Assignment:
1. Calculate financial ratios (liquidity, profitability, leverage, asset efficiency, returns) for the years included in the attached financial statements.
2. In order of priority (#1 being the highest), rank the three greatest concerns you have about the HISTORICAL performance. Your rankings are not necessarily entire focus areas (e.g., not all of profitability, but maybe one aspect of it) and should not necessarily be a ratio either. Briefly explain why you selected these three concerns.
3. Do the same as what you did in #2 above, except do it now for the one-year forecast period.
4. Use your answer in #3 (forecast concerns) to create your own forecast. In Excel, create a new, one-year forecast (balance sheet, income statement, and statement of cash flows) that combines the companys forecast with your concerns in #3 to reflect your adjusted forecast. Use Excel so that this is a mathematical exercise where your income statement adds/subtracts correctly, your balance sheet balances, and the statement of cash flows sums to the actual change in cash on the balance sheet.
Yalue Driuers These are the kew wariablee that influence free cosh flow and, therefore, DRIYE YALUE Holes A A port of thiz exercize, these "holef" are celle that participonte must fill rith FORMULAS that include value drivere in collumne H and X plue accounting i Midnest Shocks Semsitirity havalysis Salor Graukh OPMA comin swW Frmmen EFfostivo Tax Riake ArRidn Invonkary dah ArP dah QabEx Dividondr Manademont Fos Qkhor? Midwest Shocks, Inc., a manufacturer of shock absorbers and related parts, is considering alternative financial strategies. The management buyout is long past, and the executive management team has successfully completed most of the manufacturing transformation process - moving its manufacturing processes to countries with lower labor costs. They are now considering financial strategies with eyes on the near future. The reader will help management consider alternatives consistent with the client's operating and financial strategies, the capital markets and, of course, bank credit appetite. Special emphasis in this case is placed on understanding how the current financial situation engages with long-term financial planning. Midwest Shocks, Inc.: Headquartered in Decatur, IL, Midwest Shocks, Inc. is a leading North American designer, manufacturer, and distributor of shock absorbers for passenger cars, sport utility vehicles, trucks, and off-highway vehicles in the aftermarket industry. Products include various forms of shock absorbers including monotube, twin-tube, pneumatic, hydraulic and coilovers. The Company has manufacturing capabilities spread throughout the U.S., China, and Mexico. Sales are diversified on a geographic basis with U.S. sales making up the majority at 74%, Canada at 9% and the remainder spread between Asia, Europe, Mexico, and South America. History Midwest Shocks was founded by the Lamar brothers in 1926. In the roaring '20's, James and William Lamar began making shock parts in central California to be used in the agricultural industry and for passenger automobiles in what appeared to be a burgeoning industry. The Lamars continued to make auto parts and built a successful, thriving business for almost 50 years. In 1976, the Lamar brothers sold to Nadra, a manufacturer of auto parts equipment with deep ties into the auto industry. Nadra considered this acquisition wildly successful as it allowed the company to deepen its relationships with both auto manufacturers and distributors in the aftermarket space. Nadra weathered several business cycles in the highly cyclical auto industry. However, the company was highly levered. Shortly after the recession that lasted much of 2001 , Nadra entered bankruptcy. The causes of the bankruptcy were primarily tied to financial distress. As part of the restructuring, Nadra sold its aftermarket businesses including shocks to AfterM Auto, a privately held manufacturer of aftermarket auto parts. The purchase agreement was executed in June of 2004 and, at close, AfterM named this new subsidiary "Midwest Shocks". Nadra was widely recognized as a manufacturing specialist. The shock absorber manufacturing process that AfterM inherited was remarkably efficient and required no immediate enhancements. AfterM's strategy was to lever its aftermarket distribution network to increase volume and enjoy the ensuing cash flow improvements. And lever their distribution network they did, growing sales at almost 8% annually for the past decade During this period, AfterM had also initiated the process of reducing manufacturing costs. It began by moving part of the manufacturing process to China to enjoy reduced labor costs. In doing so, it purchased controlling interests in two small manufacturing