De La Salle University - Manila

Ramon V. Del Rosario College of Business

Management and Organization Department

Case 1: San Miguel Corporation

In partial fulfillment of the requirements

for the FNC535M course
Master of Business Administration

Submitted by:

Group 4
Limbauan, Valerie Joy
Malimban, Carlito Jr.
Munsayac, Margaret

Submitted to:
Kenneth Yumang

June 16, 2018

 Table of Contents

I. Case Background 1
II. Case Objectives 1
III. Statement of the Problem 2
IV. Scope and Limitation 2
V. Logical Analysis using Conceptual Frameworks 2
A. Who are we? What do we do? 2
Vision 3
Mission 3
Goals and Objectives 3
Target Market 3
B. Where are we now? 4
C. Where do we want to go? 4
Strengths 5
Weaknesses 5
Opportunities 6
Threats 6
D. How do we get there? 6
E. What are the expected results? 7
VI. Logical Conclusion and Recommendation 8
VII. References 9

Appendices 10
A. Financial Statements of the Company 10
A.1. Income Statement 10
A.2. Statement of Financial Position 11
B. Financial Statements Analysis 12
B.1. Computational Analysis 13
B.1.1. Horizontal/Trend Analysis 13
B.1.2. Vertical Analysis 13
B.2. Narratives 19
B.2.1. Income Statement 19
B.2.2. Statement of Financial Position 20
I. Case Background

San Miguel Corporation (SMC or the Company) has been the forefront of the Philippines’
industrial growth. It is a diversified conglomerate which segments are beverage, food,
packaging, energy, fuel and oil, and infrastructure (Financial Times, n.d.).

Internal change marked the Company’s growth from the early 1960s to the early 1970s. The
Company’s President recognized that a centralized organization was no longer appropriate as the
Company was growing rapidly and the environment was changing. In 1964, the Company has
restructured along divisions which were engaged in manufacturing and marketing various
product lines (e.g., beer, packaging, and soft drinks) and hired management consultants to install
modern management systems (e.g., budgeting, systems analysis, and planning).

In 1973, the President convened a historic management conference in Hawaii which charted
corporate directions and objectives which led to the adoption of a more participative
management style which formally defined the manager’s job to include planning, delegation,
and communication.

The 1980s were turbulent times for the Philippines and for the century-old San Miguel
Corporation (SMC or the Company). SMC was the country’s largest conglomerate, with annual
sales of P53 billion or US$2 billion and assets of P42 billion or US$1 billion in 1991. SMC
employed 36,000 people, its activities accounted for 4% of the nation’s GDP and 6.5% of its tax
revenues. The 1990s posed new and major challenges for the Company. The political
environment remained fraught with uncertainties and the liberalization of the economy
intensified competition. Management needed to ensure that its strategy, organizational structure
and processes, and external relationships were adequate to confront the expected threats and to
capitalize on the opportunities facing it domestically and internationally.

For the details of the financial statement of the Company for the period ended December 31,
1968 to 1974, see Appendix A.

II. Case Objective

A. To analyze the gap between the current situation of the Company and where it wants to
position itself.
B. To enumerate ways on how the company could increase its flexibility in responding to
macro and micro environmental changes.
C. To identify corporate planning strategies that will direct the Company’s operations and
business plans.
 D. To determine managers’ action items in relation to achieving the Company’s goals and
objectives based on the analyses of presented financial data.

III. Statement of the Problem

What strategies or changes in systems and management styles does SMC need to implement in
order for it to ensure sustainable growth and continuous success in achieving the Company’s
goals?

IV. Scope and Limitation

A. Financial statement analyses have been done based on the available data only.
B. Line items included in the analyses pertain to those material items only or those that
have fluctuating balances over the years.

V. Logical Analysis using Conceptual Frameworks

SMC has a defined approach on how to achieve their goals. This is done by closely evaluating
the Company’s core vision and mission, as well as instilling this from upper management down
to the line managers. As stated in the case, it is important for SMC that each of its employees
understand the Company, its future, and how to get there. During the review the Company’s
performance and strategies in 1973, management came up with the creation of SMC2 (Senior
Management Committee of San Miguel Corporation). Part of this corporate strategy review is to
determine the best fit strategy to reach the future goals of the Company which led to answering
the following corporate strategy framework’s questions.

A. Who are we? What do we do?

As aforementioned, the Company is a diversified conglomerate which segments are

beverage, food, packaging, energy, fuel and oil, and infrastructure. The Company’s image
was even defined and perceptions such as ‘giant’, ‘beer’, ‘quality products’, ‘principally
beverages broadening to foods’, ‘conservative’, ‘good employer for rank and file’, and
‘social responsibility’ have come up to describe the Company. All of these can be
classified as part of what gives SMC a competitive advantage in the industry during the end
of 20th century.

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Vision

“We are San Miguel.

Guided by a strong sense of social, environmental and economic responsibility, our

businesses will lead efforts to deliver on national goals, setting the pace of progress in the
Philippines” (San Miguel Corporation, n.d., italics added).

Mission

“To provide goods and vital services well within the reach of every Filipino, making every
day life a celebration” (San Miguel Corporation, n.d., italics added).

Goals and Objectives

● To be constantly aware of the aspirations of the people and of the nation, and to ensure
that San Miguel continues to make a major contribution towards the achievement of
these aspirations.
● To manufacture, distribute and sell throughout the Philippines, food products,
beverages, packaging products and animal feeds; being ready at all times to add,
modify or discontinue products in accordance with changes in the market.
● To diversify into fields which will ensure optimum utilization of management resources
and a substantial contribution to corporate profits.
● To seek and develop export markets for new products as well as for those already being
produced by the Corporation.
● To generate a return on funds employed sufficient to ensure an adequate rate of growth
for the Corporation, and to provide satisfactory returns to stakeholders.
● To provide an environment which is conducive to the development of the individual
and which encourages employees to realize their full capabilities.
● To maintain the highest ethical standards in the conduct of our business.
● To adopt a flexible and objective attitude towards change and to pursue an active policy
of innovation.

