Plainview Technology Case

Plainview manufactures iris scanning equipment for biometric

identification
In 2009, Plainview lost its largest customer, a defense contractor,
which accounted for half of its business
Customer transferred business to a foreign competitor with lower labor costs

Plainview management responded by increasing automation

Also built plants in California and South Carolina to be closer to customers

Plainview expanded into new industries

Health care, financial institutions, nuclear power

Plainview switched from high-volume, standard products to smallerbatch, customized products

In 2010, Plainview adopted new 6G technology, which provides better
results at lower manufacturing cost
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Plainview Technology Case

The company has experienced explosive growth after surviving its
crisis and has picked up greater following by analysts and investors
A new analyst has just a few hours to prepare before participating on
a conference call with Plainview Technology management
Only information available is financial statements and ratios
Based on the ratios, what seems to be the secret to the companys
turnaround?
What questions would you ask management during the call?

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Balance Sheet - Assets

($000's)
Cash & Equivalents
Accounts Receivable
Inventories
Prepaid Expenses
Current Assets

12/31/2009
295
4,704
7,481
275
12,755

12/31/2010
288
12,013
20,660
203
33,164

12/31/2011
1,045
12,625
28,532
280
42,482

Land
Building & Improvements
Construction in Progress
Machinery and Equipment
Accumulated Depreciation
Net Propery, Plant, & Equip

85
3,878
2
19,548
(4,708)
18,805

295
4,546
21
31,009
(9,245)
26,626

295
5,093
442
49,226
(16,436)
38,620

Other Assets
Total Assets

380
31,940

94
59,884

103
81,205

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Balance Sheet Liabilities & Stockholders Equity

($000's)
Curr. Portion of L.T. Debt
Accounts Payable
Accrued Wages
Accrued Taxes
Other Current Liabilities
Current Liabilities

12/31/2009
1,066
3,360
529
21
355
5,331

12/31/2010
2,207
8,445
1,237
836
820
13,545

12/31/2011
753
8,531
1,468
182
797
11,731

Long Term Debt

Deferred Tax and Other
Total Long Term Liabilities

6,742
721
7,463

23,451
641
24,092

29,210
587
29,797

Common Stock
Paid In Capital
Retained Earnings
Stockholders' Equity
Total Liabs. & Stkhldrs. Eq.

84
16,866
2,196
19,146
31,940

95
16,929
5,223
22,247
59,884

107
29,275
10,295
39,677
81,205

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Income Statement
($000's)
Sales
Cost of Sales
Gross Profit

Year ended:

12/31/2009
42,420
(36,726)
5,694

12/31/2010
70,229
(59,330)
10,899

12/31/2011
102,026
(85,404)
16,622

SG&A Expense
Operating Income

(2,298)
3,396

(3,824)
7,075

(5,469)
11,153

Interest Expense
Other/Net
Pre-tax Income

(1,086)
54
2,364

(1,953)
(77)
5,045

(2,665)
(40)
8,448

(894)
1,470

(2,018)
3,027

(3,378)
5,070

Taxes
Net Income

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SCF: Operating
($000's)
Year ended:
Cash Flows from Operating Activities:
Net Income
Depreciation
Doubtful Accts.
Changes in:
Accounts Receivable
Inventories
Deferred Taxes
Prepaid, other
Accounts Payable
Accrued Wages
Other Current Liabs.
Accrued Taxes
Cash Flow from Operations

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12/31/2009

12/31/2010

12/31/2011

1,470
2,372
12

3,027
4,537
48

5,070
7,191
48

4,594
1,481
8
(1)
(3,927)
99
110
(502)
5,716

(7,357)
(13,179)
178
179
5,084
708
464
816
(5,495)

(660)
(7,872)
587
14
86
232
(23)
278
4,951

SCF: Investing and Financing

($000's)

Year ended:

12/31/2009

12/31/2010

12/31/2011

Cash Flows from Investing Activities:

Capital Expenditures
Sales of Equipment
Cash Flows from Investments

(14,044)
327
(13,717)

(12,490)
150
(12,340)

(19,387)
85
(19,302)

Cash Flows from Financing Activities:

Proceeds from Borrowings
Repayments of Borrowings
Common Stock issued
Cash Flows from Financing

8,088
(11,792)
10,084
6,380

21,113
(3,349)
64
17,828

29,658
(25,986)
11,436
15,108

(1,621)

(7)

757

1,086
1,404

1,968
1,024

2,636
2,422

Net Change In Cash

Cash Interest Paid
Cash Taxes Paid

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Common Size Financial Statements

Hard to spot trends in the financial statements because of growth
Growth in Assets and Sales drive trends in all of the line items
Are certain line items growing more or less than would be expected given the
growth in assets or sales?

