Question

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ments? Why or y Financial Statement Analysis Cases Financial Statement Analysis Case 1:Vertical Analyses of Johnson&Johnson and Pfizer Inc. Pfizer Inc. is a US company that manufactures and distributes pharmaceutical and consumer healthcare products that are similar to those sold by Johnson & Johnson. Use the excerpts of Johnson & Johnson's income statements to ans wer the following questions: a. Compute each line item as a percentage of sales for both companies. b. If sales are used as a measure of size, which company is larger? c. Which company has a higher cost of goods sold relative to sales? d. Which company has higher selling, general, and administrative expenses relative to sales? e. Which company has higher research and development expenses relative to sales? f. Which company has a higher income from continuing operations relative to sales? Comment on the difference or lack of difference given other relationships observed g. Which company has a higher profit margin? Comment on the difference between the two companies Johnson & Johnson Pfizer (amounts in millions) Net Sales Cost of Goods Sold Gross Profit Selling, General, and Administrative Expenses Research and Development Expenses In-Process Research and Development Amortization of Intangible Assets Restructuring Charges, Net Interest Expense Interest Income Other Expense (income), Net Income from Continuing Operations Before Income Taxes Income Tax Expense Income from Continuing Operations 2016 $71,890 21,685 50,205 19,945 9,095 2016 $52,824 12,329 40,495 14,837 7,872 29 4,056 1,724 491 726 (368) 484 19,803 3,263 $16,540 3,655 8,351 1,123 7,229 17 $ 7,246 31 $ 7,215 Income from Discontinued Operations, Net of Income Taxes Net Income Before Noncontrolling Interests $16,540 Income Attributable to Noncontrolling Interests Net Income $16,540 * The captions for some lines have been changed for consistency in comparing the two companies Sources: Johnson &Johnson and Pfizer income statements

Answer 1

Vertical analysis of Johnson & Johnson and Pfizer Inc:

1. Computation of each line item as a percentage of sales for both companies:

Vertical Analysis
	Johnson & Johnson 2016		Pfizer 2016
	Amount in millions	Percent	Amount in millions	Percent
Net Sales	71,890	100%	$52,824	100%
Cost of Goods Sold	$21,685	30.16%	$12,329	23.33%
Gross Profit	$50,205	69.84%	$40,495	76.66%
Selling General and Administrative Expenses	$19,945	27.74%	14,837	28.09%
Research and Development Expenses	$9,095	12.65%	$7,872	14.90%
In-Process Research and Development	$29	0.04%	$0	0.00%
Amortization of intangible Assets	$0	0.00%	$4,056	7.68%
Restructuring Charges, net	$491	0.68%	$1,724	3.26%
Interest Expense	$726	1%	NA	NA
Interest Income	($368)	-0.51%	NA	NA
Other Expense (Income), net	$484	0.67%	3,655	6.92%
Income from Continuing Operations Before Income Taxes	19,803	27.55%	$8,351	15.81%
Income Tax Expense	$3,263	4.54%	1,123	2.13%
Income from continuing operations	$16,540	23%	$7,229	13.69%
Income from discontinued operations, net of income tax	NA	Na	$17	0.03%
Net Income before Non-Controlling Interest	16,540	23%	$7,246	13.72%
Income Attributable to Non-Controlling Interest	NA	Na	$31	0.59%
Net Income	$16,540	23%	$7,215	13.66%

1. Assuming sales a measure of size, Jonhnson & Johnson company is larger.

Explanation: sales of Johnson ($71,890 millions) is higher than Pfizer sales ($52,824 millions)

1. Company with higher cost of goods sold relative to sales –

Johnson&Johnson is the company with highest cost of goods sold relative to sales, with 30.16%, while Pfizer’s COGS relative to sales is 23.33%.

1. Company with higher selling, general and administrative expenses relative to sales –

Pfizer is the company with higher selling, general and administrative expenses relative to sales at 28.09%, while J&J selling, gen and admin expenses relative sales is 27.74%.

1. Company with higher research and development expenses relative to sales –

Pfizer is the company with higher research and development expenses relative to sales at 14.90%, while J&J’s research and development expenses relative sales is 12.65%.

1. Company with higher income from continuing operations relative to sales –

Johnson&Johnson is the company with highest income from continuing operations relative to sales, with 27.55%, while Pfizer’s income from continuing operations relative to sales is 15.81%.

Comment –

The difference is prominently due to the presence of amortization of intangible assets for Pfizer, which is about 7.68% relative to sales and the relatively high restructuring charges, net which is about 3.26%.

1. Company with highest profit margin –

Johnson&Johnson is the company with highest profit margin, with 23%, while Pfizer’s profit margin is 13.66%.

Comment on the difference –

The difference in profit margins between the two companies (23 -13.66 =9.34%) could be attributed to the higher burden of Other Expenses for Pfizer, alongside the restructuring charges, net and the presence of amortization of intangibles, net.