Abbott Laboratories — 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Abbott Laboratories filed its unaudited quarterly report for the three months ended March 31, 2017. Abbott operates in branded generic pharmaceuticals, nutritionals, diagnostics, and cardiovascular and neuromodulation products. Results include St. Jude Medical from its January 4, 2017 acquisition and include Abbott Medical Optics through its February 2017 sale.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $6.335 billion | $4.885 billion | 29.7% increase |
| Operating earnings | $(202) million | $524 million | Declined $726 million |
| Earnings from continuing operations | $386 million | $56 million | Increased $330 million |
| Net earnings | $419 million | $316 million | Increased $103 million |
| Diluted earnings per share | $0.24 | $0.21 | Increased $0.03 |
| Gross profit margin | 43.7% | 53.2% | Down 9.5 percentage points |
| Net cash from operating activities | $574 million | $(93) million | Improved $667 million |
Operating margin was approximately negative 3.2% in 2017 versus 10.7% in 2016. Net earnings margin was approximately 6.6% versus 6.5% in the prior-year quarter. Reported profitability was affected substantially by acquisition-related amortization, inventory step-up amortization, restructuring and integration costs, and the gain on the sale of Abbott Medical Optics.
- Cash and cash equivalents were $8.706 billion at March 31, 2017, compared with $18.620 billion at December 31, 2016.
- Short-term investments were $154 million. Working capital was $12.7 billion, down from $20.1 billion at year-end 2016.
- Long-term debt was $23.764 billion and current debt, including short-term borrowings and the current portion of long-term debt, was $210 million.
- Total current assets were $19.329 billion and total current liabilities were $6.646 billion, implying a current ratio of approximately 2.9.
- Net cash used in investing activities was $6.154 billion, including $13.027 billion for acquisitions, partly offset by $5.472 billion of business-disposition proceeds and $1.685 billion from the sale of Mylan shares.
- Net cash used in financing activities was $4.399 billion, including $2.505 billion of long-term debt repayments, $460 million of dividends paid, and $1.455 billion of short-term debt repayments.
- The quarterly dividend declared was $0.265 per share, compared with $0.26 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Sales increased primarily because of the St. Jude Medical acquisition. Cardiovascular and Neuromodulation Products sales rose to $2.103 billion from $685 million, while reported sales excluding the acquisition and foreign exchange increased 2.2% in that segment.
- Excluding St. Jude Medical, Abbott Medical Optics, and foreign exchange effects, total sales increased 3.5%; U.S. sales increased 5.1% and international sales increased 2.7%.
- Established Pharmaceutical Products sales increased 7.0%, or 5.7% excluding foreign exchange. Diagnostic Products sales increased 3.6%, or 4.7% excluding foreign exchange.
- Nutritional Products sales decreased 1.7%, primarily reflecting weakness in international pediatric nutritionals and U.S. adult nutritionals.
- Research and development expense increased 44.5% to $547 million, and selling, general and administrative expense increased 42.8% to $2.424 billion, primarily because of St. Jude Medical and integration costs.
- Amortization of intangible assets increased to $522 million from $144 million, and cost of products sold included $392 million of St. Jude Medical inventory step-up amortization.
- Abbott completed the approximately $23.6 billion St. Jude Medical acquisition, funded with cash, debt and approximately $10 billion of Abbott common shares. The acquisition added approximately $1.4 billion of sales and an estimated $576 million pre-tax loss to first-quarter results, excluding acquisition, integration and restructuring costs.
- Abbott completed the sale of Abbott Medical Optics for approximately $4.325 billion and recorded a $1.151 billion pre-tax gain, or $721 million after tax.
- Abbott sold 44 million Mylan N.V. shares for approximately $1.685 billion, reducing its ownership interest from approximately 14% to approximately 4.8%.
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 on hand, short-term investments and borrowings. Abbott reported $5.0 billion of unused credit lines expiring in 2019 and stated that it expects to maintain an investment-grade rating. Long-term debt ratings were BBB from Standard & Poor’s and Baa3 from Moody’s.
- Abbott expects the Alere acquisition to close by the end of the third quarter of 2017, subject to shareholder approval and regulatory and other customary conditions. The amended transaction value was approximately $5.3 billion, with Alere net debt of $2.4 billion expected to be assumed or refinanced. Abbott expected to use cash and debt to fund the transaction.
- St. Jude Medical integration restructuring charges were approximately $121 million in the quarter; total restructuring charges across the disclosed programs were approximately $131 million. The filing states that the preliminary purchase-price allocation could change materially.
- Abbott received an FDA warning letter in April 2017 concerning a St. Jude Medical manufacturing facility in Sylmar, California. The facility manufactures implantable cardioverter defibrillators, cardiac resynchronization therapy defibrillators and monitors.
- Legal and environmental proceedings had an estimated possible loss range of approximately $40 million to $45 million, with an accrued balance of approximately $45 million. Management did not expect the ultimate resolution to materially affect financial position, cash flows or results of operations.
- Abbott reported that unrecognized tax benefits could decrease by approximately $200 million to $350 million within the next twelve months as tax matters are resolved.
- Foreign exchange exposure remains relevant, although Abbott stated that additional Venezuelan currency losses were not expected to be material. A hypothetical 20% decline in the value of available-for-sale equity securities would reduce fair value by approximately $280 million.
- Abbott adopted ASU 2016-09 on share-based payment accounting in the first quarter of 2017, including a $38 million tax benefit recorded in earnings.
Most Important Facts for Investors to Verify
- Assess underlying operating performance excluding St. Jude Medical acquisition effects, intangible amortization, inventory step-up amortization, restructuring costs and the Abbott Medical Optics gain.
- Monitor leverage, debt maturities, interest expense and liquidity following the St. Jude Medical acquisition and in anticipation of the Alere transaction.
- Track the FDA warning letter and any resulting remediation, manufacturing disruption, regulatory or product-liability costs.
- Confirm completion conditions, financing and assumed debt associated with the Alere acquisition.
- Evaluate whether growth in Established Pharmaceuticals, Diagnostics and the legacy cardiovascular business offsets weakness in nutritionals and emerging markets.
- Review the final purchase-price allocation for St. Jude Medical, including goodwill, intangible assets and future amortization expense.