your assumptions where applicable.
2. Based on the results of your forecast and valuation, answer the following questions for each company and include the answers in your deliverable:
- Is the stock is over- or under-valued based on your valuation?
- What are the two main reasons you believe the stock is over- or under-valued?
- When you review information from analysts and other experts on the Internet, dotheir comments and conclusions support your conclusions about the stock valuation you have prepared? When answering this question, include support from at least one reputable analyst or expert to support the validity of your conclusion.
- Based on comparison of your company’s stock price to your valuation, would you recommend buying this company and, if so, at what price per share?
Summarize the result of your work in a formal deliverable before submitting it to the dropbox assigned in TritonEd. Use the ODH letterhead provided separately as the basis for formatting your deliverable. In addition, the Excel worksheets used for your calculations should be submitted in the same dropbox as the deliverable.
Like last time, Please do the work in the docx file “Orange Dog Project” I provided. There are an example work you may reference on. Thank You!!
Maxoman Inc.
Financial Analysis of the Potential
Acquisition of CareFusion
IN PARTIAL FULFILLMENT OF
M&A DEPARTMENT TRAINING PROGRAM
Wade Lindenberger & Kayoko Graham
Maxoman Inc.
Table of Contents
2
Executive Summary
3
Deliverable #1
4
Deliverable #2
14
Deliverable #3
18
Conclusions and
Recommendations
23
Executive Summary
This report analyzes the potential acquisition of CareFusion by Maxoman,
Inc. (“Maxoman”). CareFusion operates in the medical device industry.
Our analysis of this acquisition was prepared in three deliverables as
follows:
1. We gathered general information about the target company to
understand its business environment, business model and
general mode of operations and performed top level ratio and
trend analysis of the target company.
2. We performed a credit risk analysis of the target company,
including review of several key financial ratios and evaluation of
credit ratings issued by the major credit rating agencies.
3. We reviewed key income statement and balance sheet policies
of the target company.
Maxoman Inc.
Based on the work we performed, we recommend that Maxoman complete
the acquisition of CareFusion because it will augment Maxoman’s product
lines with new products that have been proven profitable and it will allow
Maxoman to grow its profitability and cash flow.
3
Deliverable #1
1.
Use SEC EDGAR (www.sec.gov) to download the Form 10-Ks for
your target company for the three years before the acquisition
year.
We completed this task for CareFusion (ticker CFX). Using
www.sec.gov, we obtained the required Form 10-Ks and have used
those documents to prepare this report. Please note that, although
the fiscal 2014 Form 10-Ks were technically available before the date
of the final Form S-4, we have utilized the fiscal 2011 through 2013
Form 10-Ks because the 2014 Form 10-Ks would not have been
available during the time we would have been required to evaluate
the acquisition of CareFusion.
2.
Use the Form 10-Ks and the financial statements along with any
other information available online to obtain background
information about the target company and to assess the target
company’s business environment.
CareFusion (“CFN”)
Maxoman Inc.
CFN is headquartered in San Diego, California and has
approximately 15,000 employees. CFN is a global medical
technology company with clinically proven and industry-leading
products and services designed to measurably improve the safety
and quality of healthcare. Their offerings include established brands
used in hospitals throughout the United States and in more than 120
countries worldwide.
4
CFN offers comprehensive product lines in the areas of intravenous,
or IV, infusion, medication and supply dispensing, respiratory care,
infection prevention and surgical instruments.
CFN’s primary product brands include:
• Alaris IV infusion systems that feature the proprietary
Guardrails software, an application that alerts the clinician when
a parameter is outside the institution’s pre-established
limitations for that medication, thereby helping to reduce IV
medication errors;
• Pyxis automated medication dispensing systems that provide
comprehensive medication management and Pyxis automated
medical supply dispensing systems;
• AVEA and Pulmonetic Systems ventilation and respiratory
products, and Jaeger and SensorMedics pulmonary products;
• ChloraPrep products that help prevent vascular and surgicalsite infections and MedMined software and surveillance
services that help target and reduce hospital-acquired
infections, or HAIs; and
• V. Mueller surgical instruments and related products and
services.
Maxoman Inc.
CFN consists of two reporting segments: Critical Care Technologies
and Medical Technologies and Services. Specific descriptions of
these reporting segments are:
5
• Critical Care Technologies includes the infusion, dispensing
and respiratory care businesses that develop, manufacture and
sell capital equipment and related dedicated and non-dedicated
disposables; and
• Medical Technologies and Services includes the infection
prevention and medical specialties products and services
businesses that develop, manufacture and sell primarily singleuse, disposable products and reusable surgical instruments.
The markets for CFN’s products are highly competitive. No one
company competes with CFN across the breadth of its offerings, but
individual product lines face significant competition in both the
domestic and international markets. Primary competitors in the
Medical Systems segment include:
•
•
•
•
•
•
•
Baxter International
B. Braun
Fresenius Kabi
Hospira Omnicell
McKesson
Dräger
MAQUET
Primary competitors in the Procedural Solutions segment include:
Maxoman Inc.
•
•
•
•
•
•
•
•
•
•
6
3M
ICU Medical
Becton, Dickinson
Baxter International
B. Braun
Hospira
Smiths Medical
CR Bard
Integra Life Sciences
Teleflex
CFN competes based upon quality and reliability, technological
innovation, price, customer service and support capabilities, brand
recognition, patents and other intellectual property and the value
proposition of helping improve patient outcomes while reducing
overall costs associated with patient safety. Overall, CFN believes its
product quality and brand strength gives it a competitive advantage. It
expects to continue to use its clinical expertise to offer innovative,
industry-leading products and services for its customers.
3.
Use the Form 10-Ks to explore the financial statements of the
target company and familiarize yourself with their basics.
Answer the following questions and include the answers in your
deliverable:
Question
a. Accounting standards
CFN
US GAAP
b. Most recent fiscal year-end
June 30, 2013
c. Relative proportion of short-term
and long-term assets
37% and 63%
d. Relative proportion of liabilities
and equity
37% and 63%
e. Return on Assets (ROA) for most
recent year
f. Concerns in audit reports?
5%
None, as clean opinion
was rendered by Ernst
& Young, the
company’s
independent auditors;
however, did note that
CFN had an immaterial
restatement related to
its fiscal 2012 financial
statements; this
restatement had no
impact on the
independent auditor’s
opinion, which was
clean
Maxoman Inc.
CFN funds almost two-thirds of its business with owner financing.
7
4.
Prepare a common size balance sheet for the target company for
three years and include a copy in your deliverable. Once you
have completed the common size balance sheet, answer the
following questions and include the answers in your deliverable:
Maxoman Inc.
Cash and Cash Equivalents
Trade Receivables, Net
Current Portion of Net Investment in Sales-Type Leases
Inventories, Net
Prepaid Expenses
Other Current Assets
Current Assets of Discontinued Operations
Total Current Assets
Property and Equipment, Net
Net Investment in Sales-Type Leases, Less Current Portion
Goodwill
Intangible Assets, Net
Other Assets
Non-Current Assets of Discontinued Operations
Total Assets
Current Portion of Long-Term Obligations and Other Short-Term Borrowings
Accounts Payable
Deferred Revenue
Accrued Compensation and Benefits
Other Accrued Liabilities
Current Liabilities of Discontinued Operations
Total Current Liabilities
Long-Term Obligations, Less Current Portion
Deferred Income Taxes
Other Liabilities
Total Liabilities
Preferred Stock
Common Stock
Treasury Stock
Additional Paid-in-Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
8
2013
21%
5%
4%
4%
0%
2%
0%
37%
5%
12%
36%
9%
2%
0%
100%
0%
2%
1%
2%
3%
0%
7%
17%
7%
6%
37%
0%
0%
-6%
57%
12%
-1%
63%
100%
2012
19%
5%
4%
5%
0%
2%
1%
37%
5%
12%
36%
10%
1%
0%
100%
3%
2%
1%
2%
3%
0%
11%
14%
8%
6%
38%
0%
0%
-1%
56%
8%
-1%
62%
100%
2011
17%
6%
5%
4%
0%
2%
0%
35%
5%
11%
36%
10%
1%
1%
100%
0%
2%
1%
2%
3%
0%
8%
17%
8%
6%
38%
0%
0%
0%
58%
5%
0%
62%
100%
Question
a. Largest asset/largest liability
CFN
Asset: Goodwill
Liability: Long-Term
Debt
b. Proportion of total assets
financed by owners
63%
c. Proportion of total assets
financed by nonowners
37%
Based on the three-year common size balance sheets of CFN, we
noted that:
• CFN has consistently increased its cash and cash equivalents
balance;
• CFN’s debt level has remained consistent; and
• in 2013, CFN paid down debt, but issued new debt which
increased the debt balance back to previous levels (see
Question 6) below.
