Uv0263 PDF Eng

UV0263
t
os
NORTHBORO MACHINE TOOLS CORPORATION
rP
Does it matter whether we pay a high or low dividend—or no dividend at all? To
whom? And why? Our board is hearing some conflicting claims about dividend
policy. I need to resolve this and recommend a dividend decision to the board for the
third quarter of 1992.
yo
With these words, Christine Olsen, the chief financial officer of Northboro Machine Tools
Corporation, explained that she had become the judge in a debate over dividend policy within the
company. After years of traditionally strong earnings and predictable dividend growth, the company
faltered in the late 1980s. In response, management implemented two extensive restructuring
programs, both of which were accompanied by net losses. For three years in a row, dividends
exceeded earnings. Then, in 1990, dividends decreased to a level below earnings. Despite
op
extraordinary losses in 1991, the board of directors declared a small dividend. For the first two
quarters of 1992, the board declared no dividend. But in a special letter to shareholders the board
committed itself to resuming the dividend as early as possible—ideally, in 1992. In the summer of
1992, Olsen had to recommend to the board a dividend policy for implementation in the quarter
ending September 30.
tC
As a related matter, senior management was considering embarking on a campaign of

corporate image advertising, along with changing the name of the corporation to “Northboro
Advanced Systems International, Inc.” Management felt that this would help improve the perception
of the company in the investment community. Olsen needed to recommend action to the board on
this proposal.
No
Overall, management’s view was that Northboro was a resurgent company that demonstrated
great potential for growth and profitability. The restructurings had revitalized the company’s
operating divisions, and a new product promised to make its predecessors’ and competitors’
products obsolete. Many within the company viewed 1992 as the dawning of a new era that, in spite
of the company’s recent performance, would turn Northboro into a growth stock. The company had
This case is dedicated to Professors Robert F. Vandell and Pearson Hunt, the authors of an antecedent case, long out of
Do
print, that provided the model of the economic problem for this case. “Northboro” is a fictional firm, though it draws on
facts of contemporary companies. It was written by Casey S. Opitz under the supervision of Robert F. Bruner as a basis
for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright ©
1997 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden School Foundation. Rev. 12/97.
This document is authorized for educator review use only by Nguyen Dong, HE OTHER until May 2018. Copying or posting is an infringement of copyright. [email protected] or
617.783.7860
-2- UV0263
t
os
no Moody’s or Standard & Poor’s rating because it had no bonds outstanding, but Value Line rated it
an “A” company.1
Out of this combination of a troubled past and a bright future arose Olsen’s dilemma. Did the
market view Northboro as a loser, as a blue chip stock, or as a potential growth stock? How, if at all,
rP
could Northboro affect that perception? Would a change of name help frame investors’ views of the
firm? Did the company’s investors expect capital growth or steady dividends? And if those questions
could be answered, what were the implications for Northboro’s future dividend policy?
The Company
yo
Northboro Corporation was founded in 1923 in Concord, New Hampshire, by two
mechanical engineers, James North and David Peterboro, who had gone to school together and were
disenchanted with their positions and prospects as mechanics at a farm equipment manufacturer.
In its early years, Northboro designed and manufactured a number of machinery parts,
including metal presses, dies, and molds. In the 1940s, the company’s large manufacturing plant
op
produced tank and armored-vehicle parts and miscellaneous equipment for the war effort, including
riveters and welders. After the war, the company concentrated on the production of industrial presses
and molds, for plastics as well as metals. By 1975, the company had developed a reputation as an
innovative producer of industrial machinery and machine tools.
In the late 1970s, Northboro entered the new field of computer-aided design and computer-
tC
aided manufacturing (CAD/CAM). Working with a small software company, it developed a line of
