​Presentation

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timer Asked: Apr 5th, 2018
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Question description

Read the description carefully.

Read the attached case. Then, follow the description below.

I need PowerPoint 9 slides at least and Word file to read from. You must read the case to figure out the issue.

This case will be divided into three parts or students. Therefore, I want you to do just my part which includes introduction, history, background, introduce the case, new current information about SCREEN MICROTECH INC., numbers (explain it to me in the word file), statistic information (explain it to me in the word file), financial statements, solutions, and recommendations for the case, so all of the information will be from outside sources because all students will have read the case before the presentation.

Add charts and explain them in the attached file.

Please explain the numbers and statistic information to me by using red or different color in the word file.

The important information that I am going to explain to the students must be in a word file because the professor will not allow me to read from the slides. The slides must have different information from the information that I am going to explain from “the word file”, and they should be related to each other.

After you use the financial statements, explain them in the word file to me because I am not going to say anything from my mind

During using outside sources please paste the links in the slides by using footnotes in the slides. (in the slide bottom)

The information must be clear for me and the students.

9B16B005 SCREEN MICROTECH INC. Deep Dhillon wrote this case under supervision of Professor Vaughan Radcliffe solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-03-11 In July 2015, Chris Derby, chief executive officer (CEO) of Screen Microtech Inc. (SMI), sat in his Beachwood, Ohio office reflecting on the company’s successes over the past year. The capacitive touch screen manufacturer had seen significant growth in sales and was preparing to go public through an initial public offering (IPO) — an IPO that could lead to a significant bonus for Derby himself. A BRIEF HISTORY SMI started as a capacitive touch screen manufacturer in what had become a growing industry over the past several years. Although privately owned since its inception, the company always held itself to the highest of standards when it came to financial reporting. Brian Henderson, the company’s chief financial officer, consistently discussed the importance of relevance, accuracy, and consistency when it came to SMI’s financial reporting. Through reliable financial reports, Henderson strongly felt that stakeholders would gain confidence in SMI and its performance when compared to the competition. Although the company’s historical results were strong, the board felt there was a lot of potential to gain new contracts with various e-reader and Android smartphone manufacturers. Derby was brought in as CEO at the end of 2013 to help boost sales and make the company more attractive to potential investors with an end goal of SMI going public. If the company was led through a successful IPO in early 2016, Derby was promised a special cash bonus of US$1.25 million1 as well as 3 per cent of the newly listed company shares, while Henderson, who had been an integral part of the SMI team since its inaugural year, was promised a $750,000 bonus and 2 per cent of company shares. During the past two years, Derby and Henderson had worked very closely together. A TRACK RECORD OF SUCCESS Since its first year, SMI had seen success in the capacitive touch screen industry. Understanding its competitive advantages and using a conservative approach to its accounting methods allowed SMI to become cash flow positive very quickly. 