Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi ACCT 5104: FUNDAMENTALS OF ACCOUNTING Annual Report Group Project, Fall 2018 Instructor: Sudip Bhattacharjee December 3. 2018 Gate Group 2017 Annual Report Section 1 Gate group is the global leader in airline catering, retail-on-board and hospitality products and services. They provide passengers with superior culinary and retail experiences, leveraging innovation and advanced technology solutions. Headquartered in Zurich, Switzerland, the Company deliver operational excellence through the most extensive catering network in the aviation industry, serving 700 million passengers annually from over 200 operating units in 60 countries/territories across all continents with approximately 43,000 employees worldwide. Section 2 ▪ Revenues reached CHF 4.6 billion in 2017 vs. CHF 3.4 billion in 2016, an increase of 35%. (1 CHF is $1.00281 USD as of November 19th, 2018 ▪ Net profit reached CHF 85.2 million in 2017 vs. CHF 32.6 million in 2016, an increase of 161%. ▪ Improved cash generation from operations at CHF 210.2 million vs. CH 141.6 million in 2016, an increase of 48.4%. Revenues grew across all five regions in 2017, totaling CHF 4,554.2 million. In Europe and Middle East revenues increased to CHF 1,778.6 million (+3.5%), in North America to CHF 1,141.6 million (+4.6%), in Asia-Pacific to CHF 345.2 million (+10.5%) and in Latin America to CHF 330.0 million (+30.5%). The newly formed South Europe and Africa region achieved revenues of CHF 982.2 million. Organic growth in 2017 has reached 7.2% (2016: 5.5%). Over the past two-and-a-half years, Gate group has focused on the consistent, successful implementation and delivery of its Gateway 2020 strategy, which was first introduced in 2015. The strategy is based on four pillars: focus on the core, geographical expansion and the combination of commercial innovation, standardization and efficiencies. Gate group now has a much more diversified business platform for sustained growth and margin expansion which has allowed the group to deliver strong results in 2016 and 2017. 1 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi Focus on the core – high retention rate reconfirmed Gate group has transformed itself to become the industry leader in food and hospitality with a clear focus on airline catering and food and beverage retail on board. To further sharpen its profile, Gate group exited non-core assets such as airport security and selected airport retail activities. The group’s strong track record of renewing existing and winning new contracts with an average contract retention of over 90% has been reconfirmed in 2017. Geographic Expansion – focus on emerging markets In 2017, gate group continued the expansion into strategic and emerging markets such as AsiaPacific, where a 30-year strategic joint venture with Asiana Airlines at Incheon airport (Republic of Korea) was announced. The successful integration of Servair into Gate group has resulted in the creation of the new Southern Europe and Africa region, which comprises Servair’s business in France, French territories, Italy, and Africa. As a result, Gate group now has the most global network in the industry. Commercial Innovation – increase of speed to market Gate group’s four Centers of Excellence (Innovation, Retail, Culinary and Technology) drive industry innovations by working closely with customers and combining efforts to bring ideas and projects to reality. The result enhances the traveler experience and supports airline customers’ goal of providing better experiences on board. Amongst others, innovative market approaches resulted in retail on board revenues increasing by more than 100% over the past two years, reaching CHF 628.4 million in 2017. Standardization and Efficiency – simplified organization By consolidating its brands and divisions into an organizational structure by region with clear P&L responsibility and strong central control, Gate group has further improved efficiency, enforced cost discipline, e.g. through a Zero-Based Budget approach, and pushed operational standardization. The group has also made significant progress in competitive pricing and operational leverage. This strong focus on commercial innovation combined with greater financial discipline has allowed Gate group to increase its speed to market and lower the cost base resulting in higher EBITDA margins. 2 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi Robust cash flow statement and balance sheet Cash generated from operations in 2017 was at CHF 210.2 million, compared to CHF 141.6 million in the previous year, due to increased EBITDA performance partially offset by higher working capital because of the strong growth. Overall, 2017 was a year of substantial investments and acquisition activities to set up the group for future growth. Gate group’s balance sheet as at December 31, 2017, shows total assets of CHF 3’019 million and total equity has grown to CHF 443.9 million, compared to CHF 306.9 million as at December 31, 2016. Net debt at the end of 2017 was CHF 712.4 million resulting in a leverage of 2.4x, an increase from 1.7x at the end of 2016. Xavier Rossinyol, CEO of Gate Group Comments: 1. robust 2017 financial results are a direct result of the successful new strategy we began implementing in 2015. 