For the exclusive use of J . Koester , 2018 Blaine Kitchenware , Inc : Capital Structure 1 4040 following the IPO Second , beginning in the 1990s , Blaine gradually moved its production abroad . company began by taking advantage lage of NAFTA , engaging suppliers and performing some manufacturing in Mexico . By 2003 , B KI also had established relationships with several Asian manufacturers , and the large majority of its production I had undertaken a strategy focused on roundin jon took place outside the United States . Finall ding out and complementing its product offerings by diversified manufacturers . The company carefully follow poliance product lines of large acquiring small independent manufacturers or the kitchen appliance product lines of large behavior and market trends . Victor D ctor Dubinski and the board were eager to continue believed had been a fruitful strategy . The company was what they the beverage appliance segment , which demonstrated was particularly keen to increase its presence in weakest . Thus far , all acquisitions had been for cash or B KI stack the strongest growth and where BKI was Financial Performance During the y the year ended December 31 2006 , Blaine earned net income of $53. 6 million on revenue 85% of Blaine's of $342 million . Exhibits I and 2 present the company 's recent financial statements . Approximate with the line of higher-end goods 1 80% of its operating income came from the sale of accounting for the remainder . The company's 2 mid - tier products margin of nearly 22% was among the strangest within the peer group shown in Exhibit 3 . Despite its DOG EBITDA recent shift toward higher -end product lines , Blaine's operating margins had Exhibit 3 . Despite its the last three years . Margins declined with recent acquis due to integration costs and inventory write downs associated itions . Now that integration activities were completed , B KI executives exp firm to achieve operating margins at least as high as its historical margins . ected the The U.S industry as a whole faced considerable pressure from imports and private label as well as a shift in consumer purchasing preference ate label products , some of Blaine's more aggressive rivals were cutting prices to es favoring larger , " big box " retailers In response followed suit and its organic revenue rices to maintain sales growth . BI Blaine had not products lost market share . Grow He growth had suffered in recent years , as some of its core acquisitions rowth in Blaine's top line w as attributable almost exclusively to Despite the company's profi tability , returns to shareholders had been somewhat below average Blaine's return on equity ( ROE ) , shown below , was significantly below that of its publicly traded peers . Moreover , its acquisitions its earnings per share had fallen significantly since 2004 , partly due to dilutive Companies 2006 ROE Home & Hearth Design AutoTech Appliances XQL Corp 19.5% Bunkerhill Incorporated Easy Living Systems 1390 % Median 1 ROE is computed here as net income divided by end -of period book equity HARVARD BUSINESS SCHOOL I BRIEFCASES This document is authorized for use only by James Koester in FINC 6280 F2 2018 taught by JAMIE HAISCHER , Webster University from Oct 2018 to Aor 2018For the exclusive use of J . Koester . 