butler - financial analysis at msu...

Michigan State University, 2012

Professor Kirt C. Butler Department of FinanceBroad College of BusinessMichigan State University

November 24, 2014

Using financial statements to measure performance at (1) General Motors and (2) Michigan State University

• Balance sheets, income statements, cash flow

• Analyzing performance, especially with financial ratios

Financial analysis

Michigan State University, 2013- 2 -

The goal of financial analysis is to maximize financial performance by providing objective measures to …

• evaluate the financial health of an organization based upon financial statement analysis

• assess an organization’s financial performance and changes in its financial position over time

• compare an organization’s financial position and performance relative to its peer institutions

Financial analysis


Field goals 3‐pointers Free throws Floorplay ptsfg fga fg% 3p 3pa 3p% ft fta ft% tot a to a/to st blk avg

G. Harris 195 455 0.43 81 230 0.35 115 142 0.81 140 94 60 1.6 63 15 16.7A. Payne 178 354 0.50 44 104 0.42 109 138 0.79 225 41 63 0.7 15 28 16.4K. Appling 132 292 0.45 34 94 0.36 93 141 0.66 106 156 74 2.1 41 14 11.2K. Kaminsky 53 104 0.51 38 77 0.49 8 13 0.62 46 11 7 1.6 9 8 4.9A. Gauna 21 38 0.55 0 1 0.00 4 13 0.31 37 6 7 0.9 2 7 1.6R. Byrd 9 27 0.33 6 21 0.29 2 6 0.33 24 3 6 0.5 3 5 1.1D. Chapman 2 7 0.29 1 3 0.33 0 0 0.00 2 1 1 1 0 0 0.4B. Dawsen 136 222 0.61 0 1 0.00 42 64 0.66 233 46 36 1.3 35 25 11.2D. Valentine 108 265 0.41 43 114 0.38 44 65 0.68 228 144 69 2.1 37 12 8.0T. Trice 87 207 0.42 53 122 0.43 36 44 0.82 58 84 37 2.3 32 6 7.3M. Costello 52 87 0.60 0 0 0.00 33 50 0.66 113 27 22 1.2 9 43 4.0A. Ellis III 24 50 0.48 6 13 0.46 13 22 0.59 23 14 22 0.6 13 3 1.9G. Schilling 21 38 0.55 0 0 0.00 11 21 0.52 59 9 20 0.5 0 8 1.4C. Wollenman 1 2 0.50 0 0 0.00 3 5 0.60 2 0 0 ‐ 0 0 0.4K. Wetzel 4 9 0.44 1 3 0.33 0 0 ‐ 4 1 0 ‐ 0 0 0.8T. Bohnhoff 1 2 0.50 0 0 0.00 2 4 0.50 4 0 0 ‐ 0 0 0.5

2013-2014 MSU Men’s Basketball


Efficiency (per minute)

Field goals 3‐pointers Free throw Rebounding Floorplayfg fga 3p 3pa ft fta or dr tot a to st blk pf pts

G. Harris 0.17 0.40 0.07 0.20 0.10 0.13 0.03 0.09 0.12 0.08 0.05 0.06 0.01 0.06 0.52A. Payne 0.20 0.41 0.05 0.12 0.13 0.16 0.06 0.20 0.26 0.05 0.07 0.02 0.03 0.09 0.59K. Appling 0.12 0.26 0.03 0.09 0.08 0.13 0.01 0.08 0.10 0.14 0.07 0.04 0.01 0.09 0.35K. Kaminsky 0.14 0.28 0.10 0.20 0.02 0.03 0.05 0.07 0.12 0.03 0.02 0.02 0.02 0.11 0.40A. Gauna 0.10 0.18 0.00 0.00 0.02 0.06 0.06 0.12 0.18 0.03 0.03 0.01 0.03 0.17 0.22R. Byrd 0.05 0.15 0.03 0.12 0.01 0.03 0.03 0.10 0.14 0.02 0.03 0.02 0.03 0.15 0.15D. Chapman 0.10 0.33 0.05 0.14 0.00 0.00 0.05 0.05 0.10 0.05 0.05 0.00 0.00 0.10 0.24B. Dawsen 0.17 0.28 ‐ ‐ 0.05 0.08 0.10 0.19 0.29 0.06 0.05 0.04 0.03 0.05 0.40D. Valentine 0.10 0.24 0.04 0.10 0.04 0.06 0.04 0.16 0.20 0.13 0.06 0.03 0.01 0.09 0.27T. Trice 0.11 0.26 0.07 0.15 0.04 0.05 0.01 0.06 0.07 0.10 0.05 0.04 0.01 0.07 0.33M. Costello 0.10 0.17 ‐ ‐ 0.07 0.10 0.09 0.13 0.23 0.05 0.04 0.02 0.09 0.14 0.27A. Ellis III 0.08 0.18 0.02 0.05 0.05 0.08 0.03 0.05 0.08 0.05 0.08 0.05 0.01 0.15 0.24G. Schilling 0.09 0.16 ‐ ‐ 0.05 0.09 0.12 0.13 0.25 0.04 0.08 0.00 0.03 0.21 0.22C. Wollenman 0.04 0.08 ‐ ‐ 0.12 0.20 0.00 0.08 0.08 0.00 0.00 0.00 0.00 0.16 0.20K. Wetzel 0.19 0.43 0.05 0.14 0.00 0.00 0.14 0.05 0.19 0.05 0.00 0.00 0.00 0.14 0.43T. Bohnhoff 0.08 0.15 0.00 0.00 0.15 0.31 0.23 0.08 0.31 0.00 0.00 0.00 0.00 0.15 0.31

