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MODULE ASSIGNMENT PART 1A: FINANCIAL ANALYSIS

Step1: Overall View

Looking at the Income Statements and Balance Sheets of Sonesta International

Hotels Corporation for the years 1999 to 2008 one can say that there has been a

drastic decrease in Gross Profit. The year 2000 shows the highest amount – $ 62.4

million whereas the lowest point is in 2008; it being just $ 31.8 million. The total

income was the highest in 1999 with it amounting to 6.3 million; but this decreased

during the following years; the lowest amount being $6.4 million in the year 2003. The

operating income in the year 2008 shows the amount of $ 6.7 million; which is much

better compared to the previous years; especially considering that the operating

expenses have been more or less quite the same over the years.

The accounts receivable are at an all time low; $ 6.4 million in 2008. The

highest amount was in 2005; $ 13.3 million. Long term assets have decreased in 2008

($ 44.7 million) as compared to the highest value which was $ 52.4 million in 2006.

The current liabilities have been gradually decreasing, this shows that the

obligations that they need to be paying within the year have been decreasing; though

on the other hand one can see an increase in the long term debt – the highest being $

122.9 million in 2008. The total equity for 2008 is $ 4.1 million, which is the lowest

figure; the highest being $ 29.9 million in the year 2000. This shows that the residual

interest in assets for the investors has decreased.

From this quick overview; one can easily say that the Sonesta International

Hotels Corporation does not seem to be doing that well at the moment. Their long term

liabilities have increased quite drastically. Compared to the previous years; there

revenue shows a decrease. One can also see that the economic recession has affected

their organization; and this could be one of the factors for their current financial

situation.

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Step 2: Quick Review

The income statements of Sonesta International Hotel Corporation are quite

revealing. The first thing that one sees is the revenue – there is not much of a

difference between the two years; except that the revenues from the managed and

affiliated properties was much higher in 2007 ($ 18, 747) as compared to 2008 ($

8,965). This shows that the organization has probably sold or does not have as many

affiliations as before. The revenues from the other profit centres do not show much of

a difference.

Even though the total revenue in 2007 ( $ 86, 685) was higher than that in

2008 ($ 80, 517); the expenses in 2007 ($ 84,457) were higher than that in 2008 ($ 77,

125) as well.

The operating income for the year 2008 is quite higher than that in 2007 ($

6,671 and $ 2,228 respectively). This is due to the fact that there is an additional

income of $ 3,279 in 2008 from settlements – which one can assume is due to the fact

that there are less affiliated properties. The gain on sale of assets in 2008 is $ 576

which is higher than the $ 214 of the previous year.

Overall, one can see that even though the revenues for the years 2007 and 2008

do not have a major difference; the costs and expenses take up most of it, and thus

the larger difference in the operating income. This brings us to the net income - $

4,080 for 2008 and $ 1,337 for the year 2007. A single glance at these income

statements shows that the organization has shown increased income due to the fact

that they do not have that many affiliated properties. But one does not know whether

this will work in the long term – because they don’t seem to have any extraordinary

figures as such; a few minor differences in the past two years (though there is an

increase in their income and dividends per share).

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Step 3: Director’s Review and Highlights

The Directors comments shed light on the financial status of Sonesta. The year

2008 had it’s ups and downs. The first eight months went well. Revenues from hotel

operations in Boston and New Orleans together saw an increase by $4,100,000 as

compared to 2007 during the same period. Management and franchise income

increased as well. The last four months of the year were not that good. Only due to the

fact that the year began on a strong note; the year ended with an increase in total

revenues over 2007 by $ 3,614,000 and an increase in operating income by

$4,443,000.

Sonesta terminated their contract with Trump International Sonesta Beach

Resort, Florida in April 2008; and received a settlement of $5,000,000 in cash. They

also collected $3,397,000 of loan repayments. They distributed a total of $4,438,000

in dividends.

Royal Sonesta Boston lost a lot of revenue in the months of November and

December. Their target market consists of group businesses and due to the recession

and corporate cost cutting; there were a lot of cancellations and a huge drop in

reservations. Though they still had a 5% increase in revenues as compared to 2007

because the earlier months balanced out the losses for the end of the year.

