Eastboro Machine Tools Corporation

Thresia Hilda Krey 37408023 Felix Sulistio Thio37408035Nikken Nuartiana 37408037 Amanda Fabiola37408044

THE COMPANY

• Founded in 1923 in Concord, New Hampshire

• By two mechanical engineers:James East & David Peterboro

• Early yearsmachinery parts, including metal presses, dies, and molds

• 1940’stank and armored-vehicle parts, miscellaneous equipment for the war effort

• Late 1970’scomputer-aided design (CAD)computer-aided manufacturing (CAM)

WHAT’S THE PRODUCT?

INCOME STATEMENT

1998 1999 2000 2001

Net sales $ 858.263

$ 815.979

$ 756.638

$ 870.000

Cost of sales $ 540.747

$ 501.458

$ 498.879

$ 549.750

Gross profit

$ 317.516

$ 314.522

$ 257.759

$ 320.250

Research & development $ 77.678

$ 70.545

$ 75.417

$ 77.250

Selling, general, & administrative $ 229.971

$ 223.634

$ 231.008

$ 211.500

Restructuring costs

$ 65.448

$ -

$ 89.411

$ -

Operating profit (loss) $ (55.581)

$ 20.343

$ (138.077)

$ 31.500

Other income (expense) $ (4.500)

$ 1.065

$ (3.458)

$ (4.200)

Income (loss) before taxes $ (60.081)

$ 21.408

$ (141.534)

$ 27.300

Income taxes (benefit) $ 1.241

$ 8.415

$ (750)

$ 9.282

Net income (loss) $ (61.322)

$ 12.993

$ (140.784)

$ 18.018

Earnings (loss) per share $ (3,25)

$ 0,69

$ (7,67)

$ 0,98

Dividends per share $ 0,77

$ 0,25

$ 0,25

$ 0,39

WHAT HAPPENED?

• The aggressive entry of large foreign firms into CAD/ CAM and the rise of the dollar dampened sales

• Revenues declined from$ 911 million in 1994 to$ 757 million in2000

WHAT TO DO?

• First, devoted a greater share of its research & development budget to CAD/ CAM to reestablish leadership

• Second, the company underwent two massive restructuringsin 1998 restructuring costs totaled $ 65 millionin 2000 was $ 89 million

The CAD/ CAM research led to the development of asystem that Eastboro management believed wouldredefine the industry, known as Artificial Workforce.

The system was an array of advanced control hardware,

software, and applications that could distributeinformation throughout a plant

TWO FACTORS THAT COULD AFFECT SALES

• Two strong competitors were developing comparable products

• Sales of molds, presses, machine tools, and CAD/ CAM equipment and software were highly cyclical, and the strength of the U.S. economy weren’t encouraging

Eastboro management remained optimistic about the company’s prospects because of the successful of the Artificial

Workforce

CORPORATE GOALS

• Management wanted and expected the firm to grow at an average annual compound rate of 15%.

• A great deal of corporate planning had been devoted to that goal over the past 3 years and second-quarter financial data suggested that Eastboro would achieve revenues of about $870 million in 2001. (Exhibit 1)

STRATEGY TO ACHIEVE GROWTH GOAL

• The mix of production would shift substantially.

• The company would expand aggressively internationally.

• The company would expand through joint ventures and acquisitions of small software company.

THE STORY

• Eastboro had an aversion to debt.

• Although 11 members of the East & Peterboro families owned 30% of the company’s stock & 3 were on the board of directors, management placed the interest of the public shareholders first.

• At the age of 61, East was actively involved in all aspects of the company’s growth & future.

THE STORY

• His retirement was no more than 4 years into the future, & he wanted to leave a legacy of corporate financial strenght & technological achievement.

• East took particular pride in selecting & developing young managers with promise.• Campbell, bachelor’s degree in electrical

engineering. • Had been in a systems analyst for

Motorola before attending graduation.• Hired in 1991, then 2000 become a CFO.

Dividend Policies

August 2001, Campbell has 3 possible dividend policies to recommend:•Zero-dividend payout•40%-dividend payout•Residual-dividend-payout policy

Zero-devidend payout

• Firm’s strategic emphasis on advanced technologies CAD/CAM, reflected the huge cash requirement

• Firm is in a class of high-growth and high-technology firms.

• Market was expecting strong capital appreciation but, perhaps, little in the way of dividends

• Recent studies, company are less paying dividend - market wouldn’t react unkindly with zero-dividend payout

40%-dividend payout

• Dividend about $ .2 a share• $ .8/share , the highest since 1997• Anticipation to the announcement of current

stock price $ 32 per share and expected increase in order and sales – market expecting strong dividend (45%-electrical industrial equipment & 29%-machine tools industry)

• Large dividend – company had conquered problems & directors were confident of future earnings

• Borrowing to pay dividends was not inconsistent with the behaviour of most firms

Residual-dividend-payout policy

• Pay dividends only after funding all projects with positive NPVs

• View of Investor paying managers to deploy their funds at return better than they could achieve (dividends) – firm would build trust with investor and higher valuation multiples (e.g. General Motors)

• Dividend policy was ‘irrelevant’ in a growing firm in a perfect market – dividend payment would be unpredictable

• Dividend payments tended to be ‘sticky’ upward

Image Advertising and Name Change

• Eastboro’s director of Investor’s Relation, Cathy Williams, had concluded that investors misperceived the firm’s prospects and that the firm’s current name was more consistent with the firm’s historical product mix and markets than with those expected in the future.

• Through focus group, the consultants identified a name that appeared to suggest the firm’s promising strategy: “Eastboro Advanced Systems International, Inc.”

Conclusion

Jennifer Campbell was caught in a difficultposition:Some managers saw the company as entering a

new stage of rapid growth and thought that a large dividend would be inappropriate

Some thought that it was important to make a strong gesture to the public that management believed Eastboro had turned the corner and was about to return to the levels of growth and profitability seen in the 1970s and ‘80s through a dividend