Financial and Corporate Actions of Laird plc - Essay Example

Financial and Corporate Actions of Laird plc Introduction Laird pls, founded in 1824, is a British electronics and IT hardware company. The company is headquartered in London and is listed in the London Stock Exchange (Laird, 2014). The company runs its operations with 9500 employees in nineteen countries including China, Japan, India, Singapore, Mexico, etc. Laird was created by the merger of some of the top Thermal Management, EMI shielding and Wireless communication brands. The company’s operations are divided in two broad categories: Laird Wireless Systems and Laird Performance Materials. The Performance Materials division manufactures equipments that shield electromagnetic interferences, thermal management systems, signal integrity equipments, etc (Laird, 2014c). The global electronics and instruments industry has seen a growth of 4.3 percent in the year 2011 and has been evaluated at $1,844.3 billion (MarketLine, 2012). This study is focused on the company’s financial details including the company turnover, industry performance, and market report and market share. It also includes the last few years’ financial performance of the company, its financial activities and its internal and external performance analysis. Financial Trends Some key financial figures are mentioned in the figure below. All figures are in million £. Source: (Laird, 2014d) As stated in the above figure, the company had made the highest revenue in 2011, as it discontinued some of its operations that year, which added to the total revenue (Laird, 2014e). However the revenues generated from continued operation has been increasing: £491.3 m in 2011, £520.2 m in 2012 and £537 m in 2013 (Laird, 2014d). The profitability has decreased severely in 2011 and again increased in 2013, but in the recent year it has been seen to have a downward trend (Laird, 2014d). The downward trend is mostly because of the lower sales volume due to high competition and the high fixed cost of operation (Morningstar, 2014a). The operating profit has increased from 2011 and is almost steady in past two years. It is clearly seen that after discontinuing some of its operations, Laird has increased its profitability. In the last year i.e.2013, the Performance Materials division made revenue of £342.8 million, which is 6 percent more than previous year’s revenue that is £324.7 million. The IT and Telecom sector made the maximum revenue of 35 percent, followed by the Smartphone business which made 24 percent. The Wireless Systems division made revenue of £194.2 million which is 1 percent less than the previous year that is £195.5 million. The Transportation made the maximum revenue of 61 percent, followed by IT and Telecom, Industrial businesses and others made revenues of 19, 16 and 4 percent respectively (Laird, 2014e). The company operates in two segments, Performance Materials and Wireless Products (Laird, 2014d). Financial and Corporate Actions Laird plc has followed several acquisition and divestment strategies over the years, which has changed the company’s product portfolio and has also led to its growth. In 1898, the company merged with Charles Cammell and Co. Ltd. and formed Cammell Laird and Co. Ltd. The company manufactures submarines and navy ships. In 1970, the UK government overtook the ship building operations, and half of the company’s shares were nationalized. After that the company was renamed as Laird Group Ltd. In 1994, the company changed its product portfolio and started developing a series of EMI shield equipments. Laird acquired APM in 1996, which allowed them to manufacture specialized metal coated EMI shields. In 2010, the company acquired Cattron, which manufactures wireless control and automation equipments. In the next year, the company acquired Kluver, which manufactured cooling system for medical equipments. In 2012, Laird made an acquisition of a leading microwaves absorber equipment manufacturer known as Microwaves Materials Group. In the same year the company entered into the M2M wireless communication market by acquiring Summit Data Communications. In 2013, Nextreme Thermal Solutions was acquired, which is a thin film thermometric technology developer. This acquisition allowed Laird to have a strong foot hold in the thermal management market (Laird, 2014f). Profitability Gross Margin Source: (Morningstar, 2014a) The above chart shows a steady rise in gross margin the year 2009 to 2012. However in the year 2013, the margin growth has slowed down. According to the data of Morningstar (2014a) this trend can be explained by the reduced cost of sales. However in 2013, the rise of price of the raw materials has slowed down the margin growth. Net Profit Margin (%) From the above graphs the profitability of the company has dropped severely from 2009 and has reached to negative value in 2011. Then again it has gone up in 2012 and has fallen slightly in 2013. The fall of profit in 2013, is due to rise in price of raw materials (Laird. 