Abbott Laboratories: 2018 Q2 Form 10-Q Summary
Business context and reporting period
Abbott is a global healthcare products company with reportable segments in Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Cardiovascular and Neuromodulation Products. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Net sales | $7.767 billion | $6.637 billion | $15.157 billion | $12.972 billion |
| Operating earnings | $882 million | $386 million | $1.490 billion | $144 million |
| Earnings from continuing operations | $718 million | $270 million | $1.127 billion | $656 million |
| Net earnings | $733 million | $283 million | $1.151 billion | $702 million |
| Diluted EPS | $0.41 | $0.16 | $0.64 | $0.40 |
- Sales increased 17.0% in the quarter and 16.8% year to date; excluding foreign exchange, growth was 15.3% and 14.0%, respectively.
- Reported operating margins were approximately 11.4% for the quarter and 9.8% year to date, versus approximately 5.8% and 1.1% in the prior-year periods. Gross margins were 50.5% and 50.6%, compared with 46.0% and 44.8%.
- Segment sales growth in the quarter was led by Diagnostics, up 47.2%, largely reflecting the Alere acquisition; Established Pharmaceuticals increased 10.5%, Nutritionals 7.3%, and Cardiovascular and Neuromodulation 7.1%.
- Six-month net cash from operating activities was $2.352 billion, compared with $1.925 billion in 2017. Capital expenditures were $573 million.
- Investing activities used $537 million, while financing activities used $8.086 billion, including $7.280 billion of long-term debt repayments and $985 million of dividends paid.
- Cash and cash equivalents declined to $3.065 billion from $9.407 billion at December 31, 2017. Working capital was $5.2 billion, compared with $11.2 billion at year-end.
- Short-term borrowings were $341 million, current long-term debt was $506 million, and long-term debt was $19.823 billion at June 30, 2018. The reported long-term debt balance declined from $27.210 billion at year-end.
- Abbott had $5.0 billion of credit lines expiring in 2019 and reported long-term debt ratings of BBB from Standard & Poor’s and Baa2 from Moody’s.
- The quarterly dividend declared was $0.28 per share, up from $0.265 in the prior-year quarter.
Material changes versus the prior comparable period
- Diagnostics sales benefited substantially from the Alere acquisition, completed in October 2017. Excluding Alere, divestitures, and foreign exchange, total sales increased 8.0% in the quarter and 7.5% for the first six months.
- Profitability improved primarily because the 2017 comparison included inventory step-up amortization associated with the St. Jude Medical acquisition. Abbott also reported margin improvement in Diabetes Care and Cardiovascular and Neuromodulation.
- Operating expenses increased with the addition of Alere, higher growth and market-expansion spending, and increased research and development investment. Six-month research and development expense rose 8.4%; selling, general and administrative expense rose 9.1%.
- Other income and expense was substantially less favorable year to date because the 2017 period included a $1.151 billion pretax gain on the sale of Abbott Medical Optics to Johnson & Johnson.
- Abbott repaid its $2.8 billion term loan and $1.150 billion revolving-credit balance in January 2018, redeemed additional 2019 notes in March and June, and recorded a $14 million debt-extinguishment charge.
- Foreign currency translation produced a $1.026 billion loss in accumulated other comprehensive income for the first six months, compared with an $821 million gain in 2017, reducing comprehensive income to $295 million from $1.566 billion.
Outlook, commentary, risks, and unusual items
- The filing does not provide a specific consolidated earnings or revenue guidance range.
- Management expects operating cash flow, cash on hand, short-term investments, and borrowings to fund dividends, capital expenditures, and other investments.
- Abbott identified healthcare regulation, pricing controls, competition, rebates, foreign exchange, technological developments, and government payment policies as important risks. The filing refers investors to the 2017 Form 10-K for a fuller risk discussion.
- Restructuring and integration charges totaled approximately $45 million in the first six months under management’s discussion, while Note 10 separately details approximately $33 million of acquisition-integration restructuring charges and $12 million of other restructuring charges.
- Estimated annual amortization expense for intangible assets is approximately $2.4 billion in 2018, declining to approximately $2.0 billion by 2021 and 2022.
- The Tax Cuts and Jobs Act impact remained provisional at an estimated $1.476 billion of net tax expense, including a $16 million state-tax adjustment recorded in the first six months of 2018. Further adjustments may be material.
- Abbott estimated that gross unrecognized tax benefits could decrease by $500 million to $700 million within the next twelve months as tax matters are resolved.
- Legal and environmental proceedings had an estimated possible loss range of $85 million to $130 million, with an accrued balance of approximately $105 million. Management did not expect a material adverse effect.
- Abbott adopted new revenue-recognition guidance in 2018; the cumulative adjustment increased retained earnings by $23 million and did not materially affect individual income-statement or balance-sheet line items.
Important facts for investors to verify
- Whether Diagnostics growth and margin performance remain sustainable after the Alere acquisition contribution is fully incorporated.
- The pace and cost of integrating Alere and St. Jude Medical, including remaining restructuring, amortization, and inventory-related charges.
- Debt reduction progress, refinancing needs, credit-line availability, and the effect of reduced cash balances on liquidity.
- Finalization of the provisional Alere purchase-price allocation and any resulting changes to goodwill, intangible assets, or future amortization.
- Updates to the provisional Tax Cuts and Jobs Act estimate and potential resolution of $500 million to $700 million of unrecognized tax benefits.
- Foreign exchange exposure and the effect of currency movements on international sales, earnings, and accumulated other comprehensive income.
- Regulatory approvals, reimbursement developments, product launches, competitive pressures, and market-share trends in cardiovascular devices, diagnostics, nutritionals, and pharmaceuticals.