Target Market:

● Philippine and international market

The management has reviewed corporate objectives, both long term and intermediate, and
identified what they had accomplished as well as the problems they encountered in view of
the years ahead to determine the strategies for the coming years. Since the country is

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seeing a drastic change in its political and economic landscape which could affect the
Company’s business, a strategic corporate planning was deemed needed.

B. Where are we now?

During the case’s timeline, the country has been experiencing a Peso devaluation, the
corporation was continuing its growth, and the impact of the New Society was being felt.
These changes influenced the management’s determination to plan strategically for the
future. The Company’s strengths such as ‘technical expertise’, ‘strong distribution
network’, ‘leadership in private sector’, ‘a good image’, ‘control of the beer market’,
‘credit worthiness’, and ‘good relations with labor and government’ and weaknesses such
as ‘management development’, ‘lack of defined objectives’, ‘organizational
communications’, ‘complacency’, and ‘management style’ were identified. The
management has already noted that the weaknesses must be weakened to improve their
strengths and that its good brand recognition could be leveraged to support its entry into a
new but related product category.

Mr. Andres Soriano, the Company’s President, noted that the centralized management style
is no longer appropriate to the Company and has decided to introduce decentralization or
the delegation of tasks and authority so that business operations can be done in a more
cohesive way. During the case timeline, managers have been acting on their individual
problems without even thinking on its impact to the Company as a whole. Individual
managers were not able to see the whole picture and this is what the President wanted to
address; hence, the creation of the Senior Management Committee that will assist in
bridging the communication gap between employees and top management.

Net sales have increased by 9.51% in 1972 as compared to 1971 but on the other hand, net
income had declined by 6.50%. It could be noted that while the net sales have increased,
cost of sales and operating and administrative expenses have significantly increased as well
which rendered the operating income to be lower than the previous year. This increase in
cost and operating and administrative expenses could be attributed to an increase in the cost
of production such raw materials used, overhead, and cost of labor. From years 1968-1971,
gross profit margin averages at 13% but it declined to 11% in 1972. To know more about
the Company’s position in terms of their financials, refer to Appendix A. More in depth
analysis was also presented in Appendix B.

C. Where do we want to go?

Corporate targets in terms of sales, profitability and overall growth has been discussed by
top management. SMC targeted P3 billion in sales by the year 1980, P350-P400 million in

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net profits, and an annual growth of not less than 10% in volume. The Company also
wants to create an Export Division to develop business that could be a potential source of
more dollar receipts for the country and for them to correct the imbalance between their
exports and imports.

Such aspirations are envisioned to be achieved through reached agreements on needs and
requirements that consist of increasing the existing staff and strengthening the management
styles. These were the reasons why corporate planning strategies were deemed necessary
by the President. Planning, forecasting, and budgeting must be deliberately done in order
for the Company’s operations to run smoothly as intended.

SMC also intends to change the current management style in the company to determine the
most suitable to its employees and to the tasks required. The move from autocratic side
towards a more participative style will be a long drawn out process but it is necessary to
achieve a balanced style without going to the other extreme. The change could be slow and
tedious but a start has been made and has laid the groundwork for the implementation of
the program. Those that have taken the trainings, particularly the executives and managers,
should be able to fully understand the new management system that they will have to use to
their advantage in discharging their responsibilities in their respective offices.

The Company acknowledges that it needs to make changes simply because it must meet
new challenges and if must be flexible with the fast changing environment. It cannot
afford to be complacent as there will always be an entity that will challenge their business.

The following are the Strength and Weaknesses of the Company and the Threats and
Opportunities to the industry that are essential towards the Company’s planning on how to
be where they want to be at.

Strengths:
● Forefront of Philippine industrial growth
● First-mover
● One of the biggest tax payers
● Monopoly in beer products
● Strong branding in the market
● Large operational base

Weaknesses:
● Centralized management system
● Poor internal communication

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Opportunities:
● Potential increase in exports
● Growing population

Threats:
● Inflation
● Money supply decrease
● Peso devaluation
● Political instability

D. How do we get there?

In line with the Company’s goals of achieving higher returns and overall growth, action
plans for implementation has to be outlined. One of which is defining the Corporate
Objectives that will serve as guidelines for all the Company’s endeavors. This enables the
employees to define their own objectives in relation with corporate thinking and continuous
down through the Company; to plant level, to department level and in a lot of cases, to the
level of the individual who is defining his or her own objectives in terms of their work.
This exhibits McGregor’s Theory Y.

Basically, SMC’s objectives circle around being constantly aware of the aspirations of the
people and the of the nation. This is in line with SMC’s enterprise objectives of increasing
the standard of living of the society. The Company must also continue its desire diversify
into fields which will ensure optimum utilization of management resources and a
substantial contribution to corporate profits. Such move is important to ensure that the
business will not remain static in the face of change. The Company must also seek and
develop export markets for new products as well as for those already being produced.
Aside from these, SMC’s creation of a dedicated Human Resources Division is a huge step
since the big weight in giving an effect to corporate and critical objectives lies in the
human resources area - the area where they realized that they were unorganized to move
forward at the rate they consider as critical. Without people, all the financing, technical
proficiency, and all management expertise will amount to nothing.

The management also emphasized that each of the SMC employee will have a footprint on
the changes being implemented because no matter how well thought-out the plans were; it
will not flourish without the work of every single staff. Hence, a regular general meeting is
essential for the employees to understand their role in the company’s business and also to
avoid confusion that may arise in the process.

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The Company must also continue to highlight the importance of effective internal
communications in order to achieve their goals. This is an area which the Senior
Management Committee identified as a weakness and thus, needs more attention. Since one
of the weaknesses identified is lack of information on policies and procedures, management
should periodically review and update their Corporate Policies and regularly keep their
manuals up-to-date so that the management can always provide a current guide for all
managers. Related to this is the creation of a Communications Task Force which will work
on identifying the Company’s weaknesses in the area of communications, both downwards
and upwards. This task force must also be recommending actions for improvements. To do
this, the management has requested the Division Managers to cascade the proceedings of
SMC2 meetings down through their divisions, and in the process, to get a greater
involvement from all concerned. Additionally, the management has also been inviting to
their meetings, in rotation, small groups of officers who are not members so that they may
understand and appreciate the work that upper management does

SMC has seen a significant increase in their net income following the introduction of the
proposed changes in 1972. Net income surged by 29.52% in 1974 versus in 1973. A quick
glance on the Company’s income statement would reveal an almost double increase in
dividend income. This shows that the Company has been benefiting from its investments
in its associates and related parties which is a positive point for its diversification strategy.
The Company has also seen an increase in its interest payments which could be attributed
to a sharp surge of its loan and drafts payables. It can be assumed that the Company is
needing finance to support its expansion plans. See Appendix B for a more comprehensive
analysis of the financial statement balances.

