To our shareholders:
As
you know, calendar year 2008 was a challenging year for many industries, unless
you were selling mattresses to hide your currency reserves under, doomsday
shelters, guns, water purifiers, or oddly enough, toaster ovens. Concordia
Corporation Ltd is in none of those sectors; instead, as you of course know, we
are a purveyor of fine artisanal carbonated beverages. Our main competitors are
the mass-market holdings of the Coca-Cola Company, PepsiCo, and the Doctor
Pepper Snapple Group. We exist in a specialty niche with the likes of Jones
Soda Corp.
In
spite of the headwinds the larger economy poses, I feel that the company is
poised for growth unmatched in the company’s history. This is a time of fear,
and as Warren Buffet says, the time to be greedy is when everyone else if
fearful. That is why in the current fiscal year we are making a huge marketing
push behind our flagship brand, Blamm!,
the low-calorie high energy thirst refresher that is known from Hollywood
Boulevard to Wall Street and all the Main Streets in between.
Though
we look to the future, this is a time for reflection on the highs and lows of
the previous year. In the following sections, I will assess the profitability;
performance and efficiency; resource use; liquidly; the financial stability and
solvency of Concordia Corporation Ltd. I will synthesize the all of these into
a general comment and conclusions based on the totality of these sections.
I: Profitability, Performance, and
Resource Use for the Stockholder
When
looking at the profitability of a company, it is too easy to look at the top
line number. So, when you look at the gross sales from 2009 on the income
statement (Fig 2), and you see that we brought in less in fiscal 2009 than we
did ($68800 in 2009 compared to $73500 in 2008). However, we were able to
almost double our net income by taking an extraordinary after tax income of
4800 where we had an after tax loss the previous fiscal year of $1000. This
boosted our net income to $8860 for the fiscal year.
There
are other ways to look at our profit, which show the strength of the company.
For example, our gross margin percentage, which is a comparison of the net
sales and the profit after the cost of goods sold has increased over Fiscal
2008 and even compared to Fiscal 2007. We have been able to do so mainly be
decreasing the cost of goods sold by negotiation of favorable terms with our
bottlers, and intelligent speculation on the corn futures market. Corn sugar
makes up 60% of the overall materials cost of Blamm! and a similar amount of our other branded products. These
two actions have allowed Concordia to see a 12% drop in materials cost in the
last two years (fig 5) and growing our gross margin ratio to 44.56 %, in line
with industry averages.
Unfortunately,
the gross margin is not all profit, and we cannot just return all that money to
shareholders as dividends nor can we invest it to grow the company. All the
expenses have to come out of that margin: selling, administrative,
depreciation, interest, and taxes have to be paid. The good news is that, as we
spoke above, we were able to clear a profit in spite of the economy, and even
have a greater profit margin than our competitors, clearing 12.87% of our gross
sales as profit for the company and our shareholders. This compared to an
industry average in 2009 of an 8.5% margin, so we beat out the industry by
almost half again of their margin, in spite of the larger players ability to
negotiate with suppliers (fig 12).
Likewise,
with our net income, many of the other metrics of our profitability have
increased in the past year compared to 2008, but it is necessary to point out
that in terms of net income, 2008 was an anomaly, with net income lowered
rather than raised with after-tax extraordinary charges. Perhaps can go even
further back in time and compare the 2009 growth and growth potential with
periods before the recession beginning. Green shoots already are sprouting that
the recovery will be swift and painless, the financial crash of 2008 forgotten
in memory like the Eisenhower Recession of 1958. The recovery summer is
beginning, so let us look briefly at our return on assets. We have increased
our net income, with interest payments (net of taxes) added back in as a ratio
to total assets compared to 2008 (fig 12), but compared to 2007 we have
actually decreased our income as a percentage of assets. That is troubling, and
it is a trend to watch, but it is a place where we see we can gain
efficiencies. If we can pare back the size of our balance sheet as we have this
past year, mostly by the sale of land and securities (fig 10), we will be able
to maximize the return on assets even with a comparable net income.
