monmouth st2
TRANSCRIPT
1998 1999 2000 2001 2002
Operations
Sales $ 48.5 $ 49.1 $ 53.7 $ 54.8 $ 55.3
Cost of Goods 32.6 33.1 35.9 37.2 37.9
Selling, General and
Administrative Costs 10.7 11.1 11.5 11.9 12.3
Depreciation Expense 2.0 2.3 2.4 2.3 2.1
Interest Expense .4 .7 .8 .8 .8
Income Before Taxes 2.8 1.9 3.1 2.6 2.2
Taxes 1.1 .8 1.2 1.0 .9
Net Income $1.7 $1.1 $1.9 $1.6 $1.3
Percentage of Sales
Cost of Goods 67% 67% 67% 68% 69%
Sell, Gen’l, Admin. 22% 23% 21% 22% 22%
Operating Income 6.6% 5.3% 7.3% 6.2% 5.4%
Stockholder Information
Earnings Per Share $ 2.91 $ 1.88 $ 3.25 $ 2.74 $ 2.23
Dividends Per Share 1.60 1.60 1.60 1.60 1.60
Book Value Per Share 49.40 49.68 51.33 52.47 53.10
Market Price 33-46 35-48 29-41 25-33 23-32
Price/Earnings Ratio 11-16 10-26 9-13 9-12 10-14
Shares Outstanding 584,000 584,000 584,000 584,000 584,000
Exhibit 1 Condensed Operating and Stockholder Information, Robertson Tool Company (millions of dollars except per-share data)
Assets Liabilities and Net Worth
Cash $ 1 Accounts Payable $ 2
Accounts Receivable 8 Other 2 WCR 24Inventories 18 Current Liabilities 4
Other 1 Long-term Debt 12
Current Assets 28
Net Plant and Equipment 19 Net Worth 31
Total Assets $ 47 Total $ 47
Collection Period (days) 53 Debt as % Capital 28%
Days of Inventory (days) 173 Total Assets/Net Worth 1.52
Sales/Total Assets 1.18
Exhibit 2 Balance Sheet at December 31, 2002, Robertson Tool Company (millions of dollars)
0.387097
1998 1999 2000 2001 2002
Operations
Sales $ 45 $ 97 $ 99 $ 98 $ 100
Net Income 1.97 3.20 3.20 1.13 2.98
Financial Position
Current Assets $ 25 $ 46 $ 49 $ 41 $ 46
Current Liabilities 6 11 15 10 13
Net Working Capital 19 35 34 31 33
Long-term Debt 10 18 16 15 17
Shareholders’ Equity 21 36 40 41 41
Stockholders Information
Earnings Per Share $ .78 $ .61 $ .59 $ .21 $ .54
Dividends Per Share 0 0 0 0.20 0
Book Value Per Share 8.31 6.86 7.37 7.38 7.45
Market Price 6-17 10-18 7-18 4-10 5-8
Price/Earnings Ratio 8-22 16-30 12-31 19-48 9-15
Shares Outstanding 2,525,600 5,245,900 5,430,100 5,510,000 5,501,000
Exhibit 3 Condensed Operating and Stockholder Information, NDP Corporation (millions of dollars except per-share data)
Actual Forecasts
2002 2003 2004 2005 2006 2007 to Infinity
Sales $ 55.3 $ 58.6 $ 62.1 $ 65.9 $ 69.8 $ 69.8
Cost of Goods 37.9 39.8 41.6 43.5 45.4 45.4
Gross Profit 17.4 18.8 20.5 22.4 24.4 24.4
Sell & Admin 12.3 12.3 12.4 12.5 13.3 13.3
Depreciation 2.1 2.3 2.5 2.7 2.9 2.9
EBIT 3.0 4.2 5.6 7.2 8.2 8.2
Tax @ 40% 1.2 1.7 2.2 2.9 3.3 3.3
EBIAT $ 1.8 $ 2.5 $ 3.4 $ 4.3 $ 4.9 $ 4.9
CoGS % Sales 69% 68% 67% 66% 65% 65%
Sell & Admin % Sales 22% 21% 20% 19% 19% 19%
Beginning of Year $ 19.0 $ 20.7 $ 21.7 $ 22.6 $ 23.5
Capital Expenditures (4.0) (3.5) (3.6) (3.8) (2.9)
Depreciation Expense 2.3 2.5 2.7 2.9 2.9
