Hampton Machine Tool Company (HMTC) was founded in 1915 to produce machine tools. Machine tools manufacturing business is highly prone to economic fluctuations. Therefore, success of HMTC depends upon success of other related industries. The major customers of the company are aircraft manufacturers and automobile manufacturers. Sales of HTMC boomed during 1960s, decreased in the mid 70s and started to recover around 1978 due to the increase in demand of military aircrafts, a stable automotive industry and lack of strong competition. The company’s success is attributed to its conservative financial policy during recessions. HMTC managed to have enough working capital against fluctuations in the economy and had no debt from 1968 to December 1978. President of HMTC took down a 1 million loan at the end of December 1978 to finance the repurchase of stock from disagreeing shareholders. The interest rate on the loan was 1.5% a month and the loan was due at the end of September 1979. By mid September 1979 the manager of HMTC 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. The manager also wanted to have another $350,000 loan to finance new equipment to maintain production efficiency. HMTC’s main problem is shortage of cash.
Interpretation of Company’s Exhibits
Cash flow statement of the company for 9 month period is provided as an attachment. It shows that only 27% of cash is coming from operations. The company’s net operating cash flow is 1.2 million while its current liabilities amount to 4.5 million. This signals a need for the company to raise money to meet its liabilities. Cash outflows of the company reveals that nearly half of the cash (49%) goes to inventory and 45% goes to NFF. Half of the cash is consumed by inventories hampering the company’s cash flow. Moreover, stock repurchase consumed too much cash. Net profit...
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