SMC intends to succeed on their goals and in doing so, it would need the active
participation of everyone in the Company. While it may not be easy, it will be worth it
with the right mindset. It is only then that they will be able to face the demands which will
be made upon the Company for their growth in the ever fast-changing world.

E. What are the expected results?

Based on the analyses made and the identified ideal actions to be taken, the Company is
expected to continue to grow even in a changing environment. Though key performance
indicators cannot be forecasted or quantified, it is highly probable that the Company’s
financial performance and financial position will continue to improve as decentralization
and other developmental projects are being implemented.

Improved communication within the organization will also entail a more harmonious
working environment for all employees and managers. This will also make delegation of

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 tasks and authority more successful as directions and other messages will be properly
cascaded. This will also be able to aide in the learning and growth strategies of the
Company.

The new participative management style will also be a tool in ensuring that corporate
strategies of the Company are in place in order for the Company to better serve its
customers and its stakeholders.

VI. Logical Conclusion and Recommendation

Based on the Company’s financials, the movement leans toward an optimistic trend. Net income
for the past 7 years has steadily increased at the same rate with the Company’s additional
investment for business expansion. This means that despite the changing economic and political
landscape, the company still thrives. The creation of a Senior Management Committee to assist
in identifying and resolving issues within the company is a commendable move from the higher
ups. For a Company as big as SMC, it is challenging to properly disseminate information
without losing the original thought and result to confusion among the employees. Hence, the
upper management addressed this issue by creating a communications task force with the
objectives of ensuring that every employee is within the loop of organizational decisions. Along
with these initiatives, the group recommends to improve the decentralization within its business
divisions. As the company grows and more sub-units are being established, managers should be
left to plan for strategies while the operations are to be delegated to staffs. Moreover, the
company’s business divisions are scattered all over the country and it would not be efficient if
every decision has to have an approval from the head office. Those who are front liners and
involved in the daily operations have a better understanding of what works and what’s needed
for the unit to function smoothly. It only makes sense that those in management concern
themselves on what strategies to implement then cascade it down to business units.

The group also recommends for the Company to aggressively look for potential partners in
neighboring countries who will market their products. From years 1960-1969, the imports
exceed the exports by 4.2 points on an average. The Company can help the country balance its
trade deficit by developing their export strategy which will also benefit them as this will ensure
that they will have an increase in sales, as well as potential sales in general. This increase in
sales will in turn result to higher profits for the company since foreign orders are usually much
more than those placed by local buyers or distributors. During this time also, SMC is a pioneer
in crafting beers in Asia which gives them a huge advantage and can be considered by buyers as
a unique offering from them. It should also be noted that during this time, the peso is starting to
weaken against dollar. SMC can take advantage on this to gain market share internationally
when its products are less expensive compared to goods that are priced in stronger currencies.

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While the Company seems to be performing well based on its healthy financials, it would be
wise if it does not become complacent as there will always be new entrants in the market who
could grab their market share. SMC should always be on the lookout for innovative and fresh
ideas and offerings that would add value to their business. The Company should also listen to
their employees, particularly those on the ground as they have the most insight on the day to day
operations and thus, better resources of feedback that can be helpful when the management plans
for future strategies and come up with improvements as needed.

VII. References

Accounting Coach. (n.d.). What is the difference between vertical analysis and horizontal
analysis? Retrieved June 15, 2018, from www.accountingcoach.com:
https://www.accountingcoach.com/blog/vertical-analysis-horizontal-analysis

Financial Times. (n.d.). San Miguel Corp. Retrieved June 15, 2018, from markets.ft.com:
https://markets.ft.com/data/equities/tearsheet/profile?s=SMC:PHS

Investopedia. (n.d.). Financial statement analysis. Retrieved June 15, 2018, from
www.investopedia.com: https://www.investopedia.com/terms/f/financial-statement-
analysis.asp

Masson, D. J. (2018, March 9). 6 steps to an effective financial statement analysis. Retrieved
June 15, 2018, from www.afponline.org: https://www.afponline.org/trends-
topics/topics/articles/Details/6-steps-to-an-effective-financial-statement-analysis

San Miguel Corporation. (n.d.). Our vision and mission. Retrieved June 15, 2018, from
http://www.sanmiguel.com.ph/page/our-vision-and-mission

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APPENDICES

A. Financial Statements of the Company

A.1. Income Statement

THE SAN MIGUEL CORPORATION

STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1968 TO 1974
(P'000)

1968 1969 1970 1971 1972 1973 1974

Net Sales 532,903 561,223 666,360 830,175 909,136 1,111,530 1,494,414

Cost of Sales 460,855 490,608 579,240 724,016 806,484 955,944 1,278,124
Income from Operations 72,048 70,615 87,120 106,159 102,652 155,586 216,290

Other Income (Charges)

Dividends 11,048 9,862 13,566 8,211 8,661 9,172 17,462
Gain on Sale of Investments - 6,275 7,361 6,275 6,275 6,750 -
Interest - Net (4,324) (6,537) (9,508) (15,049) (18,152) (22,935) (30,838)
Miscellaneous - Net 684 1,921 1,942 2,744 1,554 (409) (3,792)
7,408 11,521 13,361 2,181 (1,662) (7,422) (17,168)

Earnings before Interest on Preferred Stocks

and Provision for Income Tax 79,456 82,136 100,481 108,340 100,990 148,164 199,122

Interest on Preferred Stock 840 840 840 840 752 - -

Income Tax 23,583 21,794 29,196 29,704 27,193 40,021 59,056
24,423 22,634 30,036 30,544 27,945 40,021 59,056

Net Income 55,033 59,502 70,445 77,796 73,045 108,143 140,066

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A.2. Statement of Financial Position

