Blaine Kitchenware

rP os t 4040 OCTOBER 8, 2009 TIMOTHY LUEHRMAN JOEL HEILPRIN op yo Blaine Kitchenware, Inc. groovy social organization On April 27, 2007, skipper Dubinski, CEO of Blaine Kitchenware, Inc. (BKI), sat in his office reflecting on a meeting he had had with an investment banker earlier in the week. The banker, whom Dubinski had cognize for geezerhood, asked for the meeting aft(prenominal) a group of private fair-mindedness investors make discreet inquiries about(predicate) a possible acquisition of Blaine. Although Blaine was a macrocosm friendship, a mass of its distributes were controlled by family members descended from the firms founders together with conf utilise family trusts.Family interests were strongly represented on the board of directors as well. Dubinski k new the family had no accredited interest in sellingon the contrary, Blaine was interested in getting other companies in the kitchen thingmajigs spaceso this overture, like a a couple of(prenominal) others before it, would be politely rebuffed. No tC Neverthe little, Dubinski was struck by the bankers assertion that a private blondness buyer could unlock value inherent in Blaines strong operations and oddment sheet. Using cash in on Blaines proportion sheet and new borrowings, a rivate equity firm could purchase all of Blaines superior partakes at a cost higher than $16. 25 per share, its current song price. It would then repay the debt over time using the clubs proximo earnings. When the banker pointed out that BKI itself could do the corresponding thingborrow coin to buy back its own sharesDubinski had asked, But why would we do that? The bankers response was blunt Beca work youre over-liquid and under-levered. Your shareholders are paying a price for that. In the days since the meeting, Dubinskis thoughts kept returning to a share repurchase.How many shares could be bought? At what price? Would it sap Blaines monetary strength? Or prevent it from making future acquis itions? Blaine Kitchenwares phone stress Do Blaine Kitchenware was a mid-sized producer of branded small appliances primarily employ in residential kitchens. Originally founded as The Blaine Electrical Apparatus lodge in 1927, it produced then-novel electric home appliances, much(prenominal) as irons, vacuum cleaners, flicker irons, and cream separators, which were touted as modern, clean, and easier to practice session than counterparts fueled by oil, coal, gas, or by hand.By 2006, the keep attach tos products consisted of a wide range of small kitchen appliances exampled for food and beverage preparation and for cooking, including several branded lines of deep fryers, griddles, flitter irons, toasters, small ovens, blenders, mixers, pressure cookers, steamers, slow cookers, shredders and slicers, and coffee makers. ________________________________________________________________________________________________________________ HBS Professor Timothy A. Luehrman and Illino is initiate of Technology Adjunct Finance Professor Joel L.Heilprin prepared this case save as a basis for class discussion and non as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration. Copyright 2009 President and Fellows of Harvard College. To order copies or request consent to disgorge materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http//www. bsp. harvard. edu. This payoff may not be digitized, photocopied, or otherwise reproduced, stick on, or transmitted, without the permission of Harvard Business School. This enter is pass for use precisely by Atul Singh at JRE Group of Institutions until June 2013. write or mailing is an trespass of copyright. email&160protected harvard. ed u or 617. 783. 7860. rP os t 4040 Blaine Kitchenware, Inc. Capital Structure Blaine had fair under 10% of the $2. 3 billion U. S. commercialise for small kitchen appliances.For the period 20032006 the perseverance posted modest yearbook unit gross gross sales growth of 2% despite positive foodstuff conditions including a strong housing grocery store, growth in affluent mansioners, and product innovations. Competition from inexpensive imports and aggressive pricing by mass merchandisers limited industry dollar volume growth to just 3. 