Royal Sonesta New Orleans had a lot of losses – mainly due to the hurricane

threats. The hotel had to be closed for some time. They have now decided to bring it

back on par by opening a new jazz club.

Sonesta Bayfront Coconut Grove was affected by the economic decline a little

more than the others. Revenues were lower than that in 2007. The owner had to

refinance the hotel and paid for the balance of the company’s $5,000,000 loan; which

stopped the accounts from going into red.

The hotels, resorts and cruises in Egypt did comparatively better than the rest;

which helped in the overall accounts of Sonesta. They are expanding their properties

in Cairo. South America does not provide a lot of revenue or income but the licensed

hotels help to expose the brand on a larger scale.

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Sonesta had to stop and even terminate/end quite a few of their projects and

developments; mainly because of the recession. But they have started on some new

developments and expansion of properties. They are keen to start franchising in the

United States of America.

The year has been a hard one, but they are coping and the $5,000,000

settlement did help as they could pay out dividends through that which made the

shareholders feel more secure and confident. They had too many projects, the same

reason for them having to recalculate their strategies. But, they have prioritized their

goals and are looking at the long term benefits of the decisions being made at the

moment.

Step 4&5: Reviewing the Profit and Loss Account

The vertical analysis of the Income Statement of Sonesta shows that

50.99% of the total revenues come from the Rooms Division Department in 2008 as

compared to 45.13% in the year 2007. There is an increase in operational costs and

expenses by 39.96% in 2008 while it was 35.38% in the previous year.

The Horizontal Analysis shows that the total revenues decreased by 7.12% in

2008; but the total costs and expenses decreased by 8.68% as well. The Gross Profit in

2008 shows a drastic drop (-16.54%) as compared to -4.27% in 2007.

Dividends per share show an increase as compared to the previous year. This is

quite a good sign. While integrating both the horizontal and vertical analysis; it can be

noticed that the difference between the total revenues of 2007 and 2008 is 12.97%. On

the other hand, revenues from affiliated properties do not show a good sign. The

comparison of rental expenses show a difference of 41.67% - that means the costs of

renting their properties has increased. Property taxes show a decrease – they may

have sold some of their properties and thus pay less property tax and instead now

have to pay a lot more rent.

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Step 6&7: Probing the balance sheet for Financial Health

Looking to the horizontal analysis of the balance sheet one can see that the

cash of Sonesta is increasing, though in percentage it is decreasing, nominal it is

increasing. This means more cash is coming in every time. The horizontal analysis

does not show anything really remarkable except of the enormous increase in other

short term liabilities of 265.5% from 2006 to 2007, this just means that Sonesta had

more short term debts that year.

The vertical analysis shows that with around 30% for 2006, 2007 and 2008, the

property, plant and equipment are the biggest part of their assets. This is logic

because property and equipment always have a high value. Looking to the other side

of the balance sheet, the long-term liabilities are for the three years between 50% and

60%, what this comes down to is that Sonesta has a high long-term loan.

From the ratio analysis can be concluded that the high loan percentage in the

vertical analysis makes sense because when calculating the ratios the Debt-Equity

ratio turns out to be 29.98. This means that 30% of the company is indebted. This is a

high percentage, so to check if the liquidity of the company is bad, one should look at

their current ratio as well. The current ratio of the company is above 2,5 in 2006,

2007 and 2008, so the company is able to repay their current liabilities more than 2,5

times this is very positive. Also the solvency ratio of the company is above 1, this

means the company is able to repay all of their debts, e.g. in 2008 for 1.03 times. It

would be good to increase their solvency ratio but as long as it is not below 1 there are

no problems yet.

From the analysis of the balance sheet can be concluded that the liquidity and

the solvency of the company are average now. But it is advised to Sonesta to decrease

their debts.

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Step 8: Review of Cash Flow Statement

The Cash Flow Statements of Sonesta International Hotels Corporation gives

one an overall view as to the amount of free cash available in the organization, which

shows whether it can take care of its obligations or not.

The net income in the year 2008 is $4.1 million whereas it was $1.3 million in

the year 2007. This shows an increase in the income by $2.8 million. This shows a

positive reflection of Sonesta’s financials. On the other hand, the Depreciation and

amortization amount for 2008 is $5.8 million; which is higher than the net income in

the same year by $1.7 million. This is not a good thing as depreciation does form a

percentage of the cash flow from operations. But, on the brighter side; the depreciation

in 2008 has decreased from the year 2007 by $0.3 million.

