Reorganizing Wheeling Pittsburgh

Ratio Analysis

Perform traditional comparative and trend analysis as well as multivariate financial statement analysis for 1980 to 1990. Can you analyze the performance of Wheeling Pittsburgh in a manner that reveals if WHX was heading towards distress before 1985?

The table below shows calculated financial ratios for the period 1980-1990. Calculation details include:

* ROE was calculated using Reported Net Income prior to preferred dividends and Total Common Equity without including Minority Interest or Preferred Stock * ROA was calculated using Reported Net Income prior to preferred dividends * ROE and ROA use Average Common Equity and Average Assets in the denominator, respectively * Total Debt includes the Current Portion of Long-term Debt and Long-term Debt * Total Capital includes Total Debt, Total Common Equity, and Preferred Stock. * EBITDA-CEx stands for EBITDA minus Capital Expenditures.

After improving Y/Y in 1981, WHX financial performance severely deteriorated in the period 1982-1983. Financial metrics mostly improved in 1984, led by revenue growth and margin expansion. However, the damage done the prior 2 years was severe enough to send the company to a distressed state. After annual increases during 1980-84, leverage reached a peak in 1984 as shown by Debt/Equity of 209.8% and Debt/Capital of 60%. EBITDA during 1982-84 was not enough to cover 1 year of interest expenses. ROE was increasingly negative during 1982-84.

Liquidity and cash balances deteriorated, primarily impacted by dismal profitability and increased cash conversion cycle (decreased efficiency) during 1981-83. The charts below show the evolution of cash balances, cash flow from operations, cash conversion cycle, total capital and leverage for the period 1980-1984.

In summary, the analysis of financial ratios and trends for the pre-bankruptcy period 1980-1984 clearly shows severe deterioration in WHX’s financial performance. EBITDA coverage was not enough to cover 1 year of interest and cash balances eroded to the point where 1984 cash of $39M could not cover interest expenses for that year of $64M. Financial distress is evident but not fully conclusive until 1984.

Multivariate analysis using the Z-Score is congruent with the above conclusion. However, the perception of distress is evident during the entire pre-bankruptcy period when using the Z-Score. The table below shows the calculation of the Z-Score for the period 1980-1990. Note that Market Value of Equity (MVE) excludes preferred stock. The Z-Score is calculated using the coefficients for a manufacturing U.S. firm.

WHX was in the “distress” zone (Z-Score < 1.8) during the entire pre-bankruptcy period, reaching the lowest Z-Score of 0.73 in 1983. At this point, distress was a reality and the likelihood of bankruptcy had increased substantially.

At the end of 1985, WHX had already filed for bankruptcy and financial performance was at its worst during the period 1980-90. After voiding the fixed-price iron ore supply contracts, gross margin improved dramatically to drive operating profitability during 1986-90. However, after reaching a peak in 1988, operating profitability deteriorated the next 2 years leading to a net loss margin of -4.6% in 1990. Efficiency declined dramatically due to poor inventory turnover, leading to the worst cash conversion cycle in the period 1980-90. While the Z-Score improved post-bankruptcy, it stayed within the “distress” zone. In 1990, the Z-score declined to 1.39 from a peak 1.60 the prior year, showing that WHX was still in distress.

Stock Price Analysis

1. Research the stock price of WHX prior to, during, and after its filing for bankruptcy. What were the trading ranges and closing price on the day that the company filed? What were they the day after filing?

The table below shows the stock price ranges before, around, and after the bankruptcy filing. Prior to the filing the stock price reached a peak...
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