GSBM 698. C.

MCPEAK, SPRING 2010

Team Ecce Signum

H eatefl ex Cor poration

FEBRUARY 18,2010
Polly Bendush
Michael Srour
Scott Erickson
Yaya Zhou
Sachendra Jain
E2b Financial Analys!

PEPPERDINE UNIVERSITY, THE GEORGE L. GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT 1


GSBM 698. C. MCPEAK, SPRING 2010

E2B Financial Analysis Project

H eatefl ex Cor poration

FEBRUARY 18,2010

CONTENTS:

I. ECCE SIGNUM TEAM MEMBER BIOS

II. INDUSTRY OUTLOOK & COMPANY OVERVIEW

Snapshot of the Semiconductor Industry & Growth Projections,
Summary of Heateflex Corporation’s Current State of Business

III. LONG TERM DEBT & SOLVENCY RATIOS,

RECOMMENDATIONS & DEFINING ACTIONS
Debt to Total Assets Ratio, Times Interest Earned Ratio & CFO to
Debt Ratio

1V.CASH BUDGETING & TOOL TO FACILITATE

IMPLEMENTATION OF IMPROVEMENTS

V. Z-SCORE & TOOL TO FACILITATE

IMPLEMENTATION OF IMPROVEMENTS
Defined & Calculated: to determine the probability of Bankruptcy
within the next 2 years

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 TEAM B: ECCE SIGNUM
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Bios
1.
Team Ecce Signum
Katharine is a first-year student in the 20-month program, concentrating in Finance(Accounting), at
Pepperdine University's Graziadio School of Business and Management.  She received an athletic
scholarship to play Varsity Volleyball at Duke University and graduated with degrees in Cultural
Katharine Anthropology and History.  Upon graduation, she returned to Southern California to spend 3 years
Polly working in sales for 7 for all mankind (VF Corp), a large apparel company.  Currently, Polly serves as the

Bendush Vice President & Director of the Case Competition for Pepperdine's Values Centered Leadership Lab. 
She remains committed to Duke's Alumni Association as the Young Alumni Coordinator for the Duke
Club of Southern California and serves on the Alumni Admissions Advisory Committee, interviewing for
Duke's undergraduate admissions department.  On top of her extracurriculars, she plays in Hermosa
Beach's co-ed kickball, beach volleyball & indoor volleyball leagues with friends.  Polly looks forward to
finding a job in Corporate Finance.
Michael is currently a first year MBA candidate at Pepperdine University focusing on Marketing and
Strategy.   Michael is a graduate of the University of California Santa Barbara and has a Bachelor of
Michael
Science in Molecular and Cellular Biology.  He has spent the last three years doing direct marketing and
Srour consulting for medical service companies in the greater Los Angeles area.  He is currently the Director of
Events for Challenge for Charity at Pepperdine, and an active member of the Marketing Club.  

Scott is a first-year student in the 20-month MBA program at Pepperdine's Graziadio School of Business
and Management where he is studying Finance. Scott graduated from California Polytechnic State
University in San Luis Obispo, CA where he studied Business Administration, concentrating in
Scott marketing management. After graduating from Cal Poly, Scott spend 4 years on a regional marketing
team with a Fortune 500 Telecommunications company, managing product launches, marketing strategy,
Erickson and campaign analysis. At Pepperdine, Scott is President of the business school's Toastmasters
International Club, he is also a member of Pepperdine's Emerging Leaders, a small group of first year
students chosen by faculty to mentor the incoming class. After graduation Scott is looking forward to a
career in capital markets finance

Yaya is currently a graduate student at Pepperdine University, majoring in Applied Finance. She is
recipient of merit-based scholarship and also act as the secretary of Toastmaster Club. She received her
BA of Finance in Donghua University in Shanghai, China. Apart from academic, she also devotes her
self in professional activities. During her undergraduate she worked as an intern in two main banks in
China(ICBC, SPDB), tasks ranging from evaluating loan application of public companies to customer
service for individual investment portfolios. In her first semester in Graziadio Business School, her team
Yaya Zhou won the 2009 Pepperdine Investment Challenge Competition. Yaya plans to concentrate her study in
Finance and looks forward to a career in corporate finance.  Yaya does a lot volunteer work outside
school. She was the active volunteer for 2007 World Special Olympic Games in Shanghai. She has been
a volunteer for Nike "Just Like You" International Sports Exchange program after she attended
Pepperdine. By the opportunity of this program, she has a chance to promote the international
awareness among youth through sport, and the promotes Chinese culture to American children.

