Abbott Laboratories 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
Abbott Laboratories filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Abbott develops, manufactures and sells health care products through Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, Vascular Products and other businesses. Results exclude the developed-markets branded generics business from continuing operations because Abbott agreed to sell it to Mylan; the transaction was expected to close in the first quarter of 2015.
Financial Performance and Position
| Metric | Three Months 2014 | Three Months 2013 | Nine Months 2014 | Nine Months 2013 |
|---|---|---|---|---|
| Net sales | $5,104 million | $4,825 million | $14,957 million | $14,643 million |
| Operating earnings | $731 million | $473 million | $1,772 million | $1,505 million |
| Earnings from continuing operations | $440 million | $644 million | $1,089 million | $1,504 million |
| Net earnings | $538 million | $966 million | $1,380 million | $1,987 million |
| Diluted earnings per share | $0.36 | $0.61 | $0.90 | $1.25 |
- Continuing-operations sales increased 5.8% in the third quarter and 2.1% for the first nine months. Excluding foreign exchange, growth was 6.7% and 3.9%, respectively.
- Third-quarter gross margin was 51.7%, compared with 50.2% in 2013; nine-month gross margin was 51.1%, compared with 50.2%.
- Operating earnings increased primarily due to sales growth, margin improvement initiatives, lower intangible amortization and lower restructuring costs.
- Reported continuing-operations earnings declined because 2013 included significant discrete tax benefits, including a $241 million third-quarter benefit. The 2014 third-quarter tax expense was $278 million, compared with a $163 million tax benefit in 2013.
- Nine-month operating cash flow was $2,437 million, compared with $1,699 million in 2013. Capital expenditures were $790 million, and acquisitions of businesses and technology used $2,822 million.
- Cash and cash equivalents were $3,613 million at September 30, 2014, compared with $3,475 million at December 31, 2013. Investments were $1,264 million, down from $4,623 million.
- Short-term borrowings were $4,376 million and long-term debt was $3,719 million, compared with $3,164 million and $3,388 million, respectively, at year-end 2013.
- Abbott reported $5.0 billion of unused credit lines supporting commercial paper arrangements. Long-term debt ratings were A+ from Standard & Poor’s and A1 from Moody’s.
- Working capital was $5.6 billion at September 30, 2014, compared with $9.7 billion at December 31, 2013.
Material Changes Versus the Prior Comparable Period
- Nutritional Products sales increased 9.3% in the quarter and 2.2% for the nine months; Diagnostic Products increased 4.9% and 4.1%; Established Pharmaceutical Products increased 11.5% and 2.9%; Vascular Products declined 2.4% and 0.3%.
- International sales increased 8.9% in the quarter and 3.7% for the nine months, while U.S. sales declined 0.6% and 1.2%, respectively.
- Research and development expense decreased 9.5% in the quarter and 2.3% for the nine months. Selling, general and administrative expense decreased 0.6% in the quarter and increased 1.1% for the nine months.
- Net cash used in financing activities was $2,042 million, including $2,194 million for share repurchases and $1,007 million of dividends paid. Abbott repurchased 54.6 million shares for approximately $2.1 billion during the first nine months.
- The quarterly dividend was increased to $0.22 per share from $0.14 per share, a 57% increase.
- Cash flow improved from 2013, when financing included a $5.901 billion transfer of cash and cash equivalents to AbbVie following the separation.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Abbott expects annual operating cash flow to continue exceeding annual capital expenditures and cash dividends.
- Abbott expects approximately $1.4 billion of foreign earnings to be repatriated in 2014, generating approximately $450 million of additional tax expense; estimated U.S. cash taxes on the repatriation were expected to be approximately $10 million after deferred tax asset utilization.
- Management stated that up to $350 million of recorded gross unrecognized tax benefits could decrease within the following twelve months as tax matters are resolved.
- On September 26, 2014, Abbott acquired control of CFR Pharmaceuticals for approximately $2.9 billion in cash, or $2.8 billion net of acquired cash, and assumed approximately $570 million of debt. The preliminary total allocation included $1.8 billion of intangible assets and $1.6 billion of goodwill. CFR’s annualized sales were expected to be approximately $800 million; its third-quarter contribution was not significant.
- Abbott entered into an agreement to acquire Veropharm in Russia for approximately $345 million to $430 million, plus assumed net debt of approximately $120 million. Closing was expected in the fourth quarter of 2014.
- Restructuring charges totaled $227 million in the first nine months, including $107 million for current initiatives and $120 million for other cost-reduction actions. Related accrued balances remained material.
- The developed-markets branded generics business generated 2014 nine-month net sales of $1,461 million and net income of $253 million, compared with $1,550 million and $290 million in 2013. Assets held for disposition totaled $3,143 million, against liabilities of $817 million.
- Major risks include foreign-exchange volatility, government regulation and health-care reimbursement pressures, competitive conditions, emerging-market economic and political developments, tax examinations, litigation and environmental matters, and the execution and regulatory approval of planned transactions.
- Legal and environmental exposures had an estimated possible loss range of approximately $65 million to $90 million, with an accrual of approximately $75 million. Management did not expect the ultimate disposition to materially adversely affect Abbott.
- The filing states that disclosure controls were effective as of September 30, 2014. The CFR acquisition was the only reported material change to internal control during the quarter.
Important Facts for Investors to Verify
- Confirm the final closing status, consideration and purchase accounting for the Mylan transaction and the Veropharm acquisition.
- Assess the sustainability of reported operating-margin improvement after restructuring benefits, lower amortization and the intellectual-property matter affecting Vascular Products.
- Reconcile continuing-operations earnings with prior periods after excluding discontinued operations and adjusting for 2013 and 2014 discrete tax items.
- Monitor leverage, short-term borrowings, cash balances and liquidity following the CFR acquisition, share repurchases and increased dividends.
- Evaluate foreign-exchange sensitivity, particularly because international sales represented approximately 69% of nine-month continuing-operations sales and currency translation produced a $1.053 billion reduction in other comprehensive income.
- Track the timing and cash-tax impact of foreign-earnings repatriation and the resolution of unrecognized tax benefits.