Textron Case Essay Example for Free

Textron Case Essay 1) How does Textron make money? Textron is able to make money as a result of 4 defining aspects of its business model: a. Textron is a conglomerate: by purchasing a variety of companies, Textron is able to share technology between its business units thus increasing its competitive advantage in these respective units. For instance, lessons learned in aerodynamics at Bell Helicopters can be used in the construction of aircraft at Cessna. Additionally, because of Textrons size, it increases its buyer power and can take advantage of economies of scale when purchasing from the common suppliers across business units. b. Diversification: Textron has purchased a variety of companies that complement one another such as different target markets (regular consumers vs. government consumers) and both high and low priced products (ex: hardware tools vs. private jets). Thus, like a well diversified stock portfolio, Textron is able to hedge its exposure to risk between its various business units (if one industry performs poorly one year, another industry may fair better). c. Vertically integrated: in Textrons history it developed a vertically integrated company that controlled every operational aspect of the business from raw goods to processing to distribution. Thus, it has been able to control the costs of many aspects of its business d. Finance business unit: Additional revenue is generated through the earned interest from customers who purchase credit from Textron in order to purchase Textron products. This revenue stream keeps customers in the Textron environment instead of losing customers to other credit-granting financial institutions. This Textron environment also: * Creates a one-stop-shop that can increases Textrons stickiness to its customers (also increase customer retention), which may lead to longer and stronger customer relationships. * Creates flexibility since Textron can offer more favourable interest rates than other financial institutions to promote more Textron sales 2) Assessment of Textrons: Assessment of Exhibit 1: Textron is investing heavily in assets that are not producing the sales or profits required to sustain its growth. Hence, its only choice is to finance its growth, which increases its debt and risk of bankruptcy. Textron needs to improve its asset management by increasing the output of its assets (such as PPE), changing its assets or improving its days inventory. Textron can increase the outputs of its assets by training staff to use equipment and tools more effectively or upgrade equipment and tools that can increase productivity. Textron can decrease its days inventory by improving its sales forecasting in order to produce only enough units that are demanded by the market. 3) Assessment of Textrons Cash Flow: Analysis of Cash Flow Statements 2004-2006 (in millions): * Under CFO * Net income nearly tripled from 2005 (203) to 2006 (601) * Under CFI * Net cash used in acquisitions increased significantly from 2005 (28) to 2006 (502) * Under CFI the Net Cash Used in Investing Activities of Continuing Operations has more than doubled from 2004 (800) to 2006 (2062) however, under CFO, the Net Cash Provided by Operating Activities of Continuing Operations has not doubled nor has it grown significantly from 2004 (949) to 2006 (1017). * Under CFF * In 2004 the Net Cash Provided by Operating Activities (Net CFO) is 950 and the Net Cash used in Investing Activities (Net CFI) 818. Therefore Textron generated enough cash to finance its investment activity (950-818 = 135). By contrast, in 2005 and 2006, Textron has had to use debt to finance its investments since in 2005 the Net CFO is 1036 million and Net CFI 1195 million (delta = -159) and in 2006 the Net CFO is 969 but the CFI is 1409 (delta = -440). By increasing the amount of debt, Textron increases its risk of going bankrupt in the future should the company not be able to meet its debt obligations. * Final Assessment of Cash Flow Statement: It seems that Textron is making a good amount of cash through its operations but this cash is not enough to feed its investment activities. Even worse, the increased investment has had little impact in increasing cash inflow. * Assessment of Exhibit 2: All of the above ratios are point towards poor cash flow management except Current Ratio. Thus Textrons favourable Current Ratio can be interpreted as Textron has the ability to pay off its liabilities only if it sells its large inventory (indicated by its large Days Inventory value). 4) Textrons use of LIFO and FIFO: e. Textrons income before taxes in 2006 using FIFO * Under current method: * The beginning inventory of 2006+purchase -COGS=the ending inventory of 2006 * 1,712 + purchase 8,528 = 2,069(in millions) let this calculation be called A