THE SAN MIGUEL CORPORATION

STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 1968 TO 1974
(P'000)

1968 1969 1970 1971 1972 1973 1974

ASSETS
Current Assets
Cash and Short Term Investments 19,220 33,969 36,196 102,074 59,344 65,137 105,958
Marginal Deposits on Letters of Credit 10,224 5,676 6,946 6,014 3,780 13,253 14,595
Accounts Receivables - Net
Trade 28,636 23,126 31,908 41,295 39,447 48,859 70,264
Other 9,354 15,012 19,922 17,207 18,718 18,891 26,780
Finished Goods and In-process 21,163 19,008 33,765 27,506 35,564 37,771 65,562
Materials, Supplies, Containers 110,542 119,169 130,431 155,125 193,930 190,270 379,387
Prepaid expenses 5,362 5,249 6,284 4,586 8,094 7,197 9,782
Total current assets 204,501 221,209 265,452 353,807 358,877 381,378 672,328

Non-current Receivables
Installments Receivable - 26,714 20,036 13,357 6,678 - -
Deferred income tax - - - - - 754 3,330
Others 8,526 9,156 7,958 5,698 4,672 4,777 15,115
8,526 35,870 27,994 19,055 11,350 5,531 18,445
Investments
Asscociated Companies 20,514 28,838 40,937 73,394 90,022 95,561 122,658
Other Companies 5,603 7,593 7,192 7,411 7,617 7,562 9,184
Land 161 161 161 - - - -
Total investments 26,278 36,592 48,290 80,805 97,639 103,123 131,842

PPE
Land and Improvements 25,762 27,428 30,524 31,425 40,760 50,645 51,726
Buildings 271,635 299,385 372,612 416,610 454,324 480,732 516,010
CIP 2,220 12,209 14,160 6,684 11,760 9,601 12,074
Total Cost 299,617 339,022 417,296 454,719 506,844 540,978 579,810
Accumulated Depreciation 123,388 139,446 159,583 183,857 206,185 228,510 250,398
PPE - Net 176,229 199,576 257,713 270,862 300,659 312,468 329,412

Other Assets
Redemption Fund 1,100 1,500 1,900 2,300 200 - -
Containers in Circulation 3,671 3,875 5,699 13,434 18,646 25,267 25,683
Others - - - - 1,417 1,582 3,616
Total other assets 4,771 5,375 7,599 15,734 20,263 26,849 29,299

Total Assets 420,305 498,622 607,048 740,263 788,788 829,349 1,181,326

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 THE SAN MIGUEL CORPORATION
STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 1968 TO 1974
(P'000)

1968 1969 1970 1971 1972 1973 1974

LIABILITIES ANS STOCKHOLDERS' EQUITY
Current Liabilities
Loans and drafts payable 81,863 226,317
Accounts payable and accrued expenses 62,955 87,749
Income and other taxes 21,902 21,866
Current maturity of long-term debt 64,660 71,170
Dividends payable 10,938 13,147
Total Current Liabilities - - - - - 242,318 420,249

Long-term debt - net of portion shown under

current liabilities 107,922 191,772

Reserves
Employee benefits 12,339 12,339
Self-insurance 1,634 2,182
Total Reserves - - - - - 13,973 14,521

Unrealized gross profit on sale of real estate 1,020 814

Stockholders' Equity
Capital stock
Issued and outstanding 181,926 218,312
Prepaid capital in excess of par value 9,925 9,925
Retained earnings
Appropriated for Expansion projects 130,000 180,000
Appropriated for stock dividends 36,385 43,662
Unappropriated 105,880 102,071
Total Stockholders' equity - - - - - 464,116 553,970

Total Liabilities and Stockholders' Equity - - - - - 829,349 1,181,326

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B. FINANCIAL STATEMENT ANALYSIS

“Financial statement analysis is the process of analyzing a company's financial statements for
decision-making purposes and to understand the overall health of an organization. Financial
statements record financial data; however, this data must be evaluated through financial
statement analysis to become more useful to investors, shareholders, managers, and other
interested parties” (Investopedia, n.d.).

Techniques commonly used as part of financial statement analysis include horizontal analysis,
vertical analysis and ratio analysis (Investopedia, n.d.). Horizontal or trend analysis pertains to
the comparison of two or more years of financial data in both peso and percentage form; vertical
analysis reports each amount on a financial statement as a percentage of another item; net
income for Income Statement and total assets for Statement of Financial Position (Accounting
Coach, n.d.). Ratio analysis calculates statistical relationships between data but due to
unavailability of data, such cannot be performed in the analyses.

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For any financial professional, it is important to know how to effectively analyze the financial statements of a firm. This requires an
understanding of three key areas: (1) the structure of the financial statements, (2) the economic characteristics of the industry in which
the firm operates, and (3) the strategies the firm pursues to differentiate itself from its competitors (Masson, 2018).

B.1. Computational Analysis

B.1.1. Horizontal/Trend Analysis

THE SAN MIGUEL CORPORATION

STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1968 TO 1974
(P'000)

HORIZONTAL / TREND ANALYSIS (Increase/Decrease)

1968 1969 1970 1971 1972 1973 1974 1968 1969 1970 1971 1972 1973 1974

Net Sales 532,903 561,223 666,360 830,175 909,136 1,111,530 1,494,414 28,320 105,137 163,815 78,961 202,394 382,884
Cost of Sales 460,855 490,608 579,240 724,016 806,484 955,944 1,278,124 29,753 88,632 144,776 82,468 149,460 322,180
Income from Operations 72,048 70,615 87,120 106,159 102,652 155,586 216,290 (1,433) 16,505 19,039 (3,507) 52,934 60,704

Other Income (Charges)

Dividends 11,048 9,862 13,566 8,211 8,661 9,172 17,462 (1,186) 3,704 (5,355) 450 511 8,290
Gain on Sale of Investments - 6,275 7,361 6,275 6,275 6,750 - 6,275 1,086 (1,086) - 475 (6,750)
Interest - Net (4,324) (6,537) (9,508) (15,049) (18,152) (22,935) (30,838) (2,213) (2,971) (5,541) (3,103) (4,783) (7,903)
Miscellaneous - Net 684 1,921 1,942 2,744 1,554 (409) (3,792) 1,237 21 802 (1,190) (1,963) (3,383)
7,408 11,521 13,361 2,181 (1,662) (7,422) (17,168) 4,113 1,840 (11,180) (3,843) (5,760) (9,746)

