Annual Report 2

THE A-TEAM

“Always Ahead”

ANDREWS INC. ANNUAL REPORT

“Always Ahead”

1

EXECUTIVE SUMMARY

Andrews Inc. is a company built on a two-pronged approach to success: 1) leveraging high margins to drive the

bottom line and investor returns, and 2) utilizing an appropriate amount of leverage to fund capital expenditures

and magnify returns for shareholders. We have taken a margin-focused approach to the computer sensor

industry, operating in three high-margin segments: high end, traditional, and low end.

We regret to report that our execution of this strategy in relation to our three key performance metrics – ROE,

contribution margins, and stock price – has underperformed the past few years; however, we believe that our

patience is paying off, and that our transition period, which was initiated in 2020, is finally coming to a close,

returning us to profitability next year in 2023. This transition took much longer than expected due to a variety of

complications: 1) We faced significant market contraction in 2020, which was when our new product, AhHa,

began its initial sales; 2) We faced customer preference drift rates that were far slower than our projections,

meaning our products were incorrectly positioned for a few years before customer preferences adjusted to where

we had positioned them; 3) We failed to take into account how long it would take to build customer awareness,

and therefore market share, when transitioning a product – Able – between segments; and 4) We failed to realize

that producing high MTBF products and maintaining a commitment to quality was simply not something that

customers valued or based buying decisions on in our target segments, and instead simply increased costs.

The end result of these headwinds was that our new product, AhHa, didn’t establish market share as fast as we

projected. This was a major problem for us, as we went from 26% traditional market share in 2019 to merely 8%

in 2020. Combine this with a strategic exit from the performance and size segments, and you can see why our

sales dropped significantly, and with them fell profits. Moreover, the slow drift rate of the low end segment

meant Able was not going to be ideally positioned for at least two years, when we had thought it would be one.

This meant that we were forced to hold off the phasing out of Acre until Able could establish market share. In

the past year, holding onto Acre – as an insurance policy to make sure that Able was able to generate enough

sales to be the sole product in the low end segment – produced a $5.334MM loss, which wiped out what would

have otherwise been a profitable year. The high end market has seen increasing competition from a second

Digby product, yet Adam has remained a constant in that market, bending but never breaking. This may be a

sign of things to come.

I understand your scepticism in some of our results, and how we can remain positive in spite of them; however,

please hear me out. We have identified a variety of ways to improve margins going forward, and are projecting

proforma contribution margins of 33.1% in 2023, increasing to 42.0% in 2024. This will return us to being a

high margin business, as our strategy outlines. Moreover, sales should see a tailwind of markets growing at

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record rates. And lastly, all of our products have now successfully transitioned/entered their respective market

segments, have established market share positions, are ideally positioned on the perception map (both now and

for the years to come), and have the marketing and promotion budgets to back them. Our balance sheet will

benefit from increasing cash flow generation, which we can use to pay down debt, and return to our target

Debt/EBITDA range of 2.0-2.5x.

Our proforma financial statement projections show our best year yet to come in 2023. Some of the major

assumptions that are baked into these Base, Bull and Bear cases can be found here:

We believe that the base case is a very reasonable place to start, as it outlines a scenario in which we simply

maintain our current market share in each of the respective three segments. Given our products are gaining

customer awareness, we feel like there is room for upside; however, given the threat of competitors also having

products gain awareness, there is some downside risks to our projections as well. As can be seen in more details

in our financial statements, even our bear case, which assumes that we only capture 80% of the market share we

currently have – a very conservative assumption – has us making a hefty profit, albeit a much smaller one when

you adjust for a one-time write-off of $17.301MM, as shown by the normalized net profit figure.

In our minds, we have weathered the storm quite nicely, and have positioned Andrews for incredible success in

the future. The best is surely yet to come!

Sincerely,

Paul Thompson

CEO

Andrews Inc.

Total Segment Segment Projected Market Share Unit Sales

Demand Last Year Growth Rate Demand this year Bear Base Bull Bear Base Bull

Low End (Able) 9244 12.60% 10409 15% 19% 22% 1582 1978 2290

Traditional (Ah Ha) 6896 9.80% 7572 16% 20% 24% 1211 1514 1817

High End (Adam) 3195 17.20% 3745 21% 26% 30% 779 974 1123

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ANNUAL REPORT

STRATEGY Stated Objective

From the beginning, Andrews Inc. has looked to take a differentiation focus strategy in the computer sensor

industry, and originally planned to focus on the three high growth segments: high end, performance, and size.

The rationale behind this was that these segments all have similar customer profiles – all are relatively price

insensitive, and looking for a high-quality, cutting-edge product – and thus we believed we could effectively

target all three. Moreover, customers being relative price insensitive would allow us to maximize our margins

without sacrificing sales. However, we used the first board meeting in 2019, which was held after the first four

years of production, as an opportunity to reflect on our successes and failures, and to evaluate what the strategic

direction of our company would look like moving forward.

It was here that we realized that despite having similar customer profiles, the one major different between the

high end, size and performance segments is customers’ willingness to pay. The customers of all three segments

demanded similar, top-of-the-line materials, and a constantly updated product, and thus production costs across

the segments were very similar; however, the high end segment product could be sold at a price point over $6

higher per unit, or at an 18% premium to the size and performance

categories. The combination of expensive materials costs,

expensive labour costs, and lower prices really pinched our

margins in the performance and size segments. Overall, these

segments only made up 22% of our top line, contributed a meager

10% to our overall contribution margins, and were actually dilutive

by over $7,000,000 to our net income at the end of Year 4.

We were at a crossroads: to either invest heavily in driving down our costs and establishing a more solidified

market share in these markets, or to divest and invest these funds into our established products that held strong

market share positions in profitable segments. We chose the latter.

Execution

There were a couple of major oversights with regards to transitioning our traditional product, Able, into the low

end segment, that made this strategy take longer to execute that anticipated, and also to yield less profitable

results that initially anticipated. Firstly, we grossly over-estimated the drift rate of the low end segment and

traditional segments. Our strategy was to hold Able in the same spot on the product perception map – not

4

updating it – and instead waiting for the segment to move to it, and allowing it to gain ‘age’, the most important

product characteristic in the low end segment; however, because the segment didn’t move as fast as we had

forecasted, Able spent a significant amount of time in no-mans-land – the term we have coined for the area

between the different product circles – in this case, between traditional and low end.

To make matters worse, we failed to account for the fact that the ideal position in the low end segment, relative

to the centre of the segment circle, is actually offset towards lower performance and bigger size. We had thought

that given the choice between a superior product and an inferior product, given identical prices, that customers

would chose quality. However, it turns out that this is not what customers were looking for, and this meant that

the segment would have to drift even further in order to take our product from the leading edge to the trailing

side of center.

The last problem we faced in the low end segment was that given our product had far superior performance, size

and MTBF metrics, its materials cost per unit was much higher than the rest of the products in the segment.

