Upload
others
View
4
Download
0
Embed Size (px)
Citation preview
Financial Statement & Security Analysis Case Study
Bilgin Demir Master of Science Financial Engineering
Stevens Institute of Technology
School of Systems and Enterprises
Hoboken, New Jersey
917.742.3008
2
Table of Content
Asssesment of Financial Distress 3 Analysis of Historical Operating Performance 7 Financial Position (GAAP Basis) and ROE (DuPont) Analysis 11 Capital Structure Analysis 17
3
1. Assessment of Financial Distress
Financial distress is a condition in which a firm faces an unexpected and
persistent shortage of cash due to the weakness of the firm or its business
environment. Competition, product life cycle or cyclical sales are the factors,
which affect cash inflows in the firm. Adverse investment decisions like
acceptance of high risk can be a cause of financial distress. Types of financial
distress are economic failure, business failure, insolvency and bankruptcy.
1.1 Altman Z-Score
Altman Z score is a relatively accurate predictive model for financial
distress. It requires the calculation of several financial ratios each of which
reflects and aspect of the financial condition of the company. These aspects
include liquidity, solvency, financial flexibility and the future earning of the
company. Considering the differences between the consistencies of these
ratios with the probability of the bankruptcy of the company, different
weighs should be assigned to these ratios before summing them up to get the
Altman Z-Score. The higher the Altman Z-Score, the lower the probability
for the company to bankrupt.
• If Z < 1.81, the company has a high probability of bankruptcy.
• If 1.81< Z < 2.99, the company is in the gray area, which means that
there are some issues to investigate to estimate the probability of
bankruptcy.
• If Z > 2.99, the company has a low probability of bankruptcy.
4
1.2 The Altman Z- Score of Qualcomm Inc.
Z = 1.2 (X1) + 1.4 (X2) + 3.3 (X3) + 0.6 (X4) + 1.0 (X5)
X1 = Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = EBIT / Total Assets
X4 = Market Value of the Equity / Book Value of Debt
X5 = Sales / Total Assets
Table 1 Millions ($) 2012 2011
Working Capital 10,343 9,004
Total Assets 43,012 36,422
Retained Earnings 20,701 16,204
EBIT 5,682 5,026
Market Value of Equity 113,918 86,665
Book Value of Debt 9,557 9,564
Sales 19,121 14,957
2012 2011 Changes
X1 0.24 0.24 0
X2 0.48 0.44 9.09%
X3 0.13 0.13 0%
X4 9.06 11.91 -23.9 %
X5 0.41 0.44 -6.8 %
Z 9.03 7.27 24 %
5
1.3 Comments on the significance of Altman Z-Score calculated
The final Altman Z-Scores of Qualcomm Inc. are 7.27 and 9.03 for 2011
and 2012 respectively. Both scores for the periods mentioned higher than
2.99, hence it is very unlikely for Qualcomm to go bankruptcy in the near
future. Comparing the two Z-scores one of the 2012 fiscal year is higher than
2011 fiscal year by 24 %. Deep analysis of financial ratio components of the
Z-Score is required to what led the Z-score to increase in 2012.
First, X1 remains the same from 2011 fiscal year to 2012 fiscal year.
Working capital and total assets of Qualcomm increased around 14% and
18% respectively. The company has $15,645 in 2012 and $14,293 of current
assets and $5,302 in 2012 and $5,289 in 2011 of current liabilities (all in
millions). Current assets increased 9.45% while current liabilities increased
0.24% that means that the company can easily compensate its current
liability with its current assets.
Second, since the retained earnings increased 27.7% in 2012, the X2 score
increased. Qualcomm Inc. has a large amount of retain earnings to reinvest
in its core business or to pay the debt and compensate its current liabilities.
It also enables the company to create future growth opportunities. Hence,
the increase in X2 score is proves that the company has a good solvency and
financial flexibility.
Third, X3 remains flat in 2012 fiscal year. Total assets of 36,422 in 2011
are up to 43,012 by 18.09% while EBIT (operating income) increased to 5,682
in 2012 from 5,026 in 2011 by 13.05%.
6
During the 2012 fiscal year Qualcomm Inc. revenues are up 27.8 % compare
to 2011 fiscal. Even though cost of equipment and services is up 45.4% to
7,096 from 4,877 the earnings before interest and taxes is up 15% thanks to
investment income increase of 33.13.
Fourth, market value of equity of Qualcomm Inc. increased to 113,918 in
2012 from 86,665 in 2011 meanwhile book value of debt decreased to 9,557
in 2012 from 9,564 in 2011. It caused X4 score increased to 11.91 in 2012
from 9.06 in 2011. There were 1,704 outstanding common stocks in 2012
compare to 1,680 (all in millions) outstanding shares in 2011. Meanwhile the
company increased its treasury stock from 32,908 to 40,978 by using share
repurchase program to manage its leverage position.
