Abbott Laboratories 10-Q Summary
Business context and reporting period
Abbott Laboratories reported results for the three months ended March 31, 2018. The company develops, manufactures and sells branded generic pharmaceuticals, nutritionals, diagnostic products, and cardiovascular and neuromodulation devices. The quarter includes the contribution from the Alere acquisition, which closed in October 2017.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $7.390 billion | $6.335 billion | 16.7% increase |
| Operating earnings | $608 million | $(242) million | Improved by $850 million |
| Earnings from continuing operations | $409 million | $386 million | 6.0% increase |
| Net earnings | $418 million | $419 million | Essentially flat |
| Diluted earnings per share | $0.23 | $0.24 | Decrease |
| Gross margin | 50.6% | 43.4% | Improved 7.2 percentage points |
| Operating margin | 8.2% | (3.8)% | Improved materially |
| Net cash from operating activities | $1.108 billion | $574 million | 93% increase |
Sales growth was reported across all major reportable segments. Diagnostics sales increased 58.7%, primarily due to Alere; excluding Alere and foreign exchange, Diagnostics sales increased 5.5%. Cardiovascular and Neuromodulation sales increased 10.5%, Nutritionals increased 7.0%, and Established Pharmaceutical Products increased 9.9%. International sales increased 17.6%, including a 6.5% favorable foreign-exchange effect.
Cash and cash equivalents declined to $3.857 billion at March 31, 2018 from $9.407 billion at December 31, 2017. Total debt was approximately $21.9 billion, consisting of $230 million of short-term borrowings, $507 million of current long-term debt and $21.154 billion of long-term debt. Abbott repaid approximately $6.0 billion of long-term debt during the quarter. The company reported $5.0 billion of available credit lines expiring in 2019 and investment-grade ratings of BBB from Standard & Poor’s and Baa2 from Moody’s.
Investing cash flow used $238 million, including $275 million of capital expenditures. Financing cash flow used $6.455 billion, primarily reflecting debt repayments and $491 million of dividends paid. Abbott declared a quarterly dividend of $0.28 per share, up approximately 6% from $0.265 in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue benefited substantially from the Alere acquisition and favorable foreign exchange. Excluding Alere, specified divestitures and foreign exchange, total sales increased 6.9%.
- Gross margin improved primarily because Q1 2017 included significant inventory step-up amortization related to the St. Jude Medical acquisition.
- Q1 2017 included a $1.151 billion pretax gain from the sale of Abbott Medical Optics, whereas Q1 2018 did not.
- Q1 2017 included approximately $430 million of tax expense related to the AMO sale; Q1 2018 included approximately $65 million of excess tax benefits from share-based compensation.
- Operating cash flow increased by $534 million, aided by higher segment earnings, working-capital improvements, lower acquisition-related expenses and lower pension contributions.
- Long-term debt decreased by approximately $6.1 billion from year-end 2017 following repayment of term-loan, revolving-credit and notes balances.
Outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative earnings or revenue guidance range. Management described growth drivers including FreeStyle Libre, Core Laboratory and Point of Care diagnostics, Electrophysiology, Neuromodulation, MitraClip and HeartMate 3. Abbott also cited competition, price controls, rebates, regulatory requirements, foreign-exchange movements and government health-care policy as ongoing business risks.
Abbott recorded approximately $33 million of employee-related severance and other restructuring charges in Q1 2018, including costs associated with integrating St. Jude Medical and Alere. The remaining restructuring accruals totaled approximately $197 million at March 31, 2018.
The company’s estimate of the net tax expense from the Tax Cuts and Jobs Act increased to $1.475 billion, including a $15 million first-quarter adjustment. This estimate remains provisional and could change materially as additional analysis and regulatory guidance become available.
Legal and environmental proceedings had an estimated possible-loss range of approximately $90 million to $135 million, with an accrued balance of approximately $110 million at March 31, 2018. Management did not expect these matters to have a material adverse effect on financial position, cash flows or results of operations.
Remaining performance obligations were approximately $2.9 billion in Diagnostics and $340 million in Cardiovascular and Neuromodulation. Abbott expects to recognize approximately 60% over the next 24 months. The filing also notes that the preliminary purchase-price allocation for Alere remains subject to finalization, and differences could be material.
Facts investors should verify
- Separate underlying growth from the effects of the Alere acquisition, divestitures and foreign exchange.
- Assess debt-reduction progress, cash balances, refinancing needs and the effect of continued interest costs.
- Monitor the final Alere purchase-price allocation, goodwill and intangible-asset amortization, including estimated 2018 amortization of approximately $2.4 billion.
- Track the provisional $1.475 billion Tax Cuts and Jobs Act estimate and potential future tax adjustments.
- Evaluate whether margin improvement is sustainable after the favorable comparison with 2017 acquisition-related inventory step-up charges.
- Review regulatory, reimbursement, pricing, litigation, environmental and foreign-exchange exposures described in the filing and the 2017 Form 10-K.