5% annually over that same period. Historically, the industry had been fragmented, but it had of late experienced roughly consolidation that many participants expected to continue. In recent years, Blaine had been expanding into foreign markets.Nevertheless in 2006, 65% of its receipts was gene yardd from shipments to U. S. wholesalers and retailers, with the balance coming from sales to Canada, Europe, and Central and South America. The company shipped approximately 14 million units a year. op yo There were three major segments in the small kitchen appliance industry food preparation appliances, cooking appliances, and beverage-making appliances. Blaine produced product for all three, but the majority of its revenues came from cooking appliances and food preparation appliances.Its market share of beverage-making appliances was only if 2%. Most of BKIs appliances retailed at medium price points, at or just below products offered by the best-known national brands. BKIs market research consistently showed that the Blaine brand was well-known and well-regarded by consumers. It was associated roughlywhat with nostalgia and the inception of familiar, wholesome dishes. tC Recently, Blaine had introduced some goods with smart technology features and sleeker styling, identifying higher-end consumers and intended to deal at higher price points.This scheme was in response to increase competition from Asian imports and private label product. The majority of BKIs products were distributed via a network of wholesalers, which supplied mass merchandisers and department stores, but its upper-tier products were sold directly to curio retailers and catalogue companies. Regardless of the distribution channel, BKI offered consumers standard warranty terms of 90 days to one year, depending on the appliance. No Blaines monthly sales reached a seasonal peak during October and November as retailers increased stock in anticipation of the holiday season.A smaller peak occurred in May and June, co-occur with Mothers Day, a summer surge in weddings, and the seasonal peak in home purchases. Historically, sales of Blaine appliances had been cyclical as well, lean to track overall macroeconomic activity. This also was the case for the industry as a whole in particular, changes in appliance sales were correlated with changes in housing sales and in home renovation and household formation. BKI owned and operated a small factory in Minnesota that produced suck iron parts with specialty coatings for certain of its cookware offerings. separatewise, however, Blaine, like about companies in the appliance industry, outsourced its ware. In 2006 BKI had suppliers and contract manufacturers in China, Vietnam, Canada, and Mexico. Do Victor Dubinski was a great-grandson of one of the founders. An engineer by training, Dubinski served in the U. S. Navy after graduating from college in 1970. After his discharge, he worked for a rangy aerospace and defense contractor until joining the family business in 1981 as head of operations. He was take to the board of directors in 1988 and became Blaines CEO in 1992, succeeding his uncle.Under Dubinskis leadership, Blaine operated often as it always had, with three notable exceptions. First, the company undefiled an IPO in 1994. This provided a measure of liquidity for certain of the founders posterity who, collectively, owned 62% of the outstanding shares 2 BRIEFCASES HARVARD commerce SCHOOL This document is authorized for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or posting is an onset of copyright. email&160protected harvard. edu or 617. 783. 7860. rP os t Blaine Kitchenware, Inc. Capital Structure 4040 ollowing the IPO. Second, beginning in the 1990s, Blaine gradually moved its production abroad. The company began by taking advantage of NAFTA, engaging suppliers and performing some manufacturing in Mexico. By 2003, BKI also had established relationships with several Asian manufacturers, and the large majority of its production took place outside the United States. Finally, BKI had undertaken a strategy focused on rounding out and complementing its product offerings by acquiring small independent manufacturers or the kitchen appliance product lines of large diversify manufacturers.The company carefully followed changes in customer purchasing behavior and market trends. Victor Dubinski and the board were eager to continue what they believed had been a fruitful strategy. The company was particularly keen to increase its presence in the beverage appliance segment, which demonstrated the strongest growth and where BKI was weakest. Thus far, all acquisitions had been for cash or BKI stock. op yo financial Performance During the year ended December 31, 2006, Blaine earned net income of $53. 