Abbott Laboratories: Company History and Performance

Background of the Company

The company was founded in 1888 by Dr. Abbot and since then it has grown into a multinational operating in all continents. The company offers various products including continuum of care, nutritional products, laboratory products and other medicinal products. The company has ‘sales, manufacturing, research and development, and distribution facilities around the world’ to meet the needs of its customers (Abbot, 2009).

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The company mission statement is commitment to ‘serving Global Health Care Needs’ (Abbot, 2009). In other words, Abbot Laboratories seeks to make a difference by developing innovative products and creating cost-effective solutions that improve the world’s population lives.

The company also belief that they will succeed when their customers are satisfied thus the need to be interested in them. This has prompted them to provide their customers with quick and efficient services. Abbot’s overall strategy is to make disciplined investments to maximize the return on invested assets within appropriate risk tolerances

Financial statements

Abbot Laboratories
for 2006, 2007 and 2008 then summarize data
INCOME STATEMENT 2008 2007 2007
Sales $ 29,527,552.00 $ 25,914,238.00 $ 22,476,322.00
COGS $ 12,612,022.00 $ 11,422,046.00 $ 9,815,147.00
Gross Profit $ 16,915,530.00 $ 14,492,192.00 $ 12,661,175.00
Research Development $ 2,688,811.00 $ 2,505,649.00 $ 2,255,271.00
non recurring $ 97,256.00 $ – $ 2,014,000.00
Selling/Administrative Costs $ 8,435,624.00 $ 7,407,998.00 $ 6,349,685.00
Operating Profit $ 5,693,839.00 $ 4,578,545.00 $ 2,042,219.00
other income $ 571,924.00 $ 484,245.00 $ 174,512.00
EBIT $ 6,384,760.00 $ 5,062,790.00 $ 2,692,542.00
Interest Expense $ 528,474.00 $ 593,142.00 $ 416,172.00
Net Income before Taxes $ 5,856,286.00 $ 4,469,648.00 $ 2,276,370.00
Taxes $ 1,122,070.00 $ 863,334.00 $ 559,615.00
Net Income after Taxes $ 4,734,216.00 $ 3,606,314.00 $ 1,716,755.00
Discontinuing opera $ 146,503.00
$ 4,880,719.00 $ 3,606,314.00 $ 1,716,755.00
Earnings per share $ 1.06 $ 0.93 $ 1.08
BALANCE SHEET
Cash $ 4,112,022.00 $ 2,456,384.00 $ 521,192.00
Marketable securities $ 967,603.00 $ 364,443.00 $ 852,243.00
Accounts receivables $ 7,928,531.00 $ 7,056,748.00 $ 5,948,058.00
Inventory $ 2,775,849.00 $ 2,951,442.00 $ 2,806,421.00
other current assets $ 1,258,554.00 $ 1,213,716.00 $ 1,153,969.00
Total Current Assets $ 17,042,559.00 $ 14,042,733.00 $ 11,281,883.00
long term investments $ 1,073,736.00 $ 1,125,262.00 $ 1,229,873.00
property plant and equipment $ 7,219,166.00 $ 7,518,149.00 $ 6,946,435.00
goodwill $ 9,987,361.00 $ 10,128,841.00 $ 9,449,281.00
intangible assets $ 5,151,106.00 $ 5,720,478.00 $ 6,403,619.00
deferred long term assets $ 1,945,276.00 $ 1,178,461.00 $ 867,081.00
Total Assets $ 42,419,204.00 $ 39,713,924.00 $ 36,178,172.00
LIABILITIES AND STOCKHOLDERS EQUITY
Accounts Payable $ 6,932,639.00 $ 5,517,579.00 $ 5,742,651.00
Current long term debt $ 3,647,957.00 $ 2,725,915.00 $ 5,401,261.00
other current liabilities $ 1,011,312.00 $ 859,784.00 $ 807,283.00
Total Current Liabilities $ 11,591,908.00 $ 9,103,278.00 $ 11,951,195.00
long term debt $ 8,713,327.00 $ 9,487,789.00 $ 7,009,664.00
other liabilities $ 4,634,418.00 $ 3,344,317.00 $ 3,163,127.00
Total liabilities $ 24,939,653.00 $ 21,935,384.00 $ 22,123,986.00
Common Stock ($10 par) $ 7,444,411.00 $ 6,104,102.00 $ 4,290,929.00
Retained earnings $ 13,825,383.00 $ 10,805,809.00 $ 9,568,728.00
treasury stock $ (2,626,404.00) $ (1,213,134.00) $ (195,237.00)
other stockholder equity $ (1,163,839.00) $ 2,081,763.00 $ 389,766.00
Total stockholders equity $ 17,479,551.00 $ 17,778,540.00 $ 14,054,186.00
Total liabilities and stockholders equity $ 42,419,204.00 $ 39,713,924.00 $ 36,178,172.00