Balance sheet
Express all numbers as a percent of Total Assets

Income statement
Express all numbers as a percent of Sales

Cash flow statement

Typically not common sized

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Common Size Balance Sheet - Assets

($000's)
Cash & Equivalents
Accounts Receivable
Inventories
Prepaid Expenses
Current Assets
Land
Building & Improvements
Construction in Progress
Machinery and Equipment
Accumulated Depreciation
Net Propery, Plant, & Equip
Other Assets
Total Assets

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12/31/2009
0.01
0.15
0.23
0.01
0.40

12/31/2010
0.00
0.20
0.35
0.00
0.55

12/31/2011
0.01
0.16
0.35
0.00
0.52

0.00
0.12
0.00
0.61
(0.15)
0.59

0.00
0.08
0.00
0.52
(0.15)
0.44

0.00
0.06
0.01
0.61
(0.20)
0.48

0.01
1.00

0.00
1.00

0.00
1.00

Common Size Balance Sheet Liabilities & Stockholders Equity

($000's)
Curr. Portion of L.T. Debt
Accounts Payable
Accrued Wages
Accrued Taxes
Other Current Liabilities
Current Liabilities

12/31/2009
0.03
0.11
0.02
0.00
0.01
0.17

12/31/2010
0.04
0.14
0.02
0.01
0.01
0.23

12/31/2011
0.01
0.11
0.02
0.00
0.01
0.14

Long Term Debt

Deferred Tax and Other
Total Long Term Liabilities

0.21
0.02
0.23

0.39
0.01
0.40

0.36
0.01
0.37

Common Stock
Paid In Capital
Retained Earnings
Stockholders' Equity
Total Liabs. & Stkhldrs. Eq.

0.00
0.53
0.07
0.60
1.00

0.00
0.28
0.09
0.37
1.00

0.00
0.36
0.13
0.49
1.00

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Common Size Income Statement

($000's)
Sales
Cost of Sales
Gross Profit

12/31/2009
1.00
(0.87)
0.13

12/31/2010
1.00
(0.84)
0.16

12/31/2011
1.00
(0.84)
0.16

SG&A Expense
Operating Income

(0.05)
0.08

(0.05)
0.10

(0.05)
0.11

Interest Expense
Other/Net
Pre-tax Income

(0.03)
0.00
0.06

(0.03)
(0.00)
0.07

(0.03)
(0.00)
0.08

Taxes

(0.02)

(0.03)

(0.03)

0.03

0.04

0.05

Net Income

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DuPont Analysis
DuPont Analysis
Return on Equity

12/31/2009
11.34%

12/31/2010
14.63%

12/31/2011
16.37%

Return on Assets
Financial Leverage

7.26%
2.32

9.40%
2.22

9.68%
2.28

Return on Assets
Return on Sales
Asset turnover

5.16%
1.41

6.15%
1.53

6.69%
1.45

Return on Equity = Net Income / Avg. Stockholders' Equity

Return on Assets = (Net Income + After-tax Interest Exp.) / Avg. Total Assets
Financial Leverage = Avg. Total Assets / Avg. Stockholders Equity
Return on Sales = (Net Income + After-tax Interest Exp.) / Sales
Asset turnover = Sales / Avg. Total Assets

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Cross-Sectional Comparisons - DuPont

Return on Equity
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2009

2010

Return on Assets
12.00%
11.00%
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
2009
2011

Return on Sales

2011

Asset Turnover
3.00
2.80
2.60
2.40
2.20
2.00
1.80
1.60
1.40
1.20
1.00

7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
2009

2010

2010

KNOWLEDGE FOR ACTION

2011

2009

2010

2011

DuPont Analysis Conclusions

Big increases in ROE were unique for the industry
Improved ROA was the source of the increase in ROE
Financial Leverage was largely unchanged

The ultimate source of the ROE increase was improvement in Profit

Margin (Return on Sales)
In contrast to competitors, ROS grew dramatically
Asset Turnover ratio was flat (similar to competitors)

=> The secret to Plainviews success was that their sales became
more profitable between 2009 and 2011

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