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4040
OCTOBER 8, 2009
TIMOTHY LUEHRMAN
JOEL HEILPRIN
Blaine Kitchenware, Inc.: Capital Structure
On April 27, 2007, Victor Dubinski, CEO of Blaine Kitchenware, Inc. (BKI), sat in his office
reflecting on a meeting he had had with an investment banker earlier in the week. The banker, whom
Dubinski had known for years, asked for the meeting after a group of private equity investors made
discreet inquiries about a possible acquisition of Blaine. Although Blaine was a public company, a
majority of its shares were controlled by family members descended from the firm’s founders
together with various family trusts. Family interests were strongly represented on the board of
directors as well. Dubinski knew the family had no current interest in selling—on the contrary,
Blaine was interested in acquiring other companies in the kitchen appliances space—so this overture,
like a few others before it, would be politely rebuffed.
Nevertheless, Dubinski was struck by the banker’s assertion that a private equity buyer could
“unlock” value inherent in Blaine’s strong operations and balance sheet. Using cash on Blaine’s
balance sheet and new borrowings, a private equity firm could purchase all of Blaine’s outstanding
shares at a price higher than $16.25 per share, its current stock price. It would then repay the debt
over time using the company’s future earnings. When the banker pointed out that BKI itself could do
the same thing—borrow money to buy back its own shares—Dubinski had asked, “But why would
we do that?” The banker’s response was blunt: “Because you’re over-liquid and under-levered. Your
shareholders are paying a price for that.” In the days since the meeting, Dubinski’s thoughts kept
returning to a share repurchase. How many shares could be bought? At what price? Would it sap
Blaine’s financial strength? Or prevent it from making future acquisitions?
Blaine Kitchenware’s Business
Blaine Kitchenware was a mid-sized producer of branded small appliances primarily used in
residential kitchens. Originally founded as The Blaine Electrical Apparatus Company in 1927, it
produced then-novel electric home appliances, such as irons, vacuum cleaners, waffle irons, and
cream separators, which were touted as modern, clean, and easier to use than counterparts fueled by
oil, coal, gas, or by hand. By 2006, the company’s products consisted of a wide range of small kitchen
appliances used for food and beverage preparation and for cooking, including several branded lines
of deep fryers, griddles, waffle irons, toasters, small ovens, blenders, mixers, pressure cookers,
steamers, slow cookers, shredders and slicers, and coffee makers.
________________________________________________________________________________________________________________
HBS Professor Timothy A. Luehrman and Illinois Institute of Technology Adjunct Finance Professor Joel L. Heilprin 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. This
case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional
references to actual companies in the narration.
Copyright © 2009 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.
This document is authorized for use only by Songyuan Liu in W2024 FIN4400 taught by Shiu-Yik Au, University of Manitoba from Dec 2023 to May 2024.
For the exclusive use of S. Liu, 2024.
4040 | Blaine Kitchenware, Inc.: Capital Structure
Blaine had just under 10% of the $2.3 billion U.S. market for small kitchen appliances. For the
period 2003–2006 the industry posted modest annual unit sales growth of 2% despite positive market
conditions including a strong housing market, growth in affluent householders, and product
innovations. Competition from inexpensive imports and aggressive pricing by mass merchandisers
limited industry dollar volume growth to just 3.5% annually over that same period. Historically, the
industry had been fragmented, but it had recently experienced some consolidation that many
participants expected to continue.
In recent years, Blaine had been expanding into foreign markets. Nevertheless in 2006, 65% of its
revenue was generated from shipments to U.S. wholesalers and retailers, with the balance coming
from sales to Canada, Europe, and Central and South America. The company shipped approximately
14 million units a year.
There were three major segments in the small kitchen appliance industry: food preparation
appliances, cooking appliances, and beverage-making appliances. Blaine produced product for all
three, but the majority of its revenues came from cooking appliances and food preparation
appliances. Its market share of beverage-making appliances was only 2%. Most of BKI’s appliances
retailed at medium price points, at or just below products offered by the best-known national brands.
BKI’s market research consistently showed that the Blaine brand was well-known and well-regarded
by consumers. It was associated somewhat with “nostalgia” and the creation of “familiar,
wholesome dishes.”
Recently, Blaine had introduced some goods with “smart” technology features and sleeker styling,
targeting higher-end consumers and intended to compete at higher price points. This strategy was in
response to increased competition from Asian imports and private label product. The majority of
BKI’s products were distributed via a network of wholesalers, which supplied mass merchandisers
and department stores, but its upper-tier products were sold directly to specialty retailers and
catalogue companies. Regardless of the distribution channel, BKI offered consumers standard
warranty terms of 90 days to one year, depending on the appliance.
