Celgene Corp. (NASDAQ:CELG)

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Celgene Corp., effective income tax rate (EITR) reconciliation

	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
U.S. statutory tax rate	21.00%	35.00%	35.00%	35.00%	35.00%
Tax rate differences on foreign operations	-11.20%	-28.80%	-21.10%	-21.00%	-22.30%
State taxes, net of federal benefit	1.40%	0.60%	0.80%	1.20%	1.00%
Change in valuation allowance	0.30%	0.80%	0.50%	2.00%	0.20%
Acquisition and collaboration related differences	6.00%	2.10%	-0.70%	4.50%	-0.30%
Changes in uncertain tax positions	-0.10%	0.10%	-0.40%	-0.50%	-0.40%
Stock compensation excess tax benefits	-0.50%	-6.70%	0.00%	0.00%	0.00%
Other	0.30%	-0.70%	1.60%	-0.40%	0.90%
Effective income tax rate, before 2017 Tax Act	17.20%	2.40%	15.70%	20.80%	14.10%
2017 Tax Act	-0.90%	29.40%	0.00%	0.00%	0.00%
Effective income tax rate	16.30%	31.80%	15.70%	20.80%	14.10%

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

The effective income tax rate exhibited significant volatility between 2014 and 2018, characterized by substantial deviations from the U.S. statutory tax rate. While the statutory rate remained constant at 35.00% from 2014 through 2017 before decreasing to 21.00% in 2018, the effective rate fluctuated based on a combination of operational efficiencies and legislative changes.

Effective Income Tax Rate Fluctuations: The effective income tax rate varied from a low of 14.10% in 2014 to a peak of 31.80% in 2017, before settling at 16.30% in 2018. A critical observation is the divergence in 2017, where the rate before the impact of the 2017 Tax Act was exceptionally low at 2.40%, only to be elevated by legislative adjustments.
Impact of Legislative Changes: The 2017 Tax Act introduced a major disruption in the tax profile, contributing a positive 29.40% to the effective rate in 2017. In 2018, the impact of this act shifted to a slight reduction of -0.90%, aligning with the overall reduction of the U.S. statutory tax rate to 21.00%.
Foreign Operation Tax Differentials: Tax rate differences on foreign operations served as the most consistent and significant factor in reducing the effective tax rate. These differences provided a downward adjustment every year, reaching a peak reduction of -28.80% in 2017, though this benefit narrowed to -11.20% by 2018.
Operational and Transactional Adjustments: Acquisition and collaboration related differences showed inconsistent trends, ranging from -0.70% in 2016 to a peak increase of 6.00% in 2018. Additionally, stock compensation excess tax benefits began influencing the rate in 2017, providing a significant reduction of -6.70% in that year, which decreased to -0.50% in 2018.

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Celgene Corp., components of deferred tax assets and liabilities

US$ in millions

	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
NOL carryforwards	242)	249)	133)	56)	5)
Tax credit carryforwards	44)	11)	14)	11)	5)
Share-based compensation	380)	317)	412)	341)	251)
Other assets and liabilities	59)	38)	59)	58)	58)
Intangible assets	425)	333)	809)	665)	660)
Accrued and other expenses	316)	278)	263)	233)	192)
Deferred tax assets, gross	1,466)	1,226)	1,690)	1,364)	1,169)
Valuation allowance	(195)	(277)	(143)	(91)	(40)
Deferred tax assets, net	1,271)	949)	1,547)	1,273)	1,129)
Plant and equipment, primarily differences in depreciation	—)	—)	—)	—)	(7)
Other assets and liabilities	(59)	(52)	(10)	(4)	(4)
Intangible assets	(3,795)	(2,008)	(1,013)	(1,135)	(1,183)
Unremitted earnings	—)	—)	(317)	(317)	(317)
Unrealized gains on securities	(146)	(193)	(69)	(130)	(237)
Deferred tax liabilities	(4,000)	(2,253)	(1,409)	(1,586)	(1,748)
Net deferred tax asset (liability)	(2,729)	(1,304)	138)	(312)	(619)

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

The financial trajectory of the deferred tax position exhibits a significant shift from a moderate net liability to a temporary net asset position, culminating in a substantial net deferred tax liability by the end of the analyzed period. The most prominent driver of this volatility is the exponential growth in liabilities associated with intangible assets, which offset the steady accumulation of deferred tax assets.

