Abbott Laboratories: 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Abbott Laboratories reported unaudited results for the three and nine months ended September 30, 2019. The company operates across Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, Cardiovascular and Neuromodulation Products, and Diabetes Care, which is included in Other. International sales represented approximately 65% of nine-month revenue.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $8,076 million | $7,656 million | $23,590 million | $22,813 million |
| Operating earnings | $1,198 million | $995 million | $3,143 million | $2,485 million |
| Net earnings | $960 million | $563 million | $2,638 million | $1,714 million |
| Diluted earnings per share | $0.53 | $0.32 | $1.47 | $0.96 |
| Operating cash flow | Not separately provided | Not separately provided | $3,720 million | $4,535 million |
- Sales increased 5.5% in the third quarter and 3.4% for the first nine months. Excluding foreign exchange, sales increased 7.4% and 7.2%, respectively.
- Gross margin was 52.4% in the third quarter versus 51.5% in the prior year, and 52.3% for the first nine months versus 50.9%.
- Operating margin was approximately 14.8% in the third quarter and 13.3% for the first nine months, compared with approximately 13.0% and 10.9% in the respective 2018 periods.
- Cash and cash equivalents were $4,091 million at September 30, 2019, compared with $3,844 million at December 31, 2018. Working capital was $5.6 billion at both dates.
- Capital expenditures were $1,204 million and acquisitions of businesses and technologies were $171 million during the first nine months.
- Total debt was approximately $19.1 billion at September 30, 2019, consisting of $204 million of short-term borrowings, $1,254 million of current long-term debt and $17,639 million of long-term debt.
- Abbott had $5.0 billion of available lines of credit expiring in 2023. Long-term debt ratings were BBB+ from Standard & Poor’s and A3 from Moody’s.
Segment and Operating Performance
- Third-quarter sales increased, excluding foreign exchange, by 7.9% in Established Pharmaceuticals, 3.3% in Nutritionals, 6.6% in Diagnostics and 5.6% in Cardiovascular and Neuromodulation.
- For the first nine months, excluding foreign exchange, sales increased 6.5% in Established Pharmaceuticals, 4.4% in Nutritionals, 5.7% in Diagnostics and 5.0% in Cardiovascular and Neuromodulation.
- Diabetes Care sales increased 36.5% excluding foreign exchange to $1.833 billion for the first nine months. FreeStyle Libre sales were $1.308 billion, up 72.9% excluding foreign exchange.
- First-nine-month sales growth in Cardiovascular and Neuromodulation was led by Electrophysiology, Heart Failure and Structural Heart. Rhythm Management and Neuromodulation declined excluding foreign exchange.
- Research and development expense increased 6.1% for the first nine months, including a $102 million immediate expense for an acquired Cephea Valve Technologies research and development asset.
Material Changes Versus the Prior Comparable Period
- Net earnings increased 70.5% in the third quarter and 53.9% for the first nine months, supported by higher operating earnings, lower interest expense and favorable other income.
- Interest expense declined by $38 million in the third quarter and $132 million for the first nine months, primarily due to euro debt refinancing and debt repayments.
- Operating cash flow declined $815 million for the first nine months, primarily because of greater working-capital investment, higher cash taxes and larger pension contributions.
- Foreign exchange reduced reported sales growth by 1.9 percentage points in the third quarter and 3.8 percentage points for the first nine months.
- Abbott adopted the new lease standard on January 1, 2019, recording approximately $850 million of right-of-use assets and related liabilities. The standard had no material earnings impact.
- Current long-term debt increased to $1,254 million from $7 million at year-end, primarily reflecting debt maturing in September 2020.
- Accumulated other comprehensive loss increased to $7,763 million from $7,586 million at December 31, 2018, primarily due to foreign currency translation losses.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear quantitative earnings or revenue guidance update. Management states that dividends, capital expenditures and other investments are expected to be funded through operating cash flow, cash on hand, short-term investments and borrowings.
- The board authorized early redemption of up to $5 billion of outstanding long-term notes. In October 2019, it also authorized up to $3 billion of common-share repurchases, in addition to $795 million remaining under the prior authorization.
- Restructuring and integration initiatives related to St. Jude Medical, Alere and other cost-reduction programs generated $101 million of charges in the first nine months, with $138 million of related accruals outstanding at September 30, 2019.
- Legal and environmental matters had an estimated possible loss range of $110 million to $140 million and an accrued balance of approximately $125 million. Management did not expect these matters to have a material adverse effect, although outcomes remain uncertain.
- Abbott expects gross unrecognized tax benefits to decrease by approximately $185 million to $430 million, including cash adjustments, within the next twelve months as tax matters are resolved.
- Remaining performance obligations were approximately $3.2 billion in Diagnostics and $350 million in Cardiovascular and Neuromodulation; approximately 60% was expected to be recognized over the next 24 months.
- Key disclosed risks include foreign exchange volatility, intense competition, pricing and rebate pressure, government regulation, healthcare reimbursement and legislative changes, product and technology development, litigation, and tax matters.
Most Important Facts for Investors to Verify
- Whether reported sales growth continues to translate into underlying growth after foreign exchange effects, particularly in Diabetes Care, Diagnostics and Cardiovascular products.
- The timing and funding impact of the potential $5 billion debt redemptions and the $3 billion share-repurchase authorization.
- Progress in reducing leverage while maintaining investment-grade credit ratings and funding the dividend.
- Whether working-capital investment, pension contributions and cash taxes continue to suppress operating cash flow.
- The earnings impact of restructuring, integration, acquired research assets, amortization and other unusual items.
- Developments in legal proceedings, tax audits, healthcare regulation, reimbursement policy and foreign exchange conditions.