W11710
GEMINI ELECTRONICS
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Version: 2016-03-15
Sarah McIvor, CA, a junior partner with Price Waterhouse Coopers, had been selected to conduct a
financial review of Gemini Electronics Ltd. Gemini was an up-start American electronics company that
recently went public and now wanted to expand its business in order to rival major Korean and Japanese
producers. Before the company finalized any expansion plans, Dr. Frank Wang, the founder, felt it was
prudent to conduct an independent evaluation of Gemini’s financial condition.
Having managed a number of audits of leading companies in the industry, McIvor’s knowledge of
consumer electronics was extensive. If the report was well-received by Gemini, this would mean a lot of
additional auditing and consulting business for her firm and a promotion to senior partner. She decided to
clear her desk of all other files and to focus on the Gemini account for the next two weeks.
COMPANY FORMATION
Gemini Electronics was a U.S.-based manufacturer of televisions (TVs). The company was founded in
2002 by Frank Wang, a second-generation American of Chinese descent. As part of his PhD studies in
electrical engineering at the California Institute of Technology (CIT) in the early 1990s, Wang participated
in a number of basic research projects relating to the development of liquid crystal displays (LCD). Despite
being only a doctoral student, he made a number of significant contributions to these projects and came in
contact with venture capitalists who were working with CIT to commercialize this important work.
Coming from a family of entrepreneurs, Wang became very interested in the business side of research and
development (R&D). His plan after graduation was not to pursue a career in teaching and research as most
of his colleagues wanted to do but to build a major electronics firm to rival the likes of Samsung, Sony and
LG. Not only would he bring honour and wealth to himself and his extended family, but he felt strongly
that such an enterprise would allow the United States to re-establish itself as a major manufacturer of
consumer electronic products. Since the 1980s the United States continued to make major contributions in
the area of basic research, but most of the design and manufacturing was done by firms in countries such as
Japan, Korea and Taiwan. Wang’s goal was to reverse this trend.
㈮洀Realizing that he needed to acquire practical design and production experience, in 1995 Wang made
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Realizing that he needed to acquire practical design and production experience, in 1995 Wang made the
decision to return to his father’s home country of Taiwan and work for a number of electronics contract
manufacturers there who did TV work for the Koreans and Japanese. Wang stayed in Taiwan for nearly six
years before returning to the U.S. with his young family. Immediately upon his arrival, he went to work
promoting his business plan for Gemini Electronics to venture capitalists in California.
Gemini was going to produce big-screen LCD and plasma TVs for the U.S. market. Wang hoped to
capitalize on American patriotism and disappointment over the loss of so many U.S. brands such as RCA,
Zenith, Quazar and Motorola to other countries. He planned to cater primarily to big box retailers such as
Best Buy, Costco, Sam’s Club, Walmart and Target who wanted to shorten their supply chains by sourcing
TVs in North America. Gemini would produce its TVs on a just-in-time basis and pass on most of the
distribution savings (transportation and warehousing) to the consumer. This would allow Gemini to
quickly build market share in the U.S., Canada and Mexico by offering prices that were considerably
below the competition.
RAPID GROWTH
By 2005 this strategy had proven to be a great success. Gemini was the largest TV producer in the U.S.
with a 35 per cent market share. Major retailers quickly agreed to carry the brand because of its reputation
for excellent quality at an affordable price. Gemini was becoming a source of great concern for its major
competitors Samsung, Sony and LG. Due to changing technology, Gemini decided to focus on just LCD
TVs but had added a number of additional products such as DVD players (HD and Blue Ray), home
theatre sound systems and cable sets. The venture capitalists had taken the company public in December
2004.