Deferred Tax Asset Components: A consistent upward trend is observed in net operating loss (NOL) carryforwards, which increased from 5 million USD in 2014 to 242 million USD by 2018. Accrued and other expenses also showed a steady climb, rising from 192 million USD to 316 million USD over the same period. Share-based compensation remained a significant contributor, peaking at 412 million USD in 2016 before stabilizing at 380 million USD in 2018. However, the gross deferred tax assets experienced a peak in 2016 at 1,690 million USD followed by a decline and partial recovery, influenced in part by a valuation allowance that expanded from 40 million USD in 2014 to a peak of 277 million USD in 2017.
Deferred Tax Liability Components: The liability profile is dominated by intangible assets, which experienced an aggressive increase in the latter years of the period. While liabilities for intangible assets stood at 1,013 million USD in 2016, they surged to 2,008 million USD in 2017 and further expanded to 3,795 million USD by 2018. This specific component was the primary driver behind the overall increase in total deferred tax liabilities, which grew from a low of 1,409 million USD in 2016 to 4,000 million USD in 2018.
Net Deferred Tax Position: The net position transitioned from a liability of 619 million USD in 2014 to a net asset of 138 million USD in 2016, marking a period of relative tax asset strength. This trend reversed sharply in 2017, resulting in a net liability of 1,304 million USD, which further deepened to 2,729 million USD by 2018. This reversal indicates that the growth in taxable temporary differences, particularly regarding intangible assets, significantly outpaced the growth of deductible temporary differences and carryforwards.

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Celgene Corp., deferred tax assets and liabilities, classification

US$ in millions

	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
Current deferred tax assets	—)	—)	—)	—)	12)
Non-current deferred tax assets (included in Other non-current assets)	24)	23)	138)	66)	57)
Current deferred tax liabilities	—)	—)	—)	—)	131)
Non-current deferred tax liabilities	2,753)	1,327)	—)	378)	556)

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

The deferred tax position of the organization is characterized by a significant increase in non-current deferred tax liabilities and a volatile trend in non-current deferred tax assets over the five-year period ending December 31, 2018. There is a notable shift toward long-term tax obligations, which grew substantially in the latter years of the analysis.

Non-Current Deferred Tax Assets: Non-current deferred tax assets exhibited an upward trend from 2014 to 2016, rising from 57 million US$ to a peak of 138 million US$. However, a sharp contraction occurred in 2017, where the value fell to 23 million US$, remaining relatively stagnant at 24 million US$ by the end of 2018.
Non-Current Deferred Tax Liabilities: The non-current deferred tax liabilities showed an overall trajectory of aggressive growth despite an initial decline from 556 million US$ in 2014 to 378 million US$ in 2015. Following a period of missing data in 2016, liabilities surged to 1,327 million US$ in 2017 and more than doubled to 2,753 million US$ by December 31, 2018, indicating a substantial increase in future taxable obligations.
Current Classification Trends: Current deferred tax assets and liabilities were only reported for the 2014 fiscal year, with values of 12 million US$ and 131 million US$, respectively. The absence of these figures in subsequent years suggests a reclassification of deferred tax items entirely to non-current categories, aligning with specific accounting standard changes regarding the presentation of deferred taxes on the balance sheet.

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Celgene Corp., Financial Data: Reported vs. Adjusted

