DISH Network Corporation - Research Paper Example

DISH Network Corporation Introduction DISH Network Corporation (DISH Network) is one of the leading companies in the business of providing satellite delivered digital television which was established almost 29 years ago. The company successfully launched its first Direct Satellite Broadcasting (DSB) in 1995 and in the same year the company went on getting itself publicly listed on NYSE (DISH). The company has achieved major milestones in the satellite TV industry with newer solutions and technologies and competitive price cut downs for its consumers which have allowed the company to grow at a rapid pace. The company has its headquarters in Englewood, Colorado and being the third largest broadcasting company in the US it is serving to more than 13.9 million customers throughout the US. The company’s President and CEO is Mr. Charles W. Ergen and the company employs more than 26,000 employees throughout its distribution network in the US. Before FY 2008 the company has two separate reporting segments namely DISH Network and EchoStar Technologies Corporation. However, after restructuring of company’s assets a separate publicly traded company EchoStar Corporation (EchoStar) was formed where as the company became a single reportable segment that is DISH Network with its business as provider of a DBS (direct broadcast satellite) subscription television service in the US. The company provides complete solution through receiver systems and programming to its customers which offer a large number of video and radio channels. The product / service supply chain comprises of direct sales channels, independent retailers such as small satellite retailers, direct marketing groups, local and regional consumer electronics stores and nationwide retailers and even telecommunications companies (DataMonitor). The company’s major competitors include AT&T Inc., Comcast Corporation, Cox Communication, Inc., Time Warner, Inc. and TiVO Inc. etc. Company Financial Overview The company’s total current assets were $6,460,047 and total liabilities $8,409,153 as of December 2008. In the same period the company had a negative shareholders’ equity of $1,949,106. During the year ending December 2008 (FY 2008) the company has recorded sales revenues of $11,617.2 million. The company was able to post an operating profit of $2,056.2 million in FY2008, while its net profit was $902.9 million in FY2008. The company’s operating activities generated a cash inflow of $2,188 million whereas cash out flows from investing activities and financial activities were $1,597 million and $1,411 million respectively. The company’s share is currently trading at a price of $21.26 per share (as of 15 Dec 2009) and its P/E ratio is 14.26. The company did not pay any dividend in the year ending December 2008 (DISH). Basis for Financial Ratio Analysis For the purpose of the financial ratio analysis of DISH Network Corporation the SEC Filling of the company that is Form 10-K for the year 2008 is used. The report also provides comparative figures for the year 2007 which are also used in the calculation performed in this report. In addition to the annual report of DISH Network Corporation the Annual Report 2008 of its major competitor AT&T Corporation is also used for calculating profitability ratios for the year 2008 which are then compared to the company under review. Initial Review The company initial review could be based on two reports namely auditor’s report and the management report which were published in the Form 10-K Report of the company. Independent Auditors Report The company’s financial statements for the year ending December 2008 have been audited by KPMG, L.L.P. The auditor report that provides auditors opinion on the company’s accounting and reporting system along with assessment of the company’s internal controls has been included in the SEC Form 10-K Report submitted by the company. The major highlights of this report suggest the audit firm has carried out the audit of the company’s financial records and reported figures on the basis of standards set out by Public Company Accounting Oversight Board (PCAOB). The auditor report suggests that the company’s financial statements are prepared on a consolidated basis for both 2008 and 2007. All financial statements and their elements including consolidated income statement; consolidate balance sheet; changes in stockholders’ equity (deficit) and cash flow statement are prepared in conformity to the US Generally Accepted Accounting Practices and there is a reasonable assurance that these financial statements are free of material misstatements, errors and omissions (Dish Network). Furthermore, the audit firm carried out investigation and assessment of the company’s internal controls and it is of the opinion that the company’s internal controls are in line with the standards set out in Internal Controls – Integrated Framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This is an important appraisal as the US companies are required to provide assessment of their internal controls and the audit firms are required to evaluate their sufficiency and efficiency. The auditor’s report highlights the purpose of the internal controls over financial reporting by identifying different internal controls that (1) are responsible for ensuring the maintenance of detailed records that accurately and fairly reflect the company’s transactions and disposals of the assets; (2) are aimed at providing reasonable assurance that transactions are recorded and presented in the financial statements in conformity with generally accepted accounting principles and all receipts and payments are made by the company upon receiving relevant authorization of management and directors of the company and 3) are targeted at providing reasonable assurance that incidences of unauthorized acquisition, use and disposal of the company’s assets that could have material impact on the financial results would be detected and prevented (Dish Network). Management