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Pog's Recycling Company In April 1991, the owner and manager of Pop's Recycling Company, J. R. Vann, approached the Crewe National Bank (CN B) concerning a loan. This visit to the bank was the second for Vann in the last eighteen months. An unusual occurrence, he thought, for a highly profitable firm. The company (a recycler of metal, glass, and paper) was in the midst of a healthy increase in sales. Operations were begun in 1980, and the firm had shown a profit each year since 1982. The company was founded in 1980 by J. R. Vann in response to the growing usage of recycled material in the manufacture of paper products, as well as metal and glass products. The primary raw material was scrap, which was hauled in by scrap collectors of various size. While paper and glass were recycled by the company, the business consisted mainly of the processing of scrap metal. There had been considerable consolidation in the metal recycling business during the past decade. In fact, J. R. Vann, known as Pop to nearly everyone, started Pop's Recycling Company against the advice of certain business associates. Their primary concern was the apparent falloff in the availability of scrap metal. As a result of that trend, some of the small brokers or recycling yards had either gone out of business or had been bought by larger recycling yards such as Pop's. That meant the larger, more well-established yards were getting r stronger, which in turn meant that a new entrant into the business faced an uphill climb. J. R. Vann, however, was convinced that he could make a strong showing in the business. He had become familiar with the business, over the years, through prior employment in the steel industry. As a result of that conviction, his entire savings and a sizable loan from a local insurance company launched Pop's Recycling Company. The processing of the steel taken in from its "across the scale" purchase of scrap metal consisted of shredding or shearing the metal. Shredding was used to process such metal as junk cars, the primary source of scrap, and shearing was used to process steel bars and other structural type steel. The company took in approximately 30,000 tons of metal which required shredding and about 15,000 tons of metal which needed to be sheared. The processed metal was shipped to foundries across the United States for use in a variety of applications. In fact, the company was such an important supplier of metal to specific foundries, it had become necessary to keep a certain level of inventory on hand in order to ensure that the demand could be met without delay. The sales forecast for Pop's for 1992 was $14,500,000. The recycling companies which had survived the "shake-out" of the 19805, as it had become known throughout the economy, meant to stay very loyal and dependable reEative to their customer base. Accordingly, a good relationship with the foundries was a must. At the level of Pop's, this meant keeping a steady supply of scrap metal throughout the year. That goal created a need for cash. Further, machinery had to be kept in good working order and suppliers expected to be paid within the 30-day limit, which had become standard in the business. 0f the approximately sixty competitors on the east coast of the United States, twenty were in the mid- Atiantic region and considered direct competitors of Pop's. Thus, a well-managed balance sheet was essential. In that regard, industry averages for certain items are shown as Table 3. Of special concern were the company's payables and inventory levels. Mr. Vann believed that a reasonable level in these areas would permit him to maintain a solid relationship with his suppliers and his customers. Vann believed that his long term debt would be constant, that is, would remain at its present level. In addition, he hoped to move the profit nearer to the industry average level, or beyond. The loan which Mr. Va nn sought from CNB was for the purpose of increasing the company's stock of scrap metal. In recent months, a large portion of railroad track and rolling stock was being dismantled at certain points in the immediate region, and an unusually large supply of steel had become available. These "bulges" in the incoming supply of scrap metal were a typical occurrence. It provided the recycling companies an opportunity to build up their backlog of steel and other metals. Such a supply would be used to feed the emerging and successful new, smaller steel companies in the United States. (The cold-roll production process used by foundries had given some hope to the once flagging steel industry). In order to properly manage the situation, Vann considered a loan of $200,000 to be adequate for his short-term needs. The financial statements which follow illustrate certain aspects of the company's operating history. The bank's loan officer, Cheryl Fries, wanted to make the correct and appropriate decision. Pop's Recycling had a longstanding reputation as a wellrun company. In addition, her informal grapevine indicated that Vann handled his credits well. If the analysis of the company's financial statements bore out these impressions, the bank would have gained another solid commercial customer. The essential questions which Fries wanted to answer related to the necessity of the loan, the size of the loan, and if it were actually needed. She began an analysis of the company's needs based upon their audited financial statements shown as Tables 1 and 2, and competitor information in Table 3 (next page). TABLE I Pop's Recycling Company Income Statement Data 1987 1988 1989 1990 1991 Sales Profit after tax\\ $8 , 200 , 000* $410, 000 $8 , 700, 000 $9. 500, 000 440, 000 332, 000 $1 1 , 000 , 000 330 , 000 $12 , 000, 000 336, 000 Case 5 Pop's Recycling Company TABLE 2 Pop's Recycling Company Balance Sheet* 1987 1988 1989 1990 19 91 Cash $290 , 100 Accounts receivable - $239, 266 ;229. 500 418 , 200 488. 070 $215, 500 :205, 100 532, 950 425, 000 Inventory* 964. 500 1 . 171, 036 634, 742 1. 489.525 2. 598. 693\\ Total current assets 3. 220, 087 $1 , 672, 800 $1, 898, 372 Fixed assets , net $2, 2.51, 975 $3, 239, 193 2. 509, 200 $4, 059, 929 2 . 786, 00 1 3, 150. 513 3, 138. 540 Total assets $4 , 182, 000 3. 452, 383 14:084 , 43 3 15, 40 2, 480 $6 , 377 , 733 17 . 512. 312 Accounts payable $385, 020 $408, 476 $647. 869 Accrued wages and taxes $1 , 140, 650 $1, 550, 175 510, 480 541, 098 581.400 610.470 Notes payable - bank Total current liabilities 130,000 78, 000 673, 130 75, 000 75.000 $1 , 045, 500 75, 000 $1 , 027, 574 $1 , 304. 209 Long-term debt $585, 480 $1 , 826 , 120 $2, 298, 305 665, 839 Owners equity 1 , 020, 408 775, 200 713, 200 1, 101, 6 1 , 020, 408 1 , 020, 408 Earned surplus 1, 530. 612 1.970. 612 1 , 143, 801 1 , 143 , 795 2. 302, 61 1 2, 632. 612 Total liabilities and equity $4 , 182, 000 2. 968. 612 $4, 684,433\\ $5, 402, 488\\ $6, 377, 733 $7.512. 312 TABLE 3 Pop's Recycling Company Selected Operating Data for Major Recyclers , 1991 Profit margin on sales Total debt - to - total assets 5 Percent 25 Percent Inventory - to- sales 28 Percent Accounts payable as a percent of sales Current ratio\\ 10 Percent 1. 80: 1
