UV 2405 Dec. 24, 2016

 

FLINDER VALVES AND CONTROLS INC.

 

In early May 2008, W.B. “Bill” Flinder, president of Flinder Valves and Controls Inc. (FVC), and Tom Eliot,

chief executive officer of RSE International Inc. (RSE), were planning to negotiate a possible acquisition of FVC by

RSE. Serious discussions for combining the two companies had started in March of that year, following casual

conversations that dated back to late 2007. Those initial talks focused on the broad motives for each side to do a deal,

and on the management issues, including compensation, in the new firm. What remained was to negotiate a final term

sheet on which the definitive agreement would be drafted and signed.

In the background, the past 12 months had been associated with mounting difficulty for the U.S. economy.

The industries within which RSE and FVC operated were not immune from these effects. A recent analyst report

summarized the market view for industrial manufacturing.

Tighter borrowing standards and a severely weakened housing sector are weighing on the domestic economy,

prompting consumers to cut back on spending and industrial manufacturers to reduce production. A similar

situation now seems to be taking hold in Western Europe.

Both corporate leaders were concerned about the opportunities and risks of doing a deal in this increasingly

challenging environment.

Flinder Valves and Controls Inc.

Flinder Valves and Controls Inc., located in Southern California, manufactured specialty valves and heat

exchangers. FVC maintained many standard items, but nearly 40% of its volume and 50% of its profits were derived

from special applications for the defense and aerospace industries. Such products required extensive engineering

experience of a kind only a few firms were capable of providing. FVC had a reputation for engineering excellence in

the most complex phases of the business and, as a result, often did prime contract work on highly technical devices

for the government.

FVC was an outgrowth of a small company organized in 1980 for engineering and developmental work on

an experimental heat-exchanger product. In 1987, as soon as the product was brought to the commercial stage, Fast

Vent Construction Inc. was organized to acquire the properties, both owned and leased, of the engineering corporation.

The president of the predecessor company, Bill Flinder, continued as the president of FVC. Eventually, the company

acquired the patents it had licensed.

 

This case was prepared by Robert F. Bruner. It was written as a basis for class discussion rather than to illustrate

effective or ineffective handling of an administrative situation. Information about the company has been disguised.

Some information on peer firms is fictional and has been added for the sake of deepening student analysis. Copyright

copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored

in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,

photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 6/98.

 

 

The raw materials used by the company were obtainable in ample supply from a number of competitive

suppliers. Marketing arrangements presented no problems. Sales to machinery manufacturers were made directly by

a staff of skilled sales engineers. The Auden Company, a large firm in a related field, was an important foreign

distribution channel under a nonexclusive distributor arrangement. About 15% of FVC’s sales came from Auden.

Foreign sales through Auden and directly through FVC’s own staff accounted for 30% of sales. Half the foreign sales

originated in emerging economies, mainly Brazil, Korea, and Mexico. The other half originated in the United

Kingdom, Italy, and Germany.

Although competitive erosion in the mid-2000s had temporarily interrupted FVC’s sales growth, better

economic conditions in the markets of developed countries, together with FVC’s recent introduction of new products

for the aerospace and defense industries, offered the company excellent prospects for improved performance. Sales in

the first quarter of 2008 grew 23% over the corresponding period in 2007, at a time when many of FVC’s competitors

experienced limited growth prospects. Exhibits 1 and 2 show the most recent financial statements for FVC.

FVC’s plants, all of modem construction, were organized for efficient handling of small production orders.

The main plant was served by switch tracks in an IS-car dock area of a leading railroad and also by a truck area for

the company’s own fleet of trucks. From 2005 to 2007, net additions to property totaled $7.6 million.

Bill Flinder, an outstanding researcher in his own right, had always stressed the research and development

involved in improved products, with patent protection, although the company’s leadership was believed to be based

on its head start in the field and its practical experience.

FVC’s success had brought numerous overtures from companies looking for diversification, plant capacity,

management efficiency, financial resources, or an offset to cyclical business. For instance, when FVC was taken public

in 1996, Auden Company, which later became a holder of 20% of FVC common stock, advanced a merger proposal.

Rumors of possible antitrust action by the U.S. Department of Justice had circulated after the news of the proposed

merger became public, and Auden withdrew from the discussions. FVC received various proposals from 1998 on, but

none reached the stage of working out an agreement until the advances of RSE.

