Financial-statement-analysis-of-Abbott

1、Financial statement analysis of Abbott Financial statement analysis of Abbott Group 2Members in participationYangyang CaiHua HuangBiao JiangChenglong QianCongcong LinZijian WangJie Zheng.Part 131.History of Abbott32.State of operation:33.Strategies for sustainable earning growth:3(1) Diversified pro

2、ducts:3(2) High pricing3(3) Shift of market segments:44.SWOT Analysis for Abbott:4Part 251. Accounting methods for Inventories:52. Accounting method for R&D:53. Accounting method for Depreciation:54. Basis of consolidation and change in accounting principle:6Part 361. History data analysis6(1) A

3、ctivity:6(2) Liquidity:7(3) Solvency:7(4) Profitability7(5) Cash flows82. Peer comparison: Abbott VS Johnson:8(1) Activity comparison:8(2) Liquidity comparison:8(3) Solvency comparison9(4) Profitability comparison9(5) Cash flows comparison9Conclusion10Reference10Part 11. History of AbbottAbbott 

4、;Company was founded by Dr. Wallace C. Abbott (1857-1921), an 1885 graduate of the University ofMichigan. His innovation about the use of the active part of a medici

5、nal plant, an alkaloid, was successful since it allowed more consistent and effective dosages for patients. As the companys overseas sales and reputation was going, in 19

6、31, Abbott formed its first international office in Montreal, Canada. Abbott continued expanding and divided itself to several regions, with each subsidiaries reporting to the international management.2. S

7、tate of operation:Over the last century, Abbott is specialized in producing medicines; medical diagnostic instruments and tests; minimally invasive surgical devices; nutritional supplements for infants, children and adults; and products for veterinary care. Abbott has sales, manufacturing, research

8、and development, and distribution facilities around the world. Abbott is currently in a state of stable growth, which will be further discussed in the financial ratio sector. In 2011, global sales and earnings per share of Abbott rose more than 10 percent. Also, the performance of Abbott is ranked t

9、he best in American medical technology group. 3. Strategies for sustainable earning growth:(1) Diversified products:Abbott Laboratories is a well-diversified company, involved in the discovery, development, manufacture and marketing of pharmaceuticals and medical goods that encompass a wide range of

10、 product areas. Dont ever put all the egg in one basket is a general rule that Abbott applies and is a vital reason to its success.(2) High pricing There are two major categories of firms in the pharmaceutical products industry, branded pharmaceuticals and generic pharmaceuticals. Abbott Laboratorie

11、s is among the branded pharmaceutical companies, often referred to as the industry innovators. These companies invest heavily in research and development to come up with unique drugs or improved versions of already existing drugs, and then patent these findings. Abbott generates a huge amount of inc

12、ome by pricing relatively high on new drugs. (Actually, in 2009, Abbott was sued because of pricing the drug way above the market value. The case was finally settled by the court in $0.7m)(3) Shift of market segments:Abbott is constantly searching for new markets to expand its market share. The emer

13、ging market in the blue sector stands for countries in the Middle East, Asia, Africa and South America. The shrinking part in the Europe and America markets will shift to the emerging market. In fact, according to the CEO of Abbott, China is the biggest market in the emerging market which will be th

14、e priority of Abbotts targets. In order to do this, Abbott changes its focus from breakthrough medicines like arthritis treatment Humira, which command high prices in developed markets, to more basic products like nutrition supplements and generic drugs that can thrive in places like India, China an

15、d Vietnam.4. SWOT Analysis for Abbott:Strength1. Abbott is collaborating with Syngene, India's leading contract research organization, to establish its first nutrition research and development (R&D) center in the country;2. Abbott Molecular has acquired an exclusive license to develop a diag

16、nostic test in the United States based on several new biomarkers;3. Includes a broad range of specialized medicines; medical diagnostic instruments and tests; minimally invasive surgical devices; a spectrum of nutritional supplements for infants, children and adults; and products for veterinary care

17、;4. Abbott Launches PediaSure SideKicks , a nutritional beverage to help balance out a picky eater's uneven diet;5.Strong employee force of 90,000.Weakness1. Products listed on the site may be available only in certain countries;2.Company is overly dependent upon mature products whose patents ma

