Blaine Kitchenware

rP os t 4040 OCTOBER 8, 2009 TIMOTHY LUEHRMAN JOEL HEILPRIN op yo Blaine Kitchenwargon, Inc. cap body structure On April 27, 2007, Victor Dubinski, chief in ope symmetryn(p) officer of Blaine Kitchenware, Inc. (BKI), sat in his office reflecting on a coming upon he had had with an coronation banker earlier in the week. The banker, whom Dubinski had kn protest for twelvemonths, asked for the meeting after a separate of clandestine loveliness investors made discreet inquiries rough a possible acquisition of Blaine. Although Blaine was a public comp each, a majority of its percentages were controlled by family members desc exterminateed from the pie-eyeds fo lows together with dissimilar family trusts.Family touchs were bullockyly represented on the poster of directors as well. Dubinski knew the family had no current interest in sellingon the contrary, Blaine was provoke in acquiring other companies in the kitchen utensils spaceso this everyplaceture, like a few other s before it, would be courteously rebuffed. No tC Nevertheless, Dubinski was struck by the bankers assertion that a close equity buyer could unlock take account inherent in Blaines strong ope respitens and balance aeroplane. Using specie on Blaines balance sheet and new seizeings, a rivate equity firm could purchase whole of Blaines corking shares at a cost high than $16. 25 per share, its current stock price. It would thusly repay the debt over time utilise the associations proximo earnings. When the banker pointed prohibited that BKI itself could do the same(p) thing absorb m maveny to buy back its own sharesDubinski had asked, But why would we do that? The bankers response was blunt Beca rehearse youre over-liquid and under-levered. Your shareholders are paying a price for that. In the days since the meeting, Dubinskis thoughts kept reversive to a share salvation.How many shares could be bought? At what price? Would it sap Blaines pecuniary strength? Or hold it from making future acquisitions? Blaine Kitchenwares bank source Do Blaine Kitchenware was a mid-sized producer of brand pocket-sized appliances primarily usanced in residential kitchens. Origin whollyy founded as The Blaine galvanising Apparatus Company in 1927, it produced then-novel electric automobile dental plate appliances, much(prenominal) as irons, vacuity cleaners, waffle irons, and thrash separators, which were t egressed as modern, clean, and easier to use than counterparts fueled by oil, coal, gas, or by hand.By 2006, the bon tons ingatherings consisted of a coarse range of tiny kitchen appliances used for regimen and beverage preparation and for cooking, including several brand lines of deep fryers, griddles, waffle irons, toasters, small ovens, blenders, mixers, haul cookers, steamers, slow cookers, shredders and slicers, and coffee makers. ________________________________________________________________________________________________________________ HBS Professor timothy A. Luehrman and Illinois Institute of Technology Adjunct finance Professor Joel L.Heilprin prepared this case unaccompanied as a basis for phratry discussion and non as an endorsement, a source of primary data, or an representative of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. at that smudge are occasional references to actual companies in the narration. Copyright 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, portend 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http//www. bsp. harvard. edu. This publication may not be digitized, photocopied, or otherwise reproduced, stick on, or transmitted, without the permission of Harvard Business School. This register is legitimate for use notwithstanding by Atul Singh at JRE assort of Institutions u ntil June 2013. write or circular is an trespass of copyright. emailprotected harvard. edu or 617. 783. 7860. rP os t 4040 Blaine Kitchenware, Inc. cracking Structure Blaine had equitable under 10% of the $2. 3 billion U. S. mart for small kitchen appliances.For the period 20032006 the diligence posted modest socio-economic classbook unit gross tax income festering of 2% despite plus mart conditions including a strong caparison market, growth in affluent householders, and crossway innovations. Competition from inexpensive imports and aggressive price 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 youngly see some consolidation that many participants evaluate to continue. In recent years, Blaine had been expanding into foreign markets.Nevertheless in 2006, 65% of its revenue was generated from shipments to U. S. wholesalers and retailers, with the b alance coming from gross revenue to Canada, Europe, and Central and South America. The friendship shipped almost 14 one thousand million units a year. op yo There were three major segments in the small kitchen appliance industry regimen 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 regimen preparation appliances.Its market share of beverage-making appliances was precisely 2%. Most of BKIs appliances retailed at medium price points, at or just below products offered by the best-known national brands. BKIs market seek consistently showed that the Blaine brand was well-known and well-regarded by consumers. It was associated close to with nostalgia and the creation of familiar, wholesome dishes. tC Recently, Blaine had introduced some goods with smart technology features and sleeker styling, buming higher-end consumers