Common size financial statement

Income statement

INCOME STATEMENT 2008 2007 2007
Sales in figures $ 29,527,552 $ 25,914,238 $ 22,476,322
Sales 100% 100% 100%
COGS 42.71% 44.08% 43.67%
Gross Profit 57.29% 55.92% 56.33%
Research Development 9.11% 9.67% 10.03%
non recurring 0.33% 0.00% 8.96%
Selling/Administrative Costs 28.57% 28.59% 28.25%
Operating Profit 19.28% 18% 9%
other income 1.94% 1.87% 0.78%
EBIT 21.62% 19.54% 9.86%
Interest Expense 1.79% 2.29% 1.85%
Net Income before Taxes 19.83% 17.25% 8.01%
Taxes 3.80% 3.33% 2.49%
Net Income after Taxes 16.03% 13.92% 5.52%
Discontinuing opera 0.496%
Net income 16.53% 13.92% 5.52%

Common size

BALANCE SHEET
Cash 9.69% 6.19% 1.44%
Marketable securities 2.28% 0.92% 2.36%
Accounts receivables 18.69% 17.77% 16.44%
Inventory 6.54% 7.43% 7.76%
other current assets 2.97% 3.06% 3.19%
Total Current Assets 40.18% 35.36% 31.18%
long term investments 2.53% 2.83% 3.40%
property plant and equipment 17.02% 18.93% 19.20%
goodwill 23.54% 25.50% 26.12%
intangible assets 12.14% 14.40% 17.70%
deferred long term assets 4.59% 2.97% 2.40%
Total Assets 100.00% 100.00% 100.00%
$ 42,419,204.00 $ 39,713,924.00 $ 36,178,172.00
LIABILITIES AND STOCKHOLDERS EQUITY
Accounts Payable 16.34% 13.89% 15.87%
Current long term debt 8.60% 6.86% 14.93%
other current liabilities 2.38% 2.16% 2.23%
Total Current Liabilities 27.33% 22.92% 33.03%
long term debt 20.54% 23.89% 19.38%
other liabilities 10.93% 8.42% 8.74%
Total liabilities 58.79% 55.23% 61.15%
Common Stock ($10 par) 17.55% 15.37% 11.86%
Retained earnings 32.59% 27.21% 26.45%
treasury stock -6.19% -3.05% -0.54%
other stockholder equity -2.74% 5.24% 1.08%
Total stockholders equity 41.21% 44.77% 38.85%
Total liabilities and stockholders equity 100.00% 100.00% 100.00%

