Aurora Textile Company (SPREADSHEET)

Cover SheetAurora.xls

This spreadsheet supports STUDENT analysis of the case, "Aurora Textile Company" (Case 21)

Copyright (C) 2007, by the University of Virginia Darden School Foundation.

Exhibit 1

Consolidated Statement of Operations for the Fiscal YearsEnding December, 31 1999-2002($ thousands)1999200020012002Pounds shipped (000's)187,673190,473151,893144,116Average selling price / lb1.31031.20641.20451.0235Conversion Cost / lb0.44470.44210.44650.4296Average Raw Material Cost / lb0.70770.64290.64870.4509Net Sales$245,908$229,787$182,955$147,503Raw Material Cost132,812122,46198,53664,982Cost of Conversion83,45484,21267,82261,912 Gross Margin29,64123,11416,59720,609SG&A Expenses14,60314,21811,63510,305Depreciation & Amortization15,24113,00511,1969,859Operating Profit(203)(4,109)(6,234)445Interest Expense6,7776,7735,1303,440Other Income (Expense)1,143(1,232)(409)Asset Impairments*4,7587,564Earnings Before Income Tax Provision(6,980)(9,739)(17,354)(10,968)Income Tax Provision (Benefit) @ 36% tax rate(2,513)(3,506)(6,247)(3,949)Net Earnings($4,467)($6,233)($11,106)($7,020)

* Costs associated with the shut down of plants

Exhibit 2

Consolidated Balance Sheets for the Fiscal YearsEnding December, 31 1999-2002($ thousands)1999200020012002AssetsCash and cash equivalents$1,144$5,508$2,192$1,973Accounts receivable, net17,32211,66320,39026,068Inventories34,77833,15531,31333,278Other current assets2,7741,9227122,378Total Current Assets$56,018$52,247$54,608$63,697

Property and Equipment Land2,6542,5942,5162,505 Buildings32,72931,85930,30830,427 Machinery and equipment230,759220,615197,889190,410Gross PP&E266,142255,068230,713223,342Less accumulated depreciation(147,891)(147,104)(146,302)(154,658)Net PP&E118,250107,96484,41168,684Goodwill1,1801,1801,1801,180Other non-current assets3,5163,4992,8242,430Total Assets$178,965$164,890$143,023$135,991

LiabilitiesAccounts payable12,2367,6939,66710,835Accrued compensation and benefits 4,1483,7124,1764,730Accrued interest1,8301,090961929Other accrued expenses4,0833,9143,8813,657Current portion of long-term debt1,0091,73000Total Current Liabilities$23,306$18,139$18,685$20,151Long-term debt66,99166,99158,00058,000Other long-term liabilities16,56614,08111,77610,297Total Liabilities$106,863$99,211$88,461$88,448

Shareholder's equityCommon stock, par $0.0150505050Capital surplus15,86815,67815,66815,668Retained earnings56,18449,95138,84531,825Total Shareholders' Equity$72,102$65,679$54,563$47,543Total Liabilities and Shareholders' Equity$178,965$164,890$143,023$135,991

Exhibit 3

Plant Production CapabilityPlantTechnologyProduct MixCount RangeCapacityHunterRing100% Cotton5/1 to 22/1600,000RomeRotor100% Cotton5/1 to 22/11,200,000BartonRotorHeather and Poly/Cotton Blends8/1 to 30/1800,000ButlerRotor100% Cotton5/1 to 30/11,000,000

Exhibit 5Cost of Customer ReturnsExisting machineCalculationPrice of Yarn Sold$5.0Reimbursement cost$25.0Liability multiplier5.0(25/5)Returns as % of Volume1.50%Returns as % of Revenue7.50%(5 x 1.5%)Returns as cost/lb$0.077(7.5% x $1.0235/lb)

ZinserCalculationPrice of Yarn Sold$10.0Reimbursement cost$75.0Liability multiplier7.5(75/10)Returns as % of Volume1.00%Returns as % of Revenue7.50%(7.5 x 1.0%)Returns as cost/lb$0.084(7.5% x $1.0235/lb x 110%)