Unknowns: ‘Tum Tum’ Nairn | Javon Bess | Marvin Clark Jr. | Bryn Forbes | Kenny Goins


Financial statements

• Balance sheet - Measures an organization’s assets and the

sources of funds used to buy or build those assets

• Income statement - Measures profitability during a particular period of

time, such as the most recent fiscal year

• Sources and uses of funds and the Statement of cash flow

- Measures where funds come from and where they are used


Total assets = Liabilities & Net Worth

Current assets Current liabilitiesCash & equivalents Accounts payableReceivables (e.g., wages, taxes)Inventories Short-term debt

Long-term assets Long-term liabilities Tangible assets Long term debt(land, plant, equipment) Capitalized leases

Intangible assetsIntellectual property Net worth Brand name, franchise (Net assets or position)

The main balance sheet accounts


Warning!Book value does not necessarily equal market value

• Book values for current assets and liabilities typically are close to market values (with the exception of inventory)

• Book values for long-term financial liabilities also typically are close to their market values

• Book values for long-term assets typically are valued at historical cost (with an adjustment for depreciation) and seldom reflect their market values

The main balance sheet accounts


GM’s Corporate strategy• GM’s purpose begins with a few simple but incredibly

powerful words: We are here to earn customers for life. Our purpose shapes how we invest in our brands around the world to inspire passion and loyalty. It drives us to translate breakthrough technologies into vehicles and experiences that people love. It motivates the entire GM team to serve and improve the communities in which we live and work around the world. Over time, it’s how we will build GM into the world’s most valued automotive company.

GM Financial’s overall objective• GM Financial’s objective is to drive incremental GM vehicle

sales while achieving appropriate risk-adjusted returns.


Current Assets ($mil) Current Liabilities ($mil) Cash, receivables, other 55,282 Total current liabilities 53,992 Inventories 14,714 Non‐current Liabilities Total current assets 69,996 LT debt, deferred tax, etc 23,701Non‐current Assets Pensions, retirement benefits 34,729 Mkt sec, equity, other 27,308 Total non‐current liabilities 58,430 Property 24,196 Deferred income taxes 27,922 Total Equity 37,000 Total non‐current assets 79,426Total Assets 149,422 Total Liabilities & Equity 149,422

General Motors Consolidated Balance Sheets (2012)

Total equity = Assets – Liabilities = 149,422 – (53,992 + 58,430) = 37,000


2012 ASSETS ($mil) Auto‐ GM Elimi‐ Consol‐Current Assets motive Finance nations dated Cash & receivables 36,725 5,878 ‐68 42,535 Inventories 14,714 ‐ ‐ 14,714 Other current assets 12,638 119 ‐10 12,747 Total current assets 64,077 5,997 ‐78 69,996Non‐current Assets Restricted cash, receivables 380 7,257 ‐1 7,636 Property & equity in other affiliate 31,027 52 ‐ 31,079 Goodwill & intangible assets, net 7,504 1,278 ‐ 8,782 Other non‐current assets 30,756 1,784 ‐611 31,929 Total non‐current assets 69,667 10,371 ‐612 79,426Total Assets 133,744 16,368 ‐690 149,422

General Motors = GM Automotive + GM FinancialMSU is similarly comprised of many different units


Current Liabilities 2012 2011 Payables, ST debt, current portion of LT debt 30,684 30,351 Accrued liabilities 23,308 22,875 Total current liabilities 53,992 53,226Non‐current Liabilities Long‐term debt 10,532 8,033 Pensions & post‐retirement benefits 34,729 31,911 Other liabilities & deferred income taxes 13,169 12,442 Total non‐current liabilities 58,430 52,386Total Equity 37,000 38,991Total Liabilities and Equity 149,422 144,603

