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KLA-TENCOR.
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Assesses working capital management of the company.... More...
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Paper Abstract:
Assesses working capital management of the company. Focuses on the firm's financial performance in relation to liquidity and efficiency ratios. Identifies underperforming or deteriorating ratios (liquidity, work-capital to assets, current, quick and cash ratios, asset and inventory turnover). Recommendations for specific changes in the firm's working capital management strategy.
Paper Introduction:
This research assesses working capital management at KLA-Tencor Corporation as a case analysis. The focus of the assessment of working capital management at the company focuses on the firm’s financial performance in relation to liquidity and efficiency ratios. The five-year period of analysis is 1998-2002 inclusive (fiscal year closing 30 June).
The initial part of the assessment involves the identification of liquidity and efficiency ratios at the company that were (1) under-performing when compared with industry standards, or norms, or (2) were deteriorating over the five=year period of analysis. Then, specific recommendations are developed with respect to specific changes (or no changes) in the firm’s working capital management strategy.
Identifying Underperforming and/or Deteriorating Liquidity and
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(2 2b) of 2.4 appears to be a morerealistic level of inventory turnover for the industry. The industry ratio provided in the casematerials (35.13) is 14.6 times higher that the industry ratio reported bypublic financial reporting services (2.4) and is inconsistent with theoverall financial performance of the firm (Hoover's, Inc., 2 2b). 4. Sales fell by22.2 percent in 2 2 from 2 2 (Calculated from data obtained fromHoover's, Inc., 2 2c). This action should not affect sales, profitability, customer service, orproduct quality. Sales fell by 22.2percent in 2 2 from 2 2 (Calculated from data obtained from Hoover's,Inc., 2 2c). The industry efficiency ratioprovided in the case materials for asset turnover was uncontroversial. That sales decline largely explains the reduction in theasset turnover ratio from 2 1-to-2 2. (2 2b, August 1 ). The levels of current liabilities are high; however, the proportion ofcurrent liabilities accounted for by accounts payable is relatively modest. Working capital-to-assets ratio. Identifying Underperforming and/or Deteriorating Liquidity and Efficiency Ratios The liquidity ratios relevant to this assessment of the firm's workingcapital management strategy are (1) working capital-to-assets, (2) currentratio, (3) quick ratio, and (4) cash ratio. Thus, the working capital-to-assets ratio, while not deteriorating over the five-year period ofanalysis, was most definitely a point of concern for the company. Current Ratio. Retrieved from the Internet on 2 2- 8-11 at: http://www.hoovers.com/profile/1/ ,2147,13881, .htmlHoover's Inc. If the industry inventory turnover level reported by Hoover's,Inc. Quick Ratio. Total inventory as a proportion of total assetsalso was exceptionally high in both 2 1 (14.4 percent) and 1998 (15.2percent), a situation that did not prevail in the other three years of theperiod of analysis. 3. 2. 3. If the industryinventory turnover level provided in the case materials were to be used,the company was under-performing the industry in relation to inventoryturnover. Company "A" [KLA-Tencor Corporation] is the world leader in themanufacture and marketing of testing equipment and software to detectdefects in silicon wafers during the silicon wafer manufacturing process.The company's products provide (1) test floor automation and processcontrol and (2) factory-level yield management (Hoover's, Inc., 2 2a).Therefore, the relevant industry comparisons are ratios applicable to theequipment and materials sub-segment of the semiconductor segment of theelectronics manufacturing industry.Liquidity Ratios The values the relevant liquidity ratios for the company were providedas a part of the case materials. The five-yearperiod of analysis is 1998-2 2 inclusive (fiscal year closing 3 June). Inventory Turnover. Industry values were not provided for the (1) working capital-to-assets ratio or (2) cash ratio. The recommendations are as follows: 1. Industry liquidity ratioswere provided in the case materials for two of the four relevant liquidityratios. Further, this actionshould improve the company's liquidity risk. Cash Ratio. The exceptions were 1998-to-1999 and 2 1-to-2 2(Hoover's, Inc, 2 2c). The mean inventory turnover at thecompany was 2.53, and the ratio dropped from 2.71 in 1998 and from 2.83 in2 to 2.27 in 2 2. Additionally, total current liabilities as aproportion of total revenues were exceptionally high in 2 1 (45.8 percent)and 1999 (41.8 percent), while the proportion in the other three years ofthe period of analysis ranged from 3 .1 percent to 34.7 percent (Calculatedfrom data obtained from Hoover's, Inc., 2 2c). Current assets increasedmore in both proportional and actual terms than did fixed assets, anindication that inventory levels, accounts receivable levels, and cashlevels were not being managed as efficiently as they should have been. Accounts receivable as a proportion oftotal revenues and total assets were high in both 2 1 and 1998 (both yearswith falling working capital-to-assets ratios). The cash ratio fell 18.1 percent in 1998and 41.4 percent in 2 1. Days-salesoutstanding at the company (6 .38) are comparable to the industry averageof 61.28 (Hoover's, Inc., 2 2b). Detailed Annual Financials, 1-2. Then, specificrecommendations are developed with respect to specific changes (or nochanges) in the firm's working capital management strategy. The company should reduce its reliance on short-term credit. Asset Turnover. At the end of fiscal year 2 2, cash andmarketable securities accounted for 32.6 percent of total assets. The industry norm current ratio was .71.Therefore, the company was not under-performing the industry in relation tothe current ratio. KLA-Tencor Corporation. The same situationprevailed, however, in 2 , when the ratio was at its highest point duringthe period of analysis. KLA-Tencor Corporation. The industry normasset turnover ratio was 