Abbott Laboratories 2015 Q2 Form 10-Q Summary
Business context and reporting period
Abbott Laboratories filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Abbott develops, manufactures and sells health-care products through Established Pharmaceutical Products, Nutritional Products, Diagnostic Products and Vascular Products, with additional non-reportable Diabetes Care and Medical Optics businesses.
The developed-markets branded generics pharmaceuticals business and animal health business were sold in the first quarter of 2015 and are presented as discontinued operations. Prior-period amounts were reclassified where applicable.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Net sales | $5,170 million | $5,057 million | $10,067 million | $9,812 million |
| Operating earnings | $729 million | $677 million | $1,339 million | $1,042 million |
| Earnings from continuing operations | $786 million | $425 million | $1,315 million | $649 million |
| Net earnings | $784 million | $466 million | $3,076 million | $841 million |
| Diluted EPS from continuing operations | $0.52 | $0.28 | $0.87 | $0.42 |
| Diluted net EPS | $0.52 | $0.30 | $2.03 | $0.55 |
- Second-quarter sales increased 2.2%; six-month sales increased 2.6%. Excluding foreign exchange, sales increased 10.8% and 10.4%, respectively.
- Foreign exchange reduced second-quarter total sales by 8.6% and international sales by 12.4%; six-month effects were reductions of 7.8% and 11.3%, respectively.
- Gross margin was 54.2% in both the quarter and six-month period, compared with 52.1% and 50.9%, respectively, in the prior-year periods.
- Calculated operating margins were approximately 14.1% for the quarter and 13.3% for the six months, compared with approximately 13.4% and 10.6% in the prior-year periods.
- Net cash from operating activities was $943 million for the first six months, compared with $1,236 million in 2014. Capital expenditures were $451 million.
- Cash and cash equivalents were $4.048 billion at June 30, 2015, versus $4.063 billion at December 31, 2014. Working capital was $11.9 billion, up from $4.7 billion.
- Short-term investments increased to $7.129 billion from $397 million, primarily reflecting retained Mylan shares and proceeds invested from the sale of additional Mylan shares.
- Short-term borrowings were $2.867 billion and long-term debt was $5.862 billion at June 30, 2015, compared with $4.382 billion and $3.408 billion, respectively, at year-end 2014.
- Abbott issued $2.5 billion of long-term debt in March 2015 with maturities from 2020 through 2025 and entered into interest-rate swaps covering the issuance.
- Net cash used in financing activities was $924 million, including $1.347 billion of share purchases and $724 million of dividends paid. Quarterly dividends declared were $0.24 per share, up 9% from $0.22.
Segment performance and material changes
| Segment | Q2 2015 sales | Q2 reported change | Q2 change excluding foreign exchange | Six-month 2015 sales |
|---|---|---|---|---|
| Established Pharmaceutical Products | $977 million | 31.3% | 46.0% | $1,874 million |
| Nutritional Products | $1,717 million | (0.8%) | 3.9% | $3,386 million |
| Diagnostic Products | $1,177 million | (1.0%) | 8.7% | $2,270 million |
| Vascular Products | $722 million | (5.6%) | 3.2% | $1,420 million |
- Established Pharmaceuticals benefited from the CFR Pharmaceuticals and Veropharm acquisitions and strong emerging-market growth.
- Nutritional Products reflected international growth, partially offset by weakness and competition in U.S. adult nutritionals.
- Diagnostics benefited from emerging-market growth and share gains in core laboratory markets.
- Vascular Products benefited from MitraClip and endovascular growth, offset by pricing pressure on drug-eluting stents.
- Research and development expense increased 11.1% in the second quarter, primarily from higher spending and a milestone payment, but decreased 3.0% for the six months due mainly to lower restructuring costs.
- Selling, general and administrative expense increased 4.8% for the quarter and 6.0% for the six months, largely due to the CFR and Veropharm acquisitions.
Dispositions, unusual items and outlook
The sale of the developed-markets branded generics pharmaceuticals and animal health businesses produced a pretax gain of $2.820 billion, tax expense of $1.084 billion and an after-tax gain of $1.736 billion in the first six months. Abbott also sold 40.3 million Mylan shares for $2.29 billion of net proceeds, recognizing a pretax gain of $207 million and reducing its Mylan ownership from approximately 22% to approximately 14%.
These transactions materially increased six-month net earnings and are not representative of recurring operating performance. Second-quarter other income also included a $79 million reduction in the fair value of acquisition-related contingent consideration.
The filing does not provide a specific earnings or revenue guidance range. Management stated that dividends, capital expenditures and other investments are expected to be funded through operating cash flow, cash and short-term investments, and borrowings.
- Abbott had $5.0 billion of unused credit lines supporting commercial paper arrangements and reported long-term debt ratings of A+ from Standard & Poor’s and A2 from Moody’s.
- Foreign-exchange volatility remains material. Abbott held approximately $4.682 billion of available-for-sale equity securities, principally Mylan shares; a hypothetical 20% decline would reduce fair value by approximately $936 million.
- Medical Optics goodwill was approximately $2 billion, and its estimated fair value exceeded carrying value by approximately 15% at June 30, 2015. Lower growth, regulatory delays, adverse currency movements or higher discount rates could create impairment risk.
- Abbott reported approximately $50 million accrued for legal and environmental matters, with estimated possible losses of approximately $40 million to $55 million. Management did not expect a material adverse effect, while noting that outcomes are uncertain.
- Abbott had approximately $380 million of net monetary assets exposed to Venezuelan currency revaluation and could not predict whether the bolivar would be devalued or whether the current exchange rate would remain available.
- Tax authorities could reduce recorded gross unrecognized tax benefits by approximately $525 million to $635 million within the next twelve months as tax matters are resolved.
Most important facts for investors to verify
- Separate recurring operating results from the $1.736 billion after-tax disposition gain and the $207 million Mylan-share sale gain.
- Assess the sustainability of reported sales growth excluding foreign exchange, particularly in emerging-market pharmaceuticals and nutritionals.
- Reconcile lower operating cash flow with higher earnings, including the effects of pension contributions, taxes and discontinued-operations transactions.
- Monitor leverage after the $2.5 billion debt issuance, share repurchases and continuing dividend payments.
- Track the market value and concentration risk of the retained Mylan investment.
- Evaluate Medical Optics goodwill impairment sensitivity, Venezuelan currency exposure, tax contingencies and litigation accruals.
- Confirm that no subsequent filing provides guidance or developments not included in this quarter’s report.