BB 2
197315 million bikes sold bicycle boom (Baldwin 135,000) 198210 million bikes sold (Baldwin 99,000) Baldwin: 1982 Structural Financial Model Capacity used now Total Capacity (one shift) Cost Structure Fixed Mfg. (14% sales) S&A (22% sales) Fixed 98,791 units 131,721 units Per Unit $110 $66 $44
BB 3
Du Pont Model
Profit/Sales x Sales/Assets x Assets/Equity = Profit/Equity Margins Asset Intensity 10,872/8,092 (1.3x) Leverage = Shareholder Return 255/3102 (8%)
255/10,872 (2+%)
8,092/3,102 = (2.6x)
USA Average?
BB 4
BB 5
$69.20 $23.09
BB 6
Raw Material (2 months) Accounts Payable Offset (1 month assumed) Work in Process Finished Goods At Hi-Valu Warehouse (2 months) Accounts Receivable (1 month)
BB 7
4. Carrying Costs
23.5% on Raw Material + WIP + Finished Goods (23.5% on $470,000) 19.0% on Accounts Receivable (19.0% on $190,000) = $110,000
40,000
$150,000
$150,000 = $6 per unit
a. What rate to use? Debt rate vs. weighted average cost of capital Finance Cost + Non-financial Cost (tax, insurance, obsolescence, ...) b. The charge = rate x Investment
BB 8
Variable cost per unit Per Unit Incremental Erosion costs (3,000 units @ $44)
~$130,000
BB 9
Good if RI > 0
a. Contribution Margin
b. Erosion ~ 3,000 x ~ $44 = ~ $130,000 c . The Finance Charge (per item 4 above = $150,000)
BB 10
Profit Model
PAT/Sales Margins CURRENT: 1982 255 10,872 x 10,872 8,092 x 8,092 3,102 = 8% x Sales/Assets Asset Intensity x Assets/SE Leverage = ROE
1) PC of $580 - Carry Cost of $150 - Erosion CM of $130 = $300 x ~60% = $180 2) +$2.3M ($92 x 25,000) - .3M ($110 x 3,000) = $2M 3) +745 Working Capital Assets
BB 11
Conventional Pro
Incremental profit and incremental ROI excellent (even with erosion). The existing business covers the fixed costs (i.e. we are showing profits in 1982). The Incremental business need only show positive marginal contribution. We have excess capacity and volume isnt growing. Opens up a new (for Baldwin) and more stable distribution channel (Hi Value). Opens up a new market segment for growth for Baldwin (The Discount Retail segment). Risk seems low (or does it?!).
BB 12
Cons
Can we really look at a deal on an incremental basis when it covers 25% of volume and runs for at least 3 years??!! On a full cost basis, not attractiveLose $16 per unit [92-69-15-24]. Lousy ROE (} 8% ) now; Even with the H/V deal, the ROE is still not good (} 13% ); Need to get higher margin on the remaining capacity. Creates a major cash crunch; Highly leveraged now; No debt capacity left; How to finance the incremental investment? Inventory at H/V may run up to average 4 months, not 2 months; Implications for ROI, cash flow, and financing? Additional sales losses, if current dealers drop Baldwin line? A very sweet deal for H/V; Can we negotiate a better deal? (probably yes; should we try?)
BB 13
BALDWIN: 1982
Balance Sheet
Cash A/R (45 days) Fixed Assets $342 $1,359 $3,635 $8,092 2,678 + 1,512 3,102 A/P (45 days) + Accruals $852 Bank Borrowing $2,626 LTD SE $1,512 $3,102 $8,092
D/E Ratio =
BB 14
BB 15
Baldwin: Background
Currently profitable, but only modestly so (ROE }8%) Heavily leveraged Their old strategic niche is eroding away, slowly but surely, from above and below Sales volume decreasing during last 2 years A solution presents itself in the H/V offer Is it a good solution?
BB 16
How much flexibility does Baldwin have to experiment? How much urgency is there to do something? Does the H/V deal make sense strategically?
BB 17
Current contribution margin: $44 (40% of sales) Break even point: 89k units ($3.9M / 44) or 2/3 of cap. Profit (before tax) at around 450K Profit (before tax) at cap. Would be at 1.9M => Excellent! Inventory: 120 days (long); Receivables 45 days (avg.) Gross margin: 26% of sales (low in manufacturing) Selling and admin costs: 22% of sales (high, given GM) These results suggests that Baldwin is geared for much higher level of sales so, what about H/V offer?
BB 18
What is Baldwins strategic niche currently? Does it matter if they stray from that? Can we be a significant supplier simultaneously in two price segments with a substantially identical product? How to implement diverse strategies (low cost and differentiation) within the same firm? Avoid stuck-in-the-middle
BB 19
BB 20
Financial Analysis
Sorting out the relevant costs Contribution or full cost profit as the metric How to best treat fixed or common costs
There are no Free Lunches, Good Cheap Cigars, or Short-Run Business Decisions