Kilmarnock FC´s financials (part 2)

Kilmarnock FC´s balance sheet is a relatively simple one. Intangible assets (player registrations) have been extremely low, and in may 2013 the value was down to 0. That is simply because when a club buys a player, the transfer sum is marked in the intangible assets and amortised over the duration of the contratc. In Kilmarnock´s case, there haven´t been too many players bought during the last few years. New players have arrived mainly through free transfers and loans. 

While there haven´t been too many intangible assets, tangible assets in something the club has had no shortage of. The total value of tangible assets in May 2013 was £ 14 million. This consists of ”conference, banqueting & leisure activities” (the Park Hotel), worth £ 2,8 million, the Rugby Stadium, worth £ 11,0 million and plant and machinery, worth £ 17 261 million, Fixtures, fitting & equipment, worth £ 61 823 and motor vehicles, worth £ 17 176. Frankly, the book value of the stadium seems very high. The value of the Park Hotel was substantially lowered in the latest accounts due to an impairment of £ 1 478 504. This impairment cost is the exceptional item that caused the result of the latest financial year to sink as low as £ -2,2 million. According to the annual report, the Park Hotel was sold on March 2014 to The Park Hotel Ayrshire Limited with £ 2,4 million. The impairment cost is the difference of this sum, and the carrying value that the asset had (£ 3,8 million). 

The structure of the club´s creditors and net debt is presented in the following figure:

 In the  latest accounts, chairman Michael Johnston states that he has been able to reduce the loans of the club significantly. During the last four seasons, the debts haven´t been reduced quite that much, though. The club has been forced to rely on bank overdrafts with their payments, and there hasn´t really been much change with the overdraft-amounts. Long term loans have been reduced, but once again, not by much. At least, not enough to make any kind of radical difference to the club´s financial position. As the profit & loss account shows, interest payments were substantial all the way until last accounts. And it is those interes payments that have made life so difficult for Kilmarnock. It is also worth noting that almost £ 10 million in loans is a huge amount for any company that operates with a turnover of £ 6-7 million. There is no way that those kind of loans could ever be repayed. A slight reduction in total amounts makes very little difference. 

Billy Bowie has reportedly now invested heavily in to the club´s finances. First £ 250 000 and then £1,4 million as part of the debt reduction deal that took place earlier this year. The Park  Hotel was sold to Bowie´s company, who then converted the balance of the bank debt into equity. The loan by Former director Jamie Moffatt was apparently written off. Consequently, the club is now said to be practically debt free. It will be interesting to see the new financial report and figure out just how the whole thing was done. Since Michael Johnston´s share of the stocks was reduced from 87 % to below 50 %, a share issue to Bowie seems likely. Some sort of capital loan would also be a possibility. 

Nevertheless, what is vital for Kilmarnock FC is that being debt free it is also free of the vicious cycle of restructuring debts it can´t pay. It is also free of interest payments, that consumed much of the EBITDA. The downside is, that the club is now without the Park Hotel, so their turnover will diminish. Still, it is a healthy situation for the club. 

What is interesting to see is where the club (and Bowie) will go from here. In august 2014 Bowie told the BBC: "I would like to get away from [being seen as the money man]," Bowie said. "What I've put in is far more than I expected, but I was in a fortunate position where we could restructure the debt. It would be better to make the club work financially rather than to look for another investor. If I was to put in more money then I would be letting myself down as well. We've got a budget forecast, we're working with that”.

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Nothing wrong with Bowie´s statement. That´s how you do solid business. Unfortunately, that´s rarely how you run a football club. The fans are most likely more than happy to see the club in a healthy financial position. But results-wise, they would most likely want to see some improvements as well. And that doesn´t happen without investments to the squad and facilites. Since probably no one at Kilmarnock wants to see the club go back to bank loand and overdrafts, the only way to do that is raise funds the other way. We need to remember that the club´s EBITDA has been nothing to get too excited about. And without the Park Hotel, the turnover will get smaller. So financing any kind of heavy investments will not happen through profitable business. Therefore, only one option remains: Raising funds by increasing equity. Most likely through share issues or capital loans. Bowie would be the logical person to supply those funds, and my guess is the fans certainly wouldn´t mind that to happen.

