Eei Corporation

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GRADUATE STUDIES

MASTERS IN BUSINESS ADMINISTRATION

FINANCIAL MANAGEMENT

CASE 13-1: EEI Corporation1

A CASE STUDY

CASE OVERVIEW

Company Background

EEI Corporation was one of the oldest construction companies in the Philippines who is engaged in the business of building industrial plant facilities, installing equipments, providing replacements parts and supplies, and providing specialized engineering services to industrial companies in the Philippines and overseas, principally in Middle East.

Highlights of Operations

EEI Corporation struggled in mid 1980s where they faced financial difficulties due to troubles with a large project in Middle East. The challenge was addressed by the company’s management team headed by the President who channeled the efforts of the company in products and markets where it had distinctive competence.

The company operated through two divisions which are the Construction-the main service and revenue segment of the company, which was involved in constructing large-scale industrial facilities, and in providing technological skills, labor and specialized engineering services; and the Machinery Division-which came from the success of the Construction Division, who sold and developed markets for the machinery and industrial products of prominent foreign manufacturers where they acted as distributor, subcontractor, or licensee of the foreign supplier.

The Task

The Group Manager and Controller of EEI Corporation was tasked to prepare a preliminary forecast of the sales and net profit of the company for the next three years for the strategic planning workshop of senior managers.

EEI’s managers were optimistic about the future, thus the forecast for the next three years should be guided by the growth in revenues, expenses, and income over the last four years – using the 1991 to 1994 financial statements, because the company experienced the business crisis prior to 1991 starting from 1986. It seemed proper to use the only the most recent experience as basis for a forecast because the consensus among the EEI’s managers was that famine was not in sight for the next three years.

Forecasting Method / Requirements

• Analyze the growth rates
• Forecast the total revenues and net income for the next three years using the average or the previous year’s growth rates. • Explain the method of forecasting used.
• Meet the management’s requirement to deliver at least 20% return on equity per year by using the forecast net income – forecasting the assets and equity based on past growth rates and net income. Financial Highlights

EEI Corporation
Financial Highlights of EEI Corporation and Subsidiaries 1991-1994 (in million pesos)
INCOME STATEMENT1991199219931994

REVENUES
Construction1,1152,1511,6901,977
Merchandise sales938963105
Commissions and others32506671
Service Income563368115
Gain on disposal of property,
plant, and equipment0200

1,2962,3251,8872,268

COSTS AND EXPENSES
Construction932183514041647
Selling and administrative141182162207
Cost of merchandise sold67523566
Cost of services45285377
Interest93317

1,1942,1001,6572,014

INCOME BEFORE TAX102225230254
Provision for Income tax36777988
Income before minority interest66148151166
Minority interest on
net loss (income)00(1)(1)

NET INCOME66148150165

BALANCE SHEET

ASSETS7311,2101,3502,289
LIABILITIES4466536651,422
STOCKHOLDER’S EQUITY285557685867
Financial Highlights Analysis
Division Share
1991199219931994
REVENUES
Construction86.03%92.52%89.56%87.17%
Machinery13.97%7.48%10.44%12.83%
EXPENSES
Construction78.06%87.38%84.73%81.78%
Machinery21.94%12.62%15.27%18.22%

Growth Rates – EEI CORPORATION

Revenues-79.40%-18.84%20.19%
Expenses-75.88%-21.10%21.54%
Net Income-24.24%1.35%10.00%

Growth – Per Division
REVENUES...
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