Blaine’s monthly sales reached a seasonal peak during October and November as retailers
increased stock in anticipation of the holiday season. A smaller peak occurred in May and June,
coinciding with Mother’s Day, a summer surge in weddings, and the seasonal peak in home
purchases. Historically, sales of Blaine appliances had been cyclical as well, tending to track overall
macroeconomic activity. This also was the case for the industry as a whole; in particular, changes in
appliance sales were correlated with changes in housing sales and in home renovation and household
formation.
BKI owned and operated a small factory in Minnesota that produced cast iron parts with specialty
coatings for certain of its cookware offerings. Otherwise, however, Blaine, like most companies in the
appliance industry, outsourced its production. In 2006 BKI had suppliers and contract manufacturers
in China, Vietnam, Canada, and Mexico.
Victor Dubinski was a great-grandson of one of the founders. An engineer by training, Dubinski
served in the U.S. Navy after graduating from college in 1970. After his discharge, he worked for a
large aerospace and defense contractor until joining the family business in 1981 as head of operations.
He was elected to the board of directors in 1988 and became Blaine’s CEO in 1992, succeeding his
uncle.
Under Dubinski’s leadership, Blaine operated much as it always had, with three notable
exceptions. First, the company completed an IPO in 1994. This provided a measure of liquidity for
certain of the founders’ descendants who, collectively, owned 62% of the outstanding shares
2
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Blaine Kitchenware, Inc.: Capital Structure | 4040
following the IPO. Second, beginning in the 1990s, Blaine gradually moved its production abroad.
The company began by taking advantage of NAFTA, engaging suppliers and performing some
manufacturing in Mexico. By 2003, BKI also had established relationships with several Asian
manufacturers, and the large majority of its production took place outside the United States. Finally,
BKI had undertaken a strategy focused on rounding out and complementing its product offerings by
acquiring small independent manufacturers or the kitchen appliance product lines of large
diversified manufacturers. The company carefully followed changes in customer purchasing
behavior and market trends. Victor Dubinski and the board were eager to continue what they
believed had been a fruitful strategy. The company was particularly keen to increase its presence in
the beverage appliance segment, which demonstrated the strongest growth and where BKI was
weakest. Thus far, all acquisitions had been for cash or BKI stock.
Financial Performance
During the year ended December 31, 2006, Blaine earned net income of $53.6 million on revenue
of $342 million. Exhibits 1 and 2 present the company’s recent financial statements. Approximately
85% of Blaine’s revenue and 80% of its operating income came from the sale of mid-tier products,
with the line of higher-end goods accounting for the remainder. The company’s 2006 EBITDA
margin of nearly 22% was among the strongest within the peer group shown in Exhibit 3. Despite its
recent shift toward higher-end product lines, Blaine’s operating margins had decreased slightly over
the last three years. Margins declined due to integration costs and inventory write-downs associated
with recent acquisitions. Now that integration activities were completed, BKI executives expected the
firm to achieve operating margins at least as high as its historical margins.
The U.S. industry as a whole faced considerable pressure from imports and private label products,
as well as a shift in consumer purchasing preferences favoring larger, “big box” retailers. In response,
some of Blaine’s more aggressive rivals were cutting prices to maintain sales growth. Blaine had not
followed suit and its organic revenue growth had suffered in recent years, as some of its core
products lost market share. Growth in Blaine’s top line was attributable almost exclusively to
acquisitions.
Despite the company’s profitability, returns to shareholders had been somewhat below average.
Blaine’s return on equity (ROE), shown below, was significantly below that of its publicly traded
peers.1 Moreover, its earnings per share had fallen significantly since 2004, partly due to dilutive
acquisitions.
Companies
2006 ROE
Home & Hearth Design
AutoTech Appliances
XQL Corp.
Bunkerhill Incorporated
EasyLiving Systems
Mean
11.3%
43.1%
19.5%
41.7%
13.9%
25.9%
Median
19.5%
Blaine
11.0%
1 ROE is computed here as net income divided by end-of-period book equity.
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4040 | Blaine Kitchenware, Inc.: Capital Structure
During 2004–2006, compounded annual returns for BKI shareholders, including dividends and
stock price appreciation, were approximately 11% per year. This was higher than the S&P 500, which
returned approximately 10% per year. However, it was well below the 16% annual compounded
return earned by shareholders of Blaine’s peer group during the same period.
Financial Policies
Blaine’s financial posture was conservative and very much in keeping with BKI’s long-standing
practice and, indeed, with its management style generally. Only twice in its history had the company
borrowed beyond seasonal working capital needs. The first time was during World War II, when it
borrowed from the U.S. government to retool several factories for war production. The second time
was during the first oil shock of the 1970s. On both occasions the debt was repaid as quickly as
possible.
