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9B06B025

CALTRON LTD.

Authorized for use only in the course Financial Analysis at Sheridan College taught by Umar Minhas from 1/8/2024 to 4/20/2024.
Dan Thompson prepared this case solely to provide material for class discussion. The author does not intend to illustrate either
effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying
information to protect confidentiality.

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Copyright © 2006, Ivey Management Services Version: (A) 2006-07-25

Caltron Ltd. is 100 per cent owned by Pulsar Computer, which is one of the leading computer makers in
North America. Caltron was started in 1971 by Pulsar’s founder, Jenny Jones, to supply electronic
calculators to the scientific and business communities. When microcomputers were first developed in the
early 1980s, Jones started Pulsar, and despite rigorous competition and merciless industry consolidation, it
managed to survive as a very profitable computer maker.

Even with the rapid growth of the microcomputer industry, Pulsar retained ownership of Caltron. Jenny
Jones was very attached to this unit for sentimental reasons and in 1999, as chairman and chief executive
officer (CEO) of Pulsar, had even appointed her daughter-in-law, Kyla Jacobs-Jones, a recent MBA
graduate, as the unit president. The board of directors was not impressed with this obvious nepotism, but
Jones insisted and they relented.

ON PROBATION

During 2001, Jones began to feel pressure from some of the independent board members to divest Caltron
because of its poor financial performance compared to other calculator makers. Old equipment, poor
factory operations, an expensive unionized workforce, and intense competition from low-wage developing
countries were at the root of the company’s problems.

Anxious to appease the other directors and test the management skills of her new daughter-in-law, Jones
put Jacobs-Jones on notice that if she wanted to stay with the company, she would have to prove herself
and turn this unit around. She was to have two years and complete autonomy over the plan of action, but
would not receive any financial help from Pulsar. In two years, the company’s financial health would be
reviewed and a decision made about Jacobs-Jones and the unit’s future.
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OPERATIONAL ISSUES

When the electronic calculator was first introduced in the early 1970s, it was a high-margin item sold
through specialty electronic and office supply stores. Since then, the product has become a commodity
with steadily declining prices and gross margins. Initially, North American producers contracted out
component production to remain competitive with foreign producers, but now nearly all companies have
moved assembly abroad to capitalize on the low-labor rates. A high-volume, low-cost strategy is the norm

Authorized for use only in the course Financial Analysis at Sheridan College taught by Umar Minhas from 1/8/2024 to 4/20/2024.
in the industry.

Out of loyalty to the workforce, Caltron has maintained calculator assembly operations in North America,
and hopes to overcome the labor rate disadvantage through factory automation. In 2002 and 2003, it
invested heavily in new equipment to greatly expand capacity and reduce labor costs. Initially, the new
production systems were difficult to install and worker training was more time consuming than expected
due to low education levels among the workers, but by 2003 factory operations were improving. Due to
the greatly expanded production, even with the high degree of automation in the renovated factory, no
layoffs were required.

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Calculators came in a number of different models and were produced in large batches requiring that
extensive finished goods inventories be carried. There were also large component inventories to guard
against supply interruptions from overseas suppliers. Now that the new manufacturing equipment was
fully operational, Jacobs-Jones was wondering whether these inventories could be better managed.

In order to sell all the extra output, Caltron had to significantly expand its sales force and administrative
staff. Manufacturing, selling and administration workers belonged to the same union. The sales force was
on straight salary as per the collective agreement. Surprisingly, Caltron’s administrative offices were not
highly automated.

FINANCIAL SITUATION

All calculator sales were made to retailers or wholesalers at net 30. Officially, Caltron charged interest on
overdue accounts, but had not been enforcing that rule in attempts to expand sales to match the new
capacity.

Most components and supplies were purchased on the terms 2/10, net 30. Interest was paid when the
company took longer than 30 days.

Caltron had a $1,000,000 line of credit with the Bank of Montreal. The company had to maintain a
coverage ratio of 2.0 with accounts receivable being valued at 75 per cent and inventory at 50 per cent. A
current ratio of 1.5 was also required and a times interest earned ratio of at least 2.0. Caltron could
negotiate a line of credit of more than $1,000,000, but the bank would only authorize it if the institution
had sufficient loanable funds and the company was in good financial condition. The economy was just
entering what was expected to be a mild recession.

