Abbott Laboratories 2017 Q3 Form 10-Q Summary
Business context and reporting period
Abbott Laboratories reported unaudited results for the three and nine months ended September 30, 2017. Abbott develops, manufactures and sells branded generic pharmaceuticals, nutritional products, diagnostic systems and cardiovascular and neuromodulation products worldwide.
Results include St. Jude Medical from its January 4, 2017 acquisition. Alere was acquired on October 3, 2017 and is not included in the reported periods.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $6.829 billion | $5.302 billion | $19.801 billion | $15.520 billion |
| Operating earnings | $810 million | $897 million | $1.035 billion | $2.237 billion |
| Earnings from continuing operations | $561 million | $(357) million | $1.217 billion | $298 million |
| Net earnings | $603 million | $(329) million | $1.305 billion | $602 million |
| Diluted EPS | $0.34 | $(0.22) | $0.74 | $0.40 |
| Gross margin | 50.8% | 54.3% | 47.0% | 54.0% |
| Net cash from operating activities | Not separately provided | Not separately provided | $3.930 billion | $2.033 billion |
Sales increased 28.8% in the quarter and 27.6% for the first nine months. Excluding foreign exchange, growth was 28.2% and 27.9%, respectively. Reportable-segment sales increased 36.9% excluding foreign exchange in the quarter and 35.1% for the nine months.
- Q3 segment sales: Established Pharmaceutical Products $1.171 billion, Nutritionals $1.768 billion, Diagnostics $1.279 billion, and Cardiovascular and Neuromodulation Products $2.224 billion.
- For the first nine months, Cardiovascular and Neuromodulation Products sales were $6.587 billion, compared with $2.175 billion in the prior-year period, primarily due to St. Jude Medical.
- Research and development expense increased 59.3% in Q3 and 50.3% for the nine months, primarily from the acquired St. Jude Medical business.
- Interest expense increased by $87 million in Q3 and $366 million for the nine months, mainly because of debt issued to finance St. Jude Medical.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $11.012 billion at September 30, 2017, down from $18.620 billion at December 31, 2016.
- Operating cash flow was $3.930 billion; investing cash flow was $(6.466) billion, including $13.027 billion for acquisitions; and financing cash flow was $(5.169) billion.
- Capital expenditures were $790 million. Dividends paid were $1.385 billion.
- Current assets were $21.377 billion versus current liabilities of $7.935 billion. Working capital was $13.4 billion, down from $20.1 billion at year-end 2016.
- Short-term borrowings and current debt totaled $715 million, while long-term debt was $23.310 billion. The fair value of total long-term debt was $25.166 billion.
- Abbott had $5.0 billion of available revolving credit lines at September 30, 2017. On October 3, 2017, it borrowed $1.7 billion under those lines and $2.8 billion under a term loan to fund the Alere acquisition and related refinancing.
- Abbott stated that it expected to maintain an investment-grade rating. Ratings at September 30, 2017 were BBB from Standard & Poor’s and Baa3 from Moody’s.
Material changes versus the prior comparable period
- The St. Jude Medical acquisition added $4.4 billion of sales during the first nine months but also produced an approximately $1.2 billion pretax loss, including approximately $1.0 billion of intangible amortization and $840 million of inventory step-up amortization.
- Gross margin declined because of acquired intangible amortization and inventory step-up amortization.
- Goodwill increased to $22.066 billion from $7.683 billion and net intangible assets increased to $18.578 billion from $4.539 billion, primarily due to St. Jude Medical.
- Abbott sold its Abbott Medical Optics business to Johnson & Johnson in February 2017, recognizing a $1.163 billion pretax gain and a $728 million after-tax gain.
- Abbott sold 51 million Mylan N.V. shares for $1.977 billion, reducing its ownership from approximately 14% to 3.4%.
- Net earnings improved substantially from the prior year, which included a $947 million other-than-temporary impairment of the Mylan investment and a $481 million Venezuelan foreign-exchange loss.
- Restructuring charges totaled approximately $249 million in the first nine months, including $162 million related to St. Jude Medical integration.
Guidance, outlook, commentary, risks and unusual items
The filing text does not provide a clear numerical revenue or earnings guidance update. Management cited growth opportunities from St. Jude Medical and the subsequent Alere acquisition, continued international expansion of Alinity diagnostic systems, and cost-improvement initiatives.
- Alere was acquired after the reporting date for approximately $4.6 billion, with approximately $2.96 billion of debt assumed and repaid. Its results are not included in this Form 10-Q.
- Alere agreed to divest certain businesses to Quidel and Siemens in connection with regulatory review of the acquisition.
- Abbott received an FDA warning letter concerning the acquired Sylmar, California facility. Management reported that a corrective-action plan had been submitted and implementation was progressing.
- Abbott operates in highly competitive and heavily regulated healthcare markets and faces pricing pressure, rebates, government payment policies, product regulation, technology changes and foreign-exchange exposure.
- Legal and environmental proceedings had an estimated possible loss range of approximately $40 million to $45 million, with an accrual of approximately $45 million. Management did not expect a material adverse effect on financial position, cash flows or results of operations.
- Tax authorities could reduce recorded gross unrecognized tax benefits by approximately $200 million to $350 million within the next twelve months, including cash adjustments.
- Venezuelan operations represented less than 0.01% of consolidated assets at September 30, 2017, and additional foreign-exchange losses were not expected to be material.
Important facts for investors to verify
- Assess the sustainability of reported growth after separating St. Jude Medical and Alere acquisition effects from organic growth.
- Monitor integration costs, restructuring charges, acquired intangible amortization and inventory step-up effects on margins and earnings.
- Reconcile debt incurred for Alere with post-acquisition cash flow, liquidity and leverage.
- Track the FDA remediation plan for the Sylmar facility and any related regulatory or product consequences.
- Evaluate the final purchase-price allocations for St. Jude Medical and Alere, which were preliminary and could change materially.
- Review tax contingencies, litigation exposures, foreign-exchange risks and the effect of healthcare regulation and pricing pressure.