Hampton Machine AnalysisHampton Machine AnalysisCompany OverviewHampton 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 1960s, 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 1970s, Hamptons 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.
Larger and more profitable aircraft sales were possible at a time when the United States and its partners were struggling to maintain their balance sheets. In 2007, with oil price stabilization, a series of changes in accounting practices in place to deal with commodity prices created the problem of a “golden opportunity” for Hampton’s Fisker Aircraft Company. With the financial crisis over in 2008, Hampton took responsibility for increasing profitability. Hampton eventually made a decision to reduce production, but with it, the cost of its aircraft operations.
Hampton’s aircraft have taken a hit as well. Since 2007, the number of Hampton aircraft in American military and commercial operations by date has nearly doubled, to almost one million in 2013, from 10 million, according to the latest available military figures. In 2008, this number was close to 1 million, and in 2011, it nearly doubled. However, when compared to the late 1990s, its share of the aircraft business has dropped by an average of 12 percent of its current product lineup and by 19 percent since its introduction in the mid-2000s. And even in 2007 and the previous two fiscal years, there were far fewer Hampton aircraft. In fact, although the military has been the major vendor of Hampton aircraft since the mid-1990s,[1] the defense component remains competitive and even produces its own aircraft as its own aircraft. These changes led to a decrease in Hampton’s fleet, which may lead to a decline in the market share of Hampton aircraft. In addition, Hampton’s stock prices at the time of this writing rose by 16 percent from $13 to $24 per dollar on May 14th, 2008, the day after the Gulf War began.
As a result of new strategies and new products, Hampton will continue to expand its fleet. Because the Hamptons have been so profitable in recent years, as well as the development of new aircraft, other Hampton aircraft like the H-19 Thunderbolt and Hawker Hornet, are also being developed. However, the largest increase in sales is likely due to the Hamptons’ improved operational performance, which can easily be attributed to its low costs. To stay competitive, Hampton will need to develop new aircraft, which will require significant development in the form of new airplanes.
Hampton is a small, privately built aircraft manufacturer with roughly $11 million in operational revenue and a total market share of only 22 percent. The company’s aircraft sales include about three thousand planes that are currently operated by the U.S. Navy, but currently include more than half a dozen domestically built aircraft. Due to Hampton’s low manufacturing costs, the company has also been able to produce a fairly large number of new and smaller aircraft.[2]
Creditors
Hammond
Locating a company outside of Hampton cannot be done so easily. There is a variety of new competitors operating out of Hampton’s existing business model, some of which have experienced success in other industries. For example, although it is important for the Hampton brand to remain competitive and keep gaining customers and making profits, the company has faced a number of regulatory pressures in the past few years. The FAA has established its “Lackhold,” a regulatory body within the FAA that regulates aircraft ownership for a period of five years.[3] Additionally, FAA officials have come under increasing scrutiny in the past few years. In response to recent requests by the Federal Aviation Administration (FAA) to expand its domestic aircraft ownership
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 problemHampton Machine Tool Companys 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.
AnalysisHampton 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 CompanyCash BudgetSeptemberOctoberNovemberDecember($000)($000)($000)($000)Cash InflowAccounts Receivable (less advances)1,3231,1842,265Bank LoanTotal Cash Inflow2265Cash OutflowAccounts PayableCapital Expenditure – Purchase EquipmentLoan Principal Payment1,350DividendsInterest20.2520.25TaxesOther