Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated our usual set of Cash Management, Growth, Profitability and Value metrics. This post reports on the metrics and the associated financial gauge scores.
King Pharmaceuticals manufactures and sells various brand-name prescription pharmaceuticals. Some background information about King and the business environment in which it is currently operating can be found in the look-ahead.
King completed a $1.6 billion acquisition of Alpharma on 29 December 2008. King's financial results in 2009 to date characterize the operations of the composite company. However, we have not found combined financial statements, on a pro forma basis, for 2008 and before. Therefore, when we compare King's performance in 2009 to that in 2008, we're comparing the combined company on one hand with King-only on the other. The former includes Revenue and profits from Alpharma products and the latter does not.
In summary, King's latest quarterly results produced the following changes to the gauge scores:
- Cash Management: 7 of 25 (unchanged June)
- Growth: 0 of 25 (unchanged)
- Profitability: 6 of 25 (unchanged)
- Value: 2 of 25 (down from 3)
- Overall: 17 of 100 (down from 18)
| Cash Management | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| Current Ratio | 2.2 | 2.3 | 5.3 | 2.8 |
| LTD/Equity | 21.7% | 25.7% | 14.6% | 18.9% |
| Debt/CFO (years) | 1.6 | 2.0 | 0.7 | 1.0 |
| Inventory/CGS (days) | 144.2 | 147.1 | 102.3 | 179.4 |
| Finished Goods/Inventory | 72.7% | 69.4% | 64.4% | 51.5% |
| Days of Sales Outstanding (days) | 46.7 | 46.2 | 40.6 | 46.1 |
| Working Capital/Invested Capital | 26.3% | 25.8% | 75.6% | 47.3% |
| Cash Conversion Cycle Time (days) | 139.0 | 139.1 | 73.9 | 161.5 |
| Gauge Score (0 to 25) | 7 | 7 | 14 | 16 |
King paid $1.6 billion in cash for Alpharma last year. While this obviously had an effect on the company's liquidity and debt, the company's Balance Sheet appears solid.
One concern might be that King held, as of 30 September 2009, tax-exempt auction rate securities having a par value of $377 million. Poorly functioning credit markets have led to failed auctions, which makes it difficult for holders such as King to recover the full value of its investments, although King does receive the interest payments it is due.
In the immediate aftermath of the Alpharma deal, Long-term Debt jumped to $878 million (39 percent of Stockholders Equity at the time) and debt due within one year reached $444 million. In early 2009, King redeemed $385.2 million of Alpharma Convertible Senior Notes. By the end of September, King encouragingly had reduced long- and short-term debt levels to $506 million and $127 million, respectively.
King's Inventory is now valued at $208 million, up from only $92 million last September. The recent figure includes inventory related Alpharma's business and the earlier figure does not. We're encouraged the days of Inventory held (as measured by days of Cost of Goods Sold) is much less than King's five-year average, but we would like to see Inventory days less than last year's 102 days. The high Inventory figure, especially the Finished Goods ratio, put a lot of downward pressure on the gauge score.
The Days of Sales Outstanding, which is based on the Accounts Receivable, is not decreasing the way we thought it would. But, the figures (which we now calculate slightly differently) are consistent with historic values.
| Growth | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| Revenue growth | -3.7% | -15.6% | -17.3% | 2.1% |
| Revenue/Assets | 48.3% | 46.3% | 50.8% | 55.8% |
| Operating Profit growth | -14.3% | -12.7% | 23.5% | 7.3% |
| CFO growth | -32.2% | -43.7% | 0.0% | -2.7% |
| Net Income growth | N/A | N/A | 41.8% | 10.7% |
| Gauge Score (0 to 25) | 0 | 0 | 8 | 10 |
Products developed by Alpharma have contributed to Revenue in the last three quarters, which has cushioned the trailing-year sales decline that King would have experienced on its own.
According to the 10-Q, sales of branded prescription pharmaceuticals fell $18.5 million (6.1 percent) in the quarter. However, Revenue from the branded products King was selling last year dropped $70.1 million because King gained $40.4 million from sales of the Flector® Patch, which was brought to the company by Alpharma, and $11.2 million from the new Embeda long-acting opioid.
The Net Income growth rates are listed above as Not Applicable because King lost money, on a GAAP basis, over the last four quarters. The loss was almost $480 million because of a $593 million charge for in-process R&D associated with the Alpharma acquisition in the fourth quarter of 2008.
Cash Flow from Operations has been positive in each quarter of the last couple of years, but the trailing-year amounts are lower.
| Profitability | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| Operating Expenses/Revenue | 78.3% | 75.2% | 70.1% | 72.1% |
| ROIC | 10.2% | 10.9% | 19.4% | 19.4% |
| Free Cash Flow/Invested Capital | 16.9% | 14.9% | 29.8% | 25.2% |
| Accrual Ratio | 4.3% | 6.1% | -27.2% | -0.1% |
| Gauge Score (0 to 25) | 6 | 6 | 16 | 14 |
While down from last year, Free Cash Flow of nearly 17 percent of Invested Capital would normally be considered a healthy figure.
| Value | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| P/E | N/A | N/A | 9.4 | 21.1 |
| P/E vs. S&P 500 P/E | N/A | N/A | 0.5 | 1.3 |
| PEG | N/A | N/A | 0.4 | 0.2 |
| Price/Revenue | 1.6 | 1.5 | 1.3 | 1.8 |
| Enterprise Value/Cash Flow (EV/CFO) | 6.9 | 7.1 | 2.4 | 5.6 |
| Gauge Score (0 to 25) | 2 | 3 | 22 | 12 |
| Share price ($) | $10.77 | $9.63 | $9.58 | - |
On optimism about new products emerging (or close to emerging) from King's pipeline, the price of King shares increased 11.8 percent during the third quarter, from $7.07 to $9.63. This rise came on top of a 36 percent share price rise during the second quarter, admittedly from depressed levels. 
It's not shown above, but we excluded the $610 million of special charges recorded in the December 2008 quarter and reran the numbers. The Price/Earnings multiple, with the exclusion in effect, would be about 20.
| Overall | Sep 2009 | Jun 2009 | Sep 2008 | 5-Yr Avg |
| Gauge Score (0 to 100) | 17 | 18 | 69 | 52 |
The gauges essentially stood still at weak levels during the third quarter. However, the results are not as meaningful as we would like. The Alpharma acquisition significantly reduced the comparability of recent results with King's historical data, and earlier special charges have greatly impacted trailing year results.
King is facing some significant concerns. We await future results to determine how well the company is addressing them.
Full disclosure: Long KG at time of writing.
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