In addition to a deep recession in 2008 and 2009, in late 2009 a major threat emerged as Gemini’s Korean
and Japanese competitors began lowering their prices to comparable levels. With the falling U.S. dollar,
brought on by that country’s large trade deficit, and Gemini’s significant advantage in logistic costs, it was
felt these lower prices were not sustainable. Of greater worry were a number of technological trends. First,
Sony announced that it would introduce a 3-D TV by summer 2010, and other major producers were
expected to quickly follow. Initially, prices for these new products would be high and 3-D recorded content
would be in short supply, but it was expected that within a few years 3-D TVs would be the industry
standard; when this actually occurs will depend on how quickly consumers replace their TVs again after
just having upgraded to digital/HD units. A second trend was the need to add video phone capabilities to
TVs. With the growing popularity of Internet phone services such as Skype, it was felt that a much higher
percentage of phone calls would be made with video. TVs would have to accommodate the dialling of
numbers and contain video recording and voice input capabilities. Finally, future TVs will likely have to
incorporate hardware and software so users can “surf” the Web and read/send e-mail without a micro,
laptop or notebook computer. Gemini felt it would be able to produce 3-D TVs within 18 months, likely in
time to meet the expected growth in demand. Introducing video phones, Web browsing and e-mail
capabilities is something it can do now as all needed technology is available; in fact, the company already
has prototypes under development.
PRODUCT DIVERSIFICATION
In January 2010, Wang formed an ad hoc committee of senior managers at Gemini to study different
growth options. One option was to continue to focus on TVs but to expand geographically into South
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America, Europe and Asia. Wang felt that geographic expansion was wise, but he also wished to develop
Gemini’s product offering so he could compete with Samsung, Sony and LG in all market segments.
Possibilities included smart phones, e-readers and tablets, MP3 players, game machines, advanced audio
systems and notebook, laptop and micro computers. Gemini could design these new products internally or
expand through acquisition. Motorola had expressed interest in selling its cell phone unit while Palm had
clearly stated it was looking to be acquired by a firm with greater financial resources. Taiwan’s Acer was
disappointed with its acquisition of Gateway in 2007 and was rumoured to want to sell. Bose had discussed
merging its audio business with a larger company that had greater access to international markets.
FINANCIAL STATEMENTS
Exhibits 1, 2 and 3 contain financial statements provided by Gemini Electronics for the last five years since
the initial public offering (IPO). Exhibit 4 contains industry averages.
OPERATIONS
Gemini had a number of advantages over its Asian competitors. As a young and relatively small company
compared to others in the industry, it was more innovative and less prone to bureaucratic delays and infighting. The company was forced to greatly expand the number of administrative and sales personnel in
2006 and 2007, but rapid growth soon improved efficiency.
Southern California, despite inroads from other countries, was still the premiere location in the world for
R&D in the electronics industry. Gemini had been trying to take advantage of this by purchasing a number
of patents from U.S. universities and expanding its own R&D program. In 2009, Gemini opened a new
research facility on the CIT campus.
LCD TVs were large items that were expensive to ship and prone to damage during their long journey
from Asian factories. These costs necessitated higher selling prices as did the fact that retailers had to keep
larger inventories on hand to guard against supply interruptions. Gemini’s just-in-time production and
delivery of TVs from factories in the U.S. allowed them to sell units at greatly reduced prices despite
having to pay much more for labour in the U.S. and in Mexico where many of their component parts were
produced.
Gemini’s production facilities were state-of-the-art as they were only a few years old. Assembly lines were
highly automated and could be quickly changed to produce different models, resulting in smaller
inventories of work-in-progress and finished goods to meet retailer demand. Due to the limited amount of
electronics manufacturing being done in the U.S., Gemini still had to source many of its parts from Asian
contractors. This meant that larger parts inventories had to be maintained because of long delivery times.
In recent years, the company had been successful in sourcing a much greater proportion of their parts in
North America.
Being a new American TV brand in an industry that had long been dominated by Asian producers, Gemini
had a hard sell trying to convince major retailers that their products were worth carrying. All appreciated
the low costs and fast delivery time, but none were sure whether the customer could be convinced to buy
this new brand. To compensate, many retailers demanded more generous credit terms than Net 30, which
was standard in the industry. Interest was also not charged on overdue accounts.
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(Tapmi) from Dec 2023 to Jun 2024.