Exhibit 6MonthlySpot Price $ (contract size 50,000lbs)2 / 9774.053 / 9773.274 / 975 / 9770.016 / 9773.587 / 9771.818 / 979 / 9772.0510 / 9768.7511 / 9712 / 9767.411 / 982 / 9863.903 / 9865.644 / 9863.675 / 9863.006 / 9881.607 / 9881.938 / 989 / 9871.5210 / 9872.3211 / 9861.0012 / 9860.741 / 992 / 9963.393 / 9964.794 / 9959.425 / 9958.726 / 9949.907 / 9948.208 / 999 / 9951.1810 / 9949.4411 / 9949.8012 / 9948.531 / 002 / 0057.193 / 0059.314 / 0056.305 / 0056.646 / 0051.607 / 0050.458 / 009 / 0062.4510 / 0063.6011 / 0064.7212 / 0064.321 / 0159.302 / 0152.383 / 0153.544 / 0143.835 / 0144.336 / 0142.657 / 0140.618 / 019 / 0134.0010 / 0132.1911 / 0136.2312 / 0134.941 / 022 / 0234.653 / 0234.534 / 0233.805 / 0232.046 / 0243.777 / 0245.238 / 0245.109 / 0242.3010 / 0241.7911 / 0247.5012 / 0245.981 / 03

Exhibit 7Interest Rate Yields: January 2003U.S. Government (% yield)Treasury bill (1-year)1.24%Treasury note (10-year)3.98%Treasury bond (30-year)4.83%

Industrials (% yield)

Prime rate14.25%AAA (10-year)4.60%AA (10-year)4.66%A (10-year)4.87%BB (10-year)5.60%BBB (10-year)6.90%1The prime rate was the short-term interest rate charged by large U.S. banks for corporate clients with strong credit ratings.

