Transcript Murray Ohio Manufacturing BU657 Case Presentation

Murray Ohio
Manufacturing
BU657
Case Presentation
June 3, 2006
Murray Ohio
Group Members




Anouska Harris
Kevin Melo
Kate Richard (MIA)
Rafael Torres
Agenda








Overview
Business Strategy
Class Discussion – Framing
Accounting Analysis
Financial Analysis
Forecasting
Class Discussion – Strategy Evaluation
Closing Remarks
Murray Ohio – Overview

Murray Ohio: Not in Ohio!





57 acre manufacturing site in Tennessee
Market: Manufacturer and seller of power mowers
and bicycles.
Exchange: NYSE
Bicycles: Murray brand and private labels through
major retailers.
Power Mowers: Full line of walk behind and riding
mowers through major regional chains.

1985 formed subsidiary, Sabre Corp, to sell mowers to the
higher end mower market.
Murray Ohio – Strategy Analysis (SWOT)
Positive
Internal
Factors
• Complete line of products
• Historical profitability
• Mower segment performing well
• 49 years of dividend payment
without reduction
• Low debt
Opportunities
External
Factors
• Current demand is strong
• New Sabre mower line
• Change to more profitable strategy
• Manufacturing productivity
improvements
• Low debt - financing opportunities
• Possible increase in import tariffs
on bicycles
Negative
• Recent erratic financial
performance
• Management preferences to "stay
the course“
• Bicycle segment performing poorly
(Net loss in 1984)
Threats
• Demand based on discretionary
income
• Significant foreign competition in
bicycles
• Low cost competition
• Margin reductions
• Increasing inventories
• Stronger domestic competition in
both segments
• Increased capital expenditures
Discussion: Framing
Discuss in your groups – 5 Minutes!
You are a stock analyst reviewing Murray Ohio
as a member of an income portfolio (equities
paying dividends).
Question 1:


What should you be looking for in this company?
What options are available to you as the analyst?
Options
Option 1: Keep Murray Ohio in Income portfolio
Option 2: Switch Murray Ohio to different
portfolio with different mandate
Option 3: Sell Murray Ohio shares
Accounting Analysis - Adjustments (1)
Unusual Items for 1984
1) Investment from Tax Credit
-Changed from deferral and amortization
method to taking tax credit immediately (note A & C)
2) Tax on International Sales Operations
-Potential payment of taxes (DISC) has been
eliminated
-Tax legislation enacted in 1984 (note B)
3) Increased Pension rate of return
- From 7% to 8%
- Results in decrease of pension expense (note F)
1) + 1.4 M
4) Gain from settlement of law suit (note M)
4) + 0.085 M
2) + 0.92 M
3) + 0.763 M
+ 3.168 M
Accounting Analysis - Adjustments (2)
Unadjusted Net Income
= $7.8M
Adjustments – Previous Slide
(from notes A, C, B, F & M)
= ($3.2M)
Adjusted Net Income
= $4.6M
Accounting Analysis – Other Considerations

Land recorded at book value (1930)


Inventory recorded at LIFO versus FIFO



Likely worth more (pg.233)
Increases in inventory acquisition costs immediately affect net
income
LIFO revaluation reserve to bridge to FIFO (Note K) $6.8M
Pension Plan over-funded
Net Assets Available for plan benefits
PV of Vested Liability – Guaranteed payment amount
PV of Non-Vested Liability – Potential payment amount
Over-funded Balance
(Made up of ROA and mandatory contributions)
$47.2M
$27.5M
$ 4.5M
$15.2M
Financial Analysis
Dupont Ratio Analysis
NI
Sales
Assets NI
X
X

Sales
Assets
SE
SE




Net Profit Margin = Measures how many cents of income are
earned on each dollar of sales
Asset Turnover = Measures how efficiently assets are used to
generate sales
Financial Leverage = Measures degree of indebtedness (risk)
Return on Equity = Measures rate of return on shareholder’s
investment
Unadjusted Dupont Ratio Analysis
Un-Adjusted for accounting differences in 1984
Net Profit Margin:
7825
=
0.020
=
1.828
=
1.861
(0.020 X 1.828 X 1.861) =
0.069
383,589
Asset Turnover:
383,589
209,777
Financial Leverage:
209,777
112,721
Return on Equity:
Adjusted Dupont Ratio Analysis
Adjusted for Accounting differences in 1984
Net Profit Margin:
4,657
383,589
Asset Turnover:
383,589
1.828
=
1.861
(0.012 X 1.828 X 1.861) =
0.041
209,777
112,721
Return on Equity:
0.012
=
209,777
Financial Leverage:
=
Dupont Ratio Analysis
Adjusted for Accounting differences in 1984
Time Series
1982
1983
1984
Net Profit Margin:
0.018
0.032
0.012
Asset Turnover:
2.572
2.773
2.801
Financial Leverage:
1.390
1.274
1.215
Return on Equity:
0.063
0.113
0.041
Financial Analysis
Operating Profit/ Net Sales By Business Segment
Mowers
1984
24,533,300
Bicycles
10.4%
236,421,047
1983
25,057,921
18,603,595
155,415,363
2.3%
147,079,185
12.2%
205,036,387
1982
3,352,581
12,000,318
6.6%
181,377,604
12.0%
7,086,836
133,138,347
5.3%
Forecasting – Scenarios (1)
Forecasting Assumptions:

Foreign imports will continue to increase relative to domestic production

Murray Ohio will continue with the bicycle business

Strategic and structural changes being made will likely decrease both sales
growth and NOPAT margin for the next 2 years
Optimistic

Successful in achieving low cost production structure

Sales growth and NOPAT margin will decline and then increase again

Increase in NOPAT margin will not match the level previously experienced

Successful introduction of a new line of high quality mowers
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Further growth to both sales and NOPAT margin
Pessimistic

Never achieve a low cost production structure

Losses from the bicycle business continue to increase over time

NOPAT margin and sales growth will decrease (possibly be negative)

Failed introduction of a new line of high mowers
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Further drag on both sales growth and NOPAT margin
Forecasting – Baseline
Historical Ratios
1982
1983
1984
33.9%
-0.8%
3.0%
3.7%
2.1%
After-tax net interest rate on
debt
42.2%
13.1%
43.1%
Net operating working
capital/sales
23.7%
24.1%
22.2%
Net operating long-term
assets/sales
15.2%
11.9%
13.5%
Net debt/net capital
28.1%
21.5%
17.7%
Shareholders' equity/net
capital
71.9%
78.5%
82.3%
Sales Growth
NOPAT Margin
Forecasting – Optimistic (1)
Assumptions About Drivers
Forecast Period
1985
1986
1987
1988
1989
1990
1991
1992
1993
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
4.0%
4.0%
4.0%
NOPAT Margin
1.5%
1.0%
1.5%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
After-tax net
interest rate on
debt
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
Net operating
working
capital/sales
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
Net operating
long-term
assets/sales
13.0%
13.0%
13.0%
13.0%
13.0%
13.0%
13.0%
13.0%
13.0%
Net debt/net
capital
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
Shareholders'
equity/net capital
78.0%
78.0%
78.0%
78.0%
78.0%
78.0%
78.0%
78.0%
78.0%
Sales Growth
Forecasting – Optimistic (2)
BALANCE SHEET
1985
1986
1987
1988
1989
1990
1991
1992
1993
Net Working Capital
87.34
87.34
88.22
89.98
92.68
96.39
100.24
104.25
108.42
Long-Term Assets
49.37
49.37
49.86
50.86
52.38
54.48
56.66
58.93
61.28
136.71
136.71
138.08
140.84
145.07
150.87
156.90
163.18
169.71
30.08
30.08
30.38
30.98
31.91
33.19
34.52
35.90
37.34
Shareholders Equity
106.63
106.63
107.70
109.86
113.15
117.68
122.38
127.28
132.37
Total Net Capital
136.71
136.71
138.08
140.84
145.07
150.87
156.90
163.18
169.71
1985
1986
1987
1988
1989
1990
1991
1992
1993
379.75
379.75
383.55
391.22
402.96
419.08
435.84
453.27
471.41
Net operating profits
after tax
5.70
3.80
5.75
7.82
8.06
8.38
8.72
9.07
9.43
Net interest expense
after tax
12.03
12.03
12.15
12.39
12.77
13.28
13.81
14.36
14.93
Net income
-6.33
-8.23
-6.40
-4.57
-4.71
-4.89
-5.09
-5.29
-5.51
Basic EPS
$(1.62)
$(2.11)
$(1.64)
$(1.17)
$(1.21)
$(1.26)
$(1.31)
$(1.36)
$(1.41)
Total Net Assets
Net Debt
INCOME
STATEMENT
Sales
Forecasting – Optimistic (3)
CASH FLOW FROM
OPERATIONS
1985
1986
1987
1988
1989
1990
1991
1992
Net Income
-6.33
-8.23
-6.40
-4.57
-4.71
-4.89
-5.09
-5.29
32.02
32.02
32.34
32.98
33.97
35.33
36.75
38.22
0.00
-0.87
-1.76
-2.70
-3.71
-3.86
-4.01
-4.17
25.68
22.91
24.17
25.71
25.56
26.58
27.64
28.75
Purchase of Capital
Equipment
