PRA – 1: Burton Sensors, Inc.

FM-2
Submitted to: Prof. Kanagaraj

Group Members:
GN Ranjan BJ22066
Kritika Goel BJ22072
Mukul Kaushik BJ22074
Priyanshi Gupta BJ22087
1. CASE SUMMARY
1.1. Company Overview
1.1.1. About Company –
Burton Sensors, Inc formerly AMI Labs is a USA based sensor designing and manufacturing company. The
company specializes in the manufacturing of temperature sensors including a variety of resistance
temperature detectors, bearing temperature probes, temperature transmitters. The company serves a
wide range of industries including petrochemicals, food processing, industrial machinery etc.

1.1.2. Expansion Strategy –

Burton has grown through a mix of organic growth and acquisitions. The company started as AMI labs in
2002 and then in 2004 acquired Burton Sensors. Later it financed its organic growth through internally
generated cash flows. In 2011 the company went for IPO to finance its expansion. Burton is also relying
on debt for its CAPEX and OPEX. In the past few years company has emerged as a fast-growing company
and has also become profitable but it has reached its debt capacity, and this has led to the president of
the company Amy Marshall to seek alternatives for funds.

1.2. Industry Overview

As of 2017, in USA sensor industry was competitive and highly fragmented and served both international
and domestic markets. Smaller firms specialized in producing customized products while larger firms
enjoyed efficient distribution channels and economies of scale, hence produced diversified range of
sensors. Traditional contact types such as thermocouples and resistance temperature detectors
dominated the sensor market in 2017 but industry experts predicted fiber optic sensors would grow
more rapidly in future. The sensor market was expected to grow at a CAGR of 4.5% between 2017-23.

Net Income vs Cash Flow

700
600 571.3
500
400 345.4
260.7
$ 000s

300 244.4
200
100 53 67
0 -40.3 -28.4
-100
2014 2015 2016 2017

Net Income Cash Flow

2. PROBLEM STATEMENT:
2.1. Should Burton Sensors purchase thermowell machines?
2.2. Should Burton issue shares to raise additional capital?
2.3. Should Burton Sensors acquire Electro-Engineering Inc. in an all-stock deal?

3. SOLUTIONS:
3.1. For deciding whether to buy Thermowell Machines, we will calculate WACC and then
using the WACC, calculate NPV and IRR

Calculating WACC by using Exhibit 4 and other details mentioned in case:

Calculation of Beta
Particulars TEL Ametek Opsens Cyberoptics Average Burton
Equity/Capital 69.18% 68.34% 77.22% 100.00% 71.58% 19.61%
Debt/Capital 30.82% 31.66% 22.78% 0.00% 28.42% 80.39%
Debt/Equity 44.55% 46.33% 29.49% 0.00% 40.13% 410.00%
Tax Rate 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
Levered Beta 1.24 1.25 1.02 0.85 1.09 3.32
Unlevered Beta 0.96 0.96 0.86 0.85 0.91

Calculation of WACC
10-year US Treasury Note Yield 3.00%
Equity Risk Premium 5.80%
Beta 3.32

Cost of Equity 22.28%

Cost of Debt 5.50%

Tax Rate 35%
After Tax Cost of Debt 3.6%

Debt in the capital structure 80.39%

Equity in the capital structure 19.61%
WACC 7.24%

Now, using the WACC, we calculate PVCI, and in turn, NPV and IRR
 Calculation of PV of Cash Flows from Buying Thermowell Machine
Particulars 2017 2018 2019 2020 2021 2022 2023
Cost Savings 1400000 1463000 1528835 1597633 1669526 1744655 1823164
Less: Salary of Operators 170000 170000 170000 170000 170000 170000 170000
Less: Material & Rent Expense 780000 780000 780000 780000 780000 780000 780000
Less: Depreciation 85714 85714 85714 85714 85714 85714 85714
Total Income 364285.7 427285.7 493120.7 561918.3 633811.8 708940.4 787449.9
Add: Depreciation 85714 85714 85714 85714 85714 85714 85714
Less: Taxes 97500 119550 142592.3 166671.4 191834.1 218129.1 245607.5
Net Cash Inflow/(Outflow) 352500 393450 436243 480961 527692 576526 627557
Incremental Working Capital Released 650000
PV of Cash Inflow/(Outflow) 328693.3 342100 353690.6 363611.1 371996.9 378973.8 783074

