Abbott Laboratories 2011 Q2 Form 10-Q Summary
Business Context and Reporting Period
Abbott Laboratories reported unaudited results for the three and six months ended June 30, 2011. The company develops, manufactures and sells pharmaceuticals, nutritional products, diagnostics and vascular products worldwide. Reportable segments were reorganized in 2011 to place international branded generics in Established Pharmaceutical Products and combine domestic and international proprietary pharmaceuticals.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Net sales | $9.616 billion | $8.826 billion | $18.657 billion | $16.524 billion |
| Operating earnings | $1.773 billion | $1.606 billion | $3.075 billion | $3.076 billion |
| Net earnings | $1.943 billion | $1.292 billion | $2.807 billion | $2.295 billion |
| Diluted EPS | $1.23 | $0.83 | $1.79 | $1.47 |
| Cash dividends declared per share | $0.48 | $0.44 | $0.96 | $0.88 |
- Q2 sales increased 9.0%; six-month sales increased 12.9%.
- Q2 operating margin was approximately 18.4%, compared with 18.2% in the prior-year quarter. Six-month operating margin was approximately 16.5%, compared with 18.6%.
- Q2 net margin was approximately 20.2%, compared with 14.6%. The result included a $519 million tax benefit from favorable resolution of prior-year tax positions.
- Gross margin was 59.8% in both second quarters and 58.6% for the first six months of 2011 versus 58.4% in the prior-year period.
- Research and development expense increased 21.0% in Q2 and 23.9% year to date, including a $125 million impairment charge for research and development intangible assets.
- Net cash from operating activities was $4.514 billion for the first six months, versus $3.871 billion in 2010.
- Capital expenditures were $764.8 million; acquisitions of businesses and technologies used $187.5 million.
- Cash and cash equivalents were $4.077 billion at June 30, 2011. Current investments were $4.816 billion, producing cash and current investments of approximately $8.9 billion.
- Short-term borrowings were $5.566 billion, current long-term debt was $25.8 million and long-term debt was $12.628 billion. Total reported debt was approximately $18.2 billion.
- Working capital was $8.3 billion at June 30, 2011, compared with $5.1 billion at December 31, 2010. Abbott reported $6.7 billion of unused credit facilities.
Material Changes Versus the Prior Comparable Period
- International sales grew 12.8% in Q2 and 18.2% for the first six months, while U.S. sales grew 3.9% and 5.8%, respectively. Favorable foreign exchange contributed 4.6% to Q2 sales growth and 3.1% to six-month growth.
- Proprietary Pharmaceutical Products sales increased 13.0% in Q2 and 12.4% year to date. Established Pharmaceutical Products increased 10.3% and 36.4%, respectively, benefiting from the Solvay and Piramal acquisitions.
- Nutritional Products sales increased 5.4% in Q2 and 6.5% year to date. U.S. pediatric nutrition sales remained affected by the 2010 Similac powder formula recall.
- Vascular Products sales were flat in Q2 but increased 6.2% year to date. Nutritional and vascular segment operating earnings declined in the quarter, while pharmaceutical and diagnostic operating earnings increased.
- Operating earnings were essentially flat for the first six months despite sales growth, reflecting increased research and development, acquisition-related costs, restructuring charges and other expenses.
- Net cash from investing activities improved to an outflow of $2.096 billion from $7.355 billion, primarily because 2010 included significant acquisitions. Financing activities used $2.071 billion, including $1.434 billion of dividends and $2.007 billion of long-term debt repayment.
- The $1.87 billion escrow deposit related to the HUMIRA patent litigation was released after the Federal Circuit invalidated the asserted patent; the funds were reclassified as short-term investments.
- The company eliminated the one-month reporting lag for foreign subsidiaries. A $137 million charge was recorded in Q1 2011 for cumulative immaterial prior-period effects, with retrospective presentation otherwise not applied to previously reported interim periods.
Guidance, Outlook, Risks and Unusual Items
- Management forecast worldwide HUMIRA sales growth in the high teens for 2011.
- Abbott recorded $272.5 million of acquired in-process research and development expense in the first six months, including $173 million in Q2 for development and commercialization agreements.
- Health care reform increased Medicaid rebates, introduced Medicare Part D coverage-gap rebates and imposed an annual branded-drug fee. These items are expected to continue pressuring pharmaceutical margins. A 2.3% medical-device excise tax was scheduled to begin in 2013.
- Restructuring plans generated approximately $90 million of charges in the first six months of 2011, excluding approximately $65 million related to the Solvay restructuring and approximately $18 million related to diagnostic operations. Additional charges were expected during 2011.
- Abbott faces a Department of Justice investigation into Depakote sales and marketing practices, including potential False Claims Act, Food, Drug and Cosmetic Act and anti-kickback issues. The company could not estimate a loss, recorded no reserve and stated that resolution could materially affect cash flows or results in a given period.
- The HUMIRA patent judgment was reversed and rehearing was denied, but Centocor could seek U.S. Supreme Court review by September 12, 2011. Abbott recorded no reserve for the matter.
- Other litigation and environmental exposures had an estimated possible-loss range of approximately $85 million to $120 million, with a recorded reserve of approximately $100 million.
- Abbott reported that several patent disputes were settled and dismissed during the quarter, including Bayer-related HUMIRA litigation, fenofibrate litigation and Niaspan litigation. New testosterone-gel patent litigation against Teva remained pending.
- Gross intangible assets and goodwill remained significant at $11.7 billion and $16.8 billion, respectively, at June 30, 2011. Estimated annual intangible amortization was approximately $1.6 billion for 2011.
Important Facts for Investors to Verify
- Assess recurring earnings excluding the $519 million tax benefit and other unusual items, including acquired in-process research and development, restructuring charges and the $125 million intangible impairment.
- Evaluate whether sales growth is sustainable after separating unit growth, acquisitions and favorable foreign exchange.
- Monitor the Department of Justice Depakote investigation, potential cash exposure and any subsequent reserve or settlement.
- Review debt maturities, short-term borrowing levels, credit-facility availability and the effect of acquisition-related contingent payments.
- Track pharmaceutical rebate and health-care-reform effects on gross margins, particularly in the Proprietary Pharmaceutical Products segment.
- Verify the status of Centocor’s potential Supreme Court petition and other HUMIRA, AndroGel, stent and generic-drug patent disputes.
- Consider the effect of the foreign-subsidiary reporting change on period comparisons and prior-period interpretations.