End of Year $ 20.7 $ 21.7 $ 22.6 $ 23.5 $ 23.5
Exhibit 4 ProFormas for Robertson Tool (millions of dollars)
Net Plant & Equip @
Net Plant & Equip @
Actual Forecasts
2002 2003 2004 2005 2006 2007 to Infinity
Sales 55.3 58.6 62.1 65.9 69.8 69.8
Cost of Goods 37.9 39.8 41.6 43.5 45.4 45.4
Gross Profit 17.4 18.8 20.5 22.4 24.4 24.4
Sell & Admin 12.3 12.3 12.4 12.5 13.3 13.3
Depreciation 2.1 2.3 2.5 2.7 2.9 2.9
EBIT 3.0 4.2 5.6 7.2 8.2 8.2
Tax @ 40% 1.2 1.7 2.2 2.9 3.3 3.3
EBIAT 1.8 2.5 3.4 4.3 4.9 4.9
CoGS % Sales 69% 68% 67% 66% 65% 65%
Sell & Admin % Sales 22% 21% 20% 19% 19% 19%
Beginning of Year $ 19.0 $ 20.7 $ 21.7 $ 22.6 $ 23.5
Capital Expenditures (4.0) (3.5) (3.6) (3.8) (2.9)
Depreciation Expense 2.3 2.5 2.7 2.9 2.9
End of Year $ 20.7 $ 21.7 $ 22.6 $ 23.5 $ 23.5
Exhibit 4 ProFormas for Robertson Tool (millions of dollars)
Net Plant & Equip @
Net Plant & Equip @
% of sales2007 to Infinity 2002 2003 2004 2005 2006 2007 to Infinity
1.00 1.00 1.00 1.00 1.00 1.00### 0.68 0.67 0.66 0.65 0.65### 0.32 0.33 0.34 0.35 0.35### 0.21 0.20 0.19 0.19 0.19### 0.04 0.04 0.04 0.04 0.04### 0.07 0.09 0.11 0.12 0.12### 0.03 0.04 0.04 0.05 0.05### 0.04 0.05 0.07 0.07 0.070 0.00 0.00 0.00 0.00 0.000 0.00 0.00 0.00 0.00 0.00### 0.01 0.01 0.01 0.01 0.01### 0.00 0.00 0.00 0.00 0.000 0.00 0.00 0.00 0.00 0.000 0.00 0.00 0.00 0.00 0.000 0.00 0.00 0.00 0.00 0.000 0.32 0.33 0.33 0.32 0.340 -0.07 -0.06 -0.05 -0.05 -0.040 0.04 0.04 0.04 0.04 0.040 0.00 0.00 0.00 0.00 0.000 0.35 0.35 0.34 0.34 0.340 0.00 0.00 0.00 0.00 0.00
2003 2004 2005 2006 2007
Net Income $ 11.0 $ 11.9 $ 12.8 $ 13.8 $ 15.0
Shares Outstanding (mil) 4.21 4.21 4.21 4.21 4.21
Earnings Per Share $ 2.61 $ 2.83 $ 3.04 $ 3.27 $ 3.56
Exhibit 5 Five-Year Forecast of Monmouth, Inc. Earnings, Excluding Robertson Tool (millions of dollars except per-share data)
Actuant Corp. Idex Corp. Lincoln Electric Snap On Inc. Stanley Works
Collection Period (days) 55 77 47 61 96 77 53
Inventory % Sales 12% 18% 13% 17% 18% 16% 33%
Operating Margin % Sales 17% 13% 20% 15% 10% 15% 5%
Return on Capital 21% 9% 10% 12% 11% 14% 4%
Times Interest Earned 3.8 3.2 7.1 11.5 7.8 9.3 3.5
Debt % Capital
98% 52% 30% 27% 29% 40% 28%
29% 37% 20% 17% 19% 24% 37%
Bond Rating BB- BB+ BBB - A+ A -
Value of Firm ($ mil) $ 712 $ 1,443 $ 1,191 $ 1,145 $ 1,861 $ 3,014 $ 29
EBIAT ($ mil) 55 119 98 90 129 234 1.80
EBIAT Multiple 12.8 12.1 12.2 12.7 14.4 12.9 16.1
Share Price $ 42 $ 42 $ 29 $ 22 $ 26 $ 27 $ 30
Earnings Per Share 2.80 3.20 2.00 1.78 1.80 2.32 2.32
Price/Earnings 15.0 13.1 14.5 12.4 14.4 11.6 13.5
Equity Beta 1.00 1.00 1.00 .75 1.05 .95 avg equity beta = 1.05Asset Beta .71 .63 .80 .63 .85 .73 = .73
B levered =
Exhibit 6 Selected Financial Information on Quasi-Comparable Firms, 2002
Briggs & Stratton
Robertson Tool Co.