General Motors Consolidated Balance SheetsHealth care is an important post-retirement benefit at MSU


Revenues– Costs of goods sold– Selling, general and administrative expense– Depreciation (a non-cash charge)

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

EBIT (earnings before interest and taxes)– Interest expense

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Taxable income– Tax

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Net income– Dividends

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Added to retained earnings (net worth)

The main income statement items


General Motors Consolidated Income Statements

Consolidated Income Statements (in $mil) Years ended Dec 31Net sales and revenue 2012 2011 Total net sales & revenue 152,256 150,276Costs and expenses Cost of goods sold 141,881 131,229 Selling, general & admin expense 13,593 12105 Goodwill impairment 27,145 1,286 Total costs and expenses 182,619 144,620 Operating income (loss) ‐30,363 5,656

GM lost money on their operations in 2012 because of Goodwill Impairment (i.e., an accounting change reflecting the estimated value of tax shields).


General Motors Consolidated Income Statements

Operating income (loss) ‐30,363 5,656 Financial interest & expense 106 329 Income before taxes ‐30,257 5,985 Income tax expense (benefit) ‐34,831 ‐110 Equity income net of tax & investment gain 1,562 3,192Net income 6,136 9,287

The 2012 income tax benefit was due primarily to deferred tax asset valuation allowance reversals of $36.3 billion in the U.S. and Canada.This is not relevant to MSU.


Profits are not the same as Cash Flowso organizations also report…

• Sources of funds- A decrease in an asset account

(e.g., sell used equipment, buy printer ink on credit)- An increase in a liability account

(e.g., the Provost provides forward funding of the start-up costs for a new online M.S. program)

• Uses of funds- An increase in an asset account

(e.g., buy a new printer for the office)- A decrease in a liability account

(e.g., pay an employee their accrued wages)

Sources and uses of funds


Balance Sheets ($mil)Current Assets 2012 2011 Sources of funds Cash & cash equivalents 28,096 33,224 Decrease in Cash & equivalents 5,128 Accts receivable 14,439 13,215 Decrease in Other noncurrent assets 2,035 Inventories 14,714 14,324 Increase in Accounts payable 615 Other (oper leases, etc.) 12,747 4,160 Increase in Accrued current liabilities 433 Total current assets 69,996 64,923 Increase in Long term debt 2,499Non‐current Assets Increase in Pensions & benefits 2,818 Marketable securities 7,636 7,139 Increase in Other liabilities & deferred taxes 727 Equity in non‐consolidated affiliates 6,883 6,790 Total sources of funds 14,255 Property 24,196 23,005 Other non‐current assets 40,711 42,746 Total non‐current assets 79,426 79,680 Uses of fundsTotal Assets 149,422 144,603 Increase in Accounts receivable 1,224Current Liabilities Increase in Inventories 390 Accounts payable 25,166 24,551 Increase in Other current assets 8,587 ST debt & current portion of LT debt 5,518 5,800 Increase in Marketable securities 497 Accrued current liabilities 23,308 22,875 Increase in Equity in affiliates 93Non‐current Liabilities Increase in Property 1,191 Long‐term debt 10,532 8,033 Decrease in ST debt 282 Pensions & post‐retirement benefits 34,729 31,911 Decrease in Total equity 1,991 Other liabilities & deferred taxes 13,169 12,442 Total uses of funds 14,255Total Liabilities 112,422 105,612Total equity 37,000 38,991Total Liabilities and Equity 149,422 144,603

GM’s sources of cash


Balance Sheets ($mil)Current Assets 2012 2011 Sources of funds Cash & cash equivalents 28,096 33,224 Decrease in Cash & equivalents 5,128 Accts receivable 14,439 13,215 Decrease in Other noncurrent assets 2,035 Inventories 14,714 14,324 Increase in Accounts payable 615 Other (oper leases, etc.) 12,747 4,160 Increase in Accrued current liabilities 433 Total current assets 69,996 64,923 Increase in Long term debt 2,499Non‐current Assets Increase in Pensions & benefits 2,818 Marketable securities 7,636 7,139 Increase in Other liabilities & deferred taxes 727 Equity in non‐consolidated affiliates 6,883 6,790 Total sources of funds 14,255 Property 24,196 23,005 Other non‐current assets 40,711 42,746 Total non‐current assets 79,426 79,680 Uses of fundsTotal Assets 149,422 144,603 Increase in Accounts receivable 1,224Current Liabilities Increase in Inventories 390 Accounts payable 25,166 24,551 Increase in Other current assets 8,587 ST debt & current portion of LT debt 5,518 5,800 Increase in Marketable securities 497 Accrued current liabilities 23,308 22,875 Increase in Equity in affiliates 93Non‐current Liabilities Increase in Property 1,191 Long‐term debt 10,532 8,033 Decrease in ST debt 282 Pensions & post‐retirement benefits 34,729 31,911 Decrease in Total equity 1,991 Other liabilities & deferred taxes 13,169 12,442 Total uses of funds 14,255Total Liabilities 112,422 105,612Total equity 37,000 38,991Total Liabilities and Equity 149,422 144,603