facilities there. The company understood that reducing manufacturing costs was critical for its long-term survival and planned to continue this initiative by purchasing other cross-border manufacturing companies. The company examined alternative locations not only in China, but also in Mexico and Brazil. While continued sales growth was expected, in mid-2018 it was not clear the historic pace of revenue growth could be maintained. The company knew that to improve cash flow, sales growth alone was not enough. During this period, AfterM approached an investment bank to discuss strategic alternatives. Over the remainder of 2019, AfterM worked with its financial advisors to examine opportunities to continue to reduce manufacturing costs and to grow sales at above market rates. During this period, AfterM also entertained bids from potential suitors. The executive team decided that if they found a bidder willing to pay an attractive price, they would consider a sale. Then, in 1Q2020, the company accepted a bid from Tung Capital. Tung was founded by US based Chinese investors with experience and business relationships within the manufacturing community throughout China. Tung was impressed with Midwest Shocks' management team and wanted to retain them to continue to enjoy solid performance. Hence, Tung's bid included capital contributions from select members of Midwest Shocks' existing management team. The overarching strategy was to continue to identify manufacturing efficiencies to improve cash flow and to extend the sales reach in both existing and new markets. The Sale Transaction Tung Capital (including select members of AfterM's management team) agreed to purchase Midwest Shocks for $152 million. Funding for the acquisition included the assumption of senior debt, preferred stock offered by the sellers and common stock as follows: The existing revolver and note were assumed by Tung. AfterM provided seller financing in the form of preferred stock. However, the preferred was essentially bridge financing. It carried a 12-month tenor after which it was expected to be refinanced. The sellers offered this to allow Tung one year to seek additional funding. The preferred stock carried 10% PIK interest ["Payment-In-Kind" capital does not require interest/dividend payments to remain current). If the preferred stock were not refinanced in one year, it would convert to common and would represent a controlling interest. Tung provided $24mm of the new equity and the existing management team provided an additional $4mm. Manufacturing Strategy Even though the Midwest Shocks' US based manufacturing plants were non-union, the cost of manufacturing in the US significantly exceeded the cost of manufacturing in other countries - primarily due to labor costs. In the US, Midwest Shocks' hourly labor costs (fully loaded including benefits) exceeded $20. Hourly costs in both China and Mexico were approximately or slightly less than $5 (USD equivalent). When factoring in transportation costs, significant savings could still be realized by continuing to move manufacturing outside of the US. The new buyers understood without question that they had to continue to reduce manufacturing costs. While AfterM had moved some manufacturing to China, the process had to be accelerated. Tung had strong cross-border manufacturing relationships and meaningful experience in this process, the product of prior experience in similar situations. In consideration of this specific transaction, Tung connected with partners in both China and in Mexico. Before closing the Midwest Shocks acquisition, Tung reached agreement with a Mexican entity to begin the process of moving coilover manufacturing to Juarez. They had reached a separate agreement with a Chinese manufacturing company to move pneumatics to China after the transaction was complete. Shortly after closing the transaction, Tung planned on moving over 2,000 US jobs to China and Mexico. Sales Growth Strategy Since the Lamar brothers began making shock absorbers over 85 years ago, Midwest Shocks had developed long standing, meaningful client relationships. In 2020, Midwest Shocks was the North American market share leader in mono and twin tube pneumatic shocks and the number two market share leader in coilover with 98% of their revenues generated in aftermarket sales. Their key client list included household names such as Napa Auto Parts, AC Delco, CarQuest, O'Reilly Auto Parts and many more. Tung understood these relationships were critical to Midwest Shocks' success. Because of this, it offered attractive management contracts to key individuals. Management also invested equity alongside the Tung group. These arrangements incentivized Midwest Shocks' management which remained confident it could increase penetration with existing