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Wilson Lumber Company

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This case has been adapted by Marc Bertonche, Visiting Professor at the Harvard Business School, from the original Wilson Lumber Company case (HBS-9-286-122). It was prepared as the basis for class discussion rather than to illustrate either effective or ineffective liandling of an administrative situation.

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After a rapid growth in its business during recent years, the Wilson Lumber Company in the spring of 2002 anticipated a further substantial increase in sales. Despite good profits, the company had experienced a shortage of cash and had found it necessary to increase its borrowing trom the SuburbanNational Bank:to $1,630,000 at the end of2001. The maximum loan that Suburban National would make to any one borrower was $1,650,000 and Wilson had been able to stay within this limit only by relying very heavily on trade credit. Mr. Roger Wilson, owner and president of the Wilson Lumber Company, was therefore actively looking elsewhere for a new bankingrelationshipwhere he would be able to negotiate a larger loan. Mr. Wilson had recentlybeen introduced by a personal mend to Mr. George Dodge, an officer of a much larger bank:,the Northrop National Bank. The two men had tentatively discussedthe possibility that the Northrop bank:might extend a line of credit to Wilson Lumber up to a maximum amount of $3,250,000. Mr. Wilson thought that a loan ofthis size would more than meet his foreseeable needs, but he was eager for the flexibilitythat a line of credit of this size would provide. Subsequent to this discussion Mr. Dodge had arranged for the credit department of the Northrop National Bank:to investigateMr. Wilson and his company. The Wilson Lumber Company had been founded in 1990 as a partnership by Mr. Wilson and his brother-in-law, Mr. Henry Stark. ln 1997 Mr. Wilson bought out Mf. Stark's interest for $750,000 and incorporated the business. The business was located in a growing suburb of a large city. The company owned land with access to a railroad siding, and two large storage buildingshad been erected on this land. The company' s operations were limitedto the wholesaledistribution of lumber products in the local area. Typical products inc1udedplywood, moldings, and sash and door products. Quantity discounts and credit terms of net 30 days on open account were usually offered to customers. Sales volume had been built up largely on the basis of successful price competition made possible by careful control of operating expenses and by quantity purchases of materials at substantial discounts. Much of the moldings and sash and door products, which constituted significant items of sales, were used for repair work. About 55% of total sales were made in the six months trom March through August. No sales representatives were employed, orders being taken exclusivelyover the telephone. Annual sales of$II,870,000 in 1999, $14,080,000 in 2000, and $18,840,000 in 2001 yielded after-tax profits of $210,000 in 1999, $240,000 in 2000, $310,000 in 2001. Profit and loss statements for the years 1999 through 2001 are given in Exhibit 1. Mr. Wilson was an energetic man, 39 years of age, who worked long hours on the job. He was

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helped by an assistantwho, in the words of the investigatorof the NorthrupNationalBank, .

"has been doing and can do about everything that Mr. Wilson does in the organisation." Other employees numbered 80 in early2002. As part of its customary investigation of prospecti,,:eborrowers, the Northrop National Bank sent inquiries concerningMf. Wilson to a number of firms that had business dealings with him. The manager of one of his large suppliers,the Barker Company, wrote in answer: "The conservative operation of his business appeals to us. He has not wasted his money in disproportionate plant investment Ris operating expenses are as low as they could possibly be. He has personal control over every feature of his business,

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and he possesses sound judgement and a willingnessto work harder than anyone 1 have ever known. This, with a good personality, gives him an excellent turnover; and ITommy personal experience in watching him work, 1 know that he keeps close check on his own credits." AlIthe other trade letters received by the bank bore out the statement quoted above. The bank gave particular attention to the debt position and current ratio of the business. It noted the ready market for the company's products at all times and the fact that sales prospects

were favorable.The bank's investigatorreported: "... Salesare expectedto reach$25 million

in 2002 and may exceed this level if prices of lumber should rise substantially in the near future." Wilson Lumber's sales were protected to some degree ITom fluctuations in new housing construction because of the relatively high proportion of its repair business. Projections beyond 2002 were difficult to make, but the prospects appeared good for a continued growth in the volume of Wilson Lumber's business over the foreseeablefuture.

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The bank also noted the rapid increase in WilsonLumber's accounts payable in the recent past. The usual terms of purchase in the trade provided for a discount of 2% for payments made within 10 days of the invoice date. Accounts were due in 30 days at the invoice price but suppliers ordinarily did not object if payments lagged somewhat behind the due date. During the last two years Mr. Wilson had taken very few purchase discounts because of the shortage of funds arising from the additional investments in working capital associated with the company's increasing sales volume. Trade credit was seriously extended as Mr. Wilson strove to hold his bank borrowing within the $1,650,000 ceiling imposed by the Suburban National Bank. Balance sheets as of December 31,1999-2001 are presented in Exhibit 2. The tentative discussions between Mr. Dodge and Mr. Wilson had been in terms of a revolving short-term loan not to exceed $3,250,000 in amount. The specifie details of the loan had not been worked out, but Mr. Dodge had explainedthat the agreement would involve the standard covenants applying to such a loan. He cited as illustrative provisions the requirement that restrictions on additional borrowing would be imposed, that net working capital would have to be maintainedat an agreed level, that additionalinvestments in fixed assets could be made only with the prior approval of the bank, and that limitations would be placed on withdrawals of funds ITomthe business by Mr. Wilson. Interest would be set on a floating rate basis at 3 percentage points above the lowest rate charged by the bank on short-term loans. Mf. Dodge indicated that the initial rate to be paid would be approximately9%. Both men also understood tnat NIT.Wilson would sever ms relationsmp with the Suburban National Bank if he entered into a loan agreement with the Northrop National Bank.

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Exhibit 1 Profit and Loss Statements for the Years ending Dece~
($ 'OOOs)

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1999 Net sales Cost of sales(l) Gross rnargin Operating expenses(2) Operating profit (EBIT) Interest expense Profit before taxes
Incorne taxes Net profit

---Il,870 8,550 3,320 2,970 350 90 260

50 210

1999 through 2001

2000 14,080 10,050 4,030 3,600 430 140 290

50 240

2001 18,840 13,640 5,200 4,600 600 230 370

60 310
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(1) Details of cost of sales 1999 Beginning inventory Purchases Ending inventory Cost of sales 1,280 8,940 (1,670) 8,550 2000 1,670 10,660 (2,280) 10,050 2001 2,280 14,280 (2,920) 13,640

(2) Operang expenses include a salary for Mr. Wilson of $145,000 in 1999, $150,000 in 2000, and $155,000 in 2001.

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' Exhibit 2 Balance Sheets as ofDecember 31, 1999-2001
($ 'OOOs)

Assets Cash Accounts receivable, net Inventory

Total CUITentassets

1999 410 1,100, 1,670 3,280 900 4,180

2000 340 1,550 2,280 4,170 980 5,150

2001 290 2,220 2,920 5,430 1,100 6,530

Net fixed assets Total assets r" Equity and liabilities Short-tenn bank bOITowings Accounts payable Accrued expenses Long-tenn debt - CUITent portion Total CUITent liabilities Long-tenn debt Totalliabilities Shareholders' equity Totalliabilities and equity : ,..

750 870 170 50 1,840 450 2,290 1,890 4,180

1,020 1,340 210 50 2,620 400 3,020 2,130 5,150

1,630 1,790 270 50 3,740

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350 4,090 2,440 6,530

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