FVC had come to RSE’s attention with the FVC’s disclosure of a U.S. government contract. FVC was to

develop an advanced hydraulic-controls system, code-named “widening gyre,” for use in numerous military

applications. The technology was still in research and development, but was expected to have broad commercial value

if the results were found to be economically successful.

RSE International Corporation

Tom Eliot had founded RSE International in 1970, grown it, taken it public, and firmly rooted it as a Russell

1000 company. In response to what he perceived to be the firm’s growth challenges for the next decade, Eliot had

persuaded RSE’s board that the company should follow a policy of focused diversification, which would be achieved

by an aggressive growth-by-acquisition program designed to create opportunities and entries into more dynamic

markets than the ones RSE then served.

In 2008, RSE manufactured a broad range of products including advanced industrial components as well as

chains, cables, nuts and bolts, castings and forgings, and other similar products. RSE then sold them (mostly indirectly)

to various industrial users. One division produced parts for aerospace propulsion and control systems with a broad

line of intermediate products. A second division produced a wide range of nautical navigation assemblies and allied

products. The third division manufactured a line of components for missile and fire-control systems. These products

were all well regarded by RSE’s customers, and each was a significant factor in its respective market. Exhibit 3 shows

the RSE balance sheets for 2007; Exhibit 4 presents the income statements from 2003 to 2007.

The company’s raw material supply (sheets, plates, and coils) of various metals came from various producers.

RSE International’s plants were ample, modem, well¬ equipped with substantially newer machinery, and adequately

served by railroad sidings. The firm was considered a low-cost producer that possessed unusual production knowledge.

It was also known as a tough competitor.

 

 

Eliot and his management team had initiated several changes to help increase RSE’s profit margins. Chief

among them, in late 2006, had been the implementation of Project CORE, a business wide initiative to improve and

unify the corporate wide information systems. This project had already identified numerous opportunities for

improving profits and sales. As a result, RSE’s latest sales and earnings forecasts projected a steady increase over the

next five years. The current plan (excluding merger growth) called for sales to hit $3 billion within five years (Exhibit

5). Despite Eliot’s confidence and optimism for the future of the company, he believed that the stock market still

undervalued his firm’s shares.

The Situation

During the early part of 2008, a series of group meetings had taken place between Tom Eliot and Bill Flinder

and their respective advisers. It seemed clear to both parties that both FVC and RSE could profit-from the merger. By

early May, a broad outline of the merger seemed to be developing. Fast Vents was to become a subsidiary of RSE

International-the deal would be structured in such a way as to preserve FVC’s identity. The two sides had explored

some of the governance and compensation issues in the merger. Fast Vents would be retained along with his top

management team and all other employees. No layoffs were contemplated. This reflected RSE’s intention to invest in

and grow the FVC operation. FVC’s solid management team was one of the factors that had attracted RSE in the first

place, and Eliot wanted to keep the same management in place after the merger. Flinder would receive a generous

option-based incentive bonus that could result in a salary increase of between $50,000 and $200,000 per year. Because

Flinder was 62 years old and nearing retirement, the compensation package was meant to retain him in the coming

years as he trained a new chief executive.

The price of the deal was less clear. FVC’s shares traded on the NASDAQ, whereas RSE’s traded on the

American Stock Exchange. The market capitalizations for FVC and RSE were approximately $100 million and $1.4

billion, respectively. Both companies had experienced recent rapid rises in share price due to strong performance

despite the weak economic environment. (Exhibit 6) shows recent share prices for FVC and RSE.

The financial advisors had collected a variety of relevant capital-market data. Exhibit 7 provides valuation

information on exchange-listed comparables for Fast Vents and RSE. Exhibit 8 presents information on recent related

acquisitions. Exhibit 9 presents historical money-market and stock-return data through May 2008. FVC’s debt was

currently rated Baa.