2. Gate group is the clear number one airline caterer and we recognize that the only way to succeed in the long term is to deliver continuous value to our customers. Our passion for commercial innovation and obsession with operational excellence have made Gate group the largest and fastest growing network in the airline catering industry today. 3. The integration of Servair provides us with a highly complementary presence in key markets where Gate group was not previously present, such as France and Africa. Servair also contributes substantially to Gate group’s ambition for culinary excellence. 4. Geographical expansion, particularly in emerging markets and growth in food and beverage retail, has diversified the portfolio of Gate group. 5. Gateway 2020 strategy, which set ambitious but realistic plans to transform Gate group, is nearing the midpoint. 3 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi Comparative Firms - Overview of key financial figures Key Financials (CHF m) 2017 2016 2015 Revenue 4'554.2 3'363.1 2'996.4 EBITDA 300.4 200.5 145.6 EBITDA Margin 6.6% 6.0% 4.9% Operating Profit 167.1 77.6 40.0 Operating Profit Margin 3.7% 2.3% 1.3% Profit / (Loss) of the company 85.2 32.6 (62.1) Cash Generated from Operations 210.2 141.6 116.1 Net Debt 712.4 352.1 240.1 Gate group Holding AG published today its 2017 full-year results and Annual Report, reporting a robust increase in revenue, EBITDA and EBITDA margin in 2017. EBITDA improved by 50% in 2017 vs. 2016 and net profit more than doubled. These results underpin significant progress towards Gate group’s Gateway 2020 strategy targets. 4 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi 1. Inspect the liability and equity sections of your firm's comparative balance sheets. Does your firm use financial leverage? Is your firm's use of financial leverage greater for the most recent year than for the previous year? If the degree of leverage has changed, what impact has this had on the firm's risk? Discuss. ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ 2. Identify the investment characteristics of your firm's long-term debt. Obtain the most recent information on the company’s bonds from the Mergent Online Database of the Virginia Tech Library. Lookup your company to determine whether it has any long-term debt listed. Answer the following questions for each issue of long-term debt. (If your firm has more than two issues, select two representative issues for listing here.) Not every firm has bonds outstanding, nor are all bonds listed in these sources. If no bond information is available regarding your firm, you may skip this section. Long-Term Long-Term Debt Issue #1 Debt Issue #2 a. Type of debt (notes, subordinated notes, ___________ ___________ senior notes, debentures, etc) b. Interest Rate ___________ ___________ c. Year Debt Due ___________ ___________ d. Debt Rating (indicate which rating source you used) _____ Moody's ___________ ___________ _____ S& P ___________ ___________ e. Either the issue " investment grade" or "Speculative grade"(i.e., "Junk bonds") ___________ ___________ f. Call date of the debt (if any) ___________ ___________ g. Call price of the debt (if any) ___________ ___________ h. Current market price ___________ ___________ i. Recent price range 1) Highest price ___________ ___________ 2) Lowest price ___________ ___________ j. Yield to maturity ___________ ___________ 5 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi 3. Identify the primary stock exchange where your company's preferred stock and common stock are traded. (Also, note the ticker symbol, usually a three or four-letter abbreviation that identifies the firm's stock.) This information usually is found in the last few pages of the annual report. a. Primary stock exchange where your firm's common (and preferred) stock is traded. ________________________________________________________________ b. Ticker symbol(s) __________________________________________________ 4. Obtain today's issue (or the most recent issue available) of The Wall Street Journal a. Indicate the date of The Wall Street Journal you used. _____________________ b. Go to section C of your issue to find the stock exchange tables. Find your firm's exchange and your firm's data. If your firm has more than one class of common stock listed, select the first one shown. If questions arise about notations in the stock listings, answers can be found by referring to the “Explanatory Notes" section that usually appears at the bottom of column 1 on page C3 of The Wall Street Journal. c. Fill in the blanks for each of the following 3) 4) 5) 6) 7) 1) Price range during prior 52 weeks _________ High ______ Low 2) Regular annualized dividend ______________________________ Volume (in hundreds of shares) ___________________________________ Day's highest price ______________________________ Day's lowest price ______________________________ Day's closing price ______________________________ Change in price from yesterday ______________________________ 5. Compute each of the following ratios for your firm for the most recent year. a. Return on (common) equity = Net income (- preferred dividends) (Common) stockholders' equity Return on (common) equity = b. Debt to equity = _______________________ = _________ _____Long term debt____ Total stockholder's equity Debt to equity = _______________________ = ____________ c. Debt to assets = ______Long term debts_ Total assets Debt to assets = _______________________ = _____________ 6 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi d. Dividend payout Ratio = Total cash dividends on common stock Net Income Dividend payout Ratio =_______________________ = _____________ e. Current Ratio = Total current assets Total current liabilities Current Ratio = _______________________ = _____________ f. Market value to book value per share = Market value per (common) share Book value per (common) share Market value to book value per share =_______________________ = ________ NOTE " Market value per share" and " book value per share" usually refers to common stock. Therefore, to obtain book value per common share: 1. Subtract any equity accounts arising from preferred stock from total shareholder's equity, and 2. Divide the remainder by the number of common shares outstanding. 6. For a ratio to be meaningful it must be compared to that of other companies, or to other years of the same firm. To give some perspective to your firm's ratios, check with five classmates (groups) who are evaluating different firms. Place your firm's ratio in the first column and those of your classmates in the other columns. Ratio Your COMPARATIVE FIRMS Firm Firm1 Firm2 Firm3 Firm4 Firm5 a. b. c. d. e. f. _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Return on (common) equity Debt to equity Debt to assets Dividend payout ratio Current ratio Market value to book share _____ _____ _____ _____ _____ _____ 7. Overall, what does your analysis in # 5 and 6 reveals to you about your firm's liquidity, dividend policy, and use of leverage? Do you observe big differences between your firm and other firms? If you compared your firm to companies in other industries, is there anything about the difference in industry that might tend to explain some of the differences you observed? Discuss. ____________________________________________________________________ 7 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi ___________________________________________________________________________ ____________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ 8. Memo No. 2 - Financing Activities Please write a memo based on what you have learned about your company's overall financing activities (restrict your response to one page). Guide for Memo No. 2 a. Evaluate your company's financial structure. Include the following ▪ The amount of dent financing and equity financing ▪ The changes from the prior to the current year ▪ The primary transactions that caused these changes ▪ The overall assessment of your company’s financing activities. 8 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi Section 3 Analysis of Investing Activities In this section, you will evaluate results of management's investing decisions. First, you will determine selected characteristics of your firm's property, plant and equipment. Second, you will explore your firm's return on assets by analyzing asset turnover and profit margin. Lastly, you will analyze the profitability of your firm's segment. 1. Evaluate your company's investment in property, plant and equipment. a. Determine the following amounts as reported by your firm on its most recent financial statements. You will probably have to inspect the notes to the financial statements to obtain some of the information. 1) Cost of property, plant and equipment 2) Accumulated depreciation 3) Depreciation expense 4) Cash paid for property, plant and equipment b. Use the amounts above to answer the following questions 1) What percent of the cost of property, plant and equipment was written off as depreciation expense in the most recent year? _________________________ 2) What does your answer imply about the average life of your company's property, plant and equipment? _____________________________________________________________ 3) What percent of the cost of property, plant and equipment is in the accumulated depreciation account? _________________________________ 4) On average, then, are the property, plant and equipment assets relatively new, relatively old, or in mid-life? _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ 5) What is the relationship between the cost of property, plant and equipment purchased during the year and cost of property, plant and equipment charged to the