Is it fair to expect that from Bowie? Probably not. Bowie has done more than his share in freeing the club of it´s debts. It would optimistic to expect him to pour cash into the club straight away. But that´s just how football clubs are operated these days. Smart financial operations and success on the pitch rarely go hand in hand. Success requires investments, investments require cash. And all eyes are on Bowie. 

Having said that, the club is certainly not doing badly on pitch at the moment. The Rugby Park currently has a modern artificial grass surface. At the time of writing this, Kilmarnock FC are sitting at 5th place of the Scottish Premiership with 20 points from 11 matches. That is not too bad. Where to club goes from here depends largely on Bowie and his willingness to inject funds. Whatever happens, the club is in a healthy position now, and therefore the future looks relatively bright. And that is not something to belittle. In fact, in a current economic climate, it is actually a nice place to be in.

Kilmarnock FC´s financials (part 1)

Scottish Premier League side Kilmarnock FC just started their first season with local businessman Billie Bowie as a majority shareholder and a board member of the club. Bowie became the owner last spring, after a complex arrangement, where the club was essentially freed of it´s debt. Before Bowie came into the club, Kilmarnock had been a steady figure at the Scottish Premier League for a long time, but during the past few years result had been mixed. Their positions at the premier league between 2010 were, respectively, 11th, 5th, 7th and 9th. Off the pitch, the club has operated with a seemingly tight budget. Chairman Michael Johnston has had his hands full with managing the finances. Not all fans have appreciated Johnston´s efforts, and in 2013 some of the fans of the club who felt Johnston was not acting in the best interests of the club, protested heavily in order to get rid of the chairman. 

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When Billie Bowie came to the rescue, he insisted the club is not at all a lost cause. Interwieved by Daily Record in October 2013, Bowie stated: “I asked for, and carried out, a full examination of the club’s books. I went over the past five years’ worth of audited accounts and was left to conclude that Kilmarnock Football Club is a very well-run business.” So is it? A man who has invested so heavily in the team should know what he´s talking about. The thing with Kilmarnock FC is that it is a question of how you decide to look at it. Below is the club´s profit and loss account from the previous four seasons, May 2014 accounts have not been released yet.   

	2010	2011	2012	2013
Turnover	6 136 449	7 134 354	7 413 789	6 093 484
Other operating income	56 868	103 368	56 868	56 868
Cost of sales	-891 402	-899 758	-792 722	-813 361
Administrative expenses	-5 963 378	-5 535 477	-5 994 815	-5 413 774
Profit on player sales	1 209	0	0	0
EBITDA (%)	-660 254	802 487	683 120	-76 783
Amortisation of player registrations	-55 286	-49 993	-8 039	0
Depreciation	-431 114	-425 732	-408 403	-385 881
Operating profit	-1 146 654	326 762	266 678	-462 664
Exceptional Items	900 000		0	-1 478 504
Interest receivable and similar income
Interest payable and similar charges	-219 993	-140 165	-255 294	-269 962
Profit before taxation	-466 647	186 597	11 384	-2 211 130
Tax on loss on ordinary activities
Profit for the period	-466 647	186 597	11 384	-2 211 130

The first thing that comes to mind is that the club´s turnover is not a huge one. Having said that, excluding Celtic (and previously, Rangers), few clubs at SPL operate with a significantly higher turnover. For example in 2011, the combined turnover of SPL was £ 164 million, of which Ranger´s and Celtic´s shares were, respectively £ 52,6 million and £ 57,2 million. Excluding Rangers and Celtic, Kilmarnock FC´s turnover was actually third highest, after Aberdeen and Hearts. As with any club, Kilmarnock´s turnover is heavily dependent on their final position in the league, and it is easy to see how the changes in Kilmarnock´s turnover are very much in line with their league positions. A curious detail with Kilmarnock´s turnover is that while it´s main source of income is obviously football related, until recently the club also owned a hotel not too far from the stadium. The Park Hotel was valued at £ 2,7 million in the accounts of 2013, after an impairment of  £ 1,5 million. In 2012, the hotel´s value was still £ 4,4 million. The impairment cost was actually a substantial factor in 2013´s loss of £ -2,2 million. 

