Alpharmas 2003 Financial Statements - Essay Example

Alpharma Inc. is one of the giants in the global pharmaceutical industry. The company provides health safety medication and life saving drugs to the people around the world. The company does not only develop the pharmaceutical products, but also manufactures them and market them to make them available in most parts of the world. Due to the every increasing cost and expenses that adversely affected the company's profit margin, even though the company was having substantial increase in turnover and revenues, the management decided to launch a workforce reduction program in the year 2003. As mentioned in the company's annual report (2003, p21), "In the fourth quarter of 2003, the Company reviewed its overall business cost structure, which resulted in a reduction in force at each of its segments. The Company expects this work force reduction to generate annual cost savings of approximately $10.0 million in 2004 and $13.0 million in subsequent years. The Company is evaluating other actions to reduce its cost base in 2004 and beyond". This program was designed to improve the company's ability to retain the profit gained through sales turnover by minimising the cost incurred by the company in maintaining the large number of employees. The company even raised an expense of $8.7 million in introducing and implementing this program in the organisation as mentioned in the company's annual report (2003, 8) as, "incurred an $8.7 million pre-tax charge, in connection with an employee reduction program". INTRODUCTION Alpharma Inc, as stated above, is said to be one of the giants in the international pharmaceutical industry. The company's business can be segmented into four dimensions of activities i.e., International Generics, Active Pharmaceutical Ingredients, US Human Pharmaceuticals, Animal Health etc (Annual report 2003, p7). The International Generics are basically the dosage pharmaceuticals that are provided to several countries around the world including the UK, the Middle East, China, and Indonesia etc. The Active Pharmaceutical ingredients consist of antibiotic medicines that are sold to other pharmaceutical industries in the United States, serving as the raw material for certain medicines in such industries. Human Pharmaceutical provides liquid and solid based medicine to other middle businesses in the country. Animal Health business segment provides a range of product line dealing in animal health medicine (Annual report 2003, p7). The company is engaged in doing business activities in around 60 countries around the globe. According to the company's annual report (2003, p7), "the Company conducts business in more than 60 countries and has approximately 4,700 employees at 40 sites, in 27 countries". The company reduced a considerable number of employees in the year 2003, on the rationale to combat the increasing costs and expenses affecting the company's profit margin. The company had been incurring severe losses for the past few years due to the increasing costs and expenses either incurred during the production and distribution, or during the operating activities of the business. However, the company's results for the year 2003 seem to be improving the financial position of the company as the company's management introduced a workforce reduction program, curtailing the number of employees in the company in order to minimise costs. This paper discusses the impact of workforce reduction program in Alpharma on the financial statements of the company for the year 2003. In the pursuit of discussion, financial ratios have been analysed in order to provide a better insight on every aspect of the company's financial position and performance. KEY RATIO ANALYSIS A company's financial statements are the representatives of the company's financial worth i.e., the financial position and performance in terms of facts and figures. In order to get a better picture of the key impact of the employee layoff program initiated by the Alpharma's management on the financial statements of the company for the year ended 2003, we will analyse the company's financial statement with the help of selective financial ratios (Alpharma ALO, accessed 06.03.06): Gross Margin Percentage 2002 2003 42.8% 40.3% The gross margin percentage ratio is the best analyser of the company's profitability, evaluating the profit after having accounted for the entire cost of goods sold (Mcmenamin, 1999). The above chart displays that Alpharma's gross profit margin has decreased by almost 2.5% in the year 2003, whereas the company claimed that by laying off employees at a high level, it would be able to reduce much of its cost. But if we dig deep into the financial statements, we will see that the cost of sales has increased by 9.4% as compared to the last year, which has negatively affected the company's gross margin on sales. Net Margin Percentage 2002 2003 (7.98%) 1.31% The net margin percentage ratio shows the profit margin of the company after accounting for various operating expenses (Mcmenamin, 1999). In the year 2002, the net profit margin of Alpharma was in negative, which means that the company was not able to retain any profit out of the gross margin due to the overwhelming operating expenses. However, in the company's 2003 financial statements, a sharp reduction in the 'other' operating expenses can easily be noticed leading to a positive net profit margin. Therefore, the company's financial performance seems to have increased over the year, mainly due to the reduction in other operating costs. Asset Turnover 2002 2003 0.53 0.56 The Asset turnover ratio reveals the efficiency of a company's