The Capital Expenditures in 2008 show a figure of $-3.5 million which is less as

compared to 2007; which had a figure of $-4.3 million. One can see that Sonesta has

not bought as many assets in 2008 as they did in the previous year. This increases the

value of the organization as there is a larger amount of available funds since they did

not spend as much.

Cash from Financing Activities shows that as compared to 2007, the year 2008

is much better as there is a drop of $3.2 million. This shows that the organization is

giving out too many loans; but not as much as compared to 2007.

The free cash flow shows a drastic improvement from $3.2 million in 2007 to

$4.5 million in 2008. This is a $0.3 million increase. This shows that there is more

cash in the organization. Also the fact that there are more funds coming in from

operating activities ($8 million) as compared to financing activities ($4.8 million) which

proves that the Sonesta group does have quite a good financial standing at the

moment.

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Step 9: Key Business Drivers

To identify the key business drivers of Sonesta one should look at their income

statement. The main revenue centers of the company are Rooms Division and Food &

Beverage. Detracting the costs and operating expenses and human resources they are

also the highest profit centers.

Rooms Division is the main profit center, this is logic because the rooms are the

main property of the hotel and they should also generate the highest revenue. Also

selling rooms has less costs than Food & Beverage because they only need to be

cleaned and sometimes refurbished but in Food & Beverage new food needs to be

bought every time and the food has to be prepared, it has to be served etcetera.

The other profit centers of the company like Management, License, Service Fees

and Parking, Telephone and Other are just small extra profit centers Sonesta has, they

cannot be seen as a company’s key business drivers because they are not able to

generate profit and they would not even exist without the key business drivers Rooms

Division and Food & Beverage. To conclude one can see that Rooms Division is the key

business driver of Sonesta and logically following through cross selling the other key

business driver is Food & Beverage.

Step 10: Future Prospects

Sonesta has incurred quite a few losses during the past year. A brief overview of

their financial statements shows that there hasn’t been much progress since the past

three years. They have opted for a new strategy and put a few plans in place. They

have consolidated some of their assets and made some new partnerships. Most of their

revenues come from the operating activities of their owned and leased hotels. They

have decided to focus more on franchising in the United States. This is a good idea;

but they need to broaden their horizons. They should focus on the more developing

countries as well. This will not only give them brand exposure but they will be able to

carve out a niche for themselves.

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The properties in Egypt have been doing comparatively well; though the owner

of an establishment in Egypt has been given a loan at an interest which will be paid

during the term of their agreement. This is a long term asset and will keep a steady

amount of income coming into the organization. They have other outstanding loans as

well, and the risks of these loans being repaid are not that high.

Sonesta continues to operate and license hotels in the United States and

abroad as an independent entity. This will work for them in the long term as a lot of

their income comes in from management, license and service fees. One can see that

their establishments are not really making a profit. Their redevelopment plans are on

par, but they also need to try and focus more on the operations part as well.

Step 11: Summarize and Conclude

Sonesta International Hotels Corporation has not been doing that well since the

past three years. One can say that they have stretched themselves out too much and

hence were not able to control the establishments under them. But the recession

seems to have given them a wake-up call and they have reassessed their priorities.

They have terminated some of their contracts and developments and thus have some

extra income to help them get back on their feet.

Sonesta’s future is by no means bleak; but instead of over achieving, they need

to spend their resources on getting more business, working on a marketing strategy

and opening up their marketing mix. Some say that the recession is the time to buy

up properties and expand; if funds allow. But the shareholders need to be kept in

mind as well – which is what they didn’t forget while giving out a special dividend in

February.

Sonesta does seem to be on the right track and they are looking at the long

term consequences of their decisions; but sometimes things can spin out of control

and then everything just goes on a downward spiral. They need to concentrate on their

current acquisitions and not take too many risks.

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Bibliography:

Schmidgall, R.S., 2006. Hospitality Industry Managerial Accounting. 6th ed.

Michigan; The Educational Institute of the American Hotel and Lodging

Association.

Cote, R., 2001. Accounting for Hospitality Managers. 4th ed. Michigan; The

Educational Institute of the American Hotel and Lodging Association.