Abbott Laboratories 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, 2009. The company develops, manufactures and sells pharmaceutical, nutritional, diagnostic and vascular products worldwide. Abbott reported 1.547 billion common shares outstanding at September 30, 2009.
Financial Performance and Position
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net sales | $7.761 billion | $7.498 billion | $21.975 billion | $21.577 billion |
| Operating earnings | $1.640 billion | $1.397 billion | $4.372 billion | $3.951 billion |
| Net earnings | $1.480 billion | $1.085 billion | $4.207 billion | $3.344 billion |
| Diluted EPS | $0.95 | $0.69 | $2.70 | $2.14 |
| Cash dividends declared per share | $0.40 | $0.36 | $1.20 | $1.08 |
- Sales increased 3.5% in the quarter and 1.8% year to date; excluding unfavorable foreign exchange, management reported growth of 8.4% and 8.1%, respectively.
- Gross margin was 56.7% in the quarter versus 55.3% in the prior-year quarter and 57.1% for the first nine months versus 56.3%. Reported operating margin was approximately 21.1% versus 18.6% in Q3 2008 and 19.9% versus 18.3% for the nine-month periods.
- Net margin was approximately 19.1% in Q3 2009 versus 14.5% in Q3 2008 and 19.1% for the first nine months versus 15.5%. Comparisons were materially affected by litigation, TAP-related and other nonrecurring items.
- Net cash from operating activities was $5.443 billion for the first nine months, compared with $5.762 billion in 2008. Capital expenditures were $844 million, dividends paid were $1.796 billion and acquisitions used $1.519 billion.
- Cash and cash equivalents were $4.876 billion at September 30, 2009, compared with $4.112 billion at December 31, 2008. Investments, primarily time deposits and certificates of deposit, were $3.819 billion.
- Short-term borrowings were $4.043 billion and long-term debt was $11.577 billion, versus $1.691 billion and $8.713 billion, respectively, at year-end 2008. Working capital increased to $8.9 billion from $5.5 billion.
- Abbott reported unused credit facilities of $6.3 billion supporting commercial paper arrangements. Long-term debt ratings were AA from Standard & Poor’s and A1 from Moody’s.
Material Changes Versus the Prior Comparable Period
- Pharmaceutical Products sales declined 1.6% in Q3 and 3.8% for nine months, primarily reflecting generic competition affecting Depakote, Omnicef and Synthroid. Depakote U.S. sales fell to $257 million from $1.0 billion for the first nine months.
- HUMIRA and international pharmaceuticals partly offset generic pressure. Abbott raised its 2009 HUMIRA worldwide sales-growth forecast to 18%–20%, or 28%–30% excluding currency effects.
- Nutritional Products sales rose 9.8% in Q3 and 6.8% year to date; Vascular Products sales rose 4.7% and 24.8%, respectively. Diagnostic Products sales were essentially flat in Q3 and declined 2.8% year to date.
- Advanced Medical Optics was acquired in February 2009 for approximately $1.4 billion in cash, financed with long-term debt. Ibis Biosciences was acquired for $175 million in January 2009. These transactions increased goodwill, intangible assets and debt.
- Abbott issued $3.0 billion of long-term debt in the first quarter and repaid approximately $1.0 billion of long-term notes due in February and May 2009. Share repurchases totaled approximately $800 million for 14.5 million shares during the first nine months.
- Other income included a $287 million gain from the Medtronic intellectual-property settlement and a $797 million release of a contingent liability associated with the conclusion of the TAP joint venture. These items significantly increased reported earnings.
- Abbott recorded $38 million of additional diagnostic restructuring charges and $26 million of additional pharmaceutical and vascular restructuring charges during the first nine months. Further charges are expected through 2011 for the diagnostic program.
Guidance, Outlook, Risks and Unusual Items
- Management expected operating cash flow to continue exceeding capital expenditures and cash dividends. The planned Solvay pharmaceuticals acquisition was expected to be funded with existing cash and short-term investments.
- Abbott agreed in September 2009 to acquire Solvay’s pharmaceuticals business for EUR 4.5 billion, approximately $6.6 billion, plus potential milestone payments of up to EUR 300 million. Closing was expected in the first quarter of 2010, with forecast 2010 sales of approximately $3 billion and approximately $500 million of additional research and development spending.
- After quarter-end, Abbott acquired Visiogen for $400 million and Evalve for $320 million in cash plus a potential $90 million regulatory milestone payment. The filing states that substantial portions of the purchase prices were expected to be allocated to goodwill, acquired in-process research and development and amortizable intangibles.
- NYU and Centocor obtained a jury award of approximately $1.67 billion in the HUMIRA patent case. In October 2009, the district court overturned the willfulness finding but upheld validity, infringement and damages; Abbott planned to appeal and had recorded no reserve.
- Abbott also faced Xience V patent litigation, government investigations concerning Depakote sales and marketing, pricing-related reimbursement litigation, and other legal and environmental matters. Recorded reserves for specified legal and environmental exposures were approximately $285 million, compared with an estimated possible-loss range of approximately $230 million to $385 million, excluding matters for which losses could be material or were not estimable.
- Future results remain subject to currency movements, generic competition, healthcare legislation and reimbursement changes, regulatory requirements, litigation outcomes, acquisition integration and product development risks.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2009, and reported no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $287 million Medtronic settlement gain and $797 million TAP liability release.
- Assess the effect of Depakote and other generic competition on pharmaceutical revenue and future earnings.
- Monitor the HUMIRA patent appeal and the potential financial effect of the approximately $1.67 billion damages award.
- Verify the financing, closing and integration impact of the Solvay transaction and the post-quarter acquisitions of Visiogen and Evalve.
- Review the increase in debt and short-term borrowings, available credit capacity and liquidity required for acquisitions.
- Evaluate foreign-exchange sensitivity, restructuring charges through 2011 and the adequacy of legal and environmental reserves.