-10.00 -10.00 -10.00 -10.00 -10.00 -10.00
-10.00
-10.00
Interest Payments
-12.03 -12.03 -12.15 -12.39 -12.77 -13.28
-13.81
-14.36
3.84
4.39
Operations:
Non-Cash Charges to
Income
Change in Working
Capital (CA-CL)
Cash from Operations
Non-Operating Activities:
Net Effect on Cash
3.65
0.88
2.02
3.32
2.79
3.31
Forecasting – Pessimistic (1)
Assumptions About Drivers
Forecast Period
1985
1986
1987
1988
1989
1990
1991
1992
1993
-2.0%
-1.0%
-2.0%
-2.0%
-3.0%
-3.0%
-3.0%
-3.0%
-3.0%
NOPAT Margin
1.5%
1.0%
0.5%
0.5%
0.0%
-0.5%
-0.5%
-0.5%
-0.5%
After-tax net
interest rate on
debt
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
Net operating
working
capital/sales
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
23.0%
Net operating
long-term
assets/sales
13.0%
13.0%
13.0%
13.0%
13.0%
13.0%
13.0%
13.0%
13.0%
Net debt/net
capital
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
22.0%
Shareholders'
equity/net capital
78.0%
78.0%
78.0%
78.0%
78.0%
78.0%
78.0%
78.0%
78.0%
Sales Growth
Forecasting – Pessimistic (2)
BALANCE SHEET
1985
1986
1987
1988
1989
1990
1991
1992
1993
Net Working Capital
86.46
85.60
83.88
82.21
79.74
77.35
75.03
72.78
70.59
Long-Term Assets
48.87
48.38
47.41
46.46
45.07
43.72
42.41
41.13
39.90
135.33
133.98
131.30
128.67
124.81
121.07
117.44
113.91
110.49
29.77
29.47
28.89
28.31
27.46
26.63
25.84
25.06
24.31
Shareholders Equity
105.56
104.50
102.41
100.36
97.35
94.43
91.60
88.85
86.19
Total Net Capital
135.33
133.98
131.30
128.67
124.81
121.07
117.44
113.91
110.49
1985
1986
1987
1988
1989
1990
1991
1992
1993
375.92
372.16
364.72
357.42
346.70
336.30
326.21
316.42
306.93
Net operating profits
after tax
5.64
3.72
1.82
1.79
0.00
-1.68
-1.63
-1.58
-1.53
Net interest expense
after tax
11.91
11.79
11.55
11.32
10.98
10.65
10.33
10.02
9.72
Net income
-6.27
-8.07
-9.73
-9.54
-10.98
-12.34
-11.97
-11.61
-11.26
Basic EPS
$(1.61)
$(2.07)
$(2.50)
$(2.45)
$(2.82)
$(3.16)
$(3.07)
$(2.98)
$(2.89)
Total Net Assets
Net Debt
INCOME
STATEMENT
Sales
Forecasting – Pessimistic (3)
CASH FLOW FROM
OPERATIONS
1985
1986
1987
1988
1990
1991
1992
Net Income
-6.27
-8.07
-9.73
-9.54 -10.98 -12.34
-11.97
-11.61
31.69
31.38
30.75
30.13
29.23
28.35
27.50
26.68
0.86
1.71
1.68
2.47
2.39
2.32
2.25
2.18
26.29
25.02
22.70
23.06
20.64
18.34
17.79
17.25
1989
Operations:
Non-Cash Charges to
Income
Change in Working
Capital (CA-CL)
Cash from Operations
Non-Operating Activities:
Purchase of Capital
Equipment
-10.00 -10.00 -10.00 -10.00 -10.00 -10.00 -10.00 -10.00
Interest Payments
-11.91
-11.79
-11.55
4.38
3.23
1.14
Net Effect on Cash
-11.32 -10.98 -10.65 -10.33 -10.02
1.74
-0.34
-2.32
-2.55
-2.77
Discussion: Back to Strategy Analysis
Discuss in your groups – 10 Minutes!
Question 2:
Re-evaluate Murray’s business strategy for
the future. (page 224)


Is their current strategy likely to be successful?
Why or why not?
What other strategies might they employ?
Question 3:
Evaluate the analyst’s position. (page 221)

As an analyst, what should you do?
Murray Ohio – What happened?

Murray continued with its strategy of turning around the
bicycle division, but problems persisted

Company cut dividends by 50% in 1985

Stock price remained around $21 until 1987

In 1988 Electrolux AB (Sweden) made an unfriendly
takeover offer for $48/share - Murray resisted

Murray ultimately acquired by Tomkins PLC (GB) for
$52/share
Thank You