AnalysisAssumptionsDiscount Rate = 10%Strategic issue:s:Volume growth2%2%2%2%2%2%2%2%2%2%Ten-year timelineSelling old machine in Mexico - do we still compete in that market?Inflation1%1%1%1%1%1%1%1%1%1%Zinser becoming widely used by U.S. yarn producers20022003200420052006200720082009201020112012Is Aurora able to remain in operation for 10 years?BAUYear 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Volume in units per week500,000510,000520,200530,604541,216552,040563,081574,343585,830597,546600,000maxI0 (Initial Investment) at time = 0BAUProposalWeeks in year5252525252525252525252none$8.05 MM for machine8.25MM capitalized costAnnual volume26,000,00026,520,00027,050,40027,591,40828,143,23628,706,10129,280,22329,865,82730,463,14431,072,40731,200,000$0.115MM structural alterationsPrice per unit1.02351.03371.04411.05451.06511.07571.08651.09731.10831.11941.1306$0.055MM airflow modificationDirect materials/unit0.45000.45450.45900.46360.46830.47300.47770.48250.48730.49220.4971$0.030MM testing costCost of returns (figure) per pound0.07700.07780.07850.07930.08010.08090.08170.08260.08340.08420.0851LESS: $0.5MM from sale of existing machineConversion costs excl returns0.35300.35650.36010.36370.36730.37100.37470.37850.38220.38610.3899LESS: $0.54MM tax savings because old machine sells below BV ([$0.5MM - $2.0MM]*36%)Revenue26,611,00027,414,65228,242,57529,095,50029,974,18530,879,40531,811,96332,772,68433,762,41934,782,04435,274,119PLUS: Training (expense :. after tax) = $0.05MM*(1-36%) = 32kTotal direct costs22,880,00023,570,97624,282,81925,016,16125,771,64926,549,95227,351,76128,177,78429,028,75329,905,42230,328,505Indirect costs, excl depreciation1,862,7701,919,0261,976,9802,036,6852,098,1932,161,5582,226,8372,294,0882,363,3692,434,7432,469,188TV (Terminal Value) at time = 10BAUProposalDepreciation500,000500,000500,000500,000500,0000.00.00.00.00.00.0none$0.1MM from sale of ZinserOperating Income1,368,2301,424,6511,482,7751,542,6551,604,3432,167,8942,233,3652,300,8122,370,2972,441,8802,476,426LESS: $0.036MM tax expense because Zinser sells above BV ([$0.1MM - $0.0MM]*36%)Tax rate36%36%36%36%36%36%36%36%36%36%36%NOPAT875,667911,776948,976987,2991,026,7801,387,4521,429,3531,472,5201,516,9901,562,8031,584,913Cash Flow ComponentsBAUProposaladd back Depreciation500,000500,000500,000500,000500,0000.00.00.00.00.00.0Volume in unitscurrently = 500,000 pounds/wk x 52 wks, max =600k pounds/wk5% lowerOCF1,375,6671,411,7761,448,9761,487,2991,526,7801,387,4521,429,3531,472,5201,516,9901,562,8031,584,913Annual growth in volume2%2%Days in inventory3030303030303030303030Annual inflation (costs & revenue)1%1%Inventory = COGS*(days/365): assumes FGI in inv1,880,547.951,937,340.491,995,8482,056,1232,118,2182,182,1882,248,0902,315,9822,385,9252,457,9802,492,754Price per unit$1.0235/pound10% higher :. 