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Transcript of Annual Report 2
THE A-TEAM
“Always Ahead”
ANDREWS INC. ANNUAL REPORT
“Always Ahead”
1
EXECUTIVE SUMMARY
Andrews Inc. is a company built on a two-pronged approach to success: 1) leveraging high margins to drive the
bottom line and investor returns, and 2) utilizing an appropriate amount of leverage to fund capital expenditures
and magnify returns for shareholders. We have taken a margin-focused approach to the computer sensor
industry, operating in three high-margin segments: high end, traditional, and low end.
We regret to report that our execution of this strategy in relation to our three key performance metrics – ROE,
contribution margins, and stock price – has underperformed the past few years; however, we believe that our
patience is paying off, and that our transition period, which was initiated in 2020, is finally coming to a close,
returning us to profitability next year in 2023. This transition took much longer than expected due to a variety of
complications: 1) We faced significant market contraction in 2020, which was when our new product, AhHa,
began its initial sales; 2) We faced customer preference drift rates that were far slower than our projections,
meaning our products were incorrectly positioned for a few years before customer preferences adjusted to where
we had positioned them; 3) We failed to take into account how long it would take to build customer awareness,
and therefore market share, when transitioning a product – Able – between segments; and 4) We failed to realize
that producing high MTBF products and maintaining a commitment to quality was simply not something that
customers valued or based buying decisions on in our target segments, and instead simply increased costs.
The end result of these headwinds was that our new product, AhHa, didn’t establish market share as fast as we
projected. This was a major problem for us, as we went from 26% traditional market share in 2019 to merely 8%
in 2020. Combine this with a strategic exit from the performance and size segments, and you can see why our
sales dropped significantly, and with them fell profits. Moreover, the slow drift rate of the low end segment
meant Able was not going to be ideally positioned for at least two years, when we had thought it would be one.
This meant that we were forced to hold off the phasing out of Acre until Able could establish market share. In
the past year, holding onto Acre – as an insurance policy to make sure that Able was able to generate enough
sales to be the sole product in the low end segment – produced a $5.334MM loss, which wiped out what would
have otherwise been a profitable year. The high end market has seen increasing competition from a second
Digby product, yet Adam has remained a constant in that market, bending but never breaking. This may be a
sign of things to come.
I understand your scepticism in some of our results, and how we can remain positive in spite of them; however,
please hear me out. We have identified a variety of ways to improve margins going forward, and are projecting
proforma contribution margins of 33.1% in 2023, increasing to 42.0% in 2024. This will return us to being a
high margin business, as our strategy outlines. Moreover, sales should see a tailwind of markets growing at
2
record rates. And lastly, all of our products have now successfully transitioned/entered their respective market
segments, have established market share positions, are ideally positioned on the perception map (both now and
for the years to come), and have the marketing and promotion budgets to back them. Our balance sheet will
benefit from increasing cash flow generation, which we can use to pay down debt, and return to our target
Debt/EBITDA range of 2.0-2.5x.
Our proforma financial statement projections show our best year yet to come in 2023. Some of the major
assumptions that are baked into these Base, Bull and Bear cases can be found here:
We believe that the base case is a very reasonable place to start, as it outlines a scenario in which we simply
maintain our current market share in each of the respective three segments. Given our products are gaining
customer awareness, we feel like there is room for upside; however, given the threat of competitors also having
products gain awareness, there is some downside risks to our projections as well. As can be seen in more details
in our financial statements, even our bear case, which assumes that we only capture 80% of the market share we
currently have – a very conservative assumption – has us making a hefty profit, albeit a much smaller one when
you adjust for a one-time write-off of $17.301MM, as shown by the normalized net profit figure.
In our minds, we have weathered the storm quite nicely, and have positioned Andrews for incredible success in
the future. The best is surely yet to come!
Sincerely,
Paul Thompson
CEO
Andrews Inc.
Total Segment Segment Projected Market Share Unit Sales
Demand Last Year Growth Rate Demand this year Bear Base Bull Bear Base Bull
Low End (Able) 9244 12.60% 10409 15% 19% 22% 1582 1978 2290
Traditional (Ah Ha) 6896 9.80% 7572 16% 20% 24% 1211 1514 1817
High End (Adam) 3195 17.20% 3745 21% 26% 30% 779 974 1123
3
ANNUAL REPORT
STRATEGY Stated Objective
From the beginning, Andrews Inc. has looked to take a differentiation focus strategy in the computer sensor
industry, and originally planned to focus on the three high growth segments: high end, performance, and size.
The rationale behind this was that these segments all have similar customer profiles – all are relatively price
insensitive, and looking for a high-quality, cutting-edge product – and thus we believed we could effectively
target all three. Moreover, customers being relative price insensitive would allow us to maximize our margins
without sacrificing sales. However, we used the first board meeting in 2019, which was held after the first four
years of production, as an opportunity to reflect on our successes and failures, and to evaluate what the strategic
direction of our company would look like moving forward.
It was here that we realized that despite having similar customer profiles, the one major different between the
high end, size and performance segments is customers’ willingness to pay. The customers of all three segments
demanded similar, top-of-the-line materials, and a constantly updated product, and thus production costs across
the segments were very similar; however, the high end segment product could be sold at a price point over $6
higher per unit, or at an 18% premium to the size and performance
categories. The combination of expensive materials costs,
expensive labour costs, and lower prices really pinched our
margins in the performance and size segments. Overall, these
segments only made up 22% of our top line, contributed a meager
10% to our overall contribution margins, and were actually dilutive
by over $7,000,000 to our net income at the end of Year 4.
We were at a crossroads: to either invest heavily in driving down our costs and establishing a more solidified
market share in these markets, or to divest and invest these funds into our established products that held strong
market share positions in profitable segments. We chose the latter.
Execution
There were a couple of major oversights with regards to transitioning our traditional product, Able, into the low
end segment, that made this strategy take longer to execute that anticipated, and also to yield less profitable
results that initially anticipated. Firstly, we grossly over-estimated the drift rate of the low end segment and
traditional segments. Our strategy was to hold Able in the same spot on the product perception map – not
4
updating it – and instead waiting for the segment to move to it, and allowing it to gain ‘age’, the most important
product characteristic in the low end segment; however, because the segment didn’t move as fast as we had
forecasted, Able spent a significant amount of time in no-mans-land – the term we have coined for the area
between the different product circles – in this case, between traditional and low end.
To make matters worse, we failed to account for the fact that the ideal position in the low end segment, relative
to the centre of the segment circle, is actually offset towards lower performance and bigger size. We had thought
that given the choice between a superior product and an inferior product, given identical prices, that customers
would chose quality. However, it turns out that this is not what customers were looking for, and this meant that
the segment would have to drift even further in order to take our product from the leading edge to the trailing
side of center.
The last problem we faced in the low end segment was that given our product had far superior performance, size
and MTBF metrics, its materials cost per unit was much higher than the rest of the products in the segment.