Sachendra is a first-year student in the 20-month MBA program at Pepperdine University's Graziadio
School of Business and Management. Sachendra graduated from University of Delhi, India with a
Sachendra degree of Bachelor of Commerce and after that pursued a one year post graduate diploma program in

Jain Marketing and Sales Management from Institute of Management Studies, New Delhi, YMCA.
Sachendra has two years of work experience as a Merchandiser in an India based Apparel
manufacturing and export company. He plans to concentrate his studies in finance and entrepreneurship
PEPPERDINE UNIVERSITY, THE GEORGE L. GRAZIADIOand wants to establish a new start-up project after graduation.
SCHOOL OF BUSINESS AND MANAGEMENT
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TEAM B: ECCE SIGNUM
II.
HEATEFLEX
Heateflex Corporation manufactures
INDUSTRY SNAPSHOT &
COMPANY OVERVIEW
The company now relies on its
As they continue to expand, Heateflex
Industry Snapshot
SEMICONDUCTOR
INDUSTRY
After a period of rapid
decline in semiconductor
equipment sales in the latter half
of 2008 and all of 2009,
Standard & Poor’s believes the
semiconductor equipment
industry will rebound in 2010.
The firm believes that after a
period of under-investing by
manufacturers, advanced
technology purchases will lead the
industry rebound. Gartner Inc.,
an information technology market
research and consulting firm,
forecasts worldwide
semiconductor equipment
spending to rebound 39.1% to
PEPPERDINE UNIVERSITY, THE GEORGE L. GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT
GSBM 698. C. MCPEAK, SPRING 2010
COMPANY OVERVIEW
and distributes ultra-pure heating
equipment to various markets including
Semi-Conductor, Medical and Electronics.
Founded in 1974, Heateflex has
consistently built on its solid foundation
of offering high quality heating solutions
at competitive prices.
innovative and broad line of products to
provide total heating solutions for its
domestic and international clients.  By
customizing their existing technology to
specific client requests Heateflex has
emerged as an industry leader. 
has their sights set squarely on the
future, both in existing markets and new
ones like Solar Cell technology.
$22.2 billion in 2010, up from semiconductor equipment
$15.98 billion for 2009. Standard demand cycle from 2000 to 2009
(Zino, 2009). Heateflex should be
and Poor’s projects that this
rebound in semiconductor prepared from capacity and
liquidity standpoints to meet the
equipment spending will translate
forecasted increase in demand in
into a 40% to 50% increase in
2010 forecasted increase in
semiconductor equipment sales in
demand in 2010:
2010. Several factors
and market trends can
Semiconductor Equipment Demand Cycle
be associated with this
projected growth,
including; an increase
in flat panel TV
orders, and increase in
flash memory demand,
an increase in logic
equipment spending
and an increase in
overall semiconductor
demand from China.
The following chart
depicts the
4
 TEAM B: ECCE SIGNUM

GSBM 698. C. MCPEAK, SPRING 2010

III.
LONG TERM DEBT & SOLVENCY RATIOS:
DEBT TO TOTAL ASSETS
Debt to total assets ratio measures company solvency. It is derived by taking the companies total liabilities and dividing
them by the company’s total assets. Liabilities include short term as well as long term liabilities of the company.