Maxoman Inc.
We will address debt issues further in the Deliverable #2 section of
this report.
9
5.
Prepare a common size income statement for the target
company for three years and include a copy in your deliverable.
Once you have completed the common size income statement,
answer the following questions and include the answers in your
deliverable:
Revenue
Cost of Products Sold
Gross Margin
Selling, General and Administrative Expenses
Research and Development Expenses
Restructuring and Acquisition Integration Charges
Gain on Sale of Assets
Reserve for Expected Government Settlement
Operating Income
Interest Expense and Other, Net
Income Before Income Tax
Provision for Income Tax
Income from Continuing Operations
Loss from Discontinued Operations, Net of Tax
Net Income
Question
a. Major expenses
b. Unusual or discontinued items
Maxoman Inc.
c. Profitable?
10
2013
100%
48%
52%
28%
5%
1%
0%
1%
17%
2%
15%
4%
11%
0%
11%
2012
100%
50%
50%
29%
5%
1%
0%
0%
16%
2%
14%
4%
10%
-2%
8%
2011
100%
49%
51%
31%
4%
2%
0%
0%
15%
2%
12%
4%
9%
-1%
7%
CFN
Cost of Products Sold,
Selling, General and
Administrative
Expenses
Income from
Discontinued
Operations, but not
significant
Yes, consistent with
growing profit margin
each year
We have summarized our comments and observations about the
three-year common size income statements of CFN in the following
paragraphs.
Gross Margin: CFN’s gross margin has increased modestly over the
period, driven by a decrease in cost of products sold. According to
CFN’s 2013 Form 10-K, the increase in gross margin was primarily
the result of infusion capital pricing improvements, manufacturing
savings, and lower recall charges compared to prior year. Favorable
manufacturing cost reductions had a positive impact on gross margin
as a percentage of revenue. Manufacturing savings resulted from:
• cost benefits recognized through strategic sourcing of raw
materials;
• manufacturing efficiencies associated with lean transformation;
and
• and reduced overhead spending.
Maxoman Inc.
Selling, General and Administrative Expenses: CFN’s selling,
general and administrative expenses have decreased over the
period. According to CFN’s 2013 Form 10-K, the decrease was
primarily due to savings associated with restructuring activities and a
reduction in the amortization of intangible assets. These decreases
were partially offset by the onset of the new medical device excise tax
that was implemented in fiscal year 2013 as part of the healthcare
reform in the United States and the costs associated with the
operations of Intermed and UK Medical.
11
Research and Development Expenses: CFN has maintained a
steady level of research and development (“R&D”) expenses during
the period and increased expenses by 17% in 2013 to continue to
invest in next generation platforms, primarily in each of their Medical
Systems business lines. This is important, as R&D is the critical for
companies in CFN’s industry. In general, it appears CFN is
committed to continuously engaging in R&D to introduce new
products and enhance the effectiveness, ease of use, safety and
reliability of existing products. Its R&D efforts include internal
initiatives as well as collaborative development opportunities with
third parties and licensing or acquiring technology from third parties.
CFN evaluates developing technologies in areas where it has
technological or marketing expertise for possible investment or
acquisition and intends to continue its focus on R&D as a key
strategy for growth, which will focus on internal and external
investments in those fields that it believes will offer the greatest
opportunity for growth and profitability.
Operating Income and Income from Continuing Operations: The
combination of increases in gross margin and decreases in selling,
general and administrative expenses have consistently increased
operating income and income from continuing operations.
6.
For the target company, use the most recent Form 10-K before
the acquisition to determine the size and direction (cash source
or use) of cash flows from operations, investing and financing.
Answer the following questions and include the answers in your
deliverable:
Question
a. Cash flow from operations
$613 million
b. New property and equipment
purchases
$84 million
c. New debt or debt repayment
Issued new debt of
$298 million and repaid
debt of $251 million
d. New stock issued
No new stock issued,
but repurchased stock
of $400 million
Maxoman Inc.
e. Dividends
12
CFN
None
Based on review of the statement of cash flows:
Maxoman Inc.
• CFN generated significant cash flow from operations, even with
the sizable commitment to R&D expenses;
• CFN utilized a significant amount of cash in investing activities,
including purchase of property and equipment; and
• CFN utilized a significant amount of cash in financing activities,
including repurchase of stock pursuant to a stock repurchase
program authorized by the Board of Directors. Since CFN does
not pay dividends, this is a way to return investment to CFN
shareholders. This use of cash was slightly offset by increased
borrowings.
13
Deliverable #2
1.
Use the target company’s Form 10-K to read the debt footnote.
Answer the following questions and include the answers in your
deliverable:
Question
CFN
a. Does it use short- or long-term
debt?
CFN uses both shortand long-term debt,
including a revolving
credit facility and
Senior Unsecured
Notes.
b. Is the debt from banks or is it
publicly traded?
It is from both banks
and publicly traded
sources.
c. Does the debt carry covenants
that provide protection to
creditors?
The revolving credit
facility contains several
customary covenants.
The Senior Unsecured
Notes are subject to an
indenture agreement
that limits its ability to
incur certain secured
debt and enter into
certain sale and
leaseback
transactions.
Maxoman Inc.
NOTE: Based on our review of the Form 10-Ks for CFN, we identified
no evidence of default or renegotiated covenants.
14
2.
Compute the following ratios for three years for the target
company:
• Return on equity (measures profitability)
• Times interest earned (measures ability to adequately cover
interest payments)
• Current ratio (measures liquidity)
• Quick ratio (measures liquidity)
• Debt-to-equity (measures solvency)
Maxoman Inc.
The following table contains the results of our calculation of these
ratios, with ratios in green representing ratios that exceed the industry
average and ratios in red representing ratios that trail the industry
average.
15
Compare the ratios calculated over time for the target company and
answer the following questions:
Question
Maxoman Inc.
3.
16
CFN
Is the target company more or less
solvent than last year?
Based on its debt-toequity ratio, which is
steady and low, CFN
appears to be solvent
and this solvency has
not changed from the
prior year. Regarding
other indicators of
credit risk, liquidity
appears solid, while
times interest earned
and return on equity
are improving.
Supplemental Question: How
does each company compare with
industry/competitor averages?
CFN significantly trails
the industry average in
profitability and times
interest earned but
compares quite
favorably in the
liquidity and the debtto-equity ratios.
Conclude with an assessment about the target company’s
liquidity or solvency. You should express an opinion about
whether the target company has an appropriate level and types
of debt and whether you expect the target company to continue
operating with its existing capital structure.
To reach a definitive conclusion about the target company’s liquidity
and solvency, we obtained the target company’s credit rating issued
by Standard & Poor’s (“S&P”) and Moody’s.
CFN has credit ratings of Baa3 (stable) from Moody’s and BBB
(stable) from Standard & Poors. These ratings are at the lowest level
of investment grade and were only recently upgraded from below
investment grade.
In addition to the above, CFN is profitable, has positive cash flow
from operations and has generated positive net cash from 2011
through 2013. Further, CFN is using debt for strategic investment
purposes, including acquisition of companies that improves its
product offerings and profitability and return of investment to
shareholders.
Maxoman Inc.
