Textron free essay sample

Anna Amphlett, a financial analyst at Textron Corporation, has been asked by the controller to benchmark the company’s recent financial performance against competitors in the aerospace and defense industry. Top management plans to assess the performance of the company’s supply chain and its future working capital requirements. Textron experienced impressive stock price growth in the last five years, but top management is particularly interested in understanding the company’s sizeable investments in net working capital over the same period. In benchmarking Textron’s performance, Amphlett must also consider what to do about accounting method differences across companies in the aerospace and defense industry, since they may have a significant effect on the interpretation of differences in reported performance. EXECUTIVE SUMMARY Textrons Board of Directors had launched a new initiative to assess the companys supply chain and the companys working capital needs. First step was to benchmark the companys recent financial performance against other aerospace and defense firms to determine the areas in which the companys performance could be improved. Top management was particularly interested in understanding the companys sizeable investments in net working capital. COMPANY PROFILE Company History Textron started as a small textile company in 1923, when 27-year-old Royal Little founded the Special Yarns Corporation in Boston, Massachusetts. Revenues that first year were just $75,000. Today that company has grown into a highly successful multi-industry enterprise recognized for our network of powerful brands, world-class processes and talented people. The Tex was derived from textiles and the tron came from synthetics such as Lustron. The theme of the advertising reflected Littles vision: From yarn to you, its Textron all the way. Birth of a Conglomerate,Products and Business Segments In 1952, facing yet another decline in the demand for textiles, Little approached the Textron Board of Directors for approval to diversify by acquiring businesses in unrelated industries. He planned to maintain textile operations as an earnings base while acquiring non-textile businesses. Textron purchased its first non-textiles business Burkart Manufacturing Co. of St. Louis, Missouri who supplied cushioning materials to the automotive market in 1953. Littles success building a diversified company prompted other businesses to follow his model. The pace of acquisitions was great and among the more important businesses added in the early 1950s Textron Inc. is a Global Multi-Industry Company. It is a pioneer of the diversified business model. It grown into a network of businesses with total revenues of $12. 2 billion, and approximately 40,000 employees with facilities and presence in 32 countries, serving a diverse and global customer base. Headquartered in Providence, Rhode Island, U. S. A. ,Textron is ranked as 190th from 216th in 2005 on the Fortune 500 list of largest U. S. companies. Organizationally, Textron consists of numerous subsidiaries and operating divisions and segments, which are responsible for the day-to-day operation of their business namely:(1) The Cessna segment manufactures business jets, single-engine utility turboprops, and single-engine piston aircraft, as well as parts, maintenance, inspection, and repair services. (2) The Bell segment manufactures and supplies military and commercial helicopters, tiltrotor aircraft, and related spare parts and services. (3) The Textron Systems designs, develops, installs, and provides maintenance of advanced full flight simulators; and supports aviation training products and related services. (4) The Industrial segment offers blow-molded plastic fuel systems, windshield and headlamp washer systems, engine camshafts, catalytic reduction systems, and other parts, as well as plastic bottles and containers; golf cars and professional turf-maintenance equipment, (5) The Finance segment provides commercial loans and leases for aircraft and helicopters. Textron’s Strategy Textrons Board of Directors provides strategic and management oversight as well asglobal business perspective, while upholding rigorous governing principles on behalf of the companys shareholders. Senior leaders from directors to the corporate officers share an unrelenting focus on Textrons vision to become the premier multi-industry company in the world, recognized for the network of powerful brands, world class enterprise and talented people through enterprise and portfolio management. Textron’s stock price performance Textron’s recent stock price performance was impressive with overall increase from $22 in 2001 to more than $55 in 2007 much better than SP 500. According to Cowan the estimated EPS in 2007 and 2008 of $6. 25 and $7. 30 respectively. $51. 50 is the target price per share set by Prudential. STATEMENT OF THE PROBLEM Over the last 10 years of unimpressive growth of Textron’s sales, net income and cash flow, Anna Amphlett (financial analyst) has come up to the following problems: 1. What is Textron’s current standing in the Aerospace and Defense industry? 2. Is Textron making more money than its competitors? Is Textron’s management strategy more effective than others? 3. What might be some of the areas Textron need to improve? 