6 million on revenue of $342 million.Exhibits 1 and 2 present the companys recent financial statements. Approximately 85% of Blaines revenue and 80% of its operate income came from the sale of mid-tier products, with the line of higher-end goods accounting for the remainder. The companys 2006 EBITDA margin of nearly 22% was among the strongest within the peer group shown in Exhibit 3. Despite its recent shift toward higher-end product lines, Blaines operating margins had decreased slightly over the last three years. mouldings declined due to consolidation costs and inventory write-down s associated with recent acquisitions.Now that integration activities were completed, BKI executives expected the firm to win operating margins at least as high as its historic margins. tC The U. S. industry as a whole faced vast pressure from imports and private label products, as well as a shift in consumer purchasing preferences favoring larger, big box retailers. In response, some of Blaines more(prenominal) aggressive rivals were cutting prices to maintain sales growth. Blaine had not followed suit and its organic revenue growth had suffered in recent years, as some of its core products lost market share.Growth in Blaines line of longitude line was attributable almost exclusively to acquisitions. No Despite the companys profitability, returns to shareholders had been somewhat below average. Blaines return on equity ( roe), shown below, was significantly below that of its publicly traded peers. 1 Moreover, its earnings per share had locomote significantly since 2004, partly due to dilutive acquisitions. Companies 2006 ROE Do Home &038 home Design AutoTech Appliances XQL Corp. Bunkerhill Incorporated EasyLiving Systems Mean 11. 3% 43. 1% 19. 5% 41. 7% 13. 9% 25. 9%Median 19. 5% Blaine 11. 0% 1 ROE is computed here as net income divided by end-of-period book equity. HARVARD agate line SCHOOL BRIEFCASES This document is authorized for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or posting is an intrusion of copyright. email&160protected harvard. edu or 617. 783. 7860. 3 rP os t 4040 Blaine Kitchenware, Inc. Capital Structure During 20042006, intensify annual returns for BKI shareholders, including dividends and stock price appreciation, were approximately 11% per year.This was higher than the S&038P 500, which returned approximately 10% per year. However, it was well below the 16% annual compounded return earned by shareholders of Blaines peer group during the same period. Financial Policies op yo Blaines financial posture was conservative and very much in keeping with BKIs long-standing practice and, indeed, with its management style generally. scarce twice in its history had the company borrowed beyond seasonal works capital needs. The freshman time was during World War II, when it borrowed from the U. S. government to reorganise several factories for war production.The second time was during the first oil profane of the 1970s. On both occasions the debt was repaid as quickly as possible. At the end of 2006, Blaines balance sheet was the strongest in the industry. Not only was it debtfree, but the company also held $231 million in cash and securities at the end of 2006, down from $286 million two years earlier. Given much(prenominal) substantial liquidity, Blaine had terminated in 2002 a revolving credit agreement knowing to provide standby credit for seasonal needs the CFO argued that the fees were a waste of money and Dubinski agreed.In recent years the companys largest uses of cash had been common dividends and cash consideration paid in various acquisitions. Dividends per share had risen only modestly during 20042006 however, as the company issued new shares in connection with some of its acquisitions, the number of shares outstanding climbed, and the payout ratio rose significantly, to more than 50% in 2006. tC 2004 $ 53,112 $ 18,589 41,309 $ 1. 29 $ 0. 45 35. 0% 2005 $ 52,435 $ 22,871 48,970 $ 1. 07 $ 0. 47 43. 6% 2006 $ 53,630 $ 28,345 59,052 $ 0. 91 $ 0. 48 52. 