Celgene Corp., adjustments to financial statements

US$ in millions

	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
Adjustment to Current Assets
Current assets (as reported)	9,067)	14,892)	10,868)	9,401)	9,713)
Less: Current deferred tax assets, net	—)	—)	—)	—)	12)
Current assets (adjusted)	9,067)	14,892)	10,868)	9,401)	9,701)
Adjustment to Total Assets
Total assets (as reported)	35,480)	30,141)	28,086)	27,053)	17,340)
Less: Current deferred tax assets, net	—)	—)	—)	—)	12)
Less: Noncurrent deferred tax assets, net	24)	23)	138)	66)	57)
Total assets (adjusted)	35,456)	30,118)	27,948)	26,988)	17,272)
Adjustment to Current Liabilities
Current liabilities (as reported)	4,057)	2,987)	2,959)	1,969)	2,112)
Less: Current deferred tax liabilities, net	—)	—)	—)	—)	131)
Current liabilities (adjusted)	4,057)	2,987)	2,959)	1,969)	1,981)
Adjustment to Total Liabilities
Total liabilities (as reported)	29,319)	23,220)	21,486)	21,134)	10,815)
Less: Current deferred tax liabilities, net	—)	—)	—)	—)	131)
Less: Noncurrent deferred tax liabilities, net	2,753)	1,327)	—)	378)	556)
Total liabilities (adjusted)	26,566)	21,893)	21,486)	20,757)	10,128)
Adjustment to Stockholders’ Equity
Stockholders’ equity (as reported)	6,161)	6,921)	6,599)	5,919)	6,525)
Less: Net deferred tax assets (liabilities)	(2,729)	(1,304)	138)	(312)	(619)
Stockholders’ equity (adjusted)	8,890)	8,225)	6,462)	6,231)	7,143)
Adjustment to Net Income
Net income (as reported)	4,046)	2,940)	1,999)	1,602)	2,000)
Add: Deferred income tax expense (benefit)	32)	(1,330)	(344)	(33)	(272)
Net income (adjusted)	4,078)	1,610)	1,655)	1,569)	1,728)

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

The financial information reveals adjustments primarily related to the removal of deferred tax assets, impacting several balance sheet and income statement items between 2014 and 2018. These adjustments consistently result in lower reported asset and liability values when compared to their adjusted counterparts, with a corresponding effect on stockholders’ equity and net income.

Asset Adjustments: Adjustments to both current and total assets are present throughout the period. The difference between reported and adjusted total assets begins at US$67 million in 2014 and fluctuates, reaching a low of US$23 million in 2017 before increasing to US$24 million in 2018. The adjustments suggest a reduction in asset values due to the elimination of deferred tax assets. Current assets show a similar pattern, with adjustments of US$12 million in 2014, remaining consistent in 2015 and 2016, and then disappearing in 2017 and 2018.
Liability and Equity Adjustments: Reported total liabilities are consistently higher than adjusted total liabilities, with the difference ranging from US$687 million in 2014 to US$2,753 million in 2018. This indicates a reduction in reported liabilities through the removal of deferred tax liabilities. A similar pattern is observed in current liabilities, though the magnitude of the adjustment is smaller. Stockholders’ equity is consistently higher in the adjusted figures, particularly in 2014, 2017, and 2018, suggesting that the removal of deferred tax assets increases the reported equity position.
Net Income Adjustments: Adjustments to net income are present each year. The difference between reported and adjusted net income is relatively small in 2014-2017, ranging from US$272 million to US$1,330 million. However, in 2018, the adjustment increases significantly to US$32 million, indicating a larger impact from the deferred tax asset removal on reported earnings. This suggests that the tax adjustments have a more substantial effect on net income in the later period.

Overall, the consistent adjustments across multiple financial statement items point to a systematic removal of deferred tax assets and liabilities. The increasing magnitude of these adjustments, particularly in 2018, warrants further investigation to understand the underlying reasons and potential implications for the company’s financial position and performance.

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Celgene Corp., Financial Ratios: Reported vs. Adjusted

Celgene Corp., adjusted financial ratios

	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
Current Ratio
Reported current ratio	2.23	4.99	3.67	4.77	4.60
Adjusted current ratio	2.23	4.99	3.67	4.77	4.90
Net Profit Margin
Reported net profit margin	26.51%	22.66%	17.87%	17.49%	26.44%
Adjusted net profit margin	26.71%	12.41%	14.80%	17.12%	22.84%
Total Asset Turnover
Reported total asset turnover	0.43	0.43	0.40	0.34	0.44
Adjusted total asset turnover	0.43	0.43	0.40	0.34	0.44
Financial Leverage
Reported financial leverage	5.76	4.36	4.26	4.57	2.66
Adjusted financial leverage	3.99	3.66	4.33	4.33	2.42
Return on Equity (ROE)
Reported ROE	65.67%	42.48%	30.29%	27.07%	30.65%
Adjusted ROE	45.87%	19.57%	25.62%	25.17%	24.18%
Return on Assets (ROA)
Reported ROA	11.40%	9.75%	7.12%	5.92%	11.53%
Adjusted ROA	11.50%	5.35%	5.92%	5.81%	10.00%

