Financial Statement Analysis: Alcatel-Lucent - Research Paper Example

? Financial ment Analysis Table of Contents Introduction 3 Analysis 4 Property Plant and Equipment 4 Intangible Assets 5 Current Liabilities 6 Long term Liabilities 6 Summary 9 Bibliography 10 Introduction The analysis of a company’s financial data reflects the company’s performance. The analysis can be carried out in relation to the past years’ performance of a company or in relation to the performance of other companies in the same industry. It will give an overall view of the company in a manner that is understandable to the stakeholders. For the purpose of this paper, the organization of Alcatel-Lucent Enterprise has been chosen. This company is known for developing and implementing end to end solutions for other companies. It’s the company’s goals to design solutions that are aligned with their clients’ objectives. The various kinds of solutions they provide cover the areas of professional services, support services and managed services. The analysis of the company is described in detail here. Analysis: In the analysis of this company we will be focusing on a few areas of the financial statements. These areas include: property plant and equipment, intangible assets, current liabilities, long term liabilities and capital leases. All of these areas will be discussed separately and their data will be analyzed over the period of last two years. Property, Plant and Equipment: The net value of the property, plant and equipment has increased by approximately 4% (2009-$1672 million; 2010-$1740 million). It is a result of higher acquisitions and less disposals as compared to the year 2009. As compared to the last year the company acquired approximately $50 million additional assets and decreased disposal of assets by approximately $154 million. The depreciation charge for the year was $36 million lesser than the last year (2009- $502 million; $467 million). The company charges depreciation on a straight line basis, based on the number of years of the useful life of the assets. For the depreciation purposes the useful life of the assets as per the company is; buildings and building improvements: 5-50 years, infrastructure and fixtures: 5-20 years, plant and equipment: 1-10 years. To the cash flow statement the total depreciation and amortization charge for the year 2010 was $1,359 million which was 2.5% greater than the year 2009. Total gain from the disposal of assets in the year 2010 that was taken to the cash flow statements was $227 million which was 58.6% less than the last year. The difference arising in depreciation of assets for corporate purposes and for tax purposes gives rise to the deferred tax. This change is basically because of the different depreciation rates charged for both the purposes. In the year 2010 that liability has increased by 13.4% as the deferred tax charge rose to $1,298 million for the company as a whole. Intangible Assets: Besides the company figures, the basic understanding that matters, is to differentiate between intangible assets and the normal property, plant and equipment of the company. In an easier approach to understanding intangible assets, they can be defined as the assets that have no physical existence, which cannot be touched or seen and have no substantial form (Reily, Schweihs 1999). But to be categorized such assets as assets in the financial statements, they should be able to be measured reliably and they should be considered value adding to the financial performance of the company. In the year 2010 the value of intangible assets increased from $9,823 million to $10,590 million. The intangible assets of the company include development costs, assets acquired in business combinations (i.e. acquired technologies, in-process research and development, customer relations) patents, trademarks and licenses. The amortization costs for the year 2009 and 2010 was approximately the same. The charge for the year 2010 was $872 million. The capitalized costs for the intangible assets were approximately the same as well. The costs capitalized for the year 2010 were $456 million which is only 4.5% lower than the value in the year 2009. As mentioned earlier the amortization charge and depreciation charges are taken together for the cash flow purposes and for the year 2010 the amount that was added back was $1359 million. One of the basic intangible assets is Goodwill. The value of goodwill has increased from $5,705 million to $5,982 million that is an increase of approximately 5%. The company tests the goodwill for impairment every year specifically in the second quarter of the year. The basic way to calculate good will is to account for the fair value of the assets acquired at the date of acquisition. How can one differentiate between the fair value of the assets and the goodwill? Fair value is the amount that could be recovered by selling the assets in the open market at an arms length whereas book value is the value of the assets that is shown in the company’s books, that reflect their cost and the depreciation or impairment charges that are accounted for against those assets. Only the goodwill that arises as a result of acquisitions and is not internally generated is accounted for in the financial statements of a company. Under US GAAP a company holding more than 50% of a company’s interest is considered the holding company and is bound to consolidate its statements (Delaney, Whittington, 2010). No impairment loss on goodwill was accounted for the year 2009 or 2010. Total impairment losses for the year 2010 were approximately $37 million which is 28.6% higher than the charge of the year 2009. This total charge consists of the impairment losses of all the intangible and tangible assets for the years 2009 and 2010. Now the point is how to determine the impairment loss on an asset. Under US GAAP an impairment loss on an asset is only recognized when the carrying value of an asset has exceeded its fair value and it is not recoverable any more. In general US GAAP does not consider property plant and equipment impaired if it is impaired under IFRS. In addition US GAAP does not allow reversals of impairment losses (Mackenzie et al, 2011). Current Liabilities: The total current liabilities