{"id":164,"date":"2011-01-05T18:54:50","date_gmt":"2011-01-05T18:54:50","guid":{"rendered":"http:\/\/www.department99.com\/bobamter\/?page_id=164"},"modified":"2015-08-14T16:38:29","modified_gmt":"2015-08-14T16:38:29","slug":"case-study-pacific-aerospace-electronics-inc","status":"publish","type":"page","link":"https:\/\/bobamter.com\/?page_id=164","title":{"rendered":"Case Study: Pacific Aerospace & Electronics Inc."},"content":{"rendered":"

Pacific Aerospace & Electronics Inc., <\/em><\/h2>\n

Wenatchee, WA<\/em><\/h2>\n


\n<\/em><\/p>\n

Situation:<\/strong><\/p>\n

$95 million in sales Pacific has six aerospace product manufacturing businesses.\u00a0 Three are its basic core and tightly related.\u00a0 Three are completely unrelated to core:<\/p>\n

Core Businesses:<\/p>\n

Hermetic connectors and enclosures.
\nElectromagnetic, ceramic filters.
\nMetallurgical bonding and fusing.<\/p>\n

Non-Core Businesses:<\/p>\n

Aircraft parts machining.
\nAerospace design engineering service.
\nNon-light reflective LCD glass display converter.<\/p>\n

Pacific ran into serious cash flow problems.\u00a0 Its majority subordinated bondholder was GSC Partners.\u00a0 Retained by GSC to evaluate Pacific, determine operational improvements and pro form the financial statements.<\/p>\n

Positives:<\/strong><\/p>\n

\u00bb Competent division management at first and second tier.\u00a0 Largely highly knowledgeable, well educated, motivated and relatively long-tenure employees.\u00a0 Controller is very capable and should be considered as Chief Financial Officer.<\/p>\n

\u00bb Interconnect and Filter businesses are solid with potential for profitable sales growth.<\/p>\n

Negatives:<\/strong><\/p>\n

\u00bb Chief Executive Officer.<\/em> Not capable or not interested in working as an operating CEO of a manufacturing company.\u00a0 An undisciplined dreamer who does not have the ability to hold disciplined strategic and operating focus.\u00a0 Within a short period of time after the change of control, will lead Pacific into trouble again.<\/p>\n

\u00bb Chief Operating Officer.<\/em> A $95 million in sales company does not need a COO.\u00a0 Was appointed in 1999 to improve Pacific\u2019s operating results.\u00a0 Has not succeeded.<\/p>\n

\u00bb High Corporate and Division Overhead.<\/em> Corporate overhead is set for a company with sales above $200 million. Examples:<\/p>\n

    \n
  • General Counsel<\/li>\n
  • Legal Assistant,<\/li>\n
  • Assistant to the CEO,<\/li>\n
  • Environmental Coordinator,<\/li>\n
  • CEO\u2019s annual salary excessive at $416,000,<\/li>\n
  • Headquarters building costing $168,000 per year when office space is readily available in the nearby manufacturing buildings.<\/li>\n
  • An overhead concern: there are two Division General Managers of similar product line divisions with sales of approximately $20 million.\u00a0 Each general manager earns about $140,000 annually.<\/li>\n<\/ul>\n

    \u00bb No strategic focus.<\/em> Pacific\u2019s business plan is not a strategic plan.\u00a0 It\u2019s largely a description of Pacific.\u00a0 The company is going in too many directions at the same time.\u00a0 Knee jerk, opportunistic decision making has resulted in putting Pacific in unrelated, non-core, money losing and cash draining businesses.<\/p>\n

    \u00bb Poor organization.<\/em> There are no cost accountants and no manufacturing engineers in the company.\u00a0 These positions are essential for pricing and application of capital spending.\u00a0 There are too many small manufacturing operations without the economies of scale to absorb the overhead and produce acceptable profitability.<\/p>\n

    \u00bb Excess inventory. <\/em> Interconnect\u2019s net inventory totals $5.1 million and 28% of sales.\u00a0 Machining\u2019s net inventory totals $5.1 million and 33% of sales.\u00a0 These inventories are in excess by approximately $5.4 million.\u00a0 Inventory turns are a poor 3.<\/p>\n

    \u00bb Machining Division.\u00a0 Negatives:<\/em><\/p>\n

      \n
    • Low equipment utilization estimated at 50%.\u00a0 There is apparently a duplication of equipment with the Interconnect Division.\u00a0 The capital expenditure requirements for Machining include equipment that is in-place in the Interconnect plant.<\/li>\n
    • 87% of sales are to one customer, Boeing.\u00a0\u00a0 It is a commodity machining operation.\u00a0 Nothing is proprietary.\u00a0 There are thousands of machine shops exactly like this one in the USA.<\/li>\n
    • The burden rate is 300% and needs to be one-half of this to have competitive and profitable prices.<\/li>\n<\/ul>\n

      \u00bb Two businesses are not viable.<\/em> The Enhanced Display and Engineering Services Divisions are not viable and are not in Pacific\u2019s core.\u00a0 These are cash users and a drain.\u00a0 It is doubtful either division can be made profitable.<\/p>\n

      \u00bb Changing the well-recognized brand names.<\/em> Prior to Pacific\u2019s ownership the following were the companies brand names: Interconnect was Pacific Coast Technologies (PCT), Filters was Ceramic Devices, Machining was Cashmere.<\/p>\n

        \n
      • These names were reportedly well regarded.\u00a0 Changing these names to Pacific was a mistake.\u00a0 It takes years for a company to be recognized in its field.\u00a0 The brand becomes a franchise and should not be changed if the company had a successful reputation.<\/li>\n<\/ul>\n

        Conclusions and Recommendations:<\/strong><\/p>\n

        \u00bb Close or sell the Enhanced Displays and Engineering Services Divisions.<\/em> These are not viable businesses and are a cash drain.\u00a0 First Quarter FY2002 EBITDA Loss for Enhanced Displays was $698,000.\u00a0 Engineering Services\u2019 loss was estimated at $255,000.<\/p>\n