Report The management report identifies that the company’s financial statements are prepared in accordance to the generally accepting accounting standards and all estimations, judgments and assumptions made by the company to prepare these financial statements are reasonable and in line with the historical experiences of the company. The management discussion clearly sets out the accounting policies and practices which the company has adopted for preparation of its financial statements and also provided a full account of the new changes in the accounting standards which affected the company’s accounting and reporting. The management report highlights major achievements of the company and relevant financial figures which are summarized under different sub headings and related to the notes to consolidated financial statements. Since the publishing of the annual report the company has been able to achieve a milestone by reaching a total number of 14 million customers (DISH). The report also discusses the poor economic conditions prevailing in the US economy which is affecting company’s business as more and more customers are defaulting on their payments and the company has to undertake further expenses for recoveries which in most cases are impossible. The company has been a lower cost satellite television service provider and has undergone various changes and has regularly carried out aggressive advertisement to ensure that consumers make the company services their first choice. The management discussion on cash flows of the company highlighted the reasons for negative cash flows from both investing and financing activities. The net decrease in cash flow from investing activities has been primarily due to “net decrease in, purchases of marketable investment securities, a decrease in cash used for purchases of property and equipment, a decrease in cash used for the purchases of strategic investments, including Sling Media, and an increase in proceeds from the sale of investments” (Dish Network). While on the other net outflow from financing activities in the year 2008 has been due to “an increase in cash outflows for debt redemptions, distributions related to the Spinoff and stock repurchases” (Dish Network). The management report identifies numerous risks to which the business of the company is subjected to. These risks include risk of fraud by customers which involved misuse of credit or debit cards and failing on payments. In addition to these the business also faces market risks and interest rate risks. The company’s long term senior notes have received a rating of Ba3 and BB- by Moody’s Investor Service and Standard and Poor’s Rating Service. This rating suggests that the vulnerability in the value of long term notes because of the credit risk however it is less likely that the company will have problems paying of the interest element and principal amount of the debt instrument. The financial statements of the company are authorized and signed by the company’s top management and members of board of directors. The company has been involved in two litigation cases which have resulted in recording of litigation expenses as $34 million and $94 million. These cases against the company and were registered by TiVO due to software infringement by the company prior to the implementation of alternative technology which resulted in penalties charged by the Texas Court. In addition to these two cases the company is involved in 16 other legal proceedings which could have negative impact on the company’s standing if they are succeeded against the company in respective courts. Liquidity Analysis The liquidity analysis provides a view of current financial position of the company. This could be carried by evaluating the changes in different element of the balance sheet and income statement in particular the current assets, current liabilities, revenues and cost of sales of the company. For the purpose of this analysis the liquidity analysis of DISH Network constitutes of calculation of certain useful financial ratios including current ratio, quick ratio, average sales per day, average collection period and cost of goods sold per day which are provided in the following table and summarized below. Ratios 2008 2007 Liquidity Ratios Current ratio 0.70 1.00 Quick ratio 0.56 0.93 Average sales per day $31,827.91 $30,384.59 Receivables Turnover Ratio 14.17 15.86 Average Collection Period (Average Age of Receivables) 25.76 23.01 Cost of goods sold per day $21,963.68 $20,628.50 Table 1: Liquidity Ratios of DISH Network Corporation (Figures for calculating ratios are taken from the SEC Form 10-K Filling of DISH Network Corporation) Analysis The current ratio of the company has decline from 1.00 in 2007 to only 0.70 in 2008. This suggests that the company may run into problems if its current obligations fall due and the company will have difficulty paying off them from its current assets. The major reasons for decline could be suggested to include decline in the cash position of the company and settlement of marketable securities. The company’s accounts receivables have increased over the year by almost $100 million whereas its inventories have increased by $120 million. This could suggest that there is a slowdown in the demand for company’s services and the company is facing difficulty in getting rid of inventories quicker. The quick ratio which excludes inventories from the current assets suggests further problems for the company as its value is only 0.53 in 2008 compared to 0.93 in 2007. This ratio is more appropriate as it ignores inventories which are considered as less liquid compared to other current assets of the company. The company is making an average sale of $31,827.91 in 2008 showing an increase of 4.75% over 2007. The receivables turnover is high which implies that the company is able to convert sales into cash 14 times. This ratio has deteriorated as compared to the last year however upon close examination it could be observed that the company’s accounts