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Riordan Manufacturing Analysis

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Running head: RIORDAN MANUFACTURING ANALYSIS

Riordan Manufacturing Analysis

University of Phoenix Online

BSA 500

Abstract

Riordan Manufacturing is a global plastics manufacturer and a leader in the field of plastic injection molding. This paper will provide a brief background history of the company, some identified core values, ratio analyses, a variance analyses on the companies financials, an analysis of the current accounting systems and recommendations on providing appropriate communicative and data gathering software for the future accounting systems.

Riordan Manufacturing Analysis

The objective of this paper is to provide an analysis of Riordan Manufacturing’s financial situation and its current financial system. Included in this paper is a brief overview of company values, an analysis of company financial statements and ratio’s, accounting modules, and additional modules that should be connected to Riordan’s accounting system.

Company Background & Core Values

Founded by Dr. Riordan in 1991, the company's focus was on research and development and the licensing of its existing patents, but in 1993, the company expanded into the production of plastic beverage containers when it acquired a manufacturing plant in Albany, GA. Their advanced capability allows them to create innovative plastic designs that have earned international acclaim. Currently with 550 employees and facilities in Albany, Georgia, Pontiac, Michigan, Hangzhou, China and San Jose California they have projected annual earnings of $46 millions.

Riordan Manufacturing values being a nationwide leader in implementing diversity in the workplace. Through innovative ideas from many different cultures and traditions Riordan designed a company where recruitment, development and retention of diverse talent are a priority. Employee diversity continues to enhance the development and delivery of innovative products to customers all around the world. Global marketplaces and the communities served by Riordan Manufacturing benefit from this major commitment to embrace and respect a diverse labor force.

Other core values of equal importance are attention to detail, extreme precision, and enthusiastic quality control. Providing customers with “value-added solutions to their most demanding design challenges” (Virtual Organizations Portal, 2005) remains a company standard. With facilities in San Jose, California, Albany, Georgia, Pontiac, Michigan and Hangzhou, China, they have the capacity to fulfill client’s unique needs, provide innovative solutions, products and services at a reasonable cost, and seek, through their commitment to their core values, to develop long-term relationships with customers.

Financial Analysis

Financial ratios are indicators of a company's performance and financial condition. The following analysis shows Riordan Manufacturing’s ratios and how they can be used in making financial decisions. Here, we have compared two separate years of financial data to facilitate forecasting and analyses.

Liquidity Ratios

Liquidity Ratios are used to provide information about a company's ability to meet short-term financial goals or obligations. The current ratio is the ratio of current assets to current liabilities (for example):

Current Ratio = Current Assets/Current Liabilities.

Current Ratio: 2003 = 15,415,168/5,836,032 = 2.64

2004 = 14,643,456/6,029,696 = 2.42

With a current ratio higher than 2, the company is performing in line with market expectations. The current ratio for its industry is 1.8.

One downside of the current ratio is that the “hard to liquidate inventory” may be included in the equation. The Quick Ratio is an alternate method:

Quick Ratio = Current Assets – Inventory/ Current Liabilities.

Quick Ratio: 2003 = 15,415,168 - 8,074,880/5,836,032 = 1.25

2004 = 14,643,456 – 7,854,112 / 6,029,696 = 1.12

A Quick Ratio between 0.5 and 1.0 is usually considered satisfactory. But a ratio under 1.0 may also be a hint of some cash flow problems. Riordan’s Quick Ratio is over 1 which indicates that the company should not have any problem meeting its short-term obligations. The Quick Ratio for its industry is 1.3.

Financial Leverage Ratios

These ratios are used to provide an insight of the long-term solvency of a company. They differ from Liquidity Ratios by indicating how a company is using its long-term debt.

Debt Ratio = Total Debt/Total Assets.

Debt Ratio: 2003 = 14,158,976/35,637,504 = 0.39 = 39.7%

2004 = 12,160,256/33,856,256 = 0.35 = 35.9%

A Debt Ratio above 100% indicates that a company has more debt than equity. Riordan has a low level of debt compared to its equity, which informs us that it is safe to lenders and investors. The Debt Ratio for its industry is 1.85.

The Interest Earned Ratio shows how a company's earnings can pay for interest payments on debt.

Interest Coverage = EBIT/Interest Charges

(EBIT = Earnings before interest and taxes).