Based on all the above, we have concluded that, given trends and
comparisons to industry averages, it appears CFN is profitable, liquid
and solvent. Based on its return on assets and return on equity, it
appears CFN is under-utilizing its assets and equity, respectively. In
addition, its debt is only marginally investment grade. Thus, its credit
risk is a concern. Still, based on review of CFN’s cash provided by
operations, its debt maturity schedule and its solvency ratios, it
appears that CFN has sufficient cash from operations to satisfy its
debt obligations in the foreseeable future.
17
Deliverable #3
1.
Answer the following questions about the target company’s
revenue and include your answers in your deliverable:
a. What are the main sources of revenue for the target company?
This table details the main sources of revenue for CFN, along with
revenue from 2012 and 2013:
b. What is the target company’s revenue recognition policy?
Maxoman Inc.
CFN generates revenue through the sale and lease of equipment,
software, services, medical products, supplies, and the income
associated with the financing of its equipment leases. CFN
recognizes revenue when:
18
• persuasive evidence of an arrangement exists;
• product delivery has occurred or the services have been
rendered;
• the price is fixed or determinable; and
• collectability is reasonably assured.
The timing of revenue recognition and the amount of revenue actually
recognized in each case depends on a variety of factors, including
the specific terms of each arrangement and the nature of CFN’s
obligations. Determination of the appropriate amount of revenue
recognized may involve subjective or complex judgments and
estimates.
c. How do the target company’s senior managers explain revenue
levels and changes?
Maxoman Inc.
According to the MD&A section of CFN’s 2013 Form 10-K:
19
• Revenue in CFN’s Medical Systems segment decreased 5% to
$2,329 million compared to the prior fiscal year. The decrease
was primarily a result of decreased revenues in the Dispensing
Technologies ($45 million), Infusion Systems ($39 million), and
Respiratory Technologies ($27 million) business lines.
• Revenue in the Dispensing Technologies business line
decreased $45 million to $993 million, primarily due to a
decrease in the volume of equipment installations in advance of
a new product release.
• Revenue in the Infusion Systems business line decreased $39
million to $916 million, primarily due to the net impact of a
decrease in the volume of pump installations offset in part by an
increase in equipment pricing and in dedicated disposable
volumes.
• Revenue in the Respiratory Technologies business line
decreased $27 million to $393 million because of continued
constraints on hospital capital spending in the current year.
• Revenue in CFN’s Procedural Solutions segment increased 5%
to $1,221 million compared to the prior fiscal year. The increase
in Procedural Solutions revenue was due to growth in the
Medical Specialties ($27 million), Infection Prevention ($18
million), and Specialty Disposables ($17 million) business lines.
2.
Review the accounts receivable footnote in the target company’s
most recent Form 10-K and comment on the company’s policies
and the composition of accounts receivable.
CFN does not have a separate accounts receivable footnote, most
likely because trade accounts receivable is not one of its larger
assets. However, CFN summarizes its accounts receivable policies in
Note 1 to the audited financial statements.
According to Note 1, CFN’s trade receivables are primarily comprised
of amounts owed to CFN through its operating activities and are
presented net of an allowance for doubtful accounts and accrued
rebates. An account is considered past due on the first day after its
due date. CFN monitors past due accounts on an ongoing basis and
establishes appropriate reserves to cover probable losses. They write
off any amounts deemed uncollectible against an established
allowance for doubtful accounts.
From a credit risk standpoint, CFN’s trade receivables, lease
receivables and accrued interest receivables are exposed to a
concentration of credit risk with customers and
re-sellers in the healthcare sector. Credit risk can be affected by
changes in reimbursement and other economic pressures impacting
the hospital and acute care sectors of the healthcare industry. Such
credit risk is limited, however, due to supporting collateral and the
diversity of the customer base, including its wide geographic
dispersion. CFN performs ongoing credit evaluations of its customers’
financial condition and maintains reserves for credit losses. Such
losses historically have been within their expectations.
Maxoman Inc.
3.
20
Review the inventory footnote in the target company’s most
recent Form 10-K and comment on the company’s policies and
the composition of inventory.
According to Note 1 to the audited financial statements, CFN
primarily determines inventory cost on a currently adjusted standard
basis (which approximates actual cost on a first-in, first-out basis).
CFN reduces the carrying value of inventories to a lower of cost or
market basis for those items that are potentially excess, obsolete or
slow-moving and reserves for excess and obsolete inventory based
upon historical experience, sales trends, and specific categories of
inventory and age of on-hand inventory. Work-in-process and finished
goods inventories include raw materials, direct labor and
manufacturing overhead.
Note 7 to the audited financial statements details the composition of
inventory as follows:
Maxoman Inc.
4.
21
Review the plant assets footnote in the target company’s most
recent Form 10-K and comment on the company’s policies and
the composition of plant assets.
According to Note 1 to the audited financial statements, property and
equipment are stated at cost. Property and equipment held for sale
are recorded at the lower of cost or fair value less costs to sell.
Depreciation expense is computed using the straight-line method
over the estimated useful lives of the assets, including capital lease
assets which are depreciated over the shorter of the terms of their
respective leases or their estimated useful lives. CFN uses the
following range of useful lives for its property and equipment
categories buildings and improvements: one to 39 years; machinery
and equipment: three to 15 years; and furniture and fixtures: three to
seven years. When certain events or changes in operating conditions
occur, an impairment assessment may be performed on the
recoverability of the carrying amounts.
Maxoman Inc.
Note 9 to the audited financial statements details the composition of
property and equipment as follows:
22
Conclusions and Recommendations
This acquisition offers two major benefits for Maxoman:
• It expands and complements Maxoman’s product lines with
CFN products that are proven to be profitable.
• It will increase profitability and cash flow for Maxoman in the
long term.
Maxoman Inc.
In conclusion, we recommend Maxoman move forward with this deal
because it makes sense for Maxoman, the financial impacts are
reasonable, and the deal will create value for Maxoman and its
shareholders.
23
Orange Dog Holdings
M&A Department Training Program – Deliverable #1 Calculations to Support Report
Companies:
ADIDAS
NIKE
Employees:
56,888
73,100
Question 3c: Relative proportion of short-term and long-term assets (millions)
Short-term assets
As percentage of total assets
Long-term assets
As percentage of total assets
Total assets
Ticker Symbol 1
9,813,000
63%
5,799,000
37%
15,612,000
Ticker Symbol 2
15,134,000
67%
7,402,000
33%
22,536,000
Question 3d: Relative proportion of liabilities and equity (millions)
Total liabilities
As percentage of total liabilities and equity
Total equity
As percentage of total liabilities and equity
Total liabilities and equity
Ticker Symbol 1
9,248,000
59%
6,377,000
41%
15,625,000
Ticker Symbol 2
12,724,000
56%
9,812,000
44%
22,536,000
1,702,000
14,019,000
15,612,000
14,815,500
11%
1,933,000
23,259,000
22,536,000
22,897,500
8%
Question 3e: Return on assets (ROA)
Net income
Beginning total assets
Ending total assets
Average total assets
Return on assets
Question 4: Common size balance sheet
Fiscal year ends in2018
May. USD in
2017
millions except
2016 per share data.
