10.6.1 BackgroundOrdinarily, Wei Chang enjoyed the occasional mid-afternoon walk across theuniversity-like campus of Die Cast Testing, Inc. (DCT), to visit the R&Dlab. His father, Ming Bud Chang had co-founded DCT over 30 years agowith his colleague Harley LeRose (now, the VP of R&D at DCT) from DukeUniversity and DCT had gained notoriety as a local success story - steadygrowth in instruments for casting integrity test equipment with virtually nodebt. Numerous students from Duke had taken jobs with DCTs R&D lab.Wei prided himself in not only knowing each of the 170 company associates,but also having maintained enough technical expertise to make trips to theR&D lab a fun part of the job. Too bad none of the other executives likehanging out here, he often though. They cant fully appreciate our industryif they dont spend at least a little time visiting R&D.Today was slightly different. Wei was bringing unfavorable financial newsto Harley LeRose, and one of the options to discuss at the next board meetingwas the need to possibly terminate some new project development activity.Harley had been pretty content with a career in the lab, and this had madeit easy for Wei to step in to the role of president when Weis father retired.But now, DCT was at a fork in the road. Incremental product developmenthad worked for a long time, and it was Wei who encouraged R&D to moveinto more radical measurement systems associated with microsystems sensorsfor high-speed multi-axis inspection - geometric control of complex part designwas back in vogue in the casting industry. Specifically, the automotive segmentwas beginning to look like capital investments were on the horizon. The R&Dinitiative was a fairly big investment requiring DCT to suffer a drop of cashreserves. Up to the last fiscal quarter the board had been supportive, but nowhad been pushing Wei to consider either acquiring more debt or trimmingR&D dramatically. They were at the point where jobs might actually have tobe cut.Working capital was an increasing issue. Customer Days Sales Outstanding(DSO) continued to skyrocket (from 89 to 132 days over the last year) at thesame time product development was 9 months behind on the launch of anew microsystem electronics analysis product line (reliability test equipment).Sales was having the company be the bank, with extended payment termsto support prices; it seemed to Wei that in many cases the combination ofprice/terms to get product out the door was just plain unfavorable. EPStrends were downward, and the last quarter drop to a loss of $0.25/share meantWei would be presenting to the board an estimated year-end EPS of $1.15; ifit tanked any further and went below $1.10, all managerial bonuses would besuspended. Still, they were not doing badly; with a market capitalization ofaround $132M, at least the stock price of $10.25 was double digit. More ofconcern to Wei was that even in a down economy, DCTs competitors seemedto be doing OK. As a private company, this was not too much of an issue, since as old-time employees like to say Private money means patient money.It was a source of management pride that the company was always in controland thus investing in the future when competitors had to lay off employeesto restore profitability. Still, debt was not part of the company DNA, andWei was nervous about costs. The last thing he wanted was poor press if theyhad to borrow more money.One aspect of DCTs business that Wei was proud of since his becomingpresident a decade ago was going global. He had managed to preserve jobsby sending all manufacturing offshore, keeping the strategic front end (R&D,product development, marketing) local. While this had many appealing at-tributes, there seemed to be grumbling among the local managers that theyjust didnt have a handle on overseas project status. In fact, it seemed thatDCTs own plants were using temp labor as a substitute for DCT employ-ees, and the word on the street was that part of the 9-month delay was theconstant retraining of temporary employees. The Hefei plant was a particularchallenge, as it was somewhat inland and not a popular destination for themanagers back in the US. So far the idea was to set profitability levels andlet the locals do things the way the local culture dictates. If it is not aboutmanaging profit, then why go offshore in the first place thought Wei. MaybeIll go to Hefei in a month or two and see whats up.Along with the global strategy, Wei had also pushed for a more diverseboard. Rather than a majority of the board coming from engineering back-grounds, 6 of the 11 current board members were executives whom Wei hadbrought in from the outside over the last decade. This fresh external over-sight had been central to the bank approving a credit line increase a fewyears ago. It troubled Wei that the board seemed comfortable with debt -some board members actually joked he was preoccupied with avoiding debtand needed to be more modern, but high debt levels was not a companysituation his father would have fostered.Traditionally, DCT had a debt/equity ratio of 7.5% that was normally 10%below their industrial peer group. Today, problems with existing product salesand new product launches not only drove D/E to 11%, but the line of creditwas nearly exhausted. Wei was hoping Harley would help him with ideas toavoid acquiring more debt to continue funding R&D. Maybe Harley wouldeven offer some R&D projects that could be terminated.

Wei Chang was hopeful that Harley LeRose could help him decide on one ofthree basic go-forward options. Actually this might be pretty easy work,particularly since Harley was a co-founder and knew DCT better than anyoneelse. Weis three ideas were the following:

1. Do nothing at all and work through this in real-time with the board atthe next meeting. They were, after all, there to help shape the company,and he needed them now!

2. Cut the new microsystems test product line developments and focus on the core products that had made DCT successful. This was painfuland almost unthinkable to Wei since it would mean a 20% reduction inworkforce at the main campus. This would look terrible in the press.

3. Acquire more debt to fund the current level of activity, continuing towait out the storm of the current economy. This option was almost un-thinkable to Wei, since it would drive D/E to a historic high of 18%,andWei felt this would leave the company in a position the co-founders hadalways wanted to avoid.