Last, X5 is 0.41 in 2011 and 0.44 in 2012 respectively. X5 as ratio of sales
over total assets does not provide a detailed information as X3 since it does
not include cost and expense into consideration. X3 stays the same in 2012
fiscal year compare to 2011 fiscal year whereas X5 score increased 7.3 % from
2011 to 2012. Maintaining the X3 score the same shows that company
balances its control of cost and expense related with its sales increase.
Finally, the most impressive part of this analysis is that Qualcomm Inc.
has a high retained earnings and EBIT. These two highlights that
Qualcomm Inc. is strong company having big capital and earning potential.
The company also increased its dividends to $ 0.93 per share in 2012 from $
0.80 per share in 2011.
7
2. Analysis of Historical Operating Performance 2.1 Income Statement Items and Trend Analysis
A Year -to- Year trend analysis by computing the percentage and dollar
change between 2011 fiscal and 2012 fiscal for the following income
statement items.
Table 2 2012 2011 $ Change % Change
Net Sales 19,121 14,957 4,164 27.84% Gross Profit 12,025 10,080 1,945 19.29% Operating
Income (EBIT) 5,682 5,026 656 13.05%
Interest Expense 90 114 (24) -21.05% Net Income 6,109 4,260 1,849 43.40%
EBITDA 6,579 6,087 492 8.08% 2.2 Profitability Ratios for fiscal 2011 and fiscal 2012
Table 3
2012 2011
Gross Margin 0.63 0.67 Operating Margin 0.29 0.33 Interest Coverage 72.91 49.8
Net Margin 0.319 0.28 EBITDA Margin 0.34 0.40
8
2.3 Comments on Qualcomm Inc. Financial Performance
Qualcomm had a good operating year in 2012 that company’s net sales
increased by 28.8 % or $4.16 billion and it generated $12 billion gross profit
in 2012, an increase of $1.9 billion or 19.29%. However, compared the gross
margin in 2012 it was down 5.9% compared with the year 2011. From the
increase of gross profit, but decrease of gross margin, we can see that
company’s cost of goods sales increased in 2012. Cost of goods sold increased
by 45.4% in 2012 to $7.09 billion from $4.8 billion in 2011. The company
management indicates in its annual report of 2012 is that “the gross margin
was adversely affected by $137 million in charges of from the recognition of
the step-up of inventories to fair value and amortization of intangible assets
related to the acquisition of Atheros in fiscal 2011. Also noted that margin
percentage may fluctuate in future periods depending on the mix of products
sold and services provided, competitive pricing, new product introduction
costs and other factors.”1
Operating income represents the company’s financial performance before
net interest cost, other nonoperation items and equity income. Operating
margin is a measurement of the proportion that the revenue gained from the
company’s core business net of operating and producing costs to the net
sales. In other words, it measures the efficiency the company gaining its
operating income. If a company’s margin is increasing, it is because of the
increase of net sales or the decrease of operating and producing expenses.
The higher the operating margin, the more efficiently the company operates.
1 Qualcomm Inc. Form 10K Period ending 09/30/2012 page.35
9
Operating margin decreased by 12.1% in 2012 that is not satisfactory.
Operating income increased 656 million and net sales grew by 4.16 billion.
Even though both operating income and net sales increased, operating
margin did not improve at all. The reason is that growth of cost of sales
offset the increase of net sales so the increase of operating income is much
less than net sales. The sales, general and administrative expenses
increased 19.48 % from 2011 fiscal year to 2012 fiscal year. If these expenses
can be lowered it would affect the operating margin positively.
On the other side excluding the depreciation and amortization EBITDA
increased 8.07% to $ 6.6 billion though depreciation and amortization
decreased to $897 million in 2012 from $1.06 billion in 2011. EBIT margins
are 33% in 2011 and 29% in 2012 while EBITDA margins are 40% in 2011
and 34% in 2012. These two margins decreased between two fiscal years
because of the 45.4% increase in the cost of goods sold. The higher the
EBITDA margin is the less operating expenses eat into a company’s bottom
line, leading to a more profitable operation.
The interest coverage ratio is calculated by dividing company’s earnings
before interest and taxes (EBIT) by interest expenses of the same period.
The lower the interest coverage ratio, the higher the company is obligated by
interest expenses. When a company ‘s interest coverage ratio is 1.5.X or
lower its ability to meet interest expenses may be questionable. An interest
coverage ratio below 1 indicates the company is not generating sufficient
revenue to satisfy interest expenses.