Given the price sensitive nature of the customers, increasing prices accordingly was not an option. Because the
segment remained relatively still, and was not moving very fast, the competition could afford to not update their
products, and were able to take advantage of their much lower input prices – they poured these saved funds into
marketing and promotion. In order to compete and develop product awareness in the new segment for Able, we
were forced to match these budgets, and contribution margins in this segment suffered as a result.
Having seen that it was going to take at least two more periods for the segment to move to where our product
was currently located on the perception map, we made the tough choice to sacrifice ‘age’, and updated our
product – making it bigger and worse performing. Yes, you read that correctly. We were forced to make our
superior product worse in order to better position it within the low end segment. This made its age lower, but put
Able in a strong position to compete in the segment moving forward. Moreover, making the product worse
lowered our material cost, which allowed us to increase our overall contribution margins from Year 6 to Year 7.
Our original plan was to phase out our original low end product, Acre, in Year 5, as Able was expected to take
over the sales of the segment and Acre was on the very edge of the customer’s perception map; however, for all
the reasons listed above, Able sales lagged our projections, and thus we were forced to continue selling Acre
much longer than anticipated. This presented a new problem: that it’s positioning was drifting further and further
from the segment’s circle on the perception map. Having a low end product on the outer edge of the perception
map circle was not a problem initially because its high age allowed it to continue to hold market share. However,
the next year it was outside the outer band of the circle all together, and therefore would not even be considered
by customers. Moreover, Able still hadn’t established itself in Year 6, and so management decided that it was
5
too risky to count on Able alone to compete in this market which was so vital to our core operations. In short, we
made a decision to invest money updating Acre, moving it back closer to the segment circle on the customer
perception map.
This was a hard decision to make, given we knew that updating it would make its age lower (which had
previously been its primary selling point), and given we had plans to phase the product out, it was hard to justify
spending money updating it and marketing it. However, in the end, we agreed that this was a prudent
management move because we viewed it as somewhat of a put option on Able sales; if Able was still unable to
establish itself as a legitimate low end product, and gain market share, then Acre, would likely be able to capture
some of this market share. If Able sales were strong, we hypothesized that they would likely come at the expense
of Acre’s ability to generate sales. In the end, the latter played out: Able finally established a solid market share
position, and Acre sales were quite dismal. This result allows us finally execute our original strategy of phasing
our Acre, which we did in Year 8 by selling down capacity – generating over $30,000,000 in cash flow in the
process – and using these funds to invest into automation for our other segments.
In the traditional segment, we positioned our new traditional product, AhHa, on the cutting edge (or lower right
corner) of the traditional product circle on the perception map, expecting the circle to move quite rapidly and
have AhHa perfectly positioned by the time our production came online, as there is a year lag between designing
and positioning the product and when you first begin production and recording sales. However, the drift rate of
the traditional segment was also slower than anticipated, leaving our product in a non-ideal spot; as a result, we
did not gain market share as quickly as anticipated, which shows up in our need to take out an emergency loan of
over $13,000,000 in Year 5.
The high end segment product, Adam,
has been the lone bright spot in our
execution of our strategy, and even it has
faced increasing competition. Our
strategy with Adam has simply been to
continue to position it on the cutting
edge of the segment, to continue to keep
up with the competition in terms of
marketing and promotion budgets, and to
maintain market share in a market that
what was market with only 3 products in Year 4. This has been fairly successful, but we have seen market share
erode slightly with the introduction of a second high end product by Digby. The market has become a four horse
28%26%
15%
32%
0%
10%
20%
30%
40%
50%
Year 4 Year 5 Year 6 Year 7
High End Market ShareDixie Adam Bid Coke Drum
6
race, and we believe we are in a great position to continue to remain competitive in this area without having to
worry about our margins being squeezed in a price war due to the customers being relatively price-insensitive.
Performance Summary
When judging our performance, we must first recall our key performance indicators – return on equity, margins,
and stock price. These metrics were selected at the beginning of Year 1 as relative indicators of our management
team’s ability to execute our original strategy, as well as our ability to react to market forces and make
adjustments as necessary. Our key performance indicators (as can be found in Appendix II: Statement of
Objectives) are as follows:
ROE: The A-Team is committed to providing a superior return to shareholders, coming in various
different forms. One would be the return on equity of our business, which we hope to magnify with
leverage. If we are successful, our ROE will be greater than our competitors, and somewhere in the low-
to-mid double digit percentages. Given historical stock market data, we believe this level of ROE
provides our investors with an appropriate risk-adjusted return. Moreover, we are committed to
returning any idle cash to investors in the form of share buybacks and dividend payments. This will be
dictated by our business’ need for investment and our ability to generate free cash flows, and thus
cannot be accurately forecast.
ROE is an area of the business that has significantly
underperformed for the past few years. However, we
believe that this can be attributed to market
contraction over the past couple periods and
difficulties transitioning products between market
segments, which will be extensively discussed later
in this report. That being said, the silver lining in a
number of years characterized by negative ROEs is
that we have actually performed quite well on a
relative basis. Compared to our closest competition,
we have outperformed every competitor in our
industry (see graph, left), besides Digby, whose $213MM market cap makes them less comparable. Moreover,
we can report that Andrews Inc. will be returning to its past tradition of providing excellent ROEs in the near
future, with our 2023E ROE projected to be 23.1% in our base case, a large portion of which is due to a one-time
write off, but nevertheless is a welcome change from posting negative ROEs.
86.2%
84.6%
71.4%
124.2%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
130.0%
Year 4 Year 5 Year 6 Year 7
ROE Index Since First Board Meeting
Andrews Baldwin Chester Digby
7
Margins: Andrews Inc. has always been a company that prides itself on operating with high margins. At
the end of Year 4, our contribution margins were 31.6%, which was slightly higher than the industry
average of 29.3%. At the first board meeting, we outlined a plan to exit our low margin business
segments (size and performance), which was going to increase our contribution margins to 36.8%.
Contribution margins have been an area that has caused our management team significant grief and headache
over the past three years. At the last board meeting, we were in a strong position in terms of our margins, and
believed that we were poised to build on that, and really leverage strong margins as part of our two-pronged
approach to success. This has not been the case. Fortunately, we believe that over the past year, we have
identified several key problem areas and are working hard towards solving them. This is reflected by our margin
improvement over the past year and into Year 8 projections.
When it comes to evaluating our contribution margins, we have been forced to make some significant changes
due to the challenges faced in the low end and traditional segments – which are both segments where we were
introducing new products (or transitioning old products into a new segment). Having positioned our new
traditional product, AhHa on the cutting edge of
the segment, in order to account for the lag in
production from when the product was designed,
meant that its materials were much more
expensive than the competition to begin with,
which hurt margins in this segment. Moreover,
we kept automation fairly low in this segment
while we were tinkering with the positioning of
AhHa, as this would decrease the amount of time
it took to make changes to the product. In Year 6, AhHa improved market share from 3% to 15%. This served as
a signal to management that we had the positioning correct, and that we could begin to increase automation, as
changes to the product would now simply be made to keep up with the slower-than-expected moving market.
