Allergan PLC (NYSE:AGN)

The financial performance between 2015 and 2019 is characterized by a significant contraction in 2016 followed by a sustained period of growth. Both net cash provided by operating activities and free cash flow to the firm (FCFF) exhibit a similar trajectory, reflecting a strong correlation between operational cash generation and the overall cash available to the firm's providers of capital.

Operating Cash Flow Dynamics

Net cash provided by operating activities experienced a sharp decline in 2016, falling from 4.53 billion USD in 2015 to approximately 1.43 billion USD. A rapid recovery occurred in 2017, with values rising to 5.87 billion USD. Following a slight dip in 2018 to 5.64 billion USD, the metric reached a period peak of 7.24 billion USD by the end of 2019.

Free Cash Flow to the Firm (FCFF) Trends

FCFF mirrored the operational volatility observed in 2016, dropping to 1.55 billion USD from a 2015 level of 4.51 billion USD. From 2017 onward, FCFF demonstrated a consistent and uninterrupted year-over-year increase, rising from 5.64 billion USD in 2017 to 6.14 billion USD in 2018, and ultimately reaching 7.52 billion USD by December 31, 2019.

Comparative Analysis of OCF and FCFF

A divergence between operating cash flow and FCFF is observable in the latter part of the period. In 2015, 2016, and 2017, FCFF closely tracked or remained slightly below operating cash flows. However, in 2018 and 2019, FCFF exceeded net cash provided by operating activities. This suggests that the firm may have realized cash inflows from the sale of assets or experienced a reduction in capital expenditures that offset operational requirements, thereby enhancing the total cash flow available to the firm.

The financial period from 2015 to 2019 is characterized by significant volatility in the effective income tax rate and a marked increase in the net cash outflows for interest payments starting in 2017.

Cash Paid for Interest, Net of Tax

Net cash expenditures for interest remained relatively stable between 2015 and 2016, with a slight decrease from 446,365 thousand US$ to 421,707 thousand US$. However, a substantial increase occurred in 2017, where payments rose to 720,972 thousand US$, representing a growth of approximately 71% over the prior year. Following this spike, the figures plateaued, remaining at 718,481 thousand US$ in 2018 before experiencing a modest decline to 686,788 thousand US$ in 2019.

Effective Income Tax Rate (EITR) Trends

The effective income tax rate exhibited extreme fluctuation during the analyzed period. After starting at 35.30% in 2015, the rate spiked to 67.00% in 2016. From 2017 onward, a consistent downward trajectory is observed, with the rate falling to 37.00% in 2017, 25.60% in 2018, and reaching a period low of 12.50% in 2019.

Correlation Between Tax Rates and Interest Outflows

Because interest payments are reported net of tax, the declining EITR from 2017 to 2019 suggests that the tax shield benefit derived from interest expenses diminished over time. The sharp increase in net cash paid in 2017 coincided with a significant drop in the EITR from 67.00% to 37.00%, indicating that a larger portion of the interest expense was paid in cash rather than being offset by tax savings. By 2019, despite the EITR reaching its lowest point at 12.50%, the net cash paid for interest decreased slightly, implying a reduction in the gross interest obligation that outweighed the impact of the reduced tax shield.

The five-year period from 2015 to 2019 is characterized by a significant compression of the Enterprise Value to Free Cash Flow to the Firm (EV/FCFF) multiple. While the enterprise value generally declined over the majority of the period, the cash flow generation capabilities improved substantially after a notable dip in 2016, leading to a lower and more stabilized valuation multiple by the end of the period.

Enterprise Value Trends

A sustained downward trajectory in enterprise value was observed from 2015 through 2018, with the value decreasing from 164.19 billion US$ to 68.16 billion US$. This trend was interrupted in 2019, when the enterprise value increased to 81.90 billion US$.

Free Cash Flow to the Firm (FCFF) Dynamics

FCFF experienced significant volatility initially, dropping from 4.51 billion US$ in 2015 to a low of 1.55 billion US$ in 2016. Following this trough, a consistent growth pattern emerged, with FCFF rising to 5.64 billion US$ in 2017, 6.14 billion US$ in 2018, and peaking at 7.52 billion US$ in 2019.

EV/FCFF Ratio Analysis

The EV/FCFF ratio peaked in 2016 at 69.00, a result of the simultaneous decrease in enterprise value and the sharp contraction in free cash flow. Subsequent years saw a rapid devaluation of the multiple, falling to 14.68 in 2017 and further declining to 10.90 by 2019. This suggests that the market valuation of the firm became more closely aligned with its actual cash flow generation over time, moving from a high-premium valuation to a more conservative multiple.