Finance and Accounting at JC Penney and Infineon - Example

Based on the above analysis, the two recommendations for JCP are:

• Defer capital expenditure on renovation and refurbishment of stores. Spend money only on customer specific improvements such as in the changing rooms in select stores. Against the outflow of $ 810 million in 2012, target an outflow of only around $ 300 million in 2013. The $ 510 million reduction in outflow would help ease the liquidity problem for the company.
• Take up an intensive effort to increase sales in Q1 of 2013. Identify non-moving and slow-moving inventory for additional incentives such as discount coupons. Replenish only fast moving inventory and establish store displays and publicity to increase revenues. One approach could be to leverage JCP’s Sephora beauty product line and its in-store hair styling and manicure services with special deals to drive apparel and accessory sales.

If JCP is able to improve Q1 revenues in 2013 to the level of $ 3,943 million achieved in 2011, the additional revenue of around $ 800 million over Q1 of 2012 would give the company relief in its liquidity problem. It would also have the additional benefit of sending a strong signal of the company’s turn-around to the company’s lenders, investors and other stake-holders.

Infineon Case Analysis

Company background

Infineon Technologies is a semiconductor manufacturing company headquartered in Germany. The company is market leader in three major end use market segments --- Automotive, Industrial & Multimarket and Chip Card & Security. For the fiscal year ended September 30, 2011 the company revenues were € 3,997 million which was a 21% growth over 2010. The Automotive business segment had revenues of € 1,552 million (39%), the Industrial& Multimarket segment € 1,800 million (45%) and the Chip Card & Security segment € 428 million (11%). The company’s products have a Gross Margin 0f 41%. The semiconductor industry has high R&D expenses and this has been 11% of revenues for Infineon in 2011.

Semiconductor manufacturing is a capital-intensive business. In 2011, the company has committed to spend € 887 million in capital investments and the plans in 2012 will be for similar spends. Infineon claims to be the only company to have mastered the production of power semiconductors on 300 mm diameter silicon wafers. For the older 200 mm technology, the company has a plant in Malaysia for lower cost of production (Infineon 2011 AR, p 8)

Though semiconductor manufacturing is a global industry, end product manufacturers prefer to work with local suppliers unless there is a decisive technology or cost advantage to working with an overseas supplier. Infineon has the strongest presence in Europe with 48% of its revenues from that region. The company gets 5% of its revenues from Japan and 11% from the Americas and needs to forge partnerships with other companies to increase its penetration in those markets. The BRICS countries, particularly China, are becoming important geographies for the company (Infineon 2011 AR, p3, p 23).

Description of the problem for Infineon

Infineon has had two very successful years in 2010 and 2011. Net income in 2011 was € 1,119 million compared to € 660 million in 2010. The summarized cash flow statement from the company’s 2011 annual report is shown below (Infineon 2011 AR, p 175).

(all figures in € million)

2,011

2,010

Cash flow from operating activities

Net Income / (loss)

1,119

660

Income from discontinued operations

(375)

(348)

Depreciation and amortization

364

336

Other items

138

299

Net cash from operating activities

1,246

947

Cash flow from investing activities

Investments sale & purchase

(1,622)

30

Cash from discontinued operations

946

147

Plant & Machinery

(845)

(292)

Other items

(32)

(93)

Net cash from investing activities

(1,553)

(208)

Cash flow from financing activities

Change in long term debt

(52)

(296)

Repurchase of convertible bonds

(173)

(193)

Dividends paid

(109)

-

Stock issue / repurchase

(26)

-

Other items

5

2

Net cash from financing activities

(355)

(487)

Net change in cash during year

(662)

252

Cash at end of year

1,007

1,667

In addition to net income from operations, the company also had € 946 million inflow from sale of discontinued operations. The company has made financial investments of € 1, 622 million in the year. The net cash position at the end of 2011 is € 2, 387 million which is a substantial 40.6% of the company’s total assets at € 5, 873 million.

With the business outlook for 2012 also expected to be good, the company’s cash position is expected to further improve. The company management has to decide on striking a balance between retaining cash in the company and rewarding investors. The company would need to retain cash to guard against possible downturns in the cyclical semiconductor industry and for future acquisition opportunities. The reward for investors could be in the form of increased dividends or share repurchase programs. This paper examines the alternatives available to the management.

Analysis of the options available to the company

• Dividend distribution

Infineon made the first dividend distribution of € 0.10 per share for 2010 for a total outflow of € 109 million. This was the first time the company had paid a dividend since the year 2000.

A January 2016 report by Allianz Global Investors says that companies that have a stable dividend policy are valued higher by investors. The report says that a comparison of dividends and profits of S&P 500 companies in the past 10 years shows that company profits are subject to 56% volatility compared to only 6% volatility in dividends. Stocks of dividend paying companies are less volatile than stocks of companies that do not pay dividends. The report also says that the ratio of dividends to earnings per share in Europe is at 60% compared to 43% in US and 42% in Asia. Stable companies adopt a stable dividend distribution policy where the dividends grow year-to-year and a cut in dividends paid out is avoided (Allianz, 2016, p10-11).

In 2010, Infineon had earnings per share of € 0.61 on which it paid a dividend of € 0.10 and in 2011, on earnings per share of € 1.03, the company has announced a dividend of € 0.12 or a 20% growth in dividends year-to-year. The dividend growth rate should be higher than the inflation rate to satisfy the investors. In this case, the growth rate is substantially higher than the inflation rate which is under 3% in Europe. If the 20% dividend growth is maintained for 2012, the outflow would be € 130.8 million (109 x 1.2).

If the company pays out a larger dividend such as, say a 40% increase over 2011, the company should be prepared to maintain that growth level in succeeding years.

• Buy-back of convertible subordinate bonds 7.5% due 2014

The company had issued € 196 million of convertible bonds in 2009 due in 2014 with an interest rate of 7.5% to institutional investors in Europe. These are convertible into equity shares of the company. During 2011, Infineon had acquired bonds of nominal value € 59 million at a price of € 173 million. Bonds of nominal value € 137 million are outstanding which can be converted into 60 million equity shares (Infineon 2011 AR, p 214).

Infineon would be well advised to use its surplus cash to buy back these convertible bonds during 2012. At the same purchase price as the previous redemption, the company would expect an outflow of around € 400 million. This buy-back would reduce dilution of the investors’ investment in the company and help to maintain higher stock prices.

• Consolidation in the semiconductor industry

The soaring costs of new chip development and the high risks in cutting-edge technology development are leading to a wave of mergers and acquisitions in the semiconductor industry. The tabulation below shows some of the recent deals and the amounts involved (Carey, 2015).

Infineon would need to be able to spend between € 500 million and € 1,000 million to be able to bid for any company that it finds attractive. The acquisition can be by a mix of cash and equity and Infineon would also be able to secure loan funding for such an acquisition.

The recommended course of action

Based on the above analysis, the recommendations for Infineon are:

• Plan on a 20% growth in dividends in 2013 and set that as the long term goal for the company. This will give the company an image of stability in the minds of investors and stock market analysts.
• Buy-back the convertible bonds. The coupon rate on the bonds at 7.5% is much higher than the effective borrowing rate for Infineon on its long term debt. This would result in cost savings and in addition be an indirect reward for the present investors as it would reduce dilution of their holdings.
• Keep the remaining cash and cash equivalents to be able to make bids for acquisitions in the semiconductor industry. The cash chest would be cushion for Infineon even if a financial crisis such as the one in 2008-2009 causes banks to stop lending or if interest rates go up.

This cash reserve would also provide for payment of dividends for 1 to 2 years, even if the business cycle turns extremely adverse for the company.