Financial Management - Logitech International - Case Study Example

FINANCIAL MANAGEMENT BUSINESS INTRODUCTION: Logitech International is registered with symbol LOGN in the SWX Swiss Exchange as a Swiss public company. In the NASDAQ, it trades by the symbol LOGI. It was also added to the NASDAQ-100 Index in January 2007. The company is a world leader in consumer electronics and personal peripherals. It is one of the most innovative companies which is striving hard to provide its consumers an experience of newer technologies and innovative ideas in digital music, PC navigation, home entertainment controls, internet communications, gaming and wireless devices. Thus the products of the company are being appreciated and liked by the consumers due to their innovations, beautiful designs and value for money. 89 percent of its revenue comes from its retail process. The company initially benefited from the easy accessibility of computers and their popularity among new users who enhanced their basic desktop PC systems with more features that add functionality and provided them with personalized settings. And now the latest trend amongst PC users to utilize their desktops for gaming, listening to music, multimedia or CD/DVD popularity and internet communication using webcams etc. is proving beneficial to the company. With more and more consumers opting for laptops and palmtops, the demand fr PC peripherals is increasing day by day leading to growth in companies like Logitech. Logitech has come out with specially designed peripherals, such as mice, speakers, webcams, headsets, headphones and notebook stands for laptop users at home or on road or at office. They also provide personal peripherals for other digital items such as gaming consoles, portable music players and mobile phones etc. They have fully utilized the newer technologies such as wireless to offer a range of wireless devices such as mouse, keyboards, presentation devices, headphones, gaming controllers and streaming music systems Moreover, easy accessibility to high speed internet connections have led to increased use of voice and video communications, video sharing on web sites, Web-based music and radio etc. and thus there is an increased demand for products that help in these such as multimedia keyboards, webcams, voice-access headsets, speakers, and streaming media systems. Its product lines also include advanced universal remote controls to help consumers with operating their home-entertainment systems easily which are at the moment becoming more and more popular with flat-panel TVs, digital-video recorders, digital audio systems, PC-based media systems and game consoles etc On the financial front, Logitech International is enjoying a very successful and profitable run in the market. As per its report for the second quarter of Fiscal Year 2008 the sales are going up and were $595 million. This was an increase of 19 percent from the sales figures in the same quarter last year. Operating income is $80.4 million, which is again an increase of about 54 percent from last year. Gross margin is at the all time high for the company at 36.3 percent as compared to 34.5 percent in Q2 of Fiscal year 2007. Similar improvements are seen in cash flow from operations which is at $103 million as compared to $80 million in the last year. In retail as well, the company posted record sales growth of 16 percent. There has been a strong demand for Harmony remote controls, audio products, and keyboards and desktops and this has resulted in such a good figures for the second quarter. The only jarring note came from the impairment in the value of its short-term investment portfolio caused due to dislocations in the credit markets. The company has terminated the services of its treasurer whose actions and misrepresentations caused the fiasco. The loss is expected to be around between $55 million and $75 million, which will be reported on the Q2 FY 2008 income statement as an unrealized loss under Other Expense. The Boston Matrix categorizes opportunities into four groups, shown on axes of Market Growth and Market Share: In this industry , the retail products have short product life cycles, so a failure to accurately predict high demand for a product can result in lost sales. So, it is important to significantly expand the number and types of products and find new markets to sell them. Out of product lines of Pointing, Keyboards, Audio Video, Gaming, Remotes and OEM – The figures shows that the sales are up for remotes and keyboards. Sales are almost same for pointing and have decreased for other items. Thus market growth is limited in other areas and the company should try to move keyboards and remotes from cash cows to stars. . THE PROPOSAL As we look toward increasing profitability and new product developments for the company, we must try to assess various business strategies and alternatives. We can do this by using a strategic approach, such as the Ansoff Model or Matrix. This technique helps to evaluate various options and choose the best possible. The Ansoff Matrix was first published in the Harvard Business Review in 1957 and quite easy to use. It shows four growth options for business formed by matching up existing and new products and services with existing and new markets : market development, Diversification, market penetration and product development. Out of these, Logitech should focus on market development as this strategy focuses on targeting new markets, or new areas of the market. This is because, the industry segment to which it caters is extremely volatile with users preferences changing quite fast and price competition and other promotional activities are very fierce. The company has already moved into new markets, such as the market for programmable remote controls and streaming media devices. The company has decided to develop an overseas manufacturing strategy