Automation, however, takes a year to come online, and thus benefits were not seen until Year 7 results, where
Current Year Proforma - No Performance & Size
FYE 2019 FYE 2019
Sales $174,476 $135,248
Contribution Margin $55,213 $49,834
Margin % 31.6% 36.8%
EBIT Margin $21,091 $28,593
Margin % 12.1% 21.1%
40.5%
37.2%
33.5%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Year 4 Year 5 Year 6 Year 7 Year 8
Contribution Margins Over TimeAndrews Baldwin Chester Digby
33.1%
8
our contribution margins improved to 28.5% from 25.4% (see graph above). We also have projected significant
margin improvements into Year 9, which I will discuss further in the Learning Outcomes section.
Stock Price & EPS: The A-Team has a focus on high margin segments of the sensor industry, and thus
we are positioning ourselves as profitable company. Moreover, we have, from the beginning, outlined a
capital structure that would focus avoiding diluting current shareholders when raising capital by raising
debt rather than equity whenever possible, and using appropriate leverage to magnify shareholder
returns.
Here at Andrews Inc., management
strongly believes that eventually
market forces will prevail, and good
companies get rewarded for their
success with strong stock prices and the ability to raise capital cheaply in the future. Thus, we have selected our
stock price, and EPS, as a very relevant
metric to indicate success. At the end of
Year 4, our stock price was $19.43, which
was second to Digby in our industry.
However, we will be the first to admit that
our stock has underperformed expectations
over the past few years. We are not alone
when it comes seeing declines in stock
prices (see graph right). Digby has proved
to be formidable competition, forcing both
Baldwin and Chester out of key markets for
each company respectively. Moreover, Digby has established a monopoly on the performance segment,
achieving 100% market share, and using this cash flow to invest heavily in other areas.
That being said, we believe it is important to remember that despite our recent struggles, Andrews Inc. is the
only company in the industry to record a cumulative profit (besides Digby), with cumulative profits through
Year 7 of $6,554,769. Moreover, our management group is very bullish on our stock’s prospects moving
forward. As you can see, our stock price increased last period as our contribution margins recovered, and we
reduced our net loss to -$594,187. Looking further into this, as was mentioned in the Execution section above,
we made a conscious decision to hang on to Acre for one period longer, despite knowing that there was a chance
its sales could be very weak, as an insurance policy on Able not being able to secure market share. If you look at
the Year 7 Income Statement (in the Capstone Courier), you will see that our $594,187 net loss comes despite
$41.08
$27.15
$16.32$19.43
$32.59
$39.63
$1.97$9.53
$1.48 $1.00$1.76
$14.81
$47.21 $44.21
$50.83
$75.14
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
Year 4 Year 5 Year 6 Year 7
Stock Prices Andrews Baldwin Chester Digby
Year 7 Andrews Baldwin Chester Digby
Stock Price $19.43 $9.53 $14.81 $75.14
Market Cap ($MM) $37 $21 $36 $213
EPS ($0.32) ($1.83) $1.08 $7.08
Cumulative Profit $6,554,769 ($5,299,808) ($14,980,798) $61,902,965
9
losing $5,334,000 on our Acre product segment. On a forward looking basis, without this drain on earnings,
Andrews Inc. is in a good position to turn a solid profit next year. Turning to our proforma income statements
(see Appendix), as a base case we outline $7.70 EPS, which is based on simply maintaining the same market
share in each segment as we achieve in Year 7. This EPS grow can be attributed to higher margins and flat
market share, with our sales growth coming as a result of strong market growth in all segments. Moreover, a
significant amount of this EPS is created by a $17.3MM one-time write-off. Our base case normalized EPS is
$3.82, which we believe is very realistic given our assumptions.
Learning Outcomes
Looking forward to Year 8 and beyond, our contributions margins will be propelled by three major factors:
1) Management learned that the MTBF (mean time before failure) metric had an incredibly large impact on
the cost of materials. This is something that we really hadn’t tinkered with at all until Year 8. Basically,
before Year 1, in our Company Objectives, we stated that Andrews Inc. was going to be a company that
put forth high-quality products. In keeping with this philosophy, we set MTBF to the top of the
allowable range for each segment. We have since re-evaluated this strategy, and set MTBF to be in line
with competitors, has led to an increase in contribution margins going forward. This should have
little/no effect on demand for our low end, traditional and high end products as MTBF is only of 9%, 9%
and 19% importance to customers in these segments respectfully.
2) Management has seen the value in investing in TQM initiatives. Initially we evaluated these initiative on
a constant returns to scale basis, meaning that we assumed a $1,500,000 investment that produced a 1%
reduction in materials cost would produce a further 1% for the next $1,500,000 investment as well. This
is the analysis we presented to you at the previous board meeting, and was the basis behind our rationale
for not investing heavily here.
However, having seen the other
company’s results, we began to
strategically invest in some areas,
and have seen the increasing returns
to scale nature of these investments.
While payoff for the initial
spending is limited, as you invest
more, your returns increase, and
persist over time. Given our
troubles transitioning products between segments, cash flow in Years 5 and 6 was not sufficient to allow
us to invest heavily in this area. However, in Year 7 we began to right the ship, and built up a cash
7.6%
9.8%
4.4%
12.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Material CostReduction
Labour CostReduction
Reduced AdminCosts
Demand Increase
TQM ReturnsWorst Case Midpoint Best Case
10
position. $10,000,000 of this cash balance has been invested into TQM in Year 8 alone, where we can
now boast that we have reduced material costs by 7.6% (at the midpoint between best and worse-case
scenarios), reduced labour costs by 9.8%, and increased demand for our products by 12.8%. These cost
reductions have materially increased our contribution margins for Year 8, where they will be 33.1%, an
increase of 150 bps over what they were at the last board meeting.
3) Management realizes that even at 33.1%, our
contribution margins will still be some of the
lowest in the industry, and this is
something that needs to change. Our
strategy for addressing this issue is to
invest into increased automation for all our
segments. We believe this is prudent
because as we have discussed at length
above, the segments are moving much
slower than initially anticipated. Thus, the
levels of automation that we outlined in Year
1 are no longer appropriate. Moreover, we
have seen that the automation levels of our
competition are much higher than ours,
and so we can be confident that if the
market begins to move faster, we will still
be in a better position to react, even after
our increases in automation. Automation
works as follows: at a rating of 1.0, labour
cost per unit is $12.00. For each 1.0 point
increase in automation, labour costs per
unit decrease $1.20, or 10% of their initial level. Thus, we can very accurately forecast what our
contribution margins will look like in Year 9, when our automation comes online. Our calculations are
shown on the right, where we model what our proforma contribution margins will look like moving
forward. Our predictions show at in Year 9 Andrews will enjoy 42.0% contribution margins as a
company, which we believe will put us back in a position where we can speak to margins as a position
of strength for our company.
