Clarkson Lumber
Hardwoods, Hard Times
BBUS 505a
Cavelero, Engstrom, Tobey & Zadah
Overview
• Case Summary
• Problem Identification
• Findings
• Methodology
• Metrics
• Insights
Case Summary
• Clarkson Lumber Company [‘CLC’], is a small PNW lumber concern
experiencing rapid, questionably financed growth.
• Keith Clarkson [‘Clarkson’], sole owner of CLC, has maxed out ($399K of
$400K) his line of credit [‘LOC’] at Suburban National.
• CLC relies heavily on trade credit and short term debt.
• Clarkson wants to move to Northrup National Bank – a larger bank – with a
a $750K short-term LOC.
• George Dodge, Northrup officer, is cautiously receptive. He’s asked a team
of intelligent, attractive analysts to investigate the current state of CLC.
Problem Identification
“Clarkson wants to move to Northrup National Bank – a larger bank offering
a $750K LOC.”
• CLC overuses expensive short-term debt to finance growth and
buyout his former partner.
• It is our opinion that receiving a larger LOC from our bank will result
in negative future growth and exacerbate current cash flow problems.
• There are other problems with cash-flow, including inventory
purchasing, A/R and a 2% A/P discount (opportunity).
• PPE depreciation is an unkown; for our analysis, we factored it out.
Findings
• CLC can be a profitable investment for Northrup, but not with the stated
credit terms. Debt restructuring is needed to maximize CLC’s profitability.
• According to our research, CLC is in danger of growing at a
“unsustainable” pace:
a. Most metrics are highly positive
b. DuPont shows consistent gains
c. However, CLC’s sustainable growth rate is 20.7%; his
current projected growth is 21.7%
• Greatest challenge is cash flow
a. Poor financing, capital structure
b. Growth overly reliant on expensive short- term debt
c. Increasing inventory
Findings
1.
Short-term LOC of $750k will put CLC in bankruptcy by the end of 1998
2.
CLC’s projected growth creates a forecasted EFN of ~$975K.
3.
By maintaining the projected growth rate, Northrup can facilitate CLC’s
maximum profitability by offering “balanced” financing of 35% short-term
(~$340k) and 65% long-term (~$635 k).
Findings
Operating Income
$180
$20
$160
$14
$140
$120
$8
$100
Balanced
Short Term
$80
$60
$40
$20
$0
1996
1997
1998
Methodology
1.
2.
3.
4.
Financial Statements Analysis
• Common-Size Income Statement (% Sales)
• Common-Size Balance Sheet (%Assets)
Ratio Analysis
• Short-Term Solvency (Liquidity)
• Long-Term Solvency (Financial Leverage)
• Assets Management (Turnover)
• Profitability
The Du Pont Identity (Current, Forecasted)
Financial Planning
• Estimated sales growth
• Forecasted growth using ‘% of sales’ approach
• Estimated amount, type of EFN
• Estimated sustainable growth
1996: Q1
Clarkson vs. Industry
Low-Profit Outlets
High-Profit Outlets
CLC 3YR
1995
Percent of Total
Sales:
Cost of goods
76.90%
75.10%
75.60%
75.80%
Operating expense
Cash
22.00%
1.30%
20.60%
1.10%
20.90%
1.40%
20.80%
1.20%
Accounts receivable
Inventory
13.70%
12.00%
12.40%
11.60%
11.90%
12.30%
13.40%
13.00%
Fixed assets, net
Total Assets
Percent of Total
Assets:
12.10%
39.10%
9.20%
34.30%
8.00%
33.70%
8.60%
36.20%
Current liabilities
52.70%
29.20%
48.41%
66.50%
Long-term liabilities
Equity
34.80%
12.50%
16.00%
54.80%
13.45%
38.14
6.10%
27.40%
100.00%
100.00%
100.00%
100.00%
Total Assets
Metrics: Short Term Solvency
QUICK RATIO
CURRENT RATIO
2.49
2.5
2.5
2.0
2.0
1.58
1.27
1.5
1.5
1.15
0.82
1.0
0.61
1.0
0.5
0.5
0.0
0.0
1993
1994
1995
1993
1994
1995
Metrics: Leverage
4.06
0.73
0.68
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
0.80
2.59
0.70
1993
1994
0.86
1995
0.60
0.45
1993
0.50
0.40
1994
