UV1189
Rev. Nov. 2, 2016
Horniman Horticulture
Bob Brown hummed along to a seasonal carol on the van radio as he made his way over the dark and icy
roads of Amherst County, Virginia. He and his crew had just finished securing their nursery against some
unexpected chilly weather. It was Christmas Eve 2015, and Bob, the father of four boys ranging in age from 5
to 10, was anxious to be home. Despite the late hour, he fully anticipated the hoopla that would greet him on
his return and knew that it would be some time before even the youngest would be asleep. He regretted that
the boys’ holiday gifts would not be substantial; money was again tight this year. Nonetheless, Bob was delighted
with what his company had accomplished. Business was booming. Revenue for 2015 was 15% ahead of 2014,
and operating profits were up even more.
Bob had been brought up to value a strong work ethic. His father had worked his way up through the ranks
to become foreman of a lumber mill in Southwest Virginia. At a young age, Bob began working for his father
at the mill. After earning a degree in agricultural economics at Virginia Tech, he married Maggie Horniman in
2003. Upon his return to the mill, Bob was made a supervisor. He excelled at his job and was highly respected
by everyone at the mill. In 2010, facing the financial needs of an expanding family, he and Maggie began
exploring employment alternatives. In late 2012, Maggie’s father offered to sell the couple his wholesale nursery
business, Horniman Horticulture, near Lynchburg, Virginia. The business and the opportunity to be near
Maggie’s family appealed to both Maggie and Bob. Pooling their savings, the proceeds from the sale of their
house, a minority-business-development grant, and a sizable personal loan from Maggie’s father, the Browns
purchased the business for $999,000. It was agreed that Bob would run the nursery’s operations and Maggie
would oversee its finances.
Bob thoroughly enjoyed running his own business and was proud of its growth over the previous three
years. The nursery’s operations filled 52 greenhouses and 40 acres of productive fields and employed 12 fulltime and 15 seasonal employees. Sales were primarily to retail nurseries throughout the mid-Atlantic region.
The company specialized in such woody shrubs as azaleas, camellias, hydrangeas, and rhododendrons, but also
grew and sold a wide variety of annuals, perennials, and trees.1 Over the previous two years, Bob had increased
the number of plant species grown at the nursery by more than 40%.
Bob was a “people person.” His warm personality had endeared him to customers and employees alike.
With Maggie’s help, he had kept a tight rein on costs. The effect on the business’s profits was obvious, as its
profit margin had increased from 3.1% in 2013 to an expected 5.8% in 2015. Bob was confident that the
nursery’s overall prospects were robust.
1 Over the past year, Horniman Horticulture had experienced a noticeable increase in business from small nurseries. Because the cost of carrying
inventory was particularly burdensome for those customers, slight improvements in the credit terms had been accompanied by substantial increases in
sales.
This case was prepared by Michael J. Schill, Professor of Business Administration, as a basis for class discussion. Horniman Horticulture is a fictional
company reflecting the disguised attributes of actual firms. Copyright 2006 by the University of Virginia Darden School Foundation, Charlottesville,
VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden
School Foundation.
This document is authorized for use only in Prof Piyush Pandey's Corporate Finance-I_2023 at Shailesh J. Mehta School of Management (SJMSOM) from Sep 2023 to Mar 2024.
Page 2
UV1189
With Bob running the business full time, Maggie primarily focused on attending to the needs of her active
family. With the help of two clerks, she oversaw the company’s books. Bob knew that Maggie was concerned
about the recent decline in the firm’s cash balance to below $10,000. Such a cash level was well under her
operating target of 8% of annual revenue. But Maggie had shown determination to maintain financial
responsibility by avoiding bank borrowing and by paying suppliers early enough to obtain any trade discounts.2
Her aversion to debt financing stemmed from her concern about inventory risk. She believed that interest
payments might be impossible to meet if adverse weather wiped out their inventory.
Maggie was happy with the steady margin improvements the business had experienced. Some of the gains
were due to Bob’s response to a growing demand for more mature plants. Nurseries were willing to pay
premium prices for plants that delivered “instant landscape,” and Bob was increasingly shifting the product mix
to that line. Maggie had recently prepared what she expected to be the end-of-year financial summary
(Exhibit 1).3 To benchmark the company’s performance, Maggie used available data for the few publicly traded
horticultural producers (Exhibit 2).
Across almost any dimension of profitability and growth, Bob and Maggie agreed that the business
appeared to be strong. They also knew that expectations could change quickly. Increases in interest rates, for
example, could substantially slow market demand. The company’s margins relied heavily on the hourly wage
rate of $10.32, currently required for H2A-certified nonimmigrant foreign agricultural workers. There was some
debate within the U.S. Congress about the merits of raising this rate.