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

An analysis of the financial ratios between 2014 and 2018 reveals that the removal of deferred taxes significantly alters the perception of profitability and solvency, while having negligible impact on liquidity and operational efficiency.

Liquidity and Operational Efficiency: The current ratio remained relatively stable between 2014 and 2017, though a significant contraction is observed in 2018, where both reported and adjusted ratios fell to 2.23. The variance between reported and adjusted current ratios is minimal, indicating that deferred tax adjustments have little influence on short-term liquidity assessments. Similarly, total asset turnover shows no variance between reported and adjusted figures, maintaining a consistent range between 0.34 and 0.44 throughout the period.
Profitability Margins: A divergence is evident in the net profit margin. While reported margins fluctuated but ended the period at 26.51%, the adjusted margins exhibited a steady decline from 22.84% in 2014 to a low of 12.41% in 2017. This suggests that deferred tax accounting previously masked a decline in core profitability. However, in 2018, the adjusted margin rose sharply to 26.71%, aligning closely with the reported figure.
Financial Leverage and Solvency: The reported financial leverage shows a strong upward trend, increasing from 2.66 in 2014 to 5.76 in 2018. In contrast, the adjusted financial leverage is consistently lower and exhibits less volatility, peaking at 4.33 in 2015 and 2016 before declining to 3.99 by 2018. This indicates that a substantial portion of the reported leverage was driven by deferred tax liabilities rather than operational debt.
Returns on Assets and Equity: The impact of deferred taxes is most pronounced in the return ratios. Reported ROE experienced an aggressive increase, rising from 30.65% in 2014 to 65.67% in 2018. The adjusted ROE, however, followed a more modest trajectory, peaking at 45.87% in 2018, revealing that reported returns were significantly inflated. A similar pattern is observed in ROA, where adjusted figures are consistently lower than reported figures from 2014 through 2017, though they converged to approximately 11.50% in 2018.

Overall, the removal of deferred taxes provides a more conservative view of the company's financial performance. The adjustments highlight a reduction in actual profitability and leverage compared to the reported figures, particularly between 2014 and 2017, while the convergence of reported and adjusted ratios in 2018 suggests a shift in the tax position or accounting impact during that fiscal year.

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	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Current assets	9,067)	14,892)	10,868)	9,401)	9,713)
Current liabilities	4,057)	2,987)	2,959)	1,969)	2,112)
Liquidity Ratio
Current ratio¹	2.23	4.99	3.67	4.77	4.60
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted current assets	9,067)	14,892)	10,868)	9,401)	9,701)
Adjusted current liabilities	4,057)	2,987)	2,959)	1,969)	1,981)
Liquidity Ratio
Adjusted current ratio²	2.23	4.99	3.67	4.77	4.90

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

2018 Calculations

¹ Current ratio = Current assets ÷ Current liabilities
= 9,067 ÷ 4,057 = 2.23

² Adjusted current ratio = Adjusted current assets ÷ Adjusted current liabilities
= 9,067 ÷ 4,057 = 2.23

An evaluation of the liquidity position between 2014 and 2018 reveals a period of high short-term solvency followed by a significant contraction in the final year. While the company maintained a robust current ratio for most of the period, the convergence of declining assets and rising liabilities in 2018 led to a notable reduction in the current ratio.

