Financial Statement Analysis Project To successfully operate in the world of business, the ability to comprehend a company's annual report and analyze the financial condition of a company is extremely important. This assignment will help you gain some experience interacting with an annual report, and it will allow you to apply some of what you have learned so far in accounting to a real world company. For this assignment, you are to examine the 2019 financial statements of Sprouts Farmers Market, Inc., and use that report to answer the questions that follow. Each answer should be numbered, and each question should be answered in complete sentences. For full credit, show all calculations. 10. (6 points) Calculate the following solvency ratios for the current year and give a one sentence description of each result. a. Debt to assets ratio b. Debt to Equity ratio (total liabilities / total equity) b. Times Interest Earned Ratio 11. (2 points) Calculate the free cash flow of the company for the most current year (Hint: use the formula given in the book on page 17-17) FOR QUESTIONS 13 15: LOOK AT THE NOTES TO THE FINANCIAL STATEMENTS (beginning on page 6) 13. (1 Point) In what state did Sprouts Farmers Market, Inc. incorporate? 14. (1 Point) For 2019, what percentage of the company's sales were from Perishables"? 15. (1 Point) What does the company estimate for the useful life of its buildings for depreciation purposes? SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) December 29, 2019 December 30, 2018 $ $ 85,314 15,713 275,979 10,833 387,839 741,508 1,028,436 185,395 368,078 11,727 2,722,983 1,588 40,564 264,366 27,323 333,841 766,429 194,803 368,078 12,463 1,675,614 $ $ 261,326 48,579 253,969 48,603 7,428 ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Property and equipment, net of accumulated depreciation Operating lease assets, net Intangible assets, net of accumulated amortization Goodwill Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities Accrued salaries and benefits Current portion of capital and financing lease obligations Current portion of operating lease liabilities Current portion of finance lease liabilities Total current liabilities Long-term capital and financing lease obligations Long-term operating lease liabilities Long-term debt and finance lease liabilities Other long-term liabilities Deferred income tax liability Total liabilities Commitments and contingencies (Note 19) Stockholders' equity: Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding Common stock, $0.001 par value; 200,000,000 shares authorized, 117,543,668 shares issued and outstanding, December 29, 2019; 124,975,691 shares issued and outstanding, December 30, 2018 Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity 106,153 754 416,812 310,000 119,642 1,078,927 549,419 41,517 54,356 2,141,031 453,000 153,377 50,399 1,086,418 117 670,966 (4,682) (84,449 581,952 2,722,983 124 657,140 1,134 (69,202) 589,196 1,675,614 $ $ SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) December 29, 2019 $ 5,634,835 3,740,017 1,894,818 1,549,707 120,491 7,260 217,360 21,192 Net sales Cost of sales Gross profit Selling, general and administrative expenses Depreciation and amortization (exclusive of depreciation included in cost of sales) Store closure and other costs Income from operations Interest expense, net Other income Income before income taxes Income tax provision Net income Net income per share: Basic Diluted Weighted average shares outstanding: Basic Diluted Year Ended December 30, 2018 $ 5,207,336 3,459,861 1,747,475 1,404,443 108,045 12,076 222,911 27,435 320 195,796 37,260 $ 158,536 December 31, 2017 $ 4,664,612 3,097,582 1,567,030 1,245,640 94,194 1,126 226,070 21,177 625 205,518 47,078 $ 158,440 196,168 46,539 149,629 $ 1.23 $ $ 1.25 1.25 $ $ $ $ 1.17 1.15 1.22 119,368 119,742 128,827 129.776 135,169 137.884 SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) (Accumulated Deficit) Retained Earnings Common Stock Total Stockholders' Equity Shares 140,002,242 $ 140 $ 597,269 $ 75,500 $ 158,440 672,909 158,440 (784) (784) 2,144,669 2 9,298 9,300 (9,696,819) (10) (203,382) (203,392) 14.221 14,221 132,450,092 $ 132 $ 620,788 $ 30,558 158,536 (784) $ 650,694 158,536 1,918 1,918 3,227,693 3 21.840 21,843 Balances at January 1, 2017 Net income Other comprehensive income (loss) Issuance of shares under stock plans Repurchase and retirement of common stock Share-based compensation Balances at December 31, 2017 Net income Other comprehensive income (loss) Issuance of shares under stock plans Repurchase and retirement of common stock Share-based compensation Balances at December 30, 2018 Net income Other comprehensive income (loss) Issuance of shares under stock plans Repurchase and retirement of common stock Share-based compensation Impact of adoption of ASC 842 related to leases Balances at December 29, 2019 (11,096,595) (11) (258,296) 14,512 (258,307) 14,512 124,581,190 $ 124 $ 657,140 $ 1,134 $ (69,202) 