4. How do different accounting methods used by companies of the same industry affect her analysis? OBJECTIVES To make a benchmark performance between the Textron and its best and immediate competitor(s) within the same industry segment (mostly Aerospace and Defense firms) by using financial ratios for the fiscal 2005 and 2006 and to compare with Textron’s. ANALYSIS Financial Ratio Benchmarking Benchmarking can be done in many ways, and ratio analysis is only one of these. One benefit of ratio analysis as a component of benchmarking is that many financial ratios are well-established calculations derived from verified data. In benchmarking as a whole, benchmarking can be done on a variety of processes, meaning that definitions may change over time within the same organization due to changes in leadership and priorities. The most useful comparisons can be made when metrics definitions are common and consistent between compared units and over time. Benchmarking using ratio analysis can be useful to various audiences. From an investor perspective, benchmarking can involve comparing a company to peer companies that can be considered alternative investment opportunities from the perspective of an investor. In this process, the investor may compare the focus company to others in the peer group (leaders, averages) on certain financial ratios relevant to those companies and the investor’s investment style. From a management perspective, benchmarking using ratio analysis may be a way for a manager to compare their company to peers using externally recognizable, quantitative data. Industry competitors General Dynamics is a market leader in business aviation; land and expeditionary combat vehicles and systems, armaments, and munitions; shipbuilding and marine systems; and mission-critical information systems and technology. Honeywell International, Inc is an American multinational conglomerate company that produces a variety of commercial and consumer products, engineering services, and aerospace systems for a wide variety of customers, from private consumers to major corporations and governments. Lockheed Martin global aerospace, defense, security, and advanced technology company with worldwide interests. It was formed by the merger of Lockheed Corporation with Martin Marietta in March 1995. It is headquartered in Bethesda, Maryland, in the Washington Metropolitan Area. Lockheed Martin employs 116,000 people worldwide Northrop Grumman Aerospace Systems, one of four sectors within Northrop Grumman Corporation, is a premier developer, integrator, and producer of manned and unmanned aircraft, space systems and advanced technologies critical to our nation’s security. From sea, air, land or space, Aerospace Systems provides solutions that advance technology and discovery while meeting customer needs with high impact, best value aerospace products and systems. The Raytheon Company is a major American defense contractor and industrial corporation with core manufacturing concentrations in weapons and military and commercial electronics. It was previously involved in corporate and special-mission aircraft until early 2007. Raytheon is the worlds largest producer of guided missiles. Rockwell Collins, Inc. is a large United States-based international company headquartered in Cedar Rapids, Iowa, primarily providing avionics and information technology systems and services to governmental agencies and aircraft manufacturers. Financial Ratio Analysis In analyzing the Textron Corporation and its industry which is the aerospace and defense, we opt to performed financial benchmarking since financial ratios and as dictated by our objectives. With that we could compare and analysis financial data to assess our company’s overall competitiveness and productivity. First we identify the subject of which we need to improve or the weaknesses we choose to benchmark. The company’s unimpressive growth on sales, net income/operating margin and cash flows over ten years was what we had identified. We compared financial ratios of profitability, solvency, liquidity and activity from 2005-2006 of Textron Corporation against the industry competitors namely General Dynamics Corp. , Honeywell Int’l Inc. , Lockheed Martin Corp. , Northrop Grumman Corp. , Raytheon Co. , and Rockwell Collins Inc. against Textron Corporation. These were the result of the analysis: On the basis of gross margin and return on sales left after of cost of goods sold and operating expenses. General Dynamics Corporation had the top percentage of a 100%. Next-to-leading was Rockwell Collins Inc. followed by Textron Corporation(GMR) while Rockwell hit the top with regard to Return on sale of 12. 35%. Rockwell Collins also top the most outstanding and effective management as measured by ROE and ROA, Textron and Raytheon had the lowest percentage on ROS and ROA however Textron got the third rank next to Lockheed on accomplished ROE. In terms of liquidity Rockwell Collins had a strong level of current and quick assets while General Dynamics and Northrop is at the least. Textron also had a good s Ranking the financial leverage ratios Textron’s assets were mostly finance by long-term debt compare to other company. Notice that Rockwell Collins had the most conservative policy with regards to borrowing funds from long-term accounts. The company also had a good standing in meeting interest obligations. Textron’s can collect receivables more often than others, approximately 12 times while Raytheon can create and sold inventories 36 times in one operating period. Such companies hit the top ratio of activity measurement. On the other hand Rockwell had a rare receivable collection policy and longest times inventories were created and sold. After we had conduct comparison on the overall Aerospace and Defense Industry and determine significant areas which may affect our benchmarking analysis, we now conclude that ROCKWELL COLLINS INC. will be our basis for best practice and standard for the remaining analysis. Since Rockwell Collins profitability and management effectiveness were constant we also assume its attainment for our company. We considered to aim the highest possible stand Rockwell had currently so that if ever we failed to meet our goal or if won’t be on top we still be falling at least near to the industry’s best practice. So on the next reporting period we can define our strategies and be better that what the industry has for today. With these, we now take a closer look on the analysis between TEXTRON CORPORATION and ROCKWELL COLLINS INC. to know on more of the areas we want to improve and learn from them on how they achieve their success. BENCHMARKING: TEXTRON CORPORATION VS ROCKWELL COLLINS As pictured in the graph Rockwell had an