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Market research indicated that most Americans did not realize that Gemini TVs were made in the United
States, so in early 2009 the company felt it was in a financial position to begin advertising this point
heavily in TV spots. Previously, its advertising was limited to funding product ads in store flyers.
Wang knew from experience that consumer electronics was a very competitive industry and that Asian
competitors were long-term thinkers who were willing to sacrifice profits in the short term to build market
share. Company policy was to maintain large cash balances to guard against this uncertainty.
Venture capitalists funded Gemini’s start-up with a number of rounds of financing beginning in fall 2002,
and by late 2004 they had accumulated a 45 per cent equity stake. After just three years, the decision was
made by the venture capitalists to take the company public in an IPO. Wang owned the remaining 55 per
cent of the company and was very concerned about losing control. Subsequent to the IPO, the company
adopted a policy of paying no dividends and financing all growth with debt; no new common shares would
be issued.
Gemini had a $500,000,000 line of credit with Wells Fargo Bank to finance seasonal variations in net
working capital — the loan had to be 200 per cent secured by inventory and accounts receivable. All land,
plant, equipment and some patents were financed with term loans. These loans were negotiated with a
number of banks so Gemini could diversify its funding sources. To comply with the line of credit and term
loans, the current ratio had to be kept above 1.5.
All inventory purchases were on terms 2/10, Net 60, and most suppliers charged interest at 12 per cent per
annum on any overdue amounts.
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Exhibit 1
INCOME STATEMENT
2005
2006
2007
2008
2009
Sales
2,142,659,000
5,413,625,000
8,671,715,000
12,175,476,500
13,664,714,160
Cost of Goods Sold
1,323,957,000
3,120,000,500
5,032,513,200
7,886,796,000
8,974,149,576
818,702,000
2,293,624,500
3,639,201,800
4,288,680,500
4,690,564,584
1,001,234,530
Gross Profit
Operating Costs
Selling and Distribution
212,340,640
545,980,400
854,300,000
934,532,230
R&D
93,640,450
220,340,340
365,660,340
476,350,230
785,774,340
Administration
95,003,300
405,340,300
832,740,300
999,453,230
980,340,500
Amortization
Operating Profit
Interest
Earnings Before Taxes
Taxes
Net Income
81,414,429
122,465,588
187,929,165
288,216,088
394,440,051
336,303,182
999,497,873
1,398,571,995
1,590,128,722
1,528,775,163
53,251,456
145,434,234
288,898,584
277,686,944
329,923,700
283,051,726
854,063,638
1,109,673,411
1,312,441,778
1,198,851,462
99,068,104
298,922,273
388,385,694
459,354,622
419,598,012
183,983,622
555,141,365
721,287,717
853,087,156
779,253,450
Exhibit 2
BALANCE SHEETS
2005
2006
2007
2008
2009
Cash
310,630,300
790,419,373
1,437,227,573
1,366,526,361
1,413,474,400
A/R
316,972,950
758,988,750
1,201,094,250
1,328,523,975
1,503,560,340
Parts Inventory
253,578,360
607,191,000
960,875,400
1,062,819,180
1,201,345,530
WIP Inventory
26,789,180
45,354,460
66,650,675
75,640,210
89,575,400
359,340,630
960,187,250
1,451,230,215
1,605,660,505
1,805,340,520
Finished Goods Inventory
1,267,311,420
3,162,140,833
5,117,078,113
5,439,170,231