management in utilising the assets and financial resources of the company towards the generation of sales revenue. As evident from the above chart, the company has generated more sales on its assets than the previous year (Meigs & Meigs, 1993). It illuminates that the workforce reduction program has enhanced the efficiency of the company's management rather than affecting it adversely. Inventory Turnover 2002 2003 2.1 2.4 The inventory turnover ratio reveals the number of times the company finished its entire stock in a year (Mcmenamin, 1999). The above graph explicates that the time it took the company to empty its stock increased to some extent in the year 2003 as compared to the last year. The 2002 results showed that the company finished its entire stock twice in the year, whereas in the year 2003, this efficiency increased to more than twice times emptying of stock by the company. This shows that the cut down of employees at such a large scale has affected the company's efficiency in generating sales as often as it did before. Return on Equity 2002 2003 (10.47%) 1.59% The return on equity ratio shows the profit generated by the company on the funds invested by its shareholders in the form of equity fund (Meigs & Meigs, 1993). In the year 2002, the company's utilisation of its equity funds went into negative, again mainly due to the increasing number of expenses and operating costs. However when the company decided to lay off a big number of employees in order to minimise costs, the company managed to reduce its operating expenses and consequently, it began to generate returns. Therefore, it can be said that the workforce reduction program has had a positive impact on the company's ability to generate profit on the funds invested by the shareholders. Return on Assets 2002 2003 (4.22%) 0.73% The returns or profits generated after utilising the financial resources of the company determine the company's financial performance throughout the year (Meigs & Meigs, 1993). All the company's efforts into the utilisation of its assets towards profit generation went in vain in the year 2002 due to the overwhelming hike in expenses. However, this situation seems to be improving in the year 2003 where the company has started earning a profit on its assets. But as it can be seen, the profit is so minimal even after the workforce reduction program that it could hardly reach 1% of the total assets. Cash Conversion Cycle 2002 2003 169.8 163.7 The cash conversion cycle acts as a tool to analyse the company's performance in terms of the time spent by the company every time in the whole cycle of purchasing the raw material, produce the goods, generate sales and finally collect the receivables from debtors (Brigham and Houston, 2003). It is always better and feasible to have a lower cash conversion cycle because every time this cycle is completed, the company gets actual cash, which is needed by virtually every company for its day-to-day operations. As evident from the above chart, the company's cash conversion cycle has been reduced from about 170 days to 164 days. This shows that the company has been able to run the complete business cycle, from purchasing of raw material to collection of receivables more efficiently and swiftly than it did before. Current Ratio 2002 2003 1.79 1.96 The current ratio is the most important evaluator the company's liquidity position (Meigs & Meigs, 1993). For Alpharma's financial statements, it may be useful to analyse if the company has implemented the employee lay-off program at the cost of its investment in the current assets. The above chart reveals that the company's current ratio has risen from 1.79 in 2002 to 1.96 in the year 2003. This means that the company would still retain a lot of the current assets after paying off all the shirt-term liabilities and obligations. The company is having a healthy proportion of current assets and current liabilities in its financial structure. The implementation of workforce reduction rather improved the company's liquidity position. Quick Ratio 2002 2003 0.69 0.90 The quick ratio is yet another measure of evaluating a company's liquidity position. It assesses the company's ability to pay off its short-term debts and liabilities after keeping aside the stock (Mcmenamin, 1999). Alpharma's financial statements show that the company has almost half of its current assets tied up in inventory. Even though it is necessary to keep a certain level of stock, but it is not a feasible for the company's financial position to have a major part of its current assets occupied by stock, as it takes longer to convert the stock into cash and also there is never a guarantee that the company can sell of the entire stock profitably. Debt/Equity 2002 2003 0.89 0.72 The debt to equity ratio shows the extent of the company's reliance on long-term debts and borrowings compared to the equity capital (Meigs & Meigs, 1993). It also evaluates the major source of funds the business utilises for its operations. Alpharma uses somewhat a mixture of debt and equity funds as the sources of its capital. The company has however relied more on equity funds rather than the borrowings in the year 2003. This is a healthy sign for the company's solvency, as there seems to be less reliance on external funds. Company's debt has further been reduced in the year as mentioned in the annual report (2003, p19), "In 2003 long-term debt was reduced by $65.0 million due to repayments from operating cash flow". Dividend Per Share 2002 2003 0.18 0.18 The dividend per share is of importance to the investors and shareholders who are interested in the company's potential to pay dividends on