CASE STUDY
MASSEY-FERGUSON 1980
Group A7:
• Elisenda Sumarroca
• Martin Von Vopelius
• Finn Pilath
• Dimitris Sotiriou
• Lorenzo Masserini
• Ilia Antipov
Q1: DESCRIBE THE INDUSTRY AND THE
KEY FACTORS TO BE SUCCESSFUL
Industry
• Competition between large multinational companies with a large portfolio of products and medium to small companies with a limited range of products.
• Main companies in North America: Deere & Co, Massey-Fergusson and
International Harvester.
• Increasing importance of Diesel engines with the rising gasoline prices which has caused more R&D in this field.
• Decline in demand in North America due to high interest rates, economic recession, soviet grain embargo and severe drought. This recession has also caused
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1) high interest rates (costs on short-term debt rose; depressed markets for farm and industrial machinery -> hurt overall sales)
2) poor weather in Western Europe
3) decline in North American farm prices and incomes (economic recession, Soviet grain embargo, drought in summer of 1980, world-wide depression)
4) imposition of credit and monetary restrictions in Argentina and Brazil -> declines in farm machinery sales
What went wrong (for Massey)?
•) ambitious program of acquiring assets and expanding operations (during 60s and 70s);
70s were primarily financed by debt (huge proportion was short-term debt: bank borrowings up from 113US$m in FY1976 to 1.015US$m in FY1980); FY1978 D/E ratio:
214%
•) from FY1976 onwards, net income fell continuously - in FY1978 net loss of 262US$m due to reasons above and poor product market alignment: recurring problem of currency fluctuations How did Massey respond?
Cutting labor force from
68,000 to 47,000
Reducing manufacturing
space from 30m to 20m sq. ft.
Reducing inventories from
1,083US$m to 989US$m
Elimination of unprofitable operations (e.g. office
during year 12 and year 13. However, in year 13 and year 14 total current assets fell
There are two noticeable dips in the net income in the 4th and the 7th period. The dip in the 4th time period is because of the introduction of a new product called “Allround+” which is a 4-hour liquid cold medicine for the children and the dip in the 7th period is because of the introduction of another new product called “Allright” which is a 4-hour allergy capsule. Whenever, new products are introduced a lot of money is invested in marketing and promoting the new products to encourage or boost the sales of the product. This process increases the expenses of the products and erects a higher threshold for the company to reach to, to make a profit. Hence, it is normal when the net income dips during the introduction of new products in the market.
July Recurring EBITDA was $8.4M unfavorable to budget by $10.2M; unfavorable to July FY16 budget by $8.9M
The cash flow situation started falling from the end of year 12. The company should have known from this.
effect the American auto industry are; global competition in the industry, new technology for powering
Cartwright is a retail distributor of lumber products. It built its competitive edge based on pricing and having a careful control over its operations. The company reported an operating income of $86,000 and $111,000 in 2003 and 2004, respectively. This is a 29% increase in operating income in one year, which shows the firm’s strong ability to generate cash. The firm’s account receivables and inventory are increasing from year to year which is a good sign of a growing business. Cartwright is not an asset intensive company. It does not have to have huge fixed assets; most of its assets are cash, accounts receivable and inventory which all depend on future sales. Sourcing of materials is managed very well, purchased at discounts most of the time and contribute to having lower prices.
In the year 2007, there is a drop in financial performance within the company. Earnings have dropped
Massey’s competitors were International Harvester and Deere&Company. In 1976, Massey’s market share was 34%, while the other two were 27.7% and 38% respectively. International Harvester had the highest sales and it was also the most efficient in making use of its assets, with a sales/asset ratio of 1.54. Massey was in the middle, doing better than Deere&Company. With regard to financing, in 1976, Massey and International Harvester both had a less than 50% debt/total capital. While till 1980, International Harvester managed to keep the ratio around 50%, Massey had the total debt/capital ratio out of control, with more than 80% debt financing. Neither of the two competitors relied on short term debt such as STD, while Massey relied heavily on STD.
balance sheet reported an operating loss of $301m (for the first time since 1998) while warning
Because they have faced cash shortage trouble. Their profitability has grown for 1993 ~ 1995 period, as we can see from their I/S (e.g. Sales and Net Income, etc.). However, as its business size grows, their A/R increased, which means that it is getting difficult to collect cash. On the other hand, A/P decreased for the same period, which means that the company paid cash for A/P, resulting in critical cash shortage. Furthermore, the A/P payment period is shorter than A/R collection periods, the company’s cash problem happens to be accelerated.
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1 In Ravi Suria’s analysis, “we believe that the current cash balances will last the company through the first quarter of 2001.” According to Exhibit 12c the cash flow statement, in contrast, the cash balance could last for the first quarter of 2001, when it suffered from 407 losses in operating activities, though positive in investing and
In this example we have a case in which years 89, 90 and 91 net income is less than net cash provided by operating activities. One of the major reasons for this appears to have been depreciating high cost of equipment. The depreciation is trending downward over the three-year period indicating less long-term assets are being purchased/capitalized to run operations. While depreciation does not involve cash, it does impact net income. In addition, account payables have been decreasing over the last two years and significant cash has been used in the last year to pay the liability. In 1990 there are significant costs associated with restructuring activities. There
The net income was negative from 1989 to 1991. The net income is negative due to the depreciation costs. Operating