Interest Coverage: 2003 = 4,020,541/217,092 = 18.5

2004 = 3,246,122/230,221 = 14.1

Not only does a lower times Interest Earned Ratio signifies that less earnings are accessible to meet interest payments but also the company is more susceptible to increases in interest rates. The interest earned ratio for its industry is 15.5.

Profitability Ratios

Profitability Ratios indicate a company's ability to generate profits.

Gross Profit Margin = Sales – Cost of goods sold/Sales.

Gross Profit Margin: 2003 = 43,418,370 - 34,517,604/43,418,370 = 0.20 = 20%

2004 = 46,044,288 – 37,480,050/46,044,288 = 0.186 = 18.6%

Riordan Manufacturing is in a good position to generate profits compared with its industry which is 21.3%.

Return on Assets (ROA) indicates how a company's assets are used to generate profits.

Return on Assets = Net Income/Total Assets.

ROA: 2003 = 2,510,276/35,637,504 = 0.07 = 7%

2004 = 1,990,495/33,856,256 = 0.058 = 5.8%

The industry average is 7% which indicates that Riordan Manufacturing in a good position.

Return on Equity (ROE) measures the profits paid to the shareholders; profits earned for each dollar invested in the company's stock.

Return on Equity = Net Income/Shareholder Equity.

ROE: 2003 = 2,510,276/21,478,528 = 0.092 = 9.2%

2004 = 1,990,495/21,696,000 = 0.117 = 11.7%

The industry average is 6.3% which indicates that Riordan Manufacturing has a higher percentage compared to its industry.

Appendix A and Appendix B show the variance analysis for the income statement and balance sheet respectively.

Though the majority of Riordan Manufacturing’s financial ratios have decreased since 2003 (2004 vs. 2003), the numbers indicate that Riordan Manufacturing is performing at industry levels.

Accounting System Modules

The operating entities in Georgia, Michigan, California, and China each have independent, differing finance and accounting system. These sites provide information to the corporate office that is consolidated at the corporate level. The following is a list of the basic components of each system and an explanation on why these modules are useful:

General Ledger

The General Ledger Module is the “heart and soul” of any accounting system. It contains all the sub-ledger activity thereby allowing the highest summary level of financial information from the transaction data/details supplied by its sub-ledger. All activities that have a financial impact to the company are reflected in the General Ledger.

Accounts Payable

The Accounts Payable Module helps with the procurement cycle, thereby allowing the ability to process high business volumes and management of cash flow. The module also helps with the management of supplier relationships and price assessment.

Accounts Receivable

The Accounts Receivable Module tracks customers and ensures the collection of money owed. It also produces legal documents to advise customers of their responsibilities, invoice, statement, and dunning notice.

Order Entry

The Order Entry Module records all products shipped to customers and updates the inventory. This information is then transferred into a receivable, which accounts for sales revenue.

Procurement

The Procurement Module handles all the purchasing activity of a company such as: materials, office’s supplies, and services. This module captures expenditures and accounting information that will be fed to accounting and will ultimately hit the general ledger.

Sales and Purchasing History

The General Reports Module provides a wide selection of reports covering such topics as inventory status, inventory valuation, sales analysis and history, purchasing history, product movement, and reorder recommendations

Invoicing and Shipping

This module allows the system to link the shipment module to the invoicing module. Once an order has been completed, a shipping record can be printed on site, allowing the system to create and print invoices.

Payroll

The Payroll System has the ability to enter and process multiple pay types such as multiple companies and departments, different types of pay periods (weekly, biweekly, etc.) and commissions. This system also handles employee tax information and supports technology for printing and distributing checks.

Financial Reporting

The Financial Reporting Module allows the organization to replace reports that are regularly created manually by the accounting and finance division. Business users will have the ability to create specific reports (scorecards, performance trends, transaction level data, etc.) and data mine “business intelligence” that is not otherwise apparent.

EDI (San Jose Only)

The EDI Module will handle all the information from different sites using a network system via the internet or their own intranet. Instead of receiving hard copies of reports, it will be received electronically into the financial system thereby allowing “seamless compatibility” within the different operating entities.

Bar Code Reading (San Jose Only)

The bar coding reading system allows the versatility to adapt to any of the companies processes. One of the most useful functions is keeping track of inventory when the assembly process depends on JIT (just-in-time) inventory control. The FIFO (first-in-first-out) system can be enhanced by the continual updates from the scanning processes.