Debt to Total Assets= Total Liabilities

Total Assets

Debt to Total Assets Ratio Analysis form of Notes-Payable in 2002 from a former shareholder
of the company. Every year the company pays a principal
Analysis of Heateflex amount of $177,778 back to the shareholder. If Heateflex
• This is a very important ratio for the company continues this payment schedule, by 2013, it will get rid of
because it indicates the leverage of the company, i.e.,
this borrowing, hence making the financial foundation of
what part of assets of the company is financed by the company even stronger.
borrowing. A higher ratio may often indicate a risk to the Another reason for why ratio has improved is that since
company’s operation because a higher ratio indicates
2007, the company has taken no amount from the bank in
greater leverage. . A high debt to total assets ratio may form of a line of credit, thus further reducing its overall
also limit the company’s potential to take on additional debt.
debt.. External lenders may show very little interest to a
Comparative Analysis to Competitors
firm that already has a large percentage of its capital as Applied Materials & SemiTools
debt . Thus, a higher debt to total assets ratio can result Semi tools and Applied Materials are the two public
in reduced financial flexibility. companies that can be seen as Heateflex’s competitors for
Heateflex’s debt to total assets ratio was 63.72% in which data is publicly available. Even though both of these
2006, 71.21% in 2007, 53.98% in 2008 and 41.02% in companies are much bigger in size, due to similar nature of
2009., The ratio increased by approximately 8% in 2007 to business as Heateflex, they can be compared in a broad
sense. Both Semi tools and Applied Material have a
debt to total assets ratio of approximately 30% in 2008
Heateflex Debt to Assetsand 26% in 2009 compared to 55% for Heateflex in
80% 2008 and 41% in 2009. Hence Heateflex has a higher
ratio when compared to the industry. But in the coming
60% two years, if everything within the company continues
to operate in a similar manner to historical trends,
40%
Heateflex’s debt to total assets ratio is expected to more
20% closely resemble that of the industry.
Recommendations
0% The company has been doing fairly well to reduce its
percentage of debt to total assets. As mentioned
2009 2008 2007 2006

2009
2008
2007
2006
above, the reduction in note payable to a former
shareholder and using internal funds rather than
relying on credit from the bank, has helped the
company immensely in improving its ratio. With an
71.21%. But since, it has been continuously declining,
improved ratio in the coming years, the company can look
indicating a sound balance in firm’s financial composition.
to a financial institution for further expansion.
The ratio for the Heateflex is further expected to
decline in the future. The company had taken a loan in

PEPPERDINE UNIVERSITY, THE GEORGE L. GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT 5

TEAM B: ECCE SIGNUM
GSBM 698. C. MCPEAK, SPRING 2010

III.
LONG TERM DEBT & SOLVENCY RATIOS:
TIMES INTEREST EARNED
Another useful solvency measure is the times interest earned ratio. It provides an indication of a company’s ability to
meet interest payments as they come due. It is computed by dividing the income before interest expense and income
taxes by interest expense. It uses the earnings before interest expense and tax expense because the number best
represents the amount available to pay interest. The equation looks like:

Times Interest Earned= Earnings before Interest & Taxes (EBIT)

Interest Expense
Failing to meet these obligations could force the
company into long-term problems and possible
Times Interest Earned Ratio Analysis
Analysis of Heateflex bankruptcy. Ensuring interest payments to debt
Heateflex has a high amount of interest expense holders and preventing bankruptcy depends mainly
due to the interest from the Notes Payable to the on a company's ability to sustain earnings. However, a
previous owner. In 2008, the company had earnings high ratio can indicate that a company has an
before interest and taxes that were more than 12 times undesirable lack of debt or is paying down too much
the amount needed to pay interest. Then in 2009, the debt with earnings that could be used for other
ratio dropped close to 1. Heateflex should continue to projects. The rationale is that a company would yield
greater returns by investing its
Heateflex Times Interest Earned
earnings into other projects and
13.5 borrowing at a lower cost of capital
12.0 than what it is currently paying for
10.4 its current debt to meet its debt
8.9 obligations.
7.3 Recommendations
5.8 Heateflex is paying off Notes
4.2 Payable to the previous owner until
2.7 2013 at an interest rate of 10%. In
1.1 2008, Heateflex had a Line of
(0.5) Credit with the bank at at Prime
(2.0) minus .25%. The current Prime
2009 2008 2007 2006 Interest Rate is 3.25%.
monitor this ratio because as the multiple decreases, Our recommendation is for Heateflex
the likelihood of the company defaulting on interest to approach the bank to negotiate a line of credit that
payments increases. has an interest rate lower than 10%. This would
The ratio indicates that, historically, Heateflex has allow the company to pay off their existing balance of
generated income high enough to maintain a fair debt the Notes Payable to the owner (10%) with bank-
position. However, currently, the company is not in issued debt.
an ideal position to service its debt.