Cash and cash equivalents
9.95%
11.00%
16.84%
Short-term investments
1.77%
1.68%
1.76%
Total cash
11.72%
12.68%
18.59%
Receivables
14.50%
15.94%
15.49%
Inventories
24.80%
25.42%
22.07%
Prepaid expenses 2.58%
2.10%
1.91%
Other current assets
4.96%
3.38%
4.79%
Total current assets
58.55%
59.53%
62.86%
Gross property, plant
24.04%
and equipment
24.99%
26.02%
Accumulated Depreciation
-11.42% -11.22% -11.68%
Net property, plant
12.62%
and equipment
13.77%
14.34%
Goodwill
9.30%
8.41%
7.98%
Intangible assets 12.17%
10.07%
6.66%
Deferred income taxes
4.82%
4.34%
4.17%
Other long-term assets
2.53%
3.88%
4.00%
Total non-current41.45%
assets
40.47%
37.14%
Total assets
100.00% 100.00% 100.00%
Short-term debt 4.19%
0.94%
0.42%
Capital leases
0.02%
0.06%
Accounts payable16.45%
13.60%
14.73%
Taxes payable
3.51%
4.30%
2.86%
Other current liabilities
20.41%
24.48%
25.70%
Total current liabilities
44.58%
43.32%
43.77%
Long-term debt 6.47%
6.77%
10.31%
Capital leases
0.03%
0.52%
Deferred taxes liabilities
2.55%
1.89%
1.54%
Accrued liabilities 0.79%
0.59%
0.12%
Deferred revenues 0.27%
0.35%
0.41%
2018
14.67%
10.84%
25.50%
15.15%
22.61%
6.96%
70.22%
32.89%
-16.44%
16.45%
0.61%
1.31%
11.40%
29.78%
100.00%
0.21%
10.24%
1.14%
5.18%
8.27%
25.04%
9.39%
2017
16.37%
10.19%
26.57%
15.81%
21.73%
4.94%
69.05%
34.21%
-17.06%
17.15%
0.60%
1.22%
11.98%
30.95%
100.00%
1.42%
8.81%
1.20%
4.64%
7.46%
23.53%
14.92%
2016
18.85%
4.42%
23.27%
15.52%
23.34%
5.01%
67.15%
39.45%
-19.69%
19.76%
0.68%
1.26%
11.13%
32.85%
100.00%
1.52%
10.11%
1.66%
5.41%
8.10%
26.80%
15.39%
Pensions and other2.37%
benefits 2.07%
1.59%
Minority interest -0.11%
-0.10%
-0.08%
Other long-term liabilities
0.41%
0.70%
0.97%
Total non-current 12.78%
liabilities 12.26%
15.38%
Total liabilities 57.35%
55.58%
59.15%
Additional paid-in capital
1.32%
1.40%
1.27%
Retained earnings36.38%
43.57%
38.78%
Accumulated other4.94%
comprehensive
-0.56%income0.79%
Total stockholders’
42.65%
equity 44.42%
40.85%
Total liabilities and
100.00%
stockholders’
100.00%
equity100.00%
1.49%
17.67%
42.71%
36.40%
19.40%
57.29%
100.00%
-0.92%
23.12%
46.66%
37.15%
17.11%
53.34%
100.00%
-0.41%
29.66%
56.46%
28.34%
15.61%
43.54%
100.00%
2018
100.00%
53.76%
46.24%
2017
100.00%
55.42%
44.58%
2016
100.00%
56.16%
43.84%
32.34%
30.75%
31.63%
32.34%
30.75%
31.63%
13.91%
0.37%
14.28%
2.67%
11.61%
11.61%
11.61%
2.21
2.16
13.83%
0.40%
14.22%
1.88%
12.34%
12.34%
12.34%
2.56
2.51
12.21%
-0.33%
11.88%
6.57%
5.31%
5.31%
5.31%
1.19
1.17
1698
1742
15.95%
1658
1692
15.91%
1624
1659
14.34%
Question 5: Common size income statement
Fiscal year ends in2018
May. USD in
2017
millions except
2016 per share data.
Revenue
100.00% 100.00% 100.00%
Cost of revenue 51.38%
49.55%
48.15%
Gross profit
48.62%
50.45%
51.85%
Operating expenses
Research and development
0.85%
0.88%
Sales, General and41.98%
administrative
40.98%
41.19%
Other operating expenses
-1.70%
-1.14%
-0.28%
Total operating expenses
41.14%
40.72%
40.91%
Operating income 7.48%
9.72%
10.94%
Interest Expense 0.36%
0.29%
0.19%
Other income (expense)
0.37%
0.10%
0.10%
Income before taxes
7.49%
9.53%
10.85%
Provision for income
2.21%
taxes
3.15%
3.05%
Other income
0.01%
0.00%
Net income from continuing
5.28% operations
6.38%
7.80%
Net income from discontinuing
0.01%
-1.20%
ops
-0.02%
Other
-0.02%
-0.01%
-0.01%
Net income
5.27%
5.17%
7.77%
Net income available
5.27%
to common
5.17%
shareholders
7.77%
Earnings per share
Basic
5.08
5.42
8.44
Diluted
4.99
5.38
8.42
Weighted average shares outstanding
Basic
200
202
202
Diluted
206
204
202
EBITDA
9.91%
12.11%
13.28%
Question 4: Common size balance sheet
Fiscal year ends in May. USD in millions2018
except per 2017
share data. 2016
Cash and cash equivalents
9.95%
11.00%
16.84%
Short-term investments
1.77%
1.68%
1.76%
Total cash
11.72%
12.68%
18.59%
Receivables
14.50%
15.94%
15.49%
Inventories
24.80%
25.42%
22.07%
Prepaid expenses
2.58%
2.10%
1.91%
Other current assets
4.96%
3.38%
4.79%
Total current assets
58.55%
59.53%
62.86%
Gross property, plant and equipment 24.04%
24.99%
26.02%
Accumulated Depreciation
-11.42% -11.22% -11.68%
Net property, plant and equipment
12.62%
13.77%
14.34%
Goodwill
9.30%
8.41%
7.98%
Intangible assets
12.17%
10.07%
6.66%
Deferred income taxes
4.82%
4.34%
4.17%
Other long-term assets
2.53%
3.88%
4.00%
Total non-current assets
41.45%
40.47%
37.14%
Total assets
100.00% 100.00% 100.00%
Short-term debt
4.19%
0.94%
0.42%
Capital leases
0.02%
0.06%
Accounts payable
16.45%
13.60%
14.73%
Taxes payable
3.51%
4.30%
2.86%
Other current liabilities
20.41%
24.48%
25.70%
Total current liabilities
44.58%
43.32%
43.77%
Long-term debt
6.47%
6.77%
10.31%
Capital leases
0.03%
0.52%
Deferred taxes liabilities
2.55%
1.89%
1.54%
Accrued liabilities
0.79%
0.59%
0.12%
Deferred revenues
0.27%
0.35%
0.41%
Pensions and other benefits
2.37%
2.07%
1.59%
Minority interest
-0.11%
-0.10%
-0.08%
Other long-term liabilities
0.41%
0.70%
0.97%
Total non-current liabilities
12.78%
12.26%
15.38%
Total liabilities
57.35%
55.58%
59.15%
Additional paid-in capital
1.32%
1.40%
1.27%
Retained earnings
36.38%
43.57%
38.78%
Accumulated other comprehensive income
4.94%
-0.56%
0.79%
Total stockholders’ equity
42.65%
44.42%
40.85%
Total liabilities and stockholders’ equity
100.00% 100.00% 100.00%
2018
14.67%
10.84%
25.50%
15.15%
22.61%
6.96%
70.22%
32.89%
-16.44%
16.45%
0.61%
1.31%
11.40%
29.78%
100.00%
0.21%
10.24%
1.14%
5.18%
8.27%
25.04%
9.39%
2017
16.37%
10.19%
26.57%
15.81%
21.73%
4.94%
69.05%
34.21%
-17.06%
17.15%
0.60%
1.22%
11.98%
30.95%
100.00%
1.42%
8.81%
1.20%
4.64%
7.46%
23.53%
14.92%
1.49%
17.67%
42.71%
36.40%
19.40%
57.29%
100.00%
-0.92%
23.12%
46.66%
37.15%
17.11%
53.34%
100.00%
2018
100.00%
2017
100.00%
Question 5: Common size income statement
Fiscal year ends in May. USD in millions2018
except per 2017
share data. 2016
Revenue
100.00% 100.00% 100.00%
Cost of revenue
51.38%
Gross profit
48.62%
Operating expenses
Research and development
0.85%
Sales, General and administrative
41.98%
Other operating expenses
-1.70%
Total operating expenses
41.14%
Operating income
7.48%
Interest Expense
0.36%
Other income (expense)
0.37%
Income before taxes
7.49%
Provision for income taxes
2.21%
Other income
0.01%
Net income from continuing operations 5.28%
Net income from discontinuing ops
0.01%
Other
-0.02%
Net income
5.27%
Net income available to common shareholders
5.27%
Earnings per share
Basic
5.08
Diluted
4.99
Weighted average shares outstanding
Basic
200
Diluted
206
EBITDA
9.91%
49.55%
50.45%
0.88%
40.98%
-1.14%
40.72%
9.72%
0.29%
0.10%
9.53%
3.15%
0.00%
6.38%
-1.20%
-0.01%
5.17%
5.17%
48.15%
51.85%
41.19%
-0.28%
40.91%
10.94%
0.19%