Compared the interest coverage ratio in 2011, the interest coverage ratio in
2012 was about 63X and increased by 43.2%. The high interest coverage
ratio is contributed by sufficient EBIT and decrease in debts.
10
The net margin is calculated by dividing net profit by company’s revenue.
The net margin of Qualcomm improved roughly 14.2% in 2012 and the total
margin of the company is 31.9 %. As an operating segment QTL is the most
profitable segment with 88% EBT as a percentage of revenues in 2012. Even
though QCT segment has revenues of $12 billion it has 19% EBT/revenue
ratio that is lower that 23% in 2011. According to Qualcomm’s Form 10K
“The decreases in EBT as a percentage of revenues in fiscal 2012 and 2011
were primarily due to decreases in gross margin percentage partially offset
by the effects of higher increases in QCT revenues relative to the increases
in research and development expenses and selling, general and
administrative expenses. QCT gross margin percentage decreased in
fiscal 2012and 2011 as a result of the net effects of lower average selling
prices, unfavorable product mix and higher product support costs, partially
offset by a decrease in average unit costs. The higher product support costs
in fiscal 2012 primarily related to increased expenses incurred to facilitate
additional supply of 28 nanometer integrated circuits. QCT inventories
increased by 36% in fiscal 2012 from $714 million to $973 million primarily
due to an increase in work-in-process and finished goods related to growth of
the business.”2
2 Qualcomm Inc. Form 10K Period ending 09/30/2012 page.37
11
3. Financial Position (GAAP Basis) ROE (DuPont) Analysis
3.1 Calculation of Qualcomm’s Return on Equity (ROE) for 2011 and
2012 by using 3-step DuPont model
Return on equity measures the relationship between profitability and
stockholder’s equity. The 3-step DuPont model breaks down (Return on
Equity) into three parts: profitability, activity and solvency.
ROE = Profitability * Activity * Solvency
!"# !"#$%&!"# !"#$% ×
!"# !"#$%!"#$% !""#$" ×
!"#$% !""#$"!"##"$ !"#$%&
Table 4
3-step DuPont model analysis on ROE
2011 2012 Change
Net Income 4,260 6,109 43.4%
Net Sales 14,957 19,121 27.8%
Total Assets 36,422 43,012 18%
Common Equity 86,665 113,918 31.4%
Profitability 28% 31% 10.7%
Activity 41% 44% 7.3%
Solvency 42% 37% -11.9%
ROE 4.91% 5.36% 9.16%
12
3.2 Discussion of the factors that drive the change in Return on Equity
The Return on Equity of Qualcomm increased by 9.16%. The 3-steps
DuPont model breaks ROE into three factors that are profitability, activity
and solvency. By analyzing the change in these three factors, we will know
what caused the change of the ROE.
The profitability corresponds to the net profit margin of the company. The
company improved its net profit margin by 10.7% in 2012. This number
explains the relationship between sales and profit and the company kept its
profitable condition in 2012.
The activity condition that is measured by the total asset turnover
improved 7.3% from 2011 to 2012. Activity ratio describes the relationship
between the company’s levels of operations (sales) and the assets needed to
sustain operating activities. The company improved the efficiency of using
its assets in 2012.
The main reason Return on Equity did not improve much because of the
decrease in the total assets to common equity (solvency) ratio, which
decreased 11.9% in 2012. The decrease in Assets to Equity is a good signal
for the company because the proportion of the equity in the assets is bigger
and the proportion debt is smaller. In other word, the solvency of the
company improved. The company has enough capital to pay debt and
liability as they come due. As the assets increased 18.1% in 2012 and
retained earnings increased 27.7%. Therefore, that can be explained that
decrease in the Assets to Equity ratio mainly caused by the increase in the
retained earnings.
13
The retained earnings were $ 16.2 billion in 2011 and $20.7 billion in 2012.
Qualcomm Inc. continued to repurchase its stock from 2010 to 2012. “The
incremental dilutive common share equivalents, calculated using the treasury
stock method for fiscal 2012, 2011 and 2010 were 40,978,000, 32,908,000 and
15,652,000, respectively.”3 Also it means that the strategy of the company is
to improve its solvency by slightly sacrificing its ROE.
3.2 Comments on Qualcomm’s Liquidity position as of 09/30/2012
3.2.1 Liquidity Ratio Analysis
Liquidity measures the financial flexibility of a company. A company with
good financial flexibility can take advantage of acquiring business and good
price in the market. It also helps the company to overcome financial
difficulties, providing enough cash in downside situations immediately.