Earnings before Interest on Preferred Stocks

and Provision for Income Tax 79,456 82,136 100,481 108,340 100,990 148,164 199,122 2,680 18,345 7,859 (7,350) 47,174 50,958

Interest on Preferred Stock 840 840 840 840 752 - - - - - (88) (752) -
Income Tax 23,583 21,794 29,196 29,704 27,193 40,021 59,056 (1,789) 7,402 508 (2,511) 12,828 19,035
24,423 22,634 30,036 30,544 27,945 40,021 59,056 (1,789) 7,402 508 (2,599) 12,076 19,035

Net Income 55,033 59,502 70,445 77,796 73,045 108,143 140,066 4,469 10,943 7,351 (4,751) 35,098 31,923

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 THE SAN MIGUEL CORPORATION
STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 1968 TO 1974
(P'000)

HORIZONTAL / TREND ANALYSIS (Increase/Decrease)

1968 1969 1970 1971 1972 1973 1974 1968 1969 1970 1971 1972 1973 1974
ASSETS
Current Assets
Cash and Short Term Investments 19,220 33,969 36,196 102,074 59,344 65,137 105,958 14,749 2,227 65,878 (42,730) 5,793 40,821
Marginal Deposits on Letters of Credit 10,224 5,676 6,946 6,014 3,780 13,253 14,595 (4,548) 1,270 (932) (2,234) 9,473 1,342
Accounts Receivables - Net - - - - - -
Trade 28,636 23,126 31,908 41,295 39,447 48,859 70,264 (5,510) 8,782 9,387 (1,848) 9,412 21,405
Other 9,354 15,012 19,922 17,207 18,718 18,891 26,780 5,658 4,910 (2,715) 1,511 173 7,889
Finished Goods and In-process 21,163 19,008 33,765 27,506 35,564 37,771 65,562 (2,155) 14,757 (6,259) 8,058 2,207 27,791
Materials, Supplies, Containers 110,542 119,169 130,431 155,125 193,930 190,270 379,387 8,627 11,262 24,694 38,805 (3,660) 189,117
Prepaid expenses 5,362 5,249 6,284 4,586 8,094 7,197 9,782 (113) 1,035 (1,698) 3,508 (897) 2,585
Total current assets 204,501 221,209 265,452 353,807 358,877 381,378 672,328 16,708 44,243 88,355 5,070 22,501 290,950

Non-current Receivables
Installments Receivable - 26,714 20,036 13,357 6,678 - - 26,714 (6,678) (6,679) (6,679) (6,678) -
Deferred income tax - - - - - 754 3,330 - - - - 754 2,576
Others 8,526 9,156 7,958 5,698 4,672 4,777 15,115 630 (1,198) (2,260) (1,026) 105 10,338
8,526 35,870 27,994 19,055 11,350 5,531 18,445 27,344 (7,876) (8,939) (7,705) (5,819) 12,914
Investments
Asscociated Companies 20,514 28,838 40,937 73,394 90,022 95,561 122,658 8,324 12,099 32,457 16,628 5,539 27,097
Other Companies 5,603 7,593 7,192 7,411 7,617 7,562 9,184 1,990 (401) 219 206 (55) 1,622
Land 161 161 161 - - - - - - (161) - - -
Total investments 26,278 36,592 48,290 80,805 97,639 103,123 131,842 10,314 11,698 32,515 16,834 5,484 28,719

PPE
Land and Improvements 25,762 27,428 30,524 31,425 40,760 50,645 51,726 1,666 3,096 901 9,335 9,885 1,081
Buildings 271,635 299,385 372,612 416,610 454,324 480,732 516,010 27,750 73,227 43,998 37,714 26,408 35,278
CIP 2,220 12,209 14,160 6,684 11,760 9,601 12,074 9,989 1,951 (7,476) 5,076 (2,159) 2,473
Total Cost 299,617 339,022 417,296 454,719 506,844 540,978 579,810 39,405 78,274 37,423 52,125 34,134 38,832
Accumulated Depreciation 123,388 139,446 159,583 183,857 206,185 228,510 250,398 16,058 20,137 24,274 22,328 22,325 21,888
PPE - Net 176,229 199,576 257,713 270,862 300,659 312,468 329,412 23,347 58,137 13,149 29,797 11,809 16,944

Other Assets
Redemption Fund 1,100 1,500 1,900 2,300 200 - - 400 400 400 (2,100) (200) -
Containers in Circulation 3,671 3,875 5,699 13,434 18,646 25,267 25,683 204 1,824 7,735 5,212 6,621 416
Others - - - - 1,417 1,582 3,616 - - - 1,417 165 2,034
Total other assets 4,771 5,375 7,599 15,734 20,263 26,849 29,299 604 2,224 8,135 4,529 6,586 2,450

Total Assets 420,305 498,622 607,048 740,263 788,788 829,349 1,181,326 78,317 108,426 133,215 48,525 40,561 351,977

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 THE SAN MIGUEL CORPORATION
STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 1968 TO 1974
(P'000)

HORIZONTAL / TREND ANALYSIS (Increase/Decrease)

1968 1969 1970 1971 1972 1973 1974 1968 1969 1970 1971 1972 1973 1974
LIABILITIES ANS STOCKHOLDERS' EQUITY
Current Liabilities
Loans and drafts payable 81,863 226,317 144,454
Accounts payable and accrued expenses 62,955 87,749 24,794
Income and other taxes 21,902 21,866 (36)
Current maturity of long-term debt 64,660 71,170 6,510
Dividends payable 10,938 13,147 2,209
Total Current Liabilities - - - - - 242,318 420,249 - - - - - 177,931

Long-term debt - net of portion shown under

current liabilities 107,922 191,772 83,850

Reserves
Employee benefits 12,339 12,339 -
Self-insurance 1,634 2,182 548
Total Reserves - - - - - 13,973 14,521 - - - - - 548