presses that would manufacture metal parts by responding to computer commands. Northboro
merged the software company into its operations and, over the next several years, perfected the
CAM equipment. At the same time, it developed a superior line of CAD software and equipment that
would allow an engineer to design a part to exacting specifications on a computer. The design could
then be entered into the company’s CAM equipment, and the parts would be manufactured without
the use of blueprints or human interference. By year-end 1991, CAD/CAM equipment and software
No
were responsible for about 45% of sales; presses, dies, and molds for 40%; and miscellaneous
machine tools for 15%.
Most press and mold companies were small, local or regional firms with limited clientele.
For this reason, Northboro stood out as a true industry leader. Within the CAD/CAM industry,
however, a number of larger firms, including General Electric, Hewlett-Packard, and Digital
Equipment, competed for dominance of the growing market.
Do
Throughout the 1980s Northboro helped set the standard for CAD/CAM, but the aggressive
entry of large foreign firms into CAD/CAM and the rise of the dollar dampened sales. Moreover,
1
Value Line’s financial-strength ratings, from A++ to C, were a measure of a company’s ability to withstand adverse
business conditions and were based on leverage, liquidity, business risk, company size, and stock-price variability, as
well as analysts’ judgments.
617.783.7860
-3- UV0263
t
os
Northboro fell behind some of its competition in the development of user-friendly software and the
integration of design and manufacturing. As a result, revenues declined from a high of $607 million
in 1985 to $504 million in 1991.
To combat the decline in revenues and improve weak profit margins, Northboro took a two-
rP
pronged approach. First, it devoted a greater share of its research and development budget to
CAD/CAM in an effort to re-establish leadership in the field. Second, the company underwent two
massive restructurings. In 1989, it sold two unprofitable lines of business with revenues of $31
million, sold two plants, eliminated five leased facilities, and reduced personnel. Restructuring costs
totaled $44 million. Then, in 1991, the company began a second round of restructuring by altering its
manufacturing strategy, refocusing its sales and marketing approach, and adopting administrative
procedures that allowed for a further reduction in staff and facilities. The total cost of the operational
yo
restructuring in 1991 was $60 million.
The company’s latest income statements and balance sheets are provided in Exhibits 1 and 2.
Although the two restructurings produced losses totaling $135 million in 1989 and 1991, by 1992
the restructurings and the increased emphasis on CAD/CAM research appeared to have launched a
turnaround. Not only was the company leaner, but also the CAD/CAM research led to the
op
development of a system that Northboro management believed would redefine the industry. Known
as the Artificial Workforce, the system was an array of advanced control hardware, software, and
applications that could distribute information throughout a plant.
Essentially, the Artificial Workforce allowed an engineer to design a part on the CAD and
input the data into a CAM that could control the mixing of chemicals or the molding of parts from
tC
any number of different materials on different machines. The system could also assemble and can,
box, or shrinkwrap the finished product. Thus, no matter how intricate, a product could be designed,
manufactured, and packaged solely by computer.
Northboro developed applications of the product for the plastics, food-processing, and pulp
and paper industries in 1991 and by the next year was developing applications for the oil- and gas-
refining and chemicals industries.
No
By October 1991, when the first Artificial Workforce was shipped, Northboro had orders
totaling $75 million; by year-end, the backlog totaled $100 million. The future for the product
looked bright. Several securities analysts were optimistic about the product’s impact on the
company. The following comments paraphrase their thoughts:
…Artificial Workforce products have compelling advantages over competing entries

and will enable Northboro to increase its share of a market that, ignoring periodic
Do
growth spurts, will expand at a real annual rate of about 5% over the next several
years…
…The company is producing the Artificial Workforce in a new automated facility

