Abbott Laboratories 2016 First-Quarter Form 10-Q Summary
Business context and reporting period
Abbott Laboratories reported results for the three months ended March 31, 2016. The company operates through Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Vascular Products, with additional non-reportable Diabetes Care and Medical Optics businesses. The financial statements are unaudited and should be read with Abbott’s 2015 Form 10-K.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $4.885 billion | $4.897 billion | (0.2%) |
| Operating earnings | $524 million | $610 million | (14.1%) |
| Operating margin | 10.7% | 12.5% | Down 180 basis points |
| Earnings from continuing operations | $56 million | $529 million | (89.4%) |
| Net earnings | $316 million | $2.292 billion | (86.2%) |
| Diluted earnings per share | $0.21 | $1.51 | (86.1%) |
| Gross margin | 53.2% | 54.3% | Down 110 basis points |
| Net cash from operating activities | $(93) million | $2 million | Declined $95 million |
Sales excluding foreign exchange increased 5.1%. Reportable-segment sales excluding foreign exchange increased 5.8%, led by Established Pharmaceuticals at 11.0%, Nutritional Products at 4.3%, and Diagnostics at 6.9%; Vascular Products increased 0.9%.
- Cash and cash equivalents were $3.334 billion at March 31, 2016, down from $5.001 billion at December 31, 2015.
- Short-term investments were $623 million, compared with $1.124 billion at year-end 2015.
- Short-term borrowings were $2.610 billion and long-term debt was $5.977 billion; total debt was approximately $8.590 billion excluding certain held-for-disposition liabilities.
- Working capital was $4.0 billion, down from $5.0 billion at December 31, 2015.
- Abbott had $5.0 billion of unused credit lines supporting commercial paper arrangements. Long-term debt ratings were A+ from Standard & Poor’s and A2 from Moody’s, although ratings were under review following announced acquisitions.
- Capital expenditures were $243 million. Abbott paid $385 million in dividends and repurchased 10.4 million shares for $408 million under its repurchase program.
- The quarterly dividend declared was $0.26 per share, an 8% increase from $0.24 in the comparable period.
Material changes versus the prior comparable period
- Operating earnings declined primarily because of unfavorable foreign exchange, higher research and development costs, and unusual items. Research and development expense increased $66 million, or 21%, partly due to a $43 million impairment of in-process research and development.
- The company recorded a $477 million foreign currency loss from revaluing Venezuelan net monetary assets after moving to the DICOM exchange rate. The filing states that Venezuela represented approximately 0.1% of consolidated assets after revaluation and that additional losses were not expected to be material.
- Interest expense increased because of long-term debt issued in March 2015 and higher short-term borrowing rates.
- Continuing-operations tax expense was reduced by an approximately $140 million benefit from resolving prior-year tax positions. Discontinued operations included $247 million of net tax benefits, primarily from prior-year tax matters.
- Q1 2015 net earnings included a $1.737 billion after-tax gain from the sale of the developed-markets branded generics and animal-health businesses. This makes the year-over-year decline in total net earnings not representative of underlying operating performance.
- Foreign currency reduced reported international sales by 7.8% and total sales by 5.3%. International sales excluding foreign exchange increased 6.6%.
- Operating cash flow was affected by $491 million of defined-benefit pension contributions, approximately $125 million of cash taxes related to business dispositions, and working-capital and other uses.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide a clear quantitative full-year earnings or revenue guidance figure. Management expects to fund dividends, capital expenditures, and other investments through operating cash flow, cash on hand, short-term investments, and borrowings. Abbott expects to maintain an investment-grade credit rating despite anticipated higher borrowings.
- Abbott agreed to acquire Alere for an expected equity value of $5.8 billion and assumed or refinanced net debt of approximately $2.6 billion. A 364-day bridge facility of up to $9 billion was arranged. The transaction remained subject to shareholder and regulatory approvals; the FTC issued a second request for information on May 2, 2016.
- After quarter-end, Abbott agreed to acquire St. Jude Medical for an expected equity value of approximately $25 billion and assumed or refinanced net debt of approximately $5.7 billion. Abbott arranged a 364-day bridge facility of up to $17.2 billion. The transaction was subject to shareholder and regulatory approvals.
- The Alere transaction involved a delay in Alere’s 2015 Form 10-K related to revenue-recognition analysis in Africa and China, creating additional transaction and diligence risk.
- Abbott’s Mylan equity investment had a fair value of approximately $3.5 billion at March 31, 2016, with $372 million of unrealized gross losses. A hypothetical 20% decline in these securities would reduce fair value by approximately $650 million.
- Restructuring charges were approximately $16 million in Q1 2016, and restructuring accruals totaled $171 million at March 31, 2016 across the disclosed plans.
- Legal and environmental proceedings had an estimated possible loss range of approximately $35 million to $50 million, with a recorded accrual of approximately $45 million. Management did not expect a material adverse effect, although outcomes remain uncertain.
- Abbott estimated that gross unrecognized tax benefits could decrease by $100 million to $200 million within the next twelve months as tax matters are resolved.
- Key ongoing risks include foreign exchange volatility, Venezuela’s economic conditions, healthcare regulation and reimbursement pressures, competitive markets, acquisition financing and regulatory approvals, pension funding, litigation, and potential market-value declines in Mylan securities.
Facts investors should verify
- Whether the Alere acquisition closed on the expected terms and the ultimate impact of regulatory review, Alere’s delayed filing, and assumed debt.
- Whether the St. Jude Medical acquisition closed and the resulting effect on Abbott’s leverage, interest expense, share count, credit ratings, and liquidity.
- Underlying sales and margin trends excluding foreign exchange, particularly in Diagnostics, Nutritionals, Established Pharmaceuticals, and Vascular Products.
- The sustainability of operating cash flow after pension contributions, tax settlements, acquisition-related costs, and other unusual items.
- The valuation and volatility of Abbott’s Mylan investment and any future other-than-temporary impairment.
- Progress in resolving unrecognized tax benefits, litigation matters, restructuring obligations, and Venezuela-related exposures.