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2 Oneida, Ltd. June 25, 2004 Scott Abegg Jackie Connor Tiffani ...

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2 Oneida, Ltd. June 25, 2004 Scott Abegg Jackie Connor Tiffani ...

Oneida, Ltd.

    June 25, 2004

    Scott Abegg

    Jackie Connor

    Tiffani Panian Norma Lisa Tuttle

    Sarah Welch

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    Executive Summary

    Oneida, Ltd. is the world‟s largest manufacturer of stainless steel flatware. Oneida also markets a complete selection of dinnerware, glassware, and other tabletop accessories. Their products are sold in the following markets: consumer, food service, and international. Consumer service includes major retail accounts and direct sale programs. The food service market includes restaurants, airlines, health care facilities, schools and hotels. They operate in more 1than seventy-five countries worldwide in the international market.

    Oneida is currently facing challenging financial conditions. For the fiscal year ended January 31, 2004, Oneida experienced an overall net loss of $99,340,000. This loss was caused by an eight percent decrease in sales coupled with an increase in operating expenses. These expenses include selling, distribution, administrative, and restructuring expenses as well as impairment losses on depreciable assets and goodwill. Oneida has $304,792,000 of current 1liabilities which includes $223,214,000 of recently reclassified long-term debt.

    PricewaterhouseCoopers has decided not to continue as Oneida‟s auditor, and the NYSE has 2dropped Oneida forcing their stock to be traded over the counter.

    Economic and environmental conditions are also affecting Oneida‟s financial position. Terrorist attacks, war, economic recession, and the SARS epidemic are a few examples of these conditions. Due to the decline in travel, hotels, restaurants, and airlines have had to cut back on their tableware orders. Consumer spending also decreased causing retail outlets to diminish their 1product orders.

    Oneida is engaged in several current efforts to revitalize the company. They have closed several manufacturing facilities, eliminated many employees, and are pursuing a lean manufacturing initiative in their remaining plant. Along with the closures, Oneida is redirecting their strategy from manufacturing to sourcing. They are also having ongoing discussions with 1banks attempting to negotiate new debt agreements.

    We have two independent recommendations Oneida can use to improve the financial position of their company. Our first recommendation is to sell the manufacturing facility in Sherrill, New York. The proceeds from the sale should be used to eliminate a portion of the debt. Additional cost savings from the sale of the plant should be used to further research and development.

    Our second recommendation is to participate in a highly leveraged merger. This merger will allow Oneida to consolidate with a more profitable firm within the industry and allow them to use both companies‟ cash flows to help pay off the debt. Another company would benefit

    from Oneida‟s brand name and market share.

    While these recommendations will not completely diminish Oneida‟s financial difficulties, they will put Oneida in a better position to continue in the marketplace.

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    Proposal

    Oneida Ltd. is one of the world‟s largest manufacturers and marketers of tableware. They manufacture metalware, glassware, dinnerware, and tabletop accessories. They engage in the foodservice, consumer, and international markets. Oneida‟s business has recently declined

    due to environmental factors affecting the markets such as war and terrorists, the SARS epidemic, and the current recession of the U.S. economy. They have also experienced internal business

    1problems including a decrease in sales, rising costs, liquidity issues, and expansive debt.

     Recently, Oneida has experienced a decrease in sales. Revenues for the fiscal year ended January 31, 2004, were $452,975,000. This amount was down approximately 8% from the prior year‟s net sales of $491,875,000 (Appendix B). In addition to the decrease in sales, Oneida has experienced an increase in sales and administrative expenses, including restructuring expenses,

    1an impairment loss on assets, and an impairment loss on goodwill. The company‟s auditor,

    PricewaterhouseCoopers, issued a statement in April 2004 raising doubts as to the company‟s ability to continue as a going concern. Furthermore, as of May 2004, PwC declined to continue as Oneida‟s auditor. The New York Stock Exchange suspended trading of Oneida stock because

    the company fell below qualifying standards for 30 consecutive trading days. The NYSE‟s

    decision was also influenced by PwC‟s going concern statement. Oneida‟s stock is currently

    2being traded over the counter.

     Oneida‟s goal in restructuring is to provide a broad range of tableware products by

    focusing less on manufacturing and more on sourcing. Due to the restructuring plans of Oneida, the company had to sell most of the manufacturing plants in an effort to cut costs. Plants have been closed in Canada, Mexico, Italy, China, and Buffalo, New York. Currently, Oneida

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    operates one manufacturing plant in Sherrill, New York. This manufacturing plant produces

    1some of the company‟s highest-end flatware as well as moderately priced flatware.