0.10%
10.85%
3.05%
53.76%
46.24%
55.42%
44.58%
32.34%
30.75%
32.34%
30.75%
13.83%
0.40%
14.22%
1.88%
12.34%
12.34%
12.34%
2.56
2.51
1658
1692
15.91%
5.42
5.38
8.44
8.42
13.91%
0.37%
14.28%
2.67%
11.61%
11.61%
11.61%
2.21
2.16
202
204
12.11%
202
202
13.28%
1698
1742
15.95%
7.80%
-0.02%
-0.01%
7.77%
7.77%
2016
18.85%
4.42%
23.27%
15.52%
23.34%
5.01%
67.15%
39.45%
-19.69%
19.76%
0.68%
1.26%
11.13%
32.85%
100.00%
1.52%
10.11%
1.66%
5.41%
8.10%
26.80%
15.39%
-0.41%
29.66%
56.46%
28.34%
15.61%
43.54%
100.00%
2016
100.00%
56.16%
43.84%
31.63%
31.63%
12.21%
-0.33%
11.88%
6.57%
5.31%
5.31%
5.31%
1.19
1.17
1624
1659
14.34%
Orange Dog Holdings
M&A Department Training Program – Deliverable #2 Calculations to Support Report
Companies:
ADIDAS
NIKE
Employees:
56,888
73,100
INPUT
Summary: Deliverable #2 table of ratios
ADIDAS
Return on equity
Times interest earned
Current ratio
Quick ratio
Debt-to-equity ratio
NIKE
2016
16.51%
21.94
1.31
0.76
0.25
2017
18.59%
33.92
1.37
0.79
0.19
2018
26.91%
57.10
1.44
0.93
0.28
3-Year
Ave
20.67%
37.65
1.37
0.83
0.24
2016
1,017
5,666
6,472
6,069
17%
ADIDAS
2017
1,097
6,472
6,450
6,461
17%
2018
1,702
6,450
6,377
6,414
27%
2016
3,760
12,707
12,258
12,483
30%
NIKE
2017
4,240
12,258
12,407
12,333
34%
2018
1,933
12,407
9,812
11,110
17%
2016
1,440
70
21.57
ADIDAS
2017
2,023
62
33.63
2018
2,378
42
57.62
2016
4,623
19
244.32
NIKE
2017
4,886
59
83.81
2018
4,325
54
81.09
2016
8,886
6,765
1.31
ADIDAS
2017
8,645
6,291
1.37
2018
9,813
6,834
1.44
2016
15,025
9,138
1.64
NIKE
2017
16,061
10,852
1.48
2018
15,134
12,124
1.25
2016
1,510
269
2,200
6,765
0.59
ADIDAS
2017
1,598
244
2,315
6,291
0.66
2018
2,629
274
2,419
6,834
0.78
2016
3,138
2,319
3,241
9,138
0.95
NIKE
2017
3,808
2,371
3,677
10,852
0.91
2018
4,249
996
3,498
12,124
0.72
2016
982
674
636
6,472
0.35
ADIDAS
2017
983
162
137
6,450
0.20
2018
1,609
86
66
6,377
0.28
2016
2,010
45
45
12,258
0.17
NIKE
2017
3,471
331
331
12,407
0.33
2018
3,468
342
342
9,812
0.42
2016
30.12%
236.95
2.80
1.90
0.17
2017
34.38%
80.49
2.93
2.01
0.31
Question 2a: Return on equity ratios (millions)
Income from continuing operations
Beginning shareholders’ equity (controlling interest)
Ending shareholders’ equity (controlling interest)
Average shareholders’ equity (controlling interest)
Return on equity
Question 2b: Times interest earned (millions)
Income from continuing operations before taxes
Interest expense
Times interest earned
Question 2c: Current ratio (millions)
Current assets
Current liabilities
Current ratio
Question 2d: Quick ratio (millions)
Cash
Marketable securities
Accounts receivable
Current liabilities
Quick ratio
Question 2e: Debt-to-equity ratio (millions)
Long-term debt
Current portion of long-term debt
Short-term debt
Total shareholders’ equity (controlling interest)
Debt-to-equity ratio
2018
17.40%
82.31
2.51
1.63
0.39
3-Year
Ave
27.30%
133.25
2.75
1.85
0.29
INPUT
Orange Dog Holdings
M&A Department Training Program – Deliverable #1 Calculations to Support Report
Companies:
ADIDAS
NIKE
Employees:
56,888
73,100
Question 3c: Relative proportion of short-term and long-term assets (millions)
Short-term assets
As percentage of total assets
Long-term assets
As percentage of total assets
Total assets
Ticker Symbol 1
9,813,000
63%
5,799,000
37%
15,612,000
Ticker Symbol 2
15,134,000
67%
7,402,000
33%
22,536,000
Question 3d: Relative proportion of liabilities and equity (millions)
Total liabilities
As percentage of total liabilities and equity
Total equity
As percentage of total liabilities and equity
Total liabilities and equity
Ticker Symbol 1
9,248,000
59%
6,377,000
41%
15,625,000
Ticker Symbol 2
12,724,000
56%
9,812,000
44%
22,536,000
1,702,000
14,019,000
15,612,000
14,815,500
11%
1,933,000
23,259,000
22,536,000
22,897,500
8%
Question 3e: Return on assets (ROA)
Net income
Beginning total assets
Ending total assets
Average total assets
Return on assets
Question 4: Common size balance sheet
Fiscal year ends in2018
May. USD2017
in millions 2016
except per share data.
Cash and cash equivalents
9.95%
11.00%
16.84%
Short-term investments
1.77%
1.68%
1.76%
Total cash
11.72%
12.68%
18.59%
Receivables
14.50%
15.94%
15.49%
Inventories
24.80%
25.42%
22.07%
Prepaid expenses 2.58%
2.10%
1.91%
Other current assets
4.96%
3.38%
4.79%
Total current assets
58.55%
59.53%
62.86%
Gross property, plant
24.04%
and equipment
24.99%
26.02%
Accumulated Depreciation
-11.42% -11.22% -11.68%
Net property, plant
12.62%
and equipment
13.77%
14.34%
Goodwill
9.30%
8.41%
7.98%
Intangible assets 12.17%
10.07%
6.66%
Deferred income taxes
4.82%
4.34%
4.17%
Other long-term assets
2.53%
3.88%
4.00%
Total non-current41.45%
assets
40.47%
37.14%
Total assets
100.00% 100.00% 100.00%
Short-term debt 4.19%
0.94%
0.42%
Capital leases
0.02%
0.06%
Accounts payable16.45%
13.60%
14.73%
Taxes payable
3.51%
4.30%
2.86%
Other current liabilities
20.41%
24.48%
25.70%
Total current liabilities
44.58%
43.32%
43.77%
Long-term debt 6.47%
6.77%
10.31%
Capital leases
0.03%
0.52%
Deferred taxes liabilities
2.55%
1.89%
1.54%
Accrued liabilities 0.79%
0.59%
0.12%
Deferred revenues0.27%
0.35%
0.41%
2018
14.67%
10.84%
25.50%
15.15%
22.61%
6.96%
70.22%
32.89%
-16.44%
16.45%
0.61%
1.31%
11.40%
29.78%
100.00%
0.21%
10.24%
1.14%
5.18%
8.27%
25.04%
9.39%
2017
16.37%
10.19%
26.57%
15.81%
21.73%
4.94%
69.05%
34.21%
-17.06%
17.15%
0.60%
1.22%
11.98%
30.95%
100.00%
1.42%
8.81%
1.20%
4.64%
7.46%
23.53%
14.92%
2016
18.85%
4.42%
23.27%
15.52%
23.34%
5.01%
67.15%
39.45%
-19.69%
19.76%
0.68%
1.26%
11.13%
32.85%
100.00%
1.52%
10.11%
1.66%
5.41%
8.10%
26.80%
15.39%
Pensions and other2.37%
benefits 2.07%
1.59%
Minority interest -0.11%
-0.10%
-0.08%
Other long-term liabilities
0.41%
0.70%
0.97%
Total non-current12.78%
liabilities 12.26%
15.38%
Total liabilities 57.35%
55.58%
59.15%
Additional paid-in capital
1.32%
1.40%
1.27%
Retained earnings36.38%
43.57%
38.78%
Accumulated other4.94%
comprehensive
-0.56%income
0.79%
Total stockholders’
42.65%
equity 44.42%
40.85%
Total liabilities and
100.00%
stockholders’
100.00%
equity
100.00%
1.49%
17.67%
42.71%
36.40%
19.40%
57.29%
100.00%
-0.92%
23.12%
46.66%
37.15%
17.11%
53.34%
100.00%
-0.41%
29.66%
56.46%
28.34%
15.61%
43.54%
100.00%
2018
100.00%
53.76%
46.24%
2017
100.00%
55.42%
44.58%
2016
100.00%
56.16%
43.84%
32.34%
30.75%
31.63%
32.34%
30.75%
31.63%
13.91%
0.37%
14.28%
2.67%
11.61%
11.61%
11.61%
2.21
2.16
13.83%
0.40%
14.22%
1.88%
12.34%
12.34%
12.34%
2.56
2.51
12.21%
-0.33%
11.88%
6.57%
5.31%
5.31%
5.31%
1.19
1.17
1698
1742
15.95%
1658
1692
15.91%
1624
1659
14.34%
Question 5: Common size income statement
Fiscal year ends in2018
May. USD2017
in millions 2016
except per share data.