the annual and interim basis (Mcmenamin, 1999). The company has had a stable level of dividend per share, which assures the investors and shareholders that the company would be paying the same level of profit to them in future. The company's annual report (2003, p66) mentions that "Quarterly dividends per share in 2003 and 2002 were $.045 per quarter or $.18 per year". It also indicates that the workforce reduction program has neither affected nor improved the company's ability to pay dividends even though the company's profit has increased during the year 2003. Earnings Per Share 2002 2003 (1.88) 0.89 Earnings Per Share is important for the investors and shareholders who are willing to gain profit on the market price of the company's shares (Mcmenamin, 1999). Alpharma's earning per share ratio (annual report 2003, p24) shows that the company's investors have also got the opportunity to earn with the increase in market price of the company's shares in the year 2003. This has mainly been possible because of the company's decision and implementation regarding the reduction of various costs incurred by the company affecting its profit margin. Price/Sales 2002 2003 0.5 0.8 The Price to sales ratio determines the worth of a company's stock price in terms of the comparison of its market price to the unit of sales (Brigham and.Houston 2003). The above chart displays that the Alpharma's price-to-sales ratio has been less than 1 for both the years, however in the year 2003, it jumped to 0.8 from 0.5 in the year 2002. It shows that the investors have to pay more prices for the fewer units of sales in order to purchase the company's shares. This shows that apart from an increase in the profit generated and retained by the company, the work force reduction program has also caused the market price of the company's shares to rise. CONCLUSION The company's workforce reduction program in the year 2003 had a direct impact on its annual financial statements. The company seems to have reduced its operating expenses to a great extent. As revealed by the company's financial statements for the year 2003, the company has managed to convert its negative earnings towards profit. It has all been just the impact of improved sales and reduced operating expenses under the name of other operating expenses' in the company's profit and loss account. However, the employee reduction program has not resulted into the minimisation of the company's cost of sales, which has further increased in the year 2003. It shows either the company did not reduce the number of its direct labour or if it did, the reduction did not have any positive impact on the company's cost of sales. Therefore, it can be said that the company needs to consider the major causes of increasing cost of sales or it may be that a considerable reduction in the number of employees has resulted in a considerable decline in the labour efficiency. Apart form the increasing cost of sales, the operating expenses incurred by the company such as selling, general and administrative expenses have also been increased by $18.5 million (about 6 percent). The company's annual report (2003, p13) says that, " ..SGA expense increased $72.1 million and approximately $90.4 million excluding the effect of goodwill amortization". Therefore, the only factor contributing to the strengthening of the company's profit and loss statement seems to be the expenses under the head 'other operating expenses' showing a decreasing trend and thus, improving the gross margin of the company. Other than this expense, the company's research and development expenses have also decreased, which in turn causes the expenses to look better than that of the previous year. These two factors have been vital to the improvement in the company's financial position and performance. The overall impact of employee reduction program seems to be positive. The company has been directed on the track of earning profit. After so many years of negative earnings or losses, the company managed to make some profit. Most of the company's financial ratios have been improved and company seems to be more reliable and credible investment than before. Management of Alpharma seem to have focused on their efficiency in running the affairs of the company and the improvement of profit margin in the course of preparation of the company's financial statements. They have emphasised the point that the past inefficient performance and losses were a result of the large number of employees in the company while concealing all weaknesses which needs management attention, for instance, increasing cost of sales. The company's financial results of the year 2003 are showing an improvement in the overall performance of the company making the investors and shareholders in a better position to trust the company and pour in their funds as investment in the company. It does not however assure the future credibility of the investment into the company's shares, as these results are just for one year whereas an employee reduction program takes years for the evaluation of its impact on the company's profit and financial stability. References Alpharma ALO, accessed March 06, 2006 from the World Wide Web: http://quicktake.morningstar.com/Stock/Profitability10.aspCountry=USA&Symbol=ALO&stocktab=keyratio Annual Report (2003), Alpharma Inc., p7-66, accessed March 6, 2006. Eugene F. Brigham, Joel F. Houston (2003), "Fundamentals of Financial Management", South- Western College Pub Meigs & Meigs (1993), "Accounting: The Basis For Business Decision Making", Mc Graw Hill: New York Mcmenamin Jim (1999), "Financial Management: An Introduction", Routledge, London Read More