GM’s uses of cash


Operating cash flow = Cash revenues – Cash operating expenses – Taxes

Net cash flow = Operating cash flow Income Statement

+ Change in Net working capital Balance Sheet(Net working capital = Current Assets – Current liabilities)

+ Capital investment & disposal values Balance Sheet

Operating cash flow for a taxable corporation= After-tax income + Depreciation tax shield= (Rev – Exp)(1 – Tax rate) + (Depr)(Tax rate)

Cash flow (CF)


Cash flows from operations 2012 Net income 6,136 Depreciation & amortization expense 38,762 FX remeasurement & transaction losses 117 Amortization of discount & issue costs on debt 188 Undistributed earnings of nonconsolidated affiliates ‐179 Pension contributions & OPEB payments ‐3,759 Pension and OPEB (income) expense 3,232 (Gains) losses on extinguishment of debt 250 Provisions (benefits) for deferred taxes ‐35,561 Change in other investments & misc assets ‐57 Change in other operating assets & liabilities (Note 30) 687 Other operating activities 789Net cash provided by operating activities 10,605

GM’s statement of cash flows


Ratios and common sense


Many ratios are available to measure financial health

Liquidity = our ability to meet short-term needsEfficiency = output / input Points per minute in basketball

Leverage = the impact of debt on the balance sheetPerformance = have we met expectations? Did we win?

We need to use common sense in selecting which ratios to use in financial analysis. Ratios that are relevant for GM may not be relevant for measuring financial health at MSU, and vice versa.

Ratios and common sense


Net working capital = Current assets – Current liabilities= ($69,996 – $53,992) = $16,004

Current ratio = Current assets / Current liabilities= $69,996 / $53,992 = 1.30

Quick ratio = (Cash + Receivables) / Current liabilities= $55,282 / $53,992 = 1.02

Cash ratio = (Cash & equivalents) / Current liabilities= $28,096 / $53,992 = 0.52

MSU: Primary reserve ratio= Total expendable net assets / Total expenses

Liquidity ratios


Profit margin = Net income / Sales = $6,136/$152,256 = 4%

Asset turnover = Sales / (Previous total assets)= $152,256 / $144,603 = 1.05 times

Receivable turnover = Sales / Previous receivables= $152,256 / $13,215 = 11.52 days

Inventory turnover = Costs / (Previous inventory)= $141,881 / $14,324 = 9.91 days

Average collection period = Prev receivables / (Sales/365)= $14,324 / ($152,256/365) = 31.68 days

MSU: Net operating revenue ratio = Income / Revenues

Efficiency ratios


Debt ratio = Total liabilities / Total assets= ($53,992 + $58,430) / $149,422 = 0.75

Times-interest-earned = EBIT / Interest= –$30,257 / $106 = –287.44 !

Long term debt ratio = Long term debt / (Debt + Equity)= $23,701 / ($23,701 + $25,853 + $11,147) = 0.39

Long term debt-equity ratio = Debt / Equity = $23,701 / ($25,853 + $11,147) = 0.64

MSU: Viability ratio = Total expendable net assets / Total long-term debt

Leverage ratios


Return on equity = Net Income / Equity= $6,136 / $25,853 = 0.237

Return on capital = (Net Income + Interest(1-T)) / (Capital)= ($6,136+$106*(0.65))/($23,701+$25,853+$11,147)= 0.102

Return on assets = (Net Income + Interest(1-T)) / Assets= ($6,136+$106*(0.65)) / $149,422 = 0.042

MSU: Return on net assets ratio= Change in net assets / Total net assets

Performance (or profitability) ratios


Benchmarking financial performance

Oil Telcom Utility Retail Ind. GMReturn on equity, % 7.4 7.4 21.3 5.8 12.8 0.2Return on assets, % 7.9 3.3 4.1 6.4 5.9 0.0Sales to assets ratio 2.2 0.7 0.4 2.2 1.0 1.0Operating profit margin, % 3.6 4.7 9.8 2.9 6.0 -0.2Long-term debt ratio, % 21.0 26.1 57.0 35.2 37.9 0.1Current ratio 1.1 3.0 0.9 1.3 1.5 1.3

GM relative to other U.S. companies


Accounting and common sense2013 GM annual report (pp. 12-13)

Restated operating performanceAdjusted Automotive Free Cash Flow $11,021Less: Capital Expenditures ($7,549)Automotive Free Cash Flow $3,472“Management believes these non-GAAP measures provide meaningful supplemental information regarding GM’s operating results and liquidity because they exclude amounts that management does not consider when assessing and measuring…performance… (They are) used by management in its financial and operational decision-making.”