The first step to measure the liquidity of the company is to analysis the
liquidity ratios. The three liquidity ratios are defined as:
!"##$%& !"#$%: !"##$%& !""#$"
!"##$%& !"#$"%"&"'(
!"#$% !"#$%: !"##$%& !""#$" − !"#$"%&'($)
!"##$%& !"#$"%"&"'(
!"#ℎ !"#$%: !"#ℎ +!"#$!"#$%! !"#$%&'&"(
!"##$%& !"#$"%"&"'(
3 Qualcomm Inc. Form 10K Period ending 09/30/2012 page F-‐13
14
Table 5
Liquidity Ratios Results
In millions 2012
Current Assets 15,645
Current Liabilities 5,302
Inventories 1,030
Cash 3,807
Marketable Securities 8,567
Current Ratio 2.95
Quick Ratio 2.75
Cash Ratio 2.33
As a quick explanation of current ratio is mainly used to give an idea of the
company’s ability to pay its short-term liabilities with its short- term assets.
The higher the ratio, the more capable the company is of paying its
liabilities. A ratio under 1 suggests that the company would be unable to pay
off its debt obligation if they come due. While it show that company is not in
good financial health, but does not necessarily mean that it will go bankrupt.
At Qualcomm the current ratio of 2.95 shows that the company has a
healthy operation system. It has more current assets than current liabilities.
Also it manages to collect account receivables in a timely manner. As total
current assets include cash and cash equivalents, marketable securities,
inventories and account receivable, Quick ratio shows the picture without
including inventories in total current assets. Quick ratio is considered more
conservative approach to measure a company’s liquidity since some
companies have hard time to turn their inventories into cash.
15
Qualcomm has inventories of $1 billion that are waiting to be sold. When we
take the inventories out of the picture Qualcomm has a quick ratio of 2.75.
Even inventories are taken out Qualcomm has a strong operation to pay its
short-term liabilities.
As it comes to cash ratio is similar to current ratio, but it only includes cash
and cash equivalents, and marketable securities. Ratios greater than 1
indicate a company’s ability to cover it current debt, but ratios that are too
high might indicate that company does not allocate enough funds to grow its
business. In case of Qualcomm, it has the ratio of 2.33 which means that
company would be able to cover its short-term obligations if occur.
3.3 A Close Look Operating, Investing and Financing Activities
Qualcomm started 2012 fiscal year with $5.4 billion, but closed the fiscal
year with $3.8 billion. Compare to increase of $1.9 billion cash at the end of
2011 fiscal year; Qualcomm had the decrease of $1.6 billion cash at the end
of 2012 fiscal year. There are activities that cause the increases and
decreases of cash that can be analyses in three categories that are operating
activities, investing activities and financing activities.
3.3.1 Operating Activities
Qualcomm’s net income was $6 billion and its depreciation and
amortization was $897 million less than $1.1 billion. Gain on sale of wireless
spectrum decreased $1.2 billion and the excess of income tax provision was
$395 million. Net realized gain (loss) on marketable securities did not
change much compare to 2011 with the loss of $369 million. Losses on
derivatives instrument was $84 million with compare to gain of $3 million in
2011.
16
One of the biggest decreases on cash statues was created by the increase of
account receivables that was up from $140 million in 2011 to $456 million
in 2012.The firm kept the inventory of $252 million in 2012 with $62
million in 2011 and used some of its cash to purchase some assets worth of
$240 million. Also it increased it accounts payable to $371 million to hold
some cash on hand. At the end of the 2012 fiscal year, company provided $
5.9 billion cash by operating activities.
3.3.2 Investing Activities Qualcomm added capital expenditure to by purchasing some assets to improve or
maintain its operations. “Cash outflows for capital expenditures were
$1.3 billion and $593 million in fiscal 2012 and 2011, respectively, including
approximately $480 million and $225 million, respectively, related to the
construction of a new manufacturing facility in Taiwan for its QMT division.
Company expects to continue to incur capital expenditures in the future to
support its business, including research and development activities.”4
Company purchased securities to sell for $15.5 billion and received $9.8
billion from the proceeds of the sale of securities. Also purchased trading
securities for $4 billion and received $3 billion from the sale of trading
securities. There was no purchase of marketable securities during 2012
fiscal year and company received $1.9 billion proceed from sale of wireless
spectrum. As cash outflow the company spent $833 million on acquisition
and other investments. Net cash used by investing activities was $6.8 billion
in 2012 fiscal year.
