Scenario You have almost completed your analysis of Companies A and B and are scheduled to deliver your proposal to the board. W
Scenario
You have almost completed your analysis of Companies A and B and are scheduled to deliver your proposal to the board. While researching to ensure accurate and up-to-date data, you learn that two of Company B's aircraft have been grounded over the past couple of months due to technical issues, one of which could have been an FAA safety violation.
The subsequent investigations, technical repairs, and grounded flights have led to a 10% drop in their revenue over the last month. Mitigation expenses have added about $80,000 to their operating costs. Company B has also suffered negative customer feedback due to some of the ground crew's mishandling of the situation.
In this assignment, you will write an executive summary to capture the situation and share your analysis and perspective on how these safety issues might affect your acquisition recommendation.
Prompt
Write an executive summary describing the newly discovered concerns and your analysis of the situation at Company B.
Specifically, you must address the following rubric criteria:
- Summarize the safety issues and their direct impact on the company over the past month.
- Describe how this news affects factors other than revenue, which will then affect the company's value.
- How does this affect your initial performance evaluation and analysis of the company?
- Do you see any additional risks? Explain.
- Will it impact your recommendation about acquisition? Why or why not?
- What additional information about this situation will you need to make your final decision?
Guidelines for Submission
Submit a 1- to 2-page Word document using double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA style. Consult the Shapiro Library APA Style Guide for more information on citations.
COMPANY B Three-Year Data
| B_CO_FINANCE | Learner Copy | Rev 3/14/21 | |||
| COMPANY B | |||||
| Illlustrative Data for Educational Purposes | |||||
| All values shown are in thousands. | |||||
| 2017 | 2018 | 2019 | |||
| Income Statement | |||||
| Revenue | 27,981 | 26,302 | 27,091 | ||
| Cost of Goods Sold (COGS) | 15,389 | 18,411 | 18,151 | ||
| Gross Profit | 12,591 | 7,891 | 8,940 | ||
| Expenses | |||||
| Salaries and Benefits | 2,910 | 2,600 | 2,910 | ||
| Rent and Overhead | 1,354 | 1,354 | 1,354 | ||
| Depreciation and Amortization | 2,814 | 2,806 | 2,776 | ||
| Interest | 2,700 | 1,800 | 1,800 | ||
| Total Expenses | 9,778 | 8,560 | 8,840 | ||
| Earnings Before Tax | 2,813 | (669) | 100 | ||
| Taxes | 788 | (141) | 21 | ||
| Net Earnings | 2,025 | (529) | 79 | ||
| 2017 | 2018 | 2019 | |||
| Balance Sheet | |||||
| Assets | |||||
| Cash | 82,445 | 82,914 | 72,944 | ||
| Accounts Receivable | 1,380 | 1,297 | 1,336 | ||
| Inventory | 3,078 | 2,018 | 1,989 | ||
| Property and Equipment | 37,413 | 37,007 | 37,032 | ||
| Total Assets | 124,316 | 123,236 | 113,301 | ||
| Liabilities | |||||
| Accounts Payable | 1,560 | 1,009 | 995 | ||
| Debt | 90,000 | 90,000 | 80,000 | ||
| Total Liabilities | 91,560 | 91,009 | 80,995 | ||
| Shareholders' Equity | |||||
| Equity Capital | 33,685 | 33,685 | 33,685 | ||
| Retained Earnings | (929) | (1,458) | (1,379) | ||
| Shareholders' Equity | 32,756 | 32,227 | 32,306 | ||
| Total Liabilities and Shareholders' Equity | 124,316 | 123,236 | 113,301 | ||
| 2017 | 2018 | 2019 | |||
| Cash Flow Statement | |||||
| Operating Cash Flow | |||||
| Net Earnings | 2,025 | (529) | 79 | ||
| Plus: Depreciation and Amortization | 2,814 | 2,806 | 2,776 | ||
| Less: Changes in Working Capital | (10,312) | (592) | 25 | ||
| Cash from Operations | 15,151 | 2,869 | 2,830 | ||
| Investing Cash Flow | |||||
| Investments in Property and Equipment | (2,706) | (2,400) | (2,800) | ||
| Cash from Investing | (2,706) | (2,400) | (2,800) | ||
| Financing Cash Flow | |||||
| Issuance (repayment) of Debt | – | – | (10,000) | ||
| Issuance (repayment) of Equity | – | – | – | ||
| Cash from Financing | – | – | (10,000) | ||
| Net Increase (decrease) in Cash | 12,445 | 469 | (9,970) | ||
| Opening Cash Balance | 70,000 | 82,445 | 82,914 | ||
| Closing Cash Balance | 82,445 | 82,914 | 72,944 | ||
| Supporting Schedules | |||||
| Working Capital Schedule | |||||
| Accounts Receivable | 1,380 | 1,297 | 1,336 | ||
| Inventory | 3,078 | 2,018 | 1,989 | ||
| Accounts Payable | 1,560 | 1,009 | 995 | ||
