Abbott Laboratories 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
Abbott Laboratories filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company develops, manufactures and sells health care products through four reportable segments: Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Cardiovascular and Neuromodulation Products. Diabetes Care is included in Other.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Net sales | $7,979 million | $7,767 million | $15,514 million | $15,157 million |
| Operating earnings | $1,206 million | $882 million | $1,945 million | $1,490 million |
| Net earnings | $1,006 million | $733 million | $1,678 million | $1,151 million |
| Diluted earnings per share | $0.56 | $0.41 | $0.94 | $0.64 |
| Operating margin | 15.1% | 11.4% | 12.5% | 9.8% |
| Net margin | 12.6% | 9.4% | 10.8% | 7.6% |
- Gross margin was 52.8% in Q2 and 52.3% for the first six months, compared with 50.5% and 50.6%, respectively, in the prior-year periods. Abbott attributed the improvement primarily to lower intangible amortization and restructuring costs.
- Six-month operating cash flow was $1,772 million, down from $2,352 million. The decline reflected $326 million of pension contributions, increased working capital investment and approximately $615 million of cash taxes paid.
- Six-month investing cash flow was negative $894 million, including $803 million of capital expenditures and $160 million for business and technology acquisitions.
- Six-month financing cash flow was negative $1,591 million, including $521 million of long-term debt repayments, $1,133 million of dividends paid and $221 million of share purchases.
- Cash and cash equivalents were $3,137 million at June 30, 2019, compared with $3,844 million at December 31, 2018. Working capital increased to $6.1 billion from $5.6 billion.
- Long-term debt was $18,982 million and short-term borrowings plus current long-term debt were $212 million at June 30, 2019. The company had $5.0 billion of available credit lines expiring in 2023 and reported long-term debt ratings of BBB+ from S&P and A3 from Moody’s.
- Quarterly dividends declared were $0.32 per share, approximately 14% higher than the $0.28 declared in the comparable 2018 quarters.
Material Changes Versus Prior Comparable Period
- Q2 net sales increased 2.7% as reported and 7.3% excluding foreign exchange. Six-month sales increased 2.4% as reported and 7.1% excluding foreign exchange. Foreign exchange reduced Q2 sales by 4.6% and six-month sales by 4.7%.
- All reportable segments grew on a constant-currency basis in Q2 and the first six months, except for certain individual product categories. Diabetes Care was a major contributor: first-half sales increased 31.2% as reported and 38.4% excluding foreign exchange, with FreeStyle Libre sales of $812 million.
- Q2 segment sales were $1,108 million for Established Pharmaceuticals, $1,875 million for Nutritionals, $1,905 million for Diagnostics, and $2,473 million for Cardiovascular and Neuromodulation.
- Operating earnings increased primarily because of lower intangible amortization, lower integration and restructuring costs, lower net interest expense and improved gross margin. Net interest expense declined by $43 million in Q2 and $94 million for the six months.
- Research and development expense was essentially unchanged in Q2 but increased $85 million, or 7.3%, for the six months, including a $102 million immediately expensed acquired R&D asset related to Cephea Valve Technologies.
- Abbott repaid the $500 million principal amount of its 2.80% notes due 2020 in February 2019. Approximately $700 million remained available under the board’s debt-redemption authorization.
Guidance, Outlook, Risks and Unusual Items
- The filing text does not provide a clear quantitative earnings or revenue guidance update. Management described continued growth opportunities in Diabetes Care, Diagnostics, Electrophysiology, Heart Failure and Structural Heart.
- Remaining performance obligations were approximately $3.1 billion in Diagnostics and $375 million in Cardiovascular and Neuromodulation. Abbott expects to recognize approximately 60% over the next 24 months and 16% over the following 12 months.
- Restructuring charges related primarily to St. Jude Medical and Alere integration totaled $36 million in the first six months, with $48 million remaining in the related accrual at June 30, 2019.
- Tax expense included a $78 million reduction to the TCJA transition tax liability and approximately $90 million of excess tax benefits from share-based compensation. Abbott estimated that gross unrecognized tax benefits could decrease by $185 million to $430 million within the following 12 months.
- Abbott adopted the lease standard on January 1, 2019, recording approximately $850 million of right-of-use assets and additional operating lease liabilities. The standard had no material earnings impact.
- Legal and environmental proceedings had an estimated possible loss range of approximately $90 million to $125 million, with an accrual of approximately $110 million. Management did not expect a material adverse effect, but noted that estimates may change.
- Key risks include foreign exchange volatility, pricing controls and rebates, competition, regulatory and legislative changes affecting health care products, government purchasing patterns, litigation, tax matters and integration of acquired businesses.
- Disclosure controls and procedures were evaluated as effective, and no material change in internal control over financial reporting was reported during the quarter.
Important Facts for Investors to Verify
- Whether constant-currency sales growth continues to offset the reported impact of a stronger U.S. dollar.
- The sustainability and profitability of FreeStyle Libre and other Diabetes Care growth.
- Performance trends in weaker areas, including Established Pharmaceuticals, Rhythm Management, Neuromodulation and certain Diagnostics categories.
- Operating cash flow conversion, inventory and receivables growth, pension funding and cash tax requirements.
- Debt reduction plans, leverage, interest costs and the effect of lease liabilities on reported liquidity.
- Potential changes in tax exposures, litigation accruals, restructuring costs and acquired-intangible amortization.
- The filing’s future outlook or guidance, which is not clearly quantified in the provided text.