Flinder had shared FVC’s current corporate-financial-statement forecast with Eliot but had emphasized that

it did not include any benefits of the merger or the benefits of promising new technologies, such as the widening gyre

(Exhibit 10). The company assumed PPE would be 37% of sales and net working capital of 34% of sales. The

reluctance to include the widening gyre project stemmed from the substantial uncertainty remaining regarding its

potential economic benefits. Tax rate was assumed at 40%. Eliot expected the merger to generate significant cost

gains. RSE’s greater purchasing power would lower the cost of materials and components for FVC. RSE’s new

resource management system could be expected to reduce FVC’s in-process costs. Estimates from RSE’s due-

diligence process had identified cost savings of 7% of cost of goods sold. He also recognized other synergy gains that

arose from RSE’s stronger marketing clout, cross-selling with other RSE products, which he estimated to be 15% of

selling, general administrative costs. Eliot also believed that the widening-gyre project could have a broad application

in nautical, aerospace, and automotive products. But for the sake of conservatism, he chose not to include these in the

valuation.

The companies had yet to settle on the form of consideration, either cash or RSE stock that would best serve

the parties to the deal. Eliot expected that RSE had the financial capacity to borrow the entire amount through its

existing credit facilities. Roughly 70% of the FVS stock was held by its board of directors and their families, including

the 20% owned by the Auden Company and 40% owned by Bill Flinder. The Auden Company did not object to the

merger, but it had given notice that it would sell any RSE shares received in the deal. The Auden Company was about

to undertake a new expansion of its own, and its executives were not disposed to keeping tag ends of minority interests

in a company such as RSE. They saw no reason, however, for not maintaining their satisfactory business relationships

with the FVC enterprise if it became a division of RSE International.

 

 

Exhibit 1

FLINDER VALVES AND CONTROLS INC.

Balance Sheet as of December 31, 2007, for Flinder Valves and Controls Inc.

(dollars in thousands)

 

Assets

 

 

Cash $1,884

 

 

U.S. Treasury tax notes and other Treasury obligations 9,328

 

 

Due from U.S. government 868

 

 

Accounts receivable net 2,316

 

 

Inventories, at lower of cost or market 6,888

 

 

Other current assets 116

 

 

Total current assets

 

$21,400

 

Investments

 

1,768

 

Land 92

 

 

Buildings 36,240

 

 

Equipment 18,904

 

 

Less: allowance for depreciation 7,056

 

 

Total plant, property, and equipment—gross 48,180

 

Construction in process 88

 

 

Total plant, property, and equipment—net*

48,268

 

Patents

 

156

 

Cash value of life insurance

 

376

 

Deferred assets

 

156

 

Total assets

 

72,124

Liabilities and Stockholders’ Equity

 

 

Accounts payable 2,016

 

 

Wages and salaries accrued 504

 

 

Current maturities of long-term debt 30,000

 

 

Employees’ pension cost accrued 208

 

 

Tax accrued 72

 

 

Dividends payable 560

 

 

Provision for federal income tax 1,200

 

 

Total current liabilities

 

34,560

 

Deferred federal income tax

 

800

 

Common stock at par (shares authorized and outstanding 2,440,000 shares) 1,220

 

 

Capital surplus 7,180

 

 

Earned surplus 28,364

 

 

Total equity

 

36,764

 

Total liabilities and stockholders’ equity

 

72,124

 

 

* Equivalent land in the area had a market value of $320,000, and the building had an estimated market worth of

$16,800,000. Equipment had a replacement cost of approximately $24,000,000 but a market value of about

$16,000,000 in an orderly liquidation.

 

 

Exhibit 2

 

Summary of Earnings and Dividends for Flinder Valves and Controls Inc.

(dollars in thousands)

2003 2004 2005 2006 2007 2007 2008

Sales $36,312 $34,984 $35,252 $45,116 $49,364 $11,728 $14,162

Cost of goods sold 25,924 24,200 24,300 31,580 37,044 8,730 10,190

Gross profit 10,388 10,784 10,952 13,536 12,320 2,998 3,972

Selling, general, and administrative 2,020 2,100 2,252 2,628 2,936 668 896

Other income—net 92 572 108 72 228 14 198

Income before taxes 8,460 9,256 8,808 10,980 9,612 2,344 3,274

Taxes 3,276 3,981 3,620 4,721 4,037 1,009 1,391

Net income 5,184 5,275 5,188 6,259 5,575 1,335 1,883

Cash dividends 1,680 2,008 2,016 2,304 2,304 576 753

Depreciation 784 924 1,088 1,280 1,508 364 394

Capital expenditures 1,486 1,826 2,011 2,213 2,433 580 640

Working capital needs 1,899 3,492 -1,200 4,289 4,757 1,130 1,365

Ratio analysis

Sales 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Cost of goods sold 71.4 69.2 68.9 70.0 75.0 74.4 72.0

Gross profit 28.6 30.8 31.1 30.0 25.0 25.6 28.0

Selling, general, and administrative 5.6 6.0 6.4 5.8 5.9 5.7 6.3

Other income—net 0.3 1.6 0.3 0.2 0.5 0.1 1.4

Income before federal taxes 23.3 26.5 25.0 24.3 19.5 20.0 23.1

Net income 14.3 15.1 14.7 13.9 11.3 11.4 13.3

FLINDER VALVES AND CONTROLS INC.

