Cash Flow Statements - Assignment Example

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Cash Flow Cash Flow ments Home Products Opening Balance of Cash/Cash Equivalents 545 421 Cash Flow from Operations Net Cash provided in operating activities Total Net Income 3,883 3,338 Depreciation and Amortization 1682 1718 Stock-based Compensation Expense 215 214 Decrease(Increase) in Receivables (170) (102) Decrease (Increase) in Inventories 256 (355) Decrease (Increase) in Other Current Assets 159 12 Increase (Decrease) in Accounts Payable & Accrued Expenses 422 (133) Increase (Decrease) in Deferred Revenue (29) 10 Increase (Decrease) in Income Taxes Payable 14 (85) Increase (Decrease) in Deferred Income Taxes 170 104 Increase (Decrease) in Other Long Term Liabilities (2) (61) Increase (Decrease) in others 51 (75) Net Cash provided by Operating Activities 6,651 4,585 Net Cash provided (used) by Investing Activities (1,129) (1,012) Net Cash provided (used)by Financing Activities (4,048) (4,451) Increase (Decrease) in Cash/Cash Equivalents 1,474 (878) Effect of exchange rate changes (32) 2 Closing Balance of Cash/Cash Equivalents 1,987 545 Lowe’s 2012 2011 Opening Balance of Cash/Cash Equivalents 652 632 Cash Flow from Operations Total Net Income 1,839 2,010 Depreciation and Amortization 1,579 1,684 Deferred Income Taxes 56 (133) Loss on Property and other assets 456 103 Share based payment expense 107 115 Decrease (Increase) in Inventories (33) (64) Decrease (Increase) in Other Current Assets 137 (142) Increase (Decrease) in Accounts Payable (5) 60 Increase (Decrease) in other current liabilities 215 219 Net cash provided by operating activities 4,351 3,852 Net cash provided (used) by Investing Activities (1,437) (2,184) Net cash provided (used) by Financing Activities (2,549) (1,651) Effect of exchange rate variation (1) 3 Increase (Decrease) in Cash/Cash Equivalents 364 20 Closing Balance of Cash/Cash Equivalents 1,016 652 Change in Cash Position The Home Depot There is an increase in the amount of cash and cash equivalents in 2011 of $1,474M compared to 2010. The increase has come entirely from operating activities (6,651M) while investing and financing activities have contributed to decreases in cash and cash equivalents. Net earnings plus added back depreciation have contributed to the bulk of cash flow from operating activities, amounting to 3,883+1,682= $5,565 million. Increases/decreases in inventory, receivables, accounts payable, and other miscellaneous items have contributed the remaining $1,068M. Thus the increase has come mostly from the profits earned during the year. Out of the increase realized through operating activities, $1,129M have been used in investing activities, the major portion having been invested in capital expenditures. A small part has been accounted by sale of assets and property, and from sale of business. Financing activities have accounted for $4,048M of the outflow from the total of $6,651M contributed by operating activities. The bulk of this amount has gone in repurchase of stocks and in payment of dividends. Lowe’s The increase in cash and cash equivalents during the year 2011 was $364 million. The contribution from operating activities was $4,351M, of which the major portion was from net operating income ($1,839M) and depreciation ($1,579M). The net increase in cash and cash equivalents on account of these two items was $3,418M. The remaining amount of $931M has come from changes in current assets/liabilities and miscellaneous items. Of the cash generated by operating activities, $1,437M has been used in investing activities and $2,549M in financing activities. The major portion of the amount used by investment activities has gone to acquisition of property, which has partly been funded by net sale of investments, the remaining coming from cash generated in operating activities. The bulk of the cash used in financing activities has gone towards repurchase of shares and payment of dividends ($3,584M). This has been partly funded by issuance of long-term debt, the balance coming from cash generated in operating activities. Forecast of Short-Term Cash Position Both the selected companies belong to the same industry classification dealing with home improvement products at the retail level. The reported revenue for this industry was $300 billion in 2011. Roughly half of this, or $150 billion, is relevant to the companies being analyzed. The market share of Lowe’s with revenue of $50 billion was about 33%, while that of Home Depot with revenue of $70 billion was roughly 46%. The main investment expenditure in both cases was from technology and systems upgrades, and expansion and opening of new stores. With this background, the likely cash position of the two companies is discussed in the following sections. Home Depot Home Depot has invested heavily in logistics improvement, inventory management systems, and additional distribution center space. Further investments are likely in environmental friendly technologies and interconnected retail. In 2011, Home Depot closed five stores and opened eleven new stores, effectively adding six new stores. This trend appears likely to continue into the next few years. Consequently, investment on this count is likely to be restricted to just a few new stores. Cash flows from operating activities are likely to continue to be strong, given the huge market share of the company and past track records. Investment activities are likely to continue along the same lines as past years, and since not many new stores are planned, investments in environment and logistics are likely to continue. Financing activities have absorbed about $4 billion, mainly on the account of repurchase of stocks and payment of dividends. While the payment of dividends is likely to continue at the existing level, repurchase of stocks could slow down, depending on the decision made by the company in this regard. In view of these, the cash position is likely to be even better in the next 2-3 years, with cash accumulation of around $2-3 billion as against the figure of $1 billion for 2011. Home Depot might use this additional accumulation to reduce debt or repurchase more stocks. Opportunities for investing these funds seem limited unless Home Depot decides to aggressively enter foreign markets in developed an emerging economies. Lowe’s Lowe’s is committed to further expansion and is planning to open nearly 100 stores in 2012. This trend is likely to continue during the next 2-3 years. More investments are also planned in Information Technology, infrastructure and stores systems. Lowe’s has also obtained the sanction from its Board of Directors to repurchase $5billion worth of shares. About $3.5 billion cash addition has come from net income generated and depreciation. Another $900 million has come from changes in assets and liabilities. The latter is not likely to continue and may even be reversed. Hence, it is not realistic to consider it while making projections for future years. Around $1.5 billion were invested in 2011. Given the expansion plans, a similar amount is likely to be invested in the next 2-3 years also. The cash generated from operations is likely to continue at present levels, given the healthy market share and the past performance of the company. The expansion activities might yield some additional income, but given the general economic condition, the revenue is unlikely to go up substantially from expansions. After investing nearly $1.5 billion, Lowe’s is likely to have a surplus of around $2 billion. Out of this, some portion will go towards payment of dividends. The balance can be utilized for the planned repurchase of shares. Consequently, accumulation of additional cash is likely to be negligible. The scenario for the next 2-3 years will, consequently, be one of little cash accumulation. Most of the cash generated by operating activities are likely to be absorbed by investments in technology, systems and new stores, and repurchase of shares. Read More