Hampton Machine Tool Company

Topics: Balance sheet, 1979, Money Pages: 7 (2299 words) Published: February 27, 2011
Hampton Machine Tool Company

On September 14, 1979, Mr. Jerry Eckwood, vice president of the St. Louis National Bank was considering a loan request from a customer located in a nearby city. The company, Hampton Machine Too] Company, had requested renewal of an existing $1 million loan originally due to be repaid on September 30. In addition to the renewal of the existin- loan, Hampton was asking for an additional loan of $350,000 for planned equipment purchases in October. Under the terms of the company's request, both loans, totaling $1.35 million, would be repayable at the end of 1979. Since its establishment in 1915, Hampton Machine Tool Company had successfully weathered the severe cyclical fluctuations characteristic of the macl-tine tool manufacturing business. In the most recent cvcle, Hampton had experienced record production and profitability during the niid- and late 1960s. Because Hampton's major customers included the aircraft manufacturers and automobile manufacturers in the St. Louis area, the company's success in the 1960s reflected a strong automobile market and the heavy defense spending associated with the Vietnam War. Hampton rode the 1960s boom into the early 1970s. Hampton, along with the rest of the capital goods industry, experienced a severe decline in sales and profitability in the rriid-1970s. Precipitous declines in the production of automobiles in St. Louis facilities reflected the Arab oil embargo, subsequent increases in the price of gasoline and the 1974-1975 recession. Massive reductions in defense spending in the post-V'ietnam War period had a severe adverse impact on Hampton's other major customer segment, n-dlitary aircraft manufacturers. Hampton's sales had bottomed out in the n-@d-1970s and the several years prior to 1978 had seen a steady rebuilding of sales. Hampton's recoverv was due primarily to three factors. First, military aircraft sales had increased substantially, reflec@ng both an expan6ing export market and a more benign domestic market. Secondly, though the automobile manufacturers in the area were not expanding, this segment of Hampton's market had at least stabilized. Finahy, the adverse economic conditions in the rrdd-1970s had taken their toll in the regional capital goods industry. Consequently, Hampton's market share increased as many tl-dnly capitalized competitors had been forced out of the industry. Hampton's recovery had suffered a n-dld setback, as 1978 sales were far below capacity. However, with a substantial backlog of firm sales orders, Hampton entered 1979 expecting its first year of capacity sales since 1972. Hampton's conservative financial policies had contributed to its survival and success in the volatile capital goods industry. The company had traditionally maintained a strong working capital positic,n as a buffer against economic uncertainty. As a result, the company had no debt on its balance sheet during the ten years prior to December 1978. In a meeting in early December 1978, Mr. Benjan-dn G. Cowins, president of Hampton, requested the initial loan of $1 million to facilitate purchasing the stock of several dissident shareholders. While Hampton had some cash in excess of that required for normal operations, excess cash was not sufficient to effect the stock redemption. Therefore, \lr. Cowins had asked Mr. Eckwood for a loan from the St. Louis National Bank. The loan of $1 million %N-as to be taken down at the end of December 1978. Hampton would make monthly interest payments at an interest rate of 11/2% per month (approximately 18% on an annual basis) on the principal which would be due at the end of September 1979. l@ support of his request, Mr. Cowins had submitted a forecast of monthly shipments for 1979 (see Exhibit 1), a balance sheet dated November -',O, 1978 (first column of Exhibit 2), and documentation of Hampton's bacuog of sales orders. Mr. Eckwood felt at the time that the documentation provided by Mr. Cowins was...
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