Please see tables 1 thru 7 and appendix 1 thru 4 to reEEspoOnse to this finance QUeEstiOon.

• Assume you are a consultant brought in to assess the company:In your opinion, what operational and financial charges need to be made to improve SealTek's operational and financial performance? Why?

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• The numbers generated in the worksheets (that follow your writeup) should be used to support and define your recommendations.
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SealTek Fittings (India) Financial Analysis Worksheets TABLE 1 The Profit & Loss Statement TABLE 2 The Managerial Balance Sheet TABLE 3 Inventory Analysis TABLE 4 Net Working Capital (NWC) Analysis TABLE 5 Cash Flow Analysis TABLE 6 Return on Capital TABLE 7 Benchmarking 2010 PerformanceTABLE 1 Seallek Fittings (India) (millions of Indian rupee, INR) THE PROFIT AND LOSS STATEMENT (P&L) 2008 2009 2010 Sales revenues (net) 1,861.7 100.0% 1,560.3 100.0% 1,940.3 100.0% Cost of goods sold (COGS) (1,255.1) -67.4% (1,160.1) -74.4% (1,456.7) -75.1% Gross profit 606.6 32.6% 400.2 25.6% 483.6 24.9% Marketing and selling expenses (125.4) -6.7% (128.2) -8.2% (116.8) -6.0% General & administrative expenses (162.7) -8.7% (158.3) -10.1% (160.8) -8.3% Operating profit EBITDA 318.5 17.1% 113.7 7.3% 205.9 10.6% Below The Line Depreciation expense (50.5) -2.7% (58.2) -3.7% (62.0) -3.2% Earnings before interest & tax EBIT 268.0 14.4% 55.5 3.6% 143.9 7.4% Interest expense (26.1) -1.4% (34.6) -2.2% 47.7) 2.5% Earnings before taxes EBT 241.9 13.0% 20.9 1.3% 96.2 5.0% Tax expenses (60.5) -3.2% (5.2) -0.3% (24.1) -1.2% Net income NI or EAT 181.4 9.7% 15.7 1.0% 72.2 3.7% NOTES Profit Distribution: Dividends paid 60.0 60.0 60.0 Retained earnings 121.4 (44.3) 12.2 Sales growth 12% -16% 24% Currency: INR/USD 43.43 48.34 45.67 Sales (millions of US$) 42.9 32.3 42.5 Net income (millions of US$) 4.2 0.3 1.6 Many companies use the financial results above the line, EBITDA, as a metric of managerial performance. This is because the principle components below the line, depreciation, interest, taxes, are all driven by financial and accounting activities largely controlled by corporate and are therefore not under the discretion or direction of business unit management. According to financial theory, value is created by the firm by generating larger and growing results from EBITDA growth - the financial results of the business of the firm. and not from the financial or accounting practices asTABLE 2 SealTek Fittings (India) (millions of Indian rupee, INR) The Managerial Balance Sheet The Managerial Balance Sheet reduces Assets to three categories (Cash, NWC, Fixed Assets), resulting in a right- hand-side which is pure financing (short-term debt, long-term debt, and equity). 31 December 2008 Cash 61.2 9.0% Short-term debt 119.5 17.7% NWC 276.9 40.9% Long-term debt 127.8 18.9% Net fixed assets 338.6 50.0% Equity 429.4 63.5% Invested capital 676.7 100.0% 676.7 100.0% 31 December 2009 Cash 26.4 4.1% Short-term debt 137.3 21.4% NWC 279.9 43.5% Long-term debt 120.6 18.8% Net fixed assets 336.6 52.4% Equity 385.1 59.9% Invested capital 642.9 100.0% 643.0 100.0% 31 December 2010 Cash 17.4 2.3% Short-term debt 242.7 32.2% NWC 388.7 51.6% Long-term debt 113.2 15.0% Net fixed assets 347.1 46.1% Equity 397.3 52.7% Invested capital 753.2 