Peer Responses

Response to Person 1

Hello,

This is a great post. Your analysis of Nike and Under Armour’s debt reporting is commendable. The structure given that highlights the various aspects of their financial strategy makes it easier to comprehend. I am intrigued by the fact that Nike has significantly reduced its long-term debt over time: Peer Responses.

Notably, this is so because I also reviewed Nike in my discussion, but I had not observed this. Also, it is interesting to learn that the reduction in long-term debt could result from using bonds as opposed to bank loans to finance long-term debt. Essentially, this supports the fact that bonds are cheaper in the long run compared to bank loans (Liao et al., 2022).

Your concern regarding the interest rate management strategies has challenged my thoughts. Many companies deploy various methods to manage interest rates. Overall, your discussion provides key learnings about long-term debt management. Great work.

Reference

Liao, Y., Huang, P., & Ni, Y. (2022). Convertible bond issuance volume, capital structure, and firm value. The North American Journal of Economics and Finance, 60, 101673. https://doi.org/10.1016/j.najef.2022.101673

Responding to Person 2

Hello,

Great work with your post: it post provides significant insights into Bark, Inc.’s debt management. I take note that Bark Inc. and Freshpet Inc. use long-term debt to finance operations. The adoption of convertible bonds by the two companies is thought-provoking, particularly with regard to whether convertible bonds could have more advantages than other conventional approaches to funding long-term debt. One reason that could be behind the use of convertible bonds is that they provide flexibility in repayment in addition to your observation regarding potential interest savings (Jo et al., 2023).

I agree with you that the choice of convertible bonds is related to the cost-effectiveness of raising capital while preserving the cash flow. In addition, it would be valuable to understand how beneficial it would be if the company enhanced transparency on the use of convertible bonds. Essentially, this could help us in learning more about long-term debt management.

Reference

Jo, K., Choi, G., Jeong, J., & Ahn, K. (2023). Information flow among stocks, bonds, and

convertible bonds. PloS one, 18(3), e0282964.

https://doi.org/10.1371/journal.pone.0282964

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Person 1

Company: Nike and Under Armour

1. In Nike’s most recent 10-K, they report items related to this topic in their consolidated balance sheet and their notes to the financial statement. On the balance sheet, ‘notes payable’ has its own line-item while ‘bonds’ are categorized under long-term debt. In the notes to the financial statement, there are detailed breakdowns of Nike’s short-term borrowings (such as short-term notes) and long-term debt (such as outstanding bonds and notes payable). For required reporting, Nike should be reporting all of their total amounts of short-term borrowings and long-term debts on their balance sheet.

   They are also required to include detailed information on their debts, interest rates, maturities, and repayment schedules in their notes to the financial statement. For reporting under specific circumstances, an example could be if Nike were to restructure some of their debts. If Nike were to decide that they wanted to restructure their debts, specific details of these transactions must be listed in the notes again.

2. What stands out to me in Nike’s reporting on this topic is that they have had a significant reduction of long-term debt within the last year. Another thing that tends to stand out to me is that Nike tends to use bonds rather than bank notes or loans for its long-term financing needs. One question that I have on an element of their reporting is, “what strategies does Nike use to help manage their interest rates?

   “Interest rates constantly fluctuate and understanding these strategies helps manage their interest rate risk. Another possible question that I have is, “how do market conditions affect Nike’s decisions revolving around their future debt financing?” Market conditions are also continuously changing, and these trends have important effects on Nike’s decisions on how they want to finance their debts.

3. Both Nike and Under Armour opt to use bonds for their long-term debt needs. More specifically, they tend to use senior-notes, which are a type of bond. An explanation for these financing decisions is that through using senior notes, Nike and Under Armour can more effectively manage their capital structures.

   With that, they can maintain financial flexibility while balancing the benefits of debt financing. Financial flexibility, market conditions, and strong credit ratings are important factors that play into these companies’ decisions on opting to use bonds and senior notes.

Person 2

Company Name: Bark, Inc.

1. Bark, Inc.’s recent 10-k reports on the following topics within the financial statements and notes. On the balance sheet, there is a line is called “Other Long-Term Liabilities.” If you hover over it, it states, “Amount of liabilities classified as other, due after one year or the normal operating cycle, if longer.”

   The income statement included a line called “Interest expense,” which states, “amount of the cost of borrowed fund accounted for as interest expense”. The notes to the financial statements provide details about the long-term debt and what is included in the lines.

After reading the chapter, companies should report their long-term financing from bonds and notes payable on the balance sheet as a long-term liability if due after one year. The income statement reports interest expense and any gains or losses on the retirement of long-term liabilities. Cash paid for interest is included in operating activities on the statement of cash flows under GAAP (if IFRS it is under financing activities).

Peer Responses

Companies must disclose in the notes to financial statements the various characteristics of their long-term debt, including the book value, interest rates, maturity dates, scheduled repayment for each of the next 5 years, interest expense, interest paid, and capitalized interest.

Items that are only reported under certain circumstances include troubled debt restructuring, convertible debt (when big modifications or converted), debt retirement (if before maturity), and a guarantee of the liability.

1. What stood out for me is the reduction of debt. The notes stated, “the Company repurchased $45.0 million of the $83.5 million of outstanding aggregate principal amount of the 2025 Convertible Notes” This reduced the outstanding principal balance from $83,525 to $40,644.

   This looks like a substantial decrease in debt.I think this would indicate that the company is in a great position to pay off such a large portion of its debt. I wonder if they paid these off as a strategy and how much interest they ended up saving in the end by paying such a large amount?

2. Bark, Inc. used convertible notes that total $40.6 million. Freshpet, Inc. had convertible Senior notes in the amount of $393.5 million. Both primarily use notes for their long-term debt. I do not see any explanation of their decision to go this way.

BARK, INC (3/31/2024). Annual report (Form 10-K). U.S. Securities and Exchange Commission. Retrieved from https://www.sec.gov/Archives/edgar/data/1819574/000181957424000025/bark-20240331.htm

FRESHPET, INC (12/31/2023). Annual report (Form 10-K). U.S. Securities and Exchange Commission. Retrieved from https://www.sec.gov/Archives/edgar/data/1611647/000143774924005542/frpt20231231_10k.htm

Wahlen, James, et al. Intermediate Accounting: Reporting and Analysis, 4^th ed., CENGAGEL,  2023.