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financial statement analysis Abbott Laboratories and Target
Financial Statement Analysis October 18 2010 Good Karma: Amanda Tryon, Kara Brown, Karen Allen, Melissa Masters Abbott Laboratories and Target Financial Statement Analysis 2010 2 Table of Contents Part I: Abbott Laboratories………………………………………………………………………………………………………………………………… 3 Executive Summary 4 I. Introduction of the company. 5 II. Performance analysis 6 III. Financial position 7 IV. Critique 8 V. External perception of the company 12 VI. Conclusions and recommendations 13 Part II: Target 16 Executive Summary 17 I. Introduction of the company 18 II. Performance analysis 18 III. Financial position 20 IV. Critique 22 V. External perception of the company: 24 VI. Conclusions and recommendations. 26 Appendix A - Abbott Competition 28 Appendix B- Target Competition 30 Appendix C- Customer Perceptions- Target 31 Appendix D-Common Size Income Statement- Abbott 32 Appendix E- Common Size Balance Sheet- Abbott 34 Appendix F- Common Size Balance Sheet- Target 38 Appendix G- Common Size Income Statement- Target 40 Appendix H- Key Financial Ratios- Target 41 Appendix I- Key Financial Ratios- Abbott 42 Appendix J- Target’s Annual Report –Fiscal year 2009 43 Appendix K- Abbott Laboratories’ Annual Report -Fiscal Year 2009 135 Works Cited 214 Financial Statement Analysis 2010 3 Part I: Financial Statement Analysis 2010 4 Executive Summary Abbott Laboratories is an international company based in Illinois. They are involved in the sale of a largely diversified line of healthcare products. This company has diversified itself in the areas of pharmaceutical, diagnostic, nutritional, and vascular products, which has benefited its ability to remain financially stable. In the healthcare industry, specifically pharmaceuticals, competition is fierce. Each company tries to be on the cutting edge of technology with their drugs and other miscellaneous products. Abbott has still proven to be a viable competitor in its market. Sales increased from 2008 to 2009. Also, the market price per each share of common stock was maintained. This shows that this corporation can perform and will continue to do so. With the passage of healthcare reform bill there is uncertainty about what the future holds. The nursing shortage, drug costs, and soaring health care plan premiums will rekindle fears of medical inflation. A considerable portion of Abbott Laboratories‘ market is that of healthcare related products. Abbott‘s sales have been impacted significantly over the last three years with the purchase of several pharmaceutical products and joint ventures along with the loss of patent protections. Abbott has done well weathering the economic downturn with an increase in net sales and gross profit for the 2 nd , 3 rd and 4th quarters of 2009 as compared to 2008 and 2007. After creating and reviewing the common size income statement for Abbott Laboratories, we see that the numbers are strongly consistent from year to year. In order to compete, Abbott is actively buying and selling companies and divisions. This has helped them increase their growth in emerging markets. We recommend investing in Abbott, but conservatively. With health care reform looming over head, change is coming. All is not clear on how it will directly affect Abbott‘s performance, but they have proven before that they are a formidable competitor. Financial Statement Analysis 2010 5 I. Introduction of the company. Abbott Laboratories is involved in the sale of a largely diversified line of healthcare products. Abbott operates four segments: Pharmaceutical, Diagnostic Products, Nutritional, and Vascular Products. Its Pharmaceutical Products include adult and pediatric pharmaceuticals. Its Diagnostic Products include diagnostic systems and tests that are sold to blood banks, hospitals, commercial laboratories, clinics, physicians' offices, alternate-care testing sites and plasma protein therapeutic companies. The Company's Nutritional Products include a line of pediatric and adult nutritional products sold worldwide. Its Vascular Products include coronary, endovascular, and vessel closure devices for the treatment of vascular disease. Since Abbott is involved four different segments, they have different competition and competition strategies for each segment. For Pharmaceutical products, the competition is from other pharmaceutical companies. Searching for innovative products is the biggest part of the competition. Changes in medical practices and product releases from competitors can quickly result in changes in their business. They must also consider their product price, as many substitute generic drugs. The Diagnostic Product division faces the same types of competition in innovation and price. However, it must also consider product performance, contracts and productivity. Several products they have in this segment are subject to regulatory changes. Nutritional Products generally have competition from other consumer and health care manufacturers. They consider advertising, packaging, price and availability. A large part of competition in this area is ingredient innovations. New products by competitors and