and think to compete at higher price points.This dodge was in response to increase competition from Asiatic imports and private tail product. The majority of BKIs products were distributed via a clams income of wholesalers, which supplied mass merchandisers and department stores, but its upper-tier products were sell directly to specialty retailers and catalogue companies. heedless of the distribution channel, BKI offered consumers standard warranty call 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 presentiment of the holiday season.A smaller peak occurred in May and June, coinciding 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, be to track overall macroeconomic activity. This prodigalityively was the case for the industry as a whole in particular, changes in appliance sales were correlated with changes in accommodate sales and in home restoration and household formation. BKI owned and operated a small factory in Minnesota that produced set iron parts with specialty coatings for certain(prenominal) of its cookware offerings.Otherwise, however, Blaine, like most companies in the appliance industry, outsourced its production. In 2006 BKI had suppliers and contract manufacturers in China, Vietnam, Canada, and Mexico. Do Victor Dubinski was a bully-grandson of one of the founders. An engineer by training, Dubinski served in the U. S. dark blue after graduating from college in 1970. After his discharge, he worked for a large aerospace and defense avower until joining the family business in 1981 as head of operations. He was elected to the dining table of directors in 1988 and became Blaines CEO in 1992, succeeding his uncle.Under Dubinskis leadership, Blaine operated a good deal as it always had, with three notable exceptions. First, the confedera tion completed an IPO in 1994. This addd a measure of liquidity for certain of the founders posterity who, collectively, owned 62% of the outstanding shares 2 BRIEFCASES HARVARD stemma domesticate This document is reliable for use besides by Atul Singh at JRE Group of Institutions until June 2013. Copying or scorecard is an infringement of copyright. emailprotected harvard. edu or 617. 783. 7860. rP os t Blaine Kitchenware, Inc. great(p) Structure 4040 ollowing the IPO. Second, beginning in the 1990s, Blaine gradually fall upond its production abroad. The troupe began by taking advantage of NAFTA, winsome 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 diversified manufacturers.The caller-out carefully followed changes in customer purchasing style and market rows. Victor Dubinski and the observation were bore 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 demonstrate the strongest growth and where BKI was weakest. Thus far, all acquisitions had been for bills or BKI stock. op yo Financial Performance During the year ended celestial latitude 31, 2006, Blaine earn bread income of $53. 6 million on revenue of $342 million. demos 1 and 2 present the companys recent financial statements. rough 85% of Blaines revenue and 80% of its operating income came from the sale of mid-tier products, with the line of higher-end goods write up for the remainder. The companys 2006 EBITDA margin of nigh 22% was among the strongest within the peer collection shown in debunk 3. Despit e its recent remove toward higher-end product lines, Blaines operating margins had decreased slightly over the belong three years. valuation reserves declined due to integration be and inventory write-downs associated with recent acquisitions.Now that integration activities were completed, BKI executives pass judgment the firm to achieve operating margins at least as high as its historical margins. tC The U. S. industry as a whole grammatical constructiond abundant pressure from imports and private label products, as well as a shift in consumer purchasing preferences favoring larger, big misfortune retailers. In response, some of Blaines to a greater extent than 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 top line was attributable almost exclusively to acquisitions. No Despite the companys profitabilit y, returns to shareholders had been somewhat below average. Blaines return on equity ( roe), shown below, was substantially below that of its publically traded peers. 1 Moreover, its earnings per share had travel significantly since 2004, partly due to dilutive acquisitions. Companies 2006 ROE Do Home & Hearth cast 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 BUSINESS SCHOOL BRIEFCASES This document is authorize for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or neb is an infringement of copyright. emailprotected harvard. edu or 617. 783. 7860. 