     One of the major problems Oneida faces is its debt. They have been in violation of numerous covenants including leverage ratio, interest coverage ratio, and net worth covenants since October 25, 2003. The violation of these covenants has caused Oneida to reclassify all the outstanding debt as current, allowing creditors to demand immediate payment of the principal. Oneida has $223,214,000 of long-term debt recently reclassified as current debt. The total current liabilities are $304,792,000. Creditors have given Oneida waivers for credit extension

    3until July 15, 2004. Currently, Oneida is in the process of requesting amendments to the credit agreements that will restructure the financial agreements to contain more reasonable terms. If new terms cannot be reached, the company will continue to default on their loans, possibly

    1leading to the liquidation or bankruptcy of the firm.

    Recommendation One: Sell Sherrill Plant

    Our first recommendation for Oneida is to sell the Sherrill, New York manufacturing plant. The main goal under Oneida‟s current restructuring plan is to move the focus of operations from manufacturing products themselves to sourcing products through lower-cost producers. Oneida has recently closed and/or sold a majority of their manufacturing plants as part of their initiative to return to profitability, increase liquidity, and compete in the marketplace. The company hopes this redirection will allow them to become a more diverse supplier of

    1tableware products.

    The manufacturing plant in Sherrill, New York is the only plant that Oneida still operates. The existence of this plant appears to contradict the company‟s strategic objective of sourcing

    products. The main point of outsourcing is to reduce costs, but Oneida has retained this factory

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    that continues to use capital resources inefficiently. Oneida must cut plant costs of $18,000,000

    4this year in order to avoid closure of the Sherrill plant. According to Peter J. Kallet, Oneida

    Chairman and CEO, “…we must emphasize the need for the Sherrill factory to achieve greater

    5cost reductions in order to remain in operation.” We do not believe that Oneida is fully

    implementing its outsourcing strategy by maintaining a manufacturing facility.

    Operating only one plant reduces the benefits of economies of scale provided when there are multiple facilities. Having economies of scale allows the company to benefit from ordering large quantities of raw materials at a lower price. One facility will not reap the benefit of quantity discounts.

    Oneida believes that product diversity, design, and innovation are factors that will allow them to maintain a competitive market position. To place emphasis on the excellence in development and design of their products, Oneida maintains in-house design and engineering

    1departments and collaborates with other manufacturers and independent designers. However,

    according to prior years‟ financial reports, Oneida has not spent material amounts on research and development. Oneida needs innovative designs; therefore, we believe that they should use the proceeds from the Sherrill plant to further research and development efforts.

    The company also needs to use the proceeds from the sale of the Sherrill, New York manufacturing facility to pay off a portion of the current debt. We could not obtain an exact figure for the value of the manufacturing facility since Oneida does not release financial information on each of its individual facilities. We believe it to be worth a substantial amount of money because of its square footage compared to the other facilities (Appendix C). We believe this plant could also be valuable because it produces the highest-end and moderately priced flatware.

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    Recommendation Two: Leveraged Merger

     Our second recommendation is to engage in a highly leveraged merger with a company in a similar industry. We suggest a company in a similar industry because of improvements in the

    6travel and food service industries. Other companies in the industry are performing well while

    Oneida has a continued lack of financial success (Appendix E). Some of Oneida‟s main

    strengths are market share and name recognition. According to The Associated Press, “Analysts say, „Oneida, Ltd. has some redeeming qualities that can help save it. The company still commands nearly 50% of the market share in the food service industry, and its sales of $450

    7million though down reflect its continued popularity with consumers.‟” Sales in the first

    quarter of the 2004 fiscal year are $110.6 million, which is $3.6 million higher than sales during

    1the same period last year.

     Due to these redeeming qualities, we believe Oneida could put itself in a position to participate in a highly leveraged merger with a company in their industry. In this merger, the

    8buying company will finance the purchase price with debt, using Oneida‟s assets as collateral.

    Oneida‟s assets currently have a book value of $441,501,000, which should supply significant

    1collateral for the merging company (Appendix D).

     The merger provides many benefits to both the buying company and Oneida. Using debt as opposed to equity is a cheaper method of financing a merger. Financing through equity is more expensive because it carries more risk since the stockholders have no claim on the

    8company‟s assets. Once the companies merge, they will consolidate their liabilities and will be

    9able to use the cash flows from both companies to payoff the debt.