EDSS (Executive Decision Support System) (San Jose Only)

EDSS is a Decision Support System (DSS) that is incorporated with system software such as distribution, accounting, and manufacturing. It is an “easy to use” query tool that can retrieve information for decision making. Users chose from a list of data criteria based upon the organization, customer product, etc. He/she then “drags” the criteria combinations onto the preferred report.

Accounting Systems

Riordan Manufacturing’s corporate office has a license for a fully integrated Windows based ERP (Enterprise Resource Planning) manufacturing, distribution and financial management software application specifically designed for plastics, processors, and process and assembly manufacturers. During the acquisition of the entities in Michigan and Georgia, the matter of finance and accounting (F&A) system’s compatibility was not addressed. For this reason, Michigan and Georgia have application issues which are not compatible with the current financial system. The following is a list of additional modules that should be connected to the accounting system:

Inventory

The Inventory module will help Riordan Manufacturing with the physical management of their stock (until used up or sold). It will perform a sound cataloging procedure by assigning item numbers that the accounting system can process.

Asset Management

Asset Management will help Riordan Manufacturing with physical maintenance, tracking of assets, and financial management. Physical maintenance includes the asset location, condition, and the assignment of asset management to specific individuals.

Cash Management

Cash Management will help Riordan Manufacturing manage and control the cash cycle. It will ensure liquidity and enhance profitability. Benefits of this module include multi-currency capabilities, cash balancing, bank reconciliation, and cash forecasting.

Web Applications

Web Applications will help Riordan Manufacturing in many ways. Customers and salespeople alike can enter orders through the web. This “real-time” web configuration will shorten the order cycle, and enhance customer satisfaction. Employees of Riordan will be able to use this medium for expense reporting, supply requisitions, and communication between employees.

Multiple Currencies

Since Riordan has a joint venture with China, the Multiple Currency module will be of considerable help. Financial transaction with China will be recorded in the sub-ledgers and converted into the “functional currency” by using current exchange rate information. The transactions will be recorded and maintained in the accounting data. Riordan’s “functional currency” will be in US dollars.

Payroll

The Payroll module will apply human resource data to salaries and benefits and determine the amount of pay and how to get the disbursement to the employee. It will take into consideration national tax codes and world wide regulations. The system can also track and do calculations for data such as sick time, leave of absence, and vacation.

Travel/Expense Reporting

Because Riordan has multiple offices within the United States and a joint venture with China, travel budgets and expense reporting of trips can be documented into the travel/expense reporting module. Riordan employees and management can use this module to document information such as cost of plane tickets, vehicles, food, and supplies while employees are traveling.

Conclusion

After analyzing Riordan Manufacturing’s current accounting modules and its financial situation, the implementation of an Enterprise Resource Planning (ERP) system/solution would be beneficial. One option would be the use of SAP, ERP that contains the necessary modules identified in this paper.

SAP is a worldwide leader in ERP management. With the use of this ERP system, Riordan Manufacturing will have the ability to manage and track all costs and expenditures related to manufacturing, testing, inventory, payroll and human resources. This system would be of considerable help to achieve the “seamless” connection between accounting and the different systems in Riordan Manufacturing. It will create a powerful, successful, and profitable company by improving production in all areas of the business. It will open up communication channels between employees, suppliers, buyers, and the rest of the world.

Riordan Manufacturing is truly an industry leader in the field of plastic injection molding. The ratios resulting from the analyses of Riordan Manufacturing’s financial statements are clear indicators of their success in the plastic industry. By implementing the suggested solutions, they will improve their communication and accelerate many of their processes thereby becoming more effective and efficient.

References

Brealey, Myers, & Marcus (2003). Fundamentals of Corporate Finance (4th ed.). New York: McGraw-Hill.

James, D., & Seibert, G. H. (1999). Oracle Financials Handbook. Berkeley, CA: Osborne/McGraw-Hill.

Msn (2006). MSN Money. : . Retrieved from http://moneycentral.msn.com/investor/home.asp

University Of Phoenix (2006). Virtual Organizations Portal. : . Retrieved from https://ecampus.phoenix.edu/Login.asp?TargetURL=/secure/aapd/CIST/VOP/Business/Riordan/RioMfgHome002.htm&Failed=No

University Of Phoenix, Class Notes (2006). BSA 500 Course Notes. : .

Appendix A

Riordan Manufacturing, Inc.