3 rP os t 4040 Blaine Kitchenware, Inc. Capital Structure During 20042006, compounded annual returns for BKI shareholders, including dividends and stock price appreciation, were approximately 11% per year.This was higher than the S&P 500, which re false 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 coiffe and, indeed, with its management style generally. Only double in its history had the company borrowed beyond seasonal working neat require. The primary time was during World War II, when it borrowed from the U. S. governance to retool several factories for war production.The back up time was during the first oil nose candy 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 hard currency and securities at the end of 2006, down from $286 million two years earlier. Given such substantial liquidity, Bla ine had terminated in 2002 a revolving credit agreement designed to provide standby credit for seasonal needs the CFO argued that the fees were a waste of silver and Dubinski agreed.In recent years the companys largest uses of interchange 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 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 send away income Dividends add up 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. Average capital expenditures during the chivalric three years were just over $10 million per year. While they were pass judgment to remain modest, future expenditures would be set in part by the fulfilment and nature of Blaines future acquisitions. In recent years, after-tax cash generated from operations had been more than four times average capital expenditures and rising, as shown in the table below. 4 2004 EBITDA Less revenue enhancementes After-Tax operating(a) Cash execute 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 pass for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or posting is an infringement of copyright. emailprotected 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 form _or_ system of government 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, different the previous two years. While the calling card remained receptive to opportunities, Dubinski and his team had no target in mind as unless 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, self-control structure, and acquisition plans. In addition, he wondered closely timing. Blaines stock price was not far off its all-time high, provided its performance clearly lagged that of its peers.A summary of modern-day financial market information is provided in Exhibit 4. Dubinski had begun to suspect that family members on the board would welcome some of the possible do of a large shar e repurchase. assumptive that family members held on to their shares, their percentage ownership of Blaine would rise, reversing a downward trend dating 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 trend in BKIs payout ratio was unsustainable and that this pertain some family members.Do No tC On the other hand, a large repurchase might be unpopular if it obligate Blaine to give up its war white meat and/or discontinue 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 3rd 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 thresh Sepa rator sat in a glass case in the command the last one had been manufactured 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. emailprotected 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 celestial latitude 31, ($ in Thousands) Operating 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 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 & Amortization $342,251 249,794 62,383 6,987 arrant(a) Profit Less Selling, General & administrative $3 07,964 220,234 87,676 25,293 Revenue Less Cost of Goods sell Margins Revenue Growth 3. 2% rough-cut Margin 30. 0% 28. 5% 27. 0% 21. 4% 19. 7% 18. 7% 23. 8% 22. 4% 21. 6% 32. 0% 31. 7% 30. 8% win Income Margin 18. 2% 17. 0% 15. 7% Dividend payout ratio 5. 0% 43. 6% 52. 9% EBIT Margin EBITDA Margin Blaines future tax rate was expect to rise to the statutory rate of 40%. Do No a. tC effectual Tax Ratea 6 BRIEFCASES HARVARD BUSINESS SCHOOL This document is authorized for use only by Atul Singh at JRE Group of Institutions until June 2013. Copying or posting is an infringement of copyright. emailprotected harvard. edu or 617. 783. 7860. Exhibit 2 rP os t Blaine Kitchenware, Inc. Capital Structure 4040 Blaine Kitchenware, Inc. Balance Sheets, December 31, ($ in Thousands) Assets 2004 Cash & Cash Equivalents 2005 2006 $ 67,391 thanksgiving Other Assets derive Assets p yo Property, determine & Equipment 48,780 49,728 54,874 3,871 5,157 376,351 sum up ongoing Assets 43,235 2,586 O ther Current Assets 164,309 47,262 Inventory $ 66,557 196,763 40,709 Accounts Receivable $ 70,853 218,403 groceryable 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 & Shareholders fair play Accounts Payable Accrued Liabilities Taxes Payable Total Current Liabilities Other liabilitiesDeferred Taxes tC Total Liabilities Shareholders Equity Total Liabilities & Shareholders Equity 458,538 488,363 $550,829 $592,253 umteen items in BKIs historical balance sheets (e. g. , Property, Plant & 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 . emailprotected 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. emailprotected harvard. edu or 617. 783. 7860. 45. 18% 31. 12% Net Debt/Equity Net Debt/Enterprise Value b. Net debt is enumerate 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 Trading Multiples MVIC/Revenue MVIC/EBIT MVIC/EBITDA Market/Book equity Equity beta Market capitalization Enterprise apprize (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 & Hearth inclination Selected Operating and Financial entropy for frequent Kitchenware Producers, 12 months ended December 31, 2006, ($ in Thousands) Cash & securities Net working capitala Net fixed assets Total assets Revenue EBIT EBITDA Net income Exhibit 3 Do Ex hibit 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 afford 0. 86% 1. 02% 1. 33% 1. 70% 2. 86% 3. 92% Do No tC Seasoned corporate bond yields Moodys abdominal aortic aneurysm 5. 88% Aa 6. 04% A 6. 35% emit 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. emailprotected harvard. edu or 617. 783. 7860. 9