which, when in full swing, will help restore margins to levels not seen for years…
617.783.7860
-4- UV0263
t
os
…The important question now is how quickly Northboro will be able to ship in
volume. Manufacturing foul-ups and missing components have delayed production
growth through May 1992, about six months beyond the original target date. And
startup costs, which were a significant factor in last year’s deficits, have continued to
penalize earnings. Our estimates assume that production will proceed smoothly from
rP
now on and that it will approach the optimum level by year’s end…
Northboro management expected domestic revenues from the Artificial Workforce series to
total $90 million in 1992 and $150 million in 1993. Thereafter, growth in sales would depend on the
development of more system applications and the creation of system improvements and add-on
features. International sales through Northboro’s existing offices in Frankfurt, London, Milan, and
Paris, and new offices in Hong Kong, Seoul, Manila, and Tokyo were expected to provide additional
yo
revenues of $150 million as early as 1994. Currently, international sales accounted for about 15% of
total corporate revenues.
Two factors that could affect sales were of some concern to Northboro. First, although the
company had successfully patented several of the processes used by the Artificial Workforce system,
management had received hints through industry observers that two strong competitors were
op
developing comparable products and would probably introduce them within the next 12 months.
Second, sales of molds, presses, machine tools, and CAD/CAM equipment and software were highly
cyclical, and predictions about the strength of the U.S. economy were mixed. The economy had been
weak for almost two years. As shown in Exhibit 3, the projected indicators were sending mixed
messages. Domestic real GNP was expected to grow at 3.2% and 2.8% in the next two years,
respectively. On the other hand, capital spending on industrial durable equipment was expected to
tC
increase dramatically over the next two years, at 7.5% and 8.7%, respectively.
Corporate Goals
A number of corporate objectives grew out of the restructurings and recent technological
advances. First and foremost, management wanted and expected the firm to grow at an average
No
annual compound rate of 15%. A great deal of corporate planning was devoted to that goal over the
preceding three years and, indeed, second-quarter financial data suggested that Northboro would
achieve revenues of about $580 million in 1992, as shown in Exhibit 1. If Northboro achieved a
15% compound rate of growth through 1998, the company would reach $1.3 billion in sales and
$107 million in net income.
In order to achieve this growth goal, Northboro management proposed a strategy relying on
Do
three key points. First, the mix of production would shift substantially. CAD/CAM and peripheral
products on the cutting edge of industry technology would account for three-quarters of sales; the
company’s traditional presses and molds would account for the remainder. Second, the company
would expand aggressively internationally, where it would hope to obtain half of its sales and profits
by 1998. This expansion would be achieved through opening new field sales offices around the
world. At present, Northboro was represented only in Europe. Third, the company would expand
617.783.7860
-5- UV0263
t
os
through joint ventures and acquisitions of small software companies, which would provide half of
the new products through 1998; internal research would provide the other half.
From its beginning Northboro had an aversion to debt. Management believed that a small
amount of debt, primarily to meet working-capital needs, had its place, but that anything beyond a
rP
40% debt to equity ratio was, in the oft-quoted words of the founder David Peterboro, “unthinkable,
indicative of sloppy management, and flirting with trouble.” Senior management was aware that
equity was typically more costly than debt but took great satisfaction in the company “doing it on its
own.” Northboro’s highest debt to capital ratio in the past 25 years—28%—occurred in 1991, and
was still the subject of conversations among senior managers.
Although 11 members of the North and Peterboro families owned 30% of the company’s
yo
stock and three were on the board of directors, management placed the interests of the public
shareholders first. (Shareholder data are provided in Exhibit 4.) Stephen North, chairman of the
board and grandson of the cofounder, sought to maximize the growth in the market value of the
company’s stock over time.
At the age of 61, Steven North was actively involved in all aspects of the company’s growth
op
and future. He was conversant with a range of technical details of Northboro’s products and was
especially interested in finding ways to improve the company’s domestic market share. His
