FIT – MGT 5000 – Week 8
1. What is(are) Under Armour, Inc.’s, main source(s) of cash? Is this good news or bad news to its managers, stockholders, and creditors? What is Under Armour, Inc.’s, main use of cash? Is this good news or bad news? Discuss your reasoning.
Operating activities which produced $219,033,000 in cash in 2014 is Under Armour’s primary source of cash.
Under Armour generates ample cash from basic operations to finance current operations and to reinvest in the business.
It would appear that Under Armour’s primary use for cash is reinvestment which we see as negative cash flow from investment activities for the acquisition of new assets.
Under Armour’s cash flows have experienced 183% growth from 2013 to 2014. Under Armour’s cash flow position (liquidity) is indicative of a healthy organization and provides Under Armour with flexibility. All of this adds up to good news for managers, stockholders, and creditors.
2. Explain briefly the three most significant differences between net cash provided by operating activities and net income.
Change in Accounts receivable = ($101,057,000)
Change in inventories = ($84,658,000)
Depreciation and amortization = $72,093,000
3. Did Under Armour, Inc., buy or sell more plant assets during 2014 than in the previous two years? How can you tell?
Yes, Under Armour purchased more plant assets during 2014 than in the previous two years.
2014 Purchases of property and equipment = $140,528,000
2013 Purchases of property and equipment = $87,830,000
2012 Purchases of property and equipment = $50,650,000
4. Identify the largest item in the financing activities section of the Consolidated Statement of Cash Flows. Explain the company’s probable reasoning behind this activity.
Proceeds from term loan = $250,000,000
It would appear that Under Armour is taking on long-term debt to fund expansion, possibly through acquisition.
5. Evaluate Under Armour, Inc.’s, overall performance for 2014 in terms of cash flows. Be as specific as you can. What other information would be helpful to you in making your evaluation?
Under Armour’s net cash flows from operations showed positive growth from 2012 to 2014.
Under Armour’s strong net cash flows allowed them to invest in the business by acquiring assets and strengthen their balance sheet by paying down long-term debt without taking on new debt.
Consider three different businesses:
1. A bank
2. A magazine publisher
3. A department store
For each business, list all of its liabilities – both current and long-term. Then compare the three lists to identify the liabilities that the three business have in common. Also, identify the liabilities that are unique to each type of business.
Short-term liabilities or current liabilities do not differ greatly between industries when viewed from a balance sheet perspective, at least not at first glance. Short-term liabilities are obligations due within twelve months and may include items such as short-term loans from banks including lines of credit, accounts payable balances, dividends and interest payable, bond maturity proceeds payable, consumer deposits, and reserves for taxes. Long-term liabilities are obligations due outside of the twelve month window or the companies operating cycle should it happen to be longer than twelve months, these liabilities might include items such as debentures, loans, deferred tax liabilities and pension obligations.
Below we can clearly see both similarities and differences between short-term (current) and long-term liabilities by sector.
Response to follow-up question
1. Identify all the stakeholders of a corporation. A stakeholder is a person or a group who has an interest (that is, a stake) in the success of the organization.
By the definition of a stakeholder above or this definition of a stakeholder: “Stakeholders are individuals or groups who have an interest in an organization’s ability to deliver intended results and maintain the viability of its products and services.” It would be fair to say that a stakeholder would be an engaged party, this could be an owner, manager, government agency, supplier, contractor, competitor, customer, etc….
It would seem that the key difference between a stakeholder and a non-stakeholder is that the stakeholder has to be interested in the success of the organization. Not all stakeholders are created equal; they differ in importance and influence.
2. Do you believe that some entities are “too important to fail”? Should the federal government help certain businesses to stay afloat during economic recessions and allow others to fail?
This is a complicated question which delves deeply into many aspects of an individual’s belief system from a political, social and economic perspective. Given the complex nature of the question, I think that before postulating a response some background is required regarding who I am which likely provides a critical perspective on my opinion. With that said I think my answer is “I don’t know”, and I would never proclaim to know what the correct answer to this incredibly complex question for which I lack many of the variables required to solve the equation. I consider myself a fiscal conservative; thus it makes sense that I would believe in free market capitalism, the opportunities created via failures within the capitalistic system should self-heal as competition, and the free market economy does what it was intended to do. So where does this all get so complicated? Well, we live in a hybrid system where capitalism, socialism, and nepotism all coexist, very complex indeed. Anyone who followed the financial crisis in 2007 and who is five weeks into this course probably realizes at this point that if banks were highering nuclear physicists to build financial products that something was probably awry. I find LIFO shady, so it should come as no surprise that I think credit default swaps (http://www.investopedia.com/terms/c/creditdefaultswap.asp) represent absolute insanity. With this said, as a fiscal conservative, I also believe in consumer responsibility. We all now know that the financial crisis in 2007 was caused in large part by complex financial products like mortgage-backed securities, collateralized debt obligations, and credit default swaps.
