Abbott Laboratories 2013 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, 2013. Abbott’s continuing businesses comprised Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, Vascular Products, Diabetes Care, and Medical Optics.
The January 1, 2013 separation of the research-based pharmaceutical business into AbbVie materially affects comparability. AbbVie’s historical results are presented as discontinued operations, while prior-year balance sheets and cash flows were not retrospectively adjusted.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $5.369 billion | $5.265 billion | $16.193 billion | $15.862 billion |
| Operating earnings | $630 million | $310 million | $1.873 billion | $1.383 billion |
| Earnings from continuing operations | $773 million | $339 million | $1.794 billion | $1.101 billion |
| Net earnings | $966 million | $1.943 billion | $1.986 billion | $4.910 billion |
| Diluted EPS from continuing operations | $0.49 | $0.21 | $1.13 | $0.69 |
| Diluted net EPS | $0.61 | $1.21 | $1.25 | $3.06 |
- Q3 sales increased 2.0%; excluding a 2.3% unfavorable currency effect, sales increased 4.3%. Nine-month sales increased 2.1%; excluding currency, growth was 4.0%.
- Q3 operating margin was approximately 11.7%, versus 5.9% in the prior-year quarter. Nine-month operating margin was approximately 11.6%, versus 8.7%.
- Gross margin was 50.7% in Q3 versus 49.0% in Q3 2012; nine-month gross margin was 50.5% versus 50.7%.
- Q3 continuing-operations earnings included $241 million of tax benefits from favorable resolutions of prior-year tax matters. Discontinued operations included a $193 million tax benefit related to pre-separation AbbVie tax positions.
- Net cash from operating activities was $1.699 billion for the first nine months, compared with $7.811 billion in 2012. The 2012 period included discontinued AbbVie operations and an approximately $800 million payment related to government investigations.
- Capital expenditures were $841 million and acquisitions of businesses and technology were $566 million during the first nine months.
- Cash and cash equivalents were $2.882 billion at September 30, 2013, versus $10.802 billion at December 31, 2012. Cash and investments combined were approximately $8.605 billion.
- Total borrowings, including short-term borrowings and current and long-term debt, were approximately $8.263 billion at September 30, 2013, versus approximately $20.476 billion at year-end 2012.
- 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 $8.4 billion at September 30, 2013, compared with $18.0 billion at December 31, 2012.
Segment performance
| Segment | Q3 2013 sales | Q3 change | 9M 2013 sales | 9M change |
|---|---|---|---|---|
| Established Pharmaceuticals | $1.235 billion | (2.9%) | $3.685 billion | (2.4%) |
| Nutritional Products | $1.635 billion | 1.9% | $5.038 billion | 6.2% |
| Diagnostic Products | $1.125 billion | 8.0% | $3.349 billion | 5.9% |
| Vascular Products | $747 million | 0.6% | $2.240 billion | (3.1%) |
Nutritional and Diagnostics operating earnings improved, while Established Pharmaceuticals and Vascular Products remained under pressure. Vascular sales were affected by pricing pressure, competition, unfavorable currency, and the wind-down of certain royalty and supply agreements.
Material changes versus the prior comparable period
- Continuing-operations profitability improved substantially, primarily due to lower selling, general and administrative expenses, lower interest expense, improved Q3 gross margin, cost controls, and discrete tax benefits.
- SG&A declined 9.7% in Q3 and 6.1% for the nine-month period, partly because certain corporate costs transferred to AbbVie and because of expense-control initiatives.
- Research and development expense increased 1.8% in Q3 but decreased 1.7% year to date, primarily due to expenditure timing.
- Abbott transferred approximately $5.9 billion of cash, $14.6 billion of long-term debt, and approximately $6.1 billion of goodwill to AbbVie at separation.
- Abbott acquired IDEV Technologies for $310 million and OptiMedica for $260 million in cash during August 2013. OptiMedica also includes potential milestone payments of up to $150 million.
- Share repurchases totaled approximately $1.566 billion in the first nine months, including $350 million in Q3 under a new $3 billion authorization. Abbott stated that repurchases under the prior authorization ceased in the second quarter.
- Abbott declared $0.14 per share quarterly dividends during the first three quarters and announced an increase to $0.22 per share beginning with the February 2014 payment.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects annual operating cash flow to continue exceeding capital expenditures and cash dividends.
- A supplier recall disrupted international pediatric nutrition sales in the third quarter. Abbott expected the disruption to affect growth through the fourth quarter of 2013 and the first half of 2014; the filing states that no health issues were associated with the recalled products.
- Abbott expects approximately $400 million to $450 million of gross unrecognized tax benefits, including cash adjustments, may decrease within the following twelve months as tax matters are resolved.
- Legal and environmental proceedings had an estimated possible loss range of approximately $80 million to $100 million, with an accrued balance of approximately $85 million. Management did not expect the ultimate resolution to materially affect financial position, cash flows, or results of operations.
- Restructuring charges included approximately $23 million in the first nine months for the 2013 manufacturing and operational programs, with additional accrued restructuring liabilities remaining at September 30.
- Abbott retained certain tax liabilities related to AbbVie’s pre-separation operations and had approximately $261 million of net assets pending transfer to AbbVie because of regulatory and marketing-authorization requirements.
- Receivables from government health systems in Italy, Spain, Portugal, and Greece totaled approximately $462 million; portions were more than one year past due.
- The filing provides no clear companywide earnings-per-share guidance for 2013.
Most important facts for investors to verify
- Separate ongoing Abbott performance from discontinued AbbVie operations when comparing periods.
- Assess the sustainability of the Q3 margin and EPS improvement excluding the $241 million continuing-operations tax benefit and other unusual items.
- Monitor international pediatric nutrition sales recovery following the supplier recall.
- Review cash generation after separation, pension contributions, acquisitions, share repurchases, dividends, and the $5.9 billion cash transfer to AbbVie.
- Evaluate currency exposure, pricing pressure in Vascular Products, European government receivables, and regulatory and reimbursement risks.
- Confirm the final purchase-price allocations, contingent milestone obligations, and integration results for IDEV Technologies and OptiMedica.