Current Asset Trends: Current assets exhibited volatility, increasing from 9,713 million USD in 2014 to a peak of 14,892 million USD in 2017. However, a sharp decline occurred in 2018, with assets falling to 9,067 million USD, the lowest level recorded in the five-year period.
Current Liability Trends: A consistent upward trajectory is observed in current liabilities. Obligations rose from 2,112 million USD in 2014 to 4,057 million USD by 2018. This represents a near doubling of short-term liabilities over the analyzed timeframe, contributing to the tightening of the liquidity margin.
Adjusted Current Ratio Analysis: The adjusted current ratio remained strong from 2014 to 2017, fluctuating between 3.67 and 4.99. A significant divergence is noted in 2014, where the adjusted ratio of 4.90 exceeded the reported ratio of 4.60 due to adjustments in both current assets and current liabilities. From 2015 through 2018, the adjusted and reported ratios were identical, indicating that no further adjustments were applied. The ratio declined sharply to 2.23 in 2018, reflecting the combined impact of lower assets and higher liabilities.

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	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income	4,046)	2,940)	1,999)	1,602)	2,000)
Net product sales	15,265)	12,973)	11,185)	9,161)	7,564)
Profitability Ratio
Net profit margin¹	26.51%	22.66%	17.87%	17.49%	26.44%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income	4,078)	1,610)	1,655)	1,569)	1,728)
Net product sales	15,265)	12,973)	11,185)	9,161)	7,564)
Profitability Ratio
Adjusted net profit margin²	26.71%	12.41%	14.80%	17.12%	22.84%

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

2018 Calculations

¹ Net profit margin = 100 × Net income ÷ Net product sales
= 100 × 4,046 ÷ 15,265 = 26.51%

² Adjusted net profit margin = 100 × Adjusted net income ÷ Net product sales
= 100 × 4,078 ÷ 15,265 = 26.71%

An analysis of profitability metrics from 2014 to 2018 reveals a notable divergence between reported and adjusted financial performance. While reported net income and margins showed a recovery pattern following a dip in 2015, adjusted metrics experienced a multi-year decline before a significant surge in the final period.

Adjusted Net Profit Margin Trends: A consistent contraction is observed in the adjusted net profit margin between 2014 and 2017, where the ratio fell from 22.84% to 12.41%. This downward trajectory occurred even as the reported net profit margin began to recover from its 2015 low of 17.49%. This divergence indicates that non-recurring items or specific accounting adjustments positively influenced reported results while operational profitability, on an adjusted basis, continued to erode during this timeframe.
Reported versus Adjusted Net Income Divergence: The variance between reported and adjusted net income intensified through 2017. In 2017, reported net income stood at 2,940 million US$, while adjusted net income was considerably lower at 1,610 million US$. This gap suggests that a substantial portion of the reported earnings during this period was derived from items excluded from the adjusted performance metrics.
Performance Acceleration in 2018: A sharp reversal in profitability trends occurred in 2018. Adjusted net income increased substantially to 4,078 million US$, and the adjusted net profit margin rose to 26.71%. This represents a significant recovery, as the adjusted margin not only reversed the prior four-year decline but also exceeded the 2014 baseline. This shift indicates a substantial improvement in adjusted operational efficiency or a significant change in the underlying cost and revenue structure during the final year of the period.

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	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net product sales	15,265)	12,973)	11,185)	9,161)	7,564)
Total assets	35,480)	30,141)	28,086)	27,053)	17,340)
Activity Ratio
Total asset turnover¹	0.43	0.43	0.40	0.34	0.44
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Net product sales	15,265)	12,973)	11,185)	9,161)	7,564)
Adjusted total assets	35,456)	30,118)	27,948)	26,988)	17,272)
Activity Ratio
Adjusted total asset turnover²	0.43	0.43	0.40	0.34	0.44

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

2018 Calculations

¹ Total asset turnover = Net product sales ÷ Total assets
= 15,265 ÷ 35,480 = 0.43

² Adjusted total asset turnover = Net product sales ÷ Adjusted total assets
= 15,265 ÷ 35,456 = 0.43

A consistent upward trajectory in total assets is observed from 2014 through 2018. Reported total assets grew from 17,340 million USD to 35,480 million USD, representing a substantial increase in the company's asset base over the five-year period. Adjusted total assets mirrored this growth pattern, starting at 17,272 million USD and ending at 35,456 million USD.

