Abbott Laboratories 2018 Form 10-K Summary
Business context and reporting period
Abbott Laboratories filed its Form 10-K for the fiscal year ended December 31, 2018. Abbott is a diversified global healthcare company operating through Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Cardiovascular and Neuromodulation Products. Diabetes Care is included in “Other.” Approximately 65% of 2018 net sales were generated outside the United States, and the company employed approximately 103,000 people at year-end.
The filing is an annual report rather than a standalone quarterly filing. Fourth-quarter 2018 net sales were $7.765 billion, compared with $7.589 billion in fourth-quarter 2017. Fourth-quarter earnings from continuing operations were $655 million, compared with a loss of $864 million in the prior-year quarter.
Key financial metrics
| Metric | 2018 | 2017 | Change or observation |
|---|---|---|---|
| Net sales | $30.578 billion | $27.390 billion | Increased 11.6% |
| Operating earnings | $3.650 billion | $1.564 billion | Operating margin improved to approximately 11.9% from 5.7% |
| Gross margin | 51.3% | 47.5% | Improved 380 basis points |
| Earnings from continuing operations | $2.334 billion | $353 million | 2017 was reduced by significant tax and acquisition-related items |
| Net earnings | $2.368 billion | $477 million | Net margin was approximately 7.7% |
| Diluted EPS from continuing operations | $1.31 | $0.20 | Improved substantially |
| Net cash from operating activities | $6.300 billion | $5.570 billion | Increased $730 million |
| Capital expenditures | $1.394 billion | $1.135 billion | Increased $259 million |
| Cash dividends paid | $1.974 billion | $1.849 billion | Declared dividend increased to $1.16 per share |
| Cash and cash equivalents | $3.844 billion | $9.407 billion | Declined primarily from debt repayment and dividends |
| Total debt carrying amount | $19.366 billion | $27.718 billion | Reduced by approximately $8.3 billion net |
| Total assets | $67.173 billion | $76.250 billion | Declined primarily after debt reduction and currency effects |
Segment sales were $9.437 billion for Cardiovascular and Neuromodulation, $7.495 billion for Diagnostics, $7.229 billion for Nutritionals, and $4.422 billion for Established Pharmaceuticals. Reported segment operating earnings were $2.896 billion, $1.868 billion, $1.652 billion, and $894 million, respectively. Diagnostics benefited substantially from the inclusion of Alere, while Cardiovascular and Neuromodulation benefited from the inclusion of St. Jude Medical for a full year.
Material changes versus the prior comparable period
- Sales growth of 11.6% reflected the Alere acquisition, volume growth across businesses, and an unfavorable foreign-exchange impact of approximately 0.4 percentage points. Price reduced sales growth by approximately 1.0 percentage point.
- Diagnostics sales increased 33.6% excluding foreign exchange, including the full-year impact of Alere. Excluding Alere and foreign exchange, Diagnostics sales increased 6.5%.
- Cardiovascular and Neuromodulation sales increased 5.9% reported, or 4.9% excluding foreign exchange, led by Electrophysiology, Structural Heart, and Neuromodulation.
- Established Pharmaceuticals sales increased 3.2% reported, or 7.0% excluding foreign exchange, led by India and China. Nutritionals sales increased 4.4% reported, or 4.9% excluding foreign exchange.
- Operating margin improved by approximately six percentage points, primarily from business margin improvements and lower inventory step-up amortization and integration costs, partly offset by higher intangible amortization.
- Research and development expense was $2.3 billion, essentially flat with 2017. Selling, general and administrative expense increased 6.1%, largely due to the full-year impact of Alere and increased growth investments.
- Abbott repaid approximately $8.3 billion of debt net of borrowings, including $4.0 billion of debt redeemed in October 2018. It also issued approximately $4.0 billion of euro-denominated debt in September 2018.
- Interest expense declined to $826 million from $904 million, primarily because of debt repayment. Abbott recorded $167 million of debt extinguishment costs, including a $153 million charge related to the October debt redemption and related interest-rate-swap unwinding.
- 2018 results included $130 million of additional tax expense related to finalizing the Tax Cuts and Jobs Act accounting. The cumulative TCJA tax expense reached approximately $1.59 billion, with approximately $1.58 billion of transition-tax obligations remaining payable over eight years.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a specific 2019 revenue or earnings forecast in the filing. Abbott stated that 2019 priorities include expanding Alinity diagnostics, growing Electrophysiology, Heart Failure and Structural Heart, broadening nutrition products, expanding emerging-market pharmaceuticals, and increasing adoption of the FreeStyle Libre continuous glucose monitoring system. Research and development spending is expected to approximate 7.5% of 2019 sales.
- Abbott expects operating cash flow to continue to exceed capital expenditures and cash dividends. Planned 2019 pension contributions were approximately $380 million.
- Abbott had $5 billion of available unsecured revolving credit capacity under an agreement expiring in 2023 and stated that it expects to maintain an investment-grade credit rating. Year-end ratings were BBB from Standard & Poor’s and Baa1 from Moody’s.
- Goodwill was $23.3 billion and net intangible assets were $18.9 billion at December 31, 2018. Intangible amortization was $2.2 billion in 2018, with estimated annual amortization of approximately $2.0 billion in 2019 and $2.2 billion in 2020.
- Approximately 45% of consolidated gross revenues were subject to rebates and allowances. Rebates and chargebacks were approximately $3.0 billion in 2018; a one-percentage-point increase in the rebate rate on related gross sales would reduce net sales by approximately $160 million.
- Legal and environmental proceedings had an estimated possible loss range of $125 million to $165 million, with approximately $145 million accrued at year-end. Management did not expect the ultimate resolution to materially affect financial position, cash flows, or results of operations.
- Key risks include healthcare pricing and reimbursement pressure, extensive regulatory requirements, product safety or recall exposure, patent and intellectual-property challenges, manufacturing and supplier disruptions, foreign-exchange volatility, cybersecurity and data-privacy incidents, international political and economic conditions, and integration or execution risks from acquisitions.
- Abbott received an FDA warning letter concerning its Sylmar, California facility acquired with St. Jude Medical and was implementing corrective actions.
- Abbott early-adopted several accounting standards in 2018. The new revenue standard increased retained earnings by $23 million at adoption, and the company expected the new lease standard to add approximately $800 million to $900 million of operating lease right-of-use assets and liabilities beginning in 2019.
Most important facts for an investor to verify
- Whether Diagnostics and Cardiovascular and Neuromodulation growth remains strong after acquisition-related comparisons normalize.
- Progress in reducing debt and the effect of approximately $19.4 billion of reported debt, future interest costs, and scheduled maturities.
- The sustainability of the improved operating margin after excluding acquisition integration benefits, inventory step-up effects, restructuring charges, debt extinguishment costs, and tax items.
- Alere and St. Jude Medical integration results, including the substantial goodwill and intangible-asset balances subject to impairment risk.
- Rebate accrual assumptions, pricing pressure in coronary stents, and reimbursement changes affecting nutrition, diabetes care, diagnostics, and medical devices.
- Regulatory remediation at the Sylmar facility and the potential effect of product-quality, safety, recall, or litigation matters.
- Adoption of the 2019 lease standard and the final treatment of the remaining TCJA transition-tax obligation.