generic substitutes are an issue. The Vascular Products are facing many of the same challenges as above. They are highly competitive in product innovation, price and convenience. Many of the segments face the possibility of product obsolescence due to new product offerings by competitors, changes in medical practices, and government regulation. Financial Statement Analysis 2010 6 II. Performance analysis In reviewing the 2009 annual report of Abbott Laboratories, the strengths and weaknesses of the company‘s performance were analyzed. This company has diversified itself in the areas of pharmaceutical, diagnostic, nutritional, and vascular products, which has benefited its ability to remain financially stable. The sale of these types of products is not seasonal; therefore we expect their sales numbers to remain constant throughout the year. The business of healthcare and pharmaceuticals has many downfalls or weaknesses. Because Abbott depends heavily on its creation of new products and the research done, the risk of a product failing and resulting in a financial loss is high. However, when a product is successful, the financial benefits are great. With the creation of new products, it is the responsibility of Abbott to obtain patents on the creation and distribution. When these patents are held, Abbott becomes the only distributor of the product, therefore controlling the price. Patents only last for a certain length of time, causing a decrease in revenue and operating income once a patent expires. Legal expenses can also occur if there is a patent infringement claim by another company. These legal expenses can potentially affect cash flow; therefore budget allowances must be allowed. The creation and success of new products relies heavily on the amount of research performed. The more research a company performs, the more money they will spend. The research is done so a product will meet government regulations, along with hopefully preventing legal issues that can arise from a dangerous product. Abbott products are sold worldwide, so they must submit to the government regulations for each country where their products are sold. Even with the amount of research that is done, the corporation is still subject to product liability claims and safety concerns. If it is found that a product puts someone at risk, potential legal expenses may occur. In the healthcare industry, specifically pharmaceuticals, competition is fierce. Each company tries to be on the cutting edge of technology with their drugs and other miscellaneous products. Products that are Financial Statement Analysis 2010 7 being researched are kept top secret until the research is mostly complete. Each company is kept in the dark until this time, making competition hard to predict. In spite of these weaknesses, Abbott has still proven to be a viable competitor in its market. Sales increased from 2008 to 2009. Also, the market price per each share of common stock was maintained. This shows that this corporation can perform and will continue to do so. III. Financial position Analyzing the strengths and weakness for Abbott Laboratories is tricky. In late 2009, when Abbott Laboratories acquired a unit of Solvay of Belgium for $6.6 billion, the large merger was praised as a signal for restored confidence (Sorkin, 2009). However, less than a year later, the Pharmaceutical giant announced that they would be cutting 3,000 jobs, or 3 percent of its work force (Reuters, 2010). As an investor, the declaration a company is downsizing 3 percent of its work force is not a comforting sign to reinvest. However, this downsizing came almost entirely from the Solvay positions. Probably, the downsizing which was found mainly in research and development, and commercial and manufacturing was planned for during the acquisition and prior to the merger being announced. In May 2010, Abbott Laboratories announced they would purchase the Indian drug maker Piramal Healthcare for $3.7 billion. Abbott stated even though paying $2.12 billion in cash upfront for Piramal, and then $400 million annually over the next four years, this purchase will add immediately to Abbott‘s earnings (Timmons, 2010). PricewaterhouseCoopers estimates that emerging markets will account for 30 – 40 percent of pharmaceutical sales growth in the next 10 years (Timmons, 2010). Pharmaceutical business in emerging markets is drastically different from the West. Consumers in emerging markets typically pay directly for their prescriptions, while those in the West typically rely on insurance and government care. As Abbott Labs and Piramal expand into India, the company will become the largest drug company in India with 7 percent of the market. Financial Statement Analysis 2010 8 Abbott Laboratories has also had their share of bumps in the road. Facing competition from the generic drugs, sales of Humira, mostly used for treatment of Rheumatoid Arthritis, have been decreasing. Another casualty to the generic competition is the drug Depakote, typically used as an anti-seizure medicine. In 2009, sales of Depakote tumbled 75 percent, after losing exclusivity in 2008. (Bloomberg News, 2009). There are two polar views on the drug Meridia, an anti-obesity