Asset Utilization Efficiency: The adjusted total asset turnover ratio exhibited a period of volatility followed by stabilization. After starting at 0.44 in 2014, the ratio declined to its lowest point of 0.34 in 2015. This indicates a temporary decrease in the efficiency of generating revenue relative to the asset base. However, a recovery phase followed, with the ratio climbing to 0.40 in 2016 and reaching 0.43 in 2017, where it remained constant through 2018.
Correlation Between Reported and Adjusted Metrics: There is a negligible variance between reported and adjusted total assets throughout the analyzed period. This minimal difference is further reflected in the asset turnover ratios, where the reported and adjusted values are identical for every year from 2014 to 2018. This suggests that the adjustments applied to the total assets did not materially alter the interpretation of asset productivity.
Growth and Productivity Relationship: Despite the total asset base more than doubling between 2014 and 2018, the company succeeded in restoring its asset turnover ratio to near-initial levels. The stability of the ratio at 0.43 during the final two years of the period indicates that revenue growth scaled proportionally with the expansion of the asset base after the 2015 dip.

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	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Total assets	35,480)	30,141)	28,086)	27,053)	17,340)
Stockholders’ equity	6,161)	6,921)	6,599)	5,919)	6,525)
Solvency Ratio
Financial leverage¹	5.76	4.36	4.26	4.57	2.66
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted total assets	35,456)	30,118)	27,948)	26,988)	17,272)
Adjusted stockholders’ equity	8,890)	8,225)	6,462)	6,231)	7,143)
Solvency Ratio
Adjusted financial leverage²	3.99	3.66	4.33	4.33	2.42

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

2018 Calculations

¹ Financial leverage = Total assets ÷ Stockholders’ equity
= 35,480 ÷ 6,161 = 5.76

² Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity
= 35,456 ÷ 8,890 = 3.99

An examination of the financial position from 2014 to 2018 reveals a consistent expansion of the asset base. Reported total assets increased from US$ 17,340 million to US$ 35,480 million over the five-year period, a trend closely mirrored by adjusted total assets. While the asset growth was linear and substantial, the trajectory of stockholders' equity exhibited significant divergence between reported and adjusted figures.

Equity Trends: Reported stockholders' equity remained relatively stagnant and volatile, starting at US$ 6,525 million in 2014 and ending lower at US$ 6,161 million in 2018. In contrast, adjusted stockholders' equity demonstrated a general upward trend, rising from US$ 7,143 million in 2014 to US$ 8,890 million in 2018. The gap between these two metrics widened significantly after 2016, indicating that tax-related adjustments had a progressively larger positive impact on the equity valuation.
Reported Financial Leverage: A sharp increase in reported financial leverage is observed, rising from 2.66 in 2014 to 5.76 by 2018. This upward trajectory suggests a higher reliance on debt relative to reported equity, with the most significant spike occurring between 2017 and 2018.
Adjusted Financial Leverage: The adjusted financial leverage ratio presents a more moderated risk profile. While it increased from 2.42 in 2014 to a peak of 4.33 in 2015 and 2016, it subsequently declined to 3.66 in 2017 and 3.99 in 2018. This indicates that when adjusted for income tax effects, the company's leverage remained more stable and significantly lower than the reported figures in the final two years of the analysis.

The divergence between reported and adjusted leverage ratios becomes most prominent in 2018, where the reported ratio of 5.76 is substantially higher than the adjusted ratio of 3.99. This variance suggests that the reported leverage overstates the financial risk when the adjustments to stockholders' equity are taken into account.

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	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income	4,046)	2,940)	1,999)	1,602)	2,000)
Stockholders’ equity	6,161)	6,921)	6,599)	5,919)	6,525)
Profitability Ratio
ROE¹	65.67%	42.48%	30.29%	27.07%	30.65%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income	4,078)	1,610)	1,655)	1,569)	1,728)
Adjusted stockholders’ equity	8,890)	8,225)	6,462)	6,231)	7,143)
Profitability Ratio
Adjusted ROE²	45.87%	19.57%	25.62%	25.17%	24.18%

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

2018 Calculations

¹ ROE = 100 × Net income ÷ Stockholders’ equity
= 100 × 4,046 ÷ 6,161 = 65.67%

² Adjusted ROE = 100 × Adjusted net income ÷ Adjusted stockholders’ equity
= 100 × 4,078 ÷ 8,890 = 45.87%

An analysis of the financial performance from 2014 to 2018 reveals a significant divergence between reported and adjusted metrics, particularly regarding profitability and equity valuation. While reported figures show a more aggressive growth trajectory, the adjusted figures provide a more conservative view of operational returns until a sharp inflection point in 2018.