2018 For the exclusive use of J . Koester , 2018 4040 1 Blaine Kitchenware , The Capital Structure During 2004 2006 , compounded annual returns for BK B KI shareholders , including dividends and stock price appreciation , were approximately 1 1 % per year . This was hi than the STEP 500 , which returned approximately 10% per year . How owever . it was well below annual compounded return earned by by shareholders of Blaine's peer group during the the same period inancial Policies Blaine's financial posture was conservative and very much in with BKT's long standing practice and indeed , with its management style generally ally . Only twice in its history had the company borrowed beyond seasonal working capital needs . The first time was during World War Hong ord War II , when it borrowed from the U U.S . government to retool several factories for w second time as during the fire the first oil shock of the 1970s On both occasions the debt was repaid as quickly possibl At the end 's balance sheet was the free , but the com strongest in the industry . Not only was it debt . mpany also held $231 million in cash and securities at the end of zone . $ 2006 , down from million two years earlier Given such substantial liquidity , Blaine had terminated in 2002 a revolving credit agreem ent designed to provide stand by credit for seasonal needs ; the CFO argued that the tees are a waste of money and Dubinski agreed In recent years the company's largest uses of cash had been co mmon dividends and cash consideration paid in various acquisitions . Dividends per share had risen only modestly during 2004 2006 ; however , as the company issued new shares in connection with some of its acqui cquisitions the number of shares outstanding climbed , and the payout ratio rose significantly , to more than 50% Net incom $53 , 112 852 435 Dividends Average shares outstanding Earnings per share Dividend per share Payout ratio The next largest use of funds was capital expenditures , which were modest due to Blaine's extensive outsourcing of its manufacturing . Average capital expenditures during the past three years were just over $10 million per year . While they were expec ted to remain modest , future ex would be driven in part by the extent and nature of Blaine's future acquisitions . In recent years ditures after-tax cash generated from operations had been more than four times average capital expenditures and rising , as shown in the table below EBITDA $ 69 , 370 868 895 873, 861 Less : Taxes 24 303 After - Tax Operating Cash Flow BRIEFCASES I HARVARD BUSINESS SCHOO his document is authorized for only by James Koester in FINC 6290 F2 2018 taught by JAMIE HA HAISCHER , Webster University from Oct 2018 to Apr 2019Neverthen "unlock" " value inherent i ant in Blaine's strong g operations nce sheet and new w borrowings, private equity firm could purchas of Blaine's outs bala shares at a price price higher than $16 an $16.25 per share, it en repay . When the banker r pointed out that BKI itsels over time using the company's future future earnings. -borrow money to buy back its own shares- s-Dubinski h asked. the same thing se was blunt: "Because you're over-liquid and under-lev in that?". The banker's resp -naving a price " in the days since the meeting, Dubinsky face. How many shares could be bough what price? t it from making future acquisitions? For the exclusive use of J. Koester, 2018. ices Exhibit 2 Blaine Kitchenware, Inc.: Capital Structure 1 4040 IS Blaine Kitchenware, Inc. Balance Sheete .810s netecoxi .& to seu eviauloxe For the exclusive use of J. Koester, 2018. 4040 1 Blaine Kitchenware, Inc.: Capital Structure Exhibit 1 Blaine Kitchenware, Inc., Income Statements, years ended December 31, ($ in Thousands) Operating Results Revenue 2004 2005 2006 Less: Cost of Goods Sold $291,940 $307,964 $342,251 Gross Profit 204.265 220,234 249.794 Less: Selling, General & Administrative 87,676 87,731 92,458 25,293 27.049 28.512 Operating Income Plus: Depreciation & Amortization te antimadlyutter to vidlidlie 62,383 60,682 63,946 6,987 EBITDA teluipoo s, bininde cidart 8,213 9.914 mog an iny said orait its all ito vel tons easy 69,370 68,895 73,860 EBIT fieftam lanashh evoeasioomwires to Plus: Other Income (expense) 62,383 60,682 63,946 15,71 16,057 13,506 Earnings Before Tax v fatnow beconf