drug. In January 2010, European Medicines Agency advised doctors and pharmacists to stop prescribing and dispensing Meridia and equivalents of Meridia (Singer and Pollack, 2010). The Food and Drug Administration, looking at the same data asked Abbott Laboratories to put a stronger warning on its label. The key ingredient, sibutramine, is at the crux of this decision. The question is if this ingredient when given to a patient diagnosed with uncontrolled high blood pressure is at a higher risk of a heart attack or stroke. Most recently, in September 2010, Abbott Laboratories had to recall millions of containers of its bestselling Similac infant formula due to the possibility of being contaminated with insect parts, such as small beetles or larvae. This recall affected 5 million containers of formula. Abbott announced that they expected a $100 million dollar loss in connection with this recall. With this announcement, shares of Abbott Laboratories fell 16 cents (Perrone, 2010). IV. Critique Healthcare as we know it is about to change. With the passage of healthcare reform bill there is uncertainty about what the future holds. The nursing shortage, drug costs, and soaring health care plan premiums will rekindle fears of medical inflation. A considerable portion of Abbott Laboratories‘ market is that of healthcare related products. Abbott operates in numerous countries and employs both internal and external tax professionals to minimize audit adjustment amounts where possible. Changes in foreign reimbursement, political and economic stability will also significantly impact their bottom line. Their operation in international markets is 50 percent of consolidated net sales for Abbott Laboratories. Their gross profit margin in 2008 was higher due, in part, to favorable product mix and foreign Financial Statement Analysis 2010 9 exchange. However, there was a decline in their gross profit margins in 2009 due to the negative impact from lower sales of Depakote. One other important and detrimental part of the business is patents and trademarks. There are several legal proceedings that they are currently facing due to patent infringement both locally and internationally. The estimated loss due to litigation is $170 million to approximately $310 million. Abbott Laboratories‘ revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Abbott‘s sales have been impacted significantly over the last three years with the purchase of several pharmaceutical products and joint ventures along with the loss of patent protections. One main focus of Abbott is that of Humira which has increased sales worldwide. However, they have seen a significant decline in sales of Omnicef and Clarithromycin, with Omnicef being the greater of the two. They are in a constant battle with products being produced in a generic form, which significantly affects the sales of their products. Abbott concludes that its 2009 long term debt is due to financing recent acquisitions. Operating cash flows in excess of capital expenditures and cash dividends have partially funded these acquisitions. As of December 31, 2009, Abbott‘s long term debt rating was AA by standard and A1 by Moody‘s Investor‘s Service. One significant impact of Abbott‘s bottom line is the sales rebates that they provide. Approximately 50 percent of Abbott‘s consolidated gross revenues are subject to various forms of rebates and allowances which Abbott records as a reduction of revenue at the time of sale. They also offer discounts to those that pay within 15 to 30 days. One of the largest rebates that they provide are to the Women‘s Infant and Children‘s (WIC) division which they have a contract with in 24 states. Indiana is not one of those states. Abbott has done well weathering the economic downturn with an increase in net sales and gross profit for the 2 nd , 3 rd and 4th quarters of 2009 as compared to 2008 and 2007. They record cash, cash Financial Statement Analysis 2010 10 equivalents and investments with the cash equivalents consisting of time deposits and certificates of deposit. They use FIFO as their inventory method. Depreciation and amortization expenses are calculated using a straight-line method over the estimated useful lives of the assets. The estimated useful life as provided by the financial reports states that a building‘s useful life is 10 to 50 years and equipment is 3 to 20 years. They also noted internal controls and the external audit being completed by Deloitte and Touche out of Chicago. Deloitte did report that the company adopted a new accounting standard related to business combinations in 2009. It states that research and development is accounted for as an indefinite-lived tangible asset until approval or discontinuation rather than as expense. Acquisition costs are expensed rather than added to the cost of an acquisition and the fair value of contingent consideration at the date of an acquisition is added to the cost of the acquisition. The report was very informative, as some of our group‘s members work in healthcare They have come to realize the amount of money that is required to run a health care system. This report helps us understand why some costs get passed on to the consumers. The companies