For the past few weeks we have been talking about The Boyd Group (“Boyd”), one of the largest collision and glass repair business in the world. Headquartered in Winnipeg, Canada, Boyd operates under three main trademarks; Boyd Auto Body and Glass in Canada, Gerber Collision and Glass in the U.S. and Gerber National Glass Services, a network of over 3,000 independently owned glass repair and replacement businesses across the U.S. Boyd is the largest pure-play collision repair business in the world by number of locations, and one of the largest in terms of sales.
This week we are going to look at Boyd’s fiscal year 2014 Balance Sheet, or more formally the Consolidated Statement of Financial Position. The balance sheet, unfortunately, is one of the more overlooked financial statements in the industry. For many, it is a statement relegated to year-end tax planning and rarely, if ever, analyzed throughout the year. But understanding and managing a balance sheet is one of the core tenets of corporate finance.
Regardless if your goal is to grow, sell, or stand pat, balance sheet management is critical to your business. For the company looking to sell, a well-managed and efficient balance sheet will demonstrate the strength and success of your business in a financial way, increasing the value you bring to a potential buyer and thus increasing the value of your business. If you are looking to grow, your bank and your investors will demand, often contractually, that you manage you balance sheet to very specific metrics. Even if you plan to stand pat, your balance sheet provides key insight into the health and operations of your business in a way that the cash flow statement and an income statement never can.
Over the next two weeks we are going to look at Boyd’s balance sheet and compare and contrast where Boyd’s balance sheet is similar and different to smaller MSOs and independent companies in the industry. More importantly, however, we will use the balance sheet to calculate some operating and financial metrics used by Wall Street analysts to measure the health of a company. We will also compare those to similar industry KPI’s that you may be more familiar with and perhaps give you a few new metrics in which to evaluate your company. After that we will discuss perhaps my favorite section – recent acquisitions. While understanding the balance sheet can be a bit tedious and dry at times, it allows us to get to the fun stuff we will discuss over the next few weeks.
The Balance Sheet (Consolidated Statement of Financial Position, pg 49)
The balance sheet summarizes the assets, liabilities and shareholder equity of a business at a specific point in time. Whereas the income statement and cash flow statement represent results over a period, the balance sheet is a snapshot as of a specific date. Assets are what a company owns, liabilities are what a company owes, and stockholder equity represents what is left over, i.e. the theoretical liquidation value of a company if management were to sell off all assets and pay off all liabilities. This is represented by the most basic balance sheet formula, Assets – Liabilities = Stockholders Equity. In Boyd’s case, as of December 31, 2014, total assets were $488 million, total liabilities were $352 million and total equity was $136 million (all amounts are in Canadian dollars unless otherwise specified).
The balance sheet is important because it links together the income statement with the cash flow statement through the use of accrual accounts. Accrual accounts on a balance sheet represent liabilities and non-cash based assets. As we have seen over the past few weeks cash inflows and outflows do not exactly match income and expenses and accrual accounts account for those differences. Take two common balance sheet accounts, accounts receivable and accounts payable. Accounts receivables represents the difference between the sales recorded and the cash received. Accounts payable similarly represents the difference between costs recorded and cash paid to vendors. The amounts listed on the balance sheet bridge the gap between the income statement and the cash flow statement.
A central underlying unchangeable principal is that Assets = Liabilities + Stockholders Equity. This always holds true. For example, if a company decides to take on additional liabilities in the form of debt stockholder equity will drop unless the company acquires additional assets. Another example of how this works is when an insurance check is cashed prior to completion of repairs. The cashed check becomes both an asset and a liability at the same time. The check is converted into cash (an asset) and simultaneously a liability is created in the form of unearned income. This is a central tenet of understanding the balance sheet and how assets, liabilities and equity are interrelated.
Assets can be segmented into short term, or current assets, long term assets, and intangible assets. Short term or current assets are items that can be converted into cash on a relatively quick basis. In addition to cash and savings, current assets include accounts receivable, as well as inventory/work in process and pre-paid expenses. As of December 31, 2014, Boyd recorded $139 million in current assets.
Long term assets are items that are generally more difficult to quickly convert into cash. These include investments in property, equipment, facilities, and even interests in other businesses in some cases. On the balance sheet these assets are recorded at the price they were purchased less depreciation. Intangible assets and goodwill are also included in long term assets. Intangible assets are things like trademarks or brand names, customer relationships, and non-compete agreements. Goodwill is a specific type of intangible asset that arises as a result of an acquisition of another company at a premium to the book value of assets. Most companies have customer relationships or management teams in place that are valuable, but whose value may not be fully reflected on the balance sheet. As a result most businesses are acquired at a premium to book value, resulting in the creation of goodwill. We will talk more about goodwill and acquisitions next week.
As of December 31, 2014, Boyd recorded $349 million in long term assets predominately consisting of $89 million in property, plant and equipment; $112 million in intangible assets and $143 million in goodwill. Plant, property and equipment consists mainly of $41.6 million in shop equipment and $30.6 million in leasehold improvements. As is common with the large consolidators, Boyd does not own the real estate where it operates. There are many more details regarding plant, property and equipment on page 66 and intangible assets on page 70. Rather than risk putting you to sleep, I’ll leave it to your discretion to review these numbers!
Similar to assets, liabilities are also divided into short term (or current) as well as long term. Short term liabilities are liabilities that are payable within the next 12 months and include accounts payable, any short term borrowing or leases, the current portion due of long term debt and the current portion of long term leases. Typically you will find deposits received from insurers and customers recorded as an unearned income liability. Boyd has $108 million in current liabilities, $97 million consisting of accounts payable and other accrued liabilities, and $11 million consisting of the current portion of long term debt and leases.
Long term liabilities generally include long term debt, or debt that is due longer than a year out as well as financial lease obligations. Financial lease obligations are related to equipment and upgrades as opposed to lease agreements. While the company may enter into long term facility lease agreements, these are only reflected in operating expenses and not reflected on the balance sheet. You can read more about Boyd’s operating leases on page 83. At the end of 2014 Boyd had $136 million outstanding in long term debt, convertible debt, and financial leases.
Separate from long term debt, Boyd also has a host of liabilities associated with the legal and capital structure of the company. Because the company has issued certain types of debt and equity that are exchangeable or convertible, as well as stock options to management, the company is required to recognize the future liability associated with these financial instruments. As a result the company recorded $97 million in liabilities associated with these instruments, in addition to an $11 million deferred income tax liability.
After separating assets from liabilities at book value, $136 million in equity remains. Over the course of its existence, Boyd has raised $196 million in equity capital, purchased $4 million in outstanding shares, accumulated $22 million in other comprehensive earnings primarily from the impact of exchange rates and accumulated a total accounting net loss of $86 million.
The balance sheet is packed full of useful information. Today we just barely scratched the surface. Next week we will look at a number of ratios and KPI’s that tie all three financial statements together to give us a better understand both the operations and the financial health of Boyd and better manage your business. We will understand how long the company takes to get paid, how long it takes to pay vendors, and how many days it takes to convert labor into cash. We will approximate Boyd’s cycle time and look deeper into the business and its financial and operational obligations. We will also look at some different metrics to measure how effective Boyd is investing capital on behalf of shareholders. These are good numbers for every owner to understand – the more effective a business is at generating a return on investment the more valuable that business becomes.
I’m eager to hear from you. How do you manage balance sheet? Have you considered taking on debt to acquire other collision businesses like Boyd has? Have you perhaps even considered taking on an equity partner or merging with another operator in your marketplace? If so, shoot me an email via my contact page to discuss further as we explore Boyd together. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.
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