have increased from $12,455 million in year 2009 to $13,380 million in 2010. This makes an increase of 7.4% approximately. The current liabilities of the company include current portions of the long term debt, the portions that are payable under that year, customers’ deposits and advances, trade payables, current income tax liabilities and other current liabilities. Every current liability is recorded on the basis of its type. The portions of the long term debt are the part of the long term debt that will be paid in the period of one year, as soon as it is paid the liability becomes zero for that year. Customers’ advances are a liability till the service that is due to those customers in accordance of the advances is delivered. Current tax liability is the income tax charge for the year for the company. As soon as these liabilities are settled for the year the amount of these liabilities become zero for that year. Long term Liabilities: The long term liabilities of the company for the year 2010 amounted to $14,048 million as compared to $13,917 million in the year 2009. This shows an increase of almost 1%. This means that the company was able to stabilize its credit situation. A company’s long term debt situation is very important as it measures the financial stability of the company. The more the debt is, the more will be the interest expense. A greater interest expense gives rise to a lower profit. That would lead to lower return for the shareholder’s of the company and that would lead to less satisfaction and concerns on the shareholders behalf. If the condition gets worse the company can lose its shareholders and thus their investments. In short it is very crucial for a company to monitor its financial stability. As it can be seen in the case of Alcatel-Lucent the increase is mere 1%which seems kind of steady over the past few years as well. The non current liabilities of the company constitute pensions and post retirement plans, convertible and other bonds, deferred tax liabilities and other long term debt. The finance cost and the interest related to gross financial debt has increased form $877 million to 1165 million that is an increase of approximately 32.8%. This is not a good sign. As can be seen from the financial statements of the company, there are different kinds of bonds; convertible bonds or normal bonds. Convertible bonds have the option to be converted into equity shares when they mature, where as normal bonds don’t have that option. US GAAP requires that the interest payments related to the loans should be shown as an outflow from the operation cash flows form the company and the issuance costs of the bonds should be accounted for separately from the main loan amount as well. Bonds can be redeemed at par or premium. Such terms are defined by the issuer at the time of issuance of the bonds (Robinson et al, 2009). Another form of finance is acquiring assets through lease. Assets acquired under the capital lease have a possibility that they will most likely be converted into the company owned assets at the end of the lease period. Under the US GAAP, the lease where the ownership of the asset transfers to the lessee, and the lease term covers the economic life of the asset, the lease has the bargain purchase option and the minimum lease payments in relation to the lease cover the fair value of the asset then such a lease is a capital lease (Grabowski, 2011). The company’s financial statements show that the property, plant and equipment held under capital leases have a net carrying amount of approximately $50 million for the year 2010 where as it was approximately $56 million in the year 2009. There were also higher lease payments (2009- $300 million Approx: 2010- $289 million approx) in the year of 2009. The capital leases of the company majorly refer to IS/IT equipments sold and leased back in connection with the company’s co-sourcing agreement with Hewlett Packard. The lease term regarding this agreement is covering the duration from year 2009 to 2013. The cash flow statements of the company show that the company issued $1,437 million of long term and short term debts in the year 2010, which was approximately 32.8% higher than the year 2009 but to be on the safe side the company has repaid/repurchased a higher amount of debt as compared to the year 2009 as well (2009- $510 million: 2010- $677 million). Summary: Now to summarize the observations regarding the financial statements of Alcatel-Lucent, it can be seen that the over all figure of the property plant and equipment of the company increased by approximately 4% as a result of more acquisitions than disposal of assets. The depreciation charges on the assets are based on their useful lives. The intangible assets increased by 7.8% which are regularly amortized. The impairment tests are carried out regularly usually in the second quarter of the year but the impairment tests can also be carried at any time whenever the company thinks there is a need for one. Though the current liabilities of the company have increased by 7.4% it was still able to stabilize its long term debt situation. But still the interest expense that the company is bearing is very high. If the company’s financial position is observed as a whole it can be seen that the financial aspects of the company are very stabilized mostly. Besides a few ups and downs as compared to the details for the year 2009, the company had been able to either maintain or slightly increase its financial stature in the year 2010. Bibliography Reilly, R. F., & Schweihs, R. P. (1999). Valuing intangible assets. New York: McGraw-Hill. Delaney, P. R., & Whittington, R. (2010). Wiley CPA examination review: Outlines and study guides. Hoboken, N.J: Wiley. MacKenzie, B, Coetsee D, Chamboko R (2011). Wiley interpretation and application of international financial reporting standards 2011. Hoboken, N.J: Wiley. Robinson, T. R. (2009). International financial statement analysis. Hoboken, N.J: John Wiley & Sons. Andre Horst Grabowski, A. H. (2011). A comparison of leasing according to the treatment of different accounting pronciples and diverse treatment in loacal GAAP’s of major industrial countries, leasing in the light of HGB, US GAAP and IFRS. Germany: GRIN Verlag. Read More