(Unaudited)

Three months ended 3/30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 3

FLINDER VALVES AND CONTROLS INC.

Consolidated Balance Sheet for RSE International as of December 31, 2007

(dollars in thousands except per-share figures)

Assets

Cash $46,480

U.S. government securities, at cost 117,260

Trade accounts receivable 241,760

Inventories, at lower of cost or market 179,601

Prepaid taxes and insurance 2,120

Total current assets 587,221

Investment in wholly-owned Canadian subsidiary 158,080

Equipment 270,000

Investment in supplier corporation 104,000

Cash value of life insurance 3,920

Miscellaneous assets 2,160

Property, plant, and equipment, at cost:

Buildings, machinery, equipment 671,402

Less: allowances for depreciation and amortization 260,001

Property, plant, and equipment—net 411,402

Land 22,082

Property, plant, equipment, and land—net 433,484

Patents, at cost, less amortization 1,120

Total assets $1,559,985

Liabilities and Stockholders’ Equity

Notes payable to bank $5,795

Accounts payable and accrued expenses 90,512

Payrolls and other compensation 38,399

Taxes other than taxes on income 3,052

Provision for federal taxes on income refund, estimated 32,662

Current maturities of long-term debt 300,900

Total current liabilities 471,320

Note payable to bank1 119,100

Deferred federal income taxes 29,668

2% cumulative convertible preferred stock, $20 par, 27,783

1,389,160 shares outstanding2

Common stock, $2 par; 96,000,000 shares authorized; 125,389

62,694,361 shares issued

Capital surplus3 21,904

Retained earnings 764,821

Total equity 939,897

Total liabilities and stockholders’ equity $1,559,985

1 $150,000,000 note, payable semiannually beginning June 30, 2008; $30,900,000 due within

one year, shown in current liabilities. One covenant required the company not to pay cash

dividends, except on preferred stock, or to make other distribution on its shares or acquire any

stock, after December 31, 1999, in excess of net earnings after that date.

 

 

 

 

Exhibit 4

 

FLINDER VALVES AND CONTROLS INC.

Summary of Consolidated Earnings and Dividends for RSE International

(dollars in thousands)

2003 2004 2005 2006 2007

Net sales $1,623,963 $1,477,402 $1,498,645 $1,980,801 $2,187,208

Cost of products sold 1,271,563 1,180,444 1,140,469 1,642,084 1,793,511

Gross profit 352,400 296,958 358,176 338,717 393,697

Selling, general, and administrative 58,463 69,438 74,932 87,155 120,296

Earnings before federal income taxes 293,937 227,520 283,244 251,562 273,401

Tax expense 126,393 95,558 116,130 101,883 109,360

Net earnings 167,544 131,962 167,114 149,679 164,041

 

Depreciation 19,160 20,000 21,480 24,200 26,800

Cash dividends declared 85,754 77,052 53,116 77,340 92,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 5

FLINDER VALVES AND CONTROLS INC.

Forecast Financial Statements for RSE International

for the Years Ending December 31, 2007–12

(dollars in thousands except per-share figures)

Actual Projected

2007 2008 2009 2010 2011 2012

Sales $2,187,208 $2,329,373 $2,480,785 $2,642,037 $2,813,769 $2,996,658

Cost of goods sold 1,793,510 1,920,085 2,064,243 2,216,470 2,367,290 2,537,259

Gross profit 393,698 409,288 416,542 425,567 446,479 459,399

Selling, general, and admin. 120,296 129,786 139,481 151,027 161,315 169,826

Income before tax 273,402 279,502 277,061 274,540 285,164 289,573

Tax expense 109,361 111,801 110,824 109,816 114,066 115,829

Net income 164,041 167,701 166,237 164,724 171,098 173,744

Cash dividends 92,238 102,082 108,714 115,779 125,185 133,313

Depreciation 26,800 27,950 29,770 31,700 33,170 35,960

Net PPE 389,321 426,522 459,404 498,497 541,109 587,580

Net working capital 422,597 447,956 486,428 528,407 574,238 624,303

Earnings per share1 $2.62 $2.60 $2.58 $2.56 $2.66 $2.70

Divs. per share common stock1 $1.42 $1.58 $1.69 $1.80 $1.94 $2.07

Div. per share preferred stock2 $0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 6

FLINDER VALVES AND CONTROLS INC.

