Hampton Machine Analysis

Company Overview

Hampton Machine Tool Company, a machine manufacturer, was established in 1915. A major component of its customer base is made up of automobile and aircraft manufactures in the St. Loius area. Hampton has had experience of 64 years (1915-1979) and has successfully been able to overcome the severe cyclical fluctuations experienced by machine tool manufacturing businesses.

In the 1960's, Hampton felt the boom with record setting profits due to a strong automobile market and heavy defense spending associated with the Vietnam War. However, in the mid-1970s, a severe decline in sales and profitability was noticed. This was due to the oil embargo as well as due to recession. Withdrawal from the Vietnam war, resulting in reduction in defense spending affected the military aircraft customer segment of Hamptons'. By the late 1970's, Hampton's automobile market stabilized, aircraft sales increased, and economic conditions had taken their toll in the regional capital goods industry. All of this resulted in a larger market share for Hampton as other competitors were unable to make it through the tough times. Hamptons' conservative financial policies (such as strong working capital) helped weather the volatile capital goods industry.

The president of the company, Mr. Cowin, 58 years old, succeeded his father in law in 1963. He is widely respected, energetic and has been successful. He took down a loan of $1 million from St. Louis National Bank to finance the repurchase of stock from disagreeing shareholders. The loan was originally taken out on the terms of monthly interest payment at a rate of 1.5% a month and the loan was due at the end of September 1979.

By mid September 1979, Hampton wrote a letter to the bank indicating that the company is not able to pay back the loan on time and requested an extension for the existing amount until the end of 1979. Hampton, also wanted to have another $350,000 loan to finance new equipment to maintain production efficiency. Hampton has had no existing loan for the past ten years on its balance sheet prior to this loan and seems to be in the growth stage of development.

Definition of the problem

Hampton Machine Tool Company's at this stage wishes to extend its $1m loan to the end of the year and to request another loan for the purchase of much needed equipment. The problem arises whether it will be able to repay the loans on time,

There are several factors that lead to this situation.

– One of such factors is the fact that since December 1978, Hampton has made a major cash disbursement of $3 million on repurchasing 75,000 of it outstanding stocks, for which the loan was initially requested (loan proceeds and additional $2 million excess cash they had).

– In the period between November 1978 and August 1979, stock repurchase represented 58% of total expenditures for that period, while inventory purchases represented 42% of total expenditures.

– Its sales shipment had been upset due to the suppliers' delay in sending the electronic control mechanisms to Hampton. This has influenced the decrease of cash from past months as for example the accumulated orders have not been filled.

Analysis

Hampton Machine Tool Company can prepare a cash budget for the four months September through December 1979, and also a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979.

The pro forma balance sheet is another financial concept that can be used by Hampton Machine Tool Company.

Hampton Machine Tool Company

Cash Budget

September October November December

($000) ($000) ($000) ($000)

Cash Inflow

Accounts Receivable (less advances) 1,323 665 1,184 2,265

Bank Loan 0 350 0 0

Total Cash Inflow 1323 1015 1184 2265

Cash Outflow

Accounts Payable 600 600 600 600

Capital Expenditure - Purchase Equipment 0 350 0 0

Loan Principal Payment 0 0 0 1,350

Dividends 0 0 0 150

Interest 15 15 20.25 20.25

Taxes 181 0 0 181

Other