0.30
1995
0.20
0.10
0.00
DEBT-EQUITY RATIO
TOTAL DEBT RATIO
66.46%
66.46%
70.00%
70.00%
48.83%
60.00%
50.00%
52.70%
60.00%
29.92%
50.00%
40.00%
29.20%
40.00%
30.00%
20.00%
30.00%
10.00%
20.00%
0.00%
10.00%
Current liabilities
CLC 1993
CLC 1994
0.00%
CLC 1995
Current Liab. - Industry Comparison
Low-Profit
High-Profit
CLC 1995
Metrics: Asset Utilization
48.95
64.00
50.00
62.57
45.00
62.00
43.14
38.24
40.00
59.86
35.00
60.00
1993
1993
30.00
1994
1994
58.00
55.86
1995
25.00
1995
20.00
56.00
15.00
10.00
54.00
5.00
0.00
52.00
DAYS PER INVENTORY TURNOVER
DAYS ACCOUNTS IN A/R COLLECTION
Metrics: Inventory
% of Sales
12.32%
12.40%
12.20%
12.00%
12.00%
Inventory
11.80%
11.60%
11.60%
11.40%
11.20%
Low-Profit Outlets
High-Profit Outlets
Clarkson 3YR
Metrics: Inventory
% of Current
vs. Current Assets
54.00%
53.00%
52.00%
51.00%
50.00%
49.00%
48.00%
47.00%
46.00%
45.00%
44.00%
43.00%
53.00%
51.73%
50.87%
49.13%
48.27%
47.00%
Non-inventory
1993
Inventory
1994
1995
Years
Metrics: DuPont Analysis
0.18
0.17
0.20
0.03
2.1%
2.0%
1.7%
0.02
0.12
0.15
0.02
0.10
0.01
0.05
0.01
0.00
0.00
1993
1994
1993
1995
1994
PROFIT MARGIN
ROE
3.18
3.20
3.10
3.00
2.90
2.80
2.70
2.60
2.50
3.65
3.01
2.76
1993
1995
1994
TOTAL ASSET TURNOVER
1995
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
3.11
1.82
1993
1994
EQUITY MULTIPLIER
1995
Metrics: Forecasted DuPont
0.21
0.20
0.19
0.025
2.4%
2.3%
2.2%
0.20
0.020
0.15
0.015
0.10
1996
1997
1996
1998
1997
PROFIT MARGIN
ROE
2.99
2.99
1998
2.99
3.24
3.00
4.00
2.85
2.56
2.75
3.00
2.50
2.00
2.25
1.00
2.00
0.00
1996
1997
TOTAL ASSET TURNOVER
1998
1996
1997
EQUITY MULTIPLIER
1998
Income Statement
Operating Expenses
1993
Net sales
1994
1995
Percent of Sales
$2,921
$3,477
$4,519
Beginning inventory
330
337
432
10.1%
Purchases
2,209
2,729
3,579
78.0%
Total Inventory
Ending inventory
$2,539
$3,066
$4,011
337
432
587
12.4%
$2,202
$2,634
$3,424
75.7%
$719
$843
$1,095
Operating expensesb
622
717
940
EBIT
$97
$126
$155
23
42
56
$74
$84
$99
14
16
22
$60
$68
$77
Cost of Goods Sold:
Total Cost of Goods Sold
Gross profit
2% AP Discount
Interest expense
EBT
Provision for income taxesc
Net income
20.9%
Balance Sheet
Net sales
Balance
1993
$2,921
1994
$3,477
1995
$4,519
$43
$306
$337
$686
$233
$919
$52
$411
$432
$895
$262
$1,157
$56
$606
$587
$1,249
$388
$1,637
$60
$100
Cash
Accounts receivable, net
Inventory
Current
Property, net
Total Assets
Notes payable, banka
Note payable to
Notes payable, trade
Accounts payable
Accrued expenses
Term loan, current portionc
Current liabilities
Term loan
Note payable, Mr. Holtzb
Total Liabilities
Net worth
Total Liabilities and Net Worth
---$213
$42
$20
$275
$340
$45
$20
$565
$390
$100
$127
$376
$75
$20
$1,088
$140
$120
$100
$785
$372
$1,157
$100
$0
$1,188
$449
$1,637
--
-$415
$504
$919
Percent of Sales
1.4%
12.4%
11.6%
8.1%
8.1%
1.5%
Insights: Long-Term Debt
• Exchange a portion of short-term liabilities for long-term debt
•
Will reduce interest payments
•
Long-term debt has smaller payments, lower rates
•
Savings passed to his cash flow; used to manage A/P
Insights: Reduce Inventory
• Reduce existing inventory
•
Increase sales?
•
Slow inventory growth; more capital in cash flow
•
Drain inventory by growing with current excess
Insights: Increase A/R Turnover
• Increasing A/R turnover primes cash flow
•
More cash in hand
•
Can incentivize quicker collections with cash discount
•
Savings in financing charges greater than 1% rebate
Key Concerns
• Key Concerns
•
Will bank accept such a loan?
•
Can CLC collateralize long-term debt?
•
Micromanaging sales within bank’s core capabilities?
•
High inventory a hedge against price fluctuations?
•
Can CLC profit margin afford 1% hit?