100.0% 753.2 100.0% Note: Net working capital (NWC) = A/R + Inventories + Prepaid - A/P - Accrued. The Managerial Balance Sheet is intended to focus the analyst's attention on key asset categories and how the firm is financing those assets -- in order to make a clear distinction between operations (assets) and financing (the funding of those assets). Net working capital (NWC) = (A/R + Inventory + Prepaid) - (A/P + Accrued)TABLE 3 SealTek Fittings (India) (millions of Indian rupee, INR) Inventory Analysis 2008 Product Line Sales Cost of Sales Inventory Gross Margin Days Inventory Pneumatic Systems 707.4 470.2 76.3 33.5% 59.2 Hydraulic Systems 844.7 542.2 85.2 35.8% 57.4 Components 223.4 179.8 21.6 19.5% 43.8 Instrumentation 86.2 62.9 9.2 27.0% 53.4 Total 1,861.7 1,255.1 192.3 32.6% 55.9 2009 Product Line Sales Cost of Sales Inventory Gross Margin Days Inventory Pneumatic Systems 570.3 450.2 74.3 21.1% 60.2 Hydraulic Systems 725.9 498.1 81.9 31.4% 60.0 Components 183.6 149.5 17.9 18.6% 43.7 Instrumentation 80.5 62.3 9.4 22.6% 55.1 Total 1,560.3 1,160.1 183.5 25.6% 57.7 2010 Product Line Sales Cost of Sales Inventory Gross Margin Days Inventory Pneumatic Systems 670.8 540.6 96.3 19.4% 65.0 Hydraulic Systems 950.1 657.3 114.2 30.8% 63.4 Components 219.2 179.5 24.2 18.1% 49.2 Instrumentation 100.2 79.3 13.1 20.9% 50.3 Total 1,940.3 1,456.7 247.8 24.9% 62.1 Financial managers of real companies must understand that the sales and profitability of different products and services within the company's portfolio will differ. Whether the firm may or can choose to reduce or rationalize their portfolio depends on a number of factors including the demands of customers and interrelationships between products and services offered. Regardless, in the end, the firm must still manage its own inventory in order to manage its net working capital.TABLE 4 SealTek Fittings (India) (millions of Indain rupee, INR) Net Working Capital (NWC) Management 2008 2009 2010 Sales (INR) 1,861.7 1,560.3 1,940.3 Sales growth (%) -16.2% 24.35% Net Working Capital (NWC in INR) 276.9 279.9 388.7 NWC/Sales (percent) 14.9% 17.9% 20.0% Net Working Capital Components Days sales outstanding 39.4 46.5 55.1 (A/R / (Sales/365) ) Days of inventory 55.9 57.7 62.1 (Inventory / (Cost of sales/365) ) Days of prepaid expenses 6.7 9.1 6.1 (Prepaid / (Sales/365) ) Days to pay (31.1) (33.1) (35.2) ( - A/P / (Cost of Sales/365) ) Days accrued expenses (8.6) (8.4) (8.3) ( - Accrued / (Sales/365) ) Days of NWC 62.3 71.8 79.8 (A/R + Inv + Prepaid - A/P - Accrued) Financing of Net Working Capital % of NWC Financed by Long-Term Debt 79% 60% 42% (LT Debt + Equity - Net Fixed Assets) / NWC % of NWC Financed by Short-Term Debt 21% 40% 58% (ST Debt - Cash) / NWC The management of net working capital (NWC) is based on days of sales (or days of payables). The management objective is to minimize NWC while maintaining adequate levels for the maintenance and growth of the business. The financing of NWC is a separate critical management challenge, with more conservative management financing NWC with a greater proportion of long-term debt.TABLE 5 seau'ek Fittings (mom) (millions of Indian rupee, INR) 2009 2010 Opening Cash Balance 61.2 26.5 Cash Fiow from Operations EBIT 55.5 143.9 Less interest expense (34.6) (47.7! Less taxes (5.2) (24.1! Plus depreciation 58.2 62.0 Change in