retirement was no more than four years in the future, and he wanted to leave a legacy of corporate
financial strength and technological achievement. The Artificial Workforce, a project he took under
his wing four years earlier, was beginning to bear fruit. He now wanted to ensure that the firm would
also soon be able to pay a dividend.
tC
He took particular pride in selecting and developing young managers with promise. Olsen
had a bachelor’s degree in electrical engineering and was a systems analyst for Motorola before
graduate school. She was hired in 1982 out of a well-known MBA program. By 1991 she had risen
to the position of chief financial officer.
No
Dividend Policy
Northboro’s dividend and stock price histories are presented in Exhibit 5. Prior to 1986, both
earnings and dividends per share had grown at a relatively steady pace, but the recession in the early
1980s and the restructurings took their toll on earnings. As a consequence, dividends were pared
back in 1990 to $0.25 per share—the lowest dividend since 1977. In 1991, the board of directors
declared a payout of $0.25 per share despite reporting the largest per-share earnings loss in the
Do
firm’s history, and in effect, borrowing to pay the dividend. In the first two quarters of 1992, the
directors had not declared a dividend. In a special letter to shareholders, however, the directors
declared their intention to continue the annual payout later in 1992.
617.783.7860
-6- UV0263
t
os
In August 1992, Olsen contemplated three possible dividend policies to recommend:
• Zero dividend payout. This option could be justified in light of the firm’s strategic reposition
to advanced technologies and CAD/CAM, and reflected the huge cash requirements of that
move. The proponents of this policy argued that it would signal that the firm belonged in a
rP
class of high-growth and high-technology firms. Some securities analysts wondered whether
the market still considered Northboro as a traditional electrical equipment manufacturer or as
a more technologically advanced CAD/CAM company. The latter category would imply that
the market was expecting strong capital appreciation, but perhaps little in the way of
dividends. Others cited Northboro’s recent performance problems. One “questioned the
wisdom of ignoring the financial statements in favor of acting like a blue chip.” Was a high
dividend in the long-term interests of the company and its stockholders, or would the
yo
strategy backfire and make investors skittish?
• 40% dividend payout, or a dividend of $0.20 per share. This would restore the firm to an
implied annual dividend payment of $0.80 per share, the highest since 1988. Proponents of
this policy argued that there was undoubtedly some anticipation of such an announcement in
the current stock price of $32 per share, and that this was justified by expected increases in
orders and sales. Northboro’s investment banker suggested that the market might be
op
expecting a strong dividend in order to bring the payout back in line with the 52% average
within the electrical industrial equipment industry and with the 68% average in the machine
tool industry. Still others believed that it was important to send a strong signal to
shareholders, and that a large dividend (on the order of a 40% payout) would suggest that the
company had conquered its problems and that its directors were confident of future earnings.
Supporters of this view argued that borrowing to pay dividends was not inconsistent with the
tC
behavior of most firms. Finally, some older members of management opined that a growth
rate in the range of 10% to 20% should accompany a payout of 30% to 50%.
• Residual dividend payout policy. A small segment on the finance staff argued that Northboro
should pay dividends only after funding all projects offering positive net present values
(NPVs). Their view was that investors were paying managers to deploy their funds at returns
better than they could achieve otherwise, and that, by definition, such investments would
No
yield positive NPVs. By deploying funds into these projects and otherwise returning unused
funds to investors in the form of dividends, the firm would build trust with investors and be
rewarded with higher valuation multiples. General Motors was the preeminent example of a
firm that had followed such a policy, though few large publicly held firms followed their
example.
Another argument in support of this policy was that dividend policy was “irrelevant” in a
growing firm: any dividend paid today would be offset by dilution at some future date by the
Do
issue of shares necessary to make up for the dividend. This argument reflected the theory of
dividends in a perfect market advanced by two finance professors, Merton Miller and Franco
Modigliani.2 The main disadvantage of this policy to Christine Olsen was that dividend
2
M.H. Miller and F. Modigliani, “Dividend Policy, Growth and the Valuation of Shares,” Journal of Business, 34
(October 1961): 411–433.
