Butler Lumber Case

Assumptions about our role: We are thea Loan Officer Underwriting Team working
for Northrup National Bank and we are assessing the possible risks of providing a
secured revolving line of credit to Butler Lumber yard. We will provide a brief
background on the firm, conduct an analysis on the firms financial statements, and
make a recommendation about the terms, if any, that Northrup should ofer Mr.
Butler.

Butler Lumbers Background

Butler Lumber is a small company based in the Pacific Northwest that provides in
retail distribution of lumber products. Their core products are holdings and sash
used for repair works and plywood and door products. The cCompany operates only
as a B2C in two main areas namely,: new housing constructions and the repair
business. First The first area of their business is little bit volatile and connected to
general economic conditions, but the repair business is very stable. The
Company has eleven full time employees half of them work in the yard and drove
trucks (to get material from suppliers and to final customers), second half work at
the office and help with sales. cCompany is led by its CEO Mr. Mark Butler, who is
currently sole proprietor. It was set up in 1981 by Mark Butler and his brother in
law. In 1988 Mr. Butler bought out his partner and at that point he issued a notes
payable of 105,000. He paid of the note in 1989. It was partly paid by a 70K loan
secured by PP&E (land and building). The interest on the loan is 11% and its paid by
quarterly instalments of 7K over 10 years

Current Situation
Currently, 55% of the all sales are fixed between April and September.
Company The company has no sales reps and all orders are managed exclusively
over the phone

The Company is economically stable, with good prospects to raise its sales and net
profit
Recent history:
Sales numbers are as follows:
For1988: 1,697,000K and Net profit: 31000
For 1990: 2,694,000K, Net profit: 1988: 31K 1990: 44000K
To be able to secure additional growth and and to stick with their business plans, the
company is looking for additional short term debt financing from credible banking
institutions. With its support,The company wants to fully use the discount

opportunities from its having good relationship with itgood relations withs suppliers
and and capitalize on discounts from the bulk quantity purchases of material.

Business CaseHistory of the Company

1981 Company founded as a partnership of Mr. Mark Butler and Mr. Henry Stark and
established on bought land and with two large storage buildings
1988 Mr. Butler bought his partner out and incorporated the business
105K N/P (paid by 1989): N/P was partly paid by a 70K loan (neg. 4Q1988),
secured by PP&E (land and building). Interest on the loan is 11% and its paid
by quarterly instalments of 7K/over 10 years

Current situation

The 1991
cCompany anticipates a substantial increase in sales.: We noted that
the turnover could reach 3,6 million600K with possible volatility both waysand
may exceed this level if prices of lumber should rise substantially in the near
future. This would obviously depend on the economy. The growth rate could
be afected with a possible economic downturn.
: sales might go higher if
prices of lumber raise substantially or growth might be slower in connection to
possible economic turndown
The cCompany is profitable, but in need of cash to use discount
opportunitiesfunds to accommodate the expected growth. Unfortunately,
Suburban National bank as its long-time partner ofers only 250K loan severed
collateralized by thewith companys PP&Es. Thus, Mr. Butler as CEO, is trying
to find new bank that would give his company a larger and unsecured loan.
Northrop National bank offer and its conditions
90 days secured note d N/P not to exceedmax. 465,000K

Interest will be based as floating rated at 2% above the banks prime rate
Net working capital maintained at an agreed level
Investment into fixed assets will be counter signed by the banks officers
Limitations on withdrawals of funds from the company by Butler.
Company will end its relationship with previous banking partnerSuburban
National Bank

Personal wealth of Mr. Butler

72K house built on 1979, mortgaged for 38K. Half of the interest (55K) in the house
is hold by Mrs. Butler.

70K life insurance policy

Financial Analysis
We assessed the firms financial health by evaluating its liquidity, it profitability,
trends on the balance sheet and its operational efficiency. Before we present
discuss the financial details companys financials we will present lay out the
assumptions we used in the creation of this analysis. We will, acknowledgealso
display information gaps were seeking to fill.
Assumptions: These initial findings were based of of an analysis of the financial
statements provided by Butler Lumber. , because of Due to the a lack of information
on certain items wesome of the information was presumed ve .
had to make the following assumptions.
Financial ratios are calculated using end of year numbers from the balance sheet
vice the average in the year. Since we only have data from 1988 to Q1 1991 we
think its more important to be consistent in applying formulas and that the inclusion
of 1988s information adds more than using the EOY balance detracts.
1. No values for depreciation were given, so depreciation was derived from the
cash flow analysis.
2. For the initial portion of the analysis, Mr. Butlers personal income from the
business was takenis as an operating expense and has a significant negative
efect on the firms cash flow.
3. After presenting the initial numbers we assess how the cash flow would have
been diferent if Mr. Butler were to only have takenonly to take half of his
salary

Information Gaps
1. Industry averages- Because our firm does not often deal with firms in this
industry it is difficult to assess Butler Lumbers financial health without
understanding what is normal in the industry. Weve requested the data, but
will rely on anecdotal evidence collected when interviewing references to
come to a conclusion.
2. More complete financial information- If the firm provides more detail about
its financial documents we would be able to conduct a more
thoroughroughout analysis of its risks
Overall Assessment of the Firms Financial Health
Overall Butler Lumber is a firm that has seen rapid growth in revenues and its
balance sheet since 1988. While the growth has been genuine and sustained it has
been driven by a significant increase in the firms leverage. Its current line of credit
is maxed out and payables have been significantly stretched to finance the firms

expansion of transactions. Weve identified several areas that are particularly

relevant to assessing assess the firms health namely,: lLiquidity.,

Liquidity
Butler lumber has seen a significant decrease in key liquidity ratios throughout the
period, particularly when one focuses on the cash ratio. While it would be helpful
context to have the appropriate industry averages, the numbers themselves are
quite clear. The firms current and quick ratios are not particularly worrisome, but
they are masked by the fact that the firm has a significant A/R and Inventory
balances.1 Cash balances have declined from 58,000K USD at EOY 1988 to 31,000K
at the end of Q1 1991. Weve identified the firms liquidity as a significant risk and
recommend imposing terms concerning the firms cash ratio and current ration. The
company overall is economically stable, with good prospects to raise its sales and
net profit

1 Whilst we acknowledge that inventory and recievables can be converted into cash
quickly in extremis, the firms narrow operating profit margin of 2.94% means that
this would have a significant negative efect on the firms financial health.