TOKYO -- Housing materials maker Lixil and electronics titan NEC are both fine-tuning the performances of their operations in order to free up more cash for acquisitions and research and development.
Lixil plans to reap 40 billion yen ($369 million) this fiscal year by reducing the amount of in-process inventory at 100 facilities in Japan and abroad. The company was formed by a merger of Tostem, Inax and other group members in 2011, but their production operations had remained separate. It will set reduction targets for each production line, such as for window frames, and shrink inventory at every factory by an average of 15%.
The extra funds, combined with its profit guidance for the year, would boost its operating cash flow by 80% to 150 billion yen.
The company hopes to use the extra money to raise its interest in Grohe, a German bathroom fixture maker in which it purchased a more than 40% stake last fiscal year and turned into an equity-method affiliate. It eventually wants to become a majority owner of the German company.
Lixil's aggressive acquisition strategy has expanded its interest-bearing debt, and its capital ratio is being squeezed. "We can allow interest-bearing debt to rise and push through with acquisitions until the ratio hits 30%," said President Yoshiaki Fujimori. With the purchase of U.S.-based American Standard and others, the figure had fallen to 34% by the end of June. By improving production efficiency, it hopes to accumulate funds for its next deals without raising new capital.
NEC will slash inventory at its factories and change the payment terms for system development, among other measures. It aims to boost its free cash flow -- calculated by subtracting money used for capital spending from operating cash flow -- to 100 billion yen in fiscal 2015 from 55.2 billion yen last fiscal year. This would free up more funds for R&D and future acquisitions.
Both companies hope the changes in their production operations will shorten their cash conversion cycles, or the time it takes to convert cash input into earnings. This fiscal year, Lixil aims to cut its cycle from 89 days to 75 days or fewer, while NEC plans to lower its from 47 days to about45 days, then to close to 40 days next fiscal year.