Abbott Laboratories Form 10-Q Summary
Business context and reporting period
Abbott Laboratories filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. Abbott develops, manufactures and sells pharmaceuticals, nutritional products, diagnostic products and vascular products worldwide. The filing was submitted November 5, 2010.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $8.675 billion | $7.761 billion | $25.199 billion | $21.975 billion |
| Operating earnings | $1.181 billion | $1.640 billion | $4.258 billion | $4.372 billion |
| Net earnings | $891 million | $1.480 billion | $3.185 billion | $4.207 billion |
| Diluted EPS | $0.57 | $0.95 | $2.04 | $2.70 |
| Gross margin | 56.9% | 56.7% | 57.9% | 57.1% |
| Operating margin | 13.6% | 21.1% | 16.9% | 19.9% |
| Net margin | 10.3% | 19.1% | 12.6% | 19.1% |
Net sales increased 11.8% in the third quarter and 14.7% in the first nine months. Reported growth primarily reflected the Solvay Pharmaceuticals acquisition and foreign-exchange effects. Excluding exchange, management stated that sales increased 12.8% in the quarter and 12.9% year to date.
Operating performance was pressured by higher research and development, selling, general and administrative, restructuring and impairment costs. Research and development increased 59.7% in the quarter and 33.6% year to date; excluding Solvay restructuring charges, the increases were 39.5% and 26.8%, respectively.
Net cash from operating activities was $6.419 billion for the first nine months, compared with $5.443 billion in the prior-year period. Investing activities used $9.748 billion, including $9.120 billion for business acquisitions. Financing activities used $994 million. Cash and cash equivalents declined to $3.818 billion from $8.809 billion at December 31, 2009.
At September 30, 2010, total debt was approximately $18.7 billion, consisting of $3.588 billion of short-term borrowings, $2.219 billion of current long-term debt and $12.911 billion of long-term debt. Abbott issued $3.0 billion of long-term debt during the second quarter. The company reported $6.7 billion of unused credit facilities and long-term debt ratings of AA from Standard & Poor’s and A1 from Moody’s.
Working capital was $3.9 billion at September 30, 2010, compared with $10.3 billion at December 31, 2009. Cash dividends declared increased to $0.44 per share in the third quarter from $0.40 in the prior-year quarter.
Material changes versus the prior comparable period
- Pharmaceutical Products sales increased 21.7% in the quarter and 19.9% year to date, principally due to the Solvay acquisition. Vascular Products sales increased 18.6% and 20.5%, respectively.
- Nutritional Products sales declined 1.5% in the quarter, partly because of the voluntary recall of certain Similac powdered infant formulas in September 2010. Year-to-date Nutritional Products sales increased 6.4%.
- U.S. sales increased 6.6% in the quarter and 7.1% year to date; international sales increased 16.2% and 21.2%, respectively.
- Gross margin improved modestly, but operating and net margins declined because of substantially higher operating expenses and unusual items.
- Other income in 2009 included a $287 million Medtronic litigation settlement gain and a $797 million derecognition of a TAP joint-venture contingent liability. These items were not comparable recurring benefits in 2010.
- Abbott completed the $2.2 billion cash acquisition of Piramal Healthcare’s Healthcare Solutions business on September 8, 2010, with additional payments of $400 million annually from 2011 through 2014. The acquisition added preliminary goodwill of $1.0 billion and acquired intangible assets of $2.6 billion.
- Abbott acquired Solvay Pharmaceuticals for approximately $6.1 billion in February 2010. Solvay contributed approximately $900 million of third-quarter sales and $2.0 billion of nine-month sales, but generated pretax losses of approximately $365 million and $435 million, respectively, including acquisition, integration and restructuring expenses.
Outlook, commentary, risks and unusual items
- Management expected operating cash flow to continue exceeding capital expenditures and cash dividends.
- Abbott forecast full-year worldwide HUMIRA sales growth to approach 20% in 2010.
- A Solvay-related restructuring plan is expected to generate pretax charges of approximately $810 million to $970 million over the following two years. Abbott recorded $436 million of related charges in 2010 through September 30, leaving a restructuring accrual of $399 million.
- Abbott recorded a $189 million third-quarter impairment charge for the sibutramine intangible asset after the product was withdrawn from the U.S. market in October 2010.
- Abbott expects an additional acquired in-process research and development charge in the fourth quarter related to licensing rights for a chronic kidney disease product. A separate development agreement could require approximately $500 million of milestone payments.
- Health care reform is expected to increase Medicaid rebates, add Medicare Part D coverage-gap rebates and impose a branded-drug industry fee beginning in 2011. Abbott also expects a medical-device excise tax beginning in 2013. The filing does not provide a clear quantified estimate of the full future earnings impact.
- Abbott deposited $1.87 billion in restricted funds to secure a judgment in the HUMIRA patent litigation involving New York University and Centocor. Abbott appealed the judgment and recorded no reserve; the potential resolution could materially affect cash flows or results of operations.
- Recorded reserves for other legal and environmental exposures were approximately $265 million, with estimated possible losses generally ranging from approximately $245 million to $290 million. The filing states that some remaining matters cannot be reasonably estimated.
- Other risks include product safety issues and recalls, patent and pricing litigation, regulatory and reimbursement changes, foreign-exchange movements, goodwill and intangible-asset impairment, pension obligations, competitive pressures and financing-market conditions.
Important facts for investors to verify
- Verify the final purchase-price allocations and performance of the Solvay and Piramal acquisitions, including contingent consideration and integration costs.
- Assess the effect of the Similac recall, sibutramine withdrawal and related impairment or remediation costs.
- Monitor the HUMIRA patent appeal and the $1.87 billion restricted deposit, as well as other patent, pricing and product-liability proceedings.
- Reconcile reported earnings with restructuring, impairment, acquisition-related and other nonrecurring items.
- Evaluate liquidity after the acquisition spending, the decline in cash balances and the increase in debt, including upcoming maturities.
- Verify the timing and financial impact of health care reform-related rebates, fees and taxes.
- Review the filing’s unaudited financial statements together with Abbott’s 2009 Form 10-K and subsequent filings; the filing text does not provide a full quarterly balance-sheet or segment cash-flow analysis.