BLAINE KITCHENWARE INC.
Blaine Kitchenware was a mid-sized producer of small appliances primarily used in residential kitchens. By 2006, the company’s products consisted of a wide range of small kitchen appliances including deep fryers, griddles, toasters, ovens etc. Blaine had just under 10% of the $2.3 billion U.S. market for small kitchen appliances. For the period 2003 to 2006, the industry posted modest annual unit sales growth of 2%. In 2006, 65% of its revenue was generated from shipments to U.S. wholesalers and retailers. The company shipped approximately 14 million units a year. There were three major segments in the small kitchen appliance industry: food preparation appliances, cooking and beverage making appliances but Blaine’s maximum revenue came from cooking and food preparation appliances and its market share in beverage making appliances is only 2%. In 2006, Blaine had suppliers and contract manufacturers in China, Vietnam, Canada and Mexico. BKI’s market research consistently showed that the Blaine brand was well-known and well-regarded by consumers.
During the year ended December 31, 2006, Blaine earned net income of $53.6 million on revenue of $342 million. Approximately 85% of Blaine’s revenue and 80% of its operating income came from the sale of mid-tier products.
Blaine’s 2006 EBITDA margin of nearly 22% was among the strongest within the peer group. Blaine’s operating margins had decreased slightly over the last three years. Margins declined due to integration costs and inventory write-downs associated with recent acquisitions. Now that the integration activities were completed, BKI executives the firm to achieve operating margins as high as it historical margins. Most of the Blaine’s rivals were cutting prices to maintain growth but Blaine did not follow suit and as a result its core products lost its market share. Growth in Blaine’s top line was attributable almost exclusively to acquisitions. Despite the company’s profitability, returns to shareholders had been somewhat below average. Blaine’s return on equity (ROE) was significantly below that of its publicly traded peers. Moreover, its earnings per share had fallen significantly since 2004, partly due to dilutive acquisitions. Stock price appreciation, during 2004-2006, compounded annual return for BKI’s shareholders, including dividends and stock price appreciation were approximately 11% per year which was below the 16% annual compounded returned by shareholders of Blaine’s peer group during the same period.
Blaine’s financial posture was conservative, only twice in the history had the company borrowed beyond seasonal working capital needs. The first was during World War II and second during oil shock of 1970s.
At the end of 2006, the company held $231 million in cash and securities, Blaine’s balance sheet was the strongest in the industry. Given such substantial liquidity, Blaine had terminated in 2002 revolving credit agreement designed to provide standby credit for seasonal needs.
In the recent years the company’s largest uses of cash had been common dividends and cash paid in various acquisitions. Dividends per share had risen only modestly during 2004-2006. However, as the company issued more shares the number of outstanding shares climbed as a result earnings per share decreased from $1.29 to $0.91 from 2004-2006 and payout ratio rose significantly to over 50% in 2006.
The next use of funds was capital expenditures, which were modest due to
Blaine’s outsourcing of its manufacturing. Average capital expenditure of
Blaine during the past three years was just over $10 million per year. In recent years, after tax cash generated from operations had been more than four times average capital expenditures.
Question 1:- Do you believe Blaine’s current capital structure and layout policies are appropriate?
Answer:- The capital structure of Blaine is prudent and conservative. The main...
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