Net Income Trends: Reported net income exhibited a general upward trend, rising from US$ 2,000 million in 2014 to US$ 4,046 million in 2018. In contrast, adjusted net income remained relatively stagnant between 2014 and 2017, fluctuating within a narrow range of US$ 1,569 million to US$ 1,728 million. A substantial increase occurred in 2018, where adjusted net income surged to US$ 4,078 million, aligning closely with reported figures for the first time in the observed period.
Stockholders' Equity Movements: A divergence is observed in the equity base. Reported stockholders' equity showed volatility, peaking at US$ 6,921 million in 2017 before declining to US$ 6,161 million in 2018. Conversely, adjusted stockholders' equity followed a consistent upward trajectory after 2015, increasing from US$ 6,231 million to US$ 8,890 million by 2018. This indicates that the adjustments consistently increased the equity base over time, particularly in the final two years of the period.
Return on Equity (ROE) Analysis: Reported ROE demonstrated a strong and accelerating upward trend, escalating from 30.65% in 2014 to 65.67% in 2018. Adjusted ROE remained relatively stable around 24% to 25% from 2014 to 2016, followed by a notable decline to 19.57% in 2017. A sharp recovery occurred in 2018, with adjusted ROE rising to 45.87%. The widening gap between reported and adjusted ROE, especially in 2017 and 2018, suggests that the factors requiring adjustment had a material impact on the perceived efficiency of equity utilization.

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	Dec 31, 2018	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income	4,046)	2,940)	1,999)	1,602)	2,000)
Total assets	35,480)	30,141)	28,086)	27,053)	17,340)
Profitability Ratio
ROA¹	11.40%	9.75%	7.12%	5.92%	11.53%
Adjusted for Deferred Taxes
Selected Financial Data (US$ in millions)
Adjusted net income	4,078)	1,610)	1,655)	1,569)	1,728)
Adjusted total assets	35,456)	30,118)	27,948)	26,988)	17,272)
Profitability Ratio
Adjusted ROA²	11.50%	5.35%	5.92%	5.81%	10.00%

Based on: 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31).

2018 Calculations

¹ ROA = 100 × Net income ÷ Total assets
= 100 × 4,046 ÷ 35,480 = 11.40%

² Adjusted ROA = 100 × Adjusted net income ÷ Adjusted total assets
= 100 × 4,078 ÷ 35,456 = 11.50%

The financial performance from 2014 to 2018 is characterized by steady asset expansion and a notable divergence between reported and adjusted profitability metrics during the mid-period.

Net Income Trends: Reported net income experienced initial volatility, decreasing from US$ 2,000 million in 2014 to US$ 1,602 million in 2015, before entering a growth phase that culminated in US$ 4,046 million by 2018. In contrast, adjusted net income remained relatively stagnant between 2014 and 2017, fluctuating between US$ 1,569 million and US$ 1,728 million, until a significant surge occurred in 2018, reaching US$ 4,078 million.
Asset Base Evolution: A consistent upward trajectory is observed in the asset base. Reported total assets grew from US$ 17,340 million in 2014 to US$ 35,480 million in 2018. The most rapid expansion occurred between 2014 and 2015, where assets increased by approximately US$ 9,700 million, contributing to a dilution of the return on assets during that period.
Adjusted Return on Assets (ROA) Analysis: Reported ROA fell from 11.53% in 2014 to 5.92% in 2015, followed by a steady recovery to 11.40% by 2018. Adjusted ROA exhibited a more prolonged period of suppression; after an initial drop to 5.81% in 2015, the ratio continued a slight downward trend to 5.35% in 2017. A sharp correction occurred in 2018, with Adjusted ROA rising to 11.50%, effectively converging with and slightly exceeding the reported ROA for the same period.

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