· balance sheet values
· market values
avg asset beta
I. Interest Rates in May 2003
30-Year U.S. U.S. Corporate Bonds Rated
Treasury Bonds AA A BBB BB
4.10% 4.52% 5.07% 6.07% 7.96%
II. Estimated Market Risk Premium = 5.5% over 30-Year U.S. Treasury Bonds
III. Median Values of Key Ratios by Standard & Poors’ Rating Category
AAA AA A BBB BB B
Times Interest Earned (X) 27.3 18.0 10.4 5.9 3.4 1.5
EBITDA / Interest (X) 31.0 21.4 12.8 7.6 4.6 2.3
Pre-tax Return on Capital (%) 25.2 25.4 19.7 15.1 12.5 8.8
Debt as % Capital (%) 12.6 36.1 38.4 43.7 51.9 74.9
Number of companies 6 15 118 213 297 345
IV. Debt and Times Interest Earned Ratios for Selected Industries
AAA AA A BBB BB
Food Processing
Debt % Capital 44% - 51% 54% 53%
Times Interest Earned 7.9 - 6.7 4.3 2.9
Electrical Equipment
Debt % Capital - - 36% 48% 72%
Times Interest Earned - - 7.3 3.2 1.6
Electric Utilities
Debt % Capital - 46% 54% 57% 73%
Times Interest Earned - 4.0 3.4 2.7 2.0
Exhibit 7 Information on United States Capital Markets
Guide Questions:1 If you were Mr Vincent, EVP of Monmouth Inc, would you try to gain control of Robertson Tool in May 2003?2 Why is Simmons eager to sell its Robertson position to Monmouth for $50 per share? What are the concerns of and alternatives
for each of the other groups of Robertson shareholders?3 What is WACC of Robertson Tool using CAPM? Carefully consider which equity value you will use:
- Current- Prospective with synergy values- Required value to get transaction done (see question 7)
4 What is maximum price Monmouth can afford to pay using DCF? Use company forecast on Exhhibit 4. Run the valuationas of the start of 2003. Is this a reasonable forecast? Why or why not? If not, what changes would you make?
5 For comparison, run a DCF of Robertson using sales growth on Exhibit 4 but without synergies/margin improvements.Compare this value to #3 above.
6 What is maximum price Monmouth should pay based on market multiples of EBIAT? Use 2002 numbers forRobertson. Would your answers change if you modify the 2002 Robertson EBIAT based on margin improvements anticipated by Monmouth?
7 What offer would you make to gain the support of the Robertson family and the great majority of the stockholders?Will you offer to give away all the expected synergy values/margin improvements, why or why not?
Question 1 Yes, due to extensive distribution and the ability to be the market leader by generating 6 - 7% sales growth per year.
question 2
Question 3 I Current WACCB un = 0.73D/E = 0.56B L = 0.8964Ke 9.0302Kd= 7.96
WACC = 7.839024
Prospective with synergy valuesII Sheet DCF
Question 4, 5,6 next sheet.
for RobertsonActual Forecasts
2002 2003 2004 2005 2006 2007 to Infinity
Sales 55.3 58.6 62.1 65.9 69.8 69.8
COGS 37.90 39.80 41.60 43.50 45.40 45.40
Gross Profit 17.4 18.8 20.5 22.4 24.4 24.4SG and A 12.3 12.3 12.4 12.5 13.3 13.3
Depreciation 2.10 2.30 2.50 2.70 2.90 2.90
EBIT 3 4.2 5.6 ### 8.2 8.2Tax @ 40% 1.2 1.68 2.24 2.88 3.28 3.28EAT 1.8 2.52 3.36 4.32 4.92 4.92Dep 2.10 2.30 2.50 2.70 2.90 2.90
WCR 24 25.44 26.97 28.58 30.30 30.30change in WCR 1.44 1.53 1.62 1.72 0.00Capital Expenditures (4.0) (3.5) (3.6) (3.8) (2.9)
Cash Flow -0.620 0.834 1.802 2.305 4.920Terminal Value 85.94587Free Cash Flow -0.620 0.834 1.802 2.305 90.866DCF -0.574979 0.716933 1.437275 1.704907 62.33081
SUM DCF 65.61494Less : Debt 12DCF Equity 53.61494Number of shares 0.584Share Price 91.80641
without synergies on the basis of 2002 forecast
Without synergyActual Forecasts
2002 2003 2004 2005 2006 2007 to InfinitySales 55.30 58.60 62.10 65.90 69.80 69.80
COGS 38.16 40.43 42.85 45.47 48.16 48.16 0.69Gross Profit 17.14 18.17 19.25 20.43 21.64 21.64SG&A 0.00 12.89 13.66 14.50 15.36 15.36 0.22Depreciation 2.10 2.30 2.50 2.70 2.90 2.90EBIT 15.04 2.97 3.09 3.23 3.38 3.38Tax @ 40% 6.02 1.19 1.24 1.29 1.35 1.35EBIAT 9.03 1.78 1.85 1.94 2.03 2.03 Add depreciation 2.10 2.30 2.50 2.70 2.90 2.90 WCR 24.00 25.43 26.95 28.60 30.29 30.29 0.43 Less change in WCR 1.43 1.52 1.65 1.69 0.00 Less Net Capex 4.00 3.50 3.60 3.80 2.90Cash flow from assets -1.35 -0.67 -0.61 -0.56 2.03Terminal Value 25.68608Free cash flow -1.35 -0.67 -0.61 -0.56 27.72
DCF -1.249108 -0.571692 -0.486052 -0.415643 18.95012
SUM DCF 16.22763Less debt 12Equity 4.227626Share Price 7.239085
WACC = 7.839024