Abbott Laboratories — Form 10-Q Summary
Business Context and Reporting Period
Abbott Laboratories filed an unaudited Form 10-Q for the three months ended March 31, 2010. The company develops, manufactures and sells pharmaceutical, nutritional, diagnostic and vascular products worldwide. Abbott reported four principal segments: Pharmaceutical Products, Nutritional Products, Diagnostic Products and Vascular Products.
Financial Results and Key Metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $7.698 billion | $6.718 billion | 14.6% increase |
| Operating earnings | $1.470 billion | $1.061 billion | 38.6% increase |
| Net earnings | $1.003 billion | $1.439 billion | 30.3% decrease |
| Diluted EPS | $0.64 | $0.92 | 30.4% decrease |
| Gross profit margin | 56.7% | 56.3% | 40 basis-point increase |
| Operating margin | 19.1% | 15.8% | Approximately 330 basis-point increase |
| Net margin | 13.0% | 21.4% | Decrease, affected by prior-year unusual income |
| Operating cash flow | $1.523 billion | $699 million | Increase of $824 million |
Sales growth reflected unit growth, the Solvay Pharmaceuticals acquisition and a favorable currency effect. Excluding favorable foreign exchange, sales increased 10.5%. International sales rose 19.6% to $4.445 billion, while U.S. sales rose 8.4% to $3.253 billion.
- Pharmaceutical Products sales increased 12.9% to $4.103 billion; operating earnings increased to $1.528 billion from $1.305 billion.
- Nutritional Products sales increased 11.8% to $1.320 billion; operating earnings increased to $188 million from $180 million.
- Diagnostic Products sales increased 12.1% to $915 million; operating earnings increased to $146 million from $88 million.
- Vascular Products sales increased 15.8% to $747 million; operating earnings increased to $182 million from $160 million.
Research and development expense increased 12.2% to $730 million, reflecting continued pipeline investment. Selling, general and administrative expense increased 4.4% to $2.162 billion.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents declined to $1.567 billion at March 31, 2010 from $8.809 billion at December 31, 2009.
- Working capital declined to $2.5 billion from $10.3 billion, primarily because cash and short-term investments were used to fund the Solvay acquisition.
- Investing cash outflow was $7.659 billion, including $6.416 billion for business acquisitions and a $1.870 billion deposit of restricted funds.
- Financing cash outflow was $520 million, including $861 million of share repurchases and $621 million of dividends paid.
- Short-term borrowings were $5.730 billion, current long-term debt was $718 million and long-term debt was $10.879 billion.
- Abbott reported $6.3 billion of unused credit facilities supporting commercial paper arrangements. Long-term debt ratings were AA from Standard & Poor’s and A1 from Moody’s.
- Cash dividends declared increased to $0.44 per share from $0.40 per share.
Material Changes Versus the Prior Comparable Period
- Reported sales and operating earnings increased substantially, but net earnings and EPS declined because Q1 2009 included approximately $797 million of income from derecognition of a TAP Pharmaceutical Products joint-venture contingent liability and other acquisition-related income.
- Net foreign exchange loss increased to $70 million from $14 million, including an approximately $86 million charge related to the Venezuelan bolivar devaluation.
- The February 2010 acquisition of Solvay Pharmaceuticals contributed approximately $210 million of sales and a $37 million pretax loss, including acquisition and integration expenses.
- Solvay was acquired for approximately $6.1 billion in cash, with preliminary fair-value allocations including $2.1 billion of goodwill, $4.1 billion of acquired intangible assets and $600 million of acquired in-process research and development.
- Abbott also acquired STARLIMS Technologies for approximately $105 million during the quarter. Facet Biotech was acquired for approximately $430 million on April 20, 2010, after the reporting period.
- Goodwill increased to $15.008 billion from $13.200 billion, and net intangible assets increased to $10.663 billion from $6.292 billion, largely due to acquisitions.
- Abbott repurchased approximately 14.8 million shares under its publicly announced program for approximately $800 million during the quarter.
Guidance, Outlook, Risks and Unusual Items
- Management stated that annual operating cash flow is expected to continue exceeding capital expenditures and cash dividends.
- Abbott forecast approximately 20% full-year worldwide HUMIRA sales growth for 2010.
- Health care reform legislation increased the basic Medicaid rebate rate from 15.1% to 23.1%. Abbott recorded an approximately $60 million provision against sales and expects continuing pressure on Pharmaceutical Products gross margins.
- Abbott recorded an approximately $60 million tax charge to reduce deferred tax assets associated with retiree health care liabilities. Future reform-related costs include a branded-drug industry fee beginning in 2011, additional Medicare Part D rebates and a 2.3% medical-device excise tax beginning in 2013.
- Abbott deposited $1.87 billion into escrow to secure a judgment in the HUMIRA patent litigation involving New York University and Centocor. The underlying judgment included approximately $1.67 billion of damages and $175 million of prejudgment interest; Abbott is appealing and recorded no reserve.
- Legal and environmental proceedings had recorded reserves of approximately $235 million, with an estimated possible-loss range of approximately $190 million to $315 million, excluding specified matters that could materially affect cash flows or results.
- Solvay-related AndroGel antitrust litigation, HUMIRA patent litigation, Medinol stent litigation and pricing-related investigations remain important contingencies. Management stated that outcomes cannot be predicted with certainty.
- Restructuring charges totaled approximately $17 million in Q1 2010, and additional diagnostic restructuring charges are expected through 2011.
- Comprehensive loss was $827 million, despite net earnings of $1.003 billion, primarily because of a $1.987 billion foreign-currency translation loss.
Important Facts for Investors to Verify
- Assess the sustainability of reported sales growth after separating Solvay contributions and favorable foreign exchange.
- Reconcile the sharp decline in net income and EPS to the nonrecurring TAP-related income recognized in Q1 2009.
- Monitor post-acquisition leverage, cash balances, restricted funds and the integration and profitability of Solvay.
- Evaluate the impact of Medicaid rebates, future health care reform fees and medical-device taxes on margins and cash flow.
- Track the HUMIRA patent appeal and other litigation, particularly matters for which Abbott has no recorded reserve or cannot estimate potential losses.
- Verify whether HUMIRA sales growth, pipeline investment and restructuring actions support management’s stated outlook.