At the end of 2006, Blaine’s balance sheet was the strongest in the industry. Not only was it debtfree, but the company also held $231 million in cash and securities at the end of 2006, down from $286
million two years earlier. Given such substantial liquidity, Blaine had terminated in 2002 a revolving
credit agreement designed to provide standby credit for seasonal needs; the CFO argued that the fees
were a waste of money and Dubinski agreed.
In recent years the company’s largest uses of cash had been common dividends and cash
consideration paid in various acquisitions. Dividends per share had risen only modestly during
2004–2006; however, as the company issued new shares in connection with some of its acquisitions,
the number of shares outstanding climbed, and the payout ratio rose significantly, to more than 50%
in 2006.
Net income
Dividends
Average shares outstanding
Earnings per share
Dividend per share
Payout ratio
2004
2005
2006
$ 53,112
$ 18,589
41,309
$ 1.29
$ 0.45
35.0%
$ 52,435
$ 22,871
48,970
$ 1.07
$ 0.47
43.6%
$ 53,630
$ 28,345
59,052
$ 0.91
$ 0.48
52.9%
The next largest use of funds was capital expenditures, which were modest due to Blaine’s
extensive outsourcing of its manufacturing. Average capital expenditures during the past three years
were just over $10 million per year. While they were expected to remain modest, future expenditures
would be driven in part by the extent and nature of Blaine’s future acquisitions. In recent years,
after-tax cash generated from operations had been more than four times average capital expenditures
and rising, as shown in the table below.
EBITDA
Less: Taxes
After-Tax Operating Cash Flow
4
2004
2005
2006
AVG.
$ 69,370
24,989
44,380
$ 68,895
24,303
44,592
$ 73,860
23,821
50,039
46,337
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Blaine Kitchenware, Inc.: Capital Structure | 4040
Reassessing Financial Policies in 2007
In 2007 Blaine planned to continue its policy of holding prices firm in the face of competitive
pressures. Consequently, its managers were expecting top line growth of only 3% for fiscal year 2007.
However, this growth rate assumed no acquisitions would be made in 2007, unlike the previous two
years. While the board remained receptive to opportunities, Dubinski and his team had no target in
mind as yet at the end of April.
As he reflected on the possibility of repurchasing stock, Dubinski understood that he could
consider such a move only in conjunction with all of BKI’s financial policies: its liquidity, capital
structure, dividend policy, ownership structure, and acquisition plans. In addition, he wondered
about timing. Blaine’s stock price was not far off its all-time high, yet its performance clearly lagged
that of its peers. A summary of contemporaneous financial market information is provided in
Exhibit 4.
Dubinski had begun to suspect that family members on the board would welcome some of the
possible effects of a large share repurchase. Assuming that family members held on to their shares,
their percentage ownership of Blaine would rise, reversing a downward trend dating from BKI’s IPO.
It also would give the board more flexibility in setting future dividends per share. Both Dubinski and
the board knew that the recent trend in BKI’s payout ratio was unsustainable and that this concerned
some family members.
On the other hand, a large repurchase might be unpopular if it forced Blaine to give up its war
chest and/or discontinue its acquisition activity. Perhaps even more unsettling, it would cause
Blaine to borrow money. The company would be paying significant interest expense for only the
third time in its history. As Dubinski turned his chair to face the window, he glanced at the framed
photo behind his desk of his great grandfather, Marcus Blaine, demonstrating the company’s first
cream separator—its best-selling product during Blaine’s first decade. A real Blaine Electrical Cream
Separator sat in a glass case in the corner; the last one had been manufactured in 1949.
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4040 | Blaine Kitchenware, Inc.: Capital Structure
Exhibit 1
Blaine Kitchenware, Inc., Income Statements, years ended December 31, ($ in Thousands)
Operating Results
2004
2005
2006
$291,940
204,265
$307,964
220,234
$342,251
249,794
Gross Profit
Less: Selling, General & Administrative
87,676
25,293
87,731
27,049
92,458
28,512
Operating Income
Plus: Depreciation & Amortization
62,383
6,987
60,682
8,213
63,946
9,914
EBITDA
69,370
68,895
73,860
EBIT
Plus: Other Income (expense)
62,383
15,719
60,682
16,057
63,946
13,506
Earnings Before Tax
Less: Taxes
78,101
24,989
76,738
24,303
77,451
23,821
53,112
$ 18,589
52,435
$ 22,871
53,630
$ 28,345
3.2%
5.5%
11.1%
Revenue
Less: Cost of Goods Sold
Net Income
Dividends
Margins
Revenue Growth
Gross Margin
30.0%
28.5%
27.0%
EBIT Margin
21.4%
19.7%
18.7%
EBITDA Margin
23.8%
22.4%
21.6%
Effective Tax Ratea
32.0%
31.7%
30.8%
Net Income Margin
18.2%
17.0%
15.7%
Dividend payout ratio
35.0%
43.6%
52.9%
a. Blaine’s future tax rate was expected to rise to the statutory rate of 40%.