Given the price sensitive nature of the customers, increasing prices accordingly was not an option. Because the

segment remained relatively still, and was not moving very fast, the competition could afford to not update their

products, and were able to take advantage of their much lower input prices – they poured these saved funds into

marketing and promotion. In order to compete and develop product awareness in the new segment for Able, we

were forced to match these budgets, and contribution margins in this segment suffered as a result.

Having seen that it was going to take at least two more periods for the segment to move to where our product

was currently located on the perception map, we made the tough choice to sacrifice ‘age’, and updated our

product – making it bigger and worse performing. Yes, you read that correctly. We were forced to make our

superior product worse in order to better position it within the low end segment. This made its age lower, but put

Able in a strong position to compete in the segment moving forward. Moreover, making the product worse

lowered our material cost, which allowed us to increase our overall contribution margins from Year 6 to Year 7.

Our original plan was to phase out our original low end product, Acre, in Year 5, as Able was expected to take

over the sales of the segment and Acre was on the very edge of the customer’s perception map; however, for all

the reasons listed above, Able sales lagged our projections, and thus we were forced to continue selling Acre

much longer than anticipated. This presented a new problem: that it’s positioning was drifting further and further

from the segment’s circle on the perception map. Having a low end product on the outer edge of the perception

map circle was not a problem initially because its high age allowed it to continue to hold market share. However,

the next year it was outside the outer band of the circle all together, and therefore would not even be considered

by customers. Moreover, Able still hadn’t established itself in Year 6, and so management decided that it was

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too risky to count on Able alone to compete in this market which was so vital to our core operations. In short, we

made a decision to invest money updating Acre, moving it back closer to the segment circle on the customer

perception map.

This was a hard decision to make, given we knew that updating it would make its age lower (which had

previously been its primary selling point), and given we had plans to phase the product out, it was hard to justify

spending money updating it and marketing it. However, in the end, we agreed that this was a prudent

management move because we viewed it as somewhat of a put option on Able sales; if Able was still unable to

establish itself as a legitimate low end product, and gain market share, then Acre, would likely be able to capture

some of this market share. If Able sales were strong, we hypothesized that they would likely come at the expense

of Acre’s ability to generate sales. In the end, the latter played out: Able finally established a solid market share

position, and Acre sales were quite dismal. This result allows us finally execute our original strategy of phasing

our Acre, which we did in Year 8 by selling down capacity – generating over $30,000,000 in cash flow in the

process – and using these funds to invest into automation for our other segments.

In the traditional segment, we positioned our new traditional product, AhHa, on the cutting edge (or lower right

corner) of the traditional product circle on the perception map, expecting the circle to move quite rapidly and

have AhHa perfectly positioned by the time our production came online, as there is a year lag between designing

and positioning the product and when you first begin production and recording sales. However, the drift rate of

the traditional segment was also slower than anticipated, leaving our product in a non-ideal spot; as a result, we

did not gain market share as quickly as anticipated, which shows up in our need to take out an emergency loan of

over $13,000,000 in Year 5.

The high end segment product, Adam,

has been the lone bright spot in our

execution of our strategy, and even it has

faced increasing competition. Our

strategy with Adam has simply been to

continue to position it on the cutting

edge of the segment, to continue to keep

up with the competition in terms of

marketing and promotion budgets, and to

maintain market share in a market that

what was market with only 3 products in Year 4. This has been fairly successful, but we have seen market share

erode slightly with the introduction of a second high end product by Digby. The market has become a four horse

28%26%

15%

32%

0%

10%

20%

30%

40%

50%

Year 4 Year 5 Year 6 Year 7

High End Market ShareDixie Adam Bid Coke Drum

6

race, and we believe we are in a great position to continue to remain competitive in this area without having to

worry about our margins being squeezed in a price war due to the customers being relatively price-insensitive.

Performance Summary

When judging our performance, we must first recall our key performance indicators – return on equity, margins,

and stock price. These metrics were selected at the beginning of Year 1 as relative indicators of our management

team’s ability to execute our original strategy, as well as our ability to react to market forces and make

adjustments as necessary. Our key performance indicators (as can be found in Appendix II: Statement of

Objectives) are as follows:

ROE: The A-Team is committed to providing a superior return to shareholders, coming in various

different forms. One would be the return on equity of our business, which we hope to magnify with

leverage. If we are successful, our ROE will be greater than our competitors, and somewhere in the low-

to-mid double digit percentages. Given historical stock market data, we believe this level of ROE

provides our investors with an appropriate risk-adjusted return. Moreover, we are committed to

returning any idle cash to investors in the form of share buybacks and dividend payments. This will be

dictated by our business’ need for investment and our ability to generate free cash flows, and thus

cannot be accurately forecast.

ROE is an area of the business that has significantly

underperformed for the past few years. However, we

believe that this can be attributed to market

contraction over the past couple periods and

difficulties transitioning products between market

segments, which will be extensively discussed later

in this report. That being said, the silver lining in a

number of years characterized by negative ROEs is

that we have actually performed quite well on a

relative basis. Compared to our closest competition,

we have outperformed every competitor in our

industry (see graph, left), besides Digby, whose $213MM market cap makes them less comparable. Moreover,

we can report that Andrews Inc. will be returning to its past tradition of providing excellent ROEs in the near

future, with our 2023E ROE projected to be 23.1% in our base case, a large portion of which is due to a one-time

write off, but nevertheless is a welcome change from posting negative ROEs.

86.2%

84.6%

71.4%

124.2%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

130.0%


ROE Index Since First Board Meeting

Andrews Baldwin Chester Digby

7

Margins: Andrews Inc. has always been a company that prides itself on operating with high margins. At

the end of Year 4, our contribution margins were 31.6%, which was slightly higher than the industry

average of 29.3%. At the first board meeting, we outlined a plan to exit our low margin business

segments (size and performance), which was going to increase our contribution margins to 36.8%.

Contribution margins have been an area that has caused our management team significant grief and headache

over the past three years. At the last board meeting, we were in a strong position in terms of our margins, and

believed that we were poised to build on that, and really leverage strong margins as part of our two-pronged

approach to success. This has not been the case. Fortunately, we believe that over the past year, we have

identified several key problem areas and are working hard towards solving them. This is reflected by our margin

improvement over the past year and into Year 8 projections.

When it comes to evaluating our contribution margins, we have been forced to make some significant changes

due to the challenges faced in the low end and traditional segments – which are both segments where we were

introducing new products (or transitioning old products into a new segment). Having positioned our new

traditional product, AhHa on the cutting edge of

the segment, in order to account for the lag in

production from when the product was designed,

meant that its materials were much more

expensive than the competition to begin with,

which hurt margins in this segment. Moreover,

we kept automation fairly low in this segment

while we were tinkering with the positioning of

AhHa, as this would decrease the amount of time

it took to make changes to the product. In Year 6, AhHa improved market share from 3% to 15%. This served as

a signal to management that we had the positioning correct, and that we could begin to increase automation, as

changes to the product would now simply be made to keep up with the slower-than-expected moving market.