| Net Working Capital (NWC) | 2,898 | 2,306 | 2,331 | ||
| Change in NWC | (10,312) | (592) | 25 | ||
| Depreciation Schedule | |||||
| PPE Opening | 37,521 | 37,413 | 37,007 | ||
| Plus Capex | 2,706 | 2,400 | 2,800 | ||
| Less Depreciation | 2,814 | 2,806 | 2,776 | ||
| PPE Closing | 37,413 | 37,007 | 37,032 | ||
| Debt and Interest Schedule | |||||
| Debt Opening | 90,000 | 90,000 | 90,000 | ||
| Issuance (repayment) | – | – | (10,000) | ||
| Debt Closing | 90,000 | 90,000 | 80,000 | ||
| Interest Expense | 2,700 | 1,800 | 1,800 | ||
,
MBA 620 Company B Information
Location, Size, and Age of the Firm
• Name: • Location: Orlando, FL • Size: 98 employees • Age: began operations in 1988
Customer Segment and Target Market
• Market: Florida and nearby destinations
• Destinations: eight (the Bahama Islands; Savannah, Georgia; Atlanta, Georgia; Tampa, Florida; Fort Myers, Florida; Miami, Florida; Tallahassee, Florida; and New Orleans, Louisiana)
• Market segment: tourists and business
• Aircraft capacities: 12–50 seats
• Customer segment: vacationers, tourists, business travelers
• Retention: 40% repeat customers
• Seat occupancy average: 62% (middle of industry benchmark data)
• Average customer fare: $249 USD
Major Competitors
• Delta Connection
• American Eagle
• Sun Country
• Frontier
Company Leadership
Privately held, with a board, president, VP admin, CFO, COO, VP sales
Company Strategy and Direction
As a smaller player, the company is more of a follower than a leader; however, the new president has a desire to shake things up. The image of the company as cheap transportation is no longer sufficient, and the leadership team seeks to demonstrate that even a small company can be an innovation leader. They hope to do this by emphasizing the potential benefits of agile problem solving and a lean and clean working environment. These 10-year goals were adopted in 2015; they were reaffirmed in 2019 shortly before the arrival of the new president:
• Demonstrate adaptability, flexibility, and speed in decision making and innovation
• Build the best workforce; be a winning team
• Do the right thing; provide excellence in customer service
• Enjoy the short run; invest in the long run
Current Financial Highlights
• Annual revenues: $26-27 million
• Annual growth YoY: 3%
• Gross profit margin: 33%
• Net profit margin: 0.2%
• Aircraft in fleet: 40
• Average age of aircraft: 18 years (25 years of useful life is typical)
• See financial statements for more information
Background
• The company is known as a value leader.
• In 2016, the company sold its ownership in a regional hotel chain, resulting in substantial cash holdings.
• The company has strong business relationships with area employers in the theme park industry.
• The company president is new this year; prior experience has been heavily influenced by organizational transformation initiatives.
• Turnover among employees is higher than many airline companies, but average for the central Florida economy; maintenance employees are increasingly more difficult to find and retain; overtime is common in the maintenance department.
• Wage levels in the Orlando area are growing, resulting in upward pressure in compensation.
• Customer feedback received that is at or above industry benchmarks (at industry benchmarks 60th percentile or higher; positive feedback):
o Short wait times at counter o Ease of modifying reservations o Cost o Overall value
• Customer feedback received below industry midpoint (negative feedback): o Airplane cleanliness o Amenities o Food and beverages o In-flight noise
Internal Process Highlights
• Within the last 30 days, an investment and joint venture was established with SITA Horizon software system, including an industry-standard customer portal and a hospitality industry interface functionality.
• Bookkeeping is integrated with the new SITA system; an external accounting firm will still be used for audits.
• HR function is provided by a consortium partner in the local area (outsourced).
• On-ground operations teams rated fair against industry-wide efficiency standards.
Human Resource Highlights
• Employees with a high school diploma or higher: 95%
• Employees with a post-secondary degree or diploma: 60%
• Average turnover rate: 18% annually
• Internal training offered: o Regulatory refresher courses (as needed, with supervisor approval) o Quality and Customer Service Principles (self-study)
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