clients. Additionally, management believed that with Tung's support certain key prospects [e.g. Auto Zone] could be converted into clients, driving significant revenue growth. Tung also understood that Midwest Shocks needed to expand geographically and had plans for reaching to China, Europe, Australia, Mexico, and Brazil. While the existing sales team was not equipped for expansion of this magnitude, Tung had enjoyed success with geographic expansion in prior transactions and remained confident they would do the same here. To accomplish this, Midwest Shocks would need to acquire manufacturing capacity. The Midwest Shocks Management Team - Joseph Byrde, CEO: Mr. Byrde has been the CEO of Midwest Shocks since 2010 and was the COO for the five preceding years. Prior to joining Midwest Shocks, Mr. Byrde worked in various capacities for General Electric for 20 years. Key positions held at GE included deputy COO of motor/generator and CFO of transportation. Byrde earned a bachelor's degree in mechanical engineering from the University of Minnesota - Richard Wader: CFO Mr. Wader has been the CFO since 2013, joining Midwest Shocks from Brunswick where he was Controller and VP Finance. Prior to joining Brunswick, Wader started his career and spent 10 years at Pentair. Wader is a Certified Public Accountant and holds a bachelor's degree from Wayne State University. - Lisa Macgregor: COO Ms. Macgregor has been the COO since 2020 after joining Midwest Shocks from Danaher where she was the head of supply chain management. She worked there for seven years in various operational capacities. Before joining Danaher, Ms. Macgregor held various roles at General Electric and 3M. Lisa graduated from Wake Forest with a degree in Engineering Management and from Vanderbilt with an MBA - Bob Pakmeer: VP Marketing/Sales Mr. Pakmeer joined Midwest Shocks in 2011 as the VP of Marketing and Sales. Prior to joining Midwest Shocks, Pakmeer spent 15 years with Michelin. His roles at Michelin included numerous sales and management positions and his final role there was the VP and head of marketing for Canada and Mexico. Pakmeer earned a bachelor's degree in Marketing from Illinois State University. The First Two Years: The Lamar brothers began their business in the 1920's. Both Nadra and AfterM continued the Lamar legacy building Midwest Shocks into a North American powerhouse. Now, with the support of Tung Capital, Midwest Shocks was preparing for its next phase. It wanted to expand its North American expertise and command into other countries. To accomplish this, it first needed to continue to reduce manufacturing costs. In 2020 and 2021, Midwest Shocks successfully relocated much of the North American manufacturing to China and Mexico. In the third quarter of 2021, Midwest Shocks employed roughly 2,400 individuals in China and another 900 in Mexico. That left roughly 2,000 US based employees. And while Midwest Shocks retained some US based manufacturing in Decatur, the US based manufacturing FTE totaled fewer than 600 . The remaining US based team was focused on other key functions including sales, distribution, finance, marketing, R\&D, and customer service. The attached financial statements for the years 2019-2021 plus the management forecast for 2022 highlight Midwest Shocks' progress in moving much of its manufacturing outside of the US. The agreements that Tung reached with partners in China and in Mexico were well executed. And while the company recognized costs to effect this transformation (see restructuring charge expenses), it was also able to quickly recognize cost savings associated with Chinese and Mexican labor markets. Midwest Shocks was also able to replace the preferred stock (offered by AfterM as part of the sale transaction) with other forms of capital in 2019. Hence, AfterM no longer retained any interest in Midwest Shocks after that point. At the start of 2022, Midwest Shocks is feeling confident of its outlook. Richard Wader shared the 2022 management forecast with you. The forecast demonstrates a meaningful increase in EBITDA stemming from the operational improvements executed since the 2020 purchase. Wader mentions the ownership group has been pleased with the transitional period and with the resulting return on its investment. The company has now shifted focus to the task of building out a global sales organization. And while that process began shortly after the acquisition, the company was largely focused on moving the manufacturing processes. Now it is ready to invest more time and capital in building out the global network. Wader also shared that he is considering the impact this will have on the firm's financial position. Financing the company for the first two years had not been difficult. Midwest Shocks was able to raise