Abbott Laboratories 2011 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, 2011. Abbott develops, manufactures and sells pharmaceutical, nutritional, diagnostic and vascular products worldwide. Reportable segments were Proprietary Pharmaceuticals, Established Pharmaceuticals, Nutritional Products, Diagnostic Products and Vascular Products.
Effective January 1, 2011, Abbott eliminated the one-month reporting lag for foreign subsidiaries and retrospectively applied the related accounting change. The company also reorganized its reportable segments to reflect the transfer of international branded generics to Established Pharmaceuticals.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $9.817 billion | $8.675 billion | $28.474 billion | $25.199 billion |
| Operating earnings | $595 million | $1.181 billion | $3.669 billion | $4.258 billion |
| Net earnings | $303 million | $891 million | $3.110 billion | $3.185 billion |
| Diluted EPS | $0.19 | $0.57 | $1.98 | $2.04 |
| Gross margin | 59.5% | 56.9% | 58.9% | 57.9% |
| Operating margin | 6.1% | 13.6% | 12.9% | 16.9% |
| Net margin | 3.1% | 10.3% | 10.9% | 12.6% |
Sales increased 13.2% in the quarter and 13.0% for the nine months. Excluding favorable foreign exchange effects of 5.3% and 3.8%, underlying sales growth was 7.9% and 9.2%, respectively. International sales increased 19.1% in the quarter and 18.5% for the nine months, compared with U.S. growth of 5.8% in both periods.
Segment sales growth was broad-based. For the nine months, Proprietary Pharmaceuticals increased 12.8%, Established Pharmaceuticals 31.3%, Nutritional Products 8.6%, Diagnostics 9.6% and Vascular Products 5.7%.
Cash flow from operating activities was $7.569 billion for the first nine months of 2011, compared with $6.419 billion in 2010. Capital expenditures were $1.217 billion, acquisitions and technology investments used $673 million, dividends paid were $2.186 billion, and debt repayments totaled approximately $2.796 billion, including short-term and long-term debt.
Cash and cash equivalents were $5.049 billion at September 30, 2011, compared with $3.648 billion at December 31, 2010. Working capital was $7.7 billion, compared with $5.1 billion at year-end 2010. Short-term borrowings were $3.590 billion, current long-term debt was $35 million, and long-term debt was $13.097 billion. Abbott reported $6.7 billion of unused credit facilities supporting commercial paper arrangements and long-term debt ratings of AA from Standard & Poor’s and A1 from Moody’s.
Cash dividends declared per common share increased to $0.48 in the quarter and $1.44 for the nine months, compared with $0.44 and $1.32 in the comparable 2010 periods.
Material changes versus the prior comparable period
- Net sales grew strongly, aided by unit growth, favorable foreign exchange and contributions from the Solvay and Piramal acquisitions.
- Operating earnings declined 49.6% in the quarter and 13.8% for the nine months, while net earnings declined 66.0% and 2.4%, respectively.
- Results included a $1.5 billion charge related to the Department of Justice investigation of Depakote sales and marketing activities. The charge materially reduced third-quarter earnings and was described as non-cash when recorded, although final resolution is expected to affect cash flows materially.
- Nine-month results included $272.5 million of acquired in-process research and development expense, compared with $75 million in 2010.
- Gross margin improved year over year, but management cited additional health-care-reform rebates, European government pricing actions and foreign exchange as continuing pressures.
- Research and development expense increased 11.7% for the nine months, reflecting acquisitions and continued pipeline investment. Selling, general and administrative expense increased substantially, primarily because of the litigation reserve and higher acquisition-related and commercial spending.
- Abbott recorded $570 million of tax benefits from favorable resolution of prior-year tax positions during the first nine months. This contributed to an unusually low reported tax expense and effective tax rate.
- The Federal Circuit reversed the $1.67 billion HUMIRA patent damages judgment and found the relevant Centocor patent invalid; Centocor’s rehearing request was denied, although a potential U.S. Supreme Court petition remained available through November 10, 2011.
Guidance, outlook, risks and unusual items
- Management expected operating cash flow to continue exceeding capital expenditures and cash dividends.
- Abbott expected to exceed its previous forecast of high-teens worldwide HUMIRA sales growth for 2011.
- The Depakote investigation remained subject to ongoing settlement discussions involving potential civil and criminal claims. The recorded legal reserve was approximately $1.6 billion, and the estimated range of possible loss for legal and environmental matters was approximately $1.58 billion to $1.61 billion.
- Abbott stated that resolution of the government investigation could have a material impact on cash flows in a particular year. The filing does not provide a definitive settlement amount or completion date.
- Health-care reform is expected to continue pressuring pharmaceutical margins through higher Medicaid and Medicare rebates, the annual branded-drug fee and, beginning in 2013, a 2.3% medical-device excise tax.
- Restructuring programs produced accrued balances of $122 million, $231 million and $92 million at September 30, 2011 for the principal initiatives. Additional charges were expected through 2012 and, for certain diagnostic activities, through 2015.
- In October 2011, after the reporting period, Abbott announced plans to separate into two publicly traded companies: a diversified medical products company and a research-based pharmaceutical company. The planned tax-free distribution was expected to be completed by the end of 2012.
Most important facts to verify
- Whether the Depakote investigation was ultimately settled, the final cash payment, and any additional penalties or compliance obligations.
- The effect of the $1.5 billion litigation charge and the $570 million tax benefit on normalized earnings and cash flow.
- Progress, structure, tax treatment and execution costs of the announced separation into two companies.
- Organic sales growth excluding acquisitions and foreign exchange, particularly for Proprietary and Established Pharmaceuticals.
- Debt maturities, refinancing requirements and the impact of contingent acquisition payments on future liquidity.
- Potential changes in pharmaceutical rebates, government pricing, regulatory requirements, patent litigation and restructuring costs.