Balance Sheet Analysis Applebee's International 2004 In analyzing the common-size balance sheet for Applebee's, it is noted that the total current assets has jumped from 11% to 14% of the total assets. The total assets for Applebee's has jumped 6% from 2000 to 2001 driven by increased in the total current assets of 28%. Of those 28% increase, they consisted of 88% increase in the Cash & Equivalents (increased of $10.6 millions) caused by the decreased in the Capital Stock repurchasing in 2001 by Applebee's. The repurchase of capital stock has decreased by 31% as noted from the year-to-year percentage changes of the Statement of Cash Flow which equivalent to about $11 million dollars. The other current assets increased was from the other Current Assets category; there was an increase of 92% from 2000 to 2001. Due to the higher earnings for Applebee's, there was an increase in income tax due.
A significant component of the increase of other Current Assets was from increased in prepaid income taxes with net deferred income tax asset of $6.7 millions dollars. The intangibles has also decreased from 18% to 16% in common-size balance sheet for Applebee's from 2000 to 2001. This is equivalent to a decrease of 7% from year to year percentage change. This change was driven by amortization of intangible assets related to previous acquisitions of other franchisee restaurants by Applebee's. There was a trend in rise of the net property & equipment related assets since 2002 to 2004.
This boost in net property and equipment assets was related to the acquisition strategy conducted by Applebee's. For the $34 millions acquisitions of 21 restaurants in Washington D.C. area on November 7, 2002; $24 millions has been allocated to the fair value of property and equipment plus $10 millions in goodwill. This has caused a jump in net property & equipment assets for 2002 to jumped 16% and Intangibles assets to jumped 12% when compared to 2001. Since most of the purchased are by cash, this has caused a 31% decreased in the Cash & Equivalents for Applebee's balance sheet. For the 11 Applebee's restaurants acquisitions in Illinois, Indianan, Kentucky, and Missouri for $21.8 million on March 24, 2003, $7.9 millions were allocated to the fair value of property and equipment, the other $16.6 millions went to goodwill, plus a net liabilities in additions of $1.3 millions. The acquisition in 2003 has caused increased of 10% in the net property & equipment assets, 18% increased in the intangibles assets.
The common-size balance sheet profile did not change significantly for 2003 because of this acquisitions. Moreover, there was also a 33% increased in Deposits & Other Assets from 2002 to 2003 which was related to the insurance subsidiary of Applebee's. In September of 2002, Applebee's has formed the Neighborhood Insurance Inc., an insurance subsidiary of Applebee's to provide qualified franchisees with workers' compensation and general liability insurance. The new subsidiary required a restricted asset to covered potential claims that was determined based upon third-party actuarial estimates which has been determined to be $10.76 millions and has accounted for most of the 33% increase in Other Assets from 2002 to 2003. The common-size for Deposits & Other Assets has jumped from 4% in 2002 to 5% in 2003 for the common-size analysis.
All of the above occurrences in 2003 has added 14% in total assets from 2002 to 2003's balance sheet. There is a consistent increased in the inventory level since 2000. In the most recent year of 2004, common-size inventory level of total assets are 5% the highest in over 5 years. This is mostly due to openings of new company restaurants and acquisitions of existing franchisee restaurants resulting in gains in overall inventory level.
For the $13.8 millions 10 Applebee's restaurants acquisitions in Southern California on 13.8 million, $10.8 millions goodwill are recorded and $2.5 million for property and equipment are recorded in 2004. This has caused a 16% increased in net property & equipment and a 17% increased in intangibles from 2003 to 2004's balance sheet. The purchase was made by cash, so there is a significant decrease in the cash & equivalents for Applebee's in 2004 of a 39% decrease and common-size change from 3% in 2003 to only 1% of total assets in 2004. Red Flag has been raised since Applebee's clearly is using too much of its cash for expansions and acquisitions.
Lack of cash might create a liquidity problem for the company in the future. In 2004, there were 17.38 millions added for restricted assets related to the insurance subsidiary which has caused the Deposits and Other Assets to jump 36% and the common-size total assets to change from 2003's 5% to 2004's 6%. Besides the amortization of intangibles from acquisitions in 2004, there are also the lease acquisition costs for six former Ground Round restaurants for about $4.9 million in cash in 2004. This will be amortized over 8 to 20 years and is accounted in the intangibles accounts and caused part of the gains of the 17% in the intangibles for 2004. For the Shareholders' Equity analysis, it is notable that the retained earnings has been increasing since 2000. It has a total increase of 112% from 2000 to 2004.
