Using the spreadsheet below, prepare pro forma income statements, balance sheets, and cash flow statements to estimate the amount of funds required and the timing of the needs under level production. Does Polar need more than $4 million in short-term financing in any given month? |
Polar Sports, Inc. ________________________________________________________________________________________________________________ Harvard Business School Professor W. Carl Kester and Professor Wei Wang, Queens University, Kingston, Ontario, prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental. Copyright © 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. W . C A R L K E S T E R W E I W A N G Polar Sports, Inc. In early January 2012, Richard Weir, president of Polar Sports, Inc., sat down with Thomas Johnson, vice president of operations, to discuss Johnson’s proposal that Polar institute level monthly production for 2012. Since joining the company less than a year earlier, Johnson had become concerned about the many problems arising from its highly seasonal production scheduling, which reflected the seasonality of sales of skiwear and accessories. Weir understood the cost savings and improved production efficiency that could result from level production, but he was uncertain what the impact on other aspects of the business would be. Polar Sports, a fashion skiwear manufacturer based in Littleton, Colorado, carried production lines in high-quality ski jackets, snow pants, sweaters, thermal soft shells and underwear, and accessories such as gloves, mitts, socks, and knit caps. The company produced most of these products in a wide range of styles, sizes, and colors. Polar had a unique design of skiwear that employed special synthetic materials for better insulation and durability. The design and color of products changed annually. Dollar sales of a given product line could vary as much as 30% to 40% from year to year. The ski apparel design and manufacturing business was highly competitive. The industry comprised a few large players and a number of smaller firms. Besides several major competitors in the market such as North Face, Burton, Karbon, Spyder Active Sports, and Sport Obermeyer, high- end designers like Prada and Giorgio Armani had recently entered the technical skiwear market. Occasionally, a company was able to gain share in that competitive market by developing and marketing new fabrics and using innovative patterns in a given year; typically, however, competitors were able to market similar products the following year. Unlike Polar, several large producers had shifted their major production to Asia and Latin America to save on labor costs, making their products more competitive in price. Fierce competition in both design and pricing resulted in short product lives and a relatively high rate of company failures. 9-913-513 A U G U S T 2 0 , 2 0 1 2 For the exclusive use of I. Belle, 2020. This document is authorized for use only by Ingrid Belle in Supply Chain Finance FA2020 taught by RUDOLF LEUSCHNER, Rutgers University - Newark from Sep 2020 to Feb 2021. 913-513 | Polar Sports, Inc. 2 BRIEFCASES | HARVARD BUSINESS SCHOOL Company Background Polar Sports, Inc., was established in 1992 by Richard Weir, a retired professional snowboarder. His desire was to produce high-quality skiwear and accessories for people of all ages and abilities. Through Weir’s expansive network of ski instructors and resorts, Polar was able to sell a few hundred units of high-quality products by the third year of operation. Polar experienced fast growth since the late 1990s, after sponsoring a number of snowboarding events and endorsing a few talented athletes who later competed in several international competitions. Polar became a popular brand among both professional and amateur skiers and snowboarders. The company’s sales growth was affected only slightly by the 2008–2009 economic recession. In 2011, Weir hired Thomas Johnson, a production manager at a sports equipment factory, as vice president of operations. The skiwear production process, though not complex, was nevertheless labor intensive. It required designers to constantly come up with new styles to stay ahead of competing products. The designers worked closely with raw-materials suppliers in developing new fabrics. Focusing on both the technical and the fashion aspects of their products, Polar’s designers helped create a high-tech temperature-control fabric for the base and middle layers, providing both breathability and waterproofing. The production technology required skilled labor, and the process was primarily manual, which ensured that stitching was accurate and jackets and pants were properly insulated. Company Financials The popularity of skiing and snowboarding had grown tremendously over the past two decades. According to a National Sporting Goods Association survey, at the end of 2010 more than 15 million