617.783.7860
-7- UV0263
t
os
payments would be unpredictable. In some years, dividends could be cut—even to zero—
possibly imposing negative pressure on the firm’s share price. Olsen was all too aware of
Northboro’s own share price collapse, following its dividend cut. She recalled a study by
another finance professor, John Lintner,3 which found that firms’ dividend payments tended
to be “sticky” upward—that is, dividends would rise over time and rarely fall, and that
rP
mature slower-growth firms paid higher dividends, while high-growth firms paid lower
dividends.
In response to this internal debate, Olsen’s staff pulled together Exhibits 6 and 7, which
present comparative information on companies in three industries—CAD/CAM, machine tools, and
electrical industrial equipment—and on a general sample of high- and low-payout companies. To
test the feasibility of a 40% dividend payout rate, Olsen developed the projected sources and uses of
yo
cash provided in Exhibit 8. She took the boldest approach by assuming that the company would
grow at a 15% compound rate, that operating margins would improve over the next few years to
historical levels, and that the firm would pay a dividend of 40% of earnings every year. In particular,
the forecast assumed that the firm’s net margin would hover between 5.6% and 6.0% over the next
six years and then increase to 7.95% in 1998. The firm’s operating executives believed that this
increase in profitability was consistent with economies of scale to be achieved upon the attainment
op
of higher operating output of the Artificial Workforce.
Image Advertising and Name Change
As part of a general review of the firm’s standing in the financial markets, Northboro’s
tC
director of Investor Relations, Alice Dent, had concluded that investors misperceived the firm’s
prospects and that the firm’s current name was more consistent with the firm’s historical product
mix and markets than with those expected in the future. Dent commissioned surveys of readers of
financial magazines, which revealed a relatively low awareness of Northboro or its business.
Surveys of stockbrokers revealed higher awareness of the firm, but a low or mediocre outlook on
Northboro’s likely returns to shareholders and growth prospects. Dent retained a consulting firm that
recommended a program of corporate “image” advertising targeted toward opinion-leading
No
institutional investors and individual investors. The objective was to enhance the awareness and
image of Northboro. Through focus groups, the consultants identified a name that appeared to
suggest the firm’s promising strategy, “Northboro Advanced Systems International, Inc.” Dent
estimated that the image advertising campaign and name change would cost about $10 million.
Stephen North, the firm’s board chair, was mildly skeptical. He said, “Do you mean to raise
our stock price by “marketing” our shares? This is a novel approach. Can you sell claims on a
Do
company the way Procter & Gamble markets soap?” The consultants could give no empirical
evidence that stock prices responded favorably to corporate image campaigns or name changes,
though they did offer some favorable anecdotes.
3
J. Lintner, “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes,” American
Economic Review 46 (May 1956): 97–113.
617.783.7860
-8- UV0263
t
os
Conclusion
Christine Olsen was caught in a difficult position. Members of the board and management
disagreed on the very nature of Northboro’s future. Some managers saw the company as entering a
new stage of rapid growth and thought that a large (or in the minds of some, any) dividend would be
rP
inappropriate. Others believed that it was important to make a firm gesture to the public that
management believed Northboro had turned the corner and was about to return to the levels of
growth and profitability seen in the 1970s. This action could only be accomplished through a
dividend. As she wrestled with the different points of view, she wondered whether management
might be representative of the company’s shareholders. Did the majority of public shareholders own
stock for the same reason, or were their reasons just as diverse as those of management?
yo
op
tC
No
Do
617.783.7860
-9- UV0263
t
os
Exhibit 1
Consolidated Income Statements
(dollars in thousands, except per-share data)
rP
For the Years Ended December 31
Projected
1989 1990 1991 1992
Net sales $572,175 $543,986 $504,425 $580,000
Cost of sales 360,498 334,305 332,586 366,500
yo
Gross profit 211,677 209,681 171,839 213,500
Research and development 51,785 47,030 50,278 51,500
Selling, general, and administrative 153,314 149,089 154,005 141,000
Restructuring costs 43,632 0 59,607 0
Operating profit (loss) (37,054) 13,562 (92,051) 21,000
Other income (expense) (3,000) 710 (2,305) (2,800)
op
Income (loss) before taxes (40,054) 14,272 (94,356) 18,200
Income taxes (benefit) 827 5,610 (500) 6,188
Net income (loss) $(40,881) $ 8,662 $(93,856) $ 12,012