The common size for retained earnings has improved from 62% in 2000 to 83% in 2004 driven by sales growth from Applebee's new restaurant openings and acquisitions. The new initiatives, "Carside To Go" started in 2002 has also helped increase sales and earnings. Because of new equipments needed to accommodate the "Carside To Go" initiatives, company thus required to increase investments in new equipments. The common-size of net property & Equipment jumped from 66% in 2001 to 68% in 2002.
There is a consistent trend of Applebee's in repurchasing it's common stock as shown by the increased of Treasury Stock Account. A big jumped in repurchasing was noted in 2004. A year to year comparison has shown Applebee's increased is repurchasing activities by 30% from 2003 to 2004. This is evident from the management intention to distribute it's earnings to the shareholders in order to maximize shareholders' wealth and also to prevent dilution of shares when distributed options and compensations are exercised.
However, considering the financial situation of Applebee's is running low in cash reserve, a red flag is raised because it will be in the best interest for the company to scale back it's repurchasing program to conserve cash to pay for it's obligations such as deferred taxes. There is an increasing trend that Applebee's are delaying the accounts payable evident from the consistent increase in the Account Payable amounts. It has been steadily increasing since 2001 to 2004 and may be a potential red flag that Applebee's are delaying the payments in order to conserve and inflate more cash. In 2004 there was also a deferred income tax of $29 million that Applebee's has not paid. From the cash & equivalents balance, Applebee's does not have enough money to pay the income taxes without tapping into it's available credit line, and there is question about how long this tax can be deferred before penalties start accruing. This is a red flag and investors need to take note of if management of Applebee's need to slow their expansion plans to conserve more cash or need to increase their borrowings to improve liquidity.
One positive not is Applebee's has been paying down it's Long Term Debt, during the common-size analysis for balance sheet, the Long Term Debt in 2000 was 19% of total liabilities, in 2004 the portion has reduced to only 5%, this is a 66% decreased from 2000 to 2004. Although the overall total liabilities of Applebee's has increased by 35% over the last four years, but for the common-size analysis, the total liabilities has dropped from 40% of 2000 to 34% in 2004. This means the common-size total shareholder's equity has improved from 60% to 66% from 2000 to 2004, which is a achievement that deserves to be applauded. The The amortization method Applebee choose has been in conformance with the GAP standards. There are no evidence of overstating in those categories. There is an revenue improvement of 13% increase from 2003 to 2004 are driven by the sales increase for existing restaurants and the expansion plans of opening new restaurants and acquisitions.
The 13% increases in sales can be break down to company new restaurants openings and acquisitions of 8% growth and 3% internal organic growth by existing restaurants. The organic growth of 3% are contributed by increase guest traffics, menu price increase, franchise royalties and fees increased of 11% (more opening of new franchise restaurants), and the successful implementation of "Carside To Go" take out order initiatives in driving the organic growth. The revenue and earnings growth of 2003 was attributed to the beginning of the "Carside To Go" initiative and has caused a sales growth of 20% and net earnings growth of 13%. The net income margin improves to 19% for 2004 due to maturity of the "Carside To Go" takeout promotion campaign. The acquisitions of Southern California, Illinois, Indiana, Kentucky, and Missouri have contributed approximately 3% increase of restaurants's ales, which is offset by 1% sales decline in or sale of eight restaurant in the Atlanta, Georgia are in July 2003. Increase in "Other Franchise Income" of 4% also has helped the overall improvement.
Other Franchise Income are consists of the Insurance services, and technology products sold through the mother company Applebee's. The 4% increase constituted to $468,000 dollars from 2003 to 2004. Because of the overall sales and earnings growth enjoyed by Applebee's, all the relative expenses tied to operation expenses has also increased proportionally. Interest expense has fall consistently due to Applebee's consistently paying off the long term debt. Interest expense has decreased 82.8% from 2000 to 2004. All the above are contributing factors in Applebee's achieving higher earnings, a 75% increase in net earnings from 2000 to 2004.
Average shares has fall due to consistent share repurchasing programs by Applebee's. Overall, the common-size analysis of the income statement are relatively consistent over the five years of study. Cost of goods has stayed consistent between 74%-75%, the Depreciation and amortization is between 9%-11%, income from Continue operations and Net Income are also both between 9%-10% in common-size analysis for income Statement. No unusual fluctuations has been discovered. As of December 26, 2004, our liquid assets totaled $10,924,000. These assets consisted of cash and cash equivalents in the amount of $10,642,000 and short-term investments in the amount of $282,000.
The working capital deficit increased slightly from $50,359,000 as of December 28, 2003 to $51,041,000 as of December 26, 2004. This increase was due primarily to increases in the loss reserve and unearned premiums related to the captive insurance subsidiary and accounts payable and was partially offset by increases in inventories and receivables.