Abbott Laboratories 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2013, filed August 6, 2013. Abbott’s continuing operations comprised Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, Vascular Products, Diabetes Care and Medical Optics. The research-based pharmaceutical business was separated into AbbVie on January 1, 2013 and is presented as discontinued operations in prior-period results.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Net sales | $5.446 billion | $5.313 billion | $10.824 billion | $10.597 billion |
| Operating earnings | $627 million | $564 million | $1.242 billion | $1.073 billion |
| Earnings from continuing operations | $476 million | $411 million | $1.021 billion | $762 million |
| Net earnings | $476 million | $1.725 billion | $1.021 billion | $2.967 billion |
| Diluted EPS from continuing operations | $0.30 | $0.26 | $0.64 | $0.47 |
| Net cash from operating activities | Not separately provided | Not separately provided | $1.177 billion | $4.292 billion |
- Second-quarter sales increased 2.5%; six-month sales increased 2.1%. Excluding 1.7% unfavorable currency effects, sales increased 4.2% and 3.8%, respectively.
- Continuing-operations operating margin was approximately 11.5% in the quarter and 11.5% year to date, compared with approximately 10.6% and 10.1% in the comparable 2012 periods.
- Gross margin declined to 49.7% from 51.7% in the quarter and to 50.4% from 51.6% year to date.
- Segment sales growth for the quarter was 7.9% in Nutritional Products and 5.3% in Diagnostic Products; Established Pharmaceutical Products declined 2.3% and Vascular Products declined 2.0%.
- Cash and cash equivalents were $5.572 billion at June 30, 2013, compared with $10.802 billion at December 31, 2012. Current investments were $3.821 billion.
- Short-term borrowings were $4.260 billion, current long-term debt was $264 million and long-term debt was $3.411 billion at June 30, 2013. The filing reports $5.0 billion of unused credit lines supporting commercial paper arrangements.
- Operating cash flow was $1.177 billion, capital expenditures were $565 million and dividends paid were $444 million during the first six months. Financing cash flow included a $5.901 billion transfer of cash to AbbVie and $1.215 billion of share repurchases.
Material changes versus the prior comparable period
- Reported net earnings and EPS fell sharply versus 2012 because the prior-year periods included AbbVie-related discontinued-operation earnings of $1.314 billion for the quarter and $2.205 billion for six months. Continuing-operation earnings increased 16% for the quarter and 34% year to date.
- The AbbVie separation transferred approximately $27.1 billion of assets and $23.8 billion of liabilities, including $14.6 billion of long-term debt, and $5.9 billion of cash. It materially reduced Abbott’s balance sheet and prior-period comparability.
- Interest expense fell to $41 million from $83 million in the quarter and to $81 million from $165 million year to date, primarily because of lower borrowings after the separation.
- Research and development expense declined 2.2% in the quarter and 3.5% year to date. Selling, general and administrative expense declined 5.5% and 4.3%, partly because certain corporate costs transferred to AbbVie and certain transition-service costs are billed to AbbVie.
- Foreign currency translation produced a $600 million year-to-date reduction in other comprehensive income from continuing operations. Accumulated foreign-currency translation losses were $887 million at June 30, 2013.
Outlook, commentary, risks and unusual items
- Management stated that annual operating cash flow is expected to continue exceeding capital expenditures and cash dividends. The filing does not provide specific revenue or earnings guidance.
- Gross margins were affected by pricing pressure in developed markets, product mix, unfavorable currency, restructuring costs and competition, particularly in vascular products.
- Abbott expects to provide transitional services to AbbVie for up to 24 months, with a possible one-year extension. Certain assets and liabilities remained held for disposition pending regulatory transfers, with the majority expected to transfer in 2013 and the remainder in 2014.
- The company recorded a $103 million first-quarter tax benefit from retroactive U.S. tax-law extensions. Abbott believes gross unrecognized tax benefits could decrease by $550 million to $650 million within the next twelve months as tax matters are resolved.
- Legal and environmental exposures had an accrued balance of approximately $75 million, with estimated possible losses ranging from $65 million to $90 million. Management did not expect their ultimate resolution to materially affect financial position, cash flows or results of operations.
- Government health-system receivables in Italy, Spain, Portugal and Greece totaled $466 million; portions were more than one year past due. The company monitors payment plans and fiscal conditions in these markets.
- In July 2013, Abbott announced agreements to acquire IDEV Technologies for $310 million, net of cash and debt, and OptiMedica for $250 million in cash plus up to $150 million of milestone payments.
- Abbott purchased approximately 32.9 million shares for $1.2 billion in the first six months and authorized a new $3.0 billion repurchase program in June 2013. The filing states that no further purchases would be made under the unused portion of the prior authorization.
Important facts for investors to verify
- Verify continuing-operation trends separately from the discontinued AbbVie results when comparing 2013 with 2012.
- Assess whether pricing pressure, currency volatility and vascular-product competition continue to offset volume growth.
- Reconcile the post-separation cash balance, debt maturities, commercial-paper usage and available credit capacity.
- Monitor the transfer of remaining AbbVie assets, liabilities, pension obligations and tax responsibilities, including the $296 million net-assets transfer obligation.
- Review the timing and cash impact of restructuring payments, pension contributions, tax settlements and the announced IDEV and OptiMedica acquisitions.
- Evaluate collection risk for government receivables in Southern Europe and the potential impact of healthcare regulation, including the 2.3% U.S. medical-device excise tax.