Hansson Private Label Essay
1. How would you describe HPL and its position within the private label personal care industry?
HPL is a mid-sized private label manufacturer of personal care goods. In 1992, the company acquired production assets from Simons Health and Beauty Products, and through increased efficiency had enjoyed growth within the sector. The company’s production is estimated to account for about 28% of the $4 billion sold in their product category, generating revenue of $681 million in 2007.
The company was recently presented an opportunity by its largest retail customer to significantly increase its share in their private label manufacturing. The prospect of growth was risky, since it required …show more content…
OCF = EBIT – Taxes + Depreciation
Second, we calculate the changes in working capital using the DSO, DSI and DPO ratios provided in the request form.
Capital Expenditure = Change in Net Working Capital
Net Working Capital = Current Asset – Current Liabilities
= A/R + Inventory – A/P
A/R = DSO * (Revenue / Number of days in Period)
Inventory = DSI * (COGS / Number of days in Period)
A/P = DPO * (COGS/ Number of Days in Period)
Afterwards we have all calculation available to estimate the Free Cash Flow (FCF), calculated as following
FCF = OCF – Capital expenditure
Referring to Exhibit 5, Executive VP of Manufacturing Robert Gates based his capital request form on a ten-year deal to estimate the project’s FCFs. However, from the information provided in the case we know that “the customer would commit to only a three-year contract”. Robert Gates financial assumptions expect capacity utilization to be increasing during the course of the project, but don’t take into account the operational risks that might occur from a changing “relationship with the customer” or a disappearing “demand (…) at the end of the initial three-year contract”.
Consequently, this would decrease revenue and reduce the FCF. Also, the risk measurement for a ten-year estimation shouldn’t be neglected. First, “making this (…) investment and incurring the associated debt (…) increases HPL’s (…) risk of financial distress should…