Automation, however, takes a year to come online, and thus benefits were not seen until Year 7 results, where

Current Year Proforma - No Performance & Size

FYE 2019 FYE 2019

Sales $174,476 $135,248

Contribution Margin $55,213 $49,834

Margin % 31.6% 36.8%

EBIT Margin $21,091 $28,593

Margin % 12.1% 21.1%

40.5%

37.2%

33.5%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Year 4 Year 5 Year 6 Year 7 Year 8

Contribution Margins Over TimeAndrews Baldwin Chester Digby

33.1%

8

our contribution margins improved to 28.5% from 25.4% (see graph above). We also have projected significant

margin improvements into Year 9, which I will discuss further in the Learning Outcomes section.

Stock Price & EPS: The A-Team has a focus on high margin segments of the sensor industry, and thus

we are positioning ourselves as profitable company. Moreover, we have, from the beginning, outlined a

capital structure that would focus avoiding diluting current shareholders when raising capital by raising

debt rather than equity whenever possible, and using appropriate leverage to magnify shareholder

returns.

Here at Andrews Inc., management

strongly believes that eventually

market forces will prevail, and good

companies get rewarded for their

success with strong stock prices and the ability to raise capital cheaply in the future. Thus, we have selected our

stock price, and EPS, as a very relevant

metric to indicate success. At the end of

Year 4, our stock price was $19.43, which

was second to Digby in our industry.

However, we will be the first to admit that

our stock has underperformed expectations

over the past few years. We are not alone

when it comes seeing declines in stock

prices (see graph right). Digby has proved

to be formidable competition, forcing both

Baldwin and Chester out of key markets for

each company respectively. Moreover, Digby has established a monopoly on the performance segment,

achieving 100% market share, and using this cash flow to invest heavily in other areas.

That being said, we believe it is important to remember that despite our recent struggles, Andrews Inc. is the

only company in the industry to record a cumulative profit (besides Digby), with cumulative profits through

Year 7 of $6,554,769. Moreover, our management group is very bullish on our stock’s prospects moving

forward. As you can see, our stock price increased last period as our contribution margins recovered, and we

reduced our net loss to -$594,187. Looking further into this, as was mentioned in the Execution section above,

we made a conscious decision to hang on to Acre for one period longer, despite knowing that there was a chance

its sales could be very weak, as an insurance policy on Able not being able to secure market share. If you look at

the Year 7 Income Statement (in the Capstone Courier), you will see that our $594,187 net loss comes despite

$41.08

$27.15

$16.32$19.43

$32.59

$39.63

$1.97$9.53

$1.48 $1.00$1.76

$14.81

$47.21 $44.21

$50.83

$75.14

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00


Stock Prices Andrews Baldwin Chester Digby

Year 7 Andrews Baldwin Chester Digby

Stock Price $19.43 $9.53 $14.81 $75.14

Market Cap ($MM) $37 $21 $36 $213

EPS ($0.32) ($1.83) $1.08 $7.08

Cumulative Profit $6,554,769 ($5,299,808) ($14,980,798) $61,902,965

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losing $5,334,000 on our Acre product segment. On a forward looking basis, without this drain on earnings,

Andrews Inc. is in a good position to turn a solid profit next year. Turning to our proforma income statements

(see Appendix), as a base case we outline $7.70 EPS, which is based on simply maintaining the same market

share in each segment as we achieve in Year 7. This EPS grow can be attributed to higher margins and flat

market share, with our sales growth coming as a result of strong market growth in all segments. Moreover, a

significant amount of this EPS is created by a $17.3MM one-time write-off. Our base case normalized EPS is

$3.82, which we believe is very realistic given our assumptions.

Learning Outcomes

Looking forward to Year 8 and beyond, our contributions margins will be propelled by three major factors:

1) Management learned that the MTBF (mean time before failure) metric had an incredibly large impact on

the cost of materials. This is something that we really hadn’t tinkered with at all until Year 8. Basically,

before Year 1, in our Company Objectives, we stated that Andrews Inc. was going to be a company that

put forth high-quality products. In keeping with this philosophy, we set MTBF to the top of the

allowable range for each segment. We have since re-evaluated this strategy, and set MTBF to be in line

with competitors, has led to an increase in contribution margins going forward. This should have

little/no effect on demand for our low end, traditional and high end products as MTBF is only of 9%, 9%

and 19% importance to customers in these segments respectfully.

2) Management has seen the value in investing in TQM initiatives. Initially we evaluated these initiative on

a constant returns to scale basis, meaning that we assumed a $1,500,000 investment that produced a 1%

reduction in materials cost would produce a further 1% for the next $1,500,000 investment as well. This

is the analysis we presented to you at the previous board meeting, and was the basis behind our rationale

for not investing heavily here.

However, having seen the other

company’s results, we began to

strategically invest in some areas,

and have seen the increasing returns

to scale nature of these investments.

While payoff for the initial

spending is limited, as you invest

more, your returns increase, and

persist over time. Given our

troubles transitioning products between segments, cash flow in Years 5 and 6 was not sufficient to allow

us to invest heavily in this area. However, in Year 7 we began to right the ship, and built up a cash

7.6%

9.8%

4.4%

12.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Material CostReduction

Labour CostReduction

Reduced AdminCosts

Demand Increase

TQM ReturnsWorst Case Midpoint Best Case

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position. $10,000,000 of this cash balance has been invested into TQM in Year 8 alone, where we can

now boast that we have reduced material costs by 7.6% (at the midpoint between best and worse-case

scenarios), reduced labour costs by 9.8%, and increased demand for our products by 12.8%. These cost

reductions have materially increased our contribution margins for Year 8, where they will be 33.1%, an

increase of 150 bps over what they were at the last board meeting.

3) Management realizes that even at 33.1%, our

contribution margins will still be some of the

lowest in the industry, and this is

something that needs to change. Our

strategy for addressing this issue is to

invest into increased automation for all our

segments. We believe this is prudent

because as we have discussed at length

above, the segments are moving much

slower than initially anticipated. Thus, the

levels of automation that we outlined in Year

1 are no longer appropriate. Moreover, we

have seen that the automation levels of our

competition are much higher than ours,

and so we can be confident that if the

market begins to move faster, we will still

be in a better position to react, even after

our increases in automation. Automation

works as follows: at a rating of 1.0, labour

cost per unit is $12.00. For each 1.0 point

increase in automation, labour costs per

unit decrease $1.20, or 10% of their initial level. Thus, we can very accurately forecast what our

contribution margins will look like in Year 9, when our automation comes online. Our calculations are

shown on the right, where we model what our proforma contribution margins will look like moving

forward. Our predictions show at in Year 9 Andrews will enjoy 42.0% contribution margins as a

company, which we believe will put us back in a position where we can speak to margins as a position

of strength for our company.