the necessary capital, albeit at a price. And the global buildout will center around the sales process, not manufacturing, so Wader expects capital demands will be limited. Still, he wonders what he should be considering that he is not. He asks you to look at his historical financial statements as well as his 2022 forecast [12/31/2022 "Plan"). Given their operating strategy, he has asked you to provide thoughts/recommendations around any financial area/strategy/concern you think should be top of mind for him. ats. Midwest Shocks Midwest Shocks Yalue Driuers These are the kew wariablee that influence free cosh flow and, therefore, DRIYE YALUE Holes A A port of thiz exercize, these "holef" are celle that participonte must fill rith FORMULAS that include value drivere in collumne H and X plue accounting i Midnest Shocks Semsitirity havalysis Salor Graukh OPMA comin swW Frmmen EFfostivo Tax Riake ArRidn Invonkary dah ArP dah QabEx Dividondr Manademont Fos Qkhor? Midwest Shocks, Inc., a manufacturer of shock absorbers and related parts, is considering alternative financial strategies. The management buyout is long past, and the executive management team has successfully completed most of the manufacturing transformation process - moving its manufacturing processes to countries with lower labor costs. They are now considering financial strategies with eyes on the near future. The reader will help management consider alternatives consistent with the client's operating and financial strategies, the capital markets and, of course, bank credit appetite. Special emphasis in this case is placed on understanding how the current financial situation engages with long-term financial planning. Midwest Shocks, Inc.: Headquartered in Decatur, IL, Midwest Shocks, Inc. is a leading North American designer, manufacturer, and distributor of shock absorbers for passenger cars, sport utility vehicles, trucks, and off-highway vehicles in the aftermarket industry. Products include various forms of shock absorbers including monotube, twin-tube, pneumatic, hydraulic and coilovers. The Company has manufacturing capabilities spread throughout the U.S., China, and Mexico. Sales are diversified on a geographic basis with U.S. sales making up the majority at 74%, Canada at 9% and the remainder spread between Asia, Europe, Mexico, and South America. History Midwest Shocks was founded by the Lamar brothers in 1926. In the roaring '20's, James and William Lamar began making shock parts in central California to be used in the agricultural industry and for passenger automobiles in what appeared to be a burgeoning industry. The Lamars continued to make auto parts and built a successful, thriving business for almost 50 years. In 1976, the Lamar brothers sold to Nadra, a manufacturer of auto parts equipment with deep ties into the auto industry. Nadra considered this acquisition wildly successful as it allowed the company to deepen its relationships with both auto manufacturers and distributors in the aftermarket space. Nadra weathered several business cycles in the highly cyclical auto industry. However, the company was highly levered. Shortly after the recession that lasted much of 2001 , Nadra entered bankruptcy. The causes of the bankruptcy were primarily tied to financial distress. As part of the restructuring, Nadra sold its aftermarket businesses including shocks to AfterM Auto, a privately held manufacturer of aftermarket auto parts. The purchase agreement was executed in June of 2004 and, at close, AfterM named this new subsidiary "Midwest Shocks". Nadra was widely recognized as a manufacturing specialist. The shock absorber manufacturing process that AfterM inherited was remarkably efficient and required no immediate enhancements. AfterM's strategy was to lever its aftermarket distribution network to increase volume and enjoy the ensuing cash flow improvements. And lever their distribution network they did, growing sales at almost 8% annually for the past decade During this period, AfterM had also initiated the process of reducing manufacturing costs. It began by moving part of the manufacturing process to China to enjoy reduced labor costs. In doing so, it purchased controlling interests in two small manufacturing facilities there. The company understood that reducing manufacturing costs was critical for its long-term survival and planned to continue this initiative by purchasing other cross-border manufacturing companies. The company examined alternative locations not only in China, but also in Mexico and Brazil. While continued sales growth was expected, in mid-2018 it was not clear the historic pace of revenue growth could be maintained. The company knew that to improve cash flow, sales growth alone was not enough. During this period, AfterM approached an