Business Context and Reporting Period
Abbott Laboratories filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. Abbott operates through Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Medical Devices. Results were materially affected by the COVID-19 pandemic, which reduced elective procedures and routine diagnostic testing while increasing demand for COVID-19 testing products.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net sales | $7.328 billion | $7.979 billion | $15.054 billion | $15.514 billion |
| Operating earnings | $672 million | $1.206 billion | $1.430 billion | $1.945 billion |
| Net earnings | $537 million | $1.006 billion | $1.101 billion | $1.678 billion |
| Diluted EPS | $0.30 | $0.56 | $0.61 | $0.94 |
| Gross margin | 47.9% | 52.8% | 49.1% | 52.3% |
| Operating cash flow | Not separately provided | Not separately provided | $2.037 billion | $1.772 billion |
- Q2 sales declined 8.2% year over year, including a 2.8 percentage-point unfavorable foreign-exchange impact. Six-month sales declined 3.0%, including a 2.3 percentage-point foreign-exchange impact.
- At June 30, 2020, cash and cash equivalents were $4.763 billion, short-term investments were $274 million, and working capital was approximately $6.3 billion.
- Total debt was approximately $19.7 billion, comprising $1.3 billion of current debt and $18.2 billion of long-term debt, compared with approximately $17.9 billion of long-term debt at December 31, 2019.
- Net cash used in investing activities was $1.012 billion, including $1.002 billion of capital expenditures. Net cash used in financing activities was $77 million, including $1.280 billion of dividends paid.
- Abbott issued $1.3 billion of senior notes in June 2020: $650 million of 1.15% notes due 2028 and $650 million of 1.40% notes due 2030. The proceeds were intended to repay approximately $1.3 billion of notes due September 2020.
Material Changes Versus the Prior Comparable Period
- Medical Devices sales fell 21.2% in Q2 and 10.2% for the six-month period, primarily because COVID-19 reduced cardiovascular and neuromodulation procedures. Six-month declines were especially pronounced in vascular, neuromodulation, structural heart, electrophysiology, and rhythm management.
- Diagnostics sales increased 4.7% in Q2 and 2.0% for six months. Molecular Diagnostics sales increased 135.7% for six months, driven by COVID-19 testing, while Core Laboratory sales declined 9.2% because of lower routine testing volumes.
- Nutritional Products sales increased 0.4% in Q2 and 3.3% for six months. Established Pharmaceutical Products sales declined 8.6% in Q2 and 2.1% for six months, with foreign exchange a significant factor.
- COVID-19 testing-related sales totaled $652 million in the first six months, the vast majority generated in Q2. Abbott launched six COVID-19 molecular, serology, and rapid antibody tests during the period.
- FreeStyle Libre sales were $1.197 billion for the first six months, up 50.4% excluding foreign exchange.
- Gross margin declined because of unfavorable pandemic-related business mix, lower cardiovascular, neuromodulation, and routine diagnostics volumes, increased intangible amortization, and foreign exchange.
- Net earnings and EPS were pressured by lower operating earnings. Q2 tax expense included an $11 million tax benefit versus $96 million of tax expense in the prior year; six-month 2020 results included approximately $81 million of tax benefits from the St. Jude tax settlement, $67 million of excess share-based compensation tax benefits, and $20 million of discontinued-operation tax benefits.
- Other income and expense shifted from $38 million of income in Q2 2019 to $22 million of expense in Q2 2020, primarily because of equity investment impairments. Six-month impairments totaled approximately $110 million.
- Restructuring charges totaled $33 million in the first six months of 2020, with $36 million and $84 million remaining in related accrued balances at June 30, 2020.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide a clear quantitative earnings or revenue guidance range. Management states that the duration and impact of COVID-19 remain unpredictable.
- Procedure and routine testing volumes improved during Q2 as healthcare resources and demand began returning toward normal levels, but the extent and timing of recovery remained uncertain.
- Abbott had access to $5.0 billion of credit lines expiring in 2023 and stated that it expects to maintain an investment-grade rating. Long-term ratings at June 30, 2020 were A- from Standard & Poor’s and A3 from Moody’s.
- Legal and environmental proceedings had an estimated possible loss range of approximately $85 million to $120 million, with an accrued balance of approximately $105 million. Management did not expect a material adverse effect, although outcomes remain uncertain.
- Tax authorities may reduce Abbott’s recorded gross unrecognized tax benefits by approximately $70 million to $410 million within the following twelve months as matters are resolved.
- Abbott adopted the expected-credit-loss standard on January 1, 2020; the cumulative adjustment was not significant. It expects the income-tax simplification standard effective in 2021 to have no material impact.
- Disclosure controls were deemed effective, and the filing reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether elective procedure volumes and routine diagnostic testing continue to recover and whether COVID-19 testing demand offsets weakness in core businesses.
- The sustainability, pricing, and capacity implications of the $652 million of COVID-19 testing-related sales.
- Medical Devices segment recovery, particularly vascular, neuromodulation, structural heart, electrophysiology, and rhythm management.
- Debt refinancing and liquidity after repayment of the notes due September 2020, including leverage and interest-rate exposure.
- Whether lower gross margins, investment impairments, restructuring costs, and increased intangible amortization persist.
- The resolution and cash impact of tax matters, litigation, environmental exposures, and other contingencies.