Market Prices of Flinder Valves and RSE International Corporation

High Low Close High Low Close High Low

2003 $16.25 $8.75 $15.00 $12.31 $10.05 $11.88

2004 24.75 14.00 22.63 14.36 11.77 13.16

2005 25.00 20.00 22.25 12.81 9.27 11.13

2006 Quarter Ended:

March 31 24.38 20.75 21.50 14.13 12.83 13.95

June 30 22.75 20.38 21.00 13.69 12.04 11.78

September 30 22.75 20.38 21.50 12.83 10.48 11.26

December 31 24.36 20.13 21.00 12.39 11.26 11.87

2007 Quarter Ended:

March 31 23.50 20.00 21.75 11.60 10.20 10.67 13.61 12.21

June 30 23.63 19.88 22.00 11.60 10.90 10.90 13.15 12.04

September 30 22.75 20.00 22.50 13.61 11.13 13.61 14.22 12.37

December 31 30.00 22.25 28.50 17.01 13.30 16.78 17.32 13.77

2008 Quarter Ended:

March 31 32.13 26.00 31.50 20.73 15.08 20.69 17.32 13.98

May 1, 2008 $39.75 $38.90 $39.75 $22.58 $18.30 $21.98 $17.63 $15.35

Flinder Valves and Controls RSE International Corporation

Common Stock Common Stock Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 7

 

 

 

FLINDER VALVES AND CONTROLS INC.

Market Information on Firms in the Industrial Machinery Sector Expected

Price/ Growth

Earnings Dividend Rate

Ratio Beta Yield to 2010 Debt/Capital

Cascade Corp.

Manufactures loading engagement devices 10.5 0.95 1.7% 5.1% 29%

Curtiss-Wright Corporation

Manufactures highly engineered, advanced technologies

that perform critical functions 17.2 1.0 0.7 12.3 36%

Flowserve Corp.

Makes, designs, and markets fluid handling

equipment (pumps, valves, and mechanical seals) 20.8 1.3 1.0 27.0 30%

Gardner Denver

Manufacturers stationary air compressors, vacuum

products, and blowers 10.9 1.3 Nil NMF 19%

Idex Corp.

Manufactures a wide range of pumps and machinery

products 16.1 1.05 1.5 10.8 22%

Roper Industries

Manufacturers energy systems and controls, imaging

equipment, and radio frequency products 19.7 1.2 0.5 10.8 29%

Tecumseh Products

Manufactures compressors, condensers, and pumps 38.2 1.05 Nil NMF 8%

Watts Industries

Manufactures and sells and extensive line of valves

for the plumbing and heating and water quality markets 15 1.3 1.5 8.4 32%

NMF = not meaningful figure.

Source: Value Line Investment Survey, April 25, 2008.

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 8

 

Information on Selected Recent Related Mergers

Effective Date Acquirer Business Target Business

5/25/2006 Armor Holdings Inc. Law enforcement equip Stewart & Stevenson Turbine-driven products

6/26/2006 Bouygues S.A. Construction Alstom SA Power generation equip

9/20/2006 Boeing Co. Aircraft Aviall Inc Vehicle parts

11/10/2006 Daikin Industries Ltd. Air conditioning sys OYL Industries Bhd Airconditioners

12/8/2006 Oshkosh Truck Corp. Heavy duty trucks JLG Industries Inc Excavators/telehandlers

4/11/2007 Rank Group Ltd. Investment holding co SIG Holding AG Packaging/plastics machinery

6/22/2007 Meggitt PLC Aerospace/defense system K&F Industries Holdings Aircraft braking systems

7/31/2007 BAE Systems Inc. Electronic systems Armor Holdings Inc Law enforcement equip

12/3/2007 Carlyle Group LLC Private equity firm Sequa Corp Aircraft engine component

12/20/2007 ITT Corp. Pumps/valves EDO Corp Electn system products

2/6/2008 London Acquisition BV Investment holding co Stork NV Components

6/5/2008 Ingersoll-Rand Co Ltd. Industrial machinery/equip Trane Inc Airconditioners

FLINDER VALVES AND CONTROLS INC.