37.2%

31.8% 30.4%

49.3%

37.3%39.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Able Adam AhHa

Estimated Contribution Margins

Old Automation Rating New Automation Rating

Estimated Contribution Margins Able Adam AhHa

Production 2000 800 1815

1st shift capacity 1400 900 1000

% capacity 143% 89% 182%

Selling Price $18.00 $37.00 $26.50

Old Automation Rating 7.0 3.0 5.0

Old Labour Cost/unit $5.62 $9.82 $8.95

Old Contribution Margin 37.2% 31.8% 30.4%

New Automation Rating 8.5 4.5 6.5

New Labour Cost/unit $3.45 $7.80 $6.61

New Contribution Margin 49.3% 37.3% 39.3%

Contribution Margin Increase 12.1% 5.5% 8.8%

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RESEARCH & DEVELOPMENT Stated Objective

Our objective following the board meeting was to continue investing heavily in research and development. This

included making improvements to the performance, size, and MTBF of our sensors. In the early years of our

firm’s existence we were focused on products in every segment of the marketplace. During the board meeting,

we proposed the idea of phasing out Agape and Aft, the products in the Size and Performance segments. These

products had lower contribution margins than our other products. Phasing them out would increase our

company’s bottom line, while allowing us to place additional focus on our remaining products. We would

continue to manufacture processors in the Low End, Traditional, and High End segments.

Able

Able

Acre

Adam

Aft

Agape

AhHa

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0.0 5.0 10.0 15.0 20.0

Size

Performance

Perceptual Map

Able

Acre

Adam

Aft

Agape

AhHa

Low End

Performance

Traditional

High End

Size

12

Execution

Each week we continued to very carefully monitor the changes in preferences of the market segments, and

decide if we should: a) updating our products; b) leave them unchanged; or c) introduce a new product. In some

cases it was in the best interest of our firm to reduce the capabilities of a product, as will be further explained.

In 2020 our new product AhHa was introduced to the marketplace. It was intended to occupy the traditional

market segment. Following our strategy proposed in the previous board meeting, we had Able takeover as

primary the Low End product, and began phasing out Acre. We took an approach of gradually moving the

products into their new roles.

Performance Summary

As mentioned, our goal was to introduce a new product,

AhHa, into the traditional segment, and then to transition

Able to the low end segment, and to phase out Acre. That

goal was eventually achieved, but the execution of this

strategy took much longer than expected. During its first

year, AhHa captured a small 3% of the market share for

Traditional processors. This was inline with our firm’s

expectations because new products in any segment typically

have very small market penetration their first year; however,

we expected Able to continue to compete in this segment

during the first year while AhHa was building market share and customer awareness. However, as can be seen

by Able’s meager 5% market share (see graph, right), this did not go according to plan. We essentially went

from a 26% market share in the traditional segment in 2019, to 8% in 2020. This was a major headwind for cash

flow and profitability, especially since we had dropped two of our other segments, making the traditional

segment essentially one-third of our business.

The transition of Able replacing Acre as the primary product

in the Low End segment is now completed, but wasn’t

completed without its own complications. In the year 2021,

both products had significant market share in the Low End

segment, with Acre achieving 12% and Able 14%. However,

we were still unsure of Able’s ability to solely generate the

sales we needed out of the low end segment. This led us to

keep both products in the market, using Acre as an insurance

13

policy against shortcomings Able may have experienced. However, Acre’s specifications were falling

significantly behind, and demand fell off significantly in 2022, with market share going to 3%, signaling to us

that it was time to end production of Acre, and phase the product out, which had been the plan since the past

board meeting.

Learning Outcomes

The transitioning of products has been a major strategy of our firm over the last several years. It enabled of to

successfully meet the needs of our target markets and remain on the outer cusp of consumer’s expectations.

However, there have be significant costs effects that were initially unaccounted for.

One of the main costs associated with any products are material costs, which can range from 25% to 45% of the

total costs of the product. Material costs are directly related to the specifications of a product. Smaller, faster,

and more reliable processors have significantly higher material costs compared to larger, slower processors.

When Able was transitioned to the Low End market its specifications were slightly ahead of consumer’s

perceptions. Moreover, the price of Able had to be reduced from $26.00 to $18.00 to be competitive in the Low

End market. The result was that the contribution margins of Able shrunk considerably. To offset this effect, our

firm undertook research and development to lower the capabilities of the product (yellow arrow on perceptual

map, above).

The added attention our firm placed on the material costs led us to another insight; the MTBF (reliability) of the

processors contributed significantly to the total costs of the product. From the on onset, our firm committed to

making sure our products were amongst the most reliable in the market. We have since come back on this

strategy, as the additional costs from a high reliability have not been made up for in terms of sales. With the

exception of the Performance market, reliability is a relatively minor purchasing criterion.

Our firm decided to exit the Size and Performance market segments. At the time our firm made this decision,

these were highly saturated markets with every firm having at least one product offering in the market. The

competitive landscape of these markets has drastically changed. In the Size segment, two firms have 94% of the

market. In the Performance segment, Digby has 100% of the market share. It is difficult to estimate the potential

market share and subsequent sales that our firm would have gained had we remained in these markets, as other

firms employed a similar strategy to us and chose to exit at the same time.

14

MARKETING

Stated Objective

Our stated marketing objectives in our last annual report moving forward were as follows:

Objective #1: Achieve a 35% market share in the high-end segment.

Objective #2: Improve our accessibility ratings in the Traditional and Low End segments. At the time

our first annual report was written, our accessibility ratings were as follows: Traditional – 66%, Low

End – 65%

Execution

Our overarching strategy was to reallocate the marketing dollars we saved from exiting the Performance and

Size segments to the Traditional, Low-End, and High-End segments. We did have to make some minor

adjustments along the way, however.

Objective #1:

o In 2021, we realized that Adam’s price had stayed stagnant too long, and was now above the

ideal price range for customers in the High End segment. This caused us to promptly decrease

Adam’s price by $1.00, from $38.00 to $37.00

o We forecasted our sales by using the current year’s total market size, multiplying it by the

predicted segment growth rate, and then multiplying that market size by our predicted market

share (a mid-point between conservative and optimistic benchmarks).

Objective #2:

o The market experienced a downturn in 2020, prompting us to slightly cut our promotion and

sales budgets.

o We returned to normal budgetary levels in 2021 and 2022 in order to regain ground in our

awareness and accessibility ratings.

o We ensured we did not overspend based on the cost-benefit of diminishing returns.

Performance Summary

We did not achieve our goal of 35 percent market share in the High End segment. Although we were

disappointed by only attaining 26 percent of the market, we also realize that our marketing budget was as

stretched as far as possible – therefore, our shortfall could be attributed to a combination of Digby’s dominance

in the industry and our own shortcomings in predicting their strategic actions (see graph, below).

15

In regards to Objective #2, we have made significant improvements in both categories. Our accessibility in the

Traditional segment increased by 30 percent and now sits at 86 percent, while our rating in the Low End segment

increased nearly 34 percent to 87 percent.

