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Aurora Textile Company

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jin wang

on 3 July 2014

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Transcript of Aurora Textile Company

Aurora analysis
Aurora Textile Company
Yarn manufacturer were declining in number while facing tougher and tougher competition from the influx of imported yarns. At the same time, the strong U.S. dollar had made it more appealing for some foreign textile manufacturers to export aggressively, flooding the U.S.
Yarn manufacturer
The production of yarn involved the processes of cleaning and blending, carding, combining the slivers, spinning, and winding . Aurora used only rotor spinning and ring spinning in its yarn production. Ring spinning was a process of inserting twists by means of a rotating spindle. In rins
pinning, twisting the yarn and winding it on a bobbin occurred simultaneously and continuously.
Product : cotton / synthetic(mainly)
Industry analysis
The industry, which had started in New England, moved to the southern United States to take advantage of cheaper production costs. In more recent years, the search for cheaper production costs had begun to move the textile-mill industry to Asia.
The industry movement: New England – U.S. – Asia (for cheaper production costs)
like Aurora because of the liability associated with customer returns.
Information technology also had a downside for yarn producers
The U.S. government’s free-trade policies were implemented through the North American Free Trade Agreement (NAFTA) and the Caribbean Basin Initiative (CBI). These trade agreements had created a burden on the U.S. textile industry by encouraging trade with Canada, Mexico, and Caribbean countries, which lowered the prices of consumer goods in the U.S. market.
The U.S. government’s free-trade policies
Consumer preferences and fads shape the market
The emphasis in the industry had shifted from mass production to flexible manufacturing as textile mills aimed to supply customized markets. Firms were concentrating on manufacturing systems that allowed small quantities of customized goods to be produced with minimal lead time.
Production Technology
Rotor spinning inserted twists by means of a rotating conical receptacle into which the fiber was admitted. In “open-end” spinning, air current an centrifugal force carried fibers to the perimeter of the rotor, where they were evenly distributed in a small group. The tails of the fibers were twisted together by the spinning action of the rotor as the yarn was continuously drawn from the center of the rotor. The process was very efficient and reduced the cost of spinning,
Aurora was the largest volume producer of all cotton yarns for white athletic socks in the United States
with nearly half the U.S. population owning socks made with Aurora yarns. Aurora had long enjoyed supplying the hosiery market for several reasons.First, as a leader in the market, Aurora was able to command attractive margins and maintain relationships with some of the largest and most profitable hosiery companies in the world. Second, hosiery was produced using bulky, heavy yarns. Aurora’s plants were designed for this type of manufacturing operation, which allowed the company to process large quantities of yarn efficiently. Third, unlike other segments of the textile industry, the hosiery market had successfully defended itself against global competition.
Problems that Aurora have
The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities with its short-term assets.
Current ratio = Current assets/ Current liabilities
Acceptable current ratios: 1.5 to 3
Aurora’s current ratio is too high
Aurora may not be efficiently using its current assets
May also indicate problems in working capital management
Profit margin on sales is a ratio that measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin on sales = Net income available to common stockholders/sales = -7,020/ 147,503 = -0.0476
There are problems in pricing strategies and costs control.
Return on Assets is an indicator of how profitable a company is relative to its total assests
ROA = Net income available to shareholders/ Total asset = -7,020/ 135,991 = -0.0516
Return on Equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
ROE = Net Income/Shareholder's Equity = -7020 / 47,543 = -0.15
SG&A expenses and Depreciation and amortization were too high
Old equipment required additional processes made the process more costly
Altman Z
Altman Z is a way to predict corporate failure.
Z = 1.2X1 +1.4X2 +3.3X3 +0.6X4 + 1.0 X5
X1 = Working capital / Total assets
X2 = Retained earnings / Total assets
X3 = EBIT / Total assets
X4 = Market value of equity / Book value of total liabilities
X5 = Sales / Total assets

Z = 1.2X1 +1.4X2 +3.3X3 +0.6X4 + 1.0 X5
= 1.937
(Z<1.81, go bankrupt; 1.81<Z<2.99, grey area)
Poor economic environment: both the company and the industry were continuing to lose money
The company had not responded quickly to the deteriorating business environment
Since1999, about 150 textile plants had been closed in the United States, and 200,000 industry jobs had been lost.
The company had limited cash available and had trouble maintaining sufficient working capital.
Other Problems
Problem solving
In January 2003, the chief financial officer of Aurora was questioning whether the company should install a new machine, Zinser, to solve the problem.
Finer-quality yarn;
10% increase in the selling price of yarn;
Efficiency would reduce operating costs;
Lower power consumption and maintenance expenses
However, $8.25 million installed cost, made the Zinser decision a difficult one.

Capital Budgeting for Projects
Purpose of projects
Comparing two projects (investment and no investment), we will choose the most profitable and promising one which also meet shareholders' benefits.

No Investment
Conditions & Assumption
Gross margin grows 25%,
SG&A expenses decline 10%,
Depreciation decrease 12%,
Expenses do not change.
The hurdle rate is 10%
All data are dollars in thousand.
No Investment
Conditions & Assumption
Due to information in case:
Sales decrease 5%,
The price increase 10%,
Conversion cost is stable,
SG&A expenses is 7% of revenue.
Returns as cost/lb. $0.084
Others do not change.

Projects Analysis
NPV (dollars in thousands)
Projects Analysis
Besides, we should also consider the following problems without investment on Zinser:
Old equipment maintainance expense.
SG&A expenses and Depreciation and amortization.
Low asset utilization ratio.

As a result, we advise that this company should agree with the new project, which owns a huge profitable future.
Jin Wang
Zexi Liu
Xinghan Wang
Industry analysis
Aurora analysis
Problems that Aurora have
Capital Budgeting for Projects
Projects Analysis
Criterias: Cash flow, PV,NPV and so on.
For the first forcasting three years: Project one shows a higher NPV from 2003 to 2005.
However, in the long run, we can find high gross margin and growth rate in NPV for Investment project.

Group 6
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