Padgett Paper Products Company

I. Executive Summary

Padgett Paper Products Company, a publicly traded company located in Richmond, VA sells a variety of stationary products including notebooks, loose-leaf binders, forms and filler paper for students and record keeping purposes.

Padgett has a customer basis of roughly 5,000 wholesalers and retailers across the United States and Canada. They currently possess a debt structure of 2/10 net 30 which causes them to have a cash deficit on the balance sheet. Rising inflation and the increase in cost of paper products caused smaller companies to be acquired by larger companies such as Padgett. After several acquisitions and the acquisition of their competitor, Tri-State Tablet Company, a need for a new loan structure was apparent due to the level of debt required to make the acquisition.

Realizing the need for a new loan structure, Padgett now must find a mutually acceptable debt structure that will minimize lender risk while increasing company value. Options will be provided for future evaluation and analysis to ensure this is met.

When looking to find optimal loan structure we conducted a financial ratio analysis to determine which areas required the most attention. We looked at liquidity ratios to find out how effective Padgett was using their assets. We looked at Activity ratios to find out how the turnover for its inventory, receivables, and accounts payable affected its current cash issue as well as finding out where there is need for improvement. We then looked at and analyzed the debt management ratios to figure out how the company was currently using its debt and equity to fund the business. Through that we also were able to find areas of concern that we want to make Padgett aware of. We found that the main area of concern came in the company’s receivables section. Padgett is not providing companies with enough incentive to pay early or on time, which results in less cash on hand and lower levels of liquidity. In addition to a low payment incentive, customers are not penalized for breaking payment terms and typically extend their payment period 30 days past due. In order to correct this, Padgett would need to increase discount rate providing customers with a greater incentive to pay within the first 10 days, as well as implement an interest rate penalty for customers who choose to stretch out the payment period beyond term limitations.

The next area that we found that could be changed to achieve a more efficient company is to change from the current FIFO method of inventory to the LIFO method. In doing this, Padgett will be able to actually realize a $0.5 million tax deferral if they go to this method even though this would be tough to implement.

If Padgett decides to implement these two strategies that we recommend we feel that they will be