Revenue
100.00% 100.00% 100.00%
Cost of revenue 51.38%
49.55%
48.15%
Gross profit
48.62%
50.45%
51.85%
Operating expenses
Research and development
0.85%
0.88%
Sales, General and41.98%
administrative
40.98%
41.19%
Other operating expenses
-1.70%
-1.14%
-0.28%
Total operating expenses
41.14%
40.72%
40.91%
Operating income 7.48%
9.72%
10.94%
Interest Expense 0.36%
0.29%
0.19%
Other income (expense)
0.37%
0.10%
0.10%
Income before taxes
7.49%
9.53%
10.85%
Provision for income
2.21%
taxes 3.15%
3.05%
Other income
0.01%
0.00%
Net income from continuing
5.28%
operations
6.38%
7.80%
Net income from discontinuing
0.01%
-1.20%
ops
-0.02%
Other
-0.02%
-0.01%
-0.01%
Net income
5.27%
5.17%
7.77%
Net income available
5.27%
to common
5.17%
shareholders
7.77%
Earnings per share
Basic
5.08
5.42
8.44
Diluted
4.99
5.38
8.42
Weighted average shares outstanding
Basic
200
202
202
Diluted
206
204
202
EBITDA
9.91%
12.11%
13.28%
Question 4: Common size balance sheet
Fiscal year ends in May. USD in millions2018
except per2017
share data.2016
Cash and cash equivalents
9.95%
11.00%
16.84%
Short-term investments
1.77%
1.68%
1.76%
Total cash
11.72%
12.68%
18.59%
Receivables
14.50%
15.94%
15.49%
Inventories
24.80%
25.42%
22.07%
Prepaid expenses
2.58%
2.10%
1.91%
Other current assets
4.96%
3.38%
4.79%
Total current assets
58.55% 59.53% 62.86%
Gross property, plant and equipment 24.04%
24.99%
26.02%
Accumulated Depreciation
-11.42% -11.22% -11.68%
Net property, plant and equipment
12.62%
13.77%
14.34%
Goodwill
9.30%
8.41%
7.98%
Intangible assets
12.17%
10.07%
6.66%
Deferred income taxes
4.82%
4.34%
4.17%
Other long-term assets
2.53%
3.88%
4.00%
Total non-current assets
41.45% 40.47% 37.14%
Total assets
100.00% 100.00% 100.00%
Short-term debt
4.19%
0.94%
0.42%
Capital leases
0.02%
0.06%
Accounts payable
16.45%
13.60%
14.73%
Taxes payable
3.51%
4.30%
2.86%
Other current liabilities
20.41%
24.48%
25.70%
Total current liabilities
44.58% 43.32% 43.77%
Long-term debt
6.47%
6.77%
10.31%
Capital leases
0.03%
0.52%
Deferred taxes liabilities
2.55%
1.89%
1.54%
Accrued liabilities
0.79%
0.59%
0.12%
Deferred revenues
0.27%
0.35%
0.41%
Pensions and other benefits
2.37%
2.07%
1.59%
Minority interest
-0.11%
-0.10%
-0.08%
Other long-term liabilities
0.41%
0.70%
0.97%
Total non-current liabilities
12.78%
12.26%
15.38%
Total liabilities
57.35%
55.58%
59.15%
Additional paid-in capital
1.32%
1.40%
1.27%
Retained earnings
36.38%
43.57%
38.78%
Accumulated other comprehensive income
4.94%
-0.56%
0.79%
Total stockholders’ equity
42.65% 44.42% 40.85%
Total liabilities and stockholders’ equity
100.00% 100.00% 100.00%
2018
14.67%
10.84%
25.50%
15.15%
22.61%
6.96%
70.22%
32.89%
-16.44%
16.45%
0.61%
1.31%
11.40%
29.78%
100.00%
0.21%
10.24%
1.14%
5.18%
8.27%
25.04%
9.39%
2017
16.37%
10.19%
26.57%
15.81%
21.73%
4.94%
69.05%
34.21%
-17.06%
17.15%
0.60%
1.22%
11.98%
30.95%
100.00%
1.42%
8.81%
1.20%
4.64%
7.46%
23.53%
14.92%
1.49%
17.67%
42.71%
36.40%
19.40%
57.29%
100.00%
-0.92%
23.12%
46.66%
37.15%
17.11%
53.34%
100.00%
2018
100.00%
2017
100.00%
Question 5: Common size income statement
Fiscal year ends in May. USD in millions2018
except per2017
share data.2016
Revenue
100.00% 100.00% 100.00%
Cost of revenue
51.38%
Gross profit
48.62%
Operating expenses
Research and development
0.85%
Sales, General and administrative
41.98%
Other operating expenses
-1.70%
Total operating expenses
41.14%
Operating income
7.48%
Interest Expense
0.36%
Other income (expense)
0.37%
Income before taxes
7.49%
Provision for income taxes
2.21%
Other income
0.01%
Net income from continuing operations 5.28%
Net income from discontinuing ops
0.01%
Other
-0.02%
Net income
5.27%
Net income available to common shareholders
5.27%
Earnings per share
Basic
5.08
Diluted
4.99
Weighted average shares outstanding
Basic
200
Diluted
206
EBITDA
9.91%
49.55%
50.45%
0.88%
40.98%
-1.14%
40.72%
9.72%
0.29%
0.10%
9.53%
3.15%
0.00%
6.38%
-1.20%
-0.01%
5.17%
5.17%
48.15%
51.85%
41.19%
-0.28%
40.91%
10.94%
0.19%
0.10%
10.85%
3.05%
53.76%
46.24%
55.42%
44.58%
32.34%
30.75%
32.34%
30.75%
13.83%
0.40%
14.22%
1.88%
12.34%
12.34%
12.34%
2.56
2.51
1658
1692
15.91%
5.42
5.38
8.44
8.42
13.91%
0.37%
14.28%
2.67%
11.61%
11.61%
11.61%
2.21
2.16
202
204
12.11%
202
202
13.28%
1698
1742
15.95%
7.80%
-0.02%
-0.01%
7.77%
7.77%
2016
18.85%
4.42%
23.27%
15.52%
23.34%
5.01%
67.15%
39.45%
-19.69%
19.76%
0.68%
1.26%
11.13%
32.85%
100.00%
1.52%
10.11%
1.66%
5.41%
8.10%
26.80%
15.39%
-0.41%
29.66%
56.46%
28.34%
15.61%
43.54%
100.00%
2016
100.00%
56.16%
43.84%
31.63%
31.63%
12.21%
-0.33%
11.88%
6.57%
5.31%
5.31%
5.31%
1.19
1.17
1624
1659
14.34%
Orange Dog Holdings
M&A Department Training Program – Deliverable #2 Calculations to Support Report
Companies:
ADIDAS
NIKE
Employees:
56,888
73,100
INPUT
Summary: Deliverable #2 table of ratios
ADIDAS
Return on equity
Times interest earned
Current ratio
Quick ratio
Debt-to-equity ratio
NIKE
2016
16.51%
21.94
1.31
0.76
0.25
2017
18.59%
33.92
1.37
0.79
0.19
2018
26.91%
57.10
1.44
0.93
0.28
3-Year
Ave
20.67%
37.65
1.37
0.83
0.24
2016
1,017
5,666
6,472
6,069
17%
ADIDAS
2017
1,097
6,472
6,450
6,461
17%
2018
1,702
6,450
6,377
6,414
27%
2016
3,760
12,707
12,258
12,483
30%
NIKE
2017
4,240
12,258
12,407
12,333
34%
2018
1,933
12,407
9,812
11,110
17%
2016
1,440
70
21.57
ADIDAS
2017
2,023
62
33.63
2018
2,378
42
57.62
2016
4,623
19
244.32
NIKE
2017
4,886
59
83.81
2018
4,325
54
81.09
2016
8,886
6,765
1.31
ADIDAS
2017
8,645
6,291
1.37
2018
9,813
6,834
1.44
2016
15,025
9,138
1.64
NIKE
2017
16,061
10,852
1.48
2018
15,134
12,124
1.25
2016
1,510
269
2,200
6,765
0.59
ADIDAS
2017
1,598
244
2,315
6,291
0.66
2018
2,629
274
2,419
6,834
0.78
2016
3,138
2,319
3,241
9,138
0.95
NIKE
2017
3,808
2,371
3,677
10,852
0.91
2018
4,249
996
3,498
12,124
0.72
2016
982
674
636
6,472
0.35
ADIDAS
2017
983
162
137
6,450
0.20
2018
1,609
86
66
6,377
0.28
2016
2,010
45
45
12,258
0.17
NIKE
2017
3,471
331
331
12,407
0.33
2018
3,468
342
342
9,812
0.42
2016
30.12%
236.95
2.80
1.90
0.17
2017
34.38%
80.49
2.93
2.01
0.31
Question 2a: Return on equity ratios (millions)