The
final part to look at our profitability is our shareholders. We want to give
back as much as possible to the owners of the company as possible. We have not
been the best at that as we could be. The dividend yield ratio, a comparison of
how much is given back to the shareholders in terms of the share price and the
shares outstanding has slipped to just less than 2% compared to just less than
3% in 2007 (fig 12). A lot of the decline is based on the rise in the share
price in the last two years, as it has increased from fifteen dollars to
twenty-five dollars on the open market, and the dividend yield and the share
price are inversely correlated. Another troubling issue concerning our
investors is that the both the book value and the earnings per share have been
shrinking, even with the perceived raise of 2009 over 2008. The good news is
that company remains profitable and has increased total dividends per share
even over 2007 levels. This is a pattern our shareholders can expect to
continue as we grow in profitability and shrink the balance sheet.
II: Liquidity Analysis for the
Short Term Creditor
Our
short-term creditors can be assured that our liquidity is growing in strength.
Our long term-debt positions have decreased 24% in the last four years (fig 4),
keeping our interest expenses in check. This decrease in liabilities has
allowed our working capital to grow from negative $93200 to a positive $69400
in the last three years. This swing from a negative working capital to a
positive working capital means that the value of our current assets have
surpassed the value or our current liabilities. It also means that the current
ratio, a comparison between these two figures has gone from less than one to
more than one, showing that we finally have a surplus of fairly liquid assets.
Of note is that the competition in our industry has consistently had a current
ratio larger than we have had on hand, where the current assets are twice
liabilities (fig 4). In our case, this is based on the larger amount of debt we
carry relative to equities, and less on the amount of assets we have on hand.
At
issue with the current asset structure is our reliance on accounts receivable.
From a look at the common-size balance sheet (fig 10), it is easy to say that
A/R is one of the largest asset classes we have. In fact, it is almost half the
size of our net sales as a consistent A/R turnover ratio around two would
indicate. This means either that we are giving too much leeway in terms of the
sales of our products, or that we need to be more aggressive in our collections
tactics of outstanding debt. This over-reliance on receivables as a large part
of our current assets may inflate what we see as the cash position in the
current ratio. Instead, it may show a bit of trouble since the quick, or
acid-test ratio consistently being below one means that we are not as flexible
short-term because a lot of our assets are in short-term debt that we have to
collect from our customers. This is another position where we can improve and
grow, as we can see that while we are taking 192 days to clear our receivable,
the industry average is almost six months less than we are achieving (fig 12).
Once we are able to make that change and rely less on A/R, we will have more
cash on hand and thus a better liquidity position. A related issue is that we
are not selling our inventory fast enough. We have traditionally turned over
our inventory slower than our competition. This means that it could be out
there being sold more even if we just raise the rate of sales. This will be
hopefully be addressed in the coming year with the previously spoken of
marketing push for Blamm!, so that we
are not sitting on unproductive assets.
III: Solvency Analysis for the Long
Term Creditor
In
2006, we expanded our balance sheet by issuing notes to fund the construction
of our headquarters in River Forest, Illinois. These long-term notes funded the
total cost of $38000 (with construction capitalized). This action had the
effect of increasing our long-term debt over the prior year infinitely. Since
that time, we have been diligent in paying off these liabilities. The long-term
debt in that time has decreased from 19% to 15% of our total debt and equity
position of the balance sheet (fig 10). In real terms, that is a non-inflation
adjusted decrease of $7000. The consequence of this borrowing for the long-term
creditor is that it massively increased our debt to equity level. Our current
level of 83% is much higher than the industry average of 30%. Though we are
paying that down over time, it remains one of the larger fractions of the same
size balance sheet. We have rolled it
over to new bonds at a much lower rate than we were able to obtain in 2006. Though
we have little faith that this current low interest rate environment will
remain much beyond 2010, funding expansion with debt meant we did not have to
dilute the pool of shares issued to build our headquarters, keeping up
dividends per share.
IV: Concluding Remarks
We
remain confident that the crisis of 2008 was just a blip in our earnings and
the larger economy. We remain on a growth path, and look to the years prior to
fiscal 2008 as our trend lines. Based on the preceding discussion, Concordia
Corporation Ltd has three pointed goals that we need to work on for fiscal
2010.
The
first goal is sales growth. As stated above, we are making a major push to
position Blamm! as an everyday drink
and not just a specialty soda. This will take marketing dollars, but it should
also increase both gross sales and net income.
The
second goal is increasing turnover in both inventory and our accounts receivable.
