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Cash on the chip: working capital in technology - Moderate working capital improvement in 2010 - EY - Global

Cash on the chip: working capital in technology

Moderate working capital improvement in 2010

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In 2010, only three out of seven segments and 40% of the companies analyzed managed to report a year-on-year improved working capital performance.

2010 saw a limited improvement in working capital performance, which can be attributed to higher levels of working capital requirements associated with increased sales growth.

Some improvements in working capital

It is worth noting that using the last quarter of the year rather than the full year would have shown an increase of 2% in C2C, partly reflecting weaker than expected seasonal sales growth in Q4, as well as the impact of inventory replenishment initiatives. Had current deferred revenues been considered, C2C would have also increased by almost one day (from 9.6 days to 10.4 days).

In 2010, only three out of seven segments and 40% of the companies analyzed managed to report a year-on-year improved working capital performance. Leading performers reported a drop of 30% in C2C, while laggards saw an increase of 11%. Several large companies reported well-below-average working capital progress, significantly influencing overall changes.

More specifically, the headline performance analysis shows a reduction in receivables, partly offset by swelling inventories — and no change in payables.

DSO was down 2% year-on-year. However, using the last quarter of the year as a basis for comparison rather than the full year would have shown an increase of 2% in DSO, primarily due to higher sales levels. Every segment but two (diversified technology and distribution) reported a year-on-year improved receivables performance. Forty three percent of companies reported a year-on-year reduction in DSO.

In contrast, DIO was up 3% year-on-year. Using the last quarter of the year as a basis for comparison rather than the full year would have shown a much bigger deterioration, with DIO up 8%, inflated by higher levels of production, in conjunction with build-up of inventories to replenish levels and reduce lead times.

Only two segments (computer equipment and diversified technology) saw a year-on-year drop in DIO. Close to two-thirds of companies analyzed reported a year-on-year deterioration in inventory performance.

DPO remained unchanged year-on-year. Again, using the last quarter of the year as a basis rather than the full year would have shown a much bigger increase of 4% in DPO, due to higher levels of production and capital spending. Three out of seven segments (software, communications equipment and computer equipment) saw a year-on-year improvement in payables performance. Half of companies analyzed reported a year-on-year reduction in DPO.

Current deferred revenues dropped from 8.1% in 2009 to 7.7% in 2010. Three out of five segments that carry deferred revenues reported a year-on-year fall.

Impressive year for technology sales

Working capital results were achieved in the context of a much better year in 2010 than expected in terms of sales growth (above 20% for the companies analyzed). Demand for technology products has been progressing steadily during 2010.

However, this situation, compounded by a period of underinvestment and supply chains being much leaner, led to severe supply constraints and extended lead times across the industry during 2009–2010. Most companies now consider that for a majority of products, average lead times exiting 2010 are nearing normal levels.

For some companies, seasonal sales patterns have also been unusual, with revenues showing little growth in Q4 compared with Q3 (as supply and inventories were adjusted to end demand after several quarters of significant growth and extended component lead times).

Change in WC performance metrics across the industry

Global 2010 2009 Change
DSO 56.4 57.8 -2%
DIO 20.8 20.1 3%
DPO 38.9 38.9 0%
C2C 38.3 39.1 -2%
       
  C2C
Segment 2010 2002 Change
Computer
equipment
–4.1 –0.2 nm
Semiconductor
components
51.0 51.6 –1%
Software 51.0 51.4 –1%
Communications
equipment
50.8 50.2 1%
Diversified
technology
55.6 53.3 4%
Distribution 41.7 38.7 8%
EMS 38.0 32.1 18%
Top 70 US 38.3 39.1 –2%

Source: EY analysis, based on publicly available financial statements



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