1 All currency amounts are in U.S. dollars unless otherwise specified. Page 2 9B16B005 The majority of this success came as a result of SMI’s relationship with its main client, Deltech. Being a manufacturer for numerous clients of its own, Deltech consistently purchased various types of screens from SMI and helped the company to grow quickly. For SMI’s financial statements for fiscal years 2013 and 2014, see Exhibit 1. CONSERVATISM IN ACCOUNTING AND MANAGEMENT The strong relationship with Deltech led to consistent on-time payments and minimal late payments, giving Henderson the confidence to not provision for bad debts when recognizing revenue. If any of the company’s few smaller accounts did create bad debts, a direct write-off basis had been adopted. Similarly, because Deltech’s needs were consistent and predictable, Henderson saw no need to provision for returns. In the rare cases that returns were seen, they were recorded on a case-by-case basis. Since production equipment was evolving quickly, new equipment had been purchased every five years. A double declining balance depreciation method was used to conservatively account for the value of the equipment as well as ensure that equipment was fully depreciated by the end of its five-year life. When Derby was brought in at the end of 2013, he and Henderson discussed the various accounting methods used by SMI, and while they disagreed on some items, they agreed that consistent methods should continue to be used through 2014. However, some items were kept open for later discussion. 2015: A MONUMENTAL YEAR Under Derby’s leadership, SMI saw a major increase in sales in 2015. Deltech still provided a vast majority of the company’s sales, but numerous new clients were found. The company also invested in new equipment in 2015, a purchase that was in line with SMI’s five-year equipment cycle. However, this new equipment allowed SMI to offer a more varied and versatile line-up of touchscreens at competitive prices. Further, Derby recognized that SMI wasn’t using this equipment to its full potential. In fact, the company was dealing with excess production capacity, but needed a new manufacturing warehouse to take advantage of it. In one monumental year, Derby was able to lead SMI to a 33 per cent increase in year-over-year sales by building new relationships and by moving, expanding, and investing in company equipment and operations. The 33 per cent sales increase was not achieved with Deltech but, rather, with various manufacturing companies that made e-readers and Android smartphones. These clients had large contracts with companies such as Samsung and LG, and they in turn relied on various screen manufacturers. Because SMI was now producing for these new clients, Derby saw a significant upside when projecting future years’ growth. If SMI was able to deliver on its promises, it could gain a larger share of these clients’ contracts going forward. Derby also recognized that new sales also came with new costs. New executive and office staff were hired to help SMI in its expansion efforts, and investments were made in advertising to allow SMI to build its brand. Because these new, large clients brought so much new business to SMI at once, they also dictated many of the terms. These included more liberal return policies and payment schedules. The new screens had to be adapted to a variety of manufacturing processes, and the new customers were very selective. Therefore, it was anticipated that returns would increase. Historically, 2 per cent of Deltech products were returned, and the initial numbers on new sales projected an overall average of 5 per cent returns. With Page 3 9B16B005 regards to payments, SMI was technically able to maintain a payment period of 30 days, but the quality of its receivables was less well-known. Bad debts were also expected because of the larger list of clients without established payment histories. Derby and Henderson debated both these points and ultimately settled on provisioning for 2 per cent bad debts. Derby was able to persuade Henderson to optimistically provision 3 per cent for returns on sales. To allow for SMI’s production equipment’s potential to be realized and to prepare for continued future growth, SMI moved its production plant and heavily invested in research and development (R & D). Derby was able to sell the original plant at an attractive price. The company had previously purchased its land and building for production for $10 million and currently recognized a net book value of $2.5 million. Due to industry growth, a buyer for this facility was relatively easy to find, and SMI was able to sell for $12 million. This cash was used to retire the mortgage debt and retain the remainder in the corporate treasury for future use. The company smoothly transitioned operations to a new facility, for which it was able to sign a multi-year lease for $420,000 annually. Once the company moved in, a $2 million R & D project was started to help diversify the company’s offering. Because the benefits of this research would not be realized until 2016, Derby and Henderson agreed to