depreciation expense? Does this imply that your firm's productive capacity is growing, getting smaller, or staying about the same? _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ 2. Evaluate the effect of asset growth on the return of assets. a. Compute your firm's return on asset for the most recent year. Return on assets = Net income (- preferred dividends, if any) Total assets 9 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi Return on assets = ______________________ =______________ Note To obtain more meaningful results, the net income number should exclude the effects of special item such as discontinued operations, extraordinary items, and the cumulative effect of a change accounting principle. If any of these items appear on your firm's income statement for the year under consideration, exclude their impact from net income when making the calculation s here and in the parts that follow. To exclude special items from net income, start with net income, deduct any special items that caused net income to increase, and add back any special items that caused net income to decrease. b. Compute your firm's asset turnover ratio. Asset turnover = __Sales____ Total assets Asset turnover = _______________________ = ________________ How many dollars of sales were generated by each dollar of assets for the year in question? ____________ c. Compute your firm's profit margin Profit margin = net income (- preferred dividends, if any) Sales Profit margin = ______________________ = ________________ For the year in question, how many cents out of every sales dollar did the company keep as profit after accounting for all expenses? _______________ d. For perspective, compare your firm's asset turnover and profit margin with those of the other firms. Check with five classmates who are evaluating different firms than you are and fill in the table below. Ratio Your COMPARATIVE FIRMS Firm Firm1 Firm2 Firm3 Firm4 Firm5 1) Asset turn over 2) Profit Margin _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ 10 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi e. Compared to other firms, how would you describe your firm's asset turnover and profit margin? ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ 3. Evaluate the firm's segment information a. Near the end of the notes to the financial statements you should find information about your company's line of business. Are your firm's segments all contributing equally to sales and profits? Complete the table of segment information in the following page. List the operating income, identifiable assets, and return on identifiable assets (of each segment) for the current year and two prior years. List the current year information first. (If your firm operates as a single segment, substitute geographic data, if any, in the analysis below.) Divide column A by column B to obtain return on identifiable assets. To conserve space, record the information in millions of dollars. Segment Names Year (A) Operating income 1) ____________ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ 2) ____________ 3) ____________ 4) ____________ 5) ____________ (B) Identifiable assets _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ (A) / (B) Return on identifiable assets ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ b. Discuss the results of your segment analysis. Are some segments performing better than the others? Might overall profitability be enhanced by reallocating assets to some segments and away from the others? What questions would you have for management regarding its various lines of business? Does one management address "segment strategies" in the Management Discussion and Analysis? Explain 11 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi __________________________________________________________________ __________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ____________________________________________________________ No. 3- Investment Activities Please write a memo analyzing your company's investing activities (restrict your response to one page). Guide for Memo 3 a. What can you conclude about the company's investment policies based on its investment activities? b. What were the primary causes for the change in fixed or non-current assets from last year to the current year? c. What new insights do you have relative to your assessment of the company? d. Discuss whether you are now more favorably impressed with your company? 12 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi Section 4 Analysis of Operating Activities The purpose of this section is to determine the effects of management's operating decisions. You will (1) identify your firm's profit strategy, (2) evaluate your firm against selected measures of efficiency and effectiveness, and (3) link your firm's operating and investing activities with financing activities. 