The banking industry constructed these financial products, and in most cases, these products were not crafted by “bankers” but by mathematicians and physicists who made the products so complex that it obscured what was very risky and illogical. Why any consumer would think that a financial product called a “Power Option Arm” mortgage was a good idea baffles me, how any person can signup for a mortgage where your LTV can balloon to 120% (or anywhere past 100%) just seems crazy.
Here is the problem, we let all these financial products be created, the products were so complex that most didn’t understand them and greed took over. Greed manifested itself as what became known as the predatory lender. The question is who suffers when a corporation which is “too big/important to fail” is allowed to fail? I always think about Enron and the massive impact the failure of Enron had on so many people (social empathy kicks in here, I’m a capitalist not heartless). Personally, I don’t understand why any individual would rely on one company, the government or anyone else to protect their retirement but the reality is we all rely on and trust the monetary system. Maybe even this is changing with the emergence of crypto-currencies, but for now, we have the known, government regulated financial system that we need to place our faith in.
I’d like to say the government should have let AIG, Lehman Brothers. Merill Lynch and others fail, but the answer is I just don’t know what the right decision was. I happen to like Henry Paulson, and I think the financial sector and country were lucky to have such a well-connected operator as the Secretary of the Treasury during a time when deals seemingly needed to be made. In the case of the financial crisis of 2007, it was even more complicated given the involvement and burden of government-sponsored enterprises like Fannie Mae and Freddie Mac. Maybe the government, who should be focused on the social good, should focus more on consumer education and consumer regulation and protection because it’s unlikely over the long-term that they will outwit large corporations who have objectives which are not focused on the social good. I’ll avoid lobbyists, campaign donors, super PACs, special interest groups, etc… but let’s face it the government is indirectly involved in the largest corporations in the world, and maybe the government is more accountable as a shareholder, who knows. I believe that we need to begin building a society where the educated consumers are the rule, the control of poorly architected financial products was in the hands of the masses, the masses could have created zero demand, but instead, the masses created massive demand.
3. Identify several measures by which a company may be considered deficient and in need of downsizing. How can downsizing help to solve this problem?
Declining market value or market capitalization. Declining market value may be caused by a lack of revenue or shrinking gross profits due to market commoditization, new entrants, increased competition, higher raw material cost, etc…, etc… A company may need to refocus, shedding commoditized businesses which rely on volume and focusing on niche high-value high gross profit businesses. A downsizing event will likely accompany this sort of pivot.
Declining sales and shrinking backlog which forecasts an impending cash flow problem. A company may be forced to downsize due to reduced sales volumes which and predicted cash flow issues.
Net losses where expenses exceed revenues. Downsizing may be one variable a company adjusts to rightsize expenses.
Antitrust issues and government involvement. E.g. – Standard Oil.
Increasing labor costs. A shift in market requirements may require a different labor cost structure; this may cause a company to exit markets where lower cost labor was required to enter markets which have a higher labor cost. Downsizing an area of the business which is less profitable to reinvest in areas of the business which are more profitable and address market demand is advantageous.
Return on equity (ROE) which is the relationship between net income and common stockholders’ equity. A company has a fiduciary duty to deliver shareholder value. Return on equity is calculated as (Net income / Shareholder equity). To maximize ROE, a company may need to reduce costs to increase net income.
4. Debate the bailout issue. One group of students takes the perspective of the company and its stockholders, and another group of students takes the perspective of the other stakeholders of the company (the community in which the company operates and society at large).
This is an interesting one. Let’s look at TARP (Troubled Asset Relief Program), the backbone of the financial bailout which was constructed by the United States government to allow the US government to purchase toxic assets and equities from financial institutions. For institutions that needed TARP to stay alive, it’s hard to argue against TARP from the perspective of the company, the shareholders or the stakeholders. I believe that the TARP program was looked at favorably by companies, shareholders, and individual stakeholders of organizations (e.g. AIG). This view may not have been shared by all stakeholders, for instance, if we assume that a competitor is a stakeholder the competitor may have a perspective that the United States government, via TARP removed the opportunity that should have been created by a free market economy.