149,629 589,196 149,629 (5,816) (5,816) 822,586 1 4,877 4,878 (7,950.858) (8) (176,302) (176,310) 8,949 8.949 11,426 11,426 117,452,918 $ 117 $ 670,966 $ (84,449) $ (4,682) $ 581,952 SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) December 29, 2019 Year Ended December 30, 2018 December 31, 2017 149,629 $ 158,536 $ 158,440 110.749 96,987 122,804 81,842 4,113 8,949 (216) 4.136 4,115 14,512 23.333 1,482 14,221 7,803 2,086 36,062 (11,612) 19,208 (1,275) 28,699 295 (88,002) 578 355,210 (7,666) (34,824) (2,908) (5,086) 4,366 3,039 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense Operating lease asset amortization Store closure and other costs Share-based compensation Deferred income taxes Other non-cash items Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Other assets Accounts payable and other accrued liabilities Accrued salaries and benefits Operating lease liabilities Other long-term liabilities Cash flows from operating activities Cash flows from investing activities Purchases of property and equipment Proceeds from sale of property and equipment Cash flows used in investing activities Cash flows from financing activities Proceeds from revolving credit facilities Payments on revolving credit facilities Payments on capital and financing lease obligations Payments on finance lease liabilities Payments of deferred financing costs Cash from landlord related to capital and financing lease obligations Repurchase of common stock Proceeds from exercise of stock options Other Cash flows used in financing activities Increase / (Decrease) in cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash at beginning of the period Cash, cash equivalents, and restricted cash at the end of the period (4,920) (25,079) (2.733) (114) 39,244 12,764 24,731 294,379 10,868 309,567 (183,232) (177,083 1 (177,082 (198,624) 30 (198,594 (183.232 265,405 (180,405) 233,000 (128,000) (4,517) 153,000 (60,000) (4,192) (690) 1.325 (203,392) 9,300 (176,310) 4,878 (319) (87.441) 84,537 2,248 86,785 (2,131) 3,643 (258,307) 21.843 (59) (134,528 (17,231) 19,479 2,248 (103,959) 7,014 12,465 19,479 $ S Supplemental disclosure of cash flow information Cash paid for interest Cash paid for income taxes $ S $ 20,293 44,637 27,086 15,527 20,759 33,475 Supplemental disclosure of non-cash investing and financing activities Property and equipment in accounts payable Property acquired through capital and financing lease obligations $ 18,515 $ $ 12,001 9,081 17,869 23.882 Financial Statement Analysis Project To successfully operate in the world of business, the ability to comprehend a company's annual report and analyze the financial condition of a company is extremely important. This assignment will help you gain some experience interacting with an annual report, and it will allow you to apply some of what you have learned so far in accounting to a real world company. For this assignment, you are to examine the 2019 financial statements of Sprouts Farmers Market, Inc., and use that report to answer the questions that follow. Each answer should be numbered, and each question should be answered in complete sentences. For full credit, show all calculations. 10. (6 points) Calculate the following solvency ratios for the current year and give a one sentence description of each result. a. Debt to assets ratio b. Debt to Equity ratio (total liabilities / total equity) b. Times Interest Earned Ratio 11. (2 points) Calculate the free cash flow of the company for the most current year (Hint: use the formula given in the book on page 17-17) FOR QUESTIONS 13 15: LOOK AT THE NOTES TO THE FINANCIAL STATEMENTS (beginning on page 6) 13. (1 Point) In what state did Sprouts Farmers Market, Inc. incorporate? 14. (1 Point) For 2019, what percentage of the company's sales were from Perishables"? 15. (1 Point) What does the company estimate for the useful life of its buildings for depreciation purposes? SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) December 29, 2019 December 30, 2018 $ $ 85,314 15,713 275,979 10,833 387,839 741,508 1,028,436 185,395 368,078 11,727 2,722,983 1,588 40,564 264,366 27,323 333,841 766,429 194,803 368,078 12,463 1,675,614 $ $ 261,326 48,579 253,969 48,603 7,428 ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Property and equipment, net of accumulated depreciation Operating lease assets, net Intangible assets, net of accumulated amortization Goodwill Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities Accrued salaries and benefits Current portion of capital and financing lease obligations Current portion of operating lease liabilities Current portion of finance lease liabilities Total current liabilities Long-term capital and financing lease obligations Long-term operating lease liabilities Long-term debt and finance lease liabilities Other long-term liabilities Deferred income tax liability Total liabilities Commitments and contingencies (Note 19) Stockholders' equity: Undesignated preferred