37.2%
31.8% 30.4%
49.3%
37.3%39.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Able Adam AhHa
Estimated Contribution Margins
Old Automation Rating New Automation Rating
Estimated Contribution Margins Able Adam AhHa
Production 2000 800 1815
1st shift capacity 1400 900 1000
% capacity 143% 89% 182%
Selling Price $18.00 $37.00 $26.50
Old Automation Rating 7.0 3.0 5.0
Old Labour Cost/unit $5.62 $9.82 $8.95
Old Contribution Margin 37.2% 31.8% 30.4%
New Automation Rating 8.5 4.5 6.5
New Labour Cost/unit $3.45 $7.80 $6.61
New Contribution Margin 49.3% 37.3% 39.3%
Contribution Margin Increase 12.1% 5.5% 8.8%
11
RESEARCH & DEVELOPMENT Stated Objective
Our objective following the board meeting was to continue investing heavily in research and development. This
included making improvements to the performance, size, and MTBF of our sensors. In the early years of our
firm’s existence we were focused on products in every segment of the marketplace. During the board meeting,
we proposed the idea of phasing out Agape and Aft, the products in the Size and Performance segments. These
products had lower contribution margins than our other products. Phasing them out would increase our
company’s bottom line, while allowing us to place additional focus on our remaining products. We would
continue to manufacture processors in the Low End, Traditional, and High End segments.
Able
Able
Acre
Adam
Aft
Agape
AhHa
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
0.0 5.0 10.0 15.0 20.0
Size
Performance
Perceptual Map
Able
Acre
Adam
Aft
Agape
AhHa
Low End
Performance
Traditional
High End
Size
12
Execution
Each week we continued to very carefully monitor the changes in preferences of the market segments, and
decide if we should: a) updating our products; b) leave them unchanged; or c) introduce a new product. In some
cases it was in the best interest of our firm to reduce the capabilities of a product, as will be further explained.
In 2020 our new product AhHa was introduced to the marketplace. It was intended to occupy the traditional
market segment. Following our strategy proposed in the previous board meeting, we had Able takeover as
primary the Low End product, and began phasing out Acre. We took an approach of gradually moving the
products into their new roles.
Performance Summary
As mentioned, our goal was to introduce a new product,
AhHa, into the traditional segment, and then to transition
Able to the low end segment, and to phase out Acre. That
goal was eventually achieved, but the execution of this
strategy took much longer than expected. During its first
year, AhHa captured a small 3% of the market share for
Traditional processors. This was inline with our firm’s
expectations because new products in any segment typically
have very small market penetration their first year; however,
we expected Able to continue to compete in this segment
during the first year while AhHa was building market share and customer awareness. However, as can be seen
by Able’s meager 5% market share (see graph, right), this did not go according to plan. We essentially went
from a 26% market share in the traditional segment in 2019, to 8% in 2020. This was a major headwind for cash
flow and profitability, especially since we had dropped two of our other segments, making the traditional
segment essentially one-third of our business.
The transition of Able replacing Acre as the primary product
in the Low End segment is now completed, but wasn’t
completed without its own complications. In the year 2021,
both products had significant market share in the Low End
segment, with Acre achieving 12% and Able 14%. However,
we were still unsure of Able’s ability to solely generate the
sales we needed out of the low end segment. This led us to
keep both products in the market, using Acre as an insurance
13
policy against shortcomings Able may have experienced. However, Acre’s specifications were falling
significantly behind, and demand fell off significantly in 2022, with market share going to 3%, signaling to us
that it was time to end production of Acre, and phase the product out, which had been the plan since the past
board meeting.
Learning Outcomes
The transitioning of products has been a major strategy of our firm over the last several years. It enabled of to
successfully meet the needs of our target markets and remain on the outer cusp of consumer’s expectations.
However, there have be significant costs effects that were initially unaccounted for.
One of the main costs associated with any products are material costs, which can range from 25% to 45% of the
total costs of the product. Material costs are directly related to the specifications of a product. Smaller, faster,
and more reliable processors have significantly higher material costs compared to larger, slower processors.
When Able was transitioned to the Low End market its specifications were slightly ahead of consumer’s
perceptions. Moreover, the price of Able had to be reduced from $26.00 to $18.00 to be competitive in the Low
End market. The result was that the contribution margins of Able shrunk considerably. To offset this effect, our
firm undertook research and development to lower the capabilities of the product (yellow arrow on perceptual
map, above).
The added attention our firm placed on the material costs led us to another insight; the MTBF (reliability) of the
processors contributed significantly to the total costs of the product. From the on onset, our firm committed to
making sure our products were amongst the most reliable in the market. We have since come back on this
strategy, as the additional costs from a high reliability have not been made up for in terms of sales. With the
exception of the Performance market, reliability is a relatively minor purchasing criterion.
Our firm decided to exit the Size and Performance market segments. At the time our firm made this decision,
these were highly saturated markets with every firm having at least one product offering in the market. The
competitive landscape of these markets has drastically changed. In the Size segment, two firms have 94% of the
market. In the Performance segment, Digby has 100% of the market share. It is difficult to estimate the potential
market share and subsequent sales that our firm would have gained had we remained in these markets, as other
firms employed a similar strategy to us and chose to exit at the same time.
14
MARKETING
Stated Objective
Our stated marketing objectives in our last annual report moving forward were as follows:
Objective #1: Achieve a 35% market share in the high-end segment.
Objective #2: Improve our accessibility ratings in the Traditional and Low End segments. At the time
our first annual report was written, our accessibility ratings were as follows: Traditional – 66%, Low
End – 65%
Execution
Our overarching strategy was to reallocate the marketing dollars we saved from exiting the Performance and
Size segments to the Traditional, Low-End, and High-End segments. We did have to make some minor
adjustments along the way, however.
Objective #1:
o In 2021, we realized that Adam’s price had stayed stagnant too long, and was now above the
ideal price range for customers in the High End segment. This caused us to promptly decrease
Adam’s price by $1.00, from $38.00 to $37.00
o We forecasted our sales by using the current year’s total market size, multiplying it by the
predicted segment growth rate, and then multiplying that market size by our predicted market
share (a mid-point between conservative and optimistic benchmarks).
Objective #2:
o The market experienced a downturn in 2020, prompting us to slightly cut our promotion and
sales budgets.
o We returned to normal budgetary levels in 2021 and 2022 in order to regain ground in our
awareness and accessibility ratings.
o We ensured we did not overspend based on the cost-benefit of diminishing returns.
Performance Summary
We did not achieve our goal of 35 percent market share in the High End segment. Although we were
disappointed by only attaining 26 percent of the market, we also realize that our marketing budget was as
stretched as far as possible – therefore, our shortfall could be attributed to a combination of Digby’s dominance
in the industry and our own shortcomings in predicting their strategic actions (see graph, below).
15
In regards to Objective #2, we have made significant improvements in both categories. Our accessibility in the
Traditional segment increased by 30 percent and now sits at 86 percent, while our rating in the Low End segment
increased nearly 34 percent to 87 percent.