    The companies create an operating synergy upon consolidation. They will obtain the benefits of economies of scale because they will have larger operations and will be able to

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    9purchase large quantities of inventory at discounted prices. In addition, the company that

    acquires Oneida will be able to use Oneida‟s brand recognition to increase sales.

    The company merging with Oneida will receive tax benefits that are provided by the deductibility of interest payments on the company‟s debt. Since the merging company will be

    paying off Oneida‟s existing debt and the newly issued debt, these interest payments will result

    9in tax savings.

    Another benefit of the merger is the decrease in reinvestment risk. Reinvestment risk is the risk that management will take surplus cash flows and invest them in unprofitable or underperforming projects. Therefore, by having a larger amount of debt, managers are forced to

    9use surplus cash flows to pay back debt. As we learned in the “Agency” lecture, this debt keeps

    management from wasting surplus cash and keeps management on its toes.

     The two recommendations previously discussed are independent of each other. The first recommendation of selling the manufacturing facility will not coincide with the second recommendation, which requires a merging company to utilize Oneida‟s assets for collateral. We believe that either option would help Oneida achieve a better financial position.

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    Works Cited

    1. Oneida Ltd. Annual Report 2004.

    2. “Oneida‟s Stock Delisted; Auditor Quits; Flatware Maker Falls Below NYSE Standards.

    Stock Trades Over the Counter.” The Post-Standard. Syracuse, New York; May 12,

    2004.

    3. “Oneida Ltd. Gets Another Debt Repayment Extension.” The Associated Press State & Local

    Wire. June 16, 2004.

    4. “Oneida Gains Extension on Loan Payment; Company Works with Lenders on

    Recapitalization, Misses Payment to Pension Plan.” The Post-Standard. Syracuse, New

    York; June 16, 2004.

    5. “Oneida Reports Sales Increase in Financial Results for First Quarter Ended May 1, 2004;

    Business Restructuring Results in Cost Savings.” PrimeZone Media Network. May 26,

    2004.

    6. Libbey Inc. Annual Report 2004.

    7. “From Utopia to Despair, Oneida Ltd. Struggles to Survive.” The Associated Press State &

    Local Wire. May 12, 2004.

    8. “Acquisition Financing.” American Capital. www.americancapital.com.

    rd9. Chew, Jr., Donald H. The New Corporate Finance: Where Theory Meets Practice. 3 ed.

    McGraw-Hill: 2001; 529-535.

    10. http://finance.yahoo.com.

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    Appendix A

    Company Overview

     Oneida Ltd. is one of the world‟s largest stainless steel and silver-plated flatware

    manufacturers and distributors. The company originated in New York in the late 1800s. Initially, the company focused its manufacturing efforts around silver-plated, sterling, and stainless steel flatware. However, throughout the years Oneida has expanded its product line to include tableware, kitchenware, glassware, and other gift items. Recently, the company has made further changes, redirecting the firm‟s focus from manufacturing to sourcing. In addition to manufacturing, the company purchases products from domestic and international manufacturing

    1facilities and then markets and sells these products to retail distributors throughout the world.

     Facilities: In the past, Oneida has had domestic and international manufacturing and marketing facilities. Since 1999, the company has closed facilities in Canada, Mexico, Italy, China, and the United States. These closures are based on Oneida‟s strategy to eliminate unproductive and inefficient manufacturing facilities. The company‟s remaining manufacturing plant is located in Sherrill, New York. In an effort to cut costs, the firm is implementing a lean

    1manufacturing system in the Sherrill facility.

     Employees: Because of restructuring, Oneida planned to lay off approximately 1,150 employees. As of April 1, 2004, Oneida had close to 2,035 employees worldwide. At the end of

    1fiscal year 2003, 772 employees were scheduled to be terminated.

     Industry: There are several environmental conditions that have affected the industry this year. These factors include a sluggish U.S. economy, changes in national and international political conditions, war and terrorist attacks, staggering gas prices, SARS epidemic, and major

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    1slowdowns in the retail, travel, and entertainment industries. Primary competitors are Libbey,

    10Waterford, Brown-Forman, and Mikasa.

     Customers and Suppliers: Oneida targets both individual consumers and foodservice clients. Oneida reaches its individual consumers by selling products through retail stores, department stores, specialty shops, and discount chains. Oneida also reaches their consumers through a chain of 58 individual outlet stores called Oneida Home operated by Kenwood Silver Company. Oneida provides products to foodservice clients such as restaurants, hotels, airlines, and educational institutions. Oneida has outsourced many of its operations to several domestic

    1and international suppliers.

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