6,013,296,190
L,P,&E, Net
Total Current Assets
710,727,625
812,956,891
1,317,388,220
2,281,077,095
3,363,891,508
Intangibles
103,416,660
411,698,984
561,903,428
601,083,781
580,509,006
2,081,455,705
4,386,796,708
6,996,369,761
8,321,331,107
9,957,696,704
1,564,430,450
Total Assets
A/P
422,630,600
1,011,985,000
1,305,530,320
1,509,430,300
Current Portion of LT Debt
147,920,710
341,394,916
607,184,919
651,847,287
785,532,620
Total Current Liabilities
570,551,310
1,353,379,916
1,912,715,239
2,161,277,587
2,349,963,070
Long-term Debt
739,603,550
1,706,974,582
3,035,924,595
3,259,236,437
3,927,663,101
Shareholders’ Equity
771,300,845
1,326,442,210
2,047,729,927
2,900,817,082
3,680,070,533
2,081,455,705
4,386,796,708
6,996,369,761
8,321,331,107
9,957,696,704
Total Liabilities and Equities
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Exhibit 3
SALES ANALYSIS
2005
2006
2007
2008
2009
TV-LCD
Unit Price
$ 1,640
$ 1,485
$ 1,425
$ 1,250
Unit Cost
$ 950
$ 835
$ 819
$ 810
$ 702
250,000
2,620,000
4,889,600
8,560,300
11,230,388
Unit Price
$ 1,340
$ 1,100
$ 1,000
-
-
Unit Cost
$ 850
$ 700
$ 646
-
-
1,080,000
830,000
530,400
-
-
$ 250
$ 240
$ 225
Quantity
$ 1,070
TV-Plasma
Quantity
DVD-HD
Unit Price
Unit Cost
Quantity
$ 180
$ 140
$ 145
$ 134
$ 125
$ 120
$ 112
240,000
1,400,000
2,010,000
1,400,000
350,000
$ 185
DVD-Blue Ray
Unit Price
-
-
$ 275
$ 220
Unit Cost
-
-
$ 175
$ 161
$ 138
Quantity
-
-
330,000
1,580,000
2,890,000
$ 95
Cable Sets
Unit Price
$ 105
$ 100
$ 100
$ 95
Unit Cost
$ 45
$ 45
$ 43
$ 40
$ 41
245,600
399,400
854,300
1,298,700
1,654,200
Unit Price
$ 570
$ 570
$ 570
$ 550
$ 520
Unit Cost
$ 350
$ 355
$ 355
$ 350
$ 335
350,300
410,500
956,500
1,367,500
1,745,000
Quantity
Home Theatre
Quantity
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Exhibit 4
INDUSTRY AVERAGES
Key Financial Ratios
Current Ratio
Cash Ratio
Parts Inv Turnover in
Days
WP Inv Turnover in Days
FG Inv Turnover in Days
A/R Turnover in Days
A/P Turnover in Days
Cash Conversion Cycle
Fixed Assets Turnover
Total Assets Turnover
Debt Ratio
Times Interest Earned
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Assets
Return on Equity
Industry
Averages
2009
2.84X
0.05X
32.26 days
7.89 days
188.33 days
30.44 days
11.11 days
192.81 days
2.42X
1.00X
0.50X
3.21X
38.00%
7.41%
3.32%
3.32%
6.60%
Vertical Analysis (%)
Income Statement 2009
Sales
100.00
Cost of Goods Sold
62.00
Gross Profit
Operating Costs
Selling and Distribution
R&D
Administration
Depreciation
Operating Profit
Interest
Earnings Before Taxes
Taxes
Net Income
38.00
10.89
7.01
8.34
4.35
7.41
2.31
5.10
1.79
3.32
Vertical Analysis (%)
Balance Sheet 2009
Cash
Accounts Receivable
4.54
8.34
Parts Inventory
WIP Inventory
Finished Goods Inventory
Total Current Assets
Land, Plant & Equipment, Net
Other Assets
Total Assets
5.48
1.34
31.99
51.69
41.34
6.97
100.00
Accounts Payable
Current Portion of LT Debt
Total Current Liabilities
Long-term Debt
Shareholders’ Equity
Total Liabilities and Equities
11.23
7.00
18.23
31.50
50.27
100.00
Source: Industry average information from a reliable third party source.
This document is authorized for use only in Prof. Pradeepta Sethi, Prof. Sibanjan Mishra & Prof. Kumar Sanjay Sawarni 's Financial Management-II-FIN 5002-2 at Ta Pai Management Institute
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