investment bank to discuss strategic alternatives. Over the remainder of 2019, AfterM worked with its financial advisors to examine opportunities to continue to reduce manufacturing costs and to grow sales at above market rates. During this period, AfterM also entertained bids from potential suitors. The executive team decided that if they found a bidder willing to pay an attractive price, they would consider a sale. Then, in 1Q2020, the company accepted a bid from Tung Capital. Tung was founded by US based Chinese investors with experience and business relationships within the manufacturing community throughout China. Tung was impressed with Midwest Shocks' management team and wanted to retain them to continue to enjoy solid performance. Hence, Tung's bid included capital contributions from select members of Midwest Shocks' existing management team. The overarching strategy was to continue to identify manufacturing efficiencies to improve cash flow and to extend the sales reach in both existing and new markets. The Sale Transaction Tung Capital (including select members of AfterM's management team) agreed to purchase Midwest Shocks for $152 million. Funding for the acquisition included the assumption of senior debt, preferred stock offered by the sellers and common stock as follows: The existing revolver and note were assumed by Tung. AfterM provided seller financing in the form of preferred stock. However, the preferred was essentially bridge financing. It carried a 12-month tenor after which it was expected to be refinanced. The sellers offered this to allow Tung one year to seek additional funding. The preferred stock carried 10% PIK interest ["Payment-In-Kind" capital does not require interest/dividend payments to remain current). If the preferred stock were not refinanced in one year, it would convert to common and would represent a controlling interest. Tung provided $24mm of the new equity and the existing management team provided an additional $4mm. Manufacturing Strategy Even though the Midwest Shocks' US based manufacturing plants were non-union, the cost of manufacturing in the US significantly exceeded the cost of manufacturing in other countries - primarily due to labor costs. In the US, Midwest Shocks' hourly labor costs (fully loaded including benefits) exceeded $20. Hourly costs in both China and Mexico were approximately or slightly less than $5 (USD equivalent). When factoring in transportation costs, significant savings could still be realized by continuing to move manufacturing outside of the US. The new buyers understood without question that they had to continue to reduce manufacturing costs. While AfterM had moved some manufacturing to China, the process had to be accelerated. Tung had strong cross-border manufacturing relationships and meaningful experience in this process, the product of prior experience in similar situations. In consideration of this specific transaction, Tung connected with partners in both China and in Mexico. Before closing the Midwest Shocks acquisition, Tung reached agreement with a Mexican entity to begin the process of moving coilover manufacturing to Juarez. They had reached a separate agreement with a Chinese manufacturing company to move pneumatics to China after the transaction was complete. Shortly after closing the transaction, Tung planned on moving over 2,000 US jobs to China and Mexico. Sales Growth Strategy Since the Lamar brothers began making shock absorbers over 85 years ago, Midwest Shocks had developed long standing, meaningful client relationships. In 2020, Midwest Shocks was the North American market share leader in mono and twin tube pneumatic shocks and the number two market share leader in coilover with 98% of their revenues generated in aftermarket sales. Their key client list included household names such as Napa Auto Parts, AC Delco, CarQuest, O'Reilly Auto Parts and many more. Tung understood these relationships were critical to Midwest Shocks' success. Because of this, it offered attractive management contracts to key individuals. Management also invested equity alongside the Tung group. These arrangements incentivized Midwest Shocks' management which remained confident it could increase penetration with existing clients. Additionally, management believed that with Tung's support certain key prospects [e.g. Auto Zone] could be converted into clients, driving significant revenue growth. Tung also understood that Midwest Shocks needed to expand geographically and had plans for reaching to China, Europe, Australia, Mexico, and Brazil. While the existing sales team was not equipped for expansion of this magnitude, Tung had enjoyed success with geographic expansion in prior transactions and remained confident they would do the same here. To accomplish