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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. 6 th 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.