stock; $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding Common stock, $0.001 par value; 200,000,000 shares authorized, 117,543,668 shares issued and outstanding, December 29, 2019; 124,975,691 shares issued and outstanding, December 30, 2018 Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity 106,153 754 416,812 310,000 119,642 1,078,927 549,419 41,517 54,356 2,141,031 453,000 153,377 50,399 1,086,418 117 670,966 (4,682) (84,449 581,952 2,722,983 124 657,140 1,134 (69,202) 589,196 1,675,614 $ $ SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) December 29, 2019 $ 5,634,835 3,740,017 1,894,818 1,549,707 120,491 7,260 217,360 21,192 Net sales Cost of sales Gross profit Selling, general and administrative expenses Depreciation and amortization (exclusive of depreciation included in cost of sales) Store closure and other costs Income from operations Interest expense, net Other income Income before income taxes Income tax provision Net income Net income per share: Basic Diluted Weighted average shares outstanding: Basic Diluted Year Ended December 30, 2018 $ 5,207,336 3,459,861 1,747,475 1,404,443 108,045 12,076 222,911 27,435 320 195,796 37,260 $ 158,536 December 31, 2017 $ 4,664,612 3,097,582 1,567,030 1,245,640 94,194 1,126 226,070 21,177 625 205,518 47,078 $ 158,440 196,168 46,539 149,629 $ 1.23 $ $ 1.25 1.25 $ $ $ $ 1.17 1.15 1.22 119,368 119,742 128,827 129.776 135,169 137.884 SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) (Accumulated Deficit) Retained Earnings Common Stock Total Stockholders' Equity Shares 140,002,242 $ 140 $ 597,269 $ 75,500 $ 158,440 672,909 158,440 (784) (784) 2,144,669 2 9,298 9,300 (9,696,819) (10) (203,382) (203,392) 14.221 14,221 132,450,092 $ 132 $ 620,788 $ 30,558 158,536 (784) $ 650,694 158,536 1,918 1,918 3,227,693 3 21.840 21,843 Balances at January 1, 2017 Net income Other comprehensive income (loss) Issuance of shares under stock plans Repurchase and retirement of common stock Share-based compensation Balances at December 31, 2017 Net income Other comprehensive income (loss) Issuance of shares under stock plans Repurchase and retirement of common stock Share-based compensation Balances at December 30, 2018 Net income Other comprehensive income (loss) Issuance of shares under stock plans Repurchase and retirement of common stock Share-based compensation Impact of adoption of ASC 842 related to leases Balances at December 29, 2019 (11,096,595) (11) (258,296) 14,512 (258,307) 14,512 124,581,190 $ 124 $ 657,140 $ 1,134 $ (69,202) 149,629 589,196 149,629 (5,816) (5,816) 822,586 1 4,877 4,878 (7,950.858) (8) (176,302) (176,310) 8,949 8.949 11,426 11,426 117,452,918 $ 117 $ 670,966 $ (84,449) $ (4,682) $ 581,952 SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) December 29, 2019 Year Ended December 30, 2018 December 31, 2017 149,629 $ 158,536 $ 158,440 110.749 96,987 122,804 81,842 4,113 8,949 (216) 4.136 4,115 14,512 23.333 1,482 14,221 7,803 2,086 36,062 (11,612) 19,208 (1,275) 28,699 295 (88,002) 578 355,210 (7,666) (34,824) (2,908) (5,086) 4,366 3,039 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense Operating lease asset amortization Store closure and other costs Share-based compensation Deferred income taxes Other non-cash items Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Other assets Accounts payable and other accrued liabilities Accrued salaries and benefits Operating lease liabilities Other long-term liabilities Cash flows from operating activities Cash flows from investing activities Purchases of property and equipment Proceeds from sale of property and equipment Cash flows used in investing activities Cash flows from financing activities Proceeds from revolving credit facilities Payments on revolving credit facilities Payments on capital and financing lease obligations Payments on finance lease liabilities Payments of deferred financing costs Cash from landlord related to capital and financing lease obligations Repurchase of common stock Proceeds from exercise of stock options Other Cash flows used in financing activities Increase / (Decrease) in cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash at beginning of the period Cash, cash equivalents, and restricted cash at the end of the period (4,920) (25,079) (2.733) (114) 39,244 12,764 24,731 294,379 10,868 309,567 (183,232) (177,083 1 (177,082 (198,624) 30 (198,594 (183.232 265,405 (180,405) 233,000 (128,000) (4,517) 153,000 (60,000) (4,192) (690) 1.325 (203,392) 9,300 (176,310) 4,878 (319) (87.441) 84,537 2,248 86,785 (2,131) 3,643 (258,307) 21.843 (59) (134,528 (17,231) 19,479 2,248 (103,959) 7,014 12,465 19,479 $ S Supplemental disclosure of cash flow information Cash paid for interest Cash paid for income taxes $ S $ 20,293 44,637 27,086 15,527 20,759 33,475 Supplemental disclosure of non-cash investing and financing activities Property and equipment in accounts payable Property acquired through capital and financing lease obligations $ 18,515 $ $ 12,001 9,081 17,869 23.882