Learning Outcomes
Without a doubt, our biggest learning outcome over the course of the seven years was our sales forecasting. In
the first half, we were unable to be highly accurate as we usually greatly overstated the number of units we
thought we could sell. That left us with excess inventory, lower-than-expected market share, and less cash on
hand for future decisions. In the past couple of years, however, we were finally better able to predict demand.
We believe that our marketing strategy has been relatively successful. Our decision-making process is now
refined and we only need to make minor adjustments and calculations every year to ensure our continued success
in the segments we operate in.
Moving forward, our ability to predict our competitors’ actions with regards to pricing and marketing budget
will be of a greater focus. This will allow us to incrementally increase our position in each of the Traditional,
Low End, and High End segments.
PRODUCTION Stated Objective
To maintain our production as efficiently as possible, we made slight adjustments to automation and capacity
this period. Our general goals were the following: 1) maintain high automation in traditional and low segments;
2) maintain low automation in the high end segment; 3) sell capacity down fully for Performance and Size
markets; and 4) ensure that first shift capacity is used fully, and second shift tapped into, before expanding.
0%
10%
20%
30%
40%
50%
60%
70%
Year 4 Year 5 Year 6 Year 7
High End Market Share by Firm
Andrews Baldwin Chester Digby
16
The idea in selling capacity down for the Performance and Size markets was to use this cash flow to finance
additional capacity and automation of our new project – AhHa. The first and second shift strategy is purposed to
avoid the high fixed costs of increasing capacity and relative lack of cash flow during our transition period.
Execution
The major adjustments that were made during this period were in regards to automation and subsequent labour
costs. Inventory management proved difficult with the contingency of our demand forecasts.
In terms of automation, we increased the rating of Able, tactically trying to drive down labour costs. While this
is cheaper in the long run, we did so recognizing that this holds us ‘in’ for a little longer, with less ability to
respond quickly to a changing market; we are confident that this is the appropriate decision for this product
because, as discussed previously, the markets had been moving slower than expected, and Able was now in the
low end segment, where age is more important than positioning.
Performance Summary
Our largest production focus in this period was to drive down labour costs to increase margins overall. Because
of our capacity utilization, production constraints have not been putting a ‘cap’ on availability, nor have they
been decreasing units sold.
In 2020 we noticed that we were selling over capacity, as were Baldwin and Digby. Chester was producing
under capacity. This was a sign of good utilization of our plant space; however, we also recognized that if this
ratio continued to increase we would have to expand to ensure labour costs didn’t increase too far as more units
were produced on overtime.
In 2021 Andrews undershot the production to capacity ratio, and we were producing below our capacity, and
failing to tap into second shift utilizations. This round, Baldwin was the only competitor producing at more than
capacity; they were, however, significantly over capacity which shows increasing labour costs throughout this
year, and potentially a glass ceiling on production in the future, as capacity takes a year to come on line.
Moving to 2022, we again were producing only slightly under capacity, putting us in line this year with Baldwin
and Chester. Digby was producing at a very high ratio when compared to their available capacity. During this
year we also experienced higher plant utilization than most competition, with our capacities finally beginning to
line up with our production, as our products began to establish themselves in their respective markets.
17
The summary of our capacity
increases were that Able was given
more capacity as the low-end
segment experienced higher volumes
of demand, and we transitioned it to
this market area. This can be seen
by the one year of have no
production for this segment (see
graph, left) as we expanded capacity,
and had to sell off excess inventory.
However, plant utilization was
immediately back up to 131% as the product took off in the low end segment. We also increased capacity of
AhHa from 700 to 1000 units in 2021 to accommodate our success in establishing market share with this
product. This was a very prudent move, as one can see that this increase in capacity came with no decrease in
plant utilization (see graph), which means that we were able to fill this new capacity with demand immediately.
Learning Outcomes
It was reinforced this period that high levels of automation can help our company drive down labour costs, and
will not greatly hinder our ability to react to the slower-than-expected moving market segments. In terms of
capacity, we better recognized where our capacity overage and underage were wasteful. We have designed our
capacity in the respective segments to target plant utilization rates that are in the ~120% range, which we believe
is the perfect balance between maintaining low per unit labour costs, and ensuring that we are using all of the
plant space, which is very expensive to acquire. We would need to see plant utilization rates of over 150%
before we would consider adding to our current levels, and do not anticipate this being a problem for at least
another couple years.
HUMAN RESOURCES Stated Objective
Going into the first board meeting, Andrews had adopted best-in-industry Human Resources practices and was
spending in line with competition when it came to recruiting and training. While this was a good tactic to
initially boost our lagging productivity and turnover ratings (in which we were successful), we later realized that
our Human Resources dollars were not providing the returns that investing in other areas of the business could.
Now, rather than looking at spending the most money, Andrews’ objective is to get the most value out of each
dollar in regards to our productivity, turnover, and administrative costs.
131%
113% 111%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
Able Acre Adam AhHa
Plant Utilization Rates over Time
2019 2020 2021 2022
18
Execution
For the last few years, Andrews has been taking an approach that focuses more on efficiency, and getting the
value out of each dollar put towards training and recruiting. Through trial and error, we are confident that we
will be able to continue decreasing our spending and still improve in our metrics of Human Resources success,
relative to our competition. We have continually cut spending on recruiting to where we currently sit, spending
$1,750,000 annually, the lowest in the industry. Moreover, we have reduced our training hours to 40 hours
annually, where Baldwin and Digby both sit as well. As can be seen in the figures below, we can both decrease
costs and still manage to keep pace with the competition in terms of the productivity index. On a per dollar basis,
however, we outperform significantly.
Performance Summary
Andrews is proud of our Human Resources achievements to date, as shown by increasing productivity despite
decreasing our expenditures in the area. One of our greatest successes in Human Resources has been our ability
to decrease administration costs for the last consecutive 4 years. This has been due to our investment in TQM,
which improves efficiency in the office without compromising results. We have been able to save several
thousand dollars with the TQM system, and we have been able to take this money and invest in back into the
company in other areas. Our costs have been gradually and very stably declining over the past four years, which
none of our competitors can claim. However, we have also seen an equal or greater increase in our productivity.
This is proving that we can now have the best of both worlds, to speak figuratively; we can both decrease our
costs and maintain a competitive Human Resources policy. As we learned in the beginning of the simulation,
dollars in Human Resources are well spent and very necessary to the running of a large corporation. However, as
we have now learned, we do not need to continue with “best-in-industry” practices, and can look at a more
efficient way of allocating our Human Resources dollars.
19
Learning Outcomes
While at the last board meeting we were confident with our Human Resources policy of adopting best-in-
industry practices, we realize now that this may not have been an efficient allocation of dollars. We have learned
that efficiency is more important than the actual amount of dollars used. We have learned that we can increase
productivity, lower turnover, and reduce HR admin costs through moderate spending, and that the remaining
dollars can be put to better uses in other departments.