AIG, Citigroup, and Bank of America all took TARP funds; they needed the funds to stay afloat. The Department of Treasury seemingly wanted all banks to take some level of TARP. TARP aimed at providing necessary liquidity but also aimed to restore confidence, the idea that all institutions took TARP funds would help to obscure the institutions who needed TARP funds to survive. Many institutions did not accept TARP funds, sighting a desire not to be beholden to the United States government. The questions here are as follows:
1) Did the bailout kill the free market economy?
2) Were organization who mismanaged their business rewarded while those who managed prudently had the spoils of a
free market economy taken from them because of government involvement?
3) What would have been the result of no bailout? Would the remaining institutions have been able to pick up the pieces? Or would a gaping hole now exist in the monetary system?
IMO the bailout was necessary.
1) Organizations who managed responsibly did so by not accruing toxic assets. Thus there was no reason to believe they would have picked up these assets after the institutions who held them collapsed.
2) Toxic assets (mortgages) would be abandoned by the consumer and the lender thus offering no incentive for remaining lenders to absorb these assets. This would devalue of all surrounding assets. This did happen, but TARP did help to stabilize the decline.
5. What is the problem with the government taking an equity position such as preferred stock in a private enterprise?
IMO the biggest issue with the government taking an equity position in a private enterprise is the apparent conflict of interest. How do you regulate that which you own? 🙂 Now, I am not an idealist, so I don’t get too wrapped around the axle here and I am also acutely aware that covert quid pro quo probably a bigger issue the government taking an overt equity position in a private enterprise. In 1916 Congress created the first government-sponsored enterprise (GSE) with the creation of the Farm Credit System, my point is that 2007 does not mark the dawn of evil government involvement in private enterprise. Congress established the idea of the GSE as a means to overcome “market imperfections.” There are a million different perspectives from which to argue government involvement in private enterprise but IMO the more government provides for the social good (e.g. national health care), the more government involvement we will see in private enterprise.
Blumberg, A. (2008, October 30). How Credit Default Swaps Spread Financial Rot. Retrieved June 01, 2017, from http://www.npr.org/templates/story/story.php?storyId=96333239
Fontinelle, A. (2014, March 19). Troubled Asset Relief Program – TARP. Retrieved June 01, 2017, from http://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp
Harber, K. (2015, October 27). Principles of Management. Retrieved June 01, 2017, from https://open.lib.umn.edu/principlesmanagement/chapter/4-6-stakeholders/
Nielsen, B. (2008, April 08). Payment Option ARMs: A Ticking Time Bomb? Retrieved June 01, 2017, from http://www.investopedia.com/articles/mortgages-real-estate/08/payment-option-arm.asp?lgl=myfinance-layout-no-ads
What comes after those ellipses? (n.d.). Retrieved June 01, 2017, from http://www.businessdictionary.com/definition/stakeholder.html
1. Three important pieces of inventory information are (a) the cost of inventory on hand, (b) the cost of sales, and (c) the cost of inventory purchases. Identify or compute each of these items for Under Armour, Inc., at December 31, 2014. Assume “food and paper” are cost of goods sold.
2. Which item in requirement 1 is most directly related to cash flow? Why? (Challenge)
3. Assume that all inventory purchases were made on account and that only inventory purchases increased Accounts Payable and Other Current Liabilities. Compute Under Armour, Inc.’s cash payments for inventory during 2014.
4. How does Under Armour, Inc., value its inventories? Which costing method does Under Armour use?
5. Did Under Armour, Inc.’s gross profit percentage and rate of inventory turnover improve or deteriorate in 2014 (versus 2013)? Consider the overall effect of these two ratios. Did Under Armour, Inc., improve during 2014? How did these factors affect the net income for 2014? Under Armour, Inc.’s inventories totaled $319 million at the end of fiscal 2012. Round decimals to three places.
Note: Spreadsheet detailing calculations embedded below.
Cost of goods sold (millions) = $1,572
Less: Beginning inventory (millions) = ($469)
Add: Ending inventory (millions) = $537
Cost of inventory (millions) = $1,640
Cost of inventory purchases.
Beginning accounts payable (millions) = $165
Add: Cost of inventory (inventory purchases) (millions) = $1,640
Less: Ending account payable (millions) = ($210)
Cash payments for inventory (millions) = $1,595
Under Armour values inventories using Lower-of-Cost-or-Market Value.
Under Armour FIFO to compute cost of inventory.
Stated in Appendix B, Under Armour, Inc. 2014 Annual Report – page 860, Note 2 (Summary of Significant Accounting Policies) under Inventories.