Similarly, Mark Haas restated MSU’s operating results in his 2014 report to the Board of Trustees


MSU Financial Stewardship Practices

• Support educational, research, and outreach programmatic needs.

• Recurring expenses should be funded with recurring revenues.

• Include funding for future needs using long-term financial framework to determine multi-year budgets.

• Deploy diverse revenue streams for funding programmatic needs, including donations and research activities.

From a presentation by Mark Haas to the MSU Board of Trustees, October 2014


To evaluate ongoing operations - achieve comparability over time- achieve comparability across institutional units

(either MSU-v-competitor or unit-v-unit within MSU)- use financial ratios to make decisions

To forecast and prepare for the future - forecast the sustainability of net income and cash flow- anticipate changes in investments- identify financing needs

Financial analysis at MSU

Michigan State University, 2013- 31 - IPEDS 2012-12 reporting

MSU is near the top in B1G enrollment


MSU lags in total revenues

Maryland, Northwestern, Rutgers not shown


…and in total assets and net position

Maryland, Northwestern, Rutgers not shown


MSU’s Balance sheet ($ millions)

Assets 2014 2013 2012 2011Current assets 507 513 444 428 Noncurrent assets: Restricted cash & equivalents 16 101 ‐ 111 Endowment & other investments 2,317 1,945 1,775 1,764 Capital assets, net 1,995 1,901 1,819 1,703 Other 71 67 69 87 Total assets 4,906 4,527 4,107 4,093 Deferred outflows of resources 60 61 83 54 Current liabilities 491 488 437 410 Noncurrent liabilities 1,302 1,275 1,077 1,013 Total liabilities 1,793 1,763 1,514 1,423 Net position (or Net assets) 3,173 2,825 2,676 2,724


2014 2013 2012 2011Land 39 38 35 32 Buildings and site improvements 2,681 2,518 2,309 2,156 Construction in progress 214 184 227 205 Software and other intangibles 95 93 91 87 Equipment and other 735 706 672 626 Museum collections 12 11 10 9 Less: accumulated depreciation (1,781) (1,649) (1,525) (1,412) Capital assets 1,995 1,901 1,819 1,703

MSU’s Balance sheet ($ millions)


1,901 1,995

1,945 2,317

250

251 101

16 330

327

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

FY2012-13 FY2013-14

Cash and short-terminvestments

Restricted cash andinvestments

Receivables, inventories,and other

Long-term investments

Capital assets

Total

(3)

(85)

1

372

94

$ Change

379

$4,906

$4,527

(land & buildings)

Mill

ions

(bond proceeds)

(including new gifts and transfers from short-term investments)

Assets increased by $379 million


1,113 1,074

263 307

44 50 120 125 87 89 73 72 63 76

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

FY2012-13 FY2013-14

Accounts payable

Other liabilities

Personnel costs

Revenue received in advanceof services provided

Interest rate swaps liability

OPEB

Debt

$ Change13

(1)

2

5

44

(39)

30 Total

Millions

6

(self insurance, payroll taxes)

$1,793$1,763

(summer school, athletic tickets)

Liabilities increased by $30 million


Statements of Net Position(Amounts in Millions)

2013 2014 $ ChangeAssets:

Current Assets 513$ 507$ (6)$ Noncurrent Assets 4,014 4,399 385 Total Assets 4,527$ 4,906$ 379$

Deferred Outflows of Resources 61$ 60$ (1)$

Liabil ities:Current Liabilities 488$ 491$ 3$ Noncurrent Liabilities 1,275 1,302 27 Total Liabil ities 1,763$ 1,793$ 30$

Deferred Inflows of Resources -$ -$ -$

Net Position:Net Investment in Capital Assets 937$ 983$ 46$ Restricted:

Nonexpendable 436 487 51 Expendable 567 674 107

Unrestricted 885 1,029 144 Total Net Position 2,825$ 3,173$ 348$

June 30,

MSU’s Balance sheet


Unrestricted Net Position increased $144 million

-263 -307

11 4

369 434

335 345

254 265

91 100 88

188

$(400)

$(200)

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

FY2012-13 FY2013-14

Total

Millions

$

100

11

10

65

(7)

(44)

144

$1,029

$885

9

QUASI/TERM ENDOWMENT INVESTMENTS:Represent expendable funds that by Board designation, the principal may not be expended.

