What effect would the proposal have on Blaine?s balance sheet? Name and calculate three effects Calculate the effect of the proposal on Blaine?s earnings before taxes and net income. Assume a tax rate of 30.8%. Calculate the effect of the proposal on Blaine?s leverage and coverage ratios. (Total Assets/Equity, Times Interest Earned)

3/26/2015 + Blaine Kitchenware Inc. Case Study FINA 4300.002 Spring 2015 + Blaine Kitchenware, Inc. Purpose of case: Evaluate capital structure using financial statement analysis techniques learned in Chapters 1-6 of Higgins textbook. Consider and evaluate repurchase recommendation Introduction to case study format 1 3/26/2015 + Blaine Kitchenware Inc. (BKI) Public company with 59 million shares outstanding Majority interest held by family members Strong family representation on the Board of Directors Company is mid-sized producer of branded small appliances for residential use Blaine's market share for small kitchen appliances just under 10% Kitchen appliance industry seeing increased competition from inexpensive imports and aggressive pricing Recent consolidation among some companies + BKI Strategy Timeframe for case: 2007 Recent initiatives: Completed IPO in 1994 Began moving production abroad in the 1990s (primarily Mexico and Asia) 3. Acquired small independent manufacturers or kitchen appliance product lines to round out and complement its product offerings. Acquisitions thus far for cash or stock. 1. 2. 2 3/26/2015 + Share Repurchase Proposal Blaine will purchase 14 million shares of its stock at a price of $18.50 per share. Current stock price is $16.25 per share and shares outstanding equal 59 million. Repurchase will be funded with: $209 million cash from balance sheet (includes cash & cash equivalents as well as marketable securities) $50 million new debt issue at an interest rate of 6.75% + Financial Performance In 2006 BKI earned net income of $53.6 million on revenue of $342 million. Approximately 85% of revenue and 80% of operating income came from mid-tier products with the remainder coming from higher-tier line. Operating margin of 22% was among the strongest in the peer group (see Exhibit 3). Despite shift toward higher-end product lines, operating margins decreased slightly over the last 3 year. Margin decline due to integration costs and inventory write-downs associated with acquisitions. BKI executives expected operating margins to increase now that integration activities were complete. 3 3/26/2015 + Financial Performance Industry Factors affecting BKI U.S. small appliance industry facing pressure from imports and private label products. Shift in consumer spending pattern toward larger \"big box\" retailers. Some of BKI competitors cut prices to maintain sales growth. BKI had not cut prices and organic revenue growth suffered as a result. Result: Blaine's top line growth almost exclusively due to acquisitions. Shareholder returns below average. EPS fell significantly since 2004 due to dilution. + BKI Financial Policies Very conservative - no debt beyond seasonal working capital needs. Strongest balance sheet in the industry $231 million in cash and securities at the end of 2006 BKI terminated revolving credit line in 2002 - management considered the fees a waste of money. Largest use of cash in recent years: dividends and acquisitions. Only modest increase in dividends per share but new share issuance in connection with acquisitions caused dividend payout to rise to more than 50% 4 3/26/2015 + Financial Analysis Analyze effect on: Balance Sheet Income Statement (EBT and NI) Liquidity Leverage Coverage Ratios + Considerations of Stock Repurchase Move had to be considered in conjunction with BKI financial policies: Ownership structure Dividend policy Capital structure Liquidity Acquisition plans Timing - stock price near all-time high even though performance lagged peers Increase in family ownership - reverse dilution of recent years Change in financial policy with regard to debt and ability to make acquisitions. 5 3/26/2015 + Assignment 1. Do you believe Blaine's current capital structure and payout policies are appropriate? Why or why not? 2. Should Dubinski recommend a large share repurchase to the board? What are the primary advantages/disadvantages of such a move? 3. What effect would the proposal have on Blaine's balance sheet? Name and calculate three effects. 4. Calculate the effect of the proposal on Blaine's earnings before taxes and net income? Assume a tax rate of 30.8%. 5. Calculate the effect of the proposal on Blaine's leverage and coverage ratios. (Debt/Equity, Debt/Total Assets, Times Interest Earned) 6. As a member of Blaine's controlling family, would you be in favor of this proposal? Why or why not? 6 BLAINE KITCHENWARE Case Exhibit 1 Operating Results: Revenue Less: Cost of Goods Sold Gross Profit Less: Selling, General & Administrative Operating Income Plus: Depreciation & Amortization EBITDA 2005 307,964 220,234 87,731 27,049 60,682 8,213 68,895 2006 342,251 249,794 92,458 28,512 63,946 9,914 73,860 62,383 15,719 78,101 24,989 53,112 18,589 EBIT Plus: Other Income (expense) Earnings Before Tax Less: Taxes Net Income Dividends 2004 291,940 204,265 87,676 25,293 62,383 6,987 69,370 60,682 16,057 76,738 24,303 52,435 22,871 63,946 13,506 77,451 23,821 53,630 28,345 3.2% 30.0% 21.4% 23.8% 32.0% 18.2% 35.0% 5.5% 28.5% 19.7% 22.4% 31.7% 17.0% 43.6% 11.1% 27.0% 18.7% 21.6% 30.8% 15.7% 52.9% Margins: Revenue Growth Gross Margin EBIT Margin EBITDA Margin Effective Tax Rate (1) Net Income Margin Dividend payout ratio BLAINE KITCHENWARE Case Exhibit 2 Assets: Cash & Cash Equivalents Marketable Securities Accounts Receivable Inventory Other Current Assets Total Current Assets 2004 67,391 218,403 40,709 47,262 2,586 376,351 2005 70,853 196,763 43,235 49,728 3,871 364,449 2006 66,557 164,309 48,780 54,874 5,157 339,678 Property, Plant & Equipment Goodwill Other Assets Total Assets 99,402 8,134 13,331 497,217 138,546 20,439 27,394 550,829 174,321 38,281 39,973 592,253 Liabilities & Shareholders' Equity: Accounts Payable Accrued Liabilities Taxes Payable Total Current Liabilities Other liabilities Deferred Taxes Total Liabilities Shareholders' Equity Total Liabilities & Shareholders' Equity 26,106 22,605 14,225 62,935 1,794 15,111 79,840 417,377 497,217 28,589 24,921 17,196 70,705 3,151 18,434 92,290 458,538 550,829 31,936 27,761 16,884 76,581 4,814 22,495 103,890 488,363 592,253