Padgett Blank Book Company
Windsor Trust Company of New York has had a long standing relationship with Padgett Blank Book Company since 1939. In 1988 Padgett acquired a long-coveted competitor, Tri-State Tablet, for an attractive price on short notice. This brought Padgett to the bank to ask for an additional $3.6 million loan. Padgett already had $3.6 million outstanding. The company had previously been approved for a $5 million line of credit; however, a new temporary line of $8 had been approved. This would bring Windsor’s exposure to $7.2 million.
Francis Libris, Vice- President of Windsor Trust Company, was responsible for managing and structuring the relationship with ...view middle of the document...
Padgett is a closely held, publicly traded company with the vast majority of its owners being comprised of family relatives and descendants. Few of these members, however, were active in the operations of the company, and most just considered their ownership shares as another equity investment. Due to this fact, the market demand for ownership stock in Padgett was quite low, and this made it difficult for the company to acquire funds through the issuing/reissuing of equity shares. As a result, the company relied heavily on borrowing funds from lenders (namely Windsor Trust) to finance its operations. Padgett’s customers were comprised of about 5,000 wholesalers and retailers throughout the U.S. and Canada, with no single customer constituting a large portion of the company’s sales. Padgett would experience a slight seasonal variation of sales, mainly attributed to back-to-school sales. The company wished to maintain a steady level of production to reduce unit costs in its highly competitive market, and this led to a seasonal variation of about $2 million in Padgett’s borrowing pattern.
During the 1970s, many smaller firms in the same market had been experiencing difficulty in financing their current assets due to a high inflation rate. This led to a period of consolidation, in which many of Padgett’s competitors sold their businesses to larger companies in the market. Padgett’s management decided to begin acquiring smaller firms that were consistent with the company’s production or marketing needs, the culmination of these acquisitions being the obtaining its competitor, Tri-State Tablet Company in 1988. Padgett also changed the way it collected inventory for financial statements by switching from a FIFO method to a LIFO method which will result in a tax benefit of about $500,000. They also expect to receive $700,000 from the cash sale and tax refunds from the disposal of a warehouse they acquired from Tri-State Tablet. The forecast provided by Windsor indicates a long-term need of at least $5 million.
In order to analyze the Padgett Blank Book Company, we first created the common size numbers for the balance sheet and the income statement of this company. Next, we used the DuPont Analysis ratios to see how effective and efficient the company was. In addition to this, we analyzed the company’s cash flow statement to see how well the company managed its cash flows and to measure the liquidity of the company. After looking at the common size balance sheet and income statement, there were several important items that we found. First, we looked at the net income of the company (Table 1), which showed that it had been decreasing from 1985 to 1987, but increasing slightly from 1987 to 1988. This suggests that this company has a relative inconsistent net income, and may have difficulty managing this end figure. Next, we looked at Padgett’s net sales and operating expenses, which both increased from year to year. This could be evidence...