tC
Earnings (loss) per share $(3.31) $0.70 $(7.62) $0.97

Dividends per share $0.78 $0.25 $0.25 $0.401
No
Do
1
This assumes a $0.20 dividend per share for the last two quarters of 1992.
617.783.7860
-10- UV0263
t
os
Exhibit 2
Consolidated Balance Sheets
(dollars in thousands)
rP
December 31
Projected
1990 1991 1992
Cash and equivalents $ 9,278 $ 14,820 $ 17,110
Accounts receivable 139,027 124,824 145,000
yo
Inventories 153,561 135,925 145,000
Prepaid expenses 9,506 8,677 10,000
Other 14,789 13,809 14,000
Total current assets 326,161 298,055 331,110

Property, plant, and equipment 218,402 239,227 274,000
Less depreciation 111,609 122,324 137,000
op
Net property, plant, and equipment 106,793 116,903 137,000
Intangible assets 6,286 1,399 1,000
Other assets 10,482 11,792 12,000
Total assets $449,722 $428,149 $481,110

tC
Bank loans $ 22,797 $ 47,563 $ 50,000

Accounts payable 24,299 22,826 25,000
Current portion of long-term debt 200 100 1,000
Accruals and other 86,249 107,734 122,000
Total current liabilities 133,545 178,223 198,000

Deferred taxes 11,324 9,179 11,000
No
Long-term debt 6,000 5,850 20,000

Deferred pension costs 29,860 42,886 47,000
Other liabilities 1,545 3,629 5,000
Total liabilities and equity 182,274 239,767 281,000
Common stock, $1 par value 12,570 12,570 12,570

Capital in excess of par 71,916 71,938 71,938
Cumulative translation adjustment (4,377) 13,472 18,000
Retained earnings 194,332 97,398 104,598
Do
Less treasury stock at cost:

1990—256,151; 1991—255,506 (6,993) (6,996) (6,996)
Total shareholders’ equity 267,448 188,382 200,110
Total liabilities and equity $449,722 $428,149 $481,110
617.783.7860
-11- UV0263
t
os
Exhibit 3
Economic Indicators and Projections
rP
Projected
June
1989 1990 1991 1992 1993 1994
3-month Treasury bill rate (at auction) 8.12% 7.51% 5.37% 3.43% 3.51% 4.52%
30-year Treasury bond rate 8.45 8.61 8.14 7.67 7.68 8.00
AAA corporate bond rate 9.26 9.32 8.77 8.14 8.16 8.39
yo
Change in:
Real gross national product 2.5 0.8 (1.2) 2.0 3.2 2.8
Producer price index 4.8 6.0 0.01 1.7 0.3 1.1
Industrial durable equipment purchases 7.8 (2.6) (9.1) (1.6) 7.5 8.7
Price deflator 3.6 4.7 4.1 2.3 2.5 3.1
Consumer spending 6.9% 6.4% 3.7% 5.3% 6.2% 6.5%
op
tC
No
Sources: U.S. Economic Outlook, WEFA Group, January 1993; Federal Reserve Bulletin, June 1992; Value Line
Investment Survey, July 17, 1992.
Do
617.783.7860
-12- UV0263
t
os
Exhibit 4
Stockholder Comparative Data, 1981 and 1991
(thousands of shares)
rP
1981 1991
Shares Percentage Shares Percentage
Founders’ families 1,540 13 1,540 13
Employees and families 2,483 20 2,063 17
Institutional investors
yo
A. Growth-oriented 1,546 13 786 6
B. Value-oriented 987 8 1,590 13
Individual investors
A. Long-term; retirement 4,598 38 3,324 27
B. Short-term; trading-oriented 587 5 1,586 13
C. Other; unknown 429 4 1,425 12
12,170 100 12,314 100
op
tC
The investor relations department identified these categories from company records. The type of institutional investor
was identified from promotional materials stating the investment goals of the institutions. The type of individual investor
was identified from a survey of subsamples of investors.
No
N.B.: percentages do not add up exactly because of rounding.