All dividend payments to Pulsar were suspended in 2001 in anticipation of the plant modernization and
expansion.
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The following industry averages were available (based on year-end figures):

Current Ratio 2.7

Cash Ratio .45
Inventory Turnover in Days 60 days
Accounts Receivable Turnover in 32 days

Authorized for use only in the course Financial Analysis at Sheridan College taught by Umar Minhas from 1/8/2024 to 4/20/2024.
Days
Accounts Payable Turnover in 15 days
Days
Cash Conversion Cycle 77 days
Fixed Assets Turnover 7.0
Total Assets Turnover 2.5
Debt Ratio 40%
Times Interest Earned 8.0
Cost of Borrowing 6.8%

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Gross Profit Margin 22.0%
Operating Profit Margin 13.0%
Net Profit Margin 6.0%
Return on Assets 15.0%
Return on Equity 25.0%

THE APPRAISAL

In early 2004, Dan O’Shea, CA, CFA, a corporate finance consultant with KPMG, was hired to conduct an
appraisal of Caltron. Pulsar’s board of directors asked him to prepare a memorandum evaluating Caltron’s
performance over the last three years (see Exhibit 1). They also asked him to evaluate the performance of
Jacobs-Jones and to make recommendations on the future of Caltron.
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Exhibit 1

FINANCIAL STATEMENTS1

Income Statement
For Year Ending December 31 (000s)

Authorized for use only in the course Financial Analysis at Sheridan College taught by Umar Minhas from 1/8/2024 to 4/20/2024.
2003 2002 2001
Sales 6,854,000 5,128,800 2,954,000
Cost of Goods Sold 5,825,900 4,308,192 2,422,280
Gross Profit 1,028,100 820,608 531,720
Depreciation 120,000 116,960 18,900
Other Operating Expenses 685,400 512,880 236,320
Earnings Before Interest and Taxes 222,700 190,768 276,500
Interest 215,683 140,847 37,875
Earnings Before Taxes 7,017 49,921 238,625

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Income Taxes 2,807 19,969 95,450
Net Income 4,210 29,953 143,175
Units Sold 527,230 366,340 196,930

Balance Sheet
December 31 (000s)
2003 2002 2001
Cash 24,000 10,000 9,000
Short-term Investments 53,519 0 295,340
Accounts Receivable 878,776 617,160 301,200
Inventories 1,716,480 1,287,360 518,460
Total Current Assets 2,672,775 1,914,520 1,124,000
Property, Plant, and Equipment 1,706,363 1,402,500 691,000
Less: Accumulative Depreciation -383,160 -263,160 -146,200
Total Assets 3,995,978 3,053,860 1,668,800
Accounts Payable 948,802 511,267 145,600
Line of Credit 875,635 510,582 200,000
Current Portion of Long-term Debt 100,000 32,340 30,050
Total Current Liabilities 1,924,437 1,054,189 375,650
Long-term Debt 1,067,660 1,000,000 323,432
Common Shares 660,000 660,000 660,000
Retained Earnings 343,881 339,671 309,718
Total Liabilities and Equity 3,995,978 3,053,860 1,668,800

1
All funds in Cdn$ unless otherwise noted.
Page 5 9B06B025

Exhibit 1 (continued)

Cash Flow Statement

For Year Ending December 31 (000s)
2003 2002
Operations

Authorized for use only in the course Financial Analysis at Sheridan College taught by Umar Minhas from 1/8/2024 to 4/20/2024.
Net Income 4,210 29,953
Add: Depreciation 120,000 116,960
Change in Accounts Payable 437,535 365,667
Less: Change in Accounts Receivable 261,616 315,960
Change in Inventory 429,120 768,900
Total (128,991) (572,280)
Investments
Purchase of Property, Plant and Equipment (303,863) (711,500)
Financing
Change in Line of Credit 365,053 310,582

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Change in Long-term Debt 135,320 678,858
Total 500,373 989,440
Change in Cash/Cash Equivalents 67,519 (294,340)