18、y expire in near future;3. Abbot faces lot of litigation cases in various countries regarding its products.Opportunity1. Broad-based medical innovation, in technologies and businesses across the spectrum of health care;2. Pioneering solutions that advance health care;3. Address health needs in under

19、-developed and poor countries;4. Leverage its core business expertise and resources to create sustainable solutions in countries around the world.Threats1.Unprecedented generic erosion exacerbated by ineffective product lifecycle launches;2.Government regulation;3. Industry consolidation.Part 21. Ac

20、counting methods for Inventories:Abbotts inventories are stated at the lower of cost (first-in, first-out basis) or market. Cost includes material and conversion costs:(US dollars in thousands)Year20112010200920082007Total inventories3,284,2493,188,7343,264,8772,775,8492,951,442COGS15,540,58014,665,

21、19213,209,32912,612,02211,422,046Purchase15,636,09514,589,04913,698,35712,436,429NAFIFO gives a better indication of the value of ending inventory (on the balance sheet), but it also increases net income because inventory that might be several years old is used to value the cost of goods sold. Whats

22、 more the increasing net income sounds good. And there are no GAAP or IFRS restrictions on the use of FIFO in reporting financial results. But you must remember that it also has the potential to increase the amount of taxes that a company must pay during inflation.2. Accounting method for R&D:Th

23、e accounting principle of expensing R&D cost is simply the accounting profession's best attempt to provide accurate financial information about complex business transactions. Investors who have a thorough understanding of the principle and know its limitations have the opportunity to make mo

24、re informed investment decisions.3. Accounting method for Depreciation:Abbott used Accelerated depreciation method to depreciate fixed-asset. The financial statements of the Abbott, we can see that the depreciation and amortization of the asset is increasing from 2009 to 2011. But the amount of incr

25、ease is so small that can not affect the financial statement. And from 10k, we know that the accounting method does not change from 2009 to 2011, so the increase of the depreciation and amortization is not result from the change of accounting method. In our opinion, the reasons of the increase can b

26、e so many. For example, the Abbott company bought new capital so that the fixed assets increased, as a result, the depreciation increase. 4. Basis of consolidation and change in accounting principle:Prior to January 1, 2011, the accounts of foreign subsidiaries were consolidated based on a fiscal ye

27、ar ended November 30 due to the time needed to consolidate these subsidiaries. Effective January 1, 2011, the one month lag in the consolidation of the accounts of foreign subsidiaries was eliminated and the year-end of foreign subsidiaries was changed to December 31. The change in accounting princi

28、ple related to the elimination of the one month reporting lag is preferable because it will result in more contemporaneous reporting of the results of foreign subsidiaries. In accordance with applicable accounting literature, a change in subsidiaries' year-end is treated as a change in accountin

29、g principle and requires retrospective application. The cumulative effect of the change was an increase in retained earnings of $289 million as of January 1, 2009 and a corresponding decrease in other long-term liabilities. The impact of the change was not material to the results of operations for t

30、he previously reported annual and interim periods after January 1, 2009, and thus, those results have not been revised. A charge of$137 million was recorded to Other (income) expense, net in 2011 to recognize the cumulative immaterial impacts to 2009 and 2010. Had the financial statements been revis

31、ed, net sales, operating earnings and net earnings in 2009 would have increased by $211 million, $36 million and $38 million, respectively, and net sales, operating earnings and net earnings in 2010 would have decreased by $21 million, $195 million and $175 million, respectively.Part 31. History dat

32、a analysis (1) Activity: It is a good indicator of operating. a. Inventory turnover: Abbotts inventory turnover is stable.b. AR turnover: Abbotts inventory turnover is also stable with a lowest turnover of 1.233 in 2012 Q1.c. Fixed asset turnover: Abbotts fixed asset turnover is stable. d. Total ass

33、et turnover: Abbotts total asset turnover is stable (2) Liquidity: Current ratios is stable, reflecting the broadest measure of current and potential resources available to meet short-term obligations. (3) Solvency: a. DTE：Abbotts DTE was downward sloping, which means the risk of the company has dec

34、reased since the debt has declined and equity has increased. b. Times interest earned: Abbotts times interest earned fluctuates. Times interest earned is an indicator of safety for creditors as it measures the extent to which earnings are available to meet interest charges. Abbott recorded a litigat