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 TEAM B: ECCE SIGNUM
GSBM 698. C. MCPEAK, SPRING 2010

III.
LONG TERM DEBT & SOLVENCY RATIOS:
CFO TO DEBT
CFO/Total funded debt ratio provides information on how much cash the company generates from operations that
could be used to pay off the total debt. The higher this ratio, the higher a company’s ability to fulfill its long-term debt
obligations will be. Total funded debt refers to all interest-bearing debt, including both short and long term debt. For
Heateflex, we use the “note payable” and “current portion of note payable” as the “total funded debt”.

CFO to Debt= Cash from Operations (CFO)

Total Liabilities

CFO to Debt Ratio Analysis the capital expenditure also increased a lot in 2009. Notice
Analysis of Heateflex & that the new “Employment Agreement” issued in 2008
Competitors requires “a base salary of $135,000 per year (with a 3%
The Cash flow from operations to /Total funded increase in the second and third years of the contract)”for
debt ratio for Heateflex is the highest in year of 2008, its president and CEO. The increase in accrued salaries
which is 1.62. This means that the cash generated by the (liabilities) contributes a big portion to the increase in
firm is 1.6 times of its total funded debt; Heateflex had capital expenditures.
sufficient free cash to fulfill its debt obligations. (Appendix
1) in 2009, this ratio went down below zero. In this year,
CFO to Debt Comparison
the company had a negative cash flow. There’s a sharp
increase in CFO in 2008 and a sharp decrease in 2009.
The total funded debt for company is steadily decreased
year by year. 180%
The main reason for the dramatic fluctuation in
136%
Heateflex’s CFO is the weak global economy. (Appendix 3)
In 2009, sales decreased 45% and inventory almost 92%
doubled the based on 2008’s amount. Although sales 48%
declined 45% in 2009, receivables increased 20%. Besides,
4%
CFO to Debt (40%)

170% 2009 2008

Compared with its two main competitors, Semitools
137%
and Applied Materials, Heateflex holds the highest
CFO/TFD ratio in 2008 but the lowest one in 2009.
103%
Applied Materials has a relatively steady ratio, but it
70% has the lowest sales and market share. Based on the
current solvency status of these three companies,
37% investors may favor Applied Materials. In addition,
Applied Materials purchased Semitools in
3% December,2008, which made it a much stronger
competitor.
(30%)
2009 2008 2007 2006

PEPPERDINE UNIVERSITY, THE GEORGE L. GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT 7

TEAM B: ECCE SIGNUM
GSBM 698. C. MCPEAK, SPRING 2010

III.
LONG TERM DEBT & SOLVENCY RATIOS:
CFO TO DEBT

CFO to Debt= Cash from Operations (CFO)

Total Liabilities

CFO to Debt Ratio Analysis could improve its solvency by

Recommendations decreasing the amount of cash tied
In 2009, most customers
up in inventory.
slowed their capital
CFO TFD
spending with the onset of
2006 491,557 1,200,000
the credit crisis and the
2007 154,357 1,020,000
uncertainty in the world
2008 1,358,656 840,000
economy. In order to
2009 -106,531 420,000
generate more cash from
sales, Heateflex may want CFO & Total Funded Debt 2006-2009
$1,500,000
to make more frequent
receivable collections than $1,125,000
before. It could also
$750,000
change its cash
management techniques, $375,000

adopting some financial

$0
CFO DEBT
methods such as
“Check-21” or -$375,000
2006 2007 2008 2009
“automatic payment” to
speed up collections. Also, Heateflex

PEPPERDINE UNIVERSITY, THE GEORGE L. GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT 8

TEAM B: ECCE SIGNUM
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IV.
CASH BUDGET:
RECEIPTS &
DISBURSEMENTS
Month Month Month
The cash budget is a tool
used to show anticipated SALES 25 10 4