defer $1.25 million of the costs to the 2016 year. While making these various changes to the business, Derby and Henderson revisited their conversation about depreciation. Derby lobbied to have SMI move from its traditional five-year double declining method to a new seven-year life cycle that used simple straight line depreciation, claiming that the equipment did not lose value as quickly as it had in the past. They eventually agreed that the technology had matured and settled on a straight line depreciation method that would simplify the financial statements for SMI’s stakeholders but maintained the original five-year life cycle. For the company’s financial statements for this transformative year, see Exhibit 2. MAJOR SHIPMENT DAMAGE AND DELAY On December 27, 2015, a truck carrying a major shipment of $7 million worth of touch screens overturned on the interstate near the port of Long Beach, California. SMI’s records showed that the shipment’s cost was $5 million, and initial reports indicated that it was mostly undamaged. However, it would all have to be returned to its manufacturing facility in Beachwood, Ohio for inspection, quality testing, and repacking. Upon inspection of the cargo, it was discovered that approximately 20 per cent of the shipment had been directly damaged and was not salvageable. The remaining goods would still be inspected further and repackaged before being returned to inventory. The client agreed to wait for the full order to be replenished before receiving the next delivery. This undelivered shipment had been booked as a $7 million sale because the company had expected successful delivery to the customer’s facility in Long Beach in December. A free on-board destination delivery method had been established by SMI, an approach that was in line with the company’s historic methods of revenue recognition. The truck rollover created a delay in shipping, and the customer’s new expected delivery date for the full shipment was January 20, 2016. ANNUAL REPORTING AND AN IMPENDING IPO The company’s fiscal year matched the calendar year, and Henderson was diligent in having the financial statements prepared as soon as possible. Both he and Derby saw that it was a great year for the company, Page 4 9B16B005 but one that came with many changes, which stakeholders would want to know about. The 2015 financial statements (see Exhibit 2) were prepared before the truck rollover. Both Derby and Henderson agreed that because the shipment was still being delivered to the same customer for the same amount, there was no need to make any changes to the statements. Derby was personally invested in the statements being prepared on time, which would be a major indicator of the company’s success and would help it to be valued for the IPO. Both Derby and Henderson were aware that a successful IPO meant a significant cash bonus and a percentage of company equity for each of them. As the 2015 financial statements were released to the company’s major stakeholders, Derby reflected on an exhausting, but very successful 2015. The company had moved its production, expanded operations, built a larger client base, and gained an unprecedented increase in sales. Derby was very eager and excited to see SMI go through a successful IPO in early 2016. Page 5 9B16B005 EXHIBIT 1: SMI’S FINANCIAL STATEMENTS FOR FISCAL YEARS 2013 AND 2014 Income Statement 2013 Gross Sales Less: Returns Net Sales Cost of Goods Sold 2014 $24,775,000 $0 $24,775,000 $17,696,000 Gross Profit $7,079,000 Operating Expenses Executive Salaries Office Salaries Depreciation Expense — Production Equipment Office Expense Advertising Expense Bad Debt Expense Interest Expense R&D Expense Total Operating Expense Net Income $1,100,000 $1,200,000 $864,000 $75,000 $125,000 $45,500 $425,000 $500,000 $4,334,500 $2,744,500 $25,450,000 $0 $25,450,000 $18,179,000 $7,271,000 $1,200,000 $1,350,000 $518,400 $82,500 $175,000 $50,000 $430,000 $525,000 $4,330,900 $2,940,100 Statement of Stockholders’ Equity Retained Earnings, 1/1 Net Income Retained Earnings, 12/31 2013 $950,700 $2,744,500 $3,695,200 2014 $3,695,200 $2,940,100 $6,635,300 Page 6 9B16B005 EXHIBIT 1 (CONTINUED) Balance Sheet Assets Current Assets Cash Securities Available for Sale (approximately) Accounts Receivable Inventory Prepaid Expenses Total Current Assets 2013 2014 $4,638,000 $900,000 $4,400,000 $531,200 $1,200,000 $11,669,200 $8,027,200 $990,000 $4,450,000 $585,500 $1,100,000 $15,152,700 Property, Plant, and Equipment Land and