Playing the Numbers Game

Numbers! I need to see numbers! exclaimed Marcus in response to com- ments made by the assistant vice-president of Finance, Jeff Smith. Marcus Lenovo, president and chief executive officer of Duralex Inc., had been instrumental in significantly increasing the companys size during his first five years in office. He spearheaded some successful marketing campaigns and revamped the production facilities by adopting the latest technology in injection molding. He also implemented various cost-cutting measures and introduced performance plans to boost efficiency. Foremen and supervisors were offered stock option incentives, and bonuses were tied to earnings per share (EPS) growth.

Duralex Inc., a medium-sized plastic molding company, was founded in 2008 and was located in Midland, Michigan. The company supplied molded plastic products to various processing industries as well as end-users. It enjoyed a fairly diversified base of customers, ranging from automobile and home products manufacturers to the federal government. After an initial period of sluggish growth, the firms revenues and profits had almost quadrupled. Most of the increase had been achieved under Lenovos lead- ership. The plastics business offered potential for high profit margins, and as a result it attracted many competitors. Despite the fierce competition, Duralexs stock, which traded in the over-the-counter market, had tripled in value over the past five years, making the shareholders very happy.

Recently, however, the stock price had dipped sharply, raising concerns among security analysts. Jeff Smith, the assistant VP of finance, brought this matter to Marcuss attention informing him that the analysts had given their closest rival, APEX Molding, a strong buy rating while downgrading Duralexs rating to a Hold. This recent development had outraged shareholders, and the personal relations department had been overwhelmed with calls from anxious owners wanting to know what was going on.

Marcus, a motivated leader, was not about to give up easily, however. His track record of turning companies around was very good. He knew that if he could identify the main problem areas, he would be able to make some strategic moves to alleviate the problems. He therefore demanded that he be given a detailed report of the firms financial condition in comparison to that of APEX Molding. Marcus had learned over the years that in order to be successful, it was very important to play the numbers game.

Case 3 Playing the Numbers Game 15 Table 4 APEX Molding Annual Income Statements (Value in Millions) Seling, General &Admin Expenses Total Income Avail for Interest Exp 2 Net Income from Cont Operations Net Income from Discont Opers Net Income from Total Operations Income from Cum. Eff of Acct. Chg Income from Tax Loss Carryforward 0