Learning Outcomes

Without a doubt, our biggest learning outcome over the course of the seven years was our sales forecasting. In

the first half, we were unable to be highly accurate as we usually greatly overstated the number of units we

thought we could sell. That left us with excess inventory, lower-than-expected market share, and less cash on

hand for future decisions. In the past couple of years, however, we were finally better able to predict demand.

We believe that our marketing strategy has been relatively successful. Our decision-making process is now

refined and we only need to make minor adjustments and calculations every year to ensure our continued success

in the segments we operate in.

Moving forward, our ability to predict our competitors’ actions with regards to pricing and marketing budget

will be of a greater focus. This will allow us to incrementally increase our position in each of the Traditional,

Low End, and High End segments.

PRODUCTION Stated Objective

To maintain our production as efficiently as possible, we made slight adjustments to automation and capacity

this period. Our general goals were the following: 1) maintain high automation in traditional and low segments;

2) maintain low automation in the high end segment; 3) sell capacity down fully for Performance and Size

markets; and 4) ensure that first shift capacity is used fully, and second shift tapped into, before expanding.

0%

10%

20%

30%

40%

50%

60%

70%


High End Market Share by Firm


16

The idea in selling capacity down for the Performance and Size markets was to use this cash flow to finance

additional capacity and automation of our new project – AhHa. The first and second shift strategy is purposed to

avoid the high fixed costs of increasing capacity and relative lack of cash flow during our transition period.

Execution

The major adjustments that were made during this period were in regards to automation and subsequent labour

costs. Inventory management proved difficult with the contingency of our demand forecasts.

In terms of automation, we increased the rating of Able, tactically trying to drive down labour costs. While this

is cheaper in the long run, we did so recognizing that this holds us ‘in’ for a little longer, with less ability to

respond quickly to a changing market; we are confident that this is the appropriate decision for this product

because, as discussed previously, the markets had been moving slower than expected, and Able was now in the

low end segment, where age is more important than positioning.

Performance Summary

Our largest production focus in this period was to drive down labour costs to increase margins overall. Because

of our capacity utilization, production constraints have not been putting a ‘cap’ on availability, nor have they

been decreasing units sold.

In 2020 we noticed that we were selling over capacity, as were Baldwin and Digby. Chester was producing

under capacity. This was a sign of good utilization of our plant space; however, we also recognized that if this

ratio continued to increase we would have to expand to ensure labour costs didn’t increase too far as more units

were produced on overtime.

In 2021 Andrews undershot the production to capacity ratio, and we were producing below our capacity, and

failing to tap into second shift utilizations. This round, Baldwin was the only competitor producing at more than

capacity; they were, however, significantly over capacity which shows increasing labour costs throughout this

year, and potentially a glass ceiling on production in the future, as capacity takes a year to come on line.

Moving to 2022, we again were producing only slightly under capacity, putting us in line this year with Baldwin

and Chester. Digby was producing at a very high ratio when compared to their available capacity. During this

year we also experienced higher plant utilization than most competition, with our capacities finally beginning to

line up with our production, as our products began to establish themselves in their respective markets.

17

The summary of our capacity

increases were that Able was given

more capacity as the low-end

segment experienced higher volumes

of demand, and we transitioned it to

this market area. This can be seen

by the one year of have no

production for this segment (see

graph, left) as we expanded capacity,

and had to sell off excess inventory.

However, plant utilization was

immediately back up to 131% as the product took off in the low end segment. We also increased capacity of

AhHa from 700 to 1000 units in 2021 to accommodate our success in establishing market share with this

product. This was a very prudent move, as one can see that this increase in capacity came with no decrease in

plant utilization (see graph), which means that we were able to fill this new capacity with demand immediately.

Learning Outcomes

It was reinforced this period that high levels of automation can help our company drive down labour costs, and

will not greatly hinder our ability to react to the slower-than-expected moving market segments. In terms of

capacity, we better recognized where our capacity overage and underage were wasteful. We have designed our

capacity in the respective segments to target plant utilization rates that are in the ~120% range, which we believe

is the perfect balance between maintaining low per unit labour costs, and ensuring that we are using all of the

plant space, which is very expensive to acquire. We would need to see plant utilization rates of over 150%

before we would consider adding to our current levels, and do not anticipate this being a problem for at least

another couple years.

HUMAN RESOURCES Stated Objective

Going into the first board meeting, Andrews had adopted best-in-industry Human Resources practices and was

spending in line with competition when it came to recruiting and training. While this was a good tactic to

initially boost our lagging productivity and turnover ratings (in which we were successful), we later realized that

our Human Resources dollars were not providing the returns that investing in other areas of the business could.

Now, rather than looking at spending the most money, Andrews’ objective is to get the most value out of each

dollar in regards to our productivity, turnover, and administrative costs.

131%

113% 111%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Able Acre Adam AhHa

Plant Utilization Rates over Time

2019 2020 2021 2022

18

Execution

For the last few years, Andrews has been taking an approach that focuses more on efficiency, and getting the

value out of each dollar put towards training and recruiting. Through trial and error, we are confident that we

will be able to continue decreasing our spending and still improve in our metrics of Human Resources success,

relative to our competition. We have continually cut spending on recruiting to where we currently sit, spending

$1,750,000 annually, the lowest in the industry. Moreover, we have reduced our training hours to 40 hours

annually, where Baldwin and Digby both sit as well. As can be seen in the figures below, we can both decrease

costs and still manage to keep pace with the competition in terms of the productivity index. On a per dollar basis,

however, we outperform significantly.

Performance Summary

Andrews is proud of our Human Resources achievements to date, as shown by increasing productivity despite

decreasing our expenditures in the area. One of our greatest successes in Human Resources has been our ability

to decrease administration costs for the last consecutive 4 years. This has been due to our investment in TQM,

which improves efficiency in the office without compromising results. We have been able to save several

thousand dollars with the TQM system, and we have been able to take this money and invest in back into the

company in other areas. Our costs have been gradually and very stably declining over the past four years, which

none of our competitors can claim. However, we have also seen an equal or greater increase in our productivity.

This is proving that we can now have the best of both worlds, to speak figuratively; we can both decrease our

costs and maintain a competitive Human Resources policy. As we learned in the beginning of the simulation,

dollars in Human Resources are well spent and very necessary to the running of a large corporation. However, as

we have now learned, we do not need to continue with “best-in-industry” practices, and can look at a more

efficient way of allocating our Human Resources dollars.

19

Learning Outcomes

While at the last board meeting we were confident with our Human Resources policy of adopting best-in-

industry practices, we realize now that this may not have been an efficient allocation of dollars. We have learned

that efficiency is more important than the actual amount of dollars used. We have learned that we can increase

productivity, lower turnover, and reduce HR admin costs through moderate spending, and that the remaining

dollars can be put to better uses in other departments.

FINANCE Stated Objective

Following the previous board meeting, our stated objectives that we wanted to achieve was a) better

management of working capital with a $2mm cash buffer and b) an optimal capital structure between 1.0x-1.5x

Debt/Equity. This was in tandem with our improved way of forecasting demand and our exit of the Performance

and Size segments. We believed that this would help to normalize our volatile working capital needs and

increase margins.