1. Total assets at the company increased each yearduring the period of analysis. KLA-Tencor Corporation. The company should apply the excess cash and marketablesecurities to the reduction of current assets. Retrieved from the Internet on 2 2- 8-11 at: http://www.hoovers.com/ enterprise/landscape/1/ ,3 91,13881, .htmlHoover's Inc. Recommendations for Working Capital Management Strategy at the Firm Recommendations for the firm's working capital management strategy aredeveloped in relation to (1) cash and marketable securities, (2), creditpolicy, (3) inventory, and (4) sources and uses if short-term financing.The consequences of working capital management strategy recommendations arediscussed in relation to their potential to affect the firm's (1) sales,(2) profitability, (3) customer service, (4) quality, (5) risks, and (6)other factors if relevant. (2 2a, August 1 ). Further, this action should improve the company'sliquidity risk. Therefore, the company was not under-performing theindustry in relation to the quick ratio. Rather, this ratio (1) decreased from 1997-to-1998 and from 2 -to-2 1, while it increased from 1998-to-1999, from 1999-to-2 , and from2 1-to-2 2. The inventory turnover ratio declined in each ofthe final three years of the five-year period of analysis. This action should not affect sales,profitability, customer service, or product quality. The asset turnover ratio declined in each of thefinal three years of the five-year period of analysis. The current ratio at the company ranged from a low of1.93 in 2 1 to a high of 3.14 in 2 . Works CitedHoover's Inc. Over the five-year period of analysis, however,the cash ratio increased 46.8 percent from .88 in 1998 to 1.29 in 2 2.The combination of high levels in accounts receivable and inventorycontributed to lower cash ratios in 2 1 and 1998. For most liquidity ratios, values wereprovided in the case materials for comparable industry ratios for the five-year period of analysis (1998-2 2 inclusive). The company should limit inventory levels to 15 days ofcost of goods sold. Total inventoryincreased in each of the first four years of the five-year period ofanalysis. Competitive Landscape, 1-3. The initial part of the assessment involves the identification ofliquidity and efficiency ratios at the company that were (1) under-performing when compared with industry standards, or norms, or (2) weredeteriorating over the five=year period of analysis. Industry efficiencyratios were provided in the case materials for each of the efficiencyrations relevant to this assessment. As sales increased inboth 2 1 and 2 , however, the declines in the inventory turnover ratiosin those years cannot be attributed to falling sales. The quick ratio at thecompany ranged from a low of 1.12 in 2 1 to a high of 2.18 in 2 . Thisaction should not affect sales, profitability, customer service, or productquality. Values were provided for thefive-year period of analysis (1998-2 2 inclusive). The mean ratio for the five-year period (1998-2 2inclusive) at the company was .4 69. The company should not change its credit policy. This action should notaffect sales, profitability, customer service, or product quality.Further, this action should improve the company's liquidity risk. The relevant efficiency ratiosare (1) asset turnover and (2) inventory turnover. Company Profile, 1-5. The focus of the assessment of workingcapital management at the company focuses on the firm's financialperformance in relation to liquidity and efficiency ratios. Themean asset turnover at the company was .65, and the ratio dropped from .71 in 1998 and from .79 in 2 to .6 in 2 2. A change in credit policy to lower theratio likely would have adverse effects on sales and profits. (2 2c, August 1 ). The industry norm inventoryturnover reported by Hoover's, Inc. Total revenues at the company increased in three years during the five-year period of analysis. As sales increased in both 2 1and 2 , however, the declines in the asset turnover ratios in those yearscannot be attributed to falling sales. Thus, the company was under-performing theindustry in relation to asset turnover. The industry normquick ratio was .45. While the cash ratio atthe company was not deteriorating, it was a point of concern for thecompany.Efficiency Ratios The values of the relevant efficiency ratios for the company wereprovided as a part of the case materials. Retrieved from the Internet on 2 2- 8-11 at: http://www.hoovers.com/ annuals/1/ ,2155,13881, .html The industry norm asset turnover ratio provided inthe case materials was 35.13, a level inconsistent with the industryleadership performance of the company. The working capital-to-assets ratioat the beginning of the period of analysis (1998) was lower ( .3912) thanat the ending of the period in 2 2, when the ratio value was .4585. The mean current ratio over theperiod of analysis was 2.66. This research assesses working capital management at KLA-TencorCorporation as a case analysis. The proportional increase in inventory value was greater thanthe proportional increase in sales. (2 2b) were to be used, the company would not be under performing theindustry in relation to inventory turnover, but the fact would remain thatinventory level at the company deteriorated over the five-year period ofanalysis. Theindustry efficiency ration provided in the case materials for inventory,however, was controversial. Themean quick ratio over the period of analysis was 1.69. Average total assets increased ineach year of the five-year period of analysis. That sales decline largely explains the reductionin the inventory turnover ratio from 2 1-to-2 2. The company mean is 168 days, while the industry normis 153 days (Hoover's, Inc., 2 2b). The quick ratio at the company also failed to follow atrend over the five-year period of analysis. The current ratio, as was true of the working capital-to-assets ratio at the company did not follow a trend over the five-yearperiod of analysis. The cash ratio at the company increased in three years ofthe five-year period of analysis. 5. The working capital-to-assets ratioat the company did not follow a trend pattern over the five-year period ofanalysis. Further, this action should not increase the company's liquidityrisk. The company should reduce its cash and marketable securitiesto 21.5 percent of total assets.
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