6
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Blaine Kitchenware, Inc.: Capital Structure | 4040
Exhibit 2
Blaine Kitchenware, Inc. Balance Sheets, December 31, ($ in Thousands)
Assets
2004
2005
2006
Cash & Cash Equivalents
$ 67,391
$ 70,853
$ 66,557
Marketable Securities
218,403
196,763
164,309
Accounts Receivable
40,709
43,235
48,780
Inventory
47,262
49,728
54,874
Other Current Assets
2,586
3,871
5,157
Total Current Assets
376,351
364,449
339,678
Property, Plant & Equipment
99,402
138,546
174,321
Goodwill
8,134
20,439
38,281
Other Assets
13,331
27,394
39,973
Total Assets
$497,217
$550,829
$592,253
Accounts Payable
$ 26,106
$ 28,589
$ 31,936
Accrued Liabilities
22,605
24,921
27,761
Taxes Payable
14,225
17,196
16,884
Total Current Liabilities
62,935
70,705
76,581
Other liabilities
1,794
3,151
4,814
Deferred Taxes
15,111
18,434
22,495
Total Liabilities
79,840
92,290
103,890
Liabilities & Shareholders’ Equity
Shareholders’ Equity
417,377
458,538
488,363
Total Liabilities & Shareholders’ Equity
$497,217
$550,829
$592,253
Note:
Many items in BKI’s historical balance sheets (e.g., Property, Plant & Equipment) have been affected by the firm’s
acquisitions.
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31.74%
24.10%
45.18%
31.12%
Net Debt/Equity
Net Debt/Enterprise Value
b. Net debt is total long-term and short-term debt less excess cash.
a. Net working capital excludes cash and securities.
1.02x
7.35x
6.03x
4.26x
1.91x
10.56x
9.46x
1.63x
1.24
LTM Trading Multiples
MVIC/Revenue
MVIC/EBIT
MVIC/EBITDA
Market/Book equity
Equity beta
1.03
13,978,375
$18,415,689
776,427
$1,127,226
Market capitalization
Enterprise value (MVIC)
$4,437,314
4,973,413
3,283,000
$ 350,798
372,293
475,377
Net debtb
Total debt
Book equity
$ 536,099
1,247,520
7,463,564
$9,247,183
$ 21,495
54,316
900,803
$ 976,613
Cash & securities
Net working capitala
Net fixed assets
Total assets
$18,080,000
2,505,200
3,055,200
$1,416,012
AutoTech
Appliances
$ 589,747
106,763
119,190
$ 53,698
Home &
Hearth Design
17.97%
15.23%
1.45x
8.65x
7.84x
2.51x
0.96
5,290,145
$6,240,947
$ 950,802
972,227
2,109,400
$ 21,425
353,691
3,322,837
$3,697,952
$4,313,300
721,297
796,497
$ 412,307
XQL Corp.
6.01%
5.67%
1.14x
7.42x
6.88x
4.93x
0.92
3,962,780
$4,200,836
$ 238,056
391,736
804,400
$ 153,680
334,804
815,304
$1,303,788
$3,671,100
566,099
610,399
$ 335,073
Bunkerhill, Inc.
-15.47%
-18.31%
1.87x
18.05x
15.15x
4.41x
0.67
418,749
$ 353,949
$ (64,800)
177,302
94,919
$ 242,102
21,220
68,788
$ 332,110
$ 188,955
19,613
23,356
$ 13,173
EasyLiving
Systems
Selected Operating and Financial Data for Public Kitchenware Producers, 12 months ended December 31, 2006, ($ in Thousands)
Revenue
EBIT
EBITDA
Net income
Exhibit 3
-24.06%
-31.68%
2.13x
11.40x
9.87x
1.96x
0.56
959,596
$ 728,730
$(230,866)
488,363
$ 230,866
32,231
174,321
$ 592,253
$ 342,251
63,946
73,860
$ 53,630
Blaine
Kitchenware
4040 -8-
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Blaine Kitchenware, Inc.: Capital Structure | 4040
Exhibit 4
Contemporaneous Capital Market Data (April 21, 2007)
Yields on U.S. Treasury Securities
Maturity
30 days
60 days
90 days
1 year
5 years
10 years
20 years
30 years
4.55%
4.73%
4.91%
4.90%
4.91%
5.02%
5.26%
5.10%
Seasoned corporate bond yields
Moody’s Aaa
5.88%
Aa
6.04%
A
6.35%
Baa
6.72%
Ba
7.88%
B
8.94%
Default spread
0.86%
1.02%
1.33%
1.70%
2.86%
3.92%
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