Swan-Davis, Inc. CaseIntroductionSwan- Davis, Inc. (SDI) is a public company that manufactures equipment for sale to large contractors. Stock currently sells for $15. Tom Stone, founder and current chairman, owns 14% of the stock. Stone, officers and directors own 27% of the shares as a group. Due to the highly competitive and cyclical industry, SDI has been experiencing many problems. Due to low profit margins, the company is in violation of loan covenants with their bank. SDI’s current ratio is 1.6, below the required 1.75. Also, their Times-Interest-Earned ratio is 3.4, below the required 3.5. If the violations are not corrected, the company will be forced to file for Bankruptcy. However, Vice President and Loan officer, Isabelle Ramirez, agreed to hold off taking any action as long as the company can supply the bank with a specific, feasible, and credible plan for getting SDI out of its difficulties. Filing for Bankruptcy hurts every party involved, including the bank, so Ramirez is willing to give SDI the opportunity to get back on track.
The construction slump of 1995 led to a drastic decrease in demand. SDI reduced its prices in hopes of stimulating sales but the price cut fell short to expectations. Sales and profits remained low and inventories increased dramatically. Also, SDI relaxed credit standards and lengthened its credit terms but this only led to unstable cash flows. However, Tom Stone remained optimistic and made the decision to keep investing in plant and equipment. Accounts payable also increased rapidly because the methods SDI had been using to raise capital were falling short. It is important to mention that SDI had recently signed a $20 million loan contract for expansion purposes that will take place during the second quarter of 1997. Taking all this consideration, SDI’s treasurer, Bob Wilkes strongly believes that they can turn the company around with a few changes.
In 1997, Tim Jaffar, the head of the General Services Association, said he was confident that this turnaround would work out for the company. During a time when the company was undergoing significant changes and some of its workforce was expected to move around, the General Services Association (GSA) in 1994 came close to taking over the company. With this power was transferred to Tony Higgs whose business philosophy had been a highly conservative one: a large company would be good for one’s profits but it is not possible for a company to avoid a decline in profits as quickly as it was in 1995.
The decision to take over the business came as a surprise to the community and was, therefore, not immediately announced by Tom Stone. Although it was one of his most important decisions, the company could not have looked past the financial challenges it faced in 1996 and 1998, as well as the fact that the company was still in a state of financial crisis. A few hundred employees were sent to North America and all the employees were out of work for many years.
When Tom Stone spoke out and he took over the company, he did not have the resources to focus more on the company’s performance and profitability, and the results did not impress people in North America. This came as a shock to many of those who were paying close attention to development, which had led to a decline in the company’s operating revenues and net revenue and, consequently, the decrease in sales and profit per employee.
During his tenure Tom Stone was known by many as a man who always found ways to build a company. He was an architect and the company’s president; he made lots of deals and kept the building to himself. He was also the mastermind of the company’s financial difficulties which were due to the lack of resources within the company, and the mismanagement of funds, which had made the company even more illiquid.
Tom Stone’s actions that resulted in all those things and other significant difficulties that would bring about the demise of the company were a wake-up call to many business and political leaders who did not want the company to fall apart. It was obvious that the GSA’s leadership would need to change soon. They had been entrusted with building a company and it was just too late. The new administration should step up and help improve it and we would see this as a major policy victory.
In 1997, Tim Jaffar, the head of the General Services Association, said he was confident that this turnaround would work out for the company. During a time when the company was undergoing significant changes and some of its workforce was expected to move around, the General Services Association (GSA) in 1994 came close to taking over the company. With this power was transferred to Tony Higgs whose business philosophy had been a highly conservative one: a large company would be good for one’s profits but it is not possible for a company to avoid a decline in profits as quickly as it was in 1995.
The decision to take over the business came as a surprise to the community and was, therefore, not immediately announced by Tom Stone. Although it was one of his most important decisions, the company could not have looked past the financial challenges it faced in 1996 and 1998, as well as the fact that the company was still in a state of financial crisis. A few hundred employees were sent to North America and all the employees were out of work for many years.
When Tom Stone spoke out and he took over the company, he did not have the resources to focus more on the company’s performance and profitability, and the results did not impress people in North America. This came as a shock to many of those who were paying close attention to development, which had led to a decline in the company’s operating revenues and net revenue and, consequently, the decrease in sales and profit per employee.
During his tenure Tom Stone was known by many as a man who always found ways to build a company. He was an architect and the company’s president; he made lots of deals and kept the building to himself. He was also the mastermind of the company’s financial difficulties which were due to the lack of resources within the company, and the mismanagement of funds, which had made the company even more illiquid.
Tom Stone’s actions that resulted in all those things and other significant difficulties that would bring about the demise of the company were a wake-up call to many business and political leaders who did not want the company to fall apart. It was obvious that the GSA’s leadership would need to change soon. They had been entrusted with building a company and it was just too late. The new administration should step up and help improve it and we would see this as a major policy victory.
In 1997, Tim Jaffar, the head of the General Services Association, said he was confident that this turnaround would work out for the company. During a time when the company was undergoing significant changes and some of its workforce was expected to move around, the General Services Association (GSA) in 1994 came close to taking over the company. With this power was transferred to Tony Higgs whose business philosophy had been a highly conservative one: a large company would be good for one’s profits but it is not possible for a company to avoid a decline in profits as quickly as it was in 1995.
The decision to take over the business came as a surprise to the community and was, therefore, not immediately announced by Tom Stone. Although it was one of his most important decisions, the company could not have looked past the financial challenges it faced in 1996 and 1998, as well as the fact that the company was still in a state of financial crisis. A few hundred employees were sent to North America and all the employees were out of work for many years.
When Tom Stone spoke out and he took over the company, he did not have the resources to focus more on the company’s performance and profitability, and the results did not impress people in North America. This came as a shock to many of those who were paying close attention to development, which had led to a decline in the company’s operating revenues and net revenue and, consequently, the decrease in sales and profit per employee.
During his tenure Tom Stone was known by many as a man who always found ways to build a company. He was an architect and the company’s president; he made lots of deals and kept the building to himself. He was also the mastermind of the company’s financial difficulties which were due to the lack of resources within the company, and the mismanagement of funds, which had made the company even more illiquid.
Tom Stone’s actions that resulted in all those things and other significant difficulties that would bring about the demise of the company were a wake-up call to many business and political leaders who did not want the company to fall apart. It was obvious that the GSA’s leadership would need to change soon. They had been entrusted with building a company and it was just too late. The new administration should step up and help improve it and we would see this as a major policy victory.
Answers to questions1. Apply the DuPont equation (ROE = Profit margin x Total assets turnover x Equity multiplier) so SDI’s data to obtain a general overview of the firm’s financial condition. Consider SDI relative to its industry, its historical trend, and its forecasted trend.
According to its ROE of 7.6% ( ROE = 2.6 x 1.0 x 2.9 = 7.6%) relative to the industry ROE of 15.6%, the company is in poor condition. However, the forecast trend shows that the firm’s ROE should increase to 16.0% by 1997.
a. What areas of strength, what weaknesses, and what needed corrective actions are revealed by the historical data?A strength that the historical data reveals is that SDI’s recent past performance has been better than the industry. For instance, ROE for 1994 was 21.3% compared to the industry with an ROE of 14.2%. This quick comparison signals that SDI has potential for growth and it was giving its shareholders more for their