Ratio Analysis

RATIO FORMULAE 2008 2007 2006
Liquidity Ratios
Current Ratio

Total Current Assets

Total Current Liabilities

17042559

11591908
=1.47:1

14042733

9103278
=1.54:1

11281883

11951195
=0.94:1

Quick Ratio

Current Assets-Inventory

Total Current Liabilities

17042559-2775849

11591908
=1.2:1

14042733-2951442

9103278
=1.2:1

11281883-2806421

11951195
=0.71:1

Cash Ratio

Cash marketable securities

Current liabilities

4112022+967603

11591908
=0.44:1

2456384+364443

9103278
=0.31:1

521192+852243

11951195
=0.11:1

Asset Activity Ratios
Receivables Turnover Ratio

Annual credit sales

Account receivable

29527552

7,928,531
= 3.7 times

25914238

7056748
=3.7 times

22476322

5948058
=3.8 times

Days Sales Outstanding

365

Receivable Turnover

365= 99 days
3.7
365= 99 days
3.7
365= 96 days
3.8
Inventory Turnover Ratio

Cost of Good Sold

Inventory

12612022

2775849
= 4.5:1

11422046

2,951,442
=3.9:1

9815147

2806421
=3.5:1

Days Sales in Inventory

365

Inventory Turnover

365= 81 days
4.5
365= 94 days
3.9
365= 104 days
3.5
Total Asset Turnover Ratio

Sales

Total assets

29527552

42419204
= 0.7 times

25914238

39713924
=0.65 times

22476322

36178172
=0.62 times

Leverage Ratios
Debt Ratio

Total debt

Total assets

24939653

42419204
=0.59:1

21935384

39713924
=0.55:1

22123986

36178172
=0.61:1

Debt-to-Equity Ratio Long term debt

Equity

8713327

17479551
=0.50:1

9487789

17778540
=0.53:1

7009664

14054186
=0.50:1

Equity Multiplier

Total assets

Shareholder equity

42419204

17479551
=2.4 times

39,713,924

17778540
=2.2 times

36178172

14054186
=2.6 times

Profitability Ratios
Gross Profit Margin

Gross profit

Sales

16915530

29527552
=57.29%

14492192

25914238
=55.92%

12661175

22476322
= 56.33%

Net Profit Margin

Net Income

Sales

5693839

29527552
=19.28%

4578545

25914238
=17.67%

2042219

22476322
= 9.09%

Earning Power(ROA)

EBIT

Total assets

5693839

42419204
=13.42%

4578545

39713924
=11.53%

2042219

36178172
= 5.64%

Return on Equity

Net income to common

Common equity

4,880,719

17479551
=27.92%

3606314

17778540
=20.28%

1716755

14054186
=12.22%

Analysis and Interpretation

The financial ratios used for the comparison of the performance of the company are for the three years. These ratios include; the inventory, debt to equity ratio, Profit margin, liquidity, quick ratio, cash ratio return on assets to mention a few. The profitability ratio is important for company because it allows them to see how much they are able to make per sale. In the overall scheme of things it also allows the Abbot to determine whether they are low priced or high priced for the customer. The profit margin should be high enough to create a profit for the company but low enough so that the customer can enjoy the discounted price. This is a delicate balance that company must do (White, Sondhi and Fried D, 1999, 143).

The current ratio increased by 0.6 in the year 2006-2007 but decreased by 0.07 in the year 2008. The quick ratio increased from 0.71:1 to 1.2:1 in year 2006 -2007and remained constant for year 2008. The cash ratio increased by 0.2 in year 2006-2007and the last year increased by 0.13. Receivables turnover decreased from 3.8 to 3.7 in year 2006 -2007 and remained constant in 2008.inventory turnover ratio increased in the year 2007 to 3.9:1from 3.5:1 in year 2006 and in year 2008 it increased to 4.5:1.daays for sales inventory decreased from 104 days to 94 days in year 2006 -2007and it further decreased to 84 days in year 2008. Total asset turnover ratio increased in year 2007 to 0.65 times and in 2008 increased further to 0.7 times. The debt ratio decreased from 0.61:1 to 0.55:1 in 2006- 2007but there was a slight increase to 0.59 in year 2008. Debt to equity ratio also increased in the year 2007 to 0.53:1 but in 2008 it decreased to 0.50:1. The equity multiplier decreased from 2.6 times to 2.2 times in 2006 -2007 and increased to 2.4 times 1n 2008. The gross profit margin decreased from 56.66% to 55.92% in year 2006- 2007but in 2008 it increased to 57.29%. Net profit margin experienced a growth from 9.09% to 17.7% in year 2006 -2007 and it continued to grow to 19.28% in year 2008. Earnings power ratio increased form 5.64% to 11.53% in 2006 -2007 and it further increased to 13.42% in 2008. The return on equity also experienced a significant growth by 8.06% in 2007 and in 2008 it increased by 7.7%.

2008 has the highest returns on assets followed closely by 2007. It is already expected that 2009 will be generating the highest return on assets since they are the world leader in terms of efficiency in the industry. This happened despite financial crisis thus the management did a good job by creating efficient logistical supply and production chains even if they are operating on w worldwide scale.