1.1*$1.0235 = 1.12585/poundReinvestment in operations (ST & LT)56,79358,50860,27562,09563,97065,90267,89269,94372,05534,774Revenuevolume x pricevolume x priceFCF1,354,9841,390,4681,427,0241,464,6851,323,4821,363,4511,404,6271,447,0471,490,7481,550,139Direct materials/unit$0.45/pound$0.45/poundConversion costs incl returns/unit$0.43/pound0.407/poundInventory = Mat'l Cost*(Days/365): assumes raw mat'l only961,643.84990,6851,020,6041,051,4261,083,1801,115,8921,149,5911,184,3091,220,0751,256,9221,274,704Cost of returns (figure) per pound0.0770.084Alt Reinvestment29,04229,91930,82231,75332,71233,70034,71835,76636,84617,782Conversion costs excl returns/unit0.353reduces $0.03/pound (maintenance & power) :. 0.323Alt FCF1,382,7351,419,0571,456,4771,495,0261,354,7401,395,6531,437,8021,481,2241,525,9571,567,130Total direct costsDM+ConvCost+Cost of returnsDM+ConvCost+Cost of returnsIndirect costs7% of revenue7% of revenueDepreciation2MM straightline for 4 years = 500,000straightline for 10 years, salvage = 0Operating IncomeRevenue - Dir Costs - Ind Costs - DepreciationRevenue - Dir Costs - Ind Costs - DepreciationVolume growth2%2%2%2%2%2%2%2%2%2%Tax rate36% stated36% statedInflation1%1%1%1%1%1%1%1%1%1%NOPATOpInc*(1-t)OpInc*(1-t)20022003200420052006200720082009201020112012add back Depreciation500,000825,000ZinserYear 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10OCFNOPAT+D&ANOPAT+D&AVolume in units per week484,500494,190504,074514,155524,438534,927545,626556,538567,669579,022Reinvestment in operations (ST & LT)increase in inverntory (see below)increase in inverntory (see below)Weeks in year52525252525252525252FCFOCF-ReinvestmentOCF-ReinvestmentAnnual volume25,194,00025,697,88026,211,83826,736,07427,270,79627,816,21228,372,53628,939,98729,518,78630,109,162Price per unit1.13711.14851.16001.17161.18331.19511.20711.21911.23131.2436Days in inventory3020Direct materials/unit0.45450.45900.46360.46830.47300.47770.48250.48730.49220.4971Days in inventory = 365 / (COGS/Average Inventory)Cost of returns (figure) per pound0.08400.08480.08570.08650.08740.08830.08920.09010.09100.0919Days*(COGS/AvgInv) = 365Conversion costs excl returns0.32300.32620.32950.33280.33610.33950.34290.34630.34980.3533COGS/AvgInv = 365/daysRevenue28,648,31229,513,49130,404,79831,323,02332,268,97833,243,50134,247,45535,281,72836,347,23637,444,923AvgInv/COGS = days/365Total direct costs21,704,63122,360,11123,035,38623,731,05524,447,73325,186,05425,946,67326,730,26327,537,51728,369,150AvgInv = COGS*(days/365)Indirect costs, excl depreciation2,005,3822,065,9442,128,3362,192,6122,258,8282,327,0452,397,3222,469,7212,544,3072,621,145Depreciation825,000825,000825,000825,000825,000825,000825,000825,000825,000825,000Operating Income4,113,2994,262,4354,416,0764,574,3564,737,4174,905,4025,078,4605,256,7455,440,4135,629,629Tax rate36%36%36%36%36%36%36%36%36%36%NOPAT2,632,5112,727,9592,826,2892,927,5883,031,9473,139,4573,250,2143,364,3173,481,8643,602,962add back Depreciation825,000825,000825,000825,000825,000825,000825,000825,000825,000825,000OCF3,457,5113,552,9593,651,2893,752,5883,856,9473,964,4574,075,2144,189,3174,306,8644,427,962Days in inventory20202020202020202020Inventory = COGS*(days/365): assumes FGI in inv1,880,5481,189,294.851,225,2121,262,2131,300,3321,339,6021,380,0581,421,7361,464,6721,508,9051,554,474Reinvestment in operations (ST & LT)(691,253)35,91737,00138,11939,27040,45641,67842,93644,23345,569FCF4,148,7643,517,0423,614,2873,714,4693,817,6773,924,0014,033,5374,146,3804,262,6314,382,393