to manufacture novel products in the in-car information & entertainment sector such as a satellite route finder. This is to enable Logitech to achieve greater revenues through their expanded business operation Market and competitiveness review for the business proposal Let us try to take a look at the external and internal environment and different factors affecting this proposal. Using PEST analysis we can find out the political, economic, social and Technological factors affecting the various strategies. As per Thompson (2002), the economic conditions affect the difficulty level of success and profits of a company as they are related to cost and demand of the product. And they are in turn affected by the rules and policies of governments. The exchange rate or other taxes can make a product expensive or inexpensive. Similarly, the socio cultural environment such as the demography of the region or the age and income factors play an important role in creating a demand or rejection of a product. (Thompson, 2002; Pearce and Robinson, 2005). It is quite possible that the threats to existing products might lead to increasing opportunities for other new products. And finally the technology is widely recognised as one of the major cause of creation of competitive advantage (Capron and Glazer, 1987; Johnson and Scholes, 1993) Similarly, Porter’s Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are: Supplier Power, Buyer Power, Competitive Rivalry, Threat of Substitution, Threat of New Entry. Thus based on the above two analysis, we can say that this industry is very competitive and there are lots of competitors for Logitech. Thus they cannot afford to slip at any point and need to continuously bring out new products with new innovations and try to expand into different markets as well. The main competitor include Microsoft in retail cordless (mice and desktops) and corded (mice and keyboards) categories. They have a relatively greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base. In the lower price segments, there could be pressure from less-established brands which could impact the market share. The new laptop peripheral segment also has lots of new and old competitors who have broader product offerings than Logitech. Besides Microsoft, the competitors for PC Web cameras include Creative Labs and Philips. Microsoft definitely has an edge over others as it is a leading producer of operating systems and applications with which the mice, keyboards and webcams are designed to operate. Thus they can improve the functionality of their products to correspond with ongoing enhancements to its operating systems and software applications before Logitech and others. In the PC, mobile entertainment and communication platform speaker business, the main players are Plantronics , Creative Labs, and Bose Corporation. Thus competition is tough and we need to be aggressive in our plans as well. manufacturing strategy Logitech has been following a strategy of acquisitions and new manufacturing operations in different markets for more penetration and market share in the world. In October 2006, it acquired Slim Devices, Inc. (“Slim Devices”), a privately held company specializing in network-based audio systems for digital music, based in Mountain View, California. The acquisition helped them to expand in the digital music and home-entertainment control environment. Similarly, in May 2004, Intrigue Technologies, Inc. (“Intrigue”), a privately held provider of advanced remote controls, based in Mississauga, Canada was acquired by Logitech to expand in the living room environment. The Canada based center develops the Web-connected advanced remote control products. Growth Alternatives: There are several alternatives by which the company can achieve high growth and earnings, These are : 1. cost cutting, the provision of value added services, new technologies, and increased economies of scale to reduce cost. Most of these are the products of Internal Development. 2. Acquiring Technology. 3. Joint Venture (JV) Entities 4. Acquisitions In Internal Development -- there is complete control on design, timing and quality and the team is known and technology already tested. But it is usually the slowest and takes a lot of time to develop as there are lost of distractions and delays. When Acquiring Technology License – it may be the Fastest process and least expensive with no investments in terms of development needs. But there is a lot of dependency on Third Party and there is always a risk of termination or non renewal of licence. And it may be difficult to get exclusive rights. In case of Joint Ventures – it is easiest and another fast way of penetration and pooling of resources and technology helps to market better. But there may be logistics problems and there is no independence. There may be a risk of split as controls do not work. Canada as a country is ripe for starting a manufacturing unit as the design and development centre is already in place there. This will help to overcome any new product manufacturing problems that they may face. Moreover the political, social and legal environment is sound and good enough for the company. There are no problematic laws as the acquisition has shown. There are enough resources present as the research centre has shown. There are no major players in Canada except Thompson Ltd and there is no dearth of skilled manpower and knowledgeable personnel required for new technologies. Moreover, the research and design centre situated in Canada can provide the necessary guidance. FINANCIAL ANALYSIS Calculation of ratios from information derived from the company’s financial statements such as balance sheets or cash flow statements etc are known as the financial ratio analysis. By comparing with other similar companies or by looking at the benchmarks, a company’s financial condition can be analyzed. For