Unrealized gross profit on sale of real estate 1,020 814 (206)

Stockholders' Equity
Capital stock
Issued and outstanding 181,926 218,312 36,386
Prepaid capital in excess of par value 9,925 9,925 -
Retained earnings -
Appropriated for Expansion projects 130,000 180,000 50,000
Appropriated for stock dividends 36,385 43,662 7,277
Unappropriated 105,880 102,071 (3,809)
Total Stockholders' equity - - - - - 464,116 553,970 - - - - - 89,854

Total Liabilities and Stockholders' Equity - - - - - 829,349 1,181,326 - - - - - 351,977

- -

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B.1.2. Vertical Analysis

THE SAN MIGUEL CORPORATION

STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1968 TO 1974
(P'000)

VERTICAL ANALYSIS
1968 1969 1970 1971 1972 1973 1974 1968 1969 1970 1971 1972 1973 1974

Net Sales 532,903 561,223 666,360 830,175 909,136 1,111,530 1,494,414 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales 460,855 490,608 579,240 724,016 806,484 955,944 1,278,124 86.48% 87.42% 86.93% 87.21% 88.71% 86.00% 85.53%
Income from Operations 72,048 70,615 87,120 106,159 102,652 155,586 216,290 13.52% 12.58% 13.07% 12.79% 11.29% 14.00% 14.47%

Other Income (Charges)

Dividends 11,048 9,862 13,566 8,211 8,661 9,172 17,462 2.07% 1.76% 2.04% 0.99% 0.95% 0.83% 1.17%
Gain on Sale of Investments - 6,275 7,361 6,275 6,275 6,750 - 0.00% 1.12% 1.10% 0.76% 0.69% 0.61% 0.00%
Interest - Net (4,324) (6,537) (9,508) (15,049) (18,152) (22,935) (30,838) -0.81% -1.16% -1.43% -1.81% -2.00% -2.06% -2.06%
Miscellaneous - Net 684 1,921 1,942 2,744 1,554 (409) (3,792) 0.13% 0.34% 0.29% 0.33% 0.17% -0.04% -0.25%
7,408 11,521 13,361 2,181 (1,662) (7,422) (17,168) 1.39% 2.05% 2.01% 0.26% -0.18% -0.67% -1.15%

Earnings before Interest on Preferred Stocks

and Provision for Income Tax 79,456 82,136 100,481 108,340 100,990 148,164 199,122 14.91% 14.64% 15.08% 13.05% 11.11% 13.33% 13.32%

Interest on Preferred Stock 840 840 840 840 752 - - 0.16% 0.15% 0.13% 0.10% 0.08% 0.00% 0.00%
Income Tax 23,583 21,794 29,196 29,704 27,193 40,021 59,056 4.43% 3.88% 4.38% 3.58% 2.99% 3.60% 3.95%
24,423 22,634 30,036 30,544 27,945 40,021 59,056 4.58% 4.03% 4.51% 3.68% 3.07% 3.60% 3.95%

Net Income 55,033 59,502 70,445 77,796 73,045 108,143 140,066 10.33% 10.60% 10.57% 9.37% 8.03% 9.73% 9.37%

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 THE SAN MIGUEL CORPORATION
STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 1968 TO 1974
(P'000)

VERTICAL ANALYSIS
1968 1969 1970 1971 1972 1973 1974 1968 1969 1970 1971 1972 1973 1974
ASSETS
Current Assets
Cash and Short Term Investments 19,220 33,969 36,196 102,074 59,344 65,137 105,958 4.57% 6.81% 5.96% 13.79% 7.52% 7.85% 8.97%
Marginal Deposits on Letters of Credit 10,224 5,676 6,946 6,014 3,780 13,253 14,595 2.43% 1.14% 1.14% 0.81% 0.48% 1.60% 1.24%
Accounts Receivables - Net
Trade 28,636 23,126 31,908 41,295 39,447 48,859 70,264 6.81% 4.64% 5.26% 5.58% 5.00% 5.89% 5.95%
Other 9,354 15,012 19,922 17,207 18,718 18,891 26,780 2.23% 3.01% 3.28% 2.32% 2.37% 2.28% 2.27%
Finished Goods and In-process 21,163 19,008 33,765 27,506 35,564 37,771 65,562 5.04% 3.81% 5.56% 3.72% 4.51% 4.55% 5.55%
Materials, Supplies, Containers 110,542 119,169 130,431 155,125 193,930 190,270 379,387 26.30% 23.90% 21.49% 20.96% 24.59% 22.94% 32.12%
Prepaid expenses 5,362 5,249 6,284 4,586 8,094 7,197 9,782 1.28% 1.05% 1.04% 0.62% 1.03% 0.87% 0.83%
Total current assets 204,501 221,209 265,452 353,807 358,877 381,378 672,328 48.66% 44.36% 43.73% 47.79% 45.50% 45.99% 56.91%

Non-current Receivables
Installments Receivable - 26,714 20,036 13,357 6,678 - - 0.00% 5.36% 3.30% 1.80% 0.85% 0.00% 0.00%
Deferred income tax - - - - - 754 3,330 0.00% 0.00% 0.00% 0.00% 0.00% 0.09% 0.28%
Others 8,526 9,156 7,958 5,698 4,672 4,777 15,115 2.03% 1.84% 1.31% 0.77% 0.59% 0.58% 1.28%
8,526 35,870 27,994 19,055 11,350 5,531 18,445 2.03% 7.19% 4.61% 2.57% 1.44% 0.67% 1.56%
Investments
Asscociated Companies 20,514 28,838 40,937 73,394 90,022 95,561 122,658 4.88% 5.78% 6.74% 9.91% 11.41% 11.52% 10.38%
Other Companies 5,603 7,593 7,192 7,411 7,617 7,562 9,184 1.33% 1.52% 1.18% 1.00% 0.97% 0.91% 0.78%
Land 161 161 161 - - - - 0.04% 0.03% 0.03% 0.00% 0.00% 0.00% 0.00%
Total investments 26,278 36,592 48,290 80,805 97,639 103,123 131,842 6.25% 7.34% 7.95% 10.92% 12.38% 12.43% 11.16%

