Celgene Corp. (NASDAQ:CELG)

The period under review demonstrates a fluctuating relationship between net operating profit after taxes, cost of capital, and invested capital, ultimately impacting economic profit. Initial years exhibit negative economic profit, followed by a period of improvement, though remaining below positive territory.

Net Operating Profit After Taxes (NOPAT)

NOPAT initially decreased from US$1,826 million in 2014 to US$1,787 million in 2015. A subsequent increase is observed, reaching US$1,954 million in 2016 and US$1,913 million in 2017. A substantial surge in NOPAT occurs in 2018, reaching US$4,676 million, representing a significant positive change.

Cost of Capital

The cost of capital generally decreased over the observed period. Starting at 21.21% in 2014, it declined to 19.43% in 2015, 19.76% in 2016, 18.78% in 2017, and further to 17.95% in 2018. This decreasing trend suggests a potentially lower risk profile or improved financing conditions.

Invested Capital

Invested capital experienced a significant increase from US$9,844 million in 2014 to US$18,136 million in 2015. This growth continued, albeit at a slower pace, reaching US$18,672 million in 2016 and US$18,857 million in 2017. A further substantial increase is noted in 2018, with invested capital reaching US$27,773 million. This indicates considerable investment activity over the period.

Economic Profit

Economic profit remained negative for the first four years of the period. It began at -US$262 million in 2014, worsening to -US$1,737 million in 2015 and remaining relatively stable at -US$1,735 million in 2016 and -US$1,628 million in 2017. While still negative, economic profit improved to -US$308 million in 2018. The improvement in 2018 is attributable to the substantial increase in NOPAT, partially offsetting the impact of the increased invested capital and the continued cost of capital.

Despite the positive trend in NOPAT and decreasing cost of capital, the significant increases in invested capital consistently outweighed these benefits, resulting in negative economic profit for the majority of the period. The substantial increase in NOPAT in 2018 demonstrates a potential shift towards value creation, though economic profit remains negative.

Net Income

The net income demonstrates a fluctuating yet generally upward trend over the five-year period. Starting at $2,000 million in 2014, it experienced a notable decline to $1,602 million in 2015. This was followed by a recovery in 2016, reaching $1,999 million, subsequently increasing more substantially in 2017 to $2,940 million. The most significant growth occurred in 2018, with net income reaching $4,046 million, more than doubling the 2015 low point and exceeding the 2014 figure by a substantial margin. This trend suggests an overall improvement in profitability, with a particularly strong performance in the final year under review.

Net Operating Profit After Taxes (NOPAT)

NOPAT shows a more consistent pattern over the period, with marginal fluctuations between 2014 and 2017. It started at $1,826 million in 2014, experienced a slight decrease to $1,787 million in 2015, then increased moderately to $1,954 million in 2016, before a small decrease to $1,913 million in 2017. A significant increase occurred in 2018, with NOPAT more than doubling to $4,676 million. This sharp rise contrasts with the relative stability of previous years and indicates a substantial improvement in operational efficiency or profitability in 2018. The disparity between net income and NOPAT values also suggests changes in tax impact or non-operating items affecting earnings.

Overall Analysis

Both net income and NOPAT reveal a period of relative stability or moderate variation from 2014 to 2017, followed by significant growth in 2018. The sharp increase in 2018 for both metrics represents a notable positive shift in financial performance. While net income shows some volatility, NOPAT is comparatively stable until the final year, indicating consistent operating profitability prior to the substantial improvement. The data suggests the company may have implemented effective strategies or benefited from market conditions that dramatically enhanced profitability and operational results in 2018.

Provision for taxes on income

The provision for taxes on income exhibited fluctuations over the observed period. Starting at $328 million in 2014, it increased to $422 million in 2015, then decreased to $373 million in 2016. A significant rise occurred in 2017, reaching $1,374 million, followed by a notable decline to $786 million in 2018. This pattern indicates volatility in the tax obligations estimated for income taxes, with a pronounced peak in 2017.

Cash operating taxes

Cash operating taxes showed a similar volatile pattern. Beginning at $654 million in 2014, the value fell to $555 million in 2015, then rose substantially to $884 million in 2016. A dramatic increase was observed in 2017, peaking at $2,853 million. The following year, 2018, saw a sharp decrease to $903 million. This trend suggests a significant variation in the actual cash tax payments, with the highest cash outflow recorded in 2017.

Comparative insights

Both provisions for income taxes and cash operating taxes demonstrate notable volatility with peaks in 2017. The magnitude of cash operating taxes consistently exceeds the provision for taxes, particularly evident in 2017 when cash taxes were more than double the provision amount. This discrepancy might indicate timing differences or adjustments between accrued tax expenses and actual cash payments during these periods.

Overall trend

The data reveals inconsistent patterns in both tax provisions and cash taxes over the five years, with a significant spike in 2017 followed by a decrease in 2018. The spikes may be linked to underlying changes in earnings, tax planning strategies, or external tax regulations affecting the company’s tax liabilities and payments.