2014e). Liquidity Current Ratio The current ratio shows a gradual rise from 2009 to 2012, which means the current liabilities are less than the current assets, but in 2013, there is a sharp fall indicating the sudden rise in current liabilities than its current assets. The sudden rise in liabilities is due because the company has taken a lot of short term loans, which decreased its current ratio (Laird, 2014e). Debt to Equity Ratio Source: (Morningstar, 2014a) The company’s rise in debt/equity ratio from 2009 to 2011 suggests that the debt balance increased or its equity balance got decreased. In 2012 to 2013 the company’s debt to equity ratio has increased as the graph shows a decline. This as a result has reduced the liquidity of the company, which will prevent it to make any immediate pay-offs. Risk Management Operating a large multinational firm often comes with several risk factors; most important ones are financial risk and political risk. These risks can eventually cause hindrance to the organization’s operations if they are left unchecked. In the following section, the financial risks involving the exchange rate fluctuation and the political risks involved are discussed. Exchange Rate risk Exchange rate risk involves a chance of potential loss or potential gain which is a result of change in exchange rates. The risk of loss involves the depreciation of local currency against the host country’s currency with which the business deal is done. This risk of change in the value of local currency usually hampers the company’s core business as a whole rather than individual transaction. The present value of future cash flow of the company degrades due to currency value fluctuations as a result it affects the revenue of the organization, mostly generated by exports and domestic sales (Giddy and Dufey, 2014). Exchange rate risks have been broken down into three types by Papaioannou (2006) in his article as Transaction risk, Translational risk and Economic risk. The transactional risk can be defined as the risk of cash flow change due to change in exchange rates. It affects the financial activities like export contracts, import contracts and repatriation of funds. Translational risk involves the change in values of balance sheet of a foreign subsidiary with respect to the parent company situated in the home country (Papaioannou, 2006). This risk is generally measure in terms of net assets to exchange rate fluctuations. Finally, the economic risk involves the risk of total economic downturn of the entire firm due to change in exchange rate (Giddy and Dufey, 2014). Laird plc operates its multinational business in countries like China, Japan, Mexico, Singapore, India, and many more. Due to its global operation, the company faces issues relating to currency imbalances. Often due to currency exchange rate fluctuations, the procurement and operating costs in host country increases or do not align with the revenues in domestic currency. In the year 2012, about 75 percent of the revenues were valued in USD. In most of the currencies except USD and Euro, the cost of operation increased over revenue generated. The Renminbi or RMB is 40 percent of the company’s cost base. This currency imbalance has impacted the revenue and RMB has not recovered in terms of USD in that year. There was also a translational impact while converting the figures into the domestic currency which is Sterling. The appreciation of USD over sterling increased the operating profit of year 2011 by almost £ 0.8 million (Laird, 2013). The company minimizes the currency fluctuation impact by trying to match the income and cost at the local currency. The company forwards cover of minimum 75 percent of the total unsurpassed amount. Some of the borrowings made on foreign currencies are used to hedge the currency of the company’s cash flow and principal assets. In case where the borrowings are made on the same currency in the overseas assets investment, the amount is considered as net investment hedge (Laird, 2013). Hedging is a process of entering in to a contact in order to protect a company’s financial structure from sudden or unexpected currency exchange rate changes (WU, 2014). Exchange rate risks can be a serious problem if they are not managed properly. Most firms use the “Value at Risk” method of measuring risks (Holton, 2003). This calculation is based on three parameters, the holding period till which the position of foreign exchange is to be held (usually it is one day), secondly, the level of confidence based on which the estimate is made (usually it is between 95 to 99 percent) and finally, the currency unit on which the denomination is done (Holton, 2003). The management of exchange rate risk is mostly taken care of by hedging strategies. The risks over short term receivables are mitigated by tactical hedging and the long term risks by strategic hedging. To avoid the impact of drastic currency rate fluctuations, the translational risks (or balance sheet risk) are hedged in a very non systematic and infrequent manner. The debt structure of the organization, its international investments and devaluation of subsidiaries are the primary risk of change in exchange rate of currencies. The economic risks are dealt as a residual risk, as it is difficult to quantify because the risk is reflected at the present value of all the potential future cash flows. The risk of exchange rate change can be further worsened by the rise in inflation rate, which can cause a firm to lose its competitiveness in the market, because the adjustments of exchange rate are not aligned with the purchasing power parity (Froot and Thaler, 1990). Political Risk Political risks are more or less an integral part of any business operation and for companies like Laird plc who operate in several countries, the risk becomes more significant. Different countries have different political scenarios and depending on which the company must plan its business operations, so that it does not contradict with the local political ventures. Moran (2014) in his article has reported about the rise in political risk for the multinational companies and his studies have shown that in countries where political risks were high decades ago are still prevalent at a constant level. Some countries have slightly improved in terms of political stability like Colombia, Georgia, Zimbabwe, etc, however in countries like Brazil, Sudan and Libya, the business activities are hampered due to its unstable political environment (Moran, 2014). Laird plc runs its business by following its “Global code of Conduct” which is applicable to all of its subsidiaries and business activities. The employees are also asked to stick to all the rules and regulations that define the company’s ethical practices and its dealing with foreign political laws. The company operates in several countries and each of them may have laws which are different than that of the employees’ home countries, so Laird plc has strictly laid down regulations for the employees to follow the local laws (Laird. 