PPE
Land and Improvements 25,762 27,428 30,524 31,425 40,760 50,645 51,726 6.13% 5.50% 5.03% 4.25% 5.17% 6.11% 4.38%
Buildings 271,635 299,385 372,612 416,610 454,324 480,732 516,010 64.63% 60.04% 61.38% 56.28% 57.60% 57.96% 43.68%
CIP 2,220 12,209 14,160 6,684 11,760 9,601 12,074 0.53% 2.45% 2.33% 0.90% 1.49% 1.16% 1.02%
Total Cost 299,617 339,022 417,296 454,719 506,844 540,978 579,810 71.29% 67.99% 68.74% 61.43% 64.26% 65.23% 49.08%
Accumulated Depreciation 123,388 139,446 159,583 183,857 206,185 228,510 250,398 29.36% 27.97% 26.29% 24.84% 26.14% 27.55% 21.20%
PPE - Net 176,229 199,576 257,713 270,862 300,659 312,468 329,412 41.93% 40.03% 42.45% 36.59% 38.12% 37.68% 27.88%

Other Assets
Redemption Fund 1,100 1,500 1,900 2,300 200 - - 0.26% 0.30% 0.31% 0.31% 0.03% 0.00% 0.00%
Containers in Circulation 3,671 3,875 5,699 13,434 18,646 25,267 25,683 0.87% 0.78% 0.94% 1.81% 2.36% 3.05% 2.17%
Others - - - - 1,417 1,582 3,616 0.00% 0.00% 0.00% 0.00% 0.18% 0.19% 0.31%
Total other assets 4,771 5,375 7,599 15,734 20,263 26,849 29,299 1.14% 1.08% 1.25% 2.13% 2.57% 3.24% 2.48%

Total Assets 420,305 498,622 607,048 740,263 788,788 829,349 1,181,326 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

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 THE SAN MIGUEL CORPORATION
STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 1968 TO 1974
(P'000)

VERTICAL ANALYSIS
1968 1969 1970 1971 1972 1973 1974 1968 1969 1970 1971 1972 1973 1974
LIABILITIES ANS STOCKHOLDERS' EQUITY
Current Liabilities
Loans and drafts payable 81,863 226,317 9.87% 19.16%
Accounts payable and accrued expenses 62,955 87,749 7.59% 7.43%
Income and other taxes 21,902 21,866 2.64% 1.85%
Current maturity of long-term debt 64,660 71,170 7.80% 6.02%
Dividends payable 10,938 13,147 1.32% 1.11%
Total Current Liabilities - - - - - 242,318 420,249 - - - - - 29.22% 35.57%

Long-term debt - net of portion shown under

current liabilities 107,922 191,772 13.01% 16.23%

Reserves
Employee benefits 12,339 12,339 1.49% 1.04%
Self-insurance 1,634 2,182 0.20% 0.18%
Total Reserves - - - - - 13,973 14,521 - - - - - 1.68% 1.23%

Unrealized gross profit on sale of real estate 1,020 814 0.12% 0.07%

Stockholders' Equity
Capital stock
Issued and outstanding 181,926 218,312 21.94% 18.48%
Prepaid capital in excess of par value 9,925 9,925 1.20% 0.84%
Retained earnings 0.00% 0.00%
Appropriated for Expansion projects 130,000 180,000 15.67% 15.24%
Appropriated for stock dividends 36,385 43,662 4.39% 3.70%
Unappropriated 105,880 102,071 12.77% 8.64%
Total Stockholders' equity - - - - - 464,116 553,970 - - - - - 55.96% 46.89%

Total Liabilities and Stockholders' Equity - - - - - 829,349 1,181,326 - - - - - 100.00% 100.00%

- -

-18-
B.2. Narratives

B.2.1. Income Statement

Sales - Since sales is the lifeblood of the company, the increasing sales trend, based from
the data provided from 1968 to 1974, is favorable to the Company. The strength of the
Company’s branding as well as its diverse product lines may have been the factors that
caused this favorable trend. As such, the management should perform regular strategic
planning which involves forecasting and budgeting so that they could seize the
opportunities to continue to upsurge their sales and for them to be flexible for any changes
that could happen in the business environment. Having an idea as to the probable market
demand and the capacity of the Company to produce their products will be good bases for
decision-making. Strategic promotional activities must also be designed in order to
strengthen more their brand and to allow their products to reach more potential customers
in the country. With all these, both the Sales, Budget, and Marketing Department, along
with the top management, will have to work hand-in hand to achieve the company’s goals.

Cost of Sales (COS) – For the period of seven years, the company’s COS has been ranging
from 85-90% of Sales; hence, generating only a gross profit of at least 10%. However, it
can also be noted that the income statement has not presented any line item for Operating
Expenses. This made our group to assume that operating expenses has been lodged with
the Cost of Sales; thus, causing the huge cost ratio. Though, a decline in the cost ratio has
been noted since 1973, the company must still look for ways in order to lessen their COS.
Cost-cutting agendas, if possible, should be discussed and the efficiency of use of resources
must also be looked into. As noted in the case, the Company’s major business lines are in
the manufacturing industry; hence, wastage can be an issue. In addition, since the company
is still growing at the time, there could still be some improvements in its processes that may
entail reduced costs. If the company will be able to review their expenses, they may be
able to lessen their COS to 70-80% of sales or even better. In this regard, Production,
Budget, and Accounting Department must work together in order to have a holistic analysis
of the company’s COS.

Other Income (Charges) – The Company’s other income (charges) have been fluctuating
over the years.

Dividend income is directly related on the Company’s investment in its affiliates and in
other companies. What management can do to drive this upward is to strategically
select the best investment vehicle or company to invest to. Management may review
the dividend payout of their prospect investees and also their integrity. Of course, the

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 management may not want to be affiliated with companies that may cause harm to the
name of the Company.

Net interest expense can be expected to be due from the borrowings made by the
company. As can be noted on the available data on 1973 and 1974, the increase in
long-term debt (current and non-current) has corresponding increase in the interest
expense. Management may want to assess this as interest expense has been equaling to
1-2% of sales. However, if the management sees that the weighted cost of capital is
lower if they borrow money instead of issuing their own stocks and that they can claim
the interest expense as tax deductible expense, then it can be argued that the benefits
derived from borrowing the money has outweighed the interest expenses incurred.
However, the Company must still guard their capital structure as the ideal debt-to-
equity ratio is still at 50:50.