Do
617.783.7860
-13- UV0263
Exhibit 5
Do
Per-Share Financial and Stock Data1
Divi-
dends Cash Shares
No
Sales/ per Flow/ Stock Price Average Payout Average Out
Share EPS Share Share High Low Average P/E Ratio Yield (millions)
1976 $14.62 $0.45 $0.18 $0.98 $20.50 $ 9.75 $14.58 32.4 40% 1.2% 10.25
1977 16.11 0.74 0.22 1.30 21.25 10.25 14.95 20.2 30 1.5 10.31
1978 22.40 0.90 0.27 1.44 21.38 8.25 13.59 15.1 30 2.0 10.62
tC
1979 25.81 1.60 0.31 2.06 18.63 10.25 13.44 8.4 19 2.3 11.83
1980 27.37 2.31 0.40 2.85 22.63 12.25 18.48 8.0 17 2.2 11.97
1981 30.26 2.61 0.57 3.27 24.00 18.13 21.14 8.1 22 2.7 12.17
1982 31.87 2.63 0.72 3.36 26.88 18.38 22.88 8.7 27 3.2 12.42
1983 37.97 2.71 0.82 3.62 29.63 19.63 24.39 9.0 30 3.4 12.42
617.783.7860
op
1984 40.97 2.58 0.87 3.64 40.00 20.25 29.67 11.5 34 2.9 12.43
1985 48.56 3.60 0.93 4.84 41.25 27.50 34.20 9.5 26 2.7 12.50
1986 43.88 2.81 1.04 4.28 39.00 21.50 32.03 11.4 37 3.2 12.35
1987 43.16 0.65 1.04 2.24 47.50 29.75 37.05 57.0 160 2.8 12.35
1988 41.76 0.35 1.04 2.01 40.50 27.00 31.47 89.9 297 3.3 12.35
yo
1989 46.32 (3.31) 0.78 2.88 30.75 22.13 26.45 NMF NMF 2.9 12.35
1990 44.18 0.70 0.25 2.00 31.88 22.50 27.20 88.2 36% 1.0 12.31
1991 $40.96 $(7.62) $0.25 $(0.98) $39.88 $18.38 $29.15 NMF NMF 0.9% 12.31
rP
Note: NMF = not a meaningful figure.
1
Adjusted for 3-for-2 stock split in January 1982 and 50% stock dividend in June 1986. os
t
-14- UV0263
Exhibit 6
Do
Comparative Industry Data
(as of December 31, 1991)
Annual
Growth Rate of
Cash Flow
No
Last Next Current Current
Sales 10 3–5 Payout Dividend Debt/ Insider P/E
(millions) Years Years Ratio Yield Equity Ownership Ratio
Northboro $ 504 (1.5)% +15% Nil Nil 28% 30% NMF

tC
CAD/CAM Companies (software and hardware)
Autodesk 285 41.51 10 20% 1.3% 0 10 22
GM-EDS 7,028 27 9.5 27 1.2 11 Nil 24
Digital Equip. 13,911 13 10.0 Nil Nil 1 3.5 NMF
Intergraph 1,195 32.5 5.5 Nil Nil 2 28 13
Mentor Graphics 400 16.01 16.0 >100 1.2 20 27 NMF
SCI Systems 1,129 24.5 9.5 Nil Nil 100 7.6 22
617.783.7860
op
Sun Microsystems 3,221 57.9 29.5 Nil Nil 25 3.7 12
Gerber Scientific 250 14.5 5.5 59 1.7 3 13.7 39
Hewlett-Packard 14,494 14.0 12.5 16 1.0 3 18.1 16
Electrical Industrial Equipment Manufacturers

Emerson Electric 7,427 9.0 10.0 47 2.7 14 0.9 18
General Electric 43,089 10.0 10.0 41 3.0 15 0.7 14
yo
General Signal 1,616 3.5 7.0 54 2.8 50 6.6 17
Honeywell 6,193 3.5 8.5 33 2.4 33 0.6 16
Measurex 254 11.5 12.5 86 1.9 1 4.0 16
Machine Tool Manufacturers

Acme-Cleveland 184 (10.5) 8.0 91 5.3 14 3.4 30
rP
Cincinnati Milacron 754 (5.5) 15.5 >100 2.3 100 10.3 33
Giddings & Lewis 327 NMF NA 13 1.3 50 1.2 21
Monarch $ 106.6 (16.0)% 14.0% 68% 2.0% 1% 2.1% 32
NMF = not a meaningful figure because of recent reported losses.