FINANCE Stated Objective
Following the previous board meeting, our stated objectives that we wanted to achieve was a) better
management of working capital with a $2mm cash buffer and b) an optimal capital structure between 1.0x-1.5x
Debt/Equity. This was in tandem with our improved way of forecasting demand and our exit of the Performance
and Size segments. We believed that this would help to normalize our volatile working capital needs and
increase margins.
Execution
During the years 2019-2021, Andrews was faced with a shrinking market as the industry for the Low,
Traditional and High-end segment declined at a CAGR of 3%. Moreover, we were in the midst of transitioning
new products into both the traditional and low end segments, and in both cases market share took longer than
expected to generate. These two factors, in combination with our exit from the Size and Performance segments,
led to a) lower overall sales and b) a buildup of inventory in the system. As a result, Andrews’ had to take out an
emergency loan of $13.9mm in 2020 to stay solvent, which increased leverage to 5.8x. This arose as sales came
in weaker than expected given our exit from the Size and Performance segments, and we had to repay a
$13.8MM bond issuance that was maturing that year. Given that we had already issued the maximum amount of
debt allowed for that period of $17.0MM, this created liquidity issues.
2.1x
3.5x
4.1x
2.6x
2.1x
5.8x5.4x
4.0x
1.5x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
2015 2016 2017 2018 2019 2020 2021 2022 2023E
Andrews' Leverage
Leverage increasedue to emergency loan
20
The inventory glut started to alleviate in 2021 as the market showed signs of improvement, as shown by the
$25mm increase in cash. Looking forward, we have implemented measures to ensure that this does not happen
again as explained in our learning outcomes section.
Performance Summary
As a result of these difficulties, Andrew’s stock price depreciated by 36% and is currently trading at 6.3x
EV/EBITDA on a LTM basis. We believe that the market is largely concerned with our existing 4.0x leverage
which is high as compared to peers. Thus, a key focus for management is to deleverage the balance sheet with
any excess FCF following 2023E to a target of 2.0-2.5x.
($5,341)
($12,704)
($6,538)
($2,007)
($11,431)($7,675)
$25,840
$1,105
$17,374
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000
2015 2016 2017 2018 2019 2020 2021 2022 2023E
NWC for Andrews
Inventory build up begins to sell down and generate cash flow
$34$31
$21
$29
$41
$29$26 $26
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
2015 2016 2017 2018 2019 2020 2021 2022
Andrew's Stock PriceOver 41% depreciation in stock price
4.0x
2.2x
5.1x
1.6x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
Andrews Baldwin Chester Digby
Debt/EBITDA Across the Industry
21
In this period, Andrews also had difficulties managing ROEs. We believe that this is largely attributed to our
high cost structure. Thus looking to 2023E, Andrews is looking to invest $10mm in Total Quality Management
(TQM) initiatives that is expected to decrease labour and material costs by 11% and 9% respectively, among
other benefits discussed in the Strategy section of this report. This investment combined with market growth
expectations leads us to our
base case estimates of ROEs
of 23.1% in 2023, higher
than what we have been able
to achieve historically. We
believe this is realistic as the
market is expected to grow at
double the rate from 2019,
our best performing period to
date.
Learning Outcomes
In order to strengthen our ability to manage working capital through down cycles, we will actively use a bear,
base and bull scenario to stress test our forecasts in order to ensure that we will have a liquidity buffer. As shown
by our bear case scenario, even if Andrews only manages to sell 70% of our forecasted sales, we will still have a
$17mm cash buffer that will prevent management from having to seek emergency funding in the future.
Looking ahead, Andrews’ continues to
be committed to returning value to
shareholders. Thus, management will
continue to focus on deleveraging the
balance sheet to 2.0-2.5x
Debt/EBITDA as well as to drive ROEs
through cost reduction initiatives.
8.7%
0.6%
-4.4%
6.9%
14.4%
-3.0%
-10.1%
-1.2%
14.8%
23.1%
28.1%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2015 2016 2017 2018 2019 2020 2021 2022 Bear Base Bull
ROE for Andrews
2023E
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
Bear Base Bull
2023E Forecasts
Acutal EPS Normalized EPS Cash Balance (RHS)
22
APPENDIX I: FINANCIAL STATEMENTS
Balan
ce Sh
ee
t (in$'000s)
20152016
20172018
20192020
20212022
2023E
Be
arB
aseB
ull
Cash
$3,434$12,093
$5,353$5,877
$0$0
$28,691$17,524
$20,562$40,854
$54,873
Acco
un
ts Re
ceivab
le8,307
6,9276,511
10,48114,340
9,44410,161
8,1238,310
10,30011,669
Inve
nto
ry8,617
24,46529,789
27,59339,040
48,43419,726
21,36527,590
11,754716
Total C
urre
nt A
ssets
$20,358$43,485
$41,653$43,951
$53,380$57,878
$58,578$47,012
$56,462$62,908
$67,258
Plan
t and
eq
uip
me
nt
113,800118,200
122,600122,600
106,760131,836
137,436137,400
109,634109,634
109,634
Accu
mu
lated
De
pre
ciation
(37,933)(41,413)
(47,773)(55,947)
(64,120)(58,048)
(67,211)(76,347)
(49,706)(49,706)
(49,706)
Total Fixe
d A
ssets
75,86776,787
74,82766,653
42,64073,788
70,22561,053
59,92859,928
59,928
Total A
ssets
$96,225$120,273
$116,480$110,605
$124,460$131,666
$128,804$108,065
$116,390$122,835
$127,186
Acco
un
ts Payab
le$6,583
$8,347$6,717
$6,484$10,358
$7,180$5,029
5,734$6,005
$6,005$6,005
Cu
rren
t De
bt
00
6,9500
18,74513,748
20,8500
00
0
Lon
g Term
De
bt
41,70060,694
53,74453,744
39,84456,864
54,01454,014
54,01454,014
54,014
Total Liab
ilities
$48,283$69,041
$67,411$60,228
$68,947$77,792
$79,893$59,748
$60,019$60,019
$60,019
Co
mm
on
Stock
18,36021,360
21,36020,420