They lag the industry average and negatively affect our liquidity positions.
They are also non-productive assets. We would rather invest the cash where we
can seek yield and not in our warehouses or our customer’s pockets. On that
front, we are making major efforts on making collections more efficient and in
our just-in-time manufacturing. Most of our inventory is in raw materials, and
we need to coordinate with our suppliers so those assets are used smarter.
Finally,
we want to return more to our shareholders. To accomplish this goal, we have a
two-part plan. First, we are increasing the dividend, as we have
year-over-year; we also have plan to buy back a quarter of outstanding shares,
so that our industry-beating earnings per share as well as the market price per
share will increase.
With pride in the
Concordia Corporation Ltd mission, and an eye for new opportunities, we feel
that these specific actions will help grow our company’s growth and position it
as a leader in the industry| Concordia Corporation Ltd | ||||||
| Balance Sheet | ||||||
| 2006 | 2007 | 2008 | 2009 | |||
| Cash at Bank | $ 11,100.00 | $ 11,600.00 | $ 16,700.00 | $ 10,300.00 | ||
| Cash on Hand | $ 400.00 | $ 400.00 | $ 600.00 | $ 600.00 | ||
| Marketable Securities | $ 12,800.00 | $ 4,300.00 | $ 10,900.00 | $ - | ||
| Accounts Receivable | $ 20,400.00 | $ 37,800.00 | $ 35,000.00 | $ 37,400.00 | ||
| Inventory | $ 11,280.00 | $ 11,300.00 | $ 11,240.00 | $ 11,100.00 | ||
| Prepayments | $ 4,720.00 | $ 4,370.00 | $ 4,560.00 | $ 4,850.00 | ||
| Plant (Net) | $ 15,000.00 | $ 18,000.00 | $ 19,000.00 | $ 21,000.00 | ||
| Land | $ 40,000.00 | $ 40,000.00 | $ 40,000.00 | $ 30,000.00 | ||
| Buildings (Net) | $ 70,000.00 | $ 64,000.00 | $ 54,400.00 | $ 60,400.00 | ||
| Patents | $ 12,000.00 | $ 11,600.00 | $ 13,200.00 | $ 13,300.00 | ||
| Goodwill | $ 2,000.00 | $ 1,600.00 | $ 1,200.00 | $ 800.00 | ||
| Total | $ 199,700.00 | $ 204,970.00 | $ 206,800.00 | $ 189,750.00 | ||
| Liabilities | ||||||
| Accounts Payable | $ 46,400.00 | $ 52,890.00 | $ 49,270.00 | $ 35,210.00 | ||
| Bills Payable | $ 18,000.00 | $ 18,000.00 | $ 8,000.00 | $ 11,000.00 | ||
| Wages Payable | $ 7,800.00 | $ 4,800.00 | $ 9,900.00 | $ 8,400.00 | ||
| Income Tax Payable | $ 5,500.00 | $ 3,400.00 | $ 3,600.00 | $ 2,700.00 | ||
| Debentures (Long Term Debt) | $ 38,000.00 | $ 32,200.00 | $ 39,000.00 | $ 29,000.00 | ||
| Equity | ||||||
| Paid up Capital ($1 shares) | $ 56,000.00 | $ 56,000.00 | $ 56,000.00 | $ 56,000.00 | ||
| Share Premium Reserve | $ 6,000.00 | $ 6,000.00 | $ 6,000.00 | $ 6,000.00 | ||
| Retained Profits | $ 22,000.00 | $ 31,680.00 | $ 35,030.00 | $ 41,440.00 | ||
| Total | $ 199,700.00 | $ 204,970.00 | $ 206,800.00 | $ 189,750.00 | ||
| Concordia Corporation Ltd | ||||||||||
| Income Statement | ||||||||||
| Year Ending June 30th 2009 | ||||||||||
| 2007 | 2008 | 2009 | ||||||||
| Operating Revenue | $ 71,200.00 | $ 73,500.00 | $ 68,800.00 | |||||||