example, look at Appendix 1 for the basic key figures of the company for Fiscal year 2007 and 2008. From there, we calculate the liquidity ratios: These ratios tells us about the short-term solvency of a firm. The Current ratio (all current assets divided by current liabilities) and quick ratio (current assets except inventory divided by current liabilities) are the two main liquidity ratios. The accepted norm for current ratio is 1.5:1. It should not be less than this. For Logitech, For period ending 30th Sep, 2007 – Current Ratio is 2.22 and Quick ratio is 1.7 Similarly, on calculating the gross margin (gross profit divided by net sales) = 34.3. Break-even analysis is a management control that approximates how much a company should sell in order to cover its costs with NO profit and NO loss. Profit comes after break-even. At the simplest level -- Break-even = Fixed Costs / Contribution Margin % Where Fixed Costs are those costs that are not variable as a result of the sales activity. These include rent of the building or insurance costs etc. while, expenses such as advertising and usage of shop or store supplies will vary with sales. And Contribution Margin = (Revenue - Variable Costs) / Revenue. Generally, the gross margin % can be taken as the Contribution Margin %. Thus assuming that gross margin will be slightly less than what they are achieving now – say 20% and Fixed costs is around $300,000 (including rent and insurance), then Breakeven = 300000/20% = $15,000,000 . APPENDIX Gross profit for fiscal years 2007 and 2006 was as follows (in thousands): 2007 2006 Change % Net sales . . . . . . . . . . . . . $2,066,569 $1,796,715 15% Cost of goods sold . . . . . . . 1,357,044 1,222,605 11% Gross profit . . . . . . . . . . . . $ 709,525 $ 574,110 24% Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.3% 32.0% Operating expenses for fiscal years 2007 and 2006 were as follows (in thousands): 2007 2006 Change % Marketing and selling . . . . . .$272,264 $221,504 23% % of net sales . . . . . . . . . . . . 13.2% 12.3% Research and development . . . 108,256 87,953 23% % of net sales . . . . . . . . . . . . . . 5.2% 4.9% General and administrative . .. . . 98,143 65,742 49% % of net sales . . . . . . . . . . . . . . . . . . . . . . . . . .. 4.7% 3.7% Total operating expenses . . . . . . 478,663 $375,199 28% Cash Flow from Investing Activities Cash flows from investing activities during fiscal years 2007, 2006 and 2005 were as follows (in thousands): 2007 2006 2005 Purchases of property, plant and equipment . . $ (47,246) $(54,102) $(40,541) Purchases of short-term investments . . . . . . . . . .(416,475) — — Sales of short-term investments . . . . . . . . . . . . . . .201,850 — — Sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . 12,874 ----- — Premiums paid on cash surrender value life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (537) (1,464) — Acquisitions and investments, net of cash acquired . (20,524) 860 (30,494) Net cash used in investing activities . . . . . . . . . . $(270,058) $(54,706) $(71,035) LOGITECH INTERNATIONAL S.A. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) March 31, 2007 2006 ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . .. . . . . $ 196,197 $ 245,014 Short-term investments . . . . . . . . . . . . . . . . . . . 214,625 — Accounts receivable . . . . . . . . . . . . . . . . . . . . .. 310,377 289,849 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,964 196,864 Other current assets . . . . . . . . . . . . . . . . . . . . .. . . 68,257 34,479 Total current assets . . . . . . . . . . . . . . . . . . . . . . 1,007,420 766,206 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 36, 414 Property, plant and equipment . . . . . . . . . . . . . . . 87,054 74,810 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 179,991 135,396 Other intangible assets . . . . . . . . . . . . . . . . . . . . . . 18,920 11,175 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,064 33,063 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,327,463 $1,057,064 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Short-term debt . . . . . . . . . . . . . . . . . . . . . . . .. . . . . $ 11,856 $ 14,071 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,129 181,290 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . .. . . . . . 235,080 162,922 Total current liabilities . . . . . . . . . . . . . . . . . . . . .. . . . 465,065 358,283 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . — 4 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,874 13,601 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 482,939 371,888 Commitments and contingencies Shareholders’ equity: Shares, par value CHF 0.25 – 231,606,620 authorized, 71,561,860 conditionally authorized, 191,606,620 issued at March 31, 2007 and 2006 . . . . . . . . . . . . . . 33,370 33,370 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 72,779 100,339 Less shares in treasury, at cost, 9,363,639 at March 31, 2007 and 8,955,226 at March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (217,073) (186,080) Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995,606 765,758 Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . (40,158) (28,211) Total shareholders’ equity . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 844,524 685,176 Total liabilities and shareholders’ equity . . . . . . . . . . . . $1,327,463 $1,057,064 REFERENCES: Capron, N. and Glazer, R. (1987) Marketing and technology: a strategic coalignment, Journal of Marketing, Vol. 51 Issue 3, pp.10-21. Johnson, G. and Scholes, K. (1993) Exploring Corporate Strategy – Text and Cases, Hemel Hempstead: Prentice-Hall. Pearce, J. and Robinson, R (2005) Strategic Management, 9th Edition, New York: McGraw-Hill. Porter, M. (1985) Competitive Advantage, New York: Free Press. Thompson, J. (2002) Strategic Management, 4th Edition, London: Thomson Read More