Income Statement

For the 12 months ending September 30, 2004

Variance % Change

2004 2003 2002 2004 vs 2003 B/(W) 2003 vs 2002 B/(W) 2004 vs 2003 B/(W) 2003 vs 2002 B/(W)

Sales 46,044,288 43,418,370 39,481,276 2,625,918 3,937,094 6.0% 10.0%

Direct Cost of Goods Sold 37,480,050 34,517,604 30,953,320 2,962,446 3,564,284 8.6% 11.5%

Gross Margin 8,564,238 8,900,766 8,527,956 (336,528) 372,810 -3.8% 4.4%

Operating Expenses

Sales, Marketing & Other 920,886 1,085,459 1,105,476 164,573 20,017 15.2% 1.8%

Depreciation 349,937 329,980 312,612 (19,957) (17,368) -6.0% -5.6%

Quality Assurance 1,095,854 1,033,357 1,085,459 (62,497) 52,102 -6.0% 4.8%

Research & Development 828,797 868,367 1,065,994 39,570 197,627 4.6% 18.5%

General & Administrative 1,524,066 1,085,459 829,107 (438,607) (256,352) -40.4% -30.9%

Machining & Systems 598,576 477,602 434,294 (120,974) (43,308) -25.3% -10.0%

Total Operating Expenses 5,318,115 4,880,225 4,832,943 (437,890) (47,282) -9.0% -1.0%

Profit Before Interest & Taxes 3,246,122 4,020,541 3,695,013 (774,419) 325,528 -19.3% 8.8%

Non-Operating Expenses

Interest Expense 230,221 217,092 197,406 (13,129) (19,686) -6.0% -10.0%

Taxes 1,025,406 1,293,173 1,189,186 267,767 (103,987) 20.7% -8.7%

Total Non-Operating Expenses 1,255,628 1,510,265 1,386,593 254,637 (123,672) 16.9% -8.9%

Net Profit After Taxes $1,990,495 $2,510,276 $2,308,420 ($519,781) $201,856 -20.7% 8.7%

Appendix B

Riordan Manufacturing, Inc.

Balance Sheet

Fiscal Year Ending September 30th

2004 2003 Variance (2004 - 2003) % Change

Assets

Current Assets

Cash 357,216 85,632 271,584 317.2%

Accounts Receivable 5,657,216 6,556,160 (898,944) -13.7%

Current Portion of Notes Receivable 117,888 13,184 104,704 794.2%

Inventories 7,854,112 8,074,880 (220,768) -2.7%

Deferred Income Taxes - net 328,832 349,184 (20,352) -5.8%

Prepaid Expenses and Other Items 328,192 336,128 (7,936) -2.4%

Total Current Assets 14,643,456 15,415,168 (771,712) -5.0%

Notes Receivable, less current portion 177,408 431,104 (253,696) -58.8%

Investment in Joint Venture 133,504 139,136 (5,632) -4.0%

Property, Plant and Equipment - net 18,511,360 19,205,120 (693,760) -3.6%

Intangible Assets - net 336,128 395,136 (59,008) -14.9%

Other Assets 54,400 51,840 2,560 4.9%

Total Assets 33,856,256 35,637,504 (1,781,248) -5.0%

Liabilities and Stockholders' Equity

Current Liabilities

Current Portion of Long-Term Debt 1,106,304 1,737,728 (631,424) -36.3%

Accounts Payable 3,573,248 2,676,096 897,152 33.5%

Accrued Liabilities 1,350,144 1,257,344 92,800 7.4%

Income Taxes Payable 164,864 (164,864) -100.0%

Total Current Liabilities 6,029,696 5,836,032 193,664 3.3%

Bank Line of Credit 487,936 245,760 242,176 98.5%

Long-Term Debt - less current portion 2,535,552 4,793,856 (2,258,304) -47.1%

Deferred Income Taxes - net 3,107,072 3,283,328 (176,256) -5.4%

Total Liabilities 12,160,256 14,158,976 (1,998,720) -14.1%

Common Stock 29,055,488 29,491,328 (435,840) -1.5%

Stated par value is $.01.

20,000,000 shares authorized.

Issued and Outstanding 15,801,332 and 16,620,875 respectively, net of treasury shares.

Other Accumulated Comprehensive Losses (202,496) (163,840) (38,656) 23.6%

Accumulated Deficit (7,156,992) (7,848,960) 691,968 -8.8%

Total Stockholders' Equity 21,696,000 21,478,528 217,472 1.0%

Total Liabilities and Stockholders' Equity $33,856,256 $35,637,504 ($1,781,248) -5.0%