Inventory = Mat'l Cost*(Days/365): assumes raw mat'l only961,644627,434.14646,383665,903686,014706,731728,075750,062772,714796,050820,091Alt Reinvestment(334,210)18,94919,52120,11020,71821,34321,98822,65223,33624,041Alt FCF3,791,7213,534,0103,631,7683,732,4783,836,2293,943,1144,053,2274,166,6654,283,5294,403,922BAU FCF1,354,9841,390,4681,427,0241,464,6851,323,4821,363,4511,404,6271,447,0471,490,7481,550,139Proposal FCF4,148,7643,517,0423,614,2873,714,4693,817,6773,924,0014,033,5374,146,3804,262,6314,382,393Incremental FCF2,793,7802,126,5742,187,2632,249,7852,494,1952,560,5502,628,9092,699,3332,771,8832,832,255Io7,242,000TV64,000Year012345678910CF to discount(7,242,000)2,793,7802,126,5742,187,2632,249,7852,494,1952,560,5502,628,9092,699,3332,771,8832,896,255Discounted value(7,242,000)2,539,8001,757,4991,643,3231,536,6331,548,6991,445,3641,349,0461,259,2591,175,5491,116,632NPV8,129,8038,129,803

Analysis (2)AssumptionsDiscount Rate = 10%Strategic issue:s:Volume growth2%2%2%2%2%2%2%2%2%2%Ten-year timelineSelling old machine in Mexico - do we still compete in that market?Inflation1%1%1%1%1%1%1%1%1%1%Zinser becoming widely used by U.S. yarn producers20022003200420052006200720082009201020112012Is Aurora able to remain in operation for 10 years?BAUYear 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Volume in units per week500,000510,000520,200530,604541,216552,040563,081574,343585,830597,546600,000.00maxI0 (Initial Investment) at time = 0BAUProposalWeeks in year5252525252525252525252none$8.05 MM for machine8.25MM capitalized costAnnual volume26,000,00026,520,00027,050,40027,591,40828,143,23628,706,10129,280,22329,865,82730,463,14431,072,40731,200,000$0.115MM structural alterationsPrice per unit1.02351.03371.04411.05451.06511.07571.08651.09731.10831.11941.1306$0.055MM airflow modificationDirect materials/unit0.45000.45450.45900.46360.46830.47300.47770.48250.48730.49220.4971$0.030MM testing costCost of returns (figure) per pound0.07700.07780.07850.07930.08010.08090.08170.08260.08340.08420.0851LESS: $0.5MM from sale of existing machineConversion costs excl returns0.35300.35650.36010.36370.36730.37100.37470.37850.38220.38610.3899LESS: $0.54MM tax savings because old machine sells below BV ([$0.5MM - $2.0MM]*36%)Revenue26,611,00027,414,65228,242,57529,095,50029,974,18530,879,40531,811,96332,772,68433,762,41934,782,04435,274,119PLUS: Training (expense :. after tax) = $0.05MM*(1-36%) = 32kTotal direct costs22,880,00023,570,97624,282,81925,016,16125,771,64926,549,95227,351,76128,177,78429,028,75329,905,42230,328,505Indirect costs, excl depreciation1,862,7701,919,0261,976,9802,036,6852,098,1932,161,5582,226,8372,294,0882,363,3692,434,7432,469,188TV (Terminal Value) at time = 10BAUProposalDepreciation500,000500,000500,000500,000500,0000.00.00.00.00.00.0none$0.1MM from sale of ZinserOperating Income1,368,2301,424,6511,482,7751,542,6551,604,3432,167,8942,233,3652,300,8122,370,2972,441,8802,476,426LESS: $0.036MM tax expense because Zinser sells above BV ([$0.1MM - $0.0MM]*36%)Tax rate36%36%36%36%36%36%36%36%36%36%36%NOPAT875,667911,776948,976987,2991,026,7801,387,4521,429,3531,472,5201,516,9901,562,8031,584,913Cash Flow ComponentsBAUProposaladd back Depreciation500,000500,000500,000500,000500,0000.00.00.00.00.00.0Volume in unitscurrently = 500,000 pounds/wk x 52 wks, max =600k pounds/wk5% lowerOCF1,375,6671,411,7761,448,9761,487,2991,526,7801,387,4521,429,3531,472,5201,516,9901,562,8031,584,913Annual growth in volume2%2%Days in inventory3030303030303030303030Annual inflation (costs & revenue)1%1%Inventory = COGS*(days/365): assumes FGI in inv1,880,5481,937,3401,995,8482,056,1232,118,2182,182,1882,248,0902,315,9822,385,9252,457,9802,492,754Price per unit$1.0235/pound10% higher :. 