Income from continuing operations
Beginning shareholders’ equity (controlling interest)
Ending shareholders’ equity (controlling interest)
Average shareholders’ equity (controlling interest)
Return on equity
Question 2b: Times interest earned (millions)
Income from continuing operations before taxes
Interest expense
Times interest earned
Question 2c: Current ratio (millions)
Current assets
Current liabilities
Current ratio
Question 2d: Quick ratio (millions)
Cash
Marketable securities
Accounts receivable
Current liabilities
Quick ratio
Question 2e: Debt-to-equity ratio (millions)
Long-term debt
Current portion of long-term debt
Short-term debt
Total shareholders’ equity (controlling interest)
Debt-to-equity ratio
2018
17.40%
82.31
2.51
1.63
0.39
3-Year
Ave
27.30%
133.25
2.75
1.85
0.29
INPUT
Orange Dog Holdings
Financial Analysis of the Nike and
Adidas
IN PARTIAL FULFILLMENT OF
M&A DEPARTMENT TRAINING PROGRAM
Ziyan Ou
Yunqing Zhu
Table of Contents
Executive Summary (3)
Deliverable #1 (add page number)
Deliverable #2 (add page number)
Deliverable #3 (add page number)
Orange Dog Holdings
Conclusions and Recommendations (add page number)
2
Executive Summary
This report analyzes two firms that are direct competitors over the decades, which are
Adidas and Nike. We shall look at each of the firms and their outstanding financial characteristics.
Adidas is an international firm that was started by Gebrüder Dassler in 1924 to produce shoes,
clothes and other sportswear. The second firm is Nike. Nike Corporation was founded in 1964
under the name Blue Ribbon Sport before changing its name to Nike Corporation in 1971. Phil
Knight and Bill Bowerman formed the firm. The company is headquartered in Washington and
serves its customers who are spread across the globe. We gather information relating to both
companies financial performance, business model, ratios to analysis their position,
competitiveness and trend.
Deliverable #1
1.
Use SEC EDGAR (www.sec.gov) to download the three most recent Form 10-Ks for
each company you have selected.
ADDIDAS (ADDYY)
NIKE (NKE)
Orange Dog Holdings
2.
3
Use the Form 10-Ks and the financial statements along with any other information
available online to obtain background information about each company and to
assess each company’s business environment. Use a SWOT analysis to briefly
analyze the competitive landscape for each company. The goal is to understand the
overall business environment of each company so that you can assess its financial
statements in a broader business context. Provide a summary of your findings in
this deliverable.
Adidas
The revenue of the firm has continued to grow year after year. The current revenue is
$21.915 billion with a gross profit and net profit of $11.4 billion and $1.7 billion respectively for
the last financial year. The firm currently trades its share at $130.50 which one of the highest prices
in the market. The price-earnings ratio is $29.40. The products of Adidas are sold worldwide with
over 56,888 employees located in different parts of the world to facilitate the sales of the company
(Adidas AG, 2018). The first strength of Adidas is that is has a strong financial position because
of the over 2000 branches all over the world. Secondly, the firm has excellent distribution network
that ensure that all its products reach the targeted customers wherever they are across the globe.
Despite the strengths, the firm has a weakness in its pricing. The products of the firm are very
costly thus scaring away some of the potential customers. The other weakness is that the firm
heavily depends on outsourcing which may hinder the growth of the firm in other areas apart from
Asia where they outsourcing is done.
There are several opportunities that the company can use to grow and expand its business.
The demand for the sportswear is in the increase and the firm can shift its market attention to the
developing nations. The demand for the premium products has been on the rise because of the
Orange Dog Holdings
increase in earnings of people across the globe. The major threats to the firm is the stiff competition
4
and strict regulation on tariffs and duties that increase the prices of the products and lowers the net
incomes.
Nike
The market price of its shares is $87.60. The current revenue is $36.4 billion with a gross
profit and net profit of $16 billion and $1.9 billion respectively for the last financial year. The
company is a source of employment to over 73,100 people across the globe (NIKE Inc., 2018).
Nike has a strong brand name that makes it continue to increase its sales despite the
competition from other firms. The second strength is the excellent distribution network that allows
its products to reach all the customers in all parts of the world. One of the major weakness of Nike
is limited market access in the developing countries where the competition is less stiff. The second
weakness is the labor controversies that could affect the name of the firm.
Nike has the opportunity to redeem its image by creating a good relationship with the
employees and the labor market to make the firm employees’ friendly for its prosperity. The
economic status in the developing nations is changing and Nike could consider have its production
in the regions to boost its market share in the industry. Stiff competition is a major threat to the
company. The second threat is the imitation of the products made by Nike thus reducing the sales
by Nike in the market.
3.
Use the Form 10-Ks to explore the financial statements of each company and
familiarize yourself with their basics. Answer the following questions and include
the answers in your deliverable:
Orange Dog Holdings
Question
5
Adidas
Nike
a. Accounting standards?
IFRS
GAAP
b. Most recent fiscal yearend?
31st December 2018
31st May 2018
c. Relative proportion of
short-term and long-term
assets?
63:37
67:33
d. Relative proportion of
liabilities and equity?
59:41
56:44
e. Return on Assets (ROA)
for most recent year?
12%
8.44%
f. Concerns in audit reports?