this, Midwest Shocks would need to acquire manufacturing capacity. The Midwest Shocks Management Team - Joseph Byrde, CEO: Mr. Byrde has been the CEO of Midwest Shocks since 2010 and was the COO for the five preceding years. Prior to joining Midwest Shocks, Mr. Byrde worked in various capacities for General Electric for 20 years. Key positions held at GE included deputy COO of motor/generator and CFO of transportation. Byrde earned a bachelor's degree in mechanical engineering from the University of Minnesota - Richard Wader: CFO Mr. Wader has been the CFO since 2013, joining Midwest Shocks from Brunswick where he was Controller and VP Finance. Prior to joining Brunswick, Wader started his career and spent 10 years at Pentair. Wader is a Certified Public Accountant and holds a bachelor's degree from Wayne State University. - Lisa Macgregor: COO Ms. Macgregor has been the COO since 2020 after joining Midwest Shocks from Danaher where she was the head of supply chain management. She worked there for seven years in various operational capacities. Before joining Danaher, Ms. Macgregor held various roles at General Electric and 3M. Lisa graduated from Wake Forest with a degree in Engineering Management and from Vanderbilt with an MBA - Bob Pakmeer: VP Marketing/Sales Mr. Pakmeer joined Midwest Shocks in 2011 as the VP of Marketing and Sales. Prior to joining Midwest Shocks, Pakmeer spent 15 years with Michelin. His roles at Michelin included numerous sales and management positions and his final role there was the VP and head of marketing for Canada and Mexico. Pakmeer earned a bachelor's degree in Marketing from Illinois State University. The First Two Years: The Lamar brothers began their business in the 1920's. Both Nadra and AfterM continued the Lamar legacy building Midwest Shocks into a North American powerhouse. Now, with the support of Tung Capital, Midwest Shocks was preparing for its next phase. It wanted to expand its North American expertise and command into other countries. To accomplish this, it first needed to continue to reduce manufacturing costs. In 2020 and 2021, Midwest Shocks successfully relocated much of the North American manufacturing to China and Mexico. In the third quarter of 2021, Midwest Shocks employed roughly 2,400 individuals in China and another 900 in Mexico. That left roughly 2,000 US based employees. And while Midwest Shocks retained some US based manufacturing in Decatur, the US based manufacturing FTE totaled fewer than 600 . The remaining US based team was focused on other key functions including sales, distribution, finance, marketing, R\&D, and customer service. The attached financial statements for the years 2019-2021 plus the management forecast for 2022 highlight Midwest Shocks' progress in moving much of its manufacturing outside of the US. The agreements that Tung reached with partners in China and in Mexico were well executed. And while the company recognized costs to effect this transformation (see restructuring charge expenses), it was also able to quickly recognize cost savings associated with Chinese and Mexican labor markets. Midwest Shocks was also able to replace the preferred stock (offered by AfterM as part of the sale transaction) with other forms of capital in 2019. Hence, AfterM no longer retained any interest in Midwest Shocks after that point. At the start of 2022, Midwest Shocks is feeling confident of its outlook. Richard Wader shared the 2022 management forecast with you. The forecast demonstrates a meaningful increase in EBITDA stemming from the operational improvements executed since the 2020 purchase. Wader mentions the ownership group has been pleased with the transitional period and with the resulting return on its investment. The company has now shifted focus to the task of building out a global sales organization. And while that process began shortly after the acquisition, the company was largely focused on moving the manufacturing processes. Now it is ready to invest more time and capital in building out the global network. Wader also shared that he is considering the impact this will have on the firm's financial position. Financing the company for the first two years had not been difficult. Midwest Shocks was able to raise the necessary capital, albeit at a price. And the global buildout will center around the sales process, not manufacturing, so Wader expects capital demands will be limited. Still, he wonders what he should be considering that he is not. He asks you to look at his historical financial statements as well as his 2022 forecast [12/31/2022 "Plan"). Given their operating strategy, he has asked you to provide thoughts/recommendations around any financial area/strategy/concern you think should be top of mind for him. ats. Midwest Shocks Midwest Shocks