2014 Gross profit percentage = 49.03%
2013 Gross profit percentage = 48.76%
Gross profit from 2013 to 2014 improved.
2014 Inventory turnover ratio = 3.125
2013 Inventory turnover ratio = 3.033
The inventory turnover ratio from 2013 to 2014 improved.
Both gross profit and inventory turnover improved from 2013 to 2014.
Gross profit percentages and increase in gross profits suggest increasing efficiency and value and healthy business which is avoiding commoditization.
The higher inventory ratio shows that Under Armour is moving more inventory faster indicating increasing sales.
Note: Spreadsheet detailing calculations
Focus on cash and cash equivalents. Why did cash and cash equivalents change during 2014? The statement of cash flows holds the answer to this question. Analyze the seven largest individual items on the statement of cash flows (not the summary subtotals such as “net cash provided by operating activities”). For each of the seven individual items, state how Under Armour’s actions affected cash. Show amounts in millions and round to the nearest $1 million. (Challenge)
Numbers below are in 000s
Cash increased from $347,498 (Dec 31, 2013) to $593,175 (Dec 31,2014)
Refer to Exhibit 4-2 on page 205 that contains the Report of Management on Internal Control over Financial Reporting. Under Armour, Inc. has a similar report included in its annual report. Show how this report corresponds to the objectives of internal control included in this chapter. (Challenge)
The Financial Statement and Supplemental Data (Item 8) section of Under Armour’s Annual report states that “Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.” This depicts what the text calls “tone at the top”. This section also states that “This evaluation included the review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation”, this depicts control procedures and monitoring controls. There is clearly a correspondence between what is conveyed here and what is outlined in chapter four of the text.
Under Armour Annual Report. (n.d.). Retrieved May 18, 2017, from http://investor.underarmour.com/annuals.cfm
1. Which was larger for Under Armour, Inc. during 2014: (1) sales revenue, or (2) cash collected from customers? Why? Show computation. (Challenge)
2014 Sales revenue = $3,084,370 > Cash collected from customers in 2014 = $3,014,487
2. Investors are vitally interested in a company’s sales and profits and its trends of sales and profits over time. Consider Under Armour, Inc.’s sales and net income (net loss) during the period from 2012 through 2014. Compute the percentage increase or decrease in net sales and also in net income (net loss) from 2012 to 2014. Which item grew faster during this two-year period—net sales or net income (net loss)? Can you offer a possible explanation for these changes? (Challenge)
Net sales (revenue) grew faster than net income.
A potential explanation for income growth not keeping pace with or outgrowing revenue growth is expense increases which grew at a greater rate than revenue.
Note: Detailed calculations and explanations contained in the attached spreadsheet.
1. Go on the Internet and do some research on Under Armour, Inc., and its industry. Use one or more popular websites like http://finance.yahoo.com or http://www.google.com/finance. Write a paragraph (about 100 words) that describes the industry, some current developments, and a projection for where the industry is headed.
Founded in 1996 by former University of Maryland football player Kevin Plank, Under Armour claims to be the originator of performance apparel. Under Armour differentiates their apparel by stating it keeps athletes cool, dry and light throughout the course of a game, practice or workout. Under Armour has experienced excellent market traction and has risen to be one of the top performance apparel providers in the word. Under Armour is the official footwear supplier of the NFL and MLB and partners with the NBA. Under Armour heavily relies on athlete endorsements from top performers in football, basketball, soccer, and baseball. Under Armour’s products are made from its moisture-wicking and heat-dispersing fabrics which keep athletes dry and relatively comfortable. Under Armour is entering the technology space and leveraging their foothold in the apparel market to enter the wearable market to allow customers track their fitness. Under Armour sells online, by catalog, through its own retail and outlet stores, and in more than 25,000 retail stores worldwide.
Under Armour is in the apparel manufacturing company that develops, manufactures, markets and sell its own products. Under Armour is an apparel maker and retailer and they are impacted by trends in both the apparel and retail sectors. As Under Armour enters the tech sector they will be impacted by technology adoption and obsolescence, this will be interesting to watch.
Under Armour is being impacted by a struggling retail sector. After years of steady, double-digit growth, the high-performance athletic apparel and footwear maker reported 7% growth on revenues of $1.1 billion with a net loss of $2 million in the first quarter 2017 and a $0.01 loss in diluted earnings per share. Stiff competition and lost U.S. retailers (e.g. – Sports Authority & Sports Chalet) are sighted as having a material impact on Under Armour’s results. Source: http://www.uabiz.com/results.cfm
While Under Armour had a difficult Q1 2017 their balance sheet remains healthy.