19,27219,272
19,27219,272
19,27219,272
19,272
Re
taine
d Earn
ings
29,58239,872
27,71029,956
36,24134,602
29,63929,045
37,09843,543
67,166
Total Eq
uity
$47,942$51,231
$49,069$50,376
$55,513$53,874
$48,911$48,317
$56,370$62,815
$86,438
Total Liab
ilities &
Ow
ne
r's Equ
ity$96,225
$120,273$116,480
$110,605$124,460
$131,666$128,804
$108,065$116,390
$122,835$127,186
Balan
ce Sh
ee
t (Co
mm
on
Size)
20152016
20172018
20192020
20212022
2023E
Be
arB
aseB
ull
Cash
4%10%
5%5%
0%0%
22%16%
18%33%
43%
Acco
un
ts Re
ceivab
le9%
6%6%
9%12%
7%8%
8%7%
8%9%
Inve
nto
ry9%
20%26%
25%31%
37%15%
20%24%
10%1%
Total C
urre
nt A
ssets
21%36%
36%40%
43%44%
45%44%
49%51%
53%
Plan
t and
eq
uip
me
nt
118%98%
105%111%
86%100%
107%127%
94%89%
86%
Accu
mu
lated
De
pre
ciation
-39%-34%
-41%-51%
-52%-44%
-52%-71%
-43%-40%
-39%
Total Fixe
d A
ssets
79%64%
64%60%
34%56%
55%56%
51%49%
47%
Total A
ssets
100%100%
100%100%
100%100%
100%100%
100%100%
100%
Acco
un
ts Payab
le7%
7%6%
6%8%
5%4%
5%5%
5%5%
Cu
rren
t De
bt
0%0%
6%0%
15%10%
16%0%
0%0%
0%
Lon
g Term
De
bt
43%50%
46%49%
32%43%
42%50%
46%44%
42%
Total Liab
ilities
50%57%
58%54%
55%59%
62%55%
52%49%
47%
Co
mm
on
Stock
19%18%
18%18%
15%15%
15%18%
17%16%
15%
Re
taine
d Earn
ings
31%33%
24%27%
29%26%
23%27%
32%35%
53%
Total Eq
uity
50%43%
42%46%
45%41%
38%45%
48%51%
68%
Total Liab
ilities &
Ow
ne
r's Equ
ity100%
100%100%
100%100%
100%100%
100%100%
100%100%
23
Cash
Flow
Statem
en
t (in'000s)
20152016
20172018
20192020
20212022
2023E
Be
arB
aseB
ull
Cash
flow
s from
op
eratin
g activities
Ne
t Inco
me
(Loss)
$4,189$290
($2,162)$3,465
$7,969($1,639)
($4,963)($594)
$8,053$14,498
$18,849
De
pre
ciation
7,5877,880
8,1738,173
8,1738,789
9,1629,160
7,3097,309
7,309
Extraord
inary gain
s/losse
s/write
offs
0220
70
0(4,793)
0(11)
(17,301)(17,301)
(17,301)
Acco
un
ts payab
le3,583
1,764(1,630)
(233)3,874
(3,178)(2,151)
706271
271271
Inve
nto
ry(8,617)
(15,848)(5,324)
2,196(11,446)
(9,394)28,708
(1,639)(6,225)
9,61120,649
Acco
un
ts rece
ivable
(307)1,380
416(3,970)
(3,859)4,897
(717)2,038
(187)(2,177)
(3,546)
Ne
t cash fro
m o
pe
ration
s$6,434
($4,314)($520)
$9,632$4,711
($5,318)$30,039
$9,660($8,080)
$12,211$26,231
Cash
flow
s from
inve
sting activitie
s
Plan
t imp
rove
me
nts (n
et)
$0($9,020)
($6,220)$0
($12,600)($6,703)
($5,600)$23
$11,118$11,118
$11,118
Ne
t cash fro
m in
vestin
g activities
$0($9,020)
($6,220)$0
($12,600)($6,703)
($5,600)$23
$11,118$11,118
$11,118
Cash
flow
s from
finan
cing activitie
s
Divid
en
ds p
aid(4,000)
00
00
00
00
00
Sales o
f com
mo
n sto
ck0
3,0000
00
00
00
00
Pu
rchase
of co
mm
on
stock
00
0(2,158)
(2,833)0
00
00
0
Cash
from
lon
g term
de
bt issu
ed
018,994
00
017,020
18,0000
00
0
Early retire
me
nt o
f lon
g term
de
bt
00
00
00
00
00
0
Re
tirem
en
t of cu
rren
t de
bt
00
(6,950)(6,950)
0(18,745)
(13,748)(20,850)
00
0
Cash
from
curre
nt d
eb
t bo
rrow
ing
00
6,9500
00
00
00
0
Cash
from
em
erge
ncy lo
an0
00
04,845
13,7480
00
00
Ne
t cash fro
m fin
ancin
g activities
($4,000)$21,994
$0($9,108)
$2,012$12,023
$4,252($20,850)
$0$0
$0
Ne
t chan
ge in
cash p
ositio
n$2,434
$8,660($6,740)
$524($5,877)
$0$28,691
($11,167)$3,038
$23,329$37,349
24
Inco
me
Statem
en
t (Co
mm
on
Size)
20152016
20172018
20192020
20212022
2023E
Be
arB
aseB
ull
Sales
100%100%
100%100%
100%100%
100%100%
100%100%
100%
Variab
le C
osts
72%73%
72%66%
68%73%
75%72%
69%67%
66%
Dire
ct Labo
r29%
30%28%
26%29%
30%41%
41%32%
32%32%
Dire
ct Mate
rial42%
40%40%
38%37%
38%52%
50%34%
34%34%
Inve
nto
ry Carry
1%3%
4%3%
3%5%
4%2%
3%1%
0%
Gro
ss Margin
28%27%
28%34%
32%27%
25%28%
31%33%
34%
SG&
A9%
10%15%
18%15%
16%14%
15%13%
11%9%
R&
D0%
2%4%
3%2%
3%2%
2%2%
1%1%
Pro
mo
tion
s4%
3%4%
6%5%
6%6%
6%5%
4%4%
Sales
4%4%
5%8%
6%5%
4%6%
5%4%
4%
Ad
min
1%1%
2%2%
3%3%
2%1%
1%1%
1%
EBITD
A19%
17%13%
16%16%
11%11%
14%18%
22%25%
De
pre
ciation
8%8%
9%6%
5%8%
7%9%
7%6%
5%
Ne
t Margin
12%9%
4%10%
12%3%
4%4%
11%17%
19%
Oth
er
0%1%
0%0%
0%-2%
4%0%
-17%-14%
-12%
EBIT
12%8%
4%10%
11%5%
-1%4%
28%30%
32%
Sho
rt Term
Inte
rest
0%0%
1%0%
1%2%
0%0%
0%0%
0%
Lon
g Term
Inte
rest
5%7%
7%5%
3%6%
6%5%
5%4%
4%
Taxes
2%0%
-1%1%
3%-1%
-2%0%
4%6%
7%
Pro
fit Sharin
g0%
0%0%
0%0%
0%0%
0%0%
0%0%
Ne
t Pro
fit4%
0%-2%
3%5%
-1%-4%
-1%18%
20%20%
Inco
me
Statem
en
t (in$'000s)
20152016
20172018
20192020
20212022
2023E
Be
arB
aseB
ull
Sales
$101,073$101,141
$95,066$127,519
$174,475$114,898
$123,627$98,830
$101,107$125,322
$141,975
Variab
le C
osts
(72,513)(74,138)
(68,298)(84,397)
(119,262)(83,767)
(92,261)(70,694)
(70,144)(84,079)
(93,792)
Dire
ct Labo
r(28,932)
(30,458)(26,863)
(33,258)(50,824)
(34,375)(40,147)
(29,582)(32,076)
(39,621)(44,823)
Dire
ct Mate
rial(42,546)
(40,743)(37,860)
(47,827)(63,754)
(43,580)(49,746)
(38,548)(34,757)
(43,048)(48,883)
Inve
nto
ry Carry
(1,034)(2,936)
(3,575)(3,311)
(4,685)(5,812)
(2,367)(2,564)
(3,311)(1,410)
(86)
Gro
ss Margin
$28,560$27,003
$26,768$43,122
$55,213$31,131
$31,366$28,136
$30,963$41,243
$48,183
SG&
A(8,978)
(9,781)(14,340)
(22,673)(26,948)
(18,872)(17,512)
(14,601)(13,012)
(13,173)(13,285)
R&
D0
(2,132)(3,424)
(3,260)(3,943)
(3,041)(1,930)
(1,844)(1,545)
(1,545)(1,545)
Pro
mo
tion
s(4,100)
(2,900)(4,080)
(7,200)(8,200)
(6,700)(7,500)
(6,100)(5,325)
(5,325)(5,325)
Sales
(4,100)(3,850)
(5,200)(9,772)
(9,675)(5,500)
(5,500)(5,500)
(4,975)(4,975)
(4,975)
Ad
min
(778)(899)
(1,636)(2,441)
(5,130)(3,631)
(2,582)(1,157)
(1,167)(1,328)
(1,440)
EBITD
A$19,582
$17,222$12,428
$20,449$28,265
$12,259$13,854
$13,535$17,951
$28,070$34,898
De
pre
ciation
(7,587)(7,880)
(8,173)(8,173)
(8,173)(8,789)
(9,162)(9,160)
(7,309)(7,309)
(7,309)
Ne
t Margin
$11,995$9,342
$4,255$12,276
$20,092$3,470
$4,692$4,375
$10,642$20,761
$27,589
Oth
er
0(1,320)
(7)(32)
(42)2,442
(5,400)11
17,30117,301
17,301
EBIT
$11,995$8,022
$4,248$12,244
$20,050$5,912
($708)$4,386
$27,943$38,062
$44,890
Sho
rt Term
Inte
rest
00
(771)0
(2,473)(1,868)
00
00
0
Lon
g Term
Inte
rest