4 Qualcomm Inc. Form 10K Period ending 09/30/2012 page 39
17
3.3.3 Financing Activities Borrowing in 2012 fiscal year was down to $710 million from $1.5 billion in
2011. Company repaid $ 591 million on some of its loans and debenture. At
September the firm has loan and debenture liabilities aggregate of $1.1
billion and loans in the aggregate of $545 million are due and payable in full
on December 18, 2012. As a cash source Qualcomm received $1.7 billion
proceeds from the issuance of common stock. As of September 25, 2012, the
company repurchased 24 million shares for $1.3 billion. Also dividend
payments increased to $1.6 billion in 2012 compare to $1.3 billion in 2011.
Therefore; net cash used by financing activities was $757 million.
4.Capital Structure Analysis
Analyzing the capital structure of the company provides us a lot useful
information about its solvency and future capital liquidity. Capital structure
refers to the sources of financing of the company, from which we will know
the ability of the company to cover its long-term obligations. The total debt
to total capital ratio and the total debt to EBITDA ratio are used to measure
the capital structure of the company.
Table 6
In millions 2012 2011
Total Debt 9,467 9,450
Total Capital 43,012 36,422
EBITDA 6,579 6,087
Total Debt/ Total Capital 0.22 0.25
Total Debt/ EBITDA 1.43 1.55
18
Both the total debt to total capital ratio and total debt to EBITDA ratio
decreased 12% and 7.7% respectively in 2012. The company has increased it
earnings to support its debt by 8.1% and the total debt only increased by
0.17%. Meantime, company’s total capital increased 18% while its
shareholders’ equity increased by 24.3%.
Total debt to EBITDA is mainly by credit agencies to assess the
probability of defaulting on issued debt. A high total debt to EBITDA ratio
suggests that a firm may not service its obligated debt, but that is not case
for Qualcomm Inc.
Total debt to Total Capital ratio gives insight information about a
company’s financial structure and how it is financing its operations. The
higher the value of the ratio the more debt the company has compared to its
equity. Qualcomm’s Total Debt to Total Capital ratio is 0.22, which is very
low number means that any given time the company is able pay its obligated
debt.
4.1 Enterprise Value Analysis
Enterprise value analysis would help use to determine the company’s
market value and its level of debt. It is calculated as,
Enterprise Value = Market Value of Equity + Total Debt
Table 7
Enterprise Value
2012 2011
Total Debt 9,467 9,450
Market Value of Equity 113,918 86,665
Enterprise Value 123,382 96,115
Total Debt/Enterprise Value 7% 9.8%
19
The enterprise value of Qualcomm increased in 2012 to $123 billion from
$96 billion in 2011. The main component of enterprise value is its market
value of equity. The company’s stock price has changed significantly from
September 23,2011 to September 28,2012 from $49.14 per share to $62.47
per share. As of November 5, 2012 the company’s outstanding common stock
in the market was 1,704,029,150. Hence, the debt is only a small proportion
of the enterprise value so the capital structure of the company is very good.
4.2 Average Total Life Span and Average Age of Property, Plant and Equipment 4.2.1 Average Total Life Span of Property, Plant and Equipment
Average total life span of property, plant and equipment estimates how
soon the company has to replace property, plant and equipment. It also
indicates that the potential cost of capital to replace the operation
necessities in the end of their use life. We can estimate the future capital
expenditure of the company by this formula:
Average Total Life Span = Gross Plant & Equipment / Current Year’s
Depreciation Expense
4.2.2 Average Age of Property, Plant and Equipment
Average age of property, plant and equipment implies the average time
horizon since the property, plant and equipment were purchased. Combining
with average total life span of property, plant and equipment we can
estimate the future investment the company must make to continue its
operations.
20
Average Age = Accumulate Depreciation / Current Year’s Depreciation
Expense
Also Average Remaining Life can be formulated as follow:
Average Remaining Life = Net Plant and Equipment Assets / Current Year’s
Depreciation
and that would help us to calculate Average Total Life Span as
Average Total Life Span = Average Remaining Life + Average Age
Table 8
Average Total Life Span and Average Age of Property, Plant and Equipment
In millions 2012
Gross Plant & Equipment 5,923
Accumulated Depreciation 3,072
Net Plant and Equipment Assets 2,851
Current Year’s Depreciation Expense 897
Average Total Life Span 6.60
Average Age 3.42
Average Remaining Life 3.17
Using the average total life span the company has to spend at least $5.9
billion to renew its property, plant and equipment in about 6 years average.
These future expenditures will affect the company’s cash flow and earnings
in 6 years. Also what we see here at average age Qualcomm has fairly new
property, plant and equipment that can be productive about 3 more years,
but of course it can be shorter or longer for various reasons.