35、ion reserve of $1.5 billion in the third quarter of 2011, which causes the decrease of operating earnings from 1,773,453 in 2011Q2 to 594,878 in 2011Q3. So times interest earned of Abbott declines significantly in 2011Q3.(4) Profitabilitya. Profit margin: the profit margin of Abbott is positive, ran

36、ging from 0.17 to 0.29. Profit margin is a measurement of the profitability of a firm's "core" business. Abbotts core business grew healthily.b. ROA: Abbotts ROA is downward sloping, decreasing from 0.68 to 0.019. This ratio measures the efficiency of the use of assets in generating op

37、erating profits and of the return accruing to capital used in the operations. It may also be measured on a pretax basis to exclude the impact of differences in tax position and financial policy.c. ROE: From 2011 Q2 to 2012 Q3, the primary cause of the fluctuated change in ROE is the change in tax bu

38、rden (-15.93%), change in financial leverage (-592.60%).(5) Cash flows From the diagram, we can learn that Abbott has positive CFO and FCF, reflecting that Abbott is growing healthy and has an upward trend of CFO and FCF. 2. Peer comparison: Abbott VS Johnson:(1) Activity comparison:a. Inventory tur

39、nover: Abbott has higher inventory turnover than Johnson & Johnson. b. Fixed asset turnover: Abbott is higher than Johnson & Johnsonc. Total asset turnover: Abbott is higher than Johnson & Johnson(2) Liquidity comparison:a. Current ratio: Johnson & Johnsons current ratio is higher th

40、an that of Abbott. b. Quick ratio：Johnson & Johnsons quick ratio is higher than that of Abbott.c. Cash ratio：The cash ratio of Johnson & Johnsons is higher than that of Abbott. The significantly decrease in the period from 2012Q1 to 2012Q because the cash and cash equivalents decreased from

41、30,267 million to 14,042 million.(3) Solvency comparisona. DTE: In summary, DTE of Abbott is higher than that of J Johnson & Johnson.b. DTC: DTC of Abbott is stable while Johnson & Johnsons is upward. In summary, Johnson & Johnsons DTC is about five times higher than that of Abbott. c. T

42、imes interest earned: TIE of both company fluctuate. In summary, Johnson & Johnsons DTC is about six times higher than that of Abbott in 2011Q2, and then intersect in 2012 Q2. (4) Profitability comparisona. ROE： ROEs of the two companies fluctuate. In summary, Johnson & Johnsons ROE is about

43、 seven times higher than that of Abbott. Form 5M analysis, we can learn that Abbott has a lower operating margin, a lower interest burden, a higher tax burden, a higher asset turnover and a lower financial leverage compared with Johnson & Johnson in the period of 2012 3Q. (5) Cash flows comparis

44、ona. CFO: The CFO of two companies goes up and down simultaneously. CFO of $2.8 billion was the result of $3.9 billion of net earnings and $1.6 billion of non-cash charges primarily related to depreciation and amortization, stock based compensation, and deferred tax provision reduced by $2.7 billion

45、 related to changes in assets and liabilities, net of effects from acquisitions. Then on October 2011, Abbott became to separate into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals. Their annual sale nearly 18 billion dollars and 22

46、 billion dollars. By doing this, the Abbott will have a extensive pipeline of new product and technology as well as opportunities of significant marginal expansion. As a result, the CFO increased during this time.b. CFI: The CFI of Abbott is stable while Johnson & Johnsons fluctuates. In the fou

47、rth quarter of 2011, Abbott entered into a global collaboration for the joint development and commercialization of second-generation oral antioxidant inflammation modulators resulting in a charge to acquired in-process and collaborations research and development of $400 million which was paid in the

48、 first quarter of 2012. In connection with the acquisition of Solvay Pharmaceuticals, the achievement of a certain sales milestone resulted in a payment of approximately $134 million in the first quarter of 2012 for which a liability was previously established.c. CFF: CFF of the two companies fluctu

49、ate. Eventually, Johnson & Johnsons CFF is higher than that of Abbotts.d. FCF: Johnson & Johnsons has a FCF which is more drastic while the FCF of Abbott fluctuates mildly. In summary, FCF of Johnson & Johnson is higher than that of Abbotts.ConclusionAbbot is in the state of maturity in terms of business cycle, (reflected by the positivity of CFO and the negativity of CFI) which means Abbott spent a lot on opening new branches