| Cost of Goods Sold | ||||||||||
| Opening Inventory | $ 11,280.00 | $ 11,300.00 | $ 11,240.00 | |||||||
| Purchases | $ 43,000.00 | $ 45,200.00 | $ 38,000.00 | |||||||
| $ 54,280.00 | $ 56,500.00 | $ 49,240.00 | ||||||||
| Closing inventory | $ 11,300.00 | $ 11,240.00 | $ 11,100.00 | |||||||
| Cost of Goods Sold | $ 42,980.00 | $ 45,260.00 | $ 38,140.00 | |||||||
| Gross Profit | $ 28,220.00 | $ 28,240.00 | $ 30,660.00 | |||||||
| Expenses | ||||||||||
| Selling | $ 6,800.00 | $ 8,200.00 | $ 9,900.00 | |||||||
| Administrative | $ 3,400.00 | $ 3,400.00 | $ 6,000.00 | |||||||
| Depreciation | $ 6,500.00 | $ 5,000.00 | $ 5,000.00 | |||||||
| Interest | $ 3,000.00 | $ 2,500.00 | $ 3,000.00 | |||||||
| $ 19,700.00 | $ 19,100.00 | $ 23,900.00 | ||||||||
| Operating profit before income tax | $ 8,520.00 | $ 9,140.00 | $ 6,760.00 | |||||||
| Income Tax Expense | $ 3,400.00 | $ 3,600.00 | $ 2,700.00 | |||||||
| Operating profit after income tax | $ 5,120.00 | $ 5,540.00 | $ 4,060.00 | |||||||
| Extraordinary items (after tax) | $ 6,800.00 | $ (1,000.00) | $ 4,800.00 | |||||||
| Operating profit after tax and ext. items | $ 11,920.00 | $ 4,540.00 | $ 8,860.00 | |||||||
| Retained Profits at 1 July | $ 22,000.00 | $ 31,680.00 | $ 35,030.00 | |||||||
| $ 33,920.00 | $ 36,220.00 | $ 43,890.00 | ||||||||
| Dividends Paid (All Common) | $ 2,240.00 | $ 1,190.00 | $ 2,450.00 | |||||||
| Retained Profits at 30 June | $ 31,680.00 | $ 35,030.00 | $ 41,440.00 | |||||||
| Ratio Analysis | |||||||||||
| Concordia Corporation LLC | Industry Average | ||||||||||
| 2007 | 2008 | 2009 | 2007 | 2008 | 2009 | ||||||
| The Common Stockholder | |||||||||||
| Earnings Per Share | $ 2.38 | $ 0.91 | $ 1.77 | $ 0.60 | $ 0.60 | $ 0.62 | |||||
| Gross Margin Percentage | 39.63% | 38.42% | 44.56% | ||||||||
| Price-earnings Ratio | 6.292 | 22.026 | 14.108 | ||||||||
| Dividend Payout | $ 0.19 | $ 0.26 | $ 0.28 | ||||||||
| Dividend Yield Ratio | 2.99% | 1.19% | 1.96% | ||||||||
| Return on Total Assets | 6.78% | 2.93% | 5.38% | ||||||||
| Return on Common Shareholder's Equity | 13.42% | 4.76% | 8.84% | 11% | 12% | 11% | |||||
| Book Value Per Share | $ 18.74 | $ 19.41 | $ 20.69 | ||||||||
| Profit Margin | 16.74% | 6.18% | 12.87% | 6.50% | 8.50% | 8.50% | |||||
| The Short Term Creditor | |||||||||||
| Working Capital | $ (9,320.00) | $ 8,230.00 | $ 6,940.00 | ||||||||
| Current Ratio | 0.882 | 1.116 | 1.121 | 2.1 | 2.1 | 2.2 | |||||
| Acid Test Ratio | 0.684 | 0.893 | 0.843 | 0.9 | 1 | 0.9 | |||||
| A/R Turnover | 2.45 | 2.02 | 1.90 | ||||||||
| Average Collection Period | 149.18 | 180.76 | 192.05 | 125 | 124.5 | 125.3 | |||||
| Inventory Turnover | 3.81 | 4.02 | 3.41 | 6 | 5.6 | 6.2 | |||||
| Average Sales Period | 95.88 | 90.89 | 106.90 | ||||||||
| Long Term Creditor | |||||||||||
| Times Interest Earned Ratio | 6.107 | 4.256 | 4.853 | ||||||||
| Debt-to-Equity Ratio | 119% | 113% | 83% | 30% | 32% | 30% | |||||