RETIREMENT AND INSURANCE:Includes reserves for post-employment health benefits and the University’s Noncontributory Retirement Program (UNCRP).

DEPARTMENTAL WORKING CAPITAL:Represents balances designed to ensure the stable, efficient operations of University departments.

PROGRAMMATIC COMMITMENTS:Represents funds provided for commitments and projects which generally will be completed within the subsequent fiscal year.

CAPITAL AND INFRASTRUCTURE:Includes reserves for various University building, infrastructure, and programmatic needs related to construction and technology changes.

UNCOMMITTED:Represent general fund funds not specifically designated. Amount would fund approximately 1 day of operating expenses.

OTHER POST-EMPLOYMENT BENEFITS (OPEB): Includes accumulated annual OPEB accrual .


Big Ten Unrestricted Net Position

$2.8

$5.0

$2.7

$1.5 $1.4 $1.4 $1.3 $1.3 $1.0 $0.8 $0.8 $0.6 $0.5 $0.5

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0(billions)

$0.9

Note: Amounts listed are fiscal year 2013 totals, except for MSU which lists both fiscal year 2013 ($0.9) and 2014 ($1.0) totals. Unless otherwise noted, amounts represent consolidated financials of the University and may include multiple campuses, if applicable.

MSU – 2013MSU – 2014 incremental increase

Big Ten Peers - 2013


1,4011,497

1,5721,714

1,798 1,830 1,897 1,9662,060 2,110

708 768 854 830564 638

789 772 8851,029

51%

54%

31%

43%

49%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

$0

$500

$1,000

$1,500

$2,000

$2,500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total annual expenses ($)

(2013 average = 50%)

Unrestricted Net Position v total annual expenses

Mill

ions

Percent of total expenses

41


Sources of funds Uses of fundsMSU influenced MSU influenced

Tuition and fees Employee wages & benefitsSelf-supporting activities Construction spendingSpending policy distributions Financial aidGeneral fund carry-forwards Vendor expensesDebt proceedsGifts and grants

External influenced External influencedInvestment income Investment lossState appropriations

MSU’s Sources and Uses of Funds


MSU’s Income statementOperating revenues: 2014 2013 2012 Student tuition & fees, net 753 697 640 Grants and contracts 389 396 404 Auxiliary activities 303 305 293 Other operating revenues 175 180 166 Total operating revenues 1,620 1,578 1,503 Operating expenses: Instruction & dept research 632 589 575 Research 312 329 319 Public service 222 233 210 Academic support 95 82 82 Student services 49 46 32 Scholarships & fellowships 60 56 55 Institutional support 115 113 103 Operation & maintenance of plant 139 144 149 Auxiliary enterprises 289 289 275 Depreciation 150 139 128 Other operating expenses, net 6 4 3 Total operating expenses 2,069 2,024 1,931 Operating loss (449) (446) (428)


Nonoperating revenues (expenses): 2014 2013 2012 State operating appropriation 250 245 241 State AgBioRes appropriation 30 29 28 State coop ext serv appropriation 26 25 24 Federal Pell grant revenue 37 38 39 Gifts 55 46 52 Net investment income (loss) 324 187 (22) Int exp on cap asset‐related debt (41) (36) (35) Other nonoperating revenues 6 6 7 Net nonoperating revenues 687 540 334 Income (loss) before other 238 94 (94) State capital appropriations 30 2 1 Capital grants and gifts 36 15 15 Additions to permanent endowment 44 38 30 Increase (decrease) in net position 348 149 (48) Net position, beginning of year 2,825 2,676 2,724 Net position, end of year 3,173 2,825 2,676

MSU’s Income statement


Operating Statement (reformatted)(Amounts in Millions)

2009 2010 2011 2012 2013 2014Revenues:

Student tuition and fees, net of allowances 510$ 542$ 568$ 640$ 697$ 753$ Grants and contracts 340 373 373 404 396 389 Auxiliary activities 275 276 280 293 305 303 State appropriations 357 356 346 293 299 306 Investment income budgeted for operations 35 35 29 27 29 29 Gifts 55 53 46 52 46 55 Capital appropriations, grants and gifts 14 29 18 16 17 66 Additions to permanent endowments 16 25 17 30 38 44 Other revenues, net 184 189 216 212 224 218

Subtotal - revenues 1,786 1,878 1,893 1,967 2,051 2,163 Expenses:

