Abbott Laboratories — Form 10-Q Summary
Business context and reporting period
Abbott Laboratories filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Abbott develops, manufactures and sells pharmaceutical, nutritional, diagnostic and vascular products worldwide. The company was preparing to separate its research-based pharmaceutical business into a new publicly traded company, subject to required approvals, targeted for completion by year-end 2012.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $9.807 billion | $9.616 billion | $19.264 billion | $18.657 billion |
| Operating earnings | $2.104 billion | $1.773 billion | $3.680 billion | $3.075 billion |
| Net earnings | $1.725 billion | $1.943 billion | $2.967 billion | $2.807 billion |
| Diluted EPS | $1.08 | $1.23 | $1.85 | $1.79 |
| Gross margin | 62.9% | 59.8% | 61.8% | 58.6% |
| Operating margin | 21.5% | 18.4% | 19.1% | 16.5% |
Second-quarter sales increased 2.0%, while sales increased 3.3% for the first six months. Excluding unfavorable foreign exchange, growth was 6.7% and 6.3%, respectively. U.S. sales increased 6.1% in the quarter and 6.0% year to date; international sales declined 0.9% in the quarter and increased 1.4% year to date.
Six-month reportable-segment sales were: Proprietary Pharmaceuticals $8.452 billion, Nutritional Products $3.150 billion, Diagnostics $2.120 billion, Established Pharmaceuticals $2.503 billion and Vascular Products $1.569 billion. HUMIRA sales totaled $4.259 billion, up 15% from the prior-year period.
Six-month net cash from operating activities was $4.292 billion, compared with $4.514 billion in 2011. Investing cash flow was negative $4.324 billion, including $878 million of capital expenditures, $781 million for business and technology acquisitions, and $2.677 billion of net investment-security purchases. Financing cash flow was positive $401 million.
Cash and cash equivalents were $7.053 billion at June 30, 2012, compared with $6.813 billion at December 31, 2011. Working capital was $9.1 billion. Short-term borrowings were $5.064 billion, current long-term debt was $1.019 billion and long-term debt was $12.004 billion. The filing states that Abbott had readily available financial resources and long-term debt ratings of AA from Standard & Poor’s and A1 from Moody’s.
Material changes versus the prior comparable period
- Gross margin improved by 310 basis points in the quarter and 320 basis points year to date, reflecting product mix, cost-reduction initiatives and foreign exchange.
- Operating earnings increased 18.7% in the quarter and 19.7% year to date, despite higher selling, general and administrative expenses and continued pipeline investment.
- Quarterly net earnings and diluted EPS declined because the second quarter of 2011 included a $519 million tax benefit from favorable resolution of prior-year tax positions. Six-month net earnings increased 5.7%, while diluted EPS increased 3.4%.
- Proprietary Pharmaceutical Products sales increased 4.9% in the quarter and 6.0% year to date. Nutritional Products increased 6.3% and 8.1%, and Diagnostics increased 3.8% and 4.9%, respectively.
- Established Pharmaceutical Products sales declined 6.0% in the quarter and 3.9% year to date, while Vascular Products declined 8.3% and 6.6%. Vascular results were affected by the wind-down of certain royalty and supply agreements; excluding those agreements and currency effects, Vascular sales grew.
- Abbott repurchased 27.2 million shares for approximately $1.6 billion during the first six months of 2012 and declared dividends of $1.02 per share, compared with $0.96 in the prior-year period.
Guidance, outlook, risks and unusual items
- Management expected operating cash flow to continue exceeding capital expenditures and cash dividends. The filing does not provide a clear full-year earnings or sales guidance figure.
- Abbott expected to recognize approximately $340 million to $350 million of tax benefits in the third quarter of 2012 from the July resolution of prior-year tax positions. Additional related cash payments were not expected to be material.
- Abbott recorded $110 million of acquired in-process and collaboration research and development expense in the second quarter for the AP214 acquisition. First-quarter 2012 charges included $150 million for a JAK1 collaboration and $50 million for a clinical development milestone. The JAK1 agreement could require approximately $1.2 billion of additional milestone payments.
- Abbott recorded $100 million of Depakote-related charges in the first quarter of 2012, following $1.5 billion of charges in the third quarter of 2011. It paid approximately $800 million of the $1.6 billion settlement in the second quarter and expected to pay the remainder during the second half of 2012.
- Other income for the first six months included approximately $60 million from resolution of a contractual agreement. Operating cash flow also reflected approximately $800 million of government-investigation settlement payments.
- Government health-system receivables in Italy, Spain, Portugal and Greece totaled approximately $1.192 billion. Significant portions were more than one year past due in Italy, Portugal and Greece, presenting collection and sovereign-credit risk.
- Risks include pricing and reimbursement pressure, increased Medicaid rebates, health-care reform requirements, foreign exchange volatility, regulatory and competitive pressures, patent litigation, execution of the planned separation and cybersecurity threats. Abbott identified no material change to previously disclosed risk factors except the added cybersecurity risk.
- Other matters include patent disputes involving Niaspan, Norvir and Simponi, as well as an appeal concerning Xience stent patents. Management stated that other legal and environmental matters were not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Progress, approvals, financing and tax treatment of the planned separation of the proprietary pharmaceuticals business.
- Timing and cash impact of the remaining approximately $800 million Depakote settlement payment.
- Whether the expected $340 million to $350 million third-quarter tax benefit was realized.
- Sustainability of margin expansion after adjusting for product mix, currency effects and prior-year tax and impairment items.
- Collection trends and aging of government receivables in Italy, Portugal, Greece and Spain.
- Future milestone obligations, clinical outcomes and regulatory progress for AP214, the JAK1 collaboration and other acquired programs.
- Impact of currency movements, Medicaid rebates, health-care reform and the planned 2013 medical-device excise tax.