Eastboro Machine Tools Corporation
Thresia Hilda Krey
Nikken Nuartiana
37408023
37408037
Felix Sulistio Thio
Amanda Fabiola
37408035
37408044
THE COMPANY
• Founded in 1923 in Concord, New Hampshire
• By two mechanical engineers:
James East & David Peterboro
WHAT’S THE PRODUCT?
• Early years
machinery parts, including metal presses, dies, and molds
• 1940’s
tank and armored-vehicle parts, miscellaneous equipment for the
war effort
• Late 1970’s
computer-aided design (CAD)
computer-aided manufacturing (CAM)
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
$
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
$
-
$
(55.581)
$
20.343
$
(138.077)
$
31.500
$
(4.500)
$
1.065
$
(3.458)
$
(4.200)
$
(60.081)
$
21.408
$
(141.534)
$
27.300
$
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
Gross profit
Operating profit (loss)
Other income (expense)
Income (loss) before taxes
Income taxes (benefit)
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
restructurings
in 1998 restructuring costs totaled $ 65 million
in 2000 was $ 89 million
The CAD/ CAM research led to the development of a
system that Eastboro management believed would
redefine the industry, known as Artificial Workforce.
The system was an array of advanced control hardware,
software, and applications that could distribute
information 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 hightechnology 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 difficult
position:
 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