Abbott Laboratories: Q1 2013 Form 10-Q Summary
Business context and reporting period
Abbott Laboratories filed an unaudited Form 10-Q for the three months ended March 31, 2013. Following the January 1, 2013 separation of AbbVie Inc., Abbott’s continuing operations comprise Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, Vascular Products, Diabetes Care, Medical Optics and related activities. Historical research-based pharmaceutical operations are reported as discontinued operations.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $5.378 billion | $5.284 billion | 1.8% increase |
| Operating earnings | $615 million | $509 million | 20.7% increase |
| Earnings from continuing operations | $545 million | $351 million | 55.1% increase |
| Diluted EPS from continuing operations | $0.34 | $0.22 | 54.5% increase |
| Net earnings | $545 million | $1.242 billion | Prior period included $891 million from discontinued operations |
| Net cash from operating activities | $460 million | $2.225 billion | Decrease primarily reflecting separation-related and other items |
Reported gross margin was 51.1%, compared with 51.4% in the prior-year quarter. Operating margin was approximately 11.4%, compared with 9.6% in Q1 2012. Continuing-operations net margin was approximately 10.1%, compared with 6.6% in the prior-year quarter.
- Segment sales: Nutritional Products $1.699 billion, up 8.7%; Diagnostic Products $1.088 billion, up 4.4%; Established Pharmaceutical Products $1.233 billion, down 1.9%; Vascular Products $742 million, down 7.7%.
- Geography: U.S. sales were $1.534 billion, down 3.3%; international sales were $3.844 billion, up 3.9%. Excluding unfavorable foreign exchange, total sales increased 3.5%.
- Cash and investments: Cash and cash equivalents were $4.373 billion and current investments were $4.144 billion at March 31, 2013.
- Debt: Short-term borrowings were $3.358 billion, current long-term debt was $278 million and long-term debt was $3.467 billion, for total reported debt of approximately $7.1 billion.
- Liquidity: Current assets were $19.097 billion versus current liabilities of $10.406 billion, implying a current ratio of approximately 1.8. Abbott also had $5.0 billion of unused credit facilities supporting commercial paper arrangements.
- Shareholder returns: Abbott repurchased approximately 25.0 million shares for $850 million under its authorization and declared a quarterly dividend of $0.14 per share.
Material changes versus the prior comparable period
- The AbbVie separation materially changed the company’s scale and comparability. Abbott transferred approximately $27.1 billion of assets and $23.8 billion of liabilities to AbbVie, including $5.9 billion of cash, $14.6 billion of long-term debt and approximately $6.1 billion of goodwill.
- Q1 2012 included $4.173 billion of AbbVie-related sales and $891 million of discontinued-operation net earnings; Q1 2013 included no discontinued-operation earnings.
- Cash declined from $10.802 billion at December 31, 2012 to $4.373 billion at March 31, 2013, primarily because $5.901 billion was transferred to AbbVie.
- Total assets decreased from $67.235 billion to $42.687 billion, while long-term debt declined from $18.085 billion to $3.467 billion.
- Research and development expense decreased 4.8%, and selling, general and administrative expense decreased 3.1%, partly because certain corporate costs transferred to AbbVie or became reimbursable under transition services agreements.
- Interest expense declined to $41 million from $82 million, primarily because of lower borrowings.
- The first quarter included an approximately $103 million tax benefit from the retroactive extension of U.S. research tax credit and related tax provisions.
Outlook, commentary, risks and unusual items
- Management stated that annual operating cash flow is expected to exceed annual capital expenditures and cash dividends, but the filing does not provide specific revenue or EPS guidance.
- Sales growth reflected unit growth, partially offset by unfavorable currency translation. Vascular sales were pressured by competition and pricing declines in drug-eluting stents and other coronary products.
- Abbott remains exposed to government reimbursement, health-care reform, pricing pressure, foreign exchange, regulatory requirements and competitive conditions. Beginning in 2013, Abbott recorded a 2.3% U.S. excise tax on certain medical-device sales.
- Government receivables in Italy, Spain, Portugal and Greece totaled $466 million; portions were more than one year past due, particularly in Italy, Portugal and Greece.
- Abbott estimated possible losses from legal proceedings and environmental exposures at approximately $70 million to $90 million and had accrued approximately $75 million. Management did not expect a material adverse effect, although outcomes remain uncertain.
- Abbott estimated that gross unrecognized tax benefits could decrease by $550 million to $650 million within the next twelve months as tax matters are resolved.
- Restructuring accruals remained outstanding, including $117 million related to 2012 commercial streamlining plans and $53 million related to diagnostic manufacturing actions.
- Abbott and AbbVie continue to provide transitional services, generally for up to 24 months with a possible one-year extension. Certain remaining AbbVie assets and liabilities were classified as held for disposition and are expected to transfer primarily in 2013 and the remainder in 2014.
Important facts for investors to verify
- Reconcile continuing-operations trends with the post-separation reporting structure; Q1 2012 comparisons exclude AbbVie for segment presentation but consolidated statements separately show discontinued operations.
- Assess the sustainability of the approximately $103 million Q1 tax benefit and the potential timing of tax-benefit settlements.
- Monitor international receivables, especially government balances in Southern Europe and amounts past due.
- Review Vascular Products pricing pressure, competitive dynamics and the effect of discontinued royalty and supply agreements.
- Track cash generation after the separation, share repurchases, dividends, restructuring payments and remaining transition obligations to AbbVie.
- Confirm the timing and terms of transfers of remaining held-for-disposition assets and liabilities to AbbVie.