pass the cost off to the hospitals which then pass it off to the consumer in order to effectively run a health care system. The notes supplied information regarding accounting policies and areas in which estimates were used. Among the many different products that Abbott develops, manufactures and sells the consolidated version of their statements made the report easier to read and understand. Also included within the notes was supplemental financial information. This involved discussion about their investment in Boston scientific and other expenses for 2009 related to long term liabilities and comprehensive income. Within the last 3 years Abbott has been involved in a joint venture with TAP pharmaceutical products and the selling of its spine business. However, the spine business was not presented as discontinued operations in the report because the effects were not significant. Abbott is involved in international markets and there are several tables within the notes that address foreign currency and foreign subsidiaries. They also included in depth information about post employment benefits. This [...]... expenses 25 Financial Statement Analysis 2010 VI Conclusions and recommendations Common Size Statement Analysis When reviewing the common size statements for Target, it appears that overall; Target has remained consistent and upward in their growth Target has reduced their expenses and taxes by a little over 1 percent and has kept their other expenses low as well There are no significant company or financial. .. the company Target s main lines of business are retail and credit card Target is known for their operations in general merchandise and food items Their general merchandise segment includes household essentials, electronics, apparel and accessories, and home furnishings and décor They have recently been working to expand their dry, dairy and frozen food assortment They also operate Super Target stores... = Wal-Mart Stores Inc Industry = Discount, Variety Stores 30 Financial Statement Analysis 2010 Appendix C- Customer Perceptions- Target 31 Financial Statement Analysis 2010 Appendix D-Common Size Income Statement- Abbott Consolidated Statement of Earnings (Common Size Income Statement Percents) 2009 Net Sales Cost of products sold Research and development 2008 2007 100.00% 100.00% 100.00% 42.94% 42.71%... investing in Abbott, but conservatively With health care reform looming over head, change is coming All is not clear on how it will directly affect Abbott s performance, but they have proven before that they are a formidable competitor 15 Financial Statement Analysis 2010 Part II: 16 Financial Statement Analysis 2010 Executive Summary Target s main lines of business are retail and credit card Target is... those of Wal-Mart and shop at Target because of their differentiated product line They view Target as being more fashionable and as providing the full shopping experience and great value for the money They also prefer the cleanliness of Target stores and shorter waiting time to pay See Appendix C for customer perceptions Analysts Analysts believe that Target s recent decision to expand their food format... Visiogen, Evalve Inc and Solvay in 2009 are considered to be solid additions to the company‘s ophthalmic, drug, and medical devices portfolios Implementation of new healthcare reform is complex and creates uncertainty regarding the long-term financial impact on 12 Financial Statement Analysis 2010 the industry Still analysts say that Abbott is a strong company that has the resources, knowledge, and know how... Sanofi-Aventis Industry = Drug Manufacturers - Major 28 Financial Statement Analysis 2010 Drug makers Ranked By Sales Company Symbol Price Change Market Cap P/E AstraZeneca PLC AZN 52.69 1.90% 75.87B 8.95 Abbott Laboratories ABT 51.94 0.66% 80.20B 15.22 Bristol-Myers Squibb Company BMY 27.62 -0.22% 47.36B 4.83 29 Financial Statement Analysis 2010 Appendix B- Target Competition Direct Competitor Comparison... changes Competitors Target s largest competitor is Wal-Mart They also compete in certain areas with Costco and Kohl‘s Wal-Mart views Target as being a more expensive, more fashionable competitor As a result, they recently picked up the Better Homes and Gardens brand as a way to compete in home goods Wal- 24 Financial Statement Analysis 2010 Mart‘s main focus is cost efficiency, while Target s key strategy... shooting and technical support The second service, Target Mobile, allows guests to maximize their dollars and time with a convenient cell phone shopping experience both instore and online Partnering with RadioShack, they are now providing in-store wireless shopping stations that enable Target guests to purchase mobile phones and activate contracts from the nation‘s top carriers (Target launches, 2010) Target. .. home Product offerings will be from Android-powered smartphones, Motorola, Samsung, Nokia, LG and will have wireless plans from every major U S 20 Financial Statement Analysis 2010 service provider The third service, Target Electronics Trade-In encourages guests to be eco-friendly by trading in old electronics devices and in return guests will receive credit towards any Target purchase This program will