Bob was optimistic about the coming year. Given the ongoing strength of the local economy, he expected
to have plenty of demand to continue to grow the business. Because much of the inventory took two to five
years to mature sufficiently to sell, his top-line expansion efforts had been in the works for some time. Bob was
sure that 2016 would be a banner year, with expected revenue hitting a record 30% growth rate. In addition, he
looked forward to ensuring long-term-growth opportunities with the expected closing next month on a
neighboring 12-acre parcel of farmland.4 But for now, it was Christmas Eve, and Bob was looking forward to
taking off work for the entire week. He would enjoy spending time with Maggie and the boys. They had much
to celebrate for 2015 and much to look forward to in 2016.
Most of Horniman’s suppliers provided 30-day payment terms, with a 2% discount for payments received within 10 days.
As compensation for the Browns’ services to the business, they had drawn an annual salary of $50,000 (itemized as an SG&A expense) for each of
the past three years. This amount was effectively the family’s entire income.
4 With the acquisition of the additional property, Maggie expected 2016 capital expenditures to be $75,000. Although she was not planning to finance
the purchase, prevailing mortgage rates were running at 6.5%. The expected depreciation expense for 2016 was $46,000.
2
3
This document is authorized for use only in Prof Piyush Pandey's Corporate Finance-I_2023 at Shailesh J. Mehta School of Management (SJMSOM) from Sep 2023 to Mar 2024.
Page 3
UV1189
Exhibit 1
Horniman Horticulture
Projected Financial Summary for Horniman Horticulture
(in thousands of dollars)
Profit and loss statement
Revenue
Cost of goods sold
Gross profit
SG&A expense
Depreciation
Operating profit
Taxes
Net profit
Balance sheet
Cash
Accounts receivable
Inventory1
Other current assets2
Current assets
Net fixed assets (NFAs)3
Total assets
2012
2013
2014
2015
788.5
402.9
385.6
301.2
34.2
50.2
17.6
32.6
807.6
428.8
378.8
302.0
38.4
38.4
13.1
25.3
908.2
437.7
470.5
356.0
36.3
78.2
26.2
52.0
1048.8
503.4
545.4
404.5
40.9
100.0
39.2
60.8
120.1
105.2
66.8
9.4
90.6
99.5
119.5
146.4
468.3
507.6
523.4
656.9
20.9
19.3
22.6
20.9
699.9
731.6
732.3
833.6
332.1
332.5
384.3
347.9
1,032.0 1,064.1 1,116.6 1,181.5
Accounts payable
Wages payable
Other payables
Current liabilities
Net worth
6.0
5.3
4.5
5.0
19.7
22.0
22.1
24.4
10.2
15.4
16.6
17.9
35.9
42.7
43.2
47.3
996.1 1,021.4 1,073.4 1,134.2
Capital expenditure
Purchases4
22.0
140.8
38.8
145.2
88.1
161.2
4.5
185.1
1 Inventory investment was valued at the lower of cost or market. The cost of inventory was determined by accumulating the costs associated with
preparing the plants for sale. Costs that were typically capitalized as inventory included direct labor, materials (soil, water, containers, stakes, labels,
chemicals), scrap, and overhead.
2 Other current assets included consigned inventory, prepaid expenses, and assets held for sale.
3 NFAs included land, buildings and improvements, equipment, and software.
4 Purchases represented the annual amount paid to suppliers.
This document is authorized for use only in Prof Piyush Pandey's Corporate Finance-I_2023 at Shailesh J. Mehta School of Management (SJMSOM) from Sep 2023 to Mar 2024.
Page 4
UV1189
Exhibit 2
Horniman Horticulture
Financial Ratio Analysis and Benchmarking
2012
2013
2014
2015
Benchmark1
2.9%
48.9%
6.4%
4.1%
2.4%
46.9%
4.8%
3.1%
12.5%
51.8%
8.6%
5.7%
15.5%
52.0%
9.5%
5.8%
(1.8)%
48.9%
7.6%
2.8%
Return on assets (net profit/total assets)
Return on capital (net profit/total capital)
3.2%
3.3%
2.4%
2.5%
4.7%
4.8%
5.1%
5.4%
2.9%
4.0%
Receivable days (AR/revenue × 365)
Inventory days (inventory/COGS × 365)
Payable days (AP/purchases × 365)
NFA turnover (revenue/NFA)
41.9
424.2
15.6
2.4
45.0
432.1
13.3
2.4
48.0
436.5
10.2
2.4
50.9
476.3
9.9
3.0
21.8
386.3
26.9
2.7
Revenue growth
Gross margin (gross profit/revenue)
Operating margin (op. profit/revenue)
Net profit margin (net profit/revenue)
1
Benchmark figures were based on 2014 financial ratios of publicly traded horticultural producers.
This document is authorized for use only in Prof Piyush Pandey's Corporate Finance-I_2023 at Shailesh J. Mehta School of Management (SJMSOM) from Sep 2023 to Mar 2024.