Americans over seven years of age participated in skiing or snowboarding. The skiwear manufacturing industry experienced fast growth in the 2000s with the rising popularity of winter extreme sports such as snow kiting and heli-boarding. Polar achieved progressive market share through its unique design and expansive sales network. Its sales grew from $4.65 million in 2001 to $16.36 million in 2011. With a number of promising new designs under production, sales were projected at $18.0 million for 2012. However, the ultimate success of the new designs depended greatly on how well the market would respond. In recent years, more-intense competition had made accurate predictions increasingly difficult. Polar’s net income reached $897,000 in 2011 and was projected to be $1,147,000 in 2012 under seasonal production. Tables A and B show the latest financial statements. The cost of goods sold had averaged 66% of sales in the past and was expected to remain at approximately that level in 2012 under seasonal production. Operating expenses, projected to be 24% of sales, would be incurred evenly throughout each month of 2012 under either seasonal or level production. Polar was facing a corporate tax rate of 34%. For the exclusive use of I. Belle, 2020. This document is authorized for use only by Ingrid Belle in Supply Chain Finance FA2020 taught by RUDOLF LEUSCHNER, Rutgers University - Newark from Sep 2020 to Feb 2021. Polar Sports, Inc. | 913-513 HARVARD BUSINESS SCHOOL | BRIEFCASES 3 Table A Consolidated Income Statement, 2009–2011 (in thousands of dollars) 2009 2010 2011 Net sales 14,079 15,065 16,360 COGS 9,011 10,244 10,798 Gross profit 5,068 4,821 5,562 Operating expense 3,520 3,615 4,090 Interest expense 105 125 128 Interest income 17 19 15 Pretax profit 1,461 1,099 1,359 Income tax 497 374 462 Net income 964 725 897 Table B Balance Sheet at December 31, 2011 (in thousands of dollars) Cash 500 Accounts receivable 5,245 Inventory 1,227 Current assets 6,972 PP&E 2,988 Total assets 9,960 Accounts payable 966 Notes payable, bank 826 Accrued taxes 139 Long-term debt, current portion 100 Current liabilities 2,031 Long-term debt 1,000 Total liabilities 3,031 Shareholders’ equity 6,929 Total liabilities and shareholders’ equity 9,960 As noted, sales of skiwear and accessories were highly seasonal, with more than 80% of annual dollar volume generated from September through January. Table C shows both actual monthly sales for 2011 and projected monthly sales for 2012. Polar pursued three sales channels: wholesale, catalog, and online direct sales. Polar’s wholesale channel, which accounted for 70% of sales, included about 1,000 dealers, sporting goods stores, specialty ski stores, and department stores. During the SIA Snow Show in Colorado, the biggest annual exhibition for skiwear manufacturers held in late January, Polar presented its latest product designs, which would be released in the fall. It often received orders representing around 15% of its annual sales right after the show; these were shipped in September. Customers usually took 60 days to pay for wholesale purchases, and the collection experience had been very satisfactory. Transactions with catalog and online direct sales were usually settled on the date of purchase. For the exclusive use of I. Belle, 2020. This document is authorized for use only by Ingrid Belle in Supply Chain Finance FA2020 taught by RUDOLF LEUSCHNER, Rutgers University - Newark from Sep 2020 to Feb 2021. 913-513 | Polar Sports, Inc. 4 BRIEFCASES | HARVARD BUSINESS SCHOOL Table C Monthly Sales (in thousands of dollars) Sales 2011 Projected Sales 2012 January 671 702 February 393 486 March 360 414 April 311 378 May 180 162 June 196 180 July 474 378 August 769 540 September 2,896 2,970 October 2,618 2,520 November 4,564 5,724 December 2,928 3,546 Total 16,360 18,000 Polar’s practice was to fulfill customers’ orders promptly. A small fraction of capacity at Polar’s Littleton plant was required to meet orders from February through July each year. From August through January, the company greatly expanded its workforce. New employees were hired and trained, and existing employees were asked to work overtime. All equipment was used more than 15 hours per day, which called for frequent maintenance. Whenever possible, shipments were made on the same day an order was placed. Production was scheduled to match sales for each month. Under seasonal production, in 2012 Polar would maintain the same level of inventory that it held on December 31, 2011. The accounts payable balance at the end of a month was assumed to be 50% of the cost of goods sold that month. This figure was related to material purchases that accounted for 50% of the cost of goods sold for 2012. Total material purchases, based on 30-day payment terms, were forecasted to be $5,940,000 in 2012. The 2011 year-end cash balance of $500,000 was regarded as the minimum necessary for the