Total reported debt & leases

The total reported debt and leases exhibited a significant upward trend over the five-year period. Starting at $7,068 million in 2014, the figure more than doubled by 2015 to $14,456 million. It then remained relatively stable in 2016 around $14,480 million before increasing consistently to reach $20,645 million by 2018. This indicates a growing reliance on debt and lease obligations to finance operations or investments during this timeframe.

Stockholders’ equity

Stockholders’ equity showed some fluctuations with no clear positive trend. The equity started at $6,525 million in 2014, decreased to $5,919 million in 2015, then increased gradually in 2016 and 2017 to reach $6,921 million. However, in 2018, equity declined again to $6,161 million. This pattern may suggest variability in retained earnings, issuance or repurchase of shares, or other equity-related activities affecting the net book value of shareholders' investment.

Invested capital

Invested capital expanded substantially over the period assessed. It nearly doubled from $9,844 million in 2014 to $18,136 million in 2015 and then continued to grow steadily to $18,672 million in 2016 and $18,857 million in 2017. A marked increase occurred in 2018, with invested capital soaring to $27,773 million. This substantial growth points to increased capital deployment into long-term assets or working capital, possibly reflecting strategic expansion or acquisition initiatives supported partially by rising debt levels.

The economic spread ratio exhibited a notable trend over the five-year period. Initially negative, the ratio demonstrated significant deterioration before showing signs of improvement towards the end of the observed timeframe. Economic profit remained negative throughout the period, though its magnitude fluctuated. Invested capital consistently increased year-over-year.

Economic Spread Ratio

The economic spread ratio began at -2.66% in 2014 and declined substantially to -9.58% in 2015. This represented a significant widening of the negative spread. A slight improvement to -9.29% was seen in 2016, followed by a further, though smaller, improvement to -8.63% in 2017. The most substantial positive change occurred in 2018, with the ratio increasing to -1.11%, indicating a considerable reduction in the negative spread. This suggests that while returns were still below the cost of capital, the gap was narrowing.

Economic Profit

Economic profit was negative in each year analyzed. The largest negative value was recorded in 2015 at -1,737 US$ millions, a substantial decrease from the -262 US$ millions reported in 2014. Economic profit remained relatively stable between 2015 and 2017, fluctuating around -1,628 to -1,735 US$ millions. A significant improvement was observed in 2018, with economic profit increasing to -308 US$ millions, the least negative value over the period.

Invested Capital

Invested capital demonstrated a consistent upward trend throughout the period. It increased from 9,844 US$ millions in 2014 to 27,773 US$ millions in 2018. The largest year-over-year increase occurred between 2017 and 2018, with an increase of 8,916 US$ millions. This continuous growth in invested capital, coupled with consistently negative economic profit, contributed to the initially widening negative economic spread ratio.

The convergence of increasing invested capital and improving, though still negative, economic profit in 2018 resulted in the most favorable economic spread ratio of the period. The trend suggests a potential shift in the company’s ability to generate returns relative to its capital employed, although further monitoring is necessary to confirm a sustained positive trajectory.

The economic profit margin exhibited significant fluctuations between 2014 and 2018. Initially negative, the margin demonstrated a substantial decline before exhibiting improvement towards the end of the period. A review of the economic profit and adjusted net product sales reveals the underlying drivers of this trend.

Economic Profit Margin

The economic profit margin began at -3.47% in 2014. This metric then deteriorated considerably, reaching -18.89% in 2015, representing the most substantial negative margin observed during the analyzed timeframe. A moderate improvement followed in 2016, with the margin increasing to -15.52%. Further, albeit smaller, improvements were noted in 2017 (-12.53%) and 2018 (-2.01%). The trend indicates a gradual reduction in the magnitude of the negative economic profit margin over the five-year period.

Economic Profit

Economic profit was negative throughout the period, ranging from -262 million to -1,737 million. The largest negative economic profit occurred in 2015 (-1,737 million), coinciding with the lowest economic profit margin. While remaining negative, economic profit showed a decreasing trend in absolute value from 2015 to 2018, moving from -1,737 million to -308 million. This reduction in the magnitude of the loss contributed to the observed improvement in the economic profit margin.

Adjusted Net Product Sales

Adjusted net product sales consistently increased throughout the period, rising from 7,569 million in 2014 to 15,302 million in 2018. This consistent growth in sales likely played a role in the improving economic profit margin, as the denominator in the margin calculation increased while the numerator, though still negative, decreased in absolute value. The rate of sales growth appeared to accelerate from 2016 onwards.

In summary, while economic profit remained negative across the analyzed period, the economic profit margin demonstrated a trend of improvement, driven by both a reduction in the magnitude of economic loss and consistent growth in adjusted net product sales. The most significant improvement in the margin occurred after 2015, coinciding with the peak in negative economic profit.