Increasing amount of salaries
and wages payable
Increasing selling general and
administrative expenses
Nike uses Generally Accepted Accounting Principles (GAAP) to report its financial
statements while Adidas which is a German fir uses International Financial Reporting Standards
(IFRS). The last financial year ended on 31st May 2018 for Nike, while the last date in Adidas
was 31st December 2018. The ratio of short term to long term assets of Adidas is 63:37 while
Nike has a ratio of 67:33. The ratio of liabilities to equity assets of Adidas is 59:41 while Nike
has a ratio of 56:44. The return on assets of Adidas is 12% while Nike has 8.44% as return on
assets (NIKE Inc., 2018). The auditor of Adidas is KPMG AG Wirtschaftsprüfungsgesellschaft,
The main concern raised by the auditors in their report is the increasing amount of salaries and
wages payable which indicates that the firm owes money to most of their employees (Adidas
AG, 2018). The auditor of Nike Corporation is PricewaterhouseCoopers, LLC. The auditors
raised the issue of the increasing selling general and administrative expenses which only lowers
the operating income of the firm. The auditor recommended the reevaluation of the selling
general and administrative department.
Orange Dog Holdings
4.
6
Using the Excel worksheet provided separately, prepare a three-year common size
balance sheet for each company and include a copy in your deliverable. Once you
have completed the common size balance sheets, answer the following questions and
include the answers in your deliverable:
Orange Dog Holdings
Adidas
.
7
Orange Dog Holdings
Nike
8
Question
Nike
Adidas
a. Largest asset/largest
liability?
Current asset
Current asset
b. Proportion of total assets
financed by owners?
40.8%
43.5%
c. Proportion of total assets
financed by nonowners?
59.2%
56.5%
d. What significant trends and
changes did you notice?
Why do you think they
occurred?
The increase in the current
assets while the non-current
assets decrease.
The decrease in the current
assets while the non-current
assets increase.
The most significant assets category for the two firms is current assets while the largest
liability category is current liabilities. The total asset financing by shareholders’ equity in Adidas
and Nike is 40.8% and 43.5% respectively. The total asset financing by total liabilities in Adidas
and Nike is 59.2% and 56.5% respectively. The major trends in Adidas are the increase in the
current assets while the non-current assets decrease. On Nike Corporation, the current assets
have been on a downward trend while non-current assets increase. The shareholders’ equity of
Nike has also been decreasing over the last three years. Furthermore, both companies constantly
increase in cash and cash equivalents balance.
Orange Dog Holdings
5.
9
Using the Excel worksheet provided separately, prepare a three-year common size
income statement for each company and include a copy in your deliverable. Once
you have completed the common size income statement, answer the following
questions and include the answers in your deliverable:
Orange Dog Holdings
Adidas
10
Orange Dog Holdings
Nike
11
Question
Nike
Adidas
a. Major revenues?
Sales
Sales
b. Major expenses?
Sales, general administrative
expenses.
Sales, general administrative
expenses.
c. Which company is more
profitable?
5.27% least profitable
11.61% more profitable
d. More or less profitable
than in prior year?
More profitable
Less profitable
e. What significant trends
and changes did you
notice? Why do you think
they occurred?
Gross profit increased slightly
over the last three years while
operating income increases as
well. The net income
increased from the previous
period and this was caused the
decrease in operating
expenses.
The gross profit and operating
income decreased over the last
three years.The net income
from continuing operations
drops significantly in 2018,
which caused the net income
decreased.
The primary revenue item for the two firms is sales while the significant expense is sales,
general administrative expenses. Adidas was more profitable in the current year than in the prior
year while Nike was less profitable compared to the prior year. The trend observed in Adidas is
that the gross profit increased over the last three years while operating income increased as well.
The net income increased from the previous period and this was caused the decrease in operating
expenses. The trend observed in Nike is that the gross profit and operating income decreased over
the last three years. The net income decreased from the previous period, and this was caused the
increase in operating expenses. Nike maintained a high steady level of research and development
and increased the expensed to 30%, while Adidas stayed at a low level of research and
development expense. It shows that Nike put much more effort on engaging on R&D to introduce
Orange Dog Holdings
new products.
12
6.
For each company, use the most recent Form 10-K to determine the size and
direction (cash source or use) of cash flows from operations, investing and financing,
with the goal of understanding the target company’s pattern of cash flows and to
form an opinion about the general strength of its cash flows. Answer the following
questions and include the answers in your deliverable:
Question
Nike (millions)
Adidas (millions)
a. Cash flow from
operations?
$2,646
$4,955
b. New property and
equipment purchases?
$611
$1,028
c. New debt or debt
repayment?
617(debt)
-16(debt repayment)
d. New stock issued?
–
–
e. Dividends?
$528
$1,243
The firms had cash flow from operating activities of $2,646 millions and $4,955 millions
for Adidas and Nike respectively. The two firms had a capital expenditure of $611 millions and
$1,028 millions for Adidas and Nike respectively. Adidas borrowed a total of 617 millions while
Nike paid 16 millions to cover its debts. The two firms did not buy any stock but paid a dividend
of $528 millions and $1,243 millions for Adidas and Nike respectively. Nike utilized a
Orange Dog Holdings
significant amount of cash in investing activities, including purchase of new property and
13
equipments. Nike had significant higher amount of dividends than Adidas.
Deliverable #2
1.
Use each company’s most recent Form 10-K to read the debt footnote(s). Answer the
following questions and include the answers in your deliverable:
Question
Adidas
Nike
a. Does it use short- or longterm debt?
b. Is the debt from banks or
is it publicly traded?
c. Does the debt carry
covenants that provide
protection to creditors?
d. Was there any mention of
default or renegotiated
covenants?
Orange Dog Holdings
Make additional brief comments and observations as necessary to supplement your
answers.
14
2.
Compute the following ratios for three years for each company:
•
•
•
•
•
Return on equity (measures profitability)
Times interest earned (measures ability to adequately cover interest payments)
Current ratio (measures liquidity)
Quick ratio (measures liquidity)
Debt-to-equity (measures solvency)
Insert clear screen capture of tables of ratios (see separately provided Excel worksheet).
Question
Adidas
Nike
Is each company more or less
solvent than last year?
Which company is more
liquid and solvent?
Orange Dog Holdings
Make additional brief comments and observations as necessary to supplement your
answers.
15
3.
Conclude with an assessment about each company’s liquidity or solvency. You
should express an opinion about whether the company has an appropriate level and
types of debt and whether you expect each company to continue operating with its
existing capital structure.
Company 1
Provide your conclusion on Company 1.
Company 2
Orange Dog Holdings
Provide your conclusion on Company 2.
16
Deliverable #3
1.
Using the Excel worksheets provided separately, complete a parsimonious forecast
and discounted cash flow valuation for each company. Include a screen capture of
the results in your deliverable.
Company 1
Insert clear screen capture of Company 1 forecast and valuation.
Company 2
Orange Dog Holdings
Insert clear screen capture of Company 2 forecast and valuation.
17
2.
Summarize in your deliverable key notes to the forecast and valuation for each
company, explaining your main assumptions and providing sources for your
assumptions where applicable.
Company 1
Summarize key notes to the Company 1 forecast and valuation, explain main assumptions
and provide sources for your main assumptions.
Company 2
Orange Dog Holdings
Summarize key notes to the Company 2 forecast and valuation, explain main assumptions
and provide sources for your assumptions.
18
3.
Based on the results of your forecast and valuation, answer the following questions
for each company and include the answers in your deliverable:
Question
Company 1 Name
Company 2 Name
a. Is the stock over- or undervalued based on your
valuation?
b. What are the two main
reasons you believe the
stock is over- or undervalued?
Orange Dog Holdings
c. When you review
information from analysts
and other experts on the
Internet, do their
comments and conclusions
support your conclusions
about the stock valuation
you have prepared? When
answering this question,
include support from at
least one reputable analyst
or expert to support the
validity of your
conclusion.
19
d. Based on comparison of
your company’s stock
price to your valuation,
would you recommend
buying this company and,
if so, at what price per
share
Make additional brief comments and observations as necessary to supplement your
answers.
Conclusions and Recommendations
Orange Dog Holdings
Provide your conclusion and recommendations.
20
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