Calculation of NPV and IRR

Total PV of Cash Inflow/(Outflow) 2922140
Cost of Thermowell Machine 600000
Working Capital Investment 650000
NPV of Buying Thermowell Machines 1672140
IRR 18.8%

Since the NPV is positive, IRR is positive and greater than WACC, Burtons Sensors should buy
Thermowell Machines.
3.2 To decide whether Burton should issue shares for raising additional capital, we check
whether the two conditions given by Burton’s bank.
Condition - 1
Particular 2016A 2017E
Bank Loans 4,580 5,080
AR + Inventory 4,751 5,823
Bank Loan % 96% 87%
Target Ratio 75%
Target Bank Loan 4,367
Required Repayment 713
Cash Proceeds from Equity Issue 1,575

Condition - 2
2016 2017
Particular
Existing Structure Existing Structure Post Issue Structure
Total Liability 8,537 9386.4 9386.4
Total Equity 1,546 2116.8 3866.8
Liability/Equity 5.5 4.4 2.4

If no more equity is released, both conditions will not be met. Therefore, the equity should be
offered through a private placement in order to satisfy the conditions.
3.3 To determine whether Burton Sensors should acquire Electro-Engineering Inc. in an all-
stock deal, we first determine the Enterprise Value of Electro-Engineering Inc. (in $ ‘000s)
WACC Calculation
Debt 310.6
Equity 1429.6
Tax Rate 0.35
Finance Costs (as per P&L statement) 18.7

Calculating Cost of Debt 3.57%

Calculating Cost of Equity

Beta 1.04
Risk Free Rate 3%
Market Return 8.8%
Equity Risk Premium 5.8%

Ke (Cost of equity) 9.00%

Wd 17.85%
We 82.15%

WACC 8.03%
Terminal Growth Rate 1.25%

PBT Calcuation
Particulars 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E
Net sales 2944.90 3566.30 4072.70 5050.15 5933.92 6824.01 7642.89 8407.18
COGS 1525.00 1811.70 2085.20 2474.57 2907.62 3343.77 3745.02 4119.52
Gross profit 1420.00 1754.60 1987.50 2575.58 3026.30 3480.25 3897.88 4287.66
SG&A expense 814.90 930.10 1080.90 1204.97 1415.83 1628.21 1823.59 2005.95
R&D expense 153.10 178.30 219.90 262.57 308.53 359.35 399.08 439.61
Depreciation and amortization 142.20 196.90 206.10 259.41 182.55 209.04 237.94 245.83
Interest expense 18.70 18.70 18.70 18.70 18.70 18.70 18.70 18.70
Pretax income (loss) 291.00 430.60 461.80 829.87 1100.64 1264.89 1418.51 1577.51
Income taxes 101.80 150.70 161.60 290.46 385.22 442.71 496.48 552.13
Net income 189.10 279.90 300.20 539.42 715.41 822.18 922.03 1025.38
Number of common shares (thousands) 1100.00 1100.00 1100.00 1100 1100 1100 1100 1100
Earnings per share 17.00 0.25 0.27 0.49 0.65 0.75 0.84 0.93
 FCFF Valuation
Particulars 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E
Net Income 189.10 430.6 461.8 539.42 715.41 822.18 922.03 1025.38
Add: Depreciation 142.20 196.90 206.10 259.41 182.55 209.04 237.94 245.83
Add: Interest 18.70 18.70 18.70 18.70 18.70 18.70 18.70 18.70
Tax 35% 35% 35% 35% 35% 35% 35% 35%
Less: Capital Expenditure 230.3 287.1 346.6 288.0 307.2 313.9 303.1 308.1
Less: Changes in Working Capital -78.5 216.2 318.6 152.1 229.0 233.2 204.8 222.3
FCFF 191.66 136.36 14.85 370.89 373.92 496.21 664.30 752.98
PV of FCFF 343.31 320.37 393.54 487.68 511.66

Terminal Value 7636.87

PV of Terminal Value 5189.43
Enterprise Value 7245.99

The EBIDTA of Electro Engineering in 2016 is $6,86,700. According to the case, we can acquire
the company at 10 times the EBIDTA, i.e., $68,67,000. Enterprise value according to our
calculations is $72,45,990. Therefore, Burtons Sensors should acquire Electro-Engineering in an
all-equity deal.

4. CONCLUSION:
4.1. Burtons Sensors should buy Thermowell Machines
4.2. Burton should issue shares for raising additional capital
4.3. Burtons Sensors should acquire Electro-Engineering in an all-equity deal.