receivables have increased by 14% despite of the increase in the sales value. The average collection period of the company has worsened to almost 26 days from the last year when it was 23 days. The company cost of sales per day is $21,963.68 in 2008 and $20,628.50 in 2007 indicating a rise of 6.4%. Profitability Analysis The profitability analysis of a company allows assessing the ability of the company to generate earnings to fund its operations and other investment decisions. This analysis is based on the evaluating company’s revenues and net income and determining relationship to the elements of other financial statements. Ratios included for analysis include gross profit rate, profit margin ratio, asset turnover ratio, ROA, ROE, Cash return on assets, quality of income and EPS. Furthermore, the company’s results are compared with those of its major competitor AT&T, Inc. Results for both companies are presented in the following tables along with descriptive analysis. Ratios 2008 2007 Profitability Ratios Gross Profit Rate 17.70% 14.19% Profit Margin Ratio 6.78% 6.79% Asset Turnover Ratio 5.65 7.05 Return-on-Assets (ROA) 38.30% 47.85% Return-on-Equity (ROE) -40.40% 117.64% Cash return on assets 33.88% 25.94% Quality of Income 2.78 3.48 Earnings per Share $2.01 $1.69 Table 2: Profitability Ratios of DISH Network Corporation (Figures for calculating ratios are taken from the SEC Form 10-K Filling of DISH Network Corporation) AT&T, Inc. Financial Ratio Analysis Profitability Ratios   2008 2007       Gross Profit Rate 18.59% 17.16% Profit Margin Ratio 10.37% 10.05% Asset Turnover Ratio 0.47 0.43 Return-on-Assets (ROA) 4.85% 4.34% Return-on-Equity (ROE) 13.35% 10.36% Cash return on assets 12.69% 12.42% Quality of Income 2.62 2.87 Earnings per Share $2.17 $1.95 Table 3: Profitability Ratios of AT&T, Inc. (Figures for calculating ratios are taken from the Annual Report of AT&T, Inc.) Analysis The company’s gross profit margin improved from 14.19% in 2007 to 17.70% in 2008 however it remained lower than that of AT&T which is 18.59% in 2008 and 17.16% in 2007. This suggests that AT&T is either operating at higher profit margins or it is more efficiently managing its cost of sales and other administrative expenses. The profit margin of DISH is very low as it considers itself as low cost service provider. AT&T has a profit margin of 10.37% as compared to 6.78% of DISH. The company’s ROA has declined significantly from 47.85% in 2007 to 38.30% in 2008 while that of AT&T remains poor only at 4.85% in 2008 and 4.34% in 2007. The ROE of DISH is negative 40.40% in 2008 as compared to 117.64% in 2007. On the other hand ROE of AT&T is 13.35% in 2008 and 10.36% in 2007. Cash return on assets of DISH is 33.88% in 2008 and 25.94% as compared to 12.69% in 2008 and 12.42% in 2007 of AT&T. Quality of income declined to 2.78 in 2008 from 3.48 in 2007. In case of AT&T it also remained weak at 2.62 and 2.87 in 2008 and 2007 respectively. The EPS of DISH is $2.01 and $1.69 in 2008 and 2007 respectively while that of AT&T is $2.17 in 2008 and $1.95 in 2007. Solvency (capital structure) Analysis The solvency analysis of a company ascertains the capital structure of the company. It assesses the overall company’s both short and long term obligations as proportion of the company’s equity and assets. Two accounting ratios have been calculated for this purpose including financial leverage and debt to total assets ratio which are provided in the following table and analysis thereof. Ratios 2008 2007 Solvency Ratios Financial leverage (4.31) 14.76 Debt to Total Assets 1.30 0.94 Table 4: Solvency Ratios of DISH Network Corporation (Figures for calculating ratios are taken from the SEC Form 10-K Filling of DISH Network Corporation) Analysis The company has a negative equity in the year ending December 2008. The main reason for this accumulated deficits amounting $2,492,804 in the company records and payoff of treasury stocks $1,443,786. The resulted negative equity in the year 2008 was $1,949 million showing a decline of 404% from $639 million in 2007. As an outcome of negative equity the financial leverage of the company is negative 4.31 in 2008 as compared to positive 14.76 in 2007. The debt to total assets ratio suggests that the company’s assets value has decline drastically over the period of one year where the value of the ratio was 0.94 in 2007 as compared to 1.30 in 2008. This could be traced to the balance sheet which suggests a 36% decline in the value of total assets of the company whereas the current liabilities of the company declined by 29.5% and long term obligations increased by 4% from 2007 to 2008. Conclusion The above financial ratio analysis could be viewed from the investor’s perspective who has a saving of $10,000 to invest in the company’s stock. In this regard following recommendation could be made to support the investment decision. It is through this report recommended to the investor not to invest $10,000 in the company’s stock. The reasons for this suggestion are that the current economic scenario is not favoring investment in such company which is experiencing weakening liquidity position and which has a negative equity. It is further recommended that investor should be watchful of the company’s financial position in the coming months as the company’s stock has a P/E that is quite high i.e. 14.26 and EPS of $2.01 and there is an expectation that the stock will pick up its value in the near future. In such situation the investor is advised to invest in the company’s stock in the coming weeks or months maintaining a safe approach. Works Cited AT&T. AT&T Inc. 2008 Annual Report. Financial Report. Dallas, Texas: AT&T Corporation, 2008. DataMonitor. DISH Network Corporation. New York: DataMonitor, 2009. DISH. Investor Relations - Overview. 2009. 15 December 2009 . DISH.. Investor Relations: Key Ratios. 15 December 2009. 15 December 2009 . Dish Network. Sec Form 10-K Annual Filling: Dish Network Corporation. Englewood, Colorado: Dish Network Corporation, 2008. Read More