1
os
Last 5 years only.
Source: Value Line Investment Survey.

t
-15- UV0263
Exhibit 7
Do
Selected Healthy Companies with High- and Zero-Dividend Payouts
(as of December 31, 1991)
Expected Return Expected Growth Current Current Expected Growth Current

on Total Capital Rate of Dividends Dividend Dividend Rate of Sales P/E
No
Industry (next 3–5 years) (next 3–5 years) Payout Yield (next 3–5 years) Ratio
High-Payout Companies
BRE Properties Real estate inv. 13.5% 3.0% 125% 7.7% 8% 12.1
Federal Realty Real estate inv. 10 9.0 500 7.2 7 52.5
tC
Idaho Power Electric power 8.5 1.5 118 7.2 +3 16.1
Sierra Pacific Electric power 7.5 0 103 8.0 (0.5) 13.7
Halliburton Oilfield services 14.5 6.5 97 3.4 9.0 39.7
Consolidated National gas 10.5 5.5 97 4.0 7.5 21.1
Sonat Gas transmission 8.5 0 110 4.7 +4 20.0
Pacific Enterprises Gas utility 8.0 0 125 15.2 (11) 10.3
617.783.7860
op
Zero-Payout Companies
Oracle Systems Software 20 0 0 0 15 37.2

Novell Software 22.5 0 0 0 25 33.9
King World Productions TV shows 19.0 0 0 0 9.5 10.4
Harley-Davidson Motorcycles 15.5 0 0 0 10.5 24.1
yo
Duty Free International Retail 16.5 0 0 0 31 28.9
50-Off Stores Retail 18.5 0 0 0 24 24.3
Lands’ End Retail 19.5 0 0 0 16.5 17.8
Cabletron Network systems 21.0 0 0 0 32.5 22.2
Cisco Systems Network systems 23.0% 0% 0% 0% 34.0% 30.3
rP
Source: Value Line Investment Survey. os
t
-16- UV0263
t
os
Exhibit 8
Projected Sources and Uses Statement Assuming a 40% Payout Ratio1
(dollars in millions)
rP
Total
1992 1993 1994 1995 1996 1997 1998 1992-1998
Sales $580 $667 $767 $882 $1,015 $1,167 $1,342
Sources of cash:
Net income 12 27 38 49 61 65 107 $358
yo
Depreciation 15 17 20 23 27 31 35 168
27 44 58 72 88 96 142 526
Uses of cash:
Capital expenditure 35 40 45 50 55 60 65 350
Working capital 13 10 10 10 10 10 10 73
op
48 50 55 60 65 70 75 423
Excess cash (borrowings needed)1

(21) (6) 3 12 23 26 67 103
Dividend2 5 11 15 19 24 26 43 143
tC
Excess cash (borrowings needed) after dividend1

$(26) $(17) $(12) $(8) $(1) $0 $24 $(40)
No
1
This analysis ignores the effects of borrowing on interest and amortization. It includes all increases in long-term
liabilities and equity items other than retained earnings.
2
Dividend calculated as 40% of net income.
Do
617.783.7860

Uv0263 PDF Eng

Uploaded by

Copyright:

Available Formats

Uv0263 PDF Eng

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Uv0263 PDF Eng

Uploaded by

Copyright:

Available Formats

UV0263

As a related matter, senior management was considering embarking on a campaign of

…Artificial Workforce products have compelling advantages over competing entries

…The company is producing the Artificial Workforce in a new automated facility

Image Advertising and Name Change

Net income (loss) $(40,881) $ 8,662 $(93,856) $ 12,012

Earnings (loss) per share $(3.31) $0.70 $(7.62) $0.97

Total current assets 326,161 298,055 331,110

Total assets $449,722 $428,149 $481,110

Bank loans $ 22,797 $ 47,563 $ 50,000

Total current liabilities 133,545 178,223 198,000

Long-term debt 6,000 5,850 20,000

Common stock, $1 par value 12,570 12,570 12,570

Less treasury stock at cost:

Total liabilities and equity $449,722 $428,149 $481,110

N.B.: percentages do not add up exactly because of rounding.

Northboro $ 504 (1.5)% +15% Nil Nil 28% 30% NMF

Electrical Industrial Equipment Manufacturers

Machine Tool Manufacturers

NMF = not a meaningful figure because of recent reported losses.

Source: Value Line Investment Survey.

Expected Return Expected Growth Current Current Expected Growth Current

Oracle Systems Software 20 0 0 0 15 37.2

Excess cash (borrowings needed)1

Excess cash (borrowings needed) after dividend1

You might also like