Provision for Income Tax – This item is directly related to the Company’s taxable
income. An increasing trend in income tax reveals that that the company has been more
profitable over the years. Income tax should not be viewed by management as a burden but
as a proof that their hard works have been paid off as the Company continues to generate
more income. As such, management should always be governed by good principles and
should not attempt to circumvent the law by avoiding or evading tax, which other
companies opt to do so as to keep more money in the company’s pockets.

Payment pattern of dividends cannot be determined as the data is incomplete.

Nevertheless, the Company should consider to continuously pay dividends in order to keep
their investors. Keeping the investors happy will keep their money tied for the Company’s
operations.

B.2.2. Statement of Financial Position

ASSETS

Cash and Short-term Investments – The Company has fluctuating cash and short-term
investments balance from 1968 to 1974. It can be noted that an abrupt increase in 1971 has
occurred and then a decline in 1972, followed by consistent increases since then. These
increases can be due to additional issuances of stocks or due to borrowings made by the
Company. Disposal of asset cannot be a probable cause of the trend since no dramatic
decrease in any of the asset line items was noted. Also, the 1974 increase can be explained
by the increase in balance of the liability accounts. With these, the Company’s
management must observe their cash balances. High cash balance may mean that the

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company is highly liquid but it may also depict mismanagement of cash. Proper working
capital balance must be determined or set by management so that they would know the
adequate balance of cash that they should keep because keeping more than what they need
for operations entails opportunity costs for the Company as the said idle cash could have
been invested to generate additional earnings. This again supports the proposition that
regular strategic planning and budgeting of the management must be in place in order to
cater for all of this issues.

Marginal Deposits on Letters of Credit – the increase in this account is a proof that the
company’s imports had continued to increase over the years. This increase in imports is
parallel to the increase in inventory (both finished goods and raw materials) and is an
indication that the Company’s business is growing as production, along with sales, is
increasing. However, with the Company’s goal to balance their exports and imports,
management should not opt to lessen their import level but should look into ways on how
to upsurge their exports; thus, they should design effective promotional activities to market
their products to other countries.

Accounts Receivables – With the seven-year data presented, accounts receivable’s

nominal balance has been increasing, along with the rise in sales. However, if you look
into it, trade receivables ending balance has consistent balance if compared to total assets
and sales for the period. Over the years, it was maintained to be 5-6% of total assets and 4-
5% of net sales. This is a good indication that receivables management is strictly in place.
For the Company to maintain this status, credit and collection team should continue to
implement stringent credit policies and should be efficient and effective in their collection
process. Past due accounts must be kept to its minimum and clients with past due accounts
should be monitored and communicated to the Sales Team to minimize the potential loss to
the company. This mandates that there should be a good working relationship and
communication between the credit and collections team and the sales team because it’s not
good to continue to make sales to entities who has no ability to pay as agreed.

Inventories – Parallel with the increase in sales is the increase in production; hence, the
increase in various inventories of the Company. As can be noted, the dramatic increase
started in 1972 but was mostly evident in 1974. This can be explained by the plans of the
company to expand their market through exporting, as discussed in the case. This shows
favorability to the Company but both production and sales managers must see to it that
produced items can be sold at a reasonable span of time to keep the Company’s resources
circulating and not being tied up with slow moving inventories. Keeping the balance
between production and sales ensures that the Company’s resources are efficiently being
used to maximize the Company’s profit as inventory holding costs are kept to a minimum.
Materials, supplies, and containers’ balance is far higher than the finished goods since the

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Company’s products are packaged in reusable bottles exclusively designed for the
Company. As number of consumers continue to rise, containers/bottles to be used to cater
for these consumers’ demand must also be increased.

Investments – As discussed in the dividends’ analysis, the Company has been investing to
more and more companies, related party or not. This is good both for the Company and its
investors as the idle resources are being placed somewhere that they can generate extra
income. These will be an indicator to the investors that the management are doing well in
managing the funds of the Company and that they are performing their duty to increase the
wealth if the stakeholders. Nevertheless, the management must still be wary and must
strictly scrutinize every investment option that they are prospecting to avail. They should
not always be attracted merely by high returns; they should also weigh the risks. A
discussion of these investment options with the top management is a good way to come to
an agreement as to which investment to be added to their portfolio.

Property, Plant and Equipment (PPE) – net – Knowing that the Company is
continuously growing and diversifying its business, PPE additions have been booked every
year. This shows favorability to the Company as this makes room for further expansion of
production capacity. Management should continue to invest of PPE as long as they can
forecast that their increased production has corresponding market demand and that their
current facilities cannot accommodate already that increased capacity. This leads back
again to the need for strategic planning and forecasting at the start of the period.

Other Assets – Containers in circulation’s trend is similar to sales as these may pertain to
products’ bottles in the hands of retailers or distributors or even customers. Distribution
managers/agents must see to it that these containers will be circulated back to the Company
for reuse. Otherwise, penalty should be imposed to the distributor/retailer who fail to
return said containers.

LIABILITIES AND EQUITY

Total Liabilities – Current and non-current liabilities both increased from 1973 to 1974.
This suggests that the Company has availed of additional borrowings and has slowed their
disbursement for their other payables. This may be good as the Company is being
leveraged but the surge of liabilities must also be monitored as investors may tend to worry
if liabilities is already way higher than the balance of equity. Also, liquidity and solvency
of the Company must be supervised to ensure that liabilities are paid when they are due.

Equity – An increase in capital stock is noted in 1974. This additional issuance may have
been made to generate additional resources to fund the continuing expansion of the

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Company’s business. Also, this increase in capital stock may have been made in order to
strike a balance in liabilities and equity since additional borrowings were also made in the
same year. Further, having both borrowings and equity to fund the company’s operations
could have indicated lower weighted average cost of capital than having to use either
equity or borrowings, alone. Hence, management must always see to it that cost of capital
is considered and not just avail of loans to be highly leveraged or to just have both equity
and liability at the same level to strike a balance.

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