Instruction and departmental research 551 556 561 575 589 632 Research 262 277 294 319 329 312 Public service 212 228 220 210 233 222 Academic support 77 75 78 82 82 95 Scholarships and fellowships 41 50 53 55 56 60 Institutional support 90 91 94 103 113 115 Operation and maintenance of plant 158 143 138 149 144 139 Auxiliary enterprises 256 256 269 275 289 289 Depreciation expense 91 98 116 128 139 150 Other expenses, net 60 56 74 70 86 96

Subtotal - expenses 1,798 1,830 1,897 1,966 2,060 2,110

Net, before investments (12) 48 (4) 1 (9) 53

Other components of net income (loss):Net investment income (loss) (278) 129 260 (49) 158 295

Net income (loss) (290)$ 177$ 256$ (48)$ 149$ 348$

Year ended June 30,


Operating Statement (reformatted)

(Amounts in Millions)2009 2010 2011 2012 2013 2014

Total Revenues 1,786$ 1,878$ 1,893$ 1,967$ 2,051$ 2,163$ Total Expenses 1,798 1,830 1,897 1,966 2,060 2,110

Net, before investments (12) 48 (4) 1 (9) 53

Other components of net income (loss):Net investment income (loss) (278) 129 260 (49) 158 295

Net income (loss) (290)$ 177$ 256$ (48)$ 149$ 348$

Year ended June 30,


MSU operating revenues & expenses ($ mil)


Increasing reliance on tuition revenue ($ mil)


Ratios used in Higher Ed to evaluate ongoing operations *

Primary reserve ratio (in years) Resource sufficiency= Total expendable net assets / Total expenses

Net operating revenue ratio (%) Operating results= Total income / Total revenues

Return on net assets ratio (%) Asset management= Change in net assets / Total net assets

Viability (or coverage) ratio (%) Leverage= Total expendable net assets / Total LT debt

Composite financial index Overall financial health* Strategic Financial Analysis for Higher Education, 7e, 2010, by Prager, Sealy & Co. LLC, KPMG LLP, and Attain LLC.

Measuring financial health at MSU


B1G Primary reserve ratios= Total expendable net assets / Total expenses

a measure of liquidity or resource sufficiency


Primary reserve ratio = Total expendable net assets / Total expenses

measures how long we could operate using expendable reserves

Median = 8.30

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 total expendable net assets 710 777 904 1027 1091 1228 1231 924 1034 1380 1319 total expenses 1248 1299 1306 1401 1497 1573 1714 1798 1829 1897 1966

RATIO = 0.569 0.598 0.692 0.733 0.729 0.781 0.718 0.514 0.565 0.727 0.671…in months 6.828 7.176 8.304 8.796 8.748 9.372 8.616 6.168 6.78 8.724 8.052


• A higher primary reserve ratio indicates a greater ability to meet short-term operating and financial obligations

• MSU’s 2012 ratio of 0.671 years (or about 8 months) is near the median for B1G universities

• This liquidity measure indicates that MSU could fund about 8 months worth of expenses with the expendable net assets currently on hand

Primary reserve ratio = Total expendable net assets / Total expenses

measures how long we could operate using expendable reserves


Net operating revenue ratiomeasures if operating activities provided a surplus or deficit

Median = 0.073

Net Operating Revenue Ratio 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 total oper/nonoper income 19 62 168 165 136 194 30 ‐297 143 260 ‐59 total revenues 1260 1355 1462 1553 1617 1751 1724 1478 1953 2118 1872

RATIO = 0.015 0.046 0.115 0.106 0.084 0.111 0.017 ‐0.201 0.073 0.123 ‐0.032


2011 B1G Net operating revenue ratios= Change in net assets / Total net assets

measures return on investment of net assets


Net operating revenue ratiomeasures if operating activities provided a surplus or deficit

• MSU’s 2012 ratio of -3.2% is below zero indicating a net loss on operations

• A high return is desirable, but a large surplus might not be desirable if it means we are not contributing to our mission

• MSU’s 5-year average is -0.4% so we are pretty close to “breaking even” during recent years

• This ratio is volatile for all universities because it varies with investment performance & not just operations

• MSU’s Investment Spending Policy uses a 5-year average


Return on net asset ratiomeasures the total return on investment of net assets for the year

Median = 0.77

Return on Net Assets Ratio 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 change in net assets 54 77 175 177 197 251 67 ‐290 177 256 ‐48 total net assets (beg‐of‐year) 1,587 1,641 1,718 1,893 2,070 2,267 2,514 2,581 2,291 2,468 2,724

RATIO = 0.034 0.047 0.102 0.094 0.095 0.111 0.027 ‐0.112 0.077 0.104 ‐0.018


2011 B1G Return on net assets= Total income / Total revenues

a measure of performance


Return on net asset ratiomeasures the total return on investment of net assets for the year

• MSU’s 2012 ratio of -1.8% is below that of our B1G peers as well as below our own recent performance