Turnover-wise, the hotel´s signifigance is not at all small. The following figure shows the club´s turnover-distribution in £ millions:

 

While the income from football activities varies quite a bit, mainly due to variations in ticketing income and tv-payments, the turnover generated by the Park Hotel has been relatively stable around £ 2 million. When football related income has diminished, the hotel´s share of total turnover has been actually been more than half, as in 2013. 

Kilmarnock has been taking a pretty good care of their wage bill. Many football clubs have incredibly high wage bills that can sometime consume almost all of the turnover. With Kilmarnock, that is not the case. The wage/turnover -ratio, as can be seen below, was at 65,5 % in 2010, but has since declined and was at 57 % in 2013, which is not that high for a football club. According to the annual report, in 2013 the average monthly number of employees was 179. Of this, 61 were football related, 4 related to administration, 14 were retail and commercial staff and 100 hotel and part time –employees. 

 

So far everything looks fine. A hotel to support the turnover, moderate wage bill, no problem. But looking at the income statement, the club´s administrative expenses are actually not that small. Despite the mild wage bill, the total administrative costs vary between £ 5,4 and 6 million. Total costs also vary very little compared to the turnover. What these costs actually are is a little unclear, since the annual report doesn´t specify the issue. But it is safe to say that at least a part of it is related to running the hotel. 

Whatever the case, the fact is that the club´s operations are not very profitable. EBITDA ( Earnigs Before Interest, Taxes, Depreciation and Amortisation) was positive in 2011 and 2012, when the income was boosted by succesful positions at the SPL, but with less success on the pitch, EBITDA fell to negative figures in 2010 and 2013. In other words, the club´s costs have not adjusted to changes in turnover. 

One slightly peculiar thing about the cost structure is that according to the financial statement, in 2013 and 2012 ”£ 60 000 worth of consultancy and legal fees were charged during the year by Messers J & A B Boyd, a firm in which Mr Michael Johnston is the principal.” In 2011 and 2010 these amounts were, respectively, £ 55 000 and £ 50 000. What these legal and consulting services are is not stated. Obviously these are not decisive numbers in the big picture, but image-wise enough to raise a few eyebrows. 

Player registrations´ amortisations are not significant in Kilmarnock´s case. Combined amortisations during 2010-13 were only slightly over £ 100 000. This is a clear indication of how tight the budget at Kilmanock has been. According to transfermarkt-website, Kilmarnock has bought only two players between 2010 and present. Rui Miguel and David Silva arrived in 2010—2011 with transfer fees of £ 44 000 each and left later with free transfers. Apart from Miguel and Silva, all the other players have arrived through free transfers, loans or end of loans. With very few players bought, the amount on intangible assets is mininal, and consequently, amortisations very small as well. While this is financially a solid strategy  for keeping the amortisations low, it might not be the right way to build a winning team.  A team consisting of loan players and free transfers rarely produces that many fireworks. But this is a question of perspective. Europe is full of clubs with bloated wage bills and huge amortisations; clubs that invest more than they can afford and are on the brink of bankruptcy as a result. Kilmarnock have obviously chosen a different route and have still managed to keep the club in the league, if barely at times.

  

Depreciations have been around £ 400 000, and are mostly related to Rugby Park and the Park Hotel. The club ´s operating profit has been positive in 2011 and 2012, but the figure has been relatively weak in 2010 and 2013.

Looking at the income statement, after operating loss comes a very telling figure of the club´s situation. Since the clubs operations haven´t been too profitable and they haven´t had an owner to inject interest-free funds, the club has had to rely on bank loans and overdrafts. As a result, the club´s interest payments have been substantial. The interest payments may not seem that big at first glance. But the fact is that even when the operating profit has been positive, interest payments have consumed a lot of that sum. When the operating profit is negative, interest payments only make the situation worse.

So while there has been an obvious effort to keep costs at a reasonable level and manage the finances smartly, the fact is that the club is not really making profit in the long run. It is often the case with football clubs that there is a kind of a tradeoff between making a profit and having success on pitch. With Kilmarnock FC, there hasn´t been expensive investments to help achieve that success, but then again the club isn´t really making any money, either.

In part two, I will take a look at the club´s balance sheet, and how having Billie Bowie on board has changed the situation.