Abbott Laboratories: Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Abbott Laboratories is a diversified healthcare company operating through Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, Cardiovascular and Neuromodulation Products, and the non-reportable Diabetes Care business. This unaudited quarterly filing covers the three months ended March 31, 2019, compared with the prior-year quarter.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $7.535 billion | $7.390 billion | 2.0% |
| Operating earnings | $739 million | $608 million | 21.5% |
| Earnings from continuing operations | $672 million | $409 million | 64.3% |
| Net earnings | $672 million | $418 million | 60.8% |
| Diluted earnings per share | $0.38 | $0.23 | Increase |
| Net cash from operating activities | $712 million | $1.108 billion | Down $396 million |
Gross profit margin was 51.6%, compared with 50.6% in the prior-year quarter. Operating margin was approximately 9.8%, compared with 8.2%, and net margin was approximately 8.9%, compared with 5.7%.
Sales excluding foreign-exchange effects increased 6.8%. Foreign exchange reduced reported total sales growth by approximately 4.8 percentage points. U.S. sales increased 2.9%, while international sales increased 1.4% as reported and 9.0% excluding foreign exchange.
- Nutritionals: Sales of $1.792 billion, up 2.0% reported and 5.7% excluding foreign exchange.
- Diagnostics: Sales of $1.841 billion, up 0.2% reported and 4.4% excluding foreign exchange.
- Cardiovascular and Neuromodulation: Sales of $2.329 billion, up 0.2% reported and 3.6% excluding foreign exchange.
- Established Pharmaceuticals: Sales of $992 million, down 4.9% reported but up 5.4% excluding foreign exchange.
- Diabetes Care: Sales of $566 million, up 34.4% reported and 42.0% excluding foreign exchange; FreeStyle Libre sales were $379 million.
At March 31, 2019, cash and cash equivalents were $3.022 billion, short-term investments were $239 million, and total current assets were $14.409 billion versus current liabilities of $9.113 billion. Long-term debt was $18.845 billion, with an additional $201 million of short-term borrowings and $8 million of current long-term debt. Abbott reported $5.0 billion of available credit lines expiring in 2023.
Cash used in investing activities was $396 million, including $335 million of capital expenditures and $78 million for business and technology acquisitions. Cash used in financing activities was $1.142 billion, including a $500 million long-term debt repayment, $565 million of dividends paid, and $217 million of share purchases. The quarterly dividend declared was $0.32 per share, approximately 14% above the $0.28 declared in Q1 2018.
Material Changes Versus the Prior Comparable Period
- Operating earnings increased primarily because of higher sales, lower intangible amortization, reduced interest expense, and lower SG&A, partially offset by higher research and development spending.
- Intangible amortization declined to $486 million from $584 million. Estimated annual amortization expense is approximately $2.0 billion in 2019.
- Research and development expense increased 14.2% to $672 million, including a $102 million immediately expensed acquired R&D asset related to Cephea Valve Technologies. The comparable 2018 quarter included a $25 million immediately expensed R&D asset.
- SG&A expense decreased 2.6%, primarily due to lower acquisition-related integration costs and favorable foreign exchange effects.
- Interest expense declined by $56 million, and net interest expense declined by $51 million, reflecting debt repayments and the September 2018 euro debt refinancing.
- Operating cash flow declined $396 million, principally because of a $313 million pension contribution and increased working-capital investment.
- Abbott adopted the new lease standard on January 1, 2019, recording approximately $850 million of operating lease right-of-use assets and related liabilities. The standard had no material earnings impact but materially increased reported balance-sheet assets and liabilities.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing text does not provide specific full-year earnings or revenue guidance. Management described growth across all businesses excluding foreign exchange and highlighted continued adoption of Alinity diagnostics, HeartMate 3, MitraClip, TactiCath, and FreeStyle Libre.
- Restructuring charges related to St. Jude Medical and Alere integration totaled $35 million in the quarter. The related accrued balance was $61 million at March 31, 2019.
- Abbott recorded a $78 million reduction to its TCJA transition-tax liability following final Treasury regulations. The cumulative net TCJA tax expense was reduced to $1.51 billion.
- Management expects gross unrecognized tax benefits to decrease by approximately $185 million to $430 million within the next twelve months as tax matters are resolved.
- Legal and environmental proceedings had an estimated possible loss range of approximately $95 million to $140 million, with an accrued balance of approximately $115 million. Management did not expect the ultimate disposition to materially affect financial position, cash flows, or results of operations.
- Key operating risks include foreign-exchange volatility, healthcare regulation and reimbursement changes, pricing pressure, competition, government purchasing patterns, product development and approval risks, litigation, and integration of acquired businesses.
- Abbott’s long-term debt ratings were BBB+ from Standard & Poor’s and Baa1 from Moody’s. Management expected to maintain an investment-grade rating.
Important Facts for Investors to Verify
- Whether reported sales growth continues after adjusting for the 4.8% foreign-exchange headwind.
- The sustainability of Diabetes Care and FreeStyle Libre growth and its contribution to consolidated results.
- Progress and margins in Diagnostics, Cardiovascular and Neuromodulation, and Established Pharmaceuticals, including weaker Rhythm Management and Neuromodulation sales.
- Whether operating cash flow recovers after the unusually large pension contribution and working-capital investment in Q1.
- The future effects of approximately $18.9 billion of long-term debt, lease liabilities of $851 million, and planned debt repayments.
- The amount and timing of restructuring, acquisition-integration, R&D asset, tax, litigation, and other unusual charges.
- The impact of the 2019 lease adoption and the upcoming 2020 credit-loss accounting standard.
- Any subsequent changes to earnings or sales guidance, which the filing text does not clearly provide.