Individual Candela Corporation Case Acc.

230 2013

CASE 4.2 CANDELA CORPORATION 1. Candela Corporation Statement of Cash Flows Summary Analysis For the Years Ended July 3, 2004, June 28, 2003, and June 29, 2002

2004 Inflows: Cash from operations Proceeds from issuance of common stock Net borrowings on line of credit Effect of exchange rate changes Total Inflows 1,132 4,707 0 172

2003

2002

19 11,655 78 0 3 4,620 0 1,552

65 26 0 9

0 394 50 890

0 30 4 66

6,011 100.0 17,827 100.0

1,334 100.0

Outflows: Cash used in operations Purchases of property, plant and equipment Repurchases of treasury stock Principal payments of long-term debt Net repayments on line of credit Total Outflows 0 685 0 0 0 0 100 0 0 0 0 1,227 0 3,330 1,114 0 22 0 59 19 7,071 1,058 5,215 370 0 52 8 38 2 0

685 100.0

5,671 100.0

13,714 100.0

Change in cash Neo

5,326

12,156

(12,380)

1.

Candela Corporation has volatile cash flow from operating activities (CFO)

over the three years from 2002 to 2004. The firm experienced a net loss in 2002, but there is a profit in 2003 and 2004. CFO was negative and much worse than the net loss in 2002. In 2003, CFO was positive and greater than net income, but in 2004, CFO took a plunge, though still positive, was much less than net income.

Accounts receivable grew each year and this has reduced CFO especially in 2002 and 2004. With the exception of 2003 inventories have been increasing, also causing a reduction in CFO. The increases in accounts receivable and inventories could be due to an expansion or poor management of assets. The firm has reduced accounts payable all years despite the current asset increases. In 2003, the income Tax Payable account increased causing CFO to be over $4 million higher than it otherwise would have been, but the impact in 2004 was a reduction in this account causing CFO to be less. Other negative impact to the CFO in 2004 is the increasing the other current asset accounts. This means the tax effects of stock options being exercised.

Candela has generated cash from the issuance of common stock all three years; however, this source of cash should not be relied on for future cash inflows. The firm needs to focus on increasing CFO. Other than use of a line of credit in 2002, the firm has not used short-term or long-term debt. Since Candela operates

globally, foreign exchange rate effects have positively impacted the cash flows of the firm.

Candela's only investments are purchases of property, plant and equipment, but the dollar amount of investment declined significantly in 2004. Since the firm discontinued operations, this could be the reason for fewer capital expenditures. It seems that they had to purchase new equipment to operate the business further.

No other cash was used in 2004, but the firm did repurchase a significant amount of treasury stock in 2002, and made payments on long-term debt and the line of credit in 2003. It is good the firm has made payments on debt without borrowing more. Further investigation is needed to determine if the repurchase of common stock was a good use of the company's funds.

Candela does not appear to have any liquidity problems, but could work on being more efficient in collecting its accounts receivable. The buildup of inventories in 2004 should also be investigated further.

2.

The statement of cash flows is extremely useful in making credit

decisions. Although the statement of cash flows is prepared from the balance sheet and income statement, it presents information in a way that reveals how the firm is generating cash and how the cash is being used, over a period of time.

The volatility of CFO for Candela cannot be observed by looking at only the income statement or the balance sheet. The reasons for this volatility can be determined fairly quickly by looking at the statement of cash flows.