buildings: office space Land and buildings: production Equipment Total PPE Less: Accumulated Depreciation Net PPE $2,000,000 $2,500,000 $10,000,000 $14,500,000 $8,704,000 $5,796,000 $2,000,000 $2,500,000 $10,000,000 $14,500,000 $9,222,400 $5,277,600 Total Assets $17,465,200 $20,430,300 Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Payroll Taxes Payable Salaries Payable Current Portion of Long-Term Debt Total Current Liabilities $1,050,000 $210,000 $350,000 $260,000 $1,870,000 $1,225,000 $225,000 $375,000 $270,000 $2,095,000 Long-Term Liabilities Notes Payable — Bank (less current portion) $10,900,000 $10,700,000 Total Liabilities $12,770,000 $12,795,000 Stockholders’ Equity Share Capital Retained Earnings Total Stockholders' Equity $1,000,000 $3,695,200 $4,695,200 $1,000,000 $6,635,300 $7,635,300 Total Liabilities and Stockholders’ Equity $17,465,200 $20,430,300 Page 7 9B16B005 EXHIBIT 1 (CONTINUED) Statement of Cash Flows 2013 Cash Flow from Operating Activities Net Income Adjustments to Net Income Depreciation Expense Decrease (Increase) in Accounts Receivable Decrease (Increase) in Prepaid Expense Decrease (Increase) in Inventory Increase (Decrease) in Accounts Payable Increase (Decrease) in Taxes Payable Increase (Decrease) in Salaries Payable Cash Provided by Operating Activities 2014 $2,744,500 $2,940,100 $864,000 $200,000 (24,500) (116,000) $110,000 (20,000) (10,000) $3,748,000 $518,400 (50,000) $100,000 (54,300) $175,000 (15,000) (25,000) $3,589,200 $0 $0 $500,000 (60,000) (200,000) Increase in Cash Beginning Cash $4,188,000 $450,000 $3,389,200 $4,638,000 Ending Cash $4,638,000 $8,027,200 Cash Flow from Investing Activities Purchase of Equipment Cash Flow from Financing Activities Note Payable — Long-Term Payment on Long-Term Note Payable Source: Company files. Page 8 9B16B005 EXHIBIT 2: SMI’S FINANCIAL STATEMENT FOR FISCAL YEAR 2015 Income Statement 2015 Gross Sales Less: Returns Less: Provision for Bad Debts Less: Provision for Returns Net Sales Cost of Goods Sold Less: Loss of Inventory Gross Profit Operating Expenses Lease Expense Executive Salaries Office Salaries Depreciation Expense — Production Equipment Office Expense Advertising Expense Interest Expense R&D Expense Total Operating Expense $34,100,000 $0 (682,000) (1,023,000) $32,395,000 $24,357,000 $8,038,000 $420,000 $1,555,000 $1,525,000 $2,155,520 $95,000 $195,000 $115,000 $750,000 $6,810,520 Income from Continuing Operations Gain on sale of production facilities $1,227,480 $9,500,000 Net Income $10,727,480 Page 9 9B16B005 EXHIBIT 2 (CONTINUED) Balance Sheet Assets Current Assets Cash Securities Available for Sale (approximately) Accounts Receivable Inventory Prepaid Expenses Total Current Assets $7,665,700 $1,030,000 $7,550,000 $755,000 $1,300,000 $18,300,700 Property, Plant, and Equipment Land and Buildings: Office Space Land and Buildings: Production Equipment Total PPE Less: Accumulated Depreciation Net PPE $2,000,000 $0 $10,000,000 $12,000,000 $2,155,520 $9,844,480 Total Assets $28,145,180 Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Payroll Taxes Payable Salaries Payable Current Portion of Long-Term Debt Total Current Liabilities 2015 $1,555,000 $245,000 $450,000 $310,000 $2,560,000 Long-Term Liabilities Notes Payable — Bank (less current portion) $10,500,000 Total Liabilities $13,060,000 Stockholders’ Equity Share Capital Retained Earnings Total Stockholders’ Equity $1,000,000 $14,085,180 $15,085,180 Total Liabilities and Stockholders’ Equity $28,145,180 Page 10 9B16B005 EXHIBIT 2 (CONTINUED) Statement of Cash Flows 2015 Cash Flow from Operating Activities Net Income Adjustments to Net Income Gain on Sale of Building Depreciation Expense Decrease (Increase) in Accounts Receivable Decrease (Increase) in Prepaid Expense Decrease (Increase) in Inventory Increase (Decrease) in Accounts Payable Increase (Decrease) in Taxes Payable Increase (Decrease) in Salaries Payable Cash Provided by Operating Activities Cash Flow from Investing Activities Purchase of Securities Available for Sale Purchase of Equipment Cash Used by Investing Activities Cash Flow from Financing Activities Payment on Long-Term Note Payable Cash Provided by Financing Activities $1,227,480 $9,500,000 $2,155,520 ($3,100,000) ($200,000) ($169,500) $330,000 $20,000 $75,000 $9,838,500 $0 ($10,000,000) ($10,000,000) ($200,000) ($200,000) Increase in Cash Beginning Cash ($361,500) $8,027,200 Ending Cash $7,665,700 Source: Company files.

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