Business Context and Reporting Period
Abbott Laboratories filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. Abbott operates through Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Cardiovascular and Neuromodulation Products. The Alere acquisition, completed in October 2017, materially affects year-over-year comparisons, particularly Diagnostics.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $7.656 billion | $6.829 billion | $22.813 billion | $19.801 billion |
| Operating earnings | $995 million | $769 million | $2.485 billion | $913 million |
| Earnings from continuing operations | $552 million | $561 million | $1.679 billion | $1.217 billion |
| Net earnings | $563 million | $603 million | $1.714 billion | $1.305 billion |
| Diluted EPS | $0.32 | $0.34 | $0.96 | $0.74 |
| Operating cash flow | Not separately provided | Not separately provided | $4.535 billion | $3.930 billion |
- Sales increased 12.1% in the quarter and 15.2% for the first nine months. Excluding foreign exchange, growth was 14.8% and 14.3%, respectively.
- Reported gross margin was 51.5% in the quarter versus 50.6% and 50.9% for the nine months versus 46.8% in the comparable periods.
- Approximate operating margin was 13.0% in Q3 2018 versus 11.3% in Q3 2017, and 10.9% for the first nine months versus 4.6%. Net margin was approximately 7.3% in Q3 and 7.5% for the nine months.
- Capital expenditures were $927 million for the first nine months, compared with $790 million in 2017.
- Cash and cash equivalents were $7.369 billion at September 30, 2018, compared with $9.407 billion at December 31, 2017. Working capital declined to $5.4 billion from $11.2 billion.
- Total borrowings were approximately $23.6 billion at September 30, 2018, including $4.063 billion of current long-term debt, $19.284 billion of long-term debt, and $211 million of short-term borrowings, versus approximately $27.9 billion at year-end 2017.
- Abbott had $5.0 billion of available credit lines expiring in 2019. Long-term debt ratings were BBB from Standard & Poor's and Baa1 from Moody's.
- Cash dividends declared were $0.28 per share in each quarter of 2018, up approximately 6% from $0.265 in 2017.
Material Changes Versus the Prior Comparable Period
- Diagnostics sales rose 42.6% in Q3 and 49.2% for the nine months, primarily because of the Alere acquisition. Excluding Alere and foreign exchange, Diagnostics sales increased 6.6% for the nine months.
- For the nine months, Cardiovascular and Neuromodulation sales increased 7.0% as reported and 4.9% excluding foreign exchange. Electrophysiology and Structural Heart were principal growth areas, while Heart Failure and portions of Vascular were weaker.
- Nutritionals sales increased 6.1% for the nine months, while Established Pharmaceutical Products increased 6.1% as reported and 8.3% excluding foreign exchange.
- Operating earnings benefited from the absence of significant 2017 inventory step-up amortization related to St. Jude Medical. Nine-month 2018 operating earnings also benefited from higher segment earnings.
- Net earnings and Q3 diluted EPS declined despite higher sales because 2017 included $42 million of discontinued-operation earnings in Q3, while 2018 included $67 million of debt-extinguishment costs and an investment impairment reflected in other expense.
- First-nine-month 2017 results included a $1.163 billion pretax gain, or $728 million after tax, from the sale of Abbott Medical Optics. That gain did not recur in 2018.
- Operating cash flow increased $605 million year over year, supported by higher earnings, working-capital improvements, timing of pension contributions, and lower acquisition-related expenses.
Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide a clear quantitative earnings or revenue guidance update.
- Management identified continued growth across all business segments, with Diabetes Care growth led by FreeStyle Libre. Management also cited product launches and approvals in electrophysiology, Structural Heart, vascular products, and heart failure.
- Abbott expects to fund dividends, capital expenditures, and other investments through operating cash flow, cash and short-term investments, and borrowings.
- Abbott issued approximately $4.0 billion of euro-denominated debt on September 27, 2018 and subsequently redeemed approximately $4.0 billion of debt on October 28, 2018. The October redemption generated a $67 million net charge and occurred after the reporting date.
- Restructuring and integration charges totaled $63 million in the first nine months under the filing's management discussion; the notes separately identify $45 million for St. Jude and Alere integration and $18 million for other streamlining actions.
- The company recorded a provisional cumulative $1.513 billion net tax expense related to the Tax Cuts and Jobs Act and cautioned that the amount may be materially adjusted. Abbott also expects gross unrecognized tax benefits could decrease by $500 million to $700 million within the next twelve months.
- Legal and environmental proceedings had an estimated possible loss range of $125 million to $165 million and an accrued balance of approximately $145 million. Management stated that the ultimate disposition is not expected to materially affect financial position, cash flows, or results of operations.
- Key operating risks include healthcare regulation and reimbursement, price controls, competition, rebates, foreign-exchange volatility, product approvals and launches, integration of acquisitions, litigation, and potential impairment of goodwill or intangible assets.
- Accumulated other comprehensive loss increased to $7.009 billion from $6.062 billion at year-end, principally due to foreign-currency translation losses.
- Abbott adopted the revenue recognition standard and other accounting standards in 2018; management stated that the revenue standard's impact on individual financial statement line items was not significant. Leases, hedge accounting, and tax-effect reclassification standards were not yet adopted.
Most Important Facts for Investors to Verify
- Whether Diagnostics growth remains strong after separating the impact of the Alere acquisition and foreign exchange.
- The sustainability of reported margin expansion after the favorable comparison with 2017 acquisition-related inventory step-up amortization.
- The post-October debt balance, refinancing effects, interest expense, and progress toward maintaining investment-grade ratings.
- Final resolution of the provisional $1.513 billion Tax Cuts and Jobs Act estimate and potential tax-benefit settlements of $500 million to $700 million.
- Integration and restructuring costs, acquisition-related synergies, and any goodwill or intangible-asset impairment indicators.
- Regulatory, reimbursement, litigation, product-liability, and environmental developments, including the $145 million legal and environmental accrual.
- Management's subsequent formal earnings and revenue guidance, which is not clearly provided in this filing.