Abbott Laboratories: Form 10-Q Summary
Business context and reporting period
Abbott Laboratories filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2009. Abbott operates across Pharmaceutical, Nutritional, Diagnostic, and Vascular Products, with worldwide sales to retailers, wholesalers, hospitals, laboratories, physicians, and government agencies.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $7.495 billion | $7.314 billion | $14.213 billion | $14.080 billion |
| Operating earnings | $1.671 billion | $1.407 billion | $2.732 billion | $2.554 billion |
| Net earnings | $1.288 billion | $1.322 billion | $2.727 billion | $2.260 billion |
| Diluted EPS | $0.83 | $0.85 | $1.75 | $1.45 |
| Gross margin | 58.3% | 57.3% | 57.3% | 56.8% |
- Q2 sales increased 2.5%; six-month sales increased 0.9%. Excluding unfavorable foreign exchange, management reported sales growth of 10.5% for the quarter and 8.0% year to date.
- Calculated operating margins were approximately 22.3% in Q2 2009 versus 19.2% in Q2 2008, and 19.2% for the first six months of 2009 versus 18.1% in the prior-year period. Net margins were approximately 17.2% and 19.2%, respectively, for the 2009 periods.
- Six-month net cash from operating activities was $2.413 billion, compared with $3.064 billion in 2008. Capital expenditures were $515 million, and cash dividends paid were $1.177 billion.
- Cash and cash equivalents were $4.204 billion at June 30, 2009, compared with $4.112 billion at December 31, 2008. Working capital was $7.6 billion versus $5.5 billion at year-end 2008.
- Short-term borrowings were $4.296 billion and long-term debt was $11.372 billion at June 30, 2009. Abbott issued $3.0 billion of long-term debt in the first quarter to finance the Advanced Medical Optics acquisition and repay acquired debt.
- Abbott reported unused credit lines of $5.3 billion supporting commercial paper arrangements. Long-term debt ratings were AA from Standard & Poor’s and A1 from Moody’s.
Material changes versus the prior comparable period
- Vascular Products sales increased 34.3% in Q2 and 38.3% for the first six months, benefiting in part from the U.S. launch of the Xience V stent in the third quarter of 2008.
- Nutritional Products sales increased 4.0% in Q2 and 5.1% year to date.
- Pharmaceutical Products sales declined 4.3% in Q2 and 5.0% year to date, primarily because of generic competition affecting Depakote, Omnicef, and Synthroid. U.S. Depakote sales fell to $190 million from $727 million for the first six months.
- Diagnostic Products sales declined 6.2% in Q2 and 4.1% year to date, with foreign exchange a significant adverse factor.
- HUMIRA growth partly offset pharmaceutical declines. International HUMIRA sales were $1.290 billion for the first six months versus $1.039 billion in 2008.
- Abbott acquired Advanced Medical Optics for approximately $1.4 billion in cash in February 2009 and Ibis Biosciences for $175 million in January 2009. The acquisitions added approximately $1.7 billion of goodwill and increased debt and intangible assets.
- Six-month 2009 net earnings included a $797 million pretax benefit from derecognition of a contingent liability related to the conclusion of the TAP Pharmaceutical Products joint venture. The comparable 2008 period included TAP joint-venture income, acquired in-process research and development charges, and investment gains.
- Research and development expense increased 2.0% in Q2 and 3.5% year to date. Selling, general and administrative expense decreased 1.4% in Q2 and increased 0.6% year to date.
Guidance, outlook, risks, contingencies, and unusual items
- Management forecast worldwide 2009 HUMIRA sales growth of 15% to 20%, or 25% to 30% excluding foreign exchange.
- Abbott expects annual operating cash flow to exceed capital expenditures and cash dividends.
- A jury awarded approximately $1.67 billion in June 2009 to New York University and Centocor in a HUMIRA patent case. Abbott recorded no reserve, intends to seek reversal or reduction of the verdict, and plans to appeal if necessary. The ultimate exposure could be material.
- In July 2009, Abbott settled outstanding intellectual-property litigation with Medtronic. Medtronic will pay Abbott $400 million, with the one-time benefit to be recognized in third-quarter 2009 earnings.
- Other legal and environmental proceedings had a recorded reserve of approximately $275 million at June 30, 2009, with an estimated possible-loss range of approximately $205 million to $415 million, excluding certain matters for which losses could be material or cannot be estimated.
- Abbott expects additional restructuring charges through 2011, primarily related to manufacturing transitions, product registrations, accelerated depreciation, and product transfers.
- The stronger U.S. dollar materially reduced reported international sales. Abbott also faces risks from generic competition, healthcare regulation and reimbursement changes, patent litigation, product development, and integration of acquisitions.
- Defined-benefit plan contributions were $700 million in the first six months of 2009, compared with $200 million in 2008, and post-employment medical and dental contributions were $13 million versus $65 million.
Most important facts for investors to verify
- Confirm the ultimate outcome and financial impact of the $1.67 billion HUMIRA patent verdict and related University of Iowa litigation.
- Verify recognition and cash receipt of the $400 million Medtronic settlement in third-quarter 2009 results.
- Separate recurring operating performance from the $797 million TAP liability derecognition and other acquisition-related valuation gains.
- Assess the effect of Depakote and other generic competition on pharmaceutical revenue and margins.
- Monitor debt repayment, interest costs, and leverage following the Advanced Medical Optics acquisition and $3.0 billion debt issuance.
- Evaluate foreign-exchange effects, restructuring costs, pension funding requirements, and the adequacy of liquidity facilities.
- Track HUMIRA growth against management’s 2009 forecast and assess whether reported growth is being masked by currency movements.