net working capital (NWC) (3.0! (108.8! Cash ow front operating activities (0GP) 70.9 25.4 Cash Flow from Investing Capital expenditure (56.2) (72.5! Net acquisitions of assets - - Cash ow from investing activities (ICE) (56.2) (72.5! Cash Howfront Financing Dividend payments (60.0) (60.0! Change in Long Term Debt (7.2) (7.4! Change in Short Term Debt 17 .8 105.4 New Issues (Repurchases) of Equity - - Cash ow from financing activities (FCF) (49.4) 33.0 Closing Cash Baiance 26.5 17.4 I Value is created through cash flow, not accounting. The cash flow statement organizes corporate cash ows into three basic categories which reect the rm's execution of its business - - operating .. investing .. and financing . A profitable firm will generate a positive OCF. That same firm should always be re-investing in itself and its business, experiencing a negative ICF. If the firm is in a rapid growth stage of its business life cycle, FCF will be positive (the firm is raising capital from outside the firm). If the firm is in a mature or even declining stage of its business life cvcle. FCF will be negative. TABLE 6 SealTek Fittings (India) (Indian rupee, IINR) Return on Invested Capital 2008 2009 2010 Margin = EBIT / Sales 14.4% 3.6% 7.4% X X X Capital Turnover = Sales / Invested Capital 2.75 2.43 2.58 Pre-tax ROIC=EBIT / Invested Capital 39.6% 8.7% 19.1% X X Tax Effect = (1 - Tax Rate) 75.0% 75.0% 75.0% After-tax ROIC 29.7% 6.5% 14.3% Return on Assets After-tax Return on Assets 21.9% 2.0% 7.7% (EAT/Total Assets) Return on Equity After-tax Return on Equity 42.2% 4.1% 18.2% X Retention Rate (Note 2) 66.9% -282.0% 16.9% Sustainable Growth Rate 28.2% -11.6% 3.1% (Retained Earnings/Equity) ROE = Return on Equity; ROIC= Return on Invested Capital; EAT = Earnings After Tax Note 1: Financial leverage multiplier = Pretax ROE / Pretax ROIC Note 2: Retention rate (b) = Retained earnings / Earnings after tax Return on invested capital is a key metric of business performance used by many companies because it combines operating and financial information derived from two different financial statements -- the income statement and the balance sheet. An ROIC greater than the firm's cost of raising canital -- the company's weighted average cast of canital or WACC. -- is kev to the The sustainable growth rate is that rate of sales growth the company could support financially using internal financing at the current rate of profitability. For example, a 3.1% sustainable growth rate means that if the company's sales grow faster than 3.1%, at current onerating narameters. external financing will he needed (new debt or new equity or hoth).TABLE 7 SealTek Fittings (India) Benchmarking 2010 Performance Company Company Company SealTek A B Working Capital Management Days Sales Outstanding 55.1 38 41 40 Days of Inventory 62.1 44 39 38 Days Payables 35.2 36 34 35 Use of Debt Financing Debt / Total Assets 0.38 0.26 0.21 0.25 Debt / Invested Capital 0.47 0.31 0.35 0.29 Debt / Equity 0.90 0.65 0.59 0.52 Returns on Sales and Capital Gross Profit Margin 24.9% 28.0% 24.6% 25.3% Return on Sales 3.7% 14.2% 7.7% 12.1% Return on Invested Capital (ROIC) 14.3% 23.2% 17.3% 21.9% Return on Assets (ROA) 7.7% 14.3% 10.1% 15.9% Return on Equity (ROE) 18.2% 29.5% 22.5% 27.4% Benchmarking provides a different perspective on the performance of the firm. Whereas all the