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Analysis of Strong Tie's Financial Performance and Future Recommendations

Company background

In  early  January  2009,  David  Johnstone  received  the  draft  2008  financial  statements  for  Strong  Tie  and  began to question the company’s performance when compared to previous years. How were profits holding up,  given  the  intense  price  competition  in  the  industry?  Were  attempts  to  lower  costs  through  more  automation paying off? Were the current problems in the U.S. housing market going to continue to reduce demand for connectors? How would lenders react to this poor performance? Was the company’s financing in danger?  After  discussing  the  matter  with  company  accountant  Audrey  Johnstone,  it  was  decided  that  an  outside  consultant should be hired to provide an independent analysis of the company’s recent performance and to provide suggestions for future action.  

Strong  Tie Ltd.,  located  in  Winnipeg,  Manitoba,  designed and  manufactured  the  standardized and  customized structural connectors used to reinforce wood joints in the construction of decks, fences, houses and  other  structures.  Strong  Tie  was  a  family-owned  corporation  founded  in  1946  by  Bill  Johnstone  to  capitalize on the high demand for housing as returning World War II veterans married and began families. Bill  Johnstone  died  in  1975  but  passed  the  business  on  to  his  son  David,  who  continued  to  operate  the  business  along  with  his  three  daughters,  Ellen,  Elizabeth  and  Audrey.  David  served  as  CEO,  while Ellen  Johnstone, P.Eng, was responsible for product design and production; Elizabeth Johnstone, CSP, managed marketing,  sales  and  distribution;  and  Audrey  Johnstone,  CA,  managed  the  company’s  finances.  The  Johnstone  family  was  a  pillar  of  the  Winnipeg  business  community,  making  sizeable  donations  to  local  charities and sport teams.  

 
The  standardized  connectors  were  designed  in  Winnipeg  based  on  input  from  architects,  draftsmen  and  builders. The production process was highly automated with metal cutting, stamping and drilling machines completing  most  of  the  tasks.  Human  intervention  was  required  to  transfer  work-in-process  between  stations, to feed machines and to pack, store and distribute the end products. This automation had allowed production  to  remain  in  Canada  to  date  despite  fierce  competition  from  low-wage  countries,  particularly  China. Customized connectors were produced based on specifications provided by the customer. For the exclusive use of t. rodriguez, 2021.

Strong Tie prided itself on its product design capabilities. Designers in Winnipeg consistently generated an array  of  new standardized  connectors  that  improved  on  existing  products  or  addressed  newly  identified  industry  needs.  These  products were  described  in  detail  in  terms  of  dimension,  strength  (load-bearing  weights and steel gauge) and installation on the company’s website or in a paper catalogue located in stores both  were  of  very  high  quality.  Strong  Tie  also  had  a  reputation  among  construction  professionals  as  providing innovative solutions to unique design requests and being able to produce customized products in a timely manner at a reasonable price.  

Product design and production

Standardized  products  were  distributed  through  all  national  home  improvement  chains  in  North  America  including  Home  Depot,  Lowe’s,  Rona,  Home  Hardware,  Eagle  and  Sears.  Most  local  chains  catering  to  contractors also carried the standardized products and accepted requests for customized connectors, which they then forwarded to Strong Tie. Strong Tie was estimated to have a 60 per cent market share, which had fallen from 70 per cent in recent years. Universal Connector, a U.S. firm based in Ohio, was estimated to have a 30 per cent and growing share; it offered  a similar array of standardized products and customized design  services.  The  remainder  of  the  market  was  served  by  five  Chinese  producers  whose  market  share had  grown  considerably  in  the  last  five  years,  although  they  had  yet  to  enter  the  customized  product  segment. Universal Connector had closed a number of its U.S. manufacturing facilities in recent years and replaced them with new facilities in China, which put considerable downward pressure on industry prices. Currently, Strong Tie priced its products at a premium to its competitors because of its industry leadership. 
 

All  sales  were  on  terms  Net  60.  Large  accounts  such  as  Home  Depot  had  a  reputation  of  stretching  their  payments past the due date because of their buying power, while contractors frequently delayed payments due to cash flow problems. All purchases, which were primarily steel, were on terms 2/10, Net 60. Metal prices varied considerably, and the trend over 2006 to 2008 was for these prices to rise due to increasing demand  from  emerging  market  countries,  particularly  Brazil,  Russia,  India  and  China.  Strong  Tie  had  attempted  to  adopt  just-in-time  inventory  practices  to  help  reduce  its  raw  material,  work-in-process  and  finished goods inventory levels.  

 
The Johnstone family maintained excellent relations with its unionized workforce, which was represented by the United Steel Workers of America. They prided themselves on paying generous wages and providing their  workers  with  excellent  health  care,  disability  and  pension  benefits.  The  company  had  never  had  a  strike and was currently negotiating a new collective agreement to take effect in three months on April 1, 2009.  

Prepare the following Financial Exhibits for 2006, 2007, 2008.

• Ratio Table with Industry averages (liquidity, asset management, long term debt ability, profitability) (2 points)

• Common Size Income Statement and Balance Sheet (1 point)

• Dupont Analysis of ROE (0.5 point)

• Cash Flow Statements (for 2007 and 2008) (1point)

2. Prepare a two-page memorandum as requested by Mr. Johnstone. The memo should be divided into sections describing liquidity, asset management, long term debt ability, profitability and recommendations. (Times New Roman font, 12 points, 1.5 line spacing) (5 points)

3. Grammar/ Writing Style/ Presentation (0.5 point) Total: (10 points).

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