1. Which profit strategy does your firm appear on the following: product differentiation or cost leadership? To help answer this question, compute your firms return on assets and its two important component parts: profit margin and assets turnover. Use the most recent year's data available. a. Return on assets = Net income X Operating revenues* [Profit Margin] Operating revenues* Total assets [Asset Turnover] * means the same thing as the word "sales" Note Be sure to use an income number that excludes the effects of special items that are not expected to recur. For example, this means that items such as discontinued operations, extraordinary items and the cumulative effect of a change in accounting principle should be excluded from the income number you use. 2) Return on assets = ________________ X ____________________ 3) Profit margin = _______________ 4) Asset turnover = ________________ 2. Compute the following measures of efficiency and effectiveness for your firm. a. Operating cash flow to total assets = cash flow from operations Total assets Operating cash flow to total assets = ______________ = _______________ b. Inventory Turnover = Cost of goods sold Inventory Inventory Turnover = ____________________ = _________________ 13 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi c. Accounts receivable turnover = Operating revenues (sales) Accounts receivables Accounts receivable turnover = _____________ = _________ d. Gross Profit margin = Operating revenues - cost of goods sold Operating revenues Gross Profit margin = ________________ = ________________ e. Operating Profit margin = Operating revenues - all operating costs Operating revenues Operating Profit margin = ________________ = ________________ f. Return on equity = profit margin X asset turnover X financial leverage Return on equity = profit margin X asset turnover X total assets Equity Return on equity = __________ X _________X _______ = ______________ [taken from [taken from No. 1a.3] No. 1a.4] 3. For perspective, compare your firm's ratios to the results of your classmates who are studying different firms than you are. Ratio Your COMPARATIVE FIRMS Firm Firm1 Firm2 Firm3 Firm4 Firm5 a) Operating cash flow to Total assets _____ _____ _____ _____ _____ _____ b) Inventory turnover _____ _____ _____ _____ _____ _____ c) Accounts receivable turnover _____ _____ _____ _____ _____ _____ d) Gross profit margin _____ _____ _____ _____ _____ _____ e) Operating profit margin _____ _____ _____ _____ _____ _____ f) Return on equity _____ _____ _____ _____ _____ _____ 14 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi g) Assuming the current year's ratio values are representative, where is your company strong in relation to the other firms and where is it weak? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ 4. Memo 4- Suitability as an investment You have completed the study of your company's annual report, specifically reviewing its financing, investing, and operating activities. Take the perspective of a financial analyst and write a final memo which will bring your previous analyses together (restrict your response to three pages). Guide for Memo 4: a. Make an overall assessment of your company's financial health b. Recommend whether your client should add your company to his/her investment portfolio 15 Group Name: Ted Nebiyeloul, Ali Morya E Motaen & Othman Ahmed O Alturaymi PEER EVALUATION FORM GROUP NUMBER: _________________ YOUR NAME______________ The purpose of this form is for you to evaluate the contribution made by each or your group members to the overall performance and success of your group's projects. In making you assessments, you might take into account such factors as: effort, quantity of contribution, quality of contribution, evidence of advance preparation for meetings, meeting of deadlines, and degree of cooperation with other group members, etc. DIRECTIONS: 1. In the space provided below, write in the names of all group members (including yourself). You should omit anyone who was part of your group initially but dropped the course or for some reason is not part of your group at the end of the course. 2. Allocate a total of 100 points among your group members (including yourself) such that the points awarded indicate your judgment of the overall value of each member's relative contribution. The total points awarded must add up to 100. For example, if you have four group members (and in your judgment) all members made equal contributions, each group member (including yourself) would be allocated 25 points. If you award someone 10 points and someone else 30 points, this would indicate that you valued the latter person's contribution three times more than the first person's contribution. 3. Put the completed form in a sealed envelope and submit it with group project report. GROUP MEMBER NAMES POINTS EARNED a. Ted Nebiyeloul __________ b. Ali Morya E Motaen __________ c. Othman Ahmed O Alturaymi __________ d. __________________________________________ __________ e. __________________________________________ __________ Signature: ______________________ Date: __________________ 16
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