COMPARATIVE ANALYSIS CASE The Bristol-Myers Squibb Company (hereafter BMS) and Merck & Co. The Balance Sheets and Statements of Cash Flows of BMS and Merck are attached. The companies' complete annual reports, including the notes to the financial statements, are available online. Instructions Use the companies' financial information to answer the following questions. (Write your answer with question#) a) What method of computing net cash provided by operating activities does BMS use? What method does Merck use? Explain. What were the amounts of cash provided by operating activities reported by BMS and Merck in 2020? b) What was the most significant item reported by BMS and Merck in 2020 in their investing activities sections? What is the most significant item reported by BMS and Merck in 2020 in their financing activities sections? flows? c) What were these two companies' trends in net cash provided by operating activities over the period of 2018-2020? You may use the percentage change in support of your answer. d) Where is "depreciation and amortization" reported by BMS and Merck in their statements of cash flows? What is the amount and why does it appear in that section of the statement of cash e) Based on the information contained in BMS and Merck's financial statements, compute the following 2020 ratios for each company. These ratios require the use of statement of cash flow data. (These ratios are available in Chapter 5 of the textbook.) Write the formula first and then show the computation (Detailed and elaborate computations are needed) a. Current cash debt coverage. b. Cash debt coverage. c. Free cash flow f) What conclusions concerning the management of cash can be drawn from the ratios computedin e)? PART 2: Also answer the following general questions not related to above case: ASC 230: Statement of Cash Flows 1. How is the information provided in the statement of cash flows different from the information reported in the income statement? 2. Why do you think most companies use indirect method of preparing statement of cash flows? 3. How do each of the three sections of the statement of cash flows relate to the Balance Sheet? 4. Net income is determined on accrual basis. However, net income is the first item on the statement of cash flows. Explain this obvious contradiction. Consolidated Balance Sheet Merck & Co., Inc. and Subsidiaries December 31 (Sin millions except per share amounts) Assets Current Assets Cash and cash equivalents Short-term investments MEREK Accounts receivable (net of allowance for doubtful accounts of $85 in 2020 and $86 in 2019) Inventories (excludes inventories of $2,197 in 2020 and $1,480 in 2019 classified in Other assets-see Note 7) Other current assets Total current assets Investments Property, Plant and Equipment (at cost) Land Buildings Machinery, equipment and office furnishings Construction in progress Less: accumulated depreciation Goodwill Other Intangibles, Net Other Assets Liabilities and Equity Current Liabilities Loans payable and current portion of long-term debt Trade accounts payable Accrued and other current liabilities Income taxes payable Dividends payable Total current liabilities Long-Term Debe Deferred Income Taxes Other Noncurrent Liabilities Merck & Co., Inc. Stockholders' Equity Common stock, $0.50 par value Authorized-6,500,000,000 shares Issued-3,577,103,522 shares in 2020 and 2019 Other paid-in capital Retained earnings Accumulated other comprehensive loss Less treasury stock, at cost 1,046,871,695 shares in 2020 and 1,038,087,496 shares in 2019 Total Merck & Co., Inc. stockholders' equity Noncontrolling Interests Total equity The accompanying notes are an integral part of this consolidated financial statement 2 2020 2019 8,062 S 9,676 774 7,851 6,778 6,310 5,978 5,541 4,277 27,764 27,483 785 1,469 350 343 12,645 11,989 16,649 15,394 7,324 5,013 36,968 32,739 18,982 17,686 17,986 15,053 20,238 19,425 14,604 14,196 10,211 6,771 $ 91,588 $ 84397 $ 6,431 S 3.610 4,594 3,738 13,053 12,549 1,575 736 1,674 1,587 27.327 22,220 25,360 22,736 1,015 1,470 12,482 11,970 1,788 1,788 39,588 39,660 47,362 46,602 (6,634) (6.193) 82,104 81,857 56,787 55,950 25,317 25,907 87 94 25,404 26.001 S 91,588 $ 84,397 MERCK Consolidated Statement of Cash Flows Merck & Co., Inc. and Subsidiaries Years Ended December 31 ($in millions) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Amortization Depreciation Intangible asset impairment charges Charge for the acquisition of VelosBio Inc. Charge for the acquisition of Peloton Therapeutics, Inc. Charge for future payments related to collaboration license options Deferred income taxes Share-based compensation Other Net changes in assets and liabilities Accounts receivable Inventories Trade accounts payable Accrued and other current liabilities Income taxes payable Noncurrent liabilities Other Net Cash Provided by Operating Activities Cash Flows from lavesting Activities Capital expenditures Purchase of Seagen Inc. common stock Purchases of securities and other investments Proceeds from sales of securities and other investments 2020 2019 2018 70825 9,777 $ 6,193 1,973 3,103 1,726 1,679 1,416 1,718 1,040 296 1,660 993 650 (668) (556) (509) 475 417 348 (49) 184 978 (1.002) 294 (418) (855) (508) (911) 724 399 230 (1,138) 376 (341) 560 (2,359) 827 (453) (237) (266) (2,436) (32) (674) 10,253 13440 10,922 (4,684) (3,473) (2,615) (1,000) (3.202) (7,994) 2,812 Acquisition of VelosBio Inc., net of cash acquired Acquisition of ArQule, Inc., net of cash acquired Acquisition of Antelliq Corporation, net of cash acquired 8,622 15,252 (2,696) (2,545) Acquisition of Peloton Therapeutics, Inc., net of cash acquired (3,620) Other acquisitions, net of cash acquired Other Net Cash (Used in) Provided by Investing Activities Cash Flows from Financing Activities Net change in short-term borrowings (1,040) (1,365) (294) (431) 130 102 (9,443) 2,629) 4,314 2,549 Payments on debt Proceeds from issuance of debt Purchases of treasury stock 0,710) 5,124 (1,957) (4,287) 4,419 4,958 Dividends paid to stockholders (1.281) (4,780) (9,091) Proceeds from exercise of stock options (6,215) 39 (5,595) (5.172) Other Net Cash Used in Financing Activities Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash 361 591 5 (325) Cash, Cash Equivalents and Restricted Cash at End of Year (includes $103 of restricted cash at December 31, 2020 included in Other Assets see Note 6) Cash, Cash Equivalents and Restricted Cash at Beginning of Year (includes $258 of restricted cash at January 1, 2020 included in Other Assets see Note 6) (2.832) 253 (1,769) (8,861) (13,160) 17 (205) 1,967 1,871 9934 7,967 6,096 8,165 5 9,934 $ 7,967 The accompanying notes are an integral part of this consolidated financial statement 82 3 CONSOLIDATED BALANCE SHEETS Dollars in Millions, Except Share and Per Share Data ASSETS Current Assets: Cash and cash equivalents Marketable debt securities Receivables Inventories Other current assets Total Current Assets Property, plant and equipment Goodwill Other intangible assets Deferred income taxes Marketable debt securities Other non-current assets Total Assets LIABILITIES Current Liabilities: BMS Short-term debt obligations Other current liabilities Accounts payable Total Current Liabilities Deferred income taxes Long-term debt Other non-current liabilities Total Liabilities Commitments and contingencies EQUITY Bristol-Myers Squibb Company Shareholders' Equity: Preferred stock, $2 convertible series, par value $1 per share: Authorized 10 million shares; issued and outstanding 3,484 in 2020 and 3,568 in 2019, liquidation value of $50 per share 2020 Annual Report December 31, 2020 2019 14,546 S 12,346 1,285 3,047 8,501 7,685 2,074 4,293 3,786 1,983 30,192 29,354 5,886 6,252 20,547 22,488 53,243 63,969 1,161 510 433 767 7,019 6,604 118,481 S 129,944 2,340 S 3,346 2,713 2,445 14,027 12,513 19,080 18,304 5,407 6,454 48,336 43,387 7,776 10,101 80,599 78,246 Common stock, par value of $0.10 per share: Authorized 4.5 billion shares; 2.9 billion issued in 2020 and 2019 292 292 Capital in excess of par value of stock 44,325 43,709 Accumulated other comprehensive loss (1.839) (1.520) Retained earnings 21,281 34,474 Less cost of treasury stock-679 million common shares in 2020 and 672 million common shares in 2019 (26,237) (25,357) Total Bristol-Myers Squibb Company Shareholders' Equity 37,822 51,598 Noncontrolling interest Total Equity Total Liabilities and Equity S 60 37.882 118,481 S 100 51,698 129,944 The accompanying notes are an integral part of these consolidated financial statements. 4 Bristol Myers Squibb CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in Millions Cash Flows From Operating Activities: Net (loss)/earnings BMS 2020 Adjustments to reconcile net (loss)/earnings to net cash provided by operating activities: Depreciation and amortization, net Year Ended December 31, 2019 2018 (8,995) S 3,460 $ 4,947 10,380 1,746 637 Deferred income taxes 983 (924) 45 Stock-based compensation Impairment charges 779 441 221 1,203 199 126 Pension settlements and amortization 43 1,688 186 Divestiture gains and royalties (699) IPRD charge-Myokardia acquisition (1,855) (992) 11,438 Asset acquisition charges 1,099 63 1,211 Equity investment (gains)/losses (1,228) Contingent consideration fair value adjustments (275) 513 (1,757) 523 Other adjustments (177) (26) (45) Changes in operating assets and liabilities: Receivables (646) 752 (429) Inventories 2,672 463 (216) Accounts payable 188 229 (59) Income taxes payable Other (2,305) 907 203 1,074 819 718 Net Cash Provided by Operating Activities 14,052 8,210 7,066 Cash Flows From lavesting Activities: Sale and maturities of marketable debt securities 6,280 3,809 2,379 Purchase of marketable debt securities (4,172) (3,961) Capital expenditures (2,305) (753) Divestiture and other proceeds (836) (951) 870 15,852 1,249 Acquisition and other payments, net of cash acquired (13,084) (24,777) (2,372) Net Cash Used in Investing Activities (10,859) (9,913) (2,000) Cash Flows From Financing Activities: Short-term debt obligations, net Issuance of long-term debt Repayment of long-term debt Repurchase of common stock Dividends (267) 131 (543) 6,945 26,778 (2,750) (9,256) (5) (1,546) (7,300) (320) (4,075) (2,679) (2,613) Other 542 (53) (54) Net Cash (Used in/Provided by Financing Activities (1,151) 7,621 Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash (3,535) 111 (9) (41) Increase in Cash, Cash Equivalents and Restricted Cash 2,153 5,909 1,490 Cash, Cash Equivalents and Restricted Cash at Beginning of Year Cash, Cash Equivalents and Restricted Cash at End of Year 12,820 6,911 5,421 S 14,973 $ 12,820 S 6,911 The accompanying notes are an integral part of these consolidated financial statements