Execution

During the years 2019-2021, Andrews was faced with a shrinking market as the industry for the Low,

Traditional and High-end segment declined at a CAGR of 3%. Moreover, we were in the midst of transitioning

new products into both the traditional and low end segments, and in both cases market share took longer than

expected to generate. These two factors, in combination with our exit from the Size and Performance segments,

led to a) lower overall sales and b) a buildup of inventory in the system. As a result, Andrews’ had to take out an

emergency loan of $13.9mm in 2020 to stay solvent, which increased leverage to 5.8x. This arose as sales came

in weaker than expected given our exit from the Size and Performance segments, and we had to repay a

$13.8MM bond issuance that was maturing that year. Given that we had already issued the maximum amount of

debt allowed for that period of $17.0MM, this created liquidity issues.

2.1x

3.5x

4.1x

2.6x

2.1x

5.8x5.4x

4.0x

1.5x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

2015 2016 2017 2018 2019 2020 2021 2022 2023E

Andrews' Leverage

Leverage increasedue to emergency loan

20

The inventory glut started to alleviate in 2021 as the market showed signs of improvement, as shown by the

$25mm increase in cash. Looking forward, we have implemented measures to ensure that this does not happen

again as explained in our learning outcomes section.

Performance Summary

As a result of these difficulties, Andrew’s stock price depreciated by 36% and is currently trading at 6.3x

EV/EBITDA on a LTM basis. We believe that the market is largely concerned with our existing 4.0x leverage

which is high as compared to peers. Thus, a key focus for management is to deleverage the balance sheet with

any excess FCF following 2023E to a target of 2.0-2.5x.

($5,341)

($12,704)

($6,538)

($2,007)

($11,431)($7,675)

$25,840

$1,105

$17,374

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

2015 2016 2017 2018 2019 2020 2021 2022 2023E

NWC for Andrews

Inventory build up begins to sell down and generate cash flow

$34$31

$21

$29

$41

$29$26 $26

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

2015 2016 2017 2018 2019 2020 2021 2022

Andrew's Stock PriceOver 41% depreciation in stock price

4.0x

2.2x

5.1x

1.6x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x


Debt/EBITDA Across the Industry

21

In this period, Andrews also had difficulties managing ROEs. We believe that this is largely attributed to our

high cost structure. Thus looking to 2023E, Andrews is looking to invest $10mm in Total Quality Management

(TQM) initiatives that is expected to decrease labour and material costs by 11% and 9% respectively, among

other benefits discussed in the Strategy section of this report. This investment combined with market growth

expectations leads us to our

base case estimates of ROEs

of 23.1% in 2023, higher

than what we have been able

to achieve historically. We

believe this is realistic as the

market is expected to grow at

double the rate from 2019,

our best performing period to

date.

Learning Outcomes

In order to strengthen our ability to manage working capital through down cycles, we will actively use a bear,

base and bull scenario to stress test our forecasts in order to ensure that we will have a liquidity buffer. As shown

by our bear case scenario, even if Andrews only manages to sell 70% of our forecasted sales, we will still have a

$17mm cash buffer that will prevent management from having to seek emergency funding in the future.

Looking ahead, Andrews’ continues to

be committed to returning value to

shareholders. Thus, management will

continue to focus on deleveraging the

balance sheet to 2.0-2.5x

Debt/EBITDA as well as to drive ROEs

through cost reduction initiatives.

8.7%

0.6%

-4.4%

6.9%

14.4%

-3.0%

-10.1%

-1.2%

14.8%

23.1%

28.1%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2015 2016 2017 2018 2019 2020 2021 2022 Bear Base Bull

ROE for Andrews

2023E

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

Bear Base Bull

2023E Forecasts

Acutal EPS Normalized EPS Cash Balance (RHS)

22

APPENDIX I: FINANCIAL STATEMENTS

Balan

ce Sh

ee

t (in$'000s)

20152016

20172018

20192020

20212022

2023E

Be

arB

aseB

ull

Cash

$3,434$12,093

$5,353$5,877

$0$0

$28,691$17,524

$20,562$40,854

$54,873

Acco

un

ts Re

ceivab

le8,307

6,9276,511

10,48114,340

9,44410,161

8,1238,310

10,30011,669

Inve

nto

ry8,617

24,46529,789

27,59339,040

48,43419,726

21,36527,590

11,754716

Total C

urre

nt A

ssets

$20,358$43,485

$41,653$43,951

$53,380$57,878

$58,578$47,012

$56,462$62,908

$67,258

Plan

t and

eq

uip

me

nt

113,800118,200

122,600122,600

106,760131,836

137,436137,400

109,634109,634

109,634

Accu

mu

lated

De

pre

ciation

(37,933)(41,413)

(47,773)(55,947)

(64,120)(58,048)

(67,211)(76,347)

(49,706)(49,706)

(49,706)

Total Fixe

d A

ssets

75,86776,787

74,82766,653

42,64073,788

70,22561,053

59,92859,928

59,928

Total A

ssets

$96,225$120,273

$116,480$110,605

$124,460$131,666

$128,804$108,065

$116,390$122,835

$127,186

Acco

un

ts Payab

le$6,583

$8,347$6,717

$6,484$10,358

$7,180$5,029

5,734$6,005

$6,005$6,005

Cu

rren

t De

bt

00

6,9500

18,74513,748

20,8500

00

0

Lon

g Term

De

bt

41,70060,694

53,74453,744

39,84456,864

54,01454,014

54,01454,014

54,014

Total Liab

ilities

$48,283$69,041

$67,411$60,228

$68,947$77,792

$79,893$59,748

$60,019$60,019

$60,019

Co

mm

on

Stock

18,36021,360

21,36020,420

19,27219,272

19,27219,272

19,27219,272

19,272

Re

taine

d Earn

ings

29,58239,872

27,71029,956

36,24134,602

29,63929,045

37,09843,543

67,166

Total Eq

uity

$47,942$51,231

$49,069$50,376

$55,513$53,874

$48,911$48,317

$56,370$62,815

$86,438

Total Liab

ilities &

Ow

ne

r's Equ

ity$96,225

$120,273$116,480

$110,605$124,460

$131,666$128,804

$108,065$116,390

$122,835$127,186

Balan

ce Sh

ee

t (Co

mm

on

Size)

