Dynashears, Inc. is a scissors and shears manufacturing company that has recorded stable sales and growth rates since 1958. On April 1991 Dynashears, unable to pay liquidate a $1 million loan, acquired from the Wellington National Bank in the previous months to complete a plant modernization and cover their fall funding requirements, thefirm requested an extension.
Evidence supports Dynashear’s president’s claim that the company's decreased liquidity and increased absorption of cash is due to the decrease in sales caused by a recession. As of March 1991, the average inventory turnover ratio variance is 28 days over the pro-forma projections due to a 16% decline in sales (reference exhibit [ex.] C). Its quick ratio anddays-sales-outstanding have moved accordingly, pointing to a reduction in cash, which had a variance of up to $1.3m off-target when comparing pro-forma to actual cash flow statements. Long-term debt and debt-to-equity ratios (reference ex. A and C) show little variance from projections.
For the upcoming period, we offer strategic recommendations based on a continued economic recession scenario,reducing forecast sales by 16% from original pro-forma (reference ex. D). Dynashears will cut dividends until the loan is paid and temporarily shut down its factory and halt production from May through June. These steps will restore inventory turnover ratio to approximately 100 days (which is more in-line with a recession scenario) and increase cash flow enough to pay back its loan, as well asprovide enough cushion to internally finance continued operations in a recession environment.
Mr. Winthrop of Wellington National Bank of New York must assess Dynashears’ pro-forma and actual income statements to assess Dynashears’ inability to pay back its short-term loan from his bank in agreement with the loan contract. Dynashears has experienced a drop in sales and free cashflow over the past 6 months (reference ex. A and C), which it blames on the worsening economy, thus higher inventories and a costly modernization program. Mr. Winthrop has extended the loan’s payment date from December to April and Dynashears has asked again for more time. Mr. Winthrop and Mr. Sheehan, the CFO of Dynashears, must determine the way forward in regards to the loan.
II. AnalysisA. Strategic Diagnosis
* Strengths and Opportunities
* Dynashears has a broad product line, which diversifies its market risk and has an extensive distribution network throughout the country.
* A finished plant modernization program was expected to save about $780,000 yearly, which will strengthen their position in competition and bad economy.
* Weaknesses and Threats* Dynashears is suffering from a current cash shortage due to a lack of sensitiveness and slow reaction to market changes.
* The looming economic recession could further exacerbate the decline in sales.
B. Financial Diagnosis
A variance analysis was done to compare the financial ratios from the projected figures for 1990-91 to the actuals from the same period.
Performance Ratios(reference ex. C)
* Profit margins fluctuated between 6% and 18%, rising in tandem with the seasonal sales peaks between August and December. There is little variance except for an 8% dip in February 1991 due to restructuring expenses.
* ROE variance is very minimal between the pro-forma statements and actual statements with the largest dip being 1% below projections. As the ROE is extremelylow to begin with, the company is making very little return on equity at an average actual return of 1% due mainly to a slower-than-expected asset turnover in the Du Pont equation.
Asset Management Ratios (reference ex. C)
* The inventory turnover period has increased dramatically since December, with an average variance 30 days longer than the pro-forma numbers over the last four months,...