9% No bread income Dividends comely shares outstanding Earnings per shareDividend per share Payout ratio Do The next largest use of funds was capital expenditures, which were modest due to Blaines extensive outsourcing of its manufacturing. bonnie capital expenditures during the past three years were just over $10 million per year. While they were expected to remain modest, future expenditures would be operate in part by the extent and nature of Blaines future acquisitions. In recent years, aft er-tax cash generated from operations had been more than four propagation average capital expenditures and rising, as shown in the table below. 4 2004 EBITDA slight imposees After-Tax operational Cash Flow 2005 69,370 24,989 44,380 $ 68,895 24,303 44,592 2006 $ 73,860 23,821 50,039 AVG. 46,337 BRIEFCASES HARVARD BUSINESS SCHOOL This document is authorized for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or posting is an infringement of copyright. email&160protected harvard. edu or 617. 783. 7860. Reassessing Financial Policies in 2007 rP os t Blaine Kitchenware, Inc. Capital Structure 4040 In 2007 Blaine planned to continue its constitution of holding prices firm in the face of competitive pressures. Consequently, its managers were expecting top line growth of only 3% for fiscal year 2007.However, this growth rate assumed no acquisitions would be made in 2007, unlike the antecedent two years. While the board remained receptive to opportunitie s, Dubinski and his team had no target in mind as yet at the end of April. op yo As he reflected on the possibility of repurchasing stock, Dubinski understood that he could consider such a move only in conjunction with all of BKIs financial policies its liquidity, capital structure, dividend policy, ownership structure, and acquisition plans. In addition, he wondered about timing. Blaines stock price was not far off its all-time high, yet its performance clearly lagged that of its peers.A summary of contemporaneous financial market information is provided in Exhibit 4. Dubinski had begun to suspect that family members on the board would have some of the possible effects of a large share repurchase. presume that family members held on to their shares, their percentage ownership of Blaine would rise, reversing a downward trend date from BKIs IPO. It also would give the board more flexibility in setting future dividends per share. Both Dubinski and the board knew that the recent tre nd in BKIs payout ratio was unsustainable and that this concerned some family members.Do No tC On the other hand, a large repurchase might be unpopular if it forced Blaine to give up its war chest and/or disclose its acquisition activity. Perhaps even more unsettling, it would cause Blaine to borrow money. The company would be paying significant interest expense for only the tercet time in its history. As Dubinski turned his chair to face the window, he glanced at the framed photo behind his desk of his great grandfather, Marcus Blaine, demonstrating the companys first cream separatorits best-selling product during Blaines first decade.A real Blaine Electrical Cream Separator sat in a glass case in the corner the last one had been fabricate in 1949. HARVARD BUSINESS SCHOOL BRIEFCASES This document is authorized for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or posting is an infringement of copyright. email&160protected harvard. edu or 617. 783. 7860. 5 Exhibit 1 rP os t 4040 Blaine Kitchenware, Inc. Capital Structure Blaine Kitchenware, Inc. , Income Statements, years ended December 31, ($ in Thousands) in operation(p) Results 2004 2005 2006 $291,940 204,265 Net Income Dividends 63,946 9,914 68,895 73,860 60,682 16,057 63,946 3,506 78,101 24,989 76,738 24,303 77,451 23,821 52,435 $ 22,871 53,630 $ 28,345 5. 5% 11. 1% op yo Earnings Before Tax less(prenominal) Taxes 60,682 8,213 53,112 $ 18,589 EBIT Plus Other Income (expense) 92,458 28,512 62,383 15,719 EBITDA 87,731 27,049 69,370 Operating Income Plus Depreciation &038 Amortization $342,251 249,794 62,383 6,987 double-dyed(a) Profit Less Selling, General &038 Administrative $307,964 220,234 87,676 25,293 tax revenue Less greet of Goods Sold Margins Revenue Growth 3. 2% Gross Margin 30. 0% 28. 5% 27. 0% 21. 4% 19. 7% 18. 7% 23. 8% 22. 4% 21. 6% 32. 0% 31. 7% 30. 8% Net Income Margin 18. 2% 17. 0% 15. 7% Dividend payout ratio 5. 