O.M Scott Case Analysis

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February 18, 2015

O.M. Scott and Sons Case Analysis

Prepared By:

Adam Correa

Fin 423 T/Th 10:00

Prof. Lotfaliei

814720108

Summary:

Beginning in 1868, the O.M. Scott and Son’s Company line of business involved processing clean, weed-free grass seed. They are innovators in the mass distribution of chemical, lawn and fertilizer products. The company has the advantage in the fertilizer manufacturing industry by owing a huge share in the market because there were limited emerging competitors in early 1959. Advances in distribution methods helped enable the firm to expand their business nationally as well as increase their product line to dominate the outdoor home economic market. There line of business revolves highly around their seasonal sales periods which spike in the March and September quarter ends. In order to maintain supply for the high demand increase, Scott and Son’s company needs to finance and produce more stand-by inventory. The firm’s main customers are small local retailers and large outdoor retailers. Due to the seasonal nature of the business, some dealers were continuously asking for credit extensions exposing faulty local garden and hardware stores that could not be relied upon to make payments. In an attempt to solve the issue, Scott and Son’s introduced a separate payment plan in 1959. The trust receipt asked the dealer to provide: 1) immediate transfer to the dealer of title to any Scott products shipped 2) retention of a security interest by Scott in merchandise so shipped until sold by the dealer acting as a retailer and 3) segregation of a sufficient proportion of the funds received from such sales to provide payment to Scott as billed. A rapid growth in accounts receivables was the result of the trust receipt program which made the company less liquid. In order to maintain operations, a combination of subordinated notes, a revolving line of bank credit, and increase in supplier credit was implemented. This drove Scott and Son’s leverage down by accumulating more debt which in order to maintain their sales with risky dealers.

Thesis:

From analyzing Scott and Son’s financial data, management actions, and economic conditions, I have concluded that the company has a high chance of default if they continue with their current growth patterns and expected growth for the next years. The company is currently illiquid and their leverage has immensely increased from the previous years. After the trust was implemented, the company’s accounts receivable grew enormously causing an increase in the internal debt structure. We must question management decisions to continue profitable operations.