Use the year-end financial statements for Merck & Co. to answer the following questions.

Note that
Merck’s financial statements are stated in millions of dollars (i.e., Merck’s 2022 revenue of $59,283 is
$59.283 billion. ALL QUESTIONS CAN BE ANSWERED USING ONLY THE NUMBERS HIGHLIGHTED IN
YELLOW – YOU CAN IGNORE ALL OTHER PARTS OF THE FINANCIAL STATEMENTS.

For the questions that require calculations, please show, and label your work (the steps along the way)
in order to receive partial credit. For example, when asked for net working capital, please show the
numbers you use for current assets and current liabilities to do the calculation.

Some questions require answers from previous questions to complete. If you show your work, you can
receive full credit in such cases even if the answer is wrong due to an earlier error.

1. Present a partial non-GAAP/adjusted income statement for Merck & Co. for the years
ended 2022 and 2021. Present the statements in both dollars and in common size format.
HINT: Cost of Sales, SG&A and R&D on the GAAP income statements include unusual
items in both years. The unusual items need to be removed to calculate adjusted income
statements. The amounts of the unusual items in each line are detailed in the table
immediately beneath the GAAP income statements. Present Merck’s adjusted income
statement using the following format, inserting the Gross Profit and Operating Income lines
which don’t appear on the reported GAAP statements. (20 points)

2. At what rate did Merck’s revenue grow in 2022 vs 2021? (4 points)

59,283 / 48704 – 1 = .217 = 21.7%

3. How much and in what direction did Merck’s adjusted gross margin and adjusted operating
margin change in 2022 from 2021 in basis points? (3 points each)

Gross margin change: .7445 - .7565 = -.012 = -120 basis points

Operating margin change: .3799 - .3247 = .0552 = +552 basis points
4. Using Merck’s GAAP income statement and the non-GAAP reconciliation tables, calculate
Merck’s adjusted Pretax Income (Income from Continuing Operations Before Taxes) and
adjusted income tax expense (Income Tax Provision) for 2022. For this question, ignore the
last two lines on the income statement related to Noncontrolling Interests that are not
highlighted. (6 points)

Adj. Pretax Income = Reported Pretax Income + non-GAAP Adjustments

= 16,444 + 3704 + 666 + 1348 = $22,162

Adj. Income Taxes = Reported Income Taxes + non-GAAP Adjustments

= 1918 + 1232 = $3,150

5. Using the answers from Question #4, calculate Merck’s non-GAAP/adjusted tax rate for
2022. (4 points)

Adjusted Tax Rate = Adjusted Income Taxes / Adjusted Pretax Income

= 3150 / 22,162 = .142 = 14.2%

6. Using the adjusted tax rate from Question #5, calculate Merck’s non-GAAP/adjusted net
income available to all stakeholders for 2022. Round the adjusted tax rate from Question #5
to the nearest whole number. Merck’s 2022 interest expense was $962 million (it is
embedded in the Other (Income)/Expense, net line). For this question, you will also need
to calculate non-GAAP/adjusted net income, which you should be able to do from the
answer to question #4. (10 points)

Adjusted Net Income to All Stakeholders = Adj. Net Income + After-Tax Interest Expense

Adjusted Net Income = Adjusted Pretax Income – Adjusted Income Taxes

= 22,162 – 3150 = $19,012

After-Tax Interest Expense = Interest Expense * (1 – Adjusted Tax Rate)

= 962 * (1 - .14) = $827

Adjusted Net Income to All Stakeholders = 19,012 + 827 = $19,839

7. Calculate Merck’s net working capital at year-end 2022 and 2021. (15 points)

Net Working Capital = Current Assets – (Total Current Liabilities – Short-Term Debt)

2022: 35,722 – (24,239 – 1946) = 35,722 – 22,293 = $13,429

2021: 30.266 – (23,872 – 2412) = 30,266 – 21,460 = $8,806
8. Calculate Merck’s invested capital at year-end 2022 and 2021. (15 points)

Invested Capital = Net Working Capital + Long-Term Assets

Long-Term Assets = Total Assets – Current Assets

2022: 13,429 + (109,160 – 35,722) = 13,429 + 73,438 = $86,867

2021: 8806 + (105,694 – 30,266) = 8806 + 75,428 = $84,234

9. Calculate Merck’s return on invested capital for 2022. (15 points)

ROIC = Adj. Net Income to All Stakeholders / Average Invested Capital

Average Invested Capital = (86,867 + 84,234) / 2 = $85,551

ROIC = 19,839 / 85,551 = .232 = 23.2%

10. Break down Merck’s return on invested capital into its components of asset turnover and
profit margin for 2022. (15 points)

Asset Turnover = Revenue / Average Invested Capital

Asset Turnover = 59,283 / 85,551 = 0.693

Profit Margin = Adj. Net Income to All Stakeholders / Revenue

Profit Margin = 19,839 / 59,283 = .335

ROIC = Asset Turnover * Profit Margin

= 0.693 * .335 = .232 = 23.2%