excellent performance in terms of profitability than Textron. Rockwell’s GMR, ROS and ROA’s ratio were assumed to be the result of effective management and strategies to increase sales at maximum in the minimum cost. Although Textron gross margin ratios were closely to Rockwell’s the return on sale (ROS) bent down to 5%. This was to assume that Textron’s fixed administrative and selling expenses were higher that Rockwell. However Textron boost its return on equity (ROE) because of debts. Obtaining higher debt automatically generates an increase in the equity return. Return on asset (ROA) simply implicates how much earnings we had for every dollar sales and obviously Rockwell had a higher return on assets for it maximize the capacity of its fixed assets for a higher a sales volume. Textron showed a reliance borrowing funds from others than its shareholders in financing its operation and therefore its assets was mostly finance by creditors rather than owner. Times interest earned by Rockwell hits the highest times its earnings available could meet interest obligations against it interest obligations. These graph simply showed that Textron was under a financial leverage and such contributes a financial risk on part of Textron On the analysis liquidity analysis we look at the change in Textron’s acid test ratio and current ratio. The graph pictured out that how the company’s management strategies in handling quick asset were quite aggressive Textron’s operating cycle takes 119 days while payment period takes 114 days this means that Textron should be aware on conserving its investment on current assets. There was a delay of 5 days in paying creditors after maturity. Definitely Rockwell Inc. has the same scenario since their ratios were similarly closer to one another. In asset management analysis, day’s receivable of Textron compare to Rockwell Collins Inc. is stricter in this could be one the reason of decrease of Textron’s growth in its revenue, net sales and cash flows. We assume that Textron’s collection policy stricter than Rockwell. Rockwell’s asset was more utilized at maximum compare to Textron. However, Textron’s number of days inventory was created before sold was shorter than Rockwell which was favorable for Textron. Disclosure Incorporated with the Analysis In order to make an â€Å"apples-to-apples† comparison between the companies, appropriate adjustments to inventory and cost of sales data must be adjusted. Inventory accounting method has a direct impact on financial ratio analysis results on the reported financial measures. We do not adjust these accounts considering the other ratios may be affected and for reasons that the financial statements of competitors are not given. We wish to do common-size analysis and inventory adjustments as well if only these data limitations associated with the case would not exist. Being on the same industry Textron and Rockwell both have products of spare parts it just so happen that most of Rockwell’s revenues are coming from the sale of parts and other related services rather aircrafts which is contrary to Textron. Inventory Ratio analysis compared between Textron and Rockwell would not be adopted since Textron’s inventory days are better than Rockwell’s instead we recommend of ways on how to improve it and lower the number of days on the creation and sale of goods waiting time. In effect this would contribute to a more efficient operating cash cycle. CONCLUSION After the benchmarking performance analysis on the Aerospace and Defense Industry we could conclude that Textron Corporation’s stand on the industry was on average because Textron was not on top but it had strong positions that were better than the most among the industry. The different accounting policies that exist among different companies will not affect our benchmarking analysis as long as it conforms to the GAAP. We do not adjust the inventory and cost of sales account for it would affect the other ratio analysis since we only have limited financial information about the other company in the industry. On the other hand, proper disclosure of the effect of the differences would be appropriate as remedy for be believe that the methods use by the companies are base on the management strategies of what is better for their organizations. RECOMMENDATIONS There are areas in which Textron needs to improve like its receivable collection policy, days to sell inventories, asset utilization, conservation on current assets and debt/capital structure. With these Textron would be able to strengthen it unimpressive growth on sales, net income and cash flows. We recommend Textron to offer cash discounts for example a period of 10 days and maintain their strict credit policy collection to commercial products like spare parts, repairs and maintenance etc. Establish good creditor-debtor relationship. We are expecting that this strategy will increase sales and reduce receivable balance. Days to sell inventory should be shorten to avoid excess cost on handling inventories cost. Solvency on part of Textron must also be observed due their increasing long term debts. We also advise them to minimize borrowing of funds because this could help a business in the long run. Wise decision on borrowing long-term debts must be first considered. A heavy debt burden couples with a sudden economic downturn could put a company out of business rather quickly. Textron conservatism on current ratio be observe so that it could improve their operating cycle. Assessing the company’s overhead cost and see if there are opportunities to decrease them. Lowering overhead has a direct impact on profitability. Overhead expenses including administrative, selling, labor etc. that Textron was incur to operate the business out of direct materials and direct labors. Review the profitability on the company’s various product and services. Assess where prices can be increase on a regular basis to maintain and increase profitability. As costs increase and market change, prices may lead to be adjusted as well.