• Deficits are bad, but we also need to pursue our mission– A surplus might not be desirable if it is because we are not

contributing to our mission (e.g., at the expense of growth)

• This ratio is volatile for all universities because it varies with investment performance & not just operations

• MSU’s Investment Spending Policy considers our 5-year investment performance when determining how much of our investment earnings to make available for spending on operations


Viability (or coverage) ratiomeasures the availability of expendable net assets to payoff debt at any point in time

Viability Ratio 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 total expendable net assets 710 777 904 1027 1091 1228 1231 924 1034 1380 1319 total long‐term debt 260 300 402 484 478 594 570 579 851 854 896

RATIO = 2.731 2.59 2.249 2.122 2.282 2.067 2.16 1.596 1.215 1.616 1.472

Median = 2.12


2011 B1G Viability ratios= Total expendable net assets / Total LT debt

availability of expendable net assets to pay debt(that is, financial leverage)

Big Ten Median: 1.86


• MSU’s 2012 ratio of 1.5 means that we have enough in expendable net assets to pay off debt 1.5 times

• The 5-year average is expendable net assets of 2.12 times debt

• This measure is important because it influences our bond rating and cost of borrowing

• Debt was reduced by $39 million in 2013-2014, after increasing by $200 million in 2012-2013 to fund infrastructure development.

Viability (or coverage) ratioavailability of expendable net assets to pay debt at any point in time

Bonds78%

CP14%

Other8%

2013-2014


as of 11/17/2013

B1G Credit ratings from Moody’s


The Composite Financial Index (CFI) is a weighted average of the other 4 ratios, composed of strength factorsand index weights.

For MSU, it is calculated as:

Composite Financial Index (CFI) = ( Primary reserve ratio / 0.133 ) * 0.35+ ( Net operating revenues ratio / 0.007 ) * 0.10+ ( Return on net assets ratio / 0.020 ) * 0.20 + ( Viability ratio / 0.417 ) * 0.35

Composite Financial Index (CFI)


The Composite financial index (CFI) is a weighted average of the other four ratios

CFI range Recommended action *

-1 to 1 Assess the viability of the institution’s survival0 to 2 Reengineer the institution2 to 4 Direct resources toward transformation4 to 6 Focus resources to compete6 to 8 Experiment with new initiatives> 8 Deploy resources to achieve a robust mission

* Fitzgerald, “Moody’s Ratings Approach for Private Colleges and Universities,” (Moody’s Investors Services, 1999).

Composite Financial Index (CFI)


Median = 4.875

Composite financial index (CFI)a weighted average of the other four ratios

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Primary reserve ratio 1.497 1.574 1.821 1.929 1.918 2.055 1.889 1.353 1.487 1.913 1.766 Net operating revenue ratio 0.214 0.657 1.643 1.514 1.200 1.586 0.243 (2.871) 1.043 1.757 (0.457)Return on net assets ratio 0.340 0.470 1.020 0.940 0.950 1.110 0.270 (1.120) 0.770 1.040 (0.180)Viability ratio 2.292 2.174 1.888 1.781 1.915 1.735 1.813 1.340 1.020 1.356 1.235

CFI SCORE 4.344 4.875 6.372 6.164 5.984 6.486 4.215 (1.299) 4.319 6.067 2.364


2011 B1G Composite Financial Indices

Big Ten Median: 3.55


Composite financial index (CFI)a weighted average of the other four ratios

• This ratio also varies with investment performance & not just operations because it is a function of the other ratios

• MSU’s 2012 ratio of 4.80 is solidly in the “focus resources to compete” category

• Our CFI also compares favorably to our B1G peers

• We must continue to work on our outputs and processes in order to achieve continued success


Allocating financial resources to mission

• What is the mission?– Are resources sufficient and flexible?– Does financial asset performance support the strategic direction?– Do operating results indicate the institution is living within available

resources?– Is debt managed strategically to advance the mission?

• Priorities must be set!– Critical to the mission– Very important to the mission– Important to the mission– Less important to the mission– Not important to the mission


• MSU once again received a clean external audit opinion.

• MSU’s financial position remains strong with a $3.2b net position. The increase of $348m (12.3 percent) from 2013 was primarily due to market gains on investments.

• MSU continued to manage through the impacts of state and federal budget constraints.

• The 2013-2014 tuition revenue increase reflects a nonrecurring strategic shift in our enrollment mix.

• Long-term trends have tuition rates & state appropriation revenues expected to grow at the rate of inflation.From a presentation by Mark Haas to the MSU Board of Trustees, October 2014

Fiscal Year 2013-14 Financial Overview

butler - financial analysis at msu...

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