will an gredmemn vibrant lent booga Less: Taxes 78,101 76,738 lessd nugs 77,451 24,989 24,303 23,821 Net Income b boon bu wawob s anistoves Gana bulow s 53,112 52,435 Dividends 1 370 $ 18,589 53,630 wesw offat twoveg aid $ 22,871 $ 28,345 Margins Revenue Growth 3.2% 5.5% 11.1% Gross Margin f'insoainge arise ed bluow ynegmoo 30.0% 28.5% 27.0% EBIT Margin Aswobinin er't goal of tineb aid bomut idenid 21.4% 19.7% 18.7% EBITDA Margin 23.8% 22.4% 21.6% Effective Tax Ratea ill snout jouboy / 32.0% 31.7% 30.8% Net Income Margin heralasturnsin hood bad one fast ard cron wo ord t 18.2% 17.0% 15.7% Dividend payout ratio 35.0% 43.6% 52.9% a. Blaine's future tax rate was expected to rise to the statutory rate of 40%. SGA COGS 71, 37 729. SG JA 8.27. $. 82 C thay ihlme S."). $. 27.For the exclusive use of J. Koester, 2018. 4040 | Blaine Kitchenware "- gros Totoob For the exclusive use of J. Koester, 2018. Blaine Kitchenware, Inc.: Capital Structure 1 4040 Exhibit 2 Blaine Kitchenware, Inc. Balance Sheets, December 31, ($ in Thousands) Assets 2004 2005 2006 Cash & Cash Equivalents $ 67,391 $ 70,853 $ 66,557 Marketable Securities 218,403 196,763 164,309 40,709 43,235 48,780 Accounts Receivable 49,728 54,874 Inventory 47,262 3,871 5,157 Other Current Assets 2,586 339,678 Total Current Assets 376,351 364,449 99,402 138,546 174,321 Property, Plant & Equipment 20,439 Goodwill 8,134 13,331 27,394 39,973 Other Assets $497,217 $550,829 $592,253 Total Assets Liabilities & Shareholders' Equity $ 26,106 $ 28,589 $ 31,936 Accounts Payable 22,605 24,921 27,761 Accrued Liabilities 14,225 17,196 16,884 Taxes Payable 76,581 Total Current Liabilities 62,935 70,705 1,794 3,151 4,814 Other liabilities 15,111 18,434 22,495 Deferred Taxes 79, 92,290 103,890 Total Liabilities 458,538 488,363 Shar areholders' Equity 417.377 $592,253 Total Liabilities & Shareholders' Equity $497,217 $550,829 Note: Many items in BKI's historical balance sheets (e.g., Property, Plant & Equipment) have been affected by the firm's acquisitions.HOSIVH 3IW F2 2018 taught by JAMIE Koester in FINC 629 by James Koeste for use only by Ja authorized for us This document is auth MVIC/EBIT Equity beta Net Debt/Equity Net debtb Total debt MVIC/EBITDA Book equity EBIT MVIC/Revenue EBITDA Total assets Market/Book equity Revenue Net income Exhibit 3 Net fixed assets Net Debt/Enterprise Value Cash & securities LTM Trading Multiples Market capitalization Net working capitala Enterprise value (MVIC) a. Net working capital excludes cash and securities. Net debt is total long-term and short-term debt less excess cash. . . -1 Ctructure $ 589,747 $1,127,226 106,763 $ 350,798 $ 976,613 119,190 $53,698 Home & 1.03 $ 21,495 Hearth Design 475,377 776,427 900,803 372,293 54,316 10.56x 45.18% 1.63x 31.12% 9.46x 1.91x Selected Operating and Financial Data for Public Kitchenware Producers, 12 months ended December 31, 2006, ($ in Thousands) $18,080,000 AutoTech $1,416,012 Appliances 2,505,200 3,055,200 536,099 $9,247,183 $18,415,689 $4,437,314 7,463,564 1,247,520 13,978,375 4,973,413 3,283,000 7.35x 1.02x 24.10% 31.74% 4.26x 6.03x XQL Corp. $4,313,300 721,297 $ 412,307 796,497 $3,697,952 $ 950,802 353,691 LE8'ZZE'S 21,425 2,109,400 $6,240,947 972,227 5,290,145 0.96 1.45x 8.65x 2.51x 7.84x 17.97% 15.23% $ 33 Bunkerhill, Inc. $3,671,100 610,399 566,099 $ 153,680 $1,303,788 334,804 815,304 .073 $ 238,056 391,736 3,962,780 804,400 $4,200,836 0.92 1.14x 6.88x 7.42x 4.93x 6.01% 5.67% EasyLiving Systems $ 188,955 $ 13,173 19,613 $ 242, 102 23,356 $ 332,110 21,220 68,788 $ (64,800 177,302 94,919 $ 353,949 418,749 0.67 18.0 1.87x 15.15x 4.41x -15.47% -18.31% Blaine Kitchenware $ 342,251 53,630 63,946 73,860 $ 230,866 4040 - 32,231 174,321 $ 592,253 $(230,866) 488,363 $ 728,730 959,596 0.56 2.13x 11.40x 9.87x 1.96x 24.06% -31.68% For the exclusive use