1.1*$1.0235 = 1.12585/poundReinvestment in operations (ST & LT)56,79358,50860,27562,09563,97065,90267,89269,94372,05534,774Revenuevolume x pricevolume x priceFCF1,354,9841,390,4681,427,0241,464,6851,323,4821,363,4511,404,6271,447,0471,490,7481,550,139Direct materials/unit$0.45/pound$0.45/poundConversion costs incl returns/unit$0.43/pound0.407/poundInventory = Mat'l Cost*(Days/365): assumes raw mat'l only961,644990,6851,020,6041,051,4261,083,1801,115,8921,149,5911,184,3091,220,0751,256,9221,274,704Cost of returns (figure) per pound0.0770.084Alt Reinvestment29,04229,91930,82231,75332,71233,70034,71835,76636,84617,782Conversion costs excl returns/unit0.353reduces $0.03/pound (maintenance & power) :. 0.323Alt FCF1,382,7351,419,0571,456,4771,495,0261,354,7401,395,6531,437,8021,481,2241,525,9571,567,130Total direct costsDM+ConvCost+Cost of returnsDM+ConvCost+Cost of returnsIndirect costs7% of revenue7% of revenueDepreciation2MM straightline for 4 years = 500,000straightline for 10 years, salvage = 0Operating IncomeRevenue - Dir Costs - Ind Costs - DepreciationRevenue - Dir Costs - Ind Costs - DepreciationVolume growth2%2%2%2%2%2%2%2%2%2%Tax rate36% stated36% statedInflation1%1%1%1%1%1%1%1%1%1%NOPATOpInc*(1-t)OpInc*(1-t)20022003200420052006200720082009201020112012add back Depreciation500,000825,000ZinserYear 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10OCFNOPAT+D&ANOPAT+D&AVolume in units per week484,500494,190504,074514,155524,438534,927545,626556,538567,669579,022Reinvestment in operations (ST & LT)increase in inverntory (see below)increase in inverntory (see below)Weeks in year52525252525252525252FCFOCF-ReinvestmentOCF-ReinvestmentAnnual volume25,194,00025,697,88026,211,83826,736,07427,270,79627,816,21228,372,53628,939,98729,518,78630,109,162Price per unit1.13711.14851.16001.17161.18331.19511.20711.21911.23131.2436Days in inventory3020Direct materials/unit0.45450.45900.46360.46830.47300.47770.48250.48730.49220.4971Days in inventory = 365 / (COGS/Average Inventory)Cost of returns (figure) per pound0.08400.08480.08570.08650.08740.08830.08920.09010.09100.0919Days*(COGS/AvgInv) = 365Conversion costs excl returns0.32300.32620.32950.33280.33610.33950.34290.34630.34980.3533COGS/AvgInv = 365/daysRevenue28,648,31229,513,49130,404,79831,323,02332,268,97833,243,50134,247,45535,281,72836,347,23637,444,923AvgInv/COGS = days/365Total direct costs21,704,63122,360,11123,035,38623,731,05524,447,73325,186,05425,946,67326,730,26327,537,51728,369,150AvgInv = COGS*(days/365)Indirect costs, excl depreciation2,005,3822,065,9442,128,3362,192,6122,258,8282,327,0452,397,3222,469,7212,544,3072,621,145Depreciation825,000825,000825,000825,000825,000825,000825,000825,000825,000825,000Operating Income4,113,2994,262,4354,416,0764,574,3564,737,4174,905,4025,078,4605,256,7455,440,4135,629,629Tax rate36%36%36%36%36%36%36%36%36%36%NOPAT2,632,5112,727,9592,826,2892,927,5883,031,9473,139,4573,250,2143,364,3173,481,8643,602,962add back Depreciation825,000825,000825,000825,000825,000825,000825,000825,000825,000825,000OCF3,457,5113,552,9593,651,2893,752,5883,856,9473,964,4574,075,2144,189,3174,306,8644,427,962Days in inventory20202020202020202020Inventory = COGS*(days/365): assumes FGI in inv1,880,5481,189,2951,225,2121,262,2131,300,3321,339,6021,380,0581,421,7361,464,6721,508,9051,554,474Reinvestment in operations (ST & LT)(691,253)35,91737,00138,11939,27040,45641,67842,93644,23345,569FCF4,148,7643,517,0423,614,2873,714,4693,817,6773,924,0014,033,5374,146,3804,262,6314,382,393

Inventory = Mat'l Cost*(Days/365): assumes raw mat'l only961,644627,434646,383665,903686,014706,731728,075750,062772,714796,050820,091Alt Reinvestment(334,210)18,94919,52120,11020,71821,34321,98822,65223,33624,041Alt FCF3,791,7213,534,0103,631,7683,732,4783,836,2293,943,1144,053,2274,166,6654,283,5294,403,922BAU FCF1,382,7351,419,0571,456,4771,495,0261,354,7401,395,6531,437,8021,481,2241,525,9571,567,130Proposal FCF3,791,7213,534,0103,631,7683,732,4783,836,2293,943,1144,053,2274,166,6654,283,5294,403,922Incremental FCF2,408,9862,114,9532,175,2912,237,4512,481,4892,547,4612,615,4252,685,4412,757,5722,836,791Io7,242,000TV64,000Year012345678910CF to discount(7,242,000)2,408,9862,114,9532,175,2912,237,4512,481,4892,547,4612,615,4252,685,4412,757,5722,900,791Discounted value(7,242,000)2,189,9871,747,8951,634,3281,528,2091,540,8091,437,9751,342,1261,252,7781,169,4801,118,381NPV7,719,9697,719,969