Abbott Laboratories — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2015, filed May 6, 2015. Abbott develops, manufactures, and sells health care products through Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Vascular Products. Results exclude the developed-markets branded generics pharmaceuticals and animal health businesses from continuing operations following their February 2015 dispositions.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales from continuing operations | $4.897 billion | $4.755 billion | 3.0% |
| Operating earnings | $610 million | $365 million | 67% |
| Earnings from continuing operations | $529 million | $224 million | 136% |
| Net earnings | $2.292 billion | $375 million | Primarily affected by disposition gain |
| Diluted EPS from continuing operations | $0.35 | $0.14 | 150% |
| Diluted net EPS | $1.51 | $0.24 | Primarily affected by disposition gain |
| Gross margin | 54.3% | 49.5% | +480 basis points |
| Net cash from operating activities | $2 million | $336 million | Down $334 million |
Operating margin was approximately 12.5% versus 7.7% in the prior-year quarter. Continuing-operations net margin was approximately 10.8% versus 4.7%.
- Segment sales were $897 million for Established Pharmaceuticals, $1.669 billion for Nutritionals, $1.093 billion for Diagnostics, and $698 million for Vascular Products.
- Sales excluding foreign-exchange effects increased 10.0% overall, including 13.6% internationally. Reported international sales increased 3.5%, but foreign exchange reduced international sales growth by 10.1 percentage points.
- Research and development expense was $313 million, down $56 million, primarily because of lower restructuring costs.
- Selling, general and administrative expense was $1.737 billion, up 7.2%, primarily reflecting the CFR Pharmaceuticals and Veropharm acquisitions.
- Cash and cash equivalents were $3.226 billion at March 31, 2015, compared with $4.063 billion at December 31, 2014. Short-term investments increased to $6.623 billion, principally due to Mylan N.V. shares received in the branded-generics transaction.
- Total debt was approximately $8.9 billion, including $2.921 billion of short-term borrowings, $51 million of current long-term debt, and $5.931 billion of long-term debt, compared with approximately $7.8 billion at year-end.
- Abbott issued $2.5 billion of long-term notes with maturities in 2020, 2022, and 2025 and fixed rates of 2.00%, 2.55%, and 2.95%, respectively. Proceeds were used to reduce short-term borrowings.
- 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.
- Capital expenditures were $235 million. Financing cash outflows included $1.346 billion of share repurchases and $364 million of dividends paid. The quarterly dividend declared was $0.24 per share, up from $0.22.
Material changes versus the prior comparable period
- Abbott completed the sale of its developed-markets branded generics pharmaceuticals business to Mylan on February 27, 2015, receiving 110 million Mylan N.V. shares valued at approximately $5.77 billion. Abbott recognized a $1.737 billion after-tax gain.
- Abbott completed the sale of its animal health business to Zoetis on February 10, 2015, receiving $230 million in cash and recognizing an after-tax gain of approximately $131 million.
- Discontinued operations contributed $1.763 billion in Q1 2015, compared with $151 million in Q1 2014. The resulting net earnings and EPS comparisons are not representative of underlying continuing operations.
- Continuing-operations sales growth was strongest in Established Pharmaceuticals, up 31.8% reported and 43.0% excluding foreign exchange. Nutritionals increased 2.3% reported and 6.3% excluding foreign exchange.
- Reported Diagnostic Products sales declined 2.1%, while sales excluding foreign exchange increased 6.0%. Reported Vascular Products sales declined 5.4%, with sales excluding foreign exchange increasing 2.1%.
- Operating earnings benefited from gross-margin initiatives, lower restructuring costs, and favorable comparison with the unusually weak first quarter of 2014.
- Cash from operations was limited to $2 million, reflecting $529 million of defined-benefit pension contributions, working-capital uses, and the non-cash tax effects associated with the disposition gain.
- Abbott repurchased approximately 26.9 million shares for approximately $1.25 billion during the quarter.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide a clear full-year earnings or revenue guidance figure.
- Management described emerging-market growth, including the CFR and Veropharm acquisitions, as important contributors to sales performance. It also cited gross-margin initiatives and continued growth in international pediatric and adult nutritionals.
- Foreign exchange remains a material risk. The stronger U.S. dollar reduced Q1 reported sales, and Abbott continues to face currency exposure through international operations and derivatives.
- Abbott’s Venezuela operations represented approximately 3% of Q1 net sales. The company used an official exchange rate of 6.3 bolivars per U.S. dollar and stated that it could not predict whether a devaluation would occur or whether the rate would remain available. Net monetary assets subject to revaluation were approximately $345 million.
- Abbott identified governmental health-system receivables in Italy, Spain, Portugal, and Greece as a credit and collection consideration. These receivables represented approximately 8% of total net trade receivables at March 31, 2015.
- Abbott estimated legal and environmental exposures at approximately $70 million to $85 million and had accrued approximately $80 million. Management did not expect the ultimate disposition to materially affect financial position, cash flows, or results of operations.
- Abbott believes gross unrecognized tax benefits could decrease by approximately $525 million to $635 million within the next 12 months as tax matters are resolved.
- Restructuring charges totaled approximately $8 million in Q1 2015, with an additional approximately $13 million of charges primarily related to accelerated depreciation under other restructuring plans.
- In April 2015, Abbott sold 40.3 million Mylan shares for $2.29 billion of proceeds and expects to recognize a pretax gain of $206 million in Q2 2015.
- Abbott’s estimated annual amortization expense for intangible assets is approximately $680 million in 2015, declining to approximately $530 million in 2019.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the $1.737 billion after-tax disposition gain and other discontinued-operations items.
- Assess the sustainability of reported sales growth after adjusting for foreign exchange, acquisitions, and the divested businesses.
- Review the very low $2 million quarterly operating cash flow and the effect of pension contributions, working capital, and disposition-related tax items.
- Monitor Mylan share-price exposure, the subsequent sale of 40.3 million Mylan shares, and the remaining Mylan equity position.
- Evaluate debt refinancing, variable-rate exposure created by interest-rate swaps, and the use of short-term borrowings.
- Assess Venezuela currency risk, European government receivables, tax contingencies, litigation accruals, and the completion of purchase-price allocations for recent acquisitions.