Abbott Laboratories 2016 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, 2016. Abbott develops, manufactures, and sells branded generic pharmaceuticals, nutritional products, diagnostic systems and tests, and vascular medical devices worldwide. Reportable segments were Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Vascular Products.
Financial Performance and Key Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $5.302 billion | $5.150 billion | $15.520 billion | $15.217 billion |
| Operating earnings | $897 million | $713 million | $2.237 billion | $2.052 billion |
| Continuing-operations earnings (loss) | $(357) million | $596 million | $298 million | $1.911 billion |
| Net earnings (loss) | $(329) million | $580 million | $602 million | $3.656 billion |
| Diluted EPS | $(0.22) | $0.38 | $0.40 | $2.41 |
| Operating cash flow | Not separately provided | Not separately provided | $2.033 billion | $2.138 billion |
Third-quarter sales increased 2.9% reported and 4.0% excluding foreign exchange. Nine-month sales increased 2.0% reported and 5.2% excluding foreign exchange. The third-quarter gross margin was 54.3%, compared with 53.5% in the prior year; the nine-month gross margin was 54.0% in both periods. Approximate operating margins were 16.9% in the third quarter of 2016 versus 13.8% in the prior year, and 14.4% for the first nine months of 2016 versus 13.5% in 2015.
Third-quarter segment sales were $1.012 billion for Established Pharmaceuticals, $1.755 billion for Nutritionals, $1.213 billion for Diagnostics, and $708 million for Vascular Products. Excluding foreign exchange, nine-month growth was strongest in Established Pharmaceuticals, up 9.8%, Diagnostics, up 6.1%, and Vascular Products, up 4.9%; Nutritionals increased 2.5%.
At September 30, 2016, cash and cash equivalents were $2.500 billion, short-term investments were $2.007 billion, and working capital was approximately $4.7 billion. Short-term borrowings were $2.531 billion, current long-term debt was $4 million, and long-term debt was $5.975 billion. Abbott reported $5.0 billion of unused credit lines supporting commercial paper arrangements, expiring in 2019.
Cash declined from $5.001 billion at December 31, 2015, primarily due to operating and investing uses, dividends, share repurchases, debt repayment, pension contributions, and the Venezuela currency loss. Nine-month investing cash flow was $(1.798) billion, including $802 million of capital expenditures. Financing cash flow was $(2.357) billion, including $1.153 billion of dividends and $522 million of share purchases.
Material Changes Versus the Prior Comparable Period
- Sales growth was positive but reduced by unfavorable currency translation, particularly internationally.
- Operating earnings improved despite higher interest expense and foreign-exchange effects.
- Reported continuing-operations and total earnings declined sharply because of a $947 million other-than-temporary write-down of Abbott’s Mylan N.V. equity investment, a $481 million Venezuela currency loss, and higher financing costs.
- Prior-year results benefited from a $1.752 billion after-tax gain on the sale of the developed-markets branded generics business and animal health business; the absence of that gain materially reduced 2016 year-to-date net earnings.
- Research and development expense increased 4.2% for the first nine months, while selling, general and administrative expense decreased 1.3%.
- Abbott repurchased 10.4 million shares for $408 million under its share repurchase program during the first nine months and increased the quarterly dividend 8%, to $0.26 per share.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a clear numerical earnings or revenue guidance range. Management expects to fund dividends, capital expenditures, and other investments through operating cash flow, cash and short-term investments, and borrowings, while expecting to remain investment grade. Abbott’s long-term debt ratings at September 30 were A+ from Standard & Poor’s and A2 from Moody’s; both were under review because of the planned acquisitions.
Abbott agreed to acquire Alere for approximately $5.8 billion of equity value and assume or refinance approximately $2.5 billion of net debt. Abbott also agreed to acquire St. Jude Medical for an estimated equity value of approximately $24 billion and assume or refinance approximately $5.4 billion of net debt. Bridge facilities of up to $9 billion for Alere and $17.2 billion for St. Jude Medical were arranged as backup financing. Both transactions remained subject to regulatory and other closing conditions at the reporting date, and Abbott faced additional FTC information requests. Alere had also filed litigation alleging breach of acquisition-related obligations; Abbott denied the allegations.
Abbott announced the sale of Abbott Medical Optics to Johnson & Johnson for $4.325 billion in cash, expected to close in the first quarter of 2017 subject to customary conditions and regulatory approvals. AMO assets of $3.331 billion and liabilities of $657 million were classified as held for disposition, but its operating results were not reported as discontinued operations.
Venezuela was remeasured using the DICOM exchange rate, producing a $481 million foreign-currency loss in the first nine months. Abbott stated that Venezuela represented approximately 0.1% of consolidated assets at September 30 and that additional losses were not expected to be material. A 20% decline in Abbott’s available-for-sale equity securities, principally Mylan shares, would have reduced fair value by approximately $540 million.
Legal and environmental proceedings had an estimated possible loss range of approximately $40 million to $45 million, with a recorded accrual of approximately $45 million. Management did not expect these matters to have a material adverse effect. Abbott also disclosed that unrecognized tax benefits could decrease by $100 million to $200 million within the next twelve months as tax matters are resolved.
Important Facts for Investors to Verify
- Assess the effect of the Mylan investment write-down, Venezuela remeasurement, and other unusual items on recurring earnings and cash flow.
- Verify the closing status, financing, regulatory approvals, purchase accounting, and leverage impact of the Alere and St. Jude Medical acquisitions.
- Monitor completion of the AMO sale and the resulting cash proceeds, gain or loss, and portfolio impact.
- Reconcile reported sales growth with constant-currency growth and evaluate foreign-exchange exposure in emerging markets.
- Review debt ratings, bridge financing, assumed target-company debt, and post-transaction liquidity.
- Evaluate the sustainability of operating cash flow after pension contributions, dividends, capital expenditures, acquisitions, and share repurchases.
- Follow tax audits, litigation, environmental claims, acquisition-related lawsuits, and regulatory matters.