2013b). The company also encourages its employees to respect the local cultures and customs so as to avoid any dispute over clash of different cultures. The company complies with all the necessary regulations like customs, export, trade control, applicable license requirements, etc. The company also has strict policy over money laundering activities, insider trading of price sensitive information and other unethical practices. Laid plc, recruits workers from host countries by making sure that they are not being discriminated and that all the labour laws are strictly followed. The company also prohibits all of its employees and business activities from any association or contribution to local political parties (Laird, 2009). As a result, it has been able to avoid any political disputes in the company, which has allowed it to keep a close business relationship with the government. Rajwani (2014) in his article has explained the primary reasons of political risks and how to mitigate them safely. He mentioned that political instability can arise from several issues, and these issues are not same for all countries. In the Middle East and North African countries, the primary issue is regarding high levels of unemployment combined with high inflation rate and corruption in most of the management systems (Rajwani, 2011). Due to political unrest, the companies who have outsourced their operations in these countries are eventually closing down their business, as a result they have faced huge financial loses. In USA, the risks involved are regarding civilian unrest and terrorist attacks (Rapoza, 2013). Thus Lairds can use Investment contract and insuring its operations to reduce the effect of political risk in the business operation. Rajwani (2011) also mentioned certain risk mitigation practices. Certain proactive measures like insuring certain business operations and assets can to some extent lower the financial loses. Insurance protects the company from financial loses which is likely to occur from political risks. Employing control procedures like setting up a risk management board, its sole responsibility is to monitor the political environment and the changing regulations. They also use certain scoring systems to evaluate and predict any future contingencies and adapt their operations likewise (Rapoza, 2013). Conclusion and Recommendation Laird plc has expanded itself on a continued basis by several strategic acquisitions. It holds the leading position in wireless radio technology equipment manufacturing business. It operates in several countries which bring certain risks involving exchange rate fluctuation and political issues. The exchange rate risks of Laird are mostly from increased operating cost; however the appreciation of the United States dollar often leads to increased operating profit. The company uses certain hedging strategies in order to reduce the exchange rate fluctuation risks. In case of political risks, the company follows strict rules and regulations to avoid involving itself into any political issues. It is recommended for the company that it should choose its next host country for operations based on its political stability and stable exchange rate. The company can use its brand value, technological expertise and product reliability to go into a horizontal diversification by manufacturing consumer electronics. It can also collaborate with large consumer electronics companies and become a supplier of internal components. References Froot, K. and Thaler, R. 1990, Anomalies: Foreign Exchange. Journal of Economic Perspectives. 4 (3). 179–192. Giddy, I. H and Dufey, G., 2014. The Management of Foreign Exchange Risk. [online] Available at: [Accessed 15 November 2014] Holton, G.A. 2003. Value-at-Risk: Theory and Practice. Academic Press. San Diego, California. Laird. 2009. Business Ethics And Conduct Policy Statement. [online] Available at: [Accessed 15 November 2014] Laird. 2013. Announcement Of Results For The Year Ended 31 December 2012. [online] Available at: [Accessed 15 November 2014] Laird. 2013b. Global Code of Conduct. [online] Available at:< http://www.laird-plc.com/laird/dlibrary/panda/Laird_GlobalCodeOfConductPolicy_Oct2013.pdf> [Accessed 15 November 2014] Laird. 2014. About Laird. [online] Available at: [Accessed 15 November 2014] Laird. 2014a. Our Business. [online] Available at:< http://www.lairdtech.com/about-us/our-business#.VFe1sDTF80U> [Accessed 15 November 2014] Laird. 2014b. 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[online] Available at: [Accessed 15 November 2014] Papaioannou, M. 2006. Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms. International Monetary Fund, 6(255). pp.7-10. Rajwani, T. 2011. How Should Firms Deal With Political Risk? [online] Available at: [Accessed 15 November 2014] Rapoza, K. 2013. On Political Risk & Terrorism, U.S. Riskier Than Botswana. [online] Available at: [Accessed 15 November 2014] WU. 2014. Currency Hedging. [online] Available at: < http://business.westernunion.com/resource-center/fx-101/hedging/ > [Accessed 15 November 2014] Read More