previous worksheets and statements analyzed the company from its own results over time, benchmarking compares selective measures and metrics against comparable firms in the Publicly traded firms are constantly benchmarked by the firms, analysts, and all participants in the public equity markets. Privately held firms, however, due to their lack of reporting and transparency, are often fail to utilize benchmarking sufficiently to assess their own performance on an on-going basis.Appendix 1. SealTek Fittings, Statement of Income (millions of INR, year ending December 31) Income Item 2008 2009 2010 Sales 1,861.68 1,560.30 1,940.30 Cost of goods sold 1,255.12 1, 160.10 1,456.70 Gross profit margin 606.56 400.20 483.60 Marketing & selling expenses 125.42 128.20 116.84 General and administrative expenses 162.66 158.29 160.82 Earnings before interest, taxes, depreciation 318.48 113.71 205.94 and amortization Depreciation expenses 50.54 58.17 62.00 Earnings before interest and taxes 267.94 55.54 143.94 Interest expenses 26.10 34.60 47.70 Earnings before taxes 241.84 20.94 96.24 Taxation expenses @ 25% 60.46 5.24 24.06 Net income 181.38 15.71 72. 18 Dividends paid 60.00 60.00 60.00Appendix 2. SealTek Fittings, Balance Sheets (millions of INR, year ending December 31) Assets 2008 2009 2010 Cash 61.20 26.40 17.40 Accounts receivable 201.21 198.78 292.91 Inventory 192.29 183.49 247.84 Prepaid expenses 34.17 38.73 32.59 Current assets 488.88 447.39 590.73 Gross fixed assets 437.24 493.44 565.94 Accumulated depreciation 98.64 156.81 218.81 Net fixed assets 338.60 336.63 347.13 Total Assets 827.48 784.02 937.86 Liabilities & Net Worth 2008 2009 2010 Accounts payable 107.05 105.27 140.48 Accrued expenses 43.71 35.78 44.18 Short-term debt 119.54 137.29 242.74 Current Liabilities 270.30 278.34 427.40 Long-term debt 127.80 120.60 113.20 Equity 429.38 385.09 397.27 Liabilities & Net Worth 827.48 784.02 937.86Appendix 3. Sales Decomposition by Region Sales by Region (millions of Rmb) 2008 2009 2010 India 484.0 530.5 776.1 Europe 279.3 187.2 194.0 Americas 446.8 312.1 310.4 Singapore/Indonesia/Korea 502.7 405.7 523.9 China 148.9 124.8 135.8 Global sales, net 1,861.7 1,560.3 1,940.3 Supplementary Data: Sales by Region (percent) 2008 2009 2010 India 26% 34% 40% Europe 15% 12% 10% Americas 24% 20% 16% Singapore/Indonesia/Korea 27% 26% 27% China 8% 8% 7% Global sales, net 100% 100% 100% Average Exchange Rate for the Period 2008 2009 2010 INR / EUR (rupees per euro) 63.54 67.27 60.59 INR / USD (rupees per US dollar) 43.43 48.34 45.67 INR / SGD (rupees per Singapore dollar) 30.65 33.24 33.53 INR/ CNY (rupees per Chinese yuan) 6.2587 7.0762 6.7470Appendix 4. Sales and Costs by Product Line (millions of Rmb, year ending December 31) 2008 Product Line Sales Cost of Sales Inventory Pneumatic Systems 707.4 470.2 76.3 Hydraulic Systems 844.7 542.2 85.2 Components 223.4 179.8 21.6 Instrumentation 86.2 62.9 9.2 Total 1,861.7 1,255.1 192.3 2009 Product Line Sales Cost of Sales Inventory Pneumatic Systems 570.3 450.2 74.3 Hydraulic Systems 725.9 498.1 81.9 Components 183.6 149.5 17.9 Instrumentation 80.5 62.3 9.4 Total 1,560.3 1,160.1 183.5 2010 Product Line Sales Cost of Sales Inventory Pneumatic Systems 670.8 540.6 96.3 Hydraulic Systems 950.1 657.3 114.2 Components 219.2 179.5 24.2 Instrumentation 100.2 79.3 13.1 Total 1,940.3 1,456.7 247.8