Abbott Laboratories 2012 Q3 Form 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, 2012. Abbott develops, manufactures, and sells pharmaceutical, nutritional, diagnostic, and vascular products worldwide. The report reflects continuing operations before the planned separation of the research-based pharmaceuticals business into AbbVie, expected to be ready on January 1, 2013, subject to required approvals.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $9.773 billion | $9.817 billion | $29.037 billion | $28.474 billion |
| Operating earnings | $1.989 billion | $595 million | $5.669 billion | $3.669 billion |
| Net earnings | $1.943 billion | $303 million | $4.910 billion | $3.110 billion |
| Diluted EPS | $1.21 | $0.19 | $3.06 | $1.98 |
| Gross margin | 62.2% | 59.5% | 61.9% | 58.9% |
| Operating margin | 20.4% | 6.1% | 19.5% | 12.9% |
| Net margin | 19.9% | 3.1% | 16.9% | 10.9% |
Reported sales declined 0.4% in the third quarter but increased 2.0% for the first nine months. Excluding unfavorable foreign exchange, sales increased 4.1% and 5.6%, respectively. U.S. sales grew 3.1% in the quarter and 5.0% year to date, while international sales declined 3.0% and 0.1% due primarily to currency effects.
- Proprietary Pharmaceuticals sales increased 2.4% in the quarter and 4.7% year to date; nine-month HUMIRA sales increased 26% in the United States and 6% internationally.
- Nutritional Products sales increased 4.5% in the quarter and 6.9% year to date.
- Diagnostics sales increased 1.6% in the quarter and 3.8% year to date.
- Established Pharmaceuticals sales declined 7.3% in the quarter and 5.0% year to date.
- Vascular Products sales declined 10.2% in the quarter and 7.8% year to date, partly because royalty and supply agreements for certain third-party products were winding down.
Cash Flow, Balance Sheet, Debt, and Liquidity
| Metric | September 30, 2012 | December 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $7.997 billion | $6.813 billion |
| Current assets | $27.264 billion | $23.769 billion |
| Working capital | $11.0 billion | $8.3 billion |
| Short-term borrowings | $3.206 billion | $2.348 billion |
| Current portion of long-term debt | $1.019 billion | $1.027 billion |
| Long-term debt | $12.055 billion | $12.040 billion |
- Operating cash flow for the first nine months was $7.811 billion, compared with $7.569 billion in the prior-year period.
- Investing activities used $4.856 billion, including $1.409 billion for property and equipment, $1.202 billion for businesses and technology, and $2.246 billion for investment securities.
- Financing activities used $1.790 billion, including $2.371 billion of dividends and $1.723 billion of common-share purchases, partly offset by stock-option proceeds and short-term borrowings.
- Cash increased by $1.184 billion during the first nine months to $7.997 billion.
- Abbott had $7.0 billion of new five-year credit facilities supporting commercial paper arrangements. The company stated that it had readily available financial resources.
Material Changes Versus the Prior Comparable Period
- Operating earnings and net earnings increased substantially, primarily because the third quarter of 2011 included a $1.5 billion Depakote-related government investigation charge. The first nine months of 2012 also included a $100 million Depakote charge recorded in the first quarter.
- Third-quarter 2012 earnings benefited from a $386 million tax benefit related to favorable resolution of prior-year tax positions. The third quarter of 2011 included $570 million of tax benefits and the tax effect of the Depakote litigation reserve, limiting comparability.
- Gross margin expanded by 270 basis points in the quarter and 300 basis points year to date, reflecting cost-reduction initiatives, favorable product mix, exchange effects, and improvement across reportable segments.
- Research and development expense increased 15.3% in the quarter and 6.8% year to date, including restructuring charges. Excluding restructuring charges, the increases were 0.3% and 5.4%.
- Abbott recorded approximately $189 million of third-quarter restructuring charges, including $167 million of severance and $22 million primarily for asset impairments. It also recorded approximately $150 million for severance and contractual obligations related principally to exiting a research and development facility.
- Cash payments of approximately $800 million were made during the second quarter to settle Depakote-related claims; the remaining approximately $800 million was paid in October 2012.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- A generic version of TriCor was expected to enter the U.S. market in the fourth quarter of 2012. Abbott expected combined 2013 sales for TriCor, TRILIPIX, Niaspan, and Simcor to be less than $1 billion.
- The planned separation of the research-based pharmaceuticals business was expected to occur on January 1, 2013, subject to required approvals. The new business had approximately $17.4 billion of 2011 annual sales.
- In October 2012, Reata discontinued the Phase III BEACON study of bardoxolone methyl because of excess serious adverse events and mortality in the treatment arm. Abbott held a $124 million equity investment in Reata and was evaluating any impairment.
- Abbott initiated a $7.7 billion tender offer for debt and expected an estimated $1.2 billion cost to extinguish the debt, net of estimated interest-rate-swap gains. AbbVie also planned a long-term debt offering of approximately $14.7 billion, with Abbott guarantees expected to expire upon separation.
- Abbott’s long-term debt was rated AA by Standard & Poor’s and A1 by Moody’s at September 30, 2012. Subsequently, Moody’s affirmed A1 and Standard & Poor’s lowered the rating to A+.
- Governmental receivables in Italy, Spain, Portugal, and Greece totaled approximately $1.19 billion. Portions were more than one year past due, particularly in Italy, Portugal, and Greece.
- The Depakote settlement resulted in a Corporate Integrity Agreement and probation obligations, including enhanced compliance, reporting, monitoring, and certification requirements. Failure to comply could result in monetary penalties or exclusion from federal health care programs.
- Other principal risks included regulatory approval and compliance requirements, product recalls or manufacturing disruptions, patent litigation, pricing pressure, foreign exchange, health-care reform, and competitive generic-product entry.
Most Important Facts for Investors to Verify
- Whether the AbbVie separation occurred on schedule and the final allocation of assets, liabilities, debt guarantees, and costs between Abbott and AbbVie.
- The ultimate cost and balance-sheet impact of the $7.7 billion debt tender offer and related bridge financing.
- The effect of generic TriCor competition and the resulting decline in the lipid-franchise revenue outlook.
- The carrying value and any impairment recognized for Abbott’s Reata investment after the bardoxolone clinical-study termination.
- Progress and remaining costs of the restructuring programs, including the associated cash payments and expected savings.
- Collection trends for government receivables in Italy, Spain, Portugal, and Greece.
- Compliance with the Corporate Integrity Agreement and probation requirements following the Depakote settlement.
- The extent to which reported earnings benefited from one-time tax benefits and the absence of the prior-year litigation charge.