Competition includes the likes of Nike, Adidas, and Columbia Sportswear. Increased competition may have played a role in gross profits being down 70 basis points to 45.2 percent.
The apparel industry is highly competitive and this trend will continue. Under Armour needs to continue to innovate, they need to continue to expand both direct-to-consumer and international sales. Under Armour will also have to continue to pursue new retailers while maintaining margins.
2. Read Note 1—(Description of Business) of Under Armour, Inc.’s annual report. What do you learn here and why is it important?
The Description of Business in the 10-K filing is exactly that, a description of what the company does, any subsidiaries it might own, what markets it operates in. This section might also include significant recent events like competition, regulations, or labor issues, special operating costs, seasonality, etc… This is a summary of what the business is and how it operates.
Under Armour is in the apparel business.
Under Armour develops, markets and distributed branded apparel, footwear, and accessories.
Under Armour is focused on athletic apparel.
Under Armour conducts worldwide operations.
Under Armour is an active lifestyle brand.
3. Name two of Under Armour, Inc.’s competitors. Why is this information important in evaluating Under Armour, Inc.’s financial performance?
Nike and Adidas are the two competitors pointed out in Under Armout, Inc.’s 2014 10-K filing. (Harrison, Horngren & Thomas, 2017, p. 855)
Understanding the market segment, the trend within that segment and the total market opportunity is critical to understanding is how Under Armour is performing.
Competition provides both market opportunity, the ability to share shift an already defined market with a proven need but it also creates margin pressure. This greater the supply, the greater the competition the more advantageous it is for the consumer. Margin erosion is likely with increased competition. Under Armour, like it’s competition Nike and Adidas attempt to offset what could be called commodity apparel by creating “lifestyle” brands and creating “brand loyalty”
4. Write Under Armour, Inc.’s accounting equation at December 31, 2014 (express all items in millions and round to the nearest $1 million). Does Under Armour, Inc.’s financial condition look strong or weak? How can you tell?
Assets = Liabilities + Owners’ Equity (Harrison, Horngren & Thomas, 2017, p. 12)
$2,095,083 = 744,883 + $1,350,300
Owner’s (stockholder’s) equity has show y/y growth indicating that Asset growth is outpacing liability growth, indicating a strong financial position and a healthy trajectory.
Owner’s Equity = Assets – Liabilities
5. What was the result of Under Armour, Inc.’s operations during 2014? Identify both the name and the dollar amount of the result of operations for 2014. Does an increase (or decrease) signal good news or bad news for the company and its stockholders?
2014 Net Income (in thousands) = $208,042
Net Income (in thousands) increased from 162,330 in 2013 to $208,042.
6. Examine retained earnings in the Consolidated Statements of Shareholders’ Equity. What caused retained earnings to increase during 2014?
2014 Retained earnings (in thousands) = 856,867
2013 Retained earnings (in thousands) = 653,842
When revenues exceed expenses the result will be a positive balance in retained earnings. (Harrison, Horngren & Thomas, 2017, p. 18)
7. Which statement reports cash and cash equivalents as part of Under Armour, Inc.’s financial position? Which statement tells why cash and cash equivalents increased (or decreased) during the year? Which activities caused Under Armour, Inc.’s cash and cash equivalents to change during 2014, and how much did each activity provide or use?
Which statement reports cash and cash equivalents as part of Under Armour, Inc.’s financial position? Consolidated Balance Sheet
Which statement tells why cash and cash equivalents increased (or decreased) during the year? Consolidated Statement of Cash Flows
Which activities caused Under Armour, Inc.’s cash and cash equivalents to change during 2014, and how much did each activity provide or use?
Cash and cash equivilents – Beginning of period (in thousands) = 347,489
+ 2014 Cash flows from operating activities (in thousands) = 219,033
+ 2014 Cash flows from investing activities (in thousands) = (153,312)
+ 2014 Cash flows from financing activities (in thousands) = 245,686
+ 2014 Effect of exchange rate changes on cash and cash equivilents = (3,341)
= Cash and cash equivilents – Beginning of period (in thousands) = 347,489
347,489 + 219,033 + (153,312) + 245,686 + (3,341) = 593,175
Hall, J. (1970, January 01). Under Armour Inc Is Feeling the Impact of a Changing Retail Landscape. Retrieved May 04, 2017, from https://www.fool.com/investing/2017/04/28/under-armour-inc-is-feeling-the-impact-of-a-changi.aspx
Harrison, W. T., Horngren, C. T., & Thomas, C. W. (2017). Financial accounting. Boston: Pearson.