Abbott Laboratories — 2011 First-Quarter Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three months ended March 31, 2011. Abbott develops, manufactures and sells pharmaceutical, nutritional, diagnostic and vascular products worldwide. Reportable segments were reorganized effective January 1, 2011; prior-period segment information was adjusted for comparability.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $9.041 billion | $7.698 billion | 17.4% increase |
| Operating earnings | $1.301 billion | $1.470 billion | 11.5% decrease |
| Net earnings | $863.8 million | $1.003 billion | 13.9% decrease |
| Diluted EPS | $0.55 | $0.64 | 14.1% decrease |
| Gross profit margin | 57.3% | 56.7% | 0.6 percentage-point increase |
| Operating margin | 14.4% | 19.1% | Decrease |
| Net margin | 9.6% | 13.0% | Decrease |
| Cash flow from operations | $2.011 billion | $1.523 billion | 32.1% increase |
International sales were $5.524 billion, up 24.3%, while U.S. sales were $3.517 billion, up 8.1%. Sales growth reflected acquisitions, unit growth and favorable foreign exchange; excluding exchange, total sales increased 16.1%.
- Proprietary Pharmaceuticals sales increased 11.7% to $3.783 billion, supported by HUMIRA and the Solvay acquisition.
- Established Pharmaceuticals sales increased 80.7% to $1.295 billion, primarily reflecting Solvay and Piramal acquisitions.
- Nutritional Products sales increased 7.8% to $1.423 billion; U.S. pediatric nutrition sales remained essentially flat following the Similac recall.
- Diagnostic Products sales increased 7.4% to $983 million, and Vascular Products sales increased 13.1% to $845 million.
Cash and cash equivalents totaled $2.740 billion at March 31, 2011, compared with $3.648 billion at year-end 2010. Current investments were $3.762 billion and restricted funds were $1.874 billion. Working capital was $6.4 billion, versus $5.1 billion at December 31, 2010.
Investing cash outflow was $2.301 billion, including $391.8 million of capital expenditures and $1.917 billion of net investment-security purchases. Financing cash outflow was $684.3 million, including $684.0 million of dividends paid and $500.6 million of long-term debt repayment.
Total debt was approximately $18.8 billion, comprising $6.3 billion of current borrowings and current long-term debt and $12.5 billion of long-term debt. Abbott reported $6.7 billion of unused credit facilities, with long-term debt ratings of AA from Standard & Poor’s and A1 from Moody’s.
Material changes versus the prior comparable period
- Sales rose strongly, but operating earnings and net earnings declined because of higher research and development, selling and administrative expenses, acquisition-related costs, restructuring charges, higher interest expense and a $137 million accounting-principle charge.
- Research and development expense increased 27.4%, reflecting Solvay and Facet acquisitions and continued pipeline investment. Selling, general and administrative expense increased 31.8%, or 26.5% excluding acquisition-integration and restructuring charges.
- Gross margin improved modestly, partly due to improved diabetes and diagnostics margins, but was pressured by health-care reform rebates, European pharmaceutical pricing actions and foreign exchange.
- Operating cash flow increased despite lower net earnings, aided by working-capital changes and noncash depreciation and amortization.
- Foreign-currency translation generated a $1.617 billion gain in other comprehensive income, compared with a $1.987 billion loss in Q1 2010, substantially increasing shareholders’ equity.
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 a specific full-year sales or earnings-per-share guidance figure.
- A change eliminating the one-month reporting lag for foreign subsidiaries was applied as a change in accounting principle. Abbott recorded a $137 million Q1 2011 charge; management stated the effect on previously reported periods was immaterial.
- Abbott recorded $100 million of acquired in-process research and development related to a milestone for licensing rights to a chronic kidney disease product.
- Restructuring charges totaled $116 million in the first quarter, with additional charges expected during 2011, particularly for the Solvay-related restructuring and manufacturing realignment programs.
- Health-care reform is increasing pharmaceutical rebates and introduced an annual branded-drug fee; Abbott expects these items to pressure pharmaceutical margins. A medical-device excise tax is scheduled to begin in 2013.
- Abbott estimated possible losses for legal proceedings and environmental exposures at approximately $170 million to $215 million, with reserves of approximately $195 million. Management believes resolution should not materially adversely affect financial position, cash flows or results.
- The Federal Circuit reversed the HUMIRA patent judgment involving NYU and Centocor and found the patent invalid; Centocor petitioned for rehearing on April 25, 2011. Abbott has recorded no reserve for the former judgment.
- Abbott believes up to $1.2 billion of gross unrecognized tax benefits, including cash adjustments, could decrease within the next twelve months as tax matters are resolved.
Important facts for investors to verify
- Assess how much of sales growth is attributable to the Solvay and Piramal acquisitions, foreign exchange and sustainable unit growth.
- Reconcile the decline in operating and net margins with elevated R&D, selling and administrative spending, restructuring, amortization and unusual charges.
- Monitor debt levels, contingent consideration and scheduled payments associated with the Piramal and Solvay acquisitions.
- Track the resolution of the Centocor rehearing petition and other patent, antitrust, environmental and tax matters.
- Evaluate the effect of health-care reform rebates, the branded-drug fee, European pricing actions and the future medical-device excise tax on margins and cash flow.
- Confirm the timing and magnitude of additional restructuring costs and the progress of acquired product pipelines, including the chronic kidney disease program.