 

 

 

Information on Selected Recent Related Mergers

Acquirer Target

Transaction

Size ($mm)

Target Net

Sales Last 12

Months ($mm)

Equity Value/

Target Net

Income

Enterprise

Value/ Target

Net Sales

Enterprise

Value/ Target

Operating

Income

Enterprise

Value/ Target

Cash Flow

Premium 4

Weeks Prior to

Announcement

Date (%)

Armor Holdings Inc. Stewart & Stevenson 1,123 726 65.3 1.12 33.1 23.7 40.6

Bouygues S.A. Alstom S.A. 2,467 17,679 nmf 1.48 77.9 22.5 -1.2

Boeing Co. Aviall Inc. 2,057 1,371 28.9 1.53 18.7 14.9 27.2

Daikin Industries Ltd. OYL Industries Bhd 1,152 1,581 27.6 1.41 21.5 16.8 19.4

Oshkosh Truck Corp. JLG Industries Inc. 3,252 2,289 20.5 1.30 11.9 10.7 52.3

Rank Group Ltd. SIG Holding AG 2,314 1,418 38.6 1.56 64.8 14.2 19.3

Meggitt PLC K&F Industries Holdings 1,802 424 20.3 4.26 13.1 10.8 13.5

BAE Systems Inc. Armor Holdings Inc. 4,328 2,805 30.5 1.71 17.1 14.3 29.3

Carlyle Group LLC Sequa Corp. 2,007 2,181 34.4 1.25 20.6 12.5 63.3

ITT Corp. EDO Corp. 1,678 945 86.8 1.99 34.0 23.9 40.5

London Acquisition BV Stork NV 2,347 2,153 17.1 0.02 na na 35.2

Ingersoll-Rand Co. Ltd. Trane Inc. 9,751 8,328 21.2 1.39 14.9 11.6 na

FLINDER VALVES AND CONTROLS INC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 9

 

FLINDER VALVES AND CONTROLS INC.

Capital Market Interest Rates and Stock Price Indexes

(averages per annum, except April 2008, which offers closing values for April 25, 2008)

2006 2007 April 2008

U.S. Treasury Yields

3-month bills 4.70% 4.40% 1.28%

30-year bonds 5.00% 4.91% 4.52%

Corporate Bond Yields by

Aaa 5.59% 5.56% 5.58%

Aa 5.80% 5.90% 5.96%

A 6.06% 6.09% 6.32%

Baa 6.48% 6.48% 6.98%

Stock Market

S&P 500 Index 1,418 1,468 1,398

Price/earnings ratio 17.7× 18.3× 17.4×

Industrial Machinery

Price/earnings ratio 13.9× 14.0×

Dividend yield 1.4% 1.4%

Historical return premium of equity over government debt (1926-2007)

Geometric average 5.5%

Arithmetic average 7.2%

Data Source: Value Line Investment Survey, April 25, 2008; Federal Reserve Bulletin; Compustat

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 10

 

 

Forecast of Stand Alone Financial Statements for Flinder Valves

Actual

2007 2008 2009 2010 2011 2012

Sales $49,364 $59,600 $66,000 $73,200 $81,200 $90,000

Cost of goods sold 37,044 43,816 48,750 54,104 59,958 66,200

Gross profit 12,320 15,784 17,250 19,096 21,242 23,800

Selling, general, and administrative 2,936 3,612 4,124 4,564 5,052 5,692

Depreciation $1,508 $1,660 $1,828 $2,012 $2,212 $2,432

Other income—net 228 240 264 288 320 352

Income before taxes 8,104 10,752 11,562 12,808 14,298 16,028

Taxes 4,037 4,301 4,625 5,123 5,719 6,411

Net income $4,067 $6,451 $6,937 $7,685 $8,579 $9,617

FLINDER VALVES AND CONTROLS INC.

Projected

for Years Ending December 31, 2008–12

(dollars in thousands)