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You are finance director for an Engine Group. Specifically you are responsible for the accounting, planning and financial analysis
for two locations (Clarkwood and Magadore). The Engine group has thirteen facilities located around the world. Facilities
locations are as follows: US (four), Mexico, Europe (five), China, Thailand, and Brazil. The Vice President of Finance, Robert, has
asked you to perform a review potential restructuring actions regarding the Clarkwood plant. The Clarkwood plant is located in
Cleveland, Ohio and is one of the founding facilities for the Company. The plant produces engine components that are shipped
to automotive customer’s engine facilities for assembly into engines. The customer base is located in North America. As is
customary in the automotive industry, program awards are typically for the life of the engine (7‐10 years).
The Clarkwood plant has been struggling financially for several years. It is the Engine Group’s largest facility but also its worst
financial performer. Its future sales are projected to decline as several programs are ending and the company was not awarded
the successor programs. This plant has been on the Company’s watch list for closure over the past several years. Due to its
financial performance and declining sales, the Company’s management believes this could be the right timing to close it and
transfer production to its other sites.
Closing Clarkwood has been rumored for several years and is a highly sensitive subject. It has been in the community over 50
years and is unionized. In addition, the Company has a location in Mexico which would most likely pick up some of Clarkwood’s
traditional production. This project is highly confidential. It has been code named “Project Sidewinder”. You will be working
with a small team to develop the financial projections and make a recommendation on potential closure. There are two
scenarios that make the most sense.
1. Downsize the plant. The strategy is to run out existing product until the end of its life cycle. Any new business
awards will be sourced to one of Engine’s other North American facilities.
2. Close the plant. Shutdown the Clarkwood facility by end of 2018. Transfer cu
ent production to other Engine
locations. Request customers to re‐source certain products to other suppliers.
Downsize Case Information:
Depreciation is in not included in cash fixed costs. This is a non‐cash expense that is deductible for taxes.
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Unit volume (in 000's) 30,135 26,605 17,753 13,006 10,871
Unit Price 1.926 2.005 2.045 2.160 2.250
Cost % of Sales
Material 28.9% 28.9% 31.1% 31.0% 31.3%
Labor 45.0% 45.1% 53.4% 53.4% 46.1%
Other variable costs 16.8% 18.2% 18.1% 18.1% 17.2%
Fixed costs, cash 16.3% 18.0% 17.3% 19.3% 19.6%
Other (in $ 000's)
Severance (restructuring) 1,800 4,200 2,500 2,100 2,400
Asset impairment, non‐cash restructuring 3,000
Depreciation 2,800 2,500 2,100 1,800 1,400
Capital expenditures 400 500 500 500 500
Working capital change 500 400 1,000 400 200
Asset sales proceeds 300 300 300 300 200
Shutdown (or Close Plant) Case Information:
Production will be transfe
ed from Clarkwood during 2017 and 2018. Plant will shutdown in 2018.
Do to the sensitive nature of the project, your team was unable to provide much income statement detail for each
location.
You will need to work with sales and EBIT margin. The EBIT margin includes depreciation.
Restructuring charges are not included in the EBIT numbers.
To generate a high level income statement you need to layer on restructuring costs and income taxes.
Working capital will increase in the first two years of the project as the company will build inventory banks to protect
its customers from supply disruption from any threatened employee strike related to closure news.
Other information (same for both cases):
Change in working capital is the cash flow impact: Shutdown case cash inflows, Downsize case cash outflows then
inflows
Proceeds from asset sales – assume assets are sold at book value, no gain or loss on sale (no tax impact).
Asset impairment charge is non‐cash charge that is deductible for taxes. It is considered restructuring
Income tax rate 35% (this is the same rate for income from all locations in this analysis). Any losses generated will be
offset by income in other parts of the company
Restructuring costs (except asset impairment) are cash costs and should be recognized in the year they are paid
WACC 12.0%
Lastly, no terminal value has been determined in either case. The situation is fluid and you think the best approach is to
compile and sort through the data you already have. This should be enough information to make a solid recommendation
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Sales
Clarkwood 55,309 14,058 ‐ ‐ ‐
Mexico 2,587 12,559 9,648 5,850 2,280
Tennessee 1,932 21,683 16,775 12,361 12,297
EBIT Margin
Clarkwood ‐17.1% ‐76.6%
Mexico 15.4% 15.4% 15.4% 15.4% 15.4%
Tennessee 11.0% 31.2% 24.7% 29.0% 28.1%
Restructuring Recap
Restructuring severance 8,100 10,700 900
Restructuring other 1,800 5,300 1,300
Asset impairment, non‐cash 3,000
Other (in $ 000's)
Depreciation 2,800 2,500 1,500 1,300 1,000
Capital expenditures 1,200 ‐ ‐ ‐
Change in working capital (1,300) (1,000) 1,600 500 500
Asset sales proceeds 300 800 300 ‐ ‐
Deliverables / Analysis
Complete a financial analysis in Excel and recommend whether the Company should close the Clarkwood plant or
downsize it to minimize losses
Financial analysis should include high level income statement for each case. The downsize case will have more detailed
income statement as your team had more information to analyze and project items
Management will want to understand how the financials are impacted by either scenario
Key financial metrics are sales, Earnings Before Interest and Taxes (EBIT) before restructuring and EBIT margin
efore restructuring
They want to see restructuring expense in the income statement as a separate line item
One last metric is EBITDA and EBITDA % (again before restructuring charges)
Management will want to understand the cash flow impact of your decision
One last item, management would like to understand, what is the maximum amount of cash restructuring charges
they can take in 2018 under the Shutdown Case so that the financial returns for both scenarios are equal