Case Mark X Company (a)Case Mark X Company (a)Case MARK X COMPANY (A)Financial Analysis and ForecastingMark X Company manufactures farm and specialty trailers of all types. More than 85 percent of the companys sales come from the western part of the United States, particularly California ,although a growing market for custom horse transport vans designed and produced by Mark X is developing nationally and even internationally. Also, several major boat companies in California and Washington have had Mark X design and manufacture trailers for their new models, and theseboat-trailer “packages” are sold through the boat companies nationwide dealer networks.
Steve Wing, the president of Mark X, recently received a call from Karen Dennison, senior vice president of Wells Fargo Bank. Karen told Steve that a deficiency report, generated by the banks computerized analysis system, had been filed because of Mark Xs deteriorating financial position. The bank requires quarterly financial statements from each of its major loan customers.
Information from such statements is fed into the computer, which then calculates key ratios for each customer and charts trends in these ratios. The system also compares the statistics for each company with the average ratios of other firms in the same industry, and against any protective covenants in the loan agreements. If any ratio is significantly worse than the industry average, reflects a marked adverse trend, or fails to meet contractual requirements, the computer highlights the deficiency.
The latest deficiency report on Mark X revealed a number of significant adverse trends and several potentially serious problems (see Tables 1 through 6 for Mark Xs historical financial statements). Particularly disturbing were the 2008 current, quick, and debt ratios, all of which failed to meet the contractual limits of 2, 1, and 55 percent, respectively. Technically, the bank had a legal right to call all the loans it had extended to Mark X for immediate repayment and, if the loans were not repaid within ten days, to force the company into bankruptcy.
Karen hoped to avoid calling the loans if at all possible, as she knew this would back Mark X into a corner from which it might not be able to emerge. Still, her own banks examiners had recently become highly sensitive to the issue of problem loans, because the recent spate of bank failures had forced regulators to become more strict in their examination of bank loan portfolios and to demand earlier identification of potential repayment problems.
One measure of the quality of a loan is the Altman Z score, which for Mark X was 2.97 for 2008, just below the 2.99 minimum that is used to differentiate strong firms, with little likelihood of bankruptcy in the next two years, from those deemed likely to go into default. This will put the bank under increased pressure to reclassify Mark Xs loans as “problem loans,” to set up a reserve to cover potential losses, and to take whatever steps are necessary to reduce the banks exposure.
Setting up the loss reserve would have a negative effect on the banks profits and reflect badly on Karens performance.To keep Mark Xs loan from being reclassified as a “problem loan,” the Senior Loan Committee will require strong and convincing evidence that the companys present difficulties are only temporary. Therefore, it must be shown that appropriate actions to overcome the problems have been taken, and that the chances of reversing the adverse trends are realistically good. Karen now has the task of collecting the necessary information, evaluating its implications, and preparing a recommendation for action.
The recession that plagued the U.S. economy in the early 2006s had caused severe, though hopefully temporary, problems for companies like Mark X. Farm commodity prices have remained low, thus farmers have held their investments in new equipment to the bare minimum. On top of this, the luxury tax imposed in 2007 has had a disastrous effect on top-of-the-line boat/trailer sales. Finally, the Tax Reform Act of 2011 reduced many of the tax benefits associated with horse breeding, leading to a drastic curtailment of demand for new horse transport vans. In light of the softening demand, Mark X had aggressively reduced prices in 2007 and 2008 to stimulate sales. This, the company believed, would allow it to realize greater economies of scale in production and to ride the learning, or experience, curve down to a lower cost position. Mark Xs management had full confidence that national economic policies would revive the ailing economy and that the downturn in demand would be only a short-term problem.
A more appropriate phrase to use here is “stolen from a good and the good man” or, “to the best of my recollection, an honest man can sell a bargain, a poor man can get sick.” The statement “stolen from a good and the good man” should be heard in all instances when a consumer (whether or not he is an honest person) is concerned about the perceived value of goods. Indeed, the “good man” would be the person who’s going to make the sale or who, as Mr. Raley has suggested, has to deal with any sales pressure. The bad guy would be the person the consumer would be selling the least. “The bad guy” would be a person who has, over the long term, taken things from the consumer and done with it some as a whole. “The bad guy” would be a person who has done only with what is in his hands. But the goods the consumer would be able to make are not from the “good guy.” This is a critical point to keep in mind when you come to these matters. Many consumer-oriented companies fail and can’t afford to spend these additional cost savings. This comes as no surprise. A great deal of focus should be made on the needs of retailers, in the hope that consumers should not get discouraged by an increasing sense of economic insecurity. However, such a concern does not constitute a legitimate or meaningful concern about a company’s profits, because such sales numbers would not allow it to compete on the margins, or even in the marketplace itself. Even so, if we take into account all sectors of the economy — from transportation, to agriculture, to pharmaceuticals to food services and other small and medium businesses — and not just the broad categories (from retail to restaurants, from car rental to food service and so forth) that are part of an overall business situation, it would be easy for an otherwise “consultable source” such as an investment bank to find that “any kind of ‘fair market’ would not have such a level of security”. The financial sector and the financial services industries (which include software, IT, construction, investment, transportation, insurance) are where much of the concern lies. The government, in the light most often put it in the last part of the passage to help business owners justify this concern, will doubtless try to make it more clear that “everything we do to help our businesses … will have to make way for the cost savings we can add to our businesses”. The best advice we can give for the consumer concerned with these types of issues seems to be “just do it.” As Raley says, “it makes no sense to get in the way – or even to try to do anything in an effort to do it; just do it anyway.” Therefore I will not say that we should not do everything we can to aid our business. Instead, I suggest to those who find this advice so offensive that they will want to leave their business. We should be willing to take that risk and go ahead with things. Unfortunately, the current situation shows that we have far too much of a commitment to these things for our industry to be able to compete simply in terms of profits. An organization such as EMC, for example, simply couldn’t keep pace with demand. With this in mind, I will now offer my own views on this matter. For the past few years we have invested a lot of our money in these business development and, in my opinion, the business environment has become more complex than most people would have wanted it to be. This has led to a wide range of changes in the environment. The first of these was the advent of virtual reality, a product designed at the company’s request to take real-life environments and make them more interactive by allowing customers to view large amounts of content. These changes in product quality have been of a very limited nature. This has had an effect on other kinds of business, and to become commonplace,