1. Rockboro Machine Tools Corporation
Group 4
邱鈺婷 吳洧林
温珮禎 黃亭雅
吳詠文

2. C ONTENTS Problem Analysis 1 3 Problems Conclusion 2 4
Company Introduction
Problem Analysis 1 3
Problems
Conclusion 2 4

3. Part one
Company Introduction
第 一 章

4. Company Introduction 1 Entered the field of CAD/CAM1
Entered the field of CAD/CAM
Products: Machinery parts
1980S
First restructuring, cost $98 million
Early years
2012
1923
After war
2009
2014
Products: Industrial machinery and machine tools
founded  as a farm-equipment manufacturer
Fallen behind the competition of software development, design and manufacturing
Second restructuring , cost $134 million
Fast growth of AIW

5. Sales Structure 1
The CAD/CAM segment is expected to grow through wider applications of AIW in the future.

6. Part two
Problems Faced
第 二 章

7. Problems Faced 2 1 2 3
Management holds contradicting views about company future and payout policies
Poor visibility and image
→ Rebranding or not
Not able to recover its profit margin after recession
Uncompetitive
cost structure

8. Part three
Problems Analysis
第 三 章

9. 1) Share Repurchase 3 Signal confidence. Increase EPS.3
1) Share Repurchase
Pros:
Signal confidence.
Increase EPS.
Stock price seems to increase.
Cons:
Rockboro’s Insider ownership is comparatively higher than other competitors.
The effect of increase the stock price.
Cash isn’t enough for repurchase, and it will increase debt and D/E ratio.
The last repurchase in 2009 didn’t raise the stock price.

10. 1) Share Repurchase 3 Comparable Company Approach CAD/CAM companies3
1) Share Repurchase
Comparable Company Approach
CAD/CAM companies
Autodesk, Inc.
Ansys, Inc.
Cadence Design
Mentor Graphics
PTC
Synopsys, Inc.
P/E ratio
nmf 23
17.6
16.9
26.4
15.4
Average P/E ratio
19.86
Year
2014
2015(Projected)
Rockboro EPS
-7.57
0.98
Rockboro reasonable share price

11. 1) Share Repurchase 3 Comparable Company Approach3
1) Share Repurchase
Comparable Company Approach
Electrical-industrial equipment manufacturers
Emerson Electric Company
Hubbell Inc.
Rockwell Auto
P/E ratio
17.6
21.3
19.9
Average P/E ratio
19.6
Year
2014
2015(Projected)
Rockboro EPS
-7.57
0.98
Rockboro reasonable share price
nmf
19.028

12. 1) Share Repurchase 3 Reasons not to Repurchase:3
1) Share Repurchase
Reasons not to Repurchase:
The actual share price ($15.25) was lower than the estimated share price.
The company can repurchase their stock when the price was undervalued.
Rockboro could repurchase the share which makes price higher and improve EPS at the same time.
However, there is no sufficient excess cash. Also, the profit margin is not stable. So it’s not appropriate to do share repurchase.

13. 2) Changing Name 3 Facing Problems:3
2) Changing Name
Facing Problems:
Current name revealed a relatively low awareness. A low outlook on Rockboro’s likely returns to shareholders and its growth perspective.
The whole alternation would cost approximately $15 million.
The market still considered Rockboro a traditional electrical-equipment manufacturer.
It could enhance the firm’s visibility and image as a high-growth and high-technology firm. Besides, their main targets are institutional and individual investors.
Reasons to Change:

14. 3) Dividend Payout Policy3
3) Dividend Payout Policy
Zero dividend
40% dividends payout
$0.1 per share
Residual dividend payout
Bird-in-hand theory and Signaling:
Investors prefer cash since there is no uncertainty for higher return, paying dividends not only gives signals to investors that the company is well recovering, but also returns cash to shareholders.

15. 4) Dividend Payout Policy - Zero dividend payout3
4) Dividend Payout Policy - Zero dividend payout
Pros:
To attain the strategic goal on advanced technologies and CAD/CAM, a great amount of money is required.
The market expects strong capital appreciation but perhaps little in the way of dividends.
With this policy, it is expected that in 2017 the company’s excess cash could turn to positive amount.
Cons:
No capital gain for shareholders past four years.
Also, dividends of 2.9%, compare with average 12.9%.
Zero-dividend payout could make investors skittish and lost interest.

16. 4) Dividend Payout Policy3
4) Dividend Payout Policy
Assumption:
Sale growth Rate：15%
Net Income as % of Sales：2.1%, 4.0%, 5.0%, 5.5%, 6.0%, 6.5%, 6.5%
$ thousands
Historical
Projected
Year
2012
2013
2014
2015
Net Sales
1,287,937
1,223,969
1,134,956
1,305,000
Sales Growth Rate -
-4.93%
-7.27%
14.98%

17. 4) Dividend Payout Policy - 40% dividend payout3
4) Dividend Payout Policy - 40% dividend payout
dividend/net income=40% 27*0.4=10.8  million
$ thousands
2015
2016
2017
2018
2019
2020
2021
Dividend
= 40%NI
10.8 24
34.52
43.68
54.8
68.24
78.48
Excess cash
after dividend
-44.4
-33.6
-28.32
-26.58
-12.4
-6.34
-7.28

18. 4) Dividend Payout Policy - $0.1 per share3
4) Dividend Payout Policy - $0.1 per share
0.1*27.9=2.79 million quarterly 2.79*4=11.16 million Dividend=0.1*share outstanding(27.9m)*4
$ thousands
2015
2016
2017
2018
2019
2020
2021
Dividend
11.16
Excess cash
after dividend
-44.76
-20.76
-4.96
5.94
31.24
50.74
60.04

19. 4) Dividend Payout Policy3
4) Dividend Payout Policy
Excess Cash after Dividend payout

20. 4) Dividend Payout Policy - Regular dividend payout3
4) Dividend Payout Policy - Regular dividend payout
Pros:
A large dividend suggests that the company had conquered its problems and the director was confident of its future earnings.
Cons:
If  40% dividend payout policy is adopted, the cash flow would not become positive till 2021.
Though the sales growth rate in 2015 was 14.98%, we regard sales prediction 15 % is too optimistic. We attribute the source of growth in 2015 to AIW system. However, there are two competitors who will release similar system next year. It is difficult to assume the growth rate would maintain 15% till 2021.
$0.1 per share is much lower than the original $0.64 and dividend cut may negatively affect company’s stock price.

21. 4) Dividend Payout Policy - Residual dividend payout3
4) Dividend Payout Policy - Residual dividend payout
Pros:
The investment in positive-NPV projects not only helps to generate dividends to the investors but also foster growth of the company.
Payout can be made at returns not otherwise achieve.
Firm would build trust with investors.
Cons:
The investment in positive-NPV projects not only helps to generate dividends to the investors but also foster growth of the company.
Payout can be made at returns not otherwise achieve.
Firm would build trust with investors.

22. Part Four
Conclusion
第 四 章

23. Dividend + Share Repurchase
Conclusion 4
Dividend + Share Repurchase
Based on our analysis above, we recommend Rockboro adopt dividends payout rather than share repurchase. It's better to use quarterly dividend of $0.1 per share, comparing with 40% dividend payout, judging from the amount of excess cash after dividend. Using 40% dividend payout requires the company to increase its leverage.

24. Rockboro should rename its brand.
Conclusion 4
Rockboro should rename its brand.
Though changing brand name is costly, there are several advantages:
New name helps Rockboro become more recognized for its products nowadays.
New name containing the image that helps to enhance marketing of the AIW system.
New name might help to attract new investors.