II. Collections
cash flows. Due to the
importance of cash, many 1st Month (20%) 2 1

consider the cash budget to 2nd Month (60%) 15 6

be the most important 3rd Month (20%) 5

0 17 12
financial budget. Cash Total
budgets are often used to II. Payments

assess whether the entity Wage/material 5 5 5

has sufficient cash to fulfill Salaries & Sales Expenses 3 3 3

regular operations and/or Taxes 7 7 7

whether too much cash is Total payments 15 15 15

being left in unproductive Increase or (decrease) (15) 2 (3)

capacities. It also enables a III. SURPLUS or LOAN

company to determine how Beginning cash w/o loan $0 ($5) $7
much credit it can extend to Cumulative cash ($15) ($3) $4
customers before it begins Less: Target $
10 $
10 $
10
to have liquidity problems Cumulative surplus or total ($5) $7 $14
The cash budget contains loans
three sections; cash CASH POSITION deficit Surplus Surplus

disbursements, financing,
and cash receipts. Cash
disbursements reflect
Appropriate Management Need more capital, Pay Debt, Make Pay Debt, Make Short
Action Approach Bank for Short Term Term Investments In
Financing, Consider Investments In Money Market Account
shutdown of inefficient Money Market if Cyclical, Long Term

expected cash payouts, such operation or investment Account if Cyclical, investments if long term
Long Term surplus, expand
as direct materials and investments if long operations, replace or
labor. This portion also term surplus, expand update fixed assets
operations, replace
includes estimates for
or update fixed
taxes, dividends, and other assets

payments. The cash receipts

section shows expected cash flow from the company’s primary sources of revenue. These receipts are
typically cash sales and collections of credit sales from customers. It is useful to prepare a schedule of
collections from customers in this section. For Heateflex, historical receipts have amounted to 50% in the
first month, 30% in the second month, and 15% in the third month and 5% beyond 90 days

PEPPERDINE UNIVERSITY, THE GEORGE L. GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT 9

TEAM B: ECCE SIGNUM
GSBM 698. C. MCPEAK, SPRING 2010

V. Z-SCORE: Working Capital

Z Score Financial Analysis is commercially used to indicate 6.56 x
Total Assets
the likelihood of a company going bankrupt within the 24
month period following the analysis. The method was
+
Retained Earnings
3.26 x
developed in 1968 and has been used as a financial tool Total Assets
since. Since its inception the formula has been found to +
be anywhere between 80-95% accurate in predicting EBIT
6.72 x
bankruptcy. The actual Z Score value is obtained by Total Assets
applying either 4 or 5 specific financial ratios to a +
specific set of coefficients. The coefficients were Equity
1.05 x
obtained by gathering historical data on companies that Total Liabilities
have gone bankrupt and deriving the appropriate
values. For our analysis the ratios include: (in order of application) Working capital/total assets,
Retained earnings/total assets, Earnings before interest and taxes/total assets and finally Equity/total
liabilities. If the final Z score value is 2.6 or higher then the company should not expect to go into
bankruptcy in the next two years.

When we applied the formula to Heateflex we found that in 2008 they had a Z score of
5.42, and in 2009 a value of 3.95. This indicates that based on historical precedent we can be
80-95% confidant that Heateflex will not go bankrupt in the next two years. Their value has
decreased in the last year but is still significantly above the bankruptcy line. We suggest that
Heateflex perform this analysis quarterly and have provided an easy to use tool to do so.

PEPPERDINE UNIVERSITY, THE GEORGE L. GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT 10

TEAM B: ECCE SIGNUM
GSBM 698. C. MCPEAK, SPRING 2010

Sources
Data & Information

Standard & Poor’s. (2009). Industry Surveys:

Semiconductor Equipment. New York, NY:  Zino, A.

Weygandt, Jerry. Financial Accounting: Tools for

Business Decision Making, 5th Edition. Jefferson City:
Wiley, 2009

Weygandt, Jerry. Managerial Accounting: Tools for

Business Decision Making, 4th Edition. Jefferson City:
Wiley, 2008.

PEPPERDINE UNIVERSITY, THE GEORGE L. GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT 11