(5,421)(7,567)
(6,803)(6,803)
(5,065)(6,563)
(6,926)(5,300)
(5,300)(5,300)
(5,300)
Taxes
(2,301)(159)
1,164(1,904)
(4,379)883
2,672320
(4,425)(7,966)
(10,357)
Pro
fit Sharin
g(85)
(6)0
(71)(163)
00
0(164)
(296)(385)
Ne
t Pro
fit$4,188
$290($2,162)
$3,466$7,970
($1,636)($4,962)
($594)$18,054
$24,500$28,848
No
rmalize
d N
et P
rofit
$4,188$1,610
($2,155)$3,498
$8,012($4,078)
$438($605)
$753$7,199
$11,547
No
rma
lized N
et Pro
fit Ma
rgin
4%2%
-2%3%
5%-4%
0%-1%
1%6%
8%
25
APPENDIX II: STATEMENT OF OBJECTIVES
Company Objective
The A-Team will be taking a differentiation focus in the computer sensor industry, focusing on the three high
growth profile segments: high end, performance, and size. Factors contributing to this decision regarding the
strategic direction of our firm include the fact that these segments all have similar customer profiles – all are
relatively price insensitive – and thus we believe we can effectively target all three. Moreover, we know that
market is moving towards smaller and higher performance sensors, and thus we believe that staying ahead of the
curve, and focusing on positioning our sensors on the frontier of the industry will ensure we maintain a
sustainable competitive advantage.
Research & Development
We will look to invest heavily in R&D in the early stages, making improvements to the performance, size and
MTBF of our sensors positioned in the size, performance, and high end categories. The traditional and low end
categories will receive less investment, and will be used as cash flow generators in large, established markets to
fund spending our higher end products. We will look to take advantage of new customer segments that emerge
with new products. Our primary focus will be to improve MTBF as much as possible because this resonates with
our target market, and we hope to build a brand a round reliability.
Marketing
Our team will pick a product differentiation strategy, creating a superior product that customers are willing to
pay more for. In the marketing department, we will focus on setting a premium price to be able to afford our
R&D that has given the consumer smaller products, better performance, and higher MTBFs. We will choose to
place fewer of these items on the market, but they will be made very well and the customer will place high value
on our products. We will advertise moderately, as we have a niche consumer base. They simply need to be aware
that our superior products are available on the market. In short, our marketing strategy is to differentiate, set a
high price, and advertise moderately.
Production
In order to reach our production needs for our high-end, size, and performance products, our team does not feel
the need to automate heavily. Rather, we will focus creating a high-end product that may not have mass market
appeal. We do not need to have a great deal of inventory, seeing as our production might be lower than our
competitors, but still intend to keep enough to prepare for a large increase in demand. We also need to keep in
mind that our low automation may give us faster reaction to changing markets, which allows us to capitalize on
26
new markets that emerge. We hope to use as much of the first shift of production as possible, working them to
capacity, to save unnecessary spending on a second shift of labour.
Finance
Given our niche differentiation focus, we will be forced to invest heavily into research and development in the
early stages of the business cycle. In order to fund this spending, we plan to raise capital through a combination
of issuing long-term debt, short-term debt and equity as needed. We may be forced to raise some equity up front
until we have a better idea of our proforma cash flows available to pay back debt. That being said, we will avoid
diluting our current shareholders by issuing equity unnecessarily, and thus will strive to raise the majority of our
financing through a combination of short-term and long-term debt. Increasing leverage will magnify returns to
shareholders, and thus fits well with our stated objectives. Key factors in deciding which type of debt to issue
will be our outlook on interest rates, as well as our need to control leverage ratios.
Key Performance Indicators (KPIs)
ROE: The A-Team is committed to providing a superior return to shareholders, coming in various
different forms. One would be the return on equity of our business, which we hope to magnify with
leverage. If we are successful, our ROE will be greater than our competitors, and somewhere in the low-
to-mid double digit percentages. Given historical stock market data, we believe this level of ROE
provides our investors with an appropriate risk-adjusted return. Moreover, we are committed to returning
any idle cash to investors in the form of share buybacks and dividend payments. This will be dictated by
our business’ need for investment and our ability to generate free cash flows, and thus cannot be
accurately forecast.
Margins: Given that our target customers are relatively insensitive to price, we believe that with the
correct marketing strategy we can price our sensors near the top of the market’s accepted range.
Furthermore, we hope that spending heavily on R&D initially will drive down costs in the future, which
should translate into industry leading margins. Given contribution margins start Year 1 at 28.3%, we
hope to increase these at least 10 percentage points.
Stock price: The A-Team has a focus on high growth segments of the sensor industry, and thus we are
positioning ourselves as a high growth company. Thus, with a high growth profile, good margins, and
optimal levels of leverage, we should be able to translate this into a high stock price.
27
APPENDIX III: ORGANIZATIONAL STRUCTURE
APPENDIX IV: LATEST CAPSTONE COURIER
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