0% 43. 6% 52. 9% EBIT Margin EBITDA Mar gin Blaines future tax rate was expected to rise to the statutory rate of 40%. Do No a. tC Effective Tax Ratea 6 BRIEFCASES HARVARD BUSINESS SCHOOL This document is authorized for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or posting is an infringement of copyright. email&160protected harvard. edu or 617. 783. 7860. Exhibit 2 rP os t Blaine Kitchenware, Inc. Capital Structure 4040 Blaine Kitchenware, Inc. Balance Sheets, December 31, ($ in Thousands) Assets 2004 Cash &038 Cash Equivalents 2005 2006 $ 67,391 grace of God Other Assets Total Assets p yo Property, Plant &038 Equipment 48,780 49,728 54,874 3,871 5,157 376,351 Total Current Assets 43,235 2,586 Other Current Assets 164,309 47,262 Inventory $ 66,557 196,763 40,709 Accounts Receivable $ 70,853 218,403 martable Securities 364,449 339,678 99,402 138,546 174,321 8,134 20,439 38,281 13,331 27,394 39,973 $497,217 $550,829 $592,253 $ 26,106 $ 28,589 $ 31,936 22,605 24,921 27,761 14,225 17,196 16,884 62,935 70,705 76,581 1,794 3,151 4,814 15,111 18,434 22,495 79,840 92,290 103,890 Liabilities &038 Shareholders virtue Accounts Payable accumulated Liabilities Taxes Payable Total Current Liabilities Other liabilitiesDeferred Taxes tC Total Liabilities Shareholders Equity Total Liabilities &038 Shareholders Equity 458,538 488,363 $550,829 $592,253 Many items in BKIs historical balance sheets (e. g. , Property, Plant &038 Equipment) have been affected by the firms acquisitions. Do No Note 417,377 $497,217 HARVARD BUSINESS SCHOOL BRIEFCASES This document is authorized for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or posting is an infringement of copyright. email&160protected harvard. edu or 617. 783. 7860. 7 This document is authorized for use only by Atul Singh at JRE Group of Institutions until June 2013.Copying or posting is an infringement of copyright. email&160protected harvard. edu or 617. 783. 7860. 45. 18% 31. 12% Net Debt/Equity N et Debt/Enterprise Value b. Net debt is total long-term and short-term debt less excess cash. a. Net working capital excludes cash and securities. 1. 91x 10. 56x 9. 46x 1. 63x 1. 03 776,427 $1,127,226 $ 350,798 372,293 475,377 LTM duty Multiples MVIC/Revenue MVIC/EBIT MVIC/EBITDA Market/Book equity Equity beta Market capitalization Enterprise value (MVIC) Net debtb Total debt Book equity $ 21,495 54,316 900,803 $ 976,613 31. 74% 24. 10% 1. 02x 7. 35x 6. 03x 4. 26x 1. 24 17. 97% 15. 23% 1. 5x 8. 65x 7. 84x 2. 51x 0. 96 5,290,145 $6,240,947 $ 950,802 972,227 2,109,400 $ 21,425 353,691 3,322,837 $3,697,952 $4,313,300 721,297 796,497 $ 412,307 XQL Corp. -15. 47% -18. 31% 1. 87x 18. 05x 15. 15x 4. 41x 0. 67 418,749 $ 353,949 $ (64,800) 177,302 94,919 $ 242,102 21,220 68,788 $ 332,110 $ 188,955 19,613 23,356 $ 13,173 EasyLiving Systems 4040 -8- -24. 06% -31. 68% 2. 13x 11. 40x 9. 87x 1. 96x 0. 56 959,596 $ 728,730 $(230,866) 488,363 $ 230,866 32,231 174,321 $ 592,253 $ 342,251 63,946 73, 860 $ 53,630 Blaine Kitchenware rP os t 6. 01% 5. 67% 1. 14x 7. 42x 6. 88x 4. 93x 0. 92 3,962,780 $4,200,836 $ 238,056 391,736 04,400 $ 153,680 334,804 815,304 $1,303,788 $3,671,100 566,099 610,399 $ 335,073 Bunkerhill, Inc. op yo 13,978,375 $18,415,689 $4,437,314 4,973,413 3,283,000 $ 536,099 1,247,520 7,463,564 $9,247,183 $18,080,000 2,505,200 3,055,200 $1,416,012 AutoTech Appliances tC No $ 589,747 106,763 119,190 $ 53,698 Home &038 Hearth Design Selected Operating and Financial Data for Public Kitchenware Producers, 12 months ended December 31, 2006, ($ in Thousands) Cash &038 securities Net working capitala Net fixed assets Total assets Revenue EBIT EBITDA Net income Exhibit 3 Do Exhibit 4 rP os t Blaine Kitchenware, Inc. Capital Structure 4040Contemporaneous Capital Market Data (April 21, 2007) Yields on U. S. Treasury Securities Maturity 30 days 60 days 90 days 1 year 5 years 10 years 20 years 30 years op yo 4. 55% 4. 73% 4. 91% 4. 90% 4. 91% 5. 02% 5. 26% 5. 10% Default sp read 0. 86% 1. 02% 1. 33% 1. 70% 2. 86% 3. 92% Do No tC Seasoned corporate bond yields Moodys Aaa 5. 88% Aa 6. 04% A 6. 35% Baa 6. 72% Ba 7. 88% B 8. 94% HARVARD BUSINESS PUBLISHING BRIEFCASES This document is authorized for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or posting is an infringement of copyright. email&160protected harvard. edu or 617. 783. 7860. 9