Strengths and weakness

Leadership: – The board of directors of the corporation consists of 11 directors. All the directors have a lot of talent and vast amounts of experience in the different fields. This enables them to be ethical in their overseeing and governance of the corporation key committees of the board meet on a regular basis. Two thirds of the directors are independent and therefore able to provide the right blend of guidance and advice. Importantly, the chairman is not the chief executive officer providing a unique separation of powers and responsibility. The independent directors have a leader who brings in their presentation on a regular basis.

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Inputs:-. Core to the success of the company was the focus on apparel for upper to middle-income customers. The prices are less than half of up market outlets because of time of purchase and the very large amount that are bought at ago. The delivery and inventory system while not centrally located keep close taps with stores personnel to enable a quick turnover of inventory.

Performance:-The Company has performed well beyond the expectation and they are fifth largest company. Maintaining the position will depend on allot of innovation and attention to the prevailing economic condition. Keeping a close eye on customers expectation and expansion into Asia will be important to e-commerce has become the new way to market and sell products.

Technology:-The company has managed to keep in line with technology by having invested in an e-inventory system although it has matured into an interactive future that adds value to the experience most importantly though is the linking of all systems.

Staffing: It has become increasingly crucial to have the right staff personnel who know his or her work well. Customers are more aware of their rights, have a wide variety of buying options, and therefore may vote with their feet if not treated well.

Staff moral and staff welfare is important to the company with a vice chairman in charge of human resources is in daily contact with district manager. Employees have an above average remuneration package, a lunch allowance and have access to the company’s recreation facilities. Their health package enables employees to get treatment and the pension plan is well up to date with current realities.

Stock Price/Performance-

The company’s stock performance was exceptionally well in the year 2009, when it went and later recovered to as compared to the performance of the economy. The fairy tale picture is nice to embrace but hard to believe especially after one looks at the stock performance. Therefore we might want to study the investment performance of the firm.

Weekly prices
Graph summarizing of stock performance

The price of the stock may fluctuate widely within a short span of time even though earnings remain unchanged. The causes of this phenomenon are varied, but it is mainly due to change in investor’s attitude towards equities in general, or towards certain types or groups of securities in particular. Variability in return on most common stocks that are due to basic sweeping changes investor expectations is referred to as market risk.

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I will recommend to any potential investor to buy the shares of this company as they are undervalued in the market. While the existing investor I will advice him to hold selling the shares.

Summary and conclusion

As shown in the figures above, Abbot Laboratory’s performance improved in the three years under consideration as well the stock performed well. A look at the company’s net income for the same period shows an increase. This, given the other ratios for the company, shows an improving management performance and control over the company’s resources.

Other financial ratios of the company such as its profitability, liquidity and activity ratios show an upward trend in the company’s overall performance. In spite of a relatively low growth in the company’s gross profit margin, the net profit margin percentage and rate of return on capital employed by the company improved at a faster rate.

Furthermore, as displayed above, aside from the company’s improving profitability performance, it is also having difficulty in converting its assets, specifically inventories and receivables, into cash which it needs to pay its trade payables. As a result of its slower conversion of inventory to receivables to cash, its quick and current ratios declined during the year. Another thing is that the company pays its trade payables much earlier than it receives cash for its trade receivables. If this trend continues, the company would need additional funding to finance its working capital requirements.

I conclude that Abbot is a profitable investment if the intention of the investment is to generate growth in the short term. However, if the investor intends to take an active role in the management of the company and is willing to sacrifice short term gains for the possibility of long term gains, then an investment in the company can be profitable. For a long term investment, the investor, as the new management, needs to make immediate and drastic reorganization and restructuring of Abbot Laboratories to ensure that assets are use efficiently and effectively.

A long term investment, although can be profitable, is viable because of the need to take an active role in the management of the company – a role which the investor can not assume.

Reference List

Abbot, (2009). abbot history. Web.

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Holmes, G., Sugden, A. & Gee, P. (2008). Interpreting Company Reports and Accounts. London: Prentice Hall.

White, G., Sondhi ,E. & Fried, D. (1999). The analysis and use of financial statements New York: John Wiley.

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