20152016

20172018

20192020

20212022

2023E

Be

arB

aseB

ull

Cash

4%10%

5%5%

0%0%

22%16%

18%33%

43%

Acco

un

ts Re

ceivab

le9%

6%6%

9%12%

7%8%

8%7%

8%9%

Inve

nto

ry9%

20%26%

25%31%

37%15%

20%24%

10%1%

Total C

urre

nt A

ssets

21%36%

36%40%

43%44%

45%44%

49%51%

53%

Plan

t and

eq

uip

me

nt

118%98%

105%111%

86%100%

107%127%

94%89%

86%

Accu

mu

lated

De

pre

ciation

-39%-34%

-41%-51%

-52%-44%

-52%-71%

-43%-40%

-39%

Total Fixe

d A

ssets

79%64%

64%60%

34%56%

55%56%

51%49%

47%

Total A

ssets

100%100%

100%100%

100%100%

100%100%

100%100%

100%

Acco

un

ts Payab

le7%

7%6%

6%8%

5%4%

5%5%

5%5%

Cu

rren

t De

bt

0%0%

6%0%

15%10%

16%0%

0%0%

0%

Lon

g Term

De

bt

43%50%

46%49%

32%43%

42%50%

46%44%

42%

Total Liab

ilities

50%57%

58%54%

55%59%

62%55%

52%49%

47%

Co

mm

on

Stock

19%18%

18%18%

15%15%

15%18%

17%16%

15%

Re

taine

d Earn

ings

31%33%

24%27%

29%26%

23%27%

32%35%

53%

Total Eq

uity

50%43%

42%46%

45%41%

38%45%

48%51%

68%

Total Liab

ilities &

Ow

ne

r's Equ

ity100%

100%100%

100%100%

100%100%

100%100%

100%100%

23

Cash

Flow

Statem

en

t (in'000s)

20152016

20172018

20192020

20212022

2023E

Be

arB

aseB

ull

Cash

flow

s from

op

eratin

g activities

Ne

t Inco

me

(Loss)

$4,189$290

($2,162)$3,465

$7,969($1,639)

($4,963)($594)

$8,053$14,498

$18,849

De

pre

ciation

7,5877,880

8,1738,173

8,1738,789

9,1629,160

7,3097,309

7,309

Extraord

inary gain

s/losse

s/write

offs

0220

70

0(4,793)

0(11)

(17,301)(17,301)

(17,301)

Acco

un

ts payab

le3,583

1,764(1,630)

(233)3,874

(3,178)(2,151)

706271

271271

Inve

nto

ry(8,617)

(15,848)(5,324)

2,196(11,446)

(9,394)28,708

(1,639)(6,225)

9,61120,649

Acco

un

ts rece

ivable

(307)1,380

416(3,970)

(3,859)4,897

(717)2,038

(187)(2,177)

(3,546)

Ne

t cash fro

m o

pe

ration

s$6,434

($4,314)($520)

$9,632$4,711

($5,318)$30,039

$9,660($8,080)

$12,211$26,231

Cash

flow

s from

inve

sting activitie

s

Plan

t imp

rove

me

nts (n

et)

$0($9,020)

($6,220)$0

($12,600)($6,703)

($5,600)$23

$11,118$11,118

$11,118

Ne

t cash fro

m in

vestin

g activities

$0($9,020)

($6,220)$0

($12,600)($6,703)

($5,600)$23

$11,118$11,118

$11,118

Cash

flow

s from

finan

cing activitie

s

Divid

en

ds p

aid(4,000)

00

00

00

00

00

Sales o

f com

mo

n sto

ck0

3,0000

00

00

00

00

Pu

rchase

of co

mm

on

stock

00

0(2,158)

(2,833)0

00

00

0

Cash

from

lon

g term

de

bt issu

ed

018,994

00

017,020

18,0000

00

0

Early retire

me

nt o

f lon

g term

de

bt

00

00

00

00

00

0

Re

tirem

en

t of cu

rren

t de

bt

00

(6,950)(6,950)

0(18,745)

(13,748)(20,850)

00

0

Cash

from

curre

nt d

eb

t bo

rrow

ing

00

6,9500

00

00

00

0

Cash

from

em

erge

ncy lo

an0

00

04,845

13,7480

00

00

Ne

t cash fro

m fin

ancin

g activities

($4,000)$21,994

$0($9,108)

$2,012$12,023

$4,252($20,850)

$0$0

$0

Ne

t chan

ge in

cash p

ositio

n$2,434

$8,660($6,740)

$524($5,877)

$0$28,691

($11,167)$3,038

$23,329$37,349

24

Inco

me

Statem

en

t (Co

mm

on

Size)

20152016

20172018

20192020

20212022

2023E

Be

arB

aseB

ull

Sales

100%100%

100%100%

100%100%

100%100%

100%100%

100%

Variab

le C

osts

72%73%

72%66%

68%73%

75%72%

69%67%

66%

Dire

ct Labo

r29%

30%28%

26%29%

30%41%

41%32%

32%32%

Dire

ct Mate

rial42%

40%40%

38%37%

38%52%

50%34%

34%34%

Inve

nto

ry Carry

1%3%

4%3%

3%5%

4%2%

3%1%

0%

Gro

ss Margin

28%27%

28%34%

32%27%

25%28%

31%33%

34%

SG&

A9%

10%15%

18%15%

16%14%

15%13%

11%9%

R&

D0%

2%4%

3%2%

3%2%

2%2%

1%1%

Pro

mo

tion

s4%

3%4%

6%5%

6%6%

6%5%

4%4%

Sales

4%4%

5%8%

6%5%

4%6%

5%4%

4%

Ad

min

1%1%

2%2%

3%3%

2%1%

1%1%

1%

EBITD

A19%

17%13%

16%16%

11%11%

14%18%

22%25%

De

pre

ciation

8%8%

9%6%

5%8%

7%9%

7%6%

5%

Ne

t Margin

12%9%

4%10%

12%3%

4%4%

11%17%

19%

Oth

er

0%1%

0%0%

0%-2%

4%0%

-17%-14%

-12%

EBIT

12%8%

4%10%

11%5%

-1%4%

28%30%

32%

Sho

rt Term

Inte

rest

0%0%

1%0%

1%2%

0%0%

0%0%

0%

Lon

g Term

Inte

rest

5%7%

7%5%

3%6%

6%5%

5%4%

4%

Taxes

2%0%

-1%1%

3%-1%

-2%0%

4%6%

7%

Pro

fit Sharin

g0%

0%0%

0%0%

0%0%

0%0%

0%0%

Ne

t Pro

fit4%

0%-2%

3%5%

-1%-4%

-1%18%

20%20%

Inco

me

Statem

en

t (in$'000s)

20152016

20172018

20192020

20212022

2023E

Be

arB

aseB

ull

Sales

$101,073$101,141

$95,066$127,519

$174,475$114,898

$123,627$98,830

$101,107$125,322

$141,975

Variab

le C

osts

(72,513)(74,138)

(68,298)(84,397)

(119,262)(83,767)

(92,261)(70,694)

(70,144)(84,079)

(93,792)

Dire

ct Labo

r(28,932)

(30,458)(26,863)

(33,258)(50,824)

(34,375)(40,147)

(29,582)(32,076)

(39,621)(44,823)

Dire

ct Mate

rial(42,546)

(40,743)(37,860)

(47,827)(63,754)

(43,580)(49,746)

(38,548)(34,757)

(43,048)(48,883)

Inve

nto

ry Carry

(1,034)(2,936)

(3,575)(3,311)

(4,685)(5,812)

(2,367)(2,564)

(3,311)(1,410)

(86)

Gro

ss Margin

$28,560$27,003

$26,768$43,122

$55,213$31,131

$31,366$28,136

$30,963$41,243

$48,183

SG&

A(8,978)

(9,781)(14,340)

(22,673)(26,948)

(18,872)(17,512)

(14,601)(13,012)

(13,173)(13,285)

R&

D0

(2,132)(3,424)

(3,260)(3,943)

(3,041)(1,930)

(1,844)(1,545)

(1,545)(1,545)

Pro

mo

tion

s(4,100)

(2,900)(4,080)

(7,200)(8,200)

(6,700)(7,500)

(6,100)(5,325)

(5,325)(5,325)

Sales

(4,100)(3,850)

(5,200)(9,772)

(9,675)(5,500)

(5,500)(5,500)

(4,975)(4,975)

(4,975)

Ad

min

(778)(899)

(1,636)(2,441)

(5,130)(3,631)

(2,582)(1,157)

(1,167)(1,328)

(1,440)

EBITD

A$19,582

$17,222$12,428

$20,449$28,265

$12,259$13,854

$13,535$17,951

$28,070$34,898

De

pre

ciation

(7,587)(7,880)

(8,173)(8,173)

(8,173)(8,789)

(9,162)(9,160)

(7,309)(7,309)

(7,309)

Ne

t Margin

$11,995$9,342

$4,255$12,276

$20,092$3,470

$4,692$4,375

$10,642$20,761

$27,589

Oth

er

0(1,320)

(7)(32)

(42)2,442

(5,400)11

17,30117,301

17,301

EBIT

$11,995$8,022

$4,248$12,244

$20,050$5,912

($708)$4,386

$27,943$38,062

$44,890

Sho

rt Term

Inte

rest

00

(771)0

(2,473)(1,868)

00

00

0

Lon

g Term

Inte

rest

(5,421)(7,567)

(6,803)(6,803)

(5,065)(6,563)

(6,926)(5,300)

(5,300)(5,300)

(5,300)

Taxes

(2,301)(159)

1,164(1,904)

(4,379)883

2,672320

(4,425)(7,966)

(10,357)

Pro

fit Sharin

g(85)

(6)0

(71)(163)

00

0(164)

(296)(385)

Ne

t Pro

fit$4,188

$290($2,162)

$3,466$7,970

($1,636)($4,962)

($594)$18,054

$24,500$28,848

No

rmalize

d N

et P

rofit

$4,188$1,610

($2,155)$3,498

$8,012($4,078)

$438($605)

$753$7,199

$11,547

No

rma

lized N

et Pro

fit Ma

rgin

4%2%

-2%3%

5%-4%

0%-1%

1%6%

8%

25

APPENDIX II: STATEMENT OF OBJECTIVES

Company Objective

The A-Team will be taking a differentiation focus in the computer sensor industry, focusing on the three high

growth profile segments: high end, performance, and size. Factors contributing to this decision regarding the

strategic direction of our firm include the fact that these segments all have similar customer profiles – all are

relatively price insensitive – and thus we believe we can effectively target all three. Moreover, we know that

market is moving towards smaller and higher performance sensors, and thus we believe that staying ahead of the

curve, and focusing on positioning our sensors on the frontier of the industry will ensure we maintain a

sustainable competitive advantage.

Research & Development

We will look to invest heavily in R&D in the early stages, making improvements to the performance, size and

MTBF of our sensors positioned in the size, performance, and high end categories. The traditional and low end

categories will receive less investment, and will be used as cash flow generators in large, established markets to

fund spending our higher end products. We will look to take advantage of new customer segments that emerge

with new products. Our primary focus will be to improve MTBF as much as possible because this resonates with

our target market, and we hope to build a brand a round reliability.

Marketing

Our team will pick a product differentiation strategy, creating a superior product that customers are willing to

pay more for. In the marketing department, we will focus on setting a premium price to be able to afford our

R&D that has given the consumer smaller products, better performance, and higher MTBFs. We will choose to

place fewer of these items on the market, but they will be made very well and the customer will place high value

on our products. We will advertise moderately, as we have a niche consumer base. They simply need to be aware

that our superior products are available on the market. In short, our marketing strategy is to differentiate, set a

high price, and advertise moderately.

Production

In order to reach our production needs for our high-end, size, and performance products, our team does not feel

the need to automate heavily. Rather, we will focus creating a high-end product that may not have mass market

appeal. We do not need to have a great deal of inventory, seeing as our production might be lower than our

competitors, but still intend to keep enough to prepare for a large increase in demand. We also need to keep in

mind that our low automation may give us faster reaction to changing markets, which allows us to capitalize on

26

new markets that emerge. We hope to use as much of the first shift of production as possible, working them to

capacity, to save unnecessary spending on a second shift of labour.

Finance

Given our niche differentiation focus, we will be forced to invest heavily into research and development in the

early stages of the business cycle. In order to fund this spending, we plan to raise capital through a combination

of issuing long-term debt, short-term debt and equity as needed. We may be forced to raise some equity up front

until we have a better idea of our proforma cash flows available to pay back debt. That being said, we will avoid

diluting our current shareholders by issuing equity unnecessarily, and thus will strive to raise the majority of our

financing through a combination of short-term and long-term debt. Increasing leverage will magnify returns to

shareholders, and thus fits well with our stated objectives. Key factors in deciding which type of debt to issue

will be our outlook on interest rates, as well as our need to control leverage ratios.

Key Performance Indicators (KPIs)

ROE: The A-Team is committed to providing a superior return to shareholders, coming in various

different forms. One would be the return on equity of our business, which we hope to magnify with

leverage. If we are successful, our ROE will be greater than our competitors, and somewhere in the low-

to-mid double digit percentages. Given historical stock market data, we believe this level of ROE

provides our investors with an appropriate risk-adjusted return. Moreover, we are committed to returning

any idle cash to investors in the form of share buybacks and dividend payments. This will be dictated by

our business’ need for investment and our ability to generate free cash flows, and thus cannot be

accurately forecast.

Margins: Given that our target customers are relatively insensitive to price, we believe that with the

correct marketing strategy we can price our sensors near the top of the market’s accepted range.

Furthermore, we hope that spending heavily on R&D initially will drive down costs in the future, which

should translate into industry leading margins. Given contribution margins start Year 1 at 28.3%, we

hope to increase these at least 10 percentage points.

Stock price: The A-Team has a focus on high growth segments of the sensor industry, and thus we are

positioning ourselves as a high growth company. Thus, with a high growth profile, good margins, and

optimal levels of leverage, we should be able to translate this into a high stock price.

27

APPENDIX III: ORGANIZATIONAL STRUCTURE

APPENDIX IV: LATEST CAPSTONE COURIER

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Annual Report 2

Documents

Transcript of Annual Report 2