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Recommendations for STC.

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Introduction

Industry characteristics Mr. Watson, our team has reviewed your concerns regarding the financial projections created by Mr. Finson, the company's CFO. As you already know, STC operates in a highly competitive and fast-changing industry. Its success is based on introducing innovative products and new technologies. Heavy investment in R&D is required because of the need to introduce new products and technologies. The company's goal from an innovative standpoint is to make its own products obsolete, before one of its competitors does. Industry financial profile Just based on the profile of the industry mentioned above, it is not advisable for STC to carry high amounts of inventory, as it quickly may become obsolete because of the short life cycles of products. Inventory probably has a shelf life of less than 2 years. Because of the high operational risk of the business, it is not recommended for STC to take on a high amount of financial risk (incur debt). ...read more.

Middle

Our revised EBITDA figures are in Figure 1 attached. Concerns over uneven growth We have some concern about the uneven growth in sales, inventories and receivables in the past, but we are not overly concerned that Mr. Finson's estimates are positively linear while past performance has not been positively linear. The part that we are concerned about were the overly optimistic projections for 1984. We are not too concerned about the uneven historic financial data, since most of the inconsistencies can be explained, due to increased personnel, competitive pressures, increasing R&D, manufacturing problems and a product recall. Some of these events have been corrected, and for the most part, events such as manufacturing problems and recalls, is an innate risk of the business that cannot be predicted. Some fluctuating in revenue can be expected as older products end their life cycles. Financial pressures A worst-case scenario for STC would be an economic downturn, coupled with another product recall or production problem and a competitor introducing a better product than STC. ...read more.

Conclusion

Teradyne's SG&A as a % of sales was only 20%, compared to 46% for STC during 1984. It is a large competitive disadvantage if its largest competitor has a better cost structure. STC should seriously evaluate its operations and determine the minimum amount of employees it requires to efficiently run its operations. Employee layoffs may be necessary. STC can also offer an early retirement package to reduce its staff. STC should become conservative as far as capital expenditures. STC can also look to outsource productions of its low end products and some future products, in order to save money on capital expenditures and reduce the amount of employees. This would also reduce its assets, and improve asset turnover. It may even look to issue additional stock. We would still try to avoid issuing additional debt, since STC has high operational risk